<DOC>
[107th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:87139.wais]
GOVERNMENT PURCHASE AND TRAVEL CARD PROGRAMS AT THE DEPARTMENT OF THE
ARMY
=======================================================================
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
__________
JULY 17, 2002
__________
Serial No. 107-213
__________
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
______
87-139 U.S. GOVERNMENT PRINTING OFFICE
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
JOHN SULLIVAN, Oklahoma (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
DOUG OSE, California MAJOR R. OWENS, New York
ADAM H. PUTNAM, Florida PAUL E. KANJORSKI, Pennsylvania
JOHN SULLIVAN, Oklahoma CAROLYN B. MALONEY, New York
Ex Officio
DAN BURTON, Indiana HENRY A. WAXMAN, California
J. Russell George, Staff Director and Chief Counsel
Bonnie Heald, Deputy Staff Director
Justin Paulhamus, Clerk
David McMillen, Minority Professional Staff Member
C O N T E N T S
----------
Page
Hearing held on July 17, 2002.................................... 1
Statement of:
Grassley, Hon. Charles E., a U.S. Senator from the State of
Iowa....................................................... 5
Kutz, Gregory D., Director, Financial Management and
Assurance, U.S. General Accounting Office, accompanied by
Special Agent John Ryan, Assistant Director, Office of
Special Investigations, U.S. General Accounting Office;
Major General Thomas W. Eres, Commander, California Army
National Guard; Sandra L. Pack, Assistant Secretary of the
Army, Financial Management and Comptroller, Office of the
Secretariat; and Jerry S. Hinton, Director for Finance,
Defense Finance and Accounting Service, Department of
Defense.................................................... 48
Kutz, Gregory, Director, Financial Management and Assurance,
U.S. General Accounting Office, accompanied by Special
Agent John Ryan, Assistant Director, Office of Special
Investigations, U.S. General Accounting Office; James T.
Inman, Acting Deputy Assistant Secretary of the Army for
Policy and Procurement; and Diedre A. Lee, Director,
Defense Procurement, Office of the Under Secretary of
Defense for Acquisition, Technology and Logistics,
Department of Defense...................................... 128
Letters, statements, etc., submitted for the record by:
Eres, Major General Thomas W., Commander, California Army
National Guard, prepared statement of...................... 83
Grassley, Hon. Charles E., a U.S. Senator from the State of
Iowa:
Information concerning fraudulent transactions........... 120
Prepared statement of.................................... 10
Hinton, Jerry S., Director for Finance, Defense Finance and
Accounting Service, Department of Defense, prepared
statement of............................................... 100
Horn, Hon. Stephen, a Representative in Congress from the
State of California, prepared statement of................. 3
Inman, James T., Acting Deputy Assistant Secretary of the
Army for Policy and Procurement, prepared statement of..... 132
Kutz, Gregory D., Director, Financial Management and
Assurance, U.S. General Accounting Office, prepared
statement of............................................... 53
Lee, Diedre A., Director, Defense Procurement, Office of the
Under Secretary of Defense for Acquisition, Technology and
Logistics, Department of Defense, prepared statement of.... 141
Pack, Sandra L., Assistant Secretary of the Army, Financial
Management and Comptroller, Office of the Secretariat,
prepared statement of...................................... 91
Schakowsky, Hon. Janice D., a Representative in Congress from
the State of Illinois, prepared statement of............... 42
Waxman, Hon. Henry A., a Representative in Congress from the
State of California, prepared statement of................. 36
GOVERNMENT PURCHASE AND TRAVEL CARD PROGRAMS AT THE DEPARTMENT OF THE
ARMY
----------
WEDNESDAY, JULY 17, 2002
House of Representatives,
Subcommittee on Government Efficiency, Financial
Management and Intergovernmental Relations,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to recess, at 10 a.m., in
room 2154, Rayburn House Office Building, Hon. Stephen Horn
(chairman of the subcommittee) presiding.
Present: Representatives Horn, Schakowsky, Waxman, and Ose.
Staff present: J. Russell George, staff director and chief
counsel; Bonnie Heald, deputy staff director; Justin Paulhamus,
clerk; Sterling Bentley, Joey DiSilvio, Freddie Ephraim,
Michael Sazonov, and Yigal Kerszenbaum, interns; Phil Schiliro,
minority staff director; Kate Anderson, minority counsel; Karen
Lightfoot, minority senior policy advisor; David McMillen,
minority professional staff member; and Jean Gosa, minority
assistant clerk.
Mr. Horn. A quorum being present, this hearing of the
Subcommittee on Government Efficiency, Financial Management and
Intergovernmental Relations will come to order.
We are here to continue our examination of two Government
credit card programs within the Department of Defense: the
Department of the Army's travel card program, and its purchase
card program.
We will begin with the Army travel card program. As you
will soon hear, the General Accounting Office has found that
these travel cards, which clearly state that they are for
``Official Government Travel Only'' have been used for escort
services, casino and Internet gambling and at facilities called
gentlemen's clubs; bearing such names as ``Bottoms Up,''
``Cheetah's Topless Club,'' and ``Teazers,'' regardless of
whether the cardholder is traveling on official Government
business or not.
When first conceived, the Government travel card program
was envisioned as an efficient way to reduce the Government's
costs of administering travel. The cardholder is reimbursed for
the travel expenses by the Government, and is responsible for
paying the credit card bill.
In most cases, the cardholders pay their bills on time, but
in far too many other cases, they do not. These delinquencies
and charge-offs are costing the Army millions of dollars in
lost rebates, higher fees, and time and effort spent attempting
to collect the overdue accounts.
At a subcommittee meeting more than a year ago, a
representative from the Bank of America, which issues the
Defense Department's travel cards, stated that the bank was
writing off more than $2 million in delinquent travel card
charges each month. In addition, cash advances charged to the
Defense Department travel card were twice as likely not to be
paid back, when compared to other card charges, leading one to
believe that misuse is routine, if not rampant.
Ms. Schakowsky and Senator Grassley, who is our first
witness today, joined me in requesting the General Accounting
Office to examine the extent of these problems.
This morning, we will focus on the GAO's investigation of
the Department of the Army's travel card program. At 2 p.m., we
will reconvene to examine the Army's purchase card program. I
welcome our witnesses today, and I hope that we can provide the
information we need to correct this egregious situation.
[The prepared statement of Hon. Stephen Horn follows:]
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Mr. Horn. Now I am delighted to have with us today, Senator
Grassley, who has been a very patient person, with the rest of
us. We do not like what we see, and we want to solve it. So
Senator, we are delighted to have you with us again.
STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR FROM THE
STATE OF IOWA
Senator Grassley. Thank you, Mr. Chairman, and thank you,
most importantly, for your outstanding leadership on the DOD
credit card issue.
We began this oversight investigation more than 2 years
ago. We jumped into this mess, not knowing what we would find.
As each new layer of abuse has been peeled back, we have made
new discoveries. You have encouraged us to keep digging, and we
are staring, it seems like, into a bottomless pit.
With 2.3 million credit cards at 23 different agencies
spawning expenditures of $20 billion a year, the pit is deep,
and it is dark.
Through thick and thin, you, Mr. Chairman, stood like the
Rock of Gibraltar. You have been steadfast and unwavering. You
have provided the venue where we could do oversight without
fear of interference. You have created an environment that,
quite frankly, is getting results, and that is what our work
should be doing around here.
Thanks to you, Mr. Chairman, we have the DOD credit card
abuse under the microscope, and we are going to keep it under
the microscope. The General Accounting Office is helping us,
and is doing a great job. It has been an honor and a privilege
for me to participate.
As I said, when I was before your committee in March of
this year, in a place like the Pentagon, the glare of public
spotlight is never welcome, but shedding light on a problem
like this one is the heart and the soul of congressional
oversight. Exposure makes good things happen.
Thanks to you, Mr. Chairman, the spot-light switch is set
on full power. The beam is focused on the problem. Hopefully,
we will soon see the bottom of the pit and know what to do.
Mr. Chairman, we have come a long way. We have seen the
promised land, but we are not there, yet. We have generated
pressure for change. The momentum is good, but the outcome is
uncertain.
So we have more work to do, and I hope today's revelations
help us maintain momentum and keep us moving down the field
toward the end zone.
There has been recent progress. For starters, Secretary
Rumsfeld is on our side. He is trying to solve the problem,
instead of making excuses. I find that rare for Secretary's of
Defense that I have served with in the past.
Secretary Rumsfeld created the Charge Card Task Force to
clean up the mess, and that Task Force is moving in the right
direction.
The Office of Management and Budget has just announced a
crackdown on credit card abusers. Salary offsets are working.
Travel card charge-offs have stopped; charge-offs are accounts
that the Bank of America had to write off as bad debt, due to
non-payment. More than $6 million in outstanding debt has
already been recovered, and hopefully more is on the way.
The 713 commissioned officers who had defaulted on $1.1
million in travel card charge are being dragged to the pay
window. Half of those bills have been paid in full. The rest
are in salary offsets or voluntary re-payment plans.
The Department of Defense Inspector General is starting to
be very proactive in this area. So far, the IG has been ``out
to lunch'' on the credit card abuse, but that seems to be
changing. The IG is creating an automated ``data mining''
capability to police the system and provide real time
oversight.
One area still needs dramatic and drastic improvement. That
is the travel voucher turn-around time. It takes far too long
to reimburse troops for official travel expenses. This, in
turn, is pushing account delinquencies upward. With a little
luck, maybe we may see reform in our lifetime.
I would like to now look at the situation with the U.S.
Army: Army purchase cards and army travel cards, as you have
already announced. Our first hearing in July 2001 and the
second one in 2002 were Navy days. After the first two
hearings, our critics complained that somehow Senator Grassley
and Congressman Horn were focusing on a few isolated cases. One
rotten apple, we were told, does not make the whole barrel bad.
Well, today's hearing will lay the one bad apple theory to
rest for good. This time around, the General Accounting Office
visited 13 installations, and tested a much bigger sample. The
General Accounting Office used techniques to call several
thousand suspicious transactions for hundreds of thousands of
charges. All sorts of stuff fell out, including 13 purchase
card fraud cases, plenty of waste and abuse, as well, plus a
number of potential travel card fraud cases.
Some are now active criminal investigations. I want to look
at the lack of reliable data on fraud cases. We now know that
there are a lot of bad apples out there, but exactly how many,
we do not know. The GAO says the number is big, like 500-plus.
The DOD IG thinks it is maybe more like 72. Nobody knows for
sure.
The General Accounting Office says there are no reliable
data on the total number of cases under active investigation.
Somebody should be able to punch a button and get the number.
Lack of data on fraud cases is product of a ``hear no evil-see
no evil'' kind of mentality that is too prevalent around here.
The Department of Defense cannot manage effectively, obviously,
they do not have information to make management decisions. So
reliable data is a very important thing.
Now I would like to look at fraud and abuse cases. The
General Accounting Office has found everything but the kitchen
sink and, hopefully, that is coming to light. We have
Government employees using their cards to make mortgage
payments and closing costs; to buy cards; to buy engagement
rings; racetrack betting; Elvis photos from Graceland; a framed
John Elway jersey; a trip to the Rose Bowl game; and even
Caribbean Cruises. You name it, it seems like they are being
done.
The General Accounting Office found at least 200
individuals who were using Department of Defense plastic to buy
cash in ``gentlemen's clubs'' like the Bottoms up Lounge that
you mentioned, Mr. Chairman. These are adult entertainment bars
that are located near military bases. They are probably run by
the mob. After surrendering their military IDs and credit
cards, the soldiers get $500 cash.
They spent the $500 on lap dancing and other forms of
entertainment. But the amount posted on their account is $550.
The extra $50 covers a 10 percent fee to get the cash.
At the last hearing, I mentioned Pablo Falcon. He ran up a
bill of $3,100 at one of these places. Since then, the General
Accounting Office has found many others doing it, too, to the
tune of $38,000.
Now I would like to look at bad checks. The General
Accounting Office found 1,200 Department of Defense personnel
who wrote NSF or bad checks, to pay travel card bills. Over 200
are chronic rubber check writers. Some are commissioned
officers. One individual, a Staff Sergeant at Fort Jackson,
South Carolina, wrote 86 bad checks in 2001 alone, totaling
$270,000. That was against his unpaid balance of $36,000.
The Staff Sergeant's 86 bad checks should have come as no
surprise. Before receiving his Government card, he had a
criminal record for credit card fraud and bad checks. He had a
$115,000 real estate loan that went bad. He had declared
bankruptcy and used two Social Security numbers to perpetuate
crime.
The Staff Sergeant's 86 bad checks were a boosting
operation, and this is how boosting works. Under industry
regulations, a payment check must be credited to an account
upon receipt. Once posted, the account appears to have been
paid, providing more credit for more purchases.
By writing successively larger bad checks, at the right
moment, the Staff Sergeant succeeded in raising his credit
limit to $35,000, and he charged right up to that limit, Mr.
Chairman.
One or two bad checks obviously can happen. I understand
that. But the regular abusers, especially commissioned
officers, need to be held accountable.
Mr. Chairman, I asked the General Accounting Office to
transmit the list of chronic bad check writers to Secretary
Rumsfeld and the Department of Defense IG for further review.
Writing a lot of bad checks and leaving a trail of bad debts
are signs of financial irresponsibility. These people, under
those circumstances, could be national security risks.
Under the existing Department of Defense rules, a person's
level of financial responsibility is a key factor in
determining whether that person holds a security clearance and
is placed in a sensitive position.
The General Accounting Office has tested that rule. To do
this, the General Accounting Office culled out the 105 worst or
most abusive travel card cases, and did a match up with
clearances.
Among the 105 worst cases, the GAO found 40 cardholders who
hold secret, top secret, or higher clearances. Each of those 40
accounts had to be charged off by the Bank of America as bad
debt. The bad debt on these accounts alone is a staggering
$148,430. One of these individuals, a GS-13 in the Pentagon,
wrote four bad checks worth $77,000, and had accumulated $3,257
in bad debt on her DOD travel card account. She used it to
cover a personal move of $3,600, from her apartment in Virginia
to a new home in Mitchellville, Maryland.
When she applied for a Department of Defense travel card,
she exercised her right. She put an ``X'' in the no-credit-
check box, and she did this for good reason. She had a bad
credit report. She had defaulted on several charge accounts.
She holds a top secret clearance, and works on a highly
classified project. This case is troublesome, and ought to be
for three reasons. The person's supervisor was completely
unaware of the bad checks and the bad debt. Second, No
discriminatory action has been taken. Third, on the day she was
interviewed by the General Accounting Office, she paid off her
debt to the bank.
The General Accounting Office has referred all these cases
to the Army's Central Adjudication Facility for review, and the
CAF is the one that grants clearances. The CAF needs to assess
the level of financial irresponsibility, and determine whether
any of these clearances should be pulled.
Now I would like to speak about something I call goodies
for everyone, because these are some words used by people in
the Defense Department.
``Let us get enough goodies for everyone,'' it was said.
That is a lofty objective behind a command decision to buy 80
palm pilots for $30,000. The palm pilots were bought by an
office over at the Pentagon, the Office of Assistant Secretary
of Defense for Acquisition. That is the office run by the DOD
purchase card czar, Ms. Dee Lee.
Mr. Chairman, those audacious words come right out of her
internal memo. I have that memo here, and I would like to have
that placed in the record, if I could.
Mr. Horn. It will be put into the record at this point.
Senator Grassley. So let us get enough goodies for
everyone. It is a product of a culture. It is an attitude
nurtured in a place where there seems to be no restraint. It
says, ``We can splurge, at the taxpayers' expense and not worry
about it.''
It is unfortunate that such an attitude is being nurtured
in the purchase card czar's front office. It sends the wrong
message to the troops in the field. The message going out is
clear. Abuse is OK. Everyone deserves to get some goodies.
The General Accounting Office figures Ms. Lee wasted $1,540
on the palm pilots. She paid top dollar for a rush order that
ended up in the storage cabinet. Maybe the goodies were not
needed, after all. Maybe, in fact, $30,000 was wasted.
Mr. Chairman, we need to answer the question, why are there
so many bad apples in the barrel? The reason can be boiled down
to three words, ``ineffective internal controls.''
That brings me to my last main point. Weak or nonexisting
controls, like the ones in place today, leave the door wide
open to theft. Army internal controls are AWOL. The General
Accounting Office tested Army transactions against a standard
set of internal controls. Army failures rate on the control
tests were unbelievably high, across the board; as high as 86
to 87 percent in key areas.
An important part of checking to make sure that you got
what you paid for, obviously, is inventory control; and it is
seen as the Army having none.
At Fort Benning, GA, for example, 84 percent of pilferable
items bought with purchase cards were not recorded in the
books. So where is this property today, right now? Letting
soldiers keep their cards when they leave is another kind of
control failure.
The General Accounting Office found 317 cardholders at Fort
Hood, Texas, who were allowed to keep their cards when they
left the Army. We know that at least one of these cards was
used to commit fraud. When weak controls and no credit checks
are combined with monthly purchase card spending limits of up
to $4,100, fraud is very easy.
Mr. Chairman, weak controls leadeth the dishonest into
temptation. Checking credit card transactions is so very
simple; just match receipts with statements. Why is the Army
not doing it?
The General Accounting Office says the Army troops are just
too busy with other duties to do it. Being too busy to make
routine control checks to protect the taxpayer's money is not
acceptable.
Purchase card accounts are U.S. Treasury accounts. These
are accounts obviously belonging to the taxpayers. Protecting
tax money is not an option. It is mandatory, Mr. Chairman. If
the troops can not do it, then maybe credit cards are not the
answer.
So Mr. Chairman, this is what I have to say on your topic
this morning. If I can, I plan to return, as you requested that
I do, to this afternoon's hearing, to provide an in-depth
report on very troublesome fraud cases, and particularly one
involving a current Army employee, Ms. Tanya Mays.
Thank you, Mr. Chairman.
[The prepared statement of Senator Grassley follows:]
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Mr. Horn. Thank you very much, Senator, for taking this
time. I know you have plenty of business on the other side of
the Hill. So we appreciate you taking this time.
Senator Grassley. And I thank you for letting me in early,
ahead of all your Members' statements, because we do have a
vote at 10:30. So I appreciate that very much.
Mr. Horn. We have one on our side in 5 minutes.
Senator Grassley. I will leave my statement here for the
record.
Mr. Horn. Thank you. Well, let us swear in everybody, and
then I will yield to Ms. Schakowsky as the ranking member.
Mr. Waxman.
Mr. Waxman. Mr. Chairman, may I request that I be allowed
to give an opening statement right away, because I am called to
another committee?
Mr. Horn. Sure.
Mr. Waxman. Thank you very much.
We are going to hear today yet again about the financial
mismanagement of the Department of Defense. Americans have been
hearing a lot about financial mismanagement lately. Revelations
about corporate misdeeds in companies like Enron and WorldComm
fill the headlines on a daily basis.
The public is growing increasingly concerned, and this
concern is spreading to how the Federal Government manages its
money.
We, in Congress, have a responsibility to ensure that the
Federal Government's accounts are honest. That is why today's
hearing is so important, and I want to thank the chairman for
calling it.
I also want to thank my colleague, Representative
Schakowsky for her vigilance in pursuing this issue. I am
pleased to work with her to hold the Defense Department
accountable.
Today, she and I will send a letter to Secretary Rumsfeld,
urging him to address the problems of financial mismanagement,
found by GAO's investigations.
As GAO's testimony and report reveal, this mismanagement is
rampant. GAO found widespread abuse of Government travel cards
and purchase cards. Both of these cards are intended to
increase convenience for Government employees.
The travel cards are designed to make it easier for
Government employees to pay for official travel, and the
purchase cards are designed to make it easier to buy needed
items. Both cards are specifically intended for official
business.
But we will hear today that these cards were frequently
used, not for official business, but instead for private
pleasure. For instance, GAO found that at one site, 45 percent
of the purchases on the travel card were for personal use.
For example, one use of these travel cards was at strip
clubs. Army personnel would use these cards to obtain cash or
sometimes ``club cash'' from the strip club, often at 10
percent fee. GAO identified about 200 individuals who were
charged almost $38,000 at these establishments. One cardholder
alone obtained more than $5,000 in cash.
But that is not the only disturbing example. GAO found that
these travel cards were being used to pay for everything from
dating and escort services, to casino and Internet gambling, to
cruises. GAO's findings on purchase cards, which the committee
will hear about today are similarly troubling.
For instance, these cards were also used to purchase escort
services. In another example, GAO estimates that $100,000 was
spent on various items, including a computer game station,
digital camera, and a surround sound system. In another case,
$30,000 was spent on items that included clothing from
Victoria's Secrets.
These abuses are unacceptable, and it is even more
unacceptable that the Defense Department has not done more to
stop them. GAO reported on these problems last year, yet the
department failed to correct them.
It is common sense that the use of these cards require
proper oversight. No Government agency should give its
employees a blank check, and not watch to see how the money is
spent. Yet, that is effectively what the department has done
with these cards.
GAO found that a weak overall control environment, and
breakdowns in key internal control activities leave the Army
vulnerable to potentially fraudulent, improper, and abusive
purchases. It is past time for our Government to get its books
in order.
Thank you very much, Mr. Chairman.
[The prepared statement of Mr. Waxman follows:]
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Mr. Horn. Thank you.
Would you like, Ms. Schakowsky, to add anything at this
point?
Ms. Schakowsky. How were you going to do this?
Mr. Horn. I am going to swear in the witnesses, and I would
just as soon have you do it now, and then they will be here.
Ms. Schakowsky. Thank you, Mr. Chairman, for calling these
hearings today. I appreciate your separating the travel card
and purchase card issues, so we can focus on the unique aspects
of each.
Mr. Waxman referred to the letter that he and I now have
authored to Secretary Rumsfeld today, urging that there be a
consistent and effective effort to solve the financial
management problems at the Defense Department.
The primary issue before us today is the failure of
financial management at the Department of Defense. Last year,
the Inspector General reported that the Defense Department had
$1.2 trillion in expenditures that could not be properly
accounted for in the annual audit.
The GAO has repeatedly testified that the failure of the
Defense Department to be able to audit its books is what is
keeping the entire Government from being able to have a clean
audit.
Today, we will hear several examples of misuse of
Government credit cards. I am sure that tomorrow's news stories
will focus on the most outrageous of these examples, as they
should.
However, we will not solve this problem by only focusing on
these examples, and only singling out the individuals, because
it will not reveal the true problem facing our oversight role;
which is the department.
As Senator Grassley stated, we are talking about having to
change the culture, a culture of abuse, a culture of no
accountability that is in the Department of Defense right now.
Government travel and purchase cards were instituted to save
money for the Government.
However, we have gone from a system of Byzantine chains of
review for small purchases or day trips, to no management at
all.
The span of control in many of the agencies reviewed by GAO
is absurd. We see purchases made on Government cards for
personal use. We see individuals defaulting on large sums owed
for Government travel; travel for which the individual was
reimbursed, and then the person is promoted. Where is the
management oversight?
Again and again, whether it is procurement, travel cards,
purchase cards, or contract management, the story is the same.
DOD management is not just bad, it is atrocious.
Last week was one of the worst weeks on Wall Street in Wall
Street history, because the public has lost confidence in
corporate financial management.
What is clear from our testimony today is that the
financial management at DOD, at the Department of Defense is as
bad or worse as Enron, WorldComm, Xerox, or any other
corporations that have misled the public.
I want to say that again, because I think the American
people should be shocked that financial management in our own
U.S. Government of Defense is as bad or worse as Enron,
WorldComm, Xerox, in my opinion, or any of the other
corporations that have misled the public.
At a time when allegations of wrongdoing, about business
executives and high ranking Government officials are dominating
the news, we must demand that our agencies set a good example.
The President ran on the idea that Government should be run
more like business. Well, it looks like one should be careful
what one wishes for.
Our former colleague, Senator Proxmire used to give out the
Golden Fleece Award, which often went to some unit within the
Defense Department. Perhaps it is time that we brought that
back.
I am dismayed at the number of hearings that we have had
that highlight the failure of financial management at DOD, and
yet nothing has happened.
Some, I am sure, will complain that we should not be
distracting the military from its primary mission, as we fight
terrorism. But it is scandalous that the Department of Defense
management is permitted to squander funds that could be spent
protecting our home front, and those serving on the front line.
Thank you, Mr. Chairman.
[The prepared statement of Ms. Schakowsky follows:]
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Mr. Horn. Thank you. We will now ask panel two to come
forward. Gregory Kutz is Director, Financial Management and
Assurance, U.S. General Accounting Office. He is accompanied by
Special Agent John Ryan, Assistant Director, Office of Special
Investigations in the U.S. General Accounting Office.
Then we have Major General Thomas Eres. He is Commander of
the California Army National Guard. Sandra L. Pack is the
Assistant Secretary of the Army, Financial Management and
Controller, Office of the Secretariat; and Jerry Hinton,
Director for Finance, Defense Finance and Accounting Service,
Department of Defense.
Now we want not just you, but we want all your assistants
that are going to give you testimony or whisper in your ear or
whatever it is. The clerk will take down the names and put in
those people, the staff back-up, and they will be in the record
at this point.
So if you will all come and raise your right hand. Let us
see, we have 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, it looks like.
[Witnesses sworn.]
Mr. Horn. The clerk will note that all have affirmed the
oath. We have now a vote on the floor. Please be seated. We are
going to come, as fast as we can, back off the floor, and then
come back here. So we are in recess now.
[Recess.]
Mr. Horn. The recess is over at seven before the time. So
we now will have Greg Kutz, Director of Financial Management
and Assurance, U.S. General Accounting Office. You have spent a
lot of time with this, so give us the best you can think of, in
terms of the summary.
STATEMENTS OF GREGORY D. KUTZ, DIRECTOR, FINANCIAL MANAGEMENT
AND ASSURANCE, U.S. GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY
SPECIAL AGENT JOHN RYAN, ASSISTANT DIRECTOR, OFFICE OF SPECIAL
INVESTIGATIONS, U.S. GENERAL ACCOUNTING OFFICE; MAJOR GENERAL
THOMAS W. ERES, COMMANDER, CALIFORNIA ARMY NATIONAL GUARD;
SANDRA L. PACK, ASSISTANT SECRETARY OF THE ARMY, FINANCIAL
MANAGEMENT AND COMPTROLLER, OFFICE OF THE SECRETARIAT; AND
JERRY S. HINTON, DIRECTOR FOR FINANCE, DEFENSE FINANCE AND
ACCOUNTING SERVICE, DEPARTMENT OF DEFENSE
Mr. Kutz. Thank you, Mr. Chairman. It is a pleasure to be
here to discuss our audit of the Army Travel Program. With me
is Special Agent John Ryan from our Office of Special
Investigations, who is an expert in credit card fraud and
abuse.
I have in my hand a travel card, and it is also shown on
the monitor, for those in the audience. As you can see, it
looks like a normal credit card. The card used by the Army is a
Bank of America Master Card, and can generally be used wherever
Master Card is accepted. However, notice that it says, ``For
Official Government Travel Only.''
Travel card charges are billed to and paid for directly by
the cardholder, unlike the purchase card, where they are billed
to the Government and paid by the Government.
Travel cards were introduced to the Government to improve
efficiency and reduce the cost of operations. The Department of
Defense individually billed travel card activity was over $2
billion in fiscal year 2001.
With 1.4 million travel cards in the hands of DOD
employees, effective internal controls are necessary to prevent
fraud and abuse.
Today, I will discuss our audit of the Army travel program
for fiscal year 2001. This is the first in a series of audits
on the Department of Defense travel programs. We plan to issue
the results of our Navy and Air Force audits in the next
several months.
I also want to thank the Army for their cooperation in our
audit. The recent success of our forces in Afghanistan has
again demonstrated that our military forces are second to none.
The bottom line of my testimony is that the Army had
significant breakdowns in internal controls over the travel
program. These breakdowns contributed to significant
delinquencies and charge-offs, and fraudulent and abusive
activity.
My testimony has three parts. First, delinquencies and
charge-offs; second, fraudulent and abusive activity; and
third, the effectiveness of internal controls.
First, we found substantial delinquencies in charge-offs of
Army travel card accounts. Most Army employees used their card
appropriately and paid the bank on time. However, as shown on
the posterboard, we found that the Army has the highest
delinquency rate in the Federal Government.
For the 2-years ending March 31, 2002, the Army's
delinquency rate fluctuated between 10 and 18 percent. this was
about 5 percentage points higher than the rest of DOD and 7
percentage points higher than Federal civilian agencies. In
addition since 1999, nearly $34 million of Army accounts have
been charged-off.
These delinquencies and charge-offs have cost the Army
millions of dollars in lost rebates, higher fees, and
substantial resources spent pursuing and collecting past-due
accounts.
We found that the Army's delinquency and charge-off
problems relate primarily to young, low and mid-level enlisted
military personnel. Specifically, this is privates to staff
sergeants, with basic pay ranging from $11,000 to $26,000.
The Army and DOD have taken action to improve management
attention on delinquent accounts. In addition, beginning
November 2001, DOD began offsetting military and civilian
employee wages and retirement payments. These and other actions
have significantly reduced charge-offs and increased recoveries
in fiscal year 2002.
My second point relates to our findings of numerous
instances of potentially fraudulent and abusive activity. Fraud
and abuse were substantial in fiscal year 2001. Since 1999,
23,000 Army accounts were charged off, while thousands more
have been delinquent.
In addition, we estimate that 15 to 45 percent of 2001
travel card transactions at the four installations that we
audited were for personal charges.
The instances of potential fraud we found related to
individuals who wrote three or more NSF or ``bounced'' checks
to the Bank of America. During fiscal year 2001, over 4,000
Army personnel wrote NSF or bounced checks to the bank. More
than 200 of these cardholders, all having their accounts
charged-off, may have committed bank fraud by writing three or
more NSF checks to the bank.
One cardholder, as Senator Grassley mentioned, from Fort
Jackson, wrote 86 NSF checks to the bank, for about $270,000.
This cardholder was convicted of writing NSF checks, prior to
getting a Government travel card.
This cardholder was able to boost his credit limit from
$10,000 to $35,000, by writing these NSF checks. As of late
May, this cardholder was being court martialed.
We also identified substantial abuse of the travel card.
Abuse due to failure to pay Bank of America included both
cardholders that were reimbursed for official travel, and those
that used the card for personal charges.
The posterboard shows examples of abuse, resulting in
charged-off accounts, including: the purchase of a used car
from Budget Rent-A-Car; adult entertainment charges, including
gentlemen's clubs, such as the Spearmint Rhino Adult Cabaret;
Internet and casino gambling, including a Pennsylvania National
Guard solder, who charged nearly $14,000 for his Black Jack
gambling habit; and use of reimbursed travel money to pay for
the closing costs on a home purchase.
We found that having the travel card was like having cash.
Specifically, cardholders abused the travel card by improperly
obtaining cash at gentlemen's clubs.
These clubs, which provide adult entertainment, supplied
cardholders with actual cash or ``club'' cash for a 10 percent
fee. For example, a cardholder wanting $300 of cash would be
provided $300 and billed $330. These transactions appeared on
the monthly credit card bill as restaurant or bar charges.
One cardholder, who was on official travel, obtained $5,000
in cash at two gentlemen's clubs, in Columbia, South Carolina,
called Bottoms Up and Platinum Plus. This cardholder told us
that the ability to obtain cash at these clubs was common
knowledge among military members.
We also found abusive charges that were personal use, but
where the cardholder ultimately paid the Bank of America. These
cardholders benefited by effectively getting an interest-free
loan. These purchases included cruises, a package for the Rose
Bowl, sports and theater tickets, insurance, and women's
lingerie.
In addition, it was troubling to see little evidence of
disciplinary action against travel card abusers. In the rare
cases where severe disciplinary action was taken, it was often
done in conjunction with other problems such as drug abuse.
We even found that a California National Guard employee was
promoted from Major to Lieutenant Colonel, after having her
$5,000 account balance charged-off.
In addition, we found that 38 of 105 severe travel card
abusers from our testing have active, secret, or top secret
clearances. An individual's finances are one of the key factors
used in determining whether a clearance is granted.
We found that the Army does not link fraudulent or abusive
use of the travel card to the maintenance of security
clearances.
In addition to travel card abuse, many of these 38
individuals had other financial problems, such as bankruptcy,
foreclosed home mortgages, and repossessed automobiles. Let me
repeat, the people with these financial problems had secret and
top secret clearances in June 2002.
Mr. Chairman, as you, Representative Schakowsky, and
Senator Grassley requested, we have provided the DOD with a
list of these individuals to reevaluate the security
clearances.
My third point relates to weaknesses in internal controls.
Mr. Horn. Let me just interrupt on that. We sent over to
the Secretary about 800 names on that, and I think they came
from you. So I just wanted to know where that is.
Mr. Kutz. That is a different list. This is a list of
people with active, secret, and top secret clearances that
abused their travel card.
Mr. Horn. And they have matched that against that?
Mr. Kutz. We had matched that.
Mr. Horn. You matched that?
Mr. Kutz. Yes, we did the matching.
Mr. Horn. OK.
Mr. Kutz. My last point relates to weaknesses in internal
controls. A weak control environment, compounded by instances
of delays in processing travel reimbursements, contributed to
the Army's high delinquency rates.
Army management has not provided for an effective
infrastructure, primarily human capital related, to effectively
manage this program.
For example, agency program coordinators, who oversee
travel cardholders' activities, are often military personnel,
who are rated primarily on other job responsibilities, such as
airport security.
The APC role is an ``other duty as assigned.'' Many of
these APCs are set up to fail in their duties, because they are
given a substantial span of control, in one instance, up to
1,000 cardholders, and virtually no time to do this collateral
duty.
Many problems related to the Army issuing travel cards to
individuals, regardless of their prior credit history. We found
a significant correlation between travel card abuse, fraud, and
delinquencies, and prior credit problems.
Prior problems included defaulted credit cards, automobile
loans and home mortgages, bankruptcies, and prior convictions
for writing bad checks.
Delays in processing travel reimbursements, particularly at
the California National Guard, contributed to the high
delinquency rate for that unit. We found a substantial number
of California Guard, and several employees at other units, that
should have been reimbursed for interest and late fees.
In summary, a weak internal control environment has
resulted in a travel program with substantial fraud and abuse,
and a significant level of delinquencies and charge-offs. DOD
and the Army have taken positive steps to improve the
delinquencies and charge-offs.
However, we believe that the Army actions to date have
focused primarily on treating the symptoms of the problems, the
delinquencies and charge-offs, rather than the causes.
Preventive solutions include mandatory splitting of
disbursements; exempting individuals with financial problems
from receiving a card; deactivating cards when employees are
not on official travel; and a strong, consistent disciplinary
policy.
We will followup on this testimony with a report with
recommendations. We plan to work closely with the Army and the
Charge Card Task Force to implement these recommendations.
Mr. Chairman, that ends my statement. Agent Ryan and I
would be happy to answer questions when the others have done
their statements.
[The prepared statement of Mr. Kutz follows:]
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Mr. Horn. Let us start now with Mr. Ryan. Is there anything
that you would like to add?
Mr. Ryan. Not at this time, Mr. Chairman.
Mr. Horn. All right, we will go to Major General Eres,
Commander of the California Army National Guard. We will go
ahead with your testimony, General.
General Eres. Good morning, Mr. Chairman, thank you for the
opportunity to be here representing the California Army
National Guard. Recently I assumed a new position in homeland
security/homeland defense.
I am here representing Major General Paul D. Monroe, the
Adjutant General of the State of California. We have prepared
remarks that have been submitted to your our committee, which
are quite extensive and comprehensive.
My remarks here will be identified in those areas that I
think need particular attention from our standpoint. I would
like to thank the GAO and this committee for commissioning them
to come to California, because you do not know what you do not
know; and GAO has given us a basis within which to get a good
sense of the people component of trying to manage this program,
with all of the technology that we have in existence.
I believe that a little bit of context for the National
Guard in California is important. It is about 16,450 in size,
about 2,000 of which are full-time, 14,000 of which would be
traditional guard, which means they have other employment and
other jobs.
We have a full-time manning challenge out in California, in
that we actually have personnel full-time at about 43 percent
of what we have authorized. What that means is, 43 percent of
the individuals who are necessary are actually doing the job.
That is an environmental point only, for purposes of the
context within the management challenges created by the travel
card program are presented.
This is a people world. This is a people business that we
are dealing with in credit management. One of the cotter-pins
for that is the Agency Program Coordinator has been identified
by GAO out in California. We use this position as an additional
duty.
It is clear from the audit and clear from our review, this
must change. This must be a high priority, dedicated
assignment, with responsibility and authority commensurate with
it. That will require a readjustment of priorities of the
limited full-time personnel, but that is something that will
need to be reviewed carefully by the Adjutant General, and
those adjustments made.
Included in that would be reducing the span of control; as
was mentioned, something more modest, down to perhaps 300 to
one.
We also believe that about 90 percent of the problem that
we are dealing with here is in the area of communication. As I
mentioned, this is a people business. Perhaps we should look
more at a partnership-type thinking, in terms of the players
and principles we are dealing with, from the Bank of America,
the Department of Defense, the National Guard and its chain of
command, the individual soldier, and ultimately, the merchant
that accepts the card.
I am intrigued by, for example, the nature of the look of
the card. It looks very clear up on the screen, but when you
look at the card directly, it is very hard to discern it from
any other credit card.
I believe merchants, if they were to see a card that had
something more like a chartreuse color, with very bold ``United
States Federal Government, For Official Use'' would be more
questioning in terms of swiping that card, when someone is
purchasing tickets to Disneyland, when they are supposed to be
on travel.
These are some of the suggestions that we have been looking
at, to try to make the culture a little bit more attuned to the
responsibilities that we have with respect to managing this
program.
One of the things that we have found is that we need better
systems integration. If we can get the systems integrated, then
we can have better synchronization as relates to trying to
manage the program.
As has been noted, we had a situation where an individual
was promoted, and how could that happen when they have a
deficient credit card?
It happens because of stovepipes, and we have to find a
better way of integrating between those stovepipes their
information, in a way that we can better synchronize those
actions necessary to identify an individual and their file, and
any personnel actions that may be in the pipeline, so that, in
fact, these can be reconciled.
Administratively, we are in the process of trying to better
tune the time delay between processing travel vouchers, so that
the individual solder gets, in a timely fashion, a
reimbursement of that travel voucher. So, in fact, they have
the capability to pay that credit card bill.
Internal controls are very important to us. We believe that
we have now a better handle in terms of segregating
responsibility within USPFO, the APCs and the chain of command.
We believe that GAO hit the nail on the head with respect
to the fact that you need to have that independence, that check
and balance, and the chain of command has to be intimately
involved, in terms of making sure that the right people, the
supervisorial chain, get the right information at the right
time, that is accurate; so in fact, they can post their chain
of command, and take those actions that are necessary.
We think that the notion of a split disbursement is a very
good notion. It is voluntary at the moment, but we think
perhaps some legislative change there to make it mandatory
would be appropriate; that, in effect, when you use your travel
card on official business, it is for official business.
Therefore, the reimbursement should go to the Bank of
America for those direct costs that the card was used for;
incidental expenses, of course, going to the individual
soldier.
We also think that the notion of the offset is important,
and we think that is a good idea. We also think the idea of
interest charges and the notion of late fees are also
important.
One of the things, though, that we need to do is to be
preemptive in our educational process with the soldier. We need
to have an early warning system that allows the bank to
integrate with our system, in terms of when that soldier goes
on orders, so that travel card is activated at that moment, and
when that soldier comes off of orders, it is de-activated; and
then internally within that timeframe of active duty or, if you
will, on travel.
Any kind of a transaction that appears to be out of the
ordinary creates a flag with respect to the reporting of that
transaction. So before the travel voucher is even submitted, we
are already alerted that there is a potential transaction that
appears to be inappropriate, in terms of that travel.
We think this would be an additional way to try to find, at
the front end, an opportunity to find out if there is a
problem, and do the reconciliation before 60, 90, 120, or 180
days pass. At that stage of the game, the ship has sailed and
we are fighting, in effect, a backfire.
Again, I thank you for the opportunity to make these
preliminary remarks in support of the written statements that
we have prepared, and I am available to answer any questions
you might have, sir.
[The prepared statement of General Eres follows:]
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Mr. Horn. Thank you, General; you made some suggestions
that need to be implemented.
Sandra Pack is the Assistant Secretary of the Army,
Financial Management and Comptroller. Please proceed.
Ms. Pack. Good morning, Mr. Chairman; I am pleased to
appear before the committee today to talk about the Army's
travel card program.
Given the scope and the complexity of the U.S. Army, we
face daunting challenges, any time we undertake significant
change. That certainly was the case in November 1998, when we
began implementing the Army's travel card program.
We did this as a result of the Travel and Transportation
Reform Act of 1998, which stipulates that the Government-
sponsored, contractor-issued travel card be used by all
Government employees, to pay for official business travel
costs.
Despite initial implementation problems, including
inadequate software, on-line management system deficiencies,
and insufficient training for our personnel, the Army has
succeeded in implementing a stable travel card program.
The travel card program provides many benefits to the Army.
It meets our travel and transportation needs, and provides an
effective, convenient method for Army travelers to pay official
travel expenses, and moreover, the travel card program improves
the Army's cash management and provides cost savings.
For example, the Army received $2.7 million in travel card
rebates during fiscal year 2000. In fiscal year 2001, the Army
saved over $73 million in administrative processing and
accounting costs, because the travel card greatly reduced the
need for travel advances.
The Army has two kinds of travel card accounts:
individually billed accounts where the individual cardholder is
liable for payment; and centrally billed accounts, where the
Government is liable for payment.
Given the current delinquency rate of less than 1 percent
for the centrally billed accounts, we believe that the Army has
established and is maintaining adequate oversight and internal
controls for these accounts. Hence my comments today will not
focus on centrally billed accounts.
Managing the delinquency rates for the Army's individually
billed accounts, however, has proven significantly more
difficult. This is the area where we are focusing our
attention.
The Army currently has approximately 420,000 individually
billed account cardholders. In any given month, approximately
115,000 Army travelers satisfy their travel needs with this
card, and over 92 percent pay their bills on time So it is fair
to say that the vast majority of Army travel card users are
following the rules.
In October 2000, the Army's Vice Chief of Staff established
a delinquency goal of not more than 4 percent, which is
consistent with the three to 5 percent delinquency rate
experienced by the private sector. By May 2001, the delinquency
rate for individually billed accounts had dropped from 11
percent to 5.6 percent. Since then, the delinquency rate has
fluctuated and now stands at about 8 percent.
As of June 2002, most Army commands had met or were within
2 percentage points of the 4-percent goal. We are now
concentrating on bringing those few remaining commands in line
with our 4 percent delinquency goal. I will elaborate on some
of the challenges that we face in accomplishing this goal.
As you know, the nature of the Army's mission involves
destinations, durations, and circumstances that are not
comparable with others in the Federal Government and,
therefore, may not have been envisioned in the original
contract.
While the travel card has proven to be a valuable tool for
the majority of the Army's personnel, it frequently is not
useful for travelers in remote locations or on deployments.
In addition, our experience has been that the majority of
our delinquent cardholders are lower grade, enlisted soldiers,
who tend to be inexperienced in personal finance and in the use
of charge cards.
These 130,000 cardholders represent 30 percent of the cards
issued, and only 15 percent of the Army's total spending, but
they are responsible for 59 percent of the delinquencies and
bank write-offs.
The Army leadership is engaged and committed to solving
these travel card problems. For example, the Secretary of the
Army has authorized, and we now post on the Army's senior
leadership intranet site, the delinquency statistics for our
commands.
We provide Army senior leaders and major commands monthly
delinquency reports that permit them to compare their
performance with other commands and subordinate units. We
conduct bi-weekly teleconferences between our Army travel card
program manager and his counterparts in the field.
In addition, the Army is working closely with the
Department of Defense to remedy its travel card problems. We
were actively involved in the Department of Defense's recent
effort to re-negotiate the contracting bank's task order.
These contract modifications include key provisions that
help reduce travel card delinquencies, including: a salary
offset program that allows delinquent account balances to be
collected from the cardholder's pay; increased cardholder fees
for late payments and back checks; and a significant reduction
in the number of travel cards issued to infrequent travelers.
As a result, the Army has canceled or de-activated over 60,000
travel card accounts.
The Army also is an active participant on the Department of
Defense Charge Card Task Force. In conjunction with this
effort, the Army has taken a number of actions, including:
providing additional training for cardholders and unit travel
card program coordinators; working closely with the bank to
resolve problems of cardholders who are misplaced in the Army
account structure; expanding the use of split disbursement and
salary offset; closing inactive accounts; assessing alternative
travel card products, such as debit cards and smart cards;
working closely with the Army investigative community to ensure
that relevant findings of cardholder delinquency are promptly
coordinated with security administration personnel and the
cardholder's supervisor; and using the Travel and
Transportation Reform Act exemption for en-route expenses
associated with mission deployments.
In addition we are making changes in the Army's travel card
policy, including: prohibiting travel card use for permanent
change of station moves; encouraging the commands to use the
training request form or the purchase card to pay advance
conference and registration fees; including the unit travel
card program coordinator as a mandatory step in the in-and-out
processing procedures; and reducing the number of cardholder
accounts for which each unit travel card program coordinator is
responsible.
In short, the Army believes that the travel card program is
worthwhile. It is an effective tool for meeting the Army's
travel and transportation needs, and for reducing
administrative and support function costs. We are committed to
reducing our travel card problems, and we strongly support
initiatives to improve the program.
We have made good progress in reducing delinquencies and
misuse, and we believe that our continued efforts will result
in continued improvements in the future.
Mr. Chairman, that concludes my statement. I will be happy
to take any questions.
[The prepared statement of Ms. Pack follows:]
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Mr. Horn. Thank you very much for your testimony.
We now move to Jerry S. Hinton, Director for Finance,
Defense Finance and Accounting Service.
Mr. Hinton. Good morning, Mr. Chairman, thanks; I am
pleased to be here today to discuss the Department's travel
card program.
The travel card program falls within my responsibilities.
The travel card program provides savings to the Department, and
has helped to streamline our operations, and the cards offer
convenience to those who travel on official business.
The Department's senior leadership is seriously concerned
about the operational shortcomings, the delinquencies and
abuses that are the focus of this hearing. the failure to
fulfill the job responsibilities and observe appropriate
standards of conduct will not be tolerated.
Mr. Chairman, when I appeared before this subcommittee in
May of last year, I noted that the Department was working to
address delinquencies and improve the travel card program.
Since last year, we have reduced the Department's centrally
billed travel card account delinquency rate from 14 percent in
January 2001, to less than 2 percent in May 2002. The June
report, which we received Monday, shows it is now approximately
1 percent.
We also modified the task order terms to eliminate the
automatic billing cycle credit replenishment feature for
standard and restricted accounts.
We canceled approximately 115,000 cards, and deactivated
another 112,000 belonging to infrequent travelers.
We implemented salary offset that has significantly reduced
the number of accounts written off by the bank. As of May 2002,
$15.1 million had been collected and paid to the card-issuing
bank, Bank of America. Again, our general report this week
shows over $17 million has now been collected.
Accountability is a major focus within the Department.
Component heads have been directed to report on the actions
taken to resolve current cases of charge card misuse, abuse,
delinquencies, and to preclude future such instances.
Improved internal controls and process re-engineering are
important to the Department. The Under Secretary of Defense
Comptroller, Dr. Zakheem, established a task force in March to
investigate the Department's charge card programs and to
propose ways to strengthen them.
The task force report, issued on June 27, 2002, included
findings and observations similar to those of GAO, and 16 of
those recommendations address the travel card program.
Those recommendations fall into three areas: one,
management emphasis and organizational culture; No. 2, process
and work force development; and three, compliance. The specific
recommendations related to the travel card program are
summarized in my statement, and we are working their
implementation.
Mr. Chairman, the senior leaders in the Department are
engaged in ensuring the travel card program is properly
administered and successful.
That concludes my remarks, and I will be pleased to answer
any questions you may have.
[The prepared statement of Mr. Hinton follows:]
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Mr. Horn. Thank you, and we now will recognize the
gentleman from California, Mr. Ose, for 5 minutes of
questioning, and then the ranking member next.
Mr. Ose. Thank you, Mr. Chairman; I regret I was late. It
is not often that someone sneaks something by me, but when I
got back to my office this morning, I discovered, much to my
chagrin, that somebody had snuck one by this morning.
In watching the television and noting the introduction of
one of our witnesses today, I am not sure that we did quite
enough justice to him; that being Major General Eres, who is a
resident of Sacramento.
Frankly, he is too humble. But I will tell you for a fact,
that in my community, there are people who do and there are
people who talk; and this gentlemen is a man who does. He has
for many years.
He is a past President of the Sacramento Metropolitan
Chamber of Commerce. He has been in Rotary. He has got four
wonderful kids. His wife is actually the General in the
household.
I will tell you, he has a long history in Sacramento
business enterprise, also. He has served in any number of
roles, one of which has been as counsel to my family. It is a
distinct pleasure to have him join us here today.
I am sorry I was not here for his remarks or his first
introduction, but I did want to get here and thank him. Because
he is one of those people that make Sacramento a great place to
live. So, General, thank you for coming.
General Eres. Thank you.
Mr. Ose. My questions really devolve around to the issues
that you put on the table, and I am not going to speak to a
chartreuse card, at the moment. I will get back to that.
The question I do have, I mean your testimony is very
telling. What General Eres brought up was the issue of, if
somebody is deployed, and they have a claim for reimbursement,
as is his want, he is always worried about the people who are
actually out in the field.
What happens when someone who is deployed makes a
reimbursement request, and it takes longer than 30 days for
that person to recover their funds, and what is the consequence
there?
General Eres. The consequence that we have found is that a
vast majority of the cards have been issued to people in the
lower ranking positions, both enlisted, warrant, and in the
officer core. So these are people that are usually pretty
tight, in terms of the amount of cash-flow that they have
available to them.
The primary resource then, for repayment of the card, would
be the reimbursement that they get from the voucher that is
processed. Depending upon the timeframe within the bank, it
goes from a card that is delinquent to one that is seriously
heading toward a potential for a charge-off or potentially
would be a candidate for an offset or a garnishment, if you
will.
It is a timeframe that can be influenced by a delay in
processing that travel voucher. We believe, in California, from
the National Guard's perspective, we have taken strong efforts
to try to augment the actual staff that are going to be
processing these cards. We think that we can do a much better
job than we have been doing.
The requirement is that the individual, after leaving that
travel status, has 5 days to turn their report in, or their
travel request in. That should be processed, and they should
have a check on the way in approximately 30 days.
If the system is working, that money ought to be applied to
the travel card and clear the account. In an abundance of
caution, I think, though, under the notion that has been
suggested as a split disbursement perhaps, in my view that, and
I believe for General Monroe, is a very positive step.
So, in fact, those charges legitimately on that card for
travel are bifurcated, and the check is paid directly to the
Bank of America, with the incidental payments going directly to
the soldier.
Mr. Ose. Would you recommend doing that electronically, for
instance, to the card provider?
General Eres. I really do. I think that in this paperless
information technology, there is much more we can do to
interface between the Bank of America and its systems, our
systems and the National Guard called aft-costs, and in the
processing that we do through the U.S. Property and Fiscal
Office, and the oversight that can be provided by the APCs. I
think we have the capability to integrate and synchronize those
activities by using technology.
Mr. Ose. Does the Guard in California bifurcate these
payments, or follow the system you have just described?
General Eres. They do only on a voluntary basis, on this
split disbursement. We really favor that the notion be
mandatory. We do not know of any reason why it should not.
In the old days, and I will show my age here, when you went
and obtained a vehicle for military travel, you got what was
called a log book. When you got the log book, you signed for
that vehicle. There was a gas card in it. You went on your
travel. You turned the card and the log book in and logged out.
That is a system that ought to fit nicely within the use of the
travel card, we think.
Mr. Ose. I regret my time is expired, Mr. Chairman.
Mr. Horn. Well, we will get back to that. Let me just say,
to followup on one question, you mentioned the Bank of America.
Could they not match their particular knowledge of either
people that had accounts, or where you can get from any place,
I guess, and what do you think about them? Do they ever look to
see if this is a person that is a deadbeat; and if not, why
not?
General Eres. One of the suggestions from the General
Accounting Office was to take a look at the pre-qualification
of those soldiers who are given the card. That is, in effect, a
manifestation of trust in the soldier.
To the extent those cards are being given to those who
already have a credit history that is not supported in the
private sector for a card, it is something that we should
ensnare at the front end of this process.
The difficulty we have is that a number of the individuals,
this is their first card, their first exposure to credit. We
have a larger job to do, as basically credit managers, to
educate, train, and oversee those who are given that trust, and
may not use it expeditiously or responsibly.
As relates to the Bank of America, I am not familiar with
their capabilities and capacities, in terms of managing these
accounts. I believe their Eagle system is a good start, and I
believe it gives an opportunity for the electronic interface,
the integration and synchronization I mentioned, to alleviate a
great deal of the challenge. Because if we do not have timely,
accurate information on the transaction itself, we are behind
the power curve.
Mr. Kutz. Mr. Chairman, let me add to that. Because we
would distinguish, as the General did, between people with bad
credit and no credit. A lot of the young people coming into the
military have no credit. We are not suggesting in our
recommendations that they not be provided a card. They should
be provided what is called a restricted card, which has a lower
credit limit and has tighter controls.
But what we did find was a significant correlation between
the abusers of the travel card and those that had prior credit
problems. One of our recommendations is going to be that they
deny travel cards to people with prior significant credit
problems.
Mr. Horn. I now yield 5 minutes to Mrs. Schakowsky, the
ranking member on this subcommittee.
Ms. Schakowsky. Thank you, Mr. Chairman.
Mr. Kutz, you have testified in the last year on a number
of instances of fraud, waste, and abuse, including purchase
card fraud and abuse at the Navy, chem-bio suits that were
being sold on the Internet for less than $3, while DOD is
buying them for over $200 each.
DOD is spending $17 per line to process a purchase card
bill; and Army purchase card fraud and abuse, and Army travel
card delinquencies, charge-offs, fraud, and abuse, it seems
like even more than that.
Given your broad perspective, can you tell me why the
Department of Defense continues to have billions of dollars in
waste, fraud, and abuse?
Mr. Kutz. I think this gets into your initial opening
statement with respect to, this is a financial management
problem. The Department has been unable to reform its business
processes.
You have issues such as culture, which we have talked about
at many of these hearings, being a common theme throughout
these different types of problems that we find.
You find lack of sustained leadership over periods of time.
This credit card problem that we have here is not something
that a task force report or a quick hit is going to fix. It is
going to take sustained leadership and time to deal with this.
Then I believe that things oftentimes revert back to their
norm. If you do not stay on top of this over a period of time,
it could revert back to the way it is.
The other thing that we see here is the issue with
disciplinary action and accountability, and who is responsible
for this program?
I think that is something the Department often has trouble
with, with respect to the Office of the Secretary of Defense
versus the Army here. Whose program is this? Who is the point
person?
Who can you actually go out and touch and say, you are
responsible, and you are the one who is going to fix this
program? That is a common theme, I think, we have seen with all
the things we have testified before you.
Ms. Schakowsky. Well, let me followup on that then with the
General. Because we have a case where a California National
Guard cardholder was actually promoted after charge-offs.
I am just trying to understand how we can establish the
right culture, the right atmosphere, the right accountability
and controls, when we find that those individuals, rather than
being punished, in fact, in some instances, are promoted.
General Eres. Yes, ma'am, the particular case that you are
referring to, I have become very familiar with. I mentioned in
my opening remarks the challenge we have with what we call
stovepipes or parallel systems.
So it is entirely possible that you could have a member of
the National Guard, who has a full-time position within the
National Guard, but also has a position within a chain of
command that is the military chain of command.
It may be that the abuse of the credit card was something
that was handled by the immediate supervisor on the full-time
side of that pipeline; whereas, the chain of command on the
miliary unit side was not aware that was even a problem.
What we have done to take corrective action on that is to
integrate those two stovepipes. We have also integrated the
security check, the classified process by which we have
security clearances for our personnel.
So at the minimum, the immediate action we have taken is to
link not only the full-time military system with the military
unit system, with the security system, and to be in a position
where we have any indication that there has been a default or a
deficiency on the travel account that, I will use the term
descriptively, flags that particular individual across all of
those stovepipes.
So you do not have a promotion or an award or send somebody
off to school or other training, when you have that kind of an
incident or a flag, if I could use that phrase.
Ms. Schakowsky. So do you feel confident that kind of
problem will not surface again?
General Eres. I feel confident, ma'am, that purposes if we
have accurate information that drives the flagging process, and
again, I am using that descriptively, we can do that.
What I am not confident in is, do we get accurate, timely
information of the condition of the account soon enough, so
that those flags will be effective.
As I mentioned earlier, I think this is where the
technology between the Bank of America and its Eagle system and
our pay system will help us flag, very early, immediately when
that account becomes deficient; or, I do not whether the term
is slow pay or no pay.
Ms. Schakowsky. Well, let me ask you this, General, because
in the GAO report, we are talking about, and I do not know if
this is the full extent of it, the delinquencies and charge-
offs cost the Army $2.4 million, estimates the GAO, in lost
rebates, and will cost $1.4 million.
You know, in every case, we are talking about millions and
millions of dollars. Do you feel confident that we are not
going to have the same hearing a year from now? Let us start
with 6 months from now. Do you feel confident we are not going
to find the same thing, 6 months from now?
General Eres. In the context of the California Army
National Guard, I am confident that we have a very good data
base on the problems that you are addressing, and that we have
meaningful solutions.
I would be more than willing to submit it to another look-
see, whether it is by GAO, or I can assure you internally
within our own system, we will have our own audit, to make sure
that we are benchmarked, and that we are not going to be back
here in 6 months having the discussion because those systems,
those stovepipes, are not communicating and are not integrated.
Ms. Schakowsky. Mr. Ryan, did you want to say something? Do
you mind, Mr. Chairman? Mr. Ryan wanted to respond.
Mr. Horn. Go ahead, Mr. Ryan.
Mr. Ryan. I think in response to what the General is
saying, a lot if it ties in on how much the Army is committed
to bring in full-time APCs. These APCs are front line. They
identify potential problems. They can notify commands of
problems.
If we have APCs that are doing part-time work, they cannot
do both jobs. We talked to one APC that had over 1,000
cardholders to manage. The only thing that he did at the end of
the months was to try to look at delinquencies, and keep his
Commander out of trouble.
If we have full-time APCs that, on a daily basis, are
looking at the transactions, that are looking at the
delinquencies, I think that you will find that overall there
will be a better management of the program.
But the Army has to commit to this. They have to commit to
full-time people to do this job. We have a lot of money
invested in this, and I think that we need full-time people to
monitor the program.
Ms. Schakowsky. And is there a commitment to do that?
Mr. Ryan. I think you need to ask the Army.
General Eres. I will pass that on to the Army. I am sure
they are pleased to get it. But I can tell you that in the
National Guard, we are staffed at 43 percent of authorized,
required full-time.
So the National Guard gets the resources that we are
assigned. We utilize those, and as Mr. Ryan has indicated, that
means our APCs are duo-hatted, triple-hatted, or even more.
What we are talking about here is if the program is
important enough, what we need to do is to look at how you can
re-prioritize resources in order to have more and dedicated
personnel in this area. Because we are in a sub-optimum
environment, in terms of resource allocations.
Mr. Kutz. Representative Schakowsky, I would like to add
one thing to that, quickly. We also saw, at some of the
different units than the California National Guard, that the
military APCs turned over every 6 months or so.
One of the other things that we are going to be
recommending is that the Army look at having more civilians, if
possible, to act in the APC role. Because what we found was
that APC's were in the position for 2 or more years and you
need some continuity in that position to have it be effective.
Ms. Schakowsky. Thank you.
Mr. Horn. I think the answer to your question is one, for
the Assistant Secretary of the Army, Ms. Pack, what can you do
in answering Mrs. Schakowsky's question, which is a very
important question; and what is the Army doing about it?
Ms. Pack. Mr. Chairman, I became aware of these problems in
preparing for this hearing today. What I would say about that
is, the Army, like any other institution, has to make tradeoffs
with resources.
From the GAO report, which I found very beneficial--and I
am an accountant by trade, so I believe audits are good--we
have learned that, basically, we have an oversight problem. The
way to fix that is to put human capital against that and, of
course, that costs money.
Ms. Schakowsky. Excuse me, but we are talking about huge
sums of money that is just falling away like sand through our
fingers; huge sums of money that should be used to protect our
homeland, to take care of our men and women in uniform.
I understand that we are going to have to put more money
into it. But this cavalier attitude that I find that, well, you
know, we are like any other organization, and we have to have
the resources, this is a crisis worth billions of dollars.
I think it is absolutely equal to the Enrons and the
WorldComms, with our own Department of Defense; and it requires
a much more aggressive attitude than what I am hearing from you
and that what we have heard, time and time again, at hearing
after hearing.
We are talking billions. We are talking about trillions,
$1.2 trillion, that we do not know where it is or how it is
accounted for. This is not just a nickel and dime kind of
operation, a couple of guys going to a strip club. We are
talking about a culture, a systematic problem within this
department. We are talking about being in deficit spending
right now. We are talking about $48 billion more for the
Department of Defense to do its job.
So I think that we ought to find the money to do it,
because we are going to save, hopefully, billions and billions
of taxpayer dollars. They deserve no less, Ms. Pack.
Ms. Pack. Yes, ma'am, I agree with everything you have
said. I have been in this position for 8 months. I have just
now come to understand the scope of this and the complexity of
this. Believe me, I take this personally. I believe this is my
personal responsibility to correct. So do not take me wrong in
saying that there are tradeoffs.
What we need to do, and you are right, we can save billions
of dollars, by adding people. One of the things that I had
asked my staff before I came over here this week is, I need to
know what it would take to get the right people in the right
places to take care of this?
What is the dollar figure we are talking about, so that we
can take this to the leadership and say, here is what we need
to do. This is the solution. If we do this, yes, it will cost
something, but the savings will far outweigh that.
Mr. Horn. Well, I would like to add to that, when did you
first learn of this situation? You have been here 8 months, and
when did you first learn of this?
Ms. Pack. When I first learned of this, I believe, was in
the March timeframe, when these hearings were being held
earlier.
Mr. Horn. OK, well, when you heard that, what did you and
the various civilian officers in the Army do? Did anything
happen?
Ms. Pack. Well, we became part of this task force, the DOD
Charge Card Task Force, and we started looking at this program
in detail to see where are the problems. That is why I say, the
GAO report was especially helpful, because it looked at
specific places, specific problems, and gave us the details on
where the problems lie.
In my line of work, credit problems are a security risk,
and you do not get hired if you have those problems. So I take
those very seriously.
The thing that is frustrating to me is, these kinds of
problems are manageable. It just simply takes somebody at the
monitor, looking at this. We simply do not have the people
doing that. Therein lies the major problem.
Mr. Horn. Well, I guess what I asked, when this first came
to my attention, months ago, was where are the Master
Sergeants; where are the people that know what is going on?
Ms. Pack. The chain of command; I agree.
Mr. Horn. The officers often do not know what is going on.
Ms. Pack. That is right.
Mr. Horn. New lieutenants and everybody that ever was in
the Army or any of our services; woe be the person that thinks
they know everything out of the Academies or everything out of
the technical this or that.
Get a good Chief Petty Officer for the Navy and a good
Master Sergeant for the Army; now can they not do that and say,
you know, go down the command bit, where you have got the
problems, and assign a few people to that to say, straighten it
up. Then I think it would be straightened up.
Ms. Pack. Absolutely, sir, and let me just add, the
supervisor cannot do anything about a problem of which he knows
nothing. That is where the program coordinators come in. If you
do not have somebody watching this to spot the problems, then
no action will be taken.
Mr. Horn. Yes.
Ms. Schakowsky. Are you saying to us that we will be back
here in 6 months or a year, if we do not get more personnel
there? There is really virtually nothing you can do if there
are not more people to straighten out these problems?
Ms. Pack. No, I am not saying that, ma'am. What I am saying
is, give me 6 months, and let us see what we can do about this.
I am engaged on this, and we will work on this. I know at the
outset, one of the problems we have is oversight, and we have
got to solve that.
So let me work on this, and let me come back to you in 6
months and tell you what we have been able to accomplish. This
is fixable.
Ms. Schakowsky. Mr. Chairman, how many hearings over how
many years have you had on this?
Mr. Horn. On this one, alone?
Ms. Schakowsky. Not just this one alone; on the problems at
DOD? We hear the same thing.
Mr. Ose. Mr. Chairman, if I might?
Mr. Horn. Yes, the gentleman from California.
Mr. Ose. Ms. Pack.
Ms. Pack. Yes.
Mr. Ose. With the problems that you have discovered in the
payment systems that we are talking about here today, I mean, I
think Mrs. Schakowsky raises an interesting question. How long
have they been going on?
Ms. Pack. I am sorry, I did not understand your question.
Mr. Ose. How long have the payment or credit issue problems
that you are dealing with been going on, that Mrs. Schakowsky
has very eloquently brought up?
Ms. Pack. With this program, I am aware of the program
starting in 1998. There were immense problems in the first
year, implementation problems, because the on-line system was
not available. It did not work.
So, once the bank got that program working, and we finally
had the detail that we could look at, we had a back log to get
through. So many of the specific problems that had been
mentioned in early testimony, we were completely unaware of,
because we had no way to see them.
So what I would say to you is, the problem was that, and
this goes to the culture, it gave the impression that no one
was watching, and no one was. It gave the impression that no
one cared. That is hard to negate, once you have established
that.
Mr. Ose. Was the program set up by virtue of a
congressional mandate?
Ms. Pack. I believe so; yes, sir.
Mr. Ose. So somewhere in legislation, it was specified that
this system will be implemented?
Ms. Pack. What was specified was that an official travel
card be used for all travel, and that all Federal employees use
that.
Mr. Ose. All right, as it relates to this particular branch
of this particular system, what you are pointing out is that,
frankly, whoever set it up really did not understand checks and
balances, in terms of how it gets implemented. Is that what you
are saying?
Ms. Pack. I would say it was not ready for implementation.
The systems were not there in the first year. So it took that
long just to get them, so that we had the visibility of the
accounts.
Mr. Ose. And the system of checks and balances, I mean, I
understand credits and debits and all that. It is not a very
complicated thing. I mean, banks do it all the time.
Ms. Pack. I agree. I agree.
Mr. Ose. So is there some reason it has not been done, to
date?
Ms. Pack. Sir, I am not sure what you are asking me.
Mr. Horn. I think what he is saying, if I might add to it,
because we are all feeling that way, that you are a newcomer,
and thank heavens they get newcomers, because that is what we
need to turn some of these systems around; and I am sure you
will be handling this as best you can.
But the problem is that they have not really got it yet,
and that is what gets us, I think. Every time they come in,
they take the oath and all this, and we are saying, hey, what
have you done? Mr. Hinton, we asked him, the last time, what
are you going to do?
I mean, the problem is, when people go in with the
services, they run them around to facilities, and they have a
lot of flags and all the rest of it, to keep you from doing the
real work that you have got to do. Where do you get the people
and at what point are supervisory going?
We ought to change a lot of civilians in a lot of these
major bureaucracies. Some of those people have very good
skills, and they would know how to solve this. It is just that
we get a feeling that, well, here they are again and, you know,
let us just wear them out for a month or two.
Well, we are not going to end this, I mean, this afternoon.
We are going to see a few cases due for the fraud people;
namely, the U.S. attorneys.
Ms. Pack. Sir, I agree with you, and if I were in your
shoes, I would be enormously frustrated. I cannot speak for the
performance of my predecessors. I can speak for myself, and I
am a person who understands the meaning of commitment.
I am committed to fixing this. This is not going to lose my
attention, when I walk out this door. I commit to staying on
top of this, as long as I am serving in this position.
Mr. Horn. Yes, the gentlewoman from Illinois?
Ms. Schakowsky. I wanted to ask about training. The General
was talking about young people sometimes, who do not have a lot
of experience.
And when I look at the Army delinquent and total
outstanding travel card balances that are in the GAO report,
you find that the single largest bulk is E-1 to E-3s and E-4 to
E-6. We are talking about people who earn between $11,000 and
$26,000. It is not all that surprising that at the end of the
month, they do not have money to pay those.
What are we doing to help train these young people. Often,
they are 18 or 20-year-olds, who may not have had any
experience or any credit, as was pointed out, in how to handle
this? We all know, those of us who have kids that have gone to
college understand the problem, you know.
Ms. Pack. Right.
Ms. Schakowsky. You give a kid a credit card and things
happen. So we have to train them on how to responsively use
those.
When we are distributing them wholesale throughout a huge
system like this, what are we doing?
Ms. Pack. Well, you make very good points, ma'am. I mean,
training is absolutely essential. The other thing is just mass
distribution. Do not give the cards to people unless they truly
need them. Then before you give them the cards, make sure they
have the training.
So one of the things I have requested from our field, is
for them to send in all of the training materials they have
come up with, so that we can compile these and come up with a
standard training package that we make available on the
Internet; and that we get back to the Commands and ask them to
use in training these people.
That is one point. We do not have one specific training
package now. So that is one of the things I have already
ordered. Let us call it all in from the field, just take the
best of it, compile it, develop a standard package that will
address this and address it effectively.
Ms. Schakowsky. Also, Mr. Kutz said that we could set lower
credit limits.
Ms. Pack. Yes.
Ms. Schakowsky. I think we could turn cards on, when an
individual is on travel and off, at other times. I mean, it
seems that there are lots of management tools that could be
applied to this kind of situation.
Ms. Pack. I agree with you. Those are great ideas. But keep
in mind, that type of management is contemporaneous. That
means, you have to have people dedicated to that job, who are
dedicated to knowing when people are going on travel and when
they are coming off, so that you are activating and
inactivating correctly.
If we do not have the people now, after the fact, looking
at the transactions, after they have already been made,
obviously, we do not have the people who can do that in
advance, or be there contemporaneously.
Ms. Schakowsky. I guess, I mean, credit limits are credit
limits.
Ms. Pack. That is true. That is true. Keep in mind also,
there are two parties to this, and that is what complicates it,
in the sense that the bank, itself, I do not think was prepared
for the volume of transactions it was going to get on this.
Hence, transactions have come through that should not have,
because someone was over their credit limit. Transactions have
come through from merchant codes that should not be allowed.
Both parties on this have had to work together to get to where
we are today.
Ms. Schakowsky. Which is in a mess.
Ms. Pack. Well, it is not what it needs to be, absolutely.
But if you look at it from the standpoint that 92 percent of
the cardholders are following the rules, we have come a long
way.
Ms. Schakowsky. Well, let me ask you this. What would the
Army do, and what would it cost, if Congress canceled the
travel card program?
Ms. Pack. The Army would have to go back to doing travel
advances, which would then raise our bill with the DFAS folks
quite a bit. It would be $24 per transaction, I believe.
So the savings, you would be throwing the baby out with the
bath water. We would go back to a cumbersome system that
required a lot of accounting support and would be expensive. We
would be going backward if we did that.
Ms. Schakowsky. I am a little concerned, though, that then
we have a cost benefit ratio, that it is better to let all
these abuses go on, because in the end, it is cheaper than, you
know, taking away the travel cards.
Ms. Pack. No, ma'am, we would not look at it that way. I
mean, we want no abuses. It is an imperfect world. I am sure we
will not ever get to 100 percent, but we can do a lot better
than we are doing.
Ms. Schakowsky. I hope so.
Mr. Horn. Well, on that point, and you have obviously
started on this, the General Services Administration has a
number of training programs on line. Is the Army making use of
those tools?
Ms. Pack. I am not sure the awareness is what it should be.
That is another thing that we are going to do, to make sure
that people in the field are aware that is there and available
to them.
Of course, having it available is not necessarily the whole
answer, either. These people need to have the time to do the
training.
Mr. Horn. Well, General Eres has, I think, some good
suggestions on a change in the travel card's appearance and a
kind of reduction, really, in that card, and the changing of
it. What do you think of that? Have you had a discussion with
either the Command you are in or with the Army, in itself, in
the Pentagon? What is the best way to do it, General?
General Eres. I do not want to go way out of my pay grade.
I am just a poor country General from California. [Laughter.]
The notion, from my standpoint, was looking at ``Private
Snuffy'' in the foxhole out in the State of California.
What sorts of things can we do to help change the culture,
and particularly when we are dealing with that 18 year old that
you are referring to, that will help at least alert the fact
that if they pull that card out of their billfold, and it gives
enough distinction to it, just maybe there is a little bit of a
reminder that this is for official use only? I think, from that
standpoint, that may be a first step.
I do believe that we owe the solders in the system a better
system of education and training. I think that in much of that,
it befalls the chain of command to do that; those Master
Sergeants that you are referring to; that particularly in a
high risk group, that we do not just have a CD, or we have
simply a canned briefing that they get once year.
But there should be something a little more hands-on to
that, that is going to help make them more responsible for a
lifetime; not just simply the time that they are in the
military.
I think this is an opportunity, and I welcome the
institutionalized education and training materials that might
come to us. But I am also reminded that making the training
available will not work if we do not have the execution of the
actual training. That means, again, that Master Sergeant, one
on one, with those youngsters, those young soldiers.
Mr. Horn. Well, I would think, either at reveille or
whatever, that it ought to be that finance does matter.
Granted, they are there for fighting. Obviously, we do not want
to disturb that.
But we need to have some point of key enlisted or
commissioned people on regiments and battalions and the
company, right down to the platoon, that this is your chance.
If you mess it up, you might lose your credit, in terms of the
civilian area. We want you to be people that are good citizens,
and you are going to have to do this, this, and this.
If you say it enough, they ought to be well put, I would
think, by a few people, out in the range and in the forts and
in the camps, and so forth. But it has got to be right down
there. I cannot be in the Pentagon, although they have sure
abused it, also. But you need to do all of those things.
Mr. Ryan, as a good investigator, tell me what would you
do, if you were put over in the Army, and they said, look,
clean this up?
Mr. Ryan. That is a tall order, Mr. Chairman.
First of all, I truly believe that if the Army Command, at
Ms. Pack's and levels comparable to her, pay attention to this
issue, I think the delinquency rates and the charge-offs can
come way down.
I think that will affect the Government going back in and
renegotiating with Bank of America to lower some of these fees.
We are paying a lot in regards to fees.
I think also, by putting what I call the ``Cop on the
Watch,'' the APC, getting someone in there at a grade level
that is not going to take any guff from any of these people
when they talk to them, and also using them as an educational
tool, a teacher, they are going to be in contact with these
soldiers. They are going to be the person who is going to push
the buttons and talk to their commanders. I think that we can
start at that level.
I think also we need to make the security clearances
directly tied in to the fact that these accounts and these
soldiers are charging-off accounts.
We have some soldiers that absolutely have committed crimes
by writing bad checks. They have a pattern of writing bad
checks. They have a pattern of boosting their own accounts.
This all has to be taken into consideration. We need to
start making people responsible, and we start, as the General
says, getting away from the stovepipes and crossing the
responsibilities.
It all starts at the top. If you cannot get the people at
the top to emphasize the importance of the issue, then we are
at a loss, and we will be back here again in 6 months.
From the perspective of an investigator, I think the most
important tool that we can use is the ``Cop on the Beat,'' the
APC, who can use the Eagle system to help monitor and find out
exactly what is going on.
In regards to the General's chartreuse color card, I think
it is a good idea. People cannot use as an excuse, I pulled the
wrong card out of my wallet.
But on the other hand, there has to be some responsibility
put on the merchants that accept it. We have deceptive
transactions taking place between cardholders and the vendors
of these adult entertainment facilities.
We have, in my opinion, them making false statements to
financial institutions. They are selling money, and they are
disguising it under bar and restaurant charges.
This is something that also has to be looked at. DOD does
not necessarily have visibility over that, because as business
goes on, these vendors are changing their names.
We have institutions, Crazy Horse II, is doing business as
the Power Co. It is hard to figure out what the Power Co. is.
From an APC's perspective, if they are in the full-time, they
are going to gather intelligence information in regards to
doing their job.
So again, the APC, I think, Mr. Chairman, to me, is the
most important person to help with this problem.
Mr. Horn. Any other advice?
Mr. Kutz. I would say, on the issue that was discussed
earlier with Congressman Ose, the issue of splitting of
disbursements, that would be probably our No. 1 recommendation,
to have the Department work with the Congress to mandate that;
not only probably for DOD, but possibly Government-wide.
You could potentially drive down all of the delinquency
rates across the Government by mandating the splitting of
disbursements. That is something that we have found is also
used in the private sector by large corporations, which has
kept their delinquency rates low.
Mr. Horn. In my remaining months in Congress, I am
committed to reviewing the implementation of this legislation,
and see it moving through the subcommittee.
The travel card and the purchase card program that we have
talked about today were the result of legislation that I pushed
through Congress. My intent was to reduce the transactional
costs for the Government's performing basic functions.
The abuses described today are very troubling. I am
encouraged by the steps taken by Secretary Rumsfeld to address
this issue, but more must be done, and it must be done more.
Let me assure you that you will be back before us in the
Fall, and I hope we want to hear better news, and make sure
that it is just another game and we want action, in brief.
So with that, we are going out of this particular one, into
the 2 one this afternoon. It will be at 2, and we are thanking
the people here that put all this together. So we will combine
all of this, and we will now adjourn this. We will see you at
2.
[Recess.]
Mr. Horn. The Subcommittee on Government Efficiency,
Financial Management and Intergovernmental Relations will have
this oversight hearing. It goes over from the morning and this
is ``Government Purchase and Travel Card Programs at the
Department of the Army.''
We are glad to have the number of people that know what can
be done and we hope this is the last time we have to ask the
very bright officials to come here and still not have served
the thing.
A quorum being present, we will continue our examination of
government credit card programs at the Department of Defense
focusing on the Department of the Army's Purchase Card Program.
Last year, I was joined by Ms. Schakowsky and Senator
Grassley in requesting that the General Accounting Office
examine the purchase card programs at two naval facilities in
San Diego, California. At a subcommittee hearing held on July
30, 2001, the General Accounting Office reported it found
serious abuse and fraudulent use of these government guaranteed
credit cards. Purchases were made for personal items, including
clothing, luggage, designer briefcases and the taxpayers paid
the bills.
At the time, we did not know whether these abuses were
unique to these two facilities or whether they were symbolic of
a much broader problem. Now, the General Accounting Office has
found similar examples of waste, fraud and abuse of credit
cards at the Department of the Army, including extravagant
purchases and items for personal use. Once again, no one is
minding the store at the Department of Defense. I realize well
that you have a major war going on and there are many things to
do, but we also have people in finance over there and they
ought to be doing the right thing and not just letting it sit
there.
I welcome this panel of witnesses and I want to know what
is being done to ensure this appalling waste of taxpayers'
money is stopped. We will probably have to swear in some
because you weren't here. Let us have those who did not take
the oath this morning.
[Witnesses sworn.]
Mr. Horn. The clerk will note that seven have affirmed and
Senator Grassley, I am told, is here. We will start with
Senator Grassley and then we will go to the panel.
Senator Grassley. I had an opportunity to thank you for
your leadership and I appreciate that very much, and the hard
work you do in this area.
At the last hearing, I shed some light on a particularly
troublesome fraud case involving a current Army employee, Ms.
Tanya Mays. I would like to revisit the case and give you some
new information.
The alleged fraud occurred while she was employed by the
Navy Department in San Diego. She is now in charge of what they
call cash integration in the Army's financial management
organization in the Pentagon. Since our March meeting, her case
has disappeared off the radar screen and by raising this
troublesome matter in March, I had hoped someone in the
Pentagon with some clout would hear me and do something about
the case.
Secretary Rumsfeld's Charge Card Task Force came to my
office on May 16 to provide a briefing on the plans for
cleaning up the credit card mess. The Task Force doesn't seem
to care a hoot about Tanya Mays' case though. I hope this is
not a bad omen. The Task Force brushed off questions I had
about the Mays' case and when I asked about it, the Task Force
provided kind of a candid response, something about the Navy
got the money back, consequently problem solved. That response
really bothers me, it just doesn't seem to cut it.
Mr. Chairman, getting the money back is a red warning flag.
It should also trigger a followup action like criminal
investigation. The General Accounting Office's Office of
Special Investigations examined Tanya Mays' case and here are
the facts as we know them.
Ms. Mays' purchase card allegedly went Christmas shopping
in December 1999 and in a few short days ran up $12,000 of
bills. It was used to buy seven gift certificates worth $7,500,
a Compaq computer, an Amana range, groceries, gas, clothing.
You name it, it seems like they got it, and all expensive stuff
and all at taxpayers' expense. The Citibank statement for
December 1999's shopping spree is dated January 21, 2000. All
purchases were made over a 6-day period from December 20
through December 26 for a grand total of $12,550.24.
The Christmas shopping spree prompted the bank to suspend
the account. Ms. Mays got the bad news when she attempted to
use the card on December 27. When confronted with the
suspicious transaction, she told the bank she lost the card.
Two days later, she was issued a new one. In late January 2000,
she presented the $12,550.24 bill to her Navy superior for
approval. Her signature appears at the bottom of the statement.
Her signature signifies that she accepted the charges as her
own. According to the supervisor, she said she needed it
approved in a big hurry because she had already been late in
submitting it.
If she questioned the charges, she was required to attach a
dispute form to the January 2000 statement. No dispute form was
attached, there were no complaints and no story about losing
the card. The supervisor then rubber stamped it, approved,
without reviewing it. Once she got the skids greased and the
payment ball rolling, she claimed once again the charges were
not her's. She said she kept the card in her office desk drawer
and somebody took it for a few days. She told that story on
January 31, 2000 but the bill got paid in full anyway.
At this point, Citibank gave her a dispute form but for
reasons yet to be explained, she waited 13 months until
February 2001 to file a sworn affidavit disputing charges. By
then the evidence trail was cold. When Ms. Mays left the Public
Works Department in June 2000 for another Navy office in San
Diego, she did not surrender her card. She was allowed to keep
it and that was contrary to regulations. She abused it again.
This time for a personal car rental on June 18, 2000 for
$357.95. Public Works gladly paid this bill as well. Ms. Mays
also used her official travel card in mid-1999 to buy three
airline tickets for her son. They cost around $722. The grand
total on Ms. Mays' government card was $13,630.19.
Mr. Chairman, I ask unanimous consent to have these
documents and statements of January 2000 printed in the record.
Mr. Horn. Without objection, this will be in the record at
this point.
[The information referred to follows:]
[GRAPHIC] [TIFF OMITTED] T7139.081
[GRAPHIC] [TIFF OMITTED] T7139.082
[GRAPHIC] [TIFF OMITTED] T7139.083
[GRAPHIC] [TIFF OMITTED] T7139.084
Senator Grassley. The handwriting on Ms. Mays' purchase
card receipt has been subjected to analysis by the U.S. Secret
Service Forensic Division. These experts have concluded that
someone other than Ms. Mays actually signed the receipts but
all appeared to have been signed by the same person. The Amana
range, for instance, was bought with a gift certificate made
out to Ms. Mays' ex-boyfriend's mother. The boyfriend in
question resided at Ms. Mays' address at the time the
fraudulent purchases were made. Mr. Chairman, her ex-boyfriend
has a long criminal record; he is considered a real pro at
committing fraud.
This new information seems to raise the possibility that
the boyfriend used the card without Ms. Mays' knowledge or
approval. Most of the experts who have investigated this case
don't buy that theory. However, they believe that Ms. Mays did
not make the purchases but that she knows who did. Ms. Mays
needs to come clean; there are too many unanswered questions.
If someone stole her credit card and used it between
December 20 and December 26, 1999 as she claims, how did she
happen to have it yet again on December 27 when she tried
unsuccessfully to use it? Why didn't Ms. Mays examine her
January 2000 bill before presenting it to her naval superior?
Did she check it and reconcile charges with her receipts? Why
did she sign the January 2000 statement signifying that the
charges were her's? Why didn't she attach the required dispute
form to her January 2000 statement? Why did it take her 14
months to give a sworn affidavit disputing the charges? Why did
she abuse her purchase card again in June 2000?
When she handed the January 2000 statement to her
supervisor, it seems to me that she had to know the score.
These charges were incurred on her credit card account, they
appeared on her statement. She endorsed that statement. She
submitted it and she demanded immediate payment. She now needs
to accept responsibility for the charges that appeared on her
statement.
It is true that the Navy eventually got the money back in
April 2001. That is good news. The taxpayers' losses were
recovered. Getting the money back is a powerful indictment at
the same time. It seems that Citibank and/or the Navy came to
the conclusion that the charges on Ms. Mays' account were
fraudulent. Mr. Chairman, why can't Mr. Rumsfeld's task force
see the handwriting on the wall? Why didn't the Navy Criminal
Investigation Unit get on the stick and attack this case in
January 2000? The Naval Criminal Investigative Service seems to
have dropped the ball. That brings us back to Ms. Mays. Ms.
Tanya Mays and/or her associates have the stolen goods. That
means the bank gets left holding the bag. The bank gets busted
and the criminals skate. That is not right.
There are other signs that Ms. Mays was not acting in good
faith. The $357.95 personal car rental charge she incurred was
also reversed through a credit from Citibank. Again, the Navy
got the money back, Ms. Mays agreed to repay the bank but she
hadn't done that. Ms. Mays has just repaid Bank of America the
money she owed for her son's airline tickets she initially paid
the bank $343.21 on that bill but $378.79 was left unpaid for 3
years until recently when we started cranking up the pressure.
In February 2002 after being grilled by the General Accounting
Office investigators, she finally paid off that balance. The
account was closed and not reissued.
Mr. Chairman, Ms. Mays' credit record is a trail of bad
debt. It is scandalous, she should never have been issued a
government credit card. She had a long history of personal
credit card abuse. She had at least 12 accounts that went bad.
Whoever gave her government credit cards, should have had their
head examined, quite frankly. The bottom line again is lack of
accountability.
Based on the General Accounting Office's work so far, I
would have to say the Army is tougher on credit card crime than
the Navy. We found an Army female sergeant who was court
martialed in April 2002 and sentenced to 18 months
incarceration for $30,000 in fraudulent purposes. The Army
Staff Sergeant who wrote 86 bad checks was court martialed and
is now confined. The Navy is at the zero end of the scale. The
Mays case is a combined Army-Navy case. To my knowledge, no
disciplinary action has been taken against Ms. Tanya Mays. She
seems to be working her way up the promotion ladder like
nothing has ever happened. As I understand it, she was moved
into a bigger job and given a promotion in October 2001, 21
months after the alleged Christmas shopping spree. I am told
the Navy helped put her on the fast track for the Army job. The
Navy gave her glowing recommendations when she applied for her
current position with the Army. That seems to be an old
bureaucratic trick, sprinkle some perfume on tarnished goods
and pass it on to the other service. This case obviously sets a
terrible example. It symbolizes all that is wrong with the
Department of Defense Credit Card Program. Ms. Mays must be
held accountable for the purchases that appear on her
government credit card. If someone else committed these alleged
crimes, then she obviously needs to spill the beans.
I want this matter investigated and I think by
investigating it, the matter would be solved, at least based on
what I know. Right now, the prospects for accountability look
dim. No one wants to touch this case seemingly with a ten foot
pole. The U.S. attorney has repeatedly declined to prosecute
because the amount stolen is too small.
Mr. Horn. Which U.S. attorney, San Diego or here?
Senator Grassley. I will have to get that information and
insert it in the record because I don't know.
Mr. Horn. Does Mr. Kutz with the GAO team know? Mr. Ryan.
Senator Grassley. We will have the information for you in
the next panel.
The Navy refuses to pursue the case because Ms. Mays is no
longer employed by that department. Her current employer, the
U.S. Army, refuses to take action because the alleged crimes
were committed while she was employed by the Navy, and the
Tanya Mays case seems to be falling through cracks.
However, there are two new developments. First, I am told
the Department of Defense IG opened an active investigation on
June 3. Second, Ms. Mays holds a security clearance. As I
explained this morning, a person's level of financial
responsibility is a key factor in granting clearances. On June
12, I asked the Assistant Secretary of the Navy to review her
credit history and determine whether she has the requisite
level of financial responsibility to hold a clearance. On July
1, I was informed that her security clearance has been, in
their words, informally suspended pending further review.
If the Department of Defense is unable to resolve this
matter in a way that is fair and just for Mays but also in the
case of Citibank, then all the promises about credit card
reform are nothing but empty promises. Accountability and
reform go hand in hand. Without accountability, it doesn't seem
to me that you can have reform. Tanya Mays is a good place to
start, and that is where the rubber meets the road.
I spent my time on just one case, but I think it is an
example of a culture that if we focus more light on a few of
these very egregious cases and get action on them, that
consequently we will be able to continue on the positive
approach that I expressed in my statement this morning.
That is the end of my comments, Mr. Chairman.
Mr. Horn. Thank you very much for digging into this. I was
worried about that the last time and you have broadened out a
lot more than we knew at that time. If we knew it, why can't
the legal enforcement of the executive branch deal with these
matters? Is someone up high protecting her or what? This is
just idiocy.
Senator Grassley. Obviously your question is a legitimate
one and maybe time will prove we will get a positive response
from the people concerned. In the meantime, I guess we just
raised questions.
Mr. Horn. So the Inspector General over there now has this
case?
Senator Grassley. Starting June 2 with some preliminary
reports, July 1.
Mr. Horn. Is that Army or Defense IG?
Senator Grassley. I think it is the Department of Defense.
Mr. Horn. We need to get into that.
Senator Grassley. Thanks a lot, Mr. Chairman.
Mr. Horn. Thank you. You have done a lot of work and it is
well done.
We will now move to Panel Two, Gregory Kutz, Director,
Financial Management and Assurance, U.S. General Accounting
Office; Special Agent John Ryan, Assistant Director, Office of
Special Investigations, U.S. General Accounting Office; James
T. Inman, Acting Deputy Assistant Secretary of the Army for
Policy and Procurement; and Diedre A. Lee, Director, Defense
Procurement, Office of the Under Secretary of Defense for
Acquisition, Technology and Logistics, Department of Defense.
Ms. Schakowsky. I would like to give my opening statement
now.
Mr. Horn. Fine.
Ms. Schakowsky. Thank you for allowing me to give my
opening statement at this point before we hear the witnesses. I
appreciate once again your holding this hearing.
As I said this morning, I am deeply disturbed by the record
of financial mismanagement at the Department of Defense, and I
am not encouraged by anything I have heard so far today. I look
forward to Secretary Rumsfeld's response to the letter that
Representative Waxman and I sent this morning asking how he was
going to address the financial mismanagement problems at the
Defense Department.
The abuse of purchase cards, even more than the problems
with travel cards, is simply bad management. There are too many
cards. There is too little oversight. There is no
accountability.
This morning, we heard about a National Guard officer who
defaulted on $5,400 of travel charges and then was promoted. At
the last hearing, I made the comment that nothing happens to
people who abuse the privileges they have and I was corrected
by, oh, yes, something happens, they get promoted.
Earlier this year, we were told about a Navy employee who
purchased $800 worth of luggage supposedly to transport
computer equipment and then left the luggage behind when he
returned to San Diego. This afternoon, we will hear more
examples of egregious behavior by Defense Department employees.
Where and when will it end?
The Purchase Card Program may have been a promising idea
when it was devised, and I know it was devised in good faith,
but the management at the Defense Department has turned it
upside down. A program that was designed to save money has
instead made it easier to abuse the purchasing system. A
program that was designed to streamline bureaucracy has made it
easier for an employee to buy personal items and on the Federal
Government's tab.
I am anxious to see the results of the study I requested
from the GAO that compares the price paid on these purchase
cards to the price of the same item on the GSA schedule. I have
little doubt now what it will show. Any of these abuses could
have been stopped if management was managing, and it was not.
The abuses of financial management do not stop at credit
cards. Last month we heard about DOD selling chemical
protective suits on the Web for pennies on the dollar. Last
year we heard there was over $1 trillion on the DOD books that
could not be properly accounted for. Two years ago, GAO
included financial management of the Defense Department on its
high risk list and it will be there again next January. First
it was $600 hammers and $3,000 toilet seats, and now it is
escort services and plastic surgery. Leadership must come from
the top and this pattern of abuse at the Defense Department
must come to an end.
At a time when the deficit is growing and the Government
must meet the new challenges of terrorism, the Department of
Defense must become a partner in improving Government
accountability and not the poster child for fiscal
irresponsibility.
Thank you, Mr. Chairman.
Mr. Horn. Thank you. You have hit a lot of the hot spots.
Let us start now with Mr. Kutz. Do you want to give us a
summary of the purchase card problem?
STATEMENTS OF GREGORY KUTZ, DIRECTOR, FINANCIAL MANAGEMENT AND
ASSURANCE, U.S. GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY
SPECIAL AGENT JOHN RYAN, ASSISTANT DIRECTOR, OFFICE OF SPECIAL
INVESTIGATIONS, U.S. GENERAL ACCOUNTING OFFICE; JAMES T. INMAN,
ACTING DEPUTY ASSISTANT SECRETARY OF THE ARMY FOR POLICY AND
PROCUREMENT; AND DIEDRE A. LEE, DIRECTOR, DEFENSE PROCUREMENT,
OFFICE OF THE UNDER SECRETARY OF DEFENSE FOR ACQUISITION,
TECHNOLOGY AND LOGISTICS, DEPARTMENT OF DEFENSE
Mr. Kutz. It is a pleasure to be here again this afternoon
to discuss our audit of Army purchase cards. With me again this
afternoon is Special Agent John Ryan from our Office of Special
Investigations.
I have in my hand a purchase card. It is also shown on the
monitor. As you can see, similar to the travel card, this looks
like a normal credit card. The card used by the U.S. Army is a
U.S. Bank Visa card and can generally be used wherever Visa is
accepted. However, notice this says ``For official U.S.
Government purchases only.'' The Army has about 100,000 of
these purchase cards and spent about $2.4 billion in fiscal
year 2001. Unlike the travel card, purchase card charges are
billed to the Government and paid directly by the Government.
Today, I will discuss our third in a series of audits of
purchase cards at the Department of Defense. I have testified
twice before the subcommittee on purchase card usage at two
Navy units in the San Diego area. Today, I will discuss Army
purchase cards and in the next several months, we will be
releasing reports on Air Force and Navy purchase cards.
I want to thank the Army for their cooperation in the
audit. As I mentioned this morning, the recent success of our
forces in Afghanistan has shown once again that our military
forces are second to none. Also, I want to make clear that our
audit of the purchase card was looking at implementation, not
design. Used and controlled appropriately, the purchase card
can benefit the Federal Government.
The bottom line of my testimony is that for fiscal year
2001, we found significant breakdowns in purchase card
controls. These breakdowns contributed to fraudulent, improper
and abusive purchases and theft and misuse of government
property. My testimony has three parts: first, the overall
purchase card control environment; second, the effectiveness of
key internal controls; and third, examples of fraudulent,
improper and abusive charges.
First, our work has shown that the lack of a strong
internal control environment leads to the risk of improper
behavior. We found that Army management has focused primarily
on maximizing the use of purchase cards and paying the bills
quickly. However, the Army has not provided for adequate
infrastructure for management of the program. Specific
weaknesses in the control environment related to operating
procedures, management over the number of cardholders, spending
limits, program coordinator oversight, and span of control for
approving officials.
One effect of the weak control environment was ineffective
control over canceling accounts of departed cardholders. For
example, Fort Hood had a substantial problem with termination
of purchase cards. Data show that over 300 active cardholders
at Fort Hood were no longer assigned to the units that issued
their card. One of these purchase cards was used to make
undetected fraudulent purchase at the Sunglass Hut and the
Discovery Channel Store. These fraudulent purchases were not
identified until we informed Fort Hood officials about them.
Second, with Army's weak overall control environment, it is
not surprising we found controls were ineffective at all five
of the case study installations that we audited. The control
activities we tested in aggregate are intended to provide
reasonable assurance that purchases are for valid, authorized
government needs.
Based on statistical sampling, we found key internal
controls failed from 25 to 87 percent of the time. In addition,
the installations could not provide supporting invoices for 7
to 26 percent of the transactions we tested. For example, for
many of the fraud cases, the certification of the monthly bill
by the approving official was nothing more than a rubber stamp.
Further, the job of approving official is a collateral duty
with insufficient time available for effective performance.
Third, given the weak control environment, it is also not
surprising that we found potentially fraudulent, improper and
abusive purchase card transactions for 2001. Based on our
limited testing, we identified or became aware of 13 fraud
cases. Seven of the 13 cases were at two locations, Eisenhower
Medical Center and Fort Benning. As shown on the poster board,
three large fraud cases were at Eisenhower. Fraudulent
purchases included computers, digital cameras, women's
lingerie, jewelry, car repairs and clothing.
As shown on the next poster board, four of the fraud cases
were at Fort Benning. Fraudulent purchases there included DVD
players, cruises, a trip to Las Vegas, and food. One cardholder
made 178 criminal charges for $30,000 both before and after he
retired. These charges were made over the period of 2 years and
the approving official did not verify the purchases. Another
cardholder, a Chapel fund manager, used the purchase card to
pay for escort services in New Jersey. Funds used to pay for
the purchase card bill for these services came from the Chapel
offering. This individual was demoted and required to repay the
funds.
In addition to fraudulent purchases, we also identified a
significant number of improper or abusive purchases. Examples,
as shown on the poster board, include $16,000 of executive
office furniture, including elegant desks, chairs and a
conference table, leather bomber jackets from Sky Mall,
wasteful and abusive cell phone usage at Fort Hood, a $500 Bose
radio purchased by an individual to listen to music in his
office, designer day planners costing up to $250 each, as the
Senator mentioned this morning, 80 palm pilots for Pentagon
officials, fine china and crystal from Royal Daulton and Lenox
that was used for culinary arts competition, 30 sunglasses
purchased from the Sun Glass Hut for the Golden Knights
Parachute Team, and a damaged $2,250 tree to plant in
celebration of Earth Day. For these purchases, we generally
found no documented justification. Rather, Army often provided
us with after the fact rationalization for the purchases. With
100,000 Army purchase cards, there are many people making daily
decisions about how to spend the Government's money. However,
the abusive and wasteful purchases I just described raise
questions that go far beyond the confines of the Purchase Card
Program.
In summary, our testimony shows some real consequences of
ineffective financial management and internal controls. We
support the use of a well controlled Purchase Card Program.
However, as implemented by the Army, this program is highly
vulnerable to fraud, waste and abuse. As reflected by our
recommendations, we believe the keys to reforming Army's
Purchase Card Program include well designed, Armywide operating
procedures and controls, effective program coordinators and
approving officials, reducing the number of purchase cards to
the minimum number necessary, developing clear, detailed
guidance in the appropriate usage of the purchase card, and
establishing proper incentives, accountability and consequences
for all personnel involved in the program.
The Army has reacted in a positive manner to all of our
recommendations. We plan to continue working constructively
with the Army and the DOD Charge Card Task Force to implement
these recommendations.
Mr. Chairman, this concludes my testimony. Agent Ryan and I
would be happy to answer your questions.
Mr. Horn. Thank you very much.
We will now move to James T. Inman, Acting Deputy Assistant
Secretary of the Army for Policy and Procurement. To start
with, Mr. Inman, how did they get you into this situation?
Mr. Inman. I was drafted. Dr. Oscar left and he asked if I
would be willing to sit in the hot seat and I said I would do
whatever he wanted me to do. So I am here, sir.
Mr. Horn. Army Policy and Procurement, this falls in that
rubric then?
Mr. Inman. Yes, sir. We are the established executive
agency for the Army's program in the new Army Acquisition
Contracting agency but I answer to Mr. Bolton and Mr. Bolton
does not like unanswered questions, so that falls within my
purview.
Mr. Horn. Tell us what you know.
Mr. Inman. I am Jim Inman, the Acting Deputy Assistant
Secretary of the Army for Policy and Procurement.
I have submitted testimony for the record and with your
permission, I would like to summarize that testimony.
Mr. Horn. Thank you.
Mr. Inman. I feel strongly, first of all, about the
Purchase Card Program. It is contributing significant savings
to the Department and I firmly believe that we cannot go back
to the old way of doing business. Before I continue, however, I
want to thank the Government Accounting Office for the
assistance they have rendered us in defining the scope of our
program's shortcomings. I do know that we have shortcomings and
I affirm to you that we are committed at the very highest
levels of the Army to correcting our programmatic weaknesses to
ensure the continuance of the public trust. That is critical to
our existence as an organization.
The Army experienced a rapid growth in the use of the
purchase card between 1995 and 1999. At the same time, we were
dramatically reducing the population of the acquisition
community, the functional element responsible for the
administration of the program. We are taking steps to respond
to the GAO's findings that the Army has not devoted adequate
manpower to the program. We recognize that these shortages have
contributed to an overall weak internal control environment.
This has made the Army program vulnerable to fraud, waste and
abuse.
Recently, the Department of Defense Charge Card Task Force
identified several best practice workload matrices. On July 8,
2002, our Vice Chief of Staff tasked the Army to ``comply with
the recommended ratios and monitor the Purchase Card Program to
eliminate the weaknesses noted in the GAO audit.'' He
reiterated the need to develop and maintain a system of strong
internal controls to ensure we are proper stewards of the
taxpayers' dollars.
The Army is also pursuing other measures to improve our
effectiveness. We are completing a standard operating procedure
[SOP] to standardize and tighten purchase card procedures. The
SOP will address weaknesses identified by the GAO, as well as
those uncovered by the Department of Defense Inspector General.
These weaknesses include controls over the issuance and
assessment of the ongoing need for cards; cancellation of cards
when appropriate; span of control of the approving official and
their respective cardholders; and appropriate cardholder
spending limits.
The Army Standard Operating Procedure will also include
checklists as part of its oversight system for program
coordinators to use in performance of program reviews as well
as for the approving officials' reviews of their respective
cardholders. In addition, we have requested that the bank
assist us in developing standard data base queries that our
program coordinators can use in reviewing transactions to
evaluate our own program performance.
In conclusion, I will tell you that the Purchase Card
Program is critically important to the Army. We recognize that
we need to make changes. We are aggressively correcting
weaknesses and implementing across the board standard
practices. We are determined, and I think I speak for Mr. White
when I say this, to make this the most effective and efficient
system possible.
This concludes my testimony. I am prepared to respond to
any questions you or members of the subcommittee may have.
[The prepared statement of Mr. Inman follows:]
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Mr. Horn. Thank you very much.
We have to go into recess and we will be back. We will be
in recess now and will be back at 2:55 p.m.
[Recess.]
Mr. Horn. Sorry it is so late but we had three votes that
were very complicated. We won most of them.
It is now 3:20 p.m., and we will pick up where we left off.
Mr. Inman.
Mr. Inman. I believe I concluded my remarks and said I
would be glad to answer any questions.
Mr. Horn. OK. Now we will go with Ms. Lee.
Ms Lee. I appear before you today to discuss the Department
of Defense's implementation of the governmentwide Purchase Card
Program and corrective actions we are taking to correct the
problems identified by our own internal reviews and the General
Accounting Office.
I would like to echo what Mr. Inman said about the
importance of the purchase cards to the Department of Defense.
We do use the cards to streamline process and we do save a good
amount of money on administrative process. However, I would
also like to echo what Mr. Inman and Mr. Kutz said. It is
absolutely unacceptable that we have abuse or misuse of these
cards and we have a lot of work to do to ensure that we rebuild
your confidence and that of the taxpayer and make sure our
people understand the obligations and the responsibilities we
expect for them to deliver on.
As you know, we established a task force in response to
your request and the concerns of your subcommittee and the
concerns of the GAO. I have a copy of that Task Force report
and I know we previously furnished it to you. I would like to
mention a few things in the report. The thing that particularly
catches my attention and I think one of the most important for
all of us to emphasize is that the recommendations note that
the tone at the top or leadership is absolutely essential for a
successful purchase card program.
We have heard you loud and clear. We absolutely agree and
we are aggressively pursuing to ensure that everyone knows the
importance of the proper use of these cards.
I am going to focus on three areas today that are contained
in the Credit Card Task Force report. The first one is
management emphasis and organizational culture. As I mention
there, we need to focus on leadership. At the Department, we
have made sure we have emphasized that. The Deputy Secretary
signed a letter on the 21st of June to all the Service
components and defense agencies explaining to them the
importance of proper use of the card and requiring them to come
back and tell him if they had any actions and corrective
actions they were taking within their service. We will be
acting promptly and vigorously on those issues.
As well, I personally made some visits to some areas where
we have had concern and I have talked with service acquisition
executives, my boss, Mr. Wynn and we have even had some
meetings in the purchasing areas to make sure everyone realizes
the importance of that.
Another key area that the Task Force emphasizes is the
process. We have a concept of operations which is here. The
concept actually goes into quite a bit of detail, including
flowcharts on how to do everything through the program from set
up and approval of purchase card officials, how to train them,
what to do. It is true we haven't had that guidance as concise
and clear in the past as we should have, so we are now working
on that.
In meeting with the GAO, we talked a little about do these
things, if implemented properly, will they help with the
answers. The answer is absolutely yes.
Mr. Horn. What is the title of that document?
Ms. Lee. This is called ``The Government Purchase Card
Concept of Operations.'' We have it in draft and are going to
finish it probably within the next month or so.
Mr. Horn. That is the DOD version?
Ms. Lee. Yes, sir.
Mr. Horn. Not GSA?
Ms. Lee. No, sir. This is the DOD version.
Mr. Horn. We would like that put in the record at this
point.
Ms. Lee. Will do.
The third thing I would like to mention beyond process is
basically people. As you and I have discussed, this is all
about paying attention. We need to make sure we have not only
the right people but we have them appropriately trained and we
have emphasized the right oversight for this program. Those are
some areas we are also going to focus on.
We have talked about internal controls and the issues that
have been brought up here today. I do want to give a few
examples. We are looking at making sure the approving official
has a reasonable span of control. We said the maximum of 300
cardholders but that could vary if you have people with a lot
of charges. Perhaps the number should be less and we have a
method for monitoring that.
We also have a way we are going to use data mining. We used
to call it mongoose but it actually is an electronic method
where we go in and look at the purchases and certain things
cause a blip, and then we further investigate. For example,
certain purchases around a holiday might show us something we
need to go further and investigate into that. We are working on
that with the GAO and our own IG to make sure we aggressively
pursue any questionable transactions.
Last but not least, we are stressing to our folks not only
the importance of the card but the remedies for misuse. We are
processing an additional FAR case, a defense acquisition
regulations case, which will go out for public comment but it
very clearly delineates the Uniform Code of Military Justice
could be applied for misuse and what the civilian remedies are
for anyone who misuses their card.
I agree wholeheartedly that we need to focus and make sure
we are using these cards properly. They are a good tool. The
majority of our people are great folks who are using the cards
properly. We do have some misuse and we are going to
aggressively pursue that and correct it.
I would be happy to answer any questions you may have.
[The prepared statement of Ms. Lee follows:]
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Mr. Horn. Let us start.
Ms. Schakowsky. This is our second hearing of the day on
waste, fraud and abuse, travel cards this morning and purchase
cards this afternoon. As I said this morning, I think the
overall picture of financial mismanagement at the Department of
Defense is really equal to the problems we are seeing at Enron,
at World Com, etc. and worthy of equal attention because we are
talking about billions of taxpayer dollars once you go through
all these problems we have, and over $1 trillion that cannot be
accounted for.
I was happy, Ms. Lee, to hear you talk about culture,
solving the problem comes from the top, but I want to tell you
that I come here today even more skeptical than I have been in
the past because if you look at the top of the Army, at the
Secretary of the Army, you find the Secretary of the Army,
Thomas White, is under FBI investigation for possible insider
trading for sale of Enron stock, being one of Enron's top
executives and Enron employees have said that he knew about
accounting practices and inflated revenues.
I think we are talking about culture and creating a culture
of honesty where people aren't fast and loose, cooking the
books, they feel that financial management is really important,
that being a guardian of the money is really important. I think
it ought to start with replacing the Secretary of the Army if
we want to create a culture that really demands accountability
and financial management that is appropriate.
I think what the Department does in terms of its inability
to pass an audit and therefore making it impossible for the
whole Government to have a clean audit, should be laid at the
feet of the people at the top. The people at the top right now
are under a cloud and I think should not be there.
I want to change tones here because I think there has been
this task force, you do have the report, you have some plan for
how to get there. When do you think you can come back and tell
us about concrete improvements that have been made so that we
don't have to come back here again in 6 months as we have over
and over and find the same problems existing?
Ms. Lee. I will be happy to come back at any time. We do
have specific dates in our report by which things are due and
are just working them off one by one, including additional
direction and additional training. At any time, I would be
happy to come and discuss any and all points in the report or
any other issues that concern you.
Ms. Schakowsky. When is the next date when you measure the
success of your reform efforts?
Ms. Lee. Probably the next really upon us date is the
responses to the Deputy Secretary's letter, how the services
responded and what corrective action and in turn, what do we
need to do to make sure we accomplish that and support it. That
is the next pending date which will be the end of this week or
early next week we should see those results.
Mr. Inman. Let me add I have seen Mr. White's draft
response and I think it is pretty substantial.
Ms. Schakowsky. Mr. Kutz, at the end of your testimony you
listed some specific recommendations of things that could be
done in terms of these credit cards. Would you tic through them
once again, setting limits on the amount of credit, etc?
Mr. Kutz. I had five bullets at the end which highlight
some of the major recommendations we have made both to the Navy
and the Army. One for the Army was to develop Armywide
operating procedures, which they do not have, but which have
been underway for quite some time. I believe that is one thing
that is going to be done here. Reducing the number of cards,
since we had our first Navy hearing, Navy has taken substantial
action. They have gone from 58,000 cards to 26,000 cards, so
they have made significant improvements in that area. I believe
Army is working toward the same type of situation, although
they still have 100,000 cards. I think probably Army needs to
do a scrub of cardholders.
Again, accountability, infrastructure and I think at the
first two hearings we talked about some sort of guidelines that
lay out what is or isn't an appropriate use of the purchase
card with probably some specific examples of things that are
prohibited because we have seen in the Army and the Navy some
similarities in the types of things that are being purchased
that shouldn't be.
Ms. Schakowsky. Ms. Lee, do you feel all of those are
adequately responded to in your plan?
Ms. Lee. Yes, ma'am. We have addressed those issues,
including special approvals and things in the back of the
concept of operations and a list of things that are
inappropriate. I would emphasize that anything that is not
government official is a inappropriate purchase.
Mr. Inman. I would like to add that in the Army's Standard
Operating Procedure we have addressed all those issues, working
with the GAO. I am very pleased with the help we have gotten
from the Joint Program Office in helping us come to grips with
trying to put out unified guidance on this. Just this week, we
canceled 1,700 accounts. We put out guidance in February,
followed up in March, twice in June. People didn't want to
play, we said OK, game is over, goodbye.
Mr. Horn. Is there a policy that when a person leaves the
Government, the Military, the Department of Defense, whatever,
they get their credit cards cut just as we do when we get a new
one from some credit card company? What is the policy on that
where you can say, you are leaving, so we want the card back?
Mr. Inman. It has been a while since I have cleared post
but when I used to clear post, I would get a sheet of places I
had to go and things I had to do and the people I had to clear
with would signoff or initial that. I would take that piece of
paper to the final clearing place and the person would make
sure there were initials in the correct blocks, nice to know
you, goodbye. I expect that is still the process but there is
nothing to prevent forged initials and signatures. That is one
of the things.
Mr. Horn. Say if you are on a base, that is usually where
that happens, maybe it is with civilians, I don't know, but
that is when you see they are going, you need to ask for the
government credit card. Is there a place there? Do you have a
government credit card? At that point, you say we want it.
Mr. Inman. I am told there is APC clearance, the person in
charge of the program at the installation has to be cleared so
that everyone has to stop by there to make sure their credit
card is turned in.
Mr. Kutz. The place we found that was the biggest issue was
at Fort Hood with respect to purchase cards. We found there
were about 300 cards for people that had left that were still
active. There was at least one, maybe two of those cases where
we identified fraud. In my oral statement, I mentioned the Sun
Glass Hut and the Discovery Channel Store. That was one of
those examples.
Since we have been at Fort Hood they have canceled those
cards, but what they have done to change the policy and make
sure it happens again, we are not sure. I believe there are
policies to check out your card at these installations. It is a
matter of if they are being enforced and if the APCs are
actually involved in that policy to be notified that someone
with a card is actually leaving. So there may be policies in
place but either the policies need to be beefed up and/or there
needs to be something done to ensure the policies are actually
being followed.
Mr. Horn. Did you see beyond the various military
facilities and deal with some of the civilian part of the
military?
Mr. Kutz. Some of these were civilians at Fort Hood but it
was primarily military. Again, it was something we saw in the
Army Travel Program where there were people who had left or
retired who had kept their travel card and were still using the
card. Some of the chargeoffs for travel cards were people that
had used a card after leaving the service.
Mr. Horn. When a thief in this country sees a Master card,
they simply use it over the phone and here is my number and so
forth. Meanwhile, they are long gone with the goods or whatever
or it is done by mail. What do you have as a thought as to how
we deal with this?
Mr. Kutz. With respect to canceling cards, I think they
could also have a back-up policy. You can use the data to bump
active cardholders against active employees. That would be a
failsafe back-up policy they could have to make sure there
aren't any people who have active credit cards that aren't on
the current payroll. That would be something we probably would
recommend they consider as a back-up policy.
Mr. Horn. That would mean that they hadn't paid all their
obligations and you could take it out of the payroll or what?
Mr. Ryan. In the case you are talking about with these
purchase cards, the Government is paying the bill. The
cardholders are the agents of the Government. One of the things
we have to consider is when they do leave, that the approving
official can contact the issuing bank and have the card
canceled. Therefore, it can't be used outside of their
employment. That is kind of the best way to try to approach
that from a backup standpoint.
Mr. Kutz. What happens with the purchase card and the
examples we found was the people who had left were gone, so
they were no longer on the payroll, they were using the
purchase card because nobody was reviewing the monthly bill,
charges were going through and being paid for people who no
longer worked at the Army. So once you are gone, there is
nothing you can do to actually offset wages. It is too late at
that point.
Mr. Horn. That is also our problem with the IRS, I might
add, on some of these questions.
The GAO report contains an expansive list of
recommendations. What are the most important actions the Army
needs to take?
Mr. Kutz. I believe reducing the number of cards to the
minimum number necessary to complete the mission. I think Mr.
Inman said they are working hard to reduce the number of cards.
That is a critical element as is making sure the agency program
coordinators and the approving officials are sufficiently
trained. For example, the approving officials are given
sufficient time and are rated on their job as approving
official. Right now, those are collateral duties, they are not
rated on that, it is not important and if they don't do it,
there are no consequences.
Mr. Horn. Obviously, Senator Grassley and I care about the
problems of fraud, waste and abuse. If the Army effectively
implements some of their recommendations, will fraud, waste and
abuse be reduced?
Mr. Kutz. It would be reduced but there is no way you can
eliminate fraud. Wherever there is money, as Mr. Ryan has
taught me, there is fraud. Certainly if you put a reasonable
set of controls in place, which are the kinds of controls we
talked about, advance approval, approving official review, and
independent receipt and acceptance, if you have a group of
those controls in place and they are consistently being
followed, it is much more difficult for fraud to be committed.
That doesn't prevent you from having fraud such as collusion or
kickbacks with vendors which are some of the fraud cases we
found here. Again, it makes it much more difficult for someone
to actually perpetrate and get away with the fraud.
Mr. Ryan. I would also like to add that the better job that
we can do identifying the government agent, the individual who
is holding the card, both financially, criminally and mentally,
we can better identify the individual when we know what type of
individual we are giving the card to. We found situations, as
Senator Grassley mentioned, where an individual had poor
credit. That is another example in which we have given this
person, an agent of the government, the power to spend the
taxpayers' money. We need to do a better job in identifying who
those agents are going to be and we need to be doing the proper
background checks. We are never going to eliminate fraud, but
at least try to curtail it.
Mr. Horn. The Department of Defense Comptroller is Dov
Zakheim and he announced the establishment of a Charge Card
Task Force to deal with the problems. They issued a report on
June 27. Is that part of what you have Ms. Lee?
Ms. Lee. That is the report right there.
Mr. Horn. Let us get that. We want to see what happens
between there and then. We will put this in the hearing record
also and we will also look at it.
[Note.--The report entitled, ``Department of Defense Charge
Card Task Force Final Report,'' may be found in subcommittee
files.]
Mr. Horn. What are your views on the Task Force because the
Army is taking it in the head now for what they had to say
about the Purchase Card Program, I assume not just for the Army
but for all the services, or was this focus strictly for the
Army?
Ms. Lee. No, this task force was DOD-wide, looking at
appropriate use of the purchase card and the travel card. There
are separate recommendations for travel card versus purchase
card. I had a brief discussion with Mr. Kutz and asked him,
what do you think about our recommendations. I will let him
answer that.
Mr. Kutz. For the purchase card, we thought the task force
report was complete in describing the issue and in the types of
recommendations and that the recommendations they had were
consistent with the ones we had issued for the Navy reports and
also for the Army.
With respect to travel, we did find that the report had a
lot more holes in it with respect to some of the issues we
talked about this morning. For the Purchase Card Program, it
appeared to be reasonably complete with respect to the types of
issues we had seen in those two. We haven't completed our work
Navy-wide or Air Force-wide to know if our recommendations are
complete but assuming what we found so far, they would address
those if implemented as Ms. Lee said across the Department of
Defense.
Mr. Horn. Would this be simply the tip of the iceberg or do
we see something under the water?
Mr. Kutz. With respect to fraud, we found that the
Department does not know how much there is out there with
respect to purchase card. They do not have a system that tracks
the kinds of cases. The 13 cases we either identified or became
aware of, if you wanted to roll that up for the Army, you
couldn't because there isn't a data base, so they don't know
what they know. They also don't know what they don't know
because there is a lot of fraud out there that does not get
identified, especially with the kind of control environment we
have identified and talked about this morning and this
afternoon.
So we don't know whether it is the tip of the iceberg
necessarily but what we do know is that the Department needs to
start keeping track of these fraud cases and learning from
them, knowing where they are and trying to identify the types
of things that are happening so they can try to prevent them
from happening in the future.
MR. HOGAN: For example, apparently, Mr. Kutz, on
questionable purchases you mentioned, there was a damaged tree
plant on Earth Day. The Army paid $2,250 for the tree. I don't
know if that is good or bad. I happen to like trees. Maybe
whoever the officer was liked trees too. What do you conclude
from all that?
Mr. Kutz. We concluded that was an abusive purchase, not
only because they didn't need to buy a $2,200 tree to plant in
the middle of a courtyard with a bunch of other trees but as it
turned out, this tree was damaged. It had 50 holes, it was
leaking sap, there appeared that woodpeckers had been at the
tree basically. By the time they actually tried to return it to
the vendor, the vendor said it is too late, it is your tree. So
the Government was stuck with a $2,250 damaged tree.
Mr. Horn. Was that a nursery?
Mr. Kutz. Yes, it was a nursery they bought it from.
Mr. Horn. Can we just say, folks, that will be the last
thing we buy from you if you don't take this back?
Mr. Kutz. Hopefully, that is what happened. What we do know
is they did plant another tree for Earth Day this year and they
spent $500 this year, so they didn't need a $2,250 tree.
Mr. Horn. Mr. Ryan, the GAO's report includes dollar
amounts of some fraud cases. Is that the total amount of money
involved in these cases of fraudulent purchases? How much have
we got in some chart?
Mr. Ryan. We have no idea. I don't think DOD has any idea.
In regards to keeping track of the number of fraud cases both
for purchase and travel, there doesn't seem to be a system in
which you can push a button and get data back. We asked, in
some cases they did worse searches. They ran credit card,
travel card, purchase card, impact card and then they combined
that information and said, this might be what we have. We can't
tell you they are fraud cases but this is the result of our
inquiry.
As a criminal investigator and a supervisor in my former
Secret Service life, we were able to identify the number of
cases by assigning a specific administrative number to a type
of case. So when we needed data to determine what the trends
were, where we need to put our resources, and I might also add
the amount of training that is needed for investigators. We
talk about a lot of training for people that handle the system,
but what about the people responsible for doing the
investigations? All this data needs to be gathered and needs to
be at someone's fingertips.
It also maybe should be considered that when we are
awarding these contracts to these banks, we put a condition in
there that the banks have to train our investigators, give them
the latest investigative information, the tactics, make it a
responsibility of the financial institutions that we contract
with to provide training to the investigators, to bring in the
best investigators we can to work on financial crimes.
Mr. Horn. Mr. Ryan, do vendors contribute to the defrauding
of the Army purchase card program, and if so, please explain
and give us some examples?
Mr. Ryan. When looking at vendor fraud, I think it is
important to recognize that we have learned the cardholders are
turning over their account numbers to the vendors. The vendors
have a data base of our government purchase card numbers. As a
direct result, a vendor can then submit the purchase card
number to the merchant bank for the transaction that maybe was
done correctly and then they could just keep adding transaction
after transaction. So it is a vehicle for them to get money.
If we have cardholders and approving officials that are
asleep at the switch, and have no idea what they are approving
or what they are not approving, yes, the vendor is going to
make money on submitted transactions. That is the way vendor
fraud can work.
Mr. Horn. Does the DOD have the resources it needs to
identify and investigate financial crimes involved in these
credit card programs, or can you move around people to solve
the problem, at least so you can build a decent culture there?
Where do you get the personnel to do this because somebody will
whine about that and say, ``we can't do that, we have this
great burden.'' For heavens sake, right down at the field, they
ought to have somebody. They ought to make that in the office's
analysis when they get a chance to go from a lieutenant to
captain, captain to major and so on, and when you have civil
servants and they go for the senior class and so forth, it
seems to me like the people above them, they ought to have
something in the file to say that person didn't have one idea
in America on this thing, they just don't seem to care.
Mr. Ryan. I can talk about it from an investigator's point
of view. I think the investigators in the military services are
good, hardworking investigators. Fraud investigations sometimes
turn out to be a complicated issue because of the mechanics of
a credit card transaction or a bank transaction. I would like
to emphasize again the importance of providing enough training
to the investigators to make them the best they can be. We can
use them to learn when they do an investigation, they can bring
back what the systemic problem was within that so we can pass
that on to the appropriate management people so if adjustments
need to be made, they can be made.
Investigators can provide a lot of information if they are
taught correctly how to do the investigations. I would like to
emphasize again that if we could tie it into a contract where
the banks have to provide some training to our investigators, I
think it will be a benefit for the military services to use the
resources of those investigators.
Mr. Horn. I now yield to Ms. Schakowsky.
Ms. Schakowsky. Ms. Lee, at our March hearing, we learned
from the GAO--I believe you were here and corroborated this--
that the Navy had a policy of not putting on its inventory
items that were easily pilfered. We just don't list those in
our inventory. I am wondering, that was March, this is July,
what the Defense Department has done now to change that policy?
Ms. Lee. The concept of operations talks about the
importance of having recordable property. There is also some
dual receipt matching and guidance on how to do that. The Navy
specifically suspended almost all their cards where they had a
very small amount and they have had a very aggressive
reinstatement program with letters from the Admiral telling
people who are reinstated and are quite aggressively trying to
correct some of those issues but we are focusing on it DOD-wide
as well.
Ms. Schakowsky. So you have changed your policy on that?
Ms. Lee. The policy was always that sensitive property
should be recorded and tracked. For some reason or other, some
of the items, the Navy was not doing that, so we have
reemphasized that requirement.
Ms. Schakowsky. You have reemphasized it but do you know
now that it is being done? Let me ask the GAO if you know if
there has been a change now?
Mr. Kutz. In the Army, four of the five installations we
audited had difficulty finding property. For Army, I think the
policy generally was to record pilferable property in the
records. In some cases, the issue becomes what is pilferable
property, so they would tend to err on the side of not
recording it rather than recording it.
With the Navy units in San Diego, they interpreted guidance
from the Navy to mean they did not have to put it on the
records. Whether that issue has been cleared up, I don't know,
but they had interpreted the guidance they were getting from
the Navy to mean they did not have to account for any
pilferable property.
Ms. Schakowsky. Which is different from what you just said,
that it was always the rule. They interpreted the rule to mean
they didn't have to so that is the way they were executing.
Ms. Lee. The Navy interpreted the rule differently. We have
clarified to them that their interpretation is not correct.
Ms. Schakowsky. I wanted to ask about training. In the
earlier hearing, we were dealing with people who use travel
cards who are often young people who have no credit history, no
experience in using credit cards. Here, we are dealing with
individuals, all of whom have been assigned actually to make
purchases; but is there some kind of built in retraining
program so that these people understand, not just for the
people supervising them, but for the people who have the cards
in their hands? Is there some kind of staff training going on?
Ms. Lee. Yes, we are putting in place right now a new
electronic training process which will be housed in Defense
Acquisition University, will be required for people to take it
before they are allowed to have a card and to have refresher
training. It includes basics about how to use your card. It
also includes some specific instruction from the government
because as you know, for example, before you purchase, if it is
a certain item, it should be purchased from JWOD or Javitz
Wagner O'Day or blinded, handicapped people, or certain
products have certain requirements. Certain hazardous
materials, you have to have a special approval before you can
purchase it even if it is available on the purchase card. So we
train people in all those processes as well as what they can
buy and how it has to be approved, how they have to reconcile
their statements, what their limitations of time are and what
happens if you don't do what you are supposed to do.
Ms. Schakowsky. I want to get to that. I think the two
things that the American people would care about are
restitution, the people pay back the money they have stolen
from the taxpayers and punishment, and that there actually is
some consequence to having done that. If you could address
that? With Tanya Mays, it is still unclear that we actually got
the money back that she probably stole, so I want to know about
restitution and punishment.
Ms. Lee. Mr. Inman has a list here. We do have examples
where people have been prosecuted, they have made restitution,
they are serving jail time.
Ms. Schakowsky. We also have examples of people who have
been promoted, so it is not just a matter of examples, it is
policies and the norm now.
Ms. Lee. The policy is to take the appropriate action and
to recover the money for the taxpayer. We do give people due
process, so we do give them an opportunity to respond but yes,
we are taking corrective action.
Ms. Schakowsky. If 6 months from now this purchase card
problem is not resolved, will you be held accountable?
Ms. Lee. Yes, ma'am.
Ms. Schakowsky. What does that mean?
Ms. Lee. Obviously I will be explaining to you, as well as
my bosses, what the issues were, what we need to continue to
do, and what I have done to make that improvement. I
unfortunately do not think we can totally eliminate it. We need
to make sure when we discover a misuse of the card, that we
take prompt and meaningful action.
Ms. Schakowsky. Let me ask another question. Mr. Ryan was
just asked a question to quantify the problem, he said, I don't
know. Maybe you can answer Mr. Inman. I don't think DOD knows,
I don't think the Army knows. Who knows? Are we going to have
the data so that we know, so these questions can be answered in
a meaningful way to anyone?
Ms. Lee. Yes. We have gone to our Inspector General for the
Department of Defense who is the focal point for all DOD audits
and asked them to assume the oversight, an additional oversight
of the Purchase Card Program. They are making sure all the
audits conducted by the IG, whether the Army IG, the Air Force
IG, the Navy IG, that they have a broad oversight from that
standpoint. I did go back to them and say, what is our
accounting method, how do we record them and report back.
Ms. Schakowsky. It sounded like Mr. Kutz said this is kind
of a no-brainer, that these are coded in a special way so that
you can actually retrieve them from a data base in some orderly
fashion. I don't think you have to be a management mavin to
imagine that would be a smart idea. Is that kind of thing
happening?
Ms. Lee. I am not familiar with the IG's accounting system
and I will certainly get an answer for you on that.
Ms. Schakowsky. Mr. Ryan.
Mr. Ryan. I think it is important to recognize the
difference between the audit responsibilities and investigative
responsibilities. We are looking to identify systemic problems
to help curtail the purchase card fraud. We are going to do
that by learning from our investigations. We found there is no
centralized data base to record the number of investigations
that the DOD IG is doing in the area of purchase card fraud.
My suggestion is, like a lot of other Federal agencies,
they should have a data base that when an office in California,
New Orleans or whatever opens a credit card case, there is a
central data base that says, in New Orleans we have 14 credit
card cases open. Right now, unless you specifically go to the
people in that office, management can't really tell. It is a
great tool to be able to see where you have your problems and
maybe you can use your investigative cases in conjunction with
trying to do audits in those particular areas. I have talked to
some of the IG people and I believe they are headed in that
direction. They just need a central data base to record their
investigations.
Ms. Schakowsky. The need for clear and comprehensive
guidance for purchase card operations through DOD, you said
there needed to be some standards concerning what could be
purchased, what was right and you identified that as an
essential element of the reform efforts.
My understanding was DOD itself is reluctant to take direct
action to establish those guidelines but rather rely on the
individual services to establish those guidelines and the
components of those. Is that not the responsibility of DOD?
Ms. Lee. It is a shared responsibility. We set the general
parameters and the services have the implementation. As well, I
also do the Defense Acquisition Regulation which is a
departmentwide regulation which tells people the parameters
under which the program operates. They do have some flexibility
in their implementation in that the Department of Defense
doesn't appoint the cardholders, that flows down through the
individual organizations because we feel they are best equipped
to identify the people who need to do it for their job and are
qualified. We set the general policy and then the services
implement.
Ms. Schakowsky. We have talked about vendor fraud, which we
haven't really had a hearing about. Is there anything about
getting a rein on these purchase cards? Have you dealt at all
with vendor fraud at DOD and where are we with that?
Ms. Lee. If properly implemented, if people are paying
attention--if a vendor did have your card, if you pick up the
phone and make a transaction, they have your number. In any of
those cases, a vendor could choose to misuse your card, my
personal card, my government card.
Ms. Schakowsky. But much more likely is a situation where
they think that money is going to get paid without scrutiny.
Ms. Lee. Correct. If we are not paying attention, it
certainly can happen. If you are paying attention and you have
used your card for one tree and all of a sudden you get billed
for ten and you know you didn't get 10 trees, the system works
and people would dispute it and we would go back. So paying
attention will help us, will make the difference.
Ms. Schakowsky. It seems to me vendor fraud could really
mount to a lot of money. Where are we in understanding the
extent of this?
Mr. Kutz. With respect to the biggest fraud case in our
report, the $100,000 case at Eisenhower, there was vendor fraud
involved in there. There were kickbacks and there was a
combination of collusion between the cardholder, approving
official and some vendors, so there were a number of parties
involved in that. Again, $100,000 is what they know about. When
we first looked at the case and picked some of the cardholders
from that in our samples, it was $20,000, so it grew to
$100,000. It is still ongoing at this point, so it could be
larger than that. That was an example where there was vendor
fraud involved.
Ms. Schakowsky. One vendor, right?
Mr. Kutz. One vendor, I believe. There were other smaller
instances of single purchases where there were charges with no
support. The Army went back to the vendor who said, oops, we
really didn't give you anything. Whether it was fraud or not,
or an unintentional billing, we don't know, but there were
several cases like that of transactions we selected for say
$500 or something like that where there was no support, the
Army had paid the bill, and when they went back to the vendor
they got their money back.
Ms. Schakowsky. I have a real bad feeling we are talking
about large amounts of money when you think of all the vendors
that are involved in this. Have we asked for a systematic look
at vendor fraud overall?
Mr. Kutz. Not as a separate study. We are looking at it on
the Air Force and the Navy-wide audits but that is something
that could be looked at with a sharper focus solely on that if
that is something you would be interested in. We are looking at
that as part of a broader study of those two but we haven't
focused just on that.
Ms. Schakowsky. Let me end with this. I am tired of the
product always being just a report. Reports fill up shelves,
etc. I am not saying this report won't turn into action, but if
it doesn't, it is not worth the paper it is printed on. I think
it is real important this not be put on a shelf somewhere and
viewed as, yes, we are doing something, and I can show you on
page 42 that we are really doing it. No. We have to come back
with some evidence that this kind of financial mismanagement is
under control. I look forward to that hearing.
Mr. Horn. The Defense Department keeps saying the cases of
purchase card fraud are isolated. However, the General
Accounting Office found 13 cases in the Army with only limited
testing. The GAO also reported the Army does not know the
number of fraud cases under investigation. Of course nobody
knows how much unidentified fraud there is.
Given all this, how can the Department of Defense continue
to maintain there is not much fraud in the program?
Ms. Lee. Those numbers are troubling and those instances
are troubling but we have also spent over $6 billion this past
year and had 10 million transactions. I realize it is a limited
sample but it is a sample that identified 13. We have good
people in the Department, the majority use the cards properly.
We do have some who either through intention or not who have
misused the card. We need to go after those aggressively but I
do recognize we have a lot of good people who use the cards
properly and have confidence they will continue to do so.
Mr. Horn. Mr. Inman, based on the GAO report, immediate
actions are needed to improve control over the Army's Purchase
Card Program. What in your view are the most important actions
that need to be taken to improve the program?
Mr. Inman. We have taken some actions. The Vice Chief of
Staff of the Army has sent a memorandum to the Army saying do
this, do it right now, or else. We are looking to respond very
quickly over Mr. White's signature. The Army's Standard
Operating Procedure is due to be signed off by the end of this
month, I am told, which will pull guidance that is admittedly
in diverse locations into one location to address each and
every one of the GAO recommendations.
The things we are really focusing on are controls over the
issuance and assessment of the ongoing need for cards or
cancellations of cards where appropriate. I would like to
reiterate this week alone, we canceled 1,700 accounts because
they were not in compliance with our guidance. I don't know
what the total is to date but it is a lot because I know the
program manager and he doesn't take many prisoners. He is very
serious about his job.
The span of control of the approving official and the
respective cardholders--we want our billing officials to manage
not more than seven cardholders and our APCs to have
responsibility for not more than 300 cardholders. The Vice
Chief of Staff put out in his memorandum that he wants the
agency program coordinators to be General Schedule 11 graded
personnel, the equivalent of a captain in the Army, the
position requiring in-depth skills in financial and contacting
policy and procedures with strong verbal communication
capability.
We are also looking at policies directing Army activities
to ensure adequate resources by number and grade are committed
to make this program work the way you intended for it to work
when you passed the legislation.
Mr. Horn. Could you tell me who that individual is that
takes no prisoners in this thing?
Mr. Inman. My very dear friend, Mr. Bruce Sullivan. He is
sitting behind me. He is a first round draft choice on
anybody's team.
Mr. Horn. Is he a senior member in the civil service?
Mr. Inman. Unfortunately not, sir. We are going to lose him
very quickly, I am also sad to say.
Mr. Horn. If he is the solution to getting a solution, I
would hope the powers that be over there give him a decent
place to work and let him go. Mr. Sullivan, we would like to
make sure you really are going to go after these people. Mr.
Ryan is a good companion in this regard. He knows all the
different things they can do.
The Army has taken exception to the General Accounting
Office recommendations that two control activities, advance
approval and independent receiving and acceptance, should be
included in the Army's Standard Appropriating Procedures
governing the Purchase Card Program. Would you explain why the
Army is taking that position? Is this out of the Vice Chief?
Mr. Inman. No, that was our response to the GAO audit. We
felt for the majority of purchases, it was not necessary to
have advance approval if we had properly trained and motivated
personnel. I operate from very wide point of view. Obviously I
get caught up short from time to time but I tend to trust my
employees to do those things which I ask them to do. So I do
not think it is necessary to have advance approval in most
cases. If there is any question, either don't do it or ask
permission.
The second thing was?
Mr. Horn. The Army takes exception to the GAO's
recommendation that two control activities, advance approval
and independent receiving and acceptance, should be included in
the Army's Standard Operating Procedures governing the Purchase
Card Program. Mr. Kutz, was that a response to the GAO audit?
Mr. Kutz. As I recall, we had a lot of recommendations and
they did agree with everything except in some respects those. I
would agree with respect to advance approval. We would not
expect it for every type of purchase. I don't know if I would
say most shouldn't have necessarily, but certainly routine
purchases within the normal scope of someone's operating
responsibility don't necessarily need to have advance approval.
We are looking at some of the questionable type items we
are talking about at the hearing today, that those should have
advance approval. I guess we thought in a lot of instances that
those with advance approval got bought anyway but there were a
lot that didn't have advance approval or documented
justification as to why they were buying them. I would agree to
some extent with the comment on that one.
Mr. Horn. Mr. Inman, in your civilian authority, when you
are dealing with both senior military leaders and civilian
managers in eliminating fraud, waste and abuse, what are the
items that have been done and what the ones you want to do?
Mr. Inman. One of the things we want to do is unify the
guidance for the Purchase Card Program within the Department of
the Army. That is being done and will be signed out under the
Standard Operating Procedure this month I am told.
Mr. Horn. That goes through the Vice Chief of Staff?
Mr. Inman. That will be signed out by the Director of the
U.S. Army Contracting Agency who is executive agent for the
program with the Army. I guarantee you that General Keane will
know about this. I got a call at noon. There was an article in
the Early Bird that talked about--there was an early release on
our hearing, he hadn't heard about it and he was interested so
I had an opportunity to explain.
Mr. Horn. I haven't seen it either.
Mr. Inman. He is interested. I can assure you that General
Shinseki is interested; my boss, Mr. Bolton, is quite
interested, as is my Military Deputy, General Caldwell. We will
put the guidance out, we know we have to come to grips with the
idea that intent doesn't bring home the bacon. We are going to
have to do more than ``intend to do well,'' we are going to
have to do well and we have to prove ourselves to you because
we owe that.
Our focus is the 20 year old kid who is turning over rocks
killing bad guys, that is our focus. We don't want anything to
detract from what it is you ask us to do on behalf of the
Republic. We will do everything we can to get the focus off the
things we have not done properly to get it back on the kids
doing the job for the country.
Mr. Horn. Let us see what happens over the next 2 months.
Do you think all this can be done in 2 months, 1 month, what,
getting all this moving?
Mr. Inman. If I get the Standard Operating Procedure signed
off this month, I would think we should have some good
information. Mr. Sullivan advised me part of what we have to do
is realign the resources and he would think we should show some
measurable results within 3 months from the time the Standard
Operating Procedure is signed off.
Mr. Horn. Around the Christmas season.
Mr. Inman. Or shortly thereafter when things are settled
down.
Mr. Horn. I just wonder if they will use their cards more
likely in December.
Mr. Inman. I think you sent us a very clear message and we
will be watching those very closely.
Mr. Horn. Ms. Lee, could you explain your office's purchase
of palm pilots mentioned in the GAO's report?
Ms. Lee. That was covered in the earlier hearing. That was
the Office of Acquisition and Technology and Logistics and the
e-mail I saw and the little I know about it, I would need to
get you more information for the record. It appears there was a
purchase made to support the office. I am not familiar with the
specifics and I would be happy to get that information for you.
Mr. Horn. As I remember, either you or somebody in your
office said, gee, those are goodies, we are going to have them
all out. How do you know they need to have the goodies?
Ms. Lee. I did see a copy of the e-mail, somebody provided
it to me. I think that was misstated. I am not listed on the e-
mail, nor did I participate in the purchase.
Mr. Horn. That is why I don't have e-mail. After going
through the White House under Mr. Clinton and seeing the
silliest things I have ever seen in my life in their e-mails, I
decided I don't need that. If you want to see me, bring a
candle.
Ms. Schakowsky. Let me followup on the palm pilot. You did
read the GAO report, right?
Ms. Lee. Yes, I did.
Ms. Schakowsky. And it is in there?
Ms. Lee. Yes.
Ms. Schakowsky. So you knew about the palm pilot? I am
confused as to why you can't respond to that since it was in
the GAO report.
Ms. Lee. There is a line in the report that says these are
some of the findings that we found and we are looking into
those but I don't have the specifics on that at this moment.
Ms. Schakowsky. Let me reiterate that it is time for us to
have a totally different set of hearings, ones where we come in
with real progress reports, real changes where we can measure
from what was to show what is and there has been measurable
progress. If 3 months is what it takes, then I think we should
reconvene in 3 months and show the American people we are
serious about good financial management at the Department of
Defense and within our government.
Mr. Horn. We used to do that under the Y2K thing. Does OMB
know about all these things going on and do they worry about it
or have they ever said anything about it?
Ms. Lee. Yes. OMB is very concerned. They have tasked us
all governmentwide to look at our purchase card programs and to
give them a plan. We all submitted plans for improvement to the
Office of Management and Budget.
Mr. Horn. How about GAO, Mr. Kutz, anybody talk to GSA
because that was most of it originally I believe, for the
Government generally.
Mr. Kutz. Are you asking if we have talked to GSA?
Mr. Horn. Yes.
Mr. Kutz. We talked to GSA as part of understanding what
the guidances they have issued are. We have not spoken to OMB
about anything, they have not contacted us but I know they have
read our reports and I believe OMB was at a hearing one of my
counterparts, Linda Calbom, back in May about purchase cards. I
know an OMB representative was there expressing concern for the
administration with the problems identified in the purchase
card program.
Mr. Horn. It is a good idea because I would think it has
spread a bit around the civilian part and we haven't looked at
that.
Mr. Kutz. Yes, there are problems beyond the Department of
Defense with the usage of purchase cards other agencies. That
is why OMB has gotten involved, they are now seeing this as a
governmentwide issue, not a DOD issue.
Mr. Horn. I thank you all for these interesting questions
and interesting answers. Let us hope next time there is some
real difference. I hope those of you here now know we really
will become very tired of having to deal with this if no
progress is being made. I am looking especially to the
political employees that get the thing moving and get the
services moving. It looks like you are doing it. Let us hope we
can get that done. I am glad the Vice Chief of the Army is
taking it seriously.
I am not quite clear, you have a Defense IG and civilian
IGs and don't we still have service IGs from the services. What
are they doing on this?
Mr. Inman. We intend to use the Department of the Army IG
and the Army Audit Agency as co-helpers in doing a perennial
review of the things we have put in place. I have been talking
to Mr. Sullivan about how we might best do that. We are not
going to let people rest on their laurels even if they improve.
Mr. Horn. Because they are generally going to be the ones
out in the facilities, not sitting around in the Pentagon. That
is where if you can head it off at the pass, we are in better
shape that we don't get in the way of the IGs and really direct
them in that. Often it isn't something like credit cards they
are worried about, they have a long line of what they worry
about. It would be good to see what they say when they go to
various forts and camps and hospitals and all the rest.
With that, we thank you and I thank those that put together
this hearing: J. Russell, Staff Director, Chief Counsel; and
Bonnie Heald, to my left, Deputy Staff Director; Justin
Paulhamus, the Clerk; Chris Barkley, the assistant to the
subcommittee; Sterling Bentley, Intern; and Joey DiSilvio,
Intern; Freddy Emphraim, Intern; Michael Sazanov, Intern; and
Yigal Kerszenbaum, Intern; and Senator Grassley's staff,
Charlie Murphy; David McMillen, professional staff, along with
Jean Gosa, the minority clerk for Ms. Schakowsky and Mr.
Waxman. The court reporter is Mel Jones. Thank you. We
appreciate it.
With that, we are adjourned.
[Whereupon, at 4:20 p.m., the subcommittee was adjourned,
to reconvene at the call of the Chair.]