[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]




  THE USE AND ABUSE OF GOVERNMENT PURCHASE CARDS: IS ANYONE WATCHING?

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

                                HEARING

                               before the

                 SUBCOMMITTEE ON GOVERNMENT EFFICIENCY,
                        FINANCIAL MANAGEMENT AND
                      INTERGOVERNMENTAL RELATIONS

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 30, 2001

                               __________

                           Serial No. 107-62

                               __________

       Printed for the use of the Committee on Government Reform


  Available via the World Wide Web: http://www.gpo.gov/congress/house
                      http://www.house.gov/reform


78-830              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2002
____________________________________________________________________________
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                     COMMITTEE ON GOVERNMENT REFORM

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut       MAJOR R. OWENS, New York
ILEANA ROS-LEHTINEN, Florida         EDOLPHUS TOWNS, New York
JOHN M. McHUGH, New York             PAUL E. KANJORSKI, Pennsylvania
STEPHEN HORN, California             PATSY T. MINK, Hawaii
JOHN L. MICA, Florida                CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia            ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
JOE SCARBOROUGH, Florida             ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio           DENNIS J. KUCINICH, Ohio
BOB BARR, Georgia                    ROD R. BLAGOJEVICH, Illinois
DAN MILLER, Florida                  DANNY K. DAVIS, Illinois
DOUG OSE, California                 JOHN F. TIERNEY, Massachusetts
RON LEWIS, Kentucky                  JIM TURNER, Texas
JO ANN DAVIS, Virginia               THOMAS H. ALLEN, Maine
TODD RUSSELL PLATTS, Pennsylvania    JANICE D. SCHAKOWSKY, Illinois
DAVE WELDON, Florida                 WM. LACY CLAY, Missouri
CHRIS CANNON, Utah                   DIANE E. WATSON, California
ADAM H. PUTNAM, Florida              ------ ------
C.L. ``BUTCH'' OTTER, Idaho                      ------
EDWARD L. SCHROCK, Virginia          BERNARD SANDERS, Vermont 
JOHN J. DUNCAN, Tennessee                (Independent)


                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
                     James C. Wilson, Chief Counsel
                     Robert A. Briggs, Chief Clerk
                 Phil Schiliro, Minority Staff Director

    Subcommittee on Government Efficiency, Financial Management and 
                      Intergovernmental Relations

                   STEPHEN HORN, California, Chairman
RON LEWIS, Kentucky                  JANICE D. SCHAKOWSKY, Illinois
DAN MILLER, Florida                  MAJOR R. OWENS, New York
DOUG OSE, California                 PAUL E. KANJORSKI, Pennsylvania
ADAM H. PUTNAM, Florida              CAROLYN B. MALONEY, New York

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
          J. Russell George, Staff Director and Chief Counsel
   Bonnie Heald, Director of Communications/Professional Staff Member
                         Scott R. Fagan, Clerk
           David McMillen, Minority Professional Staff Member


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on July 30, 2001....................................     1
Statement of:
    Grassley, Hon. Charles E., a U.S. Senator from the State of 
      Iowa.......................................................     2
    Kutz, Gregory D., Director, Financial Management and 
      Assurance, U.S. General Accounting Office, accompanied by 
      Robert Hast, Managing Director, Special Investigations, 
      U.S. General Accounting Office; Ernest L. Valdes, 
      Commanding Officer, Space and Naval Warfare Systems Center, 
      San Diego, CA (SPAWAR); John E. Surash, Commanding Officer, 
      Navy Public Works Center, San Diego, CA; Keith W. Lippert, 
      Director, Defense Logistics Agency, former Commanding 
      Officer, Naval Supply Systems Command (NAVSUP), accompanied 
      by Larry Glascoe, Executive Director, Navy Supply Systems 
      Command; Jerry Hinton, Director of Finance, Defense Finance 
      and Accounting Service; Patricia Mead, Acting Deputy 
      Assistant Commissioner, Office of Acquisition, Federal 
      Supply Service, General Services Administration, 
      accompanied by Sue McIver, Director, Services Acquisition 
      Center, Federal Supply Service, General Services 
      Administration; and Deidra Lee, Director of Defense 
      Procurement, Department of Defense.........................    13
Letters, statements, etc., submitted for the record by:
    Grassley, Hon. Charles E., a U.S. Senator from the State of 
      Iowa, prepared statement of................................     7
    Hinton, Jerry, Director of Finance, Defense Finance and 
      Accounting Service, prepared statement of..................    61
    Kutz, Gregory D., Director, Financial Management and 
      Assurance, U.S. General Accounting Office, prepared 
      statement of...............................................    17
    Lippert, Keith W., Director, Defense Logistics Agency, former 
      Commanding Officer, Naval Supply Systems Command (NAVSUP), 
      prepared statement of......................................    54
    Mead, Patricia, Acting Deputy Assistant Commissioner, Office 
      of Acquisition, Federal Supply Service, General Services 
      Administration, prepared statement of......................    67
    Surash, John E., Commanding Officer, Navy Public Works 
      Center, San Diego, CA, prepared statement of...............    46
    Valdes, Ernest L., Commanding Officer, Space and Naval 
      Warfare Systems Center, San Diego, CA (SPAWAR), prepared 
      statement of...............................................    35

 
  THE USE AND ABUSE OF GOVERNMENT PURCHASE CARDS: IS ANYONE WATCHING?

                              ----------                              


                         MONDAY, JULY 30, 2001

                  House of Representatives,
  Subcommittee on Government Efficiency, Financial 
        Management and Intergovernmental Relations,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2154, Rayburn House Office Building, Hon. Stephen Horn 
(chairman of the subcommittee) presiding.
    Present: Representative Horn.
    Staff present: J. Russell George, staff director and chief 
counsel; Bonnie Heald, professional staff member and director 
of communications; Scott Fagan, assistant to the subcommittee; 
Chris Barkley, staff assistant; Davidson Hulfish, Samantha 
Archey, Fred Ephraim, and Christopher Armato, interns; David 
McMillen, minority professional staff member; and Jean Gosa, 
minority assistant clerk.
    Mr. Horn. This hearing of the Subcommittee on Government 
Efficiency, Financial Management and Intergovernmental 
Relations will come to order. For the last 6\1/2\ years, I have 
chaired the subcomittee that ensures that taxpayer dollars are 
being used efficiently and effectively. Yet time after time 
this subcommittee has received reports that Federal departments 
and agencies have not been good stewards of billions of dollars 
provided by hard-working taxpayers. Sometimes the allegations 
have been attributed to poor accounting procedures. Other times 
they have been attributed to flagrant mismanagement. In the 
case of the Department of Defense, there seems to have 
developed a culture throughout previous administrations that 
encompasses both of these elements.
    This is the second time in less than a week that 
representatives from the Department of Defense have appeared 
before this subcommittee to defend illegal or otherwise 
improper uses of its roughly $325 billion budget. Last week we 
learned that some Defense Department officials have been 
illegally tapping closed appropriations accounts despite a 10-
year-old law that prohibits such actions.
    Today we will examine the government's purchase card 
programs at two Navy units within the Department of Defense, 
the Space and Naval Warfare Systems Center and the Navy Public 
Works Center. Both are based in San Diego, CA. This 
investigation was initiated by our first witness, Senator 
Charles Grassley from Iowa. Our second witness will come from 
the General Accounting Office.
    Last year the Department of Defense used purchase cards, 
MasterCards or VISA cards, for more than 10 million 
transactions valued at $5.5 billion. That figure represents 
more than one-third of the entire government's purchase card 
transactions, which totaled $15 billion in fiscal year 2000. 
Unlike the government's travel card program in which the 
cardholder pays the bill, the purchase card bills are paid by 
the Federal Government.
    This credit card program was designed to save money by 
eliminating bureaucracy and paperwork associated with making 
small purchases. As defined by the General Services 
Administration, small purchases are those under $2,500. In 
addition, Federal agencies can receive rebates from the banks 
that issue the cards when the bills are paid promptly. Those 
benefits, however, do not consider the cost of fraudulent or 
improper use of the cards for personal expenses, and in the 
cases we will examine today, they fail to consider the cost of 
proper oversight and management of the programs. Most 
reasonable people would hardly construe these as legitimate and 
necessary government expenses, and all taxpayers would agree.
    Senator Grassley and I have asked the General Accounting 
Office to expand its investigation of the government purchase 
card program as well as the travel card program. If the misuse 
and outright fraud found in these two Navy facilities are 
indicative of the governmentwide programs, then the cost of the 
programs may far outweigh its benefits.
    Our witnesses today have been involved in the 
implementation and oversight of the government's purchase card 
program. In addition, we will hear testimony from witnesses who 
are responsible for the two Navy purchase programs audited by 
the General Accounting Office. We want to know how these abuses 
were allowed to occur and what is now being done to stop them.
    I welcome all of you, and we now look forward to your 
testimony. We will start with the gentleman from Iowa, Senator 
Grassley, who is the one that first picked this up, and he's 
got a very good reputation for looking at misuse of the 
taxpayers' money. We are delighted to have him with an opening 
statement, and we would like him to come with us when that 
statement is over and join us here for the question period.
    And it is a pleasure to have you here, Senator.

STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR FROM THE 
                         STATE OF IOWA

    Senator Grassley. Thank you, Mr. Chairman, and I want to 
compliment you for doing a thorough job of our Constitutional 
responsibilities of oversight to see that money is spent 
according to the Constitution and congressional policy, and to 
make sure that the laws are faithfully executed. I'm glad to 
join you in that effort. And so I thank you for inviting me to 
testify on credit card abuse. It's an honor and privilege to be 
here, and especially to work with you on a very important 
issue.
    As the chairman knows, in recent years I have become 
increasingly concerned about the total breakdown of the 
internal financial controls at the Defense Department. My 
concerns are reinforced by the continuous stream of audits 
issued by the General Accounting Office and the DOD's Inspector 
General. These audits consistently show that sloppy accounting 
and nonexistent internal controls leave the Department of 
Defense's financial resources vulnerable to theft and to abuse.
    In 1997-1998, as chairman of the Judiciary Subcommittee on 
Administrative Oversight, I conducted my own review of internal 
controls at the Department of Defense. I issued a report and 
held a hearing. I came away from the experience convinced that 
there were no effective internal controls in place. Stealing 
money was a piece of cake. Fraudulent activity, if detected, 
was detected by chance and not, oddly enough, as a result of 
effective internal controls.
    This work taught me one very important lesson about 
government bookkeeping. Bookkeeping is the key to controlling 
the money. If your books of account are accurate and complete, 
it's easy to follow the money trail, and that makes it hard 
then to steal money, and that's how it should be. By contrast, 
if your bookkeeping is sloppy and nonexistent, as it is at the 
Pentagon today, then there is no money trail, and that makes it 
easy to steal money. And that's exactly why I'm so concerned 
about the Pentagon's mushrooming credit card operation. Credit 
cards weaken controls, erase the audit trail.
    Mr. Chairman, I'd like to focus on the dangers of credit 
card proliferation in what I will characterize as a zero-
control environment. Today there are over 1.8 million 
Department of Defense cards in circulation that generate about 
$9 billion a year in expenditures. A credit card is a license 
to spend money. Any person with a credit card is authorized to 
spend money with no checks and balances. In the past, 
Department of Defense employees needed a phony invoice to 
trigger a fraudulent check, and getting a fraudulent Treasury 
check took some doing. Well, now that obstacle is gone. Credit 
cards then provide a shortcut to the cash pile. The Pentagon is 
giving everyone a big scoop shovel and telling them to rip into 
the national money sack and do it at both ends.
    The Department of Defense created an army of spenders. With 
the Department of Defense credit card in hand, they have almost 
unlimited authority to spend money. There are no controls, no 
responsibilities, no accountability. If they want to spend 
money, they go to the nearest ATM machine or use a DOD 
convenience check to get cash, and they're doing it with 
alarming regularity. If they need a new computer or a Palm 
Pilot, they go to CompUSA and charge it and keep it. If they 
need something for the house, they go to Home Depot and charge 
it. If they feel like a night out on the town, they go to a 
night club and charge it. Pentagon credit cards are being taken 
on a shopping spree, and the taxpayers are footing the bill.
    The General Accounting Office testimony today, I think, 
will clearly show that no one is minding the store. No one is 
checking to see if the goods and services charged to a purchase 
card account were received. And no one is checking to verify 
the charges if they were legitimate, and that is required by 
law.
    The General Accounting Office reports that purchase cards 
are being used to buy expensive items for personal use with no 
accountable records. There were over 500 known purchase card 
fraud cases in the last 2 years alone, and with just a small 
sample, the General Accounting Office found more. The worst 
part of it, Mr. Chairman, is no one seems to care. The Defense 
Finance and Accounting Service simply pays the bill in full, no 
questions asked.
    Mr. Chairman, I know you have looked at the Department of 
Defense travel cards, and they remain a festering problem. They 
need more attention. And they offer us a rare glimpse at a root 
cause of the Department of Defense control problem. As I said, 
credit cards are a license to spend money, and they're being 
issued with no road test. They're being issued willy-nilly, 
with no credit checks.
    Mr. Chairman, that may sound like that's got to be wrong, 
but that's true. There are no credit checks. Even purchase 
cards with a $100,000 limit are issued with no credit check. 
One credit card company, the Bank of America, identifies high-
risk individuals, but the bank's appraisal in the case of the 
military is irrelevant. At the Pentagon, everyone gets a card.
    This is a fatal flaw in the program. It leaves the door 
wide open to fraud and abuse. Military and civilian personnel 
who could never qualify for credit suddenly find themselves 
with unlimited credit on a government credit card.
    The application form itself helps to set the stage for 
fraud and abuse. It's right up front on the application. No 
credit check is an option, and all the applicant has to do is 
check box B, ``no credit check.'' When first-time cardholders 
see this, they must lick their chops, obviously.
    No credit check is the same as no control. A ``no credit 
check, everybody gets a travel card'' policy is causing account 
delinquencies to go ballistic. As you know, Mr. Chairman, there 
are over 43,000 Department of Defense employees, civilian and 
military, who have defaulted on more than $59 million in 
charges for what is supposed to be authorized travel. This, of 
course, is a black mark on the Armed Forces. The Department of 
Defense is supposed to pay the cardholder, but the money 
doesn't always get to the bank. The government has no liability 
for unpaid balances, and the bank has no collection authority 
and earns no interest. The bank has to write off the 
delinquencies, thus take a loss, and the losses are mounting 
fast. They now exceed $200 million.
    There is the case of the marine sergeant who ran up a 
$20,000 bill and then left the service and the unpaid bill when 
his enlistment was up. That case is not unique. There is a 
soldier who spent $3,100 in a night club, the dead sailor who 
spent $3,565, an Army reservist's wife who spent $13,053 on a 
shopping spree in Puerto Rico.
    The marine sergeant, Sergeant X, was initially issued a 
restricted card in March 2000 because of a questionable credit 
record. The restricted status put the lid on Sergeant X's 
credit allowance, but not for long. On March 21st, the Marine 
Corps arbitrarily raised his credit limit from $2,500 to 
$10,000. The higher limit precipitated a spending spree. Then 
the alarm bells went off at the bank. There was a fraud alert 
on August 3rd due to, ``unusual account activity.''
    Two weeks later Sergeant X got special permission to make 
charges on a blocked merchant category code [MCC], at a 
civilian clothes store like Macy's. The next day, August 18th, 
Sergeant X's credit limit was raised again to $20,000. Then 
Sergeant X's account became past due and then delinquent.
    Now, despite all the red warning flags, the Marine Corps 
raised Sergeant X's credit limit one last time, January 29, 
2001. This time it went to $25,000.
    In just one 2-month period, Sergeant X made cash 
withdrawals totaling $8,500. The bank thinks he was using the 
cash withdrawals to make payments on his credit card account. 
Finally, in February, Sergeant X's credit was revoked. Mr. 
Chairman, the Marine Corps was warned, but looked the other way 
while Sergeant X robbed the bank.
    Mr. Chairman, I hope you will join me in asking the 
Inspector General to examine these cases and determine whether 
the Department of Defense is paying for unauthorized expenses 
and whether others could be involved in stealing money. The 
driver behind the delinquencies are cash withdrawals from the 
ATM machines for personal use. Over 20 percent of all 
Department of Defense travel card transactions are cash 
transactions. Now, this is five times the industry average. 
Most cash transactions go delinquent and are written off as bad 
debt.
    Attempted access to blocked MCC codes like Sergeant X's 
case is a tip-off. It's the warning flag. Many MCCs are 
blocked, like on-line gambling casinos, Toys R Us and the like. 
The bank knows when a card is used to gain access to a blocked 
MCC code. The banks also know that an unsuccessful hit on a 
blocked MCC code is almost always followed immediately by a 
successful hit at the nearest ATM machine. ATMs are used to 
circumvent the blocked MCC code to make an unauthorized 
purchase.
    Mr. Chairman, the bank gave the Pentagon an antifraud 
control device. It's called by the acronym EAGLS, E-A-G-L-S. It 
provides an online capability to detect suspicious account 
activity and delinquency; information needed to take corrective 
action, in other words. Daily account activities on EAGLS 
should be watched like a hawk. If Sergeant X was getting cash 
at the ATM machine without travel orders, his access to the 
cash machine should have been shut down. Unfortunately, EAGLS 
control is ignored. Nobody uses it.
    The thinking behind the Department of Defense credit card 
explosion is good. Reduce the paperwork. Save money to 
streamline the process. Adopt best practices of the commercial 
sector. In the private sector credit cards are big business. 
That's because the control environment is good. Monthly bills 
are reconciled and are paid promptly. In corporate America, if 
you abuse your card, you lose it or you get fired.
    In the Pentagon there is no accountability and no control. 
Trust and accountability are key ingredients in any credit card 
program. Trust and accountability go hand in hand because a 
credit card provides direct unrestricted access to cash. Credit 
cards create a low-control environment. The credit card 
environment requires a high degree and level of trust and 
accountability.
    Mr. Chairman, the low-control credit card environment is 
incompatible with the zero-control environment at the Pentagon. 
Issuing credit cards willy-nilly with no credit checks in a 
zero-control environment is a recipe for disaster, and that's 
exactly where we are today, Mr. Chairman, a disaster, and Bank 
of America is holding the bag, and the bank can only blame 
itself for being in such a predicament. The bank signed the 
contract. The bank agreed to assume all the risk and all the 
responsibility, but with absolutely no authority. All the 
authority rests squarely in the hands of the Pentagon. The 
contracts give the Department of Defense absolutely vital 
authority over the bank's decisions. On the most important 
decisions of all, whether to do credit checks, the Pentagon is 
forcing the bank to adopt worst business practices of the 
public sector. The contract mandates the policy. There shall be 
no control filter with credit checks. Everybody gets a card, 
even those with bad credit records.
    Mr. Chairman, the ``no credit checks, everybody gets a 
card'' policy allows the abuser to rob the bank, and the 
Department of Defense is backing them up. That is causing the 
bank to sustain unacceptable losses. Bank of America's 
predecessor, American Express, endured the same fate. So 
something has to give. It seems like the current arrangement is 
very unworkable.
    I know that the Department of Defense is trying to fine-
tune the process, but recent improvements are very modest. The 
root cause of the problem remains untouched: no control and no 
credit checks. If the Department of Defense is serious about 
adopting the best practices of the commercial sector, then the 
Department of Defense has to do an about-face maneuver. The 
Department of Defense must give the bank authority to decide 
who can be trusted with a card and what the credit limit should 
be on each account. This rule should apply to travel as well as 
purchase cards. I think that this would solve the problem. I 
think that is the key, Mr. Chairman. Modify the contract to 
allow credit checks and regulate limits. It seems to be very 
simple.
    In closing, Mr. Chairman, Secretary Rumsfeld has made a 
personal commitment to clean up the financial mess at the 
Pentagon. Obviously, he is just getting started, and we know 
how things take several years, and it may be that is true with 
Secretary Rumsfeld's best efforts before we see results. I 
support his efforts 100 percent and look forward to some very 
good results. So nothing I have said here today should be taken 
as criticism of Secretary Rumsfeld. The problems I have 
addressed are the result of decisions made in previous 
administrations and mainly by former Deputy Secretary of 
Defense Hamre.
    I thank you, Mr. Chairman.
    Mr. Horn. We thank you, Senator, and please join us here.
    [The prepared statement of Senator Grassley follows:]

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    Mr. Horn. And we will now bring all of the witnesses and 
administer the oath, and also we will tell you about how this--
I would like all of the assistants that will be whispering in 
various ears to also take the oath so I don't have to interrupt 
this testimony, and so just get them all, and the clerk will 
take the names. Please raise your right hands.
    [Witnesses sworn.]
    Mr. Horn. So I just want to make sure we have all the 
witnesses here, and the first will be Mr. Kutz of the U.S. 
General Accounting Office, accompanied by Robert Hast, Managing 
Director, Special Investigations, U.S. General Accounting 
Office; Captain Ernest L. Valdes, Commander, Space and Naval 
Warfare Systems Center in San Diego; Captain John E. Surash, 
the Commanding Officer, Navy Public Works Center, San Diego; 
and Vice Admiral Keith W. Lippert, the Director of the Defense 
Logistics Agency, former commanding officer, Naval Supply 
Systems Command, and he is accompanied by Larry Glascoe, 
Executive Director of the Navy Supply Systems Command; Jerry 
Hinton, Director of Finance, Defense Finance and Accounting 
Service; Patricia Mead, the Acting Deputy Assistant 
Commissioner, Federal Supply Service, General Services 
Administration, accompanied by Sue McIver, the Director, 
Services Acquisition Center, Federal Supply Service, General 
Services Administration; and we have Deidra Lee, Director of 
Defense Procurement, Department of Defense.
    And we will now start with the gentleman with the U.S. GAO, 
General Accounting Office. That reports, for those of you that 
are not familiar with them, to the Comptroller General of the 
United States, and it is an arm of the Congress, the 
legislative branch, and they do excellent work, and we're 
both--Senator Grassley and I have certainly made great use out 
of the GAO in our years in the Congress.
    So we will now start in with Mr. Kutz, the Director of 
Financial Management and Assurance.

 STATEMENTS OF GREGORY D. KUTZ, DIRECTOR, FINANCIAL MANAGEMENT 
 AND ASSURANCE, U.S. GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY 
 ROBERT HAST, MANAGING DIRECTOR, SPECIAL INVESTIGATIONS, U.S. 
    GENERAL ACCOUNTING OFFICE; ERNEST L. VALDES, COMMANDING 
OFFICER, SPACE AND NAVAL WARFARE SYSTEMS CENTER, SAN DIEGO, CA 
(SPAWAR); JOHN E. SURASH, COMMANDING OFFICER, NAVY PUBLIC WORKS 
  CENTER, SAN DIEGO, CA; KEITH W. LIPPERT, DIRECTOR, DEFENSE 
   LOGISTICS AGENCY, FORMER COMMANDING OFFICER, NAVAL SUPPLY 
    SYSTEMS COMMAND (NAVSUP), ACCOMPANIED BY LARRY GLASCOE, 
EXECUTIVE DIRECTOR, NAVY SUPPLY SYSTEMS COMMAND; JERRY HINTON, 
 DIRECTOR OF FINANCE, DEFENSE FINANCE AND ACCOUNTING SERVICE; 
PATRICIA MEAD, ACTING DEPUTY ASSISTANT COMMISSIONER, OFFICE OF 
     ACQUISITION, FEDERAL SUPPLY SERVICE, GENERAL SERVICES 
 ADMINISTRATION, ACCOMPANIED BY SUE McIVER, DIRECTOR, SERVICES 
 ACQUISITION CENTER, FEDERAL SUPPLY SERVICE, GENERAL SERVICES 
      ADMINISTRATION; AND DEIDRA LEE, DIRECTOR OF DEFENSE 
               PROCUREMENT, DEPARTMENT OF DEFENSE

    Mr. Kutz. Mr. Chairman and Senator Grassley, good morning. 
It's a pleasure to be here to testify on the results of our 
audit of Navy purchase cards. With me this morning is Bob Hast, 
Managing Director of our Office of Special Investigations and 
an expert in credit card security issues.
    Purchase cards were introduced into the government in the 
1980's primarily to streamline the acquisition process for 
small purchases. Usage of purchase cards is growing quickly in 
the Federal Government, increasing from about $2 billion in 
1995 to about $12 billion in 2000. DOD purchase cards usage in 
fiscal year 2000 was about $5 billion.
    With rapid growth in the usage of purchase cards, 
establishment of effective internal controls is critical to 
prevent fraud, waste and abuse. I have a purchase card in my 
hand here that Citibank was kind enough to provide for today's 
hearing. As you can see, it looks like a normal credit card. 
Navy's card is a MasterCard and can be used wherever MasterCard 
is accepted; however, notice that it says, ``For official U.S. 
Government purchases only.''
    As requested initially by Senator Grassley, our audit 
focused on Navy purchase card activity in the San Diego area 
using a case study approach at SPAWAR Systems Center, or 
SPAWAR, and Navy Public Works Center, or Public Works. These 
two Navy activities, which provide goods and services to their 
Navy clients, had about $68 million of purchase card activity 
in fiscal year 2000.
    The bottom line of my testimony this morning is that we 
found significant breakdowns in Navy purchase card controls in 
the San Diego area. These breakdowns contributed to fraudulent 
and abusive spending and theft and misuse of government 
property.
    My testimony has three parts: first, the overall purchase 
card internal control environment; second, the effectiveness of 
key internal controls; and third, fraudulent and abusive usage 
of purchase cards.
    First, we found an ineffective overall internal control 
environment at SPAWAR and Public Works. Our work has shown that 
the lack of a strong internal control environment leads to the 
risk of improper behavior. For example, neither SPAWAR nor 
Public Works had effective policies over the issuance of 
purchase cards. Any employee having supervisor approval could 
basically get a purchase card. As a result, as shown on the 
posterboard, we found a proliferation of purchase cards, with 
36 percent of SPAWAR and 16 percent of Public Works employees 
holding purchase cards. In contrast, we found that for six 
large defense contractors, no more than 4 percent of employees 
held purchase cards, and at GAO, about 2 percent of our 
employees hold purchase cards. This control breakdown resulted 
in over 1,700 cardholders, each with a monthly spending limit 
of over $20,000. We found no compelling reason why over 1,700 
individuals were given the power to make purchasing decisions 
for the Federal Government.
    We found other overall internal control weaknesses relating 
to rebate management, training, and the usage of internal 
audits. In fact, at SPAWAR, we found evidence that management 
ignored internal review results that demonstrated some of the 
very same problems that we found.
    Second, with the ineffective overall control environment I 
just described, it is not surprising that the four basic 
controls we tested were ineffective. These controls include 
independent documentation of receipt of goods, independent 
certification of the monthly credit card bill, timely recording 
of purchases into the accounting records, and recording of 
property purchases into the property inventory records. These 
four controls are intended to provide reasonable assurance as 
to the integrity of purchase card transactions.
    As shown on the posterboard, we estimate control failure 
rates of 35 to 100 percent for fiscal year 2000. The primary 
problem we found was that Navy employees were simply not 
following basic policies and procedures. For example, for 65 
percent of SPAWAR and 47 percent of Public Works transactions, 
we found no evidence that a person independent of the 
cardholder validated that goods and services were received. 
This control is intended to minimize the risk, for example, of 
employees going on a personal shopping spree. Unfortunately, 
the high failure rate for fiscal year 2000 clearly shows that 
this control was ineffective.
    In addition, SPAWAR and Public Works did not record 
property purchases in inventory records as required by Navy 
policy. When we asked to inspect 65 items from our sample, the 
two commands could not provide conclusive evidence that 31 
items, including laptop computers and a digital camera, were in 
possession of the government. One of the 31 items was a video 
conferencing camera reported as stolen. For this item we found 
that the responsible Public Works employee had received and 
deposited in his personal checking account $2,500 from a 
personal insurance claim. Only after being confronted by our 
investigators did the employee reimburse the government with a 
personal check.
    Third, we found fraudulent and abusive transactions 
involving Navy San Diego activities, including SPAWAR and 
Public Works. Weak internal controls contributed to five recent 
cases of alleged purchase card fraud related to Navy activities 
in the San Diego area. Two of these related to Public Works. 
These purchase card fraud cases, which so far total over 
$660,000, involve numerous purchases of items for personal 
gain. Examples included home improvement items from the Home 
Depot, laptop computers, Palm Pilots, DVD players, an air 
conditioner, clothing, jewelry, eyeglasses and pet supplies. 
The control breakdowns related to these frauds were so 
pervasive that the total dollar amount could not be determined. 
One cardholder sentenced to 15 months in prison commented that 
illegal usage of the purchase card was ``too easy.''
    Another of the Navy purchase card fraud cases involved 
compromise of as many as 2,600 purchase cards for Navy 
activities in the San Diego area. Navy investigators were only 
able to obtain a partial list of 681 compromised accounts. The 
account numbers showed up on a computer printer at a community 
college library in San Diego in 1999. However, the Navy has not 
yet canceled the compromised accounts. Rather, they're only 
canceling the accounts as fraudulent activity is identified. 
Navy investigators estimated that as of January 2001, at least 
27 alleged suspects used 30 of the compromised account numbers. 
These suspects made more than $27,000 in fraudulent purchases 
of pizza, jewelry, phone calls, tires and flowers.
    With ineffective internal controls, preventing and 
detecting fraudulent purchases for compromised accounts will be 
virtually impossible. As of May 21, 2001, we identified 22 
compromised SPAWAR accounts that are still active. We also 
found transactions at SPAWAR and Public Works that we believe 
are potentially fraudulent or abusive. As shown on the 
posterboard, the potentially fraudulent purchases include 
personal items such as cosmetics from Mary Kay, and gift 
certificates from Nordstrom. It is unclear whether these 
purchases were made by Navy employees, or were due to 
compromised accounts. The ineffective monthly certification 
control resulted in payment of these obviously unauthorized 
purchases. However, we found evidence that the Navy 
subsequently received credit from Citibank for these items.
    We referred all potentially fraudulent transactions to Mr. 
Hast and his team for further investigation. The abusive 
purchases relate primary to SPAWAR and include items where the 
purchase was at an excessive cost, questionable government 
need, or both. For example, as shown on the posterboard, we 
found purchases of items such as flat-panel computer monitors 
costing from $800 to $2,500 each. We believe the cost of these 
monitors is excessive when compared to standard GSA monitors 
that cost about $300 each. In addition, we found items 
purchased that were of questionable government need, including 
Palm Pilots, designer Palm Pilot carrying cases, and a leather 
briefcase from the Coach store. Accessories were also purchased 
for the Palm Pilots, including keyboards, travel kits, 
additional memory, modems and belt clips. We found no 
documentation to justify these as valid government purchases. 
Rather, it appears that these purchases were often made to 
satisfy the personal preferences of purchase card holders.
    In summary, we found that Navy's management of the purchase 
card program in the San Diego area is simply not acceptable. We 
found significant problems with every aspect of the program 
that we reviewed. These problems contributed to fraudulent and 
abusive usage of purchase cards.
    I testified before this subcommittee in May on the 
importance of fixing DOD's serious financial management 
problems. Last week we testified that DOD made $615 million of 
illegal and improper adjustments to closed appropriations 
accounts. Today, you see another example of what can happen 
when financial management is broken and accountability is lost.
    The individuals here from the Navy appear to be very 
capable people who can fix these problems. To do so, they will 
need to demonstrate leadership in this area and establish 
accountability, proper incentives and consequences for their 
employees to ensure proper behavior. We will be issuing a 
report with recommendations after this hearing. We are 
available to work with the Navy to implement those 
recommendations.
    Mr. Chairman, that ends my statement. Mr. Hast and I would 
be happy to answer questions after the others give their 
statements.
    Mr. Horn. Well, thank you very much for that presentation. 
We have faith in the GAO and you just do a marvelous job. So 
thank you.
    [The prepared statement of Mr. Kutz follows:]

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    Mr. Horn. Our next witness is Captain Ernest L. Valdes, the 
Commander of the Space and Naval Warfare Systems Center in San 
Diego, otherwise known as SPAWAR.
    Go ahead, Mr. Valdes.
    Captain Valdes. Mr. Chairman, Senator Grassley, thank you 
for the opportunity to discuss the Navy purchase card program. 
I entered a full statement to the committee, and I'd like to 
provide a summary statement at this time.
    Mr. Horn. Without objection, it's in the record. I might 
add, when you're called, the whole statement goes in 
automatically.
    Captain Valdes. Thank you.
    Mr. Horn. And we'd like you to summarize it.
    Captain Valdes. Yes, sir.
    Mr. Horn. Because the sooner we can summarize it and get 
into a dialog with Senator Grassley and myself and any others 
that want to appear, and so we want to get a positive way.
    Captain Valdes. Thank you, Mr. Chairman.
    I'm Captain Ernest Valdes, commanding officer, Space and 
Naval Warfare Systems Center, San Diego. It's my job to command 
an organization whose mission is to provide the joint 
warfighter with the technology to collect, process, display and 
transfer information necessary to conduct military operations.
    My command is one of the many Navy activities that uses and 
relies on the government purchase card program. We are a major 
command within the Navy and employ a workforce of approximately 
80 military and 3,400 civilian government personnel consisting 
primarily of scientists, engineers and computer specialists. My 
command manages more than 1,000 projects both large and small, 
in research and development, testing evaluation, installation 
and in-service engineering in support of the Navy and Marine 
Corps. For fiscal year 2000, SSC revenues were over $1.2 
billion.
    The Navy's purchase card program greatly facilitates the 
timely and efficient response to our fleet and customer needs 
and is crucial to fulfilling our mission in support of naval 
forces. For over 10 years, SSC San Diego has effectively 
managed the purchase card program that makes over 50,000 
purchases a year valued at approximately $45 million per year. 
The success of our program is based upon effective management 
controls and in the trust we have in our cardholders, who are 
career Civil Service employees or Active Duty service members.
    We firmly believe the purchases being made are for 
legitimate government purposes. For example, during an upgrade 
of the operations center of USS Blue Ridge, a command and 
control ship forward-deployed in Japan, our team of engineers 
and technicians found computer and local area network 
components requiring immediate replacement or repair. During 
this effort, which includes an installation of an entire 
network on board the command ship, and a major upgrade to its 
command and control system, we placed 30 people on board the 
Blue Ridge for over 3 weeks working around the clock to 
complete this effort. The use of the purchase card resulted in 
immediate government savings by allowing the team to quickly 
procure necessary items and contributed significantly to the 
successful upgrade of Blue Ridge, accomplished in time for an 
upcoming operational exercise.
    In addition to the trust we place in our cardholders, we 
have management controls to oversee the program. These 
management controls include as a first line of defense 
responsibility of the cardholder to review and challenge any 
discrepancies on their monthly card statements. Approving 
officials then review their individual cardholder statements as 
a second line of review. My command's agency program 
coordinator further reviews a random sample of cardholder 
statements each month, contacting cardholders and their 
supervisors when deficiencies are noted, including taking the 
action of revoking the card for misuse or, in other areas, 
disciplinary action to the cardholder.
    Given the significant size of this program, we conduct 
regular reviews that occasionally reveal misuse or compromise 
of the purchase card. For example, our internal review process 
disclosed an employee's misuse of a purchase card for personal 
items while on travel. In this and other similar cases, 
cardholder authority was revoked. We also rely on our workforce 
to do the right thing and report cases of purchase card abuse, 
either directly to their supervisor or through hotline calls.
    We have seen a few cases that revealed compromise of a 
purchase card by third parties outside the Navy; that is, the 
card number was stolen. And this resulted in the purchase of 
cosmetics and items at a record music store. In these instances 
of compromise or stolen purchase cards, the affected 
cardholders immediately reported and disputed the charges, and 
the cases were resolved in favor of the cardholders. And I 
refer to the Mary Kay issue that the GAO discussed earlier. 
That was an incident of a stolen credit card number.
    I will now address the specific GAO findings and address 
weaknesses in the program that merit attention and followup 
action. Our first action was to review the number of purchase 
cardholders at my command, and we have reduced the number of 
cardholders at the center by 18 percent. Our existing program 
is to require that all cardholders receive training prior to 
receiving the purchase card. We experienced a backlog in 
refresher training, and I intend to correct that problem by 
accelerating the training schedule to complete all training and 
refresher training by the end of the fiscal year.
    SSC San Diego relies on the following procedure and 
management control to execute our program and combat 
vulnerability to abuse: First, a mandatory initial training 
program and following refresher training every 2 years--these 
are existing management controls at the Center; supervisory 
oversight of cardholders' use and need; cardholder review of 
their monthly statements; approving officials' review of the 
individual cardholder's statement.
    We conduct random reviews every month by the agency program 
coordinator, and we have an aggressive action plan to correct 
deficiencies through counseling, retraining, and cardholder 
revocation for the serious cases. Mr. Chairman, we conduct 
formal investigations and pursue disciplinary action.
    Finally, SSC San Diego has recognized that the purchase 
card program was a manual, paper-intensive process that would 
benefit from the employment of modern e-business solutions. My 
command recently implemented an enterprise resource planning 
system incorporating best commercial practices and utilizing 
commercial off-the-shelf software. This system will 
substantially improve our business processes at the command, 
including the purchase card program, and significantly improve 
our documentation issues that the GAO auditors highlighted.
    In conclusion, Mr. Chairman, the purchase card program is 
vital to the successful implementation of SSC San Diego's 
mission to support our Navy and Marine Corps team. I also 
believe the implementation of enterprise resource planning will 
greatly improve the management tools available to oversee the 
program, while providing our workforce the necessary 
flexibility to accomplish the Center's mission in support of 
our Naval forces.
    Mr. Chairman, Senator, thank you for giving me this 
opportunity to address the committee, and I'll address 
questions at any time, sir.
    [The prepared statement of Captain Valdes follows:]

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    Mr. Horn. I think at this point we're going to yield to 
Senator Grassley, because he has another appointment coming, 
and he'll question you and some of the others, even though you 
haven't had a chance to give your testimony at this point.
    Senator Grassley. I have my questions of the General 
Accounting Office, but I hope that before the day is over, we 
hear that part of the solution to the issues that we have 
before us is that we are going to give the normal commercial 
way of checking credit for the issue of the credit cards to 
have the authority to issue credit cards to those that have 
good credit risk as opposed to everybody. And I hope the 
Defense Department would look to the banks for that normal 
commercial way of doing business.
    Mr. Kutz, in 1997-1998, you provided extensive support for 
my review of internal controls at the Department of Defense. We 
discovered that supporting documentation like receiving reports 
simply did not exist. At the conclusion of that review, which 
was in September 1998, Mr. Hamre launched the purchase card 
initiative. Purchase cards eliminate the need for receiving 
reports.
    Do you think that the Department of Defense answers to the 
internal control problems that we uncovered in 1998?
    Mr. Kutz. I believe most of the problems we found were 
actually implementation of policies and procedures. As part of 
this study, we found certain flaws in policies and procedures, 
but for the most part, the controls that we looked at were 
adequate. The issue was that the employees were either not 
doing the control or not leaving a documentation trail that 
shows that they did the control. We believe that the problems 
that we found are for the most part the employee following 
mostly valid policies and procedures.
    Senator Grassley. OK. The General Accounting Office has 
documented extensive misuse of purchase cards. To what extent 
have you checked the Department of Defense payment records to 
verify that taxpayer dollars have been used to cover 
unauthorized purchases?
    Mr. Kutz. As part of this review, we audited the underlying 
records for these two locations. We're doing a DOD-wide 
purchase card review for you and Chairman Horn, as was 
discussed earlier today. So beyond what we found at these two 
locations, as you mentioned in your opening statement, we're 
aware that for the 2-year period there are 500 or so potential 
frauds DOD-wide. But beyond these two locations, we really 
can't speak to other findings or issues with respect to the 
purchase card program at DOD.
    Senator Grassley. Has anyone examined the Department of 
Defense payment records to determine if the Department of 
Defense is using tax dollars to cover unauthorized charges on 
travel card accounts? And this is in regard also to my asking 
the internal--or the Inspector General to do an examination of 
the most egregious cases, like Sergeant X that I talked about 
in my opening comments.
    Mr. Kutz. We're doing a DOD-wide audit of travel cards for 
you and Chairman Horn. And again, beyond that, I know Chairman 
Horn had a hearing on that in the spring, and the issues with 
respect to the delinquency of the Department were discussed 
extensively. Beyond that, we're in the middle of putting a plan 
together to look at this DOD-wide, and we will look at all 
aspects of management of the travel card program at the 
Department and hopefully report back to you and Chairman Horn 
in the Spring.
    Senator Grassley. And, Mr. Chairman, that will be the last 
of my questioning, but, once again, I want to thank you for 
your leadership in this area and would pledge to continue to 
work with you.
    Mr. Horn. Well, it's always a pleasure to work with you. 
When I was a Senate staff member in the early 1960's, there was 
Senator Williams of Delaware, and he was the one that really 
looked after all this, and I'm glad to see that your fine work 
goes in Senator Williams doing it. And they woke up when he 
came in asking questions, and I think that hopefully they will 
get your questions and get the point.
    In the group 2 days ago, I said we're going to have another 
hearing in 3 months. We're not going to just let this drift. 
And we're going to do that until the Pentagon gets organized 
and starts doing what any corporate group would do. So we need 
to get you on track. And when the Bank of America came in to 
see me, I said, goodbye, folks. Don't even talk to me about it; 
that, you know, you've taken that risk, and you should have--
you should have done just what the Bank of America would have 
done to its own people. So thank you.
    So we'll go down the line now and get everybody's testimony 
then. I've got a whole series of questions.
    So Captain John E. Surash, the commanding officer for the 
Navy Public Works Center in San Diego.
    Captain Surash. Good morning, Mr. Chairman. I'm Captain 
Jack Surash, commanding officer of Navy Public Works Center in 
San Diego. Sir, we provide the full range of Public Works 
services to the Navy and Marine Corps activities in the San 
Diego area. These services are provided to over 3,000 buildings 
on seven major bases, as well as military family housing 
located at several off-base sites. These commands and 
activities, including support for the many ships at the 
waterfront in San Diego Bay, consist of over 400 clients 
located in a 200-square-mile area. We must operate our business 
with the same price, quality, customer service and 
competitiveness issues that challenge and motivate all 
commercial businesses.
    The Public Works Center employs a workforce consisting of 
14 military and approximately 1,700 civilian and contractor 
personnel. Prior to the introduction of purchase cards, we 
obtained materiel requirements through a central procurement 
office. Frankly, this was a very cumbersome, bureaucratic, 
expensive and slow procedure.
    The purchase card plays a critical role in handling our 
daily operations in support of the Navy fleet and Marine Corps. 
During fiscal year 2000, my cardholders made over 56,000 
purchase card transactions valued at approximately $30 million. 
The purchase card replaced a procurement system that was not 
cost or time-effective for small dollar purchases.
    Mr. Chairman, in 1999 my command's internal review process 
uncovered several areas of concern. To determine whether these 
concerns were unique or systemic, we took the rather 
extraordinary step of requesting a review of our purchase card 
program by the Naval Audit Service. The auditors periodically 
updated me on these findings, and, based on their updates, I 
directed a number of changes be put in place.
    In September 2000, we published a completely reviewed 
purchase card instruction which strengthened internal control 
procedures. I instructed my agency program coordinator to 
conduct stand-down training for all cardholders, supervisors 
and approving officials. Purchase cards were suspended for any 
employee who did not attend this training. I also required my 
agency program coordinator to conduct refresher training on an 
annual basis for all cardholders, supervisors and approving 
officials. We reviewed the number of purchase cardholders, 
resulting in an approximate 30 percent reduction from about 360 
down to 247 cardholders.
    As a part of our new process, we now require the 
cardholder, the supervisor and the approving official to sign a 
certification on each monthly cardholder statement. I tasked my 
supervisors to review the cardholder package and provided them 
with a checklist to aid their review. I directed that all 
original purchase card documents be maintained in one central 
location, so that if the need arose, all documents could be 
easily retrievable. I also strengthened internal controls for 
the dispute process.
    GAO's audit covered fiscal year 2000. Mr. Chairman, I would 
point out that this is approximately the same period that the 
Naval Audit Service was conducting their review of my command. 
However, based on the GAO review, I learned there were a couple 
of areas that still needed to be addressed, so as a result of 
their investigation, I took the following action: A key issue 
was ensuring separation of functions between the person 
ordering material and the person receiving and accepting it. 
Our program had allowed cardholders to order and receive 
materials and services so long as someone else had made the 
original request for the material. I have now issued a revision 
to that policy that strictly requires that someone other than 
the cardholder accept and receive material and services.
    Although our cardholders had received the required 
training, I issued contracting warrants based upon the training 
they took. The training records were discarded at the time we 
issued the new instruction, and we conducted stand-down 
training. I have now directed that all future training and 
contracting warrants be maintained for historical audit 
purposes. In addition, I've added another person to my 
command's internal review staff and initiated a program where 
they independently perform a review of the purchase card 
program every month.
    The GAO presented a list of 39 questionable purchases. Mr. 
Chairman, we were already aware of 20 of these, all from three 
cardholders, as a result of our normal internal investigations. 
All 20 transactions were being handled through appropriate 
means involving our internal review office, consultation with 
the Naval Criminal Investigation Office and our own legal 
counsel.
    Research on the additional 19 transactions, 12 were, in 
fact, proper; 2 were disputed, and credits were received; and 2 
involved cardholders using the wrong card by mistake. The final 
three were valid official requirements; however, the purchase 
card was the incorrect procurement tool to use. In addition, 
the General Accounting Office identified 21 purchases that had 
been improperly spread to stay under purchase card thresholds. 
Further research shows that 12 were, in fact, split purchases.
    Mr. Chairman, however, much of the work at the Public Works 
Center is task-oriented. Purchases are made based on 
requirements that are known at a specific point in time. As 
work progresses, similar requirements may become evident, and 
purchases are made to fulfill the additional requirements. In 
these cases it may appear that purchases have been split to 
circumvent the purchase limits, when, in fact, the purchases 
were made based on requirements as they were known at the time. 
However, this is an area that we know we have to continually 
watch, and I have directed my people to do so.
    In summary, Mr. Chairman, we have previously recognized 
that management and control of our purchase card program 
required increased attention. The General Accounting Office 
pointed out some additional areas where revisions to the 
program were needed, and we are quickly making those changes.
    The purchase card program provides my command a flexible 
and powerful procurement method, one I truly believe makes us 
more responsive and cost-effective in meeting Navy and Marine 
Corps requirements. I fully recognize that proper controls are 
a key element, and I am committed to ensuring these controls 
are in place.
    This concludes my summary statement, Mr. Chairman.
    Mr. Horn. Thank you very much.
    [The prepared statement of Captain Surash follows:]

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    Mr. Horn. And we now go to Vice Admiral Keith W. Lippert, 
Director of Defense Logistics Agency, former commanding 
officer, Navy Supply Systems Command.
    Admiral Lippert. Mr. Chairman, thank you for the 
opportunity today to discuss the Department of the Navy 
Purchase Card Program. I am Vice Admiral Keith Lippert, 
currently serving as the Director of the Defense Logistics 
Agency. I took over on July 20th. I previously served as the 
Commander of Naval Supply Systems Command, or NAVSUP, from 
August 1999 to July 11, 2001.
    NAVSUP is the Department of the Navy's purchase card 
program manager, and in this capacity we are responsible for 
the establishment of Navy and Marine Corps policies and 
procedures for use of the purchase card and the management of 
purchase card services provided by Citibank. I am aware that 
there are issues surrounding the purchase card program. The 
Department of the Navy is addressing these issues, and I am 
confident that the policies, procedures and metrics that are in 
place to manage this 12-year-old purchase card program are 
adequate and comparable to the best practices of private 
industry. However, there can be improvements.
    The General Accounting Office noted during their outbrief 
to the Department of the Navy that its written purchase card 
policies and procedures are generally adequate. The Department 
of the Navy recognizes that program execution is not always 
perfect. Oversight procedures, however, exist to identify and 
address areas of concern.
    The Department of the Navy's Purchase Card Program is very 
successful overall and represents a significant business 
revolution in how the Department of the Navy purchases supplies 
and services. The card allows the purchase of commercially 
available supplies and services without the delay incident to 
the traditional purchasing process. The purchase card also 
reduces costs by consolidating transactions into a single 
monthly invoice for payment.
    The Department of the Navy's reliance on the purchase card 
continues to grow. Today the Department of the Navy buys 99 
percent of all requirements valued at $2,500 or less through 
the purchase card. And throughout the Navy and Marine Corps and 
in every commanding activity, there are more than 30,000 
purchase cards with 9,100 approving officials and 1,800 agency 
program coordinators providing management and oversight.
    The Department of the Navy purchase card policy establishes 
the structure and procedures used to manage the card program. 
The Department of the Navy's purchase card policy is available 
in hard-copy and on the Naval Supply Systems Command Web site, 
making it readily accessible to all. The Department of the 
Navy's policy establishes controls for the oversight and 
management of the program from the Department of Navy's major 
command level to the local activity cardholder. The controls 
cannot completely eliminate the occurrence of misuse. They can, 
however, deter and identify misuse.
    The greatest strength of the system is employee honesty. 
The workforce is relied upon to properly use the card and to 
report misuse. The Department of the Navy's Purchase Card 
Program is structured in a way to place responsibility and 
accountability at the lowest possible level, and the Department 
of the Navy trusts that its employees will execute these 
responsibilities with integrity.
    There are three separate processes that provide checks and 
balances. The first is the establishment of accountability at 
the various levels of the program. The program establishes 
oversight responsibility for each level of the subsequent 
levels below them. This structure is similar to that used by 
Citibank for its corporate customers and creates a multitiered 
network of oversight.
    The first tier, is the agency program coordinator, 
establishes cardholder limits and restricts vendor lists and 
conducts a semiannual review of purchase card use. Also 
resident at the local level is the approving official, who 
certifies all purchase invoices prior to payment.
    Another level of oversight is performed by the Department 
of the Navy's contracting personnel. Contracting personnel 
approve and monitor execution of purchase card activities. 
Financial management policy also establishes procedures for 
funds control. Additional reviews are also conducted by the 
Navy and DOD Inspector General and audit services.
    And finally, CitiBank, the Department of the Navy's bank 
card contractor, constantly monitors purchase card 
transactions. Since the inception of the purchase card contract 
with Citibank in November 1998, the Department of the Navy has 
made over 7 million credit card transactions. It is interesting 
to note that the commercial benchmark for vendor fraud and 
compromised card activity is 0.06 percent to 0.09 percent of 
the total dollar value spent. The Department of the Navy's rate 
is less than half of the commercial benchmark. One measure of 
the effectiveness of our oversight is that since November 1998, 
only 38 cases of fraudulent activity have been reported by the 
Naval Criminal Investigative Service.
    I would like now to address some of the Department's 
initiatives to improve our purchase card program.
    First, the Department of the Navy is in the process of 
moving from a manual purchase card process to a fully automated 
purchase card system, such as the Enterprise Resource Planning 
System.
    Second, the Department of the Navy has increased training 
of the Department of the Navy's employees to reinforce proper 
purchase card usage.
    And finally, the Department of the Navy is implementing 
electronic management tools such as Citibank's newly fielded 
dynamic reporting system that will permit it to better analyze 
purchase card transaction data.
    In conclusion, the purchase card is a vital acquisition 
tool for its service members and civilian employees. I commend 
the General Accounting Office audit team for identifying 
opportunities for the Department of the Navy to improve an 
extremely complex program. The Department of the Navy has taken 
actions to improve its existing program.
    This concludes my statement, and I am readily available to 
answer your questions, sir. Thank you very much.
    Mr. Horn. We thank you very much.
    [The prepared statement of Admiral Lippert follows:]

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    Mr. Horn. We now go to Jerry Hinton, the Director of 
Finance for Defense Finance and Accounting Service.
    Mr. Hinton. Good morning, Mr. Chairman. My name is Jerry 
Hinton, and I'm the Director of Finance for Defense Finance and 
Accounting Service. I welcome the opportunity to discuss with 
you the responsibilities for paying purchase card bills at 
DFAS.
    DFAS purchase card payment process is in accordance with 
the DOD Financial Management Regulation and DOD policy 
memorandum. Specifically, DFAS performs a prepayment audit 
review or audits before charge card payments are made. Their 
prepayment review includes checking for the procurement 
identification number [PIN], and, if needed, the subprocurement 
instrument identification number [SPIIN]. We check for the 
payees' names and addresses. We check that the invoice date is 
later than the purchase order date, that the invoice is 
originally invoiced, that the estimated pay date is correct, 
that the appropriate payment office is identified by the line 
of accounting reference, that the prompt payment or 
certification is provided, that the correct amount is being 
paid to include interest where applicable, and that only the 
charge that is certified by the approving official is being 
paid.
    In the case of the Navy, the entitlement system, which is 
called the Standard Accounting and Reporting System [STARS] One 
Pay, automatically schedules the payment through a disbursing 
module to make the payment when required.
    Now I would like to address the GAO draft that discussed 
duplicate payments for charge card invoices. We have confirmed 
some duplicate charge payments were made at DFAS San Diego 
during the period covered by the audit. Most of these payments 
were caused by Citibank error. Shortly after the duplicates 
were discovered, Citibank systemically corrected the problem 
that had contributed to the duplicate payments. All duplicate 
payments identified were recovered from Citibank.
    Mr. Chairman, that concludes my remarks, and I'll be happy 
to answer any questions.
    Mr. Horn. Thank you.
    [The prepared statement of Mr. Hinton follows:]

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    Mr. Horn. And we now have Patricia Mead, the Acting Deputy 
Assistant Commissioner, Office of Acquisition, Federal Supply 
Service, General Services Administration.
    Ms. Mead. Good morning, Mr. Chairman and members of the 
subcommittee. I am Patricia Mead, Acting Deputy Assistant 
Commissioner, Office of Acquisition of the Federal Supply 
Service. I am pleased to be here on behalf of the General 
Services Administration to discuss the governmentwide purchase 
card program.
    GSA has been responsible for contracting for purchase card 
services since 1989. The most recent purchase card contracts 
were awarded in 1998 to five banks as part of the GSA Smart Pay 
Program. The purchase card was initially adopted as a 
management tool. The purchase card replaced the paper-based, 
time-consuming purchase order process for small dollar 
procurements.
    Now, as the primary payment and procurement method for 
purchases under $2,500, the purchase card currently saves the 
government approximately $1.2 billion annually in 
administrative costs. In addition to these administrative 
savings, the government received refunds from GSA contractor 
banks in excess of $50 million last year based on total 
purchase card charges of $12 billion.
    Because the GSA Smart Pay Program was designed as a 
managerial tool, agencies have numerous tools for oversight of 
the program. GSA mandated that contractors provide electronic 
reports to agency managers. These reports are secure and easy 
to access via the Internet. Agencies use these reports to 
assist in the identification of questionable transactions; for 
example, split purchases, improper cardholder limits exceeding 
the cardholder's contract warrant authority, and fraudulent 
activity.
    While all payment mechanisms are subject to a certain 
degree of risk, GSA has built safeguards and systematic 
controls into the program designed to minimize risk. For 
example, when accounts are set-up, agencies determine what 
limits to set on each transaction. They are able to set limits 
by dollar amount per transaction, number of transactions per 
month, total per month and the types of businesses at which the 
purchase card may be used.
    In addition, the agency decides to whom a purchase card 
should be issued; any limits on the use of the card; approval 
procedures; roles and responsibilities; and degree of agency 
program oversight. Most agencies establish their operating 
procedures at the Department level with further refinements in 
the field locations.
    The controls GSA established in the contracts with the 
banks operate at multiple levels. Each cardholder with account 
activity in a given billing cycle receives a statement from his 
or her bank at the end of the cycle. This statement is a 
critical control. The cardholder receives training to 
understand the importance of promptly reviewing and approving 
the accuracy of the statement in accordance with agency policy. 
Operationally, after the cardholder reviews the statement, it 
is routed to an approving official or certifying official who 
approves the statement. This review is intended to validate all 
transactions as proper. Training has been established for all 
reviewing officials, emphasizing the need to report suspected 
card misuse to the agency program coordinator or to the 
Inspector General for further action.
    Liability for transactions made by authorized cardholders 
rests with the government. If the card is used by an authorized 
cardholder to make an unauthorized purchase, the Government is 
liable for payment, and the agency is responsible for taking 
appropriate action against the cardholder.
    The contract provides for agency program coordinators to 
oversee the program. The role of the agency program coordinator 
includes ensuring that cardholders properly use the card and 
monitor account activity. Because GSA Smart Pay is a critical 
managerial tool, agency program coordinators receive numerous 
reports on cardholder activity from the banks. To simplify the 
oversight process, transactions can be segregated by dollar 
amount, merchant type and frequency of transactions with 
specific merchants. Although reports can be helpful in 
identifying questionable purchases, reviewing and approval of 
transactions at the local level continues to be our most 
effective control mechanism.
    GSA recognizes that cardholder training is essential to 
ensuring proper use of the card. GSA provides online cardholder 
training free to all purchase cardholders. The training 
discusses how to make purchases with the card, roles and 
responsibilities of cardholders and ethical conduct. Many 
agencies choose to supplement this training with written, oral 
or online training of cardholders on agency procedures.
    GSA requires that all contractors participate in an annual 
training conference for purchase card program coordinators. 
Subjects of the annual training conference include electronic 
reporting tools, industry best practices, fraud monitoring and 
card management controls. The contractors are also required to 
provide onsite training to agency program coordinators. Written 
training materials provided by the contractors include 
cardholder guides and agency program coordinator guides. These 
address authorized uses of the card and responsibilities of the 
cardholder and the agency program coordinator.
    As part of a continuing effort to improve the card program, 
GSA has recently formed a purchase card roundtable comprised of 
25 agencies, which will address issues of concern, including 
fraud and program audits. This is an opportunity for agencies 
to share experiences and learn from each other.
    Finally, there is a full electronic record of all 
transactions under the GSA Smart Pay Program. This electronic 
footprint makes fraud or misuse far easier to detect than any 
paper-based environment. A strong training program, state-of-
the-art tools and a detailed review structure give Federal 
agencies all the tools and internal controls necessary to 
effectively run the purchase card program.
    But as stated in the recent GAO Report on Strategies to 
Manage Improper Payments, people make internal controls work, 
and responsibility for good internal controls rests with all 
managers. Agencies must use the tools GSA has made available. 
GSA will continue to work with our industry partners and our 
customer agencies to minimize risk to the Government and ensure 
proper use of the cards.
    Mr. Chairman, that concludes my prepared remarks today. I 
would be happy to answer any questions you may have. Thank you.
    Mr. Horn. Thank you.
    [The prepared statement of Ms. Mead follows:]

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    Mr. Horn. Our last presenter is Deidra Lee, Director of 
Defense Procurement for the Department of Defense. And I gather 
you do not have a written statement because you have been out 
of town, and you came back for this hearing, so thank you for 
coming.
    Ms. Lee. Good morning, Mr. Chairman. It's a pleasure to see 
you again. We have worked together on some other issues. I do 
not have a written statement for the record, as you mentioned, 
but I am here to tell you that I would like to assure you that 
the Department of Defense takes financial responsibility very, 
very seriously. We will look into these issues regarding the 
purchase card and other financial issues that have been raised. 
And I certainly look forward to working with GAO, the services, 
and this committee to make sure we have demonstrated to the 
taxpayer that we are spending their dollar wisely.
    Mr. Horn. We thank you for that, and we'll now go to 
questions. And let's start with Mr. Kutz.
    You have heard this testimony. Do you think they'll solve 
the problem, or is this just talk?
    Mr. Kutz. As I said earlier, I know Captain Valdes 
mentioned his enterprise resource system off-the-shelf package 
that's being implemented. I think that will certainly help 
automate some of the processes. But what we're talking about 
here, Mr. Chairman, is a people issue, a leadership issue and 
an accountability issue, and I think they have clearly the 
capability to do it. I have read the backgrounds of these 
folks. They have done fine service to our country, and I 
certainly don't have any doubt that they can fix the problems, 
but it's going to take attention and, you know, some of their 
precious time. And I'm sure they are busy with lots of things 
in the positions that they're in, but they are going to have to 
spend probably a little bit more time on this type of issue to 
make it happen.
    Mr. Horn. What do you think we should do, have a 3-month 
rule for this group also, and will you be doing a check and 
repeating what you have already done, put in your blue cover, 
and see if the recommendations are being implemented; or is 
this----
    Mr. Kutz. We could certainly do that. As we said earlier, 
we are looking at this issue beyond these two locations for you 
in a broader study of DOD purchase card usage. But certainly we 
would hope to work with these folks to deal with the 
recommendations and find valid ways to implement them. And if 
you would like us to report back to you this fall on that, we 
would be happy to do that.
    Mr. Horn. Let's get it done by November 1. And then in the 
meantime, you are going through two more operations, I take it.
    Mr. Kutz. We'll probably look beyond that. We had not 
looked at the Army or the Air Force, So we will probably take a 
look at Army and Air Force. I think of the 500 potential frauds 
that Senator Grassley mentioned, I believe 322 of them, based 
on my notes, are Army-related. So probably Army is the place 
that we will focus some case studies on in the immediate or 
short term.
    Mr. Horn. Admiral Lippert, it's your responsibility, I take 
it, now throughout the Defense Department, and you would have 
the same policies for the Navy that you will for the Army and 
the Air Force?
    Admiral Lippert. From NAVSUP's perspective, we set the 
policy for the Navy, and now as Director of the Defense 
Logistics Agency, I will be setting the policies within the 
Defense Logistics Agency, which is separate from the rest of 
the Department of Defense.
    Mr. Horn. But that is the right button to press if 
something happened?
    Admiral Lippert. Yes, sir.
    Mr. Horn. So I'm sure you will solve that problem.
    Mr. Kutz, in Admiral Lippert's testimony, he said the Navy 
rate of vendor fraud and compromised card activities is less 
than half of the commercial benchmark. Given your findings, do 
you think he is correct?
    Mr. Hast. Mr. Chairman----
    Mr. Horn. Mr. Hast is assistant to Mr. Kutz.
    Mr. Hast. In listening to the Vice Admiral's testimony, he 
stated that commercial fraud at Citibank is between 6 and 9 
percent.
    Admiral Lippert. That was 0.06 and 0.09 percent.
    Mr. Hast. Actually, it's 0.006 and 0.009. Those are basis 
points. And the credit card industry is running fraud at about 
6 to 9 basis points. We did not check to see whether the Navy's 
was half of that, but if they are 0.04, that would be 
significantly higher than what the credit card industry is, 
which is 0.006 to 0.009.
    Admiral Lippert. The numbers I was quoting were correct. As 
I said, it's 0.06 percent, which is not 6 percent, but 0.06 of 
1 percent. And the numbers that we got are quoted from 
Citibank.
    Mr. Horn. What's the best thing GAO can give to the Admiral 
that is the most important thing for him to look at in the next 
3 months?
    Mr. Kutz. Probably reducing the number of purchase cards or 
taking a long hard look at why there are this many purchase 
cards out there. It does appear for the Navy that there's 
47,000 or 48,000 purchase cards based on what we found in the 
records. I think there needs to be a look to see if that is 
something that is really controllable, or is that just way too 
many purchase cards to control.
    So I think the first line of defense here would be looking 
to make sure that we have the right number of cardholders, 
because the more cardholders you have, the harder it's going to 
be to train them, to monitor them, to review their 
transactions, etc. So, again, I would recommend that as the 
first thing to take a look at here.
    One other thing, and Mr. Hast can probably expand on this, 
is that those compromised accounts that I mentioned are still 
live out there, and I think somebody needs to immediately 
cancel those accounts.
    And, Bob, do you want to add to that?
    Admiral Lippert. Could I address that point, Mr. Chairman? 
The accounts he is referring to were identified by us in the 
Naval Criminal Investigative Service, and they asked us to keep 
those accounts open while they are doing an investigation. So 
why they are still open is, based upon their suggestions and 
direction to us, is that it's an ongoing investigation.
    Mr. Horn. Any comment?
    Mr. Hast. I understand that law enforcement would need some 
of those accounts to stay open, but when you have 2,600 
accounts open, you have the vulnerability of almost $230 
million worth of fraud if they got into the wrong hands and 
someone was able to exploit that. I think that's an awful lot 
of vulnerability to leave sitting out there.
    Mr. Horn. Well, I must say it seems to be that they're 
getting very high priced items, computer hand-held this and 
that, and they can go out and just simply say, Well, we needed 
it for whatever we did, and instead, they are making a few 
bucks on the side. Is that what you saw in some of this?
    Mr. Hast. Yes. Those were some of the types of cases that 
we reviewed.
    Mr. Horn. And if you were in the Admiral's place, what 
would you do? Would you just say, look, you are doing it for 
the Navy or the Army or the Air Force, we expect you to use 
that card in that way and not go out and make yourself a 
fortune.
    Mr. Hast. I am sure those controls are in place and those 
expectations are in place. I think that working with the credit 
card industry--and as I said, they are--working with Citibank 
on the front-end-loaded software that recognizes abnormal 
purchases and recognizes fraud is really the way to go. The 
credit card industry, when they found fraud creeping up, put a 
lot of money into research and development and developed front-
end-loaded fraud control, and they have been successful since 
1984 until the present in lowering fraud from close to 30 basis 
points down to 7 or 8 basis points.
    So I do believe that technology and working with the 
industry on the front-end-loaded system are the way to go.
    Mr. Horn. When the GIA started looking at this, did they 
have any reports from the Inspector General of the Navy or 
Defense or Army or Air Force? Where are the Inspectors General 
on these?
    Mr. Kutz. The DOD Inspector General is doing a Department-
wide study that has not been released. There were several Naval 
Audit Service audits done of the Public Works, and I don't know 
if they were requested by the captain or not. It sounds like 
they maybe were. One of those was issued in December 1999 and 
had some of the issues that we found for 2000. The other one 
was done for fiscal 2000. And I believe that the captain was 
briefed on that, and we do not know the results. So he may be 
able to elaborate on what the Naval Audit Service found with 
respect to Public Works.
    Mr. Horn. Admiral, when the GAO noted that 2,600 purchase 
card accounts were compromised, and many of these accounts had 
been hit for items such as jewelry, pizza and other 
inappropriate purchases, why hasn't the Navy canceled those 
accounts and just let them work their way back?
    Admiral Lippert. Mr. Chairman, that is the direction that 
we have from the Naval Criminal Investigative Services, to keep 
those accounts open while they are doing an ongoing 
investigation for fraud. So that's why we haven't canceled 
those immediately.
    Mr. Horn. So that service of the Navy is working on this?
    Admiral Lippert. Yes, sir. Yes, sir.
    Mr. Horn. And then I guess, Mr. Hast, why did the Office of 
Special Investigations get involved in the compromised card 
number case? Did you develop information that would help to 
identify the source of the compromised numbers or what?
    Mr. Hast. Yes. As part of GAO's review of the Navy Purchase 
Card Program, the Office of Special Investigations was asked to 
review ongoing Naval Criminal Investigative Service 
investigations. One investigation was the one with the 2,600 
cards, and we are especially interested in that because that 
seemed to have the greatest vulnerability. While NCIS initiated 
an investigation with a Secret Service task force, we conducted 
an investigation in which we developed information to help NCIS 
identify the source of the 2,600 numbers. Specifically, we are 
able to identify that the addresses on the list were shipping 
addresses, and they were a number of merchants that kept this 
type of information. NCIS has now identified that merchant who 
has verified that the list came from their data base and that 
two former employees were targets.
    Mr. Horn. Ms. Lee, as the Director of Defense Procurement, 
tell me how your office can solve this problem, and do you have 
ground rules?
    Ms. Lee. Yes, sir, we do. We have Department-wide policy, 
Department of Defense-wide policy on how the purchase card is 
to be used. As was discussed by GAO and others, we set the 
Department-wide policy, which is then implemented at the 
various services, at the various units. It certainly does run 
along these lines, which is make sure that people that need the 
card have the card; that their supervisor is aware of it; 
review of their purchases; and overall review of the system. 
And we will certainly take a look at where, if anything, we 
need to strengthen those policies, including training for both 
the individuals and the supervisors, to make sure we are 
protecting the cards.
    Mr. Horn. Had you had any knowledge of what was going on 
here in the last couple of months?
    Ms. Lee. Yes, sir, I was aware there was a review ongoing 
at those particular units. I was also aware that we have 
various IG looks periodically, and also that our regular 
procurement reviews that the services conduct of their various 
units, they look at their purchase card programs.
    Mr. Horn. Well, did you call in the various service IGs, 
the very service--people on the financial side? How do you 
operate on behalf of the Secretary of Defense?
    Ms. Lee. Periodically, certainly as these kind of issues 
arise or as we find them from our normal review process, we try 
to put out--and we discussed that I have an interdepartmental 
staff where all the services come together, and we talk about 
these kinds of issues and what they're doing at each service 
level. I also meet with the other defense agencies, who do, 
although not represented by the major services--we have a good 
number of people out there in that area as well. We look at 
what our overall policies are and periodically put out updates, 
reminders, and additional information to the whole Department 
for the purchase card program.
    Mr. Horn. Do you have other situations like this, and if 
so, what are you going to do about it?
    Ms. Lee. Mr. Chairman, we certainly are going to make sure 
that every time in every instance when there is a purchase card 
issue or a perceived issue that we investigate the appropriate 
circumstances and take the appropriate action. As has been 
mentioned here, the purchase cards are a valuable tool. We just 
want to make sure people are using them correctly.
    Mr. Kutz. Mr. Chairman, last week, just for your 
information, GAO testified on purchase card problems at the 
Department of Education. And so that is another place that we 
are aware of that has some of the same types of issues as we 
reported on here.
    Mr. Horn. Well, I thank you on that.
    Captain Valdes, going back to your computer purchases, you 
told GAO that the acquisition of flat panel monitors, which 
cost between $800 and $2,500, that that was justifiable because 
they use less energy than the traditional 17-inch monitors, 
which cost approximately $300. Could you share with the 
subcommittee the study showing that the savings in electricity 
offsets the additional cost of a flat panel monitor?
    Captain Valdes. Yes, Mr. Chairman. The benefits are in 
power savings. We have seen numbers upwards of 75 percent, And 
the recent Consumer Reports indicates such. But it's not just 
an electricity savings. That is important in California, as you 
might imagine. But it's just not----
    Mr. Horn. I advise people to take a candle to California.
    Captain Valdes. I've got one in my briefcase.
    We buy these flat panels for shipboard use. We put a whole 
network of ultrathin monitors on board USS Coronado, the 
flagship for the Third Fleet, and the purpose there was to save 
space, reduce the heat on board the ship, and to maximize the 
efficiency of the space that's available to the crew members, 
which already are very tight quarters.
    So there's a number of benefits to the flat panel display. 
The price is coming down significantly, and we feel in many 
areas with power savings--it's also fairly immune--well, it is 
immune to electromagnetic radiation effects. So if you have a 
CRT, and you are a high-powered transmitter, for example, you 
will see distortion with a standard CRT. With a flat panel you 
won't.
    So from a military point of view and from a space, 
electricity and weight point of view, it becomes very important 
for the Marine Corps. We use vans for radar air traffic 
control--these are very small vans, Mr. Chairman. And we use 
flat panels to save limited space in those vans.
    I'm also prepared to discuss some of the GAO findings as 
they relate to fraud if you feel it's necessary.
    Mr. Horn. Do you think the computers should be bought one, 
two at a time, or do you think the Navy should buy computers in 
bulk like other government agencies in order to get the best 
prices?
    Captain Valdes. That is a valid point, Mr. Chairman. I am 
going to look into how we might improve our procurement process 
with respect to bulk versus individually. Right now we buy 
these systems by project because that's the way the accounting 
works in the Navy Working Capital Fund Command. And I have over 
1,000 different projects at the Command. So the challenge there 
is going to be to align the dollars with the project to make it 
work. But I'll look into that.
    Mr. Horn. How many Palm Pilots did you have to give away, 
as it seems to be?
    Captain Valdes. Sir, we have used Palm Pilots, just like 
most folks in business do, to improve the efficiency and 
effectiveness of the worker.
    Mr. Horn. And what do you find that does for you?
    Mr. Valdes. Well, what it does is it allows people to 
manage their time effectively. It allows them to retrieve data 
fairly quickly. I use it personally to be able to manage my 
time during the day.
    Mr. Horn. Well, is it everybody that has to have one?
    Captain Valdes. No, sir.
    Mr. Horn. I see some of that here, too. But it just seems 
to me that not everybody has to carry one of these around. 
There can be a scheduler that does that.
    Captain Valdes. That is a valid point. For all purchases, 
we require that the supervisor or approving official approve 
the purchase. And so if an engineer or a scientist feels he 
needs a Palm Pilot, or one of our legal or professional staff 
members, then the supervisor will make that determination, sir.
    Mr. Horn. Now you haven't had that up to now, so is this a 
new policy?
    Captain Valdes. No, sir. We have always had the policy 
where the approving official makes a determination on every 
purchase. That's been a long-standing policy at the Center and 
in accordance with Navy and DOD policy.
    Mr. Horn. Who has to sign-off on a Palm Pilot?
    Captain Valdes. The supervisor and approving official.
    Mr. Horn. And what rank would that be?
    Captain Valdes. A typical supervisor is an engineer, 
roughly at what we call the DP-3 level, DP-4 level. So it is a 
senior supervisor engineer with typically 10 to 15 years of 
experience in government service. So that's really the level of 
approval that occurs.
    Mr. Horn. So this is in the senior Civil Service?
    Captain Valdes. Yes, sir. It is individuals who have 
seniority within Navy.
    Mr. Horn. How about the uniformed?
    Captain Valdes. Well, it's a similar approval. We only have 
80 military personnel, so it's typically a smaller group of 
people, but it's a senior-level person. In the case of if a 
lieutenant needs a Palm Pilot, it will be his or her 
supervisor.
    Mr. Horn. What did they do before they had a Palm Pilot?
    Captain Valdes. They carried a lot of paper.
    Mr. Horn. Are you thinking of a slide rule?
    Captain Valdes. Slide rules and paper.
    Mr. Horn. Seems to me you have got to make some tough 
judgments, and these are little toys for a lot of people. And 
gee, you know, I am at such and such a level, and look, I've 
got a Palm Pilot.
    Captain Valdes. Mr. Chairman, I'm going to look into it 
within my command.
    Mr. Horn. Meanwhile the taxpayers are making out their 
1040's and all.
    Could you give us some examples where you feel the 
organization's purchase card program was effectively managed, 
and what are you going to do about it, real fast?
    Captain Valdes. Yes, sir. Our management is, as I 
mentioned, at various different levels. We have management 
controls across the command. I mentioned the approval 
authority. I mentioned the supervisory controls. My plan is to 
reduce the number of cardholders. I've already reduced it by 18 
percent. I intend to approve training. We currently train every 
cardholder before the card is issued, and we have a very good 
track record in making sure that every cardholder gets training 
before the card is issued.
    What we need to improve on is refresher training, and I'm 
going to work to improve that posture in my command.
    Mr. Horn. When was that training implemented?
    Captain Valdes. We've always had that policy at the 
command.
    Mr. Horn. Well, if you've had that policy, and we've got 
fraud, I don't know why we can't get a new system.
    Captain Valdes. Yes, sir. When the GAO came to my command, 
they looked at all the folks that were carrying cards, and we 
provided them with assurances and documentation that they're 
all trained. Where we're weak is on some of the documentation 
to prove that the individual is trained. But all of the members 
of my command are trained prior to receiving a card.
    The other areas are refresher training--it's required every 
2 years. And we will work hard to catch up in that area.
    Mr. Horn. For those that seem to be mall happy, do we just 
take the scissors and cut the card in half? It would save a lot 
of taxpayers' money.
    Captain Valdes. Yes, sir. In the cases that GAO has 
highlighted and other cases that I'm aware of from our own 
internal controls, we revoke the card immediately.
    Mr. Horn. Mr. Kutz, is there anything you want to add?
    Mr. Kutz. I am sure what Captain Valdes said about the flat 
panel monitors is probably accurate, but I would note that we 
found them in the accounting department and with secretaries 
also. So I am not sure how that relates to the mission he was 
talking about.
    Captain Valdes. That was the power savings aspect.
    Mr. Kutz. And I did read the same Consumer Report in July, 
and I think according to that report, the entire cost of 
operating a normal computer for 5 years is about $57. So I 
would like to see his study that demonstrates the cost benefit 
of the electricity savings.
    But I do think the Navy needs to look at what they're 
buying with the purchase card. If we are going out and buying 
one and two computers at a time, are we paying full retail, and 
are we getting the full benefit of having the--or are we 
outweighing the savings that we've got from the streamlined 
acquisition process? The same thing with Palm Pilots. Whether 
they are a valid Government item or not, I am not certain. I 
know a lot of people that have them, and I'm not sure of anyone 
I know in the government or the private sector that has 
actually paid for them.
    So you need to take a hard look at what is actually being 
purchased and if the purchase card is the right vehicle for it, 
because my understanding is that buying computers in bulk 
results in substantial savings. And I know at GAO, we buy them 
400, 500 at a time.
    Captain Valdes. Right now, our numbers show that roughly 10 
percent of our total computer buys is flat panels. So it is not 
a pervasive issue throughout the command. It's roughly 10 
percent. But I'll look into decreasing that number.
    Mr. Horn. Captain Surash, the General Accounting Office 
noted that one of your employees effectively stole $2,500 by 
accepting a personal reimbursement from an insurance claim for 
stolen government property. Now, what action has the Navy taken 
against this individual for pocketing the reimbursement that 
belonged to the government?
    Captain Surash. Mr. Chairman, we were aware of a number of 
the issues that GAO had discovered. That one, though, was one 
we were not aware of, and I've disciplined--administrative 
discipline is quite possible. That is currently under review. 
We just found out about that a very short time ago, sir.
    Mr. Horn. Was it just one case, or do you know about more 
cases?
    Captain Surash. That is the only case with those 
particulars that I'm aware of, sir.
    Mr. Horn. Now, some of your employees were buying at 
Macy's, Nordstrom and Sam Goody. I don't know who Sam Goody is, 
so enlighten me.
    Captain Surash. Sir, the Nordstrom buy was actually safety 
shoes. We provide our--we're mainly a blue collar workforce. 
Our 1,700 folks for the most part are blue collar and not white 
collar and out maintaining bases, and a lot of our folks need 
safety shoes, and we pay for their safety shoes. In this 
particular case, we had one of my female employees purchase a 
set of safety shoes at Nordstrom for $99.95, sir.
    Mr. Kutz. We were talking about three gift certificates for 
$1,500. We are OK with the safety boots. We didn't question the 
safety boots.
    Captain Surash. On that, sir, there is a case the General 
Accounting Office discovered seven purchases that sparked their 
interest all from the same individual. Actually, there were a 
total of 22 transactions that we were already aware of and 
taking action on this individual.
    The action we took was we referred this case to the Naval 
Criminal Investigative Service. That--I do not have the final 
outcome of that particular investigation.
    At my command, sir, we have canceled 54 cards. Some of that 
was because we had some employees leave, but it was also 
because of misuse. I currently have 30 cards suspended as of 
the close of business Friday, and these were because our 
internal review process now has found things that we don't like 
are going on. There are three individuals that misuse was so 
serious that essentially I tried to fire them. In the Civil 
Service system, I issued a notice of proposed removal. And one 
individual was, in fact, fired, one resigned, and one was able 
to retire before I could complete administrative action on him, 
sir.
    Mr. Horn. Well, thank you. And that started last Friday? 
Nothing like a good old congressional hearing for some action.
    Captain Surash. That is not--those aren't actions since 
last Friday. The actions that I'm talking about are within the 
last year, sir.
    As I mentioned in my testimony, we did a major overhaul at 
my command effective in the fall of 2000. And unfortunately, 
the GAO review of things at my command was essentially before 
my major changes were put in place. I don't want to sit here to 
tell you that I've got a perfect running process, but it is 
much improved from what GAO saw during their onsite last year.
    Mr. Horn. Mr. Hinton, you've paid the bills. Do you have 
some kind of auditing control that would send up a red flag if 
a bill came through with large purchases made at Macy's or 
Nordstrom?
    Mr. Hinton. The way the system works today, we see the 
bills, but not the details behind it, we do not have the 
details available to us. We rely on the process that the 
Department has in place, that the certifying official, those 
people that have signed-off on these purchases, have looked at 
them and reviewed them.
    Mr. Horn. Wouldn't common sense in your organization say, 
wow, there's a real red light here? DFAS, what good is it? I 
mean, if you can't look at the check and say, good heavens, 
$2,500 for this? And, you know, especially when you see Macy's 
and Nordstrom.
    Mr. Hinton. As I said earlier, we cannot see that as 
Macy's. We receive a certification from the particular service 
that says--under the Certifying Officers Act, that 
responsibility rests with the person that does the 
certification. We have attempted to go in and look at some 
merchant category codes. We did a study--we have an operation 
to go in and look at some of the transactions, but they are 
normally after the buys and more after the fact as opposed to 
before the payment is made.
    Mr. Horn. Well, when you get that--it's really a purchase 
order of sorts, isn't it?
    Mr. Hinton. Yes, sir.
    Mr. Horn. Or are they paying it out-of-their-pocket and 
then turning it in? I don't think so.
    It just seems to me, DFAS is--you know, they've fouled 
things up for the last 10 years that I know about in Columbus 
where that place was just a mess. Now, I know you've improved 
that. And they were knocking off $1 million checks to people. 
And when they threw up their hands and said, I didn't have that 
contract, I mean, good heavens.
    What can your operation do, and why can't it do something?
    Mr. Hinton. Well, thanks Mr. Chairman, for recognizing some 
improvements in Columbus. I would just like to say just like 
the people mentioned at the table, DFAS is a part of the 
Department and will look at ways we can also improve our 
processes as well.
    Mr. Horn. Well, that's where I raised the flag of why the 
Inspectors General didn't check this sooner. And it seems to me 
we put them in there so they can get at things like this. So 
good old General Accounting Office comes in and does it.
    Mr. Kutz, anything you want to add to this?
    Mr. Kutz. With respect to preventing the payments of 
vendors like Nordstrom, Macy's, etc., the key control there is 
the monthly certification, which doesn't take place at DFAS. 
That takes place at the activity. And that's why it is 
important that each month, before the bill is paid, things like 
the Nordstrom, Macy's, etc., get flagged so you don't pay them. 
Rather than the pay-and-chase type of situation where you pay 
it, and then you go back and try find out later whether you had 
overpaid for things that weren't yours or were improper 
purchases. So that is the key control to making sure that you 
don't pay improper payments.
    Mr. Horn. And, Ms. Mead, does GSA have this problem 
throughout the Federal Government, or what's your reading on 
this?
    Ms. Mead. We're not aware of it going on unless an agency 
reports it to us.
    Mr. Horn. So you've setup a training program?
    Ms. Mead. We have a training program, and we have extensive 
electronic reports that enable the agencies to make their 
controls work. The data is available and very visible.
    Mr. Horn. Well, are you sure that those training exercises 
are being done?
    Ms. Mead. I am sure they are being done. We're not sure 
that the things that people are learning are being put into 
effect.
    Mr. Horn. Well, what would you do about it? Can you help 
them? I mean, you're putting training in, and then it seems to 
me that every agency has an Inspector General. And I can 
certainly ask, is the training being done? Now, is that 
training by GSA, or is it by the agency?
    Ms. Mead. GSA makes training available on a Web site, and 
the contract requires that the banks provide training to the 
agencies. So we do know people who attend the training once a 
year at the annual training conference.
    Mr. Horn. OK. So, could they find whether training has 
occurred or not just by asking the question?
    Ms. Mead. Of each of the Department agencies?
    Mr. Horn. Each Department. You're there because 
centralization and the Hoover Commission said, hey, we can save 
money for the taxpayers. Now that we find it, nobody seems to 
care much about it. And GSA ought to. You've got a very fine 
Administrator there, and I would think he would get at this.
    Ms. Mead. We see our role as putting the tools in the hands 
of the agencies so that they can have effective controls.
    Mr. Horn. So you've got a model training program; is that 
it?
    Ms. Mead. We think we have a good training program.
    Mr. Horn. Could you file for us at this point in the record 
just to see what it's like? Give it to the staff and we will 
put that in the hearing record. Thank you.
    Anybody else want to make any points on this that we 
haven't asked? This is your chance.
    Mr. Kutz. Mr. Chairman, there are two more I would make. 
One other thing that Senator Grassley pointed out is management 
of the issue of credit limits for individual employees on a 
monthly basis. That's something that the Navy probably needs to 
take a look at from the standpoint of should everybody have a 
$20,000 or $25,000 limit, or are there some that maybe could 
get by with a couple thousand dollars a month limit, which, as 
Mr. Hast said earlier, reduces your exposure?
    The other idea that was raised, and I'll let Mr. Hast 
expand on it, is the issue of credit checks, which probably 
does have some merit, because some of the frauds that we have 
seen are for people that had prior credit problems that were 
then given a government credit card and then committed frauds.
    Mr. Horn. Mr. Hast.
    Mr. Hast. I agree. I think it would be prudent that prior 
to giving someone a government credit card with a very high 
credit limit on it, we would check their credit and make sure 
that they behave responsibly in their personal life. I think 
someone who doesn't behave responsibly in their private life is 
much more likely not to behave responsibly with the public's 
money.
    Mr. Horn. Who do you see should do that credit check? Is it 
the bank? Is it the Navy or the Army or the Air Force?
    Mr. Hast. Whoever is issuing those cards. Whichever command 
is actually giving out the cards should set up a mechanism that 
they're able to do credit checks, and they're very easily done 
now by computer. They don't take a long time, and they are not 
very expensive.
    Mr. Horn. Well, is it easy for them to get the check? And 
if so, do they have to pay a fee for it?
    Mr. Hast. They would have to pay a fee for it.
    Mr. Horn. What is the fee?
    Mr. Hast. I would have to look. I'm not positive.
    Mr. Horn. Well, perhaps Captain Surash and Captain Valdes 
would know.
    Captain Surash. I'm not familiar with a fee for credit 
check.
    Mr. Horn. Well, maybe that's because nobody's ever done it. 
But let's look into that, and we ought to check on people's 
credit.
    Captain Valdes. Mr. Chairman, I would like to briefly 
discuss the abuse issue, with your permission.
    The GAO came to audit my command in August of last year. 
They spent 10 months. The total period of the audit was 10 
months long. During that time they looked at 50,000 
transactions, and they used an automated tool for that, which 
we are trying to get from them, on how to automatically review 
50,000 transactions. But they started with Citibank data, from 
what I understand. And they found 78 cases of suspicious 
vendors--what they term suspicious vendors; 78 cases out of 
50,000. Now we have--of those 50,000 transactions, they 
resulted in 6,000 vendors, and then they looked at each vendor 
to determine whether or not it was a suspicious case or 
suspicious transaction.
    I had our legal inspector general look at the GAO list, and 
they found the following: Of the 78 vendors and transactions 
that were suspicious from the GAO's point of view, the vast 
majority, 62 cases on the list, were for legitimate government 
purchases and transactions. There were six cases of stolen 
cards or third-party fraud. There were five cases in the GAO 
list that we found through our Inspector General and legal to 
be cardholder misuse; not fraud, but misuse. The total value of 
that misuse was $2,107. Every dollar is important. I take this 
seriously. But just to put it in perspective, it's $2,107 out 
of $45 million in transactions. There were four cases of 
erroneous use of the card, and there was one possible billing 
error.
    In summary, out of 50,000 transactions, a total of $45 
million, GAO data itself revealed five cases of cardholder 
misuse for a total of $2,107.
    I'm taking action, and I've already taken action on many of 
these cases, and I am going to pursue it. But I just wanted to 
make sure we put it in perspective, because I do not feel we 
have a problem--a serious abuse and fraud problem. In fact, I'm 
pretty proud of our workforce. I'm proud of their honesty and 
integrity. Over 99.98 percent of our purchases are for 
legitimate government use.
    Thank you, Mr. Chairman.
    Mr. Horn. Mr. Kutz, do you want to comment?
    Mr. Kutz. We only looked at supporting documentation for 
the two commands now for 400 to 500--or 4/10 to 5/10 of 1 
percent of the transactions. What the captain is talking about 
are our automated tools where we downloaded information from 
Citibank into our system to scan it for obviously abusive-type 
things, such as the Coach store, which popped out when we did 
that. We didn't look at 50,000 transactions. We scanned through 
for obviously fraudulent or improper types of things. So to say 
that we looked at 50,000 transactions and have no problem with 
anything but what we found is a mischaracterization of our 
findings.
    Captain Valdes. Sir, I did not say they looked at every 
transaction. What I said is that they scanned 50,000 
transactions for all vendors. From that, they were able to pull 
6,000 vendors that our command uses. And from that, they looked 
at 6,000 vendors and determined that there were 78 suspicious 
vendors or transactions. And that's the methodology that they 
used.
    Mr. Horn. And that is the one that you are using, too; is 
that correct?
    Captain Valdes. What I would like to do with that automated 
tool--right now, we do all this by hand. It's a manual process. 
I mentioned the Enterprise Resource Planning will help me 
automate that process, but I am also interested in tools to 
detect abuse, and whatever tools I can be provided with, I will 
use.
    Mr. Horn. Is GAO able to transfer that material?
    Captain Valdes. They have given us enough information to be 
able to find that tool, yes, sir.
    Mr. Horn. Any other comments?
    Well, Captain, this is the last comment I'll ask. Your 
staff justified the purchase of a leather briefcase from the 
Coach Store as being more durable and thus less expensive in 
the long run than other briefcases. Do you believe the Federal 
Government should be buying all of its employees briefcases 
from the Coach Store?
    Captain Valdes. No, sir. That was abuse of a purchase card. 
I have written a letter of caution to the employee, and she's a 
good employee, Mr. Chairman. She probably made an honest 
mistake and happened to be at Nordstrom and purchased that bag, 
and I think she'll do better next time.
    Mr. Horn. I won't comment on that.
    Let's see. In closing, we will check back 3 months from 
now, just as we're doing with the last group from the Pentagon 
this last week. With the advent of the new administration, we 
anticipate the type of problem we have been discussing today 
will be resolved. Secretary Rumsfeld has been very clear in his 
desire to make the Department of Defense accountable for the 
money it spends, and I want to be equally clear in my 
endorsement of that policy. The examination of government-
issued purchase cards has only just begun.
    I want to thank all of our witnesses today. I am sure there 
are ways you would have preferred to spend this morning. Let's 
hope there won't be need for another hearing on these two 
programs.
    I would like to thank the staff who put this hearing 
together, and this is on our side and the minority: J. Russell 
George behind me, staff director/chief counsel; Bonnie Heald, 
to my left, your right, professional staff member and director 
of communications; Scott Fagan, assistant to the subcommittee; 
Chris Barkley, staff assistant; Davidson Hulfish, intern; 
Samantha Archey, intern; Fred Ephraim, intern; Christopher 
Armato, intern.
    Minority staff: David McMillan, minority professional staff 
member; Michele Ash, minority counsel; Jean Gosa, minority 
clerk; and Christina Smith, Nancy O'Rourke and Lori Chetakian, 
our court reporters.
    So we will have a hearing where we can go over these things 
about 3 months from now. So we will be looking for that. So 
with that, we're adjourned.
    [Whereupon, at 12 noon, the subcommittee was adjourned.]

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