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



 
 THE USE AND ABUSE OF GOVERNMENT CREDIT CARDS AT THE DEPARTMENT OF THE 
                                  NAVY
=======================================================================

                                HEARING

                               before the

                 SUBCOMMITTEE ON GOVERNMENT EFFICIENCY,
                        FINANCIAL MANAGEMENT AND
                      INTERGOVERNMENTAL RELATIONS

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                            OCTOBER 8, 2002

                               __________

                           Serial No. 107-236

                               __________

       Printed for the use of the Committee on Government Reform


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








                       U. S. GOVERNMENT PRINTING OFFICE
88-886                         WASHINGTON : 2003
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                     COMMITTEE ON GOVERNMENT REFORM

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut       MAJOR R. OWENS, New York
ILEANA ROS-LEHTINEN, Florida         EDOLPHUS TOWNS, New York
JOHN M. McHUGH, New York             PAUL E. KANJORSKI, Pennsylvania
STEPHEN HORN, California             CAROLYN B. MALONEY, New York
JOHN L. MICA, Florida                ELEANOR HOLMES NORTON, Washington, 
THOMAS M. DAVIS, Virginia                DC
MARK E. SOUDER, Indiana              ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio           DENNIS J. KUCINICH, Ohio
BOB BARR, Georgia                    ROD R. BLAGOJEVICH, Illinois
DAN MILLER, Florida                  DANNY K. DAVIS, Illinois
DOUG OSE, California                 JOHN F. TIERNEY, Massachusetts
RON LEWIS, Kentucky                  JIM TURNER, Texas
JO ANN DAVIS, Virginia               THOMAS H. ALLEN, Maine
TODD RUSSELL PLATTS, Pennsylvania    JANICE D. SCHAKOWSKY, Illinois
DAVE WELDON, Florida                 WM. LACY CLAY, Missouri
CHRIS CANNON, Utah                   DIANE E. WATSON, California
ADAM H. PUTNAM, Florida              STEPHEN F. LYNCH, Massachusetts
C.L. ``BUTCH'' OTTER, Idaho          ------ ------
EDWARD L. SCHROCK, Virginia                      ------
JOHN J. DUNCAN, Jr., Tennessee       BERNARD SANDERS, Vermont 
JOHN SULLIVAN, Oklahoma                  (Independent)


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

    Subcommittee on Government Efficiency, Financial Management and 
                      Intergovernmental Relations

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

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
                      Bonnie Heald, Staff Director
                Dan Constello, Professional Staff Member
                          Chris Barkley, Clerk
           David McMillen, Minority Professional Staff Member





                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on October 8, 2002..................................     1
Statement of:
    Aviles, Dionel, Assistant Secretary of the navy, Financial 
      Management and Comptroller.................................    97
    Grassley, Hon. Charles, a Representative in Congress from the 
      State of Iowa..............................................     5
    Kutz, Greg, Director, Financial Management and Assurance, 
      U.S. General Accounting Office; Special Agent John Ryan, 
      Assistant Director, Office of Special Investigations, U.S. 
      General Accounting Office; and Rear Admiral Robert Cowley, 
      Deputy for Acquisition and Business Management, Research 
      Development and Acquisition, Office of the Assistant 
      Secretary of the Navy......................................    18
Letters, statements, etc., submitted for the record by:
    Aviles, Dionel, Assistant Secretary of the navy, Financial 
      Management and Comptroller, prepared statement of..........   100
    Grassley, Hon. Charles, a Representative in Congress from the 
      State of Iowa, prepared statement of.......................    11
    Horn, Hon. Stephen, a Representative in Congress from the 
      State of California, prepared statement of.................     3
    Kutz, Greg, Director, Financial Management and Assurance, 
      U.S. General Accounting Office, prepared statement of......    21


 THE USE AND ABUSE OF GOVERNMENT CREDIT CARDS AT THE DEPARTMENT OF THE 
                                  NAVY

                              ----------                              


                        TUESDAY, OCTOBER 8, 2002

                  House of Representatives,
  Subcommittee on Government Efficiency, Financial 
        Management and Intergovernmental Relations,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2 p.m., in 
room 2247, Rayburn House Office Building, Hon. Stephen Horn 
(chairman of the subcommittee) presiding.
    Present: Representatives Horn, and Schakowsky.
    Staff present: Bonnie Heald, staff director; Henry Wray, 
senior counsel; Dan Daly, counsel; Dan Costello, professional 
staff member; Chris Barkley, clerk; Ursula Wojciechowski and 
Juliana French, interns; David McMillen, minority professional 
staff member; and Jean Gosa, minority clerk.
    Mr. Horn. We are going to swear in people, so I'm going to 
start on panel two. And panel one is Senator Grassley, and that 
will come when he gets here.
    So let me just get Greg Kutz, Special Agent John Ryan, Rear 
Admiral Robert Cowley and Special--let's see, the Honorable 
Dionel Aviles, Assistant Secretary of the Navy for Financial 
Management, Comptroller. And come behind the table there, and 
if you would please raise your right hand--and any staff that 
are going to whisper in your ear. And the clerk will also get 
the ones in the back.
    [Witnesses sworn.]
    Mr. Horn. I want to get the staff because they will be 
wonderful people to put in the hearing.
    So a quorum being present, this hearing of the Subcommittee 
on Government Efficiency, Financial Management and 
Intergovernmental Relations will come to order.
    Today's hearing is on the use and misuse of government-
issued credit cards at the Department of the Navy. This hearing 
is the fifth in a series of subcommittee hearings to examine 
the purchase card and travel card programs at the Department of 
Defense. These programs were created to save taxpayers' money 
by streamlining the government's cumbersome procurement and 
travel procedures. However, over the past year-and-a-half, this 
subcommittee has heard so many examples of fraudulent and 
abusive use of these programs that it is impossible to know 
whether the programs have saved any money at all.
    Up to now, the Department of Defense has failed miserably 
to monitor the use of these cards. One employee who went on a 
$12,000 shopping spree at the government's expense was never 
disciplined. As I remember, it was a Navy person; and then she 
was dropped off by the Army. In fact, she was promoted. Others 
have used their government-guaranteed credit cards to buy such 
items as jewelry, expensive radios, designer briefcases and 
flowers. Travel cards, which are to be used for only official 
government travel expenses, have been used at gentlemen's 
clubs, gambling casinos, cruise ships, and, as you will hear 
today, even at brothels.
    You will also hear the failure to review one cardholder's 
statement, allowed that employee to make more than $250,000 in 
unauthorized and illegal purchases over a 10-month period. That 
employee spent thousands of dollars on Internet purchases, 
prepaid toll tags, remote-controlled helicopters, and even a 
dog.
    Until the subcommittee began this investigation 1\1/2\ 
years ago, no one seemed to notice these abuses or seemed to 
care. Records were missing. Equipment bought with the 
government credit cards was nowhere to be found. Monthly bills 
were rubber stamped for payment by overworked officials, who 
were responsible for hundreds of monthly credit card statements 
in addition to their other duties.
    The subcommittee focused on the Department of Defense 
because this one Department accounts for 65 percent of all 
purchase and travel cards issued by the entire Federal 
Government. Since the subcommittee began this investigation 
with the able help of the Accounting Office headed by the 
Comptroller General of the United States, the Department of 
Defense has taken several significant steps to strengthen its 
control over the purchase card program. The Department has cut 
the number of credit cards it issues. It has also limited the 
number of accounts each approving officer panels. In addition, 
the Department is developing a plan that will provide a 
foundation for credit card programs throughout the department. 
Meanwhile, the Departments of the Army and Navy have rewritten 
their purchase card policies and procedures manuals.
    The Department of Defense is also beginning to gain better 
control over its travel card program. Deadbeat employees who 
fail to pay their travel card bills will get their wages 
garnished. Those who write bad checks to pay their credit card 
bills will lose those cards.
    These are all the steps in the right direction, but much 
more needs to be done. It will take a sustained effort from the 
Secretary's office down to the local commanders and supervisors 
to clean up this mess. And that is precisely what Congress 
expects and the American taxpayers demand.
    That said, I will welcome our witnesses today and I will 
look forward to discussing strategies for resolving this 
egregious situation. I happened to be in the Pentagon this 
morning and Secretary Rumsfeld and I had a number of comments 
on this. He is outraged by what's going on; and when the war is 
over, why, I think he will really move things along.
    So we have Mr. Grassley, who has worked on this with us, 
and we're glad to have him here.
    [The prepared statement of Hon. Stephen Horn follows:]
    [GRAPHIC] [TIFF OMITTED] 88886.001
    
    [GRAPHIC] [TIFF OMITTED] 88886.002
    
    Senator Grassley. Mr. Chairman, did you want me to start?
    Mr. Horn. Yes.

    STATEMENT OF HON. CHARLES GRASSLEY, A REPRESENTATIVE IN 
                CONGRESS FROM THE STATE OF IOWA

    Senator Grassley. Thank you very much. I am sorry I missed 
your opening comments, or at least part of them. This is our 
fourth and final hearing on the joint oversight investigation 
of the Department of Defense credit card abuse. It has 
obviously been an honor and privilege for me to conduct 
oversight with the distinguished company that you make, Mr. 
Chairman. From day one, this has been a team effort and you 
have been a leader. With you up front in the driver's seat, we 
have accomplished much of our mission. We have done everything 
in our power to ensure that the taxpayers' money is spent 
wisely; most importantly, according to law. Our success is due 
to your outstanding leadership, and I thank you from the bottom 
of my heart. When you step down at the end of the session, you 
will be missed, especially by this Senator from Iowa.
    Your departure will leave a gaping hole in our frontlines, 
and it is going to be very hard to fill it. Courage is in such 
short supply in the area of congressional oversight. As I have 
repeatedly stated, you have put the glare of the public 
spotlight on a very dark corner of the Pentagon. In a huge 
bureaucracy, like the Pentagon is, daylight is never welcome. 
In fact, it is feared and hated. But shedding light on a 
problem like credit card abuse is the heart and soul of 
oversight. Our purpose from the beginning was to determine the 
scope of abuse and then figure out how to put a stop to it all. 
You have so graciously provided the venue where we could do 
what had to be done.
    Mr. Chairman, we started this investigation more than 2 
years ago. Yes, it's true we have come a long ways. We have 
seen the promised land, but we're not yet there. We have much 
more work to do before we get to the end of the road. At our 
first hearing July 30, 2001, we examined a sample of fiscal 
year 2000 purchase card transactions collected from two Navy 
organizations in the San Diego area. We found zero controls, 
extensive abuse, and total disregard for accountability. The 
Navy dismissed our findings as a few, in their words, ``unique 
and isolated cases.'' Not to worry, we were told. We don't have 
a problem, is what the Navy said. And obviously the implication 
was one rotten apple doesn't make the whole barrel bad.
    Then we had our second hearing 8 months later, March 13, 
this year. We went back to the same two Navy units for a second 
look. We examined a more current sample of fiscal year 2001 
transactions. And guess what we found? Results were the same, 
or maybe even worse. No effective controls, extensive abuse, 
and no accountability. After this go-around, the Navy started 
singing a different tune. Yes, we have a problem is kind of 
what they said. And I hope those words were spoken with 
sincerity and not just for our benefit.
    Mr. Chairman, our second hearing hit home hard. Department 
of Defense and other government agencies started scrambling for 
cover. Six days after our second hearing, Secretary Rumsfeld 
set up a charge card task force to clean up the mess. And I 
have thanked Secretary Rumsfeld for his quick action on that. 
He seems like a Secretary of Defense--as he stated in his 
September 10, 2001 speech at the Navy War College, that, you 
know, we're spending the taxpayers' money. I never really heard 
a Secretary of Defense much concerned about that. And this 
Secretary of Defense wants to get more bang for our dollar.
    And particularly when you're in an economy of winning a 
war--I mean, when you're in an effort to win the war on 
terrorism, or any other war, we all have to be pulling 
together, and that obviously includes the people with credit 
cards in the Defense Department.
    Now, after that charge card task force was set up, then 2 
months later, on May 7 this year, the Office of Management and 
Budget announced a crackdown on credit card abusers. OMB 
threatened to close 2\3/10\ million government credit accounts 
unless the agencies involved started controlling employee 
abuses. Inspectors general throughout the government launched a 
series of investigations directed at suspected credit card 
abuse. Then we had mandatory salary offsets, involuntary 
paycheck deductions taking effect. Offsets reduced Bank of 
America's annual credit card loss from $20 million per year 
down to $4 million a year. So all the people at the Department 
of Defense violating and misusing credit cards were dragged 
then, in a sense, to the teller's window with cash in hand to 
pay long, overdue bills.
    Then, Mr. Chairman, we had our third hearing, July 13, this 
year. We examined a much larger sample of Army travel and 
purchase card transactions made in fiscal year 2001 along with 
some from this fiscal year 2002. Once again, we got the same 
results: No controls, extensive abuse, no accountability.
    After our third hearing, I was contacted by my 
distinguished colleague from West Virginia, Senator Byrd. He 
had seen the news coverage of your hearing, Mr. Chairman, and 
wanted to put a stop to the abuse. The use of Defense 
Department travel cards to pay for lap dancing at Bottoms Up 
Lounge really got Senator Byrd energized. He suggested that we 
team up on a credit card amendment on the Department of Defense 
appropriation bills. And that was a golden opportunity, and I 
grabbed it because of the respect that he has in the U.S. 
Senate to get things done.
    Our amendment does several things. It puts the lid on 
Department of Defense credit cards, fiscal year 2003, at 1\1/2\ 
million. It makes credit card checks mandatory. It requires 
disciplinary action for abuse, and prohibits the use of credit 
cards in places like the Bottoms Up Lounge, and casinos.
    Our amendment was adopted by the Senate July 31. So, Mr. 
Chairman, as I said at the beginning, we have come a long ways. 
We have accomplished a lot. We have had an impact. We have good 
momentum, but the final outcome is obviously, like so many 
things in government, still in doubt. We are definitely moving 
in the right direction, but we don't have change itself. Real 
reform is still somewhere down the road.
    We must be certain that our impact is lasting and 
meaningful, and I would like to see a permanent solution. But 
how do we get from where we are today to a more lasting 
solution?
    In a moment Mr. Greg Kutz--and I hope I'm pronouncing his 
name right--of the General Accounting Office will be presenting 
his report on Navy and Air Force travel and purchase card 
transactions. Mr. Kutz is about to tell us the same story we 
heard at hearing No. 1, hearing No. 2, and hearing No. 3.
    The same identical pattern of abuse is apparent in this new 
General Accounting Office data. So the problems, Mr. Chairman, 
are systemic. This time we looked at a much bigger sample and, 
once again, the results are strikingly similar. Once again, the 
bottom line is the same: no controls, extensive abuse, no 
accountability. Failure rates for the Navy and Marine Corps on 
a standardized set of control tests were near 100 percent in 
key areas. Admittedly, the Air Force did slightly better. 
Overall, the General Accounting Office gave the Air Force a 
grade of C. The Army, Navy, and Marine Corps, by comparison, 
earned a grade of F.
    The new data did, however, point up one slight variation in 
pattern of abuse. The General Accounting Office once again 
found thousands of dollars in new travel card charges for lap 
dancing at gentlemen's clubs like the Cheetah Club. However, 
this time around there was a new twist. The General Accounting 
Office found abuse taken to new depths. The General Accounting 
Office discovered thousands of dollars in travel card charges 
for the procurement of services from prostitutes in Nevada. At 
least 53 Navy, Marine, and Air Force personnel got their 
official travel cards swiped at such places as Salt Well, Madam 
Butterfly and the Chicken Ranch.
    The reports delivered today by Mr. Kutz constitute the 
final phase of our oversight investigation. That means the 
General Accounting Office's work is just about done. For over 2 
years now, the GAO has been hammering away at a hunk of the 
Department of Defense iron on the congressional anvil. That is 
exactly what the GAO was set up to do, and they did it well.
    So it makes me happy to see the General Accounting Office 
doing its job. The GAO has been conducting a root canal 
operation that has been slow, methodical, very unpleasant, 
especially for credit card abusers and those responsible for 
curbing that abuse. The General Accounting Office's persistent 
probing at bases all around the country has created a lot of 
pressure and, of course, apprehension.
    The General Accounting Office, as we know, has fangs and 
has sunk them deeply into this problem. But all of a sudden, 
Mr. Chairman, when you lower your gavel and close this hearing, 
the pressure will drop to zero or close to it. So that worries 
me. What's going to happen? So in shifting gears in order to 
keep moving down the road toward credit card reform, we must do 
that: shift gears. I don't want to see all of your good work go 
down the tubes. I don't want to see the Department of Defense 
credit card operation get back to business as usual. I don't 
want all the good work to amount to nothing more than some 
simple ripple on the proverbial Pentagon pond. I will do 
everything possible to keep that from happening, but I am going 
to need all the help we can get.
    Thankfully, Mr. Chairman, I now think I know where the help 
may come from, because we have a new team coming on the field 
to play. The new team has a new coach, and the new coach has a 
new philosophy on how the game is supposed to be played. The 
new coach's name is Joe Schmitz. He is the newly appointed 
Inspector General of the Defense Department. He seems to speak 
softly, but I think he carries a big stick. Until now the 
Department of Defense IG has been AWOL on the credit card 
abuse, and that's changing fast. Under Joe Schmitz, the 
Inspector General is going to be proactive. The future looks 
brighter.
    The IG looks like he is really ready to grab the bull by 
the horns, and the man who is supposed to get the job done is 
Army Colonel Bill Kelley. He works for Mr. Schmitz. Colonel 
Kelley strikes me as a person who intends to succeed. He wants 
accountability as much as I do. The future of our oversight 
work may now be in Colonel Kelley's hands.
    Colonel Kelley is proceeding cautiously one step at a time. 
He envisions a plan with four phases. Phase one is essentially 
complete. His data mining operation is already up and running. 
Data mining is nothing more than a computer program that can 
search through a pool of transactions and identify and cull out 
suspicious charges. These are then subjected to further 
examination. In the first cut, Colonel Kelley's data mining 
operation checked 12 million purchase card transactions made 
between October 2000 and December 2001. Some 12,257 charges 
made by 1,571 cardholders got flagged. They just didn't smell 
right. More may be added to that list.
    As the data miners drilled deeper and checked out these 
charges, 62 potential fraud cases popped up onto the radar 
screen. Criminality ranged from $15 all the way up to 1.7 
million. All 62 cases have been referred to the Department of 
Defense criminal investigative units, the Defense Criminal 
Investigative Unit, the Naval Criminal Investigative Unit, the 
Criminal Investigative Division of the Army, and the Office of 
Special Investigations, Air Force. Forty of these cases were 
already known to authorities. That's a reality check. It tells 
us that the Department of Defense data mining operation works 
according to the specs.
    Colonel Kelley's data mining also discovered another 
important piece of information. While the Department of Defense 
authorities were aware of 40 of the 62 suspected fraud cases 
detected by data miners, most, if not all, were dead in the 
water. Nothing was being done. But no longer. Action is now 
underway across the board. In addition, Colonel Kelley's data 
miners uncovered hundreds of unauthorized and improper charges. 
These have been referred to senior management for possible 
disciplinary action. Now that's a description of phase one.
    I will go to phase 2. The more current sample of 7 million 
purchase card transactions will be surveyed covering the period 
January 2002 to August 2002. The scope of this review will be 
expanded to include overseas locations and nonappropriated 
funds activities. Data mining will be extended to travel card 
transactions during phase 3.
    Negotiations are already underway with the Bank of America 
to obtain data for some 35 million transactions starting in 
September 2002 and looking back 16 months. There's a problem 
with the Bank of America, because they want $12,000 for the 
data package; it seems to me they could contribute that to the 
Federal Government. But I am not involved in those 
negotiations.
    Colonel Kelley thinks that $12,000 is a ripoff, and he 
believes that access to that data is provided for under the 
travel card contract, and wants the banks to hand it over free 
of charge.
    So then we go to phase 4, which I would say is the 
automatic pilot approach of colonel Kelley. This is going to be 
more challenging. The goal is to set up a real-time, 
continuous, sustained, data mining operation covering all 
credit card transactions. Colonel Kelley wants to put data 
mining on auto pilot, and the final solution then must still be 
worked out in to the future somewhere. So it's not entirely on 
paper at this point and we don't have a schedule for it yet, 
but Colonel Kelley hopes that the Department of Defense and the 
General Services Administration can work together to create 
such long-term solutions.
    GSA is very impressed with the Department of Defense data 
mining operation and is working hard to create a comparable 
governmentwide data mining operation. He says that Commerce and 
Treasury Departments are ready to jump on the bandwagon, but 
that's just the beginning.
    So you have seen some benefit of your investigations just 
within the Department of Defense, Mr. Chairman, extending into 
other departments of government already. Phase 4 is the key, of 
course, to effective oversight down the road. What we're 
talking about, Mr. Chairman, is moving from today's snapshots 
in time, like those done by the Department of Defense and the 
General Accounting Office, to a fully automated data mining 
operation. Colonel Kelley believes we have the wherewithal to 
do it right and to do it soon. It's technically feasible. We 
just need to find the money, the people, and the organization 
to get the job done. Once the cardholders understand their 
transactions are under constant surveillance, all the abuse 
will come to a screeching halt.
    That may be naive for me to say that, but at least ongoing 
checks are going to keep it to a very minimum. There are always 
a few clever ones out there, of course, who will figure out 
some way of gaming the system.
    Now, Mr. Chairman, as I have said at other hearings, 
there's a value to hearing government credit cards, and we 
began these hearings by emphasizing that fact. So I will end on 
the same note. Government credit cards can work in the right 
kind of environment. The thinking behind credit cards at the 
Department of Defense is good: reduce paperwork, save money and 
streamline the process; make it quicker and easier for the 
troops to carry out the mission.
    When the Defense Department started down the credit card 
road, the whole idea was to adopt the best practices of the 
commercial sector. In the private sector, credit cards are a 
big success. That's because the control environment is very, 
very good. Somebody is always minding the store. Bills are 
reconciled and paid promptly. And in corporate America, if you 
abuse your credit card, you either lose it or get fired. So 
there's a need for trust and accountability.
    The control environment in the Pentagon is entirely 
different. That very key point has been repeatedly hammered 
home at each of our hearings. Every shred of evidence presented 
by Mr. Kutz and the General Accounting Office clearly indicates 
that there are no effective controls in place today and little 
or no accountability. Since credit cards are low-control 
financial instruments, credit cards require a high level of 
trust and accountability. Trust and accountability have to be 
the cornerstone of any successful credit card program. The 
total absence of credit checks for the Department of Defense 
cardholders erodes trust and it breeds mistrust and it invites 
abuse.
    The General Accounting Office data invariably shows that 
the worst abusers have had bad credit records stretching way 
back in time, records that are ignored by the Pentagon 
managers. The standard credit check should be a starting point, 
just like it is in the private sector. A clean report means you 
get a card. A bad report means no card. A satisfactory credit 
check, then, of course is a building block for trust and 
confidence.
    Department of Defense's no-credit-card-check policy is 
history, I hope, because it will be dead if the Byrd-Grassley 
amendment is adopted in conference and becomes the law of the 
land. Issuing credit cards willy-nilly , with no credit checks, 
no controls, no accountability, and monthly spending limits of 
up to $100,000 is a recipe for disaster. It just doesn't work. 
It leaves the door wide open to fraud and abuse. If the 
Department of Defense wants this program to succeed, then the 
Department of Defense needs to get on the stick and make the 
controls work. With effective controls and with some 
accountability, credit cards will work like they're supposed to 
work.
    Mr. Chairman, I am glad to be with you one last time on 
this issue. I would like to wish you well in retirement. And I 
hate to say it, but this is a bid farewell, at least not for a 
friendship, but our working relationship as Members across the 
Rotunda. So I say good luck and Godspeed to you. It has been a 
privilege working with you, and I thank you for your 
outstanding leadership.
    [The prepared statement of Senator Grassley follows:]
    [GRAPHIC] [TIFF OMITTED] 88886.003
    
    [GRAPHIC] [TIFF OMITTED] 88886.004
    
    [GRAPHIC] [TIFF OMITTED] 88886.005
    
    [GRAPHIC] [TIFF OMITTED] 88886.006
    
    [GRAPHIC] [TIFF OMITTED] 88886.007
    
    Mr. Horn. Thank you very much, Senator. You have a lot of 
things on your plate in the Senate where you chair a major 
committee. And you will have to keep on with our friends, and 
the General Accounting Office will have to keep on when they 
get the attention of the administration on this. When you think 
of all the problems we have in America with families that don't 
have enough things to eat on the table.
    So we thank you for coming and we will ask our panel two, 
which is Greg Kutz, Director of Financial Management and 
Assurance, U.S. General Accounting Office; Special Agent John 
Ryan, Assistant Director, Office of Special Investigations, 
U.S. General Accounting Office; and Rear Admiral Robert Cowley, 
Deputy for Acquisition and Business Management Research 
Development and Acquisition, Office of the Assistant Secretary 
of the Navy.
    We now have the ranking member here, Mrs. Schakowsky, the 
gentlewoman from Illinois, who takes a great interest in these 
fraudulent type of activities within the Federal Government 
when a lot of people in Illinois, just as California, could use 
that money for valid things. But right now, we're talking about 
people who are doing invalid and fraudulent things. So glad to 
have you here.
    Ms. Schakowsky. Thank you, Mr. Chairman. As we conclude the 
hearing on this issue in this Congress, I believe we have made 
considerable progress. These hearings have exposed major flaws 
in a relatively new program. These hearings have developed a 
clear understanding of the causes for those problems and we are 
in the process of setting out clear solutions to many of the 
problems that program management uncovered in these 
investigations.
    The GAO has been extremely helpful in developing the 
materials for these hearings, as well as keeping us well 
informed as how the investigations progressed. Our staffs have 
worked together in a collegial fashion, with the clear intent 
of carrying out our institutional obligations. These hearings 
are a model for how our Founding Fathers envisioned 
congressional oversight.
    I will be and have been seeking, Mr. Chairman, every 
opportunity to credit you for this and for your great work. 
It's my understanding that our staffs are working on a report, 
and if time permits we'll be able to bring that report before 
the full committee tomorrow.
    Despite GAO's indications in today's testimony that there 
is some improvement at the Navy, I find the lack of management 
oversight and control of the travel and purchase card programs 
at the Navy an embarrassment. From our first hearing to the GAO 
report before us today, the Navy has abdicated its managerial 
responsibility.
    At our first hearing on purchase cards at the Navy Space 
Research Center in San Diego, the commander of the Center told 
the subcommittee that his organization had effectively managed 
the purchase card program for 10 years. He went on to say, ``We 
firmly believe the purchases being made are for legitimate 
government purchases and ultimately benefit our customers.''
    At that hearing, GAO reported on improper purchases, 
including home improvement items from Home Depot, numerous 
items from Wal-Mart laptop computers, Palm Pilots, DVD players, 
an air conditioner, clothing, jewelry, eye glasses, pet 
supplies, and pizza.
    The GAO reported at the Space Warfare Center, ``The control 
breakdowns related to the frauds were so pervasive that the 
total amount of these frauds could not be determined.''
    Is this what the Navy calls a well-run program? We were 
told later that the commander who made those statements was 
gone, only to discover that ``gone'' meant that he had changed 
offices. Is that what the Navy calls accountability?
    At our next hearing nearly 9 months later, it was more of 
the same. The Navy insisted the program was well run, and GAO 
found purchases like Lego robot kits and Palm Pilots. To make 
matters worse, many of the items purchased with government 
purchase cards could not be found when the GAO went to look for 
them. The Navy explained that it was Navy policy not to 
inventory items that are easily stolen. Is this what the Navy 
calls responsibility? I couldn't believe that was true.
    And when the representatives of the Defense Department 
testified before us, I asked if that was DOD policy and was 
assured it was not. Despite what DOD said, the Navy still 
doesn't believe it needs to keep track of $500 cameras or $300 
Palm Pilots.
    Ethical standards at an agency are set at the top. Where is 
the Navy command in setting these ethical standards? The 
problems in the government travel card program are somewhat 
different, and here Congress must shoulder some of the blame. 
Congress passed a law that required agencies to issue 
government travel cards for all employees traveling on official 
business. We have learned that unlike the business environment, 
which was the model for this legislation, government travel is 
quite different. Nowhere is this more apparent than at DOD, 
where default and delinquency rates are well above the civilian 
average, and the Navy is among the worst in DOD.
    As we all know, many of the men and women who put their 
lives on the line to defend our freedom and security are quite 
young. Many of them are just out of high school, with little 
experience with independence and responsibility. We then ship 
them around the world, often on commercial airlines, and give 
them a government credit card to pay the way.
    We put guns into the hands of these men and women, and then 
give them extensive training on how to use those guns properly. 
We put many of our Nation's most closely guarded secrets of 
national security into the hands of these men and women, and 
make sure they are well aware of the consequences of divulging 
those secrets. But we put these powerful financial instruments 
into their pockets and provide no training in how to manage 
them, and there is no consequence for misuse.
    This is a management failure. There is one thing that comes 
up over and over at DOD, at the Education Department and at 
HUD. The management of these agencies was happy to get rid of 
the employees in the contracting offices and happy to get rid 
of the complications of providing employees with cash for 
government travel. However, management then turned its back on 
these programs. It is not surprising that these programs are in 
trouble.
    The Navy should be ashamed of the contents of the GAO 
testimony before us today. Just listen to a few of the 
conclusions:
    Critical internal controls were ineffective. Little 
evidence cardholders screened for required vendors. Little 
evidence of independent receipt and acceptance of item 
purchased. Little evidence that monthly purchase cards were 
reconciled prior to payment. Major commands failed to maintain 
accountability for pilferable items. Potentially fraudulent, 
improper, and abusive transaction.
    The testimony on travel cards is much the same. Delinquency 
rates are high. Write-offs are substantial. Soldiers pay with 
bad checks. Travel cards are misused and no one is held 
accountable. The list goes on and on.
    The Navy is not the only agency with these problems, but 
there is no solace in having company in disgrace. The ethical 
standards are set at the top by those who come before us to 
testify, and the failures reported by the GAO are an 
embarrassment that these managers should feel as deeply as 
those caught in the act. Just as it is our patriotic duty to do 
whatever is necessary to protect this Nation and to guarantee 
its security, it is also our patriotic duty to ensure that 
every taxpayer dollar spent is accounted for.
    Those precious dollars represent the hard work of the 
American public and must be spent wisely and with 
responsibility to ensure that our Armed Forces are capable of 
carrying out the important and challenging missions with which 
they are charged.
    Mr. Chairman, I appreciate your indulgence in allowing this 
lengthy opening statement. Thank you.
    Mr. Horn. We have Mr. Kutz as the Director for Financial 
Management and Assurance, U.S. General Accounting Office.

  STATEMENTS OF GREG KUTZ, DIRECTOR, FINANCIAL MANAGEMENT AND 
 ASSURANCE, U.S. GENERAL ACCOUNTING OFFICE; SPECIAL AGENT JOHN 
  RYAN, ASSISTANT DIRECTOR, OFFICE OF SPECIAL INVESTIGATIONS, 
U.S. GENERAL ACCOUNTING OFFICE; AND REAR ADMIRAL ROBERT COWLEY, 
   DEPUTY FOR ACQUISITION AND BUSINESS MANAGEMENT, RESEARCH 
DEVELOPMENT AND ACQUISITION, OFFICE OF THE ASSISTANT SECRETARY 
                          OF THE NAVY

    Mr. Kutz. Mr. Chairman and Representative Schakowsky, it is 
a pleasure to be here to discuss our audit of the Navy purchase 
card program first. With me is Special Agent John Ryan from our 
Office of Special Investigations.
    DOD has the largest purchase card program in the Federal 
Government. As of July 2002, DOD had 212,000 purchase cards, 
which is about 55 percent of the Federal Government's total.
    Today I will discuss our fourth in a series of audits of 
the DOD purchase card program. My testimony includes the 
results of our audit of the Navy, which includes the Marine 
Corps. I want to thank the Navy and Marine Corps for their 
cooperation throughout this audit.
    The bottom line of my testimony is that the control 
breakdowns that we identified at the two units in San Diego are 
indicative of systemic Navy-wide problems. As a result, the 
Navy purchase card program is vulnerable to fraud, waste and 
abuse.
    My testimony has three parts: first, the overall control 
environment for the purchase card program; second, the 
effectiveness of key internal controls; and third, fraudulent, 
improper, and abusive activity.
    First, for fiscal year 2001 and into 2002, we found a weak 
overall control environment. The Navy has not provided for an 
adequate infrastructure to effectively oversee and manage the 
purchase card program. Specifically, we found approving 
officials with unreasonable spans of control, excessive 
spending limits, inconsistent and ineffective training, and 
weak or nonexistent monitoring and auditing.
    The Navy has taken significant actions to improve the 
control environment over the program. Some of the more 
significant steps include, as shown on the poster board, 
reducing the number of purchase cards from 59,000 to 25,000, a 
reduction of nearly 60 percent; corresponding improvements in 
the span of control for approving officials to cardholders; 
reductions in spending limits at the four commands that we 
audited by about $140 million; improvements in the training 
program; and actions taken or planned on all 29 of our 
recommendations from our November 2001 report and a commitment 
to take action on the recommendations in our report that's 
being issued today. Continuation of these improvements would 
further improve management of the program.
    Second, for fiscal year 2001, based on statistical 
sampling, we found key internal controls failed from 58 to 98 
percent of the time. For example, oftentimes approving 
officials certified the monthly bill for payment without 
examining cardholder supporting documents. For many of the Navy 
fraud cases identified in our report, the certification of the 
monthly bill by the approving official was nothing more than a 
rubber stamp. Another area of concern at one location was 
missing documentation. Specifically, Camp Lejeune was unable to 
identify support for 29 transactions for $50,000. These 
unsupported purchases included vendors such as rental car 
companies, gift stores, and a stereo store.
    We continued to find accountability problems for property 
purchased with the credit card, including items such as 
computers and digital cameras. On a positive note, Camp Lejeune 
was able to find all 16 items from our statistical samples.
    However, the three Navy case study sites could not locate 
35 of 98 property acquisitions from our samples. For example, 
for one large computer buy at the Atlantic Fleet, they could 
not confirm the location of 187 computers and 87 flat panel 
monitors.
    Third, given the weak controls, it is not surprising that 
we identified potentially fraudulent, improper, and abusive 
charges. The fraud cases in our report relate primarily to the 
Atlantic Fleet and Camp Lejeune. We found cardholder fraud, 
vendor fraud, and fraudulent usage of compromised purchase card 
accounts. One large case at the Atlantic Fleet in Norfolk 
included cardholders conspiring with at least seven vendors to 
submit about $89,000 in bogus and inflated invoices. 
Cardholders received bribes and kickbacks because of their 
positions as Navy buyers.
    We also found that the Pacific Fleet provided five 
government purchase cards to employees of a private consulting 
firm. From March 1999 to November 2001, these five purchase 
cards were used for $230,000 of charges for airline tickets, 
hotels, rental cars, restaurants, flowers, and golf outings. 
This consulting company used the purchase card to avoid paying 
State sales taxes and obtained the Federal Government discount 
on airline tickets and hotel rooms. Within a week of our 
inquiry, the Pacific Fleet canceled these cards. We have 
referred this company to DOD for further investigation.
    Another case of potential vendor fraud related to 75 
charges for $164,000 that the Navy paid for in advance of 
receiving the goods and services. Most of these charges were at 
or near the $2,500 micropurchase limit. We found that for two 
charges, no services were ever provided, while in other cases 
the actual services provided were far less than the $2,500 paid 
for by the Navy. For one $2,500 charge, the vendor's own 
records indicated that only $72 of services were ever provided.
    These cases clearly demonstrate that the breakdowns in 
purchase card controls leave Navy and the DOD vulnerable to 
vendor fraud.
    In addition to fraudulent purchases, we also identified a 
significant number of improper and abusive purchases. Examples 
as shown on the poster board are food, including $7,000 of 
charges at a Norfolk hotel for local NAVSEA employees; 
clothing, including slacks shirts and a leather flight jacket; 
cell phone waste and abuse, including monthly charges for a 
cell phone that had been returned to the vendor 13 months 
earlier; unneeded computers, including 22 purchased in April 
2001 that were still in the original boxes in June 2002; 
designer leather goods, including totes and a folio that cost 
$300 at the Coach Store; 90 Palm Pilots costing $32,000, 14 of 
which had not been issued 20 months after the date of purchase; 
and Bose equipment, including $300 headsets used to listen to 
music and $350 clock radios purchased for officers' quarters. 
For these purchases, we generally found no documented 
justification. Rather, the Navy generally provided us with 
after-the-fact rationalization for the purchases.
    We also found that the Navy has not maximized its buying 
power when using the purchase card. For 122 vendors, each with 
over $1 million of 2001 business, the Navy had not negotiated 
reduced price contracts. We believe that the Navy could better 
leverage its buying power and negotiate discounts with these 
vendors.
    In summary, our testimony shows what can happen when 
financial management is broken and accountability is lost. The 
Navy has taken significant positive steps to improve the 
purchase card program. I applaud the Navy for their actions to 
date and their constructive approach to dealing with these 
issues.
    Secretary Rumsfeld has noted that transforming DOD's 
processes could save 5 percent of DOD's budget, about $15 to 
$20 billion annually. One small example of that transformation 
would be improving the management of the purchase card program. 
Maximizing the benefits of this program could save DOD millions 
of dollars annually. As we have said before, the effectiveness 
of our military force is second to none. I would challenge the 
Navy to achieve that same level of success with its financial 
management, including that of the purchase card program.
    Mr. Chairman, that ends my statement. Agent Ryan and I will 
be happy to answer questions after the Admiral goes.
    [The prepared statement of Mr. Kutz follows:]
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    Mr. Horn. This is Rear Admiral Cowley, Deputy for 
Acquisition and Business Management, Research Development and 
Acquisition, Office of the Assistant Secretary of the Navy. 
Admiral, we are glad to have you here.
    Admiral Cowley. Mr. Chairman and distinguished members of 
the committee, thank you for the opportunity to discuss the 
Department of the Navy's purchase card program. I am Rear 
Admiral Bob Cowley, Deputy for Acquisition and Business 
Management for the Assistant Secretary of the Navy for Research 
Development and Acquisition. In this capacity I am responsible 
for the establishment of the Department of Navy policies and 
oversight for the purchase card program.
    I am aware of and I am very concerned about the internal 
control and oversight issues identified by the General 
Accounting Office regarding the Department of the Navy purchase 
card program.
    First let me say that I believe increasing the 
effectiveness of the Department of Navy purchase card 
operations and improving internal controls and oversight, thus 
preventing waste, fraud and abuse, are synonymous. Let me 
assure you that the Department of the Navy personnel and the 
purchase card program have been working diligently to 
streamline purchasing and improve controls and oversight.
    The Department of the Navy continues to aggressively 
address the policy training and internal control weaknesses 
identified by the General Accounting Office. Over the past 6 
months, we have implemented many improvements. Specifically, we 
have established and reinforced and engaged in supporting from 
the top; made progress on implementing the DOD task force 
recommendations; reinforced and strengthened our written 
purchase card policies and procedures; completely revised and 
distributed training materials; enforced compliance with 
internal controls, including span of control and credit limits; 
and increased the use of technology to detect misuse and abuse.
    The Department recognizes that proper management and 
compliance of any program must be led from the top. We have 
engaged Department leadership in taking a proactive role in 
oversight, discipline, and setting a supportive command 
environment. The command environment which sets high 
expectations for integrity, program compliance, and prudent use 
of taxpayers' dollars is absolutely critical to the success of 
the program. The Navy's high standards have been clearly 
communicated to the Department's command leadership.
    The Department of the Navy has established and proactively 
enforces control for the oversight and management of the 
program, from the major command level to the local activity 
cardholder. We have set the span of control to be no more than 
seven cardholders per one approving official. All Department of 
the Navy approving officials are now compliant with this 
control. Credit limits have been reduced to be more in line 
with historic spending patterns, thus minimizing the potential 
for fraud and misuse.
    Finally, the Department of the Navy has implemented an 
internal data mining capability using commercial off-the-shelf 
software. This software emulates the methodology and criteria 
employed by the General Accounting Office to uncover 
questionable transactions. I am confident the program 
management policies, procedures, and controls that are now in 
place are addressing the program weaknesses highlighted by the 
General Accounting Office, and are comparable to the best 
practices of the private industry.
    In conclusion, the purchase card is a vital acquisition 
tool for our service members and civilian employees. I commend 
the General Accounting Office for identifying opportunities for 
the Department of the Navy to improve our program and I am 
committed to the continuous improvement of the program.
    Mr. Chairman, that concludes my statement and I will be 
pleased to answer your questions, sir.
    Mr. Horn. I am going to start with you, Admiral, in terms 
of some questions. Admiral, how extensive is the fraud and 
abuse in the Navy's purchase card program? Do we know?
    Admiral Cowley. Sir, we have implemented a data mining 
capability, as I just indicated. And in addition, we also are 
pursuing another recommendation from the General Accounting 
Office to engage the Naval Audit Service in a periodic forensic 
audit program that will allow us to assess the effectiveness of 
our management controls and to allow us to build a program 
baseline against which we can identify trends in our 
performance and begin to get our arms around the actual extent 
of the conduct.
    Mr. Horn. Well, you don't sound like you've got a lot of 
sanctions here. What sort of sanctions have you imposed on 
people in your command?
    Admiral Cowley. Individual commanders, commanding officers, 
and supervisors are empowered to administer the disciplinary 
process on a case-by-case basis. Disciplinary and other actions 
in response to purchase card misconduct is a matter of command 
and supervisory discretion. And what the Navy is doing in this 
area, specifically the Office of the Judge Advocate General and 
the Office of the Assistant Secretary of the Navy for Manpower 
and Reserve Affairs, is developing a set of guidelines to be 
used by commanders, commanding officers and supervisors. 
Without dictating which action must be taken, it will provide 
them with guidelines in dealing with purchase card misconduct 
in the future.
    Mr. Horn. Admiral, how many captains are below you in the 
Research Development and Acquisition group?
    Admiral Cowley. How many captains are below me?
    Mr. Horn. Yes.
    Admiral Cowley. There are three.
    Mr. Horn. What has happened to them now and what kind of 
supervisory network do they have for their command?
    Admiral Cowley. None of them are in a command position, 
sir. They are in staff positions.
    Mr. Horn. So they're staff. So where's the first line under 
you?
    Admiral Cowley. The first line under us is the eschelon 2 
command, sir.
    Mr. Horn. I couldn't hear you. What?
    Admiral Cowley. The eschelon 2 command.
    Mr. Horn. How many in that command?
    Admiral Cowley. We have Naval Sea Systems Command, the 
Naval Air Systems Command, Space and Naval War Systems Command, 
the Naval Supplies Systems Command, and the Naval Facilities 
Command.
    Mr. Horn. In your capacity, and you are testifying, what 
kind of supervisory actions have they taken in their particular 
command?
    Admiral Cowley. Beginning over a year ago, there have been 
a series of communications to the commanders requiring that 
they certify the internal controls in place at their commands, 
and, in addition, require that they certify the training of the 
individual participants in each of the watch stations in the 
purchase card program. They have in fact come in with those 
certifications.
    Mr. Horn. Does anybody check--at what level does somebody 
check to see that this isn't frivolous, and all the rest of the 
things we have seen in this organization. What has been told? 
So what do you see there?
    Admiral Cowley. The management controls are within the 
discretion of the commanders. However, as indicated earlier, in 
line with assessing the proper management, we are beginning a 
program of--with the Naval Audit Service for periodic surprise 
forensic audit to ensure that indeed, these controls are in 
fact implemented and are in fact operative on an ongoing basis.
    Mr. Horn. What enlisted type or officer type do your 
supervisors look at, the people in that command? I mean, we 
have to get down to the nitty-gritty. Nothing's going to 
happen--it isn't the way I see it--with the Navy unless they 
get with it. There are millions of dollars down the drain, and 
everybody's coming up here all the time with the authorizing 
and the appropriating committee, saying we need all this money 
for getting all this research and development and acquisition. 
That's your bailiwick over there. And the question is, where do 
you get a little money which you could use and put it to the 
research development? So what is the best way to get at this? 
You've got two captains that are staff. So how many people 
report to them?
    Admiral Cowley. It's a very small number on our staff.
    Mr. Horn. Well, I'm sure it might be, but even on that, who 
signs off on that--you, the captains, is there somebody else 
involved?
    Admiral Cowley. We have an APC, an Activity Program 
Coordinator, who reviews the purchase card program within the 
Office of the Assistant Secretary of the Navy for Research 
Development and Acquisition.
    Mr. Horn. So the Assistant Secretary, then, has the way of 
looking at the paper and seeing if it's not very quick? And is 
that the way it works with the Assistant Secretary?
    Admiral Cowley. The purchase card programs are set up 
within each command activity and are monitored on the basis of 
each command activity. I know I can address the programs on a 
number of the ships. In fact, they are set up--the supply 
officer, who is usually an O4 or O5 oversees the purchase card 
program. Each activity has, depending upon the person 
populating the command activity, established programs with what 
stations.
    Mr. Horn. Representative Terry has asked us to ask this 
question of Navy witnesses, and here it is: Is the Navy aware 
that it could use outside companies with expertise in the 
credit card business to assist it in gaining better control of 
the credit card programs? Has the Navy ever used such type of 
organization? Do you think it's worthwhile to explore and get 
something done?
    Admiral Cowley. Yes, sir, we do believe that. In fact we 
have two prototypes currently ongoing where we have procured 
data mining software, the same software used by the General 
Accounting Office, to allow us to review suspect purchases. So 
we are pursuing technology solutions to better enable us to 
manage the program; yes, sir.
    Mr. Horn. Admiral, we continue to hear reports from the 
General Accounting Office that the Navy loses computers. They 
aren't alone in the executive branch. I think we had 1,000 
disappear in IRS. And that's the tax collector. And flat panel 
monitors, digital cameras, video equipment, the list goes on 
and on. Why doesn't the Navy believe in accounting for 
expensive items such as these that can be easily stolen?
    Admiral Cowley. We do believe in accounting for expensive 
items that are pilferable or easily convertible to personal 
use. We believe records should be kept. In the past our 
instruction has not been in alignment with the financial 
management regulation or with the DOD regulation. We are 
bringing our instruction in alignment with those regulations 
which will require for accounting of those pilferable items.
    Mr. Horn. What is your highest figure that you consider an 
expensive one and one that ought to be looked at?
    Admiral Cowley. The capital threshold is $5,000. However, 
my concern with picking a particular dollar threshold would be 
the level at which people would then account for the material. 
Rather, we would rather have the individual commanding officers 
look at material, regardless of dollar value, that would fall 
into that pilferable material category; material which is 
critical to their mission accomplishment or is otherwise hard 
for them to repair and replace.
    Mr. Horn. I take it these are computers that are lap 
computers.
    Admiral Cowley. They may be, sir.
    Mr. Horn. Where people can carry it and off it goes?
    Admiral Cowley. That would be included.
    Mr. Horn. And the digital cameras and the flat panel 
monitors and the videotaping, some people have a great basement 
where they must have had all this equipment in there. It's the 
taxpayers'. And the taxpayers say, gee, I would love a little 
bit like that, but you can't.
    Mr. Kutz. Mr. Chairman, if I could add, one of the things 
that gets at your previous point is the fact that the 
management of this program is very decentralized. What happens 
with this program happens far, far outside the Beltway. This is 
not an inside-the-Beltway program. The spending is going on and 
the control of property is far outside. It is at the bases and 
the commands across the country.
    And I believe that the admiral's position that the Navy 
believes this should be accounted for may be true as an 
organization, but if you actually go out there to the locations 
in the field, that view isn't necessarily shared across the 
Navy. And that becomes one of the challenges the admiral faces 
in instituting change here, is that the culture right now is 
that this is not important and this is not something people are 
evaluated on. This is not something the NAvy has ever done 
before.
    So that is going to be a challenge for them to actually get 
accountability for this property, because for years people have 
not been doing it.
    Mr. Horn. And it's very tough to break into the culture.
    Mr. Kutz. And it is very difficult with the purchase card, 
when you are buying in some cases one or two items versus 
having it received at a central warehouse, to establish that 
accountability. What it requires is the purchaser to make a 
phone call or call the property book people and make sure that 
the property is actually entered into the property records and 
bar-coded. So it takes an extra step you wouldn't necessarily 
have when you have centralized receiving of property.
    Mr. Horn. Admiral, how do you plan to ensure that the 
changes you're making will result in a long-term improvement of 
the purchase card program?
    Admiral Cowley. Well, we have included in our enhanced 
training, in our improved training requirement for accounting 
pilferable material, and we intend to use our forensic audit 
program to ensure compliance with the management controls that 
are in place.
    Mr. Horn. Is anybody trying to get in the Naval Academy at 
Annapolis? Is there an ethics question? Is there a fraud bit? 
It seems to me if you're going to have very fine--and you do 
have very fine people there, but they need to know that if 
you're going to be a naval officer, you've got to be aware of 
your responsibilities, and what sanctions, and how you would 
deal with it. That's reality.
    Now, does anybody know whether Annapolis has any of this, 
before these young people get out in the Pentagon or the base 
or whatever it is? That's where it starts.
    Admiral Cowley. Yes, sir.
    Mr. Horn. And if you miss it, they'll say, hey, we do this 
all the time and that's baloney. You've got to cut through it 
and you've got to make sure that the money put to it by the 
taxpayers will still be around until somebody's walking off 
with it. So that's our worry.
    I went to many a hearing like this with Admiral Rickover 
and my counterpart, Mr. Chet Hollifield, and he turned 
Annapolis--the Navy Academy at Annapolis--around, and so did 
Admiral Rickover, and they made a major contact in the feeling 
there.
    And so I just would suggest that you might in what--you're 
talking with the Secretary of the Navy, he's a first-rate 
person, and he might want to take a look at this and say what 
kind of ethics, what kind of this and that ought to be at least 
one credit in the Annapolis. Same with West Point. And that 
would help. Then people would know, gee, there is something out 
there besides just leaping up ladders.
    So, Mr. Ryan, you've been a very able person, checking all 
of these things. You investigated a company that the Navy paid 
in advance for goods and services that were never provided. I 
believe the company is Digital Wizards in San Diego. Isn't that 
fraud? Shouldn't we be investigating all the Digital Wizard's 
business transactions with the Federal Government?
    Mr. Ryan. Mr. Chairman, based on previous testimony we had 
given, the full committee asked us to look into Digital Wizard. 
The committee sent a letter to Digital Wizard, asking for their 
work papers that directly related to the transactions submitted 
for those $2,500 transactions. At the time there were 75 
transactions that we needed to look at. We sent agents to San 
Diego. We looked at the paperwork as associated to those 
transactions. And it was troubling to us because we truly 
believed, based on the paperwork that we saw, that the 
government was paying and not receiving what they should have 
been getting. Several transactions that were $2,500, there was 
no work papers to support that anything was done. Other 
transactions for $2,500 had support papers for, as Mr. Kutz 
said $75; some for $600; some for a $1,000. So based on that, 
Agent Hill and the SPAWAR's people started to look at those 75 
transactions. We truly believe, just based on that 75, that the 
government was overcharged $34,000.
    We also uncovered during the course of the investigation--
--
    Ms. Schakowsky. Mr. Chairman, if you will yield, is this 
for product or for services?
    Mr. Ryan. Services. Also during the course of the 
investigation, we looked at--we found an additional 120 
transactions that we felt needed to be investigated. We passed 
those on to SPAWAR. After consultation with the staffs, we 
contacted DCAA.
    Mr. Horn. DCAA is the Defense Contract Agency.
    Mr. Ryan. We contacted them. We're discussing Digital 
Wizard with them with their field people in California. They 
have other contracts in excess of $10 million with SPAWAR. We 
believe that DCAA should look into all the transactions 
associated with Digital Wizard.
    Mr. Horn. Mr. Kutz, anything you want to add on this?
    Mr. Kutz. In addition to the vendor possibly taking 
advantage--and again it's potential fraud, I don't know if we 
can conclude it's fraud at this point, a vendor possibly taking 
advantage of the situation--the Navy is at fault for not 
looking to see that they ever received the goods and services. 
For each one of these transactions in violation of the Navy's 
own policy, they were paid in advance; in other words, they ran 
them against the credit card before the services were provided, 
and then nobody ever checked to see whether $2,500 was ever 
provided in services.
    So the Navy is also at fault here, in addition to 
potentially a vendor being responsible for this whole 
situation.
    Mr. Horn. Mr. Kutz, through your work on this issue, do you 
think that the Navy really knows the extent of fraud, waste and 
abuse in its purchase card program?
    Mr. Kutz. As the admiral said, with respect to the fraud 
that's out there that they're aware of, that there are 
investigations that are outstanding or cases that have been 
closed, they don't know what they know. In other words, they 
don't know what cases are out there. And he's talking about 
trying to put together some sort of a data base that can 
accumulate that information for purposes of learning and 
understanding what kinds of fraud have been perpetrated over 
time.
    They also don't know what they don't know. And that is the 
more troubling part here with the kind of control environment 
that you have over the purchase card program, is that the 
amount of unknown fraud that the preventive and detective 
controls are not catching could be significant, could be much 
more than what they actually know. So at the end of the day, 
they don't know in total, but the more troubling part is they 
need to do a better job of knowing what they know, which are 
the cases outstanding. And I believe that they agree with us. 
We have made a recommendation to them on that, and I am hopeful 
they will implement that recommendation.
    Mr. Horn. You found that the Navy has taken appropriate 
disciplinary action against the cardholders, but who else in 
the misuse of their purchase cards? And did it slop over into 
other services or----
    Mr. Kutz. With respect to discipline on the purchase card 
program, our report says we found no evidence of disciplinary 
action against anyone that had improper or abusive charges. We 
did find evidence when there was fraud, they did take actions. 
There were investigations and prosecutions and people have gone 
to jail. But for the improper or abusive charges, there has 
been no evidence of disciplinary action. I believe in one case, 
a cardholder had their card taken away.
    So I would say based on our work, there has not been 
disciplinary action, and certainly that is something we have 
recommended that they take a strong look at. Try to get some 
guidelines out there for some suggested possible disciplinary 
action for different kinds of offenses that the commands can 
use so we can see some sort of consistency of application of 
discipline.
    But again, you have an environment right now where people 
out there know they can get away with it and nothing has 
happened to date. I would say for the improper charges--we 
talked about the Lego toy robots, the clothes, food, etc., I am 
not aware of--except for one case of the leather flight 
jacket--any money being repaid to the Federal Government.
    Mr. Horn. Do you believe the Defense Department's 
management of its cellular telephones is an area in which there 
may be extensive waste and abuse?
    Mr. Kutz. Yes, that is something we have seen across the 
services. In my opening statement, I mentioned the case where 
they had turned the cell phone in 13 months earlier but were 
still paying the monthly cell phone charge. We have also seen 
lots of abuse of the cell phones where people are improperly 
using them for personal calls, business.
    We saw for SPAWAR--Mr. Ryan and I both looked at--that they 
handed out 60 or 70 cell phones to contractors who then were 
using them uncontrolled. And again, given that the contractors 
weren't given any instructions as to how to use the cell 
phones, they were using them for friends and family.
    The control problems are out there. There are some units 
that have done a better job of controlling this. But Mr. 
Chairman, the issue is nobody is looking at the monthly bill to 
make sure that the charges on there are for official government 
telephone calls. We have hundreds of dollars of cell phone 
calls coming in on individual monthly statements that are very 
questionable.
    Mr. Horn. Mr. Kutz, we have seen delinquency rates ranging 
from 10 percent to 18 percent in the Navy and Army travel card 
programs. Delinquency at civilian agencies appear to average 
from 4 to 8 percent. How do these rates compare to corporate 
travel programs?
    Mr. Kutz. You are speaking of the travel program?
    Mr. Horn. Yes.
    Mr. Kutz. With respect to the travel program, the Navy's 
and the government rates, as far as we can see--and the 
government rates are significantly higher than private-sector 
corporate travel programs. The banks were unwilling or unable 
to give us the information on what their actual delinquency 
rates were, and I guess that is proprietary information. But 
based on discussions with one company who does not want to be 
disclosed, their delinquency rate was less than 1 percent.
    At the General Accounting Office, our rates fluctuate 
between zero and 1 percent. But to be fair to the services, I 
don't think that would be a proper comparison. We have a much 
different demographic makeup of our people that hold credit 
cards, as do corporations. And so I believe that the rate that 
the services have tried to shoot for is 4 percent, which we 
have no evidence of whether that is good or bad, but given what 
we have at this point, that may be a reasonable delinquency 
rate for them.
    Mr. Horn. Mr. Ryan, in one of the cases you investigated, 
fraud was committed on a government travel account held by a 
cardholder who had died in 1999. Can you explain how these 
charges were made and why the account was not shut down?
    Mr. Ryan. Yes. That was a travel card account. What had 
happened was the cardholder was killed. At the same time of his 
death, there was the reissuing of his travel card. What had 
happened was the travel card went to his address that he had at 
the time he had died. However, his family had moved.
    It was forwarded back to the bank with a forwarding 
address, at which time the bank immediately sent the card to 
the forwarding address. Family members got ahold of the card, 
activated it through an automated system, and proceeded to use 
the card. It was due to the attention of the APC at the time 
who noticed that the card was being used in the vicinity of 
where the cardholder lived, contacted the commander, the 
commander advised the APC that the gentleman had died. But in 
the meantime the card was used extensively for fraud.
    We investigated it and were able to take pictures from the 
ATM machine, provide those pictures and the other evidence to 
the Secret Service in the region where the fraud took place, 
and it is my understanding they are investigating it.
    Mr. Horn. Now I yield to the gentlewoman from Illinois and 
the ranking member, Ms. Schakowsky.
    Ms. Schakowsky. Thank you, Mr. Chairman.
    I heard you say, Admiral Cowley, that you do believe that 
cameras and Palm Pilots, etc., should be inventoried and 
tracked, etc. But it was my understanding, Mr. Kutz, that last 
week when staff met, that was one of the GAO recommendations, 
but I thought that the Navy was in disagreement. Am I 
misunderstanding that? In disagreement with that 
recommendation? I'm just confused about where we really stand 
on that.
    Mr. Kutz. I believe initially they were in disagreement 
with that, but I believe now they would concur, and they are 
going to adopt the DOD-wide policy.
    Ms. Schakowsky. So beginning now, going forward? Or has 
that been--because that has not been my understanding, that you 
are going to look at those transactions.
    Admiral Cowley. Ma'am, my staff has looked at a draft of 
the instruction that would bring us in line with the DOD 
regulation and the financial management regulation, and I 
expect that will be issued within the near term. So we will be 
in compliance.
    Ms. Schakowsky. How soon is near term, because we keep 
having these hearings, and we keep hearing the same thing over 
and over again?
    Admiral Cowley. Ninety days, ma'am.
    Ms. Schakowsky. Within 90 days that will be the policy, and 
then you will begin to track those?
    Admiral Cowley. No, ma'am. We expect to aggressively pursue 
this and begin to track it as the training and information is 
put out to our individual cardholders.
    Ms. Schakowsky. So what is the 90 days?
    Admiral Cowley. It's for the instruction to be signed.
    Ms. Schakowsky. But you will begin implementing this plan 
immediately?
    Admiral Cowley. Yes, ma'am, through our Department of the 
Navy Business Office, which is the program manager for the 
purchase card.
    Ms. Schakowsky. Some of my colleagues have suggested that 
on these kinds of purchases, like the Bose clock radios, the 
designer leather goods, the $2,200 flat-panel monitors, etc., 
that officers like yourself should be held financially 
responsible for these abuses, or that we should hold the 
approving officer financially responsible for improper 
purchases. What do you think of those kind of proposals that 
somebody is going to pay?
    Admiral Cowley. I believe that is within the discretion of 
the individual commanders, commanding officers and the 
supervisors over those officers.
    Ms. Schakowsky. Has that ever happened?
    Admiral Cowley. I have no knowledge of that, ma'am.
    Mr. Kutz. Representative Schakowsky, there is one case 
where there was a leather flight jacket purchased that, after 
we discussed it with the individual involved, they repaid it, 
but as part of our work, we have only seen it once.
    Ms. Schakowsky. That is the individual cardholder who paid 
it back? Is that what you are saying?
    Mr. Kutz. I believe it was the person who authorized the 
cardholder to do it in that case.
    Ms. Schakowsky. Let me ask you then about disciplinary 
action of any sort on the others who have been guilty not so 
much of fraud, but these kinds of abusive purchases. How can 
the Navy come before us in the face of only one example of an 
individual being in any way held accountable? What kind of a 
message does that send about how we manage our affairs and 
spend taxpayer dollars?
    Admiral Cowley. Well, ma'am, I can address several cases of 
fraud where individuals were in-fact court-martialed.
    Ms. Schakowsky. Not fraud. I am talking about these kinds 
of clearly abusive purchases, not fraud. Are we going to just 
look the other way and say that is OK?
    Admiral Cowley. No, ma'am. We are not. As Mr. Kutz has 
indicated, this is a decentralized process, and as I indicated 
earlier, the Judge Advocate General and the Office of the 
Assistant Secretary of Navy for Manpower Reserve Affairs are, 
in fact, developing a schedule, a guideline for people to use 
in reviewing these cases, and without dictating actual action, 
they will provide commanders with a baseline from which to 
execute their disciplinary responsibilities.
    Ms. Schakowsky. I don't know, with all due respect, you 
know, I have not been here a long time, but thanks to the 
chairman, even in the short period that I have been on this 
committee, we have had hearing after hearing, and we hear those 
kinds of word. Oh, we're going to begin to establish procedures 
that will then result in blah, blah, blah. And yet no one to 
date through the whole period--except for one person--of these 
hearings has ever been held accountable. And we are in a period 
of time--I don't mean to vent totally on you, Admiral, but here 
you are. But we have, you know, $300 billion a year in the 
Department of Defense, and we are about to likely add another 
$50 billion to that. And as the Senator from my State used to 
say, $34,000--this is not exact words--here and there, pretty 
soon $24,000 here, $24,000 there, you start to get real money. 
And it seems that everywhere you look there is $10,000, 
$100,000, $1 million. And pretty soon it adds up to real money.
    And I am ready for someone to come back and not talk about 
process by saying, we have punished this many cases, and we 
have seen a reduction in this many cases of abuse, rather than 
constantly talking about what is going to be done.
    When do you think you will be able to come back to us and 
say, we have disciplined so many people, and this is how much 
money we think we have saved the government as a result?
    Admiral Cowley. Ma'am, I'd like to be able to tell you that 
now. I believe the guidelines will be out in the December 
timeframe.
    Ms. Schakowsky. And so then how soon will we be able to see 
results? If we held a hearing, unfortunately not with this 
chairman because of his retirement, but another hearing, when 
do you think that we will see some real results?
    Admiral Cowley. I think with the enhanced training that we 
have out there, I think in the near term. I'm not able to give 
an exact date, ma'am.
    Ms. Schakowsky. Well, we will be back. Some of us will be 
back.
    Mr. Horn. What is a near term and a long term in dealing 
with Congress? I mean, the reason they sent you here is they 
are going to give you another star if you can get through it 
all. Well, what are we talking about, 2 months, 3 months?
    Admiral Cowley. Six months, sir.
    Mr. Horn. Six months?
    Admiral Cowley. Yes, sir.
    Ms. Schakowsky. I see that there has been a reduction in 
the number of people that have credit cards. What has been the 
criteria in reducing the numbers, and are any kind of credit 
checks involved in that? Are these more categorical rather than 
individual?
    Admiral Cowley. The needs of the commander are what informs 
the number of purchase cards out there. We have, in fact, as 
Mr. Kutz indicated, significantly reduced the number of cards, 
about 32 percent by my look, coming down from 29,000 to 22,000 
cardholders, and that is based on the command's needs.
    Ms. Schakowsky. Mr. Kutz, is this at all based on increased 
management controls, or is this categorical?
    Mr. Kutz. I would say it is a positive step. I believe that 
they went back and scrubbed who actually needed to have a card, 
and so they have done it based on an instructed, disciplined 
look, and it is a very positive step, and it provides them the 
ability to better control this program.
    Ms. Schakowsky. But, again, would individuals be 
disqualified because of past behavior, or is it more this 
category of employee no longer needs a card?
    Mr. Kutz. It is not necessarily category. I think it is 
more that you don't need three people in a unit with a card, or 
you don't need people in a certain group, or you only need 1 
card for every 40 people in a group or something; whereas I 
don't know anything with respect to how they have cut cards. We 
haven't seen evidence of cutting cards for the discipline or 
people misusing.
    Ms. Schakowsky. Or prescreening?
    Mr. Kutz. No, they are not prescreening for that. No.
    Ms. Schakowsky. Let me see if there were other questions 
that I have here.
    Well, let me ask you Mr. Kutz, when we talk about the 
disciplinary action, how do you envision that DOD would 
appropriately deal with the discipline of abuse? Not fraud, I'm 
talking about abuse of the purchase card.
    Mr. Kutz. Well, what we've recommended is the guidelines 
that the admiral mentioned where they would develop some 
guidelines that commands could use to apply to various 
situations. The issue is going to be getting the commands to 
apply those guidelines in the real world when someone actually 
does an abuse and actually identify the abuse in the first 
place.
    One thing that is interesting about the improper and 
abusive charges that you mentioned, that for the most part they 
were authorized. That's why they're not fraud, generally. So 
you have the cultural issue, too, about what should we and 
shouldn't we buy with taxpayer funds. We shouldn't necessarily 
be buying food, clothing, luggage, Lego toy robots, etc., with 
taxpayer funds.
    Ms. Schakowsky. I have a letter that I am going to give to 
you, and after this I will ask the chairman if he wants to 
cosign, to begin an investigation on the issue of vendor fraud 
in the purchase card program, because it is clear from the 
little bit of look that you have given, that some vendors are 
submitting charges against purchase card accounts where no 
goods or services were delivered. And I think it is really 
important that we take a look at that to determine the extent 
of the problem and report back to us. But it sounds like you 
have begun to do a little bit of that look. I wonder if you 
wanted to comment on what you think we might find.
    Mr. Ryan. I think in the situation we are dealing with 
purchase cards, I hear a lot of we're going to buy this program 
and we are going to do this and we're going to do that. I think 
that when you get down to it, where the rubber meets the road, 
it falls upon the employee to bring a new employee in who is 
trusted, can make good decisions, and is accountable for the 
actions that they get involved in. We see, a lot of the 
investigations that we looked at, that the approving official, 
the cardholder, they have questionable backgrounds. They have 
financial problems, bankruptcies, failure to pay their bills or 
not making good decisions. These are the agents of the 
government. These are the people that we're giving the card to 
to use to make the right decisions.
    I think from the conversations I have had with the admiral, 
I think some of the ideas are wonderful about bringing in naval 
audit. I think it is great to have naval criminal investigators 
come in and join in a partnership to help the Navy identify the 
potential vendor fraud cases and the contractual fraud cases.
    But I also think that it's important that establishing a 
good basis, a good foundation, the foundation starts with the 
people who are using the cards and approving these 
transactions. If we can start there and make improvements, I 
think the admiral is headed in the right direction by bringing 
naval audit in to do surprise audits on certain units, having 
the criminal investigators investigate potential fraud cases, 
see if there is intent. And I think it will lead to exactly the 
vendor fraud situation that you are asking us to look at, 
because we're going to have vendors that are billing two and 
three times, four times. You have vendors that are using the 
credit card to steal the government's money, because if the 
cardholder is not paying any attention, they are going to pay 
the bill. We're getting bills for services, and we're not going 
out and checking it.
    So I think that what you are asking is what we have started 
to do. We have started to see. We have been able to work and do 
a lot of data mining and use that information to start to 
develop where we need to go.
    Ms. Schakowsky. But one thing about what you just said gets 
back a little bit to the question I was asking earlier. Do any 
of these protocols, these new procedures that we're 
establishing, deal with checking out the individuals as opposed 
to saying within a unit only so many people get a credit card? 
Are we going to have a screening process for individuals so 
that we can prevent the fraud in the first place or the abuse 
in the first place?
    Admiral Cowley. Well, ma'am, we don't have a credentialing 
process to speak of. However, in the training material that we 
have recently distributed, there is a process whereby there 
is--the accepting official would nominate cardholders, 
nominates personnel to become cardholders. So indeed there is a 
process. The individual who best knows that employee or the 
individual nominated to become a cardholder would have some 
knowledge of them from their working with them daily.
    Ms. Schakowsky. What do we know about the nominator, 
someone who makes the determination on who gets the cards? 
Look, I'm not interested in establishing some sort of a ``Big 
Brother'' routine here, but if we're putting in the hands of 
individuals the opportunity to use taxpayer dollars to a large 
extent, I want to know that we have checked these people at 
some level and that there is some process at least that we look 
into their ability to exercise that authority correctly. It 
doesn't sound like anything in the new procedures you are 
setting up go to the individual level. I just want to suggest, 
based on what I'm hearing, that's a really important thing to 
do.
    I have one more question. Mr. Kutz, you said something, and 
I did not quite get it; 58 to 90 percent of the time in 
something you checked. What was that?
    Mr. Kutz. That was our statistical samples over the basic 
controls we tested for screening for vendors, independent 
receipt and acceptance, proper approval of the credit card bill 
by the approving official. And that is where we found the 
failure rates of 58 to 98 percent. And that is where the 
documented evidence was not there to show that it was done for 
that percentage of the statistically selected transactions that 
we looked at. And again, there may be instances where the 
documentation--the person did it, but did not document it. But 
in many cases it was clear, based on discussions, span of 
control or whatever, that the people had not done their job 
with respect to the purchase card.
    So that's a very high failure rate though, but consistent 
with what we reported on the Army 2 months ago.
    Ms. Schakowsky. Right. But this is for services, whether or 
not services were rendered for the money that was spent?
    Mr. Kutz. That would be one--yes, because when you are 
doing the independent receipt and acceptance or the review of 
the monthly credit card bill, you would be making sure that 
goods and service were provided. So, yes. That would be an 
example and the fraud case that we talked about earlier would 
be an example of where those controls broke down.
    Ms. Schakowsky. Admiral, when we're looking at 58 to 98 
percent, that is a huge challenge in front of you. What is an 
acceptable number do you think? We're talking about 4 percent, 
but----
    Mr. Kutz. That was on delinquencies.
    Ms. Schakowsky. On delinquencies. What is an acceptable 
rate? Obviously anything lower than that will show progress. 
Where are you aiming to get to?
    Admiral Cowley. I don't believe any number is an acceptable 
rate there, ma'am. I think we should continue to try to improve 
the process by identifying those vulnerabilities in the 
process----
    Ms. Schakowsky. In some cases----
    Admiral Cowley [continuing]. And mediate them.
    Ms. Schakowsky. In some cases almost 100 percent bad.
    Admiral Cowley. Yes, ma'am.
    Ms. Schakowsky. We have a lot of work to do. Thank you.
    Mr. Horn. The honorable Dionel Aviles, Assistant Secretary 
of the Navy, Financial Management and Comptroller, if you could 
come in and join the club. We will keep the three witnesses and 
add the Assistant Secretary.
    The Assistant Secretary was nominated by President George 
Bush, June 12, 2001. He has had a rich career here in the 
executive branch. He served in the National Security Division 
of the Office of Management and Budget, and he has been a 
budget examiner for Navy procurement for their search and 
development programs, and he probably met the admiral somewhere 
in that. He was a program engineer in the private sector as 
well as the public sector.
    So since you're the one that really knows financial 
management, and comptroller is a key position, if you could 
give us some thoughts on that and what you're doing in the Navy 
to either solve this thing of purchase cards and travel card 
and give us your thinking.
    The Assistant Secretary and then----

 STATEMENT OF DIONEL AVILES, ASSISTANT SECRETARY OF THE NAVY, 
              FINANCIAL MANAGEMENT AND COMPTROLLER

    Mr. Aviles. Thank you, Mr. Chairman.
    Mr. Horn. Do you have to leave?
    Mr. Aviles. Happy to defer to my fellow witnesses from GAO.
    Mr. Chairman, thank you for the opportunity to discuss the 
Department of Navy Government Travel Charge Card Program and 
our recent efforts made to improve its performance.
    I am Dionel Aviles, the Assistant Secretary of the Navy for 
Financial Management and Comptroller, and in this capacity I am 
responsible for the Department of Navy policies associated with 
the Government Travel Charge Card Program.
    As you will likely hear from the GAO witnesses, there have 
been several instances of delinquency and misuse in the Navy's 
travel card program. I share your concerns about these problems 
and thank you for focusing attention to this most serious 
issue.
    I would like to tell you about some of the corrective 
actions that we're taking to improve the program. As was 
discussed at a previous hearing, we use two types of travel 
accounts--centrally and individually billed--in our travel card 
programs. Since the individually billed accounts, those held by 
our sailors, marines and civilians, are the ones that involve 
the incidents of delinquency and misuse that we will hear 
about, I will confine my remarks to those accounts.
    Individually billed accounts are issued by the bank in the 
name of the individual who is solely responsible for the timely 
payment of all charges made on the account with their personal 
funds. Cardholders sign an agreement that makes them personally 
responsible for payment in full of the amount indicated on the 
monthly statement. The overwhelming majority of our cardholders 
adhere to this agreement by using the travel card properly and 
paying the amount they owe promptly.
    Regrettably a small percentage of our cardholders do not 
follow the rules or in some cases, due to circumstances they 
may not be able to control, are unable to pay their balances in 
a timely fashion. To address the problem, we are taking 
aggressive action to reduce incidents of misuse and 
delinquencies.
    Examples of these efforts include, No. 1, strengthen 
controls. Last April we established a new delinquency goal for 
all commands of not more than 4 percent of the total dollars 
outstanding on our total of accounts being more than 60 days 
past the billing date. Commands failing to meet this goal are 
required to implement additional remedial actions that include 
deactivation of card accounts until just prior to an 
individual's travel, conducting spot checks for inappropriate 
card use, and increasing spot checks if a pattern of possible 
misuse arises.
    Earlier this year I sent out over 7,000 letters to each 
cardholder who was 60 days or more delinquent past the billing 
date, urging them to pay their bill, alerting them to the 
consequences of continued delinquency, and providing a point of 
contact in my office for questions.
    Three, command attention. I have met with the senior 
leadership--this is at the two- and three-star admiral level--
of all the major commands failing to meet the delinquency goal 
discussed above, requiring them to provide specific actions 
that they are taking to improve performance. These regular 
performance reviews will continue for commands that fail to 
meet the delinquency goal.
    No. 4, deactivation upon transfer. I have directed that all 
commands include travel card managers in their personnel 
checkout procedures to ensure accounts do not remain active 
when cardholders depart an organization. This change should 
discourage the use of the card during permanent change of 
station moves, which normally take a longer period of time to 
reimburse than the temporary duty travel for which the card was 
intended.
    Five, misclassification of merchants. I have asked that the 
DOD travel card program manager review and change potential 
erroneous merchant codes. You will hear from the GAO witnesses 
of cases where merchants with improperly classified codes are 
making it difficult for travel card managers to spot incidents 
of misuse.
    No. 6, debit card option. We are working with the 
Department of Treasury to prepare a prefunded or debit travel 
card pilot program to determine if it may be a viable 
alternative to the current charge card program for at least 
some of our members. Last March the Under Secretary of Defense 
Comptroller established a charge card task force to evaluate 
the Department's purchase and travel card programs. The task 
force's preliminary recommendations for the travel card were 
released in June, and we are working to implement those 
recommendations. For example, we have begun a pilot program to 
identify potential misuse by monitoring unusual activity. 
Accounts identified for potential misuse are immediately 
deactivated until travel card managers or the cardholders are 
contacted to confirm the transactions.
    To further automate this process, we have procured the same 
software used by the GAO to conduct their data mining efforts. 
We are canceling accounts with no activity for the proceeding 
12 months. This effort has resulted in the cancelation of over 
80,000 card accounts. These are in addition to over 40,000 
accounts closed by previous Navy reviews.
    Last May we held a training conference for more than 350 
east coast travel managers, and we have scheduled another one 
for November for west coast managers, and I have over 300 
attendees signed up. We are also developing tailored computer-
based training for all cardholders, travel card managers, 
commanding officers, and supervisors.
    Additionally, the task force recommended the use of the 
split disbursement method of payment. This is where a portion 
of the travel entitlement goes directly to the bank on behalf 
of the cardholder. The Navy strongly supports and encourages 
the use of split disbursement and believes this can go a long 
way toward resolving delinquency issues.
    Some of the problems experienced with the Government Travel 
Charge Card Program can be traced to its implementation. At its 
inception, many of the people in the Navy and the Marine Corps 
thought that every sailor, marine and civilian in the 
Department were required to have and use the travel card. Many 
commanders thought that we had contracted with the bank to 
manage this program, and their personal attention was not 
required. Many cardholders did not understand their ultimate 
obligation to pay their charge card bill and the restrictions 
placed on the use of the card. The confluence of these 
misperceptions helped to get us where we are today.
    In closing, only the persistent and pervasive involvement 
of the Department of the Navy's senior leadership and 
commanders will improve this program. I can't promise you that 
the changes that we have made to date will be enough to correct 
all of the problems that you will hear about today. Indeed with 
this type of card, we will always have some level of 
delinquency and misuse. However, I do believe that we're 
changing perceptions about this program and beginning to fix 
some of its problems, and I promise you that I will not relent 
in focusing my personal attention on this problem.
    Thank you, Mr. Chairman. This concludes my remarks, and I 
stand ready to answer any questions that you may have.
    [The prepared statement of Mr. Aviles follows:]
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    Mr. Horn. I have just one question for you, and then we 
will move back to the Comptroller General.
    You're on the task force for the Navy. Were you also on the 
task force that the Secretary of Defense set up to deal with 
this?
    Mr. Aviles. Yes, sir. That is Dr. Zakheim, the Under 
Secretary of Defense Comptroller, was charged by the Secretary 
of Defense to lead that effort, and so the Department of Navy 
did participate with the DOD staff in developing those 
recommendations for the task force.
    Mr. Horn. Do you think since that task force is still 
going--isn't it?
    Mr. Aviles. Yes, sir. They have reported out their initial 
recommendation. I don't know if it is going to remain a 
standing task force or whether the intent would be to stand 
that down and report back through our normal reporting chains 
on changes that we have made. In my case, for the travel card 
program that would be through the Under Secretary of Defense 
Comptroller's Office.
    Mr. Horn. So you feel that you're moving along in the Navy. 
How about the Army and the rest?
    Mr. Aviles. I don't have specific information with respect 
to changes that are being made for the Army and the Air Force, 
sir.
    Mr. Horn. When will that defense one pull together and go 
after all the services and then come in with another 
recommendation?
    Mr. Aviles. Sir, many of the task force recommendations 
were not specific to any individual services. So, for instance, 
encouraging the use of the split disbursement option, that 
applies to all services, that they are encouraging that; 
additional--making available additional training materials, 
ensuring that is available for all persons involved in the 
process, not just the program coordinators or travel card 
managers, but also commanding officers, individual cardholders, 
to ensure that everyone understands their responsibility under 
the program.
    Mr. Horn. Does the Navy have any idea how extensive the 
fraud and abuse is in its travel card program?
    Mr. Aviles. Mr. Chairman, I don't know that--I think that 
gets into what Mr. Kutz quantified as not knowing the 
unknowable. In many cases we rely upon safeguards that are 
built into the system, controls that are intended to prevent or 
preclude misuse of the card. For instance, merchant category 
codes that are intended to allow the travel card to be used 
only in certain types of activities, we have evidence where 
some of those codes have been misrepresented. Whether that was 
intentional on the part of the vendor or not, it has the 
practical effect of defeating that control.
    Additionally, we rely heavily on agency program 
coordinators, those managers, to look at transactions after the 
fact to detect instances where the card may have been misused. 
But again, that is not a leading indicator, that is a lagging 
indicator. We depend heavily on those internal controls, the 
safeguards built into the card with respect to limitation 
requirements for preauthorization and merchant category codes, 
as the principal line of defense for preventing misuse.
    Mr. Horn. I'm going to go now for Mr. Kutz of GAO, and then 
I will get back do you.
    The General Accounting Office has done a fine job over the 
months, so tell us what you know about the travel card 
situation.
    Mr. Kutz. OK, Mr. Chairman, I will get right to our bottom 
line, which is that we did find significant breakdowns in 
controls over the Navy's travel program. These breakdowns 
contributed to substantial delinquencies and charge-offs and 
also contributed to fraudulent and abusive activity.
    I'm going to talk about three parts here to our testimony: 
first, the delinquencies and charge-offs; second, fraud and 
abuse; and third, internal controls.
    First, we found substantial delinquencies and charge-offs 
of Navy travel accounts. Most Navy travel cardholders properly 
used their card and paid the bill on time. However, as you can 
see on the posterboard, the Navy, which is the blue line, has a 
high delinquency rate. Following the blue line you will see 
that for the eight quarters ending March 31, 2002, the Navy's 
delinquency rate fluctuated between 10 and 18 percent.
    Mr. Horn. Is the yellow the Army?
    Mr. Kutz. Yes, the yellow is the Army. And the Navy's rates 
here, as you can see, just about mirrored those of the Army. 
And the Army, as we mentioned those at the last hearing, is the 
highest in the Federal Government.
    Navy's rates were also, as you can see, 6 percentage points 
higher than civilian agencies.
    In addition, nearly $17 million of Navy accounts have been 
charged off. These delinquencies and charge-offs have cost the 
Navy millions of dollars in lost rebates, higher fees, and 
substantial resources spent pursuing and collecting past due 
accounts.
    This second posterboard shows that we found the Navy's 
delinquency and charge-off problems relate to young, low- and 
midlevel enlisted military personnel. The high volume of travel 
and 20 percent delinquency rate for the E4 to E6 rank have had 
a significant impact on Navy's high delinquency rates. The E4 
to E6 in the Navy are petty officers, and for the Marine Corps 
are corporals to staff sergeants. Pay levels for these 
personnel, excluding supplements such as housing, are $18,000 
to $27,000 a year.
    As Mr. Aviles noted, DOD, the Navy, and the major commands 
within the Navy have taken a number of actions to reduce the 
delinquencies. For example, the Wage and Salary Offset Program 
has resulted in nearly $20 million of collections of past due 
and charged-off balances, and about $5 million of that, Mr. 
Chairman, relates to the Navy and the Marines.
    In addition, DOD has been working, as Mr. Aviles noted, on 
legislation that would authorize mandatory usage of the split 
payment disbursement process. We agree that mandating this 
process would significantly reduce the delinquencies at Navy 
and DOD.
    Second, the fraud and abuse that were mention are 
extensive, with nearly 14,000 Navy accounts charged off in the 
last 3 years and thousands more delinquent. In addition, we 
estimate that 7 to 26 percent of the transactions at the 3 case 
study sites that we audited were not for official government 
travel.
    Potential fraud related to individuals who wrote three or 
more nonsufficient funds checks to the bank as payment for 
their travel card bill. For the 18 months ending March 31, 
2002, 5,100 Navy personnel wrote NSF or bounced checks, while 
more than 250 may have committed bank fraud by writing 3 or 
more NSF checks to the Bank of America.
    Abuse of the Navy travel card was significant with 
purchases of jewelry, adult entertainment, gambling, cruises 
and tickets to sporting events. For example, we identified 247 
transactions for over $28,000 at gentlemen's clubs such as Mr. 
Magoo's in Jacksonville, Florida, and Cheetah's Lounge in Las 
Vegas. In addition, tickets were purchased to see the Los 
Angeles Lakers and the New York Yankees.
    Fifty Navy personal also used their government travel cards 
to pay for prostitution at two Nevada brothels. One of these 
brothels is located near Fallon Naval Air Station. The 79 
charges we identified at this brothel showed up on the credit 
card bill as bar or restaurant charges for James Fine Dining. 
However, based upon further investigation, these charges were 
for prostitution at a legalized brothel known as the Salt Wells 
Villa. Account balances for 11 of these 50 cardholders were 
later charged off or put into the salary offset program.
    As we talked about today, we found little evidence of 
disciplinary action against Navy personnel that misused the 
travel card. Of the 57 cardholders with the most significant 
fraud and abuse that we looked at, 20 of them had evidence of 
disciplinary action. One cardholder who wrote $20,000 of NSF 
checks and had their account balance charged off was recently 
promoted.
    Mr. Horn. Were these in the service or in the Civil 
Service?
    Mr. Kutz. Service. This was a service person.
    Mr. Horn. OK. Now, as I've got it, you reported that 50 
cardholders used their travel card to pay prostitutes, and 
another 147 made almost $29,000 worth of charges at gentlemen's 
clubs. Some of the charges were for very large dollar amounts. 
How could this go undetected, I would ask the Navy? Fallon is a 
naval air station, isn't it?
    Mr. Aviles. That is correct, sir.
    Mr. Horn. Well, it sounds like they have a great party out 
there. But the question comes, if it is the gentlemen's club, 
and it is serving a lunch or a dinner, the General Accounting 
Office wouldn't worry about that one, I take it.
    Mr. Kutz. If the travel card was used to buy a drink, that 
would not necessarily be an improper use of the card. Drinks 
and dinner, that would be an official usage of the card.
    Mr. Horn. Well, any others you want to have, Special Agent 
Ryan? What have you found?
    Mr. Ryan. A lot of things.
    Mr. Horn. You look like a happy guy.
    Mr. Ryan. Thank you, Mr. Chairman.
    Mr. Chairman, what we would say is that there are several 
things. When we deal with the gentlemen's clubs, the 
gentlemen's clubs, in my opinion, are basically deceiving a lot 
of people when they conduct transactions by selling cash. They 
were signed up by a merchant bank as a merchant to do bar and 
restaurant charges. What we are finding in the cases not only 
with the Navy, but in the Army, and found them with the Air 
Force, too, is that they're selling cash to these soldiers for 
10 percent. They are avoiding--the soldier is avoiding being 
limited on the amount of cash that they can get because there 
are limits on his ATM withdrawals.
    Then they are submitting these transaction slips, these 
merchants are submitting these transaction slips to the 
merchant bank for $600, $700 even $1,000, saying they provided 
food and drinks. That is just not true.
    We found with the case with Salt Wells, because of the data 
mining techniques that we did with the Army, we decided to look 
at MCC codes because we felt there was deceptive MCC codes, and 
in this case we came across James Fine Dining under a bar 
merchant code. But the dollar amounts, as you mentioned, were 
very, very high, so we actually presumed that it was for 
gambling. We started doing our investigation and contacted the 
sheriff's departments in a lot of the counties that we were 
looking at and found out that they had never heard of James 
Fine Dining, but they were aware of a place in Fallon called 
Salt Wells Villas, which was a brothel.
    We contacted the merchant bank and found out that James 
Fine Dining was another name that was used, and the reason we 
were told that they went to that was to provide confidentiality 
to the cardholders who were coming in and getting services.
    I think in some respects there is a part of deception on 
the part of the merchant bank in disguising exactly what that 
merchant is doing. Salt Wells doesn't serve any food, they do 
serve drinks, but yet they classify it as James Fine Dining. We 
found a lot of instances like this, Chicken Ranch, Madam 
Butterfly's and other gentlemen's clubs selling cash, making 
statements to banks saying that they are providing food and 
drinks when in reality they are selling cash. And as part of 
the investigations that you asked us to look at----
    Mr. Horn. Now, who has to relate that--which regulatory 
organ in Nevada or in the U.S. executive branch, who classifies 
these things?
    Mr. Ryan. Well, as a criminal investigator for well over 20 
years, I believe a false statement to a financial institution 
is a crime. I believe that when a merchant submits a 
transaction slip, he is making a false statement if you can 
prove that he never intended to provide, in this particular 
case, food and drinks. I believe that executive law enforcement 
should look at that.
    Mr. Kutz and I have traveled to South Carolina and have 
discussed this exact issue with law enforcement personnel in 
that State, and I think they are taking it under advisement. I 
think that your hearings have uncovered this. And I think it is 
something that law enforcement should look at.
    Mr. Horn. Mr. Secretary, why weren't these charges 
detected? Do we know? In that part? Did you get the report from 
GAO?
    Mr. Aviles. Sir, we definitely got cueing from GAO with 
respect to these specific instances. I would note, however, 
particularly in the case that Special Agent Ryan has indicated, 
it was not readily apparent if this was not a restaurant 
because of the merchant category coding. I don't know what 
expectation we can have for an agency or an activity program 
coordinator, that card manager who may be hundreds of thousands 
of miles away at a different duty station, to understand the 
possibility that this was somehow being deceptively or 
erroneously being represented.
    Mr. Horn. Do you think something can be done when you find 
these things, and if so, who would you--is it the bank people 
that have this classification?
    Mr. Aviles. Yes, sir, yes. I have communicated with both 
the Department--the Defense Finance and Accounting Service and 
the travel card program manager for the Department of Defense 
with respect to this issue with transactions being processed 
against blocked merchant category codes, as you heard Mr. Kutz 
testify. There is no legitimate travel-related expense in a 
jewelry store, yet we have found instances where transactions 
have been processed at jewelry stores on a travel card. That is 
not supposed to happen.
    We're asking them to take a look at that and help us 
understand how that can happen, and clearly in cases where we 
believe that the merchant is being either erroneously 
represented or deceptively using an erroneous category code to 
reveal the--to conceal the true nature of the business.
    Mr. Kutz. Mr. Chairman, with respect to the brothels, it 
was particularly difficult for them to catch, because the 49 
individuals that went to the Salt Wells Villa in Fallon were 
all on official travel. They were not from the local command. 
They were from out of town on official travel on official 
orders. So that makes it particularly difficult to determine 
that they were misusing the credit card, because it would have 
appeared to an APC looking at transactions as if it were a 
restaurant.
    Mr. Aviles. And please keep in mind many different commands 
were represented here, so it is not a single individual 
noticing a high degree of activity at a particular merchant.
    Mr. Horn. The Navy could be considering activating cards 
when the cardholders travel, and then deactivating them when 
the travel assignment ends. What is the problem with that, or 
are you thinking about that?
    Mr. Aviles. Sir, we have actually already implemented that 
for commands that are executing above our target delinquency 
metric of 4 percent. This was--our initial corrective actions 
were intended to try to address the high delinquency rates that 
we were observing, try to focus command attention to that. And 
as I indicated, two- and three-star admirals come and see me on 
a regular basis if their delinquency rate is high. Those are 
some spirited conversations with respect to how they intend to 
get back into alignment.
    I would like to point out as an example, the deputy 
commander at CINC land fleet publishes delinquency statistics 
for subordinate commands in the fleet. This is an incredible 
motivating tool, I believe, when commanders understand that 
their seniors are taking a hard look at this, evaluating their 
performance, and posting it up there for the entire world to 
see. I have high hopes that this would result in much improved 
performance on delinquency.
    I believe that by tackling delinquency first, it is usually 
a harbinger for other types of misuse. I don't want to put 
words in the GAO witness' mouth, but clearly if you have got a 
high delinquency, you may have other problems as well, so that 
is what we have been focused on.
    Mr. Horn. So is that the best we can do on the travel 
cards?
    Mr. Aviles. Absolutely not, sir. Absolutely not. Our 
current statistic for delinquency as we compute it for the 
month of September 2002 is that we are running about 8\1/2\ 
percent delinquency metric. So we're not where we need to be as 
a department. What I have indicated is that we are focusing 
command attention at the appropriate level. I am actively 
engaged to an extent that I think is somewhat disconcerting to 
some of the commanders in the Navy that I am paying so close 
attention to this, and I don't intend to let go.
    This is nothing to be--excuse me--this program has the 
promise to deliver for us incredible flexibility and savings. I 
think, as I indicated earlier, there was tremendous 
misperception when it was rolled out that we were contracting 
this out and that individual commands didn't have to be 
involved. That is not the case.
    Mr. Horn. Mr. Ryan, your General Accounting Office 
testimony notes that a second class petty officer reservist, 
whose civilian job was with the U.S. Postal Service, made phony 
charges on his government travel card and effectively floated a 
loan to his limousine company. Could you elaborate on this 
scheme and what has happened?
    Mr. Ryan. In this particular case, a gentleman was granted 
a travel card. Our investigation determined that he filed and 
became owner of a limousine service. The evidence indicates 
that when he needed money, he would take his travel card and 
run it through his limousine service. The limousine service 
would then get the cash. Either he would pay it back, or if he 
got extra cash during the month, he would go ahead and do a 
credit back to his travel card account. In some cases he was 
delinquent, and he floated himself 60-day loans.
    He was interviewed. He admitted it, that he used the card 
for personal use. He used it to go to vacation. He used it for 
cash. But the one thing about it, he was not charged off. He 
paid his bill. But he did--he was delinquent. He leads up to 
that 8 percent or 14 percent that we are talking about. He 
abused and misused his card.
    Mr. Horn. Mr. Secretary, I think that putting something up 
on the command deck, or something where people can see it, is a 
good way to warn people. Do you think the Navy is going far 
enough in disciplining cardholders who blatantly misuse their 
cards for personal items, gentlemen's clubs and gambling? What 
is your thinking on that?
    Mr. Aviles. Sir, as the admiral had indicated with the 
purchase card, when we discover incidents of misuse of either 
the travel card or the purchase card, we report that 
information to the appropriate chain of command for 
disciplinary action. It would be inappropriate for me to try 
and dictate a disciplinary outcome to satisfy my desires. We 
rely heavily upon military commanders to make those judgment 
calls.
    In some cases with respect to travel card delinquency, 
there may be perfectly reasonable instances for that. One of 
the things that we have found with certain types of our 
intelligence units, a member will go on travel and, because of 
the nature of the assignment, be unable to file a travel claim 
in a timely fashion. If this happens on short notice, and he 
has not made prior arrangements for settlement of that account, 
he can find himself in a delinquent status.
    The commander needs to be able to have some discretion, 
some ability to exercise judgment on a case-by-case basis as to 
who constitutes an abuse versus an innocent mistake.
    Mr. Horn. Now, you are part of the people that are over in 
the Pentagon who have been cleared by the U.S. Senate? To what 
degree does the service command know about all of this? In 
other words, the Chief of Naval Operations, how much does he 
know?
    Mr. Aviles. Sir, the Chief of Naval Operations and 
Commandant of the Marine Corps, we keep their staffs apprised 
of information within these programs. We have a component, as 
their individual commands are executing this, and I am the one 
that is meeting with these--we call them echelon two commands, 
those major commands--they come in to report their delinquency 
status, those staffs are apprised of our activities. 
Additionally, in cases of apparent misuse or severe delinquency 
on a card, those chains of commands are informed of our 
findings for appropriate action.
    Mr. Horn. And you think the other services operate about 
the same way?
    Mr. Aviles. I have no knowledge of how the Army and the Air 
Force operate, sir. I presume it is a similar situation.
    Mr. Horn. I just wondered if the service line, all they 
have to do is send to a CINC, and they could handle a lot of 
these questions. And that would be the best way, if people are 
having a career in the Navy and they have to know that these 
fraud and waste things are important.
    Mr. Aviles. Sir, I think it is consistent with any service 
culture that the commander sets the tone. As the admiral 
indicated in his statement, it is the tone from the top. If you 
understand that your superior looks at this and evaluates your 
performance on the basis of it, performance will generally 
improve.
    Mr. Horn. Well, this has been an interesting afternoon, and 
we will probably have a hearing 3 or 4 months from now. So we 
would like to know, GAO, if we can get the next hearing on that 
and see where you might have looked again, or go to another 
part of another service or whatever. So I would hope that you 
would keep the heat on until we get it turned over. And maybe 
the civilian side also ought to be looked at so we can get 
things moving. So thank you.
    I want to thank the people that have been helpful in 
putting this hearing together. Bonnie Heald is the staff 
director of the subcommittee; Henry Wray, the senior counsel; 
Dan Daly, the counsel--put your hand up. There he is. And Dan 
Costello, who is right next to me, professional staff that did 
most of the work on the questions; and Chris Barkley, got a lot 
to do after this one, and that is majority clerk. There he is. 
And Ursula Wojciechowski, intern. There she is. And Juliana 
French, another intern. They are down working below.
    Minority staff, David McMillen, professional staff. He has 
been there for a while. And Jean Gosa is the minority clerk. 
And there you are.
    The court reporters have been Nancy O'Rourke and Joe 
Strickland--it took a lot of people to keep after all of you. 
So thank you very much, and we now adjourn.
    [Whereupon, at 4:05 p.m., the subcommittee was adjourned.]

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