    [Senate Hearing 105-26]
    [From the U.S. Government Publishing Office]

    [DOCID: f:39865.done]

                                                            S. Hrg. 105-26

      TREASURY AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL YEAR 1998

    =======================================================================

                                    HEARINGS

                                    before a

                              SUBCOMMITTEE OF THE

                COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                           ONE HUNDRED FIFTH CONGRESS

                                 FIRST SESSION

                                       on

                               H.R. 2378/S. 1023

     AN ACT MAKING APPROPRIATIONS FOR THE TREASURY DEPARTMENT, THE UNITED
       STATES POSTAL SERVICE, THE EXECUTIVE OFFICE OF THE PRESIDENT, AND
     CERTAIN INDEPENDENT AGENCIES FOR THE FISCAL YEAR ENDING SEPTEMBER 30,
                          1998, AND FOR OTHER PURPOSES

                                   __________

                       Assassination Records Review Board
                           Department of the Treasury
                       Executive Office of the President
                          Federal Election Commission
                       Federal Labor Relations Authority
                           General Accounting Office
                        General Services Administration
                         Merit Systems Protection Board
                  National Archives and Records Administration
       National Commission on Restructuring the Internal Revenue Service
                           Nondepartmental witnesses
                          Office of Government Ethics
                         Office of Personnel Management
                              U.S. Postal Service
                                 U.S. Tax Court

                                   __________

             Printed for the use of the Committee on Appropriations

     Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                     senate

    _______________________________________________________________________
                For sale by the U.S. Government Printing Office
    Superintendent of Documents, Congressional Sales Office, Washington, DC
                                     20402
                          COMMITTEE ON APPROPRIATIONS

                         TED STEVENS, Alaska, Chairman
    THAD COCHRAN, Mississippi            ROBERT C. BYRD, West Virginia
    ARLEN SPECTER, Pennsylvania          DANIEL K. INOUYE, Hawaii
    PETE V. DOMENICI, New Mexico         ERNEST F. HOLLINGS, South Carolina
    CHRISTOPHER S. BOND, Missouri        PATRICK J. LEAHY, Vermont
    SLADE GORTON, Washington             DALE BUMPERS, Arkansas
    MITCH McCONNELL, Kentucky            FRANK R. LAUTENBERG, New Jersey
    CONRAD BURNS, Montana                TOM HARKIN, Iowa
    RICHARD C. SHELBY, Alabama           BARBARA A. MIKULSKI, Maryland
    JUDD GREGG, New Hampshire            HARRY REID, Nevada
    ROBERT F. BENNETT, Utah              HERB KOHL, Wisconsin
    BEN NIGHTHORSE CAMPBELL, Colorado    PATTY MURRAY, Washington
    LARRY CRAIG, Idaho                   BYRON DORGAN, North Dakota
    LAUCH FAIRCLOTH, North Carolina      BARBARA BOXER, California
    KAY BAILEY HUTCHISON, Texas
                       Steven J. Cortese, Staff Director
                     Lisa Sutherland, Deputy Staff Director
                   James H. English, Minority Staff Director
                                     ------

                Subcommittee on Treasury and General Government

                  BEN NIGHTHORSE CAMPBELL, Colorado, Chairman
    RICHARD C. SHELBY, Alabama           HERB KOHL, Wisconsin
    LAUCH FAIRCLOTH, North Carolina      BARBARA A. MIKULSKI, Maryland
    TED STEVENS, Alaska                  ROBERT C. BYRD, West Virginia
      ex officio                           ex officio
                               Professional Staff
                              Patricia A. Raymond
                                  Tammy Perrin
                                  Lula Edwards
                         Barbara A. Retzlaff (Minority)

                                C O N T E N T S

                                  ----------

                            Tuesday, April 15, 1997

                                                                       Page
    Congressional witness............................................     1
    Department of the Treasury.......................................    13
    General Accounting Office........................................    41
    Department of the Treasury: Internal Revenue Service.............    51
    Material submitted subsequent to conclusion of hearing...........    77

                            Thursday, April 17, 1997

    Department of the Treasury.......................................    81
        Bureau of Alcohol, Tobacco and Firearms......................    91
        U.S. Customs Service.........................................   108
        Federal Law Enforcement Training Center......................   118
        Financial Crimes Enforcement Network.........................   132
        U.S. Secret Service..........................................   144
    Department of the Treasury.......................................   181

                            Wednesday, May 14, 1997

    Executive Office of the President: Office of National Drug
      Control Policy.................................................   315

                            Thursday, June 19, 1997

    National Commission on Restructuring the Internal Revenue Service   399
    General Accounting Office........................................   415
    Department of the Treasury: Internal Revenue Service.............   437

        Material Submitted by Departmental and Independent Agencies Not
                         Appearing for Formal Hearings

    Department of the Treasury:
        Bureau of the Public Debt....................................   543
        Financial Management Service.................................   545
        Office of the Secretary......................................   548
    Executive Office of the President: Office of Administration......   560
    Independent agencies:
        Assassination Records Review Board...........................   570
        Federal Election Commission..................................   578
        Federal Labor Relations Authority............................   589
        General Services Administration..............................   599
        Merit Systems Protection Board...............................   615
        National Archives and Records Administration.................   619
        Office of Government Ethics..................................   627
        Office of Personnel Management...............................   628
        U.S. Postal Service..........................................   633
        U.S. Tax Court...............................................   636
    Nondepartmental witnesses........................................   639

      TREASURY AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL YEAR 1998

                                  ----------

                            TUESDAY, APRIL 15, 1997

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 10:17 a.m., in room SD-138, Dirksen
    Senate Office Building, Hon. Ben Nighthorse Campbell (chairman)
    presiding.
        Present: Senators Campbell, Shelby, Faircloth, and Kohl.
        Also present: Senator Glenn.

                                    panel 1

                             CONGRESSIONAL WITNESS

    STATEMENT OF HON. JOHN GLENN, U.S. SENATOR FROM OHIO

                      opening remarks of senator campbell

        Senator Campbell. The Subcommittee on Treasury and General
    Government will be in order. I want to apologize to all of the
    witnesses for having to delay the hearing this morning. We
    scheduled this hearing before we realized there were going to
    be votes this morning. I guess this goes to prove to you that
    we are in our usual confused state. I know some of you had
    other appointments, so I really apologize for inconveniencing
    you.
        This morning the subcommittee is here to discuss an issue
    of personal interest to most of the members; that is, the
    Internal Revenue Service's employee misuse of taxpayers' files.
    Abuse by employees in the IRS has been a concern of many
    Members of Congress for many years. Here are some of the
    examples of letters that I have received. Some of our
    constituents have written very vehemently about the problems
    they have had with the IRS.
        One constituent from Longmont, CO, thought his problems
    with the IRS had been resolved when he followed the
    instructions of the U.S. Attorney before they moved to Colorado
    from Massachusetts. This constituent says--I will just read an
    excerpt from each of these letters. We have just recently moved
    back to Colorado and the Internal Revenue Service in Worcester,
    MA, will not release our file back to the Denver office unless
    we agree to sign a Form 300 to allow this problem to be
    investigated 10 more years.
        Another constituent from Lakewood, CO, has a story of an
    abusive IRS employee in an attempt to get answers by the phone.
    Here is her account of what happened. This person talked in a
    raised voice during the whole conversation, obviously meant to
    intimidate me. He hammered and hammered about two missed
    payments. I tried to explain that I acknowledged this and
    previously corresponded about this and I needed clarification
    on the issues that concerned me. I was told, listen, do not
    argue with me. Be quiet or I will hang up. He asked me what my
    letter said and I read it to him. His reply was, well, then it
    tells you what to do, does it not?
        By now my frustration had turned to tears. I said, I am
    making an effort. I need to know how and when so that I can
    make the necessary arrangements. There is no need to get nasty
    with me. I hoped he was happy that I was this upset. He said
    exactly, I do not care if you cry or you do not cry. You do not
    make my day. By now I had had enough. I asked for confirmation
    of his name and he told me, Mr. Christenson, like I told you 5
    minutes ago. You do not listen very well, do you?
        A citizen in Broomfield, CO, found out the hard way not to
    count on information supplied by the IRS. Every time he was
    told that the situation had been resolved, the IRS found yet
    another problem. Here was his bottom line.
        I have made many business, financial, and personal
    decisions based on my information received from the IRS. I have
    ruined my credit rating, my good name, and if I do not receive
    a minimum of $5,000 by January 21 I will most probably be
    forced to file bankruptcy. I do not understand how a Government
    agency can mislead and deceive the people of this country. They
    are not accountable to anyone. You, as an elected official,
    should be concerned and understand that these are some of the
    reasons that the anti-Government are becoming more visible.
        A certified public accountant in Fort Collins, CO, has
    written on behalf of thousands of citizens who were bilked out
    of millions of dollars by a fraudulent scheme. When it was
    discovered, most taxpayers wrote off their losses for income
    tax purposes. But there were hoops created by the IRS. This
    gentleman says in part, the IRS moved in, changed the returns,
    but granted 87 percent of the investments as theft loss or
    capital loss. This was agreeable. But to claim the loss, the
    taxpayer had to sign an agreement drawn up by the IRS.
        The kicker to the agreement was that in any future recovery
    of the loss, the taxpayers had to report the recovery not at
    face value, but at an inflated amount based upon a stated
    factor for each potential year of recovery. The wording of this
    agreement was very ambiguous. I still interpret it differently
    from the IRS. I am confident that a majority of the taxpayers
    signing it did not understand its results. They also signed
    under coercion. No sign, no loss allowed.
        There is more; several other parts in that letter. I will
    not go into them because we did get started late. But those
    were a few examples of letters that I have received, and I know
    many of my colleagues receive the same type of letters. I will
    be inserting all of these in the record, without objection.
        [The letters follow:]
                     Excerpts of Constituent Correspondence
        Some things seem so logical that they are not apparent, but
    wouldn't it be a good time to do something about the IRS and the
    present tax system? The tax system is out of control, not understood by
    anyone, including tax accountants. The billions of dollars spent on the
    up-dating the computer system was money down the drain.
                                                            Denver, CO.
                                     ______

        I have always prided myself on my skill to figure out my own
    Federal income tax, while many of my friends (engineers, school
    teachers, retired military officers, and businessmen) have reverted to
    professionals to accomplish the same * * *. This year I had made some
    stock & bond transactions which require submission of the ``Gains and
    Losses from Section 1256 Contracts and Straddles, Form 6781.'' I called
    the IRS and asked for verification of my entries. The lady said she did
    not have the form. I said to her ``Please get it and help me out.'' The
    line went dead for about two minutes and she came back on and said ``We
    don't have Form 6781''. I replied `'Surely, if you're the IRS you must
    have the form.'' She reiterated ``Form 6781 is on my list but I can't
    get one.'' Then I just laughed and said, ``I don't believe this'' and
    then I thanked her for her time.
                                                  Colorado Springs, CO.
                                     ______

        When I called the IRS information line to obtain answers to
    questions, they were not able to answer them with consistency * * *.
    The tax rules are so complex, that no one, including the IRS, can
    interpret them. Yet the IRS constantly uses them to penalize and
    terrorize the American public.
                                                    Grand Junction, CO.
                                     ______

        We are average taxpayers. We required five different IRS
    publications in addition to the instructions accompanying our 1040.
    High powered mathematicians and accountants must be paid plenty to
    devise all of the formulas that go with these various publications. For
    example, Form 4797 takes 18 hours and 53 Minutes to prepare. Form 6252
    takes 56 minutes. Form 1040 takes 4 hours and 33 minutes, (just to
    mention a couple). This information is directly from the IRS. This has
    gone beyond good sense. The money wasted in the devising, publishing,
    and distributing these forms and publications would go a long way
    toward balancing the budget.
                                                            Golden, CO.
                                     ______

        We just had our taxes done. It is interesting to note that when I
    first filed an income tax return, in 1956, I was able to do it myself,
    without any help from anyone. Plus, I had a refund. Now, 41 years later
    I have to pay someone to do my taxes. Something has really gone wrong
    with our tax system when the average person has to pay someone to do
    their taxes. The IRS seems driven towards making everything so
    confusing as to make it impossible to do your tax return without
    outside help * * *. I may be wrong, but our tax system seems to be
    designed to punish you if you are successful in any way.
                                                          Lakewood, CO.
                                     ______

        I do want to say that I do not know why the IRS does what they do
    to the middle and lower-middle class of America.
                                                          Lakewood, CO.

                 Inappropriate Browsing Through Taxpayer Files

        Senator Campbell. Obviously, there are many problems and
    concerns about IRS interaction with U.S. citizens. Today we are
    going to focus on one of those concerns which was brought to
    our attention by a recent story in the Washington newspapers
    about inappropriate browsing through taxpayer files. We have
    heard allegations of IRS employees accessing the computerized
    tax records of celebrities, friends, and enemies; most often
    just for the fun of it. But I know most of my constituents
    certainly do not believe that is funny.
        This morning we are going to hear first from the ranking
    member of the Senate Governmental Affairs Committee, Senator
    John Glenn. Senator Glenn has spent considerable time on the
    issue of the IRS computer security and we are pleased to have
    him here this morning.
        We will also hear from Treasury Deputy Secretary Larry
    Summers. We are particularly interested in knowing what
    leadership has been provided from the Department on these
    issues.
        Next, the General Accounting Office will brief us on their
    recent report dealing with IRS computer security in general and
    employee browsing in particular. We will then talk with other
    representatives of the Department of the Treasury, the IRS
    Commissioner Margaret Milner Richardson, and the Inspector
    General Valerie Lau. Hopefully, we will learn what the Treasury
    Inspector General's office and the IRS itself has done to
    address these problems.

                               Prepared Statement

        The president of the National Treasury Employees Union,
    Robert Tobias, was invited to join us, but unfortunately had to
    be out of town. Without objection though, he has sent a
    statement and we will introduce that in the record.
        [The statement follows:]
     Prepared Statement of Robert M. Tobias, National President, National
                            Treasury Employees Union
        Mr. Chairman, Ranking Member Kohl, Members of the Subcommittee, on
    behalf of the 150,000 federal employees, including many at the IRS,
    represented by the National Treasury Employees Union, thank you for
    inviting me to testify today on the issue of electronic browsing of tax
    return information by IRS employees. I deeply regret that a previous
    commitment does not allow me to be here in person, but I sincerely
    appreciate the opportunity to submit this statement for the hearing
    record and would be happy to answer specific questions for the record
    as well.
        Let me state at the outset that NTEU does not condone ``browsing,''
    or the unauthorized inspection of taxpayer information by IRS employees
    or anyone else. We have worked with the IRS to emphasize the
    seriousness of these offenses to the IRS work force. In a joint
    Memorandum For All Employees, dated November 16, 1994, (which is
    included in Appendix II of the April 1997 GAO report on IRS Systems
    Security) Commissioner Richardson and I wrote: ``Safeguarding public
    confidence in the integrity and competence of the Service is a top
    priority for all employees. Each of us must take seriously any
    perceived or real breach in public confidence and trust in our ability
    to administer tax laws.''
        The joint memo went on to say: ``Our efforts to maintain taxpayer
    privacy also includes continually improving Service ability to identify
    any employee who fails to safeguard taxpayer information and, where
    appropriate, taking disciplinary action, up to and including removal.
    This effort is not intended to impose an additional burden on
    conscientious employees in their use of tax systems. It is, however,
    intended as a concerted effort to maintain a work environment that
    reflects the highest standard for the protection of sensitive taxpayer
    information.''
        I am very distressed that recent information compiled by GAO and
    IRS indicates that browsing has not been stopped by these efforts. I am
    particularly disturbed by published reports concerning incidents of
    browsing by those with truly heinous objectives such as the white
    supremacist, Mr. Czubinski.
        While NTEU is committed to the total eradication of browsing and
    for that reason will not oppose Senator Glenn's bill, S. 523, to
    criminalize the unauthorized inspection of tax returns, the
    Subcommittee should know that my belief is the large majority of
    browsing is misguided rather than malicious. Curiosity, rather than
    personal gain seems to be the common motivation. In fact, the IRS
    report that was the basis of the 1,515 instances of browsing in 1994
    and 1995 also states: ``It should be noted, however, that many of these
    cases (about one third) which are detected through regular IDRS
    security systems, are situations of accessing one's own account that is
    generally attributable to trainee error.''
        I would like to emphasize that I do not mean to try to excuse
    incidents of browsing by noting that the motivation is for the most
    part not malicious. I understand the serious impact that browsing has
    on the public's ability to feel secure that their tax documents are
    being held in a truly confidential manner and I pledge the cooperation
    of my union, as I have in the past, in efforts to end any browsing.
        As I stated earlier, I do not intend to oppose Senator Glenn's
    bill, S. 523, but have been working with him and the Treasury
    Department to clear up some concerns about the adequacy of the language
    of the bill to clearly identify the distinctions between authorized and
    unauthorized inspections. IRS employees must inspect tax returns and
    tax return information on a daily basis and care must be taken to
    ensure that only willful and intentional actions of unauthorized
    browsing will be subject to criminal penalties.
        I realize that by the time of this hearing the House and Senate
    bills to make browsing of tax returns a criminal offense will be very
    close to being on the President's desk. It is not lost on me that the
    date of this hearing is April 15th, tax filing day. I have been
    President of the National Treasury Employees Union, which represents
    IRS employees, for 13 years and associated with the Union for much
    longer. I recognize that Americans do not enjoy paying their taxes and
    that many in Congress choose the symbol laden April 15th to highlight
    their sympathy with their constituents on the issue by acts aimed at
    reforming the IRS or the tax code. I don't fault anyone for that, but I
    do hope that symbolism will not obscure the importance of legislating
    in a prudent and judicious manner, especially when criminal penalties
    are involved.
        In addition to April 15th, this week holds another symbolically
    important date for federal employees and, I hope, the country. April
    19th will mark the second anniversary of the bombing of the Oklahoma
    City Federal Building, which resulted in 169 deaths, mostly of federal
    employees who worked in the building. The GAO report on IRS Systems
    Security that was the subject of a hearing in the Governmental Affairs
    Committee last week and mentioned in numerous media stories associated
    with the issue of browsing also found serious weaknesses in physical
    security for IRS work sites. In fact, the report states that ``primary
    weaknesses were in the areas of physical and logical security.'' (p.5,
    emphasis added.) The physical security weaknesses were so serious that
    GAO refused to publish them for public review for fear of further
    endangering IRS employees and the information kept at their work sites.
    Yet, no hearings, closed to the public or otherwise, have been called.
    No bills have been introduced. No symbolically important dates have
    been targeted for action that would highlight Congressional concern or
    commitment to corrective legislation.
        My hope, Mr. Chairman, is that you and other Members of Congress
    who have jurisdiction over matters dealing with the IRS will request
    briefings from GAO on the physical security threats they found in doing
    their recent report and address those threats, which pose life
    threatening consequences, with the same zeal and speed that the issue
    of unauthorized glancing at tax returns is being addressed. I would
    suggest April 19th as an appropriate day to undertake corrective
    action.
        I am attaching to my testimony an article that appeared in the New
    York Post recently outlining a plan to have retail shops on the first
    floor of a New York City federal building that houses IRS and FBI
    offices as an example of the kind of serious security problems that
    need to be addressed at IRS facilities.
        Before concluding, Mr. Chairman, I would like to return to the
    issue of browsing by IRS employees. Because I have honestly worked hard
    to make it clear to the members of my union that browsing was totally
    unacceptable, I've been asking myself in light of the recent
    disclosures that it has not abated, why? Again, please do not take my
    words as offering excuses, but as providing you with a sense of the
    culture IRS workers operate in that could help explain why seemingly
    clear directives do not have the impact they should.
        As any parent knows, consistency and fairness are the cornerstones
    to good behavior. Rules are more likely to be followed when
    expectations are consistently put forth and the measures of meeting
    expectations fairly applied. Unfortunately, consistency and fairness do
    not reflect the current culture at IRS. And some of that is Congress'
    fault.
        Budget cuts and policy changes swing back and forth on a yearly
    pendulum. In debates on Taxpayer Bill of Rights and other similar
    legislation, IRS employees hear sentiments that would indicate that
    their most important priority is to ensure that taxpayers (or in many
    instances, tax-owers) are treated with the utmost in tact and
    politeness, regardless of the fact that they may have thrown a brick
    through your car window when you tried to get them to pay what they
    owe. Just weeks later, in Congressional debates IRS workers can hear
    loud support for contracting out tax collection to the private sector
    because the IRS employees aren't aggressive enough (and can't legally
    be motivated by quotas or monetary incentives) at collecting the
    revenue that is owed to the Treasury.
        One of my personal favorite Congressional flip-flops was on the
    administration of the Earned Income Tax Credit. First, IRS was called
    to Congress to explain why there was so much fraud being perpetrated
    under the program. They were beaten up pretty badly and instituted a
    good fraud detection system for the program. Then they were called to
    the Hill to explain why EITC refunds were being delayed in order to
    ensure that no fraud was committed.
        As I'm sure you know, IRS employees have also recently been facing
    downsizing, furloughs and Reductions in Force. I cannot overstate how
    much these proposals undermine employees' morale, especially when these
    actions are accurately perceived as being not thoroughly analyzed or
    fairly implemented, as in the case of the IRS Field RIF.
        As I said at the outset of this section, I do not mention these
    things to provide excuses for browsing tax returns, but to illustrate
    that the current real or perceived inconsistencies and unfairnesses of
    the current IRS culture make it difficult to convince IRS employees
    that the important ``must follow'' rules of today (such as those
    against browsing) will be the same tomorrow, because they often aren't.
        Thank you again for inviting me to testify today. I would be happy
    to provide answers for the record to any questions you might have.
                                     ______

                     [From the New York Post, Mar. 7, 1997]

                    G-Men Fear Wholesale Slaughter in New HQ
                               (By Niles Lathem)
        Jittery FBI and IRS agents say a government plan to let trendy
    shops rent space in their high-security downtown Manhattan building
    will make them vulnerable to terrorist attack.
        The General Services Administration, which manages federal
    buildings is going ahead with a plan to lease prime first-floor space
    in the federal building at 290 Broadway to private vendors despite the
    security concerns, The Post has learned.
        The rentals could make millions of dollars for Uncle Sam.
        Agents fear that the shops, uncontrolled by federal security, would
    offer terrorists and madmen an easy way into their building.
        The building is considered a prime target for terrorists because
    both the FBI and the IRS do their business there.
        The controversy comes just as security at all federal buildings,
    military installations and airports is being boosted, fueled by
    tensions in the Middle East, the trial of accused Oklahoma City bomber
    Timothy McVeigh and the approach of April 19--the anniversary of the
    bombing and the fiery ending of the Waco, Texas, siege.
        Security is high at 290 Broadway.
        All visitors are carefully screened, and extra measures have been
    taken to protect the building's perimeter.
        Sidewalk traffic is monitored. No unauthorized cars are allowed to
    park at the curb. Delivery trucks are not allowed to double-park.
        But, according to people who work inside, the security measures
    could be neutralized if the GSA goes ahead with its plan to build a
    trendy shopping area downstairs.
        ``We believe the potential for placing a bomb directly outside or
    inside these stores could be greatly increased as a result of these
    commercial rentals,'' managers of the IRS, the FBI and the
    Environmental Protection Agency said in a letter to the GSA.
        ``Since public access to these areas would be uncontrolled and
    delivery and repair work would not be supervised by the building guard
    service, security as a whole would be severely compromised.''
        But the GSA is undeterred.
        ``The development of retail space was part of the terms of our
    acquisition of land from New York City in 1990,'' GSA spokeswoman Rene
    Misscione told The Post.
        ``We are aware of the security concerns and these are matters we
    take seriously. These concerns are being taken into consideration in
    the negotiations,'' she added.
        The FBI, which conducts its anti-terrorism and organized-crime
    investigations out of the building, has plenty of enemies. The IRS also
    is a potential terrorist target.
        The IRS wants to use the storefronts for taxpayer service--a move
    that would increase security by keeping the general public out of the
    main section of the building. Now people coming in for audits or
    picking up forms have to go through a metal detector and up to the
    fifth floor.
        But the GSA has said the IRS would have to pay a lot more rent as
    well as foot the bill for renovating the space. The IRS has been unable
    to afford it.

                           Statement of Senator Kohl

        Senator Campbell. I thank all of our witnesses for being
    patient this morning. With that, Senator Kohl, do you have a
    statement?
        Senator Kohl. I thank you, Senator Campbell. I also would
    like to thank Senator Glenn for taking the time to testify
    before us today. His presence here and his hard work on this
    issue are clear demonstrations that IRS management and
    mismanagement are of deep concern to Democrats and Republicans
    alike.
        I will keep my opening statement brief today as I have a
    very busy morning ahead. I have to finish up on my taxes.
    [Laughter.]
        Senator Campbell. Good luck.
        Senator Kohl. In fact, I see that Commissioner Richardson
    is on the last panel of the morning. Perhaps if I work hard
    enough I could hand in my returns to her at the end of the
    hearing.
        On a more serious note, today our hearing will address
    employee misuse of taxpayer files, or what the papers have
    termed snooping. With all the recent press coverage of IRS
    problems with their computer systems and their general
    management, some might think a few IRS employees snickering
    over Elvis Presley's returns is not a serious issue. I could
    not disagree more.
        Eighty-three percent of all income taxes collected by the
    IRS--that would be about $760 billion a year--are sent in
    voluntarily. That is amazing. That means that our current tax
    collection system relies heavily on Americans willingness to
    follow tax laws and pay what they owe. These recently reported
    incidents of snooping by IRS employees, and the IRS'
    inconsistent treatment of employees caught snooping, puts in
    jeopardy this incredibly high compliance rate.
        Would you want to buy a house if you knew a peeping Tom
    lived next door? Do you want to send in a record of your most
    personal financial transactions if you think IRS employees
    might with impunity be browsing through your tax returns?
        Concerns for the privacy for citizens who willingly provide
    information to Government agencies led to the enactment last
    year of the Economic Espionage Act, a bill which I authored.
    That legislation includes a provision making it a crime to look
    at information stored in any Federal Government computer
    without proper authorization. Senator Glenn's legislation, of
    which I am a cosponsor, also makes a crime the unauthorized
    inspection of any tax return, be it on paper or the computer.
    These are the first steps we need to take to restore taxpayers'
    faith in the IRS.
        Another step is this morning's hearing. Today I hope our
    witnesses will tell us how these incidents of unpunished
    snooping occurred and what is being done to keep them from
    happening again.
        I look forward to discussing this with our witnesses this
    morning, and I hope that we can leave today with a renewed
    commitment for the IRS, Treasury, and Congress to complete the
    task started in 1992, a zero tolerance policy for snooping.
        Senator Campbell. Senator Shelby.

                          Statement of Senator Shelby

        Senator Shelby. Thank you, Mr. Chairman. Mr. Chairman, I
    have a short statement. I appreciate first, Mr. Chairman, you
    holding this hearing today on such an important task as the
    security of the American people's tax and financial
    information. But, Mr. Chairman, in my view this hearing today
    is about a lot more than ensuring the integrity of the American
    people's financial records. It goes right to the issue of
    whether or not the American people can trust their Government.
        It has been said many times before that the power to tax is
    one of the most ominous powers given to the Government. If
    there is any area in which the American people need to be able
    to trust their Government, it is in the area of tax collection.
        The recent revelation of IRS' employees snooping through
    people's files without authorization only undermines that
    trust. This abuse of power, Mr. Chairman, raises a couple of
    serious concerns, and I hope that today's panel can help
    address them.
        First, it does not seem to me that the IRS has any idea how
    bad this problem is. If I was in charge at the IRS and this
    problem was brought to my attention, it would seem to me that
    the first thing I would want to do is to get some sense of how
    widespread the problem is, Mr. Chairman. There would need to be
    some way to accurately measure how many violations have
    occurred. I am not aware of any such procedure in place at the
    IRS, but I hope there will be.
        Another concern, Mr. Chairman, is that the IRS has been
    aware of the problem of file snooping for several years now,
    and their attempts to address it have not only been ineffective
    but have appeared to me to reflect a lack of commitment to
    stamping out this problem. The lengthy delay in responding to
    this problem, the gaping holes left in the IRS security, and
    the seemingly weak disciplinary action are all prime examples.
        I look forward to hearing our witnesses today.
        Senator Campbell. With that, Senator Glenn, if you would
    like to proceed. Welcome to the committee.

                           Statement of Senator Glenn

        Senator Glenn. Thank you very much, Mr. Chairman. I
    appreciate being here with you today as the subcommittee takes
    a look at taxpayer privacy and IRS records. I want to thank
    you, Mr. Chairman, for convening this important hearing, and
    also want to thank the ranking member, Senator Kohl, for his
    efforts. I remember when the Senator from Wisconsin was a key
    member of the Governmental Affairs Committee, before he gave up
    all the glitter and glamour of that committee for the humdrum
    work of the Appropriations Committee. Senator Kohl did do a lot
    of work on privacy matters and Government information and
    public access, some of the things that you are addressing here
    today. We do miss him on our committee.
        By the end of today, hardworking citizens across this land
    will have voluntarily shared their most personal and sensitive
    financial information with their Government. All Americans
    should have unbridled faith that their tax returns will remain
    absolutely confidential and will be zealously safeguarded. That
    is the hallmark of our taxpaying system. If this trust is
    breached, it shakes the whole foundation of our very
    Government. No wonder we have some of the cynical attitude that
    is too often exhibited today.
        That is why I am so hopeful that today Congress will
    finally pass legislation I had first introduced a couple of
    years ago to outlaw what I have come to term as computer
    voyeurism. That is, the unauthorized inspection of your own tax
    information by those not entitled to see it. Some of our
    interest in this goes back several years.
        In 1993 and 1994, as chairman of the Governmental Affairs
    Committee, I held hearings which first exposed this insidious
    practice. We had come across this problem almost by
    happenstance, by a reference--it was a footnote, as a matter of
    fact, to an internal IRS report contained in one of the first
    chief financial officer audits that are required to be done and
    are performed by the General Accounting Office on the IRS.
        We conducted a couple of hearings to further investigate
    this matter. And it turned out that between 1989 and 1994, more
    than 1,300 IRS employees had been investigated on suspicion of
    snooping through private taxpayer files, confidential
    information that is supposed to be for official use only.
        Now, Mr. Chairman, at least 99 percent of the employees
    over there are very hardworking, honest people doing the best
    job they know how. But my hearings revealed that a few IRS
    employees had been browsing through the financial records of
    family members, ex-spouses, coworkers, neighbors, friends, and
    others they saw as their enemies. Still others had submitted
    fraudulent tax returns and then used their special access to
    monitor how IRS was processing those returns. Other workers had
    used their computers to issue fraudulent refunds to family and
    friends. And at least one employee was reported to have altered
    some 200 accounts and received kickbacks from those inflated
    refund checks.
        All American taxpayers were outraged to know that the most
    personal information they voluntarily and in good faith provide
    to the Government could, in effect, become an open book for
    others' private entertainment.
        Even worse was the pitifully low numbers fired for
    committing these awful actions. It turned out that no criminal
    penalties existed for many kinds of these browsing offenses. We
    all know they are wrong, but there was no law that really
    addressed them. There was a legal loophole that allowed you to
    get off the hook if you did not disclose tax information to
    others or altered those returns. That is what we have been
    working to correct through legislation.
        At our hearings, the Commissioner of Internal Revenue
    pledged to implement a zero tolerance policy, and she has
    undertaken several initiatives. I want to give her credit for
    acknowledging the problem, trying to address it, and working
    with me on this legislation. They have over 100,000--I think it
    is 106,000 employees at IRS, Mr. Chairman. About 50,000, I
    understand, work directly on taxpayer returns all through the
    year. We need to tighten up on what those employees can do.
        But it is very difficult to set up a completely foolproof
    system. And it is expensive to do that, also. So some of the
    problem with modernizing the system over there, we have to
    acknowledge, comes back to us here in the Congress, I am sorry
    to say. The Commissioner has said that she favors this
    particular legislation on tightening up and eliminating the
    loophole that I described briefly a moment ago.
        To evaluate the effectiveness of actions that she had taken
    to try and reach a zero tolerance, there is a system called
    EARL. It is a new computer detection system. So I asked the GAO
    and the inspector general at the Department of the Treasury to
    examine the results. That was the report that was released last
    week that was widely reported in the news.
        The findings of GAO's report are very disturbing. Just as
    important, their conclusions are affirmed by the IRS in a
    comprehensive internal report of their own compiled last fall.
    They are also buttressed to some extent by the Treasury
    inspector general's review. The report is restricted to limited
    official use only. It is on IRS computer security controls so
    we could not release it.
        But the bottom line is, although the IRS' efforts in this
    area are well-intentioned, unfortunately they have come a
    little late and fall short of the commitment and determination
    sorely needed to tackle this problem head on. GAO found that
    serious weaknesses in IRS' information security makes taxpayer
    data vulnerable to unauthorized use, to modification, and even
    to destruction.
        The IRS also has no effective means for measuring the
    extent of the browsing problem, the damage being done by
    browsing, or the progress being made to deter browsing. As I
    said, it is very difficult, and it is also expensive to set up
    what would be a foolproof system.
        Finally, and this is something I am having GAO look at
    further, we do not know to what extent detection and control
    systems exist in other IRS data bases besides IDRS, the primary
    taxpayers' account system examined here. I was also struck by
    the candor in the IRS' own internal report on the EARL
    detection system. That report found its progress painfully
    slow, to use their own words, and quite distressing to me,
    indicated that some employees felt IRS management did not
    aggressively pursue browsing violations.
        Moreover, some IRS workers, when confronted about their
    snooping activities, saw nothing wrong and believed it would
    be, to use their words, of no consequence to them even if they
    were caught. Obviously, we have to fix that. When you have over
    1,515 investigations of browsing since the hearings and only 23
    workers fired--I think the figures are another 480-some
    counseled, 392 got some sort of disciplinary punishment, that
    just shows in our zero tolerance policy, we have a long ways to
    go before we reach it.
        So, Mr. Chairman, I appreciate your letting me appear this
    morning and add my remarks to your deliberations here. We have
    legislation that Senator Coverdell and I are working on
    together that I hope reaches the floor of the Senate either
    today or tomorrow that will address this loophole whereby
    people taken to court and found guilty were, on appeal,
    exonerated because the law had said they could be punished only
    if they passed the information on to somebody else. That
    snooping for their own voyeurism or whatever was not really
    against the fine print of the law. So that is what we are
    hoping to close today or tomorrow with legislation on the
    floor.
        I would be glad to try to answer any questions you might
    have.
        Senator Campbell. Thank you. Thank you for your leadership
    on this issue, Senator Glenn.
        You mentioned the person that had altered 200 accounts and
    got kickbacks. There was nothing in his actions that were not
    already against an existing statute?
        Senator Glenn. Yes; I think they were fired and that person
    was--I do not know what the penalty was for that, but he was
    prosecuted.
        Senator Campbell. Thank you. Senator Kohl.
        Senator Kohl. I have no questions, Mr. Chairman.
        Senator Campbell. Senator Shelby.
        Senator Shelby. No questions.

                               Prepared Statement

        Senator Campbell. Thank you for your appearance, Senator
    Glenn, we do appreciate it. We will insert your complete
    statement in the record.
        Senator Glenn. Thank you, Mr. Chairman.
        [The statement follows:]
                      Prepared Statement of Senator Glenn
        I appreciate being here with you today as the Subcommittee takes a
    look at Taxpayer Privacy and IRS Records.
        I want to thank the Chairman, Senator Campbell, for convening this
    important hearing. I also want to thank the Ranking Member, Senator
    Kohl for his efforts.
        I remember when the Senator from Wisconsin was a key member of the
    Governmental Affairs Committee--before he gave up all the glitter and
    glamour of our panel for the ``humdrum'' of the Appropriations
    Committee. Senator Kohl did a lot of work on privacy matters,
    government information, and public access. We miss him.
        By the end of today, hard-working citizens across the land will
    have voluntarily shared their most personal and sensitive financial
    information with their government.
        All Americans should have unbridled faith that their tax returns
    will remain absolutely confidential and zealously safeguarded. That is
    the hallmark of our taxpaying system. If this trust is breached, it
    shakes the whole foundation of our very government.
        That is why I am so hopeful that today Congress will finally pass
    legislation I had first introduced a couple of years ago to outlaw what
    I have come to term as ``computer voyeurism''. That is the unauthorized
    inspection of your own tax information by those not entitled to see it.
        In 1993 and 1994, as Chairman of the Governmental Affairs
    Committee, I held hearings which first exposed this insidious practice.
    We had come across this problem almost by happenstance--by a reference
    to an internal IRS report contained in one of the first Chief Financial
    Officer (CFO) audits performed by the General Accounting Office (GAO)
    on the IRS.
        We conducted a couple of hearings to further investigate this
    matter. It turned out that between 1989-1994, more than 1,300 IRS
    employees had been investigated on suspicion of snooping through
    private taxpayer files--confidential information that is supposed to be
    for official use only.
        My hearings revealed that some IRS employees had been browsing
    through the financial records of family members, ex-spouses, coworkers,
    neighbors, friends, and ``enemies''. Still others had submitted
    fraudulent tax returns and then used their special access to monitor
    how IRS was processing those returns. Other workers had used their
    computers to issue fraudulent refunds to family and friends. At least
    one employee was reported to have altered some 200 accounts and
    received kickbacks from those inflated refund checks.
        All American taxpayers were outraged that to know that the most
    personal information they voluntarily and in good faith provide to the
    government could, in effect, become an open book for others' private
    entertainment.
        Even worse was the pitifully low numbers of employees fired for
    committing these awful actions. It turned out that no criminal
    penalties existed for many kinds of these browsing offenses. There was
    a legal loophole that allowed you to get off the hook if you did not
    disclose tax information to others or altered those returns. That is
    what I am working to correct through legislation.
        At our hearings, the Commissioner of Internal Revenue pledged to
    implement a ``zero tolerance'' policy and has undertaken several
    initiatives. I give her credit for acknowledging this problem, trying
    to address it, and working with me on this legislation.
        To evaluate the effectiveness of these actions, particularly
    ``EARL''--its new computer detection system--I asked GAO and the
    Inspector General at the Department of the Treasury to examine the
    results.
        The findings of GAO's report are disturbing. Just as important,
    their conclusions are affirmed by the IRS in a comprehensive internal
    report of their own compiled last fall. They are also buttressed to
    some extent by the Treasury IG's review (the report is restricted to
    ``Limited Official Use'') on IRS computer security controls.
        The bottom line is although the IRS efforts in this area are well-
    intentioned, unfortunately, they have come too late and fall far short
    of the commitment and determination sorely needed to tackle this
    problem head-on.
        GAO found that serious weaknesses in IRS' information security
    makes taxpayer data vulnerable to unauthorized use, modification, and
    destruction. The IRS also has no effective means for measuring the
    extent of the browsing problem, the damage being done by browsing, or
    the progress being made to deter browsing. Finally, and this is
    something I'm having GAO look at further, we don't know to what extent
    detection and control systems exist in other IRS databases, besides
    ``IDRS'', the primary taxpayers' account system examined here.
        I was also struck by the candor in the IRS' own internal report on
    the ``EARL'' detection system. That report found its progress
    ``painfully slow'', and, quite distressing to me, indicated that some
    employees felt IRS management did not ``aggressively pursue'' browsing
    violations. Moreover, some IRS workers, when confronted about their
    snooping activities, saw nothing wrong, and believed it would be of
    ``no consequence'' to them even if they were caught.
        We have to fix that. When you have over 1,500 investigations of
    browsing since my hearings, and only 23 workers fired, something just
    ain't right. That doesn't sound like ``zero tolerance'' to me.
        Again, I appreciate your interest in this important issue and want
    to offer any help I can.
        Thank you.
                                    Panel 2

                           DEPARTMENT OF THE TREASURY

    STATEMENT OF LAWRENCE SUMMERS, DEPUTY SECRETARY

                            Introduction of Witness

        Senator Campbell. We will now take the second panel which
    will be the Honorable Larry Summers, Deputy Secretary of the
    U.S. Department of the Treasury. Larry, thank you for
    appearing. I understand you are on a tight schedule, Larry, so
    if you want to abbreviate your comments, without objection, we
    will take all of your written testimony and put that in the
    record.

                         Oral Statement of Mr. Summers

        Mr. Summers. Thank you very much, Mr. Chairman. I am glad
    to be here. We have always had a good working relationship with
    this committee and Secretary Rubin and I look forward to
    working with you as our new chairman and ranking member.
        We at Treasury are very much aware of the critical
    management problems at the IRS, the problems associated with
    TSM which are by no means behind us, and the seriousness of the
    recent incidents involving browsing.
        Before I get into those subjects I want to acknowledge the
    fact that today is April 15. That it brings to a close what is
    an important annual ritual in America, the payment of taxes. A
    task that none of us enjoy but that the vast, vast majority of
    us carry through with in an honest and complete way.
        And I want to thank 100,000 honest and dedicated IRS
    employees who make this possible. To date we have processed 76
    million returns. Versus last year, I am pleased to report that
    electronic filed returns are up 25 percent, that 36 percent
    more taxpayers have been serviced over the telephone than last
    year, and the accuracy rate has increased from 90 to 93
    percent. The IRS web site has received over 95 million hits,
    and I was pleased that an AP poll released last week reported
    that 7 out of 10 taxpayers give the IRS a positive rating on
    its ability to handle returns and inquiries.
        We need to build on that record. Let me be clear. No one
    can be satisfied with where we are, but I think it is worth on
    this special day acknowledging a successful filing season.

                                    Browsing

        Let me now turn to the question of browsing. The Treasury
    Department's policy is very simple: willful, unauthorized
    access to taxpayers' records will not be tolerated. Those who
    violate the rules will be punished swiftly, surely, and with
    appropriate severity. Total respect for the privacy of
    information provided by taxpayers is integral to high quality
    customer service and voluntary compliance; the foundation of
    our system of taxation. That is why, in 1993 in response to
    incidents of violation of that policy the IRS announced what
    was intended to represent an aggressive policy to combat
    unauthorized access to taxpayer records.
        It is clear, however, that this policy was not as
    effectively designed or implemented as it should have been. So
    dealing with this problem calls for additional action on the
    legal front, the managerial front, and the technical front.
        On the legal front, unauthorized access or inspection is
    not now in itself a criminal offense. It should be. That is why
    we at Treasury, as well as Commissioner Richardson, believe
    that the antibrowsing legislation introduced by Senator Glenn
    and a companion bill introduced by Congressman Archer in the
    House need to be enacted as soon as possible. We have worked
    with Senator Glenn and his colleagues to draft this legislation
    and have promoted it from the beginning.
        On the managerial front, we agree with the Congress that
    appropriate penalties for IRS employees engaged in unauthorized
    access must be applied uniformly, firmly, and fairly if the IRS
    is to convince its employees and the public that unauthorized
    access to taxpayer information will not be tolerated.
        But penalties are only a deterrent. On the technical front,
    the IRS needs to strengthen its computer systems to prevent and
    detect unauthorized access. Dramatically improved security
    mechanisms will be an integral part of the architecture for
    modernized tax systems which the Congress will receive in May.
    Secretary Rubin and I have ordered the IRS to report in 1 month
    on what it proposes to do both managerially and technically to
    better address this problem.
        We have further asked the IRS to identify in its report
    what best practices may be learned from other enterprises,
    public and private, which acquire and process very sensitive
    information such as medical and financial records. As soon as
    that report is complete we will convene our modernization
    management board to agree on appropriate action.
        Browsing though is by no means the only significant problem
    that the IRS faces. I would like now to briefly summarize our
    plan to improve the management and operations of the IRS.

                        Treasury Plan to Improve the IRS

        Secretary Rubin and I recognized in testimony last year
    before the Congress that the modernization program, as we put
    it at the time, was off track. We called for a sharp turn and
    made clear our determination to bring about change in the way
    the IRS uses information technology and provides customer
    service. And there has been some important change.
        A new Associate Commissioner for Modernization and Chief
    Information Officer, Art Gross, has been brought into the IRS.
    Following his review of technology projects we have canceled or
    collapsed 26 programs into 9, saving in several cases hundreds
    of millions of dollars in expenses that otherwise would have
    played out over time because we judged the projects not to be
    worthwhile on a go-forward basis.
        Second, we will be submitting a draft request for proposal
    for a tax systems modernization prime contractor to Congress
    and to industry on May 15, 10 weeks ahead of the
    congressionally mandated date. On May 15 of this year we will
    submit to Congress an architectural blueprint which will
    clearly describe what modernization would and would not include
    and how the pieces fit coherently together.
        Steps such as these are only a beginning. Everyone in the
    process recognizes that these problems with the IRS have
    developed over decades and will not be solved overnight, or
    even over a couple of filing seasons.
        As we go forward, it is important that we have a framework
    in which the IRS has the best prospect of carrying out these
    very difficult tasks. Toward that end, we have proposed and
    have discussed with members of the IRS commission and with a
    number of congressional committees five steps that we believe
    are important if the IRS is to work more effectively.
        First, we must strengthen and make more proactive our
    oversight of the IRS. We will consolidate the success of the
    modernization management board by making it permanent and
    extending its mandate to cover the broad range of strategic
    issues facing the IRS. In many ways, within Government this
    entity functions like the board of directors of a troubled
    corporation with outsiders from the agency meeting monthly to
    review and approve, and in some cases disapprove, strategic
    plans that are proposed, and to ensure the top executives of
    the IRS are held accountable for performance.
        We will also establish a blue ribbon advisory committee to
    bring private sector expertise to bear.
        Second, we must work and will work to enhance and
    strengthen the IRS' ability to manage its operations working
    with Congress and the union to improve management flexibility
    in crucial areas such as personnel and procurement. In return,
    employees of the IRS, as in any well-managed business, will be
    held accountable for results.
        Third, we will work with Congress to help the IRS get the
    stable and predictable funding it needs to operate more
    effectively, particularly where capital investments and
    projects with measurable financial paybacks are concerned.
        Fourth, we will work to simplify our 9,451-page tax code.
    Yesterday the administration introduced a revenue neutral
    package of more than 60 simplification measures and we will
    continue to build on this base. These measures will save
    individuals and businesses literally millions of hours that are
    now spent in filing tax forms.
        Fifth, leadership is crucial to performance. Commissioner
    Richardson has guided the IRS through some difficult times. As
    we move forward we are committed to appointing a new
    commissioner whose past experience, different from that of most
    previous commissioners, is with the challenges of
    organizational change, customer service, and improved
    information technology management, because we see these as the
    crucial challenges that the IRS now faces.
        In conclusion, Justice Holmes said that taxes are what we
    pay for civilization. It is essential that our Nation have the
    kind of tax collection system that the American people deserve.
    We at the Treasury are determined to work closely with you
    toward that objective.
        I would be happy to answer any questions that you may have.

                               Prepared Statement

        Senator Campbell. Thank you, Mr. Summers. We have your
    complete statement and it will be made part of the record.
        [The statement follows:]
            Prepared Statement of Deputy Secretary Lawrence Summers
                                  introduction
        I am pleased to be here today to talk with you about Treasury's
    plan to implement lasting solutions to difficulties the IRS has
    encountered and, more specifically, the issue of unauthorized access by
    IRS employees to tax returns and taxpayer records. I understand that
    this is the first of a series of hearings your Committee will be
    holding over the next two months on Treasury operations as you begin
    your review of the Department's budget requirements for the next fiscal
    year. This Committee has been very supportive of the key role Treasury
    plays in Government as tax administrator, revenue collector, law
    enforcer, financial manager and regulator. Secretary Rubin and I look
    forward to working with you and members of your Committee throughout
    the coming year.
        This is the day that Americans fulfill their annual obligation to
    pay their taxes. As such, it is an appropriate moment to recall both
    the purpose of taxation as well as what Americans ought to demand of
    their system of tax collection. Taxes funds our armed forces, our
    children's education, and our parents' health care, and they finance
    advances in science and technology that benefit us all. They play a
    critical role in sustaining our society.
        However, recent announcements about problems in modernizing the
    computer systems of the IRS have focused attention on its shortfalls
    and provoked an important debate about how best to improve it. I would
    like to begin this morning by addressing the specific topic of today's
    session, the issue of unauthorized access by IRS employees of tax
    returns and taxpayer information. I want to thank the Congress and
    others for their continued focus on this matter, which is helping to
    ensure that it gets the attention it deserves. In turn, I will also
    discuss specific elements of the Administration's five-point plan for
    reform of the IRS.
                       unauthorized access of tax returns
        From the Department's perspective, total respect for the privacy of
    information provided by taxpayers is integral to high quality service
    and voluntary compliance--the foundation of our system of taxation.
    That is why, in 1995, in response to incidents of violation of that
    privacy, the IRS announced what was intended to represent an aggressive
    policy to combat unauthorized access to taxpayer records. Two years
    later, however, it is clear that this policy was not effectively
    designed or implemented and penalties are neither sufficiently
    consistent nor severe to put an end to unauthorized access.
        A key problem is that unauthorized access or inspection is not
    itself a criminal offense. In our view, it should be. We, at Treasury,
    as well as Commissioner Richardson, believe that the anti-browsing
    legislation introduced by Senator Glenn, and a companion bill
    introduced by Congressman Archer in the House, developed with our
    active participation from the beginning of the process, a bill we
    worked together to draft, should be enacted as soon as possible.
        As the Congress has recognized, appropriate penalties for IRS
    employees engaged in unauthorized access must be swift and sure if the
    IRS is to convince its employees and the public that unauthorized
    access to taxpayer information will not be tolerated. Unauthorized
    access represents a fundamental violation of the public's trust in the
    confidentiality of tax returns and return information.
        Significant progress was made on this issue last year when the
    Economic Espionage Act of 1996 amended the Federal wire fraud statute,
    to make unauthorized access by computer to information from any
    department or agency of the United States a separate misdemeanor
    offense. In view of these provisions, ``browsing'' a Federal computer
    is already punishable as a crime.
        However, the bills before the House and Senate today would amend
    the Internal Revenue Code to specifically prohibit the unauthorized
    access or inspection of tax returns and return information, whether or
    not the information is relayed to someone else, criminalizing
    activities not punishable under current law. For instance, they would
    prohibit the unauthorized inspection of non-computerized tax
    information, such as ``hard-copies'' of paper returns or return
    information. They would also prohibit unauthorized inspection of State
    or local government computers (not covered by the Economic Espionage
    Act amendments last year) when Federal tax information has been
    conveyed to them. Finally, even in cases that are already prohibited
    under current law, the new misdemeanor will provide prosecutors with an
    additional tool to obtain a plea bargain or to use in cases where they
    feel that other provisions of the law should not be invoked.
        While the new legislation would strengthen our hand in putting an
    end to unauthorized access, it is important to remember that penalties
    are only a deterrence. In addition, the IRS needs to strengthen its
    computer systems to detect and prevent unauthorized access before it
    occurs. Secretary Rubin and I have ordered the IRS to report within one
    month on what it proposes to do both managerially and technically to
    better address this problem. Let us be clear, however, that this
    problem is not one confronted by the IRS alone. Every organization that
    depends on complex computer systems faces a similar challenge.
    Therefore, the Secretary and I have also asked the IRS to identify in
    its report what best practices might be copied from other enterprises,
    both public and private, which acquire and process sensitive
    information, such as medical and financial records. As soon as that
    report is complete, we will convene a special meeting of the
    Modernization Management Board to agree on appropriate action.
        In short, Mr. Chairman, Our policy is simple: Willful unauthorized
    access will not be tolerated. Our goal is also simple: We want quick,
    appropriate and severe penalties for those who violate these rules.
        While it is vitally important that Congress pass the legislation I
    have mentioned, let me share with you some of the administrative steps
    we have already taken.
        Under Treasury's oversight, the IRS has:
      --Expanded use of the Electronic Audit Research Log (``EARL'') to
            identify instances of unauthorized access;
      --Created an ``800'' number offering tips about unauthorized
            inspections;
      --Hired new managers in computer security; and
      --Put in place disciplinary procedures that include provisions up to
            and including dismissal, for employees who are found to have
            violated the privacy policy.
        In addition, IRS employees have been provided with:
      --Warnings to employees on unauthorized access to taxpayer records
            when documents are accessed by computer;
      --Training on the privacy policy of Sec. 6103;
      --Regular refreshers on Sec. 6103; and
      --Privacy guidelines which explicitly condemn unauthorized browsing
            of taxpayer records.
        We expect that these actions as well as others enumerated in the
    GAO report issued last week will exert a strong deterrent effect on
    employees who might otherwise be tempted to perform unauthorized
    inspection of taxpayer records.
                               management reform
        To improve our ability to handle this and the other issues facing
    the IRS, significant changes are needed. I would now like to turn to
    our plan to improve the management and operation of the IRS.
        Over the last year, the Treasury Department has focused intense
    efforts on improving the IRS. The National Commission on Restructuring
    the IRS, led by Senator Bob Kerrey and Congressman Rob Portman, has
    already made a significant contribution to the ongoing discussion. A
    consensus has emerged among a wide group of stakeholders, from business
    executives to Members of Congress to leaders of the National Treasury
    Employees Union. The message is clear: it is time for change.
        I believe that in the next year or so we have the opportunity and
    the obligation to bring about the most far-reaching changes in the way
    the IRS is managed and in the way it does its business in decades. It
    will be the task of management at the IRS to manage information
    technology better and to harness it toward the goal of better customer
    service. What I would like to provide today is the Treasury
    Department's view of how to establish a framework within which the IRS
    can best get its mission accomplished. I use the phrase ``get its
    mission accomplished'' deliberately to underscore the fact that the IRS
    of the future will have to contract out, outsource, partner with the
    private sector, and rely on outside vendors to a much greater extent
    than the IRS of the present.
        Secretary Rubin and I recognized last year in testimony before the
    Appropriation Committees that the IRS's modernization program was, as
    we put it at the time, off track. We called for a ``sharp turn'' and
    made clear our determination to bring about change in the way the IRS
    uses information technology and provides customer service. And there
    has been change. Specifically:
      --We have appointed a new Chief Information Officer at the IRS, Art
            Gross. Following his review of technology projects, we canceled
            or collapsed 26 programs into nine.
      --The IRS has increased outsourcing. The percentage of contractors,
            as opposed to IRS staff, working on tax systems modernization
            has increased from 40 to 64 percent over the past two years.
            The number of IRS staff working on tax systems modernization
            has decreased from 524 to 156. And we expect to pursue a prime
            contractor for systems modernization and integration and to
            develop an outsourcing strategy for submissions processing.
      --The IRS has made progress in eliminating paper. This year, we
            estimate that 19.2 million Americans will file electronically
            by telephone or computer, up from 11.8 million taxpayers in
            1995.
      --While there is a long way to go, the IRS has made progress in being
            able to respond to all incoming calls.
      --The IRS has improved customer service by beginning to change the
            internal culture of the IRS. Last summer, President Clinton
            signed bi-partisan legislation enacting the Second Taxpayer
            Bill of Rights, which vastly increased our number of taxpayer
            advocates. After interviewing our head Taxpayer Advocate on
            NBC's Today Show, Katie Couric proclaimed that Americans have a
            friend at the IRS.
      --We will be submitting a draft Request for Proposal for a Tax
            Systems Modernization prime contractor to Congress and to
            industry on May 15, ten weeks ahead of the required due date.
      --On May 15 of this year, we will submit to Congress an architectural
            blueprint which will clearly describe what modernization would
            and would not include and how the pieces fit coherently
            together.
        Steps such as these are obviously only the beginning. Everyone
    involved in this process at Treasury, the IRS, Congress, and the union
    has recognized that the problems at the IRS have developed over decades
    and will not be solved overnight or even over a couple of filing
    seasons. Only if we confront problems directly--from protecting
    taxpayers' privacy to using technology to making sure the phones are
    answered--will we build an IRS for the 21st century.
        As we chart our new course, our focus will center on five critical
    areas to effect broad change: (1) oversight; (2) flexibility; (3)
    budgeting; (4) tax simplification; and (5) leadership. Let me address
    each of these in turn.
        First, Treasury has strengthened and made proactive our oversight
    of the IRS. We will consolidate the success to date of the
    Modernization Management Board (MMB) by making it permanent and
    extending its mandate to cover the broad range of strategic issues
    facing the IRS. We will also establish a Blue Ribbon Advisory Committee
    to bring private sector expertise to bear on the management of the IRS.
        Oversight of the IRS by the Treasury department is the best way to
    ensure the IRS's accountability to the American people and to
    coordinate tax collection with tax policy. Through the Treasury, the
    IRS is able to bring concerns about the difficulty of administering tax
    changes to senior Administration officials; I raise these concerns
    frequently in tax policy discussions with policymakers in the White
    House and throughout the Administration. In addition, the IRS is able
    to draw upon Treasury resources for critical projects, as demonstrated
    by our current cooperation on the Year 2000 conversion.
        Going forward, first, we have set up a Modernization Management
    Board comprised of senior officials from Treasury, the IRS, and other
    parts of the Administration. The Modernization Management Board is
    directed at overseeing the information technology programs and
    functions in many ways like a corporate board, approving major
    strategic decisions and investments.
        Second, we will also establish a blue ribbon Advisory Committee,
    reporting directly to the Secretary of the Treasury, to bring private
    sector expertise to bear on the management of the IRS. This committee,
    composed of senior business executives, experts in information
    technology, small business advocates, tax professionals, and others,
    will meet regularly to make recommendations on major strategic
    decisions facing the IRS.
        Second, we will enhance and strengthen the IRS's ability to manage
    its operations, working with Congress and the union to improve
    management flexibility in personnel and procurement. In return,
    employees of the IRS, as in any well-managed business, will be held
    accountable for results. Second, we will enhance and strengthen the
    IRS's ability to manage its operations. The IRS faces a multitude of
    restrictions--restrictions that would be unacceptable in the private
    sector--that hamper its ability to provide efficient service. For
    example:
      --The IRS should be able to attract and retain the highest quality
            information technology specialists and other professionals.
      --The IRS should not face rules that make restructuring the work
            force needlessly difficult for employees and the employer.
        To strengthen the Commissioner's ability to effect change, we at
    Treasury will work with Congress, the Commission, and the union to
    improve flexibility: to bring on people with specific skills more
    quickly, to pay them more competitively, and to give them the training
    they need. Many of these changes will require legislation, and we
    expect to propose this legislation to Congress later this year.
        In return, if legislation is passed, employees of the IRS, as in
    any well-managed business, will be held accountable for results.
        Let me add that in taking these steps, we are committed to
    maintaining the independence and freedom of the IRS from political
    influence.
        And a crucial part of any strategy for improving flexibility has to
    be outsourcing. Just as private industry has found that outsourcing
    enables an organization to focus on what it does best and to rely on
    others for what they do better, so government can benefit from
    outsourcing as well. Inevitably, resources hired from private companies
    will be more flexible than those that become part of the IRS's
    overhead. Where it is cost effective, but only where it is cost
    effective, we will pursue outsourcing strategies vigorously.
        Third, we will work with Congress to help the IRS get the stable
    and predictable funding it needs to operate more effectively. To this
    end, the fiscal year 1998 budget proposes multi-year investments for
    technology.
        Fourth, we will work to simplify a tax code that covers 9,451
    pages. Just yesterday, the Administration proposed a series of
    simplification proposals as part of our plan to improve IRS operations.
    These proposals represent a continuation of efforts to provide IRS with
    a simpler tax code to administer.
        There are some who, based on the complexity of the tax code and on
    the problems at the IRS, argue for extreme measures such as a flat tax.
    I believe that such proposals would not only unfairly increase the tax
    burden on the middle class and hamper economic growth, they would not
    simplify the administration of the tax code.
        Fifth, leadership is crucial to performance. Commissioner
    Richardson has guided the IRS through difficult times and has made
    progress in many areas. As we move forward, we are committed to
    appointing a new Commissioner who has experience with the challenges of
    organizational change, customer service improvement, and information
    technology management that the IRS faces.
                                   conclusion
        This morning I have discussed some of the specific steps we are
    taking and must take to put an end to unauthorized access to taxpayer
    information. In turn, I have discussed the broad five point plan that
    we believe represents the best way to reform the management of the IRS.
        Let us be clear about one thing. In any discussion of the
    performance of the IRS, we must recognize the unswerving
    professionalism and dedication of the 100,000 loyal IRS employees who
    are just completing this year's filing season. They are not the
    problem.
        Let us also recognize that while the IRS needs to be more
    responsive to taxpayers, to use technology more effectively, and to be
    more efficient, it is likely that for the foreseeable future, the
    United States will have an income tax that taxes people based on their
    ability to pay. Given this, it is not possible to eliminate the IRS,
    and it is vital that we have an IRS that functions effectively. We must
    all work constructively toward this end. What we must not do is attack
    the IRS in order to promote other agendas.
        While we have further to go, the filing season which is about to
    end has been our most successful to date. Let me share with you three
    statistics which I believe demonstrate that IRS performance is on the
    upswing. To date:
      --Electronically-filed returns are up 25 percent over last year,
            while 35 percent more taxpayers have been served by IRS
            employees over the telephone;
      --The IRS web site has received over 95 million hits this fiscal
            year, a 162 percent increase; and
      --The accuracy rate for tax law questions continues its upward trend
            from 90 percent to 93 percent.
        Reflecting the success of this past filing season, Americans are
    recognizing that the IRS has improved. A poll by the Associated Press
    released last week reported that 7 out of 10 taxpayers give the IRS a
    positive rating on its ability to handle returns and inquiries. I have
    attached to this statement summary statistics on the current filing
    season.
        In conclusion, we are making progress. But we have a long way to
    go. As we go forward, we, at Treasury and the IRS, want and need your
    suggestions and help, and I look forward to working closely with this
    Committee to set the right course and stay on it. I will now be happy
    to answer any questions the Committee may have.

                                              IRS CUSTOMER SERVICE ACTIVITY
    ----------------------------------------------------------------------------------------------------------------
                            Activity                            1994 \1\      1995 \1\      1996 \1\        1997
    ----------------------------------------------------------------------------------------------------------------
    Total Paper.............................................        54,969        56,987        53,480        49,794
    Total ELF...............................................        13,173        10,871        13,613        17,079
    Total returns (thousands) as of 4/4/97..................        68,142        67,858        67,093        66,873
    1040 Telefile...........................................           490           635         2,591         4,072
    1040 ELF \2\............................................        12,683        10,236        11,022        13,007
    On-line.................................................           N/A           N/A           122           300
    FedState................................................         1,066         1,408         2,902         3,916
    1040PC..................................................         2,507         1,253         3,871         4,488
    1040....................................................        27,470        29,154        25,769        25,114
    1040A...................................................        12,863        14,046        12,639        11,317
    1040EZ..................................................        12,130        12,534        11,031         8,875
    1040OT..................................................           N/A           N/A           170           N/A
    Direct deposit:
        Volume (thousands)..................................         9,670         6,160         8,980        13,307
        Dollars (billions)..................................         $14.5          $8.5         $16.8         $24.2
    IRS Internet accesses (fiscal year) as of 3/30/97.......           N/A           N/A    36,559,735    95,724,828
    Toll-free calls as of 3/29/97: \3\
        Fiscal Year.........................................       ( \4\ )    21,179,346    23,476,558    30,924,598
        Filing season.......................................       ( \4\ )  \5\ 14,287,0
                                                                                      85    18,081,884    24,652,160
    Walk-in as of 3/22/97:
        Fiscal year.........................................     2,869,005     2,997,884     3,224,312     3,354,413
        Filing season.......................................       ( \4\ )       ( \4\ )     2,142,728     2,296,333
    Accuracy rates:
        Tax law (percent)...................................          89.9          89.6          90.0          95.0
        Accounts (percent)..................................          85.9          91.5       ( \4\ )          93.0
    EFTPS as of 3/28/97:
        Dollars (billions)..................................           N/A           N/A           N/A         $54.8
        Number enrolled.....................................           N/A           N/A           N/A   \3\ 960,171
    TaxLink as of 3/28/97:
        Dollars (billions)..................................        $78.17         $84.9        $175.3        $173.1
        Number enrolled.....................................       ( \4\ )        32,057        57,201        79,689
    ----------------------------------------------------------------------------------------------------------------
    \1\ Comparison is made to the closest measurement period in these years.
    \2\ On-line and FedState totals are included in 1040 ELF volumes.
    \3\ As of March 15, 1997--97 calls answered including 1040, 8815 and 4262 calls.
    \4\ Unavailable.
    \5\ Computed figure.

                                Browsing at IRS

        Senator Campbell. I know that you would like to leave by
    11:15. I have about 8 or 10 questions. I think about one-half
    of those I will submit to you. If you would answer those for
    the committee in writing, I would appreciate it. Just let me
    ask you a couple.
        You have, obviously, addressed the issue with the IRS
    Commissioner as part of your oversight functions on many
    occasions. I take that from your testimony. How long have you
    known about the snooping problem within the IRS? When did it
    come to your attention?
        Mr. Summers. Snooping as an issue has been out there for
    some years. In 1993, the IRS introduced a set of policy changes
    that were designed to deter snooping within the IRS, and we
    were aware of this problem and that they were working to fix
    it. When I say we, I mean people in the Treasury Department. It
    was not part of my position at that time.
        Subsequently, it has become clear from the GAO reports and
    from other sources that the steps that had been taken were not
    adequate to respond to this problem, and that is why we have
    worked with Senator Glenn to support this legislation that
    offers, we believe, an important prospect to enhance our
    deterrence with respect to snooping.
        Senator Campbell. You feel that you cannot do an adequate
    job without that legislation to really rein in the snooping?
        Mr. Summers. I think it is absolutely essential that that
    legislation pass. I think it is also essential that we
    strengthen our technical means to detect snooping when it takes
    place. And I think it is essential that we draw on the best
    practices, because this problem of available records and
    employees is a problem that hospitals face. It is a problem
    that credit card companies face. We have to learn what the best
    practice is, and we have to make sure we are implementing the
    best practice. That is what Secretary Rubin and I have ordered
    that the IRS do.
        Senator Campbell. I noticed with interest, you mentioned
    that some of the browsing is done against people's enemies. But
    they also do it with their own relatives and friends, on
    occasion. Who within the IRS and Treasury is ultimately
    responsible for the management and security of taxpayers'
    files? Is there an office or a title of a person that is the
    lead person on that?
        Mr. Summers. Ultimately, the Commissioner of the IRS, the
    Secretary and Deputy Secretary of the Treasury, and ultimately
    the President are responsible for the execution of law, and we
    take that responsibility very seriously. There is a privacy
    advocate within the IRS for whom issues of this kind,
    obviously, should be an important focus.
        Senator Campbell. Thank you. I will submit the rest of my
    questions.
        Senator Kohl.

                           Management Failures at IRS

        Senator Kohl. Thank you, Mr. Chairman. Deputy Secretary
    Summers, I would like to focus on the Department of the
    Treasury and the IRS' administration that allows the recurrence
    of management failures. Recently Congress has signaled its
    concern over IRS' progress in modernizing its processes and
    systems by cutting IRS' budget request for funds to support
    modernization efforts, withholding modernization funding until
    IRS successfully addresses certain identified problems,
    directing Treasury to assess and report on IRS progress in
    taking corrective actions, and establishing a national
    commission on restructuring IRS with a broad charter to review
    IRS management and operations.
        Treasury has also signaled its concern by directing the IRS
    to allow in outside contractors with technical expertise, and
    establishing a review and decisionmaking board to monitor IRS'
    information technology, the Modernization Management Board. My
    question is, Have any of these efforts produced an IRS that is
    more management aware? And what actions has the IRS taken to
    indicate that they are taking these management failures
    seriously?
        Mr. Summers. Senator, the changes that have been made over
    the last year in canceling or consolidating 26 projects, many
    of which had been underway for some years that were not
    producing the kinds of cost-effective results that had been
    hoped, that represented the cancellation of contracts into
    which a good deal had been invested because of a recognition
    that you cannot run a business by using the sunk cost principle
    and continuing any investment in which you have sunk costs, but
    instead have to go on a go-forward basis and do only those
    things that are economic, going forward, recognizing that that
    can mean some painful writeoffs.
        I think that is a real departure, and I think it is an
    important departure. If you look at contracts like the DPS
    contract, a very tough decision was made and I think that
    decision was forced by the processes of improved management
    that we have put in place.
        Traditionally, senior positions at the IRS have been, in
    the vast majority of cases, filled from within. The Department
    and the IRS brought in Art Gross as Chief Information Officer
    even though his experience was not at the IRS. His experience
    was in quite innovative reengineering, in effect, of the New
    York State tax system. As Chief Information Officer and
    Associate Commissioner for Modernization, he now has broad
    ranging responsibilities for the information technology program
    and is assembling a team, in part from within the IRS and in
    part by drawing on expertise that is available on the outside,
    to change the management practice.
        So we have taken tough choices. We have brought in new
    people. We have changed approach.

                              IRS Prime Contractor

        Traditionally, the IRS has been its own systems integrator.
    It has taken responsibility for negotiating with a wide number
    of different contractors, and with that wide number of
    different contractors it puts the whole process together. We
    have made a decision to seek to move toward a prime contractor
    and have committed to develop the specifications and share them
    with industry and are ahead of schedule--something that I think
    has not been terribly common in the past--ahead of schedule in
    being in a position to share those prime contract
    specifications with the contractor community.
        And as I suggested, with all the problems, I think it is
    worth taking note and acknowledging where there has been
    improvement. Thirty-six percent more people--not enough, not
    adequate, but 36 percent more people were able to speak on the
    telephone with an IRS representative. They got more accurate
    information than they had in the past.
        So I think we have said all along that this is going to be
    a process of continuing improvement. That that is going to take
    a long time. That these problems were not made within a year
    and that it is going to be a process of producing improvement.
    But I am convinced that the turn that we indicated we needed to
    bring about is underway.

                      Treasury Executive Attention to IRS

        Senator Kohl. You are a very busy man with many
    responsibilities, one of which is the IRS. Could you tell us,
    in the average month how much time do you get to spend on these
    problems?
        Mr. Summers. It seems like a lot of time. In the last
    several months I think I have spent certainly more time on the
    IRS and issues of IRS management than I have on any other
    single issue that the Treasury Department is engaged in. I
    might say that Secretary Rubin has also devoted a substantial
    amount of time to discussing issues relating to the structuring
    of the IRS, the search for a new Commissioner, design of the
    information technology management programs.
        So this is, in terms of people, more than two-thirds of the
    Treasury Department and is about as fundamental an executive
    responsibility, collecting taxes, as the executive branch has.
    So while it may not always have been a high priority for the
    Treasury Department, certainly Secretary Rubin has made it a
    central priority for himself and for his team, and I guess his
    team starts with me.
        But beyond what we are able to do, this structure we have
    created, the management board, which by meeting monthly, by
    having to review all major investments and strategic decisions,
    focusing a whole set of review activities that take place
    within the Department.
        In our management section which looks at cost effectiveness
    analyses with respect to investments, in our tax policy areas
    that reviews regulatory decisions and reviews policy decisions
    that have impact on tax administration, in our legal area that
    reviews questions relating to taxpayers' rights and drove some
    of the decisions that were contained in the simplification
    proposal we have put forward. For example, to make certain
    adjustments with regard to equitable tolling, taxpayers who
    were disabled or were unable to file their returns for very
    legitimate kinds of health reasons who previously had not been
    treated fairly under the system.
        So it is a major preoccupation for Secretary Rubin and I.
    But beyond that, it receives very substantial attention from a
    number of different parts of the Treasury Department. In
    particular, we are strengthening the oversight in the
    management area because clearly that is something where we are
    going to need to be able to do our own analyses in order to
    hold the IRS accountable for performance.
        Senator Kohl. Thank you.
        Thank you, Mr. Chairman.
        Senator Campbell. Senator Shelby.
        Senator Shelby. Thank you.

                             Penalties for Browsing

        Secretary Summers, I understand that the GAO listed
    retirement as one of the most severe penalties that is imposed
    by the IRS on employees caught browsing. Is it possible for an
    IRS employee who is caught file snooping, browsing, to receive
    a buyout for early retirement? And is it also possible for that
    employee to keep retirement benefits?
        In other words, is there a difference between being fired
    and just getting early retirement?
        Mr. Summers. There ought to be a difference, Senator.
        Senator Shelby. What did you say?
        Mr. Summers. Senator, I said there certainly ought to be.
        Senator Shelby. There should be a difference.
        Mr. Summers. There ought to be a very clear difference.
        Senator Shelby. Do you know if there is a difference?
        Mr. Summers. I suspect that the difference now is
    inadequate. That is why I think it is very important that we
    pass this legislation that affects browsing. As you can
    appreciate, Senator, this is not an area I am familiar with.
    Throughout the Federal Government there are personnel policies
    to cover if somebody is guilty of some kind of malfeasance and
    is fired and what happens to their pension with respect to what
    they have accumulated to date. That is something that has to be
    harmonized with overall personnel policies.
        But certainly, people should not get bought out for having
    committed serious instances of malfeasance. That is absolutely
    wrong.
        Senator Shelby. How important is it, do you believe, within
    the Internal Revenue Service that they stop browsing, stop
    snooping of employees in taxpayers' files? How important is it
    to the integrity of the Internal Revenue Service?
        Mr. Summers. I think customer service is the highest
    priority for the IRS, along with ensuring compliance. And I
    think that achieving ending browsing is absolutely central to
    that objective.

                          Stopping Browsing at the IRS

        Senator Shelby. How do you stop things like that? Do you
    stop it by an example of firing people, by punishing people
    that do this, that break into taxpayers' private files? Or do
    you do it by just giving them a retirement and a little slap on
    the wrist?
        Mr. Summers. I think you do it by firing them, and I think
    you do it by making it a crime, a Federal crime. That is why
    the legislation that Senator Glenn and Senator Coverdell and
    Congressman Archer have worked on is so very important. And I
    think, as I acknowledged in my testimony, Senator, that the
    approach that was followed to date has not been adequate. That
    is why it is so important that we have this legislation.
        Senator Shelby. Would you, for the record, just furnish
    this? I am sure you do not have it today. By how many IRS
    employees who have been caught file snooping or browsing have
    received early retirement? We would like to have that for the
    record.
        And Dr. Summers, can you provide this committee an idea of
    how much money has been paid in early retirement incentives or
    retirement benefits to the IRS employees caught snooping in
    other people's tax files? Could you do this for the record for
    the committee?
        Mr. Summers. We certainly will.

                             Privacy of Tax Records

        Senator Shelby. I realize you do not deal with the details
    of this in your job description every day, but as one of the
    key people over there, you and Secretary Rubin, I think it is
    very, very important to send a message to the American people
    that when they file their tax returns that their privacy is
    going to be protected, do you not?
        Mr. Summers. Absolutely. Absolutely, I think it is a
    central aspect of maintaining the integrity of the system. That
    is why I think the legislation is important. But that is why I
    think the legislation is not the whole answer. I think we have
    to strengthen our systems of detection with respect to these
    kinds of problems. This is a problem that the IRS faces. It is
    a problem that a major hospital faces where you do not want
    people browsing through people's medical records. It is a
    problem that credit card companies face, and we need to find--
    --
        Senator Shelby. Doctor, you are not comparing, I hope, the
    Internal Revenue Service--that institution that Americans live
    in fear of and have a lot of respect for historically--to
    regular hospital records that people run in, and look in, and
    copy and so forth?
        Mr. Summers. Not at all.
        Senator Shelby. You are not really comparing the IRS to a
    hospital? I hope not.
        Mr. Summers. Not at all, Senator. I was only seeking to
    suggest that I think, as a general proposition, we in
    Government need to find best practices from the private sector
    to assure that we are incorporating them. And I think we have
    to be held to a much, much higher standard than any private
    institution in terms of stopping browsing because of how
    absolutely fundamental a person's tax return is as basic
    financial information, and how central privacy is with respect
    to that very basic information.
        Senator Shelby. Has this Secretary and this administration
    put a great emphasis on that at the Internal Revenue Service,
    or is it just business as usual? We hear about it in the press
    and somebody--we have a hearing, and it goes on and people
    continue to go on and do it, and if they get caught, they get a
    retirement. Or what happens?
        Mr. Summers. As I acknowledged, Senator, I think what we
    are seeing is that what was put in place when this problem
    surfaced several years ago was not fully adequate. That is why
    from this point forward this has been made something that is
    absolutely central. It is not business as usual. It has
    occupied a substantial amount of time of the top management of
    both the Treasury and the IRS, and we are going to do
    everything we humanly can to combat this practice.
        Senator Shelby. If the Congress passes the bill to make
    this a crime, are you and the Secretary going to urge the
    President to sign it and not veto it?
        Mr. Summers. Absolutely.
        Senator Shelby. Thank you, Mr. Chairman.
        Senator Campbell. Senator Faircloth, do you have comments
    or questions?

                          Supervision of IRS Employees

        Senator Faircloth. Yes; thank you, Mr. Chairman, I do have
    a very brief statement and I will make it more brief than it
    was. I thank you for holding the hearing.
        Today is an important day in most of our lives in that
    today is the big day, and 211 million Americans are going to
    file tax returns and they are going to pay something like $1.6
    trillion.
        But the results of the recent investigation by the General
    Accounting Office was an outrage when there were 1,500 cases of
    IRS employees going into Government computers to browse through
    tax files. It is not the first time. It went on in 1993 and
    1994 when 1,300 tore into the same files. But that ended it in
    1993 and 1994, because the Commissioner announced a zero
    tolerance for such policies. I am not sure what zero tolerance
    means. I guess it means be more discreet when you do it from
    now on.
        I am concerned that we cannot count on the senior
    management at the IRS to supervise their own employees. I have
    some questions about the supervisors themselves. I keep reading
    accounts in the paper of specific organizations being audited
    selectively. I do not know whether it is true or not. I do not
    work for the IRS. But I think if it is, it is a deplorable
    condition to have developed.
        I support the bill that Senator Glenn is an original
    cosponsor. The only problem I find with it is it is far, far
    from strong enough; $1,000 fine and 1 year in prison for
    probing into some people's files. It does not take much of a
    breaking of revenue loss to bring you a lot more than that
    under the revenue code.
        But I think I will go on with a question. What authority
    does the Secretary of the Treasury have over the IRS
    Commissioner? In other words, who supervises the head of the
    IRS in making selective audits?
        Mr. Summers. I will try to give you as legally accurate an
    answer as I can.
        Senator Faircloth. Just an accurate answer. It does not
    have to be legal.
        Mr. Summers. The Commissioner of the IRS is a Presidential
    appointee subject to Senate confirmation. The Commissioner of
    the IRS reports to the Office of the Secretary of the Treasury
    in this administration, and I think normally, through the
    Deputy Secretary of the Treasury.
        Senator Faircloth. Come through that again slower, or maybe
    quicker.
        Mr. Summers. The Commissioner of the IRS is a Presidential
    appointee subject to Senate confirmation located in the
    Treasury Department. The Commissioner reports to the Office of
    the Secretary of the Treasury.
        Senator Faircloth. Which is you?
        Mr. Summers. Which is the Secretary of the Treasury and me
    as Deputy Secretary; that is right.
        Senator Faircloth. So you supervise her?
        Mr. Summers. That is right.
        Senator Faircloth. So you take responsibility for her
    actions?
        Mr. Summers. That is right.

                            Taxpayer Bill of Rights

        Senator Faircloth. I am always amused, the administration
    has a taxpayers' bill of rights; is that not right?
        Mr. Summers. That is right.
        Senator Faircloth. Why write a taxpayers' bill of rights
    when you blatantly are ignoring the original Bill of Rights in
    the Constitution by probing into people's tax returns? Why have
    one if you are not going to obey the other? It kind of sounds
    like a redundancy to me.
        Mr. Summers. Senator, there is no difference, I think,
    between anyone in the administration, in the Congress, in the
    indignation with which we regard, and the outrage with which we
    greet these revelations that snooping is a continuing practice.
    We are determined to do everything we can to find the formula
    which will eliminate this practice because it is an outrage.
        Senator Faircloth. What did you do with the 1,300 they
    caught in 1993 and 1994? What happened to those people? How
    many of them were fired?
        Mr. Summers. I do not have the data on 1993 and 1994, but--
    --
        Senator Faircloth. Does somebody know?
        Mr. Summers. It was a small fraction.
        Senator Faircloth. Does somebody there know?
        Mr. Summers. If somebody can hand it to me, they can give
    it to me. But it was a very small fraction.
        Senator Faircloth. Were fired?
        Mr. Summers. A very small fraction were fired, that is
    right.
        Senator Faircloth. What did you do with the other ones?
        Mr. Summers. In some cases there were cautions and no
    formal discipline. In others there was formal discipline up to
    a suspension of less than 14 days. In other cases there was a
    suspension of 14 days or more or a grade reduction.
        Senator Faircloth. How many of them were retired?
        Mr. Summers. I do not have in front of me the information
    on those who retired.
        Senator Faircloth. I see a man back there who looks like he
    is getting it.
        Mr. Summers. If somebody can hand me--the only information
    that I have here is on fiscal years 1995, 1996, and 1997 to
    date.
        Senator Faircloth. So you are talking about the 1,500, the
    last batch of them.
        Mr. Summers. I am sorry, Senator?
        Senator Faircloth. It was 1,300 they caught in 1993 and
    1994.
        Mr. Summers. I do not have the numbers in front of me on
    1993 and 1994.
        Senator Faircloth. Well, do you have them behind you?

                                Browsing in 1994

        Mr. Summers. I am looking for them behind me. Apparently,
    we do not have them behind me. We will certainly furnish that
    information for the record.
        I was just given a sheet of paper that says that in fiscal
    year 1994, for example, there were 646 allegations involving
    misuse of the system. That in 50 of them the person was
    cleared. In 204 of them the matter was closed without action,
    whatever that means. In 190 of them the person received
    counseling.
        Senator Faircloth. What does counseling mean?
        Mr. Summers. I suspect that means their supervisor spoke
    with them about how this was wrong.
        Senator Faircloth. And they did not know that before?
        Mr. Summers. Senator, I can only----
        Senator Faircloth. I am sure glad they told them that that
    was wrong.
        Mr. Summers. Senator, I share your indignation about this
    having been managed in a way that was wrong. That is why I
    think this legislation making clear to everybody that this is a
    crime is so very, very important.

                           Tax Systems Modernization

        Senator Faircloth. If I may, I want to ask you a quick
    question about the computer fiasco. Will you tell me where that
    has been and where it is heading? Briefly, because the chairman
    is going to cut me off.
        Mr. Summers. It has been way off track. It has been turned
    around through the cancellation of projects that are not cost
    effective going forward through the development of an
    architecture, through bringing in new personnel, and through
    turning the most difficult work over to closely supervised
    private sector experts.
        Senator Faircloth. Whoa, whoa. You mean you are going to
    turn the tax returns----
        Mr. Summers. No, no, no. No; the task of building a
    computer system. Not operating a computer system or having any
    contact with tax returns. The task of building and constructing
    a computer system and making sure that different computers talk
    to each other in line with the recommendations of a number of
    outside groups, we are going to move toward a prime contracting
    approach.
        Senator Faircloth. Mr. Summers, there is not anyone in the
    world that knows less about computers than I do, and at 69
    years old I plan to go out of here without learning any more
    about them. But I would think somewhere in the IRS, with all of
    its accumulated wisdom, with the ability to draw on any source
    in the world, I do not see how we could waste $3 billion--and
    that is what I understand we have absolutely wasted in a fiasco
    of mistakes. Is that an overstatement of the facts?
        Mr. Summers. Senator, serious as this problem has been, I
    think it is a bit of an overstatement of the facts.
        Senator Faircloth. Cut it back to where it should be. How
    many billion did you lose?

                                  Cost of TSM

        Mr. Summers. The total cost of the project has been between
    $3 and $4 billion, and the project overall has certainly not
    lived up to expectations. But the largest fraction of that
    money has been used to modernize equipment, to create systems
    like the Telefile, which has enabled more and more Americans to
    pay their taxes on telephones. Approximately $500 million has
    been spent on systems that were subsequently discontinued as
    not cost effective.
        Senator Faircloth. So you are saying that of this $4
    billion, $3.5 billion of it has been well-spent money, and no
    waste? It can jump right in----
        Mr. Summers. No; I think there are----
        Senator Faircloth. I keep hearing that only a small part of
    it is salvageable.
        Mr. Summers. No; I think, Senator, based on our analysis of
    the situation----
        Senator Faircloth. Half of it?
        Mr. Summers. Most of the money has been spent purchasing
    equipment that is in use at the IRS today assisting in the
    processing of tax returns. I am not going to say that that
    means that that money was spent as well as it could have been,
    that the systems that were purchased were the right systems or
    that they are as effectively configured to interact with one
    another as they could have been if this project had been better
    designed and managed. But the writeoff, the stuff that is the
    equivalent of trying to purchase a plane that does not fly,
    that is contained, that represents about $500 million, which--
    just so we are clear--is $500 million too much.

                             Accountability for TSM

        Senator Faircloth. Who was in charge of buying this stuff?
    Who was the person in charge of running it, buying it and
    making it work?
        Mr. Summers. This project, the efforts to computerize the
    IRS have been underway for 25 years. The TSM program has----
        Senator Faircloth. But this thing started about 4 years
    ago, this expenditure, did it not?
        Mr. Summers. No; I think that the TSM program that involved
    the figures that you referred to dates back to 1988 or 1989----
        Senator Faircloth. Who was in charge of it in 1988 or 1989?
        Mr. Summers. And has been carried on under three or four
    IRS Commissioners. I think that the responsibility would be
    with the Commissioners. Frankly, I do not precisely recall the
    order of the Commissioners during the 1980's. Ms. Peterson was
    the Commissioner for a time. Mr. Goldberg was the Commissioner
    for a time. Mr. Gibbs was the Commissioner for a time. There
    have been a number of Commissioners.
        Senator Faircloth. But was there not an engineer, a
    computer expert within the IRS that was leading this?
        Mr. Summers. There have been a number of----
        Senator Faircloth. The Commissioner is a political
    appointee. They kind of come and go. But is there not a head
    engineer for computer buying in the IRS?
        Mr. Summers. Frankly, that has been one of the problems.
    There were over this period a number of Associate Commissioners
    for Modernization and Chief Information Officers who had
    responsibility. Frankly, the performance internally had not
    been satisfactory, which is why the Department insisted, after
    recognizing that the program was way off track, that the IRS
    turn to the outside and get someone with proven experience in
    this area, and the Department took an active involvement in
    recruiting Mr. Gross.
        Senator Faircloth. Did you fire the ones that messed up
    inside?
        Mr. Summers. The ones that----
        Senator Faircloth. That wasted this $1 billion.
        Mr. Summers. The ones who, the people who I think were
    involved in making these mistakes are no longer involved in
    information technology management at the IRS.
        Senator Faircloth. What are they involved in? They are
    still with the IRS?
        Mr. Summers. In some cases the people have resigned and
    have left the IRS. Whether there are other people who are now
    working in the IRS in capacities outside of information
    technology management who were involved in some way in this
    program, I think that may well have happened.
        Frankly, Senator, this is also part of what has been
    involved in our effort to fix this is, I think, exactly what
    you are trying to get at, which is that the culture of the IRS
    did not provide for adequate accountability.
        Senator Faircloth. I am sorry?
        Mr. Summers. The way the IRS was structured did not provide
    for adequate accountability. In other words, a committee, a
    group of people who were supposed to work together on the
    system, and so if the system did not work there was no
    identified individual who could be held responsible.
        Senator Faircloth. It sounds like it was put together by a
    committee. It really does. It has all of the outward
    appearances of a committee operation.
        Senator Campbell. The gentleman's time has----
        Mr. Summers. Senator, we have changed that. Senator, I just
    want to say, we have changed that. There is now a person who is
    in charge, who is responsible, who has come in from the outside
    and who I believe is doing a very good job.
        Senator Faircloth. Thank you.

                       Disposition of IRS Browsing Cases

        Senator Campbell. Just as an addendum to what Senator
    Faircloth, some of the questions he asked, I have a disposition
    of cases, misconduct allegations involving misuse of the IDRS
    in front of me here and I am looking at the 1995--and they are
    pretty similar to 1991, 1992, 1993, and 1994. It says 7 percent
    were cleared, 33 percent closed without action, 32 percent
    counseled, 21 percent disciplinary action, 5 percent
    retirements. Only 1 percent separation. The word separation
    means fired, gone, right?
        Mr. Summers. I believe so.
        Senator Campbell. I wanted to ask you, IRS people are all
    Civil Service people; is that correct?
        Mr. Summers. Yes.
        Senator Campbell. So it is pretty tough to fire them?
        Mr. Summers. Yes.
        Senator Campbell. You have got to have pretty solid
    grounds?
        Mr. Summers. Yes.
        Senator Campbell. The IRS, I guess their business kind of
    ebbs and flows. This is a very busy time of the year. In the
    fall it is not nearly as busy, I would assume. Is that correct?
        Mr. Summers. Yes.

                            IRS Seasonal Employment

        Senator Campbell. What do all those people do, that 100,000
    manpower do in the fall?
        Mr. Summers. The witnesses you will have subsequently could
    speak more knowledgeably than I. But part of the answer to the
    question is that the IRS hires seasonally, and hires as many as
    30,000 people seasonally.
        Senator Campbell. Are they Civil Service when they are
    hired seasonally?
        Maybe the IRS can answer. I might be asking the wrong
    person.
        Mr. Summers. I am told they are.
        Mr. Moravitz. Yes, sir; they are. Many of them are
    temporary, but they are seasonal.
        Senator Campbell. Can I also ask you, two or three times
    you referred to taxpayers as customers. If I go to a store and
    I purchase something, I know I am a customer. When did that
    come into vogue, calling taxpayers customers? And what kind of
    a service do they get for their hard-earned money when they
    turn it in? Is that kind of a placebo? Because if I ask my
    folks at home, they are not going to refer to themselves as
    customers. They are going to, if anything, refer to themselves
    as victims.
        Mr. Summers. I think you raise a very fair point, Senator.
    I think that the term customer service has been used in recent
    years precisely with the objective of trying to change the
    culture at the IRS so as to treat taxpayers more like people in
    stores treat the people who buy from them and less like
    victims. To provide more courteous and responsive service on
    the telephone, to recognize that people have problems, and to
    treat people in the right kind of way.
        It is the analogy of how successful businesses have come to
    treat the people they interact with that is what we are trying
    to inculcate in the IRS through the use of that term. I think
    we can probably all agree that the IRS should be seeing
    taxpayers not as victims, but as people who are to be respected
    and worked with as cooperatively as possible.
        Senator Campbell. I thank you, Mr. Summers. I have no
    further questions. Senator Kohl, do you have?
        Senator Kohl. I would only make the comment, Mr. Chairman,
    and Mr. Summers, in a recent poll 75 or 80 percent of the
    American people indicated that they really do not have any
    strong quarrel with the IRS; that they feel that they have been
    treated fairly and have not had any disputes of one sort or
    another. But it is, as we have pointed out and you have said,
    essential that the confidence of the American people with
    respect to this poll is repeated again and again in the future.
        There is a lot of work to be done. I am encouraged by your
    statement that you are spending a great share of your time on
    this problem. I do not think that there is anything more
    visible to the American people in terms of what you do than
    straightening out this problem and assuring the American people
    in the months and years to come that in fact the IRS is
    operating in a marvelously efficient, and disciplined and
    ethical manner. I would like to hope that as a result of your
    activities, and this hearing and what you have heard, and what
    you are going to do, that in the years ahead we will achieve
    that result.
        Mr. Summers. Thank you very much, Senator.

                              Submitted Questions

        Senator Campbell. Thank you, Mr. Summers. We got you out a
    few minutes late, but hopefully you will not miss your next
    appointment. We will submit additional questions to be answered
    for the record.
        [The following questions were not asked at the hearing, but
    were submitted to the Department for response subsequent to the
    hearing:]
                    Questions Submitted by Senator Campbell
                            irs management awareness
        Question. Deputy Secretary Summers, what I would like to focus on
    this morning is the Department of the Treasury's and the Internal
    Revenue Service's administration that allows the reoccurrence of
    management failures.
        Recently, Congress has signaled its concern over IRS' progress in
    modernizing its processes and systems by:
      --cutting IRS' budget requests for funds to support modernization
            efforts;
      --withholding modernization funding until IRS successfully addresses
            certain identified problems;
      --directing Treasury to assess and report on IRS' progress in taking
            corrective actions; and
      --establishing the national Commission on Restructuring IRS with a
            broad charter to review IRS management and operations.
        Treasury has also signaled its concerns by:
      --directing the IRS to rely on outside contractors for technical
            expertise; and
      --establishing a review and decision making board to monitor IRS'
            information technology--the Modernization Management Board.
        Have any of these efforts produced an IRS that is more management
    aware? What actions has the IRS taken to indicate they are taking these
    management failures seriously?
        Answer. We are all quite aware of these criticisms. We are
    certainly spending a considerable amount of time and effort to make
    sure that the IRS does not simply go into a defensive crouch, but
    instead deals with both criticisms and new ideas forthrightly and
    openly. We have already taken some significant actions, such as
    appointing a new CIO with wide powers and intensified our recruitment
    efforts in order to attract outside talent. We think we have made
    considerable progress already, with more to come.
        Question. Senator Glenn's Bill, the Tax-Payer Privacy Protection
    Act would:
      --Provide that unauthorized inspection of returns or return
            information is an offense punishable by a fine (not to exceed
            $1,000) or imprisonment of not more than one year, or both
            together with costs of prosecution;
      --Allow for the firing upon conviction of any officer or employee of
            the U.S. who committed the offense; and
      --Clarify that unauthorized inspection of returns or return
            information is a violation of the Criminal Code's
            confidentiality provisions.
        Do you support Senator Glenn's proposed Taxpayer Privacy Protection
    Act? Do you believe that criminalizing taxpayer file browsing will
    eliminate this practice?
        Answer. While we can never give assurance that such changes to the
    law will eliminate the practice, we support adding a new provision to
    the Internal Revenue Code that would specifically prohibit the
    unauthorized inspection or browsing of tax returns and return
    information, as Senator Glenn's bill would do. Such legislation would
    explicitly make it a crime to examine willfully records not within an
    employee's official responsibilities. It would prohibit the
    unauthorized inspection of non-computerized tax information, such as
    hard-copies of paper returns or return information, and the
    unauthorized inspection of State or local government computers not
    covered by the Economic Espionage Act amendments of last year. The new
    legislation would clarify that such inspections alone constitute a
    separate criminal offense.
        We therefore support the addition of a new, separate misdemeanor
    for unauthorized inspection, as Senator Glenn's bill would provide. For
    some minor technical reasons, however, the version of the bill that we
    prefer is S. 522 or H.R. 1226.
                               blue ribbon panel
        Question. Mr. Summers, in your April 10th testimony before the
    senate Government Affairs Committee you discussed the establishment of
    a blue ribbon panel of experts which will provide private sector
    security expertise. Could you please explain the functions of this
    panel?
        Answer. We have proposed creating a blue-ribbon panel as part of
    our 5-point plan to improve IRS management. This group would include
    outside experts in the areas of technology, financial services and tax
    administration and would provide advice and assistance to the Secretary
    and the IRS on a variety of topics, including security.
                               audit research log
        Question. Isn't it true that consistent review and application of
    the existing Audit Research Log would confirm that inappropriate access
    has occurred? Do you have any indication that the private sector has
    developed superior systems which are less labor intensive?
        Answer. The IRS' current processes have identified that
    unauthorized access has occurred. IRS is currently assessing its
    policies and procedures for protecting against and detecting
    unauthorized access, and it is currently evaluating the possible
    consolidation of many functions to ensure consistent review and
    application of the Audit Research Log.
        To date, IRS has not found any superior systems or any less labor
    intensive systems for preventing or detecting unauthorized access to
    individual tax records. IRS is continuing to look at commercial-off-
    the-shelf software or any best practices being used by the private
    sector that could be used for this purpose.
                                 fixing the irs
        Question. You are establishing panels and instituting boards and
    encouraging the use of outside contractors. But the IRS problems, those
    that seem to persist, are the result of a breakdown in management
    decision making. This decision making seems to be made independent of
    the desired outcomes. What actions are being taken to ensure the
    management of the IRS is fixed?
        Answer. I would, of course, strongly disagree with the
    characterization of IRS management as having broken down. The agency is
    still functioning and many areas are continuing to be quite successful.
    This year's filing season, for instance, has gone very well.
        But as is true with any large organization, there is always room
    for improvement. We have made a number of proposals and decisions in
    this area. For instance, we have determined that the primary criterion
    for the next Commissioner will be management experience with large
    organizations and with how to implement technology-based changes. We
    have intensified our efforts to bring in outside managers with new
    ideas, experience and energy. We would like to do more in this area.
        I think it is important to recognize that there are no simple
    answers to the problems facing the IRS. What is needed is continued
    hard work and the willingness to make difficult decisions. That is what
    we are trying to achieve.
                         modernization management board
        Question. It is my understanding that you have been instrumental in
    organizing a modernization management board (MMB) to provide oversight
    of the TSM acquisition system. What kind of oversight does this board
    provide? Can you explain the amount of time board members spend
    reviewing the IRS proposals? Who staffs the board? Has the board
    rejected any IRS proposals?
        Answer. We created the MMB last summer. I serve as the Chair. The
    other members include the senior officials from OMB, Treasury and IRS
    who are responsible for tax administration. We have tried to use the
    Board as the equivalent of a proactive Board of Directors for a large
    private sector corporation. Like any such Board of Directors, the MMB
    will focus on broad strategic issues and major investment decisions for
    the IRS. For instance, we will be spending a considerable amount of
    time this spring on the overall IRS systems architecture and
    development plan.
        I should note that the MMB does not become involved in tax policy
    issues, which are handled through different means. Its focus is on
    management issues.
        The amount of time that individual Board members spend on IRS
    issues will naturally vary. Most of the members already spend a great
    deal of time on the IRS and have general familiarity with the issues. I
    will say that I have been putting a large portion of my time into IRS
    management issues over the past year, and expect to continue to do so.
        The MMB has a small professional staff. In the past the staff has
    been drawn from the IRS. We are now converting the staff into Treasury
    employees.
        As for the Board's actions in rejecting IRS proposals, things
    seldom develop that way. I see the MMB's primary job as clarifying
    strategic options and, on occasion, choosing one. What we constantly do
    is push the IRS for more specificity, imagination and speed. So far the
    process has worked quite well.
        Question. The National Commission on Restructuring the IRS, of
    which you are a member, is planning to issue its final report in June.
    It is my understanding the Commission will address the security
    weaknesses and management problems that exist within IRS. What can you
    tell us about the Commission's recommendations for tackling these
    problems?
        Answer. The Commission is scheduled to release its final report in
    June, however, I am not a member of the Commission and will have to
    reserve my comments on their proposals until I have seen them.
                          treasury/irs accountability
        Question. How does Treasury intend to follow up and monitor the IRS
    to ensure they are following through with the policies put in place?
    The concern here is that not enough oversight has been carried out in
    the past on this issue.
        Answer. Treasury intends to monitor the ``browsing'' issue on a
    continuing basis. Deputy Secretary Summers has requested a
    comprehensive report from the IRS on its plans. This report will be
    discussed at a special meeting of the Treasury Modernization Management
    Board (MMB), which is the principal body within Treasury for oversight
    of the administrative functions of the IRS. In addition, the Treasury
    Office of Security will work closely with the security office at IRS to
    monitor implementation of IRS plans. The MMB will continue to track
    this issue.
        Using the tools presently available to it, the IRS has already
    stepped up its efforts to end ``browsing.'' Those tools include:
    employee training on the privacy policy of Sec. 6103; regular
    refreshers on Sec. 6103; privacy guidelines to employees, condemning
    unauthorized browsing of taxpayer records; warnings when documents are
    accessed by computer; expanded use of the Electronic Audit Research Log
    (``EARL'') to identify instances of unauthorized access; an ``800''
    number for reporting misconduct; new managers in the computer security
    program; and disciplinary actions, up to and including dismissal from
    employment, against employees who are found to have violated the
    privacy policy.
        We also support the application of criminal sanctions to employees
    found guilty of ``browsing.'' As you know, the Economic Espionage Act
    of 1996 amended the Federal wire fraud statute in the criminal code
    (Title 18 U.S.C.), to make unauthorized access by computer to
    information from any department or agency of the United States a
    separate misdemeanor offense. In view of these provisions, ``browsing''
    a Federal computer is already punishable as a crime.
        Further, we support the legislation (H.R. 1226 in the House, S. 522
    in the Senate) to make ``browsing'' a separate criminal offense under
    the Internal Revenue Code. This should provide an additional tool to
    criminal investigators and prosecutors and, perhaps more importantly,
    an additional deterrent to IRS employees who may be tempted to browse.
        We fully expect that these actions will deter persons who have
    access to tax returns and return information from unauthorized
    browsing, and we anticipate that the number of such instances should
    decline significantly in the future. We will be closely monitoring the
    IRS's progress in this area over the next couple years. If improvements
    are not forthcoming, we may seek additional tools from Congress.
                        security procedures/punishments
        Question. What action has the Treasury Department taken to ensure
    the IRS puts in place solid mechanisms to protect taxpayer files?
        Answer. As noted in response to the previous question, the Deputy
    Secretary has requested a comprehensive report of what IRS will do
    managerially and technically to better address unauthorized access
    problems. The report will be reviewed by the MMB, and the MMB will
    monitor IRS progress in this area.
        Question. Is there a Department of the Treasury standard for
    dealing with sensitive information, such as taxpayer files for example,
    import/export financial information at Customs? Please provide the
    committee a copy of these standards for the Record.
        Answer. The Department is governed by a wide range of standards and
    rules limiting access to official information. The Standards of Ethical
    Conduct for Employees of the Executive Branch provide that ``An
    employee shall not * * * allow the use of nonpublic information to
    further his own private interest or that of another.'' 5 C.F.R.
    Sec. 2635.703. This requirement applies to all Treasury employees in
    all bureaus and offices, is distributed to every employee, and is the
    subject of periodic ethics training. The requirement is supplemented by
    the Department's supplementary ethics regulations, specifically 31
    C.F.R. Sec. Sec. 0.205 and 0.206, which provide that ``[employees are
    required to care for documents according to federal law and regulation,
    and Department procedure [and] shall not disclose official information
    without proper authority, pursuant to Department or bureau
    regulation.''
        As a general matter, disclosure of information maintained by the
    Department is governed by the regulations at 31 C.F.R. Part 1. With
    respect to sensitive information about individuals, information that is
    retrieved by that individual's name, code, number, may be disclosed
    only to employees who have a need for the record in the performance of
    their duties, pursuant to the Privacy Act of 1974, as amended, 5 U.S.C.
    Sec. 552a . This requirement is promulgated department-wide by Treasury
    regulations at 31 C.F.R. Part 1, Subpart C and Treasury Directive 25-
    04, which also require each component to develop a Notice of System of
    Records for every system from which information about individuals is
    retrieved. All systems notices require a description of the safeguards
    for the records contained therein. A list of the Department's current
    Privacy Act Systems Notices is attached at Attachment A. As shown in
    Attachment A, the IRS has in excess of 100 Privacy Act Systems. Of
    special note regarding access to taxpayer files is IRS 34.018, which
    logs employee inputs and inquiries to the IRS's Integrated Data
    Retrieval System. A copy of that Notice is attached at Attachment B.

        [Clerk's note.--Attachment A can be found in the Federal Register,
    Vol. 60, No. 217, Nov. 9, 1995, Notices, pp. 56648-56651 and attachment
    B can be found on p. 56802 of the same volume.]

        Regarding other sensitive information, the Department's Security
    Manual establishes comprehensive, uniform security policies governing
    personnel, physical, and information systems security. While much of
    the Manual deals with National Security Information classified pursuant
    to Executive Order 12958, portions of it specifically address controls
    on Sensitive But Unclassified (SBU) Information, including proprietary,
    financial, and business confidential information. Section VI, 4.B.1 of
    the Manual, Controlled Access Protection for Automated Information
    Systems and Networks Processing Sensitive but Unclassified Information,
    is attached as Attachment C.
        [The information follows:]
                                 [attachment c]
               Office of Security Manual, Chapter VI, No. 4.B.1.
                                                       October 1, 1992.
    Subject: Controlled Access Protection (C2) for Automated Information
            Systems and Networks Processing Sensitive But Unclassified
            Information
        1. Purpose. This section provides policy and establishes the
    requirement to execute a minimum level of protection for automated
    information systems (AIS) and networks accessed by more than one user
    when those users do not have the same authorization to use all or some
    of the sensitive but unclassified (SBU) information processed, stored,
    or communicated by the AIS or network. Controlled Access Protection
    (also known as C2) can be used to deny unauthorized access to
    information stored in AIS and prevent outside intruders from
    electronically accessing SBU information by way of supporting
    telecommunications in networked AIS.
        2. Policy. It is the policy of the Department of the Treasury that
    AIS and networks which process, store, or transmit SBU information meet
    the requirements for C2 level protection as evaluated by the National
    Security Agency (NSA) or National Institute for Standards and
    Technology (NIST). The criteria for C2 is as follows:
        a. ensure individual accountability through identification and
    authentication of each individual system user;
        b. maintain an audit trail of user security relevant events;
        c. control responses to a user's request to access information
    according to the user's authorization; and
        d. prevent unauthorized access to a user's current or residual data
    by clearing all storage areas (core, disk, etc.) before they are
    allocated or reallocated. This C2 requirement shall be implemented
    within the operating system. However, with the approval of the Senior
    Information Resources Management Official (SIRMO) and the Principal
    Accrediting Authority (PAA), the object reuse feature may be
    implemented at the application level. For those systems where object
    reuse cannot be implemented, a bureau or office may elect to use
    approved alternative methods (e.g., file encryption) to satisfy this
    requirement. Waiver procedures for a permanent exemption to this
    feature of the C2 criteria are prescribed in paragraph 3.b.
        3. Exemption.
        a. A temporary exemption from the requirement to implement this
    policy by October 1, 1992, on existing AIS and networks or to
    incorporate the C2 provisions on new AIS and networks during the
    conceptual design stage may be granted jointly by the SIRMO and PAA.
    Such exceptions shall be based on the difficulty or cost of their
    execution and impairment to operations and mission effectiveness. Heads
    of bureaus and, for systems in the Departmental Offices, the Deputy
    Assistant Secretary (Administration) shall ensure continuous progress
    is made toward reducing or eliminating the circumstances causing the
    need for the temporary exemption.
        b. Permanent exemptions to paragraph 2.d. will be approved jointly
    by the SIRMO and PAA. Permanent exemptions from the requirement to
    clear residual data will be based on a risk analysis to determine what
    damage, if any, is caused by the potential disclosure of SBU
    information to a user who does not have the same authorization to use
    some or all of the SBU information on the AIS or network. No exemption
    to paragraph 2.d. is required for stand-alone AIS when all users are
    authorized access to all the SBU information on the AIS. However, prior
    to disposition or repair of any such AIS, approved clearing and purging
    is required (see Section 4.F. of Chapter VI).
        4. Applicability to Microprocessors.
        a. Networked Microprocessors. If a network is accessed by a user
    who is not authorized to use all or some of the SBU information
    processed by or communicated over the network (or if the network is
    accessed by dial-up circuits), C2 protection shall be implemented on
    microprocessors running UNIX or other multi-user multi-tasking
    operating systems. Presently, there is no acceptable and affordable
    technology that provides C2 approved software protection for DOS-based
    microprocessors (of which large numbers of MS-DOS personal computers
    have been procured throughout the Department). There are, however,
    evaluated subsystems which create C2 functionality in MS-DOS systems
    (i.e., identification, authentication, audit, discretionary access
    control, and object reuse). Therefore, until there are C2 approved
    operating systems available for networked DOS-based microprocessors,
    the bureaus could utilize existing NSA evaluated subsystems (e.g.,
    Watchdog Armor or PC/DACS).
        b. Stand-alone Microprocessors. Evaluated subsystems, as described
    in paragraph 4.a., should be considered for use on stand-alone
    workstations when either of the following applies:
        (1) SBU information is stored on the microprocessor and is shared
    by multiple users who do not have a need to know some or all of the SBU
    information stored on the system, or
        (2) the workstation with stored SBU information is located in an
    uncontrolled area.
        c. Interim Measures. Until C2 products are available, interim
    discretionary access control protection measures for microprocessors
    shall be implemented. These measures include, but are not limited to:
        (1) physical security (controlling physical access to the terminal
    and purging system of SBU information when terminal is not in use);
        (2) personnel security (background or integrity checks);
        (3) communications security (encryption or guided media);
        (4) manual user identification and authentication;
        (5) procedural security;
        (6) security training and awareness;
        (7) contingency planning; and
        (8) risk analysis.
    When C2 technology is incorporated into the computer, the above
    countermeasures (to the extent warranted by the known or perceived
    threat or vulnerability) will still be required in the overall
    protection plan for the microprocessor.
        5. Responsibilities.
        a. The Director, Office of Security, shall:
        (1) ensure compliance with this policy in the most cost-effective
    manner to include verifying that bureaus are making continuous progress
    toward reducing or eliminating the circumstances for requiring a
    temporary exemption from controlled access protection requirements;
        (2) provide input to the five-year information systems planning
    call and review bureau information systems plans for compliance with
    this policy;
        (3) review selected major solicitations of SBU AIS, as provided by
    the Deputy Assistant Secretary (Information Systems), to ensure
    compliance with this section and to eliminate duplication or conflict
    with existing or planned security measures within Treasury; and
        (4) provide reports on the results of reviews of bureau
    acquisitions and information systems plans to the Deputy Assistant
    Secretary (Information Systems).
        b. The Deputy Assistant Secretary (Information Systems) shall:
        (1) coordinate select major AIS and network solicitations with the
    Director, Office of Security, for systems security considerations;
        (2) coordinate bureau five-year information systems plans with the
    Director, Office of Security, for systems security considerations; and
        (3) ensure, through the annual computer security planning and
    reporting process, that bureaus report the status of their compliance
    with this section, including all temporary exemptions granted.
        c. The Deputy Assistant Secretary (Administration). Heads of
    Bureaus and the Inspector General shall, as it relates to their
    respective bureaus and offices:
        (1) take deliberate action, in the most cost-effective manner, to
    execute the provisions of this policy and ensure all existing
    Department of the Treasury systems shall be in compliance before
    October 1, 1992. This cost-effectiveness includes eliminating
    duplication of effort when upgrading security by ensuring that any AIS
    or network with user identification/authentication, key management, and
    encryption requirements utilize existing or planned Treasury resources
    to the maximum possible extent;
        (2) ensure that all new AIS or networks that are intended to
    process, store, or communicate SBU information incorporate the
    provisions of this policy during the conceptual design phase; and
        (3) report the status of compliance with this policy, including all
    temporary exemptions granted, to the Office of the Deputy Assistant
    Secretary (Information Systems) as part of the annual computer security
    planning and reporting process.
        6. Procedures for Controlled Access Protection
        a. Introduction.
        (1) The PAA's (data owners) of the AIS and networks have the
    authority and ability to decide who, among the system's authorized
    users, will be permitted access to SBU information.
        (2) The cost of strengthening the hardware or software features of
    your AIS or network may be prohibitive. You should document any
    exceptions to baseline requirements as explained in Section 7.A. of
    Chapter VI.
        b. C2 Criteria.
        (1) Identification and Authentication. The system shall require the
    users to identify themselves and to provide some proof that they are
    who they say they are. The most common means for accomplishing this are
    a user identification (user ID) and password. The system must protect
    authentication data so that it may not be accessed by an unauthorized
    user.
        (2) Audit. The system shall be able to create, maintain, and
    protect from modification, unauthorized access, or destruction an audit
    trail of accesses to the resources it protects. The audit data shall be
    protected by the system so that read access to it is limited to those
    who are authorized for audit data. The system shall be able to record
    the following types of events: log on, log off, change of password,
    creation, deletion, opening, and closing of files, program initiation,
    and all actions by system operators, administrators, and security
    officers. For each recorded event, the audit record shall identify:
    date and time of the event, user, type of event, and the success or
    failure of the event. For log on, log off, and password change the
    origin of the request (e.g., terminal ID) shall be included in the
    audit record. For file related events the audit record shall include
    the file's name. The ISSO and NSO shall be able to selectively audit
    the actions of one or more users based on individual identity. Audit
    procedures shall be developed and coordinated with other internal
    control procedures required under OMB Circular A-123.
        (3) Discretionary Access Control. The system shall define and
    control access between named users and system resources (e.g., files
    and programs). The system or network users shall be provided the
    capability to specify who (by individual user or users, group, etc.)
    may have access to their data. These controls are at the discretion of
    the user and the user may change them. The system or network will
    assure that users without that authorization are not allowed access to
    the data.
        (4) Object Reuse. When a storage object (e.g., core area, disk
    file, etc.) is initially assigned, allocated, or reallocated to a
    system user, the system shall assure that it has been cleared.
        c. Assurance. Given the security features in the preceding
    paragraphs, there must be some assurance that these features are
    properly implemented and protected from modification. For these systems
    and networks, assurance rests primarily with system and network
    testing. The security features including those of the system or network
    shall be tested and found to work as claimed in the system and network
    documentation. Testing shall be done to assure that there are no
    obvious ways for an unauthorized user to bypass or otherwise defeat the
    security protection mechanisms of the system or network. Testing shall
    also include a search for obvious flaws that would allow violation of
    resource isolation, or that would permit unauthorized access to the
    audit or authentication data.
        d. Documentation.
        (1) Security Features User's Guide. A single summary, chapter, or
    manual in user documentation shall describe the security features
    provided by the system, guidelines on how to use them, and how they
    interact with one another.
        (2) Trusted Facility Manual. A manual addressed to the system
    administrator, operator, and system security officer shall present
    cautions about functions and privileges that should be controlled when
    running a secure facility. The procedures for examining and maintaining
    the audit files as well as the detailed audit record structure for each
    type of audit event shall be given.
        (3) Test Documentation. A document shall be provided that describes
    the test plan and results of the security features functional testing.
        (4) Design Documentation. Documentation shall be available that
    provides a description of the developer's philosophy of protection and
    an explanation of how this philosophy is translated into the system. If
    the system's security features are composed of distinct modules, the
    interfaces between the modules shall be described.
        e. Conformance with Vendor Security Requirements and Guidelines.
    When using vendor-supplied security products providing controlled
    access protection, the extent to which AIS and network management
    follows vendor security-related instructions accompanying the system
    software documentation will determine how effective the security
    product will be. In many cases, failure to follow these instructions
    will reduce an otherwise trusted system to a less secure state. To
    prevent this, bureau ISSO's and NSO's (or available security staff) are
    required to thoroughly review all vendor recommendations and
    requirements for the configuration of security controls and formally
    document the compliance or non-compliance of such requirements. If
    operational requirements dictate that such security recommendations
    cannot be complied with, management shall formally document this
    decision through the exception process. Such exceptions require the
    review and approval of the ISSO or NSO (or available security staff).
        7. Cancellation. Treasury Directive 85-04, ``Controlled Access.
    Protection (C2) for Automated Systems which Process Sensitive
    Unclassified Information,'' dated August 15, 1989, is superseded.
        Certain information maintained by Treasury bureaus is subject to
    detailed controls on access. For example, the Customs Service maintains
    two interactive systems containing highly sensitive law enforcement and
    commercial information, the Treasury Enforcement Communications System
    (TECS) and the Automated Commercial System (ACS). Extensive security
    software requiring passwords limit access to both systems to employees
    authorized to make specific inquiries. A brief description of the
    system safeguards for ACS is attached as Attachment D. Another example
    are the restrictions on access to Financial Transaction Records
    maintained by FinCEN. See 31 C.F.R. Sec. 103.51.

        [Clerk's note.--Attachment D can be found in the Federal Register,
    Vol. 60, No. 217, Nov. 9, 1995, Notices, pp. 56763-56764.]

        Question. In your opinion, do you feel the IRS has consistently
    applied the punishments for those employees caught browsing taxpayer
    files?
        Answer. The IRS, like other Federal agencies, must consider several
    factors on a case by case basis when determining the appropriate
    penalty for misconduct. These factors include the employee's past
    disciplinary and performance history, length of service, job and grade
    level, potential for rehabilitation, the nature and seriousness of the
    offense, the consistency of the penalty with those imposed upon other
    employees, and any mitigating circumstances. Different penalties
    imposed in two cases for seemingly similar conduct may be the result of
    the weighing of these factors. It does not necessarily mean that an
    inappropriate penalty was imposed in one of the cases. In addition,
    many of these cases are appealed to the MSPB or through the negotiated
    grievance process. We understand that in some cases removals have been
    mitigated to lesser penalties by grievance arbitrators.
        It is also important to emphasize, that not all suspected instances
    of browsing actually turn out to have been willful unauthorized
    inspection of taxpayer records.
        Question. Can you explain, from Treasury's perspective, why IRS has
    been inconsistent in punishments?
        Answer. The IRS is a large, administratively decentralized
    organization and discipline is administered at the local level. As
    noted above, each case presents its own unique facts and circumstances
    and therefore different penalties may be deemed appropriate. This
    doesn't necessarily mean that the penalties are inconsistent. That
    being said, there is certainly room for improvement in terms of making
    sure that similar offenses receive similar treatment.
        Question. Has snooping been a problem with any other Treasury
    agencies with their respective files.
        Answer. ``Browsing'' is a term usually applied only to unauthorized
    access to taxpayer information. We are unaware of any similar instances
    of significant unauthorized access to sensitive systems or data at
    other Treasury bureaus.
        Question. From an oversight perspective, do you feel that there are
    any roadblocks, legal or otherwise, keeping the IRS from consistently
    applying these punishments?
        Answer. So long as this type of misconduct is subject to the same
    factors for evaluating the appropriateness of a penalty as other types
    of misconduct, there will likely be differences in penalty
    determinations because of the unique factors of each case. We will be
    evaluating whether additional legislation is needed to ensure that
    appropriate disciplinary penalties for browsing will be sustained.
                                    Panel 3

                           GENERAL ACCOUNTING OFFICE

    STATEMENT OF RONA B. STILLMAN, CHIEF SCIENTIST,
                COMPUTERS AND TELECOMMUNICATIONS
    ACCOMPANIED BY LYNDA WILLIS, DIRECTOR, TAX POLICY AND ADMINISTRATION

                            Introduction of Witness

        Senator Campbell. Our third panel will be Dr. Rona B.
    Stillman, Chief Scientist for Computers and Telecommunications
    from the General Accounting Office. Dr. Stillman, if you would
    like to submit your complete written testimony, without
    objection that will be included in the record and you are
    welcome to abbreviate it if you would like to. And if you might
    identify the lady that is with you for the record.
        Ms. Stillman. Thank you, Mr. Chairman. With me is Lynda
    Willis, our Director for Tax Policy and Administration. We
    appreciate the opportunity to testify on two very important
    matters concerning IRS: employees' unauthorized and improper
    perusal of confidential records, commonly known as browsing;
    and unjustified $1 billion-plus budget request for unspecified
    new systems development.
        Browsing is not a new problem. For years Members of
    Congress, GAO, and others have raised concerns about IRS
    employees accessing taxpayer files for purposes unrelated to
    their jobs, for example, reading the files of celebrities or
    neighbors, or making unauthorized changes to taxpayer files
    such as initiating unauthorized refunds or tax abatements.
        In response, the IRS has taken steps to detect and deter
    browsing. In particular, the IRS has developed and is using the
    electronic audit research log [EARL]. EARL is an automated tool
    which tries to identify suspicious patterns of employee
    activity by analyzing the audit trail of IDRS, the primary
    computer system IRS employees use to access and adjust taxpayer
    accounts. The IRS Commissioner has also instituted a zero
    tolerance browsing policy, and the agency has taken legal and
    disciplinary action against some employees caught browsing.
        We found that despite these steps, IRS is still not
    effectively addressing browsing. First, EARL is limited in its
    ability to detect browsing. EARL only monitors employees using
    IDRS to access taxpayer data. It does not monitor the
    activities of employees using other automated systems to access
    taxpayer data, such as the distributed input system [DIS], the
    integrated collection system [ICS], or the totally integrated
    examination system [TIES].
        In addition, EARL is not effective in distinguishing
    between browsing and legitimate work activity. It identifies so
    many potential browsing incidents that the subsequent manual
    review needed to find incidents of actual browsing is time
    consuming and difficult. IRS is evaluating options for
    enhancing EARL to enable it to better distinguish between
    legitimate activity and browsing.
        Second, according to the 1996 report of the EARL executive
    steering committee, IRS does not consistently count the number
    of browsing cases and cannot assess the effectiveness of
    individual detection programs or of IRS detection efforts
    overall.
        Further, browsing is inconsistently managed across IRS
    facilities. Facilities are inconsistent in reviewing and
    referring browsing incidents, inconsistent in applying
    penalties for browsing violations, and inconsistent in
    publicizing the outcomes of browsing cases to deter other
    employees from browsing.
        In a report we issued last week, we recommended that the
    IRS completely and consistently monitor, record, and report the
    full extent of browsing for all systems that can be used to
    access taxpayer data. We also recommended that the Commissioner
    report the associated disciplinary action taken, and that these
    statistics, along with an assessment of its progress in
    eliminating browsing, be included with IRS' annual budget
    submission. IRS has stated its intention to implement these
    recommendations. We plan to monitor its progress in doing so.
        I would now like to address IRS' budget request for new
    systems development in fiscal years 1998 and 1999. IRS has
    requested $131 million in fiscal year 1998 for new systems
    development and an additional $1 billion, $500 million in
    fiscal year 1998 and $500 million in fiscal year 1999 for an
    information technology investment account.
        To ensure that Federal agencies like the IRS invest wisely
    in information technology, the Congress has passed several
    laws, including the Chief Financial Officers Act, the
    Government Performance and Results Act, and the Clinger-Cohen
    Act. These acts require that information technology investments
    be supported by convincing business case analyses showing
    mission-related benefits in excess of the money spent. They
    also require that disciplined processes be in place to manage
    the investment and to develop or acquire the systems.
        IRS has not justified the $1.131 billion it has requested
    for fiscal years 1998 and 1999. In fact, IRS does not know how
    it will spend these funds or what benefits will be achieved.
    Instead IRS requested $131 million in fiscal year 1998 because
    that was about the same amount it received for new systems
    development in fiscal year 1997. And IRS requested an
    additional $1 billion in fiscal years 1998 and 1999 as a
    placeholder to ensure the availability of funding for yet-to-
    be-determined new systems development.
        Moreover, although they are working to improve, IRS
    continues to suffer from the same fundamental and persistent
    management and technical weaknesses that we detailed in July
    1995. It is precisely this kind of approach, that is,
    earmarking huge amounts of money without convincing supporting
    business rationale, and attempting to build and buy systems
    without disciplined systems development and acquisition
    processes, that have led to past modernization failures at IRS.
    And it is precisely this kind of approach that GPRA and the
    Clinger-Cohen Act are designed to preclude.
        Therefore, consistent with the requirements of GPRA and the
    Clinger-Cohen Act, we believe that the Congress should not fund
    any significant IRS requests for information technology
    development until IRS provides convincing analytical business
    rationale, and until disciplined systems investment,
    development, and acquisition processes are in place.
        Mr. Chairman, this concludes my statement. Lynda Willis and
    I will be happy to respond to any questions that you or the
    subcommittee members may have at this time.

                               Prepared Statement

        Senator Campbell. Thank you Ms. Stillman. We have your
    complete statement and it will be made part of the record.
        [The statement follows:]
                   Prepared Statement of Dr. Rona B. Stillman
        Mr. Chairman and Members of the Subcommittee: We appreciate the
    opportunity to testify on Internal Revenue Service (IRS) employees'
    electronic browsing of taxpayer files, as well as IRS' fiscal years
    1998 and 1999 budget requests for tax systems modernization (TSM)
    development currently before this Subcommittee.
        On April 8, 1997, we issued a report disclosing many serious
    computer security weaknesses at IRS.\1\ These weaknesses make IRS
    computer resources and taxpayer data unnecessarily vulnerable to
    external threats, such as natural disasters and people with malicious
    intentions. They also expose taxpayer data to internal threats, such as
    employees accessing taxpayer files for purposes unrelated to their jobs
    (for example, reading the files of celebrities or neighbors) or making
    unauthorized changes to taxpayer data, either inadvertently or
    deliberately for personal gain (for example, to initiate unauthorized
    refunds or abatements of tax). Such unauthorized and improper browsing
    of taxpayer records has been the focus of considerable attention in
    recent years. Nevertheless, our report shows that IRS is not
    effectively addressing the problem. IRS still does not effectively
    monitor employee activity, accurately record browsing violations,
    consistently punish offenders, or widely publicize reports of incidents
    detected and penalties imposed.
    ---------------------------------------------------------------------------
        \1\ IRS Systems Security: Tax Processing Operations and Data Still
    at Risk Due to Serious Weaknesses (GAO/AIMD-97-49, April 8, 1997).
    ---------------------------------------------------------------------------
        Compounding IRS' serious and persistent computer security and
    employee browsing problems are equally serious and persistent TSM
    management and technical problems that must be corrected if IRS is to
    effectively invest in TSM. IRS is requesting $1.131 billion in fiscal
    years 1998 and 1999 for TSM development and deployment. However, IRS
    does not know how it will spend this $1.131 billion and has not yet
    corrected the management and technical problems that IRS has
    acknowledged have resulted in hundreds of millions of dollars being
    wasted thus far on TSM. This is inconsistent with the Government
    Performance and Results Act (GPRA) of 1993 and the Clinger-Cohen Act of
    1996, which require that information technology investments be
    supported by convincing business case analyses and disciplined
    management and technical processes.
             irs is not effectively addressing electronic browsing
        Employee electronic browsing of taxpayer records is a long-standing
    problem at IRS. We reported in September 1993 that IRS did not
    adequately (1) restrict access by computer support staff to computer
    programs and data files or (2) monitor the use of these resources by
    computer support staff and users.\2\ As a result, personnel who did not
    need access to taxpayer data could read and possibly use this
    information for fraudulent purposes. Also, unauthorized changes could
    be made to taxpayer data, either inadvertently or deliberately for
    personal gain (for example, to initiate unauthorized refunds or
    abatements of tax). In August 1995, we reported that the Service still
    lacked sufficient safeguards to prevent or detect unauthorized browsing
    of taxpayer information.\3\
    ---------------------------------------------------------------------------
        \2\ IRS Information Systems: Weaknesses Increase Risk of Fraud and
    Impair Reliability of Management Information (GAO/AIMD-93-34, September
    22, 1993).
        \3\ Financial Audit: Examination of IRS' Fiscal Year 1994 Financial
    Statements (GAO/AIMD-95-141, August 4, 1995).
    ---------------------------------------------------------------------------
        To address employee browsing, IRS developed the Electronic Audit
    Research Log (EARL), an automated tool to monitor and detect browsing
    on the Integrated Data Retrieval System (IDRS).\4\ IRS has also taken
    legal and disciplinary actions against employees caught browsing.
    However, as our April 1997 report points out, EARL has shortcomings
    that limit its ability to detect browsing. In addition, IRS does not
    have reliable, objective measures for determining whether or not the
    Service is making progress in reducing browsing. Further, IRS
    facilities inconsistently (1) review and refer incidents of employee
    browsing, (2) apply penalties for browsing violations, and (3)
    publicize the outcomes of browsing cases to deter other employees from
    browsing.
    ---------------------------------------------------------------------------
        \4\ IDRS is the primary computer system IRS employees use to access
    and adjust taxpayer accounts.
    ---------------------------------------------------------------------------
    EARL's Ability to Detect Browsing Is Limited
        EARL cannot detect all instances of browsing because it only
    monitors employees using IDRS. EARL does not monitor the activities of
    IRS employees using other systems, such as the Distributed Input
    System, the Integrated Collection System, and the Totally Integrated
    Examination System, which are also used to create, access, or modify
    taxpayer data. In addition, information systems personnel responsible
    for systems development and testing can browse taxpayer information on
    magnetic tapes, cartridges, and other files using system utility
    programs, such as the Spool Display and Search Facility,\5\ which also
    are not monitored by EARL.
    ---------------------------------------------------------------------------
        \5\ This utility enables a programmer to view a system's output,
    which may contain investigative or taxpayer information.
    ---------------------------------------------------------------------------
        Further, EARL has some weaknesses that limit its ability to
    identify browsing by IDRS users. For example, because EARL is not
    effective in distinguishing between browsing activity and legitimate
    work activity, it identifies so many potential browsing incidents that
    a subsequent manual review to find incidents of actual browsing is
    time-consuming and difficult. IRS is evaluating options for developing
    a newer version of EARL that may better distinguish between legitimate
    activity and browsing.
    IRS Progress in Reducing and Disciplining Browsing Cases Is Unclear
        IRS' management information systems do not provide sufficient
    information to describe known browsing incidents precisely or to
    evaluate their severity consistently. IRS personnel refer potential
    browsing cases to either the Labor Relations or Internal Security
    units, each of which records information on these potential cases in
    its own case tracking system. However, neither system captures
    sufficient information to report on the total number of unauthorized
    accesses. For example, neither system contains enough information on
    each case to determine how many taxpayer accounts were inappropriately
    accessed or how many times each account was accessed. Without such
    information, IRS cannot measure whether it is making progress from year
    to year in reducing browsing.
        A recent report by the IRS EARL Executive Steering Committee \6\
    shows that the number of browsing cases closed has fluctuated from a
    low of 521 in fiscal year 1991 to a high of 869 in fiscal year 1995.\7\
    However, the report concluded that the Service does not consistently
    count the number of browsing cases and that ``it is difficult to assess
    what the detection programs are producing * * * or our overall
    effectiveness in identifying IDRS browsing.''
    ---------------------------------------------------------------------------
        \6\ Electronic Audit Research Log (EARL) Executive Steering
    Committee Report (September 30, 1996).
        \7\ We did not verify the accuracy and reliability of these data.
    ---------------------------------------------------------------------------
        Further, the committee reported that ``the percentages of cases
    resulting in discipline has remained constant from year to year in
    spite of the Commissioner's `zero tolerance' policy.'' IRS browsing
    data for fiscal years 1991 to 1995 show that the percentage of browsing
    cases resulting in IRS' three most severe categories of penalties
    (i.e., disciplinary action, separation, and resignation/retirement) has
    ranged between 23 and 34 percent, with an average of 29 percent.\8\
    ---------------------------------------------------------------------------
        \8\ The mix among these three categories has remained relatively
    constant each year with disciplinary action accounting for the vast
    majority of penalties.
    ---------------------------------------------------------------------------
    Browsing Incidents Are Reviewed, Referred, Disciplined, and Publicized
            Inconsistently
        IRS processing facilities do not consistently review and refer
    potential browsing cases. The processing facilities responsible for
    monitoring browsing had different policies and procedures for
    identifying potential violations and referring them to the appropriate
    unit within IRS for investigation and action. For example, at one
    facility, the analysts who identify potential violations referred all
    of them to Internal Security, while staff at another facility sent some
    to Internal Security and the remainder to Labor Relations.
        IRS has taken steps to improve the consistency of its review and
    referral process. In June 1996, it developed specific criteria for
    analysts to use when making referral decisions. A recent report by the
    EARL Executive Steering Committee stated that IRS had implemented these
    criteria nationwide. Because IRS was in the process of implementing
    these criteria during our work, we could not validate their
    implementation or effectiveness.
        IRS facilities are not consistently disciplining employees caught
    browsing. After several IRS directors raised concerns that field
    offices were inconsistent in the types of discipline imposed in similar
    cases, IRS' Western Region analyzed fiscal year 1995 browsing cases for
    all its offices and found inconsistent treatment for similar types of
    offenses. For example, one employee who attempted to access his own
    account was given a written warning, while other employees in similar
    situations, from the same division, not only did not receive a written
    warning but were not counseled at all.
        The EARL Executive Steering Committee reported widespread
    inconsistencies in the penalties imposed in browsing cases. For
    example, the committee's report showed that for fiscal year 1995, the
    percentage of browsing cases resulting in employee counseling ranged
    from a low of 0 percent at one facility to 77 percent at another.
    Similarly, the report showed that the percentage of cases resulting in
    removal ranged from 0 percent at one facility to 7 percent at another.
    For punishments other than counseling or removal (e.g., suspension),
    the range was between 10 percent and 86 percent.
        IRS facilities did not consistently publicize the penalties
    assessed in browsing cases to deter such behavior. For example, we
    found that one facility never reported disciplinary actions. However,
    another facility reported the disciplinary outcomes of browsing cases
    in its monthly newsletter. By inconsistently and incompletely reporting
    on penalties assessed for employee browsing, IRS is missing an
    opportunity to more effectively deter such activity.
        In summary, although IRS has taken some action to detect and deter
    browsing, it is still not effectively addressing this area of
    continuing concern because (1) it does not know the full extent of
    browsing and (2) it is addressing cases of browsing inconsistently.
    Because of this, our April report recommends that the IRS Commissioner
    (1) ensure that IRS completely and consistently monitors, records, and
    reports the full extent of electronic browsing; and (2) report IRS'
    progress in eliminating browsing in its annual budget submission. IRS
    has concurred with these recommendations and stated that it will
    implement them. We plan to monitor its progress in doing so.
          fiscal years 1998 and 1999 tsm budget requests not justified
        Recent legislation, such as GPRA and the Clinger-Cohen Act, require
    that information technology investments be supported by accurate cost
    data and convincing cost-benefit analyses. However, IRS' fiscal years
    1998 and 1999 TSM budget requests, which combined total $1.131 billion,
    do not include credible, verifiable justifications. Exacerbating this
    problem is the fact that the systems modernization continues to be at
    risk due to uncorrected management and technical weaknesses \9\ that we
    first reported in July 1995.\10\ Such an approach to modernization
    spending has contributed to IRS' past modernization failures, and
    giving IRS more money under these circumstances not only undermines the
    objectives of GPRA and the Clinger-Cohen Act, but also increases the
    risk of more money being wasted.
    ---------------------------------------------------------------------------
        \9\ GAO High Risk Series, IRS Management (GAO/HR-97-8, February
    1997); Tax Systems Modernization: Actions Underway But Management and
    Technical Weaknesses Not Yet Corrected (GAO/T-AIMD-96-165, September
    10, 1996); Tax Systems Modernization: Actions Underway But IRS Has Not
    Yet Corrected Management and Technical Weaknesses (GAO/AIMD-95-106,
    June 7, 1996); Tax Systems Modernization: Management and Technical
    Weaknesses Must Be Overcome To Achieve Success (GAO/T-AIMD-96-75, March
    26, 1996); and Tax Systems Modernization: Management and Technical
    Weaknesses Must Be Corrected If Modernization Is to Succeed (GAO/AIMD-
    95-156, July 26, 1995).
        \10\ Tax Systems Modernization: Management and Technical Weaknesses
    Must Be Corrected If Modernization Is to Succeed (GAO/AIMD-95-156, July
    26, 1995).
    ---------------------------------------------------------------------------
    Budget Request for Fiscal Year 1998 Systems Development Not Justified
        The Clinger-Cohen Act, GPRA, and OMB Circular No. A-11 and
    supporting memoranda require that information technology investments be
    supported by accurate cost data and convincing cost-benefit analyses.
    However, IRS has not prepared such analyses to support its fiscal year
    1998 request of $131 million for system development. The budget request
    states that IRS does not know how it plans to spend these funds because
    its modernization systems architecture and system deployment plan have
    not yet been finalized. These efforts are scheduled for completion in
    May 1997 and are intended to guide future systems development.
    According to IRS budget officials, $131 million was requested for
    fiscal year 1998 because it was approximately the same amount IRS
    received in fiscal year 1997 for system development.
    No Justification to Support Information Technology Investments Account
            Requests for Fiscal Years 1998 and 1999
        The administration, on IRS' behalf, is proposing to establish an
    Information Technology Investments Account to fund future modernization
    investments at IRS. It is seeking $1 billion-$500 million in each of
    fiscal years 1998 and 1999--for ``yet-to-be-specified'' development
    efforts. According to IRS' request, the funds are to support
    acquisition of new information systems, any expenditures from the
    account will be reviewed and approved by the Department of the
    Treasury's Modernization Management Board, and no funds will be
    obligated before July 1, 1998.
        The Clinger-Cohen Act, GPRA, and OMB Circular No. A-11 and
    supporting memoranda require that, prior to requesting multiyear
    funding for capital asset acquisitions, agencies develop accurate,
    complete cost data and perform thorough analyses to justify the
    business need for the investment. For example, agencies need to show
    that needed investments (1) support a critical agency mission, (2) are
    justified by a life-cycle-based cost-benefit analysis, and (3) have
    cost, schedule, and performance goals.
        IRS has not prepared such analyses for its fiscal years 1998 and
    1999 investment account request. Instead, IRS and Treasury officials
    stated that, during executive-level discussions, they estimated that
    they would need about $2 billion over the next 5 years. This estimate
    was not based on analytical data or derived using formal cost
    estimating techniques. According to OMB officials responsible for IRS'
    budget submission, the request was reduced to $1 billion over 2 years
    because they perceived the lesser amount as being more palatable to the
    Congress. These officials also told us that they were not concerned
    about the precision of the estimate because their first priority is to
    ``earmark funds'' in the fiscal years 1998 and 1999 budgets so that
    funds will be available when IRS eventually determines how it wants to
    modernize its systems.
        In 1995 we made over a dozen recommendations to the Commissioner of
    Internal Revenue to address systems modernization management and
    technical weaknesses. We reported in 1996 that IRS had initiated many
    activities to improve its modernization efforts, but had not yet fully
    implemented our recommendations.\11\ Since that time, IRS has continued
    to take steps to address our recommendations and respond to
    congressional direction. While we recognize that there are ongoing
    actions intended to address these problems, we remain concerned. Much
    remains to be done to implement essential improvements in IRS'
    modernization efforts. IRS has not yet instituted disciplined processes
    for designing and developing new systems, has not yet completed its
    systems architecture, and has no justification for the funding it has
    requested.
    ---------------------------------------------------------------------------
        \11\ Tax Systems Modernization: Actions Underway But IRS Has Not
    Yet Corrected Management and Technical Weaknesses (GAO/AIMD-95-106,
    June 7, 1996).
    ---------------------------------------------------------------------------
        Given IRS' poor track record delivering cost beneficial TSM
    systems, persisting weaknesses in both software development and
    acquisition capabilities, and the lack of justification and analyses
    for over $1 billion in proposed system expenditures, we believe that
    the Congress should not fund these requests until the management and
    technical weaknesses in IRS' modernization program are resolved and the
    required justifications are completed.
        Mr. Chairman, this concludes my statement. Lynda Willis, Director,
    Tax Policy and Administration Issues, and I will be happy to respond to
    any questions you or Members of the Subcommittee might have at this
    time.

                        Capabilities to Snoop or Browse

        Senator Campbell. We are focusing on the IRS, but your
    comment did bring something to my mind. Do you know of any
    other agency of the Federal Government that has the
    capabilities to snoop or browse? I am only one step ahead of
    Senator Faircloth in understanding high-technology computers,
    but could another agency access IRS files to be able to snoop
    or browse?
        Ms. Stillman. IRS operational systems are not on open
    networks like Internet. They are on closed networks and access
    is limited to IRS employees.
        Senator Campbell. At what point did the GAO become aware
    that there was browsing of files?
        Ms. Willis. Senator, I believe the first time that we
    reported to the Congress on browsing was in 1993 as a part of
    our audit of the IRS' 1992 financial statement.
        Senator Campbell. You notified them of your findings at
    that time?
        Ms. Willis. Yes.
        Senator Campbell. What was their response at that time?
        Ms. Willis. That it was a serious problem that needed to be
    corrected.
        Senator Campbell. Do you think they have taken sufficient
    actions to prevent it?
        Ms. Willis. I will let Dr. Stillman answer that, but I
    think in part the fact that we are here today in 1996 with the
    same sorts of issues and the same sorts of problems indicate
    that if we have taken actions, they have not been adequate to
    address the underlying problem.
        Ms. Stillman. That is exactly correct. They have taken some
    actions. They have developed the EARL system. They are using it
    to some extent on IDRS. The Commissioner has indicated that she
    considers it important that employees not browse and has issued
    a zero tolerance statement. None of these actions has been
    sufficient to stop browsing.
        Senator Campbell. As a person that does not understand a
    lot about sophisticated equipment, could anybody in the IRS do
    this, or does it require some kind of a special skill to access
    these records, or could anybody that is pretty good with
    computers do it?
        Ms. Stillman. There are about 58,000 employees of IRS who
    use the IDRS system. You have to be a user of----
        Senator Campbell. Any one of those could do it?
        Ms. Stillman. Yes.
        Senator Campbell. To anyone they wanted to pull up, a
    celebrity, a family, friend; is that right?
        Ms. Stillman. As far as I know, they are not limited. If
    they have sufficient information to get the record, they are
    not limited.
        Senator Campbell. I appreciate it. I also have about a half
    a dozen questions that I would like to submit to you also, if
    you would get back to the committee with those in writing.
        Ms. Stillman. We surely will.
        Senator Campbell. Thank you.
        Senator Kohl.
        Senator Kohl. Thank you very much, Mr. Chairman.

                      Degree of Seriousness About Browsing

        Dr. Stillman, there is this concern that they are just not
    serious enough about it over there, about browsing. That it is
    not taken with the degree of seriousness that the American
    people and those of us who are sitting here today think it
    should be taken, and that is why we are where we are. That when
    you see that just 1 percent of those who were redlined for
    browsing have been discharged and so on, you get the impression
    that it is business as usual and let us hope that this thing
    blows over.
        Now you know more about it than we do. To what extent would
    you disagree with this appraisal?
        Ms. Stillman. IRS itself in its 1996 Executive Steering
    Committee Report on EARL has said that the attitude of IRS
    employees is a problem, that they do not regard it seriously.
    That they do not believe they will be punished, and they do not
    believe that this activity is important.
        Senator Kohl. So then in looking at how we change that
    culture you have to look at the management. It is management
    that has the responsibility for carrying out the rules and
    regulations, and for instilling a sense of discipline. Would
    you disagree with that?
        Ms. Stillman. No, I certainly would not disagree with that.
    The values of an organization, what it believes are important
    is determined at the top.
        Senator Kohl. Then what would you say about whomever the
    Deputy Secretary happens to be from one time to another--and we
    all understand the problem did not arise yesterday--and the
    Commissioner of the IRS? After all, these are the two top
    officials on a day-to-day basis who are involved in trying to
    run this organization properly. Would you say that that is
    where you have to start? I mean, any organization starts from
    the top and it moves down from that point. Would you disagree?
        Ms. Stillman. No; I would not disagree. The Deputy
    Secretary has already testified that he believes that browsing
    is an important problem. And it is important that that belief
    be inculcated through the agency, and apparently they have not
    done that very well to date.
        Senator Kohl. So much of the concern we have should be
    focused not only on those who are doing the browsing but on
    those who are supervising them clearly?
        Ms. Stillman. It is clearly a total agency problem.

                            Funding for TSM Project

        Senator Kohl. Dr. Stillman, what should we do about the TSM
    project? In your opinion, should we continue to provide funding
    for it, and what would happen to the Nation's tax collection
    systems if we were to call a halt to the modernization efforts
    at this time?
        Ms. Stillman. There is one very important myth that ought
    to be dispelled. That is that the money spent for developing
    new systems, for TSM new systems development, impacts current
    operation in the same year. It does not. Current operational
    systems are funded and operated separately. So in the
    discussion for TSM, there is considerable leeway in determining
    what we spend, and in what order.
        What is important is that TSM or systems modernization
    spending, whatever its name is in the future, be done very
    differently than it was done in the past. That first, before
    money is spent, there be good, solid business plans and clear
    capabilities inside the organization to develop or acquire
    systems; that systems be developed or acquired in small
    increments, not in big lumps; that the small increments have
    relatively short timeframes and very clear performance measures
    so that before the next increment of investment is made it is
    clear that the previous increment has been worthwhile.
        That is not the structure that TSM has exhibited in the
    past, but that should be the structure in the future.
        Senator Kohl. Thank you.
        Thank you, Mr. Chairman.
        Senator Campbell. Thank you for your very concise and clear
    answers, Doctor. I did have a couple of little questions. How
    does the IRS actions about misconduct--I read some of the
    numbers a while ago from this sheet I have here--how does that
    compare with other agencies? I know that this is just a kind of
    a rush in the IRS now, but other agencies certainly have some
    disciplinary problems too, and I was just wondering of those,
    how many of those are closed without action, or counseling, or
    disciplinary action? Do you have any idea if the IRS has an
    undue amount of disciplinary actions compared to other
    agencies?
        Ms. Stillman. I personally have no idea.
        Ms. Willis. Senator, we have not looked at that, but I
    think there are, obviously, a couple of agencies that you could
    look at, including Veterans Affairs, Social Security
    Administration, Medicare where you have files that similarly
    would be of interest to people. But I do not know of anyone who
    has actually gone in and compared what type of disciplinary
    actions those agencies have taken against employees found
    violating the confidentiality of the data on their systems.
        Senator Campbell. That is the only questions I have. I
    certainly appreciate you appearing today and I am sorry that we
    had to hold you up so long. Thank you, Dr. Stillman.
        Ms. Stillman. Thank you so much. It has been a pleasure to
    be here.
                                    Panel 4

                           DEPARTMENT OF THE TREASURY

                            Internal Revenue Service

    STATEMENTS OF:
            VALERIE LAU, INSPECTOR GENERAL
            MARGARET MILNER RICHARDSON, COMMISSIONER
    ACCOMPANIED BY DAVID MADER, CHIEF OF MANAGEMENT AND ADMINISTRATION

                           Introduction of Witnesses

        Senator Campbell. The last panel will be the Honorable
    Margaret Milner Richardson, Commissioner of Internal Revenue
    Service, and the Honorable Valerie Lau, Inspector General of
    the U.S. Department of the Treasury. If you folks would come
    forward. Why don't we go ahead and start with you, Valerie? You
    may proceed, Ms. Lau.

                            Statement of Valerie Lau

        Ms. Lau. Thank you, Mr. Chairman. Mr. Chairman, Senator
    Kohl, I am pleased to be here today to represent both the
    Treasury Office of Inspector General and the Internal Revenue
    Service's Inspection Service. With your permission, I would
    like to submit my prepared statement for the record and
    summarize my remarks.
        Senator Campbell. Without objection, your complete
    testimony will be in the record.

                    Browsing of Tax Records by IRS Employees

        Ms. Lau. Thank you. Today we are addressing a very serious
    issue: how to protect taxpayer information from electronic
    browsing by IRS employees. Unfortunately, as you have heard,
    this is not a new issue. There has been extensive oversight of
    this problem for the past 5 years. In fact, in 1992 IRS
    internal auditors were the first to bring the problem of
    employee browsing to light. In response, IRS management has
    taken action. However, the abuse continues.
        So where do we go from here? I have three priorities to
    suggest. First, continued oversight by the IRS Chief Inspector
    and the Treasury Inspector General. Second, improved controls
    to prevent and detect abuse in current and future systems. And
    third, new laws that penalize browsing of taxpayer information
    by IRS employees.
        You might be wondering what the Treasury's auditors and
    investigators have done to help tackle this problem. I am
    pleased to say we have done quite a bit and we plan to do more.
    IRS internal auditors developed the first computer program to
    show the nature and extent of the browsing problem. That
    program was the impetus for the primary system, EARL, currently
    used to detect browsing.
        Since then, the Chief Inspector's auditors and mine have
    continued to monitor and report on the IRS' progress in
    addressing this and other computer security problems. The Chief
    Inspector and I intend to maintain our focus on this area.
        Since the auditors first identified the problem 5 years
    ago, the IRS' ability to detect browsing has improved. I
    believe the continuing audits and investigations I have
    described in my written statement have had a positive impact.
    But this does not mean that we can catch all abuses or scare
    away all of those who are intent on abusing the system.
        The challenge of protecting taxpayers' information is a
    difficult one because many IRS employees have a legitimate need
    to access the data in order to perform their assigned duties.
    Unfortunately, some IRS employees have abused this authority.
        The solutions? As others have mentioned, these include
    monitoring employee activity, educating employees, and taking
    consistent disciplinary action against those who abuse the
    taxpayers' trust.
        What else can be done? Let me return to my three
    priorities. Continued oversight. I pledge that my office and
    that of the IRS Chief Inspector will continue to give our
    attention to this area. We welcome the support you have shown
    in addressing this issue.
        Improved controls. Controls in the current IDRS system need
    to be further strengthened so they not only detect but also
    prevent abuses. In addition, controls are needed to monitor use
    of those systems not covered by detection systems such as EARL.
    The vulnerability of those systems which were identified by GAO
    need to be evaluated and given appropriate management
    attention. Prospectively, the next generation of systems should
    include controls that prevent, not just detect, unauthorized
    access.
        Finally, stronger laws. We need to have laws in place that
    penalize employees who browse taxpayer information. I join the
    support for the proposed antibrowsing legislation introduced by
    Senator Glenn.
        This concludes my remarks and I would be happy to answer
    any questions you have.

                               Prepared Statement

        Senator Campbell. Thank you, Ms. Lau. We have your complete
    statement and it will be made part of the record.
        [The statement follows:]
                       Prepared Statement of Valerie Lau
        Mr. Chairman and Members of the Committee: I am Valerie Lau,
    Inspector General of the Department of the Treasury. I am pleased to be
    here today to represent the Treasury Office of Inspector General (OIG)
    and the Internal Revenue Service's (IRS) Inspection Service. With your
    permission, I would like to submit my prepared statement for the record
    and take a few moments to summarize my remarks.
        Today we are addressing a very serious issue, how to protect
    taxpayer information from electronic browsing by IRS employees.
    Unfortunately, this is not a new issue. There has been extensive
    oversight of this problem for the past 5 years. In fact, in 1992, IRS
    internal auditors were the first to bring the problem of employee
    browsing to light. In response, IRS management has taken action.
    However, the abuse continues. So, where do we go from here?
        I have three priorities to suggest: (1) continued oversight by the
    IRS Chief Inspector and the Treasury Inspector General, (2) improved
    controls to prevent and detect abuse in current and future systems, and
    (3) new laws that penalize browsing of taxpayer information by IRS
    employees.
                     role of my office with respect to irs
        As you know, the Treasury Office of Inspector General was
    established by the 1988 Amendments to the IG Act of 1978. Unlike most
    other IG's, however, the Amendments did not create a single audit and
    investigative entity for the Treasury Department. Specifically, IRS
    retained its internal investigative and internal audit functions under
    the direction of the IRS Chief Inspector. That office has primary
    responsibility for all direct audit and investigative activity at IRS.
    My office was assigned oversight responsibility.
        The Amendments gave my office the authority to initiate, conduct
    and/or supervise audits of the IRS. However, with an audit staff of 160
    to provide primary coverage for the remaining 11 Treasury bureaus and
    the added financial audit responsibilities under the Chief Financial
    Officer's Act, our capacity to do many audits at IRS is limited. In
    contrast, the Chief Inspector has approximately 460 auditors who focus
    solely on IRS programs and operations. Consequently, my office must
    rely on IRS Internal Audit for most of the audit coverage at IRS. In
    addition, GAO performs an extensive amount of audit work at the IRS,
    including the audit of IRS' financial statements.
        The Amendments also changed the requirements for reporting the
    results of the Chief Inspector's audits and investigations. This work
    is routinely included in my office's Semiannual Report to the Congress.
    In fact, the Semiannual report has specifically included audit reports
    on computer security and browsing of sensitive taxpayer information
    since 1993.
                        ig and chief inspector coverage
        You might be wondering what the Treasury's auditors and
    investigators have done to help tackle this problem. I am pleased to
    say we have done quite a bit, and we plan to do more. IRS internal
    auditors developed the first computer program to show the nature and
    extent of the browsing problem. That program was the impetus for the
    primary system currently used to detect browsing. Since then, the Chief
    Inspector's auditors and mine have continued to monitor and report on
    the IRS' progress in addressing this and other computer security
    problems. The Chief Inspector and I intend to maintain our focus on
    this area.
        Security over tax information has received extensive and continuous
    audit coverage from both the IRS Chief Inspector and my office. While
    the Chief Inspector's work has covered a broad range of data security
    issues, Integrated Data Retrieval System (IDRS) security and employee
    browsing of taxpayer information have been a particular focus.
        The problems with IDRS were first reported by the Chief Inspector's
    office in 1992 in a report issued by the Southeast Region. The internal
    auditors developed computer utility programs which allowed them to
    analyze employee accesses to taxpayer accounts through IDRS and
    identify instances of unauthorized access and taxpayer browsing. In
    1993, the Chief Inspector conducted a nationwide audit which confirmed
    that employee browsing was a nationwide problem that needed immediate
    attention.
        In August 1993, the Senate Governmental Affairs Committee held a
    hearing focused on the Chief Inspector's findings. In response, the IRS
    developed the IDRS Privacy and Security Action Plan. That Plan included
    35 action items to improve security over information processed by IDRS.
    The plan included 10 action items that were the responsibility of the
    IRS Inspection Service.
        In 1994, at the request of Senator Glenn, the OIG reviewed the
    Service's progress in implementing the action plan. In 1996, we
    conducted a follow up review. In the second audit, we found that the
    Inspection Service had successfully completed its 10 Action Plan items
    for helping control IDRS abuse. While the IRS was making progress on
    the rest of the plan, several actions related to a key control
    mechanism, the Electronic Audit Research Log (EARL), were still not
    complete.
        In 1996, the Chief Inspector issued a follow up audit report to
    their 1994 audit of EARL. That report noted that EARL still has only
    limited ability to identify browsing and that IRS had not yet developed
    procedures to assure that potential browsing cases are consistently
    reviewed and referred. These and other issues are currently being
    addressed by the EARL Executive Steering Committee.
        The Chief Inspector and his staff have taken a proactive role in
    assisting IRS management in its efforts to improve security over IDRS.
    For example, the concept for EARL was based in part on the audit
    utility programs developed by the auditors who first identified the
    IDRS browsing problem. Also, the EARL Executive Steering Committee was
    created to respond to problems with EARL identified by the IRS internal
    auditors. A member of the Chief Inspector's staff participates on that
    Committee. The Steering Committee's 1996 report contains numerous
    recommendations to improve the Service's implementation and use of
    EARL.
        Finally, the Chief Inspector's auditors and investigators have
    worked together to identify indicators of abuse and have alerted IRS
    management through periodic Internal Audit Memorandums. Finally, the
    Chief Inspector's investigators have pursued management referrals of
    potential misuse.
        We have reported this work in our Semiannual reports to the
    Congress. Since 1993, we have regularly reported IDRS security
    weaknesses as a major area of concern for IRS. The various audits
    performed by the Chief Inspector have also contributed to raising this
    problem to the level of a material weakness in the Department's Federal
    Manager's Financial Integrity Act Assurance letter.
                                  conclusions
        Since the auditors first identified the problem five years ago, the
    IRS' ability to detect browsing has improved. I believe the continuing
    audits and investigations I have described have had a positive impact.
    But this does not mean we can catch all abuses or scare away those who
    are intent on abusing the system.
        The challenge of protecting taxpayers' information is a difficult
    one, because many IRS employees have a legitimate need to access that
    data in order to perform their assigned duties. Unfortunately, some IRS
    employees have abused this authority. The solutions? As others have
    mentioned, these include monitoring employee activity, educating
    employees, and taking consistent disciplinary action against those who
    abuse the taxpayers' trust.
        What else can be done? Let me return to the three priorities:
        Continued Oversight.--I pledge that my office and that of the IRS
    Chief Inspector will continue to give our attention to this area. We
    welcome the support you have shown in addressing this issue.
        Improved Controls.--Controls in the current IDRS system need to be
    further strengthened so they not only detect, but also prevent abuses.
    In addition, controls are also needed to monitor use of systems not
    covered by detection systems such as EARL. The vulnerability of those
    systems, identified by GAO, need to be evaluated and given appropriate
    management attention. Prospectively, the next generation of systems
    should include controls that prevent, not just detect, unauthorized
    access.
        Stronger Laws.--We need to have laws in place that penalize
    employees who browse taxpayer information. I join the support for
    proposed anti-browsing legislation introduced by Senator Glenn.
        This concludes my remarks. I will be happy to answer any questions
    you may have.

                    Statement of Margaret Milner Richardson

        Senator Campbell. Before we start the questions, I would
    also welcome Ms. Richardson, and thank you for coming. The
    committee understands that you will be leaving Government
    shortly and pursuing other adventures.
        Ms. Richardson. Yes.
        Senator Campbell. We wish you well.
        Ms. Richardson. Thank you very much.
        Senator Campbell. One of the wonderful things will be, you
    do not appear any more.
        Ms. Richardson. I will miss those opportunities.
        Senator Campbell. We will take all of your testimony in the
    record and you are welcome to abbreviate your comments if you
    would like.
        Ms. Richardson. Thank you. Mr. Chairman and Senator Kohl, I
    want to thank you very much for giving us the opportunity to
    come today and talk about the Internal Revenue Service's policy
    toward the unauthorized access of tax information by IRS
    employees. Our policy on the unauthorized access of taxpayer
    information is simple: Employees are prohibited from accessing
    information that is not needed to perform their official tax
    administration duties. They are permitted only to access
    information in order to carry out those duties, and there are
    no exceptions to that policy.

                       Unauthorized Access to Tax Records

        Shortly after I became Commissioner in May 1993, the IRS
    Chief Inspector brought to my attention results of an internal
    audit report that was looking into unauthorized access of
    taxpayer information by IRS employees. Since that time we have
    attempted to determine the scope of the problem, and we have
    also repeatedly emphasized to employees our policy against
    unauthorized access. The appendix to my testimony has a number
    of the communications and information we provided to employees.
        We have tried to educate the employees, and also to enhance
    our efforts to detect and punish those who do conduct
    unauthorized access of taxpayer accounts. I have consistently
    stressed that we will not tolerate unauthorized access of
    taxpayer accounts. Although unauthorized access does not
    involve an unauthorized disclosure outside of the Service by an
    IRS employee of taxpayer information to a non-IRS employee,
    those actions around unauthorized accesses do undermine
    taxpayer confidence in the tax administration system.
        In addition to the written communications to all employees,
    I have emphasized in virtually every meeting, teleconference,
    and every opportunity I have had to speak with employees that
    we cannot and will not tolerate such behavior. We have also
    tried to strengthen and clarify the penalties that would be
    imposed for violating our policy, and we have developed and
    supported legislative changes that would affirm criminal
    penalties for violations.
        As I mentioned, we have taken a number of steps. For
    example, now when an employee logs onto our principal taxpayer
    data base, the integrated data retrieval system you heard about
    earlier, I am sure, a statement warns of possible prosecution
    for unauthorized use of the system. All new users of that data
    base receive training on privacy and security of tax
    information before they are ever entitled to access it. They
    are required to review and to sign an acknowledgement that they
    have read and understand the rules and the penalties for
    violations of the rules.

                          Automatic Security Programs

        We have also installed automatic detection programs that
    would monitor employees' actions and accesses to taxpayers'
    accounts to help us identify patterns of use and alert managers
    to potential misuse. There are about 1.5 billion accesses to
    that data base each year, and only a very small percentage of
    those accesses are potentially unauthorized.
        Our electronic research analyzes the audit trails of each
    of the transactions and it is currently the key to our
    detection. We are continuing to refine that software so that we
    can more efficiently and effectively identify potential
    unauthorized accesses.
        We are also working with state-of-the-art private sector
    organizations with the aim of identifying the feasibility of
    various security prevention systems and the way these companies
    approach managing technology risks. Our ultimate goal is to
    better control access to information through up-front
    authorizations so that we will have to rely less on after-the-
    fact detection.

                               Employee Education

        Since 1993 we have also been engaged in a vigorous campaign
    to let employees know that unauthorized access will result in
    disciplinary action including removal. We have also charged our
    executives with supporting our commitment by making certain
    that they will provide consistency of discipline for
    unauthorized access of taxpayer information within their
    offices, that they will personally ensure that their employees
    receive the required training and orientation in their offices,
    and that they will take the opportunity to communicate our
    policy to explain what IDRS systems monitoring capabilities are
    about and what our policy is.
        In January, we centralized responsibility for all privacy
    and security systems in the Office of System Standards and
    Evaluation. Recognizing the critical need to enforce Federal
    tax law and regulations on privacy and nondisclosure of
    confidential tax information that office was created to assume
    responsibility for establishing and enforcing standards and
    policies for all major security programs, including but not
    limited to data security.
        With me today is Mr. Len Baptiste, who is sitting behind me
    and who is the National Director of that program. He came from
    the General Accounting Office where he had systems evaluation
    management experience and dealt with a number of security
    issues. We also hired William Hadesty to be the Director of
    Security Standards and Evaluation. Mr. Hadesty's private and
    public sector computer security experience includes over 10
    years with the General Accounting Office where he led
    comprehensive computer security reviews at numerous Government
    agencies, including IRS.

                        Disciplining Unauthorized Access

        Although a clear policy of communication and training and
    effective detection are important ways of institutionalizing
    our policies against unauthorized access, we also need strong
    disciplinary and judicial support to reinforce the seriousness
    and the consequences of violating our policy. In pursuing
    strong disciplinary actions before administrative tribunals,
    thus far the results have been mixed. For example, in cases
    where employees have improperly accessed information but not
    used such information for anyone's gain, financial gain or
    their detriment, those cases have not always been viewed by
    third parties as seriously as we believe that they should be.
        Because nothing is more important to the operation of the
    tax system than protecting taxpayer information, I also today
    want to renew my request that Congress clarify the law and
    criminal sanctions. We continue to support the legislation that
    was marked up by the Ways and Means Committee last week and the
    similar legislation that was introduced in the Senate. I
    understand that there will be votes on both of those today and
    I want to indicate again, we do support that and hope they will
    pass.
        The IRS has supported enactment of a criminal misdemeanor
    penalty for the willful, unauthorized inspection of returns and
    return information since it became apparent in 1994 that that
    was one of the features that we would need to make sure that
    our policy was carried out and taken seriously by employees as
    well as outsiders.
        We developed two legislative proposals. The first
    recommended that we amend title 18 of the criminal code so that
    unauthorized inspection of computer records would be punishable
    as a misdemeanor. The second one recommended amending the
    Internal Revenue Code to provide a misdemeanor penalty for the
    unauthorized inspections of returns or return information in
    any medium, not just in computers. Senator Glenn, who I know
    testified earlier, introduced in the 104th Congress the
    Taxpayer Privacy Protection Act. We supported that then, and as
    I hope he indicated, we continue to support that.
        We did, however, get through the Economic Espionage Act of
    1996 which did amend title 18 to provide criminal penalties for
    anyone who accesses a computer. But the reason we feel that the
    legislation that is before Congress today is necessary is that
    we do want to clarify that the criminal sanctions for
    unauthorized access violates the Internal Revenue Code whether
    that information is in a computer or paper format. We also
    would like to have all of the confidentiality scheme respecting
    tax information in the Internal Revenue Code.

                               Extent of Problems

        I have stated in the past and I repeat that a single, any
    single unauthorized access is one too many. But I do believe
    that it is important that we put into context the numbers that
    were recently reported in the press. As I noted, there are 1.5
    billion accesses annually on our data retrieval system. During
    1996, 1,374 cases were identified as potential unauthorized
    accesses. Of that number, upon further investigation 411 were
    determined to have been authorized. Of the remaining 963 cases,
    disciplinary actions were taken in 862 cases, and 101 are still
    under review.
        For example, also during 1995 and 1996, 120 cases were
    referred to U.S. Attorneys for prosecution, 15 were accepted,
    12 were pending, and the rest were declined.
        I want to reaffirm that we do understand as an organization
    the importance of safeguarding taxpayer information, and we
    also understand it is essential to the operation of our self-
    assessment system. As I said, we welcome the legislative
    changes and any other suggestions that you have that will help
    us address the problem of unauthorized access. Prevention is
    our ultimate goal.
        Thank you, Mr. Chairman, and I would be happy to try to
    answer any questions you might have.

                               Prepared Statement

        Senator Campbell. Thank you, Ms. Richardson. We have your
    complete statement and it will be made part of the record.
        [The statement follows:]
                Prepared Statement of Margaret Milner Richardson
        Mr. Chairman and Distinguished members of the Subcommittee. I
    appreciate the opportunity to be here today to discuss the Internal
    Revenue Service's policy toward the unauthorized access of tax
    information by IRS employees.
                                  irs' policy
        The IRS' policy on unauthorized access of taxpayer information is
    simple: IRS employees are prohibited from accessing information not
    needed to perform their official tax administration duties.
    Unauthorized access of taxpayer information violates both privacy and
    disclosure rules. IRS employees are only permitted to access
    information in order to carry out their duties. There are no
    exceptions.
        Shortly after I became Commissioner in May of 1993, the IRS Chief
    Inspector brought to my attention his concerns about unauthorized
    access of taxpayer information by IRS employees. Since that time, we
    have repeatedly emphasized to employees the IRS policy against
    unauthorized access of taxpayer information. (See Appendix.) The
    Service has also adopted procedures to educate employees about the
    policy and to detect and punish unauthorized access of taxpayer
    accounts.
        I have consistently stressed both inside and outside the Service
    that the IRS does not tolerate unauthorized access of taxpayer accounts
    by IRS employees. In addition to written communications to all
    employees, I have consistently emphasized in virtually every meeting,
    teleconference or other opportunity I have had to speak to employees
    that the IRS cannot and will not tolerate such behavior.
        The IRS has strengthened and clarified penalties to be imposed for
    violations of the Service's policy. Warning messages have also been
    added to the ``sign-on'' screens for employees with access to the
    principal database that employees use. Additional steps the IRS has
    taken to prevent unauthorized access include expanding the ability to
    detect unauthorized accesses through the Electronic Audit Research Log
    (EARL) on the Integrated Data Retrieval System (IDRS), sending
    memoranda to all employees reiterating the Service's policy, and
    developing and supporting legislative changes that affirm criminal
    penalties for violations.
        The American federal income tax system is based upon self-
    assessment. Confidentiality of tax returns and tax return information
    is part of the foundation of the self-assessment system. Public
    confidence that the personal and financial information given to the IRS
    for tax administration purposes will be kept confidential is vital to
    that system. Although unauthorized access might not involve
    unauthorized disclosure by an IRS employee of taxpayer information to a
    non-IRS employee, such actions can undermine taxpayer confidence in the
    tax administration system.
                                  irs actions
        Since 1993, the IRS has taken a number of steps to ensure that
    unauthorized access of taxpayer information by IRS employees does not
    occur. For example, each time an employee logs onto the taxpayer
    account data base (IDRS), a statement warns of possible prosecution for
    unauthorized use of the system. (See page 29 of Appendix.) All new
    users receive training on privacy and security of tax information
    before they are entitled to access the IDRS. They are required to
    review and sign an acknowledgment that they have read and understand
    the Automated Information Systems (AIS) Security Rules. (See pages 30
    and 31 of Appendix.) The Service has also installed automated detection
    programs that monitor employees' actions and accesses to taxpayers'
    accounts, identify patterns of use, and alert managers to potential
    misuse.
        The EARL system, which detects potential unauthorized accesses by
    analyzing the audit trails of each of the transactions on IDRS, is
    currently the key to detection. Because of the volume of transactions--
    about 1.5 billion annually--and the extremely small percentage of
    potential unauthorized accesses, the Service continues to refine the
    EARL software to more efficiently and effectively identify such
    potential unauthorized accesses. The IRS is also contacting ``state-of-
    the-art'' private sector organizations with the aim of identifying the
    feasibility of various security ``prevention'' systems and their
    approaches to managing technology risks. This approach will enable the
    Service to better control access to information through ``up front''
    authorizations and ultimately rely less on after-the-fact detection.
    The feasibility of monitoring potential unauthorized accesses on
    systems other than IDRS that can be used to access taxpayer data is
    also being assessed. In this regard, the IRS has initiated efforts to
    contract for feasibility assessments of all systems that are used to
    access information (e.g., the Integrated Collection System and the
    Totally Integrated Examination System) to monitor the full extent of
    unauthorized accesses of taxpayer information beyond IDRS and develop
    both prevention and detection measures.
        Administratively, since 1993, the IRS has been engaged in a
    vigorous campaign to let employees know that unauthorized accesses will
    result in disciplinary action, including removal from the Service. As
    recently as last month, I issued a memorandum to all executives and
    employees stating:

            Unauthorized access to accounts, absent mitigating
            circumstances, is serious misconduct and would normally warrant
            removal. It is also a violation of 18 USC 1030 (fraud and
            related activity in connection with computers), which can
            result in criminal prosecution. (See page 2 of Appendix.)

        At the same time, IRS executives were charged to support the
    organization's commitment to taxpayer privacy and the security of tax
    data by:
      --Assessing personally on a periodic basis the consistency of
            discipline for unauthorized access of taxpayer information
            within their offices. Electronic Audit Log Research cases will
            now be sent directly to Heads of Offices, either initially or
            after investigation by Inspection for appropriate review and
            action.
      --Personally ensuring that employees receive the required training
            and orientation within their offices; and
      --Personally taking every opportunity to communicate the Service's
            expectations, and to explain IDRS systems monitoring
            capabilities, to all their employees. (See page 4 of Appendix.)
        In January, the Service centralized responsibility for all privacy
    and systems security issues in the Office of Systems Standards and
    Evaluation (SSE). Recognizing the critical need to enforce federal law
    and regulations on privacy and non-disclosure of confidential tax
    information, SSE was created to assume responsibility for establishing
    and enforcing standards and policies for all major security programs
    including, but not limited to data security. In this regard, SSE
    provides IRS with a proactive, independent security group that is
    directly responsible for the adequacy and consistency of security over
    all IRS operations.
        Mr. Len Baptiste was appointed as the National Director of SSE. His
    past GAO systems evaluation management experience, including security
    issues, will provide the leadership needed to carry out his new duties.
    In March 1997, Mr. William Hadesty was appointed as SSE's Director of
    Security Standards and Evaluations. Mr. Hadesty's private- and public-
    sector computer security experience includes over 10 years with the
    General Accounting Office where he led comprehensive computer security
    reviews at numerous government agencies, including his review of IRS
    facilities.
        Although a clear policy, communication and training, and effective
    detection are important ways of institutionalizing a policy against
    unauthorized access, strong disciplinary and judicial support are
    essential to reinforce the seriousness and consequences of violating
    the policy. In pursuing strong disciplinary actions before
    administrative tribunals, the results thus far have been mixed. For
    example, the cases in which employees have improperly accessed
    information, but not used such information for anyone's gain or
    detriment, financial or otherwise, have not always been viewed as
    seriously as we believe they should be.
        Because nothing is more important to the operation of the tax
    system than protecting taxpayer information, I want to renew my request
    that Congress clarify the law on criminal sanctions. The IRS continues
    to support the legislation marked up by the House Ways and Means
    Committee last week and similar legislation introduced in the Senate
    which would do just that.
        The IRS has supported enactment of a criminal misdemeanor penalty
    for the willful, unauthorized inspection of returns and return
    information since 1994. In fact, in 1994, the IRS developed two
    legislative proposals on this issue. The first proposal recommended
    amending Title 18, the Criminal Code, so that unauthorized inspection
    of computer records would be punishable by a misdemeanor. The second
    proposal recommended amending the Internal Revenue Code to provide a
    misdemeanor penalty for unauthorized inspection of returns or return
    information in any medium.
        In response to the IRS' request for legislation, Senator Glenn
    introduced S. 670, the ``Taxpayer Privacy Protection Act,'' during the
    104th Congress. It provided a misdemeanor penalty for unauthorized
    inspection. Unfortunately, Congress did not pass that legislation.
    However, Congress did pass, and the President signed, the Economic
    Espionage Act of 1996 (Public Law 104-294). This Act amended Title 18
    to provide criminal penalties for anyone who intentionally accesses a
    computer without authorization, or exceeds authorized access, and
    thereby obtains information from any department or agency of the United
    States (18 USC 1030(a)(2)).
        Because the Economic Espionage Act applies only to unauthorized
    access of computer records, the IRS continued to seek legislation
    clarifying the criminal sanctions for unauthorized access or inspection
    of tax information in section 7213 of the Internal Revenue Code--
    whether that information is in computer or paper format--and ensuring
    that the entire confidentiality scheme respecting tax information and
    related enforcement mechanisms would be appropriately found in the
    Internal Revenue Code. Therefore, the IRS has worked with the staff of
    the Senate Governmental Affairs Committee to help develop the
    ``Taxpayer Privacy Protection Act'' introduced on April 8, 1997, by
    Senator Glenn. Similar legislation was introduced in the House of
    Representatives.
        The House bill would apply to the unauthorized inspection of paper
    returns and related tax information. By clarifying the criminal
    sanctions for unauthorized inspection of tax information in section
    7213 of the Internal Revenue Code, whether that information is in
    computer or paper format, the entire confidentiality scheme respecting
    tax information and related enforcement mechanisms would be found
    appropriately in the Internal Revenue Code. The Service fully supports
    such an amendment and believes that it would serve important tax
    administration objectives.
        While I have stated in the past that one unauthorized access is one
    too many, I believe it is important to put the numbers that were
    recently reported in the press into some context. There are 1.5 billion
    accesses annually on IDRS. During fiscal year 1996 there were 1,374
    cases that were identified as potential unauthorized accesses. Of that
    number, upon further investigation, 411 were determined to have been
    authorized. Of the remaining 963 cases, disciplinary actions were taken
    in 862 cases and 101 are still being reviewed.
        I want to reaffirm that the Internal Revenue Service understands
    that safeguarding taxpayer information is essential to the operation of
    our country's self-assessment system. The Service welcomes the proposed
    legislative changes and hopes that you will assist us in addressing the
    problem of unauthorized access.
        Mr. Chairman, this concludes my statement. I would be happy to
    respond to any questions.

        [Clerk's note.--The appendix to Ms. Richardson's statement will not
    appear in the record, but is available for review in the subcommittee's
    files.]

                             Zero Tolerance Policy

        Senator Campbell. You have a zero tolerance policy. I would
    like you to explain this report of the disciplinary action
    taken. It says different numbers, but in 1995, 7 percent were
    cleared, 33 percent were closed without action. Does cleared
    mean somebody accused them of it and they did not really do it?
    Clarify that for me.
        Ms. Richardson. Yes; I apologize, could I also introduce
    David Mader who is the Chief of Management and Administration
    who is here with me today and who really oversees the
    disciplinary actions of employees and the employee relations
    part of the organization.
        Senator Campbell. OK, 33 percent were closed without
    action. What does that mean, there was not enough evidence?
    What is the difference between cleared and closed without
    action?
        Mr. Mader. Mr. Chairman, the difference is on cases that
    are cleared there is no indication whatsoever that there was
    any inappropriate activity. On closed without action, the
    circumstances are not as clear and it is impossible for
    management to make a judgment as to whether the infraction
    occurred or did not occur.
        Senator Campbell. If they were cleared and there was no
    indication they were doing anything wrong, how did their names
    come up in the first place?
        Ms. Richardson. The electronic audit trail that we have
    really analyzes all of the--we have an audit trail for every
    access. But where there appear to be patterns, they will kick
    out a name and then they will manually have to be looked at to
    see whether or not the employee had authority to be in the data
    base.
        Senator Campbell. Under a zero tolerance policy, does that
    mean a first-time offender--because I notice you have some
    counseling--a first-time offender means they are out?
        Ms. Richardson. I am sorry, means they are?
        Senator Campbell. Under zero tolerance policy, does that
    mean the first time that they are accused and there is
    sufficient evidence, they are gone? They are fired or they are
    moved out.
        Ms. Richardson. In cases where we have tried to take very
    severe action the first time, we have had difficultly having
    that activity sustained in arbitration because of the
    mitigation factors. One of the things that we appreciate about
    the legislative history, that is with the bills that are being
    marked up, is an indication that those mitigation factors do
    not have to be taken into account in every single instance and
    that the presumption could be in favor of firing with
    mitigation to follow afterward, as opposed to having to start
    with progressive discipline which is typically the way the
    Federal personnel disciplinary system works. You are not
    typically fired for a first offense.
        Senator Campbell. It was reported that some employees who
    were browsing, snooping, they did not think it was wrong. I am
    sure they would think it was wrong if they were snooping around
    somebody's house, but they do not seem to recognize that it is
    the same thing. In the standards that the IRS has are there
    different standards that would allow people to assume that it
    was not wrong? I mean, could it be innocently done.
        Ms. Richardson. I cannot imagine how anybody could not
    understand today that it is wrong. It has been very clear--we
    have articulated it very clearly and without any equivocation.
    I did see a recent broadcast, with a former employee I might
    add, and despite the statement made--and I do not know
    firsthand why he would have concluded it was not wrong--but
    certainly in our efforts to prosecute him I assume he learned
    that it was wrong. But----

                          Safeguards Against Browsing

        Senator Campbell. Well, under our system of justice he will
    probably write a book and get royalties.
        Mr. Mader. Mr. Chairman, if I could. The Commissioner
    mentioned some attachments to her testimony, and each employee
    that we put on these systems signs a form that acknowledges
    they understand the rules and regulations. If you would bear
    with me, I would just like to read a couple of those sentences.
        Senator Campbell. When they sign that form--let me ask you
    first, do they go through a seminar or some kind of instruction
    or something before?
        Ms. Richardson. Before anybody is ever authorized to access
    the system in the first place they have to be trained on the
    system, and part of the training includes understanding the
    privacy and disclosure rules and the authorization----
        Mr. Mader. And then they need to sign this form. I would
    like to quote from this form.

        I have read the automated information systems security
    rules on the reverse side of this form and understand the
    security requirements of the automated information systems and/
    or applications described on this form. I understand
    disciplinary action, removal from the Service, and/or criminal
    prosecution may be taken based on violation of these rules.

        Each and every employee who accesses these systems has to
    sign that. I do not know how clear----
        Senator Campbell. They go through that once, or are there
    refresher courses, or they do that periodically?
        Mr. Mader. When they go on the system initially they, as
    the Commissioner mentioned, they have to sign this form and we
    maintain this form. Then there are periodic refresher and group
    meetings in which we continually reemphasize the privacy and
    security requirements of the Service.
        Ms. Richardson. Plus, as they sign on to the system each
    day there is a warning message on the system that indicates
    that unauthorized accesses will be subject to criminal
    prosecution.
        Senator Campbell. There is a clear explanation of the law?
        Ms. Richardson. Very clear.
        Mr. Mader. Yes.

                                Repeat Browsing

        Senator Campbell. Under the chart I have, 32 percent--this
    year, 1995, the last year this was recorded, 32 percent were
    counseled. Of that, do you know what number did repeat
    browsing?
        Mr. Mader. I do not know. I could submit that for the
    record.

                           Tax Systems Modernization

        Senator Campbell. Senator Kohl, if you would like to ask a
    couple of questions, I will try to think of a couple more here.
        Senator Kohl. Thank you.
        Commissioner Richardson, when we met yesterday you
    emphasized that the $3 billion that has been talked about as
    having been wasted in the tax systems modernization effort is
    not accurate; that there is a better and a clearer explanation
    that should be on the record. Would you like to take the time,
    along with your associate, to describe that a little bit today?
        Ms. Richardson. Certainly, Senator Kohl. I will also be
    happy to provide in more detail for the record where the moneys
    have been spent. I believe about $3.3 billion has been
    appropriated over a 10-year period for the tax systems
    modernization project. Our Chief Information Officer, Arthur
    Gross, testified at our appropriation hearing in the House and
    I know he will be here later on when you have the appropriation
    hearing to talk more specifically.
        But he indicated that based on a review that we have
    conducted in the last 6 months that about $400 million of the
    $3.3 billion over the 10-year period was devoted to
    noncontinuing projects; to projects that we have abandoned
    either because they no longer will provide what we had hoped
    they would do, or we cannot afford them, various things like
    that. So the number that relates to things that we are no
    longer using or planning to use is about $400 million.
        Of the $3 billion, we have spent quite a bit of that money
    on telecommunications infrastructure, site preparation in some
    of the service centers for upgrading our technology. I think I
    mentioned to you yesterday that we have this year over 4
    million who filed their tax returns by telephone. We now have a
    web site that has been visited over 100 million times since the
    first of the year, and we are able to route our telephone calls
    more effectively around the country.
        So this filing season we are, hopefully, still at about 70,
    over 70 percent of the callers are being serviced. We have been
    able to do that at a time when we have moved from 70 telephone
    sites and 44 geographic areas to about 31 sites on our way down
    to 23. That has been made possible because of the upgrades to
    the telecommunications technology that we have employed that
    allow us to route the calls around the country and manage our
    traffic better.
        Senator Kohl. Would you describe the TSM project, the tax
    systems modernization? That is a phrase that describes the
    investments that have been made over the past 10 years to
    modernize, upgrade, the IRS system to get it ready for tomorrow
    and the future. That is what this is all about.
        Ms. Richardson. That is what it is all about. We definitely
    need to modernize our technology. We are working on a plan
    right now, or are putting the finishing touches on a plan that
    hopefully will put in place an infrastructure and an
    incremental program that we can implement over the next few
    years that will help us provide better customer service and
    better compliance because we will have better access to
    taxpayer information.
        Now that poses an additional issue or concern about the
    issue we are talking about here today, and that is how to
    protect that information. So one of the things that we are very
    concerned about, and one of the things that Mr. Baptiste and
    his colleagues were working on is our security architecture as
    well so that we can protect that information.

                           IRS Treatment of Browsers

        Senator Kohl. Let me ask you this question. Do you think
    with respect to the browsing problem which has now mushroomed
    and become something of a scandal, do you think that the IRS
    has been tough enough in trying to deal with those who are
    accused of browsing? If you had it to do over again, would you
    be tougher?
        Ms. Richardson. First, I think we need to put into
    perspective the notion that it has mushroomed. One of the
    things that I have learned, not just about this issue but about
    our efforts along with refund fraud, is that because we are
    detecting fraud or detecting a problem and the numbers are
    going up over some period of time does not necessarily mean
    that there are more instances. It may mean that you have better
    detection.
        I believe in this case that that is exactly what the issue
    is. That we have a more effective way today of detecting the
    unauthorized access than we have ever had before. In fact,
    before 1993 we really had nothing except the reliance on people
    I guess reporting----
        Ms. Lau. Like internal auditors.
        Ms. Richardson. Internal audit reports or people who would
    perhaps report something based on what their fellow employees
    were doing. We now have some automated systems that really aid
    us in detecting the unauthorized browsing. I do not think it is
    accurate to say that the instances have mushroomed. I think
    that we are better and wiser about detecting it.
        I think that there are instances where I believe we
    probably should have taken or imposed tougher penalties. I do
    not know every specific instance. There are cases where
    mitigating instances have entered into it. But we have also
    taken some very tough actions and been thwarted in those
    actions in the courts--there are two very well known cases that
    have gotten publicity where we have prosecuted people. One
    where a jury acquitted the person because there was no
    financial gain or any other type of gain. The other was
    recently overturned by the second circuit because again, they
    felt the statutory basis for a criminal prosecution was not
    clear.
        That sends a very strong message to the people who are
    trying to impose discipline both in the administrative process
    as well as within our organization, that maybe people on the
    outside are not taking our efforts as seriously as they could.
    That is, again, why we support this legislation.

                      Qualifications for Next Commissioner

        Senator Kohl. Last question. Mrs. Richardson, with respect
    to your successor what are the qualifications, the three or
    four most important qualifications that we should look for in
    your successor?
        Ms. Richardson. I have often said probably the most
    important qualification is a sense of humor. But I also think
    that someone who has a lot of energy, who understands tax
    administration is terribly important. I think having management
    capabilities as well as experience is very useful as well. But
    I think that you also have to understand that this is a
    different environment that we are operating in in the
    Government. People like to say the Government should be run
    like a business, but there are some restrictions on people
    operating in the Government environment that are not always
    present in a business. I think those have to be taken into
    account as well.
        We have a check and balance system with Congress in its
    oversight of an agency. But we also sometimes, as a result,
    have a board of directors of 535 people who may one day think
    that the priority should be compliance, and the next day
    customer service. There is a certain amount of schizophrenia, I
    think, among the people who have to deal in that environment.
    Frequently in the private sector your board of directors and
    you can establish the priorities for an organization and then
    move to try to accomplish those, your priorities. You do not
    always get to do that in a Government environment. I think
    understanding that will alleviate any frustrations that my
    successor might have, too.
        Senator Kohl. Thank you, Ms. Richardson.
        And thank you, Mr. Chairman.

                            Punishment for Browsing

        Senator Campbell. Before I ask a question or two of Ms. Lau
    I wanted to get back just to one or two things you said. When
    you go through these charges, who is responsible for assessing
    the punishment? If it is criminal, are you to refer that to
    Justice, or how do you handle that?
        Ms. Richardson. Yes; if it is a criminal referral, it would
    be reviewed by our Chief Counsel's office and then referred to
    the Justice Department for further review.
        Senator Campbell. But if it is counseling, you do not do
    anything with Justice then?
        Ms. Richardson. Correct. If it is through the
    administrative process, the Justice Department is not really
    involved. We have for employees who are bargaining unit
    employees--I mean, that are represented by the union--they have
    the ability to go to arbitration over a disciplinary action.
        Senator Campbell. You also talked at some length about
    upgrading the devices that would identify browsing. This
    probably will be done after you leave. Do you have a timeframe
    that you think this might be done?
        Ms. Richardson. We are constantly working on ways to refine
    the audit trail system we have in place. But I think that the
    real key to being able to ultimately prevent people from
    getting in at all except on an authorized basis, the timetable
    for that really awaits our reconstructed data base as part of
    our tax systems modernization project. That is several years
    down the road.
        Senator Campbell. Several years you said?
        Ms. Richardson. Several years.
        Senator Campbell. Thank you. I appreciate your appearing. I
    know you were a little pressed for time this morning.

                         Role of the Inspector General

        Ms. Lau, could you explain your role in the investigation,
    since your office is really responsible for investigating waste
    and fraud and abuse? What was your relation to the
    investigations?
        Ms. Lau. Related to these IDRS browsing issues?
        Senator Campbell. Yes.
        Ms. Lau. One of the points that is in my written testimony
    is the statutory structure of my office in relation to the IRS.
    The IRS retains its own internal audit and internal
    investigative function. For most of these browsing cases, any
    involving criminality that would require further investigation
    would have been conducted by the Chief Inspector's office. My
    office has oversight responsibility for the Office of the Chief
    Inspector Treasury and investigative responsibility over senior
    Treasury officials and any Chief Inspector employees who might
    be involved.
        Senator Campbell. Does your office have any input on the
    counseling or policywriting or any of that with the IRS?
        Ms. Lau. No; as a matter of course, we would not be
    involved in that aspect of their program.
        Senator Campbell. I think we will end up there. I have
    about half a dozen written questions I would like to submit to
    both of you. If you would get back to us with those for the
    committee, I would appreciate it.

                              Reasons for Browsing

        One other thing maybe, Ms. Lau. Did you see any kind of a
    common theme? I have heard today some people browse relatives,
    celebrities, political opponents, something of that nature. Did
    you spot anything that could be perceived as a theme?
        Ms. Lau. I am sorry, I am not aware of any particular
    themes, but I would be happy to provide something for the
    record if we have identified such.
        Senator Campbell. Clearly, most of them did not do it
    because they were bored. They did it with some kind of intent
    apparently. Even though they might not have thought it was
    wrong, it was not accidental.
        Ms. Lau. I think the reasons surely vary, as the
    dispositions of the cases would indicate.
        Ms. Richardson. Mr. Chairman, in many cases people are
    doing it for reasons they think are perfectly fine; they are
    helping a neighbor locate a former spouse or something like
    that. That is still unacceptable and cannot be done. So many of
    the cases are not just for idle curiosity but where people
    think they are actually performing a service; checking on a
    refund for a friend or neighbor just to make sure that it had
    not gotten misplaced.
        Senator Campbell. So when they do that, that is not
    supervised or cleared by a supervisor?
        Ms. Richardson. They are not authorized to be in the system
    to look at anything other than an official case to which they
    have been assigned. So if you were to ask if we could check on
    the status of your refund, that would not be appropriate. You
    can call a number and have it checked on, but you could not
    directly ask an IRS employee just to do that. If they looked
    into the system that would be considered browsing or the
    unauthorized access.
        Senator Campbell. That is gratifying to know. A few years
    ago I cosponsored the taxpayers' bill of rights and got audited
    about 2 weeks later. I know there was no connection, of course.
        Ms. Richardson. If we were that efficient, I would be very
    surprised.

                              Submitted Questions

        Senator Campbell. I do appreciate you appearing today, and
    thank you very much. If you would both get back to us on the
    written questions, the subcommittee would appreciate that.
        [The following questions were not asked at the hearing, but
    were submitted to the Department for response subsequent to the
    hearing:]
                    Questions Submitted by Senator Campbell
                                 current policy
        Question. You've told GAO that you became aware of the browsing
    issue in 1993 and had taken steps to educate IRS employees to the
    illegality of the snooping. Do you believe that these measures have
    been effective?
        Answer. In 1994, we developed mandatory training programs for
    managers and employees who had access to confidential taxpayer
    information. These materials fully covered the importance of only
    accessing taxpayer information employees had a need to review in
    connection with their tax administration responsibilities and covered
    the fact that the Service would not tolerate unauthorized access. We
    also provided one hour of time for all employees to review the
    ``Interim Handbook of Employee Conduct and Ethical Behavior'', Document
    9335 (11-94). This Handbook covered the Declaration of Privacy
    Principles, which discussed access to tax information: ``Principle 8:
    Browsing, or any unauthorized access of taxpayer information by any IRS
    employee, constitutes a serious breach of the confidentiality of that
    information and will not be tolerated.''
        Although these actions have been effective to a large degree,
    strong disciplinary and judicial support are essential to reinforce the
    seriousness and consequences of violating the policy. In pursuing
    strong disciplinary actions before administrative tribunals, the
    results thus far have been mixed. For example, the cases in which
    employees have improperly accessed information, but not used such
    information for anyone's gain or detriment, financial or otherwise,
    have not always been viewed as seriously as we believe they should be.
        Because nothing is more important to the operation of the tax
    system than protecting taxpayer information, I want to renew my request
    that Congress clarify the law on criminal sanctions. The IRS has
    supported enactment of a criminal misdemeanor penalty for the willful,
    unauthorized inspection of returns and return information since 1994. I
    support the ``Taxpayer Privacy Protection Act'' introduced by Senator
    Glenn on April 8, 1997 and similar legislation introduced in the House
    of Representatives.
        Question. It has been reported that there are some employees who
    snooped and never thought it was wrong--I don't know if that scares
    you, but it should because it sure scares the taxpayers. Can you
    comment?
        Answer. As I responded in the last question, since 1993, the IRS
    has taken a number of steps to ensure that unauthorized access of
    taxpayer information by IRS employees does not occur. However, it is
    essential that we have strong disciplinary and judicial support to
    reinforce the seriousness and consequences of violating the policy.
        Question. Aside from the memorandums that the employees receive, do
    they receive any seminars or other instruction which explains the law
    to them and the consequences of browsing?
        Answer. In each of our training courses for IDRS users we
    incorporate the materials on ethical principals and privacy of taxpayer
    information in the course book and instructor guide for mandatory
    coverage in the training session. They are required to review and sign
    an acknowledgment that they have read and understand the Automated
    Information Systems (AIS) Security Rules. We are in the process of
    fully publicizing our updated IDRS users training materials (revised in
    fiscal year 1996) for managers and employees and the requirements for
    its use. A videotape also accompanies the training materials which
    outlines in detail what accounts employees can access and the
    ramifications of accessing unauthorized data. We are also examining
    other methods to publicize our intolerance of any unauthorized access
    of information by employees or managers.
        Question. Are these seminars mandatory in attendance?
        Answer. Yes they are. Any manager who has employees who has access
    to data must attend the Manager's seminar and employees receive
    training either as a separate module or as a module incorporated into
    the training materials dealing with access to the data. As employees
    receive different modules dealing with access to information they must
    go through the materials again.
        Question. What is the IRS' policy regarding those individuals
    who've been identified as browsing if they are caught browsing again?
        Answer. On March 14, 1997, memos from the Commissioner and the
    Deputy Commissioner were sent to all employees and to all executives to
    reconfirm the IRS Policy on unauthorized accesses. The memo to all
    executives stated that we will discipline those who abuse taxpayer
    trust up to removal and including prosecution. There is no question
    that substantiated unauthorized access and disclosure are among the
    most serious breaches of trust with the taxpaying public that a Revenue
    Service employee can commit. Although, pursuant to the penalty guide, a
    range of administrative penalties can apply, the appropriate managerial
    response to any unauthorized access, absent any mitigating
    circumstances, is a proposal to remove.
        Question. Can you provide the subcommittee with the numbers of IRS
    employees that have been caught browsing more than once? If you are
    unable to provide the subcommittee with this information, please state
    why the information is unavailable.
        Answer. Although this information is embedded in the Automated
    Labor and Employee Relations Tracking System (ALERTS) it is not
    captured in this format and there is no easy way to retrieve it at this
    time. We are forming a task group to retrieve, analyze and compile this
    data.
                               irs accountability
        Question. Ms. Richardson, can you please provide for the committee
    how you intend to change the approach to the browsing problem since the
    IRS efforts have not been effective?
        Answer. The IRS is reexamining system security looking at ways to
    tighten administration of discipline and improving employee education.
    We intend to centralize systems security and expect to be making
    substantial improvements over the next few years.
        In the long run the best approach to dealing with browsing and
    other security risks is to implement the modernization blue-print which
    provides modernized controls over security accesses. The IRS is
    reexamining system wide security in the context of developing the
    overall modernized architecture. This approach will enable the Service
    to better control access to information through ``up front''
    authorizations and ultimately rely less on the after-the-fact
    detection. In the interim, the feasibility of monitoring potential
    ``browsing'' on other systems that can be used to access taxpayer data
    is being assessed.
        I want to reaffirm that the Internal Revenue Service (IRS) has long
    understood that safeguarding taxpayer information is essential to the
    operation of this country's self-assessment income tax system. That is
    why for many years the IRS has had in place policies and practices to
    protect the security and confidentiality of taxpayer information.
        Question. Can you tell me why there is an inconsistency in the
    application of punishment when browsing has been confirmed?
        Answer. Indeed there is a spectrum of discipline Servicewide which
    can be attributed to a number of factors. Discipline is administered at
    the local level in accordance with the Penalty Guide. The local office
    determines the severity of the infraction and then relies on
    established practices and the relevance of aggravating and/or
    mitigating factors (i.e., the nature and seriousness of the offense,
    the disciplinary record and the consistency of the penalty with those
    imposed upon other employees) commonly known as the ``Douglas''
    factors. This constellation of factors makes every case unique and
    therefore requires the application of different penalties. We do intend
    to institute some form of National Office coordination to ensure that
    discipline across the nation is administered as evenly as possible.
                               fixing the problem
        Question. Do you have a plan in place to secure taxpayers'
    electronic files from browsing? Please submit for the record.
        Answer. Yes. The IRS is just finishing a new architecture for
    modernization along with a sequencing plan to describe how this
    functionality will be delivered. Within the architecture and sequencing
    plan, security and privacy have been addressed ``head on'' by a solid
    top-down design to prevent unauthorized employee activity and to detect
    anomalies or suspicious trends in employee activity. The new security
    architecture is designed to audit all activity which attempts accesses
    to taxpayer data. Additionally, a replacement for our current
    Electronic Audit Research Log (EARL) is being designed. The replacement
    will utilize advanced data mining techniques and examine more systems
    to detect trends of unauthorized activity.
        Question. When do you expect to have this plan implemented?
        Answer. These systems will be designed and deployed as part of the
    new architecture. Specific dates have not yet been determined. The EARL
    replacement may precede the first release of the modernized
    architecture, in order to increase our ability to detect unauthorized
    accesses on a wider range of systems. However, the replacement system
    will be developed in compliance with the new architecture.
        Question. Time line and cost for this plan?
        Answer. From the starting date of these projects, it is expected
    that these efforts will take approximately 48 months to build and
    deploy. The EARL replacement could be completed in 24 months. Final
    cost estimates have not been determined. These estimates, however,
    depend on the availability of appropriations.
        Question. Which department would be responsible for this
    implementation?
        Answer. Information Systems will be responsible for these efforts.
        Question. In your estimation, does your current computer system
    provide an adequate level of protection?
        Answer. Our current systems do provide some protection but improved
    levels of protection are needed.
        Question. Can it be modified to include those systems which it does
    not currently monitor or would it require a new system?
        Answer. We are currently examining opportunities and methods, which
    are not cost prohibitive, to increase the prevention and detection
    capabilities contained within our current systems.
        Question. If a new system's needed in order to secure files, do you
    have any information for the subcommittee that details what would be
    needed to secure taxpayer files?
        Answer. We are examining technologies such as file and password
    encryption and digital signatures using products such as RSA, Secure
    Sockets Layer, and S/MIME.
        Question. Has IRS made any computer-based security improvements
    over the last ten years to limit the browsing of taxpayer files?
        Answer. Yes. The IRS has made significant effort to deter browsing
    and to detect such activities. Efforts have included employing
    education and increased manual and automated audit analysis.
        Question. Will computer security improvements be part of the
    architecture that you are planning to submit to Congress in mid-May?
        Answer. Yes. The architecture will define an environment rich in
    identification and authentication (Identification and Authentication);
    access control; auditing and audit analysis; and public-private key
    encryption. Significant focus will be placed on real-time prevention of
    unauthorized employee activities which is augmented by a robust after-
    the-fact detection of unauthorized activity through a comprehensive
    audit analysis and reporting process.
        Question. Were these improvements developed in-house by IRS or did
    you contract out your systems security?
        Answer. Improvements made to date were developed by a combination
    of IRS security analysts in close coordination with the Integrated
    Support Contractor (ISC). Similarly, the new architecture was a joint
    effort between IRS architects, engineers, technical management and
    their ISC counterparts.
        Question. Did the IRS look into purchasing security programs that
    were already available commercially?
        Answer. Yes. In the past few years, coincidental with the open
    encryption standards, significant industry strides have been made with
    commercial off-the-shelf products which provide much of the
    functionality demanded by valid IRS requirements.
        Question. Were any of these improvements made as part of the TSM
    project?
        Answer. Yes. Version 1.0 and 2.0 of the formal Infrastructure
    design includes security design guidance which improves the existing
    security baseline.
                        ig investigation of irs snooping
        Question. Can you explain your role in the investigation of those
    employees which have snooped into taxpayer files, since your office is
    responsible for investigating issues of waste, fraud, and abuse?
        Answer. The first level of responsibility to evaluate indications
    of improper employee access rests with IRS management. Once indications
    of potential abuse have been identified, management then needs to do
    further work to determine if accesses are for legitimate business
    purposes or are improper browsing activity. If they determine that
    curiosity browsing has occurred, they coordinate with their labor
    relations staff and determine the appropriate disciplinary action to
    take. If there are indications of more serious misuse of taxpayer
    information, then the case is referred to the Chief Inspector's Office
    for investigation of any IRS employee below the senior management level
    (GS-14 and below). The Chief Inspector has primary internal
    investigative authority for IRS employees. However, my office oversees
    the IRS Inspection's investigative, as well as internal audit,
    operations. If the browsing involves senior IRS officials or a member
    of the Chief Inspector's Office, we will conduct the investigation.
    Since taxpayer browsing and other illegal activity on electronic files
    is primarily committed by lower graded IRS employees my office
    typically will not conduct the investigation.
        Question. At what point do these cases come to your office?
        Answer. My office would be involved in a browsing case where the
    suspected browser was an IRS senior management employee (GS-15 and
    above) or a member of the IRS Chief Inspector's staff, or in any
    browsing case having broad impact or far reaching implications.
        Question. Is there any information which the IRS is currently
    unable to provide you which would help you in working on these cases?
        Answer. There have not been many cases involving employee browsing
    that would have met the criteria to fall under my jurisdiction. Most
    cases involve IRS employees who, by virtue of their position, have
    access to taxpayers' accounts. Generally, senior level managers do not
    perform those types of tasks that would require their personal entry
    into the Integrated Data Retrieval System (IDRS). Therefore, the
    potential for this kind of violation reaching my office is minimal.
    Theoretically, there is no information in the possession of the IRS
    relative to this subject which cannot be shared with the Office of
    Inspector General. The Inspector General's authority for accessing
    confidential tax information in the possession of the Service is
    section 6103(h) (1) of the Internal Revenue Code and section 8C of the
    Inspector General Act of 1978, as amended.
        Question. In your opinion, of the browsing cases that have occurred
    can (you) explain why 33 percent of the employees are counseled and
    only 1 percent are separated?
        Answer. First, there is some apparent discrepancy in the statistics
    cited in your question and the information my office has obtained. We
    reviewed the IRS Commissioner's testimony of April 15, 1997 and the
    accompanying appendices that show the disposition of unauthorized
    access cases. According to that information, of the confirmed browsing
    cases in fiscal year 1996, 41 percent of employees were given oral or
    written counseling. Another 12 percent were separated (i.e., removed,
    resigned or retired). There is no doubt that the IRS needs to do a
    better job in taking action against employees who abuse the system. The
    issue of consistent application of disciplinary action has been
    reported as a problem in reports issued by the Chief Inspector and GAO.
    One further point regarding the 41 percent of employees who were
    counseled. It would be incorrect to assume that actual misuse was
    confirmed in these type cases. In some situations, employees were
    detected doing celebrity browsing or accessing ex-spouses, friends or
    family members' returns, and it was a first-time offense. Also, there
    are other cases where improper access is preliminarily indicated but
    management could not conclusively determine whether improper browsing
    occurred and therefore did not have a basis for taking action.
        Question. Do you believe IRS has a ``zero tolerance'' policy?
        Answer. I wholeheartedly endorse the Commissioner's policy and
    position on unauthorized accesses. IRS employees should only be
    permitted to access information in order to carry out their duties--
    with no exceptions. Although one unauthorized access is one too many,
    it is important to frame this issue with some contextual information.
    There are approximately 55,000 IRS employees who are granted access to
    the IDRS. IRS has reported that there are 1.5 billion accesses annually
    on the IDRS of which a small percentage involve potential unauthorized
    accesses. These are subsequently reviewed by IRS management to
    determine the extent and degree of possible misuse of taxpayer
    information. Of those remaining confirmed browsing cases, existing
    administrative procedures can require the IRS to use a progressive
    discipline system when dealing with bargaining unit employees. Also,
    pursuing strong disciplinary actions before the courts have produced
    mixed results. I believe the ``zero tolerance'' policy could be greatly
    enhanced by the proposed anti-browsing legislation introduced by
    Senator Glenn.
        Question. Who is ultimately responsible for addressing browsing
    issues within your office?
        Answer. My Office of Investigations would conduct investigations of
    any IRS senior level or Inspection employee involved in taxpayer
    information browsing. The Office is headed by the Assistant Inspector
    General for Investigations who reports to my Deputy Inspector General.
    Additionally, the Offices of Audit and Oversight routinely look at this
    issue from a program effectiveness perspective.
        Question. As a result of your work on the browsing issue, have you
    identified weaknesses within the IRS anti-browsing program which could
    be improved or which are lacking entirely?
        Answer. The Treasury Office of Inspector General has previously
    identified weaknesses within the IRS' anti-browsing program. We
    reviewed the program and issued a report in March 1996. We made seven
    recommendations in the report to help correct the problems identified
    during our review. Service management agreed with our findings and
    cited actions they had taken or planned for implementing our
    recommendations. We are also considering a follow-up audit on the
    taxpayer browsing issue in future audit work. The Chief Inspector's
    Office has also been proactive in their coverage of the browsing
    problem as well as identifying security weaknesses in computer systems
    other than the IDRS. In June 1996, the Chief Inspector's Office issued
    a report that concluded the Electronic Audit Research Log (EARL) system
    had limited ability to identify employee browsing; it needed consistent
    executive oversight and user involvement; and it needed a clear
    strategic direction to meet IRS objectives. Their review also found
    that there were no procedures to assure IRS management was consistently
    reviewing and referring potential browsing cases. In another report
    issued in September 1996 on IRS Small Scale Computer Systems, the Chief
    Inspector's Office reported that taxpayer data was vulnerable to
    disclosure, fraudulent manipulation, theft, and loss. Noteworthy about
    the security weaknesses in microcomputers and local area networks was
    that they were similarly cited in a report issued by the Chief
    Inspector's Office in August 1994.
        Question. Have you communicated them and any other recommendations
    with Commissioner Richardson? Please provide the subcommittee an
    outline of your recommendations for the record.
        Answer. We issued a report on March 29, 1996, to Commissioner
    Richardson presenting her with the results of our review. An outline of
    the seven recommendations are as follows:
        Taxpayer Services needs to better comply with IRS' certification
    process.
        Taxpayer Services should ensure that the uncompleted corrective
    action regarding audit trail requirements is undertaken.
        Quality Assurance Division officials should follow up on and
    receive verification of corrective actions taken by program managers to
    ensure implementation.
        Taxpayer Services should only accredit new security systems after
    the Quality Assurance Division has unconditionally certified them.
        The EARL system officials need to complete the required procedures
    for system certification and accreditation as quickly as possible.
        The EARL system officials should write new position descriptions
    commensurate with the responsibilities of the position and ensure that
    recommended 5-year background investigation updates are performed.
        The Bureau Audit Recommendation Monitoring Officer should remind
    senior management officials of the importance of verifying the accuracy
    of corrective actions reported to the Inventory Tracking and Closure
    (ITC) system.
        The Chief Inspector's report on the IRS EARL System was issued on
    June 21, 1996. The report recommended:
        IRS management establish and document the strategic direction for
    EARL and ensure that users are involved at key points throughout the
    system's development.
        Changes be made to management reporting systems to provide an
    effective feedback mechanism to show the resolution of browsing cases.
        Development of procedures to increase the system's ability to
    identify browsing in a cost effective manner.
        The Chief Inspector's report on Information Security Over IRS Small
    Scale Computer Systems was issued September 30, 1996. The report
    recommended:
        IRS management perform another self-assessment and validation of
    IRS' systems.
        Development of a plan that will budget for the costs of bringing
    IRS into compliance within two years.
        The Federal Managers' Financial Integrity Act process identify
    systems with inadequate security capabilities or improper
    configurations and that future purchases meet minimum security
    requirements.
        The Chief Inspector's Internal Audit Reports are issued to the
    Commissioner's Chief Officers who are responsible for taking action on,
    and responding to, the conditions and recommendations reported.
        Question. Can you provide the subcommittee any insights why
    browsing is taking place? For example, do the employees not understand
    it is wrong or are they just bored?
        Answer. According to the EARL Executive Committee Report issued on
    September 30, 1996, even the large number of oral and written
    communications as well as training over the past three years has failed
    to adequately explain that browsing data for personal curiosity is an
    unauthorized IDRS access and to impart the seriousness of employee
    browsing. It also found that some employees indicated that they browsed
    because they do not believe it was wrong and that there would be little
    or no consequence to them if they were caught. The perception was that
    the Service was not aggressively pursuing browsing violations.
        Question. Without getting into specifics, do you find a common
    ``theme'' to the browsing activity itself, that is what are people
    looking up?
        Answer. There is no common theme as to why employees browsed.
    Various reasons were given by the employees who were caught browsing.
    It appears to depend on what motivated the person to browse, for
    example, curiosity, financial gain, and fraud.
                          ig findings and current law
        Question. Of the cases your office has handled, did those employees
    found browsing taxpayer files fully understand the law?
        Answer. We have conducted one investigation that involved a GS-15
    manager. The investigation determined that access had occurred;
    however, the report of investigation was forwarded to IRS on December
    31, 1996 for final review and disposition. Although the investigator
    did not specifically pose a question regarding the manager's knowledge
    of the privacy and disclosure issues, we believe the manager was aware
    of the browsing restrictions.
        Question. What did the employees not understand?
        Answer. The GS-15 manager did access the IDRS for taxpayer
    information indirectly by having subordinates perform the query, but
    did not believe, nor were we able to prove, the data were unauthorized,
    misused, or divulged to any parties in violation of any IRS policy.
        Question. What has been the most difficult legal hurdle you have
    found with your involvement in browsing cases?
        Answer. The one investigation my office conducted did not reach the
    prosecutorial level. I believe that you may gain greater insight into
    any legal hurdles encountered in investigating browsing cases by
    directing your inquiry to the IRS' Office of Chief Counsel.
        Question. Is there anything lacking in the current law which you
    see as hampering your ability to effectively handle browsing cases?
        Answer. A major hurdle in deterring browsing is that the act of
    inspecting taxpayer data without disclosing information to a third
    party is not a criminal offense under existing statutes. I believe the
    proposed Taxpayer Privacy Protection Act introduced by Senator Glenn
    will enhance IRS efforts to strengthen the disciplinary actions against
    those employees who have browsed taxpayer records and/or returns. It
    clearly articulates the conditions and punishment for browsing. Again,
    however, your question can be more appropriately addressed by IRS'
    Chief Counsel's office and IRS management who have the primary
    jurisdiction of these cases.
                                     ______

                      Questions Submitted by Senator Kohl
                      irs commissioner margaret richardson
        Question. Last year as part of my Economic Espionage Act of 1996 we
    created criminal penalties from computer browsing without authorization
    or obtaining information from any Department or agency in the United
    States. Could you please explain how this law will impact snoopers of
    electronic records? Can I assume that as more and more returns are
    filed electronically this law will have greater impact on the snoopers?
        Answer. The Internal Revenue Service supported the amendment to 18
    U.S.C. Sec. 1030(a)(2)(B) which provides criminal misdemeanor penalties
    for anyone who intentionally accesses a computer without authorization
    or who exceeds authorized access and thereby obtains information,
    including tax information, from any department or agency of the United
    States. We are hopeful that this legislation will serve as a
    significant deterrent to unauthorized computer access of taxpayer
    information by Internal Revenue Service employees and others. We note
    that 18 U.S.C. Sec. 1030(a)(2)(B) has government-wide impact and as
    such you may also wish to direct your inquiry to the Department of
    Justice.
        Question. Commissioner Richardson, yesterday when we met we
    discussed the $3 billion that is reported has been wasted on the TSM
    efforts. According to your explanation $3 billion was not wasted. Can
    you please clarify this issue so that we can all understand it?
        Answer. Certainly Mr. Campbell. I believe about $3.3 billion has
    been appropriated over a 10-year period for the Tax Systems
    Modernization (TSM) project. Our Chief Information Officer, Arthur
    Gross, testified at our appropriation hearing in the House and
    indicated that, based on a review that we have conducted in the last
    six months, about $400 million of the $3.3 billion over the 10-year
    period was devoted to non-continuing projects; to projects that we have
    abandoned either because they no longer will provide what we had hoped
    they would do, or we cannot afford them; various things like that. So
    the number that related to things that we are no longer using or
    planning to use is about $400 million.
        Of the $3 billion, we have spent quite a bit of that money on
    telecommunications infrastructure, and site preparation in some of the
    Service Centers for upgrading our technology. I believe I mentioned to
    you yesterday that over 4 million taxpayers have filed their tax
    returns by telephone. We now have a Web site that has been visited over
    100 million times since the first of the year, and we are now able to
    route our telephone calls more effectively around the country.
        So far this filing season we are still at over 70 percent of the
    callers being served. We have been able to do this at a time when we
    have moved from 70 telephone sites and 44 geographic areas to about 31
    sites on our way down to 23. That has been made possible because of the
    upgrades to the telecommunications technology that we have employed
    that allow us to route the calls around the country and manage our
    traffic better.
        We definitely need to modernize our technology. We are putting the
    finishing touches on a plan right now that hopefully will put in place
    an infrastructure and an incremental program that we can implement over
    the next few years that will help us provide better customer service
    and better compliance because we will have better access to taxpayer
    information.
        Now that poses an additional issue or concern about the issues we
    are talking about here today, and this is how to protect that
    information. So one of the things that we are very concerned about is
    our security architecture as well so that we can protect that
    information.
        Question. Commissioner Richardson, you have indicated you will
    leave the IRS at the end of this tax year's filing season. I know you
    have guided the IRS through some difficult times. Thank you. Let me ask
    you--if you were going to interview potential candidates to replace you
    what characteristics would you look for on the candidates' resumes?
        Answer. I think that the most important qualifications are someone
    who has a lot of energy and who understands tax administration. I think
    that having management capabilities as well as experience is very
    useful. But I think that you also have to understand that this is a
    different environment that we are operating in the Government. People
    like to say the Government should be run like a business, but there are
    some restrictions on people operating in the Government environment
    that are not always present in a business. I think those have to be
    taken into account as well.
        We have a check and balance system with Congress in its oversight
    of an agency. But we also sometimes, as a result, have a board of
    directors of 535 people who may one day think that the priority should
    be compliance, and the next day, customer service. There is a certain
    amount of schizophrenia, I think, about the people who have to deal in
    that environment. Frequently in the private sector, you and your board
    of directors can establish the priorities for an organization and then
    move to try to accomplish those priorities. You do not always get to do
    that in a Government environment. I think understanding that will
    alleviate many frustrations that my successor might have too.
        Question. In the past the appropriation committee has recommended
    cutting IRS budget request and fencing funds associated with its
    modernization efforts. Are there other methods the committee should be
    using to try and effect fundamental management changes within the IRS?
        Answer. No.
        Question. Do you feel that the 1515 incidents of ``snooping'' by
    IRS employees is an accurate representation of unauthorized browsing?
        Answer. The 1515 incidents of ``snooping'' previously submitted for
    fiscal year 1994 and fiscal year 1995 reflect an approximate
    representation of the Service's unauthorized accesses for the years
    indicated. Recently we have reviewed and updated our database to
    include more detailed information concerning unauthorized accesses.
        Question. Did the IRS ever consider implementing a service-wide
    policy regarding the handling of unauthorized browsing?
        Answer. Yes, IRS has a number of policies in place to mitigate
    unauthorized access to taxpayer information. For example, Policy
    Statement P-1-1, which was approved on December 18, 1993, addresses
    taxpayer privacy rights. In part it states that the Service is ``* * *
    fully committed to protecting the privacy rights of all taxpayers * * *
    Among the most basic of a taxpayer's privacy rights is an expectation
    that the Service will keep personal and financial information
    confidential * * * IRS employees will perform their duties in a manner
    that will recognize and enhance individuals' rights of privacy and will
    ensure that their activities are consistent with law, regulations, and
    good administrative practice.''
        In January 1995, I sent a memorandum to all IRS employees about the
    information security policy which is intended to ensure ``* * * that
    the Service complies with the applicable guidance from public laws,
    regulations, and directives * * * that taxpayer and other sensitive
    information is protected commensurate with the risk and magnitude of
    the harm that would result from inappropriate use * * * that taxpayer
    and other sensitive information is used only for necessary and lawful
    purposes.''
        In March of this year, I sent another memorandum to all employees
    reminding them that IRS employees are ``prohibited from accessing
    information not needed to perform official duties. Unauthorized access
    to accounts is a fundamental violation of the public trust in the
    confidentiality of returns and returns information * * * It violates
    both privacy and disclosure rules and may result in removal from the
    Service and criminal prosecution.''
        Question. In your June 6, 1996 testimony before the Senate
    Committee on Governmental Affairs you indicated that the new systems
    developed to better control access to taxpayer records misuse were not
    always executed in accordance with required procedures. Since that time
    are you aware of the IRS taking any efforts to produce consistent
    guidelines for application of these systems?
        Answer. IRS Internal Audit has been looking into the Service's
    efforts to ensure information systems are adequately secured. In their
    draft audit report dated January 21, 1997, they found that the security
    certification process does not always result in a complete and/or
    independent evaluation of security controls prior to issuance of a
    certification. Further, the Service's efforts to identify all sensitive
    computer systems have not been effective. As a result of their
    recommendations, procedures should be developed to ensure consistency
    in the certification process. In addition, the EARL Executive Steering
    Committee was charted by the IRS to address inconsistencies and
    concerns about how the EARL systems were being administered and the
    effectiveness of the EARL programs. The Committee issued a report in
    September 1996, which contained many recommendations to improve the
    EARL system. Lastly, GAO reviewed the IRS systems security in December
    1996 and found that pervasive weaknesses persist in security controls
    intended to safeguard IRS computer systems, data, and facilities and
    tax processing operations from the risk of disruption and taxpayer data
    from the risk of unauthorized use, modification and destruction. Their
    recommendations, when implemented, will also result in consistent
    guidelines for application of the systems.
        Question. You also reported that corrective actions necessary for
    implementing audit recommendations were sometimes reported closed
    before all corrective actions were taken. Have you, in conversations
    with the Office of the Chief Inspector elsewhere been provided with any
    evidence that this situation has been corrected?
        Answer. In our report of March 29, 1996, we made a recommendation
    that senior management officials should be reminded of the importance
    of verifying the accuracy of corrective actions reported to the ITC
    system. As a response to our recommendation, the Management Controls
    Office implemented new procedures tightening reporting controls. For
    every new audit, a memorandum is issued to the responsible Chief
    Officer, detailing how to report their corrective actions. In addition,
    the Chief Officer must sign a memorandum verifying concurrence with
    what is reported to them.
        Question. Since Treasury has now taken on greater responsibilities
    as they relate to the IRS and the Modernization Management Board will
    the role of the IG's office be heightened?
        Answer. I believe that more vigilant oversight is needed by the
    Department over the IRS, particularly with respect to renewed efforts
    to develop the Tax Systems Modernization (TSM) architecture. I plan to
    do this through my participation as an advisory member of the
    Modernization Management Board (MMB). Back in 1995, and before the
    establishment of the MMB, my office issued a report on the Department's
    oversight of the IRS' TSM Program. We concluded that the Department's
    efforts at that time were not effective to oversee a project the size
    and complexity of TSM. We have recently initiated a follow-up audit to
    assess the Department's and IRS' revised approach, newly created
    internal structures, and oversight mechanisms that have been put in
    place since our report was issued. To this end, we will also be
    coordinating with GAO and the IRS' Chief Inspector's office to plan the
    appropriate audit coverage.
        Question. Now that the separate oversight functions within the
    Inspector General and the Chief Inspector's Office have been in
    operation for over 10 years are there other options (such as having the
    Chief Inspector report to the Treasury Deputy Secretary as opposed to
    the IRS Commissioner) that should be considered? If consideration was
    given to reorganizing this reporting structure how would taxpayer
    privacy issues be addressed?
        Answer. We have worked with the Chief Inspector's Office within the
    existing framework. I do not feel my ability to manage the internal
    audit resources in the Treasury is compromised by the current
    arrangement. We have an understanding with the Chief Inspector that
    they will work through my office whenever they have an issue where they
    cannot obtain adequate resolution with IRS management. Regardless of
    the reporting structure of any reorganization, access to taxpayer
    information and privacy must be protected under IRC 6103. Even though
    my office currently does not have the same level of access that the IRS
    Chief Inspector's Office has, we would be able to provide the same
    level of protection that is provided by the Chief Inspector's Office,
    if the need arose.
        Question. It is my understanding that the internal audit functions
    of the law enforcement agencies were transferred to the Inspector
    General's Office with internal investigations remained within the
    agency. Could and/or should that structure be duplicated in the IRS?
        Answer. As you know, the Treasury Office of Inspector General was
    established by the 1988 Amendments to the IG Act of 1978. Unlike most
    other IGs, however, the Amendments did not create a single audit and
    investigative entity for the Treasury Department. Specifically, IRS
    retained its internal investigative and internal audit functions under
    the direction of the IRS Chief Inspector. That office has primary
    responsibility for all direct audit and investigative activity at IRS.
    My office was assigned oversight responsibility. As specified by
    Section 8C of the Inspector General Act, I can initiate, conduct and
    supervise internal audits of the IRS. My authority to conduct any
    review in the IRS that I deem appropriate has never been challenged.
    Further, Treasury Order 114-01 gives me the authority, if a need
    arises, to detail personnel from the IRS Inspection Service to conduct
    audits or investigations under my direct supervision. However, with an
    audit staff of 160 to provide primary coverage for the remaining 11
    Treasury bureaus and the added financial audit responsibilities under
    the Chief Financial Officer's Act, our capacity to do many audits at
    IRS is limited. In contrast, the Chief Inspector has 445 auditors who
    focus solely on IRS programs and operations. Consequently, my office
    must rely on IRS Internal Audit for most of the audit coverage at IRS.
    Having that body of work performed by resources under my direct control
    would have the immediate effect of raising the level of independence.

                              Subcommittee Recess

        Senator Campbell. With that, the subcommittee will recess.
    Thank you.
        [Whereupon, at 12:15 p.m., Tuesday, April 15, the
    subcommittee was recessed, to reconvene at 9:32 a.m., Thursday,
    April 17.]

             MATERIAL SUBMITTED SUBSEQUENT TO CONCLUSION OF HEARING

        [Clerk's note.--The following material was not presented at
    the hearing, but was submitted to the subcommittee for
    inclusion in the record subsequent to the hearing:]
    Letter From Jeff Thompson, Chief of Government Relations for Don Novey,
      State President, California Correctional Peace Officers Association
                                        Sacramento, CA, April 23, 1997.
    Hon. Ben Knighthorse Campbell,
    Subcommittee on Treasury, Postal Service and General Government,
    Washington, DC.
        Dear Senator Campbell: Thank you for the opportunity to submit this
    letter for inclusion in the hearing record on IRS employees' misuse of
    taxpayer records held on April 15, 1997. I am submitting this letter on
    behalf of over 25,000 members of the California Correctional Peace
    Officers Association (CCPOA), all dedicated correctional officers and
    parole agents in the state of California, to highlight an issue of
    grave importance to our members and law enforcement in general.
        It has come to our attention that parolees and individuals that
    have served time in prison for felony convictions have been and are
    able to work at Internal Revenue Service (IRS) field offices and access
    sensitive tax information. The fact that convicted felons and parolees
    have access, whether authorized or not, to the addresses and social
    security numbers of officers and their families, as well as information
    on personal assets and income, pose a serious security threat. With
    such information, a revenge-seeking criminal (Particularly a member of
    a prison gang) could cause serious harm to an officer and his or her
    family.
        We are aware that current federal law and legislation moving in
    Congress would make it illegal and impose criminal penalties for any
    IRS employee to access information on computers, tax forms, and any
    paperwork without specific authorization to do so. We support this
    legislation. However, we believe more needs to be done to protect
    officers and their families.
        One problem with this law is that there is no way to prevent an
    individual from accessing unauthorized information. Based on
    discussions with the Fresno IRS Service Center, Internal Security at
    IRS needs specific information, such as the name of the employee and
    his or her social security number, in order to investigate any alleged
    misconduct on the part of an IRS employee. In other words, if an IRS
    employee was accessing information and was unauthorized to do so, an
    officer would have to know that this was occurring, who was doing it,
    and report it to IRS Internal Security before an investigation would
    occur. It would be impossible for an officer to prevent such misconduct
    from occurring in the first place. Indeed, an officer could only react
    to such misconduct if an IRS employee either informed the officer that
    he or she had accessed information or actually used such information
    against the officer.
        The second problem is that IRS employees are oftentimes working
    before a FBI fingerprint clearance has been completed. After an
    employee is hired by the IRS, he or she must fill out a background
    check, which could take months to complete. If an individual has lied
    on the background form, hopefully IRS would eventually terminate the
    employee. During the interim however, the IRS employee could work for
    months and have inappropriate and potentially damaging access to our
    peace officers' personal information.
        To provide you with one example, Inmate Ramirez (W-31599, A3-135L)
    served time in state prison and was released on parole. Within one
    year, Inmate Ramirez violated her parole and was returned to prison. At
    that time, she informed a correctional officer that she worked for the
    Internal Revenue Service while on parole. According to the parole
    offices in Fresno County, parolees would not be allowed to work at the
    IRS. However, inmate Ramirez did not tell her parole agent that she was
    working for the IRS and her file indicates that she was unemployed
    during her parole period. Inmate Ramirez was able to tell a
    correctional officer detailed information on the income and assets of
    several officers at four facilities in Central California, information
    that was clearly accessed at the IRS Fresno Service Center.
        Given the sensitive information IRS employees have access to and
    the safety issues facing law enforcement personnel and their families,
    we believe current federal law needs to be strengthened. We
    respectfully request you to introduce legislation that would prohibit
    any individual who has been incarcerated for a felony conviction within
    the past ten years to be denied employment by the IRS. Further, we
    believe such legislation should include a provision mandating that an
    employee not begin employment at the IRS until the FBI fingerprint
    clearance and the background check has been completed.
        We thank you for your consideration of this important matter.
                Sincerely,
                                                         Jeff Thompson.
                                     ______

      Letter From Robert M. Tobias, National President, National Treasury
                                Employees Union
                                           Washington, DC, May 5, 1997.
    Hon. Ben Nighthorse Campbell,
    Subcommittee on Treasury, Postal Service and General Government,
            Committee on Appropriations, U.S. Senate, Washington, DC.
        Dear Mr. Chairman: Pursuant to your request of April 22, 1997,
    requesting written responses to hearing questions from the National
    Treasury Employees Union (NTEU), I hereby submit our responses to your
    questions.
                Sincerely,
                                                      Robert M. Tobias.
        Attachment.
                                     ______

                    Questions Submitted by Senator Campbell
                             taxpayer file browsing
        Question. In your testimony submitted for the Record, you mention
    the ``budget cuts and policy,'' ``Congressional flip-flops * * * of the
    Earned Income Tax Credit,'' ``downsizing,'' ``furloughs'' and
    ``contracting out'' all have a negative impact and are part of the IRS
    culture. Please explain how these examples could in any way lead
    employees to believe that there is really nothing wrong with browsing
    taxpayer files.
        Answer. My statements do not in any way suggest that poor morale
    should excuse any unauthorized actions. My comments were meant only to
    suggest that poor employee morale and employee frustration over
    constantly changing priorities may contribute to confusion as to how
    seriously something like the ``zero tolerance'' policy is to be taken.
    I agree that browsing is a very serious issue and will continue to make
    that clear to members of my union.
        Question. Given NTEU's opposition to downsizing and Reductions in
    Force at IRS, based upon the argument that all employees are necessary
    to adequately process taxpayer information, how would you suggest I
    explain to constituents that IRS employees have time to snoop in
    taxpayer files?
        Answer. NTEU agrees with the IRS and GAO that browsers are doing
    something wrong and should be punished. More than 99 percent of IRS
    workers work hard and respect taxpayer privacy. My suggested
    constituent response would advise the constituent that the IRS caught
    and disciplined the individuals who improperly accessed these records.
    The IRS fired some employees and forced others to resign or retire. I
    believe it is more important to emphasize that these cases do not
    reflect the actions of the more than 102,000 honest, hard working IRS
    workers who diligently respect the privacy of more than 250 million
    taxpayer returns and other records the IRS processes each year.
        I would also suggest that your response mention that some of these
    cases involve improper access of taxpayer files by employees whom
    friends, neighbors or relatives asked to check on the status of their
    refunds and other information. This conduct does violate IRS policy and
    should not be tolerated, but should not be viewed as ``snooping'' into
    private tax records.
        Question. During fiscal year 1997's Treasury Appropriation bill one
    of the biggest complaints registered about outsourcing debt collection
    to the private sector was that the security of the taxpayer files would
    be potentially at risk. In light of the recent GAO report on IRS
    employees browsing, please respond for the record how you would
    characterize the outsourcing of debt collection vis-a-vis recent GAO
    revelations.
        Answer. Besides the far greater risk of unauthorized disclosure of
    taxpayer data, the outsourcing of tax debt collection could result in
    decreased taxpayer compliance and higher costs.
        First, effective use by the IRS of existing computer security
    technology could prevent nearly all unauthorized access. Second, the
    GAO did not find any evidence showing that the IRS employees who
    improperly accessed a taxpayer's tax filings were motivated by
    financial considerations. Instead, the GAO report only states that
    ``unauthorized changes could be made to taxpayer data * * * for
    personal gain.'' Third, taxpayers' data has great economic value to
    many individuals and businesses. Just a few instances of fraudulent use
    of that information could undermine our currently high rate of
    voluntary compliance. Fourth, voluntary compliance is the key to cost-
    effective tax administration in a democratic government. Both the IRS
    and NTEU believe that private debt collection would compromise
    voluntary compliance due to the manner and means of collection. Lastly,
    the current outsourcing of processing in the State of New York provides
    ample caution that private debt collection would probably not lower tax
    collection costs.
        The State of New York paid all of its contractor's capital startup
    costs, including new computer hardware, and guaranteed the company an
    exorbitant 20 percent profit. Despite the financial and technological
    edge, this contractor still processes far fewer returns and refunds
    much slower than current IRS employees using very antiquated computer
    systems.
        Question. Does your organization have a Code of Ethics?
        Answer. Both the Department of the Treasury and the Internal
    Revenue Service have strict Codes of Ethics. These Codes cover NTEU
    members. NTEU has no code covering these federal employees.
        Question. Since your members work for the Department of the
    Treasury, I would say that many of them deal with sensitive information
    in some function of their job. Does your Code of Ethics contain
    anything that deals with employee handling of sensitive information?
        Answer. Not Applicable. Please refer to the answer of the previous
    question.
        Question. Although this issue could not be characterized as
    widespread, do you feel there are any measures that Congress can take
    that would better protect those employees who do not violate this law
    or its intent?
        Answer. Again, NTEU supports improved technology that will provide
    more computer security safeguards. Contrary to the assertions of
    Commissioner Richardson, our members report that they believe they do
    not receive adequate training. NTEU members also note that is sometimes
    difficult to balance demands for greater customer service with other
    privacy priorities. In other circumstances, some IRS employees are
    responsible for creating taxpayer compliance analysis models that they
    cannot develop without inspecting a wide range of tax records.
    Especially where the IRS may impose a criminal sanction, very clear
    lines must be drawn to distinguish authorized inspection from
    unauthorized inspection.
        Question. Do you feel there is anything we can do better in order
    to prevent this practice from recurring, with an eye on maintaining a
    balance between the things the employees must endure and maintaining an
    adequate level of security and protection of files?
        Answer. Please refer to the answer to the previous question.

      TREASURY AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL YEAR 1998

                                  ----------

                            THURSDAY, APRIL 17, 1997

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 9:32 a.m., in room SD-124, Dirksen
    Senate Office Building, Hon. Ben Nighthorse Campbell (chairman)
    presiding.
        Present: Senators Campbell, Shelby, and Kohl.

                                    Panel 1

                           DEPARTMENT OF THE TREASURY

    STATEMENT OF RAYMOND W. KELLY, UNDER SECRETARY,
                ENFORCEMENT

                                Opening Remarks

        Senator Campbell. The Subcommittee on Appropriations of
    Treasury and General Government will come to order. I thank
    everyone for being here. I asked, with Senator Kohl's
    concurrence, for a visual display to be set up this morning
    and, frankly, I have been thinking about this some time. In the
    aftermath of Waco and a few other tragic incidents, the
    accusations against Government agencies kind of went up to an
    alltime high. And the very, very volatile things that were said
    about some of our Federal agencies, how they were insensitive,
    the Gestapo tactics, all the things that you and I heard,
    really bothered me.
        Part of the reason for wanting this display was to try to
    give a positive illustration of the efforts that our agencies
    are doing in fighting crime. I do not recognize some of those
    things, frankly, I appreciate the guided tour.
        Years ago, I was active, I was a deputy sheriff. The last
    time was 1968. Boy, things have come a long way. I know that
    some of these technological advances are very, very expensive.
    I noticed with interest that small box. I was told that there
    was only three of them in the world. And that the cost is about
    $25,000 a copy. That is expensive equipment.
        On the other hand, I firmly believe if you look at the
    alternative of not investing in new technology for fighting
    crime that the cost in terms of lost lives and lost property is
    going to be a heck of a lot more than that.
        I just want to thank all of the agencies that set up those
    displays. I understand that you came in pretty early this
    morning to do that and I thank you.
        I hope everybody in the audience had an opportunity to see
    those items on display. I think it is important to remember the
    people that work in the agencies, we hear from the ones that
    are kind of on the top echelon of the different agencies, but
    there are an awful lot of people out there putting their lives
    on the line for us whether they are Border Patrol or ATF or FBI
    or so on, and I just want to reaffirm my support for all of
    those people within the agencies.
        The purpose of this morning's hearing is to discuss the
    budget request of the various law enforcement agencies within
    the Department of the Treasury. Most people are not aware that
    40 percent of all Federal law enforcement is part of the
    Treasury Department and we are pleased to have those
    representatives with us this morning.
        Our first panel will include Under Secretary for Law
    Enforcement, Raymond Kelly. He is the person responsible for
    law enforcement at the Department level. He is also in a unique
    position to see the big picture and accompanying him will be
    the heads of the various agencies.
        George Weise, Commissioner of Customs, is also with us
    today. Customs has a very far-reaching mission. They administer
    and enforce the 1930 Tariff Act and its 400 provisions and its
    301 ports of entry. They monitor all incoming and outgoing
    commercial traffic, collect dues and taxes on trade, interdict
    smuggling and other illegal entry practices, and they process
    about 450 million people a year at our borders and annually
    collect about $23 billion in revenue.
        John Magaw, the Director of the Bureau of Alcohol, Tobacco
    and Firearms, is also here with us today. He has also had many
    diverse responsibilities for enforcing Federal firearms,
    explosive, and arson laws, to regulating wine, beer, and
    distilled spirits. His agency also collects about $13 billion a
    year from taxes on alcohol and tobacco and fees on firearms and
    explosives. The ATF is the premier agency in detection and
    investigation of explosives. And those who have not seen it,
    you might look at some of the ingenious bombs that have been
    built that are on display back in the back, no doubt disarmed,
    but they give a pretty graphic illustration about how creative
    people can be when they are intent on hurting their fellow
    human beings.
        Charles Rinkevich, Director of the Federal Law Enforcement
    Training Center, is also here. Mr. Rinkevich is based in
    Glynco, GA. He also has the responsibility for the Artesia, NM,
    campus. This agency provides a comprehensive consistent basic
    training for Federal law enforcement personnel and advanced
    training at the request of some other agencies. There are now
    70 agencies which send employees to be trained at this unit.
    This consolidation of training saves the Federal Government
    approximately $135 million a year.
        Stanley Morris, the Director of the Financial Crimes
    Enforcement Network. FinCEN is responsible for establishing,
    overseeing, and implementing the Treasury's policies to prevent
    and detect money laundering. It is the central source for
    identification, collation, and analysis of intelligence in
    support of law enforcement operations combating money
    laundering.
        Eljay Bowron, the Director of the U.S. Secret Service, is
    also here. While most people associate the Secret Service with
    protecting the President and the Vice President, in reality
    they have an extremely wide range of responsibilities. They
    investigate financial crimes such as counterfeiting, forgery on
    Government checks, theft and fraud associated with Treasury,
    electronics transfers, and computer and telemarketing fraud.
        They are also responsible for protecting the White House,
    the Vice President's residence, foreign diplomatic missions,
    and the Treasury Buildings.
        Our second panel will be Inspector General of the Treasury
    Department, Valerie Lau. Some of you will recognize Ms. Lau.
    She testified in committee, last week and we are glad to have
    her here again.
        And with that, Senator Kohl, if you have an opening
    statement, we would be delighted to hear that.

                           Statement of Senator Kohl

        Senator Kohl. I do, Senator Campbell, and I will submit it
    for the record.
        I would simply like to offer just a few thoughts.
        We, here, are very much indebted to those agencies who are
    coming before us today to review their budget and to make their
    requests and, of course, as you know, we will look at them very
    carefully to try and be as critical as we can, and as
    constructive as we can in helping you to fund your agencies.
        But it should be recognized that this is, in a real sense,
    the good guys against the bad guys and what you all represent
    are the good guys. And we are fighting the bad guys throughout
    this country and throughout the world. I think in that effort
    you do, for the most part, a really heroic job in fighting, in
    many cases, insurmountable odds. The money that is available
    out there in illegal traffic is enormous and as long as that
    kind of profit is available to illegal people doing illegal
    things then our job will be very difficult in combating them.
    But as technology improves, your efforts improve, the kind of
    support that we give each other, hopefully, will continue to
    improve. And we will win that war; for the most part we will
    win that war by working together.
        I think your agencies represent a commentary on how
    important Federal agencies can be, particularly law enforcement
    agencies, how important they are to our country. And while
    people are oftentimes cynical about Government and about what
    Government can and cannot do, I think there is no question that
    with respect to the kinds of efforts that you expend, your
    efforts are enormously important to our country and to our
    country's future.
        So, I start out with that kind of confidence in you and
    that kind of support for your work and I hope that working
    together with you all, Senator Campbell, myself, other members
    of our committee, we can be and will be very constructive as we
    set upon deciding your budgets for the year ahead and I am
    delighted to be in your presence.

                               Prepared Statement

        Senator Campbell. Thank you, Senator Kohl. Your complete
    statement will be made part of the record.
        [The statement follows:]

                       Prepared Statement of Senator Kohl

        Thank you Senator Campbell. We should also thank the
    agency's representatives for attending this very important
    hearing concerning the Treasury Department's law enforcement
    efforts.
        Mr. Chairman, over the last twenty or so years we've
    engaged in an ongoing debate in Washington over the role of
    government. And, while people can argue over education and
    social programs, and whether government should be involved in
    any or all of these things--on the fundamental question of
    protecting our citizens, there can be no debate. The federal
    government has an important role to play in protecting the
    public, and the agencies assembled here today are critical to
    the success of that effort.
        We are interested in reviewing all of the law enforcement
    programs that these agencies oversee, but let me highlight a
    few for special mention. First, crime prevention must be part
    of our strategy. While we must continue to fund prisons and
    police, investments in young people--before they encounter the
    law--have proven benefits.
        While crime in many areas of the country has abated,
    juvenile crime continues to be a major problem. For example,
    since 1970, the number of juvenile homicides involving a
    firearm have increased by 300 percent. And over the next 10
    years the juvenile population is expected to explode to numbers
    as large as during the Baby Boom period. So how can we address
    the juvenile crime problem?
        The Bureau of Alcohol, Tobacco, and Firearms has operated
    two programs which deserve special attention, programs which I
    plan to explore later today with our witnesses. The Gang
    Resistance Education and Training program, known as GREAT, was
    created by ATF to help young people fight the pressure to join
    gangs by bringing a specialized anti-gang message directly to
    classrooms. Preliminary results of a national GREAT evaluation
    by the University of Nebraska are positive. We must, of course,
    make sure that we are spending money wisely, and I have
    introduced legislation to require evaluation for all federal
    prevention programs. But this is a promising program that
    deserves our attention. That is why I visited two GREAT program
    classes--one in Superior and another in LaCrosse, Wisconsin--
    and heard directly from community leaders, police and young
    people, about the positive message of GREAT.
        Wisconsin has also recently benefited from another ATF
    program, the Youth Crime Gun Interdiction Initiative. This
    cooperative federal-local effort goes after illegal gun dealers
    by using the extensive ATF capabilities to trace guns used in
    crimes. By shutting down these gun traffickers, we can take
    hundreds, if not thousands of guns off the streets. Last summer
    Milwaukee was named one of 17 pilot cities to test this program
    first used with great success in Boston. And just last week our
    local police made their first arrest as a result of the joint
    Milwaukee-ATF program. The suspect was arrested for selling at
    least 28 guns to precisely the people we all agree should not
    own them--convicted felons and kids under 18. This program has
    already made a difference in my home city, and I thank you for
    your efforts.
        I hope to use these hearings to learn more about these
    prevention programs and discuss how we can build and improve
    upon the successes we've already seen.
        With regard to protecting our young people, it is important
    to credit this Administration with requiring that all federal
    law enforcement personnel use child safety locks on their
    handguns. As the sponsor of legislation to require that all
    handguns should be sold with these safety devices, I think it's
    just common sense to keep a firearm locked, stored, and safe.
    Hopefully, all families can have the same protection from
    accidental injury and death that federal law enforcement agents
    now enjoy.
        Finally, we are at a difficult time for federal law
    enforcement agencies and, as a co-chairman of the Ruby Ridge
    hearing I pursued some of these problems in some detail. So we
    must all work hard to maintain the faith of the American people
    in federal law enforcement.
        But we must also keep our perspective. Your people are on
    the front lines and many have to go to work every day knowing
    that they may be in some kind of dangerous situation. Bashing
    federal authorities will not reform agencies or build a
    stronger trust with the public. Only through constructive
    dialogue, in a bipartisan fashion, can we continue to build and
    maintain the type of law enforcement structure that will
    protect every American and preserve their confidence.

                            Introduction of Witness

        Senator Campbell. We will just start in order of the people
    as they are printed on the panel sheet here.
        So, if Ray Kelly, the Under Secretary of the Treasury for
    Enforcement for the U.S. Department of Treasury could start
    out, we would appreciate it.

                         Statement of Raymond W. Kelly

        Mr. Kelly. Thank you very much, Mr. Chairman.
        Senator Campbell. If you have extensive information you
    would like to turn in, without objection, it will all be
    included in the record. If you want to abbreviate your
    comments, feel free to do so.
        Mr. Kelly. Yes, sir.
        I have submitted my remarks for the record. I will keep to
    the direction that we have that our initial remarks will be no
    more than 2 minutes.
        Mr. Chairman, Senator Kohl, I have spent virtually my
    entire adult life in law enforcement. And I have never
    encountered better men and women than those who serve in the
    enforcement bureaus of the Treasury Department. They are
    dedicated and resourceful professionals. They are well-led by
    the executives here today and well-trained at our Federal Law
    Enforcement Training Center.
        There are scores of examples of enforcement activities in
    each bureau that deserve attention. The bureau directors will
    go into greater detail than I will now. I will only cite a few
    in the interest of time.
        ATF is revolutionizing the way American law enforcement
    solves violent crimes through its gun-tracing programs. The
    police once considered a case virtually closed when they
    apprehended the shooter and retrieved his gun. Thanks to ATF,
    we are now going after the gun traffickers and straw purchasers
    who put guns into the hands of killers.
        The Customs Service continues to interrupt the flow of
    illegal narcotics into the United States with significant
    successes in Operations Gateway and Hardline. Customs agents
    are also seizing record amounts of cash that the cartels are
    trying to smuggle out of the United States in bulk, as Treasury
    enforcement disrupts money laundering through banks and
    nonbanking systems.
        The Financial Crimes Enforcement Network has helped lead
    this effort, supported by the Criminal Investigation Division
    of IRS, and others. The Secret Service, in addition to its
    important protective missions, is meeting new challenges in
    combating counterfeiting presented by computer, printing in
    color, copier technology.
        As it has done in combating credit card fraud, the Service
    encourages the business community to work jointly with it to
    fight financial crimes in general.
        In fighting narcotics and gun trafficking, arson and
    explosives, money laundering, and other financial crimes,
    Treasury enforcement is playing to its traditional strengths.
    With the Committee's support and advice, we intend to further
    develop our expertise, sharpen our effectiveness, and stay
    forward-looking. Thank you.

                               Prepared Statement

        Senator Campbell. Thank you, Mr. Kelly. We have your
    complete statement and it will be made part of the record.
        [The statement follows:]
                     Prepared Statement of Raymond W. Kelly
        Mr. Chairman, Senator Kohl, and Members of the Committee, it is a
    pleasure for me to be here before you today to highlight the fiscal
    year 1998 budget request for Treasury's law enforcement bureaus and
    offices (with the exception of the Internal Revenue Service, Criminal
    Investigation Division (IRS-CID)). With me today are George J. Weise,
    Commissioner of the U.S. Customs Service; John Magaw, Director of the
    Bureau of Alcohol, Tobacco and Firearms; Eljay Bowron, Director of the
    U.S. Secret Service; Charles Rinkevich, Director of the Federal Law
    Enforcement Training Center (FLETC); and Stanley Morris, Director of
    the Financial Crimes Enforcement Network (FinCEN), and members of their
    staffs.
        The Treasury Department represents approximately 40 percent of the
    total law enforcement officers of the Federal Government. Each year,
    Treasury's mission grows in complexity, scope and importance. Treasury
    Enforcement plays a critical role in serving the nation's law
    enforcement priorities. Treasury agencies protect our leaders and
    safeguard our financial institutions from money launderers and fraud.
    Treasury agents and inspectors protect our borders from drug
    traffickers and every day our agents fight to protect our streets from
    the threat of bombs, arson and gun violence.
        In my testimony today, I wish to highlight aspects of our work and
    how that work would be supported by the fiscal year 1998 budget
    request.
                              u.s. customs service
        The Customs Service plays the leading role for the Treasury
    Department and the United States in interdicting drugs and other
    contraband at the border, and ensuring that all goods and persons
    entering and exiting the United States do so in compliance with all our
    laws and regulations. Most of the narcotics seized in the United States
    each year are seized by the Customs Service.
        Customs' responsibility is tremendous. To put the drug interdiction
    challenge faced by Customs into perspective: Last year, Customs
    processed over 457 million people, 126 million vehicles and nearly $800
    billion of trade. It performed the initial checks, processes, and
    enforcement functions for over 40 federal agencies and applied hundreds
    of laws and regulations. It performed these tasks by covering over
    7,000 miles of land border and servicing over 300 ports of entry. While
    doing so, it collected approximately $22 billion in revenue for the
    United States in the form of duties, taxes, and fees.
        Customs constantly strives to improve its ability to stem the flow
    of drugs while dealing with the increasing volumes of cargo and
    passengers into and out of the United States. Indeed, the number one
    operational priority for the Customs Service is preventing the
    smuggling of narcotics into the United States. It pursues this mission
    through interdiction, intelligence and investigation capabilities that
    disrupt and dismantle smuggling organizations. Major initiatives, such
    as Operation Hardline at the Southwest border and Operation Gateway in
    the Caribbean, have been extremely effective in denying smugglers
    access to the United States.
        However, as you are aware, the job is not finished; although
    Customs seizes more illegal narcotics than all other agencies combined,
    illegal narcotics and other contraband continue to find their way into
    the United States. Customs will continue to develop the capabilities to
    meet the ongoing smuggling threats, on our southwest land borders, in
    the Caribbean, and at all borders and ports of entry across the
    country. Customs actively participates in inter-agency criminal
    investigations, and it will continue to strengthen its partnerships
    with the private sector, cooperative foreign governments and other
    federal agencies in order to continue its active role in the efforts
    against narcotics smuggling.
        Customs' budget proposal reflects increases for Operation Hardline,
    Operation Gateway, updated technology and the rebuilding of
    infrastructure. The $23.4 million requested for Operations Hardline and
    Gateway, along with the funding request for infrastructure and
    equipment needs, will permit Customs to continue its fight to prevent
    illegal drugs from being brought into the United States.
                                 secret service
        The Secret Service is the nation's lead agency in investigating
    counterfeiting, forgery, and access device fraud. As the nation's
    counterfeiting expert, the Secret Service has investigated fictitious
    financial instruments, counterfeit currency and credit card schemes
    both domestically and internationally. United States currency is
    counterfeited around the globe. Indeed, approximately 70 percent of all
    counterfeit currency detected domestically is of foreign origin.
    Therefore, it is only prudent that the Secret Service devotes a large
    portion of its investigative resources to battling international
    counterfeiting issues.
        The Secret Service has learned through experience that the best
    method to manage this problem is to address counterfeit issues at their
    source, with the permanent stationing of Secret Service agents in
    foreign posts. In addition, the Secret Service leverages its resources
    by enlisting international law enforcement agencies to identify
    counterfeit currency and suppress counterfeiting plates. These efforts,
    primarily carried out through counterfeit detection seminars, have
    promoted a cooperative international law enforcement effort to detect,
    suppress and prosecute counterfeit violations
        Moreover, to prevent financial fraud schemes, the Secret Service
    has developed and implemented longstanding and effective partnerships
    with private industry to better understand various financial systems
    and combat significant losses. Assisting the industry and their
    financial systems with ``systemic fixes,'' aggressive analysis, and
    proactive security enhancement measures has increased the overall
    security of these financial systems. Proactive joint initiatives with
    the industry, such as public awareness campaigns, media programs,
    speeches, seminars, and security training, are having a positive
    impact. These partnerships have reduced the ability of criminal
    organizations to target financial institutions.
        As you know, the Secret Service also has the critical
    responsibility of protecting the President, Vice President, and other
    specially designated protectees. Its protective duties recently
    included the 50th Anniversary of the United Nations, the Olympics in
    Atlanta, and the presidential election campaign. Included in the Secret
    Service's fiscal year 1998 budget is a request for $28.8 million to
    implement security changes at the White House which are being made in
    accordance with recommendations made in the White House Security
    Review. This funding, along with the additional funding provided this
    fiscal year, will enable the Secret Service to implement all of the
    Review's recommendations. The funding provides for staffing to cover an
    enlarged security perimeter, as well as for the construction of
    additional crash resistant barriers and guard booths needed to define
    this perimeter.
                                      atf
        ATF is responsible for investigating some of the most destructive,
    dangerous, and controversial crimes in the United States--bombings of
    abortion clinics, arson of churches, firearms trafficking, and firearms
    and explosives violations. In an effort to reduce violent crime, ATF
    focuses its investigative efforts on armed violent criminals, career
    criminals, armed narcotics traffickers, violent gangs, and domestic and
    international arms traffickers. It strives to deny criminals access to
    firearms, safeguard the public from bombings and arson, and imprison
    violent criminals.
        ATF has developed and implemented a number of innovative programs
    to achieve these goals. ATF's Project LEAD, introduced in 1996, uses
    information obtained from tracing crime guns to identify and prosecute
    illegal firearms traffickers. Previously, a gun would be recovered in
    connection with a crime and, except for the investigation of the
    underlying crime, it would not be analyzed or traced further by law
    enforcement authorities. ATF has stepped up its efforts with other law
    enforcement agencies to learn more about crime guns. Using advanced
    computer software, ATF analyses information obtained during the tracing
    of crime guns to determine patterns of multiple purchases by one
    individual or from one store. When ATF uncovers a situation where
    multiple guns used in crimes all emanated from one source, they are
    able to investigate and prosecute, thereby eliminating a source of
    illegal guns. For example, when a New York City police officer was
    recently killed, four handguns were recovered at the scene. Tracing
    these handguns through Project LEAD has resulted in several
    investigations of sizable drug and gun trafficking rings across the
    country.
        To further reduce the trafficking of firearms to juveniles, last
    summer ATF initiated the Youth Crime Gun Interdiction Initiative
    (YCGII) in 17 pilot cities throughout the country. The YCGII will help
    identify the sources of firearms being supplied to juveniles and to
    prosecute the traffickers responsible for providing these guns.
        In response to the growing need for Federal assistance in
    communities experiencing serious gang and drug-related shooting
    incidents, ATF initiated a comprehensive enforcement approach entitled
    CEASEFIRE. The CEASEFIRE Program combines ATF's gun tracing, gun
    trafficking, and violent offender initiatives with the latest forensic
    technology. The Integrated Ballistic Identification System (IBIS) is
    the heart of the CEASEFIRE Program. IBIS is a computer imaging
    identification system capable of matching cartridges or bullets from
    multiple shooting incidents. It also allows investigators to link
    shootings that occur locally to shootings involving the same weapon in
    another city. Given the number of shooting incidents that occur in the
    United States each year, a firearms examiners unassisted by technology
    working to connect related shooting incidents is in effect trying to
    find the proverbial needle in the haystack. Now, with IBIS, what used
    to take weeks and sometimes months, if it could be done at all, now can
    be done in seconds. The IBIS technology has already yielded significant
    results in violence-plagued communities across the country, and will
    continue to contribute significantly to the identification of homicide
    and shooting suspects and the linking of related gang shootings. For
    example, when a gang-related shooting occurred in Atlanta, GA, in
    September 1996, no suspect was identified and no one was arrested.
    However .40 caliber shell casings were recovered at the scene and were
    entered into IBIS. Two weeks later, an individual was arrested on
    unrelated narcotics charges. The gun found in his possession was test
    fired, entered into IBIS, and found to match the gun used in the
    earlier attempted murder. But for the use of IBIS, these two seemingly
    unrelated cases would likely never have been linked. Based on the
    results achieved with IBIS to date, we estimate that 1 firearms
    examiner equipped with IBIS can do the work of 550 firearms examiners
    without IBIS. This results in substantial cost savings, greater
    efficiency and more crimes solved.
        ATF is also renowned for its expertise in the areas of arson and
    explosives. Through its certified fire investigators, National and
    International Response Teams, accelerant and explosives detection
    canine program, its accredited laboratory, its forthcoming arson and
    explosives repository, and numerous other programs, ATF maintains its
    role as the leader and innovator in these areas. Its expert work on the
    National Church Arson Task Force has helped produce a 33 percent
    clearance rate for the arsons under investigation, a rate that is more
    than twice the average rate for arson crimes in general. ATF assists
    State and local authorities with arson investigations falling under
    Federal jurisdiction and having a significant impact on their
    community, particularly when the nature or extent of the problem
    extends beyond the available resources or expertise of the locale
    involved. ATF also provides training to other Federal, State, and local
    enforcement agencies in the detection and investigation of arson,
    particularly arson-for-profit, and post-blast bombing investigation.
        In addition to all of its investigative efforts, ATF is working to
    prevent violent crime and drug use through its Gang Resistance
    Education and Training (G.R.E.A.T.) project. G.R.E.A.T. is a program by
    which uniformed law enforcement officers help elementary and middle
    school children reject gangs and the drugs they peddle. ATF administers
    the program in partnership with the Phoenix Police Department, the
    National Sheriffs' Association, the International Association of Chiefs
    of Police, and the Federal Law Enforcement Training Center (FLETC), and
    provides the training to law enforcement officers to become certified
    G.R.E.A.T. instructors. Currently, over 800 different localities are
    teaching the G.R.E.A.T. curriculum in classrooms around the country.
        To continue its vital work combating firearms violations, arson,
    explosives and violent crime, ATF's budget request for fiscal year 1998
    represents a modest 3 percent increase over its fiscal year 1997 base
    funding.
                                     fletc
        One of the reasons that Treasury law enforcement is so successful
    is the quality of training that its agents and inspectors receive at
    the Federal Law Enforcement Training Center (FLETC). Since its
    establishment by a memorandum of understanding in 1970, FLETC has built
    a reputation for providing high quality, cost effective law enforcement
    training. As you know, there are many advantages to consolidated
    training for Federal law enforcement personnel, not the least of which
    is an enormous cost savings to the Government. 70 agencies in 200
    different training programs now train at the Center. Additionally,
    FLETC has been involved in providing law enforcement training overseas
    for over 20 years and has trained more than 5,000 foreign law
    enforcement officials from more than 102 different countries. We expect
    this growth to continue as more agencies recognize the many benefits of
    consolidated training.
        Let me just mention a few of the many valuable training programs
    provided by FLETC: One of FLETC's particularly valuable tools is its
    Financial Fraud Institute (FFI). The FFI provides the skills that
    criminal investigators need to combat the ever increasing
    sophistication of money laundering, financial crime, and computer
    crime.
        FLETC is increasingly utilizing computers to provide instruction,
    thereby both providing state of the art training and maximizing the use
    of its facilities. It is also working with the U.S. Army Simulation
    Training and Instrumentation Command (STRICOM) to develop a joint
    technology transfer proposal, the centerpiece of which will be the
    FLETC's prototype multimedia computer based training module. This
    module will help prepare law enforcement officers to make split-second
    decisions in life or death situations. The expanded use of this
    computer based instruction will permit delivery of consistent and
    accurate information and training, as well as measurement and
    documentation of student performance.
        The FLETC's budget request for fiscal year 1998 is $100,832,000.
    This represents a 30 percent increase (of which 25 percent relates to
    master plan construction projects) over fiscal year 1997 that results
    from the tremendous growth in FLETC's workload. Among the chief factors
    that have contributed to this unprecedented increase in workload is the
    recent Congressional and Administrative initiative to control
    immigration along our borders, the addition of new Federal prisons, and
    enhancements to security now being required at Federal buildings around
    the country. Since early 1996, FLETC has been operating at full
    capacity and we expect that this workload will continue through fiscal
    year 1999. To accommodate this increasing demand, FLETC has been
    utilizing temporary buildings and contracted or licensed facilities. In
    addition, some Border Patrol training is occurring at a temporary
    facility in Charleston, S.C.
        To permit FLETC to train the law enforcement agents in the skills
    needed for the future, it has been implementing its master plan for
    facilities. This plan was first introduced in 1989 and when fully
    implemented will permit FLETC to achieve its goal of further
    developing, operating, and maintaining state-of-the-art facilities and
    systems responsive to interagency training needs. Indeed, a major
    portion of FLETC's fiscal year 1998 request--$18.6 million--is the
    continued implementation of the facilities master plan for new
    construction at FLETC's two centers in Glynco and Artesia. As FLETC's
    capacity increases, the need for a temporary site at Charleston, SC,
    now being used for overflow US Border Patrol training, can be phased
    out as soon as possible.
                                     fincen
        While Customs, Secret Service and IRS-CID are the financial crime
    investigators, FinCEN serves as Treasury's principal support arm for
    such investigative efforts. As its name states, FinCEN is a network, a
    link between the law enforcement, financial, and regulatory
    communities. It brings together government agencies and the private
    sector, in this country and around the world, to identify ways to
    prevent and detect financial crime, particularly money laundering.
        In the complex world of money laundering, innovation is the key to
    keeping money launderers in check. This innovative approach was
    recently demonstrated by Treasury and FinCEN with the use of a
    Geographic Targeting Order--or GTO--in the New York City area. This
    order, which supports an anti-money laundering operation of the U.S.
    Customs Service, IRS, New York City Police and others, has caused a
    dramatic reduction in the amount of illicit funds moving through New
    York money transmitters by requiring 22 licensed transmitters of funds
    to report information about the senders and recipients of all cash
    purchased transmissions to Colombia of $750 or more.
        As a result of the GTO, the targeted money transmitters' overall
    business volume to Colombia has dropped by approximately 30 percent.
    With this mode of moving money to Colombia restricted, the criminals
    have had to find other means of moving their money, including bulk
    smuggling. As a result, their transfers have become easier for law
    enforcement to detect and seize. Indeed, since the GTO went into effect
    in August 1996, Customs and the other participating law enforcement
    agencies have seized over $50 million, which is approximately four
    times higher than the amount seized during comparable periods in
    previous years.
        FinCEN's fiscal year 1998 budget request of 181 FTE's and
    $23,006,000 will support the GTO and other innovative techniques to
    combat money laundering and financial crimes, using both regulatory and
    enforcement tools. In addition, under FinCEN's appropriation, we are
    proposing that two one-time initiatives be funded from the Violent
    Crime Reduction Trust Fund: $1 million dollars for a Secure
    Communications Outreach Program and $2 million dollars and four FTE in
    support of the President's efforts to encourage money laundering
    countries to institute internationally accepted anti-money laundering
    standards.
                                    irs-cid
        Although IRS-CID is not a part of this appropriations hearing, I
    want to say a few words about their important contribution to
    Treasury's law enforcement efforts. Fighting financial crime is a job
    well suited for the special agents of the IRS-CID. They are known for
    their ability to ``follow the money trail'' and stop the criminal when
    no one else can. IRS-CID agents are financial experts in combating
    money laundering and tax evasion. Their expertise is sought in
    investigations of all types of financial crimes, including health care
    fraud, pension fraud, insurance fraud, bankruptcy fraud, telemarketing
    fraud, gaming, narcotics, and public corruption.
        Today, IRS-CID is combating the increased use of computers for
    committing financial crimes with its latest weapon * * * a new type of
    special agent known as the Computer Investigative Specialist (CIS).
    Through IRS-CID's national Computer Investigative Specialist Program,
    the CIS continuously receives training in cutting edge investigation
    automation and evidence seizure and data recovery methods. Combining
    its unique financial expertise with advanced computer skills permits
    IRS-CID to optimize its ability to investigate and solve computer based
    and computer related financial crimes.
                                   conclusion
        In summary, the Treasury Department is proud of the contributions
    that its law enforcement bureaus have made and continue to make to this
    nation. Treasury law enforcement will continue to make us proud as it
    enters into the 21st century by contributing to the goals of
    establishing leadership in the global economy, expanding trade,
    protecting our borders, fighting crime, and preserving the health and
    safety of the American people. This budget request would enable
    Treasury's law enforcement bureaus to meet the current challenges and
    to begin preparations for the challenges of the 21st century. I am
    confident you will find this to be a responsible budget, as it
    considers the growing demands of the law enforcement in a constrained
    budget environment.
        With your permission Mr. Chairman, I would like to ask the
    Directors of the Treasury law enforcement bureaus to describe in more
    detail those strategies and goals we see as playing a key role in the
    coming fiscal year, as well as our recent accomplishments. After which
    we would be pleased to answer any questions you or members of this
    Committee may have.
        Thank You.

                    Bureau of Alcohol, Tobacco and Firearms

    STATEMENT OF JOHN MAGAW, DIRECTOR
        Senator Campbell. What we will do with Senator Kohl's
    concurrence is go through the whole panel before we proceed
    with questions.
        So, John Magaw, Director of the Bureau of Alcohol, Tobacco
    and Firearms [ATF], could proceed.
        Mr. Magaw. Thank you, Mr. Chairman, Senator Kohl.
        My written statement contains the complete description of
    our budget and, so, I will just go very briefly through the
    statement.
        With me here today is our executive staff, whom I am very
    proud of. I believe that it is important that this executive
    staff is here, in this audience, to hear what you say, see what
    your concerns and suggestions are so that as we move forward,
    as a bureau, we can do what Congress wants us to do.
        The Secretary of the Treasury is charged by Congress with a
    unique set of regulatory and criminal enforcement
    responsibilities involving all controversial products--alcohol,
    tobacco, firearms, and explosives.
        These ATF-regulated products all have legitimate
    applications but also share serious social consequences if
    misused. Congress has chosen to address these products through
    a full array of Federal powers. ATF is a law enforcement agency
    with interwoven responsibilities for criminal investigation,
    tax collection, and industry regulation. ATF's fiscal year 1998
    budget request flows from our key strategies developed to best
    fulfill our mission: That is to reduce violent crime, collect
    the revenue, and protect the public.
        For example, in the area of violent crime one of our
    highest priorities is to respond to the American tragedy of
    youth violence by using the tools unique to ATF to make a
    difference through prevention and enforcement. We have exposed
    close to 1 million children to gang-resistance education and
    training programs. Through the youth gun interdiction
    initiative we are partnering with major cities to identify the
    adult sources of guns and crime guns going to juveniles.
        In compliance with the Government Performance and Results
    Act, we have developed a performance plan and set a program for
    performance targets for each of our major activities. Our
    budget request is approximately $602 million. Once our
    headquarters and laboratory relocation funding is subtracted,
    our request represents less than a 3-percent increase over our
    1997 budget.
        The most important message I bring to you today is that you
    are overseeing a revitalized ATF, made stronger by the
    accountability demanded by the men and women of ATF, the
    Secretary and 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 that you have provided for vital
    training and much needed operational equipment. This Director
    and the women and men of ATF thank you. That concludes my
    statement.

                               prepared statement

        Senator Campbell. Thank you, Mr. Magaw. Your complete
    statement will be made part of the record.
        [The statement follows:]
                      Prepared Statement of John W. Magaw
        Thank you Mr. Chairman, Senator Nighthorse-Campbell, and members of
    the Subcommittee. I welcome this opportunity to appear before this
    committee and further acquaint you with ATF and the unique value we
    bring to the American public. I am here today to support the Bureau's
    fiscal year 1998 budget request of $602,354,000 and 3,991 full-time
    equivalent positions (FTE's). When compared to fiscal year 1997, this
    request represents an increase of $89,203,000 and 73 FTE's. This
    increase consists primarily of $48,044,000 for the relocation of our
    laboratory and $26,312,000 for the relocation of Bureau headquarters.
    Minus these increases, our request represents less than a 3 percent
    increase over fiscal year 1997 base funding. In addition, while I am
    here today, I would like to discuss our ongoing Church Arson and
    Counter-terrorism activities.
        With me today are my executive staff members. If I may, I would
    like to introduce one new executive appointment. Mr. William Earle is
    our new Assistant Director for Management and Chief Financial Officer.
    He replaces Mr. Richard Watkins, who has recently retired. Since this
    new member has not appeared before your committee, I am submitting his
    biographical sketch for the record at this time. Executive staff
    members who have appeared with me before are Mr. Bradley Buckles,
    Deputy Director; Mr. Andrew Vita, Associate Director for Enforcement;
    Mr. Patrick Hynes, Assistant Director for Liaison and Public
    Information; Mr. Stephen McHale, Chief Counsel; Mr. Arthur Libertucci,
    Assistant Director for Science and Information Technology; Ms. Gale
    Rossides, Assistant Director for Training and Professional Development;
    and Ms. Marjorie Kornegay, Executive Assistant for Equal Opportunity.
                         progress in strategic planning
        As many of you are aware, starting in 1997, the Government
    Performance and Results Act, commonly referred to as ``GPRA'' requires
    us to: publish strategic plans covering at least 5 years, publish
    annual performance plans which include measurable goals, and report on
    actual performance.
        This law is intended to fundamentally change the Federal management
    and accountability from a focus on inputs and processes to a greater
    emphasis on outcomes and programmatic results. In essence, GPRA
    requires that we tell you what each of our programs is intended to do
    in the long term, specifically what we intend to achieve each year, and
    finally, what we did achieve.
        ATF began its initial strategic plan in April 1994 which consists
    of the following key strategies/activities:
      --To effectively contribute to a safer America through an integrated
            violence impact initiative.
      --To maximize ATF's effect on crime and violence through the
            collection, analysis, and exchange of information and strategic
            intelligence.
      --To maximize the advantages of technology for ATF and the public.
      --To establish cooperative working relationships with industries and
            concerned groups through a formal ATF program.
        With our fiscal year 1998 budget, we are including a performance
    plan and a set of program performance targets for each of our three
    major activities. We are making progress in developing meaningful,
    quantifiable measures for our programs. We will continue to look for
    improvements, and we welcome Congress' feedback on the measures we have
    submitted.
        As an outcome of ATF's current strategic plan, the activity
    structure in the fiscal year 1998 budget has been realigned from
    Criminal and Regulatory Alcohol, Tobacco, Firearms, and Explosives to
    our Reduce Violent Crime, Collect Revenue and Protect the Public. ATF
    has also identified key outcome-oriented measures to gauge the success
    of the goals for each activity. The new activity structure is:
        Activity 1: Reduce Violent Crime.--Reduce the future number of
    violent crimes and cost to the public through enforcing Federal
    firearms, explosives, and arson laws in the future.
        Key Indicators: Crime-Related Costs Avoided; Future Crimes Avoided.
        Activity 2: Collect Revenue.--Maintain an efficient and effective
    revenue management and regulatory system that continues reducing payer
    burden and government oversight, and effectively and fairly collects
    the revenue due under Federal laws administered by ATF.
        Key Indicators: Taxes/Fees collected from alcohol, tobacco,
    firearms, and explosives industries; Alcohol and Tobacco Taxes Owed vs.
    Paid. (Tax Gap; Ratio of Taxes/Fees Collected vs. Resources Expended;
    and Burden Reduced.
        Activity 3: Protect the Public.--Complement enforcement with
    training and prevention strategies through community, law enforcement,
    and industry partnerships and reduce public safety risk and consumer
    deception on regulated commodities.
        Key Indicators: Individuals Exposed to Community Outreach;
    Satisfaction level of Public/Community and Industry Partnerships;
    Number of Unsafe Conditions Reported and Corrected; and Numbers of
    Individuals Trained/Developed.
        ATF is committed to defining its unique Federal role, setting
    strategic goals, long term and annual targets, managing to achieve
    those targets, and reporting on its performance annually. ATF will
    continue to work over this next year to make sure that our measurements
    for success are carefully defined and tracked. Some are more difficult
    than others, but ATF is committed to reporting to the Congress and the
    American public on how well ATF is serving its taxpayers and achieving
    its goals.
                             atf's unique programs
        ATF is a law enforcement organization with unique responsibilities
    dedicated to reducing violent crime, collecting revenue, and protecting
    the public. The Bureau enforces the Federal laws and regulations
    relating to alcohol, tobacco, firearms, explosives, and arson by
    working directly and in cooperation with others. ATF's mission is to:
    Suppress and prevent crime and violence through enforcement,
    regulation, and community outreach; ensure fair and proper revenue
    collection; provide fair and effective industry regulation; support and
    assist Federal, State, local, and international law enforcement; and
    provide innovative training programs in support of criminal and
    regulatory enforcement functions.
        Year after year, ATF works to make America a safer place for all of
    us by fighting violent crime. ATF's unique position of being vested
    with the enforcement and regulation of the Federal firearms and
    explosives laws and the regulation of those industries puts it at the
    forefront of violent crime enforcement. At our disposal are valuable
    assets that assist us in carrying out investigations against those who
    violate these statutes.
        The statutes ATF enforces involve a blend of tax, regulatory, and
    criminal functions that the Treasury Department is uniquely suited to
    handle. Treasury law enforcement functions have always involved
    criminal laws interwoven with revenue laws and regulatory controls,
    whether in the enforcement of tax or trade law, currency protection, or
    firearms regulations. In the case of the firearms and explosives
    industries, the criminal investigative responsibilities cannot
    effectively be separated from the tax and regulatory responsibilities
    because they are so technically and practically interwoven.
        ATF achieves tax compliance by focusing inspections on production
    facilities offering the greatest risk to revenue based on the volume of
    operations, past history of violations, poor internal controls, or
    questionable financial conditions. Teams of ATF special agents and
    inspectors perform complex investigations of multi-state criminal
    violations of the Federal Alcohol Administration Act and sections of
    the Internal Revenue Code. In addition, there has been a marked
    increase in the area of diversion internationally by organized criminal
    groups.
        ATF inspectors maintain regulatory oversight of the legal
    explosives industry, including 13,000 explosives licensees and
    permittees. ATF's jurisdiction and specialized expertise are unique and
    provide invaluable services to the public through enforcement,
    regulation, and cooperative industry partnerships. This is particularly
    true in our efforts on firearms and explosives-related violence.
        ATF provides resources to local communities to investigate
    explosives incidents and arson. ATF has a wide range of resources
    available. For instance, our National Response Teams (NRT's) include
    special agents, explosives technicians, fire protection engineers, and
    forensic scientists who respond to major incidents within 24 hours of a
    request to assist in large-scale fire and explosives scene
    investigations. Additionally, ATF: (1) has been active in the Church
    Fire Investigations, (2) trains canines in accelerant-detection and
    explosives detection, (3) has several ongoing explosives studies, and
    (4) provides expertise in solving arson-for-profit schemes.
        In the area of firearms, our mission is simple--to reduce gun
    violence and to fairly and effectively regulate the legitimate firearms
    industry. Our targets are criminals who illegally use and/or supply
    guns to other criminals. The enemy of the law-abiding gun owner is not
    ATF; the enemy is the violent armed criminal. Every time someone fires
    indiscriminately into a school yard, or a crowded courtroom, or sprays
    gunfire at the White House, or targets law enforcement officers, we are
    reminded once again of the dangerous times in which we live. Our
    National Tracing Center, provides 24-hour assistance to Federal, State,
    local, and foreign enforcement agencies in tracing guns used in crimes.
    It is the only facility of its kind in the world. To further ATF's
    ability to trace crime guns, the National Tracing Center has partnered
    with members of the gun wholesale industry through electronic linkups
    that both speed trace completion time and save the industry money. This
    joint government/industry partnership is helping to fight crime
    nationally.
        The more successful we are in keeping guns away from criminals,
    keeping illegal gun traffickers from reaching children, and prosecuting
    those who use guns in crimes and burn down America's churches, the
    safer all Americans are. That is ATF's mission--enforcing the law on
    behalf of the American people.
                          fiscal year 1996 highlights
        In support of this mission, the following are some highlights of
    our everyday work over the past year:
      --An ATF defendant was sentenced to 215 years of incarceration. The
            sentence is the result of his conviction of 11 counts of
            robbery and 11 counts of using a firearm during a crime of
            violence. The defendant's arrest was the result of an
            investigation conducted by the Violent Crime Task Force,
            comprised of ATF agents and other law enforcement officers.
      --ATF arson investigators assisted local law enforcement and
            prosecuting attorneys in a murder by arson investigation. ATF
            investigators utilized computerized fire modeling techniques to
            refute the version of the property owner's account of the fire.
            The owner pled guilty to the murder and arson and was sentenced
            to two consecutive life terms plus 30 years of incarceration.
      --An ATF defendant, who has 40 felony convictions, was sentenced to
            22 years incarceration and fined $17,000 as a result of a
            sentencing enhancement. This sentencing was a result of the
            defendant being arrested while being in possession of a loaded
            semiautomatic pistol.
      --Five ATF defendants, who are members of the ``El Rukin'' street
            gang, were found guilty of conspiracy to commit racketeering,
            narcotics conspiracy, and other Federal law violations. The
            verdicts were the result of a 3-month trial. Each defendant is
            facing life imprisonment.
      --Two ATF defendants, who are Ku Klux Klan members, pled guilty to
            Federal arson and civil rights violations relating to the arson
            of two predominantly African American congregation churches.
            The following day two additional Ku Klux Klan members were
            indicted for Federal arson, firearms, and civil rights
            violations for their participation in one of the previously
            mentioned church fires, the burning of a migrant worker camp,
            and automobile arson, and possession of 13 firearms and
            ammunition. Two of the defendants have now been sentenced to at
            least 18 years in prison.
      --An ATF defendant was sentenced to two life sentences after being
            found guilty of Federal firearms violations. This defendant
            shot and pistol-whipped a victim as he robbed him of $150 in
            cash and a cellular phone. The defendant was later arrested in
            possession of a firearm that the ATF laboratory identified as
            the same firearm used to shoot the victim.
      --An ATF defendant was sentenced to death for a murder, which he
            committed by setting fire to an apartment in which a female
            acquaintance and her 3 year old daughter were killed. The
            investigation revealed that the arson fire was an attempt to
            cover the deaths of the victims.
      --A defendant was sentenced to 31 to 94 years in prison for two
            subway bombing incidents in which 41 people were injured. ATF
            agents assisted in the investigation by gathering evidence from
            the defendants residence, which resulted in the defendants
            conviction.
        I am also proud to report that ATF was the recipient of four Hammer
    Awards. These awards are given by the Vice President for significant
    contributions in support of the National Performance Review Principles
    of putting customers first; cutting red tape; empowering employees; and
    getting back to basics. Awards were given to the following areas:
        Project LEAD Team.--For developing a computer process that analyzes
    traced crime gun data and identifies by name criminal firearms
    traffickers and associates to aid field investigators.
        The Partnership Formula Approval Process Working Group.--For
    streamlining, in partnership with the beverage alcohol industry and the
    flavor industry, the flavor approval process. The process time required
    prior to approval of some beverage alcohol labels and prior to the
    marketing of these products was reduced by six weeks.
        The ATF CEASEFIRE Program Team.--For providing new and innovative
    government/private industry partnerships, resulting in the cost saving
    development of a highly-effective ballistics comparison technology and
    a national enforcement strategy to solve firearms related violence.
        The National Tracing Center.--For using cost effective technology
    and teamwork involving Federal and contract personnel through which to
    implement an automated records management system, convert a massive and
    disorderly records collection system to a viable data storage and
    retrieval system--a valuable tool for the law enforcement community.
        I want to congratulate the ATF personnel who have worked hard to
    earn these prestigious awards. This is a very significant
    accomplishment and shows ATF dedication and commitment to producing
    quality programs that benefit the United States.
                              the year in progress
        ATF and its predecessor agencies have rendered honorable and
    effective service for generations. As with all organizations, we have
    gone through changes. Effective organizations continuously re-examine
    the way they do business. Over the last several years we have sought to
    improve management, training, and operational systems. These changes
    have provided the framework for making ATF a stronger and more
    effective organization. With the strong support of the committee, we
    have begun to make significant strides in these areas.
        When I appeared before this subcommittee last year I talked about
    instituting a series of leadership and operational changes. I feel that
    we have made good progress in implementing these changes. Along with
    our continued work in our daily efforts to build a sound and safer
    America through innovation and partnerships, we face several important
    issues throughout fiscal year 1997 and into fiscal year 1998:
      --Headquarters Relocation.--ATF has been pursuing a suitable, secure
            site to relocate its headquarters and is requesting a
            prospectus approval to expedite the first phase of this
            relocation. Partial funding is requested in fiscal year 1998 to
            begin site acquisition, design and construction of a new
            building.
      --Restoration of Base Budget (Direct Appropriation).--ATF's base had
            a disproportionate share of pay, fixed and operational
            resources. ATF has made strides to correct this problem in
            fiscal year 1997, and with the Committee's support, ATF will
            meet its goal of continuing to correct this problem in fiscal
            year 1998.
      --Relocation of ATF's National Laboratory Center and Construction of
            a FIRE Facility.--ATF received partial funding to begin the
            required analysis, site selection and engineering and design.
            The final prospectus is pending Congressional action by the
            Senate Environment and Public Work Committee. In fiscal year
            1998, the Bureau is requesting the balance of funds to procure
            a site, design, and build the facilities.
      --Settlement of the African-American Employees Lawsuit.--During
            fiscal year 1997, the Bureau has begun to implement the
            settlement of the African-American employees lawsuit by making
            changes in our recruitment, hiring, promotion, and training
            systems.
      --Implement GPRA.--During fiscal year 1997 the Bureau identified
            outcome oriented performance measurements for fiscal year 1998,
            integrated its strategic plan with the budgeting process, and
            refined its budget activity structure to accommodate its
            business strategies. In fiscal year 1998 the Bureau will
            continue to develop systems and collect data to report on these
            performance measures.
      --Continuation of Studies.--Through funding provided to the
            Department of Treasury in fiscal year 1997, ATF in conjunction
            with the National Academy of Science, will complete the four
            part Explosion Prevention Study (which includes Taggants) and
            the Armor Piercing Ammunition Study required by the Anti-
            terrorism and Effective Death Penalty Act of 1996 and report to
            the Committee on its status by April of 1997. We are also
            contracting with the National Academy of Science to conduct the
            Smokeless and Black Powder Tagging Study as required by the
            Omnibus Consolidated Appropriation Act of 1997.
                       fiscal year 1998 resource request
        Before I move to more details of our program activities, I will
    highlight the following key budget changes from fiscal year 1997 which
    will move us closer to reaching our strategic goals, strengthening the
    management infrastructure, as well as providing the tools necessary to
    carry out our unique missions. If approved, our fiscal year 1998 budget
    represents the final stage of our three year goal of implementing a
    balanced funding ratio and will help us to fulfill our strategic goals
    to reduce crime, collect revenue and protect the public.
        In addition to non-recurring one-time costs totaling $15,854,000
    and $14,847,000 to maintaining current service levels, our direct
    appropriation request includes the following initiatives:
    Base Restoration: $20,462,000
        Supports funding to balance the Bureau's pay and non-pay expenses,
    thus providing base funding for operational needs and non-human tools
    necessary to carry out our programs in a safe and effective manner.
    Funding will be used to maintain equipment replacement cycles for
    vehicles, radios, and computers, renew software leases; meet
    communication requirements; assist in meeting the Year 2000 ADP
    conversion requirements, and provide needed recurring laboratory,
    investigative, and software supplies.
    CEASEFIRE/IBIS Maintenance Costs: $1,200,000
        The Bureau is requesting funding to maintain equipment and provide
    for recurring data line requirements associated with 25 existing sites.
    This program has now been installed at 12 out of our 21 field
    divisions.
    Canine Explosives Detection Program: $3,974,000 and 17 FTE's
        In fiscal year 1997, the Bureau has begun to expand the canine
    facility in Front Royal, VA., hire canine handlers and train up to 30
    canines. In fiscal year 1998, with an expanded facility, the Bureau
    will be able to train up to 100 canines for state, local, and federal
    agencies. This expansion will complete the canine detection training
    infrastructure necessary to provide this level of training on an annual
    basis.
        As part of our continuing plans to relocate our National Laboratory
    from Rockville, Maryland, the Bureau is requesting the following
    increase to complete this relocation and is requested as part of the
    Laboratory Construction Fund.
    Laboratory and Fire Research Facilities: $48,044,000
        In fiscal year 1997, Congress provided ATF partial funding to cover
    the costs of acquisition of a single site and the design for two
    separate buildings to house the National Laboratory Center relocated
    from space in Rockville, MD, and a new initiative, the Fire
    Investigation, Research, and Education (FIRE) Center, the newest member
    laboratory in ATF's Laboratory Services System. In fiscal year 1998,
    ATF is requesting full funding of the balance to cover construction and
    relocation costs. Construction of the new facilities is scheduled for
    completion in fiscal year 2000. Until that time, the National
    Laboratory Center will remain in its present location. The FIRE Center
    will be co-located with ATF's Forensic Science Laboratory. This FIRE
    facility will provide law enforcement agencies with access to a unique
    single facility for scientific research and forensic support into the
    causes and characteristics of uncontrolled structure fires. Currently,
    there is no fire research facility that is solely dedicated to support
    criminal enforcement needs.
        In fiscal year 1997, the Bureau was appropriated $44,595,000 from
    the Violent Crime Reduction Fund. An increase of $5,783,000 over last
    year's level allows the Bureau to fund the following initiatives:
    Headquarters Relocation: $26,312,000
        This request allows the Bureau to begin site selection and design
    for construction of a new, secured Headquarters building in the
    metropolitan Washington, D.C. area.
    Increase Number of Annual Explosives Inspections: $5,458,000 and 53
            FTE's
        This request is part of a three year phased in goal to annually
    inspect 100 percent of all high explosives manufacturing and storage
    facilities. In fiscal year 1997, we will increase our coverage to 65
    percent of the industry. In fiscal year 1998, our goal is to increase
    the annual inspection coverage to 80 percent with the addition of 53
    new inspectors.
    Clearinghouse $1,608,000 and 3 FTE's
        This request expands on the fiscal year 1997 initiative to enhance
    ATF's Explosives Incident System to allow direct access for all Federal
    agencies to report explosives and arson incidents. In fiscal year 1998,
    the Bureau expects to complete the second year requirements for systems
    development, and hardware requirements, and allow field office on-line
    access to this information. Three positions are requested to assess and
    refine the data for tactical investigative purposes.
    Illegal Firearms Trafficking: $6,000,000
        One of the Bureau's main activities is to reduce violent crime.
    This activity utilizes ATF's unique statutory jurisdictions in firearms
    and explosives to attack armed violent crime by targeting for
    prosecution those illegal firearms traffickers who are supplying
    firearms to the criminal element and deny criminals access to firearms.
    This request is for a two prong strategy to upgrade Project LEAD to a
    Local Area Network (LAN)-based system from a PC-based system on a
    nation-wide basis. These funds also allows the National Tracing Center
    to handle the increased tracing workload by enhancing software,
    simplifying data entry and provide better database tools. Fourteen
    firearms trafficking groups will have access to this information.
    Continuation of G.R.E.A.T. Program: $11,000,000 and 24 FTE's
        To continue the partnership originally established between ATF, the
    Phoenix Police Department and the Federal Law Enforcement Training
    Center to utilize the expertise of each agency and to provide gang
    resistance and anti-violence instruction to children in a classroom
    setting. ATF will provide funding to 44 different localities through
    cooperative agreements to support their participation in this community
    outreach program at the same level as in fiscal year 1997. Arresting
    violators alone will not stop crime. We must dissuade young people from
    becoming involved in violence.
        Our fiscal year 1998 budget is the cornerstone for creating a
    sound, fully balanced Bureau. It balances our pay, fixed and
    operational costs, while at the same time ensures we have acquired the
    necessary tools to face the law enforcement challenges of the twenty-
    first century.
                              reduce violent crime
        ATF recognizes the role that firearms, explosives, and arson play
    in violent crimes and pursues an integrated regulatory and criminal
    enforcement strategy to impact these crimes. Investigative priorities
    focus on armed violent offenders and career criminals, armed narcotics
    traffickers, violent gangs, and domestic and international arms
    traffickers. Sections 924 (c) and (e) of Title 18 of the United States
    Code provide mandatory and enhanced sentencing guidelines for armed
    career criminals and narcotics traffickers. ATF uses these statutes to
    target, investigate and recommend for prosecution these types of
    offenders to reduce the level of violent crime and to enhance public
    safety.
        Under the activity Reduce Violent Crime, we have three main
    programs: Deny Criminals Access to Firearms, Safeguard the Public from
    Bombing and Arson, and Imprison Violent Offenders.
                       deny criminals access to firearms
        The projects under this program relate to identifying and deterring
    the sources and participation in illegal firearms. We apply these
    strategies in concert with our community and industry partnership
    efforts and particularly in conjunction with our GREAT prevention
    effort. Projects include: Illegal Firearms Trafficking including
    Project LEAD, International Trafficking in Arms, Youth Crime Gun
    Interdiction Initiative; Firearms Inspections; Stolen Firearms;
    Operation Alliance; the National Tracing Center; and the High Intensity
    Drug Trafficking Areas (HIDTA).
    Illegal Firearms Trafficking
        The investigation of illegal firearms trafficking is one of the
    highest priorities within ATF. Illegal firearms trafficking involves
    the distribution of firearms for the principal purpose of making
    firearms available to others in violation of the law. Amendments to the
    Crime Control Act of 1990, the Brady Act, and the Violent Crime Control
    and Law Enforcement Act of 1994 have provided ATF with additional
    jurisdiction to pursue illegal firearms traffickers and reduce the
    availability of firearms to criminals. Illegal firearms trafficking
    program highlights for fiscal year 1996 include:
      --Cases forwarded for prosecution--1,043
      --Defendants recommended for prosecution--2,230
      --34,491 firearms were illegally trafficked by those 2,230 defendants
            prior to their recommendation for prosecution.
      --Due to the incarceration of these illegal firearms traffickers, in
            1 year it is projected there will be 3,520 future firearms
            related crimes avoided, producing a savings to the American
            public of $38 million in crime related costs.
        An additional component of our illegal firearms trafficking project
    is our enhanced training efforts regarding such activities, especially
    training provided to State, local and foreign law enforcement
    personnel. In addition to courses taught at the Federal Law Enforcement
    Training Center (FLETC), ATF will also conduct courses on illegal
    firearms trafficking at targeted locations.
        In partnership with the Police Executive Research Forum (PERF), ATF
    has participated in the development of firearms trafficking training
    designed to certify State and local law enforcement officers as
    trainers in this curriculum.
        These courses will enhance the expertise of our own agents as well
    as further the cooperative relationships already established with State
    and local agencies in combating illegal firearms trafficking
    activities.
    Project LEAD
        ATF has developed state-of-the-art computer software to analyze
    firearms trace data maintained by the National Tracing Center. Through
    Project LEAD, information captured during the tracing process enables
    ATF and other law enforcement agencies to identify and target potential
    illegal firearms traffickers.
    Firearms Tracing
        The ATF National Tracing Center traces the origin and ownership of
    guns used in crimes and is sharing this information with law
    enforcement agencies. The information, which is only from recovered and
    traced crime firearms, can be requested by Federal, State, local, or
    foreign law enforcement agencies. Criminal firearms trace statistics
    are maintained for each State, and investigative leads are furnished to
    the law enforcement community by identifying suspected traffickers.
        During fiscal year 1996, approximately 116,674 requests for
    firearms traces were processed, an increase of 46 percent from fiscal
    year 1995. Urgent traces are usually completed within minutes and
    facilitated by our electronic links to industry.
    Youth Crime Gun Interdiction Initiative (YCGII)
        This initiative was designed to identify the sources of firearms
    supplied specifically to juveniles and to target traffickers who
    acquire and provide guns to juveniles. With the newly developed Project
    LEAD investigative analyses, the Bureau will begin to trace juvenile
    crime guns to their sources utilizing technological improvements in
    certain select locations nationwide. In support of the YCGII, ATF
    entered into a partnership with the National Institute of Justice and
    17 police departments around the country. In support of this
    initiative, research will be conducted that will provide a
    comprehensive picture of the illegal flow of firearms to juveniles,
    juvenile crime patterns, and juvenile firearm preferences in each
    participating city. The enforcement effort will consist of ATF special
    agents and inspectors working with police departments from each
    selected city to investigate and prosecute those individuals that are
    identified as illegally supplying firearms to juveniles. The research
    results concerning trends in juvenile crime and the juvenile firearms
    market will be published at the conclusion of the initiative.
                  safeguard the public from bombing and arson
        The projects under this program focus on identifying and deterring
    sources and pursuing the criminal misuse of explosives material and
    fire. Projects include: Preventing Criminal Misuse of Explosives,
    including Trace Element (Detection), Stolen Explosives and Recovery,
    Profiling, Canine, Interdiction, Explosives Incident System, Tracing,
    Dipole Might (Pipe Bomb Study), Certified Explosives Specialist; Arson
    Audits; Asset Forfeiture; Investigation (Post Incident Response),
    including National Response Team, International Response Team,
    Explosives Technology and the Fire Facility. Consistent with our
    jurisdiction, ATF:
      --Assists State and local authorities with any arson investigation,
            falling under Federal jurisdiction, and having a significant
            impact on their community, especially when the nature or
            magnitude of the problem extends beyond the investigative
            jurisdiction or resource capability of such authorities.
      --Provides training to other Federal, State, and local enforcement
            agencies relative to the detection and investigation of arson
            over a broad spectrum of arson-oriented topics, with special
            emphasis on arson-for-profit schemes and other related arson
            tactics employed by organized crime and white collar criminals.
      --Provides training in post-blast bombing investigation to Federal,
            State, local and foreign law enforcement agencies.
      --In conjunction with the U.S. Army Corps of Engineers, the National
            Security Council, and the Defense Nuclear Agency, continued to
            participate in a project known as Dipole Might. The project is
            designed to develop a computer software system to assist
            investigators when processing large car bomb scenes.
        During fiscal year 1996, ATF instructors participated at numerous
    explosives and arson related training programs conducted throughout the
    country. ATF publications entitled ``Arson Investigation Guide'' and
    ``Explosives Investigation Guide'' were revised, and the 1996 Arson
    Case Brief Publication was distributed.
        During the period of fiscal year 1996 there were 255 explosives-
    related arrests that involved 315 defendants, 152 indictments and 294
    convictions. There were also 287 arson-related arrests which involved
    450 defendants, 81 indictments and 287 convictions. Over $29.8 million
    was saved from fraudulent insurance claims. And with ATF's
    internationally and nationally accredited laboratories, expert forensic
    support is provided on arson and explosives investigations.
    Arson Program
        ATF provides vital resources to local communities in the wake of
    arson and explosives incidents. ATF pioneered the development of local
    multi-agency task forces designed to pool resources and expertise in
    areas experiencing significant arson problems. In fiscal year 1996, ATF
    led formal arson task forces in 15 major metropolitan areas throughout
    the United States, and participated in numerous others.
        Critical to the success of this comprehensive post-incident
    response is the certified fire investigator (CFI). ATF CFI's are the
    only investigators trained by a Federal law enforcement agency to
    qualify as expert witnesses in fire cause determinations. The
    Department of Justice recently requested that ATF provide basic arson
    familiarization training to the FBI and Department of Justice
    prosecutors concerning the church fire investigations. In fiscal year
    1996, there were 54 CFI's stationed throughout the United States.
    Fifteen of those CFI's completed the 2-year training process and were
    certified in fiscal year 1996, and an additional 29 CFI candidates were
    in the initial stages of training and will be fully certified in fiscal
    year 1998. ATF CFI's have played a major role in the church arson
    investigations, and assisted with the fire investigation at the
    Department of Treasury Building in June, 1996.
        In fiscal year 1996, ATF:
      --Hired four additional explosives enforcement officers and the first
            of two full-time fire protection engineers (FPE's), making ATF
            the only Federal enforcement agency that employs this level of
            expertise. ATF's FPE's are dedicated solely to the analyses of
            origins and dynamics of fire as it pertains to criminal
            investigations. ATF also trained 24 special agents as certified
            explosives specialists.
      --Developed a prospectus covering the creation of a Fire
            Investigation, Research and Education (FIRE) Center that will
            be constructed in partnership with an institution of higher
            learning. This facility will be co-located with and be a part
            of ATF's relocated National Laboratory Center, and will focus
            on forensic investigative support.
      --At the direction of Congress, the Department of Treasury and ATF
            initiated a four-part Explosion Prevention Study. This study
            will continue to explore the feasibility of placing tracer
            elements in explosives materials for the purpose of detection
            and identification.
    Accelerant and Explosives Detection Canine Project
        ATF pioneered development and usage of canines to detect
    accelerants at suspected arson scenes in the early 1980's. This
    project, utilizing the ATF National Laboratory, has developed
    scientifically validated canine training methodologies and protocols.
        These accelerant detection canines are made available to State and
    local police and fire agencies across the country. At the present,
    there are 46 working accelerant-detecting canines teams nationwide that
    are trained and certified by ATF. Recertification of the canines is
    done annually. There are an additional 115 ATF certified canines in 7
    foreign countries through an agreement with the Department of State.
        ATF also utilizes scientifically validated training methods and
    protocols in its canine explosives detection program. ATF is expanding
    its canine explosives detection program to provide canine explosives
    detection training for State and local law enforcement agencies.
        ATF has received funding for the construction and expansion of its
    canine training facility. ATF is using the funding to expand its
    infrastructure and for the construction of a new canine training
    building and a new kennel facility. ATF will be expanding its cadre of
    explosives detection canine teams and will place these teams throughout
    the country.
        Finally, ATF has been authorized to develop explosive K-9
    standards.
    Church Arson Investigations
        Since January 1, 1995, ATF, in conjunction with the National Church
    Arson Task Force, has investigated 349 church fire incidents. As a
    result of these investigations, 159 defendants have been arrested,
    clearing a total of 115 incidents. This represents a 33 percent
    clearance rate of church arsons by the task force, which is more than
    twice the average clearance rate of 16 percent for arson
    investigations.
        In May 1996, the U.S. House of Representatives' Judiciary Committee
    held hearings on the church fires. ATF's participation in the hearings
    led to supplemental funding for fiscal year 1996 and fiscal year 1997
    totaling $24 million.
        ATF was instrumental in the development of the Major Case Team that
    has addressed the church fire investigations. The Major Case Team is
    collocated with the National Church Arson Task Force, and has a current
    staffing level of 12.
        ATF developed a Church Threat Assessment Guide, and distributed
    over 30,000 copies. An additional 250,000 copies of these guides were
    distributed by the Federal Emergency Management Agency.
        ATF implemented the 1-888-ATF-FIRE and 1-888-ATF-BOMB phone
    numbers. These national hotline numbers were developed and implemented
    in order to allow the public to phone in possible leads in these
    investigations.
    National Response Team (NRT)
        In fiscal year 1996, the NRT's provided effective post-incident
    response in 22 activations and obligated funding for the purchase of 6
    replacement NRT vehicles, which will further enhance response
    capabilities. These vehicles will be ready beginning in March. ATF will
    order 10 additional vehicles to replace all antiquated and poorly
    designed vehicles (1981-1983). The NRT was utilized for the crime scene
    efforts in the Olympic Centennial Village bombing and the TWA Flight
    800 investigations.
        ATF also maintains an International Response Team (IRT), formed as
    a result of an agreement with the Department of State. The team has
    been deployed to such countries as Peru, Argentina, Pakistan, El
    Salvador, and Macedonia. The IRT was activated for two incidents in
    fiscal year 1996.
                           imprison violent offenders
        This program focuses on the investigation, arrest and
    recommendation for prosecution, of those criminals who violate firearms
    and explosives laws in their criminal activity. Programs/projects that
    fall under this activity include: Achilles, Task Forces and Project
    Uptown; CEASEFIRE; and the Violent Offenders Program.
    CEASEFIRE
        In response to the growing need for Federal assistance in
    communities experiencing serious gang and drug-related shooting
    incidents, ATF initiated a comprehensive enforcement approach entitled
    CEASEFIRE. This approach to repetitive violent crime combines all of
    our firearms assets--tracing, trafficking program, violent offender
    program, and our Achilles program experience with the latest forensic
    technology. At the heart of the program lies the Integrated Ballistic
    Identification System (IBIS), which is a computer imaging
    identification system capable of assisting the firearms examiner in
    linking firearms to expended ammunition and multiple shooting
    incidents. It also allows investigators to link shootings in one city
    to shootings involving the same weapon in another. The system does not
    replace the firearms examiner, but helps find the proverbial needle in
    the haystack in seconds rather than what used to take weeks and
    sometimes months.
        CEASEFIRE has yielded significant results in violence-plagued
    communities across the country. ATF fully expects this project to
    continue to contribute significantly to the identification of homicide
    and shooting suspects and the linking of related gangland shootings.
    During fiscal year 1996, CEASEFIRE was able to expand to an additional
    10 sites. This allows 12 out of our 21 field divisions do not have this
    equipment on site.
        Laboratory personnel provide day-to-day technical support, give
    demonstrations of the technology, assist new users, work with the
    manufacturer on system improvements, and maintain a leadership role in
    a newly established users group.
        Detroit, MI.--A firearm taken into custody for a traffic stop was
    test fired and entered into IBIS. An ATF examiner working with the
    local police to help clear the backlog of cases matched it to a October
    1996 murder. Detroit police have said that they could not have linked
    the two incidents without IBIS. One suspect is in custody and three
    additional suspects have been identified.
        Washington, DC.--In January 1996 the CEASEFIRE program in
    partnership with the Metropolitan Police and using IBIS technology were
    able to link a 1992 shooting with a suspect who was taken into custody
    on an unrelated assault charge.
    The Achilles Program
        The Armed Career Criminal and Comprehensive Crime Control Act of
    1984 provided the cornerstone of ATF's national firearms project known
    as ``Achilles''. ATF has experienced tremendous success with the
    enforcement of Title 18 U.S.C. section 924 and 924(e), which provide
    for mandatory minimum sentencing of recidivist criminals and armed
    narcotics traffickers. The Achilles Project is particularly effective
    in removing the most violent criminals from our communities, and in
    many cases, for the remainder of their crime-producing lives. Achilles
    Task Forces have been established in 20 major United States cities. The
    task forces, comprised of ATF special agents and inspectors, often with
    assigned State and local officers, work in targeted neighborhoods where
    the highest incidents of gang-related violence, drug trafficking,
    homicides, and other violent crimes occur.
        The Achilles Project impacts on armed violent crime by
    incarcerating that percentage of active career criminals who are
    responsible for a majority of the violent crimes. From fiscal year 1989
    through fiscal year 1996 there have been 29,872 defendants recommended
    for prosecution for being armed drug traffickers or armed career
    criminals. In addition, 1,889 defendants have been sentenced to a total
    of 33,602 years in prison as armed career criminals; 5,275 defendants
    have been sentenced to a total of 31,738 years in prison as armed drug
    traffickers, and there have been 41 life sentences under these two
    statutes. Using the Achilles Project performance measure formula, which
    meets the requirements of the Government Performance Results Act, it
    can be shown that in just fiscal year 1996, with the incarceration of
    1,889 armed career criminals, ATF will have prevented 302,240 crimes
    and $700 million in crime-related costs that the public would have
    incurred.
    Laboratory Support
        The National Laboratory supports this activity by providing
    services in the following areas:
      --Firearms and Automated Ballistics Examination.--Analytical support
            services for activities under our Reduce Violent Crime
            activity.
      --Explosives and Fire Debris Analysis.--Chemist members of National
            Response Teams investigate bombings and arsons by identifying
            explosives and device components, reconstructing devices for
            investigative and court purposes, and developing investigative
            information from trace evidence collected at crime scenes using
            arson computer-based fire modeling and computer forensic data
            recovery.
        The forensic science laboratories in San Francisco, CA and
    Rockville, MD, received notice of 5-year re-accreditations following
    inspections by the American Society of Crime Lab Directors (ASCLD), the
    leading professional organization committed to forensic science service
    for the criminal justice community.
                              collect the revenue
        ATF collects the excise taxes on alcohol, tobacco, firearms, and
    ammunition. Taxes on these controversial products generate $12--$13
    billion in Federal revenue annually.
        Under this activity there are two main strategies: Ensure
    Collection of Revenue Due, and Manage and Process Revenue.
                        ensure collection of revenue due
        This program focuses on ensuring that all revenues eligible and due
    are collected. Projects under this program are: Excise Tax Inspections
    (alcohol, tobacco and firearms); Industry Seminars; Diversion and
    Smuggling; Market Basket Sampling; and Bonding and Qualification of
    Revenue Plants.
    Excise Tax Inspections
        ATF ensures that the revenue we collect remains sound by protecting
    it from fraud. There are more than 3,000 manufacturers of alcohol
    beverages, tobacco products, firearms, and ammunition who pay excise
    taxes on the commodities they produce. On-site inspections of alcohol,
    tobacco and firearms taxpayers are focused on facilities offering the
    greatest risk to revenue. With ATF's efficient post-audit system, we
    estimate that over 99 percent of the excise taxes owed to the Federal
    Government are paid through ATF in a timely fashion. Generally, the
    remainder is identified and collected through the audit process. This
    is accomplished primarily with the use of commercial records and a
    minimum of required reports or forms.
        ATF employees continuously monitor tax collections by auditing tax
    returns and assessments, initiating enforced collection action,
    analyzing required reports, and accounting for tax payments, licensing
    fees, and related refunds. ATF also reviews and acts upon applications
    and surety bonds submitted by companies that produce or sell alcohol or
    tobacco products.
        When violations of law or regulations are uncovered by ATF
    inspectors and technical specialists, the natural inclination is to get
    the problem fixed, not to prosecute in a criminal court. When
    circumstances warrant it, however, ATF's regulatory enforcement
    inspectors forward the information to the criminal enforcement agents,
    then assist in the prosecution of the criminal case.
    Diversion Project
        ATF's regulatory oversight protects the Federal Government's
    revenue through compliance inspections of the manufacturers and
    importers of alcohol beverages, tobacco products, firearms, and
    ammunition. These inspections include investigating the diversion of
    export alcohol beverages and cigarettes withdrawn from the
    manufacturers' inventories without payment of tax.
        During recent years, the Canadian government and certain State
    governments have imposed higher excise taxes on alcohol and tobacco
    products. The imposition of these taxes created a lucrative black
    market primarily dominated by white collar and organized crime groups.
        ATF discovered that alcohol and tobacco products, originally
    destined for overseas countries, were being diverted, without payment
    of taxes, from the United States to Canada. Parts of the shipments were
    illegally diverted and smuggled into Canada to avoid the payment of the
    high Canadian excise taxes. Other portions of the shipments were found
    in the United States Had the products remaining in the United States
    gone undetected, the excise tax revenue would have been lost.
        In similar circumstances, tax-paid products have been smuggled into
    Canada as well as from state to state in the United States to avoid the
    payment of the higher-rate State excise taxes in violation of Federal
    law. Domestic and international alcohol and tobacco diversion is
    becoming a target area for ATF enforcement priorities as it increases
    globally.
        The seizure of alcoholic beverages and tobacco products by ATF
    agents and inspectors in 1996 has resulted in over $804 thousand being
    credited to the Asset Forfeiture Fund. Also, through our efforts,
    several members of the organized crime groups have been successfully
    prosecuted and in fiscal year 1996, ATF accepted $107,000 in
    settlements from subject distilleries and wholesalers to compromise
    their illegal involvement in diversion activity. There are currently
    146 open diversion cases.
        Approximately $2.7 million was assessed by ATF against entities who
    evaded payment of excise taxes by diverting alcohol and tobacco
    products. ATF's combined assets of regulatory inspectors, auditors,
    special agents, intelligence analysts, and tax specialists have enabled
    ATF to detect current and prevent future erosion of the revenue,
    particularly in the area of product diversion.
        The National Laboratory, with several functions unique to ATF,
    supports this project in the following ways:
      --Beverage Alcohol Analyses.--Chemical analysis is performed on
            alcoholic beverages produced in the United States or imported
            into the United States. Examinations verify that products meet
            legal requirements and reveal whether contaminants such as
            pesticides or toxic materials are present. New products are
            evaluated to determine how much tax is to be levied.
      --Non-beverage Alcohol Program.--Chemical analysis of non-beverage
            alcohol products is performed to determine taxes owed.
            Technical evaluation of applications are conducted for new
            products containing taxable alcohol. These non-beverage alcohol
            products include foods, flavors, medicines, cosmetics, and
            industrial solvents. Over 10,000 new product formulas and
            samples are examined each year.
      --Tobacco Analysis.--Chemical analysis and physical examination of
            new tobacco products to establish tax classification are also
            conducted. Examinations of existing products ensure that ATF
            collects the proper amount of tax revenue each year.
                           manage and process revenue
        This program focuses on developing systems and processes to ensure
    that revenues received and paid out are effectively and timely managed.
    Projects under this program include: Tax Return and Claims Processing
    including Technical Services and the Tax Processing Center. This
    oversight is done with minimum impact on commercial operations.
        ATF ensures the collection of Federal excise tax and protection of
    the revenue through a system of laws, regulations, tax returns,
    permits, bonds, and disbursement (refund) functions in accordance with
    the Internal Revenue Code of 1986. The Bureau collects, records, and
    accounts for a variety of taxes and registration and license fees from
    alcohol, tobacco, firearms, ammunition and explosives industries. None
    of the non-entity revenue collected by ATF is used in any Bureau
    operations; all funds are transferred to the U.S. Treasury or other
    Federal agencies for further distribution in accordance with the
    various laws and regulations.
        Management of taxpayer accounts and the proper receipt of tax
    returns and payments ensures accurate collections and reporting of all
    receivables. ATF's collection systems include work by the technical
    services staffs located in the districts and the Tax Processing Center
    in Cincinnati, Ohio. Principal activities of these entities include
    office audits of tax returns and reports, audits of claims, and
    collection actions, review and approval of applications for permits,
    registration of plants and surety bonds, and processing and custody of
    official case files.
        ATF has begun the process of reducing the number of technical
    services offices, leading to a single revenue center in Cincinnati
    serving the whole country, which will be in place by 2001. In
    accomplishing this, ATF plans to maintain or enhance customer service
    and revenue protection despite an overall reduction in resources
    allocated to these functions.
                               protect the public
        There are three programs under this activity: Community Outreach,
    Protect the Consumer, and Public Safety.
                               community outreach
        The focus of this strategy is community efforts designed to
    encourage and participate in the prevention of violence including the
    Gang Resistance Education and Training (GREAT) project.
        G.R.E.A.T. is a school-based gang and violence prevention program
    taught by uniformed law enforcement officers to elementary and middle
    school children. ATF administers the program in partnership with the
    Phoenix Police Department, the National Sheriffs' Association, the
    International Association of Chiefs of Police, and the Federal Law
    Enforcement Training Center (FLETC).
        The Bureau anticipates providing funding to 44 different localities
    to support their participation in the G.R.E.A.T. project. We estimate
    that over 800 different localities are currently teaching the
    G.R.E.A.T. curriculum in classrooms around the country. In addition to
    providing financial resources, ATF also provides training to law
    enforcement officers, certifying them as G.R.E.A.T. instructors.
        This program has been highly successful in educating young children
    about the dangers of gangs and violence. A cross-sectional evaluation
    conducted by the University of Nebraska in Omaha was completed in 1996
    and concluded that the G.R.E.A.T. project has had a significant,
    positive impact on the participants.
                              protect the consumer
        The focus of this program is to ensure that commodities meet safety
    and product identity standards. Projects under this program include:
    Certificates of Label Approval, Market Basket Sampling, Industry and
    State Partnerships, Trade Practices, Beverage Alcohol Permits and Field
    Product Integrity.
        An important part of the ATF mission is its focus on protecting the
    consumer. The authorization for this focus and oversight is based on
    the Federal Alcohol Administration Act (FAA Act). Passed in 1935, just
    after the repeal of Prohibition, the FAA Act gives ATF the power to
    regulate and prevent many of the industry excesses that led to
    Prohibition in the first place. This law, along with portions of the
    Internal Revenue Code, requires ATF to regulate the labeling and
    advertising of malt beverages, wine, and distilled spirits.
        ATF prevents organized crime and other criminal elements from
    entering the alcohol beverage industry through the regulatory process.
    This includes the pre-screening of permit applications and the
    financial investigation of applicants.
        ATF is committed to helping the consumer directly and immediately
    by monitoring possible health hazards and investigating consumer
    complaints of tainted or adulterated alcohol beverages. Consumers are
    also helped indirectly by ATF's regulation of trade practices within
    the alcohol beverage industry. This regulatory activity ensures a level
    playing field for industry members and contributes to consumer values
    in the market.
        Finally, a continuing liaison relating to alcohol beverages is
    maintained between the United States and its foreign trading partners.
    ATF is required not only to know the United States laws relating to
    beverage production, marketing, and trade, but also the parallel
    policies of major foreign nations. This liaison helps to reduce or
    eliminate trade barriers for United States businesses selling their
    products in foreign markets.
                                 public safety
        This program focuses on keeping ineligible or prohibited persons
    out of the regulated industry and ensuring that firearms and explosives
    are properly accounted for. Program/projects include: Licensing
    (firearms and explosives); Investigations (firearms and explosives
    applications); Explosives Inspections; and Fire Facility.
    Firearms Licenses and Inspections
        The Bureau is responsible for enforcing the licensing provisions of
    the Gun Control Act of 1968 (GCA). This law imposes licensing
    requirements on firearms manufacturers, importers, collectors, and
    dealers. In order to ensure that these requirements are met, ATF
    conducts a thorough inquiry with respect to each applicant. In the
    past, the GCA contained less stringent standards for acquiring a
    firearms license. However, recent changes in law and regulation have
    resulted in several additions to licensing requirements. ATF works to
    ensure compliance with present firearms licensing requirements. ATF
    implemented procedures to require more reliable forms of
    identification, such as fingerprints to assist in identifying any
    criminal history. In addition, the November 30, 1993, enactment of the
    Brady Handgun Violence Prevention Act increased the licensing fee for
    dealers from $30 to $200 for 3 years and from $30 to $90 for a renewal
    application.
        Licensing standards were further enhanced by the enactment of the
    Violent Crime Control and Law Enforcement Act of 1994 (the Act).
    Provisions of the Act require that applicants for a license certify
    that they will comply with all State and local laws, including zoning
    requirements. In addition, applicants are required to notify the chief
    law enforcement officer of where their premises are located, and of
    their intent to apply for a Federal Firearms License (FFL).
        As a result of the recent changes in law, there has been a dramatic
    decrease in the population of licensed dealers. As of February 19,
    1997, there were 119,708 licensees in this Nation. ATF has fewer than
    450 regulatory inspectors to monitor this program and conduct all other
    field inspections, including the entire range of alcohol, tobacco, and
    explosives work.
        During fiscal year 1996 ATF received 6,460 new firearms license
    applications and inspected 6,385 on-premise firearms license dealers. A
    total of 21,795 telephone renewal applications occurred. A total of
    10,051 on premise compliance inspections resulted in 7,026 violations
    being disclosed.
    Explosives Licenses and Inspections
        As important as it is to put arsonists and bombers in jail, ATF
    recognizes the value of averting accidents and keeping explosives from
    the hands of those who are prohibited from possessing them. ATF's
    regulatory enforcement provides a system of industry regulation
    emphasizing a proactive approach to the problem. Similar to the
    requirements for firearms, all manufacturers, importers and dealers are
    required to obtain a Federal license from ATF to conduct business, and
    certain users of explosives are required to obtain a Federal permit.
        ATF regularly conducts on-site inspections to ensure that
    explosives are stored in approved facilities, which are secure from
    theft and located at prescribed distances from inhabited buildings,
    railways, and roads. One important focal point of this function is to
    correct violations before inspection, leading to reducing the threat to
    the public.
        During fiscal year 1996, ATF conducted 957 on-premise explosives
    application inspections. A total of 2,813 on-site compliance
    inspections of permit holders were conducted and 1,238 violations were
    found.
                    misdemeanor crimes of domestic violence
        The Omnibus Consolidated Appropriations Act of 1997 (the Act)
    effective September 30, 1996, made several amendments to the Gun
    Control Act of 1968. One of those amendments was to make it unlawful
    for any person convicted of a ``misdemeanor crime of domestic
    violence'' to ship, transport, possess, or receive firearms or
    ammunition.
        The amendment also applies to employees of government agencies.
    Thus, law enforcement officers and other government officials who have
    been convicted of a qualifying misdemeanor will not be able to lawfully
    possess or receive firearms or ammunition for any purpose including
    performing official duties.
        ATF has notified all Federal firearms licensees and all Federal,
    State and local law enforcement agencies of this new category of
    prohibited persons. ATF has also modified all forms used by Federal
    firearms licensees to include this prohibited person category.
                     current information technology support
        In fiscal year 1996, ATF developed a concept for the acquisition
    and deployment in fiscal year 1997 and fiscal year 1998 of
    infrastructure equipment, integrated networks, and operating and
    applications software forming an ``Enterprise Systems Architecture''
    capable of providing automated information gathering and information
    sharing capabilities to aid ATF's investigative and regulatory business
    strategies and activities. When deployed in late fiscal year 1997 and
    early fiscal year 1998, this technology will improve access to critical
    data sources throughout ATF dealing with violent crimes, gun tracing,
    regulated industry data and performance data. All employees will, for
    the first time, have access to the data they need, where and when they
    need it.
        The Enterprise Systems Architecture is a mix of hardware and
    operating software that forms the infrastructure on which a virtual
    office of continually evolving application services will be installed
    to support ATF's Firearms, Arson and Explosives, Intelligence,
    Integrated Ballistics Identification, Collections, Financial
    Management, and Personnel and Performance Measurement systems.
        The infrastructure consists of:
      --a ``backbone'' communications network capable of transmitting and
            sharing data instantaneously within and among organizational
            segments via local, metropolitan, and wide area networks;
      --deployment of a mix of desktop and notebook personal computers with
            simultaneous delivery of training in their use to ATF's
            approximately 4,000 employees;
      --a standardized suite of software consisting of operating systems,
            telecommunications software, database management systems,
            applications development tools, etc.; and
      --upgrades to ATF's mainframe computer so that it can continue to be
            the host platform for legacy applications, provide a base for
            client/server applications, and provide archival data storage
            for recovery purposes for all servers in the configuration.
        These infrastructure and application services developed within or
    under contract for ATF have been designed to meet ATF's core business
    strategies, as well as meet information systems security requirements
    and Year 2000 compliance requirements.
        In fiscal year 1997, ATF will be able to:
      --purchase mainframe computer upgrades including robotics for virtual
            unattended operation; and
      --create an Enterprise Systems Architecture office to work with the
            Information Technology Standards Working Group, the Information
            Resources Management Council, the Information Technology
            Advisory Board, and the Strategic Management Team, to apply a
            3-year lease acquisition strategy for deployment of the
            Enterprise Systems Architecture by late fiscal year 1997/early
            fiscal year 1998.
                                training efforts
        With the support of this Committee, the Bureau has undertaken a
    number of new training initiatives and enhancements to existing
    training programs. We have allocated additional resources to support
    our training efforts and have focused primarily on arson, explosives,
    and firearms training projects. We have increased the number of post-
    blast and general explosives proficiency training courses, increased
    the number of firearms trafficking schools (with an added emphasis on
    international firearms trafficking), revised our arson training
    curriculum and undertaken to train additional personnel as Certified
    Fire Investigators (CFI's), and enhanced our leadership development
    programs.
        Concurrent with these efforts and with the support of the
    Department of State, we continue to conduct post-blast and firearms
    trafficking training for international law enforcement officers in both
    Eastern Europe and Latin America.
        One of the Bureau's statutory mandates is to undertake the training
    of State and local law enforcement personnel. To this end, we conduct
    courses in firearms trafficking, post-blast explosives, arson, and
    undercover techniques for these personnel. Utilizing funds provided in
    fiscal year 1997, we have undertaken development of an Improvised
    Explosive Device (IED) training curriculum for delivery to State,
    local, other Federal, and airline industry personnel.
        In addition to our classroom activities, we have also pursued a
    number of systemic changes designed to improve the quality and
    effectiveness of our training programs. We have completed and
    implemented an ATF Training Model, which establishes standards and
    protocols for the development and delivery of ATF training. We have
    also initiated curriculum re-engineering efforts, particularly with
    regards to some of our arson training courses, designed to achieve
    formal accreditation of our educational efforts. Our recently
    implemented instructor development system is designed to enhance the
    skills and techniques of ATF instructors, thereby elevating the quality
    of the training courses ATF delivers. Finally, we have undertaken
    revisions in the methods by which we identify and select personnel to
    receive training to ensure compliance with legal mandates. Training
    must be a continuing process.
                          equal employment opportunity
        Three major cross-cutting issues dealing with training,
    recruitment, and supervisory accountability are presently being
    addressed by focus groups and members of the Executive Staff.
        I am proud of the significant progress we have made in the area of
    career advancement for women and minorities. For example, in 1987,
    women held only 5.4 percent of GS 13-15 positions in ATF; in 1996, that
    figure was 17 percent. Gains were also made in SES positions. In 1987,
    there were no women in SES positions; in 1996, women represented 14.8
    percent of the SES cadre. Minorities hold 7.4 percent of SES positions.
        We have also increased the number of female and minority special
    agents in our work force. In 1982, the Bureau employed only 23 female
    special agents; by 1988, that number had risen to 116; and by 1996, ATF
    had a total of 216 female special agents, or 12 percent of the total,
    up from 7.9 percent in 1988 and 1.8 percent in 1982. Similarly, we have
    steadily increased the number of minority special agents in recent
    years. In 1982, ATF employed only 63 minority special agents; in 1988
    that number increased to 201; and by 1996, we had a total of 357
    minority special agents, or 19.1 percent, up from 5 percent in 1982 and
    14 percent in 1988.
    ATF Early Complaint Resolution Program (ECRP)
        On December 3, 1996, ATF established an 18 month pilot Early
    Complaint Resolution Program (ECRP). This program is designed to help
    parties involved in the Equal Employment Opportunity (EEO) Complaint
    process resolve their differences through the use of Alternative
    Dispute Resolution (ADR) techniques, primarily during the pre-
    complaint/counseling stage of the process. The program is completely
    voluntary and the mediator cannot impose a decision on the parties.
    Participation in the ECRP does not jeopardize an aggrieved party's
    right to pursue formal EEO procedures if no resolution of the dispute
    is achieved. This program has the potential to improve morale and
    significantly reduce the time and costs associated with traditional EEO
    procedures.
    Professional Review Board and ATF/NTEU Partnership
        Illustrating our commitment to ensuring a fair and equitable
    workplace for our employees, ATF established a Professional Review
    Board (PRB) and the ATF/NTEU Partnership Council.
        The PRB addresses issues of timeliness and consistency in
    disciplinary actions for all non-bargaining unit employees. Working
    with the Employee and Labor Relations Branch and Chief Counsel, the PRB
    (composed of senior Headquarters managers representing a cross section
    of the Bureau) determines and issues proposals for disciplinary and
    adverse actions resulting from Office of Inspection investigations.
        The ATF/NTEU Partnership Council, which meets on a quarterly basis,
    provides a forum to address and resolve issues of mutual concern
    between ATF management and the National Treasury Employees Union. In
    the almost 2 years since its inception, the Council has worked together
    in reaching solutions to Bureau-wide issues. Feedback received from the
    facilitator who works with our Council, as well as those of other
    Federal agencies, indicates that ATF's partnership is the most
    productive and successful organization of its type in its experience.
                     management and administrative efforts
        Several other administrative and management initiatives are
    noteworthy. They are in the areas of security, field structure,
    accountability, and customer service plans.
        As a result of the Oklahoma bombing, ATF was provided funding to
    enhance physical security, both in the field and at Bureau
    Headquarters. Immediate steps were taken to safeguard employees, and
    plans are underway to relocate Bureau Headquarters so that we may have
    more control over our security. In addition, a number of security
    enhancements have been scheduled for our field installations following
    a security needs survey. For example, we are placing X-ray machines in
    facilities that receive a high volume of mail.
        ATF continues its drive to become a customer focused organization,
    which is directly in line with the guiding principles of our strategic
    plan:
      --We created a new position in the Office of the Ombudsman to
            develop, support, and oversee a problem resolution program for
            external customers.
      --We established the new position of Customer Service Specialist at
            the Firearms and Explosives Licensing Center in Atlanta and
            Technical Services in Cincinnati.
      --Annually, we publish customer satisfaction reports telling our
            customers how well we did in meeting our previously published
            service standards.
      --Several groups within ATF, including our labeling section, have
            sent their customers surveys, the results of which are used to
            improve service. More groups, including our National Response
            Teams, will be surveying their customers this year.
        This completes my statement. I will be happy to answer any
    questions you may have and I would like to express my sincere
    appreciation of the support that your Committee has provided us. I look
    forward to working with your Committee to further our mutual goals of
    safeguarding the public and reducing violent crime.

                              U.S. Customs Service

    STATEMENT OF GEORGE WEISE, COMMISSIONER
        Senator Campbell. I just noticed I had skipped over George
    Weise, U.S. Customs Service.
        So, George, I apologize, go ahead.
        Mr. Weise. Thank you very much, Mr. Chairman and Senator
    Kohl. It is, indeed, an honor to come before you and describe
    the work of the U.S. Customs Service. I would like to join my
    colleagues and take this opportunity to thank you and this
    committee for your outstanding support and to assure you that
    we will continue the high-quality performance which has earned
    your backing.
        Customs' fundamental mission, as you indicated in your
    opening statement, is to protect the Nation's borders. We
    enforce hundreds of tariff and trade laws and regulations. We
    perform the initial checks, processes, and enforcement
    functions of over 40 other Federal agencies and we collect over
    $20 billion in revenue in the form of taxes, duties, and fees.
        We have many responsibilities in Customs, but I want it to
    be made clear that none is more important than the task of
    preventing illegal drugs from crossing our borders. Drug
    interdiction has been and is our greatest operational priority.
    Last fiscal year we seized over 1 million pounds of illegal
    narcotics--a Customs record.
        Our seizures of cocaine, heroin, and marijuana rose sharply
    from the previous year: 15 percent for cocaine, 23 percent for
    marijuana, and 20 percent for heroin. These figures are
    impressive, but they are by no means signs that we, as a
    nation, are making major inroads against the cartels who
    continue to flood our communities with drugs and all too often
    deprive these communities of hope and fill them with crime.
        All of us in the drug law enforcement business can do a
    better job and Customs, notwithstanding last year's success, is
    no exception. I believe that the $641 million we have requested
    for our antidrug efforts in fiscal year 1998 will enable us to
    better combat drug smugglers.
        With these funds we will be able, for example, to conduct
    more antismuggling operations; to employ new technology, some
    of which you have seen in the room today, that will allow us to
    more efficiently and more effectively use our resources; to
    devote more personnel to high-threat drug zones; and, finally,
    to shore up our infrastructure.
        Inextricably related to Customs' interdiction mission is
    our focus on promoting integrity within our ranks. We are
    keenly aware of the threat of corruption and we are continually
    introducing new programs and procedures to prevent corruption
    and to quickly detect it when it occurs. Our Office of Internal
    Affairs continuously reevaluates security controls, regularly
    conducts extensive integrity training, and is in the process of
    improving our data base so that we can identify trends and, in
    essence, find rotten apples before they do any damage to the
    rest of the barrel.
        Our $1.7 billion budget request for fiscal year 1998 not
    only will help us in the fight against drug smuggling but will
    ensure adequate funding for all of our operations. Our capacity
    to deliver to the American taxpayers the high-quality services
    they expect and deserve depends on maintaining a well-equipped,
    reliable infrastructure.
        Let me thank you again for your support and I will be happy
    to answer any questions at the end of the testimony.
        Thank you, Mr. Chairman.

                               prepared statement

        Senator Campbell. Thank you, Mr. Weise. We have your
    complete statement and it will be made part of the record.
        [The statement follows:]
                     Prepared Statement of George J. Weise
        Mr. Chairman and Members of the Committee, it is a pleasure to be
    here today to discuss the activities of the Customs Service and to
    present our appropriation request. Once again, I am looking forward to
    working with this Committee and am confident that Customs will continue
    to enjoy the same high level of support it has received in the past.
    Accompanying me today are members of Customs executive management team.
        Our resource requests, our priorities, and our commitment are all
    derived from our mission, which is to ensure that goods and people
    entering and leaving this country conform to all applicable laws. In
    fiscal year 1998, while challenges facing Customs will continue to grow
    in complexity and scope, our greatest operational priority will
    continue to be drug interdiction and the dismantling of drug smuggling
    organizations. In fiscal year 1996, Customs cocaine seizures increased
    approximately 15 percent from the previous year, heroin seizures
    increased approximately 29 percent and marijuana and hashish seizures
    increased approximately 23 percent. Overall, Customs seized
    approximately one million pounds of narcotics--more than all other
    Federal law enforcement agencies combined. This is a new milestone for
    the agency.
        As you are aware, however, the job is not finished. Illegal
    narcotics and other contraband continue to find their way into the
    United States. To meet the drug challenge and our projected workload,
    we are proposing a budget of $1.7 billion for fiscal year 1998 which
    includes funding for anti-smuggling operations, land border automation,
    laboratory upgrades, personnel relocation and vehicle replacement.
    These resource increases, which I will discuss in more detail later in
    this statement, will contribute to refining our core processes and
    strategies.
                                    workload
        The U.S. Customs Service is accountable for the screening of all
    commercial movement of cargo across our borders. Last year, the Customs
    Service collected about $22 billion in revenue for the United States in
    the form of duties, taxes, and fees. The Customs Service applied
    hundreds of laws and regulations concerning tariff and trade to over 16
    million entry summaries which involved nearly $800 billion of trade.
    Additionally, Customs performs the initial checks, processes, and
    enforcement functions for over 40 federal agencies. Customs performs
    these tasks by covering over 7,000 miles of land border and servicing
    over 300 ports of entry.
        Customs will have to address increasing workload requirements as
    the number of passengers and conveyances crossing our land borders or
    entering through our airports and seaports grows. In fiscal year 1997,
    it is estimated that there will be 372 million land border passenger
    arrivals, 71 million air passenger arrivals, and 8 million sea
    passenger arrivals. Customs also estimates that 125 million vehicles,
    713,000 aircraft, and 110,000 vessels will enter our ports. As trade
    and traffic increase, Customs must remain ever vigilant against drug
    smuggling attempts.
                            processes and strategies
        The Customs Service reorganized in fiscal year 1995 with the
    principles outlined in their report, People, Processes and
    Partnerships: A Report on the 21st Century. This effort, which was
    recognized by the General Accounting Office (GAO) as a model in their
    guide ``Effectively Implementing the Government Performance and Results
    Act,'' provided the framework for Customs to develop the processes and
    strategies it will need to adapt to the changing demands of its
    mission.
        Customs has three core operational processes: Trade Compliance,
    Passenger Processing, and Outbound. The goal of the Trade Compliance
    process is to maximize compliance with Customs trade laws while
    decreasing the cycle time for releasing legitimate cargo in an
    environment in which our workload is expected to balloon, and in which
    we must address effective interdiction objectives which I will discuss
    shortly. Customs expects to achieve this through a balance of informed
    compliance and targeted enforcement that will allow us to focus
    resources on violators of import laws and regulations. The goal of
    Passenger Processing is to ensure compliance with Federal laws and
    regulations by targeting, identifying, and examining high-risk
    travelers, while expediting low-risk travelers. The Outbound Process is
    responsible for the enforcement of laws concerning the export of
    undeclared currency, the illegal export of stolen vehicles, munitions,
    dual use materials with military applications, and precursor materials.
    Outbound is also charged with the high profile responsibility to
    enforce embargoes against countries sanctioned for supporting
    terrorism. Other responsibilities of Outbound include the maintenance
    of the Office of Defense Trade Control (ODTC) munitions license
    program, and the collection of outbound trade statistics and harbor
    maintenance fees on exports. Inherent in Customs processes are the
    Narcotics and Money Laundering strategies which deal with those who
    willfully violate the law.
                           customs narcotics strategy
        Customs goal is to prevent the smuggling of narcotics into the U.S.
    by creating an effective interdiction, intelligence, and investigation
    capability which also helps to disrupt and dismantle smuggling
    organizations. Proactively, Customs developed four objectives as part
    of its overall narcotics strategy. The purpose of these objectives is
    to provide to Customs enforcement officers the tools and systems they
    need to improve their ability to interdict narcotics. Through the
    various initiatives and programs which I will highlight, it is clear
    that Customs is making progress in its efforts to combat the illegal
    flow of drugs.
        Customs first objective is the development, collection, analysis
    and dissemination of actionable intelligence throughout all levels of
    federal, state, and local narcotics enforcement agencies. Customs has
    been at the forefront in developing more useful intelligence,
    especially as it relates to the Southwest Border.
        A second objective of our narcotics strategy is the development and
    dissemination of information to trade and carrier communities to
    prevent the use of cargo containers and conveyances by smuggling
    organizations. One program which is helping Customs meet this objective
    is the Business Anti-Smuggling Coalition (BASC). In March 1996, BASC, a
    business-led, Customs-supported alliance, was created to eliminate the
    use of legitimate business shipments by narcotics traffickers to
    smuggle illicit drugs. BASC is currently being prototyped at the ports
    of San Diego, Miami, and Laredo. The Border Trade Alliance, Mattel and
    32 other companies in San Diego, as well as Sara Lee and other
    businesses in Miami, have been working with Customs in developing the
    program. Mattel, setting an example for others, has already developed a
    comprehensive anti-drug program that has been incorporated into its
    daily business practices. BASC was recognized in the Vice President's
    report to the President on the National Performance Review as a shining
    example of how government and industry can work together.
        Two other programs which Customs has employed are the Carrier
    Initiative Program and the Land Border Carrier Initiative Program which
    enhance the movement of legitimate cargo while bolstering Customs
    enforcement posture. These programs encourage air, sea, and land border
    carriers to improve their security practices to prevent narcotics from
    getting onboard their conveyances. Participation in both programs is
    encouraging. As of January 1997, 105 air carriers, 2,870 sea carriers,
    and 800 land border carriers have agreed to participate. Over the last
    two fiscal years, participants in the Carrier Initiative Program have
    provided Customs with information that led to seizures totaling 18,437
    pounds of narcotics, as well as initiating their own foreign
    interceptions totaling 59,181 pounds of narcotics.
        Customs third narcotics strategy objective is the development and
    introduction of technologies to identify smuggled narcotics and to
    force smuggling organizations to resort to higher risk methods. Customs
    recognizes that technology plays a significant role in our ability to
    remain effective while thwarting smuggling efforts between some of the
    ports by aircraft and boats. Customs employs a wide range of
    technological tools to protect our borders.
        This year, we look forward to further enhancing the effectiveness
    and quality of support provided by our Air Program through a variety of
    initiatives. By the end of fiscal year 1997, Customs will have
    integrated seven maritime search and surveillance-configured C-12
    aircraft into our fleet. These aircraft will be deployed to our
    Aviation Branches in Puerto Rico, Miami, and San Diego.
        Consistent with direction set forth in our fiscal year 1997
    appropriations, Customs assumed the air support requirements of the
    Bureau of Alcohol, Tobacco, and Firearms. Three new Customs Air Units
    have been established in Sacramento, California; Cincinnati, Ohio; and
    Kansas City, Missouri; to ensure our support is comprehensive and
    timely. Also this year, funding was made available to retrofit two Navy
    P-3 aircraft to Airborne Early Warning (AEW) configuration for
    incorporation into our fleet during fiscal year 1999.
        New and emerging land border technologies, such as truck x-ray
    systems and License Plate Readers (LPR's), coupled with skilled
    inspectors and National Guard personnel, provide effective enforcement
    systems for identifying and isolating the smuggler or contraband, while
    expediting the flow of legitimate trade and travelers. The LPR's will
    enable our inspectors to accomplish their work without being distracted
    by entering license plate numbers into our automated law enforcement
    system. The first truck x-ray system continues to be successful at Otay
    Mesa, California. This prototype has contributed to the seizure of
    17,765 pounds of drugs, most of which were concealed in false
    compartments and other hiding places in the vehicles, not in the cargo.
        In support of examination technology, Customs has developed the
    Automated Targeting System (ATS). ATS is an expert, rule-based system
    with artificial intelligence principles. Commercial transactions will
    be run against approximately 300 rules developed by field personnel,
    inspectors, and analysts in order to separate high-risk shipments from
    legitimate ones.
        Customs involvement in various multi-agency operations has helped
    us maximize our narcotics interdiction results and meet the fourth
    objective of our narcotics strategy--the implementation of various
    proactive, reactive, and multi-agency covert and overt narcotics
    investigative programs. In addition to fortifying and enhancing our
    efforts along the Southern Tier of the United States under Operation
    Hardline, Customs is increasing its investigative emphasis in staging
    and distribution cities such as Los Angeles, Houston, Miami, Chicago,
    and New York. These efforts will do even more to disrupt the highly
    complex and sophisticated smuggling organizations that challenge our
    borders. These investigative efforts will also add to our body of
    knowledge, allowing Customs to interdict more at the border based on
    prior information. This full circle approach is what we call the
    ``Investigative Bridge'' and it seeks to go beyond border interdiction
    and capitalize on the intelligence and information developed through
    investigations of smuggling organizations. This information then feeds
    our border interdiction efforts resulting in additional seizures and
    the cycle begins again.
        Two other effective vehicles for accomplishing this fourth
    objective are the High Intensity Drug Trafficking Areas (HIDTA)
    sponsored by ONDCP and the Organized Crime Drug Enforcement Task Force
    (OCDETF) sponsored by the Department of Justice. The HIDTA program
    identifies those geographic areas in the U.S. that are responsible for
    the majority of importation and/or distribution of much of the Nation's
    drug supply. OCDETF investigations also target major narcotics
    organizations. Frequently, these investigations link organization cells
    that span across the entire United States as well as source and transit
    countries.
                               operation hardline
        Over the course of several months during 1994, our Nation's
    Southwest Border ports of entry experienced a dramatic escalation of
    violence associated with narcotics smuggling attempts. Drug traffickers
    known as ``port runners'' were recklessly crashing narcotics-laden
    vehicles through Customs checkpoints along the entire land border with
    Mexico. These incidents of port running were often successful, and
    always posed great danger to border officers and innocent civilians. In
    February 1995, Customs began Operation Hardline in an attempt to
    permanently harden our ports of entry against border violence and to
    deny smugglers the use of commercial cargo as a means of introducing
    narcotics into the United States.
        Since the inception of Operation Hardline, we have fortified our
    port infrastructure, expanded our investigative activities, and
    enhanced our intelligence gathering and analysis efforts. As a result,
    our personnel are safer, better equipped, and in greater number at the
    ports of entry along the Southwest Border. Additionally, the highest
    threat areas have benefited from the acquisition of sophisticated
    detection technologies.
        Hardline has proven to be successful thus far. Port running is down
    over 56 percent from 1994 levels. In fiscal year 1996, narcotics
    seizures on the Southwest Border increased 29 percent by total number
    of incidents (6,956 seizures) and 24 percent by total weight (545,922
    pounds of marijuana, 33,308 pounds of cocaine, and 459 pounds of
    heroin) when compared to fiscal year 1995 totals. The total weight of
    narcotics seized in commercial cargo on the U.S.-Mexico border in
    fiscal year 1996 increased 153 percent (56 seizures totaling 39,741
    pounds) over fiscal year 1995.
                               operation gateway
        The Caribbean area, specifically Puerto Rico and the U.S. Virgin
    Islands, has emerged as a vital strategic location for the introduction
    and transshipment of narcotics into the U.S. and Europe. The Puerto
    Rico area, according to Customs intelligence reports, has the highest
    rate of non-commercial maritime and airdrop smuggling activity of any
    Customs area.
        On March 1, 1996, Customs initiated Operation Gateway. The mission
    of Operation Gateway is to achieve a complete and unified securing of
    Puerto Rico, the U.S. Virgin Islands, and their surrounding waters and
    airspace from narcotics smugglers. It is a cooperative plan that
    commits a sizable investment of funds, personnel, and equipment by
    Customs, with support from the Government of Puerto Rico. It is part of
    Customs overall plan to secure the Southern Tier of the U.S., from San
    Juan to San Diego.
        Since the initiation of Operation Gateway, Customs narcotics
    enforcement activities in Puerto Rico have increased dramatically. In
    comparing March 1 through the end of December 1996, to the same nine
    months in 1995, cocaine seizures have risen 44 percent. Reflecting our
    enforcement initiatives, we have increased the number of examinations
    of full inbound containers by 143 percent.
                             challenges for customs
        While Customs has experienced much success in its drug interdiction
    efforts, challenges will continue to surface. As long as drug smugglers
    are flexible, greedy, and have almost unlimited resources to draw upon,
    we must be prepared to meet all challenges.
                                money laundering
        Although drug interdiction remains our highest priority, it is by
    no means the only challenge facing Customs at our borders. Customs also
    focuses on the most significant international criminal organizations
    whose corrupt influence impacts global trade, economic and financial
    systems. Our efforts are not limited to drug-related money laundering
    but the financial proceeds of all crime.
        Customs has implemented an aggressive strategy to combat money
    laundering. Customs money laundering investigations yielded $258
    million in currency seizures in fiscal year 1996. Customs also made the
    largest cash seizure to date at the U.S. border--$15 million in Miami,
    Florida.
        Through our strategy, we will continue to enhance our asset
    identification and forfeiture capabilities with advanced training and
    the use of more sophisticated computer software for analytical
    purposes. Customs will also continue to develop information through
    interaction and training with foreign law enforcement personnel,
    prosecutors, judges, and legislators through domestic and international
    anti-money laundering awareness seminars. Finally, Customs will proceed
    to develop information on international money laundering organizations
    by participating in long-term advisor programs and cross-border
    reporting and information exchange programs pertaining to the movement
    of monetary instruments. Again, the focus will be on detecting the
    movement of all illicit proceeds, not just narcotic proceeds.
        In addition, Customs is currently working with the Financial Crimes
    Enforcement Network on a regulatory initiative to make foreign bank
    drafts reportable. This would curtail a frequently used money
    laundering technique and help investigators trace criminal proceeds
    that have been reinvested or repatriated back to the U.S.
                               border corruption
        Customs knows all too well that the agency is vulnerable to the
    threat of corruption by the very nature of its work. Customs is dealing
    with an enemy that has vast resources at its disposal--organized drug
    cartels.
        Fortunately, Customs has been able to effectively counteract
    criminal threats by two means: first, the vast majority of dedicated
    Customs employees will not and cannot be corrupted, and second, through
    the commitment of the Office of Internal Affairs (IA) to effectively
    pursue all allegations of corruption in a timely, professional and
    responsible manner.
        Incidents of corruption are isolated situations and represent a
    very small percentage of Customs employees--approximately 0.3 percent.
    But Customs will never be complacent about the threat of corruption.
    The Office of Internal Affairs assesses all allegations that are
    received and conducts investigations based on analysis and the content
    of the allegation. The Customs Service is proud of its ability to
    detect and ferret out corruption within its ranks, yet in balance, a
    number of high profile investigations and special projects have
    consistently shown that widespread corruption does not exist in
    Customs.
        In one significant investigation on the Southwest border, both
    Customs IA and the Treasury Inspector General found the reported
    corruption allegations to be unsubstantiated. In breaking new ground,
    the Customs Service requested the Federal Bureau of Investigation, as
    an independent entity, to conduct an objective outside investigation of
    existing information, reports and intelligence regarding alleged
    Customs corruption in the San Diego area of Southern California. The
    Customs Service provided complete support throughout the 17-month
    investigation. On August 22, 1996, the U.S. Attorney formally cleared
    Customs officials of allegations that they collaborated with drug
    traffickers at the Mexican border. A public announcement was made at
    the end of the investigation because of continuing media reporting of
    widespread corruption in Customs. The result of the FBI investigation
    revealed there was no basis for criminal prosecution.
        The Office of Internal Affairs training staff prepared an
    integrity/ethics course for approximately 60 train-the-trainer
    personnel. These 60 employees then provided the ethics course to
    approximately 5,800 Customs employees along the Southwest border, South
    Florida, and Puerto Rico.
        The Office of Internal Affairs is continuously reevaluating
    security controls, has initiated proactive integrity programs, and
    conducts operational investigations to minimize risks and to decisively
    deal with corruption issues. IA is also in the process of data base
    enhancements which will allow for more precise trend analysis, and
    adoption of an early assessment system to detect potential corruption
    indicators. Joint office integrity initiatives also include: the proper
    recruitment and selection of highly qualified individuals as Customs
    officers; full field investigative screening; rigorous training which
    includes integrity training and agency expectations of stringent
    standards of conduct, supported by a clearly defined table of offenses
    and penalties; and in-service ethics/integrity/bribery awareness
    training.
        We understand the American people expect all of its public
    officials and law enforcement personnel to have integrity and be
    deserving of their complete trust and confidence. Customs will continue
    to do everything it can to assure that this trust and confidence are
    not shaken. The Customs Service places the highest value on integrity,
    and no amount of corruption, when detected, is tolerated.
                             internal conspiracies
        Customs has recently been confronted with an emerging smuggling
    threat relating to ``internal conspiracy'' organizations who attempt to
    circumvent Customs targeting and examination processes by removing
    narcotics from cargo containers prior to inspection. There are
    virtually thousands of individuals, employed by the carriers, ports,
    freight forwarders, and contractors, who obtain certain information as
    to how, why, where, and when Customs examines cargo. These people are
    also knowledgeable about all the associated documentation, from entry
    through liquidation. They are the resident experts at all ports of
    entry and, if corrupt, are extremely valuable to any smuggling
    organization.
        Smugglers, working through an internal conspiracy, are able to
    modify their mode of operation each and every day depending upon what
    they see Customs doing. These criminals tailor their methods and
    techniques port-by-port. The cost to business and industry is in the
    hundreds of millions of dollars; the cost to the American people is
    even greater.
        There have been several recent Customs investigations whereby
    personnel who are working for airlines, steamship companies or seaport
    terminals have used their position and unrestricted access in ports of
    entry to engage in drug smuggling activities and/or conspiracies. When
    they successfully apply their knowledge in furtherance of criminal
    activity, i.e., drug smuggling, our border security and control is most
    vulnerable. In these types of conspiracies, the drug or other
    contraband is removed prior to our border searches. Customs is
    currently involved in several major initiatives focused on internal
    conspiracies in various areas of the country.
                     meeting the demands of increased trade
        In order to face the challenges of growing trade and reaching
    higher levels of compliance, Customs has undertaken innovative efforts
    in automation, outreach programs, and planning. These efforts are
    described below:
                             information technology
        Information technology has become a critical enabler for Customs in
    serving the public and addressing the international trade and
    enforcement issues facing our Nation. Some notable initiatives
    implemented over the past year include the Automated Targeting System
    (ATS) pilot in Newark, the Trend Analysis Prototype (TAP) interface
    pilot in Savannah, Los Angeles and Seattle, and the Remote Entry Filing
    prototype. In addition, drawback claims can now be submitted
    electronically using the Automated Broker Interface (ABI). Other
    initiatives include the expansion of the Advance Passenger Information
    System (APIS) and the acquisition of non-intrusive Truck X-Ray Systems
    and Automated License Plate Reader Systems for installation at southern
    tier ports of entry.
        As successful as the Automated Commercial System (ACS) has been
    over the years, it is just not robust enough to serve the processing
    needs of an increasingly complex trade environment. As a result,
    Customs has been working to replace the older system with a new, more
    sophisticated system called the Automated Commercial Environment (ACE).
        The hallmark of ACE is that it moves from a transaction-based
    approach to an account-based system founded on compliance measurement
    and predicated on reengineered ways of doing business. Companies
    cooperating with Customs achieve mutually beneficial outcomes including
    raised compliance, minimized data requirements at time of release, and
    ability to make payments on a periodic basis. As compliance increases,
    the cost to Customs and to trade will decrease. The benefits of this
    approach will include uniform treatment, shorter processing time, more
    efficient information collection and dissemination, and greater
    opportunities to fulfill our enforcement mission. A full scale
    implementation plan for the roll out of ACE in its entirety is due in
    November of this year.
                             trade outreach efforts
        Since passage of the Customs Modernization Act in December 1993,
    the Customs Service has engaged in extensive efforts to consult with
    the trade on how to improve Customs trade processes. All proposals to
    implement the Modernization Act are first put on the Customs Electronic
    Bulletin Board for informal comment. When needed, public meetings are
    held to explain proposals and solicit comments and suggestions. All of
    this routinely occurs before the formal Notice of Proposed Rulemaking
    is published in the Federal Register. The early consideration of trade
    concerns has resulted in better formal proposals. Drawback and record
    keeping are just two examples in which trade concerns resulted in
    vastly different formal proposals than originally contemplated. In
    addition, Customs has engaged in a major effort to improve the trade's
    compliance with Customs laws and regulations. These informed compliance
    efforts have included public meetings and seminars at the port and
    national levels, informed compliance publications on a variety of
    valuation and classification topics, videos on the textile rules of
    origin and compliance and a very informative Internet World Wide Web
    site and Electronic Bulletin Board. Our Website has been visited by
    over 5000 users in a single day. The Textile Origin video has been
    purchased by over 300 members of the trade. Over 250 copies of the
    Compliance video have been requested.
                          trade enforcement plan (tep)
        Since December 1993, all trade-related activities of Customs have
    been driven by the Customs Modernization Act, which mandated shared
    responsibility between Customs and the importing community for
    achieving maximum compliance with U.S. trade laws and regulations. Each
    year, Customs prepares a Trade Enforcement Plan (TEP), which describes
    the role Customs will play in furthering the goal of maximum
    compliance. To create this plan, Customs assesses the principal threats
    to compliance with U.S. trade laws, develops a coordinated approach to
    confront those high impact national threats, and defines targeted
    areas, strategies, priorities, and intra-agency responsibilities and
    time lines for accomplishing these goals.
        Customs most recent TEP builds on compliance measurement results
    and some compliance assessment results, which forms an integrated
    compliance system to assess the principle threats to compliance. This
    analysis aids Customs focus on high-priority or ``Primary Focus''
    industries (PFI's) and issues that have a significant economic impact
    on the Nation.
        In fiscal year 1996, the compliance rate for overall importation
    increased from 80 percent to 82 percent. Duty collections on imports
    remained in excess of 99 percent. Of particular note is that higher
    value importations had a significant increase in compliance, to a rate
    of over 86 percent. The cooperative effort with the importing community
    and domestic industry to address compliance issues can be credited with
    the improved performance of major importers.
                        primary focus industries (pfi's)
        PFI's are commodity areas that will attract significant attention
    from Customs in every regard. By establishing a national focus on these
    product sectors, they will receive the level of attention which they
    warrant. Eight PFI's were determined by use of a number of factors,
    including strategic importance, international trade agreements
    concerns, quotas, duty, public health and safety, Intellectual Property
    Rights (IPR), and Gross Domestic Product/economic impact. The eight
    PFI's are: Advanced Information Displays (e.g., cathode ray tubes, flat
    panel displays); Agriculture; Automobiles and Automobile Parts;
    Critical Components (e.g., fasteners, bearings); Production Equipment;
    Steel Mill Products; Telecommunications; and Textiles.
                           priority commercial issues
        Because not all important trade issues confronting Customs can be
    identified by industry sectors, additional specific and cross-cutting
    trade priorities were identified. Many of these were derived from
    earlier versions of annual Trade Enforcement Strategies, and others
    have been identified by various customers. The 12 priority issues are:
    Anti-Dumping and Countervailing Duty; Classification; Trade Statistics;
    Country of Origin Marking; Embargoes and Sanctions; Intellectual
    Property Rights; Trade Agreements; Public Health and Safety (pending
    other government agency participation); Transshipment; Quota Evasion;
    Revenue; and Valuation.
        Clearly, many of these are cross-cutting over a range of products
    or source countries. Others link closely with the priority industries--
    textiles with quotas and transshipment, for instance. A few issues such
    as embargoes and convict labor are country-specific.
        A new priority area, Revenue, has been added for the 1997 TEP.
    Concerns over the gap between revenues due and revenues collected, and
    our new ability to use compliance measurement to project a measurement
    of that gap, have enabled us to identify the scope of the issue and
    develop a Revenue Gap Subplan to address it.
                  north american free trade agreement (nafta)
        The NAFTA trade enforcement Sub-Plan will form the basis for
    Customs efforts in assuring the highest level of compliance possible
    for NAFTA transactions in the coming year. The specific goals of this
    initiative are the development of a national plan for NAFTA compliance
    for U.S. Customs; avoidance of using NAFTA enforcement as an unintended
    non-tariff barrier; the effective use of the experience and knowledge
    of all Customs Officers; and the integration of Customs NAFTA efforts
    into a single effective process. Components of the 1996-97 NAFTA Sub-
    Plan include audit; compliance measurement; informed compliance;
    interventions and investigations; port-initiated verifications; and the
    Strategic Trade Centers.
        Additionally, Customs ports have local initiatives for verifying
    the NAFTA claims for companies and commodities not selected nationally.
    Informed Compliance for NAFTA is being achieved through information
    dissemination by the Dallas NAFTA Center, video broadcasting, and port
    outreach.
                           changes in cobra user fees
        The NAFTA Implementation Act includes a provision to restore the
    Air and Sea passenger processing fee to $5.00 per entry, a reduction of
    $1.50 per entry, and again exempt passengers arriving from Canada,
    Mexico, and certain Caribbean Nations. These changes will take effect
    in fiscal year 1998. Customs estimates that the fee reduction and the
    restored exemptions will result in a $187 million decrease in
    collections from this fee.
                        fiscal year 1998 budget request
        Customs proposed appropriation for fiscal year 1998 totals
    $1,690,602,000 and 17,193 Full Time Equivalents (FTE) and reflects our
    highest budget priority for fiscal year 1998--ensuring adequate funding
    for effective operation of our programs within a constrained budget
    environment. Customs ability to perform its enforcement functions and
    collect revenue depends on a well-equipped, reliable infrastructure.
    The resources identified below are necessary to meet the broad and
    diverse mission requirements of the Customs Service and accept the
    realities of a growing workload.
                                  initiatives
        Our Anti-Smuggling Initiative will provide the necessary resources
    for Customs to counter the increasing threat of narcotics smuggling in
    cargo shipments through South Florida and other high-risk ports of
    entry. The $23.4 million ($8.4 million and 119 FTE in Salaries and
    Expenses and $15 million from the Violent Crime Reduction Trust Fund)
    requested will provide us with the human and technological resources
    vitally necessary to continue the successes seen in Operation Hardline
    on the Southwest Border and Operation Gateway in Puerto Rico, the U.S.
    Virgin Islands, and the Caribbean.
        The Land Border Passenger Automation Initiative of $11.5 million
    requested for fiscal year 1998 is a joint undertaking between Customs
    and the Immigration and Naturalization Service to provide both agencies
    with the technological tools to increase inspector effectiveness and
    safety, and expand the use of automated data capturing for query
    against enforcement databases. It will also provide valuable
    intelligence to federal law enforcement agencies on the movement of
    vehicles across our borders, and provide expanded service at low-risk
    ports through remote processing, offering the potential for a
    redirection of resources to higher risk activities.
        This year's budget request also includes $5.5 million for a hangar
    to house the two new P-3 aircraft in Corpus Christi, Texas. We are also
    requesting $2.5 million to fund 27 additional FTE for the aircrew and
    related support personnel that will be needed to support these new
    aircraft.
        To assist in the apprehension of individuals involved with the
    removal of unreported currency, weapons of mass destruction, and
    precursor chemicals, Customs requests $1.1 million from the Violent
    Crime Reduction Trust Fund to construct canopies for detailed
    inspection of suspect outbound vehicles at selected crossings. This
    enhancement will also provide our inspectors with some measure of
    safety from traffic flow while they concentrate on this important
    effort.
        Our Operational Support Initiative is comprised of three
    components: Laboratory Modernization, Vehicle Replacement, and Agent
    Relocation. We are requesting an additional $5.7 million to enable
    Customs to upgrade its laboratories with state-of-the-art analytical
    instrumentation based on contemporary scientific approaches, required
    to adequately support the Customs mission; to develop analytical
    methods for the determination of country of origin of agricultural,
    petroleum, and textile products; and to maintain a continuous and
    intensive laboratory research program. Customs must successfully meet
    the new examination requirements of expanded international trade
    (textile transshipment, trade and narcotic enforcement, criminal
    investigations, forensic work, anti-dumping violations and compliance
    measurements). Laboratories, with modern, sophisticated analytical
    instrumentation, are especially important for protecting our Nation's
    trade interests.
        Additional resources requested for Operational Support will also
    benefit our enforcement activities by replacing severely worn-out
    vehicles. By fiscal year 1998, approximately 83 percent of Customs
    vehicles will be eligible for replacement in accordance with General
    Services Administration replacement criteria. Without adequate funding,
    our vehicles will be potentially unsafe, inefficient, and very costly
    to maintain. We are requesting $10 million for this portion of the
    Operational Support Initiative.
        Lastly, the Operational Support Initiative includes funding for
    agent relocation. This funding is requested to allow Customs to
    relocate agents to high-threat drug zones. Customs is currently only
    able to fund relocations at the expense of other priorities and has not
    been able to implement a comprehensive relocation program like other
    enforcement agencies. If this continues, Customs ability to respond to
    changing threats will be hindered, the morale and effectiveness of our
    agents will likely deteriorate, and the public's and Congress'
    perception of Customs ability to perform its mission will likely be
    damaged. Funding for this portion of the initiative, $4 million, is
    requested from the Violent Crime Reduction Trust Fund.
        This concludes my statement for the record. Thank you again for
    this opportunity to appear before the Committee. You have provided
    tremendous support to the Customs Service in the past and I look
    forward to a very productive future working with you and your staff.

                    Federal Law Enforcement Training Center

    STATEMENT OF CHARLES RINKEVICH, DIRECTOR
        Senator Campbell. Charles Rinkevich, if you would like to
    go ahead.
        Mr. Rinkevich. Thank you, Mr. Chairman.
        Chairman Campbell and Senator Kohl, thank you very much for
    this opportunity to appear before you. I join with my
    colleagues and Under Secretary Kelly in also thanking you for
    the support that you have shown for Treasury law enforcement
    and particularly for the Federal Law Enforcement Training
    Center [FLETC].

                                  cost savings

        Because of the existence of FLETC, the Government avoids
    the cost of some $108 million in per diem savings and $35
    million in facility closure savings for a total of $143.1
    million in savings in duplicative training facilities around
    the country. The strength of the Center is in the consolidated
    nature of its organization. This budget request before you for
    1998 has some significant features and I will summarize those
    and the rest of my long statement has been submitted for the
    record.

                                  fletc growth

        The most significant part of this budget request is the
    initiative to support the direct cost of basic training. As you
    know, the workload of the Center, because of the growth of
    Federal law enforcement over the course of the last several
    years, has grown significantly.

                         number of graduating students

        To give you a better fix on that, in 1996, the Center
    graduated about 19,300 students. In 1997, we anticipate
    graduating over 29,000 students and for the fiscal year 1998,
    which this budget request covers, we will graduate in excess of
    31,000 students. This is a direct result of the buildup that is
    occurring principally within the Immigration and Naturalization
    Service, but also with the Customs Service, Secret Service, and
    others that have Federal law enforcement responsibility.

                                 budget request

        Our budget request before you is for $100,832,000. This is
    the largest budget request that the Center has ever submitted
    with an FTE request of 527 full-time equivalency positions.
    When you add to that the amount of funds that we will receive
    in reimbursement costs for services we provide to the agencies
    that are not included in our budget, the total budget that we
    will administer at FLETC is close to $120 million.

                                  initiatives

        There are seven initiatives within our salaries and
    expenses account, most of which are due to the workload growth,
    and two initiatives in our construction account. I will not go
    into the detail of those but reserve the time with you and the
    Committee for questions on them.

                             commitment and support

        Again, let me say, thank you for the support that this
    Committee has shown in the past and the obvious personal
    commitment and support that you and the Committee have for
    Treasury law enforcement and the Center.
        Thank you.

                               prepared statement

        Senator Campbell. Thank you, Mr. Rinkevich. Your complete
    statement will be made part of the record.
        [The statement follows:]
                   Prepared Statement of Charles F. Rinkevich
        Mr. Chairman and Members of the Subcommittee, I am pleased to be
    here today to report on the current operations and performance of the
    FLETC and to support our appropriations request for fiscal year 1998.
    The Center has seen tremendous growth since its establishment in 1970
    when a handful of agencies joined together and established the
    Consolidated Federal Law Enforcement Training Center. The Department of
    Treasury has been the lead agency for the United States Government in
    providing the administrative oversight and day-to-day direction for the
    FLETC since its creation. Under the leadership of Secretary of the
    Treasury, Robert E. Rubin; and Under Secretary for Enforcement, Raymond
    W. Kelly, the FLETC has received strong support and active assistance
    for carrying out its responsibilities. We are indeed fortunate to have
    these two distinguished individuals playing a leadership role as the
    FLETC prepares to embark on the next century. This Committee, Mr.
    Chairman, also is owed a debt of gratitude. Throughout our 27 years of
    service to Federal law enforcement, this Committee has been most
    generous in its funding of consolidated training and its oversight
    role. We extend our appreciation and look forward to working with you.
        There are now 70 agencies which train at the Center, and we expect
    this growth to continue as more agencies recognize the many benefits of
    consolidated training. The Administration and Congress can be proud of
    the quality of the training being provided at the FLETC and the savings
    realized through consolidation. FLETC's success is the direct result of
    the strong support we have received from Treasury leadership, this
    Committee, and our participating organizations.
        Today, I am prepared to discuss a number of our initiatives
    outlined in the President's fiscal year 1998 budget. The Center's
    fiscal year 1998 request is for a Salaries & Expenses (S&E)
    appropriation of $68,284,000 and 527 FTE, an increase of $12,099,000
    and 45 FTE from the fiscal year 1997 level. The S&E request includes 3
    FTE and $2,621,000 in Crime Bill funds. Our request for Acquisition,
    Construction, Improvements & Related Expense (ACI&RE) is $32,548,000,
    an increase of $10,964,000 from the fiscal year 1997 level. Crime Bill
    funding in the amount of $21,437,000 is included in the ACI&RE request.
    The S&E and ACI&RE funding requested will support nine important
    initiatives: Mandatory Basic Training Workload Increase ($5,614,000 and
    26 FTE); New Training Building Support ($1,044,000 and 6 FTE);
    Occupational Safety and Health Compliance ($400,000 and 1 FTE);
    Training Operations Support ($2,239,000 and 5 FTE); Rural Drug Training
    ($1,000,000 and 3 FTE); Environmental Compliance ($111,000 and 1 FTE);
    Fiber Optics ($3,001,000 and 1 FTE); Minor Construction and Maintenance
    ($492,000); and Master Plan ($18,618,000). The Fiber Optics and New
    Training Building Support initiatives are split between the S&E and
    ACI&RE accounts because of the nature of the initiatives. A breakout of
    the funding between the accounts for those initiatives is as follows:
      --Fiber Optics--S&E, $182,000 and 1 FTE; ACI&RE, $2,819,000; and
      --New Training Building Support--S&E, $769,000 and 6 FTE; ACI&RE,
            $275,000.
        The S&E and ACI&RE request, including the Crime Bill funding,
    represents an increase of $23,063,000 over the fiscal year 1997 level.
    Coupled with $18,709,000 in funds to be reimbursed to us for training
    related services, our total budget for fiscal year 1998 is
    $119,541,000.
        Before providing this Committee with an overview of Center
    operations, I would like to take a moment and address progress being
    made in complying with the requirements of the Government Performance
    and Results Act. As you know, Congress passed, and President Clinton
    signed, the Government Performance and Results Act, known as GPRA, in
    1993. Starting in 1997, GPRA requires agencies (1) to publish strategic
    plans covering at least five years, (2) to publish annual performance
    plans which include measurable goals, and (3) after the year is
    completed, to report on actual performance. This law is intended to
    fundamentally change Federal management and accountability from a focus
    on inputs and processes to a greater emphasis on outcomes and
    programmatic results. In essence, GPRA requires that we tell you what
    each of our programs is intended to do in the long term, specifically
    what we intend to achieve each year, and finally, what we did achieve.
        The Center and the Treasury Department have embraced GPRA and have
    begun implementing it early. The FLETC began the process of drafting
    its strategic plan in fiscal year 1994. We involved numerous levels of
    the FLETC and participating agency staff in the planning process, and a
    draft of the plan was completed and approved by the Center's Board of
    Directors in July 1995. A copy of that plan was also provided to the
    staff of this Committee for review and comment during 1995. Since that
    time we have been working with the Department of the Treasury and the
    Office of Management and Budget to ensure that our plan fully complies
    with all GPRA requirements by September 1997. We feel that the broad
    based approach followed by the FLETC in developing its strategic plan
    has resulted in a realistic and achievable plan which reflects
    organizational goals that will garner strong support from both the
    FLETC and participating agency staffs.
        Performance plans required by GPRA are now an integral part of the
    budget documents sent to you each year. In our fiscal year 1997 budget
    request last year, we incorporated measures of program performance in
    addition to the traditional output-oriented workload measures. As you
    know, good measures of program performance are not always available.
    Ours are not perfect. However, we believe that we are making progress
    in developing meaningful, quantifiable measures for our programs. As we
    gain more experience, we hope to improve on the performance measures we
    use, and we would welcome any suggestions or feedback you would like to
    provide in this area.
        Included in our budget request this year is a report on whether or
    not we achieved each of the targets we proposed for the most recently
    completed fiscal year (fiscal year 1996). The performance measures used
    for law enforcement training in fiscal year 1996 included: (1) student
    quality of training survey, (2) student weeks trained, (3) students
    trained, and (4) variable unit cost per basic student week of training
    funded. Plant operations performance measures include student quality
    of services survey. The student quality of services survey and student
    quality of training survey performance measures are outcome measures.
    The overall student quality of training index is based on a seven point
    scale, and the overall student quality of services index is based a
    five point scale. Both indices are computed using evaluations completed
    by students attending Center programs. This data is collected for the
    Center's automated Student Feedback System (SFS) using a form on which
    students are asked to evaluate the quality of Center programs,
    instructional staff, facilities, and services. I will discuss the SFS
    in more detail later. The variable unit cost per basic student week of
    training funded is also an outcome measure and is based on training
    dollars divided by funded student weeks of training. The final two
    measures, students trained and student weeks of training, are output
    measures and show the student workload at the Center.
        I want to take this opportunity to correct an error in the Center's
    1996 GPRA performance report as shown in the FLETC's fiscal year 1998
    budget submission. Both the target and the actual indices shown for the
    Student Quality of Training performance measures and Student Quality of
    Services performance measures are incorrectly recorded. The target and
    actual indices for Student Quality of Training should have been ``5.0''
    and ``5.5'' respectively. The target and actual indices for the Student
    Quality of Services should have been ``4.0'' and ``4.0'' respectively.
    This error was discovered after our budget was furnished to Congress.
        With those corrections in mind, I am pleased to report that the
    Center's performance against established targets was excellent overall.
    The index for the most critical performance measure in our plan, the
    Student Quality of Training Survey measure, was ``5.5''. This is above
    the Center's existing standard and performance plan target of ``5.0''.
    The Student Quality of Services actual performance index was ``4.0''
    which equals our performance target measure of ``4.0''.
        The performance targets for Students Trained and Student-weeks
    Trained as shown in the performance plan were not met. While the
    workload conducted was somewhat less than the initial projections and
    the targets in our performance plan, the FLETC did conduct 100 percent
    of requested basic training in fiscal year 1996. Because workload
    estimates used in the performance plan are based on Spring 1994
    estimates of our customers, it is not surprising to find that there is
    a variance between the targets and actual workload. The budget process
    requires that the Center's participating agencies provide these
    estimates well in advance of funding actions by the Congress and
    Administration. Although estimates are based on the best available data
    and the agencies' best guess at the time, changes in Congressional and
    Administration policy and initiatives that occur in the interim can and
    do have a dramatic impact on the outcome of actual workload. Therefore,
    the best measure of the FLETC's performance in this area is whether the
    Center provided 100 percent of the basic training requested, which in
    this case we did.
        The same categories of performance measures used in fiscal year
    1996 will be used in fiscal year 1997 and fiscal year 1998. However, as
    I stated earlier, the FLETC will continue to refine existing
    performance measures and/or identify new performance measures in an
    effort to more accurately reflect its performance and provide this
    Committee with the information it needs to make informed budget
    decisions. I believe that this system--setting strategic goals and
    strategies for the long term, setting annual targets, managing to
    achieve those targets, and reporting on annual performance--will help
    all of us manage the Center's programs more efficiently and
    effectively.
        In reviewing our request, and later in our discussions today, I am
    sure you will find that there is a strong and direct relationship
    between our budget initiatives and the mission and goals outlined in
    the Center's strategic plan. That mission is to provide quality, cost
    effective training for law enforcement professionals. It is a vitally
    important mission and is essential if we are to equip our law
    enforcement personnel with the skills necessary to deal with
    increasingly sophisticated and violent crimes.
        Four key strategic goals guide the Center in fulfilling its
    mission. They are:
      --Provide high quality training for law enforcement;
      --Develop, operate, and maintain state-of-the-art facilities;
      --Effectively organize, develop, and lead FLETC's personnel in
            support of the Center's mission; and,
      --Strengthen partnerships among participating organizations and the
            FLETC.
        The initiatives outlined in our fiscal year 1998 request directly
    support the mission of the Center and can be tied to one or more of the
    goals in the Center's strategic plan. Equipment and FTE's requested
    under Salaries and Expenses for Mandatory Workload, Environmental
    Compliance, New Training Building Support, Occupational Safety and
    Health Compliance, Rural Drug Training, Fiber Optics, and Training
    Operations Support are essential if the Center is to provide quality
    training that is responsive to needs of its customers. Failure to fund
    these initiatives could result in a degradation of the services and
    jeopardize training, putting the Center in a position where it could
    not meet its customers' training requirements. For example, not
    complying with environmental and health safety issues could endanger
    the health of the FLETC and participating agency personnel. It could
    result in closure of certain facilities and adversely impact on FLETC's
    ability to provide the training requested by its participating
    agencies.
        Funding requested in the ACI&RE account will allow the Center to
    continue implementation of its Master Plan for facilities expansion and
    provide the necessary data and voice communication and facilities
    maintenance support for the training requested by our participating
    agencies. Continued implementation of the Master Plan is necessary if
    we are to avoid the need to invest in costly temporary facilities to
    meet the training needs of our customers during periods of peak demand.
    Additionally, temporary facilities adversely impact on the quality of
    training provided and the quality of life of the student, even though
    we take steps to mitigate that impact as much as we can. I will discuss
    this issue more fully, later in my testimony.
                             overview of operations
        Now Mr. Chairman, if I may, I would like to provide the Committee
    with a brief overview of the operations of the Federal Law Enforcement
    Training Center.
        The Center was established by a Memorandum of Understanding in 1970
    and has experienced tremendous growth over the last 27 years. We
    currently conduct basic and advanced training for the majority of the
    Federal Government's law enforcement personnel. We also provide
    training for state, local, and international law enforcement personnel
    in specialized areas and support the training provided by our
    participating agencies that is specific to their needs. Currently, 70
    Federal agencies participate in more than 200 different training
    programs at the Center.
        There are entry level programs in basic law enforcement for police
    officers and criminal investigators, along with advanced training
    programs in areas such as marine law enforcement, anti-terrorism,
    financial and computer fraud, and white-collar crime. Training is
    conducted at either the main training center in Glynco, Georgia; our
    satellite training center in Artesia, New Mexico; or a temporary
    training facility in Charleston, South Carolina.
        The temporary training site in Charleston was established in fiscal
    year 1996, to accommodate an unprecedented increase in the demand for
    basic training by the participating agencies, particularly that of the
    Immigration and Naturalization Service (INS) and United States Border
    Patrol (USBP). It is the direct result of recent Administration and
    Congressional initiatives to control illegal immigration along the
    United States borders and to protect Federal workers in the workplace.
        In addition to the training conducted on-site at one of the FLETC's
    residential facilities, some advanced training, particularly that for
    state, local and international law enforcement, is exported to regional
    sites to make it more convenient and/or cost efficient for our
    customers. The tremendous demand for basic training over the next three
    years will increase the FLETC's reliance on export training sites to
    meet these advanced training requirements. The Center's driver and
    firearms special training facilities cannot accommodate all of the
    training being requested. Therefore, much of the advanced training
    requiring the use of special training facilities will have to be
    accommodated elsewhere.
        Realizing that a short-term solution was needed to meet the
    advanced training needs of our customers, the FLETC began to identify
    state and local training facilities that could be used to accommodate
    this training in early 1996. We are now discussing with several of
    these non-Federal organizations the use of their facilities on a
    reimbursable basis. Once discussions are complete the Center will be in
    a position to facilitate the scheduling of the training at these sites
    and assist our customers in meeting their advanced training needs.
        Over the years, the FLETC has become known as an organization that
    provides high quality and cost efficient training with a ``can do''
    attitude and state-of-the-art programs and facilities. During my
    association with the Center, I have seen first-hand the many advantages
    of consolidated training for Federal law enforcement personnel, not the
    least of which is an enormous cost savings to the Government.
    Consolidated training avoids the duplication of overhead costs that
    would be incurred by the operation of multiple agency training sites.
    Furthermore, we estimate that consolidated training will save the
    government $108,100,000 in per diem costs alone during fiscal year
    1998. This estimate is based on projected fiscal year 1998 workload and
    per diem rates in Washington and other major cities of $152/day versus
    the cost of housing, feeding, and agency miscellaneous per diem of
    $25.26/day for a student at Glynco. Consolidation also ensures
    consistent high quality training and fosters interagency cooperation
    and camaraderie in Federal law enforcement.
        We view FLETC and consolidated training as a National Performance
    Review concept ahead of its time. Quality, standardized, cost-effective
    training in state-of-the-art facilities, interagency cooperation, and
    networking are indisputable results of consolidation. However, the
    concept of consolidated training is fragile and needs constant
    nourishment and support if it is to remain intact.
                                    workload
        As I mentioned earlier, the Center is facing an unprecedented
    increase in its training workload that began in fiscal year 1996 and is
    projected to continue through fiscal year 1999. The majority of the
    increase in training workload is the result of the fiscal year 1995
    initiative by the Administration and Congress to increase the
    effectiveness of the INS in controlling our borders by increasing the
    number of INS and USBP law enforcement personnel. Other factors
    contributing to the Center's increasing workload include security
    enhancements at Federal facilities and new Federal prisons coming on-
    line.
        During fiscal year 1996, the Center graduated 19,352 students,
    representing 88,792 student-weeks of training. This total included
    15,689 students who were trained at Glynco, Georgia, 1,562 students
    trained at Artesia, and 2,101 students trained in export programs
    conducted at various locations throughout the United States. There were
    9,106 basic students; 7,704 advanced students; 1,959 state and local
    students; and 583 international students trained equating to an average
    resident student population (ARSP) of 1,708. Although the total of
    students trained was below the performance targets established for
    fiscal year 1996, the Center did provide 100 percent of the basic
    training requested by its customers. The performance targets
    established for fiscal year 1996 were based on Spring 1995 projections
    of the 70 agencies we serve. These projections are made in advance of
    appropriations. Because of circumstances beyond the control of the
    agencies or the FLETC, the projections changed by the start of the
    fiscal year, and fewer training requests materialized.
        In April 1996, participating organization projections indicate that
    during fiscal year 1997, the Center will train 29,531 students
    representing 135,691 student-weeks of training. This total includes
    26,736 students to be trained at Glynco; 1,049 students at Artesia;
    1,392 students at the temporary site in Charleston; and 354 students in
    export programs. A total of 13,517 basic students; 13,207 advanced
    students; 2,292 state and local students; and 515 international
    students are projected for a total ARSP of 2,609.
        Our participating agencies indicate that during fiscal year 1998,
    we will train a total of 31,143 students representing 137,297 student-
    weeks of training. This total includes 24,242 students at Glynco; 4,153
    students at Artesia; 1,392 students at Charleston; and 1,356 students
    in export programs. A total of 13,587 basic students; 14,694 advanced
    students; 2,356 state and local students; and 506 international
    students are projected for a total ARSP of 2,640.
        The Center has seen enormous growth in the training demanded by its
    participating agencies over the past decade. We have been able to
    accommodate many, but not all, of these increased training demands by
    being innovative and undertaking extra-ordinary measures.
        To accommodate training during fiscal year 1985 and again in fiscal
    year 1989, the Center had to temporarily expand its capacity for
    housing, dining, classroom, office space, storage, and special training
    facilities by using temporary buildings and contracted or licensed
    temporary facilities. Further, the Center has not always had space to
    accommodate all of our students in on-Center housing and has used
    contractual arrangements with local motels to house our overload. Many
    of the temporary measures taken to meet these training demands were
    costly, and they adversely impacted the Center's operations.
        The Center is again in a position where it has had to resort to
    using a temporary facility to meet the training needs of its
    participating agencies. As I mentioned earlier, a temporary training
    facility was established in Charleston, South Carolina, during 1996
    because our current facilities do not have the capacity to accommodate
    all of the training being requested. It is primarily being used to
    conduct USBP training that cannot be accommodated at the Glynco and
    Artesia training Centers. Plans call for Charleston to be closed after
    1999, once the training requirements for the Border Patrol buildup are
    completed. Sufficient capacity should then exist at Glynco and Artesia
    to meet projected training requirements of our participating agencies.
        This is the third time since fiscal year 1985 that FLETC has taken
    extraordinary measures to meet the training demands of its
    participating agencies. More importantly, it is the second time in the
    last eight years that a temporary training facility has had to be
    established. A temporary training facility was established at Ft.
    McClellan, Alabama, in 1989 to meet a similar increase in the USBP
    training workload.
        Opening temporary training facilities is a time-consuming and an
    expensive process. Capital improvements must be made to bring the
    facility on line and, unlike capital improvements made at Glynco or
    Artesia, there is no permanent return on that investment. The dollars
    expended are lost when the facility is closed. It also impacts the cost
    effectiveness of the training provided and on the student's quality of
    life and overall training experience. However, as was done in 1989, the
    Center is taking steps to mitigate any impact the temporary training
    facility might have on the quality of training provided. We are
    extremely proud of our reputation for providing high quality, cost
    effective training and will take the steps necessary to ensure that the
    quality of training provided at Charleston remains high.
                             facilities master plan
        Now, Mr. Chairman, if I may, I would like to brief you and the
    other Committee members on progress being made in expanding the FLETC's
    facilities. The Master Plan, presented to Congress in June 1989,
    provided a basis for the efficient and orderly development of the
    Center's land and facilities resources. It was and is a comprehensive
    blueprint to guide the expansion of the Center so that it can more
    effectively support the present training workload as well as the
    workload projected for the future. The original plan called for a total
    investment of $86,010,000.
        Over the years the Master Plan has been updated to refine earlier
    estimates and incorporate changes necessary to meet the evolving
    training needs of our customers. In April of 1996, a copy of the most
    recent update was provided to the Congress. It shows that approximately
    $121,346,000 is needed to completely fund the Master Plan. Through
    fiscal year 1997, Congress has appropriated $62,757,000, or about 52
    percent of the funds needed. Of this amount $48,904,000 was for Glynco
    projects and $9,715,000 was for Artesia projects.
        At Artesia, major projects that have been completed include:
    rehabilitation of the Cafeteria/Student Center complex and Main
    Classroom building; construction of a physical training complex,
    completed in October 1991; interim driver/firearms ranges, completed in
    1991; a much needed road and sidewalk network at the Artesia main
    campus, completed in 1992; permanent firearms ranges, completed in
    1993; and a driver/firearms administrative support/classroom building,
    completed in 1996. At Glynco completed projects include: a dormitory,
    completed in April 1993; an expansion of the indoor firearms range
    complex, completed in August 1993; consolidation/expansion of the
    physical techniques facility, completed in October 1993; an expansion
    of the cafeteria, completed during 1994; an addition to our Steed
    classroom building (two state of the art classroom buildings),
    completed in May 1996; and an expansion of our driver training complex
    (the addition of control tower, defensive driving and highway response
    ranges), completed in February 1997.
        The Center's fiscal year 1998 ACI&RE request is in the amount of
    $32,548,000 and includes $18,618,000 to continue implementation of the
    Master Plan. The Master Plan funds requested will complete funding of
    Phase I Master Plan projects at Glynco and provides funds for many of
    the Phase II and III projects. Projects that would be funded at Glynco
    include among others: a Firearms Multi-Purpose Building, the Student
    Activity Center, renovation of the Auditorium/Conference Center,
    Warehouse Expansion, office space, and, a Student Registration
    Facility. Artesia projects that would be funded include: a Front Gate
    Security Building, Physical Training Expansion, and, an Office
    Building.
        This Master Plan initiative supports goal two in FLETC's strategic
    plan. That goal is to develop, operate, and maintain state-of-the-art
    facilities and systems responsive to interagency training needs.
    Funding is required if the Center is to meet the training needs of its
    customers. Not funding these initiatives will result in the continued
    reliance on the more costly method of establishing temporary training
    facilities to meet training requirements. It also endangers the concept
    of consolidated training as the larger agencies look at alternatives,
    such as individual agency sites, to meet their training requirements.
        The Center continues to consult closely with its participating
    agencies so that the design features of each project will meet current
    and future needs. This close consultation sometimes prolongs the period
    it takes to design and construct facilities; however, we feel the time
    and effort are well spent because it ensures that funds are efficiently
    and wisely used.
        Obviously, changing events have and will continue to dictate
    modifications to the various projects outlined in the Master Plan. I
    assure you that we will continue to work through the Treasury
    Department, Office of Management and Budget, and the Congress in
    dealing with these changes.
        Mr. Chairman, I want to thank you and members of the Subcommittee
    for the support given the Center in its Master Plan development and
    implementation. We are pleased and grateful that Congress has seen fit
    to appropriate the funds necessary to expand our facilities and better
    equip the Center to meet the training needs of our customers. Only by
    doing so is the concept of consolidated training nurtured and
    strengthened.
        Now, if I may Mr. Chairman, I would like to take this opportunity
    to briefly discuss the eight remaining initiatives in the Center's
    fiscal year 1998 budget request which I briefly referred to earlier in
    my testimony.
                   mandatory basic training workload increase
        In our fiscal year 1998 request the Center is asking for $5,614,000
    and 26 FTE to support the direct cost of basic training. As I discussed
    in some detail already, the Center is faced with an unprecedented
    increase in its workload over the next three years. This initiative
    will allow the Center to fund 100 percent of the direct cost of the
    discounted projected basic training in fiscal year 1998 and supports
    goal one in FLETC's strategic plan.
        Our request is in accordance with the current OMB/Treasury/FLETC
    policy that requires funding of the direct cost of basic training. The
    participating agencies do not request funding for these costs in their
    budget submissions and are fully expecting and relying upon the FLETC
    to provide that funding.
                         new training building support
        As I touched on in my testimony earlier, the Center is requesting
    $1,044,000 and 6 FTE for new training building support ($769,000 and 6
    FTE in S&E and $275,000 in ACI&RE). The funding and FTE requested is
    necessary to support the operation and maintenance of new facilities
    that have already come on-line or will be coming on-line at both Glynco
    and Artesia. At Glynco these include the Driving Range Expansion, two
    Classroom Buildings, and the Computer Training Facility. In Artesia it
    includes an Administration Building, Front Gate Building, and Security
    Systems. The FLETC's request provides the necessary resources and
    personnel to support operation of the new facilities including
    utilities, contracts (janitorial/grounds maintenance), and minor
    construction and maintenance. It is essential to protect the
    Government's investment in these facilities and supports both goals one
    and two in FLETC's strategic plan.
                            environmental compliance
        Too often in the past, FLETC's compliance with environmental
    requirements has been on an emergency response basis with costs
    absorbed from existing resources. However, increasing requirements
    under environmental legislation and shrinking budgets make it
    impossible to be in compliance without additional funding.
        Environmental compliance is non-discretionary. The FLETC must be
    properly funded for the design and implementation of pollution
    prevention, hazardous waste, and recycling programs if it is to fully
    comply with environmental laws, regulations, and executive orders. In
    fiscal year 1997, funding was provided to move the FLETC closer to full
    compliance. The $111,000 and 1 FTE in our fiscal year 1998 request will
    allow the FLETC to fully comply with existing environmental laws and
    regulations. It will ensure that the health and safety of FLETC
    employees and students, as well as those of the citizens living
    adjacent to the FLETC, is protected.
        Examples of costly and serious environmental requirements that will
    be addressed by this initiative include: removal and disposal of
    underground storage tanks; analysis of solid waste discovered during
    construction; testing of water for lead; analysis, handling, and
    disposal of lead paint during renovations; and maintaining and disposal
    of hazardous waste generated by the Center's firearms, driver training,
    printing, photography, and medical operations. The requested funding
    will provide the necessary staffing to address these important and
    significant health issues. It is essential in light of the Center's
    environmental law obligation. If not funded, some of the Center's
    training operations could be adversely affected. A worst case scenario
    is that FLETC could be forced to discontinue some of its training
    operations. This request supports goals one, two, and three in the
    FLETC's Strategic Plan.
                   occupational safety and health compliance
        The head of each agency is required to ensure that the agency's
    budget submission includes sufficient resources to effectively
    implement and administer an Occupational Safety and Health Program.
    Although the FLETC has been able to utilize existing resources to
    comply with rules and regulations in the past, the expansion and aging
    of the Center's facilities, increasing training workload, and new
    requirements such as those dealing with Blood Borne Pathogens and
    Hazardous Material Management have outpaced resources and the Center's
    ability to fully comply with all requirements. Therefore, the FLETC
    must have additional resources if it is to have an effective program.
    Funding is essential in light of the FLETC's obligations under existing
    occupational health and safety laws and regulations.
        Our fiscal year 1998 request includes $400,000 and 1 FTE to support
    the required occupational safety and health program. An effective
    program at the FLETC is essential given the importance and nature of
    the Center's training mission and the grave safety risks it poses to
    both students, staff, and the surrounding community. Again, as in the
    previous initiative, this request support goals one, two, and three in
    the FLETC's strategic plan.
                                  fiber optics
        The current underground telephone cable plant at Glynco is owned
    and maintained by the local BellSouth Telephone Company. It is old, has
    reached its capacity and cannot provide the necessary services for the
    Center and its customers to operate effectively and efficiently.
    Because of restrictions imposed by divestiture, BellSouth cannot
    increase current capacity to meet the forecasted communications
    requirements of the FLETC. The best alternative is for the FLETC to
    invest in its own fiber optics plant. This initiative requests
    $3,001,000 ($182,000 and 1 FTE in S&E and $2,819,000 in ACI&RE) for the
    first phase of a $7,500,000 two-phase project. The request will start
    the site preparation, infrastructure work, and cabling of the facility.
    The second phase of the project would include completion of phase one
    and purchase and installation of remote mode switches and building
    wiring. Funding for the second phase would be requested in fiscal year
    1999.
        By investing in a fiber optics plant, the FLETC can migrate to a
    modern comprehensive telecommunications system. The Center will be able
    to use current technology, adapt to new technology as it evolves, and
    expand automation into new areas as the need arises. This initiative
    will allow the FLETC to meet the current and future communications
    requirements of the FLETC and its customers including: high-speed data
    communications, Integrated Services Digital Network, video
    conferencing, imaging, message services, and the exchange of
    information among users both locally and at satellite facilities. This
    initiative supports goals one and two in the FLETC's Strategic Plan.
                          training operations support
        The Center is requesting $2,239,000 and 5 FTE for training
    operations support in fiscal year 1998. As I mentioned earlier, the
    Center's training workload has increased dramatically in fiscal year
    1997 and is expected to stay at that level through fiscal year 1999.
    This request will provide the necessary FTE and resources to support
    this increased workload.
        The Center's current base funding and FTE resources are sufficient
    to support a basic training workload of approximately 58,000 student-
    weeks. However the fiscal year 1998 training workload is expected to be
    approximately 95,000 student-weeks, an increase of 37,000 student-weeks
    of training. Our request represents the minimum increase needed to
    support the fiscal year 1998 basic training workload. It will provide
    the funding for workload-driven increased requirements in: equipment
    (primarily training equipment), service contracts (security,
    janitorial, and lead removal), communications, utilities, and staff
    travel. Additional administrative support personnel in the areas of
    training, finance, procurement, property, and planning are also needed
    to support this workload. This initiative supports goals one, two, and
    three of the FLETC's Strategic Plan. If not approved, the Center will
    not be able to properly support its basic training mission.
                              rural drug training
        In the fiscal year 1994 Crime Bill, FLETC was authorized $1,000,000
    for Rural Drug Training. However, funding was never approved in support
    of this initiative. Therefore, the Center is requesting funding to
    support the Rural Drug Training initiative in fiscal year 1998. The
    request is for $1,000,000 and 3 FTE. It will allow the Center to
    provide 4 training programs to address the drug enforcement training
    needs of small rural law enforcement agencies. The programs are:
      --Drug Enforcement Training Program (DETP)
      --Rural Crime Drug Enforcement Task Force Training Program (RADE)
      --Airborne Counterdrug Operations Training Program (ACOTP)
      --Advanced Airborne Counterdrug Operations Training Program (AACOTP)
        This initiative supports goal one in FLETC's Strategic Plan.
                       minor construction and maintenance
        Finally, Mr. Chairman, the Center is requesting an increase of
    $492,000 in its minor construction and maintenance funds. This request
    will allow the Center to comply with the requirements of Elective Order
    12902 (EO), Energy Efficiency and Water Conservation at Federal
    Facilities, which requires that energy efficiency be accomplished over
    the next nine years.
        To meet the energy efficiency targets set by the EO, the FLETC will
    have to replace existing lighting at both the Glynco and Artesia
    training centers with modern energy efficient lighting. Although the
    Center has been funded for maintenance and minor construction (MCM) for
    the past twelve years, the existing base funding has not kept pace with
    facility expansion. It is not sufficient to meet current MCM needs and
    must be increased if the Center is to meet the requirements of the
    Executive Order without negatively impacting other operations. If this
    initiative is not supported, the Center will have to draw on existing
    resources and either reduce facility maintenance or reduce activities
    in support of training to meet the requirements of the EO. Reducing
    facility maintenance will endanger the Government's investment in
    facilities while reducing activities in support of training will
    negatively impact on the Center's mission. This initiative supports
    goals one and two in FLETC's Strategic Plan.
        Now, Mr. Chairman, if I may, I would like to take a moment and
    briefly update the Committee on activities of our satellite training
    center in Artesia, New Mexico, and the activities of our National
    Center for State, Local and International Training.
                               artesia operations
        The Artesia center was purchased and became operational in 1989.
    Training facilities at Artesia include a 164-room dormitory, cafeteria
    with seating to serve 270 persons per sitting, and a physical training
    complex. There are 22 general purpose classrooms which will accommodate
    up to 730 students. Special purpose classrooms include a 24-person
    computer classroom and a 24-person fraudulent document lab. Other
    specialized facilities at Artesia include practical exercise areas, a
    mock courtroom, driver training and firearms ranges, an obstacle
    course, 31-breakout rooms, and a rappelling tower.
        The Department of Interior's Bureau of Indian Affairs (BIA) Indian
    Police Academy moved to Artesia during 1993. In addition to the BIA
    training that is conducted, Artesia also serves as an advanced training
    site for students posted in the Western United States. Additionally,
    because of its diverse special training facilities, it can accommodate
    overflow basic training that cannot be done at Glynco because of space
    limitations. Artesia is playing and will continue to play an important
    role in meeting the training requirements of the INS over the next
    three years.
        During fiscal year 1996, the Center trained 1,562 students at
    Artesia. In fiscal year 1997, our latest estimates indicate that we
    will train 3,463 students. April 1996 projections by our participating
    agencies indicate that 4,153 students will be trained in fiscal year
    1998. The majority of the increase in the fiscal year 1998 training
    workload is due to the advanced training requirements of the INS, USBP,
    Bureau of Prisons, and Fish and Wildlife Service.
        Other users of Artesia in addition to those already mentioned above
    include the Bureau of Land Management, National Marine Fisheries
    Service, and the FLETC's National Center for State, Local and
    International Training.
        The expansion of the Artesia center as authorized by the Congress
    is continuing essentially as planned. As I mentioned earlier in my
    testimony when discussing the Master Plan, many of the Artesia Master
    Plan projects have been completed and are in use. Nine modular
    buildings have also been installed to accommodate the increase in
    training workload resulting from the INS buildup, and the Center
    recently approved the final design drawings for the expansion of the
    Artesia dormitory to add an additional 76 rooms. Additionally, the
    Center received Master Plan funding in its fiscal year 1997
    appropriation for a much needed Classroom Building/Practical Exercise
    Complex at Artesia, and initial planning for that project is underway.
              national center for state, local, and international
        Glynco's National Center for State, Local, and International
    Training was established in 1982 by the President to provide much
    needed training for state and local law enforcement agencies. Since its
    inception, the National Center has received broad support from the
    Federal, state, and local law enforcement communities. They provide
    subject matter experts for course and program development as well as
    instructional services.
        The National Center is charged with training personnel from state,
    local and international law enforcement agencies in advanced topics
    designed to develop specialized law enforcement skills. By combining
    the expertise of the participating agencies' and FLETC's staffs with
    the specialized training facilities already available at the FLETC, the
    Center is able to provide participants with instruction in advanced
    programs that meets their specific needs. In most cases the training
    enables these agencies to be more supportive of Federal agencies and
    their missions.
        During fiscal year 1996, there were 1,959 state and local students
    trained through the National Center in more than 40 advanced training
    programs. In fiscal year 1997 we expect to train 2,292 students. In
    fiscal year 1998 we project that 2,356 state and local students will
    receive training through the National Center.
        Because of the success of the National Center, many of these
    programs are being conducted on an export basis at sites across the
    country, including our Artesia center. This has proven to be a cost
    effective method to provide training to state and local agencies.
    Additionally, exporting training to state and local academies and other
    locations throughout the country increases the Center's visibility and
    leads to improved cooperation between the Center and state and local
    agencies.
        In addition to training Federal, state, and local law enforcement
    officers, the FLETC's National Center provides training assistance to
    selected foreign governments in a variety of ways including operational
    briefings, technical assistance, and hands-on training programs. The
    same network and support structure in place to assist state and local
    agencies in meeting their training needs makes the National Center a
    logical focal point for international training at the FLETC.
        The FLETC has been involved in foreign training for more than 20
    years. Since 1979 the FLETC has provided training to more than 5,000
    foreign law enforcement officials from more than 102 countries.
    Training has been provided at the Center (on a space available basis)
    or abroad with recent training focusing primarily on the areas of
    international banking and money laundering, financial fraud
    investigations, and telecommunications fraud.
        The number of foreign training requests have grown substantially in
    the last few years, with student weeks of training increasing by more
    than 200 percent since 1994. Two Administration and Congressional
    initiatives, the Freedom Support Act and the Support for Eastern
    European Democracies Act, are responsible for much of the upsurge in
    foreign training. As you know, these acts provide law enforcement
    technical assistance in combating organized crime, financial crime, and
    narcotics trafficking to Russia, the newly independent states of the
    former Soviet Union, and other eastern European countries.
        The majority of recent training has been provided under the
    sponsorship of the Department of State's Office of Antiterrorism
    Assistance and Office of International Criminal Justice. During the
    last two years programs have been conducted in Russia, Poland, and
    Hungary, with training to be conducted this fiscal year in Romania and
    Moldavia. In addition to this training, the FLETC also provides
    instruction in financial crimes to students attending each session of
    the program conducted at the International Law Enforcement Academy in
    Budapest, Hungary.
        The FLETC maintains frequent contact and liaison with several
    foreign law enforcement academies, such as the Royal Canadian Mounted
    Police Academy, Bramshill Police College in England, and the Australian
    Police Academy to further collaborative efforts in training related to
    transnational crime. Additionally, in January of this year, the FLETC,
    in partnership with the Department of State's Antiterrorism Assistance
    Program, sponsored a Training Directors' Conference at nearby St.
    Simons Island, Georgia. Approximately 35 senior-level training
    officials from 17 Latin American countries participated. The focus of
    the conference was the delivery of law enforcement training and
    education in support of counter terrorism efforts in Latin America, and
    it was hailed by conferees as a great success.
        During fiscal year 1996 the Center trained 583 foreign students,
    representing 1,455 student-weeks of training. Although the majority of
    the foreign training is done at the request and under the sponsorship
    of the U. S. State Department, the Center stands ready and has the
    capability to assist other agencies in meeting critical foreign
    training needs, particularly for the new governments in the former East
    block countries.
                           financial fraud institute
        Mr. Chairman, if I may, I would now like to spend a few minutes
    discussing the Center's Financial Fraud Institute.
        The Financial Fraud Institute (FFI) was established by the FLETC's
    Board of Directors in April 1989 to serve as the hub for the Federal
    Government's efforts in the fight against sophisticated white collar
    crime. The FFI provides training and/or coordinates training related
    research and course development, and provides an organized network for
    sharing training concepts/materials in the white collar crime arena
    including financial and computer crimes.
        Being a proactive organization, the FFI identifies the training
    methodologies and provides the knowledge and skills criminal
    investigators need to combat the ever increasing sophistication of
    financial and computer crime. The FFI is an important element in
    dealing with this growing crime problem. Programs such as Criminal
    Investigations in an Automated Environment, White Collar Crime,
    Advanced Financial Fraud, International Banking and Money Laundering,
    Computer Evidence Analysis, Telecommunications Fraud, and International
    Financial Fraud are examples of training that the FFI can provide.
        In addition to the information gathering and research conducted by
    its staff, the FFI relies on feedback and guidance from a Consultant
    Group and the Federal Computer Investigations Committee to guide and
    direct its program development efforts. Recognized experts in the field
    of computer and telecommunications fraud serve on these committees and
    provide the FFI with advice and insight necessary to stay abreast of
    changing trends in this type of criminal activity.
        The FFI Consultant Group, formed in 1989, acts as the primary
    steering committee for FFI and ensures the currency of its curriculum.
    It meets annually, and its membership includes representatives from the
    Secret Service, Customs Service, Internal Revenue Service, Financial
    Crimes Enforcement Network, Department of Treasury's Office of
    Enforcement, President's Council on Integrity and Efficiency, American
    Bankers' Association, Department of Justice, Federal Reserve Bank
    Board, Digital Equipment Corporation, American Institute of Certified
    Public Accountants, Stanford Research Institute, American Society of
    Industrial Security, American Bar Association, and the Communications
    Fraud Control Association.
        The Federal Computer Investigations Committee (FCIC), formed around
    the same time as the FFI Consultant Group, is an independent
    association of investigators, attorneys, and other professionals
    involved in the prevention, detection, investigation, and prosecution
    of all types of computer crime. Representatives from more than 30
    Federal, state, county, and municipal organizations regularly
    participate on this committee. It was born as a result of networking
    among the graduates of the FFI's programs. Its mission is to develop
    methods, standards, and techniques for the successful identification,
    investigation, and prosecution of complex computer and computer-
    supported crime.
        To complement its curriculum offerings, the FFI has also organized
    and sponsored several brainstorming sessions or colloquies where
    experts in the field make formal presentations and discuss the latest
    advancements in hardware, software, and investigative techniques to
    detect and/or prevent high-tech crime like telecommunications fraud.
    For example, in February 1996 the FFI hosted a colloquy on ``Electronic
    Sources of Information.'' More than 90 investigators and prosecutors
    from both the state and Federal sectors attended, representing
    organizations such as: the Financial Crimes Enforcement Network,
    National Security Agency, Central Intelligence Agency, Department of
    Justice, and the National White Collar Crime Center. Examples of topics
    covered in the colloquy were: ``Law Enforcement in a Digital World,''
    ``Legal and Social Issues for Law Enforcement Investigations on the
    NET,'' and ``Threats to Networks: Challenges for Law Enforcement and
    Investigations.''
        Before closing Mr. Chairman, I would like to briefly discuss the
    FLETC's efforts in measuring the quality of its training programs and
    meeting the needs of its customers. I would also like to briefly touch
    on our application of computer based training at the FLETC.
            student feedback system and customer satisfaction survey
        The Student Feedback System (SFS) is a major element of the
    overall, on-going quality assurance program at the FLETC. It was
    implemented at the Center in May of 1990 and is one of the tools the
    FLETC uses to evaluate the quality of the Center's basic training
    programs. Data is collected and analyzed on the Criminal Investigator
    Training, Land Management, and Mixed Basic Police training programs.
    Four forms are used to collect the data, a Course/Instructor evaluation
    form, a Program evaluation form, and two Administrative Services
    evaluation forms. We are in the process of expanding the SFS to include
    Center Advanced programs.
        Under the SFS, students are asked to evaluate every aspect of their
    training experience while at the FLETC. For example, they are asked
    whether practical exercises were realistic, whether examination
    question were clear and understandable, whether handout materials were
    helpful, or whether student conduct in the classroom interfered with
    learning. In the administrative support services area they are asked to
    rate housing, housekeeping, messenger service, recreational activities,
    dining hall, bus service and so on. Finally, students are asked to rate
    the overall quality of the program, instructors and administrative
    support services at the FLETC.
        The SFS provides immediate feedback that can be used to improve
    programs and has proven to be an important tool for maintaining the
    quality of FLETC training programs. I am pleased to note that in the
    latest SFS cumulative report covering fiscal year 1996, student
    perception of the overall quality of our programs and services exceeded
    our established standards.
        In addition to the SFS, the Center conducts customer satisfaction
    surveys to ensure that the FLETC is meeting the needs of its
    participating agencies. The latest survey, for which complete data is
    available, was done during fiscal year 1994. The survey measured
    customer satisfaction in three general areas: Training Systems,
    Services, and Support Systems. In training systems and service
    categories, FLETC ranked very high. The overall average for the areas
    evaluated under these two categories was 93 and 90 percent
    respectively. This indicates that over 90 percent of FLETC customers
    feel the Center is meeting or exceeding their requirements in these
    areas.
        Under training systems the agencies were asked to evaluate five
    areas: instructional facilities and resources, classroom scheduling,
    curriculum content, instructors and overall quality of the training.
    Individual ratings in the three most critical areas--curriculum
    content, instructors and quality of training--were 94, 96, and 94
    percent respectively. These ratings reflect that our customers feel the
    quality and cost effectiveness of training provided by FLETC is high
    and that the Center is meeting or exceeding their requirements.
        In the service category, our customers were asked to evaluate the
    quality of services provided by the FLETC in 45 different areas.
    Examples of the areas our customers were asked to evaluate include:
    student registration, fire prevention, emergency medical services,
    recreational services, uniform issues, post office service, moving
    service, telephone service, printing support, and safety and security
    service, etc. Again, I am pleased to report that 90 percent of our
    customers felt the quality of services provided by the FLETC met or
    exceeded their requirements.
        Customers were also asked to evaluate the FLETC's support systems
    in 9 areas. Examples are: student housing, maintenance, communication
    and interaction, FLETC's policies, organizational structure, quality of
    FLETC management, and agency participation in decision making. In this
    category, 76 percent of FLETC's customers felt that the support systems
    of the FLETC met or exceeded their requirements.
        Following the survey, FLETC began working with its customers to
    improve its performance in all areas, especially in those areas where
    customer expectations were not being met. FLETC and agency personnel
    formed work groups to correct identified weaknesses and changes were
    made to strengthen FLETC's performance in communication, procurement,
    agency participation in decision making, and housing to name a few.
        The Center recently conducted another customer satisfaction survey.
    Results of that survey are currently being compiled and analyzed.
    Although the Center received very high marks in customer satisfaction
    in 1994, we are even more pleased with preliminary trends in the
    current survey data from our on-site participating agencies. It shows
    an across-the-board improvement in almost all areas and indicates the
    actions taken to correct weakness identified in the 1994 survey are
    having the desired effect.
        The Student Feedback System and customer satisfaction surveys
    ensure that FLETC focuses on continuous improvement in meeting the
    needs of our students and participating agencies. They are two
    important tools in the Center's performance monitoring system.
                            computer based training
        For the past several years, the Center has been expanding the use
    of computer based training (CBT) in its training programs as a means of
    improving quality and/or controlling program costs. We are now using
    five CBT training courses in the Basic Criminal Investigator Training
    Program and are also using computer based interactive video training
    simulation to train in deadly force decision-making and radio
    communications. 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.
        Much of the instruction provided using CBT is after hours and/or
    off duty training that the student does on his own. This allows
    additional material to be covered in a program to meet training
    requirements without increasing the length of the program. It also
    allows students to review and practice skills that they are taught in
    the classroom, reducing the need for remedial training.
        CBT is a good long-run cost avoidance/savings and quality
    improvement tool. However, the initial investment can be quite high in
    some instances, and that is affecting the rate at which we are able to
    expand our use of CBT. The Center has only scratched the surface in the
    use of CBT and its long term impact on the training we provide will be
    tremendous.
        The FLETC's Firearms and Media Support Division staffs just
    recently completed another computer based training module, the
    Situational Awareness and Response Training CBT. The module combines
    CBT and interactive video technology using a scripted scenario that
    primarily incorporates the Federal Law Enforcement Training Center's
    (FLETC) Use of Force Model and the Justice/Treasury Use of Force
    Policy. The video scenario is displayed on a computer screen and
    students are required to select the best option from a button bar at
    one of several decision points in the scenario. If the correct option
    is selected, the video continues uninterrupted. If an incorrect option
    is selected, a narrator appears explaining the reason the option was
    incorrect. This allows students to practice decision-making skills in a
    controlled training environment. It can be used in conjunction with or
    prior to other scheduled training, and at the conclusion of training it
    can be used as an evaluation tool. The training module's file server
    can collect and compile comprehensive reports of student performance to
    include class and individual performance analysis.
        Although this training module is currently limited to firearms
    applications related to the use of force, other divisions and agencies
    can easily build upon the basic scenarios. The development of the
    multi-media training module has generated interest from other federal
    agencies and Department of Defense.
                                    closing
        Mr. Chairman, I am committed to the mission of the Center to
    provide high quality training at the lowest possible cost. Substantial
    savings are being realized through the operation of the Center as a
    consolidated training facility. I look forward to your continued
    support as the FLETC strives to remain a partnership committed to
    excellence.
        I am available to answer any questions you may have concerning this
    appropriation request.

                      Financial Crimes Enforcement Network

    STATEMENT OF STANLEY E. MORRIS, DIRECTOR
        Senator Campbell. Mr. Morris.
        Mr. Morris. Thank you, Mr. Chairman, Senator Kohl, for this
    opportunity to join with my colleagues to discuss the mission
    of the 1998 appropriation requests of the Financial Crimes
    Enforcement Network [FinCEN].

                                money laundering

        FinCEN is a small and unique agency with an incredible
    breadth of responsibility. It has thousands of law enforcement
    customers, regulates hundreds of thousands of financial
    institutions, and provides global leadership in the fight
    against money laundering. FinCEN operates in diverse forums,
    addressing extremely complex issues. It carries out its work
    with carefully tailored skills and resources enabling it to
    serve the broadest needs of its customers and the American
    people.
        To fully appreciate FinCEN's approach to combating money
    laundering, it is important to understand the complexity of the
    problem. Money laundering is the fuel for drug dealers,
    terrorists, arms dealers, and other criminals to operate and
    expand their enterprises. Indeed, organized crime cannot exist,
    much less flourish, unless it can move its profits into
    legitimate financial institutions.
        If unchecked, money laundering has the ability to
    destabilize democratic systems and undermine economic and
    financial markets around the world. As commerce is globalized,
    so is crime. It is crucial that in a global economy a
    comprehensive international effort be waged to combat this
    threat.
        As Secretary Rubin has said and I quote:

        In a global economy the comprehensive, international effort
    is required to choke off the threat imposed by money
    laundering. Also, the diffusion of responsibilities throughout
    government requires a coordinated and cooperative response
    within each government. In the United States we have brought
    together elements of our Treasury, State, and Justice
    Departments, and other agencies to deal with the issue.
    Globally, other nations will similarly need to coordinate
    expertise from across a range of ministries.

        The coordinated and cooperative response described by
    Secretary Rubin is at the heart of FinCEN's mission. It serves
    as a network bringing together diverse groups with specialized
    expertise. It helps coordinate the antimoney laundering efforts
    of Federal, State, local, and foreign law enforcement and our
    regulatory agencies. All of this is accomplished with 179
    people--a small but very effective team.

                        fiscal year 1998 budget request

        FinCEN's fiscal year 1998 budget request of 181 FTE's and
    $23,006,000 will enable us to continue our support to law
    enforcement investigations, regulatory efforts, and
    international coordination. In addition, under FinCEN's
    appropriation, we are proposing that two one-time initiatives
    be funded from the violent crime reduction trust fund, $1
    million for a Secure Communications Outreach Program which
    would be designed to improve secure communications among all
    the Treasury's law enforcement bureaus; and $2 million in
    support of the President's efforts to encourage money-
    laundering countries to institute internationally accepted
    antimoney laundering standards through training and
    technological assistance programs.
        Thank you again for the opportunity to share our efforts
    with the Committee. Please be assured that FinCEN will continue
    to use its funds wisely and look for new and innovative ways to
    lead in our fight against money laundering.
        Thank you.

                               prepared statement

        Senator Campbell. Thank you, Mr. Morris. We have your
    complete statement and it will be made part of the record.
        [The statement follows:]
                    Prepared Statement of Stanley E. Morris
        Mr. Chairman and members of the Subcommittee, thank you for this
    opportunity to discuss the mission and the fiscal year 1998
    appropriations request of the Financial Crimes Enforcement Network
    (FinCEN).
        FinCEN is a unique agency with an incredible breadth of
    responsibility, particularly considering its size. It has thousands of
    law enforcement customers, regulates hundreds of thousands of financial
    institutions, and provides global leadership on the problem of money
    laundering. Much is expected of it--and much is delivered. FinCEN
    operates in diverse forums, addressing extremely complex issues. It
    carries out its work with carefully tailored skills and resources
    enabling it to serve the broadest needs of its customers and the
    American people.
        This agency was first created seven years ago as a central source
    for financial analysis and intelligence retrieval to assist in the
    investigation of money laundering and other financial crimes. Then, two
    and a half years ago, its mission broadened to include regulatory
    responsibilities. And now with its burgeoning international programs,
    it serves as one of the key components of Treasury's anti-money
    laundering efforts.
        FinCEN's fiscal year 1998 budget request of 181 FTE's and
    $23,006,000 continues its support to law enforcement investigations,
    regulatory efforts, and international coordination. In addition, under
    FinCEN's appropriation, we are proposing that two one-time initiatives
    be funded from the Violent Crime Reduction Trust Fund: $1 million for a
    Secure Communications Outreach Program which would be designed to
    improve secure communications among Treasury's law enforcement bureaus;
    and $2 million in support of the President's efforts to encourage money
    laundering countries to institute internationally accepted anti-money
    laundering standards through training and technical assistance
    programs.
                       the magnitude of money laundering
        In order to appreciate FinCEN's approach to combating money
    laundering, it's important to understand the complexity of the problem.
    Today, I will discuss that complexity and then FinCEN's methods for
    helping to address the problem.
        Money laundering is the fuel for drug dealers, terrorists, arms
    dealers, and other criminals to operate and expand their enterprises.
    Indeed, organized crime can not exist much less flourish unless it can
    move its profits into legitimate financial institutions. If unchecked,
    money laundering has the ability to destabilize democratic systems and
    undermine economic and financial markets around the world. As commerce
    is globalized, so is crime. It is crucial that in a global economy, a
    comprehensive, international effort be waged to combat this threat.
        As Secretary Rubin has said in the past: ``In a global economy, a
    comprehensive, international effort is required to choke off the threat
    posed by money laundering. Also, the diffusion of responsibilities
    throughout government requires a coordinated and cooperative response
    within each government. In the United States, we have brought together
    elements of our Treasury, State and Justice Departments, and other
    agencies, to deal with the issue. Globally, other nations will
    similarly need to coordinate expertise from across a range of
    ministries.''
        The coordinated and cooperative response described by Secretary
    Rubin is at the heart of FinCEN's mission. It serves as a network,
    bringing together diverse groups with specialized expertise. It helps
    coordinate the anti-money laundering efforts of federal, state, local,
    and foreign law enforcement and regulatory agencies. All this is
    accomplished with 179 people--a small but very effective team.
        FinCEN accomplishes its missions in the following ways:
      --First, supporting law enforcement investigations at the federal,
            state, and local level by providing intelligence and analysis;
      --Second, regulating financial institutions under the Bank Secrecy
            Act--the BSA--(the nation's primary counter money laundering
            law);
      --Third, helping to influence and guide the international fight
            against money laundering through both bilateral and
            multilateral initiatives; and
      --Fourth, playing a leadership role in creating unique approaches to
            dealing with and beating sophisticated financial criminals at
            their game.
        We do not accomplish these enormous tasks alone. FinCEN relies on
    its partners in law enforcement--at the federal, state, and local
    levels, the regulatory community, the financial sector, and numerous
    organizations around the world. The work is too complex and far-
    reaching to do without the support and expertise of all the players.
                           i. law enforcement support
        The original mission of FinCEN centered on law enforcement case
    support. This is still our primary mission, but we have expanded it to
    include specially tailored forms of assistance. Let me describe the
    five categories of support.
        Direct Case Support.--Since its creation in 1990, FinCEN has
    provided almost 38,000 analytical case reports involving over 100,000
    subjects to federal, state, and local law enforcement agencies. Last
    year alone, FinCEN worked with more than 150 different agencies,
    answering more than 7,600 requests for investigative information. Using
    advanced technology and countless data sources, FinCEN links together
    various aspects of a case, finding the missing pieces to the criminal
    puzzle.
        Our compilation of databases provides one of the largest
    repositories of information available to law enforcement in the
    country. FinCEN's technology and expertise draws representatives from
    17 agencies--the major federal investigative agencies--in order to have
    direct access to our information. These are analysts and agents who
    serve long-term details at FinCEN. These individuals are critical in
    the case development process and act as a point of contact on essential
    law enforcement dissemination issues.
        Platform Access.--FinCEN support is also provided to law
    enforcement agencies through a ``Platform'' which is a way to permit
    others to use FinCEN's resources directly to carry out their work.
    FinCEN pioneered the Platform in 1994, offering training, office space
    and database access to employees of other federal agencies who needed
    to conduct research on cases under investigation by those agencies.
    Platform personnel are on the payroll of other federal agencies and
    come to FinCEN on a part-time basis to work only on cases being
    conducted by their own offices or agencies. These individuals know the
    needs of their organization and can support that need directly through
    database access. FinCEN is currently assisting 43 Platform participants
    from 21 agencies. About 10 percent of FinCEN's case work last year and
    20 percent so far this year was carried out through these Platforms.
        Artificial Intelligence Targeting System.--FinCEN's Artificial
    Intelligence (AI) system is yet another avenue available to law
    enforcement in the fight against money laundering. Through the
    employment of advanced AI technology, the system provides a cost
    effective and efficient way to locate suspicious activity in the tens
    of millions of currency transaction reports required by the Bank
    Secrecy Act.
        For the first time in the 25 year history of the act, every
    reported financial transaction can be reviewed and evaluated. This
    unique blend of state of the art technology within a user friendly
    environment provides intelligence analysts and federal investigators
    with the ability to link ostensibly disparate banking transactions,
    producing hundreds of leads for new investigations.
        FinCEN's innovative system finds potential suspects during the AI
    analysis who might have otherwise gone undetected. This technology and
    the expertise of FinCEN's analysts essentially find the needles in the
    haystack. Since the creation of the system in 1993, it has matched more
    than 39 million BSA reports against the algorithms of the system,
    revealing over 3,500 subjects.
        Support to ICG.--FinCEN also is supporting the Interagency
    Coordination Group (ICG) whose purpose is to share money laundering
    intelligence in order to promote multi-agency money laundering
    investigations. The group includes the Internal Revenue Service, the
    U.S. Customs Service, the Drug Enforcement Administration, the Federal
    Bureau of Investigation, and the United States Postal Service. FinCEN
    and the Department of Justice's Criminal Division, serve as advisors to
    the group. FinCEN provides a central site for the group's operations
    and the support of four personnel who provide research and analysis of
    the intelligence information generated by the group. This intelligence,
    coordinated in FinCEN's case lab, is then disseminated to case agents
    currently working major money laundering investigations in the field.
        Through analyzing information provided by the ICG, FinCEN's case
    lab has identified more than 5,000 bank accounts opened in the United
    States by Colombian/Mexican money launderers. By tailoring one of
    FinCEN's computer applications, these accounts have been linked to
    other accounts, providing additional intelligence.
        Several weeks ago, FinCEN hosted a meeting of more than 100
    investigators, analysts, and prosecutors to develop a strategy for
    leveraging the intelligence gained from this process. This law
    enforcement group is considering both domestic and international
    operations to cripple the major money laundering systems.
        Gateway.--FinCEN's network extends to state and local governments
    in order to ensure the widest possible anti-money laundering effort.
    Through a system called Gateway, state and local law enforcement
    agencies have direct, on-line access to records filed under the Bank
    Secrecy Act, the largest currency transaction reporting system in the
    world. BSA records contain information such as large currency
    transactions, casino transactions, international movements of currency,
    and foreign bank accounts. This information often provides invaluable
    assistance for investigators because it is not readily available from
    any other source.
        Using FinCEN-designed software, the Gateway system saves
    investigative time and money because subscribing agencies can conduct
    their own research and not rely on the resources of an intermediary
    agency to obtain BSA records. All states and the District of Columbia
    are now on-line with the system. In fiscal year 1996, Gateway processed
    49,466 queries from 45 states. Through February of this year, FinCEN
    has received 21,843 Gateway queries from 48 states.
        During the research and analysis process, Gateway electronically
    captures the information gathered on incoming inquiries and
    automatically compares this information to subsequent and prior queries
    from Gateway customers. About 17,000 subjects have been identified
    through Gateway. In addition, Gateway users ask FinCEN to match about
    600 new subjects each month against its other databases to identify
    potential parallel investigations. This technique enables FinCEN to
    assist state and local agencies in coordinating their investigations
    among themselves, and with federal agencies, through the sharing and
    exchanging of case data. (In other words, FinCEN has the ability to
    ``alert'' one agency that another has an interest in their subject.) In
    1996, 356 ``alerts'' were given to agencies who had an interest in the
    same investigative subject. From October 1996 through February 1997,
    186 ``alerts'' were issued.
        Since the inception of Gateway in 1994, 463 representatives of
    state and local law enforcement (to include state attorney general
    offices) have been trained on Gateway. As of March 1, 1997, there were
    354 active users of the system.
        In all the programs I just described, our goal is to give our
    customers access to as many tools as possible to build their
    investigations and to share our expertise in as many ways as possible.
    With the volume and complexity of the work, it is impossible to always
    do their analysis and intelligence gathering for them. Nor should we
    try. Agencies know best what they need for their case work. FinCEN
    strives to find all the avenues--whether it be traditional data
    analysis, detailee support, Platform, Artificial Intelligence System,
    the ICG or Gateway--to leverage our resources to efficiently and
    effectively serve the greatest number of customers. I believe that if
    we did nothing more than this law enforcement investigative support,
    FinCEN would justify its resources, but we do much more.
                  ii. anti-money laundering regulatory program
        The link between FinCEN's law enforcement mission and its
    regulatory mission is vital. The first mission finds ways to create and
    manage information needed by front-line investigators and prosecutors,
    and by policy makers. On the regulatory side, the Bank Secrecy Act is
    used to require the preservation at financial institutions and, where
    appropriate, the reporting, of that information to law enforcement.
        It makes no sense to require information--and impose burdens on
    banks and others--if the information isn't essential to our anti-money
    laundering strategy. And, it makes no sense to have potentially useful
    information that you can't get to an investigator in time for
    successful case development.
        That's where the BSA and FinCEN's database management and
    exploitation programs come together. The BSA increasingly supplies the
    input, and FinCEN's law enforcement support supplies the output. We
    endeavor only to require information of a type and in a form we can
    really put to use, and to use the BSA to get that information in a way
    that our database systems and intelligence programs are prepared to
    handle.
        Our regulatory program reflects two principles. First, effective
    anti-money laundering programs must address the needs of law
    enforcement without creating unnecessary burdens on the financial
    community. FinCEN works in partnership with banks and others to
    establish these policies and regulations to prevent and detect money
    laundering. Second, the Bank Secrecy Act rules must be of use to, and
    capable of audit and enforcement, by other agencies--the five federal
    financial supervisory agencies (as well as in some cases state banking
    officials), the Securities and Exchange Commission, the Examination
    Division of the Internal Revenue Service, and federal and state law
    enforcement agents and prosecutors. I think you can see how complex the
    issue is--just in the number of organizations involved in the process,
    much less the complexity of the regulations themselves.
        None of this is easy for a small agency (or for that matter a big
    agency). There are more than 200,000 financial services providers--from
    the largest money center banks to the scattered currency exchange
    businesses along the Southwest border, with hundreds of variations in
    between--that are subject to the BSA rules. Enforcement authorities
    around the nation--and, importantly, the Congress--look to us to use
    the BSA, as intended, to come up with appropriate civil strategies to
    prevent, detect, and enforce the laws against money laundering. At the
    same time, these financial institutions (from big to small) look to us
    for rules that make sense, don't impose unnecessary or arbitrary costs,
    and fit their own sense of what it takes to fight financial crime
    effectively.
        So there is no place for quick, ``off the rack'' solutions. There's
    no cookbook listing the recipes, let alone describing how to get the
    wide variety of regulators, agencies, and financial institutions
    involved to understand and to use the rules effectively.
        The financial industry is a crucial part of this picture. As we've
    often said, we cannot succeed in fighting money laundering in a
    professional world that separates enforcement and regulation, or the
    public and private sectors. We must break down narrow and parochial
    thinking. We need to be more flexible and creative than criminal
    organizations. Thus, our strategies for prevention emphasize working
    with the legitimate businesses that see potential money launderers
    first, up close--that is, banks and other financial institutions.
        FinCEN's regulatory program is developed in close consultation with
    the public and private officials represented on the Bank Secrecy Act
    Advisory Group (BSAAG), which has proved extremely effective as a forum
    for a frank exchange of views and fostering of increased cooperation
    and understanding between law enforcement and the financial community.
    Since its creation in 1994, the BSA Advisory Group has been hailed by
    the Treasury, Advisory Group members, the public and the G-7 Financial
    Action Task Force as an innovative way for government and industry to
    work together in a partnership to fight financial crime while reducing
    industry's regulatory burden.
        The group's members represent the financial services industry, from
    big banks to small ones, as well as the securities and casino
    industries and the nonbank sector, such as check cashers, money
    transmitters and traveler's check issuers. In addition, there is
    representation from state and federal law enforcement and regulatory
    authorities. The group discusses the problems of domestic and
    international money laundering and the programs created to fight
    financial crimes.
        Both in the design and formulation of the details of regulatory
    proposals, FinCEN consults on a regular basis with officials in other
    federal enforcement and regulatory agencies, both within the Treasury
    and Department of Justice, and, as we said, with financial industry
    officials. State officials are also consulted where states have
    significant experience and primary regulatory responsibility.
        Let me describe some examples of how FinCEN's regulatory strategy
    focuses on increasing the quality of the information and preventing our
    financial institutions from being used for money laundering:
        Exemptions.--Currency Transaction Reports--CTR's--(reports which
    are filed by banks on cash transactions over $10,000) and other key BSA
    reports still provide the basic raw material for FinCEN analyses--in
    individual cases and for broader analyses of patterns of illegal money
    movement. But the meaningful CTR data is often obscured by a large
    volume of information that is not necessary or relevant--and that clogs
    the system. In fact, the BSA database is made up of more than 100
    million reports filed by financial institutions.
        Last year more than 12 million CTR's were filed, the significant
    majority of which involved legitimate commercial transactions. While
    banks are permitted to ``exempt'' certain transactions from CTR
    filings, the existing process is too complicated, requires constant
    monitoring and creates significant liability for penalties for
    mistakes. With these risks and advances in technology, many banks have
    decided to file CTR's rather than exempt.
        So we're trying to use the Congressional directive in the Money
    Laundering Suppression Act to unclog the system. FinCEN has issued an
    interim rule (soon to be a final rule) which creates ``bright line
    tests'' by which banks may exempt most publicly traded companies and
    their subsidiaries as well as transactions with domestic banks and
    government agencies realizing that these CTR's are ``of little or no
    value for law enforcement purposes.''
        Also, we hope very soon to issue a notice of proposed rulemaking
    totally eliminating the present--complex, costly and much criticized--
    exemption system by expanding the types of businesses eligible for
    exemption beyond the entities listed above to also provide simplified
    procedures to exempt retail, wholesale and service businesses as well.
    The purpose of these proposed rules is to cut the number of filings by
    at least half and release the banks from burdensome processes so that
    they can focus on information important to investigators such as the
    reporting of suspicious activity.
        It's important to note that when the substance of our proposals was
    first announced by FinCEN, the American Bankers Association issued a
    news release applauding the effort, stating in part, ``FinCEN's new
    currency transaction reporting exemption regulation is a victory of
    reason over process...(these changes) will cut down on paperwork, save
    the banking industry millions of dollars and allow law enforcement to
    focus on truly suspicious activity.''
        SARS.--Working closely with the Federal Reserve Board and the other
    regulatory agencies, the new Suspicious Activity Reporting System
    (SARS) focuses on information government does require--information
    about transactions that appears to represent attempts to launder funds
    or violate the banking laws. The SAR system allows banks to report
    suspected criminal activity such as bank fraud, misdeeds by bank
    officials, tax fraud, check kiting, credit card fraud, embezzlement or
    money laundering, to one collection point.
        The new system, which went into effect in April 1996, merged and
    revolutionized two older reporting systems that had been in place for
    over a decade. Under the old system, banks filed more than two million
    pieces of paper, usually through the mail, in order to report
    suspicious activity occurring at or through banks; separate filings
    were made with numerous law enforcement and regulatory agencies, and no
    uniform mechanism for tracking the referrals (or even knowing that they
    had been made at each agency) existed.
        This single centralized system allows more than a dozen federal law
    enforcement and regulatory agencies to use the information in these
    reports simultaneously. The single filing point for banks permits the
    rapid dissemination of reports to appropriate law enforcement agencies,
    provides for more comprehensive analyses of these reports, and results
    in better information about trends and patterns which is vital to
    Treasury enforcement in our efforts to address money laundering. As of
    this month, financial institutions have filed almost 65,000 SARS. And
    about 40 percent of SARS filings reported suspected money laundering
    activity.
        The system is administered by FinCEN in a unique partnership with
    the IRS Detroit Computing Center, federal law enforcement and the five
    bank regulatory agencies. In the context of technology and keeping one
    step ahead of criminals, the SARS will significantly improve law
    enforcement's ability to detect, analyze and understand criminal
    financial activity. The users of the information--the IRS/CID, U.S.
    Customs, U.S. Secret Service, the FBI, the U.S. Attorneys, the federal
    bank regulators, and state law enforcement agencies and banking
    supervisors now have equal access to the data as soon as its processed.
        Wire Transfer Rules.--The world's intricate wires transfer systems
    move over $2 trillion a day, involving over 500,000 transactions. In
    the past, wire transfers offered criminal organizations an easy,
    efficient and secure method of transferring huge sums of money over a
    very short period of time. However, two funds transmittal (wire
    transfer) rules issued jointly by FinCEN and the Federal Reserve became
    effective on May 28, 1996. Requiring years to design, these wire
    transfer rules preserve an information trail about persons sending and
    receiving funds through wire transfer systems, helping law enforcement
    agencies trace criminal proceeds.
        Casinos.--Since 1985, when state-licensed casinos were first
    subjected to the safeguards and controls of the BSA, the size and
    availability of casino gaming in the U.S. has increased dramatically.
    At that time, the new rules applied only to casinos in Puerto Rico and
    Atlantic City, New Jersey. Under an agreement between the state of
    Nevada and Treasury, that state's casinos were subject to a separate
    regulatory regime. Today commercial casino gaming is authorized in
    fifteen states and accounts for nearly half a trillion dollars in
    wagered funds.
        Concurrently, there has been a significant expansion in the
    availability of bank-like financial services provided to casino
    patrons, including the establishment of deposit and credit accounts,
    and money transfer, currency exchange and check cashing services. Given
    the large volume of activity occurring at casinos, and the cash-
    intensive nature of transactions, this industry is vulnerable to abuse
    by customers intent upon committing money laundering, tax evasion and
    other financial crimes.
        FinCEN has worked closely with the industry to ensure that
    effective anti-money laundering programs exist, including working with
    the new American Gaming Association and state casino associations and
    regulators from Nevada, New Jersey, Puerto Rico, Mississippi and other
    jurisdictions.
        Tribal Casinos.--In addition to the growth in state-licensed
    gaming, in the six years since Indian tribal casinos were first
    established in the U.S., this segment of the industry has spread to
    nearly half of the states and accounted for over $50 billion in funds.
    In order to meet Congress' direction in the Money Laundering
    Suppression Act to end the disparate regulatory treatment of tribal
    casinos, and in recognition of the unanticipated growth of this
    industry, FinCEN began the extensive process of meeting with
    representatives of tribal governments, casino operators and others
    associated with this industry. We conferred with The National Indian
    Gaming Commission, National Congress of American Indians and, most
    especially, the National Indian Gaming Association.
        In April, 1996, FinCEN sponsored a BSA conference designed
    specifically to address compliance with the new regulations. While
    tribal representatives often express concern over the potential threat
    to their tribal sovereignty, FinCEN has been cited favorably for its
    willingness to work with the tribal community through the regulatory
    process.
        Moreover, our regulations were designed to avoid a contentious
    issue between tribal and state governments, by applying these
    regulations uniformly regardless of whether state-tribal compacts were
    in force. This rule received no critical comments and, on August 1,
    1996, it went into effect largely as proposed.
        Our experience in dealing with casinos has taught us that non-
    traditional financial services providers require special attention, and
    also a creative, and sometimes flexible, regulatory approach. That
    experience should serve us well as we deal with the challenge of
    upgrading BSA compliance and anti-money laundering controls in what
    we've come to call ``money services businesses,'' a subject to which
    I'd now like to turn.
        Money Services Businesses.--As you may know, hearings were recently
    held by the House Banking Committee which focused on a geographic
    targeting order, or ``GTO.'' The U.S. Customs Service, IRS, New York
    City Police, FinCEN, and others supported an anti-money laundering
    operation which caused a dramatic reduction in the amount of illicit
    funds moving through New York money transmitters. The GTO required 22
    licensed transmitters of funds to report information about the senders
    and recipients of all cash purchased transmissions to Colombia of $750
    or more.
        As a result of the GTO, the targeted money transmitters' overall
    business volume to Colombia dropped by approximately 30 percent. With
    this mode of moving money to Colombia restricted, the criminals had to
    find other means of moving their money so they turned to bulk
    smuggling. This method of money movement is vulnerable to law
    enforcement interception and resulted in a dramatic increase in the
    amount of currency seized along the East coast--over $50 million while
    the GTO was in effect. This figure is approximately four times higher
    than in previous years. The GTO was a great success story for both
    federal and local law enforcement.
        The GTO focused a search-light on a little-understood but very
    large and important part of the financial sector. This is the class of
    non-bank businesses that sell money orders and travelers checks,
    transmit funds, exchange currencies and cash checks. (We think the
    businesses are better-described by the term ``money services
    businesses'' than ``non-bank'' financial institution, because the
    latter term also includes broker-dealers, insurance companies, and
    gaming businesses.) Although the businesses that offer these products
    are often small, the industry is anything but. It is estimated that
    $200 billion passes through these businesses each year. As I indicated
    above, we think that there may be in excess of 200,000 businesses
    nation-wide that offer one or more of these products.
        Of course, as in the case of the nation's banks and securities
    firms, most money service business operators and agents are law-
    abiding, cooperate with enforcement authorities, and, in truth, are as
    interested in cost-effective financial law enforcement as we are. But
    the GTO indicates that we need to pay more attention to updating the
    way the BSA applies to these businesses, and to equalize the money
    laundering controls to which various types of financial institutions
    are subject; this is not just a question of new rules, but rather of
    extending existing rules to non-bank money service providers.
        Three proposed rules to address money services businesses are
    currently under review. Each of them is better because of our
    partnerships with industry and law enforcement. The first proposal sets
    forth a registration scheme that is designed to capture crucial
    information about money transmitters, check cashers, currency
    exchangers and issuers, sellers, and redeemers of money orders and
    traveler's checks, while at the same time not imposing an undue burden
    on small businesses engaged in providing these services.
        The other two proposals would extend the suspicious transaction
    reporting requirement to certain categories of money services
    businesses and require special currency transaction reporting and
    recordkeeping by money transmitters. These proposals are based not only
    on the general knowledge of the industry that we have gained in
    connection with the registration proposal, but also on the experience
    of the New York GTO.
        I want to emphasize that the three packages I've described are
    still in review and are simply notices of proposed rulemaking. We look
    forward to working with industry groups to refine the proposals to
    strike the necessary balance between the many competing factors that
    must be weighed to devise workable rules in this area.
        As I think you can see, we've been asked to tackle a wide variety
    of problems and issues on the regulatory side. There is no set of
    ``instructions for assembly'' that comes with these tasks, and few
    precedents for designing a regulatory system that truly enlists the
    cooperation of financial businesses in making money laundering harder
    to carry out and easier to detect. As in the case of our law
    enforcement support operations, I hope you'll agree that the taxpayers
    would be getting their money's worth if all of FinCEN's efforts were
    devoted simply to re-engineering the BSA. Still, we are required to and
    should do more.
                         iii. international initiatives
        The ``business'' of laundering money in the United States is being
    made more difficult. The consequences of these successes here at home
    are two-fold. First, criminals are being forced to search for financial
    systems beyond our borders in which to disguise their illicit proceeds.
    Secondly, a growing list of countries are recognizing the corrosive
    dangers that unchecked financial crime poses to the integrity of their
    economic and political systems. As a result, countries are seeking
    Treasury's and FinCEN's assistance in establishing effective anti-money
    laundering programs.
        We are meeting the challenges created by a borderless marketplace
    for money launderers by developing and fostering bilateral and
    multilateral initiatives aimed at whittling down the number of
    countries who choose not to play by international standards. FinCEN has
    helped Treasury provide international leadership in developing and
    fostering global anti-money laundering strategies, policies, and
    programs, and reaches out to assist countries in implementing those
    standards. FinCEN has received worldwide recognition for its
    capabilities and accomplishments and we are frequently called upon to
    provide guidance and assistance in multilateral fora, as well as in
    individual government-to-government exchanges.
        Our principal efforts in the international arena include:
        Financial Action Task Force (FATF).--In just the past three years,
    FinCEN has been instrumental in revitalizing the world's premier anti-
    money laundering organization, the Financial Action Task Force. Created
    at the G-7 Economic Summit in 1989, the FATF is comprised of 26
    countries. It is dedicated to promoting the development of effective
    anti-money laundering controls and enhanced cooperation in counter-
    money laundering efforts among its membership and around the globe.
    FinCEN serves as the lead agency for coordinating the U.S. role within
    the FATF. It heads up the U.S. delegation which consists of Treasury,
    State and Justice, and I am one of six members of the FATF Steering
    Group.
        The U.S. held the Presidency of the FATF from July 1995 to July
    1996. During the U.S. presidency, FinCEN spearheaded the successful
    effort to strengthen the Task Force's 40 recommendations, the standards
    for countries to follow in combating the laundering of criminal
    proceeds. This was the first update to the recommendations since they
    were issued in 1990.
        FATF also mandates ``mutual evaluations''--regular, on-site peer-
    group examinations of each member nation's progress in implementing
    anti-money laundering controls. A mutual evaluation of the United
    States was conducted in December 1996. The positive evaluation that the
    United States received lends international credibility to U.S. anti-
    money laundering programs as well as further establishes U.S.
    leadership in countering money laundering worldwide.
        FinCEN has given new focus to FATF's Annual Typologies Exercise,
    this year persuading FATF to issue a public version of its report. The
    annual typologies meeting brings together law enforcement
    representatives from member countries to discuss current money
    laundering trends and patterns. Disseminating public versions of these
    reports to financial institutions in the private sector provides them
    with valuable feedback about the usefulness of compliance programs to
    law enforcement. This year's report contains an annex which discusses
    the money laundering implications of emerging payment systems, such as
    electronic money (e-money) and Internet transactions.
        A primary goal of the U.S. has been to expand FATF's anti-money
    laundering standards to key regions around the world. To this end, it
    has encouraged the development of sister organizations such as the
    Caribbean Financial Action Task Force (CFATF) and the Asia/Pacific
    Group on Money Laundering.
        FinCEN played a role in the success of a conference held in October
    1996 in South Africa. The conference resulted in 13 countries from the
    region agreeing to seek the establishment of a Southern and Eastern
    African Financial Action Task Force. We are especially encouraged by
    this first but important step towards bringing a key region of the
    world under the FATF umbrella.
        With strong encouragement from the United States, the current
    President of the FATF has been developing contacts with the
    Multilateral Development Banks, such as Asian Development Bank and the
    Inter-American Development Bank.
        Financial Intelligence Units and the Egmont.--We are witnessing a
    new world-wide phenomenon, that is the establishment of financial
    intelligence units (FIU's) in countries through out the globe. These
    units serve as the central focal point for countries' anti-money
    laundering efforts. Just five years ago, there were less than a handful
    of FIU's in the world. Today, there are at least 29 such units. The
    momentum for this development came about as a result of several years
    of an intensive anti-money laundering effort by FinCEN and its
    counterparts in Europe and Australia.
        Under the leadership of FinCEN, a core group of FIU's met for the
    first time in Brussels in 1995 and created an organization known as the
    Egmont Group. This group serves as an international network, fostering
    improved communication and interaction among FIU's in such areas as
    information sharing and training coordination.
        Although differing in size, structure and individual
    responsibilities, Egmont members share a common purpose--cooperation in
    the fight against money laundering through information exchange and the
    sharing of ideas.
        The effort to increase communication among FIU's has been furthered
    by FinCEN's development of a secure web site which will permit members
    of the Egmont Group to access information on FIU's, money laundering
    trends, financial analysis tools, and technological developments. We
    cannot emphasize strongly enough the importance we place on the
    expansion of financial intelligence units around the world. It is the
    embodiment of the network concept offering support to law enforcement
    nationally and internationally.
        International Criminal Police Organization (Interpol).--Interpol is
    an international organization established to facilitate information
    sharing and coordination among nations in worldwide criminal
    investigative matters. Treasury's Under Secretary for Enforcement has
    served on Interpol's Executive Committee. At the 64th session of
    Interpol's General Assembly held in October 1995, a resolution was
    unanimously adopted establishing the first major anti-money laundering
    declaration in the organization's history. Additional progress against
    money laundering is made through annual financial analysis conferences
    which FinCEN co-sponsors with Interpol's FOPAC unit. In fact, just
    yesterday I was in Buenos Aires at the annual FinCEN-FOPAC conference,
    where more than 20 countries were discussing the ways governments can
    use suspicious activity reports filed by financial institutions to
    combat money laundering.
        Interpol is also focusing on money laundering controls in the
    countries of the Former Soviet Union and Eastern European. As these
    governments struggle to put into place effective regulatory and legal
    infrastructures, ample opportunities for criminals to launder their
    money exist. The Secretary General of Interpol called upon FinCEN to
    lead an examination of the economic environment and factors that impact
    money laundering in 15 of 26 of these countries. Since July 1995, 13 of
    the 15 reports have been drafted under ``Project Eastwash.''
        FinCEN and FOPAC's combined efforts have generated the political
    will in several of these countries to begin establishing anti-money
    laundering regimes. For example, the Latvian government used our
    Eastwash report as the impetus to push forward with efforts to develop
    new anti-money laundering measures. Through attendance at the annual
    financial analysis conferences, Slovakia and Czech Republic moved to
    establish FIU's, and most recently, several Latin American countries
    (Argentina, Colombia, Uruguay, and Bolivia) used these discussions to
    initiate similar efforts.
        Summit of the Americas (SOA).--In December 1995, Treasury Secretary
    Rubin chaired a conference in Buenos Aires, Argentina, that was
    attended by Ministers from 29 of the 34 SOA nations. FinCEN led the
    year long effort to lay the groundwork for the Buenos Aires Conference
    by coordinating the development of a Communique--a document which
    commits each of the participating countries to take a series of steps
    to combat money laundering.
        Treasury and FinCEN, along with other agencies, are leading the
    follow-up efforts to the conference. This includes offering coordinated
    training and assistance to SOA participating countries. The process is
    beginning to take effect. At least 25 of the 34 Summit countries have
    taken positive steps toward implementing the communique by passing,
    amending or drafting legislation, or issuing related regulations.
        Money laundering continues to pose a serious threat to the
    stability of the world's financial institutions. Yet, in the past two
    years, more than 25 countries with as varied political systems as
    Bulgaria and New Zealand have passed anti-money laundering laws. About
    a dozen others such as Russia, Israel, Ukraine, and Mauritius have
    draft laws or regulations pending.
        The role that the United States plays, both by itself and as part
    of multilateral efforts, is critical in setting effective standards in
    the fight against money laundering. FinCEN is at the forefront of this
    world wide movement. We have found that it is important to share our
    expertise--as well as our mistakes--with our foreign counterparts.
    FinCEN representatives have visited five continents and more than 50
    countries in the past three years urging these countries to take the
    money laundering threat seriously and adopt effective anti-money
    laundering measures. We have also acted as host to 313 visitors
    representing 71 countries since the fall of 1995.
                                 iv. leadership
        The fourth and final area goes to fundamentally how we get all of
    this done. As I said earlier, we are indeed, a small agency. I hope
    that it is also recognized that small does not mean unimportant as
    evidenced by our critical and in many cases, leading role in the fight
    against financial crime. Granted, we do not have a sizable work force.
    Therefore, we cannot possibly do everything ourselves, but it isn't
    size but rather expertise and the help of others that permits us to
    accomplish our many missions. In fact, it is our small size that allows
    us the flexibility to operate as our name suggests, i.e., as a
    ``network.''
        Candidly, we like being and want to remain relatively small. We do
    not want to increase our size substantially but rather our
    effectiveness and ability to influence others. In short, we must rely
    on our own skills to persuade and lead.
        In the era of financial globalization, no single set of skills or
    tools alone can protect the financial system from abuse. One reason we
    are able to accomplish so much with so few is the diversity and
    professional dedication of the men and women of FinCEN. We are former
    bankers, linguists, law enforcement agents, regulatory officials,
    academics, lawyers and computer experts. This is why we are able to
    lead and think outside of the status quo. And, I would like to mention
    a few areas to illustrate what I mean.
        Technology.--In the area of technology, we really are pioneers.
    FinCEN uses state of the art technology to not only strengthen its own
    capabilities, but also to improve the means by which we provide
    investigative support and analysis to law enforcement.
        In addition to having what has been called one of the best and most
    informative government Web Pages on the Internet by Federal Computer
    Week magazine, we have developed a sophisticated Intranet network of
    databases to link financial, law enforcement and commercial information
    to provide cost-effective and efficient measures (``one stop
    shopping'') for federal, state and local law enforcement officials to
    prevent and detect financial crime. FinCEN provides this information/
    access for no charge, but it is true that there is no such thing as a
    free lunch. What we gain is additional information on investigations to
    assist future investigations; this allows us to link ongoing
    investigations together to avoid duplication, and assemble masses of
    data to identify strategic trends. In this regard, our Gateway system
    won an award in 1995 from Government Executive magazine for identifying
    creative ways to enlist the support of other entities.
        FinCEN's Artificial Intelligence (AI) system is another example of
    how FinCEN has used technology to improve the quality of information.
    And, as I described earlier, the SAR system has integrated technology
    and pooled the information, expertise and resources of several
    different regulatory agencies to develop a system that was better and
    more efficient for the government as well as the industry.
        Partnership.--Five years ago, the BSA concentrated on the reporting
    of currency being deposited into banks. Today, money laundering
    methods, as well as the financial service sector, has changed
    dramatically. Our success at deterring and identifying large currency
    deposits has forced criminals to use alternative more sophisticated
    methods to gain access to the financial systems. As a result, we have
    had to employ more sophisticated counter measures. Now financial
    services are provided by hundreds of thousands of entities ranging from
    traditional depository institutions to broker dealers, state and Indian
    casinos, check cashers, currency exchangers, issuers and sellers of
    money order and travelers checks as well as money transmitters.
    Needless to say the government's resources dedicated to this fight have
    not and could not possibly increase at the same rate. Therefore, we
    have had to do more with what we have. We have done this by developing
    partnerships with the affected industries who share our mission as well
    as with other nations.
        Money laundering is a global problem and cannot be handled on a
    national basis. Treasury and FinCEN have led the world in promoting
    effective international anti-money laundering measures. As you have
    heard, we use the creation of regional organizations to ensure a level
    playing field and provide support and expertise to international
    organizations like FATF, CFATF, Organization of American States, the
    Summit of the Americas and emerging areas such as Africa and Asia.
        We have also begun to build new relationships with the nearly 30
    Financial Intelligence Units (FIU's) throughout the world. Toward that
    end, FinCEN has again used technology as an important tool. FinCEN, as
    the U.S. representative to this group, is coordinating the development
    of an International Secure Web System to provide a centralized
    information exchange service. Improved interaction and communication
    among the membership will serve a broad range of common goals in the
    area of information sharing and training and technical assistance.
        Leadership through inclusion is working at home on the domestic
    front. As you have heard, our Advisory Group is a sounding board and
    ``reality check.'' The members are truly the best and brightest of the
    industry and do not work for the Treasury, but thankfully work with us
    to provide insight and recommendations for improvement. We have also
    used outside assistance in our study of the NBFI industry, not only by
    working with members of the industry, but also by commissioning studies
    to assist us in understanding the nature and importance of this
    industry. Therefore, the outreach beyond government is allowing us to
    develop effective and commercially feasible anti-money laundering
    measures.
        Another area of which I am very proud is FinCEN's study of emerging
    new payment technologies often referred to as E-Money. FinCEN was one
    of the first government agencies to begin studying this issue over 2\1/
    2\ years ago. Our interest and ability to grasp and lead on this issue
    reflects our various responsibilities. As a regulator, we administer
    and maintain the largest currency reporting system in the world and our
    computer expertise and experience in attempting to curtail laundering
    of currency makes us particularly sensitive to crimes that could be
    facilitated by cutting-edge information technology. However, our most
    crucial role is that of being a network. E-Money, as expected, has
    raised many issues that go beyond FinCEN's or any other single agency's
    jurisdiction or mission. Our approach was to raise awareness of the
    issues and bring together and support government agencies and the
    private sector to work in cooperation to discuss the implication of
    these systems as they are being developed.
        Our efforts began with a September 1995 Colloquium in New York
    City. We chaired the FATF study of this topic and are supporting the
    work of the G-10 Working Party on Electronic Money. And again, we have
    employed technology. We have conducted computer-based E-Money war games
    and have sought out experts to support and validate our efforts to
    understand the industry. We are also developing money laundering
    simulation exercises with Rand Corporation which is an expert in
    simulations.
                                   conclusion
        FinCEN's fiscal year 1998 budget continues the programs outlined
    above. I hope I have also been able to show the importance of a secure
    communications network among the law enforcement agencies and bringing
    nations into conformance with anti-money laundering standards--the
    purpose of our initiatives under the Violent Crime Reduction Trust
    Fund.
        Thank you again for the opportunity to share our efforts with the
    Committee. Please be assured that FinCEN will continue to use its funds
    wisely and look for new and innovative ways to lead in the fight
    against money laundering.

                              U.S. Secret Service

    STATEMENT OF ELJAY B. BOWRON, DIRECTOR
        Senator Campbell. Director Bowron.
        Mr. Bowron. Mr. Chairman, I, too, would like to thank you
    and Senator Kohl for the opportunity to appear here today and
    discuss Treasury law enforcement, and specifically the Secret
    Service. I want to let you know that the entire executive staff
    of the Secret Service is here today and we want to pledge our
    commitment to continue a forthright and effective working
    relationship with the committee, and to thank the committee for
    all the support that it has given to the Secret Service.
        I have submitted a complete statement for the record
    detailing our budget request; and with the funding, the Secret
    Service will advance the attainment of its general strategic
    goals, which are: First, to maintain the highest level of
    physical protection possible through the effective use of human
    resources, protective intelligence, risk assessment, and
    technology. Second, to protect the integrity of the Nation's
    financial payment systems through criminal investigations, and
    the assessment of trends and patterns to identify preventive
    measures to counter systemic weaknesses. Third, to foster
    partnerships with both State, local, and other Federal law
    enforcement, as well as private industry and the affected
    industries specifically.
        I really think that is sufficient for my abbreviated
    statement, and I am prepared to answer your questions.
        Thank you.

                               prepared statement

        Senator Campbell. Thank you, Mr. Bowron. Your complete
    statement will be made part of the record.
        [The statement follows:]
                     Prepared Statement of Eljay B. Bowron
        Mr. Chairman and members of the subcommittee, I am pleased to be
    here today.
        Before I introduce my associates who are with me today, I would
    first like to extend my congratulations to you Senator Campbell for
    assuming the Chairmanship of this subcommittee. In addition, I would
    like to extend my best wishes, and those of the men and women of the
    Secret Service, to all of the new members of this subcommittee.
    Further, I want to let you know that my colleagues and I pledge to
    continue a forthright, effective, and cooperative working relationship
    with the subcommittee.
        With me today, Mr. Chairman, are 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, Assistant Director for Investigations; K. David Holmes,
    Assistant Director for Inspection; Lewis C. Merletti, Assistant
    Director for Training; Terrence Samway, Assistant Director for
    Government Liaison and Public Affairs; and John Kelleher, Chief Legal
    Counsel.
                     fiscal year 1998 appropriation request
        The Service's fiscal year 1998 funding request totals $605.8
    million and 5,027 FTE, and is comprised of three separate
    appropriations: the Salaries and Expenses account; the Acquisition,
    Construction, Improvement and Related Expenses account; and the Violent
    Crime Reduction Trust Fund account. Taken together, the funding
    requested for these three accounts is $17.1 million, or 2.9 percent,
    above the level of funding the Service received this fiscal year for
    these accounts.
        With this funding, the Service expects to further advance the
    attainment of its general strategic goals, which are: to maintain the
    highest level of physical protection possible through the effective use
    of human resources, protective intelligence, risk assessment, and
    technology; to protect the integrity of the nation's financial systems
    through criminal investigations, and assessing trends and patterns to
    identify preventative measures to counter systemic weaknesses; and, to
    foster partnerships with other federal, state and local law enforcement
    entities.
                          salaries and expenses (s&e)
        The Service's Salaries and Expenses appropriation request for
    fiscal year 1998 totals $575,971,000 and 5,007 FTE positions. This is
    an increase of $44,683,000, and 56 FTE over the fiscal year 1997
    appropriated level of $531,288,000 and 4,951 FTE. This request includes
    $32,385,000 and 28 FTE in program increases, $16,803,000 in upward
    adjustments necessary to maintain current program performance levels,
    and an increase of $5,000,000 and 28 FTE transferred from the Violent
    Crime Reduction Trust Fund (VCRTF). These increases are partially
    offset by $2,634,000 for non-recurring costs, and $6,871,000 in
    decreased mandatory changes in workload.
                              s&e program changes
        The Service is requesting $13,136,000 and 27 FTE to further
    implement White House Security Review recommendations. A portion of
    this funding is required to cover a shortfall in funding for additional
    staffing authorized for fiscal year 1997, and for additional technical
    and clerical FTE needed to maintain and support White House Security
    upgrades.
        Base incremental increases of $1,623,000 are requested for fixed
    site security and maintenance, and to cover a shortfall in funding
    required for the Departmental digital telecommunications system.
    Current base funding is insufficient for these mandatory requirements.
        The Service, as the Department's Executive Agent, is requesting
    $6,100,000 for the Federal Law Enforcement Wireless Users Group
    (FLEWUG). This program is jointly managed and funded by the Treasury
    and Justice Departments, and was established to plan implementation of
    a Public Safety Wireless Network (PSWN) for federal, state and local
    government agencies.
        Funding of $2,830,000 is being requested for a personal computer
    replacement program, and a local area network implementation program.
    With current base funding it would take 18 years to replace the
    Service's current personal computers, and 32 years to complete local
    area network implementation in all field offices. The requested funding
    will enable the Service to establish a five-year replacement cycle for
    personal computers and a phased six year Service-wide local area
    network implementation.
        The Service is requesting $996,000 and one FTE for its ongoing
    effort to meet standardized Departmental financial system requirements.
    This fiscal year 1998 funding will be used for modernizing the
    Service's information technology environment, for completing an
    analysis of procurement system requirements, for purchasing the
    financial management system travel subsystem, and for a portion of the
    procurement system hardware and software.
        Funding of $1,000,000 is requested for year 2000 conversion of the
    Service's information system applications.
        Funding of $5,000,000 is requested to increase base funding for the
    replacement of vehicles in the Service's investigative sedan fleet. At
    the beginning of fiscal year 1998, 49 percent of the vehicles in the
    sedan fleet will have over 60,000 miles on them--the current federal
    replacement standard. The requested funding will sustain a five-year
    replacement cycle for the investigative sedan fleet, and essentially
    meet the GSA mileage standard for replacement.
        The Service is also requesting an additional $1,700,000 to sustain
    an eight-year replacement cycle for its special purpose vehicles. This
    funding will likewise bring the replacement program for these vehicles
    in line with the replacement standard of 50,000 miles for these types
    of vehicles.
      acquisition, construction, improvement, and related expenses (acire)
        The Service's fiscal year 1998 request for the Acquisition,
    Construction, Improvement, and Related Expenses (ACIRE) account is
    $9,176,000; a reduction of $28,189,000 from the fiscal year 1997
    appropriation of $37,365,000.
        Of this amount, $7,176,000 is required for technical support
    services, special purpose equipment, information systems, dual
    operations and moving services relative to the Service's headquarters
    relocation. Funding for these fiscal year 1998 requirements is the
    responsibility of the Service, and is not covered with the construction
    of the building through the GSA's Federal Buildings Fund.
        Also budgeted under this account is $2,000,000 required to enhance
    the physical plant maintenance base for the Service's James J. Rowley
    Training Center. Base funding for routine maintenance and general
    improvement and upkeep of this facility is currently inadequate.
                   violent crime reduction trust fund (vcrtf)
        The Service's fiscal year 1998 request for funding from the Violent
    Crime Reduction Trust Fund totals $20,664,000 and 20 FTE. This is
    $664,000 greater than the level appropriated in fiscal year 1997.
                             vcrtf program changes
        The fiscal year 1998 VCRTF budget includes $15,664,000 to further
    implement White House Security Review recommendations; $3,000,000 to
    support a number of task forces investigating financial institution
    fraud; and $2,000,000 to continue to provide unique technical expertise
    and assistance to federal task forces and to state and local law
    enforcement for investigations of missing and exploited children.
    Government Performance and Results Act
        The Fiscal Year 1996 Program Performance Report is included in the
    fiscal year 1998 budget request. This report presents actual fiscal
    year 1996 performance results. Virtually all significant annual
    performance goals were met, indicating movement toward achieving the
    long term strategic goals of the Secret Service. Most annual
    performance goals in the investigative area were either met or
    exceeded. This was particularly true in areas reflecting case quality
    and impact. Highlights of the Fiscal Year 1996 Program Performance
    Report include:
      --The number of travel stops involving the protection of foreign
            dignitaries exceeded the level anticipated by over 50 percent.
      --The Secret Service closed 27,393, criminal cases resulting in
            11,889 arrests, reaching its goal in this area. Additionally,
            the Secret Service was able to surpass the planned number of
            counterfeiting and financial crime cases closed by
            concentrating investigative efforts in these high priority
            areas.
      --By effectively utilizing its investigative resources, the Secret
            Service was able to present financial crime cases for
            prosecution consistent with the crime suppression strategies of
            the U.S. Attorneys. This is indicated by both the increased
            number of arrests for financial crimes, and the number of
            defendants prosecuted at the Federal level.
      --The Secret Service also used its resources in a more efficient and
            cost saving manner by focusing on significant criminal activity
            and using joint task force operations. Again, this was
            indicated with the increased numbers of cases closed and
            arrests.
                               protective program
        The Secret Service protective operations program provides security
    for the President, the Vice President and other dignitaries and
    designated individuals; and protection of the White House and other
    buildings within Washington, D.C.
        Protective operations were extraordinarily active last fiscal year.
    In addition to the presidential campaign, and with the assistance of
    other Treasury law enforcement bureaus, massive protective security
    operations were successfully managed for the 50th anniversary meeting
    of the United Nations General Assembly, the visit of Pope John Paul II,
    and the 100th Anniversary Olympic Games. By any measure, this was an
    outstanding and historic effort.
        During the campaign, some of the more demanding protective
    operations, beyond the political conventions in San Diego and Chicago,
    were a presidential train trip and three presidential bus trips--each
    bus trip requiring over 100 motorcade vehicles. Also, a candidate/
    nominee protection CD ROM historical archive was produced to aid in
    protective planning for the next campaign.
        In September and October 1995, during the 50th anniversary meeting
    of the United Nations General Assembly, 154 Heads-of-State and 72
    accompanying spouses received protection. This was the largest single
    protective event in Secret Service history. In comparison, this fiscal
    year, during the 51st annual meeting of the United Nations General
    Assembly, 34 Heads-of-State and 10 accompanying spouses received
    protection.
        In October of 1995, Pope John Paul II visited New York and
    Baltimore. Both of these stops involved huge crowds, large public
    events, and also involved visits by the President and Vice President.
        President Clinton had extensive travel both foreign and domestic
    during the past campaign year. In April, the President visited Japan,
    Korea and Russia. After his reelection, President Clinton traveled to
    Australia, the Philippines, and Thailand.
        In October 1996, the President suddenly called for a Middle-East
    Summit of the Heads-of-State of Israel and Jordan to be held in
    Washington, D.C. This unexpected event placed a tremendous burden on
    available resources. Despite many obstacles, a comprehensive security
    plan was established that contributed to the success of this major
    event.
        The Service is currently planning security for the 1997 Economic
    Summit of the Industrialized Nations, being held in Denver, Colorado in
    June. The President will host the Heads-of-State/Government and their
    spouses of Canada, Germany, Great Britain, France, Italy, and Japan. It
    is also anticipated that Russian leaders will be invited and that they
    will attend. The First Lady, the Vice President and Mrs. Gore will also
    attend the summit. This major protective event will require significant
    manpower and resources.
        Beyond meeting the challenges of major protective events,
    construction of the new White House Remote Delivery Facility (RDF) was
    completed last September, and became fully operational the following
    month. This facility, located at the Anacostia Naval Station, is where
    Secret Service personnel screen all mail, packages, equipment, supplies
    and furniture prior to delivery to the White House. With this facility,
    efficiency has been enhanced through the use of new, state-of-the-art
    palletized x-ray equipment. This equipment significantly reduces
    processing time.
        Co-located adjacent to the RDF is the new Vehicle Repair Facility
    which became operational last September. Armored limousines used for
    the President, Vice-President and foreign dignitaries are housed and
    repaired in this facility.
                              protective research
        The Office of Protective Research has oversight of the Service's
    protective intelligence, technical security, strategic planning,
    communications, and information resources management support for both
    the protective and investigative missions.
        Protective intelligence serves as a critical component of the
    Secret Service's protective mission. The Intelligence Division develops
    threat assessments in support of protectee visits to domestic and
    foreign settings; provides warning indicators for specific and
    generalized threat environments; strengthens liaison with the mental
    health, law enforcement, and intelligence communities; and conducts
    operational studies that are needed to stay at the forefront in the
    effort to predict dangerousness.
        During fiscal year 1996, the Secret Service investigated and
    evaluated 1,903 protective intelligence cases, resulting in 60 arrests
    and 226 mental health commitments. In the first quarter of fiscal year
    1997, 388 protective intelligence cases have been investigated and
    evaluated, resulting in 10 arrests and 44 mental health commitments.
        Also, during fiscal year 1996, the Exceptional Case Study Project
    (ECSP) final report on the behavior of all persons known to have
    attacked, or approached for potential attack, a person of prominent
    public status in the United States since 1950, was completed. ECSP
    information will be used to better recognize, evaluate, and manage the
    risks of targeted violence against protectees, before an attack occurs.
        The technical security program is involved in numerous, diverse
    security and investigative related efforts, including major initiatives
    resulting from the White House Security Review. The following
    summarizes the most recent efforts concerning these initiatives:
      --The third and final phase of additional security enhancements to
            the White House itself is underway, and the second phase is
            expected to be completed this fall.
      --Permanent crash resistant barriers and guards booths are currently
            being installed at new control points around the White House
            perimeter.
      --The Joint (command/control/communications) Operations Center is
            under construction in the Old Executive Office Building, and
            should be completed this spring. This center will consolidate
            each critical element within the Secret Service that is
            responsible for incident command and coordination at the White
            House Complex. The center will be the focal point for all
            security and life safety systems, communications, and
            specialized detection and assessment programs affecting the
            White House.
      --The Service's evolving chemical and biological threat detection
            program utilizes specialized scientific equipment and systems,
            and properly trained response teams, to mitigate potential harm
            to protectees and protected facilities in the event of an
            incident.
      --The Service expects to complete this fiscal year implementation of
            a new integrated state-of-the-art White House Access Control
            System (WHACS) that utilizes electronic badge readers, entry
            turnstiles, and magnetometers.
        In the communications arena, the Federal Law Enforcement Wireless
    Users Group (FLEWUG) Program Management Office is operational. Plans
    for fiscal year 1997 are to complete the case study of Federal land
    mobile radio systems in use in Pittsburgh, Pennsylvania; establish an
    Iowa test bed for proof of concept testing of linking broad band fiber
    systems with land mobile radio or other high capacity wireless systems;
    and achieve initial operation of the Washington, D.C. test bed of
    narrow-band digital radios.
        In the Service's information resources technology program the
    mainframe computing and the client/server revolution continues to
    challenge the Service to carefully evaluate the proper mix of the two
    technologies. One example of integrating a client/server application
    with a mainframe application is the Combined Operations Logistics
    System (COLO) which was developed to support the daily operational
    needs of the candidate/nominee protection program.
                             investigative program
        The Service's investigative activity is a significant and critical
    element of its mandated mission. For over 130 years, the United States
    Secret Service has effectively served to protect the integrity of our
    nation's financial systems. Whether that involves the suppression of
    counterfeit currency, or the combating of financial institution, access
    device, or computer fraud, at the local or global level, the Secret
    Service has been successful; bringing to each of these investigative
    areas its unique expertise and forensic talents.
        United States currency has become the currency of choice world-
    wide. As the international demand for U.S. dollars has risen over the
    past several years, the Secret Service has seen a marked increase in
    the production and seizure of counterfeit U.S. currency outside of our
    borders. An analysis of the counterfeit currency passed in the United
    States in 1996 revealed that more than 68 percent originated outside
    our borders.
        There exists a need to maintain emphasis on the interdiction and
    suppression of counterfeit United States currency outside our borders.
    Last year, in response to this need, the Secret Service continued to
    expand its overseas presence, by opening new offices in Hong Kong and
    Milan. Agents also are dispatched from domestic offices on temporary
    assignments, and temporary task force operations, to individual
    countries or regions where a specific problem exists.
        The Secret Service continues to conduct seminars and provide
    training to foreign and domestic authorities concerning the
    identification of genuine United States currency, and the detection of
    counterfeit. Foreign training is done under the aegis of the State
    Department. During fiscal year 1996, the Secret Service conducted more
    than 180 seminars and training sessions for law enforcement agencies
    and banking institutions, in more than 30 foreign countries.
    Additionally, more than 900 training sessions for law enforcement
    agencies, banking institutions, businesses, and civic organizations
    were conducted by Secret Service personnel here in the United States.
        Half of the counterfeit manufacturing plants that were suppressed
    by the Secret Service in fiscal year 1996 utilized new reprographic
    technology, such as office color copier machines and ink jet printers.
    The Secret Service is the only law enforcement agency with the ability
    to decode the identification systems that have been incorporated into
    the new, foreign manufactured generation of full color copier systems,
    and it has set legal precedence by having this technical evidence
    accepted in judicial proceedings. Through cooperation with the foreign
    copier system manufacturers, the Service can determine the copier
    system make, model, serial number, purchaser name and address, and in
    some cases, the date and time the counterfeit currency was created.
    Hopefully, domestic copier manufacturers will decide to include these
    covert security features in their products, thereby eliminating the
    need for legislation requiring that action.
        The Secret Service has seen the emergence of financial crimes go
    from the local level to a global level. The Secret Service is
    continually trying to allocate more resources to already established
    offices so that it may be successful in its efforts to suppress these
    criminal activities. Also, it is more important than ever before that
    we as an agency enter into a global partnership with other law
    enforcement.
        In its approach to financial crimes investigations, the Secret
    Service has developed a preventive, risk analysis concept, which seeks
    to identify systemic weaknesses and vulnerabilities within the
    financial industry. The Service continually develops strategies, which
    employ the latest technology, to combat the criminal exploitation of
    emerging systems and related technology. Experience and expertise
    acquired during the course of investigating these technical crimes is
    routinely shared with domestic and foreign law enforcement agencies,
    the financial industry, and legislative bodies.
        The Secret Service recognizes the future of its financial crime
    investigations will continue to evolve with technology. More than ever
    the Service must rely on its already established and continuing
    partnerships with national and international law enforcement agencies,
    to combat an ever changing global problem. The Secret Service's
    financial crime investigations will continue to develop a systemic
    approach to combat this form of economic terrorism. The actual losses
    associated with financial crime investigations conducted by the Service
    in fiscal year 1996 were limited to $500 million. This figure
    represents the actual losses to federally insured financial
    institutions and other financial systems. The Service is proud of the
    fact that, while these actual losses are very high, the savings to
    American businesses and private citizens are even higher. The potential
    for total losses in these investigations exceeded $10 billion. This
    figure, arrived at through standards set by the financial industries,
    indicates the loss which would have been incurred had the criminal
    activity not been stopped through the intervention of the Secret
    Service.
        Organized criminal groups are a rapidly growing phenomenon
    throughout the world. For the past ten years, the Secret Service has
    taken an aggressive approach to this organized criminal activity by
    establishing throughout the United States and internationally, task
    forces whose primary focus is the investigation of financial frauds
    committed by organized criminals. Our experience has shown that
    organized criminal groups are involved in myriad criminal activities,
    including credit card and bank fraud, advance fee fraud, immigration
    benefit fraud, government entitlement fraud, various types of insurance
    fraud, and the trafficking of narcotics.
        Organized criminal groups, based in West Africa, Hong Kong, Russia,
    and the Middle East, threatens the integrity of America's financial
    systems by defrauding U.S. citizens and financial institutions, and by
    conducting fraudulent operations beyond our national borders. In
    addition to dedicating resources to task forces which address
    transnational crime, the Service has a permanent presence on a variety
    of working groups. One such working group, the Lyon Group, is comprised
    of representatives from all G-7 countries, plus Russia and the European
    Union. In addition to addressing transnational organized crime issues,
    this assembly is setting the foundation for establishing law
    enforcement issues at the upcoming G-7 Summit in Denver, Colorado.
        The Service has instituted a counterfeit document database,
    containing specimens of counterfeit traveler's checks, credit cards,
    driver licenses, social security cards, and other documents obtained
    from investigations conducted throughout the world. These counterfeit
    documents contain unique characteristics which enable us to track
    criminals' movements, associate investigations, and identify trends.
    This information is helpful in determining total actual and potential
    monetary losses on both national and international levels. This level
    of monetary loss can affect federal sentencing guidelines.
        The Service recently established a state-of-the-art
    telecommunications and computer laboratory to facilitate investigations
    of the growing number of computer-related crimes. This lab is unique,
    in the sense that it focuses not only on the forensic examination of
    computers, but also on the technical examination of telecommunications
    devices.
        The Service's asset forfeiture program has matured. The key element
    to the success of the program has been its partnership with the
    Treasury Executive Office for Asset Forfeiture, and a constantly
    evolving approach which targets criminal enterprises that have a
    significant impact upon the financial community. An increasing number
    of Secret Service forfeitures involve organized criminal groups
    associated with large scale food stamp fraud, and bank fraud utilizing
    the desk top publishing to produce counterfeit financial instruments.
        The Service has continued to expand its use of advanced technology.
    The Service constantly is increasing the database for its Forensic
    Information System for Handwriting (FISH), which allows for the
    searching of handwritten threat letters directed toward the President,
    Vice President, former Presidents, visiting foreign Heads-of-State,
    members of Congress, and elected state officials. Recently, a database
    containing material related to missing and exploited children was added
    to this system. The Service continues to give full laboratory support
    to the Federal Agency Task Force on Missing and Exploited Children and
    the Morgan P. Hardiman Task Force. We also are expanding our Automated
    Fingerprint Identification System (AFIS), watermark, computer printer
    and ink database capabilities for protective and criminal
    investigations. The Service continually receives requests from other
    federal, local, and foreign law enforcement agencies and non-law
    enforcement agencies, and the intelligence community, to establish the
    date of authenticity of documents through forensic techniques.
        The Service strives to exploit and leverage technology in an effort
    to provide vital services to its field investigators, as directly and
    efficiently as possible. The Service continues to work toward extending
    the capabilities of its photo-imagery system to all field offices. This
    system allows investigators to quickly and accurately transmit digital
    images of photographs and documents between Secret Service field
    locations around the world. During the past year, the Service has
    developed and designed a new electronic Confidential Informant Database
    that complies with the guidelines set forth by representatives of the
    Treasury and Justice Departments. This database allows the Secret
    Service to manage, register, control, and compensate confidential
    informants using a secure and easy-to-use system.
        The Service continues to assist other federal, state and local
    governmental agencies by lending its expertise in conducting security
    surveys. Among several such projects conducted in the past year were
    surveys of the U.S. Capitol Complex, U.S. Supreme Court Building, and
    the Bureau of Engraving and Printing's Western Currency Facility in
    Fort Worth, Texas.
        Working with the Department of Housing and Urban Development the
    Service is continuing its involvement in Operation Safe Home by doing
    security surveys to combat crime in major metropolitan public housing
    communities. The Service resumed Operation Safe Home in March in
    Greensboro, North Carolina, after the manpower intensive protective
    events were completed. Future Operation Safe Home surveys are projected
    for fiscal year 1997 and fiscal year 1998 in Hartford, Connecticut; New
    York; Philadelphia; Gary, Indiana; Kansas City, Missouri; and the
    District of Columbia.
            new headquarters building and consolidation of training
        The new headquarters consolidation building design is complete.
    Below grade foundation construction is underway and is expected to be
    completed in August. The superstructure construction is scheduled to
    follow, with phased occupancy expected to start by August 1999.
        The design of the new administration building for the Rowley
    Training Center has been completed and the construction contract is
    being advertised. The construction contract is scheduled for award in
    June 1997, with construction to be completed by June 1998.
        The prospectus for the classroom building has been prepared and
    approved by the Office of Management and Budget. This prospectus is
    being forwarded by the General Service Administration to the Congress
    for authorization. With authorization action completed by June 1997, it
    is anticipated that the construction will be completed by August 1999.
        The Service has a proud history of performing its job very
    effectively. The Service moves into the future, with all of its
    uncertainties, as a unified force to perform its duel missions of
    providing the highest level of protection for the President of the
    United States and other designated domestic and foreign dignitaries,
    and protecting the nation's financial systems through its criminal
    investigations.
        Mr. Chairman, this concludes my statement. I would be pleased to
    answer any questions that you or other members of the subcommittee may
    have.

                                Crime Prevention

        Senator Campbell. Maybe before I ask a few questions I
    might impart a little of my homespun philosophy. As some of you
    know, I used to be a volunteer counselor in Folsom Prison when
    I was a policeman and I was head of a board of directors for a
    halfway house out in Sacramento, CA. I know that the missions
    of all of your agencies have some common goals but it just
    seems to me from a broader standpoint when you talk about how
    do we reduce crime in America, boy, we are sure missing the
    boat on a lot of things. I know it is not your mission. Your
    mission primarily is prevention and interdiction and, perhaps,
    incarceration, too. I keep thinking as the drug war wages on
    and on and on that we do not seem to be making the kind of
    successful reduction that we would really like to see as
    Americans. Until we recognize that the law of supply and demand
    works for drugs like anything else and your efforts are almost
    all dealing with the supply side, and if Americans, themselves,
    cannot be convinced to reduce the demand it will be like
    Prohibition. You know, you can make all the laws in the world
    and you can have all kinds of good hardworking law enforcement
    people, but as long as Americans want it they will find a way
    to get it.
        We rarely put much effort in our crime prevention in
    education of youngsters, rehabilitation of those people who
    could be salvaged, and I know that is not in your bailiwick.
    But I remember one time when I was in Folsom I was talking to a
    convict there and he was just about to get out. He had been
    there 5 years. I asked him what he had done--he had sold dope,
    sold drugs--I asked him if what he had done was worth it to
    spend 5 years of his life in a penitentiary?
        And he told me, well, when I was selling drugs I was making
    a million bucks a year, and I'm here 5 years, that is better
    than working. And he had a point. The guy had made something
    like $5 or $6 million before he got caught and put away and it
    was just a matter of, you know, kind of a vacation for 5 years
    but the amount he had made, of course, some of that was
    confiscated and he did not get it all. Those things happen when
    he got collared but I got to thinking, holy smoke, if it is
    that lucrative and if it is that enticing some of these people
    are just looking at it like the risk you take to make those
    huge profits.
        I realize that has nothing to do with anything, I guess, in
    your mission, but I wanted to say that.
        Let me just ask and I will start with Under Secretary
    Kelly, the Office of Professional Responsibility was created by
    the House and signed into law by the 1997 omnibus
    appropriations bill. According to the House report no funds
    could be obligated for that office until the House and Senate
    Appropriations Committees received a detailed plan.
        Has there been work on that detailed plan?
        Mr. Kelly. Yes, sir; we are and have engaged in discussions
    with both this Committee staff and the House staff. Hopefully
    we will reach a resolution as early as tomorrow.
        Senator Campbell. Have you also been working with the other
    agencies on this plan?
        Mr. Kelly. Well, I have talked informally to some of the
    bureau heads about this. We have not had a plan to go forward
    with and brief. However, the structure of the office, as the
    report language indicates, is determined by the Under Secretary
    and the Secretary of the Treasury feels very strongly about
    this. I believe the structure, itself, is a management decision
    but we will hopefully have a plan at least approved by the
    House Committee by the close of business tomorrow and then
    hopefully with your approval we will be able to go forward.
        Senator Campbell. Thank you.
        One of the concerns expressed by some of our colleagues
    last year was the potential of duplication of efforts, most
    particularly between the Office of Professional Responsibility
    and the Treasury inspector general. Have there been steps taken
    to eliminate that or reduce that?
        Mr. Kelly. Yes, Mr. Chairman. There is no intention at all
    for this office to do inspector general type investigations.
    That is clearly the intention. It is, in essence, an inspection
    function rather than an investigative function.
        Senator Campbell. I thank you.
        In the breakdown of fiscal year 1998 budget request for OPR
    which accompanied the most recent draft organizational plan
    received by this subcommittee, 3.3 percent is requested for the
    Federal employee pay raise. As you know, the President has
    recommended that Federal employees receive an increase of 2.8
    percent. So, there is a little discrepancy. Can you explain
    that?
        Mr. Kelly. I think there was, in fact, an error in that,
    Mr. Chairman, hopefully that will be corrected when we put
    forward the final plan.
        Senator Campbell. I thank you.
        Let me go to Commissioner Weise. Am I pronouncing that
    right, or is it Commissioner Weise?
        Mr. Weise. It is Weise.

                               Operation Hardline

        Senator Campbell. The last three appropriations bills that
    passed Congress provided funding for the Hardline program which
    began in 1994 in response to a dramatic increase in what was
    called port runners or drug smugglers who try to crash through
    U.S. land borders in an attempt to escape inspection by Customs
    authorities. These incidents were a great threat not only to
    those trying to do the crashing, but to the agents, too.
        With Hardline there has been a reported 56 percent decline
    in port running incidents. Given the success of that program,
    can you tell the subcommittee how your fiscal year 1998 request
    would follow on that improvement?
        Mr. Weise. Yes, Mr. Chairman; I thank you very much for
    acknowledging it. I think it has been a very successful program
    and I am very appreciative for the support that this Committee
    has provided.
        With the resources that are requested in this pending
    budget before you, we would have an additional 119 inspectors
    that we would be putting into the cargo arena. One of the
    things that we fully expected when we clamped down on the ports
    of entry--where we had those instances that you talked about--
    was that the smugglers were getting so brazen that they were
    not resorting to finding secret compartments, they were simply
    loading the drugs in the trunk of their car and when they got
    to the primary inspection booth, speeding through.
        We knew full well that one of the likely responses to our
    clamping down and reducing the opportunity to smuggle through
    that method would be the scenario of bringing the drugs in via
    commercial cargo and we have seen, as a matter of fact, record
    increases in the seizures that we have made in commercial
    cargo. That is one of the reasons that we are moving through
    our fiscal year 1998 budget to put more technology, more of the
    large container x-ray machines, as well as more inspectors into
    the cargo arena so that we can be sure that we are there ready
    for them as they come through using that method of smuggling.
        Mr. Chairman, you did not ask the question directly and if
    you would not mind--regarding the comment that you made to open
    the question and answer period, I would just like to say that
    in my judgment you are absolutely right, that we cannot solve
    the problem through interdiction alone. Interdiction is an
    extremely important component of trying to deal with the drug
    problem but we do need to deal with the demand side of this
    equation as well.
        And even though it is not the primary mission of any of the
    organizations here, I know Mr. Magaw can tell you about some
    ATF outreach initiatives. And, we in Customs have a number of
    individuals who take it upon themselves with their own time to
    go out into the schools with the canines, and you may have had
    an opportunity to see it work, to help the children early on to
    understand what illegal drugs are all about. And it has been a
    tremendously successful program.
        As I have traveled around and had the opportunity to talk
    to my inspectors, I try to reinforce that the work that they do
    at great personal risk in the trenches is something that is
    very rewarding to all of us and very important to the American
    taxpayer. But the work they do in those schools is perhaps, if
    not equally productive, more productive in terms of dealing
    with our overall drug mission. And I think that is an important
    point that I just wanted to get on the record.

                                 Border Patrol

        Senator Campbell. I appreciate you pointing that out and I
    certainly commend those agents who are doing that on their own
    time. I guess one of the weaknesses of running for political
    office is that it sells when you talk about how tough you are
    going to be, you know, lock them up, throw away the key, that
    kind of business. But, when you talk about putting resources,
    money, toward education and prevention it does not seem to get
    the visceral rise of the voters. So many elected officials just
    turn gutless and they do not want to talk about putting money
    upfront to help kids, they just want to talk later about
    locking them all up which, as you and I know, is a hell of a
    lot more expensive.
        Given the 5,000 new Border Patrol agents that are going to
    come on with the INS; how will that affect the impact, the work
    of the Customs Service?
        Mr. Weise. Well, I cannot answer precisely. We have 38
    ports of entry along a 2,000-mile border between us and Mexico.
    What we found when the Border Patrol beefed up their resources
    through some very effective operations--Operation Hold the Line
    and Operation Gatekeeper--basically to deal with the threat of
    illegal immigrants crossing into the United States, as they put
    their forces in place between the ports of entry, that is when
    we had record numbers of the smuggling events at the 38 ports
    of entry.
        Senator Campbell. They look for the line of least
    resistance kind of?
        Mr. Weise. Exactly. They are looking for the point of least
    resistance and that is one of the points that we have attempted
    to make that if you only beef up one side of this and do not
    beef up the other side, in terms of the budgets with Customs
    and with INS and the Border Patrol, you find that there will be
    weaknesses in the system. So, I think it is important that you
    take a comprehensive view of that border and how the resources
    are allocated so that there is compatibility and consistency,
    so that we can maintain those strong defenses throughout the
    2,000-mile border.

                                   Smuggling

        Senator Campbell. Well, clearly as you get better they get
    better after they find other ways. And you mentioned the
    hardlining, is that kind of the latest trend in smuggling or
    are there other ways that are beginning to be on the rise?
        Mr. Weise. Well, as you indicate they are tremendously
    resourceful and they basically respond and react to wherever
    our defenses are the greatest. One of the things that we have
    noted is that we would indicate that there has been a shift in
    smuggling patterns. We have seen, for example, that our
    seizures in south Florida and in the Caribbean have increased
    dramatically over the course of the last 2 years.
        Now, I cannot scientifically demonstrate that it is because
    of the defenses that we have put in Hardline but clearly they
    are changing patterns constantly, they are looking at points of
    least resistance. What we are seeing with Mexico, for example,
    is they are resorting to the waterways again. We have seen
    increasing smuggling efforts going into San Diego, around us,
    by sea and in Brownsville, in the gulf. So, we constantly have
    to be vigilant and try to stay not only with them but try to
    stay ahead of them.
        Senator Campbell. We have noticed in our area, the Rocky
    Mountain area, an increase. I guess as you apply more pressure
    in Florida or California they find the line of least
    resistance, there are more coming through our Mountain States.
    Last year, as you know, we did start a Rocky Mountain HIDTA
    program and your agency is involved in that. I would hope that
    they are gearing up and are of some assistance to the Customs
    Service, but I do not know if they are active at the ports of
    entry. Are they at all, the HIDTA program?
        Mr. Weise. Mr. Chairman, there is some activity in the port
    of entry but we also have 2,000 criminal investigators that are
    part of the investigative teams working in conjunction with the
    Drug Enforcement Administration in doing criminal
    investigations and Customs is a very active participant in all
    of the HIDTA's including the HIDTA that you referred to.
        Senator Campbell. I think I will go ahead and ask Senator
    Kohl if he has a few questions and maybe I will come back.
        Senator Kohl. Thank you very much, Mr. Chairman.
        Why don't we start out with you, Mr. Kelly?
        Mr. Kelly, according to organizational documents OPR is to
    provide oversight support in terms of independent factfinding
    and assessments of bureau actions, policy implementation,
    training, equal opportunity, internal affairs investigations,
    and other inspection issues. The office is to be staffed by
    high-level officials with agency background to provide
    independent factfinding and assessment of bureau actions and
    policy implementation. OPR will also conduct periodic reviews
    of bureau capabilities, including internal affairs and
    inspection issues.
        Mr. Kelly, do you see this generally as the purpose of OPR?
        Mr. Kelly. Yes, sir; I do.
        Senator Kohl. Mr. Kelly, should not the bureau directors
    work directly with you in providing necessary information and
    interaction?
        Mr. Kelly. Necessary information and interaction on a daily
    basis? Yes, sir; they do.
        Senator Kohl. Mr. Kelly, have the directors been given an
    opportunity to review the draft organizational plan?
        Mr. Kelly. Only on an informal basis and not all the
    directors. But as I said in my answer to the chairman, the
    appropriations subcommittee language or the report language
    indicates that the structure will be determined by the Under
    Secretary. When the Secretary of the Treasury has agreed to the
    structure that I put forward and we have a formalized, agreed-
    to structure, then the bureau heads will certainly be involved
    in the fine-tuning of that.
        Senator Kohl. Well, do you believe that it is necessary to
    have the bureau directors to be given an opportunity to buy
    into this new plan?
        Mr. Kelly. Oh, yes; I do. Yes, sir.
        Senator Kohl. Do you think it is going to happen, will
    happen?
        Mr. Kelly. Do I think they will be given an opportunity?
    Yes, sir; I do, certainly. But we need, again, to come to final
    resolution on the structure of OPR. We have been in discussions
    with both the House Committee and the staff of this Committee
    and your staff, as well, sir. So, when we are able to do that
    then I think that would afford the opportunity to sit down and
    talk about the details of the implementation.

                     Office of Professional Responsibility

        Senator Kohl. I would ask the other directors whether or
    not you all support establishing OPR as defined by the Under
    Secretary?
        Mr. Weise.
        Mr. Weise. Yes; I support it.
        Senator Kohl. Any reservations?
        Mr. Weise. None whatsoever.
        Senator Kohl. Mr. Magaw.
        Mr. Magaw. Well, I would want to see the plan because we
    must be careful. I just want to make sure that the director
    still has the responsibility to run the bureau and if that
    would change, then I would not want to operate under those
    circumstances.
        Senator Kohl. Thank you.
        Mr. Rinkevich.
        Mr. Rinkevich. Senator Kohl, I have not had the opportunity
    to see the plan and I would associate my comment with Mr.
    Magaw's. I would like the opportunity to review it and
    understand how it would impact us. But I do think it is
    important that bureau heads have accountability along with
    responsibility for functions.
        I certainly have no objection and support proper oversight
    from the Department to a bureau, but there is a fine line
    between that oversight and the bureau director's responsibility
    to implement operationally the functions of that bureau.
        Senator Kohl. Are you suggesting that it is important that
    we carefully define and integrate how this is going to work?
    That it can work well but if we are not careful, it might not
    work well?
        Mr. Rinkevich. I think that is true.
        Senator Kohl. Mr. Magaw, is that what you said?
        Mr. Magaw. Yes, sir.
        Senator Kohl. Mr. Morris.
        Mr. Morris. Well, I had the opportunity to serve as chief
    of staff to Mr. Kelly's predecessor during the follow-on to the
    issues of Waco and the like. I support the concept and clearly
    the Under Secretary needs the tools necessary to oversee his
    obligations and responsibilities. And I know, at least when I
    was there at the main department of the Treasury he did not
    have them.
        So, I certainly support the concept. I am not aware of the
    details of the plan, but I think the concept makes a lot of
    sense.
        Senator Kohl. Mr. Bowron.
        Mr. Bowron. I am also not familiar with what the current
    plan is. I tend to think of an Office of Professional
    Responsibility as one having some responsibility for oversight
    of investigations and allegations of criminal conduct or
    unethical conduct, or misconduct on the part of bureau or
    department officials.
        And in that context, I think it is clear that Congress has
    supported the creation of an Office of Professional
    Responsibility. I think where the care really has to be taken
    is to be clear about the difference between oversight, policy
    oversight, and operational management or operational
    involvement outside of the affected bureau. And that would be
    my area of concern.
        I think there has already been a decision made and
    supported by Congress that an Office of Professional
    Responsibility is a necessary component. I would not second-
    guess the judgment of Congress in that regard. Personally, I do
    not feel I have any shortage of oversight now between
    committees on both the House and Senate side, the Department,
    the inspector general, and the General Accounting Office. I
    think there is a lot of oversight right now.
        We should not duplicate any of that oversight but, by the
    same token, an Office of Professional Responsibility may have a
    unique niche that needs to be filled in this particular case.
        Senator Kohl. All right. I thank you very much.

                                 Drug Seizures

        Mr. Weise, the drug seizures along the Southwest border
    rose between 1993 and 1995. Officials dealing with drugs
    acknowledge that the seizures are small compared with the
    mountain of drugs that traffickers are believed to smuggle from
    Mexico each year.
        For example, in 1995, we seized 119 tons of marijuana and
    marijuana believed to enter the United States by land was 4,000
    tons. Cocaine seized in 1995 was 11 tons, cocaine estimated to
    pass from South America to the United States in 1995 was 330
    tons. Heroin seized in 1995 was 89 pounds, and heroin estimated
    to arrive from Mexico to the United States in that same year
    was 5.5 tons.
        According to the Office of National Drug Control Policy's
    figures, Customs is only seizing 1 percent of all drugs
    smuggled into the United States. What is Customs doing to
    increase drug smuggling interdiction efforts? Is it an
    impossible problem? One percent, Mr. Weise.
        And this is not being critical, we understand the
    difficulty of the problem, there is no suggestion of effort or
    competence or anything else of that sort. When you look at that
    percentage the estimate is 1 percent that we are managing to
    interdict. A cynic, which I am not, might almost suggest that
    it is an impossible task and that when you look at what we are
    getting for what we put into it, the question is, is it worth
    it? One percent.
        Mr. Weise. Mr. Chairman, I am not going to quibble about
    the numbers. I will tell you that the estimate that we have is
    that we seize a much larger percentage than 1 percent. Some
    have estimated it as high as 30, some 10. But, obviously, when
    we are dealing with the quantity of drugs that are getting
    through, that is very speculative. We do not have scientific
    hard numbers, because if we could measure it, we would be
    seizing it.
        So, I would just accept the premise that we are not seizing
    as much as we need to be seizing to seriously address the drug
    problem and that is something that is clear. I have
    acknowledged in my statement that notwithstanding the fact that
    we have achieved record numbers of seizing more than 1 million
    pounds for the first time in our history and not losing sight
    of the fact that we, in the Customs Service, seized more drugs
    than all other Federal organizations combined, including the
    DEA, that we are doing in my judgment a decent job. But I think
    it gets back to the point that the chairman made that you
    cannot solve the problem through interdiction alone. Because we
    are a free society, of very open, vast expanses through which
    drugs can be smuggled into this country, most of which is in
    our area of responsibility but others, like between the ports
    of entry, are other organizations', we need to have a
    comprehensive approach.
        And I believe very fervently that interdiction is an
    important component. Many have said that we ought not to be
    wasting our time in interdiction. My feeling is the problem
    would be even worse because we are being successful in
    disrupting the methodology, the flows. We are changing the way
    they do their business.
        But so long as that demand exists in the United States, no
    matter what action we take in the interdiction arena, the
    profit motive is sufficiently broad and great that they are not
    just going to say, we give up, you have got us.
        They are going to continue to move to new areas and new
    approaches and try to find those areas of vulnerability. My
    sense is that we need to continue our commitment to
    interdiction as an important component of the larger whole, but
    we also need to work more comprehensively. We have to address
    treatment, we have to address the demand and we have to do this
    comprehensively. And that to me is the only way that we will
    ultimately be successful.
        All of that being said, seizing drugs is going to continue
    to be Customs No. 1 priority. We are looking at new methods,
    new technologies, some of which we have demonstrated--like
    full-container and cargo x-ray machines--a whole host of new
    ways of doing the job so that we can be more effective. We are
    not going to take anything for granted and we are not going to
    accept the status quo. We are going to continue to strive to
    improve.
        Senator Kohl. So, your suggestion to the American people,
    very strongly, is to recognize that unless we do something
    about the demand in this country, we are not ever going to win
    the war?
        Mr. Weise. That is my personal feeling, Senator.

                                 Border Fences

        Senator Kohl. Well, you are an experienced man and your
    opinion is very important to get out. I happen to agree with
    you and I think that is a very important message.
        Mr. Weise, is it possible to construct physical barriers to
    prevent smuggling such as fences? People talk about fences 20
    feet high and 10 feet deep. And they cannot, many of them,
    understand why our borders are not protected by these kinds of
    fences. Can you comment on that?
        Mr. Weise. Senator, we have been experimenting with fences
    and I will indicate that it is primarily not for the drug
    smugglers but more for the question of illegal immigration. And
    this has been through the Border Patrol that we have seen
    fences erected along various areas in California and they are
    obviously hotly controversial. We have historically,
    traditionally been a free society.
        And the local communities are not pleased when they see the
    fences erected and there are tremendously resourceful people
    who can get around and over those fences. Because in addition
    to those fences, you have to have someone there in case someone
    has the resources to get over the fences. And it is a 2,000-
    mile border and much of that terrain is not easily fenced
    because, as you know, in various places there are huge valleys
    and hills and very difficult terrain.
        So, in my judgment you can use fences strategically and
    tactically in certain areas, but I do not think the answer to
    the problem is a 2,000-mile fence.
        Senator Kohl. Well, now, let us get into that a little bit
    more. How many ports of entry are on the southern border?
        Mr. Weise. Thirty-eight.
        Senator Kohl. So, if we do the job at the ports of entry,
    which we are capable of doing, particularly with respect to the
    technology that is coming on board, and if drugs in this
    country are the problem that they are and we all regard that as
    such--we are not just paying lip service to it--why should we
    not at almost any cost build those fences as high as we need to
    build them and as deeply as we need to build them? What would
    be the reason not to do it in your opinion?
        Mr. Weise. Well, I am not an expert on this subject but I
    would think that one of the things you need to do is talk to
    the Border Patrol and the Immigration and Naturalization
    Service about their own experience with fences. I think they
    have seen that fences have been an effective tool when properly
    positioned to deal with the threats that existed.
        And what it does do, which is a point that you are raising,
    is that it moves people further out away from the fence and,
    under your theory, if you have a fence the full distance you
    could solve the problem. But I think what the Border Patrol's
    experience has been is that the fence, itself, is not a
    solution in and of itself. It is an important tool but we have
    to have Border Patrol officers on this side of the fence to be
    sure that it is not being penetrated.
        But I do not mean to preclude that as an option. I am
    simply suggesting it is a controversial issue. One that I have
    not given a lot of thought to as a solution to the Southwest
    border problem. But I know from many, many trips that I have
    made to the Southwest border how hotly controversial those
    fences are in the local communities. People, American citizens,
    who think that it's just not the way they want to live,
    notwithstanding that they recognize we are dealing with a
    serious problem. But, I do not know what more I can say. It is
    an interesting idea. It is one that, perhaps, ought to be
    explored. I would not preclude it as an option but I can tell
    you there would be issues that need to be addressed.
        Senator Campbell. If I could interject. You build a fence,
    you cannot just build up, you have got to build down because of
    a tunneling. But it would seem to me if you did build a fence
    what you do basically is increase the sea trade or through the
    air. You know, we have a longer border along the oceans to try
    to guard than we do along the land border.
        Mr. Weise. That is one of the reasons, Mr. Chairman, that I
    think the fences more aptly deal with the issue of people
    trying to come across and the illegal immigration issue. We
    have discovered three very sophisticated tunnels, as you have
    indicated, along that Southwest border.
        I already indicated in my earlier statement that we are
    seeing more people come around us by sea. We are seeing
    smugglers on the little jet skis that you see at local resorts
    with the drugs packed in their backpacks and loaded in and
    around the jet skis. We are seeing little fishing vessels in
    the Gulf of Mexico.
        And we have been very successful in our air interdiction
    program in the Customs Service. One of the most common ways of
    smuggling drugs for a decade leading up to the initiation of
    our air program was by air. You bring it in, you drop it
    quickly and you get back out. We have mounted some rather
    significant air defenses that have reduced that flow but,
    again, the more you put pressure in one area they will not say,
    we give up, that fence is too tall for us, they will resort to
    other means.
        And, frankly, what I have often felt as we have what we
    call a southern-tier strategy through Operation Hardline, and
    we are trying to tighten it all the way from San Diego to San
    Juan--if that gets too tight, even though it is not a threat
    area now, Canada can certainly be another border point through
    which they can come.
        Ultimately I do not think you can put a fence around this
    entire country and that is one of the problems.

                                Air Interdiction

        Senator Campbell. Well, the air creates a whole different
    problem. I notice with interest one of the displays that we
    have in the room has some photographs of some airplanes. There
    is some kind of detection apparatus that can be put on a little
    small isolated airport so that it monitors any kind of
    landings. But I know in some places in the Southwest they do
    not land. They just get it down to stall speed and dump it out
    at a prearranged location right in the middle of the desert and
    pick it up with a four-wheel-drive truck. They do not land. So,
    I am sure that that is effective to monitor the ones that are
    going to land but I often wonder how many just do not bother.
        Mr. Weise. Obviously, you cannot employ any one solution
    alone. That helps us ensure that we do not have to be observing
    those particular airstrips too much, but we have a rather
    sophisticated air interdiction system, with radar so that we
    can see when the incursions occur, when they are not on
    registered flight plans. And we can show you clear evidence and
    would love to invite you at your convenience to our air
    facility in Riverside, CA, where we see clear evidence.
        Historically, we saw many of these tracks of aircraft had
    been crossing into the United States and then returning to
    Mexico, but they are now landing more in Mexico, coming from
    South America, landing in Mexico and then using other means to
    get the drugs from Mexico into the United States over land and
    by sea and around us in the gulf.

                         New Interdiction Technologies

        Senator Kohl. Mr. Weise, will you tell us something about
    the new technologies that are being employed in interdiction?
        Mr. Weise. Well, we have some of them on display in the
    back. One of the things I think is one of the most important
    pieces that we are adding to our arsenal, as I mentioned,
    because of the smuggling that is occurring in commercial cargo,
    is a prototype in Otay Mesa, CA. It is a full container cargo
    x-ray machine that is akin to a carwash in that the entire
    vehicle can come through the machine and we get a good x-ray
    vision of the compartments of the container.
        One of the drawbacks of that is that the x ray, because of
    safety to the people in and around it, is not of sufficient
    power to go through the merchandise that may be in boxes in the
    containers. But what it is very good at and where we are seeing
    a very prevalent means of smuggling is hollowed out floors or
    walls or ceilings, in the wheel-wells and things of that
    nature. And that has been a very important addition to our
    arsenal. It is not something that you can do in and of itself,
    it has to have supplementary inspection techniques as well.
        Through our budget process we are moving beyond a prototype
    stage in Otay Mesa. Within this year, with the support of this
    Committee, we will have four additional machines like that in
    place and we will have as many as 12 over the next several
    years through Operation Hardline.
        We are also looking at a number of other technologies that
    I am not an expert on that can actually look into gas tanks and
    a whole series of things, and we will be more than happy to
    have the people that really understand the technologies come up
    and brief you on them more completely, sir.
        Senator Kohl. How do you decide where to put this new
    technology, Mr. Weise?
        Mr. Weise. Again, it is an overall threat analysis. And one
    of the things we recognize is that once you have these fixed x
    rays in place, again like the balloon theory that where your
    pressure is the greatest, they are likely to go somewhere else.
        We are trying to supplement the use of those fixed x rays
    and those are going to be put in places where we obviously have
    a very significant cargo trade, where we know the vehicles are
    coming through but supplementing those with more of a mobile
    system that is actually on a truck, itself, that can go from
    port to port and be relocated in a very short period of time,
    so that we can keep the surprise element and the uncertainty
    and keep them on their defenses. And, so, we are putting x-ray
    machines in our fixed locations where the traffic is
    significantly high and where the threat is significantly high,
    and supplementing those with others that are more mobile and
    that we can put on a kind of sporadic, random, unsuspecting
    basis so that they would not be able to predict where those x-
    ray machines would likely be.
        Senator Kohl. As you look ahead, mobile versus fixed-
    detection systems, would you comment on one versus the other or
    are they complementary?
        Mr. Weise. Again, I think they are complementary. I think
    you need some of both. I do not think it is an either/or
    proposition. I think the mobile x-ray machines are an important
    supplement to the fixed. And there are other technologies that
    we are looking at that would be able to be more powerful
    without causing risk of harm to humans, that would have greater
    strength of penetration of the cargo, itself. We are looking at
    those, as well.
        Senator Kohl. Thank you.
        And I appreciate your comments. I appreciate particularly
    your clear expression that in the long run as well as in the
    short run if we are really going to win this war, it has got to
    be done finally by reducing the demand in this country. As long
    as the demand is there, it is pretty hard to interdict 50 or 75
    or 100 percent of all the drugs that are being smuggled in.
        That is a very clear statement you are making.
        Mr. Weise. Again, it is a personal observation but yes; it
    is very clear that I believe that.

                           Youth Crime Gun Initiative

        Senator Kohl. OK. Mr. Magaw, would you say that there is a
    correlation between gun laws and childhood homicides?
        Mr. Magaw. I think the childhood homicides are primarily
    because of unsafe conditions in the home or wherever they may
    find the weapons. That is why I am very pleased with the
    increased interest by Congress in terms of locked weapons and
    securing those weapons and education for homes and children
    about weapons.
        But I think the gun laws, themselves, do not really have a
    bearing other than that this country is one that loves firearms
    and they want to have firearms and they are going to have
    firearms. So, I think the thing to do is, like seatbelts in an
    automobile, cause them to use these safety locks.
        Senator Kohl. I am aware of Boston's participation in the
    youth gun crime interdiction initiative. Can you explain to us
    why this program has been such a success?
        Mr. Magaw. I think somewhat the same as Mr. Weise
    mentioned. It would take a combination of what is available
    there. We brought our abilities to bear in assistance to the
    Boston Police Department in tracing weapons, in trying to work
    trafficking cases to cut the flow down, trying to find out who
    the kinds of persons are that are bringing the weapons in.
    Those who are on probation and parole they have put probation
    officers right in the police vehicles as they patrol the
    streets.
        They know these individuals, they know what time they are
    supposed to be on the street, when they are not supposed to be.
    So, that has really helped.
        Also, educational programs in the schools talking about
    firearm safety. The penalties of the courts have been much
    stronger in keeping the very violent criminal element off of
    the street. But what has really been helpful has been the close
    working relationship between all entities--Federal, State,
    county, and local.
        Senator Kohl. So, you would emphasize how important it is
    that you get everybody involved in dealing with the problems
    that we encounter in the inner city?
        Mr. Magaw. That is correct. I believe, as has been
    mentioned a couple of times here today, that what we have to
    really do is work in our elementary schools and our high
    schools because some of the generations that are out there on
    the street now are beyond help in a lot of cases because of
    what they have been through and we still want to try to be
    helpful to them but you are going to have the same group coming
    up if we do not do something in the schools. That is why I am
    very proud of ATF's GREAT Program and also the program that we
    have in the high schools. We have been doing it here in
    Washington for a number of years. It has been very successful
    and now there is an interest in spreading it across the country
    and that is having a law enforcement academy within the high
    school.

                 Gang Resistance Education and Training Program

        Senator Kohl. Let us talk about the Gang Resistance
    Education and Training [GREAT] Program a little bit. It
    provides grants, as you know, to communities who are
    participating in and encouraging the prevention of violence.
    The program, which is taught by uniformed officers, so far, has
    provided training to over 2 million of our children in this
    country, primarily they are enrolled in the seventh and eighth
    grades. Currently it is running in 54 locations, in 21
    different States.
        Mr. Magaw, you have talked about the GREAT Program as being
    very promising and I would suspect that you really believe we
    should continue to fund it?
        Mr. Magaw. Yes, sir; I believe that we should continue to
    fund it and even though it has not been funded all across the
    country, you mentioned the 54 locations, it is in every State.
    Every State and every law enforcement and most of the Governors
    and mayors throughout this country see the benefit of it.
        In fact, the University of Nebraska just did a study to see
    what the value was and it was very positive. So, the inquiries
    are something like 200 a month into our headquarters saying,
    how can you help us set this up? Many cities are funding it
    themselves and what we are trying to do is provide them the
    information of how to do it, trying to teach their officers to
    become instructors and providing them the school materials and
    the booklets. We are spending this money very well but we are
    only supplementing really 44 different programs, but it is in
    every State now.
        Senator Kohl. Well, now, if the program is considered to be
    the success that we believe it is, why has the funding request
    remained level for the past 3 years?
        Mr. Magaw. I think it is a matter of OMB, Treasury, and
    others. We are willing to raise that program up as high as this
    Congress would see it but what our submissions have been is
    what is reasonable, what do we believe that Congress will fund.
        Senator Kohl. Well, and I appreciate that, but here we talk
    and so oftentimes, we talk about the need to do prevention. And
    everybody at the table is suggesting--and you people are
    ultimately professional and knowledgeable--that we have to do
    something about prevention, the demand side.
        And here is an example and this is one of many of a program
    or of an area in which we can and should do more to reduce the
    demand by education, and different prevention programs. Here is
    a program that works. And yet, the funding is small and it has
    not increased over the past 3 years. And, so, I am asking you
    maybe to make a comment more than simply to tell us that, well,
    it just has not been done because the Congress has not been
    willing.
        Are we making a big mistake in not increasing funding for a
    program that is directed primarily and clearly at reducing the
    demand in our society for illicit activities and drugs, the
    GREAT Program. Should we do more to fund it?
        Mr. Magaw. I believe we should do more to fund it. What I
    would say, though, is that as we are trying to do now and use
    the funds as best we can, if a city or a location has the means
    to fund it themselves then we try to help them with the
    booklets and train the instructors.
        I think we would have to have some kind of guideline
    because the amount could just blow sky-high if we are not
    careful. But it is a program that I believe needs to be taken
    forward and taken forward rather quickly. It is capable of
    doing that. It has been tried, it has been tested. Like you
    say, it has been 2 million students. There are about 1,000
    instructors. There will be many more than that after this year
    because we have four or five major instructor programs. And,
    so, I want to see it grow.
        Senator Kohl. Out across the State of Wisconsin I attended
    several of the GREAT Program presentations in our schools and
    they are very good and they are very well received by students.
    They have clearly a positive and a beneficial effect in
    fighting the war that we are trying to fight in this country.
    And I am glad to hear you be so positive about it, Mr. Magaw,
    in strongly encouraging us to continue to fund this, to
    increase the funding to see to it that every young person in
    this country at the seventh and eighth grade level is exposed
    to the GREAT Program which I think is what you are saying.
        Mr. Magaw. That is right. What we would also use other
    funds for is in the summer program we have tried out. They go
    right back into the communities that they were born and raised
    in, so, you have to have periodic updates for them, and we have
    done that through a summer program with the Phoenix Police
    Department, Tucson, and others. And it has been very, very
    successful.

                                 Trigger Locks

        Senator Kohl. All right.
        Just a couple of questions on trigger locks. Now, will you
    say a few words and I will ask a couple of questions. How do
    you feel about trigger locks, their use in our society, the
    importance to have them in our society, proliferating trigger
    locks. The legislation that I have authored would require
    trigger locks be sold with handguns from now on in this
    country, the President's directive that law enforcement
    officials use trigger locks, how do you feel about trigger
    locks, Mr. Magaw?
        Mr. Magaw. ATF personnel have used trigger locks for any of
    the weapons that they have for years. And, so, I am a proponent
    of trigger locks. I remember back 35 years ago when I was a
    young State trooper, I did not wear a seatbelt, there was not
    even a seatbelt in my automobile. Today that seems almost
    ridiculous. I had to learn to wear a seatbelt. We had to have
    some guidelines in order to force me to first start using a
    seatbelt. Now, I do not move the car without a seatbelt, and I
    believe that these safety devices are in that category. They
    will be beneficial and it will take the public a period of time
    to get to use them, but I think clearly they are something that
    we should push forward.
        Senator Kohl. I thank you.
        Mr. Chairman, would you like to continue?
        Senator Campbell. Yes; since we are asking some questions
    of Director Magaw, let me ask you a couple.

                             Oklahoma City Bombing

        We are now going through the McVeigh trial in Denver,
    Director Magaw. And some of the Oklahoma bombing victims have
    filed a multimillion-dollar lawsuit against the Federal
    Government alleging that the Federal informant had warned the
    ATF that a building had been targeted for violence associated
    with the April 19 anniversary of the raid on the Branch
    Davidian compound in Waco.
        If that is accurate, it is rather disturbing and I know you
    have some constraints of what you can say in public, but I
    would like to know if you think there is any basis, in fact, to
    that allegation?
        Mr. Magaw. I find no basis for that allegation, but I,
    again, have to be very careful because of the muzzle order by
    the court. That has been an item that has been on some of the
    families' minds from the very day that it happened.
        On that day, when I first learned about it, we made
    inquiries. I sent an investigative team there to find out what
    we could determine and the other thing about these claims is
    that they are not only against ATF but they are virtually all
    of Government; we should have known and, therefore, we are
    liable. So, we will have to just wait and let that go forward.
        But nothing I have found in the investigation led me to
    believe that or I would have brought it forward immediately.

                                      IBIS

        Senator Campbell. Well, thank you.
        In your display back in the back of the room you have a
    very sophisticated machine that I guess is called IBIS to
    measure--it compares casings. The FBI also has an
    identification system called drugfire. A little while ago I
    talked about duplication of effort. Could you tell me how they
    compare and why the two agencies could not use the same kind of
    system?
        Mr. Magaw. They can use the same kind of system, no
    question about that. Back when the FBI started studying this
    and started doing their research they were doing shell casings.
    We felt, at the time, that bullets were also very, very
    important because there are times--in fact, now, just a crime
    out in Prince George's County, they picked up all the shell
    casings because they knew they could be used--but that bullet,
    whether it is in the body or in the woodwork or wherever it
    might be is also very important evidence.
        So, we started research on the bullet. Well, the commercial
    company who was working on that with us ended up at the same
    time developing the technology for the shell casing. So, now
    that machine will do both.
        Senator Campbell. This is IBIS, it will do both?
        Mr. Magaw. It will do both?
        Senator Campbell. Will drugfire also do both?
        Mr. Magaw. Drugfire is getting close to being able to do
    both. In the bullets they cannot quite do them in quite the
    same manner. I would want somebody independent to look at that
    and say. But the key thing I believe is that now that the
    technology has come along where it is really helping local law
    enforcement we need to get the machines tied together so that
    they can talk to each other.
        And the National Institute of Standards and Technology
    [NIST] is doing that for us under the guidance of OMB, and with
    total coordination between Director Freeh and myself. Now, they
    have got the technology figured out so that the two shell
    casing units can talk to each other but they are having a
    little trouble with the bullet being able to talk to each
    other. So, we will have to see how it goes.
        Senator Campbell. I had several questions dealing with the
    GREAT Program but you have already answered them with great
    clarity and I appreciate that. Because I think Senator Kohl and
    I really agree about the increase of youth violence and what we
    have to do in working with youngsters so, I do appreciate your
    response to that.

                           Canine Explosive Detection

        I am also interested in dogs. I notice you did not have any
    dogs up here today. But I would note that you have requested
    funding to expand the canine explosive detection program to
    train up to 100 dogs a year. First, let me ask you, are there
    machines that can totally replace that dog's nose now in
    detecting drugs or bombs?
        Mr. Magaw. There are not. The technology is getting better
    but it just cannot compare with a well-trained dog. As we have
    talked before, the combination of both of them are very helpful
    because the dog cannot do it all in an airport or something
    like that. But anything that is suspicious the dog will be more
    accurate in most cases.
        Senator Campbell. Even to a machine like you have back here
    that measures like 1 in 1 billion parts or something?
        Mr. Magaw. Well, the x-ray technology is not to that
    capability yet. The dog, itself, we have had for a couple of
    years now. And there was a demonstration here last year with a
    dog so we brought some other things this year. But we would be
    delighted for you to see the dog. The dog can pick up, if you
    had one small bullet in your pocket or a shell casing or a
    bullet that had not even been fired. That dog could check all
    of us in here and it would find that bullet on you, every time.
        And when this dog was trained and developed it was an idea
    of ours but we did not know for sure how well it would work.
    So, we got our laboratory technicians and we said, as we train
    this dog you have to make sure that it is laboratory certified.
        And, so, this dog is now laboratory certified and now what
    we feel is that it has been so valuable that we are just
    beating them up flying them all over the country. That dog went
    into the Centennial bombing at Atlanta and you can imagine that
    evening when it happened and you saw that bomb go off, people
    just dropped everything they had and left.
        So, you had backpacks, you had sacks, you had all kinds of
    things there that that dog had to clear so that we knew we were
    not putting our personnel and all the law enforcement personnel
    in jeopardy. That dog cleared that area in about 2\1/2\ hours.
        It has gone into searches where people have had guns in
    sealed plastic bags hanging on a hanger inside a suit with a
    plastic bag over it and that dog will find it. So, they are
    just so valuable that we feel that for all of law enforcement--
    and we do not want those dogs for ourselves. We will train
    those dogs like we have the fire dogs, the arson dogs, and put
    them out in the country where they can be used day to day by
    local law enforcement. The only agreement is that when we need
    them for a particular case, they will bring them to us. Most of
    the time the case is right close to where they are and they are
    helping anyway. We do not go out and work any of these cases by
    ourselves, it always involves the local community.
        It has worked very well on the arson side and we feel this
    will work very well on the explosive side. We have done it also
    for foreign countries. Israel is tremendously happy with it.
    Some of your Soviet bloc countries are tremendously happy with
    it.
        So, we just feel that it has been very well tested, that
    they are dependable, they have to be recertified and we would
    just like to see the program move forward. We think it is a
    benefit for law enforcement.
        Senator Campbell. I notice that in pictures I have seen,
    you use more of one breed than another. More German shepherds
    as an example it seems like. Is there any reason for that?
        I have a German shepherd and she is a real nice dog but
    years ago I had a Weimaraner and that dog had a nose so good,
    that dog could actually track me if I was in a car, could
    follow the tire tracks on a dirt road. Or if I was on a horse
    could follow the horse where I got on the horse and got off to
    follow me.
        Mr. Magaw. The observation you are making is exactly the
    right one. Labradors and Weimaraners are the ones that they are
    going to for this kind of work. In fact, our dog that we put
    through all these tests that I talked to you about is a
    Labrador. Your German shepherds were initially brought into the
    program in law enforcement a number of years ago when they were
    used for a different purpose. They were used as guard dogs for
    protection. If somebody was in a dark area with a weapon and
    you needed to go in, they would send a dog in first and those
    kinds of things.
        So, for most of our work, although there are some German
    shepherds, most of them are Labradors. Their nose is so good.
    They can go into a fire scene where you have nothing but water
    and muck and three or four walls down on top of it and they
    will sniff around and they will go right over to where that
    fire was started, where the accelerant was used.
        Senator Campbell. Yes; they are amazing. Any old hunter
    that uses dogs will tell you that if you get them too fat they
    will not hunt. See, their nose gets more acute when they are a
    little hungry. Not that I want to see any starved dogs but that
    is what all the hunters tell me if they are a little hungry
    their nose gets very acute.
        Mr. Magaw. See, again, that is a very good theory because
    this dog on explosives is trained exactly that way. We do not
    have a ball that it plays with, we do not have a toy that it
    gets if it finds it, it gets food. And now that has to be
    measured, you have to make sure you have got the right amount
    of vitamins and everything else and that is why it has
    scientifically been worked out. But they are much more
    effective that way.
        Senator Campbell. In 1997, the House report states that ATF
    establish a joint canine explosive detection unit with the FAA
    at either National or Dulles Airports. What is the status of
    that pilot program?
        Mr. Magaw. It is going to be done at Dulles. We feel that
    is the best place to do it along with the Federal forces that
    are there. It is a matter now of working out with Customs
    personnel as to whether we are going to work part of the time
    in Customs, whether both dog units will work the same area or
    whether they will split them up? How can the best evaluation be
    done at the end of that period of time? And, so, that is where
    we are. We are in pretty much the final stages.
        Senator Campbell. Thank you.
        I might tell all of you that we are running on a little bit
    and I have quite a number of questions for my end of it. I am
    going to ask a few of each of you and then I am going to submit
    some that I would like some answers for the record.
        Before I go on and ask the other panelists, Herb, if you
    have a few more, why don't you proceed?

                           Youth Crime Gun Initiative

        Senator Kohl. Yes, Mr. Chairman, I just have one final
    question for Mr. Magaw.
        Mr. Magaw, what do you suggest we do to reduce juvenile
    access to firearms in this country?
        Mr. Magaw. Well, there is a program now on--and we just had
    a success in your city just the other day--there are 17 cities
    throughout the country that we are trying to trace every crime
    gun and having schools try to watch for weapons that we can
    trace to find out where these weapons are coming from.
        In a lot of occasions these weapons are coming from adults.
    As these 17 cities are evaluated, and we find out where they
    are coming from we believe then we can shut down the flow, and
    that is what we have got to do. Just like we were talking about
    the drug flow, we have to interrupt this flow. It was
    interrupted in Boston and that was very vital. In Milwaukee,
    the other day, they arrested an individual who had been
    providing guns for juveniles and there was one robbery and four
    other shootings committed with these guns.
        So, it is in the early stage. It has only been operational
    for 8 or 10 months now, but it is one that we feel once we iron
    all the kinks out it would be viable to spread around the
    country.
        When I was on the street in law enforcement and I arrested
    somebody with a firearm I did not even think about tracing it.
    If it solved that crime right now, I did not think about it
    being a bigger problem. In talking to Mr. Rinkevich this
    morning, for these young officers who are coming on all over
    the country, we should get into their curriculum firearms
    identification, firearms trafficking and firearms tracing, so
    that whenever they come upon a weapon they will trace it. And
    that is what these 17 cities have agreed to do. They will trace
    every weapon they get in their hands, and that is going to be
    an enormous help.
        Senator Kohl. I think you said youth gun crime initiative.
        Mr. Magaw. That is right.
        Senator Kohl. That is a good program, very promising
    program. But curiously, Mr. Magaw, correct me if I am wrong, I
    do not think there is any request for funding in 1998 for that
    program.
        Mr. Magaw. Well, it will be the 17 cities and it is a 2-
    year research project and that would go through 1998. We then
    hope we will come back here next year, tell you the value of
    it, how it has worked, what the kinks have been and then get
    your judgment on where it should go from there.
        Senator Kohl. All right.
        Can we move on to the Secret Service, Mr. Chairman?
        Senator Campbell. Yes; just go ahead.
        Senator Kohl. OK, Mr. Bowron.

                                    Security

        What level of security would the Secret Service be
    satisfied with, Mr. Bowron?
        Any level?
        Mr. Bowron. No; not any level. The best security that we
    can provide in an open society, and I think that that is what
    we do provide; but that certainly is a resource-intensive and
    labor-intensive process to provide that kind of security.
        Senator Kohl. Has that level of security, in terms of what
    you need and what you have, gone up exponentially since 1960's?
        Mr. Bowron. Yes; because the world is a more dangerous
    place. There are things happening in this country now that
    happened only in other parts of the world before.
        Technology and the increase in the number of extremist
    individuals and groups has increased and, in general, the world
    is a more dangerous place than it was before.
        Senator Kohl. So, over the past several years, the number
    of threats that you face has increased dramatically?
        Mr. Bowron. Yes.
        There is an increase in the number of threats but maybe
    more than the number of threats, the seriousness of the threat
    and the potential of the threat.
        Senator Kohl. Now, this is an opinion that you have or I
    would like to hear about it. What happened? Back in the 1940's
    and 1950's we did not have this. We have it today. What has
    happened in our society, in your opinion, that has elevated the
    violence, the threat of violence?
        Mr. Bowron. Well, I think that in general in our society
    there is an increase in extremist philosophies and
    antigovernment philosophies. There is an increase in the
    availability of weapons, explosives, and the information that
    would give one the ability to carry out these kinds of threats.
    For example, the information needed to manufacture explosive
    devices like the one used in Oklahoma City is widely available
    in publications and on the Internet. Even information that is
    specific to how you might shape a charge to maximize the damage
    in one particular direction versus another.
        I also think that political volatility around the world
    certainly contributes to an increase in the overall threat and
    in the intelligence picture, that we rely on in order to assess
    what our protective needs are.

                     Militia Movement in the United States

        Senator Kohl. Would you tell us about the militia movement
    in the United States and the threat that that presents to your
    organization?
        Mr. Bowron. Well, I think that, first of all, in general,
    some of the rhetoric of the militia movement that is
    antigovernment is problematic, in and of itself, as a part of
    those organizations.
        But I think that a problem associated with that that may be
    even more problematic is that there are individual members or
    participants in militia groups, or extremist groups, that
    endorse the philosophy of that group, who become frustrated
    with the lack of action, in their view on the part of that
    group. And then they engage in what I think is generally
    referred to as leaderless acts. I mean they, as an individual,
    are going to be the person that does not just talk about it,
    does not just go to the meetings, does not just participate in
    the discussion, but goes and does something.
        That is a big problem, from the standpoint of law
    enforcement, from the standpoint of gathering intelligence.
    Sometimes those people are not acting with a tremendous network
    of support through an organized group, but they just believe
    and endorse the philosophy of a group and are acting on their
    own, or with a much smaller number of people.
        So, I think that certainly it is important for law
    enforcement to be able to have available the tools to monitor
    the activity of those groups relative to criminal activity, and
    to be able to provide intelligence. And sometimes that can be a
    very fine line in terms of what is appropriate in terms of the
    investigation of a group; because really it has to be
    predicated on some illegal act.
        I mean people can have a group and should not necessarily
    be subjected to an investigation but, by the same token, some
    of the rhetoric and some of the antigovernment philosophies
    espoused by those groups can become very problematic and need
    to be a part of the intelligence picture.
        Senator Kohl. Thank you.

                                  Task Forces

        Mr. Bowron, what is the West African task force? Would you
    explain that to us?
        Mr. Bowron. We have task forces in a number of cities
    across the country that really have centered on criminal
    activity, that is, organized criminal activity, perpetrated
    primarily by West African organized groups. We have even had
    agents working with the Nigerian Government in Lagos, Nigeria,
    because some of the crime emanates from there and affects the
    United States through members of those organizations here.
        So, those task forces are centered in major cities around
    the United States where we work with State and local as well as
    Federal law enforcement to try and bring all the expertise to
    bear on a wide range of criminal activities. Because, you know,
    certainly the criminal element does not compartmentalize. I
    mean they are truly infected with the entrepreneurial spirit,
    and they will just go where the money is.
        Money is the object of their criminal activity. So, it is
    very important, I think, for us to not be too compartmentalized
    in our approach to addressing that criminal activity and task
    forces seem to work best. Task forces give you the broadest
    expertise, in terms of investigative and technical ability, and
    also maximize the jurisdiction that you can rely on in order to
    investigate and prosecute those organized groups.

                               Advanced Fee Fraud

        Senator Kohl. The State of Wisconsin has been the target of
    a fraud known as advanced fee fraud. In my State, alone, over
    350 businesses and individuals have been sent solicitation
    letters. Recipients are told that they have been singled out to
    share in multimillion-dollar windfall profits for doing
    absolutely nothing. Can you tell us a little more about this
    sort of fraud and what your agency is doing to try and prevent
    it?
        Mr. Bowron. It is a very widespread problem throughout the
    United States and also in the United Kingdom. That is one of
    the specific areas where we have worked with the Nigerian
    Government in Lagos, Nigeria, to identify the principal targets
    involved in that scheme. It is commonly known as 419
    investigations; 419 happens to be the statute in Nigerian law
    that is violated.
        The scheme is basically they send out a very official
    looking letter. In fact, we have a blowup of one in the back in
    our display. It purports to be from a Nigerian bank or from an
    official government organization. The approach is to try and
    glean from the recipient of the letter some information that
    enables the criminal to extract money from that recipient.
        They will ask for your business letterhead, for a check,
    and what they are offering is, we have an enormous amount of
    money that we need to move from accounts in Nigeria and, for a
    percentage, we would like you to use your bank account to move
    this money.
        Sometimes, frankly, the recipient of the letter may have a
    little larceny in their heart; because it is obvious from the
    letter that these may not be legal funds in some instances. In
    other instances, that is not the case.
        But, as a result of receiving the letter and being offered
    this enormous amount of money just for the use of your business
    account or your bank account, they draw you into the scheme.
    Once you are drawn into the scheme then they begin to tell you
    well, before we can complete this transaction there are certain
    taxes that have to be paid, or certain legal fees that have to
    be paid. In other words, now they are asking you for money in
    order to complete this transaction.
        Now, we can sit here and think that most people would not
    go for a scheme like that, but the fact of the matter is that
    an awful lot of people have, and hundreds of millions of
    dollars have been lost by enormous numbers of victims. However,
    the good news is, we have identified who we think the key
    perpetrators of that particular scheme are, although it is by
    no means over with. We have gone through banking channels and
    public information channels to make people more aware of that
    scheme. And that has worked; the number of notifications we
    receive in terms of people receiving those letters is
    increasing.
        So we are able to give them information about that scheme
    before they are actually victimized. I can tell you, it has
    been so serious that people have actually gone to Nigeria, and
    lost their lives trying to recover their money. We have, in
    fact, been instrumental in getting some folks out of Nigeria
    who were there to get their money, before any harm came to
    them. But it is still a serious problem. It is very widespread.
    They take the shotgun approach, and certainly have been
    successful.

                              Counterfeit Currency

        Senator Kohl. We thank you for that information. Finally,
    on the counterfeit currency, Mr. Bowron, do you have the
    authority and the resources to deal with this problem insofar
    as you are able to at this time?
        Mr. Bowron. Yes, we do. The committee has been very
    supportive in terms of providing us with resources,
    particularly funding for increasing our staffing overseas. We
    are working through that process. And overseas is important in
    the counterfeit context because so much of the counterfeit
    appearing in the United States now originates overseas and is
    manufactured overseas.
        We have not completed our staffing at this point, but we
    have completed a substantial amount of it. We have some
    positions that are under appeal. Those positions that we
    ultimately do not get at the requested location we are going to
    suggest some alternative locations that would work
    geographically and logistically. But we have made great
    strides, and appreciate the support of the committee.
        Senator Kohl. Very good. I thank you.
        Mr. Chairman, would you like to----
        Senator Campbell. I have some questions for Director
    Rinkevich. While we are on this subject about counterfeit
    money, do we have an estimate of the amount of counterfeit
    money that is coming to this country?
        Mr. Bowron. Yes.
        Senator Campbell. You probably have, certainly of what you
    have confiscated. That would be my first question.
        Mr. Bowron. We can provide you with specific numbers. In
    terms of the amount that is seized overseas and the amount that
    comes into this country in circulation----
        Senator Campbell. You do not know offhand?
        Mr. Bowron. I cannot give you a total amount in terms of
    what is taken out of circulation. But I will----
        Senator Campbell. Will you provide that to the committee?
        Mr. Bowron. Yes.
        Senator Campbell. One other question dealing with
    counterfeit money. Do we have any proof that foreign
    governments are involved in counterfeiting American money?
        Mr. Bowron. No.
        Senator Campbell. Thank you.
        Director Rinkevich, let me ask you a couple of questions
    about FLETC. You requested and received a total of $1.46
    million for fiscal year 1997 for environmental compliance. In
    1998 you are asking an additional $111,000. What is that for,
    just cost overruns or something?

                             Environmental Requests

        Mr. Rinkevich. No, Mr. Chairman, that will be to expand the
    Center's ability to deal with environmental issues. The Center,
    as you know, occupies a World War II era naval installation and
    we are still dealing with environmental concerns that were left
    to us from the early days of that facility's use. Plus, we do
    have activities at the Center that indeed contribute to
    environmental problems: firearms training with the lead and
    associated activities, and photography and photo labs and those
    type of problems.
        These dollars are to enhance our ability to make sure that
    we do the proper things in terms of controlling our activities
    and remediating the environmental concerns. Some of those
    concerns were there before us, and others may have been created
    subsequent to our takeover.
        Senator Campbell. You have also requested $3.993 million
    and 26 new FTE's for mandatory workload adjustments. As I
    understand it, $1.925 million would be required to pay the
    compensation and benefits for 26 new instructors. What is the
    breakdown for the remaining $2.068 million?

                           Funding Workload Increases

        Mr. Rinkevich. Those mandatory workload increases, Mr.
    Chairman, are a result of the increase in the workload. That is
    how we derive those increases. A big part of that is for the
    compensation and benefits for the 26 instructors. It is about
    $1.9 million. Another $1.2 million is for the permanent change-
    in-station cost in bringing those instructors to the Center
    after we have hired them. Also, there are training, travel, and
    equipment costs associated with the new instructors. So the
    total comes up to just short of $4 million.
        Senator Campbell. You are also requesting $18.618 million
    from the crime bill funding for master plan construction costs.
    If that is appropriated, what is the status of the completion
    of the master plan construction, No. 1? And No. 2, is the INS
    and the Border Patrol buildup playing into your master plan?

                              Master Plan Funding

        Mr. Rinkevich. Yes, sir; it is. The status of the master
    plan activity is that if the $18.6 million in this request is
    approved by the Congress we will be at about 60 percent in the
    appropriation of dollars necessary for the implementation of
    our master plan. That document, by the way, was originally
    developed in 1989. It is now 8 years old. We have in-house
    revised that document two times and are in the process of a
    third revision which this committee will see in the not-too-
    distant future.

                             Environmental Changes

        Enough things have happened at the Center, the environment
    in which we operate has changed, the workload has changed and
    shifted to the point that our plans are to engage another
    consultant to assist us in doing a complete review of our
    facility needs against projected workload. So the status is
    about 60 percent of the master plan will have been
    appropriated, if this budget is approved.

                               INS Participation

        In regard to the Immigration and naturalization Service
    [INS] participation, I can say affirmatively that not only do
    we actively involve the INS, but we involve all of our customer
    agencies, particularly the larger ones that are posted at the
    Center, in the development of projects for submission to this
    committee as well as the actual undertaking of the design of
    those projects. We are proud of the customer orientation that
    we have at the Center. We want to be sure that any dollars that
    are entrusted to us to build facilities are going to meet the
    unique needs of the various agencies.
        So INS, as well as every other agency at the Center, are
    very heavily involved in the design of projects, and the design
    of the facilities.
        Senator Campbell. We talked when you were in my office the
    other day about the temporary FLETC facility in Charleston, SC.
    Could you tell the committee of the current status of that
    training facility, and how long you expect it to be needed, and
    perhaps the final price tag on the necessary renovations of the
    temporary facility?

                               Temporary Facility

        Mr. Rinkevich. The status of the temporary facility is that
    it is operational. The population that is there, at any given
    time, ranges between 450 and 600. That population is entirely
    made up of Border Patrol agent trainees. We, the Department of
    Justice, and the Department of the Treasury are very committed
    to deactivating our participation at that installation at the
    end of fiscal year 1999. That is the intention we clearly have,
    and I know that is also an interest this committee shares.

                             Cost of Temporary Site

        We have looked at figures that the Department of Justice
    has developed for a continuation of activities at the
    Charleston site. In fact, these are figures that I received
    just recently from Justice. They estimate that if that facility
    were to become a permanent facility to handle just the Border
    Patrol training, not including the other INS training, that the
    cost of bringing that facility on line for permanent use would
    be somewhere close to $110 million. The cost that has already
    been invested is over $8 million, and those costs were from
    appropriations that the INS received from the Congress.
        Senator Campbell. Thank you. Considering there is no
    Georgia Senator on this panel it may indeed be a temporary
    facility. But these things, you never know.
        You have requested $1 million from the crime bill fund for
    the rural drug training initiative. Could you explain that
    proposal, please?

                               Crime Bill Funding

        Mr. Rinkevich. Yes, sir; when Director Magaw was referring
    to conversations he and I had about weapons tracing and
    explosives recognition, that is the concept that we are talking
    about incorporating into our rural drug training initiative.
    This is an initiative that was authorized by the Congress 2
    years ago. This appropriation request has $1 million in it to
    implement that initiative for future and current programs, and
    the delivery of about six programs that are focused and
    targeted on rural law enforcement organizations.

                     Small Law Enforcement Agency Training

        As you may know 90 percent of America's law enforcement
    agencies consist of 50 or fewer officers. So there is a great
    deal of law enforcement in this country that is undertaken by
    smalltown police departments. The problem that they have,
    obviously, is that many of them are so small that they cannot
    afford financially or timewise for the officers to be away from
    their duty post for training. So the concept of this program is
    to deliver the training to them in locations that they can go
    to conveniently and at less cost.

                          Benefit of Train-the-Trainer

        It also embodies the notion of train-the-trainer. Four of
    these programs would be programs that train trainers from
    communities. Then rural communities could cascade that
    information out to other neighboring jurisdictions.
        Senator Campbell. Along that line, if they attend as space
    available, as I understand it, is there travel to and from
    training? Is that provided by FLETC or is that their local
    departments responsibility?

                          State and Local Requirements

        Mr. Rinkevich. That is a requirement of the local
    departments for State and local training that we do, Mr.
    Chairman. They are required to absorb the cost of travel to and
    from the Center.

                               Prepared Statement

        Senator Campbell. Speaking of Georgia, I would like to
    introduce at Senator Coverdell's request this very, very nice
    statement on FLETC in Glynco, GA, for the record, without
    objection.
        [The statement follows:]

                    Prepared Statement of Senator Coverdell

        Chairman Campbell, members of the Subcommittee, and guest,
    I appreciate the opportunity to submit testimony as you
    consider the fiscal year 1998 Treasury Postal Appropriations
    bill. Although I would very much like to deliver these remarks
    in person, I am unable due to a scheduling conflict.
        As you are aware, I am currently chairing the Foreign
    Relations Subcommittee on Western Hemisphere. Part of this
    Subcommittee's jurisdiction, which I have made as one of my
    highest priorities, is to reignite the nation's drug
    interdiction efforts, as well as protect our citizens from
    terrorist activities. Through this Chairmanship, I have had the
    opportunity to obtain direct feedback from our nation's law
    enforcement officers on what they feel is needed in their day-
    to-day activities in protecting our borders and citizens.
    Although they have mentioned several immediate needs, the one
    that is continually brought to my attention is the deployment
    of more federal law enforcement officers.
        As you know, Congress has committed to increase the number
    of federal agents on the job. As we move forward in this
    effort, we must also fulfill our obligation to the U.S.
    taxpayers by making sure these new agents are properly trained
    in the most cost-effective manner.
        As you know, prior to 1970, training of our federal law
    enforcement agents was divided between respective federal
    agencies. After the completion of two studies, the federal
    government came to the realization that this fragmented system
    had discrepancies in training, duplication of efforts, and
    inefficient use of funds. As a result, Congress authorized the
    creation of the Consolidated Federal Law Enforcement Training
    Center, whose purpose was to create high quality, standardized,
    and cost-effective training for our federal officers.
        This new organization was temporarily headquartered in
    Washington, D.C. until 1975 when, after much study, a permanent
    location was found at the former Naval Air Station in
    Brunswick, Georgia. Since then, the Consolidated Federal Law
    Enforcement Training Center has been renamed the Federal Law
    Enforcement Training Center (FLETC), and has been training and
    graduating the many men and women who continue to fight for our
    safety.
        As you consider your bill, I would like to express my
    support for the agency's appropriation request of $119,541,000.
    As you may know, this request not only includes funds for the
    administrative costs in running FLETC, but also includes the
    training reimbursement funds from 72 federal agencies,
    including the INS and Border Patrol, whose roles are currently
    expanding.
        I would also like to bring to your attention the need to
    complete the master construction plan at FLETC and express my
    support for the agency's appropriation request of $18.6 million
    to be applied towards the completion of this plan.
    Approximately 52 percent of the master plan has been completed
    and additional appropriations would allow FLETC to again move
    closer toward its goal of being the centralized training center
    for our federal agencies.
        Whether traveling in my home state of Georgia, or chairing
    a Subcommittee hearing on drug interdiction, the need to
    address the crisis we face with drugs and crime is constantly
    brought to my attention. Through continued funding and support
    of the Federal Law Enforcement Training Center, we will be able
    to take the necessary steps to achieve this goal for all
    Americans.
        Once again, thank you for allowing me to testify today and
    for all you and your colleagues on the Subcommittee are doing
    for our country.

                              Additional Questions

        Senator Campbell. Senator Shelby, did you have some
    questions you would like to ask of this panel?
        Senator Shelby. I have no questions of the panel. I am glad
    to see all of them.
        Senator Campbell. We will go back to Senator Kohl. If you
    have some more we will do another round here.
        Senator Kohl. The Federal Law Enforcement Training Center,
    Mr. Rinkevich, in the past several years your estimate versus
    what actually occurred with respect to training personnel has
    been 15 to 25 to 35 percent off. Would you explain this problem
    to us and what we can do to rectify it, because we then
    allocate money to you and go through the problem of having an
    overallocation. How are we going to deal with that or how would
    you suggest we deal with this misestimate that occurs?

                          Budgetary Process Estimates

        Mr. Rinkevich. The circumstance, Mr. Kohl, is that the
    estimates that we base our workload projections on come to us
    from the agencies. As you know, the budgetary process in the
    Federal Government requires those kinds of estimates to be
    developed by the agencies in the preparation of their budgets
    some 18 months in advance of the actual fiscal year in which
    they would be implemented. So we are at the mercy of agencies
    projecting accurately the numbers of new hires and other
    training resources that they are going to demand of us. So the
    agencies do their very best, but there are conditions that
    occur after they have made their projections that either
    increase or in some cases decrease.

                                Discount Policy

        Recognizing that, the Center has taken those agency
    projections and applied an experience factor to them to give us
    a more realistic number. For example, we know that over time
    their numbers decrease by 20 to 25 percent. So we apply a
    discount factor.
        There have been few exceptions to this discount practice.
    In the case of the INS estimates this year, we have not
    discounted those because we and they have been so certain that
    those are going to be delivered for both 1997 and 1998. We also
    have not discounted the Bureau of Prisons estimates because
    they, too, are very much on target. But every other agency we
    have discounted.

                       Solution to Overestimating Numbers

        The solution to the problem is one that is already in
    place. One or two years ago the Congress authorized the Center
    to have an account in which certain unexpected dollars for
    training in one fiscal year could be held over for use in
    another year for the same purpose. That amount would go into an
    account which would be applied to the next year's needs for
    training. So we have a multiyear account that rolls over from
    year to year. It rolls over up to 3 years, and it is designed
    to provide a cushion or an amount that can be committed to
    training in ensuing years.
        So I think, Mr. Kohl, the solution is really quite
    effective at this point.
        Senator Kohl. Anything that this committee can do to help
    you?

                                    Closing

        Mr. Rinkevich. I can think of nothing other than the
    committee's ability to understand the difficultly that FLETC
    and our participating agencies have in predicting what we are
    going to need so far in advance. Also, your understanding of
    the fact that those numbers are, in some cases, soft. They are
    all we have for projecting our training numbers in advance.
        Senator Kohl. I thank you.

                      Suspicious Activity Reporting System

        Mr. Morris, how many criminal referrals did FinCEN receive
    last year?
        Mr. Morris. Last year, a new system was put in place which
    we call the suspicious activity reporting system. That includes
    money laundering referrals from banks as well as criminal
    referrals that are required by the five bank regulatory
    agencies. I give that background because I can give a bit more
    precise answer.
        We received 64,000 referrals from financial institutions,
    40 percent of those relating to money laundering and Bank
    Secrecy Act violations which is the law that banks are obliged
    to follow in terms of currency reporting. So 64,000 is the
    total answer. In the old format, that would mean that about 60
    percent of those were criminal referrals, such things as bank
    fraud and embezzlement and the like.
        Senator Kohl. Of those referrals how many of those was
    FinCEN instrumental in resolving or solving?
        Mr. Morris. Our job is a network. We take some pride in the
    fact that FinCEN--its last letter, N standing for network--was
    a network before being a network was cool, before the efforts
    and focus were on the information superhighway.
        Our job really is to get that information into the hands of
    multiple law enforcement and regulatory agencies that have
    criminal jurisdiction. Our primary purpose in this program is
    to make sure that the Secret Service, the Customs Service, the
    Internal Revenue Service, the FBI, and the States and
    localities having investigative jurisdiction have that
    information quickly and accurately. This happens 100 percent of
    the time.
        FinCEN uses that data base to begin to examine trends and
    problems in efforts to identify potential investigative targets
    for follow-on by the investigative agencies.
        Senator Kohl. Will financial institutions profit from being
    vendors of electronic commerce for Government?
        Mr. Morris. I think that question probably more
    appropriately fits in the other F agency at Treasury, the
    Financial Management Service. The system as I understand that
    the Treasury Department is in the process of developing will be
    the movement of benefit payments electronically. At present, I
    think the answer is yes, the electronic transfer that exists at
    present will result in some profit basis so that the services
    are provided.
        There is also a consideration being used to using some of
    the new electronic money forms in that regard as well, and my
    guess is that markets will develop, as they tend to, when the
    Government begins to move large amounts of money and there will
    be profits involved in that, yes.
        Senator Kohl. As you know, what we are talking about here
    is the requirement by January 1, 1999, that all Federal
    payments, wages, salaries, retirements, and so on be made
    electronically.
        Mr. Morris. That is correct.
        Senator Kohl. So should we or should we not be looking to
    see that banks are not making extraordinary profits from
    transferring these Federal payment benefits?
        Mr. Morris. I think probably that question is
    inappropriately raised to my agency. I can either defer to the
    Under Secretary, but the short answer is that the Department is
    examining this whole effort. I am not really privy to the
    details of how it will work or what the relationship with the
    financial institutions will be. We are interested at the
    margins of the activity, as is the Secret Service, in terms of
    its potential for fraud and for creating financial crimes. But
    how that system actually goes into place is being explored at
    the Department.
        Senator Kohl. I thank you.
        Mr. Chairman.
        Senator Campbell. Thank you.

                                 Counterfeiting

        Mr. Morris, let me just ask you. It is illegal to
    counterfeit money. Most of your work is done with bills rather
    than coins, right? I mean, not many people counterfeit coins.
    It is not time efficient, I suppose.
        Mr. Morris. Counterfeiting is my colleague at the left. Mr.
    Bowron, would be happy to deal with that question.
        Senator Campbell. I got some of my questions mixed up. Let
    me ask Mr. Bowron that same question. Most of your efforts are
    done with paper, I suppose.
        Mr. Bowron. That is true, Mr. Chairman. Certainly in those
    cases, and there have been some where there is counterfeiting
    of coins, that certainly would fall within our jurisdiction.
    But that is by far the exception in terms of our investigative
    activity.
        Senator Campbell. If I went to Las Vegas, they make coins
    like tokens sometimes for their machines.
        Mr. Bowron. That is right.
        Senator Campbell. Is it illegal to counterfeit those if you
    were inclined to do so?
        Mr. Bowron. Yes; but it is not necessarily--that is not a
    Federal payment system so that is not necessarily in the
    jurisdiction of the Secret Service; but it would be a violation
    of a State or local law. In fact, that has occurred.
        Senator Campbell. It has?
        Mr. Bowron. Yes.
        Senator Campbell. I'm a jeweler, I could make one of those.
    But I guess I will not now that you have told me that.
    [Laughter.]

               National Center for Missing and Exploited Children

        I was pleased to note the participation of the Secret
    Service in the National Center for Missing and Exploited
    Children. Could you elaborate a little on the results record
    you have had since you have become involved? A very admirable
    effort.
        Mr. Bowron. Yes, sir; we have worked with the National
    Center for Missing and Exploited Children in a number of
    different cases, and our support and our involvement has
    primarily been through forensic activities that were developed
    mostly in conjunction with our protective mission. These
    forensic activities have a tremendous value in those kinds of
    investigations.
        The specific forensic activities include handwriting
    technology, a forensic information system for handwriting that
    we have, and fingerprint technology which relies on a rather
    extensive AFIS network that we have developed by networking
    four different AFIS vending systems through the Secret Service,
    and polygraph examinations. Also even in the area of cellular
    telephone communications investigations, we have been
    successful in working with State and local law enforcement to
    recover some victims of kidnapping and exploitation.
        Senator Campbell. Do most of those requests come from local
    law enforcement agencies that need help?
        Mr. Bowron. Almost exclusively. It comes through the center
    to us to support State and local law enforcement.

            Relationship With Office of National Drug Control Policy

        Senator Campbell. Director Morris, drug money is closely
    linked to money laundering. You mentioned something along this
    line. I would like to know how you interact with the drug
    czar's office.
        Mr. Morris. FinCEN has a good relationship with the Office
    of National Drug Control Policy. I know the challenges that
    they face. I served for 2 years, a number of years ago, as the
    deputy director in the drug czar's office.
        Senator Campbell. You did?
        Mr. Morris. Yes; I did. It is a very difficult challenge
    trying to do all the necessary coordination. I think also
    FinCEN is a unique agency in that we have some 28 different
    agencies who have agents or analysts assigned to our
    organization. So I think there is a natural kind of
    relationship between our organization and the ONDCP because we
    also interact with lots of other departments of the Government.
        General McCaffrey has been out to FinCEN, as well as a
    number of his senior staff. They have been involved in our
    close working relationships with banks and nonbanks. They are a
    member of the Under Secretary's antimoney laundering working
    group called the Bank Secrecy Act advisory group, and they have
    participated in the group as well as in some of our
    international initiatives. So I think our working relationships
    are quite close with them.
        Senator Campbell. I have a number of other questions I
    would like to submit to each one of you and have you answer,
    but I have no more for this panel. Senator Kohl, do you?
    Senator Shelby?
        Senator Shelby. No; I have no----
        Senator Kohl. No; I would simply say that it has been a
    really good session.
        Senator Campbell. Very informative.
        Senator Kohl. You are good people. You are doing a good
    job, and you will continue to have our support. We are working
    toward the same goals.
        Senator Campbell. We particularly thank you for setting up
    these terrific displays, not only for our education, but I am
    sure that many people in the audience found them very
    interesting, too. If there are people here who have not seen
    them, before you leave you might take a good look.
        I have a conflict, so I would like to ask Senator Shelby,
    if he has the time, if he would chair the last panel.
        Senator Shelby. Be glad to.
        Senator Campbell. If you will do that, I am going to have
    to run. Thank you.
        The last panel will be Ms. Valerie Lau of the Treasury's
    Inspector General's Office.
                                    Panel 2

                           DEPARTMENT OF THE TREASURY

    STATEMENT OF HON. VALERIE LAU, INSPECTOR GENERAL
    ACCOMPANIED BY RICHARD CALAHAN, DEPUTY INSPECTOR GENERAL

                            Introduction of Witness

        Senator Shelby. Ms. Lau, we are glad to have you here
    today. I understand you are accompanied by your deputy, Richard
    Calahan?
        Ms. Lau. Yes, sir; I am.

                               Prepared Statement

        Senator Shelby. Ms. Lau, we have your complete statement
    and it will be made part of the record.
        [The statement follows:]
                       Prepared Statement of Valerie Lau
        Mr. Chairman, Members of the Committee, I am Valerie Lau, Treasury
    Inspector General, and I am pleased to appear before you today to
    discuss the fiscal year 1998 budget request for the Salaries and
    Expenses Appropriation of the Department of the Treasury's Office of
    Inspector General (OIG).
        Sitting at the table with me today is Mr. Richard B. Calahan,
    Deputy Inspector General. Also accompanying me are Mr. Dennis S.
    Schindel, Assistant Inspector General for Audit; Ms. Raisa Otero-
    Cesario, Assistant Inspector General for Investigations; Mr. Gary L.
    Whittington, Assistant Inspector General for Resources; Mr. William
    Pugh, Deputy Assistant Inspector General for Audit (Financial
    Management); and Ms. Lori Y. Vassar, Counsel to the Inspector General.
        I have prepared a formal statement which, with your permission, I
    will submit for the record.
                                    mission
        As you know, the Treasury Office of Inspector General (OIG) was
    established by the 1988 Amendments to the Inspector General (IG) Act of
    1978. The mission of all OIG's is to conduct independent and objective
    audits and investigations relating to the programs and operations of
    their respective Departments; to make recommendations that promote
    economy, efficiency and effectiveness; and to prevent and detect fraud
    and abuse.
        Unlike most other OIG's, however, the Amendments did not create a
    single audit and investigative entity for the Treasury Department.
    Instead, we share that responsibility and have oversight of other audit
    and investigative units within the four law enforcement bureaus. Simply
    put, the Treasury OIG has direct audit responsibility for all bureaus
    except the Internal Revenue Service (IRS). 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 unique 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 the 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.
                            oig strategic direction
        We want to accomplish our mission in a way that will maximize our
    impact by focusing on what is most important. The strategic goals that
    support our mission are:
      --Promote Economy, Efficiency and Effectiveness
      --Improve Financial Management
      --Heighten Integrity Awareness and Deterrence
      --Monitor Departmental Information Systems Development
      --Address High-Priority Issues That Benefit Customers and
            Stakeholders
      --Continually Improve Through Employee and Organizational Development
        We have identified strategies to accomplish each of these goals. As
    an example, to promote economy, efficiency, and effectiveness, we are
    developing a system for long and short-range planning which will
    identify programs and activities subject to high risk and
    vulnerabilities. The plan focuses particular attention on areas which
    reflect the Department's priorities. These priorities, identified from
    the Department's budget justification, include such issues as
    ``Strengthening Internal Financial Management'' and ``Improving Border
    Operations.'' We will use our plan to direct our audit resources in a
    way that will provide coverage to significant and sensitive Treasury
    programs and operations.
        I believe that this process--establishing goals and strategies for
    the long term, setting annual targets, managing to achieve those
    targets, and reporting annually on our progress--can help us manage our
    programs more efficiently and effectively and make informed budget
    decisions.
                            fiscal year 1998 budget
        Our fiscal year 1998 budget request is $31.333 million and 313
    direct full-time equivalents (FTE). This represents a net increase of
    $1.563 million and 8 FTE over fiscal year 1997. The net $1.563 million
    increase includes: $0.614 million and 8 FTE to cover a workload
    adjustment to support audit functions that review all facets of
    Treasury's operations; $0.787 million to cover cost adjustments
    necessary to maintain our current levels; and $0.162 million to cover
    pay annualization.
                                  oig progress
        My office has made steady progress in increasing its effectiveness.
    We have made significant progress in three specific areas--improving
    Treasury's financial management, developing in-house information
    technology capability, and strengthening our organizational
    independence. We have accomplished these by using our existing
    resources more effectively.
        First, we have focused a good portion of our audit resources
    towards helping the Treasury Department improve financial management
    through financial statement audits mandated by the Chief Financial
    Officer's (CFO) Act and Government Management Reform Act (GMRA). As you
    know, this year we are responsible for auditing the first
    Departmentwide financial statements. This is a large undertaking. In
    fiscal year 1995, Treasury's revenue collections amounted to $1.4
    trillion, accounting for almost all the Government's revenue.
        In less than three years, we have built one of the strongest
    financial statement audit groups in the Inspector General (IG)
    community. We have seen progress in financial management as measured by
    improved levels of audit assurance. We intend to build on this success.
    Treasury has made great strides in financial management, but there is
    still a great deal to be done. This will continue to be a major focus
    for us.
        Second, we have made progress in developing our information
    technology (IT) 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 any in-house automated data processing
    (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 the new office with making information technology a strategic
    resource, and I am pleased with the progress we have made so far.
        This Office of Information Technology (OIT) has provided basic ADP
    audit training to our audit staff and instructed financial auditors in
    the use of computer assisted audit techniques. In addition, they direct
    the ADP audit work of the IT contractors we use when our office needs
    additional IT expertise.
        OIT has also improved our ability to use information technology to
    better advantage. One year ago, our only means of electronic
    communication was an obsolete and expensive computer system based on
    ten year old technology. During the year, we designed a new network,
    financed it using available funds, and began installation. As of today,
    we have installed local area networks and new software in the majority
    of our offices, supporting over 80 percent of our employees. By early
    spring, we will have local area networks installed in all of our
    offices and will be connected to the Treasury Communications System.
    This will improve our ability to share information and make our work
    processes more efficient.
        When I became Inspector General, I was dismayed to learn that the
    office had no system to account for project costs. During the past
    year, we have designed a new management information system that will
    run on our new network. This new system combines audit information,
    investigations case information, and project costs to give us a full
    picture of our activities. The new system will be initially installed
    April 1, 1997, and fully implemented by October 1, 1997.
        Third, we have strengthened our organizational independence. Last
    year, I reported that the General Counsel and I had entered into a
    Memorandum of Understanding (MOU) to ensure the provision of
    independent legal services by establishing procedures so that my
    counsel could provide legal advice independent of the Office of the
    General Counsel (OGC) 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, my
    counsel had in practice not reported to or been under the general
    supervision of the General Counsel. Because the MOU did not adequately
    reflect the independent relationship 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.
                              operational results
        The OIG has four line functions, Investigations and Oversight,
    Audit, Information Technology, and Evaluations.
    Investigations and Oversight
        During fiscal year 1996, the Office of Investigations (OI) closed
    156 cases resulting in 16 successful prosecutions, 7 suspensions or
    debarments, 50 administrative sanctions, and approximately $8 million
    in monetary benefits.
        Last year, I informed the Committee that OI had initiated an
    investigation into the area of Workman's Compensation and this could
    result in significant savings to the Government. One particular
    Workman's Compensation investigation resulted in a $967,000 savings to
    the government. Also, OI received special recognition from United
    States Attorneys in two different judicial districts, for its
    outstanding efforts in conducting criminal investigations.
        During fiscal year 1996, the Office of Oversight issued five
    reports concerning the operations and programs of the four law
    enforcement bureaus' internal affairs and inspection offices. At the
    present time, we have an additional nine reviews in progress. They
    address whether the internal affairs and inspections groups adhere to
    professional investigative standards, the economy and efficiency with
    which their operations and programs are carried out, and their
    compliance with applicable laws and regulations.
    Audit
        During fiscal year 1996, we issued 111 Treasury OIG audit and
    evaluation reports including approximately $26 million in total
    questioned costs and funds that the bureaus could put to better use in
    their operations. These reports covered a range of Treasury operations.
        We continue to strengthen our financial statement auditing
    capabilities and work with the Department and GAO to improve financial
    management in Treasury. In the past year's audit work, we have achieved
    measurable progress and have laid a strong foundation for meeting the
    challenges of the Department's expanded financial reporting
    responsibilities while improving the Department's financial management.
        The OIG audited Customs, Bureau of Alcohol, Tobacco and Firearms
    (ATF), the Exchange Stabilization Fund, and a significant portion of
    the Treasury Forfeiture Fund. By working with Customs, we have moved
    from a disclaimer of opinion to a qualified opinion on their balance
    sheet on the fiscal year 1995 Financial Statement. With ATF's
    assistance, we quickly identified weaknesses and through ATF's vigorous
    actions, corrections were made. Thus, we were able to issue an
    unqualified opinion on ATF's fiscal year 1995 balance sheet on their
    very first financial statement audit. The fiscal year 1996 audits of
    these two bureaus are currently in progress. In both cases, management
    has made additional improvements in internal controls and financial
    reporting processes. We have also performed audit surveys of Secret
    Service and Bureau of Public Debt (BPD), and provided oversight and
    technical assistance for eight audits performed by contractors.
        This year we are focusing more program audit efforts in the areas
    of violent crime, money laundering and border operations. In Customs
    and ATF, we have begun to concentrate on revenue areas such as user
    fees and excise taxes. We also plan to perform audits in some of the
    new areas of responsibility in Treasury such as Electronic Benefits
    Transfer (EBT) and the Debt Collection Improvement Act.
        This year we will be implementing a new audit follow-up system, and
    we will be devoting more resources on prior audit recommendations to
    ensure management has taken adequate corrective action. For example, we
    are following up on our report of the Department's oversight of Tax
    Systems Modernization (TSM).
    Information Technology
        Our Office of Information Technology supports both financial and
    program audit efforts. During its first year, this office has made
    great progress in their efforts to assist and add value to our audits.
    The recent Information Technology Management Reform Act of 1996,
    Federal Financial Management Improvement Act of 1996, and other
    legislation clearly indicate Congress' intention to make technology
    work and we are committed to do our part.
        Specifically, our OIT staff provides training and technical support
    to our financial auditors in the use of computer assisted audit
    techniques. The OIT staff has also used contractors to test computer
    controls on our Customs and Alcohol, Tobacco and Firearms financial
    audits and performed this work on our Secret Service financial audit.
    The OIT is currently involved in planning for future financial audit
    work at the Internal Revenue Service, Financial Management Service, and
    Bureau of Public Debt. The OIT is also supporting our program auditors,
    specifically in the reviews of the Tax Systems Modernization Program at
    IRS and the implementation of the Seized Asset and Case Tracking system
    (SEACATS) at Customs.
        We are also in the final stages of a departmentwide IT survey
    designed to identify the major risks affecting departmental and bureau
    information technology initiatives and operations. The survey focuses
    on IT strategic management, technical architecture, systems development
    and project management as well as the inherent risk in current
    development projects. The results of this survey report will be used to
    plan future audits in the information technology area.
    Evaluations
        Our Office of Evaluation's first year of operation has focused its
    attention on assisting the Department with consultative services to
    address emerging issues and problems before vulnerabilities develop.
    These services have suggested the use of strategic planning to assist
    Treasury in coordinating with other agencies, encouraged the upgrading
    of automation to better manage regulatory functions, and provided
    operational frameworks for implementing new initiatives. The evaluators
    have also continued to assist the Bureaus in implementing the
    Government Performance and Results Act by identifying practical issues
    that impact performance, and suggesting approaches to integrating
    strategic and tactical planning.
                                   conclusion
        In summary, we have worked hard to make our organization stronger
    and better equipped to handle the challenges of a large oversight
    mandate in a department with many significant and diverse functions. We
    thank you for your support and look forward to continued progress with
    your help.
        This concludes my opening statement. My staff and I will be happy
    to answer any questions you may have.

                            Status of Investigation

        Senator Shelby. If I can just proceed. When I was chairing
    this committee back in this past year you appeared before the
    subcommittee. I had intended today to just touch briefly on the
    status of your office's investigation, but in light of some new
    information that you have provided, I would like to discuss
    this in more detail here today.
        I have other questions on budget matters that I will submit
    for the record if we do not get to them today.
        Ms. Lau. That is fine, Senator.
        Senator Shelby. Madam Inspector General, I received a copy
    of your letter dated April 16, 1997, informing me that you have
    closed your investigation into the Secret Service testimony. I
    am glad to hear that. I would like to submit a copy of that
    letter for the record as well as copies of two letters that
    were sent to Senator Stevens and Congressman Waxman informing
    them of your office's decision. Without objection, that will be
    done.
        Ms. Lau. Thank you.
        [The information follows:]
                            Letters From Valerie Lau
                                    Department of the Treasury,
                                        Washington, DC, April 25, 1997.
    Hon. Ben Nighthorse Campbell,
    Chairman, Subcommittee on Treasury and General Government, Committee on
            Appropriations, U.S. Senate, Washington, DC.
        Dear Mr. Chairman: When I appeared before your subcommittee April
    17, 1997, I did not have the opportunity to enter an opening oral
    statement into the record. With your permission, I would like to submit
    for the record a group of letters dated April 16, 1997. In particular,
    I refer to my letter addressed to Senator Shelby regarding testimony
    before this Subcommittee last December.
        That letter summarizes two items regarding the Office of Inspector
    Generals (OIG) investigation of the Secret Service's computer system
    used to generate White House access lists. First, we have closed this
    investigation pending resolution of investigative access issues with
    the Secret Service. As we have informed you, the investigation has been
    inactive because the Secret Service will not provide the OIG full and
    unrestricted access to the employees and records needed to conduct this
    investigation. The Secret Service has insisted that all requests for
    information and contact with Service employees be done through the
    Office of Inspection, their internal affairs office. We have attempted
    to resolve the matter directly with the Service and through the
    management chain of command. We do not believe that we can conduct a
    credible and independent investigation under the circumstances imposed
    by the Service. We have notified the requesters and the Independent
    Counsel to explain our decision.
        Second, I would like to clarify my previous testimony before this
    Subcommittee last December. My testimony was based on information
    available to me at that time. I recently learned of the existence of
    administrative tracking documents which apparently, for one week,
    listed two Secret Service agents as subjects of an investigation. I
    have been informed that within a week, the OIG investigators handling
    this case concluded that no subjects could or should be identified
    based on the information available at that time. Consequently, the
    tracking document was revised.
        These documents facilitate administrative management of the
    investigative caseload and normally would not come to my attention. I
    became aware of these documents April 11 and directed by staff to
    immediately notify interested parties, such as your staff. We have
    referred this matter to the Integrity Committee of the President's
    Council on Integrity and Efficiency for appropriate action.
        I assure you that I have been forthcoming in my responses to the
    Subcommittee. Thank you for this opportunity to set the record
    straight.
                Sincerely,
                                                   Valerie Lau,
                                                     Inspector General.
                                     ______

                                    Department of the Treasury,
                                        Washington, DC, April 16, 1997.
    Hon. Richard Shelby,
    U.S. Senate,
    Washington, DC.
        Dear Senator Shelby: I want to update you on the status of the
    investigation of the U.S. Secret Service (USSS) computer system (Waves)
    used to generate lists of persons authorized to have access to the
    White House. First, pending resolution of investigative access issues
    with the USSS, we are closing this investigation. As we have informed
    you, the investigation has been inactive because the USSS will not
    provide the Office of Inspector General (OIG) full and unrestricted
    access to the employees and records associated with this investigation.
    The USSS has insisted that all requests for information and contact
    with USSS employees be accomplished through the Office of Inspection,
    the USSS internal affairs office. Enclosed are copies of letters to
    Congressman Waxman and Senator Stevens explaining this decision.
        Second, as we have discussed with your staff this week, I would
    like to clarify my testimony before your Subcommittee on December 2,
    1996. My testimony was based on information that I had at the time of
    the hearing. My comments were accurate in that our investigation
    involved the process by which the USSS developed and maintained lists
    to the White House. However, for a short period of time our case
    management records listed the two agents as subjects of the
    investigation. These documents facilitate administrative management of
    the investigation caseload and normally would not come to my attention.
    I would like to inform you of information of which I have recently been
    apprised so that there is no misunderstanding.
        According to our procedures, the Regional Inspectors General for
    Investigations (RIGI) open cases. When an investigation is initiated, a
    Case Tracking Document (CTD) is prepared containing descriptive
    information pertaining to the allegations. A CTD can be prepared
    periodically throughout the investigation as specific information is
    received or as the status of the investigation changes. It is not
    uncommon to generate several CTD's during the course of an
    investigation. For most investigations, there are a minimum of two
    CTD's, an opening and a closing.
        For the USSS Waves list investigation, there are currently two
    CTD's. The first CTD was completed on October 2, 1996, and listed two
    USSS agents and unknown USSS employees as subjects. This CTD was sent
    to the Office of Investigations, Headquarters for entry into the
    Management Information System (MIS). On October 4, 1996, OIG agents met
    with a Minority staff member of the House Government Reform and
    Oversight Committee and received a copy of the USSS agents' testimony.
    Our agents reviewed the testimony and concluded that the USSS agents'
    testimony was not in question; the preparation of that testimony and
    the process of producing the lists was. They discussed this information
    with the RIGI on October 8, 1996.
        The RIGI and her agents agreed that the USSS agents were not the
    subjects of this investigation. I have been informed that October 9,
    1996 the RIGI prepared an updated CTD, reflecting that this
    investigation was based on letters received from Congresswoman Collins
    and Senator Stevens requesting that we investigate the process by which
    the USSS Waves list was developed and maintained and that the subjects
    were unknown. This CTD was sent to the Office of Investigations,
    Headquarters for entry into the MIS.
        Upon receipt of this updated CTD in Headquarters, the subjects
    listed on the first CTD were deleted from the MIS and the system was
    updated to reflect that the subjects were unknown. This status has not
    changed.
        Should you or your staff wish to discuss this please let me know.
                Sincerely,
                                                   Valerie Lau,
                                                     Inspector General.
        Enclosures.
                                     ______

                                    Department of the Treasury,
                                        Washington, DC, April 16, 1997.
    Hon. Jim Kolbe,
    Chairman, Subcommittee on Treasury, Postal Service and General
            Government, Committee on Appropriations, U.S. House of
            Representatives, Washington, DC.
        Dear Mr. Kolbe: I want to update you on the status of the
    investigation of the U.S. Secret Service (USSS) computer system (Waves)
    used to generate lists of persons authorized to have access to the
    White House. First, pending resolution of investigative access issues
    with the USSS, we are closing this investigation. As we have informed
    you, the investigation has been inactive because the USSS will not
    provide the Office of Inspector General (OIG) full and unrestricted
    access to the employees and records associated with this investigation.
    The USSS has insisted that all requests for information and contact
    with USSS employees be accomplished through the Office of Inspection,
    the USSS internal affairs office. Enclosed are copies of letters to
    Congressman Waxman and Senator Stevens explaining this decision.
        Second, as we have discussed with your staff this week, I would
    like to clarify my testimony before the Subcommittee on February 26,
    1997. My testimony was based on information that I had at the time of
    the hearing. My comments were accurate in that our investigation
    involved the process by which the USSS developed and maintained lists
    to the White House. However, for a short period of time our case
    management records listed the two agents as subjects of the
    investigation. These documents facilitate administrative management of
    the investigation caseload and normally would not come to my attention.
    I would like to inform you of information of which I have recently been
    apprised so that there is no misunderstanding.
        According to our procedures, the Regional Inspectors General for
    Investigations (RIGI) open cases. When an investigation is initiated, a
    Case Tracking Document (CTD) is prepared containing descriptive
    information pertaining to the allegations. A CTD can be prepared
    periodically throughout the investigation as specific information is
    received or as the status of the investigation changes. It is not
    uncommon to generate several CTD's during the course of an
    investigation. For most investigations, there are a minimum of two
    CTD's, an opening and a closing.
        For the USSS Waves list investigation, there are currently two
    CTD's. The first CTD was completed on October 2, 1996, and listed two
    USSS agents and unknown USSS employees as subjects. This CTD was sent
    to the Office of Investigations, Headquarters for entry into the
    Management Information System (MIS). On October 4, 1996, OIG agents met
    with a Minority staff member of the House Government Reform and
    Oversight Committee and received a copy of the USSS agents' testimony.
    Our agents reviewed the testimony and concluded that the USSS agents'
    testimony was not in question; the preparation of that testimony and
    the process of producing the lists was. They discussed this information
    with the RIGI on October 8, 1996.
        The RIGI and her agents agreed that the USSS agents were not the
    subjects of this investigation. I have been informed that October 9,
    1996 the RIGI prepared an updated CTD, reflecting that this
    investigation was based on letters received from Congresswoman Collins
    and Senator Stevens requesting that we investigate the process by which
    the USSS Waves list was developed and maintained and that the subjects
    were unknown. This CTD was sent to the Office of Investigations,
    Headquarters for entry into the MIS.
        Upon receipt of this updated CTD in Headquarters, the subjects
    listed on the first CTD were deleted from the MIS and the system was
    updated to reflect that the subjects were unknown. This status has not
    changed.
        Should you or your staff wish to discuss this please let me know.
                Sincerely,
                                                   Valerie Lau,
                                                     Inspector General.
        Enclosures.
                                     ______

                                    Department of the Treasury,
                                        Washington, DC, April 16, 1997.
    Hon. Henry A. Waxman,
    Ranking Minority Member, Committee on Government Reform and Oversight,
            U.S. House of Representatives, Washington, DC.
        Dear Mr. Waxman: On September 25, 1996, the then-Ranking Minority
    Member of the Committee on Government Reform and Oversight requested an
    investigation into the preparation of certain testimonies before the
    Committee related to the creation of lists of persons authorized to
    have access to the White House. The initiation of an investigation was
    predicated on the notification by the Office of Independent Counsel
    (OIC) that an investigation could be conducted, without impeding their
    inquiry, subject to certain restrictions.
        To conduct this investigation requires unfettered access to records
    and personnel of the USSS. Initial contacts with the USSS established
    that the USSS was unwilling to provide the OIG with any access which
    was not coordinated with the USSS Office of Inspection. Under the
    current circumstances, we are unable to conduct a credible and
    independent investigation. The OIG would not be able to attest to the
    accuracy or veracity of the investigative results, if required to work
    through the USSS Office of Inspection. It is the position of the OIG
    that this constitutes an unreasonable denial of access by the USSS. The
    OIG has attempted to resolve this matter directly with the USSS and
    through the management chain of command within Treasury. The Inspector
    General Act, as amended (``I.G. Act'', 5 U.S.C.A. App. 3), provides
    that such instances of unreasonable refusal of access be reported to
    the Department and disclosed in the Semiannual Report to Congress (IG
    Act, Sec. 6(b)2). The OIG intends to report this matter in the next
    report to Congress.
        As it is not appropriate for the OIG to conduct this investigation
    under the conditions imposed by the USSS, the OIG is closing this
    investigation. When and if the question of access with the USSS is
    resolved, the OIG will reopen the investigation.
        If you have any questions or require any further assistance, please
    contact me.
                Sincerely,
                                                   Valerie Lau,
                                                     Inspector General.
                                     ______

                                    Department of the Treasury,
                                        Washington, DC, April 16, 1997.
    Hon. Ted Stevens,
    U.S. Senate,
    Washington, DC.
        Dear Senator Stevens: On June 18, 1996, you requested that the
    Office of Inspector General (OIG) look into the creation, handling and
    dissemination of background investigation files and the capabilities of
    the computer system used by the United States Secret Service (USSS) to
    generate lists of persons authorized to have access to the White House.
    Subsequently, the USSS provided testimony regarding the process by
    which the White House access list is maintained and updated. The then-
    Ranking Minority Member of the House Committee on Government Reform and
    Oversight made a separate request for an investigation into the
    preparation of testimony provided by Secret Service officials before
    that Committee. The initiation of an investigation was predicated on
    the notification by the Office of Independent Counsel (OIC) that an
    investigation could be conducted, without impeding their inquiry,
    subject to certain restrictions.
        To conduct this investigation requires unfettered access to records
    and personnel of the USSS. Initial contacts with the USSS established
    that the USSS was unwilling to provide the OIG with any access which
    was not coordinated with the USSS Office of Inspection. Under the
    current circumstances, we are unable to conduct a credible and
    independent investigation. The OIG would not be able to attest to the
    accuracy or veracity of the investigative results, if required to work
    through the USSS Office of Inspection. It is the position of the OIG
    that this constitutes an unreasonable denial of access by the USSS. The
    OIG has attempted to resolve this matter directly with the USSS and
    through the management chain of command within Treasury. The Inspector
    General Act, as amended (``I.G. Act'', 5 U.S.C.A. App. 3), provides
    that such instances of unreasonable refusal of access be reported to
    the Department and disclosed in the Semiannual Report to Congress (IG
    Act, Sec. 6(b)2). The OIG intends to report this matter in the next
    report to Congress.
        As it is not appropriate for the OIG to conduct this investigation
    under the conditions imposed by the USSS, the OIG is closing this
    investigation. When and if the question of access with the USSS is
    resolved, the OIG will reopen the investigation.
        If you have any questions or require any further assistance, please
    contact me, or a member of your staff may contact Raisa Otero-Cesario,
    Assistant Inspector General for Investigations.
                Sincerely,
                                                   Valerie Lau,
                                                     Inspector General.

                           Attempt to Clarify Record

        Senator Shelby. Your letter also attempts to clarify your
    previous testimony before this committee in light of documents
    and information that has been brought to the committee's
    attention.
        Ms. Lau. Yes, sir.
        Senator Shelby. I want to start off by saying that while I
    appreciate your office's desire to clarify the record, I am not
    pleased by it. In fact, I am sincerely disturbed. About a week
    ago I was made aware by your office that new information had
    come to their attention that clearly showed that on October 2,
    1996, your office did in fact open a criminal investigation
    into the testimony of two specific Secret Service agents and
    this investigation was opened solely at the request of
    Congresswoman Cardiss Collins at that time, not Senator Stevens
    and Congresswoman Collins as has been previously maintained by
    you.
        Your office provided me a copy of an e-mail which was sent
    from them. Do you have copies of all of this?
        Ms. Lau. Yes, sir; I do. Thank you.
        Senator Shelby. Your office provided me a copy of an e-mail
    which was sent from then-assistant inspector general for
    investigations, James Cottos, to Emily Coleman, regional
    inspector general for investigations. The e-mail is dated
    October 2, 1996, and it reads--I would like to ask also that
    this be made part of the record. Without objection, it is so
    ordered.
        [The information follows:]
                             Interoffice Memorandum
                                                       October 2, 1996.
    To: Emily P. Coleman.
    From: James Cottos.
    CC: Raisa Otero-Cesario.
    Subject: Investigation of Secret Service Testimony of 7/17/96.

        I talked to Lori Vassar this morning regarding the letter from
    Congresswoman Cardiss Collins. Lori talked to Don Goldberg, the staffer
    for Congresswoman Collins, about the Secret Service testimony on 7/17/
    96. The Congresswoman strongly believes that the Secret Service
    representatives committed perjury and obstruction of justice when they
    testified. The staffer has all the documents we need to initiate the
    investigation--a transcript of the testimony, the lists provided, etc.
        Lori said we have received clearance from the Independent Counsel
    to proceed, with the restriction that we clear names with them before
    interviews of Secret Service personnel. The contact attorneys at
    Independent Counsel are Rod Rosenstein or Steve Colloton. I'm sending
    copies of the two letters with SA Carl Hoecker, who stopped by to drop
    some documents off this morning. Let me know is you have any questions.
                Thanks,
                                                                   Jim.

                         Concerns About Privacy Rights

        Senator Shelby. The e-mail is from James Cottos with a cc
    to Raisa Otero-Cesario and the subject matter is investigation
    of the Secret Service testimony of July 17, 1996.
        Ms. Lau. Excuse me, sir, I also have a copy of that e-mail
    and I believe for one item I am concerned about the privacy
    rights of the individual's named on the e-mail itself. I would
    be happy----
        Senator Shelby. Well, we are concerned about a lot of
    things that you perhaps misled this committee intentionally.
        Ms. Lau. It was not my intention to mislead the committee.
        Senator Shelby. That is why we want to get into this. But
    you have got this, do you not?
        Ms. Lau. I have it, sir. I wanted to raise my concern about
    the privacy rights of the individuals who are named on the e-
    mail. I would be happy----
        Senator Shelby. I will respect their rights, but I am
    getting into the substance of--you do have a copy of this?
        Ms. Lau. I do have a copy.
        Senator Shelby. For the record, could you explain what it
    says without mentioning the people?
        Ms. Lau. If I could preface it, it is from the then-
    assistant inspector general for investigations to the regional
    inspector general for investigations, and the cc is to the
    deputy assistant inspector general for investigations. Thank
    you for letting me clarify the roles of those individuals.
        Senator Shelby. You go ahead. What is the substance of it?
        Ms. Lau. The substance of it is an authorization from the
    assistant inspector general for investigations to commence an
    investigation.
        Senator Shelby. What is the nature of the investigation?
        Ms. Lau. According to his information, he indicates that it
    is regarding the testimony of the two Secret Service agents
    provided on July 17, 1996.
        Senator Shelby. It was regarding their testimony before
    Congress, was it not?
        Ms. Lau. Yes, sir; before the House Committee on Government
    Reform and Oversight.
        Senator Shelby. Your office also explained that on that
    time on October 2, 1996, that your office opened a perjury
    investigation into the testimony of two named Secret Service
    agents based on the Congresswoman's request. I was informed
    that a case tracking form was opened on October 2, 1996,
    identifying Congresswoman Collins as the requester and naming
    two agents as the subjects of this investigation.
        According to your office, this form was later changed to
    October 9 to reflect that the investigation was based on the
    request of both Senator Stevens and Congresswoman Collins, the
    specific agents named were removed as subjects, and the nature
    of the investigation was changed to address the preparation of
    testimony by the Secret Service and their policies and
    procedures for producing access lists to the White House.

                             Case Tracking Document

        Ms. Lau. Senator Shelby, my staff have informed me that
    within a week of the preparation of the case tracking document,
    the case tracking document was revised by the OIG investigators
    who were handling the investigations. They had concluded, based
    on their preliminary evaluation of the evidence that no
    subjects could be or should be identified based on the
    information available at the time. Consequently, the case
    tracking document was revised to reflect that there were no
    known subjects of the investigation.
        Mr. Calahan. If I might just give some perspective?
        Senator Shelby. You go ahead.
        Mr. Calahan. This form is frequently changed throughout an
    investigation. Normally what happens in our investigation
    offices is that the regional inspector general for
    investigations will receive information that is indicative that
    maybe an investigation should be started, and one of the first
    things they do will be to fill out this form so that the agents
    involved can charge time to the case. They normally when they
    first fill out the form the first time they put whatever
    information they might have pertaining to the case on the form.
    Then through the process of the investigation this form is
    changed when better information comes to light.
        Senator Shelby. It looks to me like that maybe this form
    was changed for reasons other than that. In other words, when
    did you learn of the change?
        Mr. Calahan. I learned of the change last Friday morning,
    April 11, at 9:30 in a meeting with the assistant inspector
    general for investigations, the regional inspector general for
    investigations, and the supervisor on the investigation.
        Senator Shelby. Ms. Lau, when did you learn of the change?
        Ms. Lau. I learned of this from Mr. Calahan following his
    meeting.
        Mr. Calahan. I informed her immediately.
        Ms. Lau. And I in turn directed him to contact interested
    parties such as your staff that very same day.
        Senator Shelby. I want to go ahead. Your office explained
    that at that time on October 2, 1996, your office opened a
    perjury investigation. I went through that. But according to
    your office this form that we keep talking about was later
    changed to October 9 that you just mentioned to reflect that
    the investigation was based on the request of both Senator
    Stevens and Congresswoman Collins, the specific agents' names
    were removed as subjects, and the nature of the investigation
    was changed to address the preparation of testimony by the
    Secret Service and their policies and procedures for producing
    access lists to the White House. I mentioned that earlier. Let
    me go on.
        In addition, I was informed that it was not until sometime
    after October 2 that the Office of Inspector General, your
    office, considered the Stevens' request and decided to join the
    two requests in one investigation. An explanation from Emily
    Coleman, the regional inspector general for investigations for
    the eastern region explaining this change in the investigation
    was also provided and I would ask that this be made part of the
    record. And it will be, without objection.
        [The information follows:]

        In preparation for the hearing scheduled for April 17,
    1997, I was reviewing the voluminous material gathered to date
    on the USSS Waves list investigation. During this review I
    realized that a discrepancy had occurred regarding the case
    opening tracking form. I will discuss the discrepancy below:
        The Case Tracking Form (CTF) in the file is the second form
    done on this case. The original CTF (copy attached) was
    completed on October 2, 1997. This form was completed based on
    information supplied by former Assistant Inspector General for
    Investigations James Cottos. Mr. Cottos called me and also sent
    me an E-mail stating that the OIG received an allegation from
    Congresswoman Cardiss Collins. Mr. Cottos states that the
    Congresswoman strongly believes that the Secret Service
    representatives committed perjury and obstruction of justice
    when they testified on July 17, 1996. He further states that
    Independent Counsel (IC) cleared us to proceed with the
    investigation, just clear names of any USSS personnel we want
    to interview through them. He finally states that he will send
    copies of Collins' letter and IC letter to my office later that
    afternoon.

        [Clerk's note.--The copy of the Case Tracking Form was of
    very poor quality and will not appear in the hearing record.]

        Based on Mr. Cottos' telephone call to me and his E-mail, I
    opened a case on this matter on October 2, 1996. I listed the
    complainant as Cardiss Collins and the subjects were the two
    USSS agents (Libonati and Undercoffer) and additional unknown
    USSS employees. This form was mailed to Headquarters for
    processing.
        On October 4, 1996, the assigned agents met with Collins'
    staff and picked up a copy of the testimony. The testimony was
    reviewed and the case agents stated on October 8, 1996, that
    Collins' letter and Mr. Cottos' E-mail were misleading and that
    the agents' testimony were not in question, but the preparation
    of that testimony--the process of producing the lists. Based on
    the agents statement we agreed that the subject line of the CTF
    should be changed to reflect the true nature of the case. On
    October 9, 1996, I met with Lori Vassar to discuss this case.
    We discussed Collins' letter I told her that based on the
    agents review of the testimony that the agents are not the
    subjects of this investigation. Lori was somewhat confused and
    asked me about Stevens' letter. I told her I didn't have
    Stevens' letter. She provided me a copy and agreed that the
    agents were not the subjects. On October 9, 1996, I did an
    updated CTF that reflected the investigation based on Collins
    and Stevens' letters. The allegation was rewritten to reflect
    the process not the testimony of the agents. Lastly the subject
    entry was changed to reflect the Unknown status. This form was
    sent to Headquarters for entry. (I can't explain why the
    Investigative Assistant has it dated 10/2/96 in the right hand
    corner except that she looked at the open date and did not fill
    in the status change date.)
        At the time of the telephone calls (10/18) and meeting (10/
    21) with USSS, Agents Libonoti and Undercoffer were not
    considered subjects of the investigation and were not listed as
    such due to the revised CTF.

                           Response to Secret Service

        Senator Shelby. Has your office responded to the Secret
    Service letter notifying you of the concerns with your request
    for unfettered access in pursuing your investigation?
        Mr. Calahan. Senator, what we have done in response to
    Secret Service is, after a period of time of discussions, we
    have written a letter to Under Secretary Kelly to notify him of
    the situation, and I believe we did that on February 28.
    Previous to that we also provided the Under Secretary with our
    initial letter to the Secret Service back in, I think October
    31.
        Now subsequent to that there had been no action taken by
    management. We had been informed that there would not be. So at
    that point, we concluded that it would serve no useful purpose
    to continue an investigation and we closed it because of the
    access issue. Subsequent to this point, we will report it in
    our semiannual report to Congress.
        Senator Shelby. At this time I would ask that copies of
    your office's requests for access of October 31, 1996, and the
    Secret Service's response to your request of November 8 be made
    part of the record. Without objection.
        Ms. Lau. Thank you, sir.
        [The information follows:]
                         Memorandum for Eljay B. Bowron
    From: Valerie Lau, Inspector General.
    Subject: Congressional Inquiry.

        This memorandum is to request written clarification of the U.S.
    Secret Service (Service) position regarding Office of Inspector General
    (OIG) access to individuals, systems and records necessary to conduct
    our inquiry into matters referred to us by Senator Stevens and
    Congresswoman Collins. The OIG has been scrupulous in our efforts to
    consult with the Office of the Independent Counsel prior to initiating
    any inquiry into these matters. Please be assured we will continue to
    coordinate our activities with that office.
        On October 21, 1996, we met with the Service's Chief Counsel and
    Assistant Director of Inspection to discuss access to individuals,
    systems and records for the conduct of this inquiry. At that time OIG
    Counsel cited the statutory authority which provides the OIG legal
    basis for this access. We informed them of our intention to directly
    contact service employees. The Service's Chief Counsel stated that the
    Service would have to consider this issue as it was Service policy to
    require OIG to go through the office of Inspection (Inspection) for the
    conduct of OIG activity in the Service.
        On October 23, 1996, the Service's Chief Counsel reiterated the
    Service's position to the OIG Counsel. He also stated that the Service
    was not seeking to invoke the exemptions provided under section 8D of
    the Inspector General Act of 1978, as amended (IG Act), yet remained
    concerned about the effect of our inquiry on protective services. He
    further expressed his misgivings that without Inspection as an
    intermediary, the OIG inquiry would be disruptive and could delve into
    areas unwarranted by the scope of our review.
        The Service's position would require a departure from standard OIG
    practices. In investigative matters, we do not currently afford any
    other Treasury bureau with such an accommodation. As we clearly assured
    your Chief Counsel and Assistant Director for Inspection, it is our
    intention to conduct this inquiry in a thorough and professional manner
    looking only at the relevant issues. It is in the best interest of both
    parties to ensure an unimpeachable investigation. A departure from our
    standard practices may provide the appearance of a lack of impartiality
    towards the Service.
        As we stated in an earlier meeting with your staff, the Service's
    policy of using Inspection as a liaison may be a workable accommodation
    where the OIG's purpose is to conduct an audit or other review.
    However, as you know, investigative inquiries present a unique need for
    direct access to the source of evidence, whether they be individuals,
    systems or records. As OIG Counsel stated in that meeting, the OIG has
    a duty to protect the identity of any individuals who provide
    information to the OIG during the course of an investigation unless
    release of identities is unavoidable. Clearly identifying all
    individuals to be interviewed and informing the Service's internal
    affairs office, the Office of Inspection, may potentially have a
    chilling effect on employees' willingness to cooperate.
        The OIG believes the Service's general position regarding OIG
    inquiries into official matters to be contrary to the intent of the law
    as set forth in the IG Act and the corresponding Treasury Directive.
    More specifically, a thorough, credible review of the issues at hand
    cannot be conducted under the circumstances set forth by the Service.
        The legal basis for our position follows.
    Statutory Authority
        The Inspector General Act Amendments of 1988 amended the Inspector
    General Act of 1978 (5 U.S.C. App. 3), by inter alia establishing a
    statutory OIG in the Department of the Treasury. Pub.L. No. 100-504.
    The OIG is authorized to conduct, supervise and coordinate timely and
    appropriate internal audits and internal investigations relating to the
    programs and operations of the Department and all of its bureaus and
    offices; and to provide leadership and coordinate and recommend
    policies for activities designed to (A) promote economy, efficiency,
    and effectiveness in the administration of; (B) prevent and detect
    fraud, waste and abuse in; and (C) provide a means for keeping the head
    of the establishment and the Congress fully and currently informed
    about problems and deficiencies relating to the administration of
    Treasury programs and operations. Id. at Sec. 2; see also Treasury
    Directive (TD) 40-01, para. lb.
    Notice of Investigations
        In carrying out its investigative authority, the OIG is not
    required to give any notice to the head of the bureau or office
    involved. The IG Act specifically states that if the OIG initiates an
    investigation, the OIG ``may provide the head of the office of such
    bureau or service * * * with written notice that the [OIG] has
    initiated such an * * * investigation.'' IG Act at S8D(d). Further,
    there are no statutory or regulatory requirements that the OIG provide
    oral notification to bureau heads. Thus, while the Service may have
    always viewed notification as a means to insure that investigations run
    smoothly by making sure that all necessary employees are available and
    information provided, such a notification is not mandated by the IG Act
    and is provided by the OIG as a courtesy. In this connection, we note
    that while TD 40-01 states that ``[i]t is the policy of the OIG to
    notify appropriate Treasury and bureau officials of OIG investigations
    that are being conducted within their areas of responsibility[.]'', it
    is clear that this policy is discretionary. Moreover, while we have
    notified you of the existence of the investigation, the Service has
    requested notice on each interview.
        Further, the IG Act provides that,

            neither the head of the establishment nor the officer next in
            rank below such head shall prevent or prohibit the Inspector
            General from initiating, carrying out, or completing any audit
            or investigation * * *.

        IG Act at Sec. 3(a).
        It follows from the above that bureau or agency management or
    employees have no authority to require the OIG to obtain ``permission''
    to conduct an investigation, to request from the OIG a description of
    the nature of the investigation, or to restrict access to documents or
    employees by requiring that Inspection be an intermediary. The salient
    point is that the OIG has the legal authority to conduct an
    investigation (1) without providing notice of any type to the Service
    management chain; (2) without obtaining any type of ``permission'' to
    conduct such an investigation; and (3) without providing any
    description of the nature of the investigation.
        In this regard, the IG Act establishes the authority of each
    Inspector General:
        (1) to have access to all records, reports, audits, reviews,
    documents, papers, recommendations, or other material available to the
    applicable establishment which relate to programs and operations with
    respect to which that Inspector General has responsibilities under this
    Act; [and]
        (3) to request such information or assistance as may be necessary
    for carrying out the duties and responsibilities provided by this Act
    from any Federal, State, or local governmental agency or unit thereof.
        IG Act at Sec. 6(a).
        The IG Act also specifies that,

            whenever information or assistance under subsection 6(a)(1) or
            6(a)(3) is, in the judgment of an Inspector General,
            unreasonably refused or not provided, the Inspector General
            shall report the circumstances to the head of the establishment
            involved without delay.

        IG Act at Sec. 6(b)(2). The IG Act further specifies that such
    instances should be included in the Inspector General's semiannual
    report to Congress. IG Act at Sec. 5(a)(5).
    Duties of Employees
        If a Service employee is involved in any way with an OIG
    investigation, TD 40-01 is explicit that it is the duty of that
    employee to cooperate. Specifically, the Directive states:

            d. All Treasury employees must provide to the IG and to that
            officials duly authorized representatives full, free and
            unrestricted access to Treasury activities, property, data,
            correspondence, records, ADP systems, and any other information
            that the IG determines is necessary to an audit, investigation,
            or other official inquiry.

        TD 40-01, para. 2d.
        Further, in underscoring the mandate to cooperate, the Directive
    continues:

            e. All Treasury employees shall cooperate fully with duly
            authorized representatives of the OIG by disclosing complete
            and accurate information pertaining to matters being
            investigated, audited or reviewed by the OIG. If the employee
            is the subject of an investigation, the employee will be
            afforded all rights.

        Id. at para. 2e. Accordingly, once an OIG representative
    appropriately identifies himself or herself, it is incumbent on service
    employees to cooperate fully.
    Conclusion
        We have carefully considered the views the Service has expressed
    regarding this issue. However, given the seriousness of this matter and
    potential consequences of any misunderstanding between our two
    organizations, we believe that a special effort is warranted to ensure
    that we understand the Service's final position.
        Therefore, please provide us a written statement explaining your
    view on how the Service's general policy regarding OIG access and the
    Service's position in this particular matter does not constitute an
    unreasonable refusal to provide information or assistance under the
    provisions Sec. 6(b)(2) of the IG Act. Based on a review of the
    Service's written position, should we determine that that position
    constitutes an unreasonable refusal, I am required to notify the
    Secretary and Congress.
        To prevent undue delay in the conduct of our inquiry, please
    provide us your response by close of business November 8, 1996.
                                     ______

                           Memorandum for Valerie Lau
    From: Eljay B. Bowron, Director, U.S. Secret Service.
    Subject: Inspector General Investigation--FBI Background Investigation
        Files.

        This memorandum responds to your October 31, 1996, memorandum (the
    ``OIG memorandum'') in which you request a written clarification of the
    U.S. Secret Service's (the ``Secret Service'') position regarding an
    open investigation by the Office of the Inspector General (``OIG'') in
    connection with the FBI Background Investigation Files matter (the
    ``FBI Files Case''). Specifically, you request that the Secret Service
    articulate how its ``general policy regarding OIG access and the
    Service's position in this particular matter does not constitute an
    unreasonable refusal to provide information or assistance under the
    provisions Sec. 6(b)(2) of the IG Act.'' You also ask why that position
    should not compel you--to report to the Secretary of the Treasury and
    Congress that the Secret Service has unreasonably refused to permit and
    assist an OIG investigation concerning the FBI Files Case.
        Let me first say that I am disappointed in the way you have chosen
    to approach this matter. Threats and attempts at intimidation are
    generally not productive. The Secret Service has not in any way
    demanded that you get our ``permission'' to conduct an investigation,
    nor has the Secret Service in any way unreasonably refused to provide
    the OIG with information or assistance. What we have attempted to
    discuss with the OIG has been the manner in which the information and
    assistance will be provided so that the OIG and the Secret Service can
    both meet their responsibilities. So that it is clear, let me say again
    that the Secret Service stands ready to cooperate and assist the OIG in
    any valid investigative effort it is authorized to conduct pursuant to
    applicable statutory authority and relevant Treasury Directives.
        But in acknowledging the statutory authority of the OIG and the
    Secret Service's willingness to cooperate in investigations undertaken
    pursuant to that statutory authority, the Service must be cognizant of
    its own responsibilities, the foremost of which is the protection of
    the President and his family and the White House Complex. Congress
    specifically recognized the importance of this protective
    responsibility in the Inspector General Act of 1978, as amended (``IG
    Act''), by providing that the OIG may be prohibited from carrying out
    an investigation which requires access to sensitive information
    concerning ``other matters the disclosure of which would constitute a
    serious threat to national security or to the protection of any person
    or property authorized protection by section 3056 of title 18, United
    States Code, section 202 of title 3, United States Code, or any
    provision of the Presidential Protection Assistance Act of 1976.'' See
    5 U.S.C. App. Sec. 8D(a)(1)(F). As you know, there are also other
    exemptions covering, for example, access to information relating to
    ongoing criminal investigations or proceedings or intelligence or
    counterintelligence matters. See 5 U.S.C. App. Sec. 8D(a)(1)(A) and
    (E).
        As you note in your memorandum, the Secret Service is not at this
    point seeking to invoke any of the above exemptions to the OIG Act. We
    do not at this point have any firm idea-of just exactly what the OIG
    plans to do, or to what information you seek access. You state in your
    memorandum that the OIG can have unrestricted access to any Secret
    Service employees or documents ``without providing notice of any type
    to the Service management chain,'' ``without obtaining any type of
    `permission' to conduct such an investigation,'' and ``without
    providing any description of the nature of the investigation.'' This
    demand for carte blanche OIG access to the White House Complex and
    Secret Service records is precisely the issue about which the Secret
    Service has raised what we believe are legitimate concerns. The key
    point here is a simple one--the Secret Service cannot be in a position
    to carry out its protective responsibilities or to seek the exemptions
    in the OIG Act if the Service has no idea what the OIG is doing or what
    records it is accessing. This is particularly true when many if not
    most of the employees and records to which the OIG may seek access are
    on the White House Complex.
        The Secret Service is not saying that the OIG cannot be trusted or
    that the OIG needs Service ``permission'' to carry out valid
    investigations. We understand the OIG'S responsibilities--we are asking
    that you make an effort to understand ours. We have asked that the OIG
    coordinate with our Office of Inspection because of the above concerns
    and because, given the secure nature of the White House Complex, it is
    the most efficient and practical way of conducting any investigation in
    this matter. (We note that the Office of the Independent Counsel (OIC)
    has coordinated through the Service for its access to Service employees
    and documents in connection with its investigation.) Allowing OIG
    employees carte blanche access to the White House Complex and all the
    records there would be a total abdication of the Secret Service's
    unique statutory obligations and protective mission.
                          i. the investigative mandate
        Turning substantively to the FBI Files Case, the Secret Service
    remains perplexed as to the actual nature and scope of the
    investigation the OIG intends to pursue. For that matter, it is fair to
    observe that this confusion is apparently shared by the Congress, the
    Treasury Department, the news media, and the public. This confusion
    regarding the nature and scope of the OIG investigation makes it even
    more difficult for the Secret Service to ascertain if the protective
    mission of the agency and other legitimate interests will be
    jeopardized by your investigation.
    A. A Potentially Criminal Investigation With Specific Targets
        On October 16, 1996, Senator Charles E. Grassley wrote to Treasury
    Secretary Rubin requesting that Secret Service Special Agents John
    Libonati and Jeffrey Undercoffer answer certain questions concerning an
    August 1, 1993 WAVES list relevant to the FBI Files Case. These career
    criminal investigators constitute two of the Secret Service Agents
    serving as agency contacts in connection with the OIC and Congressional
    investigations into the FBI Files Case. Senator Grassley's request
    followed a September 25, 1996 letter to Secretary Rubin from
    Representative Cardiss Collins regarding a June 1993 Secret Service
    WAVES list also relevant to the FBI Files Case. This Secret Service
    list was released by the White House on September 24, 1996. In naming
    Secret Service Special Agents Libonati and Undercoffer specifically, it
    appeared that Representative Collins was requesting that the OIG
    ``investigate the preparation of the testimony before this committee by
    Secret Service officials'' on the grounds that that testimony was
    ``erroneous.''
        Observing that any future assistance by Special Agents Libonati and
    Undercoffer may be problematical in light of Representative Collins'
    letter, the Secret Service contacted the OIG on Friday, October 18,
    1996. On that date the OIG confirmed that an OIG investigation was
    being pursued regarding these two Special Agents based upon two
    referrals: (1) Representative Collins' September 25 letter; and (2) a
    June 18, 1996 letter from Senator Ted Stevens. This was the first time
    the Secret Service became aware that the OIG had officially opened any
    investigation involving the FBI Files Case, or against its agents,
    based upon Congressman Collins' letter issued three weeks earlier.
    Senator Stevens' letter, issued some four months earlier, had not been
    brought to our attention at all.
        On Monday, October 21, 1996, at your request, you and other OIG
    representatives met with Secret Service representatives to discuss this
    matter. At that meeting, the Secret Service was again advised that
    there was an active investigation of these two Secret Service special
    agents and, further, that this matter was potentially a criminal
    investigation. The OIG would not divulge with any specificity precisely
    what these agents were alleged to have done wrong or what exactly the
    OIG would be investigating.
        In light of the OIG's reluctance to shed any light on the nature
    and scope of the investigation, the Secret Service noted then, as it
    does now, that carte blanche access to the White House Complex (and to,
    for example, the White House access control system and records, FBI
    Background Investigation Summaries, and the computer records and
    personnel of the Secret Service White House Division) without any
    coordination or knowledge of Secret Service management, remains legally
    and operationally problematical. Indeed, this agency has taken similar
    positions in connection with ongoing investigations of the FBI Files
    Case, Travel Office Case, and Whitewater Case conducted by the OIC.
    Acknowledging the important protective mission and security concerns of
    the Secret Service, the OIC has agreed to a reasonable coordination of
    their investigations through appropriate Secret Service officials.
    Similarly, what the Secret Service suggested in lieu of unconditional
    access by the OIG was, in our judgment, a reasonable, coordinating role
    by our Office of Inspection that would accommodate the OIG's
    investigative efforts and yet permit organized access to subject matter
    touching both the White House and the Secret Service protective
    mission. In other words, an accommodation that would allow both the OIG
    and the Service to carry out their responsibilities.
        It appears that the Secret Service's understanding of the OIG
    investigation as ``potentially criminal in nature,'' and based upon
    Representative Collins and Senator Stevens' letters, has been
    separately confirmed by your office, and the Department of Treasury.
    For example, it was reported in an October 25 Washington Post article
    that a Treasury spokesman, Howard M. Schloss, confirmed that the OIG's
    investigation was the result of written requests by Representative
    Collins and Senator Stevens. Similarly, in two letters both dated
    October 22, 1996, addressed to Senator Stevens and Senator Richard C.
    Shelby respectively, Senator Grassley noted that his staff had
    specifically confirmed with the OIG's congressional liaison that
    Special Agents Libonati and Undercoffer were under investigation and
    that the OIG's investigation was ``potentially criminal.'' In an
    October 26 Washington Post article, it was reported that Senator
    Grassley's office was told by your office that ``a potentially criminal
    investigation wouldn't be taken off the table'' by the OIG.
    Consequently, it would appear that Congress understood your
    investigation to be based on Representative Collins' and Senator
    Stevens' letters and to be ``potentially criminal'' as well.
    B. A ``Preliminary Inquiry'' With No Targets
        Recent OIG representations have made the matter even more
    confusing. As you know, in a letter to the OIG dated October 24, 1996,
    Senator Stevens disavowed that his June 18 letter requested an OIG
    investigation of career Secret Service Agents testifying before
    Congress. Indeed, Senator Stevens demanded that the OIG ``leave my name
    out of it'' and requested that the OIG state in writing that he had not
    requested such an investigation. In a responding letter dated October
    24, 1996, you wrote to Senator Stevens that the ``OIG has not
    represented to either the [Secret] Service or * * * Senator Grassley
    that any specific agents are the `subjects' of a `potentially criminal'
    investigation.'' Instead, you characterized the matter as an ``inquiry
    * * * in its preliminary stages,'' and wrote that the ``OIG has not
    stated whether any specific [Secret] Service agents are the subjects of
    an investigation.'' Further, in an October 25, 1996 Washington Post
    article, Representative Collins is quoted as saying that she did not
    want a ``criminal investigation,'' and did not request one from the
    OIG. And in an October 26, 1996 Washington Post article, it is reported
    that the OIG disavowed the existence of an investigation ``criminal in
    nature'' and noted that the matter was a ``preliminary'' inquiry.
        This summary of reports and correspondence confirms our initial
    observation that both the nature and scope of the OIG investigation
    involving the FBI Files Case, and more importantly what precisely the
    OIG has been requested to investigate by referral from Congressional
    leaders, is not at all clear. The Secret Service has not been able to
    ascertain what the OIG believes is the appropriate nature and scope of
    such an investigation given the various contradictory communications
    which are reportedly emanating from the OIG. Indeed, it remains unclear
    whether the investigation is criminal, potentially criminal,
    administrative, or a preliminary inquiry. We are unsure if the
    investigation is based upon Senator Stevens' or Representative Collins'
    letter, or both. It is uncertain if the investigation is targeted at
    Secret Service testimony before the House Committee or more broadly
    directed toward the FBI Files Case generally. Finally, the Secret
    Service does not know precisely what a ``preliminary inquiry''
    constitutes under the IG Act.
                     ii. authority and statutory exemptions
        The answers to our reasonable inquiries are substantively relevant
    to the Secret Service on various legal grounds. These include, among
    others, the impact such an investigation might have on the protective
    mission of the Secret Service and whether the statutory exemptions to
    the IG Act should be invoked. Additional concerns relate to the impact
    of the OIG investigation on the privacy rights of individuals contained
    in numerous Secret Service systems of records relevant to the FBI Files
    Case. A third concern relates to the coordination of the OIG
    investigation in conjunction with the ongoing investigation of the FBI
    Files Case by the OIC. We turn to each issue specifically.
    A. Notice And Nature Of The Investigation
        The Secret Service has raised legitimate concerns regarding OIG
    access to the White House Complex, the White House Complex computerized
    access system, and the records and personnel of the Secret Service's
    White House Division to name just a few. All of these areas and systems
    are restricted in access for obvious reasons relevant to the Secret
    Service's protective mission. All these areas, systems and records
    carry some degree of national security implication. The Secret Service
    is entitled to know of, arrange and coordinate OIG access to these
    areas, systems, records and personnel. Similar arrangements have been
    agreed to by the OIC in conjunction with the conduct of their
    investigation into the FBI Files Case and other investigations. Your
    demand to be permitted carte blanche access and entry to any premises,
    systems, records and personnel you choose is operationally
    impracticable and legally questionable.
        The Secret Service also submits that its request to be provided a
    reasonable idea of the OIG's investigation is both consistent with the
    IG statute and the applicable Treasury Directive, and comports with
    equally important statutory obligations of the Secret Service. Your
    memorandum states that the ``Service's position would require a
    departure from standard OIG practices.'' You further state that such a
    ``departure * * * may provide the appearance of a lack of impartiality
    towards the Service.'' However, this position does not acknowledge that
    a specific exemption to your statutory authority exists concerning the
    Secret Service's protective responsibilities and that the Secret
    Service remains duty bound in a way other Treasury bureaus are not to
    ascertain the applicability of that exemption. The Secret Service can
    only do so by possessing a reasonable understanding of the nature and
    scope of the OIG investigation, and by coordinating any such
    investigation that seeks access to sensitive protective records.
        Your memorandum additionally states that notification of an OIG
    investigation is not statutorily mandated, and that Treasury policy
    mandates only ``discretionary'' notification by an OIG. We disagree on
    both counts. By virtue of the extant exemption, the IG Act implicitly
    requires that the OIG provide reasonable notice sufficient to determine
    if the exemption shall be exercised. Consistent with this
    interpretation, Treasury Directive 40-01 states:

            It is the policy of the OIG to notify appropriate * * * bureau
            officials of OIG investigations that are being conducted within
            their areas of responsibility.
    Treasury Directive 40-01. September 21, 1992.
        Your interpretation of the IG statute and notification requirements
    would effectively nullify the protective mission exemption expressly
    provided by the statute and flies in the face of a straightforward
    reading of the Directive.
    B. Privacy Act Concerns
        The FBI Files Case involves records of extraordinary sensitivity.
    For example, the FBI Background Investigation Summaries maintained by
    the Secret Service's White House Division contain derogatory
    information concerning former and present passholders to the White
    House Complex. The computerized data maintained by the Secret Service
    Access Control Branch on passholders is similarly sensitive and
    private. We remain committed to maintaining the confidentiality of such
    records and releasing such materials to investigators only consistent
    with law.
        Cognizant of the dictates of the Privacy Act of 1974, the Secret
    Service releases no record contained in the agency's system of records
    except consistent with law. See 5 U.S.C. Sec. 552a. As you know, the
    Privacy Act imposes both civil and criminal liability upon an agency's
    custodian of records for failing to adhere to the privacy protections
    of the statute. Accordingly, the custodian of records must be able to
    determine if the release of protected privacy materials to another
    individual or entity is legally permissible. To do so, the custodian of
    records must be provided sufficient information to ascertain if the
    office requesting the information has a need for the information in
    order to perform its official duties. The Secret Service has discussed
    the question of section 552a(b)(1) access with Privacy Act experts at
    the Department of Justice and Office of Personnel Management, who agree
    with us that a mere demand for access to Privacy Act materials by an
    OIG employee does not appear sufficient to permit the custodian of
    records to release any record without first ascertaining if the record
    is needed for the performance of the OIG employee's official duties.
        We again believe that the Secret Service's simple and reasonable
    request to coordinate and know what records the OIG is accessing is
    consistent with these Privacy Act concerns. For this reason alone, the
    Secret Service submits that unconditional OIG access is not reasonable
    and is legally problematical.
    C. Office Of The Independent Counsel
        Finally, the Secret Service submits that an overarching
    justification for a reasonable understanding of the nature and scope of
    the OIG investigation, and the coordination of this investigation, lies
    in the reality that a parallel OIC investigation is being conducted in
    connection with the FBI Files case. The OIC has expressed its concern
    to the Service that no activities within the Secret Service should be
    undertaken which might lead to the loss or tainting of data, evidence
    or testimony relevant to that investigation. Accordingly, the Secret
    Service has coordinated OIC Grand Jury subpoenas and investigative
    demands so as to reasonably ensure compliance with OIC's concerns.
    Conversely, the OIC has agreed to similar, reasonable coordination
    efforts requested by the Secret Service to ensure the integrity of our
    protective mission.
        It is both prudent and reasonable to suggest that the Secret
    Service should not permit access to Secret Service premises, systems,
    records or witnesses relevant to the OIC's FBI Files Case prior to it
    being crystal clear that the OIC understands the nature and scope of
    such access and will permit such access. Any miscommunication in this
    arena could prove highly problematical.
                                iii. conclusion
        In summary, the Secret Service remains unsure exactly what it is
    that the OIG is investigating and at whose behest. The Service is
    certainly not aware of any wrongdoing by its employees. Nevertheless,
    the Secret Service stands ready to cooperate and assist the OIG in any
    valid investigative effort it is authorized to conduct pursuant to
    applicable statutory authority and relevant Treasury Directives. In
    doing so, however, we cannot accede to your demand for carte blanche
    OIG access to the White House Complex and sensitive Secret Service
    records. As noted earlier, the Service cannot be in a position to carry
    out its protective responsibilities or to seek the exemptions in the
    OIG Act if the Service has no idea what the OIG is doing or what
    records it is accessing.
        We again ask that you try to understand our responsibilities and
    coordinate any investigation because of the concerns expressed above
    and because, given the secure nature of the White House Complex, it is
    the most efficient and practical way of conducting an investigation in
    this area.

                Concerns About Potential Criminal Investigation

        Senator Shelby. Ms. Lau, the next thing--what was your
    understanding, Ms. Lau, of the concerns being raised by myself
    as chairman of the committee at that time and other Members of
    Congress about your investigation into the testimony of the
    Secret Service? In other words, did you understand that we were
    concerned that the investigation was potentially criminal in
    nature? You remember the hearing?
        Ms. Lau. I remember the hearing, sir.
        Mr. Calahan. I think our whole reaction to that--yes, we
    did understand your concerns, and I think that the situation
    that our investigators went through the first week of
    retrospect of looking at this case was to determine on their
    own that--information that I was not aware of until last
    Friday--but to determine on their own that it was inappropriate
    to investigate these two people for perjury.
        Senator Shelby. Was it an attempt by your office to shut
    these people up because they were telling the truth or
    testifying?
        Ms. Lau. I am sorry, I do not understand your question.
        Senator Shelby. I am asking you, you initiated this
    investigation on behalf of Congresswoman Cardiss Collins; is
    that right?
        Ms. Lau. The case document indicates that. I believe the
    regional inspector general for investigations was not aware
    also of a separate request that we had received from Senator
    Stevens----
        Senator Shelby. I want to get into that right now. Did you
    understand that there was concern on behalf of Senator Stevens
    that his name was being associated with this investigation and
    he never intended for that to be at all?
        Ms. Lau. Yes; that was unfortunate. As I provided to you
    last December, we did clarify that record with a memo to him
    stating that was not the case. We have tried very diligently to
    ensure that any misunderstanding about that has been corrected.
    In regards to whether or not this was ever a criminal
    investigation, we have testified previously and provided
    documents that we coordinated with the office of independent
    counsel who is conducting a criminal investigation and that
    they had asked us not to conduct any work that would impede
    their ongoing criminal investigation.
        Senator Shelby. Did it ever cross either one of your minds
    that perhaps you were being used politically in this
    investigation, or could have been used politically?
        Mr. Calahan. I assured your staff last week when I met with
    them that we were never aware of any plan to retaliate against
    these people and that we were not part of any such plan to
    retaliate against these people. That was true then and it is
    true now.
        Senator Shelby. Was it not a criminal investigation when
    you opened the case on October 2 I believe it was?
        Mr. Calahan. I think we would say that it was too early in
    investigation----
        Senator Shelby. To determine that?
        Mr. Calahan. To characterize the case. In fact, we have a
    letter from our office to Secret Service counsel on October 23
    stating just that.
        Ms. Lau. That it was too premature to characterize the
    investigation in any manner.
        Senator Shelby. I want to bring your attention to a couple
    of questions and responses and ask you to explain them to me.
    These are some of the responses you gave to questions that were
    asked for the record in December. Question No. 10----
        Ms. Lau. Just a moment, sir.
        Senator Shelby. Sure, take your time. Are you ready now?
        Ms. Lau. Yes.

                               Case Tracking Form

        Senator Shelby. Question No. 10: Was a case tracking form
    created for Senator Stevens' request of June 18? If so, please
    provide a copy of that form or outline the information
    contained in that form.
        The answer was this.

        No case opening documents were created for either request
    until after the office of the independent counsel notified the
    Office of Inspector General on September 27, 1996, that it
    could proceed on both matters. The matter was forwarded to the
    appropriate regional office. Because the two requests were
    related, they were opened on October 2, 1996, as one
    investigation.

        Now I believe you also stated in your testimony before the
    committee on December 2 the following, page 48 of the
    transcript. I asked the question as follows, now I would ask
    you to clarify--do you want to find that?
        Ms. Lau. Yes, thank you.
        Senator Shelby. You take your time. That would be page 48.
        Ms. Lau. Top, bottom, or----
        Senator Shelby. On the other--are you ready now?
        Ms. Lau. I am----
        Senator Shelby. On page 48 of the transcript.
        Ms. Lau. Yes.
        Senator Shelby. Can I proceed?
        Ms. Lau. Yes.
        Senator Shelby. I ask now--and this is quoting from the
    record--I would ask you to clarify again for the record, what
    was the exact date that you decided to have one investigation?
    In other words, you folded them into one.
        And you answered, the actual date would be October 2. Is
    this true?
        Ms. Lau. That was my understanding at the time.
        Senator Shelby. Based on what?
        Ms. Lau. Based on what my staff informed me. And I had no
    reason to think otherwise until last Friday.
        Senator Shelby. But in fact it was not true, was it?
        Ms. Lau. The case----
        Mr. Calahan. It was true within the best of our knowledge I
    think. We had meetings----
        Senator Shelby. Would you let her answer her own questions?
    Was that true?
        Ms. Lau. It was true to the best of my knowledge at that
    time.
        Senator Shelby. But factually it was not true, was it?
        Ms. Lau. As far as I knew at the time that I testified, it
    was true.
        Senator Shelby. Go ahead, Mr. Calahan.
        Mr. Calahan. We had meetings with our counsel and we looked
    at the two requests, and I think within the knowledge that the
    inspector general had of those meetings she fully believed that
    the two requests had been related and that one investigation
    had been established. She did not know about the intervening
    week, October 2 through 9. As soon as the investigators had a
    discussion with counsel and learned of the Stevens' request and
    they in turn informed her of what they had determined from
    reading the testimony, that on October 9, in effect, this
    statement became true in terms of the record.
        Ms. Lau. Senator Shelby, you referred to the letter that I
    provided you yesterday that describes this in great detail. In
    that letter I indicate that these are administrative documents
    that are used by the investigators for case management
    purposes. I as the inspector general would not normally be
    aware of or review these documents at all.
        Senator Shelby. Who did you talk with in preparing for your
    testimony on December 2 I believe it was?
        Ms. Lau. In preparing for the testimony?
        Senator Shelby. Yes; your staff?
        Ms. Lau. Yes; I talked with my staff including my deputy
    inspector general, my counsel, my assistant inspector general
    for investigations, the case agent, and the supervisor, as well
    as the regional inspector general for investigations.
        Senator Shelby. Going back just to the facts. Was one
    investigation basically opened on October 2, 1996?
        Ms. Lau. One investigation was opened, yes.

                         Congresswoman Collins' Request

        Senator Shelby. Question 31--going back and you might want
    to refer to your transcript. How much time did your office
    spend considering whether or not to proceed with investigating
    Congresswoman Collins' request?
        You answered, consideration of the initiation of an
    investigation was carefully deliberated and was done in
    conjunction with consideration of the Senate committee's
    request. No consideration was made to proceed solely with
    Congresswoman Collins' request.
        But that is not true, is it?
        Ms. Lau. It was true based on the information that I had
    available to me at the time.
        Senator Shelby. You thought it was true.
        Ms. Lau. Yes, sir.
        Senator Shelby. But in fact it was not true. You thought it
    was true based on the information.
        Ms. Lau. I believed it was true based on what I was
    informed of by my staff.
        Mr. Calahan. Again, in terms of context, if I might just
    make a point?
        Senator Shelby. Sure, go ahead.
        Mr. Calahan. On October 9, this was true at all levels of
    the Inspector General's Office. On October 2, what you were
    saying is that it was not true in terms of the case tracking
    document. But again I would like to say that those were
    preliminary. That was a preliminary document. Those records are
    intended to be amended. In fact, when the case is closed, a
    case tracking document is prepared. Since we decided to close
    the case yesterday, one of these case tracking documents will
    be prepared showing that the case is closed on April 16. As you
    can see, these records change throughout the investigation.
        So at the period of time that she said this, in terms of
    the decision to have one case, she was speaking accurately
    within the scope of her knowledge of the meetings she had had
    and the discussions she had had with staff.
        Senator Shelby. But assuming you are adding to records,
    which people are, why do you not show the chronology of things
    where people would not question whether or not you were trying
    to change documents to reflect so and on? Whereas if you had
    something that was dated October 2 and you came back on October
    9 and you put an explanation of why you were doing it, you are
    not trying to change the document to reflect your testimony.
    But that could be read that way.

                          Administrative Recordkeeping

        Ms. Lau. Your point on recordkeeping is very appropriate.
    In fact this has pointed out to us that we need to take a very
    serious look at our administrative recordkeeping, and we will
    be doing so immediately.
        Senator Shelby. So your testimony, in a sense, was only
    operable after a certain date. In other words, your testimony
    that you gave before you said was based on the information that
    you had at the time; is that correct?
        Ms. Lau. I believed it to be correct, and it was based on
    the information available to me at the time that I testified.
        Senator Shelby. But in fact though, it was not true, was
    it?
        Ms. Lau. It was true to the best of my knowledge.
        Senator Shelby. To yours, from what you knew.
        Ms. Lau. And when I found out otherwise, I immediately took
    steps to inform you through your staff.

                           Letter to Senator Stevens

        Senator Shelby. I would like to also draw your attention to
    the letter you sent to Senator Stevens that you are familiar
    with.
        Ms. Lau. Yes, sir.
        Senator Shelby. In response to his request that you clarify
    that he had nothing to do with asking you to investigate the
    testimony of Secret Service agents. In your response dated
    October 24, 1996, referring to your own letter, you state, and
    I will quote--this is the letter to Senator Stevens.

        In addition, the letter of Congresswoman Collins requesting
    an investigation of the testimony before the Committee on
    Government Reform and Oversight by Service officials to
    determine how the Service concluded that it was impossible for
    the Service to provide list with outdated names, she did not
    request that the office of inspector general investigate
    specific Service agents.

        Do you believe that statement in your letter to still be
    true?
        Ms. Lau. Yes, sir, I do.
        Senator Shelby. You do? Your office has provided an e-mail
    that reflects that the Congresswoman in fact did desire--did
    desire--that two specific agents be investigated; is that not
    true?
        Ms. Lau. I was not engaged in any discussion with the
    Congresswoman or her staff, so I cannot----

                                 E-Mail Message

        Senator Shelby. I want to ask the question again. Your
    office has provided an e-mail that reflects that the
    Congresswoman in fact did desire that two specific Secret
    Service agents be investigated. Are you aware of that?
        Mr. Calahan. You are talking about the e-mail dated October
    2?
        Senator Shelby. That is right.
        Ms. Lau. Senator Shelby----
        Senator Shelby. He is in the dialog now. Excuse me just a
    minute. Yes; I am talking about October--I have a copy of it
    here. So again----
        Mr. Calahan. I think you could make that interpretation
    possibly.
        Ms. Lau. However, that conversation was made between my
    counsel, Mrs. Vassar, and staffers from Congresswoman Collins'
    office. My counsel is here today if you would like to hear from
    her regarding what she actually heard.
        Senator Shelby. I might want to in a few minutes, but I
    want to proceed here first, if I could.
        Ms. Lau. All right.
        Senator Shelby. You are familiar with, Mr. Calahan, the e-
    mail that I just referred to. You have got a copy of that?
        Mr. Calahan. Yes.
        Senator Shelby. So I am going to ask you this question
    again.
        Ms. Lau. Yes, sir.
        Senator Shelby. Your office has provided the e-mail that
    reflects that the Congresswoman in fact did desire, from what I
    read of the e-mail and you have a copy of it, that two specific
    agents be investigated. Is that correct?
        Ms. Lau. The e-mail states that. However, I would refer you
    to the Congresswoman's letter to Secretary Rubin dated
    September 25 in which in regards to the investigation she
    specifically asks, that:

        You direct the inspector general of the department to
    investigate the preparation of the testimony before this
    committee by Secret Service officials to determine how and why
    the testimony was developed that led to the conclusion that it
    was impossible for the Secret Service to provide lists with
    outdated names.

        So relative to the specifics in her request letter, it was
    regarding the preparation of testimony, not any particular
    individuals.
        Senator Shelby. Did you not open the investigation doing
    just that? In other words, what Congresswoman Collins
    suggested, perjury investigation?
        Mr. Calahan. This e-mail resulted----
        Senator Shelby. Let her answer the question first and then
    you can--did you not----
        Ms. Lau. I was not party to the discussions that are
    described in the e-mail. I only am knowledgeable of the letter
    itself, and the letter itself indicates that the request was
    for the substance of the testimony and not either of the two
    agents.
        Senator Shelby. But basically, did you not open the
    investigation or it was done doing just that, doing the perjury
    investigation as Congresswoman Collins suggested? Do you want
    to comment on that? Go ahead.
        Mr. Calahan. I would be happy to. As a result of this e-
    mail, there is no question that the form, the case tracking
    form was prepared that has the phrase on it, subjects may have
    perjured themselves.
        Senator Shelby. Absolutely.
        Mr. Calahan. And that the result of that was that for a
    period of time, days, these people were in our records as being
    investigated----
        Senator Shelby. Excuse me just a minute. Are you referring
    to this document, Treasury OIG document here?
        Mr. Calahan. Yes; the first case tracking form.
        Senator Shelby. Thank you. Go ahead.
        Mr. Calahan. The point I would like to make is while
    technically maybe these two people were subjects of an
    investigation for a week. In fact, the two people were never
    investigated. We never interviewed them. We took no steps to
    investigate these people in any way, and that the result of
    this, if you want to call it an error in judgment, is that
    there was no impact against those two people.
        Senator Shelby. Well, there is always an impact. But
    basically, this was sort of a sham in a sense, was it not? To
    bring these two veteran Secret Service agents names into
    something like this after they testified to Congress about
    something----
        Mr. Calahan. No; these are documents that normally never
    see the light of day. These are documents that do not
    constitute evidentiary information for our investigative files.
    These are administrative documents in the office that are used
    for technical management of the caseload because at any one
    time, I think right now we have 120 open investigations. So
    there has to be some method of summarizing information for use
    by the regional inspector general for investigations to keep
    track of the cases and so forth, and this is the form that is
    used.

                      Investigation Initiated on October 2

        Senator Shelby. I have some more questions. Were you aware
    at the time of the December 2, 1996, hearing that your office
    had initiated an investigation on October 2, 1996?
        Ms. Lau. I was aware that an investigation had been
    initiated on October 2; yes.
        Senator Shelby. Were you aware at the time of the December
    2, 1996, hearing before this committee that your office had
    initiated an investigation on October 2, 1996, based solely on
    the request of Congresswoman Cardiss Collins?
        Ms. Lau. No; I was not.
        Senator Shelby. Were you aware at the time of the December
    2, 1996, hearing that your office's investigation of October 2
    was opened as a perjury investigation?
        Ms. Lau. No; I was not.
        Senator Shelby. Were you aware at the time of the December
    2, 1996, hearing that your office's investigation of October 2
    identified two Secret Service agents as subjects?
        Ms. Lau. No; I had no idea.
        Senator Shelby. When did you first learn that your office
    had opened an investigation at Congresswoman Collins' request
    naming two Secret Service agents as subjects of a perjury
    investigation?
        Ms. Lau. April 11, 1997. As I mentioned, I immediately
    directed my deputy inspector general to notify you via your
    staff, and he did so that day.
        Mr. Calahan. Senator, she is being kind. She was greatly
    annoyed, as was I.
        Senator Shelby. Annoyed at what?
        Mr. Calahan. Annoyed that this had not come to our
    attention----
        Senator Shelby. Annoyed that you did not know about it?
        Mr. Calahan. Yes; much earlier.
        Senator Shelby. Were you ever informed by your staff that
    statement that ``one investigation was initiated on October 2,
    1996, based on the request of both Senator Stevens and
    Congresswoman Collins,'' in other words, was not true?
        Ms. Lau. No; I was not informed that my statement was not
    true. I believed it to be true----
        Senator Shelby. At the time.
        Ms. Lau. Based on the information I had available to me.
        Senator Shelby. According to documents you have provided,
    Ms. Coleman the regional inspector general for investigations
    for the eastern region who also testified before this committee
    on December 2, 1996, was aware of the criminal investigation
    initiated by your office on October 2, 1996. Did you as the
    inspector general consult with her before you testified on
    December 2, 1996?
        Ms. Lau. I believe we did have discussions as we were
    preparing for the hearing, sir.
        Senator Shelby. Did you consult with her after you
    testified on December 2, 1996?
        Ms. Lau. We, in responding to the questions for the record
    did, perhaps not face to face but were working----
        Senator Shelby. You did review the transcript, did you not?
        Ms. Lau. Yes; reviewing the transcript and preparing
    answers for the record.
        Senator Shelby. Who basically assisted you in preparing you
    for testimony before this committee on December 2? In other
    words, did you talk to Mrs. Vassar, Ms. Coleman, Ms. Otero?
        Ms. Lau. Cesario.
        Senator Shelby. Otero.
        Ms. Lau. She has a hyphenated last name, Otero-Cesario. Mr.
    Calahan.
        Senator Shelby. Who is seated with you.
        Ms. Lau. Who is seated with me. The case agent for the
    investigation as well as the supervisor for the investigation.
        Mr. Calahan. If I might just clarify the record.
        Senator Shelby. You go ahead; yes, sir.
        Mr. Calahan. I was just handed a piece of paper that
    indicates that the regional inspector general for
    investigations was actually out of town just before the
    December 3 hearing. So she was not----
        Senator Shelby. December 2 hearing.
        Mr. Calahan. I am sorry. So she was not part of a
    discussion that we had had to prepare.
        Senator Shelby. Who prepared the chronology provided to
    this committee on December 2 that you gave?
        Ms. Lau. I did, sir, based on the information available to
    me at the time.
        Senator Shelby. You did. Who assisted you in preparing the
    responses to the committee's additional questions for the
    record that were submitted after the December 2 hearing?
        Ms. Lau. A number of my staff. I do not know precisely who
    because it was during the holiday season. But I would be happy
    to----
        Senator Shelby. Would you do that for the record?
        Ms. Lau. Provide that for the record; yes.
        [The information follows:]

        There are inconsistent recollections regarding which
    individuals assisted in the preparation of the responses and
    the extent of their participation. As we informed you at the
    time of the hearing, I referred this matter to the President's
    Council on Integrity and Efficiency's Integrity Committee for
    its review. Subsequently, we have been informed that the matter
    has been referred to the Office of the Independent Counsel for
    appropriate action. Given that this question focuses on
    critical issues pertaining to the referred matter, we believe
    it may be inappropriate to pursue the answer to this question
    further at this time.

                 Failure to Provide Original Case Tracking Form

        Senator Shelby. Can you please tell the committee today why
    your office failed to provide a copy of the original case
    tracking form of October 2, 1996, when the committee requested
    it in December of last year. Was it an oversight?
        Ms. Lau. I do not know why.
        Senator Shelby. Do you, Mr. Calahan?
        Mr. Calahan. No; except that I think that the intention on
    the part of staff was to give you the current document. That
    this was the accurate document that correctly portrayed the
    status of the case, and that is the reason they gave that to
    you, I think. Within my knowledge, that is the reason.
        Senator Shelby. The tracking form, at the bottom it has
    initials. I think it says RSL or something like that. Whose
    initials are those? There is a date below them. It reads 10/4/
    96. What does that mean? Why are those initials and that date
    there? Do you know, Mr. Calahan?
        Mr. Calahan. I have been informed those initials and that
    date indicate the time that the form was sent to headquarters,
    and that those initials are in fact the initials of a clerical
    employee, so we would rather not state her name.

                           Amended Case Tracking Form

        Senator Shelby. OK. Now if you could look at the amended
    case tracking form you provided, you have it there, to this
    committee. It still represents that the investigation was
    opened on October 2, 1996, does it not?
        Mr. Calahan. You are referring again to the initials at the
    bottom right-hand corner of the page?
        Senator Shelby. Yes.
        Mr. Calahan. I cannot explain that. I have asked that
    question myself----
        Senator Shelby. In block two it does not show that the
    status was changed, does it?
        Ms. Lau. That would normally appear in block three, the
    status change day. I have been informed by the regional
    inspector general that normally that is where such a date would
    appear.
        Senator Shelby. Why is that now?
        Ms. Lau. Typically, the case tracking document is prepared
    by the case agent. The form can also be prepared either by the
    regional inspector general for investigations or her assistant
    regional inspector general for investigations. This form was
    prepared by the RIGI. Her initials are under block five. She
    informed me that generally any new documents that are added to
    the file will have that status change date entered as the date
    the new document was prepared.
        Senator Shelby. Now if you would just take a minute and
    look at the initials and date at the bottom of the form, the
    same initials as on the first document and yet the date is 10/
    2/96. Do you see that?
        Mr. Calahan. I absolutely do.
        Senator Shelby. How is that possible?
        Mr. Calahan. I do not know. I have asked that same question
    myself. I would just like----
        Senator Shelby. Do you know?
        Ms. Lau. I do not know either.
        Senator Shelby. Go ahead. I did not mean to interrupt you.

                        Referral to Integrity Committee

        Mr. Calahan. We see the discrepancy there, Senator, and in
    all honesty, we are going to have this situation reviewed. In
    fact, we made a referral yesterday to the integrity committee
    of the PCIE regarding this matter.
        Senator Shelby. The person, if you would look at that
    again, somehow signed off on the second case form created 7
    days later before they ever signed on the first. How is that
    possible? Is that what you are talking about?
        Ms. Lau. We do not know.
        Senator Shelby. That is troubling, is it not?
        Mr. Calahan. It is troubling.
        Ms. Lau. It is very troubling. Senator Shelby, Mr. Calahan
    made reference to the integrity committee of the PCIE. As you
    may know, the PCIE is the President's Council on Integrity and
    Efficiency that is chaired by the Director of Management at
    OMB. This integrity committee is chaired by a senior official
    of the FBI and I have referred this matter to them for
    appropriate action.

                          Standard Operating Procedure

        Senator Shelby. Let me, if I can proceed. At this point, I
    would like to draw your attention again to several statements
    that you made before this committee on December 2. First,
    Senator Kerry asked you about how you go about making tough
    calls, what process you followed, what your standard operating
    procedure was. I believe that is on page 44 of the transcript,
    if you will refer to it. Have you found that?
        Ms. Lau. Not the precise location, but----
        Senator Shelby. Take your time and find it. I will go back
    again. Senator Kerry asked you at the committee about how you
    go about making tough calls, what process you followed, what
    your standard operating procedure was. That is on page 44 of
    the transcript. You answered, ``I am afraid the buck stops
    here. I am the one who makes the decision.''
        Ms. Lau. That is true.
        Senator Shelby. Is that true?
        Ms. Lau. Yes; I am responsible for the Office of Inspector
    General.
        Senator Shelby. So if that is true, did you make the
    decision to open the investigation on October 2, 1996, of the
    two Secret Service agents?
        Ms. Lau. No; I did not.
        Senator Shelby. Who did?
        Ms. Lau. The assistant inspector general for investigations
    directed the initiation of this particular investigation. It
    was my decision, however, that----
        Senator Shelby. You concur in the decision?
        Ms. Lau. Let me clarify the issue. It was my decision that
    we would do a review to respond to the 10 questions by Senator
    Stevens and the question posed by the Congresswoman. Two
    separate requests relating to the substance of the process of
    maintaining the White House access list and the data base. I
    did not direct Mr. Cottos, the assistant inspector general for
    investigations, to initiate this investigation in this manner.
        Senator Shelby. But you are responsible for it as the
    inspector general?
        Ms. Lau. Yes, I am.
        Senator Shelby. Is that what you meant?
        Ms. Lau. I am responsible for the office; yes.

                         Intimidating Future Witnesses

        Senator Shelby. Finally, I asked if you ever considered the
    fact such an investigation could intimidate future witnesses
    from testifying before Congress as to the truth of what they
    know; page 48 of the transcript. You responded, I can say from
    experience that being asked to testify before Congress has a
    sobering effect on anyone and it reinforces each individual's
    duty to tell the truth.
        Do you believe you have met this duty in testifying before
    this committee about your office's investigation of these
    matters?
        Ms. Lau. I have made every attempt to be forthcoming. I
    have been truthful based on the knowledge that I had at the
    time I testified. When I learned of new information that needed
    to come to light, I brought it forward immediately. Yes; I
    believe that I have been very forthright.
        Senator Shelby. Did not the regional inspector general open
    this investigation?
        Ms. Lau. The regional inspector general for investigations
    opened the investigation at the direction of the assistant
    inspector general for investigations.
        Mr. Calahan. Senator----
        Senator Shelby. And she testified to this, did she not, on
    December 2?
        Ms. Lau. I would have to check the transcript.
        Senator Shelby. As far as you know.
        Go ahead, Mr. Calahan.
        Mr. Calahan. I was just going to say that that is the norm
    in the office is that regional inspectors general open cases
    and manage cases.
        Senator Shelby. I know we are in an open hearing here. I
    have also been made aware of another document that I would like
    to talk with you about later. I would meet with you and ask you
    to confirm it for its accuracy. But I will not do it in the
    open hearing.
        Ms. Lau. Thank you. We would be happy to meet with you in a
    closed session.
        Senator Shelby. But since day one, this subcommittee's
    concern and the concern of many of my colleagues has been that
    your office improperly opened a potentially criminal
    investigation targeting two veteran Secret Service agents
    because of their testimony before Congress.
        Your office's recent revelations on this matter confirm
    what we suspected all along. Yet 7 months later, two public
    congressional hearings, a series of correspondence with Members
    of Congress and the Secret Service, and numerous questions for
    the record and only now today you come forward with information
    and documents that confirm that your office did in fact open a
    criminal perjury investigation based solely on the request of
    Congresswoman Collins naming two specific Secret Service----
        Ms. Lau. No, sir; I cannot agree with your statement of the
    facts.
        Senator Shelby. How do you disagree?
        Ms. Lau. It was not just today. Immediately upon learning
    of this new information I made sure that you, through your
    staff, were notified. It is not correct----
        Senator Shelby. Was this in the last several weeks?
        Ms. Lau. This was last Friday. As soon as we learned of it,
    we reported it. I could do no better than that.
        Senator Shelby. But is not this what we are talking about
    here when things like this happen? It is more than a formality
    or an administrative management thing. We are talking about
    more than that here today. The lives and the professional
    reputations of two career law enforcement officers I believe
    were wrongly impugned when you opened that investigation on
    October 2. For that, I believe you have done some explaining.
    But I think you have got some other explaining to do.
        You also, I think, have some explaining to do about how
    your testimony could be allowed to be so ill-informed, and how
    you could testify so assertedly to what your senior staff
    certainly knew to be untrue.
        Ms. Lau. Senator Shelby, I am not happy about that myself.
        Senator Shelby. What are you going to do about it? Are you
    going to investigate your staff as to their preparation----
        Ms. Lau. As we have mentioned, I yesterday referred this to
    the integrity committee of the PCIE that is chaired by a senior
    official of the FBI. I believe an independent review of this
    matter would be very helpful.
        Mr. Calahan. There was a Presidential----

                                Executive Order

        Ms. Lau. Senator, if you would like, there is an Executive
    order that talks about the process of situations regarding
    incidents involving inspectors general and their senior staff.
    This is the process to which I am referring that we have
    referred this matter for appropriate action.
        Senator Shelby. But would it basically be your policy that
    people when they come before Congress, whether they work for
    Treasury, they work for the FBI, they work for the State
    Department, or wherever, that they come up here and they tell
    the truth; they are under oath and so forth. And they should
    not, if they are telling the truth, although it may be not
    politically good for either party or some people, that they
    always tell the truth and they not be intimidated by your
    office or any other inspector general or someone else for
    telling the truth.
        Do you agree with that?
        Ms. Lau. I believe no one should be intimidated by anyone
    when they are asked to tell the truth and do so based on the
    knowledge that is available to them at the time they are
    testifying; yes.
        Senator Shelby. Mr. Calahan, do you have anything else?
        Mr. Calahan. No.

                              Submitted Questions

        Senator Shelby. We have additional questions for the
    Department and we would ask that you respond as quickly as
    possible.
        [The following questions were not asked at the hearing, but
    were submitted to the Department for response subsequent to the
    hearing:]
                    Questions Submitted by Senator Campbell
                      Financial Crimes Enforcement Network
                        fiscal year 1998 budget request
        Question. In FinCEN's fiscal year 1998 budget request, there is a
    new initiative for $2 million in support of Presidential Decision
    Directive 42, and includes 4 FTE. Given that these funds are requested
    from Crime Bill funds, which are to run out in fiscal year 1999, why
    were these continuing personnel funds being requested out of the Crime
    Bill?
        Answer. The objective of Presidential Decision Directive 42 is to
    combat international organized crime. In support of this objective,
    FinCEN requested $2 million and 4 FTE to: (1) support law enforcement
    agencies in their actions against money launderers and their illicit
    funds and assets; (2) increase FinCEN's assistance to cooperative
    governments; and (3) achieve greater cooperation and coordination with
    other countries. FinCEN is frequently called upon to provide guidance
    and assistance in bilateral and multilateral initiatives, as evidenced
    in its work with the Financial Action Task Force, the Egmont Group, and
    the Summit of the Americas. (See descriptions of this initiative in
    later questions.)
        These resources were requested as part of FinCEN's direct
    appropriation for fiscal year 1998 and approved by the Department, as
    requested. As part of the review process, a decision was made to
    support the PDD-42 initiative for FinCEN but to fund it out of the
    Crime Bill. If FinCEN must support this very important initiative
    through Crime Bill funds, it would recruit using temporary
    appointments.
        Question. Will FinCEN absorb the costs associated with these 4 FTE
    into the Salaries and Expenses account once the Crime Bill funds are no
    longer available?
        Answer. If Congress approved the use of Crime Bill ``No Year''
    funding for FinCEN's Presidential Decision Directive 42 initiative,
    these resources would remain available until expended but would not
    become part of FinCEN's base operational funding level.
        FinCEN operates on a fairly small budget compared to other federal
    agencies. I'd like to focus on the initiatives you proposed as part of
    your budget request for fiscal year 1998 and how that will help to
    combat money laundering.
        Question. Can you briefly explain FinCEN's new initiatives for
    fiscal year 1998?
        Answer. The two initiatives requested from Crime Bill funds
    continue and improve current operations of FinCEN.
    Background on First Initiative
        As stated above, in order to achieve the President's objective, as
    defined in Presidential Decision Directive 42, to devote greater effort
    in combating international organized crime, FinCEN seeks $2.0 million
    to (1) support law enforcement agencies in their actions against money
    launderers and their illicit funds and assets; (2) increase its
    assistance to cooperative governments; and (3) achieve greater
    cooperation and coordination with other countries.
        The Annunzio-Wylie Anti-Money Laundering Act, Public Law 102-550,
    provided that: ``The Secretary of the Treasury and the Attorney General
    shall jointly establish a team of experts to assist and provide
    technical assistance to foreign governments and agencies thereof in
    developing and expanding their capabilities for investigating and
    prosecuting violations of money laundering and related laws.'' This
    mandate is supplemented by Presidential Decision Directive (PDD)-42
    which was issued by President Clinton in October 1995 in recognition of
    the growing dimensions and dangers of global money laundering. The
    Directive provides the policy framework to focus U.S. efforts at the
    international level and through cooperation, specifically technical
    assistance and training.
        At the direction of the Secretary of the Treasury, FinCEN headed an
    interagency group in 1996, as part of the PDD-42 process. Based on that
    process, FinCEN initiated an in-house prioritization plan whereby
    regions and specific nations were assessed in order to determine the
    most efficient allocation of resources. The agencies involved in this
    process assessed the financial infrastructure and money laundering
    environment, attempted to calculate the political and legal environment
    for change, and conducted a technical assistance needs analysis
    necessary to bring that country(s) into compliance with international
    anti-money laundering standards.
        This assessment included: identifying countries that have or should
    have a counter-money laundering role; evaluating the ability of that
    country(s) to create an effective interagency information sharing
    mechanism; promoting partnerships between the government and domestic
    and international financial services industry, and recommending
    regulations to fully implement anti-money laundering laws.
        In addition, FinCEN sent its specialists to other countries to
    assess the technological needs and capabilities of those sectors
    responsible for overseeing anti-money laundering efforts. FinCEN relied
    upon and used the expansive expertise of other Treasury bureaus and
    other agencies including State and Justice, thereby reducing
    duplication of effort in geographic areas. Importantly, FinCEN
    developed each of its plans based on the needs of the country. It is
    critical that any plan be country specific and include money laundering
    specialists familiar with both that country and the region within which
    it operates.
        The funding requested in fiscal year 1998 will assist the U.S. in
    achieving greater cooperation and coordination with other countries,
    and increase efforts within the U.S. law enforcement community on
    international issues.
        Specifically, FinCEN intends to enhance its technological systems,
    fashioning and using a secure Intranet system to link the United States
    and other countries on drug trafficking and money laundering matters;
    developing a multi-lingual database for the exchange of financial
    intelligence; and exploiting the suspicious activity database for
    profiling and sharing information to impede criminal activity in the
    U.S. and world banking systems. Secondly, FinCEN will be able with
    additional funding to respond in a meaningful and responsible manner to
    the growing number of requests by other federal agencies as well as
    foreign governments for support and assistance with financial
    intelligence unit (FIU) development. The linkage of FIUs worldwide is a
    key component of FinCEN's anti-money laundering strategy.
    Background on Second Initiative
        To provide a secure means of information sharing among the Treasury
    law enforcement bureaus, $1 million is requested to develop an Internet
    communication system. The need to communicate quickly and securely
    among the bureaus was identified as a priority. This system will
    greatly enhance the ability of Treasury's Office of Enforcement to
    communicate sensitive, case-related intelligence through a highly
    secure and protected system.
        Under this initiative, FinCEN is proposing to create an
    ``extranet'' using the existing Internet infrastructure to interconnect
    Treasury enforcement bureaus. The system would allow for real-time
    information sharing in the form of e-mail, ``chat'' and ``newsgroups''
    (to use Internet-speak). Moreover, the system would allow for secure
    electronic delivery of case reports, electronic requests for support,
    electronic deliveries of trend and pattern analyses, and computer-based
    training modules regarding financial crime.
        FinCEN's concept is to use state-of-the-art dynamic encryption to
    protect the flow of data through the Internet. By using an existing
    Internet infrastructure in conjunction with data encryption, FinCEN
    significantly reduces the cost of the system while at the same time
    providing services to Treasury law enforcement globally. Further, this
    solution also involves user accounts and user passwords thus limiting
    who gets access to the information, and digital certificate
    authentication to ensure that a qualified user is operating a
    government-owned computer in a physically secured environment.
        FinCEN's objective is to establish secure links for Treasury law
    enforcement to access specific information solely related to financial
    crimes. The entire system will be built around this focus and access to
    this information will be restricted to those who have a ``need-to-
    know.''
        FinCEN, given its mandate of combating money laundering, has had to
    be progressive in what tools it uses to get the job done.
        Question. Can you explain the role of technology in FinCEN's work?
        Answer. FinCEN uses state of the art technology not only to
    strengthen its own capabilities, but also to improve the means by which
    we provide investigative support and analysis to law enforcement. Our
    compilation of databases provides one of the largest repositories of
    information available to law enforcement in the country. FinCEN's
    technology and expertise draws representatives from 17 major federal
    investigative agencies who are assigned as long term detailees in order
    to have direct access to our information.
        We have developed a sophisticated Intranet network of databases to
    link financial, law enforcement and commercial information to provide
    cost-effective and efficient measures (``one stop shopping'') for
    federal, state and local law enforcement officials to prevent and
    detect financial crime. FinCEN provides this information/access for no
    charge, however, in return, FinCEN gains additional information to
    assist in future investigations. This allows FinCEN to link ongoing
    investigations together to avoid duplication and assemble masses of
    data to identify strategic trends. In this regard, our Gateway system,
    which provides state and local law enforcement with direct, on-line
    access to records filed under the Bank Secrecy Act (BSA), won an award
    in 1995 from Government Executive magazine for identifying creative
    ways to enlist the support of other entities.
        FinCEN's Artificial Intelligence (AI) Targeting System is yet
    another illustration of the important role technology plays in the
    agency's mission. Through the employment of advanced AI technology, the
    system provides a cost effective and efficient way to locate suspicious
    activity in the tens of millions of currency transaction reports
    required by the BSA. For the first time in the 25 year history of the
    Act, every reported financial transaction can be reviewed and
    evaluated, allowing FinCEN analysts and federal investigators to link
    ostensibly disparate banking transactions, producing hundreds of leads
    for new investigations.
        FinCEN has also applied technology in an innovative manner to
    develop an information system for suspicious activity reporting. The
    Suspicious Activity Reporting System (SARs) went into effect in April
    1996, merging and revolutionizing two older reporting systems that had
    been in place for over a decade. This single centralized system
    provides the users of the information--the IRS/CID, U.S. Customs, U.S.
    Secret Service, the FBI, the U.S. Attorneys, the federal bank
    regulators, and state law enforcement agencies and banking supervisors,
    equal access to the data as soon as its processed. This also creates an
    opportunity for more comprehensive analyses of these reports and
    results in better information about trends and patterns which is vital
    to Treasury enforcement in our efforts to address money laundering. As
    of April 1997, financial institutions filed nearly 65,000 SARs, about
    40 percent reporting suspicious money laundering activity.
        In addition to employing state of the art technology to our case
    support efforts, FinCEN also must stay abreast of advances in emerging
    payment systems. New cyberpayment systems are coming on-line which
    create vast opportunities for consumers and for criminals. The
    possibility of virtually untraceable financial dealings, if it came to
    pass, would create new, perhaps unparalleled problems for law
    enforcement.
        FinCEN is striving to build a knowledge base throughout Treasury
    enforcement by bringing together government agencies and the private
    sector to work in cooperation to discuss the implication of these
    systems as they are being developed. FinCEN has conducted money
    laundering simulation exercises and has sought out experts from the
    public and private sectors to support and validate our efforts to
    understand the industry.
        FinCEN employs technology, in the numerous methods outlined above,
    to give law enforcement an edge against the schemes and wrongdoing of
    money launderers and others who would try to use it to their advantage.
        Question. Specifically, can you outline CD Rom program and its
    benefits to both FinCEN and the taxpayer for the Subcommittee?
        Answer. FinCEN is now entering and will remain in a sustained
    period of providing training and technical assistance to both domestic
    and foreign entities. The focus of this training and technical
    assistance will be on financial intelligence support to combat money
    laundering and financial crime. This assistance will cover a wide range
    of subjects running the gamut from how to organize and run a financial
    intelligence unit to how to analyze suspicious transaction data to how
    to produce, understand, and use strategic financial intelligence.
        FinCEN will be creating training and technical assistance modules
    in two main formats: (1) traditional instructional modules for
    presentation in classroom settings; and (2) tutorials for
    individualized use using CD ROM as the medium.
        The following are among the subjects on which we will be aiming to
    produce both traditional instructional modules and tutorials (on CD
    ROM):
      --``How to create and run an FIU''--including sub-components on such
            topics as ``Computer LAN models,'' ``Suspect Transaction Report
            databases,'' ``Staffing,'' ``Budgets.''
      --``FinCEN (FIUs) as tools for investigators''
      --``FinCEN (FIUs) as tools for bank regulators''
      --``Investigation/Analysis of Electronic Funds Transfers''
      --``Investigation/Analysis of BSA data''
      --``Domestic and international wire transfer systems''
      --``How to do regional/state money laundering threat assessments''
      --``Organization and operation of a money laundering case lab''
      --``Analysis of Federal Reserve data''
      --``Money laundering typologies'' plus units on subsets such as
            ``Structuring'' and ``Use of monetary instruments''
      --``Vulnerabilities of cyberpayments systems to money laundering''
      --``Tactical financial intelligence analysis''
      --``Strategic financial intelligence analysis''
      --Modules on specific intelligence techniques such as computer-
            assisted brainstorming and simulation
      --``Money laundering statutes''
      --Practical exercises in money laundering intelligence analysis
        Question. What is the goal of the cyberpayment study and what do
    you hope the study will provide us?
        Answer. Cyberpayments is the term FinCEN uses to describe new
    payment mechanisms which use ``stored value'' or ``smart cards'' to
    transfer funds as well as financial transactions which occur via the
    Internet. FinCEN has been developing expertise in this area to ensure
    that these systems do not develop in a way that could potentially
    facilitate financial crimes such as money laundering.
        FinCEN intends to use requested funds to complete a portion of its
    ongoing analysis of this issue. The analysis includes additional
    domestic and international simulation exercises; securing external
    expertise to assist in the monitoring of the new systems; and continued
    outreach with the industry. FinCEN believes this process will
    contribute significantly to Treasury's on-going dialogue with industry,
    the Congress and federal agencies on the formulation of appropriate
    policy responses.
        As described above, the study of Cyberpayments is an ongoing
    process of systems which are in their infancy but continue to mature.
    The complex and dynamic nature of this issue suggests that FinCEN would
    not complete all its work in 1998, however this funding under the Crime
    Bill will significantly further FinCEN's understanding of this evolving
    issue.
        The Financial Intelligence Unit is mentioned in several places in
    your budget submission.
        Question. Can you explain what a Financial Intelligence Unit (FIU)
    is for the Subcommittee and how it can help FinCEN do its job?
        Answer. Inspired in part by FinCEN's success, Financial
    Intelligence Units (FIUs) have been established in countries throughout
    the world. These units serve as the central focal point for countries'
    anti-money laundering efforts. The FIUs are designed to protect the
    banking community, detect criminal abuse of its financial system, and
    ensure adherence to its laws against financial crime. FinCEN is one
    model of an FIU and others exist in such countries as Great Britain,
    France, Belgium, the Netherlands, Argentina, and Australia. Presently,
    there are at least 29 such units throughout the world.
        We cannot emphasize strongly enough the importance we place on the
    expansion of these units around the world. The proceeds of crime move
    quickly across national boundaries into the world's financial systems
    frequently causing money laundering investigations to spill over into
    multiple jurisdictions and traverse the web of global financial
    services. The objective is to close off avenues for money launders by
    building strong barriers to financial crime in nations around the world
    and then establishing ways to exchange information about criminal
    activity among nations. Financial Intelligence Units help accomplish
    both objectives. They are the embodiment of the network concept
    offering support to law enforcement and financial community nationally
    and internationally.
        Under the leadership of FinCEN, a core group of FIUs met for the
    first time in Brussels in 1995 and created an organization known as the
    Egmont Group. This group serves as an international network, fostering
    improved communication and interaction among FIUs in such areas as
    information sharing and training coordination.
        The FinCEN representation in the Egmont Group reflects the agency's
    leadership role in this important coordination effort. FinCEN is
    heavily involved in Egmont's three important working groups: Legal,
    Technology, and Training. The Legal working group is tasked with
    examining the obstacles related to the exchange of information among
    FIUs. The second working group, Technology, focuses on addressing
    technical matters regarding communication among FIUs. Lastly, the
    Training working group is responsible for seeking ``tools'' to assist
    in the conduct of financial analysis. FinCEN experts play key
    leadership roles in each group, working in conjunction with
    representatives from other FIUs to develop solutions to the numerous
    issues raised. Progress made in each working group is then reported at
    future meetings of the whole organization.
        The effort to increase communication among FIUs has been furthered
    by FinCEN's development of a secure web site, permitting access
    information on FIUs, money laundering trends, financial analysis tools,
    and technological developments.
                                bank secrecy act
        One of the laws which FinCEN administers is the Bank Secrecy Act,
    which is designed to ensure the existence of records that could be used
    to provide investigators and prosecutors with information on large
    currency transactions.
        Question. What is the current rate of compliance for the Bank
    Secrecy Act?
        Answer. The Bank Secrecy Act contains a number of different
    requirements, and it is difficult to create a single measure for
    compliance rates. The most encouraging developments over the past
    several years have been the cementing of a working partnership between
    the Treasury and the nation's financial institutions, especially banks,
    to build a system that truly makes money laundering more difficult.
    Thus, banks have responded very positively to the new suspicious
    activity reporting rules and have filed more than 70,000 forms in the
    first year the rules were in effect. At the same time, there is
    evidence that the large currency transaction reporting requirements
    (the ``CTR'' requirement for transactions in currency in excess of
    $10,000) are being carefully observed, and the rate of referrals of
    potential penalty cases to the Treasury from banking regulators has
    declined. The requirements for the reporting of cross-border
    transportation of currency in excess of $10,000 (the ``CMIR''
    requirement) is more difficult to track because the requirement is
    imposed upon travelers themselves, not simply financial institutions.
        It is not clear that patterns of compliance in other parts of the
    financial sector are comparable to those of banks. Recent enforcement
    activity in the New York Metropolitan Area has indicated serious abuse
    of the non-bank money transmission industry by agents of narcotics
    traffickers seeking to send funds to Colombia. The abuses uncovered
    included, at best, negligence in the application of the BSA
    requirements to the businesses involved and, at worst, active collusion
    in criminal enterprise. The experience forms a part of the basis for
    FinCEN's proposal last week of new rules aimed at money transmitters
    and other non-bank ``money services businesses.''
        It is also important to note that part of FinCEN's strategy has
    been to move away from simply tracking rates of compliance and to ask,
    instead, whether the rules involved are themselves an efficient way to
    deal with the problem of money laundering. Thus, banks have for years
    complained about being penalized for relatively minor infractions of
    the currency transaction reporting rules when the data produced had
    little relevance to the prevention or detection of money laundering.
    Without necessarily agreeing with the criticism, both Congress, in the
    Money Laundering Suppression Act, and FinCEN, have taken steps to slim
    down the reporting process to data that is truly potentially useful to
    investigators and regulators and to place the greatest emphasis on the
    building of compliance systems that can impede serious money
    launderers.
        Question. What percentage of that is voluntary and what percentage
    of that is mandatory compliance?
        Answer. A large part of Treasury's long-term strategy has been to
    convince financial institutions that it is in their own interest to
    fight money launderers, who in the long run can do as much damage to
    the financial system--and to particular financial firms--as to
    government efforts to reduce crime. While the threat of civil and
    criminal sanctions are essential to keep tension in the compliance
    system, FinCEN has stepped up efforts, as stated above, to examine
    historic strategies in an effort to craft rules that financial
    institutions themselves can apply more efficiently and cost-
    effectively, as colleagues, rather than potential adversaries, in the
    fight against money laundering. We believe this policy is meeting with
    some success and provides a firmer basis for true progress, over the
    years, than a strategy based solely on the threat of sanctions to gain
    compliance.
                     support to state and local authorities
        FinCEN has a critical role in providing support to state and local
    law enforcement agencies and their work in our communities. This is an
    aspect which I believe is critical when dealing with the enforcement of
    anti-money laundering laws and dealing effectively within our
    communities.
        Question. In fiscal year 1998, FinCEN is requesting funding for a
    new initiative called Secure Outreach. Can you briefly describe how
    this program will help state and local law enforcement to combat money
    laundering?
        Answer. The Secure Outreach Program will not directly support state
    and local investigations. As described earlier, it will establish a
    secure Internet link for the Treasury law enforcement bureaus to access
    information related to financial crimes. However, indirectly the system
    will support state and local law enforcement in that better
    communication among federal law enforcement ultimately helps get
    information to state and local entities. This is particularly relevant
    as it relates to task force efforts where federal, state and local law
    enforcement entities work together to combat criminal activity.
        Question. Can you detail for the Subcommittee the kind of support
    FinCEN provides to state and local law enforcement?
        Answer. FinCEN provides support to state and local law enforcement
    in four different components by: (1) providing state and local law
    enforcement agencies with direct, on-line access to records filed under
    the Bank Secrecy Act, through a program called Gateway; (2)
    ``alerting'' federal and state agencies which have an interest in the
    same investigation; (3) providing in-depth intelligence reports to
    supplement Gateway information; and (4) working with Gateway's state
    coordinators to inform and educate state law enforcement to ways to
    combat money laundering, including services provided by FinCEN.
    Gateway and Alerts
        Through a system called Gateway, state and local law enforcement
    agencies have direct, on-line access to records filed under the Bank
    Secrecy Act (BSA). BSA records contain information such as large
    currency transactions, casino transactions, international movements of
    currency, and foreign bank accounts. This information often provides
    invaluable assistance for investigators because it is not readily
    available from any other source.
        Using FinCEN-designed software, the Gateway system saves
    investigative time and money because subscribing agencies can conduct
    their own research and not rely on the resources of an intermediary
    agency to obtain BSA records. All states and the District of Columbia
    are now on-line with the system. The information queries are
    coordinated by law enforcement coordinators in each state. In fiscal
    year 1996, Gateway processed 49,466 queries from 45 states. Through
    April of this year, FinCEN has received 32,625 Gateway queries from 48
    states.
        During the research and analysis process, Gateway electronically
    captures the information gathered on incoming inquiries and
    automatically compares this information to subsequent and prior queries
    from Gateway customers. About 17,000 subjects have been identified
    through Gateway. In addition, Gateway users ask FinCEN to match about
    600 new subjects each month against its other databases to identify
    potential parallel investigations. This technique enables FinCEN to
    assist state and local agencies in coordinating their investigations
    among themselves, and with federal agencies, through the sharing and
    exchanging of case data. In other words, FinCEN has the ability to
    ``alert'' one agency that another has an interest in their subject. In
    1996, 356 ``alerts'' were given to agencies who had an interest in the
    same investigative subject. From October 1996 through April 1997, 203
    ``alerts'' were issued by FinCEN.
    Intelligence Reports Beyond Gateway
        When state and local investigators need information and analysis
    beyond Gateway resources, they turn to FinCEN for detailed intelligence
    reports. For such officers, FinCEN is frequently the sole provider of
    the resources and expertise that federal agencies use so effectively to
    fight crime. These resources, often too expensive for small agencies,
    are extremely important as more and more local police departments begin
    to combat sophisticated white collar crime.
        All state and local requests first pass through state coordinators
    who review the request to determine whether it is an appropriate
    tasking for FinCEN. This process ensures that FinCEN only works on
    cases that can benefit from its extensive resources.
        Intelligence reports frequently include query results of
    commercial, law enforcement, and financial databases. When appropriate,
    analysts construct analytical products such as link charts and time-
    lines. FinCEN makes and maintains contact with the requester to ensure
    the intelligence report meets the needs of the requester and can
    contribute to the successful completion of the investigation.
    Education
        (See training question below)
        Question. What percentage of work conducted by FinCEN is focused
    toward state and local law enforcement agencies?
        Answer: Approximately 20 percent of FinCEN's work is dedicated to
    supporting state and local law enforcement. (This is primarily
    accomplished through Gateway and other investigative support efforts as
    outlined above.)
        It should be noted that it is difficult to completely distinguish
    support to state and local agencies from support to federal agencies.
    There is a great deal of overlap. Some of FinCEN's work contributes to
    both federal and local investigations, for instance, under task force
    efforts. In addition, FinCEN's regulatory work, such as the design and
    management of the Suspicious Activity Reporting System, benefits both
    federal and state law enforcement. Again, with the understanding of the
    difficulty in distinguishing support categories, FinCEN estimates 20
    percent of its efforts are devoted to state and local agencies.
        Question. What percentage of the work you do with state and local
    law enforcement is focused on training them on the law and what can
    FinCEN do for them?
        Answer. The majority of resources that FinCEN expends in its
    efforts with state and local law enforcement are channeled toward
    direct support of investigations. However, we would estimate that 10-12
    percent of our effort directed toward supporting state and local
    agencies involves training, of which perhaps one-half of that addresses
    legal issues.
        FinCEN is currently considering an initiative (to begin in the fall
    of 1997) which would involve a week-long course covering in-depth
    applications in financial investigations. This would be offered, over
    the course of one year, to approximately 250 of Gateway's State
    Coordinators and their personnel (at FinCEN's expense). While we are
    not prepared to cover state statutes, some basic legal training could
    be incorporated in this course.
        As part of its existing training efforts, FinCEN focuses on
    describing the benefits states have achieved from developing and
    implementing a strategy for attacking criminal proceeds. Such a
    strategy has several different elements, including legislation.
        There are currently 30 states with legislation criminalizing money
    laundering. Unfortunately, the provisions of these laws vary
    considerably which can substantially affect their effectiveness. FinCEN
    has been working closely with the National Alliance for Model State
    Drug Laws and the National Association of Attorneys General to inform
    the states of the availability of model legislation.
                                 current issues
        With technology changing so fast these days, it is no surprise that
    it is difficult to keep up. Unfortunately, however, the criminal
    element seems to have no problem in taking what ever new technology
    that comes along and finding a way to make it useful to them in their
    crimes.
        Question. Can you comment on the latest trends in money laundering?
        Answer. Working with our partners in the law enforcement,
    regulatory and financial communities, we have learned that the tools of
    the money launderer can range from complex financial transactions,
    carried out through webs of wire transfers and networks of shell
    companies, to old-fashioned, if increasingly inventive, currency
    smuggling. We also know that as soon as law enforcement learns the
    intricacies of a new money laundering technique and takes action to
    disrupt the activity, the launderers replace the scheme with yet
    another, more sophisticated method.
        Most importantly, we see that the proceeds of crime generated in
    the United States move quickly across national boundaries and into the
    world's financial systems. The money laundering policy issues and the
    federal law enforcement cases involving international crime that FinCEN
    supports frequently spill over into multiple national jurisdictions and
    the web of global financial services.
        The Financial Action Task Force (FATF), a global leader in
    promoting anti-money laundering efforts, held its 1996-97 typologies
    earlier this year and released a public report on existing money
    laundering trends around the world. FinCEN chaired the 1996-97 FATF
    experts group on typologies which developed the report.
        A general observation drawn from this exercise, and which
    substantiates FinCEN's experience described earlier, is that given the
    global nature of the money laundering phenomenon, geographic borders
    have become increasingly irrelevant. Launderers tend to move their
    activity to jurisdictions where there are few or weak anti-money
    laundering countermeasures. Another major finding is that traditional
    money laundering techniques (such as smurfing, wire transfers, and bank
    drafts) continue as prominent laundering methods. Currency smuggling,
    also a traditional method, continues to increase due to effective
    counter-money laundering measures enforced in banks and other financial
    institutions.
        Drug trafficking remains the largest single generator of illegal
    proceeds; however, non-drug related crime (such as various types of
    fraud, smuggling and organized crime offenses) is increasingly
    significant. There is also the continuing shift from banking
    institutions to non-bank financial institutions.
        Because of this shift, Treasury recently announced new proposed
    regulations which apply to a segment of the non-banks, called money
    services businesses (MSB), such as money transmitters and check
    cashers. (See attached fact sheets.) The proposed rules require
    registration of MSBs; reporting of suspicious transactions by MSBs; and
    a lower threshold of currency transaction reporting for money
    transmitters. It should be stressed that the overwhelming majority of
    these businesses are engaged in legitimate and valuable commercial
    activity. In fact, the industry has been extremely supportive of
    FinCEN's work. The new rules are only intended to make life difficult
    for the money launderers and their accomplices.
        Question. How will the increasing usage of electronic financial
    transactions, or cyberpayments, impact the work of FinCEN?
        [With clarification from the Committee, we understand this question
    to ask how will the increasing use of wire transfers (also called funds
    transfers) impact the work of FinCEN. Electronic wire transfers move
    funds between financial institutions. This question does not relate to
    cyberpayments as defined as ``stored value'' or ``smart cards'' to
    transfer funds or financial transactions which occur via the Internet.]
        Answer: Electronic wire transfer systems move funds between
    financial institutions and handle a daily volume in excess of 500,000
    transactions, moving more than $2 trillion around the world each day.
    Wire transfers offer criminal organizations an easy, efficient and
    secure method of transferring huge sums of money over a very short
    period of time. Because wire transfer messages are often sent through
    several banks and wire transfer systems, money launderers have been
    able to easily confuse the money trail, making it difficult for law
    enforcement to trace the criminal proceeds. However, it should be noted
    that while there has been a steady increase in funds transfers between
    financial institutions, the use of these systems are not increasing in
    a manner greater than anticipated.
        Because of their use by money launderers, FinCEN issued (under the
    Bank Secrecy Act) two new regulations last year to prevent and detect
    laundering as money is moved around the country and the world. The
    first rule, issued jointly by Treasury and the Federal Reserve Board,
    requires banks and non-bank financial institutions to collect and
    retain information about transmittals of funds in the amount of $3,000
    or more; it also requires the verification of the identity of non-
    account holders that are parties to such transmittals of funds. The
    second rule (known as the travel rule), issued by Treasury alone,
    requires each financial institution that participates in a wire
    transfer to pass along certain information about the transfer to any
    other financial institution that participates in the transmittal.
        The wire transfer rules are designed to help law enforcement
    agencies detect and investigate money laundering and other financial
    crimes by preserving an information trail about persons sending and
    receiving funds through wire transfer systems. While wire transfers do
    pose a challenge to law enforcement agencies investigating money
    laundering, the regulations significantly assist investigators by
    preserving more information identifying parties to such transactions
    than was previously available.
                          support to federal agencies
        Most of FinCEN's users are state and local law enforcement but
    there are a number of federal agencies that use FinCEN's expertise.
        Question. Can you briefly describe for the Subcommittee who
    FinCEN's federal users are and what information are you able to provide
    them?
        Answer. First, it should be noted that FinCEN's primary law
    enforcement customers are federal agencies. The Internal Revenue
    Service and the Bureau of Alcohol, Tobacco and Firearms were FinCEN's
    top two federal customers. The U.S. Customs Service's Office of
    Internal Affairs and the Treasury Inspector General were also
    significantly assisted by FinCEN.
        Additionally, FinCEN continues to see a demand for services from
    all segments of law enforcement around the country. Department of
    Justice agencies, such as the FBI, USMS, and DEA are significant users
    of FinCEN, as are the Department of Defense users such as Naval
    Criminal Investigative Services, Defense Criminal Investigative
    Service, AFOSI, and U.S. Army Criminal Investigative Division.
        FinCEN's original and primary mission is centered on law
    enforcement. In addition to housing key databases, FinCEN assists
    investigators by obtaining unique and complex data and performing
    research and analysis that plays a vital part in successful
    investigations. FinCEN assistance has proved crucial in investigations
    of criminal activity ranging from money laundering to national security
    issues.
        FinCEN's work is concentrated on combining information reported
    under the BSA with other government and public information. This
    information is then disclosed to FinCEN's customers in the law
    enforcement community as intelligence reports. These reports help them
    build investigations and plan new strategies to combat money
    laundering.
    FinCEN's Information Sources
        FinCEN's information sources fall into three broad categories:
    Financial, Law Enforcement, and Commercial Databases.
        Financial Database.--The financial database consists of reports
    that are required to be filed under the BSA and include the Currency
    Transaction Report (CTR); Suspicious Activity Report (SAR), Report of
    International Transportation of Currency or Monetary Instruments
    (CMIR); Currency Transaction Report by Casinos (CTRC); and Report of
    Foreign Bank and Financial Accounts (FBAR).
        Law Enforcement Databases.--Through a Memorandum of Understanding
    (MOU), a written agreement outlining the details of database access,
    dissemination authority, etc., FinCEN is able to access individual law
    enforcement databases maintained by agencies such as the Treasury
    Bureaus, Drug Enforcement Administration, Department of Defense, and
    the Postal Inspection Service. FinCEN currently maintains MOUs with a
    wide range of federal and regulatory agencies, all 50 states and the
    District of Columbia.
        Commercial Databases.--FinCEN procures access to a variety of
    commercially maintained databases which are valuable in locating
    individuals, determining asset ownership and establishing links between
    individuals, businesses and assets. These commercial sources of
    information, coupled with the data from the law enforcement and
    financial databases, form the foundation of information sources for
    FinCEN analyses.
        Finally, the FinCEN Database serves as the central point upon which
    FinCEN coordinates information on all investigations it supports, thus
    enhancing FinCEN's efforts to improve the information sharing network.
        Currently, FinCEN has five ways of supporting federal law
    enforcement investigations. The following is a brief description of
    each of those methods.
        Direct Case Support.--Since its creation in 1990, FinCEN has
    provided almost 38,000 analytical case reports involving over 100,000
    subjects to federal, state, and local law enforcement agencies. Last
    year alone, FinCEN worked with more than 150 different agencies,
    answering more than 7,500 requests for investigative information. Using
    advanced technology and countless data sources, FinCEN links together
    various aspects of a case, finding the missing pieces to the criminal
    puzzle.
        Platform Access.--FinCEN support is also provided to law
    enforcement agencies through a ``Platform'' which is a way to permit
    others to use FinCEN's resources directly to carry out their work.
    FinCEN pioneered the Platform in 1994, offering training, office space,
    and database access to employees of other federal agencies who needed
    to conduct research on cases under investigation by those agencies.
    Platform personnel are on the payroll of other federal agencies and
    come to FinCEN on a part-time basis to work only on cases being
    conducted by their own offices or agencies. These individuals know the
    needs of their organization and can support that need directly through
    database access. FinCEN is currently assisting 43 Platform participants
    from 21 agencies. About 10 percent of FinCEN's case work last year and
    20 percent so far this year was carried out through these Platforms.
        Artificial Intelligence Targeting System.--FinCEN's Artificial
    Intelligence (AI) system is yet another avenue available to law
    enforcement in the fight against money laundering. This system provides
    a cost effective and efficient way to locate suspicious activity in the
    tens of millions of currency transaction reports required by the Bank
    Secrecy Act.
        For the first time in the 25 year history of the Act, every
    reported financial transaction can be reviewed and evaluated. This
    unique blend of state of the art technology within a user friendly
    environment provides intelligence analysts and federal investigators
    with the ability to link ostensibly disparate banking transactions,
    producing hundreds of leads for new investigations.
        Support to ICG.--FinCEN also is supporting the Interagency
    Coordination Group (ICG) whose purpose is to share money laundering
    intelligence in order to promote multi-agency money laundering
    investigations. The group includes the Internal Revenue Service, the
    U.S. Customs Service, the Drug Enforcement Administration, the Federal
    Bureau of Investigation, and the U.S. Postal Service. FinCEN and the
    Department of Justice's Criminal Division serve as advisors to the
    group. FinCEN provides a central site for the group's operations and
    the support of four personnel who provide research and analysis of the
    intelligence information generated by the group. This intelligence,
    coordinated in FinCEN's case lab, is then disseminated to case agents
    currently working major money laundering investigations in the field.
        Question. Do these federal agencies work with state and local law
    enforcement agencies using the information which FinCEN provides?
        Answer. A number of our state and local requests involve multi-
    jurisdictional task forces comprised of federal, state, and local
    investigators. In other cases, requests come from federal agencies who
    are involved in similar task forces. We do support the HIDTA (High
    Intensity Drug Trafficking Areas) and OCEDTF (Organized Crime Drug
    Trafficking Task Force) programs with case support, field support, and
    make available to them a platform at FinCEN from which they can do
    their own work.
        Question. How does your work with federal agencies differ from the
    work with state and local law enforcement?
        Answer. FinCEN's databases and its analysts are readily available
    to assist law enforcement agents in solving cases at the federal, and
    state and local levels of government. The primary difference between
    FinCEN's work with federal agencies and the services it provides to its
    state and local customers lies in the process by which they access
    FinCEN's resources. At the federal level, requests for these services
    comes directly from law enforcement agents within each federal agency
    (see pages 13-15, Support to Federal Agencies for a full description of
    how federal agencies can use FinCEN's resources). State and local
    requests, on the other hand, are channeled to FinCEN through the
    Gateway program. As mentioned in a previous answer, this system of
    state law enforcement coordinators was established to help ensure an
    efficient response mechanism for the much broader state and local
    network of law enforcement entities (see page 8, Support to State and
    Local Law Enforcement for a complete description of Gateway).
                     working within the international arena
        Clearly, much of the task FinCEN must undertake occurs outside our
    borders, particularly with the advent of electronic information and
    electronic financial transactions. Therefore, FinCEN does a substantial
    amount of its work with other nations.
        Question. Would you outline FinCEN's most recent work in the
    international arena?
        Answer. We are meeting the challenges created by a borderless
    marketplace for money launderers by developing and fostering bilateral
    and multilateral initiatives aimed at whittling down the number of
    countries who choose not to play by international standards. FinCEN
    provides international leadership in developing and fostering global
    anti-money laundering strategies, policies, and programs and reaches
    out to assist countries in implementing those standards. FinCEN has
    received worldwide recognition for its capabilities and accomplishments
    and is frequently called upon to provide guidance and assistance in
    multilateral fora, as well as in individual government-to-government
    exchanges.
        Our principal efforts in the international arena include:
        Financial Action Task Force (FATF).--In just the past three years,
    FinCEN has been instrumental in revitalizing the world's premier anti-
    money laundering organization, the Financial Action Task Force. Created
    at the G-7 Economic Summit in 1989, the FATF is comprised of 26
    countries. It is dedicated to promoting the development of effective
    anti-money laundering controls and enhanced cooperation in counter-
    money laundering efforts among its membership and around the globe.
    FinCEN serves as the lead agency for coordinating the U.S. role within
    the FATF. It heads up the U.S. delegation which consists of Treasury,
    State and Justice, and FinCEN's Director serves as one of six members
    of the FATF Steering Group.
        The U.S. held the Presidency of the FATF from July 1995 to July
    1996. During the U.S. presidency, FinCEN spearheaded the successful
    effort to strengthen the Task Force's 40 recommendations, the standards
    for countries to follow in combating the laundering of criminal
    proceeds. This was the first update to the recommendations since they
    were issued in 1990.
        FATF also mandates ``mutual evaluations''--regular, on-site peer-
    group examinations of each member nation's progress in implementing
    anti-money laundering controls. A mutual evaluation of the United
    States was conducted in December 1996. The positive evaluation that the
    United States received lends international credibility to U.S. anti-
    money laundering programs as well as further establishes U.S.
    leadership in countering money laundering worldwide.
        FinCEN has given new focus to FATF's Annual Typologies Exercise,
    this year persuading FATF to issue a public version of its report. The
    annual typologies meeting brings together law enforcement
    representatives from member countries to discuss current money
    laundering trends and patterns. Disseminating public versions of these
    reports to financial institutions in the private sector provides them
    with valuable feedback about the usefulness of compliance programs to
    law enforcement. This year's report contains an annex which discusses
    the money laundering implications of emerging payment systems, such as
    electronic money (e-money) and Internet transactions.
        Investigators worldwide will also benefit from an important new
    tool allowing them to trace the source of illegal money that flows
    around the world because of a FATF initiative FinCEN helped negotiate
    with the Society for Worldwide Interbank Financial Telecommunication
    (SWIFT). In November, the SWIFT will modify its software which will
    allow electronic messages to include the sender's bank account number,
    critical information in a financial investigation.
        A primary goal of the U.S. has been to expand FATF's anti-money
    laundering standards to key regions around the world. To this end, it
    has encouraged the development of sister organizations such as the
    Caribbean Financial Task Force (CFATF) and the Asia/Pacific Group on
    Money Laundering.
        FinCEN is also co-hosting with CFATF, a Casino and Gaming
    Conference which serves as an example of how FinCEN is sharing its
    domestic experiences abroad. The Conference will explore the money
    laundering vulnerabilities of the growing gaming industry in the
    Caribbean and discuss possible regulatory requirements for the region.
        FinCEN played a role in the success of a conference held in October
    1996 in South Africa. The conference resulted in 13 countries from the
    region agreeing to seek the establishment of a Southern and Eastern
    African Financial Action Task Force. FinCEN is especially encouraged by
    this first but important step towards bringing a key region of the
    world under the FATF umbrella.
        With strong encouragement from the United States, the current
    President of the FATF has been developing contacts with the
    Multilateral Development Banks, such as Asian Development Bank and the
    Inter-American Development Bank.
        Financial Intelligence Units and the Egmont.--We are witnessing a
    new world-wide phenomenon--the establishment of financial intelligence
    units (FIUs) in countries through out the globe. These units serve as
    the central focal point for countries' anti-money laundering efforts.
    Just five years ago, there were less than a handful of FIUs in the
    world. Today, there are at least 29 such units. The momentum for this
    development came about as a result of several years of an intensive
    anti-money laundering effort by FinCEN and its counterparts in Europe
    and Australia.
        Under the leadership of FinCEN, a core group of FIUs met for the
    first time in Brussels in 1995 and created an organization known as the
    Egmont Group. This group serves as an international network, fostering
    improved communication and interaction among FIUs in such areas as
    information sharing and training coordination.
        Although differing in size, structure and individual
    responsibilities, Egmont members share a common purpose--cooperation in
    the fight against money laundering through information exchange and the
    sharing of ideas. The Egmont Group has since met three times, most
    recently in November 1996 in Rome where participants agreed on the
    definition of an FIU. This definition will likely facilitate the
    establishment of new units by setting minimum standards.
        The effort to increase communication among FIUs has been furthered
    by FinCEN's development of a secure web site that was first
    demonstrated in Rome. This web site will permit members of the Egmont
    Group to access information on FIUs, money laundering trends, financial
    analysis tools, and technological developments. The web site will not
    be accessible to the public therefore, members will be able to share
    this information in a protected environment. We cannot emphasize
    strongly enough the importance we place on the expansion of financial
    intelligence units around the world. It is the embodiment of the
    network concept offering support to law enforcement nationally and
    internationally.
        International Criminal Police Organization (Interpol).--Interpol is
    an international organization established to facilitate information
    sharing and coordination among nations worldwide on criminal
    investigative matters. Treasury's Under Secretary for Enforcement
    serves on Interpol's Executive Committee. At the 64th session of
    Interpol's General Assembly held in October 1995, a resolution was
    unanimously adopted establishing the first major anti-money laundering
    declaration in the organization's history. Additional progress against
    money laundering is made through annual financial analysis conferences
    which FinCEN co-sponsors with Interpol's FOPAC unit. At the last
    conference, held in San Francisco in 1996, more than 30 countries
    participated.
        As the countries of the Former Soviet Union and Eastern European
    struggle to put into place effective regulatory and legal
    infrastructures, ample opportunities for criminals to launder their
    money exist. The Secretary General of Interpol called upon FinCEN to
    lead an examination of the economic environment and factors that impact
    money laundering in 15 of 26 of these countries. Since July 1995, 13 of
    the 15 reports have been drafted under ``Project Eastwash.''
        FinCEN and FOPAC's combined efforts have generated the political
    will in several of these countries to begin establishing anti-money
    laundering regimes. For example, the Latvian government used our
    Eastwash report as the impetus to push forward with efforts to develop
    new anti-money laundering measures. Through attendance at the annual
    financial analysis conferences, Slovakia and Czech Republic moved to
    establish FIUs, and most recently, several Latin American countries
    (Argentina, Colombia, Uruguay, and Bolivia) used these discussions to
    initiate similar efforts.
        Summit of the Americas (SOA).--In December 1995, Treasury Secretary
    Rubin chaired a conference in Buenos Aires, Argentina, that was
    attended by Ministers from 29 of the 34 SOA nations. FinCEN led the
    year long effort to lay the groundwork for the Buenos Aires Conference
    by coordinating the development of a Communique--a document which
    commits each of the participating countries to take a series of steps
    to combat money laundering.
        FinCEN, together with Treasury and other agencies, is playing a
    leading follow-up role. This effort includes offering coordinated
    training and assistance to SOA participating countries. The process is
    beginning to take effect. At least 25 of the 34 Summit countries have
    taken positive steps toward implementing the Communique by passing,
    amending or drafting legislation, or issuing related regulations.
        United Nations.--FinCEN has provided leadership in the anti-money
    laundering efforts of the United Nations Commission on Narcotic Drugs
    (UNCND), which is the central policy making body within the UN for
    dealing with all drug-related matters. FinCEN worked in support of a
    U.S.-sponsored anti-money laundering resolution which was adopted by
    the UNCND in March 1995. This resolution calls for UN member states to
    encourage the reporting of suspicious or unusual transactions,
    establish financial intelligence units to collect and analyze this
    data, and recommends formation of financial investigative task forces
    and anti-money laundering investigative training programs.
        In April 1996, the UNCND adopted a second U.S.-sponsored anti-money
    laundering resolution that encourages UN member states to require bank
    customer identification procedures and to broaden other anti-money
    laundering measures such as confiscation and asset forfeiture
    provisions, and stresses that the 40 Recommendations of the FATF are
    the international anti-money laundering standard.
        Asia Pacific Economic Cooperation (APEC).--FinCEN played a critical
    role in ensuring that the APEC Finance Ministers recognize the threat
    money laundering poses to the economies in the region and the
    importance of international standards which have been established by
    the FATF to combat the problem. At the APEC Finance Ministers Meeting
    held April 5-6, 1997, a Joint Ministerial Statement was issued which
    recognized money laundering as a priority concern in the region.
    Ministers welcomed the establishment of the Asia/Pacific Group on Money
    Laundering, encouraged a determined global effort against money
    laundering, and requested that relevant international organizations
    integrate anti-money laundering activities into their operations to
    strengthen the integrity of financial systems. This most recent
    reference to money laundering in the APEC Ministerial Statements
    follows language in two previous documents. All were the result of
    FinCEN efforts.
        The role that the United States plays, both by itself and as part
    of these multilateral efforts, is critical in setting effective
    standards in the fight against money laundering. FinCEN is at the
    forefront of this world wide movement. We have found that it is
    important to share our expertise--as well as our mistakes--with our
    foreign counterparts. FinCEN representatives have visited five
    continents and more than 50 countries in the past three years, urging
    these countries to take the money laundering threat seriously and adopt
    effective anti-money laundering measures.
        Question. What percentage of FinCEN's work is dedicated to helping
    other nations combat money laundering?
        Answer. Approximately 25 percent of FinCEN's work is directed
    toward strengthening its network by developing partnerships with our
    international counterparts.
        Question. What types of services can you provide other nations in
    the way of helping them improve their anti-laundering capabilities?
        Answer. FinCEN provides international leadership in developing and
    fostering global anti-money laundering strategies, policies, and
    programs, and reaches out to assist countries in implementing the
    standards on money laundering. FinCEN has developed worldwide
    recognition for its capabilities and accomplishments and is frequently
    called upon to provide guidance and assistance in multilateral fora, as
    well as in individual government-to-government exchanges.
        FinCEN's international training and technical assistance program
    has two main components: 1) instruction provided to a vast array of
    government officials, financial regulators and others on the subject of
    money laundering and FinCEN's mission and operation; and 2) training on
    financial intelligence units, modeled after FinCEN and the other
    central disclosure agencies throughout the world.
        FinCEN has provided a wide range of guidance and assistance to a
    number of countries around the world in encouraging the creation of
    FIUs. Countries are at different stages of evolution in their ability
    and willingness to implement effective counter money laundering
    programs. Therefore, our efforts and approach are tailored to the
    individual needs of recipient countries. In general, our involvement
    encompasses: 1) providing assessments of money laundering laws,
    regulations and procedures; 2) recommending ways in which to develop a
    partnership between government and financial institutions to prevent
    money laundering; 3) advising foreign government officials on how to
    establish advanced systems for detecting, preventing and prosecuting
    financial crimes; and 4) offering specialized training and technical
    assistance in computer systems architecture and operation.
        Question. Are services provided for free, or do these nations pay
    for services of FinCEN?
        Answer. Nations do not pay a fee for the services provided by
    FinCEN.
        Question. What incentive does our government give other nations for
    being proactive in their efforts to combat money laundering?
        Answer. For those countries that are proactive in their efforts to
    combat money laundering, FinCEN and other US agencies provide support,
    encouragement and guidance in how to create an effective anti-money
    laundering regime. That support includes providing a wide range of
    technical assistance and training to countries geared towards helping
    them model an effective program to meet their respective country needs.
    For its part, FinCEN focuses much of its training and technical
    assistance in the form of supporting the establishment of financial
    intelligence units (FIUs) around the globe. FinCEN has provided
    guidance and/or technical assistance to Argentina, Czech Republic,
    Ecuador, Hungary Mexico, Panama, Poland and Russia among others in the
    creation and development of their FIUs.
        Additionally, there are consequences for countries that do not meet
    international standards on money laundering. The Foreign Assistance Act
    of 1961, as amended requires the USG to certify that certain countries
    are cooperating in the fight against drug money laundering. If a
    country is not certified, most foreign assistance is cut off and the
    United States is required to vote against multilateral development bank
    lending to that country. Also, the Financial Action Task Force (FATF)
    can urge countries to give special attention to business relations and
    transactions with persons, including companies and financial
    institutions, from those countries that do not or insufficiently apply
    the FATF forty Recommendations.
        Question. What is the average number of consultations you provide
    to foreign governments in a year regarding money laundering?
        Answer. Since the fall of 1995, when our efforts to create an
    international network of financial disclosure units intensified, FinCEN
    has had over 100 consultations in the United States with foreign
    government officials. In addition, during that same time, FinCEN
    representatives have traveled for consultations to more than 60
    countries urging those governments to adopt effective anti-money
    laundering measures.
                                 tribal gaming
        Question. How does FinCEN regulate casinos to prevent and detect
    money laundering and has tribal gaming been brought under the same
    regulatory controls?
        Answer. Since 1985, when state-licensed casinos were first
    subjected to the safeguards and controls of the Bank Secrecy Act (BSA),
    the size and availability of casino gaming in the U.S. has increased
    dramatically. At that time, the new rules applied only to casinos in
    Puerto Rico and Atlantic City, New Jersey. Under an agreement between
    the state of Nevada and the Department of the Treasury, that state's
    casinos were subject to a separate regulatory regime. Today, commercial
    casino gaming is authorized in 15 states and accounts for nearly half a
    trillion dollars in wagered funds.
        Concurrently, there has been a significant expansion in the
    availability of bank-like financial services provided to casino
    patrons, including the establishment of deposit and credit accounts,
    money transfers, currency exchange, and check cashing services. Given
    the large volume of activity occurring at casinos, and the cash-
    intensive nature of transactions, this industry is vulnerable to abuse
    by money launderers, tax evaders and other financial criminals.
        FinCEN has worked closely with the industry to ensure that
    effective anti-money laundering programs exist, including working with
    the new American Gaming Association and state casino associations and
    regulators from Nevada, New Jersey, Puerto Rico, Mississippi, and other
    jurisdictions. Over the past two years, representatives from FinCEN and
    the Nevada Gaming Control Board have worked closely to ensure that
    Nevada casinos are subject to regulatory requirements that not only
    meet but, in most cases, exceed current federal standards. This effort
    culminated in the recent enactment of state legislation making
    structuring of currency transactions at casinos a felony and
    significantly increasing criminal and civil penalties against casinos
    found in violation of state regulatory requirements.
        Moreover, early this year, Nevada adopted an entire overhaul of its
    anti-money laundering regulatory requirements and internal controls.
    These new changes took effect on May 1, 1997. In addition, in an
    important step which will take effect by October 1, 1997, Nevada will
    be the first state to require its casinos to report suspicious activity
    to the federal government. FinCEN will examine the experience of Nevada
    casinos with this new requirement before imposing a similar requirement
    on other state and tribal casinos.
        Tribal Casinos.--In addition to the growth in state-licensed
    gaming, in the six years since Indian tribal casinos were first
    established, this segment of the industry has spread to nearly half of
    the states and accounted for over $50 billion in funds. In order to
    meet the Congress' direction in the Money Laundering Suppression Act to
    end the disparate regulatory treatment of tribal casinos, and in
    recognition of the unanticipated growth of this industry, FinCEN began
    the extensive process of meeting with representatives of tribal
    governments, casino operators, and others associated with this
    industry. We conferred with The National Indian Gaming Commission,
    National Congress of American Indians and, most especially, the
    National Indian Gaming Association.
        FinCEN representatives have spoken in detail about the effects of
    this change on the tribal casino industry at a conference, met with
    travel governments, and conducted on-site visits at tribal casinos of
    varying sizes to assess the operational effect of new regulatory
    requirements on these developing businesses. In April 1996, FinCEN
    sponsored a BSA conference designed specifically to address compliance
    with the new regulations. While tribal representatives often express
    concern over the potential threat to their tribal sovereignty, FinCEN
    has been cited favorably for its willingness to work with the tribal
    community through the regulatory process.
        Moreover, our regulations were designed to avoid a contentious
    issue between tribal and state governments, by applying these
    regulations uniformly regardless of whether state-tribal compacts were
    in force. This rule received no critical comments and on August 1,
    1996, it went into effect largely as proposed.
        Our experience in dealing with casinos has taught us that non-
    traditional financial services providers require special attention and
    also a creative, sometimes flexible, regulatory approach. That
    experience should serve us well as we deal with the challenge of
    upgrading BSA compliance and anti-money laundering controls in what
    we've come to call ``money services businesses.''
                                  base funding
        There is funding outlined in the budget request which indicated
    that the base is fully funded.
        Question. Is your base fully funded?
        Answer. Funds requested are expected to enable FinCEN to maintain
    its current operating level. It must be noted, however, that FinCEN has
    received support from Treasury's Asset Forfeiture Fund to fully fund
    the costs of acquiring access to commercial databases and supporting
    the Gateway program which gives States on-line access to BSA and other
    data that can be used to support their investigations. If these funds
    were no longer available, full funding for these initiatives could not
    be absorbed into FinCEN's base. This would adversely affect FinCEN's
    ability to provide support to law enforcement.
        Question. How many positions (FTE) are unfilled?
        Answer. As of May 1997, FinCEN has 14 FTE positions unfilled.
        Question. What would it take to fill those positions?
        Answer. FinCEN is actively pursuing alternative ways to strike the
    proper balance between achieving the appropriate skill mix of
    personnel--with emphasis being placed on strong analytical abilities to
    carry out it's multi-faceted mission--and guarding against committing a
    disproportionate share of its resources to meet payroll costs.
        Question. Is the amount requested to maintain current levels
    accurate? What will all of this funding be applied to?
        Answer. Funds requested to maintain current levels ($420,000) are
    adequate to meet expected increases. Funding will be applied to pay
    annualizations, the expected pay raise, and the other services areas
    where increased costs are expected. This assumes that the requested
    $199,000 for a labor cost adjustment is also received.
        Question. When President Clinton took office he issued Executive
    Order 12837 that mandated the reduction of administrative costs, as
    well as personnel over a four year period. fiscal year 1997 was the
    last year of the Order, will you continue to maintain the mandated
    reductions in fiscal year 1998?
        Answer. Executive Order 12387 required a 3 percent reduction in
    administrative overhead based on fiscal year 1993 funding levels, taken
    in each of fiscal years 1994, 1995, and 1996, and a 5 percent cut in
    1997. FinCEN will maintain these efficiency reductions.
        Executive Order 12839 mandated a reduction of 6 FTE for FinCEN by
    fiscal year 1995. FinCEN met its new target of 147. However, in 1995,
    16 FTE were transferred from Treasury: 12 from the Office of Financial
    Enforcement, and four that FinCEN was funding through a reimbursable
    agreement. Additionally, FinCEN received 16 FTE from the Violent Crime
    Trust Fund which were made part of its base in fiscal year 1996. In
    fiscal year 1997, Congress authorized 2 FTE to be devoted to outreach
    efforts to the law enforcement community. FinCEN's current authorized
    FTE level is 181.
                                     ______

                    Federal Law Enforcement Training Center
                                  fiber optics
        Question. One of your fiscal year 1998 initiatives is funding for
    fiber optics to replace the existing underground telephone cable owned
    and maintained by Southern Bell. You have requested a total of
    $3,001,000 for this project, split between the Salaries and Expenses
    account and the Crime Bill funding. What is the total cost of this
    initiative? How long will this project take? Are there any potential
    environmental concerns at Glynco which could increase those costs?
        Answer. The total cost is estimated to be $7.5 million. It is
    anticipated that the project can be completed about one year after the
    funds are completely appropriated. At this time, there are no known
    environmental concerns that will affect this project and increase the
    estimated cost.
                 temporary center at charleston, south carolina
        Question. Part of the rationale for establishing this temporary
    facility was that the FLETC was unable to commit the current resources
    to handle the expected influx of trainees. However, I am told that
    several INS and Border Patrol training classes have been canceled. With
    that in mind, would the FLETC have been able to handle the actual extra
    training without having to resort to the use of this temporary
    facility?
        Answer. No. While it is true that the Border Patrol has canceled
    several programs both at Charleston and Glynco, they hope to reschedule
    and make them up later in the year. Also, this was planned to be a
    three-year initiative. Therefore, the training could not have been
    conducted without the temporary site.
                              rural drug training
        Question. If the funding for the Rural Drug Training initiative is
    approved and the initiative is successful, would you expect that the
    FLETC would request a similar amount every year? What happens to this
    initiative when the Crime Bill is depleted?
        Answer. The Rural Drug Training initiative consists of ``train-the-
    trainer'' programs; therefore, the FLETC will be training State and
    local agencies to conduct this training. Since this will take several
    years, it will be necessary to continue the funding. If the Crime Bill
    fund is depleted and the training has not been completed, the FLETC
    would request monies from the regular salaries and expenses
    appropriation.
                                     ______

                    Bureau of Alcohol, Tobacco and Firearms
        Question. The President has requested $1.2 million for the ATF
    budget to maintain current IBIS (integrated ballistic identification
    system) sites, but no additional funding for new locations. We have
    received communications from several entities expressing support for
    sufficient funding to expand the IBIS program to new sites. Did you
    request funding for deployment of new IBIS systems in your original
    budget request to OMB?
        Answer. Yes, ATF's original budget request to OMB included new
    sites. The request of $5.7 million included approximately 4.5 million
    for costs associated with new sites and $1.2 million for costs to
    maintain the current systems.
        Question. I am a big proponent of the G.R.E.A.T Program--I believe
    that the only way we are going to steer young people away from gangs is
    through education. I understand that nine communities in Colorado have
    applied to participate in this program. What is the status of those
    applications?
        Answer. All nine cooperative agreements with the communities in
    Colorado will be in place by the end of June.
        Question. It was my understanding that the Violent Crime Reduction
    Trust Fund was designed to be used for one-time expenditures. Can you
    please explain to the subcommittee why you have requested funding for
    ongoing programs such as G.R.E.A.T and explosives inspections from the
    Trust Fund?
        Answer. The G.R.E.A.T and explosives inspections was initially
    funded under the Violent Crime Reduction Trust Fund. The Administration
    decided to continue to fund the G.R.E.A.T and explosives inspections
    from the Trust Fund.
        Question. In your prepared statement you say that ATF is
    contracting with the National Academy of Sciences to conduct the
    Smokeless and Black Powder Tagging Study as required by Congress. We
    are six months into fiscal year 1997. What is the status of that
    contract? What is taking so long?
        Answer. ATF and the National Academy of Sciences (NAS) have not yet
    agreed on a statement of work for this study due to the NAS position
    that it is unable to meet the statutory requirement that the smokeless
    and black powder study be completed by September of 1997.
        The Omnibus Consolidated Appropriations Act of 1997 mandates that
    the Secretary shall enter into a contract with the NAS to conduct a
    study of the tagging of smokeless and black powder by any viable
    technology for purposes of detection and identification. The law
    specifically requires that the study be presented to Congress no later
    than September 30, 1997. However, the NAS has consistently taken the
    position that it is not feasible to complete the study within the time
    frame specified by the law. Therefore NAS will not agree to a
    contractual statement of work that complies the statutory deadline no
    statement of work can be finalized.
        ATF does not have authority to extend the deadline imposed by
    statute for completion of the study on black and smokeless powders.
    Thus, we are unable to agree to the most recent NAS proposal which
    calls for completion of a study by August 31, 1998.
        ATF submitted its first draft statement of work to the NAS in
    December of 1996. This statement of work reiterated the requirements of
    the law, including the requirement that the study must be completed by
    September of 1997. On or about January 29, 1997, the NAS submitted
    their proposal to ATF, which called for a completion date of August 31,
    1998.
        On April 16, 1997, ATF met with the NAS and reiterated that the
    Bureau lacked the authority to extend the time for completion of the
    study beyond the statutory limit. On May 7, 1997, ATF requested that
    the NAS amend their proposal to complete the study by September of
    1997, or advise ATF in writing that they would not be able to perform
    the study as required. On May 16, 1997, the NAS submitted a revised
    proposal for the black and smokeless powder study. The revised proposal
    calls for the completion of the study by August 31, 1998. ATF has no
    authority to accept this completion date.
        Question. Can a credible study be conducted in the time remaining?
    Do you think that the statutory requirement that the report be
    presented to Congress 12 months after the date of enactment (which
    would be September 1997) should be extended?
        Answer. On February 4, 1997, the Chairman of the National Research
    Council submitted a letter to the Chairman of the Senate Committee on
    Appropriations, requesting an extension of the statutory deadline for
    the congressionally mandated study of the tagging of smokeless and
    black powder. The letter states that ``a longer timetable is necessary
    if [NAS] is to carry out a study that will provide the independent,
    scientifically credible, and objective assessment that is needed.''
        ATF is not involved in the actual conduct of the study; thus,
    questions concerning the time frame necessary to complete a credible
    study should be directed to the NAS.
        Answer. It is the position of the NAS that an extension is
    necessary so that they can carry out a study that will provide the
    independent, scientifically credible, and objective assessment that is
    needed.
        Question. There is widespread concern about the ability of the
    Federal Government to address the Year 2000 computer problem in time.
    What is the status of your efforts?
        Answer. I have appointed Mr. Patrick Schambach, Acting Assistant
    Director, Science and Information Technology, and Chief Information
    Officer, as the Year 2000 senior executive.
        An Integrated Program Team (IPT) is being formed to provide
    technical input and oversight for all Bureau Year 2000 issues. The IPT
    will report directly to Mr. Schambach. It will promote Bureau awareness
    and ensure that appropriate actions are taking place throughout the
    Bureau to correct or mitigate Year 2000 problems.
        Ms. Judith Walters, the Year 2000 Program Manager also serves as
    the IPT chairperson. She is the Bureau's single focal point for all
    Year 2000 information and actions. Ms. Walters reports to Mr. Schambach
    via Walter Scott, Chief, Information Services Division.
        The Bureau is working concurrently in the two areas, Information
    Technology (IT) and Non-Information Technology (Non-IT). These efforts
    are well underway.
    Information Technology
        A Year 2000 contractor is on-site performing impact analysis of all
    Bureau application systems. This task will be completed in July 1997.
    Deliverables for this task include a Renovation Task Schedule and
    Renovation Plans for each Bureau system.
        A Conversion Plan is in place for the Renovation Task. This task
    will implement the designated impact analysis assessments to repair,
    retire, or replace systems. Year 2000 compliance testing will be
    performed on each Bureau system.
        We have an Enterprise System Architecture Plan in place that will
    ensure Year 2000 compliance for all IT equipment and operating
    software.
    Non-Information Technology
        Identification and assessment of impacted classifications of Non-IT
    inventory and infrastructure are underway.
        The IPT will provide input into the development, staffing and
    execution of a Non-IT Vulnerability Assessment Plan and its execution.
        Our Acquisitions Division is working to create an interim measure
    for future impacted Non-IT acquisitions higher authorities provide
    policy and guidelines pertaining to Non-IT acquisitions. (No one has
    not yet addressed Year 2000 compliance for Non-IT acquisitions.)
        The current target date for Non-IT Vulnerability Assessment Plan
    execution completion is April 1998. Then, all classifications of
    impacted Non-IT equipment and facilities will have been identified for
    repair, retirement, replacement or other administrative protective
    action.
    How big of a job is it for ATF?
        IT current estimates only include costs for application systems
    efforts. This figure now stands at $5,140,000 and 24.6 staff years. It
    includes full contract life cycle support through March 2000. We are
    currently gathering Year 2000 related costs for our ATF Enterprise
    Systems Architecture Project.
        Non-IT cost impacts will not be known until the Non-IT
    Vulnerability Assessment Plan is executed.
        Question. You have requested funding to expand the Canine
    Explosives Detection Program so that you can train up to 100 dogs per
    year. How many requests do you currently have on hand from state and
    local law enforcement entities for explosives-sniffing dogs?
        Answer. Since the inception of the Canine Explosives Detection
    Program (CEDP), ATF has received numerous inquiries and requests from
    State, local, and Federal agencies and foreign countries for
    information and training in our CEDP. ATF has always supplied as much
    information as possible to those agencies requesting information. It
    was not until fiscal year 1997 that ATF received any funding in our
    appropriations to expand and enhance its CEDP, which in turn is now
    allowing us to train canines for the State and local agencies who so
    desperately need it. ATF just recently started keeping records of
    requests for assistance and for formal training.
        Thus far in fiscal year 1997, ATF has received approximately 50
    unsolicited official requests from State and local agencies wanting
    information and applications for explosives detection canine training
    and approximately 40 official requests for accelerant detection canine
    training. ATF continues to receive daily inquiries and requests for
    information from interested law enforcement agencies/personnel across
    the United States.
        Most of the requests for canine training received are from law
    enforcement agencies who have heard about the success of our program by
    ``word of mouth'' in the canine training community. Many of these
    agencies want our canines because of their ability to also detect
    weapons. ATF has not officially requested applications or advertised
    through any of the professional law enforcement journals (e.g.,
    International Association of Arson Investigators, International
    Association of Bomb Technicians and Investigators, etc). Only during a
    few presentations this fiscal year has ATF informed the law enforcement
    community of the upcoming training available for State and local
    agencies.
        ATF has received additional inquiries from foreign governments for
    canine training. These inquiries are then directed to the Department of
    State, Bureau of Diplomatic Security, Office of Antiterrorism
    Assistance (DoS-ATA). ATF only trains canines for foreign countries
    that meet the criteria set by the DoS-ATA program. The DoS-ATA totally
    funds all training and expenses associated with the foreign classes.
    DOD-ATA also stated they would fund all of the classes we are able to
    train for them.
        Question. If funded, the proposed new National Laboratory Center
    would be completed in fiscal year 2000. Yet, you are requesting full
    funding to cover construction and relocation costs in the fiscal year
    1998 budget. What was the rationale for requesting full funding up
    front? Why didn't you request partial funding-spread that required
    appropriations over two or three years?
        Answer. Full funding was requested at the beginning of the project
    because GSA requires full funding before a construction contract can be
    issued. The $55 million requested in fiscal year 1998 is to be
    allocated for the construction of the facility only. According to GSA,
    they anticipate issuing a construction contract in fiscal year 1998
    with completion of the facility by the end of 2000.
        Question. Regarding the Youth Crime Gun Interdiction Initiative
    (YCGII), what is the expected time frame for the conclusion of this
    initiative?
        Answer. The YCGII established ATF, State, and local law enforcement
    partnerships in 17 pilot cities to target the illegal firearms market
    to juveniles and gang offenders; utilized ATF's National Tracing Center
    (NTC) and Project LEAD (ATF's illegal firearms trafficking information
    system) to provide investigative leads that identify illegal firearms
    traffickers involved in the transfer and or sale of firearms to
    juveniles; and will shortly publish a series of trace analysis reports
    that provide an overview of each site's crime gun problem based on
    crime gun traces provided by local law enforcement that will provide
    operational information about the illegal juvenile gun market.
        The YCGII originally was established as a 1 year pilot project with
    respect to field operations. The YCGII was launched by President
    Clinton, Vice President Al Gore, Treasury Secretary Robert Rubin, and
    Attorney General Janet Reno at the White House in July 1996.
        Question. Most Americans associate the Bureau of Alcohol, Tobacco,
    and Firearms with guns, forgetting the other ATF responsibilities. But,
    there are many ways in which ATF protects the American consumer. Would
    you care to comment on other, less well-known functions of the ATF.
        Answer. ATF has a leading regulatory role over alcohol, tobacco
    products, and explosives that raises significant revenue for the United
    States Treasury and protects the public and consumers in myriad ways.
        ATF collects almost $13 billion in excise tax revenues. At the same
    time, ATF oversees the production, importation and exportation, and
    labeling of alcohol beverages and tobacco products. Product integrity
    inspections and audits of these industry members are an essential part
    of protecting the revenue and the public. For example, in recent years,
        ATF has investigated incidents concerning lead levels and other
    contaminants in alcohol beverages. Likewise, ATF conducts background
    investigations on applications submitted by a person or business
    wanting to enter the alcohol and tobacco industries in order to ensure
    that only qualified applicants are approved in order to safeguard the
    revenue and protect the consumers.
        ATF regulates the labeling, advertising and unfair trade practice
    provisions that govern the alcohol beverage industry. ATF reviews and
    investigates labels and advertisements to prevent consumer deception.
    Approximately 60,000 labels are reviewed each year. ATF responds to
    consumer and industry complaints about labels or advertisements. In
    responding to the needs of consumers and the wine industry for accurate
    label information, ATF has established almost 150 viticultural areas
    where grapes are grown in the United States and has promulgated a
    definitive list of American grape varietal names. ATF reviews and
    approves new wine production practices and materials to help the
    American industry stay in the forefront of innovation while still
    protecting the consumer from being mislead or deceived about the
    product in the bottle.
        ATF assists the States and the industry in many ways. Under the
    contraband cigarette law, ATF investigates interstate shipments of
    cigarettes to ensure that the relevant State taxes are paid. ATF also
    works with the Joint Committee of the States on the Study of Alcohol
    Beverage laws to facilitate coordination between ATF and State alcohol
    authorities. Many tax information exchange agreements have been entered
    into by ATF with the States to assist in the audit of ATF regulated
    industries.
        ATF has a leading role in the international area by helping the
    United States Government to remove trade barriers that hinder exports
    by the American industries. ATF works closely with the United State
    Trade Representative in bi-lateral trade negotiations as well as in
    resolving distilled spirits and wine questions under the World Trade
    Organization obligations of the United States and under the North
    American Free Trade Agreement. ATF also represents the United States in
    international organizations related to these products.
        ATF relies on innovation, partnerships and open communications to
    achieve its goal of a regulatory and enforcement programs that ensures
    collection of the revenue that is due and responds to needs and demands
    of consumers and the various industries.
        Question. The United Nations International Study of Firearms
    regulations has been ongoing since 1995 under the guidance of U.N.
    Staff and a panel of experts. That group recently made recommendations
    to the Crime Commission to set out ways to regulate approaches to the
    civilian use of firearms among its Member States. I would be interested
    in knowing the ATF policy position concerning the following
    recommendations for global firearms regulations: (1) mandatory central
    registration and licensing of firearms and their owners, (2) mandatory
    regulations for firearms use, (3) mandatory safe storage and use
    regulations, (4) gun bans, (5) forfeiture programs, and (6) unnecessary
    regulatory burdens on industry.
        Answer. The position of the Administration is to better coordinate
    with other nations to combat International illegal firearms trafficking
    and the enforcement of existing laws. U.S. delegations are instructed
    to oppose vigorously any attempt to undermine our country's sovereign
    right to enact and enforce its own laws to combat illegal traffic of
    firearms by criminals and criminal organizations.
        It should be noted that although ATF participated in the United
    Nations International Study of Firearms, the Bureau did not participate
    in the recommendation phase of the study nor did it concur with those
    recommendations. It is ATF's position that in order to decrease the
    illegal flow of firearms to the criminal element worldwide a
    cooperative and organized effort by law enforcement agencies must be
    the key to accomplishing this goal. In this regard, the expenditures of
    enforcement energies can be best served at thwarting criminal
    activities without infringing on the rights of legitimate gun
    ownership. ATF is a neutral enforcer and regulator of the United States
    Federal firearms laws and that as an agency of the United States
    government, it does not endorse any firearms-related proposals that are
    contrary to U.S. law.
        Question. Congressman Schumer recently released a report entitled
    ``The War Between the States.'' I understand that this report was based
    upon raw data supplied by ATF. Do you believe it is accurate or
    appropriate to use ATF raw data to draw conclusions about a pattern of
    interstate migration of illegal firearms from states with weak gun laws
    to states with strong gun laws? Do you think that the disclaimer
    attached to the raw data by ATF is sufficient to prevent misuse and
    misinterpretation of that raw data?
        Answer. Congressman Schumer's report was based upon his
    interpretation of raw data supplied by ATF's NTC. ATF provided this
    information to Congressman Schumer's office at their request along with
    a disclaimer that indicated what the data represents and the
    limitations of that data. Since firearms tracing information is
    available through the Freedom of Information Act, ATF can only advise
    the data requester about the limitations of the information.
    Additionally, ATF is not in a position where it can monitor or control
    the interpretation of firearms tracing data.
        It has been ATF's experience that the problem with statistical data
    from the NTC's records is in the percentage of crime guns that
    represent the universe of crime guns in a particular area. As long as
    the data is examined in the proper context, raw data can be utilized to
    draw conclusions about a pattern of interstate trafficking. Every year
    the number of crime guns traced by law enforcement increases. In
    calendar year 1996, there were approximately 134,000 crime guns trace
    requests. ATF expects the number of crime gun traces to increase as
    more agencies utilize the NTC's services. Once this occurs, the
    accuracy of conclusions based upon firearms tracing data will increase
    since more crime guns are being traced. Until that occurs, current
    conclusions drawn from crime gun trace data must be caveated by stating
    that the findings are based on a data set that does not represent the
    entire universe of crime guns; however, drawing findings from data
    sampling as opposed to the entire data universe is a widely accepted
    and valid practice among the research and academic community.
    Reasonably valid conclusions can be drawn from such data sampling
    methods.
        Question. What plans does the Department have to modernize and
    expand the business systems for ATF's Firearms and Explosives Import
    Branch and the National Firearms Act Branch? When was the last time
    these business systems were updated?
        Answer. Modernization of the business system within the National
    Firearms Act (NFA) Branch is currently underway. The newer version is
    being designed to accommodate state-of-art technology in the processing
    of applications, notices and other documents associated with the
    manufacture, importation, transfer, registration, transport and
    exportation of NFA weapons. This particular business system has been
    subject to ongoing enhancements since 1983.
                                     ______

                              U.S. Secret Service
                              white house security
        Question. The Service is requesting additional funding and staff to
    further implement White House Security Review recommendations. Has the
    review been completed?
        Answer. In September 1996, the Secret Service forwarded the final
    report to the Treasury Department concerning the White House Security
    Review.
        Question. When do you expect to begin implementation of the
    recommendations and when will it be complete?
        Answer. All of the recommendations of this review have been
    implemented. Permanent structural security changes, pending as yet
    undetermined requirements surrounding the establishment of
    ``Presidential Park'', will be installed over the next two years.
    Further, It is anticipated that funding for all of the additional
    staffing and security enhancements will be sufficient with the funding
    requested in the fiscal year 1998 Budget Request.
        Question. Do you have any idea at this time what the total cost
    will be?
        Answer. The Service, with the funding contained in the fiscal year
    1998 funding request, will have budgeted approximately $70 million for
    this effort. Approximately $25 million of this amount is a continuing
    cost for the increased staffing. These are the total costs pending
    final decisions regarding the establishment of ``Presidential Park''.
                              year 2000 conversion
        Question. There is widespread concern about the ability of the
    Federal Government to address the Year 2000 computer problem in time.
    What is the status of your efforts?
        Answer. The Secret Service is making excellent progress converting
    our Information Technology assets to be Year 2000 compliant. We have
    already converted well over 50 percent of our mainframe/legacy code to
    be compliant, and we have active programs to correct problems
    associated with our personal computers, local area networks, and mid-
    range systems. We are actively working with vendors and service
    providers to ensure that our communications infrastructure (both voice
    and data) will function properly.
        Question. How big of a job is it for the Secret Service?
        Answer. The Secret Service has an inventory of 31 mainframe/legacy
    applications. Our initial assessment identified sixteen applications
    that were non- compliant, thirteen of which are being corrected and
    three which will be replaced with new technology. The thirteen
    applications being corrected contain a total of approximately 2.5
    million lines of source code. The Service also maintains an inventory
    of approximately 4000 personal computer systems, most of which are non-
    compliant and will need to be either corrected, upgraded, or replaced.
        Question. Have you determined whether the $1 million requested for
    fiscal year 1998 will be sufficient?
        Answer. The Secret Service has projected an overall cost for
    conversion of our information technology systems to be $3.6 million,
    including both government employees and contractor support. The $1
    million requested for fiscal year 1998 is sufficient to meet our
    contractor costs in fiscal year 1998. We also project costs in
    outyears, to cover such things as the expansion of date displays on
    reports, and other less critical or unexpected changes.
        The Service recently established a working group to specifically
    address ``non IT'' technology that could be impacted by the Year 2000.
    Until this working group has completed its inventory and assessment
    process, we cannot project the associated conversion cost.
                        financial crimes investigations
        Question. In the minds of most people, the Secret Service is
    basically responsible for protecting the President and Vice President.
    However, the Service protects all Americans in other ways such as
    cracking down on counterfeiting and investigating allegations and
    computer and telemarketing fraud. Would you care to comment on other,
    less well-known functions of the Secret Service?
        Answer. In addition to protection, the Secret Service is tasked
    with several investigative jurisdictions relating to protecting the
    public and financial institutions from organized criminal groups. The
    Financial Crimes Division of the Secret Service coordinates this
    mission and is responsible for the following:
        Plans, reviews, and coordinates criminal investigations involving
    Financial Systems Crimes, including bank fraud; access device fraud;
    telemarketing and telecommunications fraud (Cellular and hard wire);
    computer fraud; fraud associated with automated payment systems and
    teller machines; direct deposit fraud; investigations of forgery,
    uttering, alteration, false personation, or false claims involving U.S.
    Treasury Checks, U.S. Savings Bonds, U.S. Treasury Notes, Bonds, and
    Bills; electronic funds transfer (EFT) including Treasury disbursements
    and fraud within Treasury payment systems; fraud involving U.S.
    Department of Agriculture Food Coupons and Authority to Participate
    (ATP) cards; Federal Deposit Insurance Corporation investigations; Farm
    Credit Administration violations; fraud and related activity in
    connection with identification documents; fraudulent commercial,
    fictitious instruments and foreign securities; coordinates the
    activities of the U.S. Secret Service Organized Crimes Program and
    oversees money laundering investigations.
        Plans, directs and coordinates all seizures effected by the Secret
    Service under Title 18 U.S.C. 492, 981, 982 and 984, as well as Title
    49 U.S.C. 80303. Interacts with the Office of Chief Counsel to ensure
    compliance with requisite legal mandates. Routinely coordinates with
    the Treasury Executive Office for Asset Forfeiture (TEOAF) to ensure
    that all policy and procedure established by the Department of the
    Treasury are complied with. Oversees the responsibilities of the
    national storage contractor, EG&G Dynatrend, to ensure proper storage,
    maintenance, accountability and disposition of seized property. Directs
    the investigation of contesting parties' claims of pauper status, and
    the petitions of those seeking remission or mitigation of forfeitures.
    In partnership with the TEOAF oversees the sharing of assets with
    local, state, and foreign law enforcement agencies participating in
    joint criminal/forfeiture actions. Monitors legal and procedural case
    trends in the asset forfeiture community and the courts, and maintains
    appropriate liaison with other agency components in an effort to remain
    abreast of community practice.
     financial institution fraud (fif) and related criminal investigations
        On November 5, 1990, pursuant to Public Law 101-529, Section 528,
    the Secret Service received concurrent jurisdiction with Department of
    Justice law enforcement personnel ``to conduct or perform any kind of
    investigation, civil or criminal, related to fraud or other criminal or
    unlawful activity in or against any federally insured financial
    institution...''
         Annually, agents of the U.S. Secret Service review thousands of
    criminal referrals submitted by bank regulators and financial
    institutions. The Secret Service promotes an aggressive policy towards
    conducting these investigations in an effort to safeguard the soundness
    of the nation's financial institutions.
    Major Initiatives:
        U.S. Secret Service has concurrent jurisdiction with the Department
    of Justice to investigate fraud, both civil and criminal, against
    federally insured financial institutions. The Crime Bill of 1994
    extended this investigative authority to the year 2004.
        The Service's financial institution fraud program distinguishes
    itself from other such programs by recognizing the need to balance
    traditional law enforcement operations with a program management
    approach designed to prevent recurring criminal activity.
        We are encountering new and developing criminal schemes which
    attack financial institutions, particularly those crimes being
    committed by organized ethnic criminal groups such as the West
    Africans, Asians and East Europeans.
        An American Bankers Association survey last year concluded that the
    two major problems in the area of bank fraud today are:
        (1) the fraudulent production of negotiable instruments through the
    use of what has become known as ``desk top publishing'' and
        (2) access device fraud.
        Recent U.S. Secret Service investigations indicate that there has
    been an increase in credit card fraud, fictitious document fraud and
    fraud involving the counterfeiting of corporate checks and other
    negotiable instruments and false identification documents through the
    use of computer technology.
        18 USC 514 was enacted into law in 1996 to prevent the increasing
    amount of fraud through the use of fictitious instruments. This law was
    passed through the joint efforts of Congress, Department of Justice and
    the Department of Treasury. The Service's Financial Crimes Division is
    responsible for the investigations of Title 18 USC 514 (Fictitious
    Instruments).
                              access device fraud
        Industry sources estimate that losses associated with credit card
    fraud are in the billions of dollars annually.
        The U.S. Secret Service is the primary Federal agency tasked with
    investigating access device fraud and its related activities under
    Title 18 USC 1029. Although it is commonly referred to as the credit
    card statute, this law also applies to other crimes involving access
    device numbers, (e.g., automatic teller machines, cell phone accounts.)
                   counterfeit and fraudulent identification
        Since 1982, the U.S. Secret Service has enforced laws involving
    counterfeit and fraudulent identification. Title 18, Section 1028 of
    the U.S. Code, defines this criminal act as knowingly and without
    lawful authority producing, transferring, or possessing an
    identification document or false identification document in order to
    defraud the U.S. Government. The use of Desk-Top Publishing computers
    to counterfeit and produce different forms of identification for the
    purpose of obtaining funds illegally, remains one of the Secret
    Service's strongest core violations.
                                money laundering
        The Money Laundering Control Act makes it a crime to launder
    proceeds of certain criminal offenses called ``specified unlawful
    activities'' (SUA), which are defined in Title 18 USC 1956 and 1957,
    and in Title 18 USC 1961, (the Racketeer Influenced and Corrupt
    Organizations Act (RICO)).
        The Secret Service has observed an increase in money laundering
    activities as they relate to these predicate criminal offenses. This is
    especially witnessed in the area of financial institution fraud, access
    device fraud (credit card, telecommunications and computer
    investigations), food stamp fraud, and counterfeiting of U.S. currency.
                                 computer fraud
        In 1986, Congress revised Title 18 of the U.S. Code to empower the
    Secret Service to investigate fraud and related activities concerning
    computers that were described as ``Federal Interest Computers'' as
    defined in Title 18 USC Section 1030. The Secret Service has also
    investigated cases where computer technology has been used in
    traditional Secret Service violations such as counterfeiting and the
    creation of false identification documents. In order to address these
    technologically advanced violations, a number of special agents of the
    U.S. Secret Service have been trained in the forensic examination of
    computer systems as well as other electronic devices.
        In 1996, a newly established state of the art computer and
    telecommunications laboratory was added to the Financial Crimes
    Division.
                            telecommunications fraud
        The Secret Service continues to maintain its role as one the most
    active law enforcement agencies in the investigation of
    telecommunications fraud. Gangs and organized criminal groups require
    instantaneous, reliable, and international connectivity in order to
    maintain and expand their illicit operations.
        The Secret Service works closely with other law enforcement
    agencies as well as representatives of the telecommunications industry
    in conducting telecommunications fraud investigations. These types of
    investigations, in many instances, act as a nexus to other criminal
    enterprises such as access device fraud, counterfeiting, money
    laundering, and trafficking in narcotics.
                          program fraud investigations
        The Program Fraud Investigations Branch was created to coordinate
    investigations related to fraud committed against government programs
    that are within the investigative jurisdiction of the Secret Service.
    This branch is responsible for identifying systemic weaknesses in
    government programs (Electronic Benefit Transfer, food stamps) which
    permit recurring criminal activity, and recommend corrective measures
    to strengthen these systems.
                                    forgery
        Hundreds of millions of government checks and bonds are issued by
    the United States each year. This large number attracts criminals who
    specialize in stealing and forging checks/bonds from mail boxes in
    apartment houses and private homes. During a fraudulent transaction, a
    check/bond thief usually forges the payee's signature and presents
    false identification.
             operation trip (treasury recipient integrity program)
        In March 1994, the Secret Service established ``Operation TRIP,''
    which was created to identify systemic weaknesses in the Treasury
    Department's disbursement systems and to subsequently suppress the
    associated fraudulent activities involving these systems worldwide. In
    a cooperative effort with other government agencies, the Financial
    Crimes Division has assisted in establishing uniform standards of
    benefit recipient verification, developed anti-fraud disbursement
    procedures, identified weaknesses in current verification systems and
    proposed acceptable alternatives to eliminate program fraud in this
    country and abroad.
        To date, the Financial Crimes Division has assisted in Operation
    TRIP efforts in Manila, Canada, Guam, Puerto Rico, Spain, Italy,
    Germany, Japan, Korea and United Kingdom.
                              food stamp violation
        The Food Stamp Act of 1977 was enacted by Congress to provide
    nutritional food to low- income families. It further directed the
    Secret Service to aggressively pursue fraud in the food stamp program.
    The possession or use of Food Stamp Coupons, Authorization to
    Participate cards, or Electronic Benefit Transfer cards by unauthorized
    persons compromises the integrity of the Food Stamp Program, and is a
    criminal violation of the Food Stamp Act.
                    electronic benefits transfer (ebt) card
        The Vice President's National Performance Review has designated the
    Electronic Benefits Transfer (EBT) card as the method of payment for
    the delivery of recurring government cash benefit payments to
    individuals without a bank account, and for the delivery of non-cash
    benefits such as Food Stamps. For individuals with bank accounts,
    Electronic Funds Transfer will continue as the preferred method of
    making federal benefit payments. The National Performance Review has
    created the Federal EBT Task Force to design and implement the new
    nationwide program, a program which will annually deliver over $111
    billion in benefits from government agencies such as the Departments of
    Agriculture, Health and Human Services, and Veterans Affairs, the
    Office of Personnel Management, and the Railroad Retirement Board.
        The Federal EBT Task Force is attempting to design a system that
    will piggyback on the existing commercial credit/debit card
    infrastructure. The task force has proposed that EBT payment services
    be provided by financial institutions designated as financial agents of
    the government. The new EBT card will be an on-line debit system with
    benefits periodically placed in a customer's account. Customers will
    use their cards to retrieve the cash benefits from automated teller
    machines and food benefits from Point of Sale terminals at
    participating retail stores.
        The Financial Crimes Division is taking a preventive approach and
    is recommending fraud deterrent features to this new system as it is
    designed.
        As with any recurring payment system, EBT is open to a wide variety
    of fraud, including: multiple false applications for benefits,
    counterfeiting of the EBT card, and trafficking in non-cash benefits
    for cash or contraband.
        In an attempt to combat these potential attacks, the Financial
    Crimes Division has suggested the use of: biometric identifiers to
    verify applicants' identities and prevent application fraud;
    counterfeit deterrents such as four color graphics and fine line
    printing and the use of holograms and embossing in the design of the
    card; and features that allow investigators to monitor transactions and
    utilize the audit trail to identify criminals who illegally traffic in
    food benefits.
        Although the new EBT system design is still evolving, it can be
    assured that criminals with expertise in credit/debit card fraud will
    attack a program of this magnitude. Fraud associated with EBT programs
    is a violation of two of the Secret Service's primary jurisdictions;
    Title 18, USC 1029, Access Device Fraud and Title 18 USC 1030, Computer
    Fraud.
                 nigerian advance fee fraud ``operation 4-1-9''
        The U.S. Secret Service has initiated ``Operation 419'' which is
    designed to target Nigerian Advance Fee Fraud on an international
    scale. Indications are that losses attributed to advance fee fraud are
    in the hundreds of millions of dollars annually. Agents on temporary
    assignment to the American Embassy in Lagos, in conjunction with the
    Regional Security Office, supplied information in the form of
    investigative leads to the Federal Investigation and Intelligence
    Bureau (FIIB) of the Nigerian National Police. This project was
    designed to provide Nigerian law enforcement officials with
    investigative leads to enable them to enforce their own jurisdictional
    venues.
        On July 2, 1996, officials of the FIIB, accompanied by Secret
    Service agents in an observer/advisor role, executed search warrants on
    sixteen locations in Lagos, resulting in the arrests of forty-three
    Nigerian nationals. Evidence seized included telephones and facsimile
    machines, government and Central Bank of Nigeria letterhead paper,
    international business directories, scam letters and addressed
    envelopes, as well as files containing correspondence from victims
    throughout the world.
        On July 25, 1996, two of these agents received awards from the
    Secretary of the Treasury for their work in this area over the last two
    years.
                                  task forces
        The Secret Service is involved in numerous task forces with
    Federal, state, county, city, and local law enforcement agencies
    nationwide. Several of these task forces specifically target
    international organized crime groups and the proceeds of their criminal
    enterprises. All assets forfeited are shared with members of the task
    forces. Congress continues to recognize the West Africans and Asians as
    two of the emerging organized criminal groups in this country.
        These groups are not only involved in financial crimes, but
    investigations indicate that the proceeds obtained from financial fraud
    are being diverted towards other criminal enterprise. During fiscal
    year 1996, the Secret Service arrested 2,843 individuals through the
    use of task force operations. The Secret Service is involved in the
    following task forces that specifically target these groups:
            Nigerian Task Forces
            Criminal Alien Task Forces
            Financial Crimes Task Forces
            Asian Organized Crime Task Forces
            Violent Crimes Task Forces
            HIDTAs (High Intensity Drug Trafficking Areas)
            INTERPOL
            IBFWG (Interagency Bank Fraud Working Group)
            CABINET (Combined Agency Border Intelligence Network)
                         asset seizures and forfeitures
        Provides assistance to investigative offices by supplying counsel,
    direction, expertise and temporary support personnel as needed in terms
    of criminal investigations and the seizure and forfeiture of assets.
    Major Initiatives:
        Continued emphasis on forfeiture actions involving program fraud
    (e.g. food stamp fraud and Medicare fraud). This emphasis is
    underscored by specialized training of both Asset Forfeiture Division
    and field personnel, and active involvement in these investigations
    from onset to criminal prosecution.
        Continued funding of task forces which have prioritized the use of
    asset forfeiture as a significant criminal deterrent.
        Continuation of an aggressive training program to enhance the
    quality and quantity of Secret Service seizures involving fraud and
    money laundering. Continued training of field investigators and support
    components, emphasizing basic asset forfeiture skills, and providing
    skill enhancement to those already possessing a basic knowledge of the
    program.
        As a funding source for the Service, allocates monies for the
    purchase of items having intrinsic law enforcement benefit and which
    perpetuate forfeiture investigations. Such items include vehicles,
    communications systems, law enforcement/forensic technologies, and the
    purchase of evidence/information.
        Coordination of the distribution of forfeited property requested
    for official use by Secret Service field offices, as well as other
    federal, state, and local law enforcement agencies participating in
    joint investigations resulting in the seizure and forfeiture of assets.
                                    training
        The Financial Crimes Division has become involved in the training
    of foreign law enforcement officials in the areas of investigative
    techniques, types of international fraud schemes, and identification of
    systemic weaknesses in their financial systems which lead to fraudulent
    activity. The Financial Crimes Division has provided training for over
    2,000 foreign law enforcement and banking officials from the following
    countries: Latvia, Russia, Japan, Slovenia, Cyprus, Ukraine, Pakistan,
    Australia, Hong Kong, Peru, Korea, France, Aruba, South Africa, Mexico
    and Spain.
                      the economic impact to u.s. citizens
        As stated, the Secret Service recognizes that only through
    partnerships with the community, financial systems, and international
    law enforcement can an effective strategy to thwart organized financial
    crime be successful. In fiscal year 1996, the actual losses associated
    with Secret Service financial crime investigations was approximately
    $500 million. Were it not for the intervention of the Secret Service in
    identifying and arresting criminals executing these schemes, the
    industry estimated that in excess of $10 billion in ``potential
    losses'' would have occurred. These figures demonstrate the requirement
    for an innovative, flexible, coordinated law enforcement strategy
    designed to adapt to the criminal schemes of the future.
        Question. One of your other functions is financial crime
    investigations. How does your responsibility dove-tail with those of
    the Financial Crimes Enforcement Network, FinCEN?
        Answer. The Secret Service has responsibility for conducting
    investigations relating to fraud committed against federally insured
    financial institutions and systems. Federally insured financial
    institutions are required to file Suspicious Activity Reports (SARs)
    when a crime or suspected crime is committed against or through their
    institutions. The SARs are filed with FinCEN and the Secret Service
    receives the SARs through FinCEN. The SARS are filed as a result of our
    financial crime investigations and are also used to initiate
    investigations.
        Due to our unique jurisdictional responsibilities we have access to
    many of the databases which FinCEN maintains. These databases allow us
    instant access to information, and we utilize these resources prior to
    tasking FinCEN to conduct similar inquiries. Many of the agencies which
    utilize FinCEN do not possess these databases and must use FinCEN.
        FinCEN is also a repository for Bank Secrecy Act (BSA) information
    which is often used in our financial crime and money laundering
    investigations.
        The Secret Service maintains a good working relationship with
    FinCEN and is currently working with them on the SARs to create a
    database which can be utilized by all of the pertinent law enforcement
    bureaus.
                                     ______

                              U.S. Customs Service
                                 drug smuggling
        I would like to take the time to recognize in fiscal year 1996 the
    Customs Service was responsible for seizing 1 million pounds of
    narcotics, more than any other federal agency. Unfortunately, as the
    Customs Service gets better at doing its fight against drugs, the drug
    traffickers get better at smuggling across our borders.
        Question. Commissioner Weise, your submitted testimony mentioned
    intelligence as being a key objective for the Customs Service, can you
    explain the types of intelligence information you're talking about?
        Answer. With the enormous volume of activity taking place at all
    ports of entry it is imperative that Customs applies its resources most
    effectively and targets those persons or conveyances that present a
    high risk of smuggling contraband into the United States. Just like any
    other law enforcement agency, Customs develops its own intelligence
    from investigations and informants. This intelligence is specific to
    Customs border drug interdiction mission and focuses on specific
    tactical intelligence that is needed to target high risk modes of
    conveyances, traffickers and smuggling methods. In addition, Customs
    depends on the Intelligence Community and other U.S. Federal law
    enforcement agencies to provide the much needed foreign based
    intelligence that is specific to Customs collection requirements. While
    efforts of these organizations meet some of Customs requirements there
    is still a need to develop and exploit targeting intelligence that is
    specific and unique to Customs. That is why Customs established a
    series of Intelligence Collection and Analysis Teams (ICATs) along the
    Southwest border whose core responsibilities are to collect all-source
    intelligence, intensify source and informant recruiting, analyze data,
    and disseminate tactical intelligence products to line officers. The
    ICATs have been very successful in their year and a half existence and
    have contributed to the seizure of over 16,550 pounds of cocaine,
    37,214 pounds of marijuana and over $4.3 million in currency.
        Question. Can you highlight for the subcommittee the Customs
    Service's most effective tools in catching drug smugglers at the ports
    of entry?
        Answer. With the deep concealment methods that are being utilized
    by smugglers, the technologies that allow us to perform non-intrusive
    examinations have proven to be a tremendous asset. Such technologies
    include the following:
      --Large scale truck x-ray system
      --Mobile truck x-ray system (prototype system in testing)
      --Transportable gamma-ray imaging system (prototype system in
            testing)
      --X-ray vans and Pallet x-ray machines.
        In addition to the gamma/x-ray systems listed above, the following
    tools have been successfully utilized by inspectional personnel to
    detect narcotics:
      --Busters (density detection devices)
      --Laser Range Finders
      --Contraband Detection Kits (CDK's) with Fiberscopes
        Please see the attached material on Customs applied technology for
    explanations of these devices.

        [Clerk's note.--The photos of Customs applied technology do not
    appear in the hearing record but are available for review in the
    subcommittee's files.]

        While the above represents some of the most advanced technologies
    to date, one of the most effective tools in combating narcotic
    smuggling is the utilization of canines. Narcotic detection dogs have
    proven to be one of the most cost effective tools used in the fight
    against smugglers.
        One must also realize that, prior to using any of the above tools,
    the most significant factor in making seizures is the ability to target
    effectively. Sound research coupled with Officer intuition is the base
    on which meaningful enforcement is built. The most advanced
    technologies used on poor targets will yield poor results. But when the
    proper tools are put at the disposal of a well trained, well informed
    officer, the result is a well equipped individual capable of combating
    the narcotics smuggler.
        A Rocky Mountain HIDTA was created in fiscal year 1997, which is an
    entity created to coordinate drug enforcement efforts at the state and
    local level.
        Question. Can you tell me how the HIDTAs are assisting the Customs
    Service in its work at the port of entry?
        Answer. The High Intensity Drug Trafficking Areas (HIDTAs) enable
    Federal, State and local law enforcement agencies to marshal the
    efforts of manpower and assets with the consolidated mission of
    disrupting and dismantling international drug smuggling organizations
    operating in their specific HIDTA location. This is accomplished by
    collectively investigating and arresting suspects, seizing their assets
    and dismantling their hierarchy. The intelligence gathered as a result
    of the HIDTA investigations regarding smuggling methods, routes and
    techniques is in turn provided to those border interdiction agencies
    such as Customs and the Border Patrol.
        Customs inspectional personnel conducting narcotics enforcement
    operations at the Ports of Entry are faced with enormous volumes of
    cargo and passengers entering the United States. Inspectors focus their
    attention on the ever changing trends and concealment methods employed
    by the smuggling organizations. The intelligence provided as a result
    of the HIDTA investigations assist Customs Inspectors to identify and
    target vehicles, pedestrians and specific cargo shipments.
                               border corruption
        Commissioner Weise, there have been numerous articles on the
    apparent corruption of Customs agents and inspectors, primarily along
    the Southwest border. And of course, it's the scandal that sells papers
    in this town, so unfortunately the actions of a small number of corrupt
    people get more attention. The Customs Service has responded not only
    with requesting an FBI investigation, but also in proposing to fund
    relocations of Customs agents.
        Question. Under this program of agent relocation, would the agents
    be transferred voluntarily or involuntarily?
        Answer. The Office of Investigations does not currently have a
    system to rotate personnel off the Southwest Border. Personnel assigned
    to the Southwest Border must apply and are relocated based upon merit
    staffing practices. They can be reassigned on a voluntary or
    involuntary basis, dependent upon Customs needs. Customs seeks to fill
    all assignments with volunteers where possible. However, if sufficient
    volunteers cannot be found, personnel may be relocated to meet the
    threat.
        Question. Would these transfers be focused on particular
    individuals thought to be susceptible to corruption or would this be a
    random transfer program in high-threat drug zones?
        Answer. Were Customs to establish a formal rotational policy on the
    border, the policy would require employee rotation on a systematic
    basis after the completion of a border tour. A systematic relocation
    policy would be based upon law enforcement threat. This would enable
    Customs to effectively maintain its border presence and systemically
    rotate personnel off the border to a new duty station. A new agent
    would be assigned to the border location. Of course, the establishment
    of a formal rotation policy on the border so that our personnel could
    be systemically rotated would require that Customs be provided the
    additional funding required to implement the policy. This has been a
    problem previously when attempts to establish a formal rotation program
    failed due to a lack of resources. Currently, Customs estimates that
    the average cost to relocate one employee agent is $60,000. These
    expenditures would have to be allocated to Customs before the agency
    personnel could be rotated on and off the border upon completion of a
    tour of duty.
        Question. Could you outline for the subcommittee what type of
    person would the Customs Service look to transfer?
        Answer. Customs could transfer agent personnel on an systematic
    basis since all agents are subject to mobility reassignment as a
    condition of employment. While recognizing the funding requirements, If
    properly funded, it would be better to systematically rotate personnel
    onto and off the border. If funded, a systematic approach to agent
    relocations would be the best way to assist in the elimination of
    perceived corruption on the border. A systematic approach to rotation
    in hard-to-fill border locations would also enhance recruitment of
    highly qualified personnel and would enhance morale on the border.
        Question. If someone was identified as being potentially influenced
    by drug smugglers, why would Customs just transfer them instead of
    separating them from the Customs Service?
        Answer. The term ``influenced'' is somewhat ambiguous.
    Understanding the underlying meaning of the question however, an
    employee suspected of wrong doing would be subject to investigation. If
    this investigation could prove by a preponderance of the evidence (the
    standard used by the Merit Systems Protection Board (MSPB)) the
    employee in question would be subject to disciplinary actions including
    separation. In the case of special agents, Customs has the ability to
    relocate these employees for a variety of reasons, including concern
    over conflicts of interest or public perception of same.
                                 current issues
        At the direction of Congress, the GAO has conducted an initial
    survey of the Customs' computer modernization program called ACE, or
    Automated Commercial Environment.
        Question. What did the Customs Service request for the ACE program
    in fiscal year 1998 and under which accounts are the funds requested?
        Answer. The President's fiscal year 1998 Budget contains $15
    million for ACE as part of the Treasury Department's Automation
    Enhancement Appropriation. As was done in fiscal year 1997, these funds
    will be transferred to Customs in the Salaries and Expenses Account.
        Question. What is the ACE request amount based on?
        Answer. The ACE budget request for fiscal year 1998 is $15 million,
    which is the annual recurrence of the amount requested in Customs
    fiscal year 1995 ACE budget initiative. That initiative assumed a
    multi-year approach for developing ACE, with the annual budgets
    directed toward the segments of the system development life cycle
    occurring during those years. Having completed the strategic planning
    and user requirements for ACE in fiscal year 1995, and the functional
    requirements and internal prototyping in fiscal year 1996, Customs is
    now engaged in developing the first operational demonstration of ACE
    which will be implemented as the National Customs Automation Program
    (NCAP) prototype beginning at the end of fiscal year 1997. Based on
    this progress and the recently updated ACE Project Plan, we have
    developed a detailed budget plan for fiscal year 1998.
        Rather than a single ``switch on'' of the new system, ACE will be
    implemented in a series of ``releases'', each comprising a set of
    automated features, and deployed to selected Customs ports and segments
    of the trade community. This is the only effective way to implement a
    system of this size and manage the inherent risk appropriately,
    especially when transitioning from a legacy system (ACS) that has been
    in operation for 13 years supporting Customs and the trade community.
    The NCAP prototype will be the first such release, followed by four
    more major releases staged in 9-12 month cycles. Each release will
    actually be deployed as a series of sub-releases 2 to 4 months apart.
    The current ACE Project Plan describes, in detail, the schedule for the
    NCAP prototype and the first major release of ACE. This plan is the
    basis for the fiscal year 1998 ACE budget.
        For fiscal year 1998, Customs plans to complete the implementation
    of the NCAP prototype (by June 1998) and develop the first sub-releases
    of Release 1 which will deployed in the beginning of fiscal year 1999.
    Customs also plans to expand the deployment of the Trend Analysis
    Platform (TAP) and ACE data warehouse, which are analytical systems
    that support field users of both ACE and the current legacy system
    (ACS). Planned activities for fiscal year 1998 that are supported by
    the ACE budget are (in $000s):

                                                                     Dollars
            Project component                                   in thousands
    Continuing definition and analysis of requirements................$2,800
    User training and outreach........................................   950
    Design, programming and testing................................... 3,700
    Project management................................................   400
    Security planning and design......................................   450
    Team support......................................................   840
    TAP and data warehouse development/expansion...................... 1,750
    Database design/administration....................................   360
    Selectivity redesign project...................................... 2,750
    ACE field equipment deployment.................................... 1,000
                            -----------------------------------------------------------------
                            ________________________________________________
          Total.......................................................15,000

        The NCAP prototype which will be deployed during fiscal year 1998
    and which is the primary product delivered with the fiscal year 1998
    funding will have the following scope:
      --it will process truck cargo arrivals at the ports of Laredo, TX,
            Detroit, MI, and Port Huron, MI;
      --based on responses to a recent Federal Register notice announcing
            the prototype, there will most likely be five major importers
            participating;
      --the prototype will implement three of the key automated features
            from the NCAP portion of the Mod Act--reconciliation, remote
            filing, and periodic filing.
      --NCAP will include a national, periodic financial statement with
            automated payment and an accounts receivable subsidiary ledger
            (required by the CFO Act);
      --it will demonstrate the streamlined ACE ``Track 4'' process for
            releasing cargo with minimal information burden on the trade
            participants; and,
      --it will demonstrate an account-based approach to improving
            compliance and tracking compliance related activities.
        The first sub-releases of Release 1, which will be developed during
    the last half of fiscal year 1998 and deployed in early fiscal year
    1999, will expand the NCAP prototype functions to rail cargo and will
    also implement the ``Track 2'' and ``Track 3'' approaches for handling
    required trade data. fiscal year 1998 will also include the expanded
    deployment of the initial NCAP prototype functions to an additional six
    land border ports: Buffalo, Blaine, El Paso, Nogales, Champlain, and
    Eagle Pass.
        Question. How significant of a threat do Customs Service personnel
    face with weapons of mass destruction and precursor chemicals?
        Answer. There is a small yet significant threat to Customs Service
    personnel posed by the illegal export or import of weapons of mass
    destruction or their components. This is supported by threat
    assessments that have been conducted by the Intelligence Community and
    by the results of a pilot program conducted by the Customs Service and
    the Department of Energy, relative to the detection of radioactive
    isotopes at several large international airports in the United States.
        Conversely, the threat to Customs Service personnel posed by the
    illegal trafficking of precursor chemicals remains high. The attempts
    at either importing or exporting illegal precursor chemicals poses a
    very serious threat to Customs Service personnel stationed at the
    various border inspection facilities throughout the U.S. This was
    evident in a recent incident on the Canadian Border where Customs
    Service personnel intercepted a large quantity of un-manifested
    precursor chemicals used to clandestinely manufacture Methamphetamine.
    These precursors were in a tractor trailer rig loaded with commercial
    merchandise destined for the U.S. Although this seizure and arrest was
    effected without injury or contamination of the Customs personnel
    involved, the potential for injury or contamination, when dealing with
    un-manifested precursors, is extremely high.
        Question. There is a presence of the National Guard at ports of
    entry. Can you describe what the role of the Guard is at ports of entry
    and the percentage of the Customs' workload the Guard is a part of?
        Answer. National Guard support for our drug interdiction mission
    has become an integral part of Customs anti-smuggling efforts.
        Some of the specific ways the National Guardsmen assist Customs
    personnel include the following:
        National Guard personnel assist Customs Canine units by
    facilitating rapid searches of cargo, baggage, and conveyances.
        Operating under State authority and under direct Customs
    supervision, they assist in conducting pre-primary inspections,
    Southwest Border Team Oriented Processing (STOP) operations, inspecting
    truck cabs, fuel tanks, tires, trailers and arriving cargo using
    density meters (Busters), laser range finders, fiber optic scopes, as
    well as forklifts, power tools, and vehicle lifts.
        They assist in the devanning and reloading of cargo containers,
    trailers and commercial shipments.
        They assist in traffic control and the handling, transportation,
    and destruction of seized narcotics.
        They assist inspectional personnel by operating many high
    technology, non-intrusive detection devices such as mobile and
    permanent x-ray systems and hand-held density meters.
        The assistance provided by the National Guard in counter-drug law
    enforcement has been invaluable and is directly responsible for Customs
    achieving many drug seizures and related arrests. In the commercial
    cargo environment in fiscal year 1997 to date, members of the National
    Guard operating at the ports of entry in the United States participated
    and provided support in 89 narcotics seizures totaling over 75,000
    pounds of marijuana and cocaine.
        As a force multiplier, Guardsmen supplement existing staff thereby
    increasing the number of examinations, and more importantly, increasing
    the intensity of these exams. National Guard support proportionally
    increases the number of seizures made by Customs by increasing the
    number of inspections conducted on high risk shipments and conveyances.
    The added staff also decreases the inspection time per shipment and
    conveyance.
        Question. How does the Customs Service use technology to assist in
    its mission?
        Answer. Technological improvements in computer processing and
    targeting along with inspectional aids like the x-ray facility in Otay
    Mesa, California have helped us with the challenge of combating
    narcotics smugglers.
        Due to the fact that drug traffickers are themselves investing in
    high technology to advantage their own smuggling operations and defeat
    ours, Customs employees have been equipped with better tools to perform
    more intensive narcotics exams and investigations. Along the Southwest
    Border for example, port infrastructures have been fortified to include
    four additional nonintrusive truck x-ray systems in fiscal year 1997.
    The following ports of entry have been scheduled to receive fixed site
    (Otay Mesa style) truck x-ray equipment:
      --Calexico, California (new cargo facility)
      --El Paso, Texas (Bridge of the Americas)
      --El Paso, Texas (Ysleta)
      --Pharr, Texas
        The truck x-ray at Calexico, California, has been completed and has
    been operational since March of this year. The additional nonintrusive
    inspection systems for El Paso and Pharr are scheduled to be
    operational by October 1997. This will increase the number of
    operational fixed-site x-ray equipment from a current level of one
    system operating in Otay Mesa, California, to a total of five systems
    at the above referenced ports of entry.
        Additionally, Customs is testing mobile x-ray and transportable
    gamma ray technology at various ports of entry along the Southwest
    Border. A mobile-truck x-ray prototype system was used at the Nogales,
    Arizona, port of entry in support of an all inclusive statewide
    enforcement operation. This system is scheduled move to various Texas
    ports of entry this year in support of Customs coordinated enforcement/
    intelligence operations planned for that region.
        Seizures in the commercial cargo environment in fiscal year 1996
    more than doubled over fiscal year 1995 levels. This dramatic increase
    was largely due to the implementation of technology and inspection
    techniques in support of enforcement operations along the Southwest
    Border, especially Operation Hard Line. The amount of cocaine seized by
    weight in the commercial cargo environment along the Southwest Border
    increased by a factor of almost 5 over fiscal year 1995 levels to a
    total of 15 cocaine seizures weighing 15,114 pounds.
        In addition, as part of Operation Hard Line, money has also been
    allocated to purchase equipment such as pallet x-rays, x-ray vans,
    portable contraband detectors (Busters), fiberscopes, and computers to
    allow inspectional personnel to conduct faster, more intensive, less
    intrusive examinations.
        Customs has numerous automated and non-automated cargo programs in
    place to meet the threat of smuggling. Customs automated systems were
    structured to be dynamic and versatile to address the fluctuation in
    smuggling trends, with the ultimate goal of identifying high risk cargo
    for examination without inhibiting the movement of legitimate trade.
    These programs include the Cargo Selectivity System and Three Tier
    Targeting System within our Automated Commercial System (ACS) and the
    Line Release Program. System criteria may be initiated at both the
    national and local level.
        Customs has also developed an Automated Targeting System (ATS) to
    assist Customs officers in identifying importations which pose a
    substantial risk of containing narcotics or other contraband. It is a
    rule-based expert system which combined the best features of two
    previous targeting systems into a single screening, profiling and
    targeting system. ATS has been installed in Newark, New Jersey, and
    Laredo, Texas. The Anti- Smuggling Initiative in the fiscal year 1998
    budget request seeks $3.0 million to continue the installation of this
    system at other high-risk ports.
        With the passing and implementation of NAFTA there has been a
    relaxing of traditional trade restriction with the US, Mexico, and
    Canada.
        Question. Can you explain NAFTA's impact on the Customs Service,
    including workload?
        Answer. While the goal of NAFTA to reduce trade barriers between
    the parties has been somewhat realized, the passage of NAFTA has not
    reduced the regulatory and enforcement workload of Customs. NAFTA has
    increased Customs workload primarily in two ways. Quantitatively, trade
    volume with Canada and Mexico has increased markedly since the
    enactment of NAFTA. The table below shows this growth.

                              [Dollars in billions]
    ------------------------------------------------------------------------
                                           1994         1995         1996
    ------------------------------------------------------------------------
    Value of Trade between the U.S.,
     Canada and Mexico...............       $172.2       $206.6       $230.7
    Change from previous Year
     (percent).......................  ...........           20           12
    Change from 1994 Baseline
     (percent).......................  ...........           20           34
    ------------------------------------------------------------------------

        Land border traffic has increased approximately 25 percent from
    1995 to 1996. In 1996 approximately 3.5 million trucks crossed our land
    borders with Customs inspecting over 900,000. Customs must process this
    increasing trade volume without significant increases in staffing.
        Qualitatively, NAFTA has added additional complexity and regulatory
    activity to Customs workload because of the verification mechanism
    provided for in the agreement. A NAFTA verification is performed by the
    importing nation's customs administration to determine if goods
    claiming NAFTA preferential treatment qualify for this treatment.
    Verifications are principally conducted by written questionnaires and
    site visits. Customs sends questionnaires to the importer/producer who
    executed a Certificate of Origin or conducts a visit to the exporting
    country to ensure compliance with the appropriate ``rule of origin.''
    The procedures for these verifications are found in 19 CFR 181.71-76.
    The table below provides detail on the number of verifications Customs
    has performed to date.

    ----------------------------------------------------------------------------------------------------------------
                                                                                  Actual
                    NAFTA Verifications Performed                --------------------------------------- To date \1\
                                                                      1994         1995         1996         1997
    ----------------------------------------------------------------------------------------------------------------
    Canada......................................................          271          882        1,807          241
    Mexico......................................................          128          411          646          109
                                                                 ---------------------------------------------------
          Total.................................................          399        1,293        2,453          350
    ----------------------------------------------------------------------------------------------------------------
    \1\ As of 5/15/97.

        Additional complexities result from the opportunity for importers
    to file for NAFTA treatment up to a year after date of importation if
    an entry has not been liquidated. This requires Customs to research
    entry documentation and perform additional verifications in order to
    determine whether any refund is due the importer (see 19 CFR 181.31).
    This provision is being used by an increasing number of importers as
    they become more experienced in operations under NAFTA.
        The NAFTA Implementation Act includes a provision for establishing
    an academic center to focus on Western Hemispheric Trade.
        Question. It is the subcommittee's understanding that there was
    $2.5 million for the Texas center and $2.5 million for the Montana
    center. Can you provide for the Record the status of the funding of
    each of these centers?
        Answer. Customs fiscal year 1997 Appropriation (Public Law 104-208)
    contained the following provision: ``. . . That of the funds
    appropriated $2,500,000 may be made available for the Western
    Hemisphere Trade Center authorized by Public Law 103-182''. The
    Conference Report (Rep 104-863) to that legislation contained language
    stating that the conference agreement provided $2.5 million for the
    Western Hemispheric Trade Center.
        Customs has no knowledge of any requirement to provide $2.5 million
    in fiscal year 1997 to the Montana center.
        Question. If the funding has not been allocated to the centers,
    please provide the subcommittee information why the funding has not
    been allocated and what would need to be done in order for that funding
    to be allocated.
        Answer. As of May 14, 1997, Customs is awaiting the submission of a
    budget proposal detailing how the funds would be spent from the Center
    at Texas A&M University. Once the Customs Contracting Officer approves
    the budget plan, the funds will be provided to the Center, via a
    modification to their current grant agreement, within 30 days.
                               air/marine program
        The Customs Service Air and Marine program is responsible for
    helping to detect, sort, track, and apprehend aircraft and vessels
    involved in smuggling.
        Question. What are the current staffing levels of both the Air and
    Marine program?
        Answer. The current Customs Air Interdiction Division has a total
    on board strength of 740 as shown below.

                      Current Staffing--Customs Air Program

                                                                   Number of
            Job category                                           personnel
    Pilots and Flight Engineers.......................................   322
    Air Interdiction Officers.........................................   109
    Detection Support Specialists.....................................    93
    Field Management and Support......................................   196
    Headquarters Management and Support...............................    20
                            -----------------------------------------------------------------
                            ________________________________________________
          Total.......................................................   740

                    Current Staffing--Customs Marine Program

                                                                   Number of
            Job category                                           personnel
    Marine Enforcement Officers.......................................    91
    Special Agents (certified to operate vessels).....................    80
                            -----------------------------------------------------------------
                            ________________________________________________
          Total.......................................................   171

        Question. Are the Southwest border and Miami areas staffed
    sufficiently to perform their role in the Customs Service interdiction
    efforts?
        Answer. In light of a constrained budget environment, the
    Administration believes that Customs proposed staffing on the Southern
    border presents a balanced resource allocation and the Customs budget
    is well-crafted to realize long-term returns on investment in better
    tools and logistics for more efficient interdiction operations. We have
    made operational employment adjustments to maximize the effectiveness
    and efficiency of our existing Air resources. For example, sharing of
    the alert response commitment on a coordinated basis between field
    elements has allows Customs to cover more land areas with fewer
    aircraft and personnel--given the current threat assessment. The
    diminished airborne intrusion threat levels the past four years have
    enabled us to sustain a minimum deterrent posture. However, any
    resumption of large-scale domestic general aviation drug trafficking
    will call for a reassessment of these techniques.
        Through funding associated with Operation Gateway, Customs received
    twenty-three additional marine enforcement officers to meet the growing
    marine smuggling threat in Puerto Rico and the Caribbean area. With
    this expanded enforcement effort in Puerto Rico, Customs has seen a
    rise in marine smuggling activity along the Southern tier.
        Question. Can you provide the subcommittee the status of the
    retrofit of the P-3 airplanes the Customs Service acquired last year?
        Answer. The two P-3s slated for retrofit were transferred to the
    Customs Service in March 1997, after being excessed from Department of
    Defense (DOD) inventory. Both aircraft have been removed from desert
    storage at Davis-Monthan Air Force Base in Tucson, AZ, prepared for
    flight and flown to Lockheed Martin Aircraft Center at Greenville, SC.
    There they will soon begin depot-level phased maintenance to prepare
    them for eventual modification to Customs P-3 AEW configuration.
        Customs anticipates the signing of the contract modification with
    Lockheed Martin in September, 1997, with eventual delivery of the P-3
    AEW aircraft in mid to late 1999. The Office of the Deputy Assistant
    Secretary of Defense for Drug Enforcement Policy and Support (DEP&S)
    received $56.2 million of the total $98.2 million appropriated for
    Customs P-3 AEW conversions. The balance ($42.0 million) was
    appropriated to the Office of National Drug Control Policy (ONDCP)
    which transferred the funds directly to Customs. After numerous
    discussions, DEP&S has agreed to enter into an Economy Act Agreement
    whereby Customs will contract for both P-3 AEW aircraft with Lockheed
    Martin with reimbursement from DEP&S. All retrofit program
    requirements, including spare parts and nonrecurring engineering costs,
    are included.
        Question. Do you have enough personnel in the Air and Marine
    program to utilize your equipment sufficiently?
        Answer. As we pointed out in our response to the question relative
    to staffing and performance in Florida and along the Southwest border,
    we have a sufficient number of personnel in the Aviation Program to man
    our equipment on the current schedule.
        Customs currently has ninety-one Marine Enforcement Officers along
    the southern tier and eighty Special Agents that have been certified as
    vessel operators. The Special Agents are performing the role of vessel
    operator on a part-time basis to address the increase in marine
    smuggling events.
        Question. How many P-3 aircraft will the newly requested P-3 hangar
    accommodate?
        Answer. The second hangar bay will accommodate one aircraft. The
    additional hangar bay will be used for maintaining aircraft rather than
    storage. The existing hangar bay is used exclusively for mandatory,
    time-consuming heavy phased maintenance programs. The second hangar bay
    will permit indoor opening of fuel cells and other delicate (corrosion
    prone) areas of the aircraft, while protecting against the elements and
    related introduction of corrosion and damaging materials to these vital
    components.
        Safety is also a critical factor in determining the need for an
    additional hangar. Maintenance operations utilizing bucket trucks, man
    lifts and forklifts in lieu of the more appropriate overhead hangar
    hoist are dangerous. The second hangar, like the existing hangar, will
    be used exclusively as a maintenance facility thus enhancing the
    operational availability of the P-3 aircraft and providing a safer
    working environment. In addition, a significant dollar savings will be
    realized by reducing corrosion damage and effectively extending the
    useful life of these aircraft.
                                  base funding
        There is funding outlined in the budget request which indicated
    that the base is fully funded.
        Question. Is your base fully funded?
        Answer. Customs base funding is an aggregate of funding received in
    past years for a variety of purposes. An attempt is made each year to
    make the appropriate adjustments for ``maintaining current levels,''
    but occasionally these adjustments are insufficient to meet increased
    costs from one year to the next. The fiscal year 1998 President's
    Budget includes $29.0 million to address a funding shortfall for rent
    requirements associated with new headquarters and border facilities,
    $10.0 million for replacement vehicles, $5.735 million for Laboratory
    Modernization, and $4.0 million for agent relocation to correct these
    identified deficiencies.
        Question. How many positions (FTE) are unfilled?
        Answer. Customs currently has 210 vacant FTEs comparing our on-
    board strength with our FTE controls.
        Question. What would it take to fill those positions?
        Answer. The completion of hiring for fiscal year 1997 initiatives
    (Operation Hard Line, Gateway and, Counter-Terrorism) during the
    remainder of fiscal year 1997 will fill most of these vacant FTEs.
        Question. Is the amount requested to maintain current levels
    accurate? What will all of this funding be applied to?
        Answer. Customs is requesting a total of $42.3 million to meet its
    increasing obligations due to pay raises, benefits, agency
    contributions to the civil service retirement funds, and other expected
    increases in the cost of operations. Customs is also requesting $29.2
    million to address a shortfall in the funding for its projected rent
    requirements in fiscal year 1998.
        Of the total amount, the budget request provides for a $25.6
    million increase to pay for the fiscal year 1998 pay raise for three-
    quarters of a year and annualize the fiscal year 1997 pay raise. Of the
    $25.6 million, $18.0 million is requested for the 2.8 percent increase
    in the fiscal year 1998 pay raise and $7.6 million is requested for the
    annualization of the fiscal year 1997 3.0 percent pay raise.
        Customs is also requesting an increase of $9.8 million for benefits
    to pay the regular increases in the cost of retirement and health
    benefits, permanent changes of station, and worker's compensation.
        Finally, Customs is requesting $6.9 million that is needed to fund
    other expected non-pay increases in the cost of Customs operations.
        All of these amounts, except for Customs unique rent situation
    stemming from building relocations and facilities expansion, are
    generated centrally by Treasury using standardized factors and
    methodology.
        Question. When President Clinton took office he issued Executive
    Order 12837 that mandated the reduction of administrative costs, as
    well as personnel over a four year period. fiscal year 1997 was the
    last year of the Order, will you continue to maintain the mandated
    reductions in fiscal year 1998?
        Answer. The administrative reductions mandated by Executive Order
    12837 have been maintained in Customs base funding requests. Therefore,
    with the exception of the recognized deficiencies in rent funding,
    vehicles, laboratory modernization, and agent relocation that the
    fiscal year 1998 President's budget seeks to rectify, the out-year
    effect of these reductions will continue.
                        fiscal year 1998 budget request
        Commissioner Weise, the fiscal year 1998 budget request for Customs
    includes $1.1 million from the Crime Bill funding for the construction
    of canopies for inspection sites at outbound sites.
        Question. Can you detail for the subcommittee what conditions
    Customs inspectors are working under such that they would need such
    protections?
        Answer. The $1.1 million budget request for fiscal year 1998 is for
    the construction of outbound facilities that include canopies.
    Currently, very few land border ports of entry have facilities where
    outbound inspections can be properly conducted. Outbound inspections
    are often conducted on busy interstate highways where vehicles travel
    at dangerously high speeds, creating a safety risk for inspectors as
    well as the public. Outbound inspections are often rerouted to inbound
    facilities which creates both a safety and control concern.
    Administrative outbound offices are usually within inbound facilities,
    far removed from point of exit. Outbound inspection areas lack computer
    terminals with Treasury Enforcement Computer System (TECS), National
    Crime Information Center (NCIC), and Automated Commercial System (ACS)
    access increasing the difficulty of performing comprehensive
    examinations. The canopies will serve to provide power and lighting and
    protection from oppressive and inclement weather conditions for both
    staff and equipment. Currently along the southern border, inspectors
    are conducting outbound inspections in a climate that often exceeds 100
     deg.F. The lack of cover also leaves the inspectors and public exposed
    when it rains.
        In the fiscal year 1998 budget request, under the Performance
    Measures under the Tariff and Trade activity, there is a listing of
    ``Customer Service (Trade)'' on S&E p.29 item nine is ``Open Protests
    Older than 1 Year''
        Question. The Protests plan you have listed at 2,000 and actual at
    7,316. Can you provide the subcommittee with information why there is
    such a large backlog of trade protests and how the Customs Service
    intends to get to the 2,000 backlog rate?
        Answer. This performance measure is a count of protests that are
    not settled within a year of submission. 19 U.S.C. Sec. 1514 allows
    importers or interested parties to administratively challenge Customs
    decisions relating to imported merchandise. In addition, 19 U.S.C.
    Sec. 1520 (c) (1) allows a party at interest to petition for correction
    of a mistake in fact, clerical error, or other inadvertence not
    amounting to an error in the construction of the law. The total open
    protests for fiscal year 1996 were 7,316. This situation was the result
    of the increased number of protests filed as a result of NAFTA, which
    allows the importer to file a petition to request liquidation of an
    entry for a refund when duty-free treatment was not claimed at time of
    entry. This protest procedure provides for a payment of 8 percent
    interest on the duties paid by the importers, which is above bank
    rates, perhaps encouraging importers to delay requesting refunds up to
    a year from entry. A technical amendment to the law was put forward in
    an attempt to end this benefit. Although it passed (Public Law 104-
    295), importers have identified another avenue of successfully delaying
    protest resolution thereby continuing the interest collection.
        The current number of open protests over a year old, 5,748,
    represents a 21 percent decrease. Customs strives to reduce the cycle
    time of protest processing by increased training, improved management
    controls, plus implementation of the Electronic Protest Filing program,
    an important component of the National Customs Automation Program
    (NCAP). The use of this performance measure has been discontinued after
    fiscal year 1996.
        Question. Can you provide the subcommittee information on the
    number of work hours the new truck x-ray saves the Customs Service in a
    year?
        Answer. To the inspectional personnel on the border, the truck x-
    ray is viewed as a tool, like the canine teams and other non-intrusive
    examination equipment, which can increase the quality of the
    inspections performed on commercial conveyances entering the United
    States. In addition, because trucks, trailers, and cargo are frequently
    physically examined, as well as x-rayed, the x-ray system is viewed as
    complementing, rather than actually replacing the physical inspection
    of the truck, trailer, and cargo. Because the x-ray system complements,
    rather than replaces physical inspections, any discussion of the number
    of work-hours saved by the x-ray system must be viewed cautiously, and
    in terms of ``potential'' work-hours saved.
        The Cargo Search truck x-ray system that is currently in place in
    Otay Mesa, California can process, on average, 6 trucks per hour. The
    truck x-ray requires a minimum of three persons to operate the system
    at all times. The x-ray is used effectively to examine both unloaded
    and loaded trucks for false compartments; false front walls, roofs, and
    floors; and for concealments in the truck/trailer frame, tanks, tires
    and other parts of the conveyance.
        If the system is operating at peak efficiency, with no down time,
    it would be able to process approximately 30,000 empty or full trucks
    and trailers per year. On average, three inspectors, working under
    optimum conditions, with no down time, can perform three 100 percent
    examinations each hour on empty trucks and trailers in Otay Mesa.
    Therefore, the truck x-ray allows a team of three inspectors to examine
    twice as many empty trucks as they could do without the x-ray, with
    comparable or greater assurance of the effectiveness of the exam. It is
    important to note that in fiscal year 1996, 45 percent of the incoming
    trucks on the southern border were empty.
        The truck x-ray unit was not designed to penetrate the cargo of a
    loaded truck, therefore the x-ray system does not replace the devanning
    of loaded trucks when the inspectional personnel feel it is necessary.
    However, the system has discovered drug shipments in some low density
    commercial cargo shipments. The x-ray system can save time by allowing
    the inspectors to concentrate their efforts on specific portions of the
    loaded truck/trailer which appear questionable in the x-ray image.
        Question. In fiscal year 1997, did the Customs Service receive
    funding to cover the mandatory pay raises or did it have to absorb the
    cost of those pay raises?
        Answer. Yes, Customs received the requested funding to cover the
    fiscal year 1997 pay raise as well as other expected cost increases in
    its appropriation. This funding was partly offset by other reductions
    to the fiscal year 1997 President's Budget request.
        Question. In the fiscal year 1998 request, S&E p. 45, there is a
    listing of fiscal year 1997's denied requests. Can you supply the
    subcommittee information on the rationale for the denial of each
    request?
        Answer. The table on page 1143 of the fiscal year 1997 Conference
    Report (H. Rep. 104-863) constructs the fiscal year 1997 appropriation
    from the fiscal year 1996 enacted level. Those items requested in the
    fiscal year 1997 President's Budget and not included in the table were
    denied without comment.
        Question. Is there a duplication of effort with the Customs Service
    lab and ONDCP and Department of Defense labs in the same areas?
        Answer. It is assumed that the term ``labs'' implies the research,
    development and evaluation (RD&E) projects that are sponsored by
    Customs, ONDCP, and the Department of Defense (DOD).
        There is very little duplication among the three areas due to the
    facts that the programs at each organization have different RD&E
    objectives, and that strong coordination exists among the three
    agencies. To the first point, Customs is a ``user'' of technology, and
    as such benefits from the external support provided by both ONDCP and
    DOD. Thus we are not cognizant of any duplication of efforts that might
    result in an overlap of programs, at least to the extent that it
    impacts our mission. The ONDCP technology programs that support Customs
    generally are more in the research area, and often end with a ``proof-
    of-concept'' demonstration. On the other hand, the projects that the
    DOD's Counterdrug Technology Development Program (CTDP) funds for
    Customs are less research oriented, and more toward the development and
    evaluation of prototype systems, primarily in the non- intrusive
    inspection area, that Customs cannot afford to develop or demonstrate
    on our own R&D budget. A good example of this is the gamma-ray imaging
    system, designed to inspect empty tanker trucks crossing the Southwest
    border for contraband hidden in the tank. Customs originated and
    initially funded the project, ONDCP provided major funding resulting in
    a proof of concept and prototype, and DOD is providing further funding
    for testing, evaluation, training, maintenance, and National Guard
    support for initial operational deployment under Customs direction.
        There is also considerable coordination among the agencies. One
    example is that the program managers of Customs RD&E, CTAC (Counterdrug
    Technology Assessment Center), and CTDP meet monthly to discuss, plan
    and coordinate their joint programs of interest.
        Question. Of the $15 million requested in fiscal year 1998 from the
    Violent Crime Reduction Trust Fund for the Anti-Smuggling, non-
    intrusive automated targeting systems, what portion of those costs are
    recurring and what portion of those costs are non-recurring?
        Answer. The $15 million requested is for two separate initiatives:
    the first is $12 million for two higher energy, fixed-site non-
    intrusive inspection systems, and the second is $3 million for the
    expansion of the automated targeting system to high-risk land and sea
    ports of entry. In both cases approximately 90 percent of the funding
    requested is non-recurring. The out year operations and maintenance of
    these systems is approximately $1.5 million per year which will be
    recurred.
        Question. In the fiscal year 1998 request, S&E p. 54 under the
    Direct Obligations Related to the Crime Bill, there are listed
    ``Civilian personnel benefits'' and ``Benefits to former personnel''.
    The VCRTF is to be used for non-recurring costs, therefore why does the
    Customs Service have continuing personnel benefits in this category?
        Answer. The fiscal year 1998 President's Budget contains a request
    for $4.0 million to fund an Agent Relocation initiative from the
    Violent Crime Reduction Trust Fund (Crime Bill). According to OMB
    guidance, a portion of relocation expenses is paid in ``Civilian
    Personnel Benefits'' (object class 12).
        ``Benefits to Former Personnel'' (object class 13) is a part of the
    standard display format, however, no obligations are shown in fiscal
    years 1996-98.
        Question. What will the Customs Service do when the VCRTF funding
    runs out in fiscal year 1999?
        Answer. Section 1900(e) of the Violent Crime Control and Law
    Enforcement Act of 1994 authorizes $125 million for appropriation to
    Treasury bureaus in both fiscal year 1999 and fiscal year 2000. During
    each budget formulation cycle, Customs and Treasury deliberate with OMB
    and ONDCP to achieve the most effective proposed allocation of VCRTF
    resources. This does not guarantee funding for Customs, and in fact,
    Congess did not appropriate any VCRTF funding to Customs in fiscal year
    1997.
                                     ______

                      Questions Submitted by Senator Kohl
                      Under Secretary for Law Enforcement
                                project outreach
        Background: Project Outreach is a voluntary program that involves
    partnerships with the local communities. All Treasury agencies are
    invited to participate by providing law enforcement agents to the
    program on a voluntary basis. According to Treasury's report on the
    program, Alcohol, Tobacco and Firearms is a major player in Washington
    D.C. and Customs is a large participant in the Nationwide program. It
    is my understanding this program is conducted with churches, boys and
    girls scouts and/or other organizations.
        Question. What is the genesis of this program?
        Answer. Project Outreach, which is aimed at reducing drug use and
    violence among teen-agers, was conceived of by a staff member of
    Treasury's Office of Enforcement in the summer of 1988. The idea was to
    encourage others in the community to become personally involved in the
    anti-drug effort, by setting the example of involvement by Enforcement
    employees. The original plan was for each Treasury Agent to make a
    presentation to a community group on drug demand reduction.
           relationship with youth crime gun interdiction initiative
        Question. Is this program part of the Kids and Guns or Youth Crime
    Gun Interdiction Initiative?
        Answer. Project Outreach is a Treasury-wide demand reduction
    program involving volunteer efforts by government employees. It is not
    part of the Youth Crime Gun Interdiction Initiative.
        The Youth Crime Gun Interdiction Initiative, an ATF program
    supported by the Office of Enforcement, is a law enforcement
    demonstration project. Its purpose is to obtain information about the
    sources of illegal guns used by gang offenders and juveniles, to devise
    new strategies for interdicting that supply based on the information,
    and to strengthen law enforcement collaboration against illegal gun
    traffickers to young people. The Youth Crime Gun Interdiction
    Initiative is a component of ATF's national firearms trafficking
    strategy, aimed at denying illegal access to firearms to criminals,
    gang offenders and juveniles. (Kids and Guns is a nickname for the
    Youth Crime Gun Interdiction Initiative.)
                       participation in project outreach
        Question. What is the level of participation by the Treasury
    agencies as a percentage of total staffing per agency and as indicated
    by the number of events held per major city?
        Answer. There is no budget for this voluntary effort by Treasury
    Enforcement employees. Each agency has a Project Outreach liaison, that
    works with the Office of Enforcement, but these are not full time
    positions. Statistics on the number of events held per major city are
    not required to be maintained. Hundreds of dedicated Treasury
    Enforcement personnel volunteer their services in their communities.
    Individuals who make significant contributions to their community are
    recognized by receiving a Project Outreach certificate of appreciation.
                            treasury forfeiture fund
        Question. Last year the Treasury Forfeiture Fund gave $242 thousand
    to the program. What was done with these (limited) resources?
        Answer. Project Outreach did not receive any funds from the
    Treasury's Secretary's Enforcement Fund authority. However, the Youth
    Crime Gun Interdiction Initiative did receive some funding from the
    forfeiture fund.
        A total of $1.175 million in forfeited funds was authorized for the
    Youth Crime Gun Interdiction Initiative. Of this total amount, $344,000
    was obligated in 1996. These funds were used for computer programming,
    computers, and training in connection with National Tracing Center
    tracing by the 17 sites participating in the project, as well as for
    some investigative costs supporting cases against illegal firearms
    traffickers.
                   coordination among youth violence efforts
        Question. What is the coordination between this program, the Youth
    Crime Gun Interdiction Initiative, GREAT, DARE, Project LEAD and other
    children education programs?
        Answer. There are instances where Project Outreach volunteers
    provide services to schools that have adopted the GREAT program. The
    Youth Crime Gun Interdiction Initiative, GREAT, and Project LEAD are
    complementary supply and demand reduction components of ATF's efforts
    to reduce illegal firearms access and gang violence among young people.
    Project LEAD and the Youth Crime Gun Interdiction Initiative are part
    of ATF's efforts to reduce the illegal firearms supply to criminals,
    gang offenders, and juveniles. GREAT is an ATF administered demand
    reduction program primarily focused on youth gang violence.
                           office of law enforcement
        Background: Under Secretary Kelly, according to the Department of
    the Treasury's Strategic Planfostering a safer America is one of the
    Department's three key missions.
        To ensure this mission is accomplished, resources are being
    requested in fiscal year 1998 to; combat violent crime, decrease the
    availability of illegal drugs and other contraband, protect designated
    officials, decrease financial crime and continue counter-terrorism
    efforts.
        Treasury law enforcement efforts are funded at approximately $3
    billion and employs over 29 thousand employees.
        Question. Given the diversity of law enforcement activities funded
    within Treasury, please explain how your office coordinates these
    activities to ensure that: each impacted agency is aware of inter-
    related activities; that a duplication of services does not occur; and
    that adequate resources are provided?
        Answer. Treasury's law enforcement activities are well coordinated.
    Each week the Treasury Enforcement Council, composed of the heads of
    the law enforcement bureaus, myself, and my senior staff, meets to
    discuss pressing issues such as policies, procedures, current
    investigations, and budgetary concerns. Various working groups
    established to assist the Treasury Enforcement Council meet regularly
    to discuss relevant topics including budgetary issues, resources, and
    cross cutting law enforcement issues. Additionally, each morning
    representatives of the bureaus meet with me and my senior staff to
    share information and to report on law enforcement activities.
        In the field, many of our law enforcement investigations are
    undertaken as a part of multi-agency task forces. The use of task
    forces encourages the sharing of information and eliminates the
    duplication of efforts. Also, representatives from the various Treasury
    law enforcement bureaus and the Department of Justice are members of
    each Treasury bureau's Undercover Review Committee. These Committees
    review and authorize proposed undercover investigations. Coordination
    is furthered by the sharing of intelligence through centers such as
    FinCEN, EPIC and NDIC. Cross checking of targets and investigative
    activities is also accomplished through a network of case query
    information systems. These systems act as a wide area network that,
    with one telephone call, allows access to various law enforcement
    databases by federal, state, and local law enforcement officers.
        Question. The Office of Law Enforcement is also responsible for
    facilitating communication with other law enforcement Departments, such
    as Justice. What format exists for coordinating inter-departmental law
    enforcement activities?
        Answer. Deputy Secretary Summers and I regularly meet with the
    Deputy Attorney General to discuss law enforcement issues of concern to
    the two departments. Additionally, my staff speaks with representatives
    of the Department of Justice virtually on a daily basis on a variety of
    issues. I meet with the heads of other law enforcement agencies, such
    as the Director of the FBI, as necessary to ensure that our bureaus are
    working together effectively. My staff and I participate in a number of
    interagency law enforcement meetings and committees including those
    relating to the Southwest border and white collar crime issues. The
    Treasury and Justice law enforcement bureaus also participate in a
    joint working group to develop law enforcement policies and procedures.
        Question. Has the Office of Law Enforcement provided a bottom-up
    review of the overall resource allocations and made a determination on
    requirements based on programmatic requirements?
        Answer. Last fall the Office of the Under Secretary Enforcement
    conducted an organizational assessment of Treasury enforcement's policy
    oversight staffing needs that were deemed essential to discharge its
    mission and duties more effectively.
        Although there was no bottom-up review of the overall resource
    allocation, the staffing assessment did quantify the additional salary
    and benefits that would be required if the Office was restructured in
    an optimum manner. As an aside, compensation (salary and benefits)
    represent about 72 percent of current budget allocations. The residual
    (non-pay) represents travel, contracts, equipment, supplies, etc.
                                     ______

                      Financial Crime Enforcement Network
                         international financial crime
        Background: I recently read in the LA Times that several
    developments are making it easier for corrupt businesses and organized
    crime groups to carry on their activities such as:
      --The globalization of the economy (increasing the monetary stakes of
            corruption).
      --Technological developments (making it easier to hide criminal
            activity and dirty money).
      --The weakness and instability of governments in many parts of the
            world (leaving them unable to raise revenue, protect border,
            and keep criminal elements from infiltrating legitimate
            institutions).
      --And, the flight of capital to offshore banks (allowing them to
            avoid taxation).
        Question. How has the trading in international currency exchange
    grown over the past five years?
        Answer. Trading in international currency markets, often called
    foreign exchange trading, has continued its steady growth, and exceeds
    currently one trillion dollars per business day. Much of this trading
    involves the U.S. dollar as it continues to remain the world's leading
    currency. The growth in foreign exchange markets is closely tied to: 1)
    the globalization of international markets; 2) growth in imports and
    exports, especially in rapidly developing regions, such as Latin
    America and South East Asia; 3) the lowering of entry costs to market
    penetration, by reduced tariffs, and the loosening of many nations'
    currency exchange controls; and 4) increasing emphasis by many
    developing nations on achieving a more stable monetary policy, which
    lessens dollarization of their economies, and furthers continuous
    foreign exchange transactions.
        Foreign exchange trading for major currencies which historically in
    the past was often dominated by a central bank or governmental
    operations is now primarily dependent on market forces. As such, the
    foreign exchange markets are largely driven by non-governmental supply
    and demand factors, such as those described above. In addition, the
    foreign exchange markets have developed ever more efficient mechanisms
    by which to hedge currency risk for market participants through the use
    of futures, options, and similar derivative instruments. This lower
    risk, in turn, permits smaller market participants to participate in
    foreign exchange transactions, and has led to an increase in foreign
    exchange transactions. This greater efficiency has resulted in cost
    reductions for many importers and exporters.
        Of course, the exchange of currencies can occur at many levels of
    an economy, and the legitimate needs of businessmen for United States
    currency, given the dollar's status as the primary international
    reserve currency, can provide opportunities for money launderers.
    FinCEN's intelligence analysts have been working for some time with
    investigators to understand the role of ``parallel'' or ``black
    market'' currency exchange systems. Such systems develop in reaction to
    the exchange controls involved, and inflated exchange rates often
    charged in official exchange rate systems. The demand for market-rate
    dollars rises as legitimate trade increases; money launderers have an
    alternate source of dollars (the proceeds of narcotics transactions in
    the U.S.) at their disposal, and they can satisfy the demand for
    market-rate dollars in the black market while at the same time
    effectively laundering their funds through the brokers to whom others
    go to buy such dollars.
        Question. Over that same period, what percentage increase have you
    seen in international financial crime?
        Answer. The most positive developments of the last half-decade--the
    fall of the Soviet Union, globalization of trade, and the stunning
    growth of technology have provided a basis for the expansion of large-
    scale organized criminal enterprise. Few accurate statistics are
    available, but the view that the growth of international organized
    crime poses a serious threat to the evolution of the global marketplace
    and to the evolution of democracy in, for example Russia, reflects the
    consensus of most observers.
        Question. Have you noted any decrease in financial crime that could
    be attributed to FinCEN's efforts to curb illegal financial activity?
        Answer. Government efforts to curb illegal financial activity--in
    which FinCEN is an active participant--have made significant progress
    in recent years. The evidence indicates that the cost of money
    laundering is rising, as is the complexity of money laundering schemes,
    as the government's knowledge of money laundering and the
    sophistication of its anti-money laundering policies have increased.
    The advent of suspicious activity reporting and the increased awareness
    of banks that they are responsible for understanding enough about their
    customers' activities to be able to tell what activities ought to raise
    suspicion, are encouraging. FinCEN hopes through recently proposed
    money services business rules, to improve compliance standards in the
    non-bank segment of the financial sector. Attempts to disrupt the
    ``money laundering systems'' that the cartels and their allies use can
    be expected to increase over the next two years.
                               criminal referrals
        Background: FinCEN is responsible for gathering various forms of
    financial information filed with financial institutions, as required by
    the money laundering regulations. Based on this data, FinCEN, a non-
    operational agency, evaluates money laundering threats, supports law
    enforcement agencies and implements the Bank Secrecy Act. FinCEN, as a
    result of agency generated criminal referrals, also provides law
    enforcement agencies with the appropriate financial information, to
    assist in the agencies criminal investigations.
        [Clarification: Based on the introduction above, we interpret the
    Committee's use of the term ``criminal referrals'' to mean requests for
    case support from law enforcement.]
        Question. How many criminal referrals did FinCEN receive last year?
        Answer: In fiscal year 1996, FinCEN received 7,530 requests for
    case support. (This number does not include the requests from state and
    local law enforcement agencies which came through the Gateway system.)
        Question. How many were from Treasury agencies? Which agencies are
    they from?
        Answer: In fiscal year 1996, 1,932 were from Treasury agencies.

                                                             Number of cases
            Agency                                       in fiscal year 1996
    Bureau of Alcohol, Tobacco and Firearms...........................   761
    Internal Revenue Service..........................................   413
    Office of Foreign Assets Control..................................   302
    US Customs Service................................................   285
    US Secret Service.................................................    29
    Department of Treasury (Inspector General)........................    16
    Office of the Comptroller of the Currency.........................     5
    Task forces with Treasury representation..........................   121

        Question. How many of these referrals was FinCEN instrumental in
    solving?
        Answer. FinCEN does not maintain statistics on the number of
    instances that our case work leads to the arrest or prosecution of
    criminals. It is important to note that successful investigations are
    often made up of a variety of influential factors, rather than just
    one. FinCEN's services are usually requested very early in the
    investigation. The information may be vital to a case, and along with
    other investigative information (informant contacts, for instance),
    find its way into a long-term financial investigation requiring years
    to fully develop. Financial cases, by their very nature, are extremely
    complex and take a great deal of time and effort to investigate. By the
    time the case reaches the arrest or prosecutorial stage, a connection
    to FinCEN's case work may be difficult to determine.
        FinCEN may add value to the investigative process in another way.
    The information provided by FinCEN may indicate to the agents that an
    investigation should be dropped because it is insignificant and that
    resources should be directed to other more important areas. (Thus,
    there would be not an arrest or prosecution statistic, but the
    information serves a useful purpose in that it helps investigating
    agencies allocate their resources more effectively.)
        FinCEN reports also are used to substantiate information from other
    law enforcement agencies supporting an investigation. Financial cases
    are complex, as stated above, and evidence which reinforces other
    information is very useful to investigating agencies. In this same
    regard, FinCEN's ``network'' approach allows it to bring together
    agencies which are conducting parallel investigations on the same
    criminal organizations. For example, an ATF office in one midwest city
    was investigating subjects who were also being investigated in a
    southwest USCS office. Both agencies had submitted a FinCEN request and
    were unaware they were working the same subjects until notified by
    FinCEN. Both case agents were subsequently put in touch with each other
    and viewed the information as helpful to their investigation. This
    network approach enables the agencies to coordinate their
    investigations and thus avoid duplicative effort and resources.
        FinCEN does not and has not taken credit for investigative work
    carried out by others. FinCEN's philosophy about its mission is
    simple--it is a support agency, providing assistance when needed to
    investigative work conducted by federal, state, and local law
    enforcement. Its service may be requested at the beginning of an
    investigation, during the investigation, at the very end of one or
    quite possibly, multiple requests could come to FinCEN during the
    course of an investigation. Viewing this support service as its role in
    the law enforcement community, FinCEN would be uncomfortable at the
    very least to take credit for arrests and prosecutions which may have
    been the result of information provided by us. Furthermore, the law
    enforcement community is a very competitive area; adding FinCEN to the
    mix by taking credit would serve no useful purpose. In fact, it would
    probably do more harm than good by alienating our customers. FinCEN's
    state-of-the-art resources, as previously described, provide
    information which may otherwise be unknown or unavailable to field
    agents. If agents feel that requesting assistance from FinCEN will
    result in a ``sharing of the limelight,'' it could very well reduce the
    number of incoming requests to FinCEN, thereby lessening the quality
    and quantity of information available to the case agent.
    Evaluating Work Products and Feedback
        This philosophy does not mean that FinCEN does not have systems for
    gauging the value of its work product. The reports going back to the
    investigators include a ``feedback'' form requesting information on the
    value of the product. However, only about 20 percent of the forms are
    returned to FinCEN. To supplement this effort, FinCEN periodically
    undertakes on-site visits, as well as telephone surveys with its
    customers to determine the value of its work products. (In the most
    recent survey, most users expressed general overall satisfaction with
    FinCEN's services with several respondents offering constructive
    suggestions which have been implemented.)
        Efforts to monitor the usefulness of FinCEN's products also involve
    a tracking system. Under the system, follow up contacts are made with
    investigating agents on significant cases (those which appear to
    involve significant number of businesses, assets, and currency
    transactions) at intervals of three, six, twelve, and twenty four
    months. The follow-up contacts are designed not only to provide
    information about subsequent developments, but equally important, to
    assist FinCEN in appropriately allocating its resources.
        In addition, the Treasury Law Enforcement Liaison Committee,
    created by FinCEN, meets quarterly to coordinate and focus the needs of
    customer agencies in Treasury. It is used to air specific issues
    relating to agency requests.
        Question. How does FinCEN prioritize the investigative requests?
    Who sets the priority list?
        Answer. As a rule, FinCEN's prioritization of cases is on a first-
    come, first-serve basis. There are, however, exceptions to this rule
    which require FinCEN to take immediate action on certain types of
    cases. When deemed appropriate (when a need really exists due to issues
    of national security, critical stages of investigations, court
    appearances, grand jury presentations, and on-site case support for an
    agency), immediate attention is given to a request.
        Question. Could you explain the similarities and differences
    between your system and the Justice Department National Drug
    Information Center? Is coordination and or data sharing between these
    two systems?
        Answer. FinCEN and the National Drug Information Center have worked
    together over the past year to find a common ground which will enhance
    mutual assistance. FinCEN is a tactical intelligence support center
    which provides information relating to specific law enforcement case
    work. We provide information gathered from BSA data, commercial
    database information, and law enforcement databases. Our support is
    wide-ranging and deals with all types of financial crimes, not just
    narcotics.
        NDIC is mandated to provide strategic intelligence relating to
    international drug trafficking and narcotics law enforcement. They
    support law enforcement through the issuance of long-term project
    papers with the purpose of advising senior law enforcement executives
    of trends and patterns in worldwide narcotics trafficking. NDIC does
    not provide database queries in response to specific requests, but
    rather, long-term analytical work products which are valuable to the
    law enforcement community as a whole but do not address specific case-
    related issues. FinCEN and NDIC regularly exchange information relating
    to specific narcotics and narcotics money-laundering issues. FinCEN was
    recently responsible for giving NDIC a major south Florida money-
    laundering database.
                             fincen database access
        Background: I recently read Grover G. Norquist's (President of the
    Americans for Tax Reform) statement to the House Judiciary Committee at
    the hearing on ``Security and Freedom Through Encryption.'' In that
    statement he said:
        ``The government has tremendous information resources at its
    disposal in data base centers, like the Financial Crimes Enforcement
    Network (FinCEN). FinCEN has literally everything there is no know
    about you--tax records, postal addresses, credit records, banking
    information, you name it--and if more taxpayers knew about if, they
    would be outraged.''
        Question. Is Mr. Norquist correct? Does FinCEN have access to all
    of this information? If so, what protections are being offered to
    ensure that this information is not being viewed randomly? Is there
    oversight for unauthorized access to information?
        Answer. Mr. Norquist's statement is incorrect. FinCEN has access to
    information filed under the Bank Secrecy Act (which it administers),
    pursuant to Congressional directive and implementing rule. It also has
    access to certain law enforcement information in the files of other
    federal enforcement agencies (for example the Customs Service and DEA),
    and to information that is sold by commercial vendors, both to
    government agencies and private buyers; much of the latter information
    is computerized public record information (for example, land ownership
    files).
        FinCEN has no access to income tax data of any kind, in accordance
    with the terms of section 6103 of the Internal Revenue Code (except for
    disclosures made by investigating authorities to obtain further
    information, as permitted by section 6103(k)(6)). The only tax records
    to which FinCEN has access are property tax records of the kind that
    any citizen may view in any courthouse. It has no access at all to
    credit records, which are generally available only upon issuance of a
    judicial order or a grand jury subpoena for the information, see 15
    U.S.C. 1681b(1). FinCEN does obtain from credit agencies certain basic
    identifying information for individuals as permitted by the Fair Credit
    Reporting Act; 15 U.S.C. 1681f. Finally, it has no general access to
    banking records but only to reports of large currency transactions and
    suspicious activity.
        (Although somewhat beside the point, it is also relevant that
    FinCEN's resources are generally used to assist in enforcement of
    criminal law and almost never simply for civil tax collection
    purposes.)
        Nonetheless, it is true that the information to which FinCEN does
    have access requires careful protection to assure that it is used only
    for permitted purposes to assist law enforcement and regulatory
    officials. As indicated more fully below, FinCEN has worked, since its
    beginning, to protect access to the information it holds, to oversee
    the activities of its employees, and, above all, to prevent misuse of
    the information with which it is entrusted.
        Question. What protections are being offered to ensure inside and
    outside computer users are not reviewing this very private information?
        Answer. FinCEN's ``network'' has been carefully built, since 1990,
    through the institution of information use, security, and dissemination
    policies. These policies are embodied in a number of written documents,
    in FinCEN internal procedures, and in the terms of a series of
    memoranda of understanding that govern FinCEN's access to information
    obtained from other government agencies. The policies define the
    parameters within which FinCEN works and are designed to protect and
    compartmentalize information, and to channel that information only to
    authorized uses.
        The policies may be summarized as follows:
        1. Need-to-Know.--No information may be read or used by a FinCEN
    employee who does not have a need to know the information for the
    performance of his or her duties.
        2. Ownership.--Each agency is deemed to ``own'' the information
    derived from its files (unless such information was itself identified
    in that agency's files as belonging to a third agency), even after the
    information is incorporated into a FinCEN report or data base. Thus,
    each bit of information must be tagged in FinCEN's files to assure that
    it is used only in accordance with the rules or policies governing its
    use in the hands of the owner-agency. Information obtained from
    commercially-available sources is treated as subject to the statutes,
    if any, to which it is subject in the hands of the companies from which
    it is derived.
        3. Owning Agency Approval.--No bit of information may be
    disseminated by FinCEN to a third agency without the explicit and in
    most situations case-by-case approval of the owning agency. This policy
    applies not only to information sought to be included in case reports
    but also to information obtained from another agency and integrated
    into FinCEN's own files.
        4. Electronic Access by FinCEN.--Generally, information is not
    downloaded wholesale into FinCEN's data bases. Instead, FinCEN has
    electronic access to the information for use on a case-by-case basis,
    in part, so that its use of information drawn from other government
    data bases can be more carefully tracked and the controls placed on the
    information by the owning agency more carefully observed.
        5. Electronic Access to FinCEN Information Sources.--No agency is
    permitted electronic access to FinCEN itself, in view of the multiple
    sources of information commingled within FinCEN and the desire to
    minimize the risks of unauthorized entry into or use of FinCEN's data
    network. BSA information is electronically available to state
    enforcement agencies and to some state banking agencies, under rules
    similar to those described above, through FinCEN's ``Gateway'' program.
    The ``Gateway'' connections run not to FinCEN itself, but to the
    Detroit Computing Center of the Internal Revenue Service where the
    files of BSA information are maintained.\1\
    ---------------------------------------------------------------------------
        \1\ The Suspicious Activity Reporting System, which joins the five
    financial institutions supervisory agencies, FinCEN, and a number of
    other federal and state enforcement agencies electronically to reports
    of suspect activity at depository institutions, is also a separate,
    stand alone system, run through the Detroit Computing Center.
    ---------------------------------------------------------------------------
        6. FinCEN Platform.--To assist with FinCEN's growing workload, and
    in accordance with its mission, FinCEN has made BSA and commercially
    purchased information available to employees of other agencies who come
    to FinCEN to perform restricted queries for their agencies. Agencies
    involved include the Federal Deposit Insurance Corporation, the Air
    Force Office of Strategic Investigations, and the Office of the
    Inspector General of the Department of Agriculture (for investigation
    of fraud against the Department's Food Stamp and other programs).
        Under these policies, FinCEN serves both as a source of analysis
    and as a sort of ``electronic information lock'' through which
    different agencies can interact. Each bit of information must pass
    through the legal and policy ``screens'' of both its owner-agency and
    FinCEN before that information is disseminated to a third party.
        FinCEN's intelligence reports, which contain information drawn from
    FinCEN's various sources, are indexed and used within the parameters of
    a system of records created in accordance with the terms of the Privacy
    Act of 1974, 5 U.S.C. section 552a (the ``Privacy Act''), and known as
    the ``FinCEN Data Base'' (Treasury/DO .200).\2\ The ``system of records
    notice'' for the FinCEN Data Base was published in the Federal Register
    on July 24, 1990, (55 Fed. Reg. 30074-75) and has been republished
    several times since. The FinCEN Data Base has been exempted by rule
    from various provisions of the Privacy Act by the Secretary of the
    Treasury, as permitted by the Privacy Act, for data bases created for
    law enforcement purposes.
    ---------------------------------------------------------------------------
        \2\ Federal agency data bases from which information is drawn are
    for the most part subject to their own ``system of records notices''
    under the Privacy Act, to the extent those data bases contain indexed
    information that relates to United States nationals. FinCEN only
    accepts data upon affirmation from the supplying agency that the
    exchange is consistent with the terms of the Privacy Act.
    ---------------------------------------------------------------------------
        The procedures through which FinCEN acquires and shares information
    from and with other agencies, outlined above, have been designed to
    assure compliance with the Privacy Act. Information sharing agreements
    with state law enforcement agencies are subject to both federal law and
    whatever state privacy statutes apply to the records from which the
    information is drawn. Information used by FinCEN is also subject to
    other legal restrictions in particular cases. Thus, as indicated above,
    information may be subject to the Right to Financial Privacy Act, 12
    U.S.C. section 3401, et seq., the FCRA, the limitations of section 6103
    of the Internal Revenue Code, or the specially restrictive terms for
    the use of information obtained in proceedings before grand juries in
    federal court, see Fed.R.Crim.P. 6(e). Judicial doctrines may also
    restrict the uses of information in related investigations, and FinCEN
    may be barred altogether from using certain information because of
    statutory restrictions or agency practice.
        FinCEN tracks each identifiable ``bit'' of information to assure
    that the use and dissemination of that ``bit'' is consistent with
    applicable legal rules. FinCEN's internal accounting systems are being
    built to provide a detailed audit trail of the use of each record and
    the information within that record. When a FinCEN agent or analyst
    retrieves data for use in a report to be prepared for another agency,
    he or she should be able to ascertain with precision the source of the
    data and the restrictions attached to that data's subsequent use. (In
    addition, as noted above, FinCEN's access to information is also logged
    within the various record systems, for example the Treasury Enforcement
    Communications System, to which FinCEN is connected.)
        These policies, and the complexity of FinCEN's mission, place a
    great deal of responsibility on FinCEN's employees. All of those
    employees must successfully complete a full field background
    investigation, and the majority hold various levels of national
    security clearances. Perhaps even more important, FinCEN's training and
    management systems are designed to protect information from
    unauthorized uses.
        Protection against unauthorized information use starts with the
    management of the analytical process itself. Agencies may request
    information from FinCEN only upon a clear specification of the purpose
    of their request. This requirement assures both that agencies owning
    information understand to whom it is being disseminated and that FinCEN
    analysts and reviewers can judge whether the requested use of the
    information is permissible under federal law, even before the
    availability of particular bits of information is determined. In
    addition, the computer work of FinCEN employees is carefully tracked
    and monitored to assure against misuse of information or unauthorized
    ``browsing'' in information files.
                 gaxiola-medina money laundering investigation
        Background: According to a March 20th Wall Street Journal article,
    it was indicated that the Deputy Secretary of Treasury was concerned
    over the failure of the Mexican Government to freeze the bank accounts
    of a suspected drug trafficker.
        The case spotlights on the Gaxiola Medina family, which runs a
    lumber distribution business in Northern Mexico. A federal grand jury
    in Detroit indicated that a member of the family ran a drug trafficking
    organization distributing more than 2,200 pounds of marijuana in the
    U.S., beginning in 1992.
        The U.S. Customs Service began investigating this case in April
    1996. U.S. agents contacted the Mexican Finance Ministry Officials who
    traced $184 million in deposits in 15 Mexican bank accounts. On January
    8th, a freeze was placed on the accounts, but when the money was frozen
    by January 20th, only $16 million remained.
        However, the New York Times article on April 2nd, said that the
    U.S. erred in seeing any corruption in this case and the $184 million
    thought to be in the accounts was a mistake.
        Question. Was FinCEN part of this investigation? What actually
    occurred?
        Answer. No, FinCEN was not part of this investigation. The Office
    of Enforcement and the U.S. Customs Service would be better able to
    address questions related to this case.
        Question. Would systems like the FinCEN data bases and their
    Suspicious Activity Reports prevent this type of activity from
    occurring?
        Answer. Since FinCEN was not involved in this investigation, it is
    impossible to know if or how its systems would have served this case.
    FinCEN defers to the U.S. Customs Service and Office of Enforcement on
    this matter.
                                     ______

                    Federal Law Enforcement Training Center
              ins/border patrol training at charleston naval base
        Background: Currently, a portion of INS/Border Patrol training is
    being conducted at the recently closed naval base in Charleston, South
    Carolina. This was a temporary measure to meet the training and
    staffing goals associated with reinforcing our borders. This Charleston
    initiative was scheduled to expire at the end of fiscal year 1999, when
    all training would move back to the FLETC-Glynco. Recently, there has
    been some discussion to maintain the Charleston site as a permanent
    training facility for INS/Border Patrol training.
        Question. What is the position of the Justice Department, which is
    currently funding all of the satellite training occurring at
    Charleston, with regard to turning this site into a permanent training
    facility for the Border Patrol training?
        Answer. Senior Justice Department officials consistently have
    expressed the view that they fully support the concept of consolidated
    training and participation in the FLETC. Their view is that the
    Charleston site should be kept open only as long as the need exists.
    They have expressed confidence that as the FLETC's capacity continues
    to increase over the next couple of years, the Immigration and
    Naturalization Service (INS) will be able to phase down the temporary
    Charleston operation and move completely back to existing, permanent
    FLETC centers. While no date has been firmly set for the closure of
    Charleston by Justice, they have clearly stated the intention to do so,
    and have urged the continued funding of the facilities Master Plan for
    the FLETC so that INS/Border Patrol training requirements can be met at
    Glynco and/or Artesia as quickly as possible.
        Question. What is the position of INS and U. S. Border Patrol
    (USBP)?
        Answer. The top leadership officials of the INS have expressed the
    same position regarding the temporary nature of the Charleston site as
    noted above by the Department of Justice. The USBP is a subordinate
    organizational element of the INS, and it is presumed the USBP's
    position is consistent with the INS and Department of Justice view.
        Question. If this facility was declared as another permanent
    training site under FLETC's administration, what additional upgrades
    and improvements would be necessary to bring Charleston up to your
    permanent training site standard?
        Answer. The FLETC has had extensive experience in developing sites
    for Federal law enforcement training. In addition to its permanent
    sites at Glynco, Georgia, and Artesia, New Mexico, the FLETC operated a
    leased facility at Marana, Arizona from 1984 to 1990. Also, for a short
    period of time, the FLETC conducted training operations at Davis-
    Monthan Air Force Base, Arizona, and Fort McClellan, Alabama. The
    latter site operation was undertaken exclusively for overflow USBP
    training that could not be met on a schedule required by the INS during
    a major buildup that occurred in 1989. In each of these site
    adaptations, whether for permanent or temporary purposes, the FLETC has
    encountered different capabilities and constraints. But our experience
    has been that closed military sites usually have significant
    structural, environmental, and modernization issues. The FLETC does not
    have a detailed understanding of all of the infrastructure and related
    building factors at Charleston. If Charleston, as a former naval base,
    is similar to the deactivated naval facility that the FLETC found at
    Glynco in 1975, there are likely to be many costly improvements needed
    to effect a proper facility conversion for law enforcement training. It
    would be speculative as to what precisely is required in bringing
    Charleston up to the standard of a permanent FLETC site until a closer
    examination and the use of appropriate facility experts is undertaken.
        Question. Can you provide a ballpark estimate of the upgrade cost
    and time needed for conversion?
        Answer. The Justice Department recently shared with the FLETC its
    cost estimate to upgrade the facilities at the Charleston site. The
    estimates suggest that about $4 million more will be required to
    sustain Charleston until the end of fiscal year 1999, in addition to
    the $8 million funded to date. To sustain Charleston for an extended
    period, the cost would be about $40 million, and to consolidate a
    permanent Border patrol Academy at Charleston would cost an estimated
    $110 million. These figures do not include the annual operation costs
    for staff and administration support. The FLETC did not participate in
    the gathering of this data, and therefore, does not take exception to
    estimates.
        Question. There is also the possibility that this facility would
    come under the administrative control of the Department of Justice,
    which could conceivably move to consolidate other Justice training at
    Charleston. Has there been any movement in this direction by INS or
    Justice? What costs would be associated in converting this site to a
    complete Justice/INS training facility?
        Answer. In addition to the INS, other Justice agencies that
    participate in the FLETC include the U. S. Marshals Service, the Bureau
    of Prisons, and the Office of the Inspector General. Neither officials
    in the Department of Justice nor anyone in the FLETC, or its
    participating agencies, have suggested or recommended relocation to
    Charleston. The Justice agencies have, in fact, repeatedly voiced high
    satisfaction with the quality of training and the facilities at the
    FLETC centers. If all of INS training and the other Justice agency
    training, which are now a part of the FLETC, were to be consolidated
    into Charleston, the costs associated in converting the site for a
    Justice training center are likely to be significantly higher than the
    $110 million identified by Justice for a USBP site alone.
        Question. Worse case scenario, what would the impact be on the
    FLETC if all the Border Patrol and INS training was shifted to
    Charleston?
        Answer. The actual INS training, including the USBP, accounted for
    39,142 student-weeks of training in fiscal year 1996 at the FLETC
    centers and Charleston. The next highest number of student-weeks in
    fiscal year 1996 was for U. S. Customs Service training which was 9,196
    student-weeks. The fiscal year 1997 figures are likely to be higher for
    the INS. The departure of INS/USBP training from the FLETC's centers
    would have a significant impact on the economies of scale that have
    been achieved over a very long history of consolidated training at the
    FLETC. Quite likely, the costs of operation and training at the FLETC
    centers would be increased unless the other Federal participating
    agencies were to fill the void created by INS's leaving. There are no
    indications now that these other agencies, alone or in the aggregate,
    would have that significant increase sustainable over one or more
    years.
        Question. What additional impact on the FLETC would result if the
    Department of Justice shifted all of its departmental training to the
    Charleston facility?
        Answer. Over a three-year period (FY 1994-1996), Justice Department
    training, in terms of student-weeks, was slightly over 51 percent of
    the training conducted at the FLETC. In the context of both students
    and student-weeks of training, Justice agency participation is
    significant to the cost benefits of consolidated Federal government-
    wide law enforcement training. The departure of Justice training from
    the FLETC concept would have serious, and likely irreversible,
    consequences to the notion of consolidated training from a
    philosophical, practical, and cost efficiency standpoint. Setting aside
    cost factors, the lynchpin for consolidation is the standardization,
    high quality training, and cooperative interaction that comes from
    Federal law enforcement agencies sharing in the same common training
    experience.
        Question. How would the loss of this training commitment to the
    FLETC impact on your current funding requests?
        Answer. The loss of INS/USBP and/or Justice Department training
    commitment to the FLETC would greatly diminish the cost savings
    currently recognized in consolidated training. Daily lodging, meals,
    equipment, administrative support, and tuition costs would rise,
    probably quite dramatically. Although we cannot provide an estimated
    figure at this time, the maximization of facilities and the volume of
    programs would drop significantly. There is a real potential that
    higher costs would cause agencies, particularly small ones, to schedule
    less training. In austere budget reduction periods, often the items
    first cut in a budget are training and travel. Conversely, the FLETC
    will still need capital funding as the requirements for environmental
    compliance alterations and training program changes are implemented
    regardless of Justice agency participation at Glynco and Artesia. If
    enacted, as requested, the fiscal year 1998 appropriation for facility
    work at the FLETC sites will reach the $80 million mark, but still be
    short of the $121 million currently identified for completed
    renovations and construction. While there will be ways to cutback on
    the new construction requirements, should the Justice agencies depart,
    the facility improvements and compliance with environmental regulations
    and some new construction will need to continue and be funded
    accordingly. At any rate, there will continue to be a need to provide
    funding for maintenance and annual operation costs. Furthermore,
    establishment of a separate facility at Charleston, or elsewhere, will
    create circumstances that will force needless competition for law
    enforcement training facility funding at a time when the Government is
    looking at greater cost reductions and consolidation.
        Question. What are the high and low limits of your ``economies of
    scale''? Specifically, at what level have you achieved the greatest
    economies of scale, and at what level is this inverted from the loss of
    training activity?
        Answer. The economies of scale are very important in the
    contractual areas, especially the two largest contracts for food
    service and dormitory management. Both of these contracts are based on
    a sliding scale geared to the daily student population. Essentially,
    the higher the student population goes, the lower the cost on a per
    student basis. Typically, these contracts are based on intervals of 100
    to 250 students. The greatest economies of scale are reached at the
    1,250 to 1,500 student population levels and the costs increase
    dramatically when the student levels drop under 1,000. When populations
    in excess of 1,500 are experienced, the economies continue to increase
    at a decreasing rate, but clearly at a savings to the taxpayer.
        Question. Should the INS/Border Patrol training initiative continue
    according to plan, with the Charleston facility closing as scheduled in
    fiscal year 1999, will the FLETC be able to meet the future training
    needs of INS/Border Patrol, in addition to its other clients, at the
    Glynco and Artesia facilities?
        Answer. Yes, if the Master Plan funding continues to be
    appropriated. The Master Plan will provide all of the facilities needed
    to conduct training well into the 21st century for all of the FLETC's
    participating agencies, including the INS and Border Patrol.
        Question. Since this is the site of the former Charleston Navy
    Base, are there any environmental hazards associated with the site? If
    the FLETC assumed permanent control of the site, would the FLETC also
    assume the liabilities associated with any identified EPA hazards in
    the future?
        Answer. The FLETC has not participated in any close review of the
    facility structures and prior land usage at the Charleston site. Rather
    than speculate as to problems that may exist at this former Navy
    shipyard, it would be prudent for the FLETC to engage appropriate
    environmental specialists for a formal study. Whether the FLETC, the
    Navy, the INS, or some other organization or mix of organizations, the
    government would be liable for environmental hazards uncovered later,
    should the FLETC assume permanent control of this site. Unfortunately,
    the experience at Glynco, a former Navy base built in the 1940's, is
    that the FLETC has had to bear the cost of major environmental cleanup
    ranging from asbestos covered structures to lead leeching into the soil
    from dirt berms built by the Navy for firearms use and continued in use
    by the FLETC. Over a period of the last 15 years particularly, the
    nature of environmental regulation has become increasingly more
    restrictive.
        Question. Are there any environmental concerns that would
    potentially jeopardize the health and welfare of the students,
    instructors, and administrative support personnel assigned to the
    Charleston site?
        Answer. As noted above, it would be premature to provide an
    assessment of environmental issues without more data being provided
    through an appropriate environmental study. It is our belief that INS
    and Justice are alert to potential environmental hazards affecting the
    health and welfare of staff and students and have taken appropriate
    precautions.
                               projected training
        Background: In past years, the FLETC has overestimated its
    projections for training from 15 to 35 percent on any given year, from
    the numbers of personnel actually trained. These projections,
    historically, have been the basis for your requests for funding
    additional FTE's, operating expenses, and capital improvements.
        The FLETC obtains the forecasted training requirements from its
    client agencies 18 months in advance of the actual training year. Often
    clients amend their anticipated training needs during this 18-month
    time period. This could account for some of the differences between the
    numbers actually trained versus the numbers originally predicted.
        The FLETC's budget request is based on the projected number of
    students they will train.
        Question. Could the FLETC supply amended training forecasts and
    budget projections based on the agency training budgets, included in
    the President's budget, when it is submitted to Congress in February?
        Answer. Because of the limited amount of time available between the
    Office of Management and Budget's final decisions on the agencies'
    budget requests and the submission to Congress, it would be extremely
    difficult to provide amended training forecasts in early February.
    Since the FLETC trains 70 different law enforcement agencies, it would
    be necessary to obtain input from each of them to update the training
    projections. While an update could be provided, it would have to be
    after the President's budget is submitted when the participating
    organization has more definitive information.
        Question. Can an agency cancel or reduce their training commitment?
    How much lead time must they provide the FLETC?
        Answer. The participating agencies provide training estimates as to
    the number of students to attend the various programs conducted. The
    FLETC uses numerous factors, including the participating agencies'
    request, past experience, facility requirements, Congressional/
    Administration interest, etc., to determine the number of programs that
    will be conducted. Allocations or quotas are then made to each of the
    participating agencies at the start of the fiscal year. While an agency
    can conceivably cancel at any time, the FLETC requires that a minimum
    of 20 days' notice be provided so that other agencies can be contacted
    to use the unfilled slots. In reality, changes take place every day and
    the allocations/quotas constantly are adjusted to meet the demands and
    requirements of the clients. The FLETC strives to ensure that all
    programs are conducted with the maximum number of students.
        Question. What agencies have presented the greatest problems in
    scheduling?
        Answer. No single agency presents the greatest problem in
    scheduling. It seems to fluctuate as the large agencies have to address
    major initiatives that affect them, such as the Immigration and
    Naturalization Service is currently facing. In previous years, other
    agencies too have periodically experienced unprogrammed increases which
    have led to similar problems. While today it is INS, next year it may
    well be another agency.
        Question. Can this committee assist you in correcting the problem?
        Answer. The FLETC is not aware of anything that could be done at
    this point by the committee to help correct the problem.
                               firearms training
        Background: The FLETC currently provides firearms training to a
    great majority of the Federal law enforcement, either in a basic
    training program, an advanced training program, or the firearms
    instructor training programs.
        Question. Does the FLETC include training for all of its firearms
    training programs on the safety and appropriate storage of weapons in
    the home? This specifically addresses the increase in the number of
    accidental discharges of firearms involving children in the homes of
    law enforcement personnel.
        Answer. For several years all basic training programs included a
    two-hour block of instruction entitled, Off-Range Safety. This course
    outlined weapon handling off the range, in the office, among friends,
    and especially at home. Over the years, in Curriculum Review
    Conferences, the FLETC's customer agencies have phased out this course.
    The safety course taught to all basic training students outlined
    general firearms safety, with primary emphasis on the firing range, and
    weapon identification. Since then, however, as a result of the recent
    Presidential memorandum directing all issued Federal firearms to come
    equipped with a locking device, the safety course has been modified.
    The course now includes training on the use of safe gun-locking devices
    for the home.
        Advanced training programs are comprised of students who have
    graduated from the basic program and are attending either follow-on
    training or a specific firearms training program. These programs are
    designed by a Curriculum Development Conference and are updated every
    three years. During these updates, the FLETC, along with the
    participating agencies, decide on a curriculum. Although these students
    would have received this type of home safety training in their basic
    program, it may or may not be included in the advanced training
    program, depending on the particular curriculum.
        Question. Does the FLETC issue trigger locks to students receiving
    firearms training?
        Answer. No. The Presidential memorandum applies to duty weapons
    being issued to law enforcement officers. The FLETC does not issue duty
    weapons; they are supplied by the employing agency. The FLETC provides
    weapons to students only for the purpose of practicing firearms
    training and survival skills on the firing range. All such practices
    are done under close supervision and the weapons never leave the range
    with the students. All training weapons are stored in gun safes in a
    secured and alarmed armory.
        Question. What Federal law enforcement agencies are currently
    issuing and mandating the use of trigger locks and other weapons safety
    guidelines for storage of weapons in the home?
        Answer. Although it would require a government-wide survey to be
    certain, we assume all affected agencies are complying with the
    Presidential memorandum on this matter.
        Question. Do the Directors of each of the Bureaus present today
    believe that the trigger lock safety program is a viable one to reduce
    the numbers of accidental discharges of firearms, specifically by
    children in our homes?
        Answer. Yes. The FLETC realizes that a law enforcement tool
    designed and issued for the sole purpose of employing deadly force is
    inherently dangerous and imposes a professional and personal
    responsibility. Consequently, we believe that any step directed toward
    home safety, and especially the safety of our children, is desirable.
        Question. Are you in favor of agency policy mandating weapons
    safety guidelines for your gun-carrying personnel in their homes?
        Answer. Yes. Although home safety is, to a large degree, common
    sense. The fact that children continue to be injured and/or killed by
    handling a (law enforcement) parent's firearm indicates that more can
    be done. We believe proper training, accompanied by proper equipment
    and agency policy, will go a long way to increase and enhance the home
    safety mindset of law enforcement officers.
                                new construction
        Background: The FLETC is requesting fiscal year 1998 funds to
    construct a new warehouse complex at the Glynco facility. The FLETC has
    a number of buildings on site that are currently being utilized for
    storage.
        Question. What is the condition of the existing warehouse
    facilities at Glynco?
        Answer. The existing warehouse facilities at Glynco are inadequate
    for the purpose for which they are being utilized. We presently utilize
    portions of four buildings for warehousing at the Center and lease
    additional space at the Glynco Jetport. All four buildings used for
    warehousing at the FLETC are over 55 years old, and two of them are
    condemned and should not be used. The remaining two warehousing spaces
    are in one-story buildings that also house office space, various
    service contractors, and a shipping and receiving function. These other
    non-warehousing functions break up the space that is used for
    warehousing, thus making the warehouse areas less than desirable for
    storage purposes from both security, and size standpoint. None of the
    warehousing space on the Center is environmentally controlled, nor is
    it conducive to new and more efficient warehousing techniques.
    Consequently, the FLETC must lease additional warehouse space away from
    the Center grounds in order to meet its supplies and equipment storage
    needs.
        Question. Are the existing warehouse facilities utilized solely for
    storage of equipment and supplies?
        Answer. Yes.
        Question. What storage alternatives currently exist in the
    community?
        Answer. As was mentioned above, the FLETC has leased warehouse
    space off-Center in order to meet its warehousing needs. Although there
    is existing storage alternatives in the community, the warehouse
    operation could run in a more efficient and effective manner if it was
    housed all in one building and on-site.
        Question. Is there a specific requirement for on-base versus off-
    base storage facilities?
        Answer. The on-base warehouse facility should be constructed in
    close proximity to an entrance gate. The warehouse would become the
    centralized receiving point for all goods entering the Center. Goods
    would only have to be handled once. They could be taken off the trucks
    and placed in storage without having to be moved in a separate
    operation. The placement of the warehouse at a gate entrance would also
    eliminate the present safety problem of having heavy duty trailer
    trucks operating on the Center's internal roadways where our students
    walk.
        Question. Should new facilities be acquired, what is planned for
    the current structures?
        Answer. Two of the current structures are unsafe and should be
    demolished. The other two would be utilized as storage areas for the
    on-site agencies.
                                     ______

                    Bureau of Alcohol, Tobacco and Firearms
                    youth crime gun interdiction initiative
        Background: The gun laws in the United States are among the least
    restrictive in the developed world. The FBI estimates there are 250
    million firearms in the country, that is one for every man, woman, and
    child. As a result, we should not be surprised that a February 7th
    Washington Post article stated that United States has the highest rate
    of childhood homicide, suicide and firearms related deaths of any of
    the world's 26 richest nations.
        According to the article, the epidemic of violence that has hit
    younger and younger children in recent years, is almost exclusively
    confined to the United States.
        On February 20th, the President went to Boston to outline a package
    of federal legislation aimed at deterring youth crime and to increase
    the severity of punishment. This package included initiatives costing
    $500 million to:
      --expand the Brady law
      --fund state and local government programs to hire additional
            prosecutors, who will focus in on gang and juvenile violations,
            and
      --provide annual grants to localities to fund after school programs.
        The President went to Boston to highlight the success that this
    City has experienced participating in the Youth Gun Crime Interdiction
    Initiative. This initiative requires the participation of Police Chiefs
    and prosecutors, who have been asked to supply the serial numbers and
    other characteristics of every gun seized form a juvenile committing a
    crime. It is my understanding that the data is used by ATF to trace the
    gun's origin of sale. Since all guns must have identification number
    and paperwork it is easy to trance these weapons.
        Question. Is there a correlation between gun laws and childhood
    homicides?
        Answer. In ATF's role in the fight against violent crime, it does
    not perform research that would determine whether there are
    correlations between gun laws and childhood homicides; however, under
    the Youth Handgun Safety Act, juvenile possession of handguns is
    illegal, with certain exceptions. ATF believes that effective
    enforcement of this and other of our nation's gun laws can reduce
    childhood homicide. ATF considered statistical information showing that
    the rate of juvenile homicide nearly tripled since 1985 in developing
    the Youth Crime Gun Interdiction Initiative as a component of the
    national firearms trafficking strategy. In addition, ATF has formed
    partnerships with the NIJ and academic community in an effort to gain
    additional information regarding effective enforcement of the Federal
    firearms laws. ATF is cognizant that this area is of great concern to
    America; however, it does not have the available resources, at present,
    to analyze guns laws and how they may affect childhood homicides.
    Information derived from the YCGII will allow ATF's investigative
    resources to better focus on illegal juvenile access to firearms.
        Question. I am aware of Boston's participation in the Youth Crime
    Gun Interdiction Initiative. Can you explain why this program is a
    success?
        Answer. The City of Boston participates in the YCGII as well as a
    multi agency initiative, the Boston Gun Project. To date, ATF has not
    conducted a formal evaluation of the Boston Gun Project that was funded
    by National Institute of Justice (NIJ) and in which ATF's Boston
    Criminal Enforcement Field Division participates. However, when ATF
    developed the YCGII, the Bureau examined how the Boston Gun Project
    worked, and tried to find ways its approach could be applied in other
    cities. The information pertaining to the Boston Gun Project contained
    in this response is based on information from ATF' Boston Field
    Division.
        The Boston Gun Project appears to be a success because it has two
    major components that work together. First, it uses crime gun trace
    analysis, information that can only be obtained through ATF, and
    debriefing of arrestees about the illegal sources of their weapons to
    develop a picture of the illegal sources of supply of crime guns to
    juveniles and gang offenders. To assist in investigative use of trace
    information, ATF has developed and deployed project LEAD, an illegal
    firearms trafficking information system, to assist in using arrestee
    information, ATF has established a special agent position, the Violent
    Crime Coordinator, who is responsible, among other areas for channeling
    information obtained from debriefings of armed arrestees to agents
    developing trafficking cases. This special agent must be able to
    analyze investigative information, affecting defendants who are to be
    prosecuted, to ensure that the subject will receive the maximum time in
    prison. The VCC must determine if Federal or State prosecution is best
    suited for each defendant that he/she comes into contact with.
        Based on this information, ATF in collaboration with the Boston
    Police Department and other law enforcement officials continue to
    improve the effectiveness of efforts against illegal traffickers in
    order to reduce the illegal supply of guns to violent young people and
    juveniles.
        Second, under the Boston Gun Project, many different Federal State
    and local agencies, including ATF, DEA, the police department,
    probation, parole, and others, are collaborating in directly
    communicating to street gangs that violence will not be tolerated. When
    necessary, they back up these communications with coordinated,
    interagency enforcement actions against gangs that have committed
    violent acts. The interagency group approach appears to have convinced
    some Boston street gangs that violent acts will be met with immediate
    consequences, and thus effectively deterred them from participating in
    gang violence. This aspect of the Boston Gun Project was made possible
    by a strong coordination, funded by the National Institute of Justice.
        ATF will be analyzing the effectiveness of the YCGII in the 1 year
    report which is scheduled to be completed in July 1997.
        Question. How much of the success of this program is dependent on
    the community's involvement?
        Answer. Both the gun trafficking prevention and the deterrence of
    gang violence in the Boston Gun Project are primarily carried out by
    Federal, State, and local law enforcement agencies. However, other
    important participants in this program are gang outreach workers,
    employed by the City of Boston, who provide various services to gang
    members and attempt to mediate gang disputes and community groups, such
    as Boston's Ten Point coalition which is a group of African American
    clergy. Additionally, other community programs may be involved in
    Boston; however, ATF's Criminal Enforcement is not aware of such
    initiatives.
        Question. The Youth Crime Gun Interdiction Initiative has been
    piloted in 16 other cities including Milwaukee, Wisconsin. Have there
    been similar results in other cities participating in the pilot?
        Answer. As in Boston, trace analysis and curbing the illegal supply
    of firearms are one component of the YCGII. ATF is presently analyzing
    the results of crime gun traces from each of the cities participating
    in this initiative. This analysis, which is the first of its kind to be
    reported by ATF, will provide law enforcement agencies participating in
    the initiative with critical information that may be able to assist
    them to develop strategies geared to reducing the illegal supply of
    firearms to juveniles and gangs.
        ATF will publish the results of 10 months of trace analysis in all
    sites in July. Each YCGII site has unique characteristics that must be
    analyzed. Upon the completion of the report, law enforcement in each
    YCGII site will be better able to implement a successful strategy to
    address juvenile firearms-related crime. It should also be noted that
    the coordinated anti-gang activity involving all federal and local
    agencies that is present in Boston is not part of the YCGII, as this
    exceeds ATF's jurisdiction, other than as a participant ATF would be
    pleased to participate in any such coordinated anti-gang effort in any
    site.
        Question. Is last week's seizure of guns and arrest of gun
    trafficker Lawrence Shikes in Milwaukee, an example of the
    effectiveness of this program? What can you tell us about this case?
        Answer. The Lawrence Shikes case in Milwaukee, Wisconsin, is an
    example of the effectiveness of this initiative. There are a number of
    ongoing cases currently in many of the other sites. However, these
    cases are presently ongoing criminal investigations and as such, ATF is
    not at liberty to discuss them. At this time, ATF's nationwide illegal
    firearms trafficking strategy, of which the YCGII is a component, has
    produced over 2,000 illegal firearms trafficking defendants annually
    since the implementation of the Integrated Violence Impact Strategy in
    fiscal year 1996.
        Question. How many programs and what is being spent annually to
    provide juvenile crime prevention programs nationally?
        Answer. ATF is responsible for administering, evaluating, and
    expanding the GREAT Program. The GREAT Program is currently funded at
    $11 million of which $3 million is required for ATF to administer and
    oversee the program. The remaining funds are provided to local
    communities to support their participation in the program. Please refer
    to question 31 for additional information.
        Question. Does the Youth Crime Gun Interdiction Initiative provide
    any grant money? Should grant funds be provided?
        Answer. Neither the Treasury Department nor ATF possess the
    authority to provide grant money so none has been provided under the
    YCGII. Funding in the amount of $1.175 million was provided by the
    Department of Treasury, Executive Office for Asset Forfeiture. A
    breakdown of that funding is as follows:
      --$550,000--To be used for investigative expenses such as evidence
            purchase, informant subsistence, purchase of investigative
            equipment, investigative travel, and other miscellaneous
            investigative expenses.
      --$200,000--To be used for modifications to ATF's NTC's Firearms
            Tracing System and Project LEAD.
      --$75,000--To be used for the purchase of 17 high speed, high
            capacity Pentium laptop computers.
      --$300,000--To be used for research on crime guns to be performed by
            the National Institute of Justice.
      --$50,000--To be used for mission travel related to training and
            support of the initiative participants and systems.
        The YCGII sites were selected based on their demonstrated
    recognition of the problem of youth firearms violence and the desire
    for a coordinated effort; 10 of the 17 cities were already receiving
    funding from the Department of Justice's Office of Community Oriented
    Policing Services to conduct juvenile firearms initiatives; an
    additional 3 of the 17 cities already had a juvenile firearms research
    element in place through the National Institute of Justice; the
    remaining 4 cities had particularly active U.S. Attorneys.
        Grant funds to police departments may be useful in assisting them
    to trace all crime guns and to identify violent gangs, groups, and
    individuals for potential investigative action. However, since crime
    gun tracing and illegal firearms trafficking cases require ATF's
    assistance, ATF cannot recommend grant funds that would support
    activities that are not proportional to ATF's resources to respond to
    them effectively. If grant funds are issued, it must be ensured that
    ATF can effectively meet the demand for its services by State and local
    law enforcement.
        Question. I see you have not requested any funding for this
    initiative in the fiscal year 1998 request. Why not?
        Answer. The YCGII was funded by the Treasury Department in July
    1996 in response to the alarming rise in juvenile firearms violence.
    The funding was intended to provide ATF with the means to look at
    illegal firearms trafficking and how it affects juveniles separately
    and to produce crime gun trace analysis on a city-specific basis.
    Treasury's funding of the YCGII has supported computer upgrades,
    firearms tracing-related training, and law enforcement operations. ATF
    is now examining the results of the crime gun traces from the YCGII
    cities and finding that there are city-specific patterns of crime gun
    use by youth that differ from the patterns that typically characterize
    the adult populations crime gun supply. These preliminary results are
    showing significant promise to reduce illegal juvenile and youth access
    to firearms violent crime through expanded YCGII initiatives.
        YCGII cases are illegal trafficking cases that involve trafficking
    to juveniles and young people. Examples of the successes of the overall
    national firearms trafficking strategy are as follows:
        Case example: In 1996, Project LEAD and firearms trace analysis
    alerted ATF special agents in Kansas City, Missouri, to potential
    illegal firearms trafficking activity being conducted by an individual.
    Information indicated that a number of firearms recently recovered in
    crimes, by law enforcement in several States, had all passed through
    this subject. Investigation revealed that over the course of 3 years
    the subject, a former Federally licensed firearms dealer, had illegally
    trafficked over 1,300 firearms of which more than 200 of those firearms
    were recovered by law enforcement from gang members and violent
    criminals after their use in crimes ranging from illegal possession to
    homicide. The subject was subsequently arrested by ATF, prosecuted in
    Federal court, and in September 1996, sentenced to 6 years in prison.
        Case example: In 1995, Project LEAD and firearms trace analysis
    alerted ATF special agents in Greensboro, North Carolina, to potential
    illegal firearms trafficking activity being conducted by an individual.
    Information indicated that a number of firearms recently recovered in
    crimes, by law enforcement in several States, had all passed through
    this subject. Investigation revealed that over the course of 2 years
    the subject, a former Federally licensed firearms dealer, had illegally
    trafficked over 3,000 firearms of which more than 200 of those firearms
    were recovered by law enforcement in crimes ranging from illegal
    possession to homicide. The subject pled guilty to numerous Federal
    firearms violations and was subsequently sentenced to 34 months in
    March 1997.
        Question. Even if you can effectively crack down on illegal gun
    trafficking, won't there still be some guns out there that potentially
    violent criminals, even kids, will have access to?
        Answer. Yes, ATF's illegal firearms trafficking strategy and the
    YCGII are intended to address juveniles and the criminal element's
    access to firearms, especially new firearms, however, they cannot
    effectively address every illegal gun source. In addition to ATF's
    Illegal Firearms Trafficking Strategy, there are other initiatives to
    assist in removing guns from the criminal element. An additional
    firearms enforcement program is the Stolen Firearms Program which is an
    aggressive enforcement effort determined to reduce the amount of
    firearms stolen from interstate carriers and Federal firearms
    licensees. ATF research and data, based upon stolen firearms
    information contained in the Firearms Tracing System, reveal that
    stolen firearms, by their very nature, are destined to be crime guns.
    The criminal element, realizing that their ability to acquire firearms
    has eroded, sees stolen firearms as an instant source of untraceable
    crime guns.
        ATF is committed to investigating thefts from FFLs in order to keep
    these firearms away from the criminal element. ATF believes that
    proactive measures such as better security measures at FFLs, the
    illegal firearms trafficking strategy, and the Stolen Firearms Program
    will reduce the criminal element's access to a large number of
    potential crime guns illegally diverted from legitimate sources.
        In addition to focusing on crime guns that are new and can
    therefore be easily traced by NTC, ATF also investigates traffickers of
    older firearms, through debriefing arrestees and other investigative
    work.
        Question. If this is true, aren't other strategies needed to
    prevent violent crime, like crime prevention?
        Answer. Yes, effectively administered crime prevention programs can
    help. ATF has found programs such as GREAT and the Department of
    Treasury's Outreach Program to be useful to young people. In addition
    to traditional crime prevention initiatives, like G.R.E.A.T are
    enforcement strategies and projects that can have a prevention impact.
    For instance the illegal firearms trafficking strategy and YCGII are
    aimed at stopping the guns from getting to the criminal element, gang
    offender, and juvenile before a handgun is used in a crime or accident.
        In addition, ATF has dedicated personnel as Violent Crime
    Coordinators (VCC). The VCC is responsible for proactively preventing
    violent crime. The VCC is responsible for the following duties through
    the position description for this job:
      --Establishes threshold prosecution levels with the U.S. attorney's
            office to ensure only those cases which the U.S. attorney's
            office will prosecute federally are pursued by the VCC.
      --Evaluates all firearms-related cases referred for prosecution by
            local, State, or other Federal agencies and determines which
            judicial system is best suited for that case based on the
            threshold levels of prosecution previously determined.
      --Establishes effective liaison and working relationships with the
            various State, local, and other Federal agencies in the VCC's
            area of jurisdiction.
      --Maintains the integrity of the Gun Control Act and the National
            Firearms Act by ensuring that each State of local officer,
            referring a case has met all the elements of proof, thus
            avoiding the chance of creating unfavorable case law.
      --Gathers and exchanges intelligence derived from observed trends and
            from defendants.
      --Ensures firearms from all referred cases are traced, thus enhancing
            the ability of Project LEAD to generate information on illegal
            firearms trafficking.
      --In cities with CEASEFIRE Project capabilities, ensures firearms
            from all referred cases are test fired and that shell casings
            and projectiles are subjected to Integrated Ballistics
            Identification System testing thus enhancing the IBIS data base
            and increasing the likelihood of ballistic matches.
            Additionally, ATF utilizes the following strategies to address
            and prevent violent crime:
      --The Achilles Project is a congressionally mandated enforcement
            program that utilizes two tough Federal statutes (18 U.S.C.
            Sec. Sec.  924(c) and 924(e)) to remove from society those
            armed career criminals, armed narcotics traffickers, and other
            violent offenders who are responsible for a disproportionate
            percentage of this Nation's violent crime. These statutes
            require mandatory/minimum terms of imprisonment for all
            individuals convicted for armed narcotics trafficking. There
            are Achilles task forces located in 20 cities nationwide that
            consist of ATF special agents and inspectors and other Federal,
            State, and local law enforcement officers. This program has
            resulted in the arrest and successful prosecution of numerous
            armed narcotics traffickers and other violent offenders.
      --The NTC traces firearms for law enforcement agencies both
            domestically and around the world. The NTC is the only source
            for information pertaining to the tracing of firearms in the
            United States. During fiscal year 1996, the NTC traced in
            excess of 134,000 firearms.
      --ATF's Firearms Trafficking Project is a comprehensive strategy to
            interdict the flow of firearms to the criminal element,
            including narcotics traffickers and violent offenders. Using
            computer technology to access data from ATF's NTC and the
            Stolen Firearms Program, ATF addresses illegal firearms
            trafficking by identifying the illegal source of the firearms
            to the criminal element. Through this program, ATF is able to
            impact upon narcotics traffickers' ability to acquire firearms
            in furtherance of their illegal activity.
      --Stolen Firearms Project which is an aggressive enforcement effort
            determined to reduce the amount of firearms stolen from
            interstate carriers and Federal firearms licensees. ATF
            research and data reveals that stolen firearms, by their very
            nature, are destined to be crime guns. The criminal element,
            realizing that their ability to acquire firearms has eroded,
            sees stolen firearms as an instant source of untraceable
            firepower.
      --The CEASEFIRE Project provides support to law enforcement agencies
            in areas of the country experiencing serious organized criminal
            gang and drug-related shooting incidents. Currently, ATF is
            utilizing a state-of-the art system that allows firearms
            technicians to digitize and automatically sort bullet and shell
            casing signatures and aids in providing matches at a greatly
            accelerated rate. The equipment expeditiously provides Federal,
            State, and local criminal investigators with leads to solve
            greater numbers of crimes in a shorter period of time.
                               g.r.e.a.t. program
        Background: The Gang Resistance Education And Training (GREAT)
    program provides grants to communities that are participating in and
    encouraging the prevention of violence. The program, taught by
    uniformed officers, so far has provided training to over 2 million
    children, enrolled in seventh and eighth grade.
        GREAT is currently running in 54 locations in 21 states.
        Question. Director McGaw, the G.R.E.A.T. Program looks promising,
    why should we continue its funding? How can we qualify G.R.E.A.T as a
    successful program for future expansion?
        Answer. Youth gang violence is still a major concern for law
    enforcement in the United States. The G.R.E.A.T. Program provides a
    major step forward in helping school age children develop life skills
    which improve their social behavior.
        The G.R.E.A.T. Program is managed by a partnership representing all
    levels of law enforcement--Federal, State, county and city. This
    management team was assembled to make sure that the needs and concerns
    of the community and law enforcement are given consideration, and to
    provide the program the best possible leadership. Following established
    organizational development and leadership practices, G.R.E.A.T. has a
    well developed strategic plan which takes it into the year 2000.
        The program was scrutinized in a Cross Sectional Evaluation
    conducted by the University of Nebraska at Omaha and the evaluators
    report that there is ``significant statistical information'' showing
    that students who received G.R.E.A.T. training developed more pro-
    social skills than those who had not attended the program. This
    evaluation was completed in 1996 and will be published by the National
    Institute of Justice. Also, a Longitudinal Evaluation is underway. At
    the end of one year of collecting information from G.R.E.A.T. students
    who are involved in the longitudinal study, the evaluators are
    unofficially reporting that they have seen responses which are similar
    to what they observed in the Cross Sectional Evaluation.
        This program is truly a partnership between law enforcement,
    educators, parents, and the community and because of this fact, it
    stands the best chance of making a positive impact on its targeted
    audience.
        The G.R.E.A.T. Program is being funded in a limited number of
    jurisdictions. In addition, the G.R.E.A.T Program is funded out of the
    Violent Crime Trust Fund which expires in fiscal year 2000.
        Question. If you consider this program a success, why has the
    funding request level remained constant for the past three years?
        Answer. The G.R.E.A.T Program has been growing at an extraordinary
    rate because participating police departments and ATF have been
    spreading the stories of success through formal and informal
    communications. However, until the University of Nebraska at Omaha's
    Cross Sectional Evaluation was completed at the end of fiscal year
    1996, ATF did not have scientific evidence that demonstrated that this
    program meets its objectives. Until the evidence of its success was
    obtained, we were taking an incremental approach in requesting funding
        Question. A public survey conducted in Green Bay, Wisconsin,
    relates increasing juvenile crime to gang activity. What could ATF do
    to help eradicate this problem?
        Answer. The G.R.E.A.T. Program is proving to be an effective tool
    in the fight against youth gang violence. However, in order for this
    program to have the most benefit it must be used with comprehensive
    illegal firearms suppression programs such as the Youth Crime Gun
    Interdiction Initiative, intervention programs, and other prevention
    programs which target youth offenders. G.R.E.A.T.'s strategic plan
    calls for us to seek and develop partnerships with other community
    based programs at the federal, state, and local levels. Through formal
    partnership with other Federal Departments (Justice and Education),
    state, local and non-profit agencies, G.R.E.A.T. has helped communities
    educate many American youths by providing them with valuable life
    skills which address the following topics: What are gangs and how they
    differ from Clubs; Crime/Victims and Victim Rights; Cultural
    Sensitivity/Prejudice; Conflict Resolution; Meeting Basic Needs; Drugs/
    Neighborhoods; Responsibility; and Goal Setting.
        The Youth Gun Crime Interdiction Initiative is aimed at stopping
    the illegal supply of guns to gang offenders and juveniles. Since much
    youth firearms violence is gang-related, the YCGII is a critical
    component of our Nation's efforts against juvenile crime. The G.R.E.A.T
    Program give ATF, other Federal agencies, and State and local law
    enforcement tools to prevent violent crime and gang activities by
    developing the life skills of those people who attend the class and
    assuming that illegal firearms are less accessible.
        Question. Other than contracting for a University of Nebraska
    evaluation, has ATF developed any standards or criteria for measuring
    the G.R.E.A.T. Program success?
        Answer. G.R.E.A.T. is given its direction by a National Policy
    Board and managed by a National Training Committee which has developed
    a policy manual designed to insure that the curriculum is not changed
    and that the instructors are certified to teach and use the curriculum.
    We also continually have dialogue with program participants. However,
    the formal scientific evaluation of the program will be accomplished by
    the University of Nebraska study. This study will also provide the
    required outcome measures which could be applied in any local
    jurisdiction to measure success.
        Question. The University of Nebraska's preliminary evaluation of
    the G.R.E.A.T program is based on the first 18 months of a four year
    examination period. How statistically valid would the 18 month results
    be in a four year longitudinal study?
        Answer. The University of Nebraska has actually completed the first
    two parts of a three-part evaluation process. The results we now have
    are from the cross- sectional and process evaluation parts. Each shows
    G.R.E.A.T. as having positive results. As mentioned in the response to
    question 25, we only have unofficial, early results on the longitudinal
    study.
        The National Institute of Justice believes longitudinal evaluations
    provide the most statistically valid indication of the effects of
    prevention/resistance programs. The evaluation being conducted by the
    University of Nebraska at Omaha must pass a ``peer review'' before it
    will be accepted by the National Institute of Justice as a valid study.
    We cannot answer the question as to the statistical validity of the
    current results toward the four year study.
        Question. It has now been a year since the preliminary results of
    the Nebraska study were released. Has a 2nd phase analysis been
    produced?
        Answer. The initial evaluation was a cross-sectional evaluation
    that has been completed, and the results will be published by the
    National Institute of Justice (NIJ) soon. NIJ did conduct a press
    conference and announced the preliminary results of the study in
    October 1996 during the annual International Association of Chiefs of
    Police (IACP) conference, however, the report still needs to be
    published by them.
        In addition, the first phase of the longitudinal evaluation is in
    progress, and the data from the post test and one year follow-up
    questionnaires are being prepared for analysis. Preliminary results
    should be available in late summer 1997.
        Question. It is currently costing $3 million annually to administer
    this program, which has provided training to approximately 2 million
    students over a five year period. Do you consider that a cost effective
    use of the funds?
        Answer. Yes, the responsibility of ATF is to administer, evaluate,
    and expand the program, as well as provide assistance to communities
    who wish to join the program, or are using the program. All of these
    funds are not expended by ATF. Theses funds also pay for such things as
    G.R.E.A.T. officer training for non-cooperative agreement cities, the
    University of Nebraska's evaluation study, and 50 percent of the
    cooperative agreement with the city of Phoenix.
                           canine explosives program
        Background: In 1990, the U.S. Department of State, Antiterrorism
    Assistance Program requested ATF to evaluate their (DOS) canine
    program, which trained explosive detecting canines for foreign
    countries. ATF uncovered several serious deficiencies including no
    scientific testing, training, or oversight. DOS requested ATF's
    assistance in developing a training program to address the ATF
    concerns. As a result ATF started it's own program. The fiscal year
    1998 ATF budget requests $3.9 million and 17 FTE to expand the canine
    training program.
        According to ATF, their program is the only scientifically based
    training program, which utilizes specific scientific protocols to
    train, test and certify the performance of their canines. In addition,
    ATF has developed canine odor recognition training, using pure
    explosive substances, designed to eliminate cross contamination of
    explosives odors during explosives detection training. As a result, ATF
    has reported that their dogs can detect small amounts of some 19,000
    different explosive compounds.
        A number of agencies and departments involved in bomb and
    explosives detection have called into question, the claims ATF has made
    about it's Canine Explosives Detection Program.
        Question. What operational experience does ATF have in the pre-
    blast use of canines to detect explosive substances and devices?
        Answer. As the primary Federal agency charged with explosives
    jurisdiction, ATF trains other Federal, State, and local law
    enforcement officials on bomb search techniques, explosives device
    recognition, etc. ATF's jurisdictional authority applies whenever the
    components of a device are present. ATF also trains FAA personnel in
    device recognition. Per the Gore Commission, they recognized ATF
    expertise in the explosives arena and recommended ATF join the airport
    consortia to do explosives and disguised firearms threat assessments.
        Because of the sensitive nature and significance of the
    investigative tool, ATF devotes additional resources to complement the
    handlers in the field. ATF is able to provide the other investigative
    tools associated with the Canine Explosive Detection Program (CEDP)
    such as laboratory analysis, explosives technology assistance,
    certified explosives specialists, National Response Teams,
    International Response Teams, explosives incidents data bank,
    explosives tracing, trend analysis, assistance in stolen explosives
    recovery, explosives training for law enforcement personnel, audit and
    major case oversight assistance, profiling, and polygraph examinations.
        The Canine Explosive Detection Program was developed and is
    designed to incorporate all the support systems necessary to maintain
    the integrity of the program and provide Federal, State, local, and
    foreign law enforcement with the most dependable, durable, and mobile
    explosives detection system available today. The CEDP incorporates the
    knowledge and experience of the ATF forensic laboratory explosives
    section and the technical expertise of ATF explosives experts, special
    agents, and canine trainers into a training regimen that produces a
    final product capable of addressing the escalating explosives threat
    faced by many communities.
        An added dimension to the explosives detection canine trained by
    the CEDP is its ability to detect firearms and ammunition. Because the
    canines are conditioned to detect smokeless powder and other types of
    explosives fillers, they may be used by law enforcement to detect
    firearms in luggage, vehicles and during the service of search
    warrants.
        ATF trained and certified canines have been used in pro-active law
    enforcement operations by foreign countries since the beginning of the
    CEDP in 1990. ATF canine teams are trained to work in a variety of
    different environmental settings on a daily basis. ATF has trained 122
    canines for 7 foreign countries to be used in the war against
    terrorism. These canines have provided the following pro-active law
    enforcement duties in foreign countries: VIP and presidential
    protection details; security sweeps in American and foreign embassies,
    synagogues, palaces, public buildings and border checkpoints; searches
    of airports and airliners; explosives detection on high-risk search
    warrants; ships and ports of entry; courtrooms; bomb threats; etc.
    Canine teams work extensively at the Italian presidential palace, at
    the Vatican and on the Pope's travels outside the Vatican, and on all
    of Egyptian President Mubarak's movements. Canine teams worked on a 24-
    hour schedule in support of site, airport, and route security at the
    Peacemaker's Summit in Sharm al Sheik attended by the leaders of 17
    countries, including President Clinton, Arafat, Mubarak, Kohl, Major,
    and Peres.
        ATF introduced a pilot program two years ago with one ATF trained
    and certified explosives/weapons detection canine team. During the past
    two years, this canine team has been used in numerous pro-active ways.
    The team has helped locate weapons and ammunition on numerous search
    warrants, they have provided security sweeps of buildings for VIP
    visits, they have helped to recover evidence after explosives incidents
    and after a shooting incident, and they have been requested by State,
    local, and Federal agencies on numerous occasions for security/bomb
    sweeps for public buildings, schools, and government offices.
        Examples from ATF's pilot special agent/canine team include the
    utilization of the team to help recover evidence after a brutal murder
    during a ``carjacking'' involving a firearm in Charlotte, North
    Carolina. The ATF canine searched a heavily wooded area, previously
    searched by officers. As a result of the shooting, the canine found
    minute amounts of skull and brain tissue in debris and on a wall with
    gunpowder residue.
        Numerous searches have been enhanced by the presence of the ATF
    canine team. On one warrant the ATF canine found two concealed firearms
    during a search warrant. One of these firearms, a small semi-automatic
    assault weapon, was concealed in a bag and suspended in a crowded
    closet. On another warrant, the ATF canine helped in the recovery of
    over 110 firearms in various locations.
        The Department of State, Office of Antiterrorism Assistance (DoS-
    ATA) has provided us with feedback on the work of the canines overseas.
    An example of the effectiveness of these canine teams on high risk
    search warrants comes from the Egyptian National Police. During entry
    to a terrorist safehouse, the canine teams were used with the entry
    team on their approach to the house. The canines alerted on the front
    door, the selected point of entry, prior to the entry. The point of
    entry was moved to an alternate entrance at the rear of the house.
    After entry was made, it was discovered the front door was booby-
    trapped with explosives. The ATF/ATA canines were credited with saving
    the lives of the six entry team members.
        The Greek canine teams have performed over 15,000 searches, of
    which 10,000 were of a preventive nature in high profile targets, and
    the remainder concerned bomb threat searches. It is reported that no
    mistakes were made, as there were no bombs that went undiscovered and
    no other objects that were identified as bombs. Two improvised
    explosives devices were located, and the ATF/ATA canines were credited
    with saving the lives of many people. These finds are described below.
        Following a bomb threat telephone call at the residence of the
    former President of the Scientific Council on Terrorist Matters, the
    ATF/ATA canine team located the clockwork explosive device.
        Additionally, following a bomb threat telephone call at the
    Building of Justice in the city of Kavala, the ATF/ATA canine team
    located the device inside a ladies handbag.
        The ATF canine team and nine ATF/ATA canine teams from Greece and
    Chile were specifically requested by the International Olympic
    Committee (IOC) and the Atlanta Committee for the Olympic Games (ACOG)
    to provide security/bomb sweeps of the Main Press Center and the
    Marriott Marquis Hotel, where a large majority of the foreign
    dignitaries, Heads of State, VIPs, and executives of IOC and ACOG were
    lodging.
        The explosives enforcement officer assigned to the CEDP has
    extensive experience with the New York City Police Department (NYPD)
    Bomb Squad. He was an explosives expert/member of the bomb squad and
    was responsible for the oversight and training of all of NYPD Bomb
    Squad explosive detection canines. The NYPD Bomb Squad was responsible
    for extensive searches for the United Nations and for all of the pre-
    blast security/bomb sweeps for the city, to include work at both
    LaGuardia and JFK airports.
        ATF also regulates the explosives industry and is the first agency
    to receive explosives samples, new packaging techniques, etc.
        Question. How effective is an explosives detection canine in the
    post-blast environment that has been littered with explosives material?
    Have any studies been performed on this subject?
        Answer. The effectiveness varies with the type of bomb and type of
    explosive. With pipe bombs, the canine search is very effective in
    locating fragments of the pipe bomb itself. In cases where a more
    vapor-producing explosive is used, such as dynamite, the canine is not
    effective in the crater area, but very effective in the wide outer
    perimeter area searching for components of the explosive device. ATF
    explosives experts are trained to recognize the blast seat and
    immediate areas surrounding it. The canines are most useful in the
    outer perimeter areas searching for bomb debris and fragmentation,
    where the fragments are not as easy to find. The canine is able to
    locate bomb debris and fragments in grass, in dirt, under leaves, in
    wooded areas, etc.
        Examples of this are the use of ATF/ATA canine teams at post-blast
    scenes. Two canine teams were asked to respond to a post-blast scene 12
    hours after two detonations occurred in Argentina. These teams
    responded to the scene and, immediately after starting the search,
    found remains of a pipe bomb. A few minutes later the canine teams
    found remains of the pipe bomb inside a garbage bag. Also, minute
    remnants of the other explosive device's power train, a small fraction
    of a cable, and a battery were found.
        Another example from Buenos Aires was a canine team that was called
    to a high school. A large group had been demonstrating near the school,
    and some detonations were heard. During the scene search, a canine had
    a positive alert to a barely visible gray spot of about 30 centimeters
    in diameter on a door of an outside patio and to a smaller spot on a
    door glass pane. These samples were sent to the laboratory which
    reported that the samples were identified as black powder residue.
        Presently no studies have been done, as this is a new area for the
    canine teams. When we have had occasions to use this technique, the
    canines found items that otherwise might not have been found by human
    searching. It has been particularly effective in cases where we have
    searched for weapons. A weapons search is essentially a search for the
    post-blast residues of smokeless powder. This works when you are
    searching for fired cartridge cases, fired weapons, or post-blast pipe
    bomb fragments.
        Question. How many ATF explosives detection dogs are operational in
    the United States? Please provide a position (job) description for an
    ATF explosives canine handler.
        Answer. After viewing the success of the ATF/ATA program in foreign
    countries, ATF decided to start its own pilot program, two years ago,
    with one operational canine team. This year ATF will add six additional
    special agent/canine teams. The position vacancy announcements have
    already been advertised for Chicago, San Francisco, Miami, Atlanta,
    Dallas, and Los Angeles. These teams, strategically placed throughout
    the United States, will help support ATF and assist State and local
    agencies. These additional teams were made possible through fiscal year
    1997 funding.
        ATF canine handlers are also ATF special agents. The special agent
    enhances the canine handler position by being an experienced law
    enforcement officer with a wide range of professional investigative
    training and experience. The special agent/canine handler is well
    versed in all areas of criminal enforcement and the various Federal
    laws enforced by ATF.
        ATF plans to train explosives detection canines for eight State and
    local agencies this year. Once the enhancements have been made to the
    canine training facility and additional training staff is in place, ATF
    will begin to train 100 canines annually. This is expected to happen
    during fiscal year 1999.

        [Clerk's note.--The position description for the ATF Special Agent/
    Canine Handler position does not appear in the hearing record, but is
    available for review in the subcommittee's files.]

        Question. The House Treasury Appropriations Bill Report for fiscal
    year 1997 expressed concern about the existence of multiple Government
    canine explosives detection programs in an attempt to avoid duplication
    and waste. How does ATF's canine explosives detection program
    objectives differ from DOD's Military Working Dog Center and FAA's
    program? Could ATF use the established assets and resources at the
    Military Working Dog Program, already utilized by a number of Federal
    agencies?
        Answer. ATF has, on several occasions, asked the Department of
    Defense Military Working Dog Program (DOD-MWD) and the Federal Aviation
    Administration (FAA) for a copy of their certification standards and
    protocols. ATF has supplied these agencies with a detailed booklet on
    its program. ATF has had discussions with these agencies and is waiting
    to receive written information on these agency's certification
    standards and protocols.
        ATF uses different canine training methods and different protocols
    than the DOD-MWD program. One difference is ATF utilizes its National
    Forensic Laboratory, located in Rockville, Maryland, and its Explosives
    Technology Branch, located in Washington, DC, in conjunction with its
    training center for expertise in the selection of explosive compounds
    used in training. The scientific validation from ATF's National
    Forensic Laboratory is different from the scientific validation by DOD-
    MWD's animal behaviorists' staff.
        The ATF program has always handled explosives samples differently
    than other programs to avoid contamination problems. Recently, some
    programs acknowledged contamination problems, and are now using the
    same or similar techniques for handling and storing explosives that ATF
    uses.
        ATF utilizes the blind test methodology, wherein the forensic
    chemist administers the certification test.
        ATF also utilizes a multitude of non-explosives distracting odors
    in its training and in the certification process. ATF believes the use
    of distracting odors more closely resembles the ``real world'' working
    environment. Canines will encounter all types of different odors while
    working, not just explosives.
        ATF only uses Labrador Retrievers, a hearty, intelligent breed
    which can readily adapt to changing environments and one which posses a
    nonaggressive disposition which is effective in searching for
    explosives.
        ATF is aware of only one Federal agency (FAA) that uses the DOD-MWD
    facilities. The FAA contracts with the DOD-MWD to train canines for
    their program. FAA then assigns these canines to other law enforcement
    agencies to support their mission. FAA does not train or have any of
    their own canine teams. ATF selects, trains, oversees, evaluates, and
    certifies all canines in their Canine Explosive Detection Program
    (CEDP).
        It would not be advantageous now for ATF to utilize the DOD-MWD
    facilities because two different training methodologies and program
    standards are utilized. ATF's certification standards are different
    from the DOD-MWD program. However, if their standards met ATF's our
    criteria and ATF needed to produce teams beyond the capabilities of the
    Front Royal facility we would consider it.
        ATF would also have to incur the expense of relocating personnel,
    lose the on-site response of its National Laboratory, and procure new
    explosives bunkers to alleviate any possible contamination problems.
        ATF has already established an excellent working relationship with
    the United States Customs Service (USCS), and is jointly utilizing
    their Canine Enforcement Training Center (CETC) in Front Royal,
    Virginia. ATF has received funding for, and is presently in the process
    of, constructing a canine training building and new kennel facility to
    augment the existing USCS facility.
        Question. Last year Congress also directed ATF to establish a pilot
    joint canine explosives detection program with the FAA to formulate
    standards for detection of explosives devices to further aviation
    safety. Where has ATF developed the necessary experience to train for
    searching and clearing large passenger airliners?
        Answer. ATF trains canines for the environments they will be
    primarily used in by the countries receiving the canines. ATF canines
    working in conjunction with the DoS-ATA Program were working pro-
    actively in foreign airports long before the pro- active approach was
    introduced to U.S. airports. ATF does not just specifically train its
    canines to work in airports, nor does it specialize its training
    program for clearing airliners. ATF-trained canines are trained to work
    in a multitude of different environmental settings. It is ATF's belief
    that if the canine is highly trained to alert to the explosives odors,
    it can easily be trained to work in a variety of different
    environmental settings.
        The ATF/ATA trained canine teams belonging to the Egyptian National
    Police have been assisting on the majority of TWA flights transiting
    Cairo. The primary flight services Riyadh/Cairo/JFK and returns. Since
    the Alexandria letter bomb incident, the ATF/ATA canines are now
    assigned to all departing TWA flights.
        The Italian National Police initially received two ATF/ATA canines
    that have been used at the Rome Fiumicino Airport. A new class of eight
    handlers just completed training and will also be assisting at
    airports.
        The Greek National Police use ATF/ATA canines on a daily basis at
    airports. U.S. airliners are among the airplanes searched daily, as
    well as Olympic Airways aircraft that fly to the United States.
        ATF understands that canines have only just begun to work pro-
    actively in U.S. airports since the explosion of the TWA flight. This
    initiative was started with fiscal year 1997 funding provided to the
    FAA for an additional 114 canine teams to be used in airports, which
    was supported by the White House Report on Aviation Safety and
    Security.
        It is ATF's understanding that the pilot program with FAA was to
    identify areas where the canines could be effectively utilized in
    airports and to gain knowledge from each others' canine programs. The
    congressional mandate authorizing the Secretary of the Treasury to
    establish national certification standards for explosives detection
    canines is separate from the joint pilot program with the FAA.
        Question. The joint FAA and ATF report to Congress is past due
    (April 1, 1997) on a trial canine explosives detection program at
    Dulles International Airport. What is the reason for the delay? What is
    the current status of the study? When is the report expected to be
    completed?
        Answer. An interim report on the establishment of a joint ATF/FAA
    canine explosives detection pilot program at Dulles International
    Airport has been prepared by ATF and is in the review process. It will
    be forwarded upon final review. We regret the delay in our response.
        ATF and FAA have met on five occasions to discuss implementation of
    the pilot program, most recently on May 19. ATF and FAA met with
    representatives from the Metropolitan Washington Airport Authority
    (MWAA) during March 1997. ATF has offered the full support of its
    Canine Enforcement Program along with an ATF special agent/canine team
    as part of the pilot program. This offer was declined by MWAA. ATF is
    continuing discussions with FAA in relation to the pilot program.
        ATF will forward their interim report on the pilot program progress
    upon final review. FAA has stated they will forward a similar report.
        Question. Have there been ``third party'' evaluations of the ATF-
    trained dogs sent to the Department of State's Anti-terrorism
    Assistance designated countries? Please provide copies of ATF's
    scientific protocols for initial training, certification, and re-
    certification procedures and standards used for the ATF Canine
    Explosives Detection trained teams.
        Answer. The Chief Explosives Forensic Chemist assigned to ATF's
    National Forensic Laboratory conducts the certification process for the
    ATF trained canines. Fresh explosives samples are brought from the
    National Laboratory's exemplar collection for the certification test.
    Two of the samples used and brought to the certification test are
    explosive samples that the canine teams have never been trained on
    before. The canine teams must positively alert to these two samples and
    the 18 other explosives samples presented in the tests to pass the
    certification process.
        An example of a third party evaluation of our canines was when the
    Greek National Police participated in the World Competition for Police
    Explosives Detection Canines in the Republic of Slovakia in September
    1996. The ATF/ATA trained and certified canine ``Garin'' won first
    place. Twenty-three countries participated using numerous canine teams.
    The Greek National Police believe this honor confirms that they are
    using the best explosives detection canines in the world.
        The Director of ATF invited representatives from every Federal
    agency with a canine explosives detection program to visit its training
    facility in Front Royal, Virginia. These agencies were invited to
    attend, discuss, and exchange information about ATF's certification
    standards and protocols, and observe the actual final certification
    process of the Egyptian National Police on November 4, 1996. Several
    agencies attended, including the FAA, Galaxy Scientific (an FAA
    research contractor), DOD-MWD, DoS-ATA, Technical Science Working
    Group--Office of Science and Technology (TSWG-OST), Department of
    Transportation (USDOT), United States Customs Service (USCS), United
    States Capitol Police (USCP), and the United States Secret Service
    (USSS).
        Attached is an ATF booklet prepared on the Canine Explosive
    Detection Program that explains the program and contains a scientific
    paper prepared by Chief Explosives Forensic Chemist, Richard Strobel.
    The paper discusses all aspects of ATF's pilot CEDP. This booklet has
    been supplied to all interested law enforcement agencies, and has been
    sent in response to inquiries made about our canine program.

        [Clerk's note.--The ATF booklet will not appear in the hearing
    record, but is available for review in the subcommittee's files.]

        Question. Are you aware of any client countries which have
    participated in the ATF Canine Explosives Detection Program (sponsored
    by DoS), seeking alternative canine program assistance? Have any of the
    teams failed re-certification? What happens to a team that fails re-
    certification?
        Answer. ATF is unaware of any client countries who are seeking an
    alternative canine program to the current ATF/ATA program. In 1990, the
    DoS-ATA evaluated the private sector canine contractor they were
    utilizing and found some deficiencies in the training process. After
    this assessment, DoS-ATA entered into an agreement with ATF to produce
    a more effective explosives detection canine. One with the capability
    of detecting more explosives odors and in smaller quantities than was
    currently being done. ATF used the expertise and success of the Canine
    Accelerant Detection Program (CADP) to develop its Canine Explosives
    Detection Program (CEDP). ATF used the training methodologies and
    protocols from the CADP, ATF explosives experts, and the ATF National
    Laboratory to develop the CEDP.
        Some countries that currently participate in the ATA Program have
    been phasing out their prior (non-ATF/ATA) bomb dogs and are completely
    replacing them with ATF/ATA trained canines. Prior to each country
    receiving the ATF/ATA canine program, an assessment is conducted on
    their capability to support the stringent program requirements. In
    addition to them having to meet ATF/ATA requirements, they are advised
    they will receive a small number of canines for piloting (2 minimum, 6
    maximum).
        Each country then has the task of comparing the canines they have
    in their existing programs to the canines supplied by the ATA Program.
    All countries have unequivocally accepted the ATF/ATA program as being
    far superior to anything they have had previously.
        The bomb squads of the respective countries are the end user and
    have stated that they have confidence in the capabilities of the
    canines trained by ATF for ATA. In Cyprus for example, the bomb squad
    commander, Inspector A. Chakalis was skeptical of canines in general
    based on canines that were in use prior to the ATF/ATA pilot. During a
    period when the canine handlers and trainers were away from the
    training facility, he hid explosives, ammunition, and weapons in
    locations the canine personnel were unaware of. He then asked them to
    conduct a search of the area. Much to his surprise, the canines found
    everything he had hidden in all of the locations. He stated to the most
    recent ATA evaluation team that he did not believe canines were capable
    of doing the things that he observed the canines doing. Because of his
    new found confidence in the canines, he has met with the national
    police hierarchy and requested the canines be assigned to his unit. He
    is now in charge of the bomb squad and the canine unit is integrated
    into that system.
        The end user is really the person who evaluates the product. In
    Cyprus they are satisfied that the ATF/ATA canines they currently have
    are far superior than any other canines they have had in their 30 plus
    years of experience with canines.
        ATA sends evaluation teams back to the countries which have
    received ATF/ATA canines. These teams conduct assessments of odor
    recognition capabilities and application of operational methods as
    taught. The respective countries have been given training guidelines
    for the upkeep/maintenance of the canines to keep them effective. Based
    on the ATF/ATA evaluations, the countries have done very well in this
    aspect.
        In the canine's working environments, they encounter terrorist
    threats on a daily basis, thus there is no margin for error. The canine
    unit administrators, managers, supervisors, trainers, and handlers
    realize the business they are in and take what they do as a matter of
    life and death. Therefore, they train in real world situations and, at
    this time, there have not been any reports of any teams in any country
    being de-certified.
        All of the countries that have received ATF/ATA trained canines
    have requested more canines. A requirement of the ATA program is that
    the recipient countries have experience in managing a detection canine
    program. They are to evaluate the ATF/ATA canines in their respective
    countries. Each country must make their own assessment of the
    effectiveness of the ATF/ATA canine program. Thus far, all countries
    have requested additional ATF/ATA trained canines for use in their
    countries.
        Several of the countries with long histories of explosives
    detection canine programs utilizing the other training methods are in
    the process of converting their existing programs over to ATF's
    training methodologies and standards.
        ATF has trained three classes for Cyprus, two for Greece, three for
    Egypt, two for Chile, two for Israel, two for Italy, and two for
    Argentina (one class completed training and one class is in training).
    Jordan is the next country scheduled to begin training. Israel and
    other countries with much explosives experience, and with high rates of
    explosives incidents, have requested more canines than we can presently
    produce with our current resources.
        All 122 ATF/ATA canine teams that have gone through ATF's 10-week
    explosives detection training program have successfully completed the
    certification process with 100 percent of the explosives odors
    identification and have successfully completed all field training
    procedures.
        All of our client foreign countries have been satisfied. They
    encounter terrorists and improvised explosive devices more often than
    the United States. The fact that they continue to request more of our
    canines and have changed their former canine programs to match ours
    speaks for itself.
        There have been no reported failures in recertification in these
    foreign countries. If a team failed the recertification process, it
    would be evaluated and re- trained in the deficient areas, and returned
    to work, if appropriate.
        Question. How many explosives detection dogs has ATF trained to
    date? What is the projected operational life expectancy of the dogs?
    How many of these dogs are still operational?
        ATF has trained and certified 122 canine teams for the DoS-ATA
    Program and 1 pilot canine team for ATF's operational usage. ATF trains
    the canine and handler together so they work more efficiently as a team
    in the field.
        The operational ``working life'' expectancy of the Labrador
    retriever utilized in ATF's canine programs is 7 to 9 years. The health
    of the canine is of the utmost importance to ATF. ATF gives additional
    health care training to every class of students. ATF also requests that
    each country send its assigned veterinarian to the training facility,
    so the foreign veterinarians can learn the new technologies and medical
    information pertinent to this breed.
        ATF has also trained and certified 56 accelerant detection canines,
    using the same methodologies, since 1986. There are still 46 of these
    canines working today, exemplifying the excellence of this program. The
    remainder of these canines have since been retired. All of these
    canines have successfully recertified on an annual basis.
        To our knowledge, of the 122 trained canine teams, approximately 5
    are not operational because of medical reasons/age. We are not aware of
    any team having been taken out of service due to training problems or
    lack of ability to identify explosives odors.
        Question. Please provide certification of the scientific validation
    of your canine training program, including sufficient detail to allow
    independent verification of stated results, not a summary of the
    program. Also, please include any peer-reviewed articles published in
    professional journals that further substantiate ATF's claim of having
    the only scientifically validated training program in the world.
        Answer. The ATF pilot explosives detection program is outlined in
    Chief Explosives Forensic Chemist Richard Strobel's report in
    attachment B. These standards have been made public by ATF and sent to
    all requesting law enforcement agencies. ATF is unaware of any other
    canine program which has done the same.
        In 1984, ATF conducted a study to determine the feasibility of
    imprinting a canine with an accelerant odor using the same
    methodologies and protocols it now uses in the explosives detection
    program. The findings of this study were presented to the American
    Academy of Forensic Science.
        ATF recognizes that other programs use scientific data to verify
    their canine programs, such as the DOD-MWD's animal behaviorists'
    studies. However, ATF has not been supplied with any of this
    information.
        To our knowledge, ATF is the only canine explosives detection
    program that fully utilizes a nationally accredited explosives forensic
    laboratory to back up its validation and certification standards.
        ATF has invited and allowed anyone interested to view our program.
    ATF has also presented studies and findings performed in conjunction
    with Lawrence Livermore Laboratories at international symposia
    (International Symposium on the Analysis and Detection of Explosives
    1992 and 1995; sponsored by the FAA). Validation is provided by the
    scientific testing and evaluation process that each canine undergoes
    and which demonstrates that the training methodology is effective. ATF
    only claims that we use scientific methods and scientific controls for
    the testing and evaluation of the canines. ATF selects the explosives
    on which to train the canines based upon the chemical compositions and
    the chemical families of explosives which exist today.
        The CEDP incorporates the knowledge and experience of the ATF
    forensic laboratory and the technical expertise of ATF explosives
    experts, special agents, and canine trainers into a training regimen
    that produces a final product capable of addressing today's escalating
    explosives threats.
        Question. What is ATF's participation in the on-going canine
    detection enhancement work and olfaction studies being funded by the
    Technical Support Working Group, DARPA, FAA, DOD, ONDCP, USSS, and the
    international cooperatives with Israel and the United Kingdom?
        Answer. ATF is not participating in this study, however, it has
    received information in relation to this study. ATF has not received
    any funding in any fiscal year to do any similar studies.
        ATF would like to continue receiving information on this study and
    any other studies by Federal agencies who have been Federally funded to
    perform such canine studies. ATF recognizes the best way to improve any
    program is through the sharing of information. This is why ATF has
    shared information on our program with and has been responsive to the
    requests of other agencies.
        Question. Have ATF's unique training protocols for explosive
    detection been used by other canine programs within the local, State,
    and Federal governments, or the private sector?
        Answer. ATF in partnership with the Connecticut State Police, has
    trained and certified 56 State and local accelerant detection canine
    teams utilizing ATF's methodologies. ATF has not trained any private,
    local, State, or other Federal Government agencies of the United States
    in its canine explosives detection program for domestic use. Since
    fiscal year 1997 funding was received, ATF will begin canine explosives
    detection training for State and local law enforcement agencies.
    Applications for participation have been sent to State and local
    agencies who have requested participation in the Canine Explosive
    Detection Program. The first class for State and local agencies will be
    conducted this fall. ATF will provide the funding for these State and
    local agencies to participate in our CEDP.
        The NYPD Bomb Squad Canine Unit has been utilizing the classical
    conditioning method of training since the early 1970's.
        Question. ATF states that their fully trained explosives detection
    canines are capable of detecting 19,000 different explosive compounds.
    What is the degree of reliability for detecting each of these compounds
    and what is the expiration of this reliability quotient upon leaving
    basic training? Please provide the scientific evidence of the canines
    abilities.
        Answer. The 19,000 number is based on the number of explosives
    formulations that exist today. Each of these formulations has explosive
    compounds which are common to the five basic chemical families of
    explosives. ATF trains the canine on these basic odors, thus allowing
    the canine the ability to detect any explosive formulation that
    contains one of these odors. This method is validated when the dogs are
    tested at the end of their training. During this test the canines are
    tested on explosive formulations that they have not been exposed to in
    their training.
        The canines are tested using the pure forms of the explosives and
    on explosives compounds they have not been exposed to before. Examples
    include NESTT explosives, reagent oxidizers, foreign explosives, urea
    nitrate and a long list of experimental and specialty use explosives.
    There have been no instances where ATF has presented a new explosives
    formulation to a trained canine which the canine could not detect.
    After basic training the canines train on a continued daily basis and
    are tested continuously, assuring the canines are working effectively.
        The degree of reliability in large part relies on the continued
    training supplied by the handler, as it does with all canine programs
    for any detection discipline. Since the ATF canines train on the food
    reward system, they average 100+ training repetitions per day of
    smelling explosives odors. This varies greatly from some other forms of
    training. As with anything, the more training received, the more
    reliable the end product.
        The ATF canines must detect 100 percent of the 20 explosives odors
    to certify. We know of no other canine programs that require their
    canines to detect 100 percent of explosives odors in order to certify.
    ATF canines must also pass the annual recertification test with 100
    percent accuracy.
        Question. Please provide copies of the scientific studies that
    support ATF's training methodology, wherein training a canine using
    pure explosives substance (e.g., RDX, TNT, and Nitroglycerin) will
    reliably alert to other explosive compounds containing that pure
    component (i.e., 20 pure odors detecting 19,000 explosive compounds).
    Will a ATF explosives detection dog trained on a pure major compound in
    smokeless powder be able to detect all smokeless powders?
        Answer. Attachment B and answers to Q41, Q44 and Q46 provide
    information on the scientific studies that have been conducted that
    support ATF's canine training.
        Yes, a canine trained on the correct smokeless powder formulation
    will be able to detect all other formulations with that common
    ingredient.
        Question. What animal behavior studies support ATF's food reward
    and measured daily diet training methodology? Is there scientific
    evidence that this methodology remains effective once the dog and
    handler leave the disciplined training environment?
        Answer. ATF utilizes the classical conditioning method of training
    which has been utilized by the canine training profession for decades.
    The classical conditioning method is not a new theory in the realm of
    behavioral psychology, nor to the field of animal behaviorists.
        The ATF canines are fed their full ration of food every day by
    their handler/partner. This daily training method is supported by the
    Guide Dog Foundations (where ATF procures its canines) and by ATF's
    veterinarian staff.
        Answer. The scientific evidence that this training method remains
    effective in the field is proven by the operational usage of the
    canines, and the numerous explosives and weapons ``finds'' made by
    these canines in actual field operations. Also the fact that all ATF
    trained canines, in both the accelerant and explosives detection
    programs, are able to pass their annual re-certification tests by
    correctly identifying all of the accelerant or explosives odors
    presented to them.
        The technique also remains effective because the canine teams
    continuously undergo the same training on a daily basis with 100+
    training repetitions wherein the canine is exposed to explosives odors.
        The recurring successes overseas and the fact that the accelerant
    detection program, using the same methodologies, has remained
    successful since 1986 is further evidence this program works.
        Question. What is the minimum acceptable margin of error for ATF's
    Canine Explosives Detection program (false positives/false negatives)?
    What has been the pass/fail history of the canine and handlers
    participating in the program?
        Answer. ATF-trained canines MUST pass the certification test with
    100 percent accuracy on all 20 compounds in order to receive ATF
    certification. Only one false alert on a non-explosives odor is allowed
    in the entire certification process. All 20 explosives compounds must
    be alerted to positively with no misses. This pass/fail standard
    ensures the proficiency of the canines and maintains the integrity of
    ATF's Canine Explosive Detection Program (CEDP). To ATF's knowledge,
    ATF is the only program with this number of explosives compounds and
    proficiency standards this high.
        ATF also utilizes the blind test methodology, wherein the forensic
    chemist administers the certification test. ATF also uses a multitude
    of distracting non-explosives odors in the certification test. ATF
    believes that canines working in ``real world'' environments will
    encounter all types of odors, not just explosives odors. Therefore, we
    train with and certify using distracting odors. Examples of distracter
    odors would be anything found in the environment in which the canine
    will be working, such as pet food, coffee, chewing tobacco, baby
    powder, toothpaste, denture cream, herbs, peanut butter, chocolate,
    soap, and tape.
        ATF certifies their canines on a minimum of 20 different explosive
    compounds in varying quantities ranging from 1.7 grams to 15 grams.
    Training quantities vary from 1 gram to amounts exceeding 1,000 pounds.
    Two odors used in the certification are from samples of explosive odors
    not previously used in training. This helps to verify that canines
    trained using ATF's methodologies on the basic families of explosives
    will enable them to detect any formulation of explosive compositions
    made from them. During a 6-year training period, ATF has utilized many
    different explosives compounds during training. All of these explosive
    compounds were detected and alerted to by ATF canines.
        To date, every canine entered into the ATF CEDP has successfully
    completed the entire training program and has received ATF
    certification as explosives or accelerant detection canines. ATF does
    not have a high ``washout `` rate which can result in a considerable
    waste of training time, resources, and money. ATF's success in this
    area can be attributed to the excellent breed and quality of canines it
    procures and the effective training methodologies we employ.
        Question. According to ATF, your training program produces
    certified canines that are capable of detecting explosives quantities
    as low as 3 grams. Please provide the reports that substantiate these
    detection levels. Does the amount of explosives relate to detection?
    Does temperature, humidity, surface area, and the presence of other
    contaminates or background odors impact detection? What validation does
    ATF propose to offer, to qualify canines detecting minimum threshold
    levels?
        Answer. All certification tests have been validated by the ATF
    National Laboratory. ATF has tested their canines on the 3 gram amount
    and lower. ATF not only uses small amounts of explosives to certify
    their canines, but also use distracting odors in the test. ATF has done
    this during the final certification test and each test is documented at
    the National Laboratory.
        Yes, ATF is fully aware that various factors/conditions will affect
    a canine's ability to detect odor, no matter what training methodology
    is used. There must be explosives odor available for the canine to be
    able to detect it. Since it is never known what the amount of available
    odor might be, ATF trains with minute quantities of explosives
    compounds. This helps give the canine the ability to detect the
    smallest quantities of explosives odors available.
        Since our canines are also conditioned to find smokeless powder and
    other types of explosives fillers, they are able to find firearms and
    ammunition. Our canines have made numerous weapons and ammunition
    ``finds''. These include locating empty bullet cartridges that have
    been fired from weapons. They also located a new firearm which was
    fired once at the factory, factory cleaned, shipped out, purchased, and
    was never fired again.
        ATF offers the fact that 122 canines have been trained and
    certified by our National Explosives Forensic Laboratory on a minimum
    of 20 explosives compounds in quantities of 15 grams or less with 100
    percent accuracy. ATF routinely trains on levels less than those used
    in the final tests.
        Question. What quality assurance exists in the ATF program that
    dogs being trained are exposed to pure target samples of explosives,
    void of cross contaminant odors from other compounds (other explosives
    and commonly neutral material)? How does ATF verify and re-certify
    their training aids as being contamination free? What instruments are
    used to ensure that cross-contamination is not present in detectable
    levels by the canines undergoing training and certification?
        Answer. ATF obtains explosives in as pristine a condition as
    possible. ATF stores the explosives in magazines that have been tested
    to ensure that they are not contaminated by volatile explosives. ATF
    changes their explosives sample training aids and their containers on a
    weekly basis to minimize the odors obtained through normal handling.
    ATF obtains fresh explosives for each class it trains.
        The final testing of the teams is done with explosives that have
    been tested by the National Laboratory using either an EGIS or Scintrex
    EVD-1 explosives detector to check for cross contamination from other
    vapor producing explosives.
        Question. ATF states that they are the only agency in the United
    States (and in the world) producing explosives detection canines and
    handler teams based upon ``scientifically validated methods.'' What is
    the canine training methodology based on, employed by the other U.S.
    Government agencies? Should Congress question the degree of continuous
    reliability and effective performance of these other programs? Have
    there been documented cases involving these other Government programs,
    where explosive devices have been missed or never detected? What
    prompted the need for a ``Government-wide'' canine explosives detection
    standard?
        Answer. ATF recognizes that other canine programs have scientific
    validation for their programs. However, ATF has not been supplied with
    any of this information.
        To our knowledge, ATF is the only canine explosives detection
    program that fully utilizes a nationally accredited explosives forensic
    laboratory to back up its validation and certification standards. Until
    recently, ATF was not aware of any explosives chemists involved in the
    oversight of any other Federal canine programs.
        ATF is the Federal agency with jurisdiction over explosives
    incidents. ATF trains its own canines, oversees its own canine program,
    trains canine teams for other law enforcement agencies, and uses its
    National Laboratory to test and certify the canines.
        Since other programs have not provided ATF with information, we
    cannot comment on their programs. Other canine training programs should
    be required to report on their own respective training methodologies.
        Congress has the authority to question the reliability of all other
    agencies with canine explosives detection training programs funded by
    Congress and should be asked this same battery of questions regarding
    their canine programs.
        ATF is not supplied with documented ``finds'' or ``misses'' by
    other agencies. Heresay would not be an appropriate response. Congress
    has a legitimate role in the oversight of expenditures for Federally
    funded programs and can request this information from the other Federal
    agencies with canine explosives detection programs. Additional
    questions could be asked in reference to canine teams which have to be
    de-certified and for these agencies to supply information reference to
    their own in-house testing procedures and results.
        ATF believes that the new awareness of the necessity for the best
    security possible and the need to protect the American public against
    terrorists threats has a great impact on the field of explosives
    detection canines.
        There are general standards for everything used in the Federal
    Government. There has never been a standard placed on the effectiveness
    of explosives detection canines nor is there a definition of the
    capabilities expected of a canine purported to be a ``bomb dog''.
        Every Federal agency utilizing explosives detection canines has a
    specific operation/mission to fulfill. The training methodology is not
    as important as the canine's ability to actually detect explosives
    odors. ATF believes its program conditions canines to effectively
    detect explosives under most if not all conditions.
        Pursuant to law under the authority delegated to the Secretary of
    the Treasury by Congress, ATF is developing National Odor Recognition
    Proficiency Standards. These odor recognition standards are not
    intended to replace any current certification standards already set by
    each respective Federal agency that employs explosives detection
    canines. It is a basic odor recognition proficiency standard that
    should be incorporated into all certification processes. This standard
    will also provide State and local law enforcement agencies with
    guidelines when procuring explosives detection canines from the private
    sector for their own programs.
        We thank the committee for these excellent well-thought out
    questions and for giving us the opportunity to explain our program. We
    can not answer for other programs but feel these are questions that
    each canine explosives detection program should be required to answer.
    This will give Congress a thorough understanding of the canine programs
    funded by the US Government.
                         arson and explosives archives
        Background: The fiscal year 1997 Appropriations included an
    initiative to enhance the ATF Explosives Incident System (Archives) to
    allow direct access for all Federal agencies to report explosives and
    arson incidents. The fiscal year 1998 request for $1.6 million to
    complete the system development and hardware requirements and allow
    field office on-line access to this information.
        Question. What are the allied elements associated with gun running
    and counter-terrorism?
        Answer. The dissolution of the USSR and increased political,
    economic, and diplomatic sanctions against States sponsoring terrorism
    has caused certain terrorists groups to work with organized criminal
    organizations in order to obtain weapons or raise funds to buy weapons.
    For example, terrorist groups in South America have allied themselves
    with Colombian Drug Cartels. ATF is investigating U.S. nationals
    involved in trafficking firearms to insurgents groups in Central and
    South America, investigations involving Middle Eastern ethnic groups
    involved in firearms trafficking, and individuals involved in
    trafficking weapons to European terrorists groups. Firearms trafficking
    has also been associated with narcotics trafficking, alien smuggling,
    and other means in furtherance of organized crime, such as money
    laundering and the trafficking of any demand commodity.
        ATF works in conjunction with other Federal law enforcement
    agencies and national intelligence agencies to counter firearms
    trafficking in terrorist operations. ATF does this through the
    International Traffic in Arms (ITAR) and Project Lead programs. ITAR is
    accomplished through ATF's firearms tracing capabilities to identify
    illegally trafficked U.S. source firearms, assisting in the
    identification of individuals and businesses holding U.S. firearms
    permits and licenses, through foreign law enforcement liaison, and
    other joint Federal and international investigative and enforcement
    projects.
        ATF developed Project Lead, an automated firearms trafficking
    information system, which analyzes unique information on crime-related
    firearms gathered by ATF's National Tracing Center. Project Lead can
    help trace when a firearm entered the hands of a criminal, and who
    provided that firearm to the criminal.
        ATF is a member of several joint task forces which include the FBI
    Joint Terrorism Task Force. The task forces were established across the
    U.S. to combine efforts to battle international terrorist groups acting
    within the U.S. and domestic terrorist groups.
        Question. Is there any evidence that international governments are
    involved in gun running?
        Answer. Yes, ATF has noticed through firearms tracing statistics,
    an increase in the trafficking of U.S. source firearms to Mexico,
    Central and South America and Asian/Pacific Nations through firearms
    tracing statistics. ATF has also initiated investigations into firearms
    trafficking within the U.S., involving foreign firearms. One ATF
    investigation involves the alleged trafficking of guns through
    corporations backed by an Asian Nation. Through other investigations,
    ATF suspects government involvement in firearms trafficking to Mexico,
    and countries in Central and South America. Firearms trafficking is
    used not only in criminal and terrorist operations, but also for
    economic purposes, such as the avoidance of import or legal
    restrictions of the country of destination.
        Question. What is the scale of weapon diversion and what is being
    done to limit the market for weapon diversion?
        Answer. Weapon diversion of U.S.-source firearms (between 1991-
    1996) has permeated the borders of 79 foreign countries, who reported
    over 30,000 firearms recovered. The majority of these firearms were
    located in three predominant countries; Canada, Mexico and Colombia.
    These firearms were used to commit violent crimes against the people of
    these countries. Allied crimes range from narcotics activities to
    terrorism and guerrilla activities.
        As a result of its unique ability to trace firearms, ATF is able to
    identify illegally trafficked U.S.-source firearms to these foreign
    countries. This information is used to identify smuggling trends in an
    effort to combat the illegal flow of firearms. The International
    Enforcement Branch (IEB) has established offices in Canada, Mexico and
    Colombia to assist international law enforcement agencies in the
    gathering and identification of U.S.-source firearms. IEB continues to
    provide extensive training in firearms identification, serial number
    restoration, and the tracing process. IEB has also established an
    international firearms response team whose mission is dedicated to
    responding to large cache of weapons seizures and properly identifying
    these large caches of firearms for tracing and investigative purposes.
        Question. Has the General Accounting Office done a study on this
    area?
        Answer. To our knowledge the General Accounting Office has not done
    a study in this area.
        Question. Please explain the international training programs run by
    ATF?
        Answer. International Law Enforcement Academy (ILEA)--Budapest: In
    partnership with the Department of State, Office of International
    Narcotics and Law Enforcement, and other Federal law enforcement
    agencies, ATF participates in training programs with foreign
    governments. During this partnership endeavor, skilled, dedicated, and
    experienced ATF instructors present to mid-level enforcement managers
    of the newly independent states of the former Russian Republic and
    Eastern/Central European countries, firearms trafficking investigation,
    explosives incident investigation techniques, and gangs/gang
    resistance.
        The block of instruction on Gangs/Gang Resistance provides an
    overview of the many gangs engaged in illegal activity in the United
    States, specifically dangerous street gangs. The instructor interacts
    with the students sharing and exchanging information enabling them to
    develop their own strategies to combat gang activities in their
    particular country.
        The Firearms Trafficking block of instruction provides an overview
    of the current firearms issues in the United States and discusses the
    most pressing law enforcement problems relating to firearms. The United
    States firearms law are reviewed and ATF's national firearms
    enforcement strategy is presented. Time is also allocated for the
    students to share and exchange information pertaining to their
    country's firearms laws, concerns, and issues, which should facilitate
    the development of strategies that meet their needs to combat firearms
    violence.
        The Explosives Incidents Investigation Techniques portion of
    instruction provides an overview of explosive theory, team concepts,
    and investigative techniques, utilizing ATF's ``100-Steps'' method of
    conducting postblast scene investigations.
        International Post-blast Investigation Training: The International
    Postblast Investigation Training is provided to countries of the newly
    independent states and countries of East/Central Europe. The students
    receive actual hands-on experience, learning how to conduct bomb scene
    investigations following an actual explosion, using the latest
    equipment available and following safe procedures while conducting
    postblast (bomb) scene investigations.
        ATF instructors present classroom instruction covering subjects
    that relate to explosive theory, team concepts, investigative
    techniques, reconstruction of crime scenes, postblast identification,
    military ordnance, the roles of the pathologist and chemist as it
    relates to explosive investigations, interview techniques and
    fingerprint processing. Practical field exercises requires the students
    to analyze the specific duties of each team member, utilize the ``100
    Steps'' method in investigating both a vehicle and residential bombing,
    and participate in the bomb scene investigation applying the learned
    investigative techniques.
        The course is conducted at the Federal Law Enforcement Training
    Center (FLETC), Glynco, Georgia. FLETC provides the facilities
    necessary to conduct this training including an explosive range.
        International Canine Explosives Detection Training: The canine dog
    detector course is designed to train canines to detect explosives
    compounds in minute amounts for use by foreign governments in the fight
    against terrorism. In addition, this program is designed to train the
    foreign governments' on how to train the explosives- detecting canines
    in the ATF methodologies so they will ultimately be able to duplicate
    this methodology without having to rely on ATF or the United States
    Government.
        International Firearms and Explosives Identification Training--
    Latin America and the Caribbean: The Basic and Advanced International
    Firearms and Explosives Identification courses are a joint effort
    between the Department of State, the United States Customs Service
    (USCS) and the Bureau of Alcohol, Tobacco and Firearms (ATF). ATF's
    training objectives are as follows: (a) to reduce the flow of illegal
    U.S. source firearms and explosives abroad by training foreign law
    enforcement and military officials to accurately recognize, describe
    and initiate tracer actions designed to identify sources of illegal
    arms; and (b) to establish a partnership with international law
    enforcement officials in Latin America and the Caribbean region which
    will allow for an ongoing international exchange of information.
        During the basic course, the students are provided with an overview
    of ATF's history/function, U.S., laws and regulations relating to the
    illegal purchase and trafficking of firearms and explosives, as well as
    how ATF identifies and documents commercial and military firearms and
    explosives for tracing purposes. At the end of the course, the students
    are given a test that they must pass in order to attend the 1-week
    advanced (train-the-trainer) training. During the test, the students
    must be able to identify ten firearms and successfully complete ATF's
    tracing form. The basic courses are conducted in regional sites
    throughout Latin America and the Caribbean, and the advanced courses
    are conducted in Washington, DC. During the advanced course, the
    participants participate in training events at ATF's National Tracing
    Center and at a local arms manufacturing plant.
        International Serial Number Restoration Training: This technical
    course provides foreign law enforcement personnel with an overview of
    serial number structure and tracing covering all aspects of magnetic,
    chemical and electrolytic techniques. This is a two day course held
    either in a foreign country or at the ATF National Laboratory,
    Rockville, MD.
        International Explosives Safe-Handling and Bomb Threat Management:
    This course involves the recognition, documentation, and safe-handling
    of commercial and military explosives and ordnance. During this course,
    foreign law enforcement officials are provided with an overview of U.S.
    laws and regulations relating to the investigations of explosives,
    proper techniques and methods for handling explosives and searching
    buildings, terrorist tactics in the use of explosives, shipping of
    explosives to laboratories, and handling of explosives scenes. This is
    a one day course delivered abroad by ATF's Country Attaches.
        Question. Revolutionary forces are providing the backing for the
    arms trade. How is ATF investigating this activity and working to
    reduce these threats?
        Answer. There are numerous revolutionary forces trafficking in
    firearms to support their efforts. ATF has participated in several
    major investigations involving these groups, and has been successful in
    identifying firearms traffickers from the United States who are
    supplying firearms to these forces. ATF has trained numerous foreign
    officials in the identification of firearms which is essential for the
    accurate tracing of firearms that are being trafficked to these groups
    worldwide. ATF has also dispatched personnel from ATF's International
    Enforcement Branch and Firearms Technology Branch to these areas where
    large caches of firearms are recovered to issue accurate compilation of
    firearms nomenclature, which in turn provides better trafficking
    intelligence and successful arrest and prosecution of the traffickers.
    ATF has also cultivated sources of information by our foreign offices
    to determine the sources in the United States. When these sources are
    identified, ATF's domestic offices go to work in perfecting
    investigations against these illegal firearms sources. ATF's
    International Enforcement Branch has been instrumental in identifying
    trafficking patterns, and providing this information to our field
    offices for further action.
                       national crime information center
        Background: Criticisms from Members of Congress as well as recent
    news reports suggest the FBI is having difficulty upgrading automatic
    systems at the National Crime Information Center (NCIC). ATF
    contributes to the records managed by the Center as well as relies on
    them.
        Question. For the public to receive full value for the monies spent
    for law enforcement resources, should efforts be made to require a
    coordinated Treasury/Justice law enforcement solution to help solve the
    FBI's problem?
        Answer. The Federal Bureau of Investigation (FBI) has recognized
    the need for input from the Criminal Justice Information System (CJIS),
    formerly National Crime Information Center (NCIC), user community
    throughout the development of the upgraded automated systems at the
    FBI. Since the beginning of the development process, the Director of
    the FBI has received recommendations and guidance in the development
    and operations of CJIS from the four CJIS Regional Working Groups. The
    groups comprise representatives from all the state and selected local
    law enforcement agencies.
        Furthermore, in December 1994, the CJIS Advisory Policy Board
    expanded the number of working groups to include the addition of the
    Federal Working Group. This group comprises representatives from over
    eighty Federal agencies. This includes representatives from ATF,
    Customs, and Secret Service.
        In addition, the Federal Working Group also participates in the
    advisory process with the other users through their representatives on
    the CJIS Advisory Policy Board. This board, formerly the NCIC Advisory
    Board, comprises selected representatives from Federal, state and local
    law enforcement agencies. The twenty- seven member board serves in an
    advisory capacity to the FBI Director on all CJIS operations.
        The combined membership of the regional working groups and the CJIS
    Advisory Policy Board also provides the FBI Director with input from
    more than 150 representatives with extensive background in law
    enforcement and information technology.
                         explosives inspections program
        Question. Aren't the inspections of these facilities part of ATF's
    regulatory responsibilities? Won't these inspections continue past the
    life of the Trust Fund?
        Answer. Yes the inspections are part of ATF's regulatory
    responsibilities and will continue past the life of the Trust Fund.
        Question. If ATF were to receive this fiscal year 1988 funding as
    part of VCRTF how, would ATF continue to fund the initiative in the
    future? Would this become part of ATF's Salaries and Expenses base
    funding level?
        Answer. ATF wishes to continue the initiative for explosives safety
    purposes to maintain 100 percent coverage.
                                 trigger locks
        Background: ATF on its own initiative, issued child safety locks,
    also known as trigger locks, to all of its agents.
        Question. In your opinion is this type of legislation important?
        Answer. ATF is a proponent of the use of trigger locks. When
    properly utilized, these devices will extremely beneficial by
    preventing children from causing tragic firearms related accidental
    injuries and deaths. Similar to a time when seatbelts were first
    introduced in the automobile industry, trigger locks might not be
    widely accepted and it will take time for the public to become
    accustomed to using them; however, they are clearly something that
    should be required.
        Question. Why did ATF issue child safety or trigger locks to its
    agents before it was a legal requirement?
        Answer. ATF issued these devices to its special agents because the
    laws of some States required them. Moreover, special agents had
    expressed concern about the safety of their children and other family
    members while their firearms where kept in the home.
        Question. Do you think child-safety or trigger locks can be an
    effective tool to protect kids?
        Answer. Yes, such trigger locks will deny access to operable
    firearms by children and should help prevent tragic and accidental
    deaths.
        Question. Do you support my bill?
        Answer. The Administration supports legislation requiring Federal
    Firearms Licenses to transfer locking devices to non licensees
    purchasing firearms. In contrast, your bill would require these
    transfers only upon the sale of handguns. There are other differences
    between your bill and the administration's bill that need to be
    resolved.
        Question. To all agency Directors present, how many accidental
    discharges of firearms involving children or others present in the home
    have occurred in the past with your own gun carrying personnel?
        Answer. ATF has received no reported accidental (unintentional)
    discharge incidents involving children or others in the home.
                      ceasefire/drugfire interoperability
        Background: Report language accompanying Public Law 104-208 (FY
    1997 Appropriations law) directed OMB to move forward the Memorandum of
    Understanding between ATF and the Federal Bureau of Investigation as a
    means of achieving Interoperability. Since that time OMB has been
    working with the National Institute of Standards and Technology to
    develop standards for the Interoperability of these systems.
        Question. What is the current status of the Interoperability issue?
        Answer. On January 15, 1996, the Bureau of Alcohol, Tobacco and
    Firearms, the Federal Bureau of Investigation, and the Office of
    National Drug Control Policy signed a Memorandum Understanding (MOU) on
    ballistics systems interoperability. The Office of Management and
    Budget has worked closely with the officials of the Bureau of Alcohol
    Tobacco and Firearms, the Federal Bureau of Investigation, vendors of
    the competing IBIS and Drugfire technologies, and State and local users
    of this technology to promote interoperability. National Institute of
    Standards and Technology (NIST) has been asked by OMB to lead the
    technical efforts associated with interoperablity implementation.
    Significant events:
        On November 12, 1996, NIST chaired and hosted a meeting with
    representative of OMB, ATF, and FBI and the two vendors of ballistics
    systems and various State and local users of IBIS and Drugfire systems.
        NIST has received technical data from both contractors to be used
    to formulate the conformance test (i.e., does each system capture and
    store image and associated text data correctly on cartridge casings
    only).
        NIST will be scheduling a meeting for July 1997 for interested
    participants to discuss and adopt specific procedures for the cartridge
    limited interoperability test (i.e., can each system accept and use
    images captured by the other system).
        Question. Is the technology used to develop these systems the same?
        Answer. Both technologies are similar in some respects. They both
    capture images of breech faces, firing pins and ejector marks. Case
    information, GRC's, and images are stored in a commercial database.
    Before doing any type of correlation, database candidates are pre-
    screened based on GRC's and event type (i.e., evidence or testfire).
    Both systems are network able.
        The United States is supporting the deployment of two incompatible
    ballistics identification systems within the law enforcement community.
    At this time, the image of a bullet or cartridge case captured on the
    Drugfire system cannot be analyzed by the IBIS system and vice versa.
    To further compound the problem, these Federally funded systems are
    provided to State and local law enforcement through separately funded
    ATF and FBI programs. Concerns have been raised within the
    Administration and the law enforcement community that having two
    divergent and competing programs is not in the best interest of law
    enforcement.
        Question. Is it feasible to make these systems interoperable?
        Answer. Currently, the Drugfire and IBIS systems are not
    interoperable. With information gathered by the National Institute of
    Standards and Technology (NIST), they've put forward specifications
    that could make both systems interoperable. With these changes in
    place, it would be possible to exchange information so that a limited
    correlation (database search) could be initiated.
        The interoperability study only considers the cartridge case
    modules of each system.
        Both systems have to capture an image in the other system's image
    format (different lighting); therefore, a hardware change is necessary.
    The graphical user intake and database structure has to be modified and
    networking protocol has to be implemented.
        Whether or not both systems can truly be interoperable is still
    unknown. We will only know for sure once we connect both systems
    together and perform all necessary tests.
        On March 27 1997, NIST proposed a test plan that briefly describes
    the evaluation method that will take place. The test is scheduled for
    summer 1997.
        Question. The ATF preferred system CEASEFIRE projects the image of
    the bullet or the cartridge while the FBI system Drugfire records the
    number of correlations between the bullets and other bullets. Does this
    variation in the way the system trace the bullets have an impact on the
    training of the staff required to complete the testing?
        Answer. Each system has its own training requirements. The ATF-
    preferred IBIS technology only requires two weeks of training, provided
    by the manufacturer, to a NON-firearms examiner. It is unclear what
    training is required to operate the FBI's Drugfire system.
        Question. When was the last time ATF sat down with all the members
    of the MOU (FBI, ATF, NIST, OMB)? At that time were all questions
    concerning the interoperability of the systems answered?
        Answer. The last meeting between all agencies was November, 1996. A
    subcommittee made up of engineers from both Forensic Technology, Inc.
    (manufacturer of IBIS) and Mnemonics (manufacturer of Drugfire) was
    created and an agreement to meet again to discuss technical issues was
    set.
        Question. Who is conducting oversight to monitor regional placement
    of these two systems to prevent redundancy?
        Answer. The Omnibus Consolidated Appropriations Act for fiscal year
    1997 restricts duplication of the two systems in State and local
    jurisdictions. During the fiscal year 1998 budget process, the Office
    of Management and Budget worked to ensure that funding for redundant
    systems was not included in the fiscal year 1998 President's Budget.
        Question. Is there a requirement that the custodial department,
    where the CEASEFIRE equipment is located, demonstrate regional
    interagency usage of the system?
        Answer. The Bureau of Alcohol, Tobacco and Firearms, in partnership
    with the custodial law enforcement agency, has incorporated language
    into the Memorandum of Understanding that they must allow law
    enforcement agencies from the surrounding jurisdictions and networked
    systems access to their bullet and cartridge case database for search
    and evaluation capability.
        Question. What have been some of the achievements realized by
    CEASEFIRE?
        Answer. Over 400 ``hits,'' including bullets, have been made
    nationwide utilizing CEASEFIRE's Integrated Ballistic Identification
    System. The aforementioned hits include, bullet to bullet match, bullet
    to weapon match, cartridge to weapon match, and cartridge to cartridge
    match. These matches include bullets and or cartridges recovered from
    homicide scenes, assaults scenes etc. Examples of IBIS hits include the
    following:
      --In January, 1996, Washington D.C., a suspect made contact with an
            ATF agent who was acting in an undercover (U/C) capacity. The
            suspect offered to sell the U/C agent a .22 caliber handgun. An
            arrangement was made to meet and conduct the transaction. On
            this same date the U/C purchased, from the suspect, a Magnum
            .22 caliber semi-automatic handgun.
          In January, 1996, the aforementioned firearm was test fired and
            the shell casing was entered into IBIS.
          In January, 1996, ATF received verbal confirmation from the
            Metropolitan Police Dept Firearms Examiner, that the test fired
            shell casing taken from the Magnum .22 caliber, semi-automatic
            handgun, purchased by the ATF U/C agent, matched the shell
            casing found at a crime scene associated with a murder earlier
            that month.
      --On June 8, 1994, suspects robbed a WinnDixie store in Danville,
            Virginia. During the robbery the store manager was shot and
            killed with a 9mm semi-automatic pistol.
          On June 12, 1994, a Bryco, 9mm semi-automatic pistol was
            recovered from a juvenile in Washington D.C., by the United
            States Park Police pursuant to an investigation of assault with
            a deadly weapon. A firearms trace request initiated in which
            ATF traced the firearm to Danville, Virginia where it had been
            purchased on June 8, 1994.
          On January 12, 1995, ATF agents interviewed the purchaser of the
            9mm Bryco pistol. The purchaser admitted to ``straw''
            purchasing the Bryco, 9mm, pistol for a local juvenile.
          On January 13, 1995, the 9mm Bryco pistol was retrieved for
            ballistic comparison.
          On January 19, 1995, IBIS was utilized to conduct a comparison of
            a test fire of the Bryce 9mm pistol and the shell casings and
            projectile recovered from the June 8, 1994, murder scene at the
            WinnDixie store. As a result of that comparison, a match was
            confirmed of the shell casing and projectile.
          As a direct result of the test/comparison done by IBIS, the
            juvenile pled guilty in State court to first degree murder. Two
            additional defendants were successfully prosecuted in State
            court.
      --On November 5, 1996, as a result of the attempted assassination of
            Japan's Chief Law Enforcement Officer, Japanese investigators
            and firearms examiners arranged to travel to the ATF National
            Laboratory, Rockville Maryland, to input into IBIS the
            projectiles recovered from the victim's body. The correlation
            was not expected to link investigations, rather to identify the
            type(s) of firearms used in the attempted assassination.
            Through specific class characteristics exhibited by .38 caliber
            projectiles, IBIS identified Colt as the most probable firearm
            used. IBIS further gave the Japanese authorities two other
            alternative candidates, a Miroku, (Japanese made firearm) and a
            Squires-Bingham, (Philippines made firearm). Currently IBIS is
            the only system capable of performing the aforementioned task.
      --On June 28, 1992, a victim was found in the Northeast section of
            Washington D.C. suffering from a gunshot wound to the chest.
            Recovered at the crime scene were numerous 9mm shell casings.
          On July 1, 1992, a suspect was taken into custody, by the
            Metropolitan Police Department, on an unrelated assault charge.
            A 9mm firearm taken into custody.
      --On January 31, 1996, ATF's CEASEFIRE Program in partnership with
            the Metropolitan Police Department and using the IBIS
            technology, linked the two aforementioned crimes giving the
            local police department a suspect in the June, 1992 assault.
      --In December, 1995, New Jersey, an individual was the apparent
            victim of a drive by shooting while walking his/her dog.
          In February, 1996, Newark, New Jersey, a individual was shot five
            (5) times, three in the head. The victim of this shooting
            survived his attack and identified his attacker.
          On January, 1997, Essex County Sheriff's Office utilizing the
            IBIS system made a positive comparison (hit) between the
            projectile used on the December, 1995 murder and the February,
            1996 attempted murder.
          Essex County Prosecutor's Office is requesting that no publicity
            be given to these results as this is an ongoing murder
            investigation.
          In November, 1996, defendant arrested by the Orange New Jersey
            Police Department, and charged with violations of New Jersey
            State weapons laws, and aggravated assault. These charges were
            a direct result of a comparison done on IBIS of projectiles
            recovered from two crime scenes from two separate
            investigations. The Essex County Sheriff's Department, where
            IBIS is located, performed the comparison. The Sheriff's
            Department was able to tie both shooting incidents together
            through IBIS and along with other investigative leads obtained
            and executed a New Jersey State search warrant which resulted
            in the arrest of one individual currently charged in both
            incidents. This case is pending judicial action.
        Question. Are there any agencies requesting CEASEFIRE, that in
    ATF's opinion, represent a serious regional need?
        Answer. To date, ATF has received requests for expansion of the
    CEASEFIRE Program to their sites or agencies from the Kentucky State
    Police; Allegheny County, Penn; Mississippi State Lab; Washoe County,
    Reno, NV; Georgia Bureau of Investigations, Savannah, GA; Alabama Dept
    of Forensic Science; and Charlotte, NC.
        Question. What are the shortfalls of the program that could be
    enhanced to achieve greater success?
        Answer. A major shortfall is interoperability between the ATF and
    FBI systems.
         demographics--potential trends in violent crime and juveniles
        Background: Criminologists have suggested that historical studies
    point to a cyclical pattern in criminal behavior. During peak periods
    of criminal activity juvenile crime always increases.
        According to population studies conducted by the Census Bureau, in
    the next fifteen years there will be a 12 percent increase in the
    population of persons between the ages of 16 to 24. Historically,
    juveniles in that age group are responsible for more than half the
    homicides in the nation. In the past fifteen years, the homicide rates
    for 13 and 14 year old's has risen by 145 percent, and the homicide
    rate for 15 year old's has risen by 240 percent.
        Question. Has ATF developed any long-term strategies to tackle the
    potential increases in juvenile crime and violence?
        Answer. Yes, ATF initiated the Youth Crime Gun Interdiction
    Initiative in 1996 in order to learn more about how youth gang
    offenders and juveniles obtain illegal access to firearms, to use
    Project LEAD to enable special agents to develop more cases focused
    specifically on illegal gun trafficking to juveniles and youth gang
    offenders, and to work with Sate and local law enforcement in crime gun
    tracing illegal firearms trafficking investigations.
        ATF believes that while there are some state and national patterns
    of firearms trafficking that are relevant it is important that each
    city with a large volume of firearms recovered by police have
    information on the illegal trafficking affecting their community.
    Therefore, ATF developed a set of standard analyses for each of 17
    pilot cities to provide snapshots of that city's illegal crime gun
    problem. ATF believes that law enforcement agencies, including ATF,
    U.S. Attorneys, police departments and district attorneys, will all
    benefit from this information, which can provide the basis for a
    collaborative enforcement strategy.
        Crime gun trace information in Project LEAD as well as information
    from debriefing armed arrestees and traditional investigative
    information is already providing the basis for cases against illegal
    trafficking to young people, however, more can be done in the future.
        In addition, ATF will be looking at youth and juvenile crime in the
    arson and explosives contexts as well, and tracking cases by age of the
    perpetrator to see if there are special problems that can be addressed
    through innovative law enforcement approaches.
        In general, ATF places an extremely high priority on strategies
    that address armed violence. in all categories age ATF pursues an
    integrated enforcement strategy through two major tactics: Denying
    Criminals Access to Firearms and Imprisoning Violent Offenders. The two
    tactics are complementary as information obtained from the firearms
    used by armed violent criminals provides leads to identify illegal
    firearms traffickers. Conversely, as illegal firearms traffickers are
    identified and incarcerated, the availability of firearms to the
    criminal element is reduced. Within each of these tactics are
    supporting projects discussed below. Each of these tactics will be in
    support of reducing juvenile crime and violence where the laws apply to
    juveniles.
      --The Achilles Project is a congressionally mandated enforcement
            program that utilizes two tough Federal statutes (18 U.S.C.
            Sec. Sec. 924(c) and 924(e)) to remove from society those armed
            career criminals, armed narcotics traffickers, and other
            violent offenders who are responsible for a disproportionate
            percentage of this Nation's violent crime. These statutes
            require mandatory/minimum terms of imprisonment for all
            individuals convicted for armed narcotics trafficking. There
            are Achilles task forces located in 20 cities nationwide that
            consist of ATF special agents and inspectors and other Federal,
            State, and local law enforcement officers. This program has
            resulted in the arrest and successful prosecution of numerous
            armed narcotics traffickers and other violent offenders.
      --The NTC traces firearms for law enforcement agencies both
            domestically and around the world. The NTC is the only source
            for information pertaining to the tracing of firearms in the
            United States. During fiscal year 1996, the NTC traced in
            excess of 134,000 firearms.
      --Project LEAD is state-of-the-art computer software that utilizes
            available trace data maintained at the NTC. When crime-related
            firearms are traced, information concerning when the firearms
            entered the hands of a criminal and who provided that firearms
            to the criminal can be gathered. Project LEAD analyzes NTC data
            that will enable law enforcement to focus resources and
            initiate criminal investigations against illegal firearms
            traffickers and their source of supply.
      --ATF's Firearms Trafficking Project is a comprehensive strategy to
            interdict the flow of firearms to the criminal element,
            including narcotics traffickers and violent offenders. Using
            computer technology to access data from ATF's NTC and the
            Stolen Firearms Program, ATF addresses illegal firearms
            trafficking by identifying the illegal source of the firearms
            to the criminal element. Through this program, ATF is able to
            impact upon narcotics traffickers' ability to acquire firearms
            in furtherance of their illegal activity.
      --Stolen Firearms Project is an aggressive enforcement effort
            determined to reduce the amount of firearms stolen from
            interstate carriers and Federal firearms licensees. ATF
            research and data reveals that stolen firearms, by their very
            nature, are destined to be crime guns. The criminal element,
            realizing that their ability to acquire firearms has eroded,
            sees stolen firearms as an instant source of untraceable
            firepower.
      --The CEASEFIRE Project provides support to law enforcement agencies
            in areas of the country experiencing serious organized criminal
            gang and drug-related shooting incidents. Currently, ATF is
            utilizing a state-of-the-art system that allows firearms
            technicians to digitize and automatically sort bullet and shell
            casing signatures and aids in providing matches at a greatly
            accelerated rate. The equipment expeditiously provides Federal,
            State, and local criminal investigators with leads to solve
            greater numbers of crimes in a shorter period of time.
          The importance of our various programs and initiatives to address
            armed juvenile crime play an integral role in the Department of
            Justice's national long term strategy to address juvenile crime
            entitled Combating Violence and Delinquency: The National
            Juvenile Justice Action Plan.
          ATF's formal efforts to reduce armed juvenile crime began in 1993
            with a firearms tracing program specifically designed to
            determine the source of firearms recovered on school property
            and from juveniles who use them to commit violent crimes. This
            initiative grew from an increase in juvenile-related violent
            crime, including juvenile gang activity and shootings on or
            near school property, and from the number of instances in which
            juveniles brought firearms to school or committed acts of
            violence at school.
          State and local law enforcement agencies were informed of this
            initiative and encouraged to participate in our efforts to
            reduce the frequency of firearms violence involving juveniles,
            identify and stem the illegal flow of firearms to juveniles,
            and apprehend and prosecute adults who violate firearms laws by
            purchasing firearms for, or providing firearms to juveniles.
            The results of that trace initiative were helpful in
            identifying general sources of firearms for juveniles and the
            firearm preferences of juveniles. This initiative also led ATF
            to develop national strategies such as the Youth Crime Gun
            Interdiction Initiative, and support strategies that
            incorporate prevention and enforcement efforts. An example of
            an effective prevention program is GREAT.
          The GREAT Program is a traditional prevention program, that
            brings law enforcement officials into schools to teach children
            the risks of gangs and guns. This new version of crime
            prevention relies on a collaborative, coordinated approach that
            makes deterrence work: Federal, State, and local authorities
            working together to prevent violent gang crime by making it
            clear to potential gang offenders that violence will not be
            tolerated, and will be responded to with certainty, swiftness,
            and whatever severity is required. This complements a law
            enforcement strategy aimed at reducing the local illegal gun
            supply. Both approaches to crime prevention have merit.
        Question. What percentage of violent crime committed by juveniles
    employs the use of a firearm or explosive?
        Answer. Current research by the National Institute of Justice
    indicates that on a national level, firearms-related homicide and
    violent crime rates involving juveniles are dramatically increasing
    while rates for similar crimes involving adults are showing a slight
    decrease. Nationally, we have estimated that in 1995 youths and
    juveniles were responsible for 6,430 murders with a firearm, 36,259
    robberies with a firearm, 39,988 aggravated assaults with a firearm and
    105,575 weapons offenses; totaling 188,252 youth and juvenile firearms
    related offenses. We are unable to estimate this data as a percentage
    of all juvenile crime. There is no data available regarding the use of
    explosives by juveniles.
        Question. What influences a juvenile to carry an illegal firearm?
        Answer. There are a number of factors that influence juveniles to
    illegally carry guns. Possible reasons may include carrying a firearm
    as a tool in furtherance of criminal activity; carrying and/or dealing
    in firearms for power, prestige or financial gain; as protection and
    out of fear of other juveniles carrying firearms; and/or as a result of
    status and peer concerns.
        Question. What are the sources of firearms for juveniles?
        Answer. There are illegal firearms traffickers-both large volume
    traffickers and small ``straw purchases'' who lawfully obtain firearms
    and then unlawfully transfer firearms to juveniles. In addition to
    diversion from retail purchase from FFL's, there is also diversion from
    the secondary market. Guns are sometimes stolen (from cars, homes,
    FFLs). Juveniles or gang members also share firearms and /or sell them
    to one another.
        Question. Director Magaw, what are your suggestions for reducing
    the juvenile access to and use of firearms?
        Answer. In most areas of the country, a joint Federal, State, and
    local law enforcement approach that incorporates ATF's illegal firearms
    trafficking strategy, as structured in the Youth Crime Gun Interdiction
    Initiative, can impact upon the access of juveniles to firearms. Since
    State and local law enforcement officers recover the majority of crime
    guns and encounter numerous offenders including juveniles in possession
    of firearms their participation and support of ATF's trafficking
    strategy is vital. It is the information from the debriefing of these
    defendants and the traces of these firearms that lead to the initiation
    of illegal firearms trafficking investigations against the sources of
    those firearms. ATF brings to this partnership the ability to Deny
    Criminals Access to Firearms, imprison the most incorrigible violent
    offenders removing them from the communities upon whom they prey and
    prevent young people from falling into violent gang behavior. In
    addition, ATF has the ability to trace firearms, analyze the data for
    leads, and use the Federal firearms laws to target the illegal firearms
    traffickers whose illegal activities often exceed the jurisdictional
    boundaries of State and local law enforcement and where often times
    there are no State laws to apply. By analyzing a specific city's crime
    gun trace information, ATF can also provide local law enforcement with
    an overview of its problem and a basis for strategy development to
    combat illegal trafficking.
        Current YCGII investigations and outside research confirm that
    juveniles prefer new firearms. This trend assists law enforcement in
    identifying firearms sources on recovered guns, since new firearms have
    a shorter time to crime and they are easier to trace the firearm and
    identify the gun's source.
        Therefore, the comprehensive tracing of all recovered crime-related
    firearms in an area experiencing high rates of armed crimes is a
    successful method for identifying those individuals who are illegally
    trafficking firearms. Additionally analyze crime gun data through
    Project LEAD, ATF's automated illegal firearms trafficking information
    system, is an important investigative tool.
        Additionally, effective utilization of the following firearms
    enforcement programs can help to address and hopefully reduce juvenile
    access to and use of firearms:
      --The Achilles Project is a congressionally mandated enforcement
            program that utilizes two tough Federal statutes (18 U.S.C.
            Sec. Sec. 924(c) and 924(e)) to remove from society those armed
            career criminals, armed narcotics traffickers, and other
            violent offenders who are responsible for a disproportionate
            percentage of this Nation's violent crime. These statutes
            require mandatory/minimum terms of imprisonment for all
            individuals convicted for armed narcotics trafficking. There
            are Achilles task forces located in 20 cities nationwide that
            consist of ATF special agents and inspectors and other Federal,
            State, and local law enforcement officers. This program has
            resulted in the arrest and successful prosecution of numerous
            armed narcotics traffickers and other violent offenders.
      --The NTC traces firearms for law enforcement agencies both
            domestically and around the world. The NTC is the only source
            for information pertaining to the tracing of firearms in the
            United States. During fiscal year 1996, the NTC traced in
            excess of 134,000 firearms.
      --ATF's Firearms Trafficking Project is a comprehensive strategy to
            interdict the flow of firearms to the criminal element,
            including narcotics traffickers and violent offenders. Using
            computer technology to access data from ATF's NTC and the
            Stolen Firearms Program, ATF addresses illegal firearms
            trafficking by identifying the illegal source of the firearms
            to the criminal element. Through this program, ATF is able to
            impact upon narcotics traffickers' ability to acquire firearms
            in furtherance of their illegal activity.
      --Stolen Firearms Project which is an aggressive enforcement effort
            determined to reduce the amount of firearms stolen from
            interstate carriers and Federal firearms licensees. ATF
            research and data reveals that stolen firearms, by their very
            nature, are destined to be crime guns. The criminal element,
            realizing that their ability to acquire firearms has eroded,
            sees stolen firearms as an instant source of untraceable
            firepower.
      --The CEASEFIRE Project provides support to law enforcement agencies
            in areas of the country experiencing serious organized criminal
            gang and drug-related shooting incidents. Currently, ATF is
            utilizing a state-of-the art system that allows firearms
            technicians to digitize and automatically sort bullet and shell
            casing signatures and aids in providing matches at a greatly
            accelerated rate. The equipment expeditiously provides Federal,
            State, and local criminal investigators with leads to solve
            greater numbers of crimes in a shorter period of time.
        Question. Have you any evidence that prevention programs such as
    the G.R.E.A.T Program, the DARE program or Project Outreach will have a
    positive impact on the future level of juvenile crime?
        Answer. ATF is not in a position to speak to the effectiveness of
    any program other than the G.R.E.A.T. Program.
        The G.R.E.A.T. Program has been evaluated in a cross-sectional
    evaluation conducted by the University of Nebraska and the evaluators
    report that there is ``significant statistical information'' showing
    that students who received the training developed more prosocial skills
    that those who had not attended. This evaluation was completed in 1996
    and will be published by the National Institute of Justice. A five-year
    longitudinal evaluation is now in progress, also by the University of
    Nebraska. The National Institute of Justice and University Professors
    familiar with the process of conducting evaluations consider
    longitudinal evaluations to be a more reliable means of predicting the
    effectiveness of prevention/resistance programs than cross sectional
    studies.
        Anecdotal evidence and other feedback from participating police
    departments who use the G.R.E.A.T. Program, such as Boston,
    Massachusetts; Portland, Oregon; Tucson, Arizona; Phoenix, Arizona;
    Philadelphia, Pennsylvania, and others have reported a reduction in
    their youth violent crime since using the G.R.E.A.T. Program in
    conjunction with proactive suppression and intervention programs.
        This program is most effective when it is reinforced by
    intervention programs, and when Federal, State, and local law
    enforcement are collaborating to suppress illegal gun trafficking to
    gang offenders and juveniles.
                    theft of military weapons and explosives
        Background: The U.S. Military has very large inventories of a wide
    variety of firearms, munitions, and explosives. In the past, theft of
    this inventory has raised concern, specifically when associated with
    anti-government groups, but also with individuals who seek to possess
    this category of weapons and explosives.
        Question. Does the military report all of its weapons and
    explosives thefts to ATF?
        Answer. There is a requirement under 10 U.S.C. 2722 that the
    Secretary of Defense shall report the theft or loss of any ammunition,
    destructive devices, or explosives to the Secretary of the Treasury.
    ATF has a Memorandum of Understanding with the Offices of the Inspector
    General, Department of defense which describes how this is to be done.
        We have been receiving this information on a routine basis from the
    Department of Defense since the fiscal year 1993.
        Question. Does ATF or the Military pass this information on the US
    Customs to monitor border movement of the stolen articles?
        Answer. ATF, the military, and in certain situations the FBI, do
    investigate known thefts or losses, and do pass on information to other
    law enforcement agencies, including Customs on a case-by-case basis
    when the investigation warrants such action. Known thefts of military
    munitions are put into N.C.I.C., to Customs has access. ATF does not
    automatically pass on all of this type of information to Customs.
        Question. Does ATF have any interaction with the military regarding
    incidents involving weapons and explosives?
        Answer. Frequently, ATF will assist military investigations
    concerning known thefts of weapons and explosives. Military Explosives
    Ordinance Disposal (EOD) is often called upon to assist ATF in the
    disposal of recovered explosives.
        Question. Of the past weapons and explosives seizures, how much is
    allied to thefts from the U.S. military installations? How much is
    associated with theft of foreign military equipment?
        Answer. Thefts of military explosives during a 5-year period (1991-
    1995) constitutes less than 1 percent of all reported thefts.
    Currently, ATF doesn't capture foreign explosives thefts, only their
    recovery. We are currently working on a data base for this very
    purpose. When complete, this system will be titled the International
    Explosives Incidents System (IEXIS).
        Question. Do U.S. military explosives and ordnance contain
    taggants?
        Answer. The only ``tagging'' requirement in existing law is the
    requirement that plastic explosives manufactured or imported on or
    after April 24, 1997, contain a detection agent. Federal law
    enforcement agencies, the National Guard, and the military have a 15
    year ``use-up'' period for plastic explosives imported into or
    manufactured in the United States prior to the date of enactment of the
    law, April 24, 1996. ATF has been advised that the military has been
    marking the plastic explosives it manufactures (primarily C4) for the
    past year.
                                  the internet
        Background: Most of us, whether we have computers or not, have
    become aware of the ability to surf ``The Internet.'' However, many
    people are unaware of what lies out in the Internet. Recently, we have
    been exposed more and more to the darker side of the information
    highway.
        Child pornography, sexual exploitation, get rich quick schemes,
    internet stalkers, how to do anything: create anarchy, rebel against
    your parents, commit the perfect murder, assemble an atomic bomb, all
    have been headlined in recent months out of concern for the social
    liabilities associated with access to this type of information and the
    precarious balance we wage with our first amendment right to ``Freedom
    of Speech.'' Recently, in the Baltimore-Washington metropolitan area,
    there have been a number of bomb incidents in our schools, involving
    students who acquired their homemade explosives recipes from the
    Internet.
        Question. Does ATF actively monitor the Internet for information on
    weapons and explosives?
        Answer. No, ATF does not monitor the Internet. However, ATF does
    look at and confirm information on the Internet related to specific
    information, incidents or investigations. ATF does some limited
    background research on what is on the Internet concerning weapons and
    explosives.
        Question. To what extent does Internet access provide information
    on the manufacturing of improvised explosives, munitions, bomb making
    and target assessment?
        Answer. We have found there is considerable information on the
    Internet concerning the making of explosives and bombs, sufficient that
    a novice on the Internet could find it easily. For example, as
    research, one person, during a three hour period found 12 sites which
    had explosives or bomb instructions. This time included reading enough
    of the site to confirm that the instructions were real. This was done
    on a 14.4 modem, which is now considered slow.
        Question. How extensive is the information pertaining to converting
    firearms to more lethal use? For example: ``How to convert a semi-
    automatic weapon into a fully automatic machine gun?
        Answer. There are very few places to find out how to alter guns to
    fire fully automatic on the Internet. Such information is much too
    specific to each particular gun and often requires parts. The Internet
    could be used to order books about the individual firearm or process.
    There are a large number of firearms sites advertising dealers, books
    on guns, gun shows, parts and accessories.
        Question. Does the Internet provide direction on manufacturing
    homemade weapons, firearms, silencers, etc?
        Answer. This information is on the Internet in some of the same
    sites as the improvised explosives. There are directions on how to make
    such things as a potato gun, zip gun, air cannon and plastic bottle
    silencer.
        Question. Has ATF been able to trace the source of any of these
    bulletin boards? What types of individuals or groups are behind
    publishing this information.
        Answer. ATF has not traced the source of the information. The
    information is not illegal. Most of the sites are quite open as to who
    and what they are. The address of the site usually contains information
    about the source of the site. The sites about making explosives are
    generally not done by extremist groups, however, many extremist groups
    do have web links to go to these types of sites.
        Question. Does ATF pursue contact referrals for illegal services on
    the Internet?
        Answer. No, ATF does not on a routine basis look for and pursue
    contact referrals for illegal services on the Internet. ATF will on a
    case-by-case basis pursue any information on the Internet that we have
    reason to believe could result in a violation of a law which ATF
    enforces.
        Question. From ATF's perspective, what role is the Internet playing
    in this illegal gun and explosive arena?
        Answer. The Internet plays the same role as what a library might
    play as far as finding information on ``how to'' make things such as
    bombs or improvised weapons. Much of the information comes directly
    from books that have been published for years. The major difference is
    that the information can be found more easily and quicker in the
    privacy of a person's home. The Internet is an excellent research tool.
        The Internet also affords communication applications much like the
    U.S. Mail in that it allows E-Mail between persons throughout the
    world. The major difference is that it is faster and more convenient.
        The Internet also affords the opportunity for persons to advertise
    the sale of commodities much like magazines or the classified
    advertisements of the newspaper. Firearms accessories, parts, and books
    can be ordered right on the net. Locations of gun shops are advertised
    on the net.
        There are a few ``Chat Rooms'' and ``Newsgroups'' which have
    discussions about guns, explosives, bombs, fires, fireworks, or
    anything in which two or more people might be interested. We have also
    found ``how to'' information in the newsgroups.
           atf national lab and fire investigation research facility
        Background: ATF is requesting $55 million in fiscal year 1998
    (combined with $7 million in fiscal year 1997) to fund the design and
    construction of a new Firearms National Laboratory Center and the Fire
    Investigation Research and Development Center (FIRE). These two
    entities would be co-located in the same facility, a location yet to be
    finalized. ATF submits that the current laboratory facility located in
    Rockville, Maryland, is no longer suitable for its purposes. ATF cites
    a severe shortage of space to accommodate all levels of forensic and
    research activity that is required of the facility. In addition, 90
    percent of the current facility has failed EPA and OSHA health and
    safety standards.
        Question. What activity is currently being performed at the
    National Laboratory in Rockville, MD?
        Answer. The National Laboratory Center houses three separate
    functions: an Alcohol and Tobacco Laboratory, a Forensic Science
    Laboratory, and Enforcement Support Branch. The Alcohol and Tobacco Lab
    does analysis on beverage and non- beverage alcohol products, tobacco
    products and consumer complaints. The Alcohol and Tobacco Lab is
    responsible for new product approval, analysis of pesticides and
    contaminants, and Government Performance Results Act customer service
    plans. Products are checked for compliance with regulations and proper
    tax classification. The Forensic Science Lab analyzes physical evidence
    from firearms, arson, and explosives investigations. This laboratory
    also includes the IBIS Program management that supports ATF's CEASEFIRE
    initiative and a computer forensics program that has been successful in
    assisting in arson-for-profit investigations and firearms trafficking.
    In addition to chemical and physical analysis, the two laboratories are
    heavily involved in methods development and research on procedures to
    advance their capabilities. The Enforcement Support Branch supplies ATF
    agents with the technical equipment needed for investigations,
    including voice and radio equipment, protective gear, and state-of-the-
    art investigative tools.
        Question. Was the facility originally constructed to perform the
    functions that the lab is doing now?
        Answer. The building was built around 1972 as an office building.
    The building was converted to a laboratory in 1978. The architect and
    building contractor had never built a lab before. The result was a
    building without the necessary plumbing, electricity, and HVAC to
    support a lab facility. In excess $500,000 has been spent to remedy
    this with little success.
        Question. Have any personnel assigned to the laboratory been
    medically or physically compromised as a results of occupational
    exposure associated with conditions in the laboratory?
        Answer. Since we are aware that the ventilation system does not
    meet lab standards, some lab hoods are used while others are not used
    for certain procedures or experiments. This has been confirmed by
    outside chemical hygiene experts. At least two employees have been
    injured as a result of the HVAC's inability to control the temperature
    and humidity in the lab. In both cases, condensation on the floor
    caused chemists to fall and require medical attention.
        Question. Is the immediate community or environment being exposed
    to any hazardous material associated with the laboratory's activity?
        Answer. No, since we are aware of the limitations of the HVAC, the
    total ventilation system, and plumbing flaws, we limit our exposure and
    use of many hazardous materials. This also requires us to drum, store
    and pay for disposal of common lab solutions as hazardous wastes. This
    is very expensive and a drain on manpower.
        Question. Have any investigations been cross-contaminated or called
    into jeopardy because of the existing working conditions at the
    laboratory?
        Answer. We have made every effort to assure that no case is
    jeopardized due to cross-contamination of evidence samples. In order to
    do this, we have sacrificed some efficiencies. This becomes more and
    more difficult as the workload increases and space becomes more of a
    premium. This space problem also impacts our ability to house new
    equipment necessary to provide the highest quality service. This issue
    does jeopardize our American Society of Crime Laboratory Directors
    (ASCLD) accreditation and ability to attract the best professionals to
    our Lab.
        Question. Has a site been proposed for the new laboratory and
    research facility?
        Answer. We have concentrated on Federal land and donated land for
    the new site. We are in the process of reviewing each site with GSA.
    The sites currently being reviewed are Fort Meade, MD; White Oak, MD;
    Vint Hill Reservation, VA; and College Park, MD. Our current prospectus
    specified the Maryland suburban area. We are extremely concerned about
    maintaining our current staff and keeping family moves to a minimum.
        Question. Has the construction prospectus been transmitted back
    from both the House Committee on Transportation and Infrastructure and
    the Senate Committee on Environment and Public Works?
        Answer. The House Committee has approved the fiscal year 1997 $6.9
    million portion of the prospectus. The fiscal year 1997 portion of the
    prospectus is currently in the Senate Committee and will be considered
    within the next two weeks. Neither committee has passed the fiscal year
    1998 portion of the prospectus ($55 million).
        Question. If funding is not secured for construction of a new
    laboratory facility, how will this impact on ATF's future
    investigations and regulatory functions?
        Answer. Our ability to continue the quality scientific work that we
    are charged with is dependent on the move to a new modern facility.
    Safety, work requirements, and our continued accreditation are in
    jeopardy without a new facility. The three main parts of a successful
    scientific organization are the people, the equipment, and the
    facility. Any shortage in any of these three areas directly impacts the
    quality of work produced.
                                     ______

                              U.S. Secret Service
                presidential protection and white house security
        Background: The fiscal year 1998 Secret Service Budget requests an
    additional $28.8 million for Presidential protection and White House
    security.
        It is important that the citizens of the United States have access
    to the President and the White House. Certain groups are calling for
    the expansion of civil liberties (limiting government interference and
    intrusion), while advocating placing limits on the civil liberties of
    others (racism, anti-Semitism and class wars).
        Developing a balance between preventing threats to the President
    and the White House, while still providing citizens access to their
    leadership is important.
        Creating vacuums around our leaders would mean terrorists had won.
    But allowing our leaders to be under a constant state of siege, would
    disrupt the stability of the country.
        Question. What level of security would the Secret Service feel
    comfortable with?
        Answer. In 1996, the Department of the Treasury and the Secret
    Service completed a review of the security of the White House Complex.
    As a result of this review, the Service implemented new security
    procedures and provided enhancements to its existing security plan.
        The Secret Service is continually involved in a risk assessment
    process in conjunction with its protective mission. The purpose of this
    process is to ensure that reasonable security measures are in place to
    support our mission. This is the basis of our Strategic Management Plan
    in relation to all of our protective operations.
        With your continued support and with the procedures that we have
    implemented, the Service is comfortable with the level of security that
    we are currently providing to our protectees.
        Question. What level of resources ($ and FTE) would that level of
    security require?
        Answer. If the requested level of funding is provided in fiscal
    year 1998, and barring any additional requirements relative to the
    creation of ``Presidential Park'', the Service will have all the
    funding necessary for the security changes recommended by the White
    House Security Review for the White House Complex. However, some level
    of funding will need to recur in subsequent years to maintain, repair
    and replace the non-personnel security enhancements which have been
    installed within the White House Complex.
        In a public format, the Service does not divulge the number of
    personnel assigned to the White House, or the cost of securing the
    White House Complex. Disclosure of this type of information could
    possibly compromise security. We would prefer to provide this
    information to you in a closed briefing.
        Question. Has the Service seen an increase in threats over the past
    four years?
        Answer. The Secret Service has seen the number of investigations of
    persons who have made or who have possibly posed threats to the
    President remain relatively constant over the past four years. The
    number of threats directed towards President Clinton during his first
    term and through the first four months of his second term has been
    generally consistent with the number of threats directed toward
    previous Presidents. There is a slight increase observed when making a
    comparison with the number of threats received by President Bush during
    his term.
        In addition, there has been a rise in threats from international
    groups since the 1993 World Trade Center bombing, and domestic
    extremist activity has increased since the 1993 burning of the Branch
    Davidian Compound at Waco, Texas. Thus, there has been an increase in
    investigations conducted by this Service of threats emanating from
    terrorist activity.
        Question. Has the rise in the United States Militia movement
    resulted in increased Presidential threats?
        Answer. During the last few years there has been a dramatic
    increase in the number, size and activity of militia groups in America.
    There is evidence of militia activity in virtually every state.
    Intelligence analysts and law enforcement agree that the militia
    movement is a symptom of a national trend toward a rise in anti-
    government sentiment.
        Beliefs underlying and motivating the militia movement include
    members' fears of a forthcoming ``one world government'', i.e. New
    World Order and suspension of the U.S. Constitution. The majority of
    militia members are ordinary citizens who have become fearful and
    mistrustful of the government.
        Federal law enforcement agencies are frequently viewed as enemies
    and collaborators in the perceived scheme to establish a New World
    Order. In some cases, Secret Service protectees will also be perceived
    as ``collaborators'' because of their affiliations with certain
    international political, economic or humanitarian organizations.
    President Clinton, foreign Heads of State/Government and some former
    Presidents should be considered potential targets because of their
    political policies or their associations with these organizations.
        The greatest concern among federal law enforcement personnel is the
    attraction to the militia movement by the ``fringe element'' which is
    no longer satisfied with maintaining a defensive posture. The April 19,
    1995 bombing of the Alfred P. Murrah Building in Oklahoma City
    illustrates, all too well, the unstable nature of certain radical
    elements influenced by militia philosophy.
        The persons and facilities protected by the Secret Service
    certainly can be considered as significant symbolic targets for
    domestic extremists.
        Question. Do fluctuations in international terrorism have
    corresponding impacts on Presidential security?
        Answer. Presidential security is adjusted as required based upon
    our assessment of intelligence information provided to the Secret
    Service from a variety of sources, including other government agencies.
        Fluctuations in international terrorism have a direct impact on
    presidential security. The capability and intentions of groups to
    target Secret Service protectees are dependent upon several factors.
    These factors include the groups' infrastructure; support from
    citizens; governments; the availability of weapons; and the ability to
    plan, organize, and carry out an attack. Host government security
    services' effectiveness and ability to monitor and control
    international terrorists impact Presidential security during foreign
    travel by the U.S. President.
        The degree to which an international terrorist group may target the
    President is often dependent upon world wide events. The Presidential
    threat level from international terrorists also fluctuates when certain
    foreign Heads of State/Government are in the presence of the U.S.
    President.
        Question. Director Bowron, I understand that 300 people are
    annually sent to St. Elizabeth to be physiologically profiled, as a
    result of reported threats to the Presidency. Could you elaborate on
    this and can you explain how the Washington, D.C. area compares to the
    number of individuals profiled nationally?
        Answer. Since January, 1993, the Secret Service has facilitated the
    commitment of just over 900 people in connection with its protective
    mission. Generally, someone who makes a threat, and who exhibits signs
    of a mental disorder, and is considered dangerous to themselves or
    others, is referred to a mental health facility for evaluation and
    possible commitment. They are not referred to these facilities to be
    profiled, but rather to determine if they are a danger to themselves or
    others, and if they are in need of treatment. During this time period,
    fifty-eight have been committed to St. Elizabeth's Hospital and twenty-
    five to D.C. General Hospital. In addition, the Washington Field Office
    has facilitated commitment of thirty-three persons in the Washington,
    D.C. metropolitan area.
        Question. Has the Service developed a systematic analysis for
    monitoring the perceived level of threat toward its protectees? Has
    this been associated with a cost benefit analysis for the level of
    security required to ameliorate different levels of threat?
        Answer. The Secret Service has developed a Protective Intelligence
    program to systematically monitor the perceived level of threat towards
    its protectees. The Protective Intelligence program monitors the
    perceived level of threat directed towards protectees in a number of
    ways. First, the number of persons who make or otherwise may pose
    threats is thoroughly investigated and evaluated. Secondly, those
    persons who have been evaluated as posing a risk to a protectee are
    carefully monitored while they continue to pose such risk. Thirdly, the
    past intelligence history, to include the number and seriousness of
    known cases, is periodically reviewed. Additionally, as a protectee
    travels throughout the country, current investigations of concern are
    reviewed to determine appropriate action. The Secret Service
    Intelligence Division's liaison activities solicit and receive
    pertinent information from other federal agencies. Secret Service field
    offices are in regular contact with State and local law enforcement,
    and mental health agencies to identify additional individuals and local
    issues of concern that may impact the protectee visit. Also, knowledge
    about the motivations, behavior and communication patterns of past
    attackers are incorporated into each Secret Service protectee
    assessment.
        The Secret Service is constantly alert to any source of threat
    against a protectee. We pursue threats whether they come from
    individuals, groups, terrorists organizations or rogue governments. Any
    and all sources of potential danger to a protectee are fully
    investigated and evaluated by special agents assigned to Secret Service
    field offices throughout the United States and around the world.
    Security concerns are then analyzed in the Service's Intelligence
    Division.
        The Secret Service has procedures in place which are followed when
    assigning security personnel to a protectee. These procedures are based
    on an analysis of a collection of information concerning our
    protectees. This is part of the risk assessment process which we use to
    assist us in our resource allocation decision making strategies. Based
    upon our risk assessment analysis, security is adjusted accordingly.
        One of the objectives within our Strategic Management Plan is to
    ensure that resources associated with our protective operations are
    ``balanced'' by the risk assessment process. We have developed criteria
    based upon our risk assessment procedures that evaluates perceived
    levels of risk directed towards our protectees.
                              counterfeit currency
        Background: Counterfeit currency funds drug trafficking, gun
    smuggling, and terrorist activities. These activities attack the
    economic stability of the United States currency.
        Question. Does the Secret Service have the resources to track the
    movement of counterfeit currency?
        Answer. The Secret Service has been very successful tracking the
    movement of counterfeit U.S. currency. Counterfeit currency tracking
    and reporting is accomplished by several different methods. The Federal
    Reserve system identifies approximately 30 percent of all reported
    counterfeit on a yearly basis. The remaining 70 percent is reported
    through commercial establishments, financial institutions and law
    enforcement efforts.
        Once a new counterfeit U.S. Federal Reserve Note (FRN) is reported
    to the Secret Service, it is examined forensically by counterfeit
    specialists in the Counterfeit Division's Printing and Technology
    Section. That particular counterfeit is then classified by its printing
    defects and assigned a circular number. Utilizing the circular number,
    the Service can monitor that one type of counterfeit note to track the
    passing or seizure activity. The Secret Service has identified over
    20,900 different counterfeit circulars, with over 20,000 variations.
        The circular number, in conjunction with the Service's counterfeit
    information system, is used to generate the necessary statistical
    information to focus investigative resources. It was found in fiscal
    year 1996, through forensic identification, that approximately 67
    percent of all counterfeit currency circulating domestically was
    produced outside the borders of the United States.
        The Secret Service has learned, through experience, that the best
    method to deal with this problem is to address counterfeit issues at
    their source. This is accomplished by the permanent stationing of
    Secret Service agents to foreign posts. Verification of all foreign
    seizures by the Secret Service is instrumental in determining the
    extent of counterfeit U.S. currency in the region. The ability to be
    able to immediately respond and verify certain counterfeit FRN's, as
    well as provide advice and assistance to foreign law enforcement, is
    instrumental to the Secret Service's success in suppressing
    counterfeit.
        Question. Does the Secret Service have the necessary authority to
    stem counterfeit activities?
        Answer. The Secret Service has exclusive jurisdiction for
    investigations involving the counterfeiting of United States
    obligations and securities under Title 18 of the United States Code,
    Section 3056.
        Occasionally the Secret Service proposes legislative changes that
    it believes would assist it in suppressing counterfeit currency. The
    Secret Service has identified counterfeiting trends that necessitate
    changes in forensic and investigative methodologies. One trend noted by
    the Service is the increased use of office machine copiers and computer
    printers. In fiscal year 1995, 8 percent of the counterfeit passed was
    office machine copied or computer generated. That statistic increases
    each year, with 11 percent circulated in fiscal year 1996 and 18
    percent for the first six months of this fiscal year.
        Some of the latest full-color digital copier systems are equipped
    with ``anti-counterfeiting'' security systems. These systems inhibit
    the production of counterfeit notes and/or encode a tracing pattern in
    each copy. The Secret Service has exclusive United States law
    enforcement capability in decoding the tracing system. The decoding has
    resulted in successfully identifying the machines used to produce
    counterfeits in approximately 65 criminal investigations.
        The Secret Service would like to see legislation enacted requiring
    that all full-color photocopy and computer output or printer devices
    manufactured in the United States or imported into the United States
    contain, as an anti-counterfeiting feature, a functional
    identification-tracing system which will leave a repeated ``latent
    code'' imprinted throughout every full color document produced by the
    device. The ``latent code'' must contain information sufficient to
    identify the make, model, and serial number of the device. Further, the
    manufacturers and/or importers must provide, to the United States
    Secret Service, the necessary information, software and training to
    decode said identification/tracing system, as well as customer
    information relating to the decoded latent imprint.
        Question. Does the Secret Service co-ordinate their counterfeiting
    intelligence with the CIA and other foreign intelligence agencies?
        Answer. The Secret Service uses various sources to obtain
    intelligence information concerning counterfeiting. Some of these
    sources provide hard data; others provide intelligence and background
    information from which certain informed judgments can be made. Our
    agency has a good working relationship with the CIA and other foreign
    intelligence agencies. The foreign intelligence community has been
    generally receptive to our intelligence needs.
        Question. It is my understanding that the Office of Foreign Asset
    Control (OFAC) tracks funding related to embargoed countries. What is
    OFAC's relationship with the Secret Service?
        Answer. The U.S. Secret Service, in a coordinated effort with
    representatives from the Drug Enforcement Administration, the
    Department of Justice, the Department of the Treasury, the Office of
    Foreign Assets Control, the Central Intelligence Agency, and the
    Federal Bureau of Investigation, have held meetings in connection with
    the enforcement of International Emergency Economics Powers Act (IEEPA)
    sanctions. The Service looks forward to enhancing those efforts and
    it's working relationship with OFAC.
        Question. Does the Secret Service share information with the OFAC
    and vice-versa?
        Answer. The Secret Service provides information to an IEEPA working
    group with the OFAC subsequently receiving information from this same
    group.
        Question. Could this relationship work better?
        Answer. There is continued interest by the Secret Service toward
    enhancing our relationship with OFAC. As an example, the Secret Service
    continues to investigate organized criminal alien groups which affect
    this country's financial systems. Many of the proceeds of their crimes
    (money laundering) are transferred overseas to foreign bank accounts or
    individuals. An increased exchange of information may be beneficial to
    both agencies and their respective goals.
        Question. What is the status of the Secret Service's overseas
    presence?
        Answer. At the present time, the Secret Service has 30 special
    agents and ten support personnel assigned to its ten foreign offices.
    Earlier this year, our request for an additional special agent position
    in Montreal was granted, and we received approval to open a new office
    in Ottawa. The Service also was granted a second special agent position
    in Hong Kong. The Chief of Mission in Bangkok is currently considering
    our request for an additional special agent position at that post.
        Question. Is the current level adequate?
        Answer. This level of staffing has improved the Service's ability
    to fulfill its protective and investigative duties overseas; however,
    there are a number of geographic areas where establishing or increasing
    our presence is necessary.
        To date, our requests to establish offices in Moscow and Mexico
    City, and our request for an additional special agent position in
    Bogota have not been approved. We continue to work closely with the
    Department of State regarding these requests, and we are hopeful that
    approval will be granted in the near future.
        Question. What are the long term costs and benefits associated with
    establishing these overseas offices?
        Answer. The personnel and space rental costs associated with
    establishing overseas offices are high and have a serious impact on an
    agency's fiscal resources. However, the cost of not making the
    commitment to respond to our criminal investigative responsibilities
    overseas is even greater. Experience has shown that where the Secret
    Service has established a permanent presence, the quality and quantity
    of the reporting of counterfeiting activity within the host country are
    greatly improved. Liaison with foreign law enforcement and foreign
    banking officials is also enhanced by the use of permanently assigned
    Service personnel at a particular posting. Many counterfeiting and
    other financial crime investigations are of considerable duration. The
    consistency that is inherent in a permanent overseas presence is
    preferable to the disruption to a case which sometimes is the result of
    the constant rotation of temporarily assigned personnel.
        Question. Does Secret Service's overseas operations duplicate the
    services of other U.S. or foreign law enforcement agencies?
        Answer. In 1996, legislation was passed which gave the Secret
    Service the particular authority to investigate the counterfeiting of
    U.S. currency outside the borders of the United States. The expertise
    that the Secret Service brings to foreign counterfeiting investigations
    benefits the U.S. economy; however, foreign banking and law enforcement
    officials also profit from the technical and investigative training
    that they receive from the Service. The Secret Service has also led the
    way in investigating the activities of Nigerian organized criminal
    groups, which have conducted 419 advance fee fraud and other financial
    fraud schemes on an international basis. The value of our overseas
    operations is not limited to our investigative mission. The Service's
    ability to fulfill its unique protective mission also is enhanced by
    its presence in a given foreign country. Although our agents may not
    have law enforcement authority in a foreign country, the Secret
    Service's expertise and investigative resources are valued by the host
    government law enforcement agencies as valuable tools in meeting our
    common goals.
        Question. Does the establishment of foreign offices require
    reciprocal actions by the United States to foreign governments?
        Answer. The Secret Service frequently hosts law enforcement and
    other officials from foreign countries when they visit the United
    States. Often these visits are related to training or information
    sharing activities.
        The Secret Service would defer to the Department of State on all
    matters concerning reciprocal actions for foreign law enforcement in
    the United States.
                forensic assistance for child exploitation cases
        Background: In recent years this subcommittee has provided funding
    so that the United States Secret Service could expand some of their
    unique forensic resources. In these times when many state and local
    police departments are experiencing limited budgetary resources,
    initiatives such as this one, could prove invaluable in investigations
    into child victimization cases.
        Question. Director Bowron could you provide to the committee your
    brief assessment of Secret Service's involvement with this program?
        Answer. I am pleased to report to this Committee that the Secret
    Service has taken a very active role in matters involving missing and
    exploited children by making forensic technology available to Federal,
    State and local law enforcement. To date, this initiative has been
    successful. Funding provided has allowed for increasing the forensic/
    technical staff, and the updating of some forensic equipment. As a
    result, requests from State and local authorities receive the best and
    most up to date forensic assistance that the Secret Service can
    provide. Through the assistance of our polygraph program alone, we have
    played a role in the resolution of 38 serious child victimization
    cases. A Forensic Information System for Handwriting (FISH) database
    with over three-hundred (300) writers has been created allowing for
    approximately forty (40) searches of pedophile letters. A brochure has
    been produced, articles have been published in technical and law
    enforcement journals and forensic experts have presented talks at
    various law enforcement and National Center for Missing and Exploited
    Children (NCMEC) clearinghouses on the Secret Service initiative on
    missing and exploited children. The program is being well received by
    the State and local law enforcement community, and requests for
    assistance are increasing with the successes of this program.
        We have also assisted the Boston Police Department in a prevention
    project which involves the fingerprinting and photographing of school
    children in the Boston Public Schools.
        Two representatives of the Forensic Services Division have been
    assigned to the Federal Agency Task Force on Missing and Exploited
    Children and took part in the creation of the manual entitled ``Federal
    Resources on Missing and Exploited Children: A Guide for Law
    Enforcement and Other Public and Private Agencies.''
        The Secret Service is in the process of providing the Naval
    Criminal Investigative Service (NCIS) with a FISH workstation which
    will allow direct connectivity to our FISH system so that they can
    search our database on missing and exploited children for the U. S.
    Navy and, perhaps in the future, for all of the branches of the
    military.
        Question. How many states have requested assistance?
        Answer. To date, the Secret Service has provided assistance to
    State and local law enforcement in twenty (20) different states for
    matters involving missing and exploited children. Several of these
    states have made multiple requests. For example, State and local law
    enforcement in California has requested our assistance in fifteen (15)
    instances; Arizona, Colorado, Florida, and New Hampshire two (2)
    instances each, and Illinois with two requests, including the recent
    ``Girl X'' investigation where a suspect was implicated as a result of
    the examination. These requests include polygraph and handwriting
    examinations, audio/video enhancements, age progression drawings,
    handwriting searches through the FISH system, fingerprint searches
    through the Automated Fingerprint Identification System (AFIS), and
    presentations at local NCMEC clearinghouses.
        I would like to stress that the Secret Service is providing
    services and resources to other law enforcement agencies upon their
    request. We are not investigating, but rather providing resources which
    might otherwise be unavailable.
        Question. Have successes in the program resulted in increased
    demands?
        Answer. Yes, especially in the area of polygraph examinations. As
    state and local law enforcement become aware of our successes in this
    area, the demand for polygraph examinations in cases involving missing,
    abused and child exploitation have increased. By utilizing other areas
    of forensic science, state and local law enforcement have learned of
    our involvement in specific cases and, as a result, now request our
    assistance in cases involving handwriting, voice, and fingerprint
    identification. With our continued involvement in this initiative, law
    enforcement organizations have increased their demands for our
    forensic/technical services.
        Question. The Secret Service fiscal year 1998 request includes
    Violent Crime Trust funding for 20 FTE to support this initiative. The
    Trust Fund was established to support and expand law enforcement
    operational activities. It is not meant as a funding source to provide
    for the costs of base law enforcement activities or to supplant
    activities which should be supported through the salaries and expenses
    appropriation. What are your plans for funding these additional
    personnel in the future?
        Answer. Because of the success of this program, it is currently
    anticipated that we will, prior to the expiration of Trust Fund
    funding, request to have the funding required to support this effort
    made part of our Salaries and Expenses appropriation.
                      west african problem and task forces
        Background: The Secret Service has an established history and
    success with an operation referred to as the ``West African Task
    Force''. The criminal element targeted in this initiative has a history
    of engaging in various financial crimes, as well as drug trafficking.
    These groups seem to have initially established themselves in urban
    areas, however, Secret Service has seen a proliferation of these crimes
    in areas not traditionally associated with this type of activity, such
    as Madison, Wisconsin.
        Question. Director Bowron, please give the subcommittee an
    assessment of the West African Crime problem, their activities, and
    where they conduct these activities?
        Answer. With the passage of the Crime Control Bill of 1984, the
    Secret Service received primary jurisdiction in the investigation of
    credit card fraud. One of the first groups that the Secret Service
    began to engage on a regular basis were loosely organized criminal
    elements within the growing Nigerian population in the United States.
        On September 17, 1986, these Nigerian criminal elements were dubbed
    ``The Nigerian Crime Network'' by the Senate permanent subcommittee on
    investigations during hearings on emerging criminal groups. The term
    ``Network'' was chosen because the subcommittee could find no evidence
    of a nationwide ``organization'' along the lines of traditional
    organized crime.
        The subcommittee determined that the network was made up of
    regional and local Nigerian organizations which maintain their
    identities and independence from the network as a whole. Further, the
    subcommittee statement purported that ``. . . unlike traditional
    organized crime, the organization appears to make no territorial
    claims, are highly mobile, and may display no clear hierarchy.''
        The Secret Service distinguishes between structured, traditional
    organized crime and what is now commonly referred to as organized
    criminal enterprises. Many of these groups do not follow patterns
    associated with organized crime in relation to structure. However,
    these groups do support themselves internally through ethnic
    association while externally creating enclaves or cells for criminal
    enterprises on a domestic and international scale.
        Since 1986, these Nigerian criminal groups have instituted
    sophisticated fraud schemes in the areas of advance fee fraud, bank
    fraud, false identification, immigration benefit fraud, various types
    of insurance frauds, passport and visa fraud, theft of services, and
    theft of cars/vehicles for export to Nigeria.
        Financial crimes committed by Nigerian criminals have bilked the
    United States economy out of enormous sums of money. Nigerian criminal
    elements have become one of the top importers of heroin and cocaine
    into the United States. It would be difficult to place a financial
    figure on the damage done to our society by Nigerian criminal elements
    through drug trafficking and the various financial fraud schemes.
        The mobility and growth of the Nigerian criminal groups are being
    facilitated by the society in which we live. Our nation is a mobile
    society and the growth of the Nigerian criminal network is being aided
    by a consumer or customer friendly industry.
        The United States Secret Service realizes that, unchecked, these
    Nigerian criminal elements will increasingly assume the characteristics
    of traditional organized crime. This is already becoming evident with
    the increased involvement in the trafficking of narcotics. In the early
    1990's the Nigerian criminal problem appears to have spread from
    primarily metropolitan areas to virtually every small town and county
    in the United States.
        Current Secret Service investigations strongly indicate that the
    organized Nigerian criminal elements are taking the proceeds derived
    from financial frauds and investing them into narcotics trafficking and
    other criminal enterprises. It is also apparent that narcotics proceeds
    are being intermingled with fraud proceeds. Certainly, it would be a
    mistake to conclude that the evolution of the Nigerian criminal network
    is complete.
        In response to the significant threat posed by Nigerian organized
    criminal elements, the Secret Service established twelve multi-agency
    task forces throughout the country, whose main focus is investigating
    crimes committed by Nigerian criminals.
        These task forces are comprised of agents from many federal
    agencies, as well as representatives from state and local law
    enforcement agencies. The Secret Service values the relationships that
    it has developed with its partners in state and local law enforcement.
    Our experience has shown that local law enforcement is often the first
    line of defense against Nigerian crime, and without local law
    enforcement participation, any national strategy to combat these
    elements will fail.
        Question. The State of Wisconsin has been the target of a fraud
    known as ``advanced fee fraud.'' I know that in my state alone, over
    350 businesses and individuals have been sent solicitation letters. The
    recipients are told they have been singled out to share in multi-
    million dollar windfall profits--for doing absolutely nothing. Can you
    please tell me a little more about this sort of fraud and what your
    agency is doing to prevent it?
        Answer. The perpetrators of advance fee fraud (AFF), known as 4-1-9
    fraud after the section of the Nigerian penal code which addresses
    fraud schemes, are often very creative and innovative. Many of the scam
    artists, however, simply copy proven techniques developed by others.
    Perhaps because of this, certain elements of AFF seem to occur in
    nearly every scheme.
      --In almost every case there is a sense of urgency. This is designed
            to minimize the ability of the victim to verify a deal or a
            specific part of a transaction, and to limit the exposure time
            of the participants.
      --The victim is enticed to travel to Nigeria or a border country. On
            arrival, sometimes without visas, the victims are whisked
            through airports, violating immigration laws.
      --There are many forged official looking documents.
      --Most of the correspondence is handled by fax or through express
            mail.
      --Blank letterhead stationary and business invoices are requested
            from the victim along with bank account details.
      --Any number of Nigerian fees are requested for processing the
            transaction, such as attorney fees, taxes or even bribes.
      --Each fee is described as the last fee to be required, until errors
            or oversights are discovered and the cycle starts again.
      --The confidential nature of the transaction is emphasized, and
            victims are cautioned against contacting authorities.
      --There are usually claims of strong personal ties to Nigerian
            officials.
      --A Nigerian residing in the United States, the U.K., or other venue
            may add credibility to the scam by purporting to be a
            ``clearing house'' bank for the Central Bank of Nigeria.
      --Offices in legitimate government buildings appear to have been used
            by impostors posing as the real occupants or officials.
        The most common forms of fraudulent business proposals fall into
    seven main categories:
      --Disbursement of money from wills
      --Contract fraud (C.O.D. of Goods or Services)
      --Purchase of real estate
      --Currency conversion scams (black money)
      --Transfer of funds from over-invoiced contracts
      --Sale of crude oil at below market prices
      --Extortion
    Disbursement of Money from Wills
        A Nigerian law firm, claiming that it represented the estate of a
    devout Catholic sent a letter to a British charity announcing that the
    devout Catholic had died and left the charity 150,000 British Pounds.
    They enclosed a counterfeit check payable to the charity for the full
    amount. The letter explained that this check could only be cashed, and
    the funds released, once 6,000 British Pounds were transferred to the
    law firm for death duties.
        Fortunately, before proceeding, the charity contacted their bank
    and discovered that the bank sorting code for the bank on which the
    150,000 British Pounds was being drawn, was not correct. Increasing
    numbers of U.S. charities and churches have been targeted by these
    schemes.
    Contract Fraud
        Many small and medium sized businesses, without extensive export
    experience, have fallen prey to various forms of Nigerian contract
    fraud. In it's simplest form, contract fraud begins with an order from
    a Nigerian company and a bank draft for items which are to be shipped
    via air freight. The Nigerian company usually tries to negotiate a
    sample or introductory price (to allow it to introduce the products
    into Nigeria). Using a real or fictitious law firm, it may convince the
    exporter that registration, import and other fees are required to bring
    their products into Nigeria.
        In most cases, the first bank draft is real and the goods are
    shipped. The company becomes convinced that it has established an
    export opportunity and a new distribution system in Nigeria.
        In a few cases, firms have been known to ship goods before a bank
    draft has cleared, only to discover that the bank draft was a forgery.
    Once the buyer builds confidence (in cases when legitimate payment is
    made) with two or three more small shipments (less than $10,000 each),
    the exporter receives an urgent letter regarding the award of a
    substantial government contract. The contract requires shipment on an
    urgent basis (less than the time required for the bank draft to clear).
    The exporter learns too late that the bank draft is a counterfeit, the
    goods are not recoverable and the company is untraceable.
        Many of the cases of contract fraud begin with the use of actual or
    forged government tenders. In either case, the recipient is enticed by
    the size of the contract and the prospect of a Nigerian firm willing to
    facilitate the award.
    Purchase of Real Estate
        Another type of Nigerian Advance Fee Fraud involves an offer to
    purchase real estate using the assistance of a real estate broker or a
    well established business executive. Once a suitable property is
    located, the broker or person acting on behalf of the home buyer, is
    required to pay certain fees to complete the transaction in return for
    receiving a normal commission.
    Conversion of Currency (Black Money)
        Over the years, there have been attempts to defraud individuals
    using elaborate schemes in which people claim they can convert
    currency. One scheme involved the sale of a liquid which purportedly
    converted special ``black paper'' into U.S. currency. While the
    demonstration was impressive, the sample ``black paper'' was actually
    U.S. currency covered with a substance which was easily removed by the
    liquid. Other schemes involve the conversion of temporarily defaced
    money.
        These types of schemes are prevalent in London, and many Americans
    have been victimized, often in conjunction with over-invoiced contract
    schemes. Prior to traveling the victim will have been informed that the
    funds have been moved from Nigeria. In some cases they will have been
    required to pay freight charges for the transfer. On arrival the victim
    contacts his representative and arrangements are made for a meeting.
    The victim is shown a suitcase of what purports to be millions of
    dollars which have been coated with a black chemical to circumvent
    discovery while in transit. The victim is told that a special chemical
    is required to transform the defaced currency. Once again victims are
    persuaded to part with their money.
    Sale of Crude Oil at Concession Prices
        One of the earliest and most prevalent fraudulent business
    proposals involves the offer of special crude oil allocations at lower
    than market prices. Like other fraudulent business proposals, the firm
    is required to pay special registration and licensing fees to acquire
    crude oil at less than 80 percent of the market price, only to find
    that the sellers have disappeared once the fees have been paid. Such
    special allocations do not exist. All sales of Nigerian crude oil are
    made through the Crude Oil Marketing Division of the Nigerian National
    Petroleum Corporation (NNPC). Firms with little experience in the
    petroleum industry can be easily duped by this scam, leaving the victim
    without his funds or the promised oil.
    Re-victimization
        An American citizen was murdered in Lagos in June of 1995 while in
    pursuit of such a scheme. The subject did not possess a valid visa,
    which indicates he was smuggled into Nigeria by ``hosts'', either from
    a border country or through a port of entry in Nigeria. This scheme
    involves the attempt to rekindle the dying hopes of previous victims of
    advance fee fraud and is both simple and ingenious. An official looking
    letter, ostensibly from the Central Bank of Nigeria, is mailed or faxed
    to previous victims which states that the new military administration
    has set up a task force (usually the Presidential Task Force) to pay
    all outstanding debts. In order to facilitate the quick disbursement of
    the funds, the individual is requested to complete a questionnaire. The
    letter requests information which the victim probably has changed since
    first becoming a victim, especially bank account numbers.
        Some of these letters are accompanied by an excellent forgery, a
    page from a Nigerian newspaper, which is sandwiched between real
    articles. And of course the individual will be advised that certain
    fees will be required before their monies can be recovered.
        The investigation of these cases indicates strongly that advance
    fee fraud groups are either sharing or selling victims to other groups.
    It is not unusual to discover that a victim has been contacted by more
    than one advance fee fraud group during the course of the scam.
    Transfer of funds from over invoiced contracts
        The most prevalent and most successful cases of advance fee fraud
    involve the fund transfer scam. In such a scheme, a company or
    individual will typically receive an unsolicited letter by mail from a
    Nigerian claiming to be a senior civil servant. In the letter, the
    Nigerian will inform the recipient that he is seeking a reputable
    foreign company or individual into whose account he can deposit funds
    ranging from $28-60 million which the Nigerian government overpayed on
    some procurement contract.
    Initial Offer Letter
        Criminals obtain the names of potential victims from a variety of
    sources, including trade journals and shows, telephone directories,
    newspapers, magazines, advertising, and commercial libraries. These con
    artists do not target a single company, but rather send out mailings en
    masse. Allegedly, Nigerians have bribed postal employees to send out
    letters at discounted rates, bought off, or otherwise subverted, bank
    officials to get them to acquiesce in the fraud and permit access to
    bank premises and facilities, and entered into a relationship with
    officials to assist them in their schemes.
        The sender declares that he is a senior civil servant in one of the
    Nigerian Ministries, usually the Nigerian National Petroleum
    Corporation (NNPC). The letters refer to investigations of previous
    contracts awarded by prior regimes alleging that many contracts were
    over-invoiced. Rather than return the money to the government, they
    desire to transfer the money to a foreign account. The sums to be
    transferred average between $28,000,000 to $60,000,000 and the
    recipient is usually offered a commission of up to 30 percent for
    assisting in the transfer.
        Initially, the target is asked to provide company letterhead
    stationary and proforma invoicing, which will be used to show
    completion of the contract. The victim is advised that the completed
    contracts will then be submitted to the Central Bank of Nigeria for
    approval. Upon approval of the contracts, the funds will be remitted to
    an account supplied by the intended victim.
        The victim is also instructed to provide banking particulars,
    including the name of account holder, the name of the bank and branch,
    the account number, and bank telephone and fax numbers.
        Victims who are foolish enough to provide an account containing
    large sums of money, such as their company account, run the risk of
    having it compromised by the criminal. However, the intended purpose of
    obtaining the account information in the first place is to let the
    Nigerian know he has ``hooked'' another victim. Those who open a new
    account with a minimum deposit to avert the possible plundering of
    their other accounts are accomplishing nothing, since the account will
    never be utilized.
        The goal of the schemer is to delude the individual into thinking
    that he is being drawn into a very lucrative, albeit questionable,
    arrangement. Along with being drawn into the scheme, the target must be
    reassured and confident of the potential success of the deal, so that
    he will become the primary supporter of the scheme and willingly
    contribute a large amount of money when the deal is threatened. The
    term ``when'' is used because the con-within-the-con is that the scheme
    will be threatened in order to persuade the victim to provide a large
    sum of money to save the venture.
        The letter, while appearing transparent and even ridiculous to
    some, is really quite effective. It sets the stage, and is the opening
    round of a two layered scheme, or scheme within a scheme.
        The criminal will eventually reach someone who, while skeptical,
    desperately wants the deal to be genuine. The individual usually will
    not seek outside advice regarding the matter or, if they do, it is only
    for the purpose of minimizing a negative assessment of the transaction.
    The individual may even attempt to further assess the situation by
    requesting more information from the sender.
        The intended victim will respond to this initial letter by
    contacting the schemers either via telephone or facsimile. The main
    concern at this point is to get the target to send the requested
    information and/or documents. If the individual does not immediately
    respond with the information or documents but requests more details,
    the criminal will respond with plausible answers and plead for quick
    action on this matter before others find out about the funds.
        Advance fee fraud schemers will often urge their victims to keep
    the business relationship secret. The questionable character of the
    business proposals offered to potential victims may further discourage
    them from going to the authorities.
    Sense of Urgency
        Limiting the amount of time in which the target must make a
    decision forces him to commit to the next step based on limited
    information, and before he can adequately reflect on the situation or
    contact more informed sources. Given the mark's proclivity to want to
    believe that the deal is genuine, there is increasing pressure to stay
    in the game.
        The perceived time limit also causes the intended victim to feel
    personally responsible for the success of the venture. The individual
    reasons that if there is indeed a time constraint (a reasonable
    assumption) and if these documents are indeed necessary (also
    reasonable) then, if this ``deal of a lifetime'' falls through, it will
    be his fault. By this time failure of the scheme is unacceptable to the
    individual, and he will typically send the requested documents.
        The scam now moves into full swing. The first and most important
    job of the criminal is to develop the individual's trust and confidence
    in the venture, which can be accomplished through various means.
    Travel to Nigeria
        Victims are almost always requested to travel to Nigeria to
    complete a transaction. Individuals are often told that they will not
    need a visa to come to Nigeria to close the deal. The Nigerian con
    artists may then bribe airport officials to pass the victims through
    Nigerian immigration and customs. In other instances, the victims will
    be told to travel to a border country or other overseas venue to
    complete the deal. Upon arrival, the Nigerians will inform the victim
    that travel to Nigeria will be required, so the victim is transported
    into the country illegally. Because it is a serious offense in Nigeria
    to enter the nation without a valid visa, the victim's illegal entry
    may be used by the criminals as leverage to coerce the victims into
    releasing funds. Violence and threats of physical harm may be employed
    to further pressure victims who are often held incommunicado in a hotel
    room or a Nigerian residence. Numerous American citizens have had to be
    physically rescued by the American Embassy security teams in the past.
        The victim is effectively isolated in a foreign land where all his
    key contacts and activities are controlled and orchestrated by the
    criminals. As a result, the individual only sees and hears what they
    want him to; which is a consistent stream of information reinforcing
    the belief that the deal is genuine. The individual further believes
    that he is at times involved in possible illegal acts, and thus will
    feel legally isolated from seeking the assistance of his or her country
    in verifying the bona fides of the schemers.
        If the intended victim either refuses or does not have the means to
    travel, it does not mean that the scheme will not proceed. The criminal
    as a general rule will find a way to circumvent any obstacle presented
    to them. In these instances it is common practice for the schemers to
    suggest that a power of attorney situation be arranged to facilitate
    the execution of required legal documents in Nigeria. And, of course,
    certain fees will be requested from the intended victim to cover any
    legal fees incurred.
        At no time will the Nigerian criminal ever travel to the United
    States in furtherance of this scheme. This does not preclude them,
    however, from requesting significant sums of money to be used for
    travel expenses for various officials. This money will then join the
    rest of the advance fees in the bottomless pit.
    Official Looking Documents
        Victims are often convinced of the authenticity of advance fee
    fraud schemes by the forged or false documents bearing apparently
    official Nigerian government letterhead, and seals, as well as false
    letters of credit, payment schedules and bank drafts.
    False Identities/Bogus Agencies
        The criminal may establish the credibility of his contacts, and
    thereby his influence, by arranging a meeting between the victim and
    ``government officials'' in real or fake government offices.
    Setting the Hook and Advance Fees
        If this ploy is effective, and it often is, and if all the other
    actions have had their intended effect on the potential victim, then
    the first part of the scam has been completed and the target is
    committed to the fraudulent scheme. The individual overcomes any
    lingering doubts and surrenders himself completely to the scheme.
        Following the initial rush to have the individual furnish the
    documents, the criminal may take his time to establish his apparent
    credibility and the legitimacy of the deal.
        First, the intended victim needs time to internally develop a sense
    of trust and secondly, by the time the individual commits to the scam
    he will have invested a lot of time in the effort, and he will want to
    carry out the rest of the process as quickly as possible. Some victims
    have an ongoing relationship with their Nigerian counterparts for many
    months.
        Now the trap is sprung and some alleged problem concerning the
    inside man will suddenly arise. An official will demand an up front
    bribe; or an unforeseen tax or fee to the Nigerian government will have
    to be paid before the money can be transferred. These can include
    licensing fees, registration fees or various forms of taxes and
    attorney fees.
        Normally each fee paid is described as the very last fee required.
    Invariably, oversights and errors in the deal are discovered by the
    Nigerians, necessitating additional payments and allowing the scheme to
    be stretched out over several months.
        The criminal will usually claim that he has the majority, but not
    all, of the required funds and the victim visualizes the deal of a
    lifetime slipping through his fingers. The criminal has now succeeded
    in persuading the target to believe that:
      --the success of the deal now lies solely in his lap
      --he has a very limited amount of time in which to react, and
      --the criminal has made a believable, but utterly fictitious personal
            financial sacrifice in an attempt to salvage the deal.
        Ultimately, the target does not want to be responsible for the
    failure of the deal and will typically arrange for the payment of the
    necessary funds.
    Clearing House Bank Operations
        Investigation has shown that in a number of cases the advance fee
    fraud group based in Nigeria will make the initial contact with the
    intended victim, and at some point that victim will be contacted by a
    group identifying itself as a clearing house bank for the Central Bank
    of Nigeria. Sometimes the group will identify itself as the Federal
    Debt Reconciliation Committee (does not exist) or an Audit Trust Bank.
    This group has no affiliation to any legitimate bank, and is often
    nothing more than a store front.
        This action is perhaps an effort by the group based in Nigeria to
    lend additional credibility to the scam by demonstrating an affiliation
    with a clearing house bank based in the United States, London, or other
    foreign venue. Or perhaps the effort is made because the group based
    outside of Nigeria has developed the means to successfully launder the
    profits.
        In some instances, the clearing house banks receive a certain
    percentage of the proceeds received as commission. The remaining monies
    are then wired to overseas accounts controlled by other Nigerians who
    desire access to U.S. dollars. Upon receipt in this account, these
    Nigerians will pay the group in Nigeria in Naira (local currency) at an
    exchange rate favorable to the advance fee fraud group. In this manner,
    the money is successfully laundered and profits expanded.
        In another case, the victims were instructed to wire monies to an
    account that had been opened by a Nigerian living in the United States.
    The monies wired to this account were then used to purchase luxury
    automobiles for export to the largest automobile dealership in Lagos.
        Investigation indicates that in some cases monies wired by victims
    are bought at a discounted rate by ``legitimate'' Nigerian businessmen
    or illegal Bureaus de Change. It is similar to a situation in South
    America which may occur between businessmen, the Casa de Cambio, and
    the cocaine cartels.
        It also appears that ``legitimate businessmen'' are allowing their
    business bank accounts both in Nigeria and abroad to be sub-contracted
    by criminals to facilitate the retention and control of the proceeds of
    criminal activity.
        Evidence indicates that proceeds from advance fee fraud are being
    diverted into the distribution of heroin. A number of suspects that
    have surfaced in advance fee fraud investigations are known to be
    targets of narcotics investigations.
        In past years it was commonly perceived that operating criminal
    enterprises between several of the main tribes in Nigeria was virtually
    non-existent. Further, Nigerian organized criminal groups never dealt
    with other nationalities or ethnic groups in furtherance of their
    activities. However, that concept is now antiquated, as the groups have
    recognized the Nigerian successes and tend to collaborate with them on
    an increasing basis. Recent investigations have shown that non-
    Nigerians have begun to work as accomplices with the advance fee fraud
    groups based in Nigeria.
                   what is the secret service doing about it?
    ``Operation 419''
        Nigerian advance fee fraud (AFF), known internationally as 4-1-9
    after a section of the Nigerian penal code, has emerged as one of the
    most lucrative fraudulent activities perpetrated by organized criminal
    elements within the Nigerian community.
        Worldwide financial losses associated with AFF are conservatively
    estimated to be in the hundreds of millions of dollars, with victims in
    the United States perhaps accounting for half of the total.
        In response to this growing epidemic, the Financial Crimes Division
    of the Secret Service initiated a program dubbed ``Operation 4-1-9'' to
    combat AFF on an international basis.
        These advance fee schemes emanate solely from within Nigeria,
    though investigations indicate that Nigerians and non-Nigerians in the
    United States, Great Britain, and other countries, are acting in
    complicity to further this activity.
        Fraudulent ``clearing house'' banks, with alleged associations to
    the Central Bank of Nigeria, have been established in the United States
    and other venues to provide instructions to victims and lend additional
    credibility to the authenticity of the schemes.
        Beginning last year, agents have been assigned on a temporary basis
    to the American Embassy in Lagos to address the problem in that arena.
    Agents established liaison with Nigerian officials, briefed other
    embassies on the widespread problem, and assisted in the extrication of
    U.S. citizens in distress who had traveled to Nigeria in furtherance of
    a scam.
        Over the last two years, the Financial Crimes Division has been
    receiving up to 100 telephone calls and 300-500 pieces of related
    correspondence from victims and potential victims on a daily basis. The
    Financial Crimes Division has developed a database containing
    information gleaned from over 50,000 Nigerian scam letters. A link
    analysis of this data revealed the suspected locations of the top
    advance fee criminals in Lagos.
        Secret Service agents on temporary assignment to the American
    Embassy in Lagos, in conjunction with the Regional Security Office,
    supplied this information in the form of investigative leads to the
    Federal Investigation and Intelligence Bureau (FIIB) of the Nigerian
    National Police. (The Nigerian police has recently undergone a
    realignment. The FIIB is now the ``D'' Department under the Office of
    Investigations).
        The FIIB Special Frauds Unit has been tasked by the Nigerian
    Government with the enforcement of the advance fee fraud and money
    laundering decrees of 1995.
        This project was designed to provide Nigerian law enforcement
    officials with investigative leads to enable them to enforce their own
    jurisdictional venues.
        On July 2, 1996, officials of the FIIB, accompanied by Secret
    Service agents and the Regional Security Office in an observer/advisor
    role, executed search warrants on sixteen locations in Lagos, resulting
    in the arrests of forty--three Nigerian Nationals. Evidence seized
    included telephones and facsimile machines, government and Central Bank
    of Nigeria letterhead stationary, international business directories,
    scam letters and addressed envelopes, as well as files containing
    correspondence from victims throughout the world.
        On August 1, 1996, Commissioner of Police--FIIB Special Fraud Unit,
    appeared on the Nigerian Television Authority (NTA) and addressed a
    press conference to announce the arrests of forty-three ``419
    operatives'' in the Lagos area with the technical support and
    assistance of the United States Secret Service.
        The results of ``Operation Sweep'' were also extensively covered in
    a number of Nigerian newspapers.
        In December 1996, Secret Service agents traveled to Nigeria as
    representatives on a State Department sponsored trip to discuss money
    laundering issues with Nigerian government officials. Purportedly an
    additional one hundred and twenty-eight Nigerian criminals have been
    arrested as a result of follow-up investigations conducted in
    conjunction with ``Operation Sweep.''
        In addition, Secret Service agents and Embassy Officials met with
    ranking officers of the Central Bank of Nigeria (CBN), including the
    Deputy Governor for Domestic Monetary and Banking Policy.
        The first meeting, held at the Bank Examination Department of the
    CBN, concentrated on aspects of money laundering and advance fee fraud.
    The Director of the Bank Examination Department explained that his
    department has the responsibility to monitor banks for compliance with
    the new money laundering decree, and the power to place either a
    ``caution'' or ``freeze'' on bank accounts that exhibited suspicious
    behavior. A caution limits the account so that only deposits can be
    made to it; withdrawals are not allowed. A freeze makes the account
    completely inaccessible.
        In response to our inquiry, the Director stated that if he were
    supplied with account information linking it to questionable
    activities, the Bank Examination Department could put a caution on the
    account pending an investigation.
        The Director further explained that there have been currency
    transaction reporting requirements placed on financial institutions
    which are similar to those in the United States, but that he does not
    have sufficient staffing or training to adequately monitor the
    activities of the numerous banks and bureaus de change which operate in
    Nigeria.
        At the conclusion of the meeting the CBN officials suggested that
    another meeting involving additional departments, more involved in
    advance fee fraud, and the Deputy Governor of the CBN, be held the
    following week.
        The aforementioned meeting was held on July 9, 1996, in the office
    of the Deputy Governor for Domestic Monetary and Banking Policy.
        At that meeting, ways were discussed by which the Central Bank, the
    U.S. Secret Service, and the American Embassy might work together to
    combat advance fee fraud and money laundering. The Deputy Governor
    approved the idea of the Bank Examination Department intervening on
    accounts identified by the Secret Service as associated with the
    receipt of the proceeds of advance fee frauds. In particular, The
    Foreign Operations Department and the Bank Security Department agreed
    to accept account numbers for investigations and, in turn, any
    derogatory information developed about foreign transfers would be
    shared. (The Central Bank of Nigeria is responsible for the monitoring
    and regulation of commercial banks in Nigeria).
        A frank discussion on the nature and consequences of advance fee
    fraud was held. The bankers espoused the standard Nigerian argument
    that the victims were also criminals; but after much discussion,
    conceded they were not criminals of the same caliber, and that not all
    advance fee fraud involved the simple transfer of ill-gotten money.
    Phoney bequests to churches and other charitable organizations,
    fraudulent oil deals, and unpaid business orders also generate
    considerable advance fee fraud money. The bankers also agreed that
    advance fee fraud hurts the image and business climate of Nigeria. The
    meeting concluded with pledges of future cooperation and with all sides
    grateful for the opportunity to meet and discuss these issues.
        Since these meetings, the Financial Crimes Division has forwarded
    numerous bank accounts known to be associated with the receipt of
    advance fee frauds to the Central Bank of Nigeria. While this
    correspondence is always acknowledged, the Secret Service is not aware
    of any arrests of suspected criminals or seizure and return of any
    monies associated with the accounts.
        The Secret Service has adopted a three-pronged approach of
    investigation, interdiction, and public education to combat this
    problem. It is anticipated that public education will have a
    significant impact on reducing the fraud losses associated with these
    schemes.
        It is not uncommon to receive a frantic telephone call from family
    members or attorneys of clients who are insistent on traveling to
    Nigeria in furtherance of these scams. Our agents have located victims
    in foreign venues and have assisted in their removal from a potentially
    dangerous environment and facilitated their safe return to the United
    States.
        The Secret Service has issued a public awareness advisory designed
    to inform and educate U.S. citizens about these schemes.
        In a cooperative effort with members of the public and private
    sectors, copies of this advisory have been reproduced and included in
    publications which reach the groups that appear most vulnerable to
    these schemes, including the elderly.
        The American Embassy in Lagos has reported a dramatic drop in the
    numbers of U.S. victims that come to their attention on a monthly
    basis. We believe that this can be directly attributed to the public
    awareness campaign initiated by this Service.
        We continue to work closely with the Departments of State, Justice,
    and Commerce, the American Embassy in Nigeria, Interpol, Scotland Yard,
    and Swiss, German, Canadian and French Law Enforcement officials, to
    name just a few, in an attempt to minimize the losses associated with
    these schemes. The Secret Service is currently planning a news media
    blitz scheduled for this summer. Our Public Affairs Division has
    contacted the major print and television networks who have shown an
    interest in assisting us in informing the American public about these
    schemes.
    Investigations of Note
        Investigative leads provided by a recent case in New Jersey
    indicated that advance fee fraud was being conducted by a group from
    South Florida. Documents provided by a victim from Japan indicated
    advance fee fraud, but the associated documents were written in the
    grammatical style of an American, not a Nigerian.
        Investigation proved that a white male in his early 60's with a
    background in the banking industry acted in complicity with Nigerian
    criminals in Lagos to defraud victims throughout the world of over $8
    million.
        The defendant cooperated in this matter and was escorted to London
    where he participated in a ``lure operation'', resulting in the arrests
    of three of his accomplices. These accomplices are currently awaiting
    extradition to the United States. A fourth accomplice was arrested in
    Lagos, Nigeria.
        Wire transfer funds cannot be transferred directly from the United
    States to Nigeria, they must pass through a U.S. correspondent bank
    account--usually in New York. Sometimes victims will report they have
    wired monies to an account in New York where, in reality, the money
    merely passed through this account toward its final destination, often
    a Nigerian bank.
        In one of the first cases prosecuted in the United States,
    Nigerians, operating out of a store front in Jersey City, N.J., bilked
    victims from around the world of at least $5 million.
        Calling themselves the International Clearing House of the Central
    Bank of Nigeria, the criminals contacted victims, advising them that
    they had received their file. The victims were then told that the file
    reflected that certain fees had not been paid and the contract funds
    could not be remitted until said fees were paid. Payment instructions
    were then provided to the victims.
        The criminals operated through at least fourteen separate bank
    accounts. When the required fees arrived at the account, the criminals
    kept 30 percent and re-wired the remaining funds at the direction of
    their accomplices in Nigeria.
        According to a cooperating defendant, the monies were wired to
    legitimate Nigerian businessmen overseas who had ``purchased'' the
    money from the 4-1-9 group in Lagos. Thus, the 4-1-9 group was able to
    effectively launder the illicit proceeds and convert it to local
    currency.
        Question. Can you tell me what relationship ``Advanced Fee Fraud''
    schemes have with our drug problems?
        Answer. Evidence indicates that proceeds from advance fee fraud are
    being diverted into the distribution of heroin and cocaine. A number of
    suspects that have surfaced in advance fee fraud investigations are
    known to be targets of narcotics investigations.
        Victims from around the world were instructed to wire transfer
    funds to an account controlled by a Nigerian residing in New Jersey.
    These funds were then used to purchase luxury automobiles for export to
    one of the largest car dealerships in Lagos. This dealership was known
    to launder illicit proceeds of narcotics traffickers. A Title I wire
    tap investigation was conducted in conjunction with the High Intensity
    Drug Trafficking Area (HIDTA) Task Force in Newark, N.J. It was learned
    that the owner of the dealership purchased the illicit proceeds at a
    discounted rate from criminals in Lagos. When the criminals presented a
    copy of the wire transfer, the owner of the dealership paid off in
    local currency. The dealership expanded profits by purchasing the
    illicit funds at a discount, laundered those funds through the purchase
    of luxury automobiles, and ultimately sold those automobiles at a
    substantial profit in Lagos.
        The controller of the bank account in New Jersey was also
    laundering the cash proceeds of narcotics trafficking. Heroin was
    shipped into the United States from Nigeria and was hand carried to
    Chicago where it was distributed. The cash proceeds were then delivered
    to the Nigerian in New Jersey who ``sold'' the cash to Nigerians in the
    U.S. Relatives or associates of the Nigerians who purchased the money
    then paid off at an advantageous exchange rate to the controllers of
    the heroin in Nigeria. The cash was effectively laundered, profits
    expanded through the exchange rate, and converted to local currency.
        Chicago is the center for the distribution of heroin throughout the
    Midwest. It is estimated that Nigerian traffickers control seventy
    percent of the heroin being imported into Chicago.
        Nigerians are considered mid-level brokers and are the primary
    source of heroin for street level dealers.
        Nigerian criminal enterprises are often engaged in myriad criminal
    activities. Though the Secret Service does not have jurisdictional
    authority to investigate the trafficking of narcotics, its financial
    crime investigations regularly place it in the center of drug related
    cases.
        Secret Service investigations into the money laundering practices
    of Nigerian organized criminal groups have shown that the individuals
    and institutions responsible for laundering the proceeds of advance fee
    are also laundering the funds associated with the trafficking of
    narcotics.
        The illicit proceeds of financial crimes are being used to enhance
    the lifestyle of the Nigerian criminal, to purchase durable goods for
    export to Nigeria, to use as a ``foreign exchange'' mechanism or
    underground bank, to invest in legitimate business throughout the
    world, and, as previously mentioned, to support the trafficking of
    narcotics.
        Question. Are you aware of any cities in Wisconsin in which these
    fraudulent activities have been associated with increased drug
    trafficking and arrests?
        Answer. No.
        Question. In what cities are your ``West African Task Forces''
    currently operating?
        Answer. The Secret Service currently maintains Nigerian Task Forces
    in the following U.S. cities: Atlanta, GA, Baltimore, MD, Boston, MA,
    Chicago, IL, Dallas, TX, Greensboro, NC, Houston, TX, Miami, FL,
    Newark, NJ, New York, NY, Washington, DC, and Los Angeles, CA.
        Question. What agencies are currently participating in the Task
    Forces?
        Answer. Participating agencies include, but are not limited to,
    representatives from the following agencies: Drug Enforcement
    Administration, Federal Bureau of Investigation, Immigration and
    Naturalization Service, Internal Revenue Service, Postal Inspection
    Service, Social Security Administration, State Department Office of
    Diplomatic Security, and Customs Service.
        In addition, there are numerous representatives from state and
    local law enforcement and prosecutors involved in these task forces.
                    coordination with other treasury offices
        Background: Director Bowron, the Treasury Department is undertaking
    an effort to create an Office of Professional Responsibility'' (OPR).
    According to the House report language establishing this effort OPR
    would have the authority to: undertake its own investigations such as
    ``Good Ol' Boys''; convene panels of outside experts to review
    allegations; and provide quality control of all internal affairs
    offices. Recently, we received a letter from the Under Secretary for
    Law Enforcement that OPR will provide essential fact finding and
    independent assessment of bureau actions and policy implementation at
    Customs, Secret Service, ATF, FLETC, and FinCen.
        Question. What is your understanding of what this office's role was
    intended to be?
        Answer. It is the Service's understanding that the role of this new
    office will be essentially as you have described it. We believe the
    office will be created with the responsibility to cover the gap in
    oversight of senior level managers that currently exists between the
    Departmental Inspector General and the ``internal affairs'' offices of
    the individual law enforcement bureaus. The Service also understands
    that the oversight responsibilities of this new office will not
    interfere with the Inspector General Act, or the exemptions granted by
    this Act to the Secret Service as they relate to classified and highly
    sensitive protection information.
        Question. Have you discussed with Treasury their draft OPR plan? If
    so, will you share those comments?
        Answer. I had an impromptu conversation with Under Secretary Kelly
    concerning an early iteration of the OPR plan. I am not certain which
    version of the plan has been adopted, and therefore, I am not prepared
    to discuss the tenets.
        Question. Your agency has, in effect, an internal affairs division
    and the Treasury Department also has an Inspector General. Does the
    OPR, as described, result in an excess of oversight?
        Answer. As I have stated previously, I have not been briefed on
    which version of the OPR concept was finally adopted. Therefore, I am
    not in a position to discuss how the plan would complement existing
    oversight policy.
                                     ______

                              U.S. Customs Service
                              border drug seizures
        Background: The drug seizures along the Southwest border rose
    between 1993 and 1995. Officials dealing with drugs acknowledge that
    the seizures are small compared with the mountain of drugs that
    traffickers are believed to smuggled from Mexico each year.
        Marijuana seized in 1995, 119 tons versus Marijuana believed to
    enter the U.S. by land, 4,000 tons
        Cocaine seized in 1995, 11 tons versus Cocaine estimated to pass
    from South America to the U.S., 330 tons
        Heroin seized in 1995, 89 pounds versus Heroin estimated to arrive
    from Mexico to the United States, 5.5 tons (1 ton equals 2000 lbs)
        Question. According to Office of National Drug Control Policy
    (ONDCP) figures Customs is only seizing one percent of all drugs
    smuggled into the United States. What's Customs doing to increase drug
    smuggling interdiction efforts?
        Answer. In the past two fiscal years, U.S. Customs has witnessed
    many significant successes and milestones in narcotics interdiction,
    resulting in large part from Operations Hard Line and Gateway. In
    fiscal year 1995, Customs seized 61 percent of the cocaine, 51 percent
    of the marijuana, and 85 percent of the heroin seized by all federal
    law enforcement agencies combined.
        In fiscal year 1996, Customs continued successful interdiction of
    drug shipments by seizing record amounts of narcotics. For the first
    time in our history, the total amount of narcotics seized by Customs in
    one year exceeded 1 million pounds. As part of this record haul,
    Customs effectively removed over 82 metric tons (180,947 pounds) of
    cocaine from circulation in the United States through strong
    interdiction and investigative efforts. It is important to note that
    narcotics shipments that are intercepted and seized at the border by
    Customs are in large wholesale quantities and are at extremely high
    purity levels. The role Customs plays in interdicting these large,
    high-quality narcotics shipments through the control of our Nation's
    border is a vital and integral part of the national narcotics strategy.
    According to seizure statistics in the National Drug Control Strategy,
    this accounts for approximately 18 to 23 percent of the total amount of
    cocaine that enters the United States annually. In the process of
    achieving these excellent results, Customs also reduced the incidence
    and related violence of port running on our Southwest border by 59
    percent over the baseline year of 1994.
        Anticipating an increase in smuggling within the commercial cargo
    environment along the Southwest border as the pressure remained in the
    passenger processing environment with Hard Line, and between the ports
    with the Border Patrol's Operation Hold the Line and Gatekeeper,
    Customs intensified its cargo efforts with impressive results.
    Southwest Border port infrastructure has been fortified and Customs
    Inspectors have been equipped with better tools to perform more
    intensive narcotics exams. Customs currently has two operational fixed
    site truck x-ray facilities in Otay Mesa, California and Calexico,
    California. Customs has procured 3 additional truck x-ray systems for
    El Paso, Texas (2 systems), and Pharr, Texas. These systems are
    scheduled to be operational by October of 1997. In addition to fixed
    site truck x-ray equipment, Customs is testing Mobile Truck x-ray and
    Gamma-ray non-intrusive examination equipment. Customs has also paid
    additional overtime for pre-primary operations; purchased over 1,700
    sets of body armor; funded integrity training; bought 126 additional
    vehicles and purchased radios and other enforcement equipment.
        Customs has received pledges from over 800 trucking companies on
    the Southwest Border to better police their trucks and warehouses in
    order to prevent the exploitation of legitimate carriers and cargo by
    drug cartels under a program called the Land Border Carrier Initiative
    Program. In addition, Customs supports the work of the Business Anti-
    Smuggling Coalition, (BASC) a business group working with its members
    to eliminate smuggling within their shipments.
        As a result of these technological advances and port infrastructure
    improvements, seizures in the Southwest border commercial cargo
    environment have doubled in each of the past two fiscal years.
        Since the initiation of Operation GATEWAY on March 1, 1996, Customs
    narcotic enforcement activities in Puerto Rico have increased
    dramatically. In comparing the first year of GATEWAY to the same period
    the previous year (March 1996 to February 1997 versus March 1995 to
    February 1996), cocaine seizures have risen 38 percent--from 23,324
    pounds in the pre-GATEWAY period as compared to 31,265 pounds since
    GATEWAY began. Also, there has been a 131 percent increase in the
    examination of full inbound containers. An additional 242 Outbound
    containers have been examined as well.
        As a direct result of outstanding air interdiction efforts by
    Customs, cross U.S. border air smuggling activity is at a level less
    than one-quarter of what it was in 1982. In fiscal year 1996, while
    continuing to maintain Customs success in preventing U.S. airways from
    being exploited by drug traffickers, Customs aircraft provided
    invaluable support to drug interdiction and investigative efforts
    throughout the hemisphere, by contributing to the seizure of over
    61,000 pounds of cocaine, 48,000 pounds of marijuana, and $18.3
    million.
        In addition, Customs Office of Investigations assigns significant
    investigative resources to those geographical areas where the majority
    of the narcotics enter the United States. However, intelligence
    developed as the result of investigative efforts exploiting Ports Of
    Entry (POE) seizures to their ultimate destination, through the
    utilization of ``controlled deliveries,'' indicates the drug smuggling
    organizations' ``command and control'' logistic centers are located at
    inland geographic locations away from the POE.
        Customs maintains an aggressive investigative posture by seizing
    drug smuggling organizations' contraband, proceeds and assets;
    arresting and prosecuting organizational members and their hierarchy;
    and infiltrating additional organizations utilizing informants,
    cooperating defendants, undercover operations, T-III wire taps, and
    long term surveillance. This specialized selective enforcement combines
    the resources of intelligence, technology, inspections and
    investigations. Information acquired from these enforcement actions are
    then fed back to the inspectors as to the smuggling routes, concealment
    methods, etc.
        Customs strives to create a constantly changing and unpredictable
    ``border'' environment to challenge the smugglers, thereby forcing them
    to continuously modify their smuggling tactics making them more
    vulnerable to mistakes, seizures and arrests. For Customs to be
    successful in stopping the flow of narcotics across our borders,
    Customs must maximize the inspection/seizure process to build the
    ``investigative bridge'' between the interdiction of the narcotics and
    the ultimate recipient.
        This approach is designed to enhance both internal and external
    cooperation and intelligence sharing, while maximizing the unique
    investigative and interdiction capabilities of Customs.
        Question. Can we construct physical barriers to prevent smuggling,
    such as a fence?
        Answer. The Customs Service has the authority to construct physical
    barriers to prevent smuggling within the ports of entry.
        With the advent of Operation Hard Line, Customs began a port of
    entry infrastructure improvement initiative to address the problems of
    border violence and narcotics smuggling. Through this initiative
    Customs is acquiring additional fencing, barriers, bollards, and stop-
    sticks (controlled deflation of tires) to ``harden the ports'' along
    the Southwest border. Customs is now in the process of further
    strengthening and tightening the Southwest border by making numerous
    additional infrastructure improvements.
        The agency has taken action by dedicating over $4.76 million to
    acquire fixed assets which include additional fixed bollards, jersey
    barriers, stop-sticks, as well as lighting improvements, speed bumps,
    and fencing for the ports of entry along the Southwest border. These
    fixed assets will improve port security and harden the Southwest border
    ports of entry. Also, Customs is in the process of acquiring automatic
    license plate readers (LPRs) which will be installed in all primary
    vehicle lanes in Southern California and some Arizona ports of entry.
    The Land Border Passenger Automation Initiative contained in the fiscal
    year 1998 President's budget requests funding to expand the
    installation of LPRs across the Southwest border and at selected high
    threat Northern border ports.
        Question. Are you working with ONDCP to develop a coordinated drug
    policy? Are you using the ONDCP figures for levels of drug trafficking?
    Can these coordinated efforts stop the drugs from coming across our
    Borders?
        Answer. Customs entire approach is centered around the ONDCP's
    National Drug Policy, (especially goals 4 and 5) which the Customs
    Service played a significant role in developing. ONDCP's National Drug
    Control Policy states, in part, ``Our objective should be to constrain
    the activities of criminal drug organizations in all aspects of the
    drug trade and progressively drive them out of business. No dimension
    of their operations should be immune from counter action . . .''
        The Customs National Narcotic Investigative Strategy envisions
    doing just that, dismantling and disrupting smuggling and
    transportation cells of drug trafficking organizations. Custom is
    utilizing every facet of our enforcement and investigative facilities
    to combat the inflow of drugs across our nations borders and the
    outflow of narcotic proceeds. Identifying and targeting suspect
    shipments at the Port of Entry and interdicting narcotics at the first
    opportunity denies the smuggler the means of continuing his illegal
    drug trade. Broadening of Customs investigative efforts through the use
    of exploiting these seizures through controlled deliveries, Title III
    wiretaps, and enhancing Operations Hard Line and Gateway, will produce
    a cyclical effect of providing intelligence and tactical information
    back to the Ports of Entry to effect more enforcement actions. This
    will contribute to the dismantling and disruption of drug smuggling
    organizations. The dismantling and disrupting of drug smuggling
    organizations is an outcome, an effective measurable change, that will
    have a significant impact on the flow of drugs into and through the
    United States.
        Question. Are there uniform prosecution guidelines along the Hard
    Line and Gateway borders?
        Answer. Each U.S. Attorney's Office assesses their threat level and
    prosecutorial interest encompassing their varying community standards
    and sets their ``filing of prosecution'' guidelines accordingly.
        Question. Do these varying prosecuting limits impact the
    effectiveness of our drug interdiction?
        Answer. The drug interdiction efforts remain the same for Customs
    throughout the Nation. Prosecution limits vary according to districts
    based on volume, workload, and determination of the U.S. Attorney's
    Office and/or Department of Justice. Some offices in the Hard Line
    area, which are impacted by a high volume of seizures have programs
    established to refer prosecution to the State. This has been very
    successful in introducing the less obtrusive smugglers into the
    criminal justice system. The programs allow for repeat offenders to be
    elevated to the Federal system. This program also allows for non-U.S.
    citizens to be excluded from entry into the U.S., further impacting the
    drug smuggling organization's transportation operation.
        Question. Are arrests for all categories of contraband seizures
    (i.e. drugs, weapons, child pornography, money laundering, etc.) given
    the same weight for prosecution along the southern border?
        Answer. The prosecution of various categories is inherent to the
    ``community standards'' and the severity of the contraband. Each case
    presented to the U.S. Attorney is independently reviewed for
    prosecution merit and effect on the community. The weighting of cases
    for prosecution is dependent upon the U.S. Attorney's Office with input
    from the investigator.
                                 ports of entry
        The Secretary of Treasury establishes Ports of Entry through a
    delegation of authority from the President of the United States. The
    Secretary of Treasury, advised by the Commissioner of Customs,
    coordinates this designation with other Federal inspection agencies,
    and when appropriate, with Canadian and Mexican officials.
        In developing recommendations Customs established specific workload
    and other criteria in evaluating whether a location should be
    designated a port of entry. According to your report on the criteria
    used to designate ports of entry. These criteria establish whether the
    proposed port of entry is a worthwhile investment for the Federal
    Government and concurrently beneficial to the general area and its
    economy. It would seem to me that the designation would, in most
    instances, provide benefits to the economy of the newly designated
    area. I am more concerned about the investment for the Federal
    Government.
        Question. Although we have reviewed your Specific Port of Entry
    Criteria I still have questions about the information Customs collects
    and how the information is weighted to ensure port of entry decisions
    are made on an independent cost basis?
        Answer. Although there is no specific weighting of the collected
    data for port of entry applications, Customs carefully evaluates the
    information. We evaluate the actual and claimed potential workload
    activities for the applicable criteria. Wherever possible, we attempt
    to provide independent projections of the probable annual transactions
    and other factors. These factors are then evaluated to insure all
    interested parties are handled fairly and in accordance with published
    criteria.
        Question. The Criteria requires the need to include the following
    facilities:
      --Wharfage and anchorage adequate for ocean going cargo/passenger
            vessels if a water port;
      --Cargo and passenger facilities;
      --Warehousing space for secure storage of imported cargo and
            passenger facilities;
      --Administrative office space, cargo inspection areas, primary and
            secondary inspection rooms and storage areas and other space
            necessary for Customs operations.
        Do all the existing ports of entry include these facilities?
        Answer. At existing ports, the facilities required to support
    Customs operations must be available. The extent of these facilities
    generally reflects the type of port and the workload.
        Question. In your report you state the criteria includes
    consideration of actual or potential Customs workload levels. How are
    the potential Customs workload levels projected?
        Answer. The potential workload levels included in the criteria
    apply to deriving projected workload from the current period. For
    example, if an application includes workload for fiscal year 1996,
    Customs might derive a projected workload level for fiscal year 1997.
    This, usually, would be derived by projecting actual figures from part
    of the year. If there were seasonal or other factors involved they
    would be incorporated in the projection. The projection would be used
    to validate the workload trend.
        Question. Would you please provide a complete report on potential
    ports of entry sites for committee review?
        Answer. There are currently about 300 Customs ports of entry. These
    are the only ports for which Customs collects data. Customs does not
    maintain a list of potential ports of entry sites. If a site is
    currently not a Customs port of entry, we do not collect any data on
    the location. Since there is no Customs presence at these locations,
    there is no data on the activities included under the port of entry
    criteria.
                              chlorofluorocarbons
        The importation of refrigerants, belonging to the class of
    chemicals known as CFC's (chlorofluorocarbons), have been banned in the
    U.S. in conjunction with the international agreement known as the
    Montreal Protocol. This agreement, signed in 1987, established a phase-
    out schedule for CFC's leading to their outright ban in the United
    States and other developed countries as of January 1996. This includes
    a chlorofluorocarbon known as Freon or CFC-12, which is known to
    destroy the ozone layer.
        The National Chlorofluorocarbons (CFC) Enforcement Initiative which
    combines the talents of the Department of Justice, the U.S. Customs
    Service, the Environmental Protection Agency and the Federal Bureau of
    Investigation, was designed to stop the flow of the banned chemicals
    into the United States. Customs role includes detection and deterrence
    of smuggling of CFC's into the United States.
        Question. Operation ``Cool Breeze'' has already resulted in over a
    dozen convictions of CFC smugglers, including $1 million in criminal
    fines and the imprisonment of the violators. Please describe Custom's
    role in Operation ``Cool Breeze.''
        Answer. Operation ``Cool Breeze'' is an operation started by
    Customs in Miami. Customs has been the lead agency in all the
    convictions mentioned in the question. The Customs agent who initiated
    these cases received the EPA's Environmental Award for 1996. This was
    the first time that a non-EPA employee has received such an award. From
    Miami, CFC cases have spread out throughout the country. Customs agents
    are actively pursuing these cases and we can expect further convictions
    in the near future. Customs is working in cooperation with agencies
    mentioned above with the addition of the Internal Revenue Service (IRS)
    which has the function of collecting the excise taxes.
        Question. In January, Customs assisted in the indictment of 12
    people charged with smuggling 100 tons of CFC's into the U.S. However,
    that is a tiny fraction of the 10,000 tons, valued over $400 million,
    that is estimated to enter the country illegally each year. It is my
    understanding that Customs is currently charging an excise tax of $5.85
    per pound on CFC-12. If 10,000 tons is being smuggled into the United
    States, the government is losing over $117 million in lost taxes
    annually. What steps is Customs taking to detect the smuggling of this
    chemical into the United States? In other words, what initiatives in
    your fiscal year 1998 budget request will reduce the level of smuggling
    of Freon?
        Answer. The fact is that no one knows the amount of CFC-12 which is
    being smuggled into the U.S. We do know, however, that there is a black
    market in CFC-12 and we are currently mounting efforts to deal with it.
    We are cooperating with all law enforcement agencies both domestic and
    foreign.
        Customs does not collect the excise tax because it is not assessed
    until the first sale or use in the United States. The IRS is currently
    collecting the $6.25 per pound excise per the implementation of the
    Montreal Protocol. Customs has notified the IRS of some $90 million in
    excise taxes due on imports, and IRS is working on this. They have
    assessed over $50 million so far. Customs is using an automated
    profiling system to identify means of smuggling. Right now, there is
    practically no CFC-12 coming into the U.S. described as such. The
    shipping documents do not describe it as CFC-12. Prior to 1996 CFC's
    were described as CFC's and Customs has captured that data and is
    working and developing historical cases. The black market is driven by
    the excise tax and the weather. The non-payment of the excise tax is
    the profit margin for the black marketeer. As with drugs, interdiction
    is not the total answer. The fact that CFC's get into the country does
    not mean that Customs is finished with them. Some of our best cases
    have been historical cases worked with other agencies. From within base
    resources, Customs hopes to increase the activity of our contraband
    enforcement teams, to pay for informants and information, and to mount
    special operations in fiscal year 1998.
        Question. What kind of an impact can we expect from this increased
    focus on Freon smuggling, in other words, what increased level of
    revenue?
        Answer. As was mentioned above, Customs does not collect the excise
    tax but Customs has and will continue to notify IRS of any CFC's that
    they are aware of. The impact will hopefully be an increased detection
    of what has become an ever more sophisticated smuggler.
        Question. Customs has seized a substantial quantity of smuggled
    Freon, which is currently being stored in its evidence warehouses. Is
    disposal of the seized Freon becoming a problem for Customs? If so,
    what action is being taken to dispose of this HAZMAT?
        Answer. Customs is incurring costs for the storage of the seized
    Freon. Seizures of pre-1996 Freon have been used by the Defense
    Department to meet their military needs. We are conducting talks with
    EPA and Justice to arrive at a means of disposal of post 1996 Freon
    that will comply with the Montreal Protocol. There is currently
    disagreement as to whether destruction or sales to Article 5 countries
    should be the means of disposal. Destruction is presently a very
    expensive proposition costing more than the value of the CFC.
                                   corruption
        Background: A Blue Ribbon Panel provided recommendations for
    dealing with allegations, of corruption and mismanagement by Customs
    employees in the Southwest region. The Panel issued a report with 50
    findings and 51 recommendations. According to a GAO report issued in
    September 1996, Customs has taken action on 47 of the recommendations
    and is still reviewing the remaining three.
        Question. How will Customs guarantee the success of the
    recommendations?
        Answer. As reported to the General Accounting Office in 1996,
    several oversight mechanisms have been put into place to alert Customs
    managers to problem areas in their offices. For example, the Office of
    Policy and Oversight was established in the Office of Investigations
    (OI) to look for trends and patterns of systemic noncompliance with
    regulations and policies. Additionally, OI instituted a Discipline
    Review Board to ensure consistency in disciplinary actions and a
    Hardship Review Board to oversee reassignments of all OI and some
    Office of Internal Affairs (IA) personnel to ensure adequate
    consideration is given to claims of hardship due to the reassignments.
    Treasury Enforcement is currently performing an evaluation of Customs
    Office Internal Affairs to ensure the program's effectiveness and
    efficiency. Further, IA has developed performance measures for
    investigations and management inspections as well as an automated
    management inspection information system to assist with trend analysis
    of inspection findings. Finally, enhanced training for special agents
    and Customs employees and periodic notification of integrity and
    whistle blower protection issues has served to institutionalize many of
    the corrective actions put into place following the blue ribbon panel
    report.
        Future actions to implement the three recommendations not yet
    implemented will await funding identification.
        Question. Have there been arrests for alleged corrupt activities
    since the Blue Ribbon panel issued its report in August 1991?
        Answer. Yes.
        Question. What has been the level of these arrests since that time?
        Answer. See the chart below. Our automated case management system
    was not in place until fiscal year 1994. We were unable to retrieve
    information on prior years from the case management system.

       Customs Employees Arrested for Corruption \1\ Fiscal Years 1994-97

            Fiscal year/Employee Type                                 Number
    1994:
        Inspector.....................................................     1
        Canine Enforcement Officer....................................     1
                            -----------------------------------------------------------------
                            ________________________________________________
          Total.......................................................     2
                            =================================================================
                            ________________________________________________
    1995:
        Senior Inspectors.............................................     5
        Inspectors....................................................     2
        Air Command Duty Officer......................................     1
                            -----------------------------------------------------------------
                            ________________________________________________
          Total.......................................................     8
                            =================================================================
                            ________________________________________________
    1996:
        Management Program Technician.................................     1
        Senior Operational Analysis Specialists.......................     2
        Supervisory Inspector.........................................     1
        Senior Inspectors.............................................     2
        Inspectors....................................................     2
        Mail Technician...............................................     1
                            -----------------------------------------------------------------
                            ________________________________________________
          Total.......................................................     9
                            =================================================================
                            ________________________________________________
    1997:
        Paralegal Clerks..............................................     3
        Senior Inspectors.............................................     4
        Customs Explorer..............................................     1
                            -----------------------------------------------------------------
                            ________________________________________________
          Total.......................................................     8

    \1\ Corruption is defined as unlawful acts by an employee involving the
    misuse of his/her official position for actual or expected material
    reward or gain. Source: IA SARs as of 5/7/97.

        Question. At what level have these arrests occurred--in the ranks
    or with the management levels?
        Answer. As the chart shows, these arrests have been almost
    exclusively in the ranks.
        Question. I know there have been discussions about the rotation of
    personnel to deter corruption. Are there any examples where this
    philosophy has succeeded with other agencies?
        Answer. Customs has not benchmarked other law enforcement agencies
    to determine if they have a specific program of relocation as an anti-
    corruption technique. Customs' perception from previous discussion is
    that other agencies do not use relocation in this manner. We understand
    that other agencies and police departments reassign their investigative
    personnel as needed to address organizational workload. Customs
    personnel are rotated through assignments as a component of
    professional development and career advancement, but not as a specific
    anti-corruption procedure.
                         non-intrusive inspection (nii)
        Background: In 1991, Congress directed the Department of Defense to
    assist Customs in their effort to interdict and reduce the supply of
    drugs and other contraband from entering the United States. DOD applied
    their technology and systems expertise to increase Customs' ability to
    monitor ground, air and maritime border traffic. Technology was
    specifically directed at increasing the amount and effectiveness of
    commercial vehicle and container inspections. Additional advances were
    made in increasing surveillance and tracking technologies, along with
    computer data systems and other electronic support.
        Question. What new technologies are being employed in interdiction?
        Answer. There are two parts to the answer. The first is what
    enhancements are we making to existing technology, and second, what
    technologies are we employing that we have not used before. In the
    first part, Customs has been employing x-rays in the non-intrusive
    inspection of baggage, small parcels and mail packages for over 20
    years. More recently, innovations in the design of large, more powerful
    x-rays have allowed us to expand our targets to vehicles and empty and
    partially filled truck containers, through the deployment of fixed
    truck x-rays at two of our Southwest border ports, and a mobile truck
    x-ray that can be moved from one port to another rapidly. These systems
    have proven so effective that funding has been committed for six more
    fixed truck x-rays and two more mobile systems. In another example, the
    popular ``Buster'', a gamma-ray densitometer that is used to detect
    contraband in places such as car door and truck panels, has benefited
    from improved detector and electronics technology, making it safer and
    more sensitive in its use.
        Regarding technologies Customs has not employed before, there are
    several systems we are in the process of evaluating and which appear
    very promising. One is a transportable gamma-ray imaging system that is
    used to determine if contraband is being hidden in empty tanker trucks
    or other conveyances crossing the border. With some improvements this
    system will be a valuable addition to our arsenal of tools to inspect
    vehicles at land border ports. Another example of new technology is
    narcotic particle detection systems recently deployed at selected
    airports and seaports. The U.S. Coast Guard and Canadian Customs have
    had some success with these systems and we are guardedly optimistic.
    Some of these devices are being tested to see if narcotic
    ``swallowers'' can be rapidly screened from breath, perspiration or
    saliva tests at the airport, prior to the more costly and time-
    consuming hospital x-ray. Other new technologies include an ultrasonic
    device for verifying the contents of liquids in 55 gallon drums and
    determining if packages of contraband are secreted inside, and the use
    of geo-positioning systems (GPS) and covert infrared tags for
    investigative tracking and surveillance of vehicles.
        As part of the fiscal year 1998 President's Budget, Customs is
    requesting funding ($12.0 million) to purchase two higher energy fixed-
    site seaport non-intrusive inspection systems to replace time-consuming
    physical examinations (requiring unloading, examination, and reloading)
    of suspect loaded containers. This system will allow Customs to examine
    the contents of loaded, sea-going containers to determine if contraband
    is present without physical examination. Customs also seeks funding
    ($3.0 million) to continue the development of automated targeting
    systems (ATS) to better direct our inspection efforts to those
    shipments/containers with the highest probability of containing
    contraband. Once our evaluation of the ATS is complete, the system will
    be implemented at high-risk land and sea ports of entry. These combined
    systems would have the capability to conduct the equivalent of
    approximately 120,000 intensive inspections per year, enabling Customs
    to maintain its vigilance in the face of an expanding, sophisticated
    threat and accommodate increases in trade volume.
        Question. How do you decide where to put this new technology?
        Answer. Currently there are three criteria used to determine where
    we place technology. The first is where intelligence estimates and past
    operational experience tell us where the major threat exists. This may
    be a single port, a group of ports, or a region. The three regions with
    current Customs priority are the Southwest border, Puerto Rico and the
    Virgin Islands, and the Southern Florida area. The second criteria is
    dictated by the nature of the technology itself. The truck x-ray, for
    example, is designed to inspect vehicles and empty and lightly filled
    trucks, and would only be deployed at a land border crossing. Mobile
    assets, such as the mobile x-ray, might be deployed at various ports
    adjacent to where the fixed systems are, to catch the smugglers that
    try to avoid the fixed system by trying to enter at a nearby port, or
    rotated throughout a group of ports on an unpredictable schedule,
    keeping the smuggler in the dark as to where it may turn up next. The
    third criteria is by Congressional mandate, e.g., the technology
    included in the Anti-Terrorism Bill of 1997 will be deployed at major
    international airports only.
        As more technology becomes available, a fourth criteria may develop
    that relates to how well some technologies work with others. This will
    be the objective of a joint Customs/DOD operation in South Florida,
    where technologies will be applied in combinations to see if there is a
    synergistic effect. This operation is scheduled for next year.
        Question. What is better, mobile or fixed detection systems?
        Answer. With all other factors equal, e.g., types of targets,
    performance and cost, mobile systems are generally better, but factors
    are rarely equal. In addition, there is the compromise of
    ``relocatable'' systems, i.e., those that can be dismantled and moved
    from one location to another in a matter of days or at the worst one or
    two weeks. On the one hand mobility brings the valuable attribute of
    flexibility to respond in the face of a mobile or variable threat, but
    on the other it also incurs the logistical problems and costs of
    managing the moving of a system from one area to another, including the
    required operational expertise, maintenance and training
    responsibilities. This implies that under equal conditions, mobile
    systems are more desirable, but will be more expensive to operate.
        Question. Based on history, I am concerned about the future of drug
    interdiction. Drug interdiction initiatives in the early 1990's focused
    on blocking the trafficking of drugs through the Caribbean corridor. As
    a result, drug traffickers moved their activities toward the Southwest
    border. How flexible are our current efforts?
        Answer. Customs has been very successful at adapting to the changes
    made by smuggling organizations.
        In order to meet the rising challenge of policing the Nation's
    borders against drugs, Customs has developed comprehensive new
    technologies and has integrated them with conventional inspectional and
    investigative techniques to support our priority missions. Customs took
    this approach due to the staggering workload along the Southwest
    Border. For example, last fiscal year, 3.5 million trucks, 75 million
    cars, and 254 million people crossed our land border through ports of
    entry. In contrast, during this time period, Customs had only 1,800
    inspectional personnel along the entire 2,000 mile border.
        Customs launched Operation Hard Line 24 months ago to permanently
    harden our Nation's Southwest Border ports of entry against drug
    smuggling activity. At the time, ports of entry along the U.S.-Mexico
    border were under siege by narcotics traffickers, known as port
    runners, who would brazenly speed drug-laden vehicles through border
    crossings, jeopardizing the safety of border officers and civilians.
    Operation Hard Line is evidence that the top priority for Customs is to
    stop drug smuggling. Port running has decreased over 56 percent.
    Southwest Border ports of entry are now safer for all Federal
    Inspection Service officers and civilians.
        Drug seizures on the Southwest Border increased substantially in
    fiscal year 1996; narcotics seizures increased 29 percent by total
    number of incidents (6,956 seizures) and 24 percent by total weight
    (545,922 pounds of marijuana, 33,308 pounds of cocaine, and 459 pounds
    of heroin) when compared to fiscal year 1995 totals. Additionally, the
    total weight of narcotics seizures in commercial cargo that entered the
    U.S. via commercial trucks on the U.S.-Mexico border in fiscal year
    1996 were up over 153 percent (56 seizures totaling 39,741 pounds) when
    compared to fiscal year 1995 seizure statistics. This increase in
    narcotics seizures is due to an increase in the number of intensified
    inspections and tactical intelligence resulting from Operation Hard
    Line.
        Nearly 165 experienced special agents and intelligence analysts
    have been reassigned under Operation Hard Line to the Southwest Border
    to work narcotics cases. Our fiscal year 1997 Budget provides an
    additional 657 positions and $65 million for Customs Operation Hard
    Line efforts along the Southwest Border and the Southern Tier of the
    United States.
        Southwest Border port infrastructure has been fortified and Customs
    Inspectors have been equipped with better tools to perform more
    intensive narcotics exams. Customs has procured four additional truck
    x-ray systems for El Paso, Texas (two systems); Pharr, Texas; and
    Calexico, California. The truck x-ray at Calexico, California, has been
    completed and has been operational since March of this year. The
    additional nonintrusive inspection systems for El Paso and Pharr are
    scheduled to be operational by October 1997. The Customs Service has
    also paid additional overtime for pre-primary operations; purchased
    over 1,700 sets of body armor; funded integrity training; bought 126
    additional vehicles and purchased radios and other enforcement
    equipment.
        Customs has also received pledges from more than 836 trucking
    companies on the Southwest Border to better police their trucks and
    warehouses in order to prevent the exploitation of legitimate carriers
    and cargo by drug cartels under a program called the Land Border
    Carrier Initiative Program.
        Question. It appears that mobile or portable technologies would
    give us the ability to refocus our interdiction efforts as needed,
    instead of revisiting this issue in another couple of years. How
    flexible will our future interdiction technology and efforts be in
    addressing drug trafficking along a new border front?
        Answer. Since the submission of the President's Budget, Customs is
    refining its requirements for non-intrusive technologies to achieve a
    greater mission capability and return on investment by including
    relocatability (capable of being deployed to another location in days
    or at most weeks) or mobility (capable of being deployed to another
    area in a matter of minutes or hours) as an important criterion. This,
    when augmented by the results from the joint Customs/DOD South Florida
    multiple systems demonstration scheduled for next year, should provide
    us with the tactical building blocks with which to design a flexible
    response to drug trafficking along a new border front.
        Question. Can't we purchase more portable systems for the price of
    one fixed site? Are there cost benefits to mobile technology over fixed
    sites?
        Answer. Mobility in and of itself is not necessarily less
    expensive. For example, the mobile truck x-ray with transmission will
    cost about $2.5 million, compared to the fixed truck x-ray cost of
    about $3.3 million, installed. The fixed system has twice the
    throughput as the mobile one, because it has two x-ray beams, where the
    mobile system only has one, and must make two passes for the same image
    coverage. In addition, there are the costs of moving the mobile x-ray
    from one site to another, extra training, and maintenance. The answer
    is a complex one that we are now in the process of addressing, since we
    have just deployed our first two mobile assets, the mobile truck x-ray
    and the transportable gamma ray imaging system, and will be obtaining
    performance and cost data from these operational deployments over the
    next several months.
        Question. What are the broader applications for this new generation
    of technology? Is it only capable of detecting drugs?
        Answer. Most of the non-intrusive inspection technology we are
    acquiring or currently use detects anomalies, rather than specific
    contraband types. X-rays, for example, are used to identify patterns,
    objects or targets that don't belong with what is expected. Thus
    inbound drugs and other contraband, or outbound explosives, weapons,
    currency or stolen cars, for that matter, all appear as anomalies to
    normal manifested goods. The performance and image resolution of the
    equipment is another matter, and systems designed to detect large
    anomalies, such as a low power x-ray to detect stolen cars in outbound
    containers, will have difficulty detecting 50 pounds of drugs in an
    inbound container. In this case, two separate systems may be required,
    each designed for its special application. To use a higher performance
    system for both applications will generally work, but at a lower cost
    benefit for those applications requiring less performance. The Buster,
    gamma-ray imaging system and ultrasonic systems described in previous
    answers are other examples of anomaly detectors.
        Trace detectors, on the other hand, are designed to identify
    specific drugs, explosives or characteristics of such contraband. Some
    drug particle and vapor detection systems, i.e., those that are based
    on ion mobility spectrometry (IMS), can detect either explosives or
    drugs with a small change in their operation, such as a switch. Customs
    is purchasing many of these systems for the anti-terrorism program with
    the intent that for dual-use applications, the explosive detector can
    be changed to a drug detector by flipping a switch.
                                air interdiction
        It is my understanding that the demand for Customs P-3 AEW aircraft
    has increased dramatically with implementation of the Administration's
    international Drug Strategy, particularly that which focuses on the
    source zones. According to Customs this requires better air
    interdiction methods.
        Question. What methods has Customs employed to ensure their air
    interdiction programs can meet this new challenge?
        Answer. Increased demands on the Air Program's assets have prompted
    creative methodologies and initiatives to accomplish our various
    missions. The most noteworthy is the application of the ``flex force''
    strategy whereby Customs quickly deploys assets to areas requiring
    attention. Operation RAPIER is an example of this strategy and consists
    of periodic, multiple, and flexible deployments (approximately 10 days
    duration) to respond to high threat areas. Intensified interdiction
    methods are then employed to disrupt smuggling operations.
        ``Flex force'' operations are intelligence driven. Four basic
    initiatives are utilized to develop characterizations, or models, to
    identify smuggling trends in a specific area. These characterizations
    include: air environment, airfield environment, aviation community and
    active criminal organizations. Once the intelligence has been collected
    and analyzed, resources are dispatched to address the threat.
        In addition to ``flex force'' operations, adaptable scheduling of
    assets, along with an increased use of ``call out'' personnel, is being
    utilized for ``day-to-day'' operations. This allows support to be
    prioritized for maximum effectiveness.
        Question. Do the long-range air interdiction strategies differ from
    short-range border interdiction strategies?
        Answer. The long-range objectives of all interdiction efforts, to
    include Customs air interdiction efforts at and beyond U.S. borders,
    are to eventually deny drug traffickers the option of using a specific
    smuggling route or method for transporting their cargo. As has been
    demonstrated by Customs successes against the domestic air smuggler and
    port runners, this long-term objective is typically accomplished by
    implementing short-range strategies which involve saturating a specific
    drug trafficking route or method with forces and technology capable of
    identifying and apprehending suspects engaged in drug smuggling. In the
    near term, these efforts typically result in a dramatic increase in
    seizures. Eventually, however, seizures typically taper off as the
    trafficker seeks out and exploits other, less risky, means of
    transportation. Once this point is reached, the long-term strategy
    becomes one of leaving behind an interdiction presence capable of
    preserving this success, and then, once again, beginning the process of
    developing and implementing a short-term strategy to fight the
    trafficker in the newly exploited smuggling routes and methods.
        Question. Are the land and marine interdiction elements
    sufficiently placed and effectively staffed to respond to suspicious
    targets identified by the air interdiction effort?
        Answer. Although Customs aircraft support air interdiction efforts
    throughout the hemisphere, Customs, through the Domestic Air
    Interdiction Coordination Center (DAICC), coordinates only those
    efforts aimed at interdicting drug trafficking aircraft operating in
    the Arrival Zone (the continental U.S., Puerto Rico and their
    surrounding areas). The Department of Defense Joint Interagency Task
    Forces (JIATFs South, East, and West) are responsible for coordinating
    interdiction activities against targets operating in the Source and
    Transit Zones and would be the appropriate entities to speak to
    interdiction response capabilities in those regions.
        As far as the adequacy of interdiction elements to respond to
    targets identified by the DAICC, recently Customs has experienced
    difficulty in responding to targets referred by the DAICC for action.
    This is due primarily to the commitment of aviation resources to
    support international efforts and availability of aircrew staffing
    levels. Although there is no conclusive evidence which indicates that
    cross-U.S. border private air smuggling activity has returned to the
    widespread levels of the past, there have been a few recent incidents
    which suggest that there have been some attempts to exploit weaknesses
    in our coverage.
        The Air Program is in the process of trying to assess the extent to
    which this is occurring and determine the appropriate adjustment in
    resources and strategies.
        The land and marine interdiction elements are strategically placed
    to respond to targets identified by air assets. High impact areas such
    as South Florida, the Gulf Coast and San Diego are being challenged to
    meet the full threat.
        Question. What percentage of identified sea, air and land targets
    are we able to effectively respond to and physically challenge with the
    above enforcement elements (i.e., special operations search, seizure
    and arrest teams)?
        Answer. Fiscal year 1997 through March, the DAICC referred 233
    suspicious air, land, and sea targets to Customs Aviation Branches for
    action. Customs aircraft successfully intercepted 64 percent of these
    targets, 66 percent of which were successfully brought to an
    enforcement stop on the ground.
        Among the principal reasons for not successfully launching on,
    intercepting and/or bringing to ground a suspect aircraft target are:
    the suspect aircraft target was the subject of an investigation and
    there were specific instructions not to intercept or stop the suspect;
    the suspect aircraft remained in or returned to foreign air space prior
    to being intercepted or stopped; the suspect target was lost from radar
    prior to being intercepted or stopped; weather either precluded the
    launch of an interceptor or bust aircraft or forced the interceptor or
    bust aircraft to return to base; the suspect aircraft activity was
    identified only by means of visual sighting and the information was not
    timely or detailed enough to either launch an interceptor or for a
    launched interceptor to locate the suspect; there was no interceptor or
    bust aircraft in the area available to launch.
        The Marine program is responding to approximately 75 percent of the
    reported targets. The reasons for non-intercept are similar to those
    cited for the Air program above.
        Question. What assistance have we received or effort has been put
    forth from the source countries to suppress smuggling of contraband by
    air and sea?
        Answer. Within South America, a U.S.-sponsored interdiction effort
    is the cornerstone of the National Drug Control Strategy to attack the
    narcotics problem at its source. A sustained Customs aviation presence,
    coupled with host nation support, continues to disrupt air and maritime
    transportation of cocaine base from Bolivia and Peru to Colombia. The
    level of support is comprehensive and includes the utilization of
    forward operating bases, logistical backing and intelligence sharing.
    In addition, extensive coordination is provided by the host nation
    riders to secure ``hot pursuit'' overflight authority and prosecute
    successful interdiction. These riders are an integral part of the
    interdiction aircrew and instrumental in the success of these missions.
        Combined operations, such as the ones currently undertaken in South
    America, serve as force multipliers in restricting the flow of
    narcotics. According to the 1997 National Drug Control Strategy:

            By the end of 1996, Peru and Colombia seized or destroyed
            dozens of drug trafficker aircraft, resulting in a two thirds
            reduction in the number of detected trafficker flights over the
            Andean ridge region compared with the number of flights
            detected before the denial program was launched in early 1996.

        These operations have become so successful that by the end of 1996
    coca cultivation exceeded the transportation capability of the
    traffickers. The direct result was a 50 percent reduction in the price
    of coca in Peru.\3\
    ---------------------------------------------------------------------------
        \3\ Office of National Drug Control Policy, The National Drug
    Control Strategy, 1997, February 1997, p. 54.
    ---------------------------------------------------------------------------
        The challenge is to further exploit our successes by blocking
    traffickers from developing alternative routes. This can only be
    accomplished through combined operations as noted above.
        Per the Memorandum of Understanding (MOU) guidelines with the Drug
    Enforcement Administration, the Marine program does not participate
    with source countries in drug related matters.
        Question. What other U.S. agencies are involved in the air
    interdiction efforts?
        Answer. The United States Customs Service, as mandated by law, is
    responsible for protecting our land and sea borders from contraband
    smugglers. Several other federal and state agencies provide valuable
    support including the U.S. Coast Guard, which provides several
    aircraft, and the Department of Defense, which provides a detection and
    monitoring capability in the source and transit zones and radar data
    from the tethered aerostat network strategically positioned along the
    southern tier of the U.S.
        Question. Besides advanced intelligence, is the air interdiction
    program the next most viable means of identifying and interdicting air
    and sea smuggling?
        Answer. Accurate, timely, advanced intelligence information is
    without question the ideal basis for a successful interdiction effort.
    In the absence of intelligence the Customs air/marine interdiction
    programs are uniquely equipped to combat the contraband smuggler. The
    Customs aviation program is comprised of various airborne assets
    strategically positioned to intercept those smugglers. The Domestic Air
    Interdiction Coordination Center (DAICC) and its subordinate facility
    located in Puerto Rico, the Drug Interdiction Operations Center (DIOC),
    are responsible for protecting the arrival zones of the U.S. and Puerto
    Rico. The DAICC and DIOC are supported by specially equipped aircraft
    and law enforcement crews positioned along the southern tier of the
    U.S., New York state, and Puerto Rico. Vessels manned by Customs
    Officers are also strategically placed along the U.S. borders and
    Puerto Rico. Additionally, Customs has long-range, sensor-equipped P-3
    aircraft that protect our domestic borders and are forward deployed
    providing detection and monitoring platforms to participating host
    nations in South and Central America. The P-3 platforms are
    complemented by a network of sensor-equipped tethered aerostats placed
    along the southern tier of the U.S.
        The DAICC, being the only facility capable of doing so, has been
    designated the single facility responsible for sorting aircraft on an
    international basis to determine legal status.
        Question. Are the Custom's Black Hawk helicopters properly equipped
    with the necessary law enforcement equipment and staffed with special
    operations personnel to effectively confront these smugglers, once they
    touch down on land?
        Answer. All of the Customs Black Hawk helicopters are equipped with
    a law enforcement radio, a night sun flood light for night operations,
    and all are capable of night vision goggle operations.
        All Customs Pilots and Air Interdiction Officers are highly trained
    for the ``special operations'' they perform. Each receives 4 months of
    initial law enforcement training at the Federal Law Enforcement
    Training Center at Glynco, Georgia. Soon after returning to their post
    of duty, each new hire attends our 2-week in-house training known as
    Standard Tactical Aviation Training. Refresher training is provided
    periodically throughout their careers.
        Question. How many P-3 AEW aircraft are needed to effectively
    defend our southern border? What is the life expectancy of the current
    fleet of P-3 AEW aircraft?
        Answer. To date, the Customs Service has effectively defended the
    southern border with 4 P-3 AEWs, operated as aerostat gap fillers and
    in smuggling choke points along the smuggling routes to the U.S.
    border. Customs is currently increasing its fleet to 6 P-3 AEWs to
    extend its operations to other smuggling avenues in the western
    hemisphere while maintaining sufficient resources to defend the border.
    The success of this approach relies heavily on prior intelligence and
    empirical smuggling trends to position the P-3 AEW in an appropriate
    orbit location. Barring this type of approach, the theoretical maximum
    number of P-3 AEW aircraft required to cover the Southwest Border from
    Brownsville to San Diego, seven days a week, 24 hours a day
    (724) on the U.S. side of the border is 30; assuming the
    aerostat system is operational at its current level. If the Government
    of Mexico would allow Customs to operate the P-3 AEW and its sensors in
    Mexican airspace, this would reduce the theoretical aircraft
    requirement to 23 due to advantages in the geographical layout. To
    extend this same coverage from Texas to Florida (across the Gulf),
    would require an additional 23 aircraft. Please see the calculations
    below for details.
    Coverage (North of Border) with Aerostats (7 x 24 Hour)
        The Aerostats have 6 orbits along the Southwest Border. Half of the
    Aerostats are down every day for an average of 8 hours. To fill those
    gaps and address other known deficiencies between the Aerostats the
    following applies:
        1. Each airframe in the inventory is capable of 95 hours of flight
    time per month
        2. 3 orbits  24 hours = 72 hours/day (gap coverage)
        3. 3 orbits  8 hours = 24 hours/day (aerostat down time
    coverage)
        4. 72 + 24 = 96 hours/day  30 days = 2,880 hours/month
        5. 2,880/95 = 30 airframes required
    Coverage Without Aerostats for Eastern U.S. (7 x 24 Hours)
        To cover the eastern half of the United States Southern Border
    would require three orbits. Aerostats are not a factor in determining
    coverage. The following applies:
        1. Each airframe in the inventory is capable of 95 hours of flight
    time per month.
        2. 3 orbits  24 hours = 72 hours/day of coverage
        3. 72 hours/day  30 days = 2,160 hours/month
        4. 2,160/95 = 23 airframes required
        The P-3 AEW, as configured for the Customs Service, is primarily
    designed for over water/jungle detection. Employment of the standard
    configured ``Dome'' over the Southwest Border (on the U.S. side)
    degrades the level of coverage. Supplemental processors and upgraded
    radars would improve the coverage south of the border for a single
    threat axis (i.e., south to north targets).
        The aircraft has no finite service life limitations as long as
    recommended inspections and maintenance are performed. There comes a
    time, however, when repairs required to keep an aircraft airworthy are
    no longer economically feasible. Based on the manufacturer's Service
    Life Extension Program studies and Customs P-3 mission profiles, it is
    estimated that Customs can expect a service life greater than 30,000
    hours for each airframe. Airframe hours for the four P-3As range from
    19,632 to 20,274. Airframe hours for the four P-3 AEWs range from
    15,506 to 22,183. Based on current utilization of approximately 500
    hours per year for each P-3A and 1,000 hours per year for each P-3 AEW,
    Customs expects another 10 years of service from its current fleet of
    P-3s.
                              marine interdiction
        The U.S. Army is transferring 8 King Air C-12's from the U.S. Army
    for use in the Customs marine interdiction program. It is my
    understanding that modification of these aircraft into the maritime
    surveillance configuration will cost $8.5 million and the suggested
    funding for the reconfiguration is through the Operation GATEWAY funds
    and unobligated carryover funds.
        Question. What type of reconfiguration is necessary? What would the
    cost of these modifications be if the aircraft were ordered with this
    configuration?
        Answer. These aircraft will be modified to incorporate a sensor
    suite that includes a sea search radar, forward looking infrared, and
    law enforcement radios for use in a marine surveillance and tracking
    configuration to replace our aging, out of production Australian-made
    Nomad Searchmaster aircraft.
        The cost for eight new aircraft with the marine surveillance
    modifications would be as follows:

    ------------------------------------------------------------------------
        Modification elements         Unit cost      Units      Total cost
    ------------------------------------------------------------------------
    New King-Air aircraft........      $3,880,000          8     $31,040,000
    Radar........................       1,024,675          8       8,197,400
    FLIR.........................         208,487          8       2,467,896
    Law enforcement radios.......         274,235          8       2,193,880
    Modification and integration.       1,065,000          8       8,520,000
                                  ------------------------------------------
          Total..................       6,552,397  .........      52,419,176
    ------------------------------------------------------------------------

        Question. It is my understanding that each C-12 maritime aircraft
    has a resale value of between $825,000 to $875,000. Does it make sense
    to make modifications that cost more than the value of the aircraft?
        Answer. The manufacturer has no finite life limitation on the
    aircraft as long as recommended inspections and maintenance are
    performed. This aircraft does have a mandatory wing spar inspection due
    at 30,000 hours.
        This group of C-12's has an average total flight time to date of
    11,373 hours per aircraft which means we should be able operate them
    for approximately 16-20 additional years. Sensor modifications are
    always expensive. We therefore opted to invest $8.5 million to modify
    the Army C-12s instead of buying brand new aircraft in this
    configuration at a cost of just over $52.4 million.
        Question. What currently is in Customs marine interdiction fleet?
    Are any of these vessels on loan to or from other local, state or
    federal agencies?
        Answer. Customs currently has 167 operational vessels. Customs
    operates 84 and the remaining 83 vessels are loaned to state and local
    agencies who crew the vessels and pay for all operational expenses
    (fuel, maintenance, etc.).
        Question. In the past it was suggested that $20 million in
    carryover balances be used to fund portions of the air and marine
    interdiction programs. What is the current carryover balance?
        Answer. The unobligated Operations and Maintenance carryover
    balance (as of April 30, 1997) for the Air Interdiction program was
    approximately $6 million. These funds will be used to cover unfunded
    requirements including: increased aircraft maintenance contract labor
    rates; increased contract labor costs to support expanded missions;
    aircraft system upgrades such as radar and radio enhancements for
    compatibility and conformity to current standards; and additional pilot
    training costs associated with additional aircraft coming into the
    Aviation fleet.
        The marine program has a current carryover balance of approximately
    $393,000. This balance is being used to pay for operational and
    maintenance expenses incurred by the marine program.
        Question. The Hard Line initiative appears to be driving more of
    the drug smuggling off shore, utilizing small watercraft to beach loads
    above the U.S. border. Does Customs have enough interdiction craft and
    marine law enforcement personnel to meet this challenge?
        Answer. Customs is assessing resource needs and possible re-
    alignments to meet the increasing marine smuggling events and properly
    address this emerging problem adequately.
                             tariff classification
        Background: A major employer in my State has been waiting for a
    decision from the Customs Service on the appropriate tariff
    classification of sanitary ware imported from Mexico (sinks,
    washbasins, toilets, and similar fixtures). I understand their case has
    been on hold for over a year and a half due to a 516 petition filed by
    another domestic manufacturer of these products. The Customs Service
    published a notice for comment over a year ago, and public comments
    were received last May. However, nearly one year later, there is still
    no decision.
        Since last fall, my constituent has been informed upon inquiry that
    the draft decision is in the clearance process at Customs or Treasury.
        Question. Would you please explain the reasons behind the delays in
    this case and inform me as to when there may be a decision on this
    matter?
        Answer. On July 25, 1996, the Customs Laboratory completed their
    review and provided their scientific understanding of the comments.
    Based on that report and other offices' review, Customs came to the
    conclusion that the actual petitioner's requests for replacement of the
    porcelain definition was not possible as Customs must use the tariff
    provided definitions. However, both domestic manufacturers and
    importers were concerned with knowing what methods were being used to
    determine whether sanitary ware met the porcelain or stoneware
    definition. Therefore, as a part of our obligation to inform the public
    as to Customs matters, any response to the petition and protest had to
    include a clear, concise explanation of all of the methods used to
    determine whether a particular article met the requirements of each of
    the subject definitions. Such an explanation of each requirement and
    the corresponding testing method has been prepared. This document is in
    review and upon final approval will be issued in the immediate future.

                              Subcommittee Recess

        Senator Shelby. Thank you for appearing here today and I
    hope we will never have an incident like this again.
        Ms. Lau. Thank you.
        Senator Shelby. Thank you. The subcommittee is recessed.
        [Whereupon, at 12:19 p.m., Thursday, April 17, the
    subcommittee was recessed, to reconvene at 9:30 a.m.,
    Wednesday, May 14.]

      TREASURY AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL YEAR 1998

                                  ----------

                            WEDNESDAY, MAY 14, 1997

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 9:30 a.m., in room SD-192, Dirksen
    Senate Office Building, Hon. Ben Nighthorse Campbell (chairman)
    presiding.
        Present: Senators Campbell, Shelby, Faircloth, Kohl, and
    Mikulski.

                       EXECUTIVE OFFICE OF THE PRESIDENT

                     Office of National Drug Control Policy

    STATEMENT OF GEN. BARRY R. McCAFFREY, DIRECTOR

                                Opening Remarks

        Senator Campbell. This hearing of the Treasury and General
    Government Subcommittee will be in order.
        I would like to welcome General McCaffrey. As I mentioned
    to you General, we have a disjointed hearing this morning. We
    are told we are going to have three back-to-back votes starting
    around 9:45 or 9:50. We will try to get through as much as we
    can when Senator Kohl arrives, and then we will probably have
    to recess for 30 or 45 minutes. I hope that does not
    inconvenience you too much, but I am sure you are aware of the
    process that we face here.
        This morning we are going to review the Office of National
    Drug Control Policy's [ONDCP] fiscal year 1998 budget request
    and, in that process, we will review the progress this office
    has made in curtailing the use of illegal drugs in this
    country. I believe, as my colleagues will also believe, in this
    tight budget time we have to demand the most out of each
    Federal dollar we spend and the effort to stem the illegal drug
    use is not exempt from that scrutiny.
        Last year General, you testified before us that in 1 year
    you would be able to demonstrate to this committee the
    successes with the funding Congress provided in fiscal year
    1997. We certainly look forward to hearing about those
    successes and certainly wish you well and want to work with you
    in furthering those successes.
        The Office of National Drug Control Policy plays a leading
    role in carrying out the country's antidrug efforts. All would
    agree that we must do what we can to combat the use of illegal
    drugs in this country. Nevertheless, we are also concerned
    about some of the particular approaches the administration and
    your office is taking.
        For example, I am somewhat concerned about our relationship
    with Mexico, where much of the illegal drug trade now seems to
    come from. I understand that Mexico and other Latin American
    countries have unique and serious challenges in their system
    that strain our efforts to help us combat drugs. I am also not
    convinced that the somewhat one-sided recertification of Mexico
    is necessarily a productive response.
        Second, I am concerned about the 5-year, $175 million per
    year request the administration has proposed for a new national
    media campaign. That is a great deal of money to be spent on
    radio and TV ads. Although I am not an expert in the field, it
    would seem to me that for much less a targeted approach we
    could probably get a lot more done for less expenditure of
    taxpayer's money. I am interested in hearing the details of
    this proposal and your defense of it.
        Finally, let me say it is not only the drugs themselves
    that are hurting our communities, but also the crime and
    violence that are so closely linked with the illegal drug use.
    In the battle against this illegal drug use we not only have to
    fight against the use of the drugs but also against the despair
    and the destruction that is inherent. As long as Americans
    unfortunately, keep using these killer substances, the drug war
    is going to be going on for a long time.

                               Prepared Statement

        With that, I want to submit my full statement for the
    record. I would ask Senator Kohl for his statement and, Senator
    Kohl, I mentioned already that we have some votes and we would
    probably have to take a recess at the conclusion of the
    General's statement.
        [The statement follows:]
                     Prepared Statement of Senator Campbell
        Good morning. I'd like to open this hearing of the Treasury and
    General Government Appropriations Subcommittee by welcoming General
    Barry McCaffrey, director of the Office of National Drug Control
    Policy. This is a rather disjointed hearing. I hope to begin about
    9:45. We will try to get through opening statements and then recess
    until after the vote.
        We are here today to critically review the ONDCP's fiscal year 1998
    budget request. In the process, we will review the progress the ONDCP
    Office has made in curtailing the use of illegal drugs in this country.
    I believe, and I think my colleagues will agree that in this tight
    budget time we must demand the most out of each federal dollar we
    spend, and the effort to stem illegal drug use is not exempt from this
    scrutiny.
        Last year, General McCaffrey testified before us that in one year
    he would be able to demonstrate to this committee the successes with
    the funding Congress provided in fiscal year 1997. I look forward to
    hearing about the successes ONDCP has seen over the last year, as well
    as your goals for the coming years, and any special challenges you will
    face.
        The Office of National Drug Control Policy plays a leading role in
    carrying out the country's anti-drug efforts. All would agree that we
    must do what we can to combat the use of illegal drugs in this country.
    Nevertheless, I am concerned about some of the particular approaches
    the Administration and your Office are taking. For example, I am
    worried about our relationship with Mexico, from where much of the
    illegal drug trade now comes.
        I understand Mexico and other Latin American countries have unique
    and serious challenges in their system that strain their efforts to
    help us combat drugs. But I am not convinced that a somewhat one-sided
    re-certification of Mexico is necessarily a productive response.
        Second, I am concerned about the 5 year, $175 million per year the
    Administration has proposed for a new ``national media campaign.'' This
    is a great deal of money to be spent on TV and radio ads. For less of
    this sum--through a targeted approach, we could get more done for less
    money. Nevertheless, I am interested to hear the details of this
    proposal, and your defense of it.
        Finally, let me say, it is not only the drugs themselves that are
    hurting our communities, but it is also the crime and violence that are
    so closely linked with illegal drug use. In the battle against illegal
    drugs, we not only have to fight against the use of such drugs, but
    also against the despair and destruction that is inherent where drugs
    are involved. As long as Americans keep using these killer substances
    the drug war will go on.
        The difference individuals can make is amazing. The message the
    American public needs to hear from you is that we are getting better at
    fighting drugs, and they need to be able to see progress in their
    communities and have tools to join the fight, too.
        Again, thank you for coming, General McCaffrey, I look forward to
    your testimony. Senator Kohl, would you like to make an opening
    statement?

                           Statement of Senator Kohl

        Senator Kohl. I thank you, Chairman Campbell, and I am
    happy to be here today. Although this is my first year as
    ranking member on this subcommittee, I have been interested in
    working on drug issues for many years.
        Director McCaffrey, I want to welcome you to the
    subcommittee hearing. I am glad we have another opportunity
    today to discuss our concerns about the devastating effects
    illegal drug use is having on the country. Since 1987, the
    Federal Government has invested an estimated $116 billion on
    drug control policies. In fiscal year 1998 the President's
    budget calls for an additional $15.9 billion, which would bring
    the total investment to over $132 billion.
        Aside from the direct costs of illegal drugs, the cost to
    our society from the violence associated with drugs and the
    increase in drug use by youths, our public's confidence has
    been shaken by the Government's ability to control the drug
    problems. I think we have reached a point where we need to be
    honest and say what works and what does not work.
        It seems a number of prevention strategies, such as the
    GREAT Program and the High Intensity Drug Trafficking Program
    are showing promise. If you can prevent drug use before it
    begins, the savings to society would be staggering. And some
    treatment programs are succeeding in moving people from drug
    use to a life that works and a life that is productive.
        At that same time, I do not believe that we can afford to
    fund anything and everything in the name of prevention and
    treatment just to see if it will work. We need to continue to
    analyze these programs and make some tough choices.
        General, let us decide the best methods for applying scarce
    resources. Let us get more aggressive and creative in our
    attacks on drugs and let us make sure that every effort is made
    to keep our children drug free.
        I have a number of questions about our national drug
    control strategy that I will ask after you deliver your opening
    statement. Those we do not have time to get to I will submit
    for the record. Again, I am pleased to be here with you, and
    with you, Mr. Chairman. We are prepared to proceed.
        Senator Campbell. With that, Director McCaffrey, you can
    proceed.

                     Statement of Gen. Barry R. Mc Caffrey

        General McCaffrey. Mr. Chairman, thank you for the
    opportunity to come over here this morning to lay out some of
    our plans and to try and respond to your own questions and
    interests.
        With your permission, I will not only address the ONDCP
    budget directly, the one that your committee monitors, but also
    try and put in context the larger national drug effort we are
    making, which as you know, is some $15.9 billion and is in nine
    separate appropriations bills, and also affects the actions of
    almost 50 Government agencies in total. I very much appreciate
    the leadership and the interest that both you and Senator Kohl
    have shown on this issue.

                                 Introductions

        There are several important people that work in our effort
    against drugs that are here with us today and I would be remiss
    to not note their presence and to thank them for their support
    and wisdom. Robbie Callaway is our senior vice president of the
    Boys and Girls Clubs of America.
        As you may know, it reaches almost 3 million young
    Americans across the country, primary focused in disadvantaged
    youths. I have used Boys and Girls Clubs as an example, in some
    ways, as the best of what we do in drug prevention. Direct
    application of adult mentoring and care and standards and
    opportunity, outside of the school system, where arguably our
    children are safest in our society. So his counsel and support
    has been very important to me throughout the year.
        Bill Alden, deputy director of DARE, is also here. As you
    know, the DARE program of some 25,000 uniformed officers across
    the country reaches some 33 million children each year, both
    here and in the international community. Last week, when I was
    in Costa Rica, one of the last things I did was to go to one of
    their DARE programs, a couple of hundred kids, 70,000 children
    in Costa Rica alone.
        Obviously, the DARE program is not enough, but it is
    focused on fifth and sixth grade and trying to educate young
    people to have some appreciation of the menace of drugs and it
    has been really a tremendous contribution.
        Linda Wolf-Jones, executive director of the Therapeutic
    Communities of America is also here. Her leadership has been
    really essential in making me more aware of the effectiveness
    of more than 400 treatment programs, both in the United States
    and in Canada, and we very much appreciated her work.
        Then finally, one of the biggest things that I would argue
    that we are doing in America is talking to our public through
    the forms of communication that modern America listens to,
    which is television, film, radio, print media. We have here in
    the room with us today Mike Townsend from Partnership for Drug-
    Free America. He and Jim Burke and about 30 professionals have
    been doing over $2.5 billion during their last several years in
    pro bono advertising work aimed at getting the message to
    America that drugs do not work, that drugs will kill you. They
    will be very heavily involved, as I will talk a little bit
    later on, in the $175 million a year public media campaign that
    you have already mentioned in your opening statement.
        Sir, with your permission, let me run through first a very
    short video tape which is an example of the work that
    Partnership for Drug-Free America has done and the kinds of
    thing we are talking about putting out in front of the American
    people. Then I will summarize our appropriations request for
    your consideration in a series of charts. This short video, I
    think, is illustrative of the kind of communications
    requirement we are going to be pushing.
        [Video tape played.]
        General McCaffrey. Pretty powerful messages. Of course, as
    we will explain later, part of the problem is that we have had
    a 30-percent decline in the availability rate of pro bono
    advertising in the last few years. The economics of this
    industry are changing and although we are getting out in
    volume, the quality of our PSA's has gone down.
        Senator, we have put a considerable amount of work into the
    written statement I have provided to the committee. It tries to
    pull together our thinking on the appropriations process and
    how we have linked it to the strategy in our plans for the
    future. In addition, I have provided for the committee copies
    of the charts that put in graphic form some of the data that
    has helped form our own judgments.
        Then there are three additional documents, Mr. Chairman, I
    would like to offer for your consideration. One of them is Dr.
    John Carnevale's, who is one of my senior colleagues working on
    the drug control budget analysis for the 5-year process, the
    1999 through 2003 drug budget that we have been putting
    enormous amounts of energy into for the last 6 or more months.
        We have also put together, that really goes in tandem with
    that, something that we think may end up changing in a broad
    way the way our Government works. Frank Raines, the OMB
    Director, and I and others are looking at performance
    measurement systems to ensure the drug strategy's success. We
    are going to try and link the strategy, its five goals, its 32
    objectives, with very carefully crafted targets and outcomes
    that have measurements to try and end up with a system that is
    not process oriented but output oriented. There are some 26
    working groups in the Government. I will try and have this to
    you in time for it to guide your thinking on the 1998 budget.
    So that is on the table.
        And then finally, Mr. Chairman, we are working, as you may
    well know, on the reauthorization bill for the Office of
    National Drug Control Policy. It has a sunset provision for
    September. This is a copy of the proposed ONDCP reorganization.
    No real increase in manpower, but we have tried to rationally
    look at how ONDCP is organized internally and how we can best
    support the purpose of the 1988 law.
        With your permission, Mr. Chairman, I will offer these
    documents for the record and for your consideration.
        Senator Campbell. Without objection, all of your supporting
    material will be included in the record.
        General McCaffrey. Mr. Chairman, I will quickly run through
    these slides, really to give you the broad outline of our
    position.

                                 ONDCP's Budget

        The first slide is important. In some manner, we relate all
    of our activities, and particularly the appropriations process,
    back to the national strategy. In the last year we have managed
    to get the executive branch, in the nine major drug
    appropriations bills, to explain what it is trying to do in
    terms of the strategy rather than in terms of program elements.
        Although I would argue it is imperfect because, as you
    know, most of these appropriation moneys are scored by the
    parent agency as to whether or how much they relate to a drug
    issue, we think we have made considerable progress in trying to
    explain what we are doing in terms of a central conceptual
    architecture.
        The next slide just gives you a quick capstone of the ONDCP
    programs themselves, some $350 million, where they are going.
    One percent of the counterdrug strategy will be used for the
    national antidrug media campaign, some $175 million a year, and
    I will talk about that in greater detail. The HIDTA's, which as
    Senator Kohl mentioned are now up to 15 in number, are showing
    considerable promise we would argue. Salaries and expenses, the
    rather modest funding for the Counterdrug Technology Assessment
    Center, which is now trying to rationalize its mandate in
    support of the strategy. And then finally, a rather small drug
    policy research budget.
        To review the challenge, in sum, adult drug use in America
    is stable or declining, although the dynamic nature of the
    threat does not necessarily tell us that is the way it will be
    in the future. We are seeing heroin in enormously high purity
    and low expense show up, new populations are becoming exposed
    to heroin, methamphetamines, Rohypenol, PCP. But by and large,
    drug use in the American population is down by 50 percent.
        However, among our children, drug use has doubled. It is
    getting worse. It is half as bad now as it was in the 1970's.
    It started to turn around. The University of Michigan, where
    this data comes from, probably in 1989 to 1990, we started to
    see a shift on the disapproval rate for drug use, the risk
    perception of drug use, and then in 1992 we clearly see it
    starting up. And it has continued to get worse each year.
        Generational replacement, generational forgetting. That is
    the crux of the problem right there.
        Senator Mikulski. Mr. Chairman, excuse me. We need to leave
    for a vote, Mr. Chairman.
        Senator Campbell. We have had the first call for it.
        Senator Mikulski. I will not be able to come back and I
    just wanted to tell General McCaffrey he has my utmost support,
    my utmost admiration. Thank you for fighting drugs and thank
    you for HIDTA in Maryland.
        And you are an excellent chairman on this topic, Mr.
    Chairman. Your work in antigang activity is nationally known
    and nationally respected. So I just wanted to say that.
        General McCaffrey. Thank you, Senator.

                                  Ad Campaign

        The ad campaign, just to summarize it quickly, our notion
    is that we would essentially devote 1 percent of the national
    drug control budget to try and target 68 million children, 90
    percent of that population four times a week, with primetime
    approaches. We are persuaded by Columbia University's evidence
    in particular that gateway behavior to drug addition suggests
    that if you can keep children from tobacco use, binge drinking,
    and marijuana--which are primarily the three gateway
    behaviors--through their 21st birthday, statistically the
    chances of them joining the ranks of the 3.6 million addicted
    Americans are remote.
        That is at the heart and soul of what we are trying to do.
    We have leaned very heavily on the thinking, the expertise, and
    the historical memory of the Partnership for Drug-Free America.
        In addition, the Advertising Council of America has a
    tremendous depth of expertise in this area.
        Senator Campbell. Director McCaffrey, we have already had
    the second call, so we are going to recess at this point. But
    if you could just leave that last chart up there, I would like
    to look at that a little bit more when I come back.
        With that, we will be in a recess for about 45 minutes.
    Thank you.
        [A brief recess was taken.]
        Senator Campbell. The subcommittee will be back in order. I
    apologize for the inconvenience of everyone and certainly
    General McCaffrey, but that is part of the deal. Had you
    finished your statement?
        General McCaffrey. Mr. Chairman, with your permission, I
    will just make sure you see the remainder of the outline.
        Senator Campbell. Please go ahead. I understand several of
    our colleagues are on the way.
        General McCaffrey. The problem of cocaine makes a good
    example of the dynamic nature of the threat we are facing. We
    have 12 million Americans regularly using drugs. It is a very
    serious situation. The consequences are staggering, 14,000 dead
    or more, $67 billion in losses.
        And yet the principal drug threat America currently faces
    is arguably cocaine. And as you look at cocaine over the last
    15 years, it is changing. It is plummeting. It is going down.
    This chart can be deceptive in that we are looking at three
    different arrays of data, new initiates to cocaine use, casual
    users, and chronic users. So they are not additive. These are
    separate mathematical functions.
        But the bottom line is new initiates to cocaine have gone
    down enormously in the last 8 years. Casual users have gone
    from about 6 million down to 1.4 million. What has remained the
    same is chronic users of cocaine. As you know, with this drug
    in particular, users develop tolerance and dependency, and we
    argue that we are actually still consuming almost 240 metric
    tons of cocaine a year.
        So cocaine use, as a gross problem affecting America, has
    gone way down and I would argue, as we look out toward the
    future, given the devastating consequences of cocaine
    addiction, this population on the far right will, with its
    tremendous mortality rate, continue to decrease.
        What that does not imply, cocaine use may be dropping in
    terms of numbers, but the impact of a smaller number of
    increasingly sick, desperate, and criminal people is
    significant. You notice we do have marijuana listed as a reason
    for health care emergency room mentions. In some cases, this is
    in conjunction with other drugs like alcohol or because of a
    traffic accident or whatever. But we do have a significant
    number of people coming into our emergency room system because
    of drug abuse and addiction.

                               The Prison System

        One of the biggest social problems facing America, is 1.6
    million Americans behind bars. The data inside these charts are
    deceptive. I do not know what the real answer is. What we
    suggest is two-thirds of the Federal prisoners, which is up 160
    percent--now almost 100,000 Americans in the Federal prison
    system--are there for drug related reasons.
        When it comes to the State system, about 900,000 Americans.
    We suggest that 22 percent of them are there for a drug-related
    reason. Experienced law enforcement officers argue the number
    is closer to being one-half. One million drug arrests a year, a
    significant amount of them driven by addicted behavior, and the
    criminality that comes from that addition.
        That process costs us $17 billion and has put us in the
    unenviable position of having the highest per capita
    incarceration rate of any civilized nation on the face of the
    Earth. We now have bypassed South Africa and Russia.
        We have to do something about it. The solution is not
    necessarily to direct that less people be in prison, but it is
    certainly to understand that the investment in drug prevention
    can lower that number, and that a reasonably small number of
    Americans--the number I use is 2.7 million--are chronically
    addicted, that subpopulation that consumes 80 percent of the
    drugs in America. And that two-thirds of them in a given year
    are involved in the criminal justice system.
        What we now have, and this number is illustrative only, is
    7 percent of the prison drug treatment capacity that we
    require. And so what my education from the law enforcement
    community of America and from physicians and from judges is
    that we have to get at this problem with a combination of drug
    treatment and drug courts and programs such as breaking the
    cycle out of the Department of Justice in which we mandate
    treatment along with incarceration and mandate drug testing.
    Otherwise, we cannot get out of this loop.
        If you look at those numbers, 1.6 million, the data
    suggests that it will go up 25 percent more between now and
    shortly after the turn of the century. Mr. Chairman, some of us
    argue we have a failed social policy on incarceration.
        There is also a racial subcomponent to this that is
    troubling, because an undue percentage of that population are
    minority Americans. I do not think, as I have studied the
    history of it, I do not suggest nor do I believe that there was
    a racist impulse to this, but we have to be concerned about the
    lack of trust of large numbers of Americans in a system that
    has an 11 percent African-American population, a 33 percent
    drug rate arrest, and a 48 percentage of the population in
    prison. Something is wrong. We have to look at this and
    determine what a rational new way of thinking through it is.
        Finally, Mr. Chairman, this chart could lend itself to
    mischief, and let me suggest my own conclusions from it. What
    you are looking at is for the easiest drug we face--and I only
    say easy because it does the most damage to us but we know
    where it is grown, how it is smuggled to the United States, who
    uses it. We know a lot about the menace of cocaine.
        We know that essentially 800-plus metric tons of cocaine
    are produced each year. With the exception of dramatic success
    in Peru in the last year, a minus 18 percent production rate,
    we have not really affected cocaine production through the
    entire period of 1990 through 1995 covered by this report.
        Each year we get about one-third of it and take it away
    from international criminals. Each year, of that 300-some-odd
    metric tons we seize in the international community, about 100
    metric tons is seized by U.S. law enforcement. Now I would
    suggest that taking away one-third of the available cocaine
    does us enormous good in American society. It means less of it
    in our school system, or work places, our sports teams, our
    society. It reduces the number of new initiates. What it cannot
    do is get at the price-availability-purity ratios of cocaine
    for the addicted Americans.
        So I would just suggest to you, when we look at
    interdiction, we can do a lot better and we have a lot of
    initiatives in this area. But over time it has been reasonably
    static from 1990 on.
        Mr. Chairman at this point I will, if I may, stop the
    prepared remarks and respond to your questions and interests.

                               Prepared Statement

        Senator Campbell. Thank you, General McCaffrey. We have
    your complete statement, and it will be made part of the
    record.
        [The statement follows:]
                 Prepared Statement of Gen. Barry R. McCaffrey
        Good morning, Chairman Ben Nighthorse Campbell, Senator Herb Kohl,
    and other distinguished Members of this Senate Appropriations
    Subcommittee. It is an honor to be here today to discuss the fiscal
    year 1998 counterdrug budget submitted by the President for
    congressional consideration and to provide an overview of the 1997
    National Drug Control Strategy.
        The President instructed me upon my appointment as Director of
    ONDCP to help create a cooperative bipartisan effort among Congress and
    the federal, state and local governments and to mobilize public and
    private support for reducing drug abuse and its consequences in
    America. My commitment to the Senate when you considered my appointment
    in February of last year was to forge a coherent counterdrug strategy
    that would reduce illegal drug use and protect our youth and society in
    general from the terrible damage caused by drug abuse and drug
    trafficking. We believe that the 1997 National Drug Control Strategy,
    which was submitted to Congress in March, and the supporting 16 billion
    dollar fiscal year 1998 drug control budget provide both a necessary
    long-term framework and the required resources for accomplishing our
    common purpose of reducing drug abuse and its consequences in America.
        Before reviewing ONDCP's fiscal year 1998 agency budget, let me
    establish a framework by discussing the entire fiscal year 1998
    counterdrug budget (which is contained in nine separate appropriations
    bills), and the 1997 Strategy. First, allow me to recognize the members
    of the Senate Appropriations Committee for your commitment to the drug
    issue. In particular, let me acknowledge the leadership of former
    Chairman Richard Shelby and Senator Barbara Mikulski. We know that the
    bipartisan support the Subcommittee provided to appropriate ONDCP's
    fiscal year 1997 budget was critical to our successes. ONDCP has also
    appreciated your counsel and support in the development of the 1997
    National Drug Control Strategy. We look forward to working with the
    Committee as a whole in the future. Your continued support is essential
    if we are to achieve our objective: preventing 68 million Americans
    under the age of 18 from becoming a new generation of drug users.
                         i. the drug challenge we face
        Divergent conclusions can be reached about the nature of America's
    current drug problem and appropriate responses to it. Some maintain
    that the source of America's drug problem is the continuing
    availability of illegal drugs. Reduce availability, they suggest, and
    the magnitude of the drug problem will diminish. Others consider the
    record number of Americans imprisoned on drug-related charges and the
    record-high federal counterdrug budgets and see an unwinnable war on
    drugs. The problem, they argue, is flawed drug policy, not drugs
    themselves. Reduce the harm caused by draconian drug policy, they say,
    and we will have a less-pronounced drug problem. Still others consider
    the dramatic 50 percent drop in the number of illegal drug users over
    the past two decades and the 75 percent drop in casual cocaine use and
    conclude that the national anti-drug effort is essentially sound. Do
    more of what we know works, they suggest, and the drug problem can be
    reduced further.
        ONDCP sees the nation's drug problem in a different light. Our view
    is that a decade of progress in the effort to reduce the demand for
    illegal drugs is threatened by resurgent drug use by our children. We
    must continue our efforts to reduce drug-related crime and violence,
    the health and social costs of illegal drug use, and the availability
    of illegal drugs. However, the centerpiece of our national anti-drug
    effort must be to prevent the use of illegal drugs, alcohol, and
    tobacco by our children. Our children are vulnerable to these
    substances. Unlike mature adults, they are more prone to take ill-
    considered risks. They may lack the backdrop of experience which would
    cause them to conclude that it makes little sense to use illegal drugs.
    Their developing bodies and emotions are even more vulnerable to these
    substances than are their adult counterparts.' We are now learning that
    exposure to addictive substances during formative years can cause a
    permanent predisposition to dependency. We must change the attitudes
    that are causing our children increasingly to use illegal drugs,
    tobacco products, and alcohol. We risk a catastrophic increase in the
    number of chronic drug users who will do enormous damage to themselves,
    their families, and our society in the future.
        The 1997 National Drug Control Strategy recognizes this reality.
    Its number one priority is to reinvigorate what must be a national
    anti-drug effort on behalf of our youth. At the same time, the Strategy
    seeks to organize better what must be a long-term effort to protect our
    citizens from drug-related crime and violence, reduce the health and
    social consequences of drug abuse, keep drugs out of our country, and
    reduce the cultivation and production of illegal drugs both at home and
    abroad. Our initial challenge is to gain consensus on the nature of the
    challenge we face. We must then expand community-based responses to the
    drug problem that are appropriately supported by federal anti-drug
    programs.
        The impact of drug abuse in America is enormously complex. Drugs
    affect each individual in a different way; so too do they disrupt
    different facets of our society. The natural reaction to this diversity
    of effect has been the mobilization of a myriad of organizations,
    resources, and policies to deal with the human and social costs of
    illegal drugs. At the apex of all this activity is the Office of
    National Drug Control Policy. We are charged to coordinate and develop
    the strategy to counter this debilitating threat to our nation.
                  ii. a review of america's drug abuse profile
    1. Fewer Americans are using illegal drugs
        As a nation, we have made enormous progress in our efforts to
    reduce drug use (see figure A-1). While America's illegal drug problem
    remains serious, it does not approach the emergency situation of the
    late 1970's or the cocaine epidemic in the 1980's. Just 6 percent of
    our household population age 12 and over was using drugs in 1995 on a
    past month basis, down from 14.1 percent in 1979. Recreational cocaine
    use has also plunged. In 1995, 1.5 million Americans were current
    cocaine users, a 74 percent decline from 5.7 million a decade earlier.
    In addition, fewer people are trying cocaine. The estimated 533,000
    first-time users in 1994 represented a 60 percent decline from
    approximately 1.3 million cocaine initiates per year between 1980 and
    1984. It is clear that when we focus on the drug problem, drug use can
    be driven down.
    2. There are encouraging signs that our drug control efforts are
            succeeding
        1995 marked the first time in the past five years that drug-related
    emergency department episodes did not rise significantly. In fact, they
    dropped for cocaine. There was a steady decline in drug-related
    homicides between 1989 and 1995. The 1996 Monitoring the Future study
    found that the use of heroin, inhalants, and LSD decreased among tenth
    and twelfth graders between 1995 and 1996. Coca cultivation in Peru,
    the source of 57 percent of the cocaine on our streets, declined by a
    dramatic 18 percent in the past year. Federal anti-drug laws, together
    with federal, state, and local anti-drug programs, are making inroads
    into the nation's drug problem.
    3. Drug use is skyrocketing among youth
        The most alarming national drug trend is the increasing use of
    illegal drugs, tobacco, and alcohol among our youth. Children who use
    these substances increase the chance of acquiring life-long dependency
    problems. According to a study conducted by Columbia University's
    Center on Addiction and Substance Abuse (CASA), children who smoke
    marijuana are 85 times more likely to use cocaine than peers who never
    try marijuana. The use of illicit drugs among eighth graders is up 150
    percent over the past five years. Fifty percent of our children now
    will have used an illegal drug by the time they graduate from high
    school. While alarmingly high, the prevalence of drug use among today's
    young people has still not returned to near-epidemic levels of the late
    1970's. The most important challenge for drug policy is to reverse
    these dangerous trends.
    4. The consequences of illegal drug use remain unacceptably high
        The social and health costs to society of illicit drug use are
    staggering. Drug-related illness, death, and crime cost the nation
    approximately $67 billion a year. This cost is exacted in additional
    health care expenses, extra law enforcement, more auto accidents,
    increased crime, and lost productivity resulting from substance abuse.
    Illegal drug use hurts families, businesses, and neighborhoods; impedes
    education; and chokes criminal justice, health, and social service
    systems. Some of those consequences include:
        a. Increased illness and death.--Drug-induced deaths increased 47
    percent between 1990 and 1994 and now number approximately 14,000 a
    year. More than 2,400 Americans suffered drug or gang-related deaths in
    1995. The nation's 3.6 million chronic drug users disproportionately
    spread infectious diseases like hepatitis, tuberculosis, and HIV. More
    than 33 percent of new AIDS cases can be traced to injecting drug users
    and their sexual partners. Indeed, AIDS is the fastest-growing cause of
    illegal drug-related deaths.
        b. Record high drug-related medical emergencies.--In 1995, there
    were a record high 531,800 drug-related hospital emergency episodes,
    slightly more than 1994's 518,500 incidents. Cocaine-related episodes
    remain at an historic high while heroin-related emergencies increased
    by 124 percent between 1990 and 1995 (see figure A-2).
        c. More heroin fatalities.--Heroin-related deaths increased between
    1993 and 1994, the most recent years for which these statistics are
    available. In Phoenix, heroin fatalities were up 39 percent, in
    Denver--29 percent, and in New Orleans--25 percent.
        d. Increased infant mortality.--About six percent of pregnant women
    are using illegal drugs and putting their children at risk. A
    Washington State study of Medicaid recipients showed an infant
    mortality rate of 14.9 per 1,000 births among substance-abusing women
    as compared to 10.7 per 1,000 for women who were not substance abusers.
    Children born to drug-abusing women were found to be 2.5 times more
    likely to die from sudden infant death syndrome.
        e. Juvenile addiction to nicotine and smoke-related illnesses.--
    Every day, 3,000 children become regular cigarette smokers; as a
    result, one-third of these youngsters will die of a smoking-related
    disease. The vast majority of smokers (over 80 percent) first tried a
    cigarette before age eighteen.
        f. Decreased workplace productivity.--Drug users bring inefficiency
    to the workplace. An ongoing Postal Service study has found that
    compared to non drug users, their absentee rates are 66 percent higher,
    their health benefit utilization rate is 84 percent greater in dollar
    terms, disciplinary actions are 90 percent higher, and their turnover
    rate is significantly higher. Clearly, productivity rates can be
    increased by making drug use less prevalent among workers.
        g. Violent crime.--In 1995, a majority of arrestees tested
    positively for drug use (see figure A-3). Those arrested for robbery,
    burglary, and auto theft also had high positive rates. Many of the 12
    million property crimes and two million violent crimes committed each
    year are drug-related.
        h. Crowded prisons and jails.--In 1995, state and local law
    enforcement agencies made 1.4 million arrests for drug law violations.
    Almost 60 percent of federal prisoners are drug offenders as are 22
    percent of the inmates in state prisons. More than 1.6 million
    Americans are now behind bars. Drug-related offenses account for nearly
    three-quarters of the total growth in federal prison inmates since 1980
    (see figure A-4).
    5. Drug use is a shared problem
        Many Americans erroneously believe drug abuse is not their problem.
    They have a misconception that drug users belong to a segment of
    society different from their own or that drug abuse is remote from
    their environment. They are wrong. Drug users permeate our society.
    They are our family members, classmates, teammates, neighbors, and
    coworkers. Seventy-one percent of illegal drug users aged eighteen and
    older (7.4 million adults) are employed. The majority are white.
    Approximately 45 percent of us know someone who has suffered a
    substance abuse problem.
        While drug use and its consequences threaten Americans of every
    socio-economic background, geographic region, educational level, and
    ethnic and racial identity, the effects of drug use are often felt
    disproportionately. Neighborhoods where illegal drug markets flourish
    are plagued by attendant crime and violence. Americans who lack
    comprehensive health plans and who have smaller incomes are less able
    to afford treatment programs. Those who depend on social services are
    often deprived of their benefits because too high a proportion of a
    social worker's case-load is occupied by drug-related medical problems.
    What we must all understand is that no one is immune from the
    consequences of drug use; every family is vulnerable. We cannot
    mistakenly assume that illegal drugs are someone else's concern.
        iii. the 1997 national drug control strategy: responding to the
                                   challenge
    1. A comprehensive ten-year plan
        The 1997 National Drug Control Strategy is America's main guide in
    the struggle to decrease illegal drug use and its consequences.
    Developed in consultation with public and private organizations, the
    Strategy provides a compass for the nation to reach this critical
    objective. It also provides long-term guidance. We propose a ten-year
    commitment supported by five-year budgets so that continuity of effort
    can help ensure success. The Strategy addresses the two sides of the
    challenge: reducing demand and limiting availability of illegal drugs.
    The document provides general guidance while identifying specific
    initiatives.
    2. Strategic goals and objectives
        The goals and objectives of the 1997 National Drug Control Strategy
    establish a framework for all national drug control agencies. They are
    intended to orient the integrated activity and budgets of all
    governmental bodies and private organizations committed by charter or
    inclination to reducing drug use and its consequences in America. Over
    the long term, these goals should remain relatively constant. Their
    supporting objectives allow for measurable progress and can be modified
    as success is achieved or new challenges emerge.
    Goal 1: Educate and enable America's youth to reject illegal drugs as
            well as alcohol and tobacco.
        Objective 1: Educate parents or other care givers, teachers,
    coaches, clergy, health professionals, and business and community
    leaders to help youth reject illegal drugs and underage alcohol and
    tobacco use.
        Objective 2: Pursue a vigorous advertising and public
    communications program dealing with the dangers of drug, alcohol, and
    tobacco use by youth.
        Objective 3: Promote zero tolerance policies for youth regarding
    the use of illegal drugs, alcohol, and tobacco within the family,
    school, workplace, and community.
        Objective 4: Provide students in grades K-12 with alcohol, tobacco,
    and drug prevention programs and policies that have been evaluated and
    tested and are based on sound practices and procedures.
        Objective 5: Support parents and adult mentors in encouraging youth
    to engage in positive, healthy lifestyles and modeling behavior to be
    emulated by young people.
        Objective 6: Encourage and assist the development of community
    coalitions and programs in preventing drug abuse and underage alcohol
    and tobacco use.
        Objective 7: Create a partnership with the media, entertainment
    industry, and professional sports organizations to avoid the
    glamorization of illegal drugs and the use of alcohol and tobacco by
    youth.
        Objective 8: Support and disseminate scientific research and data
    on the consequences of legalizing drugs.
        Objective 9: Develop and implement a set of principles upon which
    prevention programming can be based.
        Objective 10: Support and highlight research, including the
    development of scientific information, to inform drug, alcohol, and
    tobacco prevention programs targeting young Americans.
    Goal 2: Increase the safety of America's citizens by substantially
            reducing drug-related crime and violence.
        Objective 1: Strengthen law enforcement--including federal, state,
    and local drug task forces--to combat drug-related violence, disrupt
    criminal organizations, and arrest the leaders of illegal drug
    syndicates.
        Objective 2: Improve the ability of High Intensity Drug Trafficking
    Areas (HIDTA's) to counter drug trafficking.
        Objective 3: Help law enforcement to disrupt money laundering and
    seize criminal assets.
        Objective 4: Develop, refine, and implement effective
    rehabilitative programs--including graduated sanctions, supervised
    release, and treatment for drug-abusing offenders and accused persons--
    at all stages within the criminal justice system.
        Objective 5: Break the cycle of drug abuse and crime.
        Objective 6: Support and highlight research, including the
    development of scientific information and data, to inform law
    enforcement, prosecution, incarceration, and treatment of offenders
    involved with illegal drugs.
    Goal 3: Reduce health and social costs to the public of illegal drug
            use.
        Objective 1: Support and promote effective, efficient, and
    accessible drug treatment, ensuring the development of a system that is
    responsive to emerging trends in drug abuse.
        Objective 2: Reduce drug-related health problems, with an emphasis
    on infectious diseases.
        Objective 3: Promote national adoption of drug-free workplace
    programs that emphasize drug testing as a key component of a
    comprehensive program that includes education, prevention, and
    intervention.
        Objective 4: Support and promote the education, training, and
    credentialing of professionals who work with substance abusers.
        Objective 5: Support research into the development of medications
    and treatment protocols to prevent or reduce drug dependence and abuse.
        Objective 6: Support and highlight research and technology,
    including the acquisition and analysis of scientific data, to reduce
    the health and social costs of illegal drug use.
    Goal 4: Shield America's air, land, and sea frontiers from the drug
            threat.
        Objective 1: Conduct flexible operations to detect, disrupt, deter,
    and seize illegal drugs in transit to the United States and at U.S.
    borders.
        Objective 2: Improve the coordination and effectiveness of U.S.
    drug law enforcement programs with particular emphasis on the southwest
    border, Puerto Rico, and the U.S. Virgin Islands.
        Objective 3: Improve bilateral and regional cooperation with Mexico
    as well as other cocaine and heroin transit zone countries in order to
    reduce the flow of illegal drugs into the United States.
        Objective 4: Support and highlight research and technology--
    including the development of scientific information and data--to
    detect, disrupt, deter, and seize illegal drugs in transit to the
    United States and at U.S. borders.
    Goal 5: Break foreign and domestic drug sources of supply.
        Objective 1: Produce a net reduction in the worldwide cultivation
    of coca, opium, and marijuana and in the production of other illegal
    drugs, especially methamphetamine.
        Objective 2: Disrupt and dismantle major international drug
    trafficking organizations and arrest, prosecute, and incarcerate their
    leaders.
        Objective 3: Support and complement source country drug control
    efforts and strengthen source country political will and drug control
    capabilities.
        Objective 4: Develop and support bilateral, regional, and
    multilateral initiatives and mobilize international organizational
    efforts against all aspects of illegal drug production, trafficking,
    and abuse.
        Objective 5: Promote international policies and laws that deter
    money laundering and facilitate anti-money laundering investigations as
    well as seizure of associated assets.
        Objective 6: Support and highlight research and technology,
    including the development of scientific data, to reduce the worldwide
    supply of illegal drugs.
    3. Measures of effectiveness
        The development of objective measurements of effectiveness is
    essential to the success of this Strategy. The very idea of strategy
    implies a dynamic effort. Conditions change over time; initial
    approaches to a particular problem may or may not continue to apply.
    Introspection regarding the effectiveness of chosen courses of action
    is imperative. Consequently, ONDCP and the federal Drug Control Program
    agencies are developing a national performance system to measure
    progress of major drug programs supporting the Strategy, to provide
    feedback for strategy refinement and system management, and to assist
    the Administration in resource allocation.
        ONDCP has established a program evaluation office to oversee the
    design and implementation of this new system. A first set of targets
    and measures will be submitted for congressional review this fiscal
    year. The measurement system will be dynamic, flexible, and responsive.
    Our collective challenge is to reinforce success while not wasting
    resources on unproductive efforts. The performance measures system will
    be constructed in a way which ensures that sufficient time is allotted
    to a program for it to demonstrate success (an outline of this
    performance measurement system is provided at Appendix C).
    4. Strategic initiatives
        The key to a successful long-term strategy is mobilizing resources
    toward the systematic achievement of established goals. Any strategy--
    if it is to be effective--must be related to the resources it can put
    toward implementation. Included in this year's Strategy are some key
    initiatives--several of which ONDCP is responsible for implementing--to
    ensure steady progress toward decreasing drug use and its consequences.
    These include:
    a. Youth-oriented initiatives
        (1) The Youth-Oriented Anti-Drug Campaign.--Unfortunately, in
    recent years the number of drug-related public service announcements
    (PSA's) carried by television, radio, and print media have decreased
    markedly. The economics of the media industry have made advertising
    space so competitive that pro-bono advertising has dropped more than 30
    percent in recent years. Even worse, virtually no PSA's appear in
    prime-time. We seek to reverse this trend by developing a public
    education campaign that supplements anti-drug announcements already
    offered by dedicated organizations like the Partnership for a Drug-Free
    America under Jim Burke's leadership and the Ad Council. The
    President's budget seeks to fund this targeted educational campaign
    through the $175 million provided in ONDCP's Special Forfeiture Fund.
    ONDCP will also seek matching private sector donations. Attitudes can
    be changed with accurate and convincing messages.
        (2) Collaborating with the media and entertainment industries.--
    Youth, perhaps even more than the public at large, are affected by the
    icons of our society. The glamour of Hollywood movies, the charisma of
    celebrities, the perceived proximity of television stars, the prowess
    of accomplished athletes, and the artistry of musicians all sway young
    people's emotions. The creative talent of the entertainment industries
    can depict drug use and its consequences accurately, thereby increasing
    the perception of risk that young people associate with illegal drugs,
    alcohol, and tobacco. ONDCP will work with the entertainment industries
    to assist youths to form an accurate perception of the devastating
    consequences of illegal drugs.
        (3) Broadening ``drug-free zones'' and preventing alcohol and
    tobacco use by youth.--Young Americans are more likely to use illegal
    drugs, alcohol, and tobacco if these substances are readily available
    or if their use is encouraged directly or subtly in youth-oriented
    materials. We must keep illegal drugs, alcohol, and tobacco out of
    areas where children and adolescents study and play. We must also
    depict these substances and their effects in accurate ways. In addition
    to promoting the idea that youth must be educated about the dangers of
    illegal drugs, the Strategy recommends educating youth, their mentors,
    and the public at large about the dangers of underage drinking and
    about the lethal effects of tobacco products. We must encourage
    communities to support alcohol-free and tobacco-free behavior on the
    part of youth.
        (4) Expanding effective school-based prevention programs.--Schools
    offer both formal and informal opportunities for changing youth
    attitudes toward drugs. The Department of Education will continue to
    focus on improving the quality of drug and violence prevention
    programming and changing the attitudes of students and parents
    regarding illicit use of alcohol, tobacco, and drugs.
        (5) Reducing drugged driving.--20 percent of high school seniors
    say they have smoked marijuana in a car. Law enforcement officers cite
    marijuana as the second-leading cause of drug-related car crashes after
    alcohol. The drugs and driving initiative developed by ONDCP, DOT, and
    HHS is intended to reduce drug use by young people and driving under
    the influence of drugs.
        (6) Countering Attempts to Legalize Marijuana.--A 1994 survey by
    CASA found that a twelve to seventeen-year-old who smokes marijuana is
    85 times more likely to use cocaine than a non-marijuana smoking peer.
    Clearly, if we want to reduce the rate of teenage drug use and prevent
    American youth from using dangerous drugs like cocaine, we must
    continue to oppose efforts to legalize marijuana. Advocates for the
    legalization of marijuana are using two issues as subterfuges:
    ``medical marijuana'', and ``industrial hemp''.
        (a) Medical marijuana.--The federal government has a responsibility
    to ensure the rule of law and protect the American people from unsafe,
    ineffective medicine. This is a critical Food and Drug Administration
    role. Marijuana continues to be designated a Schedule I drug under the
    provisions of the Controlled Substance Act, Title II of the
    Comprehensive Drug Abuse Prevention and Control Act of 1970, because it
    has a high potential for abuse and no currently accepted medical use in
    the United States. The time-tested medical-scientific process has
    provided our society with the best health care system in the world.
    This is the only system which can determine drugs as safe and effective
    for therapeutic uses.
        (b) Industrial hemp.--Hemp plants and marijuana plants are one and
    the same; they are Cannabis Sativa plants. They differ in that the
    cultivation process causes the plant to develop different
    characteristics. Marijuana growers seek to raise the psychoactive
    content of the plant while hemp growers bring out other characteristics
    of the plant. Federal law prohibits the cultivation of Cannabis Sativa
    because the primary purpose of growers has been to produce marijuana.
    Drug-legalizers seek to revoke this prohibition against the cultivation
    of hemp in order to camouflage drug crops.
        According to the Department of Agriculture, there is little legal
    economic incentive for the cultivation of hemp. Their research suggests
    that linen manufactured from hemp would cost twice as much as the
    highest-quality flax linen. They also conclude that hemp is not
    economically viable as a source of paper pulp; the cost of cultivating
    a ton of raw hemp is higher than the value of a ton of finished
    newsprint. Department experts project that the total U.S. market for
    hemp products might reach five to ten millions dollars a year, which is
    an almost insignificant figure when considered within the context of a
    national agricultural sector that generates more than 200 billion
    dollars a year. Labor-intensive hemp products are, however,
    economically viable in countries like China and India where wages are
    low. Relaxing the ban on hemp cultivation in the United States would
    only result in increased availability of marijuana.
    b. Initiatives to reduce drug-related crime and violence
        (1) Integrating federal, state, and local efforts.--We are
    encouraging greater cooperation among our law enforcement agencies.
    Edward Byrne Memorial Grants will provide financial support to multi-
    jurisdictional task forces. Coordination is also facilitated by ONDCP's
    $140 million High Intensity Drug Trafficking Area (HIDTA) Program. This
    program facilitates coordination of anti-drug activities and
    investigations of federal, state, and local law enforcement agencies in
    areas that are critically affected by drug-related problems. The Bureau
    of Alcohol, Tobacco, and Firearms' Achilles Program is another
    important mechanism for fostering task-force approaches to drug law
    enforcement.
        (2) Linking criminal justice and treatment systems.--Incorporating
    drug prevention and treatment programs within the criminal justice
    system can result in decreased drug use and criminal activity and lower
    recidivism. To that end, the Strategy encourages drug testing,
    treatment, and education for all prisoners. It also encourages expanded
    use of drug courts that offer incentives for drug rehabilitation in
    lieu of incarceration for non-violent drug users. Finally, the Strategy
    advocates ``coerced abstinence'' programs that incorporate progressive
    sanctions to encourage criminals to stop using illegal drugs. These
    programs have the potential to influence positively the two-thirds of
    the nation's chronic drug users who fall under the domain of the
    criminal justice system each year. More than 200 drug courts and
    community programs like Treatment Accountability for Safer Communities
    are already applying these principles and are helping non-violent,
    drug-using offenders to break the cycle of drugs and crime.
        (3) Reducing the number of chronic drug users.--3.6 million chronic
    drug users are at the heart of America's drug problem. Two-thirds of
    the nation's supply of cocaine is consumed by just one-quarter of the
    drug-using population. These chronic users maintain drug markets, keep
    drug traffickers in business, and commit a disproportionately high
    percentage of drug-related crime. The Strategy focuses on helping the
    3.6 million chronic drug users in America overcome addiction. Most of
    these drug abusers are involved in one way or another with the criminal
    justice system. It is clear that the coercive power of the criminal
    justice system can be used to test and treat drug addicts arrested for
    committing crimes. Drug use by persons under supervision of the
    criminal justice system should not be tolerated. We can dramatically
    reduce the number of chronic drug users if we harness the potential of
    the criminal justice system (see figure A-5).
    c. Initiatives to reduce health and social problems
        (1) Lowering entry barriers to treatment programs.--The willingness
    of chronic drug users to undergo treatment is influenced by
    availability of treatment programs, affordability of services, access
    to publicly funded programs or medical coverage, personal motivation,
    family and employer support, and potential consequences of admitting a
    dependency problem. The Strategy seeks to reduce barriers so that more
    chronic users can begin treatment. Treatment programs must capitalize
    on individual motivation to end drug dependency. Publicly funded
    treatment must be accessible to people who cannot afford private
    programs or who lack adequate medical services.
        (2) Addressing needs of the vulnerable.--The health consequences of
    drug abuse are especially acute for pregnant women, children they are
    carrying, adolescents, the mentally ill, and the poor. We encourage
    treatment programs that address the special needs of these population.
    We encourage states, communities, and health-care professionals to
    integrate drug prevention programs in prenatal, pediatric, and
    adolescent medical practices and clinics.
        (3) Expanding drug-free workplace programs.--American businesses
    realize that keeping illegal drugs out of the workplace makes economic
    sense. Drug testing and employee assistance programs--when combined
    with supervisory concern, leadership, and support--reduce drug use. The
    share of major U.S. firms that test for drugs rose to 81 percent in
    January 1996. Our challenge is to expand these programs to the small
    business community that employs 87 percent of all workers.
        (4) Expanding community anti-drug efforts.--The community-based
    anti-drug movement in this country is strong, with more than 4,300
    organized coalitions. These coalitions are significant partners for
    local, state, and federal agencies working to reduce drug use,
    especially among young people. One of the most successful is the Miami
    Coalition established by Tad Foot and Alvah Chapman. The Community
    Anti-Drug Coalitions of America (CADCA) under Jim Copple's leadership
    has helped organize this community-based approach to the drug problem.
    They deserve our continued support and admiration.
    d. Initiatives to shield our frontiers
        (1) Organizing for success.--We are a great nation. When we apply
    ourselves to a focused cause, few obstacles can bar our way. Human
    obstacles, no matter how ruthless or well-financed, can almost
    certainly be overcome. We face an enormous organizational challenge at
    our borders and in the air and maritime approaches to the United
    States. Our status as the preeminent commercial nation in the world
    makes us particularly vulnerable to drug trafficking. More than 400
    million people enter the United States every year; any one of them can
    carry several million dollars worth of heroin. Four hundred million
    tons of cargo also enter our country every year. Illegal drugs
    represent 0.00001 percent of that traffic. Our challenge is to stop the
    one millionth part that represents illegal drugs without significantly
    affecting legal commerce and movement, which represents the life-blood
    of our country. We have the capacity to be successful until we not only
    appreciably lessen the quantity of drugs on our streets but also make
    serious inroads into the ability of international thugs to continue
    operating. Such progress requires commitment, organization, and dogged
    effort. The National Drug Control Strategy reflects all of that. Our
    job is to ensure that it is implemented.
        (2) Addressing all drug entry points.--The greater our success at
    interrupting drug trafficking along any particular border, the more
    traffickers attempt to introduce illegal drugs elsewhere. Consequently,
    we must develop a comprehensive, coordinated capability that allows the
    federal government to focus resources in response to shifting drug-
    trafficking threats. Existing organizations and initiatives--such as
    the three U.S. military Joint Inter-Agency Task Forces, the Immigration
    Service's Inspections Branch, the Border Patrols' surveillance
    operations between ports of entry, and the Customs Service's Domestic
    Air Interdiction Coordination Center--have increased our effectiveness
    and are the building blocks for this effort.
        (3) Preventing drug trafficking across the Southwest border.--If a
    single geographic region were to be identified as a microcosm of
    America's drug problem, it would be the two thousand mile-long U.S.--
    Mexican border. Cocaine, heroin, methamphetamine, and marijuana all
    cross into the United States here, hidden among the 84 million cars,
    232 million people, and 2.8 million trucks that the Customs Service
    estimates cross the 38 ports along the border. American and Mexican
    ranchers are continually threatened and often harmed by violent bands
    of drug runners openly crossing their property.
        Significant reinforcements have been committed to the substantial
    resources already focused on the Southwest border. Our challenge is to
    design and implement an overarching operational strategy that better
    organizes our interdiction operations. We must focus resources, provide
    timely and accurate intelligence on the activities of drug traffickers,
    develop evidence for prosecutions, and respond to shifting drug-
    trafficking patterns.
        (4) Closing the Caribbean ``back door.''--Our intelligence
    estimates that the Caribbean is the second-most significant drug-
    trafficking route into the U.S. after Mexico. Puerto Rico and the U.S.
    Virgin Islands are particularly targeted because of the absence of
    Customs inspections between these U.S. territories and the mainland. We
    will continue to integrate our operations throughout the Caribbean
    while building on successful programs such as the Puerto Rico/Virgin
    Islands HIDTA and ongoing Border Patrol, Coast Guard, and Customs'
    operations. A particular challenge is finding ways to help small island
    nations develop autonomous and collective capabilities to curtail drug
    trafficking, confront corruption, and prevent money laundering. The
    U.S. Interdiction Committee, under the leadership of Admiral Bob
    Kramek, the Coast Guard Commandant, will continue to provide oversight
    to U.S. interdiction efforts across the breadth and depth of the
    Caribbean.
        (5) Assuring informed drug policy.--National Drug Control Program
    agencies must be supported by a national drug intelligence system that
    provides intelligence and information at all levels---strategic,
    operational, and tactical. While the federal government has already
    made a substantial investment in counterdrug intelligence capabilities,
    there are some areas where our information base could be significantly
    improved. Consequently, ONDCP is coordinating an extensive review of
    the federal drug control intelligence architecture based on the
    following tenets:
        (a) The National Drug Control Strategy and its implementing
    programs must be information-based and intelligence-driven.
        (b) Counterdrug intelligence products must support the needs of
    policy makers, operational planners, and the courageous men and women
    who confront criminal drug organizations both at home and abroad.
        (c) No criminal organization can compete with a U.S.-backed, well-
    organized, streamlined, and integrated intelligence structure.
    e. Initiatives to reduce drug availability
        (1) Bilateral cooperation with Mexico.--We share the Congress'
    concerns about our bilateral efforts to achieve results in combating
    the production of and trafficking in illicit drugs. Significant
    quantities of heroin, methamphetamines, and marijuana used in the
    United States are produced in or pass through Mexico. Approximately 57
    percent of the cocaine used in the United States is imported through
    Mexico. These drugs are moved across the Southwest border by criminal
    organizations, the largest of which operate on both sides of the
    border. Their actions, profits, and use of violence are a major cause
    of corruption on both sides of the border. We agree that the success of
    efforts to control drug trafficking depends on improved coordination
    and cooperation between Mexico and United States drug law enforcement
    agencies and other institutions responsible for activities against
    production, traffic, and abuse of illegal drugs, particularly in the
    common border area. This was one of the major issues of discussion
    during the President's trip to Mexico last week.
        The President's decision in March to certify Mexico's counterdrug
    efforts was based upon Mexico's accomplishments last year. President
    Zedillo has identified drug trafficking as the principal threat to
    Mexico's national security. Under his leadership, Mexican drug seizures
    increased notably in 1996, with marijuana seizures up 40 percent over
    1994 and opium-related seizures up 41 percent. No other nation in the
    world eradicated as many hectares of illegal drugs as did Mexico in
    1996. Mexico is clearly serious about responding effectively to the
    massive threats of violence and corruption generated by the
    approximately 50 billion dollars of U.S. expenditures on illegal drugs.
    Indeed, large numbers of Mexican police officers, prosecutors, and
    military have been killed while fighting to protect the Mexican people
    against drug-related threats.
        However, Mexico is facing an emergency situation of violence and
    corruption. Much more needs to be done. We shared the dismay of Mexican
    authorities at the revelation that Mexico's top anti-drug official,
    General Gutierrez Rebollo, was closely associated with the Carrillo
    Fuentes drug-trafficking organization. This high level betrayal
    underscores the enormous corrupting influence and violence of the
    illegal drug trade. There is no doubt that Mexican democratic
    institutions are under brutal internal attack by international drug
    criminals. We are encouraged by President Zedillo's dedication to
    rooting out corruption no matter where it is found. We are confident
    that we can demonstrate to our two peoples over the coming year the
    concrete results of continued cooperation.
        (2) Making cocaine less available.--Our national efforts against
    coca cultivation and the production and trafficking of cocaine must be
    guided by our western hemisphere counterdrug strategy. Major
    initiatives include:
        (a) Reduction of coca cultivation.--We are supporting effective
    coca cultivation reduction programs in South America. We are encouraged
    by the dramatic 18 percent reduction in coca cultivation in Peru last
    year. For the first time in ten years, Peruvian coca cultivation has
    dropped below 100,000 hectares. Our goal of significantly reducing the
    cultivation of illegal coca within the next decade is achievable. Our
    primary focus will be on alternative economic development in Peru--the
    source of 57.5 percent of the U.S. cocaine.
        (b) Interdiction.--We have demonstrated that interdiction efforts
    in the source country zone can disrupt trafficking patterns
    significantly. Carga flights (cocaine-carrying Caravelles and Boeing
    707's) between Colombia and Mexico have stopped. We have badly damaged
    the Andean air bridge between Peru and drug processing laboratories in
    Colombia. Over the past decade, U.S. and international interdiction
    efforts have consistently intercepted about a third of the coca
    produced in South America (see figure A-6). Our challenge now is to
    react flexibly and block drug traffickers as they attempt to develop
    alternative river, ground, and maritime routes. In the transit zone of
    the Caribbean, Central America, Mexico, and the eastern Pacific, we
    must continue to conduct flexible, in-depth, intelligence-driven
    defenses. Even now, drug traffickers are using shipping containers,
    cargo ships, and fishing trawlers to compensate for our effectiveness
    against aerial smuggling. The leadership of U.S. Southern Command in
    their new Miami Headquarters under the recently rationalized, single
    Unified Command Plan, will dramatically increase the coherence and
    coordination of U.S. north-south drug interdiction activities.
        (c) Actions against trafficking organizations.--The power, wealth,
    and sophistication of Colombian, Mexican, Dominican, and other drug
    syndicates pose enormous threats to governmental and judicial
    institutions in many Western hemisphere countries. Our international
    cocaine control strategy will continue to include an across-the-
    spectrum attack on these criminal organizations.
        (3) Making heroin less available.--Efforts against production and
    trafficking of heroin will continue to be guided by the U.S. heroin
    control policy of November 1995. The heroin interdiction challenge is
    enormous. Potential global heroin production has increased about 60
    percent in the past eight years to approximately 360 metric tons. In
    1995, worldwide heroin seizures totaled 32 metric tons, less than 10
    percent of the global production potential. U.S. heroin seizures were
    just 1.3 metric tons. The U.S. demand for approximately 10 tons of
    heroin consumed by 600,000 addicts represents a fraction of the
    production potential.
        Our heroin control efforts must take these realities into account.
    We must work through diplomatic and public channels to promote
    international awareness of the heroin threat. We must help strengthen
    law enforcement efforts in heroin source and transit countries and
    bring cooperative law enforcement efforts to bear against processing
    and trafficking. These and other international challenges were raised
    by ONDCP during a recent session of the OAS Inter-American Drug Abuse
    Control Commission in Washington, D.C.
        (4) Countering the methamphetamine threat.--Methamphetamine abuse
    has been a growing problem on the West Coast and in the Southwest and
    Midwest. Methamphetamine is manufactured in both California and Mexico.
    It has also been produced in rural areas of the Midwest. All that is
    required to start up a methamphetamine laboratory is $100 worth of
    supplies, readily available from retail stores, and an Internet recipe.
    Methamphetamine production is increasing in California and the Midwest.
    DEA reported that ``meth'' lab busts increased 169 percent nationally
    in 1996 to 879. Lab busts in California were up 72 percent in 1996.
    This drug is an extremely addictive substance with long-lasting
    effects. Those under its influence often act violently (see figure A-
    7).
        (5) Measuring and reducing illegal domestic marijuana
    cultivation.--Our domestic cannabis crop reduction efforts must be
    supported by accurate information about drug crop locations and
    potential yields. We currently have no accurate estimate of the extent
    of domestic marijuana cultivation, although we know that much of the
    marijuana smoked in the U.S. is cultivated domestically commercially,
    privately, outdoors, and indoors. ONDCP will coordinate the development
    of a domestic marijuana crop measurement program and more effective
    domestic eradication efforts.
        (6) Controlling the diversion of precursor chemicals.--Drug
    production can be dramatically curtailed if the necessary precursor
    chemicals can be controlled. We are encouraged that the importance of
    controlling chemicals is internationally accepted, and we will continue
    to urge adoption of chemical control regimes by other nations, e.g.,
    Mexico's 1996 law criminalizing precursor chemical trafficking.
            iv. funding the 1997 national drug control strategy \1\
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        \1\ NOTE: Charts summarizing the fiscal year 1998 counterdrug
    budget are provided at Appendix B).
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    1. Request for $16.0 billion in fiscal year 1998
        Progress on the drug front cannot be achieved without the funding
    necessary to educate children, reduce violent drug crime, treat
    addicted citizens, protect our borders, and address foreign and
    domestic sources of supply. To support these goals for fiscal year
    1998, the President has requested $16.0 billion to fund drug control
    efforts. This request represents an increase of $818 million (5.4
    percent) over the fiscal year 1997 level of $15.2 billion. The greatest
    proportion of spending, 35 percent, is for programs that increase the
    safety of America's citizens by reducing drug-related crime and
    violence. Budgetary highlights include:
        a. $620 million for Safe and Drug-Free Schools and Communities--an
    increase of $64 million (11.5 percent) over fiscal year 1997.
        b. $522 million for prevention and treatment research by the
    National Institute of Health (NIH)--an increase of $33 million (6
    percent) over fiscal year 1997.
        c. $510 million for Community Oriented Policing (COPS)--an increase
    of $41 million (9 percent) over fiscal year 1997.
        d. $367 million in drug-related resources for the Immigration and
    Naturalization Service (INS)--an increase of $48 million over fiscal
    year 1997. (The overall INS request provides for an additional 500
    Border Patrol agents to stem the flow of illegal drugs and illegal
    aliens across the Southwest Border).
        e. $214 million for the State Department's Bureau of International
    Narcotics and Law Enforcement Affairs (INL), including $40 million for
    coca cultivation reduction and cocaine interdiction programs in Peru--
    an increase of $17 million (74 percent) over fiscal year 1997.
        f. $75 million for drug courts--an increase of $45 million (150
    percent) over fiscal year 1997.
    2. ONDCP fiscal year 1998 budget request of $351.223 million
        ONDCP is an organization of committed professional men and women.
    We will have 124 full-time employees (FTE's) and 30 detailees once
    hiring has been completed (see organizational chart at Appendix C).
    This fiscal year 1998 budget includes:
        a. $175 million to support a national media campaign for youth.--
    Drug use has gone up among America's youth during the past five years
    (See figure A-8). The principal reasons that more of our children are
    using drugs is that fewer of them disapprove of illegal drug use and
    fewer perceive regular drug use as dangerous. The University of
    Michigan's Monitoring the Future Study makes clear this association
    between attitudes and usage rates. The Assets Forfeiture Amendments Act
    of 1988 established the Special Forfeiture Fund (SFF) in order to
    provide ONDCP with supplementary resources for critical counterdrug
    programs. In fiscal year 1998, ONDCP is requesting $175 million to
    support a National Media Campaign for Youth. This initiative supports
    the 1997 National Drug Control Strategy's first goal--``Educate and
    enable America's youth to reject illegal drugs as well as alcohol and
    tobacco.''
        The campaign will use both paid and public service television
    announcements to inform youth and their parents of the consequences of
    drug use. Targeted TV ads are among the quickest, most efficient and
    effective means of reducing drug use. They can modify adolescent
    perception of drug harmfulness and increase societal disapproval of
    drugs. They can also reach ``baby boomer'' parents who may be
    ambivalent about sending strong antidrug messages to their children.
    ONDCP believes this campaign can help to reduce youth drug use
    dramatically.
        b. $140.207 million for the High Intensity Drug Trafficking Area
    (HIDTA) program.--The congressionally-mandated HIDTA program
    facilitates coordination of anti-drug activities and investigations of
    federal, state, and local law enforcement agencies. The HIDTA program
    designates critical geographic areas to which federal resources are
    allocated to link local, state, and federal drug-enforcement efforts.
    Properly targeted, HIDTA's offer greater efficiency in countering
    illegal drug trade in local areas. HIDTA programs are based on a
    logical, comprehensive methodology for prioritizing needs and working
    with other initiatives. Since January 1990, counties in the following
    15 areas of the United States have been designated as HIDTA's:
      --1990: New York/New Jersey, Co-chairs, New York City Police
            Commissioner Howard Safir and U.S. Attorney Mary Jo White; Los
            Angeles, Chair, Assistant U.S. Attorney Lisa Lench; Miami,
            Chair, Special Agent-in-Charge Doyle Jourdan, Florida
            Department of Law Enforcement; Houston, Chair, Special Agent-
            in-Charge Don Clark, FBI; and Southwest Border, Director, Mr.
            Dennis Usrey.
      --1994: Baltimore/Washington, D.C., Chair, Dr. Peter Luongo, Ph.D.
            Clinical Director, Adult Mental Health and Substance Abuse
            Services; and Puerto Rico/U.S. Virgin Islands, Chair, U.S.
            Attorney Guillermo Gil.
      --1995: Chicago, Chair, Assistant U.S. Attorney Mark Prosperi;
            Atlanta, Chair, U.S. Attorney Kent Alexander; and Philadelphia/
            Camden, Chair, U.S. Attorney Michael Stiles.
      --1996 designations include: Rocky Mountain HIDTA (Colorado, Utah,
            and Wyoming), Chair, Special Agent Michael DeMarte, DEA; Gulf
            Coast HIDTA (Alabama, Louisiana, and Mississippi), Chair,
            Special Agent in Charge Ron Caffrey, DEA; Lake County HIDTA
            (Lake County, Indiana), Chair, U.S. Attorney Jon E. DeGuilio;
            Midwest HIDTA (Iowa, Kansas, Missouri, Nebraska, and South
            Dakota), focused on methamphetamine, Chair, U.S. Attorney
            Thomas J. Monaghan; and Pacific NW HIDTA (Washington Cascades),
            Chair, U.S. Attorney Kate Pflaumer.
        The fiscal year 1998 request for $140,207,000 for the HIDTA program
    is the same as the fiscal year 1997 enacted HIDTA budget. In fiscal
    year 1997, $14.2 million in discretionary funds were allocated to the
    HIDTA program. Those funds are being used as follows:
        (1) $9 million to expand the Chicago, Philadelphia/Camden, and
    Atlanta HIDTA's ($3 million to each).
        (2) $2 million in seed money for the creation of new HIDTA's in San
    Francisco and Detroit ($1 million each) upon completion of the
    designation process.
        (3) $1.45 million for the New York/New Jersey HIDTA to support the
    Northern Manhattan Initiative (investigation of violent drug
    trafficking gangs).
        (4) $1.45 million for the Southwest Border HIDTA to establish
    regional tactical coordination centers.
        (5) $200,000 to fund a study to develop a system for identifying
    areas that should be supported by HIDTA's in the future.
        (6) $100,000 for the Houston HIDTA to incorporate several counties
    in the Corpus Christi area upon completion of the designation process.
        c. $18.016 million for ONDCP salaries and expenses.--This request
    will allow ONDCP to discharge its extensive responsibilities
    established by the 1988 Anti-Drug Abuse Act (Public Law 100-690) and
    Violent Crime Control and Law Enforcement Act of 1994 (Public Law 103-
    322). These include:
    (1) Public Law 100-690 Responsibilities
        (a) Develop the National Drug Control Strategy.
        (b) Develop a consolidated National Drug Control Budget proposal.
        (c) Certify drug control budgets of programs, bureaus, agencies,
    and departments.
        (d) Coordinate and oversee federal anti-drug policies and programs.
        (e) Encourage private and public sector drug prevention and control
    initiatives at federal, state, and local levels.
        (f) Designate High Intensity Drug Trafficking Areas (HIDTA's) and
    improve cooperation between federal, state and local law enforcement
    partnerships in those areas.
        (g) Operate a Counterdrug Technology Assessment Center (CTAC) to
    serve as the central counter-drug enforcement research and development
    center of the federal government.
    (2) Public Law 103-322 Responsibilities
        (a) Formulate drug budget initiatives.--ONDCP is required to
    request heads of departments or agencies to include in their
    departments' or agencies' budget submission to OMB funding requests for
    specific initiatives consistent with priorities established in the
    National Drug Control Strategy.
        (b) Issue budget guidance.--ONDCP is required to provide, by July 1
    of each year, budget recommendations to drug control agencies for the
    budget being formulated by the President.
        (c) Certify federal Drug Control Program agency budgets.
        (d) Direct possible staff and budget resource transfers.--ONDCP may
    transfer department or agency drug program personnel on temporary
    detail to another department or agency, or transfer up to two percent
    of the funds appropriated to a Drug Program agency account to a
    different Drug Control agency with the approval of the House and Senate
    Appropriations Committees.
        (e) Issue funds control notices.--ONDCP may direct that all or part
    of an amount appropriated to the National Drug Control Program agency
    account be obligated by months, fiscal year quarters, or other time
    periods; and activities, functions, projects, or object classes.
        (f) Assess the drug situation.--ONDCP is required to include in
    each National Drug Control Strategy an evaluation of the effectiveness
    of federal drug control programs during the preceding year.
        (g) Evaluate data system adequacy.--ONDCP is required to include in
    each Strategy an assessment of the quality of current drug use
    measurement instruments and techniques to measure supply reduction and
    demand reduction activities; an assessment of the adequacy of the
    coverage of existing national drug use measurement instruments and
    techniques to measure the casual drug user population and groups at
    risk for drug use; and a discussion of the actions ONDCP shall take to
    correct the deficiencies and limitations identified.
        (h) Evaluate treatment system adequacy.--ONDCP is required to
    include in each Strategy a discussion of the specific factors that
    restrict the availability of treatment services to those seeking it,
    along with proposed administrative or legislative remedies to make
    treatment available to individuals in need.
        (i) Evaluate Strategy functional programs.--ONDCP is required to
    include in each Strategy an assessment of drug use and availability in
    the United States, focusing particularly on the effectiveness of
    interdiction, treatment, prevention, law enforcement, and international
    programs.
        In 1996, ONDCP discharged its extensive responsibilities in the
    following ways:
        (1) Consulting public officials.--Every cabinet officer and all
    departments and agencies participated in the development of strategic
    goals and objectives and in the formulation of supporting budgets,
    initiatives, and programs. Similarly, views and suggestions were
    solicited from every Member of Congress. At the state and local levels,
    ONDCP sought input from each state governor along with those from
    American Samoa, Puerto Rico, and the U.S. Virgin Islands, and from
    mayors of every city of 100,000 or more people. Views from public
    officials overseeing federal, state, and local prevention, education,
    treatment, law enforcement, correctional, and interdiction activities
    were also requested.
        (2) Consulting the private sector.--Suggestions were received from:
    representatives of more than 4,300 community anti-drug coalitions;
    chambers of commerce; editorial boards; non-governmental organizations;
    professional organizations (i.e. actors' guilds, bar associations,
    business associations, educational groups, law enforcement and
    correctional associations, medical associations, and unions); religious
    institutions; and private citizens including chronic drug users,
    inmates, parents, police officers, prevention specialists, recovered
    addicts, students, teachers, treatment providers, and victims of drug-
    related crimes. I also joined many members of Congress in their states
    and districts to learn more about the drug problem and observe
    solutions. The interest displayed by all and the thousands of
    unsolicited letters received at ONDCP underscore that a majority of
    Americans believe that drug use and drug-related crime are among our
    nation's most pressing social problems.
        (3) Keeping the Congress informed.--The Office of National Drug
    Control Policy testified at 13 Congressional hearings in 1996. Topics
    included: drug policy priorities; the federal drug control budget;
    international drug control programs; drug trafficking in the Western
    hemisphere; preventing drug trafficking across the Southwest border;
    juvenile drug use trends; drug interdiction efforts; the global heroin
    threat; making cocaine less available; Arizona's Proposition 200,
    California's Proposition 215, and similar efforts in other states.
        (4) Keeping the American people informed.--ONDCP has supported the
    anti-drug efforts of every national television network and numerous
    local television and radio organizations over the past year; more than
    200 exclusive interviews were conducted. Detailed briefings were
    provided to the editorial boards of 24 newspapers and magazines.
    Spanish-language materials were generated for media organizations that
    serve Hispanic-Americans. A web site (www.ncjrs.org) and toll-free
    telephone service (1-800-666-3332) staffed by drug policy information
    specialists provide drug-related data, perform customized bibliographic
    searches, advise requesters on data availability and of other
    information services, and maintain a public reading room. In addition,
    ONDCP maintains a ``home page'' that provides up-to-date information
    about the Office of National Drug Control Policy and drug policy
    issues.
        (5) Building support for U.S. international drug control
    programs.--Leaders from key drug production and trafficking nations
    were briefed on the international components of the National Drug
    Control Strategy. Support for U.S. drug control efforts was also
    developed among important international and multilateral organizations
    such as the United Nations Drug Control Program, the Association of
    Southeast Asian Nations, the European Union, and the Organization of
    American States. ONDCP also sought to inform international non-
    governmental organizations such as the International Commission of the
    Red Cross and the Washington Office on Latin America about U.S. drug
    control efforts.
        (6) Convening or participating in conferences and meetings.--ONDCP
    briefed participants in numerous gatherings of organizations like the
    National Governors' Association, the Conference of Mayors, the National
    Association for the Advancement of Colored People, the American Medical
    Association, the American Bar Association, Boys and Girls Club of
    America, D.A.R.E., PRIDE, National Families in Action, and the National
    Association of Police Officers. ONDCP also participated in major
    international conferences in Geneva, Sao Paulo, and Vienna.
    Additionally, ONDCP convened or participated in the following
    conferences and meetings to promote greater coordination of
    international, federal, state, and local anti-drug efforts; consider
    emerging problems; and consult experts as the 1997 Strategy was being
    developed.
        (a) The President's Drug Policy Council.--Established by the
    President in March 1996, this cabinet-level organization met on May 28,
    1996 and December 12, 1996 to assess the direction of the National Drug
    Control Strategy and discuss drug policy initiatives. Members of the
    council include heads of drug control program agencies and key
    presidential assistants.
        (b) Southwest Border Conference.--El Paso, Texas, July 9-10, 1996.
    Federal, state, and local representatives met to discuss the challenge
    of stopping drug trafficking across the 2,000 mile-long U.S.-Mexico
    border.
        (c) HIDTA Conference.--Washington, D.C., July 15-16, 1996.
    Participants considered how the congressionally-mandated HIDTA program
    can better coordinate regional law enforcement efforts.
        (d) USIC/J-3 Counterdrug Quarterly Conference.--Washington, D.C.
    These meetings provided a forum for executive-level discussions of U.S.
    international drug interdiction programs.
        (e) California Proposition 215/Arizona Proposition 200 Briefing.--
    Washington, D.C., November 14, 1996. State, local, and community
    leaders briefed federal department and agency representatives on the
    recently-passed ballot initiatives as the federal response to both
    measures was being formulated.
        (f) Entertainment Industry.--Hollywood, California, January 9-10,
    1997. ONDCP met with leaders in the entertainment industry to discuss
    how the national drug prevention effort might be supported by the
    creative talents of the broadcast, film, and music industries.
        (g) Methamphetamine Conference.--San Francisco, California, January
    10, 1997. The purpose of this regional meeting was to examine the
    growing methamphetamine problem in western states, review progress made
    since the April 1996 release of the National Methamphetamine Strategy,
    and consider appropriate responses. A follow-on national
    methamphetamine conference will be held May 28-29, 1997 in Omaha,
    Nebraska.
        c. $17 million for the Counterdrug Technology Assessment Center
    (CTAC).--CTAC was created to serve as the central counter-drug research
    and development center for the federal government. Today, CTAC provides
    minimum but crucial funding for special research not covered by other
    agencies. It also assists law enforcement and demand reduction agencies
    in incorporating advanced technologies into their operations. Specific
    projects being supported by CTAC include research and development for
    therapeutic drugs to counteract or block the effects of cocaine abuse
    and development of cargo inspection technologies. CTAC conducts
    technology conferences and symposia, benchmark testing, and assessments
    of emerging technologies and systems. CTAC develops its long-term
    technology research and development strategy in conjunction with the
    Science and Technology Committee.
        d. $1 million for ONDCP-coordinated policy research.--ONDCP
    conducts research to inform the policy process, identify and detail
    changing trends in the supply of and demand for illegal drugs, monitor
    trends in drug use, identify emerging drug problems, assess program
    effectiveness, and improve the sources of data and information about
    the drug problem. ONDCP-supported research activities include:
        (1) Pulse Check.--This is a report on current drug use and emerging
    trends, based on qualitative information from the police,
    ethnographers, and epidemiologists working in the drug field, and drug
    treatment service providers across the country. This project is one of
    the best sources of current intelligence and data on drug use.
        (2) Retail value of drugs sold in the United States.--This is an
    annual project to determine how much Americans spend on illegal drugs.
    The report focuses on the retail sales value of cocaine, heroin,
    marijuana, and other illegal drugs. It provides ONDCP's estimates of
    the size of the chronic user population and the extent of drug use.
        (3) Drug market analysis.--Working with the National Institute of
    Justice, ONDCP is using the Drug Use Forecasting system as a vehicle to
    analyze drug markets. This project will provide information on drug
    dealing and the drug/crime connection.
        (4) Chronic user survey.--This project will develop a new
    methodology to provide a means to estimate the size, location, and
    characteristics of the chronic population of drug users in the United
    States. It involves the development of mathematical models to determine
    the demographics of chronic drug users.
        (5) Survey of illicit drug prices.--This project generates
    quarterly and annual illicit drug prices and purities for the U.S. and
    selected cities and is used to monitor market trends and support other
    research projects related to the illicit drug market.
        (6) Policy studies/briefs.--ONDCP commissions these studies for
    topical drug policy issues. In the past, studies and analyses have been
    conducted on treatment programs, transit zone interdiction efforts, and
    the progression of drug use.
        (7) Juvenile drug and violent crime study.--This project is a major
    effort to analyze the juvenile drug and violent crime issue from a
    public policy perspective. The project will also identify other types
    of risk behavior that may lead, facilitate, or predict entry into drug
    dealing and violent crime.
                                 v. conclusion
        We remain confident that drug use and its consequences can be
    substantially reduced through a sustained and coordinated effort. The
    1997 National Drug Control Strategy and the supporting fiscal year 1998
    counterdrug budget submitted for your consideration will foster
    bipartisan consensus on national drug control policy, allow us to
    expand on notable successes, and attain the objective of reducing drug
    use and its consequences in America.
        ONDCP plays a critical role in the national drug control effort.
    This small but vital agency remains committed to the task of developing
    and sustaining a cooperative, bipartisan anti-drug effort that involves
    all branches and departments of the federal government and incorporates
    extensive initiatives that are ongoing in our states, cities, and more
    than 4,300 communities. All of us at the Office of National Drug
    Control Policy appreciate the support of the Committee over the past
    year. You have provided encouragement and resources to reduce drug
    abuse and its consequences in America.
        ONDCP's current statutory authorization sunsets on September 30,
    1997. The logic that caused the Congress to conclude that a
    coordinating drug policy entity such as ONDCP was required still
    applies today. The Administration has transmitted for Congressional
    consideration a reauthorization bill (the Office of National Drug
    Control Reauthorization Act of 1997) which we believe will improve our
    ability to develop, coordinate and implement the National Drug Control
    Program. We would welcome the opportunity to brief you on the proposed
    modifications to ONDCP's charter.
        We are proud of our accomplishments but recognize that we face
    enormous challenges. Our biggest challenge is to reverse the five-year
    trend of increased drug use by our children. We must further reduce
    drug-related crime and violence. We must reduce the health and social
    consequences of drug abuse. We must better organize our efforts to keep
    drugs out of America. Finally, we must develop more effective supply-
    reduction efforts so that we can reduce the quantity of illegal drugs
    that are cultivated and produced both at home and abroad.
        Chairman Nighthorse Campbell, Senator Kohl, and other members of
    the Committee, we will continue to rely upon your guidance as we
    continue our important work. We welcome your continued involvement and
    oversight. Working together, we can succeed in better protecting our
    children, citizens, communities, schools, workplaces, and homes from
    the menace of illegal drugs.

        [Clerk's note.--The charts referred to in General
    McCaffrey's statement do not appear in the hearing record but
    are available for review in the subcommittee's files.]

                                 Incarceration

        Senator Campbell. I have to tell you, General, your
    statistics are just astounding. I was just jotting them down as
    you were speaking them. Two-thirds of Federal prisoners now,
    are in for drug-related charges, $17 billion per year, highest
    per capita of incarceration of any industrial country, 1
    million drug arrests a year, and so on.
        You probably know my feeling about the so-called drug war,
    and I am a big supporter of incarceration and interdiction and
    all the rest of it. I have always felt that we fall down on
    rehabilitating people because we have this kind of cycle where
    they keep coming back in.
        You mentioned 7 percent, did I hear you right? Only 7
    percent of the prisoners are now in treatment that need
    treatment? Is that what your statement was?
        General McCaffrey. These data are all a little bit soft,
    but essentially we say we have 50 percent of the national
    treatment capacity we need, and only 7 percent of what we
    require for the prison system. So a minor percentage of what we
    require.
        The first increase we had in drug treatment was under
    President Bush. Thank God, he doubled it (from $1 to $2
    billion). Since then, under this administration, it is now up
    to around $3 billion. We have added a third $1 billion.
        Senator Campbell. I am trying to think in terms of number
    of people in prison. Can I interpret that to mean that the vast
    majority of them that need treatment are not getting it?
        General McCaffrey. That is exactly correct. We have been
    willing to pay an average of $22,800 a year to lock people up.
    We have been unwilling to put into the equation the treatment
    in prison and the follow-on care required to address this
    problem.
        Senator Campbell. I think we have talked in private about
    that and the problem in this place is that we get elected every
    2 years on the other side, and one-third of us are up every 2
    years on this side. And it is so much easier to talk about how
    tough we are than how we are trying to treat the root cause of
    it.
        Somehow, telling people we are going to lock them up and
    throw away the key forever sells better on election day than it
    does to say we are going to spend some money on treatment and
    rehabilitation. Until we put more emphasis on rehabilitation
    and treatment as part of that, we are going to continue this
    never-ending escalation, I think, of people in prison that have
    drug-related beefs.
        Let me ask you a couple of questions here. As I understand
    it, ONDCP is required by the Anti-Drug Abuse Act of 1988 to
    publish the national drug control strategy each year. Section
    1001 of that act requires that the director consult with State
    and local officials in developing a strategy, which of course I
    applaud and I think most of our members do.
        I am informed by the Colorado Department of Public Safety
    that ONDCP provided only 5 days for the department to provide
    input into the strategy, which they do not think is enough and
    I certainly do not think it is enough. Is that a national
    average? Could you respond to that?
        General McCaffrey. I cannot respond directly to that
    timeframe. I think there has been an ongoing interaction with
    literally thousands of people across the country that gave
    folks in law enforcement and drug treatment prevention an
    opportunity to respond. I personally read every one of them.
        I do not know. I can look into this one instance, but
    clearly we get some 15,000 letters a month, some 6,000 phone
    calls, hundreds of visitors. Now part of it may be when we
    started this process we had 25 folks. We have been staffing up
    to try and just respond to the input from America. The folks
    that wrote the strategy started off with three of them and I
    think now we have about 10 or 12 in that subdepartment.
        We will get back to Colorado and find out how we can be
    more attentive to their needs.
        Senator Campbell. I would appreciate it if you would get
    back to me. I am not only interested because of the State of
    Colorado, I was wondering if that was an average for all of the
    States because I know in our State some of our local officials,
    in fact, have--this is supposed to be a Federal strategy and is
    supposed to be with State initiative, but it has kind of left
    them out of the loop because they simply do not have the time
    to be able to respond.
        General McCaffrey. Your point is a good one, Senator. This
    is the eighth strategy, so it happens every year and actually
    we can accept input at any time. It does not have to be in
    response to a formal request, and we get a lot of input.
        But I think those letters all go out in the summer and we
    table the strategy in April.

                           Youth Prevention Programs

        Senator Campbell. In March of this year, the GAO issued a
    report to Congress highlighting two types of youth prevention
    programs that are showing some potential. One of them was a
    problem-solving, decisionmaking, training modification
    attitudes that encouraged drug use. And the other uses many of
    the aspects of a child's life in combining schools, community,
    family in kind of a comprehensive approach.
        Could you tell me what the average target age is for these
    youth prevention programs?
        General McCaffrey. Of those two, I cannot. There are
    several major areas of support for drug prevention in the
    Departments of Education, Health and Human Service and others.
    We even have aspects of National Guard budget to support the
    prevention programs.
        Our central scheme has been that there should be a
    consistent and appropriate message from kindergarten through
    the 12th grade that takes into account the circumstances of the
    adolescent population you are talking to. So it should not be
    the same cookie cutter program for Samoan youth as for suburban
    Detroit. A lot of these funds are decentralized.
        Safe and Drug Free Schools, as you know, goes out as a
    block grant which then is appropriated to support several
    different kinds of programs. A part of our program is an
    evaluation component of the effectiveness of some of these
    measures.

                              ONDCP's Ad Campaign

        Senator Campbell. That was going to lead to another
    question and I noticed with interest those ads. Have you found
    that the peer type of ads in which youngsters are dealing with
    youngsters are more effective than the so-called role model ads
    in which maybe professional athletes or people of stature in
    the community talk about decreasing the use of drugs? Have you
    found which is the more effective?
        General McCaffrey. There is a considerable body of
    experience, particularly out of Partnership for Drug-Free
    America but also others, on what works and does not work. I
    think there is considerable evidence that these public service
    announcements can change youth attitudes.
        Jim Burke and I have talked about it being essentially a 2-
    year effort to start to reverse youth attitudes on disapproval
    rates of drugs. I might also add, Mr. Chairman, that some of
    these--the TV ads are one approach but there are other
    approaches. We are into print media, billboards, radio as well
    as TV.
        Some of these ads should also be aimed not at the children
    but at their parents. So I think we need a lot more work as we
    design next year's hopefully $175 million effort with a
    matching $175 million pro bono effort. We are going to try to
    get out of America a matching amount of free air and print
    time. But there is a body of evidence on what works and does
    not work.
        Senator Campbell. I note with interest, in some States they
    are taking youngsters who are right on the edge into prisons
    themselves and letting them talk or letting inmates talk to
    them about what went wrong in their life and I do not know if
    that works or not, but it is an interesting concept.
        General McCaffrey. I think it does. I am a little bit
    nervous about endorsing it here because there is also a
    counter-argument that I have read that is compelling that says
    watch out on putting the adolescent recovering addict in front
    of the schools for fear that that behavior becomes sort of a
    way in which you can generate interest and sympathy in the
    addicted. I am not sure where I come down on that.
        I think, though, when it gets into advertising, thank God
    we have one of the most creative industries in America that are
    used to getting results for money. I think that what we owe
    Congress is to get results.
        Senator Campbell. Let us talk about that a little bit. Let
    me ask you, before I turn it over to my colleagues for the
    first round of questions, in your request for $175 million you
    mention that there is a 30-percent decrease in the comped
    public service announcements. I worry a little bit that we
    might be setting into place a kind of a cash cow, that if we
    put this in statute that we are going to provide this money
    every year to pay for ads on television. Would we still get
    commitments by the private sector for free space, if they know
    that that money is available where they could simply charge the
    Federal Government for all the ads that in the past they have
    comped?
        General McCaffrey. Mr. Chairman, it is a legitimate fear.
    There is an analog, I might add, that we can study. N.W. Ayres'
    advertising campaign for the volunteer army is about the same
    order of magnitude. It also worked. It also posed exactly the
    kind of challenge you mentioned.
        We are going to have to negotiate and we have reason to
    believe from listening to the Advertising Council of America
    and PDFA, we believe we can continue to solicit pro bono
    support.
        But the economics of this industry are changing. The
    audience is getting fragmented. There are no longer only three
    TV channels. It is bunches of niche markets. Fortunately, the
    people who do this for a living still know how to deliver
    results on selling ideas. We do believe we can achieve what you
    have asked about, continue to get pro bono support.
        Senator Campbell. Should we put that in some kind of report
    language, that there should be some kind of an in-kind
    contribution if we are also going to spend money with the
    various stations?
        General McCaffrey. I think we would probably welcome that.
    As to how we negotiate this, we are about to put a contract out
    for a small amount of money to write a strategy, get a civilian
    advertising firm to show us how to go about this. I want this
    done by creative New York minds, not by Government bureaucrats.
    I will know more about it then.
        I am advised, though, that we do not want to have an
    algorithm that says we give you a buck, you give us a free
    buck, that there may be ways that we can get some very creative
    things happening here and still get pro bono time.
        Senator Campbell. I appreciate it. Let me now turn to my--
    --
        General McCaffrey. We have entitled this, Mr. Chairman, I
    might add as a public-private partnership on getting this
    message to American children and their parents.
        Senator Campbell. I support that. Senator Kohl, do you have
    some questions?
        Senator Kohl. Thank you, Mr. Chairman.

                                Drugs in Prison

        Director McCaffrey, I would like to talk to you a little
    bit more about drugs in prison. I think the average American
    would find it, or does find it, incomprehensible that men and
    women in prison are regularly receiving drugs. How does it
    happen?
        General McCaffrey. Of course, Senator, I do not have a good
    number on it. My guess would be that it depends on the prison
    system that we are talking about: if it is high security
    Federal, if it is local jails. But drugs are pervasive in
    America among those populations. One-half of them test positive
    for drugs at arrest, one-half the Americans busted, 1 million
    arrests a year.
        They go into a prison system where controls are not
    absolute, where you have a very low volume commodity that is
    easy to smuggle, where we have not funded much drug treatment.
    We have not funded drug testing for the prison population,
    never mind for the corrections officers who manage this
    facility.
        I am not sure that they are not a lot more drug free in
    prison than they are out. I think that might be a little bit of
    an overstatement to suggest that. But I think it is a
    continuing problem, you are exactly right. We are going to have
    to get that population and put them in drug treatment and test
    them, and ensure that they are focused on their own recovery.
        Senator Kohl. But are you telling us and are we going to
    tell the American people that the men and women go into prison
    with drug problems and if they so wish, we have a system that
    allows them to continue receiving and using drugs in prison?
    That we do not have a system which does not permit them to
    receive drugs?
        General McCaffrey. I think it depends on the prison system.
    I have listened very carefully over the last year to those who
    manage that system. I think there are some splendid men and
    women, the numbers are surprisingly high, it is almost 500,000
    people involved in the American corrections system. But I think
    it is strictly a function of the population and the kind of
    facility you are talking about.
        The Federal system probably tends to be managed with a
    little more resources than State and local and, in some cases
    that may not be completely true either. I mean, some of the--
    the Cook County correctional system is one of the most
    sophisticated in the country. So I think it depends on the
    facility.
        Senator Kohl. This is the information that we are now
    bringing to the American people, but we are responsible for
    doing something about it. That is why we are here.
        General McCaffrey. Absolutely.
        Senator Kohl. Would you say that there should be enormous
    vigilance in seeing to it that drugs are not permitted for
    people in jail?
        General McCaffrey. Absolutely, Senator. There is no
    question. I mean, drugs and violence need to be out of that
    system.
        Senator Kohl. Would you say that we who are supposed to be
    in charge can be accused of not doing our jobs if we do not see
    at least to that first step, that people incarcerated are not
    permitted to receive drugs?
        General McCaffrey. No; I would agree with you. I think we
    ought to be held accountable for providing a safe, drug-free
    environment for those who are incarcerated.
        Senator Kohl. We need to have, as we have talked about,
    drug treatment programs for all of those who have drug
    problems.
        General McCaffrey. I agree.
        Senator Kohl. So that when they return to society they are
    hopefully--everything has been done to rid them of the habit.
        General McCaffrey. Absolutely. And Senator, these programs
    work. I went down to Delaware, which has some enormously
    progressive rational approaches. It does reduce crime,
    violence, and welfare costs. Clearly, these in-prison systems
    that have a follow-on component do work and are cheaper than
    the alternatives.
        Senator Kohl. Is it also correct to say that if we do not
    do this, then all the money that we are spending to incarcerate
    them is, to a large extent, just wasted?
        General McCaffrey. Senator, I think almost any experienced
    police officer will tell you that if you ask them, that the
    current approach of just incarcerating people--in a lot of
    cases, we are talking about 3 days or overnight or 3 years--if
    there is no drug treatment, if they put them back in the
    community from whence they came, they are back to addictive
    behavior within a day or so and back to a life of crime without
    effective drug treatment.

                     High-Intensity Drug Trafficking Areas

        Senator Kohl. Thank you. We would like to talk a little bit
    about the high-intensity drug trafficking areas called the
    HIDTA's. Would you explain to us what the HIDTA is and what its
    intended use is?
        General McCaffrey. The HIDTA's, high-intensity drug
    trafficking areas, was an approach started in 1990. Director
    Bennett was the first to articulate the initial five of them,
    Houston, Los Angeles, Miami, New York, and the Southwest
    border. Initially, it was a concept in which we would try and
    provide limited Federal resources so that the task force
    concept would allow local, State, and Federal law enforcement
    and prosecutions to rationally oppose international criminal
    behavior.
        Over the years, through last year, we are now up to 15
    designated HIDTA's. They encompass many of the principal urban
    areas, but now they also include the Gulf Coast HIDTA, the Lake
    County HIDTA, Midwest Methamphetamines HIDTA. They are in
    various stages of development, but I would suggest it has been
    an enormously successful program in which modest amounts of
    money is invested--it is a $140 million program. For example,
    when you look at New York, it is $11 million in Federal money
    that has helped, in the last 4 years, and allowed New York to
    pull together coherent law enforcement prosecution and focus on
    drug gangs.
        It has made a difference. You can see it on the streets of
    New York at night. Howard Safir and his people and Federal
    authorities in concerted action.
        So I am very impressed, in general, with what I have seen.
    Miami, San Diego, the border HIDTA's, very impressive work.
        Senator Campbell. Would you yield just for a moment,
    Senator Kohl? I might tell you that we have had a year of
    experience in Denver. One was authorized in Denver and it got
    spread out a little bit, so we ended up opening a satellite in
    Laramie, WY, and Salt Lake City. It was funded just to a level
    of $3 million.
        I have had some meetings not only with HIDTA officials in
    Colorado but the local chiefs of police in six of the
    metropolitan areas. They all think it is a wonderful program.
    There is a lot of community involvement with it, too, as well
    as coordinating the different agencies.
        Their only concern, of course, is what we funded it for
    originally might have worked great for one office but it is too
    small when it gets spread to different satellite offices. But
    it seems to be one of the programs that we started out, that is
    having great success.
        General McCaffrey. I will try and give you a more coherent
    review of these programs, Senator, for the 1999 budget, and to
    show you where they might usefully grow. You are right, we need
    a more coherent way of managing this program.
        In the reauthorization act, I put together an office to
    manage the HIDTA program. The 1988 law suggests that I
    designate these programs. The last five were issued to me by
    congressional House appropriations action, in effect. I think
    we are going to have to be careful that in the coming years
    they are not added topsy-turvy and there is some sense of what
    we are doing, and an accountability for the money and what we
    are accomplishing.
        Senator Kohl. Just to follow on that point, Director, as
    you point out right now the HIDTA's are designated in various
    ways. Congress apparently has some responsibility for
    designating HIDTA's. ONDCP designates HIDTA. Do you not think
    we ought to have a clearer method of determining how we are
    going to spend this precious money on HIDTA's?
        General McCaffrey. Without question. I mean, the law is
    unequivocal. I am supposed to designate the HIDTA's and the
    appropriations action last year could not have taken effect
    unless I legally designated the counties that would receive the
    money. We tried to do it in the most sensible, rational fashion
    we could. I think it needs a review. I would suggest--I am
    going to task the National Defense Intelligence Center to look
    at the demographics, the smuggling rates, the use rates, the
    growing production rates domestically of marijuana,
    methamphetamines, and come up with a coherent way to move
    ahead.
        I think if you ask me to do it, which you have done in the
    law, and have me report to Congress, we will get a more
    rational way of approaching this problem.

                              ONDCP's Ad Campaign

        Senator Kohl. A little bit more on this media campaign that
    you would like us to commence. It is, as you know, $175 million
    and that is two-thirds of the proposed spending increase for
    drug abuse prevention programs in fiscal year 1998 and some
    people think that the media campaign is a great idea, some
    people think that it is not a great idea. No one knows whether
    or not it will be successful.
        My question to you, Director McCaffrey, do you not think it
    would be advisable for us to take an area or a State or a
    region and see whether or not the program is effective or can
    be effective on more of a pilot basis than deciding at the
    outset that we are going to do it in a national way and spend
    all that money?
        General McCaffrey. Senator, I share your caution in going
    into this. To put it in context, I think it is 1 percent of the
    counterdrug budget. I think it addresses a problem of enormous
    national emergency. Children drug use rates are skyrocketing.
        The most important chart I put up there was eighth grade
    rates of use. Here are the kids entering the most vulnerable
    period of their central nervous system's development, social
    development, educational possibility--and their drug use rates
    have tripled in 5 years.
        So I would suggest that we do know what we are doing on
    this program and that absorbing $175 million times two is
    something that this creative industry can do. We can be held
    accountable. We can develop performance measures. And we can
    make it work.
        There is some historical experience here. So even though I
    share your dedication to not throw money at a process, I think
    we can carry this off and in 2 years show you results starting
    to happen.
        I would also be concerned, and you mentioned this earlier
    along with the chairman, that we not start with a modest
    program. We analyzed it. We think $175 million will achieve our
    purpose and that we commit ourselves to 5 years of evaluation
    that shows it is working. I think if we went in with a partial
    program we may kill the pro bono aspect of it while not
    achieving our purpose.
        The final thing I would suggest is that we look at gateway
    behavior. To reach a 12-year-old kid--this is going to be hard
    work. This is not heroin addicts at 26 we are after. These are
    14- to 16-year-old kids smoking pot. That is what we have to
    stop. A 12-year-old smoking marijuana is 79 times more likely
    to be addicted in life than one who does not smoke.
        There are just phenomenal statistical correlations. A kid
    who is smoking is about sevenfold more likely to be addicted in
    life than a kid who is not at age 12. And binge drinking has
    similar rates of behavior. So we really, I think, have to get
    going with a sense of energy on this or we are going to lose
    another generation.
        Senator Kohl. I would just make one final comment and then
    pass it back to the chairman. I do not disagree with anything
    you are saying, but yet we are talking about very scarce
    resources. And here we are talking this morning about not
    having enough money to fund a very, very effective program that
    you have described, the HIDTA's. We are talking about not
    having, apparently, enough money to fund an essential program
    which is drug treatment in prisons.
        So it is a question of deciding how we are going to
    allocate our money. Intelligent people can have a different
    opinion.
        General McCaffrey. I agree.
        Senator Kohl. It seems to me, on the basis of what you have
    talked about this morning, with respect to how important it is
    that we see to it that prisoners are treated who have problems,
    how essential it is, and how important it is to designate, in
    view of their success, more HIDTA's that we need to have maybe
    a discussion about how we are going to fund these things, as
    well as a national media program.
        General McCaffrey. I agree, although, Senator, I would also
    suggest that from my own view of it, the smartest money we are
    going to spend is on drug prevention. By the time you end up
    with an addicted 21-year-old male in prison, addicted to
    cocaine or heroin or methamphetamines, we have a problem. At
    that point, you have a chronic relapsing disorder, a
    spiritually and physically and mentally damaged human being.
    You have them in jail at $23,000 a year. It is a $17 billion
    program to run that system.
        So I would suggest this investment up front is going to pay
    off as a capital investment cost in our future.
        Senator Kohl. No disagreement about the need to work with
    young people but we have, for example, a DARE program which is
    a direct program of getting at potential drug abuse problems
    with respect to young people in school. And that also is an
    underfunded program and a very successful one.
        So again, I think that reasonable people can debate how we
    spend this money most effectively on young people, on
    prevention.
        Thank you, Mr. Chairman.
        Senator Campbell. One thing I think all of us agree on is
    it is a lot cheaper, when you are talking about the expenditure
    of money, to do it up front in prevention than it is to do it
    afterward at $23,000 a year per person, perhaps for the rest of
    their life.
        But clearly, for that much money, we probably have to have
    some method of measuring and monitoring the results so we know
    we are getting some results with it, so we do not just keep
    putting funds into that area. Because we know that some of
    these other programs like DARE have had huge successes.
        With that, let me turn to Senator Faircloth and ask for a
    few questions.

                                 Marijuana Use

        Senator Faircloth. Thank you, Mr. Chairman.
        General, why do you think the use of marijuana has
    skyrocketed among young people in the last 4 years? What is the
    reason?
        General McCaffrey. Senator, I have listened to a lot of
    very smart folks. Dr. Lloyd Johnson at the University of
    Michigan and his colleagues have been at this since the 1960's,
    thank God, and they have got some consistent sets of data that
    they have used.
        It probably is our consensus viewpoint that America was
    outraged in the 1970's at drug abuse. Who knows, 25 million
    Americans regularly using drugs, one-third of the armed forces,
    a catastrophic impact on our society and they were fed up with
    it. So 4,000 community coalitions sprang up. News media
    attention was enormous. Parents got involved. Drug use went
    down. It worked. We drove drug abuse in America down by one-
    half.
        Now having said that, along came a new generation. We had
    solved the problem. News media attention plummeted and dropped
    off. And then finally, I would suggest, a new generation of
    parents, of schoolteachers, came along in America, many of whom
    had been exposed to drugs. Somewhere between 50 and 72 million
    Americans have used illegal drugs. It depends on your age
    group, your socioeconomic background. But if you are white, as
    I remember, and 36 to 45, the chances are 62 percent you have
    used an illegal drug.
        So that age group now is trying to----
        Senator Faircloth. Say that again, repeat that?
        General McCaffrey. If you were, I think it was, 36 to 45,
    white, the chances are 62 percent you have used an illegal drug
    sometime during your life.
        So now that generation is running America and they are the
    homeroom teachers, the police officers, young business leaders.
    They are trying to sort out: ``What do I tell my children? My
    employees? My Army company?'' And I think what we are
    suggesting we need to do is to say: ``Tell them the same thing
    you would about drunk driving.'' That in the 1960's one-half
    the people on a Saturday night were inebriated, driving around
    our highways, slaughtering the innocents. Mothers Against Drunk
    Driving got working on that issue.
        ``Tell them what you would about having smoked cigarettes
    in your twenties and finally stopped, as one-half of all
    Americans who smoke have done. Marijuana, crack cocaine, heroin
    almost wrecked America.''
        So now we are trying to get to that generation and say it
    is OK, it is not hypocrisy to tell your employees and your
    children and your school do not use drugs, it did not work. I
    think that is our challenge.
        Senator Faircloth. The California law, proposition 215,
    fiasco, whatever it turns out to be, but as I understand it
    there is nothing to prevent children just walking in and, from
    these so-called buyer's clubs, and purchasing marijuana. I
    understand that under the prescription rules they can stand on
    the street corner and smoke it and say they were verbally
    recommended to do so by their doctor; is that correct?
        General McCaffrey. By their health care provider, which
    could be an aroma therapist.
        Senator Faircloth. In other words, it is totally legalized
    in California?
        General McCaffrey. Well, Senator, we have enormous
    difficulties on this whole issue. We objected to the object
    behind propositions 200, 215. Our viewpoint was fully supported
    by the American Medical Association, the American Cancer
    Society, the American Ophthalmological Society, by all serious
    physicians' organizations. We think that the National Institute
    of Health and the Food and Drug Administration ought to be the
    place that American medicines are judged safe and effective,
    through a scientific process.
        And so propositions 215, 200--we think were a mistake. Now
    they are out there and we have a court case, as you are aware,
    in Federal district courts where the judge has given us a 42-
    page opinion. We are trying to sort out what that means in
    terms of U.S. policy. But I think you are quite correct to be
    concerned.
        And the thing I would be most concerned about is that we
    protect this process that kept thalidomide and laetrile off the
    market, and that says it is not a political or ideological
    argument on what is a medicine, it is a scientific argument. I
    think that is the problem that we have with proposition 215.
        Senator Faircloth. Well, the effect in California under
    this proposition 215, it has the effect, it has legalized
    marijuana totally in California. When your caregiver, your
    whoever, that could be most anybody, recommends you smoke it or
    you use it. You can buy it on most any street corner at a legal
    so-called buyer's market.
        It concerns me, putting money into TV ads when you have
    effectively legalized it. Would you run ads in California
    saying that you should not use it when the State has said it is
    fine to do, you can buy it here, there and here? And all you
    have to do is say your caregiver recommended you smoke it.
        It would appear to me that that is pouring money down a
    rathole and going two different ways on the same thing.
        General McCaffrey. Senator, I would agree there is an Alice
    in Wonderland quality to all of this discussion. However,
    having said that, I sort of remind all of us that 80 percent of
    our children have never touched an illegal drug, period; that
    most Americans, including California, do not use illegal drugs.
    Twelve million Americans out of 265 million do.
        The problem is, by and large, a minority of the population
    that we do not want to see double and triple in size. So I do
    not believe we should give up on this effort. There is
    tremendous support throughout California and Arizona to
    confront this issue.
        This is still a medical issue that we are concerned about
    because we want American doctors to write prescriptions for
    medicine and to be held accountable for their own behavior. We
    do not want another system to exist in parallel, in Arizona,
    for heroin, LSD, marijuana, et cetera.
        As you know, Senator, Arizona's legislature, thank God, put
    this back in a better perspective and they have held in
    abeyance some aspects of this law pending FDA approval of these
    schedule I substances as medicine. So I think we are moving in
    the right direction in a really prudent manner.
        Senator Faircloth. I have a bill, S. 40, and it would
    prevent doctors from getting around the Federal law with verbal
    recommendations. And if they were found giving these so-called
    verbal recommendations, they would be punished by not being
    allowed to participate in the entire Medicare-Medicaid system.
    Would you support that?
        General McCaffrey. Senator, the Attorney General and her
    associates are studying the Federal district court's opinion.
    They are going to have to sort this one out.
        I think we all appreciate your attention to this serious
    problem and I look forward to working with you on it. The only
    challenge is that your bill, again, does not confront the free
    speech aspects of that Federal District Court ruling.
        Senator Faircloth. Tell me that again.
        General McCaffrey. In other words, the Federal district
    court--and again, I want to let the Attorney General speak to
    the enforcement and legal aspects of this--but the court
    decision was based on free speech, not medicine, not drugs. And
    that is where the difficulty has been.
        Senator Faircloth. In other words, the doctor can just--why
    write prescriptions then? Just sort of go verbally on
    everything.
        General McCaffrey. You are raising very serious questions.
    That whole proposition 215 was unsettling.
        I think the other thing is many of us believe that medicine
    is best run as a State responsibility. I think all of us are
    nervous about intruding too much in that. At the same time, we
    believe that the Federal Government should define this schedule
    I through V drug structure. That makes sense, to guarantee all
    of us nationally sensible medical medications.
        Senator, I look forward to working with you on it, but I
    want to let the Attorney General sort out what we should do
    about this district court ruling first.

                                  extraditions

        Senator Faircloth. Let me ask you a question. There is no
    question the law enforcement people are well aware of the drug
    lords, they are easily identified. They live right across the
    border into Mexico. There has been news articles, pictures of
    their homes. I mean, they are clearly identified and
    identifiable.
        Of course, the President has been working with negotiating
    with Mexico, but what has he done and what did he do to work to
    extradite with the Mexican Government, extradite these drug
    lords? It looks like we--did the President pursue anything to
    extradite them and bring them to this country for trial? Was
    that discussed?
        General McCaffrey. Senator, the trip--and by the way, I am
    going to hopefully in the coming 2 weeks offer, in both the
    Senate and the House, an explicit debriefing on what happened
    on those trips, not only Mexico but also Central America and
    the Caribbean.
        We have a broad array of concrete partnership programs in
    the drug area. They are in the Department of Justice,
    Department of Health and Human Services, Department of Defense,
    our intelligence services. They involve binational border task
    forces. They involve extradition.
        Many of us believe that we have changed a 200-year mindset
    in a cooperative manner in which Mexico and the United States
    have decided to work together in the future, not only
    economically and politically but also on the drug issue. We did
    get 16 extradited out of Mexico last year, including two--for
    the first time in Mexican history--who were Mexican nationals.
    One of the principal four drug lords was expelled from the
    country, Juan Garcia Abrego, and is now serving a tremendous
    sentence here in the United States. There have been six more
    extraditions this year. I think in the future you will see more
    of them.
        But again, extradition must be in accordance with each
    nation's sovereign law, and there has been a considerable
    amount of unbalanced speculation in the press on this. What we
    do is the Attorney General puts together a packet by name on an
    alleged criminal, sends it to Mexico, and works that name. And
    then if they do not have charges outstanding, then we can
    extradite them.
        We are also about to change the process. We have discussed
    with the Mexican attorney general that we are going to explore
    and hopefully we will rapidly pass a new cooperative agreement
    in which we can extradite to stand trial someone who also has
    charges pending against them in the Mexican system. We have a
    similar agreement with several nations. So we will not let the
    evidence and the witnesses grow cold.
        If Mexico is going to charge a perpetrator, then when they
    try them, we will also extradite, try them, and return them for
    Mexican imprisonment. And then presumably, when they are freed
    from that sentence, they would come to us.
        I am very optimistic we are going to work in partnership on
    this issue.
        Senator Faircloth. Back to the bill, S. 40, that I have
    introduced, your answer was not very clear as to whether you
    would support it or not. The freedom of speech, or whatever
    that involves, is giving verbal descriptions. Would you support
    revoking the privilege of a doctor to participate in the
    Medicare-Medicaid governmental medical programs if they were
    giving these so-called recommendations without written
    prescriptions?
        General McCaffrey. Senator, I think I should be unclear in
    my answer to you.
        Senator Faircloth. Well, you have been.
        General McCaffrey. I think the Attorney General needs to
    study the 42-page opinion of this Federal district court judge.
    I welcome your intervention in this process. The form in which
    you might consider legislation should be held pending our
    analysis of the legal questions involved. I think that is the
    fairest answer to you, sir, that I can give.
        Senator Faircloth. Thank you, Mr. Chairman.
        Senator Campbell. I had about 25 or 30 questions I wanted
    to ask, but I did tell you I would get you out of here by noon
    for your appointment, and I have one, too. I am going to skip
    around a little bit, submit a bunch of questions to you that I
    would request that you give us something in writing on.

                               Prepared Statement

        Senator Faircloth. Mr. Chairman, I had an opening statement
    that I would like to submit for the record.
        Senator Campbell. Without objection, that will be included
    in the record.
        [The statement follows:]

                    Prepared Statement of Senator Faircloth

        Mr. Chairman, I want to thank you for holding this
    important hearing to review the budget of the Office of
    National Drug Control Policy. I also want to welcome our
    distinguished witness, General Barry McCaffrey.
        Mr. Chairman, we all know how illegal drugs are devastating
    this country. Our inner cities have become war zones, torn
    apart by drugs and crime. And not just the inner cities. Drugs
    reach into every community, from Washington, D.C. to Clinton,
    North Carolina. What parent doesn't worry about the dangers of
    raising children in this drug-invested culture?
        I am pleased to have the opportunity to hear a progress
    report from General McCaffrey on this Administration's war on
    drugs. Quite frankly, I am not sure we are winning.
        Drug use is up since President Clinton took office,
    particularly marijuana use. It seems that many of the lessons
    that were learned in the 1960's and 1970's about the dangers of
    drugs are being un-learned by today's youth.
        I am particularly troubled by developments in California
    and elsewhere that legalize the use of marijuana. Following
    passage of California's Proposition 215 in last November's
    elections, so-called ``buyers clubs'' are selling marijuana to
    anyone who walks in the door, regardless of age.
        One recent article in the Washington Post noted that these
    buyers clubs do nothing to check whether or not their customers
    have a ``medical'' need at all. And the language of Prop 215 is
    so broad that ``medical need'' could be almost anything, even
    as trivial as a headache.
        To quote from the language of Prop 215, this statute which
    supposedly only legalizes marijuana for ``medical purposes''
    also applies to: ``. . . migraine [headaches], or any other
    illness for which marijuana provides relief.''
        An initiative that was presented to the voters as helping
    relieve the pain and suffering of the terminally ill is quickly
    turning San Francisco, where many of these buyers clubs are
    located, into the next Amsterdam.
        I have introduced legislation to stop this dangerous trend
    towards legalization of marijuana through so-called ``medical
    marijuana'' initiatives.
        The Drug Use Prevention Act, Senate Bill 40, would close a
    dangerous loophole created by Prop 215.
        Doctors are already prohibited by federal law from writing
    a prescription for marijuana, but under Prop 215, patients who
    get a verbal recommendation from their doctor can obtain
    marijuana.
        If it is illegal under federal law for doctors to prescribe
    marijuana, it should be illegal for doctors to ``recommend''
    marijuana as well. A doctor should not be able to avoid federal
    drugs laws by putting the prescription pad in his pocket and,
    perhaps with a wink and a nod, giving a ``verbal''
    recommendation to smoke pot.
        My bill makes it clear that these kinds of recommendations,
    conducted by doctors in the course of their official duties,
    are also prohibited.
        Doctors who violate federal drug laws by making marijuana
    available to their patients would be denied access to the
    Medicare reimbursement system, and have their federal license
    to prescribe medicine revoked.
        These are the same kinds of punishments that already exist
    for doctors who commit fraud on the Medicare system.
        General McCaffrey, I know that you have spoken out about
    the dangers of marijuana. In fact, you have stated that there
    is currently no accepted medical use for marijuana, and that
    marijuana use is highly correlated with future use of addictive
    drugs like heroin and cocaine.
        I want to be sure that yours is not a lonely voice in the
    wilderness within this Administration. I hope to hear from you
    that this Administration will actively enforce federal law
    banning the use of marijuana, and I hope to hear that this
    Administration is focusing resources on this problem.
        I look forward to your testimony. Thank you.

                              Methamphetamine Labs

        Senator Campbell. Let me ask you first about the
    methamphetamine labs. As I understand it, they are very easy to
    set up, they are very mobile. They only cost maybe $100. There
    seems to be a huge increase nationally of seized labs. Within
    your ability to talk publicly about it, can you give the
    committee some information on how you intend to fight this very
    mobile kind of drug use?
        General McCaffrey. Senator, we have done a considerable
    amount of work. The Attorney General and I signed a joint
    methamphetamine strategy about a year ago, which we are now
    reviewing. As you know, the U.S. Congress has passed
    legislation in this area, thankfully, so we have now defined
    the precursor chemicals, penalties, and the kinds of drugs that
    are prohibited.
        We have had a regional methamphetamine conference out in
    San Francisco, in which we learned an awful lot from the six
    western States, in particular California and from California
    narcotics officers. This month, May 20 and 21, we will go to
    Omaha and I am going to host a national methamphetamine
    conference on prevention and treatment, law enforcement,
    environmental damage, and we will put out a report on that
    outcome.
        What is clear is that this is potentially the worst drug
    threat to ever face America. California, if I remember the
    numbers, busted more than 600 cooking operations last year.
    They have been very aggressive. It used to be a southern
    California biker-gang kind of drug. It is now the principal
    drug menace to America in Arizona, in Idaho, in southern
    California and San Francisco, in Hawaii. It has become the
    major drug threat in parts of the rural Midwest, Missouri,
    Kansas. It is simply astonishing.
        Its impact on human life is literally disgusting. It is
    ferociously and rapidly addictive. Crack cocaine is a 15-second
    acute high, powdered cocaine is 10 minutes, methamphetamine is
    6 to 15 hours and people are staying awake for 5 to 15 days
    straight while their personality unravels, tweaking behavior.
        It is also ferociously dangerous to handle and it is being
    cooked by people who are incompetent in handling chemical
    reactions. So we are saying, I do not know if this number is
    correct, that one out of six of these operations has a fire or
    explosion in a given year. Now they are cooking it not in the
    woods, far from human habitation, but in hotel rooms with
    hundreds of other people in the same hotel. And so the maid may
    encounter contamination of a lethality that approaches chemical
    warfare threats, hydriotic acid, red phosphorus, chemical
    reactions that if they go wrong can almost instantaneously kill
    you through asphyxiation, poisoning, or fire.
        They are pouring this stuff down sinks and in wells and in
    rivers and devastating the landscape. Some of this stuff stays
    active for 30 years, red phosphorus.
        It is hard to overstate the potential menace of all of
    this. We need a prevention program. We have legislation, we
    have a strategy and we are now seeking the involvement of local
    and State and Federal authorities in a task force approach.
        Senator Campbell. You mentioned it was the drug and lab of
    choice by the biker gangs. Heck, I already knew that. Has it
    been growing with inner-city gangs, too, using these labs?
        General McCaffrey. Well, it is sort of odd, it is growing
    in an unpredictable manner. It is not in Washington, DC, New
    York, Miami. It is in the rural Midwest. It is now Caucasian
    males who are doing the cooking. It is very little used by
    minority populations so far, thank God. It is the first drug in
    America that has more women than men addicted in several of
    these States.
        That and crack cocaine, as I look at the numbers, are the
    only two things in humanity's history that can shatter a
    mother's love for her own children. And so, some people are
    getting involved in this because it is a weight loss drug, and
    then they are addicted. It is of tremendous danger to us.

                                 Certification

        Senator Campbell. Thank you. Let me skip to Mexico's
    certification, if I could.
        I have been concerned for some time about Mexico's decision
    not to let American DEA agents carry arms in Mexico. I would
    like to know what ongoing discussions there have been with
    Mexico so that we can be assured that our agents in Mexico are
    going to have some protection.
        General McCaffrey. Mr. Chairman, I would first of all start
    off by saying that Mr. Constantine, Mr. Freeh, Mr. Kelly in
    Treasury, those three principal Federal law enforcement
    agencies and I are in agreement. We, without question--and the
    Mexicans have signed onto this same point with us in an
    alliance between Presidents Zedillo and Clinton--we will
    protect our law enforcement officers. That is a principle that
    neither side will deviate from.
        I might add, it is not just in Mexico. The violence on our
    side of the border, the threat to our law enforcement officers,
    particularly in the four border States, is simply incredible.
    We had, as you know, this last year 116 police officers
    murdered in the line of duty, hundreds more shot or injured,
    23,000 assaults, and a lot of that was driven by drug behavior.
        In Mexico we have a considerable cooperative binational
    task force law enforcement effort. We are very concerned about
    the safety of both Mexican and United States law enforcement
    officers. Two hundred or more Mexican officers were murdered
    last year, a considerable number in the border regions. Of
    course, as we are aware of only too painfully, that is driven
    by $49 billion a year of United States drug purchases and, in
    many cases, by United States arms smuggling south into Mexico.
    That is how their police officers are being killed. So both
    sides are persuaded: we are going to protect our policemen.
        Now having said that, another principle that is in this
    counterdrug Alliance that the two presidents signed is an
    absolute respect for the sovereignty of the two nations. Only
    the police, prosecutors, and judges of the Nation will be
    allowed any authority on their own air, land, and sea space. I
    think, Mr. Chairman, that has been the problem.
        It also, I might add, involves some difficulty in talking
    about it in public. I would be glad to respond to your
    questions in more detail, but I think that is where we are. We
    are going to protect Mexican and United States police officers.
    We are going to ensure that no United States law enforcement
    officer enforces laws in Mexico. That is the other part of the
    sensitivity.
        Senator Campbell. I understand that. You know, I used to go
    to Mexico all the time years ago, 25 or 30 years ago, went
    myself a lot of times and never felt at risk, never felt
    endangered, got along just great down there. I have not been
    there for years and years. Then last winter I went to Tijuana
    with some Mexican friends and I want to tell you, if I had not
    had them with me, I would have felt in danger the entire time I
    was in that town, as an individual American being down there.
    Times have changed, that is for sure.
        Well, I did promise to try to wind this up at noon. I see
    Senator Shelby has shown up. I am going to submit the rest of
    my questions for you in writing, if you could answer them, so I
    can give Senator Shelby some time to ask you his questions.
        General McCaffrey. Yes, Mr. Chairman; I would be glad to.
        Senator Shelby. Mr. Chairman, I will try to be as quick as
    I can. I do want to say hello to General McCaffrey. I worked
    with him 2 years, when he was named drug czar, and Senator
    Kerry and I tried to help him everywhere we could on the
    appropriations process, as I know you will.
        I am sorry that I am late, but we have been involved in an
    intelligence briefing.
        General, you lay out five goals, as I understand it, in
    your national drug control strategy and support these goals
    with objectives to provide for what you call measurable
    progress, good friends, you know.
        I am pleased with this approach, I believe, because for the
    first time we will be able to have some kind of benchmark of
    what we are trying to accomplish. In the past, we talked a lot
    about doing things but did we know how to get there? Perhaps
    this is a mountain, at least a goal.
        The goals and many of the objectives that you lay out to me
    appear to focus on the key areas, education, interdiction,
    supply and demand, reduction and treatment and I think that is
    good. But I am puzzled somewhat, and you may have already
    talked about it before I got here, by one particular objective
    that you cite in your strategy, General.

                               Drug Legalization

        If you would look at goal one, objective eight, and it
    reads support and disseminate scientific research and data on
    the consequences of legalizing drugs. On page four of your
    strategy report from February 1997, you state that the
    rationale for this objective is ``Drug policy must be based on
    science, not ideology. The American people must understand that
    regulating the sale and use of dangerous drugs makes sense from
    a public health perspective.''
        Why or how, General, is that an objective in encouraging
    America's young people to reject illegal drugs? Is it part and
    parcel of an effort to combat efforts to legalize drugs like
    marijuana? Because I note in your testimony, on page 12, that
    combating efforts to legalize marijuana is important for all of
    us.
        How does this objective help achieve that and what does it
    mean that the ``medical scientific process'' is the only system
    which can determine drugs as safe and effective for therapeutic
    uses? Are you leaving the back door open on legalizing
    marijuana when you say this? I do not know. I would like to
    hear your comment?
        General McCaffrey. Senator, without overstating the case, I
    think we are facing a very well organized, very cunning, very
    well funded national legalization of drugs effort in this
    country.
        Senator Shelby. Absolutely, I think you are right.
        General McCaffrey. I think it has been done by people who
    recognize that if you read the polls, 85 percent of the
    American people are not going to accept the legalization of
    these drugs. So there has been an attempt to make it palatable
    and politically acceptable, a tricky manner.
        Senator Shelby. Make it easier to swallow?
        General McCaffrey. Absolutely. So I think personally,
    although I think there are a lot of sincere people involved in
    it, that propositions 200, 215 fall into this category. I have
    started to try and focus, in a scientific way, on the benefits
    of hemp as a product to save America, to try and understand
    from an agricultural and economic viewpoint whether or not this
    is the case.
        And that is really what is meant by that language, to not
    get flim-flammed by public relations ploys, but instead to fall
    back on what America does best, which is to rationally look at
    what is being offered in the democratic public debate.
        Senator Shelby. Rational is a good word here, is it not?
        General McCaffrey. Yes, sir; I think so.
        Senator Shelby. If the FDA came out tomorrow or even later
    this afternoon and said marijuana is safe for more general use,
    would you support it?
        General McCaffrey. Let me say unequivocally, as someone who
    has spent literally years in U.S. military hospitals, and I
    tell a lot of medical groups this, I have spent a lot more time
    as a patient than most of the doctors I deal with. One of the
    reasons we have such enormous confidence in the American
    medical system is because it is based on science.
        The AMA has been supportive of national drug policy
    throughout this whole argument. Now as I look at the people in
    the National Institutes of Health, Dr. Harold Varmus, a
    reasonably astute lad with a Nobel Prize in science, I think it
    is clear that he will approach this from a medical/scientific
    viewpoint.
        In the 1980's there were hundreds of investigations about
    smoked marijuana, 400-plus compounds. Out of that they
    determined that THC, one of the principal active components,
    might have medical benefit. So it was synthetically produced
    since 1985. It has been available for American physicians to
    use. It is not used a lot because in 1997 there are far too
    many effective therapeutic approaches for nausea from
    chemotherapy, for glaucoma, than to use THC. I think that we
    owe a rigorous evaluation of smoked marijuana. If there are
    other components that might be used or modified and offered to
    American medicine, so be it.
        Now there is no evidence that we have yet seen, that I am
    aware of, that suggests that smoking a carcinogenic
    psychoactive compound has benefit. Cocaine does. Cocaine is
    used for eye surgery. Methamphetamines are used for certain
    psychiatric problems and weight control. Again, I think we need
    a rational approach to this and we have to question where it
    belongs in the NIH and FDA.
        Senator Shelby. We all realize that substances are
    controlled for good reasons. To use a drug or any kind of drugs
    therapeutically, you know through the process of healing or
    medicine, is one thing. To use drugs for leisure, at the will
    of so-and-so, that is a totally different game; is it not,
    General?
        General McCaffrey. Yes.
        Senator Shelby. And in a sense, is that not what we are
    talking about?
        General McCaffrey. I think what we are doing is that we
    have allowed this to become a political debate by drug
    legalizers instead of trusting to American science, the NIH,
    the FDA, and American doctors. They deserve our trust.
        Senator Shelby. General, do you believe that the framework
    that you have set out here will allow you to adequately judge,
    within some reasonable amount of time, what is working and what
    is not working when resources need to be shifted to where they
    might be more effective, you know, one way or another? And how
    hopeful are you on this?

                              Performance Measures

        General McCaffrey. Senator, I think we have hard work to do
    on the performance measures of effectiveness. It has never been
    done. Frank Raines is committed to it. The President is
    committed to it. After some very blunt debate the executive
    branch has signed up for it. So our purpose is to develop such
    a system to be held accountable for achieving results.
        I do believe we are going to have to go through a growth
    period on this. I think we are going to write a plan, I am
    going to have it to you prior to October 1, that says: ``Here
    is how we intend to measure targets and outcomes.'' Then we are
    going to start measuring.
        Senator Shelby. This is a big departure from what we have
    done in the past?
        General McCaffrey. Yes, sir.
        Senator Shelby. We have talked about things but we have not
    really gotten down to the lowest denominator to measure them,
    have we?
        General McCaffrey. No; we have not.
        Senator Shelby. Not in the way you are talking about?
        General McCaffrey. No; now we may have some mistakes in it
    the first year. We may find out we are measuring the wrong
    thing. But at some point, you are quite correct, if a program
    does not work you need to throttle it back. If it is working,
    we need to reinforce success. That is our purpose.
        Senator Shelby. When you do measure progress, and I hope
    you will have a heck of a lot of progress, such as a decrease
    in the previous month's use for illicit drug use such as
    cocaine or a decline in drug-related homicides, I think it is
    important to have a standard that we measure this by. And I
    think that is what you are trying to set out, is it not,
    General?
        General McCaffrey. It is, and we have some good examples in
    the New York City Police Department where justice has been
    done. You have to make sure you measure the right thing. NYPD
    does not measure arrest or the kilograms of drugs seized. It
    does measure crimes that are indicative of the quality of life
    in the city.
        So I think that is our challenge. Dr. John Carnevale, and
    his 26 work groups, will figure out what our purpose is, what
    we are trying to achieve as an outcome, and then how do we
    measure that outcome.
        Senator Shelby. And what time period, the frame of time
    periods is important to measure, too; is it not?
        General McCaffrey. I think it is.
        Senator Shelby. Are we measuring it against where we are
    today, or what happened in the 1960's or 1970's or what? Or
    both?
        General McCaffrey. I think we will get a baseline and, in
    some cases, we will have data that may go back to the 1960's.
    In some cases it may be the first time we started tracking that
    information. So the most important point would be the baseline
    from where we start, because I think all of us are convinced
    that current rates of drug use and its consequences are
    unacceptable and need to come down. They are still historically
    at an unacceptable level.
        Senator Shelby. But whatever you measure and the results
    that you come up with, they have got to mean something. They
    have got to be meaningful because we have had a lot of press
    releases in the past, and you have seen it yourself, from not
    just this administration but others, too, said gosh, we are
    winning the war on drugs, we are doing this. When we knew
    basically we were losing the war on drugs in a lot of areas.
    Maybe making progress in some areas, wide open in others.
        General McCaffrey. Your point is well taken. At the same
    time, though, it always makes me uncomfortable. One of the
    reasons I have sidestepped the metaphor of a war on drugs is
    that if it were a war, we have not been losing it. The U.S.
    Armed Forces, the New York Police Department, college
    faculties, American business have reduced drug use enormously
    in the last 15 years, thank God.
        It is unacceptable where we are, and oh, by the way, our
    children are starting to use drugs again. So we should not be
    satisfied, but there have been results from this effort.
        Senator Shelby. General, I was struck, and you showed this
    ad--and I forgot what it was, but it was a child last year,
    dealing with medicine, whatever it was. You would know it
    better than I would, you know, do not play with matches,
    whatever it is, and do not do this. And drugs, what do you say?
    A big question. It was an effective ad.
        General McCaffrey. It was very powerful. That was the
    Partnership for a Drug-Free America.
        Senator Shelby. I remember when you came to the committee
    and you showed that, and I said whew, it was good.
        General McCaffrey. Very, very painful.
        Senator Shelby. Yes; that is what I thought. Are you still
    using something like that?
        General McCaffrey. We showed that again.
        Senator Shelby. Oh, you showed it earlier?
        General McCaffrey. Yes.
        Senator Shelby. I was gone, as the chairman pointed out.
        General McCaffrey. And I have a Partnership for Drug-Free
    America representative here. They and the Advertising Council
    of America will be the source of wisdom of historical
    experience on this campaign.
        Senator Shelby. Mr. Chairman, thank you for your
    indulgence.
        Senator Campbell. Thank you, General. We got you out of
    here pretty much on time. I am sorry you are going to be a
    little bit late for your appointment, but I am sure I can speak
    for the rest of the committee in telling you we are looking
    forward to working with you and hopefully we will look forward
    to a day when there is a big reduction in the drug use in this
    country. Thank you for appearing.
        General McCaffrey. Thank you, Mr. Chairman.

                              Submitted Questions

        Senator Campbell. We have additional questions that will be
    submitted in writing to be answered for inclusion in the
    record.
        [The following questions were not asked at the hearing, but
    were submitted to the Department for response subsequent to the
    hearing:]
                    Questions Submitted by Senator Campbell
                            drug prevention programs
        Question 1. I would like to take a moment to talk about youth drug
    prevention programs, for I am concerned with recent reports saying that
    one of the most widespread programs, D.A.R.E., is not working as well
    as we originally thought. Can you tell us why? How can we make
    improvements to the program and what would you recommend?
        Answer. Dare is a valuable means of teaching drug prevention while
    strengthening linkages between the police and the community. It is
    benefiting some 25 million U.S. children as well as 8 million
    youngsters in 42 other countries. A growing body of prevention research
    indicates that ``refusal-skills'' training is among the most effective
    drug-prevention approaches. D.A.R.E. incorporates this approach into
    its lessons, but we must be realistic about our expectations regarding
    D.A.R.E. or any other short-term prevention program. There is no one
    program that fits all children and all situations. Characteristics of
    effective programs and models for successful prevention may vary
    depending on developmental stages, target population, and whether the
    program is delivered in conjunction with other important elements such
    as policy and systemic change, family interventions, community anti-
    drug coalitions, and media efforts. D.A.R.E. should be used in
    conjunction with other comprehensive approaches to show positive
    results. All children should receive drug education and prevention
    every year in a developmentally appropriate program that has been
    scientifically proven to work.
        Question 2A. I am concerned that if we are making the effort to
    keep our children from being influenced by drugs that we make a
    difference. Although I believe that not all programs will work in all
    areas, I do feel that there have got to be some common denominators
    which can guide the outcome of those efforts, being careful not to
    dictate from Washington. Along those lines, Mr. McCaffrey, are there
    currently any national standards or basic steps that all youth
    prevention programs must incorporate?
        Answer. Yes, there are national guidelines based on twenty years of
    science-based research that provide the ``principles'' to be applied in
    creating successful prevention programs. The National Institute on Drug
    Abuse (NIDA) has recently published a research-based guide to
    prevention programming, which reaffirms the findings of SAMHSA's
    congressionally mandated National Structured Evaluation of prevention
    programs. These science-based guidance documents are being disseminated
    to communities around the country.
        Question 2B. If there are national benchmarks, who establishes and
    evaluates them?
        Answer. HHS and the National Institutes of Health establish
    national benchmarks and have engaged in a rigorous research program to
    determine what really works. Additionally, ONDCP has established the
    development and implementation of a set of principles upon which
    prevention programming can be based as a major objective under its
    first goal of the National Drug Control Strategy, to educate and enable
    America's youth to reject illegal drugs as well as alcohol and tobacco.
        Question 2C. If there are not national benchmarks, what would it
    take to establish them?
        Answer. There are national benchmarks as discussed above.
        Question 3A. Positive outcomes are being seen in those programs,
    which increase a child's ability to fight peer pressure, help them to
    understand that they are not the only ones saying any to drugs [sic],
    teach them how to react to situations, and reinforcing these messages
    in all aspects of a child's life, through family, peers and community.
    These are programs like the Adolescent Alcohol Prevention Trial, the
    Life Skills Training Program, and Project Star or I-Star. To
    incorporate these types of activities into the current youth prevention
    programs, would it take a wholesale change in the way we are currently
    running the prevention programs, or would we just easily eliminate
    those that are not working?
        Answer. The programs listed are among these identified and
    highlighted by NIDA as effective in the recent research-based guide.
    What is needed is a more disciplined application of research results at
    the state and community level. As the research has shown, most
    individual programs need to be augmented with activities for the
    parents, peers, community and media as indicated. Some communities have
    very good resiliency characteristics and therefore do not need certain
    strategies. The importance of doing a risk assessment allows for
    tailoring of prevention programs at the delivery level. Some programs
    may in fact need to be eliminated if they are increasing risk factors
    in any manner. The vast majority of programs need assistance in the
    appropriate implementation of models, as prescribed in the empirical
    evidence.
        Question 3B. How hard would it be for us to incorporate these
    recommendations?
        Answer. Improving the effectiveness of prevention programs, both
    public and private, will require a commitment from local school
    districts, multiple agencies, community service providers and
    researchers. I believe the prevention field would welcome this
    challenge. Accountability will provide stable funding for the necessary
    drug prevention programs. The country will need them as we will see the
    largest population ever of young people age 12-18 in the year 2006.
    Currently there are 68 million under age 18. The prevention field has
    been employing rigorous evaluation and must continue to do so.
        Question 4. Mr. McCaffrey, I know that drugs are subject to fads
    just like anything else. Given this changing environment, how does
    ONDCP respond to these constantly changing trends?
        Answer. ONDCP keeps apprised of drug fads through its twice-yearly
    Pulse Check survey, which is a series of reports on drug use in
    selected cities across the nation. The Pulse Check provides valuable
    descriptions of the drug scene that informs researchers and policy
    makers in a timely manner. Additionally, the Pulse Check helps to
    predict needed interventions for both prevention and treatment. Needs
    assessments are mandated in the Substance Abuse Prevention and
    Treatment Block Grants (SAPT) and are shared with ONDCP. Another source
    is the Six State Consortium Project which shows trends at the state and
    substate levels for prevention planning purposes.
        Question 5. In your submitted testimony, you highlighted a chart in
    Appendix A, Figure A-3, titled ``Hemispheric Cocaine Seizures are
    Holding Steady.'' Can you tell us why there was such a dramatic drop in
    cocaine available for use between 1992 and 1993, whereas all other
    noted areas remained relatively stable?
        Answer. The amount of cocaine available is proportional to net coca
    cultivation in the source countries (Bolivia, Colombia and Peru).
    Between 1992 and 1993, a redistribution of coca growing areas within
    Peru reduced net Peruvian cultivation 16 percent (129,100 to 108,800
    hectares), consequently reducing potential coca leaf production in Peru
    by 28 percent (219,200 to 157,600 metric tons). During the same time
    frame, potential coca leaf production increased five percent in Bolivia
    (80,300 to 84,400 metric tons) and seven percent in Colombia (29,600 to
    31,700 metric tons). However, because Peru accounted for 65 percent of
    all coca leaf produced, these increases were not sufficient to offset
    the sharp decrease in Peruvian production. The net result was a
    decrease in worldwide potential coca leaf production by over 16 percent
    (329,100 to 273,700 metric tons), which, in turn, resulted in a 14
    percent net reduction in the amount of cocaine potentially available
    (835 to 715 metric tons). Concerning the causes of the relocation of
    coca cultivation in Peru, the National Narcotics Consumers Intelligence
    Committee (NNICC) Report 1995 (August 1996) notes: ``In 1993 and 1994,
    farmers moved out of the Upper Huallaga Valley (UHV), in part to escape
    insurgent activity, but other factors included soil depletion, plant
    disease, and a `gold-rush' mentality for new areas.''
                                     hidta
        Question 1A. What is the status of implementing the Rocky Mountain
    HIDTA?
        Answer. The Rocky Mountain HIDTA Executive Committee has been
    formed and meetings have been held. The Executive Committee has hired a
    director, Tom Gorman, currently Deputy Chief of the California Bureau
    of Narcotics. Director Gorman will report on July 1, 1997. The HIDTA
    headquarters will be in Denver. The Rocky Mountain HIDTA is in the
    process of selecting and training an intelligence staff.
    Representatives attended new HIDTA training sessions at the HIDTA
    Assistance Center in the Miami HIDTA. HIDTA staff will be selected and
    trained by July 1, 1997.
        Question 1B. What are some of this HIDTA's accomplishments to date?
        Answer. The Rocky Mountain HIDTA has formulated an initiative
    directed toward three threats: (1) the increasing number of traffickers
    with a nexus to the Southwest Border; (2) interdiction of distribution
    networks which have a harmful impact in the region; and (3) organized
    gangs actively involved in violent crime associated with illicit
    narcotic distribution. HIDTA staff have conducted research on the best
    practices of HIDTA intelligence sharing centers. The Rocky Mountain
    HIDTA intelligence sharing center will be activated this month. HIDTA
    representatives have met with most task forces in the Denver
    metropolitan area to inform them about this new program. With respect
    to training, the coordinator has arranged for six joint training
    classes. Law enforcement agencies from nearby jurisdictions outside of
    the HIDTA task force have requested and received training in
    intelligence and information sharing.
        Question 1C. What additional steps can be taken to support the
    HIDTA's satellite offices in Laramie, Wyoming, and Salt Lake City,
    Utah?
        Answer. The HIDTA Executive Committee has identified requirements
    for joint operations. The Rocky Mountain HIDTA intelligence sharing
    center will be establishing an intelligence sharing network with the
    offices in Laramie, Wyoming and Salt Lake City, Utah.
                       defense intelligence center study
        Question 1A. Mr. McCaffrey, during your testimony before the
    subcommittee, you stated that you were going to have the Defense
    Intelligence Center study, review, and submit a report to you on the
    amount of drugs coming into the United States. Can you please provide
    the committee with a specific outline of the goals and scope of this
    study and what you hope this study will provide?
        Answer. As I recall, during my testimony before the Subcommittee, I
    said that I was going to task the National Drug Intelligence Center
    (NDIC) to develop a methodology to evaluate the severity of the drug
    problem in various geographic areas (most likely counties) to assist in
    designating HIDTA sites, rather than a study on the amount of drugs
    coming into the United States. The methodology would consider, where
    possible, direct drug indicators (e.g., drug use prevalence, drug
    possession offenses, drug-induced deaths and morbidity), drug-related
    indicators (drug-related deaths and morbidity, suicides, crime), and
    demographics and other social indicators. We would then be able to rank
    each county within the United States (and graphically represent them)
    to determine where the most severe problems were occurring. This
    information would be considered when selecting future HIDTA sites. The
    study will be conducted using existing data from federal, state, and
    local sources.
        Question 1B. How much will this study cost, and is ONDCP going to
    pay for it out of its own budget?
        Answer. ONDCP estimates that this study will cost approximately
    $200,000. It will be funded through existing HIDTA funds. ONDCP will be
    tasking this study to its existing policy research contractor.
        Question 1C. What information will this study provide you that is
    not currently available?
        Answer. While the study is to be conducted using existing data,
    these data have never before been collated and synthesized for this
    purpose. We will have an extensive data base that can be used to
    geographically identify areas with the most severe drug problems. With
    existing computer mapping technology we will also be able to
    graphically represent these data. This information will not only be
    useful to the HIDTA selection process, but possibly to other federal
    priority-setting purposes. It also can be made available to the states
    who may have a particular interest in it for assistance in allocating
    block grant funds.
        Question 1D. Why was the Defense Intelligence Center the
    organization chosen to do this study, specifically, what attributes
    does this Center have that other organization do not, which makes them
    the appropriate choice to conduct such a study? How does this study
    overlap with the Drug Enforcement Agency already has done?
        Answer. Since my testimony ONDCP has determined, in consultation
    with NDIC, that NDIC is not the appropriate agency to conduct such a
    study. Instead, ONDCP has decided to task our policy research
    contractor, CSR, Incorporated with this project. CSR has more than 20
    years of experience in conducting substance abuse research for a
    variety of federal clients. They have served as ONDCP's primary policy
    research contractor for the past five years. As a contractor to the
    National Institute on Alcohol Abuse and Alcoholism, CSR conducted a
    similar study for county-level indicators of alcohol-related problems
    that has proven very useful to the states. Since this study is not
    concerned with an analysis of the amount of drugs coming into the
    United States, as the Subcommittee may have understood, there is no
    overlap with DEA's work.
        Question 1E. How will the Center have access to drug trafficking
    information that DEA has?
        Answer. Much of the data to be used for this study is publicly
    available and, therefore, readily available to CSR. Also, since the
    scope of the study is at the county level, any data used must be
    available for all U.S. counties. Most data that the DEA would have on
    drug trafficking probably does not meet this criteria. However, to the
    extent that the DEA has relevant data (e.g., STRIDE data), we do not
    anticipate any difficulty in obtaining it for analysis purposes. ONDCP
    and DEA have an ongoing arrangement for ONDCP to gain access to DEA's
    data excluding DEA operational data or other case sensitive data.
        Question 1F. Have you sought the Justice Department's reaction on
    this study, and if so, what is their position on involving the Defense
    Intelligence Center in this role?
        Answer. Given that ONDCP is using its own contractor, as discussed
    above, it is not necessary to discuss the study with DOJ.
        Question 1G. What impact, if any, will the Center's report have on
    existing HIDTA's?
        Answer. Results from the study will be shared with the existing
    HIDTA's which, in turn, could use them for evaluation purposes.
    However, the primary purpose of the study is to assist ONDCP in making
    future HIDTA site selections based on the severity of the drug problem.
                                 media campaign
        Question 1. Given that ONDCP's mission is to coordinate the
    national drug policy across all federal agencies, do you plan to have
    those agencies with a hand in fighting drug use among our nation's
    youth, provide some of the $175 million requested for the youth media
    campaign?
        Answer. ONDCP has proposed that the Youth Media Campaign be funded
    within ONDCP's fiscal year 1998 appropriation without funds from other
    agencies. However, other federal agencies which play a role in
    preventing youth substance abuse such as the Departments of Health and
    Human Services and Department of Justice will derive benefits from this
    campaign. ONDCP's proposal involves negotiating free ``matching'' air
    time for PSA's devoted to appropriate messages about drugs and drug-
    related issues, including youth substance abuse, drug-related crime,
    drug-related AIDS, mentoring, and parenting programs.
        Question 2. Do you currently have specific commitments from the
    private sector to provide their portion of the $175 million for the
    youth media campaign?
        Answer. ONDCP has not begun to negotiate with networks and media
    organizations at this time. If Congress appropriates funds for the
    Campaign that will be the responsibility of the media buying service
    with which ONDCP intends to contract. Such commitments are typically
    made when ad time is purchased and are based on negotiations. However,
    some networks have already committed to maintaining the existing level
    of anti-drug public service messages. In addition, at least seven major
    (non-media) national corporations have already contacted ONDCP
    indicating their willingness to become involved in a ``match''
    arrangement whereby they would purchase air time for ONDCP messages.
        Question 3. How do you believe we can continue to receive pro bono
    anti-drug advertising if we begin to pay for those ads?
        Answer. Whereas ONDCP appreciates the extensive amount of public
    service time currently contributed by the media at the network and
    local levels, a great proportion of this time is in the middle of the
    night or at other times when children are not watching. It is important
    to note that even if public service time were to be increased
    substantially, a tailored, targeted campaign of the type ONDCP is
    proposing is impossible to undertake without paid ads. ONDCP must be
    able to target specific youth audiences which watch TV at specific
    times.
        As noted above, two major networks have indicated they will not
    decrease their existing anti-drug public service commitment should we
    purchase time for anti-drug ads. We expect other media organizations to
    follow. Other networks have indicated they will increase their in-kind
    public service contributions. We anticipate negotiating a greater
    percentage of free time in local or regional markets than on network
    television.
                 interdiction efforts and mexico certification
        Question 1A. Mr. McCaffrey, I am aware that you lobbied the White
    House and Congress on recertifying Mexico, something which, as a
    Western Senator, concerns me because those of us in the West aren't
    convinced that Mexico is doing all it can in the war against drugs. I
    felt strongly enough to introduce a bill, S. 457, which gives countries
    seven months to prove they're holding up their end of the certification
    deal, whereby specific standards are to be met before the President re-
    certifies them and if they don't meet the standards, aid is cut off.
    What are your views on the current drug certification process?
        Answer. As discussed above, the drug certification process provides
    one tool among many to help reduce the flow of illegal drugs across our
    borders. The sections of law which provide a foundation for the
    certification process require two major actions. They require the
    administration to report annually to Congress about the nature of
    cooperation between the United States and the major drug producing and
    transit countries, and they require non-discretionary penalties to be
    imposed against major drug producing and transit countries which are
    not certified.
        Considering the increasing importance of our bilateral drug control
    relationship with key countries such as Mexico, we have moved to other
    mechanisms in addition to the annual certification findings and the
    International Narcotics Control Strategy Report (INCSR) to advance drug
    policy and keep Congress informed and actively involved. We have
    briefed Members of Congress about developments in Mexico, and we will
    be providing a detailed report about progress in key areas in
    September. We also have raised the profile of our counterdrug policy
    with Mexico through the creation of the U.S.-Mexico binational High
    Level Contact Group. More recently with the signing of the U.S.-Mexico
    Counter-drug Alliance our two countries set out concrete goals toward
    which we are working cooperatively, and agreed to produce a strategy to
    reach those goals by the end of this year.
        Close cooperation with both Congress and with a foreign government
    has advantages, although it is resource intensive, and is a model we
    ought to consider in determining how certification can be improved.
        Question 1B. Given the recent House and Senate opinions of the
    Administration's recertification of Mexico, do you believe the current
    certification process is working?
        Answer. The legislation introduced in the House and Senate with
    regard to Mexico reflected deep frustration with the quantity of drugs
    entering the United States across the Southwest Border, violence along
    the border, corruption and apparent Mexican inability to reduce the
    flow significantly. Perhaps most importantly it reflected a belief that
    Mexico lacks the political will to act seriously against drugs.
    However, as discussed above, the certification process is working.
        In reaching a decision to certify Mexico we had to determine
    whether or not Mexico was cooperating fully with the United States or
    acting unilaterally to accomplish the goals and objectives of the 1988
    U.N. Drug Convention. On the basis of its accomplishments, Mexico
    earned certification in 1996. Drug seizures were up, eradication was
    the best in the world, kingpins were arrested, a Mexican citizen was
    extradited to the United States for the first time, and the Congress
    enacted landmark new counterdrug legislation. More importantly, the
    leadership put drug cooperation with the United States at the top of
    their agenda, explicitly recognized the threat of drug trafficking as
    the major national security threat to Mexico.
        The decision to certify Mexico is both legally and pragmatically
    correct; Mexico was allowed to cooperate more effectively with the U.S.
    than if we had decertified Mexico or certified on U.S. national
    interest grounds.
        Cooperation is not easily quantified. Quantity of drugs seized does
    not translate directly into a measure of national cooperation. The
    number of arrests is not significant in itself unless those arrested
    control drug trafficking networks and the arrest results in disruption
    of the network. Even arrest of a major trafficker is insignificant if
    the arrestee continues doing business from prison.
        Cooperation ought to be determined by how well a nation manipulates
    its political, economic, law enforcement, and judicial systems to
    reduce the impact of illegal drug trafficking and consumption. By that
    measure Mexico has taken significant steps, some in cooperation with
    the United States. It is engaged in a thorough reform of its law
    enforcement system, which, if successful over the next several years,
    will lead to an end to impunity for drug traffickers. The military is
    currently playing a more important role in counterdrug activities and
    is performing well. Drug policy with the United States is coordinated
    through the U.S.-Mexico Binational High Level Contact Group, and we are
    working to develop a shared drug strategy by the end of the year. The
    High Level Contact Group has greatly improved military-to-military
    relations, information sharing and the development of bilateral border
    task forces, which would not have been possible if we had decertified
    Mexico or certified on the basis of U.S. national interest.
        Question 1C. How would you improve it?
        Answer. The certification process is an important mechanism, though
    not the only one, to motivate foreign governments to work against drug
    trafficking. The process is also a device which requires the Executive
    Branch to report timely and relevant information to Congress. We can
    work towards improving our consultations with Congress consistent with
    Congressional interests and needs.
        Although the certification process is extremely complex, it plays a
    pivotal role in U.S. drug policy. It should not be changed without a
    thorough examination of the likely consequences of change, intended and
    unintended.
        Question 1D. Would ONDCP and the Administration support S. 457?
        Answer. Though this legislation has not been cleared through the
    White House, ONDCP feels that the proposed legislation, which
    introduces the option of a probationary certification, would decrease
    the discretionary authority of the President to impose sanctions on
    other countries. Rather than offering greater leverage in relations
    with drug producing and transit countries, a probationary period would
    lock the U.S. into a position regarding aid and development bank
    support early on in the process and could jeopardize opportunities to
    develop alternative solutions to the international drug trafficking
    problem. While we certainly agree that close Executive/Congressional
    communication on counterdrug initiatives is imperative, the proposed
    legislation is not a viable option to promote such communication. As a
    result, ONDCP would not support S. 457.
        Question 2A. Mr. McCaffrey, is your agency responsible for
    estimating the amount of drugs that come into this country each year
    and for tracking the success of our interdiction efforts?
        Answer. ONDCP is responsible for the overall assessment of the
    success of all of U.S. drug control programs. In 1994, ONDCP created
    the position of U.S. Interdiction Coordinator (USIC) to oversee all
    international interdiction activities. The USIC has recently chartered
    and taken sponsorship of the Interagency Counter Drug Performance
    Working Group (ICPAWG) to better measure the performance of our
    interdiction resources and activities.
        ONDCP coordinates the establishment of programs and processes to
    both implement the National Drug Control Strategy and assess the
    effectiveness of those efforts. We do not prepare the estimates of the
    amounts of drugs coming into the United States but we do establish the
    requirements for making such estimates. Making these estimates is a
    complex and difficult task that involves many of our drug control
    agencies such as the State Department, Central Intelligence Agency, and
    the Drug Enforcement Administration. Though we have had estimating
    processes in place for many years, we are currently making refinements
    to give us better, more reliable and more timely information on illegal
    drug production and shipment to the United States.
        Question 2B. Can you explain to the subcommittee how you know the
    amount of drugs coming to this country if we only know we're catching a
    small portion of it?
        Answer. Estimates of the amount of cocaine, heroin and marijuana
    coming to the U.S. are developed routinely by the drug intelligence
    community. Each year an imagery-based estimate is made of illicit
    narcotics cultivation in various parts of the world such as Burma,
    Afghanistan and Colombia for heroin, and Peru, Bolivia and Colombia for
    coca. The extent of opium and marijuana growing in Mexico is also
    assessed. This statistical methodology is highly reliable and provides
    a comprehensive baseline of illicit narcotics crops.
        Estimating the amount of illegal drugs actually produced from the
    available crops is less precise. Information such as local consumption
    of raw or semiprocessed coca or opium and efficiency in converting raw
    material into cocaine or heroin is difficult to obtain. Programs such
    as the Drug Enforcement Administration's ``Operation Breakthrough'' are
    assisting us in better understanding how efficient the cocaine
    producers are. Other interagency efforts are underway to expand and
    improve our information (e.g., non-U.S. demand, particularly for
    cocaine). Estimating how much and by what means the drugs actually come
    to the U.S. is an ongoing process carried out by the principal drug
    intelligence components: DEA, CIA and Customs. The estimates are based
    on information developed through foreign intelligence collection, law
    enforcement operations, open source information, and analysis.
        Our current estimates are that most marijuana produced in Mexico,
    Colombia, and other Central/South American countries (about 10,000
    metric tons) is destined for the U.S. We estimate that about 600 metric
    tons of cocaine are available for worldwide consumption. A significant
    portion of the cocaine leaving South America has historically come to
    the U.S. The increasing demand for cocaine in Europe and other parts of
    the world make it that much more difficult to estimate how much cocaine
    is actually destined for U.S. markets. The total estimated worldwide
    heroin production is approximately 400 metric tons annually. We
    estimate that the U.S. market demand is about 10-15 metric tons.
        Question 2C. How then do you know what percentage we're actually
    interdicting?
        Answer. The percentage of what we are interdicting of cocaine and
    marijuana is based on the amounts of drugs seized compared to the
    estimates of what is coming to the U.S. The seizures include those made
    in the transit zone (both on the high seas and in the transit
    countries) as well as at the borders of the U.S.
        Question 3. What are your interdiction Priorities for this year and
    is there a way for us to measure whether or not you're reaching these
    goals?
        Answer. Our interdiction priorities are to disrupt the flow of all
    illegal drugs we know about by interdicting them along the route from
    production area to domestic U.S. markets. Areas of major emphasis are
    the source countries, the Southwest Border (U.S.) and the eastern
    Caribbean, Puerto Rico and south Florida. Each year we compare
    disruptions in the flow (seized and jettisoned and destroyed drugs)
    with previous years' results to assess our interdiction effectiveness.
    This comparison, however, presents only a partial picture of
    effectiveness because changes in the amount, type and direction of the
    flow can also affect the level of disruption. For example, an increase
    in drug seizures may occur because the traffickers greatly increase the
    flow through an area. In this case increased seizures could mean less
    effectiveness instead of more. Accordingly, our proposed performance
    targets will seek to measure flow disruptions as a ratio of estimated
    drug flow from the source country, across the transit zones, and within
    the U.S. This innovative approach will require applying new modeling
    techniques to the intelligence we now receive and will be a priority in
    implementing our new performance measurement system.
                            interagency coordination
        Question 1A. Can you describe what types of authority ONDCP
    currently has to influence its interagency coordination efforts?
        Answer. ONDCP's current authorization contains a number of
    provisions that permit us to influence interagency coordination
    efforts. These include:
      --Development of the National Drug Control Strategy, 21 USC 1504, in
            consultation with the heads of the National Drug Control
            Program agencies.
      --Development of goals, objectives, and priorities for supply
            reduction and demand reduction programs in the National Drug
            Control Strategy, 21 USC 1504(b).
      --Development of performance measures for the National Drug Control
            Strategy that evaluate the efficacy of all domestic and
            international programs in relation to the goals and objectives
            of the Strategy, 21 USC 1504(a)(7).
      --Development of a consolidated National Drug Control Program budget
            and certification of the adequacy of the annual budget requests
            of National Drug Control Program agencies to implement the
            National Drug Control Strategy, 21 USC 1502(c).
      --Request National Drug Control Program agencies to include in their
            annual submissions funding requests for specific initiatives
            that are consistent with the President's priorities for the
            National Drug Control Strategy and annual budget certification
            by ONDCP, 21 USC 1502(c)(5).
      --Monitor implementation of the National Drug Control Program by
            conducting program and performance audits and evaluations, and
            requesting assistance from the Inspector Generals of relevant
            agencies in audits and evaluations, 21 USC 1502(d)(7).
      --Issue funds control notices to National Dug Control Program agency
            accounts, 21 USC 1502(f).
      --Certify policy changes by National Drug Control Program agencies,
            21 USC 1503(b).
        Question 1B. Are there currently gaps in ONDCP's authority which
    make it more difficult for ONDCP to fulfill this mission and how can
    Congress help?
        Answer. The Administration has submitted legislation to Congress to
    reauthorize ONDCP. This bill contains the following provisions that
    will enhance ONDCP's effectiveness in coordinating the national drug
    program in the interagency process:
      --Amends current law to require the submission of a comprehensive
            ten-year plan for reducing drug abuse and its consequences in
            the United States.
      --Provides for an annual report to Congress on the implementation of
            the ten-year strategy and performance measures. Permits
            modification to the ten-year strategy as may be necessary to
            meet new and varying challenges, as well as to improve, create,
            or eliminate programs in supply and demand reduction efforts.
      --Amends current law to permit five-year drug budget projections to
            support long-range planning for national drug control program
            agencies.
      --Codifies the role played by the Director, ONDCP in the
            certification process of drug production and trafficking
            nations.
      --Clarifies ONDCP's jurisdiction over activities to reduce the
            underage use of tobacco or alcoholic beverages. Reducing the
            use of alcohol and tobacco by youth has long been recognized as
            key to effective drug prevention and education programs.
      --The Administration's bill proposes a new performance measurement
            system to evaluate the effectiveness of the National Drug
            Control Strategy and federal drug control programs.
      --The bill establishes the HIDTA program as a separate program within
            ONDCP and gives the Director the authority to issue regulations
            for the efficient operation of the HIDTA program.
        Question 1C. How do you help multiple agencies coordinate the same
    or similar programs?
        Answer. In addition to the above mentioned tools for coordination,
    ONDCP employs two others: the ongoing development of the National Drug
    Control Strategy, and extensive, ongoing programs of consultation and
    information exchange. This takes many forms:
        1. Consulting public officials. Every cabinet officer and all
    departments and agencies participated in the development of strategic
    goals and objectives and in the formulation of supporting budgets,
    initiatives, and programs. Similarly, views and suggestions were
    solicited from every Member of Congress. At the state and local levels,
    ONDCP sought input from each state governor along with those from
    American Samoa, Puerto Rico, and the U.S. Virgin Islands, and from
    mayors of every city of 100,000 or more people. Views from public
    officials overseeing federal, state, and local prevention, education,
    treatment, law enforcement, correctional, and interdiction activities
    were also requested.
        2. Convening or participating in conferences and meetings. ONDCP
    briefed participants in numerous gatherings of organizations like the
    National Governors' Association, the Conference of Mayors, the National
    Association for the Advancement of Colored People, the American Medical
    Association, the American Bar Association, Boys and Girls Club of
    America, D.A.R.E., PRIDE, National Families in Action, and the National
    Association of Police Officers. ONDCP also participated in major
    international conferences in Geneva, Sao Paulo, and Vienna.
    Additionally, ONDCP convened or participated in the following
    conferences and meetings to promote greater coordination of
    international, federal, state, and local anti-drug efforts; consider
    emerging problems; and consult experts as the 1997 Strategy was being
    developed.
        (a) The President's Drug Policy Council. Established by the
    President in March 1996, this cabinet-level organization met on May 28,
    1996 and December 12, 1996 to assess the direction of the National Drug
    Control Strategy and discuss drug policy initiatives. Members of the
    Council include heads of drug control program agencies and key
    presidential assistants.
        (b) Southwest Border Conference. El Paso, Texas, July 9-10, 1996.
    Federal, state, and local representatives met to discuss the challenge
    of stopping drug trafficking across the 2,000 mile-long U.S.-Mexico
    border.
        (c) HIDTA Conference. Washington, D.C., July 15-16, 1996.
    Participants considered how the congressionally-mandated HIDTA program
    can better coordinate regional law enforcement efforts.
        (d) USIC/J-3 Counterdrug Quarterly Conference. Washington, D.C.
    These meetings provided a forum for executive-level discussions of U.S.
    international drug interdiction programs.
        (e) California Proposition 215/Arizona Proposition 200 Briefing.
    Washington, D.C., November 14, 1996. State, local, and community
    leaders briefed federal department and agency representatives on the
    recently-passed ballot initiatives as the federal response to both
    measures was being formulated.
        (f) Entertainment Industry. Hollywood, California, January 9-10,
    1997. ONDCP met with leaders in the entertainment industry to discuss
    how the national drug prevention effort might be supported by the
    creative talents of the broadcast, film, and music industries.
        (g) Methamphetamine Conferences. San Francisco, California, January
    10, 1997. The purpose of this regional meeting was to examine the
    growing methamphetamine problem in western states, review progress made
    since the April 1996 release of the National Methamphetamine Strategy,
    and consider appropriate responses. A follow-on national
    methamphetamine conference was held May 28-29, 1997 in Omaha, Nebraska.
        Question 2. Can you outline to the committee what are the most
    difficult areas of interagency coordination?
        Answer. The areas which pose the greatest challenge to interagency
    coordination are those in which multiple agencies have developed
    multiple, often duplicating, roles and missions over a long period of
    time. In areas such as these, an overall policy coordination agency
    such as ONDCP is critical to ensuring that available assets are used in
    the most effective manner possible. Perhaps the two most important
    areas where ONDCP has taken the lead in coordinating multiple agencies
    are in the development of an Intelligence Architecture and the
    Southwest Border Initiative.
    A. Southwest Border Initiative
        If a single geographic region were to be identified as a microcosm
    of America's drug problem, it would be the two thousand mile-long U.S.-
    Mexican border. Cocaine, heroin, methamphetamine, and marijuana all
    cross into the United States here, hidden among the 84 million cars,
    232 million people, and 2.8 million trucks that the Customs Service
    estimates cross the 38 ports along the border. American and Mexican
    ranchers are continually threatened and often harmed by violent bands
    of drug runners openly crossing their property.
        Significant reinforcements have been committed to the substantial
    resources already focused on the Southwest Border. Our challenge is to
    design and implement an overarching operational strategy that better
    organizes our interdiction operations. We must focus resources, provide
    timely and accurate intelligence on the activities of drug traffickers,
    develop evidence for prosecutions, and respond to shifting drug-
    trafficking patterns.
    B. Intelligence Architecture
        We face an enormous organizational challenge at our borders and in
    the air and maritime approaches to the United States. Our status as the
    preeminent commercial nation in the world makes us particularly
    vulnerable to drug trafficking. More than 400 million people enter the
    United States every year; any one of them can carry several million
    dollars worth of heroin. Four hundred million tons of cargo also enter
    our country every year. Illegal drugs represent 0.00001 percent of that
    traffic. Our challenge is to stop the one millionth part that
    represents illegal drugs without significantly affecting legal commerce
    and movement, which represents the life-blood of our country. We have
    the capacity to be successful until we not only appreciably lessen the
    quantity of drugs on our streets but also make serious inroads into the
    ability of international thugs to continue operating. Such progress
    requires commitment, organization, and dogged effort.
        Currently, many agencies and inter-agency groups collect, process,
    analyze and use intelligence on drugs and the movement of drugs. Our
    challenge as a government is to ensure that information acquired and
    processed by one agency is made available to all agencies who have need
    of it, while at the same time ensuring that sources and methods are
    protected. This means that we must find a way to get intelligence
    gathered by national assets down to the local sheriff on the border in
    time to make arrests. At the same time, we must ensure that this
    intelligence is preserved in accordance with the criminal justice
    system's evidentiary standards so that traffickers can not only be
    arrested, but can also be convicted. All of this must be done while
    still preserving the secrecy of collection methods, be they radio and
    wire intercepts, airborne radar tracking or human intelligence. The
    challenge is immense. It requires an agency such as ONDCP, which can
    take the long view without considerations of turf, to integrate and
    implement it.
        Question 3. I understand that ONDCP is currently in the process of
    working with all of these agencies to develop performance standards in
    our effort to combat drug. What is the current status of this effort
    and the interagency involvement in this project?
        Answer. More than 100 agency representatives have worked over the
    past six months to develop performance targets and measures for the 5
    Goals and 32 Objectives of the National Drug Control Strategy. ONDCP
    established five steering groups to oversee the development of targets
    and measures for each goal. Twenty-one working groups, chaired by
    agency representatives, developed the targets for each Strategy
    Objective. Under the supervision of steering groups, the working groups
    have performed exceptionally well and have drafted 103 targets and
    measures. These draft targets and measures are now being reviewed by
    ONDCP prior to submittal for formal interagency review. ONDCP intends
    to submit a report to the Congress by the end of the Summer discussing
    the proposed Performance Measurement System.
        Question 4. What areas do you see as current successes and failures
    of ONDCP Interagency Cooperation?
        Answer. It is important to note that one of the reasons the
    President adopted a 10-year National Drug Control Strategy was that it
    was not seen to be effective to try to gauge success or failure on a
    year-by-year basis. America's drug abuse problem is a long-term
    problem, and the solution to it must be similarly long-term. With that
    caveat in mind, we are seeing promising indicators in the following
    areas:
        Countering the Spread of Methamphetamines.--Meth, ``the poor-man's
    cocaine'', has the potential to ruin the lives of an entire generation
    of young Americans. ONDCP and other federal agencies spotted this trend
    early on. With the cooperation of many state and local agencies as well
    as members of Congress, ONDCP held two methamphetamine conferences to
    examine divergent areas such as treatment, precursor control, law
    enforcement and prevention. Based on these conferences, agencies have
    formed working partnerships to target the spread of methamphetamines
    from traditional hot spots on the Pacific coast. The payoff was in the
    most recent statistical indicators of methamphetamine use, which showed
    a marked decline.
        Adoption of the Ten-Year Strategy.--This was an innovation in
    government, and marked a new way of thinking about solving interagency
    problems. The President's plan to reduce drug abuse in the long-term is
    one of the boldest examples of interagency coordination in recent
    years.
        These successes, however, do not mitigate against what is surely
    the most disturbing aspect of drug abuse in America--the rapid rise of
    drug abuse among our children. ONDCP has proposed a $175 million
    advertising campaign targeted specifically at our young people. This
    campaign will deliver a powerful anti-drug message to 90 percent of our
    young people four times a week in prime time. The aim of the campaign
    is to foster a disapproval of drug abuse and a heightened awareness of
    the risks of drug abuse. Our research has shown us that, if these two
    conditions are met, then youth drug use will decline.
                           methamphetamine and heroin
        Question 1. What is ONDCP's view of the problems of
    methamphetamines and heroin?
        Answer. These are two of the most dangerous drugs we face.
    Methamphetamine is an incredibly addictive drug that is cheaper than
    cocaine and creates a longer high. It is a powerful central nervous
    system stimulant that creates extreme paranoia and aggressiveness. It
    severely reduces and sometimes destroys normal brain processes making
    treatment extremely difficult. The chemicals used to make this drug
    create toxic environmental hazards that pose dangers to people and
    property. It is being made in small labs in the U.S. (while Mexican
    traffickers move large quantities of the drug from super labs). The
    greatest use is in the West and Southwest but is gaining popularity in
    the Midwest. Anecdotal data indicates more use by women than men.
    Although methamphetamine abuse is a small part of the overall national
    drug problem it has the potential to become the next crack epidemic if
    it is not checked. This is why it is important to stop this emerging
    drug threat. We must act now if we are to prevent a future drug
    epidemic from methamphetamine or some other synthetic drug.
        If domestic methamphetamine production decreases, the demand for
    the drug in the U.S. will likely be met primarily by large, Mexican
    methamphetamine organizations. To meet this potential growing demand
    for foreign produced methamphetamine, large loads of Mexican-produced
    methamphetamine crossing the border by drug transportation groups will
    become more common.
        U.S. recognition of this growing threat was highlighted in recent
    conferences sponsored by ONDCP in Omaha and San Francisco. Cooperative
    efforts to control precursor chemicals and to work with Mexico to
    improve their ability to discover and investigate methamphetamine
    manufacturing and smuggling operations are underway.
        The heroin interdiction challenge is enormous. Potential global
    production has increased about 60 percent in the past eight years to
    about 360 metric tons. In 1995, worldwide heroin seizures totaled 32
    metric tons, less than 10 percent of the global production potential.
    The U.S. demand is approximately ten tons of heroin which is consumed
    by 600,000 addicts; it represents but a fraction of the production
    potential. U.S. heroin seizures in 1995 were just 1.3 metric tons. Our
    heroin control efforts must take this reality into account.
        A powerful narcotic, the typical user today consumes more heroin
    than ever because snorting or smoking high purity heroin is easier than
    injection. However, needle sharing is a transmitter of HIV. Severe drug
    dependencies develop--mental and physical--causing a person to commit
    many crimes to find dollars to purchase the drug. It remains readily
    available in many cities and Colombia's heroin trafficking has
    increased. We believe there are 600,000 chronic users in the U.S.
    Although our 1996 Pulse Check found that most users are older, chronic
    abusers, we are concerned that heroin use not spread among younger
    people. ONDCP is working to expand treatment capacity for these
    addicts.
        Question 2. What additional steps can ONDCP take to help sheriffs
    and police officers in fighting methamphetamines and heroin in Colorado
    and the Rocky Mountain Region?
        Answer. Further refinement and development of the Rocky Mountain
    HIDTA program is our most important effort in the region. Designated in
    October of 1996, we have launched two major initiatives in training and
    intelligence gathering. The law enforcement training program is firmly
    underway. The intelligence program--designed to improve information
    gathering and intelligence sharing--has recently obtained its technical
    equipment and its analysts are being hired and trained.
        At the federal level, we are developing methamphetamine-specific
    education and prevention materials that will be made available at the
    local level. We have awarded $10 million to the DEA, EPA and NIDA to
    develop programs that will assist local officials. We are updating the
    anti-methamphetamine strategy which is due out early next year. The
    refined strategy will allow us to better organize and coordinate at the
    national and regional levels. We are encouraged that recent data from
    the National Institute of Justice's Drug Use Forecasting Program (DUF),
    which indicate that methamphetamine use among drug arrestees decreased
    42 percent (3.8 to 2.2) over the past year; a promising indicator that
    our comprehensive strategy is working at the local level.
                           counter drug technologies
        Question 1A. Last month, this subcommittee held a hearing on the
    federal law enforcement agencies within the Treasury Department. An
    important part of that hearing was a display of some of the latest
    technologies which are being used to fight crime. Law enforcement
    officials in Colorado, including Sheriff Pat Sullivan of Arapaho
    County, have expressed interest in the work being done by ONDCP's
    Counter Drug Technology Assessment Center (C-TAC). Can you provide the
    subcommittee with an overview of the technologies being developed by
    the Center that may be useful for state and local law enforcement?
        Answer. Technologies being developed by C-TAC for state and local
    law enforcement stem from pilot projects funded by C-TAC and managed by
    a state and local organization. The most successful of these endeavors
    has been in the application of recent significant advancements made in
    the performance and capabilities of personal computers to the law
    enforcement tasks associated with financial crimes (State Attorney
    Generals in Texas, Arizona, and Utah), trafficker communications
    patterns (landline, cellular clones, and pagers--New York State
    Organized Crime Task Force), and drug-related violent crimes (Pinellas
    County Sheriffs' Office, Florida).
        C-TAC also conducts performance evaluations of drug detection
    systems and produces an evaluation report. These reports are
    distributed to law enforcement agencies (federal, state and local) to
    assist in buying the correct drug detection systems.
        Question 1B. What about in the area of methamphetamine detection?
    Is the Center working on technologies that would help detect and shut
    down methamphetamine labs?
        Answer. The number of clandestine drug laboratories seized in the
    United States has been increasing dramatically. Of particular concern
    is the illicit production of methamphetamine which has risen in the
    Midwest and Rocky Mountain regions. To support the increased activities
    of the Drug Enforcement Administration and regional law enforcement, C-
    TAC is sponsoring programs that include the development of portable/
    mobile platforms to provide on-site forensic analytical capability.
    This will keep valuable criminal and intelligence information from
    being lost when a clandestine laboratory is seized. Additionally, a
    comprehensive database related to drug preparation along with the
    precursor chemicals and drug preparation equipment is being developed.
    C-TAC is supporting development of a system to rapidly disseminate data
    to field agents to assist in identifying the different types of drug
    labs and safety requirements recommended. C-TAC and DEA are also
    coordinating on other advanced technological efforts in locating and
    dismantling drug laboratories that will be available to state and local
    law enforcement.
        Question 1C. Colorado is seeing an increase in heroin shipments
    coming up from Mexico. Are there technologies that could assist law
    enforcement in identifying these drug traffickers and their heroin
    shipments?
        Answer. C-TAC is addressing the issue of drug trafficking and the
    ability of technology to help law enforcement restrict such
    trafficking. One program develops the capability to provide remote
    communications to law enforcement officers in all types of terrain
    including rugged geographical areas like Colorado. Preliminary analysis
    of such capabilities is being presently undertaken by C-TAC with site
    visits in the states of Washington, Idaho and Colorado. C-TAC is also
    developing methods for communications among regional law enforcement
    task forces with non-standard communication equipment to enable
    regional anti-drug trafficking operations to be successful. Initial
    models have been placed in southern California law enforcement
    agencies.
        Question 1D. My understanding is ONDCP would like to change the
    title of Chief Scientist at the Center to `Director of Technology'. It
    seems that this change would place less emphasis on the importance of
    anti-drug technology. Could you explain the proposed change to the
    subcommittee?
        Answer. ONDCP's reauthorization legislation proposes a number of
    changes to the current statutory authority for the Counterdrug
    Technology Assessment Center (C-TAC), all of which are designed to
    enhance its role in the development of anti-drug technology. The
    Administration's bill proposed to change the title of ``Chief
    Scientist'' to ``Director of Technology'' to reflect ONDCP's current
    organizational chart. This organizational chart reflects the expansion
    of ONDCP's staff to 154 (124 FTE's and 30 DOD detailees) and alignment
    of staff responsibilities. C-TAC remains a special component that
    reports directly to the Director, ONDCP.
        The reauthorization proposal reflects the increasingly important
    involvement by C-TAC in the development of drug demand reduction
    technologies. This includes supporting biomedical research into the
    development of medications to prevent and reduce drug dependence and
    abuse. These exciting activities complement C-TAC's traditional role in
    supporting supply reduction efforts through research into nonintrusive
    inspection systems; improved border surveillance, detection,
    monitoring, and apprehension capabilities; and improving drug
    intelligence activities.
        The reauthorization proposal also contains new authority providing
    C-TAC support for ONDCP's efforts to develop and implement a system of
    measures of effectiveness for programs implementing the National Drug
    Control Strategy. The involvement of C-TAC in the national drug control
    performance measurement system is key to insure that appropriate anti-
    drug technology considerations are included by national drug control
    programs agencies in the implementation of the Strategy.
                        fiscal year 1998 budget request
        Question 1A. The Administration is proposing to spend $16 billion
    in fiscal year 1998 on anti-drug efforts. Can you briefly explain those
    efforts for the committee?
        Answer. The Administration's proposal, summarized by each major
    functional area of the budget, is presented in the table below:

                                             [Budget Authority in Millions]
    ----------------------------------------------------------------------------------------------------------------
                                                                                Fiscal year--
                                                        ------------------------------------------------------------
                       Drug function                                                   1998      1997 to 1998 change
                                                         1996 actual      1997     President's ---------------------
                                                                        enacted      request     Dollars    Percent
    ----------------------------------------------------------------------------------------------------------------
    Criminal Justice System............................     $7,164.9     $7,835.5     $8,126.5     $291.0        3.7
    Drug treatment.....................................      2,553.8      2,808.7      3,003.5      194.8        6.9
    Drug prevention....................................      1,400.7      1,648.0      1,916.5      268.5       16.3
    International......................................        289.8        449.7        487.6       37.9        8.4
    Interdiction.......................................      1,321.0      1,638.6      1,609.7      -28.9       -1.8
    Research...........................................        609.2        631.9        673.5       41.5        6.6
    Intelligence.......................................        114.5        146.4        159.4       13.0        8.9
                                                        ------------------------------------------------------------
          Total........................................     13,454.0     15,158.9     15,976.8      817.9        5.4
    ----------------------------------------------------------------------------------------------------------------
    Detail may not add to totals due to rounding.

        The President's fiscal year 1998 request for $16 billion reflects
    the following priorities: reducing youth drug use, reducing the
    consequences of hardcore drug use, reducing drug-related crime and
    violence, stopping the flow of drugs at U.S. borders, and reducing
    domestic and foreign sources of supply.
      --Reducing Youth Drug Use. The centerpiece of our national
            counterdrug strategy effort remains the prevention of drug use
            by our children. Youth-oriented prevention programs today can
            significantly reduce the number of addicted adults who will
            cause enormous damage to themselves and our society tomorrow.
            Major initiatives targeting illegal drug use by youth and
            underage drinking and smoking include:
                      National public education campaign. ONDCP is
                    developing a national public education campaign to
                    supplement existing anti-drug public service
                    announcements developed by the Partnership for a Drug
                    Free America and other organizations and carried by
                    broadcast and print media. This effort will encompass a
                    broad public education campaign that warns our youth of
                    the hazards of using illegal drugs and emphasizes the
                    advantages of drug-free lifestyles.
                      Youth, drugs and driving initiative. The Department
                    of Transportation and ONDCP are developing an
                    initiative to address the problem of young people
                    driving under the influence of illicit drugs.
                      Enhanced school-based prevention programs. The
                    federal government, in partnership with state and local
                    governments and the private sector, will continue to
                    develop options to improve the effectiveness of drug
                    prevention education and to ensure that funds are used
                    as effectively as possible.
      --Reducing the Consequences of Hardcore Drug use. Hardcore drug users
            comprise about 20 percent of the drug using population, yet
            consume over two-thirds of the supply of drugs. By reducing the
            number of dependent hardcore drug users, we can reduce the
            health, welfare, and criminal consequences of illegal drug use.
            Major program initiatives targeting hardcore users include:
                      Effective rehabilitation and treatment programs.
                    Efforts will continue to expand treatment capacity
                    inside and outside the criminal justice system in order
                    to prevent the problems of hardcore drug use from
                    overwhelming our health and criminal justice systems.
                      Anti-cocaine medications development. ONDCP, in
                    collaboration with the National Institute on Drug
                    Abuse, is sponsoring research to develop an artificial
                    enzyme that would block cocaine's effect on the brain.
                    Clinical trials are anticipated by the year 2000.
      --Reducing Drug-related Crime and Violence. A disproportionate number
            of the more than 12 million property crimes and almost two
            million violent crimes that occur each year are committed by
            drug users or traffickers. Major programs targeting the drugs
            and crime relationship include:
                      Increased police presence. More police and innovative
                    approaches to policing, such as Community Policing, can
                    enable communities to reduce drug related crime and to
                    support local prevention and treatment efforts.
                      Expanded drug courts. Drug courts have proven their
                    worth in showing that court-ordered rehabilitation and
                    treatment programs can be successful in reducing drug
                    use, drug crime, and alleviating prison and jail
                    overcrowding.
                      Implementation of prison drug testing. New Department
                    of Justice guidelines require states to develop anti-
                    drug plans for prisoners and parolees over the next
                    year. States that do not comply with the new guidelines
                    by March 1, 1998, will lose federal prison grant
                    dollars.
                      Improved High Intensity Drug Trafficking Area (HIDTA)
                    programs. Properly targeted, the HIDTA program offers
                    greater efficiency and effectiveness in countering drug
                    effects in particularly troubled areas. The
                    Administration is responding to Congressional interest
                    in expanding and improving this program by developing a
                    comprehensive methodology for earmarking priorities of
                    needs, working with the Justice Department's Organized
                    Crime Drug Enforcement Task Force Program.
      --Stopping the Flow of Drugs at U.S. Borders. Unless we shield our
            borders from the flow of drugs, the United States will never
            stem illegal drug use. Interdiction is the key to stopping
            illegal drugs from crossing our borders and reaching our
            neighborhoods. Major initiatives supporting this effort
            include:
                      Programs to stop drug trafficking across the
                    Southwest Border. Drug traffickers are clearly
                    exploiting the extensive legitimate commerce and
                    traffic that crosses the busiest border in the world.
                    ONDCP began a comprehensive review of the federal
                    effort to counter drug smuggling at the Southwest
                    Border with a conference in El Paso in July 1996. These
                    efforts will continue to be priorities for funding over
                    the five-year budget planning period.
                      Strategy to close the Caribbean ``back door''. The
                    Administration will continue to expand law enforcement
                    investigations and establish flexible maritime and air
                    interdiction programs to respond to drug trafficking in
                    this region.
                      Hardening of vulnerable drug entry points. The
                    Administration will develop a comprehensive
                    coordinating capacity that allows federal resources to
                    be focused more efficiently to prevent drug traffickers
                    from importing illegal drugs.
      --Reducing Domestic and Foreign Sources of Supply. Working with
            source and transit nations offers a great prospect for
            eliminating foreign sources of supply. Cocaine, heroin, and
            recently methamphetamine, are illegal drugs produced outside
            the United States that cause the greatest harm to our citizens.
            Reducing the availability of these drugs is a priority.
            Initiatives supporting these efforts include:
                      Reduction of illegal coca cultivation in Peru.
                    Targeting Peru for an intense program that comprises
                    economic development, eradication, improving the rule
                    of law, and sustaining and supporting the political
                    will to attack the drug trade is a top international
                    drug policy priority.
                      Bilateral cooperation with Mexico. The High Level
                    Contact Group established by the Federal Government in
                    March 1996 has provided a productive framework for
                    addressing drug issues. The United States will work
                    with the Mexican Government, recognizing concerns about
                    Mexico's sovereignty, to enable it to withstand the
                    corrupting influence of drugs.
                      Reduction of heroin production and trafficking. U.S.
                    access and influence is extremely limited in Burma,
                    Afghanistan, and Laos--the key heroin producing
                    countries. Efforts are underway to work against heroin
                    trafficking organizations in cooperation with other
                    regional partners, including China, and to develop a
                    consensus in the area that will support development of
                    a regionally-integrated anti-heroin effort.
                      Attack on international criminal organizations.
                    Coordinated interagency approaches to target major drug
                    kingpins have proven to be successful. Law enforcement,
                    supported by intelligence efforts, will continue
                    efforts to disrupt and dismantle major kingpins and
                    their organizations.
                      Reduction of international money laundering. The law
                    enforcement agencies charged with disrupting money
                    laundering schemes can help disrupt and destroy drug
                    trafficking organizations by attacking their finances.
                    The U.S. government will continue to tighten its own
                    regulations and enforcement procedures to freeze,
                    secure, and confiscate cash and criminally derived
                    assets.
        Major drug-related funding initiatives in the President's fiscal
    year 1998 request include the following:
      --National Media Campaign. The President's budget seeks to fund a
            national youth media campaign targeting illegal drug
            consumption by youth through the $175 million provided in
            ONDCP's Special Forfeiture Fund. This initiative would rely on
            high-impact, anti-drug television advertisements aired during
            prime-time to educate and inform the public on the dangers of
            illegal drug use.
      --Safe and Drug Free Schools. $620 million is requested for fiscal
            year 1998, an increase of $64 million (11.5 percent) over the
            fiscal year 1997 appropriation. New resources would provide
            grant assistance to governors and state educational agencies
            for drug and violence prevention programs.
      --Coast Guard. $389 million is requested in fiscal year 1998, an
            increase of $53 million (16 percent) over fiscal year 1997.
            These new resources will enhance maritime interdiction
            operations in the Caribbean and Puerto Rico and provide
            resources for Operation STEEL WEB.
      --Community Oriented Policing (COPS). $510 million in drug-related
            resources is requested in fiscal year 1998, an increase of $41
            million (9 percent) over fiscal year 1997. COPS serves as the
            vehicle for the Administration's strategy to fight violent
            crime and drug use by increasing the number of state and local
            police officers on the streets.
      --Prevention and Treatment Research. $522 million is requested in
            fiscal year 1998 for the National Institute on Drug Abuse
            (NIDA), an increase of $33 million over fiscal year 1997. These
            additional resources will further ongoing drug prevention and
            treatment research efforts of NIDA and the Office of AIDS
            Research.
      --Drug Courts. $75 million is requested in fiscal year 1998, an
            increase of $45 million (150 percent) over fiscal year 1997.
            These grants support state and local criminal justice agencies
            to provide court-mandated drug treatment and related services
            to nonviolent offenders.
      --INS Southwest Border Initiative. $367 million in drug-related
            resources is requested for the Immigration and Naturalization
            Service (INS) in fiscal year 1998, an increase of $48 million
            over fiscal year 1997. This request provides for an additional
            500 Border Patrol agents to stem the flow of illegal drugs and
            illegal aliens across the Southwest Border.
      --International Narcotics Control and Support for Peru. The fiscal
            year 1998 budget includes $214 million for the State
            Department's Bureau of International Narcotics and Law
            Enforcement Affairs (INL). Included in the INL budget is $40
            million for Peru, an increase of $17 million over fiscal year
            1997.
        Question 1B. Does the Administration's spending priorities in these
    areas reflect ONDCP's spending priorities.
        Answer. ONDCP plays an important role during the Administration's
    deliberations on the budget to ensure that key drug initiatives receive
    adequate consideration. ONDCP fully supports the President's fiscal
    year 1998 budget and the associated spending priorities.
        Question 2A. What is ONDCP's process in developing the annual Drug
    Strategy?
        Answer. Section 1005 of the Anti-Drug Abuse Act of 1988, as amended
    (Public Law 100-690) requires the President to develop and annually
    submit to Congress a National Drug Control Strategy. ONDCP is
    responsible for preparing the Strategy for the President. The law also
    requires the Director of ONDCP to formulate the Strategy in
    consultation with a wide array of experts and officials, including the
    heads of the national drug control program agencies, the Congress,
    State and local officials, and representatives of the private sector.
    Developing and implementing the Strategy is a process that continues
    throughout the year, and the consultation process for the 1998 Strategy
    is currently ongoing. The consultation process includes input received
    by the Director during his travels around the country speaking with
    individuals, organizations and associations about the Strategy, through
    the responses to more than 1,300 letters sent to individuals in the
    public and private sector specifically seeking their input on the
    Strategy, through conferences and meetings, and from the hundreds of
    unsolicited letters received every year. Each year, starting in the
    fall, ONDCP staff collate and process all of the information obtained
    through this consultation process and incorporate it into the initial
    draft of the Strategy. This draft is distributed to representatives of
    each of the primary drug control agencies for comment. Revisions are
    incorporated and the final Strategy is produced for submission with the
    President's budget.
        Question 2B. How does ONDCP solicit, collect and use input from
    state and local law enforcement?
        Answer. The solicitation process involves the sending of a letter
    from the Director to appropriate individuals. In the letter the
    Director notes the significance of the Strategy to the nation's effort
    against drugs and the valuable contribution to that effort that the
    addressee makes, and asks that written input to the Strategy be
    submitted.
        The first step in this process is to develop a mailing list. Given
    the large number (several thousand) of state and local law enforcement
    agencies throughout the country, it is not possible to send each agency
    a letter. Rather, an attempt is made to identify leading law
    enforcement officials involved with drug policy issues. This is done
    through ONDCP's Bureau of State and Local Affairs (including HIDTA
    staff), who closely coordinate activities with state and local law
    enforcement on a regular basis, and through other ONDCP staff who
    regularly interact with law enforcement through conferences and
    research activities. The consultation process for law enforcement
    officers is similar to that used for other topic areas (e.g.,
    treatment, prevention, interdiction, source country), with appropriate
    ONDCP staff providing input to building the mailing list.
        The letters are sent prior to the Strategy drafting process in the
    fall. Last year the letters were sent on November 4. Responses are
    received and incorporated throughout the period during which the
    Strategy is written. Last year while the solicitation asked for
    responses by November 17, they were reviewed through January. Last year
    over 100 responses were received.
        As Director, I review each response and highlight suggestions that
    are to be incorporated into the Strategy. Input received at other times
    of the year through unsolicited letters, conversations with concerned
    parties, etc., are processed similarly. A report is prepared annually
    summarizing the input received from the public-and private-sector
    consultation process.
        Question 2C. Will you assure me today that Colorado and other
    states will be consulted further in advance and allowed a sufficient
    time to respond? Would you inform me as to how you intend to change the
    current policy in order to ensure this?
        Answer. Yes, I can assure you that Colorado and other states will
    be consulted further in advance and allowed a sufficient time to
    respond. Steps have already been taken to ensure that this will happen.
    For example, in December of last year ONDCP and the Bureau of Justice
    Assistance hosted a meeting at ONDCP with the State Administrators of
    the Byrne Memorial Grants to discuss ways in which the states can
    assist in forming federal drug control policy. ONDCP has taken
    immediate steps to provide state Administrators with appropriate ONDCP
    staff telephone numbers, and to assure them that their voices would be
    heard in the development of the 1998 Strategy. Additionally, the letter
    soliciting input for the Strategy will be distributed earlier to permit
    sufficient time for a complete and thoughtful response.
        Question 3A. Can you tell the committee which agencies have
    detailees working at ONDCP and which agencies have the largest number
    of detailees?
        Answer. ONDCP has civilian detailees and military assignees. We
    have civilians from the Department of State (1); the Department of
    Transportation (1); the Department of Health and Human Services (1);
    the National Science Foundation (1) and the Federal Bureau of
    Investigations (1). The military assignees are from the various
    branches of service within the Department of Defense (24).
        Question 3B. What is the typical length of assignment of these
    detailees? Is there any limitation on the amount of time detailees can
    be assigned to your agency?
        Answer. The typical length of an assignment is one year for
    civilian detailees with the possibility of a one-year extension. The
    extension must be a cooperative agreement between ONDCP and the sending
    agency. Immediately prior to the appointment of Barry McCaffrey ONDCP
    had no military assignees. Military personnel are assigned for three
    years.
        Question 3C. Does ONDCP provide these people with any training, and
    if so are these costs borne by ONDCP or the sending agency?
        Answer. The civilian detailees are provided training through the
    sending agency. However, if training is required by the Executive
    Office of the President to benefit ONDCP, the cost can be absorbed by
    ONDCP if the funds are available. Additionally, any professional
    development training required by the military assignee is funded by
    DOD. Military personnel assigned to ONDCP neither require nor receive
    any special training prior to assignment.
        Question 3D. What number of these are at ONDCP and their salaries
    are paid for by their originating agency and how may of them have their
    salaries paid for by ONDCP?
        Answer. Of the five civilian detailees, ONDCP reimburses salaries
    for three. The other two civilian detailees salaries are paid by their
    originating agencies.
        Question 4A. There is funding outlined in the budget request which
    indicated that the base is fully funded. Is your base fully funded?
        Answer. Our fiscal year 1998 budget request has sufficient funding
    to support the salary and benefits as well as the other requirements of
    154 staff, 124 FTE and 30 detailees.
        Question 4B. How many positions (FTE) are unfilled?
        Answer. Twenty-five of the 124 FTE positions are unfilled.
        Question 4C. What would it take to fill those positions?
        Answer. Recruitment has been ongoing. The following information
    specifies where we are in the process to date: Ten of the unfilled
    positions will be advertised in the near future; job announcements for
    six vacancies will close this month; interviews are ongoing for two
    vacancies; candidates are being sought for one remaining PAS position;
    one PAS is being vetted by the administration; and confirmation is
    pending for one PAS position. Four selectees are pending approval by
    the Administration (i.e., drug test results, security clearances,
    etc.).
        Question 4D. Is the amount requested to maintain current levels
    accurate? What will all of this funding be applied to?
        Answer. The ONDCP fiscal year 1998 budget request of $18,016,000
    will provide sufficient resources ($11,546,000) to support the salaries
    and benefits of 124 FTE (154 positions). The Travel object class
    request of $600,000 will cover the cost of staff and invitational
    travel, an increase of $75,000 over the fiscal year 1997 requested
    reprogrammed amount. The Transportation of Things object class request
    of $28,000 includes resources for miscellaneous moving expenses,
    freight and express charges. The Rent, Communications, and Utilities
    object class request includes GSA rent payments of $1,900,000 and
    communication and utility costs of $294,000. The Printing and
    Reproduction object class requires $302,000 for the printing of the
    National Drug Control Strategy and other publication requirements. The
    Other Services object class request of $2,889,000 supports personnel
    training, equipment maintenance, building security, the facilities
    contract to operate ONDCP's telecommunications center, and the
    Director's protection service. The Supplies and Materials object class
    request of $122,000 will allow ONDCP to purchase the supplies,
    materials, and publications required. The Equipment object class
    request of $335,000 will allow the purchase of required office
    equipment, personal computers and secure communications equipment.
        Question 4E. When President Clinton took office he issued Executive
    Order 12837 that mandated the reduction of administrative costs, as
    well as personnel over a four year period. ONDCP bore the brunt of this
    mandate with the Executive office. fiscal year 1997 was the last year
    of the Order, will you have to continue to carry out the mandated
    reductions in fiscal year 1998?
        Answer. Executive Order 12837 mandated that over a four-year period
    ending with fiscal year 1997, agencies shall submit budget requests
    that reflect no less than a 14 percent reduction in administrative
    expenses from the amounts made available for fiscal year 1993 adjusted
    for inflation. OMB has defined administrative expenses to reflect all
    non-payroll costs with the exception of GSA rent and furniture. Through
    fiscal year 1997 ONDCP administrative categories reflect a decrease of
    45 percent from amounts obligated in fiscal year 1993. Executive order
    12837 ends with the close of fiscal year 1997.
        Question 4G. Can you tell the committee the status of any unfilled
    Senate confirmed positions? How close are you to having these positions
    filled?
        Answer. Currently candidates are being sought for the Associate
    Director of the Bureau of State and Local Affairs. A short list has
    been developed and we anticipate that a nominee will be identified in
    the very near future. Confirmation is pending for the nominee Deputy
    Director for the Office of Demand Reduction: Patricia McMahon. The
    Senate Committee on Labor and Human Resources intends to hold a hearing
    on the nomination shortly. A candidate has been selected for the
    position of Deputy Director for the Office of Supply Reduction who is
    in the process of being vetted by the Administration.
        Question 5A. Mr. McCaffrey, in fiscal year 1997, the federal
    government will spend $15 billion on the fight against drugs. Recently,
    however, the GAO reported to Congress this past March, that although
    we've demonstrated some positive results, there needs to be more
    research done on understanding the elements of effective prevention and
    treatment programs. In your submitted testimony, you mention that in
    fiscal year 1998, the National Institute on Drug Abuse is requesting
    $522 million for this type of research.
        Can you briefly describe this research and when you expect some
    initial results?
        Answer. NIDA is conducting a wide variety of prevention and
    treatment research projects that will be supported with the requested
    funds. Of the total $522 million requested for NIDA, $217 million are
    for projects that support Goal 1 of the Strategy (i.e., prevention);
    these include:
      --Neurobiology of Addiction. This is continuing research on the
            neurobiological mechanisms for drug abuse that sparked the
            search for the brain's opioid receptors and their natural
            ligands.
      --Drugs and the Brain. Advances in molecular biology and neuroimaging
            have allowed researchers to visualize the effects of drugs on
            the brain and to use drug probes to specify where drugs go in
            the brain, how long they remain there, and how long brain
            dysfunction remains after drug use ceases. These techniques
            will ultimately be translated into tremendous improvements in
            prevention and treatment.
      --Medications Development. NIDA's top priority remains the
            development of an effective cocaine medication or ``cocaine
            blocker.'' NIDA/NIH supported scientists have identified and
            genetically specified the major receptor site where cocaine
            works on the brain, and have discovered many of the mechanisms
            of action both at the receptor and the molecular levels. In
            addition, NIDA will continue research toward development of
            potential new therapeutic compounds, and toward development of
            additional medications for opiate addiction.
      --Determinants of Drug Taking Behavior Among Children and
            Adolescents. NIDA is proposing to use the basic science of
            development to identify the determinants of drug taking
            behaviors among children and adolescents, and apply these
            findings to implement effective prevention and treatment
            approaches.
        Of the $522 million requested for NIDA, $307.9 million is for
    projects that support Goal 3 of the Strategy (i.e., treatment); these
    include:
      --Treatment Improvement. NIDA has established major programs to
            identify, evaluate, and develop pharmacological and behavioral
            therapies for drug addiction. As the breadth of NIDA-supported
            research is expanded, they anticipate that novel approaches
            from such areas as molecular biology, developmental and
            cognitive psychology, and social learning theory, will present
            opportunities to improve treatment efficacy.
      --Behavioral Treatments. Behavioral therapies often remain the only
            available effective treatment approaches to many drug problems,
            including cocaine addiction, where there are no viable
            medications yet. NIDA continues to assess the value of
            integrating behavioral therapies with medications and to
            support studies to match specific types of patients to
            particular behavioral interventions.
      --Health Services Research. Through this program NIDA is increasing
            its focus on the organization and financing of drug abuse
            treatment, especially as it relates to national studies or
            alternative delivery systems including managed care and managed
            behavioral health care systems.
      --HIV Infections and AIDS. The goal of NIDA's research program on
            HIV/AIDS remains to reduce HIV transmission that is related to
            drug abuse. NIDA research has demonstrated that drug abuse
            outreach and intervention programs are highly effective in
            reducing behaviors associated with HIV/AIDS.
      --Minority Populations. Racial and ethnic minority groups are
            disproportionately impacted by drug abuse and its sequelae,
            including AIDS. NIDA continues to support research to better
            understand the bases of cultural differences in drug-seeking
            and use; to develop new and enhance existing outreach/
            intervention approaches focused on racial and ethnic
            minorities; and to develop new, and adapt existing, drug abuse
            treatments shown to be effective with the general population to
            meet the special cultural needs of racial and ethnic minority
            groups.
        This research is ongoing as are the reporting of results. For
    example, results are routinely published on NIDA's HIV/AIDS
    intervention/outreach program that have had great impact on programs
    around the country. The timing of other results is more difficult to
    determine. For example, the development of a cocaine blocker is a
    lengthy and complex process that will involve lengthy clinical trials,
    peer review, and FDA approval. However, NIDA believes it is on the
    verge of developing such a medication that should be available within
    the next ten years.
        Question 5B. What do you believe is the likelihood that they will
    receive all of the $522 million requested?
        Answer. We cannot speculate on the likelihood of whether NIDA will
    receive all of the $522 million requested. However, we fully concur
    with NIDA on the importance of this research to the nation's health and
    well being and believe that it is critical to implement the goals and
    objectives of the 1997 National Drug Control Strategy.
        Question 5C. Will this research, once completed, enable you to make
    programmatic decisions? How and if not, then why not?
        Answer. As this research is completed it will be assessed by NIDA
    and others on its scientific merit and for its relevancy to
    programmatic decision making. We fully expect it to provide NIDA's
    program managers and individual state and local prevention and
    treatment program managers with valuable input. For example, we expect
    the development of a cocaine blocker to have tremendous impact on
    individual programs. Additionally, the research on minority
    populations, treatment improvement, medications development, HIV/AIDS
    outreach/intervention, and behavioral treatments are all expected to
    have significant ramifications for programmatic decisions as existing
    programs are evaluated and new ideas are tested. The results of this
    research will be used to evaluate program effectiveness to decide which
    programs work and which should be discontinued.
                                     ______

                      Questions Submitted by Senator Kohl
                              ondcp budget request
        Question 1. ONDCP is projecting a budget request in fiscal year
    2002 of $23 billion. Based on that projection, it would appear that
    ONDCP is not anticipating any success in resolving the drug problem and
    moving into a maintenance state. Is this a correct analysis of your
    projected request?
        Answer. A federal drug control budget of $23 billion is not a
    funding level that has been recommended or coordinated through an
    inter-agency process within the Administration. Although there have
    been notional discussions of possible fiscal year 2002 funding levels,
    the Administration has taken no official position on resources that
    will be required for drug control purposes in fiscal year 2002. We are
    beginning the process of constructing a five-year drug budget. This
    will require detailed input from each drug agency and department. For
    example, to close the treatment gap over the next several years, we
    will need a comprehensive analysis from the Department of Health and
    Human Services of the combination of programs to meet this objective,
    and an annual estimate of resources required to fund these programs.
    The five-year budget for fiscal year 1999 to fiscal year 2003 will
    incorporate this analysis and will be included in the 1998 National
    Drug Control Strategy.
        The drug control program may eventually reach a maintenance state,
    but that decision has not been made. Conceivably, as the Strategy
    succeeds in reducing the drug problem in the outyears, the budget could
    be reduced, except for those resources required to ensure that the drug
    problem does not return.
        Question 2. The Director has requested a desire for a five-year
    budget process. What exactly is being requested? Would you submit a
    Presidential request for an advance appropriation? Would drug control
    agencies be bound by these five-year estimates? If not, how does this
    request differ from the five-year projections required now?
        Answer. ONDCP's five-year budget will be a planning document. It
    will show funding requested by the President for the coming fiscal
    year, and anticipated resource needs for each of the four succeeding
    years. This proposal is considerably broader than current law,
    providing greater structure to this process and placing a greater
    responsibility on departments and agencies to participate in long-term
    planning. Further, this is not a proposal to alter the current
    appropriations process. No advance appropriations will be requested.
    Also, funding estimates for agencies may be revised as the five-year
    plan is updated each year, based on new challenges encountered. For
    example, the Administration is formulating a plan to provide for
    greater enforcement at and between ports-of-entry on the Southwest
    Border. This plan will involve additional resources for the Border
    Patrol. Initial funding plans covering fiscal year 1999 to fiscal year
    2003 may be revised, as the trafficking situation warrants, when the
    Administration presents its drug control plan for fiscal year 2000 to
    fiscal year 2003.
        Question 3. Could publishing five-year budget projections limit the
    ability of agencies to reflect programmatic successes indicated by a
    leveling or reduction in spending? Wouldn't this send a signal to those
    profiting from drug trafficking and sales where the emphasis is moving
    or weakening?
        Answer. Although the White House will have significant program
    detail associated with the five-year drug budget plan for each agency,
    and this information will be available to the Congress, published
    public documents will aggregate much of this information. This should
    mitigate the potential problem of signaling particular program changes
    in the outyears to our drug trafficking adversaries.
        Question 4. Under the projected increased allocation to the Drug
    Strategy, goals will be changed. Please explain how the projections for
    this reallocation were developed?
        Answer. The basic five goals of the Strategy have not changed. In
    fact, the goals are being proposed for a decade-long approach to
    confront America's drug problem. By way of background, funding used to
    be presented by major function, rather than by Strategy goal. Now ONDCP
    publishes spending estimates by both major function and by Strategy
    goal. Funding by goal is principally associated with the following
    spending functions:
        Goal 1--Prevention
        Goal 2--Domestic Law Enforcement
        Goal 3--Treatment
        Goal 4--Interdiction
        Goal 5--International and Domestic Enforcement
                   pharmacological and behavioral treatments
        Question 1. I have read that the National Institutes of Health are
    establishing programs to identify, evaluate, and develop
    pharmacological and behavioral therapies for drug addiction. Are these
    approaches similar to the programs and pharmacological aids provided
    for nicotine addition?
        Answer. Treatment for nicotine addiction generally embraces two
    modalities: medications (nicotine polacrylax gum and nicotine
    transdermal patch) and cognitive behavioral interventions. Treatments
    for drug addictions are similar to that of nicotine treatment, but
    because of the complexities of poly-drug abuse, the success rates are
    not as profound.
        For the treatment of opiate addiction, methadone has been the
    medication of choice since 1964. In 1990, LAAM (1-alpha-acetyl-
    methadol) was approved for treatment of opiate addiction as well. Both
    medications prevent withdrawal symptoms and drug hunger as well as
    blocking the euphoric effects of short-acting narcotics such as heroin.
    Methadone must be given once in a 24-hour period, while LAAM is a
    longer acting medication requiring dosing every 48 hours. Research has
    demonstrated increased effectiveness when medication therapy is
    combined with psychotherapy and life skills training. Naltrexone also
    has been shown to be effective in the treatment of opiate addiction.
    Marketed as Rivia, naltrexone has recently been shown effective in
    treatment of alcohol addiction.
        For the treatment of cocaine, research continues with
    buprenorphine. This medication is a partial agonist--a synthetic opioid
    that has been found to reduce both opiate and cocaine use in patients
    who abuse both substances. Critical in the treatment of cocaine
    addiction are the ``cuing techniques''--the concept of recognizing
    cravings and devising methods of reducing cravings without relapse. New
    medications being tested include bromocriptine and buproprion which
    work on the brain's dopamine system to treat cocaine dependence.
        ONDCP through C-TAC is funding research on the following: the
    development of catalytic enzymes that produce cocaine antibodies in the
    blood stream; the investigation of a family of NIDA compounds to block
    the effects of cocaine in the brain; state-of-the-art equipment to
    improve our understanding of drug addiction and the human brain;
    development of a national research tool that monitors the effectiveness
    of substance abuse treatment programs; development of advanced
    treatment technologies for court diversion of juvenile offenders with
    drug problems; research on alternative treatments to cocaine through
    the development of novel compounds for use as medications; and research
    on auricular acupuncture to treat cocaine problems.
        Question 2. If these therapies are not like the nicotine aids, how
    do they differ, and what success rate are we seeing for these types of
    the therapies?
        Answer. The success rates for methadone are excellent. Methadone
    has been shown to be medically safe to use and has been studied for
    more than 20 years. Success rates rose after a 1993 study by Dr. John
    Ball at the Addiction Treatment Center in Baltimore demonstrated
    appropriate dosages of methadone is a matter of individualization, not
    legislation. NIDA is currently testing a prototype instrument that
    enhances methadone treatment. The ``Vocational Readiness Screener'' is
    designed to quickly and reliably assess methadone treatment patients'
    employability and evaluate their vocational barriers and needs.
        All medication therapies are enhanced when used in combination with
    counseling and other social and medical services for the treatment of
    addiction to any illicit substance. Because of the complexity of the
    action of drugs on the brain, developing appropriate and tolerable
    medication therapy is a long, arduous process. Research has shown that
    the use of a systematic incentive program involving social support,
    education about drug-free recreation, vocational support, and monitored
    medication therapy appears to be very helpful in initiating drug
    abstinence. Relapse prevention services provide the additional
    structure and skills that have been proven effective for individuals
    with high rates of cocaine use. Successful research results have also
    been obtained through a ``harm-reduction'' approach. This assists the
    client in making gradual life style changes, combined with abstinence
    and decreased risks are considered steps in the right direction.
                                  interdiction
        Question 1. The Federal budget for drug abuse control climbed from
    $1.5 billion in fiscal year 1981 to about $15 billion in fiscal year
    1997 (GAO Observations on Elements of the Federal Drug Control Strategy
    GAO/GGD 97-42, March 197). Yet according to a GAO study (GAO 97-42 p.
    12), the amount of cocaine and heroin seized between 1990 and 1995 has
    had little impact on the availability of illegal drugs in the United
    States. Why is this?
        Answer. Cocaine seizures outside the United States have remained
    fairly steady (between 150 and 200 metric tons), over the 1990-1995
    period (The NNICC Report, DEA-96024, August 1996, p. 5). While cocaine
    is widely available and prices have been decreasing, without these
    seizures an even greater supply of cocaine would depress prices
    further, consequently encouraging current consumption by the existing
    cocaine users and causing increased rates of initiation into cocaine
    use by non-users (increased incidence). Also, seizures and reduced
    domestic availability are not the only means by which drug interdiction
    raises prices as a way to affect current consumption and incidence.
        Disruption and denial of traditional drug trafficking routes force
    the smuggler to shift operations to new areas, or different modes of
    transportation, thus raising the cost of doing business. The intent is
    to drive up the street-price of the drug in the United States and
    decrease consumption. The recent destruction of the air-bridge between
    South American source countries is an example of an operation whose
    effectiveness cannot be measure by seizures. It appears that these
    operations, although not focused toward seizures, have pressured the
    smuggler into more expensive, and slower, riverine operations. The
    effect on street price and availability is still being researched.
        Question 2. According to a GAO Study (GAO 97-42), when confronted
    with threats to their activities, drug trafficking organizations use a
    variety of techniques to quickly change their mode of operations,
    avoiding capture of personnel and seizure of illegal drugs. What kind
    of flexibility is incorporated into interdiction efforts to meet the
    rapidly changing drug trafficking organization activity?
        Answer. Technological improvement can increase the flexibility and
    responsiveness of our interdiction effort. The extensive range and wide
    area Relocatable Over the Horizon Radar (ROTHR) systems can be used
    instead of older fixed radar sites to keep initial detection and other
    sensor assets mobile. Sensor capabilities can be improved by equipping
    aircraft and surface vessels with state-of-the-art radar for initial
    detection and further classification, as well as infrared and low-light
    devices for identification and sorting. In addition, technology
    improvements and sharing will enable intelligence systems to sort
    targets from among the large amounts of ``background noise'' and
    legitimate traffic in a region.
        In the area of intelligence, ONDCP sponsors an interagency working
    group to review cocaine movement on a quarterly basis and provide an
    assessment to the interdiction and law enforcement communities. This
    group's assessment of changes in routes, modes, and methods is key to a
    flexible interdiction program. The interagency working group produces a
    semiannual report with mid-period updates. Under ONDCP's lead, a
    similar interagency mechanism is being established to assess other
    illegal narcotics transiting to the U.S.
        Operationally, our interdiction forces respond to these
    intelligence assessments through the Joint Interagency Task Force
    (JIATF) structures. The JIATF's receive and analyze raw intelligence
    and law enforcement information from a variety of U.S. agencies and
    international intelligence sources in an attempt to develop short range
    estimates of trafficker intentions. Once refined and developed, an
    analysis of the information is shared with the other U.S. interdiction
    and law enforcement agencies.
        In the area of regional coordination, we continue to work closely
    with our Caribbean neighbors in cooperative efforts to guard the
    approaches to Puerto Rico, deny traffickers safe havens in the region,
    and assist the nations to reinforce both their democratic institutions
    and their ability to withstand the influence and corruption of
    international criminal trafficking organizations. We currently have
    bilateral counternarcotics agreements in place with 17 countries in or
    bordering the Caribbean which substantially increase the flexibility of
    U.S. and host nation forces to pursue and apprehend traffickers. Also,
    the U.S. Coast Guard and the Mexican Navy has developed procedures for
    the quick exchange of maritime interdiction information to allow forces
    operating in proximity of each other to respond rapidly to trafficker
    operations.
        The threat along the Southwest Border, both at ports-of-entry and
    in more rural areas between ports-of-entry, is a major concern of the
    law enforcement officials assigned to this area. To better shield our
    borders from the threat of illicit drugs, we have significantly
    increased the deployment of federal law enforcement personnel and
    assets and are improving the coordination and information sharing
    structure along the border.
        Recent changes to Unified Command Plan and corresponding changes to
    the National Interdiction Command and Control Plan will further enhance
    U.S. interagency and multilateral interdiction coordination. The
    movement of U.S. Southern Command headquarters to Miami and assumption
    of detection and monitoring responsibility for all of the north-south
    production areas and most major trafficking routes within the Western
    Hemisphere will support our efforts.
        Finally, each quarter the Joint Chiefs of Staff, Operations
    Directorate and the United States Interdiction Coordinator sponsor a
    conference to brief the senior interagency law enforcement and support
    staffs on the status of the counterdrug efforts. This review provides
    an interagency forum for the interdiction operations and intelligence
    agencies to review the current threat, assess force laydowns and
    ongoing operations, identify gaps and shortfalls and adjust policies
    and resources as required. Other planning conferences and ad hoc
    interagency meetings occur throughout the year to assess and adjust
    policy and resources.
                                ondcp management
        Question 1. At last year's hearing, the ONDCP Director stated, ``I
    owe you results not rhetoric.'' The Director also said that he was
    going to appear before the Appropriations Committee in 1997 and
    demonstrate in concrete ways what ONDCP has achieved with the money the
    Committee has provided. What can ONDCP show that will demonstrate
    ONDCP's achievement?
        Answer. ONDCP has, in the last year, set in motion a number of
    concrete objectives which have revitalized the government's efforts to
    counter drug abuse. Most notably, ONDCP developed for the President the
    nation's first long-term counter drug strategy. The 1997 National Drug
    Control Strategy is the baseline document for the nation's next decade
    of combating drug abuse in America. To support and implement this long-
    range vision, ONDCP is in the process of developing a five-year budget
    to support a long-term strategy. This will allow us as a nation to
    quickly shift resources to target emerging trends with a flexibility
    which has been lacking in the past.
        This comprehensive five-year budget planning system will be
    supported by specific performance measures and targets for each Goal
    and Objective of the National Drug Control Strategy. To further this
    effort, ONDCP and OMB issued a joint memorandum to the Cabinet on June
    5, highlighting the importance of this approach and citing ONDCP's
    efforts as a model for long-term planning. With this new performance
    measurements system, consistent with the principles of the Government
    Performance and Results Act, ONDCP will be able to link funding for
    particular programs with desired outcomes under the Strategy.
    Performance targets and measures continue to be developed cooperatively
    with drug control agencies during fiscal year 1997, and ONDCP expects
    initial implementation of this system during fiscal year 1998. By then,
    Congress will have preliminary objective measures to assess the
    successes or failure of important drug control program components.
        ONDCP has also achieved impressive results in a number of other
    areas. Along the Southwest Border, ONDCP is leading the effort to
    develop a common effort among various agencies. In the area of
    intelligence architecture, we are spearheading a major initiative to
    reform our various information gathering systems so that redundancy is
    eliminated and key data reaches the right people at the right time. The
    Peru ``big idea'' under development will provide a package of
    incentives to coca growers as well as development programs to sustain
    last year's 18 percent drop in coca production in Peru. ONDCP held two
    methamphetamine conferences on both a regional and national scale which
    brought together experts from law enforcement, prevention, treatment
    and policy to coordinate techniques against this emerging drug threat.
    ONDCP has also developed a proposal for a Youth Media Campaign to
    target children with anti-drug messages during their prime viewing time
    in terms that they understand.
        Question 2. In a 1990 report (Drug Interdiction: Funding Continues
    to Increase but Program effectiveness is Unknown, GAO/GGD 91-10, Dec.
    11, 1990), GAO pointed out the difficulties in measuring effectiveness
    of drug interdiction activities.
        In a 1993 report on preauthorization of ONDCP, GAO found that
    national strategies contain inadequate measures for assessing the
    contributions of component programs for reducing the nations drug
    problem.
        In authorizing ONDCP in 1993, Congress specified that ONDCP's
    performance measurement system should assess changes in drug use, drug
    availability, the consequences of drug use, drug treatments capacity,
    and the adequacy of drug treatment systems.
        The fiscal year 1997 National Drug Control Strategy, once again
    addressed the need to assess programs and to provide performance
    measures. I am concerned that this is more of the same. Why haven't
    measures been provided before and why should the Subcommittee expect
    that ONDCP will produce the measures now?
        Answer. Developing performance measures that encompass more than 50
    federal agencies, 54 states and territories and 31 foreign countries
    requires a tremendous effort by ONDCP and all of the agencies involved.
    There is no precedent or model anywhere for measuring such a diverse,
    complex and widespread level of activity. ONDCP began its performance
    measurement effort in 1994 by setting up a pilot project to measure the
    effectiveness of its international programs. After setting up the
    program and providing training to the agencies, measurement of programs
    began in 1995.
        This effort produced standardized measurement definitions and
    methodologies, identification and description of all international
    programs, draft performance measures, assessments of program
    accomplishments and a relational database incorporating all
    international programs. From the pilot program we learned that we had
    to streamline and simplify our measurement process. Based on lessons
    learned, we developed a new architecture and approach for measuring the
    entire National Drug Control Strategy. In June 1996, we set up three,
    two-day offsites to test out the new measurement architecture and to
    begin development of targets and measures for the 1996 National Drug
    Control Strategy. Federal, state and non-government representatives
    attended these meetings. A more permanent interagency process was
    established afterwards. Steering groups were developed for each
    Strategy Goal and working groups for each Strategy Objective. The
    Objectives in the 1997 Strategy continued to be revised, as a result
    the interagency groups continued to meet through April 1997 to complete
    their work, which now must be reviewed by senior ONDCP and Department
    officials before submission to Congress this fall.
                           international interdiction
        Question 1. What type of flexibility is ONDCP and the drug control
    agencies providing in the development of drug interdiction programs to
    ensure they can meet the existing drug trafficking methods?
        Answer. Effective interdiction requires establishing defense-in-
    depth from the source countries, transit zone, and along our borders,
    in concert with our regional allies. Although all U.S. drug
    interdiction agencies contribute throughout our defense-in-depth force
    structure, JIATF-South concentrates in the source countries, JIATF-East
    in the outer layer of the transit zone, the U.S. Coast Guard in the
    middle layer, and the U.S. Customs Service and Border Patrol in the
    arrival zone.
        Within the transit zone, actions against narcotics trafficking are
    reactive. Traffickers initiate the move of illicit drugs along routes
    and modes of transportation of choice. They also have a demonstrated
    capacity to adapt to bypass law enforcement interdiction efforts in the
    region shortly after they are initiated. In addition traffickers employ
    off-the-shelf technology, such as commercially available Global
    Positioning Systems, to reduce the need to communicate when making a
    rendezvous. Technology, accurate intelligence data, and good analysis
    are way to ensure our interdiction efforts are as flexible as the
    traffickers' smuggling efforts.
        As discussed above in the answer to A2, the technological
    improvements can greatly increase the flexibility and responsiveness of
    our interdiction effort.
        Question 2. On April 28, 1997, The Speaker of the House told Latin
    American Heads of States that the United States should scrap its system
    of certifying governments, as either effectively fighting drug
    trafficking or failing to do so. Earlier, Mexico's President Ernesto
    Zedillo said, ``Claiming that other countries are the problem does not
    stop a single transaction.'' How does ONDCP respond to questions about
    the U.S. certification system and does ONDCP believe that certification
    provides an effective tool to combat drug trafficking activities?
        Answer. The drug certification process provides one tool among many
    to help reduce the flow of illegal drugs across our borders. The
    sections of federal law which provide a foundation for the
    certification process require two major actions. They require the
    Administration to report annually to Congress about the nature of
    cooperation between the United States and the major drug producing and
    transit countries, and they require non-discretionary penalties to be
    imposed against major drug producing and transit countries which are
    not certified.
        Congress is correctly concerned about the impact of illegal drugs
    in the United States and has enacted legislation which requires a
    formal report about the state of affairs each year. Considering the
    increasing importance of our bilateral drug control relationship with
    key countries such as Mexico, an indepth annual report may be
    insufficient for Congress to express its views and work constructively
    with the Administration to confront the drug threat.
        The penalty provisions of the certification process should be
    evaluated pragmatically. If they cause major drug producing or transit
    countries to take action to meet the counterdrug objectives of the 1988
    U.N. Drug Convention, then the penalties are doing what they were
    designed to do and should be kept. If the automatic penalties are not
    effective, we ought to consider alternatives.
        It is not clear what the penalties have accomplished to advance
    U.S. drug policy objectives. In many cases decertification or the
    threat of decertification has served our national interest well by
    causing countries to take action against drugs they would not otherwise
    have taken. Nonetheless our certification procedure is perceived by
    many, especially in Latin America, as unacceptable international arm
    twisting and interference in internal domestic affairs. For example,
    the certification process was condemned recently at the OAS General
    Assembly in Lima.
        There is a case to be made that the certification process causes a
    backlash against the U.S. in some countries that makes cooperation on
    drug policy less likely rather than more likely. The effectiveness of
    the certification process varies from country to country depending on
    what leverage is available to us because of the penalty provisions, the
    political and economic conditions in the country, and the capacity of
    the country to act against drug trafficking under any circumstances. It
    is clearly in our interest to study this complicated question carefully
    before we act.
        Question 3. In reviewing the activities of the Mexican and
    Colombian governments, how do they vary in their attempts to eradicate
    drug trafficking activity in their countries?
        Answer. At the strategic level, the Government of Mexico is
    committed to fighting against drug trafficking and its corrupting
    influence. Mexico's counterdrug strategy seeks to attack all phases of
    the drug problem, from production to consumption. During 1996, the
    Mexican Congress approved changes to their criminal code and amended
    regulations to toughen enforcement against money laundering and
    chemical diversion. They passed an organized crime bill which
    authorizes use of modern investigative techniques, such as electronic
    surveillance, witness protection, and prosecution for criminal
    association and conspiracy. Mexico has established with the U.S. a
    High-Level Contact Group on narcotics control to explore joint
    solutions to the shared drug threat, to coordinate the full range of
    drug issues and to promote closer law cooperation. Mexico has
    acknowledged the need to strengthen counterdrug capabilities, given the
    serious threat posed by organized crime, and signed several technical,
    training and material support agreements with the U.S. as well as one
    on operational coordination. This High-Level Contact Group effort most
    recently yielded the ``Declaration of the U.S.-Mexican Alliance Against
    Drugs,'' signed by Presidents Clinton and Zedillo in May 1997. The
    Mexican Constitution prohibits extradition of Mexican nationals except
    under ``exceptional circumstances,'' though Mexico has extradited U.S.
    citizen and citizens of third countries to the U.S. in the past.
    However, President Zedillo approved findings of ``exceptional
    circumstances'' in the cases of three fugitives with court-upheld
    claims to Mexican citizenship, thereby permitting their extradition to
    the United States. In 1996, Mexico extradited thirteen fugitives to the
    U.S. and expelled two others.
        At the tactical level, however, results are more mixed. Mexico has
    continued an aggressive eradication program against opium poppy and
    marijuana. Drug seizures, lab interdiction and drug-related arrests all
    increased in 1996 as compared to 1995. Mexico intensified its
    investigations of criminal organizations linked to drug trafficking,
    making several prominent arrests. Interdiction activities resulted in a
    notable reduction of detected air shipments of illicit drugs in high-
    speed aircraft in the past year, though traffickers quickly shifted
    more of their operations to maritime smuggling.
        On the other hand, Mexico continues to struggle with the effects of
    corruption. Government of Mexico law enforcement authorities and
    military personnel have not dismantled any major drug trafficking
    organizations. President Zedillo acknowledged that corruption was
    deeply rooted in Mexican institutions and in the general social conduct
    of the nation. Attorney General Lozano dismissed over 1,250 officials
    for incompetence and/or corruption. Mass firings of state and local
    police also took place for various crimes and dereliction of duty. The
    Director of the INCD (the Mexican ``Drug Czar'') was arrested in
    January 1997 on charges that he was receiving money from a Mexican drug
    lord.
        In Colombia, the U.S. continues to support and receive good
    cooperation at the tactical level. In 1996, military-police cooperation
    improved substantially, allowing a massive eradication and lab
    interdiction operation in an insurgent-infested area. The National
    Police also eradicated opium poppy. Colombian security forces
    interdicted cocaine and heroine shipments to the U.S. and Europe and
    destroyed more than 850 narcotics laboratories. The Colombian Air Force
    participated in 662 coordinated counterdrug operations (with the
    police, army, and marines), and launched 172 intercept/interdiction
    missions against narcotrafficking aircraft resulting in 34 losses of
    trafficking assets. The Air Force also provided airlift support to the
    National Police and transported herbicides to police forward operating
    bases. Colombia's Special Search Group, composed of specially-trained
    police and military personnel, kept pressure on narcotrafficking
    organizations through searches and seizures, causing several lower
    echelon leaders to turn themselves in. The Police confiscated and
    deciphered computers and documents leading to further confiscations.
    The Police also seized more than 100 trafficker properties whose assets
    could run into the tens of millions of dollars. The government of
    Colombia shared with the U.S. information on money laundering
    activities which was used to identify and economically isolate
    trafficking enterprises through U.S. sanctions imposed pursuant to the
    International Emergency Economic Powers Act. Colombian cooperation with
    international law enforcement entities, including intelligence sharing,
    is excellent.
        Nevertheless, shortfalls at the strategic level continue to
    undermine efforts at the tactical level. The Rodriguez Orejuela
    brothers (leaders of the Cali Mafia) received shamefully light
    sentences (though Miguel subsequently received a longer sentence on
    other charges). Other traffickers have also received light sentences.
    The traffickers continue to manage their drug empire from prison. The
    three Ochoa Vasquez brothers, kingpins of the Medellin Cartel, were all
    released from prison after serving sentences of only about 4.5 years
    each. President Samper was exonerated by the Colombian Congress of
    charges of corruption, though his campaign manager and treasurer were
    both convicted on the same charges. Attorney General Vasquez Velasquez
    was removed from office for corruption. The Colombian Congress did pass
    critical asset forfeiture, anti-money laundering and penalties
    enhancement laws, but only after a wire tap revealed the efforts of the
    jailed Cali Mafia kingpins to bribe and/or intimidate legislators. In
    1997, the Congress completed the first half of a process to amend the
    Constitution to reinstate extradition of Colombian nationals, but the
    bill is so full of restrictions that it would be useless in practical
    terms. We are urging Colombia to remove the restrictions in the second
    half of the process. The Congress is currently considering a bill that
    would favor sitting or former members of Congress convicted of illicit
    enrichment or other corruption charges. While acknowledging that
    alternative development is critical to the success of the eradication
    program, Colombia has not fully funded its alternative development
    program, and has applied it mostly in opium poppy growing areas, as
    opposed to coca growing areas where the vast majority of the
    eradication operations are taking place.
                               trends in drug use
        Question 1. Last year, the Substance Abuse and Mental Health
    Services Administration reported that there was a 50 percent decline in
    illegal drug use among Americans between 1979 and 1995. What has
    influenced this dramatic drop?
        Answer. Although no definitive study exists that looks at the drop
    in demand between 1979 and 1995, we hypothesize that a number of social
    factors raised citizens' awareness which contributed to the dramatic
    drop. First, schools during that time period had approximately 40
    percent more funding dollars to target drug issues, specifically the
    Safe and Drug Free Schools Program. Second, the media was very active
    and had a high reporting rate (93 percent higher than they do in 1997)
    on drug issues and their consequences. Third, large anti-drug multi-
    media advertising campaigns were initiated. Specifically, the
    Partnership for a Drug-Free America launched its advertising campaign
    in 1987 with the equivalent of $115 million in advertising dollars. In
    1991, a height was reached in advertising dollars of $365 million, or
    $1 million a day, which has since decreased to $260 million in 1996.
    (Lloyd Johnston, Keynote Speech, 1997 Safe and Drug Free Schools Annual
    Conference--Turning Research into Action.)
        Question 2. 1991 and 1992 marked the lowest reported illegal drug
    usage among adolescents in the past 6 years, according to a 1996
    University of Michigan study of ``Past 30 Day Drug Usage'' by 8th,
    10th, and 12th graders. What accounted for the low and what is
    influencing the climb in usage among these teenagers?
        Answer. The social factors attributed to the overall decrease in
    drug use among Americans between 1979 to 1995, i.e., higher federal
    program funding, high media reporting rate on drug issues, focused
    media campaigns, can also be attributed to the lowest rates described
    in 1991-1992 by adolescents.
        What changed between 1992 and 1996 to increase drug use among young
    people includes: the decreased drug prevention programming in the early
    1990's; decreased media reporting of the drug issue (between 1991 and
    1993, the media had a 93 percent drop in the coverage of drug issues
    and their consequences); declining multi-media anti-drug advertising
    which gave Americans the sense that the so-called ``Drug War'' had been
    won; pro-drug music and media-including the very-visible cigarette
    smoking by young actors and artists; and parents not talking to their
    kids about the ills of drug use and abuse. Also, effective prevention
    requires a sustained and consistent message which declined in the late
    1980's.
        As the Monitoring the Future study indicates, there is a strong
    relationship between attitudes and drug use. Prior to 1990, drug use
    disapproval rates were consistently increasing, the perception of youth
    of the risk of drug use was consistently increasing each year, and at
    the same time, drug use decreased at a significant and reverse rate.
        In just three years, 1990, 1991, and 1992, the data show that as
    the risk perception and attitudes about drug use weakened--a similar
    but inverse increase occurred in drug use beginning in 1992 and
    steadily increasing through 1996.
        According to the Partnership For a Drug Free America's Attitude
    Tracking Study, driven by increasingly lax attitudes about marijuana,
    America's teenagers are seeing fewer risks and more personal rewards in
    drug use, and drug-savvy baby boomers are underestimating the threat of
    drugs and drug use among their own children. (Partnership for a Drug-
    Free America, Adolescent Drug Use Likely to Increase Again in 1996;
    Teens See Fewer Risks in Marijuana and Drug Use, Press Release, 2/20/
    96.) According to the study, teens are less likely to consider drug use
    harmful and risky, more likely to believe that drug use is widespread
    and tolerated, and feel more pressure to try illegal drugs than teens
    did just two years ago. Changes in attitudes drive changes in behavior.
    The study found that in a wide variety of categories, teenagers see
    significantly less physical and social risks in marijuana and drugs,
    and perceive more benefits in drug use, that is, more teens believe
    drugs help you relax and that getting high feels good. Increasingly,
    teens see marijuana as ``no big deal'' which is driving their overall
    changing attitudes about drug use. Also, pre-teens remain defiantly
    anti-drug but report more drug use around them.
        Question 3. How is the 1990 low, and subsequent rise in drug
    related emergency room cases related to these usage trends?
        Answer. The Drug Abuse Warning Network (DAWN), administered by
    NIDA, monitors the number and pattern of drug-related health
    emergencies and drug-related deaths in major metropolitan areas. DAWN
    data are collected in 21 metropolitan areas from hospital emergency
    rooms and medical examiners. DAWN is an indicator of drug use
    consequences and not a prevalence of drug use indicator, therefore it
    cannot adequately be compared to other drug usage trend data.
        Emergency room mentions for cocaine increased from the first
    quarter of 1986, reached a peak around the first quarter of 1989,
    declined steadily through most of 1990, and then climbed again during
    1991. Medical examiner reports followed a similar trend. Both of these
    trends varied inversely with the standardized price. (ONDCP, Price and
    Purity of Cocaine, The Relationship to Emergency Room Visits and
    Deaths, and to Drug Use Among Arrestees, 1992.) That is, as the price
    went down between 1986 and 1988-89 (the low), emergency room mentions
    increased as did medical examiner reports. And as the price reversed
    and increased to a high in 1990, the number of emergency room mentions
    were at their lowest.
        The inverse relationship between the standardized price of cocaine,
    emergency room mentions, medical examiner reports, and arrestees who
    tested positive for recent cocaine use, suggests that cocaine use and
    consequences increase as the standardized price rises. That all three
    measures decline when the price rises indicates that these patterns
    might be attributable to the changes in the supply of cocaine. (ONDCP,
    Price and Purity of Cocaine, The Relationship to Emergency Room Visits
    and Deaths, and to Drug Use Among Arrestees, 1992.)
        As cocaine on the street becomes scarce, users will bid more for
    the cocaine that is still available. This drives up the price of
    cocaine, which in turn reduces the quantity used. Conversely, when more
    cocaine is available for sale, drug dealers will lower prices to induce
    users to increase their drug use. Therefore, as the price of cocaine
    falls, drug use increases. This explanation of how supply-side induced
    changes can affect drug use is consistent with the patterns observed in
    these data. In addition, while the DAWN data are not indicators of
    prevalence, it is conceivable that the negative consequences associated
    with drug use would be influenced as rates of prevalence increase or
    decrease.
        In contrast, as demand for cocaine falls both prices and the amount
    would be expected to fall. Yet, the expectation based solely on changes
    in demand for cocaine is not consistent with the patterns observed in
    these data. Consequently, changes in demand alone do not explain the
    observed patterns between the standardized price of cocaine and
    emergency room mentions, medical examiner reports, and the percentage
    of arrestees testing positive for cocaine. (ONDCP, Price and Purity of
    Cocaine, The Relationship to Emergency Room Visits and Deaths, and to
    Drug Use Among Arrestees, 1992.)
        Question 4. The University of Michigan also reported that illegal
    drug use among 8th graders has increased a shocking 150 percent over
    the past five years. Is there a direct correlation between marijuana
    use among this age group and future abusive drug or alcohol behavior?
        Answer. Yes. According to a study conducted by the Center on
    Addiction and Substance Abuse at Columbia University, children who
    smoke marijuana are eighty-five times more likely to use cocaine than
    peers who never tried marijuana. (J.C. Merrill, K. Fox., S.R. Lewis,
    and G.E. Pulver, Cigarettes, Alcohol, Marijuana: Gateways to Illicit
    Drug Use, Center on Addiction and Substance Abuse at Columbia
    University, 1994.)
        In addition, we also know from the Monitoring the Future study that
    there is a two year delay between youths' disapproval of drug use,
    youths' perception of using drugs as a risk, and drug use. We see an
    inverse relationship occur over a few years--as the risk perception and
    attitudes about drug use decrease--specifically between 1990 and 1992,
    a similar but inverse increase occurs in drug use between 1992 and
    1996.
        Question 5. What factors are influencing this relationship, despite
    our current preventative efforts?
        Answer. A number of factors are influencing this relationship. In
    particular, the availability of drugs, and a general lack of social
    bonding to either the family or the community.
        As discussed above, according to the Partnership For a Drug Free
    America's Attitude Tracking Study (PATS), teens today have more casual
    attitudes about marijuana, they see fewer risks and more rewards in
    drug use. Also, the parents of today's teens underestimate the risk and
    harm of drugs and drug use among their own children. (Partnership for a
    Drug-Free America, Adolescent Drug Use Likely to Increase Again in
    1996; Teens See Fewer Risks in Marijuana and Drug Use, Press Release,
    2/20/96.) Teens today believe that drug use is widespread and
    tolerated, and experience more peer pressure to try illegal drugs than
    did teens two years ago. Marijuana is not viewed as dangerous by teens
    and this view is effecting their overall attitudes about drug use. Pre-
    teens remain defiantly anti-drug but report more drug use around them.
        Most parents don't want their children experimenting with drugs and
    some feel hypocritical when talking to their kids about marijuana.
    While more parents say they are talking to their teens about drugs
    today (95 percent), only 77 percent of teens say their parents have
    talked to them. (Partnership for a Drug Free America, Partnership
    Attitude Tracking Study, 1995.)
        Question 6. Does ONDCP have any predictors which offer a forecast
    as to future adolescent trends for alcohol and drug use?
        Answer. ONDCP reports out data as collected and analyzed by other
    federally funded drug-control agencies and other organizations that
    conduct relevant data collection efforts.
        There are three indicators from the Monitoring the Future study
    that when looked at together are critical predictors of the
    relationship between prevailing attitudes and drug use. The indicators
    are: (1) youth disapproval rates of regular use of drugs; (2) youth
    perception that regular use is harmful; and (3) the percentage of youth
    who have used drugs in the last 30 days. (University of Michigan,
    Monitoring the Future Study, 1996.) What these three indicators show
    over time is a distinct relationship between youth disapproval rates of
    regular use of drugs, youth perception that regular use is harmful, and
    the percentage of youth who have used drugs in the last 30 days. These
    indicators have shown a distinct trend over time. As disapproval rates
    show a decrease at one point in time, the perception of drug use as
    harmful decreases one year later, and in the following year, a distinct
    and significant increase in drug use is observed.
                                methamphetamine
        Question 1. Is there a relationship between our cocaine
    interdiction efforts and the increase in methamphetamine production and
    usage?
        Answer. Methamphetamine has a similar effect to cocaine but is
    cheaper than cocaine (\1/2\ the price) and creates a longer lasting
    high (hours versus minutes). It can be produced inexpensively by
    clandestine labs. Precursor chemicals to manufacture this drug are easy
    to obtain. The manufacture of methamphetamine is a relatively simple
    process and can be carried out by individuals without special knowledge
    or expertise in chemistry. It is becoming the drug of choice,
    especially in areas where the availability of crack and cocaine has
    decreased.
        Question 2. Can ONDCP offer a forecast for the future trend of
    methamphetamine in America?
        Answer. Drug use behavior is a complex phenomenon for which the
    prediction of future trends is particularly difficult. With respect to
    methamphetamine, there have been several predictions since the mid
    1980's of impending epidemics that did not materialize (i.e., 1986,
    1988, 1989, 1991, and 1993). In 1996, primarily on the basis of data
    for 1995 from the Drug Use Forecasting (DUF) program and DAWN, a new
    epidemic of methamphetamine use has been predicted. These data showed
    high rates of methamphetamine use among arrestees in the West,
    Southwest, and Midwest, and increased methamphetamine-related emergency
    room episodes in the same areas, suggesting that methamphetamine use
    was on the rise and spreading from its endemic base of Hawaii and San
    Diego to other areas. However, data for 1996 from the eight DUF cities
    with the highest rates of use in 1995 indicate that while
    methamphetamine use continued to be detected among arrestees mainly in
    the western U.S. DUF sites, rates fell significantly (as much as 50
    percent) from 1995 levels. Data for the first half of 1996 from DAWN
    are about to be released and are expected to show similarly significant
    declines in methamphetamine-related emergency room episodes. The bottom
    line to be drawn from these data is that it is too soon to predict the
    future direction of methamphetamine use in America. We are encouraged
    by last year's downturn and we believe that the swift action taken by
    the Administration and Congress to increase the penalties for
    trafficking in methamphetamine have had an effect, but we also realize
    that a forecast cannot be made with one year's worth of data.
        Question 3. Mexico has been identified as the principal source for
    both manufactured methamphetamine and the source of precursor chemicals
    used for domestic production in the U.S. Does Mexico have a chemical
    precursor monitoring and enforcement program similar to the U.S. Drug
    Enforcement Agency?
        Answer. Mexico has a precursor enforcement program somewhat
    analogous to that in the United States. A Mexican law passed in May
    1996 establishes chemical trafficking as a crime subject to 5-15 years
    imprisonment and a fine. In 1996, Mexican law enforcement seized 3.3
    metric tons of ephedrine, 10 metric tons of phenylpropanolamine, and
    900,000 pseudoephedrine tablets. Regulatory controls also exist on
    precursor chemicals, but the administrative infrastructure for their
    enforcement is not as highly developed as in the U.S. Mexico lacks a
    comprehensive regulatory system to prevent the diversion of essential
    (as opposed to precursor) chemicals, but is now in the process of
    formulating legislation in this area.
        In terms of cooperative efforts with Mexico, the U.S. Mexico Bi-
    National Drug Threat Assessment published in May 1997 was the first
    formal agreement by Mexico and the United States on the facts about the
    criminal activities associated with drugs, and the effects of drugs and
    drug trafficking and related criminal activities on both societies.
    Methamphetamine use, production, and trafficking were highlighted in
    the assessment. Since June 1996, Mexico has engaged with the Department
    of Justice through the Drug Enforcement Administration to determine a
    strategy for controlling the import, export, and sale of licit
    chemicals, for preventing the illicit use and traffic of those
    chemicals, and for reducing the diversion of chemicals. The U.S. and
    Mexico Attorneys Generals agreed to identify persons, businesses, and
    criminal organizations involved in the illegal transport, use, export,
    and import of chemicals, and to obtain the support and cooperation of
    other key countries where precursor chemicals are produced,
    transported, or brokered. Additionally, the Declaration of the Mexican-
    U.S. Alliance Against Drugs signed by Presidents Zedillo and Clinton in
    May 1997 commits both nations to control essential and precursor
    chemicals to prevent chemical diversion and illicit use, and improve
    information exchange on the subject.
        The formal mechanism to spur and oversee this cooperation is the
    Bilateral Chemical Control Working Group under the aegis of the U.S.-
    Mexico High Level Contact Group for Narcotics Control (HLCG). This
    working group has coordinated bilateral chemical and clandestine
    laboratory training, information exchange, cooperation on case
    investigations, and other matters relating to bilateral cooperation. As
    part of a joint ``Practical Strategy and Action Plan'' developed during
    the summer of 1996, Mexico now has in place restrictions on the entry
    of methamphetamine precursor chemicals to key ports for more efficient
    control.
        Question 4. Is Mexico contributing to interdiction efforts in
    controlling the movement of Methamphetamine across our borders?
        Answer. Cooperative efforts to control precursor chemicals and to
    work with Mexico to improve their ability to discover and investigate
    methamphetamine manufacturing and smuggling operations are underway.
    Mexico's primary effort to interdict methamphetamine/precursor
    chemicals is via the Northern Border Response Force/Operation Halcon.
    In addition, Mexico has a series of law enforcement checkpoints along
    many roads leading to the U.S. These checkpoints are intended to seize
    all contraband (Operation Precos). Mexico has also actively
    participated in a joint U.S.-Mexico methamphetamine task force focusing
    on the most significant Mexican methamphetamine trafficking
    organization. While to date this task force has recorded the seizure of
    75 kilograms of methamphetamine and the arrest of 12 individuals
    associated with this organization, they have not yet indicted or
    arrested the principals.
        The HLCG has significantly advanced bilateral cooperation between
    the U.S. and Mexico in controlling the abuse, production, shipment, and
    sale of illicit drugs, to include methamphetamine. The HLCG's U.S.
    Mexico Bi-National Drug Threat Assessment published in May 1997
    contributed greatly to a joint understanding of the drug threat,
    including methamphetamine, and to fostering a spirit of increasingly
    greater cooperation in the US-Mexico relationship. The Declaration of
    the Mexican-U.S. Alliance Against Drugs commits both nations to improve
    our capacity to interrupt drug shipments by air, land, and sea; to
    enhance cooperation along both sides of the common border; and to
    reduce the production and distribution of illegal drugs in both
    countries, particularly marijuana, methamphetamine, cocaine, and
    heroin. Presidents Clinton and Zedillo also directed development of a
    joint counterdrug strategy to address these goals by the end of 1997.
    The strategy will have several key objectives designed to improve
    ongoing U.S.-Mexican cooperative counterdrug efforts, such as the
    Bilateral Border Task Forces in northern Mexico which will be jointly
    staffed by Mexican and U.S. law enforcement and intelligence officers.
        Question 5. Is the methamphetamine interdiction and prosecution on
    the southwest border approached on the same level as cocaine?
        Answer. Trafficking of methamphetamines is usually done along
    established cocaine (and heroin) routes--because the border is
    controlled by the Mexican drug syndicates. Consequently, interdiction
    of cocaine will often result in methamphetamine seizures. Prosecution
    of methamphetamine traffickers is treated just as aggressively as
    cocaine and the recent enactment of the 1996 Methamphetamine Control
    Act strengthens the law significantly against methamphetamine
    production and trafficking. Numerous cases have been investigated and
    prosecuted by federal agencies in cooperation with local officials. DOJ
    required each U.S. Attorney to make an assessment of the
    methamphetamine threat in each district. Strategies and specific
    activities against the drug were developed in the most severely
    affected districts. Additionally, DEA Mobile Enforcement Teams (MET)
    have launched several operations in cities and towns in the region.
        Question 6. There has been a recent rise in ``Meth'' related crime
    in Wisconsin. Can you explain what factors are in place to cause a rise
    in this drug popularity?
        Answer. Increased use of methamphetamine can result in an increased
    tolerance for the drug, leading a methamphetamine addict into an array
    of criminal activities in order to support the habit. Long-term use of
    this drug often produces symptoms of extreme paranoia and psychosis
    that can lead to increase in violent behavior. The number of
    methamphetamine labs has increased due to an increase in profitability.
    The drug is cheaper to purchase (``poor man's cocaine'') and has longer
    lasting effects. And methamphetamine can be used by all of the common
    routes of illicit drug administration, e.g., inhalation, intranasal
    ``snorting'', intravenous injection, and orally.
        Question 7. What actions can be taken to reduce this drug's
    popularity in the Northern Wisconsin Area?
        Answer. Drug testing among personnel in private sector industry, in
    the military, and among individuals supervised by the criminal justice
    system can substantially suppress illicit drug use. Intensive localized
    media campaigns can also suppress drug use by altering attitudes about
    acceptability of drug use and/or the risks associated with drug use.
    Education and training for law-enforcement officers about the effects
    of methamphetamine and more aggressive enforcement efforts can help
    reduce use, and there is some evidence that methamphetamine users
    sharply decrease their drug intake following treatment.
                             task force operations
        Question 1. The 1997 National Drug Control Strategy referenced the
    gaps that still need to be closed between a number of key agencies to
    improve drug enforcement intelligence coordination., What is ONDCP's
    current role and influence in the coordination of drug intelligence?
        Answer. ONDCP uses a variety of methods to ``influence'' expanded
    drug intelligence coordination, including the issuance of budget
    guidance and the certification of the drug control agencies' budgets.
    On a day-to-day basis, ONDCP either chairs or participates in all drug
    intelligence boards/committees. For example, ONDCP chaired an ad hoc
    interagency group that reviewed intelligence support to interdiction
    operations and developed a specific plan for improving that support.
    That plan, known as the Interdiction Intelligence Support Plan, called
    for the use of a specific ADP system as the primary tool to deliver
    intelligence to the interdiction centers. The drug intelligence
    community has subsequently expanded the use of this system to include
    use by law enforcement agencies. ONDCP also ``influences'' the drug
    intelligence system by tasking the system to provide specific
    assessments and analyses.
        Question 2. What are the current gaps or weaknesses in the
    intelligence system now?
        Answer. While the federal government has made substantial
    investments in counterdrug intelligence capabilities, there are areas
    where the information base of the National Drug Control Program
    agencies could be significantly improved. The most significant gaps in
    our drug intelligence system fall generally in two areas: (1) focusing
    available information in a way that most effectively supports the
    development of drug policy and related strategies; and (2) processing
    and disseminating operationally useful information in a timely and
    effective manner.
        ONDCP is working with the Attorney General and the Director of
    Central Intelligence, as well as other senior officials, to look at the
    whole drug intelligence effort to ensure that we have the best possible
    system. This effort will more clearly identify shortfalls and make
    recommendations for improvement.
        Question 3. How can the intelligence alliance be strengthened?
        Answer. The interdepartmental review discussed above has been
    designed to provide us with an assessment of the specific changes and
    adjustments that need to be made to strengthen our interagency
    intelligence work.
        Question 4. Is the intelligence dissemination in balance with
    intelligence collection?
        Answer. Drug intelligence, perhaps more accurately described as
    drug information, is collected by a variety of agencies for a variety
    of specific reasons. Law enforcement officers collect drug
    intelligence/information as a part of their regular, ongoing criminal
    investigative activities. Foreign intelligence agencies collect
    intelligence on a wide range of topics, including leadership,
    activities and capabilities of foreign-based drug trafficking groups,
    counterdrug activities of foreign governments, and other traditional
    foreign intelligence subjects. Because of these differences, it is
    sometimes difficult to share information across the two disciplines.
    Over the years, significant progress has been made in expanding the
    amount of information that is shared but more work is needed. This is
    one of the weaknesses that an improved Intelligence Architecture will
    address.
        Question 5. Is the intelligence being received by the local, state
    and federal enforcement agencies timely, reliable and in sufficient
    detail to be operationally effective?
        Answer. Most of the information that is tactically and
    operationally relevant to state and local law enforcement is collected
    through their own efforts. They are best able to determine its
    reliability and adequacy. The direct flow of federal strategic
    information from federal law enforcement agencies to state/local law
    enforcement is generally less timely and sometimes of undetermined
    value to the state, often because the information comes from other
    geographic areas, perhaps even from overseas. The most effective
    sharing of information between federal law enforcement and state/local
    agencies is through joint task forces where the various levels of law
    enforcement are working together against common targets.
        Question 6. In multi-agency operations, statistical overlap often
    occurs when reporting arrests, seizures, and prosecutions. What
    mechanism is being employed to keep these reports pure, avoiding
    redundancy?
        Answer. At the federal level, the Federal-wide Drug Seizure System
    (FDSS) was established to ensure that drugs seized jointly by two or
    more federal agencies were not counted more than once. The FDSS, which
    is administered by the Drug Enforcement Administration, publishes
    annual reports on the seizures by federal agencies of cocaine,
    marijuana, and heroin.
        Question 7. Does this reporting transcend the local, state, and
    federal enforcement lines?
        Answer. There is currently no system that accounts for all the
    illegal drugs seized by state and local law enforcement agencies around
    the country. The Federal Bureau of Investigation, through the Uniformed
    Crime Reporting system, is developing data elements with the UC that
    would record drugs seized at the local level.
                             department of defense
        Question 1. Will the Department of Defense continue sharing its
    technological logistical resources with Federal law enforcement?
        Answer. Technology developed by the Department of Defense (DOD) for
    military missions that have a counterdrug application will continue to
    be available to law enforcement agencies, both federal and state, in
    the performance of their roles and missions. As appropriate, it will be
    up to the individual law enforcement agency to plan, budget, and
    procure required equipment and systems. Logistical and operational
    support to law enforcement agencies will be coordinated through Joint
    Task Force Six located in El Paso, Texas.
        Small units in the military use equipment that meets needs similar
    to those of law enforcement. An example of this are night vision
    devices, developed by Army Materiel Command to enhance the Army's night
    fighting effectiveness. This application crosses over to law
    enforcement for night observation and can be adapted to camcorders.
    Technology developed by DOD can and should be used in other
    applications when possible, but should not be developed solely for law
    enforcement agencies. The responsibility to develop uniquely
    counterdrug technology should always reside with the end user.
        Question 2. Will technological initiatives emphasize serving
    multiple roles, to be used for different applications, by different
    agencies?
        Answer. Technology innovation frequently has multiple and varying
    operational applications. ONDCP will continue to encourage the use of
    innovative advancements in technology for all law enforcement end-
    users. This task is accomplished through the use of multi-agency
    coordination panels and joint task forces such as JTF-Six and Operation
    Alliance.
        Question 3. How has the JIATF been working and what is the current
    commitment of Joint Task Force Six?
        Answer. JIATF's utilize and integrate command and control,
    communication, computer, and information systems to efficiently
    coordinate operations and intelligence information with other
    counterdrug centers, law enforcement agencies, and domestic and
    international counterdrug partners. They collect, fuse, and disseminate
    counterdrug information from all participating agencies to the
    detection and monitoring forces for tactical action as well as serve as
    the focal point for de-conflicting all non-detection and monitoring
    counterdrug activities within their respective areas of responsibility.
    The JIATF's provide a valuable service to the drug program by
    coordinating the participation of DOD assets in drug programs and
    providing substantial intelligence fusion and operational planning to
    DOD and non-DOD drug operations. They have significantly enhanced
    interagency coordination and promoted the seamless integration of
    agency interdiction forces.
        JTF-Six continues to carry out myriad missions in support of
    federal and state Law Enforcement Agencies. The JTF-Six mission is to
    provide effective Title 10 U.S.C. domestic counterdrug support as
    requested by law enforcement agencies--Operational, Intelligence,
    Engineering, and General--acting as the single point of contact for DOD
    support. JTF-Six has increased the efficiency and effectiveness of DOD
    support to domestic drug law enforcement operations by working closely
    with the law enforcement agencies, HIDTA's, and Operation Alliance.
        Question 4. Has ONDCP been able to measure significant gains as a
    result of these task forces? Is so, where have they been most
    productive?
        Answer. The JIATF's have been very effective bringing appropriate
    DOD intelligence, technological, and logistical assets to bear on the
    international drug problem. They also provide a valuable operational
    planning service that substantially increases the synergy of multi-
    agency and multinational counterdrug operations.
        There are three geographically and functionally oriented JIATF's.
    They are: JIATF-South at Howard Air Force Base, Panama; JIATF-East at
    Key West Florida; and JIATF-West at Alameda, California. All three of
    the interagency task forces integrate command and control,
    communications, computers, and information systems to efficiently
    coordinate operations and intelligence information with other
    counterdrug centers, law enforcement agencies, and their international
    counterdrug partners. They collect and fuse counterdrug information
    from all participating agencies and disseminate to the detection and
    monitoring forces for tactical action. They also de-conflict other law
    enforcement counterdrug activities within their respective areas of
    responsibility. Each JIATF has a different regional focus in support of
    Goals Four and Five of the National Drug Control Strategy which address
    supply side issues.
        JIATF-West provides DOD support to law enforcement agencies and
    country teams in their efforts to disrupt international drug
    trafficking of heroin and other illegal drugs originating to Southeast
    and Southwest Asia through the Pacific ocean. JIATF-West has been key
    in the development and implementation of a regional program to track
    heroin trafficking. For example, JIATF-West sponsored the Asian
    Riverine Conference which developed a comprehensive regional course of
    action for counterdrug waterway management training.
        JIATF-South provides support to cocaine source country initiatives,
    especially detection and monitoring support to source country
    interdiction programs. Their mission is to execute U.S. national
    counterdrug policy by supporting federal agencies and participating
    nations' counterdrug efforts to deter, degrade, and disrupt the
    production and transshipment of illegal drugs within and from the
    JIATF-South area of responsibility. JIATF-South sponsored and provided
    the concept, planning, communications, and logistical support of the
    highly successful interagency and participating nation operation, Laser
    Strike. Operation Laser Strike essentially shut down the narcotics air
    bridge that flew coca base and precursor chemicals destined for the
    production of cocaine in Colombian laboratories. The disruption of the
    air bridge for almost two years has decreased the price of coca leaf to
    a point below profitability for many coca farmers. This, in turn, led
    farmers in great numbers to abandon coca and ask for help to convert to
    licit alternative development. As a result, coca cultivation has
    decreased by 18 percent in Peru last year.
        JIATF-East is the primary center for detection, monitoring,
    sorting, and handoff of suspect air and maritime drug trafficking
    events within their area of responsibility. Whereas the other JIATF's
    concentrate primarily on the regions of illicit drug production, JIATF-
    East is responsible for interdiction within the transit zone of the
    Eastern Pacific, Caribbean Sea, Gulf of Mexico, and portions of the
    Atlantic Ocean. Their mission is to detect and monitor suspected air
    and maritime drug trafficking activity within the transit zone; handoff
    this information to appropriate law enforcement agencies; and de-
    conflict non-detection and monitoring counterdrug activities occurring
    in the transit zone. Over the last three years, JIATF-East's support to
    U.S. and participating law enforcement agencies has shown a steady
    increase in drug seizures. JIATF-East has provided key support to
    counterdrug operations with DEA in Mexico and Central America, and to
    the interagency planning and operations of U.S. Customs and the U.S.
    Coast Guard in the approaches to Puerto Rico and the U.S. Virgin
    Islands.
        Finally, as an internal measure of effectiveness, the Joint Chiefs
    of Staff, Operations Directorate and the United States Interdiction
    Coordinator sponsor a quarterly conference to brief the senior
    interagency law enforcement and support staffs on the status of the
    JIATF counterdrug efforts. This review provides an interagency forum
    for interdiction operations and intelligence agencies to review the
    current threat, assess force laydowns and ongoing operations, identify
    gaps and shortfalls, policies and adjust resources as required.
        Question 5. Will the National Guard and reserve forces continue to
    support the Southwest Border interdiction effort?
        Answer. Support for law enforcement efforts along the Southwest
    Border continues to be a high priority for the National Guard. The
    governors of Arizona, California, New Mexico, and Texas received
    approximately $53.3 million for interdiction and demand reduction
    support in fiscal year 1997, which is approximately 33 percent of the
    total fiscal year 1997 State Plans Budget. While the governors can use
    these funds for support anywhere in the state, they are encouraged to
    give priority to the Southwest Border. Southwest Border support will be
    reduced to approximately $40 million due to the reduction in the
    National Guard's projected fiscal year 1998 State Plans Budget.
        During fiscal year 1997 DOD, through JTF-6 and the National Guard,
    has continued making significant improvements to the Otay Mountain road
    in southern California. This is in addition to the 30 miles of landing
    mat fence, barbed wire fence, and post obstacles already constructed in
    the San Diego area. The average number of DOD personnel including
    National Guard and other reserve components providing support on the
    border varies from an average of 1,500 to peaks of 2,500. The DOD
    programmatic commitment to the Southwest Border is $176.6 million for
    fiscal year 1997. The President's fiscal year 1998 request is $130.4
    million.
        Question 6. Is this a regional participation effort or are units
    from all over the country involved in supporting this program?
        Answer. DOD provides a wide range of counterdrug support to
    federal, state and local drug law enforcement agencies on the Southwest
    Border. National Guard (Title 32) support is coordinated by the
    National Guard Counterdrug Coordinator in the state where the support
    is to occur. Requests for military counterdrug support from federal
    agencies are prioritized by law enforcement through Operation Alliance,
    which is collocated with JTF-6. Requests by state and local agencies
    are prioritized by the state lead law enforcement agency.
                                     mexico
        Mexico's role as a cooperative partner in our drug interdiction
    efforts remains in question in view of hard intelligence that continues
    to identify Mexico as the main transit point for the flow of illegal
    drugs from South America into the United States. Also, Mexico
    increasingly is a major player in money laundering, production of
    marijuana, heroin, methamphetamine, prescription drug cloning and
    manufacturing of illegal chemical precursors.
        Question 1. How valid are the Mexican drug enforcement statistics?
    How have they been qualified?
        Answer. Statistics are reported from the Government of Mexico
    through the United States Embassy in Mexico City. The DEA and the
    Department of State's Bureau of International Narcotics and Law
    Enforcement should address the accuracy of the statistics; however,
    ONDCP can provide an overview. Some of the reporting by the Government
    of Mexico is independently verifiable (e.g., eradication efforts).
    Other categories of data--such as drug seizures and arrests--cannot be
    completely verified. Seizure data is usually provided by Mexican
    officials acting as liaison officers with U.S. personnel in Mexico and
    is compared with intelligence estimates from the same time frame. Often
    seizures can be verified by U.S. personnel when they are invited to
    view the seized contraband or are provided detailed reports of specific
    seizures. Arrests can be verified by reviewing photographs, statements,
    legal instruments and other documentation accumulated relating to an
    arrest. The information is distributed to U.S. law enforcement and
    intelligence agencies so that they can compare the reports with
    intelligence data and statistics from previous years. Only that data
    which can be corroborated is considered reliable.
        Question 2. Have U.S. drug enforcement personnel been given
    increased access by the Mexican government, to conduct investigations
    and surveillance operations in Mexico?
        Answer. Although prohibited by Mexican authority from conducting
    surveillance, DEA's access to Mexican documents, investigations and
    officials continues to expand. This has enabled U.S. agencies to work
    more closely with Mexican law enforcement entities involved in
    counterdrug activity. The DoJ Southwest Border Initiative provides for
    a regional concept for intelligence sharing, cooperative
    investigations, and coordinated enforcement activities.
        In addition, a cooperative international initiative has been
    established to create a joint task force concept with Mexican law
    enforcement officials in the Bilateral Border Task Forces in Mexico.
    According to DoJ, once they begin operations, the BTF's will offer the
    best opportunity for intelligence and information sharing between U.S.
    drug law enforcement agencies and Mexico. U.S. officers will be part of
    the BTF's along with specially vetted Mexican personnel. U.S. law
    enforcement agencies are also deeply involved in providing advice,
    assistance, and training to the Government of Mexico's efforts to
    reorganize its Attorney General's office and counterdrug enforcement
    apparatus. U.S. and Mexican cooperation from the operational law
    enforcement level through the national policy making level resulted in
    the HLCG's U.S. Mexico Bi-National Drug Threat Assessment, published in
    May 1997. This document marked the first bi-national agreement on the
    drug threat, and is emblematic of a spirit of increasingly greater
    cooperation. In the Declaration of the Mexican-U.S. Alliance Against
    Drugs, Presidents Zedillo and Clinton further committed both nations to
    increased cooperation, including development of a joint counterdrug
    strategy by the end of 1997.
        Question 3. What effect has NAFTA had on trafficking illegal drugs
    into the U.S.?
        Answer. One objective of NAFTA is to reduce barriers to free
    movement of goods and services between the U.S., Mexico and Canada.
    NAFTA also aims to increase investment opportunities and joint ventures
    among countries. Because the volume of commercial trade has grown, this
    increase has been and could continue to be exploited by drug
    traffickers. As the flow of money between the countries has expanded,
    so have the opportunities for the laundering of drug money.
    Consequently, flexibility and adaptability have become key to the
    success of interdiction efforts. The U.S. has addressed the growing
    drug threat by significantly bolstering its enforcement efforts along
    the border in the years following the creation of NAFTA.
        Drug traffickers often have connections with commercial trade-
    related businesses. These include trucking firms, rail companies,
    commercial shipping, and the warehousing and storage that accompanies
    them. Additionally, traffickers can benefit from NAFTA-related
    transportation infrastructure upgrades such as highways, railways, air
    links, and ports. By using knowledge of the potential improvements to
    legitimate trade-related travel, traffickers may also be able to
    expedite the passage of contraband.
        It is expected that privatization of Mexican banks will continue as
    will the opening of foreign private investment. This can potentially
    aid money laundering in two ways. First, traffickers can buy bank
    stocks and seek election to bank boards to facilitate the laundering of
    their profits. Also, large amounts of U.S. currency could be invested
    into the Mexican stock market where it could increase in value, then be
    wired to a U.S. account as clean money. Detection methods of these
    suspicious transactions are complicated because the transactions can be
    completed electronically--in some cases from home computers over the
    Internet.
        Although NAFTA does not relax customs inspections, it does stretch
    current interdiction assets. We are taking action to offset any
    potential increased risk by:
      --Increasing the number of customs inspectors on the border;
      --Developing and deploying new, non-intrusive inspection
            technologies;
      --Increasing Border Patrol staffing along the border with improved
            secure communications and sensor systems;
      --Improving operational coordination along the border through
            Operation Alliance and the Southwest Border HIDTA; and
      --Continuing a program of support to law enforcement agencies by
            military and National Guard units along the border.
        These actions have produced solid results. For example, last year
    seizures of illicit drugs along the Southwest Border increased in terms
    of both the number of incidents and the weight of captured substances.
    Specifically, in 1996 narcotics seizures along the U.S.-Mexican border
    were up 29 percent by number of incidents and 24 percent by total
    weight over 1995 figures.
        Possible additional actions include:
      --Further education of law enforcement officials on NAFTA-related
            provisions, rules, and laws;
      --Training of law enforcement officials on potential money laundering
            schemes involving the Mexican stock exchange;
      --Close scrutinization of funds wired to the U.S. from foreign stock
            markets;
      --Continued communication between law enforcement and commerce
            agencies of cargo loads and modes of transportation; and
      --Development of alternate cargo inspection facilities and
            establishment of guidelines to facilitate inspections.
        We are also working jointly with Mexico through the High Level
    Contact Group to define where we can most effectively combine efforts
    on the border. The HLCG's May 1997 U.S. Mexico Bi-National Drug Threat
    Assessment provides an excellent, mutually agreed upon description of
    the drug threat faced by both countries. The Declaration of the
    Mexican-U.S. Alliance Against Drugs commits both nations to 16
    counterdrug goals, including improving the capacity to interrupt drug
    shipments by air, land, and sea; combating corruption; enhancing
    cooperation along both sides of the common border; better information
    sharing and coordination between our counterdrug forces; and reducing
    the production and distribution of illegal drugs in both countries.
    Presidents Clinton and Zedillo also directed development of a joint
    counterdrug strategy to address these goals by the end of 1997.
        Question 4. Were any drug enforcement efforts compromised as a
    result of our alliance with General Rebollo?
        Answer. A comprehensive assessment of the impact on drug
    enforcement efforts is being conducted by law enforcement and
    intelligence agencies. To date, we are unaware of specific information
    that was compromised. We will be able to answer the question more fully
    when the assessment is complete but some general comments can be made.
    Law enforcement agencies have always been very careful in the types and
    amount of information they share, particularly with Mexico. Information
    is very specific and focused, and shared through specific, well defined
    mechanisms with appropriate safeguards. For example, DEA, FBI, USCS,
    and Mexico initiated establishment of several Bilateral Border Task
    Forces (BTF's) through which information was to be shared. The BTF's
    were not yet fully functional, and U.S. officers were not assigned to
    them at the time of General Gutierrez' arrest. As part of the
    reorganization of the Mexican Attorney General's office in the
    aftermath of the Gutierrez Rebollo revelations, all Mexican members of
    the BTF are being fully vetted by the Government of Mexico, to include
    background and financial investigations, and periodic polygraph and
    urinalysis tests.
        Question 5. What is the status of Mexico's current drug enforcement
    organizational effort?
        Answer. In late April 1997, President Zedillo directed the
    reorganization of those elements of the Mexican justice system involved
    in counterdrugs, due in part to concerns about corruption. The new
    organizations within the Mexican justice system, the Special Prosecutor
    for Crimes Against Health and the Organized Crime Unit are designed to
    be more carefully vetted, far leaner, and more focused than their
    predecessors. Individuals assigned to these units will be required to
    undergo a vetting process which will include background and financial
    investigations, and periodic polygraph and urinalysis tests. The first
    thirty of the fully vetted individuals began training with DEA in the
    U.S. on July 14, 1997.
        Question 6. Do you foresee relations improving between our
    respective drug enforcement agencies, which up until now, have been
    very strained on the operational intelligence and investigative levels?
        Answer. While there is extensive corruption in Mexico, there are
    also many brave, honest, and dedicated individuals fighting the
    corruption and violence that accompany drug trafficking. Over 300
    police were murdered in Mexico last year. Forty-three military
    personnel died, and 122 were wounded or injured in counterdrug
    operations. We believe that there are units in these organizations
    which are fundamentally sound and can be trusted with sensitive
    information. The degree of trust depends on the relationship that we
    develop over time in an environment where we will carefully watch the
    use of U.S. assistance.
        At the present time, there is a fairly effective cooperative
    relationship in effect between Mexican and U.S. law enforcement at the
    operational level. With the reorganization of Mexico's counterdrug
    enforcement structures and the institution of vetting procedures for
    their personnel, we expect that relationship to improve.
        We will continue to work at building a relationship of trust and
    cooperation with Mexican organizations involved in counterdrug
    activities which have contributed to the fight against trafficking-
    related violence and corruption. President Zedillo clearly recognizes
    the menace of drug trafficking, naming it Mexico's number one security
    threat. His commitment is reflected in the cooperative workings of the
    High Level Contact Group, and in the Declaration of Alliance he signed
    with President Clinton in May. The U.S. Mexico Bi-National Drug Threat
    Assessment and the developing U.S.-Mexico Bi-national Counterdrug
    Strategy are products of improving bilateral relations and increased
    understanding and cooperation at all levels.
                                crop eradication
        Question 1. In the 1997 National Drug Control Strategy, ONDCP
    announced it's long term goals and objectives. Goal 5 is to break
    foreign and domestic drug sources of supply. The first objective for
    this goal is to reduce the cultivation of crops used in the production
    of illegal drugs worldwide, through crop eradication.
        For many of the countries identified as being principal growers of
    these crops, coca, opium, and marijuana are and have been the primary
    ``cash crops'' underscoring the economy and political base of these
    poor countries.
        What is the incentive for a country to cooperate in this crop
    eradication initiative?
        Answer. It is in a country's own best interest to cooperate in crop
    eradication initiatives. In international relationships, crop
    eradication demonstrates compliance with the 1988 U.N. Convention and
    serious commitment to control illegal drug production. It is also a
    positive factor that is considered during U.S. certification
    deliberations, enhancing cooperation and support from the U.S., and
    possibly other countries. Specifically, a country's crop eradication
    program could be a factor in determining whether a country receives
    foreign aid and assistance in obtaining export-import (EX-IM) trade
    financing. Crop eradication can result in moving farmers to licit
    businesses and improving and diversifying the long-term potential for
    farmers' livelihood which is not dependent on a dangerous, destructive
    and illegal drug trafficking economy. It also helps create opportunity
    for alternative development funding and investment to improve a broad-
    based, sustainable economy.
        Question 2. What is being proposed to offset the profitability of
    this crop cultivation and production of illegal drug product? What
    agricultural alternatives are we offering?
        Answer. U.S. alternative development programs which support host
    nation alternative development initiatives consist of funding for crop
    substitution, agricultural extension programs, community development
    projects, roads, schools, health care facilities, improvements in
    transportation modes, infrastructure improvements, marketing incentives
    and farm credit support. These programs are funded by the host nation,
    the U.S. and other donors. All of these programs are reinforced and
    stimulated by sustained interdiction and law enforcement measures to
    drive down the farmgate price of illicit crops, move farmers away from
    these crops, and help ensure they will not return.
        Agricultural alternatives clearly must be tailored to the local
    situation. In Peru, the principal country fully participating in
    alternative development, we support agricultural extension programs for
    former coca growers which facilitates their cultivation of cacao,
    coffee, rice, and papaya. In Bolivia there is support for pineapple,
    bananas, and other crops, as well as a juice plant to open markets in
    neighboring countries. The U.S. also helps both countries to fund
    technical help and training to turn farmers to these crops, supply
    plant pathologists to assist in creating doctoral programs at local
    agricultural universities, and provide assistance in obtaining farm
    credit financing.
        Question 3. Will this effort receive the full backing of the
    leadership in these countries, many of whom have benefited from the
    marketing of coca, opium and marijuana?
        Answer. The leadership of most drug-producing countries have come
    to the realization that narco-trafficking does severe damage to their
    legitimate economies through displacement of licit crops (including
    vital food crops) and legitimate businesses. Traffickers increasingly
    use contraband as a means to launder drug proceeds, leaving legitimate
    importers and manufacturers without the ability to compete. Obviously,
    the vast sums of money spent on law enforcement measures also take
    their toll on already stretched national budgets.
        In this regard, Peru's President Fujimori fully supports
    alternative development for the coca growing areas of his country,
    combined with a program of sustained interdiction, law enforcement, and
    the manual eradication of coca crops (vs. chemical eradication). The
    Colombian leadership supports crop eradication through chemical spray
    programs. The government of Colombia has an alternative development
    program supported in part by the UNDCP to assist farmers to move to
    legitimate crops. The government of Bolivia (GOB) supports manual
    eradication efforts and achieved a small net reduction in coca
    cultivation in 1996. The newly elected GOB has committed to a ``coca-
    free Chapare''--the principal illicit coca growing area of Bolivia--by
    2002. In the opium growing source countries of Burma and Afghanistan,
    the leadership has not backed either eradication or alternative
    development measures.
        Question 4. What quality assurances will be implemented for the
    crop eradication program? How do we know they are effectively
    destroying these plants?
        Answer. The U.S. government, through annual reporting from the CIA/
    Crime and Narcotics Center (CNC), publishes worldwide crop cultivation
    estimates for coca and opium based upon satellite imagery and aerial
    photography. These reports are verified by field surveys involving crop
    specialists from CNC who visit coca and opium growing areas (where
    accessible) to measure crop growth, the effects of crop eradication
    spraying efforts and abandonment of growing areas, to obtain ``ground
    truth'' of estimated cultivation.
        The U.S. verifies the effectiveness of crop destruction efforts
    through the CNC field surveys, as well as reporting from State
    Department/International Narcotics and Law Enforcement (INL) and U.S.
    Embassy personnel. State/INL supports crop eradication programs against
    coca and opium grown in the Andean source countries and participates,
    in varying degrees by country, with host nation personnel conducting
    crop eradication operations.
        Question 5. What infrastructure investment will the U.S. have to
    make into these targeted countries to facilitate crop conversion?
        Answer. ONDCP is coordinating an interagency process to develop
    estimates of the necessary resource requirements to achieve a 50
    percent reduction in coca leaf grown in Bolivia, Colombia, and Peru
    over the next five years. This investment would provide enforcement and
    interdiction measures that disrupt the cocaine export industry, as well
    as alternative development programs that would provide licit income
    alternatives and encourage the cultivation of legal crops.
        Question. 6. How accurate are these estimates in painting the
    universal picture of illegal drug production activity?
        Answer. The imagery-based sampling methodology used to estimate
    licit crops in the United States is used to estimate illicit narcotics
    cultivation around the world. The statistical methodology is highly
    reliable, and is used annually to provide a strategic trend assessment
    of the illicit narcotics crops.
        Estimating the amount of cocaine or heroin actually produced from
    the available crops is less precise. Information such as local
    consumption of coca leaves, efficiencies in converting raw materials to
    cocaine or heroin, etc., are difficult to obtain. Our overall
    estimates, therefore, are generally characterized as ``potential''
    production. Programs such as the Drug Enforcement Administration's
    ``Operation Breakthrough'' are assisting us to better understand how
    efficient the cocaine producers are. Other interagency efforts are
    underway to improve information concerning the non-U.S. demand,
    particularly for cocaine.
        Question 7. How much of our information is reliant upon figures
    provided to us by target countries? How reliable are their eradication
    and seizure activity reports?
        Answer. Information provided by the target countries for
    cultivation and production is very seldom relied upon by the U.S.
    government. Whereas seizure activity as reported by target countries is
    not completely unreliable, it does not provide a reference point for
    more in-depth analysis by U.S. authorities. Target country eradication
    figures provide a measure of the level of activity. Eradication
    assessments are based on U.S. government intelligence collection and
    crop assessments.
        Question 8. What are the current Central and South American
    estimates for production, eradication (to include in-country seizures),
    and shipment of cocaine, heroin, and marijuana to the United States?
        Answer.

                                    LATIN AMERICA ILLICIT NARCOTICS PRODUCTIONS, 1996
    ----------------------------------------------------------------------------------------------------------------
                                                                  Cultivation  Eradication   Potential     Seizures
                                                                      (ha)         (ha)      production      (mt)
    ----------------------------------------------------------------------------------------------------------------
    Cocaine:
        Bolivia.................................................       48,100        7,500          215        76.40
        Peru....................................................       94,400        1,260          435        19.69
        Colombia................................................       67,200   \1\ 16,053          110        23.50
    Heroin:
        Mexico..................................................        5,100        7,900            5         .363
        Colombia................................................        6,300    \1\ 6,028            6         .183
    Marijuana: Mexico...........................................        6,500       12,200        3,400        1,150
    ----------------------------------------------------------------------------------------------------------------
    \1\ Reported spray activity.
    Seizure data: International Narcotics Control Strategy Report, 1997.

    To date, there are no reliable estimates regarding the shipments of
    heroin or marijuana to the United States, other than as discussed
    above.
        The Interagency Cocaine Flow Working Group estimated for 1996 that
    648 metric tons of cocaine left the source zone (i.e., South America)
    destined for the United States and other world markets. This estimate
    was based on known events totaling 321 metric tons and possible events
    estimated at 327 metric tons. Of the 648 metric tons that left South
    America, 191 metric tons were seized either en route or in the arrival
    zone (i.e., the United States). The remaining 457 metric tons were
    presumed to have reached world markets, including the United States.
    Estimates for the first quarter of 1997 suggest a continuation of this
    pattern.
        Question 9. What are the weaknesses in the estimates?
        Answer. As noted above, it is difficult to estimate the amount of
    coca leaf or opium gum actually harvested and processed. Illicit
    narcotic crops are detected using imagery; estimates of actual heroin
    and cocaine production are more difficult to measure.
        The principal weakness associated with our cocaine movement
    estimates are caused by incomplete intelligence. For example,
      --Even when we know a cocaine movement has occurred, we sometimes
            have to estimate the volume of cocaine delivered.
      --For ``possible'' events, where cocaine movement intelligence has
            not been corroborated, we often lack data elements, such as
            route, conveyance, or quantity. In those cases, our estimate of
            the missing data are based on precedent but subject to error.
      --Despite comprehensive monitoring of air and sea routes to the U.S.,
            traffickers are often able to avoid detection completely. This
            is particularly true with small amounts (less than 10 kilos)
            smuggled to world markets via commercial or maritime shipments.
        The principal weaknesses in seizure data estimates are: (1)
    Overestimates--host governments tend to overestimate reporting, and the
    possibility of double counting; and (2) Timeliness of reporting--host
    governments officially report seizures once a year to the U.S. just
    prior to certification. The CIA Counternarcotics Center maintains its
    own comprehensive database of actual seizure events from all-source
    reporting. The database provides an accurate representation of ongoing
    seizures in the source and transit countries. In some cases, however,
    the timeliness of seizure reporting can lag for a month or more,
    requiring constant updates to the database.
                                drugs and crime
        Question 1. What prevention programs are successful in keeping
    individuals from sliding into a life of drug abuse? What are the
    ingredients for a successful program?
        Answer. Over the past 20 years, HHS and the National Institute on
    Drug Abuse have supported a rigorous research program to determine what
    really works to help prevent drug abuse among youth. HHS was mandated
    by Congress to conduct a three-year study of prevention programs. The
    final product, the National Structured Evaluation, identified the
    necessary ``ingredients'' or ``modules'' which contributed to
    successful program outcomes. There are fourteen principles which focus
    on: enhancing ``protective factors'' and reversing known ``risk
    factors,'' targeting all forms of drug use, including tobacco and
    alcohol; teaching resistance skills and increasing opportunities to
    practice social competency skills; interactive methods; involving
    parents and school; working with communities to strengthen ``norms''
    against drug use; age-specific, developmentally appropriate and
    culturally sensitive.
        In addition, NIDA has recently published a researched-based guide
    to prevention programming, which identifies and highlights ten school-,
    community-, and family-based programs as effective. These science-based
    guidance documents are being disseminated to communities around the
    country to assist in a more disciplined application of research results
    at the state and community levels.
        Question 2. What new programs are on the horizon? Who are the
    targets and what are the goals?
        Answer. New programs are being developed as part of a research
    protocol and tested in a family, school or community setting over a
    reasonable period with positive results. There are new definitions
    adopted by the prevention field, which describe programs by the
    audience for which they are designed--specifically, universal,
    selective, and indicated programs. Universal programs reach the general
    population--all students in a school; selective programs target groups
    at risk or subsets of the general population--children of drug users or
    poor school achievers; and indicated programs for people already using
    drugs or exhibit other risk-related behaviors.
        Life Skills Training Program is an example of a universal classroom
    program designed to address a wide range of risk and protective factors
    by teaching general personal and social skills in combination with drug
    resistance skills. Strengthening Families Program is a selective
    prevention program, a multi-component, family-focused program that
    targets 6-to-10-year-old children of substance abusers. Reconnecting
    Youth Program is a school-based indicated prevention program that
    targets young people in grades 9 through 12 who show signs of poor
    academic achievement and potential for dropping out of school.
    Adolescent Transition Program is one which integrates all three
    approaches and focuses on parenting practices.
        Question 3. What should be done for those who are arrested for the
    first time and found to be abusing drugs?
        Answer. At a minimum, pretrial or post-conviction release should be
    conditioned on compliance with a program of drug testing and
    monitoring. Preferably, a formal assessment should be performed to
    determine the extent of the drug problem and any release should be
    conditioned on compliance with the treatment and/or monitoring regime
    that is developed in response to the assessment. Sanctions should be
    graduated (ultimately ending with incarceration) and employed swiftly
    in response to any slips in compliance.
        Question 4. Are there any examples where early treatment referral,
    after arrest, has successfully disengaged these individuals from
    further drug use and a subsequent life of crime?
        Answer. Effective offender management programs bring offenders
    under criminal justice supervision early, employ a formal assessment,
    apply palpable sanctions swiftly, and maintain unbroken contact with
    the offender. A notable example is the TASC program (originally called
    Treatment Alternatives to Street Crime, now generally called Treatment
    Alternatives for Safer Communities), which has been formally evaluated
    by the National Institute on Drug Abuse (NIDA) and found to be
    effective in reducing both drug use and crime. The more recently
    established drug courts, which rely on TASC or TASC-like offender
    management, are experiencing similar results.
        Question 5. What are the most vulnerable ages and influencing
    demographics in this process?
        Answer. The most extensive research on development and
    vulnerability focuses on early childhood, especially the pre-school
    years. For this group, risk factors (e.g., unemployed, and/or drug
    using, and/or law breaking parents) and predictive behaviors (e.g.,
    excessive shyness) have been identified. For older children, points of
    significant transition (e.g., from elementary to middle school and from
    middle to high school) are times of increased vulnerability. Children
    between 11 and 13 years of age appear to be particularly vulnerable, in
    that they are going through multiple transitions. Children with strong
    positive ties to healthy parents seem most able to weather these
    transitions.
                                  drug courts
        Question 1. How successful are the existing Drug Court programs in
    reducing the demand for illegal drugs?
        Answer. One indicator of demand reduction is the extent to which
    drug-law offenders stop using drugs. Since Drug Courts began operating
    in 1990, more than 45,000 persons have entered the program. More than
    70 percent of them have ``graduated'' or are presently in a Drug Court
    program, outcomes we equate with abstinence.
        Question 2. How many programs are currently in effect nationwide?
        Answer. There are approximately 200 drug courts in the United
    States.
        Question 3. What key factors influence the success of this program?
        Answer. The success of Drug Courts is attributable to a number of
    factors including the immediacy of entry into the program, a condition
    often imposed within days of arrest; availability of treatment and
    other health rehabilitation services; direct judicial monitoring of
    offenders; immediate imposition of sanctions when program participants
    violate program requirements; Drug Court strategies that are
    comprehensive (e.g., inclusive of criminal justice system, treatment,
    community anti-drug organizations) and fully coordinated.
        Question 4. How early in the criminal justice process are eligible
    candidates referred into the Drug Court process?
        Answer. Participants usually enter Drug Court programs within days
    of their arrest. Indeed, many are transported to a Drug Court
    orientation facility immediately after acceptance in the program and
    prior to their (conditional) release into the community.
        Question 5. Please describe a typical case for Drug Court referral.
        Answer. Drug Courts differ. There are, however, commonalities that
    approximate a ``model.''
        For example, the person arrested and charged with illegal drug
    possession is interviewed by drug court staff while in custody, usually
    prior to arraignment. Program eligibility having been established, the
    defendant is arraigned before a Drug Court judge (often on the same day
    as arrest) and placed in the Drug Court program.
        The initiate is ordered to undergo program orientation (again, this
    often occurs on day-of-arrest). Ideally, pretrial services, treatment
    assessment, and ``Treatment Alternatives for Safe Communities'' (TASC)
    involvement are also achieved on day-of-arrest.
        Program participants are drug tested upon entry and must meet with
    supervisory staff and/or receive treatment at least weekly. Progress is
    monitored by the Drug Court judge monthly. At the conclusion of at
    least one year of treatment and supervision, participants ``graduate,''
    their cases are dismissed and probation terminates.
        Question 6. What is the projected impact of these Drug Courts in
    breaking the cycle associated with drug-related crime and punishment?
        Answer. Research conducted by the University of Maryland (Center
    for Substance Abuse Research, University of Maryland, Drug Strategies,
    Cutting Crime: Drug Courts in Action, 1997, Washington, DC) concludes
    that ``recidivism has been significantly reduced for drug court
    participants.''
        Question 7. What happens to an individual who does not subscribe to
    the mandates of the Drug Court?
        Answer. Participants who do not fulfill their program obligations
    are subjected to graduated sanctions. At a minimum, drug testing
    frequency may increase and additional treatment might be required. As
    program violations mount, severe sanctions accrue, to include
    imprisonment, program expulsion, and reimposition of criminal
    proceedings.
                           hard core users and crime
        Question 1. ONDCP states that on average, 12.5 million Americans
    are considered to be ``past month users'', of which 3.6 million are
    considered to be ``hard core'' users. These 3.6 million hard core drug
    users are said to be responsible for most of the drugs consumed and
    drug related crimes in the U.S. today. Two thirds of these hard core
    individuals will come in contact with our criminal justice system.
        The National Drug Control Strategy is focusing on ``Demand
    Reduction'', which targets breaking the cycle of drug dependence. A key
    factor for the success of this initiative is in breaking the cycle of
    demand by hardcore drug abusers. Please define ``past month users'' and
    ``hardcore users.''
        Answer. Past month use is a standard term used in many epidemiology
    surveys of drug use (e.g., the National Household Survey of Drug Abuse
    [NHSDA] and MTF.) Past month users are those individuals who use drugs
    at least once in the 30 days prior to the interview. They also are
    commonly referred to as ``past 30 day users'' and ``current users.''
    Hardcore users (or chronic hardcore users) is not a term used typically
    in association with epidemiologic surveys because this population is
    difficult to measure and is, therefore, not well represented in surveys
    of the general population, such as the NHSDA and the MTF. However, it
    is a useful term in describing the most difficult and troublesome
    population of drug users. Hardcore users are those individuals who use
    drugs on a weekly (i.e., heavy) basis and whose use of drugs is
    accompanied by negative behavioral consequences (e.g., unemployment,
    criminal activity, and an inability to sustain relationships).
        Question 2.. How is society impacted by this population of hardcore
    users?
        Answer. Hardcore drug users are one of the most troubling aspect of
    the nation's drug problem and negatively impact society in many ways.
    For example, the hardcore using population while representing
    approximately 30 percent of the cocaine using population, accounts for
    more than two-thirds of all of the cocaine consumed in the United
    States. It is these users who maintain the illegal drug market, and its
    attendant violence, and keep drug traffickers in business. Hardcore
    users are responsible for a disproportionate amount of crime, and the
    frequency and severity of their criminal activity rises dramatically
    during periods of heaviest use. Hardcore users frequently are
    ``vectors'' for the spread of infectious diseases such as hepatitis,
    tuberculosis, and HIV and other sexually transmitted diseases. It is
    this population that serves as a reservoir of drug use for periodic
    outbreaks of renewed use of drugs among the general population, as we
    may currently see with heroin and methamphetamine.
        Question 3. What precipitates hard-core drug use?
        Answer. Scientists have attempted for many years to determine the
    origins of illicit drug use and how it progresses to chronic use. Key
    factors have been identified that differentiate those who use from
    those who do not. Risk factors are associated with those who have a
    high potential for drug use. Factors associated with reduced potential
    for use are identified as protective factors. These risk factors can
    have different consequences dependent upon an individual's phase of
    development. Generally, however, these risk factors include:
      --Chaotic home environments, particularly in which parents abuse
            substances or suffer from mental illness;
      --Ineffective parenting, especially with children with difficult
            temperaments and conduct disorders;
      --Lack of mutual attachments and nurturing;
      --Failure in school performance;
      --Poor social coping skills;
      --Affiliations with deviant peers or peers around deviant behaviors;
      --Perceptions of approval of drug-using behaviors in school, peer,
            and community environments; and
      --Availability of drugs, trafficking, and beliefs that drug use is
            generally tolerated.
        Question 4. What mechanisms do we have to identify hard core drug
    users?
        Answer. There are a number of assessment instruments that can
    determine the relative severity and progression of a user's drug abuse,
    health and social consequences, and criminal and other behavioral
    consequences. Many also address the so-called ``stakes in conformity,''
    the ties to society's institutions that can be helpful in recovery. For
    example, the Federal Bureau of Prisons employs a residential drug abuse
    treatment eligibility interview instrument that is linked to the
    Diagnostic and Statistical Manual (DSM IV) of the American Psychiatric
    Association. Many jurisdictions and programs use the Addiction Severity
    Index (ASI) developed through the efforts of researchers at the
    University of Pennsylvania and the Philadelphia Veterans' Affairs
    Program. Others, such as Colorado and Birmingham, use the Offender
    Profile Index (OPI), developed under a federal demonstration program.
    An example of a gross screening instrument would be the CAGE test for
    use by primary and/or emergency room health care professionals.
        Question 5. How effective have ONDCP efforts been in terms of
    hardcore users? In other words has the level of hardcore users changed
    over the past ten years?
        Answer. The level of hardcore drug users has remained relatively
    stable over the past 10 years. There are an estimated 2.1 million
    hardcore cocaine users and about 600,000 hardcore heroin users.
    However, this population is known to be very intractable and difficult
    to reduce. Also, research indicates that heavy use declines slowly
    following declines in initiation. According to a 1994 RAND study
    (Everingham and Rydell, Modeling the Demand for Cocaine): ``. . . the
    effect on heavy cocaine usage of government programs that reduce
    incidence (such as prevention programs) will only be realized many
    years later, and part of the effectiveness of local law enforcement
    programs and other programs that influence drug use in multiple ways
    (affecting incidence, flow rates, and the consumption rates of current
    users) also will be delayed.'' The good news is that the number of
    cocaine initiates has been declining. Cocaine initiates reached their
    peak in 1984 at 1,401,000. Since then they have fallen 62 percent to
    533,000 in 1994. Consequently, if we continue to support the
    coordinated efforts of prevention, treatment, interdiction, and source
    country programs then we can expect to begin to see a reduction in the
    hardcore user population.
        Question 6. What is the average life span of hard-core drug users?
        Answer. The average life span for the chronic addict, without
    therapeutic intervention, is shortened by about 20 years. The decreased
    life span is attributable to a number of factors including lifestyle
    (i.e., criminal behavior to support habit and diminished quality of
    life) and deterioration of health secondary to infection and resulting
    disease. With therapeutic intervention, the life span is the same as
    for the average American, if the addict receives adequate health care
    (including the use of appropriate medications) to effectively counter
    the effects of illicit drug use.
        For the approximately 600,000 opiate addicts that drug is
    Methadone. Methadone treatment clearly ranks as the most promising and
    available treatment for the opiate addict on the market today. The
    research indicates that the combined impact of psychosocial services
    and Methadone maintenance significantly improves the outcomes for the
    intravenous drug user. Some studies indicate that the longer a person
    remains in treatment the more lasting the benefits, i.e., less criminal
    activity, improved health, better overall quality of life.
        The approximately 1.6 million Americans who are chronically
    addicted to cocaine also experience a positive response (improved
    quality of life which equates with longevity) when provided
    comprehensive psychosocial interventions and appropriately medicated
    for relief of psychic and physical symptoms.
        Question 7. Is there evidence that the cycle of demand can
    effectively be broken for this group?
        Answer. The cycle of demand can be broken for the user. However,
    the extent of their addiction must be matched with treatment of
    sufficient intensity and duration. Addiction is a treatable, chronic,
    relapsing disorder. Significant benefits accrue to society at the point
    of an addict's entry into treatment--drug use, criminal activity, and
    infectious disease transmission are sharply reduced.
        For example, the congressionally-mandated, National Treatment
    Improvement Evaluation Study (NTIES) determined the persistent (12-
    month follow-up) effects of substance treatment on predominately poor,
    inner-city populations as follows: use of illicit drugs dropped an
    average of 50 percent; batteries dropped by 78 percent, drug selling by
    78 percent, shoplifting by 82 percent, and arrests by 64 percent;
    exchange of sex for money or drugs dropped by 56 percent; homelessness
    dropped by 43 percent and receipt of welfare income by 11 percent; and
    employment increased 19 percent.
        Question 8. If we find there are no effective treatment tools, what
    will be our alternatives for dealing with this group?
        Answer. Fortunately, the threat or application of criminal justice
    sanctions linked to treatment has proven generally effective. For
    violent, drug abusing criminals, long-term incarceration may be
    necessary. Treatment should still be provided to this group because it
    will improve institutional and correctional staff safety and because it
    is bound to have some effect over time. For nonviolent but persistent
    petty drug abusing criminals, longer-term probation sentences linked to
    treatment would be in order. Those in need should receive treatment at
    every security level, linked with unbroken contact with the criminal
    justice system.
        Question 9. If you had to balance your spending between preventing
    the 1st time use of drugs and treatment programs for hard core users,
    what would be the best investment?
        Answer. It is very difficult to consider preventing drug use by our
    children and helping the 3.6 million Americans who are chronic drug
    users overcome their dependency problems as mutually exclusive
    priorities. They should not be viewed as either/or propositions. If
    resources are invested in effective drug prevention programs, then the
    number of future drug users will be reduced. This will mean that there
    will be fewer casual drug users, and even fewer chronic users.
        The 1997 National Drug Control Strategy recognizes that investments
    in drug prevention programs will pay off. That's why the Strategy's
    number one goal is to educate and enable America's youth to reject
    illegal drugs as well as alcohol and tobacco. We know that a 12-year
    old who smokes marijuana is 85 times more likely to use cocaine than
    one who doesn't smoke, drink, or use pot as a drug-free peer. As we
    learn more about the ways that psychoactive substances affect the
    brain, we understand that if youth avoid using alcohol, tobacco, or
    illegal drugs until their twenties, then they are less likely to suffer
    a drug dependency problem. This logic is at the heart of the ONDCP-
    proposed youth-oriented anti-drug campaign.
        At the same time, we cannot ignore the fact that those Americans
    who are addicted to illegal drugs and other substances cause enormous
    damage to themselves, their families, and their communities. We must
    continue to invest in effective public and private treatment programs.
    We must also expand diversion programs within the criminal justice
    system (such as drug courts) so that we can break the cycle that links
    addiction, crime, and violence.

                              Subcommittee Recess

        Senator Campbell. The subcommittee is recessed.
        [Whereupon, at 11:58 a.m., Wednesday, May 14, the
    subcommittee was recessed, to reconvene at 9:32 a.m., Thursday,
    June 19.]

      TREASURY AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL YEAR 1998

                                  ----------

                            THURSDAY, JUNE 19, 1997

                                           U.S. Senate,
               Subcommittee of the Committee on Appropriations,
                                                        Washington, DC.
        The subcommittee met at 9:32 a.m., in room SD-124, Dirksen
    Senate Office Building, Hon. Ben Nighthorse Campbell (chairman)
    presiding.
        Present: Senators Campbell, Shelby, Faircloth, and Kohl.
        Also present: Senator Kerrey.

       NATIONAL COMMISSION ON RESTRUCTURING THE INTERNAL REVENUE SERVICE

    STATEMENT OF HON. J. ROBERT KERREY, U.S. SENATOR FROM
                NEBRASKA, AND COCHAIRMAN, NATIONAL
                COMMISSION ON RESTRUCTURING THE INTERNAL
                REVENUE SERVICE

                                Opening Remarks

        Senator Campbell. The subcommittee will be in order. This
    morning will be the final hearing on the fiscal year 1998
    budget for the Subcommittee on Treasury and General Government.
    This morning we will be discussing the 1998 budget for the
    Internal Revenue Service and the recommendations for the future
    of the agency.
        Since there appears to be little controversy on either
    subject, hopefully it will not be too painful. There are a lot
    of issues facing the IRS now and over the next several years.
    It is one of the largest Government users of computer
    technology. They face a huge task of correcting the year 2000
    recognition problem.
        As I understand it, right now the IRS does not know how big
    the Y2K problem is, let alone how much it is going to cost to
    fix it. In addition, there is the ongoing need to increase
    collections, while at the same time improve public relations
    with the taxpayers.
        There is also the necessary technological improvements
    originally envisioned as part of the tax modernization system,
    commonly referred to as a TSM, and now encompassed in the newly
    released modernization blueprint or architecture.
        The biggest problem, in my opinion, however, facing the IRS
    is the credibility problem, not only with the taxpayers
    themselves but with the Members of Congress, particularly the
    appropriators. It is difficult, if not impossible, for us to
    simply forget about wasted modernization funding and go right
    ahead and set up an informal information technology fund with
    the initial investment of over one-half of a billion dollars.
        Our first witness this morning is the former ranking member
    of this subcommittee, Senator Bob Kerrey, who is on his way and
    hopefully will be here when we finish our opening statements.
    Senator Kerrey is currently serving as the cochairman of the
    National Commission on Restructuring the Internal Revenue
    Service, an entity created by this subcommittee.
        This Commission is nearing completion of a year-long review
    of the IRS and will be issuing their comprehensive report on
    June 25. Hopefully we will have a preview this morning of some
    of the recommendations which will be contained in that report.
        Then we will be talking to the General Accounting Office.
    As many of you know, the GAO is reviewing various aspects of
    the IRS and has been for a number of years. And finally, we
    will hear from the Department of the Treasury and the Internal
    Revenue Service themselves.
        Representing the Treasury Department will be Deputy
    Secretary Lawrence Summers, the department-level person
    responsible for the IRS. Joining him will be the Acting
    Commissioner of the IRS, Michael Dolan. Also seated at the
    witness table with that committee and available to answer
    questions from the subcommittee will be David Mader, if I have
    pronounced that right, Chief of Management and Administration;
    Arthur Gross, the Chief Information Officer; and James
    Donelson, the Chief of Taxpayer Service.
        We have a lot of ground to cover and I do not know about
    Senator Kohl's briefing book, but mine has more questions than
    we will probably ever get through this morning. And so, we will
    be asking some and we will also be submitting a number of them
    for the record to be answered by the appropriate people.
        As a general announcement, since this is the last hearing
    of this subcommittee during the fiscal year 1998 budget cycle,
    we will be accepting written testimony from interested parties
    to be included in the complete hearing record only until close
    of business on June 30.
        With that, I will just go ahead and ask Senator Kohl if he
    has an opening statement.

                           Statement of Senator Kohl

        Senator Kohl. Thank you very much, Chairman Campbell. As
    members of the Treasury and General Government Subcommittee
    and, more importantly, as taxpayers, we all have great interest
    in the IRS. We need to know that the IRS is fulfilling its
    mission, namely collecting tax revenues at the least possible
    cost.
        The IRS's fiscal year 1998 request is almost $8 billion.
    That, of course, is a great deal of money. Before providing
    that funding, this committee has a right to know whether the
    IRS is being managed effectively and whether the Department of
    the Treasury is providing an adequate level of oversight.
        We are all aware of the creation of the Modernization
    Management Board chaired by the Deputy Secretary of Treasury
    Summers. What we do not know is whether that board is any more
    effective than past efforts in providing IRS with a consistent
    level of direction and review.
        I am concerned that the numerous issues the Deputy
    Secretary deals with will leave him little time to analyze the
    operations of the IRS. Perhaps consideration should be given to
    empowering someone to provide IRS oversight full-time. We are
    also concerned with the quality of management provided by the
    IRS Commissioner.
        We are aware that the Commissioner's position often acts as
    a revolving door. Structure needs to be developed to ensure
    that the person accepting this position is making a commitment
    to provide Federal service and leadership for an established
    period of time.
        The person selected must have a proven track record of
    having the management capabilities to run a large, successful
    operation. And it is important that the person appointed to
    that position has the ability to successfully supervise
    downsizing initiatives, modernization challenges, and the year
    2000 conversion.
        An example of why we have these continuing concerns with
    the IRS management efforts can be explained by a request we
    received just yesterday. IRS is requesting an additional $258
    million in fiscal year 1998 to complete a systems conversion to
    meet the year 2000 requirements. I am concerned about this
    request, which is tied to the modernization effort.
        We need to know, why are we hearing about it so late, what
    proposals the Department of the Treasury has for funding this
    request, has the Modernization Board approved this request, and
    how do we know the funds will be used to solve just the
    conversion problems?
        Today we will be hearing from the experts. Senator Kerrey
    is chairing a commission studying the IRS. The GAO office has
    issued over 140 reports on IRS operations, and Deputy Secretary
    Summers and the IRS staff are working through the modernization
    problems, customer service problems, and the latest crisis, the
    year 2000 compliance initiative.
        We are looking forward to an informative discussion on the
    steps that we, the Department of the Treasury, and the IRS must
    take to ensure that any further expenditures made are utilized
    appropriately. I have a number of questions for the IRS service
    that I will ask, and those we do not have time to get to, I,
    like Chairman Campbell, will submit for the record. Thank you,
    Mr. Chairman.
        Senator Campbell. Thank you, Senator Kohl. Well, since
    Senator Kerrey is running late--oh, well, he just came in. We
    have been waiting with bated breath for your testimony, Senator
    Kerrey. Why don't you go ahead and sit down? We just finished
    our opening statements and you may proceed.
        Senator Kerrey. Were they brilliant?
        Senator Campbell. They were brilliant, yes. You may go
    ahead and proceed.

                          Statement of Senator Kerrey

        Senator Kerrey. Mr. Chairman and Senator Kohl, it is very
    nice to be sitting here with you this morning. I appreciate
    very much the opportunity to testify before your committee.
    From your position, a couple of years ago, the National
    Commission on Restructuring the Internal Revenue Service began.
    It began as a consequence of making some observations about
    taxes and modernization not going well.
        We tried to fence it in conference committee, were
    unsuccessful in doing that, and with the support of the chair
    and the ranking member on the House side, we created this
    Commission. Therein lies the beginning.
        For the past year, as the cochair of the National
    Commission on Restructuring the Internal Revenue Service, I
    have worked with Senator Chuck Grassley and Congressman Rob
    Portman, who was the cochair of the Commission, as well as
    State tax administrators, private sector executives, and
    citizens groups reviewing IRS operations, management,
    governance, oversight, budget, work force, and technology.
        It is an honor to report to the Senate Appropriations
    Committee because as I said, you are the parent of our
    organization. As you know, we were created to take a hard look
    at the operations, management, governance, and oversight of the
    IRS.
        The Commission took a qualitative approach to its work,
    spending the majority of its time listening to American
    taxpayers, and experts on the IRS and the tax system. The
    Commission spent 12 days in public hearings and over 100 hours
    in private sessions with public and private sector experts,
    academia, and citizens groups.
        The Commission also held three field hearings in
    Cincinnati, Omaha, and Des Moines. We met privately with over
    500 individuals, including the majority of senior level IRS
    employees and interviewed close to 300 IRS frontline employees
    across the country.
        We received continuous input from stakeholder groups and
    conducted a nationwide survey on the American public's view of
    the IRS. And finally, the Commission reviewed thousands of
    reports and documents on the IRS itself. I am convinced, Mr.
    Chairman, that a well-run Internal Revenue Service is vital to
    the health of our Nation.
        Twice as many people pay taxes as vote. Therefore, the IRS
    is the only Federal Government agency many citizens interact
    with. We must make sure that the IRS meets their expectations
    for professionalism, service, and efficiency. A well-run IRS
    can increase the public confidence in their Government.
        The second reason IRS is so important is obvious. IRS
    collects 95 percent of the Nation's revenues. Without the IRS,
    we would not be able to fund highways, education programs, or
    the military. Now, what I will discuss today with you is the
    recommendations coming from the majority of the Commissioners.
    The Commission developed a simple, but sound vision: The IRS
    works for the taxpayer, not the other way around.
        I would like to quote from our report. ``Taxpayer
    satisfaction must become paramount at all levels of the IRS and
    the IRS should only initiate contact with a citizen if the
    agency is prepared to devote the resources necessary for a
    proper and timely resolution of the matter.''
        What that means is that rather than treating people as
    guilty, the IRS must recognize the majority of taxpayers want
    to pay their fair share of taxes, and it is the agency's job to
    make it easier for them to do so. A new customer service data
    base is integral to this vision. Electronic filing is also an
    integral part of the vision.
        Taxpayer rights are also part of the vision. Now, last
    year, some of the press asked the IRS head of strategic
    planning what was going to be the agency's strategic direction
    for 1997, and the answer, ``Get through the 1997 filing
    season.'' This is the epitome of what thinking strategically is
    not about. Our vision says that the taxpayer satisfaction all
    year long is equally as important as a smooth filing season.
        Today the IRS rates low in citizen approval for its
    service. It has a 20-percent error rate and it expends an
    incredible amount of resources and focus to correct these
    errors. They capture only 40 percent of the data from returns.
    It is 18 months before a return can be matched against 1099's.
        Can you imagine a private sector business taking 18 months
    to send someone a bill saying, ``Mr. Kerrey, our records show
    that a year-and-a-half ago, you underpaid your bill.''
    Certainly they would not stay in business very long.
        The Commission report offers both a realistic goal for the
    new folks in charge of the agency and a credible plan for
    achieving that goal. In these days of tight budgets and limited
    governmental resources, the IRS must retool its 1950's
    processes and refocus these resources to add value to customers
    in order to reach the Commission's vision.
        After spending many months digging around in the many tough
    issues confronting the IRS, the substantial majority of our
    Commission members realized that the agency suffers from two
    root problems. First, the agency has a difficult time focusing.
    The result is that many plans receive no follow through and the
    organization often lacks a coherent strategy and direction.
        The most obvious example of this lack of focus was the tax
    system's modernization debacle. The IRS threw $4 billion in
    technology money at hundreds of unrelated projects. The result
    was lots of little interesting computer applications, but no
    significant business achievements.
        The IRS executives and Treasury never decided what the
    organization wanted to accomplish. Whether it was to answer
    more phones or have more taxpayer data available for customer
    service representatives. In a better run system, that kind of
    business decision would be the predicate for a modernization
    effort. All money would be directed toward achieving that
    organizational goal. In the case of the IRS, however, because
    of the lack of strategy and direction, the $4 billion went to
    disparate programs not integrated to meet a specific business
    objective.
        The second interrelated problem identified by the
    Commission was a lack of a coherent, accountable structure to
    implement a long-term vision and goal. We found that we in
    Congress often send conflicting signals to the agency. We found
    that Treasury has basically left IRS to its own devices,
    leaving a vacuum in the executive branch oversight of the
    agency.
        We found a set of managers unable to maintain focus and
    gain traction with Congress on IRS strategy. In short, at the
    top of the IRS and in Treasury, there are murky lines of
    accountability, a lack of necessary expertise to operate in the
    new information age, and no one with authority sticking around
    long enough to get the job done.
        The officials at the Treasury Department have expertise in
    tax law and enforcement, but do not have the expertise in areas
    of customer service, technology, and management to oversee the
    IRS. Furthermore, they are not around long enough to ensure
    focus on multiyear projects like TSM or changing the culture of
    the agency to be more responsive to taxpayers.
        Additionally, Treasury does not coordinate the oversight it
    does engage in. The Commissioner of IRS must deal with various
    assistant secretaries on budget, operations, computers, and
    other issues. At the end of the day, the Commissioner really
    reports to the Deputy Secretary who also manages 10 other
    agencies, not to mention the economy.
        The recently retired Commissioner of IRS, Margaret
    Richardson, told us that she reported to three different Deputy
    Commissioners during her time in office. Because of these
    problems, the Commission began developing ideas for a new
    governance structure. The criteria for success of any new
    structure were one, clear accountability; two, expertise in
    running a modern, customer-oriented organization; and three,
    the continuity to get the job done.
        To solve the problems of continuity, expertise, and
    accountability, the Commission will recommend first, a board of
    governors appointed by the President for staggered 5-year terms
    to assume full control of IRS governance. The board will be
    fully accountable for the performance of IRS, oversee the IRS
    management, be around long enough to enforce changes throughout
    the organization, and have unique public and private sector
    expertise in managing large service organizations.
        Second, the Commissioner will be appointed for a 5-year
    term so he or she will be around long enough to effectuate real
    change. Third, the Commissioner will be given greater
    flexibility to hire or fire his own team of executives who will
    bring new expertise into the IRS.
        Fourth, the IRS will receive stable funding so its leaders
    can undertake the proper planning to rebuild its foundation.
    Our recommendations specifically say that for 3 years, IRS
    should receive current levels of funding. It is up to Congress
    to decide whether that should be current budget or current
    budget plus inflation.
        We purposely left it up to Congress to decide. We were
    silent on technology funding except that we encourage any
    additional appropriations be targeted toward (a) building a
    taxpayer accounts data base to facilitate taxpayer assistance,
    and (b) ensuring certain success in the century date change
    problem.
        Last, we recommended congressional oversight could be
    better coordinated between the authorizing committees, the
    appropriating committees, and the Government oversight
    committees. We will recommend that committee leaders, minority
    and majority, meet regularly to ensure that IRS receives clear
    guidance from Congress and that Congress is given the proper
    information to oversee the IRS.
        As you may know, the Secretary of the Treasury Bob Rubin
    and the Deputy Secretary Larry Summers disagree with our plan
    for a Board of Governors to oversee the IRS. They have
    developed an alternative proposal which would create two
    advisory-type boards which are an attempt to strengthen
    Treasury's governance of IRS.
        While we seriously considered their proposal, in the end,
    the Commission rejected this approach. First, our opinion is
    that it further blurs accountability just when there is a need
    for clearer lines of accountability. Second, it does nothing to
    alleviate the continuity problem. Political appointees who
    traditionally serve for a short period of time will continue to
    oversee IRS operations.
        Third, it endangers politicizing the IRS. What we need is
    accountability without politicization. The Treasury's proposal
    to create an oversight board of officials from OMB, OPM, and
    the Vice President's Office could undermine the credibility of
    IRS as an apolitical institution.
        The White House has always, in our judgment, wisely tried
    to keep an arm's length distance from IRS. Finally, it does not
    guarantee that the people with the proper expertise in
    computers, technology, and service will oversee IRS operations.
        Secretary Rubin and Deputy Secretary Summers have been
    vigilant in their attacks of our proposal. They have said that
    private people should not control law enforcement and that our
    Nation's revenue stream will be at risk under our proposals.
        Those accusations, Mr. Chairman and members of the
    committee, are simply not true. First, we propose that the
    Board of Governors be presidentially appointed, Senate-
    confirmed, and removable at the will of the President. While
    they serve on the Board, they will be special Government
    employees serving in a Government function, much like the
    Postal Board of Governors who have vast control over the Postal
    Service, including the enforcement arm of the Postal Inspection
    Service.
        Additionally, this Board will not have any role in tax
    policy, which will stay with the Secretary of the Treasury.
    Much like the Canadian system, our proposal will draw clear
    lines of accountability between tax policy and tax
    administration. Also, the Secretary of the Treasury will sit on
    the Board, subjecting the Board to scrutiny were there to be
    any appearance of impropriety.
        Finally, the Secretary of the Treasury would continue to
    have final say over the IRS budget before it is sent to
    Congress. Under our proposal, the Board would send Congress a
    copy of their budget at the same time they sent it to the
    Secretary, allowing Congress to make the decision of how much
    money to appropriate.
        As for the comment about endangering the Federal revenue
    stream, all I can say is that as far as I am concerned, that is
    an irresponsible comment. Anyone who understands the IRS knows
    it is like a tank, impenetrable. While our integrated proposal
    will hopefully jolt the agency into a customer focus, it
    certainly does not endanger its operation. I can only attribute
    this comment to the classic Washington battle over turf.
        The structural changes I described earlier will ensure the
    following operational changes are implemented. First, we
    advocate work force flexibility. Current Civil Service rules
    make it difficult for the IRS to retain competent employees,
    fire bad employees, and pay people appropriately. We recommend
    that the IRS be given the flexibility to redesign its work
    force rules and develop appropriate internal measurements to
    free employees from redtape and hold them accountable for
    performance.
        Second, we recommend modernizing the computers. IRS has had
    neither a strategic plan for technology nor had the people with
    the knowledge to implement technology plans. We recommend that
    the IRS develop a long-term strategic plan for modernization
    and hire qualified people to make these plans a reality.
        Third, we want to encourage paperless filing. Electronic
    filing saves the Government money and saves the taxpayer from
    receiving a baseless audit because of mistakes by the IRS. The
    Commission recommends that IRS develop a marketing plan which
    makes paperless filing the preferred method of filing for 80
    percent of the taxpayers within 10 years.
        Fourth, we have emphasized taxpayer rights. The Commission
    recommends additional steps to improve the taxpayer's ability
    to recover damages for wrongful actions by the IRS and
    encourages IRS and Congress to do everything they can to
    protect taxpayers from unnecessary disputes with the IRS.
    Stated simply, the best call from the IRS is no call from the
    IRS.
        Finally, we urge simplification of the tax code. The
    Commission found a direct connection between taxpayers'
    frustration with the IRS and complexity of the tax code. We
    encourage Congress to take steps to simplify the current law
    and to introduce a complexity index which will make Members
    consider the complexity of a new tax before they pass a bill.
        In conclusion, all of our recommendations are geared toward
    making it easier for citizens to interact with the IRS. The
    structural changes, the Board of Governors, enhanced
    flexibility for the Commissioner, and consolidated
    congressional oversight will ensure that the IRS can become a
    modern service organization.
        The other changes will make it easier for citizens to pay
    their taxes. All of them together will make the IRS run better
    and help restore citizens' faith in the American system.
        Finally, let me say that we worked very closely with
    Internal Revenue Service. I have high praise for Commissioner
    Richardson and all of her staff and people at the IRS. We
    accumulated a substantial amount of documents that are, in many
    instances, a first time look inside of the IRS. We facilitated
    an arrangement whereby we would be able to see, subject to
    privacy concerns, much of what is going on over there in a way
    that frankly I had not seen when I was on the oversight
    committee.
        Next, let me say that Secretary Rubin and the Commission
    also had a very, very good working relationship. I have always
    had a high regard for Secretary Rubin. I trust absolutely that
    his goal and our goal are one and the same. Since the
    Commission started its work, the administration has made a
    number of changes in the IRS, most notably bringing in Arthur
    Gross as the Chief Information Officer as well as creating this
    management board and making some other structural changes, the
    last of which was to bring on a business person whom they are
    going to recommend to be the new IRS Commissioner.
        My hope is that as we convert this into legislation,
    introduce it, and start to move it through, we will be able to
    reach agreement with the administration on the last point of
    difference, which is the significant structural changes that we
    are recommending with the new board.
        We have heard many arguments against this new board. Jerry
    Seib, a reporter with the Wall Street Journal, wrote an article
    yesterday. I would like to not only distribute it to this
    committee, but I would also like to make available to the
    committee the response that Congressman Portman and I made to
    the article.
        He inaccurately describes the proposal and after
    inaccurately describing the proposal, then sets out his
    objection to a proposal that we, in fact, did not make. It is
    not uncommon to have that occur in debate, but I just want to
    make it clear that you will hear many inaccurate statements
    made about our proposal and you will hear then arguments used
    why it should not be done.
        We have always maintained a goal of closing the gap, a
    breathtaking gap that currently exists between IRS's ability to
    serve customers and what the private sector can do. At the end
    of the day, the measurement is, what can my bank do and what
    can the IRS do?
        When you go to your bank and you try to get information,
    you are not told to come back in 18 months. You would find
    another bank if that was the case. There is a breathtaking
    difference. The IRS will constantly say, and to their credit,
    that the U.S. tax service is doing at least as good if not a
    better job than many other countries, and that is quite true.
        But unfortunately for the IRS and for the administration's
    defense of the IRS, the customer in the United States does not
    compare the IRS with the tax collection agency of the Federal
    Republic of Germany. They compare it to what is going on in the
    private sector.
        As I said at the start of my testimony, it is a vital
    agency because it touches every single American life, and not
    only are there benefits in restructuring and reforming the IRS
    to the taxpayer, both measured by the cost of running the IRS
    and the cost to comply, which is estimated by some to be $200
    billion a year, but there are also benefits in increasing the
    efficiency of the IRS because if this agency is regarded as
    efficient and effective, then it will go a long ways toward
    restoring and increasing the trust that citizens have in our
    capacity for self-government.
        Again, I appreciate, Mr. Chairman and members of the
    committee, your allowing me to come and present this testimony.
    Congressman Portman and I intend to produce a final written
    report as well as legislation that we hope to be introducing
    yet in this session.

                               Prepared Statement

        Senator Campbell. thank you, Senator Kerrey. We have your
    complete statement, and it will be made part of the record.
        [The statement follows:]
                      Prepared Statement of Senator Kerrey
                                  introduction
        For the past year as the co-chair of the National Commission on
    Restructuring the IRS, I have worked with Senator Chuck Grassley, and
    Congressman Rob Portman, as well as state tax administrators, private
    sector executives, and citizens groups reviewing IRS operations,
    management, governance, oversight, budget, work force, and technology.
    It is an honor to report to the Senate Appropriations Committee,
    because you are the parent of our Commission.
        As you know, we were created to take a hard look at the operations,
    management, governance, and oversight of the IRS. The Commission took a
    qualitative approach to its work, spending the majority of its time
    listening to American taxpayers and experts on the IRS and the tax
    system. The Commission spent 12 days in public hearings and over 100
    hours in private sessions with public and private sector experts,
    academia, and citizen's groups. The Commission also held three field
    hearings in Cincinnati, Omaha, and Des Moines. We met privately with
    over 500 individuals, including the majority of senior level IRS
    employees, and interviewed close to 300 IRS front-line employees across
    the country. We received continuous input from stakeholder groups and
    conducted a nation-wide survey on the American public's view of the
    IRS. And finally, the Commission reviewed thousands of reports and
    documents on the IRS.
        I am convinced that a well run Internal Revenue Service is vital to
    the health of our nation. Twice as many people pay taxes as vote;
    therefore, the IRS is the only Federal government agency many citizens
    interact with. We must make sure that the IRS meets their expectations
    for professionalism, service, and efficiency. A well run IRS can
    increase the public's confidence in the government. The second reason
    IRS is so important is obvious-the IRS collects 95 percent of the
    nations revenue. Without the IRS, we would not be able to fund
    highways, education programs, or the military.
                            the commission's vision
        What I will discuss today is the recommendations coming from the
    majority of the Commissioners. The Commission developed a simple, but
    sound, vision: THE IRS WORKS FOR THE TAXPAYER, NOT THE OTHER WAY
    AROUND.
        I quote from our report: ``taxpayer satisfaction must become
    paramount at all levels of the IRS and the IRS should only initiate
    contact with a citizen if the agency is prepared to devote the
    resources necessary for a proper and timely resolution of the matter.''
    What that means is that rather than treating people as guilty, the IRS
    must recognize that the majority of taxpayers want to pay their fair
    share of taxes, and it is the agency's job to make it easier for them
    to do so. A new customer service database is integral to this vision.
    Electronic filing is also an integral part of this vision. Taxpayer's
    rights is also part of this vision.
        Last year someone in the press asked the IRS head of strategic
    planning what was going to be the agency's strategic direction for
    1997. The answer: get through the 1997 filing season. This is the
    epitome of what thinking strategically is not about. Our vision says
    that taxpayer satisfaction, all year long, is equally as important as a
    smooth filing season.
        Today the IRS rates low in citizens approval for its service. It
    has a 20 percent error rate and expends an incredible amount of
    resources and focus to correct these errors. They capture only 40
    percent of the data from returns. It is 18 months before a return can
    be matched against 1099's. Can you imagine a private sector business
    taking 18 months to send someone a bill saying, `` Mr. Kerrey, our
    records show that a year and a half ago you underpaid your bill.''
    Certainly, they wouldn't stay in business for long.
        The Commission report offers both a realistic goal for the new
    folks in charge of the agency and a credible plan for reaching that
    goal. In these days of tight budgets and limited governmental
    resources, the IRS must retool its 1950's processes and refocus these
    resources to add value to customers in order to reach the Commission's
    vision.
                                 what we found
        After spending many months digging around in the many tough issues
    confronting the IRS, a substantial majority of our Commission members
    realized that the agency suffers from two root problems: First, the
    agency has a difficult time focusing. The result is that many plans
    receive no follow through, and the organization often lacks a coherent
    strategy and direction. The most obvious example of this lack of focus
    was the Tax Systems Modernization (TSM) debacle. The IRS threw $4
    billion dollars in technology money at hundreds of unrelated projects.
    The result was lots of little, interesting computer applications, but
    no significant business achievements. The IRS executives and Treasury
    never decided what the organization wanted to accomplish: e.g. answer
    more phones and have more taxpayer data available for customer service
    representatives. In a better run system, that kind of business decision
    would be the predicate for a modernization effort. All money would be
    directed toward achieving that organizational goal. In the case of the
    IRS, because of lack of strategy and direction, the $4 billion went to
    disparate programs, not integrated to meet a specific business
    objective.
        The second interrelated problem identified by the Commission was a
    lack of a coherent, accountable structure to implement a long term
    vision and goals. We found that we in Congress often send conflicting
    signals to the agency. We found that Treasury has basically left IRS to
    its own devices, leaving a vacuum in the Executive Branch oversight of
    the agency. We found a set of managers unable to maintain focus and
    gain traction with Congress on IRS strategy.
        In short, at the top of the IRS and in Treasury there are murky
    lines of accountability, a lack of necessary expertise to operate in
    the new information age, and no one with authority sticking around long
    enough to get the job done. The officials at the Treasury department
    have expertise in tax law and enforcement, but do not have the
    expertise in areas of customer service, technology, and management to
    oversee the IRS. Furthermore, they are not around long enough to ensure
    focus on multi-year projects like TSM or changing the culture of the
    agency to be more responsive to taxpayers. Additionally, Treasury does
    not coordinate the oversight it does engage in: The Commissioner of IRS
    must deal with various assistant secretaries on budget, operations,
    computers, and other issues. At the end of the day, the Commissioner
    really reports to the Deputy Secretary who also manages ten other
    agencies, not to mention the economy. The recently retired Commissioner
    of IRS, Margaret Richardson, told us that she reported to three
    different Deputy Commissioners during her time in office.
        Because of these problems, the Commission began developing ideas
    for a new governance structure. The criteria for success of any new
    structure were: (1) clear accountability (2) expertise in running a
    modern customer-oriented organization, and (3) the continuity to get
    the job done.
        To solve the problems with continuity, expertise, and
    accountability the Commission will recommend:
      --A board of governors, appointed by the President for staggered five
            year terms, assume full control of IRS governance. The board
            will: be fully accountable for the performance of IRS; oversee
            the IRS management; be around long enough to force change
            throughout the organization; and have unique public and private
            sector expertise in managing large service organizations.
      --The Commissioner be appointed for a five-year term, so he or she
            will be around long enough to effectuate real change.
      --The Commissioner be given greater flexibility to hire or fire his
            own team of executives, who will bring new expertise into the
            IRS.
      --The IRS receive stable funding so its leaders can undertake the
            proper planning to rebuild its foundation. Our recommendations
            specifically say that for three years IRS should receive
            current levels of funding--It is up to you to decide whether
            that should be current budget or current budget plus inflation.
            We purposefully left it up to you to decide. We were silent on
            technology funding, except that we encouraged any additional
            appropriations be targeted towards (1) building a taxpayer
            accounts database to facilitate taxpayer assistance and (2)
            ensuring certain success in the century date change problem.
      --Congressional Oversight could be better coordinated between the
            authorizing committees, the appropriating committees, and the
            government oversight committees. We will recommend that
            committee leaders, minority and majority, meet regularly to
            ensure that IRS receives clear guidance from Congress, and
            Congress is given the proper information to oversee the IRS.
                               competing proposal
        As you may know, the Secretary of the Treasury Bob Rubin and Deputy
    Secretary Larry Summers disagree with our plan for a board of governors
    to oversee the IRS. They have developed an alternative proposal, which
    would create two advisory type boards which are an attempt to
    strengthen Treasury's governance of IRS. While we seriously considered
    their proposal, in the end the Commission rejected this approach.
    First, our opinion is that it further blurs accountability just when
    there is a need for clearer lines of accountability. Second, it does
    nothing to alleviate the continuity problem--political appointees, who
    traditionally serve for a short time, will continue to oversee IRS
    operations. Third, it endangers politicizing the IRS. What we need is
    accountability without politicization. The Treasury's proposal to
    create an oversight board of officials from OMB, OPM, and the Vice
    Presidents Office could undermine the credibility of IRS as an
    apolitical institution. The White House has always, in our judgment
    wisely, tried to keep an arms length distance from IRS. Finally, it
    does not guarantee that the people with proper expertise in computers,
    technology, and service will oversee IRS operations.
        Secretary Rubin and Deputy Secretary Summers have been vigilant in
    their attacks of our proposal. They have said that private people
    should not control law enforcement, and that our nations revenue stream
    will be at risk under our proposal. Those accusations are simply not
    true. First, we propose that the Board of Governors be Presidentially
    appointed, Senate confirmed, and removable at the will of the
    President. While they serve on the Board, they will be special
    government employees serving in a government function, much like the
    Postal Board of Governors who have vast control over the postal
    service, including the enforcement arm-the postal police. Additionally,
    this board will not have any role in tax policy, which will stay with
    the Secretary of the Treasury. Much like the Canadian system, our
    proposal will draw clear lines of accountability between tax policy and
    tax administration. Also, the Secretary of the Treasury will sit on the
    board, subjecting the board to scrutiny were there to be any appearance
    of impropriety. Finally, the Secretary of the Treasury would continue
    to have final say over the IRS budget before it is sent to Congress.
    Under our proposal, the board would send Congress a copy of their
    budget at the same time they sent it to the Secretary, allowing
    Congress to make the decision of how much money to appropriate.
        As for the comment about endangering the Federal revenue stream--
    all I can say is that as far as I am concerned, that is an
    irresponsible comment. Anyone who understands the IRS knows that it is
    like a tank: impenetrable. While our integrated proposals will
    hopefully jolt the agency into a customer focus, it certainly does not
    endanger its operation. I can only attribute this comment to the
    classic Washington battle over turf.
                                 other changes
        The structural changes I described earlier will ensure that the
    following operational changes are implemented:
      --Work force Flexibility: Current civil service rules make it
            difficult for IRS to retain competent employees, fire bad
            employees, and pay people appropriately. We recommend that the
            IRS be given the flexibility to redesign its work force rules
            and develop appropriate internal measurements, to free
            employees from red tape and hold them accountable for
            performance.
      --Modernizing Computers: IRS has neither had a strategic plan for
            technology, nor had the people with the knowledge to implement
            technology plans. We recommend that IRS develop long term
            strategic plans for modernization, and hire qualified people to
            make these plans a reality.
      --Paperless Filing: Electronic filing saves the government money and
            saves the taxpayer from receiving a baseless audit because of
            mistakes by the IRS. The Commission recommends that IRS develop
            a marketing plan which makes paperless filing the preferred
            method of filing for 80 percent of the taxpayers within ten
            years.
      --Taxpayer Rights: The Commission recommends additional steps to
            improve the taxpayer's ability to recover damages for wrongful
            actions by the IRS, and encourages IRS and Congress to do
            everything they can to protect taxpayers from unnecessary
            disputes with the IRS. Stated simply, the best call from the
            IRS is no call from the IRS.
      --Simplification of the Tax Law: The Commission found a direct
            connection between taxpayers' frustration with the IRS and the
            complexity of the tax code. We encourage Congress to take steps
            to simplify the current law and to introduce a complexity index
            which will make Members consider the complexity of a new tax
            law before they pass a bill.
                                   conclusion
        All of our recommendations are geared toward making it easier for
    citizens to interact with the IRS. The structural changes (Board of
    Directors, enhanced flexibility for the Commissioner, and consolidated
    Congressional oversight) will ensure that the IRS can become a modern
    service organization. The other changes will make it easier for
    citizens to pay their taxes. All of them together will make the IRS run
    better and help restore the citizens' faith in the American tax system.

                              Opposition to Board

        Senator Campbell. I am sure I can speak for the whole
    committee on the hard work and leadership you have taken for
    the last 2 years on this Commission. You paint a picture of an
    agency in disarray without a clear chain of command, without
    clearly defined goals, and yet one that seems to be willing, up
    to a point, to improve.
        You mentioned that the Secretary is opposed to this newly
    appointed board by the President. Have you gotten any feedback
    from the President on that or will that be after----
        Senator Kerrey. No; I presume that there will be some
    response afterward. I am hopeful because my relationship with
    Secretary Rubin is and has been good and I have got great
    respect for the reasons that he opposes it and I intend,
    relentlessly, to come and say, ``Here is why we think that we
    are right and you are wrong.''
        He describes our proposal in this regard as being 100
    percent wrong. What you have to do, I think, Mr. Chairman, is,
    if you look at the two proposals and consider the principal
    argument that both he and Mr. Summers make, which is, they do
    not want a part-time board governing the IRS.
        Well, if it is a part-time problem that you object to, that
    is the problem now. I mean, the problem now is no Secretary,
    whether it is Secretary Rubin or whoever the Secretary is, no
    Secretary can give 100 percent of their time or even 50 percent
    of their time, I dare say likely even 10 percent of their time
    to worrying about an agency that I argue is the most important
    agency in all of Government.
        They manage not only the IRS, but they manage the Customs,
    the Secret Service, they manage BATF, and six other significant
    agencies inside of Treasury. So there is part-time management
    now and a lack of continuity now, and most importantly, what is
    missing is the ability to say, ``The executive branch and the
    legislative branch have agreed on a vision and a declaration of
    mission for the IRS.''
        This is where we want to go 10 years from now that we need
    to have in a joint agreement between the Congress and the
    executive branch. The only way that we could think of doing
    that is to create a strong and independent board that provides
    that kind of accountability, the President still appoints the
    Board members and they serve at the will of the President. By
    creating a single committee, we are recommending the relevant
    oversight committees coordinate oversight so that you can meet
    with this Board and agree what the purpose is going to be.
        When the private sector came to us and testified, there
    were a number of very notable things that they told us in
    response to the question, ``How do you do it? I mean, how do
    you satisfy your customers, because obviously, if you do not
    satisfy your customers on the business side, your customers can
    walk and go someplace else. They will choose someplace else
    because there are competitive alternatives. How do you keep
    your customers happy?''
        The most notable response was the investment in information
    systems. Well, then the follow-on is how did you make good
    decisions, and the answer was, sometimes we did not. Sometimes
    you make mistakes. But the most important thing in eventually
    getting it right is knowing what you want that technology to
    do.
        Having a clear vision and mission statement is the most
    important prerequisite to making the right decision. Finally,
    what the IRS said to us that I think is enormously helpful and
    relevant, but you are not going to get there under the current
    structure, they view the job being done when the tax return is
    completed.
        They see that as the finished, manufactured product. Part
    of the problem is there are start-go directions from Congress
    all the time, which is unquestionably true.
        But the IRS sees the completed product to be the form, the
    empty form, not the completed form, not the work being done and
    the tax return being completed. So the private sector
    instructions, when it comes to technology, which is the most
    crucial question when you are trying to increase that customer
    satisfaction, is you have got to have a clear vision of where
    you want to go.
        I would argue very respectfully with the President and very
    respectfully with the Treasury Secretary that unless we get
    some restructuring on their side and some reorganization on our
    side, it will be impossible to get there.
        Senator Campbell. Senator Kohl, did you have a question or
    comment?
        Senator Kohl. Just, Mr. Chairman, that it is a very
    thoughtful report that you have put before us. Obviously you
    have given it great consideration, much time and much thought,
    and you have many, many good recommendations and I look forward
    to working with you to move some legislation through that, in
    fact, does make the IRS more efficient, more effective, and
    more sensitive to the needs of people throughout our country.
    Very good report.
        Senator Kerrey. One of the companies I will mention by name
    is Intuit. I hope we can get to the level of customer
    satisfaction that that company has or even 5 percent short of
    it, which is maybe more a reasonable goal. Right now, we are
    way short of what the private sector can do.
        If IRS can get that close to it the reward will be not only
    for the taxpayer, again dollars I am talking about, but I think
    the reward will be that citizens will say we now have much more
    confidence that government by and for the people can work.
        Senator Campbell. Senator Faircloth.
        Senator Faircloth. Thank you, Senator Kerrey, and thank
    you, Mr. Chairman. I must say impressive report and I am just
    delighted to have a chance to hear it and what you are doing. I
    do have one question or concern and that is the irrevocable
    move we tend to be making toward electronic filing.
        I think it is a good idea, but I still think it should be
    done by incentives rather than a flatout demand that it should
    be an optional with the taxpayer.
        Senator Kerrey. Yes. Senator, that was a very hotly debated
    item inside of the Commission itself. We set a goal of 80
    percent and used language to make it clearer that optional
    paper filing will always be there. But the reason that
    electronic filing is such an impressive, preferred option is
    the low error rate. The error rate for electronic filing is
    around 1 percent and the error rate in the paper world is 20
    percent.
        Now, one of the interesting things that we found in the
    electronic filing system is that there is a requirement.
    Justice comes in and says, ``Even though you file
    electronically, you have got to have a signature document filed
    in a paper world.'' And Congressman Portman and I went down to
    visit a service center in Cincinnati. Actually, it is in
    Kentucky, but since it is in his district, they claim it in
    Ohio.
        In the trip through the service center, we talked to a
    number of employees and one of them said, ``We appreciate this
    need for the signature document, but with the quality of
    machines that can copy these things today, all you have to do
    is sign it in black and you cannot tell whether it is an
    original or a copy anyway.''
        So it is not going to hold up in a court of law if the
    individual signs it in black and it comes down. All this is to
    say that you are quite right. I think at the end of the day, it
    has got to be the customer making the decision, the customers
    deciding what it is that they want to use, if they want to do
    it with paper or they want to do it electronically.
        It is just, Senator, that there is such an impressive
    differential between cost of electronic and paper that the
    Commission came out on the side of saying that some goal for
    electronic filing ought to be part of the recommendation.
        Senator Faircloth. Well, if I understood what you said, you
    could file a tax return and not sign it.
        Senator Kerrey. In the electronic world?
        Senator Faircloth. Yes.
        Senator Kerrey. No; but you have to file a signature. The
    signature document has to be a part of the filing. You have to
    file a signature document on paper.
        Senator Faircloth. But did I understand you to say,
    Senator, that it does not necessarily have to be your
    signature, that it could be--that the signature in the
    electronic process would not be recognizable or hold up in a
    court.
        Senator Kerrey. Well, that is true with any paper.
        But there must be at least some evidence that the copy of
    the signature looks awfully close to the original. All I am
    saying is that even in the electronic world, even with
    electronic filing, there is a need for some paper trail.
        Senator Campbell. Thank you for your appearance, Senator
    Kerrey. We appreciate it.
        Senator Kerrey. You're welcome. Thanks.
                           GENERAL ACCOUNTING OFFICE

    STATEMENT OF JAMES R. WHITE, ASSOCIATE DIRECTOR, TAX
                POLICY AND ADMINISTRATION ISSUES
    ACCOMPANIED BY:
            RONA STILLMAN, CHIEF SCIENTIST, INFORMATION SYSTEMS
            DAVID ATTIANESE, ASSISTANT DIRECTOR, TAX GROUP

                            Introduction of Witness

        Senator Campbell. The next panel of one will be Mr. James
    White, Associate Director for Tax Policy and Administrative
    Issues from the GAO. Mr. White, all of your written testimony
    will be included in the record. If you would like to abbreviate
    your comments, that would be fine.

                          Statement of James R. White

        Mr. White. Thank you.
        Mr. Chairman and members of the subcommittee, I am pleased
    to be here today to discuss the budget of the Internal Revenue
    Service. With me are Rona Stillman, GAO's Chief Scientist
    responsible for much of GAO's work on IRS's information
    systems, and Dave Attianese, an assistant director in the tax
    issue area.
        This year, the IRS will collect about $1.5 trillion in
    taxes with over 100,000 employees and a budget of about $7.2
    billion. IRS's fiscal year 1998 budget request is for an
    increase somewhat less than the rate of inflation to almost
    $7.4 billion. The request includes a small decrease in full-
    time equivalent positions of less than 1 percent.
        Table I.1 on page 26 of my statement summarizes the 1998
    budget request and compares it to the 1997 budget. As you can
    see, the changes are small. Table I.2 on page 28 shows IRS's
    budget since 1991 in inflation-adjusted dollars. In these
    terms, IRS's budget has been decreasing since 1995 with an
    accompanying decrease in FTE's.

                            Fiscal Year 1997 Issues

        Our statement makes the following main points. With respect
    to this year's budget, as directed by Congress, IRS did
    increase staffing for taxpayer service activities, and
    taxpayers' ability to get through to IRS on the phone during
    the 1997 filing season was up significantly.
        IRS has canceled some projects costing $36 million that
    were included in its fiscal year 1997 information systems
    spending plans. This raises the question of whether the $36
    million should be rescinded. In addition, we believe that the
    problems with IRS's private debt collection pilot program mean
    the fiscal year 1997 money earmarked for future pilots should
    not be spent until the problems are corrected.

                        Developmental Information System

        Shifting to the 1998 budget proposal, we have several
    points. First, $131 million for developmental information
    systems is included in the 1998 budget request and an
    additional $1 billion, spread over 1998 and 1999, is requested
    for a capital account for information technology investments.
    The $1 billion is not included in the $7.4 billion fiscal year
    1998 request, but is in addition to it.
        Neither the $131 million nor the $1 billion have been
    justified by the kinds of cost benefit analysis and other
    support required by current law and we believe Congress should
    consider not funding these amounts until they can be justified.

                             Year 2000 Date Change

        Our second point is whether the $84 million included in the
    1998 budget request for IRS's year 2000 date change effort will
    be sufficient. Because IRS is now planning to spend more than
    double the amount originally budgeted in 1997 on this effort
    and because IRS's overall conversion needs are still being
    determined, $84 million may be substantially less than what
    will be needed in fiscal year 1998.
        Based in part on information we received late yesterday
    from IRS, the amount of fiscal years 1997 and 1998 spending
    needed to ensure year 2000 compliance may be several times what
    has been requested to date.

                                   Conclusion

        In conclusion, IRS and Congress face many challenges in
    trying to modernize our tax system. IRS has already experienced
    a decline in its inflation-adjusted budget and such real budget
    declines are likely to continue. At the same time, IRS is under
    pressure to improve its operations and taxpayer service.
        All this makes modernizing its processes and information
    systems critically important. To do so requires consensus on
    IRS performance goals and how to measure performance. We
    believe the provisions of the Chief Financial Officers Act, the
    Clinger-Cohen Act, and the Government Performance and Results
    Act provide a mechanism for accomplishing this.
        Mr. Chairman, that concludes my oral statement. I would be
    happy to respond to questions.
        Senator Campbell. OK. I thank you for that. As part of the
    fiscal year 1998 budget request, the IRS is asking for a $500
    million advance appropriation for the information system, which
    is not to be obligated during fiscal year 1998. It is an up-
    front investment by Congress to demonstrate that we are
    committed to the modernization.
        Can you give the committee any insight about how that money
    would be spent, Ms. Stillman?
        Ms. Stillman. Unfortunately, Senator, we cannot because IRS
    cannot. There is no explanation. There have been no details
    provided as to precisely how that money would be spent. What
    they have said is they want that account there, earmarked for
    such time as they determine how it should be spent.
        Senator Campbell. So we do not know what would happen if we
    do not fund it?
        Ms. Stillman. Absolutely not. A key consideration to keep
    in mind is the availability of funds is no guarantee that you
    will get any good modernization results. In fact, you have
    provided IRS with over $4 billion in the past 10 years, but
    that has not gotten you modernization. An additional $1
    billion, unless it is well-planned, will not get you
    modernization either.
        Senator Campbell. Well, that original $500 million advance,
    I am just informed by staff that the IRS is now asking for $258
    million as of 2 days ago after my briefing book was submitted.
    So there is a pretty big disparity, which would tell me that
    somebody does not have any real plan for the money, if there is
    that big of a difference just in a few days of what they are
    asking for.
        The request for comment on a prime contractor of IRS new
    modernization plan calls for a $250 million up-front investment
    by the prime and only a 3-year contract. Do you feel a prime
    can recoup their investment within the 3 years. Ms. Stillman
    again, if you would like to answer.
        Ms. Stillman. Thank you, sir. We have not analyzed the
    details of the contracting arrangement between IRS and the
    prime, and as we understand to date, those details have not
    been worked out. In fact, IRS has asked the vendor community to
    give them suggestions for structuring a partnering arrangement.
        Senator Campbell. I see, OK. In the fiscal year 1997
    Treasury appropriations bill, this subcommittee funded a
    private debt collection project which was to do a pilot
    allowing the private sector to collect on accounts that the IRS
    considered uncollectible. There has been some concern expressed
    by the private sector that this pilot was set up to fail by the
    IRS. My understanding is that GAO has recently studied this
    issue. First, do you have any comments on the success or the
    failure of that program?
        Mr. White. Mr. Chairman, there have been problems with the
    pilot program. In addition, there are two future pilots that
    are proposed. There is money in the fiscal year 1997 budget for
    a second pilot by IRS and a pilot by Treasury. Each of those
    would cost $13 million. Also, there is still $9 million,
    approximately, that has not been spent from the first pilot.
        Because of the problems with the pilots, we believe that
    the money should not be spent at this time until the problems
    are corrected. We support pilot projects, we support the
    concept of testing using private contractors in the collection
    process, but there are problems with the current pilot.
        Senator Campbell. Thank you. I am going to submit a few
    questions written to you if you would also respond to them in
    writing. One last question to ask you, though. In the IRS
    fiscal year 1998 request, there is included an increase for 195
    full-time equivalent employees and $11 million to process paper
    returns.
        While the IRS is requesting an increase in paper returns
    processing employees, they are also projecting a steady
    increase in the number of taxpayers who are going to be filing
    electronically. So my question would be, with a growing number
    of electronic returns, is there really a need for that many new
    employees to process paper returns?
        Mr. Attianese. Mr. Chairman, we had tried to get behind
    that request and the data we saw behind that request made
    little sense to us actually. The data the IRS was using showed
    that there was very little savings in FTE's from processing
    electronic returns versus processing paper returns.
        It does not intuitively make any sense to us because as
    Senator Kerrey has mentioned, there are a lot fewer errors on
    electronic returns and you need a lot fewer people to process
    those returns and correct those errors. And so, the data behind
    IRS's study really led us to question what basis they had for
    asking for that additional staffing.
        Senator Campbell. OK, thanks. Just for the record, since
    you were not listed on the panel, would you identify yourself
    for the record?
        Mr. Attianese. David Attianese. I am an Assistant Director
    in GAO's Tax Group.
        Senator Campbell. Thank you. Senator Kohl.
        Senator Kohl. Thank you, Mr. Chairman. Mr. White, the
    century date change is a potentially high risk area for the
    IRS. As you are probably aware, the IRS is requesting, as we
    have spoken of this morning, $258 million in fiscal year 1998
    funding.
        How confident are you in the IRS's ability to project the
    correct level of funding necessary?
        Mr. White. At this point, the Internal Revenue Service is
    still determining their total needs for century date
    conversion, and the estimates so far are not for the total
    needs. They have not determined their total needs yet.
        For fiscal year 1997, we know that they have just requested
    reprogramming to more than double the amount that they
    requested in their fiscal year 1997 budget request, and that is
    for the same amount of work. They are not accelerating work for
    1998 into 1997.
        Senator Kohl. Mr. White, does it make sense that technology
    is purchased for the conversion that is separate from the
    architecture approval process? Ms. Stillman?
        Ms. Stillman. As it has been structured, the year 2000
    problem is part of IRS's stay-in-business effort and would have
    to be done whether they modernized or not. In order to move to
    January 1, 2000, it is mandatory that IRS become year 2000
    compliant.
        It is a nondiscretionary effort. We are currently in the
    process of analyzing their architecture, which weighs about 50
    pounds. It is a substantial effort. It is unclear to us at this
    point how much it describes the current process and how much it
    describes a modernized set of processes, but we will be able to
    determine that at the end of our evaluation.
        Senator Kohl. OK. It is our understanding that the IRS has
    been the subject of 140 GAO reports over the past 4 years. In
    reviewing the IRS progress over that time period, where, in
    your judgment, has the IRS made real progress in implementing
    the GAO recommendations and where, in your judgment, has there
    been little progress?
        Mr. White. The IRS has made some progress. They have
    developed an architecture, for example, as Ms. Stillman just
    indicated and we are in the process of evaluating that. They
    have agreed not to spend money on developing new systems until
    the architecture is finalized and approved.
        They have taken steps to increase electronic filing and to
    cut down on filing fraud by using, for example, electronic
    filters in the electronic filing process. With electronic
    filing, you can use those filters to weed out tax returns
    before refunds are issued. And so there are a number of steps
    that IRS has taken. There are still serious management
    weaknesses, many of which Senator Kerrey described.
        Ms. Stillman. I would like to amplify on that a bit in the
    information technology area. In July 1995, we issued a report
    that made over a dozen specific recommendations for IRS to
    improve its ability to complete a successful tax systems
    modernization effort.
        To date, although IRS has engaged in many activities
    related to implementing those recommendations, none of those
    recommendations have been completely implemented, none.
        Senator Kohl. All right. Last question. Have you had a
    chance to think about and review the Kerrey report?
        Mr. White. We have not. The report has not been issued. We
    have worked closely with the commission on it, but I am not in
    a position to comment until we have seen the total package of
    recommendations, how the details will fit together.
        Senator Kohl. All right. Without knowing what direction we
    may or may not then go in, are you comfortable with the current
    structure of IRS and the way in which it relates to Treasury
    Department?
        Mr. White. Well, as we have indicated, we believe that
    there are serious management weaknesses at IRS, and I would add
    that some of the points that Senator Kerrey made, for example,
    the importance of electronic filing, is a point that we have
    been making for years now in our reports.
        Senator Kohl. Thank you. Thank you, Mr. Chairman.
        Senator Campbell. Senator Faircloth.
        Senator Faircloth. Thank you, Mr. Chairman. Mr. White, I
    read the things in your report and they are just more than
    disturbing. I mean, literally millions of dollars--I am just
    trying to take an overall view--disappeared or cannot be
    accounted for, into thin air. I have been in business for 50-
    plus years now and they have been audited by the IRS many times
    over those years.
        Actually, I must say it has always felt like it was fair
    and well-done, but they certainly expected a high degree of
    accuracy from various businesses I had that were being audited
    and we tried to provide it. That is over a period of time, but
    as I say, my opinion of the IRS is that the agents that I have
    worked with over many years have always been very satisfactory.
        But to sit here and $4 billion, I think, went into the
    computer venture and a major portion of it wasted. Why has this
    happened? What is wrong?
        Mr. White. I think the fundamental problem again is some
    management weaknesses. They did not go into this with a
    strategic plan.
        Senator Faircloth. Now, I have never run the IRS, but I
    have run a lot of businesses, but if a man cannot do it, we
    fire him. That is the only way I know to solve a management
    problem. You can consult until you are dead with old age, but
    if you fire him, that gets rid of it pretty quick and you try
    again. Is that what needs to be done at the IRS?
        Mr. White. I think rather than comment on that, I would say
    that I think the IRS Commission is going to make some
    recommendations there. We have not had a chance to evaluate
    those recommendations. We do think that the problems we have
    identified with the IRS have to be solved by whatever new
    management structure is put into place.
        Senator Faircloth. Billions of dollars that cannot be
    accounted for and you do not know whether people ought to be
    fired or not? In a private business, if you were running a
    private company, if you were running it, what would happen to
    these people, do you think, that work for NationsBank?
        Mr. White. As I said, the problems with IRS are systemic,
    longstanding problems. I am not sure I am in a position to
    identify an individual.
        Senator Faircloth. In other words, nobody is accountable?
        Mr. White. There are certainly longstanding systemic
    problems at IRS that transcend any one administration. These
    problems are not recent. They are longstanding problems with
    IRS's systems, longstanding problems with IRS's ability to plan
    modernization.
        Ms. Stillman. May I amplify on that just a little.
        Senator Faircloth. I am sorry?
        Ms. Stillman. May I amplify on that just a little.
        Senator Faircloth. I would like it.
        Ms. Stillman. I will try. Flawed decisions that led to
    spending $4 billion for TSM when we cannot demonstrate benefits
    anywhere near $4 billion were made from the start. IRS did not
    determine requirements effectively and could not answer the
    questions. What should be built? What is worth investing money
    in?
        Those decisions were not made like a businessman would make
    them. A businessman would have asked, ``Give me reliable
    figures on what this will cost. Give me a return on investment
    that is risk-adjusted for the technology risk. Make sure that
    at key times in the development of this project I can determine
    if I am getting what I was promised and if I am not getting
    what I was promised, I will terminate this.'' IRS has not
    managed that way.
        In addition, they built and bought systems, in an
    undisciplined way. So their poor decisionmaking is a systemic
    problem exhibited from the top to the bottom of the
    organization.
        Senator Faircloth. Well, Mr. Chairman, I just went through.
    We looked at the same thing, but the FAA is buying equipment
    for the Air Force. Amounts of money were very close. Has our
    Government gotten to where we are incapable of managing it?
        Mr. White. Senator, I think part of what you may be getting
    at is the importance of developing performance goals and
    performance indicators and being able to generate data from
    information systems to reliably track progress in meeting
    goals. The Government--and this is not unique to IRS--has not
    historically done a good job at that.
        Recently, Congress has passed several acts that I mentioned
    in my testimony that we believe will begin to address this
    problem, but developing performance goals is one thing. IRS
    does have a very clear mission statement. Developing
    information systems and being able to generate data to reliably
    track progress in meeting those goals is going to be hard.
        It is not as simple as measuring profit in the private
    sector because Government has more than one goal. Government's
    goal is not simply to make profit.
        Senator Faircloth. May I ask one quick question? I know I
    am not going to get a quick answer, but it would be a simple
    one. What would happen if the IRS went into a company and they
    had $13 billion in accounts receivable, $46 billion for
    collectible accounts receivable that could not be determined.
    What would the--two answers. What would the IRS do to that or,
    Senate, what would you do if you were running the company and
    found that sort of discrepancy?
        Mr. White. There is no doubt, and we have reported on this
    many times, that there are serious problems with IRS's accounts
    receivable. The receivables are very old. That has actually
    been part of the problem with the private debt collection
    pilot, that the receivables are so old they become very
    difficult to collect.
        Again, the solution here is modernization. The problems
    with IRS are interdependent. The accounts receivable problem,
    part of that is due to the fact that IRS's information systems
    are antiquated, and so they do not have good information on
    their accounts receivables and they are old and therefore very
    difficult to collect.
        Senator Faircloth. Thank you, Mr. Chairman. I am more
    confused than when I started.
        Senator Campbell. It was interesting to hear you state that
    you had been audited several times, Senator. I have only been
    audited once in my life. I was a House member and it happened
    just shortly after I cosponsored the Taxpayer's Bill of Rights.
    I was told, however, that there was no connection whatsoever
    and the other members that also cosponsored it when they were
    audited were also told there was no connection whatsoever.
        Senator Shelby, did you have any comments or questions?
        Senator Faircloth. Mr. Chairman, let me say. I have been
    into a number of businesses and had a number of businesses and
    I simply look on IRS audits as all in a day's work.
        Senator Campbell. OK. Senator Shelby.

                               Prepared Statement

        Senator Shelby. Mr. Chairman, I ask that my opening
    statement be made part of the record.
        Senator Campbell. With no objection, it will be.
        [The statement follows:]

                      Prepared Statement of Senator Shelby

        Mr. Chairman, I look forward to the testimony of today's
    witnesses. I am particularly interested in hearing about what
    progress the IRS has made in addressing the very serious and
    many concerns raised by the Committee last year about financial
    management and tax systems modernization. Thank you.

                           Debt Collection Practices

        Senator Shelby. Mr. White, I was not here at the earlier
    part of the hearing, but I am very interested in the accounts
    receivable or the debt collection practices of the IRS. You
    will recall that this committee was in the forefront a couple
    of years ago to set up a pilot program that you mention in your
    report to collect debts.
        We have talked to a lot of the people that collect debts
    for a living in the private sector every day and most of them
    told me and other members that the IRS criteria to collect the
    debts, they did not want to fool with them. They did not want
    to do this.
        I wondered if the IRS had such a strong management,
    internal management bias against letting the private sector get
    involved in the collection of debts. I know they do because I
    remember the fight we had on the floor of the Senate and in the
    conference. But if the IRS has, and I have been told, anywhere
    from $80 to $100 billion of accounts receivable, is that about
    right?
        Mr. White. Yes, sir.
        Senator Shelby. In America, and they are not collecting it,
    what is wrong with turning over that to the private lawyers
    that specialize in collections in the commercial sector every
    day and see? That was our intent, to see if it would work.
    Heck, if they collected $10 billion, it would be a lot of money
    for us up here.
        But I noted, with a lot of skepticism, the reluctance of
    the internal workings of the IRS about letting the market work
    here. Give an incentive for people to collect; yet, those
    debts, as you mentioned, are getting older and the older they
    get, the harder they are to collect. You want to comment on
    that?
        Mr. White. Yes; as I said, we believe that testing the use
    of private contractors in debt collection is very useful.
    Unfortunately, the pilot that has been underway has had some
    serious problems with it.
        Senator Shelby. Let's talk about some of those.
        Mr. White. An example would be that IRS is apparently
    unable to pay contractors on a contingency basis, a percentage
    of what they bring in. So instead, payments have been made to
    contractors in cases that were greater than the amount of taxes
    actually collected in the case.
        Senator Shelby. That makes no sense, does it?
        Mr. White. No; it does not.
        Senator Shelby. Would you need legislation to change that?
    For example, collection professionals and lawyers that
    specialize in collections, which is part of the everyday life
    in America, collect billions of dollars each year. They work on
    a percentage. If they do not deliver, they do not eat. In other
    words, they do not get anything. Is there a prohibition in the
    IRS's law against paying a commission?
        Mr. White. I am not prepared to speak on that.
        Senator Shelby. Can you find out?
        Mr. White. I can do that and we can get back to you
    quickly. We have done some analysis on this, and as I said,
    because of the problems in the pilot, we do not believe that
    further money should be given.
        [The information follows:]

        According to IRS' Office of Chief Counsel, it is not
    entirely clear whether IRS is prohibited from paying a
    commission. On one hand, the Chief Counsel's Office points to
    congressional concern, as reflected in Taxpayer Bill of Rights
    I, that IRS collection employees not be evaluated based on
    collection results. The fear has been that paying collectors
    commissions or contingency fees based on how much they collect
    could induce them to engage in abusive tactics that violate
    taxpayers' rights. On the other hand, it is not clear how this
    limitation on evaluating IRS employees applies to compensating
    private sector collectors.
        In attempting to address this tension, IRS structured the
    contracts so that payments would be made for actions such as
    successfully locating and contacting delinquent taxpayers and
    that the payments could increase with increased revenue
    collection resulting from such actions.

        Senator Shelby. Oh, I agree. I do not think it should be
    wasted and I appreciate the analysis that you are doing on
    that. Some of us were dumbfounded that the IRS did not move out
    front on this and try to collect the money. I do not think they
    are going to collect it internally, it seems that way, when
    there is $80 to $100 billion sitting around and there are
    people in America that are telling us they can collect it.
        I believe they could collect a lot of it, maybe not all.
    But just say 10 percent, $10 billion, 20 percent of the
    billions of dollars, a lot of money, isn't it?
        Mr. White. Yes.
        Senator Shelby. I am sure you have been asked this question
    already and we have beaten--we have not beaten it to death yet
    because I do not think the IRS is sufficiently modernized yet,
    but the amount of money that has been spent in tax management,
    tax system modernization, is a travesty.
        I, when I chaired this committee, was involved in trying to
    get the IRS to modernize, to get outside people to go to the
    shelf, so to speak. I have had a lot of the financial people
    telling us basically that the IRS was so far behind the market
    in software and everything that goes with it that they need
    to--you know, they were working off of a system that was 10
    years old when they started, so to speak.
        I do not know if those are the exact years. In other words,
    they were looking backward and they were trying to do a lot of
    this internally, were they not?
        Mr. White. Yes.
        Senator Shelby. What is your recommendation there? That
    they go outside?
        Mr. White. I will let Ms. Stillman answer this, but I think
    what is key here is management, again, and contracting out----
        Senator Shelby. It is at the top, is it not?
        Mr. White. Yes; and in order to get the benefits of
    contracting out, you still have to have good management.
        Senator Shelby. Well, you have got to start with the
    management, like the Senator from North Carolina just brought
    out. Without management, somebody has to be responsible and it
    starts at the top, doesn't it? Somebody has to be accountable
    in the Government as well as the private sector.
        When you have an expenditure of some $4 billion and there
    are a lot of people that spent that money, made those decisions
    that are probably still around in some capacity, something is
    wrong. You want to comment on that?
        Ms. Stillman. Thank you, sir. There is no question that
    there are major problems. Bad decisions have been made starting
    at the top of the organization and implementation has been
    undisciplined as well on the way down. As to whether or not
    contracting out will provide an answer to IRS's modernization
    problems, the answer is that contracting out, per se, will not
    provide an answer.
        Whether you contract out----
        Senator Shelby. Say that again. Wait a minute.
        Ms. Stillman. Neither contracting out nor building in-house
    is the key to successful modernization. Those are two methods
    of doing the right thing once you have determined what the
    right thing is.
        Senator Shelby. What is the key?
        Ms. Stillman. The key is to determine what the right thing
    is, what a good return on investment would be, and managing it
    well.
        Senator Shelby. That is the role of top management to do
    that, is it not?
        Ms. Stillman. Top, bottom, and middle, correct. Absolutely
    true. Absolutely true.
        Senator Shelby. Does IRS have, in your judgment, the
    quality of top management to make those decisions? That is a
    good question now to answer.
        Ms. Stillman. That is a very good question.
        Senator Shelby. Do they have it? And if they do not have
    it, as the Senator from North Carolina said a minute ago, he
    used one of our major banks in the country that happens to be
    headquartered out of North Carolina, NationsBank, but it could
    be any big bank since we are dealing in financial situations.
        Somebody in the marketplace, $4 billion not only would one
    or two heads be rolling, I think the whole organization would
    be gone. Yet, IRS is still perking along and it is business as
    usual, I think, from what we read about your report. There has
    not, in the last 2 years, Mr. Chairman, to my knowledge, been
    any wholesale changes in IRS.
        I know Senator Kerrey and I, when I was the chairman of
    this committee, Mr. Chairman, and he was the ranking Democrat,
    was very involved, as he is today, in the modernization changes
    of the IRS.
        I think the American people deserve better. I think these
    businesses deserve better. And I think the people that work at
    IRS deserve the top quality management or leadership.
        Ms. Stillman. We agree with you 100 percent.
        Senator Shelby. How do we get it?
        Ms. Stillman. Actually, the Appropriations Committees
    control IRS's resources. And by ratcheting down their budgets
    to reflect their performance, I think you will get their
    attention.
        Senator Shelby. Well, we did some of that 2 years ago, as
    you will recall. We cut about $1 billion----
        Ms. Stillman. Absolutely.
        Senator Shelby. And 5,000 employees and they still maybe
    have not gotten the message. Mr. Chairman, I know you are very
    interested in this, to make IRS an efficient part of our
    Government. One last question, Mr. Chairman. I appreciate your
    indulgence.
        Does IRS have the capability to make that decision? It is
    similar to what I have just asked a minute ago. Do they have
    the management in place to make the decisions that they need to
    make to modernize the Internal Revenue Service?
        Ms. Stillman. I think they have admitted themselves that--
    --
        Senator Shelby. That they do not.
        Ms. Stillman. They need augmentation at the very least.
    They are hiring additional people and trying to bring in a new
    Commissioner with a set of skills that they have not seen
    before. They will also get help from Treasury and/or the
    governing board.
        Senator Shelby. Mr. Chairman, thank you.
        Senator Campbell. We still have five witnesses, so we are
    going to need to move along here.
        Senator Faircloth. I have just one quick question.
        Senator Campbell. Go ahead, Senator Faircloth.
        Senator Faircloth. Senator Shelby, you were talking about
    the IRS hiring outside collection agencies, right?
        Senator Shelby. That is right, or lawyers.
        Senator Faircloth. If ever there was an organization that
    has the ability to go after a gnat with a hammer, it is the
    IRS. Hardly a week or 2 weeks go by that we do not get a
    certified letter to garnish either wages of this or that
    employee who is behind in taxes and, of course, we do it.
        But it is standard. I mean, a collection agency? I mean,
    they could steal a lockbox. The IRS can do anything to collect
    money, almost unlimited authority and power to collect money. I
    mean, they believe in the hereafter and they go after it.
        Senator Campbell. Did you have a question of the panel?
        Senator Faircloth. What?
        Senator Campbell. Did you have a question of the panel?
        Senator Faircloth. Yes; why do you need an outside
    collection agency?
        Mr. White. Part of what the collection pilot was focusing
    on was finding taxpayers that the IRS had been unable to
    locate.
        Senator Faircloth. Thank you, Mr. Chairman.

                               Prepared Statement

        Senator Campbell. OK. I thank this panel for appearing. Mr.
    White, we have your complete statement and it will be made part
    of the record.
        [The statement follows:]
                      Prepared Statement of James R. White
        IRS' fiscal year 1998 budget request is for about $7.4 billion and
    102,385 full-time equivalent (FTE) staff compared to a proposed
    operating level in fiscal year 1997 of about $7.2 billion and 102,926
    FTE's. IRS' fiscal year 1998 budget request includes $131 million for
    developmental information systems, the same amount that was provided in
    fiscal year 1997. The administration also is proposing a $1 billion
    capital account for IRS information technology investments. Neither the
    $131 million or the $1 billion is supported by the kind of analysis
    required by Clinger-Cohen Act, the Results Act, and the Office of
    Management and Budget. Therefore, Congress should consider not funding
    both the $131 million request and the capital account until management
    and technical weaknesses in IRS' modernization program are resolved and
    required analyses are completed.
        The fiscal year 1998 budget request also includes $84 million for
    IRS' turn of the century date change effort. IRS has already determined
    that it will need $61.2 million more for this effort in fiscal year
    1997 than had been allocated. Given that and because IRS' overall
    conversion needs are still being determined, it seems reasonable to
    question whether the amount requested for this effort in fiscal year
    1998 will be sufficient.
        GAO also has some concerns about certain fiscal year 1997 budget
    allocations. For example, IRS' fiscal year 1997 appropriation mandated
    that a total of $26 million be provided for debt collection pilots.
    GAO's review of the 1996 debt collection pilot identified various
    problems that impeded the pilot's success. Until those problems are
    resolved, GAO believes that IRS and Treasury should be prohibited from
    spending the $26 million. Also, given that IRS has decided not to begin
    any new systems development projects until October 1998, GAO believes
    that Congress should consider rescinding $36 million that was
    designated for that purpose in fiscal year 1997. That amount represents
    the total allocated to systems development projects that IRS has
    canceled for fiscal year 1997. By October 1998, IRS expects to have
    developed the internal capability to effectively manage systems
    development.
        Finally, IRS expects the funding limits it faces in fiscal year
    1997 and anticipates for fiscal year 1998 to continue until at least
    2002. Fiscal constraints as well as longstanding concerns about the
    efficiency of IRS operations make consensus on IRS' strategic goals and
    the measures for assessing progress against those goals critically
    important. The provisions and requirements of the Chief Financial
    Officers Act, the Clinger-Cohen Act, and the Results Act provide a
    mechanism for accomplishing this.
        Mr. Chairman and Members of the Subcommittee:
        We are pleased to be here today to participate in the
    Subcommittee's inquiry into the Internal Revenue Service's (IRS) budget
    request for fiscal year 1998. Our statement is based on a review of
    that budget request; a review of steps taken by IRS in response to its
    fiscal year 1997 appropriation, including its spending plans for
    information systems; and our past work on IRS' operations and systems
    modernization efforts.
        IRS' fiscal year 1998 budget request is for about $7.4 billion and
    102,385 full-time equivalent (FTE) staff compared to a proposed
    operating level in fiscal year 1997 of about $7.2 billion and 102,926
    FTE's. Appendix 1 provides a more detailed comparison of fiscal years
    1998 and 1997 along with data showing how IRS' appropriation has
    changed since fiscal year 1991. Appendix II has trend information for
    several of IRS' performance indicators.
        Our statement makes the following points:
      --In response to congressional concerns and direction, IRS allocated
            about 1,000 additional FTE's to taxpayer service activities in
            fiscal year 1997 and revised its fiscal year 1997 information
            systems spending plans. IRS has since canceled some of the
            projects that were included in those plans and that it had
            estimated would cost a total of $36 million in fiscal year
            1997.
      --Our review of IRS' private sector debt collection pilot program
            identified significant barriers to the pilot's success. Those
            problems should be resolved before fiscal year 1997 funds
            earmarked for private sector debt collection pilots are
            expended.
      --IRS' fiscal year 1998 budget request includes $131 million for
            developmental information systems, the same amount that was
            provided in fiscal year 1997. In addition to that basic
            request, the administration is proposing a capital account for
            information technology investments at IRS--$500 million for
            fiscal year 1998 and another $500 million for 1999. Neither the
            $131 million or the $1 billion is supported by the type of
            analysis required by the Clinger-Cohen Act, the Government
            Performance and Results Act (otherwise known as the Results Act
            or GPRA), and Office of Management and Budget (OMB) Circular
            No. A-11.
      --The budget request also includes $84 million for IRS' turn of the
            century date change effort. IRS has already determined that it
            will need several million dollars more for this effort in
            fiscal year 1997 than had been allocated. Given that and
            because IRS' overall conversion needs are still being
            determined, it seems reasonable to question whether the amount
            requested for this effort in fiscal year 1998 will be
            sufficient.
      --IRS is also requesting funds to replace two old systems used to
            process paper returns and remittances. Because spending on this
            project has been accelerated in fiscal year 1997, all of the
            funding being requested for 1998 may not be needed.
      --The largest staffing increase in IRS' budget request is for 195
            FTE's (with an associated cost of $11 million) to process a
            projected increase in the number of tax returns filed in 1998.
            IRS expects that most of the additional returns will be filed
            electronically. Data IRS used to determine how much more money
            and staff it needed to process those additional returns show
            only a small difference between the number of FTE's needed to
            process a million electronic returns and the number needed to
            process a million paper returns. That small difference is
            inconsistent with what we would have expected and may reflect,
            at least in part, the fact that electronic filing is not truly
            paperless.
      --Finally, IRS and Congress face many challenges in moving the
            nation's tax system into the next millennium. Funding limits
            faced by IRS in fiscal year 1997 and anticipated for fiscal
            year 1998 are projected to continue until at least 2002. Fiscal
            constraints as well as longstanding concerns about the
            operations and management of IRS make consensus on IRS
            performance goals and measuring progress in achieving those
            goals critically important. The provisions and requirements of
            the Chief Financial Officers Act, Clinger-Cohen Act, and
            Results Act provide a mechanism for accomplishing this.
                     overview of 1997 appropriation issues
        Before discussing the fiscal year 1998 budget request, it might be
    useful to summarize some of the issues associated with IRS' fiscal year
    1997 appropriation. The appropriation act \1\ and accompanying
    conference report \2\ for fiscal year 1997 indicated that Congress was
    concerned about various aspects of IRS' operations. Among other things,
    Congress expressed concern about (1) Tax Systems Modernization (TSM)
    and the need to direct more systems development work to the private
    sector; (2) TSM funds being directed at ``feeding the beast'' rather
    than at true modernization; (3) the ability of taxpayers to reach IRS
    over the telephone; and (4) the need to maintain taxpayer service at
    fiscal year 1995 levels, at a minimum.\3\
    ---------------------------------------------------------------------------
        \1\ The Omnibus Consolidated Appropriations Act (P.L. 104-208,
    Sept. 30, 1996).
        \2\ H.R. report No. 863, 104th Cong., 2d Sess. (1996).
        \3\ Congress added this requirement because it was concerned that
    IRS' pending reorganization of certain field activities would adversely
    affect taxpayer service.
    ---------------------------------------------------------------------------
        In response to its fiscal year 1997 appropriation and the
    congressional direction specified therein, IRS, among other things, (1)
    revised its spending plans for information systems and (2) reallocated
    resources within the processing, assistance, and management account to
    direct more FTE's to taxpayer service activities.
        Another issue associated with IRS' fiscal year 1997 appropriation
    involves funding provided for private sector debt collection pilot
    programs. We believe that spending on those programs should be
    prohibited until various problems we identified have been resolved.
    IRS' fiscal year 1997 Systems Spending Plans Appear Consistent With
            Congressional Direction, But $36 Million May No Longer Be
            Needed
        For fiscal year 1997, IRS was appropriated about $1.3 billion to
    fund its information systems. The appropriation act specified that the
    $1.3 billion be spent as follows:
      --$758.4 million for legacy systems,
      --$206.2 million for TSM operational systems,
      --$130.1 million for TSM development and deployment,
      --$83.4 million for program infrastructure,
      --$62.1 million for ``stay-in-business'' projects,
      --$61.0 million for staff downsizing, and
      --$21.9 million for telecommunication network conversion.
        IRS' plans for spending its fiscal year 1997 information systems
    appropriation and IRS' obligations through December 31, 1996, appear
    consistent with the act's direction. Specifically, at the beginning of
    fiscal year 1997, we judgmentally selected eight projects, totaling
    approximately $197 million, that IRS planned to fund with its
    information systems appropriation and analyzed each relative to the
    categories and amounts specified in the act. Our analysis showed that
    IRS identified its projects in accordance with the legislative
    categories and that all of the projects we reviewed appeared to be
    consistent with the act's categories and spending levels.
        In analyzing IRS' spending, we found that IRS had 15 projects that
    were used to justify the allocation of $130.1 million for systems
    development and deployment. Of the 15 projects, 9 (with fiscal year
    1997 costs totaling about $87.3 million) were ongoing or completed. IRS
    is reviewing one other project that was used to justify $7 million and
    canceled the remaining five projects, which had projected fiscal year
    1997 costs totaling about $36 million.
        According to IRS' Chief Information Officer (CIO), IRS canceled
    these systems because business case analyses did not justify continued
    development. The canceled projects include the Corporate Accounts
    Processing System, the Integrated Case Processing System, and the
    Workload Management System.
        The CIO also stated that IRS will not start any new system
    development projects until about October 1998, after it has developed
    the internal capability needed to effectively manage such projects.
    Therefore, Congress should consider rescinding the $36 million that IRS
    will not be using for systems development and deployment in fiscal year
    1997.
        As noted earlier, $61 million of IRS' fiscal year 1997 information
    systems appropriation was allocated for staff downsizing. We question
    whether all of the $61 million will be needed for that purpose. IRS had
    requested those funds to downsize its information systems staff by 819
    positions. According to IRS' Chief for Management and Administration,
    however, attrition among information systems staff has been higher than
    expected and IRS' downsizing plans, as of March 3, 1997, included only
    228 information systems positions.
    Increased Resources Provided for Taxpayer Service in 1997
        Given congressional concerns about the level of taxpayer service
    and the low level of telephone accessibility documented in several of
    our reports,\4\ IRS decided that its highest priority in 1997, other
    than processing returns and refunds, would be to improve taxpayer
    service, especially the ability of taxpayers to reach IRS on the phone.
    One important step IRS took to achieve that end was to increase the
    number of FTE's devoted to taxpayer service. According to IRS
    estimates, the number of taxpayer service FTE's will increase from
    8,031 in fiscal year 1996 to 9,091 in fiscal year 1997. The estimated
    number of FTE's for fiscal year 1997 is also higher than in fiscal year
    1995, which is in accord with congressional direction in IRS' fiscal
    year 1997 appropriation. According to IRS budget officials, some of
    these additional FTE's were achieved by reallocating resources
    originally targeted for submission processing; the rest were funded
    with user fees that IRS is authorized to retain.
    ---------------------------------------------------------------------------
        \4\ Tax Administration: Continuing Problems Affect Otherwise
    Successful 1994 Filing Season (GAO/GGD-95-5, Oct. 7, 1994); The 1995
    Tax Filing Season: IRS Performance Indicators Provide Incomplete
    Information About Some Problems (GAO/GGD-96-48, Dec. 29, 1995); and
    IRS' 1996 Tax Filing Season: Performance Goals Generally Met; Efforts
    to Modernize Had Mixed Results (GAO/GGD-97-25, Dec. 18, 1996).
    ---------------------------------------------------------------------------
        The bulk of the staffing increase for taxpayer service is directed
    at helping taxpayers reach IRS by telephone. In addition to the
    increase in taxpayer service FTE's discussed above, IRS also detailed
    staff from other functions to help answer the phone, including staff
    who would normally be doing compliance work. This increased staffing,
    along with other steps IRS took, seems to have succeeded in
    significantly improving telephone accessibility during the 1997 tax
    return filing season. As discussed in more detail in appendix III,
    accessibility increased from 20.1 percent during the 1996 filing season
    to 50.9 percent during the 1997 filing season.
    Problems With IRS' Private Debt Collection Pilot
        As part of IRS' fiscal year 1997 appropriation, Congress mandated
    that $13 million be made available to extend the private sector debt
    collection pilot program that was initiated in fiscal year 1996. An
    additional $13 million was earmarked for a second private debt
    collection pilot to be managed by the Department of the Treasury. To
    date, none of the $26 million has been obligated.
        At the request of the Chairman of the Oversight Subcommittee, House
    Committee on Ways and Means, we evaluated the initial pilot and found
    significant legal, systems and operations, and performance measurement
    barriers to the pilot's success. Specifically we found that
      --IRS' legal interpretations prevented the pilot from being a true
            test of private contractors' ability to collect delinquent
            taxes;
      --systems and operations problems made it difficult to identify,
            select, and transmit cases to the contractors; and
      --the pilot lacked appropriate performance measures to identify and
            capture the best practices and techniques used by private
            collectors.
        IRS agreed with our findings.
        On the basis of our findings, the Chairmen of the Oversight
    Subcommittee; the Subcommittee on Treasury, Postal Service, and General
    Government, House Committee on Appropriations; and the Subcommittee on
    Government Management, Information, and Technology, House Committee on
    Government Reform and Oversight informed the Secretary of the Treasury
    that contracts should not be awarded at this time for the Treasury-
    managed pilot.
        Until the issues jeopardizing the success of the pilots are
    resolved, we believe that IRS and Treasury should be prohibited from
    spending both the $13 million to extend the ongoing IRS pilot and the
    $13 million earmarked for the Treasury-managed private debt collection
    pilot.
    fiscal year 1998 budget request for information systems raises several
                                   questions
        IRS' fiscal year 1998 budget request includes $1.27 billion and
    7,162 FTE's for information systems. Of the $1.27 billion, $1.14
    billion is for operational systems, including funds for IRS' century
    data change effort and for replacing two old processing systems. The
    rest of the request ($131 million) is for developmental systems. In
    addition to the $1.27 billion, the administration is requesting $1
    billion over 2 years to fund a multi-year capital account, referred to
    as the Information Technology Investments Account, for new
    modernization projects at IRS.
        Our analysis of the information systems request raised several
    questions: (1) Should Congress approve the $131 million for
    developmental systems and the $1 billion capital account given the
    absence of the kind of supporting analyses required by the Clinger-
    Cohen Act, the Results Act, and OMB? (2) Is the money being requested
    for IRS' century date conversion effort sufficient? and (3) Will IRS
    need all of the money requested for replacing two processing systems?
    $131 Million Budget Request for Systems Development Not Justified
        The Clinger-Cohen Act, the Results Act, and OMB Circular No. A-11
    and supporting memoranda require that information technology
    investments be supported by accurate cost data and convincing cost-
    benefit analyses. For fiscal year 1998, IRS is requesting $131 million
    for system development. However, IRS' request does not include a
    credible, verifiable justification. According to IRS budget officials,
    $131 million was requested for fiscal year 1998 because it was
    approximately the same amount IRS received in fiscal year 1997 for
    system development.
        The budget request states that IRS does not know how it plans to
    spend the $131 million because its modernization systems architecture
    and system deployment plan have not yet been finalized. IRS publicly
    issued a draft version of these documents on May 15, 1997, and provided
    them to private industry for review and comment by July 15, 1997. Once
    finalized, these documents are intended to guide future systems
    development.
    No Justification to Support Billion Dollar Information Technology
            Investments Account
        The administration is proposing to establish an Information
    Technology Investments Account to fund future modernization investments
    at IRS. It is seeking $1 billion--$500 million in fiscal year 1998 and
    another $500 million in fiscal year 1999--for ``yet-to-be-specified''
    development efforts. According to IRS' request, the funds are to
    support acquisition of new information systems, expenditures from the
    account will be reviewed and approved by Treasury's Modernization
    Management Board (MMB), and no funds will be obligated before July 1,
    1998.
        The Clinger-Cohen Act, the Results Act, and OMB Circular No. A-11
    and supporting memoranda require that, prior to requesting multi-year
    funding for capital asset acquisitions, agencies develop accurate,
    complete cost data and perform thorough analyses to justify the
    business need for the investment. For example, agencies need to show
    that needed investments (1) support a critical agency mission; (2) are
    justified by a life cycle based cost-benefit analysis; and (3) have
    cost, schedule, and performance goals.
        IRS has not prepared such analyses for its fiscal year 1998 and
    1999 investment account request. Instead, IRS and Treasury officials
    stated that, during executive-level discussions, they estimated that
    they would need about $2 billion over the next 5 years. This estimate
    was not based on analytical data or derived using formal cost
    estimating techniques. According to OMB officials responsible for IRS'
    budget submission, the request was reduced to $1 billion over 2 years
    because they perceived the lesser amount as more palatable to Congress.
    These officials also told us that they were not concerned about the
    precision of the estimate because their first priority is to ``earmark
    funds'' in the fiscal year 1998 and 1999 budgets so funds will be
    available when IRS eventually determines how it wants to modernize its
    systems.
    IRS and Treasury Are Still Addressing Modernization Weaknesses
        In 1995 we made over a dozen recommendations to the Commissioner of
    Internal Revenue to address systems modernization management and
    technical weaknesses.\5\ We reported in 1996 that IRS had initiated
    many activities to improve its modernization efforts but had not yet
    fully implemented any of our recommendations.\6\ Congress also took
    steps to improve the modernization effort. Specifically, in the fiscal
    year 1997 Omnibus Appropriations Act,\7\ Congress directed IRS to (1)
    submit by December 1, 1996, a schedule for transferring a majority of
    its modernization development and deployment to contractors by July 31,
    1997, and (2) establish a schedule by February 1, 1997, for
    implementing our recommendations by October 1, 1997. In its conference
    report on the act, Congress directed the Secretary of the Treasury to
    (1) provide quarterly reports on the status of IRS' corrective actions
    and modernization spending \8\ and (2) submit by May 15, 1997, a
    technical architecture for the modernization that had been approved by
    the MMB. Additionally, the MMB was directed to prepare a request for
    proposal by July 31, 1997, to acquire a prime contractor to manage
    modernization deployment and implementation.
    ---------------------------------------------------------------------------
        \5\ Tax Systems Modernization: Management and Technical Weaknesses
    Must Be Corrected If Modernization Is to Succeed (GAO/AIMD-95-156, July
    26, 1996).
        \6\ Tax Systems Modernization: Actions Underway But IRS Has Not Yet
    Corrected Management and Technical Weaknesses (GAO/AIMD-96-106, June 7,
    1996).
        \7\ public Law 104-208, September 30, 1996.
        \8\ H.R. Report No. 863, 104th Cong., 2d sess. (1996). Congress
    also required that Treasury provide a schedule for developing and
    implementing all modernization projects in Treasury's fiscal year 1996
    appropriations act (Public Law 104-52, Nov. 19, 1995).
    ---------------------------------------------------------------------------
        IRS and Treasury have taken steps to address our recommendations
    and respond to congressional direction. For example, in response to the
    1997 appropriations act, IRS (1) provided a November 26, 1996, report
    to Congress that set forth IRS' strategic plan and schedule for
    shifting modernization development and deployment to contractors and
    (2) submitted to Congress a February 27, 1997, report on the timetable
    for implementing our recommendations. For its part, Treasury (1)
    provided corrective action and spending reports to Congress for the
    first quarter of fiscal year 1997 and (2) submitted an MMB-approved
    architecture to Congress on May 15, 1997, that the department and IRS
    have circulated to private industry for review and comment. As part of
    this effort, Treasury and IRS are also soliciting private industry
    input on prime contractor management strategies.
        To assess the effectiveness of IRS' efforts to date, we are
    reviewing IRS' (1) recently issued modernization architecture, (2)
    capability to acquire software-intensive systems using contractors, and
    (3) information technology investment management process. While the
    results of these reviews are not yet known, it is important to
    reiterate what we have said before--until IRS fully implements our
    recommendations, its systems modernization will continue to be at
    risk.\9\
    ---------------------------------------------------------------------------
        \9\ GAO High-Risk Series, IRS Management (GAO/HR-97-8, Feb. 1997).
    ---------------------------------------------------------------------------
        Given IRS' poor track record delivering cost-beneficial TSM systems
    and the lack of justification for proposed system expenditures,
    Congress should consider not funding both the $131 million request for
    systems development and the $1 billion capital account until the
    management and technical weaknesses in IRS' modernization program are
    resolved and the required justifications are completed.
    Funding Needs for Century Date Change Are Uncertain
        IRS, like other federal agencies, is in the midst of a major
    project aimed at making its computer systems ``century date
    compliant.'' Because IRS' systems, like many others in government and
    the private sector, use two-digit date fields, they cannot distinguish,
    for example, between the year 1900 and the year 2000 (the systems would
    show both years as ``00''). IRS estimates that the failure to correct
    this situation before 2000 could result in millions of erroneous tax
    notices, refunds, and bills. Accordingly, IRS' CIO has designated this
    effort as a top priority. The CIO established a year 2000 project
    office to coordinate work among the various IRS organizations with
    responsibility for assessing, converting, and testing IRS systems.
        IRS' current plans are to spend $106.2 million on century date
    conversion efforts in fiscal year 1997. This would exceed its fiscal
    year 1997 budget by $61.2 million. Of this amount,
      --$47.7 million is for non labor costs ( e.g., the purchase of
            updated operating system environments, contractor support for
            software conversion and testing, and additional hardware for
            expected capacity increases) and
      --$13.5 million is for additional labor costs, which is to come from
            IRS' existing budget for overall information systems staffing.
        To meet these needs, IRS is seeking approval to reprogram some
    fiscal year 1997 funds from other accounts and to use available ``no-
    year'' TSM funds. In addition, the Chief Financial Officer's
    organization is conducting an IRS-wide review to identify other sources
    of funding should they be needed.
        IRS' fiscal year 1998 budget request includes another $84 million
    for the century date change effort. It is uncertain, however, if this
    amount will be sufficient to address IRS' century date funding needs
    for fiscal year 1998. The fiscal year 1998 request was based on
    September 1996 cost estimates that, in turn, were based on an estimate
    of lines of computer code for IRS' main tax processing systems.
    However, there are potentially significant costs in other areas for
    which IRS has yet to complete initial assessments, including (1)
    secondary tax processing systems that are also critical to the tax
    administration process; (2) telecommunications; (3) commercial off-the-
    shelf software; and (4) non-information technology resources, such as
    elevators and heating and air conditioning units. IRS has efforts
    underway to address each of these areas. For example, IRS recently
    formed a committee of executives to address options for dealing with
    secondary systems. By the end of June, the committee expects to have
    made decisions on which of these systems will or will not be converted.
    IRS officials said that they expect to have a complete cost estimate
    for converting these systems by September 1997.
    Replacement of Systems That Process Paper Tax Returns and Remittances
        Also as part of its information systems request, IRS is asking for
    $44 million in fiscal year 1998 to continue developing replacements for
    two systems--the Distributed Input System (a 12-year old system used to
    process paper returns) and the Remittance Processing System (an 18-year
    old system used to process tax payments)--and to begin pilot testing in
    January 1998. IRS reports that the systems are unreliable, costly to
    operate and maintain, and not year 2000 compliant.
        Project officials told us that to meet the January 1998 milestone
    for piloting the new systems, an additional $6.1 million of fiscal year
    1997 money has been reprogrammed to the Distributed Input System/
    Remittance Processing System replacement project. Consequently, the
    project will not need this $6.1 million in fiscal year 1998.
    Accordingly, Congress should consider reducing the fiscal year 1998
    request for this project by $6.1 million.
    request for additional returns processing staff raises questions about
                         benefits of electronic filing
        IRS' largest requested budget increase is for $214 million and 195
    FTE's to maintain its fiscal year 1997 program levels in fiscal year
    1998. According to IRS, most of the $214 million is needed to cover pay
    and benefits for the employees it has on board. However, $11 million
    and all 195 FTE's are intended to cover ``mandatory workload
    increases'' in its returns processing function. More specifically, IRS
    has projected that the number of primary tax returns filed will
    increase from 197.9 million in 1997 to 200 million in 1998. IRS has
    also projected that 91 percent of the increase in primary tax returns
    (or 1.9 million returns) will be filed electronically.
        The data IRS used to determine its need for $11 million and 195
    FTE's indicated that IRS only saves about 5 FTE's for every 1 million
    returns that are filed electronically. This is contrary to what we
    would have expected. Because up-front filters keep certain taxpayer
    errors that are common on paper returns from contaminating electronic
    returns and because electronic returns bypass the labor intensive and
    error prone key punching process IRS uses for paper returns, we would
    expect that the labor and related costs to process electronically-filed
    returns would be substantially lower than the labor and costs
    associated with processing paper returns. According to IRS budget
    officials, IRS has an effort underway to determine the comparative cost
    of processing electronic and paper tax returns. They expect that study
    to be completed in September 1997.
        At least part of the smaller-than-expected savings from electronic
    filing can be attributed to the fact that electronic filing is not
    truly paperless. Taxpayers filing electronically, other than through
    TeleFile, must submit a paper signature document to authenticate the
    electronic portion of their return. And IRS has to process that
    document. In January 1993, we reported that to significantly increase
    the use of electronic filing IRS would have to resolve various issues
    that adversely affect the appeal of electronic filing.\10\ One of those
    issues is the requirement to submit paper documents with an electronic
    return.
    ---------------------------------------------------------------------------
        \10\ Tax Administration: Opportunities to Increase the Use of
    Electronic Filing (GAO/GGD-93-40, Jan. 22, 1993).
    ---------------------------------------------------------------------------
                           challenges for the future
        As discussed earlier, IRS data indicate that taxpayers had a much
    better chance of reaching IRS by telephone during the 1997 filing
    season than they had in 1996. This improvement, however, was not
    without cost. IRS used various strategies to improve accessibility, one
    of which involved detailing staff from other functions, including staff
    who would otherwise be auditing tax returns, to answer the phone. The
    funding limits and program tradeoffs faced by IRS in fiscal year 1997
    and anticipated for fiscal year 1998 are likely to continue for the
    foreseeable future. The administration's outyear projections actually
    reflect a decline in IRS funding when inflation is considered.
        At the same time, IRS is faced with competing demands and pressure
    from external stakeholders, including Congress, to improve its
    operations and resolve longstanding concerns. Modernization of IRS'
    processes and systems is critical to doing this. So is reaching
    consensus on IRS' strategic goals and performance measures.
        In recent years, Congress has put in place a statutory framework
    for addressing these challenges and helping Congress and the executive
    branch make the difficult trade-offs that the current budget
    environment demands. This framework includes as its essential elements
    the Chief Financial Officers Act; information technology reform
    legislation, including the Paperwork Reduction Act of 1995 and the
    Clinger-Cohen Act; and the Results Act, or GPRA.
        In crafting these acts, Congress recognized that congressional and
    executive branch decisionmaking had been severely handicapped by the
    absence in many agencies of the basic underpinnings of well managed
    organizations. We have found numerous examples across government of
    management-related challenges stemming from unclear missions
    accompanied by the lack of results-oriented performance goals, the
    absence of detailed business strategies to meet those goals, and the
    failure to gather and use accurate, reliable, and timely program
    performance and cost information to measure progress in achieving
    results. All of these problems exist at IRS. To effectively bridge the
    gap between IRS' current operations and its future vision while living
    within the budget constraints of the federal government, these
    challenges must be met.
        Under GPRA, every major federal agency must ask itself some basic
    questions: What is our mission? What are our goals and how will we
    achieve them? How can we measure performance? How will we use that
    information to make improvements? GPRA forces a focus on results. GPRA
    has the potential for adding greatly to IRS performance--a vital goal
    when resources are limited and public demands are high.
        GPRA requires each agency to develop a strategic plan that lays out
    its mission, long-term goals, and strategies for achieving those goals.
    The strategic plans are to take into account the views of Congress and
    other stakeholders. To ensure that these views are considered, GPRA
    requires agencies to consult with Congress as they develop their
    strategic plans.
        Congress and the administration have both demonstrated that they
    recognize that successful consultations are key to the success of GPRA
    and therefore to sustained improvements in federal management. For IRS,
    these consultations provide an important opportunity for Congress, IRS,
    and Treasury to work together to ensure that IRS' mission is focused,
    goals are specific and results oriented, and strategies and funding
    expectations are appropriate and reasonable. The consultations may
    prove difficult because they entail a different working relationship
    between agencies and Congress than has generally prevailed in the past.
    The consultations are likely to underscore the competing and
    conflicting goals of IRS programs, as well as the sometimes different
    expectations of the numerous parties involved.
        As a GPRA pilot agency, IRS should be ahead of many federal
    agencies in the strategic planning and performance measurement process.
    Nonetheless, IRS remains a long way from being able to ensure that its
    budget funds the programs that will contribute the most towards
    achieving its mission goals. While IRS needs more outcome-oriented
    indicators, it also has difficulty in measuring its performance with
    the indicators it has. For example, IRS' top indicator is its Mission
    Effectiveness Indicator. This is calculated by subtracting from the
    revenue collected the cost of IRS programs and taxpayer burden and
    dividing that result by true total tax liability. While this approach
    may be conceptually sound, IRS does not have reliable data to calculate
    taxpayer burden nor can it calculate true total tax liability.
        In summary, there are several questions regarding IRS' fiscal year
    1997 spending and IRS' fiscal year 1998 budget request that the
    Subcommittee may wish to consider. Among these are:
      --Should the $36 million that IRS will not be using for systems
            development and deployment in fiscal year 1997 be rescinded?
      --Should IRS and Treasury be prohibited from spending the $26 million
            earmarked for two private debt collection pilot programs until
            issues jeopardizing their success are resolved?
      --What level of funding will IRS need to make its information systems
            century date compliant?
      --Does IRS need all of the fiscal year 1998 funding it is requesting
            for the Distributed Input System/Remittance Processing System
            replacement project?
      --What level of funding should Congress provide for developing new
            information systems, given the lack of any justification for
            the $131 million requested for fiscal year 1998 and the $1
            billion investment account for fiscal years 1998 and 1999?
      --What reliable, outcome-oriented performance measures should be put
            in place to guide IRS and Congress in deciding how many
            resources should be given to IRS and how best to allocate those
            resources among IRS' functional activities?
        That concludes my statement. We welcome any questions that you may
    have.
                                   appendix i
         Comparison of Fiscal Year 1998 Budget Request With Prior Years
        Tables I.1 and I.2, respectively, show how IRS' fiscal year 1998
    budget request compares to (1) its proposed fiscal year 1997 operating
    level and (2) its appropriations since fiscal year 1991.

      TABLE I.1: COMPARISON OF IRS' FISCAL YEAR 1998 BUDGET REQUEST WITH PROPOSED FISCAL YEAR 1997 OPERATING LEVEL
                                                 [Dollars in thousands]
    ----------------------------------------------------------------------------------------------------------------
                                                                      Fiscal year 1997          Fiscal year 1998
                           Budget activity                       ---------------------------------------------------
                                                                    Dollars       FTE's       Dollars       FTE's
    ----------------------------------------------------------------------------------------------------------------
    Submission processing.......................................     $788,138       15,481     $820,325       15,694
    Telephone and correspondence................................      786,616       20,815      815,382       20,815
    Document matching...........................................       67,298        1,904       69,783        1,904
    Inspection..................................................      100,581        1,214      103,874        1,214
    Management services.........................................      534,808        7,275      559,355        7,352
    Rent and utilities..........................................      604,416          169      574,455          169
                                                                 ---------------------------------------------------
          Subtotal: Processing, assistance, and management
           appropriation........................................    2,881,857       46,858    2,943,174       47,148
                                                                 ===================================================
    Criminal investigation......................................      371,780        4,595      385,081        4,595
    Examination.................................................    1,586,545       25,910    1,641,834       25,916
    Collection..................................................      715,552       12,387      751,918       12,387
    Employee plans and exempt organizations.....................      128,116        2,117      132,696        2,117
    Statistics of income........................................       23,756          471       24,781          471
    Chief counsel...............................................      210,469        2,589      217,412        2,589
                                                                 ---------------------------------------------------
          Subtotal: Tax law enforcement appropriation...........    3,036,218       48,069    3,153,722       48,075
                                                                 ===================================================
    Operational information systems.............................    1,156,408        7,708    1,141,596        6,912
    Developmental information systems...........................      130,131          291      130,891          250
                                                                 ---------------------------------------------------
          Subtotal: Information systems appropriation...........    1,286,539        7,999    1,272,487        7,162
                                                                 ===================================================
          Grand Total...........................................    7,204,614      102,926    7,369,383      102,385
    ----------------------------------------------------------------------------------------------------------------
    Source: IRS' budget estimates for fiscal year 1998.

        We did not extend the above comparison to fiscal years before 1997
    because IRS restructured its budget for fiscal year 1998 and adjusted
    only its fiscal year 1997 figures to coincide with that new structure.
    One major restructuring involved what used to be the ``Taxpayer
    Services'' budget activity. That activity, which is part of IRS'
    Processing, Assistance, and Management appropriation, was renamed
    ``Telephone and Correspondence'' and was revised to combine various
    assistance programs with compliance activities conducted by phone and
    correspondence. Other restructuring included (1) a consolidation of
    what were four different resources management budget activities into a
    single Management Services activity, (2) creation of a separate budget
    activity for rent and utilities, and (3) the consolidation of what were
    four information systems budget activities into two--one for
    operational systems and one for developmental systems.

     TABLE I.2: COMPARISON OF IRS' FISCAL YEAR 1998 BUDGET REQUEST WITH IRS
                APPROPRIATIONS FOR FISCAL YEARS 1991 THROUGH 1997
                              [Dollars in billions]
    ------------------------------------------------------------------------
                                              Appropriations
                   Fiscal year                    in 1997       Total FTE's
                                                  dollars
    ------------------------------------------------------------------------
    1991....................................           7,088         115,628
    1992....................................           7,513         116,673
    1993....................................           7,792         113,460
    1994....................................           7,710         110,665
    1995....................................           7,826         112,069
    1996....................................           7,397         106,642
    1997....................................           7,205         102,926
    1998....................................       \1\ 7,182     \2\ 102,385
    ------------------------------------------------------------------------
    \1\ Requested amount.
    \2\ Estimate based on requested amount.
    Source: IRS' budget requests for fiscal years 1993 through 1998. Dollars
      are presented in 1997 constant dollars on the basis of GAO
      computations using budget request data and Gross Domestic Product
      Deflator.

                                  appendix ii
                 Trends for Certain IRS Performance Indicators
        The following tables show trends for various IRS performance
    indicators

            Table II.1: Number of Individual Income Tax Returns Filed

                                  [In millions]

                                                        Number of individual
            Fiscal year                                   income tax returns
    1991.............................................................. 114.1
    1992.............................................................. 115.0
    1993.............................................................. 114.2
    1994.............................................................. 113.4
    1995.............................................................. 116.3
    1996.............................................................. 118.8

    Source: IRS annual reports and data books.
    ---------------------------------------------------------------------------

                     Table II.2 Information Returns Received

                                  [In millions]

                                                                   Number of
            Fiscal year                                  information returns
    1991.............................................................. 1,042
    1992.............................................................. 1,035
    1993.............................................................. 1,040
    1994.............................................................. 1,052
    1995.............................................................. 1,054
    1996.............................................................. 1,070

    Source: IRS annual reports and data books.
    ---------------------------------------------------------------------------

                    Table II.3 Telephone Accessibility Rates

            Filing season                                            Percent
    1991..............................................................    40
    1992..............................................................    33
    1993..............................................................    24
    1994..............................................................    21
    1995..............................................................     8
    1996..............................................................    20
    1997..............................................................    51

    Note: Telephone accessibility is computed by dividing the total number
    of calls answered by the total number of call attempts, which we define
    as the sum of (1) calls answered, (2) busy signals, and (3) calls
    abandoned by the caller before an IRS assistor got on the line.
    Source: IRS' Management Information System for Top Level Executives and
    IRS' Telephone Data Reports.

                        TABLE II.4: AUDIT COVERAGE OF INDIVIDUAL AND CORPORATE INCOME TAX RETURNS
    ----------------------------------------------------------------------------------------------------------------
                                                                  Individual income tax       Corporate income tax
                                                                         returns                     returns
                           Fiscal year                        ------------------------------------------------------
                                                                  Number of      Percent     Number of     Percent
                                                                   audits        coverage      audits      coverage
    ----------------------------------------------------------------------------------------------------------------
    1991.....................................................       1,313,168         1.17       67,618         2.52
    1992.....................................................       1,206,019         1.06       79,597         3.04
    1993.....................................................       1,058,966         0.92       79,873         3.05
    1994.....................................................       1,225,707         1.08       58,110         2.31
    1995.....................................................       1,919,437     \1\ 1.67       51,808         2.05
    1996.....................................................       1,941,546         1.67       59,832         2.34
    ----------------------------------------------------------------------------------------------------------------
    \1\ IRS attributes the increase in 1995 to auditors pursuing nonfiler cases and the increasing number of Earned
      Income Credit claims reviewed by service center examination staff.
    Note: Audit coverage is the number of returns examined divided by the number of returns filed in the previous
      calendar year.
    Source: IRS data books.

                  TABLE II.5: DELINQUENT TAX COLLECTIONS BY IRS
                              [Dollars in billions]
    ------------------------------------------------------------------------
                                                  Current
                   Fiscal year                    dollars      1996 dollars
    ------------------------------------------------------------------------
    1991....................................            24.3            27.5
    1992....................................            24.2            26.6
    1993....................................            22.8            24.4
    1994....................................            23.5            24.5
    1995....................................            25.1            25.7
    1996....................................            29.8            29.8
    ------------------------------------------------------------------------
    Source: Current dollars from IRS annual reports and data books. 1996
      dollars are GAO computations using IRS data and gross domestic product
      indexes.

                                  appendix iii
                            Telephone Accessibility
        During each filing season, millions of taxpayers call IRS with
    questions about the tax law, their refunds, or their account. According
    to IRS data, as shown in table III.1, the accessibility of IRS'
    telephone assistance, as we have defined it in the past, has increased
    substantially.\11\
    ---------------------------------------------------------------------------
        \11\ Accessibility, as we have traditionally defined it, is the
    total number of calls answered divided by the number of call attempts,
    which is the sum of the following: (1) calls answered, (2) busy
    signals, and (3) calls abandoned by the caller before an IRS assistor
    got on the line.

    ----------------------------------------------------------------------------------------------------------------
                                                                      Number of call     Number of
                              Filing season                            attempts (in   calls answered      Percent
                                                                         millions)     (in millions)   accessibility
    ----------------------------------------------------------------------------------------------------------------
    1997............................................................            62.4            31.8            50.9
    1996............................................................           114.0            22.9            20.1
    ----------------------------------------------------------------------------------------------------------------
    \1\ These data are for January 1 through April 19, 1997, and January 1 through April 20, 1996.
    Source: IRS data.

        As table III.1 indicates, the increase in accessibility is due to a
    combination of more calls being answered and fewer calls coming in.
    IRS' ability to answer more calls is due, at least in part, to (1) an
    increase in the number of staff assigned to answer the phone, some of
    which was achieved by detailing staff from other IRS functions,\12\ and
    (2) revisions to IRS' procedures for handling calls.
    ---------------------------------------------------------------------------
        \12\ In one service center, for example, 26 staff from the
    Collection area were detailed on an as-needed basis to answer the
    phones, 45 staff from the center's Adjustment/Correspondence Branch
    were detailed to answer phone calls during the filing season, and
    another 24 staff from that Branch were detailed to answer calls for 2
    hours each afternoon.
    ---------------------------------------------------------------------------
        As an example of the latter, this year, unlike past years, callers
    who indicated, through the choices they selected on the automated
    telephone menu, that they had a question in a complex tax area (such as
    ``sale of residence'') were to be connected to a voice messaging
    system. Those callers were asked to leave their name, telephone number,
    and best time for IRS to call back, and they were told that someone
    would be calling back within 2 working days. Those return calls were to
    be made by staff detailed from IRS' Examination function. According to
    IRS, it made this change after a study showed that several areas of
    complicated tax law involved 20 to 30 minute telephone conversations
    and that an assistor could answer about 5 simpler calls within the same
    amount of time.
        The decline in the number of calls coming in can be attributed, in
    no small part, to IRS' ability to answer more calls. The more
    successful IRS is in answering the phone, the fewer times taxpayers
    should have to call in an attempt to get through. Another factor cited
    by IRS as a contributor to the number of call attempts was the
    elimination of certain notices that it deemed to be unnecessary, which,
    in turn, reduced the need for persons to call IRS with questions about
    those notices.
                           DEPARTMENT OF THE TREASURY

                            Internal Revenue Service

    STATEMENT OF LAWRENCE H. SUMMERS, DEPUTY SECRETARY
    ACCOMPANIED BY:
            MICHAEL P. DOLAN, ACTING COMMISSIONER
            DAVID A. MADER, CHIEF, MANAGEMENT AND ADMINISTRATION
            ARTHUR A. GROSS, CHIEF INFORMATION OFFICER
            JAMES E. DONELSON, CHIEF, TAXPAYER SERVICE

                           Introduction of Witnesses

        Senator Campbell. We will go to our last panel, which will
    be the Honorable Lawrence Summers, Mr. Michael Dolan, Mr. David
    Mader, Mr. Arthur Gross, and Mr. James Donelson. And as I
    mentioned before, we will probably be submitting some written
    questions to this panel. Deputy Secretary Summers and then we
    will just proceed down the line as they are listed on the
    witness list.

                        Statement of Lawrence H. Summers

        Mr. Summers. Thank you very much, Senator. I will be very
    brief in my opening statement. I want to make two primary
    points. First, I believe we are well on the way to getting the
    IRS information technology program back on track. We testified
    before this committee a year ago. We said that it was quite far
    off track.
        By bringing in a new Chief Information Officer, Art Gross,
    who is with us here today, by canceling or consolidating some
    26 projects that would have, over the coming year, spent more
    than $1 billion, by moving to a new approach based on private
    sector involvement and preparing a detailed architecture which
    is now receiving comment from potential prime contractors, by
    focusing our information technology investments on the highest
    priority items for which there is a strong business case, and
    by very substantially strengthening Treasury oversight of the
    IRS, I believe we have taken significant steps and that we are
    making significant progress toward the restoration of this
    information technology program to being what it should be.

                        Treasury Five Point Plan for IRS

        Those efforts come as part of a broader effort that the
    Department is engaged in to work to improve performance at the
    Internal Revenue Service to give the Internal Revenue Service
    the tools that it needs. One important component of that
    program is new leadership. As you may have read, a potential
    IRS Commissioner is going through the vetting process right
    now.
        He has a very different background than traditional IRS
    Commissioners, one that is grounded in management information
    technology and customer service in order to provide for
    continuity, which we see as central. Secretary Rubin has
    recommended, and this is a point on which the IRS Commission
    agrees, that the IRS Commissioner be given a 5-year term so
    that the job will be more removed from politics, so that there
    will be a longer term of service for the IRS Commissioner.
        Second, we are working to strengthen oversight of the IRS.
    We believe that it is essential that the IRS management have
    continuity, that it have accountability, and that it have
    substantial outside input. Our proposals do just that, the 5-
    year term and an advisory board that would have continuity
    across administrations.
        It would make an annual report to the taxpayers on IRS
    performance and on our performance in IRS oversight as well as
    continuation of an internal Government board for the IRS that
    we believe has been quite effective over the last year to
    provide for accountability, a reporting requirement on the
    Secretary and the Deputy Secretary of the Treasury to report
    personally to Congress every 6 months on the performance of the
    IRS so that their accountability and through them the
    President's accountability is firmly established.
        We believe that this is the best way to safeguard the 95
    percent of the Government's revenue that is collected through
    the IRS. We believe this is the best way to protect what is a
    central law enforcement function in our country, the collection
    of taxes.
        We have very grave concerns about the proposals of some to
    turn the IRS over to a board of outside corporate-type
    directors whose primary loyalty would be to their own
    institutions on which they were employed full-time and who
    would only be involved on a part-time basis with the IRS,
    therefore, it seems to us, be in an appropriate position to
    oversee a critical law enforcement function or to take an
    active part in tax policy deliberations.
        The third part of our approach is an emphasis on sound
    budgeting practices. As we restore trust, as I believe we will
    by showing results, we think it is important that budgeting
    procedures for the IRS recognize the need for some stability in
    treating capital outlays and recognize that given that the IRS
    is the principal revenue generator for the Federal Government,
    cuts in the budget actually have the perverse consequence of
    substantially increasing the budget deficit.
        Fourth, we believe that it will be necessary, in part
    through legislation and in part through administrative action,
    to substantially increase the flexibility of top IRS
    management, to bring in new people from the outside as we were
    able to bring in Mr. Gross, to reassign people when that is
    warranted by their performance, to replace people when that is
    necessary given their performance.
        If we want the kind of service that people have come to
    expect from the private sector, we have to give top management
    the tools to operate in the way that a business does.
        And finally fifth, and really separate from our concerns
    today, but which I think are of the utmost importance if we are
    going to address these problems, we are working to simplify the
    Tax Code. The administration submitted a package of some 60
    simplification programs on April 15 that will do things like
    remove the need for paper boys with bank accounts to file
    taxes--with $100 savings accounts--to file tax returns.
        I am pleased that many of those suggestions have been
    reflected in the bills that are coming out and going through
    the markup process right now in both the House and the Senate.

                           Year 2000 Date Conversion

        Finally, Mr. Chairman, I would just say that the next 2
    years are not going to be easy. On top of all of the other
    problems, we face the Y2K year 2000 problem. The IRS is
    probably as large a collection of computers dating from the
    1960's as exists anywhere. It is an absolute, stay-in-business
    issue for the IRS. Therefore, we are going to meet that
    challenge.
        It is going to be expensive. It is going to be very
    expensive. The size of the need as we have scoped this has
    become larger and larger and I cannot tell the committee that
    we have fully identified all of the costs even at this point.
    But we are working to identify them, and more importantly, to
    solve the problems as rapidly as we possibly can. Thank you
    very much.

                              Prepared Statements

        Senator Campbell. Thank you, Mr. Summers. We have your
    complete statement, and it will be made part of the record. We
    also have a prepared statement from Mr. Dolan which will be
    inserted in the record.
        [The statements follow:]
                   Prepared Statement of Lawrence H. Summers
        I am pleased to be here today to talk with you about Treasury's
    plan to implement lasting solutions to the difficulties the IRS faces.
    Before I begin, I would like to thank the Chairman, the Ranking
    Minority Member and the other members of this Committee for their
    leadership on the matter of IRS reform. With me today are Acting
    Commissioner of the IRS, Michael Dolan, Chief of Management and
    Administration, David Mader and Chief Information Officer, Arthur
    Gross. In addition, I hope you will join me in recognizing and thanking
    the more than 100,000 loyal and dedicated IRS employees who carry on
    the unpopular but vitally important task of collecting 95 percent of
    our government's revenue.
                               management reform
        Mr. Chairman, recent announcements of problems in modernizing the
    computer systems of the IRS have focused attention on the shortfalls of
    the information technology of the Service. At the same time,
    improvements in customer service in the private sector have led the
    American people to expect interactions with the IRS to be as efficient
    and straightforward as interactions with credit card companies and
    other private-sector financial institutions. This has occurred at a
    time when the IRS is also coping with an increased workload. This year,
    the IRS processed over 2 billion pieces of paper which, if placed side
    by side, would stretch over 200 miles. These developments have provoked
    an important debate about how best to improve the Internal Revenue
    Service.
        Over the last few years, the Treasury Department has focused
    intense efforts on improving the IRS. This Committee and others within
    the Congress have held extensive hearings on the matter. A consensus
    has emerged among a wide group of stakeholders, from business
    executives to Members of Congress to leaders of the IRS and National
    Treasury Employees Union on the need for change.
        I believe that, in the next year or so, we have the opportunity and
    the obligation to bring about the most far-reaching changes in decades
    in how the IRS is managed and how it does business. It will be the task
    of management at the IRS to manage information technology better and to
    harness it toward the goal of better customer service.
        Mr. Chairman, I know you and the Committee face many difficult
    choices as you work to balance priorities and funding for the coming
    fiscal year. We recognize that this Committee has provided critical
    support for making the necessary changes. But we also recognize the
    constraints imposed by the effort to balance the Federal budget by
    2002. Our budget request for the IRS therefore maintains operations
    essentially at the fiscal year 1997 level, providing the resources to
    support current staffing levels--which are over 12 percent below fiscal
    year 1993 levels. Our proposal will include funding to address the
    Century Date change--an issue not unique to the IRS, but one that could
    be disastrous for our tax system if not addressed effectively and
    quickly.
                             indicators of progress
        Secretary Rubin and I recognized last year in testimony before the
    Appropriations Committees that the IRS's modernization program was, as
    we put it at the time, off track. We called for a ``sharp turn'' and
    made clear our determination to bring about change in the way the IRS
    uses information technology and provides customer service. And there
    has been change. The results, while still in their early stages, give
    the IRS a solid foundation on which to build, and are already producing
    benefits. Some examples of the steps we have taken include the
    following:
      --We have appointed a new Chief Information Officer at the IRS, Art
            Gross. Mr. Gross brings to the IRS considerable systems
            integration and tax systems modernization experience from his
            years with the State of New York.
      --In May 1997, after many months of intense preparation, Mr. Gross
            released the IRS's Blueprint for Technology Modernization,
            which was well-received in the professional information
            technology (IT) communities both inside and outside the
            government. This Blueprint is a significant and critical first
            step in getting IRS on the right track for IT management, and
            represents the first comprehensive attempt to form a strategic
            partnership on IT with the private sector.
      --Following up on the Modernization Blueprint, we submitted a Request
            for Comment for a Tax Systems Modernization prime contractor to
            Congress and to industry on May 15.
      --Based on the reviews performed by Mr. Gross and senior IRS leaders
            of the technology efforts underway at the IRS, we cut and
            collapsed the number of projects by nearly two-thirds--from 26
            to nine.
      --The IRS has increased outsourcing. The percentage of work on tax
            systems modernization performed by contractors has increased
            from 40 to 64 percent over the past two years. The number of
            IRS staff working on tax systems modernization has decreased
            from 524 to 156. We are also developing an outsourcing strategy
            for submissions processing.
        Some other activities currently underway include the following:
      --The IRS is now working with a top marketing firm on an electronic
            filing marketing strategy to bolster taxpayer participation in
            the entire line of IRS electronic filing products, including
            Telefile, On-line filing, 1040-PC filing, and traditional
            electronic filing. The bureau is also putting forth a Request
            for Information (RFI) that will produce opportunities for
            partnering with the private sector to increase electronic
            filing.
      --A joint Treasury, IRS, and National Performance Review (NPR) task
            force is conducting a 90-day study of customer service. The
            study will draw on the experience of front-line employees and
            will focus on the issues that touch customers most deeply.
            Among other tasks it will attempt to identify ways to improve
            notices, the quality of walk-in center assistance, and
            training.
        I understand that the IRS is providing separate testimony
    describing in further detail the progress that is occurring at the IRS
    in customer service, electronic filing and other performance measures.
    The steps we have taken so far are obviously only the beginning.
    Everyone involved in this process at Treasury, the IRS, Congress, and
    the Union has recognized that the problems at the IRS have developed
    over decades and will not be solved overnight or even over a couple of
    filing seasons. But I believe that we have set up an effective
    structure for reforming the IRS, and that we are making progress
    towards our vision of a tax system that serves taxpayers better,
    collects more unpaid taxes, and is more efficient.
             the treasury department's five-point plan for the irs
        Let me now present our broad approach to IRS reform. We are
    determined to bring about changes in the way the IRS uses information
    technology, provides customer service, monitors tax compliance, and
    manages its own resources. As with any institution, however, there is a
    right way and a wrong way to make change. We believe that the approach
    described below is the right way: it charts a new course for the IRS,
    but does so without jeopardizing the institution and our nation's
    revenue stream. Our approach has identified five critical areas to
    effect this ``right'' kind of change: (1) oversight; (2) leadership;
    (3) flexibility; (4) budgeting; and (5) tax simplification. I will
    address each of these in turn.
    1. Strengthening Oversight
        First, Treasury has strengthened its oversight of the IRS and is
    committed to institutionalizing this oversight function. Oversight of
    the IRS by the Treasury Department is essential to ensuring
    accountability for the American people and to coordinating tax
    administration with tax policy.
        Last March, I announced the formation of the Modernization
    Management Board (MMB) comprised of senior officials from Treasury, the
    IRS, and other parts of the Administration. Initially, the MMB
    evaluated only information technology issues. Now, however, it is
    beginning to oversee the entire range of IRS activities. We are asking
    that the President sign an Executive Order that expands the powers of
    the MMB by making it permanent and clarifying that its responsibilities
    cover the broad range of strategic issues facing the IRS. This new
    Internal Revenue Service Management Board will meet at least monthly
    and will prepare semi-annual reports to the President and the Congress,
    which will be transmitted by the Treasury Secretary.
        The Executive Order will also contain the requirement that the
    Secretary and Deputy Secretary make themselves available twice yearly
    to Congress to report on the IRS.
        We will also establish the IRS Advisory Board, to report directly
    to the Secretary of the Treasury. This board will be comprised of
    senior business executives, experts in information technology, small
    business advocates, tax professionals, and others. It will meet
    regularly to make recommendations on major strategic decisions facing
    the IRS, and will issue an annual report to the American people and the
    Congress. This new Board will provide an additional vehicle for the
    private sector input from which the IRS can so clearly benefit, without
    compromising the bureau's government responsibilities, such as
    enforcing federal tax laws and ensuring the equitable administration of
    the tax system.
        These three steps, creating a permanent management board, requiring
    the Secretary and Deputy Secretary to report to Congress semi-annually
    and creating an advisory board comprised of outside experts will
    institutionalize the oversight function.
        In recent weeks, however, there has been considerable interest in a
    more radical model of oversight. As you know, two weeks ago, the
    National Commission on Restructuring the IRS proposed that the IRS be
    governed by an outside board of private citizens who serve on a part-
    time basis. We believe that a private-sector board would not meet
    frequently enough to address the critical and complicated decisions
    facing the bureau over the next decade. The challenges the IRS faces
    and the size and complexity of the institution demand more than the
    part-time and sporadic attention that the Commission's proposed board
    would provide.
        In contrast, Secretary Rubin and I, as well as other Treasury
    officials, are available every day to discuss pressing issues with the
    IRS. Treasury oversight is also critical because tax policy and tax
    administration are inexorably linked. The IRS's relationship with
    Treasury provides an effective mechanism for presenting to senior
    Administration officials the IRS' analysis of the impact of proposed
    tax changes on tax administration. I raise such concerns frequently in
    tax policy discussions in the White House and elsewhere throughout the
    Administration. Furthermore, Treasury oversight allows the IRS to draw
    upon Treasury resources for critical projects, as demonstrated by our
    current cooperation on the Year 2000 conversion.
    2. Recognizing the importance of leadership
        The second element of our approach to the IRS is recognizing that
    leadership is crucial to performance. As we move forward, we are
    excited by the prospect of appointing a new Commissioner with
    experience in managing organizational change, customer service
    improvement, and information technology challenges. We also will be
    proposing legislation to create a five-year fixed term for the
    Commissioner, to provide the continuity and leadership necessary for
    guiding the bureau into the next century.
        Taken together, the first two elements of our plan, strengthened
    oversight and renewed leadership can achieve the critical goals of
    ensuring continuity, outside input and accountability without putting
    at risk the progress underway at the IRS or the vital functions of
    government.
    3. Enhancing IRS management flexibility
        The third component of our five-point IRS strategy is to enhance
    and strengthen the IRS's ability to manage its operations, working with
    Congress and the union to improve management flexibility in personnel
    and procurement. In return, employees of the IRS, as in any well-
    managed business, will be held accountable for results. In addition, we
    will enhance and strengthen the IRS's ability to manage its operations.
    For example:
      --The IRS should be able to attract and retain the highest quality
            information technology specialists and other professionals.
      --The IRS should not face rules that make restructuring the work
            force needlessly difficult for employees and the employer.
        To strengthen the Commissioner's ability to effect change, we at
    Treasury will work with Congress, the Commission, and the union to
    improve flexibility: to bring on people with specific skills more
    quickly... to pay them more competitively... and to give them the
    training they need. This might include providing recruitment, retention
    and relocation incentives and using commercial recruiting firms to
    identify and screen employment candidates. Thus, the IRS faces a
    multitude of restrictions--restrictions that would be unacceptable in
    the private sector--that hamper its ability to provide efficient
    service. Some changes may require legislation, and we expect to propose
    this legislation to Congress later this year.
        Let me add that in taking these steps, we are committed to
    maintaining the independence and freedom of the IRS from political
    influence.
    4. Obtaining stable funding
        The fourth component of our strategy is to work with Congress to
    obtain stable and predictable funding for the IRS. Today, the IRS
    operates in a low-trust, short-tether budgeting environment. This
    unduly complicates rational planning for capital projects in areas such
    as information technology. As we demonstrate that the IRS is investing
    its resources more prudently, Congress should consider longer-term
    approaches to budgeting. To this end, the fiscal year 1998 budget
    proposes multi-year investments for technology. This multi-year
    proposal would provide funding stability as the IRS modernizes its
    information technology operations.
        Over time, the Administration and Congress will have to give
    careful consideration to the appropriate size of the IRS budget. The
    IRS budget has declined by more than nine percent in real terms over
    the last two years. Reducing expenditures on compliance run counter to
    the goal of reducing the federal deficit. Over the long term, the IRS
    estimates that every dollar invested in IRS enforcement returns at
    least $4 in actual collections. For example, in 1995, we undertook to
    invest $2 billion over five years to increase compliance. In the first
    year of that program, we more than exceeded the targets established for
    revenue gains.
        Looking forward, there are conflicting pressures on the IRS budget.
    Efficiency improvements are surely possible through information
    technology, which should enable us to reduce the budget in the long
    term. But we must also strive to meet expanding customer service
    expectations, which could increase our budget requirements. And to
    promote fairness and integrity in implementing tax laws while keeping
    pace with increasingly complex business transactions, we should also
    invest additional resources in compliance.
    5. Simplifying the tax code
        The fifth component of our strategy is to simplify, wherever
    possible, a tax code that currently covers 9,451 pages. In April of
    this year, the Administration offered a series of simplification
    proposals as part of our overall plan to improve IRS operations. The
    proposed package, which could save taxpayers millions of tax
    preparation hours, contains more than 60 legislative proposals to
    reduce the complexities and paperwork burdens of the existing Internal
    Revenue Code and provide substantial new tax rights to the American
    taxpayer. It is important to stress that these proposals would simplify
    the tax code without the severely adverse distributional consequences
    that detract from most other simplification proposals.
        We are pleased that Chairman Archer included most of our proposals
    in the recent Ways and Means Committee tax bill. Of the total of about
    80 simplification proposals in his bill, we count 69 that are
    substantially derived from the Administration package. These measures,
    if enacted, will improve the functioning and administration of the tax
    law for many taxpayers and the IRS.
        However, we note that the pending bill also includes many new
    provisions that are complex, and some that are far too complex. In
    crafting legislation, simplification must always be weighed with other
    important tax policy goals, including fairness, equity, economic
    efficiency, progressivity and revenue impact.
                                    summary
        These five steps--institutionalizing oversight, introducing new
    leadership, increasing flexibility, obtaining predictable funding, and
    simplifying taxes--provide a framework for improving our tax
    administration system. Of course, there are other critical issues that
    we must address. But I believe that progress on these five fronts is
    essential to addressing the IRS' problems.
                                   conclusion
        This morning I have discussed some of the specific steps we are
    taking to modernize the IRS. In turn, I have discussed the broad five-
    point plan that we believe represents the best way to reform the
    management of the IRS.
        The Treasury Department is committed to working with the IRS as it
    moves forward with its change effort. I look forward to working with
    members of this Committee and other interested parties in the coming
    months and years to meet the challenges faced by the IRS. I would
    welcome your questions.
                                     ______

                     Prepared Statement of Michael P. Dolan
        Mr. Chairman and Distinguished Members of the Subcommittee:
        With me this morning are Arthur Gross, Associate Commissioner for
    Modernization and Chief Information Officer; Jim Donelson, Chief
    Taxpayer Service and Acting Chief Compliance Officer; Tony Musick,
    Chief Financial Officer; and Dave Mader, Chief Management and
    Administration. We are pleased to be here this morning to discuss the
    Internal Revenue Service (IRS) 1997 filing season as well as the
    Service's fiscal year 1998 budget request and its effect on taxpayer
    services, the IRS compliance efforts, the IRS reorganization, and our
    continuing efforts to modernize.
                                i. introduction
        In today's testimony, I would like to account for the IRS use of
    its recent appropriation. I believe the Service has made a series of
    improvements consistent with the direction provided by this
    Subcommittee. I also will outline what we expect to accomplish with our
    fiscal year 1998 appropriation. While many of the programs that IRS has
    initiated or improved take time before their results are fully
    reflected in performance indicators, the evidence is already clear that
    the IRS has made progress in making it easier for taxpayers to get
    information about their tax obligations, pay their taxes, file their
    returns, and obtain their refunds where appropriate.
        A critical responsibility for the IRS is to plan and manage a
    successful filing season. We collect more than one trillion dollars
    annually (see Chart 1), process more than 200 million returns and 88
    million refunds, and assist millions of taxpayers in complying with
    their obligations. Over the past few years, we have been trying to
    shift taxpayers, and the IRS, from some paper transactions. We have
    made more and more information available via the telephone, computer,
    fax services, and CD-ROM. We have published telephone numbers which are
    dedicated to refund information and we have established what amounts to
    an IRS answering machine so that taxpayers can call in and leave a
    brief description of their issue. We also have encouraged taxpayers to
    use alternatives to filing by paper.
        The Service recognizes that it must continue to improve services,
    reduce costs, and provide an effective balance between assisting
    taxpayers, processing returns, issuing refunds and ensuring that all
    segments of the taxpaying public--wage earners, self-employed, and
    businesses--pay their proper amount of tax, at the least cost to the
    government and to them. Balancing these seemingly competing interests
    so that the IRS can provide the quality of tax administration our
    citizens deserve is not a simple task.
        The fiscal year 1998 budget request is structured in a way that we
    believe strikes a balance that will see customer service improve
    further; key compliance and fairness issues effectively addressed; and
    critical systems improvement achieved.
                                 ii. operations
        Background. The IRS, like many large businesses, has many functions
    which contribute to the achievement of its mission. The Service
    collects money, processes information, maintains customer accounts, and
    responds to taxpayers' questions. Customers expect the Service to do
    these functions accurately and efficiently while maintaining a high
    level of integrity and safeguarding their privacy. The Service is in
    the midst of a major transition that began several years ago and that
    will continue for several more.
                            serving taxpayers better
        Making It Easier For Taxpayers to Get Information. We understand
    that taxpayers get frustrated when they call the IRS and repeatedly get
    a busy signal. In the past four years, the IRS has answered more calls
    than ever before, but there are still taxpayers whose calls are not
    answered. There are also a growing number of taxpayers who visit or
    write. In 1993, the IRS heard from taxpayers by phone, visit, or letter
    73 million times; in fiscal year 1996, that number had increased to
    nearly 106 million taxpayers (see Chart 2). To deal with one kind of
    demand, access to the TeleTax recorded information line, which offers
    taped information on 148 topics all day, every day, and refund
    information 16 hours a day, Monday through Friday, has been expanded.
    In 1996, over 45 million TeleTax calls were answered. Assistors
    answered another 45 million toll-free calls. The overall level of
    taxpayer access to telephone assistance increased from 39 percent to 46
    percent in fiscal year 1996. More taxpayers were served by increasing
    productivity, expanding hours of service, and installing call routing
    equipment that allows the ever growing telephone workload to be better
    managed. This technology allows the Service, among other things, to
    route calls to available assistors, who may be in the next county, next
    state, or across the country. One result of these improvements is that
    in over 80 percent of the instances an account issue could be resolved
    with a single call.
        In fiscal year 1997, assistors will answer 60 million toll-free
    calls--an increase of 15 million over last year. In addition, the
    TeleTax system should provide service to over 47 million taxpayers.
    Realizing the criticality of answering a greater percentage of our
    customers' calls, the Service used its resources differently during the
    1997 filing season to ensure more taxpayers were served. So that
    assistors could answer more tax law and account questions, the IRS
    added a new, toll-free number that enabled taxpayers to quickly
    determine the status of their refunds without having to speak to an
    assistor. Taxpayers who wished to call after hours or who did not want
    to be put on hold left their questions on recorded messages, and they
    were contacted within two business days with an answer. In an effort to
    improve telephone service this year, the IRS also temporarily used some
    of its examination personnel to answer the telephones. In other words,
    compliance personnel were used to perform traditional taxpayer service
    functions. Because of these efforts, the IRS significantly improved the
    toll-free telephone system, answering approximately 70 percent of
    callers \1\ in 1997. In 1998, we want to institutionalize and improve
    these gains. As of May 31, 1997, this fiscal year we have answered over
    46 million toll-free calls. Also, our TeleTax System has provided
    service to 41 million taxpayers.
    ---------------------------------------------------------------------------
        \1\ IRS defines level of access as the percentage of callers who
    are able to get through to IRS. GAO defines level of access as the
    total number of calls answered divided by the total number of calls
    received. The total number of calls received is the sum of the
    following: (1) calls answered, (2) busy signals, and (3) calls
    abandoned by the caller before an assistor got on the line.
    ---------------------------------------------------------------------------
        Despite these improvements, not every taxpayer call was answered
    and not all taxpayers who wanted to be served were served. Resource
    constraints ultimately limit the number of calls that can be answered.
    Furthermore, it makes good business sense to find ways that might
    proactively reduce the number of calls which taxpayers are required to
    make. One sure way of affecting that equation is to make the
    information initially provided clear enough that taxpayers will not
    need to contact the Service.
        We already have made some progress with a notice reengineering
    effort. Through this effort, we eliminated 12 different notices in
    fiscal year 1996; this resulted in 18 million fewer notices being
    issued and mailed to taxpayers--avoiding millions of telephone calls or
    letters from taxpayers. We have eliminated another 20 notices and
    letters for fiscal year 1997. This is good for taxpayers, who not only
    are relieved of the stress when an official looking letter from the IRS
    arrives in the mail, but who may not need to follow up with the
    Service. It also is good for the IRS; money is saved on printing and
    postage and subsequent questions are eliminated. The notices that will
    continue are being rewritten in clearer language so that fewer
    recipients will need to have any additional explanation.
        Technology has enabled entirely new ways for taxpayers to get forms
    and information from the Service while reducing IRS' postage and
    printing costs. Three years ago, taxpayers requesting a publication or
    form either had to call to have the material mailed or they had to drop
    by an IRS office, their local post office, or library. Not today--at
    least for many taxpayers. Tax forms and publications now are available
    on CD-ROM, and, last year, the IRS instituted an innovative FAX-Forms
    service that processed over 79,000 requests for tax forms and
    instructions by fax during the filing season; as of June 1, 1997, over
    600,000 requests had been processed for tax forms, instructions, tax
    topics and newsletters. This service has been expanded this year by
    doubling the number of forms and instructions available and advertising
    the FAX phone number in all 1040 series tax packages.
        For the 1996 filing season, the Service also developed a world-
    class Web site that provides access to over 700 current and over 3000
    prior year tax forms and instructions, tax publications, regulations
    with plain English summaries, frequently asked questions, disaster
    relief assistance, newsletters, press releases, information on 148 tax
    topics, interactive applications that answer tax questions, and other
    information. This service is available world-wide, 24 hours a day, to
    anyone with access to a personal computer and the Internet. During the
    1996 filing season, over 100 million ``hits'' were logged and over
    three million files were downloaded. Through June 1, 1997, of the 1997
    filing season, the site had logged over 137 million hits and over 6.1
    million files (usually a form or information publication) have been
    downloaded. This Web Site has received outstanding customer, media, and
    industry feedback and has been honored with over 40 awards for its
    design and ease of use from such sources as Netscape, PBS, Wired
    magazine, USA Today, Tax World, Money magazine, Microsoft, Harcourt
    Brace, PC Computing Magazine, and Government Executive magazine.
        As a way of expanding the help available to taxpayers, the IRS also
    sponsors VITA, the Volunteer Income Tax Assistance program, and TCE,
    Tax Counseling for the Elderly. With these two programs, the IRS
    increased taxpayer assistance by giving taxpayers the opportunity to
    have direct contact at almost 20,000 sites with volunteers trained by
    IRS personnel. Last year, over 80,000 volunteers served almost 3.5
    million taxpayers through both of these programs.
        Easier Filing Methods. Another of the Service's goals has been to
    make it easier for taxpayers to file their tax returns. Current data
    suggests progress is being made on this front. Almost 50 percent of
    individual filers now use the easiest tax forms and almost 75 percent
    take the standard deduction. The number of returns filed electronically
    by paid preparers and by telephone has increased from 14.9 million in
    1996 to 19.1 million in 1997. This year, through June 13, 1997, we have
    received approximately 14.4 million electronically filed returns
    through paid preparers; this is a 19 percent increase over the previous
    year.
        During the 1997 filing season, almost 26 million taxpayers were
    eligible to file their tax returns with a phone call that takes less
    than ten minutes. By making TeleFile available to married taxpayers and
    taxpayers wanting direct deposit of their refunds, three million more
    taxpayers could use TeleFile this year. During the 1996 filing season--
    which was the first year of TeleFile's nationwide availability--the
    Service received 2.8 million TeleFile returns. As of June 13, 1997,
    almost 4.7 million have been received for this year. Starting in fiscal
    year 1994, taxpayers could file from their home computer through a
    third-party transmitter. In 1996, the IRS received over 158,000 returns
    that way, and as of June 13, 1997, 366,000 returns had been received.
    Also, last year, the IRS forwarded to these 31 states 3.2 million
    returns filed through its joint Fed/State electronic filing program. As
    of June 13, 1997, the IRS has forwarded 4.3 million returns to these 31
    states and to the District of Columbia. This represents a significant
    savings to taxpayers and to the states in this program.
        Electronic filing is not just limited to individuals. It is also
    available to businesses. Employers nationwide can now file their
    ``Employer's Quarterly Tax Return'' (Form 941) electronically. Almost
    363,000 of these returns were filed in this manner for 1996. A TeleFile
    option for the simpler Form 941 returns began testing on April 1, 1997,
    with nearly 900,000 eligible businesses in 14 states and the District
    of Columbia. As of May 12, 1997, almost 49,000 returns have been filed
    through this test program. Electronic filing offers advantages for
    taxpayers and for the IRS. One advantage is that taxpayer refunds are
    received sooner--an average of 21 days as opposed to 40 days for paper
    returns. The advantage for the IRS is the receipt of more accurate
    information more quickly.
        Electronic tax administration means more than just receiving
    returns electronically; it includes electronic payments as well. Most
    of the over 88 million taxpayers who will be entitled to refunds this
    year can have them directly deposited into their bank accounts.
    Taxpayers enjoy the safety and ease of direct deposit and the
    government saves the expense of printing and mailing checks. A change
    to the Form 1040 has made it even easier for taxpayers to request
    direct deposit this year. Last year, if a taxpayer wanted a refund
    deposited directly into a bank account, he or she had to submit a
    separate schedule. This year, a few extra lines on the Form 1040 will
    do it. As of June 6, 1997, in this filing season, we have had an
    increase of approximately 57 percent in the number of filers requesting
    direct deposit of their refunds.
        The TaxLink/Electronic Federal Tax Payment System (EFTPS), used by
    employers to pay employment and other depository taxes electronically,
    is faster, easier, and more accurate for tax collectors and taxpayers
    alike. In fiscal year 1996, more than $380 billion were deposited
    electronically through TaxLink, an increase over the $232 billion
    deposited in fiscal year 1995. Approximately 1.2 million businesses
    will be required to begin making deposits through EFTPS on July 1,
    1997. As of June 14, 1997, we have more than 1.1 million of the
    required taxpayers enrolled and almost 500,000 voluntary enrollments,
    and over $124 billion had been collected through the new EFTPS. The IRS
    has communicated extensively with banks, payroll companies, and
    practitioner groups--as well as with the taxpayers themselves--to
    enable a smooth July 1 implementation. We recently announced that the
    IRS will not impose penalties through December 31, 1997, on businesses
    that make timely deposits using paper federal tax deposit coupons while
    converting to the new electronic payment system. Under current law,
    taxpayers with more than $50,000 of federal employment tax deposits in
    1995 are required to enroll in the EFTPS and to deposit electronically
    by July 1, 1997. The additional 10 percent penalty for not depositing
    electronically will be waived through December 31, 1997. However,
    deposits must still be made on time even when paper coupons are used,
    in order to avoid a late deposit penalty. The IRS encourages businesses
    to use this additional time to get acquainted with EFTPS. Making EFTPS
    payments successfully will show businesses that they are correctly
    enrolled and that their payments can be processed without error.
        The IRS currently is working through the Treasury Modernization
    Management Board on ways to further expand electronic tax
    administration. That strategy anticipates that we will--
      --fully explore ways to make electronic filing more attractive to
            taxpayers;
      --leverage existing private and public sector infrastructure; and
      --aggressively partner with the private sector.
        In July we will submit, through a Request for Information (RFI) all
    interested parties' views and recommendations on the issues most
    crucial to develop a dynamic electronic tax administration program.
    Despite new electronic options, the number of paper tax returns remains
    large: the IRS processes over 190 million paper returns and documents
    each year. To address the continuing volume of paper returns, the IRS
    is pursuing the potential for outsourcing the processing of paper
    returns as was outlined in our January report. Based upon this input,
    and assuming that there is commercial interest, a Request for Proposal
    would be issued to obtain contractor bids. Risks are inherent in
    turning such a critical system over to an outside processor. Thus, the
    IRS has already begun the ongoing process of identifying specific risks
    and potential mitigation strategies as well as identifying ``inherently
    governmental'' functions in that process. Based upon the experience of
    other agencies in large scale outsourcing initiatives, the IRS
    estimates that it could be as many as four years before it could be
    ready for a pilot project on outsourcing paper returns processing. As
    this process proceeds, IRS will carefully review all steps forward to
    address concerns about privacy and scarcity of taxpayer information.
             fairness: ensuring all taxpayers pay the proper amount
        In addition to improving services to taxpayers, the Service has
    continued to improve its compliance operations. Taxpayers have an
    expectation that the system will treat them fairly. To most taxpayers
    that means they expect others to pay their correct amount of tax, and
    they expect the IRS to identify and deal with noncompliance.
        The fiscal year 1998 budget requests approximately the same number
    of employees in compliance as in the fiscal year 1997 budget. For the
    past four years, the IRS has improved the compliance program through
    earlier identification of noncompliance patterns, innovative uses of
    compliance tools, and improved procedures--such as the Market Segment
    Specialization Program, offers in compromise, and installment
    agreements. We expect to continue the emphasis on these up-front
    approaches.
        Collection. For the past three years, the collection yield has
    steadily increased. In fiscal year 1994, collection yield increased
    three percent; in fiscal year 1995, it increased more than seven
    percent; and in fiscal year 1996, it increased 19 percent. While some
    part of collection results will always be a reflection of the
    underlying economy, the 1995 and 1996 increases also reflect the
    additional collection personnel hired as part of the 1995 Compliance
    Initiative. The results also reflect the continued emphasis on early
    involvement with delinquent taxpayers. As a result of improvements in
    the Compliance Program and the Compliance Initiative, the revenue
    collected from compliance increased from $31.4 billion in 1995 to $38
    billion in 1996 (see Chart 4). We have consciously prioritized ``up
    front'' collection operations--notice and telephone calls--to deal more
    quickly and effectively with the tax debt. We also have made
    significant improvements in the rate at which examination personnel
    secure collection of agreed tax assessments. In 1996, 70 percent of
    agreed tax assessments were collected at the earliest possible time--
    the close of the examination.
        The Service has also expanded the use of an important tool--the
    installment agreement--to keep taxpayers in the system who cannot
    immediately pay all they owe. By increasing the authority we give to
    our front line personnel to accept installment agreements, installment
    collections have increased from $2.28 billion in fiscal year 1992 to $6
    billion in fiscal year 1996.
        The improvements made in the collection process not only helped
    increase the collection yield over the last several years, but they are
    also helping the IRS manage the accounts receivable inventory. In
    fiscal year 1995, the Integrated Collection System (ICS), which
    provides on-line access to current account information to revenue
    officers, was installed in two districts. In these two districts,
    productivity increased more than 30 percent, translating directly to
    additional tax collections ``in the bank.'' By February 18, 1997, ICS
    was operational in nine districts.
        Examination. In 1996, the Service closed over 2.1 million
    examinations and audit coverage was 1.63 percent--maintaining the
    accomplishments achieved in fiscal year 1995. Over 184,000
    determination letters were issued for exempt organizations and employee
    plans.
        The compliance program, however, is more than just delinquent
    accounts and traditional audits. The Service has continued to develop
    new compliance approaches. Through programs like Accelerated Issue
    Resolution (AIR) and Advance Pricing Agreements (APA's), the IRS is
    stressing early resolution of issues--a practice that can save all of
    the parties time and money. With AIR, the IRS can accelerate the
    collection of the largest corporate assessments by resolving recurring
    issues and simply carrying the resolution forward to future years--
    reducing the number of issues under examination. Under this procedure,
    taxpayers have agreed to pay about $1.1 billion between fiscal year
    1993 and fiscal year 1996.
        The APA program was developed as a new way to resolve intercompany
    pricing issues. As a cooperative process, both taxpayers and the
    government derive significant benefits. Taxpayers welcome certainty in
    a complex area and avoid a lengthy debate with the IRS. By the end of
    fiscal year 1996, the Service had entered into 79 APA's. Currently, 146
    APA's are in process.
        To address the noncompliance with underreporting of tip income, the
    IRS, working with industry representatives, developed the Tip Rate
    Determination Agreement (TRDA) and the Tip Reporting Alternative
    Commitment (TRAC). These two initiatives benefit both employers and
    employees. Employers benefit from not having significant unplanned tax
    liabilities assessed against them. Employees benefit from increased
    social security benefits, unemployment benefits, retirement plan
    contributions, and worker's compensation benefits. As of December 31,
    1996, the IRS had received over 3,100 TRAC agreements representing more
    than 21,000 establishments and more than 800 TRDA agreements with
    nearly 1,200 establishments. From tax year 1994 to 1995, tips reported
    have increased over $2 billion.
        Working with private industry, the Service is responding to the
    increased sophistication of transactions in the financial world and
    specialization in the business community. The IRS has cooperatively
    developed Market Segment Specialization Program guidelines, focusing on
    the practical problems of examining a market segment and identifying
    particular issues of interest to the IRS. (A market segment may be an
    industry such as construction or entertainment, a profession like
    attorneys or real estate agents, or an issue like passive activity
    losses.) In turn, taxpayers are better informed about the noncompliance
    in that market and about the IRS' position. Through May 1997, the
    Service issued 34 Market Segment guidelines. These guides are available
    to the public through the Government Printing Office and also on the
    IRS Home Page on the Internet.
        Last year, the IRS continued its efforts to address the problem of
    erroneous refund claims, one element of the filing fraud issue
    identified by GAO as an area of high risk for the IRS. The Service has
    contracted with the Los Alamos Labs for an anomaly detection program to
    help spot erroneous refund claims. The IRS also has continued and
    increased verifications, including increased checks of social security
    numbers. On the Electronic Return Filing System, there was a 25 percent
    reduction from fiscal year 1995 to fiscal year 1996 in the number of
    returns rejected because of missing, invalid, or duplicate uses of
    social security numbers. Similar validations were conducted on paper
    returns. In fiscal year 1996, these efforts prevented over $900 million
    in erroneous or fraudulent refunds from being issued.
        This past filing season, the IRS continued to refine the efforts to
    address refund fraud based on what was done last year. The Service is
    continuing to look carefully for suspicious returns and, under
    legislation enacted last year, can use a quicker, more efficient method
    to verify social security numbers as returns are processed.
        In addition to compliance activities in examination and collection,
    the IRS' Criminal Investigation (CI) Division investigates complex
    financial transactions of taxpayers, looking for criminal tax
    violations and money laundering. CI remains a major contributor to the
    Federal war on drugs by identifying, investigating, and assisting in
    prosecuting members of high-level drug trafficking and related
    enterprises and in dismantling their operations. CI is also actively
    identifying and investigating new and emerging areas of tax fraud that
    affect the economy and prey on honest citizens. These areas include
    bankruptcy, health care, insurance, motor fuels excise taxes, non-
    traditional organized crime, and telemarketing. Last year, CI increased
    the number of investigations started in traditional criminal tax
    violations by 14 percent; money laundering investigations increased by
    eight percent; and bankruptcy investigations increased 58 percent.
                            iii. information systems
        Over the past several years, this Subcommittee, as well as other
    Congressional committees, have focused on IRS' efforts to develop,
    implement, and manage its technology modernization projects--
    collectively referred to as Tax Systems Modernization.
        Because technology modernization is so important to the business of
    tax administration now and in the future, the Service has been working
    closely with Congress for the past year on this issue. The IRS has made
    progress in addressing the concerns and criticisms of the technology
    modernization efforts. However, the Service recognizes that there is
    more work to be done to meet the challenges of updating technology to
    better serve the American taxpayers.
        Efforts to improve the management of IRS' technology investments
    have benefited from this oversight, and Tax Systems Modernization
    remains a high priority for the IRS. The Service has made progress in
    the past year within Information Systems on modernization efforts in
    developing an architecture for modernization and in establishing a
    process for making intelligent investment choices. The fiscal year 1998
    budget proposal is designed to let the IRS continue these efforts.
        Maintaining the Legacy Systems. One accomplishment that often goes
    unheralded is the IRS' successful delivery of a tax filing season each
    year. A key factor in delivering a successful filing season is the
    group of conscientious employees in the Information Systems
    organization who continue to update the legacy systems, develop new
    computer programs to comply with legislative mandates, and manage a
    complex array of technologies.
        Year 2000 Conversion. The most immediate challenge is the massive
    century date conversion project--the Year 2000 conversion. This
    challenge is not unique to IRS and much has been recently reported in
    various media about the magnitude of this problem. Most legacy systems
    are programmed to display ``00'' in the year fields, so that beginning
    on January 1, 2000, date-based calculations will be based
    unintentionally on an interpretation of the year field as 1900. Failure
    to identify, recode, and retest each of these date-based fields could
    result in the generation of erroneous tax notices, refunds, bills,
    interest calculations, taxpayer account adjustments, accounting
    transactions, and financial reporting errors. Put another way--such a
    failure could significantly burden the over 200 million taxpayers and
    IRS resources and jeopardize IRS' ability to carry out its mission.
    This conversion not only is vital to IRS but also to other
    organizations with which the IRS shares data, such as the Social
    Security Administration, Federal Reserve Banks, and most of the states.
        To date, the Service has identified 62 million lines of computer
    code in the corporate systems that must be analyzed. The effort to make
    needed changes may exceed 2000 work years of effort on the part of both
    the IRS and its contractors to ensure these critical systems are
    century date compliant by January 1, 1999. The IRS also is aggressively
    completing the inventory of field based applications, which may require
    the review of an additional 40 million lines of computer code. In
    addition, the IRS is actively reviewing all commercial off-the-shelf
    software and hardware to either replace or upgrade to ensure
    compliance.
        With the support of Congress through a $45 million fiscal year 1997
    appropriation, the IRS has mounted a massive effort to ensure its
    systems become century date compliant. Given the broad scope of the
    Year 2000 Conversion, the Service also is diverting significant
    existing information systems resources to the project, deferring all
    but critical and legislatively mandated legacy systems changes during
    fiscal year 1997.
        In fiscal year 1998, the IRS is planning a further expansion of the
    project and, therefore, has requested a total of $84 million. The IRS'
    Chief Information Officer is currently leading an extensive effort to
    identify and cost the corrective actions that will need to be taken. If
    the resource requirements change upon completion of the field-based
    applications inventory, updated information will promptly be provided
    to the Subcommittee.
        To build the infrastructure for modernization and ensure that the
    Service's mainframe computers and supporting communications, network
    and customer service terminals are Year 2000 compliant, the Service has
    proposed consolidating its 67 mainframe computers at 12 sites to 12
    computers at two sites. This effort is consistent with a recent OMB
    directive to consolidate data centers and with the modernization
    architecture. It will also address many of the Service's operational
    concerns as well as provide the backbone for the Service's efforts to
    improve customer service.
        Management Processes and Practices. The Service has made
    significant progress towards improving the management processes and
    best practices that are requisite to managing the size and scope of
    IRS' modernization efforts. Specifically, the Service has focused
    fiscal year 1997 resources on the development of the program
    infrastructure--systems architecture and systems life cycle--needed to
    undertake major modernization efforts. The IRS adopted a Systems Life
    Cycle that provides the policies and processes needed to manage systems
    development efforts. The Systems Life Cycle is consistent with industry
    practice, thereby underscoring the commitment to shift significant
    aspects of the technology modernization efforts to contractors. The
    Service has completed a modernization blueprint, including the
    architecture, which identifies critical business requirements and
    provides for a sequenced rollout of modernization projects based on
    prioritized business needs.
        Advancing Modernization. The IRS has also put in place an
    investment review discipline to assess and prioritize information
    systems investments, monitor progress of spending against plans, and
    evaluate the results of those investments. The IRS Investment Review
    Board (IRB) has reviewed all ongoing technology development projects.
    Projects that failed to demonstrate significant business value or
    comply with best practices for disciplined systems development have
    been suspended. To date, the IRB has suspended the Document Processing
    System, Corporate Accounts Processing System, Workload Management
    System, and Integrated Case Processing System, resulting in significant
    future cost avoidance. The IRB also is overseeing the reallocation of
    resources from these projects to higher priority investments, in
    accordance with the principles of the Information Technology Management
    Reform Act.
        Last year, Art Gross was selected as the IRS Chief Information
    Officer. Art has significant technical management expertise and an
    excellent grasp of the tax ``business.'' This year, the Service has
    continued to strengthen its information technology management
    capabilities with the appointment of the new Director of the Government
    Program Management Office (GPMO), who is an experienced systems
    development program management executive from the New York State
    Department of Taxation and Finance, and a new Director of the Systems
    Standards and Evaluation Office (SSE), who was formerly with the GAO
    and has extensive experience in the development of systems life cycle
    standards, policies and procedures, and information technology program
    evaluation and oversight.
        The IRS recently initiated an aggressive, nationwide recruitment
    program for well-qualified individuals to fill approximately fifteen
    executive and senior management positions to enable the IRS to
    strengthen and improve its overall management of modernization efforts,
    including management of contractors.
        One measure of the effectiveness of an information technology
    organization is the comprehensiveness of its product assurance program.
    Between 1992 and 1996, IRS' Information Systems organization downsized
    by over 2,000 positions, with a disproportionate reduction in the
    product assurance program. In the product assurance program, resource
    levels sank to less than 30 percent of the industry standard.
    Accordingly, in 1997, the IRS is undertaking a major rebuilding of this
    program to mitigate systems acceptance testing deficiencies that have
    prevented the thorough testing and certifying of principal IRS
    operating systems.
        At the same time, the IRS continues to transfer significant aspects
    of the technology modernization program to the private sector. The
    December 1, 1996, report to Congress documents the modernization
    program resource allocation; 64 percent of it is provided by the
    private sector. The largest and most important initiative for fiscal
    year 1997 was the contract recently awarded to develop, pilot, and
    implement the submissions processing manual data entry systems
    replacement. The IRS also is in the process of competitively acquiring
    a Systems Engineering and Technical Assistance (SETA) contractor to
    provide technical, program, and project management guidance to the
    modernization effort. Pursuant to the fiscal year 1997 Treasury
    appropriation, the Treasury Modernization Management Board is
    conducting the preparation of a Request for Proposal for a prime
    contractor to manage, integrate, test and implement the program.
        The IRS has completed its strategic modernization plan, which
    integrates implementation schedules and establishes completion dates
    for each of the major components of the plan. The major components are
    (1) a Modernization Blueprint, which focuses on rebuilding the
    corporate data bases to enable customer service taxpayer account
    resolution and improved compliance; (2) a procurement strategy to shift
    primary responsibility for systems development and integration to the
    private sector; and (3) linkages among the short-term legacy and
    operational systems enhancements, the Year 2000 project, and the
    longer-term modernization sequencing plan. The modernization plan was
    submitted, as required, to Congress in May 1997.
        Downsizing. Significant progress is being made toward the Year 2000
    Conversion and implementing the program infrastructure needed to
    undertake major modernization efforts. However, the IRS also needs to
    manage a nearly 10 percent downsizing of the Information Systems
    program staffing levels during fiscal year 1997. The fiscal year 1998
    budget provides for a further downsizing of 736 FTE's. While this
    downsizing plan reflects the intention to shift additional elements of
    modernization to the private sector, this additional staff reduction
    must be carefully managed, given the importance and magnitude of the
    Year 2000 conversion and the number and the critical nature of
    initiatives that are underway in addition to modernization.
        Security of IRS Information. The IRS has long understood that
    protecting taxpayer information is essential to maintaining our
    country's self-assessment tax system. We also know that our security
    and privacy programs need to be strengthened, so that the Service has
    integrated and consistent safeguards in place to adequately ensure (1)
    the privacy and security of taxpayer account information; (2)
    continuity of its operations; and (3) security of the infrastructure
    for modernized systems.
        One taxpayer security area of particular concern to this
    Subcommittee and to us is the unauthorized access to taxpayer data by
    IRS employees--or ``browsing.'' The IRS does not tolerate browsing. We
    consistently stress both within and outside the IRS that unauthorized
    access of taxpayer accounts by IRS employees will not be tolerated.
        In the past several years, the IRS has taken a number of steps to
    ensure that unauthorized access of taxpayer information by IRS
    employees does not occur. It recently has taken action to further
    improve its processes and approach to better deal with unauthorized
    access to taxpayer records. The Service has a legal requirement to
    protect taxpayer records. The IRS review initiated a number of new
    actions aimed at improving deterrence, prevention, detection, and
    penalties. For example, in the area of detection, the IRS is
    centralizing case development for unauthorized access in its Office of
    the Chief Inspector to give it the high-priority attention that is
    needed to deal with such violations.
        In addition to the internal actions, the IRS has recommended and
    supported legislative efforts to amend the Internal Revenue Code and
    Title 18 to clarify the criminal sanctions for unauthorized computer
    access to taxpayer information.
     iv. using the fiscal year 1998 budget to achieve irs' strategic goals
        The IRS is one of the early federal agencies to use an integrated
    Strategic Management Process, one in which planning, budgeting,
    investment, performance measurement, and program evaluation processes
    are integrated. The IRS developed its strategic management process
    after consulting with other public and private sector organizations.
    The Service uses performance indicators to monitor progress during the
    year, to make mid-course adjustments to optimize performance, and to
    evaluate performance at the end of the year. In the fiscal year 1997
    budget request, the Service included outcome-oriented performance
    indicators rather than the traditional workload output measures. For
    fiscal year 1998, the Service refined these performance measures and
    used them to evaluate its program choices (see Appendix). Setting long-
    term goals and annual targets, managing activities to achieve those
    goals and targets, measuring performance annually, and holding people
    accountable will help improve tax administration. It will also help the
    IRS and Congress make more informed budget decisions about balancing
    resources across these objectives.
        Fiscal Year 1998 Increases. The fiscal year 1998 IRS budget totals
    $7.369 billion and 102,385 FTE. It includes gross increases of $308
    million and 195 FTE, amounts which are reduced by $143 million and 736
    FTE. This produces a net increase of $165 million and a net reduction
    of 541 FTE from the fiscal year 1997 operating level (See Charts 5 and
    6). Also, an Information Technology Investment Account has been
    proposed to respond to the requirements of the Federal Acquisition
    Streamlining Act of 1994 and the Information Technology Management
    Reform Act of 1996.
        The $308 million increase has been requested to permit the Service
    to do the following: (1) maintain current service levels; (2) fund
    critical operational information systems needs; and (3) fund a very
    modest increase for Criminal Investigation to detect overseas money
    laundering. The $143 million in program reductions includes $113
    million from Information Systems and $30 million from rent.
      --Maintaining Current Service Levels. The Service needs a $214
            million increase to fund mandatory pay increases and to
            maintain fiscal year 1997 program levels in fiscal year 1998.
            Without this increase, the Service would have to reduce the
            number of employees and the programs they deliver as well as
            further erode funds for essential training, travel, and
            enforcement expenses.
      --Funding Critical Operational Information Systems Needs. The Service
            is requesting a $93 million increase for Information Systems
            investments to finance immediate improvements in taxpayer
            services. Much of this increase will be used for Year 2000
            Conversion efforts. However, a portion will be used to test
            programming changes for major information systems; to replace
            vital but aging Service Center computers used to process
            remittances and input data from tax returns; and to replace
            some of the laptop computers we use to examine individual and
            business returns.
      --Deterring Money Laundering. The Service is requesting a $1 million
            increase to combat overseas money laundering. Many governments
            are considering, or have adopted, laws to criminalize money
            laundering and other financial crimes. The globalization of
            financial markets and the U.S. economy, and criminal
            organizations' increased sophistication at concealing illicit
            gains, have created an environment that requires the expertise
            of IRS special agents. This includes facilitating the
            development and utilization of information obtained in host
            foreign countries in support of criminal investigations over
            which the Service has law enforcement responsibility and
            providing assistance and support in establishing or enhancing
            money laundering, criminal tax, and asset forfeiture laws. This
            international strategy is critical for effective law
            enforcement against money laundering, criminal tax and other
            financial crimes which no longer are limited by their
            geographic boundaries.
        As a labor intensive organization (over 70 percent of our total
    budget goes for labor costs) funding for the pay raises and other non-
    discretionary inflationary costs is crucial. For example, a
    ``rollover'' budget in fiscal year 1998--one that is at the same dollar
    level as fiscal year 1997--would not allow us to both fund the pay
    raise and maintain FTE levels. Instead, IRS would need to reduce 4,000
    FTE and this would impact levels of assistance and revenue collection.
    Looking at the IRS budget over the next five years (fiscal year 1998 to
    fiscal year 2002), if the Service receives each year approximately the
    same dollars as today, it would in effect be taking a $1 billion cut in
    ``purchasing power.'' To pay for this reduction, IRS would need to
    reduce its FTE by approximately 4,000 FTE per year for a total loss of
    FTE Servicewide of about 20,000. This reduction would need to be taken
    across the board and would impact all of the Service's programs.
    Modernization offers the potential to increase productivity and reduce
    the impact of FTE reductions but modernization investments need to be
    fully deployed before long term productivity benefits can be realized.
                    v. improvements in financial management
        The GAO had listed five financial management problems as major
    contributors to the failure of the IRS to receive a clean financial
    audit opinion--two related to the administrative area and three to the
    revenue area. IRS has made significant progress toward correcting these
    five major findings.
        1. Amounts reported as appropriations available for expenditure for
    operations cannot be reconciled fully with Treasury's central
    accounting records. IRS has worked with GAO to bring this issue to
    resolution. As of fiscal year 1996, the reconciliations are current and
    there is an automated mechanism in place to ensure that these balances
    are reconciled monthly.
        2. A significant portion of IRS' reported $3 billion in non-payroll
    operating expenses cannot be verified. The IRS can and does have
    acceptable and auditable records to verify commercial vendor payments.
    The $3 billion in non-payroll operating expenses could not be verified
    because of the interagency payments included in GAO's sample. Within
    this sample were interagency payments for which they questioned whether
    the IRS had support showing receipt and acceptance from other federal
    agencies, primarily GPO and the General Services Administration.
        The interagency payment problem deals with a receipt and acceptance
    issue related to goods and services received from other federal
    agencies paid via the government's Online Payment and Collection
    system. Because they identified these transactions as exceptions, they
    concluded that their testing (review of supporting documentation) of
    the non-payroll expenditures could not be projected to the universe of
    $3 billion; therefore, they could not verify the non-payroll
    expenditures.
        The IRS has been working closely with GAO to define the problem
    areas and to propose interim and long-term solutions to the receipt and
    acceptance issues.
        3. The amounts of total revenue and tax refunds cannot be verified
    or reconciled to accounting records maintained for individual
    taxpayers. The IRS is now using individual taxpayer records to prepare
    financial statements and to ensure that the auditors can verify and
    reconcile the total revenue and tax refunds to the accounting records
    maintained for individual taxpayers. This is being done until such time
    as longer term systems solutions can be implemented.
        4. Amounts reported for various types of taxes collected (social
    security, income, and excise tax, for example) cannot be substantiated.
    In preparing the fiscal year 1995 and fiscal year 1996 financial
    statements, the IRS made great progress in developing methods to
    substantiate the revenue collected. For Social Security, the IRS
    developed an extract that enables it to report and match assessment and
    collection information. As stated earlier, the IRS is also using the
    Masterfile to provide all detailed transactions to support income tax
    collected. In providing excise tax information, the IRS will continue
    to analyze monies assessed and collected to determine if there are
    significant differences. Additionally, the IRS is developing
    programming that will enable it to have detailed assessment and
    collection information as it does with Social Security.
        5. The reliability of reported estimates for $113 billion in
    accounts receivable and $46 billion for collectible receivables cannot
    be determined. During the fiscal year 1995 audit, initial testing by
    GAO resulted in its conclusion that the Service's program that
    classified receivables as financial receivables, financial write-offs,
    and compliance assessments was flawed. Based on a review of cases this
    year to determine the validity of our categorizations, GAO has
    indicated that the systemic process is accurately segmenting our
    portfolio of receivables. GAO's next step is to review the supporting
    source documentation for the selected cases to verify they are
    accurate. The Service is in the process of building the ARDI Expert
    System, a centralized data base that allows analyses to be performed on
    the entire inventory using all of the existing information.
        Status of 59 Recommendations. The GAO has made 59 recommendations
    through their financial statement audits for the last four fiscal
    years. Of the 59 recommendations, the IRS and GAO agree that the IRS
    has implemented 22 of them. Of the remaining 37, the IRS believes it
    has met the requirements on an additional 23. The Service is working
    with GAO to get agreement before actually closing these items. Of the
    remaining 14, 9 are scheduled to be completed by the end of the fiscal
    year; and five have completion dates beyond fiscal year 1997. The IRS
    is committed to working with GAO to resolve these recommendations and
    believes that through mutual cooperation and effort this goal will be
    achieved.
                               vi. reorganization
        Beginning in 1993, the IRS announced the first of a series of
    reorganizations designed to streamline operations and reduce costs--a
    process that continues today. These carefully considered efforts,
    conceived and undertaken well before IRS appropriations were reduced in
    fiscal year 1996, were done in recognition that the IRS should
    concentrate the maximum amount of its resources on effectively and
    efficiently meeting customer needs. Prior to these organizational
    studies, the IRS organization had been relatively unchanged for forty-
    plus years.
        The National Office has been reduced in size; three regional
    offices have been closed; 63 district headquarters have been
    consolidated into 33; 80 administrative support offices have been
    consolidated into 23; and 70 customer service sites have been reduced
    to 30, and ultimately will be consolidated and centralized to 24.
    Taxpayer assistance levels and problem resolution service have been
    improved over the past year. Consolidating offices and centralizing
    operations reduces or avoids redundant infrastructure costs, such as
    space, telecommunications, toll-free call distribution systems, and
    management overhead, thus allowing the Service to devote more resources
    to service to taxpayers. When the district and headquarters
    reorganizations are completed this fall, the IRS estimates that almost
    2,900 overhead positions will have been eliminated.
        For almost three years, the IRS, working with the National Treasury
    Employees Union (NTEU), has used a variety of voluntary transition
    tools to move employees into the new, streamlined organizational
    designed. In October 1996, the IRS and NTEU signed a Pre-Reduction In
    Force (RIF) Activities Agreement which provided buyouts, outplacement
    assistance, and moving expenses for affected employees. As a result of
    this agreement, and with the approval of Congress, almost 1,300
    employees accepted buyouts. These were either employees in non-
    continuing positions, or those who occupied a position that created a
    placement opportunity for an employee in a non-continuing position.
        In May 1997, the IRS and NTEU signed a third amendment to the
    original Pre-RIF Agreement which provides additional placement
    assistance. The IRS is hopeful that this amendment will also help
    reduce the number of employees who might be involuntarily separated as
    a result of RIF later this summer. However, despite the Service's
    extensive voluntary efforts, there are still in excess of 1,100
    employees who have not been placed into continuing positions.
        The IRS and NTEU reached impasse concerning the procedures to be
    used for implementing the RIF, and resolution of the disagreement has
    been referred to the Federal Services Impasses Panel (FSIP). A hearing
    will be held before the panel July 8-10, 1997, and the IRS is hopeful
    for a decision shortly. The Service's inability to finalize its
    reorganization has caused a significant imbalance between workload and
    people. IRS has begun local negotiations on moving work, and certain
    critical vacancies have been filled in the continuing district
    headquarters (within funding limitations). However, until such time as
    the savings becomes available from the reorganization, the IRS will not
    be able to fully realize the efficiencies envisioned in its
    reorganizations. The IRS is currently placing employees in continuing
    positions and will know within the next month or so how extensive a RIF
    will have to be. After that, and once a decision is issued by the FSIP,
    the Service will move forward to separate employees. I know there is
    continuing interest in this matter by the Subcommittee and the IRS will
    continue to keep you informed about how it is proceeding.
                                vii. conclusion
        My colleagues and I appreciate the opportunity to present this
    testimony. The IRS is committed to achieving its mission in a way that
    provides the information and assistance required by our citizens and at
    the same time reinforces the overall fairness of the tax system by
    seeing to it that all of us pay our correct share of taxes. Under the
    most stable of circumstances this is a challenging responsibility. The
    testimony has highlighted some of the most important advances that we
    have made and also pointed out the many areas that still require
    improvement. The Service appreciates the consistent interest and
    support of this Subcommittee and its staff and we look forward to a
    continuing strong relationship.
                                    appendix

              Current IRS performance measures for fiscal year 1998

                                                                 Fiscal year
                    Budget level measures--Draft                     1998
                                                                   targets

                           Mission Level

    Mission Effectiveness Indicator: Total Net Revenue--
     (Budget+Burden)Total True Tax Liability (percent).         79.9

                Objective--Increase Compliance (IC)

    Total Collection Percentage................................         87.3
    Total Net Revenue Collected (in trillions).................        $1.57
    Servicewide Enforcement Revenue Collected (in billions)....        $35.2

             Objective--Improve Customer Service (ICS)

    Taxpayer Burden Cost (in dollars) for IRS to Collect $100..        $8.06
    Initial Contact Resolution Rate............................          TBD
    Toll-Free Level of Access (percent)........................         60.2
    Tax Law Accuracy Rate for Taxpayer Inquiries (percent).....           92

               Objective--Increase Productivity (IP)

    Budget Cost to Collect $100................................        $0.47
     Customers Successfully Served per Dollars Expended (in
     Customer Service Organization)............................          TBD
    Percent of Returns Filed Electronically....................         17.5
    Percent of Dollars Received Electronically.................         48.4
    Percent of Remaining Dollars Received Via Third Party
     Processors (Lockbox)......................................         66.3
    Support Services Performance Index.........................      $11,718

                Budget Activity Code (BAC) Measures

    Submission Processing BAC:
        Number of Primary Returns Processed (in thousands).....      203,829
        Total Number of Individual Refunds Issued (in millions)           88
        Processing Accuracy Rate--Paper (percent)..............           95
        Processing Accuracy Rate--Electronic Filing (percent)..           99
        Refund Timeliness--Paper (in days).....................           40
        Refund Timeliness--ELF (in days).......................           21
    Telephone and Correspondence BAC:
        Dollars Collected per Dollars Expended (in Customer
         Service Organization).................................          N/A
        Taxpayers Gaining Access as a Percentage of Demand (in
         Customer Service Organization)........................          N/A
        Number of Calls Answered (in millions).................        111.4
        ACS Dollars Collected per FTE (in millions)............         $1.4
        Service Center (Examination) Dollars Recommended per
         FTE...................................................     $480,000
        Problem Resolution Program Average Processing Time To
         Close Cases--District Office (in days)................         35.8
        Problem Resolution Program Average Processing Time To
         Close Cases--Service Center (in days).................         30.3
        Problem Resolution Program Quality Customer Service
         Rate--Districts (percent).............................         89.4
        Problem Resolution Program Quality Customer Service
         Rate--Service Centers (percent).......................         84.5
        Currency of Problem Resolution Program Inventory--
         Districts (in days)...................................        109.4
        Currency of Problem Resolution Program Inventory--
         Service Centers (in days).............................         77.6
    Document Matching BAC: Document Matching Dollars Assessed
     (in billions).............................................         $1.2
    Inspection BAC:
        Internal Audit Corrective Actions Completed (percent)..         66.3
        Criminal Cases Generating Prosecutions, Management
         Adjudications and Employee Protection Actions
         (percent).............................................         58.3
        Background Investigations Completed Timely (percent)...         82.6
        Corrective Actions Proposed, Investigations Closed and
         Employee Integrity Presentations Per FTE..............         8.33
        Usefulness of Inspection Products to Customers.........          3.0
    Management Services BAC: Support Services Overall
     Performance Index (percent)...............................            3
    Rent and Utilities BAC: Office Space per Employee (sq. ft.)          164
    Criminal lnvestigation BAC:
        Fraud Convictions......................................        1,756
        Narcotics Convictions..................................          656
    Examination BAC:
        Field Examination Dollars Recommended (in billions)....       $22.83
        Field Examination Dollars Recommended per FTE..........   $1,008,348
        Audit Coverage (percent)...............................          .57
        Appeals Non-docketed Cycle Time (days).................          238
        Appeals Staff Days per Disposal........................         2.14
    Collection BAC:
        Field Collection Dollars Collected (in billions).......        $5.87
        Field Collection Dollars Collected per FTE.............     $542,000
        Field Collection Average Cycles Per TDA/TDI Disposition         34.9
    EP/EO BAC:
        EP Determination Letter Cycle Time (days)..............          150
        EO Determination Letter Cycle Time (days)..............           87
        EP Examination Cycle Time (days).......................          TBD
        EO Examination Cycle Time (days).......................          TBD
    Statistics of Income BAC:
        Percent of Statistics of Income Projects Delivered on
         Time..................................................           90
        Statistics of Income--Quality Customer Service Rate
         (percent).............................................           90
    Chief Counsel BAC:
        Technical Advice and Service Assistance................           51
        Private Letter Rulings and Advance Pricing Agreements..           51
        Regulations, Revenue Rulings & Procedures, and
         Legislation (completions).............................            7
        Docketed Tax Court Litigation Closures.................           63
        Counsel Bankruptcy Closures............................          231
        Counsel Litigation and Advisory Support................          216
    Operational Information Systems BAC:
        Integrated Data Retrieval System (IDRS) Real Time
         Availability (percent)................................         99.0
        Weekend Taxpayer Information File (TIF) Update
         Completion Times (percent)............................         85.6
        Corporate Files On-line (CFOL) Availability (percent)..         99.0
    Developmental Information Systems BAC: None................           NA

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                         Computer Modernization Efforts

        Senator Campbell. It is my understanding that you will be
    testifying and other folks of the panel will be for questions.
    Let me just start by saying that I have a number of questions,
    some of them pretty technical, dealing with the year 2000
    issue, the Y2K issue. I have about six or seven questions in
    that area. Those I would like to submit and ask you to return
    the answers to the committee if you would, and just ask you a
    few general ones here.
        We have all heard reports that the IRS has wasted $4
    billion on computer modernization efforts over the past 10
    years. I think the committee understands the need for
    modernization and certainly supports the IRS in that effort.
    This subcommittee is going to be very reluctant to waste
    another $4 billion of taxpayers' money. You have mentioned a
    number of things like simplification reports to Congress and
    not being supportive of the commission that Senator Kerrey
    recommended.
        I would like to ask you, how are you going to assure that
    this time around, the money that we appropriate for
    modernization is going to be spent in a better fashion than it
    was the last time?

                          New Modernization Management

        Mr. Summers. Let me give a very brief answer if I could and
    then refer the question to Mr. Gross who has that
    responsibility. There is new management over the modernization
    program, a new Commissioner who has experience in this area, a
    Chief Information Officer who has done it successfully. Other
    senior executives previously associated with the program are no
    longer associated with the program.
        A new approach is being taken. That approach is based on
    only investing in the context of an architecture with a clear
    signoff by a tough-minded review board. It is based on an
    approach, in a sense, that involves planning before you build
    rather than building before you plan.
        It is based on the IRS no longer seeking to be its own
    systems integrator; but instead, going to the outside through a
    prime contractor mechanism and getting the expertise done by
    people who have done this kind of work before.
        By taking--and it is based on proceeding in small,
    measurable steps rather than in large steps where you cannot
    monitor performance for a period of several years. That is what
    the best practice in the private sector is. The person who is
    really doing it and who has prepared the architecture to date
    is Art Gross, so I might ask him to comment.
        Senator Campbell. Go ahead, Mr. Gross.
        Mr. Gross. Thank you, Mr. Chairman. All of the elements
    that Deputy Secretary Summers reported are precisely the
    elements required to go forward. In addition, as GAO reported,
    there are major process and practice deficiencies within the
    Internal Revenue Service with respect to our ability to build
    systems today.

                              GAO Recommendations

        For that reason, we do not plan to begin modernization
    until fiscal year 1999, and in the interregnum, we are in the
    process of implementing the recommendations that, in fact, GAO
    has reported. We agree with those recommendations.
        We have implemented several of those elements, including
    the issuance of an architecture, the issuance of a sequencing
    plan, the completion of an integrated test and control
    facility, and there are several other elements in play and
    underway to significantly mitigate those material weaknesses.
        Senator Campbell. I see. I do not know if you were in the
    room when Senator Faircloth was asking some questions or when
    Senator Shelby did, but I think they reflect the feeling of
    some of the members of the committee, in fact, maybe all of us,
    that we are having trouble determining a number of things in
    the IRS.
        One is, who is the person held responsible for IRS
    performance? I mean, we hear comments from the GAO and so on,
    but I know we just recently finished a hearing a couple months
    ago on browsing, and at that time, I was having problems
    finding out who the heck was responsible for reprimanding, for
    firing, for doing any number of things that should have been
    done and we found out people were just going through records
    with no authority to do so.
        Perhaps you could tell us that. Do you feel that you are
    the one who is going to be accountable for the performance or
    the lack of, as it moves down the line, Mr. Summers?
        Mr. Summers. The Secretary and I take responsibility for
    everything that happens at the Treasury Department.
        Senator Campbell. You also determine the direction the IRS
    takes along with the Secretary accepting the responsibility for
    that activity?
        Mr. Summers. The Secretary and I accept responsibility for
    the direction the IRS takes and for the top management choices
    at the IRS. The Secretary and I, in turn, hold the Commissioner
    of the IRS or, at this point, the Acting Commissioner of the
    IRS, accountable for performance of the organization and we
    expect the Commissioner, in turn, to hold their key
    subordinates accountable for performance in their specific
    areas.
        I think that is the only way to manage an organization and
    this is really something that we see as a central aspect. The
    Secretary has, I think, said many times that it would be
    easier, from his point of view, not to accept this kind of
    accountability, but we believe that if we are to have the best
    chance of success, it is crucial that the senior management of
    the department, directly in turn responsible to the President,
    be accountable for IRS performance.
        We would be very concerned about the proposals that would
    undercut that accountability by turning management over to a
    group whose primary loyalty and primary obligation was to their
    own private executive careers. We are prepared to accept that
    accountability.

                            Private Debt Collection

        Senator Campbell. In the fiscal year 1997 bill, this
    subcommittee funded a private debt collection project which was
    to do a pilot allowing the private sector to collect on
    accounts that the IRS considered uncollectible.
        There has been some concern expressed by the private sector
    that the pilot was set up to fail. I mentioned this earlier
    today, before you came in, with another panel. Could you give
    us a status report on that private debt collection, on the
    pilot for it? Mr. Dolan?
        Mr. Dolan. If I might, Mr. Chairman? I was here when you
    expressed interest earlier in the day. Essentially, I was a
    little disappointed by the characterization by the GAO because
    it is not quite on point with what I thought we had understood
    when we dealt with them face to face.
        The inference left was that there was something about the
    test and the way it was created that caused it to fail. Quite
    the contrary, I think what was tested were some propositions
    that the Congress asked us to test, which was essentially that
    there are some accounts that we do not get through today that
    are not determined, either because they are not locatable or
    because they are of a low dollar value.
        The hope was that we would experiment in an area that was
    considered not inherently governmental, and what turned out to
    be the crux of this, Mr. Chairman, was the contractor is unable
    to do the kinds of things that Senator Faircloth was talking
    about, by law.
        It was unable to seize, to levy, to do those sorts of
    things. And given the legal constraints of that understanding,
    I think the contract has not proven to be, essentially, a good
    business decision because the yield has been barely equivalent
    to the actual amount the Government has paid out.

                       Small Business in Colorado Springs

        Senator Campbell. OK. Thanks. Let me turn to a personal
    problem of a constituent. I have a constituent--she has moved
    to Albuquerque now, but she was in Colorado Springs for a
    number of years and had a small business there, by the name of
    Carol Ward.
        She went to court, as you know--or maybe you do not know--
    perhaps you can review that if you do not know the
    circumstances. But according to some of the reports,
    particularly in our major newspaper in Colorado, the Denver
    Post, she made some comments to her auditor that the IRS felt
    threatened from or became angry about and her business was
    raided and locked up for owing $324,000 after that.
        Obviously, she did not settle for that. She hired an
    attorney and took it to a judge and the judge in Denver found
    the IRS agents were grossly negligent, and that they acted in a
    reckless disregard for the law, according to the article in the
    Post.
        They then awarded her a judgment of--I forgot what it was
    now. I think about $250,000 or something. It was a pretty large
    judgment. But in the meantime, they confiscated her property,
    they locked up her building, her daughter ended up quitting
    high school because the IRS statements were posted in the
    stores around. That led students to believe that the family was
    somehow involved in some kind of illicit drug smuggling.
        She did not owe any debts before this big problem was
    caused, and by the time the IRS finished with her, she owed
    $75,000 of private debts because her store was boarded up. The
    comments she made to the IRS were the kind that anybody
    probably would have made if they felt harassed.
        She said, and I want to quote this, when she accompanies
    her son to one audit after a rather rancorous meeting, she told
    the auditor, ``Honey, from what I can see of your accounting
    skills, the country would be better served if you were dishing
    out chicken fried steak on some interstate in West Texas with
    all that clunky jewelry and big hair.'' And that apparently
    really angered the person doing the audit and she got in a lot
    of trouble after that. The judge, of course, straightened that
    all out, but she is still out of business.
        I would like to know a couple of things. First of all, do
    the IRS employees receive training in law and policy in this
    area?
        Mr. Dolan. Yes, Senator, they do.
        Senator Campbell. What disciplinary action was taken as a
    result of that incident--by the way, the IRS admitted no
    wrongdoing. The judge said they did and they awarded her a
    monetary settlement. But the IRS never admitted wrongdoing. But
    has there been any disciplinary action taken because of this
    incident?

                       Small Business in Colorado Springs

        Mr. Dolan. Senator, if you would permit me, I would like to
    give you a careful answer on this because the decision you talk
    about, the district court decision is, in fact, a court
    decision that deals exclusively with whether the disclosures
    that were made in the particular taxpayer's case were ones that
    were actionable.
        The district court case did not, at any point, deal with
    the merits of the underlying tax issue, but the reason I am
    saying I want to be careful about this is that I do not want
    to, in this forum, breach any of the confidentiality around the
    taxpayer. So as a consequence, I cannot and will not talk about
    the underlying tax circumstances that the taxpayer confronted
    or how we might have dealt with that.
        I will tell you, Senator, that I read the decision, the
    district court decision very carefully the day after it was
    issued. There were a number of allegations that the plaintiff
    took to the court. All of those allegations are dealt with by
    the court, all of them centering around some aspect or another.
        There was a finding of wrongdoing and if that finding
    indeed turns out to be factual, if the finding of what the
    revenue officer did----
        Senator Campbell. This is an internal investigation?
        Mr. Dolan. Where we are right now, Senator, is between the
    point of consulting with the Justice Department on whether or
    not there will be an appeal of the decision. Once that judgment
    is made----
        Senator Campbell. When do you expect that judgment?
        Mr. Dolan. If you would allow me to come back to you with
    the specific timeframe?
        Senator Campbell. Yes.
        Mr. Dolan. And what I will do, subsequent to that judgment,
    is look particularly at the one employee's conduct that was the
    basis for the punitive damages that were awarded in this case.
        Senator Campbell. OK. I would appreciate it if you would
    get back to me on that. Senator Kohl.

                            Reduction of IRS Funding

        Senator Kohl. Mr. Summers, GAO said that we ought to send
    the IRS a message by reducing their funding. Do you have any
    thoughts on that?
        Mr. Summers. Senator, it will not surprise you if I tell
    you that I would not recommend that course of action, and I
    would not recommend it for three reasons.
        First, I think the IRS has gotten the message from a 10-
    percent real reduction in funding that it has received over the
    last several years, from the fact that it has been forced to
    downsize by more than 12 percent, and from the kind of ongoing
    oversight that it is receiving from the Treasury Department and
    the enhanced attention that it has received from Congress.
        So I think the sense that there is a need for important
    change is a message that has been well-received. Second, if we
    are to have a prospect of bringing about that change, it cannot
    just spring full-blown.
        What Mr. Gross testified was that the work of modernization
    with the prime contractor and all that was basically going to
    begin in 1999, but that there were important preparatory steps,
    in part involving the year 2000, in part involving developing
    the capacities necessary to mobilize the prime contractor, in
    part in modernizing other systems so that they would be ready
    to integrate with modernization.
        If those resources were not made available, I think the
    consequences in terms of our ability to bring about the change
    we are trying to bring about would be very serious.
        Third, I would just remind you, as painful as it is, of the
    seriousness of the Y2K issue where our choices are few and
    expensive, and if we are going to have any prospect of dealing
    with that in a rational way, I think that we would certainly
    need the funding we have sought.
        I think GAO in its report, while it has been critical of
    some aspects, I think does recognize that the Y2K needs, if I
    understood the written report correctly, are likely to be
    somewhat greater than has been estimated so far.

                           Treasury Oversight of IRS

        Senator Kohl. All right. Can you tell us, Mr. Summers, with
    some specificity how much time you will be able to be spending
    on these IRS issues? That is a great concern to us.
        Mr. Summers. As I said, I think when I last had a chance to
    testify before this committee, I am spending more time on the
    IRS than on any other single project or single thing that I am
    involved with at the Treasury Department, and essentially no
    day goes by in which I do not have some involvement with an
    IRS-related issue.
        There are people who are directly on my staff whose
    essentially full-time responsibility is to be involved in IRS
    oversight and who are in close touch with me. I should say also
    that Secretary Rubin is very involved in the oversight of the
    IRS. About a week or 10 days ago, we had a meeting to review a
    variety of priorities with Secretary Rubin and myself and the
    Treasury oversight staff and the IRS senior management team
    that is present here.

                           Tax Refund Offset Program

        Senator Kohl. All right. Mr. Dolan, the IRS has
    successfully improved child support collection nationally
    through the tax refund offset program, as you know. This has
    helped collect more than $1 billion in past due child support
    just last year.
        But $34 billion is owed in child support past due payments
    to our Nation's children, so we would all like to see that
    program expanded. I would like to ask you what the potential
    for child support collections is under this program, in
    particular, how much of that $34 billion in past due support do
    you think that we will be able to collect and how would these
    increased collections impact your own resource needs?
        Mr. Dolan. Senator, I am not sure I can give you a
    quantification of how much we can get that you would want to
    take to the bank. I would say, and I think you know that based
    on some requests you made of the Commissioner earlier, we
    essentially were quite encouraged by the potential capacity to
    do some information matching with the Social Security
    Administration.
        I think we are in the final stages of making sure that
    there isn't an impediment in Social Security's ability to share
    that with us, and the lawyers are in the final innings of that.
        We felt pretty confident that if we could get that kind of
    data coming to us, which would essentially help us identify the
    right match between parent and child, that we could put it into
    one of our front-end programs that is a reasonably inexpensive
    way to match data and to go with a process that we essentially
    call an unallowable process, which does not envision the whole
    paraphernalia of an audit and all that.
        At this point, it would be a question of finding the
    resource to fund that program, but it is a relatively high
    return on investment kind of program. So it is a long-winded
    way of saying to you, if we can match the information but for
    this impediment on the privacy side, we think it is quite
    likely that we can put together a reasonably easy and, we
    think, high return program where we would take advantage of
    that data at the front end of the tax processing system.
        Senator Kohl. Good.
        Mr. Dolan. I would like to reserve the right to come back
    to you as we figure out this last hurdle so that we can maybe
    tell you more particularly what will come from that.

                           Year 2000 Date Conversion

        Senator Kohl. All right. Mr. Gross, year 2000 conversion is
    an area of great concern for all agencies, and especially those
    whose mission rely heavily on computer services. In fiscal year
    1997, Congress provided IRS with $45 million in the IRS fiscal
    year 1998 budget submission request of $84 million for this
    conversion.
        I now hear that this may not be enough and that the IRS
    will request $258 million. Can you explain why this number has
    been changed so often and who approved these changes?
        Mr. Gross. Senator, the Y2K problem has been an endemic
    problem for both the Internal Revenue Service, as you know, and
    all organizations depending on computers. When my tenure began
    in April 1996, we had three personnel and a total Y2K budget
    for the entire program of only $20 million.
        Since April 1996, which is 14 months ago, the Internal
    Revenue Service and Treasury have made a full--an intensive
    effort to create a viable Y2K program. When we developed our
    estimates, we made it quite clear--IRS, in conjunction with
    Treasury--that there are significant parts of this program,
    given the aging infrastructure, that we would not be able to
    estimate the cost of conversion for some time and that is still
    the case.
        If I could just go a bit further to give you some
    specifics? When we submitted a projection in 1997 for 1998,
    that projection did not take into account our field-based
    business operating systems, it did not take into account our
    telecommunications infrastructure, nor did it take into account
    the computers on which these applications actually run.
        It did not take those elements into account because we
    simply had not been able, at that time, to identify the Y2K
    issues associated with that infrastructure. Much of that has
    now been identified through the auspices of a partnership with
    the private sector. We engaged IBM and UNISYS with IRS to, as
    aggressively as practicable, develop the Y2K solution for a
    major component of the infrastructure, and that represents the
    lion's share of the $258 million funding need for 1998.
        Regrettably, we have not completed all of the inventorying
    of other elements of the infrastructure nor our field
    applications, and the implications of that are, as Deputy
    Secretary Summers reported, we believe that there are funding
    implications that will continue into fiscal year 1999, that we
    still have not fully identified all elements of the problem.
        What we can say, however, is that we believe we have
    identified and programmed all of the required conversion
    activities around the core tax systems, those systems that
    support the programs that service America's taxpayers. In other
    words, we believe we have identified the solution, the Y2K
    solution, for our ability to process tax returns, issue
    refunds, and manage our customer service and compliance
    programs.

                           Year 2000 Date Conversion

        So we have identified on a priority basis consistent with
    GAO planning guides, we have identified on a priority basis
    those applications that must be converted by year 2000, and we
    still have work to do on some of the lesser priority, but
    nevertheless important systems.

                         Earned Income Tax Credit Fraud

        Senator Kohl. All right, thank you. Mr. Dolan, many of us
    are long-time supporters of the earned income credit. It
    represents good public policy and is more important than ever
    now that we are trying aggressively to move people off public
    assistance and into the work force.
        But it is troubling that roughly 25 percent of the EIC
    filers over-claim that credit by more than $4 billion a year.
    How serious are the EIC noncompliance rates compared to
    problems with other tax provisions, and has the IRS made
    progress in bringing these rates down?
        Mr. Dolan. Let me start maybe at the back of the question
    and move forward. I think we feel reasonably good about the
    progress that has been made in recent years. I think as you may
    well remember, Senator, there was a full-court press put on in
    this arena 2 or 3 years ago based on some help that we got from
    some folks from the Kennedy School looking at different ways of
    both detecting and reacting to what we found out is not an
    uncommon phenomena across lots of parts of the financial
    services industry.
        So we took a look at best practices and ways of trying to
    do both things, both educate people--because a fair amount of
    these over-claims come as a result of people not understanding.
    And so there has been considerable work done in outreach and
    simplification of forms and schedules.
        Another area on which I would like to report more progress
    that we have made, but on which we still look for colleagues,
    is expanding the advanced earned income program. Because to the
    extent that we can get people on the advanced earned income
    program, it (a) assures that they are doing it right, and (b)
    it does not put this push, this press on the end of the year.
        But as to the actual claims, we have used a variety of
    electronic filters. We have again taken some consultation from
    some experts in this field as to how to detect patterns. Some
    of it, quite frankly, proved to be unscrupulous preparers who
    were leading people down roads that should have seemed too good
    to be true and, in fact, they were too good to be true.
        We had a very aggressive program looking at those kinds of
    folks and trying to eradicate them from the system. And so, I
    would say probably none of us are comfortable if you talk about
    an over-claim rate or an under-pay rate of more than zero.
        But if you look at the spectrum of our tax gaps, we find
    that there are lots of individual components of the tax cap
    where we are going to continue to work on bringing them down.
        I would say that is the way we have looked at earned
    income. I would not want to sit here and report to you that it
    is as good as it is going to get, but I also would not want to
    sit here and decry it, because I think we have made great
    progress and I think we expect to make even more progress on
    it.
        Senator Kohl. OK. Thank you, Mr. Dolan. Mr. Chairman, thank
    you.
        Senator Campbell. Senator Shelby.

                       Accountability for Appropriations

        Senator Shelby. Thank you, Mr. Chairman. I want to say, and
    I believe I speak for most people here, especially the ones
    that are not here, that we are not here to beat up on the IRS,
    but we are here as part of the appropriations process to see
    that this money is well-spent, that it is spent for the purpose
    it was intended because it is taxpayers' money. It is hard-
    earned money.
        Secretary Summers, you know this. We all know that. The IRS
    is one of the most visible of the agencies of the Federal
    Government because it permeates all of us in the business
    world, individuals, in some way or form.
        But what we are trying to do, I think, is to restore
    credibility and confidence in the Internal Revenue Service. We
    all, I suppose to some extent, fear the IRS because you are the
    implementator of the tax policy and you have a job to do at the
    IRS.
        But at the same time, I think you have responsibility to
    spend the money that is appropriated to the agency very wisely,
    and I think it is a given. It goes without saying. I don't
    believe it is really arguable that so much of the money has
    been wasted. I think that has been acknowledged, basically. If
    it has not, it has certainly been highly newsworthy to
    everybody.
        So how do we create accountability at the IRS for what we
    appropriate, and at the same time, create what the American
    taxpayer looks and hopes to have a level playing field in
    dealing with the IRS? Most taxpayers feel that when they are
    dealing with the IRS, most people, that they are in the ditch
    and the IRS is up on top of the bank and that they do not have
    a level playing field.
        That is all part and parcel of the IRS and you know this.
    But we are troubled, and I know I am, I am troubled, from the
    committee standpoint, of money that we appropriate and it is
    not spent well. I realize that the IRS has a job to do in our
    form of government, but when we have the General Accounting
    Office report, when we have the Tax Commission, which we
    created, Mr. Chairman, report, highly, highly, Mr. Secretary,
    critical of the IRS and how they are spending money.
        For example, the Clinger-Cohen Act--I am sure you are
    familiar with that--among other things, requires a support that
    our information technology investments, which we are talking
    about modernizing the IRS, be supported by accurate cost data
    and convincing, convincing, cost/benefit analysis. They are
    basically saying to us, as I understand it, that there is no
    rhyme or reason to a lot of the requests that you have done,
    that you have not complied with the Clinger-Cohen Act, and that
    you do not know how you plan to spend a lot of this money,
    basically that there is no justification to support billion-
    dollar information technology investments unless you know where
    you are going.
        You see this. I mean, this was released today. That is
    troubling, not to me, but it is going to be really troubling to
    the American people because this is going to be disseminated
    nationwide in just a few hours, if it has not already been.

                       Accountability for Appropriations

        So under the Clinger-Cohen Act, what we are trying to do
    there and the reason we passed that bill, which is an act
    today, was to support the agency where you need money, but let
    you justify the need and what you are going to do with it. And
    IRS is not the only agency, but it is the one before the
    committee today, that we think there has got to be
    accountability there.
        Now, having said that, where do we go, Mr. Secretary? In
    other words, what are you doing at the IRS to bring in, if you
    are, some of the top management gurus of the Nation, of the
    world? You know who they are, a lot of them. If you had a
    company the size of IRS, you have over 100,000 employees and
    that would be a large-size company, and you were having the
    kinds of management problems that you have in IRS, you would
    certainly bring in--you would roll some heads to begin with.
        Somebody would be accountable, make no mistake about that,
    and more than likely, you would bring in outside management to
    say, ``Gosh, what is wrong? What has gone wrong? What is wrong
    with the decisionmaking process here and where do we start
    today?''
        Maybe you have gone somewhere in the last 2 years, but
    according to the General Accounting Office, according to the
    Commission, I do not see a lot of progress and I am troubled,
    as the American people are troubled. You are probably troubled,
    Mr. Secretary. I know it is a big bureaucracy. I know it is
    hard to do and it is hard probably, as the Senator from South
    Carolina said, it is probably--North Carolina--to fire
    somebody.
        But in the private sector, heads would roll and there would
    be accountability. But there must be, must be accountability at
    the IRS for this kind of waste of the taxpayers' money. I know
    you have heard it before, but where do we go? Just in a few
    minutes, tell us. Where do you plan to go and how can you
    justify the expenditure in view of the Commission and the
    General Accounting Office saying, ``Gosh, you have not
    justified it.''
        Mr. Summers. Let me try to answer as best I can----
        Senator Shelby. Sure.
        Mr. Summers. Because I agree with a large part, a very
    large part, of what you said, Senator, and if I might do it by
    just going back to where we were a year ago?
        Senator Shelby. OK.

                        New Leadership for Modernization

        Mr. Summers. A year ago, we testified that this program was
    way off track. We said that we were going to bring in new
    leadership for the information technology function. The
    previous people who were involved with the modernization
    program are either no longer at the IRS or are not involved
    with the modernization program.
        We brought in an outsider to the IRS, Mr. Gross, and vested
    him with all the responsibility as Chief Information Officer
    for the modernization program based on his proven record in
    doing this on the outside.
        Senator Shelby. In addition to Mr. Gross, did you let him
    bring a team in? That is important, too, and let Mr. Gross
    select a team because just bringing the top manager in is not
    going to do it if you are not going to give him the latitude to
    bring his team in. Go ahead, Mr. Gross.
        Mr. Gross. Mr. Senator, from my first day here on April 15,
    1996, both Treasury and IRS top management have fully supported
    our efforts, and toward that end, we have just completed a
    recruitment process in which we will be appointing 13 new
    senior executive members to the information technology
    organization.
        And each of those bring----
        Senator Shelby. Where are they coming from?
        Mr. Gross. Mostly from the private sector.
        Senator Shelby. OK.
        Mr. Gross. Some internal promotions of individuals who have
    performed very ably, but mostly from the private sector and
    from outside of the organization.
        Senator Shelby. How much latitude are they giving you at
    the IRS to do this? A lot, some?
        Mr. Gross. I have received the full support of the top
    management at both Treasury and IRS to effectuate these
    changes.
        Senator Shelby. Go ahead, Mr. Secretary.
        Mr. Summers. If I could say, we have tried to give Art the
    maximum latitude that we can. I think there are a number of
    things that we are going to have to look as one of the things
    that I included in my testimony in terms of flexibility. We
    need more scope to be able to pay bonuses. We need to be able
    to recruit people more quickly through less of a Civil Service
    process.
        Senator Shelby. Do you need legislation to do that?
        Mr. Summers. We will need legislation to do some of those
    things, although there are some things that can be done with
    executive branch approval. We look forward to, at the
    appropriate time--and there is a lot of overlap here, by the
    way, on this issue, between us and the IRS Commission to making
    some specific proposals as to what we can do.
        Senator Shelby. Mr. Gross, a year hence, let's say it is
    June, this is projection. It is the middle of June 1998, a year
    hence. Where do you expect to go, not hope to go? Where are the
    realistic measurements that you think you could come up with to
    change some of the problems in a year? A year is a long time.

                           Year 2000 Date Conversion

        Mr. Gross. Year 2000 is a death march. It is the highest
    priority of our organization. We absolutely, by June 1998, need
    to be fairly well completed with our core business systems Y2K
    conversion. All of our metrics around Y2K conversion are
    targeted toward early completion of the conversion to leave
    1999 as a year for integration testing and certification.
        We also project that by June 1998, a year from now, we will
    have largely completed our preparations to begin modernization.
    We do not expect to be able to actually begin the modernization
    project, though, until at least October 1998 and that is
    because we still have much work to do on the ground in terms of
    best practice, and as Deputy Secretary Summers reported, we
    need to partner with the private sector.
        This venture could not be undertaken by the IRS alone,
    regardless of how much capacity we have acquired, and that
    private sector set of contractors, we project, will not be
    available until likely October 1998.

                         Justification for Expenditures

        Senator Shelby. How do you assure this committee, the
    Appropriations Committee over the IRS, in view of what the
    General Accounting Office has said, that you cannot justify,
    you do not have sufficient justification for these
    expenditures? What do you tell us, as appropriators, and what
    assurances can you give us that you are going to do all these
    things despite what they are saying about it?
        Mr. Summers. May I give a short answer, Senator?
        I think it is important. I think the first thing that I
    would want to emphasize is that--and I do not have the figures
    right before me--this program has been cut way back from where
    it was. The amount of money we are asking for amounts to
    spending at a rate of 25 or 30 percent.
        Senator Shelby. It is still a lot of money, isn't it?
        Mr. Summers. It still is a lot of money, but we have cut
    back. Mr. Gross, going through rigorous standards approved by
    our modernization management board, has cut back projects, some
    of which had been invested in not long before that a lot of
    people were very attached to but just do not make sense in
    light of current realities that would have spend-out of over $1
    billion.
        So the first thing to say is it is not that this train is
    still going in the way that it was before. It has been cut way
    back. Second, I have made the judgment, at least from the way I
    look at this, that it would be a mistake to cut back to zero,
    that there are a number of smaller projects that involve
    demonstrating capacity, that involve laying the groundwork for
    larger steps, that involve addressing the Y2K project, that
    make sense; they are all projects where progress can be
    monitored every few months and you can know whether this is
    working.
        It is not, you know, we are working away and we will let
    you know 2 years from now whether it is going to work. I do not
    think we can afford that. And so, the----
        Senator Shelby. Don't you think the taxpayer deserves
    better?
        Mr. Summers. The taxpayers deserve much better than the
    taxpayers have gotten and that is why----
        Senator Shelby. Better than the IRS has given in the last
    several years, 5 years.

                       Accountability for Appropriations

        Mr. Summers. Better than it has given in this area,
    absolutely, and that is why we have made a major point of, in
    this area, the fact that projects have to be monitorable, we
    have to be able to see what the results are every few months so
    that we can ask questions if the projects are off-track.
        We have also tried to look at some of the broad indicators
    of performance that matter for taxpayers. The phones are not
    being answered nearly well enough, but the rate at which they
    were answered was substantially higher in the last filing
    season than the previous filing season, and the IRS understands
    that there is an expectation and there will be accountability
    for their being answered in the next filing season than in the
    last.
        Senator Shelby. We have heard this before and I only hope
    that you come through because you are talking about a lot of
    money.
        Mr. Summers. Absolutely.
        Senator Shelby. A lot of it has gone down a rat hole. We
    hope you will close the rat hole, because if you do not, the
    American people are going to close it for you.
        Mr. Summers. Absolutely. Secretary Rubin and I, Senator,
    have said that we are prepared to accept accountability for
    this. I would also just say to you that we spent an enormous
    amount of time working with a major private sector executive
    search firm on the location of a new Commissioner for the IRS
    and the individual who is now being vetted is someone who has
    enormous experience, precisely the kind you spoke about, as a
    guru, if you like, or as an expert in implementation of
    information technology solutions.
        Senator Shelby. Well, we will be hopeful. Thank you, Mr.
    Chairman.
        Senator Campbell. Thank you, Senator Shelby. I was
    interested in your comment that you may be giving bonuses. I
    would like to put that in a perspective before we leave the
    room. Congress, as you know, has denied itself even a cost-of-
    living increase for 4 years straight based on constituents'
    anger because they believe we need to improve our performance.
    You might apply the same logic when you are thinking of
    bonuses. Maybe they ought to be on future improved performance
    and not on the past performance because the past performance,
    according to the GAO and the commission, has not been all that
    good, as you know.

                              Submitted Questions

        Well, with that, this record will stay open for 2 weeks. We
    will submit a number of written questions by subcommittee
    members that we would appreciate if you would answer those in
    writing.
        [The following questions were not asked at the hearing, but
    were submitted to the Department for response subsequent to the
    hearing:]
                    Questions Submitted by Senator Campbell
                             general budget issues
        1. According to out-year projections in the President's Budget,
    IRS' funding will remain virtually static between fiscal year 1998 and
    fiscal year 2002. (IRS' request is for $7.369 billion in fiscal year
    1998; the Office of Management and Budget's projection for fiscal year
    2002 is $7.308 billion). Because of the increasing cost of doing
    business, such static funding could lead to a significant cut in real
    dollars over the next five years.
        Question. Has IRS done any long-range planning to assess the
    potential impact of static funding over the next five years? If so,
    what is the potential impact? If not, why not?
        Answer. The IRS is doing long-range planning to assess the
    potential impact of static funding over the next five years. The IRS is
    also examining options for changing the way it does business and is
    reviewing its program priorities.
        The IRS is a labor intensive organization (more than 70 percent of
    our total budget goes for labor costs) and it needs an increase of
    about $200 million annually to pay for employee cost of living
    adjustments and other inflation costs and at the same time continue
    maintaining its operations at approximately the same levels. For
    example, a ``rollover'' budget in fiscal year 1998--one that is at the
    same dollar level as fiscal year 1997--would not allow us to both fund
    the pay raise and maintain full-time-equivalent (FTE) levels. Instead,
    the IRS would need to reduce 4,000 FTE and this would impact levels of
    assistance and revenue collection. Looking at the budget over the next
    five years (fiscal year 1998 to fiscal year 2002), if the IRS receives
    each year approximately the same dollars as today, it would in effect
    be taking a $1 billion cut in ``purchasing power.'' To pay for this
    reduction, the IRS would need to reduce its FTE by approximately 4,000
    FTE per year for a total loss of FTE Servicewide of about 20,000.
        This reduction would impact virtually all of the IRS' programs, but
    the need to protect Submission Processing and Customer Service means
    that the largest reductions would be in enforcement. Modernization
    offers the potential to increase productivity and reduce the impact of
    FTE reductions, but modernization investments need to be fully deployed
    before long term productivity benefits can be realized.
        Question. In developing its fiscal year 1998 budget, IRS gave
    higher priority to enhancing customer service than maintaining face-to-
    face compliance programs, such as district office audits. Would IRS
    envision maintaining that prioritization under a static-budget
    scenario?
        Answer. The Service continues to seek a reasonable balance between
    customer service operations and face-to-face enforcement activities. In
    the face of static--or even declining--out-year budgets, IRS will
    continue to build on the considerable progress made during the last two
    years to raise telephone access levels. However, future enhancements
    will rely, primarily, on technology-driven improvements (e.g.,
    nationwide call routing), rather than major increases in FTE levels.
    With respect to revenue-based compliance programs, including district
    office audits, we recognize the need to shift from the traditional one-
    on-one enforcement approach to ``wholesale,'' market-segment based
    treatments to address noncompliant behavior. While we a concerned about
    the long-term erosion of audit coverage rates, improved matching of
    information documents, up-front detection of compliance problem and
    ``early intervention'' efforts managed as a part of customer service
    all contribute to maintaining an effective enforcement presence.
    Assessing the relative contributions of better customer service (e.g.,
    a five percent increase in the telephone access) and increased
    enforcement (e.g., a .05 percent increase in audit coverage or $800
    million in additional revenue) represent real challenges in our efforts
    to maximize both total enforcement revenue and levels of voluntary
    compliance.
        2. IRS is planning to downsize through a combination of buy-outs,
    attrition, and a reduction-in-force (RIF). Implementation of the RIF
    has been delayed to the point that, as of mid-February 1997, it was
    unclear just when the RIF would take place and how many staff would be
    affected. It is also unclear how, if at all, IRS' budget request
    reflects the cost and impact of IRS' downsizing efforts.
        Question. Please provide a status report on IRS' downsizing efforts
    and the actual and planned impact on staffing levels.
        Answer. Since May 1995, as a result of a series of reorganizations
    and downsizing efforts, the IRS has identified approximately 4,000
    occupied positions for elimination. These positions have been primarily
    overhead, managerial, and support positions, and many of the savings
    have been diverted to front line compliance and customer service
    activities, primarily in the customer service call sites. The IRS has
    successfully placed 2,800 employees who formerly occupied non-
    continuing positions. There are currently approximately 900 occupied
    non-continuing positions in the field offices, and 300 in headquarters.
        Question. Considering the current status of the downsizing efforts,
    what cost, if any, does IRS expect to incur in fiscal year 1998 to pay
    for such things as severance pay, outplacement and relocation?
        Answer. The IRS estimates the cost to complete the Regional and
    District Management Consolidation (RDMC) and National Office downsizing
    will be $20 million. This cost includes opening a second buyout window,
    paying relocation expenses for interested employees, providing
    outplacement services to impacted employees, and paying severance pay
    to employees separated by a reduction-in-force (RIF). The vast majority
    of these costs will be incurred in fiscal year 1998.
        In fiscal year 1998, buyouts may be extended to locations and
    functions not previously included in prior buyouts depending on the
    fiscal year 1998 budget and other restructuring needs. A ballpark
    estimate is that 1,200 buyouts may be offered. If these buyouts are
    used, we estimate they will cost about $30,300 per buyout. ($20,671 for
    buyout payment, $3,371 for lump sum leave, and $6,258 contribution to
    the retirement fund.) A total of 1,200 buyouts would therefore cost
    $36,360,000. This would result in $61,076,000 in annualized salary
    savings.
        Question. What does IRS expect to save in the way of salaries and
    benefits?
        Answer. The salary and benefit savings from the field office
    reduction is estimated at $30.7 million in fiscal year 1998, and
    thereafter, over $40 million annually, as is the savings from the
    National Office downsizing. Therefore, the overall savings from the
    downsizing currently underway is over $70 million in fiscal year 1998,
    and over $80 million annually thereafter.
        Question. How are those costs and benefits reflected in IRS' fiscal
    year 1998 budget request?
        Answer. The FTE level in the fiscal year 1998 President's Budget
    Request does not reflect any impact from the planned 1997 RIF, which is
    now delayed until the early months of fiscal year 1998. When the RIF
    occurs, FTE levels will be reduced and salary savings will be used to
    pay for the costs of the RIF, such as terminal leave and severance pay.
    The IRS intends to redirect the limited fiscal year 1998 savings and
    the more substantial savings in future years to front line operations.
        Question. IRS' budget request shows a proposed operating level of
    102,926 full-time equivalent staff (FTE's) in fiscal year 1997 and an
    estimate of 102,385 FTE's in fiscal year 1998. Considering the current
    status of IRS' downsizing efforts, does IRS still expect to deliver
    102,926 FTE's in 1997 and 102,385 in 1998?
        Answer. Because there will not be a RIF in 1997, the fiscal year
    1997 FTE levels are not expected to be significantly impacted. If a RIF
    occurs early in fiscal year 1998, then almost 1,200 fewer FTE will be
    realized in the affected activities. These FTE reductions will be
    offset by FTE increases in frontline operations.
        Question. If not, what are IRS' current expectations and how would
    that affect IRS' funding request?
        Answer. Our fiscal year 1998 Budget Request assumes full funding
    for pay raises. If funds for the pay raises are not provided, then FTE
    levels would drop 4,000 to 5,000 FTE.
        3. Part of the Administration's proposal for helping the District
    of Columbia involves having IRS collect D.C. taxes. There is nothing in
    IRS' budget request relating to that additional responsibility.
        Question. Is IRS working with the D.C. Government to develop
    policies and procedures for assuming this responsibility?
        Answer. The IRS and D.C. Government officials have met weekly since
    June 4, 1997, to develop policies and procedures on assuming the
    responsibility for doing the compliance work on their individual income
    tax. The meetings are scheduled to continue at both the managerial and
    the technical level.
        Question. What kind of administrative problems, if any, does the
    IRS foresee in assuming this responsibility?
        Answer. There are a number of administrative problems that must be
    overcome to assume this responsibility, such as the need to:
      --Change the regulations and Internal Revenue Manual to perform the
            necessary compliance work.
      --Develop procedures to account for and forward taxes collected to
            D.C.
      --Coordinate the exchange of taxpayer data on compliance cases.
      --Redesign the D.C. individual income tax form(s).
      --Design Examination and Collection reports to reflect compliance
            activity by the IRS functions.
      --Provide customer service and taxpayer assistance to D.C. individual
            taxpayers when the IRS assumes responsibility.
      --Develop training for D.C. and IRS employees to administer the new
            process.
        The meetings held to date have revealed many technical and
    administrative problems and concerns. These are being documented and
    will be addressed by working groups. These working groups have members
    from both the IRS and the D.C. Office of Tax and Revenue (OTR).
        Question. Has IRS developed preliminary estimates of how much it
    will cost annually, in FTE's and dollars, to collect D.C. taxes? If so,
    what are those estimates? If IRS expects to incur such costs in fiscal
    year 1998, how will they will be funded?
        Answer. Yes, the preliminary estimates for the D.C. tax collection
    effort in fiscal year 1998 are $15 million and 151 FTE. These costs
    were not included in the IRS budget request for fiscal year 1998. If
    legislation is passed requiring IRS collection of D.C. taxes in fiscal
    year 1998, a request for supplemental funding would be required.
        Question. Can Congress expect a request for additional funding?
        Answer. If the above event occurs (legislation is passed), then
    Congress could expect a request for supplemental funding.
        4. It is our understanding that IRS, in deciding how to allocate
    resources, considers customer service to be a higher priority than
    face-to-face compliance activities. While this prioritization should
    help to increase telephone accessibility and otherwise improve IRS'
    service to taxpayers, it will continue what has been a general decline
    in IRS' enforcement presence.
        Question. In deciding on priorities, how does IRS balance the need
    to provide good service with the need to maximize revenue collection?
        Answer. Our strategy emphasizes customer service to enhance
    voluntary compliance, as well as focused enforcement activity to
    collect revenue from non-compliant taxpayers. Compliance and Customer
    Service activities are complementary in reaching this goal. The major
    step in establishing Customer Service is combining service with the up-
    front compliance activities. There is a direct relationship between
    service and compliance as we reach more people, answer more calls and
    focus on up-front compliance activities.
        Customer Service combines taxpayer assistance and taxpayer
    education activities with those compliance activities that do not
    require face-to-face contact. Providing assistance to the taxpayer who
    wants to comply with the tax law, with either tax law information or
    help with resolving a bill or a notice, results in collection of
    revenue early in the process and lessens the need for the more costly
    and labor intensive face-to-face compliance provided by Examination and
    Collection personnel.
        Question. How much does customer service contribute to improving
    compliance, and thus increasing revenues?
        Answer. Estimating the impact of various IRS activities on
    voluntary compliance has been a very elusive goal. A number of
    studies--both within the IRS and within the academic community--have
    attempted to measure these effects over the years, but none has been
    definitive. The IRS' most recent effort was an econometric analysis of
    filing and reporting compliance over the 1982-1991 period which
    evaluated the impact of a number of enforcement and non-enforcement
    activities. This study found that three customer service activities
    significantly increase voluntary filing compliance well in excess of
    their cost. These activities are: the processing of third-party
    information documents pertaining to income or deductions; the issuance
    of nonfiler delinquency notices; and the preparation of taxpayer
    returns in IRS district offices.
        Question. How does that compare to the impact of face-to-face
    compliance activities?
        Answer. IRS' study estimated that two face-to-face enforcement
    activities also have a significant, positive impact on voluntary
    compliance. Both audits and convictions arising from criminal
    investigations were estimated to increase the voluntary compliance of
    the general population many times their cost. (Collection activities
    presumably have a similar impact, but the study did not focus on
    payment compliance.)
        5. IRS' fiscal year 1998 budget estimates include numerous
    performance measures. Most of those measures seemingly focus on
    production or outputs (such as number of returns processed or dollars
    recommended per audit FTE rather than on outcomes, such as the impact
    on voluntary compliance.
        Question. How does IRS plan to achieve its compliance and customer
    service goals without measures more oriented to outcomes?
        Answer. In addition to continually working on improvements to
    performance measures, the IRS has initiated several strategies to
    increase compliance with the tax laws and improve customer service.
    These strategies are both measurable and link to our strategic
    objectives, and include:
    Compliance Strategies
      --Identify noncompliant taxpayer groups, test and then deploy
            treatments that directly address the underlying causes of their
            noncompliance with a preference for non-enforcement treatments.
      --Protect revenue by identifying noncompliance up front, before
            return processing is completed and refunds are issued.
      --Examine domestic and international tax returns, including those for
            employee plans and tax exempt organizations.
      --Internationally, the IRS will continue to emphasize increased
            administrative enforcement efforts, modernized regulations,
            legislative change and coordination with trading partners and
            industry groups to foster compliance.
      --Simplify tax returns, instructions, and publications.
    Customer Service Strategies
      --Minimize the need for taxpayers to contact the IRS for assistance
            by clarifying and reducing the numbers of notices issued,
            simplifying forms and instructions and analyzing the sources of
            demand for the IRS services.
      --Offer multiple cost-effective means (e.g., telephone,
            correspondence, Internet) with expanded hours of operations for
            taxpayers to contact the IRS and receive a prompt, accurate
            resolution of their issue on the first contact.
      --Use automated systems to effectively address taxpayers' needs
            without the need for a human tax assistor.
      --Maximize service and the productive use of IRS resources by
            implementing improved network management systems, standardizing
            the operation of Customer Service sites nationwide and managing
            all workload at a corporate level.
      --Provide the training, tools and automated systems necessary to
            allow the shifting of tax assistor resources to multiple types
            of cases to address shifting demand among different workload
            types and locations.
                           processing and assistance
        IRS' fiscal year 1998 budget request includes $2.9 billion for
    Processing, Assistance, and Management. The following questions relate
    to three major program areas covered by that request--the processing of
    returns and remittances, customer service, and document matching.
                     processing of returns and remittances
        1. During March 14, 1996 apropriation hearings on IRS, the Deputy
    Secretary of the Treasury cited three priorities based on GAO's work on
    Tax Systems Modernization (TSM). One of those priorities was the need
    to reengineer IRS' submission processing system. Last year at this
    time, IRS had a project underway assessing options such a 1)
    eliminating classes of returns, 2) expanding the eligibility for filing
    simple forms, and 3) outsourcing the data capture function.
        Question. What is the status of the reengineering project vis a vis
    the three areas cited above?
        Answer. The Tax Settlement Reengineering Project was discontinued
    because it was duplicative of the work being done under the auspices of
    the Systems Life Cycle Process recently adopted by the Service. The SLC
    requires the reengineering of business processes prior to the
    application of technology solutions. Reengineering of the business
    process will occur as the Service develops the Level 3 and Level 4
    business requirements in the areas of eliminating classes of returns
    and expanding eligibility for filing simple forms. Additionally, the
    joint IRS/NPR/Treasury task force looking at IRS Customer Service will
    include as one of its focus areas the filing and payment arena.
        Question. What is the earliest that IRS could begin outsourcing the
    data capture function?
        Answer. The May 15, 1997, Request for Comments for the
    Modernization Prime Systems Integration Services Contractor projects
    that outsourcing of the data capture function, if feasible, would
    commence in the form of a pilot, by January 1, 2000.
        Question. How, if at all, are these reengineering efforts being
    used to identify system requirements for the new Distributed Input
    System, funding for which is included in IRS' Information Systems
    request for fiscal year 1998?
        Answer. The Integrated Remittance and Submission Processing System
    (ISRP) formerly known as DIS/RPS Replacement, replaces two current
    systems, the Distributed Input System (DIS) and the Remittance
    Processing System (RPS). ISRP will ``rollover'' existing requirements
    of DIS but includes some reengineering to combine several existing work
    processes in the RPS. The replacement of the legacy DIS and RPS was
    necessitated by the fact that the existing systems are not, and cannot
    be made, Year 2000 compliant. In addition, the legacy DIS is 12 years
    old and the RPS is 19 years old, and both systems have become
    increasingly unreliable and costly to maintain. The ISRP System is a
    ``Stay In Business'' replacement of existing functionality, rather than
    a reengineering effort.
        2. Despite the availability of alternative filing methods, like
    electronic filing, the large majority of returns are still filed in the
    traditional paper format and processed through a labor-intensive,
    error-prone keypunching operation. At one time, IRS' goal was to
    receive 80 million electronic returns a year by 2001. In 1996, however,
    only about 13 percent of the individual income tax returns were filed
    electronically, which includes those filed over the telephone (i.e.,
    Tele-File).
        In response to GAO's July 1995 report on TSM (GAO/AIMD-95-156, July
    26, 1995), IRS said it would develop a comprehensive strategy for
    increasing the number of electronic returns. In its May 6, 1996 report
    to the Appropriations Committee on the status of TSM, Treasury said
    that a comprehensive electronic filing strategy would be in place by
    August 1996. That strategy has yet to be developed. On February 7,
    1997, IRS sent the Chairman of the House Appropriations Subcommittee a
    document entitled ``Critical Issues for the Development of an IRS
    Strategy for Electronic Tax Administration.'' After reviewing this
    paper, it is still unclear as to when IRS expects to have a
    comprehensive electronic filing strategy.
        Question. Why has electronic filing not grown nearly as fast as IRS
    had expected when it set its 80 million goal? Was attainment of IRS'
    goal dependent on certain things happening that proved to be
    unrealistic? If so, please explain what those dependencies were and why
    they were not achieved.
        Answer. The Electronic Filing Strategy Task Group Report (Rev. 5-
    93) was developed to produce one document to serve as the ELF Strategy,
    to identify new ways to attract taxpayers to the program, and to
    develop action plans to maximize the number of electronic returns. The
    report outlined 21 initiatives that, if all were implemented, would
    deliver 80.2 million electronic returns (69.8 Individual and 10.4
    business) by the year 2001. Implementation of certain initiatives had a
    direct impact on the ability of the IRS to reach its goals. For
    example, one initiative required electronic transmission of returns
    from practitioners preparing 100 or more returns. The IRS is exploring
    other ways to expand electronic filing other than requiring mandatory
    electronic transmission of returns from practitioners. Another
    initiative was to allow the use of signature alternatives to eliminate
    the need for paper authentication. The IRS is still in the process of
    assessing the legal impact and assurance of authentication of signature
    alternatives and continues to explore and test several methods.
        Question. What is causing the delay in developing a comprehensive
    electronic filing strategy? When does IRS now expect to complete the
    strategy?
        Answer. The IRS is issuing an RFP/RFI for comments from the Private
    Sector to help us determine what the requirements will look like.
    Concurrently, we have contracted with a market research contractor to
    research data and help define a market strategy. We plan to combine the
    results of the RFP/RFI with the market research analysis. From that the
    IRS should have enough data to develop as soon as possible a short term
    and long term strategy for electronic filing.
        Question. How does IRS' plan to develop a strategy for increasing
    electronic filings mesh with its plan to assess the feasibility of
    outsourcing the processing of tax returns and other documents?
        Answer. The Project Office for Submission Processing Outsourcing
    contract vehicle will be structured in such a way that the contract
    will reflect a decreasing volume of paper returns with the increase of
    electronically filed returns.
        3. It would appear that IRS could improve the efficiency of its
    returns processing operation if it reduced the number of returns being
    filed and the amount of data included on filed returns.
        Question. What, if anything, is IRS doing in either of those areas?
        Answer. The IRS uses a comprehensive process to ensure that it asks
    only for information on the return that is needed to fulfill specific
    requirements of the tax law or for other tax administration purposes.
    For example, information is collected to: 1) verify many of the
    mathematical computations made on the return; 2) identify unreported
    income by comparing information on the return with documents provided
    by third parties; 3) identify overstated deductions, credits, etc.; 4)
    identify returns for audit; or 5) detect potential fraud.
        Developing and revising forms involves coordination among multiple
    functional areas of the IRS (e.g., information systems, customer
    service, examination, etc.) to assure the quality and usefulness of the
    information collected. Annual reviews of the forms and instructions are
    conducted to identify opportunities for burden reduction as well as to
    ensure that the necessary data is being collected for effective tax
    administration.
        The IRS has developed shorter, simpler versions of several forms
    for filers with simpler tax situations and less potential for
    noncompliance. For individual taxpayers, we developed Form 1040EZ,
    Schedule C-EZ (for sole proprietors), Form 2106-EZ (for employee
    business expenses) and Form 1040NR-EZ (for nonresident aliens). We have
    been able to increase the number of filers using the ``EZ'' forms by
    expanding eligibility. Since 1993, for the Form 1040EZ, we have added
    married filing joint taxpayers, unemployment compensation and a paid
    preparer line. We reduced taxpayer burden by more than 46.5 million
    hours. Over 28 million taxpayers can take advantage of the ``EZ''
    forms.
        Since 1991, millions of individual taxpayers have been eligible to
    file their Forms 1040EZ by telephone. This year almost 4.7 million
    TeleFile returns have been processed. Since January 1997, we have
    received 50,000 Forms 941 filed electronically as a test for employment
    tax returns.
        For 1996, after reassessing their usefulness, several checkboxes
    and a line were eliminated from the Forms 1040 and 1040A. Since 1992 we
    have improved numerous forms and instructions and reduced taxpayer
    burden by over 94 million hours.
        As the IRS takes advantage of the technologies which improve the
    processing of tax information, we will continue to assess the need for
    the information being collected.
        Question. We understand that IRS inputs less than 40 percent of the
    data on a typical Form 1040 or a typical corporate tax return. If that
    is true, why does IRS need the other 60 percent? Couldn't some of that
    information be deleted from the return, with understanding that the
    taxpayer would be required to provide it if requested as part of an
    audit?
        Answer. The IRS uses a comprehensive process to ensure that is asks
    for information on the return that is needed to fulfill specific
    requirements of the tax law or for other tax administration purposes.
    For example, information is collected to: 1) verify many of the
    mathematical computations made on the return; 2) identify unreported
    income by comparing information on the return with documents provided
    by third parties; 3) identify overstated deductions, credits, etc.; 4)
    identify returns for audit; or 5) detect potential fraud.
        Annual reviews of the forms and instructions are conducted to
    identify opportunities for burden reduction as well as to ensure that
    the necessary data is being collected for effective tax administration.
    Developing and revising forms involves coordination among many
    functional areas of the IRS and Treasury, as well as external input
    from tax practitioners, taxpayers and other professional organizations.
    We continually assess the usefulness of the information collected.
        4. In its fiscal year 1996 and fiscal year 1997 budget requests
    combined, IRS asked for increases of 447 FTE's and 16.7 million for
    service center workload growth. In its fiscal year 1998 budget request,
    IRS is asking for another increase of 195 FTE's and $11 million for
    service center workload growth. According to its own projections, IRS
    expects to receive 200.1 million primary tax returns in 1998--an
    increase of 5.9 million over the number received in fiscal year 1995.
    Over the same time period, however, the number of returns filed through
    alternative methods (i.e., electronic filing, TeleFile, and 1040PC) is
    expected to increase by 13.7 million. It was always our understanding
    that returns filed through these alternative methods involve much less
    manual processing and are less costly to process.
        Question. Considering the actual and projected growth in
    alternative filings, which are supposedly easier and less costly to
    process, why does IRS continue to request more staff to process
    returns? Given the increase in alternative filings, shouldn't IRS be
    able to process more returns with the same or less staff?
        Answer. Each year, IRS processes more returns, per staff year
    expended, compared to the prior year, as a result of the growth in
    electronic filing, as well as other productivity gains. Nonetheless,
    the overall growth in all return filings, such as that expected for
    fiscal year 1998, typically outstretches IRS productivity gains, hence
    the request for additional FTE's for growth. A draft of the most recent
    IRS costing data available (i.e., for fiscal year 1996) shows that the
    cost of processing an individual electronic return is around 40 percent
    less than that for processing a paper individual return. Still, the
    processing of electronic returns requires IRS resources and involves
    more than just the receipt of return information. There are several
    processing costs, some that are unique to electronic filing, such as
    the processing of signature jurats (part of the ``pipeline'' processing
    cost), and other ``downstream'' processing costs that are essentially
    the same for electronic returns as for paper returns, such as making
    adjustments on taxpayer filed amended returns and resolving
    discrepancies over estimated tax payments. Further, more recent IRS
    projections of fiscal year 1998 growth, that take into account the more
    current economic outlook and actual return filings through the first
    part of 1997, now indicate even greater return growth for fiscal year
    1998 than previously estimated (i.e., 3.4 million returns instead of
    2.1 million), and with a large proportional share attributable to paper
    (i.e., 52 percent).
        Question. Do these alternative methods really cost less? Per
    return, what does it cost IRS to process (a) electronic returns; (b)
    TeleFile returns, including telecommunication costs; paper returns
    filed on Form 1040 PC; (d) paper returns filed on Form 1040EZ; and (e)
    paper returns filed on Form 1040?
        Answer. In general, alternative filing methods have a lower IRS
    processing cost compared to traditional paper returns. For example,
    based on the initial (draft) cost estimates derived from fiscal year
    1996 experience, it costs around $3.91 in direct expenses to process a
    paper individual return compared to only $2.10 to process an
    electronically filed individual return. In addition, available IRS data
    indicate that processing Form 1040EZ returns costs about 20 percent
    less than the typical paper Form 1040 return, and the cost for the Form
    1040PC is around ten percent less than Form 1040. However, better cost
    comparison data by form type are not readily available because of the
    need to allocate some common ``downstream'' processing costs and other
    administrative expenses across all form types and limitations in the
    available management information systems. At the present time,
    available IRS data also does not distinguish the cost between TeleFile
    versus standard electronic returns. The IRS is now carrying out a
    comprehensive cost review to provide more precise data on processing
    costs.
        Question. Since returns filed via these alternative methods involve
    less errors (both by taxpayers in preparing the returns and IRS in
    processing them), is it fair to assume that these alternatives save IRS
    money in downstream costs (e.g. the cost associated with sending out
    error notices and responding to taxpayer calls and letters about those
    notices)? If so, could IRS please quantify those savings?
        Answer. IRS information systems can not, at this time, precisely
    quantify the ``downstream'' processing cost savings from alternative
    filing methods. Alternative filing methods reduce certain errors, such
    as mistakes in taxpayer computations or IRS data entry errors, which,
    in turn, will reduce certain IRS downstream processing costs. However,
    existing management information systems do not capture detailed data on
    IRS adjustment activity associated with specific filing methods nor
    issues. In addition, some downstream processing costs are conceptually
    the same for electronic returns as for paper, such as responding to
    taxpayer filed amended returns, resolving discrepancies with
    withholding or estimated tax payment amounts or updating proper entity
    information. There are also other subsequent costs associated with
    collection and examination activities that are not reflected in the
    processing costs.
        5. In its budget estimates for fiscal year 1998, IRS says that
    return projections for fiscal year 1997 are lower than anticipated,
    which will allow IRS to reprogram resources to enhance telephone
    accessibility.
        Question. How did IRS use the reprogrammed resources to improve
    telephone service? Did IRS hire more staff to answer the telephone?
        Answer. During the 1997 filing season, the IRS detailed Examination
    employees to Customer Service to respond to written technical inquiries
    and to call back taxpayers who left recorded messages on tax law
    questions. The IRS also shifted personnel from certain correspondence
    work to the telephone to take advantage of non-peak workloads for
    correspondence at a time when telephone workload was at a peak.
        The Area Distribution Centers, which fill requests for tax forms,
    instructions and publications by telephone and through written
    requests, used staff savings generated by program changes, contracting
    of some work tasks, and additional automation efforts to increase
    hiring for the telephones. The IRS did bring on new hires in Customer
    Service to allow for more people to answer the toll-free lines.
        Question. What are the chances that return filings in fiscal year
    1998 will also be lower than anticipated? What is IRS' historical
    record in making such projections? Does it generally overestimate or
    underestimate filings?
        Answer. As presented in the ``FY 1998 Budget in Brief,'' IRS
    projected that 199.96 million primary returns would be filed in fiscal
    year 1998. Now, based on more recent return filing experience, as well
    as more current economic forecasts, it is most likely that actual
    fiscal year 1998 filings will be higher than that prior IRS forecast.
    From an historical perspective, comparable IRS forecasts over the past
    six years have had an average projection error of around two percent,
    which includes instances where IRS has underestimated actual filings
    and instances where IRS overestimated.
        6. According to IRS' budget estimates for fiscal year 1998, the
    number of Federal Tax Deposits received electronically has risen much
    faster than expected over the past few years. IRS says that about 1.2
    million more companies will be required to make electronic deposits in
    fiscal year 1997 and that even more companies can be expected in 1998.
        Question. Given the significant increase in electronic payments and
    the resulting reduction in the need for IRS to manually process those
    payments, why don't we see a commensurate FTE reduction in IRS' budget
    request?
        Answer. While staff year costs were reduced by the decrease of
    paper FTD coupons, the need for additional staff to provide telephone
    assistance to taxpayers attempting to use the EFTPS system for
    electronic payments offset the staff decrease. Electronic payments are
    convenient, and the system is easy to use. Taxpayers can use their
    telephone to make their payments if they choose.
        The Electronic Federal Tax Payment System (EFTPS) became
    operational in November 1996. As of June 28, 1997, we have processed
    approximately five million transactions and collected over $155 billion
    through the system. Enrollees in EFTPS now total 1.6 million, of which
    475,000 are volunteers.
        7. For the past several years, IRS has been using lockboxes to
    process payments sent in by individuals when they file their income tax
    returns. Because of concerns about the burden associated with having
    taxpayers send their returns to one location (an IRS service center)
    and their payments to another location (a lockbox bank), IRS decided,
    for 1996, to have taxpayers send their returns and payments to the bank
    and to have the banks then sort the returns and ship them to the IRS
    for processing.
        Question. In its report on the 1996 filing season (GAO/GGD-97-25,
    December 18, 1996), GAO said that IRS' data on burden was inconclusive
    and that IRS' decision to have taxpayers send not only their payments
    but also their tax returns to a Lockbox increased program costs in 1996
    by about $4.7 million. These costs are paid by the Financial Management
    Service (FMS). The IRS will be following the same procedure in 1997,
    and the FMS will again be paying. How much will this procedure cost the
    Government in fiscal year 1997 and 1998?
        Answer. Costs associated with Form 1040 returns received at
    lockboxes have not been determined for 1997. The $4.7 million increase
    referenced in the GAO report is the difference in the amount the
    government paid lockboxes for return handling in 1996 and the amount it
    would have cost if the returns were received at the service centers.
        Question. Given the extra cost to the Government, why does IRS
    continue to have taxpayers send their tax returns to the Lockbox banks?
        Answer. Based on information the IRS has received from tax
    practitioners and through focus group interviews, the IRS has decided
    that requiring taxpayers to mail their tax return separately to the IRS
    Service center and send the payment with voucher to the Lockbox bank
    would be burdensome for Form 1040 filers. Informal feedback received
    from practitioners indicated they would not be in favor of the IRS
    imposing the two envelope requirement on them.
        During our focus group interviews, most participants were concerned
    about the additional postage required by the two envelope concept;
    however, they did not reject the concept. It is our intent to continue
    with the one envelope, two labels for the upcoming filing season. We
    will continue to examine this issue more closely to determine if there
    is a need for reconsideration.
        8. Also in its report on the 1996 filing season, GAO noted that the
    number of fraudulent refunds identified by IRS in 1996 had declined
    significantly from the number identified in 1995 and that a major
    contributor to that decline was a sizable reduction in the staff
    assigned to the Questionable Refund Program (QR)--from 553 FTE in 1995
    to 379 FTE in 1996. In its fiscal year 1998 budget request to Treasury,
    IRS asked for 244 more FTE's for this area; Treasury denied that
    request. In appealing Treasury's denial, IRS noted that, in addition to
    reducing the number of fraudulent refunds identified, the reduction in
    FTE's had also caused an underutilization of the Electronic Fraud
    Detection System (EFDS), in which IRS had invested in excess of $30
    million.
        Question. How many FTE's has IRS allocated to the QRP in fiscal
    year 1997, and how many does it expect to allocate in fiscal year 1998
    if its budget request is approved?
        Answer. Fiscal year 1997 QRP allocation--280 FTE's; fiscal year
    1998 QRP allocation--280 FTE's.
        Question. Is that level of staffing sufficient for IRS to
    adequately identify and investigate Questionable Refund Schemes? If
    not, what are the negative consequences and how will IRS be able to
    effectively control against filing fraud? If the level of staffing is
    sufficient, why did IRS seek more staffing in the budget request it
    submitted to Treasury?
        Answer. Additional staffing will allow the QRDT to review and
    analyze additional returns seeking new patterns of fraud and abuse.
    Without additional staffing, the QRDT will be reviewing returns that
    meet a pattern of fraud identified in prior years.
        Question. To what extent is EFDS being underutilized? For example,
    how many terminals did IRS buy as part of EFDS?
        Answer. The total number of EFDS terminals is 628 based on fiscal
    year 1995 QRP staffing of 408 FTE's. Underutilization of the EFDS is
    attributed to staffing cuts in fiscal year 1996 and fiscal year 1997.
        Question. How many were used in 1996 and are being used in 1997 for
    the purpose intended (i.e. to help QRP staff identify fraudulent
    returns and refunds)?
        Answer. Because of the reduction in QRP staffing, as well as the
    strategic goal of EFDS becoming a multi-functional asset, terminals
    were made available to Examination for other Revenue Protection
    Initiatives implemented during the 1997 Filing Season. We are currently
    discussing a broader expansion to Examination for the 1998 Filing
    Season. Additionally, we are partnering with the District Office
    Research & Analysis (DORA) sites who will be using EFDS to research
    ways to improve detection of fraudulent refund schemes. Also, tests are
    being conducted in the Houston District and soon in the Philadelphia
    District for utilization of EFDS in the District Office, Criminal
    Investigation.
                                customer service
        1. IRS developed a ``Customer Service Vision'' to guide its efforts
    in improving service to taxpayers. The vision includes consolidating
    several parts of IRS' field organization into 23 customer service
    centers; providing customer service representatives with computer
    resources, training, and authority to enable them to resolve 95 percent
    of taxpayer issues during a single phone conversation; moving
    correspondence work to the telephone; and using automated applications
    to answer 45 percent of taxpayer's incoming calls.
        In October, 1995, GAO reported that IRS had made progress toward
    its customer service vision, but that the transition would last beyond
    the original goal of full operation in 2001 (GAO/GGD-96-3, Oct. 10,
    1995). Also in January, 1997, GAO reported that the promise of the
    vision was not likely to be fulfilled unless IRS made changes in the
    development and deployment of the integrated Case Processing (ICP)
    system, one of the primary information systems being developed to aid
    employees when taxpayers call for assistance (GAO/GGD-97-31, Jan. 17,
    1997).
        Question. What is the status of the field consolidation?
        Answer. Beginning in 1992, the IRS conducted a series of studies to
    fundamentally improve how it accomplished its mission. The studies
    resulted in decisions to make some major realignments in field office
    structure. These realignments were designed to: reduce management and
    overhead positions and redirect those resources to front line customer
    service and compliance programs; consolidate and improve our customer
    service telephone operations, and; centralize administrative and
    support responsibilities as much as possible.
        The realignments reduced the number of the IRS regional offices
    from seven to four; the number of districts from 63 to 33 and the
    number of customer service telephone sites from 70 to 23. The
    realignments were designed to take place in stages. First, during
    fiscal year 1994, the regional offices were consolidated. Executive and
    managerial personnel from the three discontinued regions were
    redeployed and their responsibilities assumed by the four remaining
    regions. The four region configuration became operational on October 1,
    1995. Throughout fiscal year 1995 the district offices designed and
    began to execute their transition plans in partnership with the
    National Treasury Employees Union (NTEU). On October 1, 1996, the IRS
    began operating with 33 districts. The vast majority of the executive
    and senior management personnel from the 30 non-continuing districts
    either left through retirement or transferred to continuing management
    positions during fiscal year 1995. In some cases managers chose to
    assume a technical position. At this point there was only minor
    redeployment impact on bargaining unit personnel and these actions were
    governed by negotiated agreement. At that time, it was acknowledged by
    both NTEU and IRS that there would be an impact on the employees in the
    compliance support operations. However, an agreement was reached which
    allowed the paraprofessional and administrative personnel to remain in
    their positions until September 30, 1996, unless they voluntarily left
    sooner.
        In October 1995, Congress failed to renew the IRS' compliance
    initiative. As a result, the IRS had more than 5,000 new compliance
    employees for which there was no funding. To address this situation,
    the IRS instituted a Servicewide hiring freeze (except for service
    center filing season hiring), severely curtailed training and travel,
    and sought other ways to fund these positions, such as a Servicewide
    furlough. One of the other areas examined was the field reorganization,
    to determine whether there was a way to achieve additional savings and
    to speed up the pace at which those savings would be realized.
        In April 1996, the Organizational Impact Analysis report was
    issued, which called for the elimination of several thousand additional
    positions, and an immediate consolidation of the compliance support
    units, and other overhead functions. Because the IRS no longer had the
    benefit of the compliance initiative, it was no longer feasible to
    finalize the reorganization solely through voluntary methods and
    attrition. NTEU was officially notified about the IRS' need to conduct
    a RIF. Negotiations began in August 1996, and the IRS and NTEU are
    currently at an impasse before the Federal Service Impasses Panel.
        To date, the IRS has placed through voluntary means approximately
    2,300 field employees, including 935 who accepted buyouts. There are
    currently slightly fewer than 900 occupied, non-continuing positions in
    IRS field offices.
        Question. Does IRS still plan to have 23 customer service centers?
        Answer. Yes, see Attachment 1.
        [The information follows:]
        [GRAPHIC] [TIFF OMITTED] T13JN19.005

        Question. Please identify those centers in operation and provide
    the schedule for implementing the others.
        Answer. See Attachment 1.
        Question. Please provide an overview of a typical center's
    workload, work processes, staffing, equipment, etc.
        Answer. A typical Customer Service center's workload and work
    processes include:
      --account and refund inquiries on toll-free lines
      --responding to taxpayer correspondence such as notices, requests for
            adjustments
      --reviewing and processing amended returns
      --accounts receivable work and preparation of installment agreements
      --preparing proposed adjustments to tax returns based on matching of
            third party documents and simple audits not requiring face-to-
            face interaction with taxpayers
        The typical front-line Customer Service employee is titled
    ``Customer Service Representative'' at the pay level of GS-07,
    beginning at $28,400 per year. Each employee has a computer terminal
    that provides access to taxpayer account information as well as various
    research databases.
        Question. Please identify those offices and units that have been
    closed or consolidated with the 23 centers and provide the schedule for
    closing or consolidating the remaining offices and units.
        Answer. See Attachment 1.
        Question. What changes has IRS made in developing and deploying
    ICP?
        Based on the results of reviews done by internal and external
    offices (GAO and the Illinois Institute of Technology Research
    Institute), on February 3, 1997, the Associate Commissioner/Chief
    Information Officer presented the ICP 2.0 Project Disposition Review to
    the Investment Review Board (IRB), recommending an immediate and
    orderly shutdown of the ICP 2.0 systems development effort. The IRB
    concurred with this recommendation. Further roll out of these
    requirements will be in accordance with the Modernization Blueprint and
    Sequencing Plan.
        Question. How have the problems with ICP affected IRS' ability to
    implement its customer service vision?
        Answer. Although further development of ICP to allow for on-line
    update capability has been terminated, an earlier release of ICP (ICP
    1.5), which provides employees with the ability to carry out research
    in several stand alone data bases from a single terminal, remains
    operational supporting the customer service vision and facilitating the
    work of 3,000 users nationwide. ICP 1.5 will continue to provide access
    to IRS databases of taxpayer information, simplified account analysis
    and account actions through universal workstations in a graphical
    environment. Resources will be committed to produce the appropriate
    life cycle documentation and system maintenance.
        Question. What are the future plans for ICP?
        Answer. After conducting a review of the Integrated Case Processing
    (ICP) development efforts, the Associate Commissioner for
    Modernization/Chief Information Officer recommended that ICP
    development, beyond the maintenance of Release 1.5, be halted. The
    Investment Review Board (IRB) concurred with this recommendation on
    February 24, 1997. Plans are being developed by the Deputy CIO for
    Systems Development for the reallocation of equipment and other
    resources (e.g., reassignment of staff to Year 2000 date conversion).
    In the long run, the functional requirements that ICP was designed to
    meet will be addressed.
        Question. How much has IRS spent on ICP? Please provide an overview
    of future funding for ICP, by fiscal year and type of expenditure.
        Answer. The IRS will have spent $176 million on ICP through the end
    of fiscal year 1997. This includes $34 million spent on ICP Release
    2.0, which was terminated by the Investment Review Board on February
    24, 1997. The balance of the funds has been used on earlier releases,
    which have been deployed. Maintenance for ICP Release 1.5, which has
    been deployed to 3,000 workstations at 14 sites to provide customer
    service representatives with single terminal and direct access to the
    major legacy systems, will continue until ICP is replaced in Phase I of
    the Modernization Sequencing Plan. ICP functionality has been
    incorporated in the Modernization Blueprint. Funding requirements for
    this functionality have not been identified. Modernized Phase I
    Business Cases are due 10/97.
        Projected funding needs for ICP Release 1.5, which include Customer
    Service operational costs (e.g., telecommunication, systems
    administrators), are:

                              [Dollars in millions]
    ------------------------------------------------------------------------
                                                       Fiscal year--
              ICP 1.5 expenditures           -------------------------------
                                                   1998            1999
    ------------------------------------------------------------------------
    Labor...................................            $2.2            $2.2
    ADP Equipment (including COTS)..........             0.2             0.1
    Other (e.g., travel, supplies, training,
     awards)................................              .1              .8
                                             -------------------------------
          Total.............................             2.5             3.1
    ------------------------------------------------------------------------

        Question. Please provide similar information for other automated
    systems, such as Telephone Routing Interactive System, Automated Tax
    Law, and Predictive Dialer, that are being developed or implemented to
    aid IRS in assisting taxpayers.
        Answer. The IRS has spent $36 million on the Telephone Routing
    Interactive System (TRIS). TRIS development is terminated with Release
    2.5, which is scheduled to be completely rolled out in 23 customer
    service sites in early 1998. Maintenance for TRIS 2.5 will continue
    until the TRIS-like functionality that has been identified in the
    Modernization Blueprint is implemented on the new target architecture.
    While the President's Budget included a request for $500,000, revised
    future funding needs to complete roll out and maintain Release 2.5 are:

                             [Dollars in thousands]
    ------------------------------------------------------------------------
                                                       Fiscal year--
              TRIS 2.5 expenditures          -------------------------------
                                                   1998            1999
    ------------------------------------------------------------------------
    Labor...................................          $2,863            $452
    ADP equipment and services (including
     COTS products).........................           6,606           4,655
    Other (e.g., travel, supplies, training,
     awards)................................             150             197
                                             -------------------------------
          Total.............................           9,619           5,304
    ------------------------------------------------------------------------

        The IRS has spent $23 million on Automated Tax Law (ATL). The ATL
    exists only on the Internet. The Investment Review Board deactivated
    the project office activities on March 3, 1997. All development of ATL
    telephonic applications will take place under Modernization.
        The IRS has spent $5 million on the Predictive Dialer initiative.
    The Predictive Dialer exists in the legacy systems as a test system in
    Buffalo, New York and two aging telecomputers in Austin and Atlanta
    which provide limited automated outcall capabilities for Collection ACS
    only. Development and deployment of corporate predictive dialer
    functionality will be done under Modernization as part of the Regional
    Communications Services components. Future funding requirements for
    legacy maintenance are:

                              [Dollars in millions]
    ------------------------------------------------------------------------
                                                       Fiscal year--
         Predictive dialer expenditures      -------------------------------
                                                   1998            1999
    ------------------------------------------------------------------------
    Labor...................................  ..............  ..............
    ADP equipment and services (including
     COTS products).........................          $1,425          $1,425
    Other (e.g., travel, supplies, training,
     awards)................................              75              75
                                             -------------------------------
          Total.............................           1,500           1,500
    ------------------------------------------------------------------------

        Question. In implementing the customer service vision, how has the
    work, authority and training of telephone assistors changed?
        Answer. Formerly, Taxpayer Service representatives were not given
    the authority to complete certain compliance procedures, such as
    initiating certain installment payment agreements. ACS representatives
    did not have the authority to perform certain account adjustments, such
    as penalty abatements. As Compliance and Taxpayer Service work
    processes are blended at sites nationwide, authority for resolving
    account issues and making account adjustments while a taxpayer is on
    the telephone have been standardized for all Customer Service
    assistors, ensuring consistency between similar programs in different
    locations.
        Questions. Is resolving taxpayers' issues 95 percent of the time
    during a single telephone conversation still an IRS goal? When does IRS
    expect to reach that goal?
        Answer. Implementing our goal of resolving taxpayer issues 95
    percent of the time in the initial contact \1\ was predicated on the
    assumption that full integration of legacy systems would occur.
    Additionally, we have revised our initial contact resolution measure by
    including quality as a component.
    ---------------------------------------------------------------------------
        \1\ Clarification: ``Initial contact resolution'' should not be
    equated with ``resolving taxpayers issues during a single telephone
    conversation''. Initial contact resolution means that the taxpayer will
    contact IRS one time a single time and all issues will be resolved
    without further action from the taxpayer.
    ---------------------------------------------------------------------------
        Question. What are the goals for fiscal year 1997 and 1998 and what
    rate has IRS achieved so far in fiscal year 1997?
        Answer. The corporate goal for fiscal year 1997 is 75 percent for
    initial contact resolution. To date, the IRS has achieved a 79.5
    percent initial contact resolution rate for fiscal year 1997. fiscal
    year 1998 goals will be formulated using baseline data gathered during
    1997.
        Question. What has IRS done to encourage taxpayers to use the
    telephone instead of corresponding with IRS?
        Answer. IRS has taken the following actions to encourage taxpayers
    to call rather than writing to the Service:
        (1) Improved access by standardizing extended hours of service;
    provided service on three Sundays during the filing season; provided
    service on the final weekend of the filing season and extended hours on
    the last two days of the filing season; put more employees on the
    phone; and detailed compliance personnel to Customer Service to answer
    complex questions.
        (2) Established four toll-free telephone numbers to speak with an
    assistor, access an interactive system, or listen to taped information
    on tax law or account questions. Our toll-free numbers are advertised
    locally, included in IRS tax forms and publications, and provided on
    notices or correspondence issued by the Service.
        (3) Implemented systems that provide assistors access to nationwide
    databases and allow account adjustments while the taxpayer is on the
    telephone, regardless of the geographic location of the taxpayer. Oral
    testimony authorities have been expanded, allowing assistors to resolve
    more issues while the taxpayer is on the phone. Also, taxpayers may
    expedite certain transactions by faxing their authorizing signature to
    an assistor.
        (4) Identified and redesigned notices. References to writing a
    letter have been deleted from all notices and a 1-800 number has been
    referenced for taxpayer use. Return envelopes, formerly enclosed with
    each notice, are no longer provided unless payment is requested from
    the taxpayer.
        Question. Has the decline in correspondence been consistent with
    the increase in telephone usage?
        Answer. We do not have valid statistics on this issue.
        Question. On average, how much does IRS save when taxpayers call
    rather than write?
        Answer. Cost comparisons are not available on all transactions at
    this time. However, telephone transactions result in less burden and
    less cost for the taxpayer than written inquiries. When taxpayers call
    rather than write it generally results in early resolution of issue.
    When issues are resolved early, the need for follow up or repeat
    contacts is lessened or eliminated.
        Question. What is the basis for IRS' goal of using automation to
    answer 45 percent of taxpayers' incoming calls?
        Answer. The long -range vision for Customer Service included the
    goal of answering 45 percent of taxpayer incoming calls through
    automation by the Year 2000, through technological improvements and
    increased oral authority to resolve questions by telephone. Customer
    Service has already exceeded this goal.
        Question. What has been IRS' experience over the last 3 years, and
    what are IRS' goals for the future?
        Answer. We expect our Tele-Tax system to provide service to more
    than 47 million taxpayers in fiscal year 1997. Our Tele-Tax system
    provided service to 29 million in fiscal year 1994, 51.3 million in
    fiscal year 1995, and 45.3 million in fiscal year 1996.
        Question. What are IRS' plans for expanding these services?
        Answer. We are purchasing new Tele-Tax equipment to replace older
    equipment that was subject to potentially significant down time. This
    will save approximately $300,000 in annual maintenance costs and will
    allow us to answer 6 million additional calls. Also, we are rolling out
    TRIS 2.5 that will provide additional automated and interactive
    applications.
        2. IRS' fiscal year 1998 budget request includes a new activity
    called ``Telephone and Correspondence,'' which includes much of what
    was in the old Taxpayer Services activity plus various non face-to-face
    compliance activities, such as those conducted by the Automated
    Collection System (ACS) sites and the Service Center Collection
    Branches. It is unclear how staffing will be allocated among the
    various areas within the Telephone and Correspondence activity. Also,
    the performance measures for the collection components of the Telephone
    and Correspondence activity are by FTE (such as ``ACS dollars collected
    per FTE'') and do not show the total collections expected from each of
    these collection components.
        Question. Please provide a breakdown of the 20,815 FTE's requested
    for the Telephone and Correspondence activity by the specific
    components within that activity. Also, please provide information on
    the total collection goals for each of the collection components in
    this budget activity.
        Answer.

                                                                         FTE
    Problem Resolution Program........................................   438
    Toll Free Operations.............................................. 6,459
    Adjustments/Taxpayer Relations.................................... 4,722
    Service Center Collection Branch.................................. 2,844
    Automated Collection System....................................... 2,839
    Service Center Examination........................................ 3,473
                            -----------------------------------------------------------------
                            ________________________________________________
          Total.......................................................20,815

        IRS Performance Measures for fiscal year 1998 for Automated
    Collection System (ACS): ACS Dollars Collected per FTE (in millions)
    target is $1.4.
        3. As part of the requirements of the Government Performance and
    Results Act of 1993, federal agencies are developing strategic plans
    that are intended to be the starting point for each agency's
    performance measurement efforts. The strategic plans are to include a
    mission statement, outcome-related goals, and a description of how the
    agency intends to achieve these goals. IRS has developed three
    strategic goals: increase compliance, improve customer service, and
    increase productivity. IRS' fiscal year 1997 and fiscal year 1998
    performance plans for the Telephone and Correspondence budget activity
    include customer service and productivity measures.
        Question. Does IRS measure the extent to which telephone and
    correspondence service affect taxpayer compliance? If not, why not?
        Answer. Estimating the impact of various IRS activities on
    voluntary compliance has been a very elusive goal. A number of
    studies--both within IRS and within the academic community--have
    attempted to measure these effects over the years, but none has been
    definitive. IRS's most recent effort, an econometric analysis of filing
    and reporting compliance over the 1982-1991 period, found no evidence
    that telephone assistance and correspondence service have any
    significant impact on the voluntary compliance of the general
    population. These results are consistent with the findings of an
    earlier study. That study found that taxpayer assistance improved the
    accuracy of returns, but also found that the revenue effect was neutral
    because the errors prevented by the assistance included fairly equal
    amounts of overstatements and understatements of liabilities. IRS is
    continuing to study these issues using additional and more recent data.
        Question. If so, when compared to an investment in enforcement,
    does an investment in these services have a greater or lesser effect on
    taxpayer compliance?
        Answer. Our customers, just like any other business--demand these
    services (correspondence, telephone, etc.); thus, the decision to
    invest resources into these activities is not based on return on
    investment, but on meeting our customers' needs.
        Question. How does IRS measure what taxpayers think of these
    services?
        Answer. IRS has used qualitative techniques such as focus group
    interviews and surveys to measure what taxpayers think of our telephone
    and correspondence services. A list of our more recent data gathering
    activities includes the following:
      --1993 Value Tracking Focus Group Report (This report is based on
            extensive focus group interviews exploring the perceptions
            taxpayers and small business owners have of the IRS and the
            services it provides.)
      --1993 Notice Clarity Focus Group Report (This study examined
            taxpayers reactions to a redesigned notice by comparing the new
            format to the current version)
      --1996 Notice Redesign Focus Group Report (These interviews obtained
            taxpayer feedback on newly redesigned notices.)
      --1995 IRS Customer Satisfaction Survey for Individuals -Final Report
            (The survey obtains data on the perceptions of adult U.S.
            residents regarding the quality of IRS service.)
        In fiscal year 1998, the IRS is planning a number of customer
    surveys, focus groups, and other vehicles to solicit customer feedback
    on its major products and services. These feedback mechanisms will
    allow the IRS to prioritize resources, develop new customer service
    measures by Business Lines, and measure district and service center
    level performance as it relates to customer satisfaction. Focus group
    interviews have been used in designing new customer service products
    such as the Automated Tax Law (ATL) application. Survey questions
    included at the end of Telephone Routing Interactive System (TRIS)
    scripts are used to obtain customer feedback. Management information
    collected by our systems indicates trends in taxpayer inquiries and
    taxpayer responses to our automated and interactive scripts. All such
    data is reviewed and applied to refine our customer service products.
    Also, the IRS has, and continues, to participate in the National
    Performance Review, conducting ``best practice'' interviews with
    industry leaders in customer service and applying the results to our
    products.
        Question. What has IRS learned?
        Answer. Some of the notable lessons learned from these reports are
    as follows.
      --IRS efforts to improve notices are having a positive effect. Tests
            of the revised math error notice indicated that taxpayers felt
            the new notice was easy to understand, and that the format and
            tone of the notice were appropriate. Taxpayer behavior also
            indicates that when notice language and format is clear and
            brief, the IRS receives fewer notice inquiries.
      --Survey and focus group results indicated that taxpayers expect the
            IRS to respond to their account inquiries like other major
            financial institutions. They want complete and current account
            information from the first IRS employee with whom they speak.
            They wish to be treated with courtesy and professionalism.
            Small business taxpayers especially, feel that IRS hours of
            operation need to be expanded to better service their needs.
        Question. And what actions has IRS taken in response?
        Answer. Customer Service has used customer feedback in developing
    and enhancing scripts for Automated Tax Law (ATL) and Telephone Routing
    Interactive System (TRIS) applications by conducting focus groups. We
    have also hired a consultant to make our systems more user friendly.
    While we recognize that many opportunities to improve our service still
    remain, we are proud of several recent accomplishments. The IRS
    conducted a comprehensive review of its notices to taxpayers and
    eliminated some notices while redesigning others. The redesigned
    notices for earned income tax credit, refund, balance due and estimated
    tax were favorably received by taxpayers in focus group interviews.
    Taxpayers generally described the redesigned notices as friendlier,
    easier on the eye, and more ``people'' oriented.
        Based on information regarding telephone service to taxpayers, the
    IRS has undertaken a nationwide program, the Performance Data System,
    to assess and train customer service representatives. Training will be
    conducted in areas of customer service such as interpersonal
    sensitivity, negotiating, oral communications and listening skills.
    Preliminary data show the training to be effective in significantly
    improving the quality of telephone service provided by IRS customer
    service representatives. A follow-up test will be administered in 1998
    to determine if long term benefits resulted from the training.
        We anticipate additional study and process improvements in the
    arena of telephone access and correspondence service.
        4. An administrative provision in the fiscal year 1997
    appropriation act said that funds provided for IRS shall be used to
    provide ``as a minimum, the fiscal year 1995 level of service,
    staffing, and funding for Taxpayer Services.'' Another provision said
    that IRS may proceed with its field support reorganization in fiscal
    year 1997 only if it ``maintains in fiscal year 1997, the current level
    of taxpayer service employees that work on cases generated through walk
    in visits and telephone calls to IRS offices.''
        Question. Please explain, in detail, what IRS is doing to satisfy
    these provisions.
        Answer. In fiscal year 1997, the IRS has substantially increased
    the level of service provided to taxpayers through telephone,
    correspondence and walk-in assistance programs. In total, we expect to
    assist 116 million taxpayers. Much of the increase is attributable to
    improvements in the level of access to telephone assistance, which has
    increased from 39 percent in fiscal year 1995 to nearly 70 percent in
    fiscal year 1997 (as of 5/97).
        Question. How is IRS interpreting these provisions? For example, is
    it IRS' belief that it must maintain, as a minimum, the same level of
    staffing and service as in fiscal year 1995 for each element of
    taxpayer service (e.g., walk-ins and telephone) or just for taxpayer
    service overall (with the freedom to reduce walk-in service and
    increase telephone service)?
        Answer. IRS has made every effort to conform to both the letter and
    the spirit of the Conference Report language. We submitted on March 27,
    1997, a report to the Appropriations Committees on the impact of our
    field support reorganization on taxpayer service programs. Our
    interpretation is this restriction should be applied for ``overall''
    taxpayer service.
        A copy of the ``Report on the Internal Revenue Service Field
    Support Reorganization has been provided as Attachment 2.
        [The information follows:]
                                  attachment 2
      Report on the Internal Revenue Service Field Support Reorganization
                                  introduction
        This report is prepared to meet the requirement of Public Law 104-
    208, which funded the Internal Revenue Service for fiscal year 1997. An
    appendix is included which defines the technical terms used throughout
    the report.
        Section 105 of the IRS Administrative Provisions in the Treasury
    Department Appropriations Act, enacted in Public Law 104-208 states,
    ``The Internal Revenue Service (IRS) may proceed with its field support
    reorganization in fiscal year 1997 after it submits its report, no
    earlier than March 1, 1997, to the Committees on Appropriations of the
    House and Senate only if the IRS maintains, in fiscal year 1997, the
    current level of taxpayer service employees that work on cases
    generated through walk in-visits and telephone calls to IRS offices.''
    \1\
    ---------------------------------------------------------------------------
        \1\ As discussed with the Majority Staff Director of the Senate
    Appropriations Subcommittee, at the time of the Bill, the word
    ``cases'' refers to Problem Resolution Program cases generated either
    through walk-in activity or local telephone contact, but does not refer
    to calls received via the ``1-800'' number.
    ---------------------------------------------------------------------------
        The Joint Explanatory Statement in Conference Report 10463 states,
    at page 1155, in reference to section 105: ``The conferees direct the
    IRS to report to the House and Senate Committees on Appropriations no
    earlier than March 1, 1997, on the impact of the reorganization with
    respect to: (1) taxpayer services, particularly taxpayer education and
    walk-in customer service offices; (2) problem resolution cases; and (3)
    the overall cost/benefit of the proposed restructuring. This report
    should also address how IRS taxpayer services will ensure adequate
    service to taxpayers in the future.''
        The reorganization has not and will not adversely impact service to
    taxpayers or the Problem Resolution Program. In fact, the IRS believes
    that completing the field reorganization will result in better service
    since resources will be redirected to customer service and compliance
    programs.
                                   background
        Beginning in 1992, a series of studies were conducted to
    fundamentally improve how IRS accomplished its mission. The studies
    resulted in decisions to make some major realignments in the field
    office structure. These realignments were designed to: reduce
    management and overhead positions and redirect those resources to front
    line customer service and compliance programs; consolidate and improve
    customer service telephone operations, and; centralize administrative
    and support responsibilities as much as possible.
        The realignments reduce the number of IRS regional offices from
    seven to four; the number of districts from 63 to 33 and the number of
    customer service telephone sites from 70 to 23. The realignments were
    designed to take place in stages. First, during fiscal year 1995, the
    regional offices were consolidated. Executive and managerial personnel
    from the three discontinued regions were redeployed and their
    responsibilities assumed by the four remaining regions. The four region
    configuration became operational on October 1, 1995. Throughout fiscal
    year 1995 and early fiscal year 1996, the district of flees designed
    and began to execute their transition plans in partnership with the
    National Treasury Employees Union (NTEU). On October 1, 1996, the IRS
    began operating with 33 districts. The majority of the executive and
    senior management personnel from the 30 non-continuing district offices
    either retired or transferred to continuing management positions during
    fiscal year 1995. In some cases managers chose to assume a technical
    position. At this point the minor redeployment impact on bargaining
    unit personnel was governed by negotiated agreement.
        Because of the Congressional approval of a five-year revenue
    initiative in the fiscal year 1995 budget which funded over 6,000
    compliance full time equivalents (FTE), an assumption underlying all
    these actions was that the resources saved through consolidation would
    be redirected and invested in the core business of customer service and
    compliance, not that, even when jobs were being eliminated, IRS would
    significantly reduce overall staffing levels. The revenue initiative
    allowed the IRS and NTEU to join in formulating a series of
    redeployment strategies and transition plans designed to capitalize on
    the experience of the work force and ensure continued employment. The
    plans assumed a gradual transition which would allow for attrition and
    voluntary job movement to adjust necessary staffing levels between the
    continuing and non-continuing offices.
        This revenue initiative was discontinued after one year, which
    meant that 6,000 FTE were no longer funded, and thus the positions into
    which employees affected by the reorganization could be placed were no
    longer available. As a result, the IRS could no longer plan to complete
    the field restructuring over the period of time originally envisioned.
        As discussed later under the section, ``Costs and Benefits of
    Reorganization,'' the IRS will achieve significant savings over five
    years which will help the IRS absorb the unfunded cost increases that
    will result from the flat budgets proposed for the Service through the
    year 2002. For example, the savings will be used to fund essential
    compliance support employees, to improve taxpayer access to the toll-
    free customer service telephone program and to expand employee
    opportunities for advanced technical training.
                   effect of reorganizing on customer service
        The Joint Explanatory Statement of the Committee of Conference, at
    page 1154, in reference to section 103 states, ``The conference
    agreement includes a provision which requires the IRS to maintain the
    fiscal year 1995 level of service, staging, and funding for Taxpayer
    services. The conferees agree that this does not mean that IRS should
    be required to rehire staff or to open closed offices. The intent of
    the provision is to ensure that, overall, IRS maintains a level of
    Taxpayer Services which meets or exceeds the 1995 level of services.
    Additionally, the IRS should be very sensitive to the needs of
    taxpayers who use walk-in service centers during the tax filing
    season.'' [Italic added for emphasis.]
        The IRS has continuously committed to Members of Congress that the
    consolidation of compliance support organizations would not diminish
    service to taxpayers. In fact, the realignments proposed for field of
    rices, including the customer service sites, together with ongoing
    program improvements, will improve the Service's ability to deliver
    effective and timely service to greater numbers of taxpayers.
        Systems and telecommunications improvements now afford the IRS the
    ability to handle taxpayer inquiries regardless of their geographic
    location. This has opened up tremendous opportunities to establish
    centralized, well equipped call sites, staffed with well trained
    assistors, which will offer expanded hours of operation. If supported
    by resources partially redirected from field reorganization savings,
    these opportunities can be fully realized, bringing cost benefits to
    the IRS through reduction of overhead and facilities costs, but also
    bringing service benefits to the taxpayer through better access and the
    quality of answers.
        Customer service in the IRS now takes many forms. Today, taxpayers
    can get help in a number of ways: electronically through the IRS
    Homepage on the Internet and assorted Bulletin Boards; by telephone
    using various toll free numbers to access an interactive system, taped
    messages or to speak with an assistor; and through walk-in service at
    an IRS office.
        As illustrated in Chart I on the next page, for the current fiscal
    year, taxpayer walk-in assistance offices in combination with improved
    telephone services is projected to-deliver nationally a level of
    service considerably above that delivered in the 1995 filing season.
    Taxpayers have been more successful in getting through to the IRS on
    its toll-free telephone lines, and the total number of people served by
    the IRS is expected to increase to 118 million in fiscal year 1997 (an
    increase of 11.6 percent over the prior year).
        To ensure that resources are used as effectively as possible, walk-
    in offices and staff have been placed in locations which generally
    serve the most taxpayers. Many walk-in sites were consolidated into
    others in the same geographic area. Despite the reduction in the actual
    number of sites providing walk-in service, the IRS has helped more
    taxpayers in walk-in sites this filing season than for the same period
    last year. From January of this year through March 8, 1997, the IRS has
    assisted 135,000 more taxpayers in walk-in sites, an increase of 7.7
    percent over the same period last year.
        In addition, taxpayer education activities will continue to be
    available in non-continuing district locations through the Volunteer
    Income Tax Assistance (VITA) Program, Tax Counseling for the Elderly
    (TCE), Understanding Taxes, Small Business Tax Education, and other
    community programs. Employees from walk-in assistance and compliance
    activities will be temporarily used as needed in the non continuing
    districts to work on these programs, particularly during the filing
    season.

                                                CHART I--CUSTOMER SERVICE
    ----------------------------------------------------------------------------------------------------------------
                                                                                   Fiscal year--
                                                             -------------------------------------------------------
                      Service program area                                                    1997      1997 thru 3/
                                                               1995 actual   1996 actual    projected       8/97
    ----------------------------------------------------------------------------------------------------------------
    Telephone Access:
        Total Calls Answered................................   101,100,000    99,100,000   111,400,000    42,500,000
        Toll-Free Calls Answered by IRS assistors...........    39,200,000    45,100,000    60,200,000    21,900,000
        Calls Answered per FTE..............................         7,051         8,321         8,610           N/A
        Level of Access (percent)...........................          39.0          46.0            60            72
        Tax Law Accuracy Rate (percent).....................          90.1          91.6            92            94
    Taxpayer (TP) Education/Outreach:
        TP's Helped by Volunteer Income Tax Assistance
         (VITA).............................................     1,800,000     1,900,000     1,900,000           N/A
        TP's Helped by Tax Counseling for the Elderly.......     1,700,000     1,600,000     1,600,000           N/A
        Outreach \1\ (All Other Education Programs).........     9,600,000     9,200,000     9,200,000           N/A
    Walk-In Customer Service: Number of People Served.......     7,500,000     6,400,000     6,400,000     2,900,000
    ----------------------------------------------------------------------------------------------------------------
    \1\ Outreach programs include tax education packages and seminars for students, small businesses, etc.

         effect of reorganizing on the problem resolution program (prp)
        The goal of PRP is to make certain that taxpayer rights are
    protected, to serve as an advocate for the taxpayer within the IRS and
    to represent the interests and concerns of taxpayers. The IRS will
    continue to work all PRP cases, regardless of volume, and adequate
    staffing will be provided to complete them. The caseworkers themselves
    will be generally consolidated in the district headquarters offices,
    and will continue to provide quality service to taxpayers in all
    locations within the district.
        The district Taxpayer Advocate (formerly the district Problem
    Resolution Officer) continues to be responsible for the oversight,
    training and direction of the caseworkers. An Associate Taxpayer
    Advocate (formerly known as Associate Problem Resolution Officer)
    remains in all non-continuing district offices and will handle local
    needs, continuing the commitment the IRS made to Members of Congress
    when it announced the district office consolidations in 1995. The title
    change was the result of the Taxpayer Bill of Rights 2, which also
    provided the Advocate with additional authority to assist taxpayers in
    hardship situations.
        As indicated in Chart II on the Problem Resolution Program (PRP),
    the IRS will continue to be responsive to taxpayers who experience
    problems.

                                          CHART II--PROGRAM RESOLUTION PROGRAM
    ----------------------------------------------------------------------------------------------------------------
                                                                                       Fiscal year--
                                                                     -----------------------------------------------
                          Service Program Area                                                             1997
                                                                        1995 actual     1996 actual     projections
    ----------------------------------------------------------------------------------------------------------------
    Quality Customer Service Rate (District Office) \1\ (percent)...            79.9            80.6            81.6
    Total PRP Cases Closed (same as cases received).................         416,476         328,088         ( \2\ )
    ----------------------------------------------------------------------------------------------------------------
    \1\ Rate at which customer service standards are met in case work processing based on monthly review of samples
      of closed cases from each district and service center. A scoring system allocates point values to the
      processing standards.
    \2\ No Projection. The IRS will work all PRP cases as it has in previous years.

                      costs and benefits of reorganization
        The IRS will achieve significant savings as a result of its
    reorganizations (through fiscal year 2001). When the reorganization
    efforts in the field offices and the Headquarters Office in Washington,
    D.C. are combined, the total net five-year savings is estimated at
    $306.8 million, which is being redirected to front line customer
    service and compliance operations. This total net savings estimate
    differs from the original estimate provided to Congress for a number of
    reasons. The original estimate of $771 million in August 1996, included
    $441 million in savings from the elimination of 1,500 Information
    Systems (IS) positions. This was the best estimate of the required IS
    downsizing based on the fiscal year 1997 IRS budget being discussed at
    that time. In November 1996, IRS reduced its savings projection to $431
    million, which included the elimination of 819 IS positions. As the
    proposed downsizing of IS has been reduced, so have the estimated
    savings from the total IRS downsizing effort.
        As shown in Chart III below, the projected savings from the field
    component of the reorganization have remained fairly constant. The
    original estimate was $144 million. This was based on an anticipated
    reduction in force date of July 1, 1997. With the separation date now
    being projected as September 1, 1997, coupled with slight changes in
    the number of positions to be eliminated, the estimate is now $138
    million.

                                         CHART III--FIELD REORGANIZATION SAVINGS
                                                  [Dollars in millions]
    ----------------------------------------------------------------------------------------------------------------
                                                                        Fiscal year--
                                                   -------------------------------------------------------   5-year
                                                       1997       1998       1999       2000       2001      total
    ----------------------------------------------------------------------------------------------------------------
    Transition Costs..............................      $33.8      $10.2  .........  .........  .........      $44.0
    Cost of Filling Positions.....................       24.0       49.9      $53.6      $54.7      $55.9      238.1
    Salary Savings................................       38.3       90.8       97.0       97.0       97.0      420.1
    Net Savings...................................     (19.5)       30.7       43.4       42.3       41.1      138.0
    ----------------------------------------------------------------------------------------------------------------
    Notes:
      --Transition costs include the cost of buyouts, moves, and reduction in force (RIF).
      --2,371 field positions are eliminated
      --1,312 needed field positions are filled
      --969 employees in field positions accept buyouts
      --Cost of new positions is the salaries and training costs of positions created due to reorganization.
      --Salary savings is the reduction in salary expenses from positions eliminated due to the reorganization.
      --These costs assume employees separated by RIF are off the rolls by September 1, 1997.
      --All costs considered in constant dollars.
      --Beginning in fiscal year 1998, savings include approximately $8.7 million more in annualized rent cost
      avoidance, in addition to the
          $138 million shown above.

        The redirection of these resources to front line customer service
    and compliance operations will allow the IRS to maintain stable levels
    of service and compliance in fiscal year 1998.
                                   conclusion
        The efficiencies gained from the reorganization, and the ongoing
    actions discussed below, will enable the IRS to exceed the fiscal year
    1995 level of service to taxpayers. In addition, the IRS continues to
    put the customer first and introduce and refine new services that make
    it easier for taxpayers to get information, file their returns, pay
    their taxes and get their refunds, and less costly for the IRS to
    administer. For example:
      --The IRS is making it easier for taxpayers to file and get help.
            During fiscal year 1996, the IRS received 15 million
            electronically filed-returns, an increase of 27 percent over
            fiscal year 1995. The biggest success was the TeleFile program,
            where 2.8 million taxpayers were able to file by making an
            easy, short telephone call (about nine minutes) to a toll-free
            number. No paper is required. The returns processed through the
            program had an accuracy rate of 99.5 percent. The TeleFile
            program is available to over 26 million taxpayers in fiscal
            year 1997. Through March 21, 1997, the IRS has received 3.8
            million returns, more than all of fiscal year 1996.
      --The IRS has a world-class Web site on the Internet. The site
            provides access to all IRS forms and publications, plain
            language summaries of tax regulations, the IRS Bulletin,
            answers to frequently asked questions and an array of other
            self-help tools. This service is available worldwide, 24 hours
            a day, to anyone with a personal computer and access to the
            Internet. As of March 16, 1997, IRS has had 82 million contacts
            to its Web site during this fiscal year, compared with 30
            million for the same period last year.
      --Another effort to provide faster, more convenient service to
            taxpayers is the TaxFax Service. Small businesses and
            individuals are the primary users of this system. Through it,
            taxpayers can order and receive tax forms and instructions
            directly, thus providing faster service 24 hours a day at less
            cost to the IRS. So far this filing season, over 240,000
            requests for tax forms and instructions have been processed.
      --The IRS has a special telephone number for tax refund inquiries.
            The new number helps taxpayers who only have a refund question,
            and frees up the availability of assistors for taxpayers who
            need help on tax law or account questions. Refund inquiries are
            also available through TeleTax 16 hours a day on weekdays.
      --Taxpayers can use automated assistance options, such as interactive
            telephone applications that allow callers to use their touch-
            tone phones to get tax account information. Two benefits of the
            initiatives are that callers can learn the status of their
            refunds and enter into installment agreements by using their
            touch-tone telephones. Also, the automated Tax Topics
            information service is available 24 hours a day, seven days a
            week.
      --The IRS conducted a comprehensive review of its notices to
            taxpayers. During 1996, it eliminated 12 notices that are
            mailed out 18 million times per year. This relieved taxpayers
            from unnecessary additional contacts with the IRS, and saved
            postage costs for the IRS. IRS plans to eliminate another 20
            notices or letters for fiscal year 1997.
      --Employers nationwide can now electronically file Form 941,
            Employer's Quarterly Tax Return. The IRS processed almost
            364,000 electronically filed Forms 941 in 1996. Electronic
            filing of Forms 941 has increased accuracy and reduced
            processing time from three weeks to as little as one week.
                         Appendix, Definitions of Terms
        After-Hours Calls.--The number of telephone calls after normal IRS
    business hours in which the callers select an automated service and
    complete the interactive process.
        Calls Answered per FTE.--The total of all calls answered [including
    assistor and automated responses, all customer service call sites and
    International, but excluding TeleTax calls received at (800) 829-4477]
    divided by total program FTE expended.
        Level of Access.--Actual calls answered (callers served) divided by
    unique number demand, i.e., the number of individual phone numbers from
    which the IRS received calls.
        Tax Counseling for the Elderly (TCE).--The TCE Program is
    administered by the IRS in cooperative agreements with nonprofit
    agencies and organizations. It establishes a network of trained
    volunteers who provide free tax information and return preparation to
    taxpayers 60 years of age or older.
        TaxFax.--System allowing taxpayers to order and receive tax forms
    and instructions by directly entering codes into their fax machines.
    This results in faster service (24 hours a day) for taxpayers and
    savings in postage and handling to the IRS. Small businesses and
    individuals are the primary customers.
        Tax Law Accuracy Rate--District Only.--Accuracy of tax law
    responses provided by IRS telephone assistors at district toll-free
    telephone sites, as measured by the Integrated Test Call Survey System,
    a centrally administered quality control site.
        TeleTax.--TeleTax is an automated interactive system which became
    available eleven years ago. It offers prerecorded information on the
    status of tax refunds and on 148 tax topics. The system is available to
    taxpayers seven days a week, 24 hours a day for tax topic information,
    and 16 hours on week days for refund inquiries.
        Toll-Free Calls Answered by IRS Assistors.--Number of telephone
    calls handled by IRS employees through the toll-free taxpayer service
    system, but not including local calls or those handled by automated
    applications.
        Total Calls Answered (Including Automation and After Hours).--Total
    of all telephone calls handled by IRS assistors on toll-free and non-
    toll free lines, through TeleTax and Interactive Voice Response Units,
    and after-hours applications.
        Volunteer Income Tax Assistance (VITA).--Provides free tax
    assistance at community locations to individuals who cannot afford
    paid-professional tax help. Volunteers trained by the IRS assist
    taxpayers with basic returns, particularly people who have limited
    income or who have special needs, e.g., are disabled, non-English
    speaking, elderly, etc.
        Question. What are the fiscal year 1995 levels of service, staffing
    and funding that IRS is using as a baseline for implementing these
    provisions?
        Answer. As indicated previously, nearly 109 million taxpayers were
    assisted through telephone, walk-in and correspondence contacts in
    fiscal year 1995 (compared to 116 million in fiscal year 1997).
    Resources devoted to Taxpayer Service in fiscal year 1995 totaled 8,049
    FTE and $447.6 million (compared to 8,048 FTE and $482.0 million in
    fiscal year 1997).
        5. As a result of restructuring, two components of customer service
    have been transferred to IRS' enforcement functions. The Collection
    function is now responsible for managing the walk-in taxpayer service
    operation and the Examination function is responsible for managing
    taxpayer education activities.
        Question. Please explain the rationale for assigning these customer
    service activities to functions whose basic missions are enforcement
    oriented.
        Answer. Customer Service is responsible at the National level for
    the oversight of the Customer Service programs. On site and at the
    regional level, the day to day operation of the walk-in program is
    overseen by Collection management since a high percentage of employees
    on site in a walk-in office are Collection employees and walk-in issues
    are generally notice related issues that tend to be Collection related
    issues. IRS has determined that early resolution of account issues is
    the most cost effective way of doing business and is in the best
    interest of taxpayers. With that in mind, we have linked the various
    components of the organization to make it easier for taxpayers to
    comply with the tax laws. The Customer Service organization provides
    taxpayers with answers to tax law and account/procedural questions,
    provides payment options, computer matches third party information
    documents to filed returns and identifies non filers, performs
    correspondence audits to correct simple issues and assists taxpayers
    with balance due issues and, when appropriate, places a lien or levy
    against the taxpayer's assets. All of these functions are provided in a
    non face-to-face environment and the same taxpayer, or customer, may
    need to interact with IRS in several of these areas on the same issue.
        For example, under the former structure, a taxpayer who owed taxes
    might have to call three different functions to: 1) get answers to tax
    law questions to file his return; 2) request the abatement of
    penalties; and 3) set up a payment plan. Assistors in Customer Service
    treat taxpayers as customers of the entire IRS regardless of where they
    live and file their tax returns, rather than as customers of a single
    function within the IRS. The Customer Service structure allows for
    greater flexibility in the use of resources, allowing IRS to maximize
    compliance while reducing burden for the taxpayer and cost for the IRS.
        Question. How will IRS ensure that walk-in services and taxpayer
    education receive their fair share when Examination and Collection have
    to make tough decisions as to where to allocate their resources? On
    what basis, for example, will Collection make resource allocation
    decisions when faced with the competing priorities of collecting
    delinquent debts and serving taxpayers at walk-in sites?
        Answer. For fiscal year 1997 and 1998, the IRS will maintain both
    programs at the fiscal year 1996 level. The IRS continues to expand and
    enhance outreach efforts associated with taxpayer education, including
    VITA sites, Tax Counseling for the Elderly and a multitude of
    specialized programs aimed at educating students and new business
    owners on our tax administration system.
        During the height of the filing season, both Examination (tax
    auditors and revenue agents) and Collection (revenue officers)
    personnel are detailed to handle walk-in traffic in field posts of duty
    as needed to assist taxpayers with their tax law and account questions.
        Question. How does IRS measure and compare the impact of these
    different activities on its mission-effectiveness indicator?
        Answer. The Mission Effectiveness Indicator (MEI) is influenced by
    a number of external factors, such as personal income growth,
    inflation, unemployment, and other demographic characteristics. It is
    difficult to isolate the impact of these external factors from the
    impact of IRS actions. Consequently, it is very difficult to make
    direct quantitative links between IRS activities and the MEI. However,
    the IRS does not rely solely on this measure to evaluate its
    performance. IRS routinely monitors a large number of operational
    measures on which its activities have a clearly measurable impact.
        6. IRS' fiscal year 1996 toll-free telephone accessibility goal was
    37 percent. IRS reports that it achieved a rate of 46 percent by using
    automated call technology, improving call routing, balancing tax
    information and account calls, and emphasizing the use of the probe and
    response guide.
        Question. What did IRS do in fiscal year 1996 in each of these
    areas?
        Answer. In fiscal year 1996, level of access to toll-free lines for
    tax law and account assistance was 46 percent an increase from 39
    percent in fiscal year 1995.
        There are several noteworthy accomplishments that enabled us to
    make significant improvements in our customer service. The
    implementation of a system which allowed our assistors to access data
    in all of the service centers gave us the capability to maximize
    nationwide call routing. This initiative allowed us to provide more
    equal access around the nation and not only to answer questions, but
    also to make account adjustments from anywhere in the country.
        In 1996, we completed the installation of Automated Call
    Distributors (ACD's) in all sites. These devices allowed each callsite
    to route calls to an assistor with the expertise to answer the
    taxpayer's specific question. The combination of Voice Response Units
    (VRU's) and ACD's boosted our productivity. These two pieces of
    equipment efficiently identify issues, enabling taxpayers to be routed
    to either an automated system or to an assistor. The assistors are
    available for more complex issues, and the less complex inquiries are
    channeled to the automated systems. By more effectively routing
    nationwide traffic and getting individual calls to the appropriate
    assistor, we experienced an increase in productivity of approximately
    15-20 percent in each site as ACD's were installed.
        Another noteworthy achievement was the distribution of more than
    3,000 terminals equipped to use an early version of ICP which allowed
    the assistors to access multiple databases from a single terminal.
        7. According to the performance measures in IRS' fiscal year 1998
    budget estimates, telephone accessibility is projected to increase from
    46 percent in fiscal year 1996 to 60 percent in fiscal year 1997 and to
    remain at that level in fiscal year 1998.
        Question. What is IRS doing differently in 1997 compared to 1996
    that will enable it to increase accessibility to 60 percent?
        Answer. For this filing season, we implemented strategies to
    increase the number of taxpayers we can assist by increasing access. We
    expanded hours of service, provided Sunday service three times during
    this filing season and extended hours for the last four days of the
    filing season. We implemented a new toll-free number that enables
    taxpayers to quickly determine the status of their refunds.
        We are using our resources differently to ensure more taxpayers are
    served--for tax law questions, taxpayers who wish to call after hours
    or do not want to wait, may leave their questions on a recorded
    message, and an employee will call the taxpayer back within two
    business days with an answer. We are putting more people on the
    telephones. For complex questions, we have assigned senior technical
    personnel to answer written referrals. We have implemented consistent
    levels of authority to ensure that all assistors can make account
    adjustments while the taxpayer is on the telephone. We will enhance
    automation by introducing new interactive applications that allow more
    taxpayers to get answers to their questions and resolve issues without
    having to speak with an assistor.
        We are improving call site management practices by implementing
    site performance measures for fiscal year 1997 that address efficiency
    rather than volume. We have implemented guidelines for the use of
    automated applications that focus on customer satisfaction rather than
    calls answered.
        Question. Has IRS made any changes to the way it measures
    accessibility in 1997 compared to 1996?
        A slight change was made to the level of access formula for fiscal
    year 1997. Since demand is measured on a 24-hour basis, we measured
    calls answered on a 24-hour basis in fiscal year 1997. In fiscal year
    1996, calls answered did not include after hours calls.
        Question. Why is no increase projected for fiscal year 1998? Even
    without additional staffing in 1998, shouldn't some increase be
    expected as a result of improved productivity through additional
    modernization of systems or work processes?
        Answer. Based on our experience in fiscal year 1997, we are
    planning for improvements in our level of access, contingent on budget
    availability.
        8. We understand that one step IRS took to increase telephone
    access in fiscal year 1997 was to detail staff from other functions,
    such as the function that handles taxpayer correspondence.
        Question. How many staff have been or will be detailed from other
    IRS areas to answer telephone calls in 1997, and from what areas are
    those staff being detailed?
        Answer. The IRS expended 124.9 FTE detailed staff from Examination
    to respond to questions left by taxpayers on our phone answering
    systems. We also detailed employees from Adjustments, Taxpayer
    Relations, Collection and Examination Branches in the service centers
    to increase telephone accessibility. Centers reported 126 FTE detailed
    to answering telephone calls during the filing season.
        Question. Does IRS expect to do the same in 1998?
        Answer. Yes, we expect to detail staff in from the various areas
    again.
        Question. How are these details going to affect IRS' ability to
    respond in a timely manner to taxpayer correspondence? Do these details
    signify IRS' belief that it is more important to answer the phone than
    respond to correspondence?
        Answer. We are committed to maintaining our standards on timely and
    accurate responses to taxpayer correspondence. We are continuing to
    cross train our staff to become more flexible in order to be able to
    shift personnel to handle peak workloads in various areas of Customer
    Service.
        9. For fiscal year 1997, IRS has several toll-free numbers for
    persons to call if they need assistance. There are separate numbers,
    for example, for persons who have questions about their account, the
    tax law, and their refunds.
        Question. Does the accessibility measure cited in IRS' budget
    estimates relate to all those toll-free lines?
        Answer. Yes.
        Question. If not, to what toll-free line(s) does the measure
    relate, and what are the accessibility goals for the other lines in
    fiscal year 1997 and 1998?
        Answer. Our level of access goal is a combined goal for our toll-
    free assistance lines.
        10. The best way to improve telephone accessibility is to reduce
    the need for taxpayers to call IRS in the first place.
        Question. What is IRS doing to reduce the need for taxpayers to
    call IRS? In responding to this question, please explain what IRS is
    specifically doing to simplify forms, clarify instructions and clarify
    notices.
        Answer. Recent notice re-engineering efforts eliminated 32
    different notices which resulted in 21 million fewer notices being
    mailed to taxpayers, preventing 21 million potential telephone
    inquiries. We are continuing to reduce the number of taxpayers who have
    to call us by improving or eliminating unclear or confusing taxpayer
    notices.
        Many taxpayers call about the status of their refund. Despite a
    reduction in the amount of time it takes to process returns and issue
    refunds, a significantly increasing percentage of all calls are related
    to the status of funds. We continue to research why we get so many
    inquiries and how to provide taxpayers with enough information so that
    they do not need to call.
        We document how the level of access affects repeat callers and the
    number of taxpayers who walk into our offices, how it impacts the
    amount of correspondence we receive, and how it alters our Problem
    Resolution cases.
        With such information, we can communicate better with taxpayers, as
    well as make better decisions about the application of resources, the
    need for additional systemic support, and the use of technology.
        Question. What constraints, if any, prevent the IRS from revising
    forms or clarifying notices?
        Answer. The IRS annually reviews its forms and instructions to
    identify opportunities to simplify them and to reduce burden. Over half
    of the reporting burden (2.7 million hours) is based on three tax
    returns forms: the 1040 for individuals, the 1120 for corporations, and
    the 1065 for partnerships. These forms represent the fundamental reason
    for the amount of this data; it is collected to administer the tax
    laws.
        The tax laws reflect a complex mix of policy goals that include
    achieving voluntary compliance, equity, economic efficiency, revenue
    protection, ability to effectively administer the law, and reduce
    taxpayer reporting burden. The IRS is faced with the formidable task of
    incorporating the legislative changes into comprehensive yet
    understandable tax forms, instructions, and publications. Extensive
    legislative changes enacted past July of any tax year makes it more
    difficult to implement the changes to forms, instructions, and
    publications because the IRS has less lead time to analyze the
    provisions, develop new and revised material for taxpayers and ensure
    that the information is printed and distributed timely to taxpayers at
    the beginning of the filing season.
        The Service has undertaken a major initiative to simplify and
    reduce the number of notices and letters that are sent to taxpayers. We
    are continuing to make significant progress in his area. So far, the
    IRS has eliminated 32 notices and letters that were previously sent out
    over 21 million times a year, reducing the need for taxpayers to call
    or write the IRS about the notices.
        Computer programs that generate most of our Master File and
    Integrated Data Retrieval System notices use older technologies that
    make it more difficult to make changes to the notices quickly.
        Other programming priorities, such as the Year 2000 conversion, can
    supersede program enhancements to these notices.
        Question. What legislative, technological, or procedural changes
    are needed to facilitate these processes? What specific evidence can
    IRS point to that illustrate these actions have had a positive effect?
        Answer. Technological alternatives to programming Master File
    notices, such as adequate software to provide nationwide one-page
    taxpayer notices with alternatives for individual text modification are
    also needed. These will save time and allow for forms to be modified on
    a timely basis. IRS has used qualitative techniques such as focus group
    interviews and surveys to measure what taxpayers think of our telephone
    and correspondence services. A list of our more recent data gathering
    activities were provided earlier in this document.
        Question. For example, does IRS keep statistics that would show how
    the number of calls relating to specific notices have changed since
    those notices were revised?
        Answer. IRS does not keep statistics on specific notices and
    related phone calls.
                               document matching
        1. According to IRS' fiscal year 1998 budget estimates, one
    component of the Document Matching activity--the Substitute for Return
    (SFR) program--was halted in January 1996 and will not be reinstated in
    fiscal year 1998 because of insufficient funding. However, IRS' budget
    estimates show that net tax delinquency assessments in fiscal year 1996
    for the SFR program were $1.47 billion. This was slightly more than the
    net tax delinquency assessments of $1.42 billion from another component
    of Document Matching--the Underreporter Program. (The $1.42 billion is
    the net of $1.56 billion in assessments less $135 million in refunds.)
        Question. Please provide information on the costs of the SFR and
    Underreporter programs that generated these assessments in fiscal year
    1996.
        Answer. The Underreporter Program cost was $59,819,624 and the
    Automated Substitute for Return (ASFR) Program cost was $12,885,233 in
    fiscal year 1996.
        ASFR, formerly a Collection nonfiler program, and the Substitute
    for Return (SFR), formerly an Examination program, are two separate
    programs. The question refers to the ASFR program. Only the ASFR
    program was halted. The Examination SFR program has always been fully
    funded and continues to be fully funded for fiscal year 1998. Some ASFR
    cases will be worked in the Examination SFR program in fiscal year
    1998.
        Question. And explain why, if the dollar amount of assessments is a
    valid performance measure, the SFR program was halted.
        Answer. In response to corporate budget reductions, the ASFR
    Program and Underreporter Program have been reduced. Less revenue is
    collected with ASFR than Underreporter per staff year. ASFR is not
    constrained by a statute of limitations and can, therefore, recover if
    a subsequent restoration of funding becomes feasible. The Underreporter
    Program, however, is time sensitive and cannot easily be restored if
    funding increases.
        Question. What are the collection rates for SFR and Underreporter
    program assessments?
        Answer. See Attachment 3.
        [The information follows:]

                             ATTACHMENT 3.--ESTIMATED COLLECTION RATES BY YEAR--COLLECTED DOLLARS AS PERCENT OF NET ASSESSED DOLLARS
                                                                      [Dollars in millions]
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                      Fiscal year
                                                        1996 net
                         Program                        assessed   1996 year 1  1997 year 2  1998 year 3  1999 year 4  2000 year 5  2001 year 6     Total
                                                        dollars
                                                        (actual)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Underreporter...................................       $1,494  ...........  ...........  ...........  ...........  ...........  ...........  ...........
        Rate (percent)..............................  ...........           50           20           15            5  ...........  ...........           90
        Dollars.....................................  ...........         $747         $299         $224          $75  ...........  ...........       $1,345
    Automated substitute for return.................       $1,929  ...........  ...........  ...........  ...........  ...........  ...........  ...........
        Rate (percent)..............................  ...........           10            5            5            2            2            1           25
        Dollars.....................................  ...........         $193          $96          $96          $39          $39          $19         $482
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    NOTES:
    1. Net assessed dollars include abatements.
    2. Source of fiscal year 1996 net assessed dollars and rates: Enforcement Revenue Information System (ERIS).
    3. Estimates are based on previous actual experience. Year 1 refers to year of assessment; year 2 is one year after year of assessment. Thus, for
      Underreporter assessments made in fiscal year 1996, we estimate that 20 percent of that assessment would be collected in fiscal year 1997.

        Question. More specifically, for each of those programs, how much
    of the assessments made in 1996 does IRS expect to collect in 1997.
        Answer. See Attachment 3.
        ASFR: 5 percent; $96 million. Underreporter: 20 percent; $299
    million.
        Question. In 1998?
        Answer. See Attachment 3.
        ASFR: 5 percent; $96 million. Underreporter: 15 percent; $224
    million.
        Question. Please explain the differences in the percentage of
    assessments collected from the two programs.
        Answer. The difference in the rate of collectibility is due to the
    type of taxpayer each program addresses. ASFR is designed to target the
    nonfiler, while the Underreporter Program primarily deals with a
    voluntary filer who fails to report income. Therefore, when the IRS
    through the Underreporter Program informs the taxpayer of his/her
    underpayment, the taxpayer complies and pays. The nonfiler, however,
    frequently does not comply unless further enforcement (levy) action is
    taken.
        Question. Since the impact of IRS' enforcement efforts is really
    determined by the amount actually collected, why doesn't the IRS use
    dollars collected as its performance measure for the SFR and
    Underreporter programs?
        Answer. The mission of the IRS is not only to collect the tax but
    to ensure voluntary compliance with the tax law. The document matching
    program enables the IRS to identify underreporting, including income
    reporting discrepancies, unsubstantiated deductions and nonfiling of
    tax returns. These programs provide a compliance presence and help to
    prevent the growth of nonfiler and underreported income populations. A
    1996 Internal Audit Review shows the Automated Substitute for Return
    Program (ASFR) resulted in 60 percent of delinquent taxpayers
    (nonfilers) becoming compliant (filers) in subsequent years. Dollars
    collected on all programs (including SFR) is a performance measure for
    the Collection function. Future collectability cannot always be
    determined at the time of assessment due to changing circumstances from
    the time of assessment to collection. However, we understand the
    importance of collecting tax dollars and encourage the payment of taxes
    owed as early in the process as possible.
                              tax law enforcement
        IRS' fiscal year 1998 budget request includes $3.2 billion for Tax
    Law Enforcement. The following questions relate to that portion of IRS'
    request.
                             criminal investigation
        1. In its budget estimates for Criminal Investigation, IRS note
    that 18 percent of its special agents are eligible to retire in fiscal
    year 1997, and another 13 percent will be eligible to retire in fiscal
    year 1998, 1999, and 2000.
        Question. How many of those eligible to retire does IRS expect will
    actually retire between now and 2000?
        Answer. The IRS estimates that approximately 550 special agents
    will retire between now and the end of fiscal year 2000. However, this
    is an estimate and since 49.7 percent of the work force is 45 years or
    older, a significantly larger number could retire depending upon
    economic conditions and employment possibilities.
        Question. What plans does IRS have to overcome the potentially
    adverse effects of such a high turnover of special agents?
        Answer. The IRS is planning to reduce its commitment to the ``War
    on Drugs''. In order to continue to fulfill its mission of fostering
    voluntary compliance, the IRS will concentrate the remaining special
    agents on ``Tax Gap'' investigations. The IRS's support of narcotics
    and money laundering investigations will be limited to the resources
    provided by the Organized Crime Drug Enforcement Task Force (OCDETF)
    through the interagency reimbursable agreement with the Department of
    Justice. This will be a reduction of over 50 percent from current
    levels. This reduction will seriously curtail IRS's ability to
    participate in multi-agency drug task forces sponsored by local United
    States Attorneys across the nation. The impact will be especially hard
    on OCDETF investigations. It will also significantly reduce the amount
    of funds flowing into the Treasury Asset Forfeiture Fund from IRS
    investigative forfeitures.
        Question. What succession planning exists?
        Answer. The IRS has a detailed succession planning program for
    special agents. The program covers the development of managers from
    first line through executives. It provides a step-by-step plan which
    details length of time between levels and the progression through
    districts of varying sizes up to eligibility for the Senior Executive
    Service. The program also requires service in a staff position at
    either the regional or headquarters level.
        Question. What on-the-job training or other means for developing
    needed expertise is planned?
        Answer. The IRS is in the process of revamping the entire special
    agent basic training program to ensure the highest quality training
    program which covers all essential special agent tasks. The program
    will cover classroom and on-the-job training. The task analysis was
    recently validated by a task force of field agents to ensure that all
    essential tasks are covered. The revision will be completed for the
    initiation of the advance special agent hiring program for fiscal year
    1999.
        2. The only significant program change in IRS' fiscal year 1998
    budget request, outside of the Information Systems area, is a $1
    million increase for combating overseas crime, specifically money
    laundering.
        Question. Why is this a priority for IRS?
        Answer. In 1995, the IRS Criminal Investigation (CI) organization
    developed an International Strategy to accomplish its law enforcement
    objectives in the international arena. Governments around the world are
    realizing that money laundering and other financial crimes are no
    longer limited by their geographic boundaries. Within the last five
    years, at least 100 countries have adopted or are considering passage
    of laws which criminalize various financial crimes including money
    laundering.
        In 1996, CI obtained permanent billets for special agents in
    Bogota, Colombia, SA; Mexico City, Mexico; and Frankfurt, Germany. In
    addition, temporary assignments were established for Ottawa, Canada,
    and Hong Kong. The establishment of permanent billets is anticipated
    for both of these locations in 1998.
        The CI International Strategy emphasizes cooperation among U.S. and
    international law enforcement communities. The successful financial
    disruption of major international criminal organizations, such as
    narcotics-related money laundering rings, can best be achieved through
    the multi-national investigation. Even with the short time period that
    our special agents have been assigned overseas, they have worked
    closely with investigators responsible for investigating similar crimes
    throughout the world, which has assisted in obtaining information
    needed in our domestic investigations. Our special agents provide
    valuable assistance in the form of training and advice to foreign
    governments trying to develop new financial crimes laws and
    information-sharing agreements. Numerous foreign governments worldwide
    have requested CI's assistance in developing money laundering and asset
    forfeiture legislation. Our special agents assigned to overseas posts
    attempt to assist these countries in developing improved banking laws
    and currency regulations as part of a comprehensive effort to deter
    money laundering and other financial crimes.
        Funding was not requested exclusively for conducting overseas money
    laundering investigations. Funding was requested to assign, support and
    maintain CI special agents in overseas posts.
        Question. What programs does IRS have in place relative to money
    laundering?
        Answer. The primary mission of CI is to foster voluntary compliance
    with the tax laws of the U.S. through vigorous enforcement of the
    criminal statutes over which CI has jurisdiction (i.e., Title 26 and
    31, tax, currency reporting, and forfeiture; and Title 18, money
    laundering and forfeiture). CI's statutory authority coupled with the
    financial investigative expertise of our special agents, has proven
    extremely useful in financially disrupting and dismantling criminal
    organizations in conjunction with the efforts of other federal law
    enforcement agencies.
        It is the objective of CI to identify, investigate, and prosecute
    the most significant tax, currency, and money laundering offenders; and
    to pursue the assets of those offenders both domestically and
    internationally for criminal, tax, and asset forfeiture purposes. Due
    to its limited resources and specialized expertise, CI will prioritize
    its efforts in currency reporting and money laundering enforcement,
    concentrating on those investigations whose size, scope, and complexity
    require the financial investigative expertise of its special agents.
    Selection and prioritization of targets for investigation will be in
    accordance with minimum standards set by the Assistant Commissioner
    (CI) and in furtherance of CI's mission.
        Question. What is IRS' authority and responsibility in this area?
        Answer. The IRS' authority to investigate money laundering is
    delineated in the Memorandum of Understanding among the Secretary of
    the Treasury, the Attorney General, and the Postmaster General
    regarding Money Laundering Investigations. The memorandum states, ``The
    Internal Revenue Service will have investigative jurisdiction over all
    violations of Section 1956 and 1957 where the underlying conduct is
    subject to investigation under Title 26 or the Bank Secrecy Act.''
        IRS' authority to investigate violations of Title 31 (Bank Secrecy
    Act) derives from Delegation Order 143. The Commissioner delegated the
    authority to initiate criminal investigations of financial institutions
    not currently examined by federal bank supervisory agencies to the
    Assistant Commissioner (CI). In addition, the Commissioner delegated
    the authority to initiate Title 31 criminal investigations of banks and
    brokers pursuant to Treasury Order 150-10, Directive 15-41 (the
    Memorandum of Understanding referenced above), and 26 CFR 301.7701-9
    (c).
                                  examination
        1. In a September 1994 report on the Coordinated Examination
    Program (CEP) and a 1996 report on large corporations not in the CEP,
    GAO reported that less than 30 percent of the additional taxes
    recommended from audits was assessed after appeals (GAO/GOD-94-70,
    Sept. 1, 1994 and GAO/GOD-96-6, Oct. 13, 1996). Among other things, GAO
    recommended that IRS begin using dollars actually collected as a
    program measure. Although IRS can now get this kind of information from
    the Enforcement Revenue Information System (EGIS), the fiscal year 1998
    budget continues to show audit results in terms of dollars recommended.
        Question. When does IRS plan to begin measuring Exam results in
    terms of dollars collected?
        Answer. The IRS did not agree with the GAO recommendation to use
    collection rates as a measurement tool to measure effectiveness and
    productivity--this is true for the Coordinated Examination Program
    (CEP) and general program examination cases. Examination's primary
    function is to conduct examinations to determine the correct tax
    liability. Future collectibility cannot always be determined at the
    time of examination based on changing circumstances from the time of
    the audit to collection, e.g., a company that goes out of business.
    However, we understand the importance of collecting tax dollars and
    encourage the payment of taxes owed as early in the examination process
    as possible. We currently have two measures which foster the payment of
    taxes owed: Percent of Dollars Collected on Examination Assessments
    Prior to 2nd Notice and CEP Agreed Dollars per FTE. These measures are
    a small part of an aggregate of a field office's bottom line results
    and are not used to measure productivity; nor are they used to evaluate
    individual employees. Employees' performance is based on critical
    elements and performance standards which assess the overall performance
    of the duties and responsibilities of their position. In fact, our own
    policy statement prohibits the use of tax enforcement results in the
    evaluation of individual performance.
        Enforcement Revenue Information System (ERIS) data, which is more
    current than the GAO data, does track collections and is more
    indicative of current CEP accomplishments. The collection rate,
    represented by ERIS data, plays an important role in the allocation of
    budget and resources. However, it should not be used to measure
    productivity because the period from the time the case closes until the
    final dollars are collected spans more than the range of the most
    current data available in ERIS. ERIS data indicates that we average
    approximately $9.4 billion collected to date per year on all cases.
    While the percent collected of settled recommendations remains fairly
    constant at 23.7 percent, future collections cannot be confidently
    projected. Also contributing to the time span and unpredictability of
    collecting dollars on unagreed cases is the Appeals process. Appeals
    settles unagreed cases using a variety of methods including additional
    information submitted by the taxpayer, settlement authority, quid pro
    quo, hazards of litigation, etc.
        Collection rates do not fully measure CEP effectiveness or CEP
    productivity because they contain distortions and are influenced by
    actions beyond the control of Examination. GAO's collection rate
    included net operating loss and credit carrybacks as well as post
    closure abatements which distort the audit work and ultimately the
    recommended tax proposed by Examination. Examination has no control
    over these items. Nor do they have control over claims and other
    affirmative issues raised by taxpayers during the course of the audits.
    These distortions are significant and should have no role in measuring
    the efforts of the examination team.
        GAO acknowledged that these items, (net operating loss and credit
    carrybacks, post closure abatements and claims), influenced the
    collection rate but ignored them when they continued to stress using
    the collection rate as a measurement tool.
        One of the measurements we use to measure CEP productivity is Total
    Adjusted Revenue (TAR). This takes into account the recommended tax
    proposed by the examination team as well as their efforts in
    considering taxpayer claims, affirmative issues and credit and loss
    carrybacks. Not only do we measure potential for dollars being paid but
    also the efforts to prevent paying out dollars through claim and loss
    and credit carryback disallowances. These efforts do not show up in the
    collection rate but do represent a big part of our examination
    activities and deserve to be recognized. Revenue protection activities
    prevent dollars from being paid out of the Treasury.
        Question. In determining how it wants to allocate resources, how
    does IRS measure the relative return-on-investment of its various
    enforcement efforts?
        Answer. The allocation of resources is based on a number of
    factors; one of which is return-on-investment (ROI). ROI matches costs
    with results to ensure that resources are applied to the most
    productive returns and areas. In Examination, there are a number of
    measurements which are based on the ROI concept. For example, the
    Coordinated Examination Program measures its effectiveness using Total
    Adjusted Revenue Dollars per Full Time Equivalents (FTE) and also
    Agreed Dollars per FTE's. Examination Programs, other than CEP, also
    have measurements based on Recommended Dollars per FTE.
        In addition, there are other factors which impact resource
    allocations many of which revolve around ensuring compliance. For
    instance, our districts have analysis units searching for local
    projects and initiatives that have audit potential. Legislative changes
    often require resource commitments to ensure adequate compliance.
    Resources spent on these returns may not be as productive as our large
    corporate audits but our efforts are warranted none the less. Another
    example is our work in the international arena. In addition to our own
    initiatives, this area has generated a great deal of interest from
    Congress which has also urged us to pursue the shifting of income
    abroad by many taxpayers.
        2. Since 1995, IRS has reemphasized its use of so-called financial
    status techniques in its audits of individual taxpayers. These
    techniques have been around for years but have fallen into disuse until
    recently. Their reemergence has generated various concerns among
    taxpayers and their representatives.
        Question. What specific criteria drive the use of financial status
    techniques?
        Answer. ``Audit techniques'' are the methods, such as interviewing
    the taxpayer or contacting third parties, by which information to
    complete an examination can be collected. There is no distinction
    between ``financial status'' audit techniques versus some other type of
    audit technique. As a result, there is no set criteria for the use of a
    specific method. The facts of the individual case determine which
    method is most appropriate.
        Generally, the choice of audit techniques used during an audit will
    be influenced by three factors:
        1. Type of Return--The audit techniques used for an individual will
    be different than those used for a business (sole proprietorship,
    corporation, partnership, etc). An audit of an individual could only
    require oral testimony from the taxpayer while an audit of a
    corporation would involve an analysis of the company's internal
    records.
        2. Availability of Books and Records--Consideration is given to the
    type of records the taxpayer has to document the item being audited.
    For example, an individual may verify a mortgage interest expense with
    a 1099 issued from the finance company. If the mortgage was privately
    financed and a 1099 was not issued, the taxpayer may be asked to
    furnish canceled checks for the payments and the sales contract.
        3. Issue Development--Information gathered during the examination
    itself may warrant different audit techniques. For example, a
    taxpayer's records are incomplete and a supplier is contacted to
    confirm purchases the taxpayer claimed as an expense.
        Question. How does the IRS ensure that examination staff
    appropriately use these techniques?
        Answer. Four memorandums stressing the purpose and appropriate use
    of ``financial status'' audit techniques have been issued to the field
    since August 1995. The memoranda provide guidance for determining the
    depth of interviews and restricting questions to information needed to
    complete the audit; verifying third party information (to the extent
    practicable) with the taxpayer; communicating with authorized powers of
    attorney; emphasizing expectations for professionalism and courtesy;
    and applying judgment to assess the facts and circumstances of
    individual cases.
        An extensive new Manual section for completing income probes,
    including the use of appropriate audit techniques is being written. A
    draft will be available in September 1997.
        On April 1, 1995, our quality measurement system, Examination
    Quality Measure System (EQMS), was expanded to include evaluation of
    financial status analyses.
        Question. What percentage of audits used these methods in 1996? Is
    this more or less than in the past? What percentage would the IRS
    expect in 1997?
        Answer. All audits include ``techniques'' as warranted by the facts
    of the case. The use of some specific techniques can be measured
    through the Examination Quality Measurement System (EQMS). The
    following information is based on case reviews conducted between April
    1, 1995 and March 31, 1997.
    Financial Status Analysis
        At a minimum, examiners complete a financial status analysis to
    determine whether reported income is sufficient to support the
    taxpayer's financial activities. The two key steps of the Financial
    Status Analysis are: (1) the development of a preliminary analysis
    based on the tax return and case file data such as W-2's and 1099's and
    (2) the updating of the preliminary analysis for additional information
    gathered during the examination process. The completed analysis should
    indicate income sufficient to support the taxpayer's personal expenses,
    business expenditures, and acquisitions.
        The depth of the analysis and the audit techniques used will be
    dependent upon facts of the individual case. When the financial status
    analysis indicates that reported income is sufficient to support the
    taxpayer's financial activities, then only the minimum requirements for
    the consideration of income must be performed. For individual
    nonbusiness returns, the taxpayer and/or representative will be
    questioned regarding taxable and nontaxable sources of income. For
    business returns, the minimum requirements include reconciling the
    books to the return, considering internal controls, evaluating the tax
    returns of significant shareholders, and analysis of the balance sheet.
        Most cases are closed based on the preliminary financial status
    analysis and minimum required consideration of income. Field revenue
    agents successfully complete the financial status analysis on 78.5
    percent of their cases; this percentage has remained constant since
    April 1995 and there are no indications that it will change in the
    future. Office auditors successfully complete financial status analyses
    on 84 percent of their cases; this is an increase from 73.5 percent in
    1995, but no further increase is anticipated.
    Indirect Methods
        More in-depth audit techniques are used only when the financial
    status analysis cannot be reconciled. The most in-depth techniques are
    called indirect methods. There are five major indirect methods: (1)
    source and application of funds, (2) net worth, (3) bank account
    analysis, (4) percentage computations and (5) unit/volume analyses.
        Based on the facts of the individual case, indirect methods are
    used in 16 percent of Office Audit examinations and 41 percent of Field
    cases. This percentage has not changed significantly since April 1995
    nor is it anticipated that it will change in the future.
    Interviewing Taxpayers
        Taxpayers are interviewed in 75 percent of both Office Audit and
    Field Examination cases. This percentage has not changed since April
    1995 and no change is anticipated in the future.
    Third Party Contacts
        Examiners generally look to the taxpayer/representative as the
    primary source of information during an examination. Third party
    contacts are made only when the taxpayer cannot provide the
    information. Third parties were contacted in 20 percent of Field
    Examination cases reviewed during fiscal year 1997. This is a
    significant decrease from 32 percent in fiscal year 1996. This
    information is not collected for Office Audit examinations.
    Tours of Business Sites
        Business sites are toured in 51 percent of examinations of business
    returns completed by Field Examination. This percentage has not changed
    since April 1995 and no change is anticipated in the future. Tours of
    business sites are not conducted for Office Audit cases.
        Question. How has the use of these techniques affected direct audit
    time and the amount of additional tax recommended?
        Answer. There are many factors which will influence the final
    outcome of an examination and the ability to isolate and measure the
    impact of an individual factor is difficult.
        However, one study of tours of business sites indicates that the
    examination cycle for business returns is shortened when a tour of the
    business site is conducted. This is true for agreed, no-change, and
    unagreed cases despite the significant difference in their examination
    cycles.
        As noted in the chart below, the technical quality of the
    examination, as defined by the Auditing Standards, is also improved.

    ------------------------------------------------------------------------
                                                 Business      Business not
                   Key element                    toured          toured
                                                 (percent)       (percent)
    ------------------------------------------------------------------------
    1B. Income/Deduction/Crd Items
     Considered.............................           88.05           86.17
    2A. Internal Controls (Business Returns)           85.55           80.07
    2B. Consideration of Books and Records..           80.44           76.62
    2C. Financial Status Analysis...........           78.61           73.58
    3A. Prior/Sub. Returns..................           88.52           83.64
    3B. Related Returns.....................           81.82           77.68
    4A. Interviews Conducted................           90.49           79.17
    4B. Adequate Exam Techniques Used.......           93.03           89.67
    ------------------------------------------------------------------------
    Note.--Each relationship was tested for independence using the Chi-
      square analysis.

        No direct relationship between conducting a tour of the business
    site and the amount of additional tax recommended has been established.
        3. In order to mitigate the impacts of funding cuts in Examination,
    IRS intends to train all districts in the use of alternative
    classification methods to identify high-yield workload.
        Question. How do the alternative classification methods to identify
    high-yield workload differ from the methods that have been used in the
    past?
        Answer. Examination is completing the development of an automated
    system that has the ability to sort workload and provide districts with
    quick access to returns available for classification and assignment.
    The system can sort transcribed return data in Discriminant Index
    Function (DIF) order by market segment, income/asset ranges, potential
    complexity and location. The system allows the district to classify
    returns on-line versus looking at paper returns at a service center. It
    allows the Service to use examiners with market segment expertise to
    classify returns locally in their districts saving travel time and
    costs.
        Examination is presently conducting a test of the SIGMA
    (Statistical Information for General Market Analysis) program. The
    SIGMA method ranks returns for classification by market segment, major
    primary business activity code, form type and income strata. SIGMA
    identifies potential aberrant return filers by comparing a return
    against what the average return looks like in the identified market
    segment.
                                  collections
        1. GAO recently reported in its High-Risk report on IRS that the
    inventory of tax debts at the end of fiscal year 1996 was $216 billion
    (GAO/HR-97-8, Feb. 1997).
        Question. Please provide a detailed breakdown of these receivables
    by their collection status at the end of fiscal year 1996.
        Answer. The attached chart (Attachment 4) shows our gross inventory
    of assessments broken down into our various workload statuses, and
    within the financial definitions.
        [The information follows:]

                              ATTACHMENT 4.--ACCOUNTS RECEIVABLE DOLLAR INVENTORY STRATIFIED BY FINANCIAL COMPONENTS AND BY ACTIVE INVENTORY AND CURRENTLY NOT COLLECTIBLE
                                                                                          [Dollars in billions]
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                                     Total
                                                                  Inactive    Deferred   Installment      TDA       Notice      Current      Other      NMF \3\     active        CNC       Totals
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    Gross inventory............................................      $20.56       $1.63       $14.42      $44.24      $10.94       $2.94       $4.79      $4.33      $103.86     $112.43     $216.29
    NMF inventory..............................................        1.24  ..........  ...........        1.57         .30  ..........        1.22      (4.33)  ..........  ..........  ..........
                                                                ------------------------------------------------------------------------------------------------------------------------------------
          Subtotal after allocation............................       21.80        1.63        14.42       45.81       11.24        2.94        6.01  ..........      103.86  ..........  ..........
                                                                ====================================================================================================================================
    Financial receivables......................................       15.09        1.40        13.33       26.34        7.83        2.94        3.35        .96        71.24       51.18      122.42
    NMF inventory..............................................         .49  ..........  ...........         .20         .12  ..........         .15       (.96)  ..........  ..........  ..........
                                                                ------------------------------------------------------------------------------------------------------------------------------------
          Subtotal after allocation............................       15.58        1.40        13.33       26.54        7.95        2.94        3.50  ..........       71.24  ..........  ..........
                                                                ====================================================================================================================================
    Financial writeoffs \1\....................................        1.36  ..........  ...........         .05         .08  ..........         .13        .06         1.61       26.68       28.29
    NMF inventory..............................................  ..........  ..........  ...........  ..........  ..........  ..........         .06       (.06)  ..........  ..........  ..........
                                                                ------------------------------------------------------------------------------------------------------------------------------------
          Subtotal after allocation............................        1.36  ..........  ...........         .05         .08  ..........         .20  ..........        1.61  ..........  ..........
                                                                ====================================================================================================================================
    Compliance \2\.............................................        4.88         .22         1.09       19.22        3.22  ..........        2.37       3.31        31.01       34.57       65.58
    NMF inventory..............................................         .75  ..........  ...........        1.37         .18  ..........        1.01      (3.31)  ..........  ..........  ..........
                                                                ------------------------------------------------------------------------------------------------------------------------------------
          Subtotal after allocation............................        5.63         .22         1.09       20.60        3.40  ..........        3.38  ..........       31.01  ..........  ..........
                                                                ====================================================================================================================================
    Compliance definition \5\..................................       17.12        1.63        13.35       39.23       10.47        2.94        4.44       4.33        93.53  \6\ 105.84  ..........
    NMF inventory..............................................        1.24  ..........  ...........        1.57         .30  ..........        1.22      (4.33)  ..........  ..........  ..........
                                                                ------------------------------------------------------------------------------------------------------------------------------------
          Subtotal after allocation............................       18.36        1.63        13.35       40.80       10.77        2.94        5.66  ..........       93.53  ..........  ..........
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\ RTC amounts included in Financial Writeoffs by major status: Inactive, $1.33; TDA, $0.05; Notice, $0.08; Other, $0.07; Total active, $1.53; and CNC, $18.35.
    \2\ Trust Fund Recovery (TFR) amounts included in Compliance Assessments by major status: Inactive, $2.11; Installment, $1.07; TDA, $4.96; Notice, $0.40; Other, $0.27; Total active, $8.81; and
      CNC, $6.59.
    \3\ In fiscal year 1995, we reported the Nonmaster File (NMF) figure as a separate category in the Total Active figures because our reports did not break these assessments into actual
      statuses. For fiscal year 1996, we are now able to segment these assessments into the various statuses. For comparison purposes, we have shown the gross inventory and the three financial
      components with NMF reported as a separate category, and after allocating the NMF into the various statuses in the subsequent lines.
    \4\ No changes are required to the CNC and the total figures since they included NMF in the prior year's report.
    \5\ The Compliance Definition is used by the Chief Compliance Officer to report on workload. RTC and TFR amounts are not included in this inventory.
    \6\ The CNC column under the Compliance definition includes all of RTC but excludes the TRF amounts.

        Question. Please identify how much of this inventory represents
    valid financial receivables versus compliance assessments and how much
    IRS expects to eventually collect.
        Answer. For fiscal year 1996, the Service divided the total
    inventory of assessments into three major categories: 1) financial
    receivables, 2) compliance assessments, and 3) financial write-offs.
    This new methodology for valuing receivables was adopted in 1995.
        As of September 30, 1996, total financial receivables were $122.4
    billion. Financial receivables are the amounts that the taxpayers agree
    to or the courts have ruled is owed. The allowance for doubtful
    accounts (ADA) amount was $88.6 billion. The net receivables amount
    (how much we expect to collect) was $33.8 billion.
        We estimate the net realizable value of these financial receivables
    by applying an ADA using both a statistical sampling technique applied
    to a random stratified sample of financial receivables less that $10
    million, and a complete review of all assessments over $10 million. The
    ADA reflects an estimate of the portion of total financial receivables
    deemed to be uncollectible. Factors such as death, bankruptcy, personal
    hardship, inability to locate taxpayers, an IRS or taxpayer error,
    economic conditions, age, and the dollar amounts of these receivables
    affect the collectibility.
        Excluded from financial receivables are $28.3 billion in
    receivables designated as financial write-offs. Financial write-offs
    are a separate category of financial receivables whose ultimate
    collection is unlikely. Due to the ten-year statute of limitations, the
    IRS must maintain these accounts on the master file until the statute
    for collection expires.
        Also, excluded from financial receivables are $65.6 billion in
    compliance assessments. Compliance assessments consist of assessments
    primarily made for enforcement purposes. Actions may still be taken to
    collect these assessments, but because the taxpayer has not responded
    to validate the claim, or an appeal or tax court has not yet ruled,
    there is not an established claim with the taxpayer. Compliance
    assessments have been excluded from total tax receivables due to the
    uncertainty of their collection.
        The attached chart (Attachment 5) shows the gross inventory of
    assessments and how we break it out for our financial statements.
        [The information follows:]
        [GRAPHIC] [TIFF OMITTED] T13JN19.006

        Question. Provide an estimate of how much of this inventory will be
    abated and for what reasons.
        Answer. The IRS does not currently have any reports or estimates of
    how much of the inventory we expect to abate.
        2. Much discussion in past years has centered on the growth in the
    inventory of tax debts. However, because of the 10-year collection
    statute of limitations and interest and penalty accruals on accounts in
    the inventory, this may not be the best measure of performance.
        Question. What other measures does IRS think might be useful in
    assessing its performance in collecting tax debts?
        Answer. The measures that the IRS believes are useful in assessing
    its performance in collecting tax debts (based on available data) are
    total dollars collected as a percentage of current year field
    receivables; percentage of current year Automated Collection System
    receivables; and percent examination dollars collected pre-second
    notice as an assessment of collection performance in relationship to
    receivables. These measures are being tracked by the IRS.
        Question. For example, could IRS tell us the amount of new
    receivables identified in the past three years and the collection
    outcome of these receivables?
        Answer. Currently, the IRS uses the Enforcement Revenue Information
    System (EGIS) to track the collection outcome of accounts. Dollars
    collected on accounts that become delinquent are tracked from the date
    of assessment until the account is resolved or the statute expires. The
    IRS is developing a report that will show dollars collected from new
    receipts versus dollars collected from previously existing debt.
    However, this report will not be available for approximately one year.
        4. Collection industry experience shows that the sooner one
    identifies a delinquency and starts collection, the more likely the
    debt will be collected. Many of the delinquencies IRS pursues are
    generated through its compliance programs, which identify non-filers,
    underreporters, and others who fail to voluntarily disclose their true
    tax liability. These compliance programs may not identify the
    delinquencies for a year or more after the due date of the return.
        Question. What is the IRS doing to identify delinquencies sooner?
        Answer. For tax years 1995 and 1996, IRS has accelerated its
    nonfiler identification program. For tax year 1995, we identified
    nonfilers in September 1996. This is three months earlier than the
    prior tax year of 1994. For tax year 1996, we will identify nonfilers
    in July 1997. This is five months earlier than tax year 1994. Notices
    for tax year 1996 will be issued six months after the due date of the
    return. The IRS began accelerating its Underreporter program in 1995 by
    issuing tax year 1993 notices in March, four months earlier than
    previous years. An additional three months acceleration was achieved
    for tax years 1994 and 1995 when we began issuing Underreporter notices
    in December of the same year the tax return was filed. For tax year
    1996, we will begin to issue notices in December 1997.
        Question. Does IRS foresee being able to identify nonfilers and
    underreporters by the due date of the return?
        Answer. Under current systems and requirements, we do not foresee
    being able to identify nonfilers and underreporters by the return due
    date. These programs are driven primarily by income information
    extracted from various types of information returns filed by payers. We
    do not begin our nonfiler and underreporter identification programs
    until we receive this information. Some of this information has a due
    date of May 31 from the payers (e.g., Forms 5498 relating to Individual
    Retirement Accounts (IRA's)). This requires the IRS to identify
    nonfilers and underreporters after the due date of the return. In
    addition, the option of taxpayers requesting an automatic 120 day
    extension of time to file their return delays our identification of
    some nonfilers.
        Question. What is needed to accomplish this?
        Answer. Identifying nonfilers and underreporters by the return due
    date would require, in addition to significant systems modernization,
    the acceleration of information return reporting by payers; filing of
    extension to file requests before the return due date; and possibly
    postponing the return due date itself.
        4. Considering the major concerns that GAO has raised over the
    years on the reliability of IRS data, particularly the underlying data
    that support many of IRS' reports, we are concerned about the accuracy
    of IRS delinquent tax collection figures.
        Question. Please explain how collection figures are calculated?
        Answer. Collection figures are obtained from two major computer
    systems: Master File and the Integrated Data Retrieval System (IDRS).
    Master File is the official source for Collection figures while IDRS
    data, which is more discreet, is used for functional analysis. Both
    systems provide accurate data for their designated purposes. Accuracy
    concerns occur when, out of necessity, our existing systems are needed
    to produce figures for which they were not originally intended.
        Question. How is this money collected? For example, how much money
    is collected as a result of each of the following techniques: telephone
    calls, notices, liens, levies, seizures, and refund offsets.
        Answer. The basic design, for both our Master File and IDRS
    reports, is to determine what transaction codes posted to tax modules
    while the modules were in a Collection status. Attributing moneys to
    the techniques listed is difficult because the major computer systems
    (Master File and IDRS) do not store the fact that a telephone call was
    made. Also, the same module could be subject to several techniques. It
    would not be unusual for the same tax module to have a phone call, a
    lien and a levy. However, based on status codes and designated payment
    codes, the allocation of the fiscal year 1996 Master File Yield is as
    follows:

                        Fiscal year 1996 Yield Allocation

            Category                                                  Amount
    Notices................................................. $14,711,979,711
    Installment agreements..................................   6,037,882,519
    Taxpayer delinquent accounts (TDA's)....................   8,432,408,035
    Deferrals...............................................     530,800,398
    Non-master file (NMF)...................................      63,028,124
                        --------------------------------------------------------
                        ____________________________________________________
          Total.............................................  29,776,098,787

        5. IRS' budget estimates include two different figures for the
    dollars collected per FTE in the Collection field function for fiscal
    year 1996. In reporting on the fiscal year 1996 performance plan and
    results (pg. TLE-22 of the budget estimates), IRS shows actual
    collections of $509,000 per FTE, while the fiscal year 1996 actual
    shown with the fiscal year 1997 and fiscal year 1998 performance plans
    (pg. TLE-10) is $486,000 per FTE.
        Question. Please clarify this discrepancy.
        Answer. The $509,000 figure refers to dollars per staff year; the
    $486,000 figure refers to dollars per FTE. The difference between the
    two is that dollars per FTE includes all Collection Field function
    (CFf) time, even if some CFf personnel are detailed out to other
    activities such as the Automated Collection System (ACS). Inclusion of
    this detail-out time causes the dollars per FTE to be lower than the
    dollars collected per staff year.
        The IRS is moving toward usage of dollars per FTE as a consistent
    measure because FTE's give a more accurate reflection of resources from
    a financial standpoint and are in-line with budget allocations.
        6. In response to questions at last year's appropriation hearing,
    IRS mentioned various initiatives that would increase the productivity
    of its collection staff. In its recent High-Risk report on IRS, GAO
    also reported that several such initiatives were underway (GAO/HR-97-
    8). However, in its fiscal year 1988 budget estimates (pg. TLE-10), IRS
    shows a lower collection figure per FTE in its field collection
    activity for fiscal year 1997 and fiscal year 1998 than it actually
    collected in fiscal year 1996.
        Question. Please explain why the collections per FTE are expected
    to be lower in fiscal year 1997 and fiscal year 1998 given the
    continuing initiatives to increase productivity.
        Answer. For fiscal year 1997, a three year baseline was the
    methodology used for goal setting, versus using the actual collections
    made in fiscal year 1996. The result was that the three year average
    was lower than the ending fiscal year 1996 results. In view of this,
    consideration is being given to using a different method in the future.
        7. IRS reported that it collected almost $30 billion in
    delinquencies during fiscal year 1996, which represented a 19 percent
    increase over the $35 billion collected the year before. IRS does not
    project that it will be able to maintain that level of collections in
    fiscal year 1997 and fiscal year 1998.
        Question. What factors accounted for the significant increases in
    Collections in 1996?
        Answer. While we cannot account precisely for the causes of the
    increase in fiscal year 1996 collections compared to the prior year,
    there are certain things that we know. The largest increase was in
    notice and installment agreement yield: 18 percent in Individual Master
    File (IMF) and 25.9 percent in Business Master File (BMF). Taxpayer
    Delinquent Account (TDA) yield also grew significantly: 14.9 percent
    IMF and 12.2 percent BMF. Review of monthly data indicates that the
    total dollar amount of first notices issued began growing rapidly in
    the third quarter of fiscal year 1995 and continued strong into the
    third quarter of fiscal year 1996. It appears likely, therefore, that
    simple growth in notices was a major contributor to the growth of
    notice yield in fiscal year 1995 and fiscal year 1996. The growth of
    TDA yield is no doubt due in substantial part to the fiscal year 1995
    compliance initiative. Prior research indicates a strong connection
    between Collection staffing and TDA yields. Substantial increases in
    Collection staffing occurred in fiscal year 1995; while staffing
    declined some in fiscal year 1996, it remained well above the fiscal
    year 1994 level. By fiscal year 1996, the new Collection personnel had
    completed their fundamental training and had begun to be more
    productive, making significant contributions to yield.
        Question. Why will IRS be unable to sustain this collection level
    in 1997 and 1998?
        Answer. Our original projections were based on the fact that the
    continued loss of experienced personnel would ultimately have an impact
    on collection yield. Although, to date, this has not occurred, with
    collection yield through May 1997 at 3 percent above the prior year, we
    strongly feel there is a connection and at some point overall yield
    will decline.
        8. Historically, IRS has devoted two-thirds of its collection
    resources to the field function where revenue officers, generally high-
    graded staff with many years of experience, make personal contact with
    delinquent taxpayers. Although this function has been the least
    productive, and most costly, step of the collection process and is used
    infrequently by private collectors, IRS continues to support a high
    level of field collection staff. In response to questions at last
    year's appropriation hearings, IRS stated that, first, service centers
    and the Automated Collection System call sites are staffed to capacity,
    and then, any additional resources go to the field. According to IRS
    figures, collections per ACS FTE are about three times that of field
    FTE's.
        Question. Has IRS considered increasing the capacity at the call
    sites to take advantage of the higher productivity of this type of
    collection activity? If not, why?
        Answer. IRS budget requests for ACS sites have consistently
    reflected the productivity of this collection activity. We will
    continue to fully staff ACS sites to the maximum authorized budget
    levels.
        Question. What has the IRS done to improve the effectiveness and
    productivity of its field collection activity?
        Answer. Collection has a number of actions in place or underway to
    increase yield and limit the growth of our accounts receivable.
    Collection has focused their efforts towards improving workflow,
    procedures, culture, management information and automation. Some
    examples of these initiatives are:
        1. The Integrated Collected System (ICS): This is a computer based
    system that provides for automated field case actions such as notice of
    levy, case histories, trust fund recovery penalty computation. It has
    shown significant productivity enhancement for the nine districts in
    which it has been implemented. Roll-out of the system continues through
    fiscal year 1998.
        2. Collection financial analysis standards: New procedures that use
    national and local expense standards have been implemented nationwide.
    Collection financial analysis standards provide revenue officers with
    uniform standards for evaluating taxpayer expense claims against
    national and local norms. These standards are applicable to individual
    income tax cases and provide a decision model for recommending
    adjustments in taxpayer financial obligations and/or assets to allow
    payment of the liability. The expense standard method will ensure that
    allowed expenses are not inflated and that payment capability is
    maximized.
        3. The IRS continues its efforts in the Fed/State cooperation area
    to provide better information sources to its employees and provide
    higher productivity potential cases to the field from available
    inventories.
        4. The Entity implementation project continues. Entity is a
    management control system which provides managers better information
    about employee case productivity. Entity information is used by
    managers to identify effective performance and issues which may require
    management direction. Archive data is also useful in determining which
    case types (individual income tax, in business trust fund, estate
    taxes, etc.) return the highest productivity for staff power invested.
        5. Inventory Delivery System (IDS): Collection is working to
    improve workflow by preventing non-productive cases from reaching the
    field. IDS will centralize locator processing and use automated methods
    to evaluate delinquent accounts for collectibility so that the most
    productive accounts are sent to ACS or revenue officers.
        Question. How is performance being measured, and what are the
    results to date?
        Answer. The Annual Performance Plan measures listed below are used
    to rate performance in the Collection Field function and the National
    results as of May 1997:

    Total dollars collected.................................  $3,888,500,000
    Dollars collected per FTE...............................        $532,000
    Total dollars collected as a percentage of current year
        field receivables...................................            21.0
    Average cycles per TDA/TDI disposition..................            34.6
    Average hours per entity disposition....................            35.9

        9. The private debt collection pilot program has been in operation
    for about six months.
        Question. What are IRS' observations of the program at this time?
        Answer. General observations on results of the Private Sector Debt
    Collection Program are tentative, since the analysis of the full year
    of operations will not be completed until September 30, 1997. In
    general, the IRS was impressed with the professionalism and commitment
    shown by the contractors; their organizational and management
    capabilities; their sensitivity to the importance of privacy,
    disclosure, and security issues unique to IRS tax collection; and their
    willingness to work closely with the IRS in resolving design, start-up,
    and shut-down issues in this pilot program.
        However, experience based on quarterly and monthly invoices to date
    indicates that the results of the pilot will not be as satisfactory as
    thought in terms of dollar yield and number of open accounts resolved.
    The contractors are not finding and contacting as high a proportion of
    delinquent taxpayers as necessary to generate a revenue stream
    sufficient to produce a positive return on investment. Also, a much
    larger than anticipated proportion of the contacted taxpayers
    (approximately 63 percent) is being referred to the IRS for case
    resolution, which not only increases IRS overhead and contract
    administration costs, but inflates the opportunity costs of diverting
    highly productive ACS employees to handle lower value cases handed off
    by the contractors. IRS experience with these ACS employees reflect
    that they each bring in approximately 1.5 million dollars in revenue.
    Diverting these resources to handle contractor referred cases has the
    impact of reducing total revenue generated by ACS creating high lost
    opportunity costs. The IRS used ACS resources for the contractor-
    referred cases due to the skill necessary to handle this type of work.
        The general conclusion to be drawn from experience to date is that
    the types of low activity aged cases reserved for contractors, as
    specified by the enabling legislation, are not very productive. They
    are low priority within the IRS for good reason, having already been
    worked through successive collection processes to the point of marginal
    yield potential. It is not cost effective, and is in fact
    counterproductive, to devote scarce resources to them, either by
    contract or in-house.
        Question. What have been the results to date?
        Answer. The contact rate, that is, the proportion of taxpayers that
    the contractors are able to talk to by phone through May 3, 1997, is
    approximately 18.5 percent of available cases. It is too early to give
    a precise estimate of the actual contact rate because the IRS has not
    yet processed and validated the contractor's invoices for the final two
    months.
        The success rate of the contractors in obtaining full payments and
    unassisted installment agreements through May 3, 1997, was about 13
    percent of the total number of contacts made. The success rate for IRS-
    assisted installment agreements secured by contractors was also about
    13 percent of the total number of contacts. The success of the
    contractors in obtaining extended full pay commitments, however, was
    less than 1/10 of 1 percent, and the IRS has concluded that this
    category was not useful for the contractors. It must be emphasized,
    however, that even in those performance categories in which contractors
    have had some success, the revenue collected to date has been less than
    the IRS operational costs of the project.
        Question. Has IRS or any of the contractors encountered any
    problems? If so, please elaborate.
        Answer. Yes. Most of the problems experienced by the contractors
    and the IRS in the pilot project were operational in nature, or were a
    function of the newness of the program and the speed with which it had
    to be implemented. These were solved as they arose. Lessons learned for
    the future revolve around a few key problem areas:
      --Outdated IRS data processing systems exacerbated the inherent
            difficulty of extracting qualifying cases from IRS master
            files, controlling them, and reintegrating them with IRS
            systems after contractor actions. These outdated systems also
            introduced unforeseen complications in merging the work from
            two IRS service centers.
      --The application of Government-wide rules concerning ``inherently
            governmental activities'' resulted in severe limitations on the
            actual tasks the contractors can legally be given: in
            particular, contractors are prohibited from actually collecting
            federal income taxes. As a result, the contractors are only
            providing certain support activities to IRS collection, not
            really collecting debts in the normal sense of the word. Added
            to this is the extreme complexity of IRS tax accounts, which
            are very active (not static like most commercial or consumer
            debt accounts). Unlike most debt collection contracts, the IRS
            contracts cannot incorporate a clean handoff of delinquent
            accounts to the contractors and a clear separation between the
            contractors' work and the work necessary by IRS employees to
            support the contractors. As already mentioned, IRS employees
            have become involved in 63 percent of the contacts made by its
            contractors.
      --Availability of inventory: after reducing the raw inventory
            available in the specified categories of work to eliminate
            cases that exceeded the contractors' authority or ability to
            work (for example: bankruptcies, deceased taxpayers, open
            criminal investigations, delinquent filers, and many other
            filers), and after further setting aside a large number of
            qualifying cases for evaluation as a control group, the IRS
            almost exhausted the inventory available for contractors in the
            IRS Western Region.
      --A larger than anticipated number of cases (almost 25 percent) were
            recalled from the contractors after assignment due to changes
            of case status in IRS (for example, cases closed by refund
            offset). Unlike commercial debt, IRS debt is not static:
            controlling and tracking cases while they are assigned to the
            contractors has been a significant challenge for the IRS data
            processing support functions.
        Question. What has IRS learned from this pilot that could help it
    improve the collection of other accounts?
        Answer. The experience reinforces some insights contained in the
    IRS modernization plans that automated skip tracing tools and telephone
    management devices (such as predictive dialers), have the capacity for
    greatly enhancing productivity in out-call operations. We also plan to
    examine possible ``best practices'' with contractors to see if they
    would improve current methods.
        Question. Are there any legislative or other changes needed to
    improve the use of private debt collectors?
        Answer. Analysis of the current pilot will be completed September
    30, 1997, and may provide data that will be useful in responding to
    questions of this nature. Many legislative or regulatory changes could
    be considered that might facilitate private sector collection of IRS
    tax debts but the IRS does not advocate the desirability of any
    specific changes without full analysis of the results of test data and
    full consideration of policy, public perception, and administrative
    implications.
        Question. For fiscal year 1998, does IRS plan any changes in the
    pilot program? If so, please discuss these changes and why they are
    being considered.
        Answer. No. The pilot program was terminated at the end of the
    first year of operations.
        10. Over the past several years, IRS has studied various ways to
    reengineer and modernize its process for collecting delinquent taxes.
        Question. What major changes have been implemented as a result of
    these studies?
        Answer. The IRS has implemented a number of changes to its
    processes and procedures to improve tax collection over the last few
    years. Some significant initiatives and changes include:
      --Integrated Collection System--Revenue officers, managers and
            support staff use laptop computers to provide current
            information and automated case processing for account delivery,
            research, collection and forms generation.
      --Entity--provides automated taxpayer based reporting and case
            management.
      --Repeat Delinquent Taxpayer Program--identifies delinquent trust
            fund taxpayers who have a history of repeated delinquency and
            whose actions warrant more aggressive collection action by
            revenue officers.
      --National Telephone Research--This contract provides the most
            efficient and economical method of performing telephone number
            research that is vital to ACS.
      --Early Intervention--Two individual notices and one business notice
            have been eliminated from the collection process. This results
            in earlier telephone contact with the taxpayer and accelerated
            collection of accounts.
      --Notice Redesign--The IRS has changed the appearance and text of
            their bills. In tests at two sites, the use of a credit card
            type notice was more effective in generating revenue than the
            traditional notice.
      --Collection Financial Analysis--New procedures that use national and
            local expense standards were adopted. Studies and input from
            the private sector indicate that the expense standard method
            will ensure that allowed expenses are not inflated and that
            payment is maximized.
      --Collection Appeals Process--This process provides a vehicle for
            taxpayers to appeal specific collection actions quickly.
        Question. Does IRS have a comprehensive strategy for making
    collection programs more effective and efficient?
        Answer. Collection's emphasis is on helping taxpayers resolve their
    account problems, especially in those situations where they may be
    first-time delinquents. However, in those situations where taxpayers
    repeatedly fail to comply with filing, depositing, and paying
    requirements, innovative enforcement techniques are encouraged to
    achieve compliance with our tax laws. There is an obligation to ensure
    that collection tools are used effectively, fairly and timely.
        Collection has a number of actions in place or underway to increase
    yield and limit the growth of accounts receivable. We are focusing
    efforts on changing workflow, procedures, culture, management
    information and automation. As part of our effort to progress beyond
    traditional collection methods, we are looking at ways the private
    sector handles debt collection.
        Question. What are the IRS' long term goals?
        Answer. Some of the IRS' long term goals are: Increase total
    collections; reduce taxpayer burden; continue emphasis on quality case
    dispositions; resolve taxpayer inquiries at first contact; increase
    productivity; and reduce overall collection costs.
        Question. What changes does IRS plan to make over the next two to
    three years to implement these goals?
        Answer. Some changes that the IRS is planning to implement these
    goals are: Redesign of the revenue officer occupation; analysis of the
    offer in compromise process; implementation of customer service;
    integration of ICS and entity; and development and implementation of
    the IDS.
        Question. What information systems support, both directly and
    indirectly, the collection function? Does IRS plan to continue
    developing or implementing these systems in 1997 and 1998?
        Answer. ICS directly supports the collection function and provides
    automated case processing for revenue officers, managers, and support
    staff. ICS began nationwide implementation in fiscal year 1995 and is
    in production in 9 of the 33 consolidated districts. Implementation is
    scheduled to complete nationwide roll-out to the remaining 24 districts
    over the next two years, budget permitting. Collection is also
    dependent upon the IDRS, Masterfile, and ACS.
        Question. What are the objectives of these systems and when does
    IRS expect them to be fully operational?
        Answer. Collection uses these systems for account management. ICS
    is operational in 9 of 33 districts. ICS implementation is scheduled to
    complete nationwide roll-out to the remaining 24 districts over the
    next two years, budget permitting.
        Question. Has IRS discontinued any systems development in the
    collection area in fiscal year 1996 or 1997? If so please describe
    these systems and funding provided for 1996 and 1997 for these systems?
        Answer. Yes (to some degree). Based upon the need for more
    documentation and consistency with the Modernization Architecture and
    Sequencing Plan, IRS inactivated a prototype for its Collection
    Inventory Delivery System (IDS). The focus is to address IDS's full
    functionality as part of the Service's modernization plan presented to
    Congress, while delivering core functionality in the interim. Three
    major IDS components are being developed now. The expected benefits of
    these three components should approach $500 million annually.
                              compliance research
        1. For over 20 years, taxpayers' compliance in paying taxes owed,
    both voluntarily and after IRS enforcement, has hovered around 87
    percent. IRS has set a goal of reaching 90 percent compliance by the
    year 2001.
        Question. What has IRS done to improve compliance, and what else is
    needed to ensure that 90 percent compliance is attained by 2001?
        Answer. The IRS has undertaken a new approach to strategic business
    planning for its three Operations business lines: Submission
    Processing, Customer Services and Compliance. In fiscal year 1997, we
    issued the first Compliance Plan which linked Compliance activities
    with our strategic goal to ``Increase Compliance.'' Also in the fiscal
    year 1997 Compliance Plan, we identified, primarily through our
    research activities, seven national compliance strategies which target
    specific taxpayer populations. We plan to use cost-effective
    ``wholesale'' approaches in which large groups of noncompliant
    taxpayers are addressed through a single application of resources to
    encourage or enable them to comply voluntarily, rather than correcting
    this noncompliance through traditional, costly face-to-face enforcement
    techniques. However, reaching the goal of 90 percent collection of
    total tax liabilities by 2001 may be out of reach.
        Question. How does IRS intend to increase voluntary compliance with
    an audit rate that is projected to decline from 1.63 percent in fiscal
    year 1996 to 1.17 percent in fiscal year 1998?
        Answer. The IRS' new authority to treat returns with missing or
    invalid dependent Social Security Numbers (SSN's) as math errors
    accounts for a significant portion of the decrease in audit coverage.
    Previously, returns with missing or invalid SSN's could only be
    adjusted--if the taxpayer could not provide a valid SSN--through an
    audit; thus, these were included in audit coverage. Currently, returns
    with missing or invalid SSN's are adjusted--if the taxpayer does not
    provide a valid SSN--as math errors. Math error adjustments are not
    currently included in audit coverage. We intend to replace traditional
    face-to-face audits in some market segments with new compliance
    strategies which will effectively increase voluntary compliance through
    alternative treatments. As a result of research activities, we will
    improve our workload selection and compliance treatments, saving costly
    one-on-one enforcement for the most egregious cases. We believe this
    application of resources will have a beneficial effect on compliance.
        2. IRS implemented its new Compliance Research and Planning
    Approach to address concerns about continued noncompliance with the tax
    laws and the large income tax gap. The new approach involves, to a
    large extent, researching ways to improve compliance for entire market-
    segments--specific groups of taxpayers who share certain
    characteristics or behaviors--and using research results in ongoing
    compliance programs.
        Question. What is the current status of the new Compliance Research
    and Planning Approach in developing, testing, and implementing
    wholesale solutions to noncompliance?
        Answer. Of the eighty national compliance research projects
    underway, seventeen have advanced to the stage of studies which, by
    identifying major causes of noncompliance, will develop treatment
    hypotheses for testing in the coming year. Five projects are now
    testing treatments. Two projects have reported findings of successful
    treatment tests and are ready to be considered for national
    implementation. Based on earlier research that indicated a substantial
    degree of inadvertent noncompliance, both of these projects--one
    dealing with self-employment tax reporting compliance and the other
    dealing with duplicate use of dependent Social Security Numbers--have
    relied on nonenforcement techniques (i.e., ``reminder'' letters to
    taxpayers) to address the specific forms of noncompliance. Tests
    results indicate the potential of these treatments as low-cost, high-
    impact solutions to these forms of noncompliance among these taxpayer
    groups. However, it should be recognized that continued budget
    reductions will ultimately have an adverse impact on the IRS' ability
    to reach its compliance goals.
        Question. How is IRS assessing the effectiveness of the Compliance
    Research and Planning Approach?
        Answer. In general, the effectiveness of the Compliance Research
    and Planning Approach will be assessed in terms of increased revenue
    and improved compliance for a lower resource investment. More
    specifically, however, the effectiveness of compliance research is
    measured in terms of its moving from profiling a market segment and
    testing non-enforcement treatments to successful implementation.
    Initiatives proposed for implementation are arrayed against each other
    and against traditional enforcement activities and adopted when they
    prove more cost-effective. Compliance research is, therefore, effective
    to the extent that it is actually implemented after having ``competed''
    against alternative resource investments. For example, based upon
    research findings that significant noncompliance on the part of certain
    sales personnel in their reporting of sales incentives was due to an
    internal regulation, the Chief Counsel organization is in the process
    of revising and clarifying this regulation.
        Question. How is IRS ensuring that the necessary data can be
    collected and tracked?
        Answer. The Compliance Research and Planning Approach applies to
    each research initiative a systematic and uniform method of profiling,
    developing and testing with resultant baseline data. Subsequent
    wholesale implementation will have resultant data captured in the IRS
    Alternative Treatment Revenue reporting mechanism. In addition, IRS has
    submitted a Modernization Blueprint that includes system requirements
    to capture and track the data needed for realizing the Compliance
    Research and Planning Approach.
        Question. What impact will the new research approach have on
    planning compliance workload and resources across all IRS functions and
    programs?
        Answer. Traditionally, the Service has planned and allocated
    resources based on functional goals which were developed independently.
    However, the key to our new approach is to equalize marginal revenue to
    marginal cost across all Operations functions, programs and geographic
    locations, thereby maximizing revenue collections. Through our
    integrated planning process, each functional area will compete for
    resources with other areas and with new compliance strategies
    identified through our research efforts. Resources will then be
    allocated to those areas to equalize marginal revenue to marginal cost,
    after allowing for minimum presence in each segment of the population.
    Ultimately, we expect that the allocation of resources among our three
    business lines will be much different than it is today.
        Our research efforts will provide us with the modeling tools and
    supporting data to make these determinations. In addition, our
    profiling, studies and tests will produce new strategies that will
    successfully compete with our traditional operations. Improved access
    to data and more sophisticated analysis will enable us to select better
    workload for all our functions, making our operations more efficient
    and productive.
        Question. How does the research vision and the new research
    approach relate to the agency's strategic objectives and overall
    mission?
        Answer. The IRS Mission states that we collect the proper amount of
    tax at the least cost and continually improve the quality of our
    products and services. Closely related are our strategic objectives to
    ``Increase Compliance'' and ``Improve Customer Service.'' Compliance
    Research supports these through a four-tiered prioritized strategy:
        (1) Ensure that those taxpayers who are currently complying
    continue to comply. This represents our taxpayer base; in order to
    build on it, we must ensure it doesn't erode.
        (2) Enable that those taxpayers who are trying to comply to do so.
    We must provide the tools to enable these taxpayers to comply. We
    believe an effective means for doing this is through education,
    outreach and informational notices designed for targeted populations.
        For these first two tiers, improved access to customer services and
    the quality and simplicity of our taxpayer education efforts will be
    key elements in our success.
        (3) For taxpayers who neglect or refuse to comply, our preferred
    treatment is ``upstream'' enforcement efforts initiated by telephone or
    through correspondence. The Automated Collection System, Correspondence
    Examination and Document Matching Activities have our best rates of
    return, maintain the highest productivity and are the least intrusive
    of our enforcement operations.
        (4) When these avenues are exhausted, or for those taxpayers for
    whom ``upstream'' enforcement is not appropriate, we will continue to
    maintain a leaner, better-targeted face-to-face enforcement program.
    Since these operations are the most costly, they will be reserved for
    the most egregious cases. While the rate of return is not as high as
    ``upstream'' programs, the rate of return for face-to-face programs is
    still profitable.
        Question. Are there any linkages between the micro-level research
    of noncompliance among market segments and the macro-level agency goal
    to increase compliance and decrease the tax gap?
        Answer. Yes. Selection of market segments for further research is
    primarily determined by ranking their compliance (or noncompliance)
    based on, in particular, estimates of underreported tax liability.
    These estimates are obtained from various sources. Underlying most of
    these sources are the results of prior TCMP surveys. As research on
    these market segments is completed, IRS plans to implement successful
    treatments to increase compliance through its Operations Plan.
        3. In 1995, IRS postponed its Taxpayer Compliance Measurement
    Program (TAMP). Since the 1960's, TAMP has provided statistically valid
    data for use in measuring taxpayer compliance and in updating the
    discriminant function (DIF) formulas used to score returns as to their
    audit potential. The last CMP covered tax year 2988.
        Question. Without TCMP, what data does IRS have to measure overall
    tax compliance and update DIF formulas?
        Answer. Last fall the IRS contracted with an outside expert to
    review its approach to gathering compliance data and to recommend
    viable options to the traditional TCMP approach. The outside expert
    found that, in order to continue to measure overall tax compliance and
    associated tax gaps and to update the Service's DIF formulas, there is
    no substitute for the data from a TCMP-type program.
        Question. Does IRS have any plans for ways to measure overall
    compliance?
        Answer. Since the TY1994 TCMP was canceled, we have devoted
    substantial effort to investigating relevant potential options for
    capturing reliable compliance information as an alternative to TCMP.
    After considering a wide range of methodologies, we have concluded that
    there is no feasible alternative to audits of randomly selected
    taxpayers if we hope to obtain accurate measures of voluntary
    compliance. We procured the services of a consulting services firm to
    reassess the program options available to us by investigating any and
    all relevant data capture options to meet the compliance data needs of
    our stakeholders. This firm, as well, concluded that there is no
    alternative to audits of randomly selected taxpayers. However, the
    budgetary constraints which led to the postponement of TCMP continue
    and are not likely to diminish in the foreseeable future. At this point
    there are no plans to conduct a TCMP survey.
        Question. Does IRS have any plans for ways to update DIF?
        Answer. Existing DIF formulas were derived from data from the most
    recent TCMP surveys--1987 returns for corporations and 1988 returns for
    individuals. Certain revisions of DIF formulas resulting from major
    changes in the tax laws are implemented between TCMP surveys as needed
    to reflect the impact of law changes on the relative ranking of
    returns. These formula revisions are not considered updates of the DIF
    Formulas. Only data from complete TCMP examinations of randomly
    selected returns can serve as the basis for DIF formula updates.
        Question. Does IRS have any plans for ways to replace DIF with an
    objective audit selection system?
        Answer. IRS has conducted significant research on alternatives for
    developing workload selection systems as replacements for DIF and will
    continue its research efforts in this area. However, none of the
    techniques that have been identified and investigated were shown to
    perform better than, or even as well as, DIF.
        4. IRS' budget submission mentions that IRS is developing research
    programs to assist in improving its compliance operations.
        Question. Can IRS provide us with details on how these research
    activities will assist in the collection of delinquent taxes?
        Answer. IRS is actively involved in a number of research activities
    to improve the effectiveness of its collection activities. The ARDI
    Expert System, currently under development, is a ``next generation''
    workload selection and prioritization system, the goal of which is to
    predict the disposition and collectability of accounts receivable. IRS
    has entered into a partnership agreement with the Idaho National
    Engineering Laboratory (INEL) to jointly develop a ``next generation''
    process optimization system to begin the process of designing optimal
    work processes for accounts receivable. IRS will be announcing shortly
    a contract to acquire the assistance of outside consulting firms to
    develop workload selection systems for accounts receivable to compare
    against our internal systems.
        Question. Also, because prevention is the best way to deal with
    delinquencies in the first place, can IRS provide details on how the
    research activities will help in developing prevention programs?
        Answer. IRS has been involved in a number of research efforts to
    develop accounts receivable prevention strategies. The FTD Alert
    program is being analyzed to determine its effectiveness in identifying
    potential FTD receivable problems and resolving these problems to
    prevent a taxpayer from generating an account receivable. In the fiscal
    year 1997 Compliance Plan, we are implementing the first seven National
    Compliance Strategies, many of which have a delinquency prevention
    component. Among the most important:
      --We have identified high-income nonfilers who were brought into
            compliance during the fiscal year 1993-94 Nonfiler Strategy and
            have now become delinquent again. Using the data acquired from
            these cases, our research activities will profile the
            characteristics of these nonfilers, then develop and test
            treatments to prevent them from becoming delinquent a third
            time.
      --We estimate that unreported tip income approaches $9-$13 billion
            annually. Through the use of Tip Reporting Alternative
            Commitment (TRAC) agreements, employers put improved tip
            reporting mechanisms in place and withhold taxes. This project
            has been worked in some local jurisdictions for several years
            and has been quite successful. The current effort seeks to
            integrate Servicewide efforts under the umbrella of one
            strategy. TRAC's reduce the need for resource-intensive, low-
            yielding tip audits.
        Question. What, if any, prevention programs have been started as a
    result of these research activities?
        Answer. All of the activities described in response S610 are
    preliminary research efforts. These studies must be completed, tested
    and implemented before any programs can be initiated.
                               dispute resolution
        1. Every year, IRS must attempt to resolve thousands of disputes
    with taxpayers over tax liabilities. Traditionally, IRS has done this
    through its Office of Appeals.
        Resolving disputes through the Office of Appeals takes a long time
    and is costly to both the IRS and the taxpayer. Since the early 1990's,
    the IRS has been attempting to implement various alternative dispute
    resolution methods to improve the cost-effectiveness of dispute
    resolution within the IRS as well as to reduce the burdens and costs
    imposed on taxpayers, particularly corporations.
        Question. How frequently has IRS used these alternative dispute
    resolution methods? What have been the specific impacts of these
    methods on the cost, time, and burden of dispute resolution and on the
    amount of tax assessments?
        Answer. ADR Program Results:
        Early Referral: The early referral process, including employment
    tax, has been used in 45 Appeals cases, involving approximately $7.3
    billion in proposed adjustments, and thus far has resulted in
    approximately $3.5 billion in agreed adjustments.
        Simultaneous Appeals/Competent Authority: Three simultaneous
    Appeals/competent authority cases have been completed. There are
    sixteen other cases in process, involving approximately $1.1 billion in
    proposed adjustments.
        Mediation: Since the inception of the mediation program, twelve
    requests for mediation have been made. Five requests were denied
    because they did not meet the mediation criteria. Two mediation cases,
    involving approximately $170 million in disputed adjustments were
    successfully resolved. This resulted in approximately $80 million in
    agreed adjustments. Five mediation cases involving about $622 million
    in disputed adjustments are in process.
        ADR Impact: The responses to our customer satisfaction surveys
    reveal that both the early referral and simultaneous Appeals/competent
    authority procedures have helped taxpayers resolve their cases more
    quickly than using the standard procedures. Also, taxpayers responded
    that they saved money by using mediation instead of having to litigate
    the issues. Appeals ADR initiatives offer prompt and less expensive
    methods for taxpayers to resolve their disputes after good faith
    negotiations have failed in Appeals or agreement cannot be reached with
    Compliance. When any of these programs enable the taxpayer and the IRS
    to reach agreement, burdens and costs to both of them are reduced.
        Appeals Process: It is important to keep in mind that most tax
    controversies are resolved through the time-tested successful Appeals
    negotiation process. In fiscal year 1996, Appeals closed 67,628 cases,
    of which more than 87 percent were agreed by both sides. We sustain
    approximately 30-40 percent of what Compliance recommends because we do
    provide taxpayers the opportunity to present their case and resolve
    cases in a fair and impartial manner. The administrative Appeals
    process is cost effective for taxpayers in relation to the alternative
    of litigating issues. If we were to add a mediator to this process, the
    costs to the taxpayer and the government would be prohibitive. Appeals
    will continue to function as a mediator for both the government and the
    taxpayer at the least cost possible. In fact, 66 percent of all the
    cases we consider are handled directly with the taxpayer, while 34
    percent employed a tax professional to represent them. While there are
    relatively few taxpayers using the ADR initiatives, these cases involve
    a significant amount of the dollars in Appeals inventory. As a result,
    Appeals ADR processes initially focused on the cases that involve the
    majority of disputed dollars coming into Appeals.
                  brief description of appeals adr procedures
        Early Referral.--Early referral procedures, contained in Revenue
    Procedure 96-9, expedite Appeals consideration of key issues that are
    ``unagreed'' (the taxpayer does not agree with the proposed examination
    adjustment). Appeals officers begin reviewing the unagreed issue while
    the examination of other issues continues, allowing for the possible
    settlement of key unagreed issues, and possibly closing the entire case
    in the Examination function, reducing costs for the taxpayer and the
    IRS.
        Although the early referral program was initially limited to
    Coordinated Examination Program cases, in Announcement 96-13 the IRS
    extended the early referral provisions to employment tax issues on a
    one-year test basis. Announcement 97-52 extends the test of the
    procedures for early referral of employment tax issues for an
    additional one-year period beginning on May 27, 1997.
        IRS examiners now consider the taxpayer's eligibility for
    employment tax relief under section 530 of the Revenue Act of 1978
    before initiating any examination of the relationship between a
    business and a worker. Taxpayers that disagree with the District's
    determination regarding the application of section 530 have the option
    of immediately requesting early referral of the issue from the District
    to Appeals.
        Simultaneous Appeals/Competent Authority.--Section 8 of Revenue
    Procedure 96-13 allows a taxpayer who has filed a request for competent
    authority assistance to also request simultaneous Appeals consideration
    of the competent authority issue. The procedure encourages taxpayers to
    request competent authority assistance and the participation of Appeals
    while a case is under Examination jurisdiction
        Mediation.--The IRS recently conducted a one-year test of mediation
    procedures for large cases in Appeals. Mediation is used later in the
    administrative process, after good faith negotiations have failed to
    produce resolution. Factual issues, such as valuation and transfer
    pricing issues, are appropriate for mediation.
        Announcement 97-1 extends the test of the mediation procedure set
    forth in Announcement 95-86 for an additional one-year period beginning
    in January 1997. Appeals will try mediation in more cases so that the
    program can be further evaluated.
        2. In an effort to speed up and reduce the cost of dispute
    resolution, Congress enacted a law that encouraged federal agencies to
    begin using independent third-party mediators to resolve disputes. IRS
    has offered only one dispute resolution technique involving an
    independent third party, which comes at the end of settlement efforts
    by the Office of Appeals.
        Question. Is IRS planning to introduce the use of third-party
    mediators earlier in the process, and if so, when?
        Answer. Yes, based upon current customer satisfaction survey data,
    we anticipate expanding mediation to cases or issues involving at least
    $1 million in dispute.
        The mediation procedure in Appeals was specifically designed to be
    used at the end of the administrative process, as a final attempt to
    resolve a dispute before litigation. Appeals has built a strong record
    of success through our standard techniques of dispute review and
    conferencing. Most tax controversies are resolved through the time-
    tested successful negotiation process of the Appeals conference. Very
    few cases are litigated--about 1,200 in any given year. During fiscal
    year 1996, Appeals closed 149 cases where more than $10 million or more
    was in dispute. Only 15 of these cases were closed unagreed. The vast
    majority of cases are, therefore, successfully resolved without the
    need for any additional resources. The IRS' and taxpayer's cost for
    using an outside mediator is approximately $5,000 each. If we were to
    introduce mediation earlier in the process, it would only serve to
    extend the lapse time of the cases since it would be introduced prior
    to a failure of good faith negotiations. It would also add costs to the
    process, especially for the taxpayer since they would have to spend
    additional funds to mediate a case.
        Introducing mediation before good faith settlement negotiations
    have occurred, could serve to jeopardize the Appeals process. We must
    be careful to not dismantle an administrative appeals system that
    continues to serve the government well, and in our opinion is the
    premier alternative dispute resolution process in government. If the
    costs of adding additional mediators to the process were instead used
    to hire additional appeals officers, we could have an immediate impact
    on reducing lapse time. Our lapse time is a direct result of our
    efforts to work with the taxpayer to provide the necessary
    documentation and oral arguments in support of the position taken, to
    grant the government equal time to rebut the taxpayer's position or
    bolster its case, and finally to make an informed decision based upon a
    reasonable effort to obtain all appropriate documentation.
        Mediation is limited to CEP cases assigned to Appeals Team Chiefs.
    Taxpayers can use the mediation procedures in conjunction with early
    referral; however, early referral has a broader application and is
    available for all CEP cases. After early referral negotiations are
    unsuccessful, taxpayers are able to then request mediation if the early
    referral issue satisfies the mediation criteria. By combining the two
    procedures, taxpayers may be able to expedite their resolution. Appeals
    is considering expanding the mediation process to cases or issues
    involving at least $1 million in dispute.
        3. During the last few years, the IRS has developed some additional
    techniques for resolving or avoiding tax disputes that, except for one,
    do not include a third-party mediator. Most of these techniques,
    including the one involving a third-party mediator, are targeted toward
    large corporations.
        Question. When does IRS plan to develop other dispute resolution
    techniques that are targeted toward (1) other corporations and (2)
    individual taxpayers-those that can least afford a lengthy appeals
    process?
        Answer. Appeals is expanding our ADR programs as follows:
                                for corporations
        Mediation.--Appeals is considering expanding the mediation process
    to cases or issues involving at least $1 million in dispute, if an
    issue can't be resolved through either the early referral process or
    the normal Appeals process. Cases over $10 million in dispute that
    currently qualify for mediation account for only 1 percent of the
    inventory in Appeals, but 88 percent of the dollars in dispute. Cases
    over $1 million in dispute are 4 percent of the inventory, but 95
    percent of the dollars.
        Employment Tax.--Announcements 96-13 and 97-52, allow taxpayers
    whose returns are being examined to request early referral of one or
    more employment tax issue(s) from district compliance functions to
    Appeals. The purpose of early referral for employment tax issues is to
    resolve them more expeditiously through simultaneous action by the
    District and Appeals. These announcements are part of the IRS' strategy
    designed to improve employment tax administration for all taxpayers,
    including those who are small business owners. The program will be
    reviewed when the two-year test concludes in May 1998.
        International Penalties.--Appeals is considering extending the
    concept of the early referral procedures contained in Rev. Proc. 96-9,
    by providing for an expedited appeal of the following penalties:
    Internal Revenue Code Sections 6038(b), 6038A(d), 6038B(b) and
    6038C(c), which are not subject to deficiency procedures. This
    expedited referral procedure will allow taxpayers an administrative
    appeal prior to the payment of the penalty.
                                for individuals
        Bankruptcy Appeals Program.--Appeals is in the process of
    developing a dispute resolution program to assist taxpayers in
    resolving IRS-related bankruptcy disputes. Under current procedures,
    once the Collection Division takes enforcement action against a
    taxpayer, the taxpayer's recourse is often just filing for bankruptcy.
    The proposed Bankruptcy Appeals Program would provide an informal
    hearing with Collection, which, if not resolved, would then allow the
    taxpayer to move the dispute to Appeals for consideration. The issues
    that will be considered under the program will initially be limited to
    dischargeability determinations (other than when the Service asserts
    fraud under B.C. Sec.  523 (a)(1)(C)), proof of claim and
    administrative claim issues, automatic stay violation issues, off-set
    and refund issues, and preferences. The program will serve to reduce
    taxpayer burden since it will be simple to use, will process disputes
    quickly, and will give Appeals authority to reach agreements with
    taxpayers.
        Collection Appeals Program.--The Collection Appeals Program (CAP)
    started in April 1996. This program allows taxpayers to appeal lien,
    levy or seizure actions proposed by or made by the Service. Before this
    time, the only opportunity a taxpayer had to appeal these actions was
    through the Collection manager and up through Collection's chain of
    command. This is the first time in the history of U.S. taxation that an
    appeal on these Collection actions through an independent organization
    such as Appeals was possible. On January 1, 1997, appeals of
    installment agreements proposed for termination were added to the
    program. This installment agreement appeal right was provided for in
    the Taxpayer Bill of Rights 2 and the Service decided to add it to CAP.
        Any taxpayer may request an appeal. Appeals is expected to reach a
    decision on these appeals in five days. This is to ensure that
    taxpayers who are anxious for a decision will have one quickly and also
    to ensure that taxpayers who are simply trying to delay collection will
    not be able to do so.
        During the first year of CAP (through March 31, 1997),
    approximately 1600 cases were received by Appeals. Approximately 90
    cases were open in Appeals on March 31, 1997.
        Appeals Protest Form.--Appeals is developing a protest form which
    taxpayers and their representatives have told us would facilitate the
    Appeals process and assist us in reducing time, cost and taxpayer
    burden. We expect to begin testing this form in early 1998 for all
    Service Center generated correspondence examinations where the current
    process precludes a taxpayer from requesting an appeal prior to the
    issuance of a statutory notice of deficiency and the filing of a
    petition with the Tax Court. We expect the use of this protest form
    will significantly reduce the time span to resolve these cases in
    Appeals, the taxpayer costs associated with filing a petition, and the
    taxpayer burden in using the Appeals process.
        TRACES.--Appeals has initiated a review of Appeals functions and
    processes to come up with new, key performance indicators that will
    foster continuous improvement and provide improved customer
    satisfaction. These key performance indicators are known as ``TRACES''
    and were developed for: Timely, Responsive, Accurate, Complete Service,
    Education, and Sustention Rate. These key factors focus on providing
    better products and services by reducing cycle/lapse time, providing
    prompt hearings for taxpayers and making settlements that are fair,
    impartial, and technically/procedurally correct.
        Customer Satisfaction Surveys.--Appeals conducts ongoing reviews of
    our programs through the information we receive from our customer
    (internal & external) surveys, including performance indicators for
    each program. The information from these surveys allow us to find ways
    to improve our services.
                              information systems
        IRS' fiscal year 1998 budget request includes $1.27 billion for
    Information Systems, of which $1.14 billion is for Operational
    Information Systems and $0.13 billion is for Developmental Information
    Systems. The following questions relate to that portion of IRS'
    request.
        1. Question. Although the IRS has taken some steps to correct
    management and technical weaknesses and more recently began to put the
    brakes on TSM development spending, what does IRS plan to do now to get
    the modernization back on track? Also, precisely which system
    development projects have been halted? Does this mean funds
    appropriated for these projects can be rescinded until further action
    is resumed? If not, why not? What impact does the spending halt have on
    the fiscal year 1998 request for these projects?
        Answer. The IRS has taken a number of steps in fiscal year 1997 to
    get Modernization back on track. These initiatives include, but are not
    limited to:
      --Recruitment of the Associate Commissioner for Modernization/Chief
            Information Officer to provide the single point of authority,
            responsibility and accountability for Modernization activities;
      --Development and implementation of a Systems Life Cycle that is
            consistent with Military Standard 498 and best practices used
            by world class technology firms that provide the procedures and
            controls required in large scale development efforts;
      --Establishment of the Government Program Management Office to serve
            as the nexus for Modernization activities and provide day to
            day management of contractor and IRS development staff;
      --Review of fiscal year 1997 active projects, resulting in the
            Investment Review Board approval to eliminate and/or
            consolidate twenty-six projects down to the technically
            feasible and maintainable nine;
      --Development and timely issuance of the Modernization Blueprint,
            which serves as the baseline for Modernization and includes the
            Business Requirements, Functional and Technical Architecture
            and Sequencing Plan for a phased implementation; and
      --Recruitment of ten senior technology executives to strengthen and
            improve the overall management of modernization efforts,
            including management of contractors.
        The systems development projects that were halted include the
    Corporate Accounts Processing System (CAPS), Workload Management System
    (WMS), Document Processing System (DPS) and the Integrated Case
    Processing System 2.0 (ICP). The review of all projects was completed
    in March 1997.
        The funds that had been allocated to these projects in fiscal year
    1997 would be applied to continuing initiatives including Telefile,
    Inventory Delivery System and National Call Routing.
        All projects that remain active are characterized as Stay in
    Business initiatives and are included in the fiscal year 1998 budget
    request. Failure to fund these initiatives in fiscal year 1998 would
    have significant impact on the Business organizations.
        2. Because of IRS' poor track record in developing automated system
    software, Treasury and IRS plan to rely more on private sector software
    development contractors. For example, Treasury is drafting a request-
    for-proposal for a ``prime contractor'' to perform and oversee all TSM
    software developmental efforts. In addition, IRS recently provided a
    plan to the Congress outlining how IRS planned to shift more system
    development tasks to private sector contractors. However, IRS has not
    had a good track record in managing contractors as evidenced by IRS'
    recent attempt to use contractors to acquire Cyberfile, which resulted
    in IRS spending over $17 million without fielding any of the system's
    promised capabilities.
        Question. What is IRS doing to ensure it has the capability to
    effectively manage software development contractors?
        Answer. The IRS has consolidated the management of all contractor
    activity into the Government Program Management Office (GPMO) which
    reports to the Associate Commissioner for Modernization/Chief
    Information Officer. This Office will manage the Modernization program
    and be staffed primarily by contractor technical management.
        The GPMO has been instrumental in building the ``team readiness''
    that will be required for the IRS to be a successful partner in
    Modernization, including development of the framework required for
    management of contractors. Actions taken in fiscal year 1997 include
    but are not limited to:
        1. Systems Life Cycle which is based on Military Standard 498 and
    consistent with best practices employed by world class technology
    institutions. It is through the SLC that accountability, authority and
    responsibility will be assigned to all facets of the IRS and contractor
    community for system development activity. The day to day management of
    SLC activities is the responsibility of the GPMO. The Systems Standards
    and Evaluation Office (SSE), reporting to the CIO, is responsible for
    on-going monitoring and evaluation of conformance to the SLC.
        2. Modernization Blueprint which defines the Business Requirements,
    Functional and Technical Architectures and Sequencing Plan for a phased
    implementation. The Blueprint was developed in partnership with the IRS
    Integration Support Contractor (ISC).
        The Blueprint is defined through Level II of a four level
    architectural framework and serves as the baseline for future
    contractor development efforts. Responsibilities for Level III and IV
    are as follows:
      --Level III to be performed by either the IRS and ISC (Phase I of the
            Sequencing Plan) or the PRIME Integration Services Contractor,
            managed by the IRS (Phase II-V of the Sequencing Plan).
      --Level IV to be performed by sub-contractors and managed by the
            PRIME.
        3. Request for Comments (RFC) for Modernization Prime Systems
    Integration Services Contractor (issued in conjunction with the
    Blueprint) to enter into a strategic partnership with a PRIME
    Integration Services Contractor to undertake a major Modernization with
    the IRS.
        Among the criteria for acquisition of the PRIME is the requirement
    that the PRIME maintain a software acquisition CMM Level 3
    Certification or mutually agreeable equivalent standard. This
    capability will ensure that the management and development processes
    required to undertake an initiative of this size, including the
    management of sub-contractors, are in place .
        Question. What assurance can IRS provide the Congress that
    contracting out will result in delivery of promised system capabilities
    on time and within budget?
        Answer. The IRS does not have the internal capability to complete
    Modernization alone, nor does the contractor community have the
    capability to complete Modernization alone. It is through a public/
    private partnership that the IRS will leverage the expertise of both
    the government (e.g., knowledge of the existing systems) and the
    contractor community (e.g., technical design and build capabilities) to
    provide the capabilities required.
        There are three critical organizational entities with
    responsibility for ensuring investments in information technology are
    sound and that development is proceeding within budget and schedule
    parameters:
        1. Investment Review Board--Investment decisions would follow the
    Systems Life Cycle (SLC) development approach adopted by the IRS
    Executive Committee in November, 1996. This approach requires
    completion of business requirements, engineering analysis, and a
    business case documenting costs, benefits and risks associated with
    each proposal consistent with ITMRA and ``RAINES'' Rules. These steps
    must be completed prior to funding decisions by the Investment Review
    Board. The IRB consists of both IRS and Treasury executive management.
        2. The SLC provides for a Modernization Management Committee (MMC),
    chaired by the Associate Commissioner for Modernization/Chief
    Information Officer, responsible for reviewing budgetary and schedule
    issues that would not normally be handled by the IRB. These reviews
    would be supported by the GPMO Program Management and Control Division,
    responsible for managing and monitoring the Modernization Management
    Plan.
        3. The Department of Treasury IRS Management Board and the Treasury
    Investment Review Board have oversight responsibility for IRS
    information technology investments. It is through these boards that the
    Department evaluates major IRS initiatives (e.g., PRIME Request for
    Comments, Modernization Blueprint) and monitors program performance.
        3. The Administration has proposed creating an Information
    Technology Investments Account and funding it with $1 billion--$500
    million to be appropriated in fiscal year 1998 and another $500 million
    in fiscal year 1999. The goal of creating such accounts is to ensure
    that agencies request full funding in advance for the entire cost of a
    capital project so that the full costs are known at the time decisions
    are made to provide resources. In establishing these accounts, the
    Office of Management and Budget requires that 1) the capital assets
    support the agency's mission, and 2) the assets have demonstrated a
    projected return on investment (ROI) that is clearly articulated.
        Question. What investment does IRS plan to make with the $1
    billion? How did IRS develop the justification for the $1 billion, and
    what are the ROI's for each of the planned investments?
        Answer. On May 15, 1997, the IRS completed the Modernization
    Blueprint, Architecture and Sequencing Plan. Business Cases for the
    Modernization Blueprint, Phase I are scheduled to be completed in
    October 1997. The $1 billion represents an advance-funded account. This
    funding will allow the IRS and the selected Prime Contractor to
    complete the detailed planning for the next phase of Modernization.
        Question. How will these investments support the agency's mission?
        Answer. The Modernization Blueprint will focus on the development
    of accessible, secure and authoritative Corporate Data Systems which
    will support improved customer service. Before funds are expended on
    these investments, the Investment Review Board will ensure that the
    projects have been reviewed and the results indicate that the projects
    are consistent with the Clinger-Cohen Act.
        Question. What are the ROI's for each of the planned investments?
        Answer. The business cases for Modernization Blueprint, Phase I to
    be completed in October 1997 will include ROI analyses.
        Question. How does IRS know what its investments and associated
    costs are when re-engineering, business, architecture, and sequencing
    plans, which will guide IRS' modernization efforts, have not yet been
    completed?
        Answer. We don't yet. On May 15, 1997, the IRS published its
    Modernization Blueprint, which contains the business requirements,
    architecture, technical standards and sequencing plans. These data in
    addition to Phase I Level III analysis to be completed in September,
    1997, will be utilized to develop business cases including budgets,
    schedules and deliverables.
        Question. How do Information Technology Investment Account projects
    differ from those being funded with the $1.28 billion in the fiscal
    year 1998 request for the development and operation of IRS information
    systems?
        Answer. With the exception of the $130.1 million Development and
    Deployment component of the fiscal year 1998 budget, the $1.28 billion
    request is dedicated to Legacy, Operational TSM, Stay in Business and
    Modernization Program Infrastructure expenses. The Development and
    Deployment account will fund those Modernization projects which were
    reviewed and approved by the Investment Review Board. The ISIA account
    would also fund Modernization efforts.
        4. In July 1995 and again in June 1996 and September 1996, GAO
    identified and reported serious weaknesses with IRS' information
    technology investment management process. GAO's bottom line was that
    IRS did not have an effective process for ranking, prioritizing, and
    selecting its information technology investments.
        Question. In light of GAO's finding, please explain how IRS
    developed the $1.3 billion being requested for information systems in
    fiscal year 1998. What assurance does Congress have that in developing
    this request, IRS ranked, prioritized, and selected those projects that
    will best meet IRS' mission needs?
        Answer. With the exception of the $130.1 million Development and
    Deployment component of the fiscal year 1998 budget, the $1.27 billion
    request is dedicated to Legacy, Operational TSM, Stay in Business and
    Modernization Program Infrastructure expenses. The Development and
    Deployment account is based on business priorities in rank order as
    follows: Submission Processing; Customer Service; Compliance; and
    Administrative Systems.
        5. For fiscal year 1997, Congress appropriated $89.4 million for
    various activities, such as the Government Program Management Office,
    the Modernization Management Board, Systems Life Cycle Development,
    Architecture Development, Reengineering Studies, and Engineering
    Infrastructure.
        Question. Please provide a description of how the funding of each
    of these activities has been spent and what results are expected by the
    end of fiscal year 1997.
        Are each of these activities expected to continue in fiscal year
    1998? If so, what is the expected funding level, and what is the
    justification for continued funding for each of these activities? For
    example, how has the $5 million for reengineering activities been spent
    in 1997, and how will these activities be continued in 1998?
        Answer. The $89.4 million associated with these activities has
    provided the following results:
        Answer. The $89.4 million associated with these activities has
    provided the following results:

    1. Government Program Management Office (GPMO): During fiscal
        year 1997 this Office has been established and consists of
        two Divisions; Architecture, Engineering and
        Infrastructure and Program Management and Control.
        Additionally, Project Offices have been established to
        manage the implementation of technology investments for
        Modernization. This office is responsible for ensuring
        that the program infrastructure that is necessary for the
        IRS to move forward with Modernization is in place
        concurrent with the award of the PRIME Integrated Support
        Services Contract (10/98).
        Key deliverables provided in fiscal year 1997 include, but
        are not limited to: Development of the Systems Life Cycle
        (SLC); Development of the Modernization Blueprint;
        Establishment of the Program Office including
        identification of programmatic interfaces with all IRS
        organizations; Integrated oversight of all contractor
        activities; Implementation of the SLC for Stay in Business
        project offices; Development of a training plan for
        project managers; Development of the Business Case for
        Phase I of the Modernization Blueprint Sequencing Plan;
        Development of the processes/procedures to implement
        Legislative requirements (e.g., ITMRA, GPRA); Creation and
        implementation of the Project Disposition Review to
        provide for the inactivation of projects deemed not viable
        technically, programmatically, etc. (e.g., Integrated Case
        Processing 2.0); and Development of a Request for Comment
        (RFC) for the PRIME Integration Support Services
        Contractor................................................   $28.047
    2. Modernization Management Board (MMB): The MMB has been
        established as the focal point for review and approval of
        significant IRS information technology and business
        initiatives. The Board is convened on a monthly basis and
        there is consistent interaction between the MMB staff and
        the IRS. The MMB has been responsible for approval of such
        items as the Modernization Blueprint, the Feasibility for
        Outsourcing Submissions Processing and the Request for
        Comment for the PRIME Integration Support Services
        Contractor................................................       2.0
    3. Systems Life Cycle (SLC): The development of the SLC is
        being managed through the GPMO in partnership with the
        IRS' Integration Support Contractor (TRW). To date, all
        major processes have been defined and the SLC is being
        used for project development activities (in a controlled
        environment). By the end of fiscal year 1997, it is
        anticipated that a training strategy will be in place to
        deploy the SLC across the IRS, concurrent with the onset
        of Modernization design activities........................     8.210
    4. Architecture Development: The Modernization Blueprint,
        which consists of the Business Requirements, Functional
        and Technical Architecture and Sequencing Plan for a
        phased implementation was developed and provided to
        Congress on schedule on May 15, 1997.
        Activities for the balance of fiscal year 1997 include the
        development of the Level III requirements and Technical
        Architecture as well as the completion of the Business
        Case for Phase I of the Sequencing Plan...................    17.844
    5. Reengineering Studies: Through participation of the
        Integration Support Contractor (TRW) reengineering
        activities with the business are on-going.
        The $5 million requested in fiscal year 1997 for
        reengineering activities through Tax Settlement
        Reengineering is not being requested in fiscal year 1998.
        Business reengineering activities in fiscal year 1998 will
        be consistent with the Architectures (Functional and
        Technical and the Sequencing Plan) as defined in the
        Modernization Blueprint.
        Additionally, reengineering played a significant role in
        the creation of the 3,500 Business Requirements contained
        in the Modernization Blueprint............................       5.0
    6. Engineering Infrastructure: The Engineering Infrastructure
        has been established through the creation of the
        Architecture, Engineering and Infrastructure Division
        within the GPMO. This Division has provided significant
        input in developing the Modernization Blueprint target
        infrastructure, including the security infrastructure to
        be developed as part of Phase I of the Sequencing Plan....    22.838
                        --------------------------------------------------------------
                        ____________________________________________________

          Total...................................................    83.939

        With the exception of Tax Settlement Reengineering, all of these
    activities are expected to continue in fiscal year 1998 to ensure
    readiness for Modernization activities (as indicated above), including
    contractor support (i.e., ISC/SETA) and Modernization Infrastructure
    investments (i.e., Tax Return Data Base conversion).
        6. In fiscal year 1997, Congress appropriated $61 million for
    downsizing the Information Systems staff by about 900. It appears that
    most of the reductions, especially in the National Office, have
    occurred through attrition rather than through RIF's and buyouts.
        Question. If IRS will not have to RIF or buy out as many
    Information Systems staff as expected, is it fair to assume that IRS
    will not need all of the $61 million appropriated for that purpose? If
    so, how much will IRS need, and how will the rest of the $61 million be
    used?
        Answer. No--IRS will need the money for other purposes. Originally,
    IRS had proposed using $61 Million for RIF's of IS personnel. A RIF
    will no longer take place in fiscal year 1997. Of the original $61
    Million, IRS has proposed transferring $25 Million of those funds to
    pay for unbudgeted needs in the Year 2000 Project. The residual $36
    Million is being used to pay for various costs related to FTE
    reductions, including partial year salaries, and costs relating to
    voluntary separations and buyouts.
        7. Question. Is IRS experiencing funding shortfalls for any
    information systems or Information Systems program activities that will
    require reprogramming of funds from other sources for fiscal year 1997,
    and does IRS' fiscal year 1998 budget account for this?
        Answer. Yes, IRS is experiencing funding shortfalls in three
    critical areas in fiscal year 1997: Year 2000 Conversion, Distributed
    Input System/Remittance Processing Systems (DIS/RPS) Replacement, and
    Data Center Consolidation. These needs, along with continued increasing
    operational costs and continued progress on Modernization preparedness,
    have caused the IRS to reconsider Information Systems needs and
    priorities for fiscal year 1998. Summarized below are the results of
    this assessment compared to the budget request.

                              [Dollars in millions]
    ------------------------------------------------------------------------
                                                    Estimate of
                 Priority                 Budget    needs as of    Over (+)
                                         request     June 1997    under (-)
    ------------------------------------------------------------------------
    Operational Systems..............       $936.6       $978.0       +$41.4
    Stay in Business:
        Year 2000 Conversion.........         84.9        170.0        +85.1
        Data Center Consolidation....  ...........        157.7       +157.7
        DIS/RPS Replacement..........         44.0         51.9         +7.9
        Quality Assurance Testing....          7.1         14.3         +7.2
        Examination Laptop
         Replacement.................          8.0          8.0  ...........
        Interim Revenue General
         Ledger System...............          5.1          5.1  ...........
    Modernization:
        Modernization Program
         Management..................         27.5         36.5         +3.8
        Modernization-Infrastructure
         Investments.................         28.3         32.1         +3.8
    Business Line Investments........        130.9         49.5        -81.4
                                      --------------------------------------
          Total Information Systems..      1,272.4      1,503.1       +230.7
    ------------------------------------------------------------------------

                        operational information systems
        1. The fiscal year 1998 budget requests an increase of $4 million
    for quality assurance.
        Question. What has IRS budgeted for and actually spent on quality
    assurance in fiscal year 1996 and 1997?
        Answer. In fiscal year 1996: The Product Assurance Division was
    allocated 267 FTE and a combined total of $3,016,000 in funds for
    travel, overtime, ADP, etc.
        Actual use in fiscal year 1996 was: 267.8 FTE and a total of
    $2,294,570 in funding. The unused portion represents funds not used
    because of a delay in the implementation of the Integrated Test and
    Control Center (ITCC).
        In fiscal year 1997: The Product Assurance Division was allocated
    351 FTE and a combined total of $4,055,662 in funds for travel,
    overtime, ADP, etc.
        Projected use through the end of the fiscal year is: 271.9 FTE and
    $4,431,849 in funding. The division shows shortages in travel, overtime
    and training. These are projected shortages and the actual will differ.
        As noted above, the Product Assurance Division was allocated 351
    FTE in fiscal year 1997 but will actually use 271. A recruiting process
    began in October 1996 in an effort to attract new employees to the
    division. Announcements for testing analyst jobs at all grade levels
    were posted in the field and National Office. To date, the division's
    recruitment effort (through the competitive process) has attracted 57
    new testing analysts.
        Question. How far will the $4 million increase in fiscal year 1998
    bring IRS toward its goal of ``full systemic testing of all tax
    processing systems by January 1, 1999?''
        Answer. According to industry standards, the cost of Systems
    Acceptability Testing should be 30-45 percent of total life cycle
    resources. At the end of fiscal year 1996, the Product Assurance
    Division testing staff represented 10 percent of the life cycle
    resources. The Division is currently at 12 percent--the goal is 30
    percent. The $4 million will allow the Division to hire and relocate
    approximately 65 IRS field personnel which will bring the testing
    resources to 15 percent of the total life cycle resources.
        Question. What additional resources are required for testing
    changes to systems as a result of the century date change (year 2000)
    problem?
        Answer. The Product Assurance Division has requested $17.1 million
    in funding for contractors and other support in fiscal year 1997 and
    $10.2 million in fiscal year 1998. This funding is a component of the
    Year 2000 request.
        Question. Has IRS budgeted for this effort out of it's base level
    quality assurance budget?
        Answer. No, this funding is a component of the Year 2000 request.
        Question. If so, how much has been budgeted for fiscal year 1997
    and 1998?
        Answer. Product Assurance Division requires base staffing of 506 to
    do full System Acceptance Testing. For fiscal year 1997 and fiscal year
    1998, Product Assurance did not increase base needs to perform Y2K
    testing. Product Assurance utilized 46.2 FTE of existing staffing for
    Year 2000 testing. This is in addition to contractor needs. When Y2K
    testing is complete, the 46.2 FTE will revert back to full systemic
    testing as part of the 506 FTE.
        2. IRS' budget request includes an increase of $39 million for the
    year 2000 problem, which is on top of the $45 million allocated to that
    effort out of base funds.
        Question. IRS' budget request includes an increase of $39 million
    for the year 2000 problem, which is on top of the $45 million allocated
    to that effort out of base funds. How does the IRS plan to spend the
    $84 million?
        Answer. The current IRS fiscal year 1998 budget requirement for
    Year 2000 (Y2K) is $170 million. This is made up as follows:

    Conversion and Testing Staff Costs......................     $59,000,000
    Telecommunications......................................      15,000,000
    ADP Equipment...........................................      13,000,000
    COTS (mostly Operating Systems) Software................      17,000,000
    Y2K Project Office/Program Management Support...........       9,000,000
    Year 2000 Certification (Product Assurance).............       7,000,000
    Plus contingency amount (expected increases) of.........      50,000,000
                        --------------------------------------------------------
                        ____________________________________________________
          Total fiscal year 1998 Budget Requirement.........     170,000,000

        Conversion, testing and certification costs will guarantee the
    accuracy and completeness of system changes prior to production; ADP
    equipment, software and telecommunications costs will replace currently
    non-compliant inventory; and the contingency amount of $50 million is
    based on the following:
      --In many areas the IRS is still in the early stages of analyzing the
            impact of the year 2000. The IRS may uncover significant
            requirements in the future, such as systems which need major
            overhauls to be made Y2K compliant.
      --There is still much uncertainty as to what can be expected when we
            exchange Y2K data with external trading partners. This is
            particularly risky because the IRS has limited knowledge and no
            control over what processing and systems the partners use to
            create the data (format is only one factor). The IRS is working
            diligently to reduce these risks.
      --The evaluation of the telecommunications systems is not yet
            complete. Recently, $8 million in new telecommunications
            requirements was validated; additional needs/amounts may yet be
            identified.
      --Analysis on minicomputers and personal computers is still underway,
            particularly the systems that support business owned and
            locally developed applications. The IRS is concentrating on
            applications software first and then systems software/
            Commercial-Off-the-Shelf (COTS) and hardware to determine which
            upgrades are needed. The IRS expects that significant upgrades
            will be required in these categories Service-wide but dollar
            estimates are not yet available. The areas of greatest concern
            for these systems are: (1) the need to upgrade to Y2K compliant
            systems software/COTS releases; (2) older hardware that cannot
            run with the newer Y2K compliant software and must either be
            upgraded or replaced; and (3) potential capacity requirements.
        Question. Given that many of the costs associated with year 2000
    conversion have not yet been determined and that most of the conversion
    must be completed by the end of 1998, what alternative sources of
    funding will IRS turn to if additional funds are needed?
        Answer. There are very limited alternative sources of funding. One
    known source is the reprogramming of Modernization (Development &
    Deployment) no-year and multi-year funds from fiscal years 1990, 1991,
    1993, 1995, and 1996 (totaling $44 million) which are still available.
    Additional funding requests may be submitted to the Investment Review
    Board and Congress.
        Question. How much funding is currently available for reprogramming
    to support the Year 2000 effort? Where would the IRS take the
    reprogramming funds from?
        Answer. As part of its fiscal year 1997 Appropriation, the IRS has
    $45 Million available for the Year 2000 effort and $7 Million available
    for the Data Center Mainframe Consolidation. In addition, $85 Million
    was requested in fiscal year 1998 for the Year 2000 effort. We are
    planning to reapply $36 Million of fiscal year 1997 Information Systems
    funds and we hope to be able to transfer $44 Million in additional
    funds from prior Information Systems no-year funds and multi-year
    accounts. These actions would help to alleviate our fiscal year 1997
    funding shortfall.
        For fiscal year 1998, we have identified our unbudgeted needs for
    Year 2000 totaling $258 Million, including:
      --$85 Million for Year 2000 to bring corporate systems into Year 2000
            compliance and avoid risking filing season failure and also to
            achieve telecommunications and field hardware compliance.
      --$15 Million for DIS/RPS Replacements and to strengthen quality
            assurance by increasing testing of annual programming changes
            before production releases.
      --$158 Million for Data Center Mainframe Consolidation which helps
            ensure Year 2000 Compliance, increases operational
            efficiencies, improves safeguards for taxpayer privacy and
            disaster recovery capability, and positions the IRS for the
            subsequent implementation of the modernization architectural
            blueprint.
        Question. Does IRS believe that it can address the Year 2000
    problem within current funding levels without seriously impacting other
    areas of its operations?
        Answer. No. Without additional funding there would be severe
    impacts on operational systems support and conceivably necessitate the
    diversion of resources from Processing, Assistance and Management and/
    or Tax Law Enforcement programs.
        Question. Has the IRS considered the need for a supplemental budget
    request for fiscal year 1998 for the Year 2000 effort? Have you
    identified an offset for this supplemental request?
        Answer. The IRS is still evaluating its total budget requirement
    for the Year 2000 project. Until we know what our funding level for
    fiscal year 1998 will be, and we determine the total costs for the Year
    2000 effort, we do not know if we will need a supplemental request.
        Question. In addition to the specific funding request for the year
    2000 conversion, are other costs associated with that effort imbedded
    in other parts of IRS' Information Systems budget request? If so, how
    much?
        Answer. In fiscal year 1997, $13 million of labor (approximately
    200 FTE's) is being diverted from the IS legacy systems base. The IRS
    expects that this diversion will be needed in fiscal year 1998.
        Question. For example, wouldn't replacement of the Distributed
    Input System, for which IRS is seeking funds in 1998, help to resolve
    part of IRS' year 2000 problem?
        Answer. Yes, because components of this system are not, and cannot
    be made, Year 2000 compliant.
        Question. IRS' Information Systems organization has apparently
    experienced significant attrition in the past few months and a planned
    RIF will apparently further reduce Information Systems staffing,
    especially in the field offices. How are attrition and the planned RIF
    affecting/going to affect the year 2000 effort especially if we assume
    that many of those leaving IRS are persons who would be most
    knowledgeable about the systems needing conversion?
        Answer. Experienced Information Systems (IS) professionals in all
    areas are in enormous demand to solve Y2K problems. An IRS RIF of IS
    staff would be counterproductive. It will exacerbate our Y2K problem.
    The IS industry is moving in the opposite direction from the IRS. It is
    expanding its IS professional staff in order to solve the Y2K problem.
        The IS organization has experienced significant attrition in the
    past few months due in part to the threat of a RIF. Experienced
    programmers have transferred to other federal agencies or left federal
    service to earn higher salaries in the private sector, often working on
    the Year 2000 problem. This continues to be a problem that could
    seriously impact the Service's ability to complete its Year 2000
    conversion. The Service has adopted a number of approaches to leverage
    its remaining experienced programmers. Assembler language programming
    classes have been provided to cross train programmers and analysts.
    Working under the guidance of IRS programmers, contractors have been
    hired specifically for Year 2000 conversion efforts. Recently, in an
    effort to retain its skilled employees, the Service announced a number
    of its vacancies for Grade 13 technical and team leader positions. This
    may result in promotions for the selected IRS employees and encourage
    some employees to remain with the IRS.
        3. In the past, IRS has been criticized for not having the
    information needed to be able to show the additional taxes assessed and
    collected as a result of its enforcement programs. IRS has been
    implementing the Enforcement Revenue Information System (EGIS) to
    provide information on tax assessments and collections as well as other
    information. IRS' fiscal year 1998 budget request for Operational
    Information Systems includes a program increase of $7 million for
    legacy systems, part of which is for EGIS.
        Question. How much of the $7 million is for ERIS and what,
    specifically, will the money be used for?
        Answer. The ERIS budget request for fiscal year 1998 is $6.08
    million. This amount is for: 1) outsourcing of data processing ($3.2
    million); 2) funding software integration and maintenance to conform to
    the six data source (feeder) systems, implementing calendar year 2000
    compatible software, and providing key data enhancements to better
    track and report enforcement results ($1.79 million); 3) continuing
    independent contractor software testing and certification ($1.0
    million); and 4) providing hardware maintenance, magnetic media, data
    transfer and other support ($90K).
        Question. How reliable are the data being entered into ERIS? What
    problems, if any, exist with the ERIS data?
        Answer. We believe ERIS to be highly reliable. This conclusion is
    based on two recently completed GAO reviews of ERIS processing and data
    that, based on oral reports from GAO, have identified no significant
    problems with ERIS. A third review of ERIS is underway as a part of the
    GAO financial review of IRS. In addition, all recommendations of
    earlier Internal Audit reports have been incorporated into ERIS.
        Although we are not aware of any problems with ERIS data, the
    project office continues to monitor and update the software for any
    changes to the feeder systems. Along with the rest of the IRS, ERIS is
    actively working to ensure that any issues associated with Calendar
    Year 2000 are dealt with in advance of the time when ERIS data will be
    impacted.
        Question. How, if at all, does IRS use ERIS data to assess the
    relative return on investment of its different enforcement programs and
    to allocate resources among those programs? If ERIS data are not being
    used in that way, why aren't they?
        Answer. IRS uses ERIS data to predict actual dollars collected
    based on Examination recommendations and to eliminate double counting
    of revenue between functions (e.g., dollars collected by Collection
    from an Examination case). However, ERIS only captures direct revenue
    collected. IRS resources are only partially allocated on the basis of
    direct revenue to cost. IRS adjusts allocations to account for the
    likely indirect effect of the various enforcement programs.
        Question. In response to a question last year, IRS said that it
    planned to use data on enforcement collections from ERIS in an
    enforcement resource allocation model that IRS was developing. What is
    the status of the model and when does IRS plan to begin using it to
    allocate resources?
        Answer. IRS has developed a simplified model to assist in
    allocating resources among Examination, Collection, and the Information
    Returns Program. Using an iterative process, this model allocates
    resources based on the estimated marginal yield to cost ratio. The
    methodology incorporated in this model is to allocate resources in each
    iteration to the function that is able to collect the most revenue at
    the least cost. ERIS data is used to enable the Service to convert
    Examination recommendations and underreporter assessments to actual
    dollars eventually collected.
        While this simplified model has been used in conjunction with the
    workload planning process, it has not been used as the exclusive
    determinant in allocating resources for several reasons. It does not
    allocate to all Compliance functions; Criminal Investigations,
    International, and EP/EO are excluded. The model also is limited to
    direct revenue collected; any indirect revenue or protected revenue
    (i.e., monies which IRS prevents from being improperly refunded) is not
    included in the model. The model is static in the sense that it
    allocates resources one year at a time; the multi-year, cross
    functional effects of resource allocation decisions are not included.
    Finally, the model does not allocate resources geographically.
        To address these limitations, IRS has begun to design a replacement
    model. The objective of this model is to maximize long term net tax
    revenue (both direct and indirect) subject to expected available
    funding. IRS has completed draft high level system design.
                    request for comments, modernization plan
        On may 15, 1997 the IRS issued a Request for Comment (RFC) on its
    initial plan for acquiring the Prime contractor for its new
    modernization effort. The RFC's key theme is a partnership between IRS
    and the private sector.
        A partnership principle proposed ``mutually beneficial financial
    arrangements based on shared capital investment and shared risk''
    (p.55). Part of that risk includes the private sector assuming front-
    end capital investment, in exchange for certain undefined reward.
        Question. What do you consider to be an appropriate up-front
    capital investment by the private sector?
        Answer. The Request for Comments (RFC) for a PRIME Systems
    Integration Services Contractor, issued on May 15, 1997, proposes that
    contractors make available no less than $200 million of working
    capital.
        Question. How will the performance reward metrics be determined?
        Answer. It is anticipated that the private sector, through
    interactive technical conferences with the IRS scheduled between May
    15, 1997, and August 15, 1997, will provide feedback regarding the
    desirability and feasibility of incorporating a performance based
    contract approach, which applies performance metrics, in the final
    draft PRIME RFP scheduled for issuance no later than October 1, 1997.
        At this time, it is planned that systems outcome measures (to be
    derived from the Modernization Blueprint, Phase I, Level III analysis)
    would be included in the final draft RFP and that PRIME offerers would
    comment on these measures. Such comments would be considered in
    completing the final PRIME RFP to be issued on December 1, 1997. It is
    also anticipated that the final elements of the performance based
    contract and associated metrics would be negotiated after contract
    award with the successful PRIME offerer.
        Question. What parallel risks and/or changes will be made at IRS to
    meet the private sector investment--or will we continue to see business
    as usual?
        Answer. Given the massive size and scope of Modernization, success
    would be dependent on an effective public/private sector partnership,
    with the interdependencies of both parties defined, planned and
    scheduled.
        Thus, to mitigate risk, it would be essential for both the public
    and private sector parties to honestly and candidly assess the needed
    capacity and capabilities of each and develop Modernization plans,
    solutions and budgets which reflect such capabilities.
        For our part, the Associate Commissioner for Modernization/Chief
    Information Officer (ACM/CIO) has testified repeatedly that the IRS
    would not commence Modernization until it possessed the requisite
    capacities and capabilities. The ACM/CIO has testified that
    Modernization ought not begin before fiscal year 1999.
        During this interim period, the IRS must develop and deploy the
    essential ``best practices'' recommended by the GAO in 1995. Toward
    that end, the ACM/CIO is completing the recruitment of ten executive
    technical managers and has formed a Systems Standards and Evaluation
    Office to oversee Modernization. Len Baptiste, formerly a GAO senior
    manager, has been recruited as Director of the Office. While much needs
    to be done, significant progress has been made during the past year to
    implement the GAO recommendations.
        In addition to developing the requisite capacities within the IRS,
    the Department of the Treasury, pursuant to the President's Executive
    Order, has formed the IRS Management Board to provide agency
    oversight--particularly with respect to Modernization.
        Question. According to the RFC the Prime contract is to last for
    three years, does the IRS believe that the private sector can forge a
    strong business relationship and recoup its up-front capital investment
    with the IRS within that short time frame?
        Answer. Modernization will be managed in a manner that is
    consistent with the tenets of the Clinger-Cohen Act including
    incremental systems development and deployment.
        It is planned that the initial increments would be implemented
    within the initial three years of the contract with the aim of
    minimizing risk and quickly assessing the effectiveness of the PRIME/
    IRS Modernization partnership. Early, incremental implementation also
    would enable the PRIME and applicable subcontractors to recover a
    portion of the ``up-front'' investment.
        It should also be noted that the IRS may extend the three year
    contract period in the final PRIME RFP based, in part, on industry
    feedback concerning the RFC. Further, the RFC currently provides for
    twelve (12) one year renewal periods, thereby providing for a potential
    fifteen year PRIME contract term.
        Question. What if the Prime fulfills its contractual obligations
    during the three year period, yet the IRS does not see any cost savings
    or return on investment, how will the Prime then be compensated?
        Answer. In general, ``performance based'' contracts provide for
    mutual agreement between the contractor and the customer concerning
    measurable outcomes of a systems implementation. Put another way, the
    contractor's compensation is dependent on not only implementing a
    system but also ensuring that the system performs in accordance with
    the pre-defined measurable systems outcomes.
        Applying these principles to the IRS, if the contractor ``. . .
    fulfills its contractual obligations . . .'' the IRS would realize the
    expected ``. . . cost savings or return on investment . . .'' and, in
    turn, the contractor(s) would be appropriately compensated.
        The specifics of the PRIME/IRS contractual relationship, however,
    would be dependent on the RFP requirements, the winning contractor's
    proposal and the post award contract negotiation.
        Question. As the private sector begins to absorb work now being
    performed by the IRS, what staffing changes will be made? Will FTE's
    remain at current levels, or will there be a significant reduction in
    staff as a result of more work going to contractors? How will the IRS
    accommodate any FTE reductions in this area?
        Answer. We don't anticipate significant staffing changes to be
    made. The IRS has lost staff through attrition or has redeployed staff
    to key legacy needs, including century date conversion and DIS/RPS
    Replacement; and is expanding its ability to test tax processing
    programming changes. In fact, during the period of fiscal year 1998-
    2000 added resources are needed for: Year 2000 Conversion (Y2K); Data
    Center Consolidation; Product Assurance build up; Modernization build
    up; DIS/RPS Replacement; Security systems; and Tax Law changes.
        Therefore, the IRS Information Systems (IS) organization cannot
    accommodate any FTE reductions if we are to accomplish the above,
    implement the Systems Life Cycle (SLC) and build a Capability Maturity
    Model Level III program. Downsizing decisions on IS should be deferred
    until 2000 when the impacts of the completion of Y2K and the initial
    savings from Data Center Consolidation are realized. Programmatic
    efficiencies from Modernization ought not be expected earlier than
    2001. Downsizing Business operations prior to 2001 is premature.
        The IRS has already shifted more than 60 percent of the IS
    resources to the private sector. Further, with respect to Modernization
    Development and Deployment, the IRS has already reduced the IRS FTE's
    from 524 to 136.
                              new budget structure
        In the fiscal year 1998 request, IRS is proposing a new budget
    structure with three new categories: (1) Processing, Assistance, and
    Management, (2) Tax Law Enforcement, and (3) Information Systems.
        Question. Although this may be more in line with what IRS is trying
    to do management-wise, there is concern that this new structure makes
    it harder for Congress to track how IRS is spending taxpayer funds.
    Please comment.
        Answer. The proposed changes in the IRS' budget activities make
    very good business sense. The new activities more closely align the
    budget activities with the major business lines, facilitate receiving a
    clean audit opinion, create a separate account for capital investment,
    and provide maximum flexibility in balancing programs. The new
    activities are just as easily trackable as the previous ones. The new
    budget categories are still covered by the same restrictions regarding
    inter-appropriation transfers and transfers in and out of budget
    activities. IRS will still follow the same GAO and Congressional
    guidelines in reporting and monitoring our progress with the budget
    activities.
        Furthermore, the GPRA has directed government agencies to define
    performance measures and establish performance targets. The new budget
    activities have performance measures which are easily trackable. IRS
    will annually report on actual versus planned performance results.
        Question. Another concern is that the new structure makes it appear
    that there I more funding for Processing and less for Tax Law
    Enforcement, but there are some compliance efforts that now fall under
    Processing. However, the general public won't necessarily be aware of
    this and perception is everything. Please provide a list of which
    compliance efforts fall under Processing (PAM) and Tax Law Enforcement
    respectively.
        Answer. One of the key features of the new structure is the
    consolidation of activities in which IRS interacts with taxpayers by
    telephone and correspondence. The new consolidated structure would
    increase flexibility to handle telephone calls and balance resources
    for the peak period for both assistance and taxpayer account work.
        It is worth noting that the IRS Toll Free Taxpayer Assistance has
    never been only an assistance program. Historically, some 60-70 percent
    of our calls have been ``account related''; only 30-40 percent of our
    calls have been tax law related. Currently, depending on whether a
    taxpayer calls or writes, the same taxpayer questions could be answered
    by different employees using different procedures. With the new
    structure, IRS will have one organization responsible for handling the
    full range of account issues. The emphasis will be on early resolution
    of issues over the phone.
        The compliance pieces that will move to Processing, Assistance and
    Management (PAM) include ACS and the Service Center Collection Branch
    which are currently part of the Collection activity. Also, moving to
    PAM is the Service Center Exam Program. These activities will be
    consolidated with Toll Free in a single consolidated Telephone and
    Correspondence Budget Activity Code (BAC). Document matching will move
    to PAM as well but will retain an identity as a separate BAC.
        The Compliance activities that remain in Tax Law Enforcement (TLE)
    are those performed by district office personnel. The programs in these
    activities are ones in which IRS interacts with the taxpayer in person.
                                     ______

                                 accountability
        The IRS has had a long history of missteps in many areas: taxpayer
    service, treatment of taxpayers, computer modernization, and auditing
    practices. Treasury oversight seems to only be apparent when Congress
    calls attention to a specific problem within the IRS.
        Question. Are there credible checks and balances within Treasury
    and the IRS to make sure policies are properly reviewed?
        Answer. I believe that we are putting the proper review
    infrastructure in place. Let me take a moment to describe the principal
    components:
      --Within the IRS, the IRS Investment Review Board is the major
            management group responsible for reviewing investment
            decisions. The Executive Committee reviews overall policy
            directions.
      --Within Treasury, the IRS Management Board (IRSMB), which was
            formerly known as the Modernization Management Board, is the
            equivalent of a strategic oversight board or Board of
            directors. The Treasury Investment Review Board is a separate
            entity which deals with cross-cutting review of technical
            issues related to modernization. The Treasury CIO chairs the
            Treasury IRB and sits on the IRSMB.
      --Of course, Treasury continues to carry out day-to-day oversight on
            a wide variety of management and tax policy issues through its
            established structures.
      --Finally, we have promised to institute a blue-ribbon group of
            outside experts to make certain that fresh perspectives and
            ideas continue to be made available to us.
        Question. Who determines the direction the IRS takes on any given
    policy?
        Answer. It depends on the question. Tax policy issues go through
    the Assistant Secretary for Tax Policy to me and the Secretary.
    Administrative issues typically go through the Assistant Secretary for
    Management. The IRSMB will review major strategic issues in the areas
    of operations. We do not get involved in the normal course of events on
    individual cases; these are left for the IRS.
                          irs restructuring commission
        Question. The IRS Restructuring Commission is due to release its
    report later this month. Treasury has expressed strong opposition to
    some of the forthcoming recommendations of this report. Please
    elaborate the Department of Treasury's concerns.
        Answer. First, I would like to emphasize that we and the Commission
    agree on many things concerning the operations of the IRS. We agree,
    for instance, on the importance of a customer service focus in any
    efforts to reform the IRS, and the need for a stable and predictable
    budget for IRS operations and modernization. We have continued to
    stress these areas of agreement.
        That being said, it is well-known that we disagree with the idea of
    turning overall management responsibility for the IRS over to an
    outside Board of Directors. We simply think that the arguments for
    continuing to have the nation's tax collection agency responsible to
    politically accountable officials, and the problems involved in turning
    supervision over to a group of part-timers who by definition have their
    own vested interests, are both overwhelming.
        We also have a number of other issues with the Commission in the
    areas of mandatory electronic filing, due dates for returns and the
    like, but it is fair to say that we are farthest apart on the
    governance issue.
        Question. The Commission was established because Congress was
    frustrated by the fact that we couldn't get the IRS to carry out
    meaningful changes that would improve its operations. Last month you
    announced Treasury's own plan to preempt the Commission's
    recommendations. Now that there are two plans proposed, what criteria
    do you believe Congress should utilize to evaluate both proposals?
        Answer. Experience and common sense.
                        year 2000 conversion of the irs
        Question. Given the IRS' recent request for $258 million for the
    Year 2000 conversion effort, is Treasury supportive of this request?
        Answer. Treasury certainly agrees that the Year 2000 Date Change
    issue is a priority and will need to be adequately funded. We also
    agree that the numbers are likely to change a bit as the IRS works
    through its massive inventory of old systems and programs. At this
    point no one can say with certainty what the final costs will be for
    this effort, but what is needed should be spent.
        Question. Is Treasury or the IRS willing to reprogram funds for
    this effort?
        Answer. If a formal reprogramming is determined to be needed it
    will be requested. Otherwise funds will be reallocated to meet
    identified needs.
        Question. If the full funding requested is not provided to the IRS,
    what will the impact be on the Treasury?
        Answer. Fixing the Year 2000 Date Change problem is a stay-in-
    business requirement. We have no real choice in the matter. For the
    IRS, this is a massive effort, involving changing millions of lines of
    code as well as updating all mainframe computers. By not fully
    addressing this issue now and providing adequate funding, we run the
    risk that IRS systems will not be up to acceptable standards by January
    1, 2000. This could result in significant financial problems for the
    entire government because it could impact on the IRS' processing
    functions whereby over 200 million tax returns and $1.5 trillion is
    collected each year. IRS collects approximately 95 percent of total
    federal revenues. Shifting money from other sources could also cause
    major problems; for each dollar taken from our operating appropriations
    we estimate that we forego $4.50 in revenue collections.
        Question. Is Treasury prepared to assist the IRS in finding an
    offset for this newly requested funding?
        Answer. Yes.
                                     ______

                     Questions Submitted by Senator Shelby
        Question. You've mentioned that you recognize the importance of
    bringing in outside expertise from the private sector to sit on the
    Modernization Management Board. Do you believe that an effort should be
    made to hire such people in order to inject fresh ideas into upper-
    level management at the IRS?
        Answer. First, I would like to clarify our position on outside
    expertise. I believe that any public agency, or private sector company,
    will benefit from fresh ideas and insights from the outside. In the
    case of our oversight of the IRS, what we want to do is balance the
    executive-branch perspective that the MMB offers with the advice and
    counsel of outside experts who will form a separate blue-ribbon panel
    that can examine a range of issues and trends in areas such as customer
    service and technology. Both perspectives, acting in concert, will give
    us the proper balance of experience and new ideas.
        The question of whether and how to hire outsiders for day-to-day
    management inevitably raises a somewhat different set of questions. The
    proper mix depends on the circumstances for the organization. In
    general I think the IRS, at this point, can benefit from the addition
    of a greater number of outside experts. That is why we have included
    this kind of infusion of new thinking as part of our overall IRS reform
    strategy.
        Question. Indications are that one of the contributing factors to
    the ineffectiveness of upper-level management is a very high turnover
    rate. In your estimation, is this a significant problem, and if so,
    what can be done to attract and retain qualified people in upper-level
    management at the IRS?
        Answer. There is no question that the turnover rate at the top of
    the IRS has increased in the last few years, and that the result has
    hurt the agency. One possible reason is, in some cases, the kind of
    people who are qualified to hold senior executive positions at an
    agency that is as large and complex as the IRS are going to be in
    demand outside the government as well, and can probably increase their
    incomes by taking some of these offers. Other factors include the way
    the government retirement plan is structured and, frankly, the
    increasing pressure on IRS executives due to public attacks on the
    Service. Many of these attacks are mis-informed and unfair and IRS
    managers have very human reactions to this kind of criticism.
        Solutions are harder to come by. Better pay will help. But the
    ultimate solution, I suspect, is to put in place the kind of
    improvements at the Service that will lead to justifiable pride in the
    work that is being done. People don't bail out of planes that are
    gaining altitude.
                                     ______

    Questions for Arthur Gross, Chief Information Officer, Internal Revenue
                                    Service
        Question. Last year's Appropriations bill spelled out several
    criteria that Congress instructed you to follow in selecting a prime
    contractor to fix the Tax Systems Modernization program. Two of the
    criteria that are particularly important are experience in managing
    large scale computer systems and experience in working with government
    tax and revenue agencies. As you've testified, you've already put out a
    Request for Comment on a new contract. Are there people in the private
    sector who can meet these criteria and fix the big problems that we all
    agree need fixing?
        Answer. Pursuant to issuing the Request for Comments (RFC) for a
    Prime Systems Integration Services Contractor, the IRS required
    potential PRIME contractor offerers to submit a ``Representation of
    Eligibility to Compete for the PRIME contract.'' Eligible contractors
    would be required to meet or exceed a variety of criteria including:
    ``Demonstrated significant program management and systems integration
    experience including management of subcontractors as measured by lead
    responsibility for development and implementation of an integrated
    information system or systems with a scope: Requiring in excess of 5
    million lines of computer code or equivalent scope and complexity
    (e.g., integration of Commercial-off-the-Shelf (COTS) software and
    custom code); and/or Requiring a budget in excess of $300 million.''
        The following companies submitted representations meeting or
    exceeding these criteria: Andersen Consulting; Computer Sciences
    Corporation; EDS Government Services; GTE Government Systems; Hughes
    Information Technology Systems; IBM Corporation; Litton PRC; Lockheed
    Martin Corporation; Northrop Grumman Corporation; Raytheon E-Systems;
    Tracor Information Systems Company; and TRW Systems Integration Group.
        With respect to the criterion requiring ``. . . experience in
    working with government tax and revenue agencies,'' most if not all of
    the twelve companies possess such capabilities. Further, the evaluation
    criteria to be applied in selecting a PRIME contractor include ``Depth
    and breadth of experience and quality of past performance in developing
    tax administration systems and large scale integrated systems.''
        Based on the industry responses to date (i.e., Representations from
    the twelve aforementioned companies), it is the judgment of the IRS
    Chief Information Officer that a number of private sector companies
    meet or exceed the criteria and, indeed, ``fix the big problems;''
    provided IRS develops the requisite capacities and capabilities to
    effectively partner with the private sector.
        Question. Given that the problems with the Tax Systems
    Modernization program have many facets, isn't it the case that rather
    than using one large firm, it would be more effective to use multiple
    firms who have expertise in each of these different areas?
        Answer. Indeed the IRS contemplates that a mix of firms would be
    required to address the many facets of the Modernization program both
    to ensure that a comprehensive array of management and technical
    expertise is deployed and to promote cost competition.
        Question. As both you and Mr. Summers mentioned, the IRS is working
    with a marketing firm to help facilitate electronic filing. Indications
    are that only 12 percent to 14 percent of returns are filed
    electronically, even though over one-half start in electronic form. In
    other words, depending on how complex an individuals returns is they
    might only be able to file certain parts of their return, while mailing
    other parts. Does the strategy you are now working on address this and
    other fundamental flaws in the current system?
        Answer. The above statement and question is addressing two separate
    issues. Returns starting out in electronic form are our targets for an
    aggressive marketing campaign in 1998 and future years. The second part
    addresses the Service's lack of our system's ability to receive
    electronically all schedules and attachments for the Form 1040. This
    issue is part of our Request for Information/Request for Proposal
    packages we are preparing to solicit assistance from third parties in
    expanding our electronic filing system.
                                     ______

                      Questions Submitted By Senator Kohl
                   Questions for the Internal Revenue Service
        1. In testimony before the Treasury General Government
    Appropriations subcommittee on April 15, 1997, Deputy Secretary Summers
    stated that of the $3 to $4 billion spent on the Tax Systems
    Modernization, $500 million represents spending for systems or
    equipment that cannot be used. Over $775 million was used for personnel
    salaries and expenses.
        Question. What modernized functions can be provided from the
    equipment purchased with the remaining $1.7 billion?
        Answer. The IRS has obligated $3.296 billion of the $3.531 billion
    appropriated by the Congress for Tax Systems Modernization (TSM) from
    fiscal year 1987 through fiscal year 1996. Of the $3.296 billion, $607
    million has been spent on efforts that the IRS determined would not
    meet future requirements and priorities or could not deliver the
    appropriate benefits to justify continuation. Based on an analysis of
    the discontinued projects, approximately 28 percent of the
    expenditures, $170 million, were dedicated to hardware, commercial-off-
    the-shelf software and site preparation that could be utilized in the
    current technology environment. The remaining TSM expenditures provide
    the IRS with better ways of delivering service, influencing compliance
    and administering the tax system.
      --Replacement of Aging Infrastructure: The IRS replaced and upgraded
            significant components of its aging computer infrastructure to
            support the processing of more than 200 million tax returns, 80
            million refunds and $1.4 trillion of tax revenues. The
            replacement and upgrading included computing center mainframes,
            data storage and associated tape robotics as well as other
            peripheral equipment. These funds also provided for site
            preparation, universal wiring, PBX units and other
            telecommunications equipment to link the computing centers with
            the service centers, district offices and customer service
            sites.
      --Development and Deployment of Return and Payment Processing
            Systems: The IRS developed and implemented systems to provide
            for the electronic transmission of tax returns and electronic
            payments as well as the automated transcription of data from
            paper Federal Tax Deposits, information return documents and
            tax returns. Employers can pay employment and other depository
            taxes electronically, which is faster, easier and more accurate
            for taxpayers and the IRS. As of May 27, 1997, the IRS has
            received $373 billion in electronic payments.
        As of May 23, 1997: The IRS received 19 million electronically
            filed returns, an increase of 27 percent over fiscal year 1996;
            Taxpayers filed almost 4.7 million returns through their
            telephones using the IRS TeleFile program, up 65 percent over
            fiscal year 1996; and A TeleFile option for the simpler Form
            941 (Employee's Quarterly Tax Return) began testing on April 1,
            1997, with nearly 900,000 eligible businesses in 14 states and
            the District of Columbia. As of May 12, 1997, almost 49,000
            returns have been filed through this test program.
      --Development and Deployment of Customer Service System: The IRS
            deployed automated telephone systems capabilities and developed
            and deployed the capability to facilitate the research of
            taxpayer account issues. These investments included 3000
            customer service workstations as well as the telecommunications
            systems to support the toll free telephone systems (including
            the Telephone Routing Interactive System) and the Teletax
            system which provides information interactively to taxpayers.
            The IRS developed a world-class Web Site on the Internet that
            provides access to all IRS forms and publications, plain
            language summaries of tax regulations, the Internal Revenue
            Bulletin, answers to most frequently asked questions, and an
            array of other self-help tools.
      --Development and Deployment of Compliance Systems: The IRS developed
            and deployed distributed systems (e.g., servers, laptops) to
            facilitate examination, collection and criminal investigation
            functions as well as systems for compliance support functions.
        Question. In reviewing the IRS business plans for moving forward is
    the MMB considering the impact of previous technological investments?
    Or are you looking at the business plan without considering previous
    investments?
        Answer. One of the many myths about previous TSM investments is
    that somehow the government got nothing for all of its investments. As
    Art Gross has testified, we did receive many benefits in the form of a
    modernized technical infrastructure and better hardware platforms. The
    new Modernization Blueprint builds on these improvements in the
    operating environment.
        2. Since section 6103 prohibits the disclosure of tax return
    information, the IRS does not deposit, what many would consider
    historical records, with the National Archives and Records
    Administration.
        Question. Since this could be detrimental to creating an accurate
    history of IRS actions, what actions are being taken to ensure
    historical records are preserved.
        Answer. The IRS has taken affirmative steps in consultation with
    the National Archives and Records Administration (NARA), to ensure that
    IRS' historical records are preserved, not destroyed, while at the same
    time maintaining the confidentiality of section 6103 protected
    information.
        In answering this question, we think it is important to reiterate
    that according to NARA, only one to five percent of records in any
    Federal agency, IRS included, have historical value. For the most part,
    IRS records of potential historical value are its administrative
    records that document the policies, organizational structure, and
    program activities of the IRS. These can include, for example, certain
    directives and correspondence, organizational studies, manuals, news
    releases, official portraits, and photographs. Section 6103 does not
    preclude NARA from accessing and reviewing these types of IRS
    management and policy records. To the extent these records contain any
    section 6103 protected data, all such protected data can be masked
    before the records are provided to NARA.
        In sum, historical records containing or consisting of section 6103
    protected information constitute a very small percentage of the IRS'
    permanent records. However, the IRS is working with NARA to ensure that
    IRS' historically valuable records that are protected by section 6103,
    in whole or in part, are preserved, not destroyed, even though section
    6103 precludes the inspection of such records, or parts thereof, by
    NARA, by historians or journalists for research purposes, and by the
    general public. Moreover, the IRS has completed records inventories
    throughout all major IRS headquarters organizations. The primary
    objective of these inventories was to identify unique program and
    policy records that document the agency's history for ultimate transfer
    to NARA.
        Records preservation issues were addressed by NARA in its most
    recent evaluation of IRS' records management program. In the summer of
    1994, representatives of NARA met with IRS officials to begin an
    evaluation process of IRS' records management program. From October
    1994 to May 1995, NARA visited IRS' National and field offices in
    connection with their evaluation. NARA's research included standardized
    questionnaires and interviews across a broad spectrum of IRS employees
    to ensure an accurate overview of records management practices at all
    levels of administration.
        On December 14, 1995, the Archivist of the United States presented
    the IRS with NARA's evaluation report on records management at the IRS.
    NARA's report made 58 recommendations for improvements in IRS' records
    management. An interagency working group was established to address the
    issues and recommendations contained in NARA's evaluation report, and a
    time-line was established for implementation of NARA's recommendations
    in five phases to be completed by September 1997. As a result,
    significant progress has been made in implementing NARA's 58
    recommendations and IRS' actions are on schedule for timely completion
    by September. On May 8, 1997, NARA issued a progress report stating
    that it continued to be pleased with IRS' progress and confirming that
    NARA was satisfied that, thus far, IRS has implemented a total of 47 of
    NARA's original 58 records management recommendations.
        3. Over the past year it has been acknowledged that perhaps the TSM
    project was just too large to accomplish and that the logical approach
    would be to upgrade segments of the existing system, adapting portions
    as successes are achieved. Under the new scenario it would appear IRS
    is moving down the same path.
        Question. Please explain how this approach will be different?
        Answer. The Modernization Blueprint lays out our target
    architecture. Along with it you will find a flexible sequencing plan,
    which describes the step-by-step approach that we will be taking to get
    us there in modular fashion. we fully intend to move sequentially. As
    existing programs are replaced they will be retired. Until then we will
    keep them operational.
        In this connection I think it's important to get the metaphors
    right. TSM is not, in any real sense, a single project or program that
    will replace a single system. The IRS computing environment today is a
    tangle of separate systems, developed over forty years for specific
    purposes and tied loosely together. Since we obvious cannot shut the
    current systems down and wipe the slate clean, we have to modernize as
    we go, and take extreme care to make sure that the existing legacy
    systems continue to operate. This kind of incremental approach is the
    heart of the current sequencing plan. It is very difficult to do and
    demands careful control as we go along.
        4. The new architecture will provide for a modernization system
    that will be a centralized rather than a distributed information
    system. That sounds like a complete change from the original plan.
        Question. Should it be assumed that the costs associated with the
    new system will be at least as great as what has already been spent to
    modernize the tax collection systems?
        Answer. There are really two issues here--one relating to the
    technical change in emphasis from a distributed design philosophy and
    the other related to costs. As to the first point, it is certainly true
    that the new Modernization Blueprint puts far more emphasis on the use
    of centralized computing resources--the so-called mainframe-centric
    approach--than did the original TSM designs. I am told that this
    represents a general trend in the industry as designers get a better
    understanding of the true strengths and weaknesses of centralized
    systems versus the distributed systems that came into vogue a decade
    ago. In our case the arguments for a centralized approach--in terms of
    economy, efficiency, and security--seem to be very strong, speaking as
    a non-expert in the field.
        As to the ultimate cost, that will depend heavily on the success of
    our efforts to engage the private sector in our Prime Contractor
    effort. Those contracts remain to be written. And of course the
    ultimate cost depends on the sufficiency of appropriations. If we
    receive adequate funds, the project will be finished quicker and cost
    less in the long run than if we stretch things out over many years.
        5. Question. Is the IRS conducting internal reviews to determine
    the core functions and what functions can be done better by the private
    sector?
        Answer. As explained further below, the IRS has a number of
    initiatives underway to either transfer workload to the private sector,
    which is currently taking place with IRS' modernization program. We are
    also studying whether certain functions, such as submission processing
    or collection, could be performed better by the private sector. In
    making these determinations, the most important question that needs to
    be addressed is not whether to outsource an activity, but how to get
    the most effective and efficient performance for the taxpayer's dollar.
        Question. What functions have you reviewed and determined could be
    eliminated?
        Answer. The IRS, like many large businesses, has many functions
    which contribute to the achievement of its mission. In striving to
    maintain the proper balance between assisting taxpayers, processing
    returns, and ensuring that all segments of the taxpaying public pay
    their proper amount of tax, IRS' emphasis has been on performing these
    functions in the most effective and efficient manner possible.
    Sometimes this can be accomplished through partnering with the private
    sector or outsourcing, while sometimes other solutions are more viable.
        For example, in the Information Systems area, the IRS continues to
    transfer significant aspects of the technology modernization program to
    the private sector. The December 1, 1996, report to Congress documents
    that 64 percent of the modernization program resource allocation is
    provided by the private sector. The largest and most important
    initiative for fiscal year 1997 was the contract recently awarded to
    develop, pilot and implement the submissions processing manual data
    entry systems replacement. The IRS also is in the process of
    competitively acquiring a Systems Engineering and Technical Assistance
    (SETA) contractor to provide technical, program and project management
    guidance to the modernization effort. Pursuant to the fiscal year 1997
    Treasury appropriation, the Treasury IRS Management Board (IRSMB) is
    working with the IRS preparing a Request for Proposal (RFP) for a prime
    contractor to manage, integrate, test and implement the program.
        In order to address the growing volume of paper tax returns and
    documents, the IRS is also studying the potential for outsourcing the
    processing of paper returns as outlined in the January 1997 report to
    Congress. Assuming that there is commercial interest, a RFP will be
    issued to obtain contractor bids. Since risks are inherent in turning
    such a critical system over to an outside processor, the IRS has
    already begun the ongoing process of identifying ``inherently
    governmental'' functions in that process. Based upon the experience of
    other agencies in large-scale outsourcing initiatives, the IRS
    estimates that it could be as many as four years before it could be
    ready for a pilot project on outsourcing paper return processing. As
    this process proceeds, IRS will carefully review all steps forward to
    address concerns about privacy and security of taxpayer information.
        Aggressively partnering with the private sector is also a key
    aspect of our electronic tax administration strategy. This month, IRS
    will issue a Request for Information (RFI) seeking views and
    recommendations from all interested parties on the issues most crucial
    to develop a dynamic electronic tax administration program.
        Finally, as discussed in more detail in an earlier question, in
    June 1996, IRS awarded contracts to private debt collection agencies to
    study the feasibility of outsourcing the collection of delinquent
    federal taxes.
        Question. Won't eliminating IRS functions provide the IRS an
    opportunity to focus management efforts on IRS core responsibilities?
        Answer. One of the recommendations contained in the recently issued
    report by the National Commission on Restructuring the IRS was that
    Congress could simplify tax administration by limiting the assignment
    of non-core functions to the IRS. As the report notes, ``the addition
    of non-core functions exacerbates governance and management problems,
    diverting the organization from establishing a strategic direction with
    clear priorities.'' The IRS generally agrees with that assessment
    regarding the addition of non-core functions. However, shifting
    existing functions and activities to the private sector would not
    necessarily have the same impact since under that approach the IRS
    would still be responsible for ensuring that the function is performed
    efficiently and effectively.
                   private sector debt collection initiative
        1. In fiscal year 1997 Congress directed the IRS to transfer $13
    million to the Department of Treasury for a second private sector debt
    collection program.
        Question. Could you please explain what action IRS has taken since
    the Departmental Offices directed IRS to be the program manager for
    this effort? Please explain how the funds have been obligated.
        Answer. In compliance with the directive from Congress to issue a
    second pilot private sector debt collection program, the IRS under the
    Department's direction, issued a Request for Information (RFI)/Draft
    Request for Proposals (RFP) on March 7, 1997, to enhance communication
    with contractors. Meetings were held between IRS representatives and
    prospective contractors to address questions and concerns regarding the
    proposed second pilot private debt collection program. The solicitation
    was released on April 30, with a due date of June 2. We received 17
    proposals.
        On June 10, Secretary Rubin received a letter from Congressmen Jim
    Kolbe and Stephen Horn and Congresswoman Nancy Johnson requesting that
    Treasury not move forward with awarding contracts solicited under the
    RFP at this time. The General Accounting Office (GAO) had reviewed the
    fiscal year 1996 IRS Private Sector Debt Collection initiative and
    identified several legal and administrative impediments that had
    prevented the pilot from being successful. They expressed concerns with
    continuing the Treasury initiative and thought that the problems
    identified by the GAO would likewise prevent contractors from producing
    an effective result. Based on GAO's findings and the IRS' pilot
    results, we agreed not to move forward with contract awards for the
    second pilot at this time. The funds have not been obligated.
        2. It is my understanding that the Private Sector Debt Collection
    contractors have a success rate of about 30.5 percent full payment from
    all contacts made. The IRS has a success rate of 14 percent. However,
    the contact rate by the contractors is below IRS expectations.
        Question. Since the cases the contractors are working are inactive,
    what level of contact would the IRS consider significant?
        Answer. The success rates referred to in the question seem to be
    slightly misstated, but appear to derive from data previously furnished
    by IRS to the House of Representatives. The success rates of the
    contractors in obtaining full payments and unassisted installment
    agreements through January 31, 1997, were about 30.5 percent of the
    total number of contacts made, roughly in line with IRS estimates. The
    contractors' success rate for IRS-assisted installment agreements is
    about 14 percent of the total number of contacts, about half the IRS
    estimate. However, the rate at which the contractors have been able to
    contact the taxpayers in the first place is significantly below the 40
    percent rate IRS considered necessary for the success of the contracts.
    As of the end of April, after nine months of operation, the contractors
    had contacted 28,273 taxpayers out of the 202,203 cases provided by
    IRS, or 13.98 percent. Although the final contact rate cannot be
    computed until contractors' invoices for May and June are verified, IRS
    projects that it will be in the range of 15 percent to 18 percent.
        Question. How does the level of contact compare to the IRS levels
    of contact.
        Answer. Since IRS does not routinely work the types of cases
    provided to the contractors, there is no IRS contact rate that is
    comparable to that of the contractors. IRS has no valid way of
    comparing the results of the contractors' work against that of any
    group of IRS employees. The cases contracted out, in accordance with
    the requirements of the authorizing legislation, were largely inactive
    and would not normally have been subjected to the kind of intense
    follow-up that the contractors are doing. Even if IRS employees were
    working similar cases, a comparison of IRS results with contractors'
    employees would be inappropriate, since IRS employees have the use of
    enforcement tools such as levy and lien, and decision making authority
    such as abatement, that cannot, by law, be transferred to contractors.
    However, IRS has established an evaluation plan that, when complete
    data are available, will compare the revenue generated from the
    contracts with revenue generated from a statistically valid control
    group of identical case types that are subject to the ordinary systemic
    and low-investment collection actions of IRS, such as annual reminder
    letters, refund offset, etc. The IRS has no preliminary estimate of the
    results such a comparison will show.
        Question. Is the IRS interested in the success of this program?
        Answer. Yes.
        Question. If so, how could the private sector debt collection
    initiative be structured to provide optimal success rates? If not, why
    not?
        Answer. The IRS does not advocate the desirability of any specific
    structure without full analysis of the pilot data results and full
    consideration of policy, public perception, and administrative
    implications. The analysis of the pilot will be completed September 30,
    1997. This analysis will provide data and analysis useful to responding
    to this question.
                           governance and management
        Question. Is the constant attention of micro issues preventing
    Treasury and the IRS from providing the necessary macro review of core
    IRS issues?
        Answer. The time devoted to addressing micro issues is considerable
    and definitely detracts from the attention that could otherwise be paid
    to more strategic matters. For example, as of June 30, 1997, there were
    nearly 50 open GAO audits covering the entire gamut of tax
    administration issues. Congressional committees also tend to focus
    their attention on specific issues and incidents. The seven committees
    (and their respective subcommittees) most responsible for IRS
    oversight--House Committee on Ways and Means, House Committee on
    Appropriations, House Committee on Government Reform and Oversight,
    Senate Committee on Finance, Senate Committee on Appropriations, Senate
    Committee on Government Affairs, and the Joint Committee on Taxation--
    focus on different issues that change from year to year. Other
    Congressional committees and member offices also surface issues as does
    the judiciary, tax practitioners, other stakeholder groups, the media
    and the general public. While these issues are important, they do
    detract from a more coordinated, high-level review of the strategic
    issues confronting tax administration.
        Question. Is it possible for IRS management to be strategic rather
    than reactive?
        Answer. The IRS has long engaged in strategic or long term planning
    and, like most organizations, this process has under gone a number of
    changes over the past few years. Recently, IRS was one of the first
    federal agencies to use an integrated strategic management process; one
    in which planning, budgeting, investment, performance measurement and
    program evaluation processes are integrated. The IRS developed its
    strategic management process after consulting with other public and
    private sector organizations. Setting long-term goals and annual
    targets, managing activities to achieve those goals and targets,
    measuring performance annually, and holding people accountable will not
    only help improve tax administration, but it will also help the IRS and
    Congress make informed budget decisions about balancing resources
    across objectives.
        Since last year, the Department of Treasury supplemented the
    existing IRS decision making process with the Modernization Management
    Board (MMB) which brings together both policy makers from Treasury and
    the IRS, as well as other stakeholders, to provide proactive direction,
    much like an activist Board of Directors. The MMB contributed
    materially to the rigor of IRS strategic and policy analyses; the
    linkage between strategic choices and resource allocation through the
    budget process; and the practicability of the IRS' implementation
    strategies. In order to further strengthen this process, on June 24,
    1997, President Clinton issued an Executive Order which established a
    permanent Internal Revenue Service Management Board to assist the
    Secretary of the Treasury in ensuring effective management of the IRS.
        Question. Deputy Secretary Summers, the MMB currently has twenty
    members; eighteen are employees of the Department of Treasury, of which
    eight are IRS employees. Only two MMB members are from outside
    Treasury. With the majority of this Board consisting of IRS
    representatives can the Board really provide independent IRS management
    review?
        Answer. I believe that the MMB can do so, but it needs a little
    help, which we will give it. The MMB is explicitly designed to bring
    together the key executives from IRS, Treasury, OMB and the National
    Performance Review who deal with IRS operations in a ``common ground''
    to discuss overall strategic issues. In addition, though, as we
    announced in March we will be establishing a group of outside experts
    in different fields to provide an independent source of advice and
    assistance to the secretary and me. These two groups will interact and
    support each other appropriately.
        Question. The Investment Review Board was established in October
    1995 to serve as the forum for senior IRS executives to make decisions
    regarding information systems expenditures and investments. This Board
    was established to provide executive direction and oversight for the
    information systems budget and for all information technology
    investments. Please explain how its functions differ from those
    proposed from the MMB and why the MMB will function better?
        Answer. The two groups really have different functions. The best
    analogy I can give is to compare the IRS to a large, Fortune 50-sized
    private firm, where you will often find both an executive committee or
    management committee which is responsible for detailed review of
    specific proposals and a Board of Directors which deals with long-term
    strategic issues. In our context, the IRS Investment Review Board is
    the internal management committee and the IRS Management Board, which
    will replace the MMB and carry on its general direction, functions as
    the equivalent of a Board of Directors. We would expect--and in fact
    this has turned out to be true--that most of the investment issues
    brought before the IRSMB have been previously discussed by the IRS IRB,
    but the IRSMB has a different purpose and a different perspective. So
    the two groups have different but complementary functions.
        Question. Acting Commissioner Dolan, the $1.28 billion requested
    for Information System in fiscal year 1997, includes $131 million for
    TSM development and deployment funds, and $83.9 million for program
    infrastructure. Please explain what those requirements are and how they
    fit into the architecture for the future TSM plan?
        Answer. The $83.9 million requested for program infrastructure in
    fiscal year 1997 was used to fund the non-recurred Tax Settlement
    Reengineering Study ($5 million), the Government Program Management
    Office, Performance Management Office and Systems Standards and
    Evaluation Office ($34.2 million), and contractor support ($44.7
    million) for the development of the Modernization Blueprint,
    Architecture and Sequencing Plan completed in May 1997. The fiscal year
    1998 request for the GPMO will fund: Core government systems
    engineering functions for modernized systems; Government management and
    control functions for modernization; The systems, privacy and security
    standards consistent with the architecture and evaluations for
    compliance with these standards; and The development and maintenance of
    business cases and operational measures.
        The $130.9 million for TSM Development and Deployment is funding
    projects approved by the Investment Review Board that have business
    value, are well managed, and are consistent with the Modernization
    Blueprint.
        Question. The initial financial plan included funding for 291 FTE.
    Through the second quarter of fiscal year 1997, 21 FTE have been
    realized. Can we assume that TSM deployment and development will not
    need the total amount of funds budgeted for this activity?
        Answer. The IRS is experiencing critical funding shortfalls in
    fiscal year 1997 for Year 2000, the replacement of DIS/RPS and funding
    the consolidation of service center mainframes. Additionally, the IRS
    lacks sufficient funds for critical information technology investment
    needed to improve customer service and compliance programs. Taken
    together, the IRS information technology needs for fiscal year 1997 far
    exceed available funds.
                               electronic filing
        Question. Electronic filing provides savings, gives the taxpayers
    immediate acceptance of returns and furnishes rapid refunds. a) What
    has the IRS done to market this service to all taxpayers? In 1993, the
    IRS projected 80 million tax returns would be filed electronically by
    2001. b) Do you believe the IRS can meet that goal?
        Answers:
        (a) Demographics/Psychographic analyses were completed for each
    return type and population segment. This information has been
    incorporated into marketing products that receive wide distribution.
        Potential markets were created and categorized by return type, age
    refund, AGI and method of return preparation. This analysis was
    conducted for all states and distributed to Field Executives. These
    profiles will continue to used to develop marketing plans in
    conjunction with nationally developed marketing products.
        A commercial advertising firm was hired to provide design,
    production and distribution assistance. A very aggressive campaign,
    with a major focus on our TeleFile Program, reached previously untapped
    markets.
        The IRS used the Internet and electronic Bulletin Boards as the
    electronic exchange of information to educate taxpayers and
    practitioners.
        We continue to conduct Tax Forums for the tax practitioner and
    electronic filing community to highlight, educate and market electronic
    commerce.
        (b) The Electronic Filing Strategy Task Group Report (Rev. 5-93)
    was developed to produce one document to serve as the ELF Strategy, to
    identify new ways to attract taxpayers to the program, and to develop
    action plans to maximize the number of electronic returns. The report
    outlined 21 initiatives that, if all were implemented, would deliver
    80.2 million electronic returns (69.8 Individual and 10.4 business) by
    the year 2001. Implementation of certain initiatives had a direct
    impact on the ability of the IRS to reach its goals. For example, one
    initiative required electronic transmission of returns from
    practitioners preparing 100 or more returns. The IRS is exploring other
    ways to expand electronic filing other than requiring mandatory
    electronic transmission of returns from practitioners. Another
    initiative was to allow the use of signature alternatives to eliminate
    the need for paper authentication. The IRS is still in the process of
    assessing the legal impact and assurance of authentication of signature
    alternatives and continues to explore and test several methods. The
    Office of A/C (Electronic Tax Administration) is currently working on
    revised goals.
        Question. Under the current IRS capabilities, the taxpayers using
    electronic filing must sign and mail a signature form as formal proof
    or authentication. Can you explain where the IRS is in terms of the
    ``authentication'' and if all electronically filed transactions have
    the same level of authentication?
        Answer. IRS is in the early stages of developing an authentication
    policy that will articulate alternative methods of signature for IRS'
    electronic tax administration programs. The future policy will:
    identify approved alternative methods for signature with applicable
    standards; determine the level of authentication needed for various
    types of transactions; and define the degree to which the environment
    will be paperless.
        An interim policy may include a PIN and password approach along
    with other alternative methods for signature (e.g., digitized
    signatures, voice signatures, facsimile). The ultimate policy will also
    embrace digital signatures possibly based on a government-wide solution
    utilizing a public key infrastructure.
        Question. Electronic filing costs the individual filer, but will
    provide the IRS savings in processing and personnel. Is there a way
    that the IRS can share the savings with the tax preparers and provide
    incentives for electronic filing?
        Answer. The IRS is currently completing an in-depth analysis of
    determining the ``Full Cost Burden'' for filing paper and electronic
    returns. In addition, we are preparing to solicit the private sector
    for proposals on how they can assist us in achieving higher volume
    goals for electronically filed returns. Using these proposals and our
    ``Full Cost Burden'' analysis we will be better able to substantiate
    savings of electronic filing and pursue monetary incentives for the tax
    practitioner or individuals.
                                   compliance
        Question. The Coordinated Examination Program was established to
    audit the nations largest corporations with assets of over $250
    million. CEP audits consume approximately 20 percent of the Examination
    audit resources. How does this application of resources relate to the
    compliance levels of this industries? Is this an important analysis?
        Answer. The CEP Program consists of approximately 1,700 of the
    largest and most complex taxpayers. Although not every return is
    examined, these taxpayers received extensive audit coverage. The audit
    results are substantial and our ERIS data indicates that we ultimately
    collect as much as 40 percent of the results. The CEP Program has been
    in existence since the 1960's and has evolved to meet the challenges of
    a global economy. The large deficiencies generated are not necessarily
    indicative of intentional noncompliance but relates more to the
    complexity and gray areas of corporate tax law and also to aggressive
    tax accounting.
        We continue to devote resources because of the potential and also
    because of the interest over the years shown by Congress. Most
    recently, a group of House Representatives have urged us to pursue the
    IRC Section 531 Accumulated Earnings Tax Penalty against large
    corporate stock buy-backs.
        Question. IRS compliance accomplishments weigh heavily on
    compliance approaches. Two new programs have been developed to resolve
    interconnected pricing issues. The Advanced Pricing Agreement program
    and Accelerated Issue Resolution Program. Please explain why these
    programs are beneficial.
        Answer. Both of these initiatives deviate from the traditional
    enforcement techniques we have historically used over the years to
    ensure compliance. The Advance Pricing Agreement Program (APA) is an
    ADR process which supplements the traditional administrative, judicial
    and treaty mechanisms for resolving intercompany pricing issues. Rather
    than ensuring compliance after the return is filed through an audit,
    the APA attempts to reach agreement with the taxpayer on the proper
    transfer pricing of future transactions. This allows the taxpayer to
    file more accurate tax returns with the correct tax. The IRS will make
    a cursory review of these returns to ensure that the taxpayer followed
    the agreement and the facts did not change.
        Accelerated Issue Resolution (AIR) is another ADR technique used in
    the CEP Program to reduce the time span of the examinations and in the
    long run reduce resources committed by both the taxpayer and the IRS.
    It also encourages the resolution of issues at the Examination level as
    opposed to protracted administrative appeals or even litigation. AIR
    can be used with intercompany pricing issues but for the most part is
    used with domestic issues.
        In many instances in large corporate audits, there will be the same
    recurring issues raised on a series of tax returns. AIR permits the
    examiners to extend the examination to all of the taxpayer's returns
    which have these recurring issues. The idea is to resolve the recurring
    issues simultaneously for all the returns now, rather than wait to
    audit these issues as the returns are placed in examination over the
    next few years.
        Question. Please also explain the Tip Rate Determination Agreement
    and the Tip Reporting Alternative Commitment programs.
        Answer. Millions of dollars of unpaid income and social security
    taxes are lost each year as a result of not reporting or underreporting
    billions of dollars of tip income. Generally, tips are taxable to the
    employee for income and social security tax purposes and are to be
    reported when tip income exceeds $20 in any month. Once the employee
    reports the tips to the employer, the employer is required to withhold
    income and social security (FICA) taxes from the reported tips as well
    as match the employee's social security tax. Tipped employees
    constitute a multi-billion dollar market segment.
        The reporting of tip income and paying of income and social
    security tax by tipped workers in the food and beverage industry is
    among the lowest in any industry, with the exception of illegal
    activities.
        A 1995 IRS study estimated that the amount of tip income
    voluntarily reported in 1993 was less than 60 percent of the true tip
    amount, leaving over $9 billion of unreported tip income.
    Underreporting of tip income by the employee puts the employer at risk
    for a significant contingent liability on the unpaid FICA (Social
    Security and Medicare) taxes and also puts the employee at risk for an
    unplanned income tax bill. This noncompliance also impacts State income
    tax revenue, worker's compensation and unemployment insurance programs,
    and the social security and Medicare trust funds.
        In an effort to address this problem of non-compliance, the IRS has
    taken numerous approaches over the years to improve tip reporting
    compliance by tipped employees. Congress has amended the IRC as well to
    help increase compliance. Unfortunately, these efforts did not raise
    the income reporting compliance of tipped employees in the food and
    beverage industry.
        The IRS recognized that a different approach to the problem of tip
    income reporting was needed and began to explore new methods to achieve
    voluntary compliance and at the same time reduce the tax burden for
    employees, employers, and the IRS. The IRS introduced the Tip Rate
    Determination and Education Program (TRD/EP) in 1993. There are two
    arrangements under this program, the Tip Rate Determination Agreement
    (TRDA) and the Tip Reporting Alternative Commitment (TRAC).
        Under TRD/EP, employers are offered the option of either entering
    into a TRDA or a TRAC agreement. Under TRDA, the IRS works with the
    restaurant owner to arrive at a tip rate for the various occupations in
    the restaurant using historical data and information from the
    restaurant owner's books and records. At least 75 percent of tipped
    employees must sign a participation agreement. Participating employees
    must then report tips at or above the rate determined in the agreement.
        During late 1994 and early 1995, a coalition of both large and
    small food and beverage representatives working in conjunction with the
    IRS came up with a new method to increase tip compliance--TRAC. What
    makes this tip initiative unique, is that the industry was directly
    involved in its development
        Under TRAC, establishments in the food and beverage service
    industry sign an agreement with the IRS under which the establishment
    agrees to establish a reasonable procedure for accurate tip reporting
    by employees; institute a training program to educate employees of
    their tax reporting obligations as they relate to tips; and comply with
    all Federal tax requirements regarding the filing of returns, paying
    and depositing of taxes and maintaining records. If the employer stays
    compliant with the TRAC agreement, then the IRS agrees not to initiate
    any tip examinations of the employer or employees.
        To give employers and employees in the food and beverage industry
    the tools they need to meet the educational requirement of the TRAC
    agreement, the IRS produced, developed and distributed a video and
    written materials. The title of the video is ``Reporting Tip Income: On
    TRAC.'' The title of the brochure is ``Tips on Tips.'' There is both a
    version for the employer and one for the employee.
        As of March 31, 1997, the IRS has received more than 3,500 TRAC
    agreements representing more than 22,000 establishments. The number of
    TRDA agreements is more than 800 representing more than 1,100
    establishments for the same period.
        Employers in the food and beverage industry report to the IRS their
    gross receipts, charged sales, charged tips, and cash sales on Form
    8027, Employer's Annual Information Return of Tip Income and Allocated
    Tips. Our latest analysis of these forms reveals that filings of Form
    8027 and tips reported have been increasing steadily since the
    implementation of TRAC and TRDA Programs. Amounts reported are:
      --1993--Gross receipts reported per Forms 8027 were 48.4 billion.
            Tips reported were $3.9 billion. The number of 8027 filings was
            47,327.
      --1994--Gross receipts per 8027's filed were $58.0 billion, with tips
            reported of $4.7 billion. The number of 8027 filings was
            55,792.
      --1995--Gross receipts reported were $59.7 billion, with tips
            reported of $5.2 billion. The number of 8027 filings was
            56,986.
        From the Form 8027 we can determine the composite tip rate being
    reported. For 1993 the tip rate was 8.1 percent, for 1994 it was 8.2
    percent, and for 1995, it continued to climb, to 8.8 percent.
                        criminal investigation division
        Question. Does the IRS anticipate a growth in criminal activity
    associated with the growth in electronic money?
        Answer. Electronic money and cyberbanking provide increased
    opportunities for the taxpayer to conveniently settle his/her tax
    liability with the government. But they also provide new techniques for
    criminals to accomplish crimes. Electronic payments, in all their
    various proposed forms, present financial regulators, tax
    administrators, and law enforcement agencies with potential problems
    similar to the Bank Secrecy Act (BSA), banking and 26 United States
    Code 6050(l) issues. Unregulated and anonymous movement of monies aided
    by the developing cyber-payment technology could cause safety and
    soundness problems in financial institutions, create new venues for
    financial fraud, allow for increased credit and consumer frauds, and
    devise new methods to assist in tax fraud and money laundering. When
    electronic transfers cross outside the U.S. borders, foreign assistance
    is crucial to trace the flow of money through layers and layers of
    foreign corporations and bank accounts, particularly when legitimate
    funds are commingled with illegally derived funds.
        In the area of compliance with the tax laws, electronic commerce
    may create new variations on old issues as well as new categories of
    issues. The major compliance issue posed by electronic commerce is the
    extent to which electronic money is analogous to cash and thus creates
    the potential for anonymous and untraceable transactions. Another
    significant category of issues involves identifying parties to
    communications and transactions utilizing these new technologies and
    verifying records when transactions are conducted electronically.
    However, developments in the science of encryption and related
    technologies may lead to systems that verify the identity of persons
    online and ensure the veracity of electronic documents.
        Question. How has the Internet's international access and influence
    affected the way law enforcement addresses financial crime in the
    future?
        Answer. With the dissolution of geographic borders through use of
    the Internet, serious questions are raised concerning ``foreign''
    activity in our country. U.S. News & World Report stated in their
    October 28, 1996, edition, that there are some 40 offshore banking
    havens, holding assets estimated at $2 trillion to $5 trillion.
    Beginning with the weekly drawings of InterLotto by the International
    Lottery in Liechtenstein in 1995, gaming activity on the Internet has
    mushroomed to hundreds of sites with rapid growth predicted
    (International Gaming & Wagering Business, August 1996). If these
    foreign businesses are not in compliance with U.S. laws, how do we
    prevent them from operating here? How can we verify that a particular
    Web site is actually located where represented?
        There is an enormous demand for U.S. currency throughout the world.
    U.S. currency is often the medium of exchange between foreign countries
    and can be easily exchanged for any other currency or vice versa. At
    the end of 1994, U.S. currency in circulation totaled approximately
    $405 billion. Of that amount, it is estimated that approximately two-
    thirds or $270 billion is being held by the underground or foreign
    interests. That means an estimated $135 billion is being circulated in
    the banking systems within the U.S. The reasons for this discrepancy
    are numerous, some legal and some illegal. Whatever the reasons, this
    data creates an urgent need for international cooperation.
        Besides the off-shore tax-free banking, there are other tax
    dilemmas. The U.S. has extensive tax treaties with other countries that
    determine which country has the right to tax certain types of income
    and confer reciprocal benefits to residents of treaty countries. A
    quandary occurs when a buyer resides in one country and purchases
    products in a second country; however, to complete this business deal,
    the transaction is electronically conducted through several countries.
    For example, a company in England purchases goods stored in Brazil from
    a seller in the U.S., but has the goods delivered to Germany with
    payment made from an account in Hong Kong. Just trying to reconstruct
    this transaction could become a nightmare, but add tax implications and
    the problem gets bigger. Therefore, international cooperation will
    serve as the cornerstone to work through these tax administrative
    issues of using cybercurrency.
        Because of growth in technology and a rapidly changing economic
    environment, tax evasion and money laundering have become an
    international problem. To put it simply, crime has no borders.
    Governments throughout the world are recognizing that money laundering
    and other financial crimes are no longer limited by the geographic
    boundaries of nations. Our CI Division has adopted an International
    Strategy to promote a financial disruption of major international
    criminal organizations. Wire transfers to and from foreign countries
    have increasingly been found in domestic investigations opening up new
    areas, geographic and otherwise, to our law enforcement agents. This
    strategy places primary focus on money laundering crimes although
    criminal tax enforcement is included in those countries which are
    receptive to the investigation of tax law violations.
        With the advent of a global economy, this strategy will depend upon
    cooperation among the international law enforcement communities. The
    subject of international compliance cannot be addressed merely at home.
    As financial markets and economies of most nations become
    internationally intertwined, large-scale money laundering and other
    financial crimes have the potential to disrupt the stability of global
    economies. Therefore, our continued efforts to work together to foster
    international cooperation and joint compliance among our treaty
    partners and other economic allies is vital. The information we gained
    from international cooperation opens a window on how small the world is
    and how together we can meet the challenges presented by this latest
    technology of cybercurrency. Today, these types of exchanges among tax
    administrations are absolutely essential to developing consistent
    approaches to tax enforcement.
        Question. Is the IRS's automated investigation system ``FOCUS'' in
    full operation?
        Answer. The Automated Information Analysis System (formerly FOCUS)
    is currently being tested in Nebraska and Texas.
        Question. Has FOCUS performed up to IRS Criminal Investigation
    Division's expectations?
        Answer. We do not have any tangible results from the initial
    testing. Preliminary feedback from the districts has been positive. The
    effectiveness of the system has been somewhat limited by the
    restrictions as to the types of data that can be processed on the front
    end.
        Question. Please explain how the system is used in predicting
    illegal financial activity.
        Answer. The concept of FOCUS is to process large amounts of data
    and link the various financial transactions that may be indicative of
    income tax or money laundering violations. Historically, special agents
    have developed cases by taking a lead and then manually researching the
    various sources of information available to determine its potential.
    FOCUS is designed to reverse this process by electronically analyzing
    all of the data sources on the front end and providing leads to the
    special agent to evaluate. In its final format, the system is intended
    to be a true ``expert system'' by incorporating the special agent's
    knowledge into the way the computer program evaluates the data. FOCUS
    is unique to virtually any other similar computer program in that it is
    largely address driven.
        Question. Do any other law enforcement agencies have access to this
    system? Why?
        Answer. The technology is available to other law enforcement
    agencies. We are currently working with U.S. Customs. However, the data
    that is being used by the IRS in Nebraska and Texas regarding tax
    return information cannot be shared with other agencies due to IRC 6103
    which protects tax return information from disclosure to other agencies
    unless specifically authorized in IRC 6103.
        Question. In IRS' view, has the Suspicious Activity Reports (SAR)
    initiative provided viable leads for investigative personnel in
    combating money laundering schemes?
        Answer. Since April 1, 1996, financial institutions have been
    required to file SAR forms which are maintained in a database at the
    Detroit Computing Center (DCC). Internal Revenue-Criminal Investigation
    (IRS-CI) has created a National General Investigation (GI) number to
    track all Primary Investigations (PI) initiated for the evaluation of
    SAR information received from DCC. This number is used to track
    resource commitments and program accomplishments. The National GI
    number is not used when a CI district office evaluates an SAR form
    developed at the district level independent of the DCC.
        The following statistics from the IRS-CI Criminal Investigation
    Management Information System (CIMIS) illustrate the number of PI's
    where the SAR was the source of information used to open the PI. These
    PI's were then tracked to determine how many evolved into a Subject
    Investigation (SI). Finally, the SI's are broken down into the current
    status or disposition.

    ------------------------------------------------------------------------
                Fiscal year 1996                  Number          Percent
    ------------------------------------------------------------------------
    Primary Investigation...................           1,853  ..............
    Subject Investigations..................             126            6.80
    SCI Discontinued Investigations.........              44           34.92
    SCI Prosecution Recommendations:........              19           15.08
    SCI in Inventory........................              63           50.00
                                             -------------------------------
          Total.............................             126          100.00
    ------------------------------------------------------------------------

    ------------------------------------------------------------------------
              Fiscal year 1996 YTD                Number          Percent
    ------------------------------------------------------------------------
    Primary Investigation...................             925  ..............
        Subject Investigations..............              26            2.81
    SCI Discontinued Investigations.........  ..............  ..............
    SCI Prosecution Recs....................               1            3.85
    SCI in Inventory........................              25           96.15
                                             -------------------------------
          Total.............................              26          100.00
    ------------------------------------------------------------------------

        It should also be noted that only those PI's whose initial source
    of information was an SAR are reflected here. The SAR's are also used
    along with CTR's and Form 8300's as an additional source of information
    for special agents in situations such as following a money trail,
    establishing ownership of the currency, or they can be utilized in
    indirect methods cases for determining cash deposits and withdrawals.
    In those situations, the SAR is not listed as the source of information
    in CIMIS and is, therefore, not reflected in the statistics above.
        It is important to remember that this form has only been in use for
    15 months. Additional time is needed for these cases to be completed.
    Perhaps, by the end of fiscal year 1998 we will have a clearer picture
    of the SAR's usefulness.
        Question. Would the SAR be valuable as an investigative tool in any
    other area of the financial community?
        Answer. The SAR contains information which would be useful to all
    aspects of the financial community involved in enforcement. Currently,
    there are proposed rules which will define a Money Services Business
    (MSB), formerly referred to as Non-Bank Financial Institution (NBFI).
    These rules also establish filing requirements for the MSB under the
    Bank Secrecy Act. The rules will likely go into effect sometime next
    Spring. At that time, these MSB's will establish an enforcement
    mechanism which law enforcement could use this information to enhance
    their efforts.
                              financial management
        Question. What is IRS' schedule for implementing GAO's
    recommendations for improving the Service's Financial Management?
        Answer. In his testimony before the Committee, Acting IRS
    Commissioner Michael Dolan stated that of the 59 original
    recommendations made by GAO as a result of their financial statement
    audits, we and GAO agree that we have completed 22. Of the remaining
    37, 23 are completed and awaiting GAO's concurrence, 14 are scheduled
    to be completed by September 30, 1997, and 5 are scheduled to be
    completed after September 30, 1997. We prepared a detailed action which
    addresses all the recommendations and provided a copy to the Committee
    on February 28, 1997. As shown in that action plan, the final actions,
    which are related to improving our tax accounts receivable, are
    scheduled to be completed by September 30, 1998.
        Question. Specifically, can appropriations available for operations
    expenditures be reconciled fully with Treasury Central Accounting
    Records?
        Answer. Yes, appropriations available for operations expenditures
    can be reconciled fully with Treasury Central Accounting Records. There
    is an automated mechanism in place to ensure that these balances are
    reconciled monthly.
        Question. And, can the IRS reconcile its cash balances to
    Treasury's records through fiscal year 1996?
        Answer. Yes, the IRS has reconciled cash balances to Treasury
    through fiscal year 1996.

                             Conclusion of Hearings

        Senator Campbell. That concludes the hearings. The
    subcommittee will recess and reconvene at the call of the
    Chair.
        [Whereupon, at 11:32 a.m., Thursday, June 19, the hearings
    were concluded and the subcommittee was recessed, to reconvene
    subject to the call of the Chair.]

        MATERIAL SUBMITTED BY DEPARTMENTAL AND INDEPENDENT AGENCIES NOT
                         APPEARING FOR FORMAL HEARINGS

        [Clerk's note.--The following departmental and independent
    agencies of the Department of the Treasury and the Executive
    Office of the President did not appear before the subcommittee
    this year. The subcommittee requested that these agencies
    submit testimony in support of their fiscal year 1998 budget
    request. Those statements and questions and answers follow:]

                           DEPARTMENT OF THE TREASURY

                           Bureau of the Public Debt

              Prepared Statement of Richard L. Gregg, Commissioner

        Mr. Chairman and members of the Subcommittee, I am pleased to have
    the opportunity to present the following information regarding the
    Bureau of the Public Debt's fiscal year 1998 budget request. Our
    request is reasonable and continues Public Debt's established track
    record of doing more with less and making the difficult decisions
    needed to make this possible.
                                 bureau mission
        Public Debt is responsible for the sale, servicing and redemption
    of Treasury securities to handle the government's financing needs, and
    for accounting for the resulting debt and related interest costs. To
    accomplish our mission, we work closely with the Federal Reserve Banks
    that act as our fiscal agents. In addition, we are responsible for
    marketing savings bonds.
                        fiscal year 1998 budget request
        This year's request totals $173.8 million, an increase of 2.4
    percent from our fiscal year 1997 enacted level of $169.7 million. Our
    staffing levels remain at 1,805 FTE, unchanged from the fiscal year
    1997 enacted level. This is the first funding increase Public Debt has
    requested since fiscal year 1993. In fiscal year 1993 our appropriation
    was $194.6 million and 1,935 FTE. Our fiscal year 1998 request
    represents a 14.7 percent decrease in dollars and a 7.2 percent
    decrease in FTE from those fiscal year 1993 levels. These savings have
    been achieved through consolidation to Parkersburg and on-going
    management efforts to streamline functions.
        Nearly all of the requested funding increase is to cover the fiscal
    year 1998 pay raise and other inflationary cost increases. The only
    non-inflationary funding increase in our request is $460,000 that we
    need to begin offering a new security. Last September, President
    Clinton announced that Treasury would begin issuing an inflation-
    indexed savings bond in 1998. This new savings bond is to follow the
    introduction of a new marketable inflation-indexed security (the first
    of which was issued in early February). These securities are designed
    to strengthen national savings by broadening the types of debt
    instruments available to investors and by offering Americans an
    investment that provides protection against inflation. We also
    anticipate that taxpayers will benefit as these securities are expected
    to reduce Treasury's financing costs.
        Our fiscal year 1998 request provides sufficient funding for us to
    accomplish our annual performance plan and continue progress toward our
    long-term strategic goals.
                             consolidation savings
        I would like to mention to the Subcommittee that, since our last
    hearing, we completed the consolidation of most of our operations in
    Parkersburg, West Virginia. This major Public Debt initiative has been
    an overwhelming success and was a product of Public Debt's long-
    standing strategic planning process. The cost savings and other
    benefits from the consolidation have significantly exceeded our
    original expectations. Our operations are now more integrated and
    better controlled. Our staffing is more predictable. And most
    important, our customers are better served. Further, the consolidation
    has enabled us to submit reduced budget requests for fiscal years 1994
    through 1997. The budget reductions from our consolidation have
    resulted in an on-going annual savings of $15 million and 300 full-time
    equivalent work years. I appreciate the Subcommittee's support for this
    important initiative.
                                   automation
        Public Debt is an organization that emphasizes the effective use of
    technology to improve operations. Our strategic planning process
    identifies and sets priorities for automation projects. As you well
    know, many Federal agencies are currently facing the same unavoidable
    challenge--modifying their automated systems to ensure that they will
    operate past 2000. Our strategic approach to make sure that our systems
    are ready is well underway and we do not expect to need any funding
    increases to make the necessary changes.
                                strategic goals
        Our long-term goals are straightforward and succinct:
      I. borrow what is necessary to meet the monetary needs of the
            Government,
      II. minimize the cost of borrowing to the Federal Government,
      III. provide for participation by a wide-range of investors in
            Treasury financing,
      IV. protect investors in government securities,
      V. provide quality customer service to investors in Treasury
            securities, and
      VI. provide accurate and timely public debt accounting information.
        We have established strategies that support these goals. The
    strategies include the extensive use of technology to serve our
    customers and support our internal operations as well as an emphasis on
    simplifying the regulations and procedures that affect our customers.
    We plan, for example, to provide our investors with ever-increasing
    amounts of information electronically. This includes not only general
    information about Treasury securities but also account-specific
    information about holdings and account status. We also plan to offer
    investors the option of purchasing securities electronically.
                          strategic management process
        We have recently incorporated the requirements of the Government
    Performance and Results Act (GPRA) into our planning process. This law
    fundamentally changes the approach to Federal management and
    accountability from a focus on inputs and processes to a greater
    emphasis on outcomes and programmatic results. In essence, GPRA
    requires that we tell you what each of our programs is intended to do
    in the long-term, specifically what we intend to achieve each year,
    and, finally, what we achieved.
        The performance plans required by GPRA are now an integral part of
    the budget documents we send to you each year. In our fiscal year 1997
    budget request, we incorporated measures of program performance in
    addition to the traditional output-oriented workload measures. For
    fiscal year 1998, we have included a more comprehensive set of measures
    for our programs. We believe that our measures reflect the key elements
    of our responsibility, provide meaningful information about our
    programs, and are currently set at levels that provide excellent
    customer service and superior operational performance.
                   fiscal year 1996 annual performance goals
        Public Debt's Saving Securities Program had two fiscal year 1996
    performance measures. The first was to issue 95 percent of over-the-
    counter savings bonds in three weeks. In fiscal year 1996, we
    substantially exceeded this goal and were able to issue 99 percent of
    these bonds timely.
        The second measure, to complete 80 percent of customer service
    transactions in six weeks, represented a real stretch for our
    organization. We set this goal as part of an overall plan to improve
    customer service. In 1993, we were completing 13 percent of our
    transactions within this time. In fiscal year 1996, our employees made
    remarkable progress but fell just short of our 80 percent goal-we
    achieved 79 percent. While the 80 percent standard was not met for all
    of fiscal year 1996, we were exceeding the standard by the end of the
    year and have continued to exceed the standard and improve service.
        We established three measures for our Marketable Securities Program
    in fiscal year 1996. The first was to announce auction results within
    one hour, 90 percent of the time-we achieved 97 percent. The second
    measure was to complete 90 percent of TREASURY DIRECT customer service
    transactions within three weeks. Our performance was 95 percent. We met
    our third performance measure by establishing 99 percent of Treasury
    Direct accounts accurately.
                                    closing
        I appreciate this opportunity to present the major policy and
    management issues facing the Bureau of the Public Debt in fiscal year
    1998.
                                     ______

                          Financial Management Service

             Prepared Statement of Russell D. Morris, Commissioner

        Chairman Campbell, Senator Kohl, and members of the Subcommittee,
    thank you for the opportunity to submit the Financial Management
    Service's (FMS) fiscal year 1998 budget request and related issues. We
    are requesting an appropriation of $202,560,000 and 2,029 FTE.
        We have always enjoyed and benefited from the bipartisan support of
    the Subcommittee. That support transcends budget dollars that, more and
    more, are in short supply. This Subcommittee has had high expectations
    of FMS; they have depended on us to lead the way in reforming and
    modernizing the government's financial practices.
                                    overview
        FMS is a relatively small agency that provides payments,
    collections, accounting information and debt collection services to all
    Federal Agencies and every individual who receives money from the
    government or pays a bill owed to the government. We operate from seven
    locations in the United States, but we support government operations
    world-wide. While our production statistics are in the millions,
    billions, and trillions, our unit costs are measured in pennies. We are
    especially proud of the fact that FMS received nine Hammer awards,
    which are recognition awards given by the Vice-President for creating
    more efficient and effective ways of serving taxpayers. These awards
    were received in program areas related to FMS mission functions such as
    debt management services, financial information services, electronic
    funds transfer, and regional operations.
        Our central roll within the government, benefits the taxpayers as
    it creates efficiencies based on enormous volumes, allows Treasury to
    administer prudent financial management policies, and facilitates the
    collection of delinquent federal debt. The Debt Collection Improvement
    Act of 1996, Public Law 104-134, enacted last April was devised to take
    advantage of the fact that FMS issues most of the government's
    payments. The Law mandates that FMS offset payments to collect debts
    due the government before we pay anyone who is a delinquent debtor.
        FMS disburses payments to a wide array of federal recipients
    including those who receive Social Security, Veterans benefits, Civil
    Service Retirement, and Internal Revenue Service (IRS) tax refunds. FMS
    disbursed over 840 million payments during fiscal year 1996 on time.
    Our payment operations touched the lives of well over 100 million
    citizens last year.
        As this Subcommittee is well aware, FMS is transforming its payment
    operations by moving from paper checks to electronic funds transfers
    (EFT). We are making an aggressive transition in order to comply with a
    provision of the Debt Collection Improvement Act of 1996 (DCIA) that
    requires virtually all federal payments to be issued by some form of
    EFT by January 1, 1999. Presently about 57 percent of all payments are
    disbursed by EFT, most through the Direct Deposit program. The
    initiative was proposed by FMS and supported by members of this
    Subcommittee. I will address our EFT implementation efforts in detail
    later in my testimony.
        FMS manages the processing of all collections for corporate and
    individual income taxes, custom duties, federal fines, and other
    levies. We manage the world's largest collection network of over 17,000
    financial institutions.
        One of our major goals, in partnership with the IRS, is to continue
    to make the nation's tax collection system more efficient for taxpayers
    as well as the government. To this end, we are shifting from paper-
    based to electronic systems. During fiscal year 1996, FMS collected
    over $400 billion in corporate withholding taxes using electronic
    systems. We anticipate that the rollout of the Congressionally mandated
    Electronic Federal Tax Payment System will dramatically increase
    electronic collections--to about $1 trillion--by the turn of the
    century.
                              financial reporting
        FMS also manages the central accounting and reporting systems that
    track the government's monetary assets and liabilities. FMS tracks and
    reports on enacted Congressional appropriations, some 7,500 separate
    accounts.
        FMS publishes the government's major financial and budgetary
    reports that are used by the public and private sectors to make policy
    and economic decisions. These reports include: the Daily Treasury
    Statement; the Monthly Treasury Statement; the Treasury Bulletin; and
    the U.S. Government Annual Report and Appendix.
        The Government Management Reform Act (GMRA) of 1994, directed all
    major federal agencies to prepare audited financial statements in order
    for the government to function in a more businesslike manner. GMRA
    mandates that Treasury issue the first audited government-wide
    financial statements beginning with fiscal year 1997, by March 31,
    1998.
        FMS is responsible for managing the preparation of the new audited
    financial statements and is working diligently with every federal
    agency, the Office of Management and Budget (OMB) and the General
    Accounting Office (GAO) to meet this requirement. We are requesting an
    appropriation of $2.5 million to upgrade the Government On-Line
    Accounting Link System (GOALS), a computer system that provides on-line
    information to federal agencies and is the foundation of the
    government's central financial systems. The requested computer
    enhancements are needed to maintain and improve the integrity of the
    government's financial data which is imperative to complying with the
    Chief Financial Officer Act and GMRA.
                                      dcia
        The debt collection legislation that I noted earlier, the DCIA,
    significantly increased FMS' responsibility to facilitate the
    collection of delinquent federal non-tax debt. We are in the process of
    implementing many provisions of the legislation. On behalf of FMS, I
    would like to thank this Subcommittee for its strong support of the
    DCIA.
        The debt collection statute was enacted to improve federal
    financial management by decreasing the amount of past-due non-tax debt,
    now estimated at more than $51 billion. We have always felt that the
    fair, prompt, and efficient collection of delinquent federal debt is
    sound financial policy, so we view full implementation of this bill as
    critical to performing our basic mission.
        The legislation created several new debt collection processes and
    tools, all of which require thorough coordination with other federal
    agencies and the issuance of complex regulations. FMS has met with over
    1,700 federal agency employees who are responsible for carrying-out the
    provisions of the DCIA and we have met with numerous groups and
    individuals that may have a stake in implementing this statute.
        One of the most important debt collection tools mandated by the
    DCIA is the Treasury Offset Program (TOP). This provision requires FMS
    to utilize Treasury's payment operations to administratively offset
    federal payments before they are issued to delinquent debtors. TOP has
    already collected over $300,000 with only a few agencies participating
    at this time. The law requires all agencies to provide FMS with their
    payment and non-tax delinquent debt information for offset. Once the
    program is fully operational, TOP will include all payments, including
    non-Treasury disbursed payments and all delinquent debt over 180 days,
    including delinquent child support debt. TOP will also include current
    programs such as the Tax Refund Offset Program and the Federal Salary
    Offset Program.
        The largest existing delinquent debt collection mechanism, the Tax
    Refund Offset Program (TROP), is currently administered by the Internal
    Revenue Service and FMS, and has been operational since 1987. Under
    TROP, the tax refunds of debtors are utilized to pay off their
    delinquent debts. Thus far, the program has recouped over $7 billion.
    The IRS and FMS have agreed to merge TROP with TOP beginning January 1,
    1998. This merger will create efficiency in administering the programs
    and make the process less complicated for federal agencies and debtors.
        An additional piece of the DCIA authorizes Treasury to help collect
    State debts such as past-due child support payments. In September,
    President Clinton issued Executive Order 13019, Supporting Families:
    Collecting Delinquent Child Support Obligations, to ensure that all
    federal agencies work with Treasury to collect past-due support. We
    will enter into agreements with States that voluntarily seek our help
    to collect these vital monies.
        The DCIA also included important provisions that can be used to
    assist families in collecting past-due child support obligations. The
    law allows the Federal government to partner with the states to collect
    child support obligations through the administrative offset program.
    Currently, eight states and the District of Columbia have taken the
    initial steps in participating in this program and over 725,000
    delinquent parents have been notified that their Federal payments could
    be seized to satisfy delinquent child support debts. All 50 states are
    expected to participate in this program. The jurisdictions currently
    participating are: Alaska; Arizona; California; Connecticut; the
    District of Columbia; Kansas; Oklahoma; Oregon; and South Dakota.
    Another major component of DCIA is the mandate that all Federal
    Agencies refer non-tax debts that are more than 180 days delinquent to
    FMS for collection. FMS is working with agencies on an individual basis
    to develop systems to electronically transfer this debt. FMS will soon
    issue a Request-For-Proposal to begin the process of hiring private
    debt collection agencies to help collect delinquent non-tax debts. FMS
    agrees with the sentiment of Congress that utilizing the talents of
    private debt collectors is an efficient and effective method to recoup
    past-due monies. Overall, collections are anticipated to be over $100
    million annually over current collections.
                                      eft
        As I stated previously, the DCIA contained a provision requiring
    that virtually all federal payments, with the exception of IRS tax
    refunds, be issued by some form of Electronic Funds Transfer (EFT) by
    January 1, 1999. We have encouraged agencies and financial institutions
    to use EFT because electronic payments are more reliable, less
    expensive and safer than payments made by check.
        We implemented the first phase of the EFT mandate when on July 26,
    1996, FMS issued a regulation that required all new recipients of
    federal funds to receive their money by EFT. Consistent with the law,
    the rule exempted tax refund payments and granted waivers for
    recipients who did not have bank accounts. This phase of the law has
    already paid dividends. FMS' EFT payments rate for January 1996 was 56
    percent while the EFT payments rate for January 1997 was 60 percent.
        The task of meeting the 1999 mandate--conversion of nearly 400
    million check payments to EFT--is infinitely more challenging. To help
    ensure the success of this unprecedented program, FMS is receiving
    support from the Department of the Treasury.
        FMS expects to issue a proposed rule to implement the 1999 mandate
    in the summer that will cover an array of sensitive issues related to:
    disbursing electronic payments to recipients who do not have bank
    accounts, including cost, access and consumer protection needs of
    recipients; electronic data interchange/vendor payments; and the
    establishment of a national federal Electronic Benefits Transfer (EBT)
    program. We expect that a final rule will be published by early fall.
        The EFT 99 project is transforming FMS and segments of the
    financial community. Its success is imperative if we wish to provide
    first rate payment services at the lowest possible cost.
                                      gpra
        FMS has worked diligently to implement the Government Performance
    and Results Act (GPRA) of 1993. GPRA levies three major requirements on
    federal agencies for the fiscal year 1999 budget cycle: strategic
    plans, annual agency performance plans, and annual agency performance
    reports. Our work has been commended and cited as an example to other
    agencies by the OMB and the GAO.
        FMS has relied on strategic planning for about 15 years. We have
    been measuring our programs' performance systematically since the
    passage of the Chief Financial Officers Act. FMS is especially proud of
    our accomplishments in performing a ``dry run'' of GPRA over the past
    year for the fiscal year 1998 budget cycle.
        FMS continues to review performance measures and their relevance to
    program goals resulting in four overarching strategic measures:
      --Dollar savings by reducing the number of check payments;
      --Dollar value of electronic collections as a percentage of total
            collections;
      --Percentage increase over fiscal year 1997 baseline of FMS-managed
            government-wide collected delinquent debt; and
      --Decrease in prior year recommendations and audit findings that
            prevent a clean opinion of the audit of the Consolidated
            Financial Statement of the U.S. Government.
        The measures are the foundation of our Annual Performance Plans as
    shown in the budget. We look forward to further refining our approach
    to GPRA implementation during the fiscal year 1999 Budget process.
                                   year 2000
        FMS is heavily dependent on automated systems. Like most agencies
    of the government, FMS faces the challenge of adapting its systems to
    the date change--the Year 2000 computer problem. Correcting this
    problem is one of our highest priorities since both public and private
    sector customers rely on our products and the accuracy of the
    information associated with these products. We are requesting an
    additional $2 million for resources which will help make automated
    systems year 2000 compliant, work that is absolutely essential to our
    operations and to the integrity of our systems for paying, collecting,
    and accounting for money government-wide. I want to assure you that we
    are asking for funding for this initiative, and the GOALS initiative,
    only because we simply have no way to absorb these costs. Due to the
    nature of FMS' mission and the fact that virtually all program
    activities are mandated by statute, it is necessary to request these
    additional funds since no base programs can be eliminated or postponed
    and we have worked very, very hard to achieve all possible cost
    recoveries.
                              legislative proposal
        Finally, FMS is requesting Congress' consideration and support for
    an important legislative initiative in fiscal year 1998. The
    President's budget proposes to create a permanent, indefinite
    appropriation to reimburse Federal Reserve banks for their services as
    fiscal agents for Treasury's Fiscal Service. Proposed language to
    establish the fund is included in FMS's justification. This initiative
    is needed to create an accurate accounting for the cost of financial
    services provided to Treasury by the Federal Reserve. The proposal is
    deficit neutral. This legislation would enable Treasury to improve
    service to its customers by expediting the development and completion
    of financial projects by Federal Reserve banks. The proposal will also
    provide FMS opportunity to more fully use activity based costing
    methods to accurately identify program and product costs.
        Thank you for allowing me the opportunity to discuss FMS' mission
    and successes. I would be happy to answer any further questions you
    have regarding FMS.
                                     ______

                            Office of the Secretary

        Prepared Statement of Robert E. Rubin, Secretary of the Treasury

        Chairman Campbell, Senator Kohl, members of the Committee: I
    appreciate the opportunity to submit testimony on the Treasury
    Department's fiscal year 1998 budget request. Today, our national
    economy is strong. In large measure due to the deficit reduction
    program of 1993, and the economic growth that it generated, the deficit
    has fallen from close to five percent of GDP to an estimate of roughly
    one percent of GDP for 1997. That deficit reduction was key to reducing
    interest rates and increasing confidence, which, in turn, drove our
    recovery. Today, unemployment is at 4.8 percent, inflation is low, and
    the economy has generated over 12 million new jobs. Treasury's budget
    is constructed to be consistent with the objective of continuing the
    economic progress of the last four years.
        The Treasury plays a key role in the core functions of government:
    tax policy, banking policy, revenue collection, federal law
    enforcement, management of the federal debt, economic policy
    development, budget policy, international economic affairs, inner city
    economic development, the processing of federal payments and the
    manufacture of our nation's currency. With such a broad portfolio, we
    take very seriously the notion that we must continually seek new ways
    to improve services and lower costs. As Secretary, I have been
    interested in and very focused on management.
        In our fiscal year 1998 budget request of $11.7 billion, funding is
    proposed for the most essential operations. The operating budget of
    $11.2 billion, excluding the information technology fund for the
    Internal Revenue Service, is 4.2 percent over the fiscal year 1997
    appropriated level. Our request maintains current service levels for
    all of Treasury's operations, while proposing important advancements
    for a few Department programs and priorities.
        In accordance with the Government Performance and Results Act
    (GPRA), we are focusing resources on the highest priorities; changing
    our focus from input to results; and expanding cooperation among
    managers, workers and stakeholders. I am pleased to report that
    Treasury's budget this year is in compliance one year ahead of time
    with all requirements mandated under the government's strategic
    planning guidelines.
        The fiscal year 1998 request continues funding to help develop
    innovative economic, financial, enforcement and tax policies. This
    level will also provide the flexibility needed to meet Treasury's
    growing demands in areas such as expanded oversight of major law
    enforcement operations, reform of international financial institutions,
    ongoing tax code improvements, and policy implications of electronic
    payments and other complex financial instruments.
        Let me now highlight some budget items focusing on three key
    Treasury missions--law enforcement, management of the government's
    finances, and promotion of a prosperous global economy.
                                law enforcement
        Treasury is responsible for more than forty percent of the federal
    government's law enforcement personnel. We are requesting new resources
    to combat violent crime; decrease availability of illegal drugs and
    other contraband; protect designated officials; continue counter-
    terrorism efforts; and upgrade law enforcement equipment, skill levels
    and facilities. Let me mention a few of our priorities.
        Requested funds will enhance Treasury efforts to decrease the
    availability of illegal firearms to criminals and juveniles, especially
    the Bureau of Alcohol, Tobacco and Firearm's successful Kids and Guns
    initiative. We also seek new resources for Customs to fight narcotics
    trafficking and other illicit smuggling activity at our borders.
        Financial crime enforcement continues to be a high priority. The
    profits of crime that are laundered into the United States' financial
    system each year are staggering and detrimental by any calculation, and
    the losses attributable to financial fraud--such as bank fraud and
    access device fraud--are a threat to financial transaction systems. We
    will enhance our tools in support of essential financial crime
    investigations to protect our financial institutions better and to
    trace illicit profits to their criminal sources.
        Money laundering and other financial crimes should be recognized as
    clear threats to financial institutions, and enforcement of financial
    crime statutes should be recognized as an avenue for law enforcement to
    attack the leaders of drug gangs and organized crime. The fiscal year
    1998 budget provides funds to continue efforts by the IRS, the
    Financial Crimes Enforcement Network, Customs and the Secret Service,
    in cooperation with other law enforcement agencies, to address money
    laundering.
        Additional resources for the Secret Service will be used to support
    the continued implementation of outstanding White House Security Review
    recommendations. We must maintain our vigilance in discharging our
    protective mission by employing methods to detect and confront security
    threats before they surface.
        We also continue to emphasize counter-terrorism efforts. Customs
    will continue aggressively to promote protection at airports through
    automated targeting, non-intrusive inspection systems, and increased
    enforcement presence. The Bureau of Alcohol, Tobacco & Firearms will
    work to decrease explosive and arson crimes through the canine
    explosives detection program, explosive inspections, and an arson
    clearinghouse.
        We also seek to upgrade law enforcement equipment, skill levels,
    and facilities for ATE, Customs, the Secret Service, and the Federal
    Law Enforcement Training Center.
                  effectively manage the government's finances
        New resources will enable Treasury to manage the tax administration
    process to improve compliance with tax laws, advance the Government's
    fiscal and financial management, and secure effective and efficient
    information systems.
        Last year, we promised a sharp turn in program direction at the
    IRS. I am pleased to say that the commitments made last year have been
    kept, including, for example, hiring a new CIO, dramatically increasing
    the use of the private sector, implementing a new Investment Review
    process, and establishing the Modernization Management Board. Last
    week, President Clinton issued an Executive Order institutionalizing
    Treasury Department oversight of IRS management. This Executive Order
    makes permanent the Internal Revenue Service Management Board created
    by the Treasury Department last year. The Department will also
    establish a blue ribbon Advisory Committee, reporting directly to the
    Secretary of the Treasury, which will bring private sector expertise to
    bear on the management of the IRS. In addition, we have canceled
    several major contracts and collapsed over 30 separate modernization
    projects into a more manageable nine. We plan to introduce legislation
    to give the new Commissioner greater management flexibilities and to
    appoint the Commissioner for a five-year term.
        Changes of this magnitude at the IRS will take time, just as the
    problems developed over a considerable period of time. Let me state
    unambiguously that the Treasury remains committed to modernizing the
    IRS. We believe that it is essential for the Administration and the
    Congress to work together to improve the functioning of our tax
    administration system, and in my time at Treasury, this committee has
    played a major role in bringing effective focus to bear on the relevant
    issues.
        The Internal Revenue Service, Financial Management Service,
    Departmental Offices, Alcohol, Tobacco and Firearms and Secret Service
    are also requesting funds to ensure that technology systems will not be
    affected by the Year 2000 date changes. These systems are critical to
    core government functions such as cash management, payments,
    collections, accounting, and financial reporting.
        Finally, a priority for Treasury is to develop and implement
    policies relating to fiscal and financial issues such as electronic
    money and other complex financial instruments.
                       promote a prosperous world economy
        Treasury plays a key role in fostering global economic growth and
    stability, in order to further U.S. economic and national security
    interests. Treasury has been actively involved in issues ranging from
    assistance to Russia, help in reconstructing Bosnia, and emergency
    support for Mexico, which, as you know, has repaid the U.S. Government
    in full, principal and interest, including a profit of $580 million.
    Most of the funding for these priorities is through our commitments to
    the World Bank, the regional development banks, the International
    Monetary Fund, and the New Arrangement to Borrow, and are under the
    jurisdiction of another subcommittee. But let me just mention a couple
    of priorities in this area that are under the jurisdiction of this
    committee.
        The fiscal year 1998 budget proposes to strengthen the Department's
    capacities to engage in opening new markets for trade and investment,
    reducing financial risks throughout the world and forging links with
    emerging markets. We also seek to upgrade equipment for the Customs
    Service to support a more effective, trade law compliance and maintain
    analytical parity with its counterparts in other countries.
        Mr. Chairman, let me mention two final areas that are priorities
    for Treasury. First, a high priority for Treasury is to strengthen the
    soundness of financial institutions in this country. The Offices of
    Thrift Supervision and the Comptroller of the Currency continue to play
    a major role in ensuring bank and thrift safety and soundness in order
    to advance a strong national economy. The Office of the Comptroller of
    the Currency has been designated as the lead to coordinate Treasury's
    efforts to study the issues related to electronic money. In addition,
    the OTS and OCC are downsizing in response to the consolidation of
    financial institutions.
        Second, President Clinton strongly believes that it is critical to
    the economic well-being of all Americans, no matter where we live, or
    what our incomes are, that we bring the residents of America's inner
    cities and other economically distressed areas into the economic
    mainstream. Treasury is actively involved in this effort, through
    measures such as the Community Development Financial Institutions Fund,
    which provides much needed investment capital to distressed urban and
    rural communities. Our budget includes $125 million for this critical
    program, which last year drew more than 260 applications for over $300
    million in assistance, demonstrating the market demand and potential
    for this program.
        Mr. Chairman, let me conclude by saying that I appreciate the
    assistance and cooperation that I have received from this Subcommittee
    since coming to Treasury. I look forward to maintaining that
    cooperation as we move forward.
        It has been my great honor to serve as Treasury Secretary for the
    last two years. In that time I have been continually impressed by the
    high quality of Treasury employees. They are professional, very
    knowledgeable about their various fields of expertise, extremely
    dedicated to their work, and to serving the public. The people at
    Treasury are our greatest resource. They deserve our respect and
    support, especially as we go through the difficult process of reaching
    budget balance.
        Mr. Chairman, with such a dedicated and talented team, with the
    close cooperation of Congress and the Administration, and with the
    appropriate funding for the Treasury Department, we will be able to
    maintain--and improve--the high level of service you have come to
    expect from the Department. Thank you very much.

                    Questions Submitted by Senator Campbell

                                budget structure
        Question. In looking over the IRS' fiscal year 1998 budget request,
    IRS has asked Congress to allow the IRS to restructure their budget
    into three categories: (1) Processing, Assistance, and Management, (2)
    Tax Law Enforcement, (3) Information Systems. Although this may be more
    in line with what IRS is trying to accomplish on the management side, I
    am concerned that this new structure may be harder for Congress to
    track how IRS is spending its money. Can you comment on this new
    structure?
        Answer. There are some elements of the restructuring that may make
    it easier to track how IRS is spending its money. For example, IRS'
    restructuring includes (1) a consolidation of what were four different
    resources management budget activities into a single Management
    Services activity and (2) creation of a separate budget activity for
    rent and utilities. Other elements of IRS' restructuring could make
    tracking more difficult. In that regard, one major restructuring
    involves what used to be the ``Taxpayer Services'' budget activity.
    That activity, which is part of IRS' Processing, Assistance, and
    Management appropriation, was renamed ``Telephone and Correspondence''
    and was revised to combine various assistance programs with compliance
    activities conducted by phone and correspondence. At the same time, the
    restructuring transfers certain face-to-face customer service
    activities to the Tax Law Enforcement appropriation. Specifically,
    funds for the Taxpayer Education Program are now included in the
    Examination budget activity and funds for the Taxpayer Walk-in
    Assistance Program are now included in the Collection budget activity.
    While these changes may be consistent with IRS' plans for managing the
    related programs, they do make it difficult to separately track how
    much is being spent on customer service and compliance. Also, such
    changes in budget structure make it difficult, if not impossible, to
    assess spending trends over several years. With respect to the proposed
    structural changes in the fiscal year 1998 budget request, for example,
    IRS revised its fiscal year 1997 figures to coincide with the revised
    structure but figures for fiscal years before 1997 are not comparable.
                             information technology
        Question. As part of their fiscal year 1998 budget request, the IRS
    is asking for a $500 million advance appropriation for Information
    Systems, which is not to be obligated during fiscal year 1998. It is to
    be an up-front investment by Congress to demonstrate that we are
    committed to the modernization effort. You mentioned about the $500
    million fiscal year 1998 capital investment for IRS' modernization
    effort in your testimony. Can you comment further?
        Answer. As we stated in our testimony, IRS is requesting $500
    million in fiscal year 1998 and another $500 million in fiscal year
    1999 to establish an Information Technology Investments Account to fund
    future modernization investments. According to IRS' request, the funds
    are to support acquisition of new information systems. The request also
    stated that expenditures from the account will be reviewed and approved
    by Treasury's Modernization Management Board, and no funds will be
    obligated before July 1, 1998. We cannot comment further at this time
    because IRS has provided no additional details on what it plans to do
    with the $1 billion nor any justification for spending these funds.
        Question. What would happen to the nation's tax collection system
    should Congress withhold modernization funding as you suggest?
        Answer. Although IRS attempts at modernization over the last 10 to
    15 years have largely failed, IRS continues to collect taxes and
    process returns at levels it deems to be successful. This is because
    the operation and maintenance of existing systems is appropriated
    separately from the funds to modernize, i.e., to develop new systems to
    do IRS' business in new and better ways. Therefore, if Congress decides
    to withhold modernization funds (and only provides funds for current
    operational systems) until IRS strengthens identified management and
    technical weaknesses, IRS will continue to maintain and rely upon its
    operational systems and will continue to collect taxes and process
    returns as it does today. IRS' performance in collecting delinquent
    taxes would also remain the same. As we have reported, IRS' performance
    in that area has generally been poor due to inefficient processes and
    systems.\1\ However, as evidenced by the lack of significant
    improvement despite the substantial amount of modernization funds
    appropriated over the past several years, funding, in and of itself,
    will not correct those inefficiencies nor improve IRS' performance.
    ---------------------------------------------------------------------------
        \1\ ``High-Risk Series, IRS Management'' (GAO/HR-97-8, February
    1997).
    ---------------------------------------------------------------------------
        Question. Can you provide any insight to this subcommittee on what
    the IRS intends to spend these funds on?
        Answer. According to IRS' fiscal year 1998 budget request, the $500
    million, along with $500 million being requested in fiscal year 1999,
    is to establish an Information Technology Investments Account to fund
    future modernization investments. IRS has said it plans to use the
    funds to support acquisition of new information systems but has
    provided no further detail. It has also said that expenditures from the
    account will be reviewed and approved by Treasury's Modernization
    Management Board, and no funds will be obligated before July 1, 1998.
        Question. The Request For Comment on the Prime Contractor of IRS'
    new modernization plan, calls for a $250 million up-front investment by
    the Prime and only a three-year contract. In your assessment, is the
    size of the investment appropriate? Do you feel the Prime can recoup
    its investment within the three years?
        Answer. Until IRS completes the architectural blueprint, provides
    defining details and a timeline for the sequencing plan, and develops
    the cost estimates for implementing these plans, we cannot assess
    whether the $250 million is an appropriate up-front investment and
    whether or how it could be recouped within three years.
                                strategic plans
        Question. This year, agencies are consulting Congress on their
    strategic plans as part of the Government Performance and Results Act,
    which is a process to help agencies establish priorities, measure their
    performance and align their budgets to fit their mission. Can you
    highlight where you think IRS is doing a good job in their strategic
    planning and where they are having difficulty?
        Answer. In response to a congressional request from the House
    Majority Leader and several chairman of various House Committees, we
    are currently evaluating all departmental strategic plans to determine
    whether they comply with requirements of the Results Act. As a part of
    that effort we are reviewing the Department of Treasury' strategic plan
    and the plans of each agency under the purview of Treasury, including
    IRS. Our response is based on our preliminary review of IRS' current
    strategic plan. In the mid-1980's IRS developed a strategic plan that
    included a mission statement, objectives, and strategies for meeting
    those objectives. Since then, IRS has been refining its strategic
    planning process to (1) establish a better linkage between strategic
    planning and IRS' budget process and (2) develop more outcome-oriented
    measures. However, IRS faces a number of challenges in its attempts to
    develop and use results oriented performance indicators to manage its
    programs. These include a lack of good data, methodological constraints
    in measuring the effectiveness of its programs, and difficulty in
    collecting the data needed.
                         private debt collection pilot
        Question. In the fiscal year 1997 Treasury Appropriation bill, this
    subcommittee funded a private debt collection project, which was to do
    a pilot allowing the private sector to collect on accounts that the IRS
    considered uncollectible. According to your testimony, GAO's review of
    the ongoing debt collection pilot identified significant legal, systems
    and operations, and performance measurement barriers to the pilot's
    success. You say that additional spending should be prohibited until
    those problems are resolved. How much additional money do IRS and
    Treasury have available to spend on debt collection pilots?
        Answer. IRS was directed in its fiscal year 1996 appropriation to
    test the use of private collection companies, and Congress earmarked
    $13 million for that purpose. IRS estimates that only about $4 million
    of the original $13 million will be obligated. With the passage of IRS'
    fiscal year 1997 appropriation, Congress earmarked another $13 million
    and directed that IRS extend the initial pilot for a second year. An
    additional $13 million was also earmarked in IRS' fiscal year 1997
    appropriation for a second pilot--to be managed by the Department of
    the Treasury. None of this additional total of $26 million has been
    obligated.
        Question. Can you comment on the success of this program? Is the
    program's failure due to the way it was set up? Do you have any
    recommendations on how to make this a successful program?
        Answer. Certain design issues and operational problems affected
    implementation of IRS' private debt collection pilot program. The
    pilot's scope was limited at the outset by certain legal
    interpretations that restricted the types of collection activities that
    private contractors can do. Also, the pilot was not designed to
    identify successful collection techniques used by the private sector
    that could be adopted by IRS. In addition, operational problems
    occurred when IRS had to use its outdated computer systems to identify
    and select cases for the contractors. At the outset, the scope of the
    contractors' activity was limited to locating taxpayers who IRS could
    not find as opposed to collecting taxes from delinquent taxpayers. The
    Office of Management and Budget and IRS consider the collection of
    taxes to be an inherently government function that must be performed by
    government employees. As a result, the pilot's contractors could only
    assist IRS in locating and contacting delinquent taxpayers to remind
    them of their outstanding tax liabilities and to suggest various
    payment options. The contractors were prohibited from actually
    collecting funds to settle delinquent accounts. The contractors also
    could not be paid on a contingency fee basis; instead they were paid
    according to a performance fee schedule. Although the scope of the
    contractors' case work was limited to locating delinquent taxpayers,
    IRS could have used the contractors to help identify successful private
    sector collection techniques that could be adopted by IRS. However, the
    pilot did not include any provisions for doing so. There were also
    operational problems with the pilot. IRS never expected that taxpayer
    cases would be released to private collectors, thus its data systems
    contain sensitive taxpayer information that is inappropriate for
    release outside of IRS. Therefore, IRS had to develop criteria and
    computer programs to screen cases prior to their transfer to the
    contractors. In addition, IRS' outdated computer systems and technology
    and the inability to transfer data from one service center to another
    impeded the referral of cases to the contractors.
                             tax return processing
        Question. In IRS' fiscal year 1998 budget request there is included
    an increase for 195 full time equivalent employees and $11 million to
    process paper returns. While IRS is requesting an increase in paper
    returns processing employees, they are also projecting a steady
    increase in the number of taxpayers who file electronically. With the
    growing number of electronically filed returns, is there a need for an
    increase in the number of employees that process paper returns?
        Answer. IRS' methodology for determining the number of returns
    processing staff needed for fiscal year 1998 seems to indicate that
    additional staff are needed to process tax returns despite an estimated
    increase in the number of electronic returns. In explaining the
    requested increase, IRS projected that the number of primary tax
    returns filed will increase from 197.9 million in 1997 to 200 million
    in 1998 and that 91 percent of the increase in primary tax returns (or
    1.9 million returns) will be filed electronically. We believe that IRS'
    methodology is flawed because it does not appear to fully account for
    some of the benefits of electronic filing beyond the data capture stage
    of tax return processing. Specifically, electronic returns have fewer
    errors, which should reduce the need for error correction in subsequent
    processing stages. The data IRS used to determine its need for $11
    million and 195 full-time-equivalent staff years indicated that IRS
    only saves about 5 staff years for every 1 million returns that are
    filed electronically. At least part of the smaller-than-expected
    savings from electronic filing can be attributed to the fact that
    electronic filing is not truly paperless. Taxpayers filing
    electronically, other than through TeleFile, must submit a paper
    signature document to authenticate the electronic portion of their
    return. And IRS returns processing staff have to keypunch data from
    that document. In January 1993, we reported that to significantly
    increase the use of electronic filing IRS would have to resolve various
    issues that adversely affect the appeal of electronic filing.\2\ One of
    those issues is the requirement to submit paper documents with an
    electronic return. Despite the fact that electronic filing is not truly
    paperless, we would have expected more labor savings than IRS' analysis
    shows. Because up-front filters keep certain taxpayer errors that are
    common on paper returns from contaminating electronic returns, we would
    expect that the labor and related costs to process electronic returns
    after the data capture stage would be substantially lower than the
    labor and related costs associated with processing paper returns.
    According to IRS budget officials, IRS has an effort underway to
    determine the comparative cost of processing electronic and paper tax
    returns. They expect that study to be completed in September 1997.
    ---------------------------------------------------------------------------
        \2\ ``Tax Administration: Opportunities to Increase the Use of
    Electronic Filing'' (GAO/GGD-93-40, Jan. 22, 1993).
    ---------------------------------------------------------------------------
                           tax systems modernization
        Question. In July 1995, GAO reported serious management and
    technical weaknesses with IRS' tax system modernization and made over a
    dozen recommendations to IRS' Commissioner to address the weaknesses.
    In May 1996, Treasury reported to the Congress that it recognized that
    IRS did not have the capability to effectively modernize its systems
    and was working with IRS to obtain additional contractors--including a
    ``prime'' contractor--to help accomplish the modernization. Following
    up on IRS efforts to correct the weaknesses, GAO reported in June and
    September 1996 that while IRS had initiated many activities to improve
    its modernization efforts, it had not yet fully implemented any
    recommendations. Consequently, in order to minimize the risk attached
    to continued investment in its systems' modernization, GAO suggested to
    Congress that it consider limiting modernization funding exclusively to
    cost-effective efforts that (1) support ongoing operations and
    maintenance; (2) correct IRS' pervasive management and technical
    weaknesses; (3) are small, represent low technical risk, and can be
    delivered quickly, and (4) involve deploying already developed and
    fully tested systems that have proven business value and are not
    premature given the lack of a completed architecture. In light of IRS
    actions to date to address GAO weaknesses, what remains to be done?
        Answer. As we noted in our recent high-risk reports addressing Tax
    Systems Modernization,\3\ IRS has not fully implemented any of the
    recommendations made in our July 1995 report.\4\ Therefore, IRS needs
    to make concerted, sustained efforts to fully implement our
    recommendations and respond to the requirements outlined by Congress.
    These efforts include (1) limiting information system projects, both in
    house and contracted out, to small, low risk, near-term projects that
    IRS has the ability to successfully develop or acquire; (2) improving
    IRS' system development and acquisition capabilities; (3) finalizing
    the architecture and ensuring that all IRS system projects conform to
    it; (4) instituting disciplined investment processes to ensure that all
    information technology investment decisions (e.g., project selection,
    control, and evaluation) are based on reliable, objective, and,
    whenever possible, quantitative data including cost and risk adjusted
    return on investment; (5) reengineering IRS business processes,
    focusing on electronic filing, and using these improved processes to
    determine those information technology investments needed to support
    the new processes; and (6) ensuring that all future IRS information
    systems budgets take into account IRS' performance as specified in the
    Clinger-Cohen Act. These efforts will take both management commitment,
    follow-through, and technical discipline by IRS in partnership with the
    Department of the Treasury, the Office of Management and Budget, and
    Congress. Once these essential improvements are made, IRS should have
    an effective implementation strategy for achieving its business vision,
    the capacity to make sound investments in information technology, and
    the necessary technical foundation for effectively modernizing its
    processes and systems. However, until these essential improvements are
    made and adequate justifications for system investments are provided,
    Congress, as we suggested in June and September 1996,\5\ could continue
    to limit modernization funding to only cost-effective efforts that (1)
    support ongoing operations and maintenance; (2) correct IRS' pervasive
    management and technical weaknesses; (3) are small, represent low
    technical risk, and can be delivered quickly; and (4) involve deploying
    already developed systems, only if these systems have been fully
    tested, are not premature given the lack of a completed architecture,
    and produce a proven, verifiable business value. As Congress gains
    confidence in IRS' ability to successfully develop these smaller,
    cheaper, quicker projects, it could consider approving larger, more
    complex, more expensive projects in future years.
    ---------------------------------------------------------------------------
        \3\ ``High-Risk Series, IRS Management'' (GAO/HR-97-8, Feb. 1997)
    and ``High-Risk Series, Information Management and Technology'' (GAO/
    HR-97-9, Feb. 1997).
        \4\ ``Tax Systems Modernization: Management'' and ``Technical
    Weaknesses Must Be Corrected If Modernization Is To Succeed'' (GAO/
    AIMD-95-156, July 26, 1995).
        \5\ ``Tax Systems Modernization: Actions Underway But Management
    and Technical Weaknesses Not Yet Corrected'' (GAO/T-AIMD-96-165, Sept.
    10, 1996) and ``Tax Systems Modernization: Actions Underway But IRS Has
    Not Yet Corrected Management and Technical Weaknesses'' (GAO/AIMD-96-
    106, June 7, 1996).
    ---------------------------------------------------------------------------
        Question. IRS has intimated that if the Congress does not fund
    modernization projects, IRS will be unable to collect all taxes due to
    the government. What would happen to the nation's tax collection system
    should the Congress withhold modernization funding as you suggest?
        Answer. Although IRS attempts at modernization over the last 10 to
    15 years have largely failed, IRS continues to collect taxes and
    process returns at levels it deems to be successful. This is because
    the operation and maintenance of existing systems is appropriated
    separately from the funds to modernize, i.e., to develop new systems to
    do IRS' business in new and better ways. Therefore, if Congress decides
    to withhold modernization funds (and only provides funds for current
    operational systems) until IRS strengthens identified management and
    technical weaknesses, IRS will continue to maintain and rely upon its
    operational systems and will continue to collect taxes and process
    returns as it does today. IRS' performance in collecting delinquent
    taxes would also remain the same. As we have reported, IRS' performance
    in that area has generally been poor due to inefficient processes and
    systems.\6\ However, as evidenced by the lack of significant
    improvement despite the substantial amount of modernization funds
    appropriated over the past several years, funding, in and of itself,
    will not correct those inefficiencies nor improve IRS' performance.
    ---------------------------------------------------------------------------
        \6\ ``High-Risk Series, IRS Management'' (GAO/HR-97-8, February
    1997).
    ---------------------------------------------------------------------------
        Question. What are your views on Treasury's and IRS' strategy to
    increase their reliance on contractors, specifically a ``prime''
    contractor, to manage modernization deployment and implementation. What
    does IRS need to do to position itself to effectively manage
    contractors?
        Answer. Increasing the use of contractors will not automatically
    increase the likelihood of successful modernization because IRS does
    not have the disciplined acquisition processes needed to manage all of
    its current contractors. As a case in point, IRS' Cyberfile--a system
    development effort led by contractors to enable taxpayers to personally
    prepare and file their tax returns electronically--exhibited many
    undisciplined software acquisition practices as well as inadequate
    financial and management controls. Eventually, IRS canceled the
    Cyberfile project after spending over $17 million and without fielding
    any of the system's promised capabilities. Therefore, if IRS is to use
    additional contractors effectively, it will have to first strengthen
    and improve its ability to manage those contractors.
                request for comments for modernization/blueprint
        Question. On May 15, 1997 the IRS released its Request for Comments
    to the IRS' Modernization Blueprint as the first step in searching for
    a Prime contractor for the IRS' new computer modernization effort. Many
    within the private sector have had a positive response to the IRS'
    Blueprint for Technology Modernization. What is GAO's opinion?
        Answer. We are in the process of reviewing IRS' blueprint with the
    goal of briefing the Congress, IRS, and Treasury later this summer.
        Question. IRS is responding to Congressional direction as evidenced
    by its Blueprint for Technology Modernization, efforts to outsource
    Modernization to a private sector Prime Contractor, and efforts to
    strengthen its project management capability through external
    recruiting. What level of funding should be provided to insure that the
    preparatory steps needed to be taken for Modernization are not delayed,
    jeopardized or prevented?
        Answer. In order to determine an appropriate level of funding, IRS
    must first identify the preparatory steps and estimate their associated
    costs. Congress then could evaluate IRS' plans and cost estimates, and
    fund those efforts that are supported by a convincing business case
    analysis. IRS funding requests need to place priority on steps to
    correct persisting management and technical weaknesses.
                              year 2000 conversion
        Question. You say in your testimony that the $84 million included
    in IRS' fiscal year 1998 budget request for the century date change
    effort may be insufficient. Why might that amount be insufficient and
    how much more might IRS need in fiscal year 1998 for this project?
        Answer. The $84 million included in IRS' fiscal year 1998 budget
    request was a preliminary estimate of century date change costs based
    on September 1996 cost estimates. This figure was based on an estimate
    of lines of computer code for IRS' main tax processing systems. IRS'
    estimates were preliminary because IRS did not have a complete
    inventory of other information management resources, including its
    secondary tax processing systems. Since then, IRS has been working to
    develop a comprehensive Service-wide inventory of its information
    management resources including all application programs, systems
    software, and hardware that should enable it to better identify its
    resource requirements for the century date change effort. The $84
    million figure also did not include cost estimates for the purchase of
    hardware and software that will be needed to make some systems century
    date compliant.
        Since submission of the 1998 budget request to Congress, IRS'
    century date change project office has been working with the various
    IRS organizations that have responsibility for carrying out century
    date conversion tasks to identify more precise cost estimates. As of
    June 6, 1997, the century date change project office had revised its
    fiscal year 1998 cost estimate from $84 million to $119 million. This
    estimate is still incomplete because there are potentially significant
    costs in other areas for which IRS has yet to complete assessments
    including (1) secondary tax processing systems that are also critical
    to the tax administration process, (2) telecommunications, (3)
    commercial off-the-shelf software, (4) increased computer capacity to
    handle expanded files, (5) replacement costs for systems that cannot be
    made century date compliant, and (6) non-information technology
    resources (e.g., elevators and heating and air conditioning units). IRS
    has efforts underway to address each of these areas. For example, IRS
    recently formed a committee of executives to address options for
    dealing with secondary systems. By the end of July, this committee
    expects to have made decisions on which of these systems will or will
    not be converted. IRS officials said that they expect to have a
    complete cost estimate for converting these systems by September 1997.
                              telephone assistance
        Question. During each filing season, GAO has consistently pointed
    out IRS' low levels of telephone accessibility. For the 1997 filing
    season, IRS added more staff to answer the telephone, including staff
    detailed from IRS' enforcement functions. What are your views on IRS'
    recent decision to add more staff to answer the telephone?
        Answer. According to IRS data, telephone accessibility increased
    from 20.1 percent during the 1996 filing season to 50.9 percent during
    the 1997 filing season. A major contributor to that increase was IRS'
    decision to add more staff, including enforcement staff, to answer the
    telephone. Although we recognize that there are costs associated with
    detailing enforcement staff to answer the telephone, we believe that
    IRS' decision was appropriate. Taxpayers who have questions about their
    account or about the tax law must be able to reach IRS by telephone.
    Although accessibility improved significantly in 1997, it is still far
    from acceptable. In trying to further improve accessibility, it is
    important that IRS look for solutions beyond merely adding more staff
    to answer the phones--solutions, for example, that negate the need for
    taxpayers to call IRS in the first place. That would require such
    things as simplifying forms and instructions, making the notices it
    sends taxpayers easier to read and understand, and continuing efforts
    to expand and market other sources of information (such as the IRS Web
    site on the Internet). The tradeoff between customer service and
    enforcement that IRS faced in 1997 is indicative of the kinds of
    tradeoffs that are likely to continue for the foreseeable future as IRS
    deals with competing demands. As we mentioned in our testimony,
    Congress has put in place a statutory framework, including the
    Government Performance and Results Act, for addressing these challenges
    and helping Congress and the executive branch make the difficult
    tradeoffs that the current budget environment demands.
                               electronic filing
        Question. Although there was an increase in electronic filing,
    including filing by telephone, in 1997, only about 17 percent of all
    individual income tax returns are filed electronically. In GAO's
    opinion, what are some of the major barriers to greater use of
    electronic filing?
        Answer. Our answer differs, in some respects, depending on whether
    we are talking about regular electronic filing (which we refer to
    hereafter as ``electronic filing'') or telephone filing (which we refer
    to hereafter as ``TeleFile''). For electronic filing, the most
    significant barrier, in our opinion, is cost. To file electronically, a
    person, even one who has prepared his or her return on a computer, must
    go through a third party and pay a fee. Thus, it is not surprising, in
    our opinion, that electronic filing has historically appealed most to
    persons who are due refunds and who want the money quickly. For those
    taxpayers who prepare their returns on computers but are unwilling to
    pay to transmit the returns electronically, the result is especially
    inefficient and counterproductive. The taxpayer prepares the return on
    a computer and then converts it to paper for mailing to IRS, which then
    employs a labor intensive, error prone process to input that
    information back into a computer. As discussed in response to an
    earlier question, one contributor to the cost of electronic filing,
    both to IRS and the taxpayer, is the fact that electronic filing is not
    truly paperless. IRS' ability to overcome barriers, like cost, and thus
    increase the use of electronic filing is impaired by the absence of
    comprehensive data on the comparative costs associated with electronic
    returns versus paper returns and the lack of a business strategy. With
    respect to the latter, we recommended in October 1995 that IRS identify
    those groups of taxpayers who offer the greatest opportunity to reduce
    IRS' paper processing workload and operating costs if they were to file
    electronically and develop strategies that focus IRS' resources on
    eliminating or alleviating impediments that inhibit those groups from
    participating in the program, including the impediment posed by the
    program's cost.\7\ IRS has yet to implement that recommendation. Cost
    should not be a barrier with respect to TeleFile. It does not cost the
    taxpayer anything to use TeleFile and, unlike electronic filing,
    TeleFile is truly paperless. However, the fact that only about 20
    percent of those persons who IRS thought would be eligible to use
    TeleFile actually used it would seem to indicate that barriers exist.
    Neither we nor IRS knows what those barriers are because IRS had not
    adequately surveyed nonusers. As we reported in December 1996, past IRS
    surveys of nonusers showed that many eligible users did not use
    TeleFile because they preferred paper, but the surveys did not probe
    into the reasons for that preference.\8\ Accordingly, we recommended
    that IRS (1) conduct, during the 1997 filing season, a survey of
    TeleFile nonusers that includes more specific information on why they
    prefer to file on paper and (2) take steps to address any identified
    barriers to increased user participation. It is our understanding that
    IRS has conducted such a survey, but the results are not yet available.
    ---------------------------------------------------------------------------
        \7\ ``Tax Administration: Electronic Filing Falling Short of
    Expectations'' (GAO/GGD-96-12, Oct. 31, 1995).
        \8\ ``IRS' 1996 Tax Filing Season: Performance Goals Generally Met;
    Efforts to Modernize Had Mixed Results'' (GAO/GGD-97-25, Dec. 18,
    1996).
    ---------------------------------------------------------------------------
                             audits/investigations
        Question. Would you please provide the Subcommittee with a detailed
    outline of the number of audit's the IG's office has conducted since
    1992.
        Answer.

    Total number of OIG audit reports issued since fiscal year 1992

            Fiscal year                                              Reports
    1992..............................................................    67
    1993..............................................................   143
    1994..............................................................   156
    1995 \1\..........................................................   141
    1996..............................................................   111
    1997 \2\..........................................................    67
                            -----------------------------------------------------------------
                            ________________________________________________
          Total.......................................................   685

    \1\ The OIG began devoting significant audit resources to financial
    statement audit work beginning in fiscal year 1995. Please note, the
    workload statistic for Number of Other Audit Reports Issued, shown in
    our fiscal year 1998 Submission, was inaccurately reported at 128. The
    correct figure is 130, with 11 Financial Statement Audit Reports Issued.
    \2\ The figure reported is through March.

        Question. Of these audits, how many were conducted bye the IG's
    office? How many were don by the private contractors?
        Answer.

    Total number of OIG audit reports conducted by the OIG

            Fiscal year                                              Reports
    1992..............................................................    67
    1993..............................................................    59
    1994..............................................................    75
    1995 \1\..........................................................    51
    1996..............................................................    46
    1997 \2\..........................................................    30
                            -----------------------------------------------------------------
                            ________________________________________________
          Total.......................................................   328

    \1\ The OIG began devoting significant audit resources to financial
    statement audit work beginning in fiscal year 1995.
    \2\ The figure reported is through March.
    ---------------------------------------------------------------------------

    Total number of OIG audit reports conducted by Defense contracting audit
    agency

            Fiscal year                                              Reports
    1992....................................................................
    1993..............................................................    68
    1994..............................................................    81
    1995 \1\..........................................................    80
    1996..............................................................    61
    1997 \2\..........................................................    37
                            -----------------------------------------------------------------
                            ________________________________________________
          Total.......................................................   327

    \1\ The figure reported is through March.
    ---------------------------------------------------------------------------

    Total number of OIG audit reports conducted by other private contractors

            Fiscal year                                              Reports
    1992....................................................................
    1993..............................................................    16
    1994....................................................................
    1995..............................................................    10
    1996..............................................................     4
    1997 \1\................................................................
                            -----------------------------------------------------------------
                            ________________________________________________
          Total.......................................................    30

    \1\ The figure reported is through March.

        Question. Please provide the Subcommittee with a list of those
    audits over the last five years which were a part of the IG's annual
    audit plan and a detailed accounting of which audits were completed and
    the status of those which are not currently completed.
        Answer.

                                    STATUS OF OIG AUDITS OVER THE LAST 5 FISCAL YEARS
    ----------------------------------------------------------------------------------------------------------------
                                                                                  Fiscal years--
                                                                     ----------------------------------------  Total
                                                                       1993    1994    1995    1996    1997
    ----------------------------------------------------------------------------------------------------------------
    Issued..........................................................      68      50      38      17       9     182
    Canceled........................................................      38      37      30      12       1     118
    Rolled over \1\.................................................      23      19       8      14  ......      64
    To be started...................................................  ......  ......  ......  ......      19      19
    In process......................................................  ......  ......  ......  ......      25      25
    CFO related \2\.................................................       2      10      11       2  ......      25
    ----------------------------------------------------------------------------------------------------------------
    \1\ ``Rolled over'' indicates that audits were planned for one year and remained as planned for the following
      year.
    \2\ ``CFO related'' indicates audits that were planned but were delayed and later included in broader based CFO
      (financial statement related) audits.

        It should also be noted that some of the OIG planned audits were
    consolidated and combined, which resulted in fewer reports than
    planned. Further, the OIG's program audit resources were significantly
    reduced in fiscal year 1995 to accomplish our responsibilities under
    the CFO Act. This resulted in fewer audits being undertaken because of
    the resources needed for financial statement audit work.
        Question. When carrying out an investigation, how long after the
    investigation begins is a contractor notified of the investigation?
        Answer. For clarification, many of our investigations do not
    involve contractors. For those that do, however, there is no
    requirement that a contractor be notified at any time that they are, or
    were, the subject of an OIG investigation. Generally, whether subjects
    of an OIG investigation are contractors or Treasury employees they will
    not be advised of their status as subjects until such time as they are
    interviewed by the OIG. At the time of an interview, the interviewing
    special agent will advise interviewees that they are either a witness
    or a subject. To ensure the integrity of the investigative process and
    to avoid compromising an investigation by premature notification, it is
    often not appropriate to advise subjects, including contractors, of the
    status until the need for an interview or the production of applicable
    documentation arises.
        Unlike an audit, where typically a contractor would be afforded an
    entrance briefing at the outset of the audit, investigations are
    conducted as discreetly as possible and only those individuals
    necessary to satisfactorily resolve the allegations are contacted.
    Allegations can sometimes be resolved by reviewing records or making
    limited contacts with third party witnesses. If, as sometimes happens,
    the investigative steps taken determine that an allegation is
    unfounded, there may be no need to contact the subject. In that case, a
    subject may never know that allegations were received and investigated.
        Question. In carrying out an investigation does Treasury IG
    personnel provide those being investigated with a list of materials to
    be produced and written questions to be answered?
        Answer. In carrying oust its investigations the OIG Office of
    Investigations, generally does not provide those being investigated
    with written questions to be answered. This is a standard law
    enforcement practice and not one that is unique within the Treasury
    OIG. Whether a list of materials to be produced is given to an
    interviewee depends entirely on whether an individual has access to
    necessary and relevant information, whether that person is the most
    appropriate provider of that material, and the degree of cooperation by
    the interviewee with the investigation.
        During an interview, documents may be requested if they are deemed
    to be relevant in resolving the allegations. Alternatively, there may
    be occasions when documents are needed in advance of an interview or
    are not otherwise voluntarily produced. An IG subpoena is another
    available mechanism for obtaining pertinent documents from a contractor
    or and individual subject.
        Question. Is it true that the Defense Contract Audit Administration
    regulations require a referral for investigation whenever a DCAA
    auditor finds evidence of wrongdoing during an audit?
        Answer. It is our understanding that DCAA's ``Contract Audit
    Manual'' requires DCAA Auditors to refer such indications for
    investigation. The GAO 1994 Revision to the ``Government Auditing
    Standards,'' Chapter 7.3 and 6.28-6.33 requires similar action.
        Question. Upon initiation of an investigation does the IG launch a
    formal investigations of wrongdoing based on specific allegations and
    is that discussed with those being investigate?
        Answer. TO OIG opens investigations based on specific allegations
    or indications of wrongdoing. It is our normal practice to discuss the
    specific allegations under investigation with to subject at the initial
    interview.
                               general questions
        Question. Is your base fully funded?
        Answer. Yes, the OIG base is fully funded for 305 FTE. However, the
    OIG has had to absorb the costs for pay raises and maintaining current
    levels over the past several years and this has not allowed the OIG to
    hire to its full FTE ceiling of 313 FTE.
        Question. How many positions (FTE) are unfilled?
        Answer. Currently, the OIG has 36 positions unfilled, of which 27,
    or 75 percent, have recruit actions/vacancies pending, and 9 which are
    in process. The OIG anticipates all positions to be filled by September
    30, 1997.
        This unusually high number of vacancies can be attributed to
    retirements and the attrition due to recruiting efforts of other OIG's,
    such as Social Security and Health and Human Services. In particular, 6
    high graded staff were recently hired by the newly established U.S.
    Postal Service Office of Inspector General. As the Treasury OIG is
    makings inroads to reduce its high grade staffing, personnel who are at
    the top of their grade levels are moving to other agencies to obtain
    promotions.
        Additionally, the OIG has requested 8 FTE with the necessary
    funding, to reach the FTE ceiling of 313, in support of the OIG's
    mission.
        Question. What would it take to fill those positions?
        Answer. The OIG is taking adequate steps to ensure that these
    unfilled positions are filled. As well, the OIG is using the past two
    years as a lesson on staffing within the organization. The OIG is
    recruiting lower level employees who will have a few years to reach the
    top of their career lacicler--from the current 27 recruit actions/
    vacancies pending, 16, or approximately 60 percent, are grades 9 or
    lower.
        However, for the OIG to fill to the FTE ceiling of 313, the OIG
    requires an additional $614,000 to be able to support the 8 FTE that
    are not currently funded.
        Question. Is the amount requested to maintain current levels
    accurate? What will all of this funding be applied to?
        Answer. Yes, the amount of $787,000 requested to maintain current
    levels is accurate. OMB's economic assumptions were used to calculate
    this requested level of funding. This funding will be applied to our
    yearly inflationary increases in rent, communications, printing,
    supplies, and equipment.
        Question. Are there any new initiatives outlined in the fiscal year
    1998's budget request, if so, what are they?
        Answer. There is one program change outlined in the OIG's fiscal
    year 1998 budget request. The OIG is requesting a workload adjustment
    of $614,000 and 8 FTE to be able to further support program audit
    functions that review all facets of an agency's operations. Currently,
    the OIG is taking a proactive approach with the Treasury bureaus to
    address major financial management and internal control vulnerabilities
    that inhibit reliable operational and financial information. The OIG
    will be able to further work with bureaus to develop corrective action
    plans that address implementation. As well, the OIG will be able to
    further assist management in identifying corrective actions which must
    be taken within the existing framework versus the actions that cannot
    be implemented without major systems overhaul. The OIG also needs
    additional information technology support for the financial statement
    audit work to ascertain that the bureaus' automated systems are
    adequate to provide reliable financial data to assist the auditors in
    rendering an opinion.
        Question. What is the turnover rate in the IG's office and how does
    it compare to other IG offices? What percentage of the turnover is
    women or minorities?
        Answer. The turnover rate for the Department of the Treasury OIG in
    fiscal year 1996 was 9 percent and for fiscal year 1997, to date, was
    9.4 percent. As the OIG has been reducing the number of high grade
    positions, there have been fewer promotion opportunities, which the OIG
    believes has resulted in an increased turnover rate.
        We contacted several other OIG offices and the turnover rates seem
    to vary by fiscal years and Departments. For fiscal year 1996, the of
    Transportation OIG had a 7.1 percent turnover rate and for fiscal year
    1997, to date, a .25 percent rate. The Department of Commerce OIG had a
    15.4 percent turnover for fiscal year 1997, to date, and could not
    readily provide information about fiscal year 1996.
        Of the Treasury OIG's turnover rate in fiscal year 1996, 52 percent
    were women or minorities, and for fiscal year 1997, to date, 62 percent
    were women or minorities. As a reference, in 1996 and fiscal year 1997,
    to date, women and minorities made up approximately 58 percent of the
    total OIG work force.
                                     ______

                       EXECUTIVE OFFICE OF THE PRESIDENT

                            Office of Administration

              Prepared Statement of Ada L. Posey, Acting Director

        I am pleased to present the fiscal year 1998 budget request for the
    following nine Executive Office of the President (EOP) accounts:
    Compensation of the President, the White House Office, Special
    Assistance to the President, the Official Residence of the Vice
    President, the Office of Administration, the Office of Policy
    Development, the National Security Council, the Council of Economic
    Advisers, and Unanticipated Needs.
        The EOP is committed to the President's and Congress' goal of
    balancing the federal budget. The total for these nine budgets,
    excluding a Congressionally mandated transfer that has no net effect on
    the federal budget, is $89 million, an increase of only 4.2 percent
    over enacted levels in fiscal year 1993 when this Administration took
    office. Operating within these austere budgets has been challenging.
    During the past four years, the EOP has met this challenge by
    identifying cost saving measures, shifting resources, and deferring or
    delaying purchases. Inflationary cost increases and mandated pay raises
    for the EOP's many General Schedule employees have been absorbed.
    Agencies whose staffs are mostly or entirely in administratively
    determined positions, such as the White House, Vice President's Office,
    and Office of Policy Development, have held salary levels nearly
    static, delayed hiring decisions, and brought in new hires at lower
    levels. The most detrimental aspect of the budget restrictions has been
    the inability to adequately maintain a strong information technology
    infrastructure within the EOP.
        There are only two significant components contained in these
    budgets requiring additional funding over the current services levels
    requested for these EOP agencies. The first involves a Congressionally
    mandated transfer of funding from the White House Communications
    Agency, a Department of Defense component, to the White House Office.
    The second is a comprehensive plan to renew and strengthen the EOP's
    information management infrastructure.
        The White House Office fiscal year 1998 budget request includes a
    $9.8 million transfer to fund non-telecommunications support services,
    historically provided by the White House Communications Agency. This
    planned transfer is a result of a Department of Defense Inspector
    General audit that concluded that several support services provided to
    the White House Office since the 1930's went beyond the required
    telecommunications support. The audit concluded that these services,
    including audio-visual support, news wire, photographic and
    stenographic services should be funded by the White House Office. The
    funding transfer was mandated by the Fiscal Year 1997 National Defense
    Authorization Act. The Department of Defense budget has been reduced
    $9.8 million to reflect the transfer; thus, there is no net increase to
    the federal budget as a result of this transfer.
        The second component of this budget request that merits special
    note is the EOP's Capital Investment Plan, funding for which is
    requested by the Office of Administration (OA). The Capital Investment
    Plan, or CIP, is a strategy designed to provide the EOP with the
    technology and services needed to develop and strengthen the EOP's
    information systems infrastructure.
        As promised in the testimony of OA Director Frank Reeder, the OA
    delivered a Five Year Information Technology Plan before the end of
    fiscal year 1996 to the House and Senate Subcommittees. It was the
    first of its kind for the OA. After discussions with the House
    Subcommittee, they indicated that the plan did not meet their
    requirements. As a result, the OA reevaluated the entire planning
    process.
        Concurrent with these discussions, the fiscal year 1997
    appropriations language contained the provision that funds may not be
    obligated for computer modernization until OA had submitted, and the
    Committees on Appropriations have approved, a Five Year Plan. This
    restricted or fenced off information technology funding for six EOP
    agencies.
        The OA's reevaluation caused us to conclude that we were still not
    in a position to prepare the kind of plan requested by House
    Subcommittee staff. Yet, the OA was still committed to providing the
    Subcommittee with a blueprint schedule and prioritization list for EOP
    computer modernization efforts. In response to Subcommittee staff,
    Director Posey submitted a Capital Investment Plan (CIP) that included
    Office of Management and Budget (OMB) information technology
    guidelines. Our response also indicated the great need for unfencing
    the funds essential to the operations of the EOP. The Capital
    Investment Plan (CIP) requests $2 million in a no-year account to
    address immediate critical needs and to fund an Architecture Plan. This
    Architecture Plan would serve as the foundation for future EOP
    recommendations in information technology.
        The cornerstone of the plan is the establishment of an EOP
    information systems architecture. In response to Congressional
    direction, the OA has enlisted an outside contractor to develop an
    information technology architecture (ITA) or an ``architectural
    blueprint'' in fiscal year 1997. Upon receiving notification from House
    Subcommittee Chairman Kolbe, in a letter detailing conditions for
    release of the entirety of fiscal year 1997 fenced EOP technology
    funds, work began immediately to develop a statement of work to define
    the requirements for the development of the architectural blueprint.
    After careful review, an outside contractor was selected to develop the
    architectural blueprint. This contractor had developed ITA's for other
    government agencies and has an outstanding reputation. As a result, the
    contractor agreed to complete the project by July 15, 1997. The
    contract to develop the blueprint by this highly reputable firm is
    continuing expeditiously and is on schedule. In response to this
    notice, six months into the fiscal year, OA has diligently pursued the
    direction of the Subcommittee under extreme time constraints requiring
    the agency to expend an additional $77,000 over the estimated $250,000
    cost of the blueprint development for a revised total of $327,000 to
    complete the blueprint before the end of the fiscal year to allow the
    unfencing of the remaining funds for urgently needed fiscal year 1997
    purchases and upgrades. Moreover, in order to fund the increased
    expense of this contractual activity, OA has economized by delaying the
    filling of agency vacancies.
        In addition to funding the systems' architecture, the CIP would
    provide computer network upgrades. The EOP staff relies heavily on
    electronic communications, both within and beyond the EOP complex. OA
    provides electronic communications support to the EOP in a most
    challenging and dynamic technical environment. As an example, during
    the last four years, the EOP has experienced a five-fold increase in
    electronic mail traffic, coupled with more stringent records management
    requirements. The implementation of the White House home page and the
    resulting increased public access to government has introduced an ever
    increasing level of Internet traffic, along with the concomitant hacker
    and illegal access security concerns. The seemingly daily influx of new
    technology is increasing the OA's burden to provide constant vigilance
    and understanding of the technology in order to maintain the integrity
    of secure access. The current EOP network increasingly is experiencing
    performance problems and failures. The CIP would provide replacement
    network equipment to handle increased traffic and eliminate
    bottlenecks.
        The CIP also mandates the acquisition and installation of a new
    financial management system. Like other federal agencies and many
    businesses, the EOP's current financial management system is not year
    2000 compliant. It is critical that the EOP acquire and implement a
    financial system in fiscal year 1998 to have ample time for data
    migration, verification, and testing before the beginning of fiscal
    year 2000.
        The final element of the CIP is equipment replacement. The OA
    infrastructure supports more than two thousand desktop systems and
    associated printers, file servers, mainframe systems, and data storage
    devices. Many of these support systems are approaching or have exceeded
    their recommended useful lifetime. New equipment is crucial to stopping
    the trend of aging without replacement, and to prevent adverse impact
    on EOP staff productivity.
        Despite limited resources, this administration has made impressive
    gains over the last four years, particularly in the area of public
    access to White House information. The public's tremendous response to
    the White House home page was reported last year. Since that time, the
    home page's popularity has not waned; it has been accessed 33 million
    times since its development in October 1994. Electronic mail messages
    continue to be a favorite form of communication by the public with the
    White House. The President, Vice President, and First Lady received
    842,000 e-mail messages in fiscal year 1996, more than double those
    received in fiscal year 1995.
        As the Committee is aware, the President in 1993 reduced the size
    of the EOP by 25 percent (effective October 1, 1993). The baseline for
    that cut was the actual number of ``bodies on board'' in the Bush
    Administration. The staffing figures were accurate and complete. The
    number included not only EOP employees, but also detailees, assignees,
    Presidential Management Interns, and all other categories of Other
    Government Employees (OGE's) that were tracked by the Bush
    Administration. That 25 percent reduced level was maintained for four
    years.
        Today, the Executive Office faces new needs, particularly the staff
    requested by General McCaffrey to implement the President's aggressive
    drug control strategy to which the Congress agreed last year in the
    Omnibus Appropriations Bill. It will also be necessary to add staff to
    the Counsel's Office to respond to requests for information from
    Congressional and other bodies. Thus, it is no longer possible to
    maintain the 1993 staffing level. However, this Administration is
    committed to maintaining reduced staffing levels in accordance with the
    12 percent reduction mandated throughout the Federal government by the
    Administration's reinvention initiatives. The EOP's fiscal year 1998
    target of 1,185 staff--employees and OGE's--actually represents a
    reduction of 15 percent from the Bush Administration baseline.
        The following are highlights of the accomplishments of some of the
    Executive Office agencies:
        The Vice President's Office has spearheaded a wide range of
    Administration initiatives, including aiding the passage of the
    Telecommunications Reform Act of 1996, which stimulates private
    investment, promotes competition in the telecommunications industry,
    and strengthens and improves universal service so that all Americans
    can have access to the benefits of the information superhighway. Vice
    President Gore also chaired the White House Commission on Aviation
    Safety and Security. Over a six-month period, the commission conducted
    an extensive inquiry into civil aviation safety, security and air
    traffic control modernization. This inquiry resulted in a comprehensive
    list of recommendations adopted by President Clinton, including one
    that aims to reduce the aviation fatal accident rate by 80 percent over
    the next decade. The Vice President also continues to lead the National
    Performance Review to make the government work better and cost less.
    For example, the State Department has now made passport applications
    available on the World Wide Web.
        In 1996, the National Security Council coordinated the
    Administration's efforts in a broad range of initiatives to advance
    America's strategic priorities. These included: (1) helping build an
    undivided, democratic Europe by leading the historic process of NATO
    enlargement; (2) forging a strong, stable Asia Pacific community by
    reinvigorating the U.S. alliance with Japan; proposing, with South
    Korea, four-party peace talks on the Korean peninsula, and advancing a
    strategic dialogue with China; (3) expanding American opportunity and
    jobs by opening markets and securing an Information Technology
    Agreement; (4) promoting peace from Bosnia to Northern Ireland to the
    Middle East; and (5) fighting dangerous transnational threats--nuclear
    proliferation, terrorism and drugs.
        The Council of Economic Advisers (CEA) continues to work with
    Executive Branch agencies and Congress to ensure that the economic
    impact of policies is taken into account during the decision making
    process. In fiscal year 1996, CEA provided sound economic analysis and
    advice during development of a range of Administration policies,
    including telecommunications reform, regulatory reform and reform of
    our country's environmental laws. CEA also worked with other agencies
    to produce a number of White Papers on current economic issues, such as
    the importance of education to economic growth.
        The Office of Administration (OA) continues to improve its customer
    service to the other EOP agencies. The Financial Management Division
    improved the process of imprest reimbursements to EOP staff by
    eliminating cash disbursements in favor of electronic funds transfers.
    In the near future, all vendor payments and employee travel voucher
    reimbursements will be made via electronic transfer as well. The Human
    Resources Management Division launched a very successful initiative in
    fiscal year 1996 designing and distributing individualized employee
    benefits booklets which contained valuable information for all EOP
    employees regarding the benefits provided to them and their families.
    During the Office of Management and Budget's budget season, OA's
    Information Systems and Technology staff provided hundreds of hours of
    computer programming time and resources to support production of the
    President's budget. Finally, the new Remote Delivery Site (RDS) was
    completed and occupied in September 1996. The new RDS is an efficient,
    modern storage and receiving facility for screening all incoming mail
    and material prior to delivery to the White House complex. OA has
    nearly completed the consolidation and transition of its on-site office
    supply operations to the EOP's RDS. While saving rent expenses by
    physically relocating this critical support operation to the RDS, OA
    employed quality reengineering techniques to develop a catalog method
    of providing office supplies to its EOP customers. Office supplies are
    now delivered by the end of the business day upon receipt of a fax or
    e-mail order from EOP customers.
        It is imperative that the federal government stay the course toward
    a balanced budget. The EOP has contributed to this effort, consistently
    presenting budget requests during the last four years that have grown
    at much less than the rate of inflation.
        The EOP will continue to maximize its resources and implement cost
    saving measures. Yet, it is also imperative that the EOP be adequately
    funded to provide the quality of support deserved by our Chief
    Executive. It is crucial that the EOP maintain the existing
    infrastructure, and plan for future investments in personnel and
    information technology, now and into the 21st century.
                                     ______

                    Questions Submitted by Senator Campbell

                             repair and restoration
        Question. Does this $200,000 cover the entire cost of the repairs
    and restoration of the White House in fiscal year 1998 and how are
    those costs above the $200,000 covered?
        Answer. The $200,000 requested is for the renovation of the
    existing electrical transformer vault, currently being replaced after
    nearly 48 years. The current vault would be converted, after the old
    outdated equipment is removed and operation of the new transformer
    equipment is assured, into an enhanced laundry/storage facility to
    improve the efficiency of operation.
         The Executive Residence Direct Program (Operating Funds) would
    continue to fund repairs and restoration of the Executive Residence and
    its Fine Arts Collection. There has been no increase in funding for
    this activity. In fiscal year 1990, the Congress funded, within the
    Direct Program, a curatorial conservation project.
        Question. Does the White House Historical Society cover some of the
    costs to the repairs and restoration and what is their role within
    restoration efforts?
        Answer. The White House Historical Association is a not for profit
    educational association that provides some funds through the sales of
    books on the history of the White House for some restoration work for
    those areas open to the public. Occasionally, the Association also
    provides funding for the purchase of items with an historical
    relationship to the White House or the Presidency.
         The White House Historical Association has no official role in any
    restoration efforts but is currently in the process of raising a 25
    million dollar endowment, the proceeds of which will be dedicated for
    the redecoration of the ``principle public rooms of the White House.''
        Question. Please explain to the Subcommittee why in fiscal year
    1997 there was not any funds enacted for repair and restoration and as
    a result of no funds enacted, are any restoration efforts occurring in
    fiscal year 1997?
        Answer. A separate account was established in fiscal year 1996 to
    program and track expenditures for capital improvement projects at the
    Executive Residence at the White House.
        In fiscal year 1996 funds were appropriated in the amount of 2.2
    million dollars for the replacement of the Executive Residence roof. No
    capital improvement funds were requested in fiscal year 1997 given the
    number of ongoing projects, and our ability to manage projects
    effectively.
        The Executive Residence Direct Program (Operating Funds) for fiscal
    year 1997 and fiscal year 1998 will continue to fund expenditures for
    normal repair and restoration of the White House and its Fine Arts
    Collection.
        Question. What is the impact of not providing the funds in fiscal
    year 1997?
        Answer. The severely needed storage space that could be made
    available in the old electrical vault would not be available. The
    existing vault would deteriorate and cost additional money to renovate
    in the future, and off-site storage space would continue to be used.
    The existing outdated laundry facility would deteriorate, posing health
    and safety issues and require added funding to update and correct
    deficiencies within the next few years.
                            office of administration
        Question. The Office of Administration is requesting a significant
    $2.783 million increase from fiscal year 1997, of which $2 million will
    be used for Capital Investment, please explain how those funds will be
    used.
        Answer. Frank Reeder, the former Director of the Office of
    Administration, began the review of the progress and direction of OA
    information technology infrastructure planning in 1995. With over 35
    years of management and information technology experience, Director
    Reeder provided the OA with the opportunity to conduct a detailed
    review of its five year plan methodology. At the direction of Mr.
    Reeder, the OA established the Information Technology Advisory Board
    (ITAB). The ITAB was organized with one or more representatives from
    each of the EOP agencies. The ITAB's mission was to perform the
    following functions: (1) identify functional requirements for
    information systems throughout the EOP; (2) ensure that adequate
    integrated computer systems are in place throughout the EOP to meet
    ongoing and future workload requirements; (3) ensure appropriate
    exchange of information technology among EOP agencies so that
    experiences and lessons learned are shared; and (4) review and
    recommend funding for information technology initiatives that are
    common to all EOP agencies.
        As promised to the House Treasury, Postal Service, and General
    Government Appropriations Subcommittee in the testimony of Director
    Reeder, the OA delivered a Five Year Information Technology Plan before
    the end of fiscal year 1996. The plan was provided to House and Senate
    Subcommittees. The first of its kind for the OA. After extensive
    direction from the House Subcommittee the OA reevaluated the entire
    planning process. A response letter was drafted, to include Office of
    Management and Budget (OMB) information technology guidelines, as well
    as incorporate a Capital Investment Plan (CIP). This reevaluation
    caused us to conclude that the OA was still not in a position to
    prepare the kind of plan requested by House Subcommittee staff. Yet,
    the OA was still committed to providing the Subcommittee with a
    blueprint schedule and prioritization list for EOP computer
    modernization efforts. In response to Subcommittee staff's request,
    Director Posey submitted the promised response. It provided a detailed
    presentation of the CIP, as well as indicating the great need for
    unfencing the funds essential to the operations of the EOP. The Capital
    Investment Plan (CIP) requests $2 million in a no-year account to
    address immediate critical needs and to fund an Architecture Plan. This
    Architecture Plan will serve as the foundation for future EOP
    recommendations in information technology:
        Information Systems Architecture Plan--$250,000.--Establishment of
    an Architecture Plan is the cornerstone of the CIP. A robust
    information systems architecture is crucial for supporting the EOP. The
    Architecture Plan will allow OA information technology to achieve
    greater parity with the current operation and future modifications to
    the EOP information systems, in accordance with recognized industry and
    government guidelines regarding the development, implementation,
    operation, and enhancement of information technology integration.
        Computer Network Upgrades--$650,000.--The ability to provide the
    EOP with electronic connectivity is a requirement for efficient EOP-
    wide operations. The primary medium supporting this connectivity is the
    EOP Local Area Network (LAN), and connections to the Internet, which
    uses more than 60 servers. Electronic mail has grown by more than a
    factor of five, to nearly 50,000 messages a week, while investment in
    infrastructure has not kept pace with this explosive growth. The LAN is
    experiencing significant performance problems. Frequent LAN failures
    are resulting in unreliable electronic communications services, which
    adversely affect staff productivity. In order to maintain current
    services levels and to contain impact on staff productivity, it is
    necessary to replace network equipment and servers in fiscal year 1998.
        Financial Management System--$600,000.--The EOP's current Financial
    Management System is neither year 2000 compliant nor integrated with
    other financial systems such as procurement and travel systems, and
    restricts individual on-line access to authorized levels of financial
    information. To ensure the continuity of operations and to correct the
    year 2000 problem, it is critical to begin the Financial Management
    System activity even as the Architecture Plan activity is underway.
    This activity is time sensitive. It is an immediate and critical need
    within OA.
        Equipment Replacement--$500,000.--The OA's efficient infrastructure
    support operations require adequate automated data processing
    capability. This capability consists primarily of OA desktop systems,
    mainframe and distributed computer systems, and the supporting systems
    providing such capabilities as computer files storage, and data
    retrieval and manipulation. More than 2,000 desktop systems and
    associated printers, file servers, applications servers, mainframe
    systems, distributed systems, and data storage devices are in place.
    Many of these OA support systems are approaching, or have exceeded,
    their recommended useful lifetime. In order to maintain current
    productivity levels, it is necessary to replace such equipment in
    fiscal year 1998 or continue the trend of aging without replacement.
        Question. The remaining is for a 3 percent increase in BA for
    fiscal year 1998, other than the 2.8 percent pay increase, what will
    the 3 percent increase be used for?
        Answer. In addition to the personnel compensation and benefits
    increase, the major portion of OA's remaining increase will be used to
    meet the information technology needs for contractor support, desktop
    and PC equipment, desktop and networking supplies, and Internet and
    firewall equipment upgrades. OA's current information technology
    facility management contract is due to expire at the end of fiscal year
    1997.
        A total of $645,000 is budgeted to support contractor transition
    expenses and other contract increases. OA expects to use an existing
    government Indefinite Delivery Indefinite Quantity contract vehicle
    that will be performance based and will reduce costs. Increases of
    $415,000 for desktop and PC equipment and of $169,000 for desktop and
    networking supplies will begin to provide much needed upgrades and
    replacements throughout OA. These funds are necessary to maintain the
    vast infrastructure within the EOP and to upgrade computers in OA with
    NT Desktop environment. Furthermore, OA will require a $48,000 increase
    in equipment to maintain Internet access as well as to maintain
    firewall security standards for the EOP information systems. OA is also
    requesting $97,000 to restore significantly diminished funding for the
    EOP libraries. These funds, for library periodicals, microfilms and
    books, are essential in preventing gaps in the library collections.
        While OA has adequately provided services with constrained
    resources, the organization has remained committed to reducing
    expenditures where possible. OA has identified one-time reductions
    along with other savings: completion of NT Desktop development,
    $258,000; reductions in hardware and software maintenance expenses,
    $228,000; networking equipment decreases, $160,000; adjustments in
    commercial on-line systems for wire service, $123,000; small reduction
    in office space, $44,000; and additional net savings in other areas,
    $34,000.
        The 3 percent increase will help OA maintain the existing
    infrastructure supporting the President and the EOP. Although this
    current service level request does not fully meet OA's needs, it
    demonstrates OA's ability to find savings within limited resources and
    make necessary but limited technology upgrades.
        Question. Can you outline for the Subcommittee what the [$743,000]
    $734,000 will be spent on in the ``other services'' object class?
        Answer. The fiscal year 1998 increase for OA's ``Other Services''
    object class is outlined below:

    Facility Contractor Support................................... $645,000
    NT Development................................................ (258,000)
    Hardware and Software Maintenance, net........................ (228,000)
    Commercial Online Services, net...............................  (89,000)
    Miscellaneous Increases and Decreases, net....................   64,000
    Capital Investment Plan.......................................  600,000
                        --------------------------------------------------------------
                        ____________________________________________________

          Total...................................................  734,000

        Question. Please outline for the Subcommittee what equipment the
    Office of Administration will purchase with the $1.749 million
    requested in fiscal year 1998?
        Answer. The fiscal year 1998 increase for OA's ``Equipment'' object
    class is outlined below:

    ADP Hardware and Software--Desktop............................ $380,000
    Firewall and Internet Equipment...............................   48,000
    ADP Hardware and Software--PC Maintenance.....................   34,000
    Publishing Hardware...........................................   17,000
    Miscellaneous Equipment, net..................................   17,000
    Library Books--permanent collection...........................   13,000
    Networking Servers............................................ (160,000)
    Capital Investment Plan.......................................1,400,000
                        --------------------------------------------------------------
                        ____________________________________________________

          Total...................................................1,749,000

        Question. Is the Office of Administration purchasing this equipment
    on an established modernization plan, if so please provide a detail
    outlining this plan to the Subcommittee.
        Answer. As promised to the House Treasury, Postal Service, and
    General Government Appropriations Subcommittee in the testimony of
    Director Reeder, the OA delivered a Five Year Information Technology
    Plan before the end of fiscal year 1996. The plan was provided to House
    and Senate Subcommittees. The first of its kind for the OA. The Plan
    set forth a vision and framework that would guide the EOP's information
    technology investments for the next five years. To that end, the plan
    described an overall strategy and priority setting system for
    activities but did not require or request specific investments in the
    future. The initiatives outlined in the plan identified the functional
    requirements for information systems throughout the EOP and ensured
    that adequate integrated computer systems would be in place throughout
    the EOP to meet ongoing and future workload requirements.
        Ensuing discussions with Subcommittee staff, resulted in agreement
    that OA needed to prepare a comprehensive systems architecture and
    investment plan. The $2 million requested comprises four components
    designed to improve information and financial management services
    throughout the EOP. An Architecture Plan is bring funded in fiscal year
    1997 and will serve as the foundation for future EOP recommendations in
    information technology.
        The equipment requested is critical in sustaining current EOP
    information systems operations until the Architecture Plan is
    completed. These expenditures cannot wait until the Architecture Plan
    is completed in fiscal year 1997. To maintain current productivity, it
    is necessary for the EOP to replace existing equipment that is
    approaching, or has exceeded, its recommended useful lifetime. In
    conformity with the CIP, the OA will make every effort to purchase
    components that are compatible with multiple architectures. In
    addition, our current fiscal year 1997 purchases are based on the same
    user-defined needs that underlie the Architecture Plan, providing for
    additional compatibility. Failure to pursue this activity in fiscal
    year 1998 will result in increasing network outages, increasing loss of
    productivity for EOP staff members, and interruptions in electronic
    communications to and from other government agencies and the public.
        Question. If the Office of Administration is carrying out a
    modernization plan, does it follow the general government guidelines
    for technology investment?
        Answer. Yes, modernization efforts by the OA anticipate adhering to
    the criterion included in the Office of Management and Budget's
    memorandum 97-02, ``Funding Information Systems Investments'' dated
    October 25, 1996 and the Clinger-Cohen Act of 1996 (Public Law 104-106)
    dated February 10, 1996, which facilitates the implementation of
    information technology architecture.
        Question. Is there the necessary evaluation of this plan by an
    ``evaluation group'' and is there a systems architecture for this plan?
    If so, please provide a detail outline of the architecture to the
    Subcommittee.
        Answer. Yes, there are several EOP agency-oriented user advisory
    groups and an Information Technology Advisory Board (ITAB), both of
    which fit within the concept of an ``evaluation group.'' The agency-
    oriented advisory groups concentrate on individual agency technical and
    business needs.
        The ITAB was organized with one or more representatives from each
    of the EOP agencies. The ITAB's mission was to perform the following
    functions: (1) identify functional requirements for information systems
    throughout the EOP; (2) ensure that adequate integrated computer
    systems are in place throughout the EOP to meet ongoing and future
    workload requirements; (3) ensure appropriate exchange of information
    technology among EOP agencies so that experiences and lessons learned
    are shared; and (4) review and recommend funding for information
    technology initiatives that are common to all EOP agencies. In
    addition, the ITAB has worked in concert with Office of Management and
    Budget (OMB) staff and OMB information technology guidelines to address
    Congressional concerns and direction. This interagency cooperation
    which has been rigorously reviewed by OMB staff has been found to be
    efficient and effective.
        The ITAB has also been advised by the Information Technology
    Resources Board of the Chief Information Officers (CIO) Council, a
    government-wide advisory body, as defined in Executive Order 13011 of
    July 16, 1996. The CIO Council has been established as the principal
    interagency forum to improve agency practices on such matters as the
    design, modernization, use, sharing, and performance of agency
    information resources. After careful review and consultation, an
    outside contractor who had developed ITA's for other government
    agencies and has an outstanding reputation, was selected to develop the
    architectural blueprint for the EOP. As a result, the contractor agreed
    to complete the project by July 15, 1997. The contract to develop the
    blueprint by this highly reputable firm is continuing expeditiously and
    is on schedule.
                              unanticipated needs
        The Congress provides the President with funds for unanticipated
    needs.
        Question. Have any funds from this account been used in this fiscal
    year? Please provide the Subcommittee with a breakout of these
    expenditures.
        Answer. There is no fiscal year 1997 appropriation for
    Unanticipated Needs. The $1 million requested was diverted by Congress
    to fund conferences on model state drug laws through the Office of
    National Drug Control Policy. In order to give the President the
    flexibility that historically has been given to other Presidents to
    respond to unplanned exigencies, we have requested restoration of this
    account in fiscal year 1998 in the amount of $1 million.
        Question. The President is requesting $1 million in fiscal year
    1998 for the Unanticipated Needs Account. Please provide the
    Subcommittee the types of activities that would necessitate the use of
    the Unanticipated Needs funds and the guidelines of how the
    Unanticipated Needs funds are to be used.
        Answer. This account has been used to fund unanticipated national
    priorities for which funding is either not available from regular
    budget accounts, or is not available in a timely fashion through the
    supplemental appropriations process. All funds allocated to this
    account that are not used for unanticipated purposes have been and will
    continue to be returned. The last request for Unanticipated Needs
    funding was in fiscal year 1994 for the J.F.K. Assassination Records
    Review Board, $250,000. Other initiatives which required funding from
    the Unanticipated Needs account include: start up costs for the
    National Space Council, $181,000 in fiscal year 1989; and the
    President's Commission on Privatization, $110,000 in fiscal year 1988.
        In order to obtain funds from the Unanticipated Needs account, the
    requesting agency petitions the Office of Management and Budget (OMB)
    with a detailed request and justification. OMB certifies that there are
    no funds available from other sources. Once OMB approves, the President
    alone authorizes expenditures from the Unanticipated Needs account.
    Prior use of these funds has occurred within strict budget controls and
    reporting standards.
                               general questions
        There is funding outlined in the budget request which indicates
    that the base is fully funded within all of the Executive Office of the
    President agencies. Please provide detailed responses for each of the
    following agencies: Council of Economic Advisors, Office of Policy
    Development, Special Assistance to the [Vice] President, Office of
    Administration, White House Office, and National Security Council.
        Question. Is your base fully funded?
        Answer. Please see response to question No. 18.
        Question. How many positions (FTE) are unfilled?
        Answer. Please see response to question No. 18.
        Question. What would it take to fill those positions?
        Answer. Please see response to question No. 18.
        Question. Is the amount requested to maintain current levels
    accurate? What will all of this funding be applied to?
        Answer. Please see response to question No. 18.
        Question. Are there any new initiatives outlined in fiscal year
    1998's budget request, if so, what are they?
        Answer. Detailed responses for question No.'s 14-18 for each agency
    are provided below.
    Council of Economic Advisers (CEA)
        CEA's request of $3,542,000 adequately funds the fiscal year 1998
    base. In addition, it also enables CEA to fill 35 requested FTE
    positions. This represents a net increase of $103,000 in budget
    authority and no increase in FTE's over the fiscal year 1997 levels.
        CEA's budget request does not include any new initiatives in fiscal
    year 1998. The following highlights the changes from the fiscal year
    1997 budget.
        The additional 3 percent increase is mainly needed to cover
    increases in two areas: pay adjustments and scheduled replacement of
    computer hardware and software. Specifically, the net increase for
    personnel includes the 2.8 percent government-wide pay raise effective
    January 1, 1998 in accordance with the Office of Management and
    Budget's guidance. It also includes promotions and within-grade step
    increases.
        During the last three years, CEA diverted funds from the equipment
    category to offset inflationary costs and mandatory pay increases. The
    increase in equipment will restore these funds and establish a regular
    replacement program for CEA's personal computers. It will enable CEA
    staff to provide economic policy support to the President in the most
    efficient manner possible.
        This request contains no additional funding for travel,
    transportation of things, and rental payments to GSA as the agency can
    operate within existing resources. Increases have been included to
    cover inflationary cost increases in other administrative categories
    such as: printing, other services and supplies.
    Office of Policy Development (OPD)
        OPD's request of $3,983,000 adequately funds the fiscal year 1998
    base. In addition, it also enables OPD to fill 31 requested FTE
    positions. This request reflects a 3 percent funding increase from the
    fiscal year 1997 enacted level, and no increase in FTE's.
        OPD's budget request does not include any new initiatives in fiscal
    year 1998. The following highlights the changes from the fiscal year
    1997 budget.
        The total requested increase of $116,000 would be used to fund
    increases in Personnel Compensation and Benefits, Other Services, and
    Supplies and Subscriptions.
        The net Personnel Compensation and Benefits increase of $76,000
    enables OPD to provide competitive salaries to continue to retain and
    attract high quality employees. In addition, it aligns Civilian
    Personnel Benefits with actual costs. These increases will be offset by
    limiting the length of detail assignments to OPD, thus decreasing the
    reimbursement required.
        This request also includes a $35,000 increase in Other Services and
    a $5,000 increase for subscriptions classified under Supplies and
    Materials. These increases are necessary to fund use of commercial on-
    line services, such as Lexis-Nexis, and periodicals. Frequent access to
    a wide variety of printed and electronic information sources enables
    OPD's staff to provide up-to-the-hour research on current policy
    issues.
        OPD plans to absorb inflationary increases in the other object
    classes to shift the much needed resources to the above mentioned
    areas.
    Special assistance to the President (OVP)
        OVP's request of $3,378,000 adequately funds the fiscal year 1998
    base. In addition, it also enables OVP to fill 21 requested FTE
    positions. This is an increase of $98,000 or 3 percent in budget
    authority and no increase in FTE over the fiscal year 1997 enacted
    levels.
        OVP's budget request does not include any new initiatives in fiscal
    year 1998. The following highlights the changes from the fiscal year
    1997 budget.
        The personnel compensation category, which has remained flat for
    two years, requires an increase of $117,000. Under the current funding
    level, the Vice President froze salaries, delayed filling vacancies,
    and had difficulty offering competitive salaries to prospective hires.
    This increase will be used to reverse this trend as well as provide
    funding for one reimbursable detailee.
        The request in communications, utilities, and miscellaneous charges
    reflects increases in local telephone tariffs, domestic long distance,
    pager, and GSA after-hour utilities costs. Although some savings have
    been achieved, a net increase is required to cover cost growth and is
    consistent with fiscal year 1997 costs incurred to date.
        A nominal increase in printing has been included in this request.
    The printing budget has remained flat for four years and requires an
    increase to keep pace with cost growth in printing and reproduction
    services.
        The $13,000 increase in other services reflects the anticipated
    increases in maintenance costs for ADP hardware, software, copiers,
    faxes, and other office equipment, as well as the estimated cost of
    commercial services.
        A reduction in supplies and materials reflects the Vice President's
    commitment to achieve savings through the use of technology. The
    savings will be achieved through the cancellation of subscriptions due
    to the use of Internet, on-line commercial databases, and electronic
    information resources.
        The decrease in equipment represents the integration of personnel
    and other operating priorities into a funding request that ensures
    appropriate application of technology. The request in this category
    will allow for system maintenance while the implementation of the next
    generation of technology is considered. It is one step in the continual
    process of providing and maintaining the tools required to effectively
    support the Vice President.
        While the fiscal year 1998 budget reflects a maintenance level
    operation, the effective implementation of new technology will continue
    to be a priority in future requests. These investments have required,
    and will continue to require, significant resources to purchase
    hardware, software and programming technology.
    Office of Administration (OA)
        OA's request of $28,883,000 includes $2,000,000 in no-year funds
    for a Capital Investment Plan. The current services level of
    $26,883,000 represents a 3 percent or $783,000 increase over fiscal
    year 1997 and adequately funds the fiscal year 1998 base. In addition,
    it also enables OA to fill 192 requested FTE positions.
        Please see responses to question numbers 5 through 11 regarding
    maintaining the current services level and new initiatives.
    White House Office (WHO)
        WHO's request of $51,199,000 adequately funds the fiscal year 1998
    base. In addition, it also enables WHO to fill 400 requested FTE
    positions. It includes $9.8 million required by the National Defense
    Authorization Act for Fiscal Year 1997 to fund services historically
    provided by the White House Communications Agency (WHCA). Excluding
    this Congressional mandate, the request represents a $1,206,000 or 3
    percent increase in budget authority and no increase in the FTE level
    from fiscal year 1997. The following highlights the changes from the
    fiscal year 1997 budget.
        The personnel increase of $883,000 provides for the 2.8 percent
    cost of living and locality adjustment per OMB guidance, within-grade
    increases for GS equivalent employees, and promotions. The requested
    increase also aligns the fiscal year 1998 budget with actual costs for
    detailees.
        The request in civilian personnel benefits reflects increases in
    worker's compensation and employee benefits. A decrease of $200,000 in
    benefits for former personnel will provide adequate funds for costs
    anticipated in a non-transition year.
        Other non-personnel object classes include a $110,000 increase in
    supplies to align the budget with actual costs. The request will more
    accurately reflect costs historically incurred in this category. This
    increase is nearly offset by a decrease of $107,000 in communications,
    utilities, and miscellaneous charges.
        The home page is rapidly becoming the most popular way to visit the
    White House and the next version of the WHO home page will be developed
    during fiscal year 1998. This increase will enable the WHO to take
    advantage of changes in technology and update the home page to reflect
    the latest information on the WHO and the Executive Office of the
    President.
        Under the past frozen budgets, reductions in the equipment budget
    have been used to absorb mandatory cost increases. The result was
    restricting purchases to an as needed basis only, which is only
    effective as a temporary solution. The majority of this increase will
    be used to fund a regular replacement program for desktop technology.
    This will ensure that the WHO staff have the appropriate tools to work
    effectively and avoid requests for large increases every few years to
    completely replace outdated technology.
        Although this budget request is a 3 percent increase, the WHO
    continues to freeze funding in many other object classes to meet
    operating priorities. After freezing our requests at the fiscal year
    1995 enacted level for two consecutive years, this increase is
    essential to continue to provide quality support to the President.
    WHCA transfer
        The WHCA transfer was proposed by Representative Spence and
    supported by Representatives Clinger and Zeliff. The proposed language
    was enacted under the National Defense Authorization Act for Fiscal
    Year 1997 (Public Law 104-201, section 912, 110 Stat. 2422, 2623;
    codified at 10 U.S.C. section 111).
        The transfer will continue to fund necessary and historically
    provided official non-telecommunication services that have been
    provided by WHCA for decades. This includes audiovisual, news wire,
    stenographic, and photographic services that provide the historical
    record of a presidency. At the end of each administration, these
    records are sent to the National Archives and Records Administration to
    become part of the official history of this country.
        The WHO is working with WHCA to ensure a smooth transition. The
    transfer amount of $9.8 million was developed by the Office of
    Management and Budget (OMB) and the Department of Defense. Since the
    estimate is based on fiscal year 1996 actual WHCA costs, there may be
    unforeseen and unbudgeted costs that may require additional funds in
    future fiscal years. This has the potential to affect WHO requests
    until there are several years of operational experience to refine
    estimates. This increase is offset by a matching reduction in the DOD
    fiscal year 1998 budget request.
    National Security Council (NSC)
        NSC's request of $6,648,000 adequately funds the fiscal year 1998
    base. In addition, it also enables NSC to fill 60 requested FTE
    positions. This represents the same levels that were enacted in fiscal
    year 1997.
        NSC's budget request does not include any new initiatives in fiscal
    year 1998. The following highlights the changes from the fiscal year
    1997 budget.
        This budget provides funds for two entities: the National Security
    Council (NSC), $6,051,000, and the President's Foreign Intelligence
    Advisory Board (PFiAB), $597,000. Unless specified otherwise, funds for
    both entities are listed in the aggregate in this budget submission.
        Funds in the amount of $4,690,000 will cover personnel compensation
    and benefits, which represents a decrease of $6,000 from that of fiscal
    year 1997. Funding levels for NSC are primarily determined by
    expenditures for personnel. Of the total funds requested for fiscal
    year 1998, 71 percent is for this category. This request includes
    funding for the locality pay adjustments and the cost of living pay
    adjustments per guidance from the Office of Management and Budget, as
    well as promotions and within-grade step increases.
        Also included in this personnel request is $1,285,000 for Special
    Personal Services Payments. This category covers the salaries and
    benefits of 8 reimbursable detailees assigned to NSC. NSC's portion of
    this request is due to the requirement in Public Law 93-126, section
    11, which stipulates reimbursement to the State Department for some of
    its detailees. Funding originally budgeted for 3 PFiAB reimbursable
    detailees will be used for other NSC and PFiAB personnel costs. The
    request for this category of personnel represents an increase of
    $379,000 from fiscal year 1997 for additional detailees.
        Rental payments to GSA have increased by $6,000 to a total of
    $1,108,000 due to the acquisition of additional storage space. No other
    additional office space has been acquired and space rental rates have
    remained constant with no increases for fiscal year 1998.
        For fiscal year 1998, NSC plans to decrease funding in
    communications to shift much needed resources to other services and
    supplies. Adjustments within these categories represent a realignment
    to historical spending levels. Other administrative operating expense
    categories such as travel, printing and equipment, have not been
    increased over fiscal year 1997 levels.
                                     ______

                              INDEPENDENT AGENCIES

                       ASSASSINATION RECORDS REVIEW BOARD

             Prepared Statement of Judge John R. Tunheim, Chairman

                                i. introduction
        Mr. Chairman and Members of the Subcommittee, I would like to thank
    you for the opportunity to submit a written statement on behalf of the
    Assassination Records Review Board regarding the Board's request for
    $1.6 million for fiscal year 1998, to fund one final year of operation.
    The Board acknowledges that all of the issues surrounding the
    assassination of President Kennedy will likely never be fully resolved,
    however, this additional time will allow us to complete our work,
    including the review and public release of critical FBI and CIA
    records, submit a comprehensive and complete final report to the
    Congress and the President, and make available to the American public
    as much information as possible on the assassination of President John
    F. Kennedy.
        Please allow me to introduce the other members of the Review Board
    with whom I have had the professional honor and personal pleasure to
    work: Dr. Henry F. Graff, Professor Emeritus of History, Columbia
    University; Dr. Kermit L. Hall, Dean, College of Humanities, and
    Professor of History and Law, The Ohio State University; Dr. William L.
    Joyce, Associate University Librarian for Rare Books and Special
    Collections, Princeton University; and Dr. Anna K. Nelson,
    Distinguished Adjunct Historian in Residence, The American University.
    We have been honored to engage in this important effort to make the
    history of the Kennedy assassination available to the American public
    and I am pleased to submit a written statement to this Subcommittee and
    answer your prepared questions.
        I would also like to describe briefly the professional staff that
    we are fortunate to have hired. The Executive Director is Dr. David G.
    Marwell, a professional historian who gained vast experience dealing
    with large numbers of important historical documents with the Office of
    Special Investigations at the Department of Justice and later as the
    Director of the Berlin Document Center. He leads a staff of 28 full-
    time employees, who have varied backgrounds as historians, lawyers,
    analysts, investigators, and administrators. The members of the staff
    have approached their unique task with seriousness of purpose,
    creativity, professionalism, and competence, and have assisted us in
    shedding new light on the assassination through the release of
    thousands of Federal Government records, and the acquisition of records
    in private hands and local governments that were not previously
    available to the American public. I believe that we assembled exactly
    the type of professional and diversified staff that Congress envisioned
    would be necessary to accomplish this difficult assignment.
                          ii. accomplishments to date
        As I know you are aware, the Review Board was created by The
    President John F. Kennedy Assassination Records Collection Act of 1992
    (JFK Act) as an independent Federal agency to oversee the
    identification and release of records related to the assassination of
    President Kennedy. The JFK Act is a unique piece of legislation
    designed to remove doubt and speculation about the content of
    government records related to the assassination of President Kennedy.
    As a result of these lingering suspicions, Congress determined that an
    independent board was the most effective and efficient vehicle to make
    all assassination records available to the public.
        The Review Board has accomplished much since we began releasing
    previously secret records in June of 1995. The Board has acted to
    transfer more than 14,000 documents to the President John F. Kennedy
    Assassination Records Collection (JFK Collection) at the National
    Archives and Records Administration. We would not have been successful
    in our efforts without the significant assistance of the National
    Archives. The JFK Collection currently totals approximately 3.7 million
    pages and is used extensively by researchers from all over the United
    States.
        By the end of fiscal year 1997, the Review Board will have reviewed
    and processed nearly all of the assassination records that have been
    identified by the more than 30 different government offices believed to
    be in possession of relevant records, with the important exception of
    the FBI and the CIA. I will elaborate on the status of records held by
    these two agencies later. The overwhelming majority of previously
    redacted information will have been made public by the Review Board.
        iii. release of government records related to the assassination
        Before discussing what we will accomplish with one final year, I
    would like to highlight for the Members of the Subcommittee some of the
    important records that the Board has made public. They include:
      --Thousands of CIA documents on Lee Harvey Oswald and the
            assassination of President Kennedy that made up the CIA's
            Oswald File and detail the agency's investigative activities
            following the assassination;
      --Thousands of once-secret records from the investigation by the
            House Select Committee on Assassinations, chaired by
            Congressman Stokes, including the controversial Staff Report on
            Oswald's trip to Mexico City;
      --Thousands of records from the FBI's core and related assassination
            files that document the FBI's interest in Oswald from 1959-63,
            after he had defected to the Soviet Union, three years before
            the assassination; and
      --The extensive FBI files on its investigation of the assassination.
        The important work in which the Review Board has been engaged can
    be best and most graphically demonstrated by discussing the ``before''
    and ``after'' versions of one of the pre-assassination FBI documents to
    which I just referred and that the Board has released to the public.
    Prior to the Review Board's review, this FBI document (JFK Collection
    Record Number: 124-10023-10236, Attachment Number 1) was only available
    to the public in a heavily redacted form. The only information that was
    not secret was the date of the memorandum, ``October 12, 1960,'' that
    it was to the ``Director, FBI,'' from ``Legat, Paris'' (the FBI
    representative in Paris), that the subject was ``Lee Harvey Oswald,
    Internal Security,'' and that it had to do with a ``Paris letter 9/27/
    60.'' The rest of the text was blacked out. Obviously, this version of
    the document left room for a great deal of speculation among historians
    and researchers regarding what was underneath the black ink on this
    document with the provocative subject title.
        The Review Board aggressively pursued the release of the redacted
    information in this document and several others that relate to the
    FBI's interest in Oswald before the assassination. After protracted
    negotiations with the FBI, an initial FBI appeal to the White House in
    an effort to keep the document secret, and a direct appeal to the Swiss
    government, we were able to release the information. The unredacted
    memorandum shows that the Swiss Federal Police had been enlisted by the
    FBI to try to locate Oswald and to determine whether or not he had
    enrolled at a school in Switzerland. Now the public is able to see the
    document in full and judge its importance. In its redacted state, the
    document could have meant anything that a researcher's imagination and
    speculation could invent. In its released form, it must be analyzed for
    what it says.
      iv. identification and location of additional assassination records
        One of the most important, most difficult, and most time-consuming
    responsibilities of the Review Board is to identify and locate
    additional records that are relevant to the assassination. This is a
    task that to some degree must logically come later in the process,
    after the Review Board has gained a full understanding of the records
    that have already been identified. Although the Review Board has made a
    significant number of requests for additional records and information,
    some of which I would like to outline, much remains to be done before
    it can be confident that it has completed this responsibility.
        I would like to highlight some of our efforts to identify and
    locate additional assassination records. Some examples:
      --Medical Records Inquiry.--The Review Board has several ongoing
            efforts to identify and locate assassination records involving
            medical issues. As with any homicide, the medical records are
            among the most important pieces of evidence. As part of its
            attempt to ensure that the medical records are as complete as
            possible, the Review Board staff has deposed the principal
            pathologists involved in President Kennedy's autopsy, as well
            as other individuals who had knowledge of the autopsy and
            related photographic records.
      --Identification and Location of Additional FBI Records and
            Information.--The Review Board has continued its efforts to
            locate additional FBI assassination records by making several
            requests for records and information. The FBI has assisted in
            this effort by giving the Review Board members access to
            requested files. The JFK Task Force at the FBI has, on the
            whole, been extremely cooperative and helpful to the Board and
            has provided the requested information.
      --Identification and Location of Additional CIA Records and
            Information.--The Review Board has initiated a number of
            requests to the CIA for additional information and records. The
            Review Board expects that these requests will be promptly and
            fully satisfied during the upcoming year.
      --Identification and Location of Additional Secret Service Records
            and Information.--Time consuming and careful review of Secret
            Service activities by the Review Board produced a series of
            requests for additional records and information that, in turn,
            led to the identification of additional relevant assassination
            records. For example, in response to the Review Board's first
            eight requests for additional information, the Secret Service
            has submitted more than 1,500 pages of material.
      --Identification and Location of Additional Military Records and
            Information.--The Department of Defense (including its many
            components and the military services) (collectively ``DOD''),
            identified few assassination records on its own initiative. DOD
            has nevertheless been cooperative with the efforts of the
            Review Board to locate assassination records. When such records
            have been located, DOD has been willing to release the records
            with few redactions.
          Additional work would be required in our last year to ensure that
            all assassination records in the military archives have been
            made a part of the JFK Collection. Fortunately, the diligent
            efforts of the ARRB staff have set the stage for accomplishing
            this task.
                    v. release of private and local records
        In addition to the release of records in the Federal Government's
    vast files, and consistent with the Board's mandate to make the
    historical record of the assassination as complete as possible, we have
    been aggressive in identifying and acquiring significant assassination-
    related records in the possession of private citizens and local
    governments, including:
      --The original personal papers of Warren Commission Chief Counsel J.
            Lee Rankin that give further insight into the operations of the
            Commission;
      --Copies of the official records of New Orleans District Attorney Jim
            Garrison's investigation of the assassination;
      --The original papers of New Orleans attorney Edward Wegmann, from
            his work as a member of the legal team that successfully
            defended Clay Shaw in 1969 against a charge of conspiracy to
            kill President Kennedy;
      --Copies of records from the Metropolitan Crime Commission of New
            Orleans, including records on District Attorney Garrison's
            investigation and prosecution of Clay Shaw and records
            regarding New Orleans organized crime figures;
      --Long-lost films taken in Dallas on November 22, 1963, that the
            public had never seen and that shed new light on the events of
            that day; and
      --Private collections of records from individuals including Warren
            Commission attorney Wesley Liebler, author David Lifton, FBI
            Special Agent Hosty, attorney Frank Ragano, as well as others.
        I am also pleased that the Review Board has recently acquired the
    original personal papers of Clay Shaw, the late New Orleans businessman
    who is the only person ever tried in connection with the assassination
    of President Kennedy. Shaw was acquitted by a jury in 1969 after being
    charged as part of District Attorney Garrison's investigation. The Shaw
    papers will surely add another dimension to this particular chapter of
    the assassination story.
        All of these records will enrich the historical record of the
    assassination for future generations of Americans. Once these records
    are processed and described by the National Archives, they will be
    available for research.
                        vi. the need for additional time
        Despite our best efforts and significant accomplishments, some of
    which I have outlined, the Review Board will not be able to complete
    its work within the original three-year timetable set by Congress for
    the following reasons:
      --First, the authors of the original legislation believed that our
            task would take three years. That estimate was based on the
            best available information at the time, but the legislation
            established an unprecedented process. There was no way of
            knowing the problems of scale and complexity that the Board
            would encounter, nor was there any way to factor in the
            comprehensive approach we have taken in fulfilling our mandate.
      --Second, the Board was not appointed until 18 months after the
            legislation was signed into law. As a result, without the
            guidance of the Board, Federal agencies initially defined for
            themselves the universe of records that should be processed
            under The Act and to speculate about the kind of evidence that
            would be needed to sustain the redaction of assassination-
            related information. Once the Board was in place, agencies
            needed to redo a considerable amount of work. In fact, many
            agencies have yet to complete their review and the Board is
            still seeking their compliance.
      --Third, our enabling legislation imposed several restrictions on the
            manner in which the Board could operate. Unlike other temporary
            agencies, the Board could not hire or detail experienced
            federal employees, but rather had to hire new employees who had
            to undergo background investigations and be cleared at the Top
            Secret level. Locating and renovating space that was suitable
            for the storage of classified materials was required. As a
            result, the Board could not begin an effective review of
            records until the third quarter of our first year.
        We are pleased and proud that the Review Board and staff have been
    able to overcome these obstacles, and that we have developed an
    efficient and effective process for the review of records. All involved
    in this process want to see that the job is done, and do not want to
    cease now with a reasonable conclusion in sight. We want to finish the
    job we began, and with one additional year we can.
                               vii. the job ahead
        The additional year of operations will permit the Review Board to
    finish its task by completing several major areas of our work. Please
    be assured that these are identifiable projects that are critical to
    ensuring that the JFK Collection is as complete as possible, that
    relevant Federal agencies have been held accountable, and that all that
    we have done is documented in our final report. The Board would focus
    in our final year on the following:
      --CIA Sequestered Collection.--The Review Board has completed its
            review of the Oswald ``201 file,'' the file created and
            maintained by the CIA on Oswald and the assassination. The
            Review Board is now faced with the task of reviewing the
            agency's ``Sequestered Collection,'' the large collection of
            files that was assembled by the CIA in response to requests
            made by the House Select Committee on Assassinations, chaired
            by Congressman Stokes, in the late 1970's. These records find
            their relevance to the assassination defined in part by the
            course of the HSCA investigation. The Sequestered Collection
            originally consisted of 63 boxes of CIA- and HSCA-originated
            records as well as 72 reels of microfilm. Unfortunately, these
            records are in a confused order, poorly described, and are
            replete with duplicates. Some of these records are clearly of
            great significance, some are of only marginal interest, and the
            relevance of others cannot be identified.
      --FBI Sequestered Collection.--The FBI divides its assassination
            records into two general categories. The first is the ``Core
            and Related Files,'' consisting of nearly 600,000 pages of
            files collected in the course of the massive FBI investigation
            into the assassination. The Review Board will complete its
            review of this significant collection by the end of fiscal year
            1997. The second, which the FBI refers to as its ``HSCA
            records,'' is a large collection of records that were
            identified as being of interest to the HSCA and which remain to
            be reviewed by the Board. Like the CIA's Sequestered
            Collection, this voluminous body of records (approximately
            280,000 pages) ranges widely in relevance to the assassination.
      --The Records of Some Federal Agencies and Congressional
            Committees.--Additional time will allow the Board to finish its
            work with several agencies, including the Secret Service, the
            National Security Agency, and Congressional committees,
            including the Senate Intelligence Committee.
      --Search for Additional Records.--With one more year of operations,
            the Board's search for additional records held by Federal
            agencies, private individuals, and local governments would be
            concluded with greater confidence. Some of these records have
            been identified, but not yet acquired by the Board.
      --Federal Agency Compliance.--In November 1996, the Review Board
            initiated a compliance program to ensure that Federal agencies
            have fully cooperated with the Board in discharging its
            responsibility of assuring Congress and the American public
            that the goals of the JFK Act have been accomplished to the
            greatest possible extent. The requests to document compliance
            with the JFK Act were sent to 27 U.S. government agencies and
            departments to confirm that the U.S. government has identified,
            located, and released all records relating to the assassination
            of President Kennedy. The agencies' statements of compliance
            will be included in the Review Board's final report to the
            Congress. The one-year extension will ensure that the
            compliance program is completed and fully documented in the
            final report.
        It is important for the Review Board to complete these major
    projects. The Board believes that the completion of the task outlined
    above, the inclusion of these important records in the JFK Collection,
    and the documentation of Federal agency compliance as part of the final
    report will mark an appropriate point at which to conclude the Board's
    work. We are confident that all that remains for the Board can be
    accomplished in an additional year.
      viii. an approach to the review of the remaining cia and fbi records
        It is clear to the members of the Review Board that there is much
    work to be done. The review of the remaining CIA and FBI records is a
    cumbersome and complicated task. However, the Board and staff have the
    benefit of our experience to date that sets the stage for an efficient
    and effective review of the remaining records. I would like to briefly
    describe our early experiences reviewing records and how the past two
    years set a firm foundation for the future and would work to our
    advantage in our last year.
        Our review of records in the early months was slowed by the
    complexities of the issues raised in the records. The unprecedented new
    standards of the JFK Act, which go far beyond those established under
    the Freedom of Information Act, required a time-consuming early phase.
        At first, the review process proceeded slowly and the agencies were
    afforded ample opportunity to present their evidence. Over time, the
    Review Board began to standardize its interpretation of the relevant
    section of the JFK Act and the issues raised in the various documents.
    Now that the Review Board and the agencies are familiar with the
    rigorous demands of the JFK Act, the process has accelerated. In a
    progressively increasing number of cases, records that initially
    contained proposed postponements can be released through a ``consent''
    process. In this consent process, the ARRB staff notifies an agency
    that its proposed postponements are not likely to be approved by the
    Review Board and the agency thereupon voluntarily consents to the
    release of the information.
        In our review of the FBI's ``Core and Related Files'' and the CIA's
    ``Oswald 201 File,'' the records that have been the focus of our
    attention to date, we subjected every requested redaction to a rigorous
    test: did the evidence of the harm that would result from the release
    of the information outweigh the public interest in the information?
        In considering our review of the CIA and FBI ``Sequestered
    Collections,'' the Board recognized that it needed to develop a
    different approach, one that would take into account the varied degree
    of relevance of individual records to the assassination. Only in this
    way could the Board ensure that it would appropriately expend its
    resources in its last year. As a first step, the Board carefully
    analyzed each collection in order to determine what priority should be
    assigned to the category of records. In addition, the Board developed a
    set of guidelines for the review of these records which recognized that
    some categories of records did not require the intensive word-by-word
    review that had been the rule for the core collections that have been
    the subject of the Board's attention to date. The development of these
    guidelines began with the August 6, 1996 Board public hearing and
    culminated in their adoption at the October 16, 1996 Board meeting. The
    ARRB staff will distinguish between records whose relevance to the
    assassination is clear and those not believed to be relevant (or
    ``NBR''). Applying these new standards will permit the ARRB staff to
    identify and review the most significant remaining records in order of
    priority.
        These detailed guidelines will reduce the loss of valuable Review
    Board and ARRB staff time expended to review, on a word-by-word basis,
    those documents that have a remote relationship, at best, to the
    Kennedy assassination. Those documents that are identified as relevant
    to the assassination will continue to be reviewed word-by-word. These
    standards of relevance are designed to ensure that the greatest number
    of true assassination records is properly identified, reviewed, and
    made public in the JFK Collection at the National Archives.
        The fruits of our labor from the first three years would be
    realized in our last year, one in which we would be reviewing some of
    the most difficult records, and potentially most important records, but
    with the benefit of our invaluable experience. I am happy to report
    that we have received assurances from the FBI and CIA that they will
    work with us in a final year to make sure that the necessary resources
    are applied so that our task can be completed.
                                 ix. conclusion
        In making our recommendation for a one-year extension, we, the
    members of the Review Board, are fully cognizant of the difficulties
    inherent in extending a temporary commission. We are aware of the
    concern that temporary bodies may have a self-preserving and self-
    perpetuating instinct, and want to assure you in the clearest and most
    unambiguous manner that our recommendation is motivated strictly by our
    desire to complete the job. My colleagues and I were appointed as
    private citizens and have many competing claims on our time and energy.
    It is our collective conviction that the additional time is necessary
    and our sincerest commitment that we will complete our task by the end
    of fiscal year 1998, if given the means.
        As I know you are aware, the Administration is supportive of the
    one-year extension for the Review Board and has submitted an fiscal
    year 1998 budget amendment for $1.6 million to allow us to complete our
    work, close out our operation, and submit our final report. (The Board
    has a budget carryover of $500,000 in no-year funds from its first
    year, a sum that will fund a full quarter year of its continued
    operation.)
        In addition, we are pleased that House Government Reform and
    Oversight Committee Chairman Dan Burton introduced H.R. 1553, which
    would amend the President John F. Kennedy Assassination Records
    Collection Act of 1992 to extend the authorization of the Assassination
    Records Review Board until September 30, 1998, and authorizes $1.6
    million for the Board to complete its work. The bill was cosponsored by
    Congressmen Henry Waxman and Louis Stokes. It passed the House of
    Representatives on June 23, 1997, and the Senate on June 25, 1997. H.R.
    1553 has now been cleared for the President's signature. Senator Arlen
    Specter had introduced a companion bill in the Senate, S. 844, earlier
    this month. These Members have exhibited an admirable bipartisan spirit
    and an understanding that we as a government, and as a nation, must
    bring closure to a sad chapter of our history, and that we must seize
    this opportunity now.
        Since the Review Board began this effort three years ago, we have
    witnessed the widespread and passionate interest that the American
    public has in the assassination of President Kennedy. We have received
    thousands of letters, telephone calls, faxes and e-mail messages from
    individuals who care deeply about our history. They come from all walks
    of life, from all over the country, and are of all ages. Their interest
    is of varying degrees and they do not all agree on what happened in
    Dallas on November 22, 1963. However, they do agree that the public has
    the right to see the files on the assassination.
        I believe that what the Review Board is all about can be summed up
    in a letter we received from a man from California just last week. The
    author is not a professional historian, not a student working on a
    paper for a history class, but simply a private citizen interested in
    learning about this tragic historical event. He wrote the following:
        ``In my humble opinion, it appears that the ARRB is having a
    healing effect upon the American public, who may be coming to realize
    that there may be closure in sight (in our lifetimes) with regard to
    the JFK assassination.''
        These words capture why the Review Board was created by the
    Congress and why we hope that the Review Board will have the additional
    year to complete our task.
         The Assassination Records Review Board was conceived as a means of
    eliminating uncertainty and speculation about the contents of
    government files relating to the assassination of President Kennedy.
    We, the members of the Board, believe that a premature termination of
    the Review Board would surely generate intensified doubts within the
    general public about the commitment of Congress to release all
    information that relates to the assassination of President Kennedy, as
    well as renewed speculation about the conduct of our government and its
    institutions and personnel. If appropriate closure is not reached now,
    the identical issues will likely have to be addressed again in the
    future at even greater cost. The additional year that we recommend will
    allow for a confident conclusion of this important task.
        Mr. Chairman, and Members of the Subcommittee, on behalf of the
    members of the Assassination Records Review Board, I thank you for
    allowing us this opportunity to discuss our work and our future. The
    Board and staff stand ready to provide the Subcommittee with any
    additional information that may be required. Thank you.
                                     ______

                    Questions Submitted by Senator Campbell

            review board request for one additional year of funding
        Question. In fiscal year 1997 the Review Board received $2.15
    million for operations and is requesting $1.6 million for fiscal year
    1998. Please explain the decrease in costs.
        Answer. The Review Board has a budget carryover of $500,000 in no-
    year funds from its first year (fiscal year 1995), a sum that would
    fund a full quarter year of continued operation. The Board would
    consequently require $1.6 million of additional funds to operate for
    one final year in fiscal year 1998.
        Question. Please provide the Subcommittee detailed budget
    justification for the Review Board for fiscal year 1998.
        Answer. Please see the attached budget justification for the Review
    Board for fiscal year 1998.
        Question. Will the Review Board be in operation throughout the
    entire fiscal year 1998, or will it only need to operate through part
    of the year?
        Answer. After a careful analysis, the Review Board has concluded
    that it will need to be in operation throughout the entire fiscal year
    1998 to ensure that: (a) the remaining assassination records are
    reviewed and publicly released; (b) the compliance of federal agencies
    is documented; and (c) a complete final report is submitted to the
    Congress.
        Question. Does your budget request for fiscal year 1998 include
    costs associated with closing down the Review Board? If so, please
    outline them for the Subcommittee.
        Answer. Yes. The total estimated cost of shutting down is $100,000.
    This figure includes: (a) severance pay; (b) cash-out of any unused
    annual leave; and (c) other costs such as the purchase of archival
    boxes for the storage of records at the National Archives and Records
    Administration, moving expenses for records, and moving expenses for
    furniture and equipment. The Review Board anticipates full-scale
    operation through July 31, 1998. The decrease in staffing for August
    and September 1998 will offset the costs associated with closing down
    the agency.
        Question. What is your current FTE level and will that level be
    maintained throughout fiscal year 1998? If not, please provide details
    on the staffing decreases which will occur as the Review Board
    completes its work.
        Answer. The Review Board's current FTE level is 31. The Review
    Board plans full-scale operation through July 31, 1998. It is
    anticipated that eight staff members will be released in August 1998
    and an additional eight staff members in September 1998.
        Question. Will the Review Board be able to finish it's work with
    the one-year extension for operation?
        Answer. Yes. The additional year will permit the Review Board to
    finish its task by completing several major areas of work. These are
    identifiable projects that are critical to ensuring that the President
    John F. Kennedy Assassination Records Collection is as complete as
    possible.
                        budget request and justification
    Object Class 11.1-Full-time staff--1,226
        The amount requested for full-time permanent staff represents the
    requirement to fund 28 full-time positions. We plan full-scale
    operations through July 31, 1998. The remaining two months of fiscal
    year 1998 will be consumed with drafting our final report that will
    reflect the benefit of the additional year, completing the review of
    records, documenting the compliance of federal agencies, and closing
    down our operations. Additionally, we have included $50,000 for
    severance pay and unused annual leave cash-out.
    Object Class 11.3--Other than full-time permanent staff--148
        The amount requested in this category represents compensation to
    Board members and 3 intermittent employees. Each paid member of the
    Board will be compensated at the rate of level IV of the Executive
    Schedule (443.52/day) for each day the member is engaged in work for
    the Board. In January of fiscal year 1996 the Chair of the Board
    converted to non-pay status. It is estimated that during the year each
    of the four paid members will attend ten Board meetings and/or public
    hearings. The estimate represents 20 work days for each member of the
    board. This estimate also includes approximately $113,000 for
    intermittent employee salaries.
    Object Class 12.1--Civilian personnel benefits--294
        The estimate in this category represents the government's
    contribution for employee benefits at the current rate of 25 percent.
    Object Class 21.0--Travel--48
        The amount requested for this object class includes travel costs
    for Board members and staff to attend Board meetings and public
    hearings, travel for staff to visit records repositories and relevant
    individuals, meeting expenses, and local travel.

    10 meetings (5 board members).................................   $22,000
    Staff travel..................................................    20,000
    Meeting expenses..............................................     3,000
    Chair travel..................................................     2,000
    Local travel..................................................     1,000
                        --------------------------------------------------------------
                        ____________________________________________________

          Total...................................................    48,000

    Object Class 23.1--Rental Payments to GSA--298
        The estimate for this object class represents the amount the Board
    will pay to the General Services Administration for office space rental
    totaling 10,000 sq. ft. at an annual rate of 28.87 per sq. ft. (fiscal
    year 1997 cost). This estimate includes an increase of 3 percent for
    inflation.
    Object Class 23.3--Communications, utilities, misc.--18
        The requested amount represents estimates for telephones, postage,
    express intercity service, and local delivery service. Since Board
    members are located in other parts of the country, it is important to
    distribute information to them on a timely basis. In addition, the
    Board anticipates intense public interest in its activities. In an
    effort to meet this public demand, the Board intends to continue its
    active public information program that includes regular mailings.

    Telephone.....................................................    $9,000
    Postage/Postage Equipment/Delivery Services...................     9,000
                        --------------------------------------------------------------
                        ____________________________________________________

          Total...................................................    18,000

    Object Class 24.0--Printing and reproduction--32
        The major items in this object class are costs related to copying
    and copier maintenance, the publication of reports to Congress, ARRB
    public information items, Federal Register publication of ARRB notices,
    and the Final Report of the Review Board.

    Federal Register notices (175 columns)........................   $22,000
    Public and press information..................................     5,000
    Copier costs--lease/maintenance/copies........................     5,000
                            -----------------------------------------------------------------
                            ________________________________________________
          Total...................................................    32,000

    Object Class 25.2-Other Services--6
        The major items in this category include media services and on-line
    services.
    Object Class 25.3--Services from other Government agencies--48
        This category includes GSA administrative support services and
    moving expenses reimbursed to GSA.
    Object Class 26.0--Supplies and materials--24
        Anticipated expenses include routine office supplies, subscriptions
    and library materials, ADP software. This estimate is based on current
    operating costs and the additional expenses related to closing an
    agency.
    Object Class 31.0--Equipment--10
        This estimate includes the cost of maintenance contracts for
    computer hardware, software, and other office equipment.

                  SALARIES AND EXPENSES--OBJECT CLASSIFICATION
                            [In thousands of dollars]
    ------------------------------------------------------------------------
                                                        1997         1998
                                                      estimate     request
    ------------------------------------------------------------------------
    11.9  Total personnel compensation............        1,620        1,668
    21.0  Travel and transportation of persons....           65           48
    23.1  Rental payments to GSA..................          292          298
    23.3  Communications, utilities, misc.........           24           18
    24.0  Printing and reproduction...............           34           32
    25.2  Other services..........................           10            6
    25.3  Services from government accounts.......           55           48
    26.0  Supplies and materials..................           30           24
    31.0  Equipment...............................           23           10
                                                   -------------------------
    99.9      Total obligations...................        2,153        2,152
    ------------------------------------------------------------------------

                                     ______

                          FEDERAL ELECTION COMMISSION

              Prepared Statement of Joan D. Aikens, Vice Chairman

        As Vice Chairman of the Commission and Chairman of our Finance
    Committee, I herewith submit testimony, on behalf of the Commission, in
    support of our fiscal year 1998 budget request.
        From a campaign finance point of view, the 1996 election involved
    unprecedented amounts of financial activity, possibly over-stepping the
    boundaries of campaign limitations and prohibitions. This forced us to
    reevaluate our fiscal 1998 budget request. We are, therefore,
    presenting a two-part budget. I will start with a justification of the
    budget request we concurrently submitted to the Congress and the Office
    of Management and Budget on October 10, 1996. This I characterize as
    our floor budget. I then will speak to a compelling need to augment
    this budget with the resources necessary to address the extraordinary
    compliance issues raised in the 1996 election cycle. This augmentation
    is presented as an amendment to the fiscal 1998 request.
            fiscal year 1998 floor budget: $29.3 million--313.5 fte
        Our floor budget is a modest request in the face of rapidly
    expanding requirements, both in terms of workload volume and public
    sensitivity. This request was tempered by the rescission enacted in
    fiscal 1995 and two successive years in which our requests were rolled
    back by both the Office of Management and Budget and the Congress.
    Therefore, being sensitive to the Congress and President's quest for a
    balanced budget, the Commission made a decision to present two funding
    levels to OMB for fiscal year 1998: a reduced performance level of
    funding ($29.3 million and 313.5 FTE) which will support a performance
    level beneath which we do not believe we can responsibly go; and a
    standard performance level ($32.6 million and 331.5 FTE) that would
    roughly return us to the performance level we were approaching prior to
    the fiscal year 1995 rescission. The Office of Management and Budget
    concurred with our $29.3 million reduced performance budget request. It
    is important to remember, however, this budget was formulated before
    certain campaign financing controversies arose during the 1996
    elections.
        At this floor funding level, we believe we can cover projected
    increases in staff salaries, rent and other overhead expenses and
    increase our staffing by six positions. Therefore, we can perform at
    roughly the same level we sustain today.
        As to our core disclosure program, that performance is exceeding
    our projections. The financial activity level reported to the
    Commission in this election exceeded $2.7 billion. Despite this
    astonishing surge in fundraising and reporting, we will meet our 48-
    hour statutory deadline on indexing nearly 85,000 reports and making
    them available for public inspection. Our data capture of nearly 2
    million itemized transactions to date has been accomplished within 30
    days of report receipt--47 percent faster than the last cycle.
    Furthermore, we are employing better and more technologically-advanced
    means of getting this information to the public. For all but Senate
    candidate committee reports, we now employ digital imaging rather than
    microfilm to duplicate and display these reports to the public. On-line
    computer access to our data bases is available both through a
    subscription service and over the Internet. We inaugurated our web site
    in mid-February 1996; by October 1, this site had been accessed over
    one million times. Even though the election is behind us, public
    interest in our information remains exceedingly high. As of February
    1997, accesses to this web site have exceeded 2 million.
        New computer systems development, however, will slip slightly from
    our original five-year plan under this budget. We have equipped all
    staff with a basic level of computer support under our new network of
    PC's. We also are moving forward steadily with our voluntary electronic
    filing system under Public Law 104-79. At the floor funding level,
    however, we will have to slow certain planned PC network enhancements
    and, in particular, put off expanding our digital imaging technology
    for documents other than financial reports by political committees.
    Despite our ability to reprogram some extra funding into our
    computerization efforts in fiscal year 1996, our request for $3.26
    million for computerization in fiscal year 1997 was cut by a larger
    amount to $2.5 million. Sensing that we could not expect more than the
    amount allowed for fiscal year 1997, and concerned about expanding the
    overall budget request, we have therefore limited our request for
    computerization in fiscal year 1998 to the same $2.5 million level.
    This is well below the fiscal year 1998 funding level suggested in our
    original Computerization Strategic and Performance Plan. Taking into
    consideration current budget constraints, our revised Computerization
    Strategic and Performance Plans for fiscal year's 1997-2002 now extends
    by one year the implementation period for digital imaging and adjusts
    upward the costs for certain fiscal years. The overall cost for the
    computerization initiatives will not increase over the originally-
    planned level, however.
        We project mixed performance in our compliance programs at this
    level of funding. Our present field audit work largely is consumed with
    the eleven presidential primary campaigns, the national party
    conventions and three general election campaigns--all of which
    participated in the public funding program. About $235 million in
    public funds were disbursed to these committees. Our auditors are
    confident, however, they can meet our two-year internal deadline of
    releasing final reports for all these extensive audits. This timetable
    was aided by the Democratic primary being essentially uncontested and
    by many of the Republican primary candidates dropping out early in the
    race.
        The disclosure reports of privately-financed House, Senate, PAC,
    and Party committees are given desk audits by our Reports Analysts.
    This activity serves multiple purposes. It identifies and corrects
    disclosure problems, thereby ensuring an accurate public record; it
    serves to train treasurers on how to comply with the law; and, finally,
    it identifies glaring problems that warrant addressing under either our
    enforcement or for-cause field audit programs. This activity has been
    strained by combining fewer staff and more and larger reports. We now
    have over 8,000 reporting committees. Within that number, larger
    committees (Senate campaigns over $500,000 and other committees over
    $250,000) represent the bulk of this desk audit work. The number of
    committees within that subset has doubled from 1982 to 1994 * * * from
    568 to 1,249. In response, higher tolerance thresholds have been set in
    our review procedures. This reduces the workload, but it also glosses
    over some degree of non-compliance.
        Our enforcement and litigation staff continue to be strained,
    despite the implementation of a similar threshold process--the
    Enforcement Priority System. At present, even without the Enforcement
    Priority System in place, the Commission has more cases awaiting
    assignment than being actively worked. As of January 31, 1997, we had a
    total caseload of 366 matters. At the beginning of fiscal year 1995,
    prior to the rescission, our Office of General Counsel had 32 Attorney
    FTE assigned to enforcement cases. Today, we have only 26 Attorney FTE
    assigned to enforcement cases. To demonstrate the impact of these
    reductions, in 1995 we had as many as 163 cases being actively worked;
    now only 98 cases are active. The floor level we seek adds only 2.7 FTE
    to the fiscal year 1997 ceiling for the Office of General Counsel. Many
    of the investigations and civil actions currently underway are too
    important to dismiss and too complex for one or two staff to handle.
        It is, therefore, a mixed message I am giving today as regards our
    proposed floor funding level. We fully appreciate the fiscal climate
    and present a request reflecting that reality. Given the workload
    before us, we urge this level not be reduced. At the same time, we must
    be candid and realistic on what can be accomplished under this budget.
        This floor funding and the attached performance plan address the
    workload we anticipated when we developed our original budget request.
    The augmentation addressed in the following paragraphs addresses the
    unexpected compliance work arising out of the 1996 election.
                fiscal year 1998 amendment: $4.9 million--37 fte
        With full support from the President and OMB, we propose to augment
    the floor budget with a special multi-disciplined project to mount an
    appropriate investigative response to the extraordinary problems
    associated with the 1996 election.
        To implement the first phase of our proposal, the FEC requested
    $1.7 million and 7.8 FTE to supplement our fiscal 1997 budget.
    Unfortunately, the recently-enacted Emergency Supplemental bill
    contained no provision for the FEC. At this juncture, we appeal to you,
    Mr. Chairman, and your colleagues, to report out a bill at the level of
    our fiscal 1998 amended request so that we will have the necessary
    funds for this agency to accomplish its mandated mission.
        This election generated a third more complaints than the 1994
    election. Among them are several allegations of violations of
    unparalleled scale. These cases entail complex factual matters,
    contentious legal and constitutional issues, and involve millions of
    dollars and thousands of financial transactions requiring detailed
    review. The law's confidentiality provisions preclude much elaboration
    on these matters, but we all read the newspapers and know well the
    alleged excesses that arose in this election. The alleged abuses
    involve fundraising from non-resident foreign nationals, the use of
    soft money possibly spent to circumvent the party spending limits on
    behalf of publicly-funded presidential candidates, coordination in
    assertedly independent expenditures, and massive, but undisclosed,
    expenditures on issue advertisements with an electioneering message by
    labor and business interests.
        Under 2 U.S.C. Sec.  437c(f)(3), we are seeking assistance from
    other investigative agencies for non-reimbursable staff details for
    this effort; however, given the fiscal climate, we are not optimistic
    about such an augmentation. We know we will need investigators,
    attorneys, auditors, systems analysts and clerical support staff to
    uncover the extent of the potential violations. Appropriate overhead
    expenses for space, supplies, computer hardware, travel and contractual
    support are also necessary. Our initial cost analysis was based on an
    assumption that we would cover most of this efforts' fixed start-up
    costs with the $1.7 million 1997 supplemental funds and then cover
    essentially staff and direct support costs in fiscal 1998. With the
    loss of the supplemental, we will now have to bear those start-up costs
    (mostly for computer hardware, software, and equipment, furniture and
    supplies) in fiscal 1998. This then reduces the number of additional
    staff we can afford from 47 to 37 FTE. This, in turn, means narrowing
    the breadth of our investigations.
        We have priced this investigative effort on the attached tables
    which break down these expenses by the traditional object
    classifications. If we secure the support of details and/or services
    from other agencies, we will adjust these figures downward.
        Until such time as we have developed more complete evidentiary
    records on these allegations and deliberated on whether and to what
    extent the law may have been broken, it is difficult to project how
    many discreet investigations should go forward and with what degree of
    depth. We also do not know the degree of cooperation or recalcitrance
    we may encounter from respondents. These matters warrant thorough
    investigations. If, however, we do not need all of the additional
    funds, we can either request reprogramming or lapse any funds not
    needed. This request is thus a ``worst case'' scenario.
                                   conclusion
        Finally, I must emphasize, this budget request speaks only to our
    responsibilities under the current law. We know Congress is
    deliberating a number of proposals that would significantly amend the
    law significantly. Any additional mandate imposed on the agency for
    rapid implementation likely will require additional funding. Given the
    variety of ideas proposed and the considerable effort involved in
    formulating cost projections thereon, we would rather defer a cost
    analysis on these proposals until enactment of a given set of proposals
    looks likely.
        This concludes our testimony. We stand ready to provide the
    Subcommittee with any additional information it may require.

                     FISCAL YEAR 1998 FEC BUDGET REQUEST AS AMENDED, NO FISCAL YEAR SUPPLEMENTAL FEC STAFFING BY FTE (FULL TIME EQUIVALENT)
                                                                        [In fiscal years]
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                           FEC historical FTE
                                                                                              1997  -------------------------------
                                                                      1995  post-    1996   M. plan                          1998       1998         1998
                                 Office                                rescission   actual             1997  M.     1997   reduced   amendment     request
                                                                                            current      plan     M. plan             24-June      amended
                                                                                                      supplement    final  perfor.
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Commissioners...................................................         19.1     16.3     17.7  ...........     17.7     18.0  ...........         18.0
    Staff director..................................................         26.1     25.8     25.0  ...........     25.0     25.0  ...........         25.0
    Administration..................................................         19.2     20.0     20.0  ...........     20.0     20.0  ...........         20.0
    Audit...........................................................         31.3     37.3     34.3  ...........     34.3     34.0            8         42.0
    Information.....................................................         13.5     12.7     13.0  ...........     13.0     13.0  ...........         13.0
    General counsel.................................................        104.3     95.3     93.3  ...........     93.3     96.0           27        123.0
    Clearinghouse...................................................          6.0      5.2      5.0  ...........      5.0      5.0  ...........          5.0
    Data systems....................................................         35.0     30.7     35.0  ...........     35.0     35.0            2         37.0
    Public disclosure...............................................         14.6     14.6     13.3  ...........     13.3     14.0  ...........         14.0
    Reports analysis................................................         41.9     40.4     41.0  ...........     41.0     42.0  ...........         42.0
    Office of Inspector General.....................................          3.8      4.0      4.0  ...........      4.0      3.0  ...........          3.0
                                                                     ---------------------------------------------------------------------------------------
          Subtotal..................................................        314.8    302.3    301.6  ...........    301.6    305.0           37        342.0
    ADP/EF..........................................................           NA      6.2      5.3  ...........      5.3      8.5  ...........          8.5
                                                                     ---------------------------------------------------------------------------------------
          Total.....................................................        314.8    308.5    306.9  ...........    306.9    313.5           37        350.5
    --------------------------------------------------------------------------------------------------------------------------------------------------------

                      FEC FISCAL YEAR 1998 AMENDED BUDGET REQUEST, NO FISCAL YEAR 1997 SUPPLEMENTAL
    ----------------------------------------------------------------------------------------------------------------
                                                   No fiscal year 1997 supplemental
                                               ---------------------------------------  Administration      Total
                                                    OGC         Audit         Data
    ----------------------------------------------------------------------------------------------------------------
    Total costs:
        Personnel.............................   $1,726,000     $282,000     $104,000  ................   $2,112,000
                                               =====================================================================
        ADP equipment.........................      279,500       70,500       17,000  ................      367,000
        ADP support...........................  ...........  ...........      100,000  ................      100,000
        Training..............................  ...........  ...........       10,000  ................       10,000
        Furniture/equipment...................  ...........  ...........  ...........          $185,000      185,000
        Space.................................  ...........  ...........  ...........           408,600      408,600
        Phones................................  ...........  ...........  ...........            37,000       37,000
        Copy equipment........................       31,500  ...........  ...........  ................       31,500
        Supplies..............................  ...........  ...........  ...........            74,000       74,000
                                               ---------------------------------------------------------------------
          Basic overhead......................      311,000       70,500      127,000           704,600    1,213,100
                                               =====================================================================
        Travel................................       60,000       50,000  ...........  ................      110,000
        Depositions...........................      110,000  ...........  ...........  ................      110,000
        Litigation document:
            Support...........................    1,320,495  ...........  ...........  ................    1,320,495
            Equipment.........................       50,000  ...........  ...........  ................       50,000
                                               ---------------------------------------------------------------------
              Subtotal........................    1,540,495       50,000  ...........  ................    1,590,495
                                               ---------------------------------------------------------------------
              Fiscal year 1998 total..........    3,577,495      402,500      231,000           704,600    4,915,595
                                               =====================================================================
    Start-up costs:
        Personnel.............................  ...........  ...........  ...........  ................  ...........
                                               =====================================================================
        ADP equipment.........................      279,500       70,500       17,000  ................      367,000
        ADP support...........................  ...........  ...........  ...........  ................  ...........
        Training..............................  ...........  ...........  ...........  ................  ...........
        Furniture/equipment...................  ...........  ...........  ...........           185,000      185,000
        Space.................................  ...........  ...........  ...........  ................  ...........
        Phones................................  ...........  ...........  ...........            18,500       18,500
        Copy equipment........................  ...........  ...........  ...........  ................  ...........
        Supplies..............................  ...........  ...........  ...........  ................  ...........
                                               ---------------------------------------------------------------------
          Basic overhead......................      279,500       70,500       17,000           203,500      570,500
                                               =====================================================================
        Travel................................  ...........  ...........  ...........  ................  ...........
        Depositions...........................  ...........  ...........  ...........  ................  ...........
        Litigation document:
            Support...........................  ...........  ...........  ...........  ................  ...........
            Equipment.........................       50,000  ...........  ...........  ................       50,000
                                               ---------------------------------------------------------------------
              Subtotal........................       50,000  ...........  ...........  ................       50,000
                                               ---------------------------------------------------------------------
              Fiscal year 1998 total..........      329,500       70,500       17,000           203,500      620,500
                                               =====================================================================
    On-going costs:
        Personnel.............................    1,726,000      282,000      104,000  ................    2,112,000
                                               =====================================================================
        ADP equipment.........................  ...........  ...........  ...........  ................  ...........
        ADP support...........................  ...........  ...........      100,000  ................      100,000
        Training..............................  ...........  ...........       10,000  ................       10,000
        Furniture/equipment...................  ...........  ...........  ...........  ................  ...........
        Space.................................  ...........  ...........  ...........           408,600      408,600
        Phones................................  ...........  ...........  ...........            18,500       18,500
        Copy equipment........................       31,500  ...........  ...........  ................       31,500
        Supplies..............................  ...........  ...........  ...........            74,000       74,000
          Basic overhead......................       31,500  ...........      110,000           501,100      642,600
        Travel................................       60,000       50,000  ...........  ................      110,000
        Depositions...........................      110,000  ...........  ...........  ................      110,000
        Litigation document:
            Support...........................    1,320,495  ...........  ...........  ................    1,320,495
            Equipment.........................  ...........  ...........  ...........  ................  ...........
                                               ---------------------------------------------------------------------
              Subtotal........................    1,490,495       50,000  ...........  ................    1,540,495
                                               ---------------------------------------------------------------------
              Fiscal year 1998 total..........    3,247,995      332,000      214,000           501,100    4,295,095
    ----------------------------------------------------------------------------------------------------------------

                                  FISCAL YEAR 1998 BUDGET REQUEST OBJECT CLASS SUMMARY
                                                    [In fiscal years]
    ----------------------------------------------------------------------------------------------------------------
                                           FEC 1998 budget request object class detail
                                      -----------------------------------------------------    Change        1998
               Object class                1996       1997  M.    Change  97    1998  red.   amendment    amendment
                                          actual    plan  Oct.-  to 98  Jan.-  perf  Oct.-    Jan.-97      Jan.-97
                                         Sept.-96        96           97            96
    ----------------------------------------------------------------------------------------------------------------
    Salaries and benefits............  $18,654,291  $19,632,500   $1,084,500   $20,717,000   $2,112,000  $22,829,000
    Overtime.........................       73,249      122,000      (55,000)       67,000  ...........       67,000
    Witnesses........................          997        5,000  ............        5,000  ...........        5,000
    Cash awards......................      170,789      200,000       70,000       270,000  ...........      270,000
    Other............................       27,146       10,000       35,000        45,000  ...........       45,000
                                      ------------------------------------------------------------------------------
          Total personnel............   18,926,472   19,969,500    1,134,500    21,104,000    2,112,000   23,216,000
                                      ==============================================================================
    Travel...........................      140,939      208,000       58,000       266,000      110,000      376,000
    Transportation of things.........       21,122       23,000        4,000        27,000  ...........       27,000
    GSA space........................    2,527,167    2,535,000       86,000     2,621,000      408,600    3,029,600
    Commercial space.................       24,502       26,000  ............       26,000  ...........       26,000
    Equipment rental.................       83,762       88,300        1,700        90,000       31,500      121,500
    Telephone local..................      180,633      170,000       10,000       180,000       33,500      213,500
    Long distance/telegraph..........       11,277       10,500          500        11,000  ...........       11,000
    Telephone intercity..............       78,514       80,000        5,000        85,000        3,500       88,500
    Postage..........................      229,159      230,000       10,000       240,000  ...........      240,000
    Printing.........................      293,669      300,000      (28,000)      272,000  ...........      272,000
    Microfilm prints.................       29,167       28,000        2,000        30,000  ...........       30,000
    Training.........................       40,181       56,383        9,617        66,000       10,000       76,000
    Administration expenses..........       80,127       69,420       13,580        83,000  ...........       83,000
    Depositions/transcripts..........       28,700       36,000        3,000        39,000      110,000      149,000
    Contracts/other..................      724,676      686,500        7,500       694,000    1,420,495    2,114,495
    Building maintenance.............       15,606       11,080       (6,080)        5,000  ...........        5,000
    Other repairs/maintenance........      281,259      286,200       26,800       313,000  ...........      313,000
    Tuition..........................        6,413        3,617        2,383         6,000  ...........        6,000
    Software, hardware...............      190,632      225,000       20,000       245,000  ...........      245,000
    Federal agency service...........      298,892      282,500          500       283,000  ...........      283,000
    Supplies and materials...........      331,287      255,000        5,000       260,000       74,000      334,000
    Publications.....................      128,472      133,500        3,500       137,000  ...........      137,000
    Publications service.............      122,082      124,000        3,000       127,000  ...........      127,000
    Equipment purchases..............      135,015      117,000      (21,500)       95,500      602,000      697,500
    Computerization: EF/AD...........    1,546,465    2,210,500     (216,000)    1,994,500  ...........    1,994,500
                                      ------------------------------------------------------------------------------
          Nonpersonnel total.........    7,549,718    8,195,500          500     8,196,000    2,803,595   10,999,595
                                      ------------------------------------------------------------------------------
          Total FEC..................   26,476,190   28,165,000    1,135,000    29,300,000    4,915,595   34,215,595
    ----------------------------------------------------------------------------------------------------------------

    Transactions entered into data base each election cycle: 1994-96--as of
                            December of election year

            Election cycle                                      Transactions
    1984..........................................................   365,796
    1986..........................................................   234,530
    1988..........................................................   620,263
    1990..........................................................   720,443
    1992.......................................................... 1,076,315
    1994.......................................................... 1,191,272
    1996.......................................................... 1,799,827

    Total disbursements in Federal elections includes reportable ``soft
    money''

                            (In millions of dollars)

            Election cycle                                Total disbursement
    1976..............................................................  $310
    1978..............................................................   386
    1980..............................................................   768
    1982..............................................................    95
    1984.............................................................. 1,259
    1986.............................................................. 1,094
    1988.............................................................. 1,607
    1990.............................................................. 1,115
    1992.............................................................. 2,051
    1994.............................................................. 1,708
    1996...........................................................\1\ 2,650
    1998...........................................................\2\ 2,000

    \1\ Projected 12/31/96.
    \2\ Estimate.
    ---------------------------------------------------------------------------

      1980-1996 Presidential elections: Certification of primary matching
               funds; millions of dollars certified per audit FTE

            Election cycle                                            Amount
    1980.............................................................. $2.18
    1984..............................................................  2.81
    1988..............................................................  4.27
    1992..............................................................  4.99
    1996..............................................................  6.30
                                     ______

                    Questions Submitted by Senator Campbell

                                   adp budget
        Question. Much of the FEC public records work and in the agency's
    fiscal year 1998 amended request notes that further modernization of
    ADP will result in some savings in staff resources. Please explain, in
    light of these potential savings, why the FEC has planned for a
    $216,000 reduction in the ADP budget?
        Answer. The Commission has not planned a reduction in the ADP/
    Electronic Filing projects budget. The attached spreadsheets for fiscal
    year 1997 and 1998 depict the total planned expenditures for the ADP/EF
    projects is $2,519,496 in fiscal year 1997 and $2,516,000 in fiscal
    year 1998, which is virtually the same. The summary by object class is
    somewhat misleading in that it depicts a $216,000 decrease in non-
    personnel costs allocated to the ADP/EF projects from fiscal year 1997
    to fiscal year 1998; however, this number does not include personnel
    costs for the projects. The difference is made up in personnel, with
    5.3 FTE planned in fiscal year 1997 and 8.5 FTE budgeted for fiscal
    year 1998. This reflects need for staff to design, implement, maintain,
    service, and train users of the new systems in fiscal year 1998 and
    beyond.

                                          ORIGINAL FEDERAL ELECTION COMMISSION AMENDED FISCAL YEAR 1998 BUDGET REQUEST
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                         Fiscal years
                           Division/office                        --------------------------  Supplement   Final 1997  Fiscal year   Amendment   Final  1998
                                                                       1996         1997         1997                      1998         1998
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Commissioners................................................   $1,652,437   $1,817,675  ...........   $1,817,675   $1,930,500  ...........   $1,930,500
    Staff director...............................................    1,926,607    2,052,499  ...........    2,052,499    2,007,500  ...........    2,007,500
        SDO/COM. SEC.............................................      824,583      899,037  ...........      899,037      882,000  ...........      882,000
        P AND M..................................................      167,567      201,967  ...........      201,967      184,500  ...........      184,500
        Personnel................................................      443,578      473,559  ...........      473,559      442,000  ...........      442,000
        Press....................................................      401,652      386,440  ...........      386,440      399,000  ...........      399,000
        EEO......................................................       89,227       91,496  ...........       91,496      100,000  ...........      100,000
    Administration...............................................    4,803,343    4,849,538      448,783    5,298,321    5,046,900      605,100    5,652,000
    Audit........................................................    2,216,413    2,375,714      157,550    2,533,264    2,460,000      401,500    2,861,500
    Information..................................................      921,093      956,341  ...........      956,341      972,000  ...........      972,000
    OGC..........................................................    7,012,057    7,258,667    1,041,262    8,299,929    7,744,100    3,697,495   11,441,595
    Clearinghouse................................................      492,340      503,252  ...........      503,252      526,000  ...........      526,000
    Data systems.................................................    3,008,497    2,903,200       61,320    2,964,520    3,047,000      211,500    3,258,500
    Public disclosure............................................      885,013      794,191  ...........      794,191      852,500  ...........      852,500
    RAD..........................................................    1,738,233    1,861,777  ...........    1,861,777    1,967,500  ...........    1,967,500
    IG...........................................................      246,192      272,650  ...........      272,650      230,000  ...........      230,000
    ADP/EF.......................................................    1,573,965    2,519,496  ...........    2,519,496    2,516,000  ...........    2,516,000
                                                                  ------------------------------------------------------------------------------------------
          Total..................................................   26,476,190   28,165,000    1,708,915   29,873,915   29,300,000    4,915,595   34,215,595
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Notes: Cash awards are not distributed by office in fiscal years 1997 and 1998; they are budgeted for areasand held in the personnel office, P and M,
      OGC, AUDIT, and SDO until awarded.
    Administration overhead such as space and supplies are allocated to the administration division in the fiscal year 1997 supplemental and fiscal year
      1998 amendment packages as they normally are.
    Fiscal year 1996 reflects lapse to Treasury as of 9/30/96 of $14,810 to cover outstanding obligations made but not finally paid as of 9/30/96 (potential
      changes in final payments).
    Budgets for the SDO components are subtotals of the SDO total.

                  contract services/incremental support costs
        Question. Please provide for the Subcommittee a detailed outline of
    how the FEC intends to obligate the $1.343 million in the Contract
    costs/other object class 25.2 Answer. The $1.343 million referenced
    reflected the increment to this object class from the original FEC
    ``Reduced performance Level'' request of $29.3 million to process the
    extraordinary cases arising from the 1996 elections. The $1.343 million
    cost included two major elements:

    Original fiscal year 1998 incremental budget request for 1996 cases

    Litigation document control services (OGC)....................$1,243,125
    ADP support (data systems)....................................   100,000
                        --------------------------------------------------------------
                        ____________________________________________________

          Total object class 25.21................................ 1,343,125

        The estimate for document control services is based on volume
    estimates for documents and pages to be scanned and indexed, and vendor
    fee schedules for that service. The ADP costs were an increment to
    existing Data Systems infrastructure support for 47 additional FTE in
    fiscal year 1998.
        Because our requested fiscal year 1997 Supplemental was not
    approved, we will be unable to support 47 FTE with the requested
    increment for fiscal year 1998, as start-up costs initially contained
    in the fiscal year 1997 supplemental now will be expended in the fiscal
    year 1998 budget. As a result, only 37 FTE will be supported, but the
    infrastructure support still will be necessary. However, work on the
    enforcement cases which was to be initiated in fiscal year 1997 now
    will occur in fiscal year 1998. Up-front work such as preparing
    documents and initial organizational case work will take place; further
    investigational efforts will be delayed because of diminished staff
    resources As a result of these changes, the incremental support costs
    are as follows:

    Revised fiscal year 1998 incremental budget request for 1996 cases

    Litigation document control services (OGC)....................$1,320,495
    ADP support (data systems)....................................   100,000
                        --------------------------------------------------------------
                        ____________________________________________________

          Total object class 25.21................................ 1,420,495

        The contract services are for on-going litigation and enforcement
    efforts, and are not to be confused with the developmental work
    contained in the ADP/EF project funds. Those funds will develop and
    implement the FEC's own case management and document control systems
    for future work.

                                  FISCAL YEAR 1998 BUDGET REQUEST OBJECT CLASS SUMMARY
                                                    [In fiscal years]
    ----------------------------------------------------------------------------------------------------------------
                                           FEC 1998 budget request object class detail
                                      -----------------------------------------------------    Change        1998
               Object class                1996       1997  M.    Change  97    1998  red.   amendment    amendment
                                          actual    plan  Oct.-  to 98  Jan.-  perf  Oct.-    Jan.-97      Jan.-97
                                         Sept.-96        96           97            96
    ----------------------------------------------------------------------------------------------------------------
    Salaries and benefits............  $18,654,291  $19,632,500   $1,084,500   $20,717,000   $2,112,000  $22,829,000
    Overtime.........................       73,249      122,000      (55,000)       67,000  ...........       67,000
    Witnesses........................          997        5,000  ............        5,000  ...........        5,000
    Cash awards......................      170,789      200,000       70,000       270,000  ...........      270,000
    Other............................       27,146       10,000       35,000        45,000  ...........       45,000
                                      ------------------------------------------------------------------------------
          Total personnel............   18,926,472   19,969,500    1,134,500    21,104,000    2,112,000   23,216,000
                                      ==============================================================================
    Travel...........................      140,939      208,000       58,000       266,000      110,000      376,000
    Transportation of things.........       21,122       23,000        4,000        27,000  ...........       27,000
    GSA space........................    2,527,167    2,535,000       86,000     2,621,000      408,600    3,029,600
    Commercial space.................       24,502       26,000  ............       26,000  ...........       26,000
    Equipment rental.................       83,762       88,300        1,700        90,000       31,500      121,500
    Telephone local..................      180,633      170,000       10,000       180,000       33,500      213,500
    Long distance/telegraph..........       11,277       10,500          500        11,000  ...........       11,000
    Telephone intercity..............       78,514       80,000        5,000        85,000        3,500       88,500
    Postage..........................      229,159      230,000       10,000       240,000  ...........      240,000
    Printing.........................      293,669      300,000      (28,000)      272,000  ...........      272,000
    Microfilm prints.................       29,167       28,000        2,000        30,000  ...........       30,000
    Training.........................       40,181       56,383        9,617        66,000       10,000       76,000
    Administration expenses..........       80,127       69,420       13,580        83,000  ...........       83,000
    Depositions/transcripts..........       28,700       36,000        3,000        39,000      110,000      149,000
    Contracts/other..................      724,676      686,500        7,500       694,000    1,420,495    2,114,495
    Building maintenance.............       15,606       11,080       (6,080)        5,000  ...........        5,000
    Other repairs/maintenance........      281,259      286,200       26,800       313,000  ...........      313,000
    Tuition..........................        6,413        3,617        2,383         6,000  ...........        6,000
    Software, hardware...............      190,632      225,000       20,000       245,000  ...........      245,000
    Federal agency service...........      298,892      282,500          500       283,000  ...........      283,000
    Supplies and materials...........      331,287      255,000        5,000       260,000       74,000      334,000
    Publications.....................      128,472      133,500        3,500       137,000  ...........      137,000
    Publications service.............      122,082      124,000        3,000       127,000  ...........      127,000
    Equipment purchases..............      135,015      117,000      (21,500)       95,500      602,000      697,500
    Computerization: EF/AD...........    1,546,465    2,210,500     (216,000)    1,994,500  ...........    1,994,500
                                      ------------------------------------------------------------------------------
          Nonpersonnel total.........    7,549,718    8,195,500          500     8,196,000    2,803,595   10,999,595
                                      ==============================================================================
          Total FEC..................   26,476,190   28,165,000    1,135,000    29,300,000    4,915,595   34,215,595
    ----------------------------------------------------------------------------------------------------------------

                                  cola request
        Question. What is the COLA percentage rate requested in the fiscal
    year 1998 amended budget request?
        Answer. The projected COLA's, based on OMB guidance at the time of
    the preparation of the fiscal year 1998 budget request, were 3.0
    percent for fiscal year 1997 (effective January 1997) and 3.1 percent
    for fiscal year 1998 (effective January 1998, or for approximately 75
    percent of the fiscal year ). The effective 1998 increase was,
    therefore, 2.33 percent in fiscal year 1998.
                           reduced budget assumptions
        Question. Please provide a detailed breakdown of the activities the
    FEC will not be able to continue if the fiscal year funding level is 5
    percent, 10 percent or 15 percent below the amended request rate.
        Answer. As noted in our testimony, our amended budget is based upon
    an extraordinary additional compliance workload related to the 1996
    election. Because of the law's strict confidentiality provision, we
    cannot speak to the issues before the Commission, except in the most
    general terms. Until we have a reasonable idea of the resources we will
    receive for fiscal year 1998, the Commission cannot determine either
    how many investigations and audits to mount or what mix of cases (new
    and old--complex and simple) best serve the law's remedial and
    deterrent goals. If our budget is reduced, tough decision-making will
    be required to parse out insufficient funds for the competing interests
    of compliance, disclosure, education, and prudent agency
    administration. Staff levels that can be supported at the specified
    funding levels are outlined below; however, we cannot specify what
    necessary work would not be undertaken at these levels.
        Our original amended request of $34.2 million was presumed to
    support a total of 360.5 staff members expressed as full-time
    equivalents (FTE's). With the loss of the fiscal year 1997
    supplemental, however, we now must absorb the major start-up costs for
    the incremental units within fiscal year 1998. Most of that money is
    needed for a one-time case management computer support contract and
    desk top computing equipment for the additional staff. Having to bear
    this cost in fiscal year 1998 means we already will have lost 10 FTE.
    That amounts to a 20 percent reduction in the incremental staff we want
    to apply to the 1996 election compliance work. Fewer investigations
    will be commenced and those undertaken must be narrowed in focus and
    likely will take longer to resolve.
        Five percent of $34.2 million amounts to $1.71. While this is
    roughly the same amount lost when the supplemental was rejected, more
    of it would have to be taken from staff salaries. Including salaries,
    benefits and all the associated equipment, supplies, space and
    overhead, the loss of that amount translates to about 15 FTE. The loss
    of another 15 staff means initiating even fewer cases and audits, and
    those commenced would take longer (which matters would be foregone
    would be the subject of considerable analysis and deliberation).
        A ten percent reduction would represent the loss of an additional
    15 FTE, which, when combined with the 10 FTE lost because of the
    rejected supplemental and the 15 FTE noted above, effectively
    eliminates 40 of the 47 FTE increment sought in the amendment. At this
    point, the Commission would have no augmentation in the face of the
    high profile compliance issues that arose during and immediately
    following the 1996 election. At least some of the major compliance
    matters nonetheless demand concerted Commission investigation and this
    will divert resources from the regular caseload. This, in turn, will
    result in more summary closings without proper resolution and possible
    court challenges by aggrieved complainants. Cuts in other activities,
    such as proactive outreach and training, in all likelihood will be
    required. Such training reduces costly compliance problems within the
    regulated community and facilitates voluntary compliance, so making
    such reductions can result in long-term inefficiencies.
        A fifteen percent reduction goes even further and cuts into the
    original floor level of funding which would have sustained 313.5 FTE.
    At 15 percent off our amendment request, we project we could support
    only about 305.5 FTE and have limited support funds for travel,
    equipment and supplies. This level is below what the Commission deemed
    its floor level to meet its statutory obligations before encountering
    the 1996 election excesses. It is likely the tradeoffs to adapt to this
    level funding also would result in delayed implementation of computer
    systems development.
                            reduced fte assumptions
        Question. Please provide a detailed breakdown of activities the FEC
    will not continue if the requested FTE are not provided.
        Answer. The Commission is structured to make its programmatic and
    administrative decisions in a collegial fashion. Beyond the general
    response to this question outlined immediately above, we are not yet in
    a position to provide greater specificity. We certainly hope we will
    not have to make such decisions, but if so, they would be set out in a
    management plan for fiscal year 1998 once we know the funding level. As
    detailed as our management plans have been, even here we are guarded
    when speaking to our enforcement and audit workloads because of the
    confidentiality provision. Therefore, we respectfully must demur on
    forecasting greater specificity at this time.

                     FISCAL YEAR 1998 FEC BUDGET REQUEST AS AMENDED, NO FISCAL YEAR SUPPLEMENTAL FEC STAFFING BY FTE (FULL TIME EQUIVALENT)
                                                                        [In fiscal years]
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                           FEC historical FTE
                                                                                              1997  -------------------------------
                                                                          1995       1996   M. plan                          1998       1998         1998
                                 Office                                  actual     actual             1997  M.     1997   reduced   amendment     request
                                                                                            current      plan     M. plan             24-June      amended
                                                                                                      supplement    final  perfor.
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Commissioners...................................................         19.1     16.3     17.7  ...........     17.7     18.0  ...........         18.0
    Staff director..................................................         26.1     25.8     25.0  ...........     25.0     25.0  ...........         25.0
    Administration..................................................         19.2     20.0     20.0  ...........     20.0     20.0  ...........         20.0
    Audit...........................................................         31.3     37.3     34.3  ...........     34.3     34.0            8         42.0
    Information.....................................................         13.5     12.7     13.0  ...........     13.0     13.0  ...........         13.0
    General counsel.................................................        104.3     95.3     93.3  ...........     93.3     96.0           27        123.0
    Clearinghouse...................................................          6.0      5.2      5.0  ...........      5.0      5.0  ...........          5.0
    Data systems....................................................         35.0     30.7     35.0  ...........     35.0     35.0            2         37.0
    Public disclosure...............................................         14.6     14.6     13.3  ...........     13.3     14.0  ...........         14.0
    Reports analysis................................................         41.9     40.4     41.0  ...........     41.0     42.0  ...........         42.0
    Office of Inspector General.....................................          3.8      4.0      4.0  ...........      4.0      3.0  ...........          3.0
                                                                     ---------------------------------------------------------------------------------------
          Subtotal..................................................        314.8    302.3    301.6  ...........    301.6    305.0           37        342.0
    ADP/EF..........................................................           NA      6.2      5.3  ...........      5.3      8.5  ...........          8.5
                                                                     ---------------------------------------------------------------------------------------
          Total.....................................................        314.8    308.5    306.9  ...........    306.9    313.5           37        350.5
    --------------------------------------------------------------------------------------------------------------------------------------------------------

                      FEC FISCAL YEAR 1998 AMENDED BUDGET REQUEST, NO FISCAL YEAR 1997 SUPPLEMENTAL
    ----------------------------------------------------------------------------------------------------------------
                                                   No fiscal year 1997 supplemental
                                               ---------------------------------------  Administration      Total
                                                    OGC         Audit         Data
    ----------------------------------------------------------------------------------------------------------------
    Total costs:
        Personnel.............................   $1,726,000     $282,000     $104,000  ................   $2,112,000
                                               =====================================================================
        ADP equipment.........................      279,500       70,500       17,000  ................      367,000
        ADP support...........................  ...........  ...........      100,000  ................      100,000
        Training..............................  ...........  ...........       10,000  ................       10,000
        Furniture/equipment...................  ...........  ...........  ...........          $185,000      185,000
        Space.................................  ...........  ...........  ...........           408,600      408,600
        Phones................................  ...........  ...........  ...........            37,000       37,000
        Copy equipment........................       31,500  ...........  ...........  ................       31,500
        Supplies..............................  ...........  ...........  ...........            74,000       74,000
                                               ---------------------------------------------------------------------
          Basic overhead......................      311,000       70,500      127,000           704,600    1,213,100
                                               =====================================================================
        Travel................................       60,000       50,000  ...........  ................      110,000
        Depositions...........................      110,000  ...........  ...........  ................      110,000
        Litigation document:
            Support...........................    1,320,495  ...........  ...........  ................    1,320,495
            Equipment.........................       50,000  ...........  ...........  ................       50,000
                                               ---------------------------------------------------------------------
              Subtotal........................    1,540,495       50,000  ...........  ................    1,590,495
                                               ---------------------------------------------------------------------
              Fiscal year 1998 total..........    3,577,495      402,500      231,000           704,600    4,915,595
    ----------------------------------------------------------------------------------------------------------------

              fec enforcement activities; request for fbi details
        Question. On March 10, 1997, the FEC contacted the Justice
    Department to request the use of FBI services to enhance the
    enforcement activities of the FEC. What was the Department of Justice's
    response?
        Answer. Although no decision has been reached yet, staff from the
    Department of Justice and the FEC have met to discuss the possibility
    of FBI or other DOJ personnel enhancing the Commission's enforcement
    activities.
              proposed ``soft money'' ban; effect on fec resources
        Question. The President recently suggested eliminating ``soft'' or
    ``in kind'' campaign contributions. How would this change impact FEC
    resources and responsibilities?
        Answer. While the Commission has received and released for public
    comment two petitions for rulemaking on ``soft money'', neither
    petition addresses ``in-kind'' campaign contributions. The Commission
    is still in the very early stages of considering these petitions and,
    in accordance with agency rules, has not yet taken any position on the
    merits of the proposals. For this reason, it is impossible to predict
    what impact any change would have, as the range of potential outcomes
    remains broad.
                    clearinghouse of election administration
        Question. The Clearinghouse on Election Administration provides
    information to election administrators. Please provide a breakdown of
    the costs associated with maintaining this and related databases.
        Answer. The Clearinghouse is comprised of 5 staff (6 prior to the
    fiscal year 1995 appropriation), and has responsibility for
    implementing aspects of the NVRA among more continuing
    responsibilities. An annual research budget of $50,000 to $100,000
    (depending on FEC funding) provides for contracts to produce products
    for use by state and local administrators of federal elections. The
    Clearinghouse staff acts as a resource for election administrators, and
    provides assistance to foreign election officials, particularly for
    developing democracies. The total Clearinghouse budget is normally
    about $500,000. fiscal year 1996 (actual), 1997 (planned), and the
    proposed fiscal year 1998 budget are compared below:

                              CLEARINGHOUSE BUDGETS
    ------------------------------------------------------------------------
                                                   Fiscal years--
               Object class           --------------------------------------
                                           1996         1997         1998
    ------------------------------------------------------------------------
    Personnel........................     $387,889     $377,022     $400,000
    Travel...........................       10,853       35,000       45,000
    Contracts........................       44,901       55,000       55,000
    Printing.........................       42,465       30,000       20,000
    Other............................        6,232        6,438        6,000
                                      --------------------------------------
          Total budget...............      492,340      503,440      526,000
                                      ======================================
    Staffing (FTE)...................          5.1      \1\ 4.2          5.0
    ------------------------------------------------------------------------
    \1\ Projected.

                              cola's/locality pay
        Question. The FEC budget request includes a pay increase of 3.1
    percent in fiscal year 1998 to cover [the cost of] the COLA and
    locality pay increases. Please adjust the budget request to reflect the
    fiscal year 1998 pay increase of 2.8 percent only.
        Answer. A pay increase of 2.8 percent effective January 1, 1998
    percent versus a pay increase of 3.1 percent results in a reduction of
    $40,000 from our base request of $29,300,000 and a reduction of $5,000
    from our requested fiscal year 1998 increment of $4.9 million. The
    total adjustment for fiscal year 1998 would be: $45,000 (the difference
    between an effective cost of 2.33 percent and an effective cost of 2.1
    percent). However, we note the requested fiscal year 1998 budget did
    not include any costs for the newly-proposed increase in employer
    contributions to the CSRS funds. A .5 percent increase in CSRS
    contributions would cost the FEC $35,000 in fiscal year 1998. For
    illustrative purposes, raising the CSRS contributions in fiscal year
    1998 would result in the following increases:

    Increase in agency CSRS contributions

            Agency increase to CSRS                      FEC Cost in FY 1998
    7 to 7.5 percent..............................................   $35,000
    7 to 8 percent................................................    70,000
    7 to 8.5 percent..............................................   105,000

        In sum, a .5 percent increase in CSRS agency contributions would
    offset the decrease in COLA costs in fiscal year 1998. Any increase in
    agency CSRS contributions above .5 percent would more than offset any
    savings from the COLA reduction.
                                     ______

                       FEDERAL LABOR RELATIONS AUTHORITY

                 Prepared Statement of Phyllis N. Segal, Chair

                                i. introduction
        Mr. Chairman and distinguished Members of the Committee: I welcome
    this opportunity to present the FLRA's fiscal year 1998 appropriations
    request and discuss the FLRA's contributions toward improving labor-
    management relations government-wide, as well as the improvements the
    FLRA has made in its internal operations. I am pleased to report that
    the FLRA is meeting the challenges posed by a constrained budget by
    increasing the efficiency and effectiveness in how we carry out the
    responsibility entrusted to us by Congress.
        We continue, as we must, to meet our statutory responsibility to
    investigate, prosecute and decide cases, and resolve bargaining
    impasses. However, instead of seeing this enforcement/adjudicatory role
    as an end in itself, our focus has shifted to giving employers and
    unions the tools with which they can carry on a constructive labor-
    management relationship, in which they are largely able to solve their
    own problems within the structure of rights and responsibilities
    created by the law. Our success is essential because the effectiveness
    of the FLRA has an impact throughout the government. We call it the
    ``multiplier effect''--every dispute that we resolve expeditiously or,
    better yet, prevent from ripening into a case that must be litigated
    and decided, saves money for the agencies and employees involved.
        As Chair of the FLRA, I have two distinct responsibilities, which
    are reflected in today's testimony. First, I am the Chief Executive and
    Administrative Officer of the FLRA, responsible for providing
    leadership to its three primary, independent components: the Authority,
    the Office of the General Counsel and the Federal Service Impasses
    Panel (the Panel). Second, I am the Chair of the three-Member
    Authority, responsible for the agency's adjudicatory functions.
        I will first testify in my capacity as the FLRA's Chief Executive
    and Administrative Officer, reviewing the FLRA's mission and general
    operations, our appropriations request, and our overall agency
    accomplishments and initiatives. I will then outline the
    accomplishments and initiatives of the Authority.
                                  ii. the flra
    A. Our mission and operation
        The FLRA is an independent agency which administers the labor-
    management relations program for 1.9 million non-postal Federal
    employees world-wide, over 1.3 million of whom are exclusively
    represented in more than 2,200 bargaining units. The FLRA is charged by
    statute with providing leadership in Federal labor-management relations
    and with resolving disputes under and ensuring compliance with Title
    VII of the Civil Service Reform Act of 1978, known as the Federal
    Service Labor-Management Relations Statute (the Statute).
        The Authority is really three agencies consolidated into one. Each
    component is independent and performs very different functions. In
    addition to the three separate components, the FLRA also provides staff
    support for two other organizations. Let me briefly outline each:
                1. The Authority
        The Authority consists of three Members who are appointed by the
    President with the advice and consent of the Senate. The Authority
    adjudicates disputes arising under the Statute, and assists Federal
    agencies and unions in understanding the Statute. In addition to
    deciding cases concerning unfair labor practices, arbitration,
    negotiability and representation issues, the Authority also works to
    help parties understand their rights and responsibilities under the
    Statute and facilitate collaborative problem-solving relationships
    between agencies and unions. The Authority includes the Office of
    Administrative Law Judges, the Office of the Solicitor, the Office of
    the Inspector General, and provides central agency management and
    administrative support to all FLRA components. In addition, the
    Authority provides staff support to the Foreign Service Labor Relations
    Board.
                2. The Office of General Counsel
        The FLRA's Office of General Counsel is the investigative and
    prosecutorial component of the FLRA. The General Counsel, who is
    appointed by the President with the advice and consent of the Senate,
    is charged with (1) investigating unfair labor practice charges; (2)
    establishing policies and procedures for processing unfair labor
    practice charges, including the active encouragement of dispute
    resolution; (3) filing and prosecuting unfair labor practice complaints
    before the Authority; and (4) supervising the Regional directors in
    carrying out their responsibilities to process representation petitions
    and supervise elections. The General Counsel is also responsible for
    the management of the Office of General Counsel employees, who make up
    over one-half of the FLRA's total work force.
                3. The Federal Service Impasses Panel
        The Panel consists of seven Presidential appointees who serve on a
    part-time basis, and are supported by a small full-time staff. The
    Panel resolves impasses between Federal agencies and unions
    representing Federal employees arising from negotiations over
    conditions of employment under the Statute and the Federal Employees
    Flexible and Compressed Work Schedules Act. In short, the Panel is the
    last step in Federal sector collective bargaining--the substitute for
    the strike and lockout in the private sector. The Panel staff also
    supports the Foreign Service Impasse Disputes Panel.
                4. The Foreign Service Labor Relations Board
        The Foreign Service Labor Relations Board (the Board), established
    under the Foreign Service Act of 1980 (the Act), administers the Act
    and is composed of three members. The Board resolves labor-management
    policy issues within the Foreign Service work force.
                5. The Foreign Service Impasse Disputes Panel
        The Foreign Service Impasse Disputes Panel, also established under
    the Foreign Service Act of 1980, resolves impasses arising from
    collective bargaining over conditions of employment affecting Foreign
    Service personnel. The Disputes Panel is composed of five members.
    B. Appropriation request
        The FLRA's fiscal year 1998 appropriations request supports all of
    these operational components. It totals $22,039,000, which will fully
    fund 216 full-time equivalent (FTE) workyears of effort. This request
    is 2 percent, or $402,000, higher than the fiscal year 1997 estimate.
        The additional funding we are requesting for fiscal year 1998
    includes: (1) $432,000 to fully fund 216 FTE's by providing the full-
    year cost of fiscal year 1997 and fiscal year 1998 pay increases of 2.8
    percent, periodic within-grade increases, career-ladder promotions,
    employee awards, and increased employee benefit costs; and (2) $35,000
    to provide for small increases in the costs of contracting out the
    travel processing and ADP support function (offset by salary and
    benefit savings due to FTE reductions in these areas), accounting and
    payroll support, and other miscellaneous service costs.
        As a result of space reductions in headquarters and Regional
    offices, we will be reducing rental payments to GSA by $65,000 in
    fiscal year 1998. This rent reduction allows us to make a smaller total
    request for our fiscal year 1998 funding than would otherwise be
    necessary.
        The FLRA's request for 216 authorized FTE's in fiscal year 1998
    represents a 14 percent decrease in our work force since fiscal year
    1993 (the baseline year for federal work force reduction initiatives)
    and maintains the agency at the same level authorized in fiscal year
    1997. This current staffing level is 33 percent smaller than it was in
    1980, FLRA's first full operating year.
        Approximately 80 percent of the FLRA's fiscal year 1998 budget
    request is attributable to employee compensation and benefit costs.
    Office rent and telecommunications account for another 11 percent of
    the budget. The remaining nine percent of the budget accounts for all
    other spending, which includes:-the travel necessary to investigate,
    prosecute, and adjudicate complaints; transcription costs to provide a
    record of formal hearing proceedings; purchase of current legal
    research materials; costs associated with printing and issuing bound
    volumes of Authority decisions; employee development and training; and
    equipment maintenance, repair, and replacement.
        This analysis clearly demonstrates that the FLRA's work is
    personnel intensive, leaving little flexibility to absorb budget
    reductions or mandatory cost increases, such as pay raises. Any
    reduction in our budget of necessity translates into a reduction in
    staff, which leads directly to a diminished ability to fulfill our
    mission. In addition, if it becomes necessary to decrease staff, we
    would lose our newest staff members, in whom we have invested training
    and mentoring, and without whom the FLRA would be unable to provide the
    optimal level of service. We would also lose the benefits of having a
    stable work force that will allow us to continue our commitment to
    effectively carrying out our mission in the years ahead.
        In this era of necessary ``downsizing'', we believe that the FLRA
    is currently ``rightsized'' at 216 FTE's to provide the level of
    service that is necessary to deal with the current workload, and
    address the backlog in the FLRA's caseload inventory.
    C. FLRA accomplishments and initiatives
        Since my arrival as the FLRA Chair in July of 1994, I have worked
    closely with the Authority Members, the General Counsel, and the Panel
    Chair to continuously improve FLRA management and operations. We have
    strengthened the quality of our customer service by recognizing that
    our separate components share a unified mission. This has been a
    dramatic shift from the way the FLRA historically operated, when each
    component focused solely on its area of responsibility.
        One example of how we are successfully working together is the new
    representation regulations which went into effect in March of 1996.
        Representation issues involve such questions as when employees are
    represented in a bargaining unit and with which union the agency must
    bargain. These issues proliferate when agencies reorganize or downsize.
    Our new regulations streamline the representation petition process,
    expedite the procedures for conducting elections, and create procedures
    to narrow and resolve issues once a petition is filed.
        Another important initiative is the promotion of efficient Federal
    sector labor-management relationships by providing assistance,
    facilitation, education, training, and intervention services. I am very
    pleased to report that, in 1996, the FLRA launched its Collaboration
    and Alternative Dispute Resolution (CADR) program. This is the first
    ever agency-wide program dedicated to improving the parties
    relationship, helping them solve problems themselves before they become
    cases, and thereby reducing the cost of conflict and litigation in the
    Federal sector.
        CADR expands, and provides overall coordination and leadership to
    strengthen, the FLRA's labor-management cooperation and ADR efforts. I
    would like to offer two examples of this in practice. For the first
    time, we are using ADR techniques in the negotiability appeals process,
    to help parties resolve their disputes without a formal decision. In
    the area of unfair labor practice charges, ADR has been integrated into
    every step of the process: when charges are filed, which is leading to
    fewer cases being litigated (which the General Counsel will discuss);
    and at the hearing stage, when the Administrative Law Judge settlement
    project pro-actively encourages the voluntary settlement of cases,
    reducing the number that are settled on the ``court house steps.''
        In fiscal year 1996, the FLRA conducted hundreds of training and
    intervention programs for thousands of participants nationwide, on
    rights and responsibilities under the Statute, interest-based problem-
    solving, and alternative dispute resolution. This year, as the FLRA
    continues to intervene in disputes, facilitate partnerships, and
    address the legal issues related to government-wide reinvention, one of
    our primary goals is to encourage an even greater reliance on
    alternative dispute resolution to increase the early and efficient
    solution to problems.
        Our fiscal year 1998 appropriations request reflects our efforts to
    become more efficient through resource reallocation. While we are
    requesting the same number of FTE's, 216, we have reallocated staff
    from the Authority component to the Office of General Counsel to allow
    the agency to process cases in the most effective fashion.
        The FLRA's dedication to strengthening the quality of services
    through greater agency-wide coordination is illustrated by the agency's
    draft strategic plan, which we developed in February of 1996, almost
    two years before such a plan is required by the Government Performance
    and Results Act (GPRA). Even without the strictures of GPRA, I believe
    that strategic planning is vital to a well-run agency. It forces all
    employees to focus on the agency's mission and accomplish its goals.
    The FLRA's strategic planning initiative establishes agency-wide goals
    and, importantly, lays out performance indicators which will allow us
    to measure our progress. I am proud to say that OMB has used the FLRA's
    draft strategic plan as a model for other small agencies. Next month,
    we will be reviewing our experience under our draft strategic plan and
    reviewing the performance measures, not simply to assess whether the
    agency accomplished its goals over the past year, but also to determine
    that we are using the best available outcome-based measurements. We
    look forward to consulting with Congress, as required by GPRA, before
    finalizing our strategic plan.
        To guarantee that individual employee performance is tied to the
    agency's strategic planning, we also developed, in partnership with our
    employees, a new agency-wide Performance Management Plan, which ties
    each employee's performance to the agency's overall goals in concrete,
    measurable fashion. The Performance Management Plan went into effect in
    August of 1996, which puts us half-way through the first year of
    implementation. All of our staff received training about the plan, to
    ensure that our employees know what is expected of them. Our
    supervisors have received additional training to increase their skills
    in providing feedback to their staff during the mid-year reviews and
    address any performance problems which may surface during the year. We
    view this year as the first phase of our effort to truly integrate
    individual performance into our strategic planning.
        Finally, we are also increasing staff productivity and ensuring
    greater agency-wide coordination through improved technology. All of
    our Regional Offices are now fully integrated into the agency's micro-
    computer network, which will allow all staff to access Authority
    decisions and other research tools. We are also in the second phase of
    up-grading our case tracking system, which will help us measure our
    performance against the agency's strategic plan.
        Agency-wide, the FLRA and each of its components have accomplished
    much this past year. I believe we are on the right path and we look
    forward to having our customers, and most importantly the American
    taxpayer, reap the benefits as we continue.
        I would now like to turn to what each of our components has done to
    move itself down this road. Let me begin with the Authority, and then
    give the General Counsel and the Chair of the Panel an opportunity to
    present their statements.
                               iii. the authority
        As I mentioned earlier, the Authority encompasses the three-Member
    adjudicatory entity, as well as the management and administration of
    the entire agency. The fiscal year 1998 appropriations request for the
    Authority totals $11,245,000 and 90 FTE's. The activities of all the
    program and administrative offices within the Authority are described
    in detail in our Budget submission. I would like to focus here on the
    unit comprised of the Offices of the three-Member Authority.
        While the accurate forecasting of the Authority's caseload is
    difficult since the cases are initiated by the parties, based on recent
    and historical trends, we expect our caseload in fiscal year 1998 to
    remain approximately the same as the actual fiscal year 1996 level,
    i.e. roughly 550 cases. Our appropriations request reflects this
    expectation. In fiscal year 1996, the Authority closed 271 cases, a 38
    percent increase over the number closed in fiscal year 1995. The
    Authority expects to continue increasing our productivity, which will
    allow us to continue to reduce our caseload inventory.
        However, I would like to point out that our caseload is not a
    complete reflection of our total workload. Our ADR efforts, for
    example, are not captured in caseload statistics. Revisiting and
    revising agency regulations require significant staff time to complete.
    The changes in our representation regulations also affect our caseload
    statistics. For example, the new representation regulations will mean
    that we will receive one consolidated representation petition, which in
    the past would have been filed as several different petitions. While
    this consolidated petition is likely to be more complex than one of the
    prior fragmented petitions, it enables a more expeditious, efficient
    and integrated resolution of the representation questions presented.
    This illustrates the reality that each case is not equivalent. Some
    cases present complex and novel questions of law. Others simply require
    the Authority to apply settled doctrine to resolve a dispute.
    Therefore, while our caseload is one performance measure, it should not
    be the only method used to judge our overall workload.
        To increase the timeliness and quality of our decisions, we are
    developing new approaches to deciding cases filed with the Authority.
    Our goal is to maximize the clarity and stability of the law governing
    Federal sector labor-management relations, so that the parties will
    better understand and be guided by their respective rights and
    obligations. Our primary focus is concentrated on cases where the law
    is unsettled. We are working to produce decisions that are clearly
    articulated to guide the parties in the future and are soundly reasoned
    to withstand judicial review. Our aim is to create doctrine that
    emphasizes the responsibilities of the parties to each other.
        To ensure that our decisions are informed by a thorough
    understanding of some of the most complicated issues we are facing, we
    have broadly sought the views of interested and affected parties
    through amicus briefs in cases involving pivotal issues of government-
    wide concern, and initiated face-to-face meetings between Authority
    staff and parties in an attempt to clarify the issues that need to be
    decided, and here again, encouraged parties to find a negotiated
    resolution of their dispute.
                                 iv. conclusion
        Our direct customers are continuing to struggle with the issues
    raised by budget reductions and agency downsizing. Effective labor-
    management relations are essential if, as Congress has encouraged,
    agencies, unions and the employees they represent are to contribute to
    the efficient operations of government. The FLRA is committed to
    providing the leadership necessary during these crucial times by
    promoting sound Federal labor-management relations. I believe that our
    fiscal year 1998 budget request will enable the FLRA to perform this
    necessary leadership role and provide an effective labor relations
    program that meets the needs of our customers and the public they
    serve.
                                     ______

     Prepared Statement of Betty Bolden, Chair, Federal Services Impasses
                                     Panel

                                i. introduction
        Mr. Chairman and distinguished Members of the Committee: I am
    pleased to have the opportunity to submit written testimony on behalf
    of the Federal Service Impasses Panel (the Panel) in support of the
    FLRA's fiscal year 1998 appropriations request. As noted by Chair
    Phyllis Segal in her testimony, the Panel resolves impasses between
    Federal agencies and unions representing Federal employees arising from
    negotiations over conditions of employment under the Federal Sector
    Labor-Management Relations Statute (the Statute) and the Federal
    Employees Flexible and Compressed Work Schedules Act (the Act). In its
    statutory role, the Panel is often referred to as the last step in
    Federal sector collective bargaining--the substitute for the strike and
    the lockout in the private sector.
        The Panel consists of seven Presidential appointees who serve on a
    part-time basis, and are supported by a small full-time staff. The
    Statute requires that Panel Members be appointed ``solely on the basis
    of fitness to perform the duties and functions involved, from among
    individuals who are familiar with Government operations and
    knowledgeable in labor-management relations.'' Since my initial
    appointment as the Panel's Chair in October 1994, I have been fortunate
    to serve with colleagues who, in both background and temperament, are
    particularly well-suited to meet the challenges of Federal sector
    dispute resolution as they exist at the present time. The other Members
    of the Panel are Gilbert Carrillo, from Davie, Florida; Bonnie Prouty-
    Castrey, from Huntington Beach, California; Stanley M. Fisher, from
    Shaker Heights, Ohio; Dolly M. Gee, from Pasadena, California; Edward
    F. Hartfield, from St. Clair Shores, Michigan; and Mary E. Jacksteit,
    from Takoma Park, Maryland.
                              ii. past highlights
        Since its inception in 1970, the Panel has been committed to
    assisting parties in the voluntary resolution of their bargaining
    impasses. Implicit in its guiding philosophy is the recognition that a
    solution to practical workplace problems fashioned from within a
    relationship is far more preferable than a solution imposed by third
    parties. For this reason, the Panel has been highly supportive of the
    recent emphasis on interest-based bargaining and collaborative
    approaches to problem solving. Fostering a climate where collaboration
    can thrive is particularly important in the current environment of
    downsizing and streamlining, where the joint development of successful
    strategies for meeting the challenges facing agencies and employees are
    critical for survival.
        Some recent statistics from fiscal year 1996 and 1997 illustrate
    the Panel's emphasis on voluntary resolution. In fiscal year 1996, the
    Panel closed 156 cases. Of these, it was successful in obtaining
    voluntary settlements in 37 cases through prompt, personal
    interventions by Panel Members and staff. Through the first half of
    this fiscal year, of the 74 cases closed by the Panel, 22 resulted from
    voluntary settlements. Moreover, even where complete settlements are
    not attained, the use of alternative dispute resolution techniques in
    face-to-face interventions often can lead to significant reductions in
    the areas over which the parties disagree, and to a much better
    understanding by the Panel of the merits of the parties' positions.
        It has been the Panel's consistent experience that voluntary
    settlements are most likely to occur when the parties are provided with
    face-to-face assistance, either at the Panel's offices or at the site
    of the dispute. In some cases, the nature of the dispute makes it
    imperative that the Panel visit the worksite. Face-to-face assistance
    was provided in 37 cases in fiscal year 1996, and the Panel continues
    to provide such assistance in this fiscal year. While the Panel
    continues to supplement face-to-face assistance through informal
    telephone conferences, the Panel cannot be effective in achieving the
    voluntary resolution of disputes unless it can expend the necessary
    resources to cover salary and travel costs.
        While the Panel has had considerable success in promoting
    cooperative, interest-based problem solving, in some cases face-to-face
    assistance is either inappropriate or unavailing. In such
    circumstances, consistent with its statutory mandate, the Panel must
    impose settlement terms through a written decision. Written final
    actions issued by the Panel are made on a case-by-case basis after a
    thorough examination of the evidence and arguments presented. Although
    they set no precedents in the legal sense for future cases on similar
    issues, they provide valuable guidance to Federal sector labor
    relations practitioners, and can be crucial in avoiding subsequent
    impasses. Thus, given their significance to the particular parties to
    the dispute, as well as to the entire professional community, they must
    be carefully crafted and include clear and convincing rationale. During
    fiscal year 1996, 33 cases were resolved through written final actions,
    18 through the issuance of Decisions and Orders of the Panel, and an
    additional 15 through Arbitrators' Opinions and Decisions, normally by
    one of the Panel Members.
                    iii. appropriations request and workload
        The fiscal year 1998 appropriations request for the Panel totals
    $877,000 and 9 FTE's (with the seven part-time Presidential appointees
    comprising 1 FTE). Accurate forecasting of the Panel's caseload is
    difficult since the cases are initiated by the parties. From fiscal
    year 1991, when the Panel received a record 293 requests for
    assistance, through fiscal year 1996, when 163 requests were filed,
    caseload has declined steadily. During this same time, in response to
    the initiatives of the President and Congress to shrink the Federal
    work force, the Panel's level of FTE's was reduced from 11 in fiscal
    year 1993, to its current level of 9.
        While there are no formal studies to confirm the reasons for the
    decline in the Panel's caseload, we believe the two factors which have
    contributed the most are: (1) the development of labor-management
    partnerships in the Federal sector as a result of the issuance of
    Executive Order 12871 on October 1, 1993; and (2) a decision by the
    FLRA in 1993 which excluded from further negotiations matters already
    covered by existing agreements. As to the first factor, the emphasis on
    labor-management partnerships has increasingly moved the parties away
    from the traditional adversarial approach and toward collaborative
    approaches where they resolve more issues themselves, without Panel or
    other third-party intervention. With respect to the second factor, the
    exclusion from further negotiations of matters covered by existing
    agreements is focusing the parties' attentions on end-of-term
    negotiations, resulting in a decrease in the Panel's traditionally high
    percentage of impact-and-implementation impasses.
        However, like the rest of the agency, the Panel's caseload does not
    completely capture our workload. The decline in the Panel's caseload
    from fiscal year 1991 to fiscal year 1996 was offset by increases in
    the difficulty of the filed cases. The era of labor-management
    partnerships ushered in by Executive Order 12871, and the increase in
    the number of cases involving end-of-term negotiations has
    significantly altered the character of the disputes the Panel now must
    deal with. For example, the Panel is increasingly helping parties
    resolve issues relating to interest-based bargaining and so-called
    ``(b)(1)'' matters. These Panel efforts are often labor-intensive
    requiring increased assistance, particularly during the initial
    investigation stage of the dispute. Moreover, the parties often
    conclude that the complex problems associated with continuing
    Government downsizing and streamlining are not amenable to resolution
    through partnership and interest-based bargaining. Disputes over these,
    their most difficult issues, are then reserved for traditional
    bargaining, and eventually come before the Panel for final resolution.
    Similarly, the parties' increased focus on end-of-term negotiations
    often results in massive, multi-issue impasses which require
    significant expenditures of the Panel's time and resources.
                        iv. future goals and objectives
        Without repeating Chair Segal's description of the FLRA's strategic
    planning efforts which integrate the various activities of the FLRA's
    components into one agency in philosophy and practice, over the past
    year the Panel has established specific objectives for improving the
    timeliness and quality of service, for effectively using and promoting
    alternative methods of dispute avoidance and resolution to reduce the
    costs of conflict, and for developing and maintaining a highly
    efficient organization with the flexibility to meet program needs.
        For example, in the area of timeliness, we have set quantitative
    standards for case processing for fiscal year 1997 based on current
    baselines. In pursuit of the objective of improving the quality of our
    dispute resolution services, we have established quality standards for
    the most important written documents produced by the Panel's staff. As
    part of the FLRA-wide strategic planning initiative, the Panel has
    established objectives, developed performance indicators, and is
    attempting to measure its performance against those indicators to
    ensure that the Panel performs its mission in an efficient and
    effective manner.
        The Panel's future goals are directly related to what experience
    has shown maximizes the Panel's ability to excel in performing its
    mission of dispute resolution. To summarize, the Panel is striving to:
    (1) investigate promptly and with the highest possible quality of
    service all requests for assistance involving negotiation impasses in
    the Federal sector, either by telephone or through a face-to-face
    meeting with the parties, depending upon which method is most
    appropriate given the location of the parties; (2) assist the parties
    in reaching a voluntary settlement of their dispute by using
    appropriate mediation and alternative dispute resolution techniques
    designed to address their stated interests, and to encourage such
    voluntary settlements at any stage of the Panel's processes; (3) make
    timely procedural determinations regarding whether the Panel should
    assert jurisdiction in a given request for assistance and, if so, to
    select the dispute resolution procedure designed with the specific
    intent of moving the parties toward accommodation; (4) impose terms
    that resolve the dispute as promptly and equitably as possible through
    written decisions which clearly articulate the rationale providing the
    basis for the Panel's decision in cases where the Panel's and the
    parties' best efforts fail to obtain a voluntary settlement; (5) serve
    as a resource to Federal sector employees, their unions, and management
    representatives to improve their knowledge and understanding of the
    purposes, policies, rights, and responsibilities under the Statute and
    Executive Order 12871; (6) make the Panel's case handling processes
    easier to understand, easier to use, and more responsive to the needs
    of the parties; (7) improve the parties' relationships by working
    collaboratively with the other components within the FLRA to provide
    quality and effective training programs designed to educate labor and
    management on the benefits of resolving disputes without having terms
    imposed by a third party; and (8) manage effectively the resources of
    the Panel by ensuring that the parties uniformly receive the highest
    quality of service from its representatives in the most expeditious,
    courteous, and effective manner possible.
        v. customer-oriented initiatives, training, and other activities
        In addition to the Panel's participation in the FLRA's strategic
    planning initiatives, during my tenure as Chair, the Panel has
    continually engaged in efforts to improve the quality of its service.
    In this regard, Panel Members and staff met directly with customers in
    Houston, Texas, in May 1995, in Chicago, Illinois, in July 1995, and in
    Boston, Massachusetts, in May 1996, to receive valuable suggestions
    regarding where improvements could be made. We held another round-table
    discussion with our customers in San Francisco on June 9, 1997.
        In addition, in September 1995, the Panel sent out customer surveys
    to all union and management representatives who requested its
    assistance in fiscal year 1994 and 1995, the first in its 26-year
    history. The survey effort culminated in the issuance of a report which
    summarized its most important findings and listed a number of action
    items to improve the quality and timeliness of the Panel's services
    consistent with the needs expressed by its customers. Among the
    initiatives launched as a result of this report was a new expedited
    arbitration procedure intended to provide the parties with resolution
    of selected, time-sensitive disputes within 48 hours of the close of
    the arbitration hearing. In conjunction with the survey and report, the
    Panel also completed the first thorough review of its rules and
    regulations since the passage of the Civil Service Reform Act of 1978.
    The Panel published revised regulations which became effective on
    August 18, 1996, aimed at making the regulations more user-friendly by,
    among other things, providing easier access to the Panel's services
    through the use of facsimile filings of requests for assistance.
        In addition to ensuring the Panel's continued effectiveness in
    performing its traditional role as the last step in the collective-
    bargaining process, the Panel has in the past, and will continue in the
    future, to collaborate with FLRA staff members in providing interest-
    based bargaining training to parties in pending Panel cases, and
    providing Panel and staff members for participation in conferences and
    union-and management-sponsored training sessions. These efforts reflect
    the Panel's commitment, in conjunction with the other components of the
    FLRA, to provide leadership within the rapidly changing Federal sector
    environment, and to incorporate effectively the concepts of labor-
    management cooperation and interest-based bargaining into the Panel's
    mission of Federal sector dispute resolution. To ensure they are able
    to meet the challenges of this new era in labor-management relations,
    it is important to provide adequate and appropriate training and
    developmental opportunities to its professional and administrative
    support staff. To this end, as part of the FLRA's strategic planning
    initiatives, the Panel has established individual development plans for
    staff members reflecting its immediate and long-term training
    requirements. Along with the rest of the FLRA, it is also developing
    performance management measures to ensure that the training it provides
    results in enhanced performance of the Panel's mission.
                                vii. conclusion
        As long as collective bargaining in the civil service is deemed to
    be in the public interest, and Federal employees are denied the right
    to strike, some mechanism for the resolution of bargaining impasses
    will always be required. The Panel, and the FLRA as a whole, have
    worked diligently to improve the efficiency and effectiveness of its
    staff. The ``multiplier effect,'' the impact that a reduction to FLRA's
    budget would have on other agency's budgets, should not be ignored.
    Every dispute that we resolve quickly, or better yet, prevent from
    requiring a final Panel decision saves money for the agencies and
    employees involved.
                                     ______

           Prepared Statement of Joseph Swerdzewski, General Counsel

                                i. introduction
        Mr. Chairman and distinguished Members of the Committee: It is my
    pleasure to present testimony on behalf of the Office of General
    Counsel of the Federal Labor Relations Authority (FLRA) in support of
    the FLRA's appropriations request. My remarks will summarize for the
    Subcommittee our accomplishments during the past year, and the progress
    we have made toward improving the quality, responsiveness and cost
    effectiveness of the services we provide to management and labor.
                       ii. the office of general counsel
        As noted by Chair Phyllis Segal in her testimony, the FLRA's Office
    of General Counsel (OGC) is the investigative and prosecutorial
    component of the FLRA. The General Counsel, who is appointed by the
    President with the advice and consent of the Senate, has authority to:
    (1) investigate, settle and prosecute all allegations of unfair labor
    practice charges filed with the FLRA; (2) review all appeals of a
    regional director's decision not to issue a complaint; (3) establish
    policies and procedures for processing unfair labor practice charges,
    including the active encouragement of dispute resolutions; and (4)
    manage, direct, and supervise all employees in the OGC in the
    performance of their delegated responsibility to process representation
    petitions and supervise elections. The fiscal year 1998 appropriations
    request for the OGC component of the FLRA total is $9,936,000 and 117
    FTE's.
                      iii. accomplishments and initiatives
        The Office of General Counsel over the past three years has managed
    its operations in accordance with its strategic planning initiative
    begun in 1995. This plan sets forth a strategy for reducing the cost of
    conflict in the Federal Sector labor relations program by improving our
    processes for the administration of the Statute, developing innovative
    approaches to resolving disputes and improving the relationships
    between labor and management in the Federal sector. The OGC strategic
    plan correlates with the agency-wide FLRA strategic planning
    initiative, which as Chair Segal mentioned, will be discussed with
    Congress before it is finalized, as is required by the Government
    Performance and Results Act.
        The first goal of our Strategic Planning initiative has been to
    improve the OGC's administration of the Statute. One objective to reach
    this goal has been to improve the timeliness of processing of unfair
    labor practice and representation cases in order to be current in the
    processing of our caseload. In fiscal year 1996 our goal was to reduce
    the number of ULP cases over 180 days old to a total of 70 cases
    nationwide by the end of the fiscal year. (This objective was a 75
    percent reduction of cases over 180 days old in the OGC's inventory).
    The OGC exceeded this goal by reducing ULP cases over 180 days to 62.
    This objective was recently updated to no more than 210 cases over 90
    days old by the end of June 1997. If achieved, the OGC will have
    accomplished a 75 percent reduction in the number of cases over 90 days
    old in its inventory (from over 1000 cases over 90 days old to 210
    cases). As of the presentation of this testimony, we are on target to
    successfully attain this goal of becoming current in our case
    processing.
        For the first time in many years the OGC is within striking
    distance of being current in our ULP case processing because of our
    success in reducing conflict between labor and management in the
    Federal sector. For the second straight fiscal year unfair labor
    practice case filings have remained at approximately 30 percent below
    the level of filings in fiscal year 1995. We believe the significant
    reduction and maintenance of the reduction has been in large part as a
    result of the implementation of our Facilitation, Intervention,
    Training and Education (FITE) program.
        FITE exists under the umbrella of the Collaborative Dispute
    Resolution (CADR) a cross-component dispute resolution program. This
    program is aimed at developing alternative approaches to resolving
    disputes and working with the parties to improve their relationships in
    order to prevent unnecessary conflict in the future. Instead of solely
    using resources to investigate and prosecute individual unfair labor
    practice charges, we have developed this initiative to enable us to
    work with the parties in a problem solving environment, as opposed to
    the stereotypical labor-management adversarial environment. Over the
    past two years we have initiated and accomplished approximately 300
    FITE programs per year. The investment of our resources in this area
    has paid off in the significant reduction in case filings in both ULP
    and representation cases. A survey of labor and management who used our
    FITE services was conducted in February 1995. This survey indicated
    that these programs are very useful and efficient in reducing unfair
    labor practice activity at their facilities. A follow-up to this survey
    is planned in early fiscal year 1998.
        Over the past 3 years we have shifted a portion of our resources
    from enforcement of the parties' rights and responsibilities to the
    prevention of disputes and improvement of the parties' relationships.
    We are best able to assist both labor and management meet the
    challenges of government downsizing and reorganization by working with
    them to solve the disputes in a problem solving environment rather than
    through time consuming and expensive, and sometimes what may turn out
    to be pointless, litigation. Working with the parties to develop
    collaborative and non-adversarial relationships requires more than a
    single input into their relationship. It requires a wide variety of
    programs to assist them in improving their relationship, developing new
    approaches to collective bargaining and assisting them to understand
    their rights and obligations under the Statute. Although our caseload
    has gone down from a statistical point of view, our workload has not
    diminished because more of our resources have been diverted to the
    prevention of disputes rather than litigation to resolve disputes.
        The OGC has continued to provide significant services to those
    parties who have agreed to jointly develop a collaborative relationship
    under Executive Order 12871. As result, labor-management partnerships
    now exist in various forms throughout the Federal government. As part
    of these processes, we have assisted the parties in developing new
    approaches to resolving issues without resorting to litigation and in
    developing various methods of alternative dispute resolution.
        A second major goal of our strategic planning initiative has been
    to develop innovative approaches to resolving disputes in the Federal
    sector. In 1995 we began to work with facilities who filed a large
    number of cases. By using newly developed intervention techniques
    designed to improve the parties' relationships, we have been able to
    reduce the level of conflict at these facilities. As a result of our
    success in using these programs, we have increased our emphasis by
    targeting new facilities for future intervention and have lowered our
    threshold for facilities targeted for assistance from 100 cases filed
    in a 12 month period to 30 cases. We have found that high filers tend
    to come from the same facilities year after year. If we can be
    successful each year at a number of these facilities, we will hopefully
    be able to manage our ULP caseload more efficiently and effectively. As
    noted above, our strategy is to push very hard this year to become
    current in case processing so that we can use these new approaches in
    working with high filers closer to the time disputes arise and thereby
    reduce the costs to both labor and management of resolving these
    disputes, as well as hopefully preventing future ones.
        In furtherance of our goal to improve our administration of the
    Statute, the OGC has issued a number of new policies. We have continued
    to operate under our Prosecutorial Discretion policy issued three years
    ago. This policy sets forth criteria for the dismissal of what would
    otherwise be meritorious charges because they are technical violations
    of the Statute which do not otherwise further the purposes and policies
    of the Statue. Over the past three years approximately 80 charges a
    year, which otherwise would have been litigated, have been dismissed.
    Our Settlement policy places greater responsibility on the parties to
    settle their own disputes by crafting solution responsive the
    particular needs of the parties. This policy has given OGC regional
    directors more discretion to approve settlements which to do not fit
    the traditional settlement mold. We have seen significant improvements
    in the number, quality and creativeness of the settlements since the
    implementation of this policy as well as a significant decrease in the
    number of complaints, which is the first phase of the litigation
    process.
        The OGC has also issued a policy on the scope of investigations
    which explains the various investigative techniques that may be used
    and gives discretion to the regional office to stop needless
    investigation when the charge clearly has no merit. The techniques used
    to investigate will vary based on the nature of the issues in the
    unfair labor practice charges. In order to be most effective, the
    technique used must fit the charges, rather than one technique for all
    charges. This policy is aimed at reducing the cost and time consuming
    nature of an investigation by using the best technique to investigate a
    charge. It also stops an investigation when further investigation would
    not be probative. All charges deserve a high quality investigation, but
    all charges do not need the same type of investigation. With this in
    mind, the OGC has established a Quality policy which sets forth quality
    standards for the processing of unfair labor practice charges and a
    separate quality policy for representation cases.
        As a method of determining whether these quality standards are
    being met, the OGC has developed a new Appeals Policy. This new policy
    establishes quality review and not just legal review as requirements
    for each appeal filed with the OGC. Furthermore each of the OGC's
    regional offices, as part of their regional strategic plans have
    adopted regional quality review processes to ensure theses standards
    are met.
        The OGC has issued a number of guidance memoranda on various
    Federal sector labor relations subjects. I have begun this practice as
    a means of educating the parties on the current state of the law,
    giving them an understanding of how the OGC will interpret, and
    therefore enforce, the law and provide them an opportunity to gain a
    better understanding of the processes of the Statute. The OGC has
    received an average of 300 requests from throughout the Federal sector
    for the guidance memoranda and the policy issuances. We will continue
    to issue labor relations guidance in order to provide clarity and
    understanding of the Statute and the OGC's processes.
        The FLRA recently issued new representation case regulations which
    greatly changed the OGC's processes for the handling of representation
    cases. The new regulations provide much greater flexibility in using
    problem solving approaches to assist the parties with the wide spread
    reorganization of government agencies which is going on today. In the
    past, representation cases required adherence to arcane and very rigid
    rules and processes to resolve issues of the status of bargaining
    units. The resolution of disputes concerning representation matters
    frequently required litigation which in many cases became very drawn
    out and expensive. Using the new processes we have developed under the
    regulations, the OGC has been able to further expand its very vital
    assistance to agencies and unions undergoing a reorganization.
        For example, the OGC just completed assisting the Department of
    Health and Human Services and its unions to dramatically reorganize the
    structure of the bargaining units in HHS to provide a significantly
    more efficient system for dealing with labor-management negotiations
    and the changes which resulted from a massive internal reorganization
    of HHS. The methods we used are estimated to have saved over $300,000
    in litigation costs alone, and the entire process from initial meeting
    to final decision took a little over four months. In fact, no
    litigation was required because the parties entered into stipulations
    which resolved all outstanding issues. Although we cannot provide a
    precise calculation of the savings to the government by the efficiency
    brought about by the new approach to bargaining unit structure put in
    place through our assistance, such a reorganization as large and
    complex as this one which affected all employees of the Department and
    all divisions would have required numerous hearings and, in the past,
    would have taken close to three years to accomplish. Furthermore, it is
    doubtful in an adversarial environment whether the reorganization could
    have been completed as successfully to fulfill the needs of the parties
    and consistent with the requirements of the Statute.
        Similarly, we have assisted reorganization activity in a number of
    large components in the Departments of Defense and Agriculture. By
    using these new approaches the number of cases have declined and the
    costs to the parties and taxpayers have likewise declined
    significantly. However, as I mention with respect to unfair labor
    practice cases, while our representation caseload has declined, our
    workload has not. In fact, the services rendered by the OGC are in
    greater demand than ever in order to assist the parties in working
    collaboratively through the myriad of issues associated with
    governmental reorganization. With the forecasts of significant future
    reorganizations, this workload could significantly increase beyond our
    caseload forecasts. However, if we can continue to build on our
    successful approaches to dealing with these reorganizations, there will
    not be a concomitant increase in cases and the costs associated with
    them.
        This illustrates what we have called the ``multiplier effect.''
    FLRA's efforts and resources have a direct impact on the resources of
    other agencies. Without our assistance, HHS, DOD or Agriculture would
    have spent far more staff time and, therefore, money on their
    reorganizations.
        We have been successful at reducing the cost of conflict in the
    Federal sector labor relations program and assisting in the successful
    reorganization, and therefore greater efficiency of government
    departments and agencies. We have set new goals in order to be able to
    obtain even greater savings for the government in the future. We intend
    on continuing to multiply the taxpayers investment in the OGC by
    continually seeking to improve our processes and to be responsive to
    needs of our customers.
                                     ______

                        GENERAL SERVICES ADMINISTRATION

              Prepared Statement of David J. Barram, Administrator

        Mr. Chairman and Members of the Committee: I am Dave Barram, and I
    am pleased to provide a statement for the record that discusses the
    General Services Administration (GSA) and its budget request for fiscal
    year 1998.
        Last year, I promised Congress that the agency would be bold and
    begin to address fundamental and paradigm-shifting approaches to
    accomplishing its dual policy and operational roles within the Federal
    community. We are doing this, and it shows.
        When I tell people about change at GSA, they sometimes give me a
    strange look, perhaps thinking that ``this poor guy from California
    believes that a 50 year old agency will really change.'' Well, this is
    cynical and very unfair, because we are on a mission: a mission to show
    that we can be the best in every area in which we operate. I think
    three impulses drive us toward change.
        First, we believe the customer is king. We're learning what that
    really means. We thrill our customers with GSA Advantage!, with less
    than 2 cents a network minute for long distance on-net telephone
    service, and with class A space at good rates. We're getting praise for
    fixing mistakes, for making vendors provide our customers what they
    agreed to, and for explaining our products. Our Office of
    Governmentwide Policy will also thrill customers by developing
    enlightened policies in new collaborative ways.
        Second, GSA employees are taking more direct responsibility for
    their work, for their organization, and for the skills they need to
    flourish. When we decided Can't Beat GSA Leasing and Can't beat GSA
    Space Alterations made a lot of sense, GSA employees did it; we didn't
    go out and hire a bunch of high-priced consultants. Both programs re-
    engineer processes to achieve efficiencies and economies, while giving
    customers added options to meet their requirements in these areas. And,
    on behalf of the Vice President, I just announced the new Access
    America Plan that will give customers the ability to get services from
    the Government electronically; our Office of Governmentwide Policy is
    heavily involved in this initiative, and GSA is well positioned to make
    the Access America vision of electronic government a reality.
        Third, where we work and how we work is changing, and the
    availability of technology will drive that change. The ``office'' we
    are used to will be different; workers will share space, have more than
    one ``location,'' and have to be accessible wherever they are. We plan
    to be in front of that wave, to provide the workplace of the future. We
    are not just in the buildings, supply, or telecommunications business;
    we are in the business of providing Federal employees with great work
    environments that are effective, innovative, productive, and that
    anticipate the workplace of the future.
                                  perspectives
        These impulses drive us and form our framework for action. Before
    moving on to specifics of the fiscal year 1998 budget, I would like to
    put some of GSA's programs and accomplishments into this framework, and
    provide an overall perspective that the Committee may find helpful.
        Measured in obligations, our fiscal year 1998 program will be
    slightly over $13.3 billion, much of which is in the form of funded
    requests from other agencies. This continued growth over the years
    reflects customer satisfaction and confidence, an outcome of
    successfully implementing initiatives to make GSA the most competitive
    and cost effective source for goods and services within the Federal
    community.
        At the same time, budgeted employment of 14,403 full-time
    equivalents (FTE's) will be at a record low, down almost 29 percent
    since fiscal year 1993. This is also over 24,000 FTE below our peak
    work force of the early 1970's, and 9,500 FTE below employment in 1950,
    our first year of operation. We are doing more with less, and we are
    doing it well.
        Most GSA spending winds up in the private sector in some fashion.
    Of $13.3 billion in expected fiscal year 1998 obligations under our own
    accounts, only $919 million, less than 7 percent, is for personnel
    salaries and benefits. The balance represents orders that will be
    placed with commercial vendors, directly or through revolving funds,
    for goods and services.
        In total, GSA's programs will influence over $43 billion in
    Government financial transactions in the budget year. As one example,
    the agency will set in place contracts that other Federal agencies will
    directly use for an estimated $14 billion in procurements. These
    provide goods and services at significant cost savings due to GSA's
    leverage as a central purchasing agent, shown in a number of fiscal
    year 1996 accomplishments:
      --GSA's contract for the IMPAC/VISA Government purchase card saved
            $394M, and refunded $1.6M to the Government.
      --GSA's contract with American Express for the travel charge card
            generated $18M in refunds.
      --We obtained unrestricted airfares at about 56 percent off normal
            coach fare on 5,152 airline routes, and saved $1.5 billion.
            Savings of $2.4 billion are projected for fiscal year 1997.
      --The agency brought its lowest long-distance telephone rates down 35
            percent, and saved more than $200M a year.
      --Almost $205M was saved on the purchase of office supplies.
      --GSA provided fleet automobiles for 20 percent less than commercial
            rates, saving $51M.
      --Small package overnight delivery was provided for one-third below
            commercial rates, saving $40M.
      --GSA also negotiated prices for shipping freight and relocating
            employee household goods that saved $95M and $74M,
            respectively.
        As previously noted, we have accomplished a significant employment
    downsizing since fiscal year 1993--over 5,800 FTE, or nearly 29
    percent. This streamlining has been accomplished entirely without
    reductions in force or other adverse actions. Some has resulted from
    managed attrition, augmented by 4,270 buyouts planned for the fiscal
    year 1994-1997 period.
        In its operations, GSA has been rapidly moving from being a
    mandatory source to being a provider of choice, and is now effectively
    competing for customer purchases of supplies, fleet services,
    information technology services and, increasingly, real property
    services. For example, GSA's Public Buildings Service is finding new
    ways to become more competitive and customer-focused. Its Can't Beat
    GSA Leasing and Can't Beat GSA Space Alterations initiatives are
    reducing delivery times and enhancing cost effectiveness by cutting
    cumbersome procedures and offering greater competition and choice to
    Federal agencies.
      --Only fully underway for a short time, Can't Beat GSA Leasing is
            already demonstrating efficiencies, and potential savings are
            estimated at tens of millions annually.
      --Can't Beat GSA Space Alterations is targeted to take up to 60
            percent off of traditional delivery schedules, reduce
            administrative costs, and put vacant Government building space
            back into revenue-generating operation faster.
        Our programs often involve meeting broad societal goals and
    improving the quality of life for Federal employees.
      --GSA is a leader in family-friendly workplaces. We opened 3 new
            child care centers in fiscal year 1996, bringing the total to
            105 GSA-managed centers in Federal buildings, serving more than
            6,500 children. We also established 15 telecommuting centers
            nationwide, used by 40 Federal agencies, to make it easier for
            Federal employees to do their work.
      --Last year, GSA launched its Good Neighbor program, a public/private
            partnership with communities that enhances local efforts aimed
            at maintaining the vitality of American cities. The program
            supports the Clinton Administration's urban agenda by using
            GSA's authorities in real and personal property to revitalize
            downtowns and local communities across the country.
      --Under the Administration's Computers to Schools initiative, GSA
            donates its surplus computer equipment to schools and non-
            profit organizations, including community-based educational
            organizations. Particular preference is given to these entities
            in Federal enterprise communities and empowerment zones.
      --GSA celebrated a record-breaking year in contracting with small,
            minority, and women-owned businesses.
      --GSA manages the Federal Government's recycling program, which
            recycled 40,000 tons of recyclable material in fiscal year
            1996. Besides saving trees, reducing waste, and avoiding
            pollution, the program earned more than $500,000 from the sale
            of recovered materials, which, under legal authority, was
            returned to agencies to use for authorized purposes.
      --The Clean Air Act Amendments of 1990 require reduction in the
            production of ozone-depleting chemicals. GSA funds projects to
            replace or retrofit air-conditioning equipment that uses CFC's.
      --Under the Interagency Fleet Management Program, an increasing
            percentage of GSA's motor vehicle inventory is being replaced
            annually with alternative fuel vehicles, in accordance with
            Executive Order 13031.
      --Energy conservation laws and associated Executive Orders require
            all Federal agencies to reduce overall energy use by 20 percent
            from 1985 levels by fiscal year 2000. At present, we are on
            target to meet the goals and, in fiscal year 1996, captured
            nine Federal energy and water conservation awards presented by
            the Federal Interagency Energy Policy Committee and the
            Department of Energy.
                      the fiscal year 1998 budget request
        In total, we are asking the Committee to provide GSA with $224.6
    million in appropriations and $5 billion in Federal Buildings Fund
    (FBF) new obligational authority (NOA) for fiscal year 1998. This is
    summarized and compared with Committee action in prior years in the
    table, below.
        Operating appropriations are a relatively small but important part
    of our program, supporting the Office of Governmentwide Policy, the
    Office of Inspector General, and a few remaining operating programs.
    The total request of $140.6 million is $19.2 million, slightly over 12
    percent, below enacted levels for fiscal year 1997. This is basically
    attributable to the transfer of certain functions to reimbursable
    financing and termination of one-time fiscal year 1997 efforts.

                                         THE FISCAL YEAR 1998 BUDGET IN SUMMARY
                                                [In millions of dollars]
    ----------------------------------------------------------------------------------------------------------------
                                                                                     Fiscal years--
                                                                   -------------------------------------------------
                                                                      1996 actual      1997 current    1998 request
    ----------------------------------------------------------------------------------------------------------------
    Operating appropriations:
        Salaries & Expenses, Policy & Operations..................         119.214          118.173          104.487
        Office of Inspector General...............................          33.274           33.863           33.870
        Allowances, former Presidents.............................           2.181            2.180            2.250
        Expenses, Presidential transition.........................  ...............           5.600   ..............
                                                                   -------------------------------------------------
          Subtotal budget authority/appropriation.................         154.669         $159.816         $140.607
                                                                   =================================================
    Federal buildings fund new obligational authority:
        Construction & acquisition of facilities..................         545.002          758.711   ..............
        Repairs and alterations...................................         659.250          639.000          434.000
        Installment acquisition payments..........................         163.663          173.075          142.542
        Rental of space...........................................       2,402.337        2,395.228        2,275.340
        Building operations.......................................       1,344.551        1,544.651        1,331.789
        Authority for prior-year projects/activities \1\..........       (-296.943)       (-383.600)         680.543
                                                                   -------------------------------------------------
          Subtotal FBF New obligational authority.................       5,114.803        5,510.665        4,864.214
                                                                   -------------------------------------------------
          Subtotal FBF budget authority...........................          67.692          392.544           84.000
                                                                   -------------------------------------------------
          Subtotal FBF appropriations.............................          86.000          400.544           84.000
                                                                   -------------------------------------------------
          Total, TPO action (BA and NOA)..........................       5,269.472        5,670.481        5,004.821
                                                                   =================================================
    Budget authority..............................................         222.361          552.360          224.607
    Appropriations................................................         240.669          560.360          224.607
    ----------------------------------------------------------------------------------------------------------------
    \1\ Non-add entries in fiscal year 1996 and 1997 reflect approved program that cannot be accomplished due to
      Rent shortfall.

        There are several points that I want to highlight concerning the
    fiscal year 1998 FBF real property program. First, we are requesting no
    new construction projects, and only one major repair project. The
    latter is $84 million for the third and final phase of the Interstate
    Commerce Commission/Connecting Wing/Customs renovation project. In the
    interim, GSA will continue to be very much involved in construction and
    major repair efforts, given that up to $1.2 billion in previously-
    authorized projects remains available for design and/or construction
    award in fiscal years 1997 and 1998.
        Second, the budget reflects $681 million in NOA in fiscal year 1998
    to fund capital projects previously authorized by Congress. This
    Committee provided for these projects in appropriations acts based on
    GSA estimates of Rent income that GSA later determined were too high by
    $681 million. The adjustments to our revenues have resulted from a
    combination of several factors, including a market-driven reduction in
    the Rent that we charge occupying Federal agencies that we failed to
    fully account for in our estimates, overly optimistic assumptions on
    when new space would enter our inventory, and generally underestimating
    the effects of Federal downsizing. We have continued to review
    anticipated net revenues and, as explained in the attached letter from
    Public Buildings Service Commissioner Robert Peck, we expect that net
    revenue will be further adjusted downward from the budget estimate by
    $79 million in fiscal year 1997 and $132 million in fiscal year 1998.
    Corrective measures have been taken to ensure that obligations do not
    exceed income through fiscal year 1997, and we are working to refine
    the process to avoid errors in anticipated income of this magnitude in
    the future.
        Third, the budget program for Rental of Space and Building
    Operations activities anticipates a net reduction of over $100 million
    based on estimated savings from
        Federal downsizing and various cost containment strategies. This
    will be an impressive and very difficult challenge, but one that I
    believe we can meet.
        Following the tragic Oklahoma City bombing of the Alfred P. Murrah
    Federal Building, GSA participated in the Vulnerability Assessment
    Study directed by the President and conducted by the Department of
    Justice. As a result of the study, GSA requested, and this Committee
    provided, increased funds in fiscal year 1997 for security enhancements
    at GSA-controlled facilities nationwide, and we will be adding over 370
    police officers and 211 other positions, which will result in over
    1,400 security personnel in addition to 3,000 contract guards. While
    the total for police officers alone will be increased to more than 700,
    based on recommendations of a staffing study by Booz-Allen, this is not
    consistent with a ``floor'' of 1,000 Federal Protective Officers
    (FPO's) established by a provision in the fiscal year 1989
    Appropriations Act, and we are asking for its repeal.
                                    closing
        About one-hundred years ago, Elbert Hubbard said, ``the world is
    moving so fast these days, that the man who says something can't be
    done is generally interrupted by someone else doing it.'' If the need
    for adapting and changing was true a hundred years ago, it is even more
    so today.
        We are doing it. We're changing our methods and our culture, and
    our budget and accomplishments show it.
        Our Federal Supply Service keeps innovating and increasing market
    share. That's a new idea, increasing market share. Other agencies were
    starting to develop their own contracts. Now, they are abandoning them
    because we can serve them better.
        The Federal Telecommunications Service continues to creatively
    lead. Nothing is more complex these days than the world of
    telecommunications. Just over one year ago, the Telecommunications
    Reform Act of 1996 was enacted, which set in motion dramatic changes in
    the telecommunications market. We're now in the midst of the
    acquisition of telecommunications services that will support the
    Federal community well into the next century.
        And, we're doing it in the Public Buildings Service, too. Can't
    Beat GSA Leasing was a great step. Can't Beat GSA Space Alterations was
    another one. These initiatives are reducing delivery times and
    enhancing cost effectiveness by cutting cumbersome procedures and
    offering greater competition and choice to Federal agencies.
        In summary, we are moving forward, and we feel a sense of urgency.
    The President talks about having less than 1,000 days before the turn
    of the Century. I would like to see us accomplish our goal of being the
    best well before the beginning of the next millennium. I know we want
    to, and I believe we can if we keep our vision as broad as we possibly
    can. You will be hearing even more GSA success stories when we come
    before you to discuss the budgets for fiscal years 1999 and 2000.
        Mr. Chairman, this concludes my formal statement.
                                     ______

                    Questions Submitted by Senator Campbell

        Question. What is GSA proposing for the properties acquired from
    the Pennsylvania Avenue Development Corporation. If disposed of, where
    will the proceeds for this property be deposited?
        Answer. GSA proposes full disposition of all six holdings received
    from PADC within the next year. The real property assets transferred to
    GSA consist of two participating interests on sites previously sold,
    two ground leases, and two undeveloped sites. GSA is currently
    evaluating issues related to the dispositions for their feasibility and
    potential for economic return. Developing and implementing the
    disposition plans will take a minimum of one year. Factors involving
    approval process, and the real estate market where these properties are
    located, will also affect the timing of final disposal.
        The proceeds from the disposal of any of the properties that GSA
    acquired from the former Pennsylvania Avenue Development Corporation
    (PADC) will be deposited into GSA's Pennsylvania Avenue Activities
    Account.
        Question. PBS is marketing a program called ``Can't Beat GSA Space
    Alterations.'' This program provides customers a choice in performing
    space alterations of less than $100,000 themselves, or through PBS. Why
    aren't agencies being given the same flexibility for more expensive
    space alterations? The program has been available since the start of
    the year. How many clients have opted for private sector space
    alterations contracts?
        Answer. GSA has limited its blanket delegation of authority for
    customers' choice to do their own alterations to the Simplified
    Acquisition Threshold (currently $100,000) of the Federal Acquisition
    Streamlining Act of 1994. Below this threshold, customers can use the
    simplified acquisition procedures authorized by the Act, which cover
    over 90 percent of all reimbursable alteration projects.
        GSA has not made a blanket delegation of authority to customers
    above the Simplified Acquisition Threshold because we believe it
    advisable to handle choice over this amount on a case-by-case
    delegation basis. This is due to more complex procurement requirements
    above the threshold and the potential adverse impacts of larger scale
    projects on building systems and other Federal tenants.
        We do not yet have measurements on how many customers have opted to
    alter their space themselves. We expect our first measurements on GSA
    ``market share'' in October. Whether or not customers choose to do work
    in the buildings themselves is still largely driven by who operates the
    building. It should be noted that GSA has delegated the operation of
    approximately 20 percent of GSA's occupiable square footage to occupant
    agencies. If the agency operates the building, alterations are
    typically done by the agency.
        Question. On May 22, 1997, the Department of Energy announced a $5
    billion renovation of Federal buildings to cut energy bills by one
    quarter. According to the Department of Energy all funding will come
    from private companies. GSA has been engaged in an energy efficiency
    program since the passage of the Energy Policy Act of 1992. The Act and
    subsequent Executive Orders require PBS to reduce energy consumption by
    30 percent (from the base year 1985) by the year 2005. How will the
    Energy Department program impact GSA's existing program? According to
    the Department of Energy, contracts have been awarded for Federal
    office buildings in Alaska, Arizona, California, Hawaii, Idaho, Nevada,
    Oregon, and Washington. How will this program impact facilities that
    GSA has modernized or updated through its Energy Efficiency Program?
    Please detail prior year spending under the GSA energy efficiency
    program.
        Answer. DOE has developed and awarded an Indefinite Delivery/
    Indefinite Quantity (IDIQ) Contract in the Western Region of the
    country for the purpose of allowing Federal agencies to acquire energy
    efficiency related products and services. Performance-based energy
    services are available to all Federal agencies with Government-owned
    facilities in Alaska, Arizona, California, Hawaii, Idaho, Nevada,
    Oregon, Washington, Hawaii, and the Pacific Trust territories, through
    delivery orders executed under an IDIQ contract under the Federal
    Acquisition Regulation (FAR) process. This new Super Energy Savings
    Performance Contract (ESPC) involves the competitive selection of a
    small number of contractors (multiple awards).
        The Energy Department program will not directly affect the GSA
    Energy Efficiency Program. The Energy program can be used by GSA as an
    additional method to obtain products and services to meet the energy
    reduction goals of the Energy Policy Act of 1992. GSA's modernization
    or updating program is a different program than the energy efficiency
    program. The modernization program is a comprehensive reinvestment in a
    building to replace and improve major operating systems, interior space
    and finishes, and building features which result in a building with a
    new expected useful life equal to that of a new building.
        In fiscal year 1996, GSA expended $7.4 million on energy savings
    projects. From fiscal year 1990-1995, GSA spent a total of $145 million
    on major energy projects.
        Question. Please provide a chart showing construction projects in
    the pipeline. Please indicate the original completion date (and if
    necessary a revised completion date) for each component site
    acquisition/design/construction, and the status of the project for all
    major construction and repair and alteration projects.
        Answer. The requested information follows:

                                                        IN DESIGN
    ----------------------------------------------------------------------------------------------------------------
                                                                      Design complete
                   Project                      Description       ----------------------          Comments
                                                                    Original   Current
    ----------------------------------------------------------------------------------------------------------------
    IRS Center, Andover, MA.............  Facility modernization.  .........    3/31/98  ...........................
    J.C. Cleveland FB, Concord, NH......  Facility R&A...........  .........    2/14/98  ...........................
    FB-CT, Providence, RI...............  Facility R&A...........    4/30/97    4/15/97  ...........................
    IRS Service Center, Holtsville, NY..  Mod.hvac/elec sys, ADA.  .........    2/11/98  ...........................
    PO-CT, New York, NY.................  Renovation/adaptive      .........    2/18/98  ...........................
                                           reuse.
    Operations Bldg., Woodlawn, MD......  R&A....................  .........     6/8/98  ...........................
    J.A. Byrne, Philadelphia, PA........  Facade upgrade.........  .........    10/1/97  ...........................
    U.S. Courthouse, Erie, PA...........  New construction.......   10/30/98     6/1/98
    IRS Service Center, Covington, KY...  Renovations............  .........    9/20/97  ...........................
    FB-PO-CT, Raleigh, NC...............  Renovations............    8/20/98    8/20/98  ...........................
    F.M. Johnson, Jr. FB-CT, Montgomery,  Renovations............    8/20/98    8/19/99  ...........................
      AL.
    Courthouse, Jacksonville, FL........  USCT N/C...............     8/1/97     9/1/97  ...........................
    Courthouse, Orlando, FL.............  New construction.......        TBD        TBD  Site only.
    CDC Env Lab, Chamblee, GA...........  New construction.......  .........     8/1/97  ...........................
    CDC Infectuous Dis Lab, Atlanta, GA.  New construction.......  .........   10/20/97
    Courthouse Annex, Savannah, GA......  New construction.......   12/31/97   12/31/97  ...........................
    Courthouse, Greeneville, TN.........  New construction.......   12/30/97   12/30/97  ...........................
    Courthouse, Miami, FL...............  New construction.......        TBD        TBD  Need House design
                                                                                          authorization.
    Kluczynski FOB, Chicago, IL.........  Highrise improvements..  .........     7/1/97  ...........................
    JCK/PO Bldgs, Chicago, IL...........  Lobby glazing, pl        .........    1/11/95  ...........................
                                           improve.
    Kluczyoski FOB, Chicago, IL.........  Elevator improvements..  .........    3/19/96  ...........................
    H. Washington FOB, Chicago, IL......  Plaza imprvts & curtain  .........    9/24/97  ...........................
                                           wall.
    H. Washington Center, Chicago, IL...  Elev upgrade & misc      .........     9/5/97  ...........................
                                           improve.
    H. Washington Center, Chicago, IL...  Electrical improvements  .........    8/11/97  ...........................
    USPO & CT, Cincinnati, OH...........  Ct Exp & Bldg              12/1/97    12/1/97  ...........................
                                           improvements.
    Courthouse, Youngstown, OH..........  New construction.......        TBD        TBD  Hold.
    FB-CT, Cape Girardeau, MO...........  New construction.......        TBD        TBD  Site only.
    USBS Admin Bidg, Del Rio, TX........  Construct new import     .........    2/25/97  ...........................
                                           lot and docks.
    FB-CT, Laredo, TX...................  Construct new FB.......    6/30/98    4/29/98  ...........................
    Customhouse, New Orleans, LA........  Modernization-Audubon..  .........    11/1/98  ...........................
    New FB Complex, Oklahoma City, OK...  New construction.......  .........    2/18/99  ...........................
    Murrah Garage, Oklahoma City, OK....  Repair to Garage/        .........    7/30/97  ...........................
                                           Landscaping.
    DFC Bldg 25, Lakewood, CO...........  Major replacemen/        .........    4/30/98  ...........................
                                           upgrades.
    Rogers Court Annex, Denver, CO......  New construction.......        TBD        TBD  ...........................
    U.S. Border Station, Babb, MT.......  New construction.......  .........    4/24/98
    U.S. Border Station, Sweetgrass, MT.  New construction.......  .........   10/30/98
    Moss Court Annex, Salt Lake City, UT  New construction.......        TBD        TBD  Need House design
                                                                                          authorization.
    450 Golden Gate FB, San Francisco,    Upgrade urban            .........    3/31/98  ...........................
     CA.                                   landscaping.
    Appraisers Building, San Francisco,   Tenant realignment.....  .........    9/17/97  ...........................
     CA.
    Old U.S. Mint, San Francisco, CA....  Modernization..........        TBD        TBD  ...........................
    FB, San Francisco, CA...............  New Construction.......        TBD        TBD  ...........................
    USGS Bldg 1&2, Menlo Park, CA.......  Modernization..........  .........   12/17/97  ...........................
    Courthouse, Fresno, CA..............  New construction.......        TBD        TBD  Need House design
                                                                                          authorization.
    Courthouse, San Francisco, CA.......  New construction.......        TBD        TBD  Site only.
    Federal Building, Anchorage, AK.....  HVAC and other           .........   12/23/97  ...........................
                                           improvements.
    The Pioneer Courthouse, Portland, OR  Renovation, chiller        5/30/98   11/23/98  ...........................
                                           replacement.
    Border Station, Oroville, WA........  New construction.......  .........    4/30/98  ...........................
    Border Station, Blaine, WA..........  New construction.......  .........    7/29/97  ...........................
    Consolidated Law Bldg, Portland, OR.  New construction.......        TBD        TBD  ...........................
    Courthouse, Seattle, WA.............  New construction.......        TBD        TBD  Need House design
                                                                                          authorization.
    Lafayette FB, Washington, DC........  Modernization..........  .........        TBD  ...........................
    Main Interior, Washington, DC.......  Modernization Ph 1/3...  .........        TBD  ...........................
    Old Executive Omce Bldg, Washington,  Misc building            .........    4/30/98  ...........................
     DC.                                   improvements.
    FOB 1OB, Washington, DC.............  Modernization..........  .........    9/30/97  ...........................
    T. Roosevelt FB (OPM), Washington,    Modernization..........  .........        TBD  ...........................
     DC.
    State Dept Ph 1/4...................  General building         .........    10/1/97  ...........................
                                           renovation.
    JW Powell FB, Reston, VA............  Laboratory improvements  .........   11/17/97  ...........................
    SEFC infrastructure, Washington, DC.  New construction-        .........        TBD  ...........................
                                           infrastructure.
    CT Annex, Washington, DC............  New construction.......        TBD        TBD  Need House design
                                                                                          authorization.
    FDA Lab CDER, White Oak, MD.........  New construction.......  .........    6/30/98  ...........................
    FDA Lab CDRH, White Oak, MD.........  New construction.......  .........    3/30/99  ...........................
    FDA Lab CBER, White Oak, MD.........  New construction.......  .........    9/30/00  ...........................
    FDA Lab OC, White Oak, MD...........  New Construction.......  .........    9/30/00  ...........................
    ----------------------------------------------------------------------------------------------------------------

                                                     IN CONSTRUCTION
    ----------------------------------------------------------------------------------------------------------------
                                                                       Construction
                                                                         complete
                   Project                      Description       ----------------------          Comments
                                                                    Original   Current
    ----------------------------------------------------------------------------------------------------------------
    A.A. Ribicoff FB, Hartford, CT......  Facility upgrade.......  .........    1/31/98  ...........................
    Norris Cotton FB, Manchester, NH....  Facility alteration &    .........    3/15/99  ...........................
                                           upgrade.
    J.O. Pastore FB, Providence, RI.....  Facility upgrade.......  .........    9/15/97  ...........................
    USCT, Boston, MA....................  New courthouse.........    1/25/99    7/25/98  ...........................
    USBS, HighGate Springs, VT..........  New border station.....  .........    10/7/97  ...........................
    Peter Rodino FOB, Newark, NJ........  Elev. modernization....  .........    6/30/99  ...........................
    USCT (40 Foley Sq) New York, NY.....  Modern/upgrd hvac......  .........    3/12/01  ...........................
    Jacob K. Javitz, New York, NY.......  Space alt..............  .........    3/31/99  ...........................
    USCT (40 Foley Sq), New York, NY....  Elev. modernization....  .........    6/30/99  ...........................
    CT, Brooklyn, NY....................  New courthouse.........    6/30/01    2/24/01  ...........................
    Foley PO-CT, Albany, NY.............  1st flr isa for U.S.       6/30/99     3/1/99  ...........................
                                           marshalls.
    PO/CT, San Juan, PR.................  Historic/Adaptive use..    5/31/99   12/26/98  ...........................
    FOB/CT complex, ISLIP, NY...........  New Federal bidg, &        9/30/00     2/2/00  ...........................
                                           USCT.
    J.A. Byrne CT, Philadelphia, PA.....  Elevator renovations...  .........     9/1/98  ...........................
    Byrne-Green Complex, Phliadelphia,    R&A, CT expansion......    1/30/99     9/1/98  ...........................
     PA.
    SSA-Mid Atlantic Ctr, Philadelphia,   System retrofit........  .........    8/20/97  ...........................
     PA.
    SSA East High-Low Rise, Woodlawn,     Modernization..........  .........     3/1/98  ...........................
     MD.
    SSA Annex, Woodlawn, MD.............  Modernization..........  .........     6/1/00  ...........................
    G.H. Fallon FB-CT, Baltimore, MD....  IRS expansion..........    6/30/98     4/1/98  ...........................
    C.S. Fisher FB-CT, Trenton, NJ......  Courthouse backfill....   11/28/98    8/11/98  ...........................
    M.H. Cohen USCT, Camden, NJ.........  Courthouse backfill....    6/30/99    3/30/99  ...........................
    FB-CT, Harrisburg, PA...............  Court expan & sys          9/30/97    7/27/97  ...........................
                                           improv.
    SSA-Mid Atlantic Ctr, Philadelphia,    R&A...................  .........    5/10/98  ...........................
     PA.
    Courthouse, Scranton, PA............  R&A....................  .........    8/17/99  ...........................
    FOB, Richmond, VA...................  Building upgrade.......  .........    6/30/98  ...........................
    Courthouse Annex, Richmond, VA......  R&A....................  .........    3/24/98  ...........................
    Courthouse Annex, Scranton, PA......  New construction.......    8/30/98    5/10/98  ...........................
    VA FOB-phase 2, Philadelphia, PA....  Demol of existing bidg/  .........   10/29/97  ...........................
                                           parking.
    FB-CT, Charleston, WV...............  New construction.......   12/30/97   10/10/97  ...........................
    FB-CT, Beckley, WV..................  New construction.......    6/28/99    6/30/99  ...........................
    FB-CT, Wheeling, WV.................  R&A....................    8/30/99  .........
    IRS Facility, Martinsburg, WV.......  New construction.......  .........     9/8/98  ...........................
    FB-CT, Asheville, NC................  Renovations............    9/12/97    9/12/97  ...........................
    Strom Thurmond FB-CT, Columbia, SC..  Renovations............    11/3/00    11/3/00  ...........................
    F.M. Johnson Jr FB-CT An,             New construction.......    1/27/99    9/22/99  ...........................
     Montgomery, AL.
    Courthouse Annex, Tallahassee, FL...  New construction.......   11/29/98     2/1/99  ...........................
    FB-CT, Ft Myers, FL.................  New construction.......     2/2/98     2/2/98  ...........................
    FB-CT, Tampa, FL....................  New construction.......    6/16/97    9/16/97  ...........................
    IRS Service Ctr Annex, Chamblee, GA.  New construction.......  .........    7/28/98  ...........................
    Courthouse, Albany, GA..............  New construction.......    6/16/98    2/15/99  ...........................
    FB-CT, Covington, KY................  New construction.......     9/3/99     9/3/99  ...........................
    Courthouse, London, KY..............  New construction.......     9/2/99     8/6/99  ...........................
    Matthew J. Perry FB-CT, Columbia, SC  New construction.......   10/17/00   10/17/00  ...........................
    EPA Lab, Research Triangle, NC......  New construction.......  .........     2/1/01  ...........................
    Howard Baker, Jr CT, Knoxville, TN..  New construction.......    1/25/98    8/28/98  ...........................
    Kluczynski IRS, Chicago, IL.........  Mod & Realignment......  .........    1/26/00  ...........................
    E.M. Dirksen FB-CT, Chicago, IL.....  HVAC improvements......  .........     7/9/99  ...........................
    E.M. Dirksen FB-CT, Chicago, IL.....  Elevator improvements..  .........    7/25/00  ...........................
    Harold Washington, Ctr, Chicago, IL.  HVAC/EMCS..............  .........    8/31/97  ...........................
    Kluczynski FOB, Chicago, IL.........  New fire alarm system..  .........     4/6/98  ...........................
    536 S Clark FB, Chicago, IL.........  R&A....................  .........     8/1/97  ...........................
    E.M. Dirksen FB-CT, Chicago, IL.....  Clean HVAC ductwork....  .........    4/29/99  ...........................
    E.M. Dirksen FB-CT, Chicago, IL.....  Chiller plant            .........    7/27/98  ...........................
                                           demolition.
    E.M. Dirksen FB-CT, Chicago, IL.....  District court              1/3/00     1/3/00  ...........................
                                           expansion.
    A.J. Celebrezze, Cleveland, OH......  Elevator modernization.  .........     1/6/98  ...........................
    FB-CT, Cleveland, OH................  New construction.......   12/24/00   12/24/00  ...........................
    FB-CT, Milwaukee, WI................  Courts expansion.......   10/30/97   10/30/97  ...........................
    Courthouse, Hammond, IN.............  New construction.......    8/12/98        TBD  Award protest.
    Border Station, Baudette, MN........  Minor new construction.  .........    11/8/97  ...........................
    FB-CT, Wichita, KS..................  New parking fac/CT impr    6/30/98    1/16/98  ...........................
    Thomas Eagleton FB-CT, St Louis, MO.  New construction.......   10/12/98   10/12/98  ...........................
    FB-CT Kansas City, MO...............  New construction.......    3/12/98    6/30/98  ...........................
    FB-CT, Omaha, NE....................  New construction.......     7/7/99    7/25/99  ...........................
    Federal Building, Little Rock, AR...  Elec, plumb, sprink,     .........    3/18/98  ...........................
                                           asbes.
    U.S. Border Station, Santa Teresa,    R&A....................  .........    9/29/97  ...........................
     NM.
    Old law school-bankruptcy, Little     Renovation of law          3/30/98   12/10/97  ...........................
     Rock, AR.                             school.
    U.S. Border Station, Brownsville, TX  Modernize border         .........    2/28/99  ...........................
                                           station.
    FB-CT, Lubbock, TX..................  Modernize Federal          5/30/98    4/23/98  ...........................
                                           building.
    Bota Border Station, El Paso, TX....  Expand import lot &      .........     3/7/98  ...........................
                                           docks.
    A Maceo Smith FOB, Dallas, TX.......  Fire safety/             .........   10/15/97  ...........................
                                           modernization.
    U.S. Border Station, El Paso, TX....  Expand bs land and       .........    1/31/98  ...........................
                                           facility.
    Courthouse, Lafayette, LA...........  New construction.......    1/31/99   10/25/98
    FB-CT, Albuquerque, NM..............  New construction.......   11/30/99    9/16/98  ...........................
    VA Data Center, Austin, TX..........  New construction.......  .........    12/8/98  ...........................
    FB-CT, Brownsville, TX..............  New construction.......   12/31/98    10/1/98  ...........................
    Courthouse, Corpus Christi, TX......  New construction.......    9/30/00    6/30/00  ...........................
    FB-CU, Denver, CO...................  R&A....................   12/21/97   12/21/97  ...........................
    FB-PO-CT, Bismarck, ND..............  Modernization..........    1/10/98    7/15/98  ...........................
    NOAA Lab, Boulder, CO...............  New construction.......  .........   10/11/98  ...........................
    USGS Lab Bldg, Lakewood, CO.........  New construction.......  .........   10/11/98  ...........................
    U.S. Border Station, Pembina, ND....  New construction.......  .........     9/1/98  ...........................
    FB-CT Annex, Fargo, ND..............  New construction.......    10/2/97   12/15/97  ...........................
    FB 300N Los Angeles, Los Angeles,     R&A....................  .........     8/1/02  ...........................
     CA.
    CT, 312N Spring St, Los Angeles, CA.  R&A....................    9/30/98    6/30/98  ...........................
    FB, 2800 Cottage Way, Sacramento,     Seismic upgrade &        .........    3/17/99  ...........................
     CA.                                   renova.
    USGS Bldg 3, Menlo Park, CA.........  Building modernization.  .........    1/17/98  ...........................
    FB-CT(US attorneys), San Diego, CA..  U.S. atty alignment,      10/10/98    6/12/99  ...........................
                                           bidg, sys.
    Border Station Main Bldg, Tecate, CA  New construction.......  .........   10/30/98  ...........................
    Prince Jonah KK FB-CT, Honolulu, Hi.  R&A....................  .........    3/30/99  ...........................
    Courthouse, Tuscon, AZ..............  New construction.......    8/15/99    9/30/99  ...........................
    Courthouse, Phoenix, AZ.............  New construction.......   12/15/99   12/15/99  ...........................
    Courthouse, Santa Ana, CA...........  New construction.......    4/30/98   10/30/98  ...........................
    Courthouse, Sacramento, CA..........  New construction.......   12/27/97    3/31/98  ...........................
    Courthouse, Las Vegas, NV...........  New construction.......    3/15/00    4/30/00  ...........................
    FB-USPO, Richland, WA...............  Seismic, fire            .........    4/15/98  ...........................
                                           protection, HVAC.
    Courthouse, Portland, OR............  New construction.......    7/23/97    7/30/97  ...........................
    Ariel Rios FB, Washington, DC.......  Finishing the            .........    3/30/98  ...........................
                                           unfinished fa-  cade.
    ICC, Customs, Connecting Wing,        Building modernization.  .........    12/4/00  ...........................
     Washington, DC.
    FOB 8, Washington, DC...............  Elevator upgrade.......  .........    12/1/97  ...........................
    Ariel Rios FB, Washington, DC.......  Modernization Ph 2/2...  .........    9/27/99  ...........................
    New Executive Office Bldg,            Replace chillers.......  .........    7/31/97  ...........................
     Washington, DC.
    FOB 6, Washington, DC...............  General building         .........     4/1/98  ...........................
                                           renovation.
    Secret Service Hq, Washington, DC...  New construction.......  .........     6/1/99  ...........................
    SEFC Site Prep/Decontamination,        New construction......  .........   10/28/98  ...........................
     Washington, DC.
    Ronald Reagan Bldg, Washington, DC..  New construction.......  .........    11/3/97  ...........................
    IRS Hq, New Carrollton, MD..........  New construction.......  .........    9/30/97  ...........................
    Secret Service Admin Bldg,            New construction.......  .........    11/1/98  ...........................
     Beltsville, MD.
    Columbia Plaza Hi-rise, Washington,   Renovation & upgrade...  .........    1/11/98  ...........................
     DC.
    Justice Bldg Ph 1, Washington, DC...  Modernization Ph 1/3...  .........     8/1/97  ...........................
    FDA Lab CFSAN, College Park, MD.....  New construction.......  .........    8/30/98  ...........................
    ----------------------------------------------------------------------------------------------------------------

                            public buildings service
        Question. The Federal Buildings Fund was established to provide
    funds for the operation, maintenance, repair and alteration and, with
    remaining revenues, construction of federal facilities. The revenue for
    these activities is generated through agencies' payment of commercially
    equivalent rental rates. This ``Rent'' forces agencies to budget for
    their office space in their annual budget requests to Congress. The
    Public Buildings Service has stated that these revenues no longer can
    provide adequate funding levels for construction and in some cases
    major repairs and alterations. Please explain why the original revenue
    generating Rent system will no longer provide the revenue levels
    adequate to meet Federal space requirements.
        Answer. In recent years the underlying assumptions of the Federal
    Buildings Fund have not proven to be accurate. Usually, the FBF has
    generated enough revenues to operate, maintain and repair buildings.
    The Fund can also generate enough revenues to fund a limited capital
    program consisting of major building renovations and new construction.
    In recent years, the Fund has had to cope with unforeseen major
    expenditures, including the exponential expansion of our court and law
    enforcement agencies and with rent caps.
        Congress has recognized, at least tacitly, the limitations of the
    Fund by supplementing it with appropriations for many projects, such as
    the purchase contract program in 1972 and the lease purchase projects
    in the late 1980's. Over the last four fiscal years Congress has
    appropriated over a billion dollars to the Fund for construction and
    renovation.
        Question. The Federal Buildings Fund has been discussing proposing
    a new ``rent'' system since 1995. What is the status of the new system?
    Will the new system include a revolving fund component? Will agencies
    ``rent'' be tied to actual costs?
        Answer. The new Rent system, which is referred to as the New
    Pricing Policy, is presently under review by the Of lice of Management
    and Budget. Changes to the Federal Property Management Regulations
    (FPMR) necessary to implement the New Pricing Policy are being
    circulated for review and comment by OMB. There is no revolving fund
    component to this new policy. Under the new policy, Rent for leased
    space will consist of a cost pass-through of lease contract costs,
    operating costs that exceed those embedded in the lease contract, and
    GSA fees. The Rent for owned space will be priced at fair market value,
    which will be based upon a market appraisal.
        Question. What safeguards has PBS developed and implemented to
    ensure that a revenue shortfall of over $800 million does not recur?
        Answer. PBS is taking a number of different actions to deal with
    the shortfall. PBS is reviewing the accuracy of its current inventory
    data base. PBS is making improvements to its existing tracking and
    management systems. This will insure that as PBS transitions to the new
    inventory and rent data system (known as STAR), the basic data included
    in the system will be accurate and up-to-date. PBS is tracking its
    billing and collection systems continuously. PBS has asked the GSA
    Inspector General to monitor an audit of our inventory data, to be
    conducted by private contractors. This audit will consist of a detailed
    examination of all basic information on a statistically significant
    sample of the GSA inventory. Buildings will be physically measured, and
    this ``actual'' square footage will be used to validate existing
    assignment data in our system for the building, the square footage used
    to determine our billing rates, and the square footage used to bill
    customer agencies.
        PBS is also developing early warning systems to alert us to changes
    in the space inventory. The new Of flee of the CFO within PBS is
    tracking monthly income and expense data from all of our regions to
    establish trends in our system quickly. Interdisciplinary teams within
    PBS have been established to make recommendations for long-term
    improvements to the system. One such solution, which we believe has
    great potential, is our pilot program to recapture vacated space in the
    inventory in a short time period by financing the cost of our tenant
    space consolidation. This is the program we have labeled ``Ponding the
    Raindrops.''
        Question. The Public Building Service's reorganization includes an
    Innovation Division. Please explain, in detail, the responsibilities of
    this division and how the division will correspond and coordinate its
    activities with the General Services Administration's Policy and
    Operations Department?
        Answer. The Strategic Innovations Office is a small group within
    the Public Buildings Service which is responsible for nurturing and
    facilitating the development of innovative products, practices and
    strategies that improve PBS' performance, services and competitive
    edge. This organization will evaluate emerging issues affecting PBS,
    develop ideas until they are well-framed, work with other organizations
    within PBS and GSA to coordinate and shepherd initiatives, and bring
    together appropriate resources to review, evaluate and pursue concepts
    and ideas.
        Strategic Innovations will work closely with other organizations
    within the Public Buildings Service as well as other organizations
    within the General Services Administration, including the Office of
    Governmentwide Policy. The Office of Governmentwide Policy has a
    broader role as it is charged with developing governmentwide policy.
    Coordination of activities between that Of lice and Strategic
    Innovations will be accomplished through the close working relationship
    the two organizations have established.
        Question. PBS signs leases requiring fixed term leases. The
    construction of the facility or the tenant build-out is not always
    completed by the lease start date. Please provide a breakdown of
    revenue lost as a result of signing firm term leases in fiscal year
    1995, fiscal year 1996 and projected for fiscal year 1997. (Please
    include the revenues for the Ronald Reagan Building in the
    calculations.) PBS is projecting a 10 percent vacancy rate in
    Government owned and leased space. How does that compare to the
    industry standards?
        Answer. PBS's information systems use buildings, rather than
    leases, as the base data in all income analysis. Therefore, it is not
    possible to provide a breakdown of net revenue loss resulting from
    delays in build-out or construction completion. Most of the lease
    contracts written by PBS provide for a flexible occupancy date.
    Normally PBS payments to lessors are not made until space is ready for
    agencies to occupy.
        With respect to the Ronald Reagan Building, it should be noted that
    the building is a lease purchase project, not a lease. The current
    financing arrangements for the Reagan Building were prepared by the
    Pennsylvania Avenue Development Corporation and the Federal Financing
    Bank, not a private lessor.
        The 10 percent vacancy rate you refer to includes a number of space
    classifications which are not comparable to vacant space in the
    industry, including space that is being readied for a new tenant or
    under alteration for a tenant. Currently GSA has approximately 13.5
    million square feet of vacant available space, which could be occupied
    immediately. This is 4.7 percent of the GSA inventory, and considerably
    less than the vacancy rates currently experienced by the industry in
    general, and by the industry in most metropolitan markets. CB
    Commercial's Office Vacancy Index of the U.S. indicated that the
    nationwide metropolitan vacancy rate was 11.6 percent for the first
    quarter of 1997, and that individual area vacancy rates ranged from a
    low of 4.3 percent in San Jose, CA, to a high of 21.6 percent for
    Hartford, CT.
                             policy and operations
        Question. The Public Buildings Service is developing an Innovation
    Division within the Service. What safeguards are in place to ensure the
    policies developed by PBS are consistent with overall real property
    policies developed by the Policy and Operation Department.
        Answer. The role of Strategic Innovations is not strictly policy
    development; as noted in response to question 4 in the section entitled
    ``Public Buildings Service'', above, Strategic Innovations is
    responsible for nurturing and facilitating the development of
    innovative products, practices and strategies that improve PBS'
    performance, services and competitive edge. The Office of Real Property
    within the Office of Governmentwide Policy develops policies that apply
    to PBS and other agencies that operate under the authority of the
    Administrator of General Services. Among other things, it identifies
    and shares best practices across the government.
        To the extent that new policies emerge from the work that Strategic
    Innovation does, we would expect that policy to be consistent with
    governmentwide policy in general, as it has been in the past. For
    example, PBS worked closely with the Office of Governmentwide Policy to
    develop the innovative ``Can't Beat GSA Leasing.'' program. Further, as
    noted in the response to the earlier question, Strategic Innovations
    has a close working relationship with the Office of Governmentwide
    Policy; if Strategic Innovations were to pursue an initiative that
    would improve PBS' performance but would have policy implications
    inconsistent with existing policies enunciated by Office of
    Governmentwide Policy, we would expect Strategic Innovations to
    collaborate with the Office of Governmentwide Policy as part of the
    development of the initiative.
        Question. Planning a change of the Federal presence in a locality
    requires knowledge of the existing and projected Federal presence.
    Since not all Federal properties are in the General Services inventory,
    what steps is the Office of Policy and Operations taking to develop
    comprehensive community plans? When will the plans be completed?
        Answer. As a follow-on action to its Federal Real Property Asset
    Management Principles issued in October 1996 and at the request of OMB
    in its fiscal year 1998 Budget Passback to GSA, the Office of Real
    Property is conducting a research study which includes an Interagency
    Community Master Plan (ICMP) to determine the value of Federal agencies
    sharing information needed for future real property asset management
    decisions. Also, this research study, scheduled to be completed by
    September 1997, will determine what type of community-based real
    property information is essential, the degree of detail needed, and the
    best form of presenting this information to all Federal agencies. An
    ICMP will be completed as one form of presenting this information. The
    research study will assess the merits and make recommendations as to
    whether ICMP's are the most practical means for sharing community based
    information, or whether another process/form will be of greater utility
    to Federal agencies.
        Question. Please provide detailed information on the Electronic
    Clearinghouse being developed, in conjunction with the Financial
    Management Service, to enhance the disposal of real estate assets.
        Answer. In August 1996, the General Services Administration
    established an electronic real property information clearinghouse on
    the Internet. The URL address is http://policyworks.gov/org/main/mp/
    library/policydocs/chhome.htm. The clearinghouse provides building and
    facility information and data, and policies and procedures that can be
    accessed and shared among real property professionals globally. Federal
    agencies that have surplused or excessed real property can link
    directly to specific clearinghouse categories where properties can be
    listed as vacant for renting and outleasing or advertised for sale.
    There are also electronic links to governmentwide policies and
    information, to GSA business lines, and to Federal agency homepages
    that can provide training and technical assistance to agencies in
    expediting the disposal of real property.
        The clearinghouse will continue to be expanded in scope and refined
    overall to reflect consistent, accurate, real time information and
    data, and ``best practices'' that promote efficient and effective real
    property asset management.
        Following is a copy of the Real Property Clearinghouse Home page:

                     Real Property Clearinghouse Home Page

        The Real Property Information Clearinghouse provides the electronic
    gateway to the dissemination and sharing of building and facility
    information and data among real property professionals. This
    collaborative effort is in response to the National Performance Review
    which recommends that the General Services Administration (GSA) act as
    a clearinghouse to offer Federal agencies alternatives for satisfying
    their real property requirements.
        GSA accepts no responsibility for the completeness, accuracy or
    validity of the building and facility information and data that is
    provided through the clearinghouse by non-GSA entities, nor does GSA
    endorse those non-GSA Real Property Professionals that provide
    information and data through the clearinghouse.
        The categories below contain building and facility information and
    data provided by real property professionals. Questions on building and
    facility information and data should be referred to the specific
    contact person where the information and data is located. Select a
    category or scroll down for an explanation of each category.
        1. Available Vacant Space Data
        2. Property for Sale Data
        3. Property Inventory Data
        4. Federal Space Needs Data
        5. Real Property Highlights Data
        6. Federal Real Estate Suppliers Data
        7. Policies and Procedures Data
        8. Organizations Data
                           explanation of categories
        1. Available Vacant Space Data: Provides a listing of the available
    Federal Government's controlled space and commercially available space
    and establishes the web page links for each provider of the information
    data.
        2. Property for Sale Data: Identifies real property (buildings and
    facilities) that is for sale by Federal agencies and commercial realty
    property owners, and establishes the web page links for each seller.
         3. Property Inventory Data: Provides descriptive information and
    data on buildings and facilities, and establishes the web page links
    for each provider of the information and data.
        4. Federal Space Needs Data: Provides notification of Federal
    agency's need for real property (buildings and facilities), and
    establishes the web page links for each notification provider.
        5. Real Property Highlights Data: Identifies agency developed
    measures which relate to buildings and facilities, and establishes the
    web page links for each provider of the information and data.
        6. Real Estate Suppliers Data: Specifies real estate services and
    related providers, and establishes the web page links for each
    information provider.
        7. Procedures Data: Displays Federal real property policies,
    procedures and guidance, including how to do business with an agency,
    and establishes the web page links for each provider of the information
    and data.
        8. Organization Data: Displays organizational structures for
    Federal real property providers and establishes the web page links for
    each provider.
        Real property professionals that are either interested in becoming
    a partner of the clearinghouse or want to add or modify these existing
    categories, should contact: Ron Whitley on (202) 501-1505 or Internet
    E-Mail: Ronald.Whitley@gsa.gov
        Question. Please provide a list of real property disposals
    completed in fiscal years 1993 through 1996. Please include the
    property location, appraised value, sales proceeds, and the marketing
    and administrative costs related to these sales.
        Answer. During the time period of fiscal years 1993 through 1996,
    GSA had nearly 2,500 individual disposal actions, with a total value of
    approximately $850 million (whether or not cash was actually received).
    For fiscal year 1997 to date, there have been 497 individual disposal
    actions with a total value of approximately $158 million. For the
    purpose of this answer, we believe the attached summary chart might be
    most beneficial. The second chart summarizes the marketing and
    administrative costs associated with Public Sales for fiscal years 1993
    through 1996. If more in-depth information is required, the Office of
    Property Disposal would be pleased to discuss or submit additional
    information to the Committee.

                                         PROPERTY DISPOSAL REDEPLOYMENT PROJECTS
                                                  [Dollars in millions]
    ----------------------------------------------------------------------------------------------------------------
                                                                           Fiscal years--
                                              ----------------------------------------------------------------------
                      Method                       1993          1994          1995           1996        1997 \1\
                                              ----------------------------------------------------------------------
                                                No.    Cost   No.    Cost   No.    Cost    No.    Cost   No.    Cost
    ----------------------------------------------------------------------------------------------------------------
    Fed. transfer............................     24    $41     20    $54     34    $10      16    $21     18     $1
    Public benefit...........................     26     14     33     51     59    141      44    138     21     20
    Homeless.................................      5     28      5      1      2      1       2      1  .....  .....
    Public sale..............................    195     31    360     38    458     37   1,070     69    450     37
    Neg sale.................................     36     10     23     26     28     58      44     81      8    100
                                              ----------------------------------------------------------------------
          Total..............................    286    124    441    170    581    248   1,176    309    497    158
    ----------------------------------------------------------------------------------------------------------------
    \1\ Note: As of 3/31/97.

    Office of Property Disposal

                    (Marketing and administrative costs \1\)

            Fiscal year
    1993..........................................................  $899,000
    1994..........................................................   902,032
    1995.......................................................... 1,084,100
    1996.......................................................... 2,021,700

    \1\ Marketing and Administrative cost of Public Sales.
    ---------------------------------------------------------------------------
                          information technology fund
        Question. ``One-Time'' expenditures from the Reserve Fund were
    required in fiscal year 1996 ($34 million) and are projected for fiscal
    year 1997 ($46 million) and fiscal year 1998 ($49 million). Please
    explain the events requiring Reserve Fund expenditures in each year?
        Answer. The reserve expenditures reflected in the budget submission
    for fiscal year 1996 through fiscal year 1998 are consistent with the
    IT Fund's Cost and Capital Requirements Plan approved by the Of floe of
    Management and Budget (OMB). As part of the annual budget process, use
    of the reserve must be approved by OMB pursuant to section 110(a)(1) of
    the Federal Property and Administrative Services Act of 1949.
        The Cost and Capital Plan provides funding for capital investments
    and program costs that are one-time or non-recurring in nature that
    improve delivery of services to our customer agencies. The majority of
    the planned expenses for fiscal year 1996 through fiscal year 1998 are
    in support of the FTS2000 long distance program. To ensure stable rates
    for its clients, the FTS2000 program funds one-time expenses and some
    transition costs through the FTS2000 Reserve. These expenses include
    costs associated with transitioning the Department of Treasury from
    Sprint to AT&T, one-time system development costs, and expenses
    associated with transitioning to the FTS2001 contracts. In addition, $5
    to $6 million a year (1 percent of the FTS2000 business volume) is
    included to fund information technology initiatives approved by the
    Interagency Management Council (IMC), and the Government Information
    Technology Services (GITS) Board.
        The remaining reserve expenses are for costs associated with the
    Local Telecommunications, Federal Systems Integration and Management
    Center (FEDSIM) and the Federal Computer Acquisition Center (FEDCAC),
    and Federal Information Systems Support Program (FISSP) programs. The
    Local Telecommunications program reserve expenses include depreciation
    of the Aggregated Switch Procurements (ASP), the Individual Switch
    Procurements (ISP) and Washington Interagency Telecommunications System
    (WITS) procurements, projected one-time costs associated with the WITS
    99 procurement, and the Metropolitan Area Acquisition (MAA) program.
    The MAA program is expected to achieve substantial price reductions for
    its local telecommunications customers. FEDSIM/FEDCAC and FISSP primary
    use of reserve funds is for capital investments for system
    enhancements/automation, and for service management initiatives that
    are one time in nature and benefit the client agencies.
        The following table reflects the Reserve Fund expenditures by
    category by fiscal year:

                            [In millions of dollars]
    ------------------------------------------------------------------------
                                                         Fiscal years--
                   Reserve category               --------------------------
                                                     1996     1997     1998
    ------------------------------------------------------------------------
    FTS2000......................................       22       32       40
    IT initiatives...............................        1        7        5
    Local telecommunications.....................        3        4        4
    FEDSIM/FEDCAC, FISSP.........................        1        1  .......
    Other........................................        7        2  .......
                                                  --------------------------
          Total..................................       34       46       49
    ------------------------------------------------------------------------

        Question. What is the status of the FTS2001 procurement? Have the
    competing bidders expressed an interest in continuing a mandatory use
    requirement?
        Answer. The Request for Proposals (REP) for the FTS2001 procurement
    was issued in May, 1997 with proposals due at the end of September,
    1997. We anticipate contract award in early to mid-1998, with
    transition to take place over the following year. During the early
    years of development of the FTS2001 strategy (1993-1995) there was
    considerable discussion, both pro and con, with the bidder community
    about the necessity of mandatory use provisions. It was concluded that
    this requirement for the current system under enacted appropriation
    language would no longer be necessary for the follow-on system. There
    will be minimum revenue guarantees, which will likely be fulfilled in
    the early years of the new contracts, which should satisfy the
    successful bidders.
                              general supply fund
        Question. The General Supply Fund is required to operate on an
    industrial funded basis. Each of GSA's industrial funds finance many
    different items. Is it GSA's policy throughout the industrial funding
    to recover the full cost of each item or to break-even on an aggregated
    fund basis?
        Answer. Within GSA's Federal Supply Service (FSS), goods and
    services are provided to customer agencies through several means. These
    include FSS Supply Distribution Facilities, Stock Direct Delivery,
    Special Orders (Nonstores and Automotive), Federal Supply Schedules,
    Excess Personal Property Sales, Transportation Management Operations,
    and the Interagency Fleet Management System (IFMS). Annual government
    sales in each of these programs range from $40 million to $5.8 billion.
    It is the policy within FSS that each of these methods of supply are
    priced to recover the full cost of the item or services provided
    through that method of supply on a break-even basis and not to base
    pricing on an aggregated fund basis. Each of these methods of supply
    have independent pricing structures to recover their costs. Net Income
    financial statements are produced and evaluated on a monthly basis for
    each of the methods of supply. Based upon year-end financial results,
    price adjustments may be made to the subsequent year's pricing to help
    ensure that each method of supply continues to approximate a break even
    posture.
        Question. What methodology does GSA use to account for
    transportation costs in the price of items supplied under the retail
    packaging products program? Has GSA attempted to determine whether the
    price should be applied standard transportation cost mark-ups?
        Answer. FSS utilizes a cost distribution model to allocate
    aggregate transportation costs to individual commodities supplied under
    the retail packaging products program. These individual transportation
    costs are then rolled up and included as part of the class mark-on for
    the commodities involved. The cost distribution is based on the weight
    of the item, the number of shipments incurred, and the average distance
    over which items are shipped from known distribution points. FSS has
    attempted to look at several different options for pricing
    transportation expenses, including a standard transportation cost mark-
    on. However, due to the tremendous variability in the cost of
    transporting certain commodities (e.g., a box of pens sent via express
    mail versus a pallet of fiberboard shipped by the truckload), the cost
    distribution model has continually proven to be the most accurate
    available means of identifying the cost of transportation for a given
    class of commodities.
        Even with the cost distribution model, only an average
    transportation cost can be computed for any particular item or Federal
    Supply Class for pricing purposes. This is because it is impossible to
    distinguish the transportation cost of other items being shipped in the
    same packaging or the same order. A box of pencils may be shipped with
    some rolls of tape via mail carrier one time, whereas another order
    includes a box of pencils with fifteen different office supply items
    the next time.
        Question. GSA adds a 7 percent surcharge to cover costs of
    delivering items to post offices under this program. How was this
    surcharge calculated? How often is the surcharge evaluated?
        Answer. The 7 percent surcharge was calculated based on a retail
    packaging products transportation cost study done at our Burlington
    Depot. The study reported the number of orders, the total weight of
    orders, and the cost of transportation for the orders that were shipped
    via USPS. It also reported the same data elements for those orders
    shipped via truck freight. The study was done in March 1995 and has not
    been redone since that time. The following data is from the study:

    ----------------------------------------------------------------------------------------------------------------
                                                                                               Actual
                                                                     Lines        Weight       price      Trans cost
    ----------------------------------------------------------------------------------------------------------------
    USPS........................................................          193        4,630    $3,774.66    $1,325.59
    GBL.........................................................           95       10,425     7,846.28       826.07
                                                                 ---------------------------------------------------
          Totals................................................          288       15,055    11,620.94     2,151.66
    ----------------------------------------------------------------------------------------------------------------

    ----------------------------------------------------------------------------------------------------------------
                                                                     Lines       Convert      All USPS      To UPS
    ----------------------------------------------------------------------------------------------------------------
    UPS.........................................................          193        4,630    $3,774.66      $667.45
    GBL.........................................................           95       10,425     7,846.28       826.07
                                                                 ---------------------------------------------------
          Totals................................................          288       15,055    11,620.94     1,493.52
    ----------------------------------------------------------------------------------------------------------------
    Note: Using USPS cost GSA $658.14 more than UPS.

        The following chart shows how the data from the study was combined
    with the transportation of other items to arrive at 6.6 percent
    (rounded to 7 percent) surcharge to cover the additional transportation
    cost:

    ----------------------------------------------------------------------------------------------------------------
                                              Postal resale items (Burlington depot)            USPS         ISPS
                   Mode                -----------------------------------------------------------------------------
                                            USPS         GBL         Total        Annual       Annual     Futr. Amt.
    ----------------------------------------------------------------------------------------------------------------
    Weight............................        4,630       10,425       15,055    2,395,828  ...........  ...........
    Percent of weight.................           31           69          100  ...........  ...........  ...........
    Cost..............................    $1,325.59      $826.07    $2,151.66     $342,412     $210,952   $1,130,101
    Percent of cost...................           62           38          100  ...........  ...........  ...........
    Cost/lb...........................  ...........  ...........  ...........  ...........  ...........  ...........
    Lines.............................          193           95          288       45,832  ...........  ...........
    Lb./line..........................           24          110           52  ...........  ...........  ...........
    Value.............................    $3,774.66    $7,846.28   $11,620.94   $1,849,338  ...........   $9,907,166
    ----------------------------------------------------------------------------------------------------------------

    ----------------------------------------------------------------------------------------------------------------
                                                        remote                     USPS         USPS     USPS future
                                           Depots       CSC's        total       discount    difference     diff.
    ----------------------------------------------------------------------------------------------------------------
    GBL...............................  $29,189,160   $1,714,218  $30,903,378  ...........  ...........  ...........
    USPS..............................    4,739,403      572,118    5,311,521          .07     $371,806     $450,914
    RPS...............................    5,802,168    1,507,941    7,310,109  ...........  ...........  ...........
    UPS...............................    4,267,848    1,858,935    6,126,783
                                       -----------------------------------------------------------------------------
          Total.......................   43,998,579    5,653,212   49,651,791  ...........  ...........  ...........
    ----------------------------------------------------------------------------------------------------------------

    ----------------------------------------------------------------------------------------------------------------
                                                                                               Resale       Resale
                                                All CSC items   Resale items      Markup       items        items
                                                FY 1993 rate        rate          factor    annual amt.  future amt.
    ----------------------------------------------------------------------------------------------------------------
    Commodity cost...........................    $112,970,100    $112,970,100  ...........   $1,849,338   $9,907,166
    Noncommodity cost........................     $47,489,180     $58,072,916  ...........     $950,662   $5,092,834
                                              ----------------------------------------------------------------------
          Total cost (selling price).........  ..............    $171,043,016  ...........   $2,800,000  $15,000,000
                                              ======================================================================
    Markup...................................           42.04           51.41         6.60  ...........  ...........
    Transp. cost (USPS cust.)................      $8,121,185  ..............  ...........     $132,945     $712,205
    Transp. cost (norm. rate)................  ..............     $18,704,921  ...........     $306,202   $1,640,370
    Weight shipped...........................     130,876,900  ..............  ...........  ...........  ...........
    Cost/lb..................................            .062            .143  ...........  ...........  ...........
    Transp. cost difference..................  ..............     $10,583,736  ...........     $173,257     $928,164
    ----------------------------------------------------------------------------------------------------------------

        Question. What percentage of orders are sent by U. S. Mail?
        Answer. The GSA supply systems only record the method of delivery
    for orders which are processed through the FSS-19 system, and the
    postal retail items are not captured in this system. For all customers,
    3,503,794 orders were processed through the FSS-19 system, of which
    734,467 or 21 percent were mailed, representing 1.8 percent of total
    weight shipped.
        Question. For orders sent by U. S. Mail what is the average and
    median postage charge incurred by GSA and what is the average and
    median dollar amount of the order?
        Answer. The GSA supply systems do not record the cost of mailing
    individual orders. Small orders are consolidated into larger mailing
    containers whenever practical, with a consequent loss of visibility of
    the cost of mailing each individual order. Given the small dollar cost
    of mailing each container and the large number of containers involved,
    it has not been practical to attempt to capture and allocate this data
    at the individual order level. Instead, daily summaries of mailing
    costs are aggregated monthly by the Distribution Centers and then
    consolidated into monthly management reports. These management
    summaries indicate that the GSA Distribution Centers mailed 1,172,160
    containers to all customers, from both the FSS-19 system and the
    Customer Supply Center system, at an average cost of $5.05 per
    container. The summary method employed in collecting this data
    precludes development of medians.
        For orders mailed from the FSS-19 system to all customers, the
    average order value was $46.30, with an average weight of 9.6 pounds.
    The statistical tools available in our current inquiry package do not
    develop medians.
        Question. In the Customer Supply Center program, how many items are
    offered for sale to the U. S. Postal Service for the retail packaging
    program? How are these items identified? Could GSA price retail
    packaging program items in the CSC based on their actual cost? Can the
    items be readily identified and segregated from other items in the CSC?
        Answer. The Customer Supply Centers are currently stocking 25
    National Stock Numbers (NSN's) for the retail packaging products
    program. These items are illustrated in a special Mailing and Packing
    Items section in the introduction section of each CSC catalog and are
    also located in the general content of each catalog. The items are
    priced based on actual cost as explained above, but the pricing is
    established on a nationwide basis by GSA's Office of Business
    Management and Marketing in coordination with the Office Supplies and
    Paper Products Commodity Center. These items are categorized by usage
    for all Federal customers and are not identified for purchase for any
    singular customer. All items stocked are identified by NSN and located/
    stored within each center. The Centers do not commingle NSN's in one
    location; thus, every item stocked is readily identified.
        Question. Please explain the process for excessing Federal
    furniture and discuss whether proper channels were followed in
    excessing furniture in Arkansas as it relates to the Arkansas
    Cooperative Extension Service.
        Answer. Under the provisions of the Federal Property and
    Administrative Services Act of 1949, as amended (the Property Act), and
    the Federal Property Management Regulations, executive agencies are
    supposed to continuously survey personal property in their possession,
    including furniture, to determine whether such property is still needed
    for official use within the agency. Property not needed for official
    use within the agency is declared excess and reported to the General
    Services Administration (GSA) to be screened for possible transfer to
    other Federal agencies. Federal agencies may acquire excess property
    for their direct use or for use by their cost-reimbursement
    contractors, project grantees and cooperative agreement participants.
        Property for which there is no Federal requirement, as determined
    by GSA, is declared surplus and is made available for transfer to the
    States for subsequent donation to public agencies at the State and
    local level and certain non-profit organizations as authorized by
    Congress. Property not needed for donation purposes is offered for sale
    to the general public by competitive means or otherwise disposed of.
        The Arkansas Cooperative Extension Service is eligible to receive
    excess property through the U.S. Department of Agriculture. However,
    title to such property remains vested in the Federal Government. As a
    public agency of the State of Arkansas, it is also eligible to receive
    donated surplus property through the Arkansas State Agency for Surplus
    Property. We are not familiar with any incident alluded to in the
    question, but we would be happy to address any specific questions on
    this matter.
                                     ______

                         MERIT SYSTEMS PROTECTION BOARD

              Prepared Statement of Benjamin L. Erdreich, Chairman

        Chairman Campbell, Ranking Member Kohl, and Members of the Treasury
    and General Government Subcommittee: I am pleased to provide a
    statement, as the Subcommittee begins its consideration of the
    appropriations for the U.S. Merit Systems Protection Board (MSPB) and
    other components of the Federal government's civil service system. This
    statement provides an opportunity to report to the Congress about
    employment and personnel issues facing Federal agencies and employees
    from MSPB's unique dual perspectives. MSPB cases present specific
    issues and problems facing Federal employees and managers, and its
    published studies provide a broad picture of trends and concerns about
    the civil service system. The independent review provided by these two
    statutory functions is central to preserving a merit-based employment
    system free from actions taken arbitrarily or for political
    motivations.
                    mspb budget request for fiscal year 1998
        After thorough consideration of our resources and needs, it is
    clear that the Office of Management and Budget (OMB) level of funding--
    $26,880,000--is insufficient. At that level, we will be forced to RIF
    administrative judges and attorneys directly involved in adjudicating
    cases. Because this staff is necessary to ensure that there is a sound
    due process system in our Federal civil service, we are making a
    priority request for an additional $840,000 over the OMB passback level
    pursuant to our budgetary bypass authority, 5 U.S.C. 1204(k). We are
    also using our bypass authority to request an additional $270,000 to
    support critical ADP needs. An investment in information technology now
    will allow us, as we move toward a paperless case file system, to
    handle future cases more quickly and with fewer staff. I urge you to
    support both these requests and fund the Board at $27,990,000 in fiscal
    year 1998.
                      reduced resources--the mspb response
        The MSPB's pattern of constant demand on shrinking resources is
    clear. The MSPB case load has continued at high levels, and, although
    its budget has steadily declined, the MSPB has maintained its
    outstanding record of case handling through cut backs in staff,
    restructuring, and reduced administrative costs. Even these extensive
    changes have not been enough. We will be cutting 20 more administrative
    positions by October 1, 1997, through a combination of RIF's and
    buyouts. The MSPB is now, however, at the point where further cost
    cutting will have deleterious effects on its adjudicatory mission.
        The figures speak for themselves. Since 1993, available funds for
    the MSPB, adjusted for inflation, have dropped from $26,400,000 to
    $23,571,556. The OMB passback level for fiscal year 1998 would put the
    MSPB at $23,373,913--a total drop in available funding of $3,026,087.
    As the attached chart shows, the MSPB has met these resource limits.
    Since 1993, when I was appointed, FTE has been cut by 18 percent (from
    326 to 266), SES positions reduced by 26 percent, regional offices
    shrunk from 11 to 5 (eliminating 1 and converting 5 others to field
    offices), office space consolidated, regional directors moved from
    administrative work to adjudicating cases, and office administrators
    retrained as paralegals.
        In planning the best use of steadily declining resources, the MSPB
    decided to preserve its core of administrative judges and attorneys as
    indispensable to its statutory adjudicatory mission. That strategy has
    worked. The MSPB's case handling record is impressive.
      --In fiscal year 1995, the Board and its regional and field offices
            closed over 13,000 cases, including cases resulting from the
            U.S. Postal Service restructuring--a 24 percent increase over
            the cases closed in fiscal year 1994 and a 40 percent increase
            over fiscal year 1993.
      --If the Postal Service cases are excluded from the fiscal year 1995
            totals, the MSPB workload has remained constant--between
            10,300-10,700 cases decided each year since 1994.
      --In fiscal year 1995, the regional and field offices handled 8,925
            cases--the second highest volume in 10 years--a caseload of 129
            cases per administrative judge. The Board Members closed 1,375
            cases in fiscal year 1996, including appeals of agency actions,
            alleged Hatch Act violations, and other original jurisdiction
            cases.
      --In fiscal year 1996, the Board's principal reviewing court, the
            U.S. Court of Appeals for the Federal Circuit, left 97 percent
            of the MSPB decisions it reviewed unchanged.
      --As for MSPB timeliness, in fiscal year 1996, on average,
            administrative judges decided cases in 94 days. The average
            processing time at Board headquarters for review of initial
            decisions by administrative judges was 121 days. This means
            that, on average, an appeal to the Board was processed through
            both levels of review in just over seven months.
                                  the outlook
        The MSPB is now at the point where it can make no further cost
    reductions without eliminating administrative judge and attorney
    positions. If Congress limits MSPB appropriations to the OMB passback
    level, the immediate effect will be an increase in the number of
    pending cases. Delay in resolving employment disputes creates extra
    costs for the parties--and ultimately for the American taxpayer,
    exacerbates the antagonism that accompanies litigation, and weakens
    productivity in the Federal workplace.
        There is little chance that the fiscal year 1998 budget problem
    will be solved by significantly reduced filings with the Board. It is
    also unlikely that the recently reauthorized Administrative Dispute
    Resolution Act will help reduce litigation until it is embraced and
    implemented by agency heads to resolve disputes where they arise--in
    the workplace--not in the courthouse.
        The MSPB projected volume of cases--about 10,700 for fiscal year
    1998--reflects continued agency downsizing; expansion of MSPB
    jurisdiction with regard to groups of employees (e.g., whistleblower
    protections for employees of government corporations and coverage of VA
    health care professionals); and newly created statutory protections
    (e.g., the Uniformed Services Employment and Reemployment Rights Act;
    Presidential and Executive Office Accountability Act). Indeed, the
    Congressional Budget Office recently stated that the continued
    expansion of veteran's preference appeal rights will increase budgetary
    pressures on the MSPB.
        The MSPB reflects a unique budgetary tension in the Federal
    government. It is simultaneously an agency that continues to undergo
    significant downsizing, while its own workload includes adjudicating
    the broader downsizing actions taken government-wide.
        Nor can the fiscal year 1998 budget problem be solved by squeezing
    MSPB spending on specific object classes further. The MSPB has little
    financial flexibility. It devotes approximately 80 percent of its
    budget to personnel compensation. An additional 12 percent is required
    for rent, utility, and maintenance costs while another 3 percent is for
    direct case processing costs, including travel, court reporting, and
    legal research. This leaves little flexibility--about $120,000--for
    employee training, printing, technology improvements, and equipment or
    to adapt to uncontrollable changes in workload.
        One promising prospect for future budget reductions lies in MSPB
    use of information technology. But, that future savings requires an
    outlay next year. ADP is a cornerstone of our ongoing agency planning,
    and we have carefully stepped from needs assessment, to architectural
    plan, to implementation. The desired results include dramatic
    reductions in paperwork, easier access by Federal employees seeking to
    file cases, and greater efficiencies at the MSPB. This efficiency
    includes using technology as a safety net for support functions
    eliminated through downsizing. The fact is that we have been barely
    able to squeeze out such planning and implementation under more recent
    budgetary constraints. Our request for $270,000 for information
    technology over the OMB passback reflects the reality that we have no
    flexibility remaining in our budget to pursue these improvements.
                   due process requires support from congress
        Providing a fair, neutral and timely process to review Federal
    employment disputes is essential to a merit-based employment system.
    While I appreciate the difficulty facing Congress this year in
    allocating scarce resources, I am compelled to request additional funds
    for our function.
        Without the requested additional funding for the MSPB, the job of
    providing statutorily demanded due process in a timely and high quality
    manner will be jeopardized. To avoid undermining the MSPB's ability to
    review employment disputes, I ask you to support an appropriation of
    $27,990,000 for the Board in fiscal year 1998.
                                     ______

                    Questions Submitted by Senator Campbell

                             information technology
        Question. The Merit Systems Protection Board has requested $1.11
    million more for fiscal year 1998 than approved by the Office of
    Management and Budget. One of the primary reasons is to fully fund
    improvements in the computer system. While we understand the need to
    invest in technology in order to streamline operations, we have learned
    the hard way the significant ADP investment should only come after the
    completion of a comprehensive plan. Has MSPB prepared a blueprint for
    ADP investments?
        Answer. Yes, the MSPB has a Technology Plan, fiscal year 1996-2000.
    In accord with the plan, the MSPB will first complete the architectural
    framework needed for client server computing. Once the architecture is
    in place, MSPB will begin evaluation and testing of components of a
    client server system, including electronic filing of the MSPB appeal
    form, electronic receipt and dissemination of case documents between
    MSPB and the parties to the case, electronic storage of case files, and
    redesign of the case management system. The MSPB is in the initial
    stages of a pilot project--an electronic filing project with the U.S.
    Court of Appeals for the Federal Circuit, the MSPB's primary reviewing
    court. Building upon experience gained during the pilot, MSPB will
    develop a prototype paperless case file system in a regional office.
        Question. If there is a blueprint for ADP investments, was the
    blueprint developed in-house?
        Answer. The MSPB Technology Plan was developed in-house by the
    MSPB's Director of Information Technology with limited consultation in
    design of architecture.
        Question. If so, what are the qualifications of the person who
    prepared the comprehensive plan?
        Answer. The director who prepared the Technology Plan has a
    Master's degree in Computer Systems from American University and
    approximately 25 years of experience in the IRM field, 15 years as a
    division director in four agencies.
                                    training
        Question. Table 3 of the MSPB budget justification document is
    ``Obligations by Object Class'' which outlines specific spending
    expectations. We note that training is not mentioned in this table. How
    much has MSPB spent over the last two years for employee training?
        Answer. MSPB spent $99,000 in fiscal 1995 and $212,000 in fiscal
    1996 on payments for training. The higher amount in 1996 reflects our
    need to provide more training for staff who have been asked to take on
    new or greater responsibilities as part of our continuing downsizing
    and reengineering. It should also be noted that travel costs associated
    with training for fiscal year 1996 were captured as a part of training
    expenses to give us a true picture of our training costs.
        Question. How do those costs break out with regard to career versus
    political employees?
        Answer. Less than 1 percent of training funding ($565) was spent on
    training for political employees in fiscal 1995 and 8 percent of
    funding ($17,381) was spent in fiscal 1996. The training for political
    employees was to assist them in their leadership roles in managing the
    MSPB's downsizing and reengineering efforts. For fiscal 1996, the
    Chairman funded a leadership training course for all department heads
    (nonpoliticals), and training of new staff members, including training
    in alternative dispute resolution techniques.
        Question. What are the anticipated training costs for fiscal year
    1998?
        Answer. We expect to spend about $100,000 in fiscal 1998 for
    training staff to take on changed responsibilities, training legal
    staff, including training new administrative judges in hearing
    procedures, and training staff in information technology.
        Question. Is there a training schedule for employees at the MSPB?
        Answer. Last year, senior managers began a program to look at
    training agencywide preceding a new budget year to determine top
    priorities in training, e.g., adaptation to new technologies,
    enhancement of individual skills (where corrective measures may need to
    be taken or new responsibilities undertaken as the MSPB downsizes and
    restructures), and direct mission-related activities (e.g., the
    Judicial Conference of the U.S. Court of Appeals for the Federal
    Circuit, the primary reviewing court of the MSPB, the National Judicial
    College training for new administrative judges). There are two
    objectives of the MSPB training program: (1) effective spending of
    limited resources; and (2) preparing for the future.
        Question. How are employees designated to receive training?
        Answer. Employees are, in general, designated to receive training
    by their supervisors. In some cases involving training in basic core
    competencies, a request is reviewed and approved by senior staff
    responsible for managing overall training in a specific broad area such
    as adjudication practices and procedures for administrative judges. For
    other specific, one-time courses, a supervisor may directly approve
    training.
                                     travel
        Question. There is a marked increase in travel costs between fiscal
    year 1996 and fiscal year 1997, and another increase for fiscal year
    1998. What is the justification for these increases?
        Answer. The majority of MSPB travel cost is for administrative
    judges' travel to hearing sites, both in the continental United States
    and outside. The travel amount in the budget submission for fiscal 1996
    is actual; the amounts for fiscal 1997 and 1998 are estimates. We are
    working to use technology to reduce travel costs. We have tested video
    conferencing equipment for use in hearings, conferences, and other
    meetings. Our initial testing indicates that it will provide good
    interaction while reducing transportation, hotel, and subsistence
    expenses. It will also cut back on indirect costs associated with
    travel, including lost work time. However, currently increased travel
    costs reflect a number of factors such as higher travel and hotel
    rates, travel costs related to installation of the wide-area network
    connecting MSPB regional, field and headquarters offices, and costs
    associated with relocating staff to fill important vacancies or to move
    staff as offices are closed as part of our downsizing and reengineering
    initiatives.
        Question. Was all travel by MSPB employees in fiscal year 1996 and
    so far in fiscal year 1997 absolutely necessary for the completion of
    the agency's mission?
        Answer. The majority of MSPB travel expense is for administrative
    judges to conduct hearings which are held throughout the world and
    sometimes last several days. The rest is to support the agency's
    mission by attending conferences to discuss legal issues and our study
    reports with the Federal personnel community and other interested
    parties and for routine administrative and supervisory functions.
             the civil service retirement and disability trust fund
        Question. The Merit Systems Protection Board has statutory
    authority to draw down from the Civil Service Retirement and Disability
    Fund, up to a certain limit. What are the statutory limitations for use
    of trust fund monies?
        Answer. 5 U.S.C. 8348 authorizes payment from the Civil Service
    Retirement and Disability Trust Fund to the MSPB, subject to annual
    limitation established by Congress, for expenses incurred in
    administering appeals in retirement cases under 5 U.S.C. 8347(d) and
    8461(e)(CSRS and FERS cases). The annual limitation is established as
    part of the Treasury-Postal Service appropriation. For fiscal year
    1997, the Trust Fund limitation is $2,430,000.
        Question. Does MSPB maintain records of the utilization of those
    funds?
        Answer. Records of the annual amounts are available. The amount of
    the limitation on use of the Trust Fund since fiscal 1993:

            Year                                                      Amount
    1993..........................................................$1,950,000
    1994.......................................................... 1,989,000
    1995.......................................................... 2,250,000
    1996.......................................................... 2,430,000
    1997.......................................................... 2,430,000
    1998.......................................................... 2,430,000

        The amount has gradually grown over the years as costs and workload
    have increased. MSPB expenses often exceed the Trust Fund limitation.
    For example, in fiscal year 1996, the MSPB spent $2,522,00 in
    adjudicating retirement cases, $92,000 more than we were reimbursed
    from the Trust Fund.
        Question. If approved for fiscal year 1998, specifically how will
    the $2.43 million from the trust fund be allocated?
        Answer. The majority of the funds will be allocated to the ten
    regional and field offices which adjudicate the initial appeals
    submitted to MSPB. Lesser amounts will be allocated to the Office of
    Appeals Counsel and the Board offices that adjudicate the petitions for
    review from the initial decisions. Funds are also allocated to the
    Office of the General Counsel for handling appeals to the U.S. Court of
    Appeals for the Federal Circuit.
                                strategic plans
        Question. Under guidance by OMB, agencies are to have their initial
    strategic plans to OMB by August 15, 1997, and to Congress by September
    30, 1997. Prior to the submission of the initial plan, agencies must
    consult with Congress in developing this strategic plan. The Committee
    on Appropriations has not yet seen a draft strategic plan from MSPB.
    When can we expect to see a preliminary draft strategic plan?
        Answer. We expect to deliver a draft to the Committee on
    Appropriations and other Congressional committees by the middle of
    July. The Results Act requires agencies to meet with stakeholders,
    those interested in or affected by their programs. At the end of May,
    we met with MSPB stakeholders in two focus groups, and we are currently
    evaluating their comments and revising our strategic plan in light of
    their comments and recommendations.
        Question. What is the timing for consultation with Congress on the
    MSPB strategic plan?
        Answer. At the request of Chairman Mica, Subcommittee on Civil
    Service, House Committee on Government Reform and Oversight, we
    provided a copy of an early draft of our strategic plan. We are
    reconsidering our plan in light of their reaction to the draft. We will
    be happy to meet with you, and other committees, now, or later, after
    we have revised our initial draft.
                                     ______

                  NATIONAL ARCHIVES AND RECORDS ADMINISTRATION

      Prepared Statement of John W. Carlin, Archivist of the United States

        I would like to set our 1998 request in context with a brief review
    of the unique and critical mission of the National Archives and Records
    Administration (NARA), the challenge of carrying out that mission in
    1998, and the structure of our current budget. I would then like to
    discuss the specific priorities outlined in the President's 1998
    request.
        First of all, while we are very small in the context of the Federal
    budget, the National Archives and Records Administration is a public
    trust on which our very democracy depends. It enables people to inspect
    for themselves the record of what government has done. It enables
    officials and agencies to review their actions and helps citizens hold
    them accountable. It ensures continuing access to the essential
    evidence that documents the rights of American citizens, the actions of
    federal officials, and the national experience.
        Ready access to essential evidence is critical for upholding the
    faith of the American people in their system of government. We need
    look no further than the headlines about ``Nazi Gold'' to see the
    importance of preserving records and making these accessible for public
    examination. The entire world is focused on the impact that open,
    accessible Federal records are having on writing this latest chapter of
    the Holocaust tragedy.
        But it's the records that don't get the headlines that we also need
    to support--the military service records from which we answer 2 million
    reference requests a year from veterans, the Census and Ship Passenger
    Arrival records that hundreds of thousands of citizens pour over each
    year to trace their family histories, and the sampling of digitized
    records that we now make available on the Internet that are being
    accessed by thousands of students, teachers, and citizens each month.
    The American people rely on our records, have a right to our records,
    and we must be vigilant in preserving and providing access to those
    records.
        As President Herbert Hoover said, upon laying the cornerstone of
    the National Archives Building, on February 20, 1933, ``Here will be
    preserved all the records that bind State to State and the hearts of
    all our people in an indissoluble union.'' Every time I look at the
    three founding documents of our country--the Declaration of
    Independence, the Constitution, and the Bill of Rights--which we
    preserve on public view in the rotunda of that building, I feel an
    awesome responsibility to the citizens of this country. Serving as a
    public trust, which the National Archives does, is no insignificant
    matter.
        To provide ready access to essential evidence for citizens, the
    National Archives and Records Administration maintains a national
    system of facilities and programs. In addition to our central National
    Archives facilities in downtown Washington and College Park, Maryland,
    NARA operates fifteen regional offices, two Presidential materials
    projects, and nine Presidential libraries. We also publish the Federal
    Register, maintain the Center for Legislative Archives, oversee the
    Information Security Oversight Office, make grants through the National
    Historical Publications and Records Commission, and annually host more
    than two million visitors to the Charters of Freedom and other exhibits
    of documentary treasures in our downtown facility, the Presidential
    libraries, and other facilities across the nation.
        While unquestionably important, the mission of the National
    Archives and Records Administration is increasingly difficult to carry
    out due simply to the unceasing passage of time. As I often remind
    people, we are in a perpetual growth industry--we can't drop off a
    century of our history as we add a new one to the books. Everyday more
    records are created and new history is being made. And while the era of
    big government may be over, government downsizing with shut downs of
    federal programs and military base closures simply means that we
    receive records this year that we thought we wouldn't receive until 25-
    30 years from now. When government grows, archives grow, and when
    government shrinks, archives grow. No matter what the size of
    government, records continue to be created and require proper
    management every day.
        This relentless growth has forced us to devote nearly half our
    total budget for space just to store our records. Our large, costly
    space requirements represent an ever increasing percentage of our
    budget to the point where building rents and mortgages are eating up 45
    percent of our budget, and when combined with personnel costs, the
    total is 90 percent of our operating expenses. That leaves us just 10
    percent for preservation costs, information technology, printing,
    training, technology improvements, communications services, travel and
    everything else. That is why the guarantee of our base is so important.
        However, we do not expect this committee to support the base or our
    1998 priorities on blind faith. When I took over this position two
    years ago, I didn't accept the contention that the National Archives
    and Records Administration was doing everything that it could to make
    the most effective use of its existing resources and I initiated a
    comprehensive strategic planning process to examine just how we were
    using our internal resources and how much more efficiently and
    effectively we might be able to carry out NARA's critical mission.
    Based on that effort we issued a strategic plan in August of last year
    and are concentrating on the priorities from that plan during this
    year.
        First of all, to implement the plan we must develop the
    infrastructure to carry it out. We have begun by instituting a two-
    stage reorganization to improve communication, reduce bottlenecks, end
    overlaps, clarify individual unit responsibilities, establish who will
    be accountable for what and speak with one voice in providing guidance
    and implementing policies. The new structure has reduced the number of
    offices and combined related functions to improve services to federal
    agencies and the public and to provide more records management
    assistance to agencies up-front, at the time they create their records.
        Our remaining priorities for the year include bringing the plan
    into full compliance with the Government Performance and Results Act as
    a basis for budget requests beginning with fiscal year 1999. Further we
    are initiating a dialogue with our federal agency partners on how we
    can work together better to improve government records management and
    ensure that essential evidence is cared for from its creation to its
    final disposition. We also will continue our construction of a
    nationwide, integrated on-line information delivery system that
    educates citizens about NARA and its facilities, services and holdings;
    makes available digital copies of high-interest documents; and contains
    an on-line ordering capability. In these ways we are increasing our
    ability to provide the public with ready access to essential evidence.
    And this year I can say to you as well that we are now implementing a
    plan for doing so with greater economy, efficiency and effectiveness.
           1998 request and changes from 1997 appropriated fund level
        NARA's 1998 request for appropriations for operating expenses is
    $206,479,000, a net increase of $9,210,000 over the adjusted 1997
    appropriation of $197,269,000. This budget reflects the continuing need
    to protect our base in the face of four unavoidable budget mandates and
    to fund clear priorities in the areas of space, technology and
    preservation.
        The overall appropriation request includes decreases of $306,000
    for one-time costs in 1997 for the reappropriation of unobligated
    balances from fiscal year 1996 appropriated funds (which is to be made
    available in 1997), and $392,000 for Rent for the Bush Presidential
    Materials Project. The Bush Presidential Library is scheduled to open
    in the latter part of fiscal year 1997. Therefore rental space will be
    vacated when that move is completed.
        These decreases are offset by four unavoidable budget mandates. The
    first three are $2,314,000 for the 1998 pay raise; $1,055,000 for
    facility rate changes which include utility and contract cost
    increases; and, $1,300,000 for the operation and maintenance costs for
    the new Bush Presidential Library. The latter costs are the
    responsibility of NARA once the facility is completed and turned over
    to the Federal Government. This funding will provide for guards,
    custodial services, mechanical services, elevator maintenance, fire and
    security, alarm maintenance, and utilities. The fourth unavoidable
    budget mandate is the $1,319,000 requested in the budget to convert
    many of NARA's intermittent employees to regular full-and part-time
    employment. Much of the work now being performed by NARA's intermittent
    employees should be performed on a full-or part-time basis.
    Intermittent employment is appropriate only for work that is sporadic
    and irregular. Heavy use of intermittents was a legitimate employment
    approach for a period in the Agency's history, but no longer. This
    change will not increase FTE for NARA but will require the funding
    necessary to cover the Federal employment benefits these employees will
    become entitled to when they are placed on full-or part-time work
    schedules.
        Now to our priorities. Adequate space and properly maintained
    facilities are our first line of defense to preserve our records and
    our history. We must provide proper storage for the valuable holdings
    entrusted to us. We also must maintain our facilities in proper
    condition for public visitors, researchers, and employees. And we must
    maintain the structural integrity of the buildings. In the fiscal year
    1996 appropriation, the Congress established the Repairs and
    Restoration account to enable NARA to provide ongoing repairs,
    alterations, and improvements to Archives facilities and Presidential
    Libraries and to provide adequate storage for holdings nationwide.
    Requirements in 1998 are $6,650,000--a decrease of $9,579,000 over the
    amount provided in 1997. The $6,650,000 includes $2,750,000 for such
    repairs as chiller replacement, roof replacement, elevator repair and
    replacement, plumbing, air handlers, security systems, humidification
    and de-humidification systems, lighting, and drainage.
        This year we are requesting an additional $1,800,000 for moving
    expenses to vacate the New York Federal Records Center which is located
    at the Army's Military Ocean Terminal, in Bayonne, New Jersey. The
    records center is the largest civilian agency tenant on this base,
    which is scheduled for closure under the Base Realignment Closure
    process. The current buildings are old--built during World War I--and
    are in very poor condition. Requested funding will provide for the
    relocation from that facility of 1.2 million cubic feet of Federal
    records and related office support equipment.
        The second need under the Repairs and Restoration account is
    funding to continue the consolidation of other Federal Records Centers
    throughout the country when it is appropriate and cost-efficient to do
    so. Other records center facilities, although rather inexpensive to
    rent, are in extremely poor condition, and totally lack environmental
    controls. Records stored in these crumbling warehouses are at risk.
    $2,100,000 is required to consolidate those records.
        The budget incorporates two additional initiatives that are
    necessary for the agency to carry out our new Strategic Plan. First of
    all, we are requesting $2,000,000 for critical upgrades to and
    development of NARA's systems for managing records in various formats,
    but particularly records generated electronically. The request includes
    funds for expert consulting services and for equipment and
    communications enhancements to NARA's existing network infrastructure.
        Second, our request includes $1,920,000 to begin a five-year action
    plan to preserve the audiovisual heritage of the United States,
    documenting the history of the United States from the 1930's to the
    1960's. Much of this heritage is in danger of being lost because many
    of the film images are on an unstable base, and many of the video and
    audio recordings were made on formats that are now obsolete.
        The budget also includes funds for grants that I award on the basis
    of recommendations from the National Historical Publications and
    Records Commission. Beginning in fiscal year 1995, the grants program
    of the NHPRC was separated from the operating expenses of NARA and a
    new appropriation account was established for the grants. The
    administration and reference services for the grants program remain
    part of the operating expenses appropriation for NARA. The grants
    program is currently authorized through fiscal year 2001. NARA is
    requesting an appropriation of $4,000,000 in 1998--a decrease of
    $1,000,000 from 1997. Nonetheless, this request is important to us
    because NHPRC grants finance research-and-development projects on
    electronic records, among other things we need, and foster partnership
    programs with state and local governments, which are trying to care for
    many records generated by federal programs that are administered by
    states and localities. NHPRC grants are important to them and to us.
        In summary, this small, but vitally important Federal agency has a
    very large challenge facing it today and into the foreseeable future.
    Ensuring that the government and the citizen will continue to have
    ready access to the essential evidence of our history will require an
    efficient and effective National Archives and Records Administration
    and the cooperation of the Congress to provide the resources necessary
    to carry out the task. For 1998, our budget request gives priority to
    financing the space necessary to adequately house our holdings and
    serve the public, the electronic infrastructure to manage the life
    cycle of growing quantities of digital records in particular, and the
    preservation tools required to protect the audiovisual holdings of the
    20th Century that are currently at risk.
        Thank you.
                                     ______

                    Questions Submitted by Senator Campbell

                            repairs and restorations
        Question. The fiscal year 1997 Appropriation provided $16.2 million
    for repair and alterations of Archives facilities and the Truman and
    Roosevelt libraries. On April 15 Archives forwarded to the subcommittee
    a report on the renovation of the Truman Library. What is the status of
    the funding? Has the Archives received matching private sector
    donations to complete the $25.5 million project?
        Answer. As discussed in the April 15, 1997, report submitted by
    NARA, the $4 million provided this fiscal year for the Truman Library
    will allow the continuation of a complete renovation of the Library's
    permanent museum exhibits and related improvements to the facility. The
    April 15 report shows that NARA has a long-range plan for this project
    which relies upon both federal funds and the support of the private
    Truman Library Institute. Now that our report is submitted, we will
    begin the obligating and contracting process to utilize the $4 million
    allocated this fiscal year, and continue the renovation.
        Regarding private support, the Truman Institute has already raised
    $5.3 million for the museum renovation. The first phase of the project,
    which involved major changes to the Oval Office and White House gallery
    exhibits, was completely paid for by the Institute. Led by new Board
    members and a strengthened development staff, the Institute intends to
    raise the remaining amount it has pledged for the renovation and
    associated educational programs by the year 2000. This schedule is
    consistent with the overall renovation plan presented by NARA in the
    report of April 15, 1997.
        On June 13, 1997, we also submitted to the subcommittee our report
    on the renovation of the Roosevelt Library. Regarding private support,
    the Roosevelt Institute has agreed to raise $4.0 million for the
    renovation. This will include: design of the Visitors Center and
    renovations to existing building; furnishing and equipping the Visitors
    Center and renovated library; partial funding of Visitors Center
    construction; and, to continue non-Federal fund-raising initiatives
    which already support Library programs, including planning for
    replacement of permanent exhibit and development of a new orientation
    film.
                        non-textual records preservation
        Question. The fiscal year 1998 Budget includes a request for $1.9
    million for non-textual record preservation as the first increment of a
    five-year program. What is the total funding level for the non-textual
    preservation program? Please explain how the $1.9 million will be
    obligated.
        Answer. Initiatives over the five years to preserve nontextual
    records shall include the following five action steps that are priced
    below based on our best current knowledge of costs for the various
    types of services, equipment and supplies. These initiatives will cover
    the first phase (five years) of a long range preservation plan.
    Implementation of the initiatives will stay within the $1,920,000
    annual total but the costs may change and shift among categories as
    actual procurements are made and contracts are awarded:
    (1) Rent cold storage space off site to store the most valuable and/or
            most deteriorated records
        Provide cold storage for records on acetate and nitrate based
    photographic film, black and white and color, including still
    photographic images, motion aerial images and accessioned microfilm.
    Beginning in fiscal year 1998 and within five years, acquire sufficient
    archival quality cold storage to move all NARA acetate and nitrate
    based records into cold storage. The cold storage will extend the
    usable life of these records, thereby providing time to initiate a long
    term and cost effective duplication plan. Cost estimates are based on
    generic lease figures from the General Services Administration. Costs
    may change when additional cold storage space actually is leased or
    more cold storage space is configured in NARA's buildings. Costs in the
    first year (1998) are estimated at $552,000; the cost to maintain this
    cold storage space in each of years two through five is $370,000.
        These costs estimates cover the lease of space, the purchase of
    shelving, and the expense of moving the records in the first year and
    continuing leasing costs in the subsequent years. The goal is to
    provide for storage of 58,000 cubic feet of the most at risk acetate
    records that are not now in cold storage.
    (2) Increase the capacity of the NARA laboratory by purchase of
            equipment and supplies
        Increase NARA preservation lab capacity to duplicate and provide
    ready access to records in cold storage, and to copy those items so
    fragile that outside contractors are not available to perform this
    work. Increased capacity will come from reallocating and retraining
    agency staff whenever possible and more importantly from the purchase
    of equipment. Much of the equipment is decades old and modern equipment
    will support better production. New motion picture duplication
    equipment will be acquired and the numbers of cameras for copying still
    photography on polyester roll film will be increased. Equipment costs
    first year (1998): $600,000; in subsequent years the equipment costs
    should be minimal unless procurement regulations and procedures delay
    some purchases.
        Lab supplies should increase $300,000 over their current base
    during the first year (1998) and remain at this level through the
    following four years. Cost in each of years one through five, $300,000.
        The combination of new equipment and increased lab supplies will
    permit increased preservation copying work on all the major media
    within NARA. The internal NARA copying operation will work in tandem
    with the outside contracts described next under action steps No. 3 and
    No. 5 to meet NARA's most urgent needs for preservation copying.
    (3) Mobilize NARA technical and acquisition staff, as well as procuring
            assistance from contract experts, to write statements of work
            and establish contracts that, together with expansion of the
            NARA lab, will greatly expand the preservation effort. NARA
            plans to contract out copying some audio and video records on
            obsolete media, to copy nitrate and diacetate negatives in
            regional archives, to begin preservation duplication in
            presidential libraries, to copy deteriorating aerial indexes,
            to begin long term coping of aerial roll film and motion
            picture film
        Let contracts to inspect, clean, and copy aerial photography, still
    pictures, and motion picture film that are on acetate media and to copy
    some audio and video obsolete formats. While NARA labs can increase
    their preservation copying work, they can never with current staffing
    resources perform all the preservation work necessary for NARA's
    holdings. Consequently, NARA must let contracts for these preservation
    efforts. To make sure that the statements of work will be the best
    possible and will be in place during the second year of the action
    plan, NARA will utilize the NARA technical and acquisition staff during
    the first year to prepare Statements of Work (SOW's), technical
    evaluation criteria, and the other facets of a major contracting effort
    to establish a series of preservation contracts that become fully
    effective in the second year and, via the exercise of option years,
    continue at the same general level through the fifth year of the plan.
        Cost in first year (1998), $0: Cost in each of years two through
    five, $900,000.
        These contracts will be addressed to convert obsolete format audio
    and video records to current formats on more stable base media; to
    inspect, repair, and duplicate aerial photography and aerial index
    film; to copy nitrate/diacetate negatives in the regions; to start on
    the need for preservation copies of still photographs, audio tapes and
    motion pictures in the presidential libraries; and to inspect, repair,
    and duplicate motion pictures.
    (4) Provide necessary supplies, equipment, and internal reallocation of
            staff to perform the on going holdings maintenance actions that
            serve to protect records such as photographic prints, maps, and
            building plans which will not be copied
        Costs for supplies to recan motion and aerial film, to refolder,
    rejacket, and rebox maps, posters, paper photographic prints will allow
    staff in NARA's nontextual records branches to perform basic non-lab
    preservation work on the at risk holdings. A major effort will be made
    in the first year and will continue at reduced level in the next four
    years as more of the records go out to contractors performing the
    preservation duplication work described under action steps No.'s 3 and
    5. Cost the first year (1998) $468,000; cost in each of years two
    through five, $250,000.
    (5) Establish an on going program of copying audio and video records on
            magnetic media, every 20 years as recommended by experts
        To schedule, write and let four year contracts to copy as much as
    possible of the 42,000 video tapes and 61,000 audio tapes that need
    recopying to ensure no information is lost by the aging process for the
    magnetic media. The first year there will be no contract cost except to
    write the statement of work for copying both media in during the next
    four years. The estimated cost for each subsequent year is $100,000,
    but--given the many preservation needs indicated under the contracting
    effort in No. 3--NARA may have to reduce the priority of this action
    and postpone it beyond this 5 year action plan. Cost the first year
    (1998) $0; cost in each of years two through five, $100,000. (See
    attached chart for Preservation costs.)

       NATIONAL ARCHIVES AND RECORDS ADMINISTRATION--NONTEXTUAL PRESERVATION REQUEST COSTS--FISCAL YEARS 1998-2002
                                                [In thousands of dollars]
    ----------------------------------------------------------------------------------------------------------------
                                                                           1998     1999     2000     2001     2002
    ----------------------------------------------------------------------------------------------------------------
    Cold storage:
        Rent ($25.00 per sq. ft.--conversion=/3.9).....................  \1\ 276      370      370      370      370
        Shelving ($3.70 per cu. ft.)...................................  \1\ 160  .......  .......  .......  .......
        Moving records ($2.50 per cu. ft.).............................  \1\ 106  .......  .......  .......  .......
        Travel.........................................................       10  .......  .......  .......  .......
                                                                        --------------------------------------------
          Total cold storage...........................................      552      370      370      370      370
                                                                        ============================================
    Equipment:
        Motion picture lab.............................................      300  .......  .......  .......  .......
        Recording lab..................................................      100  .......  .......  .......  .......
        Microfilm dupl. lab............................................  .......  .......  .......  .......  .......
        Still photo lab................................................       70  .......  .......  .......  .......
        Aerial.........................................................      130  .......  .......  .......  .......
                                                                        --------------------------------------------
          Total lab equipment..........................................      600  .......  .......  .......  .......
                                                                        ============================================
    Contracts:
        Nitrate copying................................................  .......       85  .......  .......  .......
        Motion picture:
            Obsolete video.............................................  .......  .......  .......  .......  .......
            Obsolete audio.............................................  .......  .......  .......  .......  .......
            Inspection (incr. to existing contract)....................  .......      150      200      200      200
            Dupl. of acetate base film.................................  .......      300      300      300      300
        Aerial: Inspection, repair, cleaning and duplication...........  .......      365      400      400      400
                                                                        --------------------------------------------
          Subtotal.....................................................  .......      900      900      900      900
                                                                        --------------------------------------------
        Audio and Video: Recopying of audio and video  tapes...........  .......      100      100      100      100
                                                                        --------------------------------------------
            Total contracts............................................  .......    1,000    1,000    1,000    1,000
                                                                        ============================================
    Supplies:
        Laboratory.....................................................      300      300      300      300      300
        Motion picture (recanning).....................................      338      150      150      150      150
        Still photo (jackets, mylar, folder............................       50       40       40       40       40
        Aerial/cartographic (boxes, cans, folders).....................       80       60       60       60       60
                                                                        --------------------------------------------
          Subtotal (without Laboratory)................................      468      250      250      250      250
                                                                        --------------------------------------------
          Total Supplies...............................................      768      550      550      550      550
                                                                        ============================================
          Total nontextual preservation................................    1,920    1,920    1,920    1,920    1,920
    ----------------------------------------------------------------------------------------------------------------
    \1\ Based on 43,000 cubic feet.

                           private sector involvement
        Question. What efforts, if any, have been made to encourage private
    sector involvement in the cost of non-textual record preservation? For
    example, if aerial photographs made to show the bomb damage in Europe
    during World War II are used by environmentalists and bomb disposal
    experts, not to mention the motion picture industry, perhaps they could
    be encouraged to contribute to preservation costs.
        Answer. NARA has made efforts to encourage private sector support
    for preservation of non-textual records, with rather limited success.
    At four Presidential Libraries, the private foundations associated with
    those libraries have provided some support for preservation work on
    Library holdings, but the support is primarily for textual records and
    museum items. The Herbert Hoover Library Association, for example,
    provides approximately $4,000 annually for preservation projects at the
    Hoover Library from an endowed fund. The Reagan Presidential Foundation
    funded $1,000 worth of preservation on a portion of Ronald Reagan's
    pre-Presidential collection at the Reagan Library and purchased
    audiovisual equipment that is used in small part for preservation work.
    The Truman Library Institute has provided financial support primarily
    for conservation of museum objects. The Truman Library Gift Fund also
    was the designated beneficiary of a special one-time fundraising event
    associated with the opening of a local movie theater complex in
    Independence, Missouri--those funds are dedicated to preservation of
    collections the Library could not otherwise afford. The Kennedy Library
    Foundation also recently established a preservation fund.
        On the other hand, NARA has made other efforts to obtain private
    sector support for specific non-textual preservation projects without
    success. During the World War II fiftieth anniversary commemorations,
    for example, we attempted to obtain assistance from veteran's groups to
    support copying of photographs and some textual records. Several
    private organizations have been approached to support preservation
    copying of the remaining Nuremberg memobelt recordings with no
    response.
        From our experience, and similar experiences among state
    institutions, the private sector interest is in providing support for
    exhibits and public outreach projects that can provide a visible
    demonstration of the corporate involvement, and not support for core
    functions. While we will continue to seek private support for projects,
    we believe that this approach is not a viable means of obtaining the
    funds needed for systematic preservation treatment needed for our non-
    textual holdings over the long term. First, the private sector appears
    to consider preservation of Federal records to be a Federal government
    core responsibility and is more supportive of non-textual preservation
    needs in the non-Federal sectors. The American Film Institute, for
    example, has provided grants to archival institutions around the
    country for preservation of non-Federal audiovisual records. Second, as
    the question indicates, seeking private support requires identification
    of specific collections and development of grant proposals that match
    the interests of the private sector group. Even where we have done
    this, success is not guaranteed. More important, this approach does not
    necessarily result in preservation of the records most in need of
    treatment. We therefore conclude that appropriated funding is an
    essential base for preservation of non-textual records in NARA custody.
                  consolidation of existing storage facilities
        Question. The fiscal year 1998 Budget includes a request for $2.1
    million for the consolidation of existing storage facilities. Please
    provide information on what centers would be consolidated and where the
    consolidated facility will be located.
        Answer. The National Archives and Records Administration has taken
    several important steps to manage its records center space requirements
    on a more cost effective basis while improving the environmental
    conditions in which it stores all of its records. With the funding
    requested in this initiative, we will be able to continue meeting these
    objectives of providing more cost effective and environmentally sound
    records center space.
        While we have not yet reached a final decision as to the next
    records center consolidation/relocation site(s), we are making great
    strides in our first relocation effort funded under this appropriation.
    The move of the New York Federal Records Center to the new site in the
    Kansas City, Missouri area is estimated (in the report to the Archivist
    on ``Replacing the New York Federal Records Center'') to save at least
    $14 million and as much as $23 million, over the 20-year life cycle,
    when compared to relocating to a facility in the New York/New Jersey
    area. While we cannot guarantee the same savings with the $2.1 million,
    we are looking at significant long term reductions in annual operating
    expenses. The lessons learned and the experience gained from the move
    of records from the Bayonne facility to Kansas City, Missouri are
    serving as a guide as we continue planning for a second relocation in
    fiscal year 1998 into more cost efficient space. This $2.1 million is
    critical to accomplish this move.
                announced changes consistent with strategic plan
        Question. On April 7, 1997, the Archivist announced changes
    consistent with the Archives Strategic Plan. The announced changes
    impact Archives management of FTE and hiring personnel. Please explain
    how these announced changes will assist managers in meeting the
    Archives goals.
        Answer. The personnel resources reallocation policy announced on
    April 7, 1997, allows the Archivist with the advice of his Leadership
    Team to review positions as they become vacant throughout the agency
    and determine whether they will be filled in the program where the
    vacancy occurred, or whether the resources should be shifted to another
    program. NARA's strategic plan lays out the functions and activities
    that are most important to carry out the agency's mission. To begin to
    carry out the vision of the strategic plan without an infusion of new
    resources requires the redirection of existing resources. To some
    extent that was done through an agency reorganization in which phase
    one was completed last January and phase two is expected to be
    effective January 1998. Programs were combined in a manner that
    encompass the direction set by the strategic plan, and individual staff
    members were redirected from activities not included in the forefront
    of the plan's initiatives. The policy announced in April is a
    continuation of the attempt to identify resources that can be shifted
    internally to provide staff with the kinds of skills and abilities
    needed to confront the kinds of increasingly difficult problems NARA
    must confront to assist Federal agencies to manage wisely and
    effectively agency records which continue to grow in volume and
    technical complexity, and to ensure long term access to these essential
    records for the Government and the public.
          national historical publications and records commission fund
        Question. What is the current status of the National Historical
    Publications and Records Commission fund? Why did the Archives request
    reduced funding for that grants program in fiscal year 1998?
        Answer. For fiscal year 1998 the NHPRC is authorized to receive $10
    million in grant funds. The Administration's budget for fiscal year
    1998 requests $4 million, which is $1 million less than the actual
    appropriation for fiscal year 1997, and returns the Commission to the
    funding level it had in 1979 nearly two decades ago. The reduced-
    funding request reflects no dissatisfaction with the NHPRC's program or
    achievements nor does it reflect the great need for grant funds
    throughout the country. The request is consistent with what the
    Administration has recommended in the past several years.
                          agency contributions to csrs
        Question. The President's Budget and the Bipartisan Budget
    Agreement both assume that agency contributions on behalf of their
    employees covered by the Civil Service Retirement System (CSRS) will be
    increased by 1.51 percent. Further, according to the Office of
    Management and Budget, this increase must be absorbed by agencies, at
    least in fiscal year 1998. What would be the cost of this proposal at
    NARA? Would implementation of this proposal require any staffing
    adjustments?
        Answer. The cost of this proposal for NARA is estimated at
    $580,000. During the last 10 years, NARA's base has absorbed over $23
    million dollars for such items as pay raises, Gramm-Rudman reductions,
    increased space needs, and mandated administrative and personnel
    reductions. Although we recognize that this is a time of restricted
    resources throughout the government, NARA does not have discretionary
    funding to absorb any further cuts. The largest portion of our budget
    is fixed costs for personnel, space and buildings, and Presidential and
    Congressional mandates. In fact 45 percent of our budget must go for
    rent and mortgages, and to maintain, operate and repair our buildings.
    As such, our only option is to take any new mandates out of existing
    personnel resources. This will definitely lead to a reduction on our
    personnel level, and further exacerbate the current problems we have
    dealing with critical issues relating to the management and
    preservation of Federal electronic records and the increasing early
    transfer of government records to NARA due to agency streamlining,
    closing of military bases, closing of agencies, and ending of programs.
                                     ______

                          OFFICE OF GOVERNMENT ETHICS

                Prepared Statement of Stephen D. Potts, Director

        Thank you for the opportunity to submit a statement in support of
    the Office of Government Ethics' (OGE) request for fiscal year 1998
    resources of $8,265,000 and 84 FTE's. This request represents an
    increase of $187,000, primarily to meet the expected inflationary
    increases in rent and personnel costs.
        The ethics program in the executive branch is decentralized. Thus,
    the downsizing and streamlining taking place at many agencies is
    reducing the resources available to devote to the ethics program. OGE
    is expected to take up the slack. Agencies will rely more heavily on
    OGE to assist them in developing innovative program support strategies
    and educational materials to maintain the quality of the ethics
    program. Therefore, we expect this increased agency reliance upon OGE
    to translate into our provision of more services for the same resources
    previously devoted to the program. We look forward to that challenge
    and believe we offer a fiscally and programmatically responsible
    budget.
        The ethics program directed by OGE is part of the basic
    infrastructure that supports anticorruption and conflict programs
    within the executive branch of the United States Government. The
    resources expended by OGE to direct and support prevention and
    education programs are but a small amount in comparison to the
    resources expended by those who pursue wrongdoers as well as the
    resources lost through inadvertent or deliberate misuse. We believe the
    resources we have requested are those necessary to adequately support a
    strong ethics program.
                                fiscal year 1998
        We would like to highlight some of the new and continuing major
    programs anticipated for fiscal year 1998.
        In the ethics education and training area, we plan to continue to
    develop more off-the-shelf education and counseling materials,
    including computer based training materials. These materials can be
    used by agencies with little or no modification, thus allowing them to
    use their reduced resources elsewhere in the program. Ethics education
    materials developed by OGE and by agencies are collected in our Ethics
    Information Center. They are made available to agencies as they develop
    their ethics training programs. Many of the textual materials can be
    downloaded and reproduced locally by agencies thus reducing the overall
    cost to the Government. Additionally, OGE has found an inexpensive
    source to reproduce first quality copies of OGE-developed video tapes
    for agency purchase. Finally, many of the materials produced by OGE are
    available from our WEB site and/or a CD-ROM which is issued twice a
    year through a subscription.
        To continue to strengthen our communications with agency ethics
    officials, OGE expects to continue its program of the Director's
    informal brown-bag luncheon sessions with agency ethics officials in
    Washington, and to expand its program of more direct communication with
    ethics officials in the region. With regard to the latter, OGE plans to
    expand the regional development program initiated in 1997 in the New
    York and Atlanta regions to the Chicago and Denver regions.
        The number of nominations to Presidential appointments requiring
    Senate confirmation is expected to be high particularly during the
    first half of fiscal year 1998. Consequently, resources devoted to the
    review of the financial disclosures of these nominees and the resultant
    conflicts counseling and ethics agreement development will be greater
    than usual. We will also continue to support agency ethics officials as
    they provide post-employment counseling to increased numbers of first-
    term appointees returning to the private sector. Further, we will
    continue to provide advice and counseling with regard to the executive
    branch standards of conduct and continue to review individual agency
    supplemental standards.
        OGE desk officers will maintain their day-to-day communications
    with the agencies assigned to them. This continuing liaison between OGE
    and agency ethics staffs enables OGE to respond to the needs of the
    agencies in a timely and accurate manner. In addition, this interaction
    provides OGE with an early warning that an agency ethics program is
    deficient or has problems that require specialized attention.
        The program review teams will continue to provide evaluations of
    agency ethics programs to agency heads and ethics officials that will
    help the agencies identify their programs' strengths and weaknesses.
    The specific recommendations for program enhancements will be designed
    to ensure that the integrity of the agency's operations will not be
    compromised by actual or potential conflicts of interest.
        These are just some of the programs envisioned for fiscal year
    1998. We are pleased with the past success of the executive branch
    ethics program and look forward to the challenge of maintaining and
    enhancing the quality of the program while remaining fiscally
    conservative.
                                     ______

                         OFFICE OF PERSONNEL MANAGEMENT

               Prepared Statement of Hon. James B. King, Director

        Mr. Chairman and members of the subcommittee: I appreciate very
    much this opportunity to discuss the request of the President for
    appropriations for the Office of Personnel Management (OPM) for fiscal
    year 1998. It may be useful, before reviewing OPM's budget request, to
    consider the significant changes the agency has undergone in the past 4
    years.
        When the President noted the end of the era of big government and
    called on Federal employees to do more with less, OPM responded. our
    reduction of 48 percent in our full-time equivalent (FTE) level of
    employment, from the fiscal year 1993 baseline of 6,208 to 3,253 in
    fiscal year 1998, has led the government and provided an example of the
    way in which a willingness to make the hard decisions can enable an
    organization to operate within dramatically reduced funding levels and
    continue to successfully carry out its missions.
        A total redesign of the agency's functions and the privatization of
    two major programs, training and investigations, have refocused our
    organization and strengthened our role as trustee and custodian of the
    merit system. As a result, we renewed our commitment to our core
    functions including merit systems oversight and the development of work
    force information. In the investigations privatization, we pioneered
    the approach of creating an employee stock ownership plan (ESOP)
    company from an existing unit in a Federal Agency.
        In addition, we have transformed a substantial portion of our
    employment information and staffing services into reimbursable
    activities. And, as government has been downsized, we have accepted
    significant governmentwide responsibilities by coordinating career
    transition efforts through our interagency advisory group of personnel
    directors. Our investment in technology has paid dividends in the form
    of a steady improvement in customer service in our employee earned
    benefit programs.
        The President has now challenged all of us to be committed to a new
    kind of Government and to build on the Vice President's efforts to make
    our Government work better even as it costs less. OPM is prepared to
    meet that challenge.
        The total OPM request of $12.9 billion includes appropriations
    which are 2 percent discretionary and 98 percent mandatory. For our two
    discretionary appropriation accounts containing general funds and trust
    funds, we are requesting a total of $186.2 million. Our request for our
    three mandatory payment appropriations totals an estimated $12.7
    billion. Permit me to describe each of these in more detail.
        Our request for basic operating expenses from general funds totals
    $85.4 million and 777 FTE's, a decrease of $1.9 million and 70 FTE's
    from fiscal year 1997. This is largely attributable to the success of
    our ongoing effort to transition many of our employment services,
    including testing, examination development, and employment information,
    to a fee-for-service basis. We expect to complete the process this
    fiscal year.
        Despite these reductions, we plan to invest approximately $4.5
    million in information technology enhancements during fiscal year 1998.
    Through a phased implementation of our integrated information
    technology architecture and migration plan, we will not only comply
    with the requirements of the information technology management reform
    act, but also enable OPM to maintain its leadership role in the
    development, implementation, and communication of personnel management
    policies throughout the Federal community.
        We also intend to extend our leadership role in the application of
    technology to crosscutting human resources concerns, both through the
    development of new approaches to governmentwide electronic personnel
    recordkeeping and by exploring the feasibility of extending the
    technology we apply to our internal operations (particularly electronic
    imaging) beyond OPM. There is, we believe, an opportunity for
    significant cost savings for all Federal agencies by reducing the labor
    intensive nature of the human resources function.
        For the administration of the retirement and insurance programs for
    Federal employees, we are seeking $91.2 million in transfers from the
    trust funds and 1,431 FTE's, a decrease of 10 FTE's from fiscal year
    1997. Our efforts over the next 2 years will be concentrated on the
    redesign and modernization of our benefits systems to provide our
    customers with a greater variety of services and to improve the speed
    and accuracy of all of the services we offer.
        Although it will be discussed in greater detail in a separate
    statement, it should be noted that the request for OPM's office of the
    inspector general (OIG) is, again this year, for $9.6 million and 103
    FTE's. This includes about $1 million in general funds and $8.6 million
    in transfers from the trust funds.
        OPM also provides a variety of services that are financed by
    payments from other agencies through the revolving fund. For ongoing
    revolving fund programs, the fiscal year 1998 budget includes an
    estimated $174.6 million in obligations and 770 FTE's to be financed by
    other agencies in exchange for OPM's services. The employment service
    provides employment information and automated staffing services, and
    conducts testing for the department of defense using the revolving
    fund. In addition, OPM operates its management and executive training
    programs, provides consultative services on human resources management,
    and manages the investigations program using the ESOP contractor (U.S.
    Investigations Service, Inc.) to conduct field investigations, along
    with the remaining employees of OPM's investigations service who are
    responsible for the integrity, security, and privacy interests in the
    program. It is important to note that we have reversed a 10-year trend
    of higher deficits in our revolving fund through a combination of tough
    management decisions, tighter financial controls, increased
    accountability, and downsizing.
        As always, the OPM budget request includes mandatory appropriations
    to cover the Government's contributions to the Federal employee life
    insurance and health benefits programs on behalf of annuitants, since
    those enrollees have no employing agencies to contribute the
    Government's share for them. The difficulty in predicting the needed
    amounts with precision obliges us to request a ``such sums as may be
    necessary'' appropriation for each of these accounts. For the 284,000
    nonpostal annuitants retiring after 1989 and electing post-retirement
    life insurance coverage, we estimate that $32.4 million will be
    required, while an estimated $4.3 billion will be necessary to finance
    the Government's contribution toward health benefits coverage for the
    11.8 million participating annuitants.
        In addition, as required under the system of financing established
    by Public Law 91-93 in 1969, we are requesting a ``such sums as may be
    necessary'' appropriation for the civil service retirement and
    disability fund. This payment, estimated to be $8.3 billion, represents
    the 30-year amortization of liabilities resulting from changes since
    1969 (principally pay increases) which affected benefits.
        It is also important to note that we have included once again in
    the general provisions the legislative language necessary to ensure
    that Federal blue-collar workers receive pay adjustments that parallel
    those granted their white-collar counterparts. For fiscal year 1998,
    the President's budget proposes an increase of 2.8 percent. The
    appropriate distribution between a national pay raise and locality pay
    will be determined following discussions with employee organizations
    and other interested parties.
        Thank you. I would be pleased to provide any additional information
    for the record that the subcommittee may require.
                                     ______

       Prepared Statement of Hon. Patrick E. McFarland, Inspector General

        Mr. Chairman and members of the subcommittee: Thank you for
    providing me with this opportunity to discuss the President's fiscal
    year 1998 request for appropriations for the Office of the Inspector
    General. The total request for the office of the inspector general is
    $9,605,000, which equals the amount appropriated in fiscal year 1997.
    Of this amount, $960,000 is from the salaries and expenses/general fund
    and $8,645,000 is from the trust funds. In addition, we plan for
    $150,000 in advances and reimbursements.
        The Office of Inspector General recognizes that oversight of the
    retirement and insurance trust funds administered by the Office of
    Personnel Management is, and will be, its most significant challenge.
    These trust funds are among the very largest held by the United States
    Government. Their assets totaled $417.8 billion in fiscal year 1996 and
    their annual outlays were $57.6 billion. The amounts of their balances
    alone are material to the integrity of the Government's financial
    position. I have allocated 90 percent of the Office of Inspector
    General's efforts and resources to trust fund oversight, and I believe
    that we are now as fully committed to trust fund work as is possible
    within the context of our current resource structure.
        Outlays from the OPM retirement trust funds are made in the form of
    payments to millions of annuity recipients. The health insurance trust
    fund provides payments to approximately 500 health insurance carriers
    nationwide. In turn, the health insurance carriers pay millions of
    claims for services filed by their enrollees and health care providers.
    Such payments are highly susceptible to fraud. Studies by law
    enforcement agencies, the general accounting office, and industry
    groups have consistently projected that substantial amounts will
    reflect improper, inaccurate, or fraudulent payments. We owe an
    affirmative obligation to Federal employees and annuitants to protect
    the integrity of their earned benefit programs, and to the Federal
    agencies and the American taxpayers who provide the majority of the
    programs' funding to reduce losses due to fraud and impropriety and to
    recover misspent funds whenever possible.
        Working with limited resources, the Office of the Inspector General
    has achieved an impressive record of cost effectiveness in combating
    fraudulent activities. Audits and investigations of the trust fund
    programs have resulted in significant financial recoveries to the funds
    and commitments by program management to recover additional amounts. In
    fiscal year 1996, we achieved a total financial impact of approximately
    $71.8 million, which is one of the largest such figures in the Federal
    inspector general community. This equates to $7 in funds returned for
    each dollar appropriated to OIG by congress.
        Our responsibilities for combating fraud and promoting efficiency
    in the trust fund programs will not diminish in future years. In fact,
    the retirement and insurance service's workloads are likely to grow in
    fiscal year 1998 and beyond, generating the need for intensified audit
    and investigative efforts on our part.
        The Federal Employees Health Benefits Program (FEHBP) is the
    largest employer-sponsored health insurance program in the United
    States--providing health benefits to over 9 million persons, and is the
    third-largest federally funded health care program, after Medicare and
    Medicaid. It has increasingly been cited as a model of the way a health
    insurance program can offer a wide choice of coverage options while
    controlling cost increases. Oversight responsibility for a program of
    this size and significance requires my office to devote every effort
    toward achieving recognition as a nationwide leader in fighting health
    care fraud. Our priority for 1998 is to enhance our ability to
    accomplish this goal. We are seeking to have the FEHBP included as a
    full participant in the health insurance portability and accountability
    act of 1996. Through an apparent misunderstanding of the nature and
    structure of the program on the part of the drafters of the portability
    act, FEHBP has been inadvertently excluded from most of the remedial
    and civil enforcement authorities for health care fraud which were made
    available to other Federal heath care programs. This not only has the
    effect of drastically limiting our capacity to combat fraud, but also
    reflects an unjustifiably inferior treatment of the health care
    interests of Federal employees and annuitants.
        Separate and apart from this proposal, we will also seek changes to
    the FEHBP Amendments Act of 1988 to allow OPM the same ability to
    impose administrative sanctions, in the form of debarment and civil
    monetary penalties, against health care providers who defraud FEHBP as
    is already available to other Federal health care programs. The
    principle at issue here is similar to the exclusion of FEHBP from the
    Portability Act. The 1988 legislation placed procedural requirements on
    OPM's sanctions authority which were far more restrictive than those
    which apply to programs such as Medicare and champus. The result was
    that it has not been feasible for OPM to take administrative action
    against providers, even in cases where fraud has been clearly
    established, unless other agencies had previously sanctioned them. This
    has left FEHBP programmatically, and its enrollees personally, with a
    decidedly substandard degree of protection against fraudulent or
    improper actions on the part of health care providers. This concludes
    my prepared remarks. I will be pleased to respond to any questions
    which you may have.
                                     ______

                    Questions Submitted by Senator Campbell

                      trust funds--administrative expenses
        Question. The Office of Personnel Management has statutory
    authority to draw-down from various trust funds, up to a certain limit
    set by Congress. In fiscal year 1998, OPM is requesting $85.385 million
    in appropriated funds and a total of $91.2 million transferred from
    trust funds--$78.9 million from the Civil Service Retirement and
    Disability Fund, $11.7 million from the health benefits fund, and
    $609,000 from the life insurance fund. What are the statutory
    limitations for use of trust fund monies?
        Answer. Title 5, United States Code, (section 8348(a)(2) for the
    Civil Service Retirement and Disability Fund, section 8909(a)(2) for
    the Employees Health Benefits Fund, and section 8714(a)(2) for the
    Employees' Life Insurance Fund) sets forth the basic terms and
    conditions under which the Office of Personnel Management (OPM) can
    draw against these funds to cover administrative expenses. Specific
    spending limitations, authorities, and restrictions are contained in
    the annual Treasury, Postal Service, and General Government
    Appropriations Acts passed by Congress.
        Question. Does OPM maintain detailed records of the utilization of
    those funds?
        Answer. Yes, OPM's financial management system tracks
    administrative expenditures for each of the employee benefit program
    trust funds on what is essentially a transaction basis.
        Question. What protections are in place to prevent cross-
    subsidization of other OPM activities?
        Answer. OPM's financial management system prevents cross-
    subsidization by linking, to the maximum extent possible, specific
    transactions to specific fund sources. In those instances where this is
    not possible, the OPM Chief Financial Officer distributes costs in
    accordance with established formulas. In recent years, the agency's
    accounting and procurement systems have been refined to the point where
    only a small percentage of its costs are allocated in this manner.
                    use of trust funds by inspector general
        Question. Since the Office of Inspector General also receives
    transfers from all three trust funds, who conducts audits to ensure
    appropriate use of trust fund monies?
        Answer. The Office of the Inspector General (OIG) receives 90
    percent of its operating resources through transfers from the OPM
    administered trust funds. These funds are used to perform audits and
    investigations of the Federal Employees Health Benefits Program, the
    Civil Service Retirement and Federal Employees' Retirement Systems, and
    the Federal Employees' Group Life Insurance Program. The OIG has
    achieved significant positive financial impact in these employee earned
    benefit programs. This positive financial impact was $71.8 million in
    fiscal year 1996 and for fiscal year 1992 through fiscal year 1996, our
    results exceeded $309 million.
        The OIG does not perform any ongoing financial management or
    accounting functions in-house except for budget execution and
    formulation activities. These functions are the responsibility of the
    Office of the Chief Financial Officer (OCFO) for all OPM program
    offices, including the OIG.
        However, the Chief Financial Officers Act does require that the OIG
    perform annual audits of OPM's financial statements prepared by the
    OCFO. The audits of the fiscal year 1996 trust fund financial
    statements were recently completed by an Independent Public Accountant
    (IPA). The OIG worked closely with the IPA and provided the oversight
    and coordination necessary to ensure that the audits were completed in
    a proper manner.
        The intermingling of IG and agency funds is such that an IG opinion
    on audited financial statements does not reflect specifically on the
    OIG's appropriated monies from the fund.
                    health benefits--government contribution
        Question. One of the responsibilities of the Retirement and
    Insurance Service is the administration of the Federal Employees Health
    Benefits Program. This program benefits current Federal employees and
    their dependents as well as retired Federal employees and their
    dependents.
        The formula now in place for determining the Government's share of
    FEHB premiums contains a proxy or phantom component to replace one of
    the so-called ``Big Six'' which left the program in 1989. That phantom
    formula will expire at the end of 1999.
        What would be the impact on employees of the elimination of the
    phantom component of the existing formula?
        Answer. The estimated impact on enrollees of the expiration of the
    Phantom formula and a subsequent switch to a Government contribution
    based on the remaining ``Big Five'' would be a monthly increase of
    approximately $23 per enrollee. The shift in costs from the Government
    to enrollees would amount to approximately $900 million annually.
        Question. Is OPM currently developing a different formula to
    propose to Congress?
        Answer. At the request of several Members of the House of
    Representatives, we provided technical assistance in developing a
    ``Fair Share'' proposal that was included by the Committee on
    Government Reform and Oversight in its final reconciliation package. We
    are providing similar assistance to the Senate Committee on
    Governmental Affairs.
              impact of increased agency retirement contributions
        Question. The President's budget and the Bipartisan Budget
    Agreement both assume that agency contributions on behalf of their
    employees covered by the Civil Service Retirement System (CSRS) will be
    increased by 1.51 percent. Further, according to the Office of
    Management and Budget, this increase must be absorbed by agencies, at
    least in fiscal year 1998. What would be the cost of this proposal at
    OPM?
        Answer. In fiscal year 1998, this proposal would cost OPM an
    estimated $1.7 million including reimbursable programs. About half of
    these costs will be offset because of a reduction in Federal Employees'
    Retirement System (FERS) normal costs, effective October 1, 1997.
        Question. Would implementation of this proposal require any
    staffing adjustments at OPM?
        Answer. No.
        Question. As the Government's personnel agency, has OPM developed
    any estimates of the impact of this proposal on the staffing levels of
    various agencies?
        Answer. No. Each agency is responsible for managing to budget and
    communicates the effect of financing changes on staffing plans to the
    Office of Management and Budget and Congress through the budget
    process.
        Question. Do you have any reason to believe that implementation of
    this proposal would result in massive reductions-in-force?
        Answer. No about half of the costs Governmentwide will be offset by
    the October 1, 1997, reduction in FERS normal costs. Where reductions
    in staff are necessary, agencies should be able to accommodate this
    additional cost through attrition. However, when combined with other
    funding reductions, some agencies may be forced to consider reductions-
    in-force.
        Question. Would this proposal result in efforts to ``encourage''
    employees covered by CSRS to retire earlier than planned?
        Answer. CSRS employees will not be targeted, because they will
    still cost the agencies less than FERS employees. However, some
    agencies may offer early outs to encourage increased attrition.
                          investigations privatization
        Question. There was much controversy in 1995 and 1996 over the plan
    to privatize the background investigations responsibilities of OPM. At
    that time, many feared that the Federal Government would lose control
    over sensitive information and that, over time, costs would rise.
        It is almost one year since the investigations unit was converted
    to an Employee Stock Ownership Plan with the creation of U.S.
    Investigations Services, Inc. What is the status of this program?
        Answer. The ESOP company, U.S. Investigations Services, Inc., has
    been able to continue completing work for OPM's customers on a timely
    basis with no deterioration in the quality of the product. OPM has
    continued to provide oversight of agencies' personnel security programs
    and provide assistance to agencies as needed.
        Question. Is it working?
        Answer. The ESOP company, US Investigations Services, Inc. has been
    quite successful. It has exceeded its first year projections in
    obtaining non-OPM work and, has hired a number of new personnel as well
    as individual contractors to meet the continuing Federal workload
    demand from OPM.
        Question. Has sensitive information remained secure?
        Answer. OPM continues to be the requester of Federal law
    enforcement information from the Federal Bureau of Investigations.
    Release of information to requesters continues to be strictly
    controlled by OPM through the Federal staff, which has maintained a
    presence at our facility in Boyers, Pennsylvania. We have not found any
    contractor staff in violation of the Privacy Act. Anyone found in
    violation will be immediately prohibited from working for OPM under the
    Federal contract.
        The Personnel Investigations Processing System continues to be
    controlled and maintained by Federal employees of OPM. Access to the
    data base is strictly controlled by OPM and we have kept sensitive
    information secure.
        Question. Is the Federal Government saving any money?
        Answer. Significant long-term savings have already been achieved by
    removing over 600 personnel from the Federal retirement system. Savings
    have also been achieved through the company moving from advance
    payments to performance payments for work completed for OPM some six
    months ahead of the contract schedule.
        Savings have also been achieved by OPM not having to raise prices
    to its customers. At a minimum, OPM expects to be able to hold the line
    on future price increases.
              use of annual leave to reach retirement eligibility
        Question. The fiscal year 1997 appropriations bill contained a
    provision which allows Federal employees who are involuntarily
    separated to utilize unused annual leave in order to reach retirement
    eligibility. Has this authority been utilized to any great degree?
        Answer. Information on the use of annual leave to attain retirement
    eligibility is not captured in our automated records. A review of our
    paper files to obtain an exact count of the persons taking advantage of
    this provision would be cost prohibitive. Our benefit specialists
    report it has been used by very few of the approximately 5,000
    involuntary retirements we expect to process this year.
                                     ______

                              U.S. POSTAL SERVICE

    Prepared Statement of Marvin Runyon, Postmaster General/Chief Executive
                                    Officer

        A quarter century ago, the U.S. Postal Service was commissioned by
    Congress to fulfill two distinct, yet vitally important, mandates.
        First, to be a fundamental service to the people. To bind the
    nation together with a communications network accessible to all. To
    provide postal services in every community. To deliver to everyone,
    everywhere, every day.
        Second, to serve the people like a business. To make use of the
    most modern management tools and technologies available. To render
    high-quality, low-cost products and services that can stand on their
    own in the marketplace. To be financially stable and self-supporting.
        Today, I am pleased to report that we are fulfilling these mandates
    in an historic way.
        Our national network has never been stronger. Last year, we
    delivered 183 billion pieces of mail to 128 million locations, both
    all-time highs. We are keeping our 38,000 post offices open longer, and
    we are offering a broader array of services to our nation than ever
    before.
        At the same time, we are delivering results that any business would
    be proud of.
        The past two years have been the most profitable in our history--by
    far. We ended 1996 with a net income of $1.6 billion. That followed on
    the heels of the historic $1.8 billion we earned in 1995. The combined
    surpluses of these two years is $3.4 billion, more than the total net
    income of the past 23 years put together.
        We have put that money to good use. In the past two years, we have
    lowered prior year losses by more than half. Earlier this year, we also
    put forward the most ambitious capital investment program in our
    history. That includes $14 billion over the next five years in new
    technologies and facilities that will help us cut costs and improve
    service.
        Our financial picture has remained healthy in 1997. Through May 23,
    our net income for the year stands at $1.34 billion. That is $322
    million ahead of expectations. Our revenues are $362 million below our
    plan, but we have made the necessary adjustments to cut expenses and
    come out ahead on our aggressive bottom line. Net income traditionally
    erodes during the lighter mailing months of the summer. However, we
    expect to end the year solidly in the black, only the second time in
    the past quarter century that we have had three straight years of
    positive net income.
        The Postal Service, however, is facing a loss of $1.4 billion in
    1998 and rising red ink beyond. It also has accumulated losses of $2.6
    billion still to repay. The Governors of the Postal Service are
    considering their options on future postage rates. A decision is
    expected soon.
        Mail service continues its upward climb. The Postal Service has
    once again set a new service record for local First-Class Mail service.
    Last week, we announced that independent measurements by Price
    Waterhouse confirm that 92 percent of local First-Class Mail was
    delivered overnight during the third quarter, March 1 to May 23. That
    is our highest score ever, and it is thirteen points higher than where
    we stood three years ago. The credit for this performance milestone
    goes to our managers, supervisors, and craft employees. Once again,
    they pulled together and pulled off a new service record.
        Local mail service helped lead the way. We have promised to make
    the nation's capital a model for mail service. We have made great
    strides. Southern Maryland and Northern Virginia set new performance
    records with scores of 94 percent and 93 percent, respectively. And
    Washington reached 90 percent, its second highest mark ever.
    Baltimore's score also jumped six points, from 85 to 91 percent.
        For the second straight quarter, the nation's four largest cities
    also finished at 90 percent or better. Los Angeles and New York each
    tied the national mark of 92 percent. Chicago and Philadelphia both
    scored 90.
        Despite its recent success, the Postal Service finds itself in an
    increasingly vulnerable position. On the one hand, our costs are
    growing several billion dollars a year. On the other hand, each of our
    services is feeling the pinch of competition. Market share is either
    flat or declining in four of our six major product areas, including
    correspondence and transactions, expedited mail, ground packages, and
    international. And while overall mail volume continues to grow, the
    rate of growth is eroding. We have gone from gains of 5 percent on
    average each year in the 1980's, to increases of just 2.2 percent so
    far in the 1990's. And last year, our growth was an anemic 1.1 percent.
        We are responding with bold, sweeping changes to prepare this
    organization for the 21st century. We are applying modern management
    techniques like process management and re-engineering to our
    operations. We are investing in employees with effective new training
    initiatives. We are putting more technology in our plants so that we
    can complete our letter mail automation program by next year. And we
    are developing the next generation of equipment like robots and
    advanced tray management systems. They're bringing us closer to our
    goal of a fully automated working environment.
        We are improving as quickly as we can, because we realize that what
    is at stake is the survival of a great American asset--universal mail
    service. Every dollar we save and every dollar we take in contributes
    to our financial well-being and our ability to continue our historic
    mission. It allows us to keep thousands of small post offices open for
    business. And it enables us to send our letter carriers to every
    doorstep and mailbox in America, whether you live in the Washington
    suburbs or somewhere north of Nome, Alaska.
        As you know, the Postal Service receives no tax money from the
    federal government, except for reimbursements for services mandated by
    Congress.
        Today, the Postal Service requests a total appropriation of
    $121,124,000 for fiscal year 1998. Of that amount, we request
    $86,274,000 for revenue forgone for free and reduced postage rates for
    certain types of mail, as set forth by Congress. Most of this amount--
    $55,296,000--reimburses the Postal Service for the costs of providing
    free mail for the blind and overseas voting.
        The Postal Service also requests $29,000,000 to reimburse past year
    shortfalls in revenue forgone funding. This request is the fifth
    payment in a series of 42 annual payments authorized for this purpose
    in the Revenue Forgone Reform Act.
        Consistent with the law, our request includes a net reconciliation
    adjustment to appropriations in previous years. Each year,
    appropriations for free and reduced rates are based on estimated mail
    volumes. When final audited mail volumes become available, these
    figures are reconciled with the estimates.
        Our request for $1,978,000 covers adjustments through fiscal year
    1995. We note that funding for our fiscal year 1997 request of
    $12,384,000 was deferred by Congress. In the meantime, final audited
    mail volumes for fiscal year 1995 indicated that an excess of
    $10,406,000 was received for that year. That excess is accordingly
    returned to the government, and is reflected in the net request for the
    coming fiscal year. The President's budget agrees with our request for
    current revenue forgone funding, but makes no provision for covering
    last year's revenue forgone reform reimbursement shortfall.
        Our request also includes an appropriation of $34,850,000 to cover
    workers' compensation payments for employees of the old Post Office
    Department. This appropriation funds the compensation paid to 1,828
    individuals or their survivors for injuries which occurred before July
    1, 1971. These expenses are directly related to the operations of the
    former Post Office Department and remain a liability of the U.S.
    Government. When received, these funds are paid directly to the
    Department of Labor.
        It should be noted that this appropriation is not, in any way, a
    subsidy to the Postal Service. Every one of the compensation cases
    predates our first day of operation. The responsibility of the U.S.
    Government for these Post Office Department liabilities is set forth in
    the legislation that established the Postal Service.
        Unlike the former Post Office Department, which was supported by
    annual appropriations, the Postal Service was chartered to become a
    self-supporting enterprise, financed out of its own revenues. Congress
    recognized that this would never happen if the years of deficits
    recorded by the former Post Office Department were passed forward to
    future mailers.
        To prevent this, Congress built a firewall between the liabilities
    of the former Post Office Department and the operations of the new
    Postal Service. Secure beyond that firewall, the Postal Service could
    attain financial stability. It could charge fair and reasonable postage
    rates based on the current cost of serving present-day customers. And
    it could obtain financing at realistic market rates for capital
    improvements.
        To reduce the federal deficit, the President's budget recommends
    the transfer of these Post Office Department liabilities to the Postal
    Service. This could require us to accrue immediately the full future
    cost of these liabilities, some $240 million. That would do harm to our
    financial status and impact the cost of postage.
        We strongly believe that the firewall between our activities and
    those of the Post Office Department should be maintained. To do
    otherwise, and ask today's mailers to absorb liabilities that date back
    more than a quarter of a century, would be a breach of the legislative
    contract Congress signed with postal customers.
        Finally, an annual public service appropriation of $460 million,
    authorized by law, is not requested. We have not requested nor have we
    received it since 1982. By not using these funds, the Postal Service
    and this Committee have saved the Federal Government $6 billion. We see
    this as a good faith effort to honor the legislative contract that made
    the Postal Service a self-supporting government establishment.
        We remain committed to upholding another important part of that
    contract--universal mail service. It is a cornerstone of democracy, a
    vital ingredient in social life, and a linchpin in our economy. We hope
    and trust that we have your support in fulfilling this mandate.
                                     ______

                    Questions Submitted by Senator Campbell

        Question. What are the primary reasons why the Postal Service wants
    reform? What is the Postal Service trying to accomplish?
        Answer. The existing postal ratemaking process is a form of cost-
    of-service regulation. Over the last 25 years, this regulatory
    framework has been criticized as stifling innovation, promoting
    inefficiency, and taking the focus of management away from the
    customer. An alternative regulatory model, called incentive regulation,
    has been applied successfully in railroad and telecommunications
    industries, both here and abroad. The experience with these industries
    strongly suggests that incentive regulation, if properly designed, can
    provide the framework for a more efficient and more innovative Postal
    Service. Under incentive regulation, the ratemaking process is
    streamlined by allowing reasonable pricing changes to occur without
    extensive regulatory hearings. Also, the Postal Service would be able
    to react more quickly to changing market conditions and focus more
    directly on the needs of its customers. Incentives for efficiency are
    enhanced because cost increases cannot be passed routinely to customers
    via rate increases.
        Incentive regulation provides the prospect for meaningful planning
    and budgeting for both the Postal Service and its customers. As
    ratemaking uncertainty is reduced, financial planning can be improved;
    budgeting becomes a true management tool. Incentive regulation would
    give the Postal Service more control over its pricing and enhance its
    ability to execute strategic plans. It would also give our customers
    more control for budgeting their postal costs. Freeing the annual
    income statement from the existing boom and bust of the rate cycle will
    improve financial planning and make budgets more meaningful and useful
    as measures of management performance. These efficiencies and
    improvements are entirely consistent with the basic mission of the
    Postal Service: universal public service. In fact, the increases in
    efficiency and customer focus should make the Postal Service even
    better able to fulfill its mission.
        Question. One of the integral parts of reform discussions, at least
    from the perspective of the Postal Service, is financial freedom. As
    you are aware, the Treasury Department is under the jurisdiction of
    this appropriations bill. What exactly does the Postal Service mean by
    financial freedom?
        Answer. The Postal Service seeks access to the best financial
    services available in the marketplace, and to gain the efficiencies
    that would accompany the private sector's flexibility, competition,
    innovation and rapid response to customer business needs. The Postal
    Service believes Treasury understandably has much higher priorities
    than provision of the most competitive financial services to government
    business enterprises.
        More specifically, the Postal Service seeks the authority to:
      --(1) maintain the Postal Service Fund in a Federal Reserve bank or a
            commercial bank depository for public funds selected by the
            Postal Service;
      --(2) invest funds in marketable obligations of, or obligations
            guaranteed by, the Government of the United States, or
            businesses closely related to the Postal business; and
      --(3) issue debt in the marketplace without preemption by Treasury.
        The reforms the Postal Service seeks are in contrast to current
    requirements, which are as follows: the Postal Service Fund must be
    maintained within the U.S. Treasury; investments must be in non-
    marketable, special issue Treasury securities; and the Postal Service
    must first offer all debt obligations to the Secretary of the Treasury
    before proceeding to sell the obligations to another party or parties.
        Question. The President's Budget and the Bipartisan Budget
    Agreement both assume repeal of a provision which requires the Federal
    Government to pay for workers' compensation benefits to Post Office
    Department employees injured before the creation of the United States
    Postal Service in 1971. The savings to the Federal Government, and the
    resulting cost to the Postal Service, from repeal of this mandatory
    appropriation is estimated to be $261 million over ten years. What is
    the effect on the Postal Service of the elimination of this provision?
        Answer. The Postal Service, like other business enterprises,
    follows Generally Accepted Accounting Principles (GAAP). In the event
    of elimination of the appropriation for Post Office Department claims,
    and the assumption of these costs by the Postal Service, GAAP would
    require that the Postal Service recognize on its financial statements
    the amount of the present value of all estimated future cash outlays on
    behalf of these former employees of the Post Office Department.
    Currently we estimate that the total of such future cash outlays is
    about $330 million, and that the present value of these outlays is
    about $240 million. Thus, the primary effect of elimination would be an
    immediate negative impact on the Postal Service financial statements of
    $240 million. (The $90 million balance would be recognized in future
    fiscal years.) This proposal would also result in a loss of cash to the
    Postal Service. The first cash outlay, in fiscal year 1998, would equal
    $34.9 million; subsequent cash outlays would be for lesser amounts.
                                     ______

                                 U.S. TAX COURT

               Prepared Statement of Mary Ann Cohen, Chief Judge

        Mr. Chairman and members of the Committee, I present for your
    consideration the appropriation request of the United States Tax Court
    for fiscal year 1998.
                        fiscal year 1998 budget request
        The Tax Court's fiscal year 1998 budget request is for $34,293,000
    and 350 permanent positions. This amount represents an increase of
    $512,000 from the fiscal year 1997 appropriation of $33,781,000 and no
    increase over the fiscal year 1997 request.
        This increase results from the following items: $273,000 for
    annualization, promotions, within-grade increases, and personnel-
    related benefits; $372,000 for the pay raise effective January 1998;
    and a decrease in the amount of (-$133,000) due to lower telephone,
    mail, and equipment requirements.
        The Court's request is simply to fund the normal day-to-day
    operations of processing cases from the time of filing through trial
    and final decision.
                        inventory of the u.s. tax court
        Any discussion of the Court's workload must emphasize that, at the
    present time, the Tax Court handles approximately 95 percent of all
    substantive tax litigation, exclusive of collection actions, in the
    Federal courts. As the Committee knows, it is the only court where
    taxpayers can litigate their cases without prior payment of a tax
    deficiency determined by the Internal Revenue Service. Proceedings in
    the Tax Court are begun by the filing of a petition by a taxpayer who
    has been issued a notice from the Commissioner of Internal Revenue
    determining a deficiency in tax. The Tax Court has no control over
    issuance of the notices.
        During fiscal year 1996, the number of cases filed with the Court
    increased 10 percent from the previous year, from 25,402 cases filed in
    fiscal year 1995 to 27,892 cases filed in fiscal year 1996. The Court
    closed fiscal year 1996 with 29,281 cases pending, a 1 percent
    reduction from September 30, 1995.
        The Court cannot predict with certainty the number of new cases
    that will be filed. We have no reason to expect that the number of
    petitions in fiscal years 1997 and 1998 will differ significantly from
    the number filed in 1996. The number of closings will keep pace, and
    the inventory as a whole is and will remain current.
                                    summary
        While manageable, the Tax Court inventory is substantial and will
    continue to be so because of its unique jurisdiction. The Tax Court's
    goal is to resolve cases expeditiously while giving careful
    consideration to the merits of each matter. The Court is also committed
    to providing taxpayers with a convenient forum for trial and
    simplifying the presentation of disputes involving relatively small
    amounts of tax dollars. The goals, as always, will remain constant as
    the Court endeavors to function as a safety valve in the self-
    assessment system, to assure a uniform interpretation of the Internal
    Revenue Code, and to provide a national forum for the resolution of
    disputes between the taxpayers and the Internal Revenue Service.

                           NONDEPARTMENTAL WITNESSES

        [Clerk's note.--The following testimonies were received by
    the Subcommittee on the Treasury and General Government for
    inclusion in the record.
        The subcommittee requested that public witnesses provide
    written testimony because, given the Senate schedule and the
    number of subcommittee hearings with Department witnesses,
    there was not enough time to schedule separate hearings for
    nondepartmental witnesses.]

              Prepared Statement of Bernard H. Berne, M.D., PH.D.

                              summary of testimony
        I am a resident of Arlington, Virginia. I serve the Food and Drug
    Administration (FDA) as a Medical Officer and as a reviewer medical
    device approval applications. I am testifying as a private individual
    and not as a representative of FDA or of any other organization.
        The General Services Administration (GSA) is evaluating the former
    Naval Surface Warfare Center in White Oak, Maryland, for the major FDA
    consolidation. However, this is a very poor site for this federal
    administrative and laboratory facility.
        Metrorail is three miles away. Nearby highways and roads are highly
    congested during rush hours.
        GSA and FDA are planning a country club in White Oak's affluent
    suburbs. FDA's 130-acre campus will have a visitor center and other
    amenities. Adjacent federal property will contain a golf course and a
    woodland.
        Congress must stop this extravaganza. The Administration has not
    requested any funds to begin this project, which lacks an approved
    prospectus. Congress should not initiate any appropriation to support
    the project.
        The Southeast Federal Center in Washington, D.C. is now available
    for a major federal headquarters. Adjacent to the Navy Yard Metro
    station and close to the Capitol, this site appears ideal for FDA's
    facility.
        Two Executive Orders, GSA's own regulations, and the policies and
    of President Clinton's Administration and of the National Capital
    Planning Commission (NCPC) require that GSA and FDA give the Southeast
    Federal Center preference over the White Oak site. However, because of
    past actions and requests by Conference Committees on Appropriations,
    GSA is not evaluating it.
        I therefore ask the Committee on Appropriations of the United
    States Senate to take the following four actions:
        1. Please oppose any appropriation of funds to support an FDA
    consolidation at the former White Oak Naval Surface Warfare Center in
    Montgomery County, Maryland.
        2. Please appropriate $5,000,000 to the study of a major FDA
    consolidation in the District of Columbia, with an initial focus on the
    Southeast Federal Center and its vicinity.
        3. Please do not appropriate any funds for the General Services
    Administration (GSA) to decontaminate,prepare, or acquire any site for
    any part of the FDA consolidation until a prospectus for the entire
    consolidation is approved in accordance with the provisions of the
    Public Buildings Act of 1959.
        4. Please ask GSA or the General Accounting Office to appraise the
    value of the White Oak site.
                            explanation of requests
    1. Please oppose any appropriation of funds to support an FDA
            consolidation at the former White Oak Naval Surface Warfare
            Center in Montgomery County, Maryland
        The present need for this project is questionable. New FDA
    buildings in Prince George's County will house those FDA Centers that
    now contain most or all of the FDA offices and laboratories that are
    reported to be in poor facilities.
        Many FDA offices, including my own, are in excellent buildings.
    None of my coworkers complain about their present offices.
    Nevertheless, we would all relocate to the Montgomery County
    consolidated facility.
        My coworkers and I rarely need to visit other FDA centers while
    reviewing medical device applications. The need to consolidate seems
    small.
        White Oak is three miles from the closest Metrorail station. In
    contrast, FDA's largest office building is presently only half a mile
    from a Metro station. FDA will likely lose many experienced employees
    if it moves to White Oak.
        The Naval Surface Warfare Center is in an affluent suburban
    residential neighborhood. The White Oak area does not require federal
    aid to support its development.
        Roads and highways near White Oak are highly congested during rush
    hours. These include such major arterials as Capital Beltway, New
    Hampshire Avenue, and Colesville Road. These do not need the additional
    traffic that this project would bring to the area.
        The Congressional Concurrent Resolution on the Budget for fiscal
    year 1996-2002 assumes a 30 percent reduction in funds for Federal
    Buildings construction in its seven year plan to balance the federal
    budget (Conference Report for H. Con. Res. 67: H. Rept. 104-59, June
    26, 1995, p. 84). House and Senate Committees on Appropriations need to
    address this programmed reduction in discretionary spending.
        President William J. Clinton urged Congress to further reduce
    spending on federal building projects when he vetoed the first 1995
    rescission bill (H.R. 1158). The President does not appear to support
    costly federal construction projects, especially since the
    Administration did not propose any 1998 funding to initiate or support
    this project.
        There is no urgent need for a major FDA consolidation. Congress
    needs to implement its Budget Resolution and the President's policies
    by appropriating no new 1997 funds for FDA's Montgomery County
    consolidation.
        FDA and GSA are developing plans for an extravagant 130-acre campus
    at White Oak. According to GSA's March, 1996, Draft Environmental
    Impact Statement (DEIS) for the Montgomery County consolidation, the
    White Oak campus will contain a visitor center and will feature both a
    woodland and a six hole golf course on adjacent federal property.
        FDA can accomplish its mission without a sprawling campus, a golf
    course, a woodland, or a visitor center. FDA does not need a country
    club.
        Congress has not reviewed or approved any prospectus for any part
    of the FDA consolidation. Congress does not know the specifications or
    the costs of this project.
        GSA presently has an opportunity to acquire property near the
    downtown Silver Spring Metrorail station by donation from the
    Montgomery County government. GSA also can locate the project on
    federally-owned property in downtown Washington, D.C. With such
    opportunities, Congress should not support a White Oak consolidation.
    2. Please appropriate $5,000,000 for the study of a major FDA
            consolidation in the District of Columbia, with an initial
            focus on the Southeast Federal Center and its vicinity
        Rescissions in 1996 removed all of the funding for federal
    construction at the Southeast Federal Center. The 1997 Omnibus
    Appropriations Act provided funds for environmental clean-up activities
    at this site. This federal property is therefore available for the FDA
    consolidation.
        The Southeast Federal Center is adjacent to the Washington, D.C.,
    Navy Yard. It is next to the Navy Yard Metro Station and is only a mile
    from the Capitol building.
        Previous actions and statements by Congressional conference
    committees on appropriations and rescissions have directed FDA's major
    consolidation to White Oak. Citing these actions and statements, GSA
    officials have refused my repeated requests to evaluate the Southeast
    Federal Center site as an alternative site for the consolidation.
        The March 1996 DEIS does not evaluate any sites other than the
    White Oak Naval Surface Warfare Center. Only Congress or a Federal
    court can change GSA's direction.
        A 1996 National Capital Planning Commission (NCPC) plan has
    recently designated the Southeast-Federal Center as an important site
    for new offices. NCPC expects this new economic development to ``assist
    the transformation of the Southeast Federal Center and adjacent Navy
    Yard into a lively urban waterfront of offices, restaurants, shops and
    marinas'' (``Extending the Legacy'', Plan for Washington's Monumental
    Core, NCPC, March 1996).
        The goal of NCPC's plan is to preserve and enhance Washington's
    Monumental Core, which is centered at the U.S. Capitol building. An FDA
    consolidation at the Southeast Federal Center can revitalize a decaying
    D.C. neighborhood and help achieve NCPC's goal.
        The Southeast Federal Center and its nearby depressed commercial
    area can hold buildings up to 14 stories high. If necessary for the
    consolidation, GSA can purchase adjacent commercial property at a low
    cost. The Southeast Federal Center is an ideal site for a large new
    federal headquarters facility.
        The legislation that initiated the FDA consolidation (Public Law
    101-635) authorizes only a single consolidated FDA administrative and
    laboratory facility. Indeed, Senate Report No. 101-242 (Feb. 1, 1990),
    which accompanied the authorizing legislation, states, ``the FDA needs
    to be consolidated in a buildings.'' Public Law 101-635 did not
    anticipate or authorize a 130-acre FDA campus and two satellite
    facilities.
        FDA does not require a 130-acre campus for its consolidation. Large
    high-rise buildings can readily house most or all of FDA's offices,
    laboratories, and ancillary facilities.
        Cities throughout the Nation contain many such research and office
    centers. Over 2000 National Institutes of Health (NIH) research
    laboratories are located in a single 14-story building that the
    government constructed in 1981 in Bethesda, Maryland. A single 18-story
    building in Rockville, Maryland, now houses many of FDA's offices,
    including the Office of the Commissioner.
        Congress and the Secretary of Health and Human Services (HHS) can
    readily oversee FDA's activities if FDA consolidates at the Southeast
    Federal Center. Additionally, FDA's visitors and regulated industries
    would find this site to be far more convenient than suburban White Oak.
        The Southeast Federal Center is close to both Maryland and
    Virginia. An FDA consolidation there will enhance the economies of
    three jurisdictions (D.C., Maryland, and Virginia). In contrast, a
    consolidation at White Oak would benefit Maryland at the expense of the
    District and Virginia.
        The median annual household income in the White Oak residential
    neighborhood exceeds affluent Montgomery County's median at $65,000.
    Southeast Washington's median household income is much lower. Federally
    supported economic development is far more critical to Southeast D.C.
    than to White Oak.
        Please recommend a survey of other sites in the District if GSA
    finds that FDA cannot feasibly consolidate at and near the Southeast
    Federal Center.
        A direction of planning funds to study sites in the District would
    place the project in compliance with Executive Order No. 12072 (August
    16, 1978), and with its implementing regulations in 41 CFR Sec. 101-
    17.000 et seq., as reaffirmed by the present Administration in 41 CFR
    Sec. 17.205 (Location of space) (Federal Register, Vol. 61, No. 46, pp.
    9110-9112, March 7, 1996). It would also be consistent with the
    purposes of the National Capital Planning Act of 1952 and the policies
    and recommendations that NCPC has developed to implement it.
        Executive Order 12072 and its implementing regulations direct the
    locations of federal facilities in urban areas, including the National
    Capital Region. They require federal agencies to locate and use their
    space and facilities so that the facilities ``shall serve to strengthen
    the Nation's cities'' and ``shall conserve existing urban resources,
    and encourage the development and redevelopment of cities.''
        Executive Order 12072 and its implementing regulations require GSA
    and FDA officials to ``economize in their requirements for space''. The
    Order states: ``Except where such selection is otherwise prohibited the
    process for meeting Federal space needs in urban areas shall give first
    consideration to a centralized community business area and adjacent
    areas of similar character * * * .''
        President William J. Clinton reaffirmed Executive Order 12072 in
    his Executive Order 13006, May 21, 1996, (Federal Register, Vol. 61,
    No. 102, May 24, 1996, pp. 26071-26072). Section 1 of President
    Clinton's Order states:
        ``(Statement of Policy). Through the Administration's community
    empowerment initiatives, the Federal Government has undertaken various
    efforts to revitalize our central cities, which have historically
    served as the centers for growth and commerce in our metropolitan
    areas. Accordingly, the Administration hereby reaffirms the commitment
    set forth in Executive Order No. 12072 to strengthen our nation's
    cities by encouraging the location of Federal facilities in our central
    cities.''
        On March 11, 1997, President Clinton stated that, as part of his
    economic stimulus package to revitalize D.C., he had ``directed his
    Cabinet secretaries to find other ways to help the District, beginning
    with keeping federal agencies in the city'' (Washington Post, March 12,
    1997, page 1). This is consistent with his Executive Order 13006 and
    with established federal policies concerning the location of federal
    facilities in the Washington Metropolitan Area.
        GSA's 1996 interim rule, 41 CFR 101-17.205 (Location of space),
    requires GSA and other federal agencies to comply with Executive Order
    12072. It also states in paragraph (n), ``* * * These policies shall be
    applied in the GSA National Capital Region, in conjunction with
    regional policies established by the National Capital Planning
    Commission and consistent with the general purposes of the National
    Capital Planning Act of 1959 (66 Stat. 781), as amended. These policies
    shall guide the strategic plans for housing of Federal agencies within
    the National Capital Region.''
        GSA and FDA have long disregarded the Executive Order and NCPC's
    regional policies and recommendations when planning, leasing and
    constructing federal buildings in the National Capital Region. To help
    President Clinton resolve D.C.'s financial crisis, Congress needs to
    correct this.
        A long-standing NCPC policy presently encourages government
    agencies to redistribute federal jobs in the National Capital Region.
    This redistribution is long overdue. Congress needs to address this in
    the federal buildings appropriations process.
        The redistribution would implement NCPC policies and
    recommendations that NCPC has developed in compliance with National
    Capital Planning Act. It would reverse recent trends and correct a
    growing imbalance of federal employment in the National Capital Region.
        In a recent Proposed Federal Capital Improvements Program (PFCIP),
    National Capital Region, fiscal years 1997-2001 (April, 1996) (p. 9),
    NCPC reported that the District of Columbia will lose 889 federal
    employees as a result of the FDA consolidation project. This would
    accelerate a continuing transfer of federal employment from the
    District to the Maryland and Virginia suburbs.
        According to NCPC's PFCIP (p. 10), the District's percentage of the
    total Federal employment in the National Capital Region has declined
    from 58.0 percent in 1969 to 52.4 percent in 1994.
        Because of this trend, NCPC's PFCIP (p. 12) has a final
    recommendation that states, ``The Commission encourages each agency to
    adhere to the policy in the Federal Employment element of the
    Comprehensive Plan adopted in 1983 which specifies that the historic
    relative distribution of Federal employment of approximately 60 percent
    in the District of Columbia, and 40 percent elsewhere in the Region
    should continue during the next two decades. This policy is used by the
    Commission to ensure the retention of the historic concentration of
    Federal employment in the District of Columbia, the seat of the
    national government.''
        A major FDA facility at the Southeast Federal Center is consistent
    with President Clinton's expressed policies and orders to his Cabinet
    secretaries, Executive Orders 12072 and 13006, GSA's implementing
    regulations, and NCPC policies and recommendations. A facility at White
    Oak would be inconsistent with all of these.
        FDA now plans to move about 700 federal employees in its Center for
    Food and Applied Nutrition (CFSAN) from the District of Columbia to a
    new facility in Prince George's County, Maryland. To reverse the
    accelerating decline of the nation's capital city, Congress must
    mitigate such relocations by directing the major FDA consolidation to
    the District of Columbia.
    4. Please do not appropriate any funds for GSA to decontaminate,
            prepare, or acquire any site for any part of the FDA
            consolidation until a prospectus for the entire consolidation
            is approved in accordance with the provisions of the Public
            Buildings Act of 1959
        The Public Buildings Act of 1959 requires the approval of a
    prospectus for all GSA building projects before funds can be
    appropriated for construction and site acquisition. However, no
    prospectus for any phase of the FDA consolidation has ever been
    approved.
        Provisions in the 1992, 1993, and 1995 Treasury, Postal Service,
    and General Government Appropriations Acts (Public Law 102-141, Public
    Law 102-393, and Public Law 103-329) permitted GSA to use the funds
    made available in those Acts for the FDA consolidation and for certain
    other projects, even though no prospectuses for these projects had been
    approved. These provisions released GSA from its obligation to comply
    with the Public Buildings Act of 1959 when planning the early phases of
    the FDA consolidation.
        The 1996 and 1997 Appropriations Acts (Public Law 104-52 and 104-
    208) and contained no such exemptions. Provisions in these laws state
    that appropriated funds shall not be available for construction,
    repair, alteration, and acquisition project for any project if a
    prospectus for project has not been approved. The 1998 Appropriations
    Act should contain such a provision.
        In 1995, the House of Representatives debated the need for a
    prospectus for the FDA consolidation (Congressional Record, July 19,
    1995, p. H7200-H7206). Some members of Congress appear to believe that
    the consolidation's authorizing legislation (Public Law 101-635)
    exempts the consolidation from the prospectus requirement.
        Congress must eliminate this ambiguity and ensure proper
    congressional oversight. Congress should appropriate no new funds for
    any phase of any FDA consolidation until a prospectus describing the
    entire project is approved.
        Because of a 1996 rescission (Public Law 101-19), GSA and FDA have
    no funds available to construct its major consolidated facility at
    White Oak or at any other location. Congress needs to review a
    prospectus for the project before any funds are appropriated any funds
    to construct it.
    5. Please ask GSA or the General Accounting Office to appraise the
            value of the White Oak site
        This would prepare the government for a sale of part or all of the
    Naval Surface Warfare Center. It would also help Congress evaluate the
    real cost of an FDA consolidation at White Oak. A sale would support
    the original purpose of the base closure, which is to help balance the
    federal budget.
                             additional information
        The following observations further support my requests:
        1. The government long ago designated its Southeast Federal Center
    as a site for a new federal facility. However, nothing has been built
    there yet. An FDA facility would stimulate the revitalization of this
    D.C. area.
        2. As noted above, the National Capital Planning Commissions 1996
    plan for Washington's Monumental Core states in the category of
    Economic Development, ``Assist the transformation of the Southeast
    Federal Center and adjacent Navy Yard into a lively urban waterfront of
    offices, restaurants, shops and marinas''.
        An FDA consolidation at the Center would help implement this Plan.
    The government could rent space in the ground floors of FDA's office
    buildings to operators of shops and restaurants.
        3. Unlike White Oak, the Southeast Federal Center is near a Metro
    station. Development at this site would encourage the use of Metrorail.
    This would increase the use of the area's financially troubled public
    transit system and reduce air pollution and traffic congestion.
        If the consolidation occurs at the Southeast Federal Center, many
    more FDA workers will likely choose to use Metrorail than presently do.
    This would benefit the Washington Metropolitan Transit Authority
    (WMATA) and local, state, and federal governments.
        In contrast, an FDA facility at White Oak would encourage the use
    of private automobiles. The roads near White Oak are already highly
    congested.
        The sections of I-95 and the Capital Beltway that serve White Oak
    rank among the most congested highways in the National Capital Region.
    They are the sites of frequent accidents and traffic jams.
        The White Oak area is principally residential. For this reason, few
    buses run from Metro stations to the White Oak Naval Surface Warfare
    Center in the morning and from it in the afternoon. Thus, most FDA
    employees would find it difficult to use public transportation to
    commute to and from work at White Oak.
        New public transportation routes are costly. There can be no
    assurance that bus service will improve if FDA moves to White Oak.
        If FDA consolidates at White Oak, WMATA will lose revenues from FDA
    employees who now use Metrorail and Metrobuses on a daily basis. Local,
    state and federal governments will have to pay for this, since WMATA is
    heavily subsidized.
        4. White Oak's distance from Metrorail and from the core of the
    National Capital Region will induce many employees to work at home
    under FLEXIPLACE. This will defeat the purpose of the consolidation.
        5. The Southeast Federal Center is in a decaying urban commercial
    area that is in great need of the economic development that the FDA
    consolidation would bring.
        Southeast Washington is one of the most economically distressed
    areas of the nation's capital city. As is well known, the District of
    Columbia is itself in great need of economic development.
        According to a table in the March 1996 DEIS (p. 3-55), the District
    of Columbia had in 1994 the lowest average household income ($30,727)
    of nine jurisdictions in the Washington, D.C., Metropolitan Area.
        In contrast, the White Oak site is in an affluent residential
    neighborhood that is not in great need of economic development.
    According to a March 29, 1996, Maryland National Capital Park and
    Planning Commission staff report on the White Oak DEIS, the
    neighborhood's median household income exceeds the median income for
    Montgomery County at $65,000 per year.
        According to the Washington Post (April 3, 1996), the White Oak
    neighborhood already boasts a community swimming pool, tennis courts,
    and four tot lots. A map in the March 1996 DEIS shows that a
    neighborhood community center abuts the Naval Surface Warfare Center
    near the FDA site. The FDA consolidation would add a federally-owned
    golf course to these amenities.
        The DEIS (p. 3-55) states that Montgomery County, Maryland, had in
    1994 the second highest average household income ($64,596) of nine
    listed Washington, D.C. Metropolitan Area jurisdictions. Montgomery
    County therefore does not appear to be in great need of large federal
    employment centers that might otherwise be located in the District of
    Columbia.
        There is a great economic contrast between Southeast Washington and
    White Oak. Federal development would serve a far better purpose at the
    Southeast Federal Center than it would at White Oak.
        6. FDA can place its laboratories and offices in compact and
    efficient 14-story buildings at the Southeast Federal Center. In
    contrast, its buildings at White Oak would be only five to six stories
    high.
        FDA's present headquarters are in a 18-story office building (the
    Parklawn Building in Rockville, MD). The Office of the Commissioner of
    Food and Drugs is in this building, which is half a mile from the
    Twinbrook Metro station.
        The National Institutes of Health has a 14-story research
    laboratory building that was built in 1981 at its Warren Magnuson
    Clinical Center in Bethesda, Maryland. The National Cancer Institute
    has some of its nationally-renowned laboratories in the 13th floor of
    this building, which, according to an NIH brochure, holds 2000 separate
    laboratories.
        It is therefore likely that FDA can consolidate its laboratories
    and offices in buildings up to 14 stories high in the Southeast Federal
    Center. If needed, GSA can purchase additional property nearby at low
    cost. Neighboring properties do not appear to be in good condition.
        7. The Navy Yard Metrorail Station is on Metro's Green Line. The
    station is only three stops from Maryland's Southern Avenue Metrorail
    station and only two stops from Virginia's Pentagon Station. An FDA
    facility at the Southeast Federal Center will therefore benefit the
    economies of both Maryland and Virginia, as well as the District.
        In contrast, an FDA facility at White Oak would benefit only
    Maryland. It is too far from D.C. and Virginia to provide any economic
    benefits to either of these jurisdictions. Instead, it would draw
    federal employees and associated businesses away from Virginia and D.C.
        8. An FDA consolidation at suburban White Oak would violate former
    President Jimmy Carters Executive Order 12072, which President William
    J. Clinton's Executive Order 13006 reaffirmed. It would also violate a
    federal regulation in 41 CFR 101-17.205 that GSA issued in 1996 to help
    implement the Order.
        When issuing this new regulation, GSA stated, ``On August 16, 1978,
    President Carter issued Executive Order 12072, which directs Federal
    agencies to give first consideration to centralized community business
    areas while filling federal space needs in urban areas. The objective
    of the Executive Order is that Federal facilities and Federal use of
    space in urban areas serve to strengthen the Nation's cities and make
    them attractive places to live and to work. This regulation serves to
    reaffirm the Administration's commitment to Executive Order 12072 and
    its goals.'' (Federal Register, Vol. 61, No. 46, March 7, 1996, p.
    9110.)
        The Southeast Federal Center is in an economically depressed
    centralized community business area in the city of Washington, D.C.
    This area's neighborhood urgently needs revitalization. In contrast,
    the Naval Surface Warfare Center at White Oak is not in any city, is
    far from any centralized community business area, and is in an affluent
    Montgomery County residential neighborhood.
        The Executive Order and the CFR have provisions that make them
    especially applicable when the neighborhood of the urban site
    (Southeast Washington) is economically depressed while the suburban
    site is affluent, and when the urban site is adequately served by
    public transportation, while the suburban site is not. Because of its
    residential suburban location, the White Oak site is served only
    infrequently by buses that run from Metrorail stations in the morning
    and to the stations in the afternoon.
        Appropriations legislation makes funds available for federal
    construction in specified locations. The language of such legislation
    and its supporting committee reports should not conflict with an
    existing Executive Order and a recently revised Federal regulation that
    both require federal agencies to give preference to a different
    location.
        FDA must economize on its space requirements to a great enough
    extent to allow it to consolidate at the Southeast Federal Center,
    rather than at suburban White Oak. Congress should not support the
    appropriation of funds if such an appropriation would encourage GSA to
    violate the Executive Order and its implementing regulations.
        9. The March 1995 DEIS discusses a federal report to the Secretary
    of HHS (Final Report of the Advisory Committee on the Food and Drug
    Administration, May 15, 1991) that assessed the need for new FDA
    facilities. According to the DEIS (p. 1-8), the Committee summarized
    its chapter on resources by recommending, ``The FDA must now begin to
    correct the most urgent of its facility needs, particularly for food
    and veterinary medicine laboratories and field operations.''
        It is noteworthy that FDA is now planning to relocate its food and
    veterinary medicine laboratories to new facilities in Prince George's
    County, Maryland. Facilities for field operations would not be improved
    by an FDA headquarters consolidation. According to documentation cited
    in the DEIS, the FDA offices and centers that FDA plans to move to
    White Oak do not appear to be in great need of new facilities at this
    time.
        While some FDA facilities may need renovation or replacement, many
    do not. Senate Report 101-242; which supports the consolidation, cites
    only one example of a facility that is antiquated. This is a laboratory
    in CFSAN, which FDA plans to relocate to Prince Georges County and not
    to Montgomery County.
        FDA and GSA officials may describe to you certain existing
    buildings that are inadequate. These descriptions may be correct;
    however, my personal observations indicate that the conditions of such
    buildings are not representative of most buildings that FDA now
    occupies.
        One FDA laboratory building that may need repair is on the NIH
    campus in Bethesda, Maryland. This is a laboratory of the Center for
    Biologics Evaluation and Research (CBER), which would be relocated to
    White Oak. However, this building is owned by the Federal government.
        The government will have to fund the CBER lab's renovation even if
    FDA leaves it. Further, if FDA leaves this facility, its personnel will
    lose valuable personal interactions with world-renowned personnel who
    work for NIH. They will also lose the ability to use valuable and
    unique NIH equipment. The government will gain nothing from this move.
        Some of the CBER laboratories have recently moved into a new
    building on the NIH campus. Thus, even within CBER, not all
    laboratories are in poor condition.
        In contrast to some FDA laboratories, many of the office buildings
    used by FDA are in good or excellent condition. Some are in leased
    buildings that are quite new. Some even contain amenities such as large
    atriums with palm trees.
        Such superb facilities can be observed at the Center for Devices
    and Radiological Health (CDRH) offices at 9200 Corporate Blvd. in
    Rockville. Other excellent CDRH office facilities are located at 1350
    Piccard Drive and 2094 and 2098 Gaither Road in Rockville. Still others
    can be seen at the offices of other Centers in the Metropark North
    buildings on Crabbs Branch Road in Rockville.
        The adequacy of the CDRH office facilities is documented in an
    Interoffice Memorandum sent by Electronic Mail dated 01-Feb-1995, from
    Connie J. Wilhelm-Miller, of' the CDRH Office of Management Services,
    Division of Resource Management. This memo, whose primary subject is
    Smoking Policy (smokers were putting burns in the floors and walls of
    new buildings), states that ``most of CDRH's office space is fairly
    new''. My personal observations confirm the accuracy of this statement.
        A Conference Committee Report (House Report 102-234) that supported
    the 1992 Appropriations legislation (Public Law 102-141) stated that
    there is no disagreement that FDA facilities are antiquated,
    inefficient and overcrowded. This is simply incorrect. It overstates a
    problem that is being experienced by only a small portion of FDA.
        House and Senate Reports supporting the consolidation state that
    FDA's antiquated facilities are causing recruitment and retention
    problems. However, this is only true at very few places, and perhaps
    only in the CFSAN laboratory that is relocating to Prince George's
    County.
        I know of no FDA building housing an office or laboratory that will
    move to the White Oak campus that is in such disrepair that people will
    not work in it. Some buildings may need improvement, but none are that
    bad.
        Most FDA workers work only in offices. Many of these are in fairly
    new buildings that are in good condition, such as the one in which I
    work. There is little reason to expect that many of these employees
    will be happier in a new facility at White Oak.
        Limited replacement of facilities with local consolidations where
    needed may well be desirable. However, a massive consolidation of
    Montgomery County facilities is not.
        10. FDA facilities are presently dispersed. However, this does not
    create great inefficiencies. Many FDA offices with related functions,
    such as those in CDRH in Rockville, are consolidated in buildings
    within one or two miles of each other. A large number are in and near a
    single building (the Parklawn Building) near the Twinbrook Metro
    Station in Rockville, MD.
        Although there are a number of functions that involve different
    offices in different centers, most functions are carried out within one
    Center. More importantly, few interoffice functions require more than
    occasional face-to-face interactions which necessitate travel.
        In addition, travel times between existing Centers that will
    consolidate in the Montgomery County campus are not great. All are
    connected by Rockville Pike and I-270. The average trip between offices
    is probably less than \1/2\ hour.
        It is important not to overrate the need for consolidated
    facilities.
        The U.S. Armed Forces won the Second World War operating from bases
    and headquarters throughout the U.S. and in much of the rest of the
    world. Only a tiny percentage of defense workers and military personnel
    were located in any single facility. Decentralized agencies can and do
    often work at least as efficiently as those that are consolidated.
        Further, the great majority of product approvals require
    decisionmaking within only a single building. It is only unusual
    decisions that require conferences in separate buildings. Only a tiny
    minority require conferences among offices in widely scattered
    facilities.
        Most FDA personnel therefore have no need to travel between
    different centers or offices on a regular basis. The need for
    consolidation is not great, despite the statements made in
    Congressional Committee Reports.
        A number of present FDA centers are located near Metro stations,
    such as Medical Center, Shady Grove, and Twinbrook. The large Parklawn
    Building is an example of this. Many employees can therefore now travel
    quickly and easily from one Center to another, as well as to meetings
    at NIH and in downtown D.C.
        In contrast, White Oak is 3 miles from Metrorail. Few, if any,
    people will take Metro to commute or to go to meetings at NIH or in
    D.C.
        Most communications occur today by phone and by electronic mail.
    Electronic networks allow documents to be transmitted to anyone with a
    receiver. Indeed, many FDA personnel now regularly work at home using
    FLEXIPLACE. Using home computer modems, they can connect with FDA
    computer networks to perform most necessary functions.
        The need for a costly consolidation is not great. It cannot be
    expected to greatly increase FDA's efficiency. By causing experienced
    workers to leave the agency, it may actually decrease FDA's
    effectiveness.
        11. Congress should only appropriate funds for a consolidated FDA
    facility if the consolidation would help increase the use of mass
    transportation or would aid in the redevelopment of a depressed urban
    center such as Southeast Washington, D.C. It is environmentally and
    economically unsound for Congress to fund the construction of a new
    facility at White Oak that is far from an urban center.
        12. Most FDA employees need to work only at a single location. The
    approval of new drugs and medical devices usually takes place within a
    single FDA Center. A major FDA consolidation, if it occurs, will
    primarily benefit a small cadre of FDA managers who often travel
    between centers and who are promoting the consolidation.
        In actuality, a major consolidation is not likely to benefit many
    FDA employees. It is even less likely that a consolidation will
    significantly speed the approval of new drugs and medical devices.
        13. During President George Bush's term in office, the Office of
    Management and Budget (OMB) opposed funding of the FDA consolidation
    because it was not worth the cost. The Administration considered it
    more cost/effective to renovate facilities as needed.
        It was a Congressional Appropriations conference committee that
    first proposed the appropriation of funds for the FDA consolidation
    (Conference Report for Public Law 102-141: House Report 102-234, Oct.
    3, 1991). The Conferees directed FDA, GSA, HHS, and OMB to work
    together to submit a funding plan for the project and urged OMB and the
    President to support the Conferees' concept of the ``consolidation''.
        The Conferees introduced the concept of building separate FDA
    facilities in Prince George's and Montgomery County. They recommended
    the appropriation of $200,000,000 in the Federal Buildings Fund to
    begin the process of dismantling the single-site consolidation that the
    FDA Revitalization Act (Public Law 101-635) had previously authorized.
        Public Law 101-635 had amended the Federal Food, Drugs and
    Cosmetics Act. It had authorized the Secretary of HHS (not the
    Administrator of GSA) to construct a single consolidated FDA facility.
        Despite this authorization, the Conferees recommended the
    appropriations of funds from the Federal Buildings Fund for the GSA
    Administrator to use to construct two FDA facilities in separate
    counties located in the State of Maryland. The Conferees also
    recommended that the appropriation for the FDA facilities be exempt
    from prospectus requirements of the Public Buildings Act of 1959.
        Appropriations Conference Committees have therefore undermined the
    FDA Revitalization Act, the Public Buildings Act of 1959, Executive
    Order No. 12072, 41 CFR 101-17.000 et seq., and the National Capital
    Planning Act of 1952. They have made it difficult for government
    officials to follow procedures that assure compliance with
    Congressional oversight legislation and site selection requirements in
    the National Capital Region and elsewhere.
        These Conference Committees have endorsed the appropriations of
    funds for more than one FDA ``consolidated'' facility, have designated
    the GSA Administrator (rather than the Secretary of HHS) as the planner
    and builder of the facilities. They have also allowed GSA to construct
    buildings without a prospectus.
        Appropriations conferees have recommended that FDA build a campus
    rather than consolidate in a single building. Additionally, they have
    caused FDA to transfer federal jobs out of the financially distressed
    District of Columbia and into more prosperous Maryland counties and
    neighborhoods.
        This is not good planning. It is pork barrel politics at its worst.
    Congress must correct itself.
        14. Senate Report No. 101-242, Feb. 1, 1990, which supported the
    FDA Revitalization Act (Public Law 101-635) estimated that the cost of
    the consolidation would approximate $500,000,000.
        FDA and GSA now estimate the total cost of the consolidation to be
    at least $600,000,000. This would create a cost overrun exceeding the
    original $500,000,000 estimate by $100,000,000.
        15. Despite the 1995 rescission of funds for a sprawling FDA
    facility in Clarksburg, Maryland, FDA's and GSA's facility engineers
    continue to plan for a large FDA campus. They do not wish to seriously
    economize in the agency's use of space.
        By creating unnecessarily large requirements for space, they are
    evading their responsibilities to consider locating the consolidated
    facility in a compact site in a central city. One such site is now
    available at the Southeast Federal Center.
        Unless Congress intervenes as it did in 1995, GSA and FDA will
    likely violate major provisions of Executive Order No. 12072 and the
    National Capital Planning Act of 1952. As noted above, these now
    dictate a preference for the Southeast Federal Center.
        16. Some reports on FDA have suggested that certain FDA facilities
    are overcrowded. This may no longer be true.
        GSA has recently leased a number of new buildings for FDA.
    Overcrowding is therefore not as acute as it was several years ago.
        17. The DEIS contains no information on the number of buildings
    that FDA will reuse at White Oak. FDA will not be able to use many of
    the existing buildings because they are contaminated, deteriorated, of
    unsatisfactory conformation, and poorly located. FDA will clearly need
    to build a number of costly structures at White Oak.
        18. Some of the planned excess capacity at the 130 acre White Oak
    facility is desired for future expansion. However, this amounts to
    nothing more than speculation.
        Expectations of FDA expansions may well be unrealistic. FDA has not
    grown significantly in recent years, except in a few specific areas.
    Further, regulatory agencies often do not grow over long periods of
    time when there is an antiregulatory climate, when there are budgetary
    problems, or when there are pressures to privatize Federal functions.
        FDA's major growth occurred years ago in response to obvious and
    important needs. FDA can now meet most of these needs without any
    further growth. Although many agencies try to justify their own
    expansion, FDA may never be able to significantly increase its size or
    number of employees.
        A compact site such as the Southeast Federal Center is more
    consistent with proposed FDA reform legislation than is a 130 acre site
    at White Oak. This reinforces the need for Congress to direct a study
    of the Southeast Federal Center.
        19. Because FDA would acquire more land at White Oak than it
    presently needs, it will surely press for additional funding to
    construct more buildings in the future. This will increase future
    government expenditures.
        As the FDA campus adds buildings at White Oak in the future, it
    will increase the urbanization of its surrounding residential
    neighborhood. This will eventually exceed the limits imposed by current
    zoning and land use plans and will create local controversies.
                                     ______

     Prepared Statement of Lansing E. Crane, Chairman and Chief Executive
                              Officer, Crane & Co.

        Mr. Chairman and members of the Subcommittee, I appreciate the
    opportunity to present a statement for the record on behalf of Crane &
    Co. In the past few months, much has been said about Crane & Co. in
    connection with the production of U.S. currency paper which is
    factually incorrect. This statement is intended to set forth Crane's
    position on the issues relating to currency paper production and to
    clarify some of the confusion and misinformation surrounding these
    issues.
        Crane & Co. has been the nation's currency paper supplier for 118
    years, as has been noted frequently. Nevertheless, Crane & Co. does not
    have a monopoly on the currency paper bidding process; that process is
    open as stipulated by Federal law, with bids solicited at least every
    four years by the Bureau of Engraving and Printing (BEP). Additionally,
    the Secretary of the Treasury has the authority to divide the contract
    for currency paper even if a second company has bid a higher price.
    While Crane has been a de facto sole-source supplier during most of
    this period, other companies have, on occasion, bid on and won part of
    the government's currency paper business. With only a few exceptions,
    the opportunity to bid has always existed for any domestic paper
    company.
                                  competition
        Crane & Co. strongly supports the concept of competition and the
    efforts of the Bureau of Engraving and Printing to ensure that U.S.
    currency paper contracts be open to bid. In point of fact, Crane & Co.
    has always operated as if it were competing, even when other companies
    have chosen not to bid on the currency paper contracts.
        The claim has been made that other companies do not have an
    opportunity to bid for currency paper contracts. This is not accurate.
    What is accurate is that other paper companies, many of which are
    perfectly qualified and able to bid, have simply chosen not to do so.
        The primary reason for companies choosing not to enter the currency
    paper business is that these companies can make more money producing
    other paper products, particularly commodity paper products. Further,
    many companies are not willing to make the necessary capital
    investments in the equipment and facilities required to produce
    currency paper because the size of the U.S. currency paper contracts
    has not been large enough to justify the investment, and the future of
    the industry is increasingly uncertain.
        Crane & Co. is and always has been willing to compete for currency
    paper contracts and does not argue for any barriers to access to
    competitive bidding by any interested companies, domestic or foreign.
    In fact, Crane competes successfully in those countries which do not
    have their own currency paper production capacity. On the other hand,
    Crane is precluded from competing in countries where there is a
    resident paper producer. The process in those countries does not allow
    for competitive bidding, particularly from outside sources. For
    example, the Bank of England purchases its currency paper from Portals
    without competitive bidding. The same is true for the Bundesbank in
    Germany which purchases from Louisenthal. When the ``Euro'' is
    introduced in 1999, the paper will be procured by allocation, not bid,
    from existing European suppliers and will not be open to manufacturers
    outside Europe.
        In short, the same companies pushing for international access to
    U.S. currency paper bidding are based in countries where the markets
    are not open to competition from any U.S. company.
        There is currently a worldwide excess of currency paper production
    capacity and this will only increase in the near future. Various
    factors, such as the move to plastic currency in some countries and the
    building of state-owned currency paper mills in others, are constantly
    reducing the worldwide demand for paper.
        The state-owned mills, after fulfilling their own comparatively
    small requirements, tend to devote their excess capacity to compete
    with established commercial suppliers such as Portals and Crane. Thus,
    the international market is shrinking for commercial companies. In this
    situation, the Bureau's consideration of capital assistance to
    artificially create new, additional currency paper capacity in the U.S.
    inevitably would be destabilizing for this industry.
                              the conte amendment
        The Conte Amendment is a provision in law which requires that the
    Treasury Department obtain currency paper from manufacturers within the
    United States as long as a domestic source exists--and multiple
    domestic sources currently exist. The purpose of this requirement is to
    simplify the job of the Secret Service in maintaining the security and
    integrity of U.S. currency. This requirement is also typical of other
    nations which have domestic currency paper production capacity. There
    are no nations in the world which import currency paper where an
    adequate domestic supply exists.
        The assertion has been made that the Conte Amendment ensures that
    ``only Crane & Co. can bid on U.S. currency paper contracts.'' In fact,
    this provision does not prevent any U.S. paper manufacturer from
    bidding for U.S. currency paper contracts. Two U.S. paper companies, in
    addition to Crane, have already expressed to the Bureau an intent to
    bid on the next round of contracts.
        The position of Crane & Co. on the Conte Amendment was and is that
    the company does not oppose any change in the Conte ownership
    percentage which Congress might wish to make, nor does it seek
    protection from foreign competition. Crane does believe, however, that
    the home base markets of international companies that want open access
    to U.S. currency paper bidding should also be open to the same type of
    bidding which exists in the United States. Crane believes that the U.S.
    Trade Representative is capable of certifying when and where such
    access for U.S. companies exists.
                            capacity considerations
        In the case of Crane & Co., the company's manufacturing capacity
    has been developed to match the needs of the U.S. Treasury. This is
    done because the highly specialized, expensive equipment designed for
    high denomination, multiple security-feature paper production cannot be
    economically utilized to make other paper. Further, standard
    papermaking equipment is less and less suitable for making currency
    paper, other than the lowest denominations. In short, manufacturing
    capacity must be dedicated to one product alone, with that capacity
    typically matching the domestic demand.
        Crane believes that as long as Congress requires that all U.S.
    currency paper manufacturing facilities be located within the U.S. any
    significant increase in domestic capacity will result in significant
    domestic over-capacity which, in turn, will be difficult to place on
    the international markets given the shrinking opportunities there and
    many closed markets.
        It may be that the answer to some of the problems brought on by
    security-related limitations is to work toward eliminating all tariff
    and non-tariff barriers worldwide so that capacity can flow freely to
    meet demand. However, the reality of the currency paper industry
    worldwide--that countries purchase from domestic suppliers--and the
    increasing number of state-owned facilities make such open access to
    markets unlikely, if not impossible.
        Crane does not argue for artificial barriers to competition for
    U.S. currency paper contracts. However, Crane believes that it is
    important that Congress understand the context of the U.S. market and
    how the market interacts with the rest of the world.
        Crane believes that in adopting laws to limit or expand
    opportunities for companies to ``compete'' for U.S. currency paper
    contracts, Congress should do so based on informed. expert data and
    analysis of the long-term impact of such laws given the state of the
    industry worldwide. Such changes should not be made based on either
    marketing efforts by individual companies or philosophical beliefs in
    ``competition'' without careful consideration of the realities of this
    specific industry. In the absence of such consideration, there is great
    potential to destabilize a strategically important, dedicated domestic
    industry.
                                 capitalization
        When the competitive REP was published in draft form for comment
    from the industry, Crane communicated to the Bureau Crane's concerns
    about the proposal to furnish ``Contractor Acquired Property'' to
    Crane's competitors. Crane's concerns, as articulated to the Bureau
    were, and are, that such assistance appears to be calculated to provide
    a competitive advantage to companies interested in tooling up to
    compete with Crane.
        This proposal was clearly not intended to be a loan, which if
    furnished on ordinary commercial terms would not have a competitive
    impact or advantage. The Draft RFP was vague on the basis for repayment
    by the contractor, and there clearly was the potential for the
    contractor to enjoy a competitive advantage in the negotiation of
    repayment terms, if any amounts were to be repaid at all. Federal
    acquisition regulations are ambiguous on the need and method for
    neutralizing any competitive advantage.
        Furnishing Contractor Acquired Property also would establish a
    partnership between the Bureau and the new contractor similar to that
    between a lending bank and a borrower of a very large loan. The Bureau
    would have a real and substantial stake in justifying the
    capitalization.
        Anything other than a true loan would inevitably be a subsidy--
    something that would be unfair to Crane which has invested its own
    capital to support the Bureau. Further, as an artificial factor in the
    market, such subsidies would disrupt and destabilize a dedicated
    industry. It is this concept of Contractor Acquired Property that Crane
    objected to in the REP and in the proposed language in the Supplemental
    Appropriations Bill.
                        crane, the sole source supplier
        Sole source suppliers have been in disfavor in federal contracting
    for a number of years. Over-charging and under-performance are the
    perceived byproducts of the absence of two or more responsible
    contractors competing for the same government business. This may have
    been true in defense contracting in the 1980's but is not and has not
    been true of Crane & Co. as a supplier to the Treasury.
        Crane does not argue that it should be protected as a sole source
    contractor. On the other hand, it should not be penalized for doing
    what the Treasury has required, namely to provide a reliable source of
    the highest quality currency paper available in the world. Unlike any
    other company in the world, including Portals, Crane is capable of
    making three different varieties of currency paper to supply the
    nation's requirements.
        It has Cylinder Vat and Fourdrinier machines as well as a third
    process currently used for the U.S. $100's and $50's. There isn't a
    currency paper made by any company in the world that Crane cannot
    supply to the Bureau and no one can supply the range that Crane does.
        Crane has tooled up to sufficient capacity to meet not only the
    minimum quantities the Bureau contracts to purchase, but the maximum
    quantities that they project to need without making a commitment to
    purchase. This capacity was developed for and has been contractually
    committed to the Bureau without a reciprocal commitment to purchase
    that full capacity. The Bureau commits Crane to be prepared to provide
    both minimum and maximum quantities of paper, but the Bureau only
    commits itself to purchase the minimum quantities.
        In the last seven years, the Treasury has twice changed the basic
    character of U.S. currency, other than the $1 note, and that has
    required Crane to develop equipment and processes to meet the Bureau's
    needs. This developmental and retooling effort had to occur before any
    contract was issued to purchase the newly designed paper (note the
    Treasury's testimony in July of 1994 before the House Banking Committee
    on the schedule for new currency). In short, Crane's investment of
    money and effort to support the Bureau helped bring these programs on
    line, but had to be made prior to a contractual commitment from the
    Bureau to actually purchase the paper. There are other ways that a
    dedicated currency paper supplier supports the national interest, and
    the Bureau and the Secret Service can furnish such information.
        Crane does not offer these as reasons for Congress to endorse a
    sole source arrangement as the company strongly supports the concept of
    competition. However, Crane should not be criticized for being the sole
    source when the company has simply committed itself to supplying what
    the Treasury needed and required.
                                      risk
        Some have suggested that the country is at risk if there is only
    one source of a strategically important item like currency paper.
    Crane's answer is that the risk is small, containable and acceptable
    when compared with the cost and destabilizing effect of artificially
    creating a second source. No other country has dual domestic sources,
    because no other country evaluates the risk of a sole source as
    strategically unacceptable.
        To address reliability of supply issues, Crane maintains its
    facilities extremely well and has redundant parts as well as multiple
    paper machines in multiple locations. Furthermore. the Treasury can and
    should stockpile a strategic reserve of currency paper. All such paper
    would ultimately be used so there would be no waste associated with
    such a stockpile, and the cost of buildup would be much less than
    seeking to artificially stimulate a market already open to competition.
        Finally, the Conte Amendment and the thinking behind it only
    requires domestic procurement when there is a domestic source
    available. If an interruption in availability of supply occurs, which
    hasn't been anticipated by redundancy or by strategic reserves, the
    Treasury is authorized to turn to international markets for currency
    paper.
                                  performance
        Crane & Co. supplies a raw material that is designed to support one
    of the Federal Government's few manufacturing processes--the printing
    of currency. It is designed to perform well as finished currency--to
    have a long life, to have a consistent ``feel'' and to promote
    counterfeit deterrence. Crane's paper, and the customer service that
    supports the product and the BEP, is also designed to yield the most
    efficient manufacturing of currency by the Bureau. Any cost analysis of
    currency paper must take into account the extent to which the raw
    material, as delivered, promotes efficient manufacturing by the Bureau.
    Performance is not an abstract concept but one that matters for
    production efficiency as well as cost savings from long life in
    circulation and counterfeit deterrence.
                                     price
        Crane firmly believes that the prices it negotiates with the Bureau
    are fair and reasonable to the government. From 1965 until 1991, when
    one uniform product was furnished to the Bureau, the negotiated price
    increased less than the rise in the cost of living and the price itself
    was comparable to Crane's business stationery.
        From 1991 to 1995, when currency paper developed into three
    distinct products with much greater sophistication, prices were
    negotiated through arbitration. The arbitrator, Professor Ralph Nash,
    was selected by the Treasury and is a recognized expert in government
    contracting. In 1995, Professor Nash determined the prices for 1991 to
    1995 deliveries with a retrospective summary of Crane's production
    costs in front of him. It was his task to determine what profit was
    appropriate for these contracts, and Crane and the Bureau each believed
    that his final determination was fair and reasonable. The Bureau
    confirmed its agreement with the determination, in writing.
        In analyzing Crane's business performance from 1991 to 1995,
    Professor Nash concluded that Crane had driven down the manufacturing
    cost of currency paper during that period, and had conducted its
    operations as if there had been actual competition. Professor Nash is
    the only neutral person who has ever analyzed Crane's costs, profits,
    and prices. His conclusions should be accorded far greater weight than
    the opinions of people who might have a preconceived point of view or
    competitive interest, or who have not had access to all of the relevant
    facts.
        In the absence of other competitive bidders, Crane would be
    comfortable having final contract prices determined by an arbiter of
    Professor Nash's experience, stature and neutrality. Such an
    arrangement would put to rest any concerns that the government pays a
    fair price for its paper.
                                   conclusion
        With the passage of the fiscal year 1997 Supplemental
    Appropriations Bill and the requirement in that bill for a GAO study of
    the procurement of U.S. currency paper, there is an opportunity to
    analyze the complex business of currency paper manufacturing and
    procurement. Contrary to impressions created by misinformation, a
    significant body of material already exists. In the end, however, it is
    important that policy makers be assured through an objective GAO review
    of the facts, that U.S. currency paper is produced under the most
    secure arrangements possible, and at a fair and reasonable price.
        Crane & Co. is fully prepared to do its part to get the facts on
    the record in an objective fashion so that the currency paper business
    can be properly analyzed and understood and the public interest served.
                                     ______

     Prepared Statement of Chris Koelfgen, President, National Association
                             of Foreign-Trade Zones

        Mr. Chairman and Members of the Subcommittee: On behalf of the
    National Association of Foreign-Trade Zones, thank you for the
    opportunity to present this statement to the Subcommittee concerning
    the fiscal year 1998 appropriation for the U.S. Customs Service.
        The NAFTZ is a non-profit trade association representing over 600
    members, including grantees, operators, users and service providers of
    U.S. foreign-trade zones. Today there are more than 200 approved zone
    projects located in 49 states and Puerto Rico. The total value of
    merchandise received at foreign-trade zones annually exceeds $140
    billion. Over 2,800 firms utilize foreign-trade zones and employment at
    facilities operating under FTZ status is over 300,000. The NAFTZ
    provides education and leadership in the use of the FTZ program to
    generate U.S.-based economic activity by enhancing global
    competitiveness.
        There are three issues concerning the U.S. Customs Service that we
    would like to bring to the Subcommittee's attention. They are of vital
    concern to our members and directly impact the efficient administration
    and reporting of international trade in U.S. foreign-trade zones. The
    issues are:
      --(1) Automation of the FTZ admission process;
      --(2) Expanded Customs weekly entry procedure; and
      --(3) Training of Customs personnel in FTZ procedures.
                    automation of the ftz admission process
        The National Association of Foreign-Trade Zones seeks automation of
    the FTZ admission process as part of the existing ACS system, or as an
    initial priority under the new Customs ACE system currently under
    development. As of December 1996, Customs' projection for automating
    the FTZ admission procedure estimated the process as part of the fifth
    and final phase of ACE implementation. Under this scenario, it is
    unlikely that the FTZ admission process will be automated in the next 5
    years.
        With the significant amount of economic activity moving through
    foreign-trade zones, the continued manual filing of the Customs Form
    214 is burdensome and inefficient for government and industry. The
    NAFTZ seeks Congressional assistance to mandate the automation of the
    FTZ admission process. If additional funding is required to provide for
    Customs to implement this procedure, the NAFTZ requests that Congress
    take appropriate action.
        The NAFTZ has been pursuing Customs automation of the FTZ admission
    process since the early 1980's. Today, the CF 214 is the only Customs
    form used nationwide, in large quantity, on a daily basis, that cannot
    be transmitted to Customs electronically. This form provides notice to
    Customs that merchandise has arrived and been admitted to the zone. The
    U.S. Census Bureau also collects a statistical copy of this form.
        The U.S. Customs Service was committed for years to automate the
    FTZ admission process under the existing Customs Automated Commercial
    System (ACS). This process was never implemented. When the new Customs
    Automated Commercial Environment system (ACE) was conceived, Customs
    committed to automating the FTZ admission process during Phase 1 of ACE
    development. We now understand that the FTZ admission process has been
    pushed back to Phase 5 of ACE development. Customs' delay in automating
    the FTZ admission process is particularly disturbing in light of the
    fact that in each review of an application for a new zone since the
    mid-1980's Customs has required that zone operators sign a statement
    committing to the establishment of an electronic interface with the
    U.S. Customs Service. Customs has stated that it will not activate any
    portion of an approved zone if the electronic interface has not been
    established.
        Currently, all FTZ admission data must be manually typed into the
    existing Customs system, the Automated Commercial System (ACS), by
    Customs personnel at individual ports, upon receipt of the C.F. 214.
    This FTZ admission information enables Customs to determine that
    merchandise is no longer moving in-bond under the carrier's liability,
    and that merchandise has arrived at the zone, thereby transferring
    liability to the foreign-trade zone operator's bond. Re-typing, the
    only procedure currently available to the U.S. Customs Service, creates
    an enormous burden and an incredible amount of duplicate data entry
    nationwide for Customs personnel. If the FTZ admission process were
    automated, all of this data could be transmitted electronically. In an
    environment of significant increases in international trade, coupled
    with a shrinking pool of resources, U.S. Customs Service personnel can
    and should be better utilized.
        As previously mentioned, other agencies depend on the U.S. Customs
    Service for data collection. The U.S. Census Bureau has voiced ongoing
    concerns regarding problems associated with Customs' manual collection
    of FTZ admission data. In many instances, the U.S. Census Bureau is not
    receiving the timely and accurate data it needs from the Customs
    Service to fulfill its reporting responsibilities. The Food and Drug
    Administration (FDA) has also indicated a need for admission data to be
    transmitted electronically. Currently, FDA notification is tied to
    Customs entry, which occurs when merchandise is removed from the zone.
    The FDA has been unable to link its notification requirement to the
    admission of FTZ merchandise because Customs has not automated this
    process.
                    expanded customs weekly entry procedure
        Proposed regulations were published in the Federal Register on
    March 14, 1997. The National Association of Foreign-Trade Zones seeks
    final regulations and general implementation of this procedure for all
    foreign-trade zone users that meet the established criteria.
        The NAFTZ has been pursuing U.S. Customs Service implementation of
    an expanded weekly entry foreign-trade zone procedure for distribution
    operations since 1990. Title VI of the North American Free Trade
    Agreement Implementation Act (Public Law 103-182, 107 Stat. 2057),
    which included the Customs Modernization Act, was enacted on December
    8, 1993. Section 637 of the Customs Modernization Act, amended 19
    U.S.C. 1484 concerning the entry of merchandise, by providing statutory
    support for expanding the weekly entry procedure.
        This procedure extends the current Customs regulations, which allow
    for weekly Customs entry of manufactured goods removed from a foreign-
    trade zone. The new expanded procedure allows for goods stored in a
    foreign-trade zone for the purpose of warehouse and distribution to be
    removed from the zone under a weekly Customs entry process. This
    expanded procedure further reduces paperwork and document processing by
    the U.S. Customs Service, while facilitating the movement of cargo
    through zones for companies that meet certain criteria established by
    the U.S. Customs Service.
        The criteria established by the U.S. Customs Service in the
    proposed regulations requires foreign-trade zone users to employ
    electronic entry filing and excludes weekly entry of restricted or
    quota status merchandise. In order to qualify, the particular zone
    operation must be fairly predictable, continuing and repetitive, and
    relatively fixed in variety by the type of merchandise and the nature
    of the business conducted at the site. The Port Director is provided
    discretion in approving the application to utilize the expanded weekly
    entry procedure. Once approved, instead of filing multiple Customs
    entries per day or per week, this procedure allows foreign-trade zone
    users to file one entry covering a seven-day consecutive period.
        This procedure is critical for foreign-trade zone users operating
    in just-in-time inventory environments because it allows for prompt
    shipment of merchandise from the zone. At the same time, the procedure
    reduces the number of entries that Customs must process and encourages
    automated filing. The proposed pilot program, implemented in September
    1994 to test the new procedure at a selected number of foreign-trade
    zones, has been evaluated by the U.S. Customs Service as a success.
        Expanding the weekly entry procedure will reduce the overall volume
    of paper or reports the U.S. Customs Service must manage without
    impairing the enforcement and revenue protection responsibilities of
    the agency. The automation of the zone admission procedure, along with
    this reduction in the volume of entries filed will generate a
    significant improvement in the accuracy and efficiency of U.S. Customs
    Service operations.
                training of customs personnel in ftz procedures
        In order to ensure that the efforts of the joint steering committee
    are implemented, the NAFTZ requests that Congress appropriate funds for
    the training of Customs personnel. If additional funds are not
    available, the NAFTZ requests that Congress make a statement about the
    importance of allocating existing Customs appropriations for training.
    An explicit reference related to the need for Customs training on
    foreign-trade zones should be included.
        Under the reorganization of the U.S. Customs Service, Port
    Directors have now been given responsibility for all of the foreign-
    trade zone functions formerly carried out by the District Directors of
    Customs under the previous organizational scheme. Port Directors are
    facing these additional responsibilities with little or no training on
    specific trade programs, including FTZ's.
        At the same time that Port Directors are being challenged to make
    decisions without appropriate training, Customs Headquarters has
    reduced its staff by one-third, with further reductions ahead in the
    future. This sequence of events has made it difficult, if not
    impossible, for Port Directors to receive timely responses to requests
    for internal advice on foreign-trade zone issues. As a result, foreign-
    trade zone users have experienced ad hoc decision-making by Customs
    personnel on a port by port basis. The effect of this decision-making
    is a lack of uniformity in Customs' administration of the foreign-trade
    zones program.
        To respond to this problem, the NAFTZ is currently participating on
    a joint steering committee with Customs to develop training for Port
    personnel on FTZ issues. Among the initiatives being undertaken, the
    steering committee is developing a traveling seminar. It is proposed
    that the traveling seminar will be taught by Customs personnel at
    various ports where port personnel can attend at minimal cost to the
    government. Because of the significant economic activity taking place
    in zones, it is imperative that each Customs Port Director have at
    least the same level of competence as the former District Director.
        Training is an important ingredient for improving any
    organization's operational efficiency. Training is particularly central
    when an agency is undergoing a massive transition such as that
    experienced by the U.S. Customs Service. However, we know from
    practical history that training budgets tend to be a prime target for
    reductions and eliminations. The NAFTZ believes that an investment in
    staff training constitutes the only way the U.S. Customs Service will
    emerge from this transition as an agency that can perform all of its
    responsibilities effectively.
        Thank you for your consideration of these issues. If we may answer
    any questions or provide further information, please contact us at 202-
    331-1950.
                                     ______

      Prepared Statement of Sharpe James, Mayor, on Behalf of the City of
                                   Newark, NJ

        Newark, New Jersey, the largest City in the state, is a regional
    hub of State and Federal government operations, as well as home to
    municipal and County government. The Federal presence includes such
    locations as office buildings, courts and postal facilities. Thousands
    of visitors and employees access Federal services in Newark daily, and
    their safety and security has become an important issue for the City.
        In the aftermath of the tragedy in Oklahoma City, extraordinary
    security measures were put into place around Newark's Federal complex.
    Streets through and surrounding the buildings were closed, metered
    parking spaces were eliminated, and an additional municipal Police
    presence was established. As time has passed, these actions have become
    part of an overall permanent Federal security plan for the area. Since
    Newark's Police Headquarters, Municipal Courts, and City Hall itself
    are immediately adjacent to the Federal complex, forming what is called
    Government Center, the Federal plan has had a marked impact on the
    ability of citizens to access not just Federal services, but Municipal
    ones as well.
        The City government has worked cooperatively with Federal
    authorities on this critical issue over the past two years, and the
    City has absorbed the expenses of these measures. However, we are
    seeking your assistance in recovering costs that the Newark municipal
    government has incurred in advancing the security of Federal
    facilities.
        The local Federal officials have requested the permanent closing of
    five (5) streets to vehicular traffic, and that the streetbeds be
    deeded over to the Federal government to allow permanent access
    control. An independent appraisal has valued this property at $3
    million. In addition, the City has lost revenues from 21 parking meters
    surrounding the Peter Rodino Federal Building, which had been high
    turn-over spaces, as well as from longer-term parking on adjacent
    streets. Further, summons revenue in the area has been eliminated,
    while Police overtime and patrol costs have skyrocketed, averaging at
    least $13,000 per month. The street closings have dramatically shifted
    both the traffic and parking patterns in the Government Center area,
    causing further congestion and delays in the already clogged area, and
    when they become permanent, the City will have to make a substantial
    expenditure for traffic engineering items such as traffic studies,
    resignalization and signage replacement. It is estimated that the total
    of all of these expenses has exceeded four million dollars
    ($4,000,000). We are seeking the assistance of this committee in
    securing compensation for these expenditures.
        In a related matter, several years ago it was recognized that the
    United States Post Office distribution facility in the Federal complex
    had become crowded and obsolete. In an effort to save Newark-based jobs
    and comply with the intent of Executive Order 12072, which directs
    federal agencies to be located in downtowns, the City of Newark entered
    into discussions with postal officials about locating a new mail
    handling facility in the heart of Newark's major redevelopment area.
    The original concept was for the USPS to acquire over 17 acres for the
    300,000 square foot operation, to employ 1,200 workers. However, our
    current realities of downsizing and budget cutting have impacted on
    this project too.
        Current plans for a site of only 4.5 acres to house a much smaller
    and less ambitious project. It will now accommodate the functions of
    the relocated 07103 branch facility, which is situated within the
    University Heights redevelopment area. A new Post Office in this
    neighborhood will service the thousands of new housing units-public,
    private, market-rate and low-income--which have been or will be
    constructed in the area. It is estimated that site acquisition,
    required relocations, site preparation and construction of a modern
    postal facility will cost five million dollars ($5,000,000). These
    funds will be the first Postal Service investment in a Newark
    neighborhood in decades, and show, in bricks and mortar, the Federal
    commitment to Newark, its people, and its jobs.
        To conclude: I ask you for help in coping with the changing
    situation in Newark. It is my understanding that GSA has requested $250
    million to upgrade security at Federal facilities throughout the
    country. We support that request, and urge the Subcommittee to include
    language in the bill that will direct some of these funds to be spent
    on the projects noted above.
        We have felt the ripples of the impact of a terrible tragedy, and
    ask for your help in dealing with them. And we have built a new
    neighborhood, with much Federal assistance, and ask for your help in
    completing a community by providing an essential service to its
    residents. Your help today can make the difference.

           LIST OF WITNESSES, COMMUNICATIONS, AND PREPARED STATEMENTS

                                  ----------
                                                                       Page
    Aikens, Joan D., Vice Chairman, Federal Election Commission,
      prepared statement.............................................   578
    Attianese, David, Assistant Director, Tax Group, General
      Accounting Office..............................................   415

    Barram, David J., Administrator, General Services Administration,
      prepared statement.............................................   599
    Berne, Bernard H., M.D., Ph.D., prepared statement...............   639
    Bolden, Betty, Chair, Federal Services Impasses Panel, Federal
      Labor Relations Authority, prepared statement..................   593
    Bowron, Eljay B., Director, U.S. Secret Service..................   144
        Memorandum from..............................................   194
        Prepared statement...........................................   144

    Calahan, Richard, Deputy Inspector General, Department of the
      Treasury.......................................................   181
    Campbell, Hon. Ben Nighthorse, U.S. Senator from Colorado,
      prepared statement.............................................   316
    Carlin, John W., Archivist of the United States, National
      Archives and Records Administration, prepared statement........   620
    Cottos, James, Assistant Inspector General, Investigations,
      Department of the Treasury, memorandum from....................   189
    Coverdell, Hon. Paul, U.S. Senator from Georgia, prepared
      statement......................................................   175
    Crane, Lansing E., chairman and chief executive officer, Crane &
      Co., prepared statement........................................   648

    Dolan, Michael P., Acting Commissioner, Internal Revenue Service.   437
        Prepared statement...........................................   443
    Donelson, James E., Chief, Taxpayer Service, Internal Revenue
      Service........................................................   437

    Erdreich, Benjamin L., Chairman, Merit Systems Protection Board,
      prepared statement.............................................   615

    Faircloth, Hon. Lauch, U.S. Senator from North Carolina, prepared
      statement......................................................   350

    Glenn, Hon. John, U.S. Senator from Ohio.........................     1
        Prepared statement...........................................    11
    Gregg, Richard L., Commissioner, Bureau of the Public Debt,
      prepared statement.............................................   543
    Gross, Arthur A., Chief Information Officer, Internal Revenue
      Service........................................................   437

    Kelly, Raymond W., Under Secretary, Enforcement, Department of
      the Treasury...................................................    81
        Prepared statement...........................................    86
    Kerrey, Hon. J. Robert, U.S. Senator from Nebraska...............   399
        Prepared statement...........................................   407
    King, James B., Director, Office of Personnel Management,
      prepared statement.............................................   628
    Koelfgen, Chris, president, National Association of Foreign-Trade
      Zones, prepared statement......................................   652
    Kohl, Hon. Herb, U.S. Senator from Wisconsin, prepared statement.    84

    Lau, Valerie, Inspector General, Department of the Treasury......
                                                              51, 181
        Letters from.................................................   185
        Memorandum from..............................................   192
        Prepared statements..........................................
          52, 181....................................................

    Mader, David A., Chief of Management and Administration, Internal
      Revenue Service................................................
      51, 437........................................................
    Magaw, John, Director, Bureau of Alcohol, Tobacco and Firearms...    91
        Prepared statement...........................................    92
    McCaffrey, Gen. Barry R., Director, Office of National Drug
      Control Policy.................................................   315
        Prepared statement...........................................   323
    McFarland, Patrick E., Inspector General, Office of Personnel
      Management, prepared statement.................................   630
    Morris, Russell D., Commissioner, Financial Management Service,
      prepared statement.............................................   545
    Morris, Stanley E., Director, Financial Crimes Enforcement
      Network........................................................   132
        Prepared statement...........................................   133

    Posey, Ada L., Acting Director, Office of Administration,
      Executive Office of the President, prepared statement..........   560
    Potts, Stephen D., Director, Office of Government Ethics,
      prepared state- ment...........................................   627

    Richardson, Margaret Milner, Commissioner, Internal Revenue
      Service........................................................    51
        Prepared statement...........................................    58
    Rinkevich, Charles, Director, Federal Law Enforcement Training
      Center.........................................................   118
        Prepared statement...........................................   119
    Rubin, Robert E., Secretary, Department of the Treasury..........   548
    Runyon, Marvin, Postmaster General/Chief Executive Officer, U.S.
      Postal Service, prepared statement.............................   634

    Segal, Phyllis N., Chair, Federal Labor Relations Authority,
      prepared statement.............................................   589
    Sharpe, James, mayor, city of Newark, NJ, prepared statement.....   654
    Shelby, Hon. Richard C., U.S. Senator from Alabama, prepared
      statement......................................................   421
    Stillman, Rona B., Chief Scientist, Computers and
      Telecommunications, General Accounting Office..................
      41, 415........................................................
        Prepared statement...........................................    43
    Summers, Lawrence H., Deputy Secretary, Department of the
      Treasury.......................................................
      13, 437........................................................
        Prepared statements..........................................
          16, 439....................................................
    Swerdzewski, Joseph, General Counsel, Federal Labor Relations
      Authority, prepared statement..................................   597

    Thompson, Jeff, chief of Government Relations for Don Novey,
      State president, California Correctional Peace Officers
      Association, letter from.......................................    77
    Tobias, Robert M., national president, National Treasury
      Employees Union, prepared statement............................     4
        Letter from..................................................    78
    Tunheim, Judge John R., Chairman, Assassination Records Review
      Board, prepared statement......................................   570

    Weise, George, Commissioner, U.S. Customs Service................   108
        Prepared statement...........................................   109
    White, James R., Associate Director, Tax Policy and
      Administration Issues, General Accounting Office...............   415
        Prepared statement...........................................   425
    Willis, Lynda, Director, Tax Policy and Administration, General
      Accounting Office..............................................    41

                                 SUBJECT INDEX

                                  ----------

                           DEPARTMENT OF THE TREASURY

                    Bureau of Alcohol, Tobacco and Firearms

                              U.S. Customs Service

                    Federal Law Enforcement Training Center

                      Financial Crimes Enforcement Network

                              U.S. Secret Service

                                                                       Page
    Administrative recordkeeping.....................................   202
    Advanced fee fraud...............................................   170
    Air interdiction.................................................   159
    Border fences....................................................   158
    Border Patrol....................................................   153
    Budgetary process estimates......................................   176
    Canine explosive detection.......................................   165
    Case tracking document...........................................   190
    Case tracking form...............................................   200
        Amended......................................................   206
        Failure to provide original..................................   206
    Congresswoman Collins' request...................................   201
    Counterfeit currency.............................................   171
    Counterfeiting...................................................   178
    Crime bill funding...............................................   174
    Crime prevention.................................................   150
    Discount policy..................................................   176
    Drug seizures....................................................   156
    E-mail message...................................................   203
    Environmental:
        Changes......................................................   173
        Requests.....................................................   172
    Executive order..................................................   210
    Federal Law Enforcement Training Center:
        Budget request...............................................   118
        Commitment and support.......................................   119
        Cost savings.................................................   118
        Growth.......................................................   118
        Initiatives..................................................   119
        Number of graduating students................................   118
    Financial Crimes Enforcement Network:
        Fiscal year 1998 budget request..............................   132
        Money laundering.............................................   132
    Funding workload increases.......................................   172
    Gang Resistance Education and Training [GREAT] Program...........   162
    Immigration and Naturalization Service participation.............   173
    Integrity Committee, referral to.................................   207
    Intigrated ballistic identification system [IBS].................   165
    Intimidating future witnesses....................................   208
    Investigation:
        Initiated on October 2.......................................   204
        Status of....................................................   184
    Master plan funding..............................................   173
    Militia movement in the United States............................   169
    National Center for Missing and Exploited Children...............   178
    New interdiction technologies....................................   160
    Office of National Drug Control Policy, relationship with........   179
    Office of Professional Responsibility............................   155
    Oklahoma City bombing............................................   164
    Operation Hardline...............................................   152
    Overestimating numbers, solution to..............................   176
    Potential criminal investigation, concerns about.................   199
    Privacy rights, concerns about...................................   189
    Record, attempt to clarify.......................................   188
    Secret Service, response to......................................   192
    Security.........................................................   168
    Small law enforcement agency training............................   174
    Smuggling........................................................   154
    Standard operating procedure.....................................   207
    State and local requirements.....................................   175
    Submitted questions..............................................   210
    Suspicious activity reporting system.............................   177
    Task forces......................................................   170
    Temporary facility...............................................   173
        Cost of......................................................   174
    Train-the-trainer, benefit of....................................   174
    Trigger locks....................................................   164
    Youth crime gun interdiction initiative..........................
      161, 167.......................................................

                            Internal Revenue Service

    Appropriations, accountability for...............................
      467, 471.......................................................
    Automatic security programs......................................    55
    Browsers, IRS treatment of.......................................    63
    Browsing.........................................................    13
        In 1994......................................................    27
        Penalties for................................................    23
        Punishment for...............................................    64
        Reasons for..................................................    65
        Repeat.......................................................    62
        Safeguards against...........................................    61
    Colorado Springs, small business in..............................   462
    Computer modernization efforts...................................   460
    Disciplining unauthorized access.................................    56
    Earned income tax credit fraud...................................   466
    Employee education...............................................    56
    Expenditures, justification for..................................   470
    General Accounting Office recommendations........................   460
    Inappropriate browsing through taxpayer files....................     3
    Inspector general, role of.......................................    65
    Internal Revenue Service:
        Browsing at..................................................    20
        Browsing of tax records by employees.........................    51
        Disposition of browsing cases................................    30
        Management failures at.......................................    21
        Prime contractor.............................................    22
        Reduction of funding.........................................   464
        Seasonal employment..........................................    30
        Stopping browsing at.........................................    24
        Supervision of employees.....................................    25
        Treasury:
            Executive attention to...................................    23
            Five point plan for......................................   437
            Oversight of.............................................   464
            Plan to improve..........................................    14
    Modernization, new leadership for................................   469
    New modernization management.....................................   460
    Private debt collection..........................................   461
    Problems, extent of..............................................    57
    Qualifications for next Commissioner.............................    64
    Submitted questions..............................................
      32, 66, 472....................................................
    Tax records:
        Privacy of...................................................    24
        Unauthorized access to.......................................    55
    Tax refund offset program........................................   465
    Tax systems modernization........................................
      28, 62.........................................................
        Accountability for...........................................    29
        Cost of......................................................    28
    Taxpayer bill of rights..........................................    26
    Year 2000 date conversion........................................
      439, 465, 470..................................................
    Zero tolerance policy............................................    60

                       EXECUTIVE OFFICE OF THE PRESIDENT

                     Office of National Drug Control Policy

    Ad campaign......................................................
      320, 339, 344..................................................
    Budget...........................................................   320
    Certification....................................................   352
    Drug legalization................................................   353
    Extraditions.....................................................   348
    High-intensity drug trafficking areas............................   342
    Incarceration....................................................   337
    Marijuana use....................................................   346
    Methamphetamine labs.............................................   351
    Performance measures.............................................   355
    Prison system....................................................   322
    Prison, drugs in.................................................   341
    Submitted questions..............................................   357
    Youth prevention programs........................................   339

                           GENERAL ACCOUNTING OFFICE

    Browsing, degree of seriousness about............................    47
    Debt collection practices........................................   422
    Developmental information system.................................   416
    Fiscal year 1997 issues..........................................   415
    Snoop or browse, capabilities to.................................    46
    Tax systems modernization project, funding for...................    48
    Year 2000 date change............................................   416

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