[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 ------------------------------------------------------------------------ For sale by the U.S. Government Printing Office Superintendent of Documents, Congressional Sales Office, Washington, DC 20402 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