<DOC>
[107th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:82566.wais]
THE USE AND ABUSE OF GOVERNMENT PURCHASE CARDS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON GOVERNMENT EFFICIENCY,
FINANCIAL MANAGEMENT AND
INTERGOVERNMENTAL RELATIONS
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
MARCH 13, 2002
__________
Serial No. 107-129
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
U.S. GOVERNMENT PRINTING OFFICE
82-566 WASHINGTON : 2003
____________________________________________________________________________
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COMMITTEE ON GOVERNMENT REFORM
DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York
ILEANA ROS-LEHTINEN, Florida EDOLPHUS TOWNS, New York
JOHN M. McHUGH, New York PAUL E. KANJORSKI, Pennsylvania
STEPHEN HORN, California PATSY T. MINK, Hawaii
JOHN L. MICA, Florida CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia ELEANOR HOLMES NORTON, Washington,
MARK E. SOUDER, Indiana DC
STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland
BOB BARR, Georgia DENNIS J. KUCINICH, Ohio
DAN MILLER, Florida ROD R. BLAGOJEVICH, Illinois
DOUG OSE, California DANNY K. DAVIS, Illinois
RON LEWIS, Kentucky JOHN F. TIERNEY, Massachusetts
JO ANN DAVIS, Virginia JIM TURNER, Texas
TODD RUSSELL PLATTS, Pennsylvania THOMAS H. ALLEN, Maine
DAVE WELDON, Florida JANICE D. SCHAKOWSKY, Illinois
CHRIS CANNON, Utah WM. LACY CLAY, Missouri
ADAM H. PUTNAM, Florida DIANE E. WATSON, California
C.L. ``BUTCH'' OTTER, Idaho STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia ------
JOHN J. DUNCAN, Jr., Tennessee BERNARD SANDERS, Vermont
------ ------ (Independent)
Kevin Binger, Staff Director
Daniel R. Moll, Deputy Staff Director
James C. Wilson, Chief Counsel
Robert A. Briggs, Chief Clerk
Phil Schiliro, Minority Staff Director
Subcommittee on Government Efficiency, Financial Management and
Intergovernmental Relations
STEPHEN HORN, California, Chairman
RON LEWIS, Kentucky JANICE D. SCHAKOWSKY, Illinois
DAN MILLER, Florida MAJOR R. OWENS, New York
DOUG OSE, California PAUL E. KANJORSKI, Pennsylvania
ADAM H. PUTNAM, Florida CAROLYN B. MALONEY, New York
Ex Officio
DAN BURTON, Indiana HENRY A. WAXMAN, California
J. Russell George, Staff Director and Chief Counsel
Justin Paulhamus, Clerk
David McMillen, Minority Professional Staff Member
C O N T E N T S
----------
Page
Hearing held on March 13, 2002................................... 1
Statement of:
Grassley, Hon. Charles E., a U.S. Senator from the State of
Iowa....................................................... 9
Kutz, Gregory D., Director, Financial Management and
Assurance, U.S. General Accounting Office, accompanied by
John Ryan, Special Agent, Assistant Director, Office of
Special Investigations, U.S. General Accounting Office;
Captain James M. Barrett III, Civil Engineer Corps, U.S.
Navy, and Commanding Officer, Navy Public Works Center, San
Diego, CA; Captain Patricia A. Miller, Commanding Officer,
Space and Naval Warfare Systems Center, San Diego, CA; Tina
W. Jonas, Deputy Under Secretary for Financial Management,
Department of Defense; Deidre A. Lee, Director of Defense
Procurement, Office of the Under Secretary of Defense for
Acquisition, Technology and Logistics, Department of
Defense; and Danielle G. Brian, executive director, Project
on Government Oversight.................................... 21
Letters, statements, etc., submitted for the record by:
Barrett, Captain James M., III, Civil Engineer Corps, U.S.
Navy, and Commanding Officer, Navy Public Works Center, San
Diego, CA, prepared statement of........................... 76
Brian, Danielle G., executive director, Project on Government
Oversight, prepared statement of........................... 115
Grassley, Hon. Charles E., a U.S. Senator from the State of
Iowa, prepared statement of................................ 16
Horn, Hon. Stephen, a Representative in Congress from the
State of California, prepared statement of................. 3
Jonas, Tina W., Deputy Under Secretary for Financial
Management, Department of Defense:
Information concerning property accountability........... 126
Information concerning salary offset..................... 123
Information concerning Tanya Mays........................ 119
Kutz, Gregory D., Director, Financial Management and
Assurance, U.S. General Accounting Office, and John Ryan,
Special Agent, Assistant Director, Office of Special
Investigations, U.S. General Accounting Office, prepared
statement of............................................... 25
Lee, Deidre A., Director of Defense Procurement, Office of
the Under Secretary of Defense for Acquisition, Technology
and Logistics, Department of Defense, prepared statement of 100
Miller, Captain Patricia A., Commanding Officer, Space and
Naval Warfare Systems Center, San Diego, CA, prepared
statement of............................................... 86
Schakowsky, Hon. Janice D., a Representative in Congress from
the State of Illinois, prepared statement of............... 7
THE USE AND ABUSE OF GOVERNMENT PURCHASE CARDS
----------
WEDNESDAY, MARCH 13, 2002
House of Representatives,
Subcommittee on Government Efficiency, Financial
Management and Intergovernmental Relations,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 9:58 a.m., in
room 2154, Rayburn House Office Building, Hon. Steve Horn
(chairman of the subcommittee) presiding.
Present: Representatives Horn and Schakowsky.
Staff present: J. Russell George, staff director and chief
counsel; Bonnie Heald, deputy staff director; Justin Paulhamus,
clerk; Michael Sazonoff, intern; David McMillen, minority
professional staff member; and Jean Gosa, minority assistant
clerk.
Mr. Horn. A quorum being present, the Subcommittee on
Government Efficiency, Financial Management and
Intergovernmental Relations will come to order.
I have long believed that oversight hearings, such as we
are holding today, shed light on important issues that need
attention, and that such light encourages those in charge to
fix the problem. I am delighted that in the audience are a
number of individuals, top executives, that are going into the
purchasing acquisition for DOD. I am delighted to have you in
the hearings. I hope we can learn something from this morning's
hearing. We are delighted that you will look at those laws and
make sure that they are put and implemented in all of the
contracts, so that they understand how these laws are. I thank
you very much for being here.
How many of you are here? Stand up, please, and see how
many are in the class. Only one, two, three, four, five, six. I
thought there would be about 30.
So thank you very much. I hope you enjoy it. Sometimes it
isn't enjoyable, but we'll do it.
So I have long believed that these oversight hearings, such
as we are holding today, shed light on important issues that
need attention, and that such light encourages those in charge
to fix the problem. In many cases, that has been a correct
assumption, but you will hear today what, in part, dismisses
congressional oversight as merely a nuisance that must be
endured, but that can be ignored, is the attitude.
On July 30, 2001, this subcommittee held a hearing
examining the government purchase card programs at two Navy
units in San Diego, the Space and Naval Warfare Systems and the
Navy Public Works Center. Over the last few months, the General
Accounting Office, which is the right arm of Congress for both
programmatic review as well as fiscal review, the General
Accounting Office auditors and investigators have examined
recent card purchases at the two San Diego Navy units. One of
the units, the Public Works Center, was cooperative in
providing auditors with the documentation and information they
needed to complete their job. Equally important, this unit is
making a concerted effort to identify and eliminate abusive
uses of the cards.
It is another story at the Space and Naval Warfare Systems
Center. According to the General Accounting Office, the Systems
Center provided information that was often misleading and
conflicting. Whether it is an attitude of leadership or a
pervasive culture throughout the unit, Space and Naval Warfare
Systems Center employees, most of whom are civilians, have
continued using their government-guaranteed cards to buy
extravagant personal items--all at taxpayer expense.
It is about April 15th when people will be writing out the
checks to give the Federal Government a revenue source for all
that is going on with the war and with now getting Federal
money for education throughout America, where we have a first-
rate education program, and the money is needed. It should not
be wasted, as it has been, for personal use. These items
include designer briefcases, tote bags, and day planners from
Louis Vuitton and Franklin Covey, as well as high-quality, $30
Bose headsets for listening to music.
This abuse is of special concern because of the desire by
many to increase temporarily the existing transaction limit on
most purchase cards from $2,500 per purchase to $25,000 per
transaction. This increase would apply to purchases that relate
to the war against terrorism or defending the homeland against
terrorism. That is where the money should go. Undoubtedly, this
streamlined purchasing power might be needed. But before we
consider that decision, we must be certain that proper controls
are in place to stop the abuse of public funds which occurs. It
isn't their money; it is we the taxpayers' money.
That said, I welcome our witnesses, and we will start. The
ranking member is here? If Ms. Schakowsky comes, she will have
an opening statement.
[The prepared statement of Hon. Stephen Horn follows:]
[GRAPHIC] [TIFF OMITTED] 82566.001
[GRAPHIC] [TIFF OMITTED] 82566.002
Mr. Horn. Is Senator Grassley here? All right, he will be
here in 1 minute, I am told. So we will be in recess just
waiting for the Senator. If not, we will go on with the other
panel.
[Recess.]
Mr. Horn. Mr. Kutz, Mr. Ryan, Captain Barrett, Captain
Miller, Deputy Under Secretary Jonas, accompanied by Deidre A.
Lee, Director of Defense Procurement, and Danielle G. Brian.
Let's just line up the way it is. That is the way we will take
them, as on the agenda, and leave a seat in the middle for
Senator Grassley.
[Witnesses sworn.]
Mr. Horn. The clerk will note that the witnesses have
affirmed the oath.
We will now start. The ranking member is here and has an
opening statement. So please start.
Ms. Schakowsky. Thank you, Mr. Chairman, for holding this
hearing, and I join you in welcoming our witnesses this
morning. I will address three points in my remarks this
morning.
First, I am disappointed in the arrogance and disrespect
for the American public shown by the Space and Naval War
Center.
Second, I am disappointed in the personnel at Naval Public
Works for the fraudulent use of purchase cards. GAO reports
that Public Works is making a serious effort at reform.
Finally, I believe that the problems we will address today
are not unique to these organizations, but rather are
symptomatic of the acquisition culture at the Department of
Defense. There is an attempt to return the Defense Department
to the era of the $600 hammers and $3,000 toilet seats.
GAO will report today on widespread abuse of the purchase
card system at the Space and Naval Warfare Center. Purchase
cards are used to buy luxury items like designer bags, personal
digital assistants, and high-priced clothes. Purchase limit
regulations were circumvented by splitting purchases to get
below the limit. It would be an understatement to say that the
program was managed badly at the Warfare Center. Management
completely abdicated its responsibilities. This supposedly
elite research center even tried to justify buying Lego robots
from Toys R Us as a research expenditure.
Those, however, are not the worst of the offenses. The
personnel at SPAWAR argued first that these purchases were
justified. Then they told the GAO that it didn't matter if
digital cameras and clothes and luggage disappeared because
naval regulations said they didn't have to account for items
that are easily pilfered. In other words, if something is
easily stolen, the problem is solved by not keeping track of
those things.
This morning the commander who testified last July is not
here. The former commander retired. That, in and of itself,
would not be noteworthy. However, the events surrounding this
retirement are disturbing. The commander retired after refusing
drug testing, refusing to have his car searched when he was
selected for a random search, and for trying to get two of his
subordinates to lie. For those abuses, the punishment was a
$1,000 fine and retirement. The rumor is that, once Congress
looks away, he will be back at work as a contractor--probably
paid by a purchase card.
What we have here is an organization that is completely out
of control. There is no respect for laws or regulations. There
is no accountability for fraud and abuse. When caught, they try
to justify abusive purchases. Unfortunately, the departmental
response to these problems has been weak.
Last week Congressman Davis held a hearing on a proposal to
raise the purchase limit on these cards to $25,000 per
purchase. That proposal came from the Defense Department and
those outside the government who provide goods and services.
That would eliminate from competitive bidding 99.5 percent of
the purchases made by the Federal Government.
We have seen this program badly abused by the two units
here today. I suspect that when GAO reports back to us this
summer on its examination across the whole Defense Department
we will see similar abuse.
The Defense Department has not been a good steward of
Federal funds. We should not put into their hands the tools to
further abuse the public trust.
There is, however, another question that must be addressed
before we expand the use of purchase cards. These cards make
purchasing more convenient for the government, but no one has
actually looked at the cost of using these cards. Much of what
is purchased with these cards could be purchased using the GSA
schedule, a program where GSA negotiates lower prices because
of the volume of government purchases.
GAO has told us that purchase cards will account for nearly
$20 billion in purchases this fiscal year or next. If there is
a 5 percent waste in these purchases, that is $1 billion of
waste.
I am requesting, and I hope that the chairman will join me
in this request, the GAO look at the purchases made using these
purchase cards: How many of those items could have been
purchased from the GSA schedule? Did the agency pay more or
less using the purchase card than it would have going through
the GSA?
This program is 10 years old, and GSA has never done a
careful examination of the program. Before we expand the use of
purchase cards, we should have some facts about how the system
is working today.
Again, I thank you, Mr. Chairman, for calling this hearing,
and I look forward to the testimony of our witnesses.
[The prepared statement of Hon. Janice D. Schakowsky
follows:]
[GRAPHIC] [TIFF OMITTED] 82566.003
[GRAPHIC] [TIFF OMITTED] 82566.004
Mr. Horn. I thank you for your statement. Please work with
the staff director and the deputy staff director, Ms. Heald, on
what you have just asked. We will be glad to ask GSA and others
about that.
Now is Senator Grassley here anywhere? OK, well, we are
going to start then. Oh, here we are.
Senator Grassley, we've got a seat for you right there. It
isn't as comfortable as Senate chairs, but it's the House. We
are delighted to have you here.
STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR FROM THE
STATE OF IOWA
Senator Grassley. Am I sitting with friends or enemies?
[Laughter.]
These folks in the defense of our country are not enemies.
These folks ought to be congratulated for what they do at this
particular time.
Mr. Horn. Yes, they have been sworn under oath. So we
thought we would put you in the middle there. You have done a
great job on this particular issue, just as you have done on
many other things.
Senator Grassley. Thank you very much.
First of all, let me apologize for being late. I had a
group of college kids that I got too late. I thought if we had
30 kids come from Iowa that wanted to ask their Senator a few
questions, I ought to do that. That is the reason I am late.
Thank you, Mr. Chairman.
Mr. Horn. Yes, well, bring them here, if you would like.
[Laughter.]
By the way, there are 30 people here in the Executive
Procurement Acquisition for DOD. They are in a course, and your
testimony, mine, and the ranking member's testimony will, we
hope, get through to them, because that is the first class that
has ever been in a hearing here. We are delighted to have them.
Senator Grassley. Yes. Mr. Chairman, I am here to share my
views on the latest results of our ongoing oversight of abuse
of the Department of Defense credit card. This is a joint
effort that we have been supported by the General Accounting
Office. It is an honor and privilege for me to team up with you
on such important oversight work.
What we are doing today is putting a spotlight on a
problem. In a bureaucratic place like the Pentagon, the glare
of public spotlight is never welcome, but shedding light is the
heart and soul of oversight generally, and particularly of
congressional oversight. Exposure is a great remedy enhancer.
Every time I peer into the inner recesses of the Department
of Defense credit card account, I see more abuse and more
fraud, and that makes me ask myself, how bad can it be? So we
need to keep the spotlight on full power and the beam focused
on the problem until we get to the bottom of the pit and figure
out what needs to be done.
Today there are 1.7 million Department of Defense credit
cards in circulation that generate over $9 billion in
expenditures annually. There are two types of cards, the
purchase card and the travel card. Most are travel cards. This
is 1.4 million versus 200,500 purchase cards. Most of the
dollars are for purchase card transactions, $6.1 billion per
year versus $3 billion for the travel cards.
A credit card is a financial instrument. It is a license to
spend money. And every shred of evidence that I have seen says
that the internal controls at the Pentagon are weak or
nonexistent. Credit cards is a zero control environment, and in
this environment it is a very dangerous one. That means that
there is an army, 1.7 million strong, authorized to spend money
with no checks and balances. The potential for abuse and fraud
is virtually unlimited.
Now I understand the thinking behind the credit cards, and
the thinking is very, very good. Unfortunately, we see the bad
in the execution of a very good policy. We want the men and
women serving in the Armed Forces to have the tools that they
need to carry out their duty. A credit card is one of those
modern devices that is supposed to make it better and easier
for them to get the job done quickly and effectively without a
whole lot of wasteful paperwork.
In simplifying the travel and purchase processes, each
cardholder is given authority to spend money. The authority to
spend money in the name of the taxpayer is obviously an awesome
responsibility. That authority carries heavy responsibilities.
Unfortunately, this awesome responsibility is not taken very
seriously at the Pentagon. The criticism is not directed at
Secretary Rumsfeld, because he is trying hard to cleanup a
longstanding financial mess.
My criticism is directed at those employees who are
supposed to oversee the program. Department of Defense credit
cards are issued willy-nilly with no credit checks. The results
are predictable then. The cards are being abused with impunity.
Department of Defense credit cards are being taken on shopping
sprees, and the cardholders think they are immune from
punishment, and they are, Mr. Chairman.
We have zero accountability with purchase cards, zero
accountability with travel cards until recently. That is the
root cause of the problem. That is why we are having this
hearing today, because of the lack of accountability. If there
was accountability, it is obvious that this stuff would not be
going on.
In a moment the General Accounting Office will be telling
you just how bad it really is. The General Accounting Office
has examined 300 transactions at two Navy offices in San Diego.
Despite a small sample, Mr. Chairman, the General Accounting
Office has uncovered extensive fraud and abuse, and more is
being found each day. We are looking at the tip of an iceberg.
Here's a sample of some credit card abuse: in bars, strip
joints, gambling casinos; for large cash withdrawals from ATM
machines; clothing at upscale department stores like Macy's and
Nordstrom's; designer leather goods and expensive luggage; gift
certificates, $1,500 each; $200 robots at Toys R Us; groceries,
kitchen appliances, home computers, and even a breast
enlargement operation.
So you name it; these cards are used for it, and it is all
personal business. If they need it, they buy it with Department
of Defense plastic and keep it; no questions asked.
Now there is a proposal to raise the purchase limit from
$2,500 to $25,000. If it goes up, new cars and homes might be
next. The General Accounting Office's 300 transaction sample
yielded over a half million dollars in fraudulent and abusive
purchases. Either the taxpayers or the bank gets stuck with the
bill, depending on which card is used. In either case, it is
bad.
For shopping done with a purchase card, the government is
responsible for paying the bill, and most bills are paid
promptly; no questions asked. With purchase cards, the
taxpayers are the ones that get shafted, and get shafted right
up front. To my knowledge, the government has never asked
anyone to return an unauthorized purchase or repay the money,
even when abuse is known to authorities.
Travel card expenses, by comparison, are the responsibility
of individual cardholders. The taxpayer is out of the loop, at
least up front. When the cardholder incurs legitimate travel
expenses, that person is supposed to file a travel voucher, get
reimbursed, and then pass the money onto the bank, in this
case, Bank of America. All too often, cardholders simply pocket
the money, tax dollars, leaving the bank holding the bag. When
the travel card is used to cover personal expenses, what
happens with alarming regularity, those bills are paid late,
very late, and sometimes never. With no interest charges,
obviously, abusers get a free ride.
The bank has equipped the Pentagon with an anti-fraud
detection system. It is called EAGLS, acronym E-A-G-L-S. It
gives agency program coordinators an online capability to
detect unauthorized transactions on any account. It only takes
a second to determine if a trooper is getting cash at the local
ATM machine without orders, but nobody seems to be minding the
store.
As I said at our hearing in July, Mr. Chairman, if the
Pentagon knows this stuff is happening, and if the Pentagon
does nothing, then that makes the Department of Defense party
to bank robberies, and the robbery is still in progress. The
bank is sustaining unacceptable losses, and in the end we all
pay higher prices, and the taxpayers get shafted as well. When
the bank has to write-off bad debts, tax revenues are lost.
So, Mr. Chairman, the bank has reached a breaking point. It
is losing too much money. So, on February 11, 2002, the bank
fired a warning shot across the bow. The bank is turning up the
pressure. It has declared its intent to cancel the U.S. Army
account, 413,029 cards, at midnight, March 25th, this month.
That has really gotten somebody's attention, and in a hurry,
and so there are now negotiations in progress.
Mr. Chairman, there then is a glimmer of hope on the
horizon. The reason for hope comes from a brand-new Department
of Defense policy called salary offsets. Before I explain the
new policy, it is important to understand why the Department of
Defense travel card program is teetering on the brink of
disaster. As of November 2001, 46,572 Department of Defense
personnel had defaulted on more than $62 million in official
travel expenses, and the bad debt was growing at the rate of $1
million per month, making the Department of Defense default
rate six times the industry average.
For a business interested in profits, a pile of bad debt
with no accountability made for an intolerable situation,
obviously. So something had to give. In October 2001, the bank
and the Department of Defense agreed to take action. The salary
offset program then was born. There are now 31,579 accounts
enrolled in the offset program. So far, offset payments total
$5.2 million.
As a garnishment, the salary offsets provide some measure
of accountability, but actually have limitations. For one, the
money was taken from the bank in big chunks, but it is repaid
to the bank in small chunks over a long period of time. And
there are loopholes. Ten percent of unpaid accounts will slip
right through the net, due to retirements, bankruptcies, dollar
offset limits.
The bank still expects about $2 to $4 million a year to
fall through the cracks and be written off as bad debt. But
that's considered better, and it is also consistent with the
industry average.
In addition, most of the older accounts in default will
never be captured by offsets. The bank will still have to eat
$40 million of unrecoverable debt. Even though there isn't any
hard data yet, the bank expects salary offsets to reduce the
default rate to negligible levels. That's the good news.
There is still bad news. Salary offsets are having little
or no effect on high delinquency rates. Delinquencies have
actually risen with salary offsets. That is because offsets
don't kick in until 120 days plus or 4 months past billing.
Payments are due within 30 days of billing. Today the
Department of Defense has outstanding balances of $370 million.
About 30 percent of the dollars owed for official travel
expenses are more than 30 days past due; 15.4 percent are 60
days past due. One in five Department of Defense accounts is
overdue for payment. That is four to five times the industry
average.
The 3-month gap between the payment due date and offsets
means that the bank has to float a loan. It is a free loan for
the Department of Defense abusers that costs the bank $4 to $5
million a year.
A prime driver behind delinquencies is the use of the card
to cover personal expenses. So, Mr. Chairman, you may remember
at the last hearing I mentioned several cases involving
egregious use of credit cards. Just a few of them:
A marine sergeant, A. Lopez, who ran up a $19,581 bill for
personal expenses and then left the service and the unpaid
bills when his retirement was up.
A person by the name of P. Falcon, with an unpaid bill of
$9,847, including $3,100 spent at a nightclub.
A dead sailor, T. Hayes, who spent $3,521.
Q. Rivera, Army Reserve, whose wife spent $13,000 on a
shopping spree in Puerto Rico.
R. Walker, Air National Guard, with an unpaid balance of
$7,428, including his wife's gambling debts.
In the past 8 months that have passed since the hearing,
only one of these accounts has been paid off. P. Falcon paid
his bill. Every expense posted to his account was personal. He
is under investigation.
The others have the same large, unpaid balances that we saw
last summer. Some are under investigation.
More aggressive offsets and late fees might help bring this
kind of abuse to a screeching halt. Some real leadership at the
top would also help. One of the most powerful elements of
leadership is setting an example of excellence. Setting a good
example should include paying credit card bills on time.
Officers should always set the example. Unfortunately,
there are 713 commissioned officers who have defaulted on $1.1
million in charges. All of these accounts are in charge-off
status or unpaid for 7 months or more. Their ranks range from
junior lieutenants up to senior colonels and a Navy captain.
Individual unpaid balances top out at $8,000. Some of the
charges on these accounts look suspicious and obviously need
investigation. Commissioned officers who run up $1.1 million in
bad debts set a terrible example for the rank-and-file.
Somebody in the Pentagon needs to come down hard on officer
scoff-laws. Credit card abuse in the military will never stop
until the officers cleanup their act. So, Mr. Chairman, I am
presenting to you a list of 713 commissioned officers who
defaulted on their accounts, along with unpaid bills for each
officer. I would like to have the committee take this, and I
ask that it be placed in a confidential record at today's
hearing.
Mr. Horn. Without objection.
Senator Grassley. Then I would also ask you, Mr. Chairman,
to join me in a letter to Secretary Rumsfeld, because I would
like him to see the list and determine what action should be
taken in this matter.
Mr. Horn. I am delighted to join you in that letter.
Senator Grassley. OK, thank you very much.
The General Accounting Office has uncovered a disturbing
case involving alleged purchase and travel card fraud by one
person, Ms. Tanya Mays. She was assigned to the Navy Public
Works Department, San Diego. Ms. Mays took her purchase card
Christmas shopping and in a few short days ran up a bill of
$11,551 at Macy's, Nordstrom's, and Circuit City. She bought
gift certificates worth $7,500, a Compaq computer, an Amana
range--there's nothing wrong with Amana ranges, if you pay for
them; they're made in Iowa--[laughter]--groceries and clothing,
all at taxpayers' expense.
Mr. Horn. I'm a Target man.
Ms. Schakowsky. Actually, I have an Amana. [Laughter.]
Senator Grassley. OK. She presented the bill to her Navy
supervisor, who signed and certified it for payment, and it was
paid in full. She also used her travel card to buy airline
tickets for her son. The cost was $722. When Ms. Mays left the
Public Works Department, she was allowed to keep her purchase
card. I guess they figured that she needed help again, and they
were right, she did, this time for a personal car rental, and
Public Works gladly paid the bill.
So, Mr. Chairman, I find the Mays' case very troublesome.
She has allegedly made a number of fraudulent purchases. Yet,
there seems to be total disregard for accountability. Ms. Mays
has not been asked to repay the money she allegedly stole. No
disciplinary action has been taken. In fact, she was moved into
a bigger job and has been given a promotion effective October
2001. She is now assigned to the Army's top-level Financial
Management Office in the Pentagon, and I am told that she is in
charge of cash integration.
So, Mr. Chairman, when you put one of these cases under a
microscope, it seems like the whole problem comes into much
sharper focus. The Tanya Mays case is not unique, and I can
guarantee that. Here's another.
A Department of Defense employee by the name of Somchart
``Nick'' Fungcharoen, he used his travel card exclusively for
personal expenses. Over a period of 2 years he charged nearly
$35,000, including medical expenses, $4,016. On the surface, it
appears as if he spent most of the money romancing a waitress
he met at the Hooters' Bar and Grill in Jacksonville, FL. Her
name was Jennifer Gilpin.
Mr. Horn. Senator, I'm going to have to interject for a
minute. I've got a journal call on the floor. When you are done
with that statement, if you would come up here, and we will
have Mr. Kutz start his testimony----
Senator Grassley. OK.
Mr. Horn [continuing]. And then you will have a chance to
dialog with GAO.
Senator Grassley. OK.
Mr. Horn. Then I will be back within the time.
Senator Grassley. This gentleman used his travel card
exclusively for personal expenses. Over a period of 2 years he
charged nearly $35,000, including medical expenses of $4,016.
On the surface, it appears that he had used this to romance a
waitress.
After they got to know each other, she asked him for money
to have a breast enlargement operation. He agreed and took her
to a surgeon, Dr. John J. Obi, M.D. Dr. Obi performed the
operation and Fungcharoen used his Department of Defense credit
card to pay the bill.
When the relationship soured, the case ended up in small
claims court, and the military man had retired on disability
and wanted his money back. The judge became alarmed that
Fungcharoen testified proudly that he had used his government-
issue credit card to pay the doctor. Fungcharoen whipped out
the card in the courtroom and showed it to the judge. The judge
examined the card and read on the inscription, ``For official
government travel only.''
The judge stated, in total disbelief, ``You paid for this
breast enlargement with a government credit card?'' After the
revelation, the judge said, ``Let's not go there.''
This case is unique. It is unique because the cardholder
paid his bill, though not always on time.
I have two problems with the case. First, Fungcharoen used
his card exclusively for personal business. Had he used the
standard commercial card, he would have incurred stiff interest
charges and penalty. He used the Department of Defense plastic
to avoid costs that the rest of us have to pay. He got a free
loan from the bank without asking. That is just one small step
away from other worse forms of abuse.
Second, the case underscores the total lack of oversight by
the EAGLS crew. They were asleep at the switch, and a quick
EAGLS check would have shown that he was making extensive
unauthorized purchases around his home in Florida.
And why did he have a card after retirement is obviously an
important question. Like Ms. Mays, I guess he figured out that
he needed it again.
So, Mr. Chairman, accountability is the key. With no
accountability, we can look forward to more egregious credit
card abuse, relentless abuse. It will go on and on and on with
impunity. A person who holds up a liquor store and takes $500
in cash can go to jail for 15 years. If he used Department of
Defense plastic to steal $12,000 with DOD plastic, like Tanya
Mays allegedly did, you get a promotion, and that just doesn't
seem to be right.
People who abuse their government credit cards have to pay
a price. Heads have to roll. When the price is right, the abuse
then will end. If the abusers are forced to repay the money
with penalties, the stealing will stop.
I thank you very much, Mr. Chairman.
[The prepared statement of Senator Grassley follows:]
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Senator Grassley. I will do as the chairman suggested. I
will be right up there.
We would now call upon Mr. Kutz, the Director of Financial
Management and Assurance at the General Accounting Office. Mr.
Kutz.
STATEMENTS OF GREGORY D. KUTZ, DIRECTOR, FINANCIAL MANAGEMENT
AND ASSURANCE, U.S. GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY
JOHN RYAN, SPECIAL AGENT, ASSISTANT DIRECTOR, OFFICE OF SPECIAL
INVESTIGATIONS, U.S. GENERAL ACCOUNTING OFFICE; CAPTAIN JAMES
M. BARRETT III, CIVIL ENGINEER CORPS, U.S. NAVY, AND COMMANDING
OFFICER, NAVY PUBLIC WORKS CENTER, SAN DIEGO, CA; CAPTAIN
PATRICIA A. MILLER, COMMANDING OFFICER, SPACE AND NAVAL WARFARE
SYSTEMS CENTER, SAN DIEGO, CA; TINA W. JONAS, DEPUTY UNDER
SECRETARY FOR FINANCIAL MANAGEMENT, DEPARTMENT OF DEFENSE;
DEIDRE A. LEE, DIRECTOR OF DEFENSE PROCUREMENT, OFFICE OF THE
UNDER SECRETARY OF DEFENSE FOR ACQUISITION, TECHNOLOGY AND
LOGISTICS, DEPARTMENT OF DEFENSE; AND DANIELLE G. BRIAN,
EXECUTIVE DIRECTOR, PROJECT ON GOVERNMENT OVERSIGHT
Mr. Kutz. Senator, good to see you chairing a House hearing
here. Good morning.
Senator Grassley. I can't believe it. [Laughter.]
Mr. Kutz. It is a pleasure to be here to testify on our
audit of Navy purchase cards. With me this morning is Special
Agent John Ryan from our Office of Special Investigations.
Purchase cards were introduced to the government in the
1980's primarily to streamline the acquisition process for
small purchases. Usage of purchase cards has grown quickly in
the Federal Government, increasing from about $2 billion in
1995 to nearly $14 billion in 2001.
The Department of Defense purchase card activity was about
$6 billion in 2001. With 230,000 purchase cards in the hands of
DOD employees, effective internal controls are necessary to
protect the government from fraud, waste, and abuse.
Senator, I have a purchase card in my hand here that is
also displayed on the monitor. As you can see, it looks like a
normal credit card and can generally be used wherever
Mastercard is accepted. However, notice, as you mentioned on
the travel card, this one says, ``For official government
purchases only.''
Today I will discuss our followup audit of fiscal year 2001
purchase card activity at two Navy units in the San Diego area,
SPAWAR Systems Center, which I will refer to as SPAWAR, and the
Navy Public Works Center, or Public Works. These units of
primarily civilian employees serve critical roles in supporting
DOD's mission.
Our audit focused on implementation of the purchase card
program, not its design. As you mentioned, Senator, used and
controlled properly, the purchase card can benefit the Federal
Government. The bottom line of my testimony this morning is
that for fiscal year 2001 we again found significant breakdowns
in internal controls over purchase cards at the two Navy units.
These breakdowns contributed to fraudulent and abusive
purchases and theft and misuse of government property.
My testimony has three parts: first, the overall purchase
card internal control environment; second, the effectiveness of
key internal controls, and, third, examples of fraudulent,
improper, and abusive purchases.
First, our work has shown that the lack of a strong
internal control environment leads to the risk of improper
behavior. For fiscal year 2001, the control environment at both
SPAWAR and the Public Works was ineffective. However,
improvements were made by both units, including significant
reductions in the number of cardholders, increased focus on
training, and reductions in credit limits.
A key factor impairing the control environment at SPAWAR
was the management tone at the top. The former commanding
officer testified last July that the purchase card program at
SPAWAR had effective management controls. By denying before
this subcommittee, and later to his staff, that there was a
problem, he effectively supported the status quo.
We are encouraged by the commitment of Captain Miller, the
new commanding officer, to ensure that an effective, well-
controlled purchase card program is implemented at SPAWAR.
However, we are concerned that there will be significant
cultural resistance to change. For example, through the end of
our audit, SPAWAR continued to rationalize many improper,
abusive, and questionable purchases.
A key factor in the improvements at the Public Works is the
consistently proactive attitude demonstrated by Captain Barrett
and his staff.
Second, basic internal controls over the purchase card
program remain ineffective during 2001 at both units, including
independent documentation of receipt of goods and services and
independent review and certification of the monthly credit card
bill. Public Works' failure rate of 16 percent for receipt and
acceptance was a significant improvement from the 47 percent
failure rate in 2000.
I will use the posterboard to illustrate how fraud can
occur when these two key internal controls fail. As you can
see, this excerpt from a purchase card bill is similar to a
normal credit card statement. Most taxpayers closely review
their monthly credit card bill to ensure that all the charges
are appropriate.
This extreme example is the December 1999 credit card bill
that you mentioned, Senator, for a fraud case that Agent Ryan
investigated. As you can see, somebody went on a Christmas
shopping spree. This bill, which includes over $11,000 in
fraudulent charges, was approved and paid for by the Public
Works. Consistent with our 2001 findings, both controls failed,
as the government never received these goods, and the bill was
paid with no review. Fortunately, over a year later, the
government got this money back. However, I think you will agree
this is no way to handle taxpayer money.
Third, given the weak controls, it is not surprising,
especially for SPAWAR, that we identified potentially
fraudulent, improper, and abusive purchase card transactions in
2001. Examples of actual and potential fraud include 1,914
compromised Navy accounts that were previously reported that
were used to purchase jewelry, pizza, flowers, and tires; over
$10,000 of charges by a safety product vendor that SPAWAR paid,
despite the fact that no goods were received, and $164,000 of
purchases from another SPAWAR vendor with no documentation that
any goods or services were received.
We have provided the listing of compromised accounts, which
includes 78 SPAWAR and 10 Public Works accounts that were
active to the Navy in January, and these accounts were finally
canceled earlier this month. The two vendor cases I mentioned
have been referred to Agent Ryan for investigation of fraud and
abuse.
We also identified the improper purchases at both SPAWAR
and Public Works. Some of these purchases represented
disbursement of government funds that have not authorized by
law. Examples of improper purchases included food, clothing,
and the rental of luxury automobiles.
SPAWAR also improperly wrote 30 convenience checks over the
$2,500 limit, for a total of $347,000. After we identified
wasteful and improper usage, the Navy canceled SPAWAR's
convenience check privileges.
In addition to fraudulent and improper charges, we
identified a number of abusive or questionable purchases by
SPAWAR. These represent purchases that were at excessive cost,
of questionable government need, or both.
For example, as shown on the posterboard, we found
purchases at SPAWAR including Louis Vuitton $250 day planners,
which are also shown on the monitor; $195 leather tote
handbags, again shown on the monitor; abusive and wasteful
usage of cell phones; luggage such as wallets, passport
holders, and backpacks that were given away; computer bags
purchased in Italy and from Sky Mall for as much as $250 each;
four sets of Lego toy robots that you mentioned, Senator,
costing $200 each, none being in possession of the government;
clothing, including the $140 jacket, which is also shown on the
monitor; a $300 Bose headset that was used primarily to listen
to music, and a questionable trip for 30 to Bally's Paris
Casino in Las Vegas, at a cost to the taxpayer of $15,000 to
$20,000.
Consider this: For 2001, we audited less than 200
transactions and found these abusive items, along with
potentially fraudulent and improper purchases. In contrast,
SPAWAR's stand-down review looked at 16,000 transactions, and,
Senator, guess what they found--nothing. No fraudulent,
improper, or abusive charges.
In summary, the findings today reflect what can happen when
financial management is broken and accountability is lost.
These purchase card control weaknesses are reflective of the
broader financial management problems facing DOD. It is
interesting to note that there have been limited consequences
for individuals that have misused the government purchase card.
In light of the events of September 11th, and the Federal
Government's short and long-term budget challenges, it is more
important than ever that DOD get the most from every dollar
spent. Secretary Rumsfeld has noted that billions of dollars of
resources could be freed up for national defense priorities by
eliminating wasteful
spending. The purchase card abuse I have just described is a
small example of what he is talking about.
Senator, this concludes my testimony. Mr. Ryan and I are
available for questions after the other statements.
[The prepared statement of Mr. Kutz and Mr. Ryan follows:]
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Senator Grassley. It is now my privilege to invite Captain
James M. Barrett, Commanding Officer, Navy Public Works Center,
San Diego, to testify. Welcome.
Captain Barrett. Thank you, Senator. Good morning.
As you mentioned, I am Captain Jim Barrett, Commanding
Officer of the Navy Public Works Center in San Diego. I assumed
command of the Center on August 24, 2001. I have submitted my
written testimony statement for the record.
In testimony before this subcommittee on July 30, 2001, my
predecessor stated, ``I fully recognize that controls are a key
element.'' He was committed to ensuring those controls were put
in place. I am here to assure you that I have continued to
address that commitment since taking command of the Public
Works Center, San Diego.
Prior to, during, and as a result of GAO's initial audit,
PWC, San Diego, has worked tirelessly to improve the internal
control environment of our purchase card program. As Mr. Kutz
has mentioned, we have significantly reduced the number of
cardholders; we have significantly reduced the credit limits of
our purchase cardholders; we have greatly increased the number
of approving officials that allows a more effective oversight
for those cardholders.
We have published supplemental guidelines and issued a
revised command instruction on purchase card procedures. We
have held numerous training sessions to address the issues
raised by GAO during their initial audit. We have also held
training sessions to address Navy policy changes resulting from
GAO's audit.
Mr. Chairman, I believe we have improved dramatically, and
we are continuing our work to get better. That concludes my
summary statement, subject to any questions you or the other
committee members may have. Thank you, Mr. Chairman, for the
opportunity to appear today.
[The prepared statement of Captain Barrett follows:]
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Senator Grassley. Thank you very much for your testimony.
I now would call Captain Patricia A. Miller, Commanding
Officer, Space and Naval Warfare Systems Center, San Diego.
Welcome, Captain.
Captain Miller. Good morning. Thank you, sir. Good morning,
Senator Grassley.
As you said, I am Captain Patricia Miller, Commanding
Officer, Space and Naval Warfare Systems Center, San Diego. I
assumed command on December 8, 2001. Senator Grassley, I have
prepared a written statement, which I request be submitted for
the record.
Senator Grassley. It will be received.
Captain Miller. Thank you, Senator. I will now briefly
summarize my statement.
First, I sincerely appreciate GAO's thorough and candid
assessment in their recently completed command audit. As I told
Mr. Kutz, I am personally committed to changing the culture at
my command to permanently improve this important and vital
program.
As you know, the GAO found both continued weakness and
significant improvements in our program. We agree there was a
command climate that permitted these abuses. We agree there
were several employees who used poor judgment in making
purchases, and we did not serve our employees well by providing
proper oversight to prevent these abuses.
In summary, we agree with GAO's findings. We have made
significant changes to correct these deficiencies and are
working hard to implement GAO's recommendations.
For example, we have reduced the number of cardholders by
more than 30 percent. We have dramatically increased the number
of approving officials, and are now far below the recommended
Department of Defense cardholder-to-approving-official ratio.
We have ensured these approving officials are personally
accountable for statements submitted for payment and the
cardholders under them.
All approving officials and cardholders have received
detailed training on appropriate purchasing behavior. We have
strengthened our internal controls by implementing a process to
randomly review purchase card transactions. We have implemented
a semiannual command evaluation review to look at our processes
and procedures to identify potential problems early. In
addition, GAO has reviewed the Enterprise Resource Planning
[ERP], System, and we have implemented their recommendations.
Senator, I am personally committed to increasing our
management oversight, training employees to establish a greater
awareness of ethical and prudent purchases, and changing the
command climate to ensure every single employee understands
their ethical and fiduciary responsibilities. We are fully
engaged in making the necessary changes to ensure that you and
the public have trust and confidence in my command.
Senator Grassley, I appreciate the committee giving me the
opportunity to address this important issue, and I am now
prepared to respond to any questions you may have. Thank you.
[The prepared statement of Captain Miller follows:]
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Senator Grassley. I want to thank you for the responsible
attitude toward change and correcting the problem, for both of
our Captains in command there in San Diego. Thank you very
much.
It is now my pleasure to invite Tina W. Jonas, Deputy Under
Secretary for Financial Management at the Department of
Defense. Ms. Jonas.
Ms. Jonas. Thank you, Senator. I am glad to be here this
morning to talk about this issue.
At the outset, let me say that the Department's senior
leadership is seriously concerned about purchase card problems
that are the focus of this hearing this morning. We will not
tolerate failure to comply with established policies and
procedures such as occurred with the purchase cardholders at
some locations. We understand that, even if instances of fraud
and abuse are caught early, they reveal a lapse in internal
management controls, and such lapses cannot be allowed in so
serious a business as America's national defense.
For purchase cards, the most important role of my
organization, the Comptroller's Office, is to strengthen all
internal management controls, not merely those controls
relevant to purchase cards. We are doing this as part of an
unprecedented overhaul of the Department's financial
management.
Our efforts include both long-term and short-term
initiatives. Long-term we are streamlining and standardizing
the Department's financial and non-financial systems,
transforming them into an integrated set of systems that will
enable DOD leaders to get the timely, accurate, and complete
financial information that is essential to strong internal
controls.
Short-term we are taking action to address immediate
problems to facilitate our long-term initiatives and to work
with the Department's senior leadership to overcome purchase
card problems. For example, the Under Secretary of Defense
Comptroller, Dr. Zakheim and the Under Secretary of Defense for
Acquisition, Technology and Logistics, Pete Aldridge, recently
issued a joint memorandum directing all components to ensure
compliance with published purchase card and internal controls.
These controls are consistent with the General Accounting
Office's standards, and they include a maximum dollar limit for
any single purchase, a maximum dollar limit for the cumulative
value of all purchases made during the monthly billing cycle,
limitations on the cards used to categories of merchants, if
appropriate, or to a single merchant.
It also includes requirements for the supervisor to
receive, review, and, as necessary, question and adjudicate
billing differences with each subordinate cardholder. I think
this was one of the key faults that happened at the Navy, and
we are working decisively on that problem. When implemented
properly, these controls minimize losses from waste, fraud, or
abuse.
In addition, in the Department's internal management
control program, we are making the purchase card program an
area of special emphasis. This will force DOD components to
review their internal controls for their purchase cards and
report on the adequacy of those controls. I assure you that we
will review those reports very carefully and followup with
specific actions necessary to correct problems.
We are also working with the audit community and subject
matter experts, and we have identified potential fraud
indicators for this program. For example, if the same person
that makes a purchase also approves the bill for payment, this
would be a red flag, and these types of indicators are being
developed and software is being used to identify suspect
transactions.
We are also building a front-end edit that the purchase
card contractors will use to flag suspect transactions for
review before transactions are authorized. This is the same
concept used by major credit card companies, but it is tailored
to the DOD business model.
Beyond the specific purchase card emphasis, the scope of
our management controls extends to every activity an area of
responsibility within the Department and its components, and
our procedures apply to all financial, administrative, and
operational controls.
This past year the Comptroller implemented the first phase
of an initiative to ratchet-up the management control program.
In cooperation with the Assistant Inspector General for
Auditing, we identified major areas that other senior leaders
in the Department evaluated for coverage in the Annual
Statement of Assurance in the Reporting Cycle.
Also, this past year, for the first time, we required
components to identify the cost to correct material and
systemic weaknesses, and we required the components to specify
performance metrics to gauge success in resolving identified
weaknesses. This year, again, we will work with the Inspector
General to identify issues and trends that need to be addressed
by the DOD senior leadership, and we conduct periodic visits to
component Headquarters' internal review organizations to ensure
that they are appropriately resourced and effectively
performing their missions.
In closing, Mr. Chairman, the Department takes the matter
of internal control seriously, and our most senior leadership
will manage from the top-down and ensure the correction of
those deficiencies identified by the General Accounting Office
and the Office of the Inspector General.
Thank you. I would be happy to take any questions.
Mr. Horn. Thank you very much.
We now have Deidre A. Lee, the Director of Defense
Procurement, Office of the Under Secretary of Defense for
Acquisition, Technology and Logistics, Department of Defense.
Ms. Lee.
Ms. Lee. Good morning, Chairman Horn. I'm a last-minute
addition to this hearing, to affirm Defense Procurement's
commitment to properly manage the defense purchase card
program. You and I had a brief discussion during a hearing last
week, and I just wanted to appear before you today and affirm
again that commitment.
The purchase card program is very important to the
Department. As you know, we use it for a variety of methods. It
has saved transaction costs, and it has in many cases put the
purchaser closer to the requirements and shortened that
timeframe. But it must be properly managed.
As noted, the Public Works has an improvement program and
has made some progress. The current situation at SPAWAR is
unacceptable. We are working with Captain Miller and she has
certainly stepped up-to-the-plate, starting in December, to try
to remedy these situations.
We have a two-prong approach. The first is to address the
problems at SPAWAR, and the Department has taken the following
actions: The purchase cards at SPAWAR have been suspended at
the bank--that is not just through the user, but at the bank--
effective immediately. We then are going to reinstate a handful
of the purchase cards to support mission-critical and essential
fleet needs, and they will be reviewed by the local commander.
The program office will monitor the transactions through the
bank. We can actually go through the bank and see when those
cards are used and what is turned back on, and we will do that.
Then the cards will remain suspended until Captain Miller
puts in her what we call a multi-step program, making sure
people are trained, educated, understand the commitment,
understand their responsibility. Then, little by little, with
confirmation through senior leadership, we will reinstate that
program and manage it very aggressively.
We also have a training program that she has put in place,
and everyone gets remedial training. They will be reminded of
their duty to buy only minimum requirements, instead of,
unfortunately, some of these luxury items we talked about. They
will be reminded of their obligation to purchase through NIB/
NISH, the blind, the handicapped, the Federal Supply Schedules.
We will also identify the review and certification process,
that billing officials must be connected to the cardholder and
know what they're purchasing and whether or not it applies to
their job.
We also have put in place a property accounting system. So
when purchases are made, there's a matchup: Are they there? Do
we have them?
Then there also will be a very clear statement of what the
situation is for violations of using that card. We are working
with SPAWAR to do all of that.
I am very serious about remedying the situation, and I
intend to personally verify the situation improvements and
report back to you by the end of May.
Shifting to the departmentwide program, because, as GAO
mentioned, we are also concerned, let's make sure we are doing
this right across the Department, and with you, Mr. Chairman, I
note that we have the Executive Contracting Course here. I am
glad for them to hear this discussion, so they know how serious
we are about improving this program.
We have taken an approach across the Department as well. We
have identified many activities, but mainly leadership,
internal controls, and common sense are needed to use this
program properly.
We are going to review all the approval and certification
procedures for officials. They have been instructed to do that.
We've also reviewed how we appoint billing officials, how we
appoint certification officials, the span of control.
We are reviewing the establishment for account
establishment: Who should have a card? Why? For what purpose?
To what amount? And that includes the limits.
We have instructed the card managers to review the
flexibilities within the card. Can they block certain codes,
certain merchant codes, certain vendors? And they have been
reminded to do that.
We are also making sure that appropriate resources are
allocated. You can't just handout the cards and then not have
the resources allocated to do the oversight. So we are focusing
on that as well.
We are going to have training for all purchase card
accounts and also to emphasize leadership and oversight
responsibilities. We have also partnered with DCAA, Defense
Contract Audit Agency, the Inspector General, and have several
things going on there, including an online training course that
will be available by the end of the year which specifically
addresses some of the things highlighted in GAO. We are using a
software program where we can have oversight of the purchases.
We have also put in place some additional--I have asked the
IG to do an across-the-Department look. They now coordinate all
purchase card reviews with the various inspector units and give
us a quarterly report on what they've found. We will track down
those trends and implement it across the Department program,
not just at SPAWAR or Public Works.
We also have an online software program where the
cardholder is going to have to click on each transaction. The
transaction then goes to the oversight, so that it has to
follow the process of having appropriate review.
So, Mr. Chairman, we are painfully aware of the issues with
purchase cards, and I am here to personally commit that we will
make sure these cards are used appropriately and make sure that
our people understand their responsibilities, and we all live
up to our commitment to the taxpayer.
[The prepared statement of Ms. Lee follows:]
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Mr. Horn. Well, I thank you for your statement. You
mentioned accountability. Now that accountability will come up
the service line or the civilian line, or both?
Ms. Lee. Both, sir, and including the financial side, Ms.
Jonas, as well as the policy side from a procurement-specific
standpoint, myself.
Mr. Horn. Because there are also Inspectors General in the
services.
Ms. Lee. Yes, sir. We have asked the DOD Inspector General
to coordinate all their audit reports and kind of look across
the Department, what did each Inspector General at each service
find, coordinate that and show us any trend data, any
systematic problems.
Mr. Horn. So we've got now a program that relates to
education of these in terms of both the civilian and the
service line?
Ms. Lee. Yes, sir.
Mr. Horn. Now I would like to know, what, if anything, has
been done in terms of the court martial part, and is there
anything to do with this type of bad behavior? Is there
anywhere in the court martial situation, in the code of
military justice, that one can be brought before on court
martial? Otherwise, they are just laughing.
Ms. Lee. Sir, if you are talking about the removal of the
commander from SPAWAR, that was for a variety of actions. I
understand it was not specifically the purchase card, but we
have all kind of talked about the attitude or tone at the top
that seemed to be underlying that situation, and that was one
of the issues.
Mr. Horn. Well, it's been about 30 years since I have
looked at the court of military justice, when that was put out
mostly in the Eisenhower administration. The question is, is
there language in that one can violate and be brought up on
that?
Ms. Lee. I am not personally familiar with it.
Mr. Horn. Now our last presenter is Danielle G. Brian, the
executive director of Project on Government Oversight [POGO]--
nothing to do with the comic ``Pogo,'' but sometimes things
seem that way. [Laughter.]
Ms. Brian. Mr. Chairman, thank you for inviting me to
testify at this hearing. As usual, this subcommittee is
performing the very important job of overseeing the workings of
the Federal Government. If only more committee chairmen and
members of committees took that part of their job as seriously
as you do.
I am the director of the Project on Government Oversight
[POGO]. Our organization investigates, exposes, and seeks to
remedy systemic abuses of power, mismanagement, and
subservience by the Federal Government to powerful special
interests. Founded in 1981, POGO is a politically independent,
non-profit watchdog that strives to promote a government that
is accountable to the citizenry.
Today we are talking about waste, fraud, and abuse of the
Department of Defense, the agency that can't account for $1 in
$4 it spends. I know defenders of DOD accounting procedures
claim this is an unfair criticism, that the missing $1.1
trillion is only a paper transaction. In these days of Arthur
Andersen accounting, a firm, I might add, that continues to
consult for nearly every Federal agency, my response is, show
me the money.
We have found that Federal agencies are loath to admit
they're making a mess of things. The Pentagon must be forced to
account for its expenditures of taxpayer dollars. I am
particularly impressed when government officials such as those
at the Navy Public Works put their energy into fixing a problem
rather than denying or covering it up.
Thanks to the work of Senator Grassley and his staff,
Chairman Horn, and the GAO, we have been made aware of the
abuses of Federal purchase cards, one of many Federal dollar
sink holes at DOD. The GAO found that these purchase cards, as
we have been hearing, have been used to buy personal items at
two San Diego Navy installations. Despite the Pentagon's best
efforts to pretend these were localized abuses, however, it is
clear this is a systemic problem. Across the country and in a
different service, this time the Army, similar abuses have been
uncovered.
In January 2000, two enterprising reporters at the
Fayetteville Observer sent Freedom of Information Act requests
for the receipts of more than 330,000 government credit card
purchases by Fort Bragg cardholders. Among many others, they
found charges of, for example, $981 for Atlanta Braves baseball
tickets, $235 for Six Flags Magic Mountain tickets, and my
personal favorite, $111 at Victoria's Secret.
Some may say that those who would commit fraud will do so
regardless, but creating a system where the oversight is
largely the honor system is asking for trouble. One cardholder
indicted for making over $17,000 in fraudulent personal
transactions commented that illegal use of the credit cards was
too easy, and that she was the sole authorizer of card
purchases.
We believe that for the most part the problem is not
created by the existence of the purchase cards themselves, but
with the reduced financial oversight that comes with what are
called micro-purchases of $2,500 or less for each transaction.
However, most of these unaccountable micro-purchases are made
through the use of these credit cards.
According to the Federal Acquisition Regulation, micro-
purchases may be awarded without soliciting competitive
quotations if the contracting officer considers the price to be
reasonable. A system that allows for non-competitive purchases
without checks and balances is simply a bad idea. Allowing
hundreds of thousands of government cardholders to make these
purchases is lunacy.
In addition to the outright fraud committed with the use of
these purchase cards, a more damaging problem is the
overcharging that also flies below the micro-purchasing radar
screen. A 2001 DOD IG audit of micro-purchases at the Defense
Supply Center in Philadelphia found that overcharging occurred
in no fewer than 42 percent of the audit sample. Among the most
egregious cases of overcharging was a $409 sink that should
have been purchased for $37.
Not surprisingly, both the GAO and the DOD IG have
recommended strengthened internal controls to prevent such
overcharging and outright fraud. But when Uncle Sam is paying
the credit card bill, there are currently far too few
deterrents to keep a credit cardholder from misusing these
purchase cards.
Incredibly, in the face of these findings, another
subcommittee under Government Reform, the Subcommittee on
Technology and Procurement Policy, held a hearing just last
week on proposed legislation that would increase tenfold the
micro-purchase threshold from $2,500 to $25,000 with no
additional financial oversight, which is section 221 of the
Services Acquisition Reform Act. I can imagine the headlines
that will soon follow if this bad bill becomes law.
This proposal to increase the government purchase card
micro-purchasing threshold is simply a continuation of the
efforts by acquisition reform lobbyists to reduce financial
oversight and limit the ability of competition and free market
forces to lead to smarter government spending. We have found
that so-called acquisition reforms, which have gained currency
in the past decade, have repeatedly been detrimental to
oversight and accountability of Federal procurement and have
resulted in increased expense to taxpayers. Who benefits? The
contractors who have drafted this legislation.
In our recent report, ``Pickpocketing the Taxpayer: The
Insidious Effects of Acquisition Reform,'' we cite numerous
findings by government auditors that show these reforms have,
in fact, been deforms which limit competition and pretend
prices for government purchases are determined by commercial
forces when they are not.
Mr. Chairman, I simply do not understand how we have come
to a point where the founding principles of the American
economy, free market forces and fair and open competition, are
valued only when they don't apply to the government.
The downward spiral away from competitive purchasing and
toward more acquisition from the few remaining giant defense
contractors is exacerbated by the use of government credit
cards. The Office of Advocacy of the U.S. Small Business
Administration is currently studying the effects of the use of
government credit cards on small businesses.
They have already concluded, ``Prior to acquisition reform,
micro-purchases of $2,500 or less were reserved exclusively for
small businesses.'' Today these purchases are no longer
reserved for small businesses because many of these purchases
are being acquired through the use of the government credit
card. Nearly one-half million Federal employees may use the
government credit card with any authorized merchant. There are
few, if any, acquisition controls on the use of the card. Other
than convenience, there is very little data to reveal that the
government is getting the best price with the use of the credit
card.
In conclusion, Mr. Chairman, I hope you are successful in
persuading your colleagues that reduced procurement and
financial oversight at the Pentagon is not in the American
public's best interest. Thank you.
[The prepared statement of Ms. Brian follows:]
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Mr. Horn. Thank you very much. I am going to ask a few
questions going this way this time [indicating].
Ms. Lee, I am wondering, what about the young woman who
allegedly went on a pre-Christmas shopping spree using her
government credit card? Was she reprimanded? According to the
General Accounting Office, she has moved from a government
salary grade of 11 to a grade 12. Where is she working now?
Ms. Jonas. Mr. Chairman, the woman that you are talking
about currently works for the Army, as I understand it. I have
personally spoken to the Army Comptroller about this case. I
have been advised that the case was under investigation, and
she has assured me that they are checking with the General
Counsel as to what disciplinary action can be taken.
I also have spoken personally with the Navy Comptroller,
Mr. Aviles, about this case because, apparently, if I've got
the case right, a number of the abuses happened when this woman
was with the Navy. The NCIS investigated the case. The
assistant U.S. attorney was asked to look into it. I guess they
have declined.
I would like to submit the facts for the record, if you
don't mind, because I'm doing this almost entirely from my
memory.
[The information referred to follows:]
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Ms. Jonas. But the assistant U.S. attorney apparently
declined to prosecute, and I am uncertain at this moment--you
know, I've heard two different facts on this, but I don't know
whether it was because of the threshold or whether it was
because of a lack of facts.
But I am very concerned about that case. I know Sandra
Pack, who is the Army Comptroller, who is new to the building,
also just found out about this case. So we are very well aware
of that case. We are trying to look into that and see what we
can do.
Mr. Horn. Well, I am sort of bemused that the Navy got away
with passing off some of its people on the Army. I can't
imagine the Army doing that and accepting it, but they probably
didn't know a thing about it.
Ms. Jonas. Right, yes, Mrs. Pack recently came into this
job and it is one of the things that she inherited, but she is
very well aware of it and personally assured me that she is
talking with her General Counsel on ability to act against this
person.
Mr. Horn. Mr. Kutz and Mr. Ryan, who is the special
investigator, do you have any comments on this situation?
Mr. Ryan. The case was originally investigated by NCIS and
presented to the U.S. attorney. They declined prosecution.
Mr. Horn. Now which U.S. attorney was this?
Mr. Ryan. The one in San Diego.
Mr. Horn. San Diego. Now do they have some sort of dollar
equivalent? I have seen that with some U.S. attorneys, ``Oh, we
can't be bothered with this.'' I mean, what do we have to do,
let somebody steal $2 million? I mean it all adds up when
you've got little things going. But you need to have an
example.
Mr. Ryan. Well, they have prosecutive decisions and they
make----
Mr. Horn. What was their criteria for not taking the case?
Mr. Ryan. I don't know. They just decided that they weren't
going to prosecute the case. I think we would have to ask the
U.S. Attorney's Office in San Diego to explain their decision.
Mr. Horn. And I would like the staff to deal with the
Attorney General on this and see what the criteria is and why
they're not doing something about it. Do we have any of these
cases anywhere else in the United States where a U.S. attorney
has been given it and has just said, ``Sorry, I've got other
things to do?''
Mr. Ryan. Decisions on prosecution in judicial districts is
a decision that is made by the U.S. attorney. The investigators
present the facts, and a decision to prosecute is left with the
Department of Justice. Each judicial district, from my
experience, being an agent with Secret Service for over 20
years, makes up their own mind, have their own criteria, and
they decide whether or not they are going to prosecute or not
prosecute. It really lies with the Department of Justice.
Mr. Horn. Mr. Kutz, when the General Accounting Office
discovers some of these things, and it isn't just this case,
but it is all over the country, does the GAO turn it over to
the U.S. attorney?
Mr. Kutz. We oftentimes refer it to Agent Ryan, who does
further investigative work, and also will work up a case and
then forward it to the Navy Criminal Investigative Service or
another investigative group in the Department of Defense, who
would then present it to the U.S. attorney for prosecution.
That is, indeed, what happened with the case you just
described, Mr. Chairman.
Mr. Horn. How many cases have you referred to Mr. Ryan?
Mr. Ryan. Since I've been at GAO?
Mr. Horn. Yes, and how many are accepted?
Mr. Ryan. I really can't give you a number on the number we
referred. We get a lot of information sent to GAO's BroadNet,
allegations of fraud and abuse. We look at them. We interview
the people making the allegations. We will build a case to a
certain level, pass it onto the investigative body, either
within the military or in the Executive side, the FBI or the
Secret Service, for them to followup on the cases also.
Mr. Horn. So you expect the Department of Defense in this
case or the Department of the Navy to put those papers before
the U.S. attorney?
Mr. Ryan. I believe that's the best way to present it, yes.
Mr. Horn. Does anybody in GAO say, ``We don't want to be
bothered with that?'' Or do they let you do what you think your
conscience does----
Mr. Ryan. GAO is very proactive, ever since I have been at
GAO, in pursuing, building-up these type of cases, developing
the information, and making sure that the investigative bodies
are fully aware and briefed. We make all our work papers and
all our interviews available to the investigative bodies.
Mr. Horn. Captain Miller, you have been put on this job.
What day did you take over?
Captain Miller. Sir, I assumed command on Saturday,
December 8, 2001.
Mr. Horn. Did you know what you were getting into?
[Laughter.]
Captain Miller. Unfortunately, yes, sir.
Mr. Horn. I'm curious, could you explain what the GAO found
where you got a highly sophisticated staff of scientists using
four toy robots to assist them in their work, and I'm just
curious, are they toys? They cost the taxpayers $800, I
believe. Are they in the Navy's possession? Do they have a use
for whatever the Navy is working on?
Captain Miller. Mr. Chairman, the items in question, the
purchaser felt that they had a valid government use. I
personally can't see that. That, to me, is one of those cases
of poor judgment. But the bottom line is we did not have good
management controls in place, and we did not have proper
oversight, or that purchase would never have been made.
Mr. Horn. What about the various items of clothing and
expensive handbags and daybook holders that the GAO put up on
the charts? Are they listed in your inventory and are they
under your control? Can other employees use them?
Captain Miller. No, sir, they cannot use them. Those were
purchased for personal reasons. I acknowledge the GAO's
findings on that. Again, it boils down to poor management
controls and poor oversight. We have taken positive steps, I
believe, since December 8th to ensure that our training has
been completed. All cardholders and approving officials
understand their responsibilities, and I believe that we should
see improvements.
Mr. Horn. Captain Barrett, do you and Captain Miller work
out some of the things that need to be done in both those
commands, or are we doing it each separately in terms of
accountability, in terms of inventory, in terms of following-up
on this kind of thing?
Captain Barrett. Mr. Chairman, it has been a relatively
separate effort on our behalf. Our problems tend to be internal
in nature. I won't argue that there are opportunities for
lessons learned, and we will see if we can't increase that
dialog in the future.
Mr. Horn. Mr. Kutz, what would happen if someone in the
private sector misused or fraudulently used their corporate
card in this manner? Do you know any cases, any contractors, so
forth?
Mr. Kutz. No. What we did look at was for your hearing last
summer in July, we looked at the number of cardholders or
percentage of employees that held purchase cards at private
sector corporations and found no more than 4 percent in large
defense contractors. Now, again, they do different business
than someone like SPAWAR, who has a lot of small projects. So I
can see SPAWAR probably needing more credit cards, but I think
that the industry standard is certainly that there are a lot
less credit cards in the hands of people, and that was one of
the things I will acknowledge that the Navy took significant
action on since your last hearing.
They had, at the beginning of 2001, 47,000 Navy purchase
cards outstanding, and as of September 30, 2001, they were down
to 27,000. So I think the recommendations we had and the
hearing you had had a positive impact on Navy, and they took
that issue seriously.
I certainly believe that you would find stronger internal
controls in the private sector over the usage of credit cards,
and probably the disciplinary actions would be more swift and
significant than what we have seen at the Department of
Defense.
Mr. Horn. Ms. Jonas, in your role as Deputy Under Secretary
for Financial Management, the Department of Defense has begun
offsetting wages to repay delinquent travel card bills. That is
correct, is it?
Ms. Jonas. That is correct, yes.
Mr. Horn. Would it be possible to have a similar salary
offset for the purchase card program for cases in which the
government has inadvertently paid the bill for personal items?
Ms. Jonas. That might be very appropriate in this case. If
I can get back to the committee, we will look into it, and if
that is appropriate. I will say the offset program for the
travel card we hope to have a very beneficial effect. So far,
we have collected about $21 million.
In this we think it will be a significant deterrent, and we
have to do more to deter people, send the signal from the
various high levels that this is not going to be acceptable,
and if you abuse a card, whether it be a travel card or a
purchase card, we will be there and you will be paying for
these things out of your own pocket, not out of the
government's pocket.
[The information referred to follows:]
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Mr. Horn. I am going to yield now 10 minutes to the ranking
member for questioning.
Ms. Schakowsky. Thank you, Mr. Chairman. I want to just say
that Americans right now have, correctly, a very high regard
for the men and women in our Armed Services, the efforts by our
military to protect us against terrorist attacks and now with
Homeland Security. It would seem to me that this would be a
special time of obligation on the part of every person
associated with our Defense Department to make sure that not
any of that money is squandered.
We are now going to be considering a budget that requests
an unprecedented increase in the defense budget. I think that
it is only appropriate that we scrutinize every dollar, every
million dollars, every billion dollars. I think it was pointed
out by Ms. Ryan that the financial disarray within the Defense
Department has been criticized repeatedly. She mentioned the
recent report. The DOD Inspector General found that in fiscal
year 2000 alone $1.2 trillion in Department-level accounting
entries ``were unsupported because of documentation problems or
improper because the entries were illogical or did not follow
generally accepted accounting principles.''
When we talk about the abuses today, it seems to me that we
are talking about a culture, not just a problem here or there,
but a culture that has to be changed. I am so grateful to my
chairman for continuing and following-up on that July hearing
and finding out exactly what has happened since then.
That is why I wanted to ask Ms. Lee, the pattern of abuse
that we heard about today at SPAWAR was evident at our hearing
last summer. Why did the Department do nothing to curb this
abuse between last July and today? I mean, you sound very
determined; everything is going to be changed. You had a lot of
time to do that.
Ms. Lee. Yes, Ma'am. The Navy had committed to doing some
particular changes. There was a change in command, as you know,
from that timeframe. That does not make it acceptable. We have
to be more vigilant both at the specific site level, but at the
oversight level to make sure that this time we truly deliver
those changes.
Ms. Schakowsky. I know you have detailed some things, and I
hope that those will be sufficient, so that when we come back,
Mr. Chairman, and look again, that something has really
happened. Repeatedly, the Department has failed to meet the
financial muster. So this is not the first time that we have
heard things will be better. I guess I don't know any other way
but to say firmly we absolutely expect them to be better.
I wanted to ask Ms. Jonas, according to officials at
SPAWAR, items like digital cameras and personal digital
assistants don't have to be put on an inventory, and there's no
need to account for them if they are lost or stolen. Is that
Navy or DOD policy?
Ms. Jonas. I believe that may be a Navy regulation. I will
have to check our regs. But, in any circumstance, that is not
acceptable. It is government property. Whether it is $1 or
whether it is $2,500, it must be accounted for.
I know that in the Department we have little barcodes for
all the equipment in our offices, etc., and people are
responsible for those inventories. So I will get with the Navy
Comptroller to look at their regulations, and we will review
our own regulations on accounting for property.
[The information referred to follows:]
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Ms. Schakowsky. Because officials are using that as an
excuse for the loss of these items. So are you saying that
policy doesn't exist, that it will be changed, what?
Ms. Jonas. I will look into it to review Navy regulations,
and my own personal view on this is that there is no excuse
whatsoever, none.
Ms. Schakowsky. Does DOD have any regulations or guidance,
something in writing, that would make it clear to employees
that the purchase of luxury items like Coach briefcases is
inappropriate?
Ms. Jonas. I believe Dee Lee, who is here with me, can
discuss the specifics of what they put out on the purchase
card. I don't know if you were here--well, I discussed in my
testimony, but Dr. Zakheim and Under Secretary Aldridge have
recently put out a letter on this, and what appropriate use of
cards is, and strict guidance. We expect at the very top that
be carried out.
Ms. Schakowsky. I mean, it would seem obvious that one
doesn't use a government card for breast enhancement or
Hooters, or whatever. So I don't know how one would actually
state that, but are you saying to me that, until now, it hasn't
been made explicit, that there have not been guidelines, Ms.
Lee?
Ms. Lee. Purchase of personal items is never acceptable. It
is not acceptable now.
Ms. Schakowsky. Has that been written?
Ms. Lee. Yes.
Ms. Schakowsky. Has that been in guidelines?
Ms. Lee. They are for, as it shows on the card, ``For
official government purposes only.'' Purchasing any kind of
personal item is not acceptable.
Ms. Schakowsky. So, in other words, no one should have been
confused about that. So then nothing was in place to make sure
that was carried out? Is that what you are basically----
Ms. Lee. The oversight was lacking. We certainly should----
Ms. Schakowsky. Or absent?
Ms. Lee. Or absent. We should have had a billing official
who was looking at each individual's card and saying, ``What
are you buying? Why are you buying this?''--and taking
immediate action.
Mr. Kutz. Representative, we made a recommendation, based
on the hearing last summer, that the Department come out with
specific guidance on prohibited items, and they disagree with
our recommendation. Ms. Lee is the one who signed that letter
back to us.
So there was a specific recommendation by the General
Accounting Office that they list out specifically prohibited
items, because I think their guidance is very, very general
now, and you could drive an aircraft carrier through it. I
think that they need to have very specific guidance on some of
these items that it is prohibited to buy. I don't think it
would hurt to do that, but they did disagree with that
recommendation.
Ms. Schakowsky. And, Ms. Lee, could you comment on that?
Why would you disagree with that?
Ms. Lee. Well, we will certainly relook at that, but our
general guidance was personal items are never acceptable. So if
we need to be more specific on what is a personal item, we
certainly will look at that.
Ms. Schakowsky. Well, obviously, someone was not getting
it.
Ms. Lee. Yes, Ma'am.
Ms. Schakowsky. So I think that the imagination of those
using the cards may make it hard to specifically list
everything, because who ``wudda thunkit'' on some of these
items that were purchased. Nonetheless, to reject as
unnecessary on its face was patently untrue. Clearly, something
was necessary. There must be something going on. The people
feel that with impunity they can charge these things.
So I would hope that you would relook at that since it was
a specific recommendation, and I appreciate your bringing that
to my attention. I would hope that, rather than sending another
letter declaring it unnecessary, that instead you would figure
out the comprehensive list.
Let me ask you, I guess earlier you dealt with the issue of
the former commander refusing a drug test and refusing a random
car search, and trying to get, as I said in my opening
statement, two subordinates to lie for him, and the fine was a
$1,000 fine and he was allowed to retire. I am just wondering
if this is typical punishment for someone who refuses a drug
test in the Navy, Ms. Jonas.
Ms. Jonas. The Secretary of the Navy, obviously, you know,
he has control over the civilians and the military. I
certainly, if I were in his shoes, would be personally looking
into this. I have talked to the Assistant Secretary for
Research and Development, who is one of the senior officials in
the Department of the Navy, about the specific case and
expressed my concern. I have also personally talked numerous
times to the Navy Comptroller on this. I think they are both
very concerned about it.
In part, that concern led to the new direction, the new
guidance, that Secretary Aldridge and Under Secretary Zakheim
just put out. We are very concerned about this. I cannot
explain to you how concerned we are about it. But I think with
respect to specific actions taken by the Navy, I mean that is
not within my purview, but if I were in his shoes, I would have
no tolerance for that.
Ms. Schakowsky. Fortunately, the Secretary of Defense has
invited the Illinois delegation to meet with him tomorrow, and
these are some questions that I can bring up.
Let me, in the little time remaining, Ms. Lee, I have heard
that you hold yourself out to the rest of the Federal agencies
as leaders in providing business to the JWOD, the disabled
vendors' support. I am wondering how you can hold yourself in
the Department out as leaders when units like SPAWAR haven't
even heard of JWOD and aren't using the--there's an example of
that day planner there.
Ms. Lee. They're Javits-Wagner-O'Day, and we call them NIB
NISH, National Institute for the Blind and National Institute
for the Severely Handicapped, and do have products that are
mandatory source or at least first preference for the
government to buy certain items. Among them are such things as
day planners, pencils, pens, etc.
That is being addressed again in our training program. Our
contracting folks here know that. Again, SPAWAR is an
unacceptable situation, and we have to remedy it.
Ms. Schakowsky. Mr. Chairman, if I could just make one more
remark--in addition, as part of our budget, we are also going
to be looking at the reauthorization of the TANF or welfare
program. I would guarantee that we are going to spend more time
looking at every nickel that is spent that may be overpaid to a
welfare mom out there trying to raise a couple of kids, and I
am not excusing fraud or abuse anywhere, but it just seems to
me, then, when we look at a department that has asked for $400
billion, more than $1 billion a day, to be spent, then we had
better pay attention to make sure, especially at a time when
our Nation is threatened, to look at every single penny. Thank
you.
Mr. Horn. I thank the ranking member.
Let me note--which one do you think, because we are going
to close it down soon? But, Mr. Kutz, Senator Grassley and the
subcommittee have asked you to broaden your examination of
government purchase cards to other areas of the Department of
Defense. I would not ask you to discuss this work in any
particular detail. However, I will ask you whether you are
finding similar misuses or fraudulent use of purchase cards in
other areas of the Department of Defense or in other Cabinet
departments.
Mr. Kutz. Within the Department of Defense, I think, as you
see today, the actual rubber hits the road far, far outside the
Beltway. So the policy memos that come out from Headquarters
oftentimes are not that well-distributed or known by people. So
I think you are going to see, I guess, inconsistent application
and inconsistent controls across. Some will be doing well and
others are going to be more like SPAWAR. I think we are going
to see a lot of interesting things in upcoming reports.
Again, you are talking about 230,000 people holding
purchase cards, and as Senator Grassley talked about, almost 2
million people holding travel cards. That is a large program to
control. Again, one of the things that we are looking at for
both of those programs is controlling the number of cardholders
out there, and particularly with respect to the travel card,
looking at the issue of the credit checks, because really the
credit checks is a key control in looking at travel cards.
Mr. Horn. Well, the purchase card is certainly different
than the card that any of us as government officials use in our
travel for the actual ticket of the airplane and based on the
per diem limits. One can eat anywhere they want for lunch,
breakfast, you name it. That, to my knowledge, doesn't get
really very exposed one way or the other, and it is nobody's
business where they eat. So that is not the problem. But can
they use that interest credit card to substitute for the ones
we change and have in our wallet?
Mr. Kutz. They look just like--I mean, I showed you earlier
this card here. This is the purchase card. I have a travel card
myself that I am supposed to use when I am on government
travel. They just look like a normal credit card. So you could
actually easily make a mistake if you pulled it out of your
wallet and inappropriately use it without intentionally
misusing it.
But it is accepted at many vendors. One of the things that
the Department has done and the banks have done is used what is
called the MCC codes to block certain vendors. That is a
control that is limited, but it is sometimes effective,
preventing people from going to certain stores and types of
vendors.
But, again, the travel card you are talking about, there's
actually two types of travel card. There's the individually
billed card like the one that I have, where the bill comes to
my home and I pay it myself, and then there's also centrally
billed accounts, which large plane tickets are put on and other
travel is put on. So that is a lot more like the purchase card,
and we are actually looking at those two programs separately.
Mr. Horn. In our case here in the Congress, we might use
that or our own different one, Mastercard. Now the one the
Congress has is the Visa card. We file the papers that we took
the plane thing and the food, and all that, and that goes back
through our Office of Finance. If there's something screwy
about it, they let us know. Sometimes it happens where one of
your staff members does that, but they certainly don't get into
this business of the interest cards that we are talking about
with the Navy here.
Do we know there is that type of abuse throughout part of
the executive branch or what? How is GAO dealing with it?
Mr. Kutz. The other agency we have looked at
comprehensively is the Department of Education, but their
program is extremely small compared to the Department of
Defense. The whole Department of Education's program would be
about the same as each one of the Navy units we are talking
about here. But there were significant findings of fraud and
abuse that the General Accounting Office reported out of the
Department of Education.
We are planning to look for this subcommittee at several
other executive branch agencies, and we will report back on
what we find in other agencies.
Mr. Horn. I think the Education Committee certainly has
looked at this in terms of the debt that has been created in
education.
Mr. Kutz. They were planning a hearing today actually, and
it has been postponed, but they are going to have another one
on their purchase card at Education.
Mr. Horn. Now listening to all this, do you think that the
transaction level ought to move from $2,500 to $25,000, which
is in a bill of my colleague, Mr. Davis? Ms. Lee was one of the
witnesses, and so forth. We raised these questions in that
particular area. What would GAO recommend?
Mr. Kutz. I don't think it would be necessary to give all
230,000 purchase cardholders at the Department of Defense a
$25,000 micro-purchase limit. That does not seem to be
reasonable. Would it make sense to have a small group of
tightly controlled cards have that? Yes, that might make sense
for the war on terrorism or whatever need they may have to have
the larger micro-purchase limit. But I would express
significant caution to the subcommittee and the Congress with
respect to just doing this, giving the DOD a blanket 230,000
cards with a $25,000 micro-purchase limit.
Mr. Horn. Well, I would think that those that have to--we
used to say, if the officers didn't get a good Master Sergeant,
they didn't get very far. Those that are in supply and
procurement, when they need to do something on the military
side, then, obviously, that level would be maybe not enough.
But somehow it ought to be with a signoff of somebody when they
review the paper.
Mr. Kutz. The Department currently has some cards that have
$25,000 single transaction limits to pay for things such as
training, and they also have some $100,000 cards that are used
for small purchases on contract basically. So there is
currently a procedure where they have certain cards with higher
limits. Now, again, that is a little bit different than what
you are talking about, which it sounds like it is giving the
entire Department a $25,000 micro-purchase for all the cards.
Mr. Horn. So what are you going to do with that, Ms. Lee?
If the bill goes through, Mr. Davis', are there going to be
blanket $25,000 cards?
Ms. Lee. If the bill passes, obviously, we will have to put
it in place with strong oversight and make sure that we do all
these things we talk about for the cards, regardless of the
limit.
Mr. Horn. Well, that is good to know, but we will just have
GAO looking every other month, right?
So are there any other things you would like to say, any of
you presenters, on the record? Please tell us. If you say
something's hogwash, I would like to clarify it. So any of you
want to? GAO, any comments? Navy?
Captain Barrett. No, sir.
Mr. Horn. Department of Defense?
Ms. Jonas. Mr. Chairman, I would just like to say a lot of
people say they don't want to come up and testify, but this
sunshine really does help us. I mean, as you notice and as the
Congressman noted, it is a big cultural change for the
Department. There is a lot of education that has to go on. A
lot of people really truly don't understand what the
responsibilities are of having a card. We need to get the
message down to the very lowest levels. As Greg mentioned in
his testimony, sometimes it is very hard to get the message out
from the highest levels to the lowest levels, but we are
committed to doing that. We really appreciate your work here at
this committee, and we will do our level best to try to correct
many of these problems.
Mr. Horn. Yes, I got a bill through on transitions between
Presidencies, and they have various types of material that they
bring to not just the Cabinet members, but also the various 300
to 3,000 Presidential appointees, especially Assistant
Secretaries, and so forth. So they would be looking at the
ethics, which has bogged down every administration, because it
takes so long to fill out the forms and all the rest of it. But
somehow we've got to get that into those that get these very
honored appointments.
Yes?
Ms. Schakowsky. Ms. Jonas, I just want to respond to what
you said, that it is clear that there are too many people who
don't understand how those cards can be used. I think they
understand perfectly. I think what they understand is that they
can get away with these kinds of purchases. I don't think that
anyone in their right mind would think that they could take a
government card and purchase these luxury items. What they
think is that I can do it and I can get away with it. I think
there has to be a much harsher approach to this, that it is
fraud and it is abuse, and it has to stop. If they don't
understand, then they have no place in our Armed Services, in
our Defense Department.
Ms. Jonas. I would agree. I didn't mention this in my
testimony. One of the things that we are looking at, and are in
discussions with OMB, is a legislative proposal to hold
accountable officials financially liable. We hope to be sending
that over to you. But I think that would be another significant
deterrent, including the offset. I apologize if I--I think my
comments were meant to intend that we need to do a very good
job at letting every individual in the Department, every
military officer, every civilian who has this privilege know
exactly, clearly, unambiguously, what the responsibilities are
with the card.
Ms. Schakowsky. And what the consequences will be.
Ms. Jonas. Absolutely, yes.
Ms. Schakowsky. Thank you.
Mr. Horn. That's good news. It looks like you are getting
things done. I have great affection and feelings for the
Secretary of the Navy. He is a first-rate person. Does he know
about all this? Anybody in Defense, DOD, say, ``Mr. Secretary,
you ought to know what's going on in your Navy?''
Ms. Lee. We have been talking with John Young, who is the
AT&L for the Secretary. I don't know his personal
conversations----
Mr. Horn. Stop the bureaucracy bit. ATL?
Ms. Lee. Oh, Acquisition, Technology and Logistics.
Mr. Horn. Yes. Well, we humans up here don't always know
this stuff, and we know the rigmarole that tries to get past
us. [Laughter.]
But that is why I stop on everything----
Ms. Lee. Been here too long already, huh, Mr. Chairman?
Mr. Horn. Yes. Stovepipe is my other beef in the
bureaucracy.
But, anyhow, I think the Deputy Under Secretary has got it
moving in the right place, but I would think the Secretary of
the Navy ought to know this is going on and not be blindsided
when he comes up here for the Armed Services or whatever.
I thank you very much for that.
I am going to thank the following people who put together
this interesting hearing: J. Russell George is the staff
director and chief counsel, right behind me; Bonnie Heald, to
my left, is the deputy staff director, that put the hearing
together. Justin Paulhamus is the majority clerk, and Michael
Sazonoff is the subcommittee intern. We have our court
reporter, Joan Trumps. We thank you all for helping us on this.
Ms. Schakowsky. And we thank David McMillen for his help.
Mr. Horn. Thank you. With that, we are adjourned.
[Whereupon, at 11:45 a.m., the subcommittee was adjourned,
to reconvene at the call of the Chair.]
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