<DOC>
[107th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:88886.wais]
THE USE AND ABUSE OF GOVERNMENT CREDIT CARDS AT THE DEPARTMENT OF THE
NAVY
=======================================================================
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
__________
OCTOBER 8, 2002
__________
Serial No. 107-236
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
U. S. GOVERNMENT PRINTING OFFICE
88-886 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 CAROLYN B. MALONEY, New York
JOHN L. MICA, Florida ELEANOR HOLMES NORTON, Washington,
THOMAS M. DAVIS, Virginia DC
MARK E. SOUDER, Indiana ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio DENNIS J. KUCINICH, Ohio
BOB BARR, Georgia ROD R. BLAGOJEVICH, Illinois
DAN MILLER, Florida DANNY K. DAVIS, Illinois
DOUG OSE, California JOHN F. TIERNEY, Massachusetts
RON LEWIS, Kentucky JIM TURNER, Texas
JO ANN DAVIS, Virginia THOMAS H. ALLEN, Maine
TODD RUSSELL PLATTS, Pennsylvania JANICE D. SCHAKOWSKY, Illinois
DAVE WELDON, Florida WM. LACY CLAY, Missouri
CHRIS CANNON, Utah DIANE E. WATSON, California
ADAM H. PUTNAM, Florida STEPHEN F. LYNCH, Massachusetts
C.L. ``BUTCH'' OTTER, Idaho ------ ------
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
Bonnie Heald, Staff Director
Dan Constello, Professional Staff Member
Chris Barkley, Clerk
David McMillen, Minority Professional Staff Member
C O N T E N T S
----------
Page
Hearing held on October 8, 2002.................................. 1
Statement of:
Aviles, Dionel, Assistant Secretary of the navy, Financial
Management and Comptroller................................. 97
Grassley, Hon. Charles, a Representative in Congress from the
State of Iowa.............................................. 5
Kutz, Greg, 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; and Rear Admiral Robert Cowley,
Deputy for Acquisition and Business Management, Research
Development and Acquisition, Office of the Assistant
Secretary of the Navy...................................... 18
Letters, statements, etc., submitted for the record by:
Aviles, Dionel, Assistant Secretary of the navy, Financial
Management and Comptroller, prepared statement of.......... 100
Grassley, Hon. Charles, a Representative in Congress from the
State of Iowa, prepared statement of....................... 11
Horn, Hon. Stephen, a Representative in Congress from the
State of California, prepared statement of................. 3
Kutz, Greg, Director, Financial Management and Assurance,
U.S. General Accounting Office, prepared statement of...... 21
THE USE AND ABUSE OF GOVERNMENT CREDIT CARDS AT THE DEPARTMENT OF THE
NAVY
----------
TUESDAY, OCTOBER 8, 2002
House of Representatives,
Subcommittee on Government Efficiency, Financial
Management and Intergovernmental Relations,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 2 p.m., in
room 2247, Rayburn House Office Building, Hon. Stephen Horn
(chairman of the subcommittee) presiding.
Present: Representatives Horn, and Schakowsky.
Staff present: Bonnie Heald, staff director; Henry Wray,
senior counsel; Dan Daly, counsel; Dan Costello, professional
staff member; Chris Barkley, clerk; Ursula Wojciechowski and
Juliana French, interns; David McMillen, minority professional
staff member; and Jean Gosa, minority clerk.
Mr. Horn. We are going to swear in people, so I'm going to
start on panel two. And panel one is Senator Grassley, and that
will come when he gets here.
So let me just get Greg Kutz, Special Agent John Ryan, Rear
Admiral Robert Cowley and Special--let's see, the Honorable
Dionel Aviles, Assistant Secretary of the Navy for Financial
Management, Comptroller. And come behind the table there, and
if you would please raise your right hand--and any staff that
are going to whisper in your ear. And the clerk will also get
the ones in the back.
[Witnesses sworn.]
Mr. Horn. I want to get the staff because they will be
wonderful people to put in the hearing.
So a quorum being present, this hearing of the Subcommittee
on Government Efficiency, Financial Management and
Intergovernmental Relations will come to order.
Today's hearing is on the use and misuse of government-
issued credit cards at the Department of the Navy. This hearing
is the fifth in a series of subcommittee hearings to examine
the purchase card and travel card programs at the Department of
Defense. These programs were created to save taxpayers' money
by streamlining the government's cumbersome procurement and
travel procedures. However, over the past year-and-a-half, this
subcommittee has heard so many examples of fraudulent and
abusive use of these programs that it is impossible to know
whether the programs have saved any money at all.
Up to now, the Department of Defense has failed miserably
to monitor the use of these cards. One employee who went on a
$12,000 shopping spree at the government's expense was never
disciplined. As I remember, it was a Navy person; and then she
was dropped off by the Army. In fact, she was promoted. Others
have used their government-guaranteed credit cards to buy such
items as jewelry, expensive radios, designer briefcases and
flowers. Travel cards, which are to be used for only official
government travel expenses, have been used at gentlemen's
clubs, gambling casinos, cruise ships, and, as you will hear
today, even at brothels.
You will also hear the failure to review one cardholder's
statement, allowed that employee to make more than $250,000 in
unauthorized and illegal purchases over a 10-month period. That
employee spent thousands of dollars on Internet purchases,
prepaid toll tags, remote-controlled helicopters, and even a
dog.
Until the subcommittee began this investigation 1\1/2\
years ago, no one seemed to notice these abuses or seemed to
care. Records were missing. Equipment bought with the
government credit cards was nowhere to be found. Monthly bills
were rubber stamped for payment by overworked officials, who
were responsible for hundreds of monthly credit card statements
in addition to their other duties.
The subcommittee focused on the Department of Defense
because this one Department accounts for 65 percent of all
purchase and travel cards issued by the entire Federal
Government. Since the subcommittee began this investigation
with the able help of the Accounting Office headed by the
Comptroller General of the United States, the Department of
Defense has taken several significant steps to strengthen its
control over the purchase card program. The Department has cut
the number of credit cards it issues. It has also limited the
number of accounts each approving officer panels. In addition,
the Department is developing a plan that will provide a
foundation for credit card programs throughout the department.
Meanwhile, the Departments of the Army and Navy have rewritten
their purchase card policies and procedures manuals.
The Department of Defense is also beginning to gain better
control over its travel card program. Deadbeat employees who
fail to pay their travel card bills will get their wages
garnished. Those who write bad checks to pay their credit card
bills will lose those cards.
These are all the steps in the right direction, but much
more needs to be done. It will take a sustained effort from the
Secretary's office down to the local commanders and supervisors
to clean up this mess. And that is precisely what Congress
expects and the American taxpayers demand.
That said, I will welcome our witnesses today and I will
look forward to discussing strategies for resolving this
egregious situation. I happened to be in the Pentagon this
morning and Secretary Rumsfeld and I had a number of comments
on this. He is outraged by what's going on; and when the war is
over, why, I think he will really move things along.
So we have Mr. Grassley, who has worked on this with us,
and we're glad to have him here.
[The prepared statement of Hon. Stephen Horn follows:]
[GRAPHIC] [TIFF OMITTED] 88886.001
[GRAPHIC] [TIFF OMITTED] 88886.002
Senator Grassley. Mr. Chairman, did you want me to start?
Mr. Horn. Yes.
STATEMENT OF HON. CHARLES GRASSLEY, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF IOWA
Senator Grassley. Thank you very much. I am sorry I missed
your opening comments, or at least part of them. This is our
fourth and final hearing on the joint oversight investigation
of the Department of Defense credit card abuse. It has
obviously been an honor and privilege for me to conduct
oversight with the distinguished company that you make, Mr.
Chairman. From day one, this has been a team effort and you
have been a leader. With you up front in the driver's seat, we
have accomplished much of our mission. We have done everything
in our power to ensure that the taxpayers' money is spent
wisely; most importantly, according to law. Our success is due
to your outstanding leadership, and I thank you from the bottom
of my heart. When you step down at the end of the session, you
will be missed, especially by this Senator from Iowa.
Your departure will leave a gaping hole in our frontlines,
and it is going to be very hard to fill it. Courage is in such
short supply in the area of congressional oversight. As I have
repeatedly stated, you have put the glare of the public
spotlight on a very dark corner of the Pentagon. In a huge
bureaucracy, like the Pentagon is, daylight is never welcome.
In fact, it is feared and hated. But shedding light on a
problem like credit card abuse is the heart and soul of
oversight. Our purpose from the beginning was to determine the
scope of abuse and then figure out how to put a stop to it all.
You have so graciously provided the venue where we could do
what had to be done.
Mr. Chairman, we started this investigation more than 2
years ago. Yes, it's true we have come a long ways. We have
seen the promised land, but we're not yet there. We have much
more work to do before we get to the end of the road. At our
first hearing July 30, 2001, we examined a sample of fiscal
year 2000 purchase card transactions collected from two Navy
organizations in the San Diego area. We found zero controls,
extensive abuse, and total disregard for accountability. The
Navy dismissed our findings as a few, in their words, ``unique
and isolated cases.'' Not to worry, we were told. We don't have
a problem, is what the Navy said. And obviously the implication
was one rotten apple doesn't make the whole barrel bad.
Then we had our second hearing 8 months later, March 13,
this year. We went back to the same two Navy units for a second
look. We examined a more current sample of fiscal year 2001
transactions. And guess what we found? Results were the same,
or maybe even worse. No effective controls, extensive abuse,
and no accountability. After this go-around, the Navy started
singing a different tune. Yes, we have a problem is kind of
what they said. And I hope those words were spoken with
sincerity and not just for our benefit.
Mr. Chairman, our second hearing hit home hard. Department
of Defense and other government agencies started scrambling for
cover. Six days after our second hearing, Secretary Rumsfeld
set up a charge card task force to clean up the mess. And I
have thanked Secretary Rumsfeld for his quick action on that.
He seems like a Secretary of Defense--as he stated in his
September 10, 2001 speech at the Navy War College, that, you
know, we're spending the taxpayers' money. I never really heard
a Secretary of Defense much concerned about that. And this
Secretary of Defense wants to get more bang for our dollar.
And particularly when you're in an economy of winning a
war--I mean, when you're in an effort to win the war on
terrorism, or any other war, we all have to be pulling
together, and that obviously includes the people with credit
cards in the Defense Department.
Now, after that charge card task force was set up, then 2
months later, on May 7 this year, the Office of Management and
Budget announced a crackdown on credit card abusers. OMB
threatened to close 2\3/10\ million government credit accounts
unless the agencies involved started controlling employee
abuses. Inspectors general throughout the government launched a
series of investigations directed at suspected credit card
abuse. Then we had mandatory salary offsets, involuntary
paycheck deductions taking effect. Offsets reduced Bank of
America's annual credit card loss from $20 million per year
down to $4 million a year. So all the people at the Department
of Defense violating and misusing credit cards were dragged
then, in a sense, to the teller's window with cash in hand to
pay long, overdue bills.
Then, Mr. Chairman, we had our third hearing, July 13, this
year. We examined a much larger sample of Army travel and
purchase card transactions made in fiscal year 2001 along with
some from this fiscal year 2002. Once again, we got the same
results: No controls, extensive abuse, no accountability.
After our third hearing, I was contacted by my
distinguished colleague from West Virginia, Senator Byrd. He
had seen the news coverage of your hearing, Mr. Chairman, and
wanted to put a stop to the abuse. The use of Defense
Department travel cards to pay for lap dancing at Bottoms Up
Lounge really got Senator Byrd energized. He suggested that we
team up on a credit card amendment on the Department of Defense
appropriation bills. And that was a golden opportunity, and I
grabbed it because of the respect that he has in the U.S.
Senate to get things done.
Our amendment does several things. It puts the lid on
Department of Defense credit cards, fiscal year 2003, at 1\1/2\
million. It makes credit card checks mandatory. It requires
disciplinary action for abuse, and prohibits the use of credit
cards in places like the Bottoms Up Lounge, and casinos.
Our amendment was adopted by the Senate July 31. So, Mr.
Chairman, as I said at the beginning, we have come a long ways.
We have accomplished a lot. We have had an impact. We have good
momentum, but the final outcome is obviously, like so many
things in government, still in doubt. We are definitely moving
in the right direction, but we don't have change itself. Real
reform is still somewhere down the road.
We must be certain that our impact is lasting and
meaningful, and I would like to see a permanent solution. But
how do we get from where we are today to a more lasting
solution?
In a moment Mr. Greg Kutz--and I hope I'm pronouncing his
name right--of the General Accounting Office will be presenting
his report on Navy and Air Force travel and purchase card
transactions. Mr. Kutz is about to tell us the same story we
heard at hearing No. 1, hearing No. 2, and hearing No. 3.
The same identical pattern of abuse is apparent in this new
General Accounting Office data. So the problems, Mr. Chairman,
are systemic. This time we looked at a much bigger sample and,
once again, the results are strikingly similar. Once again, the
bottom line is the same: no controls, extensive abuse, no
accountability. Failure rates for the Navy and Marine Corps on
a standardized set of control tests were near 100 percent in
key areas. Admittedly, the Air Force did slightly better.
Overall, the General Accounting Office gave the Air Force a
grade of C. The Army, Navy, and Marine Corps, by comparison,
earned a grade of F.
The new data did, however, point up one slight variation in
pattern of abuse. The General Accounting Office once again
found thousands of dollars in new travel card charges for lap
dancing at gentlemen's clubs like the Cheetah Club. However,
this time around there was a new twist. The General Accounting
Office found abuse taken to new depths. The General Accounting
Office discovered thousands of dollars in travel card charges
for the procurement of services from prostitutes in Nevada. At
least 53 Navy, Marine, and Air Force personnel got their
official travel cards swiped at such places as Salt Well, Madam
Butterfly and the Chicken Ranch.
The reports delivered today by Mr. Kutz constitute the
final phase of our oversight investigation. That means the
General Accounting Office's work is just about done. For over 2
years now, the GAO has been hammering away at a hunk of the
Department of Defense iron on the congressional anvil. That is
exactly what the GAO was set up to do, and they did it well.
So it makes me happy to see the General Accounting Office
doing its job. The GAO has been conducting a root canal
operation that has been slow, methodical, very unpleasant,
especially for credit card abusers and those responsible for
curbing that abuse. The General Accounting Office's persistent
probing at bases all around the country has created a lot of
pressure and, of course, apprehension.
The General Accounting Office, as we know, has fangs and
has sunk them deeply into this problem. But all of a sudden,
Mr. Chairman, when you lower your gavel and close this hearing,
the pressure will drop to zero or close to it. So that worries
me. What's going to happen? So in shifting gears in order to
keep moving down the road toward credit card reform, we must do
that: shift gears. I don't want to see all of your good work go
down the tubes. I don't want to see the Department of Defense
credit card operation get back to business as usual. I don't
want all the good work to amount to nothing more than some
simple ripple on the proverbial Pentagon pond. I will do
everything possible to keep that from happening, but I am going
to need all the help we can get.
Thankfully, Mr. Chairman, I now think I know where the help
may come from, because we have a new team coming on the field
to play. The new team has a new coach, and the new coach has a
new philosophy on how the game is supposed to be played. The
new coach's name is Joe Schmitz. He is the newly appointed
Inspector General of the Defense Department. He seems to speak
softly, but I think he carries a big stick. Until now the
Department of Defense IG has been AWOL on the credit card
abuse, and that's changing fast. Under Joe Schmitz, the
Inspector General is going to be proactive. The future looks
brighter.
The IG looks like he is really ready to grab the bull by
the horns, and the man who is supposed to get the job done is
Army Colonel Bill Kelley. He works for Mr. Schmitz. Colonel
Kelley strikes me as a person who intends to succeed. He wants
accountability as much as I do. The future of our oversight
work may now be in Colonel Kelley's hands.
Colonel Kelley is proceeding cautiously one step at a time.
He envisions a plan with four phases. Phase one is essentially
complete. His data mining operation is already up and running.
Data mining is nothing more than a computer program that can
search through a pool of transactions and identify and cull out
suspicious charges. These are then subjected to further
examination. In the first cut, Colonel Kelley's data mining
operation checked 12 million purchase card transactions made
between October 2000 and December 2001. Some 12,257 charges
made by 1,571 cardholders got flagged. They just didn't smell
right. More may be added to that list.
As the data miners drilled deeper and checked out these
charges, 62 potential fraud cases popped up onto the radar
screen. Criminality ranged from $15 all the way up to 1.7
million. All 62 cases have been referred to the Department of
Defense criminal investigative units, the Defense Criminal
Investigative Unit, the Naval Criminal Investigative Unit, the
Criminal Investigative Division of the Army, and the Office of
Special Investigations, Air Force. Forty of these cases were
already known to authorities. That's a reality check. It tells
us that the Department of Defense data mining operation works
according to the specs.
Colonel Kelley's data mining also discovered another
important piece of information. While the Department of Defense
authorities were aware of 40 of the 62 suspected fraud cases
detected by data miners, most, if not all, were dead in the
water. Nothing was being done. But no longer. Action is now
underway across the board. In addition, Colonel Kelley's data
miners uncovered hundreds of unauthorized and improper charges.
These have been referred to senior management for possible
disciplinary action. Now that's a description of phase one.
I will go to phase 2. The more current sample of 7 million
purchase card transactions will be surveyed covering the period
January 2002 to August 2002. The scope of this review will be
expanded to include overseas locations and nonappropriated
funds activities. Data mining will be extended to travel card
transactions during phase 3.
Negotiations are already underway with the Bank of America
to obtain data for some 35 million transactions starting in
September 2002 and looking back 16 months. There's a problem
with the Bank of America, because they want $12,000 for the
data package; it seems to me they could contribute that to the
Federal Government. But I am not involved in those
negotiations.
Colonel Kelley thinks that $12,000 is a ripoff, and he
believes that access to that data is provided for under the
travel card contract, and wants the banks to hand it over free
of charge.
So then we go to phase 4, which I would say is the
automatic pilot approach of colonel Kelley. This is going to be
more challenging. The goal is to set up a real-time,
continuous, sustained, data mining operation covering all
credit card transactions. Colonel Kelley wants to put data
mining on auto pilot, and the final solution then must still be
worked out in to the future somewhere. So it's not entirely on
paper at this point and we don't have a schedule for it yet,
but Colonel Kelley hopes that the Department of Defense and the
General Services Administration can work together to create
such long-term solutions.
GSA is very impressed with the Department of Defense data
mining operation and is working hard to create a comparable
governmentwide data mining operation. He says that Commerce and
Treasury Departments are ready to jump on the bandwagon, but
that's just the beginning.
So you have seen some benefit of your investigations just
within the Department of Defense, Mr. Chairman, extending into
other departments of government already. Phase 4 is the key, of
course, to effective oversight down the road. What we're
talking about, Mr. Chairman, is moving from today's snapshots
in time, like those done by the Department of Defense and the
General Accounting Office, to a fully automated data mining
operation. Colonel Kelley believes we have the wherewithal to
do it right and to do it soon. It's technically feasible. We
just need to find the money, the people, and the organization
to get the job done. Once the cardholders understand their
transactions are under constant surveillance, all the abuse
will come to a screeching halt.
That may be naive for me to say that, but at least ongoing
checks are going to keep it to a very minimum. There are always
a few clever ones out there, of course, who will figure out
some way of gaming the system.
Now, Mr. Chairman, as I have said at other hearings,
there's a value to hearing government credit cards, and we
began these hearings by emphasizing that fact. So I will end on
the same note. Government credit cards can work in the right
kind of environment. The thinking behind credit cards at the
Department of Defense is good: reduce paperwork, save money and
streamline the process; make it quicker and easier for the
troops to carry out the mission.
When the Defense Department started down the credit card
road, the whole idea was to adopt the best practices of the
commercial sector. In the private sector, credit cards are a
big success. That's because the control environment is very,
very good. Somebody is always minding the store. Bills are
reconciled and paid promptly. And in corporate America, if you
abuse your credit card, you either lose it or get fired. So
there's a need for trust and accountability.
The control environment in the Pentagon is entirely
different. That very key point has been repeatedly hammered
home at each of our hearings. Every shred of evidence presented
by Mr. Kutz and the General Accounting Office clearly indicates
that there are no effective controls in place today and little
or no accountability. Since credit cards are low-control
financial instruments, credit cards require a high level of
trust and accountability. Trust and accountability have to be
the cornerstone of any successful credit card program. The
total absence of credit checks for the Department of Defense
cardholders erodes trust and it breeds mistrust and it invites
abuse.
The General Accounting Office data invariably shows that
the worst abusers have had bad credit records stretching way
back in time, records that are ignored by the Pentagon
managers. The standard credit check should be a starting point,
just like it is in the private sector. A clean report means you
get a card. A bad report means no card. A satisfactory credit
check, then, of course is a building block for trust and
confidence.
Department of Defense's no-credit-card-check policy is
history, I hope, because it will be dead if the Byrd-Grassley
amendment is adopted in conference and becomes the law of the
land. Issuing credit cards willy-nilly , with no credit checks,
no controls, no accountability, and monthly spending limits of
up to $100,000 is a recipe for disaster. It just doesn't work.
It leaves the door wide open to fraud and abuse. If the
Department of Defense wants this program to succeed, then the
Department of Defense needs to get on the stick and make the
controls work. With effective controls and with some
accountability, credit cards will work like they're supposed to
work.
Mr. Chairman, I am glad to be with you one last time on
this issue. I would like to wish you well in retirement. And I
hate to say it, but this is a bid farewell, at least not for a
friendship, but our working relationship as Members across the
Rotunda. So I say good luck and Godspeed to you. It has been a
privilege working with you, and I thank you for your
outstanding leadership.
[The prepared statement of Senator Grassley follows:]
[GRAPHIC] [TIFF OMITTED] 88886.003
[GRAPHIC] [TIFF OMITTED] 88886.004
[GRAPHIC] [TIFF OMITTED] 88886.005
[GRAPHIC] [TIFF OMITTED] 88886.006
[GRAPHIC] [TIFF OMITTED] 88886.007
Mr. Horn. Thank you very much, Senator. You have a lot of
things on your plate in the Senate where you chair a major
committee. And you will have to keep on with our friends, and
the General Accounting Office will have to keep on when they
get the attention of the administration on this. When you think
of all the problems we have in America with families that don't
have enough things to eat on the table.
So we thank you for coming and we will ask our panel two,
which is Greg Kutz, Director of Financial Management and
Assurance, U.S. General Accounting Office; Special Agent John
Ryan, Assistant Director, Office of Special Investigations,
U.S. General Accounting Office; and Rear Admiral Robert Cowley,
Deputy for Acquisition and Business Management Research
Development and Acquisition, Office of the Assistant Secretary
of the Navy.
We now have the ranking member here, Mrs. Schakowsky, the
gentlewoman from Illinois, who takes a great interest in these
fraudulent type of activities within the Federal Government
when a lot of people in Illinois, just as California, could use
that money for valid things. But right now, we're talking about
people who are doing invalid and fraudulent things. So glad to
have you here.
Ms. Schakowsky. Thank you, Mr. Chairman. As we conclude the
hearing on this issue in this Congress, I believe we have made
considerable progress. These hearings have exposed major flaws
in a relatively new program. These hearings have developed a
clear understanding of the causes for those problems and we are
in the process of setting out clear solutions to many of the
problems that program management uncovered in these
investigations.
The GAO has been extremely helpful in developing the
materials for these hearings, as well as keeping us well
informed as how the investigations progressed. Our staffs have
worked together in a collegial fashion, with the clear intent
of carrying out our institutional obligations. These hearings
are a model for how our Founding Fathers envisioned
congressional oversight.
I will be and have been seeking, Mr. Chairman, every
opportunity to credit you for this and for your great work.
It's my understanding that our staffs are working on a report,
and if time permits we'll be able to bring that report before
the full committee tomorrow.
Despite GAO's indications in today's testimony that there
is some improvement at the Navy, I find the lack of management
oversight and control of the travel and purchase card programs
at the Navy an embarrassment. From our first hearing to the GAO
report before us today, the Navy has abdicated its managerial
responsibility.
At our first hearing on purchase cards at the Navy Space
Research Center in San Diego, the commander of the Center told
the subcommittee that his organization had effectively managed
the purchase card program for 10 years. He went on to say, ``We
firmly believe the purchases being made are for legitimate
government purchases and ultimately benefit our customers.''
At that hearing, GAO reported on improper purchases,
including home improvement items from Home Depot, numerous
items from Wal-Mart laptop computers, Palm Pilots, DVD players,
an air conditioner, clothing, jewelry, eye glasses, pet
supplies, and pizza.
The GAO reported at the Space Warfare Center, ``The control
breakdowns related to the frauds were so pervasive that the
total amount of these frauds could not be determined.''
Is this what the Navy calls a well-run program? We were
told later that the commander who made those statements was
gone, only to discover that ``gone'' meant that he had changed
offices. Is that what the Navy calls accountability?
At our next hearing nearly 9 months later, it was more of
the same. The Navy insisted the program was well run, and GAO
found purchases like Lego robot kits and Palm Pilots. To make
matters worse, many of the items purchased with government
purchase cards could not be found when the GAO went to look for
them. The Navy explained that it was Navy policy not to
inventory items that are easily stolen. Is this what the Navy
calls responsibility? I couldn't believe that was true.
And when the representatives of the Defense Department
testified before us, I asked if that was DOD policy and was
assured it was not. Despite what DOD said, the Navy still
doesn't believe it needs to keep track of $500 cameras or $300
Palm Pilots.
Ethical standards at an agency are set at the top. Where is
the Navy command in setting these ethical standards? The
problems in the government travel card program are somewhat
different, and here Congress must shoulder some of the blame.
Congress passed a law that required agencies to issue
government travel cards for all employees traveling on official
business. We have learned that unlike the business environment,
which was the model for this legislation, government travel is
quite different. Nowhere is this more apparent than at DOD,
where default and delinquency rates are well above the civilian
average, and the Navy is among the worst in DOD.
As we all know, many of the men and women who put their
lives on the line to defend our freedom and security are quite
young. Many of them are just out of high school, with little
experience with independence and responsibility. We then ship
them around the world, often on commercial airlines, and give
them a government credit card to pay the way.
We put guns into the hands of these men and women, and then
give them extensive training on how to use those guns properly.
We put many of our Nation's most closely guarded secrets of
national security into the hands of these men and women, and
make sure they are well aware of the consequences of divulging
those secrets. But we put these powerful financial instruments
into their pockets and provide no training in how to manage
them, and there is no consequence for misuse.
This is a management failure. There is one thing that comes
up over and over at DOD, at the Education Department and at
HUD. The management of these agencies was happy to get rid of
the employees in the contracting offices and happy to get rid
of the complications of providing employees with cash for
government travel. However, management then turned its back on
these programs. It is not surprising that these programs are in
trouble.
The Navy should be ashamed of the contents of the GAO
testimony before us today. Just listen to a few of the
conclusions:
Critical internal controls were ineffective. Little
evidence cardholders screened for required vendors. Little
evidence of independent receipt and acceptance of item
purchased. Little evidence that monthly purchase cards were
reconciled prior to payment. Major commands failed to maintain
accountability for pilferable items. Potentially fraudulent,
improper, and abusive transaction.
The testimony on travel cards is much the same. Delinquency
rates are high. Write-offs are substantial. Soldiers pay with
bad checks. Travel cards are misused and no one is held
accountable. The list goes on and on.
The Navy is not the only agency with these problems, but
there is no solace in having company in disgrace. The ethical
standards are set at the top by those who come before us to
testify, and the failures reported by the GAO are an
embarrassment that these managers should feel as deeply as
those caught in the act. Just as it is our patriotic duty to do
whatever is necessary to protect this Nation and to guarantee
its security, it is also our patriotic duty to ensure that
every taxpayer dollar spent is accounted for.
Those precious dollars represent the hard work of the
American public and must be spent wisely and with
responsibility to ensure that our Armed Forces are capable of
carrying out the important and challenging missions with which
they are charged.
Mr. Chairman, I appreciate your indulgence in allowing this
lengthy opening statement. Thank you.
Mr. Horn. We have Mr. Kutz as the Director for Financial
Management and Assurance, U.S. General Accounting Office.
STATEMENTS OF GREG 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; AND REAR ADMIRAL ROBERT COWLEY,
DEPUTY FOR ACQUISITION AND BUSINESS MANAGEMENT, RESEARCH
DEVELOPMENT AND ACQUISITION, OFFICE OF THE ASSISTANT SECRETARY
OF THE NAVY
Mr. Kutz. Mr. Chairman and Representative Schakowsky, it is
a pleasure to be here to discuss our audit of the Navy purchase
card program first. With me is Special Agent John Ryan from our
Office of Special Investigations.
DOD has the largest purchase card program in the Federal
Government. As of July 2002, DOD had 212,000 purchase cards,
which is about 55 percent of the Federal Government's total.
Today I will discuss our fourth in a series of audits of
the DOD purchase card program. My testimony includes the
results of our audit of the Navy, which includes the Marine
Corps. I want to thank the Navy and Marine Corps for their
cooperation throughout this audit.
The bottom line of my testimony is that the control
breakdowns that we identified at the two units in San Diego are
indicative of systemic Navy-wide problems. As a result, the
Navy purchase card program is vulnerable to fraud, waste and
abuse.
My testimony has three parts: first, the overall control
environment for the purchase card program; second, the
effectiveness of key internal controls; and third, fraudulent,
improper, and abusive activity.
First, for fiscal year 2001 and into 2002, we found a weak
overall control environment. The Navy has not provided for an
adequate infrastructure to effectively oversee and manage the
purchase card program. Specifically, we found approving
officials with unreasonable spans of control, excessive
spending limits, inconsistent and ineffective training, and
weak or nonexistent monitoring and auditing.
The Navy has taken significant actions to improve the
control environment over the program. Some of the more
significant steps include, as shown on the poster board,
reducing the number of purchase cards from 59,000 to 25,000, a
reduction of nearly 60 percent; corresponding improvements in
the span of control for approving officials to cardholders;
reductions in spending limits at the four commands that we
audited by about $140 million; improvements in the training
program; and actions taken or planned on all 29 of our
recommendations from our November 2001 report and a commitment
to take action on the recommendations in our report that's
being issued today. Continuation of these improvements would
further improve management of the program.
Second, for fiscal year 2001, based on statistical
sampling, we found key internal controls failed from 58 to 98
percent of the time. For example, oftentimes approving
officials certified the monthly bill for payment without
examining cardholder supporting documents. For many of the Navy
fraud cases identified in our report, the certification of the
monthly bill by the approving official was nothing more than a
rubber stamp. Another area of concern at one location was
missing documentation. Specifically, Camp Lejeune was unable to
identify support for 29 transactions for $50,000. These
unsupported purchases included vendors such as rental car
companies, gift stores, and a stereo store.
We continued to find accountability problems for property
purchased with the credit card, including items such as
computers and digital cameras. On a positive note, Camp Lejeune
was able to find all 16 items from our statistical samples.
However, the three Navy case study sites could not locate
35 of 98 property acquisitions from our samples. For example,
for one large computer buy at the Atlantic Fleet, they could
not confirm the location of 187 computers and 87 flat panel
monitors.
Third, given the weak controls, it is not surprising that
we identified potentially fraudulent, improper, and abusive
charges. The fraud cases in our report relate primarily to the
Atlantic Fleet and Camp Lejeune. We found cardholder fraud,
vendor fraud, and fraudulent usage of compromised purchase card
accounts. One large case at the Atlantic Fleet in Norfolk
included cardholders conspiring with at least seven vendors to
submit about $89,000 in bogus and inflated invoices.
Cardholders received bribes and kickbacks because of their
positions as Navy buyers.
We also found that the Pacific Fleet provided five
government purchase cards to employees of a private consulting
firm. From March 1999 to November 2001, these five purchase
cards were used for $230,000 of charges for airline tickets,
hotels, rental cars, restaurants, flowers, and golf outings.
This consulting company used the purchase card to avoid paying
State sales taxes and obtained the Federal Government discount
on airline tickets and hotel rooms. Within a week of our
inquiry, the Pacific Fleet canceled these cards. We have
referred this company to DOD for further investigation.
Another case of potential vendor fraud related to 75
charges for $164,000 that the Navy paid for in advance of
receiving the goods and services. Most of these charges were at
or near the $2,500 micropurchase limit. We found that for two
charges, no services were ever provided, while in other cases
the actual services provided were far less than the $2,500 paid
for by the Navy. For one $2,500 charge, the vendor's own
records indicated that only $72 of services were ever provided.
These cases clearly demonstrate that the breakdowns in
purchase card controls leave Navy and the DOD vulnerable to
vendor fraud.
In addition to fraudulent purchases, we also identified a
significant number of improper and abusive purchases. Examples
as shown on the poster board are food, including $7,000 of
charges at a Norfolk hotel for local NAVSEA employees;
clothing, including slacks shirts and a leather flight jacket;
cell phone waste and abuse, including monthly charges for a
cell phone that had been returned to the vendor 13 months
earlier; unneeded computers, including 22 purchased in April
2001 that were still in the original boxes in June 2002;
designer leather goods, including totes and a folio that cost
$300 at the Coach Store; 90 Palm Pilots costing $32,000, 14 of
which had not been issued 20 months after the date of purchase;
and Bose equipment, including $300 headsets used to listen to
music and $350 clock radios purchased for officers' quarters.
For these purchases, we generally found no documented
justification. Rather, the Navy generally provided us with
after-the-fact rationalization for the purchases.
We also found that the Navy has not maximized its buying
power when using the purchase card. For 122 vendors, each with
over $1 million of 2001 business, the Navy had not negotiated
reduced price contracts. We believe that the Navy could better
leverage its buying power and negotiate discounts with these
vendors.
In summary, our testimony shows what can happen when
financial management is broken and accountability is lost. The
Navy has taken significant positive steps to improve the
purchase card program. I applaud the Navy for their actions to
date and their constructive approach to dealing with these
issues.
Secretary Rumsfeld has noted that transforming DOD's
processes could save 5 percent of DOD's budget, about $15 to
$20 billion annually. One small example of that transformation
would be improving the management of the purchase card program.
Maximizing the benefits of this program could save DOD millions
of dollars annually. As we have said before, the effectiveness
of our military force is second to none. I would challenge the
Navy to achieve that same level of success with its financial
management, including that of the purchase card program.
Mr. Chairman, that ends my statement. Agent Ryan and I will
be happy to answer questions after the Admiral goes.
[The prepared statement of Mr. Kutz follows:]
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Mr. Horn. This is Rear Admiral Cowley, Deputy for
Acquisition and Business Management, Research Development and
Acquisition, Office of the Assistant Secretary of the Navy.
Admiral, we are glad to have you here.
Admiral Cowley. Mr. Chairman and distinguished members of
the committee, thank you for the opportunity to discuss the
Department of the Navy's purchase card program. I am Rear
Admiral Bob Cowley, Deputy for Acquisition and Business
Management for the Assistant Secretary of the Navy for Research
Development and Acquisition. In this capacity I am responsible
for the establishment of the Department of Navy policies and
oversight for the purchase card program.
I am aware of and I am very concerned about the internal
control and oversight issues identified by the General
Accounting Office regarding the Department of the Navy purchase
card program.
First let me say that I believe increasing the
effectiveness of the Department of Navy purchase card
operations and improving internal controls and oversight, thus
preventing waste, fraud and abuse, are synonymous. Let me
assure you that the Department of the Navy personnel and the
purchase card program have been working diligently to
streamline purchasing and improve controls and oversight.
The Department of the Navy continues to aggressively
address the policy training and internal control weaknesses
identified by the General Accounting Office. Over the past 6
months, we have implemented many improvements. Specifically, we
have established and reinforced and engaged in supporting from
the top; made progress on implementing the DOD task force
recommendations; reinforced and strengthened our written
purchase card policies and procedures; completely revised and
distributed training materials; enforced compliance with
internal controls, including span of control and credit limits;
and increased the use of technology to detect misuse and abuse.
The Department recognizes that proper management and
compliance of any program must be led from the top. We have
engaged Department leadership in taking a proactive role in
oversight, discipline, and setting a supportive command
environment. The command environment which sets high
expectations for integrity, program compliance, and prudent use
of taxpayers' dollars is absolutely critical to the success of
the program. The Navy's high standards have been clearly
communicated to the Department's command leadership.
The Department of the Navy has established and proactively
enforces control for the oversight and management of the
program, from the major command level to the local activity
cardholder. We have set the span of control to be no more than
seven cardholders per one approving official. All Department of
the Navy approving officials are now compliant with this
control. Credit limits have been reduced to be more in line
with historic spending patterns, thus minimizing the potential
for fraud and misuse.
Finally, the Department of the Navy has implemented an
internal data mining capability using commercial off-the-shelf
software. This software emulates the methodology and criteria
employed by the General Accounting Office to uncover
questionable transactions. I am confident the program
management policies, procedures, and controls that are now in
place are addressing the program weaknesses highlighted by the
General Accounting Office, and are comparable to the best
practices of the private industry.
In conclusion, the purchase card is a vital acquisition
tool for our service members and civilian employees. I commend
the General Accounting Office for identifying opportunities for
the Department of the Navy to improve our program and I am
committed to the continuous improvement of the program.
Mr. Chairman, that concludes my statement and I will be
pleased to answer your questions, sir.
Mr. Horn. I am going to start with you, Admiral, in terms
of some questions. Admiral, how extensive is the fraud and
abuse in the Navy's purchase card program? Do we know?
Admiral Cowley. Sir, we have implemented a data mining
capability, as I just indicated. And in addition, we also are
pursuing another recommendation from the General Accounting
Office to engage the Naval Audit Service in a periodic forensic
audit program that will allow us to assess the effectiveness of
our management controls and to allow us to build a program
baseline against which we can identify trends in our
performance and begin to get our arms around the actual extent
of the conduct.
Mr. Horn. Well, you don't sound like you've got a lot of
sanctions here. What sort of sanctions have you imposed on
people in your command?
Admiral Cowley. Individual commanders, commanding officers,
and supervisors are empowered to administer the disciplinary
process on a case-by-case basis. Disciplinary and other actions
in response to purchase card misconduct is a matter of command
and supervisory discretion. And what the Navy is doing in this
area, specifically the Office of the Judge Advocate General and
the Office of the Assistant Secretary of the Navy for Manpower
and Reserve Affairs, is developing a set of guidelines to be
used by commanders, commanding officers and supervisors.
Without dictating which action must be taken, it will provide
them with guidelines in dealing with purchase card misconduct
in the future.
Mr. Horn. Admiral, how many captains are below you in the
Research Development and Acquisition group?
Admiral Cowley. How many captains are below me?
Mr. Horn. Yes.
Admiral Cowley. There are three.
Mr. Horn. What has happened to them now and what kind of
supervisory network do they have for their command?
Admiral Cowley. None of them are in a command position,
sir. They are in staff positions.
Mr. Horn. So they're staff. So where's the first line under
you?
Admiral Cowley. The first line under us is the eschelon 2
command, sir.
Mr. Horn. I couldn't hear you. What?
Admiral Cowley. The eschelon 2 command.
Mr. Horn. How many in that command?
Admiral Cowley. We have Naval Sea Systems Command, the
Naval Air Systems Command, Space and Naval War Systems Command,
the Naval Supplies Systems Command, and the Naval Facilities
Command.
Mr. Horn. In your capacity, and you are testifying, what
kind of supervisory actions have they taken in their particular
command?
Admiral Cowley. Beginning over a year ago, there have been
a series of communications to the commanders requiring that
they certify the internal controls in place at their commands,
and, in addition, require that they certify the training of the
individual participants in each of the watch stations in the
purchase card program. They have in fact come in with those
certifications.
Mr. Horn. Does anybody check--at what level does somebody
check to see that this isn't frivolous, and all the rest of the
things we have seen in this organization. What has been told?
So what do you see there?
Admiral Cowley. The management controls are within the
discretion of the commanders. However, as indicated earlier, in
line with assessing the proper management, we are beginning a
program of--with the Naval Audit Service for periodic surprise
forensic audit to ensure that indeed, these controls are in
fact implemented and are in fact operative on an ongoing basis.
Mr. Horn. What enlisted type or officer type do your
supervisors look at, the people in that command? I mean, we
have to get down to the nitty-gritty. Nothing's going to
happen--it isn't the way I see it--with the Navy unless they
get with it. There are millions of dollars down the drain, and
everybody's coming up here all the time with the authorizing
and the appropriating committee, saying we need all this money
for getting all this research and development and acquisition.
That's your bailiwick over there. And the question is, where do
you get a little money which you could use and put it to the
research development? So what is the best way to get at this?
You've got two captains that are staff. So how many people
report to them?
Admiral Cowley. It's a very small number on our staff.
Mr. Horn. Well, I'm sure it might be, but even on that, who
signs off on that--you, the captains, is there somebody else
involved?
Admiral Cowley. We have an APC, an Activity Program
Coordinator, who reviews the purchase card program within the
Office of the Assistant Secretary of the Navy for Research
Development and Acquisition.
Mr. Horn. So the Assistant Secretary, then, has the way of
looking at the paper and seeing if it's not very quick? And is
that the way it works with the Assistant Secretary?
Admiral Cowley. The purchase card programs are set up
within each command activity and are monitored on the basis of
each command activity. I know I can address the programs on a
number of the ships. In fact, they are set up--the supply
officer, who is usually an O4 or O5 oversees the purchase card
program. Each activity has, depending upon the person
populating the command activity, established programs with what
stations.
Mr. Horn. Representative Terry has asked us to ask this
question of Navy witnesses, and here it is: Is the Navy aware
that it could use outside companies with expertise in the
credit card business to assist it in gaining better control of
the credit card programs? Has the Navy ever used such type of
organization? Do you think it's worthwhile to explore and get
something done?
Admiral Cowley. Yes, sir, we do believe that. In fact we
have two prototypes currently ongoing where we have procured
data mining software, the same software used by the General
Accounting Office, to allow us to review suspect purchases. So
we are pursuing technology solutions to better enable us to
manage the program; yes, sir.
Mr. Horn. Admiral, we continue to hear reports from the
General Accounting Office that the Navy loses computers. They
aren't alone in the executive branch. I think we had 1,000
disappear in IRS. And that's the tax collector. And flat panel
monitors, digital cameras, video equipment, the list goes on
and on. Why doesn't the Navy believe in accounting for
expensive items such as these that can be easily stolen?
Admiral Cowley. We do believe in accounting for expensive
items that are pilferable or easily convertible to personal
use. We believe records should be kept. In the past our
instruction has not been in alignment with the financial
management regulation or with the DOD regulation. We are
bringing our instruction in alignment with those regulations
which will require for accounting of those pilferable items.
Mr. Horn. What is your highest figure that you consider an
expensive one and one that ought to be looked at?
Admiral Cowley. The capital threshold is $5,000. However,
my concern with picking a particular dollar threshold would be
the level at which people would then account for the material.
Rather, we would rather have the individual commanding officers
look at material, regardless of dollar value, that would fall
into that pilferable material category; material which is
critical to their mission accomplishment or is otherwise hard
for them to repair and replace.
Mr. Horn. I take it these are computers that are lap
computers.
Admiral Cowley. They may be, sir.
Mr. Horn. Where people can carry it and off it goes?
Admiral Cowley. That would be included.
Mr. Horn. And the digital cameras and the flat panel
monitors and the videotaping, some people have a great basement
where they must have had all this equipment in there. It's the
taxpayers'. And the taxpayers say, gee, I would love a little
bit like that, but you can't.
Mr. Kutz. Mr. Chairman, if I could add, one of the things
that gets at your previous point is the fact that the
management of this program is very decentralized. What happens
with this program happens far, far outside the Beltway. This is
not an inside-the-Beltway program. The spending is going on and
the control of property is far outside. It is at the bases and
the commands across the country.
And I believe that the admiral's position that the Navy
believes this should be accounted for may be true as an
organization, but if you actually go out there to the locations
in the field, that view isn't necessarily shared across the
Navy. And that becomes one of the challenges the admiral faces
in instituting change here, is that the culture right now is
that this is not important and this is not something people are
evaluated on. This is not something the NAvy has ever done
before.
So that is going to be a challenge for them to actually get
accountability for this property, because for years people have
not been doing it.
Mr. Horn. And it's very tough to break into the culture.
Mr. Kutz. And it is very difficult with the purchase card,
when you are buying in some cases one or two items versus
having it received at a central warehouse, to establish that
accountability. What it requires is the purchaser to make a
phone call or call the property book people and make sure that
the property is actually entered into the property records and
bar-coded. So it takes an extra step you wouldn't necessarily
have when you have centralized receiving of property.
Mr. Horn. Admiral, how do you plan to ensure that the
changes you're making will result in a long-term improvement of
the purchase card program?
Admiral Cowley. Well, we have included in our enhanced
training, in our improved training requirement for accounting
pilferable material, and we intend to use our forensic audit
program to ensure compliance with the management controls that
are in place.
Mr. Horn. Is anybody trying to get in the Naval Academy at
Annapolis? Is there an ethics question? Is there a fraud bit?
It seems to me if you're going to have very fine--and you do
have very fine people there, but they need to know that if
you're going to be a naval officer, you've got to be aware of
your responsibilities, and what sanctions, and how you would
deal with it. That's reality.
Now, does anybody know whether Annapolis has any of this,
before these young people get out in the Pentagon or the base
or whatever it is? That's where it starts.
Admiral Cowley. Yes, sir.
Mr. Horn. And if you miss it, they'll say, hey, we do this
all the time and that's baloney. You've got to cut through it
and you've got to make sure that the money put to it by the
taxpayers will still be around until somebody's walking off
with it. So that's our worry.
I went to many a hearing like this with Admiral Rickover
and my counterpart, Mr. Chet Hollifield, and he turned
Annapolis--the Navy Academy at Annapolis--around, and so did
Admiral Rickover, and they made a major contact in the feeling
there.
And so I just would suggest that you might in what--you're
talking with the Secretary of the Navy, he's a first-rate
person, and he might want to take a look at this and say what
kind of ethics, what kind of this and that ought to be at least
one credit in the Annapolis. Same with West Point. And that
would help. Then people would know, gee, there is something out
there besides just leaping up ladders.
So, Mr. Ryan, you've been a very able person, checking all
of these things. You investigated a company that the Navy paid
in advance for goods and services that were never provided. I
believe the company is Digital Wizards in San Diego. Isn't that
fraud? Shouldn't we be investigating all the Digital Wizard's
business transactions with the Federal Government?
Mr. Ryan. Mr. Chairman, based on previous testimony we had
given, the full committee asked us to look into Digital Wizard.
The committee sent a letter to Digital Wizard, asking for their
work papers that directly related to the transactions submitted
for those $2,500 transactions. At the time there were 75
transactions that we needed to look at. We sent agents to San
Diego. We looked at the paperwork as associated to those
transactions. And it was troubling to us because we truly
believed, based on the paperwork that we saw, that the
government was paying and not receiving what they should have
been getting. Several transactions that were $2,500, there was
no work papers to support that anything was done. Other
transactions for $2,500 had support papers for, as Mr. Kutz
said $75; some for $600; some for a $1,000. So based on that,
Agent Hill and the SPAWAR's people started to look at those 75
transactions. We truly believe, just based on that 75, that the
government was overcharged $34,000.
We also uncovered during the course of the investigation--
--
Ms. Schakowsky. Mr. Chairman, if you will yield, is this
for product or for services?
Mr. Ryan. Services. Also during the course of the
investigation, we looked at--we found an additional 120
transactions that we felt needed to be investigated. We passed
those on to SPAWAR. After consultation with the staffs, we
contacted DCAA.
Mr. Horn. DCAA is the Defense Contract Agency.
Mr. Ryan. We contacted them. We're discussing Digital
Wizard with them with their field people in California. They
have other contracts in excess of $10 million with SPAWAR. We
believe that DCAA should look into all the transactions
associated with Digital Wizard.
Mr. Horn. Mr. Kutz, anything you want to add on this?
Mr. Kutz. In addition to the vendor possibly taking
advantage--and again it's potential fraud, I don't know if we
can conclude it's fraud at this point, a vendor possibly taking
advantage of the situation--the Navy is at fault for not
looking to see that they ever received the goods and services.
For each one of these transactions in violation of the Navy's
own policy, they were paid in advance; in other words, they ran
them against the credit card before the services were provided,
and then nobody ever checked to see whether $2,500 was ever
provided in services.
So the Navy is also at fault here, in addition to
potentially a vendor being responsible for this whole
situation.
Mr. Horn. Mr. Kutz, through your work on this issue, do you
think that the Navy really knows the extent of fraud, waste and
abuse in its purchase card program?
Mr. Kutz. As the admiral said, with respect to the fraud
that's out there that they're aware of, that there are
investigations that are outstanding or cases that have been
closed, they don't know what they know. In other words, they
don't know what cases are out there. And he's talking about
trying to put together some sort of a data base that can
accumulate that information for purposes of learning and
understanding what kinds of fraud have been perpetrated over
time.
They also don't know what they don't know. And that is the
more troubling part here with the kind of control environment
that you have over the purchase card program, is that the
amount of unknown fraud that the preventive and detective
controls are not catching could be significant, could be much
more than what they actually know. So at the end of the day,
they don't know in total, but the more troubling part is they
need to do a better job of knowing what they know, which are
the cases outstanding. And I believe that they agree with us.
We have made a recommendation to them on that, and I am hopeful
they will implement that recommendation.
Mr. Horn. You found that the Navy has taken appropriate
disciplinary action against the cardholders, but who else in
the misuse of their purchase cards? And did it slop over into
other services or----
Mr. Kutz. With respect to discipline on the purchase card
program, our report says we found no evidence of disciplinary
action against anyone that had improper or abusive charges. We
did find evidence when there was fraud, they did take actions.
There were investigations and prosecutions and people have gone
to jail. But for the improper or abusive charges, there has
been no evidence of disciplinary action. I believe in one case,
a cardholder had their card taken away.
So I would say based on our work, there has not been
disciplinary action, and certainly that is something we have
recommended that they take a strong look at. Try to get some
guidelines out there for some suggested possible disciplinary
action for different kinds of offenses that the commands can
use so we can see some sort of consistency of application of
discipline.
But again, you have an environment right now where people
out there know they can get away with it and nothing has
happened to date. I would say for the improper charges--we
talked about the Lego toy robots, the clothes, food, etc., I am
not aware of--except for one case of the leather flight
jacket--any money being repaid to the Federal Government.
Mr. Horn. Do you believe the Defense Department's
management of its cellular telephones is an area in which there
may be extensive waste and abuse?
Mr. Kutz. Yes, that is something we have seen across the
services. In my opening statement, I mentioned the case where
they had turned the cell phone in 13 months earlier but were
still paying the monthly cell phone charge. We have also seen
lots of abuse of the cell phones where people are improperly
using them for personal calls, business.
We saw for SPAWAR--Mr. Ryan and I both looked at--that they
handed out 60 or 70 cell phones to contractors who then were
using them uncontrolled. And again, given that the contractors
weren't given any instructions as to how to use the cell
phones, they were using them for friends and family.
The control problems are out there. There are some units
that have done a better job of controlling this. But Mr.
Chairman, the issue is nobody is looking at the monthly bill to
make sure that the charges on there are for official government
telephone calls. We have hundreds of dollars of cell phone
calls coming in on individual monthly statements that are very
questionable.
Mr. Horn. Mr. Kutz, we have seen delinquency rates ranging
from 10 percent to 18 percent in the Navy and Army travel card
programs. Delinquency at civilian agencies appear to average
from 4 to 8 percent. How do these rates compare to corporate
travel programs?
Mr. Kutz. You are speaking of the travel program?
Mr. Horn. Yes.
Mr. Kutz. With respect to the travel program, the Navy's
and the government rates, as far as we can see--and the
government rates are significantly higher than private-sector
corporate travel programs. The banks were unwilling or unable
to give us the information on what their actual delinquency
rates were, and I guess that is proprietary information. But
based on discussions with one company who does not want to be
disclosed, their delinquency rate was less than 1 percent.
At the General Accounting Office, our rates fluctuate
between zero and 1 percent. But to be fair to the services, I
don't think that would be a proper comparison. We have a much
different demographic makeup of our people that hold credit
cards, as do corporations. And so I believe that the rate that
the services have tried to shoot for is 4 percent, which we
have no evidence of whether that is good or bad, but given what
we have at this point, that may be a reasonable delinquency
rate for them.
Mr. Horn. Mr. Ryan, in one of the cases you investigated,
fraud was committed on a government travel account held by a
cardholder who had died in 1999. Can you explain how these
charges were made and why the account was not shut down?
Mr. Ryan. Yes. That was a travel card account. What had
happened was the cardholder was killed. At the same time of his
death, there was the reissuing of his travel card. What had
happened was the travel card went to his address that he had at
the time he had died. However, his family had moved.
It was forwarded back to the bank with a forwarding
address, at which time the bank immediately sent the card to
the forwarding address. Family members got ahold of the card,
activated it through an automated system, and proceeded to use
the card. It was due to the attention of the APC at the time
who noticed that the card was being used in the vicinity of
where the cardholder lived, contacted the commander, the
commander advised the APC that the gentleman had died. But in
the meantime the card was used extensively for fraud.
We investigated it and were able to take pictures from the
ATM machine, provide those pictures and the other evidence to
the Secret Service in the region where the fraud took place,
and it is my understanding they are investigating it.
Mr. Horn. Now I yield to the gentlewoman from Illinois and
the ranking member, Ms. Schakowsky.
Ms. Schakowsky. Thank you, Mr. Chairman.
I heard you say, Admiral Cowley, that you do believe that
cameras and Palm Pilots, etc., should be inventoried and
tracked, etc. But it was my understanding, Mr. Kutz, that last
week when staff met, that was one of the GAO recommendations,
but I thought that the Navy was in disagreement. Am I
misunderstanding that? In disagreement with that
recommendation? I'm just confused about where we really stand
on that.
Mr. Kutz. I believe initially they were in disagreement
with that, but I believe now they would concur, and they are
going to adopt the DOD-wide policy.
Ms. Schakowsky. So beginning now, going forward? Or has
that been--because that has not been my understanding, that you
are going to look at those transactions.
Admiral Cowley. Ma'am, my staff has looked at a draft of
the instruction that would bring us in line with the DOD
regulation and the financial management regulation, and I
expect that will be issued within the near term. So we will be
in compliance.
Ms. Schakowsky. How soon is near term, because we keep
having these hearings, and we keep hearing the same thing over
and over again?
Admiral Cowley. Ninety days, ma'am.
Ms. Schakowsky. Within 90 days that will be the policy, and
then you will begin to track those?
Admiral Cowley. No, ma'am. We expect to aggressively pursue
this and begin to track it as the training and information is
put out to our individual cardholders.
Ms. Schakowsky. So what is the 90 days?
Admiral Cowley. It's for the instruction to be signed.
Ms. Schakowsky. But you will begin implementing this plan
immediately?
Admiral Cowley. Yes, ma'am, through our Department of the
Navy Business Office, which is the program manager for the
purchase card.
Ms. Schakowsky. Some of my colleagues have suggested that
on these kinds of purchases, like the Bose clock radios, the
designer leather goods, the $2,200 flat-panel monitors, etc.,
that officers like yourself should be held financially
responsible for these abuses, or that we should hold the
approving officer financially responsible for improper
purchases. What do you think of those kind of proposals that
somebody is going to pay?
Admiral Cowley. I believe that is within the discretion of
the individual commanders, commanding officers and the
supervisors over those officers.
Ms. Schakowsky. Has that ever happened?
Admiral Cowley. I have no knowledge of that, ma'am.
Mr. Kutz. Representative Schakowsky, there is one case
where there was a leather flight jacket purchased that, after
we discussed it with the individual involved, they repaid it,
but as part of our work, we have only seen it once.
Ms. Schakowsky. That is the individual cardholder who paid
it back? Is that what you are saying?
Mr. Kutz. I believe it was the person who authorized the
cardholder to do it in that case.
Ms. Schakowsky. Let me ask you then about disciplinary
action of any sort on the others who have been guilty not so
much of fraud, but these kinds of abusive purchases. How can
the Navy come before us in the face of only one example of an
individual being in any way held accountable? What kind of a
message does that send about how we manage our affairs and
spend taxpayer dollars?
Admiral Cowley. Well, ma'am, I can address several cases of
fraud where individuals were in-fact court-martialed.
Ms. Schakowsky. Not fraud. I am talking about these kinds
of clearly abusive purchases, not fraud. Are we going to just
look the other way and say that is OK?
Admiral Cowley. No, ma'am. We are not. As Mr. Kutz has
indicated, this is a decentralized process, and as I indicated
earlier, the Judge Advocate General and the Office of the
Assistant Secretary of Navy for Manpower Reserve Affairs are,
in fact, developing a schedule, a guideline for people to use
in reviewing these cases, and without dictating actual action,
they will provide commanders with a baseline from which to
execute their disciplinary responsibilities.
Ms. Schakowsky. I don't know, with all due respect, you
know, I have not been here a long time, but thanks to the
chairman, even in the short period that I have been on this
committee, we have had hearing after hearing, and we hear those
kinds of word. Oh, we're going to begin to establish procedures
that will then result in blah, blah, blah. And yet no one to
date through the whole period--except for one person--of these
hearings has ever been held accountable. And we are in a period
of time--I don't mean to vent totally on you, Admiral, but here
you are. But we have, you know, $300 billion a year in the
Department of Defense, and we are about to likely add another
$50 billion to that. And as the Senator from my State used to
say, $34,000--this is not exact words--here and there, pretty
soon $24,000 here, $24,000 there, you start to get real money.
And it seems that everywhere you look there is $10,000,
$100,000, $1 million. And pretty soon it adds up to real money.
And I am ready for someone to come back and not talk about
process by saying, we have punished this many cases, and we
have seen a reduction in this many cases of abuse, rather than
constantly talking about what is going to be done.
When do you think you will be able to come back to us and
say, we have disciplined so many people, and this is how much
money we think we have saved the government as a result?
Admiral Cowley. Ma'am, I'd like to be able to tell you that
now. I believe the guidelines will be out in the December
timeframe.
Ms. Schakowsky. And so then how soon will we be able to see
results? If we held a hearing, unfortunately not with this
chairman because of his retirement, but another hearing, when
do you think that we will see some real results?
Admiral Cowley. I think with the enhanced training that we
have out there, I think in the near term. I'm not able to give
an exact date, ma'am.
Ms. Schakowsky. Well, we will be back. Some of us will be
back.
Mr. Horn. What is a near term and a long term in dealing
with Congress? I mean, the reason they sent you here is they
are going to give you another star if you can get through it
all. Well, what are we talking about, 2 months, 3 months?
Admiral Cowley. Six months, sir.
Mr. Horn. Six months?
Admiral Cowley. Yes, sir.
Ms. Schakowsky. I see that there has been a reduction in
the number of people that have credit cards. What has been the
criteria in reducing the numbers, and are any kind of credit
checks involved in that? Are these more categorical rather than
individual?
Admiral Cowley. The needs of the commander are what informs
the number of purchase cards out there. We have, in fact, as
Mr. Kutz indicated, significantly reduced the number of cards,
about 32 percent by my look, coming down from 29,000 to 22,000
cardholders, and that is based on the command's needs.
Ms. Schakowsky. Mr. Kutz, is this at all based on increased
management controls, or is this categorical?
Mr. Kutz. I would say it is a positive step. I believe that
they went back and scrubbed who actually needed to have a card,
and so they have done it based on an instructed, disciplined
look, and it is a very positive step, and it provides them the
ability to better control this program.
Ms. Schakowsky. But, again, would individuals be
disqualified because of past behavior, or is it more this
category of employee no longer needs a card?
Mr. Kutz. It is not necessarily category. I think it is
more that you don't need three people in a unit with a card, or
you don't need people in a certain group, or you only need 1
card for every 40 people in a group or something; whereas I
don't know anything with respect to how they have cut cards. We
haven't seen evidence of cutting cards for the discipline or
people misusing.
Ms. Schakowsky. Or prescreening?
Mr. Kutz. No, they are not prescreening for that. No.
Ms. Schakowsky. Let me see if there were other questions
that I have here.
Well, let me ask you Mr. Kutz, when we talk about the
disciplinary action, how do you envision that DOD would
appropriately deal with the discipline of abuse? Not fraud, I'm
talking about abuse of the purchase card.
Mr. Kutz. Well, what we've recommended is the guidelines
that the admiral mentioned where they would develop some
guidelines that commands could use to apply to various
situations. The issue is going to be getting the commands to
apply those guidelines in the real world when someone actually
does an abuse and actually identify the abuse in the first
place.
One thing that is interesting about the improper and
abusive charges that you mentioned, that for the most part they
were authorized. That's why they're not fraud, generally. So
you have the cultural issue, too, about what should we and
shouldn't we buy with taxpayer funds. We shouldn't necessarily
be buying food, clothing, luggage, Lego toy robots, etc., with
taxpayer funds.
Ms. Schakowsky. I have a letter that I am going to give to
you, and after this I will ask the chairman if he wants to
cosign, to begin an investigation on the issue of vendor fraud
in the purchase card program, because it is clear from the
little bit of look that you have given, that some vendors are
submitting charges against purchase card accounts where no
goods or services were delivered. And I think it is really
important that we take a look at that to determine the extent
of the problem and report back to us. But it sounds like you
have begun to do a little bit of that look. I wonder if you
wanted to comment on what you think we might find.
Mr. Ryan. I think in the situation we are dealing with
purchase cards, I hear a lot of we're going to buy this program
and we are going to do this and we're going to do that. I think
that when you get down to it, where the rubber meets the road,
it falls upon the employee to bring a new employee in who is
trusted, can make good decisions, and is accountable for the
actions that they get involved in. We see, a lot of the
investigations that we looked at, that the approving official,
the cardholder, they have questionable backgrounds. They have
financial problems, bankruptcies, failure to pay their bills or
not making good decisions. These are the agents of the
government. These are the people that we're giving the card to
to use to make the right decisions.
I think from the conversations I have had with the admiral,
I think some of the ideas are wonderful about bringing in naval
audit. I think it is great to have naval criminal investigators
come in and join in a partnership to help the Navy identify the
potential vendor fraud cases and the contractual fraud cases.
But I also think that it's important that establishing a
good basis, a good foundation, the foundation starts with the
people who are using the cards and approving these
transactions. If we can start there and make improvements, I
think the admiral is headed in the right direction by bringing
naval audit in to do surprise audits on certain units, having
the criminal investigators investigate potential fraud cases,
see if there is intent. And I think it will lead to exactly the
vendor fraud situation that you are asking us to look at,
because we're going to have vendors that are billing two and
three times, four times. You have vendors that are using the
credit card to steal the government's money, because if the
cardholder is not paying any attention, they are going to pay
the bill. We're getting bills for services, and we're not going
out and checking it.
So I think that what you are asking is what we have started
to do. We have started to see. We have been able to work and do
a lot of data mining and use that information to start to
develop where we need to go.
Ms. Schakowsky. But one thing about what you just said gets
back a little bit to the question I was asking earlier. Do any
of these protocols, these new procedures that we're
establishing, deal with checking out the individuals as opposed
to saying within a unit only so many people get a credit card?
Are we going to have a screening process for individuals so
that we can prevent the fraud in the first place or the abuse
in the first place?
Admiral Cowley. Well, ma'am, we don't have a credentialing
process to speak of. However, in the training material that we
have recently distributed, there is a process whereby there
is--the accepting official would nominate cardholders,
nominates personnel to become cardholders. So indeed there is a
process. The individual who best knows that employee or the
individual nominated to become a cardholder would have some
knowledge of them from their working with them daily.
Ms. Schakowsky. What do we know about the nominator,
someone who makes the determination on who gets the cards?
Look, I'm not interested in establishing some sort of a ``Big
Brother'' routine here, but if we're putting in the hands of
individuals the opportunity to use taxpayer dollars to a large
extent, I want to know that we have checked these people at
some level and that there is some process at least that we look
into their ability to exercise that authority correctly. It
doesn't sound like anything in the new procedures you are
setting up go to the individual level. I just want to suggest,
based on what I'm hearing, that's a really important thing to
do.
I have one more question. Mr. Kutz, you said something, and
I did not quite get it; 58 to 90 percent of the time in
something you checked. What was that?
Mr. Kutz. That was our statistical samples over the basic
controls we tested for screening for vendors, independent
receipt and acceptance, proper approval of the credit card bill
by the approving official. And that is where we found the
failure rates of 58 to 98 percent. And that is where the
documented evidence was not there to show that it was done for
that percentage of the statistically selected transactions that
we looked at. And again, there may be instances where the
documentation--the person did it, but did not document it. But
in many cases it was clear, based on discussions, span of
control or whatever, that the people had not done their job
with respect to the purchase card.
So that's a very high failure rate though, but consistent
with what we reported on the Army 2 months ago.
Ms. Schakowsky. Right. But this is for services, whether or
not services were rendered for the money that was spent?
Mr. Kutz. That would be one--yes, because when you are
doing the independent receipt and acceptance or the review of
the monthly credit card bill, you would be making sure that
goods and service were provided. So, yes. That would be an
example and the fraud case that we talked about earlier would
be an example of where those controls broke down.
Ms. Schakowsky. Admiral, when we're looking at 58 to 98
percent, that is a huge challenge in front of you. What is an
acceptable number do you think? We're talking about 4 percent,
but----
Mr. Kutz. That was on delinquencies.
Ms. Schakowsky. On delinquencies. What is an acceptable
rate? Obviously anything lower than that will show progress.
Where are you aiming to get to?
Admiral Cowley. I don't believe any number is an acceptable
rate there, ma'am. I think we should continue to try to improve
the process by identifying those vulnerabilities in the
process----
Ms. Schakowsky. In some cases----
Admiral Cowley [continuing]. And mediate them.
Ms. Schakowsky. In some cases almost 100 percent bad.
Admiral Cowley. Yes, ma'am.
Ms. Schakowsky. We have a lot of work to do. Thank you.
Mr. Horn. The honorable Dionel Aviles, Assistant Secretary
of the Navy, Financial Management and Comptroller, if you could
come in and join the club. We will keep the three witnesses and
add the Assistant Secretary.
The Assistant Secretary was nominated by President George
Bush, June 12, 2001. He has had a rich career here in the
executive branch. He served in the National Security Division
of the Office of Management and Budget, and he has been a
budget examiner for Navy procurement for their search and
development programs, and he probably met the admiral somewhere
in that. He was a program engineer in the private sector as
well as the public sector.
So since you're the one that really knows financial
management, and comptroller is a key position, if you could
give us some thoughts on that and what you're doing in the Navy
to either solve this thing of purchase cards and travel card
and give us your thinking.
The Assistant Secretary and then----
STATEMENT OF DIONEL AVILES, ASSISTANT SECRETARY OF THE NAVY,
FINANCIAL MANAGEMENT AND COMPTROLLER
Mr. Aviles. Thank you, Mr. Chairman.
Mr. Horn. Do you have to leave?
Mr. Aviles. Happy to defer to my fellow witnesses from GAO.
Mr. Chairman, thank you for the opportunity to discuss the
Department of Navy Government Travel Charge Card Program and
our recent efforts made to improve its performance.
I am Dionel Aviles, the Assistant Secretary of the Navy for
Financial Management and Comptroller, and in this capacity I am
responsible for the Department of Navy policies associated with
the Government Travel Charge Card Program.
As you will likely hear from the GAO witnesses, there have
been several instances of delinquency and misuse in the Navy's
travel card program. I share your concerns about these problems
and thank you for focusing attention to this most serious
issue.
I would like to tell you about some of the corrective
actions that we're taking to improve the program. As was
discussed at a previous hearing, we use two types of travel
accounts--centrally and individually billed--in our travel card
programs. Since the individually billed accounts, those held by
our sailors, marines and civilians, are the ones that involve
the incidents of delinquency and misuse that we will hear
about, I will confine my remarks to those accounts.
Individually billed accounts are issued by the bank in the
name of the individual who is solely responsible for the timely
payment of all charges made on the account with their personal
funds. Cardholders sign an agreement that makes them personally
responsible for payment in full of the amount indicated on the
monthly statement. The overwhelming majority of our cardholders
adhere to this agreement by using the travel card properly and
paying the amount they owe promptly.
Regrettably a small percentage of our cardholders do not
follow the rules or in some cases, due to circumstances they
may not be able to control, are unable to pay their balances in
a timely fashion. To address the problem, we are taking
aggressive action to reduce incidents of misuse and
delinquencies.
Examples of these efforts include, No. 1, strengthen
controls. Last April we established a new delinquency goal for
all commands of not more than 4 percent of the total dollars
outstanding on our total of accounts being more than 60 days
past the billing date. Commands failing to meet this goal are
required to implement additional remedial actions that include
deactivation of card accounts until just prior to an
individual's travel, conducting spot checks for inappropriate
card use, and increasing spot checks if a pattern of possible
misuse arises.
Earlier this year I sent out over 7,000 letters to each
cardholder who was 60 days or more delinquent past the billing
date, urging them to pay their bill, alerting them to the
consequences of continued delinquency, and providing a point of
contact in my office for questions.
Three, command attention. I have met with the senior
leadership--this is at the two- and three-star admiral level--
of all the major commands failing to meet the delinquency goal
discussed above, requiring them to provide specific actions
that they are taking to improve performance. These regular
performance reviews will continue for commands that fail to
meet the delinquency goal.
No. 4, deactivation upon transfer. I have directed that all
commands include travel card managers in their personnel
checkout procedures to ensure accounts do not remain active
when cardholders depart an organization. This change should
discourage the use of the card during permanent change of
station moves, which normally take a longer period of time to
reimburse than the temporary duty travel for which the card was
intended.
Five, misclassification of merchants. I have asked that the
DOD travel card program manager review and change potential
erroneous merchant codes. You will hear from the GAO witnesses
of cases where merchants with improperly classified codes are
making it difficult for travel card managers to spot incidents
of misuse.
No. 6, debit card option. We are working with the
Department of Treasury to prepare a prefunded or debit travel
card pilot program to determine if it may be a viable
alternative to the current charge card program for at least
some of our members. Last March the Under Secretary of Defense
Comptroller established a charge card task force to evaluate
the Department's purchase and travel card programs. The task
force's preliminary recommendations for the travel card were
released in June, and we are working to implement those
recommendations. For example, we have begun a pilot program to
identify potential misuse by monitoring unusual activity.
Accounts identified for potential misuse are immediately
deactivated until travel card managers or the cardholders are
contacted to confirm the transactions.
To further automate this process, we have procured the same
software used by the GAO to conduct their data mining efforts.
We are canceling accounts with no activity for the proceeding
12 months. This effort has resulted in the cancelation of over
80,000 card accounts. These are in addition to over 40,000
accounts closed by previous Navy reviews.
Last May we held a training conference for more than 350
east coast travel managers, and we have scheduled another one
for November for west coast managers, and I have over 300
attendees signed up. We are also developing tailored computer-
based training for all cardholders, travel card managers,
commanding officers, and supervisors.
Additionally, the task force recommended the use of the
split disbursement method of payment. This is where a portion
of the travel entitlement goes directly to the bank on behalf
of the cardholder. The Navy strongly supports and encourages
the use of split disbursement and believes this can go a long
way toward resolving delinquency issues.
Some of the problems experienced with the Government Travel
Charge Card Program can be traced to its implementation. At its
inception, many of the people in the Navy and the Marine Corps
thought that every sailor, marine and civilian in the
Department were required to have and use the travel card. Many
commanders thought that we had contracted with the bank to
manage this program, and their personal attention was not
required. Many cardholders did not understand their ultimate
obligation to pay their charge card bill and the restrictions
placed on the use of the card. The confluence of these
misperceptions helped to get us where we are today.
In closing, only the persistent and pervasive involvement
of the Department of the Navy's senior leadership and
commanders will improve this program. I can't promise you that
the changes that we have made to date will be enough to correct
all of the problems that you will hear about today. Indeed with
this type of card, we will always have some level of
delinquency and misuse. However, I do believe that we're
changing perceptions about this program and beginning to fix
some of its problems, and I promise you that I will not relent
in focusing my personal attention on this problem.
Thank you, Mr. Chairman. This concludes my remarks, and I
stand ready to answer any questions that you may have.
[The prepared statement of Mr. Aviles follows:]
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Mr. Horn. I have just one question for you, and then we
will move back to the Comptroller General.
You're on the task force for the Navy. Were you also on the
task force that the Secretary of Defense set up to deal with
this?
Mr. Aviles. Yes, sir. That is Dr. Zakheim, the Under
Secretary of Defense Comptroller, was charged by the Secretary
of Defense to lead that effort, and so the Department of Navy
did participate with the DOD staff in developing those
recommendations for the task force.
Mr. Horn. Do you think since that task force is still
going--isn't it?
Mr. Aviles. Yes, sir. They have reported out their initial
recommendation. I don't know if it is going to remain a
standing task force or whether the intent would be to stand
that down and report back through our normal reporting chains
on changes that we have made. In my case, for the travel card
program that would be through the Under Secretary of Defense
Comptroller's Office.
Mr. Horn. So you feel that you're moving along in the Navy.
How about the Army and the rest?
Mr. Aviles. I don't have specific information with respect
to changes that are being made for the Army and the Air Force,
sir.
Mr. Horn. When will that defense one pull together and go
after all the services and then come in with another
recommendation?
Mr. Aviles. Sir, many of the task force recommendations
were not specific to any individual services. So, for instance,
encouraging the use of the split disbursement option, that
applies to all services, that they are encouraging that;
additional--making available additional training materials,
ensuring that is available for all persons involved in the
process, not just the program coordinators or travel card
managers, but also commanding officers, individual cardholders,
to ensure that everyone understands their responsibility under
the program.
Mr. Horn. Does the Navy have any idea how extensive the
fraud and abuse is in its travel card program?
Mr. Aviles. Mr. Chairman, I don't know that--I think that
gets into what Mr. Kutz quantified as not knowing the
unknowable. In many cases we rely upon safeguards that are
built into the system, controls that are intended to prevent or
preclude misuse of the card. For instance, merchant category
codes that are intended to allow the travel card to be used
only in certain types of activities, we have evidence where
some of those codes have been misrepresented. Whether that was
intentional on the part of the vendor or not, it has the
practical effect of defeating that control.
Additionally, we rely heavily on agency program
coordinators, those managers, to look at transactions after the
fact to detect instances where the card may have been misused.
But again, that is not a leading indicator, that is a lagging
indicator. We depend heavily on those internal controls, the
safeguards built into the card with respect to limitation
requirements for preauthorization and merchant category codes,
as the principal line of defense for preventing misuse.
Mr. Horn. I'm going to go now for Mr. Kutz of GAO, and then
I will get back do you.
The General Accounting Office has done a fine job over the
months, so tell us what you know about the travel card
situation.
Mr. Kutz. OK, Mr. Chairman, I will get right to our bottom
line, which is that we did find significant breakdowns in
controls over the Navy's travel program. These breakdowns
contributed to substantial delinquencies and charge-offs and
also contributed to fraudulent and abusive activity.
I'm going to talk about three parts here to our testimony:
first, the delinquencies and charge-offs; second, fraud and
abuse; and third, internal controls.
First, we found substantial delinquencies and charge-offs
of Navy travel accounts. Most Navy travel cardholders properly
used their card and paid the bill on time. However, as you can
see on the posterboard, the Navy, which is the blue line, has a
high delinquency rate. Following the blue line you will see
that for the eight quarters ending March 31, 2002, the Navy's
delinquency rate fluctuated between 10 and 18 percent.
Mr. Horn. Is the yellow the Army?
Mr. Kutz. Yes, the yellow is the Army. And the Navy's rates
here, as you can see, just about mirrored those of the Army.
And the Army, as we mentioned those at the last hearing, is the
highest in the Federal Government.
Navy's rates were also, as you can see, 6 percentage points
higher than civilian agencies.
In addition, nearly $17 million of Navy accounts have been
charged off. These delinquencies and charge-offs have cost the
Navy millions of dollars in lost rebates, higher fees, and
substantial resources spent pursuing and collecting past due
accounts.
This second posterboard shows that we found the Navy's
delinquency and charge-off problems relate to young, low- and
midlevel enlisted military personnel. The high volume of travel
and 20 percent delinquency rate for the E4 to E6 rank have had
a significant impact on Navy's high delinquency rates. The E4
to E6 in the Navy are petty officers, and for the Marine Corps
are corporals to staff sergeants. Pay levels for these
personnel, excluding supplements such as housing, are $18,000
to $27,000 a year.
As Mr. Aviles noted, DOD, the Navy, and the major commands
within the Navy have taken a number of actions to reduce the
delinquencies. For example, the Wage and Salary Offset Program
has resulted in nearly $20 million of collections of past due
and charged-off balances, and about $5 million of that, Mr.
Chairman, relates to the Navy and the Marines.
In addition, DOD has been working, as Mr. Aviles noted, on
legislation that would authorize mandatory usage of the split
payment disbursement process. We agree that mandating this
process would significantly reduce the delinquencies at Navy
and DOD.
Second, the fraud and abuse that were mention are
extensive, with nearly 14,000 Navy accounts charged off in the
last 3 years and thousands more delinquent. In addition, we
estimate that 7 to 26 percent of the transactions at the 3 case
study sites that we audited were not for official government
travel.
Potential fraud related to individuals who wrote three or
more nonsufficient funds checks to the bank as payment for
their travel card bill. For the 18 months ending March 31,
2002, 5,100 Navy personnel wrote NSF or bounced checks, while
more than 250 may have committed bank fraud by writing 3 or
more NSF checks to the Bank of America.
Abuse of the Navy travel card was significant with
purchases of jewelry, adult entertainment, gambling, cruises
and tickets to sporting events. For example, we identified 247
transactions for over $28,000 at gentlemen's clubs such as Mr.
Magoo's in Jacksonville, Florida, and Cheetah's Lounge in Las
Vegas. In addition, tickets were purchased to see the Los
Angeles Lakers and the New York Yankees.
Fifty Navy personal also used their government travel cards
to pay for prostitution at two Nevada brothels. One of these
brothels is located near Fallon Naval Air Station. The 79
charges we identified at this brothel showed up on the credit
card bill as bar or restaurant charges for James Fine Dining.
However, based upon further investigation, these charges were
for prostitution at a legalized brothel known as the Salt Wells
Villa. Account balances for 11 of these 50 cardholders were
later charged off or put into the salary offset program.
As we talked about today, we found little evidence of
disciplinary action against Navy personnel that misused the
travel card. Of the 57 cardholders with the most significant
fraud and abuse that we looked at, 20 of them had evidence of
disciplinary action. One cardholder who wrote $20,000 of NSF
checks and had their account balance charged off was recently
promoted.
Mr. Horn. Were these in the service or in the Civil
Service?
Mr. Kutz. Service. This was a service person.
Mr. Horn. OK. Now, as I've got it, you reported that 50
cardholders used their travel card to pay prostitutes, and
another 147 made almost $29,000 worth of charges at gentlemen's
clubs. Some of the charges were for very large dollar amounts.
How could this go undetected, I would ask the Navy? Fallon is a
naval air station, isn't it?
Mr. Aviles. That is correct, sir.
Mr. Horn. Well, it sounds like they have a great party out
there. But the question comes, if it is the gentlemen's club,
and it is serving a lunch or a dinner, the General Accounting
Office wouldn't worry about that one, I take it.
Mr. Kutz. If the travel card was used to buy a drink, that
would not necessarily be an improper use of the card. Drinks
and dinner, that would be an official usage of the card.
Mr. Horn. Well, any others you want to have, Special Agent
Ryan? What have you found?
Mr. Ryan. A lot of things.
Mr. Horn. You look like a happy guy.
Mr. Ryan. Thank you, Mr. Chairman.
Mr. Chairman, what we would say is that there are several
things. When we deal with the gentlemen's clubs, the
gentlemen's clubs, in my opinion, are basically deceiving a lot
of people when they conduct transactions by selling cash. They
were signed up by a merchant bank as a merchant to do bar and
restaurant charges. What we are finding in the cases not only
with the Navy, but in the Army, and found them with the Air
Force, too, is that they're selling cash to these soldiers for
10 percent. They are avoiding--the soldier is avoiding being
limited on the amount of cash that they can get because there
are limits on his ATM withdrawals.
Then they are submitting these transaction slips, these
merchants are submitting these transaction slips to the
merchant bank for $600, $700 even $1,000, saying they provided
food and drinks. That is just not true.
We found with the case with Salt Wells, because of the data
mining techniques that we did with the Army, we decided to look
at MCC codes because we felt there was deceptive MCC codes, and
in this case we came across James Fine Dining under a bar
merchant code. But the dollar amounts, as you mentioned, were
very, very high, so we actually presumed that it was for
gambling. We started doing our investigation and contacted the
sheriff's departments in a lot of the counties that we were
looking at and found out that they had never heard of James
Fine Dining, but they were aware of a place in Fallon called
Salt Wells Villas, which was a brothel.
We contacted the merchant bank and found out that James
Fine Dining was another name that was used, and the reason we
were told that they went to that was to provide confidentiality
to the cardholders who were coming in and getting services.
I think in some respects there is a part of deception on
the part of the merchant bank in disguising exactly what that
merchant is doing. Salt Wells doesn't serve any food, they do
serve drinks, but yet they classify it as James Fine Dining. We
found a lot of instances like this, Chicken Ranch, Madam
Butterfly's and other gentlemen's clubs selling cash, making
statements to banks saying that they are providing food and
drinks when in reality they are selling cash. And as part of
the investigations that you asked us to look at----
Mr. Horn. Now, who has to relate that--which regulatory
organ in Nevada or in the U.S. executive branch, who classifies
these things?
Mr. Ryan. Well, as a criminal investigator for well over 20
years, I believe a false statement to a financial institution
is a crime. I believe that when a merchant submits a
transaction slip, he is making a false statement if you can
prove that he never intended to provide, in this particular
case, food and drinks. I believe that executive law enforcement
should look at that.
Mr. Kutz and I have traveled to South Carolina and have
discussed this exact issue with law enforcement personnel in
that State, and I think they are taking it under advisement. I
think that your hearings have uncovered this. And I think it is
something that law enforcement should look at.
Mr. Horn. Mr. Secretary, why weren't these charges
detected? Do we know? In that part? Did you get the report from
GAO?
Mr. Aviles. Sir, we definitely got cueing from GAO with
respect to these specific instances. I would note, however,
particularly in the case that Special Agent Ryan has indicated,
it was not readily apparent if this was not a restaurant
because of the merchant category coding. I don't know what
expectation we can have for an agency or an activity program
coordinator, that card manager who may be hundreds of thousands
of miles away at a different duty station, to understand the
possibility that this was somehow being deceptively or
erroneously being represented.
Mr. Horn. Do you think something can be done when you find
these things, and if so, who would you--is it the bank people
that have this classification?
Mr. Aviles. Yes, sir, yes. I have communicated with both
the Department--the Defense Finance and Accounting Service and
the travel card program manager for the Department of Defense
with respect to this issue with transactions being processed
against blocked merchant category codes, as you heard Mr. Kutz
testify. There is no legitimate travel-related expense in a
jewelry store, yet we have found instances where transactions
have been processed at jewelry stores on a travel card. That is
not supposed to happen.
We're asking them to take a look at that and help us
understand how that can happen, and clearly in cases where we
believe that the merchant is being either erroneously
represented or deceptively using an erroneous category code to
reveal the--to conceal the true nature of the business.
Mr. Kutz. Mr. Chairman, with respect to the brothels, it
was particularly difficult for them to catch, because the 49
individuals that went to the Salt Wells Villa in Fallon were
all on official travel. They were not from the local command.
They were from out of town on official travel on official
orders. So that makes it particularly difficult to determine
that they were misusing the credit card, because it would have
appeared to an APC looking at transactions as if it were a
restaurant.
Mr. Aviles. And please keep in mind many different commands
were represented here, so it is not a single individual
noticing a high degree of activity at a particular merchant.
Mr. Horn. The Navy could be considering activating cards
when the cardholders travel, and then deactivating them when
the travel assignment ends. What is the problem with that, or
are you thinking about that?
Mr. Aviles. Sir, we have actually already implemented that
for commands that are executing above our target delinquency
metric of 4 percent. This was--our initial corrective actions
were intended to try to address the high delinquency rates that
we were observing, try to focus command attention to that. And
as I indicated, two- and three-star admirals come and see me on
a regular basis if their delinquency rate is high. Those are
some spirited conversations with respect to how they intend to
get back into alignment.
I would like to point out as an example, the deputy
commander at CINC land fleet publishes delinquency statistics
for subordinate commands in the fleet. This is an incredible
motivating tool, I believe, when commanders understand that
their seniors are taking a hard look at this, evaluating their
performance, and posting it up there for the entire world to
see. I have high hopes that this would result in much improved
performance on delinquency.
I believe that by tackling delinquency first, it is usually
a harbinger for other types of misuse. I don't want to put
words in the GAO witness' mouth, but clearly if you have got a
high delinquency, you may have other problems as well, so that
is what we have been focused on.
Mr. Horn. So is that the best we can do on the travel
cards?
Mr. Aviles. Absolutely not, sir. Absolutely not. Our
current statistic for delinquency as we compute it for the
month of September 2002 is that we are running about 8\1/2\
percent delinquency metric. So we're not where we need to be as
a department. What I have indicated is that we are focusing
command attention at the appropriate level. I am actively
engaged to an extent that I think is somewhat disconcerting to
some of the commanders in the Navy that I am paying so close
attention to this, and I don't intend to let go.
This is nothing to be--excuse me--this program has the
promise to deliver for us incredible flexibility and savings. I
think, as I indicated earlier, there was tremendous
misperception when it was rolled out that we were contracting
this out and that individual commands didn't have to be
involved. That is not the case.
Mr. Horn. Mr. Ryan, your General Accounting Office
testimony notes that a second class petty officer reservist,
whose civilian job was with the U.S. Postal Service, made phony
charges on his government travel card and effectively floated a
loan to his limousine company. Could you elaborate on this
scheme and what has happened?
Mr. Ryan. In this particular case, a gentleman was granted
a travel card. Our investigation determined that he filed and
became owner of a limousine service. The evidence indicates
that when he needed money, he would take his travel card and
run it through his limousine service. The limousine service
would then get the cash. Either he would pay it back, or if he
got extra cash during the month, he would go ahead and do a
credit back to his travel card account. In some cases he was
delinquent, and he floated himself 60-day loans.
He was interviewed. He admitted it, that he used the card
for personal use. He used it to go to vacation. He used it for
cash. But the one thing about it, he was not charged off. He
paid his bill. But he did--he was delinquent. He leads up to
that 8 percent or 14 percent that we are talking about. He
abused and misused his card.
Mr. Horn. Mr. Secretary, I think that putting something up
on the command deck, or something where people can see it, is a
good way to warn people. Do you think the Navy is going far
enough in disciplining cardholders who blatantly misuse their
cards for personal items, gentlemen's clubs and gambling? What
is your thinking on that?
Mr. Aviles. Sir, as the admiral had indicated with the
purchase card, when we discover incidents of misuse of either
the travel card or the purchase card, we report that
information to the appropriate chain of command for
disciplinary action. It would be inappropriate for me to try
and dictate a disciplinary outcome to satisfy my desires. We
rely heavily upon military commanders to make those judgment
calls.
In some cases with respect to travel card delinquency,
there may be perfectly reasonable instances for that. One of
the things that we have found with certain types of our
intelligence units, a member will go on travel and, because of
the nature of the assignment, be unable to file a travel claim
in a timely fashion. If this happens on short notice, and he
has not made prior arrangements for settlement of that account,
he can find himself in a delinquent status.
The commander needs to be able to have some discretion,
some ability to exercise judgment on a case-by-case basis as to
who constitutes an abuse versus an innocent mistake.
Mr. Horn. Now, you are part of the people that are over in
the Pentagon who have been cleared by the U.S. Senate? To what
degree does the service command know about all of this? In
other words, the Chief of Naval Operations, how much does he
know?
Mr. Aviles. Sir, the Chief of Naval Operations and
Commandant of the Marine Corps, we keep their staffs apprised
of information within these programs. We have a component, as
their individual commands are executing this, and I am the one
that is meeting with these--we call them echelon two commands,
those major commands--they come in to report their delinquency
status, those staffs are apprised of our activities.
Additionally, in cases of apparent misuse or severe delinquency
on a card, those chains of commands are informed of our
findings for appropriate action.
Mr. Horn. And you think the other services operate about
the same way?
Mr. Aviles. I have no knowledge of how the Army and the Air
Force operate, sir. I presume it is a similar situation.
Mr. Horn. I just wondered if the service line, all they
have to do is send to a CINC, and they could handle a lot of
these questions. And that would be the best way, if people are
having a career in the Navy and they have to know that these
fraud and waste things are important.
Mr. Aviles. Sir, I think it is consistent with any service
culture that the commander sets the tone. As the admiral
indicated in his statement, it is the tone from the top. If you
understand that your superior looks at this and evaluates your
performance on the basis of it, performance will generally
improve.
Mr. Horn. Well, this has been an interesting afternoon, and
we will probably have a hearing 3 or 4 months from now. So we
would like to know, GAO, if we can get the next hearing on that
and see where you might have looked again, or go to another
part of another service or whatever. So I would hope that you
would keep the heat on until we get it turned over. And maybe
the civilian side also ought to be looked at so we can get
things moving. So thank you.
I want to thank the people that have been helpful in
putting this hearing together. Bonnie Heald is the staff
director of the subcommittee; Henry Wray, the senior counsel;
Dan Daly, the counsel--put your hand up. There he is. And Dan
Costello, who is right next to me, professional staff that did
most of the work on the questions; and Chris Barkley, got a lot
to do after this one, and that is majority clerk. There he is.
And Ursula Wojciechowski, intern. There she is. And Juliana
French, another intern. They are down working below.
Minority staff, David McMillen, professional staff. He has
been there for a while. And Jean Gosa is the minority clerk.
And there you are.
The court reporters have been Nancy O'Rourke and Joe
Strickland--it took a lot of people to keep after all of you.
So thank you very much, and we now adjourn.
[Whereupon, at 4:05 p.m., the subcommittee was adjourned.]
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