[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]



 
                 TREASURY, POSTAL SERVICE, AND GENERAL
                     GOVERNMENT APPROPRIATIONS FOR
                            FISCAL YEAR 1998
=========================================================================

                                HEARINGS

                                BEFORE A

                           SUBCOMMITTEE OF THE

                       COMMITTEE ON APPROPRIATIONS

                         HOUSE OF REPRESENTATIVES

                       ONE HUNDRED FIFTH CONGRESS

                              FIRST SESSION
                                ________

  SUBCOMMITTEE ON THE TREASURY, POSTAL SERVICE, AND GENERAL GOVERNMENT 
                             APPROPRIATIONS

                      JIM KOLBE, Arizona, Chairman

FRANK R. WOLF, Virginia          STENY H. HOYER, Maryland
ERNEST J. ISTOOK, Jr., Oklahoma  CARRIE P. MEEK, Florida
MICHAEL P. FORBES, New York      DAVID E. PRICE, North Carolina
ANNE M. NORTHUP, Kentucky        
ROBERT B. ADERHOLT, Alabama      

 NOTE: Under Committee Rules, Mr. Livingston, as Chairman of the Full 
Committee, and Mr. Obey, as Ranking Minority Member of the Full 
Committee, are authorized to sit as Members of all Subcommittees.

Michelle Mrdeza, Elizabeth A. Phillips, Jeff Ashford, and Melanie Marshall,
                            Staff Assistants
                                ________

                                 PART 1

                       DEPARTMENT OF THE TREASURY

                              

                                ________

         Printed for the use of the Committee on Appropriations
                                ________

                     U.S. GOVERNMENT PRINTING OFFICE
40-569 O                    WASHINGTON : 1997

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                       COMMITTEE ON APPROPRIATIONS                      

                   BOB LIVINGSTON, Louisiana, Chairman                  

JOSEPH M. McDADE, Pennsylvania         DAVID R. OBEY, Wisconsin            
C. W. BILL YOUNG, Florida              SIDNEY R. YATES, Illinois           
RALPH REGULA, Ohio                     LOUIS STOKES, Ohio                  
JERRY LEWIS, California                JOHN P. MURTHA, Pennsylvania        
JOHN EDWARD PORTER, Illinois           NORMAN D. DICKS, Washington         
HAROLD ROGERS, Kentucky                MARTIN OLAV SABO, Minnesota         
JOE SKEEN, New Mexico                  JULIAN C. DIXON, California         
FRANK R. WOLF, Virginia                VIC FAZIO, California               
TOM DeLAY, Texas                       W. G. (BILL) HEFNER, North Carolina 
JIM KOLBE, Arizona                     STENY H. HOYER, Maryland            
RON PACKARD, California                ALAN B. MOLLOHAN, West Virginia     
SONNY CALLAHAN, Alabama                MARCY KAPTUR, Ohio                  
JAMES T. WALSH, New York               DAVID E. SKAGGS, Colorado           
CHARLES H. TAYLOR, North Carolina      NANCY PELOSI, California            
DAVID L. HOBSON, Ohio                  PETER J. VISCLOSKY, Indiana         
ERNEST J. ISTOOK, Jr., Oklahoma        THOMAS M. FOGLIETTA, Pennsylvania   
HENRY BONILLA, Texas                   ESTEBAN EDWARD TORRES, California   
JOE KNOLLENBERG, Michigan              NITA M. LOWEY, New York             
DAN MILLER, Florida                    JOSE E. SERRANO, New York           
JAY DICKEY, Arkansas                   ROSA L. DeLAURO, Connecticut        
JACK KINGSTON, Georgia                 JAMES P. MORAN, Virginia            
MIKE PARKER, Mississippi               JOHN W. OLVER, Massachusetts        
RODNEY P. FRELINGHUYSEN, New Jersey    ED PASTOR, Arizona                  
ROGER F. WICKER, Mississippi           CARRIE P. MEEK, Florida             
MICHAEL P. FORBES, New York            DAVID E. PRICE, North Carolina      
GEORGE R. NETHERCUTT, Jr., Washington  CHET EDWARDS, Texas                 
MARK W. NEUMANN, Wisconsin             
RANDY ``DUKE'' CUNNINGHAM, California  
TODD TIAHRT, Kansas                    
ZACH WAMP, Tennessee                   
TOM LATHAM, Iowa                       
ANNE M. NORTHUP, Kentucky              
ROBERT B. ADERHOLT, Alabama            

                 James W. Dyer, Clerk and Staff Director









  TREASURY, POSTAL SERVICE, AND GENERAL GOVERNMENT APPROPRIATIONS FOR 
                                  1998

                                           Thursday, March 6, 1997.

                       DEPARTMENT OF THE TREASURY

                               WITNESSES

HON. ROBERT E. RUBIN, SECRETARY
GEORGE MUNOZ, ASSISTANT SECRETARY FOR MANAGEMENT AND CHIEF FINANCIAL 
    OFFICER

                  Opening Comments From Chairman Kolbe

    Mr. Kolbe. The Subcommittee on Treasury, Postal Service and 
General Government will come to order. This morning we have, as 
a wrap up to the Treasury part of our hearings, we have 
Secretary Rubin and Assistant Secretary Munoz. Assistant 
Secretary Munoz was with us yesterday as well.
    This is our last hearing with Treasury in this cycle, the 
fiscal year 1998 appropriations cycle.
    Mr. Secretary, I just want to say that with very few 
exceptions I have certainly been very pleased with what I have 
learned about Treasury operations over the past few weeks, and 
I feel like I've been getting a crash course. As someone who 
has not been on this subcommittee before it's been a lot of 
work to get up to speed, and I certainly wouldn't say I'm 
there.
    But I have certainly been impressed by the facets of 
Treasury law enforcement which runs the gamut from gang 
reduction--reducing violence in our streets, to a very major 
component, of course, with Customs and drug interdiction, to 
tracking the high tech criminal through intelligence networks.
    I think we've come a long way, and I give you a lot of 
credit for this, since the days of the good old boys round up, 
and last year's challenging efforts to try to get the Tax 
Systems Modernization plan on track--though we'll have some 
more issues in that to deal with.
    I was certainly pleased yesterday with Deputy Secretary 
Summers and his testimony. I think my friend and colleague, 
Steny Hoyer, said it best: once Treasury starts paying 
attention to a problem, they do a very good job of getting it 
fixed. The problem seems to have been getting Treasury 
sometimes to pay attention.
    And I appreciate the hard work and the dedication of both 
Treasury and the IRS in addressing the really serious problems 
of the TSM program in IRS. The candor with which you, Deputy 
Secretary Summers and Mr. Gross have addressed this thing I 
think has gone a long way to defusing what otherwise would have 
been a very, very contentious issue here in this subcommittee.
    So we've taken some big steps, but we're clearly not there 
yet, and I'm going to have some questions for you on that. So 
we've, I think, gotten the attention on the IRS and the TSM 
issue, and I certainly hope that we can keep it.
    I want to repeat to you a commitment that I made yesterday 
to Deputy Secretary Summers, and that is that if you people 
bring us a TSM plan that works, we will fund it.
    I also said I hope you will understand the skepticism with 
which we approach this. This is not a partisan issue, because 
you can go back 20 years and look through at least 4 major 
efforts at modernization that have failed miserably within IRS. 
So it has nothing to do with which administration or who is in 
charge there.
    It has to do with the complexity of the tax code. It has to 
do with the complexity of the problems that we have to deal 
with. So we're going to be very skeptical of this, and ask--I 
hope--some intelligent and tough questions about it, but I can 
tell you that this subcommittee will fund a TSM plan that works 
if you bring one to us.
    Having said that, let me just share with you a couple of 
the other concerns that I have, and I have spoken to some of 
the component parts of Treasury when they have been before this 
subcommittee earlier.
    One is the continuing allegation of corruption along the 
border in Customs. I think it's serious. The allegations are 
serious. They have been numerous, more numerous than with many 
of the other agencies, and I think aggressive action has to be 
taken in this regard. I can't think of anything that will 
undermine our credibility, or ability to interdict drugs than 
to have a public perception which is to some extent taking hold 
along the border in my area, that there is widespread 
corruption.
    We need to assure the integrity of our drug interdiction 
efforts.
    Second is technology investment. We have some of the 
appropriate investment review processes in place for IRS, but I 
think one of the questions we need to look at--and I'll have 
some questions in this area--is the technology investments that 
are being made in other areas of the Treasury and making sure 
we are reviewing those investments, and that we're making wise 
decisions.
    And lastly, again which I'll address some questions to, is 
the funding for law enforcement within Treasury, that component 
of our Federal law enforcement program, versus the Justice 
programs.
    Quite honestly, I'm just not convinced that Treasury is 
getting its fair share. I can fight that battle here with my 
counterparts in Appropriations subcommittees, and authorizing 
committees, but I want to address with you the question of the 
battle, or what you do within the administration to assure that 
we're getting an adequate share of law enforcement funding 
within the Treasury Department.
    Having said that, let me turn to my ranking member, Mr. 
Hoyer here, for his comments.
    Mr. Hoyer. Thank you very much, Mr. Chairman. As I have 
said, Mr. Secretary, and you have probably heard me say it, I 
think the Treasury Department and all of the agencies that come 
within the purview of this committee are advantaged by the fact 
that we have as our new chairman Jim Kolbe. As I've said in the 
past, and you have, I'm sure, already determined, Mr. 
Secretary, he is one the brightest and most thoughtful members 
of the Appropriations Committee and of the Congress. He 
threatens to use that in his next campaign.
    Mr. Kolbe. Mr. Hoyer, I assure you, that you're going to be 
a household word in Arizona before my next campaign.
    Mr. Hoyer. Mr. Haywood thinks I already am, apparently, on 
the other side.
    The fact of the matter is that the chairman has raised many 
of the important issues that I'm sure we're going to discuss in 
this hearing that you have been addressing. In welcoming you to 
this committee, as the Secretary of Treasury, I want to say 
that I think the country is greatly advantaged by your agreeing 
to leave a very, very profitable experience in the private 
sector to come into government with this administration--early 
on in the White House, and then subsequently as the head of 
this critically important department.
    I think the numerous newspaper articles and comments that 
people have made are absolutely accurate. As somebody who has 
had the opportunity to work with you since before you came into 
government, when you were in the private sector, and who was a 
great admirer of yours, I think that they capture the essence 
of Bob Rubin correctly when they describe you as an individual 
who is interested in results.
    I was kidding the Secretary--I know of no secretary that I 
have served with, frankly, at the national or at the State 
level who is easier to work with, more open to suggestions, and 
more positive in approach.
    And I think America has benefitted by your service, Mr. 
Secretary, and I look forward to hearing your testimony, and to 
working with you as we try to solve some of the problems. And 
I'm going to ask some questions on what we're doing in the 
economy, which I obviously think is good. To some degree we 
ought to take credit for that. When I say we, those of us who 
supported the economic program of 1993, I mean.
    But in addition, your steady hand at Treasury, I think, has 
been a significant--both from an international standpoint and 
domestic standpoint--reason for the performance that we've had. 
And I welcome you here.
    Thank you, Mr. Chairman.
    Mr. Kolbe. Thank you very much. Mr. Secretary, your full 
statement, of course, will be placed in the record. If you 
would like to summarize it, we would be happy to have you do 
that, and then we will go into questions.
    I might say that the Department has gotten better, during 
the last couple of weeks as the hearings have gone on. Mr. 
Munoz was wonderful in summarizing his statement yesterday. He 
did it in one sentence--but you don't have to do it in one 
sentence, Mr. Secretary.

                  Opening Statement of Secretary Rubin

    Secretary Rubin. I have submitted a statement for the 
record, and let me summarize it in brief.
    Let me start, Mr. Chairman, by saying that we worked 
together on trade issues over the last 4 years, and I would 
echo Mr. Hoyer's comments. We enormously welcome your 
chairmanship, and look forward to working with you.
    We have also had a very good working relationship with Mr. 
Hoyer, and I said the other day as we were talking about 
preparation for this hearing that in the two years--a little 
over two years now--that I've been Secretary of the Treasury 
the relations with this committee has really been a very useful 
and constructive one.
    I think without question, as we focus on the tax issues, 
that you have played a major role in causing us to pay the 
attention that it deserved. And now what we need to do is not 
only pay attention at the moment, but also to institutionalize 
that, and that's what we're going to do.
    Our overall budget, as you know, was designed to continue 
and build on the debt reduction of the last 4 years, and to 
balance the budget, and the Treasury budget was constructed 
within that context.
    My written testimony discusses all the various areas that 
Treasury plays a major role in. Without going through them all, 
let me just say that we have an enormous breadth of activity, 
from the IRS and tax policy; economic policy; international 
economic operations; to roughly 40 percent of the Federal 
Government's law enforcement officers, and then a very large 
manufacturing--what I think of as a manufacturing and 
processing center, manufacturing the nation's currency; 
payments for many of the agencies of the Federal Government, 
and the like.
    We have submitted a budget request of $11.7 billion. $500 
million of that, as you know, is a no year request with respect 
to TSM. So that leaves you $11.2 billion on an operating basis, 
an increase of about 4.2 percent. That's basically current 
services for the great breadth of Treasury, and then additional 
funding for some special initiatives.
    We are also one year ahead of schedule in terms of 
complying with the GPRA, and I think that's real tribute to 
George and the people who work in management, and our 
commitment to strategic planning and to focusing on what we're 
spending and what we want to get for what we're spending--to 
use Mr. Hoyer's word, ``results.''
    Our 1998 request includes what we consider to be a 
requisite funding for the Departmental offices, because that is 
where our policy operations are housed. And I can tell you, Mr. 
Chairman, in the policy deliberations of the Administration, 
Treasury is actively involved in the great preponderance of the 
issues.
    We thought it was very, very important to continue to 
attract and retain outstanding policy people. And that takes 
place predominantly, but not totally, in Departmental offices.

                            law enforcement

    Having said that, let me focus briefly on 3 key Treasury 
missions, and the budget request for them. As you know, with 
respect to law enforcement, as I said a moment ago, we have 
about 40 percent of the Federal Government's law enforcement 
officers, who focus on a broad array of issues.
    The funds requested will enable us to decrease the flow of 
guns to juveniles. We have a Kids and Guns initiative which has 
been very successful. I think it's in something like 17 
demonstration cities. We've had applications from many more 
cities. We'd like to expand that program.
    We have very active Customs operations, as you know. But as 
we put in place effective Southwest border operations, or 
operations in the Caribbean and the Virgin Islands, then 
smugglers shift their resources, and we have to strengthen the 
areas that they shift to. And that's part of what we're looking 
for in terms of Customs.
    Financial crime is an area of special focus in Treasury, 
and there are really, in the broadest sense, two pieces of 
that. One area is credit card fraud, and telephone card fraud, 
and the upcoming issues that could exist with respect to 
electronic money--all of this is becoming enormously more 
important as value is transferred not by cash, but by other 
mechanisms, all of which have the potential for fraud, an area 
of Treasury's jurisdiction.
    Another area that I think we need to particularly focus on 
as we go forward is money laundering. It obviously has the 
potential for destabilizing financial institutions, not only in 
this country, but abroad. But I think there's maybe in some 
ways an even larger issue, which is that while those who run 
organized crime or drug rings can almost always separate 
themselves from the people they have on the street, they can't 
separate themselves from their money.
    And so as they seek to launder their illegal profits, it 
provides a vulnerability that we can get at. We have had a 
tremendous focus on employing our resources around this area of 
money laundering.
    ATF continues its focus on decreasing explosive and arson 
crimes and in the context of the anti-terrorism effort, 
expanding our activity with the canine explosive detection 
program, and an arson clearinghouse.
    We are also seeking to upgrade enforcement equipment, and I 
had a discussion the other day with somebody about the 
automobiles that we use in Treasury, and how outmoded most of 
these cars are. There is a real need to bring our equipment up 
to date, and to also make sure that FLETC, the Federal Law 
Enforcement Training Center, is in an appropriate state.

                   managing the government's finances

    In terms of managing the Government's finances, our primary 
focus there is the IRS. You discussed that yesterday with Larry 
Summers. Let me just say, as he said, that I think we have 
accomplished a great deal. I do believe that we really have 
made a sharp turn with respect to TSM, but, having said that, 
as was related in a New York Times article of some weeks ago, 
these problems with respect to systems in TSM started decades 
ago, and problems that are decades in the building are not 
going to be solved quickly.
    But if we do this right, if we go at it right, and work 
together, I believe that we can build on what we have done so 
far to get this on the right track, and over time we can 
provide the IRS with what it needs, which is modern systems 
capability.
    We have made enormous changes. I think Larry Summers went 
through them with you. I won't repeat them here. But I would 
just like to say that we're going to institutionalize the 
capability, the oversight capability that we have in place at 
Treasury, and I think, with that and various other steps we're 
planning to take, we are doing things that will get this on the 
right track.
    We are also, in the area of financial management, very 
focused on electronic money. I believe that the electronic 
transfer of value is going to become an ever larger part of our 
economy, and we've got to figure out what the regulatory 
response to that should be. And we don't have views on that at 
the moment, but we have spent a lot of time on it, and at some 
point we'll fully develop our views.

                             world economy

    Finally, promoting a prosperous world economy, we are very 
active in the international economic operations, or activities 
of the Administration, Russia, Bosnia, Mexico, and the rest.
    This area is not under your jurisdiction, but it is our 
absolute conviction that if we're going to maintain our 
leadership position, we have to fund--meet our arrears and 
negotiated commitments--the World Bank, the IMF, the sister 
banks of the World Bank, the United Nations, and the rest. And 
that's not in your jurisdiction, but the support function at 
Treasury that works in this area is in your jurisdiction.

                     economically distressed areas

    Finally, Mr. Chairman, Treasury has been very active with 
respect to this whole question of inner cities, and people 
living in distressed areas, and bringing the residents of 
economically distressed areas into the economic mainstream.
    There are a lot of things we have done in that respect. One 
of our principal initiatives is the CDFI fund, which 
unfortunately is not in this subcommittee. We're asking $125 
million this year. It's a vibrant, successful program. It's 
robust. We believe it should be in this subcommittee, because 
we think it would get more systematic attention in this 
subcommittee, and it is an integral part of Treasury.
    That's a matter that is in your province to accomplish, not 
Treasury's.
    Let me conclude by saying something I said at the beginning 
of my remarks, which is that we have worked very well with this 
committee, certainly in the two and a half years I've been 
here. But I think that is a longstanding tradition.
    The committee really has played a very helpful role. It has 
sharpened our focus on the problems of the IRS. You've been 
very helpful in the law enforcement area, an area in Treasury 
that sometimes tends to get a touch overlooked. And I think 
it's very, very important that Treasury law enforcement bureaus 
receive appropriate funding so they can perform their vital 
missions.

                       treasury department staff

    And finally one of the things that has struck me at 
Treasury, and I often say this when I speak, is that Treasury 
has an enormous number of extraordinarily capable people. It 
has been a very strong positive for me, and I would say a 
little bit of a surprise to find the extraordinary number of 
people of great ability, who are dedicated and committed, and 
who really do a remarkably good job at the various things that 
they do.
    They very much deserve our respect and our support, and I 
think we all need to work together, particularly as we go 
through the difficulties of reaching a balanced budget, to make 
sure that we can continue to attract and retain and motivate 
the kinds of extraordinary people that make Treasury the 
institution that it is.
    With that, Mr. Chairman, George Munoz and I would be 
delighted to respond to whatever you would like to discuss.
    [The information follows:]

[Pages 8 - 12--The official Committee record contains additional material here.]

    Mr. Kolbe. Thank you very much, Mr. Secretary. Let me just 
say once again that we'll do the questioning in the usual way, 
which is myself and the ranking member, and then in the order 
in which the members were in the room at the time we started or 
as they come in.
    And we will try to adhere to the 5 minute rule. I'll tap 
gently, but I don't want to cut anybody off in the middle of a 
question or a line of questioning. But I think we found it 
works very well, to make sure that everybody gets to have 
several rounds of questioning that way.

                        law enforcement funding

    So I will begin. Let me ask you one in the area of budget 
that I alluded to. You mentioned again in your testimony 
thereabouts, Treasury's share of law enforcement funding.
    As I look at the budget figures, I have to tell you that it 
does concern me. I was just looking at a chart here of Justice 
versus Treasury, over the last--this is over 2 administrations, 
from 1990 through 1997.
    For example, in Justice, DEA is up 79 percent; INS is up 
160 percent; FBI is up 70 percent. You come over to Treasury 
and you look at Customs, it's 30 percent; Secret Service, 49 
percent; BATF is the only one that comes close, 63 percent, but 
it's still under the lowest, FBI, of the Justice Department law 
enforcement agencies. The Marshal's, by the way, is up 110 
percent in Justice.
    And if you look at this year's, comparing Customs and INS, 
Customs is up--even though 38 percent of its effort, according 
to its figures, is drug interdiction, its budget is up 3 
percent. INS, which has 15 percent--it's more responsible for 
controlling the immigration along the border and throughout the 
country, so only 15 percent of its effort is supposed to be in 
drugs, and its budget is up 13 percent.
    If you separate out the drug parts, from INS, the drug part 
is up 15 percent; the Customs' drug part, which is so much 
bigger, is up 5 percent. Customs, we're told over and over, is 
the front line of our defense on the interdiction effort, drug 
interdiction effort.
    And I just--I question whether or not we're really getting 
the attention to this that it deserves, and I would like some 
assurance, I guess, from you--I don't know what process you go 
through with OMB, or the White House or whatever--that you're 
making the case for the law enforcement efforts in Treasury, 
most particularly Customs, which is supposed to be our front 
line in drug interdiction.
    Secretary Rubin. I think your point is well taken, Mr. 
Chairman. Let me just make a few comments, if I may. One is 
that--I'm told by people who have been at this for a long 
time--that the working relationship between Treasury and 
Justice in the law enforcement area is A) good, and B) on a 
relative basis, better than it's been since these people can 
remember.
    I think that is very important, because it's extremely 
important that the two institutions work together effectively. 
As I say, a lot has been accomplished in that regard.
    As to the funding, I think it is very important that we do 
not have a national police force. From the beginning of this 
nation there has been this notion that you have Federal, State, 
and local police, and then within the Federal Government you 
have police powers in different agencies. It's a very sound 
principle for all sorts of reasons.
    But if you're going to do that, then you have to make sure 
that people get treated equitably, which is my point, and I 
agree with you.
    In terms of the Administration, because I've personally 
been integrally involved in our overall budget operations, I 
really have two opportunities to do this. George and I present 
the Treasury budget, certainly very forcefully, and I think we 
have effectively advocated sound funding with respect to 
Treasury law enforcement.
    And then there is an overall budget group, which I am part 
of, so I took the opportunity to see how different things were 
being done.
    The OMB people and the Administration generally have been 
very responsive to the needs of the Treasury law enforcement 
agencies, though there has been disproportionate funding, which 
is I think something that needs to be focused on each year and 
very intensely.
    On the congressional side, I don't know how you all 
function, but it seems to me it is very important, since the 
Justice bureaus tend to have a higher profile--especially the 
FBI--that this committee very forcefully advocate what they 
think is right for Treasury.
    Mr. Kolbe. Well, I assure you that we will, that I will, 
and this takes place through a process that includes the 
discussions with the other chairmen of the subcommittees, and 
the full chairman of the committee, plus the leadership as we 
come to what's called the 602(b) allocations, where we divide 
the money up under law enforcement.
    We get it in a function, and then we have to divide it up. 
But I have to tell you, it makes it tougher when we have in 
front of us requests from the Administration which so clearly 
emphasize the Justice programs and not Treasury law 
enforcement.
    Secretary Rubin. Well, I think that's a valid comment. I 
don't actually know how we did this year relative to Justice, 
but I can assure you----
    Mr. Kolbe. Well, I gave you those figures a moment ago.
    Secretary Rubin. Were those one year figures?
    Mr. Kolbe. The one year figure is 3 percent for Customs. 
This is just Customs only.
    Secretary Rubin. Yes.
    Mr. Kolbe. 3 percent versus 13 percent for INS. So 4 times 
as much in INS. 3 times as much if you separate out the drug 
function.
    Secretary Rubin. OMB had actually said to us at one point 
that they were going to focus on equitableness of funding 
between the two.
    I'm outside of my expertise so I'll go carefully on this--
but I think there was a special issue with respect to INS that 
may have resulted in that funding.
    Mr. Kolbe. Let me just ask, you said----
    Secretary Rubin. But I will say we do everything on our 
part, because the principle is right. Now, as I said, my 
impression is there are certain circumstances with respect to 
INS, or at least there were deemed to be.

            office of the undersecretary for law enforcement

    Mr. Kolbe. My time is about up, so I just want to ask this 
one other question. I don't feel I have a very clear idea, and 
maybe you can help me clarify this, about the Office of the 
Under Secretary, Mr. Kelly, for law enforcement.
    Do you see this as an operational entity, or an oversight 
function? It's not clear to me in the organization chart 
exactly how he fits in here.
    Secretary Rubin. Well, it's a good question, and I think 
that that has evolved some over even the time that I have been 
there. Not necessarily in the dichotomy that you mentioned, but 
in terms of what--if you look back at the Waco report--I don't 
know if you have read that or not, but it was really a very 
good piece of work. We can see what Mr. Hoyer thinks.
    But my view is that you need is an effective and 
professional oversight capability that is able to exercise 
serious oversight of the law enforcement bureaus. I think 
that's what it's function ought to be.
    When you talk about very major operations, if that's what 
you're asking--I don't think you should have a shadow head of 
each of these institutions. I do not believe that.
    But I do think when you have very major operations, that 
those should get a review. One of the criticisms of the Waco 
experience at Treasury, as you know, is that none of it was 
reviewed at the Assistant Secretary--there was no Under 
Secretary then. There was a feeling on the part of many, 
including many in Congress, and I think rightly, that there 
should have been a greater review, and that was one of the 
conclusions that was drawn from this.
    And so what Under Secretary Kelly is doing, and I think 
rightly doing, is building the capability to perform that 
function effectively. And also there needs to be a strong 
policy operation in the Under Secretary's office.
    Mr. Hoyer. I'd like to just follow up on what you said, Mr. 
Chairman, and what the Secretary has said. As someone who went 
through Waco from beginning to end, I think sometimes we learn 
lessons from incidences which aren't there.
    And what happened in Waco, from my perspective, is that the 
oversight within ATF left to the law enforcement side the 
oversight of that--not even at the Director's level. Because 
Higgins, of course, came out of regulatory side, he had served 
with the law enforcement people for a long time, and 
effectively allowed them to be the overseers of that operation.
    So it did not get to the secretary level. Director Higgins 
essentially knew about it, had been informed about it, agreed 
on it, but of course what ultimately happened in Waco was that 
a grievous error was made on the ground at the time of the 
implementation of the effort to arrest Koresh and others at the 
site.
    They were found out, and they should have aborted, and they 
didn't. That was the ultimate mistake. But I agree with the 
Secretary, Mr. Chairman, in the sense that I think that we now 
have some extraordinary leaders of the component parts of our 
law enforcement in Treasury, and that Assistant Secretary 
Kelly's role is not as the operating head of the agency, but as 
the CEO to whom the operating agencies report to insure that 
policy is being implemented properly and procedures followed 
properly.
    And to that extent, Mr. Secretary, you and I agree, and I 
think that works well. And particularly now, when you have John 
Magaw at ATF. He is an outstanding law enforcement official 
himself, as well as having a keen understanding of the 
regulatory side. ATF has two roles to play.
    But I agree, and think that's an important issue. And as 
I've mentioned on a number of occasions, Mr. Secretary, the 
Waco report from Treasury is the best example I know of an 
agency looking at itself in a very critical, but also 
constructive way.
    That report really said, look, we messed up in this, this 
and the other area. It took personnel actions, as you know. 
Some of those were reversed, at least partially. But 
nevertheless they took corrective action. And although I don't 
want to pick on Justice, the Justice analysis was far less, 
self critical or useful because of that.

                       tax systems modernization

    Mr. Secretary, let me ask you a couple of questions, first 
on Tax Systems Modernization. Deputy Secretary Summers did 
respond. You have mentioned it in your opening statement 
briefly.
    There has been some suggestion about privatization--not 
privatization necessarily, but splitting off IRS as an 
independent agency. I personally think that would be a mistake, 
but I would like to hear your thoughts on the record on that 
issue.
    Secretary Rubin. I've also heard the thought put forth. I 
think TSM is clearly an area that is absolutely essential. You 
cannot have an IRS that does not have modern systems 
capability. We've got to get there.
    I think that the kinds of things that we're doing today at 
Treasury, and the institutionalization, through Executive Order 
or otherwise, plus additional things we can do, will provide 
us, and I think are in the process of providing us with the 
right program to get what we need to get.
    And there really has been a sharp turn. I think the notion 
of splitting the IRS off would be precisely the wrong thing to 
do, because that will reduce the probability of getting--I feel 
this way very strongly--what we need to get, instead of 
enhancing it.
    There is a notion around that, if you can just get a few 
private sector people to oversee this, that somehow that 
willdeliver us. I was in the private sector for 26 years. I've been 
here now for a little over 4 years. There are enormous differences 
between managing the private sector and the public sector, and I think 
we need to recognize those when you think about structure and 
governance.
    I do think the MMB was a very good idea--it was Mr. 
Summer's idea, as far as I know. It certainly wasn't my idea. 
That I do know. But I think it was a very, very good idea. And 
as you know, we have people from OMB and a performance review 
on that.
    I think it is that kind of proactive oversight that we 
needed. We've been very receptive to having the input of 
private sector people. The question is how do you structure 
that.
    One thing you surely do not do, at least that I think would 
be just the opposite of a constructive approach, would be to 
split IRS off from the Treasury. There is also the very serious 
problem of how you would then handle the integration, which 
exists today, between the tax policy people in the Treasury and 
the people who perform similar functions in the IRS, because 
they work very closely together, and that is, as you know, a 
critical component of the administration of the nation's tax 
law.
    Mr. Hoyer. Mr. Secretary, I have a number of questions, but 
the last one I'll ask on this round is--I'll preface it with--
--
    Secretary Rubin. Can I add just one more thing, Mr. 
Chairman? You know, I've been here 4 years now. I have a 
general belief that the way you get things right is to have 
accountability to elected officials. I really have come to 
believe that very strongly.
    And what you have right now is accountability to elected 
officials. And ultimately it's the President, but in this case 
it's the Secretary of the Treasury, Deputy Secretary and the 
rest. And partly through the efforts of this committee and 
partly for other reasons we have become very much focused on 
the IRS, and I have no doubt that the Treasury will continue to 
be that way going forward, while we're here and whoever follows 
us is here.
    It's that kind of accountability that provides the key to 
doing what needs to be done.

                       mexico's present situation

    Mr. Hoyer. Thank you. On the issue of Mexico, and our loan 
to Mexico, I was one who thought that your leadership in this 
area, as well as in others, was extraordinarily good. I think 
your advice and counsel has proved to be excellent, and we were 
successful in this effort.
    But I would like you to comment on Mexico's present 
position, its stability. Obviously they have paid us back. We 
made a profit on our loan. They paid us back early, but how do 
we see them as our NAFTA partner, and their stability at this 
point in time?
    Secretary Rubin. At the time of the support program, we 
said it was enormously in our economic and national security 
interest that Mexico have a healthy economy, and I believe that 
unquestionably.
    We also said there are no certainties in life, and Mexico 
was facing extremely difficult conditions. In our judgment in 
that context the right thing for this country to do was the 
support program.
    If you bring that concept now to the present day, you have 
a Mexican president for whom I have developed enormous respect. 
The things that he did in putting in place his economic program 
were tremendously courageous. And they have had real effect, 
though there are many economic challenges left in Mexico.
    I believe that the best thing that we can do in terms of 
trying to maximize the probability that Mexico will deal with 
its very considerable problems--and they are very 
considerable--social problems, political problems, economic 
problems, and issues of corruption and drugs--is to support a 
courageous and honest president.
    And so that leads me to believe that we did the absolutely 
right thing with respect to certification. But we all need to 
recognize that we are dealing with a country that has enormous 
challenges to meet.
    Mr. Hoyer. Thank you.

                        internal revenue service

    Secretary Rubin. Could I say one more thing on the 
independence question? There are many issues in the IRS. It is 
also a vital national asset. As I go around to other countries 
and meet with finance ministers, this Internal Revenue Service, 
for all of its problems, is in some sense the envy of the 
world. We have something like an 85 percent compliance rate, 
voluntary compliance rate, which is pretty much unheard of 
around the world.
    It is a vital national asset. It has problems. We recognize 
that. We have to deal with them. They will not be solved over 
night. But it is enormously important that we work together on 
these in a constructive fashion.
    I think there are temptations sometimes for people to use 
those problems to advance other purposes, and that is really 
not constructive and not in the interests of this country.
    Mr. Hoyer. Thank you, sir.
    Mr. Kolbe. Mr. Istook.
    Mr. Istook. Thank you, Mr. Chairman.
    Mr. Secretary, good to be with you this morning. I would 
like to explore with you part of the area that has to do with 
your Department as the core center for economic policy 
development. But I want to get into a particular area, because 
I think it is of enormous impact right now.

                          clean air standards

    This deals with the proposed new regulations on clean air 
standards from the EPA, the Environmental Protection Agency. I 
am aware that although the EPA has submitted what they say is 
an estimate of $8.5 billion a year as the cost of its 
proposals, the Council of Economic Advisors calculated in a 
memo in December that the cost of the ozone rule of that they 
estimated would be about $60 billion, compared to, on that 
factor, an EPA cost estimate of $2.5 billion.
    Now, I don't expect you, of course, to be focusing on all 
the details of the environmental impact. I know that you want 
clean air. I want clean air. That goal is not in question.
    What is in question is the level of the benefit, compared 
to the level of the cost, and whether we have an accurate gauge 
of each of them. Your expertise, of course, has to do more with 
the area of the cost, not the benefit.
    But since there are some conflicting figures coming out 
from within the administration, since you act as a 
clearinghouse for generalized, broad-based economic impact, and 
this one is about as broad as it gets, could you expand for my 
benefit, and that of others what is going on within Treasury, 
within the administration on trying to get a correct handle on 
that?
    Is there a problem with the initial figures from the EPA? 
What's under way, and how is it being approached?
    Secretary Rubin. You raise an important question. Let me 
give you a process answer, if I may, because I don't know the 
substantive answer. I just had a memo from our Assistant 
Secretary for Economic Policy over the weekend--actually, 
that's not true; he gave it to me a week or so ago, but I 
didn't have a chance to read it until last weekend--in which he 
talked about a number of the environmental issues the 
administration is dealing with, and the processes that are 
going on therewith.
    With respect to the Clean Air Act, which I really have no 
personal knowledge of at all, I wrote back a note to him that 
said the National Economic Council--which is really responsible 
for dealing with issues that aren't ordinarily thought of as 
economic, but have very large economic ramifications--needs to 
get its arms around this and work with the EPA and with 
environmental people in the White House to sort out what we 
think in terms of the benefits. As you say, we all want clean 
air. I happen to think it's a very, very important thing we're 
doing.
    But what are the costs and how do we deal with all of this? 
I don't really have any wisdom for you other than to say it's 
very important that we have the appropriate process around 
this, and I am confident we will.
    Mr. Istook. Let me urge you, then, because I recognize that 
your position is--I'm just going to refer to it as the 
clearinghouse position. Certainly there are the different 
councils, there are the different assessments and different 
departments, but you are there at the heart of the matter.
    I would certainly encourage you to, at the Department 
level, try to bring these differing groups that are trying to 
assess this together. More and more we are hearing from the 
cities, we are hearing from the business, and we are hearing 
that this could have tremendous potential crippling effect on 
jobs in the country, on economic development, and to not create 
any appreciable improvement in air quality, and in the health 
that can follow from that.
    I am not asking you to, you know, share whether you think 
that is accurate or not, but I am asking that you make an 
effort, because I think you are in the key position, to bring 
those forces together.
    You are in the key position to have a more coordinated 
approach within the administration. I would encourage you to 
take the initiatives to do that.
    Secretary Rubin. I just made a note for myself when I get 
back to call Gene Sperling, who is head of the NEC, and who is 
really doing a very good job. And I'll talk to Gene about this, 
because we clearly need to have a process--there is a process 
around this, but I'm just not quite sure where it stands.
    I think your point is well taken. This is a major economic 
issue, and we need to make sure the economic considerations are 
properly analyzed and weighted.

             privitization of the internal revenue service

    Mr. Istook. I did have a question with regard to the IRS 
also, if I can shift to that. There's been a lot of discussion, 
of course, not just of the Tax Systems Modernization, but 
issues about what work by the IRS potentially might be 
privatized, and thereby improved, because you get around some 
of the inherent problems that you have in the government's 
ability to conduct operations on this scale.
    In that, of course, there is proper concern about issues of 
privacy, when you're dealing with an individual's tax return. 
What I would like to ask is, recognizing that it's an issue, 
it's a valid issue we both share, have you done any assessment 
as to how this relates to other privacy issues within the 
Government? And I'm talking about with private sector 
involvement.
    Tremendous amounts of the intelligence community work is 
done by the private sector, and certainly that's at the highest 
levels of secrecy and national security. The same is true for 
the defense industry as a whole. The Commerce Department has to 
deal with a large number of trade secrets and confidential 
economic information.
    I would appreciate it, if you don't already have it, if 
your Department is able to pull together an assessment of the 
significance of the privacy issues regarding privatization of 
some IRS work, as it compares with privacy issues and secrecy 
and confidentiality issues as they are handled by other areas 
of government, and compare the level of success or non-success 
with what we might anticipate within the IRS.
    Secretary Rubin. Two comments on that. One, it's a very 
good suggestion. George is handing me a note. Let me see what 
it says.
    I think I might ask George to read his own note. We should 
see what is the optimal outsourcing. That is the question we 
need to face ourselves.
    My own instinct, and I know it's very much Larry Summers' 
instinct, is that in this whole TSM thing that we have to do a 
lot more outsourcing. And we actually have. It's my 
recollection that we've increased our outsourcing from roughly 
40 percent to roughly 60 percent. And there are no secrecy 
issues so we don't have the problems that you are raising.
    As you get into debt collection and other kinds of 
activities, you obviously get into much more sensitive areas. I 
don't have a personal view of the question of privatizing debt 
collection. I know some in the Congress have an enthusiasm for 
it. They may be right. I don't know.
    But the secrecy issues bother me a little bit, and we 
haven't sorted our way through all that. But we have talked a 
fair bit about the importance of protecting confidentiality. 
But you make a very interesting point--comparing it. If we've 
done it, I'm not aware of it, and it's a very good idea.
    Mr. Istook. Because I think it's been kind of looked at in 
a vacuum, as though this was the only area of government that 
involved that issue, secrecy or privacy.
    Secretary Rubin. But you raised it in the context of, for 
example, privatizing debt collection, or were you raising it in 
the context of privatizing the whole of the IRS?
    Mr. Istook. Processing returns. Actually in the whole 
scale, whether it may be debt collection, whether it may be the 
processing of returns, and really just as we're having to look 
in the TSM process at the issue of the capability of government 
to take on a task such as that.
    There are the parallels with FAA and so forth. So, too, I 
think, as we consider this potential privatization, or 
outsourcing, we need to look at the broad issue of whether the 
private sector can deal with the issues of confidentiality 
equally as well as the government can, as far as looking where 
there's been violations, is it really getting more significant 
in one than the other.
    Secretary Rubin. Just contextually, my view is that, as I 
said before in response to Mr. Hoyer, we've got the governance 
of this thing about right. There may be some changes we should 
make one way or the other, but I think the basics we've got 
about right.
    I think within that context we can rely on the private 
sector a great deal more, subject to various caveats, one of 
which is the issue you raised. George?
    Mr. Munoz. In fact because of TSM we did start looking into 
the whole area of outsourcing with security requirements. And 
it's really in that context that we have taken a very close 
look at it.
    All of our procurement requirements for outsourcing put 
high premiums on security clearances and security procedures. 
Beyond that, all I can say is that we approach these things 
extremely cautiously because there is the reality of possibly 
having a similar level of risk on confidentiality, but then 
there is the perception problem because, as the Secretary has 
said, we enjoy a very high level of confidence from the 
taxpayers' point of view in compliance.
    Mr. Istook. I won't engage on that issue.
    Mr. Munoz. But at least from the point of view of 
compliance, there's a sense of fair share, fair administration, 
and we want to make sure that if we get out of the box, at 
least from our systems, that we approach it extremely 
cautiously.
    Mr. Istook. Thank you. I look forward to further 
information on that.
    Mr. Kolbe. Mrs. Northup.
    Mrs. Northup. Thank you. Secretary Rubin, there are a 
number of questions I would like to ask you. I'll do the first 
five minutes here.

                       bank regulatory compliance

    The first thing is that I hear from banks all the time 
about the cost of compliance with the regulatory agencies, and 
this drives up their costs to their consumers, of course.
    One of the things in particular that they talk about is 
that because there are all these laws, particularly in trying 
to protect against money laundering and drug operations and so 
forth that they feel like these regulations, in the end--quite 
honestly, the statement they make is, they spent all their time 
prosecuting us for--and they would maybe say persecuting--but 
prosecuting us for administrative mistakes, mistakes their bank 
clerks make, who are not in compliance with very technical 
parts of the law, instead of prosecuting the drug smugglers 
that they can't catch anyway.
    Now, I realize that's one sided, but could you tell me the 
percentage of efforts, both in enforcement and prosecution, 
that you all do to actually drug operations, focused on the 
person that is breaking the law in that area,in comparison with 
prosecuting banks for technical violations, errors that are made, where 
there is no suspicion or little evidence that they are actually engaged 
in money laundering or drug operations, but have made a mistake in 
compliance.
    Secretary Rubin. I don't know the answer to your question. 
We can try to get it, but I must say I wouldn't frame the 
question that way.
    Mrs. Northup. I understand.
    Secretary Rubin. I was in a regulated industry for 26 
years, and I will tell you, one of the things that is most 
striking about the American financial system--and it's true 
really in Western Europe and in some other nations like Japan 
as well--is how amazingly free of corruption it has remained, 
given the vast flows of money.
    I personally believe that it is extremely important that we 
have an effective and vigilant regulatory effort. So I do not 
agree with the premise of your question. I don't believe there 
is a persecutorial view. I think what you have is a very 
effective regulatory regime that has really prevented what 
could easily happen, which--given these vast amounts of money, 
and the temptation that has to provide to organized crime--has 
prevented the corruption of our system.
    And I think we need to remain very, very vigilant.
    Mrs. Northup. Well, I guess, I wonder if there is a way of 
trying to--first of all focus our efforts on examples of 
corruption or opportunities of corruption. Are there times and 
how often when you all find a bank, or investigate a bank or 
whatever you do, when there is no suspicion that there is 
actually money laundering there, but that there was a technical 
violation.
    Secretary Rubin. Well, we can look at this for you if you 
like.
    Mrs. Northup. Would you, please?
    Secretary Rubin. We'd be delighted to.
    [The information follows:]

                       Bank Regulatory Compliance

    Question. The percentage of efforts both in enforcement and 
prosecution, that actually involve drug operations, (i.e. 
involves a person breaking the law) in comparison with 
prosecuting banks for technical violations or errors, where 
there is little suspicion or evidence that the persons were 
actually engaged in money laundering or drug operations but 
have made compliance mistakes?
    Answer. The question as I understand it is whether the 
government has used its enforcement authority to punish 
financial institutions for technical mistakes rather than going 
after the criminals. While we do not expect banks to act as law 
enforcement agents, we do need and require their assistance as 
they are our front line of defense in the battle against money-
laundering and other financial crimes.
    Because banks are most likely to have initial contact with 
money launderers and other financial criminals, we must require 
that they pay close attention to the financial activity of 
their customers. The government receives outstanding 
cooperation from the financial sector and is committed to work 
in partnership to reduce unnecessary burdens to permit both the 
industry and the government to focus its resources on more 
sophisticated measures and analysis to prevent and detect 
financial crime. We need the financial sector not to act as 
police but as our allies. By ensuring compliance with the 
currency transactions and recordkeeping requirements, we also 
ensured that information assists law enforcement in civil, 
criminal regulatory and tax investigations. There are, however, 
BSA requirements such as the mandatory reporting of suspicious 
activity that do and must involve the bank's discretion.
    If a bank has reason to suspect that activity involves 
funds derived from illegal activity, or is designed to evade 
the BSA requirements, it is required to file a Suspicious 
Activity Report (SAR). In addition, if a transaction has no 
business or apparent lawful purpose, then the bank must examine 
all of the available facts and if it still finds no reasonable 
explanation, it must also file a SAR. SAR data is made 
available to more than a dozen federal law enforcement and 
regulatory agencies via computer. A single SAR is filed with 
FinCEN, thus reducing the banks' burdens as well as providing 
for more comprehensive analyses of these reports to identify 
trends and patterns. (Note: Of the almost 65,000 SARs filed to 
date, more than a third reported suspected money laundering 
activity and/or violations of the BSA.)
    Banks, their employees, officers and directors who are 
either knowingly involved in or willfully blind to money 
laundering activity face the full consequences of Title 18 
U.S.C., Sections 1956 and 1957, which is administered by the 
Department of Justice. Financial institutions must also comply 
with the BSA's reporting and recordkeeping requirements to 
ensure that they have sufficient internal controls and 
compliance procedures to prevent and detect financial crime. If 
a bank fails to comply with these requirements, a BSA 
enforcement action, such as a civil money penalty or a cease 
and desist order issued from its federal regulator, may be 
considered independent of whether there is a determination that 
money laundering has occurred.
    Statistics on the number of banks that have been prosecuted 
for money laundering, drug offenses, or other federal offenses 
are maintained by the Department of Justice.

    Mrs. Northup. Would you also tell me--there is quite a 
debate going on between credit unions and banks, and a point 
that the banks make all the time is that they have to comply 
with all sorts of regulatory agencies that the credit unions 
don't.
    I know that CRA is in another area, but can you tell me 
what other--if there are any regulatory costs that the banks 
bear that credit unions don't?
    Secretary Rubin. Well, we are doing--I think it's 
congressionally mandated, if I recollect--a credit union study. 
I don't know off hand when it is going to be completed.
    We'll get back to you. I just don't know when it is going 
to be completed. But there is a credit union study which was 
congressionally mandated, and it deals with all those kinds of 
issues.
    And so when that comes back----
    Mrs. Northup. Would you respond to that for the record so 
that we will have that? In other words, I want that to be 
included in the record.
    Secretary Rubin. We will do the best we can to give you a 
response for the record.
    And then, as I say, in the fullness of time we'll be 
getting a very thoughtful study.
    [The information follows:]

                           Credit Union Study

    A congressionally-mandated credit union study is due by 
September 30, 1997. I fully expect that our final report will 
address these issues. But it would be premature for me to 
comment on them at this time.

                       recertification of mexico

    Mrs. Northup. Let me ask you one more question. Since you 
are so involved in the question of drugs coming across the 
border from Mexico, did the President consult you before he--
and Mr. Chairman, I'm sorry if I'm repeating another question--
did he consult you, or did you make a recommendation about the 
recertification that happened last week?
    Secretary Rubin. Yes. He did and I did.
    Mrs. Northup. And so you suggested that Mexico be 
recertified?
    Secretary Rubin. I think it was absolutely the correct 
thing to do.
    Mrs. Northup. Why?
    Secretary Rubin. Because you have very much the same 
situation that we faced back in 1995, although this time in the 
context of a particular law. To bring that up to the present 
moment, I think you have a President in Mexico who is honest 
and who is committed, who is dealing courageously and 
effectively, given the problems he's facing--the enormous 
economic, social and political problems that affect our 
economic and national security interests. Our economic and 
national security interests, and our law enforcement interests 
lie in supporting an honest and courageous president as he 
deals with what are unquestionably very difficult problems in a 
situation where they are not going to be solved over night. 
This is going to be a long term situation.
    And I believe we need to support Mexico and support the 
forces of reform and honesty in Mexico as they try to deal with 
these very difficult problems.
    Mrs. Northup. Actually, I understand that they have issued 
some--I realize they have internal corruption that's a problem, 
but they actually also have issued regulations that make it 
harder for us to participate with them. The fact that our 
people can no longer carry guns when they cross the border has 
reduced our ability to train their people.
    There are several other restrictions they have placed on 
us. And I understand the importance of the trade, and I'm not 
at all suggesting----
    Secretary Rubin. Well, mine was not a trade comment. If you 
look strictly at law enforcement, our best chance to protect 
our interests is to support an honest President as he tries to 
work his way through very, very difficult problems.
    Mrs. Northup. Well, we could have not recertified them and 
instead just granted them a waiver, so that the economic 
interests could have been accommodated and still have put the 
pressure that personally I believe--you know, we could have 
made, asked for certain accommodations, so that we would be 
more able to, for example for them to deport people that we 
have named in warrants.
    If they're not willing to do that, they're not really 
participating.
    Secretary Rubin. Well, you know, reasonable people could 
disagree about this. It was our judgment that the best chance 
of accomplishing, or moving forward in the areas that you're 
talking about is by recertification. Regarding the issue of 
carrying firearms into Mexico--mind you, we wouldn't be wildly 
enthusiastic about Mexican law enforcement officials coming 
here with firearms. There are very delicate sovereignty issues 
here.
    But in any event, while working on extradition and the 
other issues, we should support the President rather than do 
something such as a decertification with a waiver, which is 
what you're referring to, which could possibly undermine him.
    And, as I say, reasonable people might disagree on that, 
but there is no question in my mind that we made the right 
judgment.
    Mrs. Northup. Thank you. Most of the $52.2 million increase 
that you're asking for the drug work, most of it is focused on 
the Southwest, even though we know there's a growing trade 
coming from the Southeast.
    And, you know, it seems to me like we're bearing a 
tremendous cost to try to shore up that effort, where there is 
a tremendous amount of corruption across the border. I don't 
think they have made every accommodation, and, you know, I 
don't know whether you would comment on the breakdown of the 
$52 million, or whether you already have.
    Secretary Rubin. I don't think they have made an 
accommodation. I think the question is how much it is viable 
for them to make. They also have a political system, and, as I 
said, enormous problems. I'm repeating myself now. But we 
thought our chances of accomplishing what we want would be 
greatest by supporting this President.
    Mrs. Northup. And one more question. The people that 
oversee the agency--I've forgotten who came before us--was that 
a recommendation from the bottom up, or did you make that 
decision in your office and recommend it to the President?
    Secretary Rubin. Oversee which agency?
    Mrs. Northup. Customs. Was the question of 
recertification--at what level was that decision made to 
recommend to the President that we recertify Mexico?
    Secretary Rubin. In terms of the Treasury Department?
    Mrs. Northup. Yes.
    Secretary Rubin. My level.
    Mrs. Northup. That's all,
    Mr. Kolbe. We have two votes on the way for sure, and a 
possible third, so I don't think it's fair to ask you to wait 
around.
    Mr. Hoyer, we have a couple of minutes. Do you want to get 
one in quick? And I'll try to get one in quick.

              COMMUNITY DEVELOPMENT FINANCIAL INSTITUTION

    Mr. Hoyer. Because of the time, I've got a number of 
questions, one, on the Community Development Financial 
Institutions Program, you've got money in for that. I want to 
give you an opportunity to comment on that. We don't have time, 
but I'll do so for the record.

                  FINANCIAL CRIMES ENFORCEMENT NETWORK

    Also FINCEN. You mentioned the problems that we're having 
as we go to electronic transfers, and the money laundering 
capability that gives.
    I've been to FINCEN, a very important agency, but because 
we're going to leave, I wanted to make a comment that I would 
have made at the close.

                 TREASURY FIRE/EMPLOYEE PROFESSIONALISM

    Mr. Chairman, we had a major fire over at Treasury. I went 
over there the day of the fire. Secretary Rubin has talked 
about something that I have heard every major Presidential 
appointee say. I'm glad that Anne stayed, Congresswoman, 
because we deal with Federal employees a lot.
    I don't know whether you were in the room, but he said that 
he was surprised. Every major business leader that has been 
brought into government under--and I've only been here since 
the Reagan administration--under the Reagan administration, the 
Bush administration and the Clinton administration--every one 
of them had been surprised as Secretary Rubin was with respect 
to the quality, motivation and hard work of the Federal 
employees.
    And I think that was demonstrated in spades at the time of 
this fire, which could have demoralized the agency. You weren't 
here. But there was a major fire at the top floor, caught 
between two floors. Smoke throughout the building. Luckily we 
didn't have as much physical damage as we could have had, but 
we had a lot of physical damage.
    But the employees confronted that in absolutely an 
incredible fashion, both at the management level and the folks 
who do the work on a day to day basis level. And they are to be 
congratulated, Mr. Secretary. You and all of your people. I'm 
not going to mention all of them. Some are sitting in the room. 
Linda and I had spent a lot of time walking around in water and 
smoke.
    But they did an extraordinary job, and I was pleased to see 
you reference the employees, because they are an outstanding 
group of people, and I'm very pleased that you would mention 
them as you did. And I think almost every leader that comes in 
with the bias, the perception, the demagoguery that occurs 
about Federal employees, or public employees in general, has 
the same pleasant surprise that you had with the quality of 
people that we have.
    Secretary Rubin. I think that is a challenge for all of us, 
to continue to attract and retain those people.
    Thank you. I think we're going to have to go. I have a 
series of questions that I'll have to submit for the record on 
the testimony of the Secret Service agents on the taggant 
study.
    Mr. Kolbe. And I was hoping to have a conversation with you 
on coin/dollar. We'll have to save that for another day.
    This subcommittee will stand adjourned.
    [Clerk's note.--At the time of publishing, the Department 
of the Treasury failed to provide answers to the question for 
the record on the subject of the IG investigation of Secret 
Service Agents: Agent Testimony.]
    [Questions for the record and Treasury's Budget in Brief 
follows:]

[Pages 27 - 180--The official Committee record contains additional material here.]


                                            Tuesday, March 4, 1997.

                BUREAU OF ALCOHOL, TOBACCO AND FIREARMS

                               WITNESSES

RAYMOND W. KELLY, UNDER SECRETARY FOR ENFORCEMENT
JOHN W. MAGAW, DIRECTOR, BUREAU OF ALCOHOL, TOBACCO AND FIREARMS

                  Opening Comments From Chairman Kolbe

    Mr. Kolbe. This meeting of the Subcommittee on Treasury, 
Postal Service, and General Government will come to order.
    I am very pleased this morning to welcome again our third 
or fourth time Under Secretary Kelly and Director of Bureau of 
Alcohol, Tobacco and Firearms, Director Magaw, to our hearing 
today. This hearing today, our third or fourth in our series on 
the law enforcement aspects of Treasury, will focus on how the 
Bureau of Alcohol, Tobacco and Firearms is meeting an 
increasingly heavy mission requirement that has been given it 
to combat violent crime and protect public safety.
    The importance of this mission is manifestly visible in the 
rising number of incidents of explosives and arson, as well as 
the continuing high rate of firearms use in the conduct of 
violent crime. The Bureau has the traditional regulatory and 
revenue collection responsibilities as well, and it is 
essential to apply the same energy and creativity to those 
routine responsibilities as it does to its law enforcement 
efforts.
    Bureau resources have been taxed in recent years by several 
major and tragic acts of terrorism that have stretched its 
personnel and technical capacity greatly. The committee has 
been responsive to ATF's resource needs, providing, for 
instance, $12 million in supplemental funding last year for the 
Bureau to investigate church fires, church arson fires.
    Last year, the Director expressed his concerns that ATF 
lacked the resources it needed to provide optimal levels of 
equipment and training for ATF personnel. The committee 
addressed this issue by encouraging ATF to downsize and use its 
resources for training, equipment, and staff. I am concerned 
that this downsizing has not happened as had been anticipated 
or directed by the subcommittee.
    I share the views of my predecessor in this role of 
chairman that it is essential the Bureau can perform its 
missions with the optimal technology and systems for incident 
analysis and reporting, for database development, explosives, 
arson, and ballistics identification, and that Bureau personnel 
be trained and equipped at a level equal to or better than that 
of any other Federal law enforcement agency.
    I am pleased with ATF's efforts at developing performance 
measures. I look forward to hearing about your progress, Mr. 
Director, in maintaining appropriate standards for internal 
investigations.
    Director Magaw's written testimony begins on a promising 
note, gauging ATF performance by focusing on outcomes and 
strategic planning. The categories you have selected, violent 
crime reduction, revenue collection, and public safety, I think 
are very much on the mark.
    I look forward to hearing from our witnesses today 
andwould, prior to your opening statements, ask the distinguished 
ranking member, Mr. Hoyer, for his comments.

                  Introduction by Representative Hoyer

    Mr. Hoyer. Thank you very much, Mr. Chairman. I appreciate 
your opening statement and the comments you made.
    Mr. Director, I don't know whether you heard, but when 
Secretary Kelly was testifying here on the overall Treasury law 
enforcement picture, I mentioned both your agency and the 
Secret Service, as well as Customs, in terms of the significant 
law enforcement responsibilities under the Department of 
Treasury and how he was himself an outstanding law enforcement 
officer in our country. We are privileged to have the 
opportunity of working with both you and Mr. Bowron, who I told 
him were two of the best in the Nation, and I want to reiterate 
that with you in the room. I hope you heard about that because 
I feel strongly about it.
    Mr. Secretary, as you know, Director Magaw was himself 
associated with the Secret Service for most of his career and 
Secretary Bentsen, at a time when ATF needed a strong leader 
and a leader who would be able to communicate ATF's mission 
within the Government and without prevailed upon Director Magaw 
to shift from his Secret Service responsibilities, where he was 
the Director, to ATF. ATF has benefited from that greatly, as 
has the country.
    I want to make a comment, Mr. Chairman and Mrs. Northrup. 
There has been a lot of controversy about the Bureau of 
Alcohol, Tobacco and Firearms, and much undeserved. It 
obviously has some very vociferous opponents, opposed both to 
its regulatory capacity, in some degree, but also to the law 
enforcement responsibilities it has dealing with some of the 
most dangerous and deranged criminals in America who pose 
threats not just to individuals but to masses of people in our 
Nation through the use of explosives and other terrorist 
tactics.
    Let me say, without criticizing any other Federal agency, 
but the ATF, in fact, even in its controversial roles, has for 
the most part not been the agency that brought the greatest 
controversy. Even in the Waco incident, Mr. Chairman, as you 
heard last week, when I mentioned the hearings that Mr. 
Lightfoot and I conducted on Waco. These were held immediately 
after Waco but before the trials of the Davidians, and, 
therefore, we did not go into some of the facts that may have 
come up at trial. But notwithstanding that, those series of 
hearings that we had essentially brought out all the facts that 
were brought out in the series of hearings that occurred in 
1995. We already had that on the record.
    In addition, Mr. Chairman--and I make this statement not so 
much for the public, but as we start to hear from the Director 
of ATF--we are not getting every word that I am saying? They 
are very important, and I know everybody wants to hear them. 
[Laughter.]
    Mr. Hoyer. I am appreciative of your help. Thank you so 
much.
    The Treasury Department, Mr. Secretary, in looking at its 
performance and ATF's performance as it related to Waco, wrote 
a report that was very self-critical, and analytical. It spared 
no persons or policy, and was one of the best reports that I 
have ever read of an agency criticizing itself and correcting 
those aspects where it thought it did not perform properly.
    We know there were mistakes made at Waco, and there is no 
point in reiterating those. However, it is my view that the 
wrongdoers at Waco were the Davidians, not law enforcement.
    But having said that, the important point is, Mr. Chairman, 
ATF is many times wrongly maligned. It has a very distinguished 
track record, as you know, and I mentioned this to Secretary 
Kelly. And, of course, he was in New York at the time when the 
World Trade Center was bombed. It was an ATF agent that found 
the VIN number, I suppose, the tag that led to the leads and 
led to the identification of the participant and led to the 
breaking of that case.
    ATF has extraordinarily able leadership, but as leadership 
well knows, without an extraordinarily able management and 
officer corps, it could not be as successful as it is.
    We have a number of issues that we are going to discuss. 
Moving headquarters buildings to a secure areas, is of critical 
concern to every law enforcement agency nowadays. Completing 
the construction of the new laboratory, which is included in 
your budget, is very important. I would mention also, Mr. 
Chairman--I do not know how familiar you are with it--under ATF 
we have the Gang Resistance Education and Training, a program 
which we have utilized. I know Arizona has utilized it greatly, 
with great success. And I look forward to reviewing the budget 
so that we ensure that an outstanding performance is continued 
both in terms of the law enforcement side and the regulatory 
side, and that we give you the resources that you need to 
perform the critical tasks necessary not just for the Federal 
law enforcement but for interface with local law enforcement as 
well.
    Mr. Director, your work in conjunction with the HIDTA in 
the Baltimore-Washington area, which I know and which I am 
familiar with--and I am sure the chairman is familiar with the 
Southwest border HIDTA--is absolutely essential to the 
effectiveness of that group, and I want to thank you for that.
    Mr. Chairman, I know I was a little longer than I usually 
am in opening statements, but this agency does a superlative 
job. It is criticized a lot. Cheap shots are taken. I know that 
you will be in that same vein as Mr. Lightfoot who was a very 
strong supporter. He and I worked very closely together, and I 
know that you and I will continue to work closely together to 
make sure that its effectiveness is not compromised in any way 
because it is critical to the welfare of our country and our 
citizens.
    Thank you, Mr. Chairman.
    Mr. Kolbe. Thank you very much, Mr. Hoyer, and certainly 
you are accurate in saying that we will cooperate on these 
issues, and I welcome your insight, which is substantial and 
goes back a long way.
    I will turn now to Secretary Kelly and Director Magaw for 
their opening statements. As always, the full statements will 
be placed in the record. We urge you to summarize them. That 
admonition I particularly want to give to Director Magaw, 
looking at the length of the submitted testimony here.
    Secretary Kelly?

              STATEMENT BY UNDER SECRETARY FOR ENFORCEMENT

    Mr. Kelly. Thank you, Chairman Kolbe and Congressman Hoyer 
and members of the committee. Once again, it is a pleasure to 
appear before you today.
    With me is Director of the Bureau of Alcohol, Tobacco and 
Firearms, John Magaw, and members of his staff, as well as 
Assistant Secretary James Johnson, Deputy Assistant Secretary 
Elisabeth Bresee, and other members from the Treasury 
enforcement staff.
    As you said, Mr. Chairman, you have my written testimony, 
so I will not take your time to read it, but I want to make 
just a few brief observations.
    No one is better than ATF in the investigations of arsons 
and bombings, and ATF has successfully translated its national 
expertise into a resource for local law enforcement. This 
partnership with local law enforcement is real and tangible, 
built on mutual respect. ATF is also the recognized leader in 
combating gun trafficking, and ATF is using computer advances 
and other technology to bring innovation to its law enforcement 
mission. Through Project LEAD and other programs, ATF is 
revolutionizing the way we attack crime in the United States. 
Let me give you one example.
    Last March, a New York City police officer was shot and 
killed when he tried to stop a carjacking. In the running gun 
battle that followed, the carjacker was also killed. There were 
plenty of witnesses. The gun used to kill the police officer 
was recovered. The carjacker was dead, and his accomplices were 
in custody. That would have pretty much wrapped it up in the 
old way of handling gun case. But now, because of ATF's Project 
LEAD, investigators were able to trace the carjacker's gun and 
three other weapons recovered at the scene to gun traffickers 
in various States. ATF foundthat the traffickers were supplying 
other guns to other criminals who used them to commit crimes.
    Police used to stop when they took the shooter into 
custody. Now, because of ATF's innovative approach, we can get 
the trafficker behind the shooter and prevent potential crimes, 
as well as solve the immediate case at hand.
    As I said, this is revolutionizing the way police solve and 
prevent crimes, and it is due in large measure to ATF's 
expertise and to this committee's support of ATF and its 
mission.
    I am confident that with the continued help and guidance of 
the committee, ATF as well as Treasury enforcement overall will 
remain leaders in law enforcement innovations.
    Thank you very much.
    [The information follows:]

[Pages 185 - 196--The official Committee record contains additional material here.]

    Mr. Kolbe. Thank you very much, Mr. Secretary.
    Director Magaw.

                       Statement by ATF Director

    Mr. Magaw. Thank you, Mr. Chairman and Congressman Hoyer 
and Mrs. Northup. My written statement, as the chairman 
mentions, contains a complete description of our budget 
request, and I will not take up time covering those details. 
With me, though, here today is ATF's executive staff, to 
include, Mr. Chairman, our Legal Counsel, our Ombudsman, our 
Executive Assistant for EEO. I want them all to hear what has 
been said here. I am very proud of the staff. I believe it is 
extremely important that they get involved and they hear your 
questions, concerns, suggestions and comments so that we can 
better carry out the wishes of Congress.
    The Secretary of the Treasury is charged by Congress with a 
unique set of regulatory and criminal enforcement 
responsibilities involving very controversial products: 
alcohol, tobacco, firearms, and explosives. These ATF-regulated 
products all have legitimate applications, but also have 
serious social consequences if misused. Congress has chosen to 
address these products through the full array of Federal 
powers.
    ATF is a law enforcement agency with interwoven 
responsibilities for criminal investigation, tax collection, of 
which we collect about $12 billion a year, and industry 
regulation. ATF's fiscal year 1998 budget request flows from 
our key strategies developed to best fulfill our mission 
activities, which are to reduce crime, collect revenue, and 
protect the public, as you mentioned in your statement, Mr. 
Chairman.
    In compliance with the Government Performance and Results 
Act, we have developed a performance plan and a set of program 
performance targets for each major activity. Our budget request 
this time is approximately $602 million. If we were to withdraw 
the headquarters and the laboratory relocation funding, our 
request represents less than a 3 percent increase over fiscal 
year 1997 base funding.
    The most important message I bring to you today is that you 
are now overseeing a revitalized ATF, made stronger by the 
accountability demanded by the men and women of ATF, the 
Secretary and the Under Secretary of the Treasury, and, as 
important as any, the close oversight of this Subcommittee.
    None of our recent successes--and there have been many--
would have been possible without the funding you have provided 
for the vital training and the much needed operational 
equipment. The Director and women and men of ATF thank you.
    This concludes my statement, Mr. Chairman.
    [The information follows:]

[Pages 198 - 254--The official Committee record contains additional material here.]

    Mr. Kolbe. Thank you very much. I appreciate that----
    Mr. Hoyer. They took you pretty literally.
    Mr. Kolbe. They did, they did. I appreciate the brevity in 
summarizing that.
    As I have indicated in the past, we will do the questioning 
with the chairman and the ranking member, and then we will go 
to other committee members as they come in. So Mrs. Northup 
will be the third person to question. We will try to stick to 
our 5-minute rule, and I will do that as much as I can on my 
first round. I do have several areas of questioning that I 
would like to talk about, so I will not get through them at all 
in my first round.
    Let me just focus on what is fundamentally a budget issue 
here. It may not be as much fun as some of the other things 
that we talk about in this committee with law enforcement 
agencies, but I do want to ask about--and I referred to it in 
my opening remarks--the downsizing and the base restoration for 
the agency.

                               downsizing

    As I indicated, in 1997 the subcommittee appropriation 
provided authority for ATF to downsize with the expectation 
that it would be using this to meet its requirement for 
equipment and training and operating expenses. But you did not 
do so. You have not done so. So my first question is: What was 
your decision not to downsize? Why did you decide not to 
downsize?
    Mr. Magaw. Well, shortly after that meeting, Mr. Chairman, 
a rash of church fires started to occur. Bombings have gone up, 
and arsons have gone up some 600 in that period of time. As a 
result this Committee saw a need to give us additional funds.
    Now, by taking those additional funds that you gave us and 
applying them to the equipment, moving personnel in to assist 
in all those particular areas, it freed up some of our base, 
and, therefore, I did not have to do that.
    I want to make sure that you understand, as well as 
everybody on the Committee, that this was not any intentional 
act whatsoever to do something different than what the 
Committee wanted us to do. Last year, as I remember this 
discussion, it was, ``Mr. Director, what will you do if you do 
not get your base restored?'' Our base was cut up to 70-some 
percent, and we did not have much operational money because our 
fixed costs were 16 or 20 percent. My answer was: ``If I do not 
get the funds, I will have to reduce the size.'' I must have a 
balanced budget. I must be fiscally sound. And that was what I 
intended to do.
    But in the meantime, all these other things occurred. As a 
result, I think we have been able to serve the public very well 
and, at the same time, do it with a reasonable amount of money.
    The truth is that this organization is only 48 people 
larger than it was in 1973. We are 200 smaller than we were in 
1990. So, it is not a large organization. And with the things 
that have occurred in the last year--we had the Olympics, the 
church fires, the bombings, the Anti-Terrorism Act, the Brady 
law, the Youth Crime Interdiction Program, the Lautenberg 
amendment--these kinds of things have added to our 
responsibilities. And I believe that we have done them well.
    Had we not received that extra amount of money and had 
those other things not occurred, we would have downsized.
    Mr. Kolbe. Are you proposing to reduce any positions this 
year? If so, what savings would you achieve in the forthcoming 
budget?
    Mr. Magaw. In the forthcoming budget, we are not going to 
lose positions.
    Mr. Kolbe. Let me ask you first, are you reducing any at 
all during this fiscal year?
    Mr. Magaw. During this fiscal year, no, sir. We have hardly 
hired any agents or regulatory inspectors since 1993, and I 
want to try to start working at that vacuum so 15 years from 
now we do not have a huge vacuum there. So I intended to hire 
about 100 people this year.

                             new agent cost

    Mr. Kolbe. What is the current cost of equipping 
andtraining an ATF officer?
    Mr. Magaw. If you are talking about an agent, it costs--
    Mr. Kolbe. Yes, an agent.
    Mr. Magaw. To hire, to train, to provide the equipment, the 
desk space, computer, all of that, we figure around $120,000 in 
the first year.
    [Clerk's note.--Bureau amended this to $203,000.]
    Mr. Kolbe. What would you propose that it be with your 
proposed base increase?
    Mr. Magaw. I do not understand the question.
    Mr. Kolbe. Well, you are proposing to increase your base. 
Is that figure going to stay the same, or does part of the base 
go into more of the equipment and the training?
    Mr. Magaw. If the base is restored by $20 million, it would 
cover what I am talking about doing, hiring the additional 100, 
and it would cover all of that amount for their training----
    Mr. Kolbe. But the cost per officer would not change?
    Mr. Magaw. The cost per officer would not change. Now, an 
inspector is less than that. It is somewhere around $65,000.
    [Clerk's note.--Bureau later clarified that the cost per 
agent and per inspector would change based on one-time, non-
recurring items (e.g., computers and desks) that do not remain 
in the base after the first year.]

                              base erosion

    Mr. Kolbe. You have always identified--and I am not 
familiar with other agencies who do this, but you have always 
identified an ideal mix of expenditures of 62 percent for 
personnel, 23 percent for operations, 15 percent for fixed 
costs. Is that your current allocation?
    Mr. Magaw. No, we are a little higher than that right now.
    Mr. Kolbe. Higher on which one?
    Mr. Magaw. We are higher on the personnel side.
    Mr. Kolbe. The personnel side.
    Mr. Magaw. We have gained about half of our $40 million 
shortfall. The 1998 budget request would get us to about 62 or 
63 percent of total budget for pay. This year we are still up 
around 68 or 69 percent. We went from 74 to about 68 percent. 
Not only the public sector but the private sector would say 
that you need to be somewhere between 60 and 65 percent for pay 
and that you need to have 20-some percent for operational costs 
for a unit like this.
    [Clerk's note.--The bureau later clarified that in fiscal 
year 1997, we reduced our payroll costs by 4 percent compared 
to fiscal year 1996. Thus, we are able to increase funding of 
operational costs. The Bureau's fiscal year 1997 financial plan 
distributes funding as follows: pay--69 percent, fixed costs--
16 percent and operational costs--15 percent. The fiscal year 
1998 request would result in an even better distribution: pay--
63 percent, fixed costs--16 percent and operational costs--21 
percent.]
    Mr. Kolbe. Does the $20.5 million fully fund your base?
    Mr. Magaw. The $20.5 million would put our base back to 
fully funded, yes, sir.
    Mr. Kolbe. One more question in this area here. You have no 
offsetting reduction in personnel. You have the base increase, 
but no offsetting reduction in personnel as you are proposing 
it. Your current attrition rate is only about 1 percent. Is 
that likely to continue?
    Mr. Magaw. That is likely to continue, yes, sir.
    Mr. Kolbe. What is the ideal rate for officer replacement? 
Is that attrition rate correct for what you need in terms of 
maintaining your officers, your agents?
    Mr. Magaw. Well, you know, when you used to have an 
attrition rate of somewhere between 5 and 7 percent, that took 
care of those that were gradually getting higher in grade.
    Mr. Kolbe. Right.
    Mr. Magaw. But now that it is down to 1 percent, you have 
grade creep sometimes, and what we are trying to do is look 
very carefully at every grade we have and does it need to be 
that high of a grade so that we can kind of maybe have less 14 
and 15 positions so that that grade creep is not as strong. And 
we are also looking at the administration which has given us 
guidelines in terms of how many people should you normally 
supervise for a particular grade and trying to apply that to 
our organization.
    Mr. Kolbe. The attrition rate is unusually low for law 
enforcement agents, isn't it?
    Mr. Magaw. Well, not really, not for at least the two units 
that I have worked with, the Secret Service and ATF. That is 
not too low. Now, the uniformed division of Secret Service 
would be a little higher.
    [Clerk's note.--The bureau later amended this by adding 
``the attrition rate for ATF agents is rather low. Currently, 
the rate is approximately 1 percent.'']
    If you go to local police departments, it is going to be 
much higher because what they do a lot of times is they go to 
college, they get their degree, and they go on to other law 
enforcement units that pay more. So you do have more turnover 
in local law enforcement, but not so much in Federal, certainly 
not in the Secret Service or ATF. I think the highest might be 
2 percent.
    Mr. Kolbe. If that held up forever, 1 percent attrition 
rate, if it held up perpetually, every 100 years you would 
replace your force.
    Mr. Magaw. Well, you----
    Mr. Kolbe. Is that right? What is wrong with my thinking 
here?
    Mr. Hoyer. If every 100 years you replace your force, then 
you have got an aging group of folks.
    Mr. Kolbe. That is what I am trying to get at. If you don't 
have a higher attrition rate than that, you are going to be 
suddenly faced with a very high attrition--grade creep and a 
very high attrition rate.
    Mr. Magaw. That is correct, Mr. Chairman. You will have 
bulk years. For instance, I just mentioned that we did not hire 
from 1993 until now very much. So come the 20 years, you add 25 
years on to 1993, 2018, you will have a fairly large group go 
because of an age limit. And then that is where that vacuum 
occurs. So sometimes if you have a vacuum, it offsets that 
some, too.
    [Clerk's note.--The bureau later clarified that is why it 
is good practice to hire some new agents every year. This 
hiring would offset the number of those retiring.]
    Mr. Kolbe. Thank you. I have gone over my time.
    Mr. Hoyer.
    Mr. Hoyer. What is the age limit, Mr. Director?
    Mr. Magaw. It is 57, sir.
    Mr. Hoyer. It is 57?
    Mr. Magaw. Yes, 57 for us. That is mandatory. And I have 
had a number of requests----
    Mr. Hoyer. Well, that is still very young, I would add. 
[Laughter.]

                             agent caseload

    Mr. Hoyer. Mr. Director, the chairman asked certain 
questions about the personnel and your base. What is your 
caseload now and what is projected for the coming budget?
    Mr. Magaw. The caseload----
    Mr. Hoyer. Per agent. I am talking about agents, obviously.
    Mr. Magaw. Per agent, with arson and explosives and 
firearms trafficking cases, because those are such detailed 
investigations and they take such amount of time, the caseload 
per year for those people working those kinds of investigations 
generally will run about four or five because they are so 
extensive.
    If you are talking about cases where you have--some agents 
we have working with the United States attorney in court 
monitoring everything that comes through there, and if this is 
a third-time offender, then we are trying to apply the habitual 
criminal----
    Mr. Hoyer. Career criminal.
    Mr. Magaw. That is right. And so as a result of that, they 
will run many, many more in total. So it is hard to measure the 
number.
    We have quit measuring the performance of our personnel by 
number of cases. It is more the quality and the kind of case 
that they are working. So it is a little difficult to answer 
that.

                 Church Arson Task Force Interim Report

    Mr. Hoyer. Mr. Director, I did not mention it specifically 
in my opening remarks, but I had the opportunity to see the 
interim report on the church burnings task force, also known as 
ATF. The arrests of 143 suspects in the 107 burnings is a very 
high ratio for arson cases, which are very tough cases. I want 
to congratulate you and all the other law enforcement officials 
who have worked together at the Sate, Federal, and local level 
to effect that end. This is an excellent report, and, Mr. 
Chairman, there is some good news in this report in that the 
hate crimes aspect appears to be less than what originally we 
might have perceived, which, of course, is good news. It is bad 
news that any of the arsons occurred, but some were for sort of 
base venal reasons of insurance proceeds and others were 
apparently more vandalism than malicious. That is not to say 
that the result was not malicious and terrible, but more 
sporadic than some planned efforts. So I was glad to see this 
report and glad to see the success we are having.

                               Cease Fire

    We are doing the 5-minute CEASEFIRE, Mr. Director. As you 
know, I am very interested in that program. There is some 
controversy, as we know, as to who ought to be doing this. Mr. 
Secretary, I hope you stay on top of this because it will be at 
your level and higher where some of this competition occurs.
    But, Mr. Director, if you could speak to CEASEFIRE, what we 
are doing, and what success we are having? I noticed there is 
no request for new sites. Do we have request for new sites we 
simply are not funding?
    Mr. Magaw. We had requests for new sites but OMB made the 
decision and judgment not to fund those. It so happens that 
with the funds that the FBI has for this fiscal year, they will 
virtually saturate the country with Drugfire. So we will have 
27 CEASEFIRE units; they will have hundreds of Drugfire units 
out there. [Bureau Insert]
    I think what we need to do now--Director Freeh and I are 
working on this with the National Institute of Standards and 
Technology and (NIST), OMB and, of course, the Secretary's 
officer to make sure that we bridge these machines together so 
they can talk to each other and so that we can help the police 
officers all throughout the country so it becomes a national 
net rather than just a local net.
    For instance, you may have read in your county the other 
night the police officer that was shot there, they picked up 
the shell casing. They know----
    [Clerk's note.--Bureau clarified that ``they'' refers to 
the perpetrator.]
    Mr. Hoyer. This is the metropolitan police officer.
    Mr. Magaw. That is right. They [the perpetrators] know that 
these shell casings can be checked. They picked up the shell 
casings. But we [Clerk's note.--Bureau refers to IBIS] can also 
do the bullets, and we have done that. The gun found in the 
suspect's car had the bullet that came from that weapon.
    We are doing this all over the country, and also some of 
the things that the Secretary mentioned. It is a very positive 
program. It will allow 13 handlers of these machines, do what 
7,000 technicians had to do before. It picks the needle out of 
the haystack.
    [Clerk's note.--Bureau clarified that this refers to 
firearms examiners using the IBIS system.]
    Mr. Hoyer. It is a great program. Mr. Chairman, if you 
haven't seen it, I hope you have the opportunity to see it.
    This program is a critically important program, that is one 
of the reasons why crime statistics are going down. I think one 
of the reasons is not because we have got more personnel, 
although I think the Cops on the Beat program the President has 
fought for is a good one, but having said that, our technology 
has, I think, been helping crime efforts. Secretary Kelly 
referred to how, what could have been a discrete incident in 
New York turned into a successful arrest; but as importantly, a 
broader perspective and effort on the broad range that gave 
that discrete incident the ability to happen. So that is good.
    My 5 minutes are gone. I have a lot of other questions, and 
I will ask them on subsequent rounds, Mr. Chairman. Thank you 
very much.
    Mr. Kolbe. Mrs. Northup.

                  Alcohol and Tobacco Revenue By State

    Mrs. Northup. Yes, I have a couple of questions. First of 
all, a more local issue, you regulate tobacco and alcohol. When 
you regulate racehorses, you will probably get most of 
Kentucky's industries. But in the meantime, I wondered if you 
had a breakdown State by State of what the revenues are that 
you collect in each State.
    Mr. Magaw. We would have that, and we can get that to you 
today or tomorrow. I do not know off the top of my head exactly 
what it is.
    [The information follows:]

[Pages 261 - 262--The official Committee record contains additional material here.]

    Mrs. Northup. Alcohol taxes I presume you regulate at the 
point of the distributor as opposed to the manufacturer.
    Mr. Magaw. Yes, the point of manufacture of alcohol.
    Mrs. Northup. Point of manufacture, okay.
    Mr. Magaw. And it is about $6 billion, somewhere in the $6 
billion area. The other $6 billion would come from tobacco, and 
then the small 0.8 would come from firearms and ammunition.
    [Clerk's note.--Bureau amended 0.8 to be 0.3 in excise 
taxes.]
    Mrs. Northup. Do you think there is any State that pays 
more into that fund than Kentucky does?
    Mr. Magaw. Does anybody have that--I don't think so.
    Mrs. Northup. Well, you might think about looking at 
Louisville as a possible site. You would be right there where 
you regulate. [Laughter.]
    We are not under water most of the time. Anyway, I just 
thought I would talk to you about how close you would be to the 
business you are conducting.
    Mr. Hoyer. The new member is learning very fast, Mr. 
Chairman. [Laughter.]
    We are really aware of Mrs. Northup's focus here.

                 Government Performance and Results Act

    Mrs. Northup. Let me ask you about outcome. You do point 
out in your report about the Government Performance and Results 
Act when you were talking about the Achilles program, and I 
really do not mean to be critical here. I have a lot of 
appreciation and admiration for what you all do. But when I 
look at sort of the varied areas that you regulate--arson, 
illegal trafficking in drugs and guns, gang violence--I feel 
like all of those things, what we are hearing is they are going 
up. And I just wondered, you know, it seems like there is so 
much focus in your statement on input-based analysis: we have 
done this, we have added this computer model, we have trained. 
And I know that those are all attempts to improve, but since 
the problems seem to be getting worse, do you collaborate with 
other agencies and try to perhaps find a different paradigm for 
addressing these issues rather than just keep trying to improve 
these programs when the problems, especially the gang violence, 
are just escalating across this country? The 44 sites that you 
currently have will hardly begin to touch the cities that are 
currently affected by that.
    Mr. Magaw. This gives me great frustration and our 
personnel who are out there on the street every day with the 
increased violence and the children's violence. That is one of 
the things that we are so thankful for the GREAT program, the 
Gang Resistance Education and Training program, which is in 
virtually every State now. There is one more State, and it 
comes online this summer. And we have reached 2 millionchildren 
already, and we do it with local law enforcement. And so the law 
enforcement officer is in the school. The University of Nebraska has 
just run a complete examination of our success in the first 3 or 4 
years, and compared the children who have been in the program as 
opposed to those who have not. The results are encouraging.
    [Clerk's note.--Bureau amended this to be 1 million.]
    The majority of those arrested today are career criminals 
that we are putting in institutions, they are for the most part 
what we deal with, those Achilles and those multiple offenders 
and the continual criminals. Violent criminals, they are beyond 
the kind of help that we would be able to give them at this 
point. But what about the next generation coming along? So we 
are doing both, and we love this program, and our people, our 
personnel, just love the program. We want to keep it going. So 
we are trying to do that.
    And in all the cities, almost every place we work, if you 
go to a local law enforcement probably any place in your State, 
and you say what Federal agency helps you the most on a day-to-
day basis, they will tell you ATF almost always, and they will 
follow that very quickly probably with DEA. We do work in task 
forces, and we do try to make sure that we are dealing with the 
United States attorney, the States attorneys, and make sure we 
are prosecuting--or they are prosecuting the cases that are 
most important to them.
    Mrs. Northup. Exactly. And if you have any of those 
studies, I would really love to see the analysis of, like I 
said, the outcome instead of the input basis of what we are 
improving. Because, again, you may be doing the best job that 
is even imaginable, but if our Justice Department is not or if 
our youth programs are not, then we need to address that, 
because you cannot just keep running around the same track and 
ignore the fact. I know that gang violence is something that 
actually is moving into our area, and many cities, and the 
community feels almost helpless to stem that.
    Mr. Magaw. This GREAT program is starting to work closely 
with the Boys and Girls Clubs. We are now sitting down with the 
leaders of the DARE program--we did last week--trying to see 
how they can complement each other. Most people think that we 
have to influence the children in kindergarten and first grade 
and then again in third and fourth, and then again in about the 
seventh and the eighth grades and then in high school. And if 
we put all these programs together, I do not care what program, 
what grades ATF and the other police departments this GREAT 
program teaches. It is just how can it all bind together. We 
cannot all do it, so we----
    Mrs. Northup. And does it work?
    Mr. Magaw. Pardon me?
    Mrs. Northup. And does it work? The question eventually has 
to be: And does it work?
    Mr. Magaw. Does it work? That is correct. And that is why 
we are evaluating our GREAT program now.
    Mrs. Northup. I have more questions. I will be back next 
round.
    Mr. Kolbe. Thank you very much.
    Mr. Aderholt.
    Mr. Aderholt. Not at this time.

                            Excessive Force

    Mr. Kolbe. Let me go back to some of the questions that I 
had.
    On this issue of force--first of all, a question occurred 
to me after we were starting the hearing here about the recent 
L.A. bank robbery where two robbers used AK-47's. There were 
300 police officers there, and they were unable to do anything. 
They went to a local gun shop, I believe, and borrowed a couple 
of AK-47's, and the robbers were gunned down, basically.
    Does this incident suggest anything about the disparity in 
the fire power that the criminals have versus the law 
enforcement officers?
    Mr. Magaw. In certain situations, it does, but I think it 
is too early to tell across the board.
    The Los Angeles Police Department has an outstanding 
response unit. They got there just about the same time that the 
officers did with those weapons from the gun store. I thought 
it was a very innovative way of doing it. They realized their 
troops were in trouble. They saw a gun store. They used it.
    By the time that they got there, then their real crack team 
arrived, and so we just have to wait and see where this goes. 
These people [Clerk's note.--By ``people'' bureau refers to the 
perpetrators.] even designed armor for their legs, arms, neck 
and face. It was fairly crude, but it worked. Some of the 
police officers said, ``I could see our bullets bouncing off 
their bodies.''
    There have been probably, in the last 5 years, eight or 
nine incidents like this. Up in the Midwest, there was a police 
officer that was killed like this and two others wounded. So I 
think we have to try to monitor it, but to carry weapons of 
that magnitude around in every police car, I don't think is 
justified yet. There is too much training involved, but every 
unit, including ATF, has a very, very well-trained response 
unit to handle those kinds of situations.
    The officers took cover behind automobiles and waited for 
the rest of the response.
    Mr. Kelly. If I may just add something, Mr. Chairman?
    Mr. Kolbe. Yes.
    Mr. Kelly. I was head of a major police department, and to 
address the issue, many police departments are going to having 
heavier weapons on patrol, with officers who are especially 
trained to handle these weapons because it does take, as the 
Director said, a lot of training, a lot of proficiency.
    In New York City, we want our officers with heavy weapons. 
We want them to go and shoot once a month. Now, there is a 
large cost attendant to that.
    So I don't think it is practical for most departments to 
have patrol officers armed with heavier weapons, but the key is 
to have people well trained who are immediately available, who 
are on patrol 24 hours.
    If you see what happened in Los Angeles, the SWAT team 
responded very quickly. They are among the best in the 
business, no question about it, the Los Angeles SWAT team, and 
they did an outstanding job.
    I don't think as yet you see a trend developing, but it is 
something that has to be monitored closely.
    Mr. Kolbe. I appreciate that statement. I think that is 
exactly right that it is something that has to be monitored, 
but I am interested in hearing you say that the trend is not 
yet developed. Certainly, I would find it discouraging if we 
found it necessary for police officers to have to carry in 
every police car that kind of fire power.
    On the issue of ATF and force, your agency has been 
criticized for its use of force, and I think many of the 
reports that have been done, investigations that have been 
done, have given you a clean bill of health on that, but just 
for the record, can you tell me how many incidents you had in 
1996 where ATF officers were required to shoot or use deadly 
force? Can you provide that for the record if you don't have 
it?

                              deadly force

    Mr. Magaw. We will get those numbers to you. They are very 
small in terms of deadly force; in terms of physical force, 
rather low, also.
    What we are doing now in ATF----
    Mr. Kolbe. Oh, include with that a comparison from previous 
years.
    Mr. Magaw. From previous years, all right.
    We were also concerned to make sure when I came here 3\1/2\ 
years ago of what our use of force policy was. We got together 
with the Attorney General and Treasury and made sure that all 
of our use of force policies could stand the test and were in 
proper order. I am pleased to say ours is in that order, sir, 
but I will get you those statistics.
    [The information follows:]

    1. The number of times the Bureau of Alcohol, Tobacco and 
Firearms (ATF) has used excessive force during the past few 
years is:
    FY 1997--none.
    FY 1996--8 times.
    FY 1995--6 times.
    2. What is the procedure for reviewing excessive force?
    Deadly force can be used by any ATF special agent whenever 
he/she believes that his/her life, or the life of another is at 
risk, or whenever a threat of serious bodily harm is evident 
against a special agent or another.
    All shooting incidents are reviewed and, depending upon the 
seriousness of the incident, may require an investigation by a 
Shooting Incident Review Team (SIRT).
    All SIRT investigations conclude in a report and are 
reviewed by a Shooting Review Board. This Board may make 
recommendations to those involved in the incident, their 
superiors, or other ATF entities about a variety of issues 
including safety, compliance with ATF and Treasury policies and 
guidelines, planning, etc.
    If an employee, or one acting under ATF color, is alleged 
to have used ``excessive force,'' such matter would be 
investigated by the appropriate inspection service and, in the 
case of an ATF employee, would be reviewed by ATF managerial 
authorities and ATF's Professional Review Board for 
administrative and/or disciplinary action. Employees actions 
may also be reviewed by other law enforcement agencies and 
prosecutorial entities if so warranted.

    Mr. Kolbe. One of the criticisms in the past of ATF and its 
use of force, at Waco and some of the other incidents, is that 
there was a culture that existed within ATF, as you know. That 
is the suggestion that has been made. There was a lack of 
adequate assistance to ensure the right professional behavior 
and, perhaps most important, accountability for it.
    Tell me a little bit about the review that is applied to 
these kinds of cases when there are suggestions or criticisms 
of excessive force and how does it currently work.
    Mr. Magaw. Well, if there is an accusation that there was 
some excessive force used, our Inspection Unit, will go out and 
make an inspection to find out what the facts are.
    Let me just back up for one second here. I believe that 
over the years, ATF was in a position where they had to make a 
lot of arrests. ATF arrests a lot of armed, dangerous 
individuals, and we, in my view, got into a situation where we 
would do whatever was necessary to make that arrest with safety 
to all the officers, and a lot of times, we did make arrests at 
homes and in very high-risk situations.
    Now we don't do that. The guideline now and culture, if you 
will, say, is that you make the arrest. You try everything else 
to make this arrest before you use a forcible arrest, before 
you use a special response team, before you enter someone's 
home and invade that area.
    We are successfully implementing those policies now. Our 
training instructs along those lines. We used to have 24 
special responseteams. We now have five.
    Mr. Kolbe. That is good to hear you say that. How do you 
deal with the public, though, on this issue? There is certainly 
still a large perception among a lot of the public that the 
general rule of thumb for ATF is kick the door down first and 
ask questions later. So how are you dealing with the perception 
of the public that you use, what is referred to as dynamic 
entry or heavy force, first?
    Mr. Magaw. We have a liaison and public information unit 
now that we really didn't have before. Previously there was one 
person doing it. Now we have public relations and information 
officers in each field office. They are agents. So they are 
regulatory personnel.
    [Clerk's note.--Bureau amended ``regulatory'' to 
``enforcement'']
    What we want to do is make sure that we are dealing with 
the local media, making sure that they have the facts and the 
straight story, not to try to slant it in any way. It is a 
slippery slope because if you get in a situation where you are 
trying to work public relations, you may not be doing your job 
and you can be criticized for that, but what we want to do is 
make sure that the message and the information gets out.
    We had a number of Congressmen and Senators who really 
didn't understand what ATF did, and it was because we had a 
rule that you can't contact them except here in Washington. Now 
what we have is a requirement that our supervisors out there 
have to visit with them once or twice a year, and their staff, 
to let them know what we are doing in their area, what the pros 
and cons are.
    When you ask me a question or any of the staff a question, 
you are going to get an honest, straightforward answer and any 
documentation. There are a few publications that are interested 
in doing documentation about ATF.
    Our job is telling the story as it is; if we make a 
mistake, say so. I believe over a period of time, if the public 
had seen our troops, as they did in Oklahoma City, as our 
troops would leave that bomb site in Oklahoma City, and the 
crowds would cheer.
    [Clerk's note.--Bureau changed ``troops'' to ``agents'']
    It is the same way with some of the church fires. You won't 
find a minister now or any of those church congregations that 
are anti-ATF.
    So we are just doing our job every day. When the 
opportunity arises to tell the straight facts of the situation, 
we will, but we don't do a public relations job.
    Mr. Kolbe. Thank you very much.
    Mr. Hoyer.

                             canine program

    Mr. Hoyer. I think that was an excellent answer. I think it 
is always doing the best job possible.
    I am talking about successful programs, the K-9 program. 
The chairman and Mrs. Northup and all of us know that there is 
increasing resort to the use of explosives in random and 
targeted ways.
    Tell us about the K-9 program. I understand you have 17 FTE 
additions scheduled and $4 million. Tell us about that, and 
tell us about the success of this program.
    Mr. Magaw. The success of the program in the explosives 
area----
    Mr. Hoyer. Mr. Chairman, let me make a comment. We 
considered the airport safety. I forget what the specific name 
was, but in the last days of the session last year, this issue 
came up. It is important to focus on what ATF is doing in this 
area because I think it has broader application as it relates 
to security at airports, stadiums, convention halls--wherever 
there is a large gathering and, therefore, attractive targets.
    Mr. Magaw. There are explosive dogs, and there are arson 
dogs, and I am going to talk about the explosives canines here.
    Right now, ATF just has the one dog team, but with the 
success of that dog team and the success that you and others 
have seen, you have seen fit to give us the funds to move 
ahead.
    [Clerk's note.--The bureau later clarified that we have had 
success in training dogs and handlers for foreign law 
enforcement at the request of the State Department.]
    Customs already has a dog training facility for their 
functions on drugs and things at Front Royal, Virginia. We are 
using that existing site and are building some kennels and an 
indoor facility so that we can train year-round.
    We expect that once we are up and running, there will be 
about 100 dog teams trained a year. So, in 1998, we figure we 
will train 100 dog teams.
    This year, 1997, we will train much less than that, 
probably 25 or 30 teams. Of those, only seven or eight [Clerk's 
note.--bureau corrected this to be ``six''] will remain with 
ATF. The rest will go out to State and local law enforcement. 
When ATF has a problem in that particular area, the local law 
enforcement usually has too. So they just share that dog, as we 
do our arson dogs.
    [Clerk's note.--The bureau later clarified that ATF plans 
to train approximately six additional ATF agent/canine teams to 
be deployed nationwide. Also, the Bureau plans to conduct eight 
pilot programs with State and local law enforcement.]
    Those seven or eight that we will have, two will be used in 
an experimental program. At Dulles Airport, FAA and ATF 
personnel will use two canine handler teams as part of a two 
year pilot program to see where it can be beneficial, in what 
area, without being overly disruptive.
    [Clerk's note.--As above, bureau amended this to ``six'']
    There also will be a second dog trained by the Air Force 
because the Air Force has a dog training unit, we see how the 
two training units work, how the two dogs work, are there 
things we can learn from them and that they can learn from us. 
That is the experiment that will take place in the next year as 
far as airports are concerned.

                 gang resistance education and training

    Mr. Hoyer. Well, I think that has great promise, and I am 
pleased to see that request.
    Gang Resistance Education and Training program. Mrs.Northup 
asked a question, and you responded. How much money are we asking for 
GREAT this year?
    Mr. Magaw. $11 million.
    Mr. Hoyer. $11 million.
    You say, Mr. Director, that that will then extend to all 50 
States, the GREAT program?
    Mr. Magaw. Yes. This summer, it will be in all 50 States.
    And not all of these States are funded by this because, as 
soon as a police department or a city gets this program and 
sees how important it is, sometimes they fund it themselves, 
and all we provide are the training for their instructors and 
the book materials and things like that.
    [Clerk's note.--Bureau amended ``all 50 States'' to ``44 
localities'']
    [Clerk's note.--The bureau later clarified that the Bureau 
anticipates providing funding to 44 different localities to 
support their participation in GREAT. We estimate that over 800 
different localities are currently teaching the GREAT 
curriculum. In addition to providing financial resources, ATF 
also provides training to law enforcement officers, certifying 
them as GREAT instructors.]
    Mr. Hoyer. Mrs. Northup asked a question and you responded. 
I don't know whether she has seen the GREAT program in 
operation. It is a terrific program in the sense that it 
started, as you know, with seventh-graders. In Prince George's 
County, as you know, they wanted to go to fourth-graders 
because they think the earlier you get to the young people, the 
better. Like the DARE program, one of its strengths is 
uniformed officers dealing with kids because one of the things 
we need is the synergy, the cooperation, the feeling of a joint 
enterprise between young people and uniformed officers. 
Bringing in ATF's expertise in this area and working with the 
local officers, really has been very successful.
    These young people, Mr. Secretary, get a psychology that 
the policeman, the cop on the beat, is their buddy, not their 
adversary, not looking over their shoulder, but a joint 
enterprise. It is a dynamite program. I am glad to see it going 
forward. If we were spending twice that $11 million, I think it 
would be worth the money.

                        explosives taggant study

    The taggant study, a lot of discussion about this over the 
years, language in our bill with reference to taggants. I, 
frankly, personally am somewhat ambivalent in terms of whether 
or not this is a program that can be successful.
    Would you speak to the status of the taggant study that was 
called for in the '97 appropriation bill?
    Mr. Magaw. Yes, sir. The taggant study--we are remaining 
neutral by learning what everyone says about this.
    I want to make sure, too, that as we talk about taggants, 
that somebody doesn't misunderstand. We are not talking about 
black powder here. We are talking about taggants.
    So, you take materials such as fertilizer determine whether 
and taggants can be put in those materials that won't be 
destroyed upon the explosion and then will help lead to the 
perpetrator.
    [Clerk's note.--The bureau later clarified that as part of 
the four-part study authorized by the legislation, the Bureau 
has met with worldwide representatives in an Interagency 
Committee on Explosives Technical Support Working Group; 
entered into two contracts with the National Academy of 
Sciences to independently study explosives for detection and 
identification; and contracted with the International 
Fertilizer Development Center to study the agronomic and 
economic impact of tagging ammonium nitrate fertilizer.]
    There are a number of things to study--how much is this 
going to cost, does it make these explosives more volatile, 
does it make them more difficult to handle, does it deteriorate 
the chemicals so that they don't work for what they were 
intended to do?
    We are working with the Fertilizer Institute, the Sandia 
National Laboratory, and the New Mexico Institute of Mining and 
Technology, and we are using all the information we can get 
from foreign countries who have used it. Taggants have been 
used in Ireland and in Europe for a number of years. So we are 
pulling all that information together, making sure that it is 
not a group of just ATF persons. It is the national 
organizations as well as the Federal organizations, and making 
sure that we can have a good report to bring back to the body 
of Congress. The National Academy of Sciences is under contract 
with us. So we can bring a report back that will allow this 
body to make some judgments.
    Mr. Hoyer. How soon do we expect the report. I forget when 
it is called for, in the legislation.
    Mr. Magaw. The delivery to Congress will be May 24th of 
this year.
    Mr. Hoyer. May 24th.
    Mr. Magaw. But most people that we are working with, sir, 
feels that the initial report on May 24th is not going to be 
complete. There needs to be some additional time, and they are 
hoping that it will give us time for a supplemental report in 
December of 1997.
    Mr. Hoyer. Mr. Chairman, I have some additional questions, 
but I can submit them for the record.
    Mr. Kolbe. All right. I am going to do a couple more rounds 
myself. So I will be happy to get back to you in a moment here.
    Mr. Hoyer. All right.

            violent crime reduction trust fund/base funding

    Mr. Kolbe. On the issue of the amount of money from the 
violent crime reduction trust fund, the GREAT program, I have a 
concern. You are requesting $50.4 million, I think, this year 
for violent crime reduction trust fund. $26 million is for the 
ATF headquarters. That is presumably a one-time expenditure. I 
have some questions about the capital that is involved in this, 
whether that is what was intended by that fund, but 
nonetheless, we are as guilty of that as anybody here in 
Congress, but the other part of this, your $24 million for 
increased explosive inspectors and the rest is for such things 
as the GREAT program. Those are all base activities. So this is 
going to get reflected in your base in the future years.
    Mr. Magaw. Those are base activities. We have felt that the 
church fires, the explosions, all the kind of things that have 
occurred in the last couple of years, that we need to work on 
inspecting 100 percent of those units out there because there 
is so much being stolen. What is being stolen, then, is ending 
up in your bombs.
    So what we feel we have to do in order to support the 
correction of this bombing problem is to make sure we inspect 
every handler of explosives a year, and we can't do it with the 
personnel that we have.
    Mr. Kolbe. That is not what I am getting at. Why are we 
requesting this money out of the violent crime reduction trust 
fund, VCRTF, rather than in your salaries and expenses account 
if it is base programs?
    Mr. Magaw. I will have to get that answer for you. I just 
don't know.
    Mr. Kolbe. I don't think that is a difficult question to 
understand.
    The violent crime reduction trust fund was designed to be 
for things that were one-time expenditures. That was the idea 
of it.
    Now you are using this money to build things into base that 
you will have to request in the future years as part of your 
base. Why don't you start by requesting that in your base 
expenses?
    Mr. Magaw. I am told by the note here that OMB and the 
Administration gave it to us in that manner, and so that is the 
way we have accepted it. It needs to roll over in the base 
because we are going to need to continue to do that once we 
start it.
    Mr. Kolbe. Let me go on, on this line here. You are also 
requesting a large--$5.4 million of that is for increased 
explosives inspectors, and you say in your testimony, in your 
budget request, that you are going to increase the number of 
explosive inspections by 53 from the present number of about 
47. Is that correct?
    Mr. Magaw. That is correct.
    Mr. Kolbe. That is a doubling?
    Mr. Magaw. That is right. We are going from inspecting 
about 28 percent of those.
    Mr. Kolbe. So an increase of over 100 percent, fine.
    Yet, you say that the number of sites you are going to be 
able to inspect will increase by 15 percent; from this year, 65 
percent. Something doesn't add up here.
    Mr. Magaw. Well, the first year, you have got to get them 
on board. You have to train them. We go up to 100 percent in 
1999. We will go to 100 percent.
    Mr. Kolbe. With these additional inspectors.
    Mr. Magaw. With these additional inspectors. That is 
correct, sir.
    Mr. Kolbe. So you will be able to reach 100 percent with 
these additional inspectors.
    Mr. Magaw. That is right. We will go from 28 percent to 100 
percent in that 3-year period.
    Mr. Kolbe. Okay. You are not going to be coming back and 
saying, next year, we need another 53 in order to get another 
15 percent.
    Mr. Magaw. No. That has been projected and preplanned, and 
we can handle it with those.
    Mr. Kolbe. So it has to do with bringing on-line training, 
getting them out into the field and so forth, in that time 
frame.
    Mr. Magaw. That is right. Then, before you get through each 
inspection, because each one is fairly extensive--if it is a 
quarry, how they store explosives, the safety and all of those 
kinds of things.
    [Clerk's note.--The Bureau later clarified earlier 
information by adding but, as I mentioned earlier, the Bureau 
may have a problem paying these additional inspectors since the 
request for funding was not asked for in our direct Salary and 
Expenses account request.]
    Now, once we get them all hired and they comply, then that 
number, we will be able to do that every year because you won't 
have so much to overcome after you have done it the first time.
    Mr. Kolbe. All right. I have another line of questioning I 
want to do. It is going to take me a little time. So let me go 
to Mr. Price, who just joined us here, and see if Mr. Price has 
any questions, and then back to Mr. Hoyer.

                           bombings and arson

    Mr. Price. Thank you, Mr. Chairman.
    I would like to add my welcome and thanks to our witnesses 
and ask Mr. Magaw, if he could, to elaborate on a matter that 
Mr. Hoyer raised briefly, that is the bombings and fires at 
houses of worship, incidents that have plagued particularly the 
Southeast in the last couple of years. It is, of course, an 
alarming situation. I know you share that view, particularly 
about the numerous attacks against African-American churches, 
which I believe represent 138 of the total of 328 fires of this 
sort that have occurred since 1995. So I want to commend ATF 
for its involvement in helping investigate the violence and 
working with the National Church Arson Task Force to combat it.
    I know there were some 328 church burnings investigated by 
ATF in the last couple of years, and I would like, first, to 
know how that figure relates to the total number of arson 
investigations that were opened over that time period.
    Mr. Magaw. Well, there were actually 508 church 
investigations, but, see, not all of them are arson. There are 
an awful lot of them that are accidental, but it takes a fairly 
decent amount of time to determine that. So you are right. Out 
of that 508, there are 352.
    [Clerk's note.--The Bureau later clarified that from 
January 1995 to February 25, 1997, 352 investigations have been 
initiated by the National Church Arson Task Force (NCATF).]
    But as far as all fires, all arsons throughout the country, 
we will run 1,700 or 1,800 during that period of time, almost 
2,000 when you count all the different fires that we assist 
with throughout the country.
    Mr. Price. Well, as Mr. Hoyer noted, the arrest rate for 
these church arson investigations has been higher than for 
other arsons. What kind of resources, both in terms of dollars 
and FTEs, have you devoted to the church burning 
investigations, and how much are you proposing to devote to 
this in fiscal 1998?
    Mr. Magaw. Up until now, we have spent about $13 million, 
and we have 125 to 150 personnel working on these church fires 
every day. Of course, we are not only talking about church 
fires in the South, but you are talking about church fires all 
over the country because all church fires now are reported. 
Sometimes they are a few days late, and sometimes they are very 
easy to resolve, but we are working them all around the 
country.
    We expect next year, if this trend continues, to spend even 
more than that because it appears that the church fires are 
continuing. It is not a case that church fires are new. There 
have been church fires for years. They just haven't been 
reported for the most part. Now every one is being reported.
    [Clerk's note.--Bureau later gave the amount as $8.2 
million.]
    So, as you showed, of the 352 that are arson, 146 were 
African-American and 206 were non-African-American churches. 
So, it is a real mixed bag, but it is something that if there 
is going to be a repository, which the suggestion has been, and 
if ATF is going to continue to assist local fire departments 
and local fire marshals when they don't have the expertise or 
the wherewithal to do it, it still will need to be funded at 
about that same level.
    Mr. Price. You say the trend is continuing. Are there any 
particular trend lines you would deem significant?
    Mr. Magaw. ``Probable'' is an improper term, Congressman. I 
apologize for that.
    The trend as far as number of fires are continuing, but 
those arrested is a real mixed bag. It is everything from 
people setting fires in their own church for insurance 
purposes, to juveniles who are satanistic, to covering up 
burglaries. In some cases, the perpetrators have been volunteer 
firemen. In other cases, they have been the Ku Klux Klan 
members. So, it has run the gamut.
    Mr. Price. I am aware that there is a wide variety of 
circumstances and motivations. Yet, I wonder, in all this 
detail, if you are going to be able to draw some conclusions, 
some helpful conclusions.
    I noticed in the interim report for the President you don't 
make any conclusions about why we have witnessed this rash of 
attacks on churches. Maybe that is just because it is an 
interim report, but I wonder, do you have any preliminary 
conclusions about the motivations, the dominant motivations 
that lie behind these incidents?
    For example, can you give any estimate of the percentage of 
these 138 attacks against African-American churches that appear 
to have been raciallymotivated?
    Mr. Magaw. I don't have the percent here that were racially 
motivated. Maybe while I am answering another part of that 
question, we might be able to pull this off.
    In terms of the fires around the country, it is just such a 
mixed bag. There is no doubt that in the Southeast part of the 
country, there have been an inordinate number of African-
American churches burned.
    What we are finding helpful as we go about our business is 
a booklet we put out. We have talked with the churches, and we 
have visited with the congregations and the pastors and talked 
to them about the safety.
    A lot of them are remote. They have no outside lighting 
system. They have no alarm system. They have no smoke 
detectors. They have no provisions where once every 24 hours or 
twice every 24 hours, some of their parishioners will go by. 
That booklet has been very, very valuable.
    The other part of this, too, is a lot of these people that 
we are arresting as a result of these investigations are 
copycat because of the notoriety and because there is 
notoriety. It is giving them the idea to do it. Some of them 
are very pathetic in the way they go about it. Others are very, 
very successful, and so it is so mixed.
    The answer specifically to your question concerning how 
many of these are racially motivated, we haven't drawn any 
conclusions on that, neither has ATF or the National Committee.
    Mr. Price. But presumably, your final report would attempt 
to be more definitive than this interim document?
    Mr. Magaw. Oh, yes. The final report will be much more 
detailed.
    Mr. Price. Thank you.
    Thank you, Mr. Chairman.
    Mr. Kolbe. Mr. Hoyer?

                           firearms licensees

    Mr. Hoyer. Mr. Director, I think it was 2 years ago, that 
we increased substantially costs of the licenses. Tell me the 
experience now in terms of your firearms licenses.
    I know the number of licenses has substantially decreased 
reduced. I would like, therefore, the percentage of inspections 
that you can now make as it relates to licensees and whether or 
not we are receiving a large number of complaints.
    I asked my staff whether or not we received complaints from 
former licensees who now find it too expensive to participate, 
and the answer was no, we have none, but I presume there have 
been some complaints. Obviously, you read stories about it, and 
I would appreciate your comments on this.
    Mr. Magaw. There have been some complaints, Congressman. 
One, because of the expense going up----
    Mr. Hoyer. For the record, we went from what figure to what 
figure?
    Mr. Magaw. From 288,000 to--right now it is not quite 
121.000.
    Mr. Hoyer. That is the gross number of licensees. I was 
referring specifically to the cost of the license.
    Mr. Magaw. The cost went from $10 a year to $200 now, and 
then $90, 3 years later, so $200.
    [Clerk's note.--Bureau later added that $200 is the cost of 
a three-year license, and $90 is the cost of a subsequent 
three-year renewal.]
    Mr. Hoyer. Am I correct, when we debated this and discussed 
it, the cost now is more reflective of the cost it takes to 
regulate, inspect, and to ensure compliance?
    Mr. Magaw. That is correct. They submit their fingerprints 
so there can be a record check and those additional things, but 
initially, when this program was instituted, it took a while to 
get it started. So there were some complaints about, well, it 
is taking longer to renew my license than normal. So we gave 
them a letter saying we are extending your privilege to operate 
until we get this done. So, as we have had complaints come to 
us, we have tried to correct them.
    [Clerk's note.--Bureau changed this to ``not correct'']
    We are in the final of the three years. We expect the final 
third of those licenses coming through for renewal will be 
completed in May, and we expect that the total will probably 
drop down somewhere around $110,000 if the same number decide 
that they don't want to renew it.
    Most of those people who decided not to renew were 
primarily the one or two purchases a year. They purchased one 
or two guns for themselves or their family, and by having this, 
they could get the wholesale price. So, that is the biggest 
group, but that is also the group that traffickers hid behind 
because they knew there was no way we could inspect them in a 
reasonable period of time.
    Down around 100,000, with the personnel that we have, we 
feel not only by the telephone contacts, the inquiries from 
them, the kind of information we are trying to get out to help 
them do their job better and comply with the laws, that we will 
have close oversight. It will not be disruptive to what they 
are trying to do, but will also not allow the traffickers to 
hide or those who will not abide by the law to hide.
    Mr. Hoyer. Mr. Director, at $200, are we cost-neutral? That 
is to say, is the cost of the program now, for the most part, 
paid for by the fees?
    Mr. Magaw. At least what we have shown up until now, it is 
cost-neutral.
    [Clerk's note.--The bureau later clarified that the current 
fees set by statute do not cover the costs of implementing this 
compliance program. The Treasury Under Secretary's 1994 memo to 
the GAO regarding ``user fees,'' stated that control of gun 
licenses and fees should be left to Congress to decide. Thus, 
legislation versus regulation was passed establishing license 
fees. Neither the $200 million initial fee nor the $90 three-
year renewal fee covered the cost of the program.]
    Mr. Hoyer. Referring specifically to the case that 
Secretary Kelly mentioned to in New York, did we find that the 
traced guns were black market or were they, purchased from a 
licensed dealer or formerly licensed dealer? You may not have 
that knowledge.
    Mr. Kelly. It was a store purchase from an FFL in Ohio, the 
one I remember most vividly.
    Mr. Hoyer. So it was a licensee?
    Mr. Kelly. Yes, sir.
    Mr. Hoyer. Mr. Chairman, I think what we have done is 
focused the ability of ATF to do what we want them to do under 
law.
    I have a number of gun dealers who are absolutely honest, 
law-abiding citizens. A gun show was held down in La Plata, a 
big attendance at the armory down there this weekend, very 
legitimate people, but there were some fly-by-nighters who were 
really participating in a lot of gun running, effectively, and 
getting guns to folks who were then using them to commit a lot 
of crime. While we want to make sure that legitimate citizens 
can own, and purchase without being hassled to protect 
themselves, their homes, their businesses, we also want to make 
sure that these thugs that are running around just don't have 
easy access.
    They are probably going to get them some way or the other, 
but the harder we make it, the better we are.
    Mr. Magaw. As part of our strategic plan, Congressman, we 
have reached out to the manufacturers, and also the firearms 
license dealers and those who are collectors, and we are 
reaching out in meetings with them by asking what can ATF do 
orwhat is ATF doing that is causing you problems and seeing how we can 
work those out. That, we have done a much better job with in the last 2 
or 3 years, we have cut down the size of our applications, but still 
getting the same information. I think it went from seven pages to two 
or three. So we are reaching out to the legitimate businesses.
    Mr. Hoyer. Mr. Chairman, I have a few other questions. With 
your leave, I am going to go next door because the Labor Health 
Subcommittee is having a hearing on NIDA, the drug agency, and 
I want to see what their report is. It ties in with some of 
what you are doing, the GREAT program, DARE and all of that.
    Thank you, Mr. Chairman.

                           ceasefire/drugfire

    Mr. Kolbe. Thank you very much, Mr. Hoyer.
    I want to follow up with one question along the line that 
Mr. Hoyer had earlier, and that has to do with CEASEFIRE. You 
mentioned that you've got, I think, 11 sites, is that correct, 
or something like that?
    Mr. Magaw. That is correct.
    [Clerk's note.--The bureau later clarified that by the end 
of FY 1997, ATF will have 25 to 27 IBIS sites operational.]
    Mr. Kolbe. Drugfire has blanketed the country.
    Do we have just an incredible amount of not overlap here, 
but of inability to have these two systems function together? I 
have been told that in Oakland and San Francisco, for example, 
right across the bay, these two police departments can't talk 
to each other. They can't compare notes on ballistics 
characteristics. I mean, this is ludicrous. It is the kind of 
thing we hear about over and over again, about law enforcement, 
at the local level, Federal level, or State level. I despair 
that we are ever going to change this.
    I remember from my first days, 20 years ago, this year, 
when I first served on the State legislature and was on the 
Judiciary Committee and the Appropriations Committee 
simultaneously hearing about this kind of problem. Are we ever 
going to get this kind of thing where we get some commonality, 
interoperability? I just think that the criminals must have 
laughed their way to the bank all the time with the fact that 
we can't ever get our act together.
    What are we going to do about getting CEASEFIRE and 
Drugfire to operate in a compatible fashion? How much of the 
money that we are appropriating to you this year for that is 
going to go to the interoperability of these systems?
    Mr. Magaw. Well, OMB has put together a team of specialists 
under the National Institute of Standards and Technology 
(NIST). NIST is doing it, and that contract is out. They are 
looking at how we can tie these two systems together.
    [Clerk's note.--The bureau later clarified that they are 
responsible for performing the interoperability test between 
IBIS and Drugfire.]
    The fact that these two systems were developed side by side 
ends up with really two better systems. You have in CEASEFIRE a 
system that can do bullets, almost regardless of their 
condition. Drugfire is primarily a cartridge technology.
    The fact is, what we have got to do is get them tied 
together, and I agree with you and that is what I said in my 
statement. I am not enough of a technician to know exactly how 
they can do that. The fact is, they are both systems that are 
computerized, and we should be able to tie them together, and 
we have NIST looking at that now in terms of exactly the amount 
of money we are spending for that.
    I did, also, when you talked about our IBIS systems--we 
talked about 11. It is really 25 IBIS systems as opposed to 11.
    Mr. Kolbe. It was the lack of interoperability of these 
systems.
    So, at this moment, it is in the hands of NIST to come up 
with a plan to make them interoperable?
    Mr. Magaw. Make them interoperable, yes.
    Mr. Kolbe. You would expect to have a report on this, a 
plan to coordinate with the Justice Department on this? Do you 
expect to tell us what you are planning to do in this area?
    Mr. Magaw. Yes, sir, we do. I don't have a time frame.
    Mr. Kolbe. You do not have a time table for that.
    Mr. Magaw. I know the study has taken place.
    [Clerk's note.--Bureau amended this to say ``testing is 
taking place'']
    Mr. Kolbe. We will review this question again. My final 
line----
    Mr. Magaw. We will make that a point, and as we get status 
reports on that, we will bring those to your staff.

                        the lautenberg amendment

    Mr. Kolbe. All right. Thank you. I would like that very 
much, to be kept up to date on that.
    My final line of question is the Lautenberg amendment. The 
shorthand, everybody knows what we are talking about here, but 
for the record, it is the amendment that was adopted in the 
omnibus consolidated appropriations bill last year that says 
that anybody convicted of a misdemeanor crime of violence is 
prohibited from possessing, shipping, transporting or receiving 
firearms or ammunition. It does not exclude law enforcement 
agents. It does not exclude BATF, Federal law enforcement 
agents.
    I guess the first question is to you, Mr. Secretary. Is the 
Treasury fully complying with this law?
    Mr. Kelly. Yes, sir, we are fully complying.
    Virtually, everyone has reported, and we have approximately 
10 individuals who are affected by this law.
    Mr. Kolbe. Treasury-wide.
    Mr. Kelly. Throughout Treasury, yes, sir.
    Mr. Kolbe. All the law enforcement agents carrying weapons.
    Mr. Kelly. Everyone who carries a gun----
    Mr. Kolbe. Only 10.
    Mr. Kelly. Yes, sir. That is not the absolute final figure. 
It won't deviate from that very much, approximately 10.
    Mr. Kolbe. Right. Well, the first question is, how did you 
make that determination?
    Mr. Kelly. Well, the heads of the bureaus and agencies 
queried their personnel either through their personal records 
or----
    Mr. Kolbe. Going through your own internal personnel 
records?
    Mr. Kelly. Yes, sir. Then they certified the number.
    Mr. Kolbe. It should be able to tell you if there is a 
misdemeanor conviction in there? The personnel records would 
have normally any misdemeanor conviction?
    Mr. Kelly. Personnel records should have it, but it may not 
have it. So there is a certification process where the employee 
is asked to certify that he or she does not have a misdemeanor 
conviction for domestic violence.
    Mr. Kolbe. Right. If they falsely answered that and it 
later were discovered, they would be subject to dismissal, 
correct?
    Mr. Kelly. Well, they would be subject, certainly, to 
disciplinary action, but obviously, they would be not in 
compliance with the law. They would be breaking the law.
    Mr. Kolbe. Correct, in more than one count. What have you 
done with these 10 agents?
    Mr. Kelly. We have taken their weapons away from them. We 
have formed an inter-agency committee to address this, and we 
are going to have to look at each individual case. Certainly, 
the number is 10 or approximately 10. It is certainly a number 
we can deal with.
    Mr. Kolbe. Will those agents be placed in other--they are 
not being dismissed----
    Mr. Kelly. No.
    Mr. Kolbe [continuing]. Because it is only a misdemeanor 
conviction.
    Mr. Kelly. That is right.
    Mr. Kolbe. So they will be placed in other lines of duties 
that do not require them to have weapons?
    Mr. Kelly. Most likely. That is what this committee is 
about. I think we have to look at each individual case to see 
what they are doing, what their level is, their GS level, and 
to attempt to address it appropriately, but we don't have a 
concrete policy that says specifically what will happen to each 
individual. We hope to determine that with this committee.
    Mr. Kolbe. I would appreciate it if you would give us just 
a breakdown of the agents and where they are at, obviously not 
the name, but just the numbers.
    Mr. Kelly. Yes, sir. We will do that.
    [The information follows:]

[Page 278--The official Committee record contains additional material here.]

    Mr. Kolbe. Is there a category for crime of domestic 
violence that exists now in the criminal record databases?
    Mr. Kelly. In some States, yes, and probably most States, 
no. Some States have discreet domestic violence crimes that you 
can pick up by querying a database. Other States do not.
    Mr. Kolbe. So how are local law enforcement agencies 
expected to comply with this if there is not the database, if 
we don't have this on the database?
    Mr. Kelly. Well, as I say, some States do. This will be a 
question on the form, on the Brady form. This will be added, 
and an individual will answer that question yes or no.
    Mr. Kolbe. For new agents coming in, being hired.
    Mr. Kelly. Oh, I am sorry. I was talking about----
    Mr. Kolbe. Prospective.
    Mr. Kelly [continuing]. The public at large, but you are 
talking about an employee now.
    Mr. Kolbe. An employee, yes.
    Mr. Kelly. Well, a background investigation, which is done 
on any new employee, that will be a question, and obviously, 
there is an investigation that is done for people who carry 
guns. There will be a criminal records check.
    Mr. Kolbe. That criminal records check, though, should 
always turn up this kind of a misdemeanor?
    Mr. Kelly. No. It is going to be difficult, but the 
obligation is on the individual who fills out an employment 
form, just like anyone for a job. That will be a question that 
will have to be asked for people who are going to be authorized 
to carry a weapon.
    Mr. Kolbe. Do you have some concern about the tremendous 
wide variation of State laws in domestic violence and the fact 
this is going to end up with a very uneven application?
    Mr. Kelly. Well, getting the information is going to be a 
challenge, no question about it.
    Mr. Kolbe. That wasn't the thrust of this question. The 
thrust of what I am trying to get at is that, in some States, a 
misdemeanor conviction for domestic violence can be really 
almost words used rather than any kind of physical violence, 
and in other States, it may be, indeed, somebody who was plea-
bargained down from a felony to a misdemeanor.
    I am just wondering about the tremendously uneven 
application. The amendment has no common definition of what is 
domestic violence, and the States vary widely in that. I am 
just wondering whether that poses any--whether you have any 
concern about that.
    Mr. Kelly. Well, we have some concern, but I think the----
    Mr. Kolbe. You have to go by the State law. So you have a 
Federal agent in one State that may have committed some real 
domestic violence, but isn't covered by it, and you may have 
another agent in another State that did something that is 
really fairly minor and now is deprived of his or her 
livelihood.
    Mr. Kelly. I think the misdemeanor threshold is so 
relatively high to be convicted of a crime in this country.
    I mean, there is a uniform penal code that is followed by 
most States. I am not certain there is that wide disparity. To 
be convicted of a crime, to be convicted of a misdemeanor, I 
think is still a fairly high threshold throughout the country.
    Mr. Kolbe. Are you concerned at all about the retroactive 
application of this for your department?
    Mr. Kelly. Counsel tells us that it is not retroactive in 
the sense that the law is violated after the passage of the 
Lautenberg law. Retroactive, I understand what you mean in 
terms of not being on notice previously; that this would be a 
bar.
    Mr. Kolbe. No. I wasn't questioning the constitutionality 
of it, but the fact that it is being applied retroactively and 
agents that were hired legitimately and performed well are now 
suddenly, basically, out of a job.
    Mr. Kelly. The law is applicable to, yes, law enforcement 
personnel, but everyone throughout the country. So, in that 
sense, it is being fairly applied.
    Mr. Kolbe. Okay. Then you are not concerned about the 
retroactive feature of it, whether it is law enforcement agents 
to anybody else, then? That doesn't concern you particularly?
    Mr. Kelly. Well, I think the law should be applied across 
the board evenly.
    Mr. Kolbe. Of course, but one could have adopted this and 
said, henceforth, no one shall be employed by any agency or no 
person who is convicted, henceforth, from this date forward of 
a misdemeanor will be allowed to possess a weapon.
    What I am trying to get at, going back, my understanding 
with local law enforcement agencies is that they are opposing 
it, and they are very concerned for some individuals that have 
absolutely impeccable records as law enforcement officers from 
the day they were hired onward. They may have had some in a 
previous divorce, some minor incident that resulted in, for 
whatever reason, a misdemeanor conviction.
    I think the local law enforcement agencies just dismiss it. 
They have no choice. They don't have the smaller units. They 
don't have the number of non-weapons-carrying jobs and the 
kinds of jobs that they can put these people into. I think 
there is a lot of concern about this.
    Mr. Magaw. Mr. Chairman, we are carrying out the law as it 
was written.
    Mr. Kolbe. I understand. I was just wondering if you 
personally had any concerns about the way of the law, but 
apparently, you don't.
    Mr. Magaw. Mr. Chairman, can I mention something 
aboutLautenberg before you go on?
    Mr. Kolbe. Yes.
    Mr. Magaw. Some of those concerns you were talking about, a 
young officer, in order to get a divorce settled, agrees to 
plead to something like this, and in 25 years, he or she has 
served very well. There are a few of those around. There are 
not very many, but the part about this law that really concerns 
me, and I want to bring it to the committee now, is that in 
almost every State, ATF is going to be the enforcement arm of 
first resort. There are no State statutes.
    So, when we get a call that says my spouse or my former 
spouse has these weapons, was convicted as such and such a 
time, we are concerned about the ballooning of all of these 
investigations. We don't know where the number is going to go.
    We have a number of them going on right now around the 
country and have made some arrests. We may not under these 
circumstances have the personnel to carry all of these 
investigations out, and if we do, I am not sure the committee 
and the Congress wants us doing that. We need to understand 
that part of Lautenberg, and if we don't do it and someone is 
killed as a result of it, then we are going to be sitting 
holding the bag on this one.
    So I just want to make you aware of it that it is starting. 
We are handling it right now, but it may become very difficult 
in the months to come.
    Mr. Kolbe. Just so I understand, do you use the word 
``arrest'' here?
    Mr. Magaw. If a person calls and says this person----
    Mr. Kolbe. My ex-husband.
    Mr. Magaw [continuing]. Is carrying a weapon or has 
weapons----
    Mr. Kolbe. And he has a misdemeanor.
    Mr. Magaw. That is right, and has not turned them over, has 
violated the law, has threatened me 2 days ago, what does ATF 
do at this point? The local law enforcement, unless there is an 
actual threat, unless somebody calls and says he is threatening 
me with a gun, and of course, we will have local law 
enforcement. We will call them right away, but how will we 
handle these cases? That is where the tremendous problem with 
Lautenberg is going to come in the months to come.
    I don't think you want ATF handling these cases----
    Mr. Kolbe. No, I don't.
    Mr. Magaw [continuing]. But I don't know how we are going 
to get out of it if we aren't careful as we get into it because 
we are the only one that can enforce it. It is a Federal law 
for which there is no State or county or city counterpart.
    Mr. Kolbe. I hope we are not going to arrest them, whether 
it is ATF or local, unless we have informed them, made sure 
that they were informed of this provision of law. Granted, 
there is a well-established provision that ignorance of the law 
is no excuse, but nonetheless, I hope we are not going after 
somebody who legitimately has had a gun for all these years, 
didn't get the word about Lautenberg. We are not going to just 
go out and yank them off the street because, aha, you have a 
gun and you didn't know that we just passed a law last year.
    Mr. Magaw. Your point is well made.
    Mr. Kolbe. We can't have this.
    Mr. Magaw. Your point is well made. It is like that 
flashing traffic light yellow. They leave it flash for a few 
months. We are going to do that kind of thing, but the kind of 
cases we are going to get involved with, I think your 
imagination can tell you the kinds of things we are going to 
get involved with.

               bureau costs associated with the amendment

    Mr. Kolbe. Have you done anything about what the workload 
for BATF would be under this? Do you have any estimations?
    Mr. Magaw. Well, there is no way for us to know yet. Right 
now we have put guidelines out to our personnel, as best we can 
right now. If there is an emergency call that an assault is 
taking place or something, have local police respond, and then 
they have the jurisdiction and we follow up with the 
investigation later, make sure that, like you said, if it is a 
situation where there is a call that this person has weapons, 
then we have a responsibility to make sure they are informed, 
and can we do that by registered letter and those kinds of 
things. We are just now trying to work out that policy and that 
procedure, and we need to share that with this committee, so 
that we make sure that as we go down this road, we are doing 
what this committee wants us to do.
    [Clerk's note.--The bureau later classifed that the Bureau 
has spent over $1 million on printing and postage costs 
associated with notification mailing and revisions made to form 
4473.]
    Mr. Kolbe. I think that is very, very important because I 
think there would be significant budget impacts for that. I 
would appreciate it if you would do that.
    I understand Mr. McCollum's subcommittee is holding a 
hearing on this issue tomorrow. I don't know whether you people 
are going to be testifying or not, but certainly, this issue is 
going to be one that we are going to be revisiting.
    No questions?
    Mr. Aderholt. I have some I will submit for the record.
    Mr. Kolbe. Okay. Mr. Aderholt will submit his questions for 
the record, and I will have a few others that I will submit 
also for the record.
    Thank you both very much for coming to testify today, and 
this subcommittee is adjourned.
    [Questions and answers submitted for the record and 
selected budget justifications follow:]

[Pages 284 - 364--The official Committee record contains additional material here.]

                                            Tuesday, March 4, 1997.



                  FINANCIAL CRIMES ENFORCEMENT NETWORK

                                WITNESS

STANLEY E. MORRIS, DIRECTOR, FINANCIAL CRIMES ENFORCEMENT NETWORK

                  Opening Comments From Chairman Kolbe

    Mr. Kolbe. We will call next Mr. Stanley Morris, Director 
of the Financial Crimes Enforcement Network, FinCEN.
    Mr. Director, we have already made our opening statements, 
and your statement, will be placed in the record. We hope you 
would summarize it so that we can have some time for questions.
    Mr. Morris. Thank you, Mr. Chairman, Mr. Hoyer, members of 
the subcommittee. I appreciate very much the opportunity to 
discuss our mission and the '98 budget request for the 
Financial Crimes Enforcement Network.
    I have with me Dave Gilles, who is our Assistant Director 
for Information Technology, who does more than click the 
``mouse'', which he will do here in a little bit. He also 
designs what I think are some of the most interesting 
applications of technology in the effort to deal with financial 
crimes anywhere in the world. Mr. Hoyer's visit to us not too 
long ago, was a great morale booster for a small law 
enforcement agency located outside the beltway. I might point 
out--with all the criticisms of organizations inside the 
beltway, we are just barely out--I would invite you, Mr. 
Chairman, at some point in time to also come out.
    Mr. Kolbe. We will do that.
    Mr. Morris. It is a different kind of organization and 
seeing, I hope, is believing.
    The theme of this hearing----
    Mr. Hoyer. Excuse me, Mr. Director. If you would yield, you 
came in late, but I did mention to the Chairman my visit there, 
and the extraordinary capability of you and your staff and how 
impressed I was with the technical ability that we have to 
track money now, which makes it much more difficult to hide 
illegal transactions. I wanted to reiterate that I mentioned 
that before you came in. I really was impressed by my visit.
    Thank you, Mr. Chairman.
    Mr. Morris. Thank you very much. Again, as I said, it was a 
great morale booster for a small agency with a funny name, that 
not a lot of people have heard of.
    As I said, the subject of the hearing, innovation and 
technology, describes in large part what FinCEN is all about. 
Law enforcement has to use every weapon in its arsenal to 
ensure the best offense and defense against financial 
criminals. Technology is one such weapon, and innovation is 
critical to its effectiveness.
    As our name states, FinCEN is a network, a link between law 
enforcement, regulatory and financial communities. Our goal, 
therefore, is to maximize information sharing among our 
partners in these communities and to find new ways to create 
cost-effective and efficient measures to prevent and detect 
money laundering.
    In addition to employing creative uses of technology to 
provide case support to over 150 Federal, state and local law 
enforcement agencies, we also administer the Bank Secrecy Act, 
which is the Government's anti-money laundering regulatory 
statute. This Act requires banks and other financial 
institutions to take steps to help deter and, if unsuccessful 
in deterring, detect money laundering and other financial 
crimes through various reporting and record-keeping measures.
    My testimony today will illustrate the value to law 
enforcement of the information collected through our regulatory 
programs. The kind of thing we could show Mr. Hoyer actually in 
place, we will try to show you, Mr. Chairman, through the 
application of a little technology in presenting our testimony 
and trying to describe it.
    Let me turn to an example of the type of case we help law 
enforcement develop. Such a case could be generated by FinCEN's 
proactive analysis on its own, or it could be developed in 
response to a law enforcement request.
    We start here with a mid-sized city in the United States, 
bustling with financial activity. Within this city we will be 
discussing three grocery stores run by five family members. 
Their financial dealings have come to our attention because 
their business practices don't fit within the normal financial 
activity of other small grocery stores in this city. The cash 
activity is unusual and their bank has reported that some of 
their transactions are suspicious.
    How did we arrive at this information and how will it help 
us in law enforcement develop a case? The answers are found in 
FinCEN's toolbox. Now, it looks like a traditional toolbox, but 
it's filled with anything but traditional tools. Its tools are 
state-of-the-art technology. In this case we will demonstrate 
four of our most important tools that we utilize to develop 
case information.
    First, one of the most innovative devices in the toolbox is 
FinCEN's artificial intelligence, or AI system. Let me digress 
for just a moment to describe it.
    Under the Bank Secrecy Act, financial institutions are 
required to file reports on cash transactions over $10,000. At 
present, more than eleven million such reports, called Currency 
Transaction Reports, or CTRs, are filed every year. Information 
on each of those reports, such as name of the transactor, bank 
account numbers, amount of transaction, names of the users of 
the accounts, addresses, are all included. As you can imagine, 
with over 100 bits of information on each of eleven million 
reports, the amount of information available in the database is 
staggering.
    Although this data contains valuable clues to suspicious 
activity, they are much like needles buried in a haystack. 
Fortunately, we have found a way to use technology to get at 
those needles.
    AI is a complex computer system that provides the ability 
to process vast amounts of data, enabling our analysts to 
explore the sets of links it has established.
    As illustrated in the next several screens, the customized 
programs and algorithms developed by FinCEN's computer 
scientists allow the AI's KDD, or Knowledge Discovery 
Databases, to pull in relevant information from the universe of 
CTR data. The system then connects disparate pieces of 
information, such as banking transactions and accounts, and 
this linking process reveals patterns of financial transactions 
that we know are used to launder money or to perpetrate other 
crimes. Thus, we can find potential suspects during the AI 
analysis who might have gone undetected.
    Let me show you how the AI system worked in our case 
example. What you see on the screen is a graphic representation 
of relationships revealed in the data. The AI system has linked 
together common elements from 90 different currency transaction 
reports. The system has honed in on these particular CTRs 
because the activity reveals a suspicious pattern of cash 
deposits which simply do not fit the normal profile of a small 
grocery store.
    This wheel represents the application of our data 
visualization software which is extracted from that CTR data. 
It's one of the ways our systems visually link those CTR 
filings.
    These spokes represent the interwoven and overlapping 
relationship of transactions to suspect businesses and people, 
and the total of these CTRs makes up nearly two million 
dollars.
    This next wedge highlighted in green displays the three 
accounts associated with these CTRs. The wheel continues to 
build as the system identifies our three grocery stores 
connected to the accounts.
    Finally, the last element identifies nine individuals 
making the transactions.
    At this point we have culled the needles out of millions of 
records in a haystack and zeroed in on an organization with a 
highly questionable degree of financial activity.
    Since the wheel is not necessarily the most ``user 
friendly'' way to explain what we've developed, FinCEN's 
customized software allows us, literally with the click of a 
mouse, to quickly convert the AI system information into a more 
easily understandable link chart. This chart then becomes the 
foundation of our case analysis.
    As you will see, our analysts can untangle the lines to 
show how the transactions relate to each other, and the colors 
and lines become commonly used law enforcement symbols.
    Now let's return to the toolbox. The second tool that we 
have used to develop our case is the Suspicious Activity 
Reporting System, SARS. It is our newest tool and a very 
important device in our toolbox.
    SARS merged two older paper-based regulatory requirements 
for banks to report criminal activity. These systems had been 
in place for years. We eliminated these separate and 
overlapping filings, thereby easing the reporting burden on the 
banks. In sum, it reduced the amount of required flow of paper 
by over two million pieces, while at the same time 
significantly improving the quality of the information.
    I have heard, Mr. Chairman, that Federal agencies are 
sometimes criticized by some of your colleagues up here as 
being awash in data, from which we extract a tiny bit of 
information and generate absolutely no wisdom. We hope our 
systems here are adding a little bit of wisdom to an 
extraordinary amount of data.
    Under SARS, banks report criminal activity to one 
collection point--that's FinCEN--which then provides the 
appropriate information electronically to its users, both 
regulators and law enforcement. This single filing point 
provides for easier compliance by the banking industry and more 
comprehensive information for use by law enforcement and 
regulatory agencies.
    SARS was implemented less than a year ago by us and by the 
bank regulatory agencies. It provides a single, centralized 
system for banks to report to law enforcement all criminal 
activities such as bank fraud, money laundering, embezzlement, 
check kiting, or misdeeds by bank officials, as you can see 
from the point on the screen.
    Most significantly, SARS provides valuable detailed 
information that is received first hand from the bank, and 
therefore, this data can help us to identify money laundering 
trends and patterns which can be vital to law enforcement and 
to the bank industry who have to develop countermeasures.
    This system proves to be very useful in the case example 
we're working on.
    As you can see on the SARS form, a bank has identified the 
subject, as did our AI system. In fact, during a five-month 
period, the bank filed numerous SARS on this business. All are 
for amounts suspiciously just under the CTR reporting threshold 
of $10,000, as you can see on the screen.
    Finally, many of the transactions occurred on successive 
days. This is a clear indication of what we call 
``structuring''; that is, breaking down the transactions into 
smaller amounts to avoid FinCEN's currency reporting 
requirements. So we now can add that information obtained from 
the SARS to the information originally derived from our AI 
system.
    The information contained in these two systems validates 
the partnership that we have fostered with the financial 
community to create an efficient and workable regulatory and 
reporting structure. The information provided by the banks has 
enhanced the overall picture of the grocery store's irregular 
financial activity. But we have a couple more tools as well.
    We spend two million dollars a year for the purchase of 
databases from commercial vendors. Information from 
commercially available sources plays an increasingly vital role 
in criminal investigations.
    Commercial database products include information such as 
state corporations, property records, people locator records, 
professional licenses, vehicle registration and the like. From 
these records our analysts were able to identify numerous 
luxury purchases--a large yacht, a couple of expensive vehicles 
and other items which are clearly beyond the means of the 
owners of a small, family-run grocery store.
    In addition, we discovered a corporate record that 
identifies an as yet unknown additional owner of the stores. 
Now you can see that the assets of the subjects, as well as a 
new name, are added to the mix.
    As a repository of more Federal databases than any other 
agency, FinCEN uses a fourth tool, law enforcement databases--
Customs, DEA, Postal Service, INS, DOD and others. These databases 
provide the status of current or closed investigations, as well as 
information gathered from informants, surveillances and other sources. 
They also include customs, trade, and travel information.
    The subjects of our case have been very busy. Law 
enforcement databases revealed repeated travel to and from a 
money laundering haven. We now find that the additional owner, 
first discovered in our commercial database, has a criminal 
record for marijuana smuggling. In addition, there is an 
investigative report linking our subjects to cocaine smuggling.
    The information from our law enforcement database has 
further enhanced the overall view of our subjects and their 
activity, and the mining of these data from these four sources 
yields a more complete picture, a picture that would be 
unavailable without the resources, the tools of FinCEN.
    So what does all this mean? Since an investigative report 
on one of the owners indicated involvement with narcotics 
trafficking, the suspicious financial activity may be related 
to laundering drug money. Another owner's history of narcotics 
smuggling and international air travel to a money laundering 
center would fit a narcotics organization.
    The recurring and structured deposits of cash are contrary 
to the level of business these small stores would usually 
generate, and the overt attempt to avoid reporting requirements 
indicates an effort to disguise the transactions from Federal 
authorities.
    We would, at this juncture, routinely provide our case 
findings to Federal law enforcement and work closely with the 
agents to provide the further support that they needed.
    Finally, the investigation can begin, but it finally has to 
be done in the streets by the men and women who make up Federal 
and state law enforcement.
    Financial investigations like this one are essential if we 
are to beat criminals at their game, whether it's related to 
narcotics trafficking, health care fraud, or public corruption. 
FinCEN's tools are key to following the money, but, of course, 
our tools are no ordinary tools. The support of this Committee 
in the past has allowed us to assemble a highly advanced client 
server computer environment to help FinCEN stay on top of the 
ever evolving world of high tech financial crime.
    Moreover, our computer savvy analysts are adept at 
exploiting emerging technologies and data sources, such as the 
Internet, to predict and counter the use of technology by 
organized crime and criminals.
    In addition, as we informed the committee last year, 
electronic money, although in its infancy, stands to alter the 
way criminals conduct their financial business. Our expertise 
in the area of new technologies permits us to prepare for the 
changing global financial world.
    Mr. Chairman, Mr. Hoyer, I hope this brief demonstration 
gives a somewhat better idea of how we try to use technology 
and innovation to help law enforcement. To keep up with the 
increasingly sophisticated activities of today's financial 
criminals, we must ensure that the contents of our toolbox are 
replenished and updated as changing circumstances warrant. 
Imagination and unconventional thinking are key to keeping 
money launderers in check. Our 181 FTE carry out our many 
domestic and international programs, and we try very hard to 
use our resources in ways which cross traditional bureaucratic 
lines. For example, we have pioneered a platform concept, 
offering office space and database access and training to 
employees of other Federal agencies who need to conduct 
research using some of the tools that you just saw. At the 
moment, database access is provided to 43 platform participants 
from 21 different agencies.
    Within FinCEN, approximately 55 percent of our resources 
support cases to law enforcement, just as you have seen. 
Another 20 percent is devoted to our regulatory program, and 25 
percent to strengthening our network in international 
partnerships and relationships.
    Our '98 budget request of 181 FTE and $23,006,000 reflects 
this approach. In addition, we're proposing that two one-time 
initiatives be funded from the Violent Crime Reduction trust 
fund, a million dollars for the secure Communications Outreach 
Program for us and the Treasury agencies, and two million 
dollars and four FTE in support of the President's efforts to 
encourage money laundering countries to institute 
internationally accepted anti-money laundering measures.
    These programs are designed to improve secure 
communications among Treasury's bureaus and strengthen our 
country's ability to surround the borderless world of money 
laundering with a global network of nations working together to 
combat financial crime.
    We appreciate the committee's consideration for giving us a 
little time here to do a ``show and tell'' on one aspect of our 
mission. I look forward to questions from you and Mr. Hoyer.
    [The information follows:]

[Pages 371 - 398--The official Committee record contains additional material here.]

    Mr. Kolbe. Thank you very much.
     It was an interesting presentation. We discussed your work 
recently, and this gave an even better illustration of it.
    I have just a couple of questions. This subcommittee, the 
Treasury, and the Federal Government in general are very 
interested in performance measurements. You are a support 
organization, and it seems to me that it would be very 
difficult to link directly the work that you do to the solution 
of cases, the breakthroughs in investigations, or specific 
rates of convictions. Do you attempt to do this indirectly? 
What kind of measurements, indirect or otherwise, do you try to 
use to measure your performance?
    Mr. Morris. Well, this is probably the best and probably 
the hardest question you could ask, Mr. Chairman. We have been 
struggling with this for some time because we are primarily a 
prevention-oriented agency. Indeed, if arrest and seizures and 
money-laundering go up, it probably means we are doing 
something wrong. So we need to be very careful in what we 
examine.
    The one piece of comfort I have is that there are now some 
25 nations that have created FinCEN-like agencies. Cloning is 
not illegal in the area of bureaucratic assimilation, and a 
number of countries have created organizations like ours that 
are quite new. All of them are struggling with the same issue.
    There are some indirect measures, as you suggest, that we 
think at least give us some comfort. Whether it will provide 
the committee comfort, I am not sure, but at least it provides 
us some comfort.
    First, as I mentioned, as we move additional countries to 
meet international standards, which we didn't devote a lot of 
time to, criminalizing, money-laundering, creating mechanisms 
for reporting suspicious activities from financial 
institutions, I think we can say each of those actions is 
making it more difficult for money-laundering abroad.
    We can look at and we do examine what, in fact, is going on 
in the underworld, essentially. We know, for example, in 1990 
and 1991, the average cost of money-laundering, that is, if you 
wanted to get money into a bank anonymously or through a 
special account, was running about 8 percent. It runs about 25 
percent now.
    [Clerk's note.--The agency later indicated that the phrase 
``1990 and 1991'' should be changed to ``the mid-1980s''; ``8 
percent should be 6 percent.'']
    Now, FinCEN can't take exclusive credit because there is a 
whole range of elements, but our regulatory programs have had 
an impact. Nobody brings satchels of cash any longer into the 
bank because they will show up in the SAR system as we have 
described, and so we made the challenge of money-laundering 
more difficult. So that deals a little bit with the regulatory 
aspect.
    We think we can come up with indirect measures in that 
regard. We do a lot of surveys, of course, with our colleagues 
in the private sector.
    As it relates to the support of law enforcement, which is 
more than half of our resources, in this area, we have tried to 
avoid, as you point out in your question, arrests because 
that's not what we do, but instead have built customer surveys 
into the materials.
    [Clerk's note.--The agency later changed the phrase ``have 
tried to avoid'' to ``do not make.'']
    So, when we send a case file out, we ask the law 
enforcement what the value of it was. Now, I had previous 
experiences in law enforcement, and cops don't spend a lot of 
time worrying about that aspect. So we only get about 25 
percent offered, but we also go and do surveys within the law 
enforcement community. We could make some of those available to 
the committee. But as I said, what we are driven to is the 
long-term goal would be to come up with a reasonable estimate 
of the size of the problem and then demonstrate what our 
progress towards that is, but we are some distance from being 
able to do that.
    Mr. Kolbe. Along those lines, the committee last year asked 
you to increase your efforts at outreach and education. Can you 
tell us more about what you have done to increase that 
capability?
    Mr. Morris. Yes. We have set up an ongoing set of meetings 
with the Treasury components. We have now visited, I think, and 
met with all of our customers in 11 cities, 11 major cities 
from coast to coast. We are looking and continue to look at 
ways of following on. We have made, I think, 145, 150, if my 
memory is correct, separate special requests for feedback, 
essentially, on performance, and I think probably one important 
measure is how successful our tools are. We have doubled the 
number of agencies in the last year and a half who have taken 
their own resources and come out to use some of the things that 
Dave Gillis and our people have designed, but again, those are 
indirect measures.
    The clear purpose of a lot of this is to get the best--be 
involved in the best and most significant cases. This allows us 
to do our other job, which is extract information about the 
trends and changing nature of the criminal activity we are 
dealing with, so that we can alert the banks to report it when 
they see it, and we can alert law enforcement to identify it as 
a part of their investigations.
    So this is important to us, both in terms of good customer 
relations, as well as making sure that we are engaged in the 
most significant matters.
    Mr. Kolbe. Would you say, then, that the financial 
institutions and State and local law enforcement agencies are 
aware of your work and your capabilities?
    Mr. Morris. Yes.
    Mr. Kolbe. Okay. You are requesting a million dollars in 
the violent crime reduction trust fund for a secure outreach 
program. Would this be a one-time thing for hardware, for 
equipment, or would this get added to the base?
    Mr. Morris. It is a one-time for equipment and planning to 
do that.
    Just a quick brief anecdote to explain to you what we are 
trying to accomplish here. We underwent an evaluation by the 
Financial Action Task Force who came in and assessed U.S. 
performance against the 40 recommendations of the FATF, which 
was completed in December, and I will make a copy of their 
report available to the committee staff. It is very interesting 
and identifies some strengths and weaknesses in our system.
    We had helped the Financial Action Task Force set up an e-
mail system that could directly transmit what is, in fact, a 
50-paged product. So I got a call at 8:30, Paris time, from the 
person who had completed the report and said to check my 
screen, that he was going to e-mail it immediately.
    In about a minute and a half, I had a 50-paged report that 
I could download. Then I had to go out and essentially xerox it 
and get a driver to run around and deliver it to the Government 
Agencies in Washington. So I could get it from Paris to here in 
a matter of seconds, and it took me a day and a half to run it 
around town.
    What we are trying to do is help set up systems that will 
allow us to communicate like that securely and use some of the 
capabilities of the Internet for law enforcement within 
Treasury.
    Mr. Kolbe. Thank you. I have a couple of other questions, 
but I will submit them for the record.
    Mr. Hoyer.
    Mr. Hoyer. Thank you, Mr. Chairman.
    Mr. Morris, I am not sure I followed one of your answers. 
You indicated that one of the indications of success would be 
that caseloads went down and not up. Now, we want to get people 
off the street so they are no longer committing crimes. I 
understand that. But let us assume for the minute, as I do, 
that we are presently, even with our capability here, probably 
catching a pretty small percentage of the folks that are 
laundering money and doing all sorts of things that they 
shouldn't be doing in the financial field.
    As we increase in technological capability to follow that 
grocery story to find its compound incidents and report that to 
Secret Service, FBI, and local officials, wouldn't we see a 
spikeup at least in the short run? Perhaps in the next 5 years?
    Mr. Morris. Yes.
    Mr. Hoyer [continuing]. In terms of successful arrests and 
convictions of people participating in this money-laundering 
business?
    Mr. Morris. Well, Mr. Hoyer, you are quite right. Forgive 
me for trying to be a tad bit provocative and facetious, but I 
was thinking in the long term, obviously.
    Clearly, we do not have, in my own personal judgment, the 
investment at all levels of law enforcement that I would 
consider adequate to deal in financial crimes for a range of 
reasons being driven by other matters, and so that the better 
we get and the more tools we provide, the limited resources, 
the more cases that they will be able to make, and then the 
issue becomes adequate, prosecutorial and court time.
    In an ideal world, I was trying to make the point that our 
goal, really, is prevention. In the ideal world, we would push 
all the money-laundering activity outside of the United States 
because it was too risky and difficult to conduct that activity 
inside the United States, but we are not there for a long time, 
and you are quite correct, in the near term, arrests and 
seizures should go up as we become more effective.
    Mr. Hoyer. And I would think that in answer to the 
chairman's first question, obviously the 4 months of evidence 
is an objective of the administration's, of Vice President 
Gore, and of the Congress on both sides of the aisle. Clearly 
as we have constraints in resources available, we need to make 
sure we are spending them smart and having an effect.
    It would be useful to the committee as we consider your 
budget to have any data which indicates that an upswing in 
successful prosecutions of money-laundering, is the result of 
better identification. We find out that the grocery store money 
is, A, very high for a local grocery store and, B, going to an 
awful lot of different places and, C, that there are nine other 
grocery stores acting similarly, and then we do those 
prosecutions.
    So it seems to me that, in the short run, we are going to 
have a clear performance indicator that what we are doing here, 
the investment we are making, the people that are doing their 
job, getting the information, and therefore, are getting the 
bad guys off the street.
    Now, let me make another observation, which ties into my 
next question. You mentioned 43 platforms, with 21 agencies 
participating. Platforms, I guess, are the technical hardware?
    Mr. Morris. Yes.
    Mr. Hoyer. Okay. Then 21 agencies----
    Mr. Morris. Right.
    Mr. Hoyer [continuing]. Sharing their information and 
pooling it and coming up with the greatest wealth of 
information that can then be accessed and through our smart 
technology weed out the bad guys.
    Driving offshore will not be the solution. It is sort of 
like driving crime out of Prince George's County, or better 
yet, driving crime out of the District of Columbia. As we beef 
up the District of Columbia Police Department, they become more 
effective. The criminals simply go to Prince George's, probably 
first choice, then Fairfax, and, the surrounding area.
    My point is this. Mexico recently had certification. How 
cooperative are they? I cite Mexico, but how cooperative is the 
rest of the world in dealing with this problem. They have 
platforms themselves. These are international criminals, for 
the most part. The Cali cartel, billions and billions of 
dollars. They are trying to get money back into legitimate 
circulation. It seems to me, we need that kind of cooperation. 
What are we doing there? Specifically, can you comment on 
Mexico, what they are doing to work with us on this money-
laundering issue? Because it is an international issue, with 
worldwide financial transfers. You know, you talked about 
getting data from Paris to your office in Washington. You can 
make a deposit in Hong Kong as quickly as you can make a 
deposit in District Heights, which is 10 or 15 minutes from 
here.
    Mr. Morris. Absolutely. Finance is global. The nation's 
state lines are meaningless. There are no visas and there are 
no mechanisms.
    [Clerk's note.--The agency later changed ``The nations 
state lines'' to ``A nation's borders.'']
    We have been focussing at Treasury, not just FinCEN and not 
just enforcement, but more broadly at what the dimensions of 
this really are.
    There is increasing world commitment. We have been very 
active with the Financial Action Task Force, for example, and 
we just readjusted under Treasury's leadership last year, the 
40 major recommendations, toughened them, broadened them, 
deepened them in a number of, I think, important ways.
    As I mentioned, just a couple of years ago, there were only 
three or four organizations like FinCEN. There are now over 25.
    I just left--when I should have been preparing for the 
tough question on performance measures that the Chairman asked 
me--a meeting with the Finance Minister from Romania and his 
deputy. Romania is very much concerned about organized crime, 
very much wanting to establish and have us try to help them 
establish some mechanisms there because, while they don't have 
a vital economic system at present, they can certainly build 
one.
    As it relates to Mexico, all of us have different 
relations, depending on who they deal with, of course. We have 
been dealing with the Secretary and Assistant Secretary 
Johnson, specifically, with Hacienda. They have passed some 
important laws in the last 6 months that require--move them 
towards international standards. We have provided them some 
computers, and some material and some training, and we will 
continue to provide that training to try to build up the 
infrastructure necessary for them to develop the same kind of 
deterrence mechanisms that we have developed here.
    It is absolutely true that the more effective we are, the 
bad guys are going to go to the area that is of least 
resistance, and right now, Mexico has a 1,900-mile border and 
relatively unresistant.
    We had similar problems in Panama, a dollar-denominated 
economy with lots of cash sloshing around in there. Dave had 
people down, helping them set up the computer systems, and I 
have got five people--in the amazing world that we live in--
five people from Panama all week long, including the lead of 
their--what they call their financial analysis unit, again, 
trying to give them the expertise and knowledge that we have 
developed and also tell them the things that we have done well 
and the things we have not done very well. Clearly, the 
international element to this is very, very important, and they 
will go to the weakest link.
    Last year, there was a major conference in the Caribbean of 
the various countries there because of the history of the tax 
havens and the like. I quip the Caymans have passed a major 
money-laundering law in the last year, not because of any 
strong pressure by the United States, but because of John 
Grisham and the film, ``The Firm,'' when he tainted them a 
little bit, and that was not good for the fifth-largest banking 
center in the world, the Cayman Islands, but you are quite 
correct, and I think this becomes very important.
    On the other hand, while it might not make some people 
happy, we have just pushed the problem outside the United 
States. That is progress.
    Mr. Hoyer. It is progress in one sense. It is caution. If 
you push it outside the United States and they can't cope with 
it outside the United States, you have a festering cancer that 
will ultimately infect us because we are involved with the rest 
of the world more and more. We are not insular.
    I think the bottom line is your international outreach, an 
inclusion of as many financial centers around the world. Such 
as the Far East and Central South America, Europe, and Russia 
where there is a big crime problem, as we know.
    Mr. Morris. Yes, sir.
    Mr. Hoyer. We read about Moscow and the burgeoning economy 
there, and a lot of that is underground. So, if you give a 
criminal a haven----
    Mr. Morris. That is right.
    Mr. Hoyer [continuing]. It is a little bit like the Vietnam 
War. If you give them Hanoi and they can organize there all the 
time, you are just going to get your head beaten in 
continually, even though you may control the area.
    In any event, I think you are doing an outstanding job. I 
have some other questions. I will submit them for the record, 
Mr. Chairman, and I appreciate Mr. Morris' leadership in this 
agency. I know he is doing an outstanding job, and I believe 
this committee wants to be supportive.
    Mr. Morris. Thank you.
    Mr. Kolbe. I concur with that, and we thank you very much 
for coming today and participating.
    Mr. Morris. Thank you, Mr. Chairman.
    Mr. Kolbe. The subcommittee is adjourned.
    [Questions and answers submitted for the record and budget 
justifications follow:]

[Pages 405 - 459--The official Committee record contains additional material here.]

                                            Tuesday, March 4, 1997.

                FEDERAL LAW ENFORCEMENT TRAINING CENTER

                                WITNESS

CHARLES RINKEVICH, DIRECTOR, FEDERAL LAW ENFORCEMENT TRAINING CENTER

                  Opening Comments From Chairman Kolbe

    Mr. Kolbe. This meeting of the Subcommittee on Treasury, 
Postal Service and General Government will come to order. We're 
here this afternoon to hear from two agencies, to discuss the 
budgets of two agencies, the Federal Law Enforcement Training 
Center, or FLETC, and the Financial Crimes Enforcement Network.
    Under Secretary Kelly was here this morning, so I presume 
he is not going to be with us this afternoon. His testimony 
covered all the agencies today.
    I am pleased to welcome Director Rinkevich and Director 
Morris, who will be with us in the next part of this hearing 
today. This afternoon we are going to be reviewing these two 
arms of Treasury that carry out essential law enforcement 
missions to train Federal and other law enforcement officers to 
meet high standards of professionalism and sophistication 
required of police organizations in this last part of the 
twentieth century, and to lead Treasury's battle against money 
laundering, which is a key weapon in undercutting narcotics 
trafficking and other forms of organized crime.
    We will begin with Director Rinkevich, about his fiscal 
year 1998 request for the Federal Law Enforcement Training 
Center. I am particularly interested in hearing about the 
progress of the Center and its efforts to meeting increasing 
demands for its services brought on by the recent surge in the 
number of INS officers. Following that, we will hear from 
Director Morris about his request for the Financial Crimes 
Enforcement Network. For this agency, we are very interested in 
hearing about the recent progress that FinCEN has been making 
in developing a computerized database on money laundering and 
financial crime and making that information available to law 
enforcement officers nationwide.
    I did want to mention a moment ago that Representative 
Kingston is not on this subcommittee any more, but he did ask 
me to offer a welcome on his behalf. In fact, he had planned to 
sit in--he still remains a member of the full committee--but 
was detained in his district for personal reasons.
    I look forward to hearing from our witnesses this 
afternoon, and now would ask if the distinguished ranking 
member, Mr. Hoyer, has some comments.

                    Opening Comments from Mr. Hoyer

    Mr. Hoyer. Thank you very much, Mr. Chairman. I, too, want 
to welcome Mr. Rinkevich, who is the Director of FLETC. I have 
had the privilege of visiting with him in Georgia at this site. 
They do outstanding work.

                          Government Resources

    One of the real challenges for this committee, Mr. 
Chairman, is to make sure that the resources that we have 
centralized at Glynco remain a Federal Government resource, not 
just a Treasury resource and not just a limited law enforcement 
resource, but a resource for law enforcement across the board. 
Because there are obviously other training centers. The FBI has 
its own training center. There is an inclination of almost 
every agency to have its own training center, and with that 
comes the inefficiency, obviously, of decentralization. There 
is always a pull to do that.
    I don't know whether you have been down to Glynco or not, 
Mr. Chairman----
    Mr. Kolbe. I have not been to Glynco.
    Mr. Hoyer. Maybe you ought to take the opportunity, on one 
of our trips to Florida, on the customs perspective, maybe we 
could possibly stop at Glynco, just to get a feel for the 
synergy and the way in which the agencies utilize this 
centralized facility. It really is an outstanding facility and 
is very well-equipped. Some of the facilities were really 
hurting, particularly the living quarters were pretty dismal. 
We're getting at that problem and rehabilitating them.
    In any event, welcome, Mr. Rinkevich. We look forward to 
your testimony.

                           Welcome to Fincen

    Rather than make another statement to Director Morris, let 
me say I had the opportunity to visit with FinCEN at their 
headquarters over in Virginia, and was extraordinarily 
impressed by the competency of their personnel and the 
technical capability they have in terms of tracking dollars 
from an individual deposit to the geometric explosion of that 
deposit as it goes from institution to institution, deposit to 
deposit.
    We heard the Secret Service testify, and in response to my 
question, Director Bowron indicated how closely the Secret 
Service works with FinCEN on all the money laundering efforts 
that the Secret Service has as it relates to the integrity of 
our currency. So I look forward to hearing their testimony as 
well.
    I might add that they are extraordinarily well served by 
one of the members of their staff who used to be a member of my 
staff, Miss Hafner, who not only was a member of my staff but 
also practiced law with me and is an outstanding attorney. She 
made my look good, which is very hard to do. So I welcome her 
here as well.
    Thank you.

                         FLETC Opening Remarks

    Mr. Kolbe. Thank you very much.
    With that, we will proceed. Mr. Rinkevich, I would remind 
you, as I have all the other witnesses, that the full statement 
you have will be placed in the record and we hope you will 
summarize your testimony, so that we can go to questions.
    Mr. Rinkevich. Thank you, Mr. Chairman, Mr. Hoyer. We 
appreciate the interest and the support that this committee, 
over time, has expressed and provided to the Center. We look 
forward to working with you, Mr. Chairman, and the staff, in 
the months and years to come.
    I will, indeed, ask that my full statement be admitted to 
the record. I just want to summarize, for a very brief moment, 
two items, the workload and the dollars that are driven by that 
workload.

                          Summary of Workload

    In 1996, the Center graduated 19,352 students, for an 
average student population of over 1,700. In 1997, the current 
fiscal year, we estimate that we will graduate 29,500 students, 
for an average resident student population of slightly over 
2,600. In 1998, based on the agency's projections--and we are 
very comfortable with these, given the buildup that's occurring 
in a number of agencies--we're looking at a graduation of about 
31,100 students, for an average resident student population of 
over 2,640. That gets to the question of workload, which you 
mentioned, Mr. Chairman.
    Our request before you for 1998 is for $68,284,000 in the 
S&E account, and $32,548,000 in the ACI&RE account, which is 
our construction master plan account, and a total request of 
527 full time equivalents.
    There are eight initiatives, which we would be pleased to 
answer questions about, and this 1998 request represents about 
a 29 percent increase in appropriations from 1997. But that is 
clearly driven by the enormous workload that we are confronted 
with.

                        Technology Improvements

    Now, Mr. Chairman, knowing of your interest in both 
technology and innovation, I would like to take just a few 
minutes to highlight four areas where the Center is studying or 
applying technology to improve its operations, its quality of 
training, and its responsiveness to our customers.
    First is the area of virtual reality. First I would like to 
briefly demonstrate for you some amazing new technology that 
the Center's Financial Fraud Institute is studying to determine 
its potential and application to training.
    What you are seeing is the beginning of a series of digital 
pictures that have been loaded into a computer, using a new, 
unique software. The software seamlessly knits several pictures 
of an area together so that a 360 degree panoramic view can be 
seen. The operator can even look up and down. The photographs, 
by the way, that you're seeing are of the Center's Glynco 
campus, and also the buildings you're seeing are the result of 
the master plan that this committee has supported.

                            new dormitories

    The first photo is a picture of our two new dormitories, 
the Brunswick Hall and the Gunnels dormitory. The operator will 
pan to an artist's rendition of the third new dormitory, which 
we will be constructing on that site, and that will be 
constructed with dollars that have been appropriated in fiscal 
1997.

                          indoor/outdoor range

    The second photo is a view of one of the Center's new 
state-of-the-art indoor/outdoor ranges, which is another master 
plan project. You can see the fan up there is in space that 
allows for the circulation of fresh air into the ranges, which 
makes it an indoor/outdoor range. As the camera pans around, 
you can see the students on the firing line. It's a 50 yard 
firing range with 25 firing points. So it's a project that will 
be replicated two or three more times with additional ranges at 
the Center.

                           video conferencing

    The third photograph is of the Center's distance learning 
facility. This is a broadcast-quality, television video 
conferencing studio, and is a result of the combined effort 
between the United States Customs Service and the Federal Law 
Enforcement Training Center. It is available to all of the 
Center's customers for distance learning technology, and the 
delivery of distance learning. I think you can see that the 
potential for this kind of technology. This ``bubble vision'' 
as it's called, is really enormous, both in terms of crime 
scene photographs, as well as in security surveys.

                             steganography

    The next example of technology is something called 
steganography. Steganography allows criminals to hide their 
illegal activity from law enforcement by burying one computer 
file within another. The use of steganography to hide criminal 
activity might involve the hiding of child pornography within 
apparently innocuous graphic images. The hidden file degrades 
the original graphic image very little, if at all, and when 
combined with encryption, steganography is virtually impossible 
to detect.
    If you will look at the images that are now being 
projected, you will see a simulation of steganography. To start 
with, an innocuous computer graphic or photograph is chosen as 
the ``host'' for the hidden file. In this case, it's a picture 
of our Artesia training facility in New Mexico. The file to be 
hidden is combined with the steganography program with the host 
image, rendering the hidden file virtually impossible to see or 
detect. The graphic image containing the hidden file can then 
be distributed by a variety of methods, and in this case, in 
the simulation, it's the Internet being used to deliver the 
file.
    Once received, the hidden file can be extracted from the 
graphic file by using the same program and encryption system 
that was used to combine the two files. In this case, the 
hidden image of that is the Fermilab, a Government research 
facility, but it could just as easily have been one dealing 
with child pornography or other illegal materials. As in the 
past, our Financial Fraud Institute will take an active role in 
developing and providing and using the training needed to 
assist our customers in combatting this kind of criminal 
activity.

                         training enhancements

    Now I would like to briefly discuss the Center's efforts to 
assess and enhance the quality of its training and services, 
followed by a very short discussion and brief video of a 
computer-based interactive training module.

                        student feedback system

    The Student Feedback System, or SFS as we call it, is a 
major element of the overall, ongoing quality assurance program 
at the FLETC. It was implemented in 1990, and is used to 
evaluate the quality of the Center's basic training program. 
We're in the process of expanding this system to include all of 
our Center advanced programs.
    Data from the Student Feedback System provides two of the 
key outcome measures used in the Center's annual performance 
plan required by the Government Performance and Results Act, 
commonly referred to as GPRA. These are student ratings on the 
quality of training and student ratings on the quality of our 
services.
    Students are asked to rate the courses, instructors, 
programs and administrative services. The FLETC then analyzes 
the student responses to these questions on a class-by-class 
basis and prepares a quarterly and an annual summary on each 
program.
    Students are asked to evaluate the Center's performance in 
each of the following program areas: practical exercises, 
written exams, faculty support, learning support, and student 
conduct. Students are also asked for their overall evaluation 
of the training and instruction. As you can see from the next 
slide, those ratings over the last five years have remained at 
levels above ``good'', and verging on ``excellent''. This 
compares very favorably with our established standard of 
``good'' for performance in this area.
    Students' perceptions of our administrative services are 
also gathered. Students are asked to rate the FLETC in the 
administrative service areas that are being displayed here.
    Finally, we ask our students for an overall rating of these 
administrative services. As you can see, in the latest annual 
report covering 1996, FLETC has met its standard of 4.0 or 
``good'' for administrative services.

                     customer satisfaction surveys

    In addition to the Student Feedback System, the Center 
conducts customer satisfaction surveys to ensure that the FLETC 
is meeting the needs of its agency customers. The latest survey 
for which we have complete data was completed in fiscal year 
1994 and measured customer satisfaction in three general areas: 
training systems, training services, and support systems.
    The graph you see displayed now shows the consolidated 
results of that survey in these three major areas. As you can 
see, FLETC ranked very high in two areas--training systems and 
service. The overall average for the areas evaluated under 
these categories was 93 and 90 percent respectively. This means 
that 90 percent or more of our agency customers felt that we 
were meeting or exceeding their requirements in these areas.

                       ratings in critical areas

    Customer ratings in three of the most critical areas of 
training systems, which are curriculum content and quality of 
instructors and quality of training, were 94 percent, 96 
percent, and 94 percent respectively. This means that 94 
percent or more of our customers told us that the Center is 
meeting or exceeding their requirements in these three areas.

                        ratings in service areas

    In the service category, our customers were asked to 
evaluate the quality of services provided by the FLETC in 45 
different areas. Examples are like student registration, 
recreational services, uniform issue, and other kinds of 
similar services. As you can see from the graph, 90 percent of 
our customers felt that the quality of these services met or 
exceeded their requirements.

                     ratings in other support areas

    We also asked our customers to evaluate other support 
systems and services at the Center. These included items such 
as student housing, maintenance, communication and interaction, 
organizational structure and the like. Again referring you to 
the graph being displayed, you will note that in this category 
76 percent of FLETC's customers felt that the support systems 
met or exceeded their requirements.
    Following this survey, FLETC began working with its 
customers to improve its performance in all areas, especially 
in those areas where customer expectations were not being fully 
met. We recently conducted another survey and the results of 
that survey are currently being analyzed, and a report will be 
issued some time later this month. Although we are very pleased 
with the 1994 customer satisfaction survey, we are even more 
pleased with the data that the current survey reflects. It will 
show an across-the-board improvement in almost all areas, and 
indicates the actions we have taken to correct the weaknesses 
have, in fact, worked.
    The Student Feedback System and customer satisfaction 
surveys ensure that FLETC focuses on continuous improvement in 
meeting the needs of our students and their agencies.

                        computer based training

    Finally, Mr. Chairman, for the past several years the 
Center has been expanding the use of computer-based training, 
or CBT, as a means of improving quality and/or controlling 
program costs. We are now using five CBT training courses in 
our basic criminal investigator program. That means that, in 
five course, we are asking the students to develop this 
information, and learn this information, in a one-on-one 
situation with a computer. This takes away the need for them to 
be in the classroom for that period of time, therefore allowing 
us to insert other training into the classroom environment.

                          drive and marine cbt

    Additionally, our Driver and Marine Division is in the 
final stages of developing a computer-based interactive video 
that will focus on defensive and high-speed pursuit driver 
decision making skills, a terribly important area in American 
law enforcement today. Much of the instruction provided using 
CBT is after hours and the students do it on their own. CBT is 
a good, long-term, cost avoidance savings and quality 
improvement tool.

                      interactive video technology

    I would now like to show a five-minute video which will 
demonstrate a new situational awareness and response module, 
which has been recently developed by our Firearms and Media 
Support Divisions. This module combines CBT and interactive 
video technology, using a scripted scenario that incorporates 
the Federal Law Enforcement Training Center's use-of-force 
model and the Justice/Treasury use-of-force policy.
    Don, if you will key up the video, we will take a look at 
it.
    [Video Presentation.]
    That, Mr. Chairman, concludes our opening statement and 
this demonstration. I want to again thank you for your support 
and interest in the Center, and also I should comment on the 
tremendous support that the Center has received through the 
Department as well as the Office of Management and Budget.
    [The information follows:]

[Pages 468 - 502--The official Committee record contains additional material here.]

    Mr. Kolbe. Don't worry. If I make a critical error in my 
judgment here, in my questioning, it will not be ``to shoot''. 
[Laughter.]
    Thank you. That was very interesting. We were just saying 
that probably all the kids are playing this on the Internet 
anyhow.
    Mr. Hoyer. When you go down there, they also have a program 
they did not show here. We sat at a table and had the scenario 
in front of us. You've got a gun in your hand and you act out, 
like a video game. It's the same concept of whether you 
correctly shot or if you shot the secretary coming out the 
door.

                          charleston workload

    Mr. Kolbe. Thank you very much.
    I have very few questions, and a couple of them I will 
submit for the record. But there is one I do want to get on the 
record here. It has to do with the training that you're doing 
currently at Charleston for the INS.
    I think currently almost 45 percent of your workload is in 
training INS, is that correct?
    Mr. Rinkevich. That's correct.
    Mr. Kolbe. It's the Border Patrol we're talking about here. 
And this surge led you to the decision to open a temporary 
training facility in Charleston.
    What kind of INS training is being carried out by FLETC 
there in Charleston?
    Mr. Rinkevich. At this time, Mr. Chairman, all of the 
training at Charleston is for the U.S. Border Patrol. We have a 
student population there at any given time--I think this week 
there are about 450 Border Patrol students. When they first 
opened the Charleston facility, and until we brought some of 
the special training facilities, like the firearms and driver 
ranges on line, they did some of the Non-Border Patrol training 
that did not require as much use of those ranges. But now that 
these several ranges are on line, all of the training there is 
Border Patrol.
    Mr. Kolbe. Is the training all the way from beginning to 
end, or do they move from Charleston to another location?
    Mr. Rinkevich. No, sir, it's beginning to end. Their entire 
19-week experience is at Charleston.

                 timeframe for visting charleston site

    Mr. Kolbe. At what point do you expect that you would be 
able to do all the training for INS, the Border Patrol, with 
your current facilities at Glynco and Artesia?
    Mr. Rinkevich. Based on what we know now, Mr. Chairman, the 
end of fiscal '99 should be the point in time where we will be 
able to assume all of the training for INS at Glynco or 
Artesia. This, of course, is contingent----
    Mr. Kolbe. You said fiscal '99?
    Mr. Rinkevich. Yes, sir, at the end of fiscal '99. Through 
fiscal '99 is the period that Charleston will be required, 
based on the anticipated increases that the Border Patrol and 
other INS series will be increasing. Of course, these increases 
for this year and '99 will depend on congressional 
appropriation.
    Mr. Kolbe. At that point you would then phase Charleston 
out?
    Mr. Rinkevich. Yes, sir, that is our plan at that point, to 
phase Charleston out and have all the training done at Glynco.

                           attrition training

    Mr. Kolbe. What are your assumptions about the numbers of 
INS agents over the next couple of years that would go into 
that?
    Mr. Rinkevich. We're assuming that the INS--the Border 
Patrol being the biggest part of INS--will have an authorized 
strength of 10,000, and therefore their attrition rate will be 
against that base.
    Mr. Kolbe. So you would just be doing the training for the 
attrition?
    Mr. Rinkevich. That's correct. The attrition training for 
both the Immigration Service and the Border Patrol part. We're 
assuming there will be no major increases in either of those 
organizations beyond fiscal '99.
    Mr. Kolbe. Beyond the 10,000.
    Mr. Rinkevich. Yes, sir.
    Mr. Kolbe. And as I recall, that is what we have currently 
authorized, is that not right?
    Mr. Rinkevich. That's correct. That's my understanding as 
well.

                          impact of charleston

    Mr. Kolbe. What would be the impact on FLETC's overall 
budget, and your per student training costs, if Charleston 
became a permanent facility after that point?
    Mr. Rinkevich. It is hard to say at this point, Mr. 
Chairman, but I think it would have a dramatic impact on our 
budget, not only in terms of the staffing necessary for 
Charleston, but the Charleston Navy Yard was an industrial 
facility and the security that we would have in place there 
would be difficult to continue to maintain. There are 
environmental questions that would have to be resolved, and our 
experience at Glynco, with a facility that was closed down by 
the Navy in 1975, is such that we're investing significant 
amounts of money there to clean up environmental problems.
    It is only three, three-and-a-half hours from Glynco. It 
would be a very costly, resource intensive second operation to 
run. Our view, of course, is that as the Department of Justice 
and Treasury have agreed, when the big push is over with in 
fiscal '99, then we will retreat to permanent facilities at 
Glynco and Artesia.

                       projected workload fy 1998

    Mr. Kolbe. You're estimating an increase of five percent of 
the students in fiscal '98, and one percent of student weeks, I 
think, better than a 14 percent increase in the number of 
instructors.
    Is that explained by the plan to consolidate this training 
from Charleston to Glynco in 1999?
    Mr. Rinkevich. Not in '98, no, sir. The projections in 
dollars for '98 are to handle the workload that we project to 
occur in '98 at both Charleston and Glynco. Of course, the 
increase in instructor ranks is a direct result of that 
workload. But it doesn't----

                      instructor increases fy 1998

    Mr. Kolbe. Then the question is, with only a five percent 
increase in students--I think we're talking about a 14 percent 
increase in the number of instructors. How do we get that?
    Would you identify yourself, sir?
    Mr. Rinkevich. This is Deputy Director Joe Miller, Mr. 
Chairman.
    Mr. Miller. I think it's the combination of student weeks 
that we're training, that some student weeks require more 
instructional support than other student weeks, so you cannot 
use the two comparisons and come up with the same--It's a 
different mix of programs that would result in the increase of 
staff.
    [Clerk's note.--Bureau added later that they are not fully 
staffed for the FY 1997 project.]
    Mr. Kolbe. Just one other question.
    Well, I have a couple more. I'll come back to mine. Go 
ahead.
    Mr. Hoyer. Thank you, Mr. Chairman.
    Mr. Chairman, following up on your Charleston question, 
obviously Charleston took a heck of a hit. This is Navy 
property, is it not, that you're on?
    Mr. Rinkevich. Yes, sir.

                      capital funds at charleston

    Mr. Hoyer. It took a heck of a hit in the '93 base closure, 
as you know. They lost much of the Navy there. In point of 
fact, my district competed with Charleston on the Naval 
Electronics Systems Engineering activities and we lost some of 
ours and kept some of it.
    Mr. Chairman, this is a specific example of what is so 
difficult to oppose, where everybody wants a little bit of 
this, that and the other.
    How much are we spending on capital funds at Charleston?

                        ins funds at charleston

    Mr. Rinkevich. Mr. Hoyer, the expenditure of funds for 
bringing Charleston on line for training came out of the 
Immigration Service budget. Our understanding is that it was 
something in excess of $10 million to bring on ranges and 
refurbish buildings that needed to be refurbished.
    Mr. Hoyer. What it came out of, so we all understand, is 
the 602 allocation to this committee. What I mean by that is, 
that was the overall number, with 602A being the big number and 
the 602B being the committee number. But that's $10 million, 
Mr. Chairman, at a facility that could have very well used $10 
million, that we would have then had as a continuing resource 
to be utilized not just by INS but by law enforcement 
officials, not only at the Federal level but state and local 
levels.
    Now, I don't think we're going to get in a fight right this 
second with the leaders in South Carolina who have substantial 
seniority on all of us, probably cumulatively, if we added us 
all up. [Laughter.]
    And who may be here when all of us are gone.
    Mr. Kolbe. Just one of them takes care of all of us. 
[Laughter.]
    Mr. Hoyer. That's what I mean. I mean, if I were elected to 
Congress in 1862, I would have been able to get this in my 
district.

                        investment in charleston

    Having said all of that, are the facilities that we built--
because this is going to be the issue when we come to 1999--are 
the facilities we built able to be utilized by the Navy? If 
they revert to the Navy, do they have any expected use for it? 
Clearly, if I were in South Carolina, no matter how much 
seniority I had, I would say, ``Look, you made this investment. 
You're certainly not going to abandon these facilities at this 
point in time.''
    I presume these are bricks and mortar, or are they 
temporary buildings. What did we put there?
    Mr. Rinkevich. Part of the investment was to bring existing 
structures up to standard, so they rehabed existing structures. 
The new structures were a drivers training track and a firearms 
range complex. Those were brand new from the ground up.
    Mr. Hoyer. Could we have enhanced in any way the driver 
training track that I had the opportunity of driving on down at 
Glynco with a positive effect?
    Mr. Rinkevich. Absolutely.
    Mr. Hoyer. It would have had an ongoing effect.
    I mean, what is our plan in '99 to tell the Justice 
Department and the Commerce, State and Justice Committee, on 
which you also serve, Mr. Chairman, that it makes sense to 
reconsolidate at Glynco?
    Mr. Rinkevich. An important part of that is money that was 
appropriated for a new dormitory in the current fiscal year--
and we'll be breaking ground on that, Mr. Hoyer, come the next 
month or two----
    Mr. Hoyer. In Charleston?
    Mr. Rinkevich. No, no. At Glynco, to give us the capacity 
at Glynco, so that when Charleston----
    Mr. Hoyer. I understand that, and that's important. I 
understand your argument. But here's what I'm concerned about. 
If we put $10 million plus at Charleston, come 18 months from 
now, when we're making up the budget for fiscal year '99, how 
do we justify saying, ``Okay, that $10 million is not going to 
be used further?'' In other words, do we have an alternative 
use? Is there a plan, post-'99, or do we just write that off to 
a 24-month training expense?
    Mr. Rinkevich. The buildings that were rehabed are in the 
main complex of what was the Navy shipyard, which has been 
turned over by the Navy to an economic development group in 
Charleston, so those facilities would be usable by some other 
entity, if they chose to.
    The two facilities that I referred to earlier, the drivers 
training track and the firearms complex, were built some 
distance from the Charleston Navy Yard on an active Navy 
installation, the Navy Weapons Center in Charleston. The 
arrangement between the Immigration Service and the Navy is 
that, when those ranges are no longer needed, the Immigration 
Service would return that property to its original state. So at 
this point there is on the table an expectation that those 
ranges will be disestablished.

                     cost of driver training track

    Mr. Hoyer. How much did the drivers training track cost? Do 
we know, a ballpark figure? A million dollars?
    Mr. Rinkevich. I would think less than that.
    Mr. Miller. I would think between $500,000-$600,000.
    Mr. Hoyer. And it will take some money to return it to the 
state. So we have an existing excellent driving facility that 
could be enhanced at Glynco, and we've opened one and we're 
going to close one and return it to the state that we found it 
in. It's an example of what we fight about all the time with 
FLETC.
    Mr. Chairman, I may have used my five minutes on pursuing 
that. I will come back to my other questions.
    Mr. Kolbe. Mr. Price.

                          rural drug training

    Mr. Price. Thank you, Mr. Chairman.
    Mr. Rinkevich, I would like to explore one of the smaller 
items in your budget but one that has a great deal of policy 
interest, and that is the work you're proposing to do in rural 
drug training.
    In your testimony you indicate that one million dollars in 
funding was authorized under the '94 Crime Bill for this 
purpose that has never been appropriated. You are now proposing 
to use these funds for four training programs to assist small, 
rural law enforcement agencies. Of course, this is a small part 
of your overall budget, but one of potential importance for 
districts like mine, with rural counties and local law 
enforcement agencies that need all the help they can get in 
fighting the war on drugs.
    I am new to the subcommittee. I wonder if you could tell 
me, is this the first time that you have requested the funds 
authorized under the Crime Bill for this purpose?
    Mr. Rinkevich. No, sir. My recollection is we requested 
those funds and they were not included ultimately in our 
budget.
    Mr. Price. They have never been appropriated and you have 
requested appropriation----
    Mr. Rinkevich. Requested but not included in the previous 
year.
    Mr. Price. Well, we're only talking about a million 
dollars, but you propose to use that to support four programs 
in drug enforcement training, rural crime drug enforcement task 
force training, airborne counterdrug operations training, and 
advanced airborne counterdrug operations training.
    Are these new programs? What can you tell us about them and 
the uses to which you would put these funds?

                        state and local programs

    Mr. Rinkevich. Mr. Price, I should also comment that one of 
the entities of the Federal Law Enforcement Training Center is 
our National Center for State, Local and International 
Training. We have, since 1983, trained roughly 2-3,000 state 
and local officers through that center, either in programs 
especially developed for state and local police, or allowing 
access of state and local police to Federal programs.
    Of the four programs that are part of the rural drug and 
law enforcement training initiative, two of those programs are 
already developed and functioning: the airborne counterdrug 
operations training program and the drug enforcement training 
program. Two others are in the process of being developed. They 
are the rural crime and drug enforcement task force training 
and the advanced counterdrug operations training program.
    For two to three years we have been offering training 
through the drug enforcement training program, in cooperation 
with DEA, as well as the airborne counterdrug operations 
training program. So even though we're going to be offering 
more of those programs through this initiative, on a smaller 
scale those very same programs have been available to state and 
local police, including rural law enforcement officers.
    Mr. Price. Have they had a particular rural emphasis, or 
rural focus?

                          counterdrug programs

    Mr. Rinkevich. Yes, indeed. The airborne counterdrug 
operations training program is a program that trains local 
police on how to use government aircraft, principally National 
Guard aircraft, to spot illegal drugs being grown. Obviously, 
the application of that is in rural areas more likely than 
urban areas. The drug enforcement training program, the one 
that we do now offer, is a trainer program and it's designed 
specifically for those small communities that can't afford to 
send folks off for long, extensive periods of time. We would 
train trainers who would offer this on a regional basis to 
local law enforcement, particularly those in small communities.
    Mr. Price. So this fits with work that you have underway?
    Mr. Rinkevich. Yes, sir.

                           training expansion

    Mr. Price. Can you be more specific about the million 
dollars and three FTE's that you're requesting, how that would 
augment your----
    Mr. Rinkevich. I can give you a breakout of that, Mr. 
Price. The three FTE's would constitute slightly in excess of 
$300,000. There is $200,000 in travel costs because these 
programs are designed to be exported. That is, we will take 
them out to the field, rather than having them done at Glynco.
    Training services, $229,000, supplies of $120,000, 
equipment of $125,000, printing of $20,000, and transportation 
of $5,000. If my figures are correct, that should be about a 
million dollars.
    Mr. Price. Alright. Presumably, that then would give you 
some basis for judging the potential of this effort and what 
kind of expansions might be appropriate.
    Mr. Rinkevich. Absolutely. One of the important ingredients 
in any of our training programs is an evaluation component, to 
make sure that we're meeting the needs of the students, as well 
as the agencies that send the students to us.
    Mr. Price. Thank you, and thank you, Mr. Chairman.
    Mr. Kolbe. Thank you very much. I have some other 
questions, but I'm going to submit mine for the record.
    Mr. Hoyer.
    Mr. Hoyer. Mr. Chairman, I have a number of questions and I 
will also submit them for the record.

                   Closing Remarks by Chairman Kolbe

    Mr. Kolbe. Thank you very much. We appreciate your coming, 
and appreciate your testimony and the good work you do. I'm 
looking forward to getting down to Glynco.
    Mr. Rinkevich. We look forward to having both you and Mr. 
Price coming down, and Congressman Hoyer as well for a return 
visit.
    [Questions for the record and selected budget justification 
material follow:]

[Pages 510 - 580--The official Committee record contains additional material here.]

                                        Tuesday, February 25, 1997.

                     UNITED STATES CUSTOMS SERVICE

                               WITNESSES

RAYMOND W. KELLY, UNDER SECRETARY, ENFORCEMENT, U.S. DEPARTMENT OF THE 
    TREASURY
GEORGE MUNOZ, ASSISTANT SECRETARY, MANAGEMENT, AND CHIEF FINANCIAL 
    OFFICER, U.S. DEPARTMENT OF THE TREASURY
GEORGE J. WEISE, COMMISSIONER, U.S. CUSTOMS SERVICE
RICHARD J. HOGLUND, ASSISTANT COMMISSIONER, ACTING, OFFICE OF 
    INVESTIGATIONS, U.S. CUSTOMS SERVICE
EDWARD F. KWAS, ASSISTANT COMMISSIONER, OFFICE OF INFORMATION AND 
    TECHNOLOGY, U.S. CUSTOMS SERVICE
HOMER J. WILLIAMS, ASSISTANT COMMISSIONER, OFFICE OF INTERNAL AFFAIRS, 
    U.S. CUSTOMS SERVICE
C. WAYNE HAMILTON, DIRECTOR, BUDGET DIVISION, U.S. CUSTOMS SERVICE
RICHARD DAVIS, SENIOR INSPECTOR, U.S. CUSTOMS SERVICE
LANCE LUECK, INSPECTOR, U.S. CUSTOMS SERVICE
BRAD BENCH, SENIOR SPECIAL AGENT, OFFICE OF INVESTIGATIONS, U.S. 
    CUSTOMS SERVICE

                  Opening Comments from Chairman Kolbe

    Mr. Kolbe. The meeting of the subcommittee will come to 
order.
    I welcome our witnesses who are here to testify on United 
States Customs Service.
    I thank my Ranking Member, Mr. Hoyer.
    We have had an informal subcommittee meeting before to 
introduce our staff, so I won't go through that today.
    Since the Under Secretary is here, I would like to take 
just a brief moment for a small housekeeping matter.
    Mr. Under Secretary, as you know, it is the Committee's 
policy to ask for testimony a week in advance. The schedule for 
the hearings has been set for at least a month and, in most 
cases, well over a month in time. The purpose of this is so 
that we can adequately prepare the questions that we ask, and 
that we then submit to you so you are not caught unawares of 
the questions.
    Unfortunately, in the case of the witnesses today, the 
testimony was 4 days late, and in the case of tomorrow, with 
the Secret Service and Under Secretary Kelly, the testimony was 
6 days late in coming to us. My understanding is that this was 
because the testimony was being reviewed by Treasury. I 
certainly don't mean to micromanage your affairs, but it is 
very important for us, Majority and Minority, if we are going 
to do our job correctly and work with you, that we have that 
testimony in advance so we can prepare our questions. And I 
would ask you to take that message back to the Department and 
urge them to be a little swifter in their review, or perhaps 
you need to submit it earlier to them.
    Mr. Kelly. Yes, sir. I take responsibility for that. I 
think it has to do with my newness in the position, but I can 
assure you it won't happen again.
    Mr. Kolbe. Thank you.
    With that, let me begin with a brief opening statement, and 
again, welcome Under Secretary Kelly, Commissioner Weise, to 
this first hearing for the fiscal year 1998 before the 
Treasury, Postal Service and General Government Subcommittee.
    My predecessor, Jim Lightfoot, left some pretty big shoes 
for me to fill, but I am looking forward to working with all 
the agencies that come under the jurisdiction of this 
subcommittee and continue much of the work that is already 
under way.
    I hope that, in addition, I will be able to bring some new 
and fresh ideas to the Subcommittee to keep us on the glide 
path towards a balanced budget, make government more efficient 
and responsive, and to produce an appropriation bill that both 
the Congress and the administration can support and can 
ultimately sign into law.
    I especially want to say how pleased I am to work with the 
Ranking Member, Mr. Steny Hoyer, who has served with this 
Subcommittee with distinction for some years, and I fully 
concede I have a lot to learn from him about it. As Chairman of 
the Subcommittee for many years, he left behind a very 
impressive legacy of many initiatives that he started.
    Today we are going to focus on the United States Customs 
Service, and for the next several hearings we will be focusing 
on law enforcement. Obviously, this is an Agency in which I 
have a lot of personal interest. In representing a border 
district, I have been very actively involved with trade matters 
and with border issues, and I have always argued that I think 
that Customs, and INS, as well, have contradictory missions.
    In one sense, customs job is to keep illegal goods from 
coming across the border, while INS keeps illegal people from 
coming across the border. But there is another part of the 
process, which is to facilitate the free flow of goods across 
our borders. And I think sometimes we may not keep that second 
mission in mind as much as someone who lives on the border 
might wish.
    I know this is not an easy mission and we don't make it 
easier with the laws that we give you. Customs plays not only a 
substantial role in the war on drugs, but in a sense, the 
primary role. And upon looking at the President's budget 
request, I am concerned that Customs interdiction efforts seem 
to be lagging in terms of the attention by the administration, 
and I will have some questions in that area.
    I am pleased to see a continued emphasis on innovative 
technologies along the border, which help to provide greater 
automation along the ports of entry. I am concerned about the 
lack of a master architectural blueprint or operating 
investment process to guide these efforts. I think we ought to 
try to learn from the failure of IRS, with regard to their tax 
systems modernization that has cost the taxpayers $4 billion, 
which IRS now concedes has given us absolutely nothing in 
return. We need to make sure that is not--on a lesser scale, 
admittedly--that that is not going to be repeated here with 
Treasury law enforcement, most notably Customs or any of the 
agencies that come under the jurisdiction of this committee.
    I will have questions for the witnesses concerning these 
and other topics, and I look toward to hearing the answers.
    Before I call on you for an opening statement, I would like 
to see if Mr. Hoyer would like to make an opening statement.
    Mr. Hoyer. Just briefly.
    First of all, I want to say to the Under Secretary, you are 
new, so you don't have experience with those on the committee, 
but Mr. Weise is not new and he does have that experience. This 
committee is very fortunate to have as its new Chair, Mr. Kolbe of 
Arizona. Mr. Kolbe is one of our most thoughtful and ablest Members of 
the Congress, and you are going to find a very fair hearing before this 
committee. And while some of us may differ from time to time, I want 
you to know that this side of the aisle has the utmost confidence in 
the Chairman's fairness. We were blessed to have a very fair and open 
and bipartisan Chairman that preceded Mr. Kolbe, and we were fortunate 
to get somebody equally committed to working together for the best 
product that this committee can produce for the taxpayers and for this 
country.
    So I want to welcome him as the Chairman publicly, I have 
said this privately and with our committee Members, but we are 
very fortunate to have him as our chair.
    Mr. Kolbe. Thank you, Mr. Hoyer, I will make that statement 
appear in my next campaign brochure.
    Mr. Hoyer. And he is almost as good as his future opponent, 
as good as that may be. You can bracket that, ha-ha.
    Mr. Secretary, the Director of Customs, of course, is no 
stranger to the Congress of the United States. He had a 
distinguished career here as a high-ranking staff member on the 
Ways and Means Committee, and is well-respected. In addition, 
the law enforcement agencies in Treasury, as you well know, 
from your law enforcement experience are outstanding. The New 
York bombing, of the World Trade Center, where ATF made such an 
important discovery--in fact, it was ATF that led to the 
breaking of that case, and, of course, your work in NYPD and 
the work of others both at the Federal and local level.
    This committee has historically been and continues to be a 
strong supporter of the law enforcement components of Treasury. 
Customs, of course, is the largest, with about a $1.7 billion 
and 17,000 FTEs in its budget, but also ATF and, Secret 
Service, which has, as you know, many law enforcement duties, 
in addition to the more publicly known protective 
responsibilities has it has.
    Mr. Secretary, I want to tell you, you have some of the 
most able law enforcement officials in the country heading up 
those agencies in Customs and ATF and Secret Service. And this 
committee has continually funded those agencies so that they 
could accomplish their objectives.
    In fact, administrations of both parties have not been as 
generous as this committee has historically been. In the area 
of Customs, particularly in the 1980s, we had to keep fighting 
to keep Customs at FTE levels we thought were appropriate to 
accomplish their objectives. You have a distinguished career in 
law enforcement.
    I will ask questions, I am sure other Members of the 
committee will ask questions. I am very concerned, as I know 
you are, and I am going to be talking to General McCaffrey, 
about the assertions that are made daily now in the press with 
reference to Customs. Any Agency that has that many people, 
obviously, from time to time may have a bad apple, as you had 
in the NYPD. But the Mexican performance is one I think we are 
all concerned about, I am sure we are going to go into it, and 
I know the Chairman is concerned about it. I am going to be 
asking questions about your relationship with General McCaffrey 
in terms of our coordination of this effort.
    Obviously, Justice is very much involved in INS, FBI, DEA, 
but I am pleased to have you here for your first time. I want 
to welcome you.
    I am pleased that we have a Chairman, as I said, who is 
going to pursue these issues, which I think are very serious 
ones, with a great deal of vigor, but also with a great deal of 
integrity and fairness.
    Mr. Lightfoot and I were Chair and Cochair during the 4 
years that we looked at Waco. This committee, frankly, 
developed all of the information in our hearings that was 
ultimately discovered in the last Congress by the extensive 
investigations. They spent a lot of money, a lot of time, they 
didn't find anything more than we did.
    In particular, the Treasury Department did an outstanding 
job, a much better job than Justice, in self-criticism and 
corrective action. Quite obviously, significant mistakes were 
made at Waco by the ATF, and they admitted those mistakes. They 
have corrected them and completed some personnel actions. But 
you are going to find as you enter into this responsibility, 
you have an Agency that has some of the best people in the 
world working for it, and we can achieve great results working 
together constructively.
    Again, we are pleased, on this side of the aisle, and the 
country is very fortunate to have a Chairman with the kind of 
fairness and integrity that we have.
    Thank you, Mr. Chairman.
    Mr. Kolbe. Thank you, Mr. Hoyer, for your kind remarks.
    Mr. Kelly, we would like to begin with your statement.
    As you know, the full statement will be placed in the 
record, we would appreciate it if you would summarize your 
statement so we will have as much time for questions as 
possible.
    Mr. Kelly. Yes, sir. Thank you very much.
    Mr. Chairman, Congressman Hoyer and Members of the 
committee, it is a pleasure to appear before you today to 
present the Department's antinarcotics work and join in 
presenting the Customs Service's requirements for fiscal year 
1998. Treasury's enforcements, achievements and initiatives 
being discussed this week and next week are due in large part 
to the guidance and support of this committee. I am confident 
that the Department and its enforcement bureaus will work 
diligently to build on this relationship in the coming fiscal 
year.
    I would also like to note the support and leadership that 
we have received from Secretary Rubin. Whether in support of 
Customs antismuggling efforts, our financial crimes 
enforcement, or antiviolent crimes initiatives, the Secretary 
has been an invaluable ally to the men and women of the 
Treasury law enforcement.
    Accompanying me today are Assistant Secretary James Johnson 
and Deputy Assistant Secretary Liz Brazee and other members of 
my staff, and, of course, Commissioner Weise and his staff, 
which he will introduce.
    And subsequent to my remarks, Commissioner Weise will 
provide greater insight and detail into their efforts. While I 
will defer to Commissioner Weise on the specifics of the 
Bureau's work, I would like to call to your attention the vital 
and broad-based nature of the Customs mission.
    Customs maintains critical overflight operations in the 
drug source and transit zone areas, antismuggling initiatives 
at the border, and investigative and intelligence-gathering 
operations. It also conducts investigations of money-laundering 
rings linked to narcotics smuggling.
    Largely because of its role as the Nation's primary border 
enforcement Agency, Customs antinarcotics efforts have been 
most pronounced at the Southwest border and the Caribbean. This 
work has been significantly enhanced over the past few years 
through Operation Hard Line and Gateway. Operation Hard Line, 
which began 2 years ago on the Southwest Border, continues to 
yield positive results. The total number of narcotics seizures 
increased by 29 percent, and seizures measured by total weight 
increased by 24 percent.
    With the support of this committee, Customs is building 
further on this program during the current fiscal year. For 
example, in addition to the 165 experienced Special Agents and 
intelligence analysts who have been relocated to the Southwest 
Border, $65 million in fiscal year 1997 funding will allow for 
an additional 650 positions for drug interdiction. These 
additional positions will allow us to extend the Hard Line from 
the Southwest Border to other parts of the Southern U.S., 
including the Miami area.
    A focus on the entire border is absolutely essential given 
the likelihood that traffickers will alter their attempts in 
response to the heightened enforcement in any area. In fact, 
Customs already has detected such a shift in response to Hard 
Line with the crackdown at the Southwest Border, forcing 
traffickers to look for additional smuggling routes, 
particularly in the Caribbean.
    In response to this shift, Customs has implemented 
Operation Gateway. Since the initiation of Operation Gateway 
last March, Customs narcotics enforcement activities in Puerto 
Rico have increased dramatically. From March to December 1996, 
heroin seizures increased by 28 percent and cocaine seizures by 
37 percent. Customs consistently seizes more illicit narcotics 
than all other Federal agencies combined. We will continue to 
play a principal role in this fight.
    Our counternarcotics efforts also extend to money-
laundering, which is both the life support system and the 
Achilles heel of narcotics traffickers. The better we are at 
tracking dirty money, the better our chances at unraveling the 
criminal enterprises that depend on it.
    We have developed counter-money laundering initiatives that 
focus on effective enforcement, flexible regulatory measures 
and an aggressive training and advisory program for our foreign 
counterparts. We continue to focus efforts on deterring and 
detecting money-laundering internationally.
    Last year the Customs Service seized over $232 million as a 
result of money-laundering and drug-smuggling investigations. 
In addition, Customs, along with the Internal Revenue Services 
Criminal Investigative Division, the FBI and the DEA 
successfully concluded investigations of numerous money-
laundering organizations linked to major trafficking 
organizations, such as that which resulted in the capture, 
extradition, and conviction of Juan Garcia Abrego, one of 
Mexico's most notorious drug kingpins.
    In addition, Treasury has been working in partnership with 
financial institutions to reduce burdensome paperwork in order 
for them to focus on reporting of suspicious activity. Under 
the Suspicious Activity Reporting System, banks report 
suspected criminal activity to one collection point that 
provides the information to law enforcement.
    This single filing point provides easier access to the 
information by the law enforcement and regulatory agencies. The 
result, better information about trends and patterns which is 
vital to law enforcement and banks in their efforts to combat 
money laundering.
    Another example of how a flexible approach to regulation 
leads to better enforcement is Treasury's recent Geographical 
Targeting Order, or GTO. It is designed to prevent money 
laundering through a specific group of money remitters in the 
New York metropolitan area who are suspected of funneling drug 
proceeds back to Colombia.
    As a result of this order, the flow of drug money through 
remitters in New York City to Colombia has been reduced 
dramatically. The GTO has forced the drug traffickers to 
attempt riskier schemes to move their profits back to Colombia. 
Customs has seized an additional $40 million in currency over a 
comparable period last year, as traffickers tried to smuggle 
cash out of the country through JFK and other East coast ports 
and airports in Miami, Newark, and Boston.
    Of course, making the U.S. financial channels less user-
friendly to criminal enterprises is just half the battle. Since 
organized crime is increasingly a transnational phenomenon, a 
truly effective attack requires that controls over the movement 
of their funds be implemented by all nations. The U.S. has made 
important strides in this area over the past 6 or 7 years, 
particularly through multilateral antimoney-laundering 
organizations, such as the Financial Action Task Force and the 
Summit of the Americas Process, led by Secretary Rubin, as well 
as through bilateral initiatives.
    As a result, nations increasingly are adopting the 
necessary legislative and enforcement tools to address money-
laundering and to facilitate transnational investigations. At 
times, however, all the diplomatic efforts in the world will 
not accomplish what certain well-targeted enforcement measures 
will. In October 1995, President Clinton announced a major new 
international organized crime initiative that also targets 
narcotics traffic.
    As a first step towards accomplishing this goal, he issued 
an Executive Order invoking his powers under the International 
Emergency Economic Powers Act to block assets and prohibit 
transactions with the Cali Cartel in Colombia and people in 
businesses associated with the cartel. The President's order 
delegated to Treasury's Office of Foreign Asset Control, 
working with the Department of State and Justice, the authority 
to identify the individuals and businesses that act for them or 
on their behalf and to block the assets of the traffickers and 
their front companies in the U.S.
    This action bars U.S. citizens and companies from doing 
business with them. The initial list included the four kingpins 
of the Cali Cartel and 80 companies they own or control. OFAC 
has since added over 300 names of persons and companies to that 
list.
    Finally, our antidrug efforts also include the work of the 
Bureau of Alcohol, Tobacco and Firearms which has made reducing 
drug-related violent crime a priority through its participation 
in OCDETF and HIDTA task forces, as well as its own Achilles 
program. Since its inception, Achilles has resulted in the 
recommendation of 20,000 defendants for prosecution as well as 
the issuance of 35 life sentences and 30,000 cumulative years 
of prison sentences in connection with drugs offenses.
    ATF also participates in vital demand reduction efforts 
chiefly through its Gang Resistance Education and Awareness 
Training Program, or GREAT as it is called. Working with the 
Federal Law Enforcement Training Center and local police forces 
throughout the country, ATF uses the GREAT program to reach 
school-age children and help them reject gangs and drugs. With 
the invaluable support of this committee, ATF has been able to 
extend GREAT's reach to over 2 million children since 1992, and 
to include the participation of 1,300 police officers from 
across the country.
    As impressive as our Bureau's efforts have been, we 
recognize we must continually reevaluate them. To this end the 
Department intends to enhance its own oversight of some of the 
issues and areas addressed today, with an eye toward improving 
the quality of Treasury enforcement's in-service training, 
improving the internal investigative capability of Treasury's 
enforcement bureaus and enhancing and further coordinating 
departmental antimoney-laundering initiatives.
    We look forward to working closely with you, Mr. Chairman, 
Congressman Hoyer, and other Members of the this committee as 
we move forward in these and other areas.
    Thank you very much.
    [The information follows:]

[Pages 588 - 592--The official Committee record contains additional material here.]

    Mr. Kolbe. Thank you very much, Mr. Secretary, for your 
comments.
    Commissioner Weise.
    Mr. Weise. Thank you, Mr. Chairman.
    Mr. Chairman, Mr. Hoyer, Members of the committee, it is a 
real pleasure to appear before you once again.
    Mr. Kolbe, as you have indicated, if my full statement 
could be submitted in the record, I would like in the interest 
of time to summarize, because we have some people here, as you 
might notice, some people from the front lines of Customs, 
which have some information they would like to share with the 
committee in terms of actual experiences from the border.
    Mr. Chairman, I take to heart the comments you have made in 
your opening statement about the difficult challenge that the 
fine men and women of the Customs Service face in trying to 
balance the very delicate interest in ensuring that we do 
everything in our power to keep drugs from entering this 
country, while also dealing with the fact that we have an 
important commercial responsibility.
    The people you will be hearing from in a few moments make 
that balance every day, and we know from our prior experience 
as we have been working together in the commercial aspects of 
this in this past, it is something we shouldn't lose sight of. 
But having said that, my entire experience before assuming this 
position was in the commercial arena.
    I will tell you, as the parent of two teenage daughters, it 
is very clear to me that there is no mission that we have in 
the Customs Service that is more important than keeping drugs 
from entering this country. We have all seen the tremendous 
devastation that has occurred in our streets and society with 
our teenagers and our youth. So we try our best to do the best 
job we can.
    I think we have, with the great support of this committee 
over many, many years--and I appreciate Mr. Hoyer's comments--
on a bipartisan basis, you have been there for the Customs 
Service, and as a result of that, I think we have demonstrated 
to you and the American taxpayer that they are getting the 
value for the dollars you have helped invest in the Customs 
Service.

                          operation hard line

    If I could back a couple of years, just before we got the 
support of this committee to implement Operation Hard Line, we 
were facing tremendous stress on those ports of entry down 
along that Southwest Border. The Immigration and Naturalization 
Service had put in some significant operations to really clamp 
down on smuggling of illegal aliens between the ports of entry. 
They had two major operations, Operation Hold The Line and 
Operation Gatekeeper in California and Texas.
    There had not been a lot of preplanning in terms of what 
the impact might be, but the impact clearly was at those 38 
ports of entry, along that 2,000-mile span, as the pressure 
mounted and overwhelmed us to a certain extent at the ports of 
entry. We saw instances of port-running, which increased to 
over 900 instances in a single year. Port-running is when a 
vehicle pulls up to the primary inspection booth, the Customs 
officer in the booth asks the individual to open its trunk; 
instead of doing so, the individual hits the accelerator, at 
great speed and great peril, not only to the Customs officers, 
to other innocent bystanders and vehicles and pedestrians in 
the area, and at great risk to the local community. We had over 
900 instances of that.
    What we were seeing were such brazen techniques of 
smuggling that they weren't even resorting to hidden 
compartments or to trying to find any subterfuge. The drugs 
were just loaded into the trunks, and when they got to the 
booth, they would fly through.
    Well, with the committee's help and the help of the 
administration, we were able to implement Operation Hard Line. 
In the early going, it was an investment of about $55 million, 
it was a combination of a number of investments in terms of 
technology, some very basic technology of putting some barriers 
in and around and configuring them in such a way you couldn't 
move directly through and around the inspection booth.
    We were able to put a lot more overtime, people in the area 
so they could roam with their canine and with their teams, so 
in the area before you actually got to the primary inspection 
booth, we would know we had a suspect before they got the 
opportunity, with all the traffic in front of and behind them, 
to move forward.
    Looking back 2 years later, we have seen tremendous 
success. We have reduced the instances of port-running by 
almost 60 percent in that 2-year period. We have also seen in 
the course of the last 2 years with Operation Hard Line and its 
supplement to that, Operation Gateway in Puerto Rico, we have 
for the first time in the history of the Customs Service seized 
more that 1 million pounds of narcotics in the past year. Now, 
that is something we can be proud of, but it also is a 
reflection of the challenge we face.
    [Clerk's note.--The agency later change ``more than'' to 
``approximately.'']
    We know that we can't be comfortable with what we are 
doing. We know we have much work to do and have to work in 
close consultation with other organizations, with the DEA, FBI, 
Immigration and Naturalization Service, and so many others, to 
ensure that we are doing everything in our power to carry out 
that important responsibility to keep drugs out of the country, 
and also ensure that we are not stopping commerce. We do have a 
responsibility to do that.
    I think through a lot of the technology and information we 
have been able to gather, and the intelligence we been able to 
put forward, we have been able to be more strategic in our 
focus. We have also worked with the local business communities, 
and there is an initiative, I am sure you are aware of, Mr. 
Chairman, that started in California, but which is going to 
grow. It is called the Business Anti-smuggling Coalition, or 
BASC, and it is a number of businesses taking upon themselves 
to work to ensure that they are doing careful background 
checks, criminal background checks with the people they are 
dealing with in Mexico, making sure that the loading sites 
where their merchandise is put into the trucks in Mexico are 
clean and clear and that they are doing what they can to reduce 
the possibility that drugs are going to be put into vehicles 
unbeknownst to them. So there are a number of things we are 
trying to do to make that delicate balance.

                           border corruption

    Now, we can't talk about the difficult challenge we face in 
the Southwest and in the United States without talking about 
the issue that you raise, Mr. Hoyer, and that is the integrity 
of the Customs worker. And the one thing I would like to make 
as clear as I possibly can on the record in this public arena, 
is that I believe strongly in the integrity of the U.S. Customs 
work force.
    I knew when I took this position, one of the things I knew 
is if I wasn't going to be able to understand the issues facing 
us on the Southwest Border, I couldn't lead this organization. 
So my very first visit as Commissioner of Customs was to the 
Southwest Border, and I have since madeabout 22 additional 
visits down there.
    I have met with these front-line people, I have walked 
alongside them, and seen how they risk their lives day in and 
day out. It is a very difficult challenge with unbelievably 
poor working conditions. You know what the weather is like 
along that border, 120-degree temperatures, and they have a 
great deal of integrity.
    Now, does that mean we don't have corruption problems in 
the Customs Service? Absolutely not. I know with the mission 
that we have and the resources available to the drug smugglers, 
that in one payoff they can pay an individual more than they 
can make in an entire year, that we have to be forever vigilant 
about the fear of corruption.
    But I am very frustrated, as is our work force, that 
numerous articles are painted with a broad brush implying the 
Southwest Border is rampant with systemic corruption. Virtually 
every instance where we have had either ourselves or outside 
interests come in and take a comprehensive look at the 
situation has come to the same conclusion, that there are 
individual instances, we pursue them vigorously, we take a 
number of steps to minimize the risk of corruption, but there 
is not, in my judgment, systemic corruption in the Customs 
Service, and we all owe it to the fine men and women of the 
Customs Service to ensure that we understand that.
    We can get into the question and answer period, Mr. 
Chairman, about the number of steps we take to minimize the 
risk of corruption within our work force. Some of the things we 
need to talk about we perhaps will need to talk about on 
Thursday in the closed session, about some of the proactive 
efforts we are taking to minimize this risk.
    Finally, before introducing these fine gentlemen to my 
right to the Members of the committee who do not live on the 
border, and have your personal experience of living on the 
border, to get a feel for some of the important cases we work 
on there, I would like to mention some of the other activities 
of the Customs Service.
    I think you were right to focus the subject matter of this 
hearing on drugs. It is the area, as I said, that is more 
important than perhaps anything else we do. I am proud of what 
we have been able to accomplish in the last few years with the 
support of this committee.
    We have completely restructured the Customs Service. We 
have reduced the size of our headquarters operation, eliminated 
regions and districts. We have reinvested our resources into 
the front lines. We have been the recipient of 16 Hammer awards 
from the Vice President's National Performance Review, because 
we have been working to make an organization that works better 
and costs less, again with the full support of this committee.
    We are trying to, as you alluded to in your statement, not 
make the mistakes that other organizations have made in the 
past in terms of our automated systems. We have the tools that 
this Congress gave us in the Customs Modernization Act that was 
enacted as part of the NAFTA implementation bill, to now have a 
system that will allow us to work more closely with the 
business community to try to assure that we achieve the highest 
level of compliance with U.S. laws.

                            compliance rate

    We have for the first time in the Customs Service's 
history, have a system in place where we can actually measure 
the level of compliance. And we have increased that level of 
compliance to 82 percent, and we are striving to work through 
the concept of informed compliance and inform the business 
community of what is expected of them to work together to bring 
that compliance level up even higher.
    An important number that the committee should be aware of, 
even though the overall compliance rate is only at 82 percent, 
although I think that is quite good, the actual revenue gap, in 
terms of the revenue that we should be collecting, is 99 
percent. There is only a 1-percent revenue gap. So of that 18 
percent shortfall in terms of reaching 100-percent compliance, 
we are still achieving only a 1-percent revenue shortfall.
    What that means is a lot of errors that we are finding are 
related to wrong marking, country of origin, issues that do not 
relate specifically to the revenue owed to the government. So I 
think that is something we all should be proud of and we could 
not have done without the clear support of this committee.
    With that, Mr. Chairman, I would like to introduce the 
individuals to my right who have come up from the border 
States. We have one actually from Arizona, and we would like to 
have them speak to the committee about some of the cases they 
have been working on.

                        nogales, arizona seizure

    First of all, Senior Inspector Rick Davis, who is from 
Nogales, Arizona. Then secondly, we have Inspector Lance Lueck 
and Senior Special Agent Brad Bench from Otay Mesa, California, 
who would like to share experiences they have had in terms of 
challenges on the border and the success they have had.
    Mr. Hoyer. Who is the second individual, I am sorry?
    Mr. Weise. Lance Lueck, L-U-E-C-K.
    Mr. Hoyer. Okay. And he is from where?
    Mr. Kolbe. Both from Otay Mesa--it is Nogales.
    Mr. Davis. I am Inspector Rick Davis from Nogales, Arizona.
    On August 3, 1996, I was working at the Nogales commercial 
facility----
    Mr. Kolbe. Just turn one of those microphones so this can 
be recorded here.
    Mr. Davis. On August 3rd, five transformers came in to the 
commercial facility in a refrigerated trailer. The five 
transformers were selected for intensive inspection, and due to 
my expertise in compartments and concealment, I was given the 
task of inspecting the transformers.
    The transformers create quite a few problems with their 
size alone. This one here is probably 2.5 feet wide, about 4 
feet long, and probably 5 feet high. They also contain oil for 
a coolant.
    Oil in the transformers sometimes has PCB, which is 
carcinogenic. Therefore, until we get the oil tested we do have 
to consider it as a hazardous material. So the initial 
inspection of this is going to be minimal and as nonintrusive 
as possible to keep from dealing with a HAZMAT problem.
    In this particular transformer load, three were not loaded, 
they were legitimate transformers. The other two were both 
loaded with 1,146 pounds of cocaine. The inspection, initial 
inspection was performed with a buster. That is a portable 
contraband detector, a hand-held item. And the buster showed a 
difference in density between this area and this area.
    There were other inspection techniques that were performed 
by myself, and through these special techniques, it was 
determined it was a very good possibility that a compartment 
had been built in the transformer in about this area here. To 
try to confirm that, we opened the--there is an inspection 
plate on the top up here and you can open thatvery small 
portal, and utilizing some techniques we determined that indeed there 
was a box in the two transformers.
    Our problem now came up with getting the oil from the 
transformers so that we could have access to the compartments. 
The first thing that we decided to do was make sure that it was 
clean oil and did not have the PCBs so we wouldn't have any 
HAZMAT problem. We did get it tested and it was clean oil.
    The second problem was they are very big and very heavy, 
and we have no equipment to move them. This one we could barely 
get out with a forklift. The other we could not even get off of 
the truck with a forklift. So we had to drain the oil on the 
truck. That is what we drained it with, a garden hose, siphon 
method, into 55 gallon drums.
    The removal of the lid itself, it weighed several hundred 
pounds, and we did get that off. Once we got inside, it had a 
portion of about 2 feet of legitimate transformer parts that 
had been placed back in; they had been removed, a box built in 
the bottom and the transformer parts placed back in. The oil is 
very dense and you can't see through it. We dropped a 
flashlight in it and the flashlight just disappeared. This one 
here, you can see we finally removed the entire top. It took a 
forklift to bring it off.
    This is the second transformer. You can see this one is 
almost 7 feet tall here, and this one we have got the oil 
drained out of this.
    The top of this one is off, the top of this one also 
weighed several hundred pounds. The compartment was built in 
about this area, about 3 feet down from the top, so in-between 
there and the top of the compartment you did have legitimate 
transformer parts. All these had to be removed before we could 
get to it.
    As you can see, the inspector here is wearing a mask, a 
face mask and goggles. During the cutting process, the oil, the 
flash point is pretty low so the fire hazard is not there, but 
it does create a lot of fumes and can make you sick. So we take 
precautions on the inhalant problem also.
    This is a coil of copper wire that had been placed on top 
of the boxes the compartments of the cocaine was in. This coil 
of wire, the only purpose we could figure it being there for 
was to defeat the fiberoptics scope which we occasionally use, 
and if you drop the scope into the transformer and try get a 
view of it, this is going to look like a legitimate shipment 
right down to the top of the compartment.
    This is the compartment itself. You can see this individual 
is standing in the compartment, in the transformer, I should 
say. The compartment is, like I said, about 5 feet tall. It was 
completely surrounded by oil, as you can see there, and the 
copper wiring was all the way to the ground, completely encased 
it.
    The problem, once we got it open here, arose with getting 
the cocaine out of it. It was physically impossible for us to 
get in, so what we ended up doing was using a forklift and 
knocking it over on its side and crawling into it that way.
    This is the second transformer, the box, the square one 
again. Again, you can see that the coils, all the way around 
the box, all the way to the bottom, so if you run the scope all 
the way to the bottom, you just saw copper wires all the way to 
the bottom, again surrounded by oil, preventing us from 
drilling any portion into the transformer itself.
    And this is a view in the compartment itself, on the 
rectangular one. This is the bottom of it after the cocaine has 
been removed. Hindsight, you can see that there is a cut in the 
floor there, a weld. If we had the equipment to have lifted 
this thing up and got it above where we could look under it or 
put it on a pit or something, we would have actually been able 
to see the trap door which came in from the floor. But we never 
did get this high enough to look. That was a net of 1,164 
pounds of cocaine.
    Thank you.
    Mr. Kolbe. Thank you very much. That is good detective 
work.
    [Clerk's note.--Due to difficulty with reproduction, 
photographs of the visual presentation are maintained in the 
subcommittee official files.]
    Mr. Davis. Thank you, sir.
    Mr. Bench. My name is Brad Bench, I am a Special Agent out 
of the Office of Investigations. This is Customs Inspector 
Lance Lueck, who works at the Otay Mesa Cargo Facility.
    I am the Program Manager for the Cargo Analysis Research 
Investigative Team that Lance works on down in Otay Mesa, and 
we put this presentation together to show what can be achieved 
when all the entities within Customs work together towards a 
common goal.
    Lance is going to be telling you a little bit about the 
enforcement programs they have down at the Otay Mesa Cargo 
Facility, then I am going to tell you about a case we worked 
just last month, Lance and I, where we netted over a ton and a 
half of marijuana in a one-week time period.

               cargo analysis research investigation team

    Mr. Lueck. I am a member of a Cargo Analysis Research 
Investigation Team, we call it the CARIT. This is a 
multidiscipline enforcement team made up of all entities of 
Customs. We have inspectors, agents, Intel research analysts, 
operational analysis specialist, National Guard, Intel, and 
other entities as we could gather them. Canines also.
    The CARIT acts as a command post for such units as the 
cargo rovers. They perform inspections in the cargo environment 
on a random and spontaneous nature. We also have the 
enforcement rotational team. They do specialized inspection. 
They are self-directed and work independently within all the 
cargo facilities.
    We also utilize heavily the Canine Enforcement Officers and 
their animals. They screen crates and vehicles for narcotics. 
And Otay Mesa has a full-time x-ray. It is interesting that 
last Wednesday we intercepted another front-wall compartment 
and netted a load of 966 pounds of marijuana while Congressman 
Packard and Kim were there. They saw that happen. Through all 
our inspections and enforcement activities, we have the 
assistance of California National Guard to help us everywhere 
in the facility.
    We use a lot of different tools. The buster-density 
detector, laser-range finders. We have encrypted secure radio, 
various hand drills and hand tools, and when these teams go 
mobile, we have an enforcement support vehicle dedicated to us.
    Mr. Bench. Prior to fiscal year 1997, we were getting 
unconfirmed reports that smugglers may be trying to use front-
wall compartments in empty trailers. And starting with fiscal 
year 1997, we decided to have a combined effort between the 
Office of Investigations, Field Operations, and the Office of 
Intelligence, to try to target some of thesefront-wall 
compartments and see if we could confirm it.
    We had Special Agents begin debriefing all their sources of 
information. And in one instance, we got some solid information 
about a warehouse in Los Angeles.
    We took Special Agents up to Los Angeles in conjunction 
with the Los Angeles Office and State and locals that were 
helping us out. We served a search warrant on this warehouse.
    Inside, we found a trailer with a front-wall compartment. 
There was no narcotics at the time, but we were able to 
identify the trailer fully, and we provided photos, sketches 
and information to Customs Intel specialists. They in turn 
created intelligence reports that went out to the front-line 
Inspectors and other Southwest Border units to watch for this 
trailer and this particular smuggling method.
    At the same time, once they received the reports, 
Inspectors, Canine Enforcement Officers and the National Guard 
intensified their efforts to identify this trailer and other 
front-walled compartments. The intelligence began to pay off as 
we began to see the first of many front-wall compartment 
seizures.

                           otay mesa seizure

    This is the case I was talking about. It happened one week 
in January, just last January. On January 21st, Customs 
Inspectors and Canine Enforcement Officers at the Otay Mesa 
Cargo Facility intercepted a front-wall compartment in an empty 
trailer.
    The cargo Analysis Research Investigative Team coordinated 
the follow-out of the trailer, and they do this by telling the 
driver a untruth we make up so he feels Customs is not 
suspicious of his trailer. This creates a window of opportunity 
that lets Special Agents and Customs surveillance to respond to 
the cargo facility where we can conduct surveillance.
    This is the helicopter that helps us on our surveillance 
down at San Diego. It is outfitted with a forward-looking 
infrared system for night follow-outs. It has also got about a 
10 million power Night Sun on it. It carries two pilots and can 
carry three passengers. At the same time the helicopter is in 
the air, Special Agents on the ground from the San Diego Office 
initiated the ground portion of the surveillance. This truck 
was followed.
    This is a map of the area. The red dot is about where the 
Otay Mesa Cargo Facility is. This is 905, the freeway that 
comes out of Otay Mesa. The trailer took this route and went up 
to a empty truck yard in the Chula Vista area right there.
    The trailer was dropped in that yard, and then the tractor 
disconnected from the trailer and returned to Mexico, and we 
allowed it to return to Mexico without stopping it while we 
maintained surveillance on the trailer.
    During the surveillance we have Intel specialists that we 
are in contact by phone and radio and they are able to run data 
checks for us on just about anything we have in question, and 
it gives us a lot of help on the ground during the 
surveillance. In the meantime, back at the Otay Mesa Cargo 
Facility, Inspectors intercepted another front-wall 
compartment, this is about 2 hours into our initial 
surveillance, and found another front-wall compartment in the 
trailer that we had seen in the warehouse in Los Angeles.
    The Cargo Analysis Research Investigative Team coordinated 
a second controlled surveillance for us. We had to divide our 
manpower in half from our first surveillance. Since it was 
stationary, we were able to do that and we also took the 
helicopter with us so we could do a second follow-out on this 
second trailer.
    At one point we decided to concentrate the full efforts 
onto the second trailer, the one we had seen in the Los Angeles 
warehouse. We did this because it was an identified smuggling 
operation and we had some prior intelligence on this. So we 
seized the marijuana from the first truck in the truck yard and 
left the trailer empty in the truck yard. We seized 
approximately 1,113 pounds of marijuana from that trailer.
    The next morning, the smugglers picked up the now empty 
trailer and we allowed them to return to Mexico. We continued 
surveillance on the trailer we had seen in Los Angeles for 
approximately 2 days; there was no activity on it. We 
terminated the surveillance and seized the trailer.
    When we seize a trailer like that, we take it down to the 
Otay Mesa Cargo Facility, we allow the Canine Officers to run 
the dogs on it as a training aid, and we also allow the X-ray 
Inspectors to take X-rays of it so they can refer to it later 
as a training vehicle. That right here, that is the front-wall 
compartment and the darkened area is the actual marijuana in 
the front-wall compartment area, and that is what the X-ray 
Inspectors see.
    After that we unload the marijuana with seized property 
specialists, inspectors and agents, and from that trailer we 
seized 1,076 pounds of marijuana. So after 48 hours, we had 
seized 2,189 pounds of marijuana, seized one trailer, and at 
that point there were three tractors that were subject to 
seizure.

                          tecate port of entry

    Approximately one week later, at the Tecate Port of Entry 
on January 28th, the smugglers attempted to cross a load of 
marijuana in the same trailer that we had allowed to return to 
Mexico a week earlier in the same front-wall compartment. The 
Inspectors and National Guard were ready for this because they 
had received the intelligence report that the Intel specialists 
created for us. The cargo Analysis Research Investigative Team 
was notified and they again coordinated a controlled follow-
out.
    Again, they have to give an artificial reason to the driver 
so he is not suspicious as to why he is being detained at 
Customs. This is an overhead shot of the Tecate Port of Entry. 
It is in the remote Otay Mesa mountains, and it is unique in 
the fact that it has a very small town on the United States 
side and actually quite a large town on the Mexican side.
    It is about 45 minutes outside of San Diego. This is the 
road that leads down from Tecate to San Diego and it is very 
difficult to do a ground-only surveillance from Tecate. It is 
important for us to have the surveillance helicopter to do the 
surveillance on this winding road.
    It increases our chance of success on a follow out about 
tenfold. After a 3-hour surveillance down from Tecate, the 
trailer was dropped at this auto-wrecking yard which is in 
National City, California. It was backed into a bay which 
obstructed both the helicopter's view from the air and agent's 
view on the ground.
    We had to terminate the surveillance and went into the 
yard, made three arrests and seized the tractor and trailer. In 
addition to the three arrests and seizure of tractor and 
trailer, that business also becomes subject to forfeiture.
    Out of that trailer we seized 1,173.5 pounds of marijuana. 
And the results of this case to date, we havemade four arrests, 
two trailers were seized, three tractors were seized, one tractor is 
still subject to seizure, one business is subject to forfeiture, and we 
seized a total of 3,162.5 pounds of marijuana.
    All of the entities within Customs worked well together on 
this case and without the cooperation and coordination of all 
of them together, it wouldn't have been a success, the Office 
of Investigations, the Southern California CMC, and Inspectors 
Office of Intelligence Specialists who put together the briefs 
for us, the San Diego Air Branch which supports us in our 
surveillance, the Operational Analysis staff and their 
expertise in the various computer databases, and the California 
National Guard which assist the Inspectors.
    Since we started targeting these front-wall compartments at 
the Otay Mesa Cargo Facility, in fiscal year 1997, we have made 
eight narcotics seizures totaling 8,669 pounds of marijuana. 
These seizures have an estimated street value in San Diego 
County of about $12,400,360.
    Thank you.
    Mr. Kolbe. Thank you, very, very much, Inspector Bench, 
Inspector Davis.
    Does that complete the presentations?
    [The information follows:]

[Pages 603 - 649--The official Committee record contains additional material here.]

    Mr. Kelly. Yes, sir.
    Mr. Kolbe. Let me begin the questions. We don't have all 
the Members here, but, first of all, we will try to adhere to 
the 5 minute rule and that will apply to the Chairman as well 
in asking the first round of questions.

                              WAR ON DRUGS

    We will also be going to the Ranking Member next and 
following that we will alternate between Majority and Minority 
Members that are here at the time the gavel goes down. And 
after that we will go to Members as they come in.
    Let me begin by asking, we have heard some very impressive 
information. Your testimony and written statements are very 
impressive, what we have heard from the Inspectors is very 
impressive, but the bottom line is, can either of you tell us 
that we are winning the war on drugs today?
    Mr. Weise. I would never say we are winning at this point 
in time.
    Mr. Kolbe. Are we making any progress?
    Mr. Weise. I think we are making progress, but clearly this 
is a very serious problem and going to take a long, long 
commitment to resolve it. We have an important responsibility 
in the Customs Service, and interdiction is, in my opinion, a 
key component in dealing with this problem. But it is only one 
component.
    Mr. Kolbe. What gives you hope that we are making progress 
here? I want to believe it.
    Mr. Weise. I guess the fact that we are seeing the kind of 
cooperation between the various organizations that are involved 
in this effort that we have over the last 3 or 4 years. It 
gives me some sense of hope that we can work better together 
than we have in the past and deal with the supply side of this.
    But clearly, I think one of the things that is obvious from 
the President's commitment and General McCaffrey and others, is 
that this can't be done with just one side. Unless we can work 
comprehensively to reduce the demand, we can't resolve it 
alone. But it is an important component, and as long as we have 
a bipartisan commitment that we are going to do everything we 
can to resolve this problem, I think we can make progress. 
Whether we can solve it overnight, that is not something that 
is likely. This problem has been too many years in the making. 
But I think we have a need to have a collective resolve, and I 
can tell you from seeing the kind of people you heard from 
today, we have a resolve to do everything we can to keep the 
drugs from flowing across our borders.
    It is not an easy challenge, but we are seeing some impact, 
at ports of entry where we are responsible for keeping those 
drugs from flowing. We are seeing impact in terms of smuggling 
routes going in different places now. It is a balloon effect. 
We are seeing more smuggling around San Diego and Brownsville. 
We are seeing more activity between the ports of entry. So we 
need to have that comprehensive approach.

                         PERFORMANCE INDICATORS

    Mr. Kolbe. Well, I agree we are making it more difficult, 
and that certainly is one of the things we need to do, but it 
still doesn't tell me that we are winning the war. And I say 
this from the same frustration I know you feel and your people 
in the field feel and probably a lot of Americans feel. This 
wasn't going to be my first line of questioning, but I notice 
in terms of the performance indicators that you have, you have 
some interesting performance indicators--but one that seems the 
most logical to me is, what is the street price of drugs? You 
don't even use that. Wouldn't that tell you what is happening 
to supply and demand?
    Mr. Weise. There is no question that the street price is a 
relevant criteria for the success of the overall program. And 
that is something we are working on with ONDCP to come up with 
a new measurement. Because to be candid, and I don't want to 
seem bureaucratic, but in terms of Customs, looking at seizures 
as a measurement of success is ultimately going to come back to 
bite us. Because if we are successful in basically making it 
impossible to smuggle drugs, what is going to happen to our 
seizures?
    The seizures are going to be way down because they are 
going to try to go through other routes. So we recognize that 
seizures alone, arrests, they are relevant factors of measuring 
performance, but they aren't sufficient. And we are working 
both internally and collectively with General McCaffrey and 
others to try to come up with more measures of the success of 
the overall program. But we can't individually control the 
price of drugs on the street. It also involves a lot of other 
organizations that have a piece in that. So we won't be able to 
measure Customs success purely on that, if you just use that as 
a Customs' measure of success.
    Mr. Kolbe. I agree, from a Customs' measure. I am looking 
at the overall thing. In the very brief time that is remaining, 
let me return and get started on what I wanted to be at least 
the initial line of questioning, and that is this issue of 
corruption. And there is kind of a rule of thumb that if there 
is smoke, maybe there is some fire. And I want to make clear in 
my dealing with Customs, with people along the border and in my 
region, I have great respect, and I believe the overwhelming 
majority of them are honest. But corruption has got to be 
something that worries all of us, because it absolutely 
undermines the credibility of any law enforcement agency. One 
bad apple can do that.
    And I just want you to tell me why you think there has been 
more attention to this Agency, or allegations, I think that is 
fair to take, more allegations of corruption than there have 
been with other law enforcement agencies, and how serious do 
you think the problem really is?
    Mr. Weise. Well, it is a very difficult question, Mr. 
Chairman, and one that has been my greater bone of frustration 
over the past 4 years. I will just give you a few 
illustrations.
    When I became Commissioner in May of 1993, there was an 
instance that had occurred several years earlier that many, 
both the current Customs employees and some former Customs 
employees felt was a clear indication of corruption in the 
Customs Service. This matter had been thoroughly investigated 
on two prior occasions, once by the Treasury IG's Office and 
once by the Internal Affairs Office.
    Notwithstanding that, allegations were made not only in 
that instance but a whole host of people who had information 
with regard to that one were alleging that there was rampant 
corruption and they didn't trust the Customs Service to get to 
the bottom of it. We took the unprecedented steps of obtaining 
a Memorandum of Understanding with the Justice Department, 
Treasury Department, FBI and Customs. We asked for a complete 
review of all those allegations. And they took almost 18 months 
with a Grand Jury that sat in San Diego, and they came to the 
same conclusion that the first two did: There was no evidence 
of corruption on the part of those individuals.
    We have had instances where we have worked cooperatively 
with the FBI and others, and there are individual cases. It 
seems to me that there are a lot of folks who jump to the 
conclusion that because the drugs are getting in, and because 
they see Inspectors in uniform at the ports of entry, they come 
to the conclusion that the only way to get it in was to bribe 
an inspector.

                   STEPS TO PREVENT BORDER CORRUPTION

    One of the things we have attempted to do from an operating 
standpoint, that I touched on, we try to make it as unlikely as 
possible that a single individual, an inspector or otherwise, 
will have the final say as to whether a load is going to come 
in or not. We do that through a number of steps we take.
    I have already talked about doing more activity in the 
preprimary area. Instead of waiting for that load to get to an 
inspector in a booth, we have whole teams of people with 
canines that are roaming.
    You have seen them along the border before. We do something 
called a post-primary blitz, where just on a random basis, no 
matter what the inspector said in that booth, the next 25 
vehicles are going over here and going to be lined up, and 
another team is going to come in and look at them from 
beginning to end.
    We rotate the people in the booths, not on a very, very 
frequent but irregular basis, so it is not predictable, so it 
is very unlikely of being able to predict what inspector is 
going to be in what booth at which time. Like I said, we can 
discuss in closed session about a number of things I can't 
discuss in a public arena.
    Yes, there are continued instances of problems, but it is 
not systemic. We are looking at new approaches and Under 
Secretary Kelly has brought somebody in as a consultant, too. 
He had experience with this individual in the New York City 
Police Department, and I think that it is a positive step.
    We are looking at other approaches we can take in the 
Customs Service to not only deal with the actual corruption but 
this perception of corruption, which is demoralizing to the 
Customs Service.
    Mr. Kolbe. My time has expired.
    Mr. Hoyer.
    Mr. Hoyer. I won't pursue that. But I mentioned in my 
opening statement, Mr. Secretary, coordination with General 
McCaffrey. I was very pleased with General McCaffrey's 
appointment. Because of his training and reputation I think he 
is very able to help coordinate, obviously not in the line 
capacity, because we haven't set up the so-called SARS with any 
real authority, but in a coordinated capacity, all of our law 
enforcement efforts as well as rehabilitation efforts and other 
efforts related to the demand side.
    But in terms of the supply side, the Chairman asked: Are we 
winning the war? I don't think anyone thinks we are winning the 
war in the sense that the other side is going to give up as 
long as there is billions of dollars to be made in this market.
    Having said that, however, the publicity such as, ``The 
Bleeding Border,'' published in U.S. News and other reports 
like this, is very concerning to the public in that they think 
we are not stemming the supply or staunching it with any degree 
of effectiveness. Toward that end, I am going to talk to 
General McCaffrey. I would hope that you and General McCaffrey 
and others in law enforcement coordinate on a very, very 
regular basis and let the public know the efforts we are 
taking. Let the bad guys know the efforts they are going to 
confront.
    When you read stories, as I am sure you both read these 
articles, of the blatant intimidation and bribery that is 
occurring in Mexico, the killing of the prosecutor in Tijuana, 
I think it was the prosecutor, you realize this is a war. I 
know General McCaffrey doesn't like to refer to it as the War 
on Drugs, but in this instance, it is a war. It was a war in 
Colombia and continues to be; it is a war in Mexico and 
continues to be; it is a war in America.
    I just read that in this city we have more hits on 
lawenforcement officials than any other city in America--targeted 
killings of law enforcement officials. Unfortunately, too many people 
don't believe we are as serious--historically it has been unthinkable 
to take out purposely a law enforcement official because of the 
consequences if that were to occur. So I think we need to escalate the 
effort both in actuality of coordination, but also in letting the 
public know what we are doing, to give them a greater degree of 
confidence that this government, this administration, this country is 
determining that we are going to protect ourselves from this assault.
    I didn't mention one agency, but I want to mention FinCEN, 
a critically important agency. I have been over there and seen 
their capability in terms of tracking money. Ultimately the 
goal of all this is to make money. If you track the money and 
make it more difficult to utilize, we are going to have some 
success.

                            hazmat treatment

    Let me ask you a question that is somewhat specific and 
deals with hazardous materials. In our conference report we 
directed Customs to, and I quote, ``work with Operation Respond 
Institute, the Federal Highway Administration, and the Federal 
Railroad Administration, in enhancing and implementing computer 
software to identify HAZMAT crossing the borders of the United 
States.'' The purpose, of course, in part was to assist fire 
and emergency response teams when something happens as we see 
greater NAFTA-related travel, truck travel, train travel.
    Tell me how that is going?
    Or does anybody know?
    Mr. Weise. I am looking quickly here. I will get a response 
to you.
    [The information follows:]

                            Hazmat Treatment

    In the United States, the national North American Trade 
Automation Prototype (NATAP) processing system displays a 
HAZMAT indicator at both primary and secondary processing 
workstations so that federal personnel are aware immediately 
upon arrival that a vehicle contains such material. In 
addition, the secondary workstations provide full commercial 
data on each shipment including the exact description of the 
goods on board and information on the producer/manufacturer in 
the event it is necessary to contact them in the case of 
accident regarding the handling of such goods.
    The NATAP process is also testing a simulation of the 
proposed ``International Trade Data System (ITDS) which the 
U.S. is designing to standardize U.S. data requirements and 
permit U.S. agencies to share prefiled data from a system, like 
NATAP, for purposes of assessing risk, identifying special 
needs cargo, as well as those shipments requiring permits, 
licenses, etc. In this vein, ITDS officials are currently 
discussing with the Environmental Protection Agency and 
Department of Transportation the possibility of those agencies 
participating in designing criteria and interfaces which would 
effect appropriate treatment for such goods.

    Mr. Hoyer. All right. That was somewhat esoteric, I know.
    Mr. Weise, you said the number one priority is narcotics 
interdiction. Would you clarify where the seizures occur?
    We have had some specific instances today of, excellent 
work. I congratulate the agents involved. They are a credit to 
the Service and this committee's confidence in them and 
funding.
    Would you say these are random or long-term investigations? 
In other words, how good is our intelligence?
    I know we are going to have a private hearing, you may want 
to go more definitively into this, but and you've got to be 
somewhat lucky, we all understand that, but if we have 
intelligence, if we have got people inside letting us know that 
those trucks or planes or boats are coming or the people 
carrying drugs are coming, we are obviously in better shape. 
How is our intelligence doing?
    Mr. Weise. Our intelligence is better than it was but not 
nearly good enough. We have done some things on the Southwest 
Border, put together what is called ICAT teams. They are 
interdisciplinary, with intelligence analysts, agents, and 
inspectors, working with a number of different institutions, 
that try to get the most appropriate intelligence they can 
gather but make it tactical and get it into the right hands. 
But there is absolutely no question in anyone's mind that this 
is an area that needs a lot more work.

                          mexican intelligence

    We now have a restriction, for example. About 6 years ago, 
a policy was changed in the aftermath of the Camarena killing 
in Mexico. We had been able to use confidential informants 
within a 26 kilometer range within the Mexican border.
    We have not been able to do that for the last 6 or 7 years. 
That has put a real crimp in some of the operable intelligence 
that would have helped us target some of these containers 
before they arrived. We are working with intelligence-gathering 
agencies, DEA and others to try to do better than we have done 
in recent years, but this is an issue that is on the table of 
the Mexican authorities. We have requested the ability to go 
back to using that confidential informant, and it is under 
advisement now, and we are hoping that it might come to 
fruition. But it is a problem that does need to be addressed.
    Mr. Hoyer. Thank you.
    Mr. Secretary, could you respond to my assertion that we 
need to have as much coordination as possible?
    Mr. Chairman, it is something I know you are familiar with, 
but my local law enforcement officials believe that the 
Baltimore Washington HIDTA, major contribution, is not so much 
the resources that they get, but the psychology it has created 
in terms of cooperation between national, State, and local law 
enforcement. How are we doing in terms of not only law 
enforcement but DOD and other resources available in this drug 
fight?
    Mr. Kelly. I think we are doing better than ever before. I 
have been in law enforcement a long time, and State, local, and 
Federal enforcement agencies are working better now than ever 
before. People have realized that you just can't do it alone.
    In New York City, we had, literally, agencies who were not 
talking to each other in the early 1980s. We put together a 
Terrorist Task Force which ultimately was the agency or the 
organization involved with the World Trade Center bombing 
investigation and other events that happened since that time. 
So I think there is a recognition throughoutthe law enforcement 
community that we have to work together. We are working, I think, much 
more effectively, you will hear tomorrow, for instance, Secret Service 
is involved in some 133 task forces throughout the country.
    I think that HIDTA is working well. I had experience with 
HIDTA in New York City. We have the OSADEF task forces from the 
several hundred FTE positions in Customs.
    As far as other DOD, we, quite frankly, are not working 
probably as close to DOD as we can. There are certain posse 
comitatus issues that surface with DOD.
    I think Customs is using very effectively the National 
Guard. I was out on the Southwest Border and, quite frankly, 
they would be hard-pressed to do what they are doing without 
the National Guard involvement. So as far as cooperation, 
working together, there are probably always going to be some 
turf issues that are human nature, but having worked with 
Federal agencies throughout my career, it is better now and 
there is much more recognition now than ever before.
    Mr. Hoyer. Thank you, Mr. Chairman.
    Mr. Kolbe. Thank you.
    Mrs. Meek.
    Mrs. Meek. Thank you, Mr. Chairman.
    I have some detailed questions, and I request unanimous 
consent from you to submit them for the record.
    Mr. Kolbe. Absolutely.
    Mrs. Meek. I would like to ask a more general question now, 
and I certainly welcome Mr. Weise, with whom I worked in Miami.
    We all know that international trade and tourism are 
growing very rapidly, and Miami, my home city, is a major port 
and a major airport for both cargo and passengers. Miami 
International Airport is now the largest international cargo 
airport in the country, and by most estimates it will be the 
largest in the world by the year 2000.
    I know that Customs has a lot of responsibilities and that 
they are a special interest to us in South Florida. What is 
most troubling to me is a situation I have brought before this 
committee on the first day it met, and it may not be within 
your purview, but I think it is within the purview of Customs 
and DEA and any other Federal agencies that may have some 
concern over this. What is troubling to me is why do we have 
the existence of such wide-scale drug sales in the inner-city 
minority communities?
    It is very wide-scale, pretty much focused or centered in 
those areas, and it appears to me--I would like to know what 
kind of studies have you done, what kind of intelligence have 
you done, to see why that keeps occurring?
    Now, if this is something societal that has happened, and 
it still is happening, I just cannot get any answers to why 
there is such a reflow and redistribution. I know Customs is 
primarily concerned with the border and concerned when the 
supply comes in from the outside; I think I am talking about 
within the parameters of the inside where these drugs are. That 
is my first concern, and I hope a little bit later you can 
address that for me.
    The other one is the flower industry, which is very, very 
big in Miami, and the Tomato Agreement, I have had quite a bit 
of problems in these two areas. Flowers, tomatoes, and most of 
all drugs, because Miami is pretty much one of the capitals of 
drugs in this country.
    I have been beaten over the head by voting for NAFTA, but I 
guess I will continue to be doing that. But the Tomato 
Agreement involves the Mexican tomatoes that enter into this 
country. I am told that the number of Customs employees in 
South Florida has declined, about 13 percent in recent years. 
And this combination of a rising need for Customs and declining 
Customs resources has very serious and negative implementations 
for South Florida. The crime there is escalated by it.
    I am glad to hear Mr. Kelly has worked in New York. Your 
budget only asks for an overall increase of 1 percent in 
employment, and 3 percent in funding. No one on this committee 
will like the question I am asking.
    I am just wondering why is it that we have different parts 
of the country fighting over such a very small piece of pie. It 
will end up with a diminution. So my question, my second 
question is could you provide this committee with examples of 
how you would provide better service with legitimate 
international cargo and passengers if you had more resources 
than you are now asking for, 3 percent and 1 percent?
    Mr. Kelly. If I can just address your first questions, and 
Commissioner Weise will address the second.
    I was heartened today with the drug strategy that was 
announced, because it made a major commitment to education, to 
prevention. The President talked about a $175 million package 
to involve advertising for young people, but the focus of this 
5-prong program, I would say the main piece was education. And 
I think that is how ultimately they are going to make a 
difference. We are never going to arrest our way out of the 
drug problem.
    You talk about the inner-city situation. I can tell you 
that in some cities in this country, there has been success, 
New York being one. And people don't know all the answers as to 
why things change in various cities, but we did see and have 
seen shifting drug patterns in New York City.
    For instance, the use of crack is way down in New York 
City. In other cities--crack seems to be like a 5-to-7-year 
phenomenon that hits urban areas then leaves, and New York has 
experienced that.
    There are other cities in this country that are in the 
middle of that. Now there are signs that it is going down. 
There are some things that the police can do, and New York was 
fortunate, had a 25 percent increase in manpower to target 
certain areas, flood certain areas. So I think there are things 
that local law enforcement, Federal law enforcement can do, but 
there is a larger issue here as far as drug use that I think 
education of our young people is going to be the primary way 
that we are going to get a handle on the problem of drugs, 
particularly in the inner cities.
    Mrs. Meek. I know I don't have much more time. I wish I 
could agree with you, and perhaps we will have more of a chance 
to dialogue on this in the future.
    Mr. Kolbe. Thank you, Mrs. Meek.
    Mr. Price.
    Mr. Price. Thank you, Mr. Chairman.
    I would like to welcome our guests today and thank them for 
their testimony, and I would like to turn to some of these 
trade issues and particularly to focus on the Customs Service 
monitoring of peanut imports. If I could just take a minute to 
outline the situation as I understand it, and then ask you to 
comment.
    You know, of course, that American peanut growers were 
reluctant to support NAFTA and GATT after their experience with 
the Canadian free trade agreement some years ago. That 
agreement did not restrict peanut exports from Canada, because 
there is no peanut production in Canada, but Chinese exporters 
realized they could penetrate the U.S. market by transshipping 
peanuts through Canada.
    When NAFTA and GATT negotiations got under way, domestic 
peanut growers were insistent on the inclusion of a rule of 
origin and ensuring that imported peanuts be subject to the 
same quality controls imposed on domestically produced peanuts, 
that is, USDA marketing order 146.
    As I understand it, the Customs Service at that time 
committed to ongoing efforts to ensure enforcement of the 
import quotas and compliance with the rule of origin and 
marketing order 146, which would include 10 visits to 
agricultural processing sites in Mexico, continuing audits of 
the 10 major Mexican agricultural product exporters and 
investigations of suspected violators. The service also agreed 
to assign some 350 employees, including 100 new employees, to 
country-of-origin enforcement under NAFTA.
    Last year, however, peanut growers got wind of at least 
seven shipments of peanuts that were not inspected and might 
have contained peanuts that were grown outside of Mexico. At 
that time it became clear that Customs agents were enforcing 
neither the rule of origin requirements nor marketing order 
146, because regulations had not been promulgated. I understand 
the Service undertook what appears to have been a very 
productive dialogue with domestic growers and that appropriate 
regulations are now in place. I also see that your budget 
request contains $5.7 million to bring new technologies into 
your laboratory and help enforce the country-of-origin rule, so 
it sounds like some progress has been made.
    I am concerned about this apparent 3-year period of 
noncompliance and would appreciate anything you could tell me 
about Customs enforcement of the peanut quotas, rule of origin 
and marketing order 146.
    Mr. Weise. Yes, Congressman. We take this issue very, very 
seriously. We have tried to focus our resources where they can 
do the most good to the American people and identify the 
primary focus industries. There are about 8 to 10 industries, 
one of which is clearly the agricultural sector, where we 
really do need focus, whatever resources we have on those key 
areas.
    I can't really respond to you on the record now, but I 
will, about what has happened in the past.
    I will tell you, as you have indicated and I appreciate 
your comment to this effect, we are working closely with the 
peanut industry. We have a number of initiatives, including 
improving our ability to do laboratory analysis with them. We 
are working with the U.S. Department of Agriculture on the 
implementation of the quality of standard order 146 and 
basically trying to assure that we will not release the 
shipment until USDA has looked to see that that order has been 
complied with.
    So we perhaps have not done as good a job as we should have 
at the start, but we are on the issue now and working very 
closely with a wide range of domestic interests. And hopefully 
you will keep our feet to the fire to make sure we follow 
through to the satisfaction of the people impacted by these 
regulations.
    Mr. Price. Could you give me information about the status 
of that commitment made in 1993 to make site visits and to 
devote at least 350 FTEs to rule-of-origin enforcement?
    Mr. Weise. Specifically with respect to enforcement, where 
we have the 350 people, we have fulfilled that commitment. With 
regard to the specific number of visits on this particular 
commodity, I would like to get that and submit it to you and be 
more than happy to sit down with the appropriate staff and 
discuss it. I don't have that at my fingertips in terms of how 
many visits we have made.
    Mr. Price. Do you have any estimate of the percentage of 
peanut shipments you are inspecting?
    Mr. Weise. Again, I will try to get that for you.
    Mr. Price. I think it would be helpful to have that 
information, both the history of your efforts and the current 
enforcement.
    [The information follows:]

                                Peanuts

    Prior to the House vote on NAFTA, the Customs Service met 
with peanut grower representatives to discuss their concerns on 
the threat of transshipment of both Chinese and Argentine 
peanuts and peanut butter through Mexico. As part of these 
discussions, the Customs Service agreed to perform NAFTA 
verifications as well as examine shipments of peanuts and 
peanut butter from Mexico.
    In 1995, NAFTA verifications were done by Regulatory Audit 
on two exporters of Mexican peanuts. These exporters accounted 
for 95% of all shipments of peanuts from Mexico. At that time, 
these companies were found to be compliant.
    Three NAFTA verifications are scheduled for March-early 
April 1997.
    There is one open investigation on an exporter for 
transshipping peanuts through Mexico and claiming NAFTA.
    There have been no shipments of peanut butter from Mexico.
    Customs has developed, with the assistance of industry, a 
problem-solving initiative regarding the transshipment of 
peanuts. This initiative was begun in January.
    The Office of Laboratories and Scientific Services has been 
working with industry and our officers in foreign locations to 
obtain samples of peanuts in order to develop the baseline 
required to perform trace-element testing in order to determine 
the true country of origin.
    This baseline has been developed and this initiative began 
in January. Our officers have been obtaining samples from 
imported peanut shipments for the testing and country of origin 
determinations.

    Mr. Price. The main figure in the budget relevant to this, 
as I understand it, and one of the main increase in your 
request, has to do with the lab modernization. Could you 
explain the breakdown of that $5.7 million? What are those 
expenditures going to be used for and how, precisely, is this 
related to country-of-origin enforcement?
    Mr. Weise. Again, I will provide a detailed analysis of 
that. Apparently, staff has been asked; and we are working on 
that and will get it to you as quickly as we possibly can.
    [The information follows:]

[Page 660--The official Committee record contains additional material here.]


    Mr. Price. Am I correct in assuming that the bulk of that 
$5.7 million pertains to country-of-origin enforcement?
    Mr. Weise. A significant portion--again, I don't have the 
breakdown, but a significant portion relates specifically to 
our ability to carry out the country-of-origin enforcement.
    Mr. Price. Thank you, Mr. Chairman.
    Mrs. Meek. Mr. Chairman, will you please go back to Mr. 
Weise so I can get some answers to the latter part of my 
question----
    Mr. Kolbe. Mrs. Meek, yes. Ms. Northup is next, but it is 
true that you did not--the second part of your question did not 
get answered by Mr. Weise; and I would like him to address the 
staffing issue. Then we will go to Ms. Northup.
    Mr. Weise. Thank you. I was just given the data with regard 
to the staffing. There is no question that we have had to make 
some difficult choices in terms of allocation of our resources 
over the last number of years.
    As budgets are getting tighter, obviously, we are all 
working together to try to get the fiscal deficit in order. We 
have reduced some of the resources in the narcotics area in 
south Florida over the course of the last decade or so. It 
hasn't been a very sharp decline. It has been sort of a gradual 
decline. And we have been--as resources have been becoming 
available, as the threat has risen so much on the Southwest 
border, we have been putting a lot more new resources there.
    One of the things that will help as far as the passenger 
clearances, is that we have a mechanism under the COBRA 
reimbursement, the user fees, that we are able to maintain a 
high level of the resources even in Miami and virtually all of 
our airports through that COBRA account, where we can not only 
fund overtime but fund actual additional inspectors when the 
work is commensurate with it.
    I think, hopefully, you will find in talking to your people 
in Miami that at the airports we are pretty well staffed 
because of this ability to have reimbursement through the COBRA 
account. We are less able to do it in some of the smuggling 
arenas as well as the cargo arena.
    We will be--with this budget that is before the committee 
be able to invest 119 additional positions in south Florida, 
and we will move as swiftly as we possibly can if the committee 
and the Congress approve the appropriation request that is 
before them to get those 119 positions down there.
    We certainly will constantly attempt to work with you, Ms. 
Meek, on trying to ensure that we are investing our resources 
as effectively as we possibly can; but, clearly, we do not have 
the capacity to give all the various areas of the country the 
resources that they would always like. But we are trying to be 
held accountable that we are making wise business decisions in 
terms of prioritizing the demands on our resources.
    Mrs. Meek. If I may respond.
    Mr. Kolbe. Very quickly, if you might.
    Mrs. Meek. I just want to call your attention specifically 
to the floral importers and the tomatoes that has caused us 
quite of bit of problems, and I wanted to have you understand 
that and address that today.
    Mr. Weise. Okay, I am very familiar with the tomato 
agreement and very familiar with floral imports into south 
Florida, but I am not sure on the floral imports what 
specifically you want me to comment on.
    Mrs. Meek. The inspection.
    Mr. Weise. The inspection process and the delays caused by 
it?
    Mrs. Meek. Yes.
    Mr. Weise. Okay. One of the problems we face, as you know, 
in south Florida is smuggling cocaine in flower imports from 
Colombia became a popular method of smuggling. We have worked 
very closely with the floral industry to try to ensure that we 
can do our job of ensuring that drugs are not entering this 
country without unduly impacting their business interests, and 
what we have done is entered into a partnership where they have 
taken it upon themselves to do a lot more of the investigation 
and the inspecting and the x-raying of the flowers as they go 
into their shipment, as it is loaded onto the plane.
    We work very closely with them to ensure that they have 
sufficient quality controls, and we still do random and spot 
checking on that, but we are now able to allow most flower 
imports to come through Florida more quickly than we were able 
to in the past. We still have to be cognizant of the threat of 
smuggling in flowers.
    The tomato agreement is an agreement the United States 
entered into with Mexico. We are not policy makers in Customs. 
We have the responsibility of enforcing that agreement, and we 
are trying to do the best job that we can to carry out the 
spirit and the intent of the tomato agreement.
    Mrs. Meek. Thank you.
    Mr. Kolbe. Thank you.
    Mrs. Northup.
    Mrs. Northup. I would like to get back to our relationship 
with Mexico and ask you some specific questions about what your 
relationship is with the overall administration in their effort 
to deal with Mexico on the drug questions.
    I think it is pretty clear that we have done a lot on this 
side of the border to help Mexico, to be a partner withMexico, 
to deal with the fact that they have a lot of drugs that are coming 
into this country, and I could not agree more that we have to reduce 
the demand. Luckily, I am on a different committee where we are talking 
about what those appropriations are to reduce the demand, but I want to 
talk to you about reducing the supply, which is the other side of the 
equation.
    Unless Mexico wants to be a partner with us, all of our 
efforts, it seems to me, get to be--have a declining amount of 
significance. They have--I understand when we were training 
some of their people in drug enforcement, and we had to stop 
that, when they no longer allowed our agents and officials to 
carry a gun when they were on the other side of the border. 
They have failed to extradite and to actually arrest people, 
notwithstanding the fact that we have incurred the cost and the 
effort to identify the agents on their side and asked them to 
extradite those people into this country. So it seems like the 
real effective measures, the way they could show us concretely 
that they are going to cooperate, they have failed to take 
those actions.
    It is hard when you are talking about numbers--well, you 
know, is it more? Is it less? That is hard to know. But it is 
clear that their actions, they failed to take the exact steps 
they could take to be a cooperative partner. What does that say 
in terms of whether or not we cooperate with them in terms of 
NAFTA or, you know, even if we go on and allow still the free 
trade to flow, there is--we could do it through a waiver 
process. Are you involved in those discussions with the 
administration?
    Mr. Kelly. We are involved to the extent that we provide 
information from our bureaus. We are talking specifically now 
about the certification process.
    Mrs. Northup. I am talking about recertification, right.
    Mr. Kelly. We provide information to the State Department, 
which is the lead agency that compiles this information; and, 
of course, it is given to the President for a decision with a 
recommendation. We don't have all--the totality of the 
information; but as far as Treasury's operations are concerned, 
we have seen cooperation in the area of money laundering where 
we have criminalized money laundering. We are in the process of 
helping them, installing a suspicious transaction reporting 
system with some computerization.
    We are concerned about the fact that, yes, agents are not 
allowed to be armed in Mexico, our agents. We are also 
concerned about----
    Mrs. Northup. So we are no longer helping to train them, is 
that right?
    Mr. Kelly. To the best of my knowledge, no.
    We are also concerned about the fact that our pilots, 
Customs pilots are not able to be armed in the area. These 
things have been put on the table with the Mexican government. 
They are in the process of being discussed. But as far as the 
totality of information that is involved in the certification 
process, I am simply not privy to it.
    Mrs. Northup. Well, the problem is, you can put everything 
into place, but when you have official corruption to the extent 
and level you have in Mexico, it is not being carried out.
    I think that actually they have extradited three. There are 
150 people they have that they have refused to extradite. That 
is a concrete, measurable action.
    When you have official corruption at the levels they do 
with respect to drugs, unless we can help carry out policies on 
the other side of the border, in effect they are not doing 
everything that recertification requires. And I am just--you 
know, I am concerned that we have an agency that is out there 
every day on the front line trying to solve this problem and 
where we need--the question is, are we going to have the 
political support to see this through?
    I am interested in knowing what your agency has to do with 
carrying out or discussing the actions at the highest level. If 
you are down here in your slot and you are working every day, 
that doesn't necessarily bring on the political support you 
need to be effective.
    Mr. Kelly. Well, as far as certification is concerned, you 
raise some legitimate issues. This issue of corruption and 
violence and some of the authorities that we want as far as 
immunity for our people who are operating in Mexico, all of 
these things are in the equation; and I am not privy to where 
this decision will ultimately go.
    Mr. Kolbe. Mrs. Northup, I might just suggest that these 
are questions you might want to repeat for General McCaffrey.
    Mrs. Northup. I will.
    Mr. Kolbe. On the second round, let me defer to Mr. Hoyer. 
I know you have got another appointment.
    Mr. Hoyer. I am going to be here through your time. Thank 
you.
    Hard Line and Gateway, Southwest border, south Florida, 
Caribbean, you have a new initiative. You were asking $23.4 
million for south Florida. How does that compare, to or 
supplement Gateway? Tell us about that.
    Mr. Weise. It complements the two operations. As we started 
hardening the Southwest border, what we saw--and we have to be 
careful of drawing any causal link,--but we saw in south 
Florida a doubling of our seizures of cocaine over the previous 
year as we have tried to clamp down in various areas.
    In Puerto Rico we have Operation Gateway, because Puerto 
Rico is part of the Customs area of the United States. Once you 
get the narcotics into Puerto Rico, it is like getting it into 
a State in the mainland United States.
    So those are the areas we had to clamp down. As we clamped 
down, we noted that we shouldn't lose sight of the fact that 
the smuggling has never left south Florida. A lot of people 
were frustrated by hearing it had moved to the southwestern 
United States. It has always been fairly rampant, but it is 
even larger now, that dramatic increase----
    Mr. Hoyer. Chairman, let me just interrupt for a second, to 
note that this is one of the reasons this committee put HIDTA 
in Puerto Rico.
    Mr. Weise. Exactly. We call this our southern tier 
strategy. It links Hard Line with Gateway, and covers the 
southern tier from San Diego to San Juan. We want that to be 
one hardened area, so that we can manipulate, have flexibility, 
move our resources as quickly as we possibly can to be able to 
be responsive to where the threat is coming and try to have 
that as locked down, as hardened as we possibly can, throughout 
the entire southern tier. So they are very much linked and very 
complementary.
    Mr. Hoyer. I would like to hear how our officers are faring 
in terms of their own safety. Obviously, Hard Line--you 
mentioned some things we have done in terms of the obstacle 
courses like here at the Capitol so you can't go straight 
through. Tell me about officer safety. Has it been enhanced?
    Mr. Weise. Yes, indeed it has. And I guess we should ask 
them if they disagree with anything. I say to shake their head 
violently. Otherwise we will call them to the table, whatever 
you prefer.
    But one of the things we did with the expenditures from 
Hard Line was provide bulletproof vests for virtually every 
inspector along that border.
    Another thing is we put in increased lighting. Because part 
of Operation Hard Line was to move more into what we call the 
preprimary area, before you get to the inspection booth. We 
have enhanced the lighting in that area to meet concerns about 
officer safety in a number of different locations.
    Unfortunately, we have another experiment--you have the 
bollards here in the Capitol that seem to work quite well for 
you with the amount of times they go up and down. We 
experimented in El Paso with pneumatic and hydraulic bollards, 
so the vehicle could not move forward until the bollard went 
down. Unfortunately, we impaled a number of innocent vehicles.
    Mr. Hoyer. We have had a senator or two and representative 
or two that have had that same experience.
    Mr. Kolbe. But they learned. It hasn't happened in the last 
several years.
    Mr. Weise. But we take officer safety very, very seriously; 
and we are working for an environment in which they can excel 
and can be as safe as they possibly can. Just having a 
reduction in the instances of port runners has had a 
tremendously positive effect on officer safety when we 
eliminated that as a mode of smuggling. It has helped 
tremendously.

                           customs resources

    Mr. Hoyer. The last question relates to Mrs. Meek's 
question. You have FTE cuts. Those are basically vacant 
positions.
    Mr. Weise. Yes, for the most part.
    Mr. Hoyer. They are vacant, because you don't have the 
resources to fill them.
    Mr. Weise. That is correct.
    Mr. Hoyer. So they are a cut of no people.
    Mr. Weise. That is correct.
    Mr. Hoyer. What is the relationship between--and I should 
perhaps know--resources in terms of people, Mr. Commissioner, 
available and your operational infrastructure, your 
infrastructure? Are we shifting any priority? Will you 
consciously be spending money on infrastructure capital 
expenses as opposed to people expenses?
    Mr. Weise. The significant portion of our budget is people. 
That is the heart and soul of our budget. That really is where 
most of our expenditures are.
    We know if we are going to be able to face the challenge of 
a tremendously increasing workload--no matter how you measure 
it, passengers, entries, commercial entries or the threat of 
drugs, the threat is going up, the volume of work is going up, 
and the dollars are not likely to go up commensurate with that. 
So we know we have to invest in technology. We know we have to 
find new ways and new approaches to do the job more efficiently 
and more effectively.

                    Automatic license plate readers

    One of the examples of that, on the Southwest border and 
Northern border as well, are automatic license plate readers 
which are going to be helpful in doing a more effective job. It 
doesn't require the inspector to key the license plate number 
in each time the vehicle pulls in. That not only reduces the 
time for the inspector but allows him--instead of going through 
the exercise for each car that pulls up keying it in, he can 
from the beginning, as that is being done automatically, begin 
to make eye contact with the driver, begin to look at some of 
the enforcement issues.
    That is going to be helpful to us in the long run, and that 
is the kind of thing that we are trying to complement our 
resources and investment and people with technology so we can 
help them do the job more effectively and safer.
    I can get you the detailed breakdown between the people and 
the equipment.
    [The information follows:]

[Page 667--The official Committee record contains additional material here.]


    Mr. Hoyer. Thank you.
    Mr. Kolbe. Mrs. Meek, do you have another question?
    Mrs. Meek. Yes, sir. I don't think the Commissioner--at 
least, maybe I did not communicate it well, but I don't think 
you understood what I meant in terms of the flowers and the 
tomatoes.

                           dumping of flowers

    I will just take the flowers as an example. I am very 
concerned about the dumping that happens in south Florida with 
the flowers. For example, you have a levy that you placed on, 
according to what my people tell me, on importing goods that 
come into south Florida from places that have been guilty of 
dumping before.
    Mrs. Meek. In 1986 Commerce found out that carnations, 
imported carnations, were being dumped; and because the 
government found this out, the government had to determine the 
amount of dumping each year for each import transition.
    Now, in south Florida, it is my understanding, there are 
50,000 to 60,000 flower import transportations a year. So you 
place a levy on that, those transportations, and so what 
happens? You have the deposit with Customs, the importer does, 
at the time the carnations are imported to cover the potential 
anti-dumping tariff that Commerce has. After the correct amount 
of anti-dumping tariff is calculated for each carnation 
transaction, the excess funds are returned to the importer.
    Now, I am told that in south Florida, importers of 
carnations have been waiting for many years to get this excess 
amount deposit returned, because Customs does not have enough 
resources to calculate just how much each refund should be.
    Would you clarify that or explain when they will get their 
money or if they will ever get it?
    Mr. Weise. Congresswoman, the only thing I can commit to 
you, I was not aware of that as an issue. I promise you I will 
look into that immediately and get back to you with a response. 
I was not aware that we are being dilatory in collecting the 
dumping duties on those flowers. I will look into that 
immediately and get back to you on it.
    [The information follows:]

[Page 669--The official Committee record contains additional material here.]


    Mrs. Meek. Thank you. Mr. Chairman.

                         internal affiars staff

    Mr. Kolbe. Let me, if I might, go back to where I left off 
on the corruption issue, just pick that up in here. Let me just 
ask you about your internal affairs operation, that you have, 
and I will follow up on this with Mr. Kelly on the Office of 
Professional Responsibility. Tell me a little bit about how you 
staff and how you pick people for that. Do you think it is 
sufficiently independent and divorced from the Customs Service 
as a whole so that it can act in an independent fashion?
    Mr. Weise. I do Mr. Kelly and I spoke, and I welcome a full 
review of someone who has a strong history in an internal 
affairs operation to take a comprehensive look at our operation 
and make recommendations.
    But I have given an awful lot of thought to this. Early on, 
when I first became Commissioner, there was an issue as to 
whether or not we ought to change the way the internal affairs 
office has historically been staffed and that is by, bringing 
in experienced investigators from the Office of Investigations 
or whether we ought to change that policy and practice and move 
to setting up a completely independent, autonomous entity that 
would be staffed by people from the outside. I gave that an 
awful lot of thought when I first became Commissioner and 
ultimately decided that this was the right approach for the 
following reasons:
    One, it seems to me that because of the sophistication that 
is necessary in order to do a full, thorough investigation of 
someone who has allegedly been corrupt, particularly someone 
who is a law enforcement officer themselves, they may well be 
rather sophisticated. We need to have experienced investigators 
who have demonstrated on the job that they have the kind of 
experience to really get the job done and get the job done 
well.
    There is a disparity in terms of the journeyman grade 
level. A journeyman investigator in the Office of Internal 
Affairs is a GS-13; whereas one in the Office of Investigations 
is a GS-12.
    What we have done over the course of the last 3 years is to 
work very hard to ensure that there is enough incentive to go 
into the Office of Internal Affairs, not only with the 
additional grade and the pay that one can get, but to try to 
professionalize the operation so that one could decide this 
would be the kind of career that they would wish to pursue.
    My sense is that the internal affairs office is autonomous 
and independent notwithstanding the fact that it is staffed 
with people who had spent earlier portions of their career in 
another office like the Office of Investigations. I have not 
seen any evidence that would lead me to believe that they have 
been anything less than completely impartial as they have 
reviewed the matters that have been placed before them.
    Mr. Kolbe. But they are taken from within the ranks of the 
agents?
    Mr. Weise. Yes.
    Mr. Kolbe. They are. I would be interested in knowing a 
little bit about the criteria an officer has to meet in order 
to become an internal affairs agent.
    [The information follows:]

                  Criteria for Internal Affairs Agents

    A criminal investigator must be at or eligible for the 
senior level (GS-13) to be considered for a Internal Affairs 
(IA) position. The IA candidate must have a strong 
investigative background, a background free of serious 
integrity violations, and the approval of current management 
within the chain of command.

    Mr. Weise. I would be more than happy to spell out all the 
detailed criteria; but suffice it to say, for purposes of right 
at this moment, that we want them to be the best of our best, 
the most experienced, the ones with a track record of doing 
outstanding investigations in their prior experience.
    Mr. Kolbe. The best of the best. They have been around for 
a while, and they would know the people that they are 
investigating; right?
    Mr. Weise. There has from time to time come up--that 
situation has arisen, but generally what we try to do is there 
would be a recusal if anybody has been asked to investigate 
someone that they had any direct involvement with, and so we 
try to minimize the likelihood of any situation like that 
developing.
    Often these people, when they get the promotion to go into 
the Office of Internal Affairs, they don't do it in the same 
city in which they have been operating. They move from one 
location to another so that there is less likely to be that 
situation that you have talked about.
    Mr. Kolbe. That raises just a small question. Your internal 
affairs are in how many different locations? Do you have them 
in every location where you have Customs?
    Mr. Weise. No. We have how many offices?
    Mr. Kolbe. How many Offices of Internal Affairs do you 
have?
    Mr. Weise. Twenty different Offices of Internal Affairs. Do 
we have six--is it six or seven? We have five major offices 
that have 16 suboffices. So there are 21 separate Offices of 
Internal Affairs.
    Mr. Kolbe. Last year, last September I think it was, the 
GAO issued a report about recommendations; and I think they had 
51 recommendations. Thirty of them I think you implemented, and 
I think 19 are still unimplemented. Is that an accurate 
assessment?
    Mr. Weise. It is not accurate to say they are completely 
unimplemented. What that report indicated is that 31 have been 
completely implemented and 19 are either not fully implemented 
or unimplemented. I would be glad to provide for the record the 
specific status of those.
    Some of those have been partially implemented. For example, 
up to five recommendations that related to this recommended the 
frequency with which one would do a full inspection of a 
particular operation. It recommended that we do it every 2 
years. For budgetary reasons, we do it every 4 years.
    There are other issues like that that I would like to 
provide a detailed response to for the record, that we have 
implemented partially and in our judgment implemented the full 
spirit of what the recommendation was while being as cost-
effective as we could be in carrying out that implementation.
    Mr. Kolbe. In a follow-up, would you give me some 
indication of those you have found to be the most effective 
and, also, if there are any you intend not to implement at all 
because you have rejected them as being ineffective or for 
whatever reason it was not possible to implement them?
    Mr. Weise. Yes. I will give you a detailed response on 
every one of the 19 that have not been fully implemented.
    [The information follows:]

[Pages 673 - 679--The official Committee record contains additional material here.]

    Mr. Kolbe. I am on record as having said that I think one 
of the problems with Customs is the fact that you hire and 
train and place people locally. I know from my own communities 
along the border that that seems to be an invitation for 
trouble when you--in small communities, when you have somebody 
that is hired there and they have family on both sides of the 
border, as you know. It is an invitation for some kind of 
trouble, it seems to me.
    I know that rotating Customs inspectors is a costly 
proposition, but how serious--how much attention are you giving 
to that issue and do you think that is something we are going 
to have to do more of?
    I mean, we recruit people into the military, and they may 
end up close to home, but that is not really a primary 
consideration of where we assign them and place them. But it 
seems to be the primary consideration in the hiring of Customs 
agents. Would you comment on that?
    Mr. Weise. Congressman, this is an issue that has surfaced 
over many years. You know, we have already alluded to the cost 
factor. In order to implement a full rotational policy it would 
cost roughly $60 million. I look at it as the head of an 
organization with very scarce resources, and we have to again 
do a cost-benefit analysis.
    Clearly, without doing a full examination of the issue, it 
would seem natural that the kinds of relationships that you 
talked about may lead one to conclude that there may be a 
higher risk of integrity problems. I don't think that ever has 
been fully proven. But the bottom line on this is that this 
issue--I have once again asked for a full review of this. The 
staff is taking a look at it.
    But the thing I want to come back to is that there have 
been reports in the press that this is now under advisement, 
and certainly I have asked the staff to take a look at it, and 
already you have seen kind of a demoralizing reaction by a lot 
of the people in the field. The fact that I am even looking at 
it somehow has cast an aspersion on the entire workforce along 
the Southwest border.
    I want to continue to come back to the statement I made 
earlier. I believe that the integrity of the Customs workforce 
is a very solid one, that there are again individual isolated 
incidents of corruption, and this is one of the issues that we 
ought to take a serious look at. But we should look at it with 
our eyes open, looking at all the implications of it from a 
cost standpoint, as well as how much of an effective tool would 
that be for the dollars that we would need to spend and what 
would we need to forego to have those dollars available, when 
we could use them to deal directly with some of the--the drug 
problem?
    So my bottom line is, I haven't closed my mind to it. We 
are taking a look at it. But I remain to be convinced that that 
is worth the cost in terms of the results that we would get. 
Because I continue to believe that the corruption problem is 
very small, not very large.
    Mr. Kolbe. Well, I guess that goes to the heart of the 
issue then. I certainly hope you are right. But if you believe 
that the corruption problem is isolated and small, then steps 
to deal with the problem don't seem that important. Do they?
    Mr. Weise. Well, the frustration that we face is, 
notwithstanding my belief and the various entities that have 
come in and looked at it, that have reconfirmed that as a fact, 
there continue to be portrayals in national magazines and in 
the press to the contrary. This has a destabilizing, 
demoralizing effect, so we can't just ignore it.
    We need to continue to work diligently to make sure that we 
are looking at every avenue on how we can make the situation--
reach the point that the fact and the perception is such that 
we have a workforce with a high degree of integrity. That is my 
feeling, but we need to work harder to make sure that that is 
the perception of everyone that is involved in this issue.
    Mr. Kolbe. I don't think you answered my earlier question 
on that. Why do you think the national media has singled out 
Customs for this?
    Mr. Weise. Well, the answer I gave you is not a 
satisfactory answer because I really don't know the answer to 
that question. Nothing is frustrating me more.
    I have seen reports with the same old information going 
back a long way with nothing new, but yet they keep getting 
repeated over and over and over again without any apparent new 
factual basis for the reports.
    We had an instance, for example, where a senior official of 
the Customs Service was maligned in an article that said that 
he had accepted a bribe. Subsequent to the printing of that 
article, the individual who made the accusation against the 
customs individual was subject to a lie detector test on the 
part of the FBI that was doing the investigation; they found 
that the individual failed the lie detector test miserably. He 
later admitted to making up the entire story and was actually 
arrested for providing false information.
    The subsequent article that came out on that made this 
individual out to be a hero or something. You know, it didn't 
come to the defense of the Customs officer who had been falsely 
accused.
    I can't understand why the press is reporting this issue in 
this way. Nothing has baffled me more.
    Mr. Kolbe. I have a couple of areas of questioning, 
including coming back to the Office of Professional 
Responsibility.
    Mr. Price, we have all had a second go around on questions. 
Do you have a couple of other questions?

                           child pornography

    Mr. Price. I would like to raise the matter of child 
pornography detection. You list as one of your major 
accomplishments in the past fiscal year a renewed emphasis on 
child pornography investigations and the establishment of the 
International Child Pornography Investigation and Coordination 
Center. This has led, you conclude, to an astounding increase 
in the detection, apprehension and conviction of international 
violators.
    I wonder if you could fill that out a bit. What are some of 
the indicators of this success and what are the implications 
for your future plans and for this budget request? How is it 
reflected? How is your experience reflected in this budget 
request?
    Mr. Weise. Well, Congressman, this is an area where it is a 
bit of a stretch of the traditional jurisdiction of the Customs 
Service. When one thinks of child pornography, they don't 
readily think about Customs and our association with that 
issue. But it is one that I am very proud of because we have 
found that much of this child pornography is being transported 
across our borders, and that is originating overseas and coming 
into the United States.
    We began to take an interest in this, and clearly I can 
tell you we don't devote nearly as many resources to this issue 
as we would like. As a matter of fact, we have three full-time 
people in an operation at headquarters that do this on a full-
time basis.
    But in terms of the satisfaction of the people who have 
been involved in these cases--and these three individuals are 
kind of a full-time clearinghouse and work with a number of 
different organizations to get this information, but what we 
find is a great deal of receptivity. When leads are generated 
those three send them out to the field, and there is great 
follow-up and a lot of satisfaction when you bring the 
perpetrators of this kind of crime to justice. But we have also 
developed a good deal of expertise, and other organizations, 
such as the FBI and others, come to some of the people in 
Customs who have developed an expertise.
    I would be more than happy to provide for you for the 
record the details on the number of increase of cases, but I am 
just looking quickly. Dedication of additional resources in the 
establishment of this effort has resulted in increased arrests, 
searches and seizures by Customs agents in fiscal year 1996 to 
this effect: Total searches up to 227, that is an increase of 
220 percent; seizures 255, which is an increase of 67 percent; 
and arrests 120, which is an increase of 186 percent.
    [This information follows:]

           U.S. Customs Child Pornography Enforcement Program

    Customs enforces the Child Protection Act and investigates 
the trafficking of child pornography into and throughout the 
U.S.
    Child pornography is a priority for Customs that has 
national impact.
    In FY 1995 and 1996, Customs worked 612 and 809 child 
pornography cases respectively.
    Customs agents in San Diego arrested an arrival from Mexico 
for possesson of child pornography which resulted in the 
seizure of 250 commercial video tapes.
    A mail parcel was intercepted in New York by Customs agents 
which resulted in the seizure of over 1,500 videos and 
magazines of child pornography.
    There are currently 5 major child pornography operations 
ongoing. Three of them involve the Internet.
    Statistics in all areas of child pornography enforcement 
were up in FY 1996; searches involving computers, total 
searches, arrests, and man hours were up over 150 percent.
    Customs has established the International Child Pornography 
Investigation and Coordination Center (ICPICC) which is staffed 
by special agent experts in child pornography. The ICPICC 
assists the field with cases and coordinates Customs 
international efforts to combat child pornography.
    All leads developed from tips, undercover and other 
investigative work are referred to the appropriate office for 
action and follows through.

    But we still are constrained. Because if you have a 
domestic child pornography issue, it is not within the 
jurisdiction of the Customs Service to get involved in that. So 
we work closely with other law enforcement organizations, 
particularly the FBI, on this very important matter. But we 
don't have the full jurisdiction on this matter. But the 
jurisdiction we have, where it is being brought across our 
borders, we take this issue very seriously.
    Mr. Price. And those increases are covering what time 
period?
    Mr. Weise. That is in fiscal year 1996, compared to 1995.
    Mr. Price. Compared to the previous year?
    Mr. Weise. Yes.
    Mr. Price. Well, how do--those three FTEs, they are all 
included in this international child pornography investigation 
and coordination center?
    Mr. Weise. That is correct.
    Mr. Price. That is located----
    Mr. Weise. We call it part of headquarters; but it is 
located out in Reston, Virginia.
    Mr. Price. How does a case typically get generated?
    Mr. Weise. There are a number of ways. Primarily, because 
we have begun--not begun but over the years have developed a 
reputation for our involvement and interest in these kinds of 
areas, that more often than not they come from a law 
enforcement official, domestically or abroad, that comes upon 
information and then they provide it to us.
    We take a look at the information provided to us, try to do 
an assessment as to whether it involves our jurisdiction of 
being--involving any kind of importation. If so, we put it out 
to our respective field offices to further pursue this. If not, 
we work very closely and provide it to the FBI or other 
appropriate law enforcement, State, local or Federal law 
enforcement organizations, to pursue it.
    I think primarily these cases have grown out of some 
publicity about some of the positive cases that we have made, 
and there has been a recognition amongst the law enforcement 
community that we have some level of expertise in this area.
    Mr. Price. You have expertise; but, as you stress, you do 
not have--you have shared jurisdiction.
    Mr. Weise. Yes.
    Mr. Price. And shared responsibility. Does this experience 
lead you to believe that you could profitably expand this 
operation in any way? Is it reflected in this budget request? 
What are the implications for our deliberations of this success 
story, as you describe it, thekind of constructive role this 
small group has been able to play?
    Mr. Weise. Yes. Well, the budget that is before you, 
Congressman, does not seek to expand this at this point in 
time.
    One of the things that I think people lose sight of is the 
breadth of issues that the Customs Service is involved in. I 
think often people consider--when they think of Customs, what 
comes to mind is the inspector in uniform at the airport that 
is accepting the baggage to check when they are returning to 
this country. But we like to help people, particularly the 
people who are involved in shaping our budgets, to understand 
that there is a much wider area of issues that we are not only 
involved in but providing some success with, in this case, 
limited expenditure of resources.
    We are not at this stage asking to beef that up because we 
are working very closely with the FBI. Our office in Virginia 
works closely with headquarters and the unit in the FBI that 
does these sorts of cases, and we are developing a good, solid 
exchange of information to try to make sure that domestic cases 
don't go unprosecuted. We try to do our best to investigate 
thoroughly and prosecute any case that has an international 
tint to it.
    Mr. Price. Thank you. Thank you, Mr. Chairman.
    Mr. Kolbe. Mrs. Meek, do you have another question?
    Mrs. Meek. No.
    Mr. Kolbe. We have gone past the time we have allotted for 
this. Can you stand still for two more questions from me?
    Mr. Kelly. Sure.
    Mr. Kolbe. One on the Office of Professional 
Responsibility. We created this office--this subcommittee 
created it last year--with a $1.5 million appropriation. The 
purpose was to ensure that the Treasury's law enforcement 
bureaus had adequate oversight of the internal operations. 
Similar--I think it is safe to say, similar to what the Justice 
Department has in its own Office of Professional 
Responsibility. At least that is how we envisioned it.
    At the same time, Secretary Kelly, you have indicated that 
you are going to increase--plan to increase your staff from 34 
to 74 FTEs, and it appears that the plan that you submitted 
would use these funds to do that.
    Now, since that is your area of responsibility, there is 
nothing inherently wrong with using the money within your 
organization to do just that; but, as we look at your plan, it 
doesn't appear to us that it really is doing what we had 
intended because it is more liaison with the bureaus and very 
little in terms of direct investigative responsibilities for 
these people that you had indicated that you would bring on. 
And I understand you are currently revising the proposed 
organizational structure for the Office of Professional 
Responsibility. Is that correct? And, if so, do you intend to 
submit a revised plan to the subcommittee?
    Mr. Kelly. Yes.
    Just let me correct something, Mr. Chairman. The FTE is--
provided by the appropriation is 13 people. We had an increase 
of 13, not the numbers that you said that were greater.
    Mr. Kolbe. No, but I think you, in discussions with the 
committee, had indicated you had a plan eventually to increase 
the FTEs in your offices.
    Mr. Kelly. We had a plan, but obviously it wasn't funded 
and it wasn't approved by main Treasury. So we are looking to 
use this component to increase our staff.
    I believe that the immediate plan does do what the 
committee directed, and that is to pay particular attention to 
the internal investigative components or processes of the 
bureaus. As Commissioner Weise spoke about, as a temporary 
measure we brought someone on to take a look at the issues of 
the staffing and training and resources for internal 
investigations in Customs. What we would like to do with--a 
part of this OPR piece is to have someone permanently on board 
to do that, to look at training, to look at the crosscutting 
issues that go across the bureaus.
    If you look at that organization chart, down in the lower 
left hand corner, those are the positions that we are looking 
to bring on board. Where you see bureau liaisons----
    Mr. Kolbe. Right.
    Mr. Kelly [continuing]. What I envision that to be is, in 
essence, almost a special interest desk, not unlike what you 
have--maybe it is a bad analogy but similar to the State 
Department. There are so many issues that involve the bureaus 
that we simply don't have enough information to adequately make 
policy to deal with other agencies as far as--agencies outside 
the Treasury, as far as the capabilities of Treasury 
enforcement entities and also to advocate for our bureaus. We 
are expected to advocate both internally for bureau programs 
and externally to OMB and other entities.
    I see those positions as, in essence, gatherers of 
information. And if you look down there, the group below that, 
that would be, in essence, an inspection function. We are very 
cognizant of the role of the Inspector General. We are not 
looking to do direct investigations on our own. We are looking 
to ensure, as best we can, that we are performing oversight and 
ensuring that the bureaus themselves are properly staffed in 
critical areas.
    Mr. Kolbe. Well, I think your comments then confirm exactly 
the concerns this subcommittee or this committee has had. 
Advocating for the agencies, gathering information is clearly 
not what we had thought of as the Office of Professional 
Responsibility.
    Do you think that is consistent with what we had 
established?
    Mr. Kelly. If you read the report language, I think it is 
consistent.
    Mr. Kolbe. Well----
    Mr. Kelly. But it is also something, I believe, that we 
need to properly perform our oversight function, that 
information. The premise----
    Mr. Kolbe. You used the word ``advocating'' though.
    Mr. Kelly. Sir?
    Mr. Kolbe. You used the word ``advocating.''
    Mr. Kelly. Well, advocate in the sense that we need 
knowledge both to perform oversight but also, where it is 
necessary, to bring arguments or bring positions to the fore.
    Mr. Kolbe. Well, as I--I have read the report language and 
the recommendation language, and I don't think it is 
consistent. This is something you and I are going to have to 
thrash out, obviously. But we will have some more discussions 
about that with the Minority Members as well, the Ranking 
Minority Member.
    But then, based on what you have just said, it doesn't 
sound like you are going to revise the organization.
    Mr. Kelly. Well, we revised the organization.
    Mr. Kolbe. That organization?
    Mr. Kelly. That is a revision.
    Mr. Kolbe. This is the revision?
    Mr. Kelly. What we have not done is the position 
description submission of those.
    Mr. Kolbe. We have to see that then before we have further 
discussions.
    Let me just ask you this then--maybe this will help clarify 
it for me. With regard to the allegations of corruption--let me 
make it clear I am saying allegations of corruption--in Customs 
along the Southwest border, how would you see this office 
dealing with that or having anything to do with that?
    Mr. Kelly. Yeah. First, I would use the office to do an 
examination of the capability of the internal investigative 
organization, say, in Customs, which is what, as I say, through 
a consultant we are doing now. But I see that as a permanent 
position.
    I don't see ourselves doing investigations. In fact, we 
are--as you state in your report language, we are not like the 
Justice Department, which has lots of attorneys in a criminal 
division and the civil rights division. We don't--the Office of 
Professional Responsibility in Justice looks only at attorneys 
and misconduct of attorneys. It doesn't do broad-based 
investigations and, indeed, in the report language it talks 
about the--to be sensitive to the IG's role. So I would not 
look to do investigations.
    However, one of the concerns that was voiced in the report 
is that we didn't have a body of people to do in-depth 
investigations. Waco, good old boys, required bringing people 
on board.
    So in the event that a major investigation of that sort was 
needed, then you would have, in essence, what I see as the OPR 
component, able to do those types of investigations.
    Mr. Kolbe. It doesn't appear then, from your description or 
this chart, that you would have anything that would be devoted 
really to the issue of the Southwest border. I mean, they are 
liaisoning with each of the agencies; but you wouldn't take a 
portion of this and really focus it on where a particular 
problem might be in the law enforcement area?
    Mr. Kelly. Well, we could. We would do that perhaps through 
this internal investigative inspector that we would have. But 
it doesn't envision a geographical focus at this point in time.
    Mr. Kolbe. Two other questions. I said I had two, and I 
have thought of one other, I will make them very quick.
    You know, your statement makes the point that Customs is 
the front line of the war on drugs, and I think that is true. 
But you look at the funding, and it doesn't reflect that.
    I mean, when you look at what Justice gets, it is--in every 
case if you look over the last 3 years it has doubled, in 
almost every line item it has doubled what we have given to 
Customs. And over the last year, in this budget, you are up 5 
or 7 percent. Well, INS is up, under the goals, by 21 percent, 
11 percent, 13 percent, 15 percent; double that amount.
    How do you explain this? I mean, if Customs is at the front 
line, are you losing in the fight within OMB? Maybe Mr. Kelly 
is the one to discuss this; but, Mr. Weise, let me ask you: Are 
you losing the fight with OMB to get more of the resources 
directed here? I am not sure you can answer that question.
    Mr. Weise. I am thinking real hard, Congressman.
    We have tried to act responsibly in putting forth budgets. 
We know that there are efforts under way, a commitment between 
the administration and the Congress, to try to reduce the 
fiscal deficit; and we have tried to act responsibly. We have 
tried to, in effect, take a look at our organization and find 
out where we could create greater efficiencies within our 
organization that would motivate us to completely restructure, 
reorganize ourselves, look at more technology, look at ways we 
could do a more effective job even with static or marginally 
increasing resources. We feel that we have done a credible job 
at that.
    We have not been, frankly, putting forth requests for large 
expansions of our workforce because we have been cognizant of 
the environment, the budgetary environment in which we are 
operating. Clearly----
    Mr. Kolbe. But this Congress and now this administration 
has made a very clear commitment to law enforcement and 
particularly the drug interdiction effort.
    Mr. Weise. Well, it has been fairly clear that, you know, 
in the political environment, both in the Congress and in the 
administration, the issue of illegal immigration has been a 
very, very hot issue; and so I can't begrudge--the Immigration 
and Naturalization Service, as the Border Patrol has been 
beefed up significantly. They are primarily responsible, for 
the Southwest border, between the ports of entry. There is a 
vast expanse of 2,000 miles that needs to be addressed.
    It would have been nice to have us go right along with 
them, but we have tried to act responsibly and do the best we 
can with the resources we are provided. We think we have had 
responsible budgets, and we are trying to do the best we can.
    Mr. Kolbe. How many new agents will you add in this coming 
fiscal year with this budget?
    Mr. Weise. Well, in the current year, fiscal year, we have 
657 positions that we are in the process of putting on, from 
the fiscal year 1997. From this one, it is 119 additional ones.
    [Clerk's note.--Agency later submitted ``some of which are 
agents'' for ``from the fiscal year 1997.'']
    Mr. Kolbe. 119?
    Mr. Weise. 119. Those are inspectors.
    Mr. Kolbe. Mrs. Meek.
    Mrs. Meek. I just want to agree with you on the question 
you are asking. I guess you will call me the tomato lady after 
this hearing is over, but I have a strong interest because the 
United States signed the suspension agreement with Mexico, if 
you remember. We had quite a bit of trouble throughout the 
years with the department of Commerce and Secretary Kantor 
trying to be sure that the suspension agreement was done 
properly.
    Now, Customs, they come in--you have a station in Arizona--
I can't pronounce it--Nogales.
    Mr. Kolbe. Nogales.
    Mrs. Meek. Nogales. That sounds southern to me. Well, 
Nogales.
    Mr. Kolbe. I forget that city down in south Florida, is Me-
am-mi?
    Mrs. Meek. The natives call it Miami.
    But, anyway--I forgot our Chairman was from Arizona.
    Mr. Kolbe. I grew up 50 miles from Nogales.
    Mrs. Meek. I see.
    The key to the suspension agreement being successful is 
Customs, and I am interested in what kind of inspector staffing 
you have there.
    I do have an ulterior motive. I told you the tomato farmers 
beat up on me. So I am concerned about what kind of staffing 
you have there, what kind of training they have. Do they 
understand the suspension agreement? If you could tell me in a 
short answer.
    Mr. Weise. In terms of the number of staff, I would like to 
submit that to you for the record.
    Mrs. Meek. Yes.
    [The information follows:]

                          U.S. Customs Service

Port of Nogales:                           Current On-Board Staffing \1\
    Inspectors................................................       118
    Canine enforcement officers...............................        27
    Operational analysis specialists..........................         4
    Import specialists........................................        14
    Other.....................................................        28
                    --------------------------------------------------------------
                    ____________________________________________________

      Total...................................................       191

\1\ As of the end of pay period 04 (03/01/97).
---------------------------------------------------------------------------

            Inspectors Training--Tomato Suspension Agreement

    Training has been given to the inspectors on the tomato 
suspension agreement. They have been verifying weights and have 
verified the presence of a declaration and grading certificate 
with each tomato signatory shipment. Criteria have been 
developed for those known non-signatory shippers and intensive 
examinations are completed on the few here in Nogales.

    Mr. Weise. We have worked very closely with the Commerce 
Department to try to ensure that we fully understand the 
obligations and the responsibilities that we have to enforce 
that agreement. We have sat down with the industry and our 
people to make sure that they do have a grasp of what is 
expected of them.
    To be candid with you, we would have preferred earlier in 
the process to have been called in for consultation; and we 
tried--we got wind of this kind of very late and said, look, we 
are the organization that has to implement this. We would like 
to make sure that we are a part of the solution. And we did 
have some opportunity at the 11th hour to try to see if we 
could get the administratibility of this agreement taken into 
account, and it was kind of late to make much in the way of 
modification of the agreement.
    But, notwithstanding that, it is an administration 
commitment; and we are the organization responsible for 
enforcing it; and we are going to do the best job we possibly 
can to work with the domestic industry to ensure we carry it 
out fully in the long term.
    Mrs. Meek. Thank you.
    Mr. Kolbe. Mrs. Meek, I don't know that I am going to call 
you the tomato lady; but I know you are going to give me real 
heartburn if you keep talking about these tomatoes. We have a 
very different view coming from Arizona about this issue, and 
the administration has given me real heartburn on this issue, 
but I won't get into that area here.
    My final question, really more of a comment than anything 
else, is to just raise a red flag on this whole issue of the 
technology and the automation. I made some reference to this in 
my opening comments.
    But it seems to me that you have got bits and pieces that 
are coming together here in your Customs modernization, the 
conformed compliance act of 1993, the NAFTA act. You have got 
whole issues about border--the development and acquisition of 
border port inspection, your automated targeting systems, your 
nonintrusive x-ray inspection technologies. What I see here is 
you are buying a piece here, you are buying a piece there, you 
are starting this and starting that.
    I don't see anybody that is taking an overall look at the 
architecture, which is exactly what happened to the Internal 
Revenue Service. There was nobody in there saying, how does all 
of this go together here and how does all of this fit, instead 
of just buying this and buying that and putting this kind of 
piece there?
    You have an investment review board----
    Mr. Weise. Right.
    Mr. Kolbe [continuing]. That has been established. I think 
it is, at least in part, supposed to do this.
    Mr. Weise. Yes.
    Mr. Kolbe. I don't know that it really does the 
architecture of this thing, but it is certainly supposed to 
look at this whole thing, and it has been created, as I 
understand it. But you still at this point haven't--there are 
no policies or procedures in place for it to use at this point. 
Would you just comment on that?
    Mr. Weise. Mr. Chairman, I would love to have the 
opportunity to sit down with you and your staff and talk a 
little bit about this, and certainly perhaps Thursday we can at 
least begin the process and maybe do a follow-up meeting.
    We are aware of the concerns that have been raised as to 
how it all fits together. We obviously, in looking back, see 
that we maybe have made some slight mistakes along the way. But 
we have an outside consultant now that is taking a complete 
look at all of the architecture issues and will complete its 
analysis by June of this year. That input, as well as the input 
of GAO that is taking a hard look at what we are doing, I think 
has been very positive and very constructive. Certainly there 
are mistakes, but they are not mistakes nearly of the magnitude 
that have been made by the organization you alluded to, and I 
think that we are not far off the mark.
    One of the things that I brought to this position from my 
prior experience is the essential nature of making sure that we 
don't rush headlong into implementing programs, that we are not 
fully cooperating with the entities in the private sector that 
need to interface with us in automation. We can document to 
you, we have had extensive, numerous consultations with 
virtually every potential stakeholder or anyone that interacts 
with us on these systems; and that has been a slow, long, 
deliberative process to make sure that we are taking these 
issues into account and that we are doing it right the first 
time.
    I acknowledge, before the investment review board had been 
put in place, we did have a process board of directors in terms 
of the trade compliance process which in effect acted as that 
coordinating body. So I would like to have the opportunity to 
sort of spell out the steps we have taken. I don't think it is 
anything that you or the committee need to be alarmed about in 
terms of where we are taking this.
    I feel very comfortable that we have given it that kind of 
a look. It hasn't been done in quite the way of having the 
investment review board in place, you know, several years ago. 
But we will work very closely with you and your staff every 
step of the way and show you the steps we are taking.
    Mr. Kolbe. Just let the record show that this subcommittee 
has raised this issue and that, if we have another catastrophic 
failure as we did with the IRS, I am going to have you back 
here for some other questions.
    Mr. Weise. Understood.

                        research and development

    Mr. Kolbe. On that point, I am puzzled by why there is a 72 
percent cut in your research budget. Has all technology been 
developed that there is to be developed?
    Mr. Weise. No.
    Mr. Kolbe. It sounds drastic. It is down to $500,000.
    Mr. Weise. My recollection of that--Mr. Mintz, can you kind 
of come up here and respond to that?
    Mr. Kolbe. This is related to drugs, I think. But doesn't 
this include the technology, the technology that we are talking 
about or is this just drug research?
    Mr. Weise. This is Ray Mintz, the head of our Office of 
Technology.
    Mr. Kolbe. Would you come forward so your comments can be 
heard here?
    Mr. Mintz. I guess I can't speak to the exact change in the 
budget, but I would point out that a lot of our research for 
nonintrusive inspection technology at this point is being done 
for us by the Department of Defense. So that our requirements 
for research are somewhat lessened, and we will go ahead and 
acquire that technology based on their development effort.
    That is the best answer I can give to your question at this 
point.
    Mr. Kolbe. I might want to take a look at some of the 
specifics about how that is being done.
    Mr. Mintz. Yes, sir.
    Mr. Kolbe. Is it subcontracting with DOD?
    Mr. Mintz. The Department of Defense uses their funding, 
awards the contracts. We work very closely with them, often as 
the technical representative on the contract in a partnership 
arrangement.
    Mr. Kolbe. Thank you very much.
    Mr. Mintz. You are welcome, sir.
    Mr. Kolbe. Since I am the last one here, obviously there 
are no more questions.
    I want to thank our witnesses today for their testimony. I 
want to thank the agents who came from the field today to give 
us the testimony that they did and our thanks to the work that 
you do every day for our country out there. We appreciate it 
very much.
    Secretary Kelly, Commissioner Weise, thank you very much 
for being with us today.
    This subcommittee is adjourned.
    [Questions for the record and selected budget justification 
materials follow:]

[Pages 691 - 843--The official Committee record contains additional material here.]

                                      Wednesday, February 26, 1997.

                          U.S. SECRET SERVICE

                               WITNESSES

RAYMOND W. KELLY, UNDER SECRETARY (ENFORCEMENT), U.S. DEPARTMENT OF 
    TREASURY
ELJAY B. BOWRON, DIRECTOR, U.S. SECRET SERVICE
RICHARD J. GRIFFIN, DEPUTY DIRECTOR
W. RALPH BASHAM, ASSISTANT DIRECTOR FOR ADMINISTRATION
RICHARD S. MILLER, ASSISTANT DIRECTOR FOR PROTECTIVE OPERATIONS
STEPHEN M. SERGEK, ASSISTANT DIRECTOR FOR PROTECTIVE RESEARCH
BRUCE J. BOWEN, DEPUTY ASSISTANT DIRECTOR FOR INVESTIGATIONS
K. DAVID HOLMES, ASSISTANT DIRECTOR FOR INSPECTION
LEWIS C. MERLETTI, ASSISTANT DIRECTOR OF TRAINING
TERRY SAMWAY, ASSISTANT DIRECTOR FOR GOVERNMENT LIAISON AND PUBLIC 
    AFFAIRS
JOHN KELLEHER, CHIEF LEGAL COUNSEL

                  Opening Comments from Chairman Kolbe

    Mr. Kolbe. The Subcommittee on Treasury, Postal Service and 
General Government will come to order.
    This afternoon we are pleased once again to welcome Under 
Secretary Kelly and Director Bowron to our hearing today 
covering the Secret Service. Today's hearing is going to focus 
on financial crimes and the role that the Secret Service plays 
in protecting our nation's financial system and the economy as 
a whole.
    Most people are aware of the mission of the Secret Service 
to protect the President and other dignitaries; and, for many 
people, that is what they think of when they think of the 
Secret Service. Tomorrow, the subcommittee will be meeting in a 
closed session with the Under Secretary and the Director to 
learn more about this protective mission, and I look forward to 
that, but today we are going to be focusing on another area. 
That is financial crimes.
    As I read through the written testimony from our witness, I 
was struck by the fact that there are not a lot of clear 
boundaries when it comes to financial crimes. These crimes are 
often complex and very much interrelated.
    For instance, it seems to me that computers are being used 
in almost all the financial crimes that the Director discusses 
in his testimony--used to create false identification cards, to 
counterfeit currency, credit cards, securities, commercial 
paper, government checks. They are used to move and launder 
money, both domestically and across international boundaries. 
They are used by hackers to access computer databases, and 
retrieve personal information without detection. I am pleased 
that the Secret Service has taken a very proactive stance in 
this growing area of criminal activity. I think that their 
proactive and aggressive stance is one that is very much 
required.
    But I guess the question I would ask is this: are we being 
aggressive enough? Are we doing enough to stay ahead of these 
technocrooks? Just as importantly, how do we measure our 
success as to whether they are staying ahead or falling behind?
    My other concern is that technology moves sometimes so 
quickly, too quickly perhaps. As we look to embrace electronic 
payment and cash systems, I think we have to consider whether 
or not they are ensuring that these systems are not increasing 
our vulnerability to fraud.
    In particular, as the Federal government moves toward 
electronic funds and electronic benefits transfer, we need to 
do everything we can to make sure we don't expose Federal 
beneficiaries, people who are most vulnerable and the 
government itself, unnecessarily to even added fraud.
    I look forward to hearing from our witnesses today; and I 
would, before we call them for their testimony, turn to our 
distinguished Ranking Member for some opening marks.
    Mr. Hoyer. Thank you, Mr. Chairman. I look forward to the 
testimony.
    As you have pointed out, and as I mentioned yesterday, the 
Secret Service is best known for its protective role, which it 
does so well. But it has very, very substantial capabilities 
and responsibilities in many other areas. This is an area 
where--you want the public to hear what I am saying--the Secret 
Service has done outstanding work and where there has been, 
frankly, some degree of controversy as to its role vis-a-vis 
the FBI.
    There has been discussion, but hopefully we have reached an 
agreement between various law enforcement components in our 
government. The expertise of the Secret Service in this area 
has been recognized certainly by the Congress, because it was 
resolved that the Secret Service would continue its focus and 
role in this area. So I am looking forward to hearing the 
testimony.
    I want to again say to Mr. Bowron, as I mentioned yesterday 
to Mr. Kelly, that we have some of the top talent in law 
enforcement in this country, indeed in this world, in your 
portfolio. Eljay Bowron and the men and women of the Secret 
Service are as good as it gets, and you are very fortunate to 
have them as colleagues in this critical effort--law 
enforcement responsibility at the Federal level.
    I look forward to hearing your testimony.
    Mr. Kolbe. Before I call you to testify, Michelle has 
advised me I misspoke. I knew we were postponing part of 
tomorrow's briefing, and I didn't realize it was the entire 
thing. That briefing that I discussed is postponed to April 
because of the joint session we have tomorrow with President 
Frei.
    At this point, let me call Under Secretary Kelly and Mr. 
Bowron for their statements, and let me once again emphasize 
that the full statement will be made part of the record; 
summarizing it would be much appreciated so we could have as 
much time as possible for questions.
    Mr. Kelly. Yes, sir, my remarks will be brief.
    Mr. Chairman, Congressman Hoyer, members of the committee, 
thank you. Once again, it is a pleasure to appear before you 
today. With me, as of course you know, is U.S. Secret Service 
Director Eljay Bowron and members of his staff, as well as 
Assistant Secretary James Johnson, Deputy Assistant Secretary 
Elizabeth Brezee and others from the Treasury enforcement 
staff.
    Money laundering, counterfeiting, tax evasion, financial 
institution fraud, electronic benefit fraud and insurance fraud 
have one thing in common. They pose a potential threat to our 
nation's financial underpinnings. The Treasury Department is 
responsible for safeguarding those underpinnings, so our role in 
financial law enforcement is broad.
    Secretary Rubin has committed to this effort by making the 
combatting of financial crimes one of his top priorities. 
Support of this committee has clearly been vital to this 
effort.
    I will defer to Director Bowron to explain the specifics of 
the bureau's work and programs directed at addressing financial 
crimes. I just want to underscore that the Secret Service has 
pioneered the successful efforts with the credit card industry 
to prevent fraud. It has received the unparalleled expertise to 
combat computerized crime and continues to explore innovative 
ways to investigate and detect counterfeiting and financial 
crimes in general.
    Treasury's other law enforcement components complement the 
Secret Service and each other in the financial crimes area. 
Secret Service and Treasury enforcement overall is America's 
best defense against financial crime. In my opinion, no one 
does it better. With your help, we hope to meet the new and 
more demanding challenges the future appears to have in store.
    Once again, we look forward to working with you, Mr. 
Chairman, Congressman Hoyer and the other members of the 
committee. Thank you, sir.
    Mr. Kolbe. Thank you, that was a good summary.
    Mr. Kelly. I learned my lesson.
    [The information follows:]

[Pages 848 - 858--The official Committee record contains additional material here.]

    Mr. Bowron. Mr. Chairman, Congressman Hoyer, on behalf of 
the men and women of the Secret Service, first, Mr. Chairman, 
let me congratulate you on your chairmanship and also welcome 
any new members----
    Mr. Hoyer. Although as good as he is, Mr. Director, I want 
you to know he would be a fantastic Ranking Member.
    Mr. Bowron [continuing]. And, as you noted, we have 
submitted a complete statement with our specific requests for 
fiscal year 1998 for the record.
    I would like to take a minute to introduce some very 
important members of the Secret Service that I also may turn to 
to help answer questions that may be raised by the committee. 
First, our Deputy Director, Dick Griffin; Ralph Basham, our 
Assistant Director for Administration; Rich Miller, our 
Assistant Director for Protective Operations; Steve Sergek, our 
Assistant Director for Protective Research; Bruce Bowen, our 
Assistant Director for Investigations; David Holmes, our 
Assistant Director for Inspection; Lou Merletti, our Deputy 
Assistant Director of Training; Terry Samway, Assistant 
Director for Government Liaison and Public Affairs; and John 
Kelleher, our Chief Legal Counsel.

                            financial crimes

    Pursuant to the committee's request to focus on a specific 
aspect of the Secret Service's mission, we have focused our 
conversation today on financial crimes. It is important to note 
that we have been involved in financial crimes investigation 
since the inception of the Secret Service. Our financial crimes 
cases are a very high priority, and we make a significant 
impact in this area.
    I would like to begin our presentation today by playing a 
tape from a case that we investigated at the request of the 
United States Attorney's Office in North Carolina. I think it 
is only going to serve to illustrate a point that you and 
Congressman Hoyer have already made, Mr. Chairman, but it 
involves financial crimes schemes that have been perpetrated 
against the airline industry which involved millions of dollars 
of fraudulent activity.
    Maybe not. At any rate, it illustrates the point that you 
made----
    Mr. Kolbe. It is going to come on. It just had a long lead.
    [Tape played.]
    Mr. Bowron. So, as I said, Mr. Chairman, it illustrates the 
point you made. We do protect the President, and that is our 
highest priority, but we also protect our nation's financial 
systems.
    Our financial crimes investigations have a significant 
economic impact. The actual losses associated with our 
investigations exceeded $500 million in fiscal year 1996 and 
resulted in over 9,000 arrests. Based on standards set by the 
financial industry, the estimated potential losses exceeded $10 
billion. In other words, had the criminal activity under 
investigation not been stopped by virtue of our investigation, 
$10 billion would have been the actual losses.
    To reinforce the importance of that number, it also 
represents $10 billion of potential revenue that would have 
been lost to American businesses, $10 billion lost as taxable 
revenue to the United States Government, and $10 billion which 
could have been used by criminals to further other types of 
criminal activity.
    Although the actual losses were high, the Secret Service is 
proud of the fact that the savings to the government and the 
American people are even higher as a result our investigative 
efforts. The investigations in many cases identified and 
apprehended the individuals committing these crimes, as well as 
recovered the proceeds from the crimes, which could be returned 
to the victims, businesses or the government.
    As you also indicated in your remarks, Mr. Chairman, 
although these crimes sound like separate and distinct acts, 
they are so closely intermingled and cowoven that they work 
together for successful criminal enterprise in the area of 
financial crimes. They facilitate one another.
    Each of you has packets in front of you that contain all 
the items that you need to commit these financial crimes--false 
identification, counterfeited checks from a legitimate company, 
counterfeited credit cards with limitsaccording to the 
compromised account. These are the kinds of packets that the criminal 
element puts together to facilitate these crimes. Technology gives them 
access to the systems for the financial information, and technology, 
like desktop publishing, provides them with the technical wherewithal 
to manufacture the items in front of you.
    I know the committee's time is limited today, and what we 
really want to do is answer your questions. You have had a 
chance to review the information that we have provided, so I 
would really like to just answer any questions you may have.
    Mr. Kolbe. Thank you very much for your statement.
    And I would say, just looking at this, I do appreciate the 
fact that, at least when you made this up for Mr. Dunn, you did 
shave a few years off of my age here, which is certainly 
appreciated.
    [The information follows:]

[Pages 861 - 876--The official Committee record contains additional material here.]

                            financial crimes

    Mr. Kolbe. I want to begin by asking some questions here, 
and, as I have said before, we will adhere to the 5-minute 
rule, including myself. We will use the process that we have 
used before, taking members who were here at the beginning of 
the hearing and alternating Majority and Minority and taking 
members as they come in for their questions.
    I want to begin by asking questions about measuring the 
impact of the financial crimes. You used the figure of $10 
billion of potential losses, yet you noted that the industry 
loses as much as $12 million annually just from desktop 
publishing schemes alone. Do we really have any grasp of the 
total amount of the financial fraud crimes that we are talking 
about?
    Mr. Bowron. Well, it is commonly based on industry 
estimates of the losses; and for the credit card industry, 
estimated losses are at about $1.9 billion.
    Mr. Kolbe. These are not nonpayments; these are fraudulent.
    Mr. Bowron. Right. I believe $1.9 billion is the figure 
they associate with credit card fraud.
    Mr. Kolbe. That strikes me as very low, actually, 
considering how much must be charged on credit cards in the 
course of a year. I don't quite get to $1.9 billion, but it has 
got to be a lot of money charged to credit cards.
    Go ahead.
    Mr. Bowron. Well, losses are big. Losses versus potential 
losses in most financial systems, whether it is credit cards, 
your checking account, or other schemes, have built-in limits 
that are imposed on the system or within the financial 
transaction. That is what gives them the basis to identify the 
potential losses.
    For example, suppose the credit limit on a credit card is 
$15,000, and after $5,000 of criminal activity we arrest a 
perpetrator that is committing fraud with respect to that one 
account. The credit card industry would say the potential fraud 
there wasn't just $5,000, which is the current balance on that 
card, the potential loss is $15,000. There is $10,000 more 
there that they would have hit the card for if they had not 
been arrested or apprehended.
    Now, that is just a simple example of how they estimate 
that. In most systems, that is how they calculate that number.
    Mr. Kolbe. Well, we have various estimates in drugs of what 
percentage we are actually interdicting. Do we have any idea 
what percent of financial fraud crimes we are actually stopping 
or catching? Is that a fair question?
    Mr. Bowron. It may be a fair question. We may have a method 
for answering it. I really couldn't give you an answer off the 
top of my head, but we can try to provide that to you.
    Mr. Kolbe. What then are the right performance measures to 
use? You don't--to some extent, it seems to me using cases 
closed is really just a way of measuring our workload. It is 
not really a measurement of what we are accomplishing or doing. 
It is not really a performance measurement. What kind of 
measurements do you think are appropriate to use in this area 
of financial fraud?
    Mr. Bowron. I think the economic impact of the 
investigations is a fair measurement, both as actual loss and 
potential loss, as well as activity that is aimed at systematic 
fixes to prevent future fraud.
    Mr. Kolbe. So that is the actual loss that you either 
prevent, catch or detect and the potential you may have 
deterred from your activities.
    Mr. Bowron. That is correct.
    Mr. Kolbe. Is that the $10 billion figure that you are 
using?
    Mr. Bowron. Yes.
    Mr. Kolbe. It is certainly substantial, but it probably is 
only a small part of the potential loss we have in this whole 
area. Is that not correct?
    Mr. Bowron. Well, I think part of the problem is, when you 
talk about financial crimes, they are difficult to separate. It 
may be something that we need to look at in terms of 
separating, from a resource standpoint, computer fraud versus 
telecommunications fraud, versus financial institution fraud, 
versus telemarketing, and versus credit card fraud. Because 
part of the problem is these things are all woven together. 
That is the reason that we tend to capture both losses, numbers 
and hours under the category of financial crimes. Because in 
most cases----
    For example, if we are involved in a telemarketing case, it 
normally includes computer fraud, bank fraud, credit card 
fraud, and, many times, telecommunications fraud. So they are 
so closely interwoven that it is difficult to separate out the 
performance measurements in each one of those separate 
categories.
    Mr. Kolbe. Do you have any other performance measurements 
other than this $10 billion loss?
    Mr. Bowron. Well, I think certainly----
    Mr. Kolbe. What are the other measurements----
    Mr. Bowron. Arrests and convictions. If you are working a 
lot of cases and you are not apprehending, arresting and 
prosecuting any criminals, that is a valid measurement 
thatneeds to be looked at. And, in our case, we have a relatively high 
number of arrests relative to the resources devoted; and we have a 
conviction rate of about 99 percent.
    Mr. Kolbe. I have a series of other questions, but Mr. 
Hoyer.

                         protective operations

    Mr. Hoyer. Thank you very much, Mr. Chairman.
    Mr. Director, you had a busy year last year. Election years 
are always very busy; but, in addition, you had the Olympics 
and conventions. We have a G-7 coming up in Denver. I am going 
to go beyond just the financial crimes, because I understand 
this is the only hearing we are going to have on your budget. 
So, if you don't mind, I will go beyond the financial crimes 
aspect.
    Mr. Bowron. Plans are under way for the G-7 Summit in 
Denver. There are no problems from a staffing standpoint, 
however there are problems from a funding standpoint. We are 
working with the local community to plan the security and other 
arrangements. Things are on schedule.
    Mr. Hoyer. With respect to your FTEs, 5,027, do we have 
sufficient personnel to accomplish the objectives that you have 
before you in the coming fiscal year?
    Mr. Bowron. Yes.

                  treasury recipient integrity program

    Mr. Hoyer. The TRIP program, Donna Shalala is rightfully 
very proud of the fact that we have gotten more welfare, food 
stamp fraud collections in the last 4 years than I think we had 
gotten in the previous 20 years combined. Obviously, we are 
doing a lot in Treasury.
    Tell me about the TRIP program, how successful have we 
been? This committee is excited about that because we are 
worried about the fraud of people who get money from the 
Federal government. Tell me where you are and also comment on 
the lessons we are learning and how we are transmitting that to 
other government agencies where recipients are receiving 
payments.
    Mr. Bowron. If I could take a moment, TRIP is an acronym--
Treasury Recipient Integrity Program--which is really aimed at 
making sure that organizations that provide benefits from the 
Federal government have systems in place to assure they know 
who they are doing business with. They want to be sure that the 
money that is intended to go to entitled recipients is in fact 
going to these recipients; and if money is going to nonexistent 
or wrong recipients, that this is identified.
    We have done several projects with the Department of 
Defense and other benefit providers. We have eliminated about 
$6.2 million worth of fraudulent payments that were going on, 
annually. So this is another example of $6 million in losses if 
someone had not have stepped in and identified this as a 
problem. In some cases the problem was, for example, benefits 
were being provided to people that had long since been 
deceased; benefits were still being received by people in the 
name of that individual.
    Mr. Hoyer. To put the $6.2 million in context, how much 
money do you allocate to TRIP?
    Mr. Bowron. Well, we had about $1 million for this fiscal 
year allocated to TRIP-type initiatives.
    Mr. Hoyer. So it would be fair to say that is a 6-to-1 
payoff.
    Mr. Bowron. At the present time, we have an earned savings 
of $6 million a year.
    Mr. Hoyer. I understand. But currently.
    Mr. Bowron. What has occurred is we have been able to take 
the lessons learned and provide that information--to providers.
    Mr. Hoyer. But you are also expecting at least $1 million a 
year. We are saving $6.1, but presumably you want another 
million this year. It is a 6-to-1 payoff. That is not bad in 
anyone's business. Go ahead.
    Mr. Bowron. For example, we have passed lessons learned 
through the different TRIP initiatives on to benefit providers, 
who in some cases, have instituted regular fraudulent 
prevention programs. So this kind of fraud can be stopped and 
the business systems can be fixed to eliminate some 
vulnerabilities.
    The Department of Defense, for example, has taken the 
reverification procedures, and developed them into a permanent 
program that will, every 5 years, provide reverification.
    We are currently involved with the Social Security 
Administration in a border initiative. We are doing a pilot 
project. Based on the results of the pilot project, it is 
expected that this will be an initiative to stop people who 
aren't really entitled to benefits. The people are not living 
in the United States but are applying for and receiving 
benefits and only come to the United States to pick up checks 
from mail drops, fictitious addresses and so forth and then go 
back to the country that they came from in order to spend and 
use those benefits. So, right now, we are working with the 
Social Security Administration.
    Most of our efforts have been overseas. This effort with 
the Social Security Administration is the first domestic TRIP 
program where we are taking steps inside the United States to 
identify fraud.
    Now, in addition to that, and as part of the money that is 
spent, we are also meeting and doing training and seminars and 
risk analysis sessions with the different benefit providers to 
try and identify fixes to the system and save money in terms of 
end results, to avoid costly investigations, prosecutions and 
jail time--trying to stop the fraud instead of chasing it after 
the money is out the door.
    Mr. Hoyer. Mr. Chairman, this is obviously a multibillion 
dollar payoff to the extent that we increase our ability to 
catch fraudulent recipients. This is sort of a pilot program, 
small at this point in time. But a lot of agencies are 
obviously pursuing this at our urging and their own urging. 
This is a very important program.
    Let me go on to another area; and this is the last question 
I will ask, Mr. Chairman, in this round.

                          anti-counterfeiting

    Mr. Chairman, we have worked very hard with the Secret 
Service on the whole question of counterfeiting. As you know, 
we have a new $100 bill; and I happen to like it and think it 
is a good idea for a lot of reasons. It is a more secure bill, 
as you know, than its predecessor. The $100 American bill is 
used much more overseas than it is here.
    Mr. Director, why don't you comment on where we are to the 
extent you can on the world threat and domestic threat and how 
we are doing on our resources available to fight that threat, 
particularly overseas. Because I know we have had problems, Mr. 
Chairman, with Secret Service's resources being sufficient 
overseas to work with foreign governments to get at the 
overseas counterfeiting of$100 bills and other currencies as 
well.
    Mr. Bowron. First, let me talk about counterfeiting 
overseas and domestically. In terms of the threat, the threat 
is that increasingly our currency is being counterfeited 
overseas. About 70 to 75 percent of the counterfeit that is 
passed in this country originates from outside this country.
    Now, historically, our experience has always been and 
continues to be that the most effective way to attack 
counterfeiting operations is at the source. Since the source of 
this counterfeiting is overseas, in order to be most effective 
in addressing that problem, we have increased our focus 
overseas.
    Now, I want to put the threat in perspective. Because the 
fact of the matter is this is not a problem that is out of 
control. It is not out of control because there is an 
aggressive investigative enforcement effort to suppress 
counterfeit activity worldwide, and we have had very good 
success with respect to suppressing those counterfeit 
activities.
    If you look at most recent efforts by the Federal Reserve 
Bank, the fact of the matter is that the number of counterfeit 
notes that come through the Fed from overseas, counterfeit 
notes per million, is actually lower coming from overseas than 
it is in the deposits in the United States. So I say to that, 
first of all, it isn't as though there is this huge amount of 
counterfeit notes floating around overseas that are not being 
detected by foreign banking entities. An analysis of the money 
flowing through the Federal Reserve Bank, which is substantial, 
doesn't support that.
    Secondly, our experience in working with foreign law 
enforcement and foreign banking officials gives us evidence 
that is consistent with the experience of the Federal Reserve 
in terms of their examination of the currency.
    Now, with respect to our overseas staffing, this committee 
authorized and funded 28 positions for additional staffing 
overseas, and I want to find the right section in this binder 
that gives me that. Of the 28 positions, we have filled 17 of 
those positions; and 11 positions have been denied by the State 
Department. There is no single answer for the denial, and it is 
not something that is final in anybody's estimation. In some 
cases, the problem is the availability of space. In some cases, 
it is a prioritization by the State Department and a particular 
embassy with respect to law enforcement efforts and staffing in 
that embassy.
    But through the Treasury Department, the Office of 
Enforcement and the State Department, we are going back to 
appeal those positions that have not yet been filled; and we 
are also going to offer some alternatives. I mean, this may 
turn out to be an actual case in point, but it isn't at this 
moment.
    In Moscow, for example, we are going to build a new 
embassy. There are some space problems there with respect to 
the availability for law enforcement purposes, and those are 
positions that we have not yet been able to have authorized.
    Our request for Moscow was two agents and one support 
person. We are going back to the Treasury Department and the 
State Department to appeal that decision. If we are not allowed 
in the final analysis to staff Moscow, we are going to offer 
perhaps Helsinki or some other location that will give us good 
geographic proximity and the logistical capability to get to 
that region and other places in the world that we need to go to 
be effective when conducting these investigations.
    Now, I also want to hasten to point out that the fact that 
we don't have the staffing doesn't mean we are not getting the 
job done. We are sending people there in a task force and 
temporary duty situation to make sure we address the needs and 
conduct the investigations that need to be conducted. So that 
is where we are.
    Mr. Hoyer. Thank you. Thank you, Mr. Chairman.
    Mr. Kolbe. Let's call Mr. Price.

                          white house security

    Mr. Price. Thank you, Mr. Chairman.
    I am glad to welcome our witnesses; and while I appreciate 
your testimony today, which acquaints us with the diversity of 
the work you have underway, I, too, want to return to your 
protective mission, which of course we take very seriously and 
are very appreciative of the job you are doing.
    Three of the program changes for fiscal 1998 cover White 
House security. I understand you are requesting a total of $13 
million for implementing recommendations made following the 
security review you conducted of the White House complex, and I 
believe that the Service is in the final stage of implementing 
those recommendations. Is that correct? I wonder if you could 
provide any more detail about where we are in that process and, 
when all is said and done, what portion of these 
recommendations will have been implemented. What are we talking 
about in terms of the specific objectives of the $13 million 
request?
    Mr. Bowron. Well, with respect to the $13 million, to give 
you specific dollar outlays, I would like to maybe provide you 
with a written answer to that. But the short answer to your 
question is that ongoing funding has been provided for 
completion of the recommendations; and, in fact, the 
recommendations have been implemented. We have moved forward on 
that as expeditiously as we possibly could.
    Some of the things that continue to be necessary in terms 
of funding are the bollards and other permanent security 
installations around the White House that are construction 
initiatives. In the meantime, we have taken temporary 
protective measures until those projects are completed. But the 
ongoing funding is there, the plans are under way to complete 
those projects, and that process is moving forward.
    So with the FY 1998 funding all of the initiatives that 
came from the review as well as our own analysis of the 
security needs, will have been both funded and implemented at 
the White House complex.
    Mr. Price. So this $13 million increment is basically a 
one-time request?
    Mr. Bowron. Well, no. The $13 million you are referring to, 
our Assistant Director of Administrations informs me is funding 
for FTEs. That is funding for salaries. That goes into our 
budget to pay for increased staffing.
    Mr. Price. Staffing related, though, to that security 
review?
    Mr. Bowron. Yes, the security review identified the 
resulting human resource requirement for implementation of 
White House initiatives to be 277 FTEs which will be 
underwritten by that funding, although we don't have all of 
those positions on board. We are rapidly going through the 
hiring process; and, in the meantime, any lack ofstaffing is 
being compensated for by overtime to cover the necessary operational 
requirements.
    Mr. Price. Alright and if you have further details on that, 
you can furnish them for the record.
    [The information follows:]

                          White House Security

    In 1995, the Department of the Treasury conducted a review 
of White House security. All of the recommendations of the 
White House Security Review have been implemented. However, 
some of the new security posts at the White House are 
temporarily being staffed through the use of overtime until 
full funding is secured, and officers can be hired. Also, some 
security enhancements are part of an interim plan, until 
permanent funding is provided to the National Park Service and 
the Department of the Interior so that President's Park, the 
long term preferred alternative, can be completed.
    The FY 1998 President's budget includes $28.8 million for 
White House Security, of which $15.6 million has been requested 
through the Violent Crime Reduction Trust Fund and $13.2 
million requested through the Service's Salaries and Expense 
appropriation. Specifically, this funding will be used to fully 
fund positions, for protective systems at the White House, to 
lease vehicles, and for the purchase of primary armored 
limousines. If the requested funding is provided in FY 1998 
and, barring any cost overruns during construction, permanent 
funding for all of theFTE and other security enhancements 
recommended by the review will be in place.

                          dignitary protection

    Mr. Price. I was listening with interest to your discussion 
with Mr. Hoyer about your coming challenge with meetings where 
numbers of foreign dignitaries will be present. Your cost for 
protecting foreign dignitaries in fiscal year 1996 exceeded the 
amount projected by a good bit, something like 54 percent, and 
you attributed this overage to the 50th anniversary of the UN, 
the Pope's visit, the Bosnian summit, the Olympics and so 
forth. This, along with the increase in presidential protection 
activities required during the election cycle, led to greater 
expenses and the diversion, I would assume, of substantial 
resources away from the Service's criminal investigations.
    I realize the Pope's visit and the Bosnian summit were 
unexpected events; but I wonder why that estimate was so far 
off in 1996 and whether this budget includes a more realistic 
estimate of the likely expenses in fiscal 1998, for these 
protective activities. I also wonder what the implications were 
for this overrun in terms of diversion of resources from 
criminal investigations during this election year or periods of 
high travel.
    Can we do something to address this cyclical diversion of 
funds? I know we have got to have flexibility and that the 
Service prides itself on flexibility, but it does raise the 
question of whether the baseline amount assigned to FTEs is 
sufficient to ride out these cycles.
    Mr. Bowron. Well, as you indicate, Congressman, we do have 
to have the flexibility. Our resources are pulled from our 
investigative mission in order to accomplish protective 
operations. We can provide you with more exact numbers, but the 
fact of the matter is we suffered no real appreciable loss in 
terms of our investigative effort during that period of time, 
by relying on a tremendous effort by the work force in the 
Secret Service in terms of overtime that was put in. Also in 
terms of maximizing the geographic location of our agents, and 
trying to minimize their travel time, and the logistical impact 
of their participation in those protective operations.
    In terms of the estimates for the protection of foreign 
Heads of State or other protection, we have a pretty 
straightforward way of projecting that. We have changed it a 
little bit this last campaign and it basically relates to the 
number of protection days required to arrive at the figures. We 
used that for the campaign.
    With respect to foreign Heads of State and for example as 
in the case of the Pope's visit, we can only project based on 
our past experience and based on what information we have 
available to us. For example, with the 50th anniversary of the 
United Nations and the Papal visit just in advance of that, 
those were both extraordinarily expensive undertakings. That 
was truly a historical event.
    I mean, at the 50th anniversary of the United Nations, we 
had over 150 foreign Heads of State, a very large number of 
spouses, plus the President and Vice President all in New York 
City at one time. It was more expensive than we projected it to 
be. It was a unique event, a one-of-a-kind event. There has 
never been anything like that as far as I know in the history 
of the Secret Service, maybe in the history of the world. So it 
was unique.
    Mr. Price. So your conclusion is that there is not a basic 
flaw in the method of projecting your needs and that the 
overrun would not likely be repeated.
    Mr. Bowron. No, but I would assure you that we are 
constantly looking at the means that we have to make 
projections. We try to determine whether or not there is a 
better way to project and, in fact, this past campaign was an 
example of that.
    In past campaigns we actually tried to make a guess as to 
how many candidates there would be. In fact, it doesn't matter 
how many candidates there are, what matters is how many days we 
protect a protectee and how many protection days there are. So 
we changed our method of calculating protective requirements 
for the campaigns, and we think that the system that we use now is 
better. My point is, we are constantly looking at the numbers to try to 
determine whether there is a better way for us to arrive at them, and 
whether there is better information we could use in the formula.
    Mr. Price. Well, as to this trade-off question, you say in 
your budget justification, and I am quoting, ``Due to the wide 
range of protective activities during fiscal year 1996, i.e. 
the Pope's visit, fewer criminal cases were closed than had 
originally been anticipated. As a result, the Secret Service 
closed 27,393 criminal cases during fiscal year 1996, 82 
percent of the anticipated goal of 33,500. The number of 
criminal cases closed for fiscal 1997 should reflect an 
increase over FY 1996, with more of the Secret Service's 
resources being redirected from campaign protective activities 
to the investigative areas.'' That language does suggest a 
trade-off.
    Mr. Bowron. Yes, sir. I wouldn't suggest that there was no 
impact, but what we try to do is prioritize the cases to work 
the highest priority cases to achieve the goals that we can. 
Certainly in those cases that we didn't work from a campaign 
year to a noncampaign year, those are as a result many types of 
protective operations. So if I implied that there was no 
impact, I didn't mean to imply that.
    Mr. Price. Thank you. Thank you, Mr. Chairman.
    Mr. Kolbe. Mrs. Meek.
    Mrs. Meek. One quick questions, Mr. Chairman. First of all, 
I want to commend Mr. Bowron for being here today. I learned in 
the brief time I have been here, because I had a VA-HUD 
Subcommittee, a lot more about the Secret Service than I ever 
imagined the kind of services you render. I also want to 
commend you on your step up in food stamp fraud and the TRIP 
program and other kinds of programs. I think our job now is to 
educate the public, our constituents, to the fact that there is 
a preventive arm as well as a corrective arm in terms of the 
kinds of fraud that was perpetrated before this time. So I want 
to commend you on that and ask you to please keep that going 
and try to step up the activities in that area.
    Mr. Bowron. Yes, ma'am. Thank you very much.
    Mr. Kolbe. Do you have further questions? Mike.
    Mrs. Meek. That is it, Mr. Chairman.
    Mr. Kolbe. Thank you very much.

                           WHITE HOUSE ACCESS

    Mr. Wolf. I am sorry I wasn't here earlier, I was chairing 
another subcommittee, but I can tell you there are two issues 
that I am so interested in. And when I go out to high school 
classes, and I spoke to one at Oakton High today, and I don't 
know what to tell them when I tell them that at the White House 
we are getting a situation where drug dealers can come into the 
White House, and maybe that is a one-time thing, and then we 
hear a guy on the Interpol list comes into the White House. 
Then we hear you got this guy Wynn coming into the White House 
who is out on bail. Maybe his bail may have been even revoked 
for some reasons.
    Then we have this guy, Wang, who heads up the Poly 
Corporation, Chinese Communist Corporation. It was the 
operation of a, sting operation that Customs had whereby he 
wanted to sell assault weapons that could have killed your 
people and the people in California to street gangs in 
California.
    Now, I have great respect for the Secret Service--I don't 
know what to tell people. I don't know how I would go in and 
explain how people like that can come into the White House. It 
angers me, it bothers me. I want to know that it bothers you. I 
want to know that it bothers all of your agents.
    I understand as somebody who worked for the Federal 
Government, sometimes you are afraid to speak out, but I want 
to know that you are vexed by it. I want to know that you are 
bothered by it. I want to know that it gets you down. I want to 
know when you go home and talk to your husbands and your wives 
you say I don't know what is going on here, because it bothers 
me. Because you ought to speak out, Mr. Director. You ought to 
speak out or you ought to step out. You can't be part of a 
process then allow these activities to take place.
    Tell me, how do these things take place? Do you submit 
something to the President or the Chief of Staff telling him 
that drug dealers are coming in? Do you submit and tell him 
that people that are on the Interpol list are coming in? Do you 
tell him that this guy, Wang, who is trying to sell assault 
weapons, who is connected to the Chinese Government is coming 
into the White House? Tell me, do you submit anything, do you 
tell him anything, and whether you tell him or not, I want to 
know, does it bother you? Does it make you kind of upset, or is 
it just kind of a job and that is what the job is and it is 
over? Would you answer that question for me? Does it bother 
you?
    Mr. Bowron. Well, I am going to address my professional 
response----
    Mr. Wolf. But I want to know that it bothers you, because 
it bothers me that it doesn't bother you, if it doesn't bother 
you, and frankly, when we get to a situation, and with the 
respect that I have for the Secret Service, with the 
outstanding job your people have done, and I know many of your 
people, many of your people go to my church, many of your 
people live in my area, I know a large number of your people. 
It bothers them. When I talk to them privately, they tell me it 
bothers them. I want to know, does it bothers you?
    Mr. Bowron. Well, I am not here talking privately, I am 
here talking publicly.
    Mr. Wolf. But this is a public hearing.
    Mr. Bowron. That's right, and I am going to address this 
from the standpoint of my professional, public responsibilities 
as the Director of the Secret Service. I am not going to talk 
about what I talk to my wife about when I go home, or what my 
personal feelings are about a wide range of issues that may or 
may not bother me. But I am the Director of the Secret Service 
and I am here to answer questions about the Secret Service, our 
mission, and our responsibilities.
    Mr. Wolf. But how could these four people have gotten into 
the White House?
    Mr. Bowron. Those four people got into the White House 
because they did not pose a physical threat to the President of 
the United States or the White House Complex by being there.
    Mr. Wolf. Did you tell the Chief of Staff that people like 
this were coming in?
    Mr. Bowron. The Chief of Staff gave us the information on 
who was coming--well, not the Chief of Staff, but the 
administration. We don't provide them with criminal history or 
background information on the names of individuals that they 
provide to us.
    Mr. Wolf. Did you know the man's name was on the Interpol 
list before he came? Yes or no.
    Mr. Bowron. The answer right now is I don't recall whether 
we knew that in advance or not. I don't believe that when we 
ran a name check on that individual on the data bases that we 
utilize, that an Interpol record was reflected in the 
summarized history we received.
    Mr. Wolf. Did you know that Mr. Wynn had been convicted? 
Did you tell them that Mr. Wynn had been convicted.
    Mr. Bowron. No, I would say we did not. We did not tell 
anyone that Mr. Wynn had a criminal history. I don't believe 
that we provided that information to anyone.

                           WHITE HOUSE ACCESS

    Mr. Wolf. Did you tell him when Mr. Wang was coming in that 
he was with the Poly Corporation, which was the very group that 
we had a sting operation on with the Department of Commerce?
    Mr. Bowron. My guess is, first of all, we probably didn't 
have that information about the sting operation or the 
corporation that this individual was involved with. If there 
was criminal history, we would have had it and we would have 
used it to make our judgment about whether or not they posed a 
physical threat to our protectees.
    Mr. Wolf. Well, I am going to move on to the next--I am 
going to tell you, I think it is a disgrace. I think it is a 
disgrace, and I think your people think it is a disgrace, 
because the Secret Service agents that I talk to tell me that 
they think that the fact that drug dealers were coming into the 
United States White House when people have to line up outside 
is terrible, and they think that the Poly Corporation guy to 
come in is terrible. And I would say it if it was Bush or 
Reagan or Nixon or Dole or whoever the case may be.
    My next comment, I am going to move on to the next subject, 
I think you ought to speak out on this issue, because it goes 
to the integrity of the Secret Service, the integrity of the 
process.
    Mr. Bowron. Can I speak out on that now?
    Mr. Wolf. You certainly may.
    Mr. Bowron. Let me just say that the integrity of the 
Secret Service rests on the performance of our mission to 
protect the President, the Vice President, their families and 
the White House Complex. That protection is physical 
protection, physical protection to make sure that harm does not 
come to them. I don't think that anybody intends in our 
statutory authority for the Secret Service to be the people to 
make suitability judgments about who has access to our elected 
officials.
    Mr. Wolf. That is true, but they have an obligation to say 
to the White House Chief of Staff we have a man coming in here 
who the President should not be around. We have a man connected 
to the Poly Corporation selling assault weapons to street gangs 
in California that we don't think the President should be 
around. You should not tell the President who he or she should 
have coming in, but you should certainly have a piece of paper 
going in to say, Mr. President, it is inappropriate that 
somebody convicted of drugs should come into the White House. 
There should be a paper file from the Secret Service on every 
one of these people coming in.
    You don't have the right to tell the President who he 
should have, but you have an obligation and you have a duty to 
tell the President that people of this type of records are 
coming in.
    The last question, I am running out of time, Agents 
Libonati and Undercoffer. Are they under investigation?

                SPECIAL AGENTS LIBONATI AND UNDERCOFFER

    Mr. Bowron. I talked to Agent Libonati. I know from his 
conversation with me that he received a letter from the 
Inspector General's office that has advised him that he is not 
at this time under investigation.
    Mr. Wolf. So the whole investigation is dropped.
    Mr. Bowron. I don't know whether the whole investigation is 
dropped, but I know----
    Mr. Wolf. What would they be investigating if not him and 
Undercoffer? What would they be investigating?
    Mr. Bowron. Well, I really can't speak to what they may be 
investigating----
    Mr. Wolf. They are your people.
    Mr. Bowron. But I don't know what the Inspector General is 
investigating. They are not, to my understanding, investigating 
Agents Libonati and Undercoffer. Whether they are going forward 
with any aspect of that investigation at this point, I have not 
been contacted with respect to any requests for documents, 
interviews or access. So I don't know what the status of the 
Inspector General's investigation is, other than those agents 
have been told they are not under investigation.
    Mr. Wolf. Do you think the committee should pay for their 
legal fees of $16,000?
    Mr. Bowron. I think they should not have to pay for their 
legal fees, because I don't think they were appropriately 
investigated, and as a result, should not have had to seek 
legal counsel.
    Mr. Wolf. I don't either, and I think this committee 
should, because $16,000 for somebody who may have a couple of 
kids they are trying to educate or whatever is a lot of money, 
so I would hope that you would give us a formal request on 
behalf of the Secret Service asking this committee to pay for 
these fees, because what happened there is the chill that that 
sends to all the people who may get involved in all of the same 
type of thing, people who may want to come forward and speak 
out on an issue will now say I can't put my career up. I have a 
son or daughter in college or this or that. It is a chill, and 
we would ask you, as the leader of the Secret Service, the 
people that these men look to for leadership to speak out and 
let this committee know, one, you request that they pay for the 
fee, but also say something publicly so there is no longer a 
chill out there whereby your men and women feel free that they 
can speak out and do their roles and not have that.
    I thank you, the committee. I feel so strongly, I cannot 
tell you how strongly I feel about these issues, and some day I 
would urge and ask you to come up to my office privately where 
nobody is around so we can talk about these issues. I yield 
back the balance of my time, Mr. Chairman.
    Mr. Kolbe. I thank the gentleman for his questions and 
appreciate the depth of his feeling.
    My next questions come from the testimony this morning from 
Inspector General Valerie Lau with regard to that 
investigation. Under Secretary Kelly, did you ever have a 
conversation with Ms. Lau in response to the letters she had 
received from Senator Stevens and Representative Collins when 
she initiated--``investigate''apparently isn't the right 
word,--about the inquiry to respond to that correspondence. Did 
you have any conversation with her at any time regarding that 
matter?
    Mr. Kelly. Regarding that specific matter? No, sir, not to 
my recollection.
    Mr. Kolbe. Did you ever have any conversation with her in 
which the names of Agents Libonati and Undercoffer came up as 
being under investigation?
    Mr. Kelly. No, sir.
    Mr. Kolbe. No conversation.
    Mr. Kelly. No conversation with her concerning those 
individuals. I had conversation with access in general to----
    Mr. Kolbe. Okay, well, that was my first question. Did you 
have a conversation regarding the access issue and that whole--
--
    Mr. Kelly. The access issue.
    Mr. Kolbe. My first question was in response to the letters 
that she got from Senator Stevens and Representative Collins, 
which did not name any names. She initiated an inquiry, or 
investigation, or whatever it is, with regard to the access 
issue. You did have a conversation with her about that?
    Mr. Kelly. Yes, sir.
    Mr. Kolbe. At no time in that conversation did the names of 
Agents Libonati and Undercoffer come up.
    Mr. Kelly. No, sir. The discussion was about access to 
conduct a--the investigation and access to how the process 
would run as far as access to the Secret Service and White 
House Complex.

                special agents libonati and undercoffer

    Mr. Kolbe. At any time did she inform you that Agents 
Libonati and Undercoffer were under investigation, either civil 
or criminal investigation?
    Mr. Kelly. No, sir.
    Mr. Kolbe. What is your recollection of the conversation 
you had with her then as to what this conversation was about, 
to the extent that you can tell me.
    Mr. Kelly. The conversation, again, was about how to access 
personnel and records in the Secret Service. I guess implicitly 
it was about these two agents. The name never came up. It was, 
again, the issue of how information would be obtained from the 
Secret Service.
    Mr. Kolbe. You were then not at the October 21st meeting 
where the issue, where this issue was brought up about this 
investigation, Monday, October 21st.
    Mr. Kelly. No, sir.
    Mr. Kolbe. Do you recall that meeting?
    Mr. Kelly. No, sir. I was not at that meeting.
    Mr. Kolbe. I am referring to the letter from the Executive 
Assistant to the Internal Affairs of Secret Service, if you 
would like to refer to this.
    Mr. Kelly. I was not there, sir.
    Mr. Kolbe. You were not there. Mr. Bowron, were you at that 
meeting?
    Mr. Bowron. No, sir.
    Mr. Kolbe. Have you at any time, Mr. Bowron, reviewed with 
your staff whether or not this--the contents of this letter?
    Mr. Bowron. Yes.
    Mr. Kolbe. Do you believe it to be an accurate statement of 
the facts?
    Mr. Bowron. I believe it to be an accurate statement of the 
facts.
    Mr. Kolbe. Accurate.
    Mr. Bowron. Yes.
    Mr. Kolbe. Let me quote one sentence. At this meeting, and 
this meeting we are talking about is with Inspector General 
Lau, who requested a meeting with Secret Service officials to 
discuss the pending investigation. The Assistant Director for 
Inspection attended, Mr. Holmes, and Chief Counsel John 
Kelleher attended on behalf of the Secret Service. We have 
Chief Counsel Kelleher with us today.
    Mr. Bowron. Yes.
    Mr. Kolbe. I might ask him this question. At this meeting, 
the Secret Service was again advised there was an active 
investigation of Special Agents Libonati and Undercoffer and 
that this matter was potentially a criminal investigation.
    Mr. Kelleher did not write this letter, but I presume Mr. 
Pickle must have spoken to him before he drafted this letter, 
[and] I would like to ask Mr. Kelleher if that is an accurate 
statement.
    Mr. Kelleher. Yes, sir, it is an accurate statement.
    Mr. Kolbe. We have a very interesting problem on our hands 
then. We were told this morning he was either incorrect or he 
misrepresented the statement.
    Mr. Bowron. Mr. Chairman, you may have this or you may not 
be aware of it, but I would read to you from a statement that 
was provided by Senator Grassley on this same subject matter, 
the quote here is, quoting from his statement----
    Mr. Kolbe. I am aware of this letter.
    Mr. Bowron. You are.
    Mr. Kolbe. But go ahead.
    Mr. Bowron. Whereupon my staff called Ms. Vassar in the 
presence of the chief investigator for the Senate Judiciary 
Committee as to ascertain the facts. During that telephone 
call, Ms. Vassar explained to my staff that the two Secret 
Service agents by name were being investigated at the request 
of Senator Stevens and Congresswoman Collins. The committee 
investigator prompted my staff to ask if the investigation were 
criminal. The answer my staff received from Ms. Vassar is it is 
potentially criminal. My staff simultaneously wrote down the 
word potentially on a note pad for the committee investigator 
to communicate Ms. Vassar's response.
    My staff then asked Ms. Vassar to explain which specific 
words in Senator Stevens June 18th letter to the IG allowed the 
IG to interpret this as his request to investigate the two 
agents. Ms. Vassar responded by reading Senator Stevens' letter 
verbatim.
    The question was repeated twice more by my staff, and the 
letter was read verbatim twice more by Ms. Vassar. It was clear 
at that point that the IG's office was unable to justify its 
contention that Senator Stevens indeed requested the 
investigations of Agents Libonati and Undercoffer.
    Subsequently, my staff reported to me that the committee 
investigator was told by a Treasury legislative affairsofficial 
that the investigation of the two agents was potentially criminal. The 
staff then called the Secret Service officials who corroborated that 
there was potentially--a potentially criminal investigation according 
to the IG and that it had been requested by Senator Stevens and 
Congresswoman Collins.
    Now, this communication with Senator Grassley's office was 
completely independent of any communication with the Secret 
Service.

                special agents libonati and undercoffer

    Mr. Kolbe. That is correct, and it is just simply a second 
corroboration of this.
    Well, we may need to have another hearing with some people 
under oath on this matter.
    But Mr. Wolf is absolutely correct. It doesn't matter at 
this point what we do. It doesn't matter what we do to correct 
the problem. It doesn't matter what they do in terms of sending 
letters to these agents telling them they are not the subject 
of an investigation. Whoever has been involved in this has had 
the desired effect, which is to have a chilling effect on 
anybody in a Federal agency who comes before this committee or 
any other committee and testifies on a process. All they were 
being asked to do was testify about the process--and then they 
were made the subject of an investigation. The result is 
several thousand dollars in potential legal fees.
    I would like--go ahead and comment if you want. I have one 
other question.
    Mr. Bowron. Well, I would just say that the legal fees are 
certainly important, and that they shouldn't suffer a loss in 
my opinion. I would look for some way for them to not sustain 
those costs, because it certainly was something that these 
agents didn't deserve based on what they did, and it has had a 
real impact on their morale and how they feel.
    Mr. Kolbe. One other question, sir. Under the normal 
process, if a member of the Secret Service, of your staff, one 
of your agents, testifies before a committee on anything like 
this, in a process or anything like this, would you normally 
review or--you or would somebody else in Treasury review their 
testimony beforehand?
    Mr. Bowron. Normally, if there is prepared testimony, it 
would be reviewed within the Secret Service; it would be 
reviewed by Treasury; and it would be reviewed, in many cases, 
by----
    Mr. Kolbe. Do you know if that took place in this case?
    Mr. Bowron. The normal reviewing process did not take place 
in this instance for a couple of different reasons. One was it 
wasn't so much testimony as it was them coming up to answer 
questions, and secondly----
    Mr. Kolbe. That is correct. My understanding is it was 
informal remarks that were made in the opening testimony. But 
they did write them out.
    Mr. Bowron. Secondly, I think with all the right intentions 
the Department of Treasury and the administration did not want 
to be in a position of reviewing or impacting testimony on this 
particular subject matter. We were dealing directly with the 
Congressional Committees and not putting the questions or the 
answers through the Treasury Department on this particular 
subject and that was everybody's understanding. It wasn't 
anything under the table.
    Mr. Kolbe. No, okay. So they did not submit the testimony. 
They gave it on their own in good faith and understanding they 
were giving the process. And, subsequently, we have two 
separate, independent events that corroborate this, the 
Inspector General tells these agents or through other people 
tells these people that they are under criminal investigation. 
I find that extraordinarily disturbing.

                           white house access

    I have some more questions on some other topics.
    Mr. Hoyer.
    Mr. Hoyer. Thank you.
    Mr. Bowron, do you know of anybody who screens visitors to 
the Speaker's office?
    Mr. Bowron. Who screens visitors to the Speaker's office? 
No, sir, I am not aware of anybody doing that.
    Mr. Hoyer. I am not aware of it either. I am aware of the 
fact that there was a court case, Sherill vs. Knight, 1977, 
which the Secret Service lost when it tried to screen somebody 
for reasons other than safety to the person or the property of 
the White House. Am I correct on that?
    Mr. Bowron. Yes.
    Mr. Hoyer. And can you tell us a little bit about that 
case?
    Mr. Bowron. Well, it was a case where we had denied access 
to someone based on a criminal record. The debate that ensued 
in that particular court case really centered on the Secret 
Service having to have an identifiable and clear threshold with 
respect to who they would allow or not allow into the White 
House complex.
    We took the position that that threshold was someone's 
dangerousness. With respect to what information we are able to 
share with respect to someone's criminal history, that is 
governed by Federal regulations. We only have access to 
criminal histories by virtue of being a law enforcement agency, 
and can only use that information for law enforcement purposes.
    Mr. Hoyer. Let me ask you a question on that.
    There has been a great controversy about White House 
staffers getting criminal records or FBI records of personnel 
who may or may not have worked at the White House at any given 
time. In the event we have pursued the notice that Mr. Wolf 
suggests, how easy would it be for a White House person to 
invite somebody to the White House, whether they accepted or 
not or had a potential invitation and then request a background 
check on that and advise as to whether that individual ought to 
be allowed in the White House. If we pursued a standard less 
than protection, as I understand what you are saying, then the 
record would be made available to the staffer, chief of staff 
or deputy chief of staff, who was in charge of the invitation 
list. Now, you do not do that, do you?
    Mr. Bowron. No.
    Mr. Hoyer. You do not provide that.
    Mr. Bowron. No, we do not.
    Mr. Hoyer. That is a record that is provided to you, as you 
just said, as a law enforcement agency.
    You then make a judgment based on the criteria of the 
Sherill case.
    Mr. Bowron. That case as well as our experience as to what 
type of activity should alert us as to someone being a physical 
threat.
    Mr. Hoyer. Let me make it clear. I don't want anybody in 
the audience or my good friend, who does feel very strongly 
about this issue to be in any way confused about my position. I 
think these individuals should not have been invited to the 
White House. Having said that, I think the Secret Service ought not to 
be in a position to second-guess the White House or anybody in any 
White House in invitations, except for the limited criteria of your 
responsibility, which is safety of the person and of the White House 
itself.
    I wanted to follow up on Congressman Wolf, because I know 
he feels strongly and we have a somewhat different perspective 
on the issue. And we have had this discussion before in terms 
of what criteria should be applied.
    With respect to the agents involved, I would agree with my 
colleagues. To the extent that they were acting properly within 
the framework of their duties and responsibilities, not just 
formal testimony but acting within the realm of their 
responsibilities, we ought not to allow our people, whether 
they be Secret Service or any other government official, to be 
exposed to legal expenses as a result of the performance of 
their duties or related to the performance of their duties.
    Mr. Chairman--I know Mr. Wolf and I have felt strongly 
about that in other cases, and I agree with him on this case, 
and perhaps we will pursue that.
    Mr. Kolbe. I am sure we will want to pursue that.
    Mr. Hoyer. I don't know what the time frame is, Mr. 
Chairman. Do you want to go a third round?
    Mr. Kolbe. Fine, let's do that. Mr. Wolf.

                           white house access

    Mr. Wolf. Yeah, I will just make a comment. I don't know if 
I have a question.
    I will offer, if it is not done, the amendment, as I did 
for the White House Travel Office, to make sure that your 
agents are reimbursed.
    Secondly, Mr. Hoyer and I are good friends and maybe we see 
things differently, but I don't know that we completely do. You 
have the NCIC checks. It would be good for the President, 
whoever he or she would be, that they be told that you got a 
guy coming in who has been connected with organized crime. That 
would be a good thing, and they would want to know.
    It would be a good thing to tell them you have got a guy 
coming in who is with the Poly Corporation who is connected 
heavily with the leaders--some of the prominent leaders of the 
Chinese government who sold assault weapons, who sold equipment 
to Saddam Hussein that was used against American servicemen, a 
government that is persecuting Christians, Catholic bishops and 
priests in jail, Protestant pastors in jail. There are more 
gulags than were ever in the Soviet Union. They plundered 
Tibet.
    I think the President would want to know that this guy, who 
was connected to the people that were doing these things--I 
think that under the Nixon administration or the Carter 
administration, if somebody had been connected with Gorbachev 
or Khrushchev or Stalin, who had slaughtered 30 million people, 
I think they would have wanted to know.
    And I believe--I could be wrong, and I am not perfect. 
Believe me, my feet are made of clay. When I take any socks 
off, it is all clay. I may be wrong, but I believe in those 
administrations. They would have said, Mr. President, this guy 
is connected with Stalin; and this guy is persecuting those of 
the Jewish faith and those of the Christian faith; and they are 
selling weapons to this country. I think that would have been a 
good thing to tell.
    Even if it is not down there, I am going to try to offer 
some amendment, something at least saying you should never tell 
the President who he or she should have, but you should file a 
report whereby they should have the knowledge that you have, 
the Secret Service, and you represent what is literally one of 
the finest agencies in the country. I mean, as I was growing up 
as a kid, I used to watch the shows, the Secret Service shows 
and the FBI--my dad was a policeman. You know that. I want the 
law enforcement people to be well-respected, and I think that 
would be a good friend.
    So I am--whether I am ruled out of order, tackle me on the 
Floor, whatever, I am going to offer something to say that you 
have an obligation so that no Secret Service director can dodge 
it, that you should have an obligation to send in whatever data 
you may have. We are not asking you to call the FBI and run 
background checks. But the NCIC, we run background checks with 
regard to people with criminal records on whether they can buy 
a weapon. That ought to be given.
    When I look at these things--I mean, when I ride by the 
White House, I still feel the sense--the first time I came to 
Washington, I remember I got to go in the White House. It was a 
special place. It was a kind of place that, you know, I wanted 
my kids to see. It was a special place. It still is. But I will 
tell you, it has been tarnished in my eyes.
    So we think--I think, and I know Mr. Hoyer and I are good 
friends and we may disagree, the Secret Service ought to be 
giving whatever data it may have to the President of the United 
States or the Chief of Staff so that they then can--and then if 
they decide to have the Poly Corporation in or a guy out on 
bail or a drug dealer for a picture at the Christmas tree, you 
guys, you men and women, have done your job. You can go home. 
You can be proud.
    You can't tell them what to do. But I tell you, he has to 
know or she has to know. Because, if we don't, we are going to 
destroy this.
    And I will tell you--the last comment. It is not a 
question, because I don't want to put you on the spot and I 
don't want to browbeat. I don't think I should have any right 
to do that. I think this is beginning to have an impact on the 
credibility of the government, and I think it is beginning to 
make people feel not very, very good about the Government.
    And I think whether it is a Republican administration or 
Democratic administration--let me tell you, the Nixon 
administration did terrible, terrible, terrible things; and 
what happened to President Nixon should have happened to him. 
But these things make people lose faith. And when that happens 
you can't tell the kids to come to Washington for the school 
trip, you can't tell them as they pass the White House to have 
that thrill, and they will think this town is turning into a 
town that is fundamentally--they will believe--they will begin 
to believe that this town is fundamentally corrupt. And if 
people like that can get in the White House when all the people 
who line up for hours and hours and hours and hours and hours 
have to wait to get in, we are going to really lose the 
American people.
    I have no comment, but I would appreciate a letter in 
support. I would like to put the letter from Mr. Davis with 
regard to the two agents in, and I would appreciate a letter 
from the Secret Service in support of the amendment.
    [Clerk's note.--No amendment has yet been introduced.]

                           white house access

    Mr. Kolbe. We did put this in the record, this form.
    Mr. Wolf. I have no further questions.
    Mr. Kolbe. Did either of you have any response or comment. 
It is not necessary.
    Mr. Bowron. I would only say that the Secret Service, from 
an operational standpoint, is not opposed to providing 
information to the administration or anyone else, provided that 
we are legally within the framework of the regulations that 
allow us to provide that information.
    Mr. Wolf. Do you think that would be a good idea?
    Mr. Bowron. That is an easy way for us to convey that 
information to the administration, whatever administration may 
be in there, keeping in mind that you are providing them with 
criminal background histories. Then you have to decide whether 
or not it is going to be with respect to ongoing 
investigations, and a lot of the kinds of information you made 
reference to, you are not going to get out of NCIC. It is only 
going out of background investigation.
    Mr. Wolf. Well, Mr. Director, I would like to work with you 
then to craft language, because you have forgotten more about 
this than I will ever know. I would like to craft legislation 
which I will offer here that deals with that in a responsible 
way that protects the Secret Service, but also protects the 
President of the United States from these things. I believe, 
quite frankly, now, they may very well have wished that this 
had been in place. I don't know. So if you can have your 
General Counsel come by, I would like to craft some legislation 
that would do that.
    Mr. Bowron. Yes, sir.
    Mr. Kolbe. If I might, starting this last round here, just 
one question that I hope ties together the comments of Mr. Wolf 
with the comments that Mr. Hoyer made about the Sherill case. 
Mr. Wolf has been focusing on the fact that he thinks you 
should be providing this information. Mr. Hoyer has been 
focusing on the fact that you cannot, under that decision, 
exclude somebody for these kinds of reasons from the White 
House.
    It would be possible, however, for the Administration, for 
somebody in the White House, the Chief of Staff, or through a 
policy, to say, as part of a background check, we want you to 
include any prior conviction or something that may show up.
    Mr. Hoyer. Would the Chairman yield before----
    Mr. Kolbe. Yes.
    Mr. Hoyer. You recall last year we had discussions as it 
related to the White House list--and how much information they 
were going to get. My point that I was trying to make is you 
could indirectly do exactly what we were so concerned about by 
simply saying you were going to invite X to the White House, 
and the NCIC would not be a very complete list, so you wouldn't 
get the information which Frank is legitimately concerned 
about. So what I was suggesting is it is a difficult question 
for us to resolve, a policy matter, and I think the Secret 
Service will carry out whatever policy we want.
    Mr. Kolbe. Right.
    Mr. Hoyer. But the way we said it then was, an employee 
would have to sign a release indicating that. I want to be an 
employee and I understand under those conditions, as you do 
when you make application for employment with the CIA, FBI, 
Secret Service, whatever, they are going to do a full 
background investigation. You may well have invites do a 
similar release. In other words, somebody calls me up and says, 
Steny, I want you to come down to the White House when the 
Danish Ambassador and the Queen are coming. Does Steny Hoyer 
have a criminal investigation done on him that is then 
available to, perhaps, Donald Reagan who may have been Chief of 
Staff then? We have been through this in the prior Filegate 
investigation. This is a spin-off or similar case to that.
    It is a very difficult proposition. Frank's concern, I 
think, is legitimate. The solution to it is so difficult than I 
cannot come up with an answer off the top of my head. 
Legitimately we want to make sure that Americans have the right 
to privacy. Leon Panetta or anyone else who wants me to come 
down to the White House, or if I want to come down to the White 
House, they should not call up and ask Eljay Bowron to do a 
criminal investigation on me and give it to Mr. Panetta.
    Mr. Wolf. If the gentleman would yield----
    Mr. Kolbe. I am still waiting for the answer to my 
question.

                           white house access

    Mr. Wolf. You could return a Lexus-Nexus check. You would 
have found out about Wang, the guy from Miami, the drug dealer, 
and I think you would have found out about Winn. I am not 
asking that you go to the FBI and do a background. I think Mr. 
Hoyer raises some valid points, but I think there are some 
things that can be done and I just ask that you come on by and 
we can work on this.
    Mr. Hoyer. Excuse me, Mr. Chairman----
    Mr. Kolbe. That is all right. Back to my question, can you 
provide the information, if you have it available, to us, 
requested by the House.
    Mr. Bowron. No. Mr. Chairman, I think we are talking about 
three different things. If I understand Congressman Wolf, I 
think I understand what the Congressman would like us to do, 
which right now regulations preclude us from doing NCIC 
criminal history investigations that we get as a result of a 
name check, can't be used for anything other than law 
enforcement purposes, and only shared with law enforcement 
entities. So that part of it is who has access to that 
information.
    The answer to that is law enforcement organizations for law 
enforcement purposes. Now, if you want an entity, whether it is 
the administration or whatever, if you want an entity outside 
of law enforcement to have that information, what you are 
really talking about for practical purposes is allowing that 
entity to be able to run their own NCIC checks. If you want 
them to be able to do that, they can run the checks for 
themselves. They have access to that information.
    Mr. Kolbe. So your understanding is the law now reads, if 
Mr. Bowles, the Chief of Staff says: ``We have got this person 
coming in, I am a little dubious about it. Can you tell me 
anything about it.'' You are not able to give him anything 
other than to say he is cleared from the standpoint of not 
being a physical danger to the White House. You cannot tell him 
about a criminal history.
    Mr. Bowron. Yes, and I am only smiling because, Mr. 
Chairman, I am sitting here saying that is the procedure and 
the policy, but I wouldn't suggest that a Secret Service agent 
who was asked a question, has never said something along the 
lines of, you know, you might want to take another look at this and try 
and get a bit more information.
    Mr. Wolf. I understand that has been done.
    Mr. Bowron. Well, I am not going to sit here and say that 
has never been done, but in terms of us providing that 
information, we would be outside the boundaries of the 
regulations that guide and govern our ability to have access to 
that information, and that is what we are abiding by.
    Mr. Kolbe. I have some other areas of questions which we 
have provided you earlier and I think we will just do all those 
by submitting them for the record.
    Mr. Bowron. I just wanted to follow up because the other 
part of your question on this subject deals with the difference 
between providing information from criminal history summaries, 
and whether we make a determination as to whether or not that 
person should be allowed into the White House Complex. As I 
understand Congressman Wolf, you are not suggesting that we 
should do that. You are just suggesting that we should provide 
that information.
    Mr. Wolf. Right. I don't think you should have the right to 
tell the President who should come in. I think you should be 
obligated to tell him what is available.
    Mr. Bowron. And that is a decision to be made by Congress; 
in terms of how that information is handled and who should have 
that information.
    Mr. Kolbe. Well, we certainly thank you for this testimony 
and for your assistance here today. I am sorry, yes.

                           white house access

    Mr. Hoyer. I would like to make an observation and then, if 
I might ask you a couple of sort of dull, esoteric questions 
after that. I do not believe you or anybody in the Secret 
Service needs to have any reticence when asked by Mr. Bowles or 
any other Chief of Staff or any other White House person, 
whether, based upon the information you have, would you invite 
this person to the White House. I don't think there is anything 
illegal or unethical about your responding honestly to that 
question. So A, I would be shocked if it hadn't happened, and 
B, I don't see anything wrong with it.
    You do not share the information on which you base your 
judgment because you have that information in a specific 
authorization and not to be related to others. This is 
understandable, but I don't think that in any way constrains 
your ability to pass along your opinion. So when Congressman 
Wolf asks and you answer, A, I think that is absolutely true 
and, B, I see nothing wrong with it, from a legal standpoint. I 
haven't researched this and it is just off the top of my head. 
Counsel is being very stone-faced.
    Mr. Bowron. He does a lot of that.

                      closing pennsylvania avenue

    Mr. Hoyer. Pennsylvania Avenue, talking about access.
    Mr. Bowron. Yes, sir.
    Mr. Hoyer. What is the status?
    Mr. Bowron. It is closed. Well, the status is----
    Mr. Hoyer. What does tomorrow look like?
    Mr. Bowron. We have temporary measures in place. More 
permanent measures cannot be completed until there is a funding 
mechanism for the Department of Interior and the National Park 
Service to follow through with plans for the development of a 
permanent national park that would be in that location.
    There are also some studies that are underway with respect 
to environmental issues and those have to be completed before 
they can go forward. As far as the Secret Service goes our 
plans are in place, the funding is in place, the things that we 
can do prior to the rest of the project moving forward, we are 
moving forward on now. And if part of your question was related 
to our view, our view is that closing Pennsylvania Avenue was a 
very important step to take. It remains absolutely necessary 
and there is increasing evidence everyday that it is necessary.

                         rowley training center

    Mr. Hoyer. Okay. That is what I wanted to find out. Last 
question, the most critical question that will be asked at this 
hearing. Tell me about how the two buildings are doing in 
Beltsville, wherever Beltsville is, I don't know.
    Mr. Bowron. We are underway with the administration 
building with a projected completion date of, I think, 
approximately a year from this summer. Next fall it should be 
completed. We are doing the----
    Mr. Hoyer. Next fall, fall 1998.
    Mr. Basham. 1998, Yes.
    Mr. Bowron. We are going through the preliminary steps of 
reviewing plans for the classroom building, and that is 
probably a year and a half out for completion.
    Mr. Basham. Right now we are in the process of doing the 
architectural and engineering work on the classroom building. 
We should have a contract in place for that by the summer, and 
construction will begin, probably, the summer of 1998.
    Mr. Hoyer. Mr. Chairman, I think you are scheduled to visit 
the Beltsville facility.
    Mr. Kolbe. Yes, well, we haven't set----
    Mr. Hoyer. I don't know whether Mr. Wolf has been out there 
or not, but I hope that you would invite the other committee 
members to visit. It is a very impressive facility and it is 
utilized by more than just the Secret Service, because it is in 
the Washington Metropolitan area, for relatively quick updates 
and quick training and proximate training. It is an outstanding 
facility and I am glad you are going to visit.
    Mr. Kolbe. Very impressive facility with very impressive 
congressional representation, but I would add that the 
buildings, you probably know that we are talking about really 
replacing existing space that is devoted to that same activity 
right now. We are losing a building in Washington, D.C. that 
provides us with that classroom space now. It is a forced move 
out, and we are just replacing that space, and in the long 
haul, well, not all that long, the lease saving space for this 
building. So it is a cost-effective way to save that space.
    Mr. Hoyer. Mr. Chairman, the question has been raised, is 
the classroom building authorized? Do we need to get that 
authorized?
    Mr. Basham. Yes, we do.
    Mr. Hoyer. We do need to get it authorized?
    Mr. Bowron. Yes.
    Mr. Kolbe. Further questions.
    Mr. Hoyer. No, thank you, Mr. Chairman. Thank you, Mr. 
Secretary and Mr. Director.
    Mr. Kolbe. Thank you very much for the testimony. I would 
invite Members who are here, we have a lot of Secret Service 
equipment that is here and if anybody would like to browse 
through that, I am sure they would like to show it to us. Thank 
you very much.
    [Questions for the record and selected budget justification 
materials follow:]

[Pages 900 - 998--The official Committee record contains additional material here.]

                                          Wednesday, March 5, 1997.

                OFFICE OF THE SECRETARY OF THE TREASURY

                                WITNESS

LAWRENCE H. SUMMERS, DEPUTY SECRETARY OF THE TREASURY

                  Opening Comments from Chairman Kolbe

    Mr. Kolbe. This meeting of the Subcommittee on Treasury, 
Postal Service, and General Government will come to order.
    The ranking member, Mr. Hoyer, is still in the Democratic 
Caucus and will be slightly delayed, but has asked us to go 
ahead because we are on a very tight timetable. We have only 55 
minutes, now, with the Secretary, and followed by the 
Commissioner.
    So we will begin and go ahead. First of all, I want to 
thank Secretary Summers for joining us after a rigorous and 
arduous trip to Japan and Hong Kong.
    It seems like it was just yesterday, we were talking in my 
office, and now you have been over there. I know what that is 
like, having done that three times since November, to cross the 
Pacific, and it is very difficult, to say the least. So we will 
give you some forbearance for your jet lag here, this morning.
    I will just make a very brief opening statement here, and 
we will call on Mr. Hoyer, when he gets here, to make his 
opening remarks.
    But I read your statement, Mr. Secretary, and I find it a 
very candid one, a refreshingly candid one, one that we often 
do not see in Government, frankly, especially as it regards the 
issue. I think the primary issue that this Subcommittee has 
been concerned about with the Internal Revenue Service, that is 
the TSM program.
    I appreciate the effort which you and your staff have 
devoted to the oversight of this program, and you, last year, 
acknowledged--you were the very first, last year, to 
acknowledge that there was a problem.
    You were willing to bring on Mr. Gross. And now, we have of 
course the full-blown acknowledgment that the system has 
basically not succeeded, at all, and we are back to rethinking 
where we go with this.
    So I appreciate the kind of candor that you have brought to 
this issue. That is not easy to do, especially when we are 
talking about the kind of investment that we have made.
    So I want there to be no mistake, however, with you or with 
the Commissioner, or anybody that will be listening to this 
statement, that this Subcommittee does fully support the need 
for technology modernization of the IRS. I mean, we cannot have 
a tax collection system for this Federal Government and not 
have it more modernized than it is.
    I have had only one opportunity, so far, to go to the 
Regional Center at Philadelphia, and I can say it is 
astonishing to see what goes on there. It is a miracle that 
anything ever happens, that we get anything collected, that we 
match up any check with anybody's return.
    And it also illustrates the difficulty of this 
modernization plan that we are talking about, because of the 
extraordinary variety of forms and information that is coming 
in to the IRS.
    So I do not, for one moment, suggest that this is easy. I 
do not, for one moment, suggest that any of us would have a 
quick solution to this. I think that we absolutely need to have 
the modernization. I can tell you, flatly, that if this 
administration or this Department, and Internal Revenue Service 
brings to us a modernization plan that is going to work, that 
we can be convinced is going to work--and it is going to take 
extra convincing, now, having been through this, and having 
been burned once--but if you bring us a plan that is going to 
work, it will be funded by the Subcommittee. I guarantee that.
    So I think the question for this Subcommittee, as well as 
the Department and the commission, is how are we going to 
accomplish this task, and I think all of us want to work 
together in a cooperative fashion in that regard.
    As I said, I will ask Mr. Hoyer, when he begins his 
questioning, to make his opening statement.
    We will go right into your statement, Mr. Summers, and as 
always, we will put the full statement in the record and you 
are welcome to summarize it, if you wish.

                    Summary Statement of Mr. Summers

    Mr. Summers. Thank you very much, Mr. Chairman.
    Let me say at the outset that, if anything has been 
accomplished in terms of recognizing these problems in thelast 
year, that I want to commend this committee, your predecessor as 
Chairman, its Members on both sides of the aisle, and its staff, for 
recognizing this problem, and encouraging it to be dealt with in a 
forceful and vigorous fashion.
    I would like to report, first, on what has happened since 
last year, before this committee, I testified that there was a 
need for a sharp turn with respect to modernization efforts at 
the IRS.
    First, structural elements of this sharp turn. We 
established a Modernization Management Board to discipline 
investment decisions and procedures, and to force careful 
articulations of strategy before money was spent.
    Second, the IRS hired Art Gross as its chief information 
officer with responsibility for modernization, to bring an 
external perspective, and bring a fresh look at projects, and I 
think he has done an excellent job, so far.
    Second, we have established control over outlays. Twenty-
six projects have been cancelled, or collapsed. The total sum 
of money that would have been spent on those projects would 
have been between $1.5 billion and $2 billion.
    Those were painful decisions, but it was our judgment that 
it was imperative to look at this on a go-forward basis in 
light of the current situation. We are working to develope the 
architecture which is a prerequisite to large new capital 
investment programs, and expect to deliver that to the 
committee, as promised, in mid May.
    Third, we are committed to turn to the outside, recognizing 
that that is the best way to get a complex task of this kind 
done.
    The number of IRS internal staff involved in development 
and deployment of TSM has fallen by two-thirds over the last 
year. We have moved from 60 percent internal to 40 percent 
internal, 60 percent external, in terms of TSM outlays, and we 
are on track to develop an RFP for a prime contractor to take 
over TSM responsibilities by this summer.
    [Clerk's note.--The Department provided the following 
clarification: ``* * * a RFP for a prime contractor which may 
be used to take over TSM responsibilities by this summer.'']
    Mr. Summers. Fourth, we recognize the importance of taking 
steps to make our past investments pay off, and while there has 
been a lot of criticism of this program, in many cases 
warranted, I think it is worth noting that the fraction of 
telephone calls that have been answered so far, according to 
the recent statistics, is 72 percent, up from 52 percent last 
year.
    The electronic filing rates are up by 18 percent, and that 
we have already, in early March, received more Telefile returns 
in this filing season than we did in all of last year. These 
efforts to control the program will have to continue.
    [Clerk's note.--The Department provided the following 
clarification: ``These efforts to enhance the program will have 
to continue.'']
    Mr. Summers. There will be other problems. Part of working 
through a situation like this is getting control of what has 
taken place so far, and looking at everything on a go-forward 
basis.
    For the year ahead, our challenges are to establish the 
architecture, be in a position to define a workable vision for 
TSM that can absorb more substantial volumes of investment, to 
use the resources that this committee has given us for this 
year wisely, and only after outlays have been carefully 
disciplined.
    We also need to move forward with the development of an 
outsourcing strategy for submissions processing, as we have 
committed to do, and to focus on the development of an 
electronic filing strategy, since that is so important to the 
modern operation of our tax system.
    I have been promised that an electronic filing strategy 
will be presented to the management board in May, and I expect, 
after it is approved, or adjusted by that board, to be in a 
position to share it with Members of this committee.
    I should say, finally, that I welcome your recognition, and 
I think it is something that we all share, that the collection 
of taxes is a crucial, if not most pleasant, part of civilized 
society. That the application of modern technology is crucial, 
if we are to do that with the kind of service that we expect 
the IRS to provide its customers, and that these issues have to 
be looked at and worked on in tandem with our broader efforts 
to think through the future of the Nation's tax system. The 
system includes many elements, including tax simplification, an 
area that the President's budget has committed to make further 
proposals before long.
    Thank you very much.
    [The prepared statement of Deputy Secretary Summers 
follows:]

[Pages 1003 - 1008--The official Committee record contains additional material here.]

              tax systems modernization--``a sharp turn''

    Mr. Kolbe. Thank you very much, Mr. Secretary.
    Well, I think we will start with the questions here.
    Let me just begin with this one, since we talked about Tax 
Systems Modernization, TSM, just so we can get that on the 
record. TSM is Tax Systems Modernization. We will use TSM as 
its acronym here throughout the day, I am sure.
    You referred to it as being a sharp turn, that the last 
year you had outlined a sharp turn, and you said that it could 
not happen overnight. Certainly, that turned out to be true.
    But it occurs to me, really, that--I am not sure it is 
accurate to say we have taken a sharp turn in TSM. It is more 
like we have reached a dead end at this point.
    As you have pointed out, we have terminated a large number 
of projects. Projects which only last year the Service was 
embracing, have now been terminated. Spending on the projects, 
as you have said yourself, has virtually stopped.
    To date, IRS I think has spent only about $80 million on a 
program which the Department stated was going to cost $850 
million during the fiscal year.
    The program that you laid out in your report of May 6th 
does not exist any longer. So it seems to me that for all 
intents and purposes, TSM, at least as we have known it, is 
essentially dead. So my first question, and I guess the 
fundamental question, is what do we do now? I know we have not planned 
for an architectural plan, but at this point, we're 60 days away from 
having that. You must have some idea of what we are looking at.
    What are your plans for breathing life back into TSM?
    Mr. Summers. Mr. Chairman, at the risk of forcing the 
metaphor slightly, a car normally slows down as it moves into a 
sharp turn, and the sharper the turn the more the car has to 
slow down, and that is certainly what has happened this year as 
we have reduced very substantially the flow rate of investment, 
and have reduced our request for next year relative to what the 
administration has requested in the past, reflecting the need 
to get control of the program before we are in a position to go 
forward.
    The basic TSM vision--the application of information 
technology to the IRS's central database, so as to be in a 
position to serve taxpayers better and more promptly, while at 
the same time increasing compliance, has not been altered.
    What has been altered is the means by which we propose to 
do that. No longer will that be done by allowing the IRS to 
continue as its own systems integrator, designing the details 
of the program and working to achieve their integration.
    Instead, working with consultants, the IRS will monitor the 
performance of the prime contractor, who we hope to acquire, 
who will be tasked with developing the broader system to meet 
general specifications.
    This is in line with what I am told is the best thinking in 
Government procurement, which is that it is important for the 
Government to specify its objectives, and then leave to private 
ingenuity and competition the question of how those objectives 
will be achieved.
    So if by TSM one means a set of specific contracts, many of 
those contracts, as we both recognize, have been cancelled. But 
if by TSM what one means is a vision of harnessing information 
technology to better perform the kinds of service that people 
come to expect from other financial services organizations, 
that vision is still there and we expect to deliver on that 
vision, albeit using different techniques, different techniques 
of the kind we referred to in our May 6th report, and given the 
problems that have been encountered, not on the schedule that 
was originally set.
    Mr. Kolbe. Well, following up on that, this great metaphor, 
which I guess I started by talking about a dead end--if you 
come to a dead end, the car has to stop and maneuver to turn 
around. Is that what you are saying? We are at that point at 
this time, or we are in the turn?
    And I guess the other part of the metaphor is, are we 
changing cars in this turn? That is an important point.
    Mr. Summers. We could head into a metaphysical discussion 
of whether a dead end was a cul-de-sac or a dead end was a T 
junction that the vehicle arrived in.
    Again, I think the change is coming at several levels. We 
have given a new person from the outside responsibility. We 
have structurally provided for improved monitoring and 
discipline on projects. We are using a new and more appropriate 
technique, namely, allowing the private sector to do the 
systems integration work.
    We are actively exploring a still more fundamental change, 
which is giving a substantial part of the submissions 
processing work to the private sector.
    So I think these do represent quite substantial and 
important changes, but at the same time, I think it is 
important to recognize that the basic vision of what we are 
trying to achieve has not been altered.
    Mr. Kolbe. Would it be accurate to describe what we will 
see in May, with this new architectural plan, as a ``Son of 
TSM''?
    Mr. Summers. Oh, I think it is best to be careful in the 
application of these metaphors. I guess I would rather----
    Mr. Kolbe. Well, I am trying to get some feeling for how 
drastic a change we are talking about.
    Mr. Summers. I would call it a new direction for TSM, or 
actually, I mean, a new method of achieving the TSM vision. So 
it is a sharp turn in the way the program is being managed, 
both at the level of personality and oversight, and at the 
level of the techniques that are being used to develop the 
capacities.
    I suppose, in a sense, you could say we are taking a fast 
car rather than a--we are taking a bus, not a car, it is a 
different vehicle, for going in the same basic direction.

                            tsm architecture

    Mr. Kolbe. Well, we will get off the metaphor here, but I 
am not sure I understand. Mr. Gross has said, and I cannot 
paraphrase him, I think, exactly--but has said that he thought 
the Internal Revenue Service lacked the intellectual capacity--
I think I have got the words correctly, roughly correct--to do 
this.
    So who is it that is now doing the architectural plan? I 
mean, are we devising this, internally?
    Mr. Summers. The architectural plan is being developed in 
capacity, in conjunction with a number of outside contractors. 
I think Mr. Gross will be testifying before you in a little 
while, so I hesitate to speak for him. But my understanding was 
that he was recognizing that what is true of the IRS is true of 
many firms--that they do not have the intellectual capital to 
do systems integration work, to carry out the details of the 
execution of projects of this kind, and that is why it is 
important that they not be their own systems integrator and 
instead be prepared to turn outside, to get that systems 
integration capacity.
    This is not a kind of intellectual capital that the Service 
should be in the position to develop. What the Service needs is 
an adequate capacity to set specifications and to monitor the 
performance of contractors, not to seek to do it itself.
    I think Mr. Gross is building a staff that will have that 
capacity. We have advertised nationwide about how this is one 
of the great challenges in the information technology field, 
and I gather we have hundreds of applicants, and that Mr. Gross 
has already brought in a number of people to his management 
team.
    But the key really is that we are not going to try to do 
this in-house. We are going to be turning to the outside to do 
it, but we have to get control over the projects that are 
underway.
    We will have to get a clear vision of where we want to go, 
and that is what we are doing now, before we are in a position 
to turn to the outside.
    Mr. Kolbe. Okay. I understand that the pieces of this will 
be done using outside, but also, it seems to me that you need 
somebody from outside to help you look at this thing if you are 
going to design the overall concept, the conceptual part, as we 
call it, the architecture.
    Mr. Summers. Mr. Chairman, let me speak to that, briefly.
    Mr. Kolbe. Sure.

                            irs contracting

    Mr. Summers. Briefly, if I could, but in slightly general 
terms, and I know Mr. Gross, Commissioner Richardson, and 
others, will be able to speak in more granular detail.
    I share, exactly, that view. There are two contracting 
processes that are underway. One is the process that I referred 
to earlier which is the effort to develop an RFP for a prime 
contractor who could take over systems integration capacity.
    The second, very important, is responsive to exactly the 
concern that you raise, which is currently underway, looking 
for a so-called SETA contractor.
    That is a contractor who would function as the IRS's 
advisor and partner, as the IRS negotiated with a prime 
contractor. The IRS has had a SETA contractor in the past, but 
it was felt, given the urgency of design, that it was 
appropriate to look again, and consider the right SETA 
contractor going forward, and that will be an established, 
federally funded research and development corporation that has 
experience in this area, and therefore, will be in a position 
to advise the IRS as it sets specifications.
    Because I think you are absolutely right, that the task of 
monitoring the prime contractor is not something that the IRS 
should attempt to do completely, internally.

                       confidence in funding tsm

    Mr. Kolbe. I really do not want this question to sound like 
a gratuitous swipe because it is not intended that way, but in 
all seriousness, given the track record: the May 1996 report on 
a program that does not even look like itself anymore, a 
spending plan that does not mirror any of the projections. Give 
me some assurance that I can have confidence that what we are 
going to do this time is going to be right, so that this 
Subcommittee can fund it with some confidence.
    Mr. Summers. Mr. Chairman, in fairness, I think it is 
important to recognize that the May 1996 report was carried out 
in the context of a somewhat different budgetary environment 
than the budgetary environment which ensued, and while I think 
the slowdown in spending is appropriate, I think it is also 
important to understand that some of the substantial change 
between the May report and what you actually see now is a 
reflection of the choices that this Committee has made.
    I do not know that I can give you a 100 percent confidence. 
What I can say to you is that we are proceeding in an 
appropriately deliberate fashion, that at the MMB we have made 
it clear that the easy thing to do would be to make a set of 
plans and promises and commitments as to what would be 
delivered a year or two from now, so people would feel good.
    But this program will only establish credibility when we 
start setting expectations and then exceeding them, when we 
start making commitments and then doing better than those 
commitments. And that is a process that can only take place 
over time.
    But I would hope that you would take some confidence from 
the fact that we have done what I think is relatively rare in 
Government. We have announced the problem, we have brought in 
new people, we have stopped funding things that were 
questionable, with real pain, we have started to deliver some 
results in terms of improved telephone answering, and an 
increase in electronic filing.
    And we have committed that we are not going to take new 
directions before they are actually proved out and can be 
carefully demonstrated.
    There is a huge tendency at a moment like this to look for 
a silver bullet. You know, the football version would be to 
start throwing only long balls, and often that can get you in 
more trouble than you were in to start with.
    And so I think all I can tell you is that from the 
Department's perspective, from Secretary Rubin on down, the 
instruction is very clear. Let us not promise any more than we 
can deliver, and let us not spend when we are not going to see 
the benefits clearly and quickly from the expenditures.
    You know, books are written on why these kinds of 
information technology projects fail. By the way, as I have 
gotten into this, one of the things I have realized is that the 
failure rate, when these things are done in the private sector, 
is higher than many businessmen would like it to be.
    And a crucial problem is that people try to build the Taj 
Mahal and then the specifications change. What you need instead 
is a modular approach where you ask for results, bit by bit, 
and you are in a position to monitor whether those results are 
actually delivered. I think that is what we are working to 
achieve.
    Mr. Kolbe. Well, I will let Mr. Istook go with some 
questions. I would just note that I appreciate what you are 
saying, that the failure rate on something like this is high, 
and nothing has ever been done that is as complicated as this. 
But I would also point out, if you go back and look, this is 
the fourth failure that we have had, going all the way to the 
sixties. So you can understand that our confidence rate is not 
real high here.
    Mr. Summers. I understand completely. We have tried to 
learn from those failures, and I think we have learned some 
core lessons. The IRS cannot do it itself. There needs to be 
tough-minded, constant oversight from the Department, and 
elsewhere.
    Projects need to be kept on a short tether, looking for 
results, rather than trying to build Taj Mahals as requirements 
are constantly changing. Expectations have to be set in a 
realistic fashion. People have to be held accountable. Those 
are the lessons we have learned, and I think those give us the 
best possible prospect for going forward.
    But I think, if I might say one final thing, that I think 
we now have a structure in which we will not be spending money 
at a rapid rate, if we are not delivering results.
    My hope is that the credibility of this program will be 
established by the changes that we are in a position to make, 
and that we will be in a position to increase TSM investments 
because we both recognize they are very important for the 
future. But if we are not able to establish credibility, 
expenditures will be low, and be more of a maintenance variety 
until credibility is established, and I think that is as it 
should be.
    Mr. Kolbe. Mr. Istook.

                           tsm accountability

    Mr. Istook. Thank you, Mr. Chairman.
    I am sorry we missed each other last week. I appreciate 
your effort in that way. I also appreciate the fact that you 
are on the hot seat, when you have undertaken the 
responsibilities that you have. Of course if you are not 
successful, then people can say, well, there goes Summers' help with a 
multi-billion dollar boondoggle.
    And if you are successful, they just say, ``Well, it is 
about time.'' So I realize you are in a cannot win situation 
and I appreciate the fact that you have accepted that and are 
pursing it.
    I did want to focus on a couple of things that I think are 
really important, and about which I have not yet been 
satisfied. You just made the statement with which I totally 
agree. People have to be held accountable.
    Last year, and perhaps some before, but certainly last year 
as we were talking about this, and talking about the transition 
of people that were in charge of the project being replaced by 
those who come in, either because they actually have that 
intellectual capital, that capability of handling it, or 
because they have a mind-set that is not as bureaucratic, or 
for whatever reason.
    What I have never seen is a clear assessment of what 
persons originally were at the levers of control, who had both 
responsibility and opportunity to make things happen, either 
the right way or a better way, and who did not perform, so that 
we can satisfy ourselves that those persons do not remain in 
positions where they can continue to thwart this effort.
    It is not a matter of scapegoating. It is a matter of 
pinpointing responsibility, and I have met with nothing but 
resistance, as I have tried to get that kind of assurance.
    Because I happen to believe that is at the core of the 
problem. If you do not identify the persons who are unable to 
do the job, then you cannot make sure that they are not 
continuing to taint the effort, thwart the system, and this is 
not a matter of some intentional effort on their behalf.
    Sometimes it is a matter of competency, sometimes it is a 
matter of attitude, sometimes it is a matter of bureaucratic 
turf. It could be all sorts of other things.
    I would like to know what can you provide to us that will 
pinpoint the human responsibility in a historical fashion, so 
that we can be satisfied that we are not just pursuing the same 
blind alley. When I asked for it before, we got eight boxes of 
historical material and no analysis.
    Now, if there has never been a personnel analysis, then I 
think there is a major fundamental mistake in the approach. If 
there has been a personnel analysis, I want to see it. Can you 
respond to that, please.
    Mr. Summers. Mr. Istook, the Commissioner makes personnel 
decisions at the IRS, subject to the Department's approval for 
major personnel decisions. There are questions relating to 
confidentiality that----
    Mr. Istook. This question is related to billions of 
dollars, and I do not want billions of dollars to be hung up 
because someone says, ``Well, Congress says there is supposed 
to be some confidentiality.'' This is the Congress that is 
spending the money, and if anybody is saying, ``Well, we cannot 
talk about the people that made these kind of blunders because 
we want them to be able to keep confidential and private and 
secret what they did with billions of dollars, then we have got 
a huge, huge problem.''
    Mr. Summers. I do not think there is any suggestion that we 
should keep confidential how money was spent, what decisions 
were made. Mr. Gross----
    Mr. Istook. Well, what the evaluations are of the people's 
capabilities----
    Mr. Summers. Mr. Gross has taken on a quite wide range of 
responsibility. By definition, those responsibilities have been 
removed from other people. In some cases those are people who 
have left the IRS. In some cases those are people who have been 
reassigned. That reflects a judgment as to how best the program 
can be carried on.
    I think that if you ask the question, now, for each major 
project relating to TSM, who is accountable, the IRS will be 
able to give you a clear answer to that question--who is 
accountable?
    In the past, I think some lines of accountability, going 
back 25 years, have not been established as precisely as they 
should have been, and so it is not so easy to determine where 
problems took place.
    But the Commissioner, acting with our approval, has put in 
place a structure that has involved quite a lot of personnel 
change at the IRS in the last two years. I think that puts us 
in the best position to go forward.
    Mr. Istook. Well, Mr. Secretary, I still am not getting a 
clear answer to a very basic, fundamental question.
    Has there, or has there not been an effort to identify the 
persons who either made erroneous decisions, or were not 
sufficiently competent to be able to handle the job that they 
were doing?
    Has there been an effort to identify those persons who have 
been at the root of a lot of the problem, historically, so that 
we can be sure that that problem is not being perpetuated with 
the lines of authority today?
    Has there been such an effort?
    Mr. Summers. The Commissioner has discussed her assessment 
of the performance of a variety of individuals in connection 
with the TSM program as she has made proposals to me for 
management.
    Mr. Istook. Has there been an effort such as I described, 
though?
    Mr. Summers. I am sorry?
    Mr. Istook. I am trying to get an answer to the question, 
has there been an effort such as I described, to identify who 
was making the blunders in the first place, and are they still 
involved?
    Mr. Summers. I believe the answer to the question is yes, 
there has been such an analysis, and no, people----
    Mr. Istook. Is it in writing?
    Mr. Summers. I do not know they framed it precisely the way 
that you have just asked the question. Such an analysis is in 
writing.
    Mr. Istook. Well, if it is not in writing, then how can it 
be disseminated to the people that are in charge, to make 
sure--you know, this is just something that is up in the head 
of one or more persons. Then how can you make sure that the 
same blunders are not being committed again by the same people 
who should not be in those positions?
    This sounds, to me, like a very sloppy way to handle a 
problem, when you and so many others have admitted that so much 
of the problem was human. It was the lack of the intellectual 
capital, it was the internal bureaucratic problems, it was the 
turf wars, and yet when you say that was the fundamental 
problem and you have never committed the analysis of that 
problem to writing, how can we have any confidence that we are 
going to correct that problem?
    Mr. Summers. Congressman, the individuals who, for one 
reason or another, have proven not to do an adequate job 
invarious aspects of management to this program, have been reassigned, 
or have left----
    Mr. Istook. How do we know if there is no written analysis?
    Mr. Summers. Or have left the Service. We have furnished 
you, I believe, with substantial amounts of information, 
showing you that the names of the chief information officer, 
the identities of various other people who have been involved 
in projects, have been changed over time.
    In a couple of instances, I believe there have been 
disciplinary actions taken where there were mistakes that went 
beyond questions of judgment.
    But I think holding the Commissioner accountable for the 
choices that are made of a management team and making 
reassignments, or replacements where appropriate, is the right 
way to manage a situation of this kind, and establishing a very 
clear framework going forward, of accountability for the 
delivery of particular projects is the important objective.
    I believe we have such accountability in place, and I 
believe we have made management changes where there have been 
problems in the past.
    Mr. Istook. Thank you, Mr. Chairman.
    I would request that the written analysis, if it has not 
been prepared, be prepared for the benefit of this Committee, 
as well as the full details of whatever were the disciplinary 
actions, because I do not think that you can protect the IRS 
people, and protect the taxpayers, both, and I think we have 
got to protect the taxpayers here.
    Mr. Kolbe. Thank you, Mr. Istook. I hope we will have time 
to come back for another short round of questioning. We do need 
to get to the Commissioner.
    Mr. Hoyer, welcome. We did go ahead, with your permission.

                     Summary Statement of Mr. Hoyer

    Mr. Hoyer. Yes. I apologize for being late. I had to make a 
report to the Caucus which is meeting now.
    I am not going to ask questions at this point in time. I do 
want to comment, however, Mr. Chairman, I did not hear your 
opening statement but I heard about your opening statement. I 
believe your comments were appropriate. I believe that very 
significant progress is being made. This committee, and others 
in the Congress, were in the leadership of focusing the IRS, 
and more generally, the Secretary of Treasury, and the Treasury 
Department, and Secretary Summers, on the problems of IRS. I 
want to congratulate you for the energy that you have directed 
at this, and I will thank Commissioner Richardson, when she 
appears before us, for her receptivity to the effort that is 
causing us to make progress.
    Art Gross obviously was a good selection. Mr. Chairman, 
information systems is an item that this Committee has dealt 
with over the years. It has been of great concern to us. It was 
the efforts of this committee and others, but this Committee, 
in particular, staff and Members, that focused on the critical 
nature of getting at this problem, and the money that was being 
spent.
    I am not going to ask Secretary Summers any questions, 
since we will pursue that further between now and when we mark 
this bill up. But suffice it to say that I am pleased, as you 
were, Mr. Chairman, with the candor of Secretary Summers' 
statement. I think that one of the things I mentioned with 
respect to the Waco incident at Treasury is that once you get 
Treasury focused, from my perspective, they have been as honest 
and self-critical an agency as I have dealt with in the 
Congress, under this Secretary, and previous Secretaries in 
both administrations prior to the Clinton administration as 
well.
    This particular problem, which started under the Reagan 
administration, continued through the Bush administration and 
into the Clinton administration, has been one that has been 
very hard to get a handle on, and it appears that we have done 
that, and Mr. Chairman, you and your predecessors on both sides 
of the aisle have been working on this and I think we are 
making progress.
    Thank you. Thank you, Mr. Secretary.
    Mr. Kolbe. Thank you, Mr. Hoyer.
    Mr. Forbes.

                     holtsville, NY Service Center

    Mr. Forbes. Thank you, Mr. Chairman, and Mr. Secretary, 
thank you for joining us today.
    I just wanted to visit this subject just a little bit 
longer, not to go ad nauseam here, but my concern, admittedly 
as a lay person, if you will, on some of these issues, I have 
an IRS facility, and I am proud to say I do, in my district. It 
is the IRS facility in Holtsville, and if you just watch what 
has happened over the last seven or eight years, with that 
facility alone, there has been great concern.
    First, it was going to be dedicated fully as a customer 
service center. Then that was changed, and then they were 
talking about emphasizing strictly electronic filing, and then 
that was changed back to customer service. And it is 
representative, I guess, Mr. Secretary, of a concern that I 
have, first of all, that there seems to be a little bit of a 
disconnect on what the mission, in the future, is going to be 
overall with your field offices, in particular, not just my own 
in my district.
    But generally, I think it seems that there is not a clear 
and guiding hand on what that policy will be, and what will be 
the future of some of these facilities.

                         IRS Board of Directors

    You have talked about this and I will not put you on the 
spot on that now, but it does, I guess, suggest that the recent 
National Commission on Restructuring the IRS report that was 
chaired by Bob Kerrey in the Senate, and Rob Portman, here, in 
the House, that called for a board of directors, and maybe the 
next Commissioner having kind of a very strong management 
background might be the way to go.
    Would you comment on that initiative.
    Mr. Summers. The National Commission on Restructuring the 
IRS is now ongoing, and we are very, very much looking forward 
to their report and look forward to cooperating with them, to 
discuss this very important range of problems, because clearly, 
the performance in the past has not been what we would all like 
it to be.
    The Secretary and I have said that, as we look for a new 
Commissioner, we think it is very important to get somebody 
from a strong managerial background, either someone with strong 
management experience in private sector, or someone with a 
proven record in doing tasks like this, in Government.
    Because it seems to us that the biggest challenges for the 
IRS, going forward, are in the management of information 
systems and management of a large organization. So we are very 
actively engaged in the search for such a new person.
    We look forward to a discussion of more general governance 
arrangements. Our belief is that the current structure of the 
management board, which provides for strong, heavily staffed 
departmental input, along with input from the Office of 
Management and Budget, which is represented on the board, from the 
National Performance Review, which is represented on the board, 
represents the best structure for reflecting the President's ultimate 
authority and responsibility for the executive actions of the 
Government.
    And so we believe that that structure, perhaps with some 
modifications, is the right kind of oversight structure along 
with congressional oversight.
    Mr. Forbes. So you would reject the idea of a board of 
directors for the IRS?
    Mr. Summers. We believe that the IRS has a board of 
directors that functions effectively in the way that a 
corporate board of directors functions. This approach reflects 
frankly, the difficulties that the IRS has had, unlike in many 
situations the CEO who is the Commissioner of the IRS, is not 
also the chairman of the board, in order to ensure strong 
oversight.
    But we believe that given that this is an important 
executive responsibility for which the executive branch will be 
held accountable, that that is the appropriate arrangement, 
both in an efficiency sense, and, frankly, a constitutional 
sense.
    Mr. Forbes. Thank you, Mr. Chairman.
    Mr. Kolbe. Thank you, Mr. Forbes.
    Ms. Meek.

                         Statement of Ms. Meek

    Ms. Meek. Thank you so much, Mr. Chairman.
    Good morning, good to meet you, Mr. Summers.
    I am interested, and you have not gotten to the section 
that I am primarily interested in, and that is the IRS. So I 
will wait until you begin the testimony on the IRS.
    Mr. Kolbe. The Commissioner will be following, immediately.
    Ms. Meek. The Commissioner is going to follow.
    So I just want to greet you and thank you for being here.
    Mr. Summers. Thank you.
    Mr. Kolbe. Mr. Secretary, in the remaining time, let me at 
least see if other Members have another question.
    I am sorry. Mr. Hoyer?

                     fy 1995 compliance initiative

    Mr. Hoyer. I am going to discuss this with the Commissioner 
as well, but Mr. Secretary, I was a strong proponent in 1995 of 
the tax compliance initiative.
    As you recall, that was a little over $2 billion spread 
over five years, projected to raise $9-plus billion. After the 
first year's experience, we projected it to be, in fact, double 
digit billions--10, 11, $12 billion in payoff for the $2 
billion. About a four and a half, five to one payoff from 
investment in the compliance initiative.
    That was, in a bipartisan way, agreed to be off-budget, as 
you recall. I said 1995. Earlier than that. Was it 1995? Agreed 
to be off-budget. It was the fiscal year 1995, but it was 1994, 
because it was a Democratic Congress, not that that made a 
difference. But it was a bipartisan--there was no dispute, and 
CBO and OMB agreed. The Republican leadership and the 
Democratic leadership agreed on that.
    That initiative is not funded in this budget and has not 
been funded for the last three years. I would like you to 
comment on that in terms of the judgment that we are making 
with respect to the obvious payoff from what was in effect, a 
revenue raiser, not a revenue loser.
    Mr. Summers. Congressman, that was a very important 
initiative of our Commissioner, Peggy Richardson, and let me 
just take this opportunity to congratulate her on her four 
years of service, and to wish her well as she leaves what may 
be the hardest job that anyone has to do in Government.
    I think that was the right initiative. I think the 
experience so far is that it has been a success story. For that 
portion of it which was funded, the target was to raise $330 
million in the first year, and we in fact raised $830 million 
in the first year.
    I do not think there is a clearer result in the Federal 
Government----
    Mr. Hoyer. As you recall, it was about a $400 million, that 
first year--four times five--$2 billion, overall, so the five 
to one, four to one payoff was----
    Mr. Summers. It looks like, if anything, it might prove to 
be an underestimate. We do not have that many investments that 
we can make that pay off four or five to one.
    All we are talking about is collecting taxes that people 
owe, and should be paying. I think from the point of view of 
the country, overall, investing in improved tax compliance is 
the right thing to do, and my hope would be that at some point 
the Congress will be able to establish a framework in which we 
will be able to recognize that when we fund compliance efforts, 
we are reducing the budget deficit, not increasing the budget 
deficit.
    And I think it is ironic that we find ourselves making cuts 
in the IRS budget as part of overall expenditure reductions to 
reduce the deficit, when those cuts have the effect, in toto, 
of enlarging the budget deficit, rather than reducing it.
    Clearly, in order to do that, we are going to have to find 
procedures that will convince everyone that the actual money 
will be targeted, and that extra compliance will in fact 
result.
    Well, I think the compliance initiative, for the brief time 
that it existed, was extremely successful. I think it is also 
fair to say that at points in the past, issues relating to 
compliance have been used as gap fills in budget exercises, and 
the like, and that it is important that Congress and the 
President not fall into the trap of claiming credit for 
increased expenditures in doing the budget accounting, but not 
penalizing themselves for decreased expenditures when they do 
the budget accounting.
    But I would very much hope that between the Congress and 
the executive branch, we could find a way to establish a more 
rational budget framework that recognized that extra compliance 
efforts reduce rather than increase the deficit. This is one of 
the things that I would hope could come out of a report by the 
National Commission on Restructuring the IRS.
    Mr. Hoyer. Thank you.
    I would just say, Mr. Chairman, that the irony here is it 
is really a scoring problem, because you get penalized for the 
expenditure but you do not get credit for the income, and 
therefore, it appears, superficially, that you have a cost 
without a benefit, and obviously, we are not for costs without 
benefits.
    On the other hand, this Committee does not get credit for 
the benefit that everybody not only says was going to occur, 
but in fact did occur.
    Nevertheless, I want to make it clear, because this is not 
partisan, it was in fact the Clinton OMB that decided to put 
this back on budget, and therefore, made it unlikely that we 
were going to fund it because this committee just did not have the 
602(b)s to carry it.
    But thank you, Mr. Chairman, for allowing me that question 
of Mr. Summers. I will pursue it with Ms. Richardson as well.

                      measuring compliance revenue

    Mr. Kolbe. I think the issue that you have raised is a very 
valid one. It is one that I do not think we have a very good 
handle on, is this whole compliance thing. There is no question 
that revenues keep going up. I mean, in 1996, because of the 
budget constraints, we did not give any additional money in 
compliance, and yet, of course, the revenues that were raised 
by IRS were at an all-time high.
    Not because compliance was better, but because the economy 
was growing. And that is the biggest single thing. What I do 
not think we have ever gotten a real good handle on is to tell 
us additional dollar that is spent on compliance, what 
additional revenues it brings it.
    We also look at the dollars we spend on compliance, what is 
the total revenue, and you have all these other factors that 
are much important to that, which is the economy as a whole 
that gives you the total revenues.
    So nobody has been able to translate to us what the 
compliance dollar is in terms of what we get for that.
    But let me, if I might, a couple of quick questions in the 
time that is remaining here.

                         irs board of directors

    You have expressed to Mr. Forbes, and to me, in 
conversations you had with me, your resistance to the idea of 
any kind of an outside board of governors for IRS.
    Do you see the Modernization Management Board as an 
oversight board for the IRS?
    Mr. Summers. Yes. I see it as a tough-minded oversight 
board that is in a position to hold the Commissioner and the 
senior management of the IRS accountable. That is in a position 
to structure rational policy with respect to the IRS, and that 
has an ample staff, an ample budget to hire consultants, to 
ensure that performance is what it ought to be at the IRS, and 
to force action when performance is not what it ought to be.
    And I think that we have shown that in the last year by 
taking a number of tough decisions, including the DPS contract 
and other contracts where we had to look at the situation on a 
go-forward basis. We had to recognize that whatever we could 
not change had been done in the past, but we had to look at 
what the best thing to do was, going forward.
    And I think to have, ultimately, the President 
accountable--this was an executive action--is the right thing 
to do. I may not be objective since I was very much involved in 
setting this structure up, but I do think that a structure like 
this, frankly, was long overdue. It was necessary for there to 
be some more formal accountability mechanism other than 
periodic conversations between the Commissioner and senior 
people in the department.
    But I think we have a structure now that appears to be 
working, and I would be sorry to see it change.
    Mr. Kolbe. Well, I do not want to dwell on this because I 
really want to get to another question, but all of them serve 
at the pleasure of the Secretary. It does not seem logical to 
me that they would have the kind of independence that even an 
Inspector General would have.
    One of the things that impresses me about the commission 
that Congress created, the restructuring commission, is the 
dedication that the members have brought to their task. They 
have all sat in on these meetings. They have given countless 
number of hours.
    Do you see that same kind of dedication, and the 
independence in the MMB?
    Mr. Summers. There are two different parts of that. I 
certainly see that kind of dedication in the people who 
participate in the MMB, and in the people who work full time on 
these issues, who staff the people at the MMB. But I think, 
along with the emphasis Congressman Istook I think quite 
properly put on accountability--one does need to recognize that 
at some point there has to be accountability.
    I think the right accountability is to the Commissioner, 
and the Commissioner's management team, with an adequate 
oversight mechanism to ensure that those management tasks are 
carried out and that actions are taken if those tasks are not 
being satisfactorily carried out.
    And I think the Secretary has found the right structure in 
the MMB. The MMB tasks members of his senior management team, 
reporting directly to him, to provide this kind of oversight, 
and also provides for a budget that will ensure that they are 
staffed and have access to consultants who can really get into 
the details of what is taking place at the IRS.
    And I would worry that some outside board of directors 
structure, depending on how it worked, would either supplant 
the accountability of the Commissioner by taking on the task as 
some kind of collective management group, which I think would 
be unfortunate, or would not be as well-positioned to pass 
judgment on the performance of the IRS, given that they would 
not have the perspective on the ongoing tax policy debates, for 
example.
    But I certainly think we have got a lot to learn from 
discussions with the Commission, and I think as part of the 
effort at this point the Commission is a very constructive 
step.

                       tax simplification and tsm

    Mr. Kolbe. Well, I would like to engage in some 
constructive dialogue with you about that, and I think we have 
and we will. But very quickly, because our time really is up, 
there is one other question that I just cannot let go before we 
go to the Commissioner, and it is kind of such an overarching 
fundamental question.
    One of the major criticisms of TSM, from the get-go on 
this, is that it is doomed to failure because we are placing a 
computer system on top of a Tax Code and a tax administration 
system that is hopelessly complicated.
    There is no way you can devise a modernization and a 
technology system that can deal with that. It is just going to 
be a wasted effort. So the GAO and Congress, both contended 
that we really should reengineer the tax administration system 
first, before we try to devise new technology to implement it.
    Are we doomed to failure, again, on the fifth try, because 
of that?
    Mr. Summers. I think there are two parts to that question, 
Mr. Chairman.
    One is I think we can make the job easier by simplifying 
the Tax Code.
    Mr. Kolbe. Well, you say so in your statement----
    Mr. Summers. And we have proposed some steps to do that and 
the administration looks forward to proposing more elaborate 
legislation directed at tax simplification in the near future.
    Second, I do think we cannot divorce these technology 
requirements from the way in which the IRS administers its 
business. What kind of information returns are received. How 
information returns are handled. In what form information 
returns have to be provided, as examples.
    And I think reengineering the way in which the business is 
done has to complement these efforts at modernization, and I 
think we now have structures in place that are doing just that.
    But this is not going to be easy. I think it is important 
that we proceed, deliberately, as we do this. I think it is 
important that we understand that there is not any kind of 
silver bullet, ``just get X in here to do Y, then this will all 
work again,'' if that is the approach that we are trying to 
take.
    Mr. Kolbe. Just to follow on that. No question--that 
whatever we do, we are going to need the technology, we are 
going to need the kind of modernization. But let me just take 
the most extreme example that some in Congress, and some 
prominent people in Congress have suggested we replace the 
whole Internal Revenue Code with a national sales tax.
    That would lead to a rather drastic difference in the kind 
of system that we would be designing. I think you would agree 
with that.
    So I am just wondering: Should we be pursuing this before 
we really--should we look, first, saying we have got to 
simplify the Tax Code in some way, we have got to make that 
change before we start down this path again?
    Mr. Summers. I do not believe that a national sales tax is 
in the United States's interest.
    Mr. Kolbe. I did not ask you to endorse it. All I am saying 
is if you did that, if you want to some drastic change like 
that, clearly, that your team that is looking at this 
architecture now would be looking at something very different.
    Mr. Summers. I think for the foreseeable future, it is 
overwhelming likely that a database containing basic income and 
economic information on individual tax filers and corporate tax 
filers will be the heart of our tax system, no matter how our 
tax system may be modified, going forward.
    And therefore, I think, getting such a database to work in 
an effective way is a crucial responsibility of the IRS. Doing 
that is likely to be imperative, however the Congress and the 
President decide to modify the Tax Code.

                           electronic filing

    Mr. Kolbe. Final question. Are we off on the wrong track? 
Could we be doing something very different if we just focused 
on electronic filing?
    Mr. Summers. I think electronic filing is a very important 
subject, and I am not satisfied with where we are on electronic 
filing, and that is why we are awaiting a strategy in May.
    That strategy has to be based on the idea of public/private 
partnership, I think, with a little more imagination in terms 
of both carrots and sticks. In public/private partnerships, I 
think we can do a great deal to stimulate electronic filing, 
which will mean better compliance, it will mean better taxpayer 
service, and it can also mean lower costs.
    So that has to be a central component of what we do going 
forward. I am also convinced that paper is going to be with us 
for a long time.
    Millions of Americans are going to fill out their tax 
returns with their pens, at home, and want to mail them to the 
IRS, and I think it is unlikely, and probably undesirable, that 
at any point the Congress is going to be prepared to preclude 
them from doing that.
    And as long as that is the case, I think we also have to 
have a capacity to handle paper returns. But I would say that 
along with the submissions processing, on the central 
databases, I think the electronic filing is perhaps the most 
major area for articulation of strategy in the next few months, 
and is an absolutely critical challenge for the next 
Commissioner.
    If I could just add one thought.
    Mr. Kolbe. Yes, and I really hope on this electronic filing 
we have an opportunity to have more discussion.
    Mr. Summers. Absolutely. I have had a little bit of 
discussion, people at the IRS have had much more, with people 
from the private sector, and it is clear that if there is any 
area which we cannot do ourselves, it has to be a partnership 
thing.
    If I could just finally say how much I appreciate the 
committee's involvement and how constructive the committee has 
been in bringing us to this point, acknowledge, again, 
Commissioner Richardson's service in an extremely difficult 
time.

                        irs employee dedication

    And I would like to say, finally--and I think this is 
really a very important point on which everybody ought to be 
able to agree--that whatever management problems there may have 
been, they are not the fault of the more than 100,000 very 
dedicated people at the IRS, who, with great integrity, do a 
very, very difficult job that has to be done if our country is 
to continue to have the resources to defend itself, to enforce 
the law, and to do the work of Government.
    I think it is terribly, terribly important that all of us, 
as we work on these strategic questions, respect people who 
deliver each year, a successful filing season, and who will do 
it again this year. They will deliver a filing season that 
works, where the tax returns are collected, people get their 
refunds. It is not easy work and I think a lot of those people 
have been tarred in a way that, frankly, is not fair for sins 
that are probably sins that are other people's.
    I think it is very important that they get the respect that 
they deserve.
    Mr. Kolbe. Thank you very much for making that point, Mr. 
Secretary. I am just sorry that I did not make itself earlier, 
because I absolutely agree, and I think every Member of this 
subcommittee agrees with you. The dedication of the workers in 
IRS is tremendous. They do a tremendous job under sometimes 
very difficult constraints, with very tight time deadlines, and 
they do it very professionally.
    And I think you are right--that needs to be acknowledged. 
The failures that we have are not their failures. They are 
failures of the system. They may be failures of Congress, they 
may be failures of management, but they are not their failures.
    Mr. Kolbe. Mrs. Meek, very quickly, and then we have got to 
move on.
    Ms. Meek. I would just like to say that two of our Members, 
we both have VA/HUD at the same time as this Subcommittee. They 
are both very important, but we have to shuttle between the 
two, and therefore, I would like to submit my questions for the 
record.
    Mr. Kolbe. Absolutely.
    Ms. Meek. As well as say to Secretary Summers, the one 
question I had with regard to some of your purview, because 
Commissioner Richardson is leaving, and I will save that also for the 
record since you do have--we are kind of short on time.
    Mr. Kolbe. Thank you very much, Ms. Meek. Your questions 
and any other questions of Members of the committee, and I have 
a few, also, that will be submitted for the record.
    Mr. Kolbe. Mr. Secretary, thank you very much, and we hope 
your jet lag gets better quickly here.
    Mr. Summers. Thank you.
    [Questions for the record follow:]

[Pages 1025 - 1192--The official Committee record contains additional material here.]

                                          Wednesday, March 5, 1997.

          DEPARTMENT OF THE TREASURY, INTERNAL REVENUE SERVICE

                               WITNESSES

MARGARET MILNER RICHARDSON, COMMISSIONER
MICHAEL DOLAN, DEPUTY COMMISSIONER
ARTHUR GROSS, ASSOCIATE COMMISSIONER AND CHIEF INFORMATION OFFICER
JAMES DONELSON, CHIEF TAXPAYER SERVICE AND ACTING CHIEF COMPLIANCE 
    OFFICER
TONY MUSICK, CHIEF FINANCIAL OFFICER
DAVID MADER, CHIEF MANAGEMENT AND ADMINISTRATION

                  Opening Comments from Chairman Kolbe

    Mr. Kolbe. Madam Commissioner, thank you very much for 
appearing here.
    Let me just say for my brief comments here, this will be 
your last appearance before this Subcommittee. You are 
returning to the private sector at the end of this filing 
season, where I hope that you will be so successful your own 
next filing will be much more substantial than anything you 
have been able to make as Commissioner.
    I commend you for the job that you have done in what has 
got to be an extraordinarily difficult job.
    The request of IRS this year is $7 billion, $7.5 billion 
when we would add the technology investment account, and this 
is about a $315 million increase over the 1997 appropriation.
    I have read your statement, it was a very good one, it 
certainly summarizes the accomplishments of the IRS as well as, 
I think, gives us a realistic acknowledgement of the long way 
that IRS still has to go on the road toward a modernized and 
responsive organization.
    I want to stress that I think it is the goal of this 
Subcommittee, and I believe that I speak for the majority and 
minority members alike in this, in saying that we are 
determined that you are going to have adequate resources to 
accomplish your mission.
    We may disagree on what that adequate resource level is, 
but reasonable people can and will disagree on such issues. But 
I think our goal is the same.
    I, too, want to, with you, stress that I think that tax 
simplification has to be a major component of anything that we 
look at in terms of where we go with the IRS in the future.
    That without tax simplification, I fear that we are just as 
doomed to failure in this next go-round of TSM, or whatever we 
are going to call the ``Son of TSM.'' I think we are just as 
doomed to failure if we do not think about tax simplification.
    But nonetheless, no matter what we do, the IRS, in one form 
or the other, is going to continue to exist. The tax needed to 
run Government is not going away. So we want to make sure that 
the IRS has the proper resources, the proper information 
systems, the proper management, and is the proper size to deal 
with whatever tax system Congress and the Administration 
together, working together, might decide we are going to have.
    I commend you for your openness, your sharing of 
information which you have done with this Subcommittee. I think 
it has taken some time getting us there, although I have not 
been, as you know, involved with this before. I have certainly 
gotten a good crash course in the work of this Subcommittee 
with the IRS. I think it is safe to say that beginning about 8, 
10 months ago, that I think we began to see a lot more candor 
on the part of the IRS about its accomplishments, its requirements, its 
budget.
    So I appreciate very much that, and look forward to your 
testimony today.
    Let me yield to Mr. Hoyer for an opening comment.

                      Opening Remarks of Mr. Hoyer

    Mr. Hoyer. Thank you, Mr. Chairman.
    I join you in your comments, and want to congratulate 
Commissioner Richardson, who has done an outstanding job, 
certainly, as it relates to communication with this Committee, 
with the Senate appropriating committee, with the Ways and 
Means, and the Finance Committees. She has been committed, to 
better service in the IRS, to, as Secretary Summers indicated, 
making sure that everybody in the country understands that the 
overwhelming majority of employees at IRS--and I am talking in 
the 98, 99 percent level--are dedicated, hard-working people of 
integrity who are doing an excellent job, and providing for 
what is, arguably, the best system in the world in terms of 
revenue collection.
    And a system which still has--I do not know that it is the 
best in the world, maybe you would know, but certainly, very 
close to the best in the world in terms of compliance.
    So that while we, as we do in life, focus on the problem 
areas, we ought to also reference the fact that the 
overwhelming number of areas are not problems and are 
functioning as we would want them to do.
    I personally want to say to Commissioner Richardson how 
much I appreciate her willingness to, at any time, get on the 
phone, come to the office, discuss issues, and to deal with 
them in a positive, not defensive way, which I think was very, 
very helpful.
    And so, with that, Mr. Chairman, I look forward to 
Commissioner Richardson's statement. At the end, I am sure we 
will say something further, after her last presentation. 
Perhaps she hopes this will be the last presentation before 
this committee, and that everything will go smoothly this year, 
so she will not come before us again.
    Mr. Kolbe. Madam Commissioner, you have a very long 
statement. As you know it will be placed in the record. We hope 
that you will summarize it so that we can have plenty of time 
for questions here.

                  Summary Statement of Ms. Richardson

    Ms. Richardson. I will do that, and thank you, Mr. 
Chairman, Mr. Hoyer, for your kind words, other distinguished 
Members of the Subcommittee.
    I would like to introduce some people who are with me this 
morning. Mike Dolan, who is the Deputy Commissioner. Arthur 
Gross, who is the Associate Commissioner and our Chief 
Information Officer. We also have Jim Donelson who is the Chief 
of Taxpayer Service and Acting Chief of Compliance.
    Tony Musick, who is our Chief Financial Officer, and David 
Mader, who is the head of our Management and Administration. 
They are also available to answer questions, should that be 
necessary, but there was not room at the table, I guess.
    I would like to point out that my testimony does highlight 
the accomplishments that we have made in the past several years 
at the Internal Revenue Service with the funding that this 
subcommittee has recommended, and Congress has provided.
    I think it is very clear, as everybody has acknowledged, 
that many of the programs we have put in place, or that we have 
tried to alter, take several years of effort before any results 
are seen. Changes do not typically appear overnight.
    But in the last four years, the IRS really has made 
progress in making it easier for taxpayers to get information, 
to pay their taxes, to file their returns, and to get their 
refunds.
    By most measures, the IRS is doing its job much more 
efficiently and effectively than it has ever done it in the 
past, and we have provided some charts for the subcommittee, 
that really summarize those measures. I think you have to agree 
that they do indicate we are working much more efficiently and 
effectively.
    But that does not mean that we do not recognize that we 
have to continue to improve our services, to reduce the costs, 
and to provide an effective balance between assisting 
taxpayers, processing returns, issuing refunds, and ensuring 
that all of the segments of the taxpaying public do pay their 
proper share of tax.
    You pointed out earlier Mr. Chairman, that the IRS has been 
strongly criticized as we have worked to modernize our 
technology and clearly, some mistakes have been made. But there 
also have been many successes.
    And even though the technology modernization has drawn a 
lot of attention from Congress and the press, particularly in 
the last few months, or year, the IRS is a large business and 
has many functions.
    I think Mr. Hoyer pointed out, a large number of people in 
our organization really do not have anything to do, 
specifically, with that modernization effort.
    We do collect money, we process data, we maintain our 
customer accounts, we respond to taxpayers' questions, and we 
have a large compliance organization as well.
    We do understand that customers expect us to give accurate 
answers and do it efficiently, but also to maintain the highest 
level of integrity among the employees, and safeguard the 
privacy of taxpayer information. We have worked hard to improve 
our services. We are committed to improving our communications 
with taxpayers, and we are committed to improving telephone 
service, traditional paper forms and publications, and to work 
in the electronic tax administration arena.
    I know that many of you have expressed an interest in the 
reorganization that we undertook in 1993. In 1993, we announced 
details of a major reorganization, and we have been working, 
since then, to streamline our operations and reduce our costs.
    It was a carefully considered effort undertaken before our 
appropriations were in the process of being reduced, and it was 
done in recognition that the IRS had to continue meeting 
customer needs effectively and efficiently, not just in the 
current years, but on into the future.
    I am pleased to report that the continuing improvements 
have led to a level of service, thus far, for this filing 
season, that exceeds last year's by all our measures. We are 
answering more phones, we are providing a higher level of 
service as Mr. Summers pointed out, we are getting more 
returns, electronically, than ever before.
    So, hopefully, we will continue to see that progress 
through the rest of the filing season.
    We have also spent time, these past four years, improving 
our financial management, and we have plans to do more. We do 
have a detailed action plan, we have developed in cooperation 
with the General Accounting Office, and it addresses the 
corrective actions that we need to track the progress, to 
correct the deficiencies and to implement the GAO recommendations.
    It is an issue we take very, very seriously. Since becoming 
Commissioner almost four years ago, I have constantly tried to 
stress the importance of improving the service to our 
customers, the American taxpayers.
    I support doing everything possible to explore new ways of 
doing business, from outsourcing functions that are not 
inherently governmental, to business process reengineering, to 
new technology, to reducing costs, and to increasing voluntary 
compliance.
    But I also think that Congress and the administration need 
to assure that the funding that is provided this year, while we 
are making efforts to balance the budget by the year 2002, will 
be adequate to let us do our job.
    You mentioned that regional parties can disagree on what 
priorities or level of funding should be allocated, and I fully 
concur. But I think we, at the IRS, the Government's profit 
center, cannot be viewed as just another Federal spending 
program. We do bring in over 95 percent of the dollars that run 
the Federal Government.
    Before I close, I wanted to take a moment to share some of 
my thoughts as I do look forward to a new phase of my 
professional life. I want to say I am truly privileged to have 
been able to serve as Commissioner. It is, indeed, a very 
difficult job but it is a unique opportunity, and it was great 
to be able to come back to an agency where I began my career as 
a lawyer in the Chief Counsel's Office.
    I do think that when you read the testimony closely, you 
will recognize and agree that in the past few years, the many 
dedicated employees of the IRS have accomplished a significant 
amount.
    We have provided taxpayers, as I mentioned, with more 
options for getting information, filing and paying, and getting 
their refunds. We have also served more taxpayers, processed 
more returns, and collected more money, while our workforce was 
being reduced by over 14,000 FTE.
    And you may be interested in the fact that the cost of 
collecting $100, already one of the lowest in the world, has 
gone from 60 cents in 1992 to 54 cents in 1996.
    I am proud to have been able to play a role in these 
accomplishments, but I take it as a credit to the dedication 
and professionalism of the employees of the IRS, that they have 
continued to find better ways to serve the American taxpayer at 
a time of unprecedented attack upon the tax system as well as 
upon those who administer it.
    Some of those attacks, as you know, have taken the form of 
inaccurate and misleading allegations, that certain taxpayers, 
particularly the tax-exempt organizations, have been unfairly 
targeted for audit, for partisan political reasons.
    Federal law, which protects the confidentiality of tax 
return information, and I believe properly so, precludes me and 
every other IRS employee from being able to respond publicly to 
these allegations, innuendoes, and suggestions.
    That means that we generally cannot confirm or deny, 
clarify or correct statements unless a taxpayer is willing to 
waive restrictions on disclosure.
    Because of my grave concern about the impact that the 
repeated allegations may have on the public's confidence in the 
integrity and impartiality of the IRS, I asked Chairman Archer 
and Senator Roth, as heads of the Joint Committee, if they 
would be willing, with us, to sit down and--well, we'll share 
information as provided by law with their committees, and look 
at the allegations, and to explore, also, the use of a 
provision of the law that would permit us to disclose tax 
return information to correct misstatements of fact, without a 
waiver from taxpayers.
    I am delighted to say they have accepted this offer. We 
look forward to working with their committees, and I am certain 
that the information we will be able to legally share with them 
will demonstrate our fair, impartial, nonpartisan enforcement 
of the Internal Revenue laws, but particularly in the exempt 
organization area.
    Being Commissioner has been challenging, at times it has 
been difficult, but it has mostly been a pleasure to lead what 
is clearly the best tax administration agency in the world, by 
anybody's standards.
    It is, and continues to be, the envy of the rest of the 
world, and it is the administration that most other countries 
try to emulate.
    We, at the IRS, probably know better that some changes are 
needed to improve the tax administration system, and as I said 
we are working hard to do it.
    But where I come from, in Texas, we had an expression that 
you do not burn a house down just because a room or two need to 
be fixed up.
    I especially want to thank this subcommittee for its 
support for sound tax administration. You certainly have been 
doing that for the past four years. And I particularly want to 
thank you, Mr. Hoyer, because you have, I think, always been 
fair and impartial and nonpartisan about making sure that all 
of the issues are dealt with in a very constructive way.
    I want to wish you well, Mr. Kolbe. I appreciate your 
willingness to come to Philadelphia and see, firsthand, our 
service center, and I look forward to working with you as I 
finish my days as Commissioner. But also, if there is anything 
I can do to help you and your colleagues in the future, I will 
be happy to do that.
    Now my colleagues and I are more than happy to try to 
answer questions.
    [The prepared statement of Ms. Richardson follows:]

[Pages 1199 - 1220--The official Committee record contains additional material here.]

                reorganization and the Kerrey amendment

    Mr. Kolbe. Thank you very much, Madam Commissioner. Let me 
begin--and we will, as we have done in the past--stick with the 
5-minute rule here, including myself. To the extent possible 
will not cut anybody off in the middle of a line of 
questioning, but will tap to let them know that we have reached 
time here. That way, we can each come back and get more than 
one opportunity to ask some questions.
    Let me begin by asking you a budget kind of an issue, and 
that has to do with the amendment that was added last year in 
conference, the so-called Kerrey Amendment.
    There is a suit that precludes you from carrying out some 
of your reorganization until you submit a report by--well, no 
earlier than March 1st of this year--that you are able to 
maintain the current level of taxpayer service employees before 
you go through with reorganization.
    I would like you to comment on the impact of this amendment 
on your ability to streamline your organization. You have had a 
plan in place to go through voluntary reduction in the numbers 
of positions, presumably as a result of greater productivity.
    Do you think this amendment is going to have an impact on 
the number of involuntary reductions in the force that you will 
need in order to meet staffing levels?
    Ms. Richardson. Well, I want to say, at the outset, that no 
one at the IRS, certainly not me or anyone else, likes to face 
the prospect of having any kind of involuntary reduction in 
force. We care a lot about our employees, and that is not a 
first choice in any kind of personnel management system.
    But I will say that we have, as we have looked across the 
organization, as we look at not just the budget for 1997, but 
1998 and beyond, we recognize that we have to have the staffing 
to meet the needs in the places where we need to meet them.
    And so we have moved ahead, as you know, with the help of 
this subcommittee, and we very much appreciate your expediting 
our ability to offer the voluntary separation incentive 
payments, or the so-called buyouts. The period closed--well, 
last Friday was the day that people who accepted the buyouts 
left the rolls.
    We had about, I think, 1,310 people who did accept. By our 
staffing patterns today, I think we still have over 1,400 
people in locations that are less desirable. We would like to 
have them in other locations.
    We will be offering people who did not take the buyouts, 
but who are in those locations, opportunities to take these 
other positions, and we may still, very much, have to rely on 
Reduction In Force for an involuntary separation. But we would 
like to be able to do it, to position ourselves for 1998, and 
beyond. And having our hands tied beyond the time we reach 
agreement with the union as to how the involuntary separations 
would be implemented could very well cause us some problems in 
terms of getting on with our program.
    Mr. Kolbe. There is a suit that has been filed by the 
National Treasury Employees Union, NTEU, to prohibit the 
reorganization. Can you tell us the basis of that suit and the 
status of it at this point. Or the grounds that they have sued 
to stop your reorganization.
    Ms. Richardson. Well, they basically sued on the grounds 
that it was unconstitutional and wanted to enjoin us from 
moving ahead with a Reduction In Force because of that 
particular amendment. I am sorry. It was not unconstitutional; 
it was unlawful.
    Mr. Kolbe. Unlawful.
    Ms. Richardson. Because of that particular language in our 
appropriations bill. We have, on advice of counsel, both our 
own at the Internal Revenue Service, and Mr. Knight, the 
General Counsel at Treasury, been advised that it was not 
unlawful to move ahead with the plans that we have made.
    So we have proceeded on that ground. I have to apologize. I 
believe the law suit is being held in abeyance at this point.
    Mr. Kolbe. It has not been filed?
    Ms. Richardson. It was filed, but then they asked for a 
temporary restraining order. No further action was taken on 
that. I believe we are in a position, right now, where the 
judge asked us to report on the status of negotiations that we 
have going on with the union.
    We are--and I may turn this over to Mike Dolan because I do 
not want to say this incorrectly--but we have been working very 
closely with the Federal Impasses Panel. They have sent it back 
to a mediator, and there is a date--March 21st is the date--
that the mediator has to report back to the Impasses Panel 
about those issues where we are still in disagreement.
    At that point it is my understanding the Impasses Panel 
will then make a decision one way or the other, on these 
issues, and we will then be in a position to move forward.

                        reorganization timetable

    Mr. Kolbe. So what is your time frame now for your planned 
reorganization?
    Ms. Richardson. Well, because of the people who have taken 
buyouts--and we now have some vacant positions--we would like 
to move ahead as promptly as possible. I guess we cannot do 
anything until after the 21st of March, when we know what the 
mediator is going to decide on some of the specific issues. But 
I believe we can go ahead, and I think we actually, yesterday, 
made job announcements for 1,410 positions. People have taken 
the buyouts, and then open positions are out there--we now have 
1,410 announcements out--that we hope people who are in non-
continuing positions will apply for, and if they do, they will 
be placed in those jobs.
    Mr. Kolbe. Is that reorganization--you are just going to 
fill the positions you just vacated?
    Ms. Richardson. No. Well, it is part of our reorganization.
    Mr. Dolan. If I might, Mr. Chairman.
    Mr. Kolbe. Mr. Dolan.
    Mr. Dolan. When we started at the front end of this 
particular piece of the reorganization, we had looked at what 
we would generally call our compliance support activities, and 
a conclusion was drawn that as a part of moving from what was 
then a seven region structure to a four region structure, and a 
63-district to a 33-district structure, there was the work that 
at that point was being done by roughly 2,500 people, that when 
we reconfigured into 33 districts rather than 63, the net 
effect of that reconfiguration would be that the work 
previously done by 2,500 could be done by roughly 1,500.
    And that is the sort of net transaction in which we have 
been midstream for the last several months. One part is a 
function of the so-called Kerrey Amendment, and another part a 
function of needing to consummate the bilateral negotiation 
process with the union.
    Mr. Kolbe. I have some more questions I will get to on my 
next round.
    Mr. Hoyer.
    Mr. Hoyer. Let me make sure I understand what you just 
said, Mr. Dolan.
    You have 1,100, prospectively saved on the consolidation. 
1,410 have taken buyouts or 1,310 have taken buyouts?
    Mr. Dolan. It's 1,310.
    Ms. Richardson. 1,310.
    Mr. Dolan. And I think it is 14 and--Dave, it is not ten. 
It is 14. It is actually 1,460 that are out there as advertised 
vacancies around the organization. Those are mismatches, 
geographically, in many cases, because the people who still 
exist--I am sorry.
    Mr. Hoyer. Advertised vacancy.
    Mr. Dolan. Could I give you an example.
    Mr. Hoyer. Yes.
    Mr. Dolan. Delaware/Maryland. It used to be that the 
activities of special procedures and two principal support 
activities in the Exam organization were done both in Baltimore 
and in Delaware. As that new district was created, that is now 
the total of those two, the additional employees required to do 
those combined functions in Baltimore was less than the sum of 
the two separate parts.
    Part of what is being advertised today are those additional 
positions in Baltimore that need to be filled in order for that 
whole workload to be managed.
    We have been caught, sort of in the middle here, unable to 
go ahead and consummate the constitution of that function in 
Baltimore, like it should be. And so that is what these 
advertised vacancies around the country represent, it is an 
ability to culminate that transaction.

                                buyouts

    Mr. Hoyer. Pursing that, with respect to getting to the 
numbers you want to get to, A, do you have additional authority 
on buyouts? And B, do you think that there will be another 
window in fiscal year 1998, if it is authorized?
    Mr. Dolan. I understand that we have the authority that 
runs through December of this year. We have used it in a way 
that we thought was going to be most enabling to deal with the 
folks who are in noncontinuing positions. And so having gone at 
that reasonably expansively, the first time--I guess there is 
some chance that some in that group would change their mind in 
the course of a year, or would have something different about 
their financial circumstances--but we used it about as 
vigorously as we thought we could, short of--I mean, there were 
some who would have said, ``Use it in places in the 
organization where you do not have this reorganization going 
on.'' And we of course did not want to do that. We do not want 
people leaving us in skilled positions that are not----
    Mr. Hoyer. Which is the advantage of the buyout versus a 
RIF.
    Mr. Dolan. Correct.

                         compliance initiative

    Mr. Hoyer. Let me go back, Commissioner Richardson, to the 
Compliance Initiative that I briefly discussed with Secretary 
Summers.
    As you know, I was a very strong proponent of that 
initiative. Can you focus on the figures that Secretary Summers 
used? It was $330 million, I think projected, and then actually 
800-and-some-odd collected.
    Now, that was the first year?
    Ms. Richardson. Correct.
    Mr. Hoyer. Now, did that relate to the 400-plus million?
    Ms. Richardson. Yes.
    Mr. Hoyer. So it was actually two to one for the first 
year?
    Ms. Richardson. Correct.
    Mr. Hoyer. Which it was projected to be. Less than one to 
one for the first year as we start----
    Ms. Richardson. Right. And that is typically true----
    Mr. Hoyer. And then we projected--just so I understand 
where we are, and then I will let you answer the question.
    Am I correct that, originally, we were talking about $9 
billion for the $2.3 or $4 billion, and that we then went to 
11, or 12, or $13 billion? Do you recall the figure? What it 
was? It is somewhere in that neighborhood. Okay.
    One of the things I have discussed with our staff is that 
we are still a little soft, from our staff's perspective, in 
terms of the analysis of dollars spent versus dollars received.
    In other words, as the Chairman mentioned, the economy got 
better now. It did, but can you give me a better answer for the 
record, and for the Committee, as to how we analyzed the direct 
result of that initiative.
    Ms. Richardson. When we originally worked with you and the 
Senate on the Compliance Initiative, we committed to providing 
information to both Appropriations Committees about who was 
being hired, what they would be doing, and the revenues that 
would be directly attributable to them.
    And as you recall, one important feature of the initiative 
was that the base in compliance would be funded, so this was 
not going to be--this really was going to be additional monies 
collected, above and beyond what we would have done in our 
normal course of business.
    We put together an information system and I will be happy 
to have our Chief Financial Officer give you more detail, if 
you would like.
    But that information system did track--we worked with the 
General Accounting Office on it. I believe that the issue that 
they have raised with this Committee, and they certainly have 
done it with us, is that they have not yet had a chance to go 
back in and actually evaluate the system as it was finally in 
place.
    But the methodology they agreed to--I think they were 
comfortable with everything that was being done, and that if we 
followed it, the reports we gave you were exactly what they 
would have expected and would have wanted to confirm, that that 
$803 million in the first year was attributable to the people 
who were hired through that compliance initiative.
    What happened in the second year--and so the second year 
was not funded, and the base was not funded. We no longer had 
an effective way to track those specific bodies, because we had 
done it by assuming that the base would be fully funded, or the 
system was set up to assume that.
    When that happened, it was harder to track in 1996, but I 
can assure you that most all the programs we put in place were 
not one year programs. And one of the things that I think you 
so well understood and appreciated, and is so terribly 
important, are planning programs. Whether it is modernization 
of technology or compliance program, or taxpayer service 
program, whatever--they are not one year programs, and many of 
the plans and training, and that sort of thing that you are 
doing in year one do not actually come to fruition until the 
second, third, or fourth year.
    We were very fortunate that we had bipartisan commitment to 
that initiative, so we were able to position ourselves on the 
1st of October to bring many of the people on board. I think we 
brought on 6,200, and they were trained right away, and we put 
them right to work, effectively, and that is really why we were 
able to raise more revenue than we had originally projected.
    Mr. Hoyer. As I understand your answer, although GAO has 
signed off on our methodology, they have not signed off--am I 
correct?--the 800-and-some-odd million dollar figure?
    Ms. Richardson. I think that is correct; yes.
    Mr. Hoyer. We are waiting for that. When do we expect to 
see whether or not GAO agrees with us that in fact that 
projection is correct, and accurate?
    Ms. Richardson. I will ask Tony Musick, our Chief Financial 
Officer, to answer, if you do not mind. Tony.
    Mr. Musick. I believe what they are trying to do is to 
incorporate that as a part of the financial audit for 1996. To 
pull those transactions, we have delivered tapes to them and 
have been waiting to get a sample back. I think it is all now 
part of the overall financial audit that is going on.
    Mr. Hoyer. When do we expect that audit to be issued?
    Mr. Musick. I do not have a firm date. We know that the 
administrative piece of the audit is going to be done some time 
this month, but the revenue piece, because of the complexities 
around that, probably will get extended another month or so.
    Mr. Hoyer. Well, are probably going to mark up, I presume, 
Mr. Chairman, some time in May, or early June. I hope that it 
is in May.
    It would be helpful to have that, not because I believe we 
will have the resources available within our 602(b) to again 
fund the initiative as I would like, and we will not have, I 
think, any kind of bipartisan agreement. We do not have OMB's 
agreement to go off-budget as we did in the first year of the 
five years, for the $405 million. But I think it is going to be 
important that we at least have the information that yes, in 
fact, that is accurate, the methodology was not only right, but 
the result was correct.
    And that from a business standpoint, we were correct in 
saying we spent X million, and we got two or three to one in 
return, so that we, in further proceedings of this Committee, 
we can plan for that.
    Thank you, Mr. Chairman.
    Ms. Richardson. We might perhaps ask you to help us with 
the General Accounting Office to see if they can meet your 
timetable. We will go back and ask them, or tell them what you 
mentioned in terms of the markup, but you might help us by 
talking to them as well.
    Mr. Hoyer. Thank you.
    [Clerk's note.--The Internal Revenue Service provided the 
FY 1995 Compliance Initiatives Final Report as follows:]

[Pages 1227 - 1241--The official Committee record contains additional material here.]

    Mr. Kolbe. Thank you.
    Mr. Forbes.

                       BROOKHAVEN SERVICE CENTER

    Mr. Forbes. Thank you, Mr. Chairman, and I will not take 
too much of the Committee's time. I know we have a number of 
Members that would like time with the Commissioner.
    Commissioner, I, first of all, wish you all the best as you 
leave the agency, and thank you for the generous time you spent 
with me over the last several years.
    I would say this, Commissioner, that you can imagine my 
frustration--I know we have talked about this--but in 1995 I 
posed this problem, in 1996, and again in 1997, and of course 
the problem at the Brookhaven Service Center, and I appreciate 
your willingness, and your staff's willingness to work with me.
    There is great frustration because General Services 
Administration has assured me that they are more than happy to 
go forward with this project and renovate this long overdue and 
dilapidated building, and improve the air quality for the 5,000 
employees of the IRS that work there, at peak season.
    But they keep telling me that because the IRS is unsure of 
its mission, first it was processing, then it was going to be 
customer service, and now it is basically in limbo, at least in 
the eyes of the regional folks.
    And I would just very much thank you and appreciate 
whatever you folks can do to help us make sure that in 1998, we 
are not visiting this subject again in the same manner.
    Ms. Richardson. As I mentioned to you yesterday, we will be 
more than happy to meet with you and your staff, and to give 
you a full briefing, and also to make certain that everybody 
understands exactly where we are.
    We clearly do not want to spend money that is not going to 
be productive and provide what we need in terms of the longer 
term, but we are also concerned about the employees' well-
being, and I think when you sit down with the staff, we will be 
able to work something out.
    Mr. Forbes. I thank you very much, and Mr. Chairman, if I 
might submit questions for the record. With that, I will close 
out my questioning.
    Mr. Kolbe. Absolutely. Questions will be submitted for the 
record.

                   TAX REFORM AND TAX ADMINISTRATION

    Mr. Kolbe. Mr. Aderholt.
    Mr. Aderholt. Madam Commissioner, thank you for being here 
today.
    You know, there is some opinion out there that the agency 
is seriously flawed. I just wanted to get your thoughts on the 
flat tax proposal, the value-added tax, and what kind of an 
impact do you see that having on the IRS, and do you see it 
streamlining, or do you see it creating more of a bureaucracy?
    Ms. Richardson. Well, first, I should say that our role is 
as the tax administrator, we do not do tax policy, but I have 
often said, and I believe very sincerely, that the simpler a 
tax law is for taxpayers, the easier it would be to administer.
    One of the things that I think people lose sight of 
sometimes with our current system is that 75 percent of the 
individuals who file tax returns take a standard deduction, and 
about 80 percent of the returns that are filed, those taxpayers 
are paying at a 15 percent rate, or less.
    The complexity in our Code, and last year--well, this year, 
already, we have had over 3 million people who filed their tax 
returns by telephone. We do have for a large number of 
individuals a very simple system, and we have since the 1986 
Tax Reform Act. The complexity in the Code, for individuals, 
comes in, I think, in an attempt to create fairness, and to try 
to really make sure that things are fine-tuned.
    And the economy has just gotten more complicated, has led 
to desires by people to have more complex situations reflected 
in the Tax Code. And I think that's been one of the real 
dilemmas over the last several years in terms of a tax reform 
debate, because there is no magic, simple solution out there.
    When you talk about having a flat tax, as I said, 80 
percent of the people who file returns are paying at a 15 
percent rate, or less, and most of the proposals did not 
suggest a lower rate than that. The standard deduction, again, 
is a very easy thing to administer.
    So I think that what we really need to do is try to find 
ways to help small business owners. I do believe that they are 
thwarted sometimes, or hampered with the same kind of rules 
that large corporations have, but they do not have the 
resources to comply with all of those rules.
    And we have made some major efforts, and tried to work very 
closely with the small business community to try to reduce some 
of their reporting requirements and their paperwork 
requirements. But I think there is still a lot more that could 
be done there.
    But at the end of the day, we do not write the laws. We are 
asked to administer them, and so I think that in terms of 
getting a consensus about what provisions should be taken out 
of the Code, and how that could be simplified, is going to be a 
job for you all, and it will not be that easy, based on what I 
have heard over the last several years.
    Mr. Aderholt. Thank you. That is all I have now. I may have 
some for the record.

                      THE EARNED INCOME TAX CREDIT

    Mr. Kolbe. Mr. Price.
    Mr. Price. Thank you, Mr. Chairman.
    I want to thank our witnesses for being here, and for the 
hard and sometimes thankless work you undertake throughout the 
year. I would like to focus on the Earned Income Tax Credit. As 
you know, we have had strong bipartisan support over the years 
for the Earned Income Tax Credit. I think President Reagan, at 
one point, called it our most effective anti-poverty program. 
Some of that support has eroded, though, in recent years, and 
there have been some rather severe criticisms of the Earned 
Income Tax Credit Program, and in the last Congress, a 
concerted effort by the Republican leadership to cut that 
program.
    I wonder if you could shed some light on how you administer 
the EITC; how many people are taking advantage of it, 
especially in response to the broadening of the EITC as part of 
the 1993 5-year budget bill; and the steps you have been able 
to take to deal with whatever criticisms are legitimate, of the 
fraud and abuse in the program.
    Could I just ask you, first, how many people claimed the 
EITC last year, and what percentage of available users that 
represents?
    Ms. Richardson. I believe that the number was about 14 
million. We will get you the precise number for the record. It 
is in the neighborhood of 14 million, and we have seen 
estimates that that is over 80 percent, I think, of those who 
might be eligible to claim it.
    [The information follows:]

    The total number of taxpayers who received the Earned 
Income Tax Credit (EITC) for Tax Year 1995 was 19,471,622. Of 
these 19,070,553 recipients received the credit through the 
initial filing of their individual income tax return. The IRS 
sent notices to an additional 1,253,512 taxpayers who 
appeared--from the information provided on their return, to be 
eligible for EITC. An additional 401,069 recipients received 
the credit through a post filing adjustment to their account. 
The number of taxpayers receiving EITC represents 95.8 percent 
of the potentially eligible population of 20,324,065 who filed 
tax returns for Tax Year 1995.

    Mr. Price. 80 percent of those who are eligible?
    Ms. Richardson. I think that is right. We will get the 
exact numbers for you.
    Mr. Price. How does that compare with the rate of 
participation in earlier years? Does this represent an 
improvement, a result of----
    Ms. Richardson. I think the number has gone up over the 
years. For one thing, in 1993, as you pointed out, Congress 
changed the law, streamlined it, but the credit, before that 
time, had gotten more and more complex, and people who 
typically were eligible for the credit do not necessarily have 
tax counsel to help them ferret through some of the rules.
    So when the credit was streamlined, and single individuals 
were eligible for the first time--I believe in 1995. Was that 
the first year? That broadened the base and the number of 
people who were eligible to claim it.
    Mr. Price. In addition to the specific requirements of the 
law, are there initiatives that you have undertaken or that you 
contemplate to inform taxpayers more adequately about this 
provision and facilitate their taking advantage of it?
    Ms. Richardson. Yes. We have done a number of things over 
the years. I might step back for just a moment. One of the 
things that was a major issue, when I came on board in 1993, 
were concerns about refund fraud, and particularly in the 
Earned Income Tax Credit Program.
    And in the filing season of 1995, we took some very 
aggressive steps to try to identify the fraud and also to stop 
erroneous refunds from going out the door.
    We, as I am sure, many Members of Congress remember, 
delayed issuing refunds. We worked very closely with a fraud 
expert, Malcolm Sparrow, from the Kennedy School. He was a 
former Scotland Yard detective. He has done a lot. He is very 
interested in fraud in Government programs.
    He helped us design a program to hopefully screen people 
who were not likely candidates to have committed the fraud, or 
file erroneously. But we did take an additional step of slowing 
up the refund process, so that we could really try to identify 
areas where we might have problems.
    In that particular year, we stopped about, or we prevented 
about half a billion dollars in improper refunds from going out 
the door.
    Mr. Price. What year was that, now?
    Ms. Richardson. 1995. The filing season, 1995. We matched 
Social Security numbers for dependents with the returns, and we 
lost a number of dependents. I believe the estimate was valued 
at about $2 billion in number of dependents who were not 
claimed. We are in the process of analyzing that data more 
thoroughly and compiling a report on that, which will, when it 
is completed with some recommendations, be made available to 
Congress.
    But I think we have taken a number of steps. In fact this 
is an area where some of our technology has been very 
successful. We have an electronic fraud detection system that 
we designed with the help of Los Alamos, put it in place in a 
fairly crude fashion in 1995, refined it for 1995, and refined 
it again for 1997.
    We feel very strongly that the program is one that is 
designed to benefit people, but only the people it is designed 
to benefit should receive the credit.
    During the 1995 filing season, and since then, we have 
worked with a number of groups, community groups, and others, 
to try to get the word out so that the right people can claim 
it. We worked particularly hard in places like Arizona, 
California, Texas, where we have bilingual taxpayers who might 
not understand the opportunities that are available for them to 
claim the credit. We had a very active outreach effort.
    Mr. Price. Well, certainly, the Earned Income Tax Credit 
sends the right signal to working families--that work pays--and 
it is hard to imagine any more direct and less bureaucratic 
approach to giving these families a boost than saying that you 
simply keep more of your take-home pay.
    And it is very important that the individuals and the 
families who are eligible for this credit take advantage of it, 
and that we make certain it is just as simple and 
straightforward as it can possibly be.
    Of course we also want to prevent the wrong people from 
claiming this credit. Some rather strong claims have sometimes 
been made about the extent of fraud in this program and the 
dollar amount that is involved.
    Do you have any updated estimate as to how big this problem 
is?
    Ms. Richardson. I think we need to be careful in talking 
about it as fraud--because of the complexity. Even with the 
changes in 1993, there are people who may be claiming it, who 
should not be, but do not understand the phase-out rules or a 
number of other complexities. So I do not think that all of the 
problems related to fraud--I imagine some of the erroneous 
claims are not attributable to fraudulent behavior as much as 
they are to people not understanding their obligations. I 
mentioned we were in the process of analyzing the 1995 filing 
season, and I would be reluctant to give you a number until we 
have really finished our analysis, and have our recommendations 
together, in terms of what was erroneous.
    Mr. Price. Well, can you give us some kind of broad 
estimate of the extent to which this program is having its 
intended effect are being claimed by the right people?
    Ms. Richardson. I think that the report is--as I say, we 
are in the final stages of having it done, and I think within 
the next couple of months, it will be ready, and I will be 
happy to come up and brief you and other Members of the 
committee.
    Mr. Price. That would be good, and to the extent you can 
make preliminary findings available before the hearing record 
closes on this cycle, I think that would be helpful.
    [The information follows:]

    We are working to complete the EITC Compliance Report and 
will make it available as soon as possible.

    Mr. Price. Mr. Chairman, I appreciate the time.
    Mr. Kolbe. Thank you very much, Mr. Price.
    We will go to a second round of questioning. Actually, Mr. 
Wolf has just joined us, and if you are prepared to go to a few 
questions, we can take your questions right now, Mr. Wolf.

         Appointment of IRS Commissioner--Audit of 501(c)(3)'s

    Mr. Wolf. I just have one, because it is always difficult 
to come in because I do not know what other people have asked.
    I am just wondering if you would comment--I have a bill 
that we are working on to change the way that the IRS 
Commissioner is appointed. Perhaps to take it out of the 
political process, totally, to set up a process whereby four or 
five outside groups submit five to seven names to the 
President, and then the President can select from that group.
    I believe that is the way it is done on the National 
Science Foundation, but we are checking on that.
    Do you have any comments about that? It would still allow 
the President to make the ultimate choice, but because of the 
concerns that have been expressed about certain groups being 
audited--I happened, one day, to see, I think, the show that 
Mr. Glassman had, where he talked about a number of the 
conservative groups were being audited, and the concerns that 
seemed to be out there.
    Do you think there would be some merit in setting up a 
process whereby five or six credible, distinguished groups 
would set a panel up, and then they would submit the names, and 
from those names the President will then make the selection?
    Ms. Richardson. Mr. Wolf, before you came, I mentioned that 
I had----
    Mr. Wolf. I apologize if I have covered something----
    Ms. Richardson. No; no. I mean, that is fine. I just wanted 
to make sure you were aware that I, last week, had asked 
Chairman Archer and Mr. Roth, as heads of the Joint Tax 
Committee, if--or I offered to provide to them all of the 
information that we have, can legally provide them under 
Section 6103 of the code, which is the confidentiality or 
privacy provision of the tax law, so that they could take a 
look, along with their staffs, at the audits that we have been 
conducting.
    Because I really do believe that the information that we 
could legally share would demonstrate that we have a fair, 
impartial, and nonpartisan audit program for all taxpayers, but 
most especially for tax-exempt organizations.
    They have taken me up on the offer. They sent a letter to 
me yesterday, saying they would like to have their staff meet 
with ours, and we look forward to working with them, to assure 
you and all the Members of Congress, and the public, that we do 
have a fair, impartial program, because I am concerned about 
the impact these repeated allegations could have on the 
public's confidence in the integrity of the system.
    Having said that, I think that any system that would allow 
the best person to be selected for Commissioner is worth 
considering, and I do not know, you know, specifically, what 
groups you have in mind, or what you have in mind, but I think 
any opportunity to get the best names put forward, and give the 
President a list of people that, you know, could do the job and 
do it well, is a good idea.
    I believe the Comptroller General selection is made 
somewhat along those lines.
    Mr. Wolf. Yes.
    Ms. Richardson. And you know, that has worked fairly well 
over the years, so----
    Mr. Wolf. Okay. If you could have somebody from your 
General Counsel's Office come on by and sit down with us 
sometime, maybe next week, we could just talk about some of 
these things. I would appreciate it.
    Ms. Richardson. I might also mention, and you may be aware, 
that the Commission on Restructuring the Internal Revenue 
Service is looking at different kinds of governance mechanisms, 
up to and including maybe using the Post Office as a model, or 
Fannie Mae, or Social Security, and taking IRS outside of the 
Treasury Department, making it an independent agency and having 
a board of directors.
    Mr. Wolf. I have no further questions. Thank you very much.

                 tax audits of non-profit organizations

    Mr. Kolbe. Thank you very much, Mr. Wolf.
    Let us move to a second round of questions here. We have a 
few moments to do that.
    I want to come back to this issue which Mr. Wolf alluded 
to, and you have alluded to, and that is this whole question of 
the tax audits or review of political activity of nonprofit 
groups, and the charge that is being done with a certain 
ideological or political bent to it.
    You are absolutely correct, Madam Commissioner, in saying, 
I think, that nothing--I cannot think of anything that would 
undermine the credibility of the IRS faster than this. These 
statements are certainly not good. Even worse, however, would 
be evidence that, indeed, this has been happening, and that the 
IRS has been using its auditing or review capacity in order to 
conduct political witch hunts, or whatever we want to call 
them.
    It is not unknown that the IRS has done this. We now have 
got enough history, going back many, many years, from things 
that have been released in the past, to know that the IRS has 
been used improperly by Presidents of both political parties.
    But it is very damaging to the credibility of the agency, 
if this actually happens. You have referred to yourdiscussions 
with the congressional committees, the letters that you have sent.
    Do I understand you have not yet had any further 
discussions on the letters that you have sent?
    Ms. Richardson. Well, actually, late last night I got a 
letter back from Chairman Archer and Senator Roth, taking me up 
on the offer. I have a copy of the letter, which I would be 
happy to leave with you.
    Mr. Kolbe. That will be fine.
    [The information follows:]

[Pages 1249 - 1250--The official Committee record contains additional material here.]

    Ms. Richardson. And I must say, I am delighted that the 
committees are going to give us an opportunity to present the 
facts.
    Mr. Kolbe. What is the next step?
    Ms. Richardson. Well, they asked that we sit down, or that 
I ask somebody to sit down with their staffs, and start 
exploring how best to go about getting the information to the 
committees, and as I say, I think all of us are very pleased 
that we will have an opportunity to present the facts.
    The other thing I might say, for the record: During my four 
years as Commissioner, I have never directed anybody to 
initiate an audit of any taxpayer, nor have I ever been 
directed to initiate an audit of any taxpayer. I began my 
career, as I told you, at the IRS many years ago. I was 
privileged to work for Commissioner Randolph Thrower at the 
time, and later be his partner for many years, and I have a 
very strong view about the importance of maintaining the 
integrity of the audit process. So I just wanted to say that 
for the record.
    Mr. Kolbe. Will your discussions with the committees go to 
the stage that you referred to about a possible public release 
of this information, or at this point are you just talking 
about sharing it with them?
    Ms. Richardson. Well, they did not specifically mention 
that provision, but we certainly would like to explore that as 
well.
    Mr. Kolbe. And I understand the law, too, permits you to 
share this information with the Committees. I am not aware of 
any provision that allows you to publicly release that. Is 
there a provision?
    Ms. Richardson. There is a provision of the Code, 6103(k), 
that allows the IRS, with the concurrence of the Joint 
Committee on Taxation, to release information to correct 
misstatements of fact, and it can be done without a waiver from 
a taxpayer.
    Mr. Kolbe. Without a waiver.
    Ms. Richardson. And that was put in specifically to cover 
the kinds of situations that we are finding ourselves in today, 
where we have no ability to defend the actions of the people 
working in the Service.

               political activity by exempt organizations

    Mr. Kolbe. I just want to get one other thing in this area 
clear, because I think there has been a lot of misconception 
and misunderstanding as to whether we are talking about 
501(c)(3) organizations that are prohibited from political 
activities, or auditing the tax returns of 501(c)(4) 
organizations that have political advocacy arms to them.
    Which are we talking about? Reviewing the political 
activity of the 501(c)(3)s, or are we talking about auditing of 
tax returns of 501(c)(4)s?
    Ms. Richardson. Well, I have to confess that I do not know 
what people are talking about. I think there is a lot of 
confusion. We have a factsheet that we have brought with us, 
and we will provide the committee, about permitted political 
activities on the part of exempt organizations. But we have an 
audit program that looks at a number of issues and certainly 
improper political activities are some of them.
    [The information follows:]

[Pages 1252 - 1254--The official Committee record contains additional material here.]

    Mr. Kolbe. Which information are you talking about sharing 
with the Committees, or which of the----
    Ms. Richardson. Well, I will share with you our factsheet 
which is----
    Mr. Kolbe. No; no. With Mr. Roth and Mr. Archer. Are you 
talking about sharing information dealing with 501(c)(3)s, or 
501(c)(4)s, or both?
    Ms. Richardson. It could be both, actually. It could be 
both. I mean, any of the allegations that have been made, and 
that is one of the things, I think, we have got to sit down 
with our staff and talk about--what the allegations are and 
what kind of information we can legally provide them, and I 
believe, in some cases, we have got organizations in both 
categories.
    Mr. Dolan. Far and away the greatest media pickup has been 
on allegations that would be of the 501(c)(3) type.
    Mr. Kolbe. The (c)(3)s, whether they are engaged in 
political activity?
    Mr. Dolan. That is far and away the examples that have been 
recited----
    Mr. Kolbe. Although there have been charges by some other 
groups, such as the NRA, I believe, that they are having their 
tax return audited.
    Mr. Dolan. But just to be clear, and I think maybe the 
factsheet the Commissioner referenced--even in the instanceof 
the 501(c)(3), there are two kinds of engagements we might have. One 
would be on the front end, the determination process, of which we get 
roughly 70,000 every year. The other would be----
    Mr. Kolbe. I mean, that is the initial approval.
    Mr. Dolan. Initial approval.
    Mr. Kolbe. Yes; yes.
    Mr. Dolan. But then we would also have an examination 
process. During the course of the year, we would examine (c)(3) 
entities.
    Mr. Kolbe. That leads me to my question, that I wonder if 
you might share with this Committee members. And that is, take 
a snapshot in time, or whether you can, at any one time, or you 
can take over a period of time, in the course of a tax year or 
calendar year. How many 501(c)(3)'s are actually reviewed for 
their engagement in political activities?
    And secondly, how many 501(c)(4)'s actually have an IRS 
audit of their tax returns?
    And give me those numbers in comparison to the total number 
of 501(c)(3)'s and the total number of 501(c)(4)'s.
    Ms. Richardson. If you would permit me, I would like to 
provide that for the record so we can get it absolutely 
accurate for your information.
    Mr. Kolbe. I would like it accurate, and I would like it 
provided for the record as to the time frame that we are 
talking about and the numbers that we are talking about, a 
normal review like this.
    [The information follows:]

    The IRS maintains a determination letter program by which 
an organization may seek recognition from the IRS that it 
qualifies as a tax exempt organization. Among other 
requirements, in order to be an organization described in 
section 501(c)(3), an entity must not engage in any political 
campaign activity and must limit its legislative activities. 
After initial qualification, and as part of our examination 
program, the IRS conducts exams aimed at ensuring that exempt 
organizations continue to meet the legal requirements for tax-
exempt status, including limitations on engaging in legislative 
activities and the prohibition on engaging in political 
campaign activity.
    In light of the law in this area, the IRS has made 
enforcement of political and lobbying restrictions a part of 
its exempt organizations examination program through the 
Internal Revenue Manual, IRS training materials, and the EP/EO 
annual work plan. These restrictions have been EP/EO interest 
areas for over ten years.
    We do not track the political affiliation of a taxpayer or 
the issues that are being reviewed while an examination is 
underway. However, after a preliminary review, we are aware of 
at least 50 tax-exempt organizations (including organizations 
described in section 501(c)(3) and (c)(4)) presently under 
examination, or who have an application for a determination 
letter pending, in which the issue of political or legislative 
activity is involved. The 50 number does not reflect all those 
cases currently in the field. The 50 entities do, however, span 
the entire political spectrum.
    Our information systems do allow us to track issues in 
closed cases, though not with great precision. In fiscal years 
1994-1996, our information systems indicate the following 
numbers of closed cases involving organizations exempt under 
section 501(c)(3) or (c)(4) with either political or 
legislative activity as a principal issue:

------------------------------------------------------------------------
                  Fiscal year                    501(c)(3)    501(c)(4) 
------------------------------------------------------------------------
1994..........................................           33            4
1995..........................................           33            6
1996..........................................           29            6
------------------------------------------------------------------------

    There may be some overlap in cases where more than one of 
these issues was reported. These figures include only 
examination cases. We have no data on the number of 
applications for a determination letter that were denied 
because of political or legislative activity.
    At the present time, management information systems 
indicate that approximately 350 organizations described in 
section 501(c)(4) are under examination.
    There are approximately 1.2 million exempt organizations, 
not including about 300,000 churches. Of these exempt 
organizations, around 630,000 are section 501(c)(3) 
organizations (e.g., charities), and 140,000 are section 
501(c)(4) organizations (social welfare organizations).

    Mr. Kolbe. Mr. Hoyer.
    Mr. Hoyer. Thank you, Mr. Chairman.
    I think all of us will look forward to seeing that because 
we all agree that it would very much undermine the trust the 
American taxpayer has in the system if they felt it was being 
used for political purposes. We have numerous examples, as the 
Chairman pointed out, of so-called hit lists or directives with 
reference to certain taxpayers, either individually or as 
groups. So that I will look forward to reviewing that.
    Ms. Richardson. I would like to say, though, I think that 
any information along those lines is at least 20 years old, in 
terms of any allegations. I mean, any information directly 
related to the IRS.
    Mr. Hoyer. Well, of course the information is 20 years old, 
but I suppose with the Nixon tapes that were just released, we 
heard a lot of discussion about that, as well as more recent 
allegations. But I agree with you that the----
    Ms. Richardson. But there was also never a finding that 
anyone did anything, and I believe the then-Commissioner has 
written--or I think at the time of the hearings it was 
established IRS had done nothing, and I think he has 
reconfirmed that in recent weeks.
    Mr. Hoyer. And I think that is obviously helpful, and 
builds confidence.

                          past tsm investments

    Let me go to another issue that undermines confidence, that 
I should have asked the Secretary about as well. I will ask you 
to comment on, because we continue to have discussions about 
monies that have been spent pursuant to Tax Systems 
Modernization, and the assertion that those were wasted. And I 
think that in terms of building confidence, I would like to 
either have you, or Mr. Gross, or Mr. Dolan, whoever wants to 
comment on this issue, to put it in context. $4 billion is the 
figure that is thrown around a lot, but whatever figure----
    Ms. Richardson. I am going to ask Arthur to get into more 
specifics, but from fiscal year 1987 through fiscal year 1996, 
$3.3 billion is what was appropriated, so $4 billion is not 
accurate at the outset, and I think we do have a lot to show 
for the money that has been spent. And I will let Arthur speak 
in more specifics about what kinds of things we have actually 
acquired over the years.
    Mr. Gross. Congressman Hoyer, during that period from 1987 
through 1996, the $3.296 billion were expended in part for 
infrastructure. According to IRS records, about $1 billion of 
those expenditures were allocated for mainframe, mainframe 
platforms, telecommunications, data storage devices, tape 
robotics. In addition to the $1 billion for infrastructure, IRS 
records also indicate that during that nearly 10-year period, 
that funds were also allocated for a variety of data capture 
programs such as EFTPS, the Electronic Federal Tax Payment 
System, and the electronic filing systems.
    There were also monies expended for customer service and 
compliance programs. Among the more notable programs in 
customer service it is the Integrated Case Processing system 
that facilitates customer service representatives research of 
taxpayers account issues. There has also been implementation of 
a system called the Integrated Collection System which enables 
field revenue officers to accelerate collection processes more 
efficiently and more effectively.
    There have also been some advances in our financial 
reporting systems for which funds have been expended during 
that period.
    Mr. Hoyer. Let me ask you, then, as somebody who came in 
independently. I understand that you just went through what 
those monies were spent for.
    Of the $3.296 billion, which is $700 million less than 
before, but a lot of money--from your standpoint, in analyzing 
it from a management standpoint, how much of that $3.296 
billion was in fact not utilized effectively toward the end of 
serving the taxpayer better?
    In other words, from your analysis, was in fact any of this 
money wasted? We know, and we all agree, that what we hoped to 
get we were not getting, and GAO has consistently said that, 
and Secretary Rubin and Secretary Summers, and I think 
Commissioner Richardson, and all of us agree, that yes, that is 
right. Now we are about the business of getting it.
    Now it is important, as a look-back, to say to the 
taxpayer, Look, this money was not all wasted, it did not 
accomplish the objective. But from your standpoint, if a 
constituent asked me, Mr. Hoyer, what happened with the $3.296 
billion?, I could give him that figure. But then there would be 
the assertion that we wasted money because we did not 
accomplish the objective.
    What would be a fair analysis, on your part, of what 
portion of that money was not spent well? Obviously money to 
keep the system going, and modernizing equipment that we had to 
have even though it may not have been the modernization system 
we were getting, was useful, so I presume you would put that in 
the category of a necessary expenditure. It may not have 
accomplished the overall big objective, but it was necessary to 
keep the system going along. See what I am saying?
    Mr. Gross. Yes, I do, Congressman. Not having audited the 
records, personally, the records do show that of the $3.296 
billion, $607 million were allocated to what are characterized 
as non-continuing projects. Those are projects that were 
terminated for a variety of reasons or circumstances having to 
do with technical solutions or business cases, and of that $607 
million for non-continuing projects, it is estimated that 
approximately $200 million was allocated for infrastructure 
that could be reutilized for other purposes.
    So if you would net that approximately $200 million out of 
the $607 million, the records seem to indicate that there was 
approximately $400 million allocated for non-continuing 
projects that have not been implemented, and for which we would 
not be able to access or leverage those resources.
    Mr. Hoyer. Okay. So that is the ball park, I suppose, that 
feel comfortable with--about $400 million was not utilized 
effectively in pursuance of either servicing the taxpayer on an 
ongoing basis, or meeting the objective of a system that would 
be capable into the future?
    Mr. Gross. That is what the record indicates.

                         irs reduction in force

    Mr. Hoyer. Okay. Let me make sure I got the answer to this 
question on the RIF. Do we think a RIF is going to be 
necessary?
    Mr. Dolan. It is hard to anticipate not needing a RIF, 
given the numbers as they exist today. We still have as I 
mentioned before, 1,400 and some in non-continuing. We have 
1,400 vacancies. We know full well a lot of people in those 
non-continuing are not in a financial or family position to 
move to the vacancies. We have drawn down the 1,300 that the 
traffic would bear on buyouts, and so absent some unforeseen 
act of God, or willingness of people to match up with these 
vacancies we have, at this point it would look to us, that in 
some parts of the country the RIF process would be required.

                            telephone access

    Mr. Hoyer. All right. One last question on the Service. A 
lot was written about people's inability to get to the IRS 
assisters on the telephone. Is that a problem, and if so, how 
are we remedying it?
    Ms. Richardson. Well, clearly, one of our top priorities 
has been to try to find ways to have taxpayers have access to 
us. This filing season, thus far, our level of access on the 
telephones is over 70 percent. I think Mr. Summers mentioned 72 
percent, which is about right. That is up from this time last 
year, I think around 52 percent.
    We made a very concerted effort to get people on to the 
telephones and to make sure that we did have the right number 
of people to answer the calls.
    The number of calls that we have answered has gone up, the 
volume has gone down, so we have been able to provide a better 
level of access.
    But what we have also done is try to look at alternative 
ways to get information to people. We have an automated 
telephone system with a menu of I think 148 different questions 
and answers. So, callers donot have to speak to a live assister 
but can help themselves to information.
    We have a new number this year for people who just want to 
know the status of their refunds, and they do not have to tie 
up our live assisters. They can get the status of their refunds 
by calling that number.
    We also opened, in January a year ago, a Web site on the 
Internet, and you can get the answers--the questions and 
answers that are on our Teletax system are also there. We have 
got forms, we have got publications, and a whole host of 
information that we believe is taking some of the pressure--we 
hope is taking, and we believe, although we are going to be 
doing some real serious analysis after the filing season--that 
that is taking some pressure off the telephones.
    But we also--last year--we terminated 12 different notices 
that would have gone out 18 million times, which would have the 
potential for generating 18 million phone calls. The remaining 
notices that we are sending out we have tried to clarify. We 
hope that when a taxpayer gets the notice, the first reaction 
will not be, ``I have to call because I cannot understand--it 
is not clear enough.''
    So we are looking at a number of ways to enhance the level 
of access. But if I am one of the 30 percent of callers who has 
not gotten in this year and had a chance to speak to somebody, 
or wanted to, then I would be very unhappy. So we will not be 
satisfied until we can really meet the standards that are the 
best in the private sector.
    But that does take resources. It takes some ingenuity on 
our part, but it also takes resources.
    Mr. Hoyer. I would just simply observe that one of the 
things that the Vice President talks about is the 1-800 number 
for Social Security Administration, which is deemed by the 
private sector as the best 1-800 numbers in the country, 
operated by Social Security, and if we could replicate that 
kind of record----
    Ms. Richardson. We have spent a lot of time with Social 
Security. Commissioner Chater is somebody who has been very 
generous in making her time available, to me, and her senior 
staff's time available to a number of us. Their call management 
system is something we have looked at very closely. We are 
using the same vendor, I think, but for next filing season we 
hope to have in place a different kind of system that really 
would give us far better opportunities to route calls to the 
next available operator on a national basis as opposed to a 
more--a system where we have to do call management, that 
sometimes puts us a few hours behind.
    And so we are looking at ways to enhance service, not just 
this year, but on into the future, and technology is going to 
be a real key for that.
    Mr. Hoyer. Thank you.
    Mr. Kolbe. Thank you.
    Mr. Price, do you have another questions.

                      tax incentive for education

    Mr. Price. Yes. Thank you, Mr. Chairman.
    I would like, briefly, to explore the question of tax 
incentives for pursuing higher education, which as you know, 
Madam Commissioner, is very high on the agenda of both parties 
right now. I just came from a Ways and Means hearing where this 
was being discussed.
    I would like to ask you to provide some information, 
perhaps for the record if you do not have it at your 
fingertips, on education tax breaks: the extent to which they 
were taken advantage of when they were in the Code, and what we 
might anticipate in putting them, or other incentives, back in 
the Code.
    Before tax reform in the mid 1980's, there was a deduction 
permitted for interest payments on student loans.
    Do you have any information from the last years in which 
that was in effect about how many families or how many students 
took advantage of it, and what the dollar impact was?
    Ms. Richardson. I do not know, and I am not sure we would 
have it broken out that way, because it was not just student 
loan interest that was no longer deductible. It was all 
personal interest in the Tax Reform Act of 1986. Congress, in 
exchange for simplifying the law for a number of people, and 
increasing the size of the standard deduction, concluded that 
personal interest would not be deductible. I do not honestly 
know, although I will try to find out, whether at the time 
people deducted interest we separated it out by the type of 
loan.
    I suspect we did not, but we will look at our statistics 
and then give you information for that.
    [The information follows:]

    We do not have any statistics available on taxpayers who 
used tax incentives for higher education, including statistics 
on the deduction for interest on students loans.

    Mr. Price. Well, as you know, there is serious discussion 
now of reinstating the deduction for student loan interest as 
well as exempting scholarship and fellowship awards.
    I think it is fair to say that over the 10 years since tax 
reform was enacted, the pressures for financing higher 
education have gotten much more severe. Family income has 
remained largely stagnant, but the cost of private higher 
education has gone up around 40 percent and public higher 
education is up almost 30 percent.
    There clearly is some need to reconsider just how difficult 
it has become for many families. If we are deducting interest 
on first and even second home mortgages, then clearly, there is 
a case to be made for this as an equally necessary expense.
    I know you are not in the business of making tax policy. I 
respect that distinction. But in terms of the job of 
administering the laws, do you have any observations that might 
be helpful as we consider deductions versus credits as a way of 
providing some relief and some incentives to undertake higher 
education investments?
    Ms. Richardson. Well, with the first, we do not do tax 
policy. I think that it is fair to say that the simpler the 
system, the fewer deductions, the fewer credits, the easier it 
is to administer. I think that went to a question that Mr. 
Forbes was perhaps asking earlier, and when the 1986 act was 
enacted there were some tradeoffs, and some people felt that 
they lost a lot of deductions. We could deduct sales tax at the 
time, and people kept lots of their receipts, and always felt 
obligated to add up those receipts at the end of the year, and 
then check to see whether the tax tables that would give them 
just a number, would be more generous or less generous.
    So a lot of the burden on both the administrator and the 
taxpayer has gone when we get rid of deductions. When we have 
phaseouts, which I know are done for budgetary reasons, those, 
too, create complexity, and once again you have a tradeoff 
between fairness and equity and simplification.
    I think it is probably easier to administer deductions. 
Nonrefundable credits are certainly easier for us to administer 
than refundable ones. But at the end of the day----
    Mr. Price. It is easier to administer deductions than 
credits, you are saying?
    Ms. Richardson. I think so; probably.
    Mr. Price. Why is that?
    Ms. Richardson. Because the way the system works, I think 
people typically understand how to use those deductions more 
easily than people who use credits. And if we have a lot of 
credits, and you can take them on a return that claims a 
standard deduction, you have immediately made it more 
complicated for the taxpayer and for us to verify those things 
on those returns.
    Today, people who take a standard deduction and are not 
entitled to many of the credits have a very simple situation.
    Mr. Price. Well, by the same token, though, the credits are 
available to people who do not itemize, and arguably, are a 
more targeted way of providing some relief on these expenses.
    Ms. Richardson. But I think at the end of the day, the 
issue about refundability is the one that is the most difficult 
for us, and that has been where the incentives to commit fraud 
have been the greatest.

                     president's education proposal

    Mr. Price. As you know, there is a proposal in the 
President's education package that would reward students who 
maintain a B average by offering tax credits for their tuition 
expenses. It is an attempt to enforce a certain accountability 
on the recipients of these credits.
    There has been some speculation, though, as to how 
difficult it might be to administer such a provision, or 
perhaps even some perverse incentives that it might introduce 
in terms of grade inflation.
    Just from the IRS standpoint, what would you say about the 
administrative feasibility of that B average requirement?
    Ms. Richardson. I think at the end of the day, it depends 
on how it is implemented. If someone has to provide a 
certification, that is obviously easier than if I have to go 
out and check every report card.
    I think that one of the issues that we were talking about 
earlier with Chairman Kolbe is the desire to get as much paper 
out of the system, and I think when you have to provide 
certifications or some additional pieces of paper, or a 
transcript, you are creating yet another opportunity for 
people--for us to have process or handle a piece of paper.
    Mr. Price. Thank you. Thank you, Mr. Chairman.

                       tax systems modernization

    Mr. Kolbe. We need to draw this hearing to a close. One 
question. I think I can get a one word, or one sentence answer 
from Mr. Gross.
    Mr. Gross, are you receiving the support you need within 
the Internal Revenue Service to do the work that you are doing 
on developing the architectural plan for the new or follow-on 
to TSM?
    Mr. Gross. Yes. The architectural plan referenced earlier, 
in Deputy Secretary Summer's testimony is being developed by 
both IRS Legacy Systems architects, and by worldclass 
technology companies who are currently under contract. In other 
words, we have formed a private/public partnership----
    Mr. Kolbe. My question is your support within IRS--are you 
getting the support you need within IRS to accomplish the task?
    Mr. Gross. Yes. I am.
    Mr. Kolbe. Thank you very much.
    Mr. Hoyer, you wanted to make a final comment?

                      farewell to the commissioner

    Mr. Hoyer. I want to say to Commissioner Richardson, as we 
conclude this hearing, again, how much we appreciate her 
service and her leadership and her cooperation, and her 
positive attitude as we try to solve some very thorny problems 
in the agency that are absolutely critical. As Secretary 
Summers said, and as you know, if we are going to operate 
effectively as the U.S. Government, it bears repeating that 
this system, with all the criticisms that we bring to it, is, 
in fact, the best in the world, and those people who work in it 
are to be congratulated for making it so.
    Good luck to you.
    Ms. Richardson. Well, thank you very much, and I thank you, 
Mr. Chairman, and Mr. Hoyer, very much for your support, and I 
know that the Service will continue to receive your support, 
and I think appreciates the constructive criticism that you all 
have provided.
    Mr. Kolbe. Madam Commissioner, I can certainly echo Mr. 
Hoyer's words, which were far more eloquent than mine, and we 
certainly wish you well in the new phase of your career and 
your life here, and thank you for the testimony, thank you for 
the service that you have given.
    This Subcommittee will stand adjourned until 2:00 o'clock.
    [Questions for the record and selected budget justification 
material that follow are not in order of Committee Seniority.]

[Pages 1263 - 1467--The official Committee record contains additional material here.]

                                          Wednesday, March 5, 1997.

   DEPARTMENT OF THE TREASURY, BUREAU OF ENGRAVING AND PRINTING (BEP)

                               WITNESSES

 LARRY E. ROLUFS, DIRECTOR, BUREAU OF ENGRAVING AND PRINTING
GEORGE MUNOZ, ASSISTANT SECRETARY FOR MANAGEMENT, CHIEF FINANCIAL 
    OFFICER

                              Introduction

    Mr. Kolbe. Mr. Rolufs, if you are ready, you may proceed.

                    Summary Statement of Mr. Rolufs

    Mr. Rolufs. Thank you, Mr. Chairman. As you already know, 
I'm Larry Rolufs, and I'm pleased to appear before you today to 
report the progress of the Bureau of Engraving and Printing 
during fiscal year 1996, and to discuss our future plan.
    I prepared a comprehensive statement which I will submit 
for the record, but my remarks will highlight the major topics 
discussed in that statement.
    As the nation's security manufacturing agency, the BEP 
designs and produces United States currency, postage stamps, 
Treasury obligations and other U.S. securities. Additionally, 
BEP advises and assists Federal agencies in the design and 
production of other government documents, which because of 
their innate value require counterfeit deterrent 
characteristics.
    Mr. Chairman, as you have already indicated, the BEP does 
not seek an appropriation, and for the 12th consecutive year in 
the operation of the industrial revolving fund, BEP has, we 
have received an unqualified opinion on its financial 
statements.
    Last year was a year of progress and change for us. We met 
our customers' delivery requirements, began production of new 
products, improved efficiency, and achieved significant cost 
savings.
    We delivered 9.4 billion currency notes in fiscal year 
1996, of which 1.2 billion were new design $100 notes. The $100 
notes marked the initial phase of the first major redesign of 
U.S. currency in over 60 years.
    These notes incorporate counterfeit deterrent features, to 
maintain the integrity of the nation's currency, and thwart 
technological advances available to counterfeiters.
    In the postage stamp program a major new product line was 
introduced. BEP converted more than one third of its fiscal 
year 1996 postage program to the pressure sensitive stamp 
format.
    This year most of our mainstream stamp production will be 
of the pressure sensitive variety. Along with these 
initiatives, significant improvements in efficiency and cost 
effectiveness were achieved. Productivity increased by 3 
percent in fiscal year 1996, largely due to an aggressive 
overtime reduction effort.
    Overtime costs were reduced by $3 million in fiscal year 
1996, following the reduction of $4 million in fiscal year 
1995.
    The Federal Reserve has estimated its currency requirement 
for fiscal year 1997 and fiscal year 1998 at 9.6 and 10 billion 
notes respectively. Postage stamp production is budgeted to be 
25 billion stamps each year.
    As I mentioned earlier, the first major redesign of U.S. 
currency in over 60 years was initiated last year with the 
introduction of the new design $100 note. The design changes 
include a larger, off center portrait, color shifting inks, and 
a special imbedded security thread.
    A variety of covert but machine readable features have also 
been added for banking system use.
    The Secretary of the Treasury has approved design concepts 
for a new $50 note for final production testing. A new design 
$50 note is tentatively scheduled to be issued into circulation 
in September of 1997. Introduction of a redesigned $20 note is 
expected to occur in fiscal year 1998.
    Mr. Chairman, that concludes my opening remarks, and I will 
be happy to respond to questions you or other members of the 
committee may wish to ask.
    [The prepared statement of Mr. Roulfs follows:]

[Pages 1471 - 1476--The official Committee record contains additional material here.]

                     Statement of Congressman Hoyer

    Mr. Kolbe. Thank you, very much. And because Mr. Hoyer has 
a meeting that he needs to chair, I will turn to him for 
questions.
    Mr. Hoyer. Thank you very much, Mr. Chairman. I am going to 
submit questions for the record, but I want to say that I am 
very enthusiastic about the new $100 note, not only in terms of 
its design--not that I am any judge, either artistically or 
aesthetically--though I happen to like the design. I have been 
an advocate for a long period of time on this subcommittee for 
modifying our currency.
    Most European nations modify their currency much more 
frequently than we do, which, in my opinion, has an impact on 
the underground economy, and notes that people hold. Obviously 
the $100 bill is the most counterfeited of our currency, of 
which 80 percent circulates abroad and not in the United 
States.
    The security enhancements that have made the integrity of 
that note obviously far greater than the existing $100 note. 
And so I want to congratulate you on the role that the BEP 
played in effecting that change.
    And I am pleased to hear about the $50 bill. I think that 
we ought to have, a periodic, not necessarily regular, but 
periodic change in the currency.
    I also want to congratulate you on the success of pressure 
sensitive stamps. I think it is a big improvement, 
technologically, for all of us lickers.
    Mr. Rolufs. I'd like to take credit for that, but I don't 
think I can.

                      outsourcing stamp production

    Mr. Hoyer. I also want to say to Mr. Morris who will be 
coming on soon, I really regret missing them. They are in my 
district. Their headquarters is in my district, and they are 
great tenants, great folks there, and I miss being able to be 
here for them. Because of the fact that I am chairing this next 
meeting, I will miss him.
    Let me ask one question. What plans are there to outsource 
stamp production, and what will the impact be on the work 
force?
    Mr. Rolufs. The Bureau of Engraving and Printing itself has 
no plans to outsource stamp production. Our customer is the 
Postal Service. The Postal Service currently outsources a great 
deal of the stamp production of the nation.
    Total stamps in this upcoming year will probably be 
somewhere in the range of 45 billion, of which the Bureau is 
doing 25 billion. I believe that we will see a continuing trend 
of outsourcing by the Postal Service.
    We negotiate with them on about a five year basis an 
agreement for the portion of their annual requirement which the 
Bureau will receive. But they are the customer, and they 
control where the stamps are printed.
    Mr. Hoyer. Thank you. Mr. Chairman, I will take 
theopportunity to meet with both Mr. Rolufs and Mr. Morris in my office 
in the future, just in case there are any questions or anything they 
want to say to me--not necessarily privately, but just because I cannot 
stay for the rest of the hearing.
    And I thank you for your consideration in letting me go 
first.

                          new currency design

    Mr. Kolbe. Let me ask a few questions on the currency. What 
is your timetable for the introduction of the next of the new 
paper currencies? The $50 bill goes next?
    Mr. Rolufs. The $50 bill goes next.
    Mr. Kolbe. When is that?
    Mr. Rolufs. It should be in September of this year.
    Mr. Kolbe. So you're stockpiling that now?
    Mr. Rolufs. No, we're not in production yet. We are in the 
process of putting together a number of working experiments. 
The final design is yet to come, and will be authorized by the 
Secretary.
    Mr. Kolbe. You don't have to produce a lot in advance? This 
is not like substituting a coin for the one dollar bill, you've 
got to have a huge stockpile?
    Mr. Rolufs. Not at all. This is what the Bureau of 
Engraving and Printing would term a short run.
    Mr. Kolbe. Is it the currency that is the smallest number 
in circulation, of bills in circulation?
    Mr. Rolufs. Between it and the 100, it would be very close.
    Mr. Kolbe. Following the 50, you would go to the 20?
    Mr. Rolufs. Following the 50, approximately a year from the 
beginning of the 50, we should see the 20, and then after that 
it should be the ten, and then the five, hopefully about a year 
apart.
    As with all things in a production organization, with 
design approvals, with the kinds of difficulties you may run 
into in terms of getting the designs to work on paper, that 
kind of thing, you can't predict exactly. But that's the 
schedule for right now.

                          production capacity

    Mr. Kolbe. How much of your capacity--how much of your 
total production is one dollar bills?
    Mr. Rolufs. Our one dollar note production is about 45 to 
47 percent.
    Mr. Kolbe. Gosh. If you weren't producing those one dollar 
notes you could introduce some of these other counterfeit proof 
bills faster, couldn't you?
    Mr. Rolufs. Actually, the limiting factor is not the 
production on the press so much as it is the redesign and the 
engraving portion, getting that kind of thing done is the 
limiting factor.
    Mr. Kolbe. Does it take all of your resources, let's say in 
design, and engraving and design, and getting the new 
production pieces, equipment, whatever it is we're talking 
about, together, dies, for one bill at a time?
    Couldn't you have engravers working on the 50 and the 20 
and the 10 and the 5?
    Mr. Rolufs. Unfortunately we're not blessed with that kind 
of talent in terms of portrait engravers. These are the 
engravers who do the larger portraits, and it does take some 
time to do those.
    We could probably, in my estimate, could maybe have two 
going at once, but that would be at about the limit of our 
capabilities, along with the other work that the bureau does.

                        currency paper contract

    Mr. Kolbe. Let me ask you about your currency paper. You 
released a draft request for proposals requesting bids from 
companies that want to supply paper to you for production of 
currency.
    What is the estimated dollar value of the current contract 
that you have?
    Mr. Rolufs. The contract that we have right now runs about 
$75 million a year.
    Mr. Kolbe. That's virtually at this point a sole source, is 
it not?
    Mr. Rolufs. For about the past 117 years----
    Mr. Kolbe. Give or take a year.
    Mr. Rolufs. Give or take a year, we have obtained our paper 
from Crane and Company in Dalton, Massachusetts.
    And there have been two instances that I know about where 
there was some semblance of competition for that contract.
    Mr. Kolbe. What happened?
    Mr. Rolufs. The producer produced for a short period of 
time a limited amount of paper, and then apparently decided 
that they, for whatever business reasons, that they didn't want 
to be involved any longer.
    Mr. Kolbe. We have the new solicitation out on the street 
right now. What makes this one different?
    Mr. Rolufs. Let me say this: we have a draft solicitation 
out on the street. It's out there for comment. We have not yet 
issued the final solicitation. What makes it different is 
that--there are probably a couple of aspects to it.
    One, the requirements of the Conte amendment have, in 
appropriation language, been lessened. And the second part is--
--
    Mr. Kolbe. Let me just interrupt, because I want to 
understand that. The appropriations directions over the last 
few years have reduced the requirement of the Conte amendment?
    Mr. Rolufs. That's as I read the appropriations language, 
yes. The original amendment called for a 90/10 American owned 
and controlled----
    Mr. Kolbe. Now it's 50 percent.
    Mr. Rolufs. Now it's 50, or a little over 50. However you 
want to interpret, yes. Majority, I guess.
    Mr. Kolbe. So it's 50-plus. The Department has never, in 
the years since the passing of my great friend, Sil Conte, has 
never taken a position as to whether this place should stay in 
place or whether we should just delete it all together.
    It's pretty hard to argue a national security requirement 
here.
    Mr. Rolufs. I'm not sure--the Conte amendment is a piece of 
law, or a piece of appropriation language. I don't know that we 
have a national security requirement here.
    Mr. Kolbe. Staff is clarifying that for me. The law says 
that it has to be American owned. It's only report language 
that changed it from 90 to 50.
    Mr. Rolufs. That's correct.
    Mr. Munoz. If I may, Mr. Chairman.
    Mr. Kolbe. Go ahead.
    Mr. Munoz. The General Counsel of the Treasury Department 
has actually not come out yet with its final legal reading of 
the Conte amendment, in terms of percentage ownership, whether 
it's 90/10 or now majority. The final say in terms of how 
Treasury reads that legally is yet to be issued by our General 
Counsel.
    Mr. Kolbe. I'm not sure I understand why there could be any 
misreading of that American owned--if 90 percent was good, you 
didn't have to be 100 percent.
    Mr. Munoz. I'm sorry, Mr. Chairman. Let me clarify. Our 
General Counsel is looking to make sure that in fact if it's 
gone down from 90 percent, 90/10, to whether it has in fact 
gone down to majority or not, because it may make a difference 
for those who are making bids.
    Mr. Kolbe. You're not sure what the report language said?
    Mr. Rolufs. Let me try it this way for you. One of the 
things that I asked for before issuance of the final RFP was a 
legal--well, it has to go through legal review, and I define--
not me, but my staff--defined in that RFP what our 
interpretation of the Conte amendment is.
    And legal has to pass on that. And when they pass on that, 
then I'll know. The reason for this is fairly simple. We're 
trying to, in the RFP, be in a position that should there be a 
protest, that the protest will come before award, before we go 
through the process of qualifying bidders, so that it will 
lessen the economic impact.
    And so it's going through that kind of legal review. And 
all of Treasury's solicitations do that.
    Mr. Kolbe. Your hope is the new solicitation will increase 
the competition? Do you expect that therewill be other 
companies that can bid. If you do determine that--and I don't know how 
you could determine anything else, since the report language seems 
pretty clear--that the majority is that, 50-plus percent ownership, 
American ownership.
    Do you expect to have more bidders?
    Mr. Rolufs. We have had indications that there will be more 
bidders. You never know, though, until you get to the point 
where you actually get a bid in hand. Last year we did a paper 
competitiveness study, and we solicited comments from the 
industry, and the indications were from industry that if we 
made certain changes in language, not in specification, but in 
language, that people would be interested.
    We've tried to accommodate that to the best of our ability. 
And I am hopeful.
    Mr. Kolbe. Is this paper so unique that when we think of 
the huge suppliers of paper that we think of in this country, 
they are not capable of doing this? It's a unique kind of 
paper?
    Mr. Rolufs. Certainly there are some unique things to it.
    Mr. Kolbe. Obviously the products unique. But is unique 
enough that only a very limited number of paper companies could 
produce this?
    Mr. Rolufs. I think the question more, sir, is it worth 
their time to produce it. There are some unique situations 
about our currency paper--the imbedded thread in it, for one 
thing, is a difficult thing to do. And it is certainly a skill 
that very few in the world have developed.

                              INK SUPPLIER

    Mr. Kolbe. Ink. More than one supplier?
    Mr. Rolufs. Yes. At the moment our ink is supplied from two 
sources. One is ourselves. We make a great deal of our own ink. 
The other one is SICPA. We compete, an ink contract on a 
periodic basis, and we have had good competition in those 
contracts.
    Mr. Kolbe. But SICPA is the source outside?
    Mr. Rolufs. It is the only commercial supplier of ink, at 
the moment, yes.
    Mr. Kolbe. Do you bid yourself? Is it like a bid in terms 
of--what's the word I want--competition?
    Mr. Rolufs. We don't compete, except through the fact that 
we know what our cost of producing ink is, and it certainly is 
very competitive with SICPA's costs.
    Mr. Kolbe. Do you have the capacity to do it all? Why 
wouldn't you do it all, then?
    Mr. Rolufs. We don't have the capacity to do it all. We are 
increasing some capacity, though. We are in the process of 
installing an ink mill in Fort Worth, Texas. When that ink mill 
is up, we will be doing a larger percentage of our own ink.
    Mr. Kolbe. Well, in the meantime, is there a reason that we 
have only one supplier?
    Mr. Rolufs. Simply because of the contract itself. We don't 
do multiple awards in the contract. We will come back at a 
later date. We will rebid that contract. It could be very 
possible that someone else will be the next supplier of ink 
other that SICPA.
    Mr. Kolbe. SICPA doesn't have 117 years of supplying the 
ink?
    Mr. Rolufs. They do not.
    Mr. Kolbe. How long have they?
    Mr. Rolufs. They began supplying ink for the Bureau in the 
early 1980s.
    Mr. Kolbe. They've been a sole source, then, sole outside 
source then for----
    Mr. Rolufs. We have had other sources.
    Mr. Kolbe. You have had other sources?
    Mr. Rolufs. Yes. Schmitt Ink, for instance, has supplied 
ink to the Bureau across that period of time. Not on an every 
year basis.
    Mr. Kolbe. We'll have some other questions on that, and the 
area of the paper contract for the record.

                          FACILITY UTILIZATION

    Mr. Kolbe. Let me ask you one about your new facility. You 
mentioned that roughly 45 percent of your capacity is one 
dollar bills, and you have two facilities. One here in 
Washington, and the other in Fort Worth.
    What is the breakdown in the production between those two? 
How much do you do in each of those?
    Mr. Rolufs. Currently it's somewhere in the vicinity of 60/
40. There is a growing capacity in Fort Worth because we're 
still staffing there. It will get by next year----
    Mr. Kolbe. That's totally production we're talking about.
    Mr. Rolufs. Yes.
    Mr. Kolbe. There's 60 percent here, and 40 percent in Fort 
Worth.
    Mr. Rolufs. That's correct.
    Mr. Kolbe. Will that change?
    Mr. Rolufs. Yes, it will. There is more capacity shifting 
to Fort Worth. For instance, this year we are closing two 
presses that have become antiquated, and high spoilage presses.
    Mr. Kolbe. Here.
    Mr. Rolufs. Here. That work will be shifted to Fort Worth.
    Mr. Kolbe. So when you appear before this Subcommittee a 
year from now, what will you probably tell me of the work load 
at that time?
    Mr. Rolufs. It will probably at that point be getting close 
to 55/45 or sliding closer to 50/50.
    Mr. Kolbe. Okay. So you may be close to 50/50.
    Mr. Rolufs. Yes.

                             FACILITY PLANS

    Mr. Kolbe. What is your long term plan for facilities?
    Mr. Rolufs. Would you like to hear my dream?
    Mr. Kolbe. Yes.
    Mr. Rolufs. Will you promise not to get on me about coins?
    Mr. Kolbe. I won't promise.
    Mr. Rolufs. Then I may have to lie to you a little bit.
    The Bureau, like every other manufacturing facility, has 
equipment in buildings that begin to age. And like every other 
facility, you have to find a way to do production as technology 
improves. We have the latest production technology in Fort 
Worth, Texas. It's a modern plant.
    We just had some visitors from Mexico there, and they are 
just hoping to emulate many of the things that we have done.
    So the question becomes what happens when you have to move 
to another age of technology. The Bureau's Washington facility 
is aging. It is multistoried, and it is not very efficient from 
the perspective of manufacturing currency.
    Mr. Kolbe. But every school group wants to go through it.
    Mr. Rolufs. Yes, that's true. We had over 500,000 visitors 
last year. So we need to look at a way to get into a more 
modern manufacturing facility that makes good sense in terms of 
manufacturing the nation's currency.
    I would say that I believe that we need a two plant 
concept. We could probably argue between you and I a lot about 
size of those plants. But we built two plants based on the 
premise that you shouldn't have the nation's manufacturing of 
currency all in one place because of the contingency 
possibilities--terrorist or whatever. And we believe we should 
keep that concept.
    So now the next thing is how do you move to the next 
technology age.
    Mr. Kolbe. If you don't mind my interrupting, so I 
understand. And I think there is some soundness to that. You 
are saying if you have it all in one location, if there were 
some catastrophic event, either being in an earthquake zone, or 
some catastrophic event--who knows what it might be--that 
disabled that plant, that you're in serious trouble?
    Mr. Rolufs. We're in serious trouble. Regardless of which 
plant.
    Mr. Kolbe. I might ask, aren't you in trouble with only one 
paper supplier? If some catastrophic event occurred there?
    Mr. Rolufs. You know, my father had an old saying. He said 
if you're looking for an argument, you need to choose a new 
subject.
    Mr. Kolbe. All right. Go on.
    Mr. Rolufs. So I'd like to look for a place to put our 
Washington facility that makes better sense. I'm currently 
engaged with Mr. Munoz in talking about that. And we are trying 
to struggle through that right now.
    Mr. Kolbe. While we're building it, we would have no 
problem with the capacity, because if we just didn't have to 
produce those one dollar bills----
    Mr. Rolufs. You're not supposed to do that.
    Mr. Kolbe. I didn't promise.
    Mr. Rolufs. I know you didn't promise.

                           dollar coin impact

    Mr. Kolbe. Thank you. That answers that particular 
question. Have you looked at other countries to see what the 
increase in the next highest currency, paper currency was, if 
you were to eliminate the one dollar bill? What do you think 
would be the impact on the two dollar? What is your current 
production of two dollar notes?
    Mr. Rolufs. Our current production of two dollar notes, we 
just finished one, for instance. There is no real demand. We 
did about 153 million of them last fall. And we hadn't printed 
them in 20 years.
    Mr. Kolbe. 20 years?
    Mr. Rolufs. Yes.
    Mr. Kolbe. 153 million you ran?
    Mr. Rolufs. That's right.
    Mr. Kolbe. That's less than Susan B. Anthony.
    Mr. Rolufs. Yes. It's not a lot. So, to answer your 
question, we would anticipate that about 12.5 percent of the 
current ones would go into twos.
    Mr. Kolbe. Some maybe in the fives? Just the impact on the 
next currency?
    Mr. Rolufs. What we have so far, and this is an estimate by 
the Federal Reserve, supported by GAO, it would just be on the 
two. I'm sure that there would be some minor impact.

                        postage stamp production

    Mr. Kolbe. I'm thinking some data from Canada might 
influence that. I don't know whether that reflects what 
happened to them or not. I forget. I've gotten some information 
on that before.
    You produce roughly, you said, about half of the U.S. 
postage stamps, is that right?
    Mr. Rolufs. Roughly.
    Mr. Kolbe. You bid on that?
    Mr. Rolufs. No. We do not bid on that. We have a negotiated 
contract with the Postal Service.
    Mr. Kolbe. And you're competitive with their outside 
producers?
    Mr. Rolufs. We are not competitive with their outside 
producers. We are that stable source of supply, and we are 
currently in negotiation with them to find ways that we could 
be more competitive.
    Mr. Kolbe. All of that production is done here?
    Mr. Rolufs. All of that production is done in Washington.
    Mr. Kolbe. And one of the reasons, again, is the aging 
facility, the reason it makes it more difficult to be 
competitive?
    Mr. Rolufs. That's a part of it. But there are also other 
factors that enter into this. There is a natural overhead 
overlay as a result of being a Federal Government factory. And 
that's a part of it.
    But we need to work more on our cost factors also. We, I 
believe, have some overhead that we should be working to be rid 
of in the Bureau. I have made that a priority in my own 
particular case. And we are working very hard at cost reduction 
in the Bureau, on the postage stamp side, particularly.
    Mr. Kolbe. Well, I am sorry Mr. Hoyer is not here, and I 
haven't had a chance to sit down and talk to him personally 
about this. However, my view is that ultimately we are going to 
end up going to some other kind of currency, and I believe it 
shouldn't be seen as a fearful thing for employees, because 
there are opportunities, one, with two dollar notes. Secondly, 
with a more modernized facility. Third, with substituting more 
production of postage stamps.

                            foreign printing

    Fourth, one thing I asked you in my office, and we haven't 
really talked about, have you ever considered doing currency 
production for other countries?
    Mr. Rolufs. We are currently prohibited by law from doing 
that.
    Mr. Kolbe. I didn't realize that. You are prohibited by 
law?
    Mr. Rolufs. Yes. We can only produce for the United States.
    Mr. Kolbe. What was the thinking on that?
    Mr. Rolufs. I don't know. It's an old law. But I could tell 
you that one of the interesting things----
    Mr. Kolbe. Is the Mint also?
    Mr. Rolufs. I don't know. One of the interesting things, as 
we've discussed before, is there is currently a world-wide 
over-capacity in terms of currency production capacity.
    Many of the other countries--Germany comes to mind, Sweden 
comes to mind--are out there working the world market in terms 
of producing other nations' currencies.

                            currency demand

    Mr. Kolbe. It would be interesting to see if world-wide the 
amount of currency in circulation is declining, or whether 
we're the only country where this is happening.
    By the way, we talked about this with Mr. Diehl concerning 
coins. Is the same thing occurring in paper, that in the top of 
the business cycle there is a decline in the amount of demand?
    Mr. Rolufs. We haven't seen that, but we haven't looked at 
it either. Our demand is determined differently. The Federal 
Reserve gives us an order each and every year, and they are the 
ones who use the models to project what their needs are, off of 
their banks.
    Mr. Kolbe. They give you the order. You have to produce. 
You'd be able to see the results of that, and you don't see 
that same model occurring in paper?
    Mr. Rolufs. We haven't seen that, sir.
    Mr. Kolbe. That's interesting. I wonder why that would be, 
why coins would show that kind of a business cycle nature of 
production, and paper does not.
    Mr. Rolufs. Traditionally, over the years, we have seen a 3 
to 5 percent growth in paper.
    Mr. Kolbe. Steady.
    Mr. Rolufs. Steady.
    Mr. Kolbe. Year to year.
    Mr. Rolufs. Year to year.
    Mr. Kolbe. 3 to 5 percent.
    Mr. Rolufs. The last 2 years----
    Mr. Kolbe. Is that in number of bills, or in total amount 
of currency?
    Mr. Rolufs. That's in pieces that we produce.
    Mr. Kolbe. Pieces.
    Mr. Rolufs. Yes.
    Mr. Kolbe. And of that amount, how much of that is ones?
    Mr. Rolufs. Again, it's about 45 percent.
    Mr. Kolbe. So it's about the same--so you see the same 
growth of hundreds that you see of ones?
    Mr. Rolufs. Yes. Interestingly enough, when I was at the 
Bureau early in the 1980s, as one of the assistant directors, 
the percentage was almost exactly the same as it is now in 
terms of ones.
    Mr. Kolbe. Fascinating.
    Mr. Rolufs. Money is always interesting.
    Mr. Kolbe. Always interesting. I get intrigued by this 
myself, obviously. We have a few other questions we will submit 
for the record, but we thank you very much for coming today. 
Mr. Secretary, thank you very much for being with us today.
    [Questions for the record and selected budget justification 
materials follow:]

[Pages 1486 - 1548--The official Committee record contains additional material here.]

                                          Wednesday, March 5, 1997.

     DEPARTMENT OF THE TREASURY, FINANCIAL MANAGEMENT SERVICE (FMS)

                               WITNESSES

GERALD MURPHY, ASSISTANT SECRETARY OF THE TREASURY FOR FISCAL AFFAIRS
RUSSELL MORRIS, COMMISSIONER, FINANCIAL MANAGEMENT SERVICE
MICHAEL SMOKOVICH, DEPUTY COMMISSIONER, FINANCIAL MANAGEMENT SERVICE

                              Introduction

    Mr. Kolbe. And we next go to Mr. Morris and the Financial 
Management Service.
    Welcome, Mr. Secretary, Mr. Morris and Mr. Smokovich. I'm 
pleased to have you here, and we'll take your opening 
statements. Those statements will be placed in the record in 
full. I don't know if Mr. Murphy has a statement. No?
    I guess we'll go to you, Mr. Morris.

                    Summary Statement of Mr. Morris

    Mr. Morris. Thank you, Mr. Chairman. I appreciate 
submitting the statement for the record. If I may, I'd like to 
take a couple of minutes to talk about some highlights of the 
Financial Management Service.
    I would like to point out that we, too, are opposed to 
paper for money. But our solution is more electronic than 
coinage.
    Mr. Kolbe. You're the one on the winning end at this point.
    Mr. Morris. The Financial Management Service manages the 
Government's financial infrastructure, and has been doing so 
under a series of different names for over 200 years.
    We also fulfill much of the Secretary's responsibility for 
providing leadership to other agencies, in conjunction with 
OMB, on financial management matters. We sometimes refer to 
ourselves as both the Government's checkbook and the manager of 
the Government's checkbook. We issue most of the Government's 
payments. We manage the collection of most of the Government's 
receipts.
    We track and account for the entire Government flow of 
funds. We issue the Government's financial reports. Of recent 
vintage, we collect the Government's delinquent debts.
    Mr. Chairman, I would like to call your attention to the 
Financial Management Service's performance measures that we 
have submitted with our budget. As you are aware, the 
Department of Treasury under the leadership of Assistant 
Secretary Munoz, has accelerated its schedule for GPRA 
compliance by a year, and our submission reflects that 
acceleration.
    Actually, FMS has been operating under strategic planning 
since the early 1980s. At the most general level, I believe 
these measures tell two stories. One, the people of FMS are 
very productive, and, two, we set high standards for ourselves 
and achieve them.
    We issued over 850 million payments last year with an on 
time performance of 99.9975 percent, and have set a higher 
standard for this year. Our average processing time for 
adjudicating a claim of non-receipt was just over 11 days, 
nearly 3 days below our standard, and nearly 43 days better 
than 3 years ago.
    Conversion of Government collections to electronic methods 
have grown to nearly 60 percent, and FMS, in partnership with 
IRS, collected nearly $400 billion in withholding tax through 
electronic media last year.
    Also, Mr. Chairman, there are indicators of success that 
are not reflected in GPRA measures that may be of interest to 
the committee. For example, programs managed by the Financial 
Management Service generated in excess of $1.8 billion in 
interest earned and saved in fiscal year 1996.
    In the implementation of the debt collection provisions of 
the Debt Collection Improvement Act of 1996, we have 
implemented an interim offset process to collect delinquent 
debt, and we have collected over $300,000 to date.
    Additionally, we have initiated the mandatory cross 
servicing of delinquent debts, and have collected over $350,000 
thus far this fiscal year.
    Mr. Chairman, I would also like to make you aware of some 
of the external recognition that FMS employees have earned 
recently. FMS has received a total of 12 Hammer Awards from the 
Office of the Vice President, that, as you know, recognizes 
contributions to a more efficient and more effective 
government.
    Also, last year, two FMS programs were recognized as 
finalists in the Harvard University ``Innovations in American 
Government'' Award Program. The message I am trying to convey 
by sharing this information with you is simply that money 
appropriated to the Financial Management Service will be well 
managed.
    Even though we represent less than 2 percent of the total 
Treasury budget--in some circles, $200 million is still 
considered a lot of money--and we will manage it well.
    Mr. Chairman, this budget proposal contains funding 
requests for 2 initiatives that are critical to our mission, 
but that we cannot fully fund from our base resources. These 
are, first, upgrades to our data management system, what we 
call GOALS, to enable us to collect and process the data to 
meet the requirements of the Government Management Reform Act 
in order to issue audited, consolidated financial statements 
for the entire Government.
    And, second, funding for the conversion of our critical 
date sensitive systems to year 2000 compliance.
    Finally, Mr. Chairman, I request the support of the 
subcommittee for a budget-neutral proposal to change the method 
by which the Federal Reserve is compensated for the work it 
performs on our behalf.
    The Federal Reserve Banks perform many services in support 
of the Treasury, as our fiscal agent. We do not compensate the 
Federal Reserve directly for services performed on behalf of 
the Financial Management Service, such as check clearance, 
Treasury tax and loan account management, and the accounting 
for receipts.
    Instead, these costs are paid by reducting the Federal 
Reserve earnings that are depositedto Treasury each year. A few 
years ago, this subcommittee approved a change in compensation for the 
Bureau of the Public Debt to create a permanent and indefinite 
appropriation. This change facilitated an improved cost accounting and 
a more explicit accountability for Federal Reserve services and costs.
    The experience of the Bureau of the Public Debt has been 
very positive, and we believe it would be in the interest of 
good government to provide a similar facility to FMS.
    Language in support of this proposal is in our 
appropriation bill proposal.
    Mr. Chairman, this concludes my remarks. I hope that in 
combination with the documents we have submitted, they paint a 
picture of an active, busy, effective government organization.
    I would be happy to respond to any questions you or other 
members of the subcommittee might have. Thank you, Mr. 
Chairman.
    [The prepared statement of Mr. Morris follows:]

[Pages 1552 - 1564--The official Committee record contains additional material here.]

                        organizational structure

    Mr. Kolbe. Before we get to some specific questions, I'd 
like to ask Secretary Murphy a question, I don't understand the 
logic. The Mint and BEP report to the Assistant Secretary of 
Treasury for Management. Mr. Morris reports to you, the 
Assistant Secretary of Treasury for Domestic Finance.
    Can you share with me the organizational logic here?
    Mr. Murphy. Mr. Chairman, the functions have been divided 
in such a way that the Government-wide responsibilities have 
been placed under the Fiscal Assistant Secretary. Those 
functions primarily consist of cash management, debt 
collection, credit management, and our central accounting and 
financial reporting for the Government as a whole that includes 
the first audited consolidated financial statement which is due 
in March 1998.
    The operating bureaus in the Department have reported to 
different political officials over the years. I've been with 
the Treasury since 1959, and since then the Fiscal Service has 
been assigned those functions dealing with the operating cash, 
collection, payment and Government-wide financial reporting 
responsibilities.
    Mr. Kolbe. It strikes me the Mint and BEP are two of those 
who are Government-wide.
    Mr. Murphy. Yes you can look at them in a Government-wide 
sense. The Mint and BEP are certainly a part of the Treasury's 
functions, (i.e. issuing currency, and coinage). We have, as 
you know, many Treasury functions. I think, for span of control 
and management, the functions I have responsibility for are 
closely related.
    [Clerk's note.--Assistant Secretary Murphy provided 
additional information as follows: ``We have, as you know, many 
separate business lines within Treasury. I think, for span of 
control and management, the Treasury Department functions I 
have responsibility for are closely related. They are focused 
on Financial Management of the Government.'']
    They are basically those residing in the Financial 
Management Service, and all the Bureau of Public Debt.
    Mr. Kolbe. I'll give you an A for effort on that answer. I 
don't think it's a terribly good explanation, but we'll let you 
go with that.
    Mr. Murphy. I would just add, Mr. Chairman, that we really 
have a full plate.
    [Clerk's note.--Assistant Secretary Murphy provided 
additional information as follows: ``I would add, Mr. Chairman, 
that in the fiscal service area particularly the Financial 
Management Service, we really have a full plate of major 
initiatives on tight deadlines.'']
    Mr. Kolbe. I'm sure you do. I just don't understand this. 
Maybe I should have Secretary Rubin tell me how the 
organizations work.

                    debt collection improvement act

    Let's go back, Mr. Morris, to talking about the Debt 
Collection Improvement Act. How much of the Act would you say 
you've been able to implement so far?
    Mr. Morris. Well, we are implementing across the board. 
There are 29 separate sections of that act, and we're moving 
along I think on virtually all of them.
    Mr. Kolbe. Do you have a Department-wide working group to 
help implement the Act?
    Mr. Morris. Well, Mr. Murphy, my boss, the Assistant 
Secretary, and others within the Department show an active 
interest. Mr. Summers, the Deputy Secretary, shows an active 
interest. There is not at this time a Departmental level 
coordinating committee, but rather some regular reporting and 
some ad hoc reporting as well.
    We work very closely with Mr. Murphy's office. I'm not sure 
that that's the direction of your question. There is active 
support from the Department. Last year, in fiscal year 1996, 
the Department, through Mr. Munoz's office, provided over $6 
million of incremental funding to get some systems development 
work under way.
    Am I responding to your question?
    Mr. Kolbe. You're responding. You're in the direction. I 
guess I'll follow on to that, and you might want to respond 
partly to this one--what are the roadblocks you've encountered? 
What are the areas where you are finding difficulties in 
implementing the Act?
    Mr. Morris. I don't know that it's roadblocks so much as 
maybe difficulties, priorities, not within FMS, so much as 
other agencies. There are a number of agencies throughout the 
Government who have debt that must be referred to us under the 
law.
    We have built and have available a central intake facility 
for the gathering of the data. However, not every agency is 
prepared or has their portfolio in such a form that it can be 
transferred immediately to us.
    Also, there are some due process notices that must be sent 
out by the agencies to their debtors. So the administrative 
work that needs to be done within the agencies that are holding 
debt before the debt can come together fully. It takes time.
    And, you know, they, like everyone else, raise the question 
of what are their priorities, how much money do they have, how 
many people do they have. We work with them, try to build 
schedules, and try to get commitments. I would say at this 
point, I don't think we would view the situation with alarm. We 
would like to see some things happening a little faster 
perhaps, but they are certainly moving in the right direction.

                    private debt collection agencies

    Mr. Kolbe. One of the provisions of the law allows you to 
hire outside private debt collection agencies, organizations to 
collect some of that outstanding debt.
    When you are fully implemented, what percentage--first of 
all, is that now in place? Do you have some of that going on 
now?
    Mr. Morris. No, we do not but, there are private debt 
collection contractors in a contract that is expiring this year 
under GSA. We issued a draft RFP for public comment and 
received I believe 460 public comments. Those comments just 
came in about a month ago.
    Mr. Kolbe. You're still in the stage of drafting an RFP?
    Mr. Morris. That's right. We expect to have that RFP on the 
street this month.
    Mr. Kolbe. That RFP, you would anticipate you would be 
contracting out debt collection in what areas?
    Mr. Morris. Across the board.
    Mr. Kolbe. Across the board?
    Mr. Morris. Right.
    Mr. Kolbe. All parts of the debt--the service that you 
work?
    Mr. Morris. Well, there's a requirement in the law that we 
do a match against payment files in order to make sure that 
we're not paying delinquent debtors. So the first step would be 
when the debt files come into our central intake facility, we 
would then compare that to our payment files to see if there 
are offsets available.
    I don't believe that we have identified the criteria of how 
the debts would go out to the private sector. The law also 
allows for the creation of debt collection centers within the 
government, and we have put out a set of criteria that will 
allow other government agencies to apply for designation as 
debt collection centers.
    Mr. Kolbe. Maybe I need a little background on the debt 
collection act, and what exactly debt--you collect virtually 
everything that's owed to the government. Except income taxes, 
I realize that.
    Mr. Morris. Right.
    Mr. Kolbe. But every fee, every contract, all those are 
turned over to you.
    Mr. Morris. If it's 180 days delinquent it's supposed to 
move to us to process.
    Mr. Kolbe. So you would not limit, Mr. Murphy, your plan is 
to have them just take contract on, bid on chunks of this in 
terms of dollar amounts, not kinds of debt they're going to go 
after?
    Mr. Smokovich. Let me come back on that one. The law is 
fairly specific. If an agency is servicing its debt, it is 
okay. But once that debt gets to be over 180 days delinquent. 
If it isn't scheduled for sale, if there is not a bankruptcy 
involved, if it's not in some kind of work out group, or it's 
not being actively managed by that agency--the law says the 
agency will transfer that debt to the Treasury. Treasury will 
basically begin processes to collect the debt. We will put out 
a letter or a dunning notice to the debtor, and if the debt 
comes into collection, we'll hang on to it. If it doesn't come 
into collection, we will pass these debts to collection 
agencies.
    What you should see, as these processes take hold, is that 
every piece of debt in the Government is being worked. If it's 
non-delinquent debt, we will be able to say that it's being 
worked or managed by an agency. If it's delinquent debt that's 
over 180 days old delinquent and not being worked, it will be 
at some debt collector that is under contract to the Treasury.
    That's the theory of the law, and that's the intent of the 
law, and that's what we've been really building and investing 
to do this past year.
    Mr. Kolbe. Did you want to add something to this, Mr. 
Secretary?
    Mr. Murphy. That pretty much covered what I was going to 
add. The point I want to make is that we will have a variety of 
tools that we will be using in order to try to collect this 
debt.
    There are existing private sector collection contracts out 
there now, as Commissioner Morris mentioned. The Department of 
Education has used them. Other agencies have used them. We want 
to get some of that debt out to the private collectors more 
quickly than has been done in the past.
    In the past, usually what was given to those private 
collectors was pretty stale, and so they weren't able to 
collect a very large percentage of it. But we'll have a variety 
of tools, including offset against Treasury payments; offset 
against IRS tax refunds; appointment of other agencies, 
perhaps, as debt collection centers; and we will be servicing 
some of that debt as well.

            debt collection for the internal revenue service

    Mr. Kolbe. It's a bit ironic that the one large collector 
of debt that comes under Treasury, the IRS, is the one you're 
precluded from collecting for. Does the Department have any 
position on whether or not debt collection for IRS should or 
could be transferred to this organization, the Financial 
Management Service?
    Mr. Murphy. I don't know what all the rationale was in 
drafting the legislation----
    Mr. Kolbe. I don't know either.
    Mr. Murphy [continuing]. But that is being handled and 
addressed by the Internal Revenue Service, and is a priority of 
the Department.
    Mr. Morris. My understanding is that in the President's 
budget--I don't know the specific legislation--but the 
expectation of using payment offset to collect tax debt through 
a continuous tax levy is a proposal of the administration.
    It was part of the administration's proposal for last year. 
For some reason the tax levy proposal was taken out of the 
legislation. My understanding is that it is being re-proposed 
by the administration.
    Mr. Kolbe. Staff informs me the Ways and Means Committee 
objected to that. You could, however, handle debt collection 
for the IRS?
    Mr. Morris. Right.
    [Clerk's note.--The FMS provided additional information as 
follows: ``We can handle administrative offset through proposed 
tax levy.'']

                   electronic benefits transfer pilot

    Mr. Kolbe. Let's turn to the other side of this, the 
electronic benefits. Where are we with regard to establishing 
this program?
    Mr. Morris. Well, there are several things going on at 
once. Maybe, I could talk about our efforts in three pieces. 
One piece is a program that we have operated in the State of 
Texas for several years now. This program began as a pilot and 
became operational, involving about 27,000 people, who are 
receiving Federal benefits, and only Federal benefits, on a 
Federal card.
    Now, in parallel, the State of Texas has a state-issued 
card for Food Stamps and other State welfare. We've begun 
conversations to bring those together, so we can put the--where 
there is a cross-over person who receives both Federal and 
State administered benefits--on the same card. Those 
conversations have begun.
    [Clerk's note.--The FMS provided additional information as 
follows: ``Those conversations to combine the State and federal 
benefits on one card have begun.'']
    The second piece involves the Southern Alliance of States, 
an eight state grouping--sometimes it's nine and sometimes 
seven, and I think currently it's eight states--who partnered 
with Treasury, FMS, in doing a competitive selection of a 
vendor to provide EBT services.
    The State of Alabama is expecting to begin on the first of 
April with their first transaction. In their first week of 
transactions, there will be benefits that are on one card, for 
the first time, both Federal and State funded benefits on one 
card.
    We're all going to say, this is great. A real breakthrough. 
Over the next two years, the other States within the Southern 
Alliance of States will be coming on line, and in parallel, the 
Federal benefits will be coming into that program in those 
States as well.
    There are other coalitions of States, the Northeast, the 
West Coast, and the Midwest. There are coalitions of States 
that have selected vendors in one way or another and are 
beginning to issue EBT cards and have EBT programs for State-
administered benefits.
    Of course, most of this is Federally funded--Food Stamps 
and AFDC--but they're still State-administered. Our challenge 
is to bring the Federal benefit programs in conjunction with 
those, to partner with those States.
    Most of the State groups, or the individual States, have 
asked us to get involved with them, and we intend to. We expect 
that we will be delivering Social Security and SSI and VA and 
Railroad Retirement benefits in parallel with those State 
programs.
    Mr. Kolbe. Do you anticipate extending this--just taking 
the pilot and extending it through the rest of the country? Are 
you going to try different things.
    Mr. Morris. The Southern Alliance of States?
    Mr. Kolbe. Southern Alliance.
    Mr. Morris. I think it looks right now like that's kind of 
a one time event. It was to be the prototype for the nation, 
and then the rest of the nation got out ahead of us.
    But that was the one case of a joint acquisition of a 
vendor. But in other cases, the states have already selected 
their contractor. We will need to select financial agents for--
there are three pieces of the population. There's the 
population that only receives State benefits, like Food Stamps 
and AFDC.
    Mr. Kolbe. Food Stamps are excluded, right?
    Mr. Morris. No, no. Food Stamps are the driver. There's 
more saving and benefit in converting Food Stamps to 
electronics than all the rest of the programs combined.
    Mr. Kolbe. So they are included?
    Mr. Morris. Oh, yes. There's the population that receives 
only State-funded benefits, or State-managed benefits, like 
Food Stamps and AFDC.
    Mr. Kolbe. They're not excluded.
    Mr. Morris. They're not excluded. But they're managed by 
States.
    Mr. Kolbe. Right.
    Mr. Morris. Then there is the other piece of the 
population, the unbanked population, that receives Social 
Security, Federal direct benefits--VA, SSI and a few OPM 
recipients.
    That's FMS's target population. And then there is a 
fairlysmall number of cross-over people. People who receive both 
Federal and State benefits. And it's a technology challenge to get all 
of those benefits on one card, where they are both State-administered 
and Federal. Maybe it's more a money movement challenge than it is a 
technology challenge.
    But that's where we're working with the States, so that 
people don't have to have two cards. We will have one card per 
person.

                  fee for electronic benefit transfer

    Mr. Kolbe. In the pilot program, the Southern Alliance, how 
do the banking institutions get reimbursed for their costs? How 
do you deal with the problem of a poor widow who is getting a 
small amount of benefits, and the bank takes out a charge each 
month on that, so that instead of transferring $100, it's $98?
    Mr. Morris. Well, in the Federal program, that's a 
voluntary program, and the recipient pays the cost.
    Mr. Kolbe. The recipient does pay the cost.
    Mr. Morris. And the bank has bid what I thought was an 
exceptionally low cost. I can't remember currently what the 
price was, but I was surprised at how low it was. Now, for the 
State benefits, the State is paying for the transactions.
    Mr. Kolbe. One can see how the costs would be low, because 
the banking institution doesn't have to worry about the fraud 
once the card is----
    Mr. Morris. That's true. And again, the savings versus 
processing and distribution and fraud in Food Stamps is so 
great here that there's money on the table for the states to 
pay some costs for these transactions.

                       safeguarding against fraud

    Mr. Kolbe. Yeah, the issue, then, is fraud. Are you 
building in safeguards against fraud on these cards, against 
duplication and counterfeiting?
    Mr. Morris. We certainly are.
    Mr. Kolbe. We know there's counterfeiting of Food Stamps, 
for example.
    Mr. Morris. Right.
    Mr. Kolbe. This would be a fear that one would have, that 
you have duplication of these cards, electronic cards, at this 
point. That, I take it, has been taken into consideration?
    Mr. Morris. Exactly, sir, and I recall when we had our get 
acquainted get together you had requested a paper on risk 
assessment/risk management within this program, and we will 
prepare that and provide that for you and members of the 
Subcommittee.
    Mr. Kolbe. Okay. I think that does it for the questions I 
have. We'll have a couple of others we will want to submit for 
the record.
    We thank you very much for appearing here today.
    [Questions for the record and selected budget justification 
materials follow:]

[Pages 1571 - 1693--The official Committee record contains additional material here.]

                                          Wednesday, March 5, 1997.

             DEPARTMENT OF THE TREASURY, UNITED STATES MINT

                               WITNESSES

GEORGE MUNOZ, ASSISTANT SECRETARY FOR MANAGEMENT AND CHIEF FINANCIAL 
    OFFICER
PHILIP DIEHL, DIRECTOR, UNITED STATES MINT

                  Opening Comments From Chairman Kolbe

    Mr. Kolbe. This meeting of the Subcommittee on Treasury, 
Postal Service and General Government will come to order. Mr. 
Hoyer, our ranking member, is not here yet, and may be quite 
late because of some other engagements he has, and he has asked 
us to go ahead and not hold up until he gets here.
    This afternoon we welcome three of the Federal Government's 
money managers--the U.S. Mint, the Bureau of Engraving, and the 
Financial Management Service.
    To keep things moving along, I am going to make one opening 
statement, and I would hope that each of you would make very 
brief statements. We will have, of course, the full statement 
put in the record.
    First we're going to hear from Philip Diehl who is with us 
here, the Director of the U.S. Mint. We are going to then next 
hear from Larry Rolufs, the director of the Bureau of Engraving 
and Printing, and lastly from Russell Morris, Commissioner of 
the Financial Management Service.
    With the Mint and BEP witnesses is George Munoz, assistant 
secretary of Treasury for management and the chief financial 
officer. Since the first two are under his jurisdiction, he 
will be here for those two.
    The Mint is set up, as I think members know, as a revolving 
fund, using a portion of the profits that are generated from 
seniorage to pay for costs associated with the circulating coin 
program. Sales from numismatic coin products fund this separate 
program.
    We appreciate that the Mint continues to work with this 
subcommittee, despite the fact that being on a revolving fund 
means that there is no need for a separate appropriation 
request. I think it is important that we continue to have a 
dialogue and that we continue to work together on issues.
    Mr. Diehl, your testimony is greatly appreciated, and if 
you would go ahead and start with yours, we will them move 
directly into questions.

                     summary statement of Mr. Diehl

    Mr. Diehl. As you said, Mr. Chairman, this is my first 
appearance before the committee under the revolving fund 
legislation that was enacted in the 1996 Treasury 
appropriations bill. Therefore I'm not seeking an 
appropriation, but I welcome the opportunity to report on an 
aggressive agenda of reinvention that we've undertaken at the 
Mint.
    I am not going to go through the details of my formal 
testimony, but I will give you a brief summary of the 
highlights. I want to focus on five areas in which our agenda 
of reinvention is really where the rubber meets the road for 
the Mints.
    One is in strategic planning and performance measurement 
under the GPRA; the second is our ambitious schedule of 
customer service improvements; third is reform of our troubled 
commemorative coin program; fourth is our capitalinvestment 
plans; and fifth is our PBO proposal.
    Under the category of strategic planning and performance 
measurement, the strategic planning process that was mandated 
by GPRA in 1993 began at the Mint two and a half years ago, 
shortly after the passage of that legislation.
    Our first strategic plan was issued in the spring of 1995, 
two years ahead of the GPRA mandated schedule. Frankly, Mr. 
Chairman, it was a pretty rough document. It was home grown, 
and in retrospect it wasn't much of a plan, but it was a start.
    And the thing that was crucial to its success about it was 
how we developed that plan. We developed the plan through a 
concerted effort to integrate the opinions and the insights of 
people throughout the Mint, labor and management--front line, 
right up to the executive office.
    The strategic plan is a living document. It is not a 
document that reflects the work of a small committee which is 
then put on the shelf. It is a plan that actually guides what 
we do.
    The strategic plan we will issue this spring, I think, is a 
model plan that any government agency would be proud of. It 
sets ambitious, very specific, highly quantifiable goals and 
objectives through 2003 for each of our three lines of 
business.
    It reflects our philosophy that your reach should exceed 
your grasp. It also includes annual goals which, in the present 
plan, are more specific and numerous for 1997 and 1998 than has 
been the case with earlier plans.
    Our goals and objectives cover the entire range of key 
factors affecting our performance: mission accomplishment; cost 
reduction; profitability; customer service; employee health, 
safety and training; and needed legal authorities.
    In the area of customer service improvements, three and a 
half years ago when I came to the Mint, my collector customers' 
number one complaint was order delivery delays. Only one half 
of all numismatic orders were delivered within 8 weeks. Often 
they took months--not an acceptable level of performance for 
any mail order company.
    We set an aggressive standard of performance, and an 
aggressive timetable for meeting that standard. We committed 
ourselves publicly to our customers, and then we achieved that 
standard. We began to make believers of our customers in this 
process; then we turned around and did it again, and then we 
did it a third time. Today we don't get nearly as many 
complaints about order delivery.
    We have also discovered significant cost savings that go 
along with these improvements in customer service. Because of 
simplified processing of orders, fewer errors are being made, 
and less time is required in accomplishing tasks.
    We've now expanded our customer service efforts beyond the 
narrow beachhead of order fulfillment to include virtually all 
customer service functions. We are benchmarking against the 
best in the business--in both the public and private sectors--
adopting specific, quantifiable standards for performance, then 
tracking actual performance against those standards, sometimes 
on a daily or weekly basis.
    When we find problems that get in the way of meeting a 
standard, we turn around and fix them as quickly as possible. I 
think this is the model of how the GPRA process is intended to 
be implemented.
    We also are surveying our customers on product and service 
quality and testing product innovations.
    In the area of commemorative reform, today, my customers' 
number one complaint is with our commemorative coin program: 
too many programs, too many coins in each program, too many 
weak commemorative themes.
    We have addressed this through two means. First, we've 
worked with Congress to pass legislation last year that we hope 
will reduce the number of programs and their mintages. This 
legislation also ensures greater financial responsibility on 
the part of beneficiary organizations, and it protects the Mint 
from incurring losses on those programs.
    Second, we've worked with the Citizens Commemorative Coin 
Advisory Committee, an advisory committee established by 
Congress to assist Congress in selecting proper commemorative 
themes. Collectors purchase 90 percent of all commemorative 
coins, so they should have a voice in those themes.
    And we have begun to have some success, we believe, in that 
area as well, but the jury is still out on whether the 
commemorative market will recover.
    Next is the capital investment area. One of our chief 
objectives for the passage of the 1995 revolving fund 
legislation was to give us the capability to invest in our 
facilities in the same business-like way that a private sector 
manufacturing enterprise would do.
    We have approved a five year capital investment plan that 
had a modest start last year, but is now fully underway in 
1997. Capital spending in 1998 will also be elevated above the 
historic baseline, but the trend will begin to subside in 1999 
and beyond.
    We are attempting to catch up after several decades of 
significant under-investment in our facilities and production 
equipment. Included in the plan are substantial investments in 
improvements related to the health and safety of our employees, 
as well as telecommunications and informations systems.
    Finally, we have a PBO initiative that is reflected in the 
President's 1998 budget, in which we are identified as one of 
nine candidate agencies for flexibility under that proposal.
    The PBO proposal is currently being discussed by Treasury, 
OMB, and the Vice President's NPR Office, along with the Mint, 
and we are in the process of putting together a proposal.
    That concludes my remarks. Thank you, Mr. Chairman. I will 
answer any questions you may have.
    [The prepared statement of Mr. Diehl follows:]

[Pages 1699 - 1709--The official Committee record contains additional material here.]

                     Opening Comments of Mr. Munoz

    Mr. Kolbe. Thank you, very much. Secretary Munoz, I 
apologize. We didn't have a written statement for you, and I 
didn't call on you first to see if you wanted to make any 
opening comments.
    Mr. Munoz. Mr. Chairman, I just wanted to thank you for 
holding this hearing for all the bureaus involved today, and 
I'm going to keep my introductory statement short. Just thank 
you for having me here.

                            new dollar coin

    Mr. Kolbe. That's the shortest we've had. I like that.
    I'd like to go to Secretary Munoz first. A subject that I'm 
sure that comes as no surprise that I would raise here. Looking 
at the Mint there aren't really a lot of issues from an 
appropriations standpoint that we have.
    I have one with regard to an issue that you know I have 
been involved with for a long time, and that is the 
substituting a dollar coin for the paper dollar. The other is 
on the commemorative coin issue, and then there are probably a 
couple of others we'll submit for the record.
    Secretary Munoz, as you know, I've long advocated the 
conversion of our paper one dollar currency to coin. I believe, 
I have been frank about this in saying how I got started on 
this initially. The very first organization that came to me was 
some of the copper industry elements in my state. That's what 
got me interested in this. I can say with all honesty, and look 
anybody in the eye and say it thatthis is not the issue that 
drives it for me any more. In fact, I have not for at least six or 
seven years, had a conversation with anybody in the copper industry 
about this issue.
    I just really believe it is a matter of management of our 
currency. The more I have gotten into it, the more convinced I 
am. We have always had a neutral position from the Treasury and 
the Director of the U.S. Mint on this issue up until the last 
couple of years. Now the Treasury has taken a position 
decidedly in opposition to this.
    I guess I really want to just ask you, since I think from a 
policy standpoint it has to come from your office, what is the 
driving motivation for the Department's opposition to a dollar 
coin? Is it based on data, facts that somehow have eluded me, 
that we have not been privy to? Or is this simply an ``I don't 
want to do it'' mentality?
    Mr. Munoz. Mr. Chairman, thank you for allowing me an 
opportunity to clarify the record on this. The Treasury 
Department took a position last year on legislation that was 
proposed. And I think the Treasury Department was very clear 
that its position was based on the history that we have 
experienced with the dollar coin.
    It has not taken a blanket position on this, and I would 
just say that the Secretary would be the one who has the final 
say upon a blanket decision. We made a decision based on the 
legislation as we saw it.
    That legislation did not have the withdrawal of the dollar 
bill, and as you know, there are then questions raised in terms 
of what the acceptability of a dollar coin is going to be.
    The Treasury Department has had experience with the dollar 
coin, both the Eisenhower and the Susan B. Anthony which I know 
the Chairman is very familiar with. And we have taken a look at 
this issue from time to time when it has appeared in 
legislation, but at this stage the Secretary has not taken a 
blanket decision on this.
    We are very much aware, Mr. Chairman, that probably one of 
the reasons why you think it is good management for our 
currency is for the seniorage and the savings that can come to 
the Federal Government in producing a dollar coin that is 
widely accepted.
    And so we are very much aware of that, and that is an 
attractive feature, but there are other concerns in terms of 
how the legislation would be drafted, what it would say about 
the dollar bill, the currency, whether it is withdrawn or not, 
and in terms of the timing element also.
    Mr. Kolbe. We want to work with you. If you are saying that 
you are not absolutely opposed to this, we would like very much 
to work with you. I don't know where you get the idea that our 
legislation did not withdraw the paper currency. It did.
    I have said all along there are two failures with the Susan 
B. Anthony. One, it looked and felt like a quarter. The second 
was that it kept the paper in circulation. We don't have paper 
quarters, and we don't expect people to use paper quarters and 
coin quarters any more than we should expect them to use paper 
dollars and coin dollars.
    You have to withdraw the one when you put the other into 
circulation. That was, indeed, I think, the fatal flaw of the 
Susan B. Anthony, even more than the design of it.
    And we would be very interested in working with you on the 
legislation. I would just like you to agree to talk to us and 
to cooperate on drafting some legislation.
    I have told Mr. Diehl, and I have told others, that what 
frustrates me is what I consider to be an ostrich head in the 
sand approach to this thing. It is inevitable that it is going 
to happen. It is absolutely inevitable.
    I would like for the record, for you to submit to me a 
list, of other countries that have changed one or more currency 
notes to a coin--since we introduced the Susan B. Anthony: 
which countries, what dates they were, and whether any of them 
have gone back and failed, or withdrawn those.
    [The information follows:]

              Countries That Have Changed Currency to Coin

    Australia, Canada, France, The Netherlands, New Zealand, 
Norway, Spain, and the United Kingdom have all successfully put 
high-denomination coins into circulation. (Norway as long ago 
as 1964, but the bulk of the conversions took place in the 
1980's.) All of these countries phased out their notes of the 
same values.

    Mr. Kolbe. But my view is either: one, it's inevitable that 
we're going to do it, just in order to maintain a currency that 
is manageable, that is current, and that is useable for people. 
The other, is--and this is where I think the real head in the 
sand of the Treasury Department is, we're going to go to a 
totally cashless society.
    We save a lot of interest, as you know, in our country by 
people holding on to coins and paper, which are pieces of paper 
and pieces of metal until people use them for something. And so 
the government in effect has their money while they're holding 
on to this. It is no different than holding on to a traveler's 
check, or what we call the float from a traveler's check.
     A large chunk--and much of this is overseas--of our debt 
is financed by people holding on to currency. Now, the one 
dollar bill isn't that much of that, but it has to do with a 
piece of having a system that is workable, and that people will 
continue to want to use.
    And I think that it is extraordinarily important that we be 
aggressive in maintaining a currency that is useable for 
people.
    I am wondering if you have analyzed the effects of other 
countries, as to how they have done this currency conversion, 
or whether or not anything that they have done might be useful 
to us to learn.
    Mr. Munoz. We are aware of the experiences in some of the 
other countries, and we recognize the importance of having the 
currency withdrawn, the dollar bill withdrawn in substitution.
    We also are aware that in this country there is some 
concern over such a withdrawal, if the dollar bill were 
withdrawn. And so therefore while we have not an exhaustive 
study, this has certainly been looked at when the legislation 
came up.
    Mr. Kolbe. Concern on whose part about the withdrawal?
    Mr. Munoz. The public's concern. Our assessment of whether 
the public would accept or not accept the withdrawal of the 
dollar bill.
    Mr. Kolbe. Based on polling data?
    Mr. Munoz. Based on data that we've seen, polling data, not 
conducted by the Treasury Department, but data that I believe 
came from the Federal Reserve or a similar entity.
    Mr. Kolbe. Have you looked at any of the information of 
other countries that have introduced it, such as Canada, where 
also there was a lot of grumbling, where--to put it flatly--it 
was unpopular when it was first introduced?
    Mr. Munoz. Yes. It was resisted when it was first 
introduced. And then after it had been in effect for a while, 
most people accepted it.
    Mr. Kolbe. Have you looked at some of the things that 
Canada has said in their reports about their process, or what 
they did with this, that could make it even better? For 
example, faster, doing it faster?
    Secondly, little signs were put up at cash registers that 
said, ``This is saving--this conversion is saving X millions of 
dollars in production costs.'' Don't focus on the very esoteric 
thing that we were talking about a moment ago--seniorage--but 
of the actual savings that can be had in production.
    That and making it clear to clerks to withdraw the paper, 
not put it back into circulation, so you made the withdrawal as 
fast as possible. They discovered that in the two dollar 
conversion, that the faster you did it, the better it is, and 
they had no grumbling on the second one, because people were 
used to it, and they had no problem with doing it there.
    This is one of those issues where it seems to me it 
behooves not just members of Congress but all of us in public 
office to lead and to show a little leadership.
    Mr. Munoz. Sir, I think there are certainly very positive 
elements on the side of savings, and just the utilization by 
some of our industries, in commerce. It is a complicated issue, 
and especially if it involves the withdrawal of the dollar 
bill.
    But as I said, Treasury was reacting to the legislation as 
written, and we would be more than happy to continue working 
with you and your staff in looking at any issues that we should 
look at it.
    Mr. Kolbe. We have sent a request to you on draft 
legislation. We have a letter----
    Mr. Munoz. I believe we did respond to your questions.

                 circulating commemorative coin program

    Mr. Kolbe. We just got it this morning. I have been in 
hearings all day and haven't had a chance to see it. I will 
take a look at that, and I appreciate your response to that, 
and we will get back to you.
    While I have you here in the mode of answering questions, 
the same on the circulating commemorative coin program. Your 
opposition to that: is it data based? What's the data you have 
for opposing it?
    Mr. Munoz. On the 50 state circulating commemorative coin 
program, as you know there is legislation that requires 
Treasury to study it, in terms of its acceptability and in 
terms of any cost benefits associated with it.
    We are moving forward in conducting such a study. We have 
engaged an outside consultant to assist Treasury, to basically 
take the lead on it. And when that report is concluded, we will 
submit it to the Congress and to the Secretary, and the 
Secretary will then make some recommendations on it.
    Mr. Kolbe. You indicated no opposition to this idea to 
anybody?
    Mr. Munoz. This right now is being studied. So there is no 
official Treasury position on this until the study is done.
    Mr. Kolbe. Well, it's a pretty good unofficial position, I 
guess, then. Staff to staff, I think, in terms of opposition to 
this thing.
    Mr. Munoz. Well, sir, I'm here to just say that----
    Mr. Kolbe. To the Banking Committee staff. Not to my staff.
    Mr. Munoz. We're conducting the study, and at the 
conclusion of that study, the Secretary will reach a 
conclusion.

                        susan b. anthony dollars

    Mr. Kolbe. All right. Thank you for your answers to that. 
Let me turn to Mr. Diehl, and go back to the first one, and 
we'll talk about both of them again.
    Mr. Diehl, when we began the introduction of the Susan B. 
Anthony--or let me put it this way: at the peak, what was the 
stockpile of Susan B. Anthony's.
    Mr. Diehl. We produced about 857 million of them over the 
period from 1979 to 1981. We had in our stockpile----
    Mr. Kolbe. When you stopped producing them, how many were 
in your stockpile?
    Mr. Diehl. We probably had about 550 million in our 
stockpile.
    Mr. Kolbe. What's the number today?
    Mr. Diehl. It's around 170-160 million.
    Mr. Kolbe. Roughly what did it go down by last year?
    Mr. Diehl. About 65 million.
    Mr. Kolbe. What conclusions do you reach from the fact that 
the Susan B. Anthony, miserable a coin that it is, is still 
getting out into circulation there?
    Mr. Diehl. Well, I think there's good news and bad news in 
the situation. One is that it took a long time for us to get 
above annual demand of around 10 to 20 million coins a year. 
But when it finally occurred, it seemed to have broken through 
a threshold a couple of years ago----
    Mr. Kolbe. Why do you think that occurred?
    Mr. Diehl. Well, we were tracking that at the time, and we 
were very curious about that, and we started making inquiries 
to find out what the story was. We discovered that the U.S. 
Postal Service had installed change machines, stamp machines, 
that gave Susan B. Anthony's as change in several thousand post 
offices around the country.
    And, as you can imagine, we were delighted by the prospect 
that we would finally empty our vaults of all these Susan B. 
Anthony's that had been sitting around for a decade or more.
    The bad news was that apparently the response of the 
U.S.P.S. customers was not good to this product innovation. My 
understanding is they had a number of complaints about all of 
these Susan B. Anthony's that people walked out of the Post 
Office with, and my understanding is they have put on hold 
their plan to expand the use of these machines in other post 
offices around the country.
    So instead of seeing a continual climb as they rolled out 
this program over a series of years, we have actually seen a 
leveling off and then a slight decrease back to this 60-65 
million coin demand level.
    Mr. Kolbe. I dare say that the people walking out of the 
Post Office if they were unhappy if they thought that this was 
not something that anybody else was going to want or use or 
anything. So that's not surprising.
    Nonetheless, there must be other uses, then, if there's 65 
million a year.
    Mr. Diehl. Yes. We also think there are probably some 
metropolitan transit authorities that are increasing the use of 
the Susan B. Anthony in change machines, and also in fare 
acceptance mechanisms.
    Mr. Kolbe. Based on that, in three more years, you will be 
without any Susan B. Anthony's. Really, two, two and a half 
more years. When do you reach a decision? By law you have to 
produce them, don't you?
    Mr. Diehl. The law makes the Susan B. Anthony the current 
coin of the realm.
    Mr. Kolbe. So your intention is to begin production of them 
again.
    Mr. Diehl. If the Federal Reserve Bank were to order them 
in a situation in which we're running low, we're going to have 
to start producing them. That's correct.
    Mr. Kolbe. Do you think it's a good idea to go back and 
produce more Susan B. Anthony's?
    Mr. Diehl. I think if that's the coin of the realm, whether 
it's a good idea or not, I think that is what we have to do.
    Mr. Kolbe. Of course you have to do it. That wasn't my 
question. Is it a good idea to produce more of that same coin?
    Mr. Diehl. Well, this is one of the things I think the 
Treasury Department is looking at right now: is what is the 
range of options available to us, and which are the ones that 
are most attractive to us.
    Mr. Kolbe. The truth is, for a while you don't have an 
option. It's too late to say we could do this differently. 
We've wasted year after year after year on this, and so here 
you are--there's no way you would have another coin in place, 
or some other substitute.
    In two years time, you're going to be producing Susan 
B.Anthony's again. Have you thought about how Congress and the public 
is going to react to the press releases that you've started production 
of Susan B. Anthony's again?
    Mr. Diehl. Well, I'm not certain that we'll be in a 
position where we'll have to produce Susan B. Anthony's two 
years from now.
    Mr. Kolbe. How so?
    Mr. Diehl. Well, certainly we have 2 and a half or 3 years 
worth of stock on hand, and maybe more than that, especially if 
the demand does not stay at this level. For example, if the 
United States Postal Service were to pull a significant portion 
of those machines out and put in machines that accept credit 
cards or other kinds of smart card technology, then we may well 
see demand fall below the current 60-65 million coin level.
    So it's not a foregone conclusion that we're going to need 
additional Susan B. Anthony's in only two years.
    Mr. Kolbe. Well, it looks to me like you are. You're going 
to have to have something.
    Mr. Diehl. Well, I won't argue the fact that there will be 
a point at which we will have to make a decision about whether 
we're going to be producing the Susan B. Anthony or whether 
there's something else, some other option available to us.
    Mr. Kolbe. I hope to be there; to be a little mouse in the 
corner when you testify before the Committee that says why in 
the heck have we gone back to producing this, and hear the 
explanation of why: our failure to think forwardly on this 
thing and to deal with it. We've had to go back and produce the 
coin that everybody acknowledges has been a design failure, and 
a failure from introduction, from the standpoint of introducing 
it.

                       dollar coin--cbo estimates

    The Congressional Budget Office says that the conversion 
for the dollar note to the dollar coin would save roughly $100 
million a year over the next four years. There is a start up 
cost, and then there are obviously savings after that. And we 
don't project the budget beyond that based on current use and 
projected use. The production savings is roughly around $150 
million a year.
    That is not a huge amount, but we are looking very closely 
at every dime we can find in discretionary savings here in this 
budget. Have you analyzed these figures? Does your analysis 
support or contradict CBO's testimony?
    Mr. Diehl. Well, the CBO estimate--and we're going back 
probably about a year and a half here, talking about their 
numbers--and we have heard that they are going to come forward 
with another estimate in the near future, and we have not seen 
that estimate.
    But at the time, we took issue with CBO on some technical 
questions regarding what was included and what was excluded in 
their estimate of the start up costs. And I think in the final 
analysis, after we compared notes, we and CBO agreed to 
disagree about whether all of those start up costs were 
included in their original revenue estimate.
    Mr. Kolbe. Basically did you have any doubt that from the 
production cost standpoint that a piece of currency that lasts 
for 30 years versus the 17 months of paper would not save 
production costs in the long run?
    Mr. Diehl. If the American people accept it and it 
successfully circulates, I don't have any doubt that those 
savings are achievable. If it succeeds.

                        circulating coin demand

    Mr. Kolbe. All right. I'll leave that there.
    On the circulating coin you have pointed out: there is a 16 
percent reduction in demand for circulating coins. Why do you 
think this has happened?
    This actually relates back to this issue we were just 
talking about, it seems to me, and that is a currency that is 
useable.
    Mr. Diehl. Well, over many, many years we have seen that 
demand for circulating coinage is a cyclical business. It 
depends on where you are in the business cycle. As you come out 
of a recession or an economic downturn, you begin to see coin 
demand really pick up very rapidly.
    It builds as the economy--as that part of the business 
cycle matures. And then sometime around the peak of the 
business cycle, you begin to see it fall off. In fact, you 
begin to see it fall off a little before the peak.
    So the demand for coinage is following the macroeconomic 
cycles of the economy. This current period has been a classic 
example of that. In 1992, total demand for coinage was at the 
lowest level in years--around 12 to 12 and a half billion 
coins.
    In 1995 and 1994, we were up around 19 to 20 billion coins 
in demand. We are now seeing, since about 12 months ago, we 
have begun to see a fall off in coinage demand, and we really 
attribute this to the traditional factors that we see in the 
business cycle.
    Mr. Kolbe. I've got to take a quick recess to call my 
broker here. I think we have found a new theory of when the 
down turn in the market will come. [Laugher.]
    Mr. Diehl. I can assure you that the correlations are not 
strong enough to be betting money.

                        coin production capacity

    Mr. Kolbe. Okay. Do you right now have excess capacity in 
coin production?
    Mr. Diehl. Yes, we do.
    Mr. Kolbe. About how much?
    Mr. Diehl. Well, for example, last year we produced 20 
billion coins. We struggled to do that, but we did it. This 
year we're projecting to produce about 15 billion coins. I 
would not want to try to produce another 20 billion coins this 
year, because we really wore out our equipment.
    But, yes, there is excess capacity this year.
    Mr. Kolbe. So maybe if we introduced a new coin, like a 
dollar coin----
    Mr. Diehl. I see where you are headed.
    Mr. Kolbe. Actually I wasn't headed this way. But there may 
be some excess capacity, at least for the time being, 
temporarily.
    Mr. Diehl. Well, that's the rub. That's the problem. That 
capacity exists today--that excess capacity exists today, but 
we believe it will take 30 months from the time the Congress 
passes legislation authorizing a new dollar coin until we have 
tested--and we are assuming that legislation would be similar 
to the legislation that you introduced last year, for example. 
I am assuming a gold colored alloy which would require us to 
depart from the Susan B. Anthony alloy. This would require us 
to test the acceptability for coining purposes of that new 
alloy, to obtain the necessary coin strip from our coin strip 
manufacturers, to nail down the design criteria for the coin.
    We are expecting that that would take about 30 months. 
Between now and 30 months it is anybody's guess what coin 
demand will be. I certainly would not assume that it continues 
at 15 billion coins.
    Mr. Kolbe. We haven't even gone into the economic down turn 
that you're talking about, which many people think might be 
coming, but we haven't even gone into that. So presumably it is 
not until you have bottomed out of that and you're starting up 
that you see a--but, anyhow, I see what you are saying, what 
you're getting at, in terms of the long lead time.
    Mr. Diehl. Yes. And I don't intend to be saying that I am 
predicting an economic down turn.
    Mr. Kolbe. I didn't think the administration would want you 
saying that. [Laughter.]
    Mr. Diehl. I knew you would appreciate that. What I am 
saying is that at this particular stage of the economy, we have 
seen a downturn in coin demand, and that can turn around. There 
is nothing to suggest that we could not just as easily have 
another spurt of economic growth that would drive demand for 
coinage back up between now and, say, 30 months from now.
    Mr. Kolbe. I have a few other questions we will submit for 
the record.
    Mr. Hoyer. I apologize for taking so much time. I thought I 
would just get them all out of the way, since you weren't here 
when I started my questions.

                              dollar coin

    Mr. Hoyer. That was fine. I apologize for being late. There 
are just too many meetings going on.
    Mr. Diehl, While I wasn't here, I know the Chairman has a 
great interest in the dollar coin. I have some interest in it 
as well, from different perspectives, I suppose. Not 
necessarily from the Chairman's point. But there are a number 
of different views.
    In response to the Chairman's question you raised the issue 
about whether the public was receptive to the issue and 
circulation of such a coin. I know that the polls that have 
been done seem, for whatever reasons, relatively unsympathetic. 
Is that correct?
    Mr. Diehl. Two ways to answer that question. It depends on 
how you ask the question. If you ask the question strictly in 
terms of a new dollar coin, the public is pretty receptive.
    As soon as you add the component of matching it with the 
elimination of the dollar bill, it turns decidedly and 
consistently negative.
    Mr. Hoyer. I understand, Mr. Munoz, in his testimony, 
according to Mr. Statler, indicated that one of the things your 
bill does not do as I understand it is mandate the elimination 
of the paper dollar.
    Mr. Kolbe. It does.
    Mr. Hoyer. It does? Fine.
    Mr. Kolbe. Mr. Hoyer, if you would just yield, I would be 
happy to provide your office with two polls, one by a 
Democratic polling firm, one by a Republican polling firm that 
gives the exact opposite conclusions. Depends on how you ask 
the question.
    Mr. Munoz. We've had bills on the Senate side that had 
some--
    Mr. Kolbe. In the Senate, yes.
    Mr. Munoz. When Treasury was looking at this issue last 
year, and felt that it needed to opine on what was going on, it 
realized the difficulty of pulling the dollar bill, and the 
importance of the dollar coin being accepted, and based on what 
was in evidence, there was a problem with it.
    Mr. Kolbe. If the gentleman would yield for just one 
further second on that. We have made it clear that in my view I 
would urge a presidential veto of a bill that did not phase out 
the paper dollar. I think that would be an absolute fatal flaw, 
in any attempt to introduce another coin.
    Mr. Hoyer. It has to be in the alternative. Not a 
cumulative thing.
    Mr. Munoz. For the record, the Treasury did not say we 
request that this happen with the dollar bill or not happen 
with the dollar bill. It was just opining on the legislation as 
written. There were other issues in terms of timing also, and 
for that reason, Mr. Chairman, I am saying that the Secretary 
has the final say on what the Treasury position will be on any 
kind of legislation that develops.
    Mr. Hoyer. I hadn't seen this before, Mr. Chairman. I would 
like to look at your polls, because obviously you and Mr. Diehl 
agree. It depends on how you ask the question, I suppose.
    What you are saying is if it is in fact a phase out it 
appears that the public is for the coin but doesn't want to 
give up the bill.
    Mr. Munoz. That's correct.
    Mr. Hoyer. Five polls, one apparently done for the Budget 
Committee. It says that here though. I don't know anything 
about it. Indicating that there is a high level of opposition. 
65 percent is the lowest. The Kasich poll, apparently the 
Budget Committee poll, January of 1995, indicated 82 percent. 
Obviously I don't know how that question was asked, so I don't 
know what that means.
    Mr. Diehl. That's about the right range of all the polls 
dating back to the early 90s that I have seen.
    Mr. Hoyer. But clearly the key in terms of marketing this 
is whether or not the public is going to accept it. If it 
doesn't accept it, it's a bad deal, and if they do accept it, 
and we follow Mr. Kolbe's view that you don't have both, but 
you have one or the other, or it doesn't fly, then the public's 
acceptance of it is the key factor.
    Mr. Munoz. That's the key.

                    dollar coin--cost of production

    Mr. Hoyer. Let me ask you something: Am I correct that last 
year the Mint estimated the cost at $720 million? You 
referenced the new CBO numbers in your discussion of that. But 
was that last year's figure?
    Mr. Diehl. Yes. Let me give you--there are three parts to 
our cost estimate. Eight cents a coin production cost. Total 
production cost: For 9 billion coins, that's the $720 million 
in production costs.
    We are also estimating that there would be, in addition to 
the $720 million in production costs, about $93 million in 
start up cost for us to acquire the capital equipment necessary 
and to reorganize our plant facilities in order to produce a 
dollar coin.
    And then we are also estimating a $15-20 million public 
education campaign to prepare the public for the acceptance of 
a dollar coin in place of the dollar bill. We think that's one 
of the things that's clearly required based on the experience 
of other countries. They made major investments in informing 
the public about why they were doing it, and when they were 
doing it. The research that was done, ironically dating all the 
way back before the Susan B. Anthony, strongly recommended that 
there be such a public education campaign.
    That $15-20 million estimate is very much a ballpark 
estimate. The way we came up with it was we took what the 
Canadians spent for their public education campaign. We 
adjusted it for inflation and the population difference between 
the U.S. and Canada, and we came up with something close to $20 
million.
    Mr. Hoyer. Well, that sounds reasonable. That gets you up 
into the $850 million----
    Mr. Diehl. Yes.
    Mr. Hoyer. Actually it gets you more than that, because of 
the $93 million added onto the $720. So you're up to about $813 
million, and then you're adding on $20-30 million.
    Mr. Diehl. Close to $850 million.

                              fte targets

    Mr. Hoyer. Yes. Now, unrelated to the dollar coin, an area 
which is going to be of great interest to this committee, your 
FTE's----
    Mr. Kolbe. I understand we're not the authorizing 
committee.
    Mr. Hoyer. Mr. Chairman, don't be constrained by my being 
unaware of the importance of using the assets of being Chairman 
of this Committee. [Laughter.]
    I don't want to constrain you beyond that which I am 
prepared to live with when and if. [Laughter.]
    FTE's.
    Mr. Diehl. Yes.
    Mr. Hoyer. Where are you in terms of administration goals?
    Mr. Diehl. We are under the last target that was given to 
us by the administration.
    Mr. Hoyer. What are your FTE's now?
    Mr. Diehl. Our FTE's are around 2,200. Just under 2,200. 
2,160 something, to be exact. It's around 2,200. And we have 
been consistently, since 1995, below what the administration's 
target was, translated to the Mint through the Treasury 
Department.
    Now, OMB doesn't actually set a target for the Mint. They 
set one for Treasury, and then Treasury passes one off to us.
    Mr. Hoyer. And what is your target for fiscal year 1997?
    Mr. Diehl. It's 2,376.
    Mr. Hoyer. And you're actually at 2,160, so you're 10 
percent below.
    Mr. Diehl. That's right. And our FTE trend line since 1994 
has been downward.

                comparison of coin demand to production

    Mr. Hoyer. We talked about the dollar coin, but let me ask 
you something in terms of your predictions on circulation of 
coins in general.
    Mr. Diehl. Yes.
    Mr. Hoyer. Maybe this was asked. How has your track record 
gone recently in terms of your predictions versus performance?
    Mr. Diehl. I actually have anticipated this question, and 
so I have a chart I would like to hand out to the members.
    [The information follows:]

[Pages 1721 - 1722--The official Committee record contains additional material here.]

    Mr. Hoyer. I'm really glad I asked this question in light 
of the fact that you were anticipating it. I'll have to ask 
Seth whether you planted this question.
    Mr. Diehl. Actually, you planted it in our last hearing, 
two years ago. And we may not be able to predict coin demand, 
but we like to be able to predict questions from appropriators.
    This graph is a little bit confusing. Let me walk you 
through what it is. The key line is the black line with the 
black squares which you can see best on the right hand side. 
That's the actual demand, raw demand, on an annual basis for 
circulating coinage.
    And you can see that trend line up through the peak of 1994 
and 1995, and then trailing off into 1996 and 1997. The blue 
line is how accurate our model is, based on actual economic 
data. Not forecasted data.
    In other words, we go to DRI and obtain the actual 
macroeconomic numbers for retail sales, or whatever the 
variables are, in retrospect, and plug that into the model.
    And as you can see, that blue line, with the blue 
triangles, is very close to the actual net demand for coinage.
    The other two lines represent forecasts. One, the red line, 
represent forecasts based on data available 12 months before 
the beginning of the fiscal year, and the green line is 6 
months before the fiscal year. As you can see, the closer you 
get, the better that economic data is, and therefore the better 
our estimates are.
    But in the end, we are highly dependent upon the accuracy 
or the reliability of the economic forecast data from DRI that 
we put into our model. Because what we are doing is forecasting 
the business cycle, this is a very difficult chore to do.
    It's very difficult to have very much reliability, even 6 
months out, much less 12 or 18 months. And this recall was the 
argument that we were making for the revolving fund 2 years 
ago, that when an appropriations process requires you to 
predict 18 months beforehand for budgeting purposes and 
appropriations purposes what your coin demand is going to be, 
it's going to be highly unreliable.
    And the problem doesn't lie in the model. It lies in the 
inherent unpredictability of macroeconomic forces. Fortunately, 
we now have under the revolving fund legislation the 
flexibility to adjust much more quickly to changes in demand 
for our circulating denominations.
    And that's one of the real efficiencies we expect to get 
out of the revolving fund over the next several years.
    Mr. Hoyer. To the extent that your ability to predict is 
better, I presume you're going to effect efficiencies in terms 
of production.
    Mr. Diehl. Yes.
    Mr. Hoyer. And obviously there's a cost impact to inventory 
coins.
    Mr. Diehl. Yes, there is. And there's a real cost impact of 
the old boom/bust cycle, because there gets to be a hoarding 
instinct. When you go through several years of really 
struggling to meet demand, then the next time you have an 
opportunity to produce some extra coins, you do it, and you 
fill the vaults to the brim, and sometimes in the hallways, in 
order to make sure that during the next lean period you're 
going to have enough.
    The revolving fund will allow us to break out of that 
cycle, to flatten those peaks and valleys. And that has a 
beneficial impact on our employees; we are less likely to 
depend upon temporary employees, less likely to have to call 
those people on and then let them go back off the payroll.
    So that's one of the reasons why we had the enthusiastic 
support of AFGE for the revolving fund proposal. It just allows 
us to rationalize the whole process a lot better.

                               conclusion

    Mr. Hoyer. I have some other questions, but unfortunately 
I'm going to have to leave again. I'm chairing a meeting at 
3:00 o'clock and so I'll have to leave in a few minutes. But 
thank you very much.
    Mr. Kolbe. Ms. Mink.
    Ms. Mink. Thank you very much, Mr. Chairman. I don't have 
questions. I also have another meeting. I'm using shuttle 
diplomacy today.
    Mr. Kolbe. I understand how that goes. And I understand 
now, how being Chairman you have to stay here. We have the FBI 
director next door, and I need to be at that one, too for my 
other Subcommittee. But I'm here.
    Mr. Hoyer. Life is a series of trade-offs.
    Mr. Kolbe. That's right. We thank you very much. We'll try 
to keep on track here, so we thank you very much, Mr. Diehl, 
and we'll go to the Bureau of Engraving.

[Pages 1725 - 1774--The official Committee record contains additional material here.]

                                      Wednesday, February 26, 1997.

        DEPARTMENT OF THE TREASURY, OFFICE OF INSPECTOR GENERAL

                               WITNESSES

VALERIE LAU, INSPECTOR GENERAL
RICHARD CALAHAN, DEPUTY INSPECTOR GENERAL
RAISA OTERO-CESARIO, ASSISTANT INSPECTOR GENERAL FOR INVESTIGATIONS
GARY L. WHITTINGTON, ASSISTANT INSPECTOR GENERAL FOR RESOURCES
DENNIS S. SCHINDEL, ASSISTANT INSPECTOR GENERAL FOR AUDIT
WILLIAM PUGH, DEPUTY ASSISTANT INSPECTOR GENERAL FOR AUDIT (FINANCIAL 
    MANAGEMENT)
LORI Y. VASSAR, COUNSEL TO THE INSPECTOR GENERAL

                  Opening Comments From Chairman Kolbe

    Mr. Kolbe. The meeting will come to order. We will go ahead 
and get started with our opening statements this morning.
    We welcome you, Mrs. Lau, as Inspector General of the 
Department of Treasury.
    The Inspector General is requesting a $31.3 million 
appropriation this year. That is an increase of 5 percent over 
the amount appropriated the previous year.
    Certainly I think we all agree that the role of the 
Inspector General is extraordinarily important. It performs 
financial audits to determine that the financial condition of 
the agency is fairly presented, assesses accounting controls 
and compliance with laws and regulations, oversees and conducts 
investigations of alleged misconduct, fraud and abuse, performs 
program audits of economy, efficient and effectiveness, as well 
as audits of contracts that are awarded by the Department of 
Treasury.
    The detection and eradication of fraud, waste and abuse in 
the Department is the mission of this Inspector General as it 
is for the Inspector General of all the Federal agencies. The 
role of the subcommittee of the Appropriations Committee is to 
ensure there is adequate funding so the Inspector General can 
carry out the responsibilities of that mission. Additionally, 
the Appropriations Committee must ensure that the Inspector 
General carries out the responsibilities in an effective and 
efficient manner.
    As is the case for all the agencies that comes under the 
jurisdiction of our Committee, through the use of strategic 
planning, performance goals and measures, the Committee will be 
measuring the accomplishments of the Inspector General. We will 
look closely at these to assure they accurately reflect 
outcome-based performance.
    Last but not least, the Committee has a justifiable 
interest in the IG's responsibility with regard to auditing of 
financial statements. It is important that taxpayers can 
receive assurances that their money is being spent in 
accordance with the law.
    Faith in the Federal government often stems from the 
knowledge that agencies must balance their own checkbooks. Our 
concerns become heightened when Congress gets a report from the 
General accounting which states that the IRS accounting is so 
poor the GAO is unable to verify the IRS's expenditure of 
appropriated funds.
    So I look forward to hearing from you today; and if Mr. 
Hoyer or Mr. Price comes in, we will recognize them for an 
opening statement when they do come in. But, in the meantime, I 
would ask you to proceed with your testimony and, as always, 
would remind you that the full statement will be placed in the 
record.
    Ms. Valerie Lau. Thank you.
    Mr. Kolbe. I would hope that you would summarize your 
report as briefly as possible so we can spend as much time as 
possible on the question, because your report will be on the 
record.

                      Summary Statement of Ms. Lau

    Ms. Valerie Lau. Thank you. I would be happy to.
    Mr. Chairman, as you know, I am Valerie Lau, the Inspector 
General of the Department of the Treasury. I am pleased to be 
here with you today to discuss our fiscal year 1998 budget 
request.
    Sitting at the table with me to my right is my right-hand 
person, Richard Calahan, the Deputy Inspector General.
    Sitting behind me to my left are my other five right hands: 
Mr. Dennis Schindel, Assistant Inspector General for Audit; Ms. 
Raisa Otero-Cesario, Assistant Inspector General for 
Investigations; Mr. Gary Whittington, my Assistant Inspector 
General for Resources; Mr. Bill Pugh, who is my Deputy 
Assistant Inspector General for Financial Management; and Ms. 
Lori Vassar, who is my Counsel. They will be helping me respond 
to some of the questions we field later today.
    I would also like to introduce a special member of the 
gallery. My mother, Norma Lau, is with us today.
    Mr. Kolbe. I wondered if that was your mother.
    Welcome. We are very pleased to have you with us today.
    Mrs. Lau. I am very happy to be here.
    Ms. Valerie Lau. She happens to be the elected city auditor 
of Oakland, California. She is in her fifth 4-year term in a 
nonpartisan position which has garnered bipartisan support 
consistently over the last 20 years.
    Mr. Kolbe. Well, you can be very proud of your mother.
    Ms. Valerie Lau. I am.
    Mr. Kolbe. As I am sure she is very proud of her daughter. 
They seem to be on a similar track here.
    Ms. Valerie Lau. As you know and as you mentioned, the 
Treasury Office of Inspector General was established by the 
1988 amendments to the Inspector General Act of 1978. Like all 
OIGs, our mission is to conduct independent audits, 
investigations relating to the programs and operations of our 
Department, to make recommendations that promote economy, 
efficiency and effectiveness, and to prevent and detect fraud 
and abuse.
    Unlike most other OIGs, however, the amendments did not 
create a single audit and investigative entity for the 
Department. Instead, we share that responsibility and have 
oversight over other audit and investigative units within the 
four law enforcement bureaus. Simply put, the Treasury OIG has 
direct audit responsibility for all the bureaus except for the 
Internal Revenue Service.
    We have oversight responsibility for the internal audit and 
investigative functions of the IRS Chief Inspector's Office and 
the internal affairs and inspection functions of the Customs 
Service, the Bureau of Alcohol, Tobacco and Firearms and the 
Secret Service. In addition, we have investigative 
responsibility for all other Treasury bureaus and for all 
senior level officials Departmentwide.
    Please keep in mind this structure mandated by the IG act 
amendments as we discuss the activities of my office.
    Today we would like to describe what we have accomplished 
and discuss what we hope to achieve in the years ahead. We 
realize that what counts are results, those results made 
possible by the resources entrusted to us through this process.
    This submission reflects our first efforts to integrate our 
strategic plan into our request. In this area of strategic 
direction, we have several strategic goals that support our 
mission, and those are very much in line with both the mandate 
of our act and the mission of our Department. They are to 
promote economy, efficiency and effectiveness, to improve 
financial management, to heighten integrity, awareness and 
deterrence, to monitor departmental information systems 
development, to address high-priority issues that benefit our 
customers and other stakeholders, and to continually improve 
our office's ability to deliver these services through employee 
and organizational development.
    We have identified a number of strategies to 
accomplishthese goals. For example, in the area of economy, efficiency 
and effectiveness, we are developing a system for both long-range and 
short-range planning which will identify programs and activities 
subject to high risk and vulnerabilities.
    The plan focuses attention on the Department's priorities, 
as reflected in our budget submission. Those priorities include 
strengthening internal financial management and improving 
border operations. We will use that plan to direct our audit 
resources in a way that will provide coverage to significant 
and sensitive Treasury programs and operations.
    Our budget request for fiscal year 1998 is $31.3 million 
and 313 direct full-time equivalents. This includes 
approximately .6 million to cover workload adjustments to 
support our audit functions that review all facets of the 
Treasury's operations, approximately .78 million to cover cost 
adjustments necessary to maintain current levels, and 
approximately .16 million to cover pay annualization.
    But I mentioned we want to talk about results, and so today 
I would like to highlight three particular areas where I think 
we have made some significant progress--in improving Treasury's 
financial management, in developing our own in-house 
information technology capability, and in strengthening our 
organizational independence. We have accomplished these by 
using our existing resources more effectively.
    First, we have focused a portion of our audit resources 
towards helping the Department improve financial management 
through financial statement audits mandated by the Chief 
Financial Officer's Act and the Government Management and 
Reform Act.
    As you know, this year we are responsible for auditing the 
first-ever Departmentwide financial statements. This is a very 
large undertaking. In fiscal year 1995, Treasury's revenue 
collections amounted to $1.4 trillion, accounting for almost 
all of the government's revenues.
    In less than 3 years, we have built one of the strongest 
financial statement audit groups in the Inspector General 
community. We have seen progress in financial management as 
measured by improved levels of audit assurance, and we intend 
to build on this success. Treasury has made great strides in 
financial management, but there is still more to be done, and 
this will continue to be a major focus.
    Second, we have made progress in developing our information 
technology capacity. Information technology and its 
applications are of critical importance to the Department.
    Until two years ago, we relied largely on contracted IT 
expertise to support our audits and other projects. We did not 
have in-house ADP audit expertise. Last year, I reported to the 
committee that we had hired a senior ADP manager and combined 
the staffs of our ADP support group with a small ADP audit 
group under his leadership. I charged this new office with 
making information technology a strategic resource, and I am 
pleased with the progress we have made so far.
    Third, we have strengthened our organizational 
independence. Last year, I reported that the General Counsel 
and I had entered into a Memorandum of Understanding to ensure 
the provision of independent legal services by establishing 
procedures so that my counsel could provide legal advice 
independent of the Office of General Counsel and sever 
communications about any particular subject.
    During my tenure, the OIG has handled many issues that 
required the exercise of independent legal advice. Accordingly, 
in practice, my counsel has not reported to nor been under the 
general supervision of the General Counsel. Because that MOU 
did not adequately reflect the independence between my counsel 
and the OGC, the General Counsel and I rescinded the MOU. The 
Department's organizational structure will now reflect that my 
counsel is solely an employee of the OIG who reports directly 
to and is supervised by my office.
    I would like to add an additional area where my office has 
made a difference that is not in my prepared remarks.
    Since my appointment as Inspector General, our office has 
taken a leadership role both in the IG community and in the 
larger Government financial management community. In March, 
1995, I was appointed Chairman of the President's Council on 
Integrity and Efficiency's Audit Committee, which is the 
committee that handles all audit and accounting issues relating 
to Federal financial management; and in that capacity, we have 
shown a lot of progress as partners in initiatives that I will 
share with you.
    Together with the OIGs of the Agriculture Department and 
HHS, we conducted a review of the Electronic Benefit Transfer 
program, EBT, that I think you are aware of, where we looked at 
existing EBT programs run by States. This review identified 
potential internal control problem areas that we wished to 
avoid in the Federal government's EBT program. We summarized 
those results in a report and provided them to OMB for their 
use in implementing the new Federal EBT system, and we 
participate in meetings to assure that appropriate controls are 
in place to prevent fraud and abuse in that program.
    We also have been active members, myself and members of my 
staff, in the Governmentwide audited financial statement task 
force. There we are looking at issues, both for the preparation 
and the audit of the financial statements, that are coming up 
in the conduct of these financial audits and in the process of 
working towards next year's consolidated financial audit.
    My evaluations group worked with the SBA OIG's office in 
doing a survey of the IG community about the level of IG 
involvement in the Government Performance and Results Act. I 
have a copy of that report here. I would be happy to share it 
with the Committee.
    [The information follows:]

[Pages 1780 - 1794--The official Committee record contains additional material here.]

    Ms. Valerie Lau. It provided a baseline of what IGs 
currently are doing and identified some areas that the IG 
community may wish to address in terms of our role as GPR 
continues to progress.
    Our information technology group, although small, has been 
very active, both in the Department, in IT work groups and at 
the Governmentwide level.
    So that is, in a nutshell, the summary of the progress of 
my office. This concludes my statement, and we would be happy 
to answer any questions you might have.
    Mr. Kolbe. Thank you very much, Mrs. Lau.
    [The prepared statement of Ms. Lau follows:]

[Pages 1796 - 1808--The official Committee record contains additional material here.]

                       independent legal counsel

    Mr. Kolbe. Welcome, Mrs. Meek and Mr. Price. Neither of you 
were here at the outset of the hearing, and I would like to ask 
if you have an opening statement.
    Mrs. Meek. No, Mr. Chairman.
    Mr. Price. No, Mr. Chairman.
    Mr. Kolbe. Thank you.
    I will begin with the questioning here. As before, we will 
adhere to the 5-minute rule; and I will note my own time and 
try to adhere to that as well.
    Let me quickly try to get one thing out of the way; and I 
think we can, based on your testimony; and that is the status 
of the independent legal counsel. You said that you have 
rescinded the MOU, that in the organizational structure that it 
reports directly to you. Has this been formalized by anything 
other than an organizational chart, this independence?
    Ms. Valerie Lau. There is a document which memorialized the 
agreement between the General Counsel and myself. I would be 
happy to provide that for the record.
    Mr. Kolbe. I thought that was an MOU that you rescinded.
    Ms. Valerie Lau. There was an MOU and there is now a 
document that rescinds the MOU.
    Mr. Kolbe. That document spells it out?
    Ms. Valerie Lau. Yes, it does.
    Mr. Kolbe. Would you make that available to the Committee?
    Ms. Valerie Lau. Yes.
    [The information follows:]

[Page 1810--The official Committee record contains additional material here.]


    Mr. Kolbe. Because I think that is extraordinarily 
important that we have the independence. How do you think your 
ability to seek legal counsel outside the Treasury Department 
is going to effect your mission? Do you think that is going to 
have an effect on the way you perform your mission?
    Ms. Valerie Lau. I have been very happy with the legal 
counsel that I have had. This detail, which is an important 
detail, of formally recognizing that my counsel reports solely 
to my office and is not under the supervision of the General 
Counsel enhances the independence of my office; and so I do not 
foresee any problems in that this was a long-sought-after 
organizational clarification.
    Mr. Calahan. If I might just clarify for a moment. The MOU 
that we were operating under had a very specific fire wall 
provision that the IG could implement on individual issues. In 
the practice, the way the MOU worked, that fire wall was almost 
always in place. This understanding, that we have reached at 
this point, basically concludes that fact.
    Mr. Kolbe. The new document?
    Mr. Calahan. The new document.
    Mr. Kolbe. Restates that or formalizes that?
    Mr. Calahan. Well, formalizes it for all legal counsel, all 
legal advice that is provided by the legal staff that reports 
to the IG's office.
    Mr. Kolbe. So under this document, you have the authority 
to hire, to fire, to supervise.
    Mr. Calahan. . . . and evaluate.
    Mr. Kolbe. Evaluate. What kind of contact--what kind of 
relationship is there between your legal counsel and the 
Treasury legal counsel? What relationship--is there any 
relationship that remains on that level?
    Mr. Calahan. Well, there is an informal relationship that I 
think will always have to be maintained, because I think 
attorneys need to talk to attorneys on individual issues. But 
in terms of the MOU we were operating under, it said that 
basically our counsel was under the general supervision of the 
General Counsel of the Department, and now that is not the 
case. Now OIG legal counsel is under the sole direction of the 
Inspector General.
    Ms. Valerie Lau. However, neither of us are attorneys. If 
you would like to hear the perspective from our own counsel, 
she is here.

          Allegations of abuse made against treasury employees

    Mr. Kolbe. For the record, I think that might be valid; but 
I don't think we need to do that right now.
    I have a whole line of other questions on various issues; 
but in the brief moment I have left, let me see if I can get 
one more question in and that is the concern that I think you 
share and probably all the IGs share.
    I think there is a lot of concern that the process of the 
Inspector General can be abused, that individuals can file 
complaints that have no validity whatsoever. They are 
anonymously filed on the 1-800 number. Then you spend not only 
a lot of time and energy and money doing this, but it can be a 
very emotionally disturbing thing to an employee who has no 
reason for this complaint to be filed against them.
    Obviously, this is not always the case; and we want 
employees to feel free to be the whistle-blowers. But how do we 
deal with employees who want to get back at supervisors--or 
vice versa, I suppose--but filed an anonymous complaint that 
they are padding their travel or whatever? Is there an answer 
to this problem as to how we can deal with this? And how much 
of your time do you think is spent pursuing complaints that end 
up having absolutely nothing to show for them?
    Ms. Valerie Lau. Well, sir, that is a dilemma that we do 
face; and because of our role as an Inspector General Office, 
as you have mentioned, we receive numerous allegations from all 
sources. But we have to treat them equally, regardless of their 
origin or how they are transmitted. Each allegation must be 
reviewed.
    One of our guidances on this is guidelines from the 
President's Council on Integrity and Efficiency, Quality 
Standards for Federal Offices of the Inspector General. This is 
dated January, 1986; and it specifically has a section on 
receiving, controlling and screening allegations. This is the 
guidance that we follow in our own process of receiving, 
reviewing, evaluating allegations, no matter what their source. 
But I do understand your concern about frivolous allegations.
    Mr. Kolbe. Since they can be filed anonymously, is there 
any responsibility for the person who makes the complaint to 
provide some kind of a factual basis for it? I mean, if you 
just get a call that says I think ``X'' is padding their travel 
vouchers, is that something you do need--you have to pursue it, 
I mean, even though the anonymous complaint gives no factual 
basis for that?
    Ms. Valerie Lau. If I could give an example of how we 
review an allegation and what we do with allegations according 
to their substance, it might illustrate the issue.
    When we receive an allegation, it becomes a permanent part 
of our information system. After it is received, it is screened 
by a senior criminal investigator to determine whether it does 
have investigative merit. So that goes to the credibility of 
the allegations.
    The screening results in a decision to either initiate a 
preliminary investigation, to refer the issue to another 
Treasury bureau or appropriate outside agency or to place the 
information in what we call our raw data file to be retrieved 
if subsequently there is additional information that points to 
the same area.
    So if the information on its face is not credible, it is 
not automatically pursued; but it is retained should, at a 
future date, there be other information to indicate an 
investigation is warranted.
    Mr. Kolbe. Let me follow--and that is an important point, 
and I need to stop so we can get questions from the other 
members here.
    So you are saying even if it turns out to be totally 
frivolous and totally invalid, it is still going to remain a 
permanent part of that employee's file, because there may be 
something in the future that may come up.
    Ms. Valerie Lau. That is my understanding.
    [Clerk's note.--The OIG provided the following 
clarification: ``It remains a permanent part of our 
investigative system of records but it is not placed in an 
employee's personnel file''.]
    Ms. Vassar. Excuse me, may I make a clarification?
    Mr. Kolbe. Yes. Identify yourself for the record.
    Ms. Vassar. I am Lori Vassar, the Counsel to the Inspector 
General.
    The Department of Treasury and Department of Justice have 
agreed on procedures under what is referred to as the Giglio 
Policy.
    Mr. Kolbe. Under?
    Ms. Vassar. The Giglio Policy is the process under which 
circumstances, negative information about law 
enforcementofficials, which includes not only agents but auditors, 
attorneys, anyone who is in law enforcement, in the prosecution arena. 
In essence, we do not create automatically a file in the individual 
person's name. It is not placed in their personnel files. If 
allegations are substantiated, any agency action that is taken against 
the individual would be reflected in the personnel file.
    [Clerk's note.--The OIG provided the following 
clarification: ``The Giglio Policy addresses the Department's 
obligation to disclose to Prosecutors potential impeachment 
information concerning Department of the Treasury witnesses. 
The Policy encompasses not only agents but auditors, attorneys, 
anyone who is in law enforcement, and other Treasury employees 
who may be prosecution witnesses. In essence, we do not create 
automatically a file in the individual person's name. Our 
investigative reports are not placed in their personnel files. 
If allegations are substantiated, any agency action that is 
taken against the individual based on our investigative report 
would be reflected in the personnel file.'']
    Mr. Kolbe. Well, yeah, I am talking about unsubstantiated.
    Ms. Vassar. That is retained, but it would not be released. 
Disclosure really does depend on the circumstances as to 
whether it is a high-level official. Under the Giglio 
procedures, it depends on whether the referral was made by a 
prosecutor, a magistrate or, in that respect, whether or not it 
is meritorious enough that it should be revealed should, the 
agent, auditor or attorney testify in a proceeding. We are 
very, very scrupulous in protecting the interests of the 
individuals because, unfortunately, we do recognize that law 
enforcement officials are subject, oftentimes, to complaints.
    [Clerk's note.--The IG provided the following 
clarification: ``That information related to unsubstantiated 
allegations is retained, but it would not be released, nor 
would it be included in an employee's personnel file. 
Disclosure really does depend on the circumstances such as 
whether it is a high-level official. Under the Giglio 
procedures, disclosure of unsubstantiated allegations depends 
on whether the referral was made by a prosecutor, a magistrate 
or, in that respect, whether or not it is meritorious enough 
that it should be revealed should, the agent, auditor or 
attorney testify in a proceeding. We are very, very scrupulous 
in protecting the interests of the individual because, 
unfortunately, we do recognize that law enforcement officials 
are subject, oftentimes, to unsubstantiated complaints.'']
    Mr. Kolbe. This process applies only to law enforcement.
    Ms. Vassar. No, this is true of all individuals, all 
Treasury employees.
    Mr. Kolbe. Twice you said law enforcement.
    Ms. Vassar. There are special, unique procedures as to what 
a prosecutor should receive when they are using that individual 
as a witness in a criminal proceeding. Separately, there are 
other protections as well for individuals. There is Freedom of 
Information Act case law.
    Mr. Kolbe. For all employees.
    Ms. Vassar. As to all employees, when it is appropriate to 
release information. The privacy interests of the individual 
usually outweigh disclosure to the public if it is an 
unsubstantiated allegation. It does depend on the rank, the 
level of the person, how high profile the investigation it is, 
whether it would adversely affect the integrity of the program. 
But, in essence, one would not just disclose allegations which 
are totally unsubstantiated.
    Mr. Kolbe. Thank you.
    I completely overshot my 5-minute rule. Mrs. Meek?

                   Independence of Inspector General

    Mrs. Meek. You know, I really am new to the Committee. I 
don't know that much about your operation. However, I am 
familiar with State Inspector General operations.
    I am concerned about--how independent can you become. Are 
you really independent in that the people who take care of your 
salary and all your costs are here on the Hill? So how do you 
come forth--you surge forth with the kind of independence you 
stated here? I like the fact that you do have other legal 
advice, but tell me what you do to ensure this kind of 
independence you are talking about.
    Mr. Calahan. Well, if I might, I think that one of the keys 
to the initial IG legislation was that the IGs be independent 
of the program functions and that there be processes in place 
whereby the IGs report outside their department on issues so 
that they would have some independence from their department as 
well. So the OIG reporting mechanism to the Hill is one of the 
key provisions of the IG Act to provide for that independence. 
Concerning the IG Act, it wasn't to provide independence from 
the Hill but to provide independence from the program functions 
and their departments.
    Mrs. Meek. Is that a good mix, to isolate them from the 
program functions when the two of them must run 
interchangeably? There has to be a way. I mean, you run the 
paper and the technology, but how could you do that without 
being isolated from the program function?
    Mr. Calahan. Well, we have to be knowledgeable of the 
Department's programs. That is one of the reasons they left the 
IGs in the departments, I think, so they would be knowledgeable 
about what is happening in the Department. They would be 
knowledgeable about the programs. So the decision was made to 
leave the IGs within the context of the Departments but to 
provide them line-item budget, to provide that Inspectors 
General are nominated by the President and confirmed by the 
Senate to provide the semiannual reporting function to the Hill 
and so forth, to give independence to the IG through these 
different mechanisms.
    But I think, it is important for the IGs to maintain 
extensive knowledge on the Department's processes and programs.
    Mrs. Meek. Thank you.
    Mr. Kolbe. Mr. Price.

                    Fiscal Year 1998 Budget Request

    Mr. Price. Thank you, Mr. Chairman.
    I would like to add my welcome to Ms. Lau, Mr. Calahan. We 
appreciate your being here and appreciate your testimony.
    I would like to focus on the budget increase you are 
requesting for next year, 5 percent, I believe.
    Ms. Valerie Lau. Yes.
    Mr. Price. And that includes an additional 8 FTEs.
    Now, this increase in personnel follows an increase in 1997 
of 12 FTEs. So that raises the question of exactly what the 
rationale for this increase is and what the implications would 
be if you didn't get the increase. What would be the actual 
impact in terms of audits not conducted or savings not 
identified?
    Ms. Valerie Lau. In past budgets we have not received 
enough funding and, have had to absorb the cost of salary 
increases, rent increases and the like, therefore limiting our 
ability to fund to our FTE ceiling.
    We are seeking the ability to fully fund our FTE ceiling in 
order to increase our coverage and our support on our audit 
side, both in terms of our programmatic audits and our 
financial audits, particularly in the area of information 
technology. As you know, there are a number of information 
technology investments that the Department is embarking upon as 
well as information technology applications that the Department 
will be key to such as electronic commerce, such as the 
Electronic Benefit Transfer program and such.
    In terms of how specifically not getting our requested 
budget increase would impact us, we would be happy to provide 
that for the record. But, to summarize, we would have to do 
less of almost everything. What would come first, though, is 
our salaries; and that comprises for an organization like ours 
approximately 75 percent of our current budget.
    Mr. Price. Well, we would appreciate that more specific 
information.
    [The information follows:]

    In order to more fully categorize the impact of and 
rationale for increasing our funding it is necessary to provide 
some background about prior years funding. Specifically, The 
OIG has had to absorb the costs for pay raises and maintaining 
current levels over the past several years. In this regard the 
OIG has not been able to hire up to its authorized FTE ceiling.
    For FY 1997 our appropriation fully funds 305 FTEs or 8 
FTEs below our authorized ceiling of 313. For FY 1998, the 
additional funding requested will enable the OIG to fully 
utilize our FTE ceiling of 313 in support of audit functions 
that review all facets of treasury's operations. Specifically, 
in support of program and financial statement audit work, we 
will be able to (a) reduce the costs associated with internal 
controls issues through cost/benefit analysis, and (b) support 
the information technology (IT) work that needs to be performed 
as part of the financial statement audits.
    Likewise, not getting these resources will affect our 
ability to accomplish the OIG's workload in assessing and 
recommending improvements in Treasury's implementation of 
government legislation, such as aspects of the Government 
Management and Reform Act, the Information Technology 
Management Reform Act and the Federal Financial Management 
Improvement Act.
    Programmatically, the effect of not being funded to our FTE 
ceiling of 313 would be the lack of ability for the OIG to be 
able to enhance the OIG's capability to support the current 
audit functions, including both financial statement audits and 
program audits. The OIG needs to be able to assist the Treasury 
bureaus in addressing major financial management and internal 
control vulnerabilities that inhibit reliable operational and 
financial information. The OIG also needs to assist the 
Treasury bureaus in developing corrective action plans that 
address those vulnerabilities. In the near term, the OIG needs 
to be able to assist the Treasury bureaus in identifying 
critical actions which must be taken within the existing 
framework versus the actions that cannot be implemented without 
major systems overhaul. Lastly, the OIG needs additional IT 
support for the financial statement audit work to ascertain 
that the bureaus automated financial management systems comply 
with uniform federal accounting standards and are adequate to 
provide reliable financial data to assist the auditors in 
rendering an opinion.
    The effect of not getting the funding to support the FTE 
ceiling will significantly impact the following strategic goals 
in accomplishing our mission:
    1. Promote economy, efficiency and effectiveness;
    2. Heighten integrity awareness and deterrence;
    3. Monitor Departmental information systems development;
    4. Address high priority issues that benefit customers and 
stakeholders; and
    5. Continually improve through employee and organizational 
development.
    More importantly, our ability to meet established 
performance measures will be negatively impacted if the OIG is 
unable to hire up to its authorized FTE ceiling.

                    fiscal year 1998 staffing level

    Mr. Price. Am I correct in that figure of an increase of 12 
for the current fiscal year?
    Mr. Calahan. Gary, would you like to provide?
    Mr. Whittington. My name is Gary Whittington. I am the 
Assistant Inspector General for Resources.
    Basically, the 293 is the actual number of FTEs, the full-
time equivalents, that were used in 1996 versus what we were 
authorized for use this year, which is 305. So the 12 wasn't 
actually an increase; it was because of the items that Ms. Lau 
was talking about in terms of our inability to fund those 
positions up to that full level. So the utilization of the FTE 
was at 293 versus I think it was 313 that we were actually 
authorized in 1996 also. So there was no increase in 1996. It 
was our inability to fund the total number of positions and so 
forth.
    Mr. Calahan. So does that help?
    Mr. Price. Not especially. Are there 12 additional hands on 
deck for the current year or not?
    Mr. Calahan. I think the explanation that is being made is 
that the ceiling for the IG's office hasn't really changed and 
that what we are trying to do is provide enough money to our 
budget so we can afford to hire up to that ceiling.
    Mr. Price. But the question is, what has happened in the 
current fiscal year? We are talking about staffing estimates 
here of 293 for 1996 and--in the information I have--and 305for 
the current fiscal year.
    Mr. Calahan. Right. We think we can staff--we think we can 
pay for 293, but our ceiling is 305. Isn't that right?
    Mr. Whittington. The 293 were the actual number that were 
used in 1996.
    Mr. Price. And what is the current situation?
    Mr. Whittington. The current situation is that we have 305 
for 1997 that we are authorized to hire and to fill, and our 
plans are to attempt to get to that level. Right now----
    Mr. Price. You are not right now at the 305 level.
    Mr. Whittington. No, that is a planned figure.
    Mr. Price. But you are anticipating a further increase to 
313 in fiscal 1998.
    Mr. Whittington. That is correct.
    Mr. Price. Okay. I didn't realize the 305 level had not yet 
been reached. But my question is, what is the implication in 
terms of the activity of the office of these increases, both 
the one in the current fiscal year and the one anticipated for 
next year? And you say you do not have that at present but will 
furnish it in greater detail?
    Ms. Valerie Lau. That is right.

                         mandated oig structure

    Mr. Price. Okay. I wonder if you could elaborate on the 
audit and investigative relationship you have with the Treasury 
and how that differs from other departments. You commented 
briefly on the unique structure that you have. Why was it 
established this way? How is it working?
    Ms. Valerie Lau. As I mentioned in the statement, the IG 
Act was passed in 1978. At that time, a statutory IG for the 
Department was not included in that original set of IGs.
    Beginning in 1978, there ensued a long debate on the proper 
kind of audit investigative coverage that a department such as 
Treasury should have. In particular, there was much debate over 
the appropriateness of having a single audit and investigative 
authority for the Department, especially at the law enforcement 
bureaus.
    In terms of IRS, the IRS has retained its own internal 
audit and investigative function, which looks solely at IRS 
programs and operations. The head of that organization is 
called the chief inspector, who reports to the commissioner of 
the IRS and who has dotted line reporting authority, reporting 
responsibility to me. I have oversight over that organization's 
operations.
    In addition, what was also retained at the remaining three 
law enforcement bureaus were internal affairs or inspection 
functions, which are similar to the internal affairs function 
of a police department. They handle internal investigations for 
GS-14s and below within their other bureaus at ATF, Customs and 
Secret Service. We have some split jurisdiction there because 
we have investigative authority over GS-15s and senior 
executive service corps as well as appointees and any 
allegations regarding members of the internal affairs units.
    This was what came out of the 1988 amendments to the Act.

                         oig interface with gao

    Mr. Price. How do you interface with the GAO? For example, 
when it comes to this much-publicized IRS tax system 
modernization program, have you audited that program? And, in 
general, what is your interface with the GAO?
    Ms. Valerie Lau. Okay. In general, our interface with the 
GAO is often infrequent; and it depends on the particular 
topic, with each audit organization that audits Treasury 
programs, whether it be GAO or the IRS chief inspector, we try 
not to duplicate their efforts. In fact, the IG Act requires we 
try to avoid that.
    In terms of our work with GAO, it is probably best 
illustrated by the GAO's financial statement audit of IRS. GAO 
has, as you know, audited the IRS for the past 5 years. This 
year we are working with them, too, in our role as the auditor 
for the Department, because the results of the IRS financial 
audit will be rolled up into the Departmentwide financial 
statements on which I must render an audit opinion.
    So we have an even greater interest in keeping up on what 
is happening in that audit--where the problems are, where the 
corrective actions are taking place. Next year, we will resume 
split responsibility for conducting that audit. We will be 
doing what they call the administrative financial statements 
which basically cover salary and expenses for the bureau, and 
GAO would continue to audit the revenue side of the IRS 
accounts.
    This is very similar to what we did with the Customs 
Service. GAO initially began auditing the Customs Service. The 
first year, we worked in partnership with them to learn the 
ropes, essentially, of that financial audit; and then we 
assumed sole responsibility for the Customs audit and have made 
steady progress with Customs in being able to provide improved 
audit assurance at that bureau.

                        tax system modernization

    Mr. Price. But back to the IRS--I know my time is expired--
but what about the TSM program?
    Ms. Valerie Lau. Okay. In TSM, we have done a survey of the 
Department's oversight of TSM, approximately a year ago. Since 
that time, there have been numerous specific programmatic 
reviews, as you know, both performed by the Chief Inspector's 
Office and by GAO. We are planning to do a follow-up review on 
our prior audit, looking at the kinds of oversight that the 
Department has since provided for this information technology 
investment.
    Mr. Price. Thank you, Mr. Chairman.

                      secret service investigation

    Mr. Kolbe. Thank you, Mr. Price.
    Ms. Lau, let me come back to an issue that I know has been 
the subject of some other hearings, and that is the 
investigation of Secret Service agents.
    I believe in your testimony before the Senate subcommittee 
last December, correct me if I am wrong in this, but I think it 
is correct to characterize your testimony to say you initiated 
the investigation or the interview of the two Secret Service 
agents as a result of the letter that you had received from 
Senator Stevens and subsequently another letter from 
Representative Collins, Congresswoman Collins, and that was why 
you initiated the investigation.
    Yet the letter from Senator Stevens never mentions any 
particular agents at all or by individual or asks you to do 
this but simply asks you to give them an understanding of how 
the Secret Service develops the list for the White House access 
system. I am wondering if you can tell me again why you 
initiated the investigation of the testimony of these two 
agents who had testified before the House Government Reform and 
Oversight Committee.
    Ms. Valerie Lau. Yes, Mr. Chairman.
    This has never been an investigation of the agents, as you 
mentioned. It was an investigation regarding the process by 
which the Secret Service develops and maintains access lists to 
the White House in that they may have been relied on to obtain 
FBI files. The substance of the two agents' testimony related 
to that process. Therefore, it fit in with the basic review of 
looking at the process for maintaining the lists.
    Mr. Kolbe. Did you interview a whole series of other agents 
and other people?
    Ms. Valerie Lau. We have conducted no interviews as of yet.
    Mr. Kolbe. I am sorry?
    Ms. Valerie Lau. We have not.
    Mr. Kolbe. Interviews.
    Ms. Valerie Lau. No. We have not conducted any interviews.
    Mr. Kolbe. Have you conducted an interview with these two 
agents?
    Ms. Valerie Lau. No.
    Mr. Kolbe. What kind of contact have you had with these two 
agents?
    Ms. Valerie Lau. None.
    Mr. Calahan. No contact.
    Mr. Kolbe. None?
    Ms. Valerie Lau. No.
    Mr. Kolbe. Did you never have a meeting with them on 
Monday, October 21st?
    Ms. Valerie Lau. Well, perhaps we should clarify which 
agents we are referring to.
    Mr. Kolbe. I am referring to the two agents that testified 
before the House.
    Mr. Calahan. No, we have not met with them.
    Mr. Kolbe. Did you have a meeting on October 21st with 
other Secret Service officials?
    Ms. Valerie Lau. Excuse me. I am sorry. Would you repeat 
the question?
    Mr. Kolbe. On October 21, 1996, did you have a meeting with 
the Secret Service office, specifically K. David Holmes and 
John Kelleher, to discuss this response, if you will, then to 
the inquiry from the House and the Senate?
    Mr. Calahan. Yes, we met with Secret Service officials at 
that point, but those two agents weren't present at the 
meeting.
    Mr. Kolbe. Did you, at that meeting, state that these two 
agents, that there was an active investigation of Special 
Agents Libonati and Undercoffer and that this was potentially a 
criminal investigation?
    Ms. Valerie Lau. No, we did not.
    Mr. Kolbe. Then would Mr. Pickle in his letter to Senator 
Shelby have been incorrect, or would he have mischaracterized 
the understanding that Mr. Holmes and Mr. Kelleher had at that 
meeting?
    Ms. Valerie Lau. Both are true.
    Mr. Kolbe. It is not correct.
    Ms. Valerie Lau. It is not correct.
    Mr. Kolbe. And if we were to call either of those 
individuals up here to testify, they would agree that was not 
correct. Do you think that is probably true?
    Ms. Valerie Lau. I would hope so.
    Mr. Kolbe. How do you think this misunderstanding--how do 
you think this letter got written that way?
    Ms. Valerie Lau. I have no idea.
    Mr. Kolbe. Why do you think those two agents went out and 
hired attorneys immediately after that meeting?
    Ms. Valerie Lau. I have no idea.
    Mr. Kolbe. You don't think they could have come away with 
misimpressions at all based on statements made at that meeting 
about the investigation that was going on?
    Ms. Valerie Lau. I have no idea on what basis they made 
whatever decisions.
    Mr. Calahan. It needs to be pointed out that Independent 
Counsel has been looking into these issues with the Secret 
Service for some time. In fact, it may well be that the agents 
retained counsel because of Independent Counsel's work, as 
opposed to ours.
    Mr. Kolbe. Well, I don't think so. Mr. Pickle is very clear 
in saying there was, at that meeting--they were told it was a 
potentially criminal investigation, and so I assume that was 
communicated back to the agents who decided they better hire 
attorneys at that point. Rather chilling effect on people 
testifying before Congress, isn't it?
    Ms. Valerie Lau. You have my testimony. The answer is yes.
    Mr. Kolbe. Can you give us a list of who was in this 
meeting on October 21, 1996 that we could verify? Would you 
provide us a list?
    Ms. Valerie Lau. We would be happy to provide it.
    Mr. Kolbe. We would appreciate it.
    [The information follows:]

    The following individuals were present at the October 21, 
1996, meeting with the United States Secret Service:
    Valerie Lau, Inspector General, Office of Inspector 
General, Treasury
    Richard B. Calahan, Deputy Inspector General, Office of 
Inspector General, Treasury
    Lori Vassar, Counsel, Office of Inspector General, Treasury
    Emily Coleman, Regional Inspector General for 
Investigations, Northeast Region, Office of Inspector General, 
Treasury
    John Kelleher, Chief Counsel, United States Secret Service
    K. David Holmes, Assistant Director, Office of Inspections, 
United States Secret Service

    Mr. Calahan. I would like to state that at that meeting we 
specifically said that those two agents were not the subject 
of----
    Mr. Kolbe. You are saying you specifically said they were 
not the subject?
    Ms. Valerie Lau. Yes.
    Mr. Calahan. That's correct.
    Ms. Valerie Lau. And we have provided each of the agents a 
letter to verify that.
    Mr. Calahan. That's right.
    Mr. Kolbe. Is there an ongoing investigation at this point?
    Ms. Valerie Lau. Yes, there is.
    Mr. Kolbe. You have conducted no interviews?
    Ms. Valerie Lau. No, there is not; we have not.
    Mrs. Meek. Mr. Chairman.
    Mr. Kolbe. Mrs. Meek.
    Mrs. Meek. We are not privy to the information you are 
reading, and it might give us some insight if you give us that.
    Mr. Kolbe. Most of it is contained in the hearing record 
from the Senate, and I don't know if the letter--yes, it is in 
there, from Senator Shelby. We would be happy to share that.
    Ms. Valerie Lau. Chairman Kolbe, pardon me for 
interrupting, but to clarify the issue in your line of 
questioning about whether this is an ongoing investigation and 
whether or not we have conducted any interviews as of yet. Yes, 
it is an ongoinginvestigation. No, we have not conducted any 
interviews yet because we are having an access problem. We have a 
disagreement with the Secret Service on how we are to have access to 
individuals, to documents, and to information systems that we might 
need to conduct this investigation in a credible manner.
    Mr. Kolbe. As the Inspector General, can't you make that 
determination? Don't you have access to those documents as 
Inspector General?
    Ms. Valerie Lau. The Inspector General Act does provide 
that all IGs should have access to such information. Going back 
to the amendment to the IG Act, again, the Department of the 
Treasury is somewhat different from other departments in that 
there are certain areas that are delineated under which I would 
be subject to the supervision of the Secretary. Such matters 
including national security issues.
    [Clerk's note.--The IG provided the following 
clarification. ``The Inspector General Act does provide that 
all IGs should have access to such information. Going back to 
the Act, again, the Department of the Treasury is somewhat 
different from other departments in that there is a specific 
section (8c) regarding access to sensitive information, such as 
national security wherein I would be subject to direction from 
the Secretary. Those instances require notification to 
Congress.'']
    Mr. Kolbe. This would not be a national security issue, the 
access list.
    Mr. Calahan. The question in this case is the process by 
which we would obtain access. The Secret Service would like us 
to go through their Office of Inspection to obtain access to 
people and information pertaining to this issue.
    Mr. Kolbe. Is that the normal process you follow in getting 
access to individuals in any of your departments?
    Mr. Calahan. No.
    Ms. Valerie Lau. No, we do not have such a process in any 
of the other bureaus, sir. In fairness, the concern of the 
Secret Service is that they do have a protective service 
responsibility to protect the President and his family, and it 
is this concern that they have raised in relation to the access 
issue.
    Mr. Kolbe. I don't understand that at all. I don't 
understand what the relationship of that is at all to this, but 
I will leave that where it is.
    This is not the first time where this has happened with the 
Secret Service, where they have exercised this kind of 
insistence that it be done in their own office, the access to 
records and individuals, or is this the first case where this 
has happened?
    Ms. Valerie Lau. This is the first case where it becomes a 
judgment where we may not be able to conduct a credible 
investigation. In certain other cases, for example, we do 
audits, and we do evaluations, such a request would not 
necessarily impede our independence, but on an investigation 
such as this, we believe that it is a problem.
    Mr. Kolbe. Well, if this is the first time that this has 
occurred, this particular investigation is the first time it 
has occurred, it strikes me that there may be something there 
that suggested to Secret Service that this investigation is 
being handled differently, that their staff or agents have not 
been treated fairly, and perhaps they do not want to subject 
them to what might be some kind of an internal political 
investigation. How would you characterize the current 
investigation? Is it in preliminary status?
    Ms. Valerie Lau. As no work has been conducted yet, yes.
    Mr. Kolbe. Is there any internal regulation you have as to 
how long an investigation can stay in a preliminary status 
without it being opened or closed?
    Ms. Valerie Lau. We do have a general guideline that places 
a time frame on the amount of time that a matter should be a 
preliminary inquiry. However, this is not----
    Mr. Kolbe. Can you tell us what that is?
    Ms. Valerie Lau. Yes, it is 30 days. However, this is not 
an ordinary situation in that we have encountered this access 
problem.
    In addition, let me clarify that this is not the first time 
we have encountered this kind of access problem, but it is the 
first time that we believe this matter to be so significant 
that it impedes our ability to do a credible investigation.
    Mr. Kolbe. Did it ever occur to you to simply respond to 
Senator Stevens and Representative Collins by simply saying, 
thank you for your letter, we have referred this to the 
Independent Prosecutor Mr. Starr, for further investigation.
    Ms. Valerie Lau. Upon receiving both letters, we did 
consult with the Independent Counsel's Office. In the first 
instance, because we did receive Senator Stevens' letter first, 
we were asked by the Independent Counsel to refrain from 
initiating any inquiry into the matter, and we did.
    Mr. Kolbe. And did you so state in the letter to Senator 
Stevens? Well, I guess my question would be if that is the 
case, why don't we just consider this closed?
    Ms. Valerie Lau. Unfortunately, we subsequently got an 
additional letter from the Independent Counsel's Office which 
modified their original guidance to us and allowed us to 
proceed, but in consultation with their office.
    Mr. Kolbe. Two other quick questions. Will this ever go 
from a preliminary to an opened or closed phase, or is this 
going to languish for years in this status?
    Mr. Calahan. No, it won't languish for years. We have a 
requirement under the IG Act if we have an access problem, we 
report them up the chain of command to management, and 
eventually that is reported to Congress.
    Ms. Valerie Lau. And we have begun that process.
    Mr. Kolbe. I was going to say, is there a time frame on 
that?
    Mr. Calahan. No, I don't think there is.
    Ms. Vassar. There is no statutory time frame, but we have 
been following procedures.
    Mr. Kolbe. You have attempted.
    [Clerk's note.--The IG provided the following 
clarification:...``we have been following the procedures 
delineated at section 6 in the IG Act.'']
    Ms. Valerie Lau. We were currently working with management.
    Mr. Kolbe. And lastly----
    Mr. Calahan. I might also add to that, there are issues 
related to their request that can be handled in ways perhaps 
other than through investigations, and we might be able to 
pursue them through audits. for example, we are presently 
analyzing the requests and the related issues to determine how 
much of that we can do through other review vehicles.
    Mr. Kolbe. Can you give me any indication of how many hours 
this investigation has cost your office?
    Ms. Valerie Lau. I would be happy to provide that for the 
record, sir.
    [The information follows:]

    To date, a total of 74 staff hours has been expended on the 
Secret Service investigation, at a cost of $2,293. Additional 
time was expended on preparing testimony for various committee 
hearings. However, as this time is not considered 
investigative, it is therefore not counted in the above 
figures.

    Mr. Kolbe. Thank you.
    Mrs. Meek.

                            Contracting Out

    Mrs. Meek. Thank you, Mr. Chairman.
    In going over your testimony, Mrs. Lau, I noticed that a 
great amount of your work in your area is meted out to 
contractors; am I correct? You do have quite a bit of 
contractual work in your area of expertise; am I correct?
    Ms. Valerie Lau. On the audit side of our house, I 
mentioned the work that we are doing on the financial work of 
the Department's financial statements, and in that area we have 
contracted with CPA firms to conduct some of the audits at the 
bureaus. We also have an arrangement with the Defense Contract 
Audit Agency to conduct contract audits on behalf of the 
bureaus.
    Mrs. Meek. In keeping with governmental policies, to what 
extent have you used minorities in your contractual services?
    Ms. Valerie Lau. A number of the CPA firms that we have 
used are considered small businesses, and I would be happy to 
provide the details for the record.
    [The information follows:]

    Currently 7 of 13 CFO audit contracts are with small 
minority Certified Public Accountant firms.

    Mrs. Meek. Thank you very much.
    My second question regards the IRS.
    Ms. Valerie Lau. Yes.

                            Early OIG Input

    Mrs. Meek. And I notice in last year's report, there is 
some mention here, and I have to quote this to be sure I get it 
right, ``there have been concerns raised that the Inspector 
General, acting as a reviewer of government actions, hinders 
agencies in considering innovative ideas and plans for fear 
that the IG will later disprove the action.'' The Committee 
goes on to say, ``it would be more effective if the IG would 
provide constructive input at an earlier stage of the process 
to assist the agency in making management decisions. The IG at 
GSA participated in GSA's form analysis at the initial stages 
of the process, and in doing so helped the agency develop a 
better program. The Treasury IG and the IRS Internal Audit and 
Investigation Organization should consider this type of 
approach to ensure concerns are raised at an earlier point in 
the process of management decision-making.''
    Have you in any way been able to initiate that particular 
advice from the conference report of the Committee? I have 
heard you talk about some of the things you have done. Do you 
think that is working well?
    Ms. Valerie Lau. I am happy to say that increasingly we 
have been asked by program management to consult on a 
particular issue. For example, we have been ased to provide an 
assessment of their financial management practices, separate 
from a financial audit. In another case, with the Community 
Development Financial Institutions Fund (CDFI), we were asked 
to provide consultative services by surveying comparable 
programs in the Federal, State, and nonprofit sectors and 
providing them with information on policies that were used, on 
forms and applications that were used for consideration by CDFI 
in their development of their program. So I am happy to say 
that increasingly we are receiving management's request for 
assistance rather than unilaterally deciding to offer our help.
    Mrs. Meek. Thank you. Thank you very much.
    Thank you, Mr. Chairman. That is it for me.

                Investigation of Crane and Company, Inc.

    Mr. Kolbe. Thank you, Mrs. Meek.
    A couple other areas of questioning. One, I wanted to ask 
you about the investigation of Crane Paper, and this is 
certainly not a partisan thing, since this began under the 
previous administration as an audit, and then in 1994 blossomed 
into an investigation of the contract between Bureau of 
Printing and Engraving and Crane Paper, who is the supplier of 
the paper for our currency. I know you haven't characterized it 
as a civil or criminal investigation; whether it has to do with 
pricing concerns or security concerns or anything else.
    I am just wondering, does this seem to be an inordinate 
amount of time for an investigation?
    Ms. Valerie Lau. Perhaps I could shed some light on that by 
giving you a brief overview of where we stand right now.
    This investigation does relate to contractual matters. We 
referred this case to the Department of Justice around October 
of 1993. And although we cannot comment on the status of the 
Department of Justice's work, we can tell you some things about 
our involvement in this investigation.
    We have been in contact with Crane in an attempt to obtain 
documents and in the area of witness interviews. Every step of 
the way we have attempted to get voluntary compliance with our 
requests for documents. Over a year ago in January of 1996, we 
issued an IG subpoena, thus initiating a compulsory process for 
documents.
    A major delay, though, has been Crane's refusal to allow a 
third party to provide such documents, so we have sent the 
subpoena to the Department of Justice for compulsory 
enforcement.
    Mr. Kolbe. Well, you have answered my next question then, 
which was lack of cooperation on the part of Crane has 
certainly contributed to the length of time this has taken.
    Ms. Valerie Lau. Yes, it has, and also this investigation 
relates to certain contracts spanning several years. And so it 
isn't unusual in an investigation such as this to take a little 
longer.
    Mr. Kolbe. Just for my clarification, you said that it has 
been turned over to the Justice Department, and yet you were 
referring to subpoenas. So once it has been turned over to 
Justice, what is your continuing role in it at this point?
    Ms. Valerie Lau. My attorney would like to answer.
    Ms. Vassar. We are coordinating with the Department of 
Justice, but it is an IG investigation. It is separately done 
within our office. The administrative subpoena was issued by 
our office, not the Department. There is no suit filed at this 
time.
    Mr. Kolbe. Right.
    Ms. Vassar. We are not at liberty to discuss the specifics.
    Mr. Kolbe. I understand that. I am just trying tounderstand 
the process here. If it has been--then I don't understand what it means 
``it has been turned over to Justice'' if it remains your 
investigation.
    Ms. Vassar. What it reflects is the fact that we have been 
consulting along the way with regard to various issues in our 
investigation.
    Mr. Kolbe. But you retain the control of the investigation; 
you are managing it and supervising it, and it is your people 
that are doing the various----
    Ms. Vassar. We have referred the subpoena issue over to the 
Department of Justice.
    Mr. Kolbe. I understand. I am not asking to--I am just 
trying to understand what it means when you say you refer 
something to Justice, but yet you retain control. It is still 
your investigation. The policy issue that is involved here, and 
there is an important policy issue, is it possible for you in 
your role as an auditor to really get a handle on sole source 
contracts in terms of making a true cost comparison?
    Ms. Valerie Lau. Well, if there are no competitors in the 
field, there is no way to compare costs. And so what you have 
to rely upon are actual costs in order to determine if there is 
a fair and reasonable price, and that becomes the issue in the 
absence of competitors.
    Mr. Kolbe. And do you feel, for example, in this case you 
can do that, you can get a handle on that kind of thing?
    Ms. Valerie Lau. We are attempting to determine actual 
costs, and that is why access to the documents is so important.
    Mr. Kolbe. Thank you.
    Let me turn, if I might, to another issue of performance 
measures.
    Ms. Valerie Lau. Chairman Kolbe, if I might, because I feel 
we did not satisfy you with our answers on the access issue, my 
assistant IG for investigations could shed some more light on 
the history of our access problems with the Secret Service.
    Mr. Kolbe. We can--we can do this for the record, if you 
would like.
    [The information follows:]

    Due to the research required this material will be provided 
under separate cover.

    Ms. Otero-Cesario. We have concerns with the integrity of 
our--some of our investigations. I would be happy to discuss 
that with you in closed session or for the record.
    [Clerk's note.--The IG provided the following 
clarification: ``* * * investigations involving the Secret 
Service.'']

                          Performance Measures

    Mr. Kolbe. For the record, that is fine.
    In your budget question, you have got performance goals 
indicators for your major programs, and you say that 40 percent 
of the accepted audit recommendations will be implemented. That 
is extraordinary to me. You also say 95 percent of your 
recommendations are going to be accepted. Why wouldn't you have 
100 percent of those that are accepted implemented?
    Ms. Valerie Lau. If I might, Dennis, could I ask you to 
come up and talk about the reasons.
    Mr. Schindel. My name is Dennis Schindel, and I am the 
Assistant Inspector General for Audit.
    You are right, this does not reflect in any way that our 
goal is not to get 100 percent or close to 100 percent of our 
recommendations implemented. That is why we have the dual 
performance measures of accepted and implemented.
    What implemented really reflects is more a timing issue. 
Since we are trying to measure our performance in a particular 
fiscal year, and we are looking at recommendations we have 
made, say, in fiscal year 1997 and how many are implemented in 
fiscal year 1997, it would never come close to 100 percent 
because of the amount of time it takes management to implement 
recommendations. And to the extent that we issue reports and 
make recommendations towards the end of a fiscal year, those 
would only give them maybe a couple months to try to put 
corrective actions in place before the end of the fiscal year.
    So we are just trying to--in terms of keeping a report card 
for ourselves, we are trying to set a goal that will be 
realistic in terms of what management can do within a 
particular fiscal year. But our ultimate goal would be to have 
over a period of time most of those recommendations 
implemented.
    Mr. Kolbe. So you are saying that the 40 percent figure 
applies only to those implemented in the year that the 
recommendation is made or accepted?
    Mr. Schindel. Correct.
    Mr. Kolbe. Do you track them after that? Can you tell us 
going back what percentage then gets implemented in the second 
year and third year, and at what point do we reach a 90 or 100 
percent implementation?
    Mr. Schindel. That is part--right now the Treasury 
Department has a recommendation monitoring system, which they 
call ITC, and management and the Department have responsibility 
for that system, and they track the status of recommendations. 
They issue reports on how old recommendations are that have not 
been implemented. They have to issue a report on unimplemented 
recommendations every 6 months.
    And so there is a system in place. It is management's 
system. We have recently taken a look at it in our Evaluations 
group to see how well that is working. We have some 
recommendations for improving that.
    We also, in Audit, are looking at enhancing or improving 
our own follow-up process to where we go in and follow up on 
prior audit recommendations. We feel that certainly we have a 
role to play, and we can influence therate of implementation by 
management, and we are looking, even with limited resources, to have a 
better approach to monitoring the recommendations that we have made in 
making sure that they are implemented.
    But over a period of time, the ITC system will keep track 
to make sure that ultimately all recommendations are 
implemented or there is a reason why.
    Mr. Kolbe. Well, it would be helpful if you could go back 
then and give us a kind of chart for us, recommendations made 
in--let's say going back 5 years, 1992, and how many have been 
implemented of those to date. Are we at 100 percent of 1992, 
and 1993, 1994, 1995, 1996? Because the one year just gives us 
a snapshot, and I think it is important to know how long is it 
taking us to get the other 60 percent of these implemented.
    I would also like to know if you have examples of other IG 
recommendations that are not getting implemented or are not 
accepted. I understand when there is an audit, there is always 
going to be dispute between the auditor and auditee about some 
things, and ultimately those thrash out. I sit on the board of 
trustees of a university, and we thrash these out with the 
auditor, and we usually end up accepting some things, but 
modifying others. But I would be interested in knowing if there 
are some major recommendations you have made that have not been 
accepted or not implemented. But I would also like you to age 
those for me.
    Mr. Schindel. Be happy to do that.
    [The information follows:]

[Pages 1828 - 1829--The official Committee record contains additional material here.]

                               irs issues

    Mr. Kolbe. All right. Mr. Price covered the issue pretty 
well of the--well, no. He talked a little bit about the TSM 
thing, but let me ask you a couple things about the Internal 
Revenue Service again.
    This was, as you know, a recommendation made last year by 
this Subcommittee, a transfer the IRS Inspection Service over 
to the Inspector General. That was resisted by your Department 
and the rest; other parts of Congress, I might add.
    Ms. Valerie Lau. Yes.
    Mr. Kolbe. It was not just you resisted that, it was the 
Ways and Means Committee and the Senate. We were alone on that 
in this Subcommittee. I am wondering if you could tell me in 
what way the IRS Inspection Service, mission is similar, and 
how it is different from the IG.
    Ms. Valerie Lau. Well, I can tell you that we are alike in 
that we both have audit, investigative responsibility, and the 
requirement to do those in accordance with the professional 
standards that relate to those.
    There are a number of areas where we are not alike, and 
there are four that I will discuss today. First, in reporting, 
as an Inspector General, I am required by the law to report 
both to the Secretary and to Congress. The Chief Inspector by 
structure reports to the Commissioner and to the Congress, but 
through me in terms of the semiannual reports.
    And also in hearings, for example, next week I am appearing 
before the Ways and Means Committee. I have been called to 
testify regarding GAO's high-risk areas that involve IRS. I 
have been asked to testify; however, the Chief Inspector will 
accompany me. He will not be testifying directly.
    In terms of access to 6103(b) data, the IG by law has to 
provide written notice of intent to access to the IRS. The 
Chief Inspector has unrestricted access.
    In terms of legal counsel, we have talked about that. I now 
have independent legal counsel. The Chief Inspector must rely 
on IRS legal counsel.
    In terms of jurisdiction and resources, and you alluded to 
this, as you know, I have approximately 300 FTEs to audit and 
investigate 11 bureaus and the Departmental Offices and to 
provide oversight in the internal affairs of the law 
enforcement bureaus, while the Chief Inspector's Office has 
1300 FTEs----
    Mr. Kolbe. And a budget three times as large.
    Ms. Valerie Lau [continuing]. To concentrate solely on IRS 
programs and operations.
    Mr. Kolbe. And all the problems and all the questions have 
been about their department.
    Ms. Valerie Lau. Yes, and I have a limited capacity to 
fulfill my oversight responsibilities in addition to providing 
audit coverage and investigative coverage for the rest of the 
Department.
    Mr. Kolbe. There is another difference that I don't think I 
heard you mention, and that is that you report to the Secretary 
of the Treasury.
    Ms. Valerie Lau. Yes, sir.
    Mr. Kolbe. The Inspection Service reports to the 
Commissioner, right?
    Ms. Valerie Lau. Yes, sir.
    [Clerk's note.--The IG provided the following additional 
information: ``I report to the Secretary on matters concerning 
the bureaus.'']
    Mr. Kolbe. There is a difference there, isn't there?
    Ms. Valerie Lau. Yes, there is.
    Mr. Kolbe. I mean, if the Inspection Service reported to 
the Secretary of the Treasury, it would be comparable, in a 
sense, to reporting to somebody outside of the immediate chain 
of command there.
    Ms. Valerie Lau. Well, your line of reasoning is very 
similar to Senator Glenn's.
    Mr. Kolbe. Which I haven't heard.
    Ms. Valerie Lau. At one point in the debate about whether 
the Inspection Service should be part of the IG's office, he 
proposed that the Chief Inspector be made an IG, an IG for the 
IRS. So in essence you would have had a Treasury IG and an IRS 
IG, so that would be been one solution.
    Mr. Kolbe. I am not sure why we need to have a separate IG 
for the IRS, other than it is big. It seems to me something 
along those lines needs to be worked out.
    I probably shouldn't ask you to do this, but I wish you 
would have some discussions with your superiors, the people you 
work with down at Treasury, about this and convince them to 
take a different position, because it is going to be an ongoing 
problem. It already is an ongoing problem we see with the 
Internal Revenue Service. How would you characterize your 
relationship with the IRS Inspection Service?
    Ms. Valerie Lau. I think we have had a good relationship. 
As I mentioned, the Chief Inspector will be helping me prepare 
for next week's hearings and also accompany me. The IRS 
inspection service has resources and expertise that we don't 
have in-house. They have provided assistance on certain 
investigations where we have needed specialized ADP or 
technical support, for example.
    Mr. Kolbe. There aren't any other bureaus in Treasury that 
have a separate audit and inspection service, are there?
    Ms. Valerie Lau. There is no other bureau that has an 
internal audit function. As I mentioned, there are three other 
law enforcement bureaus that do have an investigative function.
    Mr. Kolbe. That is true also, though, in Justice. All law 
enforcement has their own investigative department.
    Ms. Valerie Lau. Right, that is true.
    Mr. Kolbe. All right. I have a couple other questions for 
the record I think we will submit, and I appreciate very much 
your coming today and look forward to having you back again.
    Mr. Kolbe. This Subcommittee is adjourned.
    Ms. Valerie Lau. Thank you.
    Mr. Kolbe. Oh, wait, just a moment. We have a letter--we 
have the letter from the Chairman of the Committee on 
Government Reform and Oversight concerning the matter of the 
investigation of the Secret Service agents. We will make this a 
part of the record here. Thank you for reminding me, and we 
will make that letter, since we referred to it, a part of the 
record.

[Pages 1833 - 2037--The official Committee record contains additional material here.]



                           W I T N E S S E S

                               __________
                                                                   Page
Basham, W. R.....................................................   845
Bench, Brad......................................................   581
Bowen, B. J......................................................   845
Bowron, E. B.....................................................   845
Calahan, Richard.................................................  1775
Davis, Richard...................................................   581
Diehl, Philip....................................................  1695
Dolan, Michael...................................................  1193
Donelson, James..................................................  1193
Griffin, R. J....................................................   845
Gross, Arthur....................................................  1193
Hamilton, C. W...................................................   581
Hoglund, R. J....................................................   581
Holmes, K. D.....................................................   845
Kelleher, John...................................................   845
Kelly, R. W...............................................181, 581, 845
Kwas, E. F.......................................................   581
Lau, Valerie.....................................................  1775
Lueck, Lance.....................................................   581
Mader, David.....................................................  1193
Magaw, J. W......................................................   181
Merletti, L. C...................................................   845
Miller, R. S.....................................................   845
Milner, Margaret.................................................  1193
Morris, Russell..................................................  1549
Morris, S. E.....................................................   365
Munoz, George........................................1, 581, 1469, 1695
Murphy, Gerald...................................................  1549
Musick, Tony.....................................................  1193
Otero-Cesario, Raisa.............................................  1775
Pugh, William....................................................  1775
Rinkevich, Charles...............................................   461
Rolufs, L. E.....................................................  1469
Rubin, Hon. R. E.................................................     1
Samway, Terry....................................................   845
Schindel, D. S...................................................  1775
Sergek, S. M.....................................................   845
Smokovich, Michael...............................................  1549
Summers, L. H....................................................   999
Vassar, L. Y.....................................................  1775
Weise, G. J......................................................   581
Whittington, G. L................................................  1775
Williams, H. J...................................................   581






                               I N D E X

                              ----------                              
Department of the Treasury:
                                                                   Page
    Bank Regulatory Compliance...................................21, 22
    Clean Air Standards..........................................    18
    Community Development Financial Institution..................    25
    Credit Union Study...........................................    23
    Department of the Treasury Budget in Brief...................    70
    Economically Distressed Areas................................     6
    Financial Crimes Enforcement Network.........................    25
    Internal Revenue Service.....................................    18
    Law Enforcement Funding......................................    13
    Law Enforcement..............................................     4
    Managing the Government's Finances...........................     5
    Mexico's Present Situation...................................    17
    Office of the Undersecretary for Law Enforcement.............    15
    Opening Comments by Mr. Kolbe................................     1
    Opening Statement by Secretary Rubin.........................     3
    Prepared Statement of Secretary Rubin........................     8
    Privatization of the Internal Revenue Service................    19
    Questions Submitted for the Record by Congressman Hoyer......    62
    Questions Submitted for the Record by Congressman Istook.....    63
    Questions Submitted for the Record by Congresswoman Northup..    65
    Questions Submitted for the Record by the Committee..........    27
    Recertification of Mexico....................................    23
    Tax Systems Modernization....................................    16
    Treasury Department Staff....................................     6
    Treasury Fire/Employee Professionalism.......................    25
    World Economy................................................     6

Bureau of Alcohol, Tobacco and Firearms:
    Agent Caseload...............................................   258
    Alcohol and Tobacco Revenue by State.........................   260
    Base Erosion.................................................   256
    Bombings and Arson...........................................   272
    Bureau Costs Associated with the Amendment...................   282
    Bureau of Alcohol, Tobacco and Firearms Budget Justifications   313
    Canine Program...............................................   268
    Cease Fire...................................................   259
    Ceasefire/Drugfire...........................................   276
    Church Arson Task Force Interim Report.......................   258
    Deadly Force.................................................   266
    Downsizing...................................................   255
    Excessive Force..............................................   264
    Explosives Taggant Study.....................................   269
    Firearms Licensees...........................................   274
    Gang Resistance Education and Training.......................   269
    Government Performance and Results Act.......................   263
    Introduction by Representative Hoyer.........................   182
    New Agent Cost...............................................   256
    Opening Comments by Mr. Kolbe................................   181
    Prepared Statement by the ATF Director.......................   198
    Prepared Statement by the Under Secretary for Enforcement....   185
    Questions Submitted for the Record by Congressman Aderholt...   303
    Questions Submitted for the Record by Congressman Istook.....   295
    Questions Submitted for the Record by Congresswoman Meek.....   305
    Questions Submitted for the Record by Congresswoman Northup..   298
    Questions Submitted for the Record by the Committee..........   284
    Statement by ATF Director....................................   197
    Statement by Under Secretary for Enforcement.................   184
    The Lautenberg Amendment.....................................   277
    Violent Crime Reduction Trust Fund/Base Funding..............   270

Financial Crimes Enforcement Network:
    Financial Crimes Enforcement Network Budget Justifications...   431
    Opening Comments by Mr. Kolbe................................   365
    Prepared Statement by FinCEN Director........................   371
    Questions Submitted for the Record by Congresswoman Northup..   423
    Questions Submitted for the Record by the Committee..........   405

Federal Law Enforcement Training Center:
    Attrition Training...........................................   504
    Capital Funds at Charleston..................................   505
    Charleston Workload..........................................   503
    Closing Remarks by Mr. Kolbe.................................   509
    Computer Based Training......................................   466
    Cost of Driver Training Track................................   507
    Counterdrug Programs.........................................   508
    Customer Satisfaction Surveys................................   465
    Drive and Marine CBT.........................................   467
    Federal Law Enforcement Training Center Budget Justifications   522
    FLETC Opening Remarks........................................   462
    Government Resources.........................................   462
    Impact of Charleston.........................................   504
    Indoor/Outdoor Range.........................................   464
    INS Funds at Charleston......................................   505
    Instructor Increases FY 1998.................................   505
    Interactive Video Technology.................................   467
    Investment in Charleston.....................................   506
    New Dormitories..............................................   464
    Opening Comments by Mr. Hoyer................................   462
    Opening Comments by Mr. Kolbe................................   461
    Prepared Statement of the Director of FLETC..................   468
    Projected Workload FY 1998...................................   504
    Questions Submitted for the Record by Congresswoman Northup..   519
    Questions Submitted for the Record by the Committee..........   510
    Ratings in Critical Areas....................................   466
    Ratings in Other Support Areas...............................   466
    Ratings in Service Areas.....................................   466
    Rural Drug Training..........................................   507
    State and Local Programs.....................................   507
    Steganography................................................   464
    Student Feedback System......................................   465
    Summary of Workload..........................................   463
    Technology Improvements......................................   463
    Timeframe for Visiting Charleston Site.......................   503
    Training Enhancements........................................   465
    Training Expansion...........................................   508
    Video Conferencing...........................................   464
    Welcome to FinCEN............................................   462
    Welcome to FLETC.............................................   462

United States Customs Service:
    Automatic License Plate Readers..............................   665
    Border Corruption............................................   595
    Cargo Analysis Research Investigation Team...................   599
    Child Pornography............................................   681
    Compliance Rate..............................................   596
    Criteria for Internal Affairs Agents.........................   671
    Customs Resources............................................   665
    Dumping of Flowers...........................................   668
    General Accounting Office Recommendation.....................   673
    Hazmat Treatment...........................................653, 654
    Inspectors Training--Tomato Suspension Agreement.............   688
    Internal Affairs Staff.......................................   670
    Laboratory Support Services--FY 1998 Initiative..............   660
    Mexico Intelligence..........................................   654
    Nogales, Arizona Seizure.....................................   596
    Opening Comments by Mr. Kolbe................................   581
    Operation Hard Line..........................................   593
    Otay Mesa Seizure............................................   599
    Peanuts......................................................   658
    Performance Indicators.......................................   650
    Prepared Statement by the Under Secretary for Enforcement....   588
    Prepared Statement of the Commissioner of the Customs Service   634
    Questions for the Record Submitted by Congresswoman Meek.....   738
    Questions for the Record Submitted by Congresswoman Northup..   728
    Questions for the Record Submitted by the Committee for 
      Undersecretary Kelly.......................................   726
    Questions for the Record Submitted by the Committee..........   691
    Research and Development.....................................   690
    S&E 1996 Direct Obligations..................................   667
    Steps to Prevent Border Corruption...........................   652
    Tecate Port of Entry.........................................   601
    U.S. Customs Child Pornography Enforcement Program...........   682
    United States Customs Service Budget Justifications..........   750
    War on Drugs.................................................   650

U.S. Secret Service:
    Anti-Counterfeiting..........................................   880
    Closing Pennsylvania Avenue..................................   897
    Dignitary Protection.........................................   883
    Financial Crimes...........................................859, 877
    Opening Comments by Mr. Kolbe................................   845
    Prepared Statement by the Director of the U.S. Secret Service   861
    Prepared Statement by the Under Secretary for Enforcement....   848
    Protective Operations........................................   878
    Questions for the Record Submitted by Congresswoman Northup..   931
    Questions for the Record Submitted by the Committee..........   900
    Rowley Training Center.......................................   898
    Special Agents Libonati and Undercoffer.....................887-890
    Treasury Recipient Integrity Program.........................   879
    United States Secret Service Budget Justifications...........   936
    White House Access.........................................885, 886
    White House Access..........................................891-897
    White House Security.........................................   881

Office of the Secretary of the Treasury:
    Confidence in Funding TSM....................................  1012
    Electronic Filing............................................  1023
    FY 1995 Compliance Initiative................................  1018
    Holtsville, NY Service Center................................  1017
    IRS Board of Director....................................1017, 1020
    IRS Contracting..............................................  1011
    IRS Employee Dedication......................................  1024
    Measuring Compliance Revenue.................................  1020
    Opening Comments by Mr. Kolbe................................   999
    Prepared Statement of the Deputy Secretary of the Treasury...  1003
    Questions for the Record Submitted by Congressman Istook.....  1068
    Questions for the Record Submitted by Congressman Northup....  1087
    Questions for the Record Submitted by the Committee..........  1025
    Statement of Ms. Meek........................................  1018
    Summary Statement of Mr. Hoyer...............................  1016
    Summary Statement of Mr. Summers.............................  1000
    Tax Simplification and TSM...................................  1022
    Tax Systems Modernization-``A Sharp Turn''...................  1009
    TSM Accountability...........................................  1013
    TSM Architecture.............................................  1010
Internal Revenue Service
    Appointment of IRS Commissioner-Audit of 501(C)(3)'s.........  1246
    Brookhaven Service Center....................................  1242
    Buyouts......................................................  1223
    Compliance Initiative Final Report...........................  1227
    Compliance Initiative........................................  1224
    Farwell to the Commissioner..................................  1262
    Internal Revenue Service Budget Justification................  1331
    IRS Reduction in Force.......................................  1258
    Opening Comments by Mr. Hoyer................................  1194
    Opening Comments by Mr. Kolbe................................  1193
    Past TSM Investments.........................................  1257
    Political Activity by Exempt Organizations...................  1251
    Prepared Statement of the Commissioner of the Internal 
      Revenue Service............................................  1199
    President's Education Proposal...............................  1261
    Questions Submitted by Congressman Aderholt..................  1314
    Questions Submitted by Congressman Istook....................  1315
    Questions Submitted by Congresswoman Meek....................  1320
    Queestions Submitted by Congressman Northup..................  1323
    Questions Submitted for the Record by the Committee..........  1263
    Reorganization and the Kerry Amendment.......................  1221
    Reorganization Timetable.....................................  1222
    Summary Statement of Ms. Richardson..........................  1195
    Tax Audits of Non-Profit Organizations.......................  1247
    Tax Incentive for Education..................................  1260
    Tax Reform and Tax Administration............................  1242
    Tax Systems Modernization....................................  1262
    Telephone Access.............................................  1258
    The Earned Income Tax Credit.................................  1243

Bureau of Engraving and Printing:
    Bureau of Engraving and Printing Budget Justifications.......  1497
    Currency Demand..............................................  1484
    Currency Paper Contract......................................  1479
    Dollar Coin Impact...........................................  1483
    Facility Plans...............................................  1482
    Facility Utilization.........................................  1481
    Foreign Printing.............................................  1484
    Ink Supplier.................................................  1481
    Introduction.................................................  1469
    New Currency Design..........................................  1478
    Outsourcing Stamp Production.................................  1477
    Postage Stamp Production.....................................  1483
    Prepared Statement of the Director of the Bureau of Engraving 
      and Printing...............................................  1471
    Production Capacity..........................................  1478
    Questions Submitted for the Record by Congresswoman Northup..  1494
    Questions Submitted for the Record by the Committee..........  1486
    Statement of Congressman Hoyer...............................  1477
    Summary Statement of Mr. Rolugs..............................  1469

Bureau of Public Debt:
    Bureau of Public Debt Budget Justifications..................  1519

Financial Management Service (FMS):
    Debt Collection for the Internal Revenue Service.............  1568
    Debt Collection Improvement Act..............................  1565
    Electronic Benefits Transfer Pilot...........................  1568
    Fee for Electronic Benefit Transfer..........................  1570
    Introduction.................................................  1549
    Organizational Structure.....................................  1565
    Prepared Statement of the Commissioner of the Financial 
      Management Service (FMS)...................................  1552
    Private Debt Collection Agencies.............................  1566
    Questions Submitted for the Record by Congresswoman Northup..  1646
    Questions Submitted for the Record by the Committee..........  1571
    Safeguarding Against Fraud...................................  1570
    Summary Statement by Mr. Morris..............................  1549
United States Mint:
    Circulating Coin Demand......................................  1716
    Circulating Commemorative Coin Program.......................  1713
    Coin Production Capacity.....................................  1716
    Comparision of Coin Demand of Production.....................  1720
    Conclusion...................................................  1724
    Dollar Coin Cost of Production...............................  1719
    Dollar Coin..................................................  1717
    Dollar Coins--CBO Estimates..................................  1715
    FTE Targets..................................................  1719
    Introduction.................................................  1695
    Ne Dollar Coin...............................................  1710
    Openinng Comments of Mr. Munoz...............................  1710
    Prepared Statement of the Director of the United States Mint.  1699
    Questions Submitted for the Record by Congresswoman Northup..  1738
    Questions Submitted for the Record by the Committee..........  1725
    Summary Statement of Mr. Diehl...............................  1696
    Susan B. Anthony Dollars.....................................  1713
    United States Mint Budget Justifications.....................  1714

Office of Inspector General:
    Allegations of Abuse Made Against Treasury Employees.........  1811
    Contracting Out..............................................  1823
    Early OIG Input..............................................  1824
    Fiscal Year 1998 Budget Request..............................  1815
    Fiscal Year 1998 Staffing Level..............................  1816
    Independence of Inspector General............................  1814
    Independent Legal Counsel....................................  1809
    Introduction.................................................  1775
    Investigation of Crane and Company, Inc......................  1824
    IRS Issues...................................................  1830
    Mandated OIG Structure.......................................  1817
    OIG Interface with GAO.......................................  1817
    Performance Measures.........................................  1826
    Prepared Statement of Treasury Inspector General.............  1796
    Questions Submitted for the Record by Congressman Wolf.......  1840
    Questions Submitted for the Record by Congressman Northup....  1851
    Questions Submitted for the Record by the Committee..........  1833
    Secret Service Investigation.................................  1818
    Summary Statement of Ms. Lau.................................  1776
    Tax Systems Modernization....................................  1818
    Treasury Inspector General Budget Justification..............  1853

Additional Budget Documents:
    Community Development Financial Institutions Fund............  1958
    Departmental Offices, Office of Professional Responsibility..  1953
    Departmental Offices, Treasury Buildings and Annex Repair and 
      Restoration................................................  1967
    Interagency Crime and Drug Enforcement.......................  2031
    Treasury Departmental Offices................................  1890
    Treasury Forfeiture Fund.....................................  1995
    Treasury Franchise Fund......................................  1975
    Treasury Programs Funded from Violent Crime Reduction Trust 
      Fund.......................................................  2009