[Senate Hearing 108-556]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-556
 
                 GOVERNMENT PURCHASE CARDS: SMARTER USE
                     CAN SAVE TAXPAYERS HUNDREDS OF
                          MILLIONS OF DOLLARS
=======================================================================


                                HEARING

                               before the


                              COMMITTEE ON
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION


                               __________

                             APRIL 28, 2004

                               __________


      Printed for the use of the Committee on Governmental Affairs








                 U.S. GOVERNMENT PRINTING OFFICE

94-483                 WASHINGTON : 2004
_________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866)512-1800: 
DC area (202) 512-1800 Fax: (202) 512-2250 Mail: Stop SSOP, 
Washington, DC 20402-0001













                   COMMITTEE ON GOVERNMENTAL AFFAIRS

                   SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska                  JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
NORM COLEMAN, Minnesota              DANIEL K. AKAKA, Hawaii
ARLEN SPECTER, Pennsylvania          RICHARD J. DURBIN, Illinois
ROBERT F. BENNETT, Utah              THOMAS R. CARPER, Deleware
PETER G. FITZGERALD, Illinois        MARK DAYTON, Minnesota
JOHN E. SUNUNU, New Hampshire        FRANK LAUTENBERG, New Jersey
RICHARD C. SHELBY, Alabama           MARK PRYOR, Arkansas
           Michael D. Bopp, Staff Director and Chief Counsel
       Michael L. Stern, Deputy Staff Director for Investigations
        Don Bumgardner, Detailee, U.S. General Accounting Office
      Joyce A. Rechtschaffen, Minority Staff Director and Counsel
              Pat Hart, Minority Professional Staff Member
                      Amy B. Newhouse, Chief Clerk













                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Collins..............................................     1

                               WITNESSES
                       Wednesday, April 28, 2004

Gregory D. Kutz, Director, Financial Management and Assurance, 
  U.S. General Accounting Office.................................     4
Colonel William Kelley, Program Director, Data Mining Division, 
  Office of the Inspector General, U.S. Department of Defense, 
  accompanied by David Steensma, Assistant Inspector General, 
  Contract Management Directorate................................     6
Neal Fox, Assistant Commissioner for Commercial Acquisition, U.S. 
  General Services Administration................................     9

                     Alphabetical List of Witnesses

Fox, Neal:
    Testimony....................................................     9
    Prepared statement...........................................    70
Kelley, Colonel William:
    Testimony....................................................     6
    Prepared statement written jointly with David K. Steensma....    52
Kutz, Gregory D.:
    Testimony....................................................     4
    Prepared statement written jointly with David E. Cooper, and 
      John J. Ryan...............................................    23

                                APPENDIX

Chart entitled ``Fiscal Year 2002 Purchases From Frequently Used 
  Vendors (in millions)''........................................    49
Chart entitled ``Abusive Purchase Card Acquisitions''............    50
Chart entitled ``Amount Spent in Fiscal Year 2002 with 5 
  Frequently Used Vendors (in millions)''........................    51
Senator Russ Feingold, a U.S. Senator from the State of 
  Wisconsin, prepared statement..................................    75
Richard J. Griffin, Inspector General, Office of Inspector 
  General (OIG), prepared statement..............................    77
Hon. Linda M. Springer, Controller, Office of Federal Financial 
  Management, Office of Management and Budget, prepared statement    82
``Acquisition, Summary Report on the Joint Review of Selected DoD 
  Purchase Card Transactions'' (D-2003-109), Department of 
  Defense, Office of the Inspector General, June 27, 2003........    85
``Contract Management, Agencies Can Achieve Significant Savings 
  on Purchase Card Buys,'' GAO-04-430, March 2004................   109
















 GOVERNMENT PURCHASE CARDS: SMARTER USE CAN SAVE TAXPAYERS HUNDREDS OF 
                          MILLIONS OF DOLLARS

                              ----------                              


                       WEDNESDAY, APRIL 28, 2004

                                       U.S. Senate,
                         Committee on Governmental Affairs,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:02 a.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Susan M. 
Collins, Chairman of the Committee, presiding.
    Present: Senator Collins.

             OPENING STATEMENT OF CHAIRMAN COLLINS

    Chairman Collins. The Committee will come to order.
    Good morning. Today the Committee on Governmental Affairs 
will explore the Federal Government's use of purchase cards, 
which are commercial charge cards used by Federal agencies to 
buy billions of dollars worth of goods and services each year. 
We will hear the results of the General Accounting Office's 
investigation into waste, fraud, and abuse in the purchase card 
program.
    The American people have the right to expect the Federal 
Government to spend their tax dollars carefully and wisely. 
While this is true at all times, it is never more so than today 
when the government faces enormous fiscal pressures and a 
growing budget deficit. This Committee has an important mandate 
to help safeguard those tax dollars from waste, fraud, and 
abuse. To meet this mandate, the Committee has launched an 
initiative to root out government waste. Today's hearing is 
part of that overall effort and will focus on wasteful, 
inefficient, and in some cases, fraudulent transactions using 
purchase cards.
    Purchase cards were first introduced by the General 
Services Administration on a governmentwide basis in 1989. 
These cards are primarily used for making routine purchases 
such as office supplies, computers and copying machines. 
Purchase cards are similar to the personal credit cards that we 
all carry, but with one important difference. The taxpayer pays 
the bill.
    Although the card is only supposed to be used for official 
purposes, the Federal Government is responsible for paying all 
charges by authorized cardholders regardless of what is 
purchased. While legitimate purchases are usually quite small, 
they nevertheless add up to big money. Purchase card use has 
soared during the past decade, from less than $1 billion in 
fiscal year 1994 to more than $16 billion in fiscal year 2003. 
There are more than 134,000 purchase cardholders in the 
Department of Defense alone.
    This explosive growth presents both challenges and 
opportunities. While there are many benefits to the purchase 
cards such as expediting purchases, cutting down on red tape 
and paperwork, and saving administrative costs, the General 
Accounting Office and the Inspectors General have reported that 
inadequate controls over purchase cards leave agencies 
vulnerable to waste, fraud, and abuse.
    We will hear testimony this morning describing how smarter 
use of purchase cards could save taxpayers hundreds of millions 
of dollars. A GAO report that I requested, along with Senator 
Russ Feingold and Congresswoman Shakowsky, which is being 
released at this hearing, highlights several wasteful 
purchasing practices.
    The GAO concludes that many agency cardholders fail to 
obtain readily available discounts on purchase card buys. In 
too many cases, purchase cardholders are buying goods and 
services from vendors that have already agreed to provide 
government discounts through the GSA schedule, yet cardholders 
often lack the information and the training needed to obtain 
these discounted prices. As a result, the GAO found numerous 
instances of cardholders paying significantly more for items 
for which discounts had already been negotiated.
    In light of the fact that conscientious shoppers often can 
obtain savings beyond the scheduled discounts, these findings 
indicate that some Federal agencies are substantially 
overpaying for routine supplies.
    Let me give you an example. An analysis of the Department 
of Interior's purchase card buys of ink cartridges found that 
most of the time the cardholder paid more than the government 
schedule price to which the vendors had already agreed. One 
vendor, for example, had agreed to a schedule price of $24.99 
for a particular ink cartridge. Yet of the 791 separate 
purchases of this cartridge, only two were at or below that 
price. Some purchasers paid $34.99, or about 40 percent more 
for the same item. That may sound like a small item and a small 
amount, but when you start multiplying that across Federal 
agencies it quickly translates into significant money.
    In conducting its investigation, the General Accounting 
Office examined six agencies that together account for more 
than 85 percent of all government purchase card transactions. 
If the six agencies reviewed in the study negotiated discounts 
of just 10 percent from major vendors, and if the agency 
employees had used those discounts, the GAO estimates annual 
savings of approximately $300 million. Over 10 years, that is 
$3 billion. Since we are in the Dirksen Senate Office Building 
I will remind everyone of Senator Dirksen's famous statement 
that when you're talking about a billion here, a billion there, 
pretty soon you are talking about real money.
    The GAO also found that agencies should be making greater 
efforts to collect and analyze data on purchase card 
transactions. This would help agencies to eliminate waste and 
to expose fraud and abuse. In addition to testimony from the 
GAO, we will hear today from an official from the Department of 
Defense's Inspector General's Office who will report on his 
very interesting efforts to use data mining to identify 
inappropriate purchase card transactions including outright 
fraud.
    In one case, an employee used a purchase card to charge 
$1.7 million in fraudulent purchases from a fictitious company 
set up by her brother. These fraudulent charges took place over 
a 3-year period and they were not detected by the officials 
responsible for reviewing the bills. It was the data mining 
technique that identified these fraudulent charges.
    Examples like this one demonstrate the need for better 
controls over the purchase card program and further demonstrate 
why it is vital to give agencies the tools that they need to 
control fraud and abuse. The testimony from the Inspector 
General's Office will illustrate how data can be used as a 
management tool to detect fraudulent and improper transactions 
as well as to ensure that agencies get the very best prices on 
their many purchases.
    We will also hear from Neal Fox of the General Services 
Administration which has overall responsibility for the 
purchase card program. We must assure taxpayers that the 
Federal Government is shopping carefully, wisely, and honestly. 
That is why Senator Feingold and I today will introduce the 
Purchase Card Waste Elimination Act of 2004. Our legislation 
requires the Office of Management and Budget to direct agencies 
to better train cardholders and to more effectively scrutinize 
their purchases.
    This legislation also instructs the GSA to increase its 
efforts to secure discounts from vendors and to provide better 
tools to agencies to control wasteful spending. For example, 
one common sense reform that could be implemented is to make 
sure that those discounts come up at the point-of-sale. That 
way even if the individual cardholder were not aware of the 
discount, the discount would apply anyway. That is the kind of 
practical approach that literally could save hundreds of 
millions of dollars.
    I welcome our witnesses today and I look forward to hearing 
their testimony.
    First let me introduce our first witness today, Greg Kutz, 
who is the Director of Financial Management and Assurance in 
the General Accounting Office. He is responsible for financial 
management issues related to the Department of Defense, NASA, 
State and USAID. I believe that he is accompanied by other GAO 
officials, including David Cooper and Special Agent John Ryan. 
We have worked with this GAO team before on numerous 
investigations and they do a great job and I am very pleased to 
have them with us today.
    Our second witness will be Colonel William Kelley. Colonel 
Kelley returned to active duty in January 2002 to support 
Operation Noble Eagle. He is serving both as the senior 
military officer in the Office of the Inspector General at the 
Department of Defense as well as the program director for the 
data mining division. He is accompanied by David Steensma, who 
is the Assistant Inspector General of the Contract Management 
Directorate. Mr. Steensma is responsible for directing audits 
and managing operations for issues that cover acquisition, 
logistics, contracts, charge cards, military construction and 
environmental policies. I do not think you have nearly enough 
to do. I think we could add just a few more things to that 
list. [Laughter.]
    Our final witness today will be Neal Fox, who is the 
Assistant Commissioner for Commercial Acquisition of the U.S. 
General Services Administration. Mr. Fox is responsible for 
managing commercial service and product initiatives under the 
$16 billion purchase card program.
    I very much appreciate all of you being here today and I 
look forward to your opening statements. Mr. Kutz, we are going 
to start with you. Thank you.

TESTIMONY OF GREGORY D. KUTZ,\1\ DIRECTOR, FINANCIAL MANAGEMENT 
         AND ASSURANCE, U.S. GENERAL ACCOUNTING OFFICE

    Mr. Kutz. Chairman Collins, thank you for the opportunity 
to discuss the purchase card. We support the use of a well-
managed purchase card in the Federal Government. However, 
improved management oversight and control is necessary for the 
Federal Government to fully realize the benefits of the card.
---------------------------------------------------------------------------
    \1\ The joint prepared statement of Gregory D. Kutz, David E. 
Cooper, and John J. Ryan appears in the Appendix on page 23.
---------------------------------------------------------------------------
    My testimony has three parts. First, use of the purchase 
card in the Federal Government. Second, leveraging the 
government's purchasing power. And third, the status of fraud, 
waste, and abuse.
    First, I have a Navy purchase card in my hand that is also 
shown on the poster board here. As you can see, it looks just 
like a normal credit card. The Navy card can generally be used 
wherever Mastercard is accepted. Usage of purchase card such as 
this one in the government grew, as you mentioned, from $1 
billion in 1994 to over $16 billion in 2003. Use of the 
purchase card has fundamentally changed the way that agencies 
make small, routine purchases. In fiscal year 2003 agencies 
used the purchase card for over 26 million transactions. 
Agencies estimate that hundreds of millions of dollars can be 
saved when using the purchase card through reduced transaction 
processing costs.
    Second, as noted in our report that is released today, 
increased focus on negotiating discounts could result in 
hundreds of millions of dollars in annual savings. The six 
agencies that we studied, as you mentioned, account for over 85 
percent of the Federal Government's purchase card activity. As 
shown on this poster board, these six agencies do substantial 
business with major vendors, those with over $1 million of 
annual purchase card activity. We found that agencies generally 
have not taken effective action to obtain favorable prices from 
major vendors such as these.
    In fact our work has shown that cardholders often pay 
retail prices when using the purchase card. For example, we 
found that cardholders paid 12 to 20 percent more than GSA 
schedule prices for office supplies, cell phones, and computer 
equipment. Our work indicates that if these six agencies 
obtained discounts of only 10 percent from the major vendors 
that up to $300 million a year could be saved.
    The following examples of annual savings through discounts 
clearly demonstrate the potential for these savings including--
Veterans Affairs estimated $8.5 million for medical and 
surgical supplies, USDA's $1.8 million for office supplies, and 
the Air Mobility Command's estimated $13 million through 
schedule prices and discounts from local merchants.
    Chairman Collins, we believe that your legislation is 
consistent with our recommendations and has the potential to 
save the government hundreds of millions of dollars annually.
    Third, although there has been significant focus on 
fraudulent and abusive usage of the purchase card challenges 
remain. In the early years of the purchase card program 
management focused on expanding the use of the card. However, 
similar attention was not paid to putting internal controls in 
place. As a result, at DOD and four civilian agencies we found 
significant breakdowns in internal controls and fraudulent, 
improper, and abusive usage of the purchase card.
    We used data mining, forensic auditing, and investigative 
follow up to identify these purchases. We identified cardholder 
fraud, vendor fraud, and the fraudulent usage of compromised 
purchase card accounts. Purchase cards were used for items such 
as adult entertainment, jewelry, cruises, and designer leather 
goods.\1\ The poster board shows several other specific 
examples of improper and abusive purchases including Bose wave 
radios and headphones to listen to music, leather bomber 
jackets purchased at the sky mall, personal luggage for 
frequent travelers, and taxidermy services for the mounting of 
a road kill mule deer.
---------------------------------------------------------------------------
    \1\ The chart entitled ``Abusive Purchase Card Acquisitions'' 
appears in the Appendix on page 50.
---------------------------------------------------------------------------
    We also found ineffective inventory control over the 
purchases of sensitive and pilferable property. Examples of 
lost, missing, or stolen property include digital cameras, 
laptop computers, Palm Pilots, and cell phones. The key causes 
of the problems we identified were lack of management oversight 
and accountability, a proliferation of the number of purchase 
cards, and the ineffective design and implementation of 
internal controls.
    For example, like most Americans, cardholders are expected 
to reconcile their receipts to the monthly credit card bill. 
However, oftentimes purchase cards were simply rubber stamped 
for approval with no review of the cardholder or the approving 
official.
    Significant steps have been taken at agencies such as DOD 
to improve the management, oversight, and internal controls 
over the purchase card. For example, agencies recognized that 
the proliferation of purchase cards was a key cause of the 
problems. As a result, the number of government purchase cards 
has been reduced from a peak of 500,000 to about 315,000 today. 
DOD alone eliminated 100,000 purchase cards.
    DOD has also taken actions to address 109 recommendations 
that we made to improve their program.
    Members of Congress and taxpayers may wonder what happened 
to cardholders that misused the government purchase cards. 
Unfortunately, the answer is not much. The items on the poster 
board and other items such as food, clothing, toys and alcohol 
were paid for by taxpayers. We believe that the use of Federal 
funds for personal items is not appropriate. The lack of 
consequences for misuse of government money does not create an 
effective control environment.
    In conclusion, the purchase card has improved the 
efficiency of the Federal Government's operations. Positive 
actions have also been taken to improve internal controls. 
However, continued management focus and congressional oversight 
is needed to ensure that fraud and abuse are minimized. 
Finally, to achieve the full benefits of the purchase card more 
attention is needed to the prices paid.
    With the serious fiscal challenges facing our Nation, it is 
critical that the government realize the hundreds of millions 
of dollars of potential savings discussed today.
    Chairman Collins, this ends my testimony. Special Agent 
Ryan and Mr. Cooper and I would be happy to answer your 
questions.
    Chairman Collins. Thank you. Colonel Kelley.

TESTIMONY OF COLONEL WILLIAM KELLEY,\1\ PROGRAM DIRECTOR, DATA 
    MINING DIVISION, OFFICE OF THE INSPECTOR GENERAL, U.S. 
                     DEPARTMENT OF DEFENSE

    Colonel Kelley. Thank you very much for giving us the 
opportunity, for myself and Dave Steensma, to talk to you today 
about the purchase cards.
---------------------------------------------------------------------------
    \1\ The joint prepared statement of Colonel Kelley and David K. 
Steensma with attachments appears in the Appendix on page 52.
---------------------------------------------------------------------------
    Although the Department has taken aggressive action like 
Greg Kutz has talked about, we have some additional problems in 
better implementation and oversight and management controls at 
the activity level. Every dollar we spend that is not prudently 
used could result in us not having dollars available in our 
global war on terrorism efforts. In fiscal year 2003, we in DOD 
did almost 11 million transactions at a value of $7.2 billion. 
Every working day, DOD employees make about 41,000 purchases 
valued at about $27 million. A day's worth of purchase receipts 
for these transactions could make a pile that stands over 13 
feet tall.
    We need to build processes that pick the most important 
receipts from that pile to review because we cannot review them 
all. We do not have the resources. Management oversight we 
think could include processes such as restacking those receipts 
in an automated concept so that we could array them based on 
risk, for example. That risk could be identifying receipts that 
are for services or items that are potentially inappropriate, 
or trying to decide if we are making the best buys.
    Today we will present the results very briefly on three of 
the audit reports that we have issued recently, and we will 
discuss further action to promote our data mining and to 
partner with other activities within the government to prevent 
fraud, waste and abuse. Finally, we will present information 
that shows improvements in management of the purchase card 
program.
    The Office of Inspector General and auditors led a joint 
review. You have seen the report I believe, ma'am. We reviewed 
1,357 cardholders that we identified using business rules and 
fraud indicators. Based on that review we determined that 182 
of those cardholders either inappropriately used the card or 
fraudulently spent about $5 million of our scarce resources. 
Further, 41 of those cardholders were referred for criminal 
investigations.
    One example was a cardholder used the purchase card to make 
59 fraudulent purchases totaling more than $130,000. The 
purchases included two automobiles, a motorcycle, cosmetic 
surgical enhancements. Currently, that cardholder is in prison.
    In a review of Washington headquarters services, as was 
discussed, the lack of management controls and oversight led to 
$1.7 million in fraudulent purchases and at least $201,000 of 
additional purchases that were abusive or inappropriate. The 
director, a GS-15, and her deputy and her brother, who was the 
vendor, were convicted of the theft. We actually were buying 
paper for the bills. That is all we were getting from that 
vendor was the bills and that is what we were paying for. The 
director and the vendor are in prison. They received 3 and 4 
years' worth of incarceration respectively and were required to 
make restitution.
    Cardholders also circumvented required contracting 
procedures and did not receive the best value for supplies and 
services. For example, we paid $36,000 for 9,000 American flag 
decals. They could have been bought for $3,000. The director of 
the headquarters services agreed to implement any corrective 
actions and improve management controls.
    Controls over purchase cards were also ignored by senior 
management at the information technology center in New Orleans, 
Louisiana. Approximately $1 million of purchases were 
questionable because there was no obvious or documented mission 
need for the items purchased. For example, they bought 10 pairs 
of binoculars, six bicycles and three global positioning 
systems without a need. Further, cardholders acquired computer 
equipment and office supplies and did not use available 
discounts and reduced prices.
    In this case, the former director, his former deputy did 
not set the tone of accountability. The Navy agreed to the 
implementation of many of the recommended corrective actions 
and the four senior officials involved in this case have all 
retired.
    In all of these examples the first line of oversight 
official either did not perform their duties or were involved 
in the inappropriate acts themselves. After this statement we 
can discuss ways management could use data mining to identify 
these kinds of activities at higher risk.
    The Department is actively working to maintain a culture 
that promotes a positive and supportive attitude towards active 
management controls of purchase cards and accountability. 
Positive trends include, as was previously mentioned, the 
reductions in the number of purchase cards. We have been able 
in the Department to reduce them by 47 percent.
    The Department has developed new training for all 
cardholders and billing officials to improve their 
understanding of the purchase card program management 
responsibilities and needed management controls. In addition, 
government charge card disciplinary guidelines for both 
military and civilians have been issued.
    Further, the General Accounting Office noted the Department 
has made strong improvements over controls in the purchase card 
program, and we have initiated actions on almost all of the 109 
recommendations they have made.
    In January 2003, Mr. Steensma established the data mining 
division that I am currently the program director for after we 
ran the initial testing. We took 12 personnel from our other 
audit activities to pioneer the data mining techniques in the 
Department to identify previously unknown relationships or 
patterns among charge card data. Our intent is to pass these 
techniques on to DOD managers, the Department's managers, to 
assist them in their oversight of the charge card program.
    The Office of the Inspector General has been the focal 
point in the Department for charge card data mining, audits and 
investigations. Additionally, we have provided a forum for 
management to identify issues for audits and investigations. 
This increasing communications resulted in a positive approach 
to improve the purchase card program and is also to enhance our 
management relations with them. Additionally, the data mining 
division provided assistance and lessons learned to 12 other 
governmental agencies that are not part of the Department.
    The data mining division continues to mine data for 
purchase, travel, and aviation cards. Since March the division 
has been working with the Navy to develop a pilot program for 
purchase card transaction oversight. In the pilot program the 
data mining division identifies high-risk transactions that are 
sent to the Navy pilot program via management who sends them 
via E-mail to the official who is responsible in the 
cardholder's chain of command requesting additional information 
for assessing the appropriateness of the purchase card 
transaction. The management official's response to the 
questions regarding the transactions populates a database and 
it gives us a way to better manage the program by using that 
additional data that we have requested.
    The DOD program management office plans to implement some 
of these procedures and techniques used by the Navy pilot on a 
DOD-wide basis.
    The concept of using data mining as a continuous monitoring 
system is depicted graphically to my right.\1\ The biggest 
issue with that chart, and we can discuss it later, is the 
Department will have to resolve the issue of how bank data will 
be obtained and stored within the Department. That is probably 
one of the more difficult tasks.
---------------------------------------------------------------------------
    \1\ The graph referred to appears in the Appendix on page 67.
---------------------------------------------------------------------------
    We support the conclusions of the General Accounting Office 
report that was released today. We look forward to using data 
mining techniques and working with the Department's acquisition 
community to creatively reduce cost related to prices on 
purchase card buys. We support the GAO recommendations in 
obtaining more point-of-sales discounts.
    Other areas to improve that you might want to explore 
include the following: There needs to be better training 
developed and provided to all cardholders on how to be more 
efficient and effective buyers, and obtain best price and value 
for the government. There should be a central repository for 
all charge card type data received from the banks. This will 
reduce the cost of the banks and to each of the agencies for 
developing their own solution set for storage and access to the 
data. All transactions should flow through the same process. 
All data elements would be standardized and business rules for 
data mining could be shared.
    The data in the central repository could be mined to 
identify spending trends and utilization of vendors. This will 
help identify which vendors that we need to do a point-of-sale 
or some type of a discount with. There should also be 
continuous research on data mining tools and techniques, how to 
best educate and create smarter purchase buyers, how to improve 
and streamline management of the charge cards, and prevent 
fraud, waste, and abuse, and strategic buying of goods and 
services. A center of excellence for use of cards could be 
established to perform these previously mentioned duties.
    The digital data available from the banks on the use of 
charge cards coupled with the purchasing power of the Federal 
Government has created an historic opportunity for the 
government to transform itself and its buying habits. We need 
an organization to take the lead in this area because we do not 
want vendors to have to negotiate discount agreements with 
numerous Federal agencies, and numerous agencies developing 
similar training to create smarter buyers. We think we ought to 
couple all of this together.
    In conclusion, we think the Department has made great 
strides in improving the program. There is still more work to 
be done and we thank you for giving us the opportunity to talk 
to you.
    Chairman Collins. Thank you. Mr. Steensma.
    Mr. Steensma. The Colonel already spoke to my remarks.
    Chairman Collins. OK. Thank you. Mr. Fox.

TESTIMONY OF NEAL I. FOX,\1\ ASSISTANT COMMISSIONER, OFFICE OF 
 COMMERCIAL ACQUISITION, FEDERAL SUPPLY SERVICE, U.S. GENERAL 
                    SERVICES ADMINISTRATION

    Mr. Fox. Good morning, Senator Collins. I am pleased to be 
here on behalf of the Administrator of General Services to 
discuss the government-wide charge card program, commonly 
referred to as GSA SmartPay, which issues purchase, travel, and 
fleet cards to Federal agencies, organizations, and Native 
American tribes. Today, I will discuss the purchase card 
program.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Fox appears in the Appendix on 
page 70.
---------------------------------------------------------------------------
    GSA has been managing the purchase card program since 1989. 
The most recent purchase card contracts were awarded in 1998 to 
five banks as part of the GSA SmartPay program. The purchase 
card has proven to be the most flexible purchasing tool 
available to the U.S. Government. Agencies use the purchase 
card to acquire mission-related goods and services. The card 
has proven especially vital in enabling rapid response to and 
recovering from disasters and other emergency situations.
    Purchase card use has evolved from a mid-1990s best 
practice to a common practice today, and the annual savings to 
the Federal taxpayer are tremendous, approximately $1.4 billion 
in fiscal year 2003 transaction costs saved. Purchase card 
usage has reduced process cost, increased efficiency, and 
reduced the time it takes to obtain goods and services. With 
annual card purchases of approximately $16.3 billion, the 
purchase card is the primary payment and procurement method for 
purchases under $2,500, often referred to as micro purchases. 
Additionally, the purchase card is now emerging as a valuable 
contract payment mechanism for transactions above $2,500.
    In the mid-1990s, the focus of government purchase card 
usage was to cut through red tape and streamline micro 
purchases. More recently, the focus of the program has shifted 
to provide mechanisms for improved management and control and 
oversight.
    According to Professor Richard Palmer of Eastern Illinois 
University, considered to be the leading academician of 
purchase card studies, the percentage of misuse is lower in 
Federal agencies than among any other institution, public or 
private. His survey indicates that purchase card misuse 
accounts for only 0.017--that is 17-one-thousandths of a 
percent--of purchase card spending at State and Federal 
agencies, which is equivalent to $170 of misuse for every $1 
million of purchase card spending. This is lower than any other 
institution, including corporations, universities, and city and 
county governments.
    Building on our successes to date, GSA and its customer 
agencies are taking further actions to significantly reduce 
program risk, such as decreasing the government's financial 
exposure through closing unused or infrequently used card 
accounts. Fewer cards equate to less risk. As previously 
mentioned, the number of open card accounts has been cut in 
half over the last 3 years.
    Realigning the span of control between purchase card 
holders and approving officials, which at 23 major departments 
and agencies has dropped significantly, and averages one 
approving official for every 3.5 card holders.
    And taking appropriate action against employees whenever 
fraud or misuse are detected, including training or discipline, 
based upon the nature of the misuse.
    At GSA, we are now turning our attention to the next round 
of priorities for the purchase card program, including those 
mentioned in the recent GAO draft audit report. GSA agrees with 
the draft report's findings and recommendations. The report 
provided an objective analysis of the savings that can be 
obtained by agencies through the use of GSA schedules, combined 
with the GSA SmartPay program.
    I would now like to discuss the specific recommendations 
GAO made to GSA and our actions supporting those 
recommendations. The report concluded that agencies have just 
begun to tap the potential savings of leveraging the purchase 
card volume for better pricing and states that hundreds of 
millions of dollars could be realized annually if agencies took 
advantage of their buying power. We agree that obtaining more 
detailed purchase card data and offering customers 
opportunities to leverage spending through GSA schedules, our 
online tools ``GSA Advantage'' and ``e-Buy,'' and other 
procurement and education resources will further enhance the 
government's ability to obtain more favorable pricing.
    GAO recommended that GSA work with the banks to obtain more 
detailed purchase spend data, to include information such as 
top merchants, total transactions, and total dollars by agency 
and by industry. GSA continues to work with the banks and card 
associations in pursuit of these data. The banks' electronic 
access systems currently provide agencies with a record of all 
purchase card transactions, similar to what private citizens 
see on their personal bank card statements. This electronic 
record is available to analyze spending patterns and to 
highlight questionable transactions.
    Obtaining Level 3 data depends upon individual merchants 
upgrading their credit card reporting infrastructure, over 
which we have no direct control. Individual merchants decide to 
pass Level 3 data based upon individual business decisions. The 
government obtains Level 3 data on approximately only ten to 15 
percent of its transactions because only a small percentage of 
merchants have the systems infrastructure in place to pass 
Level 3 data today. This issue will require continued research 
and discussion to attain the intended goal of providing more 
detailed purchase data.
    GSA has recently been pursuing point-of-sale discounts with 
large vendors, especially those that are already on GSA's 
schedule. We have recently added Office Depot and Home Depot as 
walk-in stores offering discounts, and these stores are 
fielding automatic purchase card recognition in their 
electronic check-out systems.
    It should be noted that the decision to incorporate point-
of-sale capabilities, more precisely, automated check-out 
systems that will recognize a Federal Government purchase card 
and apply the appropriate GSA schedule discount to the card 
holder's order is largely merchant-dependent. Although several 
government contractors provide point-of-sale discounts under 
GSA's schedule, the vast majority of these discounts are not 
triggered by electronic card recognition. Similar to the Level 
3 dynamics, automated point-of-sale discount systems are a 
function of the merchants' willingness to invest in systems 
infrastructure upgrades.
    Notwithstanding the inherent challenges, point-of-sale 
discounts and Level 3 data are emerging trends and GSA desires 
to encourage these trends and also utilize them for the 
benefits of our customers. The GAO report notes examples of 
agencies that have leveraged their buying power in innovative 
ways and GSA intends to use such examples to educate our 
customers on these best practices and enable other agencies to 
do the same. GSA also will engage in updating its web-based 
training for card holders to include methods for comparing 
prices, including purchases through GSA Advantage and e-Buy.
    GSA has recognized from the program's inception that card 
holder training is essential to proper use of the charge cards. 
GSA provides online training free to purchase card holders. The 
training discusses roles and responsibilities of card holders, 
proper use of the card, and ethical conduct. Many agencies 
choose to supplement this training with written, oral, or 
online training of card holders on agency-specific procedures.
    GSA holds an annual training conference for over 3,000 
agency program coordinators, auditors, and investigators on a 
variety of subjects, including innovative best practices and 
charge card management and use of electronic management control 
and oversight tools.
    GSA's mission is to help Federal agencies serve the public 
by offering acquisition services at the best value. We expect 
our purchase card issuers to support this mission and deliver 
the best value to our purchase card customers, including 
providing more robust purchase card spend data. GSA recognizes 
the inherent challenges of attaining Level 3 data and point-of-
sale discounts, but we are making progress and are confident 
that leveraging buying power will be one of the next great 
success stories for the GSA SmartPay program.
    Senator Collins, that concludes my prepared remarks for 
today. I would be happy to answer any questions. Thank you.
    Chairman Collins. Thank you, Mr. Fox.
    Mr. Fox, in your testimony, you cited a study and suggested 
to the Committee that the rate of misuse of purchase cards is 
very small. Of course, the problem with that study is that it 
is only looking at outright frauds, not the kinds of 
inefficient and wasteful purchases that GAO has documented 
could amount to something like $300 million a year. But also, 
it seems to me you are underplaying the problem, because if you 
take even a small percentage and apply it to $16 billion in 
purchase card transactions, you are very quickly getting into 
millions of dollars in outright fraud, not to mention the 
hundreds of millions of dollars that are being lost when card 
holders are not taking advantage of discounted prices that the 
government has already negotiated.
    In our investigation, for example, and in working with GAO, 
the IGs, and reviewing various cases, we found many examples of 
fraud, for example, the $1.7 million purchase card fraud that 
occurred at the Department of Defense Washington Headquarters 
Services, which I referred to in my opening statement. There 
was also a Navy card holder who used her purchase card 59 times 
to make $132,000 in fraudulent purchases, including two 
automobiles and a motorcycle. We have heard of the kinds of 
abusive transactions that the GAO uncovered. There was a case 
in the VA which the Inspector General has outlined in his 
statement for the record where an employee used a purchase card 
to buy more than $200,000 worth of electronic equipment for 
personal use, yet another case where an employee at a VA 
medical center charged $170,000 in computers and other 
equipment. I could go on and on and on with examples.
    Do you think this is just a tiny problem. It sounds like 
pretty serious cases of abuse to me that would be upsetting to 
the American taxpayer.
    Mr. Fox. Senator Collins, any amount of fraud in the 
Federal Government by members of the Federal Government is too 
much fraud. So although we do like to point out that progress 
has been made, and that was the intention of the statements is 
to show that progress is being made, we want to get to that 
next level of progress just as everyone here at this table and 
on your Committee wants to get to that next level of progress.
    You mentioned the progress that can be gained through data 
mining and we are fully on board at GSA with the need for more 
data mining. As we can try to get more merchants using, 
transmitting Level 3 data so that we can then have better data 
mining capability to drill down to see those exact purchases, 
what they were, where they were purchased, and who purchased 
them, exact dollar amounts, that next level of data is 
important to rooting out the remaining fraud.
    As you mentioned, it does add up to millions of dollars, 
and again, any amount of fraud inside the Federal Government to 
GSA and all of us inside the Federal Government is 
unacceptable.
    Chairman Collins. The problem is, if GSA, as the chief 
acquisition agency in the Federal Government, minimizes this 
problem by quoting studies that suggest it is a very small 
percentage, it doesn't exactly send the right signal to other 
agencies about the importance of using time, energy, and 
resources, such as DOD clearly has done, to try to crack down 
and eliminate this kind of waste, fraud, and abuse.
    I want to ask Mr. Kutz GAO's opinion of the scope of the 
problem and of the study cited by Mr. Fox.
    Mr. Kutz. Yes. I would say that it is kind of an academic 
study of a real world problem. I mean, it was a survey, so it 
was a voluntary thing. If you were to survey the Department of 
Defense, where we did our work and where Colonel Kelley has 
done his work, they would, of course, have answered, ``We have 
no fraud and abuse.'' And so how valid is a survey in 
identifying what is a real problem in the government?
    The VA report itself, as I read it, identified 2 percent as 
misuse in that report, and I will tell you this. Could you put 
that posterboard back up? All the items that we identified on 
that posterboard and all of the other things we identify, when 
we went to the Department of Defense and at the other agencies 
that we did also, they did not acknowledge, they didn't 
recognize, they didn't have the controls in place to find these 
items. So if they had answered a survey, none of these would 
have been recognized on that survey as being fraudulent or 
misuse of Federal funds. So I really think that there are some 
serious flaws in doing a self-study of what this problem is.
    I do think that the controls that are in place today versus 
several years ago mean that the problem is going to be less, 
and the bottom line is, most card holders are honest and they 
are doing the right thing and the vast majority is. But is it a 
0.017 percent problem? I don't think so. I think we have seen 
it is probably higher than that. And certainly when you start 
getting to be like VA, 1 or 2 percent misuse of government 
purchase cards, that is fairly significant.
    Chairman Collins. I think your point is a very good one, 
that if agencies have not yet implemented effective controls, 
they could be answering the survey very honestly and yet 
missing the whole extent of fraudulent transactions.
    I want to follow up on a point that you made in your 
testimony about the relatively few cases where disciplinary 
action had been taken. Colonel Kelley mentioned some cases, and 
I was glad to hear of them, where criminal prosecutions had 
been brought and people had actually gone to jail. And I also 
want to emphasize that you are absolutely right that the vast 
majority of card holders are ethical and honest and use these 
cards in appropriate ways that save money for the taxpayer. But 
I am concerned, I am troubled that relatively few disciplinary 
actions have been taken in cases involving really egregious 
examples of fraudulent transactions for personal use.
    Now, I understand that you examined 120 improper 
transactions and that you found that only 20 led to 
disciplinary actions, and this included improper purchases of 
clothing, of Coach leather briefcases, a $600 computer bag, 
Lego toy robots, day planners, and a host of other illegal or 
inappropriate items. Could you give me a sense of what happened 
in those 120 cases? Did the individuals end up repaying the 
Federal Government for these personal items, for example?
    Mr. Kutz. Well, first of all, we reported 120 misuses. It 
was a very target-rich environment for data mining, I would 
say. And so as Colonel Kelley said in his opening statement, 
there was no way for us to follow up and investigate every 
single item. So we had thousands and thousands of potentially 
fraudulent and misuse-type cases, but we reported on 120 in the 
reports we did.
    Three of the individuals involved that were card holders 
repaid the government for those, and 20 of the 120 had some 
sort of disciplinary action taken, such as a verbal or written 
reprimand. They had to, in some cases, turn the items back. As 
I mentioned, three people paid the money back. And otherwise, 
there was really nothing that was done to those individuals.
    I think to this day, and you get into the culture of the 
Department of Defense in some cases, some of the items that we 
are talking about here, they still believe were appropriate 
government purchases. They never really agreed with us on the 
Coach briefcases. They said, well, they are better quality and 
therefore they are worth us buying. But I think they just 
missed the point completely.
    Chairman Collins. Well, it is disturbing that only three 
actually repaid the government. It concerns me that the lack of 
consequences for the use of purchase cards makes it more likely 
that these abuses will continue. Would you agree with that?
    Mr. Kutz. Yes, I would agree with that. In fact, it isn't 
just isolated to the purchase card. We had the same thing with 
the individually billed travel card. We have seen it with 
premium-class travel. Senators Coleman and Levin had a hearing 
on extensive improper usage of first and business class airline 
travel. We have got some draft reports with Senators Coleman 
and Levin right now on potential voucher fraud and other 
misuses with respect to centrally billed travel accounts. And 
again, I seriously question what kind of actions are going to 
be taken to individuals that misuse government funds, and that 
is probably one of the areas we are most disappointed in where 
the Department has gone.
    As Colonel Kelley said, they have issued guidance, but they 
didn't agree at the Department level to follow up that this 
guidance will be consistently followed across the Department, 
and so certainly it is going to be inconsistently followed, 
which is what we saw before when we did our work. Some people 
will reprimand individuals. Others will do nothing.
    Chairman Collins. Could I ask Mr. Ryan to join you at the 
table for the next question. You just mentioned that you are 
looking at the issue of vendor fraud, and I know Mr. Ryan has 
done a great deal of work in the whole area of looking at 
vendor fraud, whether it is dealing with purchase cards or 
fleet cards or other kinds of credit cards.
    Could you tell us a little bit about your experience 
looking at the vendor side of the purchase card program? We 
tend to focus on the card holder misusing the card, but are 
there cases where vendors are ripping off the Federal 
Government through the purchase card program, as well?
    Mr. Ryan. I think the system is set up that the vendor can 
take advantage of employees that pay less attention to the 
bills that come in. You can find that certain vendors are 
holding the government's purchase card in a database. They can 
keep submitting a transaction slip to the financial institution 
for monies to be received from that particular account. They 
can set it up where they will send $2,500 to the bank on a 
purchase card transaction slip and constantly get paid that 
$2,500, and if no one is confirming the services that the 
government is getting, the government will pay that vendor.
    Chairman Collins. So it could be repeated payments of the 
same bill?
    Mr. Ryan. That is exactly right, Senator.
    Chairman Collins. Is there also a problem created by the 
incentives for an employee to make sure that they are paying 
bills on time? I remember years ago Congress reacting to 
complaints from small business people that the Federal 
Government paid in a delinquent manner that it caused a lot of 
cash flow problems. So as I recall, we passed something called 
the Prompt Pay Act and I am wondering if perversely that has 
created an incentive to move these bills, pay them quickly, and 
not necessarily review them to see if they have been paid 
already.
    Mr. Ryan. That is absolutely correct. If I am receiving a 
bill and the money is not coming out of my pocket, it is coming 
out of somebody else's pocket, and my performance rating is 
based on how fast I can move paper, I am going to move it on 
because I want to get a good rating.
    So if you are paying, and I think you have heard me say 
this before, you are making business decisions over security 
decisions, in this particular case, you are paying the bill. 
You have no idea if you have gotten the services. You are 
relying on other people. But as the processor of that paper, 
you have so many days to move it off your desk, and that is 
what they do. There are no checks and balance in regards to 
confirming that.
    Mr. Kutz. And the metrics that are in place are, in fact, 
for timeliness of payment. There are no metrics to look at the 
other issues we have talked about. And what it is called, 
basically--I am not sure it is--pay and confirm is what they 
call it, but it is really pay and chase, and unfortunately, 
oftentimes, the chase never happens. The bill gets paid and no 
one ever looks to see if we got the goods or services that we 
were supposed to, or whether they were in the same quality or 
quantity we ordered.
    Chairman Collins. Thank you. Colonel Kelley, you mentioned 
in your testimony a case that I cited to Mr. Fox, or actually 
it is yet another case where a card holder used his card 52 
times over an 8-week period to make a total purchase of 
$551,000. I understand that case is under investigation, but I 
wonder if you could use that example to explain more to the 
Committee how you use data mining to flag an example that 
appears to be questionable at best, egregious fraud at worst.
    Mr. Kelley. Yes.
    Chairman Collins. Could you walk us through the process?
    Mr. Kelley. Yes, ma'am. Basically, the tools we use are 
your expectations from your business rules. For example, in 
this instance, this vendor was not used by a number of 
different card holders. An expectation would be the more card 
holders you have using a vendor, the less risk you have. So 
those vendors that are doing business with a small number of 
card holders have a higher risk. In this instance, those 
transactions were flagged for that reason.
    The other business rule we used to couple with that was the 
fact that we were looking for card holders that made repetitive 
buys near the dollar limit over certain periods of time, and we 
can move that line in the sand anywhere you want, depending on 
what you are looking to do.
    In this instance, these transactions popped up for two of 
those indicators, which we thought were pretty significant, and 
they went out and did the work to look at them and the DSA 
organization that did the work for us is smart partnering now 
with our DCIS investigators and I can say that this is going to 
probably end up in a referral for criminal prosecution for a 
number of reasons. Of course, it is an open investigation, so 
that is all I would like to say on that for right now.
    Chairman Collins. But it is an example of a case that was 
identified by you through data mining, correct?
    Mr. Kelley. Yes, ma'am.
    Chairman Collins. Mr. Steensma, as you know and as GAO has 
indicated, it isn't just the purchase card program that has had 
problems with waste, fraud, and abuse. There have been similar 
concerns with the travel card, the fleet card, and the aviation 
card programs. Do you believe that--well, first of all, is DOD 
looking at extending data mining techniques that are being used 
successfully in the purchase card program card to those other 
cards, as well?
    Mr. Steensma. Yes, we are, ma'am. We are already looking at 
the travel card and data mining that. We are looking at the air 
card and have done that actually in the past once and issued a 
report on it. We will be looking at the fleet card. But when 
you have millions of transactions like Colonel Kelley talked 
about, data mining is the only way you can actually get a 
handle and put the auditors or investigators in the right place 
to look at something and determine if it is valid or not.
    Chairman Collins. What role do you believe that GSA should 
play in promoting greater use of data mining techniques, such 
as you are using successfully at DOD, to identify questionable 
transactions?
    Mr. Steensma. Well, what we would like to see is that GSA 
get all the data from all the banks, create a central 
repository of all the charge card data. Then GSA would promote 
the data mining and use standard business rules and techniques 
across all the cards and all the data, and we would also like 
them to operate or run a program such as Colonel Kelley was 
going to explain. There aren't enough auditors or investigators 
out there to check on everything, but the way to cut down all 
these frauds and inappropriate purchases, it didn't just happen 
once. It happened numerous times.
    If you have data mining and a central repository, with 
standard business rules for all agencies, what we would like to 
see is that on a regular basis, things that look inappropriate, 
E-mails or some electronic notice gets sent to the supervisor 
or the approving official that said, ``hey, this looks strange. 
Give us some feedback on it.'' The supervisor would then 
respond and explain in the E-mail, after looking into the 
transaction, whether it was valid or not. That type of 
information would then be kept in a database also to be looked 
at to determine patterns and techniques.
    But I think GSA needs to take the lead for the whole 
Federal Government, and like Colonel Kelley said, we have 
helped out 13 other agencies. That really isn't our job. We 
need somebody to take the lead on data mining for everything. 
We also need them to do additional research on how to develop 
new data mining techniques and also so they can be used to 
improve the management controls and push it back out to the 
agency managers so they can actually manage this program and 
they can be the ones that help prevent fraud, waste, and abuse, 
or at least catch it before it gets widespread like we talked 
about today.
    Chairman Collins. Mr. Fox, what is GSA doing to promote the 
expansion of data mining techniques in other agencies? DOD has 
indicated that they have had inquiries from several other 
agencies. They have been providing information to the 
Department of Commerce, the Postal Service, and the CIA. But 
that is not really DOD's job. That is more GSA's job. Could you 
inform us of what actions GSA is taking in this area?
    Mr. Fox. Yes. We are working with all the agencies to look 
at ways to better accomplish the data mining. We have 
discussions, certainly monthly discussions with the DOD folks, 
as our largest customer, on how we can help them better 
accomplish this task. We are looking at building a next 
generation SmartPay program that will accomplish--that will 
encompass more sophisticated data mining capabilities into it.
    But in the short term, we are working with the agencies to 
do a better job of data mining. Again, much of it goes back to 
trying to obtain more detailed data that comes out of the 
merchants themselves. Many of the merchants that are 
beneficiaries of the card are small businesses and have not 
jumped forward to put in place the systems to pass the Level 3 
data. So trying to get the card agency associations to work 
with their merchants to try to pass more detailed data into the 
system and then find ways to accomplish the data mining.
    We often find that the data mining is best done at the 
local level, as opposed to the centralized level. We are 
looking at both options as to what the right way to do it is. 
But if abuse is going to be found, it is most often going to be 
found at the local level and to provide that data mining 
available to the lowest-level folks, those folks who 
immediately supervise the purchase card holders, that is where 
we can have the most impact, is to provide them the tools at 
the most local level.
    Chairman Collins. Mr. Kutz, what does GAO see as GSA's role 
in this area as far as data mining or improving the internal 
controls used by other agencies?
    Mr. Kutz. I would concur with Mr. Steensma and I would go 
further with respect to, and I think that there are certain 
agreements we have with the banks now, and the GSA 
representative could probably be more specific with that, but 
the banks have their own fraud detection software. If you ever 
got a call from your bank with an unusual charge on your 
account saying, is that really your charge, I have gotten those 
before certainly.
    We didn't see that happening at the Department of Defense. 
So our suspicions when we have talked about this are that the 
banks were running the software but not making the calls, and 
so I think that is another part of the prevention of fraud and 
misuse that could be utilized across the Department, because we 
did see examples where people took these cards and they went 
down to the mall and they hit each of the stores in the mall. 
They were clearly fraudulent purchases. And if someone had made 
a call, they could have shut it off before more transactions 
had occurred.
    Chairman Collins. That is a good point, as well.
    We have spent a considerable amount of time talking about 
fraudulent purchases and how data mining techniques could 
identify those in the sea of bills that agencies are dealing 
with. But at least as important, perhaps even more important, 
is taking advantage of negotiated discounts.
    Mr. Fox, why doesn't the GSA negotiate agreements with 
vendors so that these discounts come up at the point of sale, 
so you don't have to worry about the card holder being aware of 
what the price should be on a particular item?
    Mr. Fox. We are aggressively pursuing that. We are up to 19 
stores that our customers can walk into and get point-of-sale 
discounts. They include, as I mentioned, Home Depot, Office 
Depot, and others. We are adding others. We are working with 
Staples right now. We have talked to folks like Wal-Mart, 
talked to other large vendors who do not have schedule 
contracts to try to bring them onboard. Some of them resist. 
Wal-Mart has consistently resisted a GSA schedule contract for 
their own business reasons.
    But we are aggressively working at it. Again, we are up to 
19 walk-in stores and 32 catalogs. We have catalogs that 
customers can use to get--with discount companies and they 
provide the GSA discounts. So we do promote--we are up to a 
total of over 14,500 total GSA schedule contracts with vendors 
of all sizes around the country, 75 percent of which are small 
businesses, which tend to use the purchase card sometimes 
almost exclusively.
    So we are trying to expand our programs all the time. We 
are adding new vendors at the rate of 20 percent per year right 
now and trying to expand those opportunities for our customers, 
and also the automatic credit card recognition is a big item 
for us as we add these walk-in, walk-out stores where customers 
can go in and present their card and not even mention they are 
with the Federal Government but get that automatic discount 
from places like Home Depot and Office Depot, as they are now. 
That is high on our agenda.
    Chairman Collins. Mr. Steensma, based on your experience--
actually, I am not sure whether this should go to Colonel 
Kelley or to you, so either of you can respond. Based on your 
experience, do you think that purchase card holders usually get 
the discounted price?
    Mr. Steensma. No, I don't, especially on many of the 
activities we went to. Colonel Kelly talked about we were down 
there at Louisiana and they spent over $800,000 buying normal 
computers and office equipment and supplies. They didn't get 
one discount off any contract, GSA schedule, or anything. We 
found the same problem at Washington Headquarters Service.
    Part of this comes from an education standpoint. Well, 
those two activities, it was a lack of controls, but we have in 
DOD well over a hundred-and-some-thousand buyers right now. If 
you go look at the training that they are provided, it is 
pretty good training on what they are required to do, the 
controls they should follow, and so on, but there really is no 
training in there on how to become a smarter buyer.
    When we are talking about $16 million in purchases, we need 
somebody that is going to do research and teach people, come up 
with web-based training, how to create better buyers for DOD, 
not just DOD but the whole Federal Government, and we need 
somebody to do that and that should be a role of GSA, how to 
make smarter buyers. We can save a lot more money than we have 
even talked about today once we can educate people not to just 
what is out there, but what the trends are and where people are 
going to buy and maybe we can negotiate lower discounts than we 
have already.
    Chairman Collins. I think this is an area where there is a 
possibility of tremendous savings and we could make a real 
difference by instituting point-of-sale discounts and also by 
better training buyers, as you have suggested, and by being 
more aggressive in seeking these discounts from vendors with 
large volumes.
    The final issue I want to touch on today is the 
proliferation of purchase cards. We obviously want to make sure 
that everyone who needs a purchase card has one, uses it 
appropriately, and that should save money for the Federal 
Government and make the process more efficient.
    On the other hand, Colonel Kelley, I was struck by your 
statement--I think I got it correctly--that you have reduced 
the number of purchase cards at DOD by 47 percent. Is that 
correct?
    Mr. Kelley. Yes, ma'am. We didn't do it. The DOD--the 
Department did it.
    Chairman Collins. I didn't mean you personally.
    Mr. Kelley. OK. Thank you. [Laughter.]
    Chairman Collins. You took away each one of those, right? 
[Laughter.]
    Mr. Kelley. I have been accused of that, ma'am. [Laughter.]
    Chairman Collins. But a 47 percent reduction is really 
significant, and I guess what I would ask you and Mr. Steensma 
is did reducing the number of card holders by that 
extraordinary number have a negative impact on the efficiency 
of the Department or the ability of individuals to get the 
items they needed quickly? Mr. Steensma.
    Mr. Steensma. No, I would say not in the least. They 
eliminated cards from people who didn't need them, shouldn't 
have had them, don't use them. But the volume of purchases 
actually went up. I haven't heard one complaint about people 
couldn't get things that they needed on time because there 
wasn't a buyer there. We just had way too many cards, not just 
DOD but all the agencies out there. It was a good move to 
eliminate the thousands of cards that are already gone.
    Chairman Collins. Mr. Fox, does the GSA put out guidelines 
for agencies to follow on how to decide whether employees 
should have purchase cards?
    Mr. Fox. We do put out guidelines and they are available 
through our training programs. We have our annual training 
conference where, again, last year, we had 3,000 folks come to 
our training, annual training conference for SmartPay. We put 
out guidance to them.
    We think that we have pushed the reduction of number of 
card holders out of GSA and the agencies have certainly done a 
great job of picking up on that, because we believe that 
reducing the numbers has a positive impact in two ways. It 
eliminates--it makes the agencies make tough choices about who 
will get the card and, therefore, they give them to those who 
need them the most. And also, it decreases the number of card 
holders managed per supervisory card manager and that is down, 
on average, to about three-and-a-half card holders per 
supervisory manager, which we believe is a great statistic.
    Now, the agencies where you see them going up to 10, 15, or 
20 card holders per supervisory manager, it is very difficult 
for those managers to keep track of those and reconcile the 
accounts and reduce fraud. We think accurate card 
reconciliation at the local level is an extremely important 
part of fighting fraud.
    Chairman Collins. Mr. Kutz, is part of the problem here the 
proliferation of cards?
    Mr. Kutz. That was a major problem. Some of the initial 
looks we did at the Navy, for example, we found one out of 
every three employees would have a purchase card and they did 
not have enough approving officials, as I think the GSA 
representative mentioned here, and so you had instances where 
approving officials had 100 or more people that were making 
transactions that they were responsible for reviewing the 
statement, and it wasn't their full-time job. It was an ``other 
duty as assigned,'' which meant it was a rubber stamp. There 
was no review of the bills being paid and that was where a lot 
of the cases, we found that was one of the symptoms or causes 
of the problem.
    Chairman Collins. Thank you. It seems to me if you have so 
many card holders, that means you have way more transactions 
and that lessens the chance they are going to be reviewed and 
it increases the chances that they are going to be misused. It 
would be good if other agencies took the kind of aggressive 
approach that DOD did in really evaluating who needs a card.
    It is highly significant to me, as Mr. Steensma testified, 
that you could reduce the number of card holders by 47 percent 
and yet the purchases have gone up. So that does suggest that 
the proliferation of cards is another area that we need to 
examine.
    I want to thank each of you for being here today. I want to 
thank the GAO for doing a terrific job in taking a look at this 
issue and DOD also for the aggressive work you are doing.
    Data mining has been a very touchy issue, as you know, in 
Congress, but this seems to me to be an ideal use of data 
mining that would allow us to identify questionable or outright 
fraudulent transactions without raising some of the privacy and 
personal information issues that are so controversial when data 
mining is applied in other arenas.
    Mr. Fox, I would like to see GSA work more closely with the 
agencies to promote best practices, to learn from the 
experience at DOD and to implement fully the recommendations 
made by the General Accounting Office. It is my understanding 
GSA has endorsed those recommendations and is working to expand 
point-of-sale discounts and to implement the other reforms.
    We look forward to working with you. I will be pursuing the 
legislation with Russ Feingold, as well, which I also think 
will be helpful. But thank you all very much for your 
assistance today.
    I am convinced that if we focus on issues like this one 
that we can make a real difference in saving literally hundreds 
of millions of dollars across our government each year, and 
Colonel Kelley put it well, because each of those dollars are 
dollars that could be put to the war against terrorism or used 
to reduce the deficit or for other important programs. We have 
an obligation to the taxpayers to make sure that their money is 
wisely spent, and I think that the discussion today will help 
advance that goal.
    The hearing record will remain open for 14 days for the 
submission of any additional materials. I want to thank my 
staff also for their hard work on this hearing.
    This hearing is now adjourned.
    [Whereupon, at 11:17 a.m., the Committee was adjourned.]




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