[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
FEDERAL 9/11 ASSISTANCE TO NEW YORK:
PART I, II AND III
=======================================================================
HEARING
before the
SUBCOMMITTEE ON MANAGEMENT,
INTEGRATION, AND OVERSIGHT
of the
COMMITTEE ON HOMELAND SECURITY
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
July 12, 2006 and July 13, 2006
__________
Serial No. 109-91
__________
Printed for the use of the Committee on Homeland Security
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
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__________
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COMMITTEE ON HOMELAND SECURITY
Peter T. King, New York, Chairman
Don Young, Alaska Bennie G. Thompson, Mississippi
Lamar S. Smith, Texas Loretta Sanchez, California
Curt Weldon, Pennsylvania Edward J. Markey, Massachusetts
Christopher Shays, Connecticut Norman D. Dicks, Washington
John Linder, Georgia Jane Harman, California
Mark E. Souder, Indiana Peter A. DeFazio, Oregon
Tom Davis, Virginia Nita M. Lowey, New York
Daniel E. Lungren, California Eleanor Holmes Norton, District of
Jim Gibbons, Nevada Columbia
Rob Simmons, Connecticut Zoe Lofgren, California
Mike Rogers, Alabama Sheila Jackson-Lee, Texas
Stevan Pearce, New Mexico Bill Pascrell, Jr., New Jersey
Katherine Harris, Florida Donna M. Christensen, U.S. Virgin
Bobby Jindal, Louisiana Islands
Dave G. Reichert, Washington Bob Etheridge, North Carolina
Michael McCaul, Texas James R. Langevin, Rhode Island
Charlie Dent, Pennsylvania Kendrick B. Meek, Florida
Ginny Brown-Waite, Florida
______
Subcommittee on Management, Integration, and Oversight
Mike Rogers, Alabama, Chairman
John Linder, Georgia Kendrick B. Meek, Florida
Mark E. Souder, Indiana Edward J. Markey, Massachusetts
Tom Davis, Virginia Zoe Lofgren, California
Katherine Harris, Florida Sheila Jackson-Lee, Texas
Dave G. Reichert, Washington Bill Pascrell, Jr., New Jersey
Michael McCaul, Texas Bennie G. Thompson, Mississippi
Peter T. King, New York (Ex (Ex Officio)
Officio)
C O N T E N T S
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Page
Statements
The Honorable Mike Rogers, a Representative in Congress From the
State of Alabama, and Chairman, Subcommittee on Management,
Integration and Oversight:
Oral Statement................................................. 1
Prepared Statement............................................. 2
The Honorable Kendrick B. Meek, a Representative in Congress From
the State of Florida, and Ranking Member, Subcommittee on
Management, Integration and Oversight.......................... 3
The Honorable Peter T. King, a Representative in Congress From
the State of New York, and Chairman, Committee on Homeland
Security....................................................... 5
The Honorable G. Thompson, a Representative in Congress From the
State of Mississippi, and Ranking Member, Committee on Homeland
Security....................................................... 6
The Honorable Nita M. Lowey, a Representative in Congress From
the State of New York.......................................... 7
The Honorable Michael T. McCaul, a Representative in Congress
From the State of Texas........................................ 160
The Honorable Bill Pascrell, Jr., a Representative in Congress
From the State New Jersey...................................... 66
Witnesses
Wednesday, July 12, 2006, Part I
PANEL I
Mr. Gregory Kutz, Director, Financial Management and Assurance,
U.S. Government Accountability Office:
Oral Statement................................................. 39
Prepared Statement............................................. 41
Mr. Joe Picciano, Deputy Director for Region II, Federal
Emergency Management Agency, U.S. Department of Homeland
Security:
Oral Statement................................................. 9
Prepared Statement............................................. 12
The Honorable Richard Skinner, Inspector General, U.S. Department
of Homeland Security:
Oral Statement................................................. 27
Prepared Statement............................................. 30
PANEL II
Ms. Leigh Bradley, Senior Vice President for Enterprise Risk,
American Red Cross:
Oral Statement................................................. 98
Prepared Statement............................................. 101
Mr. Neil Getnick, President, International Association of
Independent Inspectors General:
Oral Statement................................................. 85
Prepared Statement............................................. 88
The Honorable Rose Gill Hearn, Commissioner, New York City
Department of Investigation:
Oral Statement................................................. 68
Prepared Statement............................................. 73
Ms. Carie Lemack, Co-Founder, Families of September 11:
Oral Statement................................................. 92
Prepared Statement............................................. 94
Mr. David J. Varoli, General Counsel, New York City Department of
Design and Construction:
Oral Statement................................................. 78
Prepared Statement............................................. 81
WITNESSES
Thursday, July 13, 2006, 10:12 a.m., Part II
Panel I
Mr. Leroy Frazer, Assistant District Attorney, Chief, Special
Prosecutions Bureau:
Oral Statement................................................. 145
Prepared Statement............................................. 147
Ms. Ruth, Ritzema, Special Agent in Charge for New York, Office
of Inspector General, U.S. Department of Housing and Urban
Development:
Oral Statement................................................. 124
Prepared Statement............................................. 125
Mr. Douglas Small, Deputy Assistant Secretary, Employment and
Training, U.S. Department of Labor:
Oral Statement................................................. 137
Prepared Statement............................................. 139
The Honorable Eric Thorson, Inspector General, U.S. Small
Business Administration:
Oral Statement................................................. 132
Prepared Statement............................................. 134
Panel II
Ms. Bettina Damiani, Project Director, Good Jobs New York:
Oral Statement................................................. 184
Prepared Statement............................................. 186
Ms. Eileen Mildenberger, Chief Operating Officer, Empire State
Development Corporation:
Oral Statement................................................. 169
Prepared Statement............................................. 171
Mr. Stefan Pryor, President, Lower Manhattan Development
Corporation:
Oral Statement................................................. 172
Prepared Statement............................................. 175
Mr. John Wang, Founder and President, Asian American Business
Development Center:
Oral Statement................................................. 179
Prepared Statement............................................. 181
Witnesses
Thursday, July 13, 2006, 2:12 p.m., Part III
Panel I
Mr. Bernard Cohen, Director, Lower Manhattan Recovery Office,
Federal Transit Administration, U.S. Department of
Transportation:
Oral Statement................................................. 205
Prepared Statement............................................. 206
Mr. Todd J. Zinser, Acting Inspector General, U.S. Department of
Transportation:
Oral Statement................................................. 214
Prepared Statement............................................. 216
Panel II
Mr. Ronald P. Calvosa, Director of Fraud Prevention, Lower
Manhattan Construction Command Center:
Oral Statement................................................. 226
Prepared Statement............................................. 228
Mr. Michael Nestor, Director, Office of Investigations, Port
Authority of New York and New Jersey:
Oral Statement................................................. 232
Prepared Statement............................................. 234
For the Record
Submitted by the Honorable Mike Rogers:
Investigative Report........................................... 161
Michael J. Garcia, U.S. Attorney, Southern District of New
York:........................................................
Prepared Statement......................................... 58
Mr. Thomas McCormack, Chair, Business Integrity Commission, New
York,........................................................
Prepared Statement:........................................ 202
Mr. Leroy Frazer, Jr., Assistant District Attorney, Chief,
Special Prosecutions Bureau:.................................
Letter..................................................... 256
Appendix
Additional Questions and Responses
Wednesday, July 12, 2006, Part I
Responses from Hon. Richard Skinner.............................. 247
Responses from Mr. David J. Varoli............................... 249
Responses from Ms. Bettina Damiani............................... 250
Thursday, July 13, 2006, 10:12 a.m., Part II
Responses from the Honorable Eric Thorson........................ 252
Responses from Mr. Todd J. Zinser................................ 253
Thursday, July 13, 2006, 2:12 p.m., Part III
Responses from Mr. Michael Nestor................................ 252
LESSONS LEARNED IN FRAUD DETECTION, PREVENTION, AND CONTROL--RESPONSE
PART I
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Wednesday, July 12, 2006
U.S. House of Representatives,
Committee on Homeland Security,
Subcommittee on Management,
Integration, and Oversight,
Washington, DC.
The subcommittee met, pursuant to call, at 2:05 p.m., in
Room 311, Cannon House Office Building, Hon. Mike Rogers
[chairman of the subcommittee] presiding.
Present: Representatives Rogers, Linder, McCaul, King (ex
officio), Meek, Pascrell and Thompson (ex officio).
Also Present: Representative Lowey.
Mr. Rogers. This meeting of the Management, Integration and
Oversight Subcommittee of the Committee on Homeland Security is
called to order.
This afternoon we begin a series of hearings to examine the
use and misuse of Federal disaster assistance provided to New
York after the terrorist attacks of September 11, 2001. Before
we begin, I do want to thank our panel guests for being with us
today, and we look forward to your statements and answers to
questions.
As we approach the fifth anniversary of the September 11th
attacks, we remember how the world witnessed an extraordinary
effort by New Yorkers to respond to an extraordinary event. To
help the city recover, the President and Congress provided
approximately $20 billion for New York City.
The graphics on display reflect the breakdown of the $20
billion both by category and the amount disbursed by each
Federal agency involved in this effort. But while New Yorkers
and the Nation pulled together, there were those who took
advantage of this crisis for illegal personal gain.
Late last year the New York Daily News and other newspapers
reported on examples and allegations of waste, fraud, and abuse
regarding the 9/11 funding. In response, Homeland Security
Committee Chairman Peter King requested that this Subcommittee
examine the issue. Over the past six months committee staff
conducted a bipartisan review, which included numerous
interviews in New York and Washington. The committee also
examined Federal financial records and grantee databases. The
effort was augmented by a special agent from the FBI, an
investigative reporter and technical assistance from the GAO.
We also received financial data from 16 Federal agencies.
As part of our examination we are holding three hearings.
Today's hearing will examine programs designed for the
immediate response to the terrorist attacks of September 11.
The second hearing will focus on the programs designed to help
businesses and individuals recover from 9/11, and the third and
final hearing will look ahead at the fraud controls and
programs designed to help rebuild Lower Manhattan.
While fraud did occur, the Subcommittee found that New York
City agencies responded by instituting numerous fraud controls.
Prosecutors also won prison sentences up to eight years and
restitutions totaling millions of dollars.
Our goal is to learn from the New York experience so
improvements can be made in future Federal assistance programs
to save taxpayer dollars.
[The statement of Mr. Rogers follows:]
Opening Statement of the Honorable Mike Rogers
July 12, 2007
This afternoon, we begin a series of hearings to examine the use
and misuses of Federal disaster assistance provided to New York City
after the terrorist attacks of September 11, 2001.
Before we begin, I would like to welcome our distinguished
witnesses, and thank them for taking time out of their schedules to be
with us today.
As we approach the fifth anniversary of September the Eleventh, we
remember how the world witnessed an extraordinary effort by New Yorkers
to respond to an extraordinary event.
To help the city recover, the President and Congress provided
approximately $20 billion dollars for New York City.
The graphics on display reflect the break-down of the $20 billion--
both by category, and the amount disbursed by each Federal agency
involved in this effort. But, while New Yorkers and the Nation pulled
together, there were those who took advantage of this crisis for
illegal personal gain.
Late last year, the New York Daily News, and other newspapers,
reported on examples and allegations of waste, fraud, and abuse
regarding 9/11 funding.
In response, Homeland Security Committee Chairman Peter King
requested that this Subcommittee examine the issue.Over the past six
months, committee staff conducted a bipartisan revue, which included
numerous interviews in New York and Washington.
The committee also examined Federal financial records, and grantee
databases.
The effort was augmented by a special Agent from the FBI, an
investigative reporter, and technical assistance from the Government
Accountability Office.
We also received financial data from 16 Federal agencies.
As part of our examination, we are holding three hearings:
Today's hearing will examine programs designed for the
immediate response to the terrorist attacks of September 11;
The second hearing will focus on those programs
designed to help businesses and individuals recover from 9/11;
and
The third hearing will look ahead at the fraud
controls in programs designed to help rebuild Lower Manhattan.
While fraud did occur, the subcommittee found that New York City
agencies responded by instituting numerous fraud controls.
Prosecutors also aggressively won prison sentences up to eight
years, and restitutions totaling in the millions.
Our goal is to learn from the New York experience, so improvements
can be made in future Federal disaster assistance programs to save
taxpayers' dollars.
I now turn to the Ranking Member for any statement he may have.
Mr. Rogers. And now I turn to the Ranking Member for an
opening statement. Mr. Meek.
Mr. Meek. Thank you, Mr. Chairman. I would ask at the
appropriate time if you can recognize Mr. Pascrell. I am going
to waive my statement for my opening comments, the first round
of questioning, but recognize Mr. Pascrell from New Jersey at
the appropriate time.
Mr. Rogers. The gentleman from New Jersey is recognized for
and opening statement.
Mr. Pascrell. Mr. Chairman, thank you for holding these
series of hearings over the next couple of days. This is a very
important issue for which we are going to explore events that
are long overdue, Mr. Chairman.
That there is a lack of congressional oversight has been a
deplorable trademark of the House of Representatives in recent
years. Virtually all meaningful matters that come before our
body garner little more than a cursory review, and, regardless
of the important issues at hand, essentially nothing in the way
of consequence or ramification is ever instituted. The record
is clear on that.
The Homeland Security Committee, however, is becoming an
exception to the rule. We need exceptions to the rule. We have
engaged in robust and vigorous oversight on a wide array of
issues that fall under our purview. Today we continue on that
track, and I again applaud the Chair and the Ranking Member for
allowing us to finally focus on the topic.
I am heartend by the enormity, by the breadth and scope of
the investigation this subcommittee will be undertaking.
Billions of taxpayer dollars have been allotted in the
extraordinary response to the extraordinary tragedy of 9/11,
and it is truly our moral obligation to ensure that these funds
have gone to those people and those entities that need it most.
We know the grim realities of September the 11th and the
devastating impact on the United States, to say the least. New
York City in particular faced an almost inconceivable challenge
in its response, in its recovery and in its rebuilding, which
goes on.
And the urgent needs of the city prompted an unprecedented
reaction by the Federal Government. The President requested and
the Congress delivered $20 billion to New York City to help in
response to and recovery from the attacks. These funds were
disbursed by a variety of agencies and for a multitude of
services ranging from identifying casualties, to treating the
injured, to removing the 100,000 truckloads of debris, to
providing assistance to unemployed workers and damaged
businesses, to rebuilding the transportation and communication
structure of Lower Manhattan, but to date no comprehensive
Federal accounting of these funds has ever been conducted. Nor
has the Congress, nor has the executive branch of government
assessed the Nation's response to this tragedy. The changes
must come from this committee.
Dealing with and confronting tragedy often brings out the
very best in people. We know that for some it brings out the
very worst. Any time money, and this was a lot of money, is
involved, there is the potential for nefarious deeds to occur,
embezzlement, fraud, all kinds of abuses or potentialities that
are always with us, and the witnesses, I have just glanced over
their testimony, talk about these very specific things.
We know this, so it was imperative that the Federal
agencies charged with disbursing the money have all appropriate
safeguards in place, but it appears this was not necessarily
the case. Scattered reports from an assortment of outlets have
extraordinary examples of waste, of fraud and abuse. According
to the New York Daily News, at least 63--over $63 million in
FEMA funds for Ground Zero cleanup work was paid to companies
accused of mob ties. This is unacceptable. Likewise, through
the individual and family grant program, FEMA provided
financial assistance for the replacement of air conditioners,
vacuum cleaners, air purifiers that had been ruined by airborne
residue from the collapse of the World Trade Center towers.
Much of the funding for this program, which provided up to 17
to $150 per individual or household went to people who did not
even live in the affected areas.
Some reports state that millions of dollars were awarded to
large, flourishing businesses that were not in need of
assistance. While heavily damaged businesses were awarded as
little as $,10 similarly, as has been alleged, that money that
was supposed to go to lower-income residents and Lower
Manhattan was funneled to luxury housing. Each and every one of
these allegations, and many more if true, is utterly
unconscionable, I think this committee would conclude.
As we move forward, I want to know what kinds of
information sharing and cooperation took place with all of the
Federal agencies involved in the undertaking. We have heard
that the SBA disbursed as much as $121 million in duplicative
loans. If true, then obviously information sharing was a
massive problem. We saw what happened with Katrina. We haven't
even looked at what happened after the tragedy of 9/11.
We also need to examine the extent that agencies performed
their due diligence to determine whether applicants' claims
were accurate. It seems like this was inadequate at best.
We must all work to ensure that any kind of ineffective
oversight or procurement by agencies is remedied once and for
all. We know that we have a lot of work ahead of us, and I am
looking forward to hearing from today's witnesses.
And just two final points, Mr. Chairman, if I may. In the
testimony of our good friend Mr. Richard Skinner, on page 4 he
talks about the U.S. attorneys, and I get the impression--I
hope he addresses this. I get the impression, I hope you will
correct me if I am wrong or support me if I am right, that the
U.S. attorneys felt that this was not significant enough to
look after, to look into, and that they felt that they could
not prove their cases many times.
And the second point I want to bring up is on page 9 and 10
when you talk about the air quality. There has been a lot
written about what was done after this vicious attack and how
FEMA worked with the EPA. We knew that all the records of EPA
kept on telling us, Members of the Congress, members of the New
York--particularly New York delegation, that everything was
just wonderful, and yet we understand now what our first
responders are going through.
We cannot accept anything unless we understand and the
record is put before us and the record is kept open, and I am
telling you, Mr. Chairman, we are here 5 years later, and we
still have held no one accountable. We still have held no one
accountable as to what the response was and what happened in
terms of that tragedy. I don't know if I would hope we would
all be in unison that this is not acceptable, and somebody has
got to pay the price. Whoever cleared the air, and I mean
cleared the air, and the air wasn't clear, that is pretty
simple. And as far as I am concerned, that kind of attack and
that kind of response if not true and simply expeditious at
that particular time, that person should be tried in a court.
That person should be tried in a court. I don't care how many
titles they have. We are no better if we are hiding behind our
titles as Congress, as a Congressman or Congresswoman in the
109th Congress. We are no better.
Thank you, Mr. Chairman.
Mr. Rogers. I thank the gentleman.
The Chair now recognizes the Chairman of the Full
Committee, Mr. King of New York.
Mr. King. Thank you, Mr.Chairman. Let me thank you for the
thoroughly bipartisan job that you have done on this. This is
certainly a first-class investigation that was done. You and
your staff and the people who have been assigned to this have
really performed a great public service.
As a Member of Congress who lost over 150 friends,
neighbors, and constituents on September 11th, this issue was
particularly significant to me. I remember being with
Congressman Pascrell and Congresswoman Lowey just three days
after September 11th on the 14th, being at Ground Zero and
seeing the amount of devastation. I worked two blocks from
there. It took me about a half hour to get to my borough. The
devastation was so significant and was such an enormity that it
really was beyond anyone's comprehension. And to think that
there were people who were working literally around the clock--
you think of people who died that day, but also the rescue
workers, those who were putting their lives on the line as far
as the recovery effort, because it was tremendously dangerous
for the first several weeks, and to think there were those
taking advantage of that. Those who were coming in to make
illicit and illegal money and to profit as a result of the
worst tragedy in American history to me is as despicable as any
crime can be.
So these hearings are very appropriate. They are very
significant. And I think we should note and acknowledge up
front that certainly in those first several weeks there was
definite influence of organized crime in those first two or
three weeks. We had organized crime companies coming in, being
involved, obviously making illicit profits during that time.
There were phantom employees. So definitely things went wrong.
On the other hand, I think it is significant to realize the
effort that was made and things went right is that after that
first two or three weeks of absolute devastation, very
significant controls were imposed including dividing the area
into quadrants. The fact that the area was a crime scene which
had a large number of law enforcement persons there went a
large way to cracking down on the crime that was going on, if
not eliminating it entirely. That is why there have been so
many prosecutions since then, and there has been significant
action taken by various prosecutors--by the City Department of
Investigation and numerous other authorities--which have really
gone after those who did try to profit.
We have to look carefully to make sure that they--there can
be lessons learned from September 11th. Mayor Giuliani had
measures in place that had been implemented after those first
two or three weeks. Anyone who was there during those first
several days afterwards and saw the extent of the devastation
and listened to all of the experts say that it would take at
least two years for the cleanup to be completed, and it would
cost well over a billion dollars for the cleanup to be
completed. The fact is it was done in less than nine months--
Memorial Day, eight and a half months after September 11th--and
the cost was less than $700 million. And the cost had been
projected in excess of 1.2 billion. So it is important to keep
this in perspective.
The fact is, there were a few who performed horribly. There
were a few who committed the most scandalous crimes possible.
But the overwhelming number of people involved--including the
rescue workers, ordinary citizens, ordinary contractors--did do
the job, and it was done extremely well. It really is a
tribute, I believe, to the spirit and the heart of the people
of New York in particular, but also the people of the United
States who rallied behind us.
Having said that, none of that mitigates the harm done by
those who tried to profit at the expense of those who suffered
so badly on those--on the terrible day of September 11th and
the aftermath when they were still looking for survivors, still
trying to extract bodies, and there were people down there
stealing and robbing for their own selfish purposes.
So, again, I thank Chairman Rogers and Ranking Member Meek
for having this hearing. I think it is very significant to
learn what happened on September 11th, but it is also if not
even more important to the future to get the lessons learned
from September 11th; if, God forbid, we ever are again affected
or afflicted by a terrorist tragedy or a natural disaster, so
that we be in a better position to get the job done and get it
done correctly.
Mr. Rogers. I thank the gentleman.
The Chair recognizes Mr. Thompson.
Mr. Thompson. Thank you very much, Mr. Chairman, Ranking
Member Meek for holding this hearing. The tragedy that befell
this Nation on September 11, 2001, was an attack on our people
and on our own soil. It changed the way that each of us has
come to view the serious need for safety and security in this
country. As I have often heard people say, 9/11 changed
everything. No question the attacks changed the way Americans
look at the world. However, it should also give--it should also
have changed the way our government responds to an
unanticipated, multidimensional catastrophe, what I call a
megacatastrophe, and I am afraid it is not.
I don't like to be a pessimist, but as we approach the 1-
year anniversary of Hurricane Katrina, I am reminded of this
government's failed response to that, making a catastrophe. One
year later we who live in the affected areas of Mississippi,
Louisiana and Alabama are still in the process of removing
debris and trying to get trailers set up. There are still
thousands of homes that must be demolished before new ones can
be built, insurance settlements that must be received before
homes can be demolished, and people that must return before any
rebuilding can begin.
Mr. Chairman, I know that there are those who will say that
the comparison between Katrina and 9/11 is unfair. They will
say that the enormous geographical scope of the devastation
caused by Katrina combined with State and local jurisdictional
concerns expeditiously increased the difficulty of recovery and
rebuilding in these areas, and I will agree in part with these
assessments. However, I also know that because of 9/11 we
learned some basic processes and procedures that could have
been put in place to help speed the pace of recovery for
Katrina. But these practices were not used.
In the 9/11 cleanup we learned about the importance of
having monitors on the ground to make sure that contractors
were doing the work that they were being paid to do. We learned
it in 9/11, but we didn't use it for Katrina. In 9/11 recovery
we learned that the Federal Government needed to have a system
of information sharing that would keep unscrupulous people from
claiming multiple benefits while the true and needy are left to
wait and wonder. We learned it from 9/11, but we didn't use it
for Katrina.
I know that we did not learn those lessons, because the
Government Accountability Office found that there may be $1
billion in fraud, waste and abuse associated with payments to
individual contractors. These are losses to the taxpayers, Mr.
Chairman that could have been avoided, but were not.
Mr. Chairman, I hope that we are able to examine and record
the lessons we learned from 9/11, but I must be realistic that
a little learning is not an education. A true education comes
when you can take what you have learned and put it into
practice.
Let us hope that we can put the lessons from 9/11 into
practice before we finish the job with Katrina and especially
before the next megacatastrophe.
Again, I want to thank you for holding this hearing, and
look forward to hearing from the witnesses over the next 2
days.
Mr. Rogers. I thank the gentleman.
The Chair is asked to ask unanimous consent to have our
friend and colleague from New York, Ms. Lowey, join us for this
hearing, and without objection, and we would like to hear your
opening statement if you would like the share one with us.
Ms. Lowey. Thank you, Mr. Chairman. I want to thank you and
the Ranking Member of the full committee for holding this very
important hearing.
As we know, the Nation's response to September 11th, the
folks' memories of charity generosity and decency, thousands of
New Yorkers and Americans from across the country worked
tirelessly to help our city recover, and, Mr. Chairman, Mr.
Chairman King, I do remember our walking around that site. In
fact, I will never forget it.
The Federal Government contributed $2 billion to the
recovery effort. Although this was an unprecedented amount,
there was no coordinated effort to comprehensively account for
how the funding was used. This opened the door for scattered
incidents of inappropriate spending, which is truly a tragedy,
truly outrageous, truly unfortunate.
In the aftermath of the hurricanes, it is clear we have
made little progress since September 11th to adequately verify
claims. Not only will stronger accounting mechanisms enable us
to better prevent waste and fraud, we will also gain a better
understanding of what assistance methods are the most effective
so we will be prepared for the next emergency.
Members of the New York delegation had to fight for many
months to regain $125 million for work compensation claims that
Congress rescinded. While FEMA was awarding over $63 million to
debris removal companies with ties to the mob, many who
responded at Ground Zero were suffering from numerous health
problems. In fact, just last week I was in Thornwood, New York,
talking to a firefighter who is still getting outstanding care
as a result of his work at 9/11. He and others had these
illnesses and is still recovering resulting from heroic efforts
working the pile after September 11th.
No examination of the post-9/11 recovery would be complete
without getting to the bottom of how the Federal Government
mispent millions while shortchanging important programs such as
medical treatment for first responders. I do, Mr. Chairman,
look forward to the testimony we will hear today on the initial
response. Instances of inappropriate spending are shameful when
we consider the magnitude of the tragedy of those who lost
their lives.
Mr. Chairman, this hearing is so very important not only on
this committee, but I also serve on the Foreign Operations
Subcommittee of Appropriations, and it seems that we just can't
get our oversight responsibilities together. We still don't do
a good job. Two and a half years after the Iraq confrontation
began, that finally is, and Inspector General Mr. Bowen is
identifying problems and taking action.
I know it is as frustrating to you, Mr. Chairman, as to our
Ranking Members on both sides of the aisle that there are
examples of this kind of fraud, this kind of abuse when the
need is so very great.
So I want to thank you, Mr. Chairman, for holding this
hearing. I want to thank all of our witnesses for appearing
before us, and, more importantly, I hope that we are going to
get to the bottom of this because there are so many people of
goodwill that responded to the tragedy of 9/11, and when they
read about this abuse, it goes to the core of what is wrong
about government. And we have a responsibility to make sure
this is set straight and never happens again. So I thank you
again, and I look forward to the witnesses.
Mr. Rogers. The Chair thanks the gentlelady and would like
to remind all Members statements may be submitted for the
record.
And now we would like to turn to our guests. I do want to
make the point that we expect to be called for a series of
votes in the next 10 to 15 minutes. So what I would like to do
is be able to get through each of your opening statements, and
if they are called--if you hear our beepers going off--between
now and then we will stay. We will try to get through those
opening statements, and we will recess while we go vote, and we
will come back and go to the question and answer period.
Hopefully things will work out that way, but that is the plan.
But we are going to have two panels of distinguished
guests. On this first panel we have before us--we are very
privileged to have these gentlemen with us--I would like to
start with Mr. Picciano. He is Deputy Director of Region II for
the Federal Emergency Management Agency. We welcome you and
look forward to your statement. I will remind all of you to
keep your statement to five minutes or less, and you can submit
your full statement for the record. But with that, welcome.
STATEMENT OF JOE PICCIANO
Mr. Picciano. Good afternoon, Chairman Rogers and Chairman
King, Ranking Member Meek and Thompson, members of the
committee. My name is Joseph Picciano, Deputy District Director
of FEMA, about four blocks north of the World Trade Center. Our
office was impacted by the event. On behalf of the Department
of Homeland Security and FEMA, I am here to discuss FEMA's
response and recovery to the New York City area following
September 11th. Although key FEMA leadership could address
these challenges and have left FEMA, my involvement has been
limited over the years. I will make every effort to answer your
questions. If I am unable to answer questions, I will get back
to you.
This testimony will cover the two types of FEMA programs
pertinent to the World Trade Center: public assistance,
assistance to government; and individual assistance to
individuals or victims.
There are a total of 191 applicants for public assistance.
Three applicants received 95 percent of all of the money. That
was New York City, the Port Authority and the State of New
York. Under public assistance FEMA and New York State and New
York City--and it is important to note New York State runs our
public assistance program, and we support them--worked together
to find ways within the Stafford Act to accomplish the
following needs and maintain accountability of funds: Establish
a family center for people to find their loved ones, fund the
New York City Schools to replace lost instructional times,
funded New York implementing cleanup programs for dust and
debris, death and disability programs, pay for mutual aid
reimbursement, pay for back pay on labor debris removal
contracts to clean up continual unprecedented complex site
conditions at the World Trade Center, pay for replacement of
emergency response vehicles, repair schools, repair ruined
roadways.
FEMA took action with New York and New York City to ensure
potential applicants understood how to apply for assistance.
Assistance was done in a coordinated and effective manner to
the State and city. The best technical staff we had were made
available. FEMA, New York State and New York City did make a
hotline to identify potential applicants. FEMA appointed a
Deputy Federal Coordinating Office for long-term recovery, and
we created the Federal Task Force to Support New York City and
the Infrastructure Recovery Work Group to ensure an efficient
and integrated restoration of public and private infrastructure
destroyed or damaged during the disaster.
FEMA, New York, New York City ensured quality assurance in
public assistance programs by emphasizing quality of
applications at the beginning of the process, additional checks
and balances in our system. We developed and provided clear
written guidance to the staff assisting applicants through
public assistance and through the State. And FEMA's Office of
General Counsel and the Office of Inspector General were on
site and provided us technical guidance and assistance during
the entire process.
Congress was very helpful. The consolidated appropriations
resolution that Congress enacted allowed us to address recovery
needs that were not clearly eligible under the Stafford Act.
The total obligated under that resolution was about $2.4
billion, the 9/11 associated costs, those costs that would have
been questionable under the Stafford Act, but this allowed us
flexibility to do things which we normally don't do straight
time, disability pension; overtime for security; heightened
security, which is a key concern in New York City; watershed
security; and other associated costs typical of those I just
described.
There was another $90 million under that resolution for
health monitoring of emergency service and rescue personnel,
and there was $1 billion established for insurance coverage for
New York and its contractors for claims arising from debris
removal at the Trade Center. The passage of the resolution
resulted in the city establishing a captive insurance company.
FEMA also had a series of what we call interagency
agreements with up to 12 other Federal agencies who managed
other programs. The largest one was the Department of
Transportation, who was responsible for rebuilding
transportation systems and building the hub to the extent that
it is going to be rebuilt to better serve New York City and
Lower Manhattan.
Let me move quickly to individual assistance. The most
significant and costly project in this category associated with
human service are the mortgage/rental; temporary housing;
individual family grants, as alluded to; disaster unemployment;
and crisis counseling. With all of the categories of spending
listed above, crisis counseling was the most significant, very
similar to the Oklahoma City bombing. This was a very large
building administered by the States, and multiple States tied
on to this program, and it was relatively successful in
activities that were initiated and that continue.
The largest individual assistance program in terms of
financial cost or public interest was the Mortgage and Rental
Assistance Program and Individual and Family Grant Programs.
Both of these programs no longer exist. The law changed in
2000, but it was still in effect at the time of the World Trade
Center. Mortgage and Rental Assistance Programs authorized
temporary mortgage and rental payments on behalf of individuals
and families who experienced a problem, and, given the need to
show causality as well as requirements, really delayed us in
doing anything with that. It wasn't a program we could
aggressively move forward.
As of December 31st, FEMA had mailed out 61,000 applicants,
and 28,000 were returned; 223 million of the total 245 million
going to individuals came through that program for housing.
Between 2000--April 2000 and August 2002, FEMA faced
intense scrutiny and criticism concerning the MR program from
both New York City media and elected officials. The stories
centered on the low number of applicant rates then existing in
the spring and summer in 2002. As a result, on June 28, 2002, a
number of policy changes made by our FEMA headquarters allowed
the program to be essentially open to all New Yorkers,
expanding the impact area to include the borough of Manhattan.
A letter sent to then-FEMA Joe Albaugh from seven New York
congressional delegations applauded FEMA for loosening
standards within the MRA program, which allowed for broader
eligibility for those individuals impacted with their rent or
mortgages.
The Individual and Family Grant Program was the other
program. The most challenging program to curtail potential
fraud and abuse was this program. Traditionally this program
helps individuals and families replace household items,
provides special help. There is a category called ``Other.''
That is where your air conditioners fell under.
The most difficult aspect of the IFG program was the air
quality issue caused by the destruction of the towers. By the
time determinations had been made, and it moved quickly in the
first few months, the time determinations were made, our field
teams had already given our verification, considering EPA
warning regarding air qualities as well as concerns of
residents. Rather than reinspect thousands of homes, FEMA and
the State of New York accepted self-certifications by residents
of the urgency of their need. While FEMA and State entered this
program--let me move on to why some of these reasons exist.
There are several contributing factors. EPA Dust Cleanup
Program. The news and community actions encouraging New Yorkers
to apply for the program. There was a heat wave in New York at
the time, we are talking in May, and vendors pushing hard for
the sale of air-cleaning purifiers and air conditioners. So we
had those four contributing factors.
The policy contributing factors were the introduction of
the Cannot Afford Program. Inclusion of all five New York City
boroughs was June 4, 2002, and extension of registration,
November 3rd of 2002.
I just had one more page of some of the initiatives we
took.
FEMA took several initiatives to control fraud and abuse as
described above. Our Federal Recovery Officer suspected fraud
and initiated the first random sampling of applicants, and
between January and March of 2003, over 60 percent of the
applicants inspected decided to withdraw their air condition
application. Many admitted they hadn't owned an air conditioner
prior to the World Trade Center disaster, or it had never been
damaged.
In February of 2003, the Federal Recovery Officer
proactively talked about a 90 percent potential fraud level.
This resulted in an inspector general investigation regarding
statements. The findings indicated the abuse was not as high as
90 percent as stated, but acknowledged the validity of FEMA's
Home Inspection Sampling Program, which identified a high
percentage of 60 percent. Further sampling efforts in
coordination with IG allowed us to save 120 million.
It is important to note that due to FEMA's public awareness
campaign of fraud and abuse statements, thousands of applicants
withdrew from the program. Importantly, Federal and State law
enforcement and IG worked hand in hand with us. Although fraud
did exist under the program, FEMA aggressively supported the
State managing problems under unusual circumstances.
The following is important to note. This was the first of
its kind of environmental disaster. There are presently no air
quality standards that I am aware of to guide EPA and other
agencies in what is dirty and what is not, leading to continued
confusion regarding future environmental and health impact.
Finally, considering the 230,000 people who applied for IFG
funding, that only 118,000 applicants were ultimately approved
demonstrates our efforts along with the IFG to point out fraud
and lower the potential for further abuse.
Thank you.
Mr. Rogers. Thank you, Mr. Picciano.
[The statement of Mr. Picciano follows:]
Wednesday, July 12, 2006
2:00 p.m. in 311 Cannon House Office Building
Subcommittee on Management, Integration, and Oversight
Hearing
``An Examination of Federal 9/11 Assistance to New York: Lessons
Learned in Preventing Waste, Fraud, Abuse, and Mismanagement, Part I''
Prepared Statement of Joseph F. Picciano, Deputy Director, Region II,
Federal Emergency Management Agency, Department of Homeland Security
Good Morning Chairman Rogers, Ranking Member Meek and members of
the Committee. My name is Joseph Picciano. I am the Deputy Director for
Region II of the Department of Homeland Security's (DHS's) Federal
Emergency Management Agency (FEMA) based in New York City and covering
New York, New Jersey, Puerto Rico and the Virgin Islands. On behalf of
FEMA and the Department of Homeland Security, I appear before you today
to discuss FEMA's disaster assistance for response and recovery to the
New York City area following the September 11, 2001 terrorist attacks.
FEMA and its staff are proud of the work accomplished following the
attack. The tragic event posed unique challenges. It tested our ability
to deliver help in a timely and effective manner while maintaining
accountability.
FEMA Responds
Immediately following the attack, FEMA activated the Federal
Response Plan, which brings together 28 federal agencies and the
American Red Cross to assist local and state governments in responding
to national emergencies and disasters. FEMA Headquarters also activated
the Washington-based Emergency Support Team (EST) on a 24-hour basis,
and Region II deployed its Emergency Response Team--Advance Element
(ERT-A). In addition, FEMA activated the following federal assets to
support response operations:
Twenty Urban Search & Rescue Teams (FEMA)
U.S. Army Corps of Engineers (Power and Debris Teams)
Four Disaster Mortuary Teams (DMORT)
Four Disaster Medical Assistance Teams (DMAT)
One Management Support Team (MST)
One Deployable Portable Morgue Unit (DPMU)
One Veterinary Medical Team
President Bush appointed the Federal Coordinating Officer (FCO),
responsible for coordinating the timely delivery of Federal disaster
assistance to New York State, local governments, and disaster victims.
On September 15, 2001, FEMA established the Disaster Field Office (DFO)
at Pier 90 on the West Side of Manhattan. It initially operated 24
hours per day and served as a base for all FEMA operations. On December
3, 2001, the DFO relocated to 80 Centre Street in Lower Manhattan.
President Bush pledged at least twenty billion dollars to the City
and State of New York. In the following 11 months, Congress passed
several bills to provide approximately $20 billion in direct funding
and tax benefits. This was the first time that the amount of federal
assistance for a disaster was determined early in the response and
recovery process. Congress allocated $8.8 billion of this twenty
billion to FEMA to reimburse individuals, governments, and not-for-
profit organizations for response and recovery work related to the
World Trade Center (WTC) disaster. As of May 30, 2006, FEMA has
obligated approximately $8.77 billion, leaving approximately $30.3
million remaining for distribution. These remaining funds will be used
to bring several ongoing programs to their completion, particularly
Human Services programs such as Mortgage Rental Assistance, Individual
and Family Grants, and Crisis Counseling assistance for the State of
New York, and funding to reimburse applicants for currently non-funded
projects authorized by the Consolidated Appropriations Resolution,
enacted February 20, 2003, P.L. 108-7 (CAR).
Public Assistance (PA)
Although there were a total of 191 applicants with Project
Worksheets (PWs), three applicants received approximately 95 percent of
all the Stafford Act funding:
New York City (50 agencies received assistance);
The Port Authority of New York and New Jersey; and,
The State of New York (50+ agencies, including the
MTA).
Recognizing that the response to this tragedy was widespread, and
that the New York State Emergency Management Office (SEMO) could not
conduct a thorough and complete applicant briefing with such an
extensive and unknown population, FEMA and SEMO established a Private-
Non-Profit (PNP) Hotline on October 17, 2001 to identify potential PNP
applicants. FEMA staffed the call center with local hires who worked
Monday through Friday, 8 a.m. to 6 p.m., from October 17 to November
17, 2001; however, the call center was discontinued due to extremely
low call volume (less than 150 inquiries total).
Based on the magnitude of the disaster and the duration of past
recovery efforts (such as the Northridge Earthquake and Hurricane
Andrew), the FCO appointed the Deputy FCO for Long-Term Recovery,
responsible for identifying the needs of the community, coordinating
with other federal, state, and local agencies to address those needs,
and developing FEMA's long-term recovery plans.
Since the disaster recovery needs could not be solved within one
program or agency, the Deputy FCO relied heavily on the creation of
local and federal task forces to better coordinate the recovery effort.
The various task forces focused on activities designed to immediately
stimulate the development and infrastructure needs of the community. By
bringing together all of these resources, the local agencies could
immediately gain access to the resources of numerous federal agencies,
and the local agency could promptly respond to time-sensitive problems
in an effective manner.
The primary task force was the Federal Task Force (FTF) to Support
NYC. The FEMA Deputy FCO for Long-Term Recovery chaired this task
force. It was comprised of representatives from 11 federal agencies
focused on developing a complete understanding of the reconstruction
needs of the local and state government, and devising a recovery
solution comprehensive enough to address these needs.
Equally important for its immediate impact on local projects was
the Infrastructure Recovery Workgroup (IRWG), originally chaired
jointly by SEMO and FEMA, and then later chaired by the Commissioner of
NYC Department of Transportation. This task force was assembled to
ensure an efficient and integrated restoration of public and private
infrastructure destroyed or damaged by the disaster. The IRWG consisted
of numerous federal, state, local, and private sector participants.
The Public Assistance Team
Immediately following the disaster, Region II assigned a Public
Assistance Officer (PAO) and deployed over 30 Disaster Assistance
Employees (DAEs) to serve as Public Assistance Coordinators (PACs) and
Project Officers (POs). Within two weeks of the disaster, Headquarters,
the FCO, and the Regional Director decided to replace the PAO and
outsource the remainder of the PA operation (with the exception of
National Emergency Management Information System (NEMIS) positions),
substituting the DAEs with its Technical Assistance Contractors (TACs).
The decision to outsource the PA operation, the first ever for FEMA,
was made for several reasons:
The catastrophic nature of the disaster called for
deep technical expertise and professional management;
The long-term nature of the project required a high-
level of consistency among the staff; and,
A fear that another terrorist attack might occur and
require immediate FEMA resources.
To ensure that FEMA had access the broadest available range of
technical specialists, the contracting officer asked all three TAC to
supply personnel.
Ensuring Quality
It was recognized by FEMA and the applicants that well-written PWs,
supported by accurate and well-documented cost analyses, and prepared
in accordance with the Stafford Act and FEMA regulations, would reduce
appeals and Office of Inspector General (OIG) audits. For that reason,
quality was emphasized at the outset and considered extensively when
disaster-specific processes were established.
To ensure quality, and validate that agencies were requesting
reimbursement for all they were entitled to under the law, New York
City, the disaster's largest applicant, required that all PWs, once
prepared by the PAC and PO, be reviewed and signed-off by the agency
representative, a NYC Office of Emergency Management representative,
and an OMB representative, before being entered into NEMIS. Although
FEMA was initially concerned the obligation process would be slowed, in
the end it assured both the City and FEMA of a higher quality PW.
On the FEMA side, three initiatives were undertaken to ensure
quality:
1. A Policy and Program Advisor position was created to provide
verbal and written guidance to PACs and POs on eligibility
questions. This advisor served as a critical link between PA
management (the program decision makers) and field staff (the
program implementers). Besides dealing with complex and
sensitive issues, this advisor also prepared the PA Program
Guidance memos for the PAO's signature.
2. FEMA developed a Quality Assurance Guide in October 2001,
and disseminated it to all PACs and POs. This guide provided a
series of detailed steps to be completed by FEMA POs during the
preparation of PWs.
3. A quality control queue was created within NEMIS. An
experienced technical specialist, with extensive program
knowledge, a background in accounting, and access to
management, worked off-site to review every PW and confirm
eligibility decisions against all applicable regulations and
disaster-specific guidance; verify cost estimates; correct any
errors or omissions; and provide feedback to PACs and POs, when
necessary.
In addition, FEMA's Office of General Counsel (OGC) and the OIG
were physically present at the DFO, and subsequently the Federal
Recovery Office, and provided day-to-day advice to the applicants and
PA management. The OGC attorney(s) drafted mission assignments and
interagency agreements, addressed eligibility-of-applicant issues and a
myriad of other issues surrounding access rights, property ownership,
liability, procurement, and insurance.
The OIG staff worked proactively with PA staff and applicants to
ensure a consistent level of understanding regarding the documentation
and audit requirements. Besides attending the applicant briefings and
kickoff meetings, the OIG held a three hour audit briefing for all NYC
agencies, and frequently provided feedback to PA managers regarding
program, policy, or process issues. The OIG also reviewed all 9/11
Associated Cost PWs.
Consolidated Appropriation Resolution (P.L. 108-7)
In the aftermath of the disaster, it soon became apparent that
while the Stafford Act was generally well-suited to most response and
recovery needs, there were a number of significant costs which were
clearly ineligible.
To address these types of projects, Congress enacted the
Consolidated Appropriation Resolution of 2003 (CAR) signed into law by
the President as Public Law 108-7 on February 20, 2003, to fund:
(1) 9/11-associated costs not reimbursable under the Stafford
Act;
(2) $90 million for long-term health monitoring of emergency
services, rescue, and recovery personnel; and,
(3) Up to $1 billion to establish insurance coverage for the
City of New York and its contractors for claims arising from
debris removal at the World Trade Center site.
This authorization was granted contingent on funds made available
under P.L. 107-38, 107-117, and 107-206. In other words, any
reimbursement for non-Stafford Act associated costs would come from the
existing appropriations of $8.8 billion, after all Stafford Act-related
costs had been reimbursed. By the time that the CAR was enacted, more
than 17 months after the disaster, New York City and New York State had
already paid many of these costs; therefore, reimbursement from FEMA
effectively resulted in much needed budget relief for these agencies.
In March 2003, FEMA, the City, and the State verbally agreed to the
following:
The PA program would stop accepting costs for
Stafford-eligible projects as of April 30, 2003;
The applicants would submit all Project Completion and
Certification Reports (P.4s) no later than June 16, 2003;
FEMA would programmatically close all Stafford-
eligible projects by June 30, 2003;
FEMA would use the Project Worksheet to fund all 9/11
Associated Costs; rather than complete a P.4 certifying
completion of the project and expenditure of the funds, the
City and State would each separately sign a grant management
letter certifying to abide by the Federal grant management
requirements;
FEMA would establish a Dedicated Fund (also referred
to as a Set-Aside Fund) for both the City and State that would
include:
(1) the estimated cost of all incomplete Stafford-
eligible projects deobligated due to the April 30, 2003
deadline, and
(2) an estimate for all Stafford-eligible projects not
funded on a PW as of April 30, 2003;
The City and State could draw against the 9/11
Associated Costs PWs on a dollar by dollar basis up to the
amount set-aside in their Dedicated Fund;
Once the City and State exhausted their respective
Dedicated Funds, all remaining dollars available for 9/11
Associated Costs would be divided on a two-thirds for the City,
one-third for the State basis (as mutually agreed to by NYC and
NYS); and,
The applicant and grantee would submit no further
appeals or time extension requests.
This was documented in a Joint Letter of Agreement dated June 2003.
The letter also specified that the Port Authority would receive $448.75
million in federal funding, and that the date for the Port Authority to
submit Stafford-eligible costs would extend beyond April 30, 2003.
Since all County and PNP projects were completed and funded by April
30, 2003, the agreement did not affect these applicants.
Expedited Closeout
To close out the PA Program and accelerate funding of the 9/11
Associated Costs, FEMA established an expedited closeout process.
Unlike the traditional closeout process where the applicants initiate
it and the grantee coordinates it, this expedited process established
firm deadlines and was led by FEMA. By closely managing the development
of P.4s, streamlining the financial reconciliation of projects, and
refining the closeout database initially developed by the Region to
closeout DR-1391, by July 2003 FEMA was able to receive and forward to
the grantee signed P.4s for all Stafford-eligible projects. The City
and State were active participants in this process because it quickly
brought to a close the Stafford Act-eligible program, thereby saving
the City and State considerable time and money to manage a long-term,
traditional closeout, and it allowed them to promptly draw down on any
remaining funds using 9/11 Associated Cost projects.
9/11 Associated Costs
Once the closeout was complete, FEMA then worked with NYC and NYS
to prepare PWs for 9/11 AssociatedCost projects. 9/11 Associated Cost
projects were defined as those related to 9/11 that were not
reimbursable under the Stafford Act. Projects such as CUNY's Fiterman
Hall and the Battery Park City sidewalk and road repair identified in
the City and State's dedicated fund, respectively, were not prepared as
9/11 Associated Cost projects because these were eligible under the
Stafford Act.
To determine the allocation of the CAR funding, FEMA subtracted
from the $8.8 billion all Stafford Act program expenditures to arrive
at the available funding, and immediately deducted from that figure all
the projects authorized by the CAR.
Calculating the funds available for projects authorized by the CAR
2003 was complicated, as FEMA wanted to ensure that funds remained to
meet its projected Stafford Act obligations, and still be able to
expedite funding to the City and State for the Debris Removal Insurance
Program (DRIP), expanded health care monitoring, and 9/11 Associated
Projects--all large and costly projects. To do so, FEMA's Stafford Act
projection of $6.44 billion reflected an amount slightly higher than
anticipated in certain areas--primarily for Human Services and other
Administrative Costs--to mitigate the risk of FEMA not having enough
funds to meet its Stafford Act obligations. This projection was refined
in January 2004 when it became clear that additional funds could be
made available to the City and State to fund 9/11 Associated Cost PWs,
and these PWs were obligated. All or a portion of these available funds
may be provided in the future to NYC, NYS, and the Port Authority to
cover additional 9/11 Associated Costs.
Port Authority
As a result of the WTC attacks, the Port Authority suffered an
estimated loss of $4.6 billion generated primarily by:
The collapse of seven major office buildings
(including the Twin Towers) owned by the Port Authority;
The deaths of 84 Port Authority employees, including
37 PAPD police officers;
Damage to its PATH system; and,
Lost revenue.
Since the estimated $4.6 billion loss far exceeded its insurance
coverage of $1.5 billion, FEMA, the Port Authority, and SEMO developed
and implemented an Insurance Apportionment Strategy. This strategy
provided immediate cash flow to the Port Authority for Stafford-
eligible costs, while ensuring that the overall obligation was not
duplicated by insurance benefits.
Under the terms of the ECP, and pursuant to the June 2003 Letter of
Agreement (LOA) reached between FEMA, NYS, and NYC:
1. FEMA would reimburse the Port Authority for all Stafford-
eligible work completed and paid for by May 31, 2003,
regardless of whether the entire scope of eligible work had
been completed; and,
2. The Port Authority's allocated disaster funding--whether
Stafford eligible, Associated Costs, or Subgrantee Allowance--
was capped at $448.75 million.
Using the Insurance Apportionment Strategy, FEMA reimbursed the
Port Authority for Stafford-eligible costs obligated via project
worksheets, and an administrative allowance. These payments accounted
for $400 million toward the Port Authority's funding limit capped at
$448.750 million. The left $48.750 million available to the Port
Authority as reimbursement for 9/11 Associated Costs.
Facts
In two years FEMA obligated $7.48 billion in Public Assistance and
infrastructure-related costs, in three categories as shown below in
Figure VI-1. (An additional $21 million was obligated in January and
February 2004--two years and four months after the attacks--to fund NYC
and NYS 9/11 Associated Cost PWs.)
[GRAPHIC] [TIFF OMITTED] T5501.012
FEMA Transfers $2.75 Billion to FTA
The $2.75 billion transferred to FTA was combined with the US DOT's
$1.8 billion allocation, to create a $4.55 billion transportation fund
to be administered by FTA and used to reconstruct and enhance Lower
Manhattan's transportation infrastructure, including roadways, subway
systems, and commuter rails. The process and conditions of this
transfer of funds is treated in greater detail later in the ``Emergency
Transportation--Restoration of the Lower Manhattan Intermodal System''
section of this PA Summary. Q04
FEMA Obligates $2.38 Billion Under Stafford Act
The Stafford Act obligations totaled $2.38 billion, including $.06
billion representing grant management and project administration costs.
As Figure VI-2 illustrates, of the $2.32 billion obligated to
traditional PA Program recipients, approximately two-thirds was awarded
to NYC, with the Port Authority and New York State claiming the
majority of the remaining third.
Figure VI-2 Stafford Act Project Worksheet Obligations by Recipient
[GRAPHIC] [TIFF OMITTED] T5501.013
Approximately 90 percent of the reimbursed costs represented
Emergency Work, FEMA work categories A and B (refer to Figure VI-3).
Major obligations included:
Debris Removal to DDC and DSNY
Incremental Cost Approach (ICA) for OT Labor
Death and Disability Benefits
Temporary PATH Station
Emergency Transportation (excludes Temporary PATH
Station)
OCME for Victim Identification
Building Cleaning and Air Monitoring
The above statistics comprise roughly 82 percent of all Emergency
Work and nearly 75 percent of all funds obligated within FEMA's
traditional Stafford Public Assistance Program.
[GRAPHIC] [TIFF OMITTED] T5501.014
[GRAPHIC] [TIFF OMITTED] T5501.015
FEMA Obligates $2.37 Billion under CAR 2003
As previously discussed in Section III, the passing CAR 2003 in
February 2003 allowed for greater flexibility in disbursing federal
grants to the City and State of New York for costs associated with the
events of September11th. After budgeting the $1 billion for debris
removal insurance and the $90 million for expanded health care
monitoring, FEMA allocated and then obligated funds to NYC and NYS on
9/11 Associated Cost PWs, first disposing of each entity's Dedicated
Funds, and then separating the remaining funds two-thirds to the City,
and one-third to the State. As of August 3, 2004, the City had received
$913 million in 9/11 Associated Costs and the State has received $372
million including $49 million for the Port Authority.
Backfill Labor
Stafford Act-eligible backfill labor costs after the WTC disaster
exceeded $50 million, primarily for the FDNY, NYPD, NYC Department of
Sanitation, and NYC Department of Transportation. To evaluate the
eligibility of backfill costs--costs incurred by the applicant to
backfill for an employee performing eligible emergency work--PA staff
followed the November 1993 memo issued by the PA Division Chief
regarding force account (in-house) labor. This memo outlined instances
where FEMA could reimburse for backfill, and how this reimbursement
should occur. The methodology also contained a final step to validate
that the eligible disaster-related overtime and backfill overtime did
not exceed the total overtime paid by the department. This was a
critical step since some FDNY backfill overtime PWs were greater than
ten million.
Cleaning
The collapse of the WTC created a widespread plume of dust and
debris. From the beginning, residents, community leaders, and City and
State officials expressed concern that the dust may pose a threat to
health and air quality. Due to these concerns, the EPA recommended to
FEMA that the dust and debris be removed from residential units and
unclean buildings in order to reduce the long-term risk of exposure to
chemicals such as asbestos.
Based on EPA's advisement and requests from the City, FEMA provided
funding for the exterior and/or interior cleaning of 244 buildings and
4,500 residential units in Lower Manhattan, and two unoccupied
privately owned buildings in close proximity to the WTC site. FEMA
classified this work as debris removal and based its eligibility
determination on the EPA's and NYC Department of Environmental
Protection's concern over the potential health threats posed by the
debris, and the threat to the economic recovery this debris posed to
lower Manhattan, as outlined in a letter from NYC to FEMA.
To ensure authorized right-of-entry, as required by the Stafford
Act and 42 USC Sec. 1A5173, the City of New York developed a request
form that the building owner or resident needed to sign before work
could commence. The authorization form included a stipulation that any
insurance proceeds received for activities covered by the EPA/DEP's
dust cleaning program would be remitted to the federal government. The
State Emergency Management Office maintains responsibility for
notifying FEMA of any such remittance.
Death and Disability Benefits
In responding to the WTC disaster, 341 FDNY firefighters, 2 FDNY
EMTs, 23 NYPD police officers, 3 State Court Officers, and 37 Port
Authority police officers died. Their deaths were the first large-scale
casualties resulting from an emergency response effort in FEMA's
history. For the first time, FEMA received a request that it reimburse
applicants--the City and State of New York--for certain contractually
obligated death benefits, increased pension contributions, and other
associated costs. Specifically, the City and State requested
reimbursement for more than $750 million in death and disability
benefit costs, including:
Funeral Costs and Memorial Services;
Lump Sum Line of Duty Benefit Costs;
Increased Pension Costs Due to Line of Duty Deaths;
Increased Pension Costs Due to Increased Disability
Retirements; and,
Leave Payout.
Upon review, FEMA concluded that funeral and memorial costs, lump
sum death benefits, and increased pension costs due to line of duty
deaths, although unusual, were a direct result of the disaster and a
cost of performing the emergency work. Specifically, FEMA management
found $291 million to be in accordance with OMB Circular A-87
Attachment B, Item 11, Compensation for Personnel Services, and item
11d(5).
Given the magnitude of the death benefit claims, the FEMA had an
actuary review the applicant's actuarial studies to determine the
soundness of the applicant's methodology and the reasonableness of the
assumptions. Based on the actuary's findings, which supported the
applicant's claim, FEMA authorized the reimbursements.
FEMA reimbursed the City and State for additional death and
disability benefit costs as 9/11 Associated Costs.
FEMA did not approve death benefit costs for City or State
employees killed as a result of the disaster where it could not be
reasonably demonstrated that these individuals were performing eligible
emergency work. FEMA also did not reimburse for State worker
compensation costs as FEMA reimbursed the applicant a fringe rate to
perform the emergency work, which included a component for workers
compensation.
Debris--Time and Material Contracts
The FEMA PA Debris Management Guide (FEMA 325) states that the Time
and Material (T&M) work should be limited to a maximum of 70 hours of
actual emergency debris clearance work, and shall be permitted only for
work that is necessary immediately after the disaster has occurred when
a clear scope of work cannot be developed. After the WTC disaster, the
NYC Department of Design and Construction--the overseer of the debris
removal effort--entered into time and material contracts with four
construction managers (CMs) to accomplish the emergency debris removal,
hauling tasks, building demolition, and site stabilization. The CMs
operated via a letter of intent, and not a complete written contract.
Each of the CMs was capped at $250 million.
On September 15, 2001, FEMA approved a written waiver of policy,
which allowed the extended use of T&M contracts based on continuing
unpredictable and complex site conditions at the WTC. In addition, FEMA
waived in part the requirement for competitive bidding on the basis of
continuing public exigency and emergency. Due to these contracting
circumstances, it was prudent that the federal government provide
oversight to ensure that the scope of work and costs of the debris
operation were properly controlled. In order to accomplish this, the
City and FEMA established and implemented monitoring systems using
resources from FEMA, Office of the Inspector General, the DDC, the NYC
Office of Management and Budget, the NYC Department of Investigation,
and several private auditing groups.
In November 2001, FEMA tasked the US Army Corps of Engineers
(USACE) to provide an independent evaluation of the contract
arrangement and recommend whether a T&M contract was still the most
feasible and cost effective contract payment basis, or whether another
type of contract, such as a lump sum or unit price, would be more
suitable. Based on USACE's assessment and recommendation, FEMA extended
its T&M waiver to DDC for the duration of the debris operation.
Debris Removal Insurance Program
Generally contractors, such as the four CMs, provide their own
general and professional liability insurance coverage and include the
costs of insurance as part of their overhead. As such, these costs are
generally eligible for reimbursement by FEMA. Because of the extreme
conditions related to debris removal at the WTC, and the unique nature
of the hazards associated with the debris removal operation, the CMs
required a greater amount and scope of insurance coverage than is
typically obtained, including coverage for environmental liability.
The City agreed to provide a master insurance program, called the
Coordinated Insurance Program, to cover both the debris removal
contractors and employees that had worked at the WTC site. However, due
to the impact of the disaster on the insurance market, available
insurance was severely limited. The City was reimbursed to obtain
general liability coverage and marine insurance coverage. These
policies did not provide the City with coverage for environmental
risks, such as asbestos, or professional liability. Although the City
sought coverage for these risks, no commercial insurance was available
due to the unknown environmental and health risks associated with the
disaster. Because of the unresolved insurance issue, the CMs completed
debris removal at the WTC without a written contract.
The major issue for FEMA was the City's insistence that the
liability protection apply not only to the contractors, but also to the
City for claims brought by City employees that had worked at the WTC
site. FEMA had informally advised the City that the contractor-based
insurance was eligible under the PA program, but the City-employee
based insurance was not and would have to be separated in order for
FEMA to provide funding. In addition, FEMA was concerned about the cost
effectiveness of the City's proposal.
The passage of the CAR resulted in the City establishing a captive
insurance company to process and payout any claims, and FEMA obligating
$999.9 million on PW 1554 in September 2003. The draw down of funds
will not occur until all final terms and conditions, including the
scope of coverage, have been agreed upon.
Emergency Transportation
The WTC disaster caused unprecedented damage and disruption to New
York's regional transportation system. The region relies on a complex
network of rail, subway, bus, bridges, tunnels, roads, and ferry lines
that ties together millions of workers and residents throughout New
York City and in surrounding counties in New York, New Jersey and
Connecticut. The collapse of the WTC towers caused massive damage to
sections of this regional transportation system which serves Lower
Manhattan. This network of rail, subway, bus, and ferry lines was
disrupted as a result of:
1. The destruction of the Port Authority Trans-Hudson (PATH)
WTC station, the terminal station for the PATH lines running
under the Hudson River and serving Lower Manhattan.
2. The damage to the Metropolitan Transportation Authority's
(MTA) Cortlandt Street Station and the N & R and 1 & 2 subway
lines, all located below and adjacent to the WTC towers. (The
MTA subway lines run underground along the west side of
Manhattan. These subway systems were seriously impacted by the
disaster, but unlike the PATH system, did not suffer complete
destruction of major system components.)
3. Alteration of surface transit routes made necessary by
debris removal operations and infrastructure repairs in the
vicinity of Ground Zero.
As a direct result of the disaster, 68,000 commuters who used the
WTC PATH station each day had to find an alternative route to work.
Approximately 76,000 commuters and residents were forced to find
alternatives to their pre-9/11 subway routes.
The direct damage caused by the disaster represented only a portion
of the disruption to the region's transportation system, however. The
damage caused a ripple effect that disrupted the entire system,
affecting every mode of transportation that served Lower Manhattan. For
example, the tens of thousands of New Jersey residents who commuted to
Lower Manhattan on the PATH each day were suddenly forced onto other
modes of transportation. Overnight, the demand for ferry service to
Lower Manhattan more than doubled, and Penn Station experienced an
influx of new riders as commuters were forced to take New Jersey trains
into Penn Station and then take subways downtown. This strained the
capacity of existing transportation routes, created dangerous
overcrowding, resulted in long waits for service, and caused
significant damage to the region's economy.
Restoration of the Lower Manhattan Intermodal System
A traditional interpretation of Section 406 of the Stafford Act
would have limited FEMA's funding to the replacement of the WTC PATH
station and other physically damaged elements of the system. However, a
white paper was developed that provided a broader definition, within
the context of the Stafford Act, of what can comprise a ``damaged
system,'' which FEMA Headquarters approved. By accepting this
definition, FEMA was able to find eligible both directly and indirectly
damaged projects that are critical to restoring the functionality of
the Lower Manhattan intermodal transportation system. In August 2002,
this unique approach resulted in two critical developments:
1. FEMA announced that $2.75 billion appropriated by Congress
to FEMA's disaster fund could be used to help restore the
transportation infrastructure system in Lower Manhattan. To
this amount, the Federal Transit Administration (FTA) added
$1.8 billion, both of which were made available for
transportation projects, for a total of $4.55 billion.
2. FEMA and the US Department of Transportation (DOT) entered
into a Memorandum of Agreement (MOA) in August 2002, which
designates the FTA as the responsible agency for administering
and monitoring the distribution of the $4.55 billion. This
would enable the Federal government to assess needs and
distribute funds in a systematic, comprehensive, and efficient
manner.
Although the MOA noted that the FTA needed to disperse the $2.75
billion in accordance with the Stafford Act, this was waived due to the
passage of the Consolidated Appropriation Resolution of 2003 (CAR
2003).
In March 2002, FEMA agreed with New York City that the emergency
transportation needs of the region justified the increased costs
involved in increasing the frequency of ferry services. FEMA agreed to
reimburse New York City and the Port Authority for the operating costs
of some new and expanded services initiated post 9/11. This began a
series of ferry projects aimed at providing alternatives to commuters
seeking ways, other than driving and subways, to reach Lower Manhattan.
Eventually, over $47 million was obligated for ferry service and
temporary landing projects that provided ferry service from:
Hoboken to Lower Manhattan;
Brooklyn to Lower Manhattan;
Hunters Point, Queens and East River down to Lower
Manhattan; and,
Lower Manhattan Circulator.
Family Center
As part of its rescue and response effort, the City of New York
needed to quickly establish space where families and friends of the
victims could gather to provide or could obtain information about those
missing or presumed dead, and where families of victims could apply for
assistance. To meet this need, NYC established the Family Center at
Pier 94 in Manhattan, which provided a safe and convenient location
where families to obtain information about the missing as well as
various services and programs.
Because the Family Center provided some services similar to those
of a Disaster Service Center, which are generally not eligible for PA
funding, FEMA had to carefully consider the eligibility of the build-
out and operation of the Family Center. Basing its decision on 44 CFR
Sec. 1A206.225, FEMA determined that the costs incurred by the City to
establish and operate the Family Center were eligible since services at
the Family Center, such as providing a centralized site to fill out
missing person reports, submit DNA samples, and begin processing death
certificates, was an essential community service in the aftermath of
this disaster. The total cost to build-out and manage the Family Center
was approximately $10 million.
Full Replacement Value (Vehicles)
As a result of the collapse of the WTC towers on September 11, over
200 publicly owned vehicles were destroyed beyond repair. Title 44 CFR
Sec. 1A206.226(g) stipulates that eligible equipment damaged beyond
repair may be replaced by ``comparable items.'' In interpreting this
federal regulation, FEMA's Public Assistance Guide states:
When equipment, including vehicles, is not repairable, FEMA will
approve the cost of replacement with used items that are approximately
the same age, capacity, and condition. Replacement of an item with a
new item may be approved only if a used item is not available within a
reasonable time and distance.
In recognition that the collapse of the WTC towers destroyed
hundreds of emergency response vehicles, which significantly and
adversely impacted these agencies' ongoing ability to expeditiously
deliver emergency services, the Federal Coordinating Officer, in a memo
dated December 12, 2001, sought Headquarters' approval for a disaster-
specific directive aimed at fully and promptly restoring the services
provided by these emergency vehicles, with minimal disruption to the
overall recovery process. More specifically, this directive would serve
to allow for the reimbursement of new, 2002 model vehicles to replace
those lost in the disaster in lieu of analyzing and determining, on a
case-by-case basis, whether each destroyed vehicle could be
replaced``within a reasonable time and distance.''
The FCO's request was granted and documented in PA Program Guidance
8, dated January 16, 2002. According to this guidance, the
reimbursement value of a replacement vehicle would be:
Based on the estimated cost of its purchase through the
applicant's normal procurement process; and,
Calculated net of deductions for actual or anticipated
insurance proceeds.
Lost Instructional Time
On September 11, 2001, the collapse of the WTC forced the NYC Board
of Education (BoE) to evacuate schools in Lower Manhattan and cancel
classes citywide. Whereas most students were able to return to their
respective schools on September 13th, students attending schools within
close proximity to the disaster site were displaced and unable to
return to either their own school or to provisional school facilities
until September 18th. In total, NYC estimated that public school
students lost more than 15 million hours of instructional time due to
school closures, delayed openings, and school relocations. To replace
the lost instructional time, the City proposed implementing an after-
school program, contingent on FEMA funding.
While FEMA recognized that school hours were lost as a result of 9/
11, a program contingent on FEMA funding would not satisfy the
emergency work criteria per FEMA regulations. Ultimately, Congress
directedFEMA to pay for this activity in House Report 107-593. FEMA
obligated a $78 million Category G PW to fund an after-school program
intended to replace the instructional time lost as a result of the WTC
disaster.
Mutual Aid
Not surprisingly, the response from people, non-profits, and other
governmental jurisdictions to help NYC respond and recover was
enormous. In part due to this response, the President declared every
county in New York eligible for Category B emergency work. In light of
every county being declared and the response of so many counties
without a pre-disaster mutual aid agreement in place with New York
City, FEMA found certain mutual aid arrangements eligible even though
they were not formally established in writing prior to September 11,
2001. By doing so, several provisions of Policy Series 9523.6 were
waived. These waivers and authorities were permitted only because the
impact of this terrorist event was catastrophic and well beyond
reasonable planning assumptions of the applicants, and because mutual
aid agreements were unlikely to have been formulated with all the
entities from whom assistance was needed.
In reimbursing local governments within NYS who responded to the
aid of NYC, FEMA limited the eligible costs to overtime, travel
expenses, lodging, and other direct costs, and reimbursed the mutual
aid provider directly. Only applicants who had pre-9/11 mutual aid
contracts in place that allowed payment for straight time were
reimbursed for that cost. All mutual aid providers outside of the state
had to have a pre-9/11 mutual aid contract in place to be reimbursed,
in that case through NYC. The City did not request reimbursement for
any in-state or out-of-state mutual aid providers because, according to
NYC's Office of Emergency Management(OEM) officials, none billed the
City.
Specific to DR-1391, the vast majority of mutual aid assistance
requested by NYC was provided by various New York State counties.
Although numerous counties were called upon to support the response and
recovery effort, Nassau, Suffolk, Westchester, and Rockland counties
incurred most of the mutual aid costs. These four alone accounted for
approximately $10.5 million in mutual aid assistance, with Nassau
County providing the bulk--over $7.2 million in mutual aid assistance.
Obtain and Maintain Insurance
Per Section 311 of the Stafford Act and Title 44 CFR
Sec. 1A206.253, following any disaster, and as a condition for
receiving PA funds, an applicant must obtain and maintain insurance on
those insurable facilities (including content, equipment and vehicles)
for which PA funding had been found eligible. The insurance must be for
the hazard that caused the damage. An applicant is exempt from this
requirement only if the state insurance commissioner certifies that
such insurance is not, per Section 311(a)(1) of the Stafford Act,
``reasonably available, adequate, and necessary.'' In addition, with
regard to requests from public entities that they be allowed to self-
insure, Section 311(a)(c) of the Stafford Act notes that only states
will be allowed to act as self-insurers.
Prior to 9/11, NYC did not maintain commercial insurance on NYC
buildings or property, such as vehicles or building contents. Rather,
NYC considered itself to be ``self-insured.'' When damages or losses
occurred to a NYC property, the property was either not repaired or
replaced, or else it was replaced or repaired using funds appropriated
from NYC revenues.
Following 9/11, NYC requested that it be allowed to continue to
self-insure and to be exempted from FEMA's Obtain and Maintain
Insurance requirement. NYC argued that obtaining and maintaining
commercial insurance for the damaged or destroyed property eligible for
PA funding would be a deviation from normal business practice,
resulting in serious fiscal implications to NYC's budget. On March 26,
2002 the NYS Superintendent of Insurance issued a letter stating that
NYC was self-insured, and that the type of insurance required was not
reasonably available, adequate, and necessary. FEMA's Acting Regional
Director declined to recognize NYC as self-insured, but granted a
waiver to the Obtain and Maintain requirement based on the NYS
Superintendent of Insurance's opinion.
Port Authority Apportionment
One of the most complex challenges of the disaster was determining
an insurance apportionment strategy for the Port Authority of New York
and New Jersey. The Port Authority reported estimated losses in excess
of $4.6 billion, and had $1.5 billion of insurance coverage for all
insured risks on a per occurrence basis. Since the Port's projected
losses significantly exceeded its insurance coverage--the only
applicant to whom this occurred in DR-1391--FEMA worked with the Port
Authority to develop a funding strategy that would provide the Port
Authority with cash flow, yet account for the Port Authority's future
insurance proceeds.
For the first year and a half after the disaster, while estimates
of the Port's overall loss were still being developed, FEMA, NYS, and
the Port Authority agreed to apply a 50 percent insurance reduction to
each individual funding obligation. The implementation of this strategy
allowed Stafford Act grant funds to be released in advance of final
insurance resolution. The 50 percent was based on FEMA's analysis at
the time of the Port's Preliminary Loss Assessment.
Through subsequent developments and the Port Authority's refinement
of its losses, FEMA later modified its funding strategy and effectively
reduced its obligation outlay to 26 percent of eligible projects. FEMA
and the
State allowed individual project reimbursements to be released with
varying percentages applied for insurance proceeds. Even though the
Port Authority's loss claim will continue to mature, the financial
model--the Insurance Apportionment Strategy--calculated the net FEMA
eligible obligation at $409.88 million, representing 26 percent of the
total Stafford-eligible costs.
In the end, the Port Authority was granted $397.97 million as
Stafford Act-eligible costs obligated via PWs, and an administrative
allowance of $2.03 million. FEMA was able to fully exhaust the
available insurance proceeds by documenting the amount of eligible work
and making provisions through the apportionment process, thus ensuring
no duplication of insurance benefits.
Equipment and Contents Repair and Replacement
Costs contained in this category are relatively low since its focus
is the repair and replacement of damaged equipment, computer systems,
contents and furnishings. More specifically, this category includes
costs associated with the:
(1) Replacement of destroyed vehicles;
(2) Installation and replacement of telecommunication and computer
systems, and,
(3) Replacement of destroyed building contents and furnishings.
The repair and replacement of larger, more permanent structures,
such as buildings, water mains, and transportation components are
included in the Infrastructure category.
Death and Disability Benefits
Costs contained within this category are for certain contractually
obligated death benefits, increased pension contributions, and other
costs associated with the death or disability of emergency personnel as
a direct result of the disaster. Specifically, this category includes
costs for:
(1) Funeral and memorial services;
(2) Lump sum line of duty benefits;
(3) Increased pensions due to line of duty deaths and increased
disability retirements;
(4) Leave payout to beneficiaries; and,
Cost of living adjustments for the State's pension contribution
Hazard Mitigation
This category contains costs associated with FEMA's 404 Hazard
Mitigation Grant Program (HMGP), which for DR-1391-NY provided funds
for long-term hazard mitigation measures against terrorism. Funding for
HMGP is generally 15 percent of the total estimated Federal disaster
assistance to be provided by FEMA under the declaration. That 15
percent is cost-shared on a 75/25 Federal/State and local ratio. For
this event, it was capped at 5 percent of that total, limited to the
disaster area, and intended for projects that protect infrastructure
and systems essential to the City's continued viability. These
parameters on the HMGP were implemented due to the immense financial
size of the disaster, particularly where the disaster assistance that
serves as the basis for the HMGP allocation was provided at 100 percent
federal expense, with no State or local cost-share. FEMA considered
many projects, including those that:
(1) Protect public infrastructure and utilities;
(2) Protect key governmental and healthcare facilities;
(3) Promote awareness initiatives;
(4) Ensure the continuity of government and business operations;
(5) Promote high-rise building safety; and,
(6) Protect public landmarks.
Administration
This category includes costs associated with administering all of
the FEMA Federal grant programs for DR-1391-NY. The most significant
and costly items in this category are those associated with:
(1) Grant management costs (including the FTA);
(2) FEMA administrative costs;
(3) Contractor costs; and,
(4)Administrative allowances.Q04
New Jersey
Included within this category are all costs funded through EM-3169-
NJ. The most significant and costly projects in this category were
those associated with emergency protective measures taken by the State
of New Jersey and its associated entities. Specifically, this category
contains funds expended by New Jersey resources to:
(1) Provide logistical and operational support to NYC;
(2) Evacuate Lower Manhattan;
(3) Transport and treat the injured;
(4) Establish emergency staging areas for rescue and recovery
operations;
(5) Secure bridges and tunnels; and,
(6) Manage traffic to and from New York City.
Not included in this category are New Jersey projects that were
sponsored by the New York State Emergency Management Office.
T2Individual and Family Grant
Costs contained within this category are for projects in which
individuals, not public entities, were the ultimate beneficiaries of
services. The most significant and costly projects in this category are
those associated with the Human Services Program, which includes costs
for:
(1) Mortgage and Rental Assistance;
(2) Temporary Housing;
(3) Individual and Family Grants;
(4) Disaster Unemployment;
(5) Crisis Counseling; and,
(6) Disaster Food Stamps.
Also included in this category are funds expended via Interagency
Agreements for:
(1) Expanded health care monitoring for rescue workers;
(2) Establishment of a health registry;
(3) Medical screening/health assessments of Federal workers;
and,
(4) Residential cleaning and sampling.
Costs associated with operating the Family Center are also included
in this category.
While all of the categories of spending listed above are important,
the Crisis Counseling program was the most significant FEMA had
established since the Murrah Building bombing in Oklahoma City in 1995.
As with the Oklahoma City experience, this program was also of a longer
duration than most programs associated with disaster-related
counseling. The issues and challenges to individuals and families such
as Post-Traumatic Stress Syndrome and other mental health challenges
caused by such a horrific event are manifested in the size and scope of
this program.
The largest program in terms of financial costs was the Mortgage
and Rental Assistance (MRA) program. This program was deleted from the
Stafford Act with the passage of the Disaster Mitigation Act of 2000.
However, that Act and the provisions for the deletion of MRA were not
yet in effect in September of 2001. As such, it was still an eligible
program and available for this disaster. The MRA program authorized
temporary mortgage or rental payments to or on behalf of individuals
and families who experienced financial hardship caused by a major
disaster. Given the need to show causality, as well as a requirement
that the applicants have received a written notice of dispossession or
eviction, this had always been a challenging program to administer.
Given the population size of the immediate area impacted by this event,
this was an especially difficult program to administer in both an
urgent and equitable manner. However, despite all of those challenges,
a significant number of applicants were assisted through this program.
The most challenging program, among human services programs, was
the Individual and Family Grant (IFG) program. Traditionally this
program helps individuals and families to replace household items and
provides special help for those without adequate insurance to pay for
some medical and funeral expenses. The most difficult aspect of the IFG
program was the payment for air conditioners based on the contaminated
air quality caused by the destruction of the towers.
By the time determinations had been made regarding air quality,
most home inspections, FEMA's chief means of verification of damage,
had already been performed. The EPA's warnings regarding the air
quality were real, as were the concerns of residents. Therefore, rather
than re-inspect thousands of homes, FEMA and the State of New York
accepted self-certifications by residents as to the urgency of their
need and to their contention that they were replacing air conditioners
previously owned.
While FEMA and the State entered into this program cognizant of the
risk of fraud, as with many emergency- related programs, we err on the
side of safety with the assumption that we could assure more
accountability as the recovery continues. The aggressive, and at times
deceptive, approach by vendors anxious to encourage purchases presented
a serious complication. The fact that there was no re-inspection and
the vendors' approach contributed to fraud and abuse in the IFG
program. Although this program was abused, it also ensured that those
most in need of such assistance received help.
Undeniably, the WTC disaster impelled us to move quickly and
compassionately. However, it is also our duty to ensure that our
programs provide the benefits intended under the law to eligible
applicants. The experience with the September 11th IFG program
underlines the importance of balancing compassionate service with the
need for accountability. To provide a clear understanding of how
effectively the program is operating, the States must perform
inspections and, barring those, random eligibility samples throughout
the process.
Conclusion
Taken together, these project areas represent an overall picture of
the damage and the steps taken to repair the damage and to assist the
individuals, families, and communities who suffered the most direct
pain and loss from this national event.
Even a brief review of the different categories of spending serves
as a reminder of the various forms of disruption and chaos caused by
the event but it is also a reminder of the heroic work that took place.
I appreciate the opportunity to share with you the details of
FEMA's role in response, recovery, and mitigation for the World Trade
Center disaster, and I will do my best to answer any questions you may
have.
Mr. Rogers. We are now happy to welcome back Mr. Richard
Skinner. He is Inspector General for the U.S. Department of
Homeland Security. Welcome.
STATEMENT OF RICHARD SKINNER
Mr. Skinner. Thank you. I appreciate the opportunity to be
back here to testify on this important subject. I will try to
be brief.
On September 17th, 2001, only 6 days after 9/11, the OIG
deployed a team of 24 individuals, auditors and investigators
to New York City. The mission of the investigator was
essentially to organize a multiagency task force to
collectively address fraud, waste and abuse; review
questionable applications; and moderate debris removal
operations.
Our investigators received over 1,100 complaints between 9/
16 and to date, and that resulted in approximately 250 active
investigations. The majority of these complaints were related
to fraudulent applications for the Mortgage and Rental
Assistance Program. We worked many of these investigations
jointly with the State of New York, other Federal agencies and
local authorities. To date we have arrested 117 individuals,
resulting in 96 convictions. Currently we have eight ongoing
investigations.
Our investigations have resulted in approximately $940,000
in recoveries, $6.9 million in restitutions, $2 million in
fines and $8 million in cost savings to the Federal Government.
Cost savings--we were able to stop funds from being paid to the
applicant, therefore we classified those as cost savings.
Our investigative activities closely paralleled a profile
we learned from responding to prior catastrophic disasters. We
projected that the first investigation would include false
claims for individual assistance. During our initial meetings
with representatives from both the U.S. Attorney's Office in
the Eastern and Southern Districts of New York, it was mutually
agreed that the Manhattan District Attorney's Office would
prosecute the individual assistance cases, while the U.S.
Attorney's Office would pursue public corruption and debris
removal cases.
The most problematic cases that we tried to undertake not
surprisingly dealt with the applications for air conditioners
and air-quality items. On October 18th, 2001, FEMA added air
purifiers, air filters and vacuum cleaners to its list of
eligible items for reimbursement. On March 22nd, 2002, FEMA and
the State decided to add window air conditioners as an eligible
item.
Traditionally FEMA inspectors would verify damage before
recommending repair or replacement of an electrical item;
however, when air conditioners were added as an eligible item,
home inspections had already been completed. FEMA then decided
that it would not be cost-effective to have inspectors verify
damage of a single property item that is a window air
conditioner. Instead the State implemented a self-certification
process.
May 1st, 2002, FEMA authorized advance payments to
applicants who were financially unable to purchase air-quality
items. Rather than requiring receipts for such items prior to
grant approval, which was traditionally required, which is
still required, or an ability to document financial need,
applicants were permitted to certify that they were unable to
pay for the items and were asked to provide receipts after
purchase.
Because FEMA and State controls over these items were
reduced, many applicants received assistance for which they may
not have been eligible, which increased opportunities for fraud
and abuse.
In response to these concerns and at our urging, FEMA
implemented a sampling program to verify eligibility and to
identify abusers. FEMA selected two random samples, one for
applicants who repaired or replaced air conditioners, and one
of applicants who received advances for air-quality items.
The first sample, as Mr. Picciano pointed out, resulted in
62 percent of the applicants that were sampled, we were unable
to determine whether they were, in fact, eligible. The second
sample of about 5,600 applications for air-quality items
identified about 1,600, 1,700 applicants, or 33 percent, who
had not purchased the air-quality items.
These findings and conclusions were discussed with
prosecutors in Manhattan, the Manhattan District Attorney's
Office, who expressed concern proving criminal intent. The
assistant U.S. attorneys also expressed similar concerns;
specifically the low dollar amount of the transgressions made
the cases very unattractive.
Also coupled with that was the confusion that existed at
that time with regards to eligibility, the guidelines that were
being sent out that were constantly changing also lessened the
ability or, at least the prosecutors felt, weakened their
ability to prosecute.
We reviewed many allegations and referrals concerning this
matter and determined from an historical and reasonable
approach that with few exceptions the allegations and referrals
did not appear to have a great deal of prosecutorial merit.
Nevertheless, we did have success in our opinion mitigating
some of the fraud.
As a result of FEMA's efforts to educate the public as to
the true intent of the individual assistance program and its
home inspection sampling initiative, coupled with our
investigative initiative which received considerable media
coverage, more than 100,000 of the 229,000 applicants
voluntarily chose to withdraw from the program. They either
returned or did not accept their grant award. Given that the
average award was about $1,200, these actions helped FEMA save
more than $120 million.
Regardless--regarding debris removal, we have recognized
the nature of debris removal operations makes it an area where
unscrupulous individuals could potentially use a disaster for
personal gain. Working jointly with Federal, State and local
law enforcement officials, we were successful in prosecuting
two contractors for false claims. All in all, however, due to
the tight monitor controls established by the city of New York,
we determined that fraud was not prevalent in the 9/11 debris
removal operation.
Regarding our auditor oversight activities, our efforts
were far from our traditional role. That is, going in after the
fact got you doing financial compliance items. Instead, we went
in very early and started working very closely with the FCO,
the State officials, local officials, working hand in hand
reviewing project applications, reviewing accounting systems,
reviewing claims to determine early on whether there were any
improprieties with regard to their public assistance programs.
Our mission was in essence one of prevention as opposed to one
of reaction.
We reviewed requests for funding and the detailed
worksheets for all proposed projects and met with public
assistance program staff on a regular basis. When I say regular
basis, that was on a daily basis. We had auditors there, as
many as 12 auditors at the DFO, for as long as 18 months,
working hand in hand with the program officials.
At FEMA's request, we reviewed questionable bills and
claims submitted by applicants for payment and FEMA's
implementation of its policy on heightened security
eligibility; overtime costs; applications for enhancements to
subway stations. For example, at the Columbus and Ninth Avenue
subway station, the city had submitted a proposal to expand
that subway station to handle the overflow as a result of 9/11.
That was at a cost of $30 million. We reviewed that and
determined it was not feasible to make that expansion because
new projects were--would be complete within 4 months by the
time they completed the Columbus and Ninth Avenue station. The
alternative stations would have been saving the government $30
million.
Based on our experience, two things stand out most,
however. One is the need to improve FEMA's expedited assistance
delivery process, and the need for better interagency
coordination and data sharing, particularly with other Federal
agencies and voluntary agencies involved in the delivery of
disaster assistance. This cannot be overstressed. After 9/11,
responsibilities shared among FEMA, EPA, the U.S. Department of
Justice and voluntary agencies, just to illustrate, were not
defined clearly enough to distinguish roles and establish the
sequence of delivery of assistance. Recovery from the 9/11
bombings highlighted the need for data-sharing agreements
regarding the shared roles and responsibilities among key
agencies. This needs to be done before the disaster as opposed
to an ad hoc basis as we did after 9/11 and as we are now doing
in Katrina.
Although progress has been made in this area since 9/11,
much more needs to be done. This can be accomplished in three
principal means: direct law enforcement access to FEMA data,
computer matching agreements, and real-time data exchange.
Hurricane.
Katrina clearly demonstrated that law enforcement agencies
need direct access to disaster victims' personal information
not only to reconnect family members and locate missing
persons, but also to identify convicted sex offenders and
fleeing felons who may have relocated as a result of the
disaster. In support of these issues, FEMA published just
recently, I believe just last week, a notice in the Federal
Register adding a new routine use to its disaster recovery
assistance of records that allows for greater information
sharing for Federal agencies and State and local governments.
This is a very important first step.
Another advantageous means of data sharing involves
computer matching. Computer matching agreements among Federal
agencies that provide disaster assistance are often necessary
to detect fraud, waste and abuse. Without such agreements, the
prospect for protecting the taxpayers' dollars and prosecuting
fraud is diminished.
Mr. Rogers. We are going to have to interrupt you. We have
two minutes to get to the Capitol to vote. We will be back at
approximately 3:15, 3:20, and we will pick back up at that
point. We are now in recess.
[Recess.]
Mr. Rogers. I call this hearing back to order and pick back
up with Mr. Skinner. I apologize for the interruption, but
there won't be any more since we have finished voting on the
floor for the day.
Mr. Skinner. Thank you and I understand.
When we adjourned briefly, I was talking about interagency
coordination and data sharing, essentially by giving law
enforcement direct access to FEMA data, interagency matching
agreements--and which I have already commented on.
The third point I would like to make, that it is important
that Federal agencies with disaster assistance programs--and
there are well over 22 to my knowledge--that they have the
capability to exchange real-time information among themselves.
This exchange of information is necessary to verify identity
and eligibility as well as create a holistic approach for
effective delivery disaster assistance.
According to FEMA's disaster programs, the Federal
Government has over 90 disaster assistance programs. Real-time
data sharing agreements can help prevent the duplication of
Federal disaster assistance and ensure that disaster victims
receive the full complement of disaster assistance due them.
For example, data sharing between FEMA and the Social Security
Administration and the Postal Service can go a long way to
verify the name, Social Security number, and address of an
individual applying for disaster assistance. These types of
agreements would result, in our opinion, in greater
intergovernmental cooperation and collaboration in the delivery
of disaster assistance.
I would like to note that we have an ongoing review of
FEMA's data sharing processes and procedures, and that is
currently ongoing, and once we do in fact complete that review
I would be happy to share that with the committee.
In essence, that completes my opening remarks, and I look
forward to answering any of your questions.
Mr. Rogers. Thank you, Mr. Skinner.
[The statement of Mr. Skinner follows:]
Prepared Statement of the Honorable Richard L. Skinner
Good afternoon Mr. Chairman and Members of the Subcommittee. I am
Richard L. Skinner, Inspector General for the Department of Homeland
Security. Thank you for the opportunity to be here today to discuss the
work of the Office of Inspector General (OIG) in response to the
terrorist attacks of September 11, 2001, in New York City. During the
period of the federal response, I served as the Deputy Inspector
General for the Federal Emergency Management Agency (FEMA).
Subsequently, I became the Deputy Inspector General, and later
Inspector General for the Department of Homeland Security.
OIG RESPONSE TO SEPTEMBER 11, 2001
The events of September 11, 2001, resulted in catastrophic loss of
life and physical damage as well as loss to the business and
residential infrastructure in the lower part of the Borough of
Manhattan. FEMA applied the full range of authorized disaster
assistance programs to address the post-disaster needs of the City of
New York and its citizens, including grants for Public Assistance,
Temporary Housing (specifically Mortgage and Rental Assistance),
Individual and Family Grants, Disaster Unemployment Assistance, Crisis
Counseling Assistance and Training, and Legal Services. However, due to
the unique circumstances of this disaster--i.e., managing the
consequence of a terrorist event rather than the consequences of a
natural disaster--FEMA had to use its authorities and programs more
broadly than ever before. As a result, FEMA's authorities were not
adequate to meet everyone's expectations in recovering from the
unprecedented needs created by this event.
On September 17, 2001, our investigators arrived in New York City
and met with the Federal Coordinating Officer, representatives of the
U.S. Attorney's Southern and Eastern District Office, the Manhattan
District Attorney's Office, the New York Police Department, the Port
Authority Police Department, the City of New York Department of
Investigations, and many other investigative organizations with
jurisdiction over the World Trade Center disaster. The purpose of those
meetings was to provide and receive information; explain our mission of
aggressively investigating and recommending prosecution of anyone
attempting to defraud FEMA; and, to fulfill our objectives of:
Participating in public service announcements
Conducting fraud awareness briefings
Organizing a multi-agency task force to collectively
address fraud
Reviewing applications through computer matching
Monitoring debris removal
Participating in press conferences with the U.S.
Attorney's Office
Distributing FEMA fraud Hotline posters and
information
During the initial first eight months, a satellite office was
established in Manhattan where our investigators worked round-the-
clock, in three shifts with six agents per shift. In April 2002,
investigators transitioned to two/12-hour shifts, and maintained six
agents per shift. By February 2003, investigators were working one/12-
hour shift with six agents. The Agent in Charge of the FEMA OIG Eastern
District Investigations Branch Office in Atlanta, Georgia provided
supervisory oversight of the World Trade Center investigations.
By early October 2001, we also deployed teams of auditors and
inspectors from our headquarters and various field offices to the New
York City Disaster Field Office (DFO). Our mission was to (1) assist
the Federal Coordinating Officer in reviewing and assessing procedures,
practices, and controls in place throughout the operation; (2) identify
and prevent fraud; and (3) assure FEMA's Director that all possible
actions to protect public welfare and to ensure the efficient,
effective, and economic expenditure of federal funds were undertaken.
One team of auditors and inspectors worked directly with the Federal
Coordinating Officer and monitored set-up and operation of the DFO.
Another team of auditors worked with FEMA's public assistance staff
while a team of inspectors worked with FEMA's individual assistance
program staff.
INVESTIGATIVE ACTIVITIES
We received allegations of fraud in a variety of ways. While the
FEMA OIG fraud hotline was our primary source of information, FEMA's
disaster assistance program staff, the Manhattan District Attorney's
Office, and other federal, state, and local agencies provided
information.
Our investigators received over 1,100 complaints resulting in
approximately 250 investigations, the majority of these complaints were
related to fraudulent applications for Mortgage and Rental Assistance,
Disaster Unemployment Assistance, and individual assistance. We worked
many of those investigations jointly with the Social Security
Administration OIG, the New York Department of Investigations, and
other law enforcement agencies. We arrested or indicted 117 individuals
resulting in 96 convictions, 10 dismissals, 3 warrants, and 8
investigations pending final disposition. Further, the approximate
aggregate dollar amount that can be attributed to our investigative
activity is $940,000 in recoveries, $6.9 million in restitutions, $2
million in fines, and $8 million in cost savings to the federal
government.
Individual Assistance
Our investigative activities in response to the World Trade Center
closely paralleled a profile we learned from responding to prior
catastrophic disasters. We projected that the first investigations
would involve false claims for individual assistance, which included
the Mortgage and Rental Assistance, Disaster Unemployment Assistance,
Individual and Family Grants programs, and other associated programs to
assist individuals affected by the disaster.
During our initial meeting with representatives of both the U.S.
Attorney in the Eastern and Southern Districts, it was mutually agreed
that the Manhattan District Attorney's Office would prosecute the
smaller individual assistance cases while the U.S. Attorney's offices
would pursue debris removal cases.
Examples of the individual assistance cases accepted by the
Manhattan District Attorney's Office were:
Claims for damage to residences owned by others
Claims for damage to a residence where no damage
occurred
Claims for pre-existing damage
Claims for mortgage and rental assistance
Claims in the names of decedents
Renters filing claims purporting to be landlords
Mortgage and Rental Assistance Program
The Mortgage and Rental Assistance (MRA) program was designed to
cover rent or mortgage payments for victims who suffer financial
hardship as a result of a major disaster. Victims who were unable to
pay their rent or mortgage and received written notice of eviction or
foreclosure may have been eligible for MRA grants.
One example of an MRA-related investigation involved a person who
was temporarily employed by FEMA at the Applicant Assistance Center in
Manhattan. The employee participated in a scheme to defraud FEMA by
filing false claims under the MRA program. To further the scheme, he
and seven others obtained, or helped to obtain, over $1 million in MRA
grants based upon applications that contained fake phone bills and
bogus driver's licenses, which were intended to prove residency at a
particular location, or identified residential addresses that were
actually commercial mail receiving facilities. Additionally, these
individuals enlisted accomplices to create false documents, submit
false claims, vouch for information provided to FEMA, and to receive
grant payments. In April 2006, with the cooperation of the Secret
Service and the Postal Inspection Service, six were arrested and
charged in the Eastern District of New York, in a 52-count indictment
to include false claims, conspiracy, mail fraud, wire fraud, and making
false statements. Two of the individuals pleaded guilty, one remains a
fugitive, and prosecution is pending on the remaining four defendants.
Other examples of related investigations include two individuals
who claimed damage to their personal property items from debris and
smoke filled air in their apartment, which was located 35 blocks from
the World Trade Center site. Each received $10,000 in grants from FEMA.
Another individual claimed her estranged husband was a window washer at
the World Trade Center and died in the attack. She received $3,200 in
rental assistance before we determined the husband was alive and living
on Long Island. All of these individuals were successfully prosecuted.
Individual and Family Grants Program
The Individual and Family Grants (IFG) program was designed to meet
the disaster-related necessary expenses or serious needs of disaster
victims which could not be met through other provisions of the Stafford
Act; or, through other means, such as insurance; other federal
assistance; or voluntary agency programs. Eligible expenses may include
those for real and personal property, medical and dental expenses,
funeral expenses, transportation needs, and other expenses specifically
requested by the state.
On October 18, 2001, air purifiers, air filters, and vacuum
cleaners with high efficiency particulate air filters were added to the
list of IFG eligible items. On March 22, 2002, FEMA and the state
decided to add window air conditioners as an IFG eligible item.
Eligibility was dependent upon applicants having owned a window air
conditioner that was damaged during the event. Traditionally, during a
home inspection inspectors would verify damage before recommending the
repair or replacement of an eligible item.
However, when air conditioners were added as an IFG eligible
property item, home inspections had been completed. FEMA then decided
that it would not be cost effective to have inspectors verify damage of
a single property item. Instead, the state implemented a self-
certification process. Further, on May 1, 2002, FEMA and the state
authorized advance payments to applicants who were financially unable
to purchase air quality items. Rather than requiring receipts for such
items prior to grant approval (which was traditionally required) or an
ability to document financial need, applicants were permitted to
certify that they were unable to pay for the items and were asked to
provide receipts after purchase.
On February 20, 2003, the Associated Press reported that people who
did not suffer from the effects of contaminated air filed 90 percent of
the applications for reimbursement of IFG eligible air quality items.
The source of that figure was FEMA's World Trade Center disaster
recovery manager. The manager's estimate was based on an assumption
that, of the 225,000 applicants for air quality items, only the 25,000
applicants that lived in Manhattan and who were eligible to participate
in an Environmental Protection Agency home cleaning program, suffered
from contaminated air. Consequently, the manager concluded that 90
percent of the applications submitted were from individuals who had not
suffered from the effects of contaminated air.
We determined there was no indication that eligible applicants did
not receive assistance. However, because FEMA and state management and
control over IFG eligible air quality items was reduced, many
applicants received assistance for which they may not have been
eligible, which increased opportunities for fraud and abuse.
In response to these concerns, and at our urging, FEMA implemented
a sampling program to verify applicant eligibility and to identify
abusers. FEMA selected two random samples: one of applicants who
repaired or replaced air conditioners, and one of applicants who
received advances for air quality items. Although the samples were not
designed to be statistically valid, the results suggest that a large
number of applicants were not suffering from the effects of
contaminated air.
In January 2003, FEMA selected a sample of 4,435 people who applied
for assistance to buy window air conditioners and visited their homes
to verify that they had window air conditioners before the disaster
occurred. FEMA representatives inspected damaged air conditioners or,
when damaged air conditioners had been disposed of, inspected
indentations left in windows by the air conditioners. The home
inspections identified 1,704 applicants who had evidence of the prior
existence of a window air conditioner, and 2,731 applicants, or 62%,
who did not and therefore were probably ineligible for assistance.
The second sample of 5,602 applications was selected in March 2003
to verify the proper use of $5.8 million in advances for air quality
items. Applicants who received advances were required to submit
receipts to the state within 30 days after receiving the funds, but
FEMA said that none of the applicants included in the sample complied
with this requirement. As of July 22, 2003, FEMA had completed 5,029
home inspections and determined that 3,347 applicants had purchased the
air quality items. FEMA referred the 1,682 applicants, or 33%, who had
not purchased the air quality items to the state for collection.
These findings and conclusions were discussed with Manhattan
District Attorney's Office prosecutors who expressed concern proving
criminal intent. The prosecutors felt it would be their burden to prove
that a subject's intended purpose was to defraud FEMA, yet the
prosecutors were not certain they could satisfy that element. While
prosecutors did state that they would be willing to review such cases,
unless our investigators had solid proof of intent, prosecutors would
be more likely to decline prosecution. Also, prosecutors expressed
concern over the low dollar amount--about $1,200--of each potential
case and over the administration of the program, which allowed
applicants to receive funds and purchase items with no stated purchase
deadline.
The Assistant U.S. Attorneys expressed similar concerns.
Specifically, the lack of program criteria allowing applicants to
receive funds and purchase items with no stated purchase deadline, and
the low dollar amount, made the cases very unattractive. An additional
issue for the U.S. Attorney was the appearance of selective prosecution
for which a logical defense would be why is the government prosecuting
certain individuals when it chose not to prosecute all 200,000 of the
potential fraudulent claims.
We reviewed many allegations and referrals concerning this matter
and determined, from a historical and reasonable approach, that with
few exceptions, the allegations and referrals did not appear to have a
great deal of prosecutorial merit. However, both federal and state
prosecutors stated that if the case involved false documents, they
would be more likely to prosecute those subjects. We conducted 12
investigations, the subjects of which were prosecuted by the Manhattan
District Attorney's Office. Two individuals filed claims to obtain
filters for their window air conditioners when in fact the high-rise
building where they resided had central air conditioning. Another 10
individuals, when confronted by our investigators, confessed to
submitting false invoices to support their claims for IFG assistance.
Last, we investigated complaints against 16 air quality products
companies for using unethical sales tactics and referred them to the
New York State Attorney General's office.
Nevertheless, we did have success, in our opinion, mitigating some
of the fraud. As a result of FEMA's intensive efforts to educate the
public as to the true intent of the IFG Program and its aggressive home
inspection sampling initiative, coupled with our investigative
initiatives, which received considerable media coverage, more than
100,00 of the original 229,000 applicants voluntarily chose to withdraw
from the program. They either returned or did not accept their grant
award. Given that the average IFG award was about $1,200, these actions
helped FEMA save more than $120 million.
Public Assistance
Public assistance investigations, the majority of which deal with
debris removal and generally involve primary contractors and
subcontractors, are more complex and take longer to complete than the
individual assistance investigations. Examples of public assistance
cases the U.S. Attorneys agreed to prosecute dealt with the removal and
disposal of disaster related debris. We have long recognized that the
nature of debris removal operations make it an area where unscrupulous
individuals and firms could potentially use a disaster for personal
gain. With our years of experience, we have seen contractors engaged
in:
Submitting false debris removal invoices
Artificially increasing tonnage hauled
Inflating the number of employees
Falsifying labor and material costs
Bribery, bid-rigging, and kickbacks
Working jointly with the Internal Revenue Service's Criminal
Investigations Division and the Postal Inspections Service, we
investigated the president and owner of a disaster recovery and clean-
up company. This individual and others were convicted in U.S. District
Court of engaging in a fraud scheme to enrich themselves by taking
advantage of federal disaster relief funds in New York and two other
states. Specifically, the contractor was hired to provide monitoring
and maintenance services at the Fresh Kills Landfill on Staten Island.
The contractor misrepresented the hourly rates it was paying employees,
and submitted false invoices for employee lodging and per diem.
In another investigation, two contractors working for a trucking
company were successfully prosecuted. All contractors are required to
have a valid New York City permit to do business in the city. We
received information that this trucking company submitted an
application to remove debris and provided false information as to the
owner of the company. Working jointly with the New York Department of
Investigations, we participated in the execution of a New York State
search warrant at two of its places of business, which produced
documentation as to the true owner and manager of the company. One
individual was arrested for submitting false documents to the City of
New York for a work permit license. A second individual was arrested
for making false statements in a deposition as to the ownership of the
company. Both were convicted on multiple counts of perjury.
GENERAL MANAGEMENT OVERSIGHT ACTIVITIES
As I briefly mentioned, our auditors and inspectors worked in
direct support of the Federal Coordinating Officer responding to
specific requests and addressing matters that independently came to our
attention. Some of the tasks we performed at the Disaster Field Office
related to accounting and auditing, but some were as varied as tracking
down missing copy machines. We worked closely with a team of FEMA
comptrollers and Office of General Counsel representatives, helping
them with a wide assortment of financial matters. Further, we worked
with other federal agencies, as well as with state and city
organizations and voluntary agencies. Our support included establishing
a partnership with program staff to identify and suggest courses of
action regarding potential and emerging issues with duplication of
benefits, donations management, accountable property, program
limitations and administration, DFO training, and safety and security.
Public Assistance
We responded to the World Trade Center attack as a partner with
FEMA's response and recovery components. We deployed a team of auditors
to monitor public assistance operations and assist in reviewing
requests for assistance. The team maintained a presence for more than
18 months after the attack, working with FEMA public assistance staff
to ensure that recovery efforts were on track and complied with federal
laws and regulations.
Our efforts were far from the traditional role of the OIG as this
was an extremely unique situation. We were able to contribute
significantly to the effectiveness of FEMA's response by providing
proactive oversight rather than reactive hindsight. Early in the
process we briefed applicants on how to qualify for FEMA assistance and
maintain records, and we reviewed accounting systems of some of the
local governments to ensure they were adequate for collecting necessary
cost data.
We reviewed requests for funding and the detailed worksheets for
proposed projects and met with public assistance program staff on a
regular basis to provide them technical assistance on allowable costs.
At FEMA's request, we reviewed questionable bills submitted by
applicants for payment and FEMA's implementation of its policy on
heightened security eligibility.
We did not conduct any traditional compliance audits of public
assistance grants, nor did we audit any costs incurred under the
Consolidated Appropriations Resolution Act of 2003, which provided that
costs not eligible for public assistance funding, referred to as
associated expenses, would be funded with the remainder of the $8.8
billion of authorized FEMA funding. FEMA estimated that $7.6 billion
would be required for Stafford Act purposes and $1.2 billion would be
used for associated expenses. Associated expenses include such costs as
local government employee salaries, heightened security costs, and the
``I Love NY'' campaign, which encouraged tourism and visitors to the
state.
Individual Assistance
In response to congressional inquiries, we reviewed the delivery of
individual assistance in New York after September 11, 2001. The review
focused on issues that needed to be addressed by both FEMA and Congress
as they considered regulatory and legislative changes to improve FEMA's
delivery of assistance to victims of future terrorist attacks that
result in presidential disaster declarations. The following is a
summary of some of the issues raised during our review, FEMA's Delivery
of Individual Assistance Programs: New York--September 11, 2001
(December 2002).
Eligibility Issues in the Mortgage and Rental Assistance Program
FEMA has not implemented the MRA program on a large scale because
previous disasters did not coincide with nor result in widespread
unemployment or national economic losses. From the inception of the MRA
program until September 11, 2001, only $18.1 million had been awarded
in 68 declared disasters, compared to approximately $76 million awarded
in response to the New York World Trade Center disaster alone. Because
the program was seldom used, Congress eliminated it when the Disaster
Mitigation Act of 2000 (DMA) was enacted, making the program
unavailable for disasters declared after October 14, 2002.
FEMA had to face the challenge of implementing this program in a
disaster that caused significant economic consequences, including not
only the obvious economic impact of the incident itself but also the
indirect economic effects felt throughout the nation. The language of
the Stafford Act's MRA authority established, as a criterion for
assistance, a written notice of dispossession or eviction. The law was
silent, however, on what constitutes a financial hardship. This
omission required FEMA to interpret to what extent a personal financial
loss constitutes a financial hardship, and to determine whether that
hardship resulted directly from the primary effects of the attack or
from the secondary effects on the nation.
The MRA program's limited use, the broad economic impact of this
unprecedented event, and FEMA's challenge to differentiate between
primary and secondary economic effects contributed to difficulties in
delivering timely and effective assistance. The MRA program was unique
because it addressed limited, individual economic losses versus
physical damage resulting from a disaster. Traditional inspection of
damages as a basis for program eligibility determinations, therefore,
did not apply to MRA. Individual financial hardships caused by the
disaster were evaluated on a case-by-case basis. FEMA attempted to
clarify eligibility criteria that required a clear link between
physical damage to the business or industry caused by the disaster and
an applicant's loss of household income, work, or employment regardless
of geographic location.
State Capability to Implement the Individual and Family Grants Program
Applications for IFG assistance rose sharply in June 2002, as
applicants requested assistance for air quality items. FEMA believed
the increase in new applications coincided with public announcements
being made by the Environmental Protection Agency (EPA) regarding the
poor air quality in the city and the need for air-conditioning and
related items because of the unusually warm spring and early summer.
The state believed the surge in new applications coincided with the
closing of assistance from many nonprofit organizations. FEMA received
an average of 7,660 applications per month from June 2002 to August
2002 for air quality items. Applications for IFG assistance typically
do not spike at this point in the recovery phase of a disaster.
The unanticipated increase in applications received after June 2002
also may have been related to two other decisions regarding assistance
for air quality items. First, assistance was made available to all
households in the five boroughs of New York City. The broad geographic
eligibility was not related to the areas of actual impact. A better
model might have been to limit eligibility to the same areas identified
by the EPA and the New York City Department of Health for purposes of
the apartment cleaning and testing program. Had the IFG program and the
EPA testing and cleaning program worked more closely in terms of
geographic eligibility, the IFG program would have had reasonable and
justifiable boundaries. Second, as a result of concerns expressed by
certain advocacy groups, applicants were allowed to certify that they
were unable to pay for the air quality items (costing as much as
$1,600). Funding was advanced to those applicants and they were
requested to provide receipts after purchase. There were few
limitations placed upon who could qualify for this ``unable to pay''
option. As I have previously noted, this may have increased the
likelihood of fraud and abuse.
Interagency Coordination Challenges
I cannot stress enough the need for interagency data sharing and
coordination to improve disaster response, recovery, and oversight.
After 9/11, responsibilities shared among FEMA, EPA, the U.S.
Department of Justice's (DOJ) Office for Victims of Crime, and
voluntary agencies, for example, were not defined clearly enough to
distinguish roles and establish the sequence of delivery of assistance.
Recovery from the event highlighted the need for data sharing
agreements regarding shared roles and responsibilities among key
agencies likely to respond to future criminal actions.
Information Data Sharing
Although progress has been made in this area since 9/11, much more
needs to be done. Accordingly, I would like to again emphasize the need
for interagency data sharing and coordination through three principal
means: direct access to FEMA data, computer matching agreements, and
real-time data exchange.
Hurricane Katrina clearly demonstrated that law enforcement needs
direct access to disaster victims' personal information, not only to
reconnect family members and locate missing persons, but also to
convicted sex offenders who relocated as a result of the disaster.
Hurricane Katrina left over 5,000 children missing and more than 2,000
unaccounted for registered sex offenders. The process employed by FEMA
to fulfill law enforcement agency requests for FEMA records under the
Privacy Act is untimely. The FBI has indicated that these requests
sometimes take days to fulfill. A similar protracted process was used
for governors to request information from FEMA to obtain data on sex
offenders who relocated to their state. The HHS believes, and we agree,
that evacuated, registered sex offenders are a potential threat to
children until appropriate law enforcement has information to identify
and monitor these individuals. Timely access to FEMA data can assist
law enforcement in protecting public safety and security, such as in
the apprehension of fleeing felons.
In support of these issues, FEMA published a notice in the Federal
Register, on July 6, 2006, adding a new routine use to its Disaster
Recovery Assistance system of records that allows for greater
information sharing with federal agencies, state and local governments,
or other authorized entities for the purposes of reunifying families,
locating missing children, voting, and with law enforcement entities in
the event of circumstances involving an evacuation, sheltering, or mass
relocation, for purposes of identifying and addressing public safety
and security issues. As FEMA noted, these routine uses are being added
to resolve any ambiguities about FEMA's authority to share information
under these circumstances and to ensure that necessary information can
be disseminated in an efficient and effective manner. This is a step in
the right direction.
Another advantageous means of data sharing involves computer
matching. Computer matching agreements among federal agencies that
provide disaster assistance are often necessary to detect fraud, waste,
and abuse. Agencies such as the Social Security Administration and the
Small Business Administration, for example, have expressed a high
degree of interest in such agreements with FEMA. An agreement between
FEMA and the Department of Housing and Urban Development was recently
executed to identify individuals who are receiving excess or duplicate
housing assistance relating to Hurricanes Katrina and Rita. Yet, to
date, only the HUD computer matching agreement has been executed,
eleven months after Katrina's landfall. Without such agreements, the
prospect for protecting the taxpayer's dollars and prosecuting fraud is
diminished.
One more means of data sharing I would like to convey is the real-
time exchange of information among federal agencies that provide
disaster assistance. This exchange of information is necessary to
verify identity and eligibility, as well as to create a holistic
approach for the effective delivery of disaster assistance. According
to FEMA's Guide to Recovery Programs, the federal government has over
90 disaster assistance programs. Real-time data sharing agreements are
necessary to prevent the duplication of federal disaster assistance and
to ensure that disaster victims receive the full compliment of disaster
assistance needed for a timely and effective recovery. Currently, FEMA
has a contract with the commercial data reseller ChoicePoint to
authenticate the identity of disaster assistance applicants. Since
Hurricane Katrina, approximately $4.3 million has been expended for
their authentication services. Furthermore, it is our understanding
that FEMA has extended this contract with ChoicePoint through June
2007. However, interagency data sharing agreements between federal
agencies that provide disaster assistance would lessen the government's
reliance upon commercial data resellers such as ChoicePoint for
identity authentication. For example, data sharing agreements between
FEMA and the Social Security Administration and the Postal Service can
verify the name, social security numbers, and address of an individual
applying for disaster assistance. These agreements will result in
greater intergovernmental collaboration in the delivery of disaster
assistance, which corresponds with the intent of the National Response
Plan and FEMA's Strategic Plan Fiscal Years 2003-2008, which charges
FEMA to serve as the nation's knowledge manager and coordinator of
emergency management information.
I would like to note that we have an ongoing review of how FEMA's
data sharing processes and procedures can be enhanced to promote
effective and efficient disaster response, recovery, and oversight. We
look forward to sharing our findings of this review with you when it is
complete. The following are examples where interagency data sharing and
coordination after the 9/11 terrorist attacks could have been approved.
Response to Residential Air Quality, Testing, and Cleaning Requires
More Coordination
EPA was aware, based on its work in the aftermath of the 1993 World
Trade Center terrorist bombing, that the World Trade Center complex
contained asbestos material. Neither FEMA nor New York City officials,
however, initially requested that EPA test or clean inside buildings
because neither EPA nor the New York City Department of Environmental
Protection could identify any specific health or safety threat. EPA
nevertheless advised rescue workers early after the terrorist attack
that materials from the collapsed buildings contained irritants, and
advised residents and building owners to use professional asbestos
abatement contractors to clean significantly affected spaces.
Directions on how to clean the exterior of buildings affected by dust
and debris were provided to building owners by the New York City
Department of Environmental Protection, and directions on how to clean
interior spaces were provided by the New York City Department of
Health.
Neither FEMA nor EPA traditionally had been involved in testing and
cleaning private residences. Neither agency is specifically authorized
to provide such services. However, when a potential health and safety
threat was identified and New York officials documented that interior
testing and cleaning would beneficially impact the City's economic
recovery, FEMA used its debris removal authorities under the Stafford
Act to provide the necessary funding.
However, the program to test and clean residences in lower
Manhattan did not commence until months after the disaster. Although
FEMA has the responsibility to coordinate recovery from declared
disasters, FEMA must depend on the particular expertise of the EPA in
circumstances involving possible air contaminants or environmental
hazards. EPA must confirm that such hazards constitute a public health
and safety threat before FEMA can provide funding for emergency
response. We suggested that FEMA be more proactive in requesting EPA to
conduct necessary testing and/or studies to determine if a public
health or safety threat exists in future, similar disasters so that
cleaning efforts could begin much earlier in the recovery phase. FEMA
also should address the roles of state and local agencies in such
circumstances, as consultation with those agencies would provide useful
information in review or evaluation.
Department of Justice Authorities Compliment FEMA Authorities
Because the World Trade Center complex and Pentagon were declared
disasters by the President resulting from criminal actions, both FEMA
and DOJ's Office for Victims of Crime had authority to provide victim
assistance. FEMA's Crisis Counseling Assistance and Training Program
(CCP) providers found it necessary to offer support services that went
beyond the normal levels of CCP mental health programs. Further, too
many entities were involved at the outset to ensure coordination and
avoid potential confusion of services provided to victims.
The event uncovered potential DOJ-FEMA overlaps in some programs
covering disasters that are also crime scenes. FEMA's CCP program funds
crisis counseling and the IFG program reimbursed victims of disasters
for medical, dental, and funeral expenses. The Victims of Crime Act of
1984, as amended (42 United States Code Sec. 10603), authorizes DOJ's
Office for Victims of Crime to provide financial assistance to victims
of federal crimes and of terrorism and mass violence in the form of (1)
grants to state crime victim compensation programs to supplement state
funding for reimbursement of the same out-of-pocket expenses, including
mental health counseling; and, (2) grants to state victim assistance
agencies in support of direct victim services such as, crisis
counseling, criminal justice advocacy, shelter, and other emergency
assistance services. Because the event was both a disaster and a
criminal act, programs of DOJ's office for Victims of Crime were also
applicable. As a result, expenses medical, dental, and funeral expenses
were covered by DOJ.
FEMA, the Office for Victims of Crime, and DOJ's Executive Office
for United States Attorneys subscribed to a Letter of Intent to ensure
that victims received needed services and information and to articulate
services needed in responding to catastrophic federal crime. The Letter
of Intent should serve as the foundation for future cooperative
activities but more detailed and comprehensive guidance is necessary to
ensure that services delivered to disaster victims who are also victims
of crime are appropriate, consistent, and not duplicative. Those
objectives could be accomplished through a Memorandum of Understanding
between FEMA and DOJ's Office for Victims of Crime that formalizes the
relationship, the responsibilities and authorities to be applied,
programs, time frames, and sequencing when a disaster is also a crime
scene.
Coordination with Voluntary Agencies
Voluntary Agencies (VOLAGS) typically provide immediate emergency
assistance to victims, while FEMA addresses short and long-term
recovery needs. Near the end of the recovery cycle, VOLAGS address
victims' unmet needs. After the September 11, 2001 attacks, individuals
donated time, resources, and money in record volumes to a large number
of VOLAGS. The overwhelming generosity and rapid influx of cash
donations likely contributed to the ability of VOLAGS and other groups
to provide higher levels of assistance. Since so many VOLAGS, ad hoc
organizations, and other entities not traditionally in the sequence of
delivery were distributing assistance, it was difficult to collect
accurate information necessary to understand the scope of assistance
being provided. FEMA, attempting to bring order to the chaos created by
the multitude of voluntary organizations, developed a matrix of various
government and non-government entities. At one point, this matrix
included over 100 organizations and was used to identify their
contributions to disaster recovery efforts and the types of assistance
provided. FEMA validated the information and became familiar with the
kinds of assistance being offered so that staff could make informed
referrals. In spite of those efforts, FEMA was not able to assure that
all voluntary agencies were coordinated appropriately to ensure that
benefits were not duplicated among disaster programs, insurance
benefits, and any other type of disaster assistance.
Historically, FEMA has not considered the assistance of voluntary
agencies to be duplicative of its assistance in most declared
disasters. In response to this event, however, VOLAGS far exceeded
their traditional role in the provision of assistance. FEMA, to ensure
timely assistance to victims, decided to activate its own individual
assistance program and to treat VOLAG and other non-governmental
assistance as non-duplicative. Had FEMA expended the resources
necessary to fully identify and quantify such assistance, the timely
provision of urgently needed assistance would have been delayed. FEMA
acknowledges, however, that some people may have received assistance
for similar losses from more than one source.
Regardless of FEMA's decision not to identify and quantify
voluntary agency assistance on a case-by case basis, the potential that
duplication occurred did exist although the nature and amount of
duplication remains unknown. FEMA needs to be better able to anticipate
the proactive role non-governmental organizations will play in disaster
recovery operations and attempt to coordinate relationships with those
organizations through protocols such as Memorandums of Understanding to
alleviate the potential for duplicating benefits.
Improvements have been made since the 9/11 attacks. The Coordinated
Assistance Network was established through a memorandum of
understanding in 2003 and was first piloted during the 2004 hurricane
season in Florida. The following organizations signed this document:
American Red Cross, Salvation Army, Alliance of Information and
Referral systems, United Way of America, United Services Group,
National Voluntary Organizations Active in Disaster, and Safe Horizon.
The goal of the Coordinated Assistance Network is to afford more
efficient and effective service coordination among voluntary, as well
as governmental, agencies during disaster events. It was designed as a
communication mechanism for services providers and to identify any gaps
or redundancies in services. The network allowed registered
organizations to access information on available services and to share
information on the levels of services delivered to individuals,
families, or households. It also allowed disaster victims to explain
their needs and register only once, as registration afforded disaster
victims a registration with all service providers on the network. In
response to the 2005 hurricanes in the Gulf Coast region, five
organizations were using the network and 81,817 clients records were in
the system as of September 30, 2005.
Mr. Chairman, this concludes my prepared remarks. I would be happy
to answer any questions that you or the Subcommittee may have.
Mr. Rogers. The Chair now recognizes Mr. Greg Kutz,
Director of Financial Management and Assurance, U.S. Government
Accountability Office. The floor is yours.
STATEMENT OF GREG KUTZ
Mr. Kutz. Mr. Chairman, members of the subcommittee, and
Chairman King, thank you for the opportunity to discuss fraud
prevention in times of disaster. In June I testified on the
massive level of fraud related to Hurricanes Katrina and Rita
which raised questions about the integrity of disaster
assistance programs. Today I will discuss how an effective
fraud prevention program can provide Congress and the American
taxpayers with confidence that fraud, waste and abuse will be
minimized for future disasters.
My testimony has two parts: first, fraud prevention; and
second, fraud detection and investigations. My testimony
relates to Katrina and Rita, but I do echo many of the comments
of Mr. Skinner as it relates to September 11.
First, our work across the government has shown that fraud
prevention is the most efficient and effective means to
minimize fraud, waste and abuse for any government program. Our
testimony before the Investigative Subcommittee in June
highlighted the consequences of the lack of an effective fraud
prevention program for Katrina and Rita. Specifically, through
February of 2006, we estimated $1 billion, or 16 percent, of
individual assistance payments were fraudulent or improper.
Fraud prevention processes and controls happen before
taxpayer money is disbursed. For individual assistance,
examples include validation of eligibility, fraud awareness
training, system edit checks and inspections. The key here is
fraud prevention. Once money is improperly disbursed, the
government can only hope to collect a few pennies on the
dollar.
Fraud prevention for disaster assistance programs starts
with validation of eligibility. For Katrina and Rita we
reported that individual identities and property addresses were
not validated up front. This allowed thousands of individuals
to register using invalid Social Security numbers and bogus
damaged property addresses. For future disasters, it is
critical that eligibility data such as names, Social Security
numbers, and primary addresses be validated up front.
Prior to implementing any new controls and well in advance
of any disaster, new controls must be field tested. Why? To
ensure that they are operating as intended and that legitimate
victims are not denied benefits. As fraud prevention controls
increase, the risk increases that legitimate victims will be
rejected. Thus, a safety net must be in place to quickly handle
exception cases.
Moving onto my second point. Although costly and less
effective than fraud prevention, fraud detection monitoring and
investigations are also critical. Key elements of the detection
process include data mining for fraud and the establishment of
fraud hotlines. Another key element of fraud prevention is the
aggressive investigation and prosecution of individuals who
commit fraud. Prosecuting those that commit fraud sends a
message that stealing money from the government will not be
tolerated for disasters. A well-publicized and effective
prosecution strategy should serve as a preventive measure for
future disasters.
The Hurricane Katrina Fraud Task Force has investigated and
indicted several hundred individuals to date. Schemes
identified through fraud detection, investigations and
prosecution should be fed back into the fraud prevention
program for future disasters.
In conclusion, our work has shown that there is no shortage
of morally bankrupt individuals who will steal money from the
Federal Government in times of disaster. For Katrina and Rita,
it appears that at least tens of thousands of individuals took
advantage of the opportunity to commit fraud. The government
must learn from these costly lessons and make fraud prevention
a high priority for future disasters.
Mr. Chairman, this ends my statement. I look forward to
your questions.
Mr. Rogers. Thank you, Mr. Kutz.
[The statement of Mr. Kutz follows:]
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Mr. Rogers. Before we start our questions, I would like to
ask unanimous consent that the statement from the Honorable
Michael J. Garcia, United States Attorney for the Southern
District of New York, be included for the record. Without
objection, it is so ordered.
[The information follows:]
For the Record
Submitted by Hon. Mike Rogers
Prepared Statement of the Honorable Michael J. Garcia, United States
Attorney for the Southern District of New York
Presented on July 12, 2006,
I appreciate this opportunity advise the Subcommittee on the work
of the United States Attorney's Office for the Southern District of New
York in combating fraud in 9/11 relief programs. We have found this
review of our response to 9/11 relief fraud to be useful and hope that
the Subcommittee finds our information helpful.
Introduction and Summary.
United States Attorneys Office combat fraud in government programs
in three principal ways: through criminal prosecution, which may result
in fines, sentences of imprisonment, and orders of restitution; through
civil actions seeking recovery of funds (up to treble damages under the
False Claims Act) and, in some instances, civil penalties; and through
a combination of criminal and civil actions. Our response to 9/11
relief fraud included enforcement actions of all three types.
The timing of our initial response to 9/11 fraud was, inevitably,
affected by our response to, and the dislocations to our Office
occasioned by, the attack itself. Specifically, our Civil Division was
physically dislocated by the attack and, after sharing office space
with the Eastern District of New York for two months, was related, on
an interim basis, in leased space in approximately November 2001. In
addition, the Civil Division's files remained in its old quarters, and
special procedures, including physical decontamination, were required
to access them. Our main office in Manhattan, which houses our
executive staff and criminal division, was a few blocks further away
from Ground Zero and was closed for approximately one week. Our
supporting the criminal investigation of the attacks. Our civil efforts
were also directed toward responding to terror events--specifically,
numerous issues arising from the presence of anthrax in various Post
Offices.
In approximately February 2002 this Office initiated formation of a
Trade Center Fraud Working Group. This Group included representatives
of pertinent federal, state and local agencies and helped make clear
the utility and importance of federal investigation and prosecution of
fraud stemming from 9/11 relief programs. At that time, the United
States Attorney's Office also made clear that, in addition to its
traditional role of investigating and prosecuting the larger and more
complex federal crimes, it would accept for prosecution essentially any
9/11 fraud case. (We thereafter declined only cases involving false
claims for individual air conditioner/air purifier reimbursement--
which, because of their large volume (potentially thousands of
defendants) and relatively small amounts at issue (losses in the
hundreds of dollars per case, generally), we believed would constitute
an inefficient use of both federal enforcement and judicial resources--
and cases with insufficient evidence.) This Working Group met on a
number of occasions, until its members became familiar with the
contacts and resources at the United States Attorney's Office and the
different agencies and good working relationship for the investigation
and referral of cases developed. As a result of this outreach, agencies
began developing cases for federal prosecution. In addition, we advised
on forms to be used by agencies that were disbursing grants and loans,
and discussed methods for such agencies to share information. It should
also be noted that, in addition to federal prosecution, the New York
County (Manhattan) District Attorney's Office had also been agressively
prosecuting a large number of 9/11 fraud cases that had been brought to
its attention. While, as a general matter, we believe federal
enforcement is better suited to federal program fraud cases of any size
or complexity, state prosecutors have concurrent jurisdiction over most
frauds and the Manhattan District Attorney's Office played a very
important role in criminal 9/11 fraud enforcement.
Our records reflect that we opened a total of 64 investigations and
cases, both civil and criminal, involving 9/11 fraud. Not every
investigation has resulted in the filing of a complaint or charges on
the public record, and we cannot provide any information concerning any
matter that is not on the public record. As to matters on the public
record, criminal charges relating to 9/11 have been brought against a
total of approximately 35 defendants in 29 separate cases filed in
district court. In addition, civil enforcement proceedings were brought
against two individuals, including one who was also charged criminally.
Documents from the public record which contain the specifics of those
cases have already been provided to the Committee staff.
Of the defendants criminally charged, 25 cases were resolved by
guilty plea; 3 resulted in guilty verdicts after trial; and the cases
of 7 defendants remain pending. Of those found guilty, 11 received non-
custodial sentences of probation or time served; 5 received sentences
of two to six months, including one sentence of six months' home
confinement; 10 received sentences ranging from eighteen to ninety-
seven months; and two have not yet been sentenced. Both civil cases
were resolved by stipulations and orders of settlement in favor of the
United States, in the respective amounts of $36,000 and $300,000.
AS a general matter, our review of these cases does not reveal any
particular ``pattern'' which might help guide the response to future
disaster recovery programs. Instead, to the extent the number of cases
our Office handled provides any basis to generalize, we not that in the
area of disaster relief programs, as with any federal funding program,
we will expect to see a certain number of fraudulent applications for
or misuses of funds. It may be pertinent to not that, as our evaluated
as unsuited to effective and efficient criminal law enforcement or to
civil enforcement by the U.S. Attorney's Office, and may be more
efficiently handled through administrative proceedings brought by the
affected agency. And certainly the amount of fraud, and ease with which
fraud may subsequently be proven, will depend on the amount of
information and documentation the claimant is asked to provide at the
application stage.
Mr. Rogers. I would like to start the questions, and I
would also point out that the Ranking Member and I have agreed
to one round of questions for this panel since we have another
panel waiting.
Mr. Kutz, talking about prevention, I think you are right;
I think that is the way to try to have a lesson learned that is
useful. But when you hear Mr. Skinner's remarks earlier about
the analysis made with prosecutors in New York about whether to
prosecute some of these illegalities--people ripping off the
system for air conditioners, vacuum cleaners, whatever--the
prosecutors say it is not worth pursuing. How does that help us
send a signal to future potential thieves that you shouldn't do
this?
Mr. Kutz. Well, certainly if you are going to invest money,
investing in the prevention is better than the prosecution.
Mr. Rogers. Isn't letting these people know that they are
going to be prosecuted and put in jail a means of prevention?
Mr. Kutz. And I was going to say that. However, once you
are where you are with respect to having fraud out there and
you identify individuals, I believe that aggressive prosecution
of them does send a message back, especially if it is well
publicized. It needs to be well publicized so people hear about
it and maybe they will think twice. I think it is the criminals
that are on the border. The career criminals might not make
much difference, but the criminals on the border, I think it is
going to make a difference.
Mr. Rogers. Mr. Skinner, I know that some people were sent
to jail for several years. We had several millions of dollars
recovered through fines and penalties. But it is disturbing to
hear that prosecutors were unwilling to pursue many of these
violations that you referenced in your opening statement. What
can we do to remedy that for future situations like New York
and like Katrina and Rita?
Mr. Skinner. For one thing, we can do a better job in
administering our programs. Part of the problem, the
prosecutors, both the State and local attorneys, dealt with
what they considered nebulous guidelines and what they also
viewed as somewhat confusing or conflicting instructions that
took place over a 9-month period of time.
If we had very clear guidelines, if we were better
prepared, and, in this case, what we were talking about
essentially was not public corruption, not debris removal, not
major schemes; what we were talking about was these individuals
in the five boroughs that were buying air quality units and air
conditioners. The cost was anywhere from $500 to $1,600. The
program was administered months after the incident. I believe
it was 9 months after 9/11 when there was an increase in
disaster applications. It was late in June, I believe, 2002
that we received over 2,000 to 3,000 applications because of
what the prosecutors believed was just somewhat vague--although
they may not have been, they certainly had the appearance or
could be interpreted to be vague or conflicting guidelines.
If we had better coordination with EPA early on, defined
the requirements and made an announcement as to these are the
rules which you will play by early on, which means interagency
coordination, interagency cooperation early on in the
disaster--it should have been before, not during the disaster,
that these understandings and these arrangements have been
made--we may have had less applications coming in that could
have been fraudulent. But when you get--what we are talking
about is 200,000 applications that had the potential of being
fraudulent, and that is just overwhelming.
Mr. Rogers. Let me ask Mr. Picciano.
Mr. King. Picciano.
Mr. Rogers. I am working on it.
Mr. King. You have to be from New York.
Mr. Rogers. You have heard the news. The New York Daily
News series it was really upsetting to hear about the things
money was used for like these air purifiers, but also vacuum
cleaners for anywhere in these five boroughs. We hear about
that and the need for guidelines, yet between September 11,
2001, and Katrina last fall, apparently FEMA still didn't
develop these kind of guidelines you just heard Mr. Skinner
referencing. Why?
Mr. Picciano. I think--let me just go back, being involved
in this business for 30 years, and I have been on almost every
hurricane disaster we have had. In most cases, you know, the 99
percent rule occurs. In these two very significant events, our
programs--and I have to be honest, you know, just weren't sized
up to handle these sort of events.
Now, you look at the World Trade Center and the
environmental issues that initiated the process and then what
happened in 9 months. We projected only 5,000 cases in the IFG
program during that period. And it stayed level up until those
environmental changes, things we have never encountered before,
that changed how the State--and I have to reinforce--how the
State managed its program and how we were going to deliver
services to individuals who felt they needed it, and, as a
matter of fact, requests from Congress to move forward and do
that.
So I have to absolutely agree with Mr. Skinner. We did
change our standards within the Stafford Act regulations, but
we did it to address an unusual circumstance. Hot weather, a
change in what was really environmentally at issue, we had
concerns not only with that, we had vendors that were acting
inappropriately and using newspapers and the ability to
advertise to sell this program. We were just confronted with an
unusual situation. That program no longer exists.
But in other ways, I mean, the program still is around in a
new FEMA effort, and Katrina again pointed out that size and
the type of events is going to require us to go back--and we
are--to go back and reconstruct these programs to make them
work.
Mr. Rogers. I thank the gentleman. My time has expired. The
Chair now recognizes the Ranking Member for any questions he
has.
Mr. Meek. Thank you, Mr. Chairman. I want to thank the
witnesses for coming before the committee once again. I
purposely wanted to yield to Mr. Pascrell, and I want to thank
the Chairman and the entire committee for allowing Mrs. Lowey
to come and sit with us and make a statement.
Just like Mr. King, three Members have gone through the 9/
11 experience with their constituents being the victims, both
directly and indirectly. Chairman Rogers, myself and Ranking
Member Thompson, we are--we go through the issue of FEMA
recovery, through natural disasters such as hurricanes and
other events like tornadoes in our neck of the United States,
but we could very well go through a similar thing as 9/11. It
is the reason why we are here and the reason why we are having
this hearing.
And I want to thank not only the staff on the majority and
minority side for all the work they have done, including those
individuals that participated with us in looking into this
effort. What we are talking about here, gentlemen, is what is
going on right now as we speak on the ground in the Katrina-
affected area about the wasteful spending.
And you talk, Mr. Kutz, about prevention and I want to come
back to that a little bit as it relates to the verification.
Case in point: Congressional District 17 with hurricane Wilma,
we had a number of individuals that applied for individual
assistance for chain saws and for other generators, and found
that individuals that really needed the assistance did not
apply in the numbers of individuals who had Mercedes-Benzes
and, you know, big cars and big houses and had the wherewithal
to go out and buy these items.
The States play a role in that because the States, like you
mentioned before, authorize what is eligible, what is not
eligible, in consultation with FEMA. The reason why we are here
and the reason why I am here today, and our staff is paying
attention, is that we need the recommendations, Mr. Skinner,
that you put forward and other recommendations like it, because
they are going to do what we allow them to do, and it is
pulverizing to the system and to the people that work in it.
Saying that, Mr. Skinner, you mentioned something about
verification. Mr. Kutz said something about the pre-event,
before the dollar goes out and we get pennies back on the
dollar that we recover. The verification, you mentioned
something as it relates to sharing information between Social
Security agency, IRS, FEMA, to make sure that individual lives
in the affected area and is a true--is eligible to be able to
receive these dollars. How are we doing that now, and how can
we improve that communications?
Mr. Skinner. Right now we are not doing that. I think
FEMA--and Joe may be able to answer this better than I, but I
believe FEMA right now has a contract with ChoicePoint, and as
applications come in, they may refer those applications and the
information provided in those applications to ChoicePoint for
verification; in other words, it went outside the government to
do this. We do not now have arrangements with Social Security
or the Postal Service or, for that matter IRS, as HUD has for
its programs to validate that Social Security number is
correct, that the address is correct, income as stated IS
correct. I believe with the technology as it is today, we
should be able to at the time--let's put it this way. When an
applicant calls in and makes application with FEMA, it takes
approximately 20 minutes to accept that application. If we ask
them at the beginning of that process for name, Social Security
number, address and income, by the time we complete that
application, we should have automatic feedback from those other
governmental organizations validating that information: Yes,
this person lives at that address, has this Social Security
number and has filed returns.
Mr. Meek. Mr. Skinner, FEMA or GAO can chime in at any
time. Well, I guess you wouldn't know how much this ChoicePoint
service costs, and can we do it in-house, verifying this,
because this is information that can be verified. I know we use
a lot of contractors in FEMA when it comes down to individual
assistance. You can continue to elaborate, but I am trying to
get down to how much would something like that cost, and I
don't think we need the legislative authorization to do that.
That is a decision that was made at the Department, at FEMA; am
I correct?
Mr. Picciano. I can't answer specifically. I can tell you,
though, that in the registration process for us to handle it,
we are talking about an event like Katrina, hundreds of
thousands of applicants, and we use Reservists and other folks
to pick up and assist us in contractual service. But, you know,
to answer that question more specifically, we would have to go
back and see what it would cost and how we could do it.
Mr. Meek. So we have no idea right now of what it would
take for us to have that information, have people train in
IDing, verifying identification, because this is a way the
drill works.
Here is a Congressman who has been there a couple of times.
You all come down--if FEMA comes down, along with the State, as
it relates to the response to the hurricane or whatever the
event might have been--if it was 9/11, you mention in your
testimony, and I read in your testimony seven Members of
Congress commended you all for waiving and relaxing the rules
because we have constituents in need, and government, as usual,
is not at the point where it should be in response to the needs
of many of the American disasters or people.
And that is where the fog comes in because individuals that
are there--and they should be punished, Mr. Kutz, I agree with
you 110 percent. As far as I am concerned, they should be in
jail. I was eligible for a generator and my neighbor said, I am
going to get a generator. Even though we were the last
neighborhood to get turned on with electricity, I went to
family homes because I didn't want to be a part of the whole
generator scenario.
But the real issue here is making sure we are prepared for
future events, and that is why I am excited about this hearing
and excited about hearing some of the ideas. If we can do it
in-house and sharing sensitive information--because, as you
know, I am on the Armed Services along with the Chairman, it is
a big debate going on with information of veterans getting out,
very personal information getting out that can promote fraud.
So if it doesn't cost us a lot of money to have it in-house and
to have our individuals that you all have to go out to,
Reservists, firefighters--I have seen them--I mean these are
people that just fall out of the sky. These are people that are
trained and cleared by FEMA to go out and do these assistance
assessments. Give them the tools they need through automation,
they can type into some sort of computer and get this
information, versus going out to a ChoicePoint or what have you
for several million dollars, which I think it can be done in-
house for a lot cheaper and can secure the information so that
folks won't start saying that we are selling off information to
private vendors.
But if it is something you can look into, you said at the
top of your testimony--which I am giving you an out right now--
if you don't have the answer, you will get back to us, which I
know you will, and hopefully you all can look in-house to see
how that can be done; because I think, going to the testimony
of your two colleagues there, in government of people of good
will, I think that is something that I have seen that could
possibly be something that can help us as we move on to future
events.
Mr. Picciano. Agreed. We will go back and see if we can get
you an answer. And I will just add that, you know, time and
size of events really makes a big difference. For example, when
people do call up--you know, SBA is part of that process and
there are other agencies involved in that. And what Mr. Skinner
is suggesting is a much broader approach, ensuring that all
those players are involved in that process for both preventing
fraud--and also I think it is important, as you noted, to
provide assistance to victims, because there are two ways to
look at this. There is also identifying folks out there who
need assistance that often fall through the gaps.
So I can't tell you if it can be done in-house or with a
contractor, but we will get back to you.
Mr. Meek. Well, Mr. Chairman, in closing--and I thank you
for the latitude because I want to respect the time--that we
want to make sure before we get to the point to where this
happens all over again, because as we speak here, it is
happening right now. I know we have a lot of things on the
ground dealing with Katrina, but it is happening right now.
Case in point, Mr. Chairman: I was just watching CNN the
other day in my office, and I noticed how they are starting to
remove the cars in New Orleans. I was there about 3 weeks ago--
and I used to be a State trooper--and I know when folks move
these cars in these flatbed trucks, these big Semis, they stack
three or four of them on top of each other; you have nine, ten
cars. Mr. Chairman, I saw just in my office on a phone, a
vision with a truck pulling off with three cars stacked on the
bottom, and that is a full load, and the folks are waiving them
off with the cars. That is taxpayer dollars being wasted right
there. And I am just saying and I instructed staff, let's try
to get down to the bottom of who is the oversight person over
that contract. I know it took forever for them to place this
contractor and remove those cars, but it isn't going to be
three cars at a time. We are going to go through some of the
things that were found in this report amongst the good, bad,
and ugly, and we are trying to prevent it from happening.
So if we can, that would be helpful if you can share that
information, very seriously, with us, hopefully we can head
down the right direction.
I want to apologize to the Chairman and to the committee
for taking so much time. Sorry.
Mr. Rogers. No problem. Gentleman's time has now expired.
I would recognize the Chair of the Full Committee, Mr.
King, for any questions he may have.
Mr. King. Thank you, Mr. Chairman. And let me thank the
witnesses for your testimony today. You really made a lot of
sense out of a very complex situation. I appreciate all your
efforts.
I have two questions. I will ask them at the same time and
you can just answer both of them. Primarily Mr. Picciano, but
Mr. Skinner, Mr. Kutz, Ed, whatever you feel is necessary. One
general question, one specific question.
General question is that sometimes you get what you ask
for. And I know here in Washington there were a lot of
complaints after 9/11 that not enough money was going to New
York quickly enough. As I read the testimony, it appears that
for the first time, we actually in effect mandated FEMA to
spend $8 billion. Usually we don't lay out the amount, a
specific amount in advance. You spend what is needed and just
fight afterwards. The general question would be: do you think
it made it more likely that sufficient controls would not be in
place or that money, or the system, would be abused by actually
setting that $8 billion in there, which in effect said you have
to find a way to spend the $8 billion? That is the general
question.
And the specific question is: if you could address, you
know, one issue which is mentioned often in New York, and that
is the case of the photographer--I believe Mr. Greg Brown I
think his name was, I forget the exact name who was actually
hired by FEMA. I believe he was paid about $300,000 to take
photographs of Ground Zero in a police helicopter. But there
were no restrictions put on the use of those photos, and now he
claims that he has the property rights to those photos.
Using that specific example, I know it is always easy after
the fact to come in and find the clarity in the example, but if
you could just address that and as to whether or not that is a
metaphor for other types of abuses and how that type of abuse
can be avoided in the future. General question, mandating on
spending the money and specific abuses, specifically the one
regarding the photographer.
Mr. Picciano. Regarding the mandated amount, I personally
thought that was a great way to lessen the impact of fraud and
asks our folks, both Federal, State, city, to manage that fixed
amount as carefully as possible and to effectively meet the
absolute requirements that are out there.
And if you add that with the special resolution that was
passed in 2003, that also assisted, because in areas
oftentimes--and the IG can elaborate--to make the round peg fit
in the square hole, there is a lot of manipulation of
guidelines. By allowing and recognizing the need for some
flexibility--which was not the case in Katrina--some
flexibility with the resolution that was passed for associated
cost, that was a really great tool that allowed FEMA to do
things that were necessary. The mandated insurance run by
Congress, getting $90 million into an organization--a system to
manage health care for a number of impacted people. So those
two tools were important.
I mean, there is the issue of a match, you know, avoiding
having a match or not, but actually capping the event on what
is estimated what the costs would be I think would be a good
way to begin to allow for stricter control of the expenditure
of Federal dollars.
Mr. King. So there is no human tendency to say we have to
spend this $8 billion no matter what. On balance, it was a plus
to actually have that--
Mr. Picciano. I think it was a reasonable amount of the
FEMA share of the $20 billion, $8.8. And with that flexibility,
sir, it is interesting to note that the Stafford Act still
covered a majority of what was eligible. As it turned out
there, it may have been $1 billion that was distributed as a
result of the associated costs and it was for things that were
important--heightened security, which was a real concern for
New York City. So it was manageable, we could monitor it, and
it was a way to get something done and with that flexibility,
it was helpful. We obligated more money and quicker than any
other disaster we have ever had--at least in our region a
majority of the money was out of our pocket--into where it
should be, State and local pockets.
Mr. King. Not the photographer.
Mr. Picciano. Yeah. Regarding the photographer, I am just
catching up on the facts on that because I knew it may come up.
We did enter into a contract and, admittedly, we probably
should have had in that contract constraints on use of that
information. To me that is an oversight. My understanding, it
was for $75,000, not $300,000 dollars. And most important, it
was done early on in the event and it was done to monitor, at
the request of the city, what first responding activity was to
be able to move critical resources. So the intent was good. We
made a mistake. And again, it was an oversight and we shouldn't
have done it.
Mr. King. Comments from the other two witnesses?
Mr. Skinner. I would just like to add to what Joe was
saying. We could not find any correlation between the $8.8
mandatory ceiling and fraud, waste and abuse. In fact, I don't
think there was a correlation between the two. The fraud, waste
and abuse that we did experience is the types of fraud, waste
and abuse we see after every disaster. And those were the
issues dealing with the individual assistance programs. The
public assistance programs, we saw very little because of the
monitoring controls that the city imposed over primarily debris
removal operations, so I don't think there was any correlation
whatsoever.
Mr. Kutz. I would just add a couple things. With respect to
the $8 billion, I don't think that increases your risk
necessarily of fraud, waste and abuse. What we had seen was
some supplemental spending--I use Iraq as an example--is the
risk of using that money as a get-well program for your base
appropriations. So that would be a risk, I would say, that you
might have of supplemental appropriations.
Mr. King. My understanding, it may have been $75,000 with
FEMA. I think the balance of that contract with $300,000 came
from the City's Department of Design and Construction. Thank
you very much.
Mr. Rogers. Gentleman yields back. The Chair recognizes the
gentleman from New Jersey, Mr. Pascrell, for any questions he
may have.
Mr. Pascrell. Mr. Chairman, I know we like to look to the
future in how we can make things better. I would prefer to stay
in the past today, because I want to know what happened before
I make any of those proposals.
Mr. Skinner, for the record, fraud occurs when there is a
lack of monitoring or oversight or when there is collusion. Are
there any signs in your investigation of collusion in New York
City after the tragedy of 9/11? Collusion--and I will define
that if you wish. I think you know what I am talking about.
Mr. Skinner. Could you please define that? I am not quite
sure.
Mr. Pascrell. There are those who work for the Federal
Government in the public sector who are in concert with crooks
and make deals, either in detecting whether--what the quality
of air is or detecting whether or not we can make a deal on the
side and if there are kickbacks and things like that. So it
is--
Mr. Skinner. Public corruption. Yes, we found no evidence
whatsoever to suggest that--
Mr. Pascrell. Did you investigate anything?
Mr. Skinner. We had no allegations to that effect. So to my
knowledge, we did not have any ongoing investigation in that
regard.
Mr. Meek. Would the gentleman yield?
Mr. Pascrell. Sure.
Mr. Meek. Mr. Skinner, is there a statute of limitations on
that complaint or allegations for you to look into such things?
Mr. Skinner. There is. I believe there is. I don't have
those--the exact limitations on those issues. But it would be
from the date of the actual event and the time that the crime
may have been brought to our attention, the clock would start
ticking.
Mr. Pascrell. Mr. Skinner, you are--just for the record,
just to clarify, are you saying that no public officials came
forward to place before you accusations that something was
going on within the contract letting in New York City after 9/
11? You are saying that, for a fact, no public employees came
forward to you? Not to you personally?
Mr. Skinner. Personally, yes. I would have to go back. Like
I said, we had over 1,000 complaints, nearly 1,200 complaints
that we registered. I would have to go back and review each and
every one of those to see if in fact that was the case. But
there is nothing to my knowledge at this point that anyone came
to us suggesting there was collusion involving Federal
officials with regards to kickbacks or any other type of scheme
involving contracts.
Mr. Pascrell. How closely did you examine what went on in
monitoring the air in the vicinity of the Twin Towers, in terms
of the Twin Towers? Who monitored it and who decided how much
money would be spent, and did you examine the conclusion that
the EPA came to that the air was--all was clear?
Mr. Skinner. Our office did not specifically monitor the
conclusions with regards to EPA. However, I do believe that the
EPA OIG did in fact take a look at this. What we did look at
was when was the EPA brought in, how much did they know, and
which--and what was FEMA's relationship and role with regards
to the air quality.
Mr. Pascrell. So you didn't put yourself--you are not in
the position of making a judgment concerning the review of EPA
concerning the air quality? You did not make that decision? EPA
made that decision?
Mr. Skinner. That is correct.
Mr. Pascrell. And there was no other oversight in that
decision; yes or no?
Mr. Skinner. Not by our office. But there was--EPA OIG was
on site and was somewhat involved. I do believe they did issue
a report involving the EPA's decisions and role in 9/11.
Mr. Pascrell. Mr. Kutz--thank you.
Mr. Kutz, you talked about fraud prevention and the three
things that were necessary, which you use as standard: the
direction monitoring, the data mining, and then you said
something to the effect of investigation; the investigative
part of that point number two. Was there an aggressive
investigation as far as you are concerned with the subject that
we are talking about today?
GAO is providing to the Congress of the United States your
oversight into what was done and whether it was done properly
or not. Can you say--can you put on the record that in your
estimation that the DHS had a thorough investigation, that the
inspector general's office had a thorough investigation of all
the matters that are before this committee today?
Mr. Kutz. I don't have any knowledge on September 11. I
couldn't speak to that.
Mr. Pascrell. Who would have?
Mr. Kutz. I would have to get back to you on that. I don't
think we can speak to that, though.
Mr. Pascrell. Why not?
Mr. Kutz. Well, we have looked at specific things, but I
don't think we have looked at that scope of that type of work
for September 11. Again, with Katrina/Rita, I could speak more
specifically on that.
Mr. Pascrell. We have to do our job in order to come to
conclusions which this committee will come to. I hope you
understand why I am asking the question. Who should I look to?
Who should I ask? Who would know?
Mr. Kutz. Well, I think Mr. Skinner would know. Whether
he--
Mr. Pascrell. Let me ask you this for the record--thank
you.
Let me ask, Mr. Skinner, do you think that a thorough
investigation took place into the matters that are before this
committee today?
Mr. Skinner. Yes.
Mr. Pascrell. You do. I have no further right now, Mr.
Chairman.
Mr. Rogers. I thank the gentleman. I would remind the
panelists that most of the Members will probably have some
questions for you all that they will submit to you, and the
record will be left open for the next 10 days for that purpose.
If you do receive written inquiries, I would ask you to respond
to those, in writing, to the Committee for us.
I know I am going to have some additional questions. As you
know, we are limited to one round of questions today,
specifically because we do have another panel. I want to be
respectful of your time as well as the next panel's time, but I
must say I am very disturbed about the failure to prosecute
many of these people, and I want to do what we can to rectify
that in the future. I am going to be looking for information
from you all as to specifically what do you think we can do to
make sure that after future disasters, whether natural or
otherwise, that we have put in place the framework to ensure
that everybody who takes advantage of that circumstance
criminally is prosecuted. And it seems to me that even if it is
a small crime, a relatively small--like, for example, getting a
vacuum cleaner that you weren't entitled to get or an air
conditioner or whatever, air purification system, that local
DAs--even one--local is relative, you know; New York's District
Attorney's office is huge, but they aren't worried about
resources. If we have to get additional prosecutors to provide
them the money to prosecute these crimes, we need to be able to
do that. But we need to know that they are going to be
successful prosecutions.
So I really do look to you all to give us some guidelines
on that. This Committee is going to be releasing a report a
little later this year and information like that from you all
will be helpful. And with that, this panel is excused, and I
thank you.
The Chair now calls up the second panel.
Mr. Rogers. Again, I want to thank all of our panelists for
making the time to be here and we look forward to your
statements. I also would remind you all that your entire
statement can be submitted for the record. And if you would
like to summarize, we would ask you to keep your opening
statement to five minutes or less to permit more opportunities
for questions.
Mr. Rogers. The Chair now calls the Honorable Rose Gill
Hearn, Commissioner of the New York City Department of
Investigation, for your opening statement.
STATEMENT OF ROSE GILL HEARN
Ms. Hearn. Good afternoon Chairman Rogers, Congressman
Meek, Chairman King, Congressman Thompson, members of the
committee. It is a privilege to address this committee and
describe the foresight of and efforts made by the city of New
York to prevent fraud and waste in connection with the cleanup
of the World Trade Center site immediately following the
destruction of the Twin Towers and surrounding buildings.
New York City's experience demonstrates that the proactive
measures taken were highly effective in detecting and
preventing fraud and waste without compromising the ability of
the emergency efforts to proceed with remarkable efficiency.
Appointed by Mayor Michael Bloomberg, I am the Commissioner
of the New York City Department of Investigation, known as DOI,
which is one of the oldest law enforcement agencies in the
country. Created in the wake of the ``Boss'' Tweed scandals of
the 19th century, DOI is an agency of New York City's
government charged with routing out, but, perhaps more
importantly, preventing corruption within or impacting city
government. Thus we do not just try to catch criminals after
they have committed crimes, but we also devote a substantial
amount of our resources to preventing crimes before they happen
and to preventing the needless loss of precious city resources
through waste and inefficiency.
DOI offices are located on Maiden Lane just up the block
from what was the World Trade Center. On the morning of
September 11 DOI personnel and detectives responded to the
scene to help with the evacuation of the buildings. When the
towers collapsed, the cloud of dust and smoke came rushing down
Maiden Lane and debris rained down on our building. For days
thereafter, DOI personnel became part of the on-site digging
and security operation.
My own experience included seeing the apocalyptical sight
at the World Trade Center, people jumping from the fire line 70
stories high in the North Tower, followed by the explosion of
the second plane into the South Tower, and the collapse of the
towers as if they were sand castles. The city then mobilized in
an extraordinary way and DOI was part of that mobilization.
In the aftermath of the 9/11 terrorist attacks on the World
Trade Center, the city had to undertake a cleanup operation
that was unprecedented in scope and cost. Moreover, it was
recognized that the city's cleanup would have to be safe,
include a sensitive ongoing search for remains, and allow
businesses and residents to return swiftly to the densely
populated Wall Street financial district, whose economic
viability was crucial not only to the city but to the country
as a whole.
To achieve the goals of the World Trade Center cleanup, it
was understood that vast amounts of government money would have
to be spent and spent quickly. Indeed, some of the members of
this committee were instrumental in seeing that New York
received the money it needed for the historic cleanup and
recovery effort.
However, experience has taught us that the expenditure of
large sums of money in an emergency situation increases the
likelihood of fraud inefficiency and price gouging.
Accordingly, based on the concerns of the possibilities of
fraud and corruption in all aspects of the cleanup effort,
Mayor Rudolph Giuliani's Office asked DOI to put in place a
monitoring program to prevent exploitation of the emergency
situation by unscrupulous firms and individuals. That
initiative was continued by Mayor Bloomberg who took office on
January 1, 2002 and, with it, responsibility for the site and
its cleanup which was completed in July 2002. Mayor Bloomberg
required DOI and the other agencies to continue to be vigilant
and proactive about corruption and waste issues at the site, a
priority in the Bloomberg administration.
DOI had already established under nonemergency
circumstances such a procedure for monitoring various municipal
projects. For example, construction projects within the city
where there had been a particular concern about corruption.
Thus, DOI drew on that experience in putting a monitoring
program together for the World Trade Center site, but of course
on a much larger scale.
In order to accomplish and better manage the necessary
cleanup, the city divided the 16-acre World Trade Center site,
Ground Zero, into four quadrants. A construction manager was
retained for each of the four quadrants, and I have supplied a
map of Ground Zero as divided into the quadrants. The
construction managers were paid based on labor, time and
materials they used to carry out the cleanup.
The construction managers in turn had hundreds of
subcontractors throughout Ground Zero; for example, truckers,
waste disposal and demolition companies, industries with a long
history of organized crime involvement. Thus, these contracts
were not only enormous, but as time and material contracts they
presented specific vulnerabilities to fraud and abuse from
unscrupulous contractors, subcontractors and suppliers from
which the city needed to protect itself.
In addition, the work of the contractors and oversight of
that work was complicated by the multiple activities going on
at Ground Zero during the cleanup due to the fact that the 16-
acre site was a crime scene with an active recovery effort
underway for the remains of the thousands of victims of the
disaster. In combination with the fact that the work was to be
carried out under the direction of four construction managers
rather than one, the potential for fraud was increased. Thus,
the purpose of the DOI monitoring program was, to the best of
our ability, to ensure that the city knew what work was being
performed at the site and that the billing was appropriate and
legitimate.
The Ground Zero cleanup was remarkably well coordinated and
ultimately well accomplished because one agency, the city's
Department of Design and Construction, DDC, was given the
responsibility of managing the project. DDC is the city's
construction and engineering expert.
As will be described in more detail by my colleague, David
Varoli, all four of the Ground Zero construction managers
reported to DDC. Thus, given that DOI was tasked with
monitoring the four construction managers, we collaborated
closely with DDC. DOI created and implemented the World Trade
Center integrity compliance monitorship program which was in
place by early October 2001. This program required each of the
four Ground Zero construction managers to retain an on-site
integrity monitor selected by DOI. Through DOI, each integrity
monitor had the authority to review and audit all of the books
and records of the contractors working at the site and to
maintain a physical presence at the site. By virtue of this
oversight program, the integrity monitors scrutinized the
contractors' activities in real time and functioned as the
city's eyes and ears.
DOI also required the monitors to establish a hotline
number where anyone could call with concerns or information. A
key feature to the effectiveness of the monitors was that they
reported directly to DOI on all contractor activities. Thus, if
there were any issues or problems, they were addressed
immediately. DDC was included in many of those discussions and
received regular reports as well.
DDC also required an auditing firm to assist its
engineering audit operation with auditing and payment issues.
Together with the monitors, this was an endeavor intended to
create strong oversight to detect and prevent fraud and waste.
The integrity monitor model requires specialized firms with
legal accounting law enforcement and investigative expertise.
Because this model had been used in New York City by DOI, we
were fortunate to have a number of highly qualified firms ready
to pick from, whose work we were already very familiar with.
One of the monitors, Neil Getnick, is here with us today and I
am grateful to him for being here.
Initially the integrity monitors maintained an on-site
presence at Ground Zero on a 24-hour basis, seven days a week.
While time does not permit me to list the specific tasks the
monitors engaged in day to day, generally their duties fell
into the categories of deterrence, detection, and
documentation. In order to perform these duties, the integrity
monitors reviewed books and records, identified and corrected
adequate financial and quality controls, analyzed financial
records to ensure accuracy and basic contract compliance,
assisted with clarifying agency policies at the site, analyzed
laws and contracts, gathered intelligence for the law
enforcement community, detected and corrected incompetence, and
monitored the day-to-ay work on the site. And they did all of
this with a sensitivity to the city's needs for efficiency,
speed, and cost control.
While it should be noted that the vast majority of
contractors on the site performed their work exceptionally well
and with integrity, as a result of all of these types of
intensive investigating and auditing efforts and more, the
integrity monitors prevented a significant amount of waste,
fraud and abuse in the Ground Zero cleanup. To a significant
degree, the prevention came as a result of their presence on
the site alone, which in and of itself served as a deterrent to
misconduct. For example, the sign-n sheets at the site from the
earliest days of the cleanup prior to the arrival of the
monitors contained the names of individuals who allegedly did
work at the site, who were associated with organized crime.
Moreover, some of those early sign-n sheets also contain the
names of alleged workers on multiple sign-n sheets for work
done, impossibly, on the same date and the same time. However,
when the four monitors went into place and the CMs and
subcontractors all knew the monitors were closely analyzing
such items, those probable illegitimate and duplicative labor
costs were no longer showing up on the payroll records billed
to the city, indeed corroborating the fact that the monitor
served as a deterrent.
Early on at the cleanup, DOI was advised by a local
prosecutor of an intercepted conversation between two organized
crime associates in which they lamented the on-ite presence of
the monitors at the World Trade Center and that that was making
it impossible for anyone to overbill the city via the usual
scams because the site was being so closely scrutinized.
We could not have said it better ourselves. In addition to
the deterrence of the type of willful misconduct lamented in
that intercepted phone call, it is clear that the integrity
monitors' activities further prevented waste and abuse through
the establishment of proper recordkeeping systems, their
physical presence on the site, and their frequent auditing of
the billings.
While as with the general deterrence, it is difficult to
precisely quantify the savings resulting from the institution
of good recordkeeping procedures, direct observations and the
quick detection of problems through the frequent audits, the
fact is that significant savings resulted. For example, based
on the submission and review of required documentation, the
integrity monitors found evidence that purchased equipment
initially billed to the city was also listed as equipment
leased to the city. Thus, the city was being charged a rental
fee on equipment it had already purchased. As a result, these
charges would not only be disallowed, a quantifiable savings,
but future improper billings on this equipment would not occur,
a more-dificult-of-quantify but clear savings nonetheless.
Similarly, a review of required documentation by the
integrity monitors revealed that requests for payment for
rental equipment at times included fuel costs where such costs
were already built into the rental fees. Again, these costs
would be disallowed quantifiable, and not billed going forward
less quantifiable.
In another instance, the integrity monitors on-site spot
checks resulted in a clear but difficult-to-quantify savings.
Some debris removal trucks were found to be operating with
broken odometers. Had the trucks been allowed to continue to
operate with this type of mechanical failure, they could have
easily deviated from their approved truck routes, a problem
observed with some trucking from the outset of the debris
removal activity. The work of the integrity monitors resulted
in the early detection and systemic correction of this problem
and thereby reduced the ability of unscrupulous truckers to
misdirect the debris or misuse the free dump tickets they were
given in conjunction with their Ground Zero work.
The integrity monitors' background checks on contractors
also resulted in the indictment of two principals of a carting
firm working at Ground Zero by the Manhattan District
Attorney's office for lying about their ties to organized crime
and documents filed with the city. Not surprisingly, invoices
submitted by that same carting firm were identified by the
integrity monitors as containing numerous instances of
overbilling by that contractor.
Significant quantifiable savings through the identification
and correction of sloppy and sometimes willfully abusive
practices were also achieved by the integrity monitors. For
example, in one instance, bills submitted to the city for
payment by one subcontractor were so fraught with errors and
improper markups of heavy equipment and services and lack of
documentation authorizing the performance of services and labor
charges that they were reduced by two-thirds; from $2.6 million
originally billed, reduced to $795,000.
In another instance after a long discussion concerning
various billing issues between a monitor and a subcontractor,
based on the monitor's review of the records, the subcontractor
agreed to revise prior billing submissions, estimating it to an
adjustment--downward adjustment of $1 million.
These are just a few examples to highlight the kinds of
activities engaged in by the integrity monitors in connection
with the World Trade Center cleanup and the savings to the
government that resulted from those activities.
It is clear that as a result of the World Trade Center
integrity compliance monitorship program, the government saved
a significant amount of money by preventing and curtailing
fraudulent activity, waste and abuse of public funds. In total,
we have estimated that based on their extensive work and
forensic analysis, the integrity monitors recommended in excess
of $47 million in cost savings and that their very presence on
the Ground Zero site and their frequent audits produced
additional significant savings that cannot be quantified. All
of these efforts not only protected public tax money but helped
to preserve the faith of the taxpayers and the quality and
integrity of government services.
In conclusion, DOI makes the following recommendations to
the Federal Government:
Have a list of preexisting known, experienced, and vetted
monitors in various fields of expertise and disciplines by
locality.
Put an integrity monitor in place at the outset of any
situation that will call for a large costly government response
operation so that proper recordkeeping and work procedures can
be instituted to create a culture of legal compliance within
the operation and ensure accurate accountability to the
government.
Three, have the integrity monitors report to a government
oversight agency with a broad governmental mandate encompassing
fiscal integrity and law enforcement. For example, in New York,
it was DOI.
And then, four, closely working with the integrity monitors
and the other government entities concerned with addressing the
emergency at issue throughout the duration of the project.
Thank you for this opportunity to speak to you today, and I
would be happy to answer your questions.
Mr. Rogers. Thank you, Ms. Hearn.
[The statement of Ms. Hearn follows:]
Prepared Statement of Rose Gill Hearn
Good afternoon Chairman Rogers, Congressman Meek, Members of the
Committee. It is a privilege to address this Committee and describe the
foresight of and efforts made by the City of New York to prevent fraud
and waste in connection with the clean up of the World Trade Center
site immediately following the destruction of the Twin Towers and
surrounding buildings. New York City's experience demonstrates that the
proactive measures taken were highly effective in detecting and
preventing fraud and waste, without compromising the ability of the
emergency efforts to proceed with remarkable efficiency.
Appointed by Mayor Michael R. Bloomberg, I am the Commissioner of
the New York City Department of Investigation, known as DOI, which is
one of the oldest law-enforcement agencies in the country. Created in
the wake of the Boss Tweed scandals of the 19th century, DOI is an
agency of New York City's government charged with rooting out, but
perhaps more importantly, preventing corruption within or impacting
City government. That mission is a challenging one as New York City is
one of the largest employers with one of the largest budgets in the
country. DOI often works with the federal and state prosecutors who
have jurisdiction over the City of New York. We work jointly with other
law enforcement agencies such as the New York City Police Department,
the FBI and the federal Postal Inspectors. DOI is also empowered by law
to investigate and report on potential corruption hazards and to advise
the Mayor and the other branches of City government on measures they
should take to prevent corruption and the waste of City funds. Thus, we
do not just try to catch criminals after they have committed crimes,
but we also devote a substantial amount of our resources to preventing
crimes before they happen and to preventing the needless loss of
precious City resources through waste and inefficiency.
DOI offices are located on Maiden Lane just up the block from what
was the World Trade Center. On the morning of September 11th, DOI
personnel and detectives responded to the scene to help with the
evacuation of the buildings. When the Towers collapsed, the cloud of
dust and smoke came rushing down Maiden Lane, and debris rained down on
our building. For days thereafter, DOI personnel became part of the on-
site digging and security operation. My own experience included seeing
the apocalyptical sight at the World Trade Center: people jumping from
the fireline seventy stories high in the North Tower; followed by the
explosion of the second plane into the South Tower; and the collapse of
the Towers as if they were sandcastles. The City then mobilized in an
extraordinary way, and DOI was part of that.
In the aftermath of the 9/11 terrorist attack on the World Trade
Center, the City had to undertake a clean-up operation that was
unprecedented in scope and cost. Moreover, it was recognized that the
City's clean-up would have to be safe, include a sensitive on-going
search for remains, and allow businesses and residents to return
swiftly to the densely populated Wall Street financial district, whose
economic viability was crucial, not only to the City, but to the
Country as a whole.
To achieve the goals of the World Trade Center clean-up, it was
understood that vast amounts of government money would have to be spent
and spent quickly. Indeed, some of the members of this Committee were
instrumental in seeing that New York received the money it needed for
the historic clean-up and recovery effort. However, experience has
taught us that the expenditure of large sums of government money in an
emergency situation increases the likelihood of fraud, inefficiency and
price gouging. Accordingly, based on the concerns of the possibilities
of fraud and corruption in all aspects of the clean-up effort, Mayor
Rudolph Giuliani's office asked DOI to put in place a monitoring
program to prevent exploitation of the emergency situation by
unscrupulous firms and individuals. That initiative was continued by
Mayor Bloomberg, who took office on January 1, 2002, and with it
responsibility for the site and its clean-up, which was completed in
July 2002. Mayor Bloomberg required DOI and the other agencies to
continue to be vigilant and proactive about corruption and waste issues
at the site, a priority in the Bloomberg Administration.
DOI had already established under non-emergency circumstances such
a procedure for monitoring various municipal projects, for example,
construction projects within the City, where there had been a
particular concern about corruption. Thus, DOI drew on that experience
in putting a monitoring program together for the World Trade Center
site but, of course, on a much larger scale.
In order to accomplish and better manage the necessary clean-up,
the City divided the 16-acre World Trade Center site, Ground Zero, into
four quadrants. A construction manager, or CM, was retained for each of
the four quadrants. (A map of Ground Zero as divided into the quadrants
is attached to my written materials.) The Cbs were paid based on the
labor, time and materials they used to carry out the clean-up. The CMs,
in turn, had hundreds of subcontractors throughout Ground Zero, for
example, truckers, waste disposal, and demolition companies--industries
with a long history of organized crime involvement.
Thus, these contracts were not only enormous, but as ``time and
materials'' contracts, they presented specific vulnerabilities to fraud
and abuse from unscrupulous contractors, subcontractors and suppliers
from which the City needed to protect itself. In addition, the work of
the contractors and oversight of that work, was complicated by the
multiple activities going on at Ground Zero during the clean-up due to
the fact that the 16-acre site was a crime scene with an active
recovery effort underway for the remains of the thousands of victims of
the disaster. In combination with the fact that the work was to be
carried out under the direction of four CMs, rather than one, the
potential for fraud was increased. Thus, the purpose of the DOI
monitoring program was, to the best of our ability, ensure that the
City knew what work was being performed at the site and that the
billing was appropriate and legitimate.
The Ground Zero clean-up was remarkably well-coordinated and
ultimately well-accomplished because one agency, the City's Department
of Design and Construction (DDC), was given the responsibility of
managing the project. DDC is the City's construction and engineering
expert. All four of the Ground Zero CMs reported to DDC. Thus, given
that DOI was tasked with monitoring the four CMs, we collaborated
closely with DDC.
DOI created and implemented the World Trade Center Integrity
Compliance Monitorship Program, which was in place by early October
2001. This program required each of the four Ground Zero CMs to retain
an onsite ``Integrity Monitor'' selected by DOI. Through DOI, each
Integrity Monitor had the authority to review and audit all of the
books and records of the contractors working at the site, and to
maintain a physical presence on the site, including around the
perimeter of Ground Zero. By virtue of this oversight program, the
Integrity Monitors scrutinized the contractors' activities in real time
and functioned as the City's eyes and ears. DOI also required the
Monitors to establish a hotline number where anyone could call with
concerns or information. A key feature to the effectiveness of the
Monitors was that they reported directly to DOI on the contractors
activities. Thus, if there were any issues or problems, they were
addressed immediately. Reports of their findings were made on a
frequent basis to DOI, which set up a trailer right at Ground Zero
where meetings could readily and frequently take place. DDC was
included in many of those discussions and received regular reports as
well. DDC also hired an auditing firm to assist its Engineering Audit
operation with auditing and payment issues. Together with the Monitors,
this created strong oversight to detect and prevent fraud and waste.
The Integrity Monitors were themselves closely monitored by DOI in
order to ensure that they were performing the kind of work that was
really needed by the City, and in order to enable DOI to act on their
findings quickly when necessary. The Monitors had to be tethered to a
pivotal government oversight agency like DOI would make them a much
less effective and useful tool.
DOI's Integrity Monitor program was a good government step because
it was preventive in nature. By embedding the Monitors with the
individual contractors, the monitoring program prevented fraud and
waste by any contractors that were unscrupulous or sloppy, both: (1)
instituting proper record keeping and work procedures to create a
culture of legal compliance within each contractor's operations; and
(2) ensuring accurate accountability to the City.
The Integrity Monitor model requires specialized firms with legal,
accounting, law enforcement and investigative expertise. Because this
model had been used in New York City by DOI, we were fortunate to have
a number of highly qualified firms ready from which to pick, with whose
work we were already very familiar. . The Monitors selected by DOI, who
did an outstanding job under very difficult circumstances, were four of
the New York areas leading monitoring firms: Getnick & Getnick for the
Turner Construction quadrant; Stier, Anderson and Malone, LLC for the
AMEC Construction quadrant; Decision Strategies for the Tully
Construction quadrant; and Thacher Associates, LLC for the Bovis Lend
Lease quadrant.
Thus, DDC was responsible for overseeing the operations of the four
CMs, subcontractors and suppliers performing work at Ground Zero, and
under the direction of DOI, the four Monitors maintained oversight of
those activities.
DOI oversaw the work of the Monitors by reviewing the results of
their investigations and audits and by helping to direct and focus
their activities. DOI held joint meetings with all of the Monitors
together every week in order to facilitate the dissemination of
information among the Monitors and to ensure the coordination of joint
efforts. This was particularly important because the coordination
helped to ensure that the decentralization of the clean-up effort did
not in itself breed fraudulent schemes, such as having individual
workers reported on the payrolls of different companies for work
performed at the same time or subcontractors double bill for work
through multiple CMs. DOI was also in constant communication with DDC
and other government agencies, to make sure that information obtained
by the Integrity Monitors was communicated quickly to the entities that
most needed it. Finally, DOI communicated with the other area law
enforcement and prosecutorial agencies on matters disclosed by the
Integrity Monitors and ensured an appropriate flow of information
between these agencies and the Monitors.
Initially, the Integrity Monitors maintained an on-site presence at
Ground Zero on a 24-hour basis, seven days a week. Their duties fell
into general categories of: deterrence, detection and documentation. In
order to perform these duties, the Integrity Monitors engaged in legal,
investigative, forensic accounting and engineering analysis. To perform
their jobs, they reviewed books and records; identified and corrected
inadequate financial and quality controls; analyzed financial records
to ensure accuracy and basic contract compliance; assisted with
clarifying agency policies at the site; analyzed laws and contracts;
gathered intelligence for the law enforcement community; detected and
corrected incompetence; and monitored the day to day work on the site.
And they did all of this with a sensitivity to the City's needs for
efficiency, speed and cost control.
Specific investigative, auditing and monitoring activities engaged
in by the Integrity Monitors included:
Background checks on companies and individuals working
at Ground Zero;
Establishment of a hotline to enable anonymous tips
and to field complaints from workers on the site;
Observation of employees sign-in/sign-out procedures
and reviewing sign-in and sign-out sheets;
Interviews of employees on-site;
Reviewing payrolls to ensure that there were no
fictitious employees on the payroll, through comparisons of
payroll records with payroll checks issued and payroll records
with the daily sign-in/sign-out sheets;
Reviewing payrolls for prevailing wage violations and
other labor law violations;
Monitor swipe card system at the site for employees;
Monitor equipment on site to verify its presence and
use; ensure billings conformed accordingly;
Auditing inventories of equipment on site and
verifying whether it was rented or owned by the company, and
verifying that the City was properly billed accordingly;
Monitor GPS tracking system for trucks removing
debris;
Conducting spot checks and surveillances of supplies,
equipment, activities at the site;
Monitoring of material deliveries;
Reviewing truck manifests;
Verifying that materials that were ordered were in
fact delivered;
Verifying that the materials that were ordered and
delivered were in fact job related;
Verifying that the costs of materials were not
inflated through forensic audits;
Reviewing invoices and verifying that appropriate
mark-ups were made, that there were no computational errors,
and that there was no over billing and/or double billing;
While it should be noted that the vast majority of contractors on
the site performed their work exceptionally well and with integrity, as
a result of all of these types of intensive investigating and auditing
efforts and more, the Integrity Monitors prevented a significant amount
of waste, fraud and abuse in the Ground Zero clean-up. To a significant
degree, the prevention came as a result of their presence on the site
alone, which in and of itself, served as a deterrent to misconduct. For
example, the sign-in sheets at the site from the earliest days of the
clean-up prior to the arrival of the monitors, contained the names of
individuals who allegedly did work at the site who were associated with
organized crime. Moreover, some of those early sign-in sheets also
contained the names of alleged workers on multiple sign-in sheets for
work done (impossibly) at the same dates and times. However, when the
four Monitors went into place and the CMs and the subcontractors all
knew the Monitors were closely analyzing such items, these probable
illegitimate and duplicative labor costs were no longer showing up on
the payroll records billed to the City.
Indeed, corroborating the fact that the Monitors served as a
deterrent, early on during the clean-up, DOI was advised by a local
prosecutor of an intercepted conversation between two organized crime
associates in which they lamented that the on-site presence of the
Monitors at the World Trade Center site was making it impossible for
anyone to overbill the City via the usual scams, because the site was
being so closely scrutinized. We couldn't have said it better
ourselves.
In addition to the deterrence of the type of willful misconduct
lamented in that intercepted phone call, it is clear that the Integrity
Monitors' activities further prevented waste and abuse through the
establishment of proper record keeping systems, their physical presence
on the site and their frequent audits of the billings. While, as with
the general deterrence, it is difficult to precisely quantify the
savings resulted from the institution of good record keeping
procedures, direct observations and the quick detection of problems
through frequent audits, the fact that significant savings that
resulted from these activities is clear. For example, based on the
submission and review of required documentation, the Integrity Monitors
found evidence that purchased equipment initially billed to the City
was also listed as equipment leased to the City. Thus, the City was
being charged a rental fee on equipment it had already purchased and
for which it had already been paid. As a result, these charges would
not only then be disallowed (a quantifiable savings) but future
improper billings on this equipment would not occur (a more difficult
to quantify but clear savings nonetheless). Similarly, a review of
required documentation by the Integrity Monitors revealed that requests
for payments for rental equipment at times included fuel costs where
such costs were built into the rental fees. Again, these costs would be
disallowed (easily quantifiable savings) and not billed going forward
(more difficult to quantify).
In another instance, the Integrity Monitors on-site spot checks
resulted in a clear, but difficult to quantify, savings. Some debris-
removal trucks were found to be operating with broken odometers. Had
the trucks been allowed to continue to operate with this type of
mechanical failure, they could have easily deviated from their approved
travel routes, a problem observed with some trucking from the outset of
the debris removal activity. The work of the Integrity Monitors
resulted in the early detection and systemic correction of this problem
and thereby reduced the ability of unscrupulous truckers to misdirect
the debris or misuse the free dump tickets they were given in
connection with their work at Ground Zero.
The Integrity Monitors background checks on contractors also
resulted in the indictment of two principals of a Yonkers carting firm
working at Ground Zero by the Manhattan District Attorney's office for
lying about their ties to organized crime in documents filed with the
City. Not surprisingly, invoices submitted by this same carting firm
were identified by the Integrity Monitors as containing numerous
instances of over-billing by that contractor.
Significant quantifiable savings through the identification and
correction of sloppy, and sometimes willfully abusive, practices were
also achieved by the Integrity Monitors. For example, in one instance,
bills submitted to the City for payment by one subcontractor were so
fraught with errors and improper mark-ups of heavy equipment and
services, and lack of documentation authorizing the performance of
services and labor charges, that they were reduced by two thirds--from
$2.6 million originally billed to $795,000. In another instance, after
long discussions concerning various billing issues between a Monitor
and a subcontractor based on the Monitor's review of the records, the
subcontractor agreed to revise prior billing submissions--translating
to an estimated downward adjustment of $1 million.
In yet another example, one Integrity Monitor examining
subcontractor invoices submitted to the City totaling more than $7.3
million, identified over-billing in the amount of $3 million, or almost
42% of the total invoice. In another type of overbilling uncovered and
stopped by the Integrity Monitors, certain subcontractors were found to
have impermissibly marked-up their bills beyond the 10% allowed for
overhead and the 10% allowed for profit. .
Double billing for workers, time and materials were caught through
the Integrity Monitors' frequent audits and on-site observations. So,
for instance, the Monitors caught a subcontractor submitting invoices
for debris removal at two different locations at exactly the same time,
using the exact same vehicles and drivers. This matter, among others,
was referred to the local prosecutor's office.
These are just a few examples to highlight the kinds of activities
engaged in by the Integrity Monitors in connection with the World Trade
Center clean-up and the savings to the government that resulted from
those activities. They clearly demonstrate the effectiveness of the
Integrity Monitor model, where the Monitors are embedded in a project
from the beginning, and where they report directly to a government
agency that ensures the appropriate focus of their work and the quick
and effective dissemination of their findings.
It is clear that, as a result of the World Trade Center Integrity
Compliance Monitorship Program, the government saved a significant
amount of money by preventing and curtailing fraudulent activity, waste
and abuse of public funds. In total, we have estimated that, based on
their extensive work and forensic analysis, the Integrity Monitors
recommended in excess of $47 million in cost savings and that their
very presence on the Ground Zero site and their frequent audits
produced additional significant savings that cannot be quantified. All
of these efforts not only protected public tax money, but helped to
preserve the faith of the taxpayers in the quality and integrity of
government services.
In conclusion, DOI makes the following recommendations to the
Federal Government: (1) have a list of pre-existing list of known,
experienced and vetted monitors in various fields of expertise and
disciplines; (2) put an integrity monitor in place at the outset of any
situation that will call for a large, costly government response
operation, so that proper record keeping and work procedures can be
instituted to create a culture of legal compliance within the
operation, and ensure accurate accountability to the government; (3)
have the integrity monitor(s) report to a government oversight agency
with a broad governmental mandate encompassing fiscal integrity and law
enforcement (e.g., in New York it was DOI); and then (4) closely work
with the integrity monitors and the other government entities concerned
with addressing the emergency at issue throughout the duration of the
project.
Thank you for this opportunity to speak to you today. At this time,
I would be pleased to answer any questions that the Committee members
or other representatives may have.
[GRAPHIC] [TIFF OMITTED] T5501.005
Mr. Rogers. The Chair now recognizes Mr. David Varoli,
General Counsel of the New York City Department of Design and
Construction, for your statement. And I would remind all
witnesses, we have full written copies of your opening
statements. If you could just summarize them briefly, it would
give more time for questions and answers. With that, Mr.
Varoli. Did I pronounce that correctly, I hope?
STATEMENT OF DAVID J. VAROLI
Mr. Varoli. You did.
Thank you, Chairman Rogers, Congressman Meek, Congressman
King and Congressman Pascrell. Members of the committee, good
afternoon and thank you for inviting me to testify before you.
It is both an honor and a privilege to be here today. I want to
thank you, Chairman Rogers and Ranking Member Meek, for calling
this hearing and I also want to thank Congressman King for his
opening remarks in which you recognize the work of DDC. Also
Congressman Pascrell, as you mention in one of your questions
you are here to study the past.
I believe that is probably why I have been invited, since I
have no law enforcement background, and I am here to talk about
the past. Interestingly on my way here today, I passed the
National Archive Building and there are two very good quotes in
front of that building. The first says, ``The past is our
prologue, ``and the other quote is, ``Study the past.''
I am here today to discuss the recovering cleanup efforts
in the city following the terrorist attacks of September 11,
which was the largest unplanned demolition project in American
history. Every day the city, specifically DDC in this regards,
encountered, head on, unpredictable and complex site situations
and responded with both innovation and comprehensiveness to
these issues. Yet from the outset, the city's objective was for
the work to be done in conformity with FEMA standards in order
to minimize the cost and financial exposure to the taxpayers of
both the city and the country.
I would like to take a few moments to first lay out for you
a brief description of who and what DDC is and what the city
looked like on September 10 and 11, and then I would like to
describe in detail how the city cleaned up the site, all in the
5-minute parameters.
DDC is actually celebrating its tenth anniversary this
month. We were created back in 1996 by the former mayor to
specifically oversee the work of the building of New York City
and its infrastructure. We design and construct the city's
sewers, water mains, roadways. Pretty much you name it, in any
kind of city, like Washington, D.C. or any of the districts you
gentlemen come from, we build that kind of infrastructure. We
have expertise in the fields of engineering, architecture and
construction services. We work with some of the best and the
biggest private sector firms, and we also work with some of the
new ones and some of the smaller firms. Our business is to know
the construction business and to deliver the quality and cost-
efficient services to our clients and ultimate users, the
people of the city of New York.
As you heard from my colleague, Commissioner Rose Gill
Hearn, DOI is also similar in that regards to DDC. They have
the expertise and they know their business very well, which is
finding and routing out fraud, waste and corruption. As will be
described in greater detail, I will talk about the four
construction managers and specifically the work of KPMG which
was hired by DDC as one of our auditors. Before I go into any
description of what happened on September 11 and for those next
9 months, I would just like to put into perspective what the
city looked like on September 10 and September 11.
As everyone knows what the weather conditions were on those
two days, they happen to be some of the more beautiful days in
September. The sun was shining, the skies were blue, and
everything was good in both the city and the country. And then
everything changed the morning of September 11. At that point
in time, the city did not have expertise in demolition or in
debris removal. But we did have what we would call a strong
executive branch, and with that executive branch we had very
strong expertise in the different agencies, DDC, DOI, and some
of the other agencies.
And this is a very important point worth stressing, because
this expertise, when called upon, was there and was ready to
take on the challenges of September 11.
Mr. Varoli. My perspective is both a personal and
professional one, and I won't elaborate too much because it is
in my written testimony, but I was there that day, and it was a
very interesting day both for myself and my family. And so it
is interesting to hear some of the stories of what FEMA was
telling, some of the issues what they encountered, because I
did, too, myself.
There were many success stores following the attacks. Two
of those stories are how the city cleaned up the debris in such
a short time and how the city worked to detect and prevent
fraud.
We believe that the recovery, demolition and clean-up was a
success for the following reasons: First, all branches of the
government, Federal, State and local, gave one entity, DDC,
responsibility for managing the administrative, financial,
legislative aspects of the project; and second, the event of
the tragedy forged a strong partnership between the three
levels of government and further forged a strong partnership
between DDC, the construction managers and the over 200
subcontractors that worked on that project.
With the responsibility of managing the project, DDC then
looked to the experts both in house in our own agencies and in
the city in general.
As I see my time is running out, I would like to just jump
ahead to talk about the work that KPMG did with DDC. By hiring
KPMG, DDC set up an engineering audit monitoring system which
worked hand in hand with the monitors that Commissioner Hearn
had just described, and I believe having the KPMG on board with
their own in-house expertise of engineering auditors enabled us
from the beginning to focus on the issues of what we were
considering, which were the payment requisitions, how these
documents were going to come into our agencies, how they were
going to be reviewed and passed on both to FEMA's projects
staff and then ultimately the auditors for FEMA.
And the roles and the work that KPMG did, which I will just
take a couple of seconds to describe, is very important to
understand for, I believe, the committee and for maybe future
rules that this committee may recommend.
Specifically what KPMG did was to--and I apologize for
turning on the pages--was to provide their audit expertise in
the areas of prevailing wage verification of actual number of
persons working based on shift logs on the 24 hours per day, 7
days a week. We only took 1 day off, and the irony of that
situation is the day we took off was the day Flight 587, the
Rockaway Queens flight crashed, and so it was not a day off in
the end. But every other day we worked for the entire 9 months.
KPMG also did a determination on the usage on a given shift
by established categories, operational-in-use, standby-staffed
by an operator to be employed when directed, and idle, being
serviced or repaired; verification of costs of material, rental
and cost of equipment based on costs and rental rates in effect
on September 10th, 2001; certification of cost of personnel;
and certification of marine transport.
I will jump quickly now to my conclusions. Everything,
again, I am saying is in the written testimony.
I guess I would like to again thank the committee for the
opportunity for, one, for convening these hearings and inviting
me. I would also like to highlight some of the issues we
encountered during the 9 months it took us to complete the
recovery; first and foremost, the issue of how this country
will respond, God forbid, to another act of war on its shores.
I believe the destruction that follows an act of war should
be treated differently than a natural disaster. The work that
was done at the World Trade Center was performed under a
criminal investigation the entire time. There were times when
the construction crews had to stop its work to allow the FBI,
ATF, Secret Service, FDNY and the NYPD to search for some
items. We had to respond to a lot of Federal rules and
regulations as administered by FEMA that had been created over
time by flood and hurricane damage. These policies did not fit
the mold here. In the end, after seven meetings and the act of
writing letters, we would receive an exception to a set policy
or regulation, but there has to be a better way.
In closing, like a lot of other people, I have read the
stories of how this Nation responded to the world wars that
scarred our country in the prior century. What I take from
those stories was the ideal that a democratic and diverse
Nation such as ours can and will rise up to meet any challenge.
After my personal experiences on September 11th, it is funny to
say that, but I consider myself both lucky and proud to be in
New York, to live in New York, and to work there. I witnessed
firsthand the best in people following the day's attacks.
Similar to how the Federal Government and private industry
responded to the call by President Roosevelt at the start of
World War II, the government of the city, the people of the
city and the private industry of the city answered a call on
behalf of itself and the country.
Thank you.
Mr. Rogers. Thank you, Mr. Varoli.
[The statement of Mr. Varoli follows:]
Prepared Statement of David J. Varoli
Chairman Rogers; Congressman Meek; members of the committee: Good
afternoon. Thank you for inviting me to testify before you, it is both
an honor and privilege to be here today on behalf of the City of New
York, Mayor Michael R. Bloomberg, Commissioner David J. Burney, AIA,
and the City's Department of Design and Construction.
I want to thank you, Chairman Rogers, for calling this hearing.
Today's hearing is entitled ``9/11 Federal Assistance to New York:
Lessons Learned in Fraud Detection, Prevention, and Control.'' As the
Counsel to the City's Department of Design and Construction (``DDC''),
I am here today to discuss the recovery and clean-up efforts of the
City following the terrorist attacks of September 11, 2001, which was
the largest unplanned demolition project in American history. Every day
the City encountered head on an unpredictable and complex site and
responded with innovation and comprehensiveness to all issues. Yet,
from the outset, the City's objective was for the work to be done in
conformity to FEMA standards in order to minimize the costs and
financial exposure to the taxpayers of the City and the country.
This July, DDC is celebrating its 10th anniversary. DDC was created
to oversee the work of building and repairing the City's municipal
infrastructure. DDC designs and constructs the City's sewers, water
mains, roadways, police and fire stations, daycare centers, jails,
municipal offices, and a variety of other structures in support of the
City's infrastructure. We have expertise in the fields of engineering,
architecture, and construction services. We work with some of the best
and biggest private sector firms in the world. In addition, DDC works
with a lot of small and new firms. Our business is to know the
construction business and to deliver quality and cost efficient
services to our clients and the ultimate users--the people of New York
City.
As you have heard from my colleague, Commissioner Rose Gill Hearn,
DOI is similar to DDC in that it also has an expertise and it knows its
business very well, which is finding and rooting out fraud, waste, and
corruption. DOI has created a system of inspector generals that are
placed in each agency and has established a sophisticated
infrastructure to monitor and combat government corruption both on the
inside and in the vendor community.
As will be described in greater detail, DDC immediately hired four
construction management firms--Bovis Lend Lease, Tully Construction,
AMEC, and Turner Construction (who I'll refer to as the ``Construction
Managers''). The Construction Managers were engaged to manage the
debris removal and coordinate the work of the many trades working at
the site. Moreover, DDC immediately issued a task order against a
requirements contract for the auditing services of KPMG to assist in
the engineering audit functions traditionally handled by DDC. DOI and
its private inspector generals (who I'll refer to as the ``Monitors'')
monitored the Construction Managers' compliance with the City's laws,
regulations, and policies from an integrity perspective. This included
background checks of all major principals; investigations of
potentially fraudulent matters; surveillance and review of day-to-day
operations; verification of payroll reports to comply with DDC policies
and prevailing wage laws; operating an integrity hotline to receive 24/
7 allegations of misconduct or violations; making recommendations to
the Construction Managers and DDC; and, verifying payments to
subcontractors and vendors. The Monitors functioned independently of
DDC and reported their findings directly to DOI, which then forwarded
pertinent information to DDC.
Before I describe the system put into place by DDC, DOI, and the
rest of the City, I want to first set the stage by going back in time
to the day before September 11th. It was a Monday, September 10th. The
weather in the City was outstanding. The skies were clear blue and the
sun shone brightly. Similar to the weather on September 11th, it was a
beautiful summer day even though it was already the third day of public
school. On September 10th the City did not have a plan to deal with an
act of war against the City. However, the City did have in place a form
of government that encouraged expertise in certain fields. The City,
with a strong executive branch, was separated into a series of agencies
with, for the most part, single missions and goals. This is an
important point worth stressing. City agencies like DDC and DOI are
experts at what they do and, over time, have created systems and
contracts to provide their services in an efficient manner. For
example, the City has experts in the following municipal services--
sanitation, emergencies, health, construction, law, environment,
police, fire and the prevention of corruption at the government level,
to name just a few.
On the morning of September 11th, the day was starting as good as
it ended the night before. A suit jacket was all that was needed and
kids were still wearing shorts to school. The Hudson River was
sparkling as the sun rose above the skyscrapers from the East. By 8:40,
public school children were in school and most people were at work or
commuting to work. Then, as we all know, in a matter of minutes, the
world changed for New York City, Pennsylvania, Washington, D.C., and
the United States of America. We had all been attacked and violated. A
war had been brought to our doorsteps and into our backyards. After the
first Tower fell that morning, the clear blue skies were immediately
replaced with a thick dark haze of dust. We lost more than our clear
blue skies and Sun that morning.
My perspective is both a personal and professional one. You see, I
was there the day our country's world changed. I was in Tower 1 and
Building 5, after the two planes hit, searching for my two-year old and
his daycare classmates. Later that morning, my children and I saw the
brave men and women jump from the towers, and at 9:59 in the morning I
fell on top of my children in an attempt to protect them from the
falling debris as the South Tower fell. My perspective also comes from
having lived across the street from the World Trade Center and having
my children's daycare set up in Building 5. During the clean-up, DDC
and the other governmental agencies operated out of my children's
elementary school at Public School 89. In fact, my office was my
daughter's classroom. It is a day my family, my city, and my country
will never forget.
There are many success stories that followed the City's and the
country's response following the attacks. Two of the success stories
are how the City cleaned up the debris in such a short time and how the
City worked to detect and prevent fraud. We believe that the recovery,
demolition, and clean-up was a success for the following reasons:
first, all branches of government--Federal, State, and local--gave one
entity--DDC--responsibility for managing the administrative, financial,
and legal aspects of the project; and second, the events of the tragedy
forged a strong partnership between the three levels of government and
further forged a strong partnership between DDC, the Construction
Managers, and the over 200 subcontractors. With the responsibility for
managing the project, DDC then looked to the respective experts in-
house and in City government in each of the fields of administrative,
financial, technical, and legal and brought them on the team--the
City's Department of Investigation, to name one of the most important
agencies, worked closely with DDC. Moreover, in the middle of all the
chaos following the attacks, the City put into place one of the best
proactive fraud prevention programs, whereby the City utilized the best
men and women, and technology available to monitor every aspect of the
project. The institution of the Monitors by DOI and the retention of
KPMG by DDC earlier on established a certain tone for the project of
respect and an expectation of law-abiding behavior. These two steps
created a system of verification and reconciliation of all payment
requisitions, and extensive field monitoring work.
DDC worked with a team of public and private entities in the
attempted recovery of survivors once the Towers fell, and DDC lead a
team of public and private entities in the deconstruction of the war-
damaged buildings and in the removal of the ensuing construction
debris. DDC's mission was clear--assist the City in restoring order to
the City by cleaning up the debris in a timely and cost effective
manner.
The recovery aspect of the City's job did not meet any of our
dreams, expectations, or prayers. Once the Towers fell, we did not find
any survivors. We did not find alive any of the people who did not
evacuate in time or any of our Police or Fire that had not gotten out
in time. Words cannot express how we all felt as the days turned into a
month and we had found no survivors.
As for the demolition and debris removal work, the cleanup of the
World Trade Center site far exceeded anyone's expectations. In the
aftermath of the tragic loss of life, safety was the City's number one
priority as we proceeded to demolish the remaining buildings and cart
off the debris. Another key priority was to prevent fraud and theft.
Thanks to extraordinary efforts by the City and all of its agencies,
its contractors and consultants, and cooperating state and federal
agencies, the City had an excellent safety and fraud prevention record.
Early projections had the City cleaning up the site for two or more
years. In fact, the City finished cleaning up the site in nine months.
The City worked for twenty-four hours a day, seven days a week, for
nine full months. The only day off was on November 12, 2001. The irony
of that day was that the Commissioner, First Deputy Commissioner,
myself, and a skeletal crew of DDC employees who reported for work to
catch up on paperwork, immediately dropped everything and went out to
the Rockaways, Queens, following the crash of Flight 587 to aid in the
recovery. As for the World Trade Center project, in a matter of days
DDC had created a crude management structure, which then materialized
into a clear management structure with an organization chart. In nine
months, DDC demolished the wrecks of the remaining structures--
Buildings 3, 4, 5, 6, and 7, and the skeletal walls of Towers 1 and 2,
and DDC removed 1,642,116 or slightly over one and a half million tons
of heavy steel and debris.
Together, DDC and DOI, with the assistance of the Monitors and
KPMG, instituted a program to monitor any attempts at fraud or waste,
while at the same time never stopping the debris removal process.
Furthermore, DDC and DOI put into action our respective expertise, with
the assistance of many other City agencies, State agencies and Federal
agencies. To name just a few of the other City agencies that played an
important role there was the City's Office of Emergency Management,
Police Department, Fire Department, Buildings Department, Environmental
Protection Department, Transportation Department, as well as the Port
Authority of New York and New Jersey.
It is important to understand that in a normal ``planned''
demolition and debris clean-up project, architects and engineers study
the as-builts and other related blueprints of the building to be taken
down. Experts in how to bring down a building in a neat fashion are
retained and consulted. Prior to any demolition work, the contents of a
building are emptied, the area around the building is restricted, and
only a limited work crew is allowed nearby the site both during and
after the demolition. The end result is usually a controlled and self-
contained destruction, with no loss of life and limited external
property damage.
None of this happened before September 11th. We have all seen the
pictures and film footage. War brings chaos and in the City on
September 11, we were surrounded by tons of chaos.
In addition to having people still in the buildings as they came
down, the buildings were loaded with all of their contents. The City
did not have the time to study the buildings before they came down.
There was nothing controlled about how the buildings came down. In
fact, it was the complete opposite. Chaos was the order of the day. As
I mentioned earlier, I lived nearby the World Trade Center. In my
apartment, every surface was covered in the dust and debris from the
collapse of the Towers. And, as I also stated earlier, the City was
faced with the largest unplanned demolition project--7 direct buildings
destroyed, including two of the largest office towers in the world,
plus damage to numerous nearby buildings, and, most sadly, the
unprecedented loss of life and destruction of families--parents faced
with burying their children, spouses faced with burying their spouses,
and children faced with the reality that their parents are gone
forever, as well as their childhood innocence.
As we now know, DDC was placed in charge of coordinating the
deconstruction of the remaining structures and to remove all debris.
DDC's approach was to hire the four Construction Managers and to break
down the 16-acre site into 4 quadrants or areas. This enabled the
agency to track and coordinate the flow of labor and equipment onto and
off the site, and to monitor daily and nightly the amount of progress
made. DDC contacted four of the largest construction firms in the City
who had either prior experience in the area, New York City, or the
World Trade Center complex. Every morning and evening the City's best
construction people--private and public--would meet in a kindergarten
classroom and discuss what work was to be done that day and to review
what had taken place during the prior twelve hours. Having these
meetings in a kindergarten classroom sitting in chairs appropriate for
a six year old was good for comic relief at such a sad time.
When all this started, no one knew what we were looking at in the
sense of time to complete and cost. DDC recognized very early on that
it would need help in dealing with all of the auditing and payment
issues. The City had in place a contract with KPMG, a large accounting
firm for consultanting purposes. The firm also has a construction and
forensics auditing division. DDC utilized KPMG to work with DDC's
engineering audit officer to institute an audit engineering team for
the entire project. I have not mentioned this earlier, but please keep
in mind that during the nine months DDC worked on the project, DDC also
continued to service all of its other clients and kept on building the
City's infrastructure in the rest of the City (DDC manages a current
portfolio of design and construction projects in the billions of
dollars). In addition, DOI continued its mission with regards to all
other City agencies.
What does a nine-month demolition and recovery clean-up project
mean in terms of sheer numbers and dollars? The City paid the four
Construction Managers cumulatively almost a half billion dollars or to
be precise $476,907,125.54. As I stated earlier, the City removed
1,642,116 or slightly over one and a half million tons of steel and
heavy debris. The daily average of men and women working at the site
ranged from 1,096 people in the early months to 346 people in the last
month. In total, 2,400,000 man-hours were expended during the project.
Hundreds of pieces of equipment from the largest crane in New York City
history to small hand tools were used throughout the project. In
addition to the four Construction Managers that reported directly to
DDC, there were approximately 200 different subcontractors and
consultants working on the project.
Included in the $476,907,125.54 paid to the Construction managers,
was $24,661,101.93 paid to DOI's Monitors. DDC also paid KPMG
$15,315,507.29 for all of its services. In the fall of 2001, DDC
installed a Global Positioning System in all trucks--private and
public--that came onto and left the site. In addition, in the winter of
2002, DDC instituted an electronic check-in system to gain access to
the site. This system instituted on January 31, 2002 reported 5174
people accessing the site in the remaining months of DDC's demolition
and debris removal operation.
DDC and DOI instituted a lot of innovative procedures to ensure
compliance and accuracy. The use of KPMG is one example of an
innovative procedure. For example, KPMG provided audit expertise in
prevailing wage compliance and documentation; verification of actual
numbers of personnel working based on shift logs 24/7; determination of
equipment usage on a given shift by established categories--
operational-in-use, standby-staffed by an operator to be deployed when
directed, and idle-being serviced or repaired; verification of costs of
material, rental and owned equipment based on costs and rental rates in
effect on September 10, 2001; verification of costs of professional
personnel on established salary and benefit schedules; and
certification of marine transport of debris loads by examination of
vessel logs.
With regards to reviewing the payment requisitions submitted by the
four Construction Managers, DDC and KPMG in consultation with DOI and
its Monitors, FEMA, and the four Construction Managers, put into place
a payment requisition review process as follows:
An innovative detailed system of checks and balances was instituted
by DDC and DOI to ensure that the taxpayers' money was spent in
accordance with FEMA's and DDC's policies and regulations. DDC's
engineering audit officer and KPMG, would audit a sample from each
payment requisition for each subcontractor cost category to assure
proper documentation exists and there is agreement; check for proper
equipment rates, labor rates, material prices and markups in compliance
with industry standards, and prevailing wage prices; take withholdings
of payment on a percentage basis per issue identified; enter all
findings into a central electronic database; and submit a report to DDC
and the Construction Manager for review and comment. DOI and its
Monitors would review the payment requisitions submitted by the
Construction Manager as they relate to fraud, waste, and abuse. DDC
would send field monitors, who were not auditors, out to cross
reference the payment requisition with their daily field logs for
agreement; DDC's project managers, who also were not auditors, reviewed
the payment requisition packages for reasonableness of expenses,
agreement with costs with field reports, and supporting documentation;
and, the DDC project managers would also recommend withholdings to
DDC's engineering audit officer. FEMA would review the payment
requisitions for accuracy, agreement with proper source documents, and
eligibility of cost items for reimbursement and scope of work; and
would also use their own field monitors to verify the daily reports.
With regards to tracking the time and material tickets submitted by
the approximately 200 subcontractors, DDC and KPMG created a very
detailed methodology. Each group in the process had a unique focus and
role. The system or methodology worked as follows: KPMG's role was to
assess and enhance processes and controls over field operations,
including time and materials data capture and processing; and to
monitor and sample debris removal cost data on a daily basis. DOI's
Monitors' also had a role. The Monitors focus was to review supporting
documentation for all subcontractor payment requisitions for fraud,
waste, or abuse. DDC's project managers' role was to monitor all
documentation so that the work was completed in a timely and cost-
effective manner, and to ensure that payment requisitions contain
supporting documentation. And, finally, FEMA's role was to monitor
documentation to ensure that work being performed and billed for was
eligible for payment by the Federal government, and was reasonable and
cost-effective.
To follow through on each of these important roles, a detailed
procedure was instituted by DDC. For example, KPMG fulfilled its role
by breaking out its review into three distinct parts--labor, equipment,
and materials. For labor, it would take random, 10% samples of names
from shift sign-in sheets and physically verified that the workers were
present. For equipment, it checked that all large equipment from the
Construction Manager's equipment logs were present and entered their
findings with the following notation--working, standby, or idle. As for
material, it would collect daily a copy of receiving slips and make
notes in their daily observation logs, and report findings to DDC's
engineering audit officer. DOI's Monitors, as already highlighted by
Commissioner Rose Gill Hearn, also had a comprehensive system to review
all labor, equipment, and materials.
As I conclude my testimony today, again I would to take this
opportunity to thank the Committee for convening these Hearings. I
would also like to highlight some of the issues we encountered during
the nine months it took us to complete the recovery, demolition, and
debris clean-up.
First, and foremost, the issue of how this country will respond,
God forbid, to another act of war on its shores. I believe the
destruction that follows an act of war should be treated differently
than a natural disaster. As Commissioner Gill Hearn mentioned, the work
done at World Trade Center was performed under a criminal investigation
the entire time. There were times when a construction crew had to stop
work to allow the FBI, ATF, Secret Service, FDNY, and/or NYPD search
for some item.
Moreover, we had to respond to a lot of different federal rules and
regulations as administered by FEMA that had been created over time in
response to flood and hurricane damage. These policies and regulations
did not fit the mold here. In the end, after several meetings and the
act of writing letters, we would receive an exemption to a set policy
or regulation. But there has to be a better way.
In closing, like a lot of other people, I have read the stories of
how this nation responded to the World Wars that scarred the prior
century. What I took from those stories was the ideal that a democratic
and diverse nation such as ours can and will rise up to meet any
challenge. After my personal experiences on September 11th, it is funny
to say this, but I consider myself lucky to be in New York and to work
for the City of New York. I witnessed first hand the best in people
following that day's attacks. Similar to how the federal government and
private industry responded to the call by President Roosevelt at the
start of World War II, the government of the City and the private
industry located in New York City also answered a call on behalf of
itself and the country.
Mr. Rogers. The Chair now recognizes Mr. Neil Getnick,
President of the International Association of Independent
Private Sector Inspectors General.
STATEMENT OF NEIL GETNICK
Mr. Getnick. Thank you. Good afternoon, Mr. Chairman,
Chairman King, and members of the subcommittee. My name is Neil
Getnick. I am an attorney, the managing partner of the law firm
of Getnick & Getnick, which is located in New York, and I am
really--it is a privilege to be here and an honor to appear
before you to speak about my firm's participation as an
integrity monitor in the clean-up and recovery effort which
took place at the site of the World Trade Center after
terrorist attacks upon our Nation on September 11th.
I am speaking today in my capacity as my law firm. I am
also the president of the International Association of
Independent Private Sector Inspectors General. IPSIG is another
term for integrity monitors, and among other things, it is
IPSIG that established a code of ethics which its members
follow when acting as integrity monitors which proved crucial
during the World Trade Center site disaster clean-up.
An effective integrity monitor does not duplicate or
supplant the functions of a construction manager, contractors
or governmental agencies working at a disaster relief site.
Rather, we use a multidisciplinary approach bringing to a
project unique knowledge and expertise in the following areas:
legal, investigative, auditing, loss prevention and other
project-specific requirements such as engineering and
environmental. We utilize these specific skill sets to review
and monitor policies, procedures, practices in the areas of
record keeping and billing as well as for the actual field
work, and then the integrity monitor evaluates these
procedures, and work progress to assess efficiency and accuracy
and compliance with all applicable laws, rules and regulations.
It reports its findings to an assigned governmental agency
as was the case in the World Trade Center. The integrity
monitors reported to the Department of Investigation. Much of
that information which was so reported was subsequently shared
with the monitored companies themselves and other governmental
agencies in the project, and integrity monitor in many cases--
this was certainly true at the World Trade Center--works with
the monitored parties to develop programs and procedures which
prevent corrupt practices, ensure compliance with all pertinent
laws and regulations, and promote the efficient and cost-
effective completion of the project.
So let me give you an example. When a building issue was
discovered which did not fall into the category of potential
criminal behavior, the integrity monitor brought this issue to
the attention of the construction manager and to the Department
of Design and Construction discussing ways to avoid that
problem in the future, and the billing was then adjusted to
reflect the proper amount. So this was an example of how it
facilitated corrections and improvements so that the city was
not overbilled.
On the other hand, in cases where corrupt and fraudulent
behavior was suspected, whether that was in a billing or
construction-related matter, the integrity monitor reported on
that to the Department of Investigation and then worked with it
and the appropriate law enforcement agencies to assist in the
investigation and, in some instances, the ultimate prosecution
of the responsible parties. And I do want to point out that
there were such prosecutions, although it may not be that every
office with prosecutorial power pursued every case, but rather
there was a division of labor.
Because of the unique role and skill set of the integrity
monitors, we were able to add assistance to governmental
agencies as well as to serve as a deterrent to those seeking to
take advantage of the disaster situation for their own selfish
gain. The members of the teams had expertise in legal,
investigative, forensic accounting work, and were former
government lawyers, police officers and accountants with much
experience working in law enforcement and on criminal
investigations. We were in the field on a daily basis.
I am going to stop and say if there is one thing that is
going to be taken away from this testimony today, I hope it is
going to be the words ``real-time basis.'' It is the only way
to get the job done. You can't come back 6 months later, you
can't come back a year later, and do an effective audit. You
are not going to find ghost employees a year later. You are not
going to find which equipment is not being used although it is
being billed for a year later during a static audit. But we
were in the field on a daily basis observing the work in
progress, speaking with the workers on the site, monitoring a
complaint hotline 24 hours a day, gathering significant
intelligence.
We reviewed billing submissions. We checked back-up
documentation. We visited the home office of subcontractors
where appropriate, compared the billings submission with our
own observations in the field, and then using this approach, we
worked together with the Department of Investigation and the
other governmental and private agencies on the project to then
expose and prevent the waste, fraud and abuse.
I have highlighted in my written testimony specific types
of improper and often criminal behavior which can take place
during the clean-up and recovery phase of a disaster site. If
you wish, we can go into more detail during the question-and-
answer period. But suffice it to say that behavior includes
improper billing for payroll and labor, equipment and
materials; safety and environmental issues; problems involving
subcontractors; and issues involving site security and
management of the project. And to the extent that these issues
were encountered at the World Trade Center site clean-up, they
were successfully addressed by the integrity monitors working
together with the government.
And to pick up on both Commissioner Hearn and General
Counsel Varoli, my personal experience, and I have worked with
government for many, many years as a former prosecutor, I have
never had an experience like this. Never. The Department of
Investigation, the Department of Design and Construction, FEMA,
the local prosecutors' offices, the Federal prosecutor's
office, they were truly working together, truly working
together.
Take the monitors. We were all competitors with each other,
and KPMG as well. It was a collaborative experience of the
private sector and the public sector meeting regularly and
getting the job done. And here is the main point, and if we
want to go into it during question and answers, let us do it,
because I can say that with respect to the disaster clean-up,
it is clear that the money that was spent on 9/11 disaster
relief at the World Trade Center site was, in fact, spent for
its intended purpose. We started out with a goal: Get it done.
We had below budget, ahead of time and to spec, and those goals
were met.
I understand the Homeland Security Committee is considering
legislation which will address fraud prevention and disaster
relief programs. I simply refer you to my written testimony
with some suggestions and recommendations that I think would be
very helpful in applying the lessons learned on a going-forward
basis.
Again, as we have seen with the World Trade Center recovery
and clean-up after 9/11, integrity monitors there were able to
detect and report improper behavior on a real-time basis, which
is what led to significant public savings. The use of integrity
monitors and IPSIG in future disaster relief sites will have
the same impacts and will ensure the money designated for
disaster recovery will be used for its intended purpose.
I thank you for the opportunity to address you on this
important topic, and I am happy to answer any questions you may
have.
Mr. Rogers. Thank you, Mr. Getnick, for your testimony.
[The statement of Mr. Getnick follows:]
Prepared Statetment of Neil V. Getnick
Good afternoon Chairman King, Chairman Rogers, and members of the
Subcommittee. My name is Neil Getnick, and I am an attorney and the
Managing Partner of the law firm, Getnick & Getnick, which is located
in New York City. It is a privilege and an honor for me to appear
before you today to speak about my firm's participation as an Integrity
Monitor in the clean-up and recovery effort which took place at the
site of the WorId Trade Center after the terrorist attacks upon our
Nation on September 11th. I am especially honored to appear this
afternoon with New York City's Commissioner of the Department of
Investigation, Rose Gill Hearn. The Department of Investigation has
long utilized Integrity Monitors to assist New York City in fighting
fraud, waste and abuse in City projects and departments, and was
responsible for the appointment of Integrity Monitors to participate in
the clean-up and recovery effort at Ground Zero.
New York City has shown that government can join together with
private individuals, serving as Integrity Monitors, to effectively and
economically combat and prevent fraud, not only in the area of disaster
relief, but also in the regular day-to-day business of government.
Historically, the use of Integrity Monitors was an essential component
of the City's campaign to combat mob infiltration and corrupt influence
in key industries and markets, such as wholesale food markets,
commercial carting, and school construction. The Integrity Monitors
proved highly effective and the City expanded their use. Examples of
this are found not only in the disaster relief effort at Ground Zero,
which I will address in more detail shortly, but also in situations
where the City enters into contracts with private business and has a
concern that there is the potential for misuse of taxpayer funds, and
therefore appoints an Integrity Monitor to oversee a particular
contractor or project. New York City's innovative use of private
individuals and firms as Integrity Monitors is an example of government
and the private sector working together for the public good in a cost-
effective manner.
Although I am speaking today in my capacity as the Managing Partner
of Getnick & Getnick, I am also the President of the International
Association of Independent Private Sector Inspectors General
(``IAIPSIG''). IAIPSIG is a nonprofit professional association whose
mission is to preserve and promote integrity, honesty, impartiality and
professionalism in the work of IPSIGs, monitors and independent
investigators. An IPSIG is an independent, private sector firm (as
opposed to a governmental agency) that possesses legal, auditing,
investigative, and loss prevention skills, that is employed by an
organization (i) to ensure that organization's compliance with relevant
laws and regulations, and (ii) to deter, prevent, uncover, and report
unethical and illegal conduct committed by the organization itself,
occurring within the organization, or committed against the
organization. Notably, an IPSIG may be hired voluntarily by an
organization or it may be imposed upon an organization by compulsory
process such as a licensing order or contract issued by a governmental
agency, by court order, or pursuant to the terms of a deferred
prosecution agreement. The IPSIG may also, in appropriate cases,
participate with management in enhancing the economy, efficiency and
effectiveness of the organization. Members of the IAIPSIG adhere to a
comprehensive Code of Ethics and have been appointed as Integrity
Monitors by local, state and federal agencies, as well as voluntarily
retained by private industry.
When I speak about Integrity Monitors today, I am speaking about an
IPSIG which has been imposed upon an organization, and in the case of
disaster assistance we are referring to construction management firms
and general contractors, as a condition set forth in the contract to
provide disaster relief services. This was the situation that existed
at Ground Zero.
After the attack on the World Trade Center on 9/11, Mayor Giuliani
and top New York City officials realized that, as with any
construction-type project, the potential for fraudulent and abusive
behavior was present at Ground Zero. The City was determined not to
allow that type of behavior to occur. Within a few weeks after the
disaster the New York City Department of Investigation reached-out to
private firms with extensive past experience as Integrity Monitors on
City projects and in short order put into place an Integrity Monitor
program to oversee the recovery and clean-up process. There were four
construction management companies assigned to oversee the disaster
clean-up, and the site was divided into four quadrants with each
construction manager assigned to a particular quadrant. Our firm,
Getnick & Getnick, was assigned as the Integrity Monitor to oversee the
work performed on the quadrant assigned to the joint venture between
Turner Construction Company and Plaza Construction Corporation. The
other three Integrity Monitors were Thacher Associates, LLC, assigned
to monitor Bovis Lend Lease; Stier, Anderson and Malone, LLC assigned
to monitor AMEC Construction Management, and DSFX (Decision Strategies)
assigned to monitor Tully Construction. Each of the four monitors were
well known to the Department of Investigation, having been pre-
qualified to serve as Integrity Monitors in the past and having
successfully handled other monitorship assignments for the City.
It is important to note what the appropriate role of an Integrity
Monitor is, and is not, at a disaster relief site. There are many
participants from the private and public sectors who take part in a
disaster relief project. There is a construction manager whose job is
to: manage the day-to-day operations on the work site; hire and
supervise all subcontractors; interact with the relevant governmental
agencies overseeing the project; prepare daily information logs;
prepare billing requisitions; in addition to other responsibilities.
Typically, a government agency with in-house engineering capability
oversees the performance of work by the construction managers and the
subcontractors working under them. At the World Trade Center, the New
York City Department of Design and Construction performed this task.
Numerous governmental agencies inspected the work for compliance with
applicable laws, rules and regulations, such as OSHA requirements and
safety and environmental regulations. At the World Trade Center site,
in addition to the New York City Police and Fire Departments, various
federal agencies were present on a daily basis, including
representatives from the Federal Emergency Management Agency, the
Environmental Protection Agency, the Occupational Safety and Health
Administration, and the Federal Bureau of Investigation, among others.
An effective Integrity Monitor does not duplicate or supplant the
functions of these other participants in the project. Rather, an
Integrity Monitor uses a multidisciplinary approach, bringing to a
project its unique knowledge and expertise in the following areas: (i)
legal, (ii) investigative, (iii) auditing, (iv) loss prevention, and
(v) other project-specific requirements such as engineering,
environmental, etc. The Integrity Monitor utilizes these specific skill
sets to review and monitor policies, procedures, and practices in the
area of record-keeping and billing, as well as for the actual field
work. The Integrity Monitor evaluates these procedures and work
progress to assess efficiency, accuracy and compliance with all
applicable law, rules and regulations. It reports its findings to the
assigned governmental agency, as in the case of the World Trade Center
the Integrity Monitors reported to the Department of Investigation.
Much of the information reported to the Department of Investigation was
subsequently shared with the monitored companies and the other
governmental agencies involved in the project. An Integrity Monitor in
many cases, and this was certainly true at the World Trade Center,
works with the monitored parties to develop programs and procedures
which prevent corrupt practices, ensure compliance with all pertinent
laws and regulations, and promote the efficient and cost-effective
completion of the project. For example, when a billing issue was
discovered which did not fall into the category of potential criminal
behavior, the Integrity Monitor brought the issue to the attention of
the construction manager and the Department of Design and Construction,
discussed ways to avoid that problem in the future, and the billing was
adjusted to reflect the proper amount. This is an example of how the
Integrity Monitor facilitated corrections and improvements so that the
City was not overbilled. In cases where corrupt and fraudulent behavior
was suspected, whether in the area of billing or construction-related
matters, the Integrity Monitors reported the matter to the Department
of Investigation and then worked with it and the appropriate law
enforcement agencies to assist in the investigation and in some
instances, ultimate prosecution, of the responsible parties.
Because of the unique role and skill set of the four Integrity
Monitors assigned to the recovery and clean-up at Ground Zero, we were
able to provide coordinated assistance to the companies and
governmental agencies working at the site, as well as to serve as a
deterrent to those seeking to take advantage of the disaster situation
for their own selfish gain. Members of the Integrity Monitor teams had
expertise in legal, investigative and forensic accounting work and were
former government lawyers, police officers and accountants with many
years of experience working in law enforcement and on criminal
investigations. We were in the field on a daily basis, observing the
work in progress, speaking with the workers on the site, monitoring a
complaint hotline 24 hours a day, and gathering significant
intelligence. We reviewed billing submissions, checked back-up
documentation, visited home offices of subcontractors when appropriate,
and compared the billing submissions with our own observations in the
field. Using this approach, we worked together with the Department of
Investigation and the other governmental and private agencies on the
project, to expose and prevent waste, fraud and abuse.
My firm has been appointed or retained as an IPSIG and Integrity
Monitor on numerous federal, state and local projects across a wide
variety of industries. Based on that experience generally, and at the
World Trade Center disaster site specifically, I would like to
highlight for you the types of improper and often criminal behavior
which can take place during the clean-up and recovery phase of a
disaster site, which, because of its emergency nature, is typically
billed on a time and materials basis, as opposed to a fixed price basis
following a competitive bidding process.
Improper Payroll and Labor Billing: (1) ghost employees on
the payroll; (2) employees who sign-in and out of the work site but who
go to off-site work locations during the day, often to work on private
jobs in nearby areas; (3) employees who ``loan'' their identity to
others who work in their place and receive a portion of the wages, with
the balance being pocketed by the employee named on the books; (4)
excess labor present on site resulting in inefficient use of work
force, i.e., workers on site who are not being utilized; (5)
contractors paying employees substandard wages and billing the
government at a higher rate; (6) bribes to union officials to permit
non-payment of pension and welfare benefits to union employees; (7)
inflating the amount of union benefit payments in labor bills submitted
to the government; (8) work slow-down to incur overtime pay.
Improper Equipment Billing: (1) billing for equipment not
present at the site; (2) billing for equipment present at the site
which is either unnecessary or is not functioning and in need of
repair; (3) billing for repairs which were not performed or which were
occasioned by off-site use; (4) billing for inflated rates higher than
those permitted by contract; (5) billing for inflated rates higher than
those charged on private work; (6) double-billing of equipment; (7)
excessive and inaccurate billing for fuel needed to operate equipment
on site.
Improper Materials Billing: (1) billing for substandard
materials required for proper job performance; (2) inflating the price
of materials purchased for the site; (3) inadequate inventory control
resulting in billing for materials which are removed from the job site
and used at a different location; (4) double-billing for materials; (5)
kick-back schemes and bribes resulting in inflated prices for materials
used on the work site.
Safety and Environmental Issues: (1) failure to properly
train employees in safety procedures and use of equipment, and to
enforce those procedures on the job site; (2) failure to properly
dispose of hazardous waste material; (3) billing for substandard and
ineffective environmental monitoring and testing; (4) performance of
unnecessary and duplicative environmental monitoring and testing; (5)
billing for safety equipment not utilized at the disaster site; (6)
utilization of machinery and equipment on site which does not comply
with current safety and environmental standards; (7) failure to
maintain adequate site records and logs to determine whether required
site safety and environmental standards are met.
Subcontractors: (1) selection of subcontractors based on
improper criteria which does not include ability and pricing, such as
payment of bribes, personal relationships, etc.; (2) improper mark-up
of subcontractor billings; (3) retention of subcontractors unqualified
and incapable of providing required services; (4) improper vetting of
subcontractors' qualifications and background.
Security: (1) insufficient site security and spotty
enforcement of security regulations, such as failing to check
identification and to inspect deliveries, allowing for unauthorized
personnel and goods on work-site; (2) theft of property from site due
to inadequate security, inventory control and theft prevention
procedures; (3) inadequate coordination between various organizations
and individuals responsible for site security.
Management of proiect: (1) relationships between
construction managers and subcontractors which prevent objective
evaluation of job performance; (2) corruption of supervisory personnel
by bribes, threats, etc., (3) inadequate supervision and implementation
of appropriate procedures to prevent fraud, waste, abuse, and
violations of rules and regulations; (4) inability to perform necessary
tasks and assignments.
Many of these kinds of activities were identified as issues or
potential problems by the Integrity Monitors at the World Trade Center
clean-up and recovery project, and have been encountered during other
monitorships we have worked on in the past. Due to the
multidisciplinary approach and extensive experience in combating
fraudulent and criminal activity on construction and other government
projects which the Integrity Monitors brought to bear on this
challenging task, and our partnership with City Government, we were
able to identify and address these problems, and, when appropriate,
work with law enforcement agencies to gather evidence for criminal
prosecution. As a result, the money spent on 9/11 disaster relief at
the World Trade Center site was spent for its intended purpose.
I understand that the Committee on Homeland Security is considering
legislation which will address fraud prevention in disaster relief
programs. Based on our extensive experience in working as an Integrity
Monitor and IPSIG on various governmental assignments, we offer the
following suggestions with respect to that proposed legislation:
A list of pre-qualified organizations which can act as
Integrity Monitors should be established so that qualified individuals
can quickly mobilize to monitor disaster relief programs. These
organizations should have among its members individuals with legal,
investigative, forensic auditing and loss preventions skills, and have
extensive experience in acting as Integrity Monitors on other
government projects.
The obligations and duties of an Integrity Monitor at a
disaster recovery site should be clearly delineated, and should include
adherence to a Code of Ethics such as the one followed by members of
the IAIPSIG (copy attached to this testimony).
The construction manager or contractor overseeing the
disaster relief project should be required as a condition of its
contract with the government to cooperate with the Integrity Monitor,
including providing access to all books and records and access to all
personnel, and require all of its subcontractors to do the same. The
four construction managers working at the World Trade Center disaster
site entered into such agreements with each of their respective
Integrity Monitors as a condition of the CMs providing construction
services at the site.
The hallmark of an IPSIG and an Integrity Monitor is its
independence. Integrity Monitors should have no prior business or
personal relationships with the monitored entity which would create a
conflict of interest, or even the appearance of one.
Indemnification should be provided to the Integrity
Monitor, similar to the type of indemnification provided to public
officials acting during the course of their official duties.
Payment to the Integrity Monitor for services provided
should be guaranteed on a regular basis to ensure that the Integrity
Monitor is not thwarted in carrying out its obligations by companies
that might withhold or delay payment in an attempt to deter the
Integrity Monitor from performing its duties.
Any construction project, even one which is anticipated and planned
in advance, is susceptible to fraud, waste and abuse. By its very
nature, a disaster recovery project is more vulnerable to this type of
conduct. As we have seen with the World Trade Center recovery and
clean-up after 9/11, however, the appointment of Integrity Monitors
allowed the City of New York to detect improper behavior on a real-time
basis, and not just after the fact. This enabled the City to remedy
problems and bad practices quickly, and thus save significant sums of
money. Even more noteworthy, however, is the preventive effect the
Integrity Monitors had at Ground Zero in stopping fraudulent and
wasteful conduct before it occurred by their presence and involvement
at the site. This deterrent effect is invaluable. The use of Integrity
Monitors at future disaster relief sites will have the same impact and
will ensure that the money designated for disaster recovery is used for
its intended purpose.
Thank you for the opportunity to address you this afternoon on this
very important topic. I am happy to answer any questions you may have
for me at this time.
Mr. Rogers. The Chair recognizes Ms. Carie Lemack,
cofounder of Families of September 11th. Welcome.
STATEMENT OF CARIE LEMACK
Ms. Lemack. Thank you, Chairman Rogers. Thank you, Chairman
King. Thank you, Congressman Pascrell. I am glad you are all
here today.
Obviously I recognize I come at this from a different
perspective not because I am wearing pink and everyone else is
wearing black, but because I am one of a victim's family
members from 9/11, and I actually brought my mom with me today.
This is my Judy Larocque. She was on American Airlines Flight
11. This picture was taken 3 weeks before she was killed. She
was almost 51. She would have been 51 on October 27th. And
after my mom's murder, I decided that I wanted to make sure
that the victims' needs were met, and also that we could
harvest our power together to make sure that what happened on
9/11 never happened again. And as such, I, alongside of the
family members, including my sister, founded Families of
September 11th. We are a national organization. We have 2,300
members from I believe now 49 States, and we also have members
from 9 different countries. So I am cofounder of Families of
September 11th.
But I am going to talk to you about a personal experience
that I had and some of my suggestions so you can make sure what
happened after 9/11 with the funds doesn't happen again.
I am sure you might remember that after September 11th, you
passed the Airline Stabilization Act, and among other things,
it created the Victim Compensation Fund, and this fund, we call
it the VCF, gave the family members two choices. They could
either retain their rights to sue anyone that they thought
would be--was negligent in the acts that happened on September
11th, or they could give up those rights for an undisclosed sum
of money, tax-free money, but undisclosed. Some have. My sister
and I had to think very hard about it, but it was quite clear
what we were going to do. We were taught by my mom to be
accountable when we messed up. We had to fix it and admit it to
and make sure it didn't happen again, and we did not feel that
the airlines and others were doing that, so we decided that the
only way we were going to find transparency and find
accountability was to go through a discovery process, which
means you have to go to court. So we decided we were not going
to partake in the Victim Compensation Fund.
Unfortunately, unbeknownst to us, my ex-stepfather, my
mom's ex-husband Wayne Larocque, did not find this kind of
accountability was necessary, and he was more interested in
money. We were lucky enough that the Department of Justice had
a very transparent system where you could monitor who was
applying for the Victim Compensation Fund in your loved one's
name, and I vividly remember sitting in my mom's study one day
talking on the phone with my sister and with an attorney and
thinking, wow, I was president of Families of September 11th.
At the time I was sending out notices at the time saying, you
should be diligent, keep track of anyone if they fraudulently
applied, and I decided to do the same thing. And there was my
ex-stepfather's name. I was furious, as you can imagine,
because he was jeopardizing our opportunity to seek litigation
because the airlines are trying to throw anyone out of the suit
even if they had been fraudulently applying for the victim
compensation funds.
We were lucky that Justice had this transparent system. We
contacted the appropriate authorities. They looked into his
file and recognized that he had not even admitted that my mom
had two daughters, and obviously they denied his application.
So this was a success story.
But what it highlights is the fact that other aid agencies
don't have any kind of transfer. With all due respect to my
colleague, the American Red Cross, they did not have this. The
United Way did not have this, and to this day I have no idea
what he applied for and received in my mom's name. He was due
nothing legally.
So what can you do about it? Well, you all oversee the
Department of Homeland Security, and I was shocked when I found
out that DHS does not have a victim's assistance unit, which
means while DHS was created to look out for the risks that face
this country, no one is thinking about the fact that risks
don't only affect bridges and buildings and planes, they affect
real people, and we need somebody at DHS thinking about those
people afterwards. We can protect a bridge as much as we want,
but what happens when some bad person goes after it and those
people who are affected by that tragedy? There is no one at DHS
thinking about those things.
If we had an Office of Victims Assistance, which I believe
is going to be in your authorization bill next Wednesday, so I
hope that you look at this and consider it very strongly, this
Office of Victims Assistance could have a database, a system
that could collect information much like the Department of
Justice did with the Victim Compensation Fund. They could allow
family members to apply, to fill out their financial
information once instead of multiple times like we had to do.
We spent hours and hours at the Family Assistance Center. We
spent hours on the phone oftentimes with volunteers with aid
organizations who had no idea how to help us because they had
bitten off.
This system could make sure that that doesn't happen. It is
a single application, and then you would find out what are you
eligible for. It is much like the Fast Web college scholarship
system where students can enter their financial information,
and all of the different scholarships that they are eligible
for can pop up, and they can pick those.
And this is an opt-in system. We don't want to see a system
where family members here have to be opted out. They would have
to be educated on the system. They would have to be educated on
the pros and cons and make a decision. To have them--to make
them learn about a whole new system and have to master and make
a decision about themselves is something we don't want to see
happen.
So I hope you will consider creating this database, single
implementation opt-in database, that can be used in the future
because it will prevent fraud. It will permit families who are
in the best position to know that fraud is being committed to
see the fraud depicted. It lets people know and makes sure we
can prevent it.
And my last point, and again with all due respect, fraud
works in both ways. And I hope that you will be able to help
the family members if there is another disaster, because after
9/11 the American Red Cross had billboards, they had
advertisements, they had little pop-up ads on the computer,
said they were going to collect money and help the victims of
9/11. What they weren't telling everyone, they were only going
to help a subset. They had chosen not to help the victims of
the families on the planes, which included my family, which
went away when my mom's friends gave money to that fund. They
thought it was going to help us pay the mortgage, but it
wasn't. We weren't in a position to explain that to them.
We ended up fighting the Red Cross on that. Bill O'Reilly
got involved, and they changed their minds, which was great,
but it shouldn't be incumbent on victims to help the aid
agencies to tell them what to do.
So I hope you will look at what not only the data is, but
what the aid agencies are going to do, what they say they are
going to do. We are talking about fraud today, which is
important, but also the unmet needs. There are people in New
York who are sick who are not getting help. There are mental
health benefits who are not going out to family members, and I
can't even get mine paid for. So at some point I hope we look
at those issues as well.
Thank you very much.
[The statement of Ms. Lemack follows:]
Prepared Statement of Carie Lemack
It is an honor to be given the opportunity to testify in front of
the House Committee on Homeland Security's Subcommittee on Management,
Integration and Oversight. I would especially like to thank Chairman
Rogers and his impressive staff for inviting me here today. The work
you do in overseeing the Department of Homeland Security is vital to
ensuring that our nation's protectors remain focused and prepared for
the threats our country faces.
Today we are not here to talk about these threats, though they
remain constant and require our continued vigilance. Today we are here
to talk about our response when these threats strike, and how to more
effectively deploy aid to those in need.
A quick note; while I am a co-founder of Families of September 11,
today I speak as a daughter of a 9/11 victim. My views are my own and
have not been voted on or endorsed by the Families of September 11
board of directors, of which I am a member.
There are three things that I believe responders need to keep in
mind when trying to eliminate fraud and inappropriate use of funds for
terrorism victims. First, we have to recognize that in the United
States today, ``family'' is not just the traditional husband, wife and
2.5 kids. There are couples who never married, but have made lifelong
commitments to each other; re-married fathers, with children from both
a current and previous marriage. There are young workers who support
their elderly parents and disabled siblings. When administering aid, an
organization or government agency has to be able to take non-
traditional familial structures into account.
Accordingly, if an aid organization advertises that it is
collecting and distributing donations for disaster victims, it must
abide by its promotions. The agency cannot choose which subset of
victims to support after the fact. If they advertise to help all
victims, they must help all victims.
Another issue that must be addressed is how a recipient can monitor
and report fraud. Those who are collecting aid and managing the flow of
funds for their family are in the best position to identify when
something is amiss, but oftentimes, at least in the majority of cases
after 9/11, there was no way for the head of household to know who else
was applying for, and receiving aid in the name of the victim.
Information should be available to the victims and their family
representative, not held in secret by the agencies that are unequipped
to handle the tremendous influx of requests and inquiries.
Lastly, any type of aid distribution should go through an opt-in
database system, not one that is opt-out. That is, let the families
decide who sees their personal financial information and which groups
they would like to apply to for aid, instead of automatically giving
their private information to all aid organizations that then decide
which programs they are eligible for. This process will also help
families detect and prevent fraud in their loved one's name. The opt-in
system should be used in concert with a single application, instead of
the system used after 9/11, when each aid agency had its own
application that required hours of duplicating efforts from the
families the aid was supposed to help.
These three issues became clear to me after my personal experiences
with post-9/11 aid. My mother, Judy Larocque, was the CEO of Market
Perspectives, a small market research firm employing approximately 20
people in Framingham, MA, my hometown seventeen miles west of Boston.
Mom was 50 in September 2001, about to turn 51 on October 27th. She had
two daughters; my older sister, Danielle, who at the time lived in
Chicago, and me.
Mom's dream was to get both her daughters back home after we left
Massachusetts for college in California. In the fall of 2001, it looked
like her dream was going to come true. On Labor Day weekend, Danielle
and her boyfriend, now husband Ross, came to Boston to visit. I took
Mom to a Red Sox-Yankees game, we ate lobster and steamers, and we
enjoyed a peaceful weekend spending time together. When Danielle and
Ross left to return to Chicago, Ross told Danielle he thought he could
definitely live in Boston. Mom and I were ecstatic.
On September 10th, Mom was as proud as ever. Danielle taught her
first class as an adjunct professor at Northwestern Law School that
day, and Mom beamed. When I called her late that night, I woke her up.
Even in her sleepy state, the first question she asked me was ``Did you
call and congratulate your sister?'' Of course the answer was yes. We
were as close as any mother and daughters can be. Mom made sure of
that. Whenever Danielle and I fought, she made us hug, and told us
``you are always going to be sisters, that will never change''.
That bond became even stronger after 9/11. There are not words to
describe the pain and grief of losing Mom, my best friend, my
confidant, my comforter, my rock. We all know of the horrors of that
day, September 11, 2001, so I will not go into that any further.
Instead, I will focus on the troubles we encountered after 9/11.
Immediately, we began to understand that the methods in place to
deal with victims' families are not made for today's familial
structure. Mom was recently divorced, and since Danielle and I were not
considered dependents, Mom was treated as a single woman with no
children. I cannot even begin to imagine how furious that designation
would make her.
American Airlines was the first organization we came in contact
with that treated us differently. They kept me on hold for hours, never
confirming Mom was on Flight 11. At one point, I remember thinking that
she could not have been on that flight, because an airline would not
treat victims? family members this poorly. Unfortunately, I was wrong
on multiple counts.
When Danielle asked for help in getting home to Boston from
Chicago, the American Airlines representative gave her the number for
Amtrak, and told her that the trains were all booked. We then learned
that Mom's name was released to the media sometime in the afternoon of
9/11, even though we had expressly asked American Airlines not to give
out her name.
Only later did we find out that there was a lot of information we
were not told about. There was a meeting at Logan Airport on the
morning of the 12th that we were not invited to. The only explanation
for the omission was that we were not considered immediate family,
though we can never really know if that is why information was kept
from us.
Perhaps all of this would have been different had Mom had a
husband. Instead, she had two daughters in their twenties, trying their
best to handle her affairs, but not considered her children by aid
agencies and the like.
As we struggled with that hurdle, we also learned that the
specifics of her murder were being taken into account, without our
prior knowledge, to determine if her family was eligible for aid. To
prevent improper practices, organizations need to make clearer their
criteria and procedures ahead of time to ensure all families receive
appropriate treatment.
This lesson became apparent in the American Red Cross' decision not
to give aid to the families of those who loved ones perished on the
four planes. They claimed that the airlines? legal obligations would be
substantial enough to help those families. They did this without
alerting the public, all the while collecting donations in the name of
the ``9/11 victims and their families''.
The ramifications of this decision may not be immediately apparent,
but they were severe. Suddenly, many of Mom's friends who donated to
the American Red Cross asked us about the aid we were getting to help
pay Mom's mortgage on our childhood home. When I had to tell them we
were not eligible for the aid, they became angry, frustrated, and
wanted me to provide the explanation.
It seemed that everywhere we went, we saw solicitations for the
American Red Cross. It was incredibly painful to feel like a second-
class victim's family member, as if we were not good enough for the
generosity that the American public put forth. When we went to
Framingham's Town Hall to get copies of our birth certificates to apply
for Mom's death certificate, we were faced with another reminder of our
low status. There on the counter was an appeal to help the victims in
New York and Washington by giving to the Red Cross. When we asked if
the woman at the counter knew there were victims right here at home,
her eyes welled with tears.
Families need to be accepted as what they are. When an ad is placed
saying an organization is raising money to help victims? families, it
must either specify which type of families, or be open to all affected
families. To this day, all the scholarship money that was raised for
the ``children'' of 9/11 victims only goes to dependent children of a
certain age. I was a 27-year-old daughter of a 9/11 victim, but was
deemed ineligible for any 9/11-related scholarships or aid when I began
graduate school in 2002. I may not be what most considered when they
donated money for 9/11 children, but there is no doubt in my mind, nor
would there be in my mother's, that I lost a parent on 9/11.
As a co-founder of Families of September 11, a national
organization of 9/11 victims' family members, survivors and concerned
members of the public, I heard the stories of many non-traditional
family members who fell through the cracks of aid organizations in the
months following 9/11. There were the engaged, some of whom were
supposed to be married only four days after the attacks, who were not
eligible for most types of aid. I remember vividly speaking with a
woman whose ex-husband had remarried before he was killed on 9/11, so
that the new wife received all of the aid. The problem occurred because
the man had fathered children with both women, and the first wife was
unable to collect money to help her young son. The story of a couple
who chose not to marry, but lived together for seventeen years comes to
mind, with the victims' parents getting aid, but not the partner who
was left with bills and a mortgage. This scenario was played out over
and over again with many of the gay and lesbian victims whose partners
were left with no legal and varying social status to receive aid.
Aid organizations must recognize the differing aspects of American
families as we know them today. They must be flexible and
accommodating. To its credit, the American Red Cross and United Way did
finally come around and begin to help non-traditional families. But
this change came only after tremendous pressure. It should not be the
responsibility of the victims to have to actively lobby those who are
purporting to help them. Instead, the aid organizations should welcome
their input and act on it, not resist it until Bill O'Reilly or his
counterparts repeatedly attack their practices on national television.
The Department of Homeland Security (DHS) could play a crucial role
in solving this problem. Currently, there is no Office of Victim
Assistance in DHS, which means that while there are lots of people
thinking about how to deal with preventing and immediately responding
to a disaster, there is no one trained to deal with the people a
disaster might affect. If DHS has trained professionals on hand who
specialize in assisting disaster victims, perhaps the good people at
American Airlines and other corporations can leave victim support to
those better suited.
The designation of who is eligible for aid, and who is not often
walks a thin line. We are all aware of the reports of limousine drivers
and mistresses who racked in large sums of money from aid organizations
because they were able to prove, however tenuously that they suffered
losses after 9/11. But there are some programs, and some individuals
for whom this designation is crystal clear. What is less precise,
however, is how to identify and respond to them.
After Congress created the Victim Compensation Fund (VCF), families
were faced with a difficult decision: should they give up their right
to pursue litigation against those liable in their loved one's death in
order to receive an unknown amount of money from the government? This
was made even more difficult by the fact that when the regulations for
the VCF were finalized, there was strong resistance in Washington
against any type of in depth investigation into the 9/11 attacks. How
could a family decide whether or not to pursue litigation, when we had
no way of knowing what really went wrong?
For Danielle and me, however, this decision was simple. We knew
that we had to pursue litigation in order to get to the truth, and
therefore do our part to ensure that what happened to Mom and nearly
three thousand others would never happen again. If the airlines,
security companies and others had been forthcoming, we might have
chosen differently, but based on their secretive behavior, we felt it
was our obligation to shed light on the truth in our call for
accountability.
There was someone who did not share our sentiments. He wanted to
collect money, and was not interested in seeking the truth. His name is
Wayne Larocque, and he is Mom's ex-husband.
One day while on the phone with an attorney and my sister, I
decided to look at the list the Department of Justice had created of
those who had applied for the fund. At the time I was President of
Families of September 11, and I felt an obligation to do what I had
advised our members to do; stay informed, be diligent, and make sure no
one was fraudulently applying to the VCF in your loved one's name.
When I saw Wayne's name on the list, applying on behalf of Mom, I
was shocked. That disbelief soon turned to action, and Danielle and I
quickly contacted VCF officials. As I understood it, Wayne applied, and
in his application, he failed to mention that Mom had two daughters who
were her legal next of kin.
We were not allowed to see Wayne's application, although we did
contact the proper authorities to ensure that Mom's rights, and our own
were not violated and that no fraud was ultimately committed. His
application could have jeopardized our participation in a lawsuit; the
airlines have tried to have any family that even minimally applied to
the VCF thrown out of the pending litigation.
Even today, I have no way of knowing what other money Wayne applied
for and received. Perhaps there is none. But if he was willing to go
the trouble of filling out the VCF form (which was much more involved
that most aid applications), I can only imagine how easy it might have
been for him to collect other money. Without having access to
information regarding who applied for and received money in Mom's name,
I can have no way of knowing if any fraud was committed, and therefore
cannot report and deter it.
There are systems that are very exact when determining how to
compensate victims' families. Worker's compensation for example, does a
terrific job of knowing exactly how much each family gets, and to whom
it goes. I know this, since we were not eligible for worker's
compensation aid, but Mom's mother, my grandmother, was. Based on my
experiences with it, I feel very confident that little to no fraud got
through the their system, nor the system the Social Security program
uses. I do not believe it is too much to ask aid agencies to have some
sort of system that could allow a victims? family to know who is asking
for and receiving aid in a victim's name, in an effort to curb fraud.
In the case of the VCF, this type of transparency clearly worked.
This database should be part of an opt-in system that could be used
to streamline aid distribution. After 9/11, Americans, and for that
matter, people from across the globe, showed their patriotism, unity
and compassion in a generous outpouring of support and donations.
Speaking for myself and my family, we were overwhelmed with the
selfless giving of time, money and love from our neighbors, friends,
communities and fellow Americans.
The job of collecting and distributing the aid was not an easy one.
Those agencies that stepped up to the plate and volunteered to house
and give out the money might not have been fully aware of the difficult
task that lay before them.
On the Tuesday before Thanksgiving 2001, I drove from Boston to New
York City for a meeting with other 9/11 family members and New York
Attorney General Elliot Spitzer to discuss how to streamline the aid
distribution process. He suggested creating a database of 9/11
families? financial information, so that the aid organizations could
review our status and decide how best to divvy up the aid.
I agreed that idea of a database was useful, but thought it should
work in the opposite direction. The families needed one list of aid
agencies with a common application, that told them the criteria and
amount of aid each agency was offering. This way, families could fill
out one form, and could then decide to which organizations they wanted
their application sent. For many families, the idea of deciding which
agency was able to see their information was extremely important.
Unfortunately, we were unsuccessful in creating this database. As I
understood it, the aid agencies did not want to collaborate in drafting
and approving a single application and did not like the opt-in idea.
The result was that families had to spend hours on the phone, or in
queue at the Family Assistance Center, repeating the same information
over and over again to different aid agencies. Not only was it
frustrating to the families, it also led to an environment that could
foster fraud. There was no way to keep track of which agency was paying
which bill for a family, possibly resulting in multiple payments,
whether intentional or not.
For future events requiring aid distribution, I highly recommend
the opt-in, single application approach. Families have every right to
know who sees their financial information, which an opt-in system
provides. Using an opt-out approach assumes that every family
completely understands the complicated system--after suffering a
traumatic loss, this is just one more unnecessary burden to place on a
grieving, overwhelmed family.
A single application is a seemingly simple, yet hard to implement
process. Each aid agency uses its own, slightly modified approach, and
there is no overseeing authority to make them all collaborate for the
benefit of the recipients. If Congress can get them to work together
now, before another event, perhaps the victims of the next catastrophe
will receive an improved, more streamlined and easier to use response
process.
This is an area that DHS could address. If an office of victim
assistance is created, it could house a ready-to-be-deployed database
that will immediately serve disaster victims. With one data collection
point, families are spared the unenviable task of repeating their
personal data, and are capable of monitoring aid activity for their
family. This office could also develop rules and strategies for dealing
with any fraud that is detected and increase family-approved
information sharing among agencies and aid organizations.
The generosity demonstrated by the public towards 9/11 victims?
families and survivors was tremendous and deserves to be lauded.
However, the treatment of the aid after it was collected was less then
perfect. We need to learn from the mistakes committed in the past to
improve the process for the future.
Mom always taught Danielle and me to be accountable for our
actions. If we erred in some way, we did our best to admit it, correct
it, and make sure it didn't happen again. I can think of no better way
to honor my mom than to apply this same standard to post-9/11 aid and
response. This is why I fought so hard for the creation of the 9/11
Commission, and again for the implementation of its recommendations,
and that is why I am here today to work with you to create the best aid
response we can for the future.
Thank you very much for this opportunity to speak before you. I am
happy to take any questions.
Mr. Pascrell. Mr. Chairman, I just want to make a point on
what we just said. We read about these things and the families
of the victims. It would seem to me that this committee needs
to go on record as soon as possible, our Chair and our Ranking
Member, that we will do anything that we can practically to
respond to what Ms. Lemack has just stated. I mean, I can't
fathom. I can believe it, but I can't fathom this thing. The
families are not being responded to this late. As you well
know, first responders have been given the runaround over and
over again. I alluded to that before, but I don't want this to
be about first responders because we are talking about the
families of the victims.
I would beg you to make sure that you do everything in your
power. I know your heart is in the right place. I know it will
be done.
Mr. Rogers. We are going to do our part. I thank the
gentleman. Also, again, I want the thank Ms. Lemack, and now
turn to the only panelist that we have today who doesn't
believe I have an accent. She is also a fellow Alabamian, from
north Alabama, however, but Huntsville, Alabama, and a graduate
of the University of Alabama.
We welcome you, Ms. Leigh Bradley. Leigh is the Senior Vice
President of Enterprise Risk for the American Red Cross.
Welcome. We look forward to your statement.
STATEMENT OF LEIGH BRADLEY
Ms. Bradley. Thank you so much Mr. Chairman, Member Meek
and Congressman Pascrell. I want to thank you all for providing
me the opportunity to appear before you today to discuss the
American Red Cross's response to the attacks on America on
September 11, 2001.
In my current job as the senior vice president for
enterprise risk of the American Red Cross, I am charged with
managing the Red Cross's internal audit department and
overseeing the Red Cross's compliance investigations, ethics,
and corporate safety policies and programs. Seated behind me
today are two senior Red Cross investigators: Teila Brewer, who
is vice president for investigations, compliance and ethics;
and Frank Fravilla, director of the hurricane investigative
unit and also 9/11 fraud investigator. I want to acknowledge
the work that these two individuals do every day to ensure that
we protect Red Cross assets.
I also want to acknowledge my colleague Alan Goodman, who
is the executive director of the American Red Cross September
11 recovery program, which we refer to as SRP. For the past 4
years, Alan has been at the helm of this program, which has
provided longer-term recovery to nearly 60,000 individuals and
families, including--and I would like to underscore this for
the record--families of the deceased, including those who were
on the planes that were crashed into buildings on 9/11. We
assist the physically injured rescue and recovery workers and
their families and people who are living or working in the
areas of the attacks. And what I am going to do is ask my good
friend to my right to meet with Alan Goodman after our
testimony today just to make sure that we have met her needs
and the needs of her family.
It is important to note that each day the American Red
Cross responds to disasters and communities across the Nation.
In fact, we respond to more than 70,000 disasters each year.
The vast majority of disasters we respond to are single-family
house fires. We also respond to large-scale disasters such as
hurricanes, floods, tornadoes and manmade events. There is one
constant in all response operations, and that is to ensure the
immediate emergency needs of our clients are met.
Almost immediately after the first plane struck the World
Trade Center, Red Cross volunteers and personnel were on the
scene.
The response by the American public to 9/11 is nothing
short of extraordinary. Tens of thousands volunteered with the
Red Cross, and tens of thousands mailed financial
contributions. In total, the Red Cross received more than $1
billion in contributions. The intent of our donors was to
ensure that this money was earmarked for the victims of 9/11,
and to that end we created a segregated cause known as the
Liberty Disaster Relief Fund.
The American Red Cross had two phases of response to the
tragic events of 9/11. The first phase was known as the relief
operation phase and ran through October 1st of 2002. The second
phase encompassed the long-term recovery effort dating from
October the 2nd, 2002, to the present, and that is referred to
as our September 11th Recovery Program, or, as I mentioned,
SRP. As a result of these efforts, the Red Cross has provided
support to nearly 60,000 individuals and families directly
affected by the September 11th terrorist attacks.
Now I would like to speak just briefly but more
specifically about fraud detection, prevention and controls.
Waste, fraud and abuse are very serious issues to the
American Red Cross, and why is that? Because as an independent
nonprofit agency, we rely on the donations of the American
public to provide services free of charge to victims of
disaster. We therefore work extremely hard to prevent and
detect fraud in order to be good stewards of donated dollars
and in-kind benefits.
Despite our prevention and detection efforts, however, we
did experience fraud during our response to 9/11. Some of the
schemes that we found included individuals fraudulently
claiming that a loved one had died; sometimes creating a new
identity as their own, using their real identity as the
deceased individual. In one instance we had a father claim that
one of his children had died, using the childhood picture of
himself as a young man to prove the existence of his fabricated
son. And another instance, several of these, we had individuals
claim that they had been injured in the affected area, most
notably the World Trade Center, only to find out later that
they had never been near Ground Zero.
Now, that is some interesting anecdotal information. Some
statistics may be helpful to give a more comprehensive overview
of our 9/11 fraud experience.
To date we have received 1,473 allegations of wrongdoing,
mostly fraud. Thus far we have obtained 140 criminal
convictions. Currently we have 20 pending legal cases, meaning
they are at the grand jury about to be tried. We have 213
remaining cases that are still being investigated, some of
those investigated by the Red Cross, some of them by a variety
of law enforcement agencies.
The American Red Cross to date has collected $380,000 in
court-ordered restitution, with a potential of future
restitution in excess of several million dollars. Fraud as a
percentage of the money we collected, which is just shy of $1.1
billion, is less than 1 percent.
It is fair to say that despite our strong efforts to
prevent and detect fraud, 9/11 demonstrated for the American
Red Cross the need for tighter internal controls and required
our organization to strengthen its fraud prevention and
detection mechanisms. In my written testimony I provide a
number of detailed descriptions of improvements made by the Red
Cross after our response to 9/11. However, I would like to
briefly highlight four of the most significant changes that
were implemented to help prevent fraud from occurring in the
future.
There are four of them: Donor 7, that was a new initiative;
second, a new Client Assistance System, we call it CAS; third,
a Coordinated Assistance Network, we call that CAN; and a
concerned connection line, which is basically our nationwide
whistleblower hotline.
As a direct result of the enormous public generosity in the
wake of 9/11, we created a national initiative to ensure
conformity with donor intent; in other words, a standardized
system to ensure that donated moneys were applied in such a way
as to honor the intention of the donation. Donor DIRECT, which
stands for Donor Intent Recognition, Confirmation and Trust,
provides affirmative confirmation and acknowledgment to ensure
that donations are directed as intended.
Second, and I believe this one is the most important, we
created the Client Assistance System, or CAS, which is a single
IT system to track in real time client assistance provided to
disaster victims. During 2003, as a result of a major lesson
learned from 9/11, we built a system that could handle up to
300,000 cases of individual financial assistance. That was five
times the amount of assistance provided during 9/11. During the
2005 response to Hurricanes Katrina, Rita and Wilma, we saw
more than 1.4 million cases of financial assistance. Our system
was basically swamped, and as a result we have enhanced CAS
software so that we now have a single system of records to
support financial assistance to upwards of 2 million cases.
This is so important because unless you have a real-time
ability to determine whether someone has come to you and
already received financial assistance--and people can make a
career of applying for duplicate, triplicate payments, as we
saw to some extent during our response to Katrina, Rita and
Wilma.
Third, one of the great successes to come out of the entire
nongovernmental organizations community's response to 9/11 was
the development of the Coordinated Assistance Network, meaning
CAN. Working with other voluntary agencies, and at the urging
of the GAO, the Coordinated Assistance Network provides a
framework and tools to make casework management easier and more
efficient through advanced collaboration. Specifically CAN
allows us to share client information among a group of agencies
that conduct casework using a single secure Website, provided,
of course, that we have the client's permission to share that
information, and can also add additional safeguards to prevent
fraud.
Finally, we have implemented a whistleblower hotline that
we call the Concerned Connection Hotline. It is for use by
volunteers, employees and clients who can confidentially report
through a 24-hour toll-free number any suspected fraud, waste,
abuse or related wrongdoing.
Mr. Chairman, members of the committee, we continue to
strive as an organization to ensure that we have the best
methods in place to detect and prevent fraud from occurring. As
an independent nonprofit agency, this is critical to our
future. Obviously during times of disasters, we must
consistently and responsibly steer the money that we are given
by the American people, and we must be able to demonstrate to
our donors that we vigilantly protect our assets against fraud.
I thank the committee for holding this hearing today and
providing me the opportunity to share with you some of the
ongoing efforts of the American Red Cross since 9/11 to ensure
that we continue to meet the expectations of the American
public during times of disaster, and I am happy to answer any
questions that you may have.
Mr. Rogers. Thank you, Ms. Bradley.
[The statement of Ms. Bradley follows:]
Prepared Statement of Leigh A. Bradley
Chairman Rogers, Congressman Meek, and Members of the Committee, my
name is Leigh Bradley and I am the Senior Vice President for Enterprise
Risk at the American Red Cross.
I want to thank you for providing me with the opportunity to appear
before you today to talk about the American Red Cross response to the
attacks of September 11th--work that is ongoing to this very day. I
appreciate the opportunity to share with you our lessons learned
regarding fraud prevention, detection, and controls.
The attacks on the United States that occurred on September 11,
2001, tested the American Red Cross and America in ways we had not
experienced as an organization or as a nation. It is a day that will
remain burned into the minds of all who witnessed on national
television two of our nation's tallest and proudest buildings fall more
than 100 stories, a massive inferno at the Pentagon and a plane crash
in a remote field in Shanksville, Pennsylvania. Thousands of innocent
people died on September 11, including members of the first response
community who put their lives at risk to save others. Since September
11, thousands more have since suffered from the physical and emotional
stress of responding to these vicious attacks. All who witnessed this
day will remember where they were, what they were doing, and will
always recount their feelings and emotions as we, as a nation, were
overcome with grief.
The American Red Cross had been America's partner in disaster
preparedness, prevention and response for nearly 120 years on that
fateful day in September. In our long history, we have aided soldiers
on the battlefield, supported victims of all disasters, and provided
support to first responders.
Our experience in the aftermath of the Oklahoma City Bombings in
1995 helped to prepare us for this day. Almost immediately after the
first plane struck the World Trade Center, Red Cross volunteers and
personnel were on the scene ready to aid in the response.
I want to acknowledge the work of Alan Goodman who is with me
today. Alan is the Executive Director of the American Red Cross
September 11th Recovery Program (SRP). For the past four years, Alan
has been at the helm of this program, which has provided longer term
recovery to tens of thousands of individuals and families, including
families of the deceased, the physically injured rescue and recovery
workers and their families, and people who were living or working in
the areas of the attacks.
Response to September 11, 2001
One year after the terrorist attacks occurred on 9/11, the American
Red Cross issued a report to the American people regarding the
activities of the Red Cross, the Liberty Disaster Relief Fund, and the
execution of the September 11th Recovery Program. Included in this
report was a chronology of our response, which is attached to my
testimony. (Appendix I)
Before I discuss the Red Cross response to 9/11 and some of the
lessons learned, it is important that I briefly share what the Red
Cross traditionally does during times of disaster and how this response
differed.
The American Red Cross responds to disasters in communities across
the nation each and every day. In fact, we respond to more than 70,000
disasters each year. The vast majority of disasters we respond to are
single family home fires. We also respond to large-scale disasters,
such as hurricanes, floods, tornadoes, and manmade events. There is one
constant in all of our response operations and that is to ensure the
immediate emergency needs of our clients are met.
Individual client assistance has been provided by the American Red
Cross for as long as the organization has been in existence. Red Cross
individual client assistance includes much more than just financial
support. In fact, traditional individual client assistance has been
based on a cadre of services to ensure that the health and welfare
needs of our clients are met. This includes feeding and sheltering
operations, mental health assistance, first aid, and relief and
recovery referrals. We partner with other nongovernmental
organizations, the for profit community, and with all levels of
government to ensure that the emergency needs of disaster victims are
met. In each response, our first priority is to ensure that those
affected by disaster have a safe shelter and are provided with the
basic necessities of life.
The next priority is to assist families in taking the first steps
toward recovery. This is the purpose and concern that individual client
assistance is designed to serve. It has long been the case that while
shelter, feeding and the distribution of critical items are sufficient
to stabilize individuals and families, it is not sufficient to meet all
short term emergency needs necessary for disaster victims to begin
their individual road to recovery. Critical items of assistance such as
resources for food, changes of clothing and bedding bridge the gap
between mass care activities and the receipt of state and federal
recovery assistance. This allows a family a modicum of independence and
a flexible resource for the types of essential items mentioned above.
Ultimately, within the framework of disaster assistance provided by
other agencies, as well as state and federal programs, individual
client assistance helps bridge the gap between mass care activities and
loans, temporary housing, and other assistance.
The response of the American public in the wake of 9/11 was
extraordinary. When thousands of Americans needed help following the
attacks, tens of thousands volunteered with the Red Cross, and tens of
thousands made financial contributions. The American Red Cross received
more than $1 billion in contributions. While the Red Cross often
provides financial assistance for the immediate emergency needs of our
clients, the intent of our donors was to ensure this money was
earmarked for the victims of 9/11.
To that end, we created the Liberty Disaster Relief Fund as a
distinct and segregated fund for those financial donations and to
assist those directly affected by the September 11th attacks. Former
Senate Majority Leader George Mitchell was appointed as the independent
overseer of the fund. Under the distribution plan, and consistent with
the Red Cross mission of providing immediate emergency disaster relief,
the majority of funds were to be distributed to the families of those
who were killed in the September 11 attacks, those who were seriously
injured, and others directly affected by the disaster.
For an organization that is accustomed to providing de minimus
amounts of financial assistance--money that is meant to provide for
immediate emergency needs such as a change of clothes, toiletries, or
diapers for children--this meant providing much larger sums of money.
The American Red Cross had two phases of response to the tragic
events of September 11. Phase One represents the immediate response to
the terrorist attacks, dating from September 11, 2001 through October
1, 2002, and is referred to as the Relief Operation Phase. Phase Two
encompasses the long term recovery effort, dating from October 2, 2002
to the present, and is referred to as September 11th Recovery Program
(SRP) Phase.
Relief Operation Phase
Family Gift Program #1 (FGP I)--The FGP I provided
three months of rent, food, utilities and other ongoing
expenses to family members of those missing, deceased, or
injured from the World Trade Center (WTC), Pentagon, or
Shanksville, Pennsylvania events.
SRP Phase
Family Gift Program #2 (FGP II)--The FGP II began on
December 6, 2001, and provided six months of living expenses to
family members and injured clients who received FGP I and nine
months of expenses to clients who initially sought financial
assistance after December 2002.
Family Gift #3 (FGP III)--FGP I and FGP II met the
early financial needs of the victims covered under the Family
Gift Program. The first two gifts were designed to cover the
first nine months of living expenses and these gifts were all
disbursed prior to June 30, 2002. In January 2002, the Cross
determined that the Family Gift Program should also cover unmet
essential living expenses for an entire year through September
11, 2002. The third Family Gift (FGP III) was created to cover
expenses for the months ending on September 11, 2002. The third
Family Gift (FGP III) was created to cover expenses for the
months ending on September 11, 2002. No funds were distributed
for FGP III until July of 2002.
Specifically, FGP III granted expenses, depending on whether or not
clients received the previous two gifts, to financially dependent
immediate and extended family members of decedents, child guardians,
and the ``seriously injured.'' The ``seriously injured'' were defined
as individuals who were in the immediate vicinity of the WTC, the
Pentagon or the Pennsylvania crash site on 9/11 and as a result
suffered a verifiable, serious physical injury or illness for which
they were admitted to a hospital for at least 24 hours between 9/11 and
9/18/01. The FGP III ended on June 15, 2004.
The Supplemental Gift Program--The Supplemental Gift
Program began in August 2002. Each estate and seriously injured
client was originally eligible to receive a gift of $45,000 to
be distributed to those individuals named as executors or
administrators of the estate. In November 13, 2002, the Liberty
Committee approved an increase of the gift amount to $55,000.
To be eligible for the Supplemental Gift, injured clients must have
met the FGP III criteria and additionally have been totally disabled
for 90 consecutive days. Gifts to estates were awarded with the agreed
upon restriction that they be distributed only to individual
beneficiaries, rather than to charities or academic institutions.
Supplemental gifts made to the seriously injured have no other
restrictions following verification of eligibility.
Special Circumstances Gift Program (SCG)--The SCG
Program is a needs-based gift provided to seriously injured who
qualified for the Supplemental Gift as well as financially
dependent extended, nontraditional, and traditional family
members who were eligible for the FGP III, had not received
substantial amounts of assistance from other sources, and
continued to have unmet needs. All awards were determined by a
Review Committee on a case-by-case basis, taking into account
the individual's unmet financial needs, the level of dependence
on the deceased and any 9/11 related special circumstance. The
SCG ended in December 2004.
Disaster Responders--Clients who were officially
deployed as disaster responders to the WTC, Pentagon, or
Pennsylvania are eligible to receive all of the above benefits
if they meet other specific criteria, such as for injury or
economic need.
Additional Assistance--An additional assistance
program began in April 2003 to assist disabled individuals and
family members. Eligible clients were able to receive up to six
months of financial assistance for demonstrated unmet,
essential housing and living expenses. This program ended in
December 2005.
To be eligible, family members were required to demonstrate
financial need and one of the following: financial dependence upon the
decedent, a mental health condition that led to a continuous 90-day
period of disability, or had been appointed the legal guardian of the
minor child/children of a decedent. Disabled individuals were required
to have suffered a 90-day disabling respiratory, mental health or
physical disability and demonstrate financial need.
Joint Relief Operation Phase and SRP Phase
Displaced Residents--Clients whose primary residence
was south of Canal Street in Manhattan and who were displaced
from their homes, had their homes damaged, or had access to
their homes disrupted were eligible to receive assistance which
may include relocation, temporary housing costs, rent/mortgage,
cleaning, moving, storage, and air purifiers.
Economically Impacted--Clients who worked below Canal
Street in Manhattan and were unemployed due to the 9/11 attacks
were eligible for three months of assistance with rent, food,
and utilities until February 7, 2002. After February 7th,
clients were eligible for a one month grant disbursed according
to household size. The last day for economically impacted
clients to register for Red Cross assistance was March 28,
2002.
In total, the September 11 Recovery Program has provided support to
nearly 60,000 individuals and families directly affected by the
September 11 terrorist attacks. While the direct services provided by
SRP, including financial assistance and referral to social work
agencies for case management needs, ended on December 30, 2005, the
program had been established around five major initiatives:
Long Term Mental Health Services--based on financial
need, this program provided financial assistance for services
including individual, group and family counseling; psychotropic
medication coverage; hospitalization; and inpatient and
outpatient substance abuse treatment. Programming will continue
through the end of 2007.
Long Term Health Care Services--this program provided
financial assistance and clinical case management for uncovered
health expenses directly related to injuries or illnesses
caused or exacerbated by the events of 9/11.
Family Support Services--This program provided
individualized support and guidance to eligible families to
ensure that they had access to the resources they needed for
their recovery. Trained Red Cross Family Support specialists
assisted with determining health care and mental health needs,
identifying resources, making referrals, providing assistance
through three financial assistance programs, identifying long-
term needs and planning for the future.
Assistance to Residences--For displaced residents with
ongoing needs, the Red Cross provided air purifiers and HEPA
vacuums, helped to relocate individuals and families, and
provided reimbursement for expenses incurred during
displacement. In addition, this program offered mental health
assistance to affected residents who experienced emotional
trauma as a result of 9/11.
Communication Coordination--To help meet the needs of
those affected by the September 11 attacks and maximize
efficient use of resources, the Red Cross coordinated with
other groups including community organizations, constituency
groups, advocacy organizations, local elected officials, faith-
based and interfaith organizations, and other nonprofit and
government agencies providing direct services and benefits to
those affected. The Red Cross is a founding member of the 9/11
United Services Group (USG), which coordinated 13 service
agencies to help ensure that those affected by the events of
September 11 were able to get the help they need. The Red Cross
assisted the USG in developing a shared database that has
helped various charities provide financial assistance and
services to victims of the September 11 attack more
efficiently.
At the end of the first quarter of 2006,\1\ the Liberty Disaster
Relief Fund had collected a total of $1.080 billion. Approximately $738
million of the funds received has been expended in financial assistance
to those directly affected; $159 million has been expended for
immediate and long-term program costs; $66 million has been expended
for indirect services; and about $60 million has been used for fund
stewardship. As of the end of March, 2006, $55 million remained in the
Liberty Fund.
---------------------------------------------------------------------------
\1\ These figures represent contributions and expenditures through
March 31, 2006 and are the most current data available. The next report
of the Liberty Disaster Relief Fund will be released on the fifth
anniversary of 9/11 on September 11, 2006.
---------------------------------------------------------------------------
The Red Cross will use the balance remaining in the Liberty
Disaster Relief Fund to support non-profit agencies that can deliver a
variety of services to the people whose lives were the most seriously
affected by the terrorist attacks in the communities where they live
and work. These services include mental health and wellness for adults,
adolescents and children; health diagnosis and treatment for rescue and
recovery workers; financial assistance; and community recovery in lower
Manhattan.
Fraud Prevention, Detection and Controls
Waste, fraud and abuse are very serious issues to the American Red
Cross. As an independent nonprofit agency, we rely on the donations of
the American public to provide services free of charge to victims of
disaster. We have an obligation to our donors to ensure that we are
good stewards of the donated dollar. The Red Cross treats its
obligation to deter and detect fraud or abuse with the utmost
seriousness and when appropriate seeks prosecution of fraudulent
activity to the fullest extent of the law.
During times of disasters there are individuals who take advantage
of the generosity of the American people and of the very agencies and
institutions that provide services to those in need. That has held true
in all Red Cross disaster responses, and unfortunately, it was evident
during our response to September 11. Attached to my testimony are
examples of fraud that we witnessed as an organization during our
response to September 11. (Appendix II)
We learned a number of valuable lessons in our response to 9/11 and
have implemented a number of changes in the Red Cross response to
disasters and to prevent, detect and control fraud. I will address some
of the lessons learned and elaborate on fraud prevention, detection and
controls that have been put in place as a result of our response to 9/
11.
But first let me describe the 9/11 compliance and enforcement
response. 1,473 cases were investigated by the Red Cross involving
actual or potential allegations of fraud, and many of these cases were
referred to federal, state and local prosecutors for full investigation
and prosecution. There were some cases that were not pursued by law
enforcement and these were reviewed by the Red Cross for possible civil
prosecution as I discuss below.
Methods of Prevention
The Red Cross executed a number of policies and methods to mitigate
fraud from occurring. These include:
1. Except where immediate assistance was necessary, require
applicants for assistance to document financial need and/or
injury caused or exacerbated by the disaster.
2. For every eligibility requirement, we established a
corresponding documentation requirement that was specific and
enforced.
3. Required applicants to affirm that the information provided
and recorded in the case file was accurate and true.
4. Whether automated or manual processes, developed more
effective case tracking mechanisms to detect and track fraud
and ensure that those not entitled to benefits did not receive
them.
5. Implemented at the outset of any disaster relief effort the
types of fraud detection and prevention efforts, including
cooperation with other charities and governmental entities.
6. Make certain that all decisions about program design and
eligibility criteria were made by a centralized authority and
were communicated to the field clearly, in writing.
7. Developed forms and procedures that minimize discretion for
case workers and clearly articulated the ground rules for
discretionary decisions by supervisors.
8. Delineated clearly the responsibilities of all those
involved in the review and approval process by making clear
that someone was obliged to make sure all necessary information
and documentation was provided.
Methods of Detection
Detection of fraud in the aftermath of September 11th occurred in a
variety of ways. The most prevalent and successful methods include:
1. Casework--Many cases involved the presentation of false
documents, false identities and false victims.
2. Internal Controls--Disaster Accounting was alerted to
duplication of benefits, forged checks, changes in address,
etc.
3. Neighbors, Family Members and Associates--Individuals would
alert the Red Cross to the possibility of fraudulent claims,
which were investigated.
4. Law Enforcement--Red Cross was alerted to on-going
investigations involving FEMA, NYPD and NYFD as to the
possibility of fraud.
5. Case Audit Unit--would discover inconsistent data,
documentation and statements, which would lead to further
investigation.
The Red Cross identified 20 cases as possible targets for civil
suits. Hogan & Hartson LLP, a nationally recognized law firm,
represented the Red Cross in these civil proceedings on a pro bono
basis. After further investigation on these 20 cases, we decided to
refrain from pursuing ten of the 20 cases because of factors, such as
an inability to locate and serve the defendant with legal process or
the defendant did not have sufficient financial assets that could
satisfy a judgment. However, we filed suit in the remaining 10 cases.
The total amount sought to recover in these 10 cases is $111,352. As of
this date, two cases have been completed, with $25,894 recovered
through settlements. There is a settlement in a third case for $15,600,
with monthly payments of $100 for 156 months. The defendant made the
first payment but has defaulted on remaining payments. We have filed a
motion with the court to enforce the settlement agreement, which is
pending. We have obtained a default judgment in a fourth case and we
are moving forward with the appropriate procedures to garnish the
defendant's wages. The remaining six cases are in various stages of
active litigation.
One of the lessons that the Red Cross learned from 9/11 was the
need to more aggressively pursue fraud perpetrated against the Red
Cross though the civil court process and to include verifying that Red
Cross insurers kept their commitments to pay fraud claims filed by the
Red Cross. Two cases illustrate this point.
In the Southeastern Connecticut Chapter matter, the
Red Cross filed an employee dishonesty claim with Royal
Insurance Company arising out of the embezzlement of 9/11 funds
by the Executive Director of the Southeastern Connecticut
Chapter. The Red Cross filed a claim with Royal for $173,657,
the total amount of the loss, even though the local prosecutor
valued the provable loss as $120,000. In December, 2003, the
Red Cross reached a settlement of our claim with Royal for
$97,710. The policy at the time had a deductible of $50,000, so
we received from Royal $47,710. It was determined between the
Chapter and Red Cross National Headquarters that the Liberty
Fund would receive 79% of this settlement.
In the Hudson County Chapter matter, the Executive
Director of the Chapter embezzled $1,113,577 from the Chapter
that was a provable loss. With additional costs associated with
the embezzlement that were covered by our fidelity loss policy,
the total claim submitted to Royal Insurance was $2,490,593.70.
Royal Insurance paid part of the claim in the amount of
$1,676,024.65 in August, 2003, leaving $787,796 as an amount
that Royal said was not covered by the policy. The Red Cross
filed suit against Royal and the case was settled for $475,000
in November, 2003. Thus, the total amount recovered from Royal
in this matter was $2,151,024.65.
The Red Cross will continue to work with federal, state and local
law enforcement regarding fraud against the Red Cross and will actively
pursue in the civil courts those provable cases not prosecuted in the
criminal courts. The Red Cross also will file appropriate claims with
its insurance companies and will pursue claims for any fraud losses
against those insurance companies that wrongfully deny claims.
Methods of Controls
The detection and prevention of fraud is a small, but important
component of the design of a disaster relief program. The September
11th Program provides myriad examples of the kinds of fraud that people
will try to perpetrate if substantial sums of money are available. Many
types of fraud can be minimized by taking proper steps in the design
and controls of the eligibility criteria and documentation requirements
for the programs.
In developing a response to any disaster, the Red Cross must do at
least two things; 1) define the individuals who are eligible to receive
assistance and; 2) define the assistance that each will receive.
An important issue for defining eligibility is creating an
authoritative list of those who are entitled to benefits/assistance.
This was an ongoing problem for all of the charities that responded to
the September 11 attacks. In a future disaster, it will be important
for the charities and governmental entities to work together to develop
a comprehensive list of those injured, deceased, and entitled to
benefits. Where an individual seeks benefits for a relative who is not
on the list, some additional documentation should be required.
Additionally, documentation beyond a simple assertion that an
individual was killed must be provided for claims of death. Many of the
significant cases of fraud against the Red Cross (in dollar terms)
occurred when people falsely claimed that a loved one had been killed.
A well-designed program with appropriate levels of controls should
balance the interest in minimizing fraud with the interest in ensuring
that victims receive assistance without undue administrative burden.
Failure to obtain adequate documentation or documentation of any
kind was a significant problem in the early Family Gift Programs (FGP
I; FGP II) when the standards of ``assumed'' and ``attested''
eligibility were utilized. Many case files have nothing (other than
case worker notes) to substantiate the claims made or the assistance
provided. This problem was rectified when the ``demonstrated''
eligibility standard was used for the final family gift distribution.
Although there are numerous examples of individuals who forged
documents, a substantive amount of fraud was committed by those who
lied, but were never asked to provide documentation to back up their
claims. A number of additional suspected fraud cases were identified
when applicants were unable to provide the required documentation to
substantiate their additional claims of ongoing financial assistance.
Finally, those who design future financial assistance programs must
be cognizant that the ability often given to case workers to be
creative and flexible in helping applicants to obtain benefits or
assistance often has the effect of encouraging case workers to bend or
break rules for eligibility. To the extent such flexibility is
encouraged, it should be done at the supervisory level and it should be
clear that flexibility cannot result in providing additional funds to
those who are not eligible.
Coordinated Assistance Network (CAN)
One of the great successes to come out of the entire
nongovernmental organization community's response to 9/11 was the
development of the Coordinated Assistance Network (CAN). Our
experiences in 9/11 showed clearly that having clients find their way
through a web of service providers caused added confusion in an already
trying time. Several disaster clients were lost within the improvised
system; others were shuttled from appointment to appointment, having to
tell their painful story time and time again.
The Coordinated Assistance Network provides the framework and tools
to make casework management easier and more efficient though advanced
collaboration and also adds additional safeguards to prevent fraud. CAN
enables disaster clients to visit any one of the participating
organizations, tell their story, provide required documentation, and--
with their permission--have that information shared automatically with
the partner agencies that are able to assist them. Through a secure,
web-based system, an agency can instantly review each client's specific
situation and the services received--in real time--helping to provide
better services to the client, eliminate duplication of benefits, and
measurably lessen the burden for each participating agency.
Since 9/11
In addition to the valuable lessons we have learned and
incorporated as a result of our response to 9/11, our nation has
continued to see individuals take advantage of the generosity of the
American public and the agencies responsible for helping victims
recover from disaster. This past year, the American Red Cross provided
assistance to more than 1.4 million families impacted by the
devastation wrought by Hurricanes Katrina, Rita and Wilma. $1.2 billion
of emergency financial assistance was provided to those million
families. To stop those that attempt to cheat the system, the Red Cross
participates in the Department of Justice's Hurricane Katrina Fraud
Task Force, which also includes members from the FBI, the United States
Secret Service, the Federal Trade Commission, the Postal Inspector's
Office, and the Executive Office of the United States Attorneys, among
others. The Red Cross is assisting in hundreds of investigations now in
progress. Every resource is precious to the Red Cross and we are taking
every measure to aggressively pursue any illegal activity. To date,
there have been 76 indictments and 55 convictions.
As of June 14, we are investigating 7,109 cases of suspected and
actual fraud. These represent a combination of cases turned over to law
enforcement and cases being investigated internally. We estimate the
potential of approximately $9.5 million in cases stemming from this
fraud.
There were instances where individuals or families received
duplicative assistance that was neither fraud nor abuse on behalf of
our clients, but rather a simple oversight or human error. I am pleased
to report to this Committee today that as of May 1, 2006, the American
Red Cross had collected $2.3 million in returned assistance from
clients who had received duplicate payments.
As a result of the fraud we have experienced during and since 9/11
and the 2005 hurricane season, the American Red Cross is incorporating
even stronger controls to mitigate future abuses. These include
improvements to our Client Assistance System (CAS) software, with
reporting enhancements to provide a single system of record to support
the delivery of assistance to those in need; and improvements in
chapter advance procedures and new monitoring and control processes to
support the use of the cash-enabled client assistance cards (CAC).
Closing Remarks
Mr. Chairman, Congressman Meeks, and Members of the Committee, I
want to thank you again for providing me the opportunity to share with
you our experiences in our response to September 11. The American Red
Cross provided assistance to nearly 60,000 individuals and families
impacted by the devastating attacks on America on September 11, 2001.
As the September 11th Recovery Program begins to wind down nearly five
years after the first plane struck the World Trade Center, the American
Red Cross continues to respond to disasters, both natural and manmade,
each day in communities across the country.
We are proud to be America's partner in disaster prevention,
preparedness, and response, and we urge all Americans to be prepared
for whatever disaster may strike.
I am happy to respond to any questions you may have.
Mr. Rogers. And I would like to start with the questions,
but first, I would like to make an acknowledgment. In listening
to Ms. Hearn, Mr. Varoli, and Mr. Getnick, what you had to say
with regard to the debris removal after the attack in New York
City, was accurate from all of our staff's efforts. It appears
that that was a shining moment for the City, and FEMA did an
exceptional job in removing that debris under budget, far under
budget, in half the time it was anticipated. So that really was
a time, as you put it, when folks were working in collaboration
and in a proficient way.
Having said that, Mr. Varoli, according to media reports
that had to do with what spurred these hearings, there is at
least $63.2 million in FEMA money for Ground Zero clean-up that
was paid to companies accused of mob ties. Is this accurate,
and if so, how did it occur?
Mr. Varoli. I am stumbling in response because I don't know
where that number came from. I am not familiar with the 63.2 or
who the contractors were. I would maybe look to Commissioner
Hearn if she is aware of that number. I am not.
Mr. Rogers. Set aside the amount. Mob ties at all. Were you
aware of any mob activity in the debris removal activities?
Mr. Varoli. I personally was not aware. The way DDC was set
up, and I tried to highlight in the testimony, we were there to
provide the expertise of the construction and the engineering
issues that arose. We looked to KPMG as our assistant, as the
engineering audit outsource firm, and we looked to DHS with the
expertise in rooting out foreign corruption, and I believe they
also looked to and relied upon the monitors, so maybe I would
refer to Mr. Getnick.
Mr. Rogers. Mr. Getnick, are you aware of any mob ties to
debris removal activities?
Mr. Getnick. Yes. I would like to speak to that because I
think it goes to the heart of the inquiry. This morning it goes
to the remarks of Congressman Pascrell at the start of the
hearing today. Just so we identify where Getnick & Getnick fit
into the process, the World Trade Center site was divided up
into four quadrants, and on each of those quadrants there was a
construction manager. And so we were one of the four integrity
monitors assigned to the quadrant which was the Turner
Construction site.
So, for example, you mentioned the Daily News article. I am
going to speak to the Turner quadrant, and that is sufficient,
because in the Daily News article they identified $26.7 million
of the moneys you are talking about.
What the article map of Ground Zero was supposed to say
back on December 5th was that Turner Construction hired a
contracting company that was owned by an individual who was a
reputed Lucchese associate, one of the five families who was
indicted in 1995 on charges of using a bogus minority-owned
business to legally win government work, and as the article
then goes on to say, charges were later dismissed. And this
contractor was--contracting company was paid $26.7 million.
So that is the nature of the allegations with respect to
that particular quadrant, and if you take your figure, you have
the same type of methodology which you build up.
And what I really want to get into is the nuts and bolts of
how you deal with a situation like that real-time, real
situation. Let us dig down and see what we have and what we
don't have there, because exactly what was reported was exactly
what the monitors uncovered.
We have a company 6 years earlier where an individual who
is in a principal position was indicted for a crime that did
not result in a conviction. So you don't have a convicted
company. You don't have a company that is currently under
indictment. You have a company that has an individual who is a
reputed Mafia associate, and what do you do with that?
Well, here is what they do with it. First of all, you have
to use your intelligence, literally your intelligence and your
intelligence sources to find out about it right away, which is
exactly what we did. And then when you find out about it, you
report it. You report it to DHSOI, you report it to DDC, and
you essentially set up a triage just the way you have a triage
in an emergency room: Here are your serious cases, the next
ones, the least serious cases. And you go, this is a serious
case. We have to be on top of that. We have to see who is this
contractor now subcontracting to, and sure enough you look at
the subcontractor, and one of the subcontractors we found again
is a very similar situation. You look at the principal. The
father of the principal was indicted but not convicted. So
again, you are not going to be in a situation to throw someone
like that off the project. You can't debar the company, but you
can certainly dig down and make sure that you are concentrating
your resources there.
So in that particular situation, we did just that by using
investigators in the field, by using forensic accountants who
are going to the home office examining some records, and then
using lawyers to put that together from an evidentiary point of
view.
Mr. Rogers. Do you believe the $63 million figure is
accurate?
Mr. Getnick. It is possible that number is accurate. We
have to understand what the number represents. So, for example,
in the case that I just said, we started out with an initial
requisition, which was a $2 million requisition, worked at it,
sat down and knocked out the problematic billings to under
$800,000.
So now we are going to ask a question: What happened to the
$800,000? Did that get paid to a company that at one time was
under an indictment that never got convicted; that used a
subcontractor; that in turn the father of the current owner was
indicted for a case who was never convicted? Yes. That is where
the $800,000 went.
But the important thing is that the $800,000, which was
less than half of what was billed, was an appropriate amount to
pay for work that was actually performed. And the $1.2-plus
million never got paid. And guess what? That requisition came
in less time and less problems because everyone understood real
time, real basis, these questions were being asked.
So I think at the end of the day the fair answer to the
question is that money was paid, but that money was not paid to
companies that were convicted. That money was not paid to
members of the Mafia. That money was paid after it was
scrutinized to make sure it was going for its intended purpose.
Mr. Rogers. Ms. Hearn, would you concur with Mr. Getnick's
observations?
Ms. Hearn. I do, and I discussed it with him at length. And
I think that the Daily News articles are a terrific
illustration of why DOI needed to be down at the site doing
what it did.
I think that everybody knows that former Mayor Giuliani is
a former Federal prosecutor and an organized crime prosecutor
at that, and he recognized early on as surely as night follows
day that organized crime would be looking to get into Ground
Zero. Billing schemes are perpetrated on U.S. companies under
nonemergency circumstances. Billing schemes in the construction
business, demolition trade, waste business, which is what this
project was, are pervasive with organized crime.
We knew what we were up against, and that is why we were
down there. And that is why we had a presence at the four
quadrants for which I gave you a diagram, physically out there
counting heads, who is there, what equipment is there.
Equipment is being moved around every hour, every day. What are
we being billed for? Who are you, Mr. Truck Driver, and so
forth and so on, doing best efforts to figure out who was down
there. And without issuing a press release, I can tell you that
some of the individuals and companies listed in the Daily News
articles were, as we say, invited off the site.
Mr. Rogers. Thank you very much. My time has expired.
The Chair now recognizes the Ranking Member and any
questions he may have.
Mr. Meek. Thank you so very much, and I want to commend all
of you for your efforts in your different areas of involvement
with this whole recovery, and also understanding of what has
happened and how we can improve on what is good, and also
hopefully do without those setbacks that we found along the
way.
Ms. Bradley, I wanted to ask you a question about the Red
Cross. The Red Cross plays a very strong role in the recovery
process. We have FEMA and all of these other agencies that are
responding, but it is the only entity outside of the General
Baptist Convention--I think they come in third or fourth as it
relates to recovery efforts out there. Southern Baptists. I'm
sorry--that respond mainly with food and not assistance. You
can correct me about who comes in second or third.
But when it came down to this event, the issue of fraud, I
believe you were here for the first panel, and we have talked
about the past. We are talking about the future at the same
time, and we are talking about the present. As we speak now,
several hundreds of miles away from here along the gulf coast,
a lot of this is still being played out with Red Cross, FEMA, a
number of other agencies, and to be able to stop the fraud from
happening, we have to know that we have put things in place to
stop it in every way.
I was trying to find out in the panel of trying to get the
panelists, I guess, to work together, and especially FEMA, to
give us some direction on what they are doing as it relates to
verifying real residency. Now, we know that some folks are out
there, and they are going to say some things, and when the
folks--well, the individuals go out and they say, I am going to
lie, I am going to try to steal. That is a hard will and desire
to toss water on, especially when they are there knowing that
everyone else is running around and the pressure is on to get
dollars out the door.
I am saying all of that to say that I couldn't help but
take a look at your testimony on page 5 where you talked about
your civil case. I think 20 of them were identified; 10 of them
were actually prosecuted. I think $111,000 were recovered.
I believe on the Website it said you helped 60,000
individuals as it relates to the whole 9/11 experience.
Looking at that, I know you use another statistic, over
100-some-odd people or 90-something were prosecuted. These
individuals are carrying out fraud. They hit them well in the
pocket. Why did the Red Cross only go after so far those that
were involved in fraud civilly?
Ms. Bradley. Let me first explain to you. I think it is an
important context to give to the discussion. At the American
Red Cross every day we balance two vitally important missions,
and one is getting emergency assistance into the hands of
disaster victims, whether it is a natural disaster or manmade
disaster. But equally important is making sure that we are
going to have money to perform those missions. So we have got
to constantly assure our donors that we are vigilantly
protecting our assets, meaning their money. So there is a
constant balance of trying to look at the situation, and
particularly in the chaos of the first few days or weeks of a
catastrophic disaster, we have to make some determinations on
whether or not we are going to err on the side of getting
services relief into the hands of people who so desperately
need it versus making sure that we have an ironclad system. And
the hope every day when we come to work is that we sort of
strike just the right balance, meaning that there will always
be ways for criminals to infiltrate our system.
So the idea right now, particularly after Katrina, Rita and
Wilma, at the Red Cross is to provide as much capability to
prevent fraud as we possibly can, and that is why I mentioned
our CAS system. It is a computer, it is an IT system that
allows--it is all in one place, and you can upload client
information so that if Leigh Bradley takes your client
information, your ID, it is going to go into our IT system so
you can't go 100 miles down the road and try to convince us
that you have never gotten any assistance from the Red Cross
before, because somebody is going to know right there in front
of them on a computer screen that, wait a minute, let me ask
you a few questions. Did you, in fact, receive client
assistance just a week ago, let us say, in Montgomery, Alabama?
Mr. Meek. I don't want to cut you off, but I was mainly
asking my question towards the civil cases. Why only 20 and why
only 10 were--you decided to move forth on all of the fraud
cases, and the reason why I am asking the question is that so
many Americans did pull their debit card and credit card out of
their wallets and call the Red Cross, and it is like even
individuals that lived in the New York area, and I have
constituents who do the same things with Wilma, Katrina. I
personally did it, and when you hear about the fraud, it is
like the incident taking place all over again. It is like you
are being victimized again even though it may be small.
I think it is important to say that we have very--we have
strong fraud prevention in place; not only are we going to go
after criminally, but go after in a civil way so that we hit
them in a way they hit us, and us meaning the people of
goodwill, Red Cross donors and all. That was my question. But I
hear exactly what you are saying in your system.
I just want to go back to what you were answering, another
question. In your system do you have the ability to find Social
Security numbers and verifying addresses with your in-house
system that you have at the Red Cross now with your CAN system?
Ms. Bradley. We, too, like FEMA, used ChoicePoint during
Katrina, Wilma and Rita. We don't have the kind of database
that would be required not--it is not so much to check Social
Security numbers, it is a special database that allows us to
ask additional questions. Maybe you come in to see me, you
don't have your wallet. You have to leave your house without
anything. Maybe you have never owned a home before. So you come
to me and you say, I need assistance, and our system might have
some information about you, some specific, uniquely identifying
information about you. But in order for us to verify and
authenticate your identification, we need a much more complete
and robust data system, and it doesn't have to be ChoicePoint.
We happen to contract with them because we felt like that they
had really sort of the best product on the market at the time.
And that is how we conduct identification verification and
authentication.
And then to answer your question about the civil cases,
because I definitely want to make sure that everyone is clear,
I feel like we are about as vigilant as any organization in
this country in pursuing cases, and the only reason we are
pursuing some of the cases civilly is because we have exhausted
the criminal remedy, and we can't seem to get those cases
prosecuted, but we don't want to give up even though it is
2006.
So as I said earlier, we have--we received 1,473
allegations of wrongdoing, and we continue--as I mentioned, we
have 213 remaining cases that are being investigated. We have
20 pending cases that hopefully will go to trial soon that we
will have resolved. So we continue to work hard on the criminal
side of the house, but when we don't get the relief that we are
seeking from the criminal justice system, we will pursue them
civilly.
We have also hired Hogan & Hartson, a nationally recognized
law firm, to work up all of the civil cases for us, and I want
to report to you--I am happy to report to you they are doing
all of that work on a pro bono basis, and there will be more
cases. But I will admit that if the scales are weighted, they
were certainly weighted on the criminal side, and I will tell
you why: Because we found out that it had a real deterrent
affect for us.
Let me give you a quick example. In 9/11 we didn't have any
clients return money to us. In Katrina, Rita, and Wilma, we
have had over $2 million in client assistance returned to us
already without even asking them to do this. And we believe it
is the determination of pursuing these cases in the criminal
arena that has helped us get the money back, and we will pursue
other options, too. I hope that--
Mr. Meek. Thank you very much. We were trying to figure out
the system of verifying. Thank you. My time is well overdue.
Thank you.
Mr. Rogers. The gentleman's time has expired.
The Chair will recognize Mr. King for any questions he may
have.
Mr. King. I want to thank all of the witnesses for their
testimony today and for what they have contributed, I believe,
to a very worthwhile hearing.
Ms. Lemack, are you a resident of New York State?
Ms. Lemack. No.
Mr. King. They are entitled to lifetime mental health
coverage through the New York State Compensation Fund.
Ms. Lemack. It might be capped at $25,000. At least that is
how it is in Massachusetts.
Mr. King. It is my understanding it is lifetime.
Ms. Lemack. I was saying in Massachusetts the Victim
Compensation Act is capped at $25,000.
Mr. King. My understanding is it is unlimited.
Ms. Lemack. In Massachusetts it is also per family, so if
you have five children in one family, they are all drawing off
of that.
Mr. King. I thought I would maybe give you some free
advice.
Ms. Lemack. Trying to get me to move.
Mr. King. Love to have you in New York.
I think it is important to put this in perspective, because
as someone who was close, I was able to watch a lot of what
went on. I thought the recovery effort considering everything
was monumental, and it really did represent the best of the
City and of its people, and I think it is unfortunate that even
though they are isolated, that any event at all has put any
kind of a cloud over that. But I think it is very significant
that considering the absolute enormity of the devastation, what
was done was done as quickly as it was. And it is important to
note that--I mean the City employees who contributed, you talk
about the employees, EMS workers, design and construction, DOI,
you can go through the whole list of City employers were there
day after day. As far as I know, there was not even payroll
missed by the City. People didn't lose work. They were there,
and I think it is something that should really be brought out,
and you did a good job of putting this all into perspective.
Especially, Mr. Varoli. I was reading your written
testimony. I think it is important for people to realize what
was going on at that time and what the City was confronted with
and how it overcame so much. I think it is extraordinary.
Let me take you back to September 10th, and if you can go
back to September 10th and recite any laws or regulations or
any procedures, I would ask any of the three of you what you
would have done if you can go back to that day, which would
have prevented as much of the fraud and abuse that did exist,
and I am putting it in context. I believe in the overall
picture it was not significant, but again, even $1 wasted funds
in the face of such a tragedy is wrong. But if you can go back
to September 10th, 2001, what changes would you have made,
whether it is a city charter or regulations or, you know,
provisions applying to disasters, construction projects, that
could have perhaps avoided some of that fraud that did occur, I
guess, down the line?
Ms. Hearn. We have in place at DOI at any given time a
precleared, prevetted list of monitors in various fields of
discipline that are ready to go in any situation. The City
School Construction Authority Inspector General has a
precleared, prequalified list of contractors and subcontractors
ready to go to build schools in the city, and so that list was
drawn upon when folks were being put in place for 9/11.
There is an agency in the city of New York which is called
now the Business Integrity Commission. I believe that you
received some written testimony from them. At the time they
were called the Trade Waste Association. They are a small city
agency whose job is to keep mob-related trade waste and haulers
out of licensed city business, and so that is an agency that
was in place with a database of licensed carters and debris
removers. That was drawn upon on 9/11.
So I think that the answer is--it is a conceptual one. It
is not a specific one. It is that whatever you can do to not
have to scramble when the disaster hits is helpful. And the
city, you know, drew upon those different existing procedures
that were in place to deal with our nonemergency matters that
come up in such a large city. And then, of course, you had
unbelievably strong leadership in city government at the time,
and you did have a formidable prosecutor. Mary Jo White was the
U.S. Attorney of the Southern District at the time. I was
working for her at the time. I was a Deputy Chief of the
Criminal Division in the Southern District up until December
31st, 2001, and then I became the DOI Commissioner.
So really everybody just mobilized both to try and prevent
what we surely knew was to be a magnet for fraud and organized
crime, and I think that the early days or weeks at the site
were probably pretty chaotic. And I think that it probably took
until October or so for all of these different enforcement
mechanisms to get their arms around the situation, but they
then did take control and got a handle on who and what was down
there, and there was scrutinizing billing. And it is not news
that there is mob ties in the construction business, but we
sure made our best effort to make sure there were no indicted
companies down there or anybody who we knew or learned who was
of that ilk working down there.
Now, there were companies listed in the Daily News article
that were paid various moneys, and the monitors would tell you
that every nickel of those moneys paid out to those firms was
scrutinized beyond belief by the monitors, and not just looking
at a piece of paper, but by being down there and comparing what
they saw with boots-on-the-ground kind of surveillance to what
was being billed for.
And so I don't want to speak for Mr. Getnick. He is one of
the monitors from one of the quadrants. He can attest to this
himself, but he has told me, and the other monitors have said
the same, that they feel that any money that went out towards
those expenditures in the Daily News articles were for services
that were rendered. Who they were rendered by, you know,
associates of who they were rendered by notwithstanding, they
were for services rendered. And any companies that really were
not companies that DOI, the monitors felt should not be down
there, even if they were rendering services, they were invited
off the site, as I have said.
Mr. King. Mr. Varoli.
Mr. Varoli. It is an incredible question and I am not sure
I can answer it fully. I guess what I would suggest is what
would have been helpful on September 10, some way of having in
place contracts with contractors, so the situation that arose,
which I believe came up in the previous panel, with the one
photographer in FEMA would not have occurred if there were set
contracts or at least forms of contracts in place either by
FEMA or by the city of New York saying, okay, these are the
emergency contracts.
In addition, what I think was helpful and what I spent most
of my time working on was dealing with the contractual issues
specifically with the construction managers and vis-a-vis the
subcontractors. There were lots of issues and concerns
expressed by the construction managers and by the city of New
York to some degree on the issues of insurance and
identification. And if that had been dealt with up front on
September 10, and if we had onboard or on the shelf what
sometimes we refer to requirements of an emergency contractor
in place who has the coordination and skills and ability to
take on the debris management side, that would have I think
saved some additional time.
Again, we did this in 9 months. Original projection, 2
years. We did this less--I think the dollars come out to $467
million. Again, we were looking at--at least over a billion
dollars. So it is hard to say, you know, we could have done
that much better. But those are some of the things I can think
of off the top of my head.
Mr. King. Thank you. Mr. Getnick.
Mr. Getnick. Yes thank you.
I understand that the committee is considering legislation
which will address fraud prevention in disaster relief
programs. So I want to speak to the whole point of integrity
monitors and this term I have been using, IPSIG, and say that
when I am speaking about integrity monitors and IPSIG, it is
not a generic term. It is Independent Private Sector Inspector
General that meets the standards and code of ethics of the
International Association of Independent Private Sector
Inspectors General. It is really very very important because it
is a methodology that is tried and true, and it works, and it
distinguishes the multidisciplinary approach we are talking
about that works so well from what might normally be a CPA-
style audit, which might be fine for certain--but not for what
we are doing here.
There are six things, specifically six items I will point
out, and I will summarize because they are in my written
remarks.
First, as Commissioner Gill Hearn said, with respect to
integrity monitors as well, a list of pre--I am saying
legislation should require, one, a list of prequalified
organizations which can act as integrity monitors so that
qualified individuals can quickly mobilize to monitor disaster
relief programs. And these organizations have to have members
with multidisciplinary skills, legal investigative forensic
auditing loss prevention skills, and extensive experience in
acting as integrity monitors on other government projects.
Two, the obligations and the duties of the integrity
monitor at a disaster recovery site should be clearly
delineated and adhere to a code of ethics such as one followed
by members of the IA IPSIG, and that code is attached to my
testimony today.
Third, the construction manager or the contractor
overseeing the disaster relief program should be required, as a
condition of its contract with the government, to cooperate
with the integrity monitor. So you don't get to work on a
Federal disaster relief project unless you have signed on that
you will provide access to all books and records, access to all
personnel, and you are going to--very important--require all
your subcontractors and your subcontractors of your
subcontractors to do the same.
The biggest problem is you have a general contractor and
construction manager, and everyone recognizes the name and
recognizes the company and life is great, but they don't do the
work. It is the sub, and the sub of the sub, and the sub of the
sub. They all have to be in the program. And as you work up the
chain of authority, everyone has to understand they are
responsible for what went on below.
Fourth, the hallmark of an IPSIG and integrity monitor is
its independence. Integrity monitors should have no prior
business or personal relationships with the monitored entity
which would create a conflict of interest or the appearance of
one.
Fifth, indemnification should be provided to the integrity
monitor similar to the same kind of indemnification provided to
public officials during the course of their official duties. I
have been there. I can tell you that when you tell people you
are going to take $2 million off your bill, the first thing
they are going to say is, we are going to sue you and you are
basically going to spend the rest of your life in court; now
let's negotiate.
Well, we don't give into that sort of thing, and the other
integrity monitors didn't give into that sort of thing. But you
need the built-in statutory indemnification to make that work.
And likewise of that, although it may appear self-serving
for me to say this, it is quite important, six, that the
payment to the integrity monitor services should be guaranteed
on a regular basis to see that the integrity monitor is not
thwarted in carrying out its obligations by companies that are
withholding or delaying payment in an attempt to deter the
integrity monitor from performing its duties.
And I should mention one other thing. There was one other
monitor we are not talking about today so far, and that is DOI,
which monitored the monitors to make sure that our bills were
very carefully scrutinized and that there was nothing being
paid for by the city in connection with the integrity monitors'
bills that wasn't thought through and discussed to make sure
that real value was being delivered.
Mr. King. Thank you very much. Thanks, Mr. Chairman.
Mr. Rogers. Thank you. The Chair now recognizes the
gentleman from New Jersey, Mr. Pascrell, for questions he may
have.
Mr. Pascrell. Thank you, Mr. Chairman. I thank all the
folks who testified today. I wanted to say to Ms. Lemack that--
two things. The ports bill had a Victims Assistance Office.
Hopefully, we are going to get that done. But the authorization
bill includes the Victims Assistance Office within the policy,
Office of Homeland Security. So because of your efforts and
because of the FBI, I think we are going to have exactly what
you have asked for if we get this thing passed, and we move
like a dinosaur. So let's stay on our case and keep on wagging
our tails.
I had a couple questions, if I may, Mr. Chairman, and that
is I want to ask Mr. Varoli, what is happening to the Deutsche
Bank?
Mr. Varoli. Well, I am glad to say that the Department of
Design and Construction is not involved in the Deutsche Bank.
Mr. Pascrell. You are glad to say?
Mr. Varoli. I am. There are a lot of issues with that bank,
and actually it is being handled by the Lower Manhattan
Development Corporation. The Department of Design and
Construction has no involvement with that piece of property.
Mr. Pascrell. Who is going to be held responsible--maybe
you can tell me this--for the fact that 5 years after this
disaster, we have found body parts in the Deutsche Bank, and
that they can't get it all out of their own way to start to
really do the work there. Who is responsible for that?
Mr. Varoli. It is my understanding, Congressman, that the
Lower Manhattan Development Corporation will be here tomorrow,
and they are the entity.
Mr. Pascrell. Oh, okay. I didn't know that. I am sorry.
Mr. Varoli. I didn't know it either until Commissioner Gill
Hearn whispered it to me.
Mr. Pascrell. I would like to ask some questions to Mr.
Getnick. I listened very carefully to what you had to say. How
did Turner, AMEC, Bovis and Tully get selected?
Mr. Getnick. I can't answer that question.
Mr. Varoli. I can answer that question. As I mentioned in
my testimony, both in the written and in the oral, the
Department of Design and Construction is there in the city of
New York to know the business of construction and engineering.
The entities that were selected, the majority of the four, I
believe we have done business with three of them--actually
extensive--
Mr. Pascrell. They are pretty famous.
Mr. Varoli. They are very large firm.
Mr. Pascrell. Why were they selected? There were a lot of
other large companies. Who decided this?
Mr. Varoli. My commissioner and the first deputy
commissioner, and this was all done on the fly. This was done
that evening when we were searching for lights to bring to the
site to start this search for the victims. I can tell you off
the top of my head, for example, Tully Construction--Tully
Construction was in the middle of finishing up a project that
they had just done on route 9A, which was a State contract, and
9A runs right through or right past the World Trade Center.
Mr. Pascrell. Right in the central area, so they were
already on site.
Mr. Varoli. They were already on site. Bovis Lend Lease was
a company we had worked with when a beam had fallen out of
Yankee Stadium, and they knew our emergency procedures. And we
did a lot of business with them, so we called them. Turner
Construction is another large international construction
company that has done a lot.
Mr. Pascrell. I am familiar with all these companies. I
just want to know who selected them, because going back to what
Ms. Lemack said, we are going to do everything we can to bring
transparency to the whole process so we know why certain
companies, multinational companies, are chosen for specific
jobs. I think that is important for the public to know, and
as--
Getting back to Mr. Getnick, you are right. The further you
get away from the event, the more difficult it is to get the
truth. So let's go back the best we can to these contracts that
were under scrutiny, under questioned companies. Just because a
company is indicted and is not charged--may be charged with
something else or might be convicted on something else;
correct, Mr. Getnick?
Mr. Getnick. Yes.
Mr. Pascrell. May be charged, may be indicted with certain
charges, or certain charges may be made. And then in order not
to be found guilty of those charges, you plead guilty to a
lesser offense.
Mr. Getnick. That could be the case. That was not the case
in the example I gave earlier.
Mr. Pascrell. On none of the cases, is that what you are
saying? Let me put the question this way--
Mr. Getnick. What I was asked about and can testify about
our quadrant, the moneys that were paid, that $26.7 million
that was designated to a particular contractor and the sub,
that was not the case.
Mr. Pascrell. So you are only talking about your quadrant,
and you can't speak for the other?
Mr. Getnick. I can't speak to the others with specificity,
but I can say that was generally--
Mr. Pascrell. You can understand my question. You can be
charged on one--on some specific charges and then not be found
guilty on those charges. So you know, you say they were not
found guilty on these charges, as an example, as a generality.
But you could--you could plead guilty on a lesser charge.
Mr. Getnick. Yes. And let's be very specific as to those
other quadrants. There were, in fact, other companies that were
found that did not meet the qualifications that should have
been met.
Mr. Pascrell. And why didn't they?
Mr. Getnick. They were thrown off.
Mr. Pascrell. Why didn't they?
Mr. Getnick. In one case, one company was convicted of a
crime post-9/11, but during the cleanup. And so as a result of
that, midstream that company was removed from the site.
Mr. Pascrell. So, you know, you understand the questions
and why we are asking those kinds of questions. How those
companies got on site to begin with is interesting also because
they might have been thrown off, but the fact was they were
there. They were thrown off for very specific reasons.
Mr. Getnick. Fair enough.
Mr. Pascrell. Okay. I just wanted to clarify that issue.
But again, going back to the point--transparency should be our
guideline here, and I think you would agree, and I think from
what your testimony--I read your testimony again, and I think
that is what you are trying to get at. So everybody knows what
is going on.
Mr. Getnick. I agree completely. I just also want to point
out--
Mr. Pascrell. Sure.
Mr. Getnick. --the practical aspects of gaining
transparency, and I don't want to give away any proprietary
secrets, but some of the stuff isn't really that difficult if
you get to it at the time and do it right. And I probably
wouldn't feel right if I didn't acknowledge the fact of a
particular--
Mr. Pascrell. But we are asking the questions 5 years
after--5 years after the fact.
Mr. Getnick. Yeah. But one of the good answers you are
going to get after the fact is on the 9/11 cleanup, those
things did take place real-time. And I was going to say, I have
the benefit of working with a fellow by the name of Joe Peppi,
and Joe Peppi is a former member of the DA squad in Manhattan.
He is chief of our investigations and he just has this
extraordinary practical insight of how you investigate in way
that produces practical results. So we knew that this is
essentially a debris removal project and the real dollars were
going to be concentrated in the trucking. That is where the
real dollars were. And the question is, how do you go about
doing that? How do you develop your data ways? And you know
what Joe Peppi said? Joe Peppi said, we have to get guys on
these trucks. I said, What do you mean, we have to get guys on
these trucks? He said, Look, we have people on the DA's squad,
we have got people from the major K squad, we have got people
from the intelligence squad, and we have people from the
Organized Crime Control Bureau. If I can't get one of my former
detectives on a truck and take a 3-hour trip from the site to
Fresh Kills and back, and by the end of that trip have enough
of a relationship with the driver to say how much are you
getting paid per hour, what are you getting paid on the
weekend, what are you getting paid for overtime, and what are
you getting paid into your pension and benefit funds, well,
something is wrong. And guess what? Nothing was wrong, because
he put those people on those trucks and each time for each 3-
hour investment of time up and back, we came up with that
information. That is the database. That is the database by
which you know what every contractor and what every
subcontractor is really doing by way of their payments, and
that is what we are talking when we talk about payroll fraud.
So when we saw the certified payrolls come back, we knew
this company has the individual listed and they have the truck
listed and they have the rate listed and they have all the
payments listed and they have got it signed off and they have
it certified; except for one big problem, which was that we
were on the truck talking to the driver, and we know that that
driver wasn't getting paid that amount, and we know that those
benefits were never being paid, and some of those people are
coming from different geographical areas and they are never
going to see any of those benefit funds. So guess what? We sat
down and then we began to basically say you have got two
choices, you can submit this certified payroll, in which case
we will take it from you, or you can rework it. That is the
choice you have. And most people understood that that choice
was the difference between being prosecuted and the ability to
go forward and continue to work the site.
Mr. Pascrell. You know, I must say, Mr. Chairman, most
people in the hauling business are honest working people.
Mr. Getnick. That is absolutely the case. When you say most
people are honest--
Mr. Pascrell. So I don't want to imply--son the other hand,
we are not naive. And we must follow through on our own
abilities, or hopefully abilities to monitor these kinds of
situations so we know where the public's money is being spent.
And that is the basis of our aggressiveness. Nothing more.
Mr. Getnick. I completely agree with you, Congressman. I
just want to say one other thing. When we ask the question, How
do people get to that site, let's just go back on how people
got to that site. Any person who had a heavy piece of equipment
who was in the geographical area was headed towards that site.
People just showed up. You have lights, you have my lights. You
have a truck; here is my truck.
Everyone was just pitching in on those early hours, and my
first memory of being on that site was watching someone in a
crane that was just basically moving to the left, picking up
dirt and moving to the right and dumping it at a speed which I
don't understand how the person didn't get motion sickness; and
it didn't stop, and I said, well, you know when does this guy
stop? They said he just doesn't stop.
So that is what we were dealing with. And, yes, we did get
on top of the fraud, we did get on top of the waste, we did get
on top of the abuse. But you make the most important point,
which is the people who came to that site were, by and large,
honest, hardworking people. And the most important thing that
we did was to basically let that legacy be the legacy of the
World Trade Center cleanup as opposed to a very small minority
that would have taken it in a different direction.
Mr. Pascrell. Thank you Mr. Chairman.
Mr. Rogers. I thank the gentleman. Also I thank the
panelists for your valuable time and contribution to the
hearing. I would also remind you, as I did the first panel,
that many Members are not here because they have other
committee hearings. They, along with Members that were here,
will have additional questions that they will probably submit
to you. The record will be left open for 10 days. I would ask
you that if you all are provided additional questions, that you
reply to those in writing so that we can submit them for the
record and help us to produce a really good report. Your
presence here today has been very valuable, and I do appreciate
it. And with that, this hearing is adjourned.
[Whereupon, at 5:55 p.m., the Subcommittee was adjourned.]
LSSONS LEARNED IN PREVENTING WASTE, FRAUD, ABUSE, AND MISMANAGEMENT
PART II
----------
Thursday, July 13, 2006
U.S. House of Representatives,
Committee on Homeland Security,
Subcommittee on Management,
Integration and Oversight,
Washington, DC.
The subcommittee met, pursuant to call, at 10:12 a.m., in
Room 311, Cannon House Office Building, Hon. Mike Rogers
[chairman of the subcommittee] presiding.
Present: Representatives Rogers, King, McCaul, Meek,
Pascrell, and Lowey.
Mr. Rogers. [Presiding.] This hearing of the Management,
Integration and Oversight Subcommittee of the Committee on
Homeland Security is called to order.
This morning, we are holding our second of a series of
three hearings as a part of the Subcommittee's examination of
the use and misuse of $20 billion in Federal aid provided to
New York City in the aftermath of the September 11th terrorist
attack.
This hearing will review programs that provided Federal
funding to individuals, businesses, and organizations to
recover from the devastation. And in the interest of time, the
Ranking Member and I have both agreed to forego opening
statements.
We would like to welcome our witnesses, especially those
from New York, and thank them for taking time out of their busy
schedules to be with us today. We would remind all witnesses
that your entire opening statements have been submitted in
writing. All Members have a copy of those.
And for the purposes of your opening statement now, I would
ask that you try to limit your remarks to five minutes or less,
to summarize so that we will have more time for interaction and
questions and answers.
So with that, the Chair calls the first panel and
recognizes Ms. Ruth Ritzema, Special Agent in Charge of the New
York Department of Housing and Urban Development Office of
Inspector General.
Welcome.
STATEMENT OF RUTH RITZEMA
Ms. Ritzema. Good morning.
Chairman Rogers, Ranking Member Meek, members of the
subcommittee, thank you for inviting me to testify today on the
lessons learned after the events of September 11, 2001.
The New York HUD OIG office of investigations, of which I
am the special agent in charge, was located at 6 World Trade
Center. It housed approximately 35 special agents, forensic
auditors, and support staff.
On that morning, half our staff was working in the office
when the first plane hit the north tower. As I stood and
watched massive destruction and our office burn, I realized how
lucky we were that none of our staff was injured or lost.
From the very first hours, we teamed up with the Federal
Bureau of Investigation and assisted in searching for evidence
and conducting the investigation of the terrorist incident. In
the aftermath, Congress gave HUD $3.4 billion in Community
Development Block Grants disaster aid for New York City.
The Empire State Development Corporation, ESDC, was
allocated $700 million. The Lower Manhattan Development
Corporation, LMDC, was allocated $2.7 billion.
The Congress required that we audit the funds every 6
months to ensure that ESDC and LMDC had adequate financial
management systems and adequate block grant monitoring
procedures.
Early collaboration with other agencies was important to
the success of our auditing efforts. Coordination with Small
Business Administration resulted in minimizing duplication of
benefits. We also coordinated with the Federal Emergency
Management Agency and the Internal Revenue Service.
The unusual nature of this audit recognized that the funds
needed to be dispersed quickly. Early in the program, our
audits identified weaknesses and internal controls and program
design. We audited on an almost real-time basis that gave the
auditee an early opportunity to take corrective action and
improve controls.
To date, we have audited over $1 billion in disbursements.
The result of these audits include findings of duplications of
benefits and payments, of overpayments, of ineligible and
unsupported costs, and of improvements needed in collection
efforts.
As a federal agent, of course, fraud is my biggest concern.
We have grouped our efforts into the three general areas of HUD
expenses: immediate disaster relief funding, mid-term grant
relief, and long-term rebuilding expenditures.
The U.S. Attorney's World Trade Center Fraud Working Group
was established to address all types of immediate and mid-term
grant relief fraud and included many local and federal law
enforcement agencies.
The working group attempted to, among other things,
identify all the various agency dollars, de-conflict cases, use
automation to detect criminal activity, pass on criminal trends
to enable better training, identify legal weaknesses in the
various programs, pass on recommendations to make the programs
more fraud resistant, and coordinate amnesty programs, as well
as, of course, facilitate federal, state and local
prosecutions.
Our offices worked over 115 matters. And although a number
of our cases have been completed, we still have 64 cases that
are active under investigation.
One example is a case involving an individual who claimed
his executive search firm sustained damage at Two World Trade
Center. He was convicted on 18 counts of defrauding nearly
$350,000 from private and government agencies of disaster
benefits. Using forged documents, he received Business Recovery
Grants for non-existent equipment that belonged to a property
that he never leased and was supposedly lost when the tower
collapsed.
Prior to the start of major construction efforts, the
construction integrity team was established to evaluate
vulnerabilities and improper activities regarding the
rebuilding of Lower Manhattan. This team worked on many
projects, including setting up a fraud prevention hotline,
vetting contractors and subcontractors, developing and
providing fraud awareness training, and supporting the use of
independent private-sector inspector generals or monitors.
The destruction and aftermath of Gulf Coast hurricanes
challenged the HUD OIG with a task even more daunting than the
reconstruction of Lower Manhattan. New York City received from
HUD nearly $3.5 billion; at this juncture, the Gulf Coast
states have received almost $17 billion.
Many of the lessons learned from our 9/11 experiences are
being applied to our response to the hurricanes in the Gulf
Coast. Like New York, in the Gulf Coast we are conducting
audits at an early stage, training state and local entities in
program fraud awareness, participating in joint teams, setting
up hotlines and fraud awareness campaigns, and promoting the
vetting contractors and subcontractors, as well as the use of
independent private-sector IGs or monitors.
In closing, I would like to thank the subcommittee for the
opportunity to talk about the work that the agents, auditors,
attorneys and support people of the HUD OIG has accomplished
since the onset of this tragic and trying event. We remain
committed to the department's mission of providing safe,
decent, sanitary and affordable housing and of providing
economic development for our country's communities.
I look forward to answering questions that members may
have.
[The statement of Ms. Ritzema follows:]
Prepared Statement of Ruth A. Ritzema
Chairman Rogers, Ranking Member Meek, members of the Subcommittee;
thank you for inviting me to testify today on the lessons learned after
the events of September 11, 2001. Although this hearing is about the
oversight efforts in fraud detection, prevention and control, which I
will elaborate in great detail on, I wanted to start off my testimony
by quickly sharing with you how the events of that day directly and
intimately impacted me.
Events of September 11th
The Department of Housing and Urban Development's Office of
Inspector General (HUD OIG) Office of Investigations, of which I am the
Special Agent in Charge, was at 6 World Trade Center. It housed
approximately thirty-five HUD OIG employees--special agents, forensic
auditors and support staff.
On that morning, fortuitously, our New York City special agents
were out of the office at a quarterly firearms qualification.
Unfortunately, our forensic auditors and support staff were on site
when the first plane hit the North Tower, which was adjacent to our
office. All of the auditors and support staff in the building heard the
explosion and one of our secretaries, who saw pieces of the plane and
building fall, immediately told everyone to evacuate prior to any
alarms going off. They fled across the street near the financial
district where they watched the building burn. The group became
separated when the second plane went into the South Tower.
Four of my special agents from our regional sub-office in Buffalo,
New York, had flown in for their firearms qualification and they were
to meet at our building at 9:00 a.m. for case reviews. The agents were
traveling on the subway and made a lucky mistake by getting off at City
Hall instead of the next exit that would have put them in the basement
of the World Trade Center complex at exactly the wrong time.
I had meetings scheduled for that day in New Jersey and was across
the river when I received a page from an agent about a fire at the
World Trade Center. When I heard on the radio about the second plane
going in, and worried about my own people, I immediately headed into
the City using the shoulder of the New Jersey Turnpike to bypass the
stopped traffic. As I approached the extension, I could see the towers
on fire. I repeatedly tried to get through to headquarters, the staff
or the offices, but as hard as I tried I only got a busy signal.
As I was driving towards the City, the first of the two towers
collapsed before my eyes and I heard on the radio that the Pentagon had
also been attacked. I drove through the Holland Tunnel to the federal
building located at 26 Federal Plaza, which is six blocks away from the
World Trade Center and is also where the HUD OIG Office of Audit is
located. A Federal Bureau of Investigations (FBI) agent told me that
the emergency law enforcement command post was setting up at the church
adjacent to the World Trade Center complex.
Running down Broadway, I was struck by how surreal the whole
situation appeared. The beautiful cloudless day had turned all dark
with soot and smoke in the air. People tried to turn me away from
Ground Zero until I threw on my ``Federal Agent'' vest cover. I stopped
from time to time to try to get help for a couple of people who had
pretty serious burns. I then continued to run to the command post to
check and make sure that our people were out safe. I just arrived at
the church adjacent to the towers when the second tower collapsed
literally right in front of me.
At that point, I have no memory of what happened during the
collapse. My next memory is being about a block away with firemen all
around and hearing screaming radio transmissions of firemen who were
getting buried and were desperately trying to give their coordinates;
``we're at two o'clock from the fountain'' (the fountain was located in
the middle of the plaza). After the air cleared some, another FBI agent
saw me and told me that we were rallying in Chinatown and he and I ran
there.
I immediately agreed to work with and assist the FBI in any
capacity. Our Assistant Special Agents in Charge (ASACs) had rallied
our agents and were standing by for instruction. One of my ASAC's and I
went back to what was formerly our office and watched the building
burn. Shortly thereafter, 7 World Trade Center collapsed. Training from
my years in the military kicked in as we dispersed and established
security perimeters to deal with the rumors and false reports swirling
about in the dark mist of that day. Thankfully, and most importantly,
we accounted for our people, but we had lost everything else--our
evidence, all our case files, and our equipment. The HUD OIG had
previously suffered a tragedy when one of our special agents died in
the Oklahoma City bombing and I was very grateful how lucky we were
considering our proximity to the devastation.
A command post was set up at 290 Broadway and it seemed that every
law enforcement-related agency was in that room with a phone that
rarely worked and a handwritten piece of paper taped in front of their
table to identify their agency. Our OIG agents were stationed all over
the city--at command post, airports, Ground Zero or whatever other hot
spot came up. They also searched for evidence with rakes, shovels and
gloved hands at the landfill in Staten Island. This command post was
move to the ``Intrepid'' in the Hudson River and to a garage on the
West Side Highway where for the next few months our special agents
continued to assist in the terrorist investigation and to transition
back to HUD-related oversight activities.
Auditing Activities
In the aftermath, Congress authorized HUD to provide the State of
New York with $3.483 billion in Community Development Block Grant
(CDBG) disaster assistance to aid recovery and revitalization and
earmarked at least $500 million of this to compensate small businesses,
nonprofit organizations, and individuals for economic losses. Out of
these funds, the Empire State Development Corporation (ESDC),
designated by New York State to develop and administer economic and
business recovery grant and loan programs, was allocated $700 million.
The Lower Manhattan Development Corporation (LMDC), established to
administer and develop programs to rebuild and revitalize lower
Manhattan, was allocated $2.783 billion.
Direction from the legislation insisted on speed in assisting
businesses located in lower Manhattan hardest hit by the attack. For
instance, applicants for Business Recovery Grants (BRG) were required
to have a response to their request within 45 days of application
submission. Congress also insisted on the utmost integrity from the
program and required that the HUD OIG maintain a continuous audit
activity of funds allocated to the rebuilding efforts. The Congress
required that we report on the expenditure of the funds every six
months. Our audit objectives to fulfill this mandate were to determine
whether ESDC and LMDC:
Disbursed the CDBG disaster funds to applicants in a
timely manner;
Disbursed the CDBG disaster funds to eligible
applicants in accordance with HUD-approved action plans;
Had financial management systems to adequately
safeguard the funds; and
Developed and implemented adequate procedures for
monitoring the CDBG disaster assistance programs.
HUD OIG called for a meeting with Inspectors General from all the
affected agencies to begin investigative and auditing coordination and
cooperation in the New York/New Jersey office. Early collaboration with
other agencies was important to the success of our auditing efforts. As
a result, procedures were developed that provided that if an entity
already received a Small Business Administration (SBA) grant and
applied for a BRG grant, that entity could not receive a BRG grant if
the total of both grants exceeded its economic loss. Likewise, we met
with Federal Emergency Management Agency (FEMA) officials to also work
on the issue of duplication of benefits among our programs.
We further collaborated with the Internal Revenue Service (IRS) to
obtain a copy of an applicant's tax transcript, which was then used to
verify that the tax information included on the application for
computing economic loss was accurate. We discovered that some
applicants did not file a tax return but still submitted a tax return
on their BRG application and/or they sometimes included a higher
taxable income than what was actually filed with the IRS in order to
inflate economic loss. The auditors referred these over for
investigation.
Additionally, we coordinated with the Social Security
Administration (SSA) to test whether the social security numbers from
our audit sample were legitimate. If our auditors discovered a
discrepancy (i.e., the age of applicant did not agree with the age
registered with the SSA), they referred it to investigations. In
general, if the auditors detected any suspicious information during the
course of its financial review, for instance, in the ESDC's Business
Retention Grant (BRG) or Small Firm Attraction and Retention Grant
(SFARG) programs or in the LMDC's Residential Grant program, it
referred it to investigations for further review. This greatly enhanced
anti-fraud and abuse endeavors.
HUD OIG auditors took a proactive approach that stressed prevention
of fraud and abuse, as opposed to solely a detection emphasis whereby
audits would take place long after the funds had been expended. The
unusual nature of this audit recognized that the funds needed to be
disbursed quickly and that Congress had waived the pre-set CDBG
statutory requirements that governed the parameters of who were to
receive grants. Early in the program our audits identified significant
weaknesses in internal controls and program design. We conducted audits
in an almost real-time basis that gave the auditee an early opportunity
to take corrective action and improve controls and procedures for
future expenditures. Audits were started no more than six months after
the disbursements had been made. While this was resource intensive and
caused a strain on our other operations as we had not been given any
additional funds to undertake this initiative, we felt it was important
that we remain aggressive and in the forefront.
To date, we have audited over $1 billion dollars in disbursements.
The results of these audits include findings of duplication of benefits
and payments; of overpayments; of ineligible and unsupported costs, and
of improvements needed in collection efforts. For example, our audit
work found that over $2 million had been disbursed to the Hudson River
Park Improvements Program contrary to the terms of the sub-recipient
agreement.
In furthering our early collaborative work with the SBA, only eight
months after the attack, we issued an interim audit report noting the
duplication of benefits between SBA loans and the ESDC's BRG program.
We also reported on concerns we had with the calculation of recipients'
economic loss amounts for the BRG program. As a response, ESDC
developed procedures and formulas that tried to prevent duplication.
ESDC also revised its application for the BRG program to require
recipients to itemize the amount of claimed economic loss. In addition,
it has responded by:
Revising and enhancing controls and procedures to
minimize ineligible and incorrect grant payments;
Instituting additional efforts to collect grant
overpayments;
Hiring additional internal audit and investigative
staff; and
Establishing an audit staff of retired New York State
Department of Public Service Commission employees to review the
claims submitted by utility companies under the Utility
Restoration and Infrastructure Rebuilding Program (i.e., they
have completed audits of claims for two utility companies and
disallowed in excess of $33 million of the companies' $99
million claim for reimbursement).
Investigative Activities
In addition to our audit work evaluating operational and
administrative controls and other financial matters, we are also
intensively involved in anti-fraud and abuse efforts. We have grouped
our efforts into the three general areas of HUD expenses: immediate
disaster relief funding, mid-term grant relief, and long term
rebuilding expenditures. Our Office of Investigation works in
cooperation with the Office of the United States Attorney to prosecute
recipients that have fraudulently obtained CDBG funds. We have
established working relationships with other federal agencies and State
and city entities. Very early on, due in large part to what our
auditors were initially finding, we met with the U.S. Attorney's office
to discuss the vulnerabilities and fraud patterns that were identified.
Originally established as an informal group by the U.S. Attorney's
office, the World Trade Center Fraud Working Group solidified and began
to meet monthly to discuss fraud concerns and share information on
schemes. The working group was made up of high-level management that
allowed for the discussion of complex matters and encouraged an
environment where issues were expeditiously addressed. The working
group attempted to, among other things, identify all the various agency
dollars flowing into lower Manhattan, de-conflict cases, use automation
to detect criminal activity, pass on criminal trends to enable better
training, coordinate cases for maximum impact, identify legal
weaknesses in the various programs and pass on recommendations to make
them more fraud resistant, coordinate amnesty programs, and facilitate
federal, State and local prosecutions.
This concentration of law enforcement and prosecutorial efforts
resulted in the arrest and conviction of many perpetrators and also
generated publicity that we believe had, to some extent, a deterrent
effect. Members of the group included the:
Office of the United States Attorney's-Southern
District of New York
Office of the Manhattan District Attorney
Department of Labor-Office of Inspector General
Department of Transportation-Office of Inspector
General
Federal Emergency and Management Agency--Office of
Inspector General
Small Business Administration-Office of Inspector
General
Social Security Administration--Office of the
Inspector General
Environmental Protection Agency--Office of Inspector
General
Internal Revenue Service--Criminal Investigation
Division
U.S. Postal Inspection Service
New York City Department of Investigation
Lower Manhattan Development Corporation
State of New York--Office of Inspector General
State of New York Insurance Department
Through our joint efforts, we have identified a number of types of
potential criminal vulnerabilities that relate to the disaster
assistance funding for lower Manhattan. These include:
1. False Statements and Claims
2. Wire Fraud
3. Mail Fraud
4. Theft or Bribery
5. Tax Evasion
6. Bid Rigging
7. Prevailing Wage Fraud
8. No Show Jobs
9. Artificial Price Market Inflation
10. Contract Fraud: Invoicing and Double Billing
11. Environmental Crimes
12. False Payrolls
13. Public Corruption
14. Embezzlement
15. Insurance Fraud
16. Collusion
17. Kickbacks
Every day our HUD OIG agents are at work on cases of fraud stemming
from disaster funding for lower Manhattan. We received over 115
referrals as well as work we initiated. Although a number of our cases
have been completed, we still have 62 cases open that are under
investigation.
An example is the case against an individual who claimed his
executive search firm sustained damage at 2 World Trade Center. He was
convicted on 18 counts of defrauding nearly $350,000 from private and
government agencies of disaster benefits including grants and loans.
FEMA, SBA, HUD and the Red Cross were among the targets of his fraud.
Using forged documents, he received Business Recovery Grants for non-
existent equipment that was supposedly lost when the tower collapsed.
In a further example, as I speak to you today, there is a trial
that is proceeding against a man who submitted fraudulent applications
to government programs, received $118,000 that he was not entitled to,
and applied for another grant when his scheme was uncovered. The amount
of the grant award was calculated on the size of the business's
expenses. So while his business was eligible for funds, he padded his
application with thousands of dollars of phony expenses. He included
lists of fake employees, business expenses, social security numbers,
checks, wage reports that he supposedly filed with New York State--but
never did, lease agreements, and signatures that were forged onto other
documents.
Another case involved a Maryland man, who was sentenced to 24
months incarceration, to 26 months of probation, was ordered to pay
restitution of $170,000, voluntarily forfeited $280,000 to the
government, and was fined $10,200 for obtaining Business Recovery
Grants claiming he had a business in lower Manhattan. In reality, the
floor he claimed he was on was actually entirely occupied by a city
agency. He offered a tax return that listed his business in lower
Manhattan and reported gross earnings of $3.3 million. Our
investigation proved he had no business in lower Manhattan but worked
from his home in Maryland and that the business reported minimal gross
earnings.
Two other instances illustrate some of the early matters we were
investigating. A New Jersey resident, who sublet his unit in lower
Manhattan, fraudulently submitted a two-year commitment grant
application, claiming he resided at his apartment on Pearl Street. A
Manhattan woman claimed she lived on St. John Street and intended to
stay in her apartment until the following year. In reality, she had
moved uptown to W. 63rd Street. She had given LMDC a doctored lease and
repeatedly lied about her address.
A case of public corruption was brought against an official of the
New York State Division of Housing and Community Renewal. This official
illegally obtained a LMDC Residential Retention Grant saying his father
lived with him in lower Manhattan and he then sublet the unit at market
rent prices.
Moreover, we found individuals who thought they would have easy
access to money by establishing phony addresses. One such individual
gave his address as 121 Reade Street, when in fact he lived further
uptown on West 21st Street. This cost him a $2,000 fine, 200 hours of
community service and one year's probation.
The LMDC Residential Grant Program received more than 40,000
applications and distributed more than $235 million. With each
successful prosecution, we hoped that people who had lied to receive
grant money had become anxious. To give these people a limited chance
to come forward, a Fraudulent Grant Recipient Amnesty program was
established. To date, over 160 households have returned money to the
program.
Lessons Learned from September 11th Experiences
In addition to the establishment of a joint fraud working group,
there are a number of initiatives that occurred, some of which we
helped facilitate, which we believe are important to fraud detection,
control and prevention.
A lower Manhattan Construction Command Center was organized to
coordinate all construction valued at over $25 million. As a result, a
Construction Integrity Team was established which, among other things,
consists of federal and local OIGs working in cooperation to evaluate
vulnerabilities and improper activities. It has shared information so
as to assist each of the contracting agencies in vetting contractors
and subcontractors and to ensure the integrity of the process. It has
set up an information campaign to deter fraudulent activity. It is also
a productive venue to share facts on fraudulent and abusive trends. As
construction and redevelopment begins, we anticipate that we will see
more fraud and abuse involving contractors as HUD's funding moves away
from benefit reimbursement to development efforts.
In order to provide a mechanism for the State and City to receive
information on potential improper activity relating to construction, a
Fraud Prevention Hotline was created under the direction and control of
the Command Center. It was designed to receive allegations of
corruption or criminal activity by any agency employee, public
official, contractor employee, agent, subcontractor, vendor, or labor
official. This hotline began operations in 2005. Posters publicizing
the hotline are, and will be, located in all construction work sites
and trailers. A press release was issued to inform the public. In
addition, flyers are inserted in paychecks and stickers are placed on
the back of employee identification cards in order to highlight the
hotline's presence. Moreover, a website was created that contains a
complaint form.
We also cooperated on a project that has established an employee
baseline background check from third party databases that is overseen
by a screening company. The background review will search for organized
crime connections, terrorism ties, any previous histories of violence
in construction, and theft and integrity issues. While recognizing that
some employees involved in construction may have had past criminal
problems, this check will try to evaluate the nature of the crimes
committed. It is important that the unions buy in to this process, as
they did so with this project, or it will be very difficult to
undertake.
Our oversight efforts have shown that the most effective way to
proceed is to have monitoring be constant, continuous and at all the
different levels of activity. Monitors should be concerned with: funds
disbursement from the U.S. Treasury to State financial institutions;
disbursements from the grantee to the sub-grantees; invoices and
paperwork of the grantees and sub-grantees; timely reports for award
and expenses; and timely reports on fraud prevention.
As I believe you have heard about in previous testimony, we also
advocate the use of integrity monitors, also sometimes known as
Independent Private Sector Inspectors General (IPSIGs). These are
monitors with legal, auditing, investigative and loss prevention skills
that are employed usually by a government entity to ensure compliance
with relevant laws, regulations and contracts. They can be helpful in
the procurement or licensing phase of contracts and can assist in the
vetting of initial contractors. In general, they act to deter, prevent,
uncover and report unethical or illegal conduct that is especially
useful if agency resources are inadequate to handle the response
needed.
The HUD OIG labored to provide useful fraud awareness training to
granting agencies. We gathered trends in criminal activity from a host
of other law enforcement agencies in order to facilitate our training.
We worked together with the ESDC and LMDC to train them on fraud
detection techniques, particularly before grants were disbursed, as
well as on identifying fraud indicators. This enabled the grantees to
subsequently identify possible fraud and retain the necessary
documentation for prosecution. We established a rapport that was
designed to receive referrals from them on a timely basis. Although
hard to measure, we believe these joint efforts helped to prevent, or
to mitigate, a number of potential frauds as well as to uncover, and
provide, evidence of criminal activity. We are currently working on a
training module that will be geared to the contracting community as
rebuilding efforts begin in earnest and that will include instruction
in areas such as bribery awareness, false invoice detection, and bid
rigging schemes. Throughout the grant implementation and distribution
process, we continually educated the grantees on how to structure their
application forms in a manner that would positively identify the
applicant to reduce the potential for fraudulent applications and that
would enumerate on the form the penalties for committing fraud.
From an auditing standpoint, we also believe there were important
lessons learned. We believe it beneficial to: coordinate with other
auditing entities to prevent overlap and duplication; hold meetings
with auditees when new programs begin; utilize consultants or experts
when necessary; use statistical sampling to better estimate results;
discuss results early with auditees and local agency officials to
prevent surprises; establish a relationship such that auditees will
notify OIGs immediately upon the discovery of fraud; and work closely
with investigators to get referrals to them quickly.
Oversight of Hurricane-related Disaster Relief Efforts
The destruction and aftermath of Hurricanes Katrina, Wilma and Rita
challenge the HUD OIG with a task even more daunting than the
reconstruction of lower Manhattan following the September 11th attack.
Once again, an area of our nation has been hit by an unexpected
disaster that has taxed emergency services and redirected federal
Inspectors General toward assisting local government and overseeing the
expenditure of a large amount of federal money. However, it also
important to understand that there are differences, as they relate to
our oversight efforts, between these two disasters.
From a HUD standpoint, New York City received approximately $3.5
billion. At this juncture, the Gulf Coast States have received almost
$17 billion in assistance from HUD. With post-September 11th relief
efforts: there were only two major ``pass through'' entities of CDBG
funds; there were far fewer prospective grantees and sub-grantees,
there was a limited land area to consider; and the oversight activities
were, to some extent, more controllable. With the post-hurricane relief
efforts: there is a multitude of ``pass through'' entities of CDBG
funds in numerous States; there are thousands of grantees and sub-
grantees; there is a huge land area of effected devastation; and,
consequently, there is a much more arduous task for oversight.
Though we had some disaster experience with Hurricane Andrew in
Florida a number of years back, we were definitely on a learning curve
with our September 11th oversight activities. Each of our encounters
have taught us some general lessons including probably the most
important lesson--that OIG teams on the ground, and at headquarters,
must be proactive rather than reactive. This posture extends to
collaboration. Joint task forces combine assets, manpower, information
technology, budgets and other agency specialties to monitor
expenditures and to attack fraudulent and criminal activities. To be
truly effective, an OIG must continuously work to prevent waste, fraud
and abuse by acting in real time and in a purposeful way to have a
deterrent effect. Some of our best practices garnered from September
11th have become invaluable to us in this current effort. These include
endeavors such as:
Criminal investigators and auditors training State and
local entities on how to uncover fraud, how to identify fraud
indicators, how to retain necessary documentation; and how to
make referrals to appropriate law enforcement;
Participating in joint teams, such as grant fraud task
forces and construction integrity teams;
Setting up of hotlines and information campaigns on
how to report fraud; and
Properly vetting contractors and subcontractors and
creating a clearinghouse database, as well as systems to
conduct employee background checks.
In particular, we have especially honed our training capabilities
over time and are providing in-depth and varied instructional
opportunities on topics such as fraud detection in disaster relief
settings to a host of entities in the effected Gulf Coast area. The
first State to submit their plan was the State of Mississippi through
their agency, the Mississippi Development Authority (MDA). The MDA met
on several occasions with the HUD OIG to discuss their plan, listen to
our concerns, and to be briefed by HUD OIG audit and investigative
managers on the potential for scams and how to deal with application
fraud, such as false statements, identity theft and false documents. In
addition, as part of our fraud awareness efforts, the HUD OIG educated
MDA contract appraisers hired to assess property damage on fraud red
flags. Homeowners applying for grant money received a HUD OIG fraud
awareness bulletin as part of their application packet.
Though not the focus of this testimony, I would like to inform the
Subcommittee that while we are working together to put controls in
place we do, however, still have some concerns. From an audit oversight
standpoint, the MDA plan, oversight and monitoring of grant funds
ceases after the State has issued ``compensation'' funds to the
homeowner ``to be used at the discretion of the homeowner.'' The MDA
plan is concerned with the funds to the point when they are given to
the homeowner, at which point they are allowed to work through their
personal disaster recovery as they see fit. We do not think that
monitoring and oversight should end at this phase and we have remaining
concerns about how ``compensation'' plan that basically reimburses will
spur the rebuilding of now blighted communities. What is to become of
these communities in the future?
In general, our Office of Investigation down in the Gulf Coast
region has created a far reaching fraud prevention program designed to:
(1) create a training course for other agents/auditors and program
officials to teach them to identify fraud specifically in CDBG
programs; (2) sponsor fraud prevention meetings between HUD OIG and the
major programs of HUD; and (3) sponsor fraud prevention meetings
between the HUD OIG and industry groups such as the Mortgage Bankers
Association, the Public Housing Authorities Directors Association; and
the National Association of Housing and Redevelopment Officials.
As part of this prevention program, the HUD OIG also created a
Suspicious Activity Report (SAR) that will be given to HUD grantees,
sub-grantees, and others associated with delivering disaster funds. The
SAR is a method of informing HUD OIG of suspected irregularities in the
delivery of HUD program money.
Conclusion
In closing I would like to thank the Subcommittee for the
opportunity to talk about the work that the agents, auditors, attorneys
and support people of the HUD OIG have accomplished since the onset of
this tragic and trying event. Our people do it because we are committed
to the Department's mission of providing safe, decent, sanitary and
affordable housing for the Nation, and of providing economic
development for our country's communities. I look forward to answering
questions that members may have.
Mr. Rogers. Thank you, Ms. Ritzema.
The Chair now recognizes the Honorable Eric Thorson,
Inspector General for the Small Business Administration, for
your statement. Welcome.
STATEMENT OF ERIC THORSON
Mr. Thorson. Chairman Rogers, Ranking Member Meek, and
distinguished members of the subcommittee, thank you for
inviting me to discuss the efforts by our office to oversee the
SBA's response to the September 11th terrorist attacks.
The attacks not only caused tragic loss of life, but also
greatly disrupted the national economy. The SBA responded with
two economic assistance programs.
First, SBA guaranteed loans made by lenders to affected
small businesses under what is known as the Supplemental
Terrorist Activities Relief Program, or more commonly known as
STAR loans. Second, SBA made direct disaster loans with no
lender involved to affected small businesses.
My testimony today discusses our oversight of these two
programs.
First, the STAR loan program. Congress authorized SBA to
guarantee loans to small businesses adversely affected by the
9/11 attacks and their aftermath. This was seen as a program to
assist businesses throughout the country that were harmed by
the economic consequences of the attacks.
Congress provided authority for SBA to guarantee up to $4.5
billion in loans. In the fall of 2005, the Senate Small
Business and Entrepreneurship Committee and the SBA
Administrator asked the OIG to review the STAR program. We
conducted an audit to determine whether borrowers were eligible
to receive STAR loans and whether SBA established adequate
controls to verify borrower eligibility.
We reviewed a statistically meaningful sample of 59 STAR
loans made by 27 different lenders. Based upon a review of the
lenders' loan files and discussion with available borrowers, we
were not able to determine whether 50 of the 59 borrowers, or
85 percent in the sample, were adversely affected by the 9/11
attacks and their aftermath.
For a small number of these loans, the lender failed to
prepare any justification to document borrower eligibility,
which was required by the SBA and their procedures. For many
others, the lenders' eligibility justification was either vague
or contradicted other information in the lenders' files.
Further, of 42 borrowers that we were able to interview,
only two stated they were even aware that they had received a
STAR loan; 36 borrowers said they were not asked or could not
recall being asked about the impact of the attacks on their
businesses.
In trying to establish the reason behind these findings, we
found that SBA did not implement adequate internal controls to
ensure that only eligible borrowers obtained these loans. SBA
did issue program guidance, requiring lenders to prepare and
file written justifications showing borrower eligibility.
However, after only limited lender participation, SBA began
to vigorously promote the program to pursuade lenders to
approve the STAR loans. These officials advised lenders that
virtually every small business had suffered some direct or
indirect adverse impact and could likely, therefore, qualify
for a STAR loan.
Further, SBA officials assured lenders that the agency
would not second-guess their eligibility justifications; in
fact, SBA did not require lenders to provide their eligibility
justifications to the agency and therefore had no way of
knowing whether lenders were making good decisions or not.
It is important to note that we did not find that any
businesses legitimately affected by the 9/11 attacks were
precluded from obtaining a STAR loan. In fact, when the loan
program appropriation expired in January of 2003, program funds
were still available and were then transferred to the regular
7(a) loan program.
As a result of our audit, we recommended SBA, for future
special programs where SBA guaranteed loans are used for
disaster relief, to: first, require loan applicants to submit
statements justifying how the business was harmed by the
disaster; second require lenders to verify applicant claims of
injury and fully document borrower eligibility in detail; and
third, implement controls to verify lender compliance.
In addition to the STAR loan program, SBA made disaster
loans to businesses affected by the 9/11 attacks. Under the
disaster loan, SBA is authorized to fund repairs of damage to
homes and businesses and to provide economic injury loans to
provide working capital.
We initiated a proactive investigative program because we
believed that these loans were particularly vulnerable to
fraud. Our investigative effort involved the OIG's auditing
division, which screened a sample of the loans that had gone
into default, to identify indicators of fraud. Where the
auditors flagged potential fraud, loans were then referred to
the OIG investigations division for additional action.
Based on this investigative program, as well as referrals
from other sources, we opened 51 cases on loans valued at
approximately $20 million. Thus far, we have closed 37 cases,
with 14 still open. We have obtained 10 indictments, 10
convictions and over $1 million in restitution and settlements.
The types of fraud we identified involved: claiming losses
even though their companies were not located in the disaster
area; false claims related to personal property or equipment
damage; and misuse of disaster loan proceeds.
We did obtain a prison sentence and financial restitution
from both the president and the managing partner of a business
that received a disaster loan based upon false claims that the
company had been located in the World Trade Center.
Although fraud will inevitably occur when there are
governmental benefits, these efforts highlight the need for
agencies to balance the need to get money to victims of
disasters, such as 9/11 attacks, balancing that against
implementing strong controls to prevent fraud and abuse. Once
that money has been distributed, it is extremely difficult or
impossible to get back.
I thank you for the opportunity to be here today, and I
will look forward to answering your questions.
[The statement of Mr. Thorson follows:]
Prepared Statement of Eric M. Thorson
Introduction. Chairman Rogers, Ranking Member Meek, distinguished
Members of the Subcommittee, thank you for inviting me here today to
discuss the efforts by the Small Business Administration (SBA) Office
of Inspector General (OIG) in connection with the SBA's response to the
September 11th terrorist attacks. September 11, 2001, was a day in
American history that we can never forget. Beyond the tragic loss of
life, the terrorist attacks disrupted the economy of the United States.
The SBA responded to the economic downturn by providing guaranties on
loans made by private lenders through the Section 7(a) Loan Guaranty
program, and by making loans directly to affected small businesses
under the Disaster Loan program. My testimony today addresses the OIG's
efforts to review the efficiency and management of these 9/11
assistance programs and to prosecute wrongdoers who took advantage of
this national tragedy by obtaining loans through fraudulent means.
Overview of the OIG's Audit of the STAR Loan Program. In January
2002, Congress authorized SBA to provide financial assistance to small
businesses that were affected by the 9/11 attacks and their aftermath
through what is known as the Supplemental Terrorist Activity Relief or
``STAR'' loan program. Newspaper articles in the Fall of 2005 raised
questions as to whether borrowers obtained STAR loans even though they
had not been affected by the terrorist attacks. As a result, Senator
Snowe, who chairs the Senate Small Business and Entrepreneurship
Committee, and the SBA Administrator asked the OIG to review this
program. The audit objectives were to determine if STAR loan recipients
were appropriately qualified to receive STAR loans and if SBA
established and implemented proper administrative procedures to verify
STAR loan recipient eligibility. However, before getting into the
results of our review, let me provide a short background on the STAR
loan program, which was administered under the Section 7(a) Loan
Guaranty program.
Overview of 7(a) Program. Under the Section 7(a) of the Small
Business Act, SBA may guaranty up to 85 percent of a loan made by an
authorized lender to a small business. This program is known as the
``7(a) program.'' In 1983, SBA implemented the Preferred Lenders
Program (PLP) which allows designated lenders to process, service, and
liquidate SBA-guarantied loans with reduced SBA oversight and, as SBA's
budget for salaries and expenses has shrunk over the past decade, the
Agency has increasingly delegated this authority to lenders.
Loans made under the 7(a) program that go into default are
individually reviewed by SBA to determine whether the lender complied
with the Agency's lending requirements. Generally, this review is the
primary means that SBA uses to determine lender compliance with Agency
regulations and requirements. If it is determined that the lender did
not comply materially with SBA's regulations, SBA can negotiate a
settlement of the guaranty amount or deny payment of the guaranty
entirely.
The STAR Loan Program. Under the STAR loan program, SBA was
authorized by Congress to charge lenders reduced fees for guaranties on
loans made to small businesses which were deemed ``adversely affected''
by the September 11th terrorist attacks and their aftermath. Although
the term ``adversely affected'' was not defined, Congressional staff
and SBA program managers appear to agree that Congress intended the
program to benefit not only those businesses that were directly
impacted by the attacks, i.e., firms located near the World Trade
Center or the Pentagon, but also businesses across the country that
were harmed by the economic consequences of the attacks. Congress
appropriated $75 million for the STAR loan program, which provided
authority for SBA to guaranty up to $4.5 billion in loans. Funds were
available from January 11, 2002, through January 10, 2003.
SBA Guidance on the STAR Loan Program. SBA issued guidance on the
STAR loan program that defined an ``adversely affected small business''
as any business that ``suffered economic harm or disruption of its
business operations as a direct or indirect result of the terrorist
attacks . . . .'' Qualifying businesses were not limited to a
``particular geographic area or to any specific type of business.'' SBA
procedures required lenders to determine that the loan applicant was
adversely affected by the terrorist attacks and to prepare and maintain
in its loan file ``a write-up summarizing the analysis and its
conclusion that the loan is eligible for the STAR program.'' The
guidance made clear that a lender would be deemed not to have met its
responsibility for determining that a borrower was adversely affected
if the lender did not provide a narrative justification demonstrating
the basis for its conclusion. Borrowers were permitted to use STAR loan
funds for any purpose authorized for 7(a) loans. Lenders also had
authority to reclassify loans made under the regular 7(a) program as
STAR loans if the borrower was eligible.
Our review found that lenders were initially reluctant to use the
STAR loan program due to concerns that SBA would second guess their
justifications and deny payment of the loan guaranty. Congressional
staff expressed concern about the lenders' lack of interest in the
program and urged SBA to promote the use of the program. SBA reacted by
vigorously promoting the program through articles in trade journals,
speeches at lender conferences, and by directing its district offices
throughout the country to contact local lenders to persuade them to
approve STAR loans. SBA advised lenders that a very large percentage of
small businesses could qualify for STAR loans and assured lenders that
SBA would not second guess their justifications.
OIG Audit of the STAR Loan Program. The OIG conducted an audit of a
statistical sample of 59 STAR loans from the universe of 7,058 STAR
loans approved between January 11, 2002 and January 10, 2003, to
determine whether loan recipients were eligible to receive the loans.
There were 27 lenders included in the sample. Using accepted
statistical methodology, the audit results could be projected with 95
percent certainty. For 50 of the 59 borrowers (85 percent) in the
sample, we were unable to determine from the lenders' loan files and
discussion with available borrowers whether the borrowers were
adversely affected by the 9/11 attacks and their aftermath, as required
for STAR loan eligibility. For these 50 loans, the required
justification was either (1) missing--5 loans; (2) merely a conclusion
with no support--4 loans; (3) based on the adverse affects suffered by
the business being purchased with a STAR loan rather than the ``loan
applicant'' and SBA procedures did not specify whether such loans could
qualify--11 loans; (4) contrary to documentation in the lender's loan
file or borrower statements--21 loans; or (5) vague and neither
contrary to nor supported by documentation in the lender's loan file or
borrower statements--9 loans. Although these results do not necessarily
show that the 50 borrowers were ineligible for the program, they
indicate that lenders failed to prepare adequate justifications and
obtain supporting documentation to determine eligibility.
Further, of 42 borrowers that we were able to contact, only two
stated they were aware that they had received a STAR loan. Thirty-six
borrowers said they were not asked, or could not recall if they were
asked, about the impact of the attacks on their businesses. We
concluded that, in many cases, funds appropriated for guaranties on
loans to small businesses adversely affected by the terrorist attacks
may not have been used for that purpose.
Inadequacy of SBA Program Controls. In trying to establish the
reasons behind these findings, we determined that SBA did not implement
adequate internal controls and oversight to ensure that only eligible
borrowers obtained STAR loans. Although SBA established guidance for
the program requiring lenders to prepare and file written
justifications showing borrower eligibility, senior SBA officials, in
order to encourage the use of the STAR loan program, broadened the
scope of program eligibility. Public statements made by senior SBA
officials conveyed SBA's expansive interpretation of the term
``adversely affected'' and that SBA believed that virtually every small
business had suffered some direct or indirect adverse impact and could
likely qualify for a STAR loan. Further, SBA officials reassured
lenders that the Agency would not second guess their eligibility
justifications. SBA also did not require lenders to provide their
justifications to the Agency, either at the time a loan was made or at
the time that a lender requested SBA to honor the guaranty on a
defaulted loan.
I should note that, although the SBA guaranties may not have been
used for appropriated purposes, we did not find that any businesses
legitimately affected by the 9/11 attacks were precluded from obtaining
a STAR loan. Indeed, when the STAR loan program appropriation expired
in January 2003, funds for the program were still available and were
transferred to the regular 7(a) loan program. Therefore, it does not
appear that eligible businesses were prevented from receiving STAR
loans due to a lack of funds. Furthermore, the default rate for STAR
loans does not appear excessive in comparison to similar SBA-guarantied
loans. As of September 30, 2005, only 8 percent of disbursed STAR loans
approved between January 11, 2002, and January 10, 2003, had been
transferred to liquidation status, while 10 percent of the 7(a) loans
approved during the same time period had been transferred to
liquidation status.
Lessons Learned. What were the lessons learned from this review?
For future special programs where 7(a) loans are used for nationwide
disaster relief, the OIG recommended that SBA: (1) require loan
applicants to justify how the business was harmed by the disaster; (2)
require lenders to obtain supporting documentation to verify applicant
claims of injury and provide detailed justifications showing applicant
eligibility; and (3) implement effective internal controls and program
oversight to ensure borrower eligibility and lender compliance.
Specifically related to the STAR loan program, the OIG recommended that
the Agency: (1) implement procedures to require lenders to submit STAR
loan justifications when seeking SBA's purchase of a STAR loan
guaranty; (2) establish criteria to provide more definitive guidance
and examples for purchase reviewers to use in determining what
constitutes an inadequate justification for STAR eligibility; (3) for
future purchase requests, determine whether STAR loans that contain
inadequate justifications can be reclassified as 7(a) loans or whether
SBA can deny lender requests for purchase of the guaranties under SBA
regulations; and (4) review guaranties the Agency has already paid
under the STAR loan program to determine whether lenders were paid
despite the absence of adequate borrower eligibility justifications. If
there is inadequate justification, we recommended that the Agency
determine whether SBA should reclassify the loan as a 7(a) loan or seek
recovery of the guaranties from the lenders.
Disaster Loans for Businesses Hurt by 9/11. The Small Business Act
also permits SBA to make direct loans to victims of declared disasters.
Disaster loans, which are available to businesses and to homeowners,
can be used to fund repairs of physical damage to homes and businesses,
and to provide working capital to disaster-impacted businesses to allow
them to pay their bills or otherwise fund operational needs. These
latter loans are known as Economic Injury Disaster Loans (EIDL). These
loans are made at a low interest rate, generally less than 4 percent,
with generous repayment terms, which can last up to 30 years. In order
to make Federal assistance available to more businesses that were
impacted by the September 11th terrorist attacks, and not just those
located in the declared disaster areas, SBA expanded the EIDL program
to assist small businesses located outside the declared disaster areas.
SBA disbursed over $1.1 billion in 9/11 disaster loans.
9/11 Disaster Loan Fraud. In 2003, the OIG began a proactive review
of defaulted 9/11 EIDLs to assess whether there was fraud involved in
obtaining or using loan proceeds. Inevitably, some of these disaster
loans involved fraud due to loan transactions being expedited in order
to provide quick relief to disaster victims. The OIG's Auditing
Division screened a sample of defaulted 9/11 loans to identify
indicators of fraud. Where indicators existed, these loans were then
examined further by investigators. Based on these referrals, as well as
those from other sources such as OIG Hotline, Office of Disaster
Assistance, other law enforcement, etc., the OIG's Investigations
Division opened 51 cases on loans valued at approximately $20 million.
Thus far, 37 cases have been closed, and 14 cases are in an open status
at various stages of investigation. There have been 10 indictments, 10
convictions, and over $1 million in restitution and settlements.
The types of fraud schemes we identified in these cases included
individuals and businesses claiming losses even though their companies
were not located in the disaster area, false claims related to personal
property or equipment damage, misuse of the disaster loan proceeds, and
false statements concerning financial status. For example, in one case,
the president and the managing partner of a business received an SBA
disaster loan by falsely claiming that their company had been located
at the World Trade Center. In fact, the business was not located there
on September 11, 2001, and the individuals were salaried employees of
another company at the time. They were sentenced to incarceration and
ordered to pay a combined total of $618,000 in restitution.
OIG Finding Regarding SBA Collection of 9/11 Disaster Loans. While
the auditors were screening defaulted loan files, it became apparent
that SBA was not always pursuing collection timely. Therefore, the OIG
conducted a review to determine if delinquent 9/11 disaster loans were
serviced appropriately. As of September 30, 2004, 1,495 of these loans,
valued at $208.8 million, were delinquent. The Office of Management and
Budget (OMB) requires that agencies promptly act on the collection of
delinquent debts, using all available collection tools to maximize
collections. Since 1993, SBA has employed the issuance of demand
letters as an important part of the loan liquidation process.
The OIG reviewed a sample of delinquent loans and found that SBA
sent pre-demand or demand letters to only 4 of the 17 borrowers who
should have received them. We found that insufficient staffing of SBA's
liquidation center prevented personnel from following proper collection
methods. Instead of properly issuing pre-demand and demand letters to
collect delinquent loan funds, personnel were used to service
bankruptcies, collateral activities, and/or borrower initiated offers
of compromise.
OIG Recommendations on Proper Debt Collection. The OIG recommended
that the Agency revise its procedures to direct servicing centers to
send timely pre-demand and demand letters to delinquent borrowers and
to maintain copies of these letters in loan files. Additionally, we
recommended that the Agency ensure that sufficient staff resources are
devoted to liquidation center activities to fulfill the debt collection
responsibilities required by OMB. Attention to the collection of funds
when a loan is delinquent must be part of SBA's most basic
responsibilities.
Conclusion. Thank you for the opportunity to comment. I look
forward to answering any questions that you may have.
Mr. Rogers. Thank you, Inspector Thorson.
The Chair now recognizes Mr. Douglas Small, Deputy
Assistant Secretary of the Employment and Training
Administration of the Department of Labor, for your statement.
Thank you.
STATEMENT OF DOUGLAS SMALL
Mr. Small. Mr. Chairman and members of the subcommittee,
good morning. I am pleased to have the opportunity to testify
here before you today on behalf of the U.S. Department of
Labor's Employment and Training Administration to discuss the
agency's response to the terrorist attacks of September 11,
2001, the lessons that we have learned about disaster
preparedness and program oversight as a result of that terrible
tragedy.
The Employment and Training Administration is responsible
for an array of programs and services to assist workers who
have lost their jobs or might lose their jobs as a result of a
disaster. These include the Unemployment Compensation Program,
also known as unemployment insurance, the Disaster Unemployment
Assistance Program, national emergency grants, and training
services and employment services available through about 3,500
one-stop career centers.
These career centers are positioned to serve disaster
victims because they are geographically dispersed, and they are
staffed by trained professionals, and their focus is on
individual assistance.
Each of us who served our nation during the time of the
terrorist attacks of September 11th were faced with
unprecedented challenges and problems that demanded immediate
results, and generally those results were delivered. I would
like to highlight federal assistance to New York following the
terrorist attacks.
Labor Secretary Elaine Chao and Assistant Secretary Emily
DeRocco acted swiftly to ensure that the state had resources to
meet the needs of workers whose employment was permanently or
temporarily impaired by the terrorist attack.
Secretary Chao awarded a $25 million national emergency
grant to New York. Congress provided those funds in the 2001
emergency supplemental appropriations. That bill also included
$175 million in workers compensation programs, and an earmark
for $32.5 million for the Consortium of Worker Education.
New York was also allocated $7.6 million in emergency
funding for administrative costs associated with processing
unemployment claims. The department has also made funds
available to Virginia and other states that were dealing with
economic aftershocks and industry layoffs resulting from the
terrorist attacks.
In response to the unique circumstances related to those
attacks, the department issued emergency regulations to permit
individuals who were unemployed due to the closure of
Washington National Airport eligible for disaster and
employment assistance. The deadline for applying for disaster
and employment assistance was extended from the 26 to 39 weeks,
as well for any individuals who lost their jobs as a result of
the attacks.
State agencies in New York and Virginia were able to handle
the unemployment compensation and disaster unemployment
assistance claims. New York was able to handle them through
telephone calls that enabled them to be able to process those
claims through their call center in upstate New York, since the
center in downtown New York City was temporarily closed due to
the damage of the attacks.
Virginia actually set up a temporary claims center at the
Ronald Reagan Washington National Airport, which was closed
following those attacks. That was staffed by volunteers from
the U.S. Department of Labor and neighboring states that helped
in the processing of those claims.
As a grant-making agency, the Employment and Training
Administration follows detailed written procedures to
strengthen safeguards and the integrity of the grant-making
process.
We supported the post-9/11 recommendations of the Office of
the Inspector General, which asked us to more clearly delineate
roles and responsibilities for personnel of the various
departments at the Employment and Training Administration and
at Labor. As a result, we issued guidance on the roles and
responsibilities for the Employment and Training Administration
for all phases of grant administration.
With respect to unemployment compensation, the department
requires each state to operate a benefit payment control
program that prevents, detects and recovers improper payments.
The department recently established a performance measure for
improper payments.
In addition, the president's 2006 and 2007 fiscal year
budget proposals contain a program integrity proposal that, if
enacted, would help states reduce improper payments and produce
significant cost savings, while protecting those who are
eligible, especially in the event of a massive disaster like
September 11th.
I would just to briefly say that the lessons learned from
9/11 helped us considerably in our responses to Hurricane
Katrina. We were able to respond immediately with national
emergency grants. We applied over $206 million immediately to
states that were impacted and evacuee host states, as well. And
we were able to provide unemployment compensation and disaster
employment assistance to approximately 293,000 people who
received over $784 million in unemployment compensation.
We have also created a number of tools to assist in proper
monitoring and oversight.
In conclusion, I would like to say that the terrorist
attacks and the hurricanes each were large catastrophic events
were different and required a unique response, and that we must
develop many different strategies if we are going to rapidly
respond to different circumstances as they arise.
We have developed new tools. We have an electronic
application system for national emergency grants to expedite
that processing. We have developed a core monitoring guide that
helps us look at disasters and monitor them more effectively
and to try to help people become more rapidly re-employed.
Additionally, we are in the process of developing a couple
of tools that we think will be effective: community blueprints,
and strategic action for regional transformation teams, which
we think could assist states, immediately looking at the
economic impact of these disasters.
Mr. Chairman, this concludes my testimony, and I am
prepared to respond to any questions that you may have at this
time.
Thank you.
[The statement of Mr. Small follows:]
Prepared Statement of Douglas F. Small
Good morning. Chairman Rogers, Ranking Member Meek and
distinguished members of the Subcommittee, thank you for this
opportunity to discuss the Department of Labor's Employment and
Training Administration's response to the terrorist attacks of
September 11, 2001.
In the aftermath of that terrible tragedy, the Employment and
Training Administration (ETA) engaged in a number of activities to
ensure that the affected workers received income support, job training,
job search assistance, and other employment related services. Today, I
will testify about these activities, and the lessons we learned about
disaster preparedness and program oversight during that time period. I
would also like to take this opportunity to discuss a very different
kind of disaster--Hurricane Katrina, and the lessons that we learned
from responding to the vast devastation and displacement that it left
in its wake. Finally, I will share with the subcommittee how these
lessons have helped shape our future disaster response and oversight
activities.
ETA is responsible for an array of programs and services to assist
workers who have lost or might lose their jobs as a result of
disasters. These include the Unemployment Compensation program (UC),
Disaster Unemployment Assistance (DUA), National Emergency Grants
(NEGs), and the wide variety of employment and training services that
are available through One-Stop Career Centers.
Before I go into more detail about our disaster response and
oversight activities after the terrorist attacks of September 11, 2001,
I would like to give a brief overview of each of the programs I have
just mentioned. The UC program provides temporary partial income
support (also known as unemployment insurance) to laid-off workers to
help ensure that some of the basic necessities of life are met while
the individuals look for work. It is also an important economic
stabilization tool. Benefits are provided for up to 26 weeks in most
states and the benefit amount is based on past work and wages. During
periods of high unemployment, up to 13 additional weeks of benefits are
available under the Extended Benefits program. In general, UC is
available to workers who have significant recent work experience and
are unemployed through no fault of their own.
The UC program is a federal-state partnership based upon Federal
law, but administered by state employees under state law. Federal law
defines certain requirements and each state designs its own UC program
within the framework of the Federal requirements. The primary functions
of the Federal government include: setting broad overall policy for
administration of the UC program; monitoring state performance; and
providing technical assistance when necessary. The primary functions of
states include: taking claims; determining eligibility; and ensuring
timely payment of benefits to unemployed workers.
The DUA program provides financial assistance to individuals who
are not eligible for regular UC (such as the self-employed and recent
entrants to the labor market) and whose employment has been interrupted
as a direct result of a major disaster. DUA benefits are triggered when
the President declares a major disaster in specified areas of a state.
NEGs are funded through the Secretary's reserve as authorized under
the Workforce Investment Act of 1998 (WIA). In response to a natural
disaster, states can apply for NEG funds to provide temporary disaster
relief employment for individuals who have lost their jobs as a result
of the disaster, are eligible dislocated workers, or are otherwise
unemployed. This temporary employment is to work on projects that
provide food, clothing, shelter and other humanitarian assistance for
disaster victims as well as to conduct demolition, cleaning, repair,
renovation and reconstruction of damaged or destroyed public
structures, facilities and lands located in the disaster area. The
funds may also be used to provide other employment and training
activities. Once FEMA has declared a disaster eligible for public
assistance under the Robert T. Stafford Disaster Relief and Emergency
Assistance Act, a state may submit an application for NEG disaster
funds. A short application process for disaster relief NEGs is in place
for States to request funds to respond to immediate needs.
One-Stop Career Centers are the local access point for employment
and training services, such as job search and placement services, job
vacancy listings, career planning and guidance, and supportive
services. Over a dozen federal programs are partners in the One-Stop
Career Center system. Currently, there are almost 3,500 comprehensive
and affiliate One-Stop Career Centers around the country.
ETA's Response to 9/11
All of us who served our nation during the time of the September 11
attacks vividly recall the pervasive atmosphere of urgency, ``can-do''
improvisation, broad generosity, and concern for those who were
suffering. All of us in government, including the Department of Labor,
were faced with new challenges and problems that demanded immediate
results--and generally, those results were delivered.
Following the terrorist attacks on the World Trade Center and the
Pentagon on September 11, 2001, the Secretary of Labor awarded a $25
million National Emergency Grant (NEG) to New York to assist
approximately 6,900 dislocated workers from industries directly
impacted in New York City by the disaster. Temporary jobs were not
created as a result of the nature of the disaster and the health
hazards involved. The NEG funds originated in the 2001 Emergency
Supplemental Appropriations Act for Recovery from and Response to
Terrorist Attacks in the United States (Public Law 107-38). The state
of New York subcontracted with 17 organizations to provide employment
and training services.
The Secretary also awarded a National Emergency Grant to Virginia
for $3.5 million, which served approximately 5,000 workers, including
those from airline and related industries. Several grants were awarded
to states that were impacted by layoffs in the airline and related
industries dealing with the economic aftershocks of the terrorist
attacks of September 11, 2001. They included NEG awards to Minnesota
for $8 million (to serve approximately 2,500 workers), Illinois for $5
million (to serve approximately 2,375 workers), Florida for $3.4
million (to serve approximately 2,000 workers), New Jersey for $3.2
million (to serve approximately 2,500 workers), and Massachusetts for
$2.4 million (to serve approximately 600 workers).
The Emergency Supplemental Appropriations Act also provided $175
million for New York Workers Compensation Programs, and included an
earmark for $32.5 million to the Consortium for Worker Education, a New
York City based organization.
New York was also allocated $7.6 million in emergency funding for
administrative costs associated with processing unemployment
compensation. The allocations were made in two installments of $3.1
million and $4.5 million.
ETA Regional Office staff provided technical support to New York
State, which not only experienced more than a 100% increase in
unemployment insurance claims, but was also restricted by the
peripheral physical damage in New York City. The ETA Regional Office
also coordinated activities between affected state agencies and FEMA
and provided Federal staff to the city's disaster center to assist with
UC claims.Sec.
The state agencies in New York and Virginia were able to handle
state UC and DUA claims filing. New York handled claims filing
primarily by telephone and as a result was able to process UC claims
through its upstate call center even though its New York City call
center was closed temporarily due to damage from the attacks. Virginia
(which took claims in person) set up a temporary claims center at the
Ronald Reagan Washington National Airport, which was closed for a
period following the attacks. Volunteers from the U.S. Department of
Labor and neighboring states helped Virginia staff this temporary
claims center which handled UC claims primarily from airport workers.
In response to the unique circumstances related to the terrorist
attacks, the Department of Labor issued emergency regulations to permit
individuals who were unemployed due to the closure of the airport to be
eligible for DUA. In addition, the deadline for applying for DUA was
extended in New York. Congress also extended DUA benefits from 26 to 39
weeks for individuals who lost their jobs because of the terrorist
attacks on 9/11. Approximately 3,400 people received $14 million in
DUA.
Oversight Activities
Grant making in a time of crisis requires an equal emphasis on
expediency and efficiency. ETA follows detailed, written procedures for
each of its grants, and continuously upgrades these safeguards to
strengthen the integrity of the grant-making process.
Following recommendations by the Office of the Inspector General
(OIG) to more clearly delineate the roles and responsibilities of
personnel in various departmental offices with respect to the grant
process, especially in emergency situations, ETA issued a new
Employment and Training Order (ETO) in 2003. This ETO clarified the
roles and responsibilities within ETA for grant administration,
including the Regional Office federal project officer responsibilities.
To further strengthen oversight and financial management of NEGs, ETA
also issued internal guidance on the roles and responsibilities for the
grant awards, covering all aspects of the administrative process,
including the assurance that the process is efficient and transparent.
This includes monitoring of NEG projects for compliance with the grant
fiscal and program requirements to avoid fraud and abuse.
Finally, with respect to UC, the Department requires each state to
operate a Benefit Payment Control program that prevents, detects, and
recovers improper UC payments. States utilize a wide array of tools to
detect potential improper UC payments including in-depth investigations
and cross-matches with databases from other government agencies to
determine, among other things, if individuals are still receiving UC
after they returned to work. The Department recently established a new
performance measure for improper UC payments, which was consistent with
recommendations of the OIG. The Department also has provided state UC
agencies with funds to use the latest technology to detect potential
improper payments. Since each state UC agency already had this
oversight system in place before 9/11, they did not have to create a
new oversight program after the attacks to determine if UC benefits
were improperly paid. In addition, the President's fiscal year 2006 and
fiscal year 2007 budget proposals have included UC program integrity
proposals which, if enacted, would help states reduce improper UC
payments and produce significant cost savings while protecting UC for
those who are eligible, especially in the event of a massive disaster
like September 11.
ETA's Response to Hurricane Katrina
Although Hurricane Katrina was a disaster of a very different
nature than the 9/11 tragedy, ETA's activities were informed by our
experience handling services after the terrorist attacks on September
11, 2001. In New York and Virginia, the disaster was mainly localized,
and the state infrastructure for the state workforce investment system
remained largely intact. During Hurricane Katrina, the states that were
primarily affected--Alabama, Louisiana and Mississippi--experienced
severe loss of infrastructure, and the displacement of workforce system
staff. As a result the state workforce systems were not able to readily
respond--even, in one case, to be able to electronically submit an
application for a NEG.
ETA has had substantial experience with disasters caused by
hurricanes, yet this experience did not fully prepare the agency to
respond to a disaster of the magnitude of Hurricane Katrina in which
state infrastructure was devastated. In addition to the large numbers
of persons who lost their employment due to the devastation,
significant numbers of persons evacuated the immediate areas of
devastation and relocated to other nearby states, causing new and
different challenges for the workforce system.
ETA responded quickly with NEGs and other resources to the affected
states and evacuee host states. A total of $236 million was awarded in
NEGs to states for the 2005 Gulf Coast Hurricanes.
The UC and the DUA programs provided crucial financial assistance
to victims of hurricanes Katrina and Rita. ETA estimates that
approximately 293,000 people received $784 million in UC in the areas
affected by the hurricanes. Approximately 197,000 people received $395
million in DUA.
After the Hurricanes, ETA was in close contact with state officials
in the impacted states and provided a wide array of assistance
including:
Quick distribution of $44 million in UC administrative
grants to help Louisiana, Mississippi, and Alabama repair and
replace damaged infrastructure for the UC program and to expand
their capacity to process a surge in claims;
Extending the time allowed for individuals to apply
for DUA and to provide documentation of wages and employment
because of the difficulties many evacuees faced;
Recruiting states to help Louisiana and Mississippi
with claims filing via a toll-free phone number that routed
calls from unemployed workers in Louisiana and Mississippi to
call centers in other states; and
Working with the U.S. Department of Health and Human
Services (HHS) to expedite Mississippi and Louisiana obtaining
authorization to cross-match their UC claims against the
National Directory of New Hires (NDNH). (UC beneficiaries who
continue to claim benefits after returning to work are the
number one cause of UC overpayments and the NDNH includes
information on all new hires nationwide.)
In addition, Congress enacted legislation providing $500 million to
Alabama, Louisiana, and Mississippi to help pay the costs of regular UC
benefits. Congress also enacted the Katrina Emergency Assistance Act of
2005 which extended DUA benefits from 26 up to 39 weeks for victims of
Hurricanes Katrina and Rita. (Along with DUA recipients, individuals
who received their full entitlement to UC were potentially eligible for
13 additional weeks of benefits.) Congress also enacted the Flexibility
for Displaced Workers Act (Public Law 109-72), which provided
additional flexibility for serving disaster affected individuals using
NEG funds.
The Department and ETA spearheaded several other initiatives to
help displaced workers and impacted communities. These included:
Implementing the Pathways to Construction Employment
Initiative to support economic revitalization in Louisiana and
Mississippi through a partnership between each state's
workforce agency and the community college system to establish
and operate construction career pathways. Each state was
awarded $5 million to implement the projects.
Awarding High Growth Job Training Grants to Alabama,
Louisiana, Mississippi, and Texas to train workers for jobs and
careers in critical industries such as construction, energy,
health care, transportation, and safety/security. Each state
received $3 million to implement these projects.
Awarding $63 million in Community-Based Job Training
Initiative grants to 35 community colleges in the Gulf Coast
and the Southeast whose programs will be critical to rebuilding
the regional economy.
Developing the Reintegration Counselor Program, which
deployed highly skilled counselors to increase the capacity of
One-Stop Career Centers in serving hundreds of thousands of
individuals displaced from their families and jobs. ETA
provided $13,500,000 to fund more than 150 counselors in
Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana,
Mississippi, Missouri, Oklahoma, Tennessee, Texas and Virginia.
Deploying Disability Program Navigators to assist
individuals with disabilities in the affected region ($5
million was awarded to support this initiative).
Implementing the Hurricane Recovery Coach, an
innovative online tutorial developed for workers, businesses,
and reintegration counselors/workforce staff impacted by the
Hurricanes Katrina and Rita. The Hurricane Recovery Coach
identifies common employment and recovery issues facing
evacuees and others who have been affected by the hurricanes
and provides step-by-step instructions to help users find
resources to related information.
Forming the Mississippi/Manpower partnership between
One-Stop Career Centers and Manpower, Inc. to encourage
evacuees to return home to work and to certify an evacuee's
work readiness skills. This program created ``Coming Home
Portfolios'' that include job training, support services and
employment opportunities.
Providing waiver flexibility to seven states to help
states target services to affected individuals and local areas.
A total of 46 WIA waivers and three Work-flex Plans were
approved for the states of Alabama, Arkansas, Georgia,
Louisiana, Mississippi, and Texas.
One-Stop Career Center System
One-Stops Career Centers were uniquely positioned to be an access
point for services for Hurricane victims, because they were
geographically dispersed and already the focus for individuals seeking
unemployment and disaster benefits and searching for temporary or full-
time employment. One-Stop Career Center staff are trained and
experienced in serving a wide range of customers with multiple needs.
In addition to the almost 3,500 One-Stop Career Centers around the
country, many states have developed the capacity to provide mobile One-
Stop services, particularly in remote areas. This was a service that
was critical during the massive displacement resulting from Hurricane
Katrina, when dozens of mobile career centers were deployed to provide
service at evacuee shelters. After Hurricane Katrina, evacuees were in
every state in shelters and were rapidly moving into new communities.
The One-Stop Career Centers and affiliates nationwide served as access
points for benefits and services for evacuees while away from home or
in their new hometown. One-Stop Career Centers also helped evacuees
connect to jobs across state boundaries.
During the disaster and in its aftermath, One-Stop Centers had the
capacity to broadcast employment and career opportunities nationwide
with an array of Internet-based tools to assist during the disaster.
These web tools included the CareerOneStop comprehensive Web site:
www.careeronestop.org and www.servicelocator.org.
One-Stop Career Centers also supported FEMA in identifying the
skilled and specialized workforce necessary to help in recovery and
disaster relief efforts.
Monitoring and Oversight of Katrina Activities
ETA has developed several tools to ensure that proper monitoring
and oversight is taking place in the aftermath of Hurricane Katrina.
First, ETA's regional offices produce a weekly stewardship report on
all key activities. This report was initially required by the Office of
Management and Budget (OMB) in September 2005 to document the agency's
analysis and response to the financial risks posed by the huge rapid
response required in the aftermath of the Katrina disaster. Required
information included:
Identification of abnormal risks presented by the
emergency for fraud, waste and abuse of funds/assets;
Evaluation of the effectiveness of existing controls
to prevent/detect each risk;
Additional controls to be implemented for the
emergency; and
Normal and/or additional monitoring of programs and
transactions to be used to track the effectiveness of
implemented controls.
DOL senior management requested the Office of the Chief Financial
Officer (OCFO) to recast the OMB report into a weekly report which
would specifically identify and track DOL financial control issues
relating to Katrina recovery efforts. In response, the Employment and
Training Administration developed a reporting process which includes:
a. Reports from the regional offices on Katrina related events:
i. Significant actions for the week;
ii. New issues identified as affecting timeliness of
response or vulnerability to fraud, waste and abuse;
iii. Status of progress in addressing issues requiring
on-going efforts to ameliorate the risk;
iv. Any other information pertinent to the Katrina
recovery effort financial situation, such as Office of
Inspector General investigations, State officials/
agencies' communications or investigations, etc.
b. Reports from the program offices on Katrina related issues
involving policy or other high-level responses.
c. Status of funding and expenditure for each Katrina related
grant or program.
This report is presented weekly to the Deputy Secretary of Labor to
keep senior management apprised of the financial status of the recovery
effort and to highlight possible or actual vulnerabilities and the
efforts of DOL towards abating those vulnerabilities.
For NEG projects, this report looks at overall participant
enrollments and financial draw downs for both direct disaster projects
and for evacuee projects. This report also looks at all major
monitoring activities as well as any issues identified by the states or
by regions that need resolution including policy issues, grant actions
and similar matters that affect the success of the disaster response.
Regional Monitoring, Oversight and Technical Assistance
Since Hurricane Katrina, ETA has been involved in significant on
the ground support to affected states. ETA Regional Office staff has
monitored affected states on their DUA programs in accordance with the
Secretary's standards, and has provided numerous onsite and remote
technical assistance, in addition to actual onsite monitoring and
oversight since the onset of Katrina and Rita.
Immediately after the Hurricane hit, the Dallas Regional Office
formed an internal Hurricane Team to work directly with Louisiana
Department of Labor officials to provide onsite and remote technical
assistance, oversight and monitoring, and act as a liaison to obtain
assistance from other states and regions for technology and staffing
support. To date, the members of this team have made 68 separate and
joint onsite technical assistance and monitoring visits to states in
the region in response to Hurricanes Katrina and Rita. The team has
also assisted the Louisiana Department of Labor in implementing and
carrying out the new National Directory of New Hires for cross matching
UI and DUA claimants across state lines to help alleviate fraud and
abuse of UI and DUA funds.
Lessons Learned in the Aftermath of 9/11 and Hurricane Katrina
As a result of the terrorist attacks of September 11, 2001, and
impact on the Gulf Coast in 2005 from Hurricanes Katrina and Rita, we
have learned that each large catastrophic event is different and that
we must develop a wide array of tools so that we are able to rapidly
respond to different circumstances as they arise. Although there are
many things we can do to prepare for a disaster, we have also learned
that events of this magnitude always entail circumstances that may not
be foreseen. For example, after September 11th, there was a need to
change DUA regulations in order to serve workers who were unemployed
due to the closure of Ronald Reagan Washington National Airport. The
mass relocation of victims of Hurricane Katrina required new and
different responses, including unprecedented coordination between
states to handle claims for UC and DUA.
We learned that in times of disaster, it is critical for the
workforce system to collaborate with other government agencies and have
access to information about resources that these agencies can provide.
For example, in the aftermath of the Hurricanes, dislocated individuals
who could be engaged in NEG funded temporary disaster projects required
housing since most housing in the affected areas was destroyed. The
workforce system can arrange for recruitment and placement, but did not
have ready access to information about when individuals would become
eligible for housing assistance, making the job placement situation
difficult.
Another lesson that we learned from these disasters is that
telephone and internet claim filing for UC and DUA benefits provides
needed flexibility in the aftermath of a destructive event. Although
states have gradually stopped taking claims in person, not all states
have adopted telephone and internet claims filing systems. The
Department has encouraged states to adopt these systems by providing
them with implementation grants. As of March 2001, 22 states had
implemented telephone claims filing operations and 8 states had
implemented internet claims filing operations. Since 2001, we have
given states over $15 million for telephone and internet claims filing
systems. Now, 38 states have telephone claims filing operations and 43
states have internet claims filing operations.
Remaining Challenges
Although we have made a tremendous amount of progress in our
disaster preparedness, there are still some remaining challenges that
we have identified, which include:
Streamlining DUA Funding. Although DUA is funded by FEMA, the
Department of Labor is responsible for administering the program
through the state agencies that administer state UC programs. The basic
concept is simple_FEMA transfers funds to the Department which, in
turn, gives funds to the affected states to pay DUA benefits and
administrative costs. The process involves multiple levels of review
and approval by FEMA and DOL before needed funds are authorized for
transfer. As a result, there have been instances when states were
forced to delay DUA payments because funding was received late. An
important challenge is to streamline the approval and fund issuance
process so DUA funds can reach disaster stricken states as soon as they
are needed to make payments.
Developing Business and Disaster Recovery Plans. Hurricanes, fires,
floods, earthquakes, and tornadoes, as well as physical and cyber
terrorism, computer and telecommunications failures, and pandemics
could cause mass unemployment that exceed the claims processing
capacity of the impacted states. After Hurricane Katrina, we learned
that most states do not have plans for providing services after a mass
unemployment inducing disaster or when the UC agency headquarters are
destroyed. Thus, a remaining challenge is the development of business
continuity and disaster recovery plans that address loss of
communication, loss of computer processing capability, and loss of
primary workspace, and ways in which essential business functions will
continue until normal capability is restored and vital facilities are
accessible.
Developing Cooperative Agreements between States. During Katrina,
several states provided support to the impacted states, yet there were
initial problems associated with how assisting states would be
reimbursed for assistance provided such as staffing and mobile one-stop
systems. In the future, ETA believes that it is important to encourage
states to establish a set of protocols and cooperative arrangements to
deliver services when the home state is unable.
Developing and Implementing DUA Internet Claims System. Hurricanes
Katrina and Rita highlighted the gap in operating efficiency between UC
and DUA claims processing. It is important to automate DUA claims
processing and integrate those systems with state UC systems.
Sharing Information between Agencies to Locate Victims and Provide
Services. Hurricane Katrina highlighted the barriers to information
sharing between federal agencies. This is a challenge because without
this information sharing it is more difficult to locate disaster
victims and provide needed services.
Next Steps
As a result of disaster planning since 9/11 and Katrina, ETA has
developed several new policies and tools which can be utilized in a
future emergency. We have also developed the ability to catalyze a wide
array of partners working collaboratively in support of disaster
response activities.
We have also examined several approaches to providing assistance in
the event of disasters to support communities in times of economic
shock; we are currently developing STrategic Action for Regional
Transformation (``START'') Teams of senior ETA officials that can get
on site quickly and bring information and resources to assist in the
development of a state and local response. ETA is also developing
Community Blueprints designed to support communities suffering economic
shocks to reassess their economic landscape and develop response and
growth strategies. We have also compiled a comprehensive Federal
Resource Guide that catalogues resources and services available across
the federal government to help individuals and communities.
Conclusion
The September 11, 2001 terrorist attacks and the 2005 Hurricane
Season created challenges unlike any we have seen before. In response
to these challenges, we have developed new tools to provide technical
assistance to affected states; monitor and oversee how funds are being
spent; and help displaced workers access income support and other
services, and become quickly reemployed. In addition we have developed
tools to assist communities dealing with the economic impact of these
disasters. We will continue to devote significant time and resources to
developing these tools further and preparing for potential disasters.
Mr. Chairman, this concludes my testimony. Again, I appreciate the
opportunity to appear before you on behalf of the Employment and
Training Administration. I am prepared to respond to any questions that
you may have at this time. Thank you.
Mr. Rogers. Thank you, Mr. Small, for your statement.
The Chair now recognizes a good Alabamian, Mr. Leroy
Frazer, Bureau Chief of the Special Prosecutions Bureau of the
New York County District Attorney's office. He is a former
student at Talladega College and Tuskegee University, both of
which are in my district.
So as with one of our panelists yesterday, he doesn't think
I have an accent.
Mr. Frazer. Of course not, Mr. Chairman.
Mr. Rogers. Welcome, Mr. Frazer.
STATEMENT OF LEROY FRAZER
Mr. Frazer. Thank you.
Mr. Chairman and members of the subcommittee, I appreciate
this opportunity to appear before you today to testify on
behalf of the Honorable Robert M. Morgenthau, the district
attorney of New York County, regarding the fraud cases our
office prosecuted in the wake of the September 11th attacks.
The horrific attacks on September 11th led to an
unprecedented outpouring of charitable donations by the
American people. These donations and the aid designated by
Congress were administered primarily by FEMA, the American Red
Cross, Safe Horizons Corporation, and some other charitable
organizations.
At a time when countless acts of heroism were exhibited,
others tried to profit from the confusion. I appear before you
to relay our efforts in combating fraud in the aftermath of the
September 11th attacks on our nation.
To that end, the Manhattan District Attorney's office
prosecuted approximately 539 September 11th-related cases, with
approximately 98 percent of them fraud-related, with proceeds
totaling over $5.8 million. We also learned some valuable
lessons on how to detect and combat such fraud and how, in the
future, we can seek to prevent it from occurring in the first
place.
Initially we met with the inspector general from FEMA who
informed us that it is not uncommon in instances of national
disasters that people unaffected by the disaster submit
fraudulent applications for aid. To address that, we felt it
was important to centralize investigative efforts both within
and without the office in order to be effective.
Next, we determined that the principal organizations that
were distributing funds, as I said, were FEMA, American Red
Cross, Safe Horizons and the Robin Hood Foundation. We arranged
to have a contact person at each of these organizations for
purposes of receiving grand jury subpoenas and coordinating the
dissemination of information.
We also coordinated with local law enforcement and federal
law enforcement. We called a meeting, and we had
representatives from the following agencies: FEMA, Social
Security, Postal Inspectors, FBI, Secret Service, INS, the New
York State attorney general, the New York State Insurance
Department, NYPD, New York City Department of Investigation,
and New York City Law Department.
Once again, individuals were designated to ensure the
coordinated flow of information.
The initial wave of arrests came about because a worker or
workers at the Port Authority of New York and New Jersey
alerted the agency's inspector general that some of its workers
were applying for aid from the Red Cross, claiming they had
lost days' work due to 9/11.
Even though Port Authority offices were located in the
World Trade Center, the Port Authority had relocated its
workers, and no one lost even a single day's pay.
We investigated the allegations and, in November of 2001,
initially arrested twelve individuals for lying to Red Cross
and Safe Horizons about losing work. A further investigation
resulted in a dozen more being charged 2 months later, totaling
thefts of about just under $20,000.
As a result of a coordinated, multi-agency investigation,
in March of 2002, we announced charges against 22 people for
filing for death certificates falsely claiming that members of
their family had died in the attacks. Fourteen of the
defendants received funds totaling in excess of $750,000, while
the other eight were caught before they were able to receive
any funds.
An example of those cases was one Michigan man who claimed
that his brother had died at the World Trade Center. In that
instance, he preyed upon the person at Red Cross, who was there
to help and to try and give him what he deserved. And he used
that against her and against the charity by coming up with a
number of different reasons why they needed additional funds.
Another man, a Queens man, invented a 13th child out of 12
children, and we found out later that he used aliases from two
of his children, who were serving time in different states. He
also received a significant amount of money from the charities
as a result of that. He went to trial, and he was convicted
after trial.
Additional prosecutions demonstrated the extent that
individuals would go in order to fraudulently obtain funds.
One such person who went so far as to actually, not only
submit DNA samples that were fake, but also have a funeral, a
memorial service, and submit the name in order to collect
money, and had the charities pay for those things.
Finally, I would tell you--my time is running out. I would
like to move ahead and say that there were some obvious
problems that arose in the investigation and prosecution of
September 11th fraud cases. Many of the charity's volunteers
were from different parts of the country, which made it more
difficult to contact witnesses to investigate cases and
sufficiently prepare them for grand jury proceedings.
Additionally, due to the high volume of applications
processed, volunteers were not always able to recall the
details of every interview conducted. It would be helpful in
the future if there were a training program for relief workers,
including an orientation program regarding tools to employ to
detect fraud in screening applications for aid.
While it is difficult to detect a fraudulent claim at the
outset, the more supporting documentation obtained from a
claimant the better equipped we would be to investigate and
prosecute a fraudulent claim.
Moreover, there should be prominent and conspicuous
language on all applications for aid warning that statements
are done under a penalty of perjury and, if false statements
are made, the claimant will be prosecuted. In addition, it
would be prudent to require that declarations of loss contain a
notary's signature.
Nevertheless, despite numerous instances of fraud, it was
evident from interviewing employees and volunteers of the
relief agencies that each of them was committed to assisting
victims of the September 11th disaster in an expeditious
manner.
The New York County district attorney's office has been
successful in prosecuting those who unlawfully attempted to
enrich themselves by taking advantage of the tragedy that
affected our nation. Those who made a calculated decision to
take money and profit from confusion during a time of a
national crisis were apprehended and punished.
As a result of the district attorney's prosecutions, we
believe an important message was conveyed to the public that
those who thought they could profit from the World Trade Center
aftermath were mistaken.
Thank you.
[The statement of Mr. Frazer follows:]
Prepared Statement of Leroy Frazer
Mr. Chairman and members of the Sub-Committee, I am Leroy Frazer,
Jr., Bureau Chief of the Special Prosecutions Bureau in the Manhattan
District Attorney's Office. I appreciate this opportunity to appear
before you today to testify on behalf of Robert M. Morgenthau, the
District Attorney of New York County, regarding the fraud cases our
office prosecuted in the wake of the September 11th attacks. Permit me
to introduce to the members of the subcommittee my Deputy Bureau Chief,
Joan Delaney.
The horrific attacks on September 11, 2001 led to an unprecedented
out pouring of charitable donations by the American people. These
donations and the aid designated by Congress were administered
primarily by FEMA, the American Red Cross and Safe Horizons
Corporation. At a time when countless acts of heroism were exhibited,
others tried to profit from the confusion.
I appear before you to relay our efforts in combating fraud in the
aftermath of the 9/11 attacks on our nation. Although the amount of
fraud detected represented a small percentage of the funds allocated,
we felt and still feel that it is essential for the public to know that
there would be a strong effort to detect and prosecute individuals
responsible for taking advantage of a national tragedy to line their
own pockets. To that end the Manhattan District Attorney's office
prosecuted 539 September 11th related cases, with approximately 98% of
them fraud-related with proceeds totaling over $5.8 million dollars. We
also learned some valuable lessons on how to detect and combat such
fraud and how, in the future, we can seek to prevent it from occurring
in the first place.
In the immediate aftermath of the attacks it was clear that most
New Yorkers wanted to help in any way possible. Long lines formed
throughout the city to give blood only to find out that, unfortunately,
there was not going to be a significant need. Some donated supplies to
the search and rescue workers at ground zero while still others
volunteered to distribute food and supplies, or to help affected people
fill out forms to request aid. However as we soon learned, along with
those who wanted to help, came others who sought to prey upon tragedy
to promote their own self interests.
Initially we met with the Inspector General from FEMA who informed
us that it is not uncommon in instances of national disasters that
people unaffected by the disaster submit fraudulent applications for
aid. To address that we felt it was important to centralize
investigative efforts both within and without the office in order to be
effective. Towards that end Mr. Morgenthau directed that the frauds
committed against the charities be handled principally by one section
of the office, the Special Prosecutions Bureau. Next we determined that
the principal organizations that were distributing funds were FEMA,
American Red Cross, Safe Horizons and the Robin Hood Foundation. We
arranged to have contact persons at each for purposes of receiving
grand jury subpoenas when needed and coordinating the dissemination of
information.
We also coordinated the efforts of law enforcement. A meeting was
called with representatives from the following agencies: FEMA, Social
Security, Postal Inspectors, FBI, Secret Service, INS, New York State
Attorney General, the New York State Insurance Department, NYPD, NYC
Department of Investigation, and NYC Department of Law. Once again
individuals were designated to ensure the coordinated flow of
information. This proved to be essential in our prosecutions because
most defendants applied to several different charities and many lived
outside of New York City.
The initial wave of arrests came about because a worker from the
Port Authority of New York and New Jersey alerted the agency's
Inspector General that some of its workers were applying for aid from
the Red Cross claiming that they lost days at work due to 9/11. Even
though Port Authority offices were located in the World Trade Center,
the Port Authority had relocated its workers and no one lost even a
single day's pay. We investigated the allegations and on November 8,
2001 arrested twelve workers for lying to the Red Cross and Safe
Horizons in order to receive relief funds. Further investigation
resulted in a dozen more being charged two months later. The thefts
totaled $19,582.
I indicated earlier the citizens of New York City volunteered to
help in any way possible. A group of lawyers volunteered to help
victim's families fill out the paperwork to expedite death
certificates. This valuable program was coordinated by the NYC Law
Department, but there were those who took unfair advantage of it. As a
result of a coordinated multi-agency investigation on March 21, 2002 we
announced charges against 22 people for filing for death certificates
falsely claiming that members of their family died in the attacks.
Fourteen of the defendants received funds totaling $759,465, while the
other eight were caught before they received any funds. These cases
included:
A Michigan man, Daniel Djoro, who reported that his
brother, Daniel Zagbre, had been at the World trade center for
a business meeting at the time of the attacks. Daniel Zagbre
was in fact a fictitious name the defendant himself had used in
the past. Djoro obtained $272,800 from the Red Cross and Safe
Horizon. Dijoro pled guilty and was sentenced to 4 years in
jail.
A Queens's man, Cyril Kendall, reported that his 13th
child had accompanied him to a job interview at the World Trade
Center and had perished in the attack. The investigation
revealed that the child never existed and in fact the name he
had given had been used in the past as an alias by two of his
other 12 children. Kendall received a total of $190,000 from
Red Cross and Safe Horizon. Upon conviction after trial Kendall
was sentenced to 30 years in jail.
A Utah man, Ricardo Frutos, claimed that a brother,
niece and nephew died at the World Trade Center. The
investigation revealed that the people reported dead had never
existed, a fact which was confirmed by family members. Frutos
received $47,257 from Red Cross. He pled guilty and was
sentenced to 3 years in jail.
Additional prosecutions demonstrated the extent that individuals
would go in order to fraudulently obtain funds. One such person was
Carlton McNish who reported that his wife, Jisley McNish, went to work
that morning at Cantor Fitzgerald and never returned home. He reported
this to the New York City Police Department on October 3, 2001 and then
submitted DNA from a hairbrush and a comb to the New York City Office
of the Chief Medical Examiner's Office on October 5, 2001. McNish then
went to Pier 94 on October 16, 2001 and met with a volunteer attorney
who helped him fill out an affidavit to apply for a death certificate.
In the affidavit, the defendant claimed that his wife went to work that
morning at Cantor Fitzgerald and that she called him at around 9:30
a.m. to tell him that an airplane had hit the building, that the
building was filling with smoke and that she and several co-worker's
were trying to leave. He claimed that she never returned home that day.
The affidavit was ultimately filed with the New York City Corporation
Counsel. The wife's name was included on the City's official list of
missing persons and the name appears on the World Trade Center
memorial.
The defendant submitted a copy of this affidavit and a picture of
his ``deceased wife'' to the Medical Examiner's office. He submitted an
affidavit to the American Red Cross, Safe Horizon and the Salvation
Army, claiming that he was in need of financial assistance because he
was dependent on his wife's income and obligated to support their three
children. From October 2001 to January 2002, the defendant received
$68,000 from the American Red Cross, $30,000 from Safe Horizon, and
$1,000 from the Salvation Army. In addition, he received $5,000 from
the Robin Hood Foundation because his wife's name was on the Mayor's
official list of missing persons. The defendant also called in an
application to the Federal Emergency Management Administration, but did
not get any money after the certification form that was mailed to him
was returned unsigned.
Meanwhile, in November of 2001, the defendant went to a funeral
home in the Bronx and arranged a memorial service for his deceased wife
which occurred in December of 2002. He gave the funeral home a photo of
the woman which was used in the memorial program detailing the life of
``Jasclliny McNish.'' The funeral home helped the defendant apply to
the Crime Victim's Assistance Board in Albany to get funds to pay for
the memorial service. The defendant also submitted the funeral bill to
the American Red Cross and Safe Horizon and received money from both
charities for the full amount of the bill which totaled $6,279. The
American Red Cross became suspicious when as of March of 2002; the
defendant could not provide documentation for his ``children'' or for
his wife's employment at Cantor Fitzgerald. They contacted Cantor
Fitzgerald and were informed that no one by the name ``Jocelyn McNish''
(the name the defendant gave the American Red Cross) or ``Jasclliny
McNish'' (the name on the affidavit) ever worked for Cantor Fitzgerald.
At the same time, the NYPD was investigating the defendant's missing
person report because he could not confirm the spelling of his wife's
name, her employment and various other pertinent details that should
have been known to him.
During the course of the investigation, it was discovered that the
defendant was not married to anyone by the name of Jasclliny, Jisley or
Jocelyn McNish, and that he did not have three minor children as he
claimed on his various applications for relief. There is no evidence
that, even though her name was read from the list of those killed at
the World Trade Center during the 2002 and 2003 memorial services, the
woman the defendant claimed to be his deceased wife ever existed.
McNish pled guilty and was sentenced to 7 years in jail.
Woodrow Flemming was a 48 year old homeless man who resided in a
city shelter. He claimed to have been a vendor in the World Trade
Center area and produced a W-2 form purportedly from Woodrow Flemming
and Associates and a forged letter on the letterhead of an attorney
attesting to the fact that the attorney had purchased books from him.
Upon receiving close to $10,000 in aid, Flemming recruited several
additional ``employees'' from the shelter and brought them to the
relief center, supplied them with similar forged documents, and paid
them between $100 and $1100 in order to turn over their relief checks
to him. In total, Flemming stole $108, 905. Each defendant eventually
pled guilty and Flemming was sentenced to 12 years in jail.
A similar case involved a business called K.C.'s Barbershop which
was located approximately four blocks from the World Trade Center. It
actually was a very small shop with room for one barber's chair, yet 11
barbers submitted documentation claiming to have worked there and each
one was prosecuted.
Beatrice Kaufman had a business and residence in the affected area.
She owned a temporary employment agency and had planned to combine and
renovate two apartments. During the summer of 2001 she had made
arrangements to stay at the Helmsley Carlton Hotel during the
construction period and was due to relocate there on September 11,
2001. Construction had begun prior to 9/11 and she was living in her
home in the Hamptons, where she remained on 9/11. After returning to
the city post 9/11, Kaufman submitted identical bills for her hotel
fees and living expenses to her personal and business insurance
carriers, as well as FEMA, falsely claiming that the World Trade Center
attacks had caused her to suddenly and unexpectedly evacuate her
apartment and that her agency had lost valuable contracts due to the
attacks. She told her insurers and FEMA that she was physically and
emotionally unable to return to her apartment until February 2002, a
date which happened to coincide with the completion of the renovation.
In total she received $108,713 from her insurance companies and $5,940
from FEMA. She pled guilty and received a sentence of 6 months jail and
4 1/2 years probation.
Finally I will tell you about thefts from the city's Municipal
Credit Union (MCU). MCU's membership is open to, among others,
employees of the city, state and federal governments and employees in
the health care industry, and is located at 22 Cortlandt Street, near
where the World Trade Center towers stood. As a result of the collapse
of the towers, MCU's own ATM machines were disabled and MCU
intermittently lost its computer link to the New York Cash Exchange
(NYSE) network which administers bank-to-bank transactions and
processes ATM transactions, including withdrawals. When the link to the
NYCE network was interrupted, NYCE had no ability to access MCU account
balances to ensure that there were sufficient funds to cover a
withdrawal when a member withdrew cash using his MCU-issued ATM card or
used as a Visa credit card. Upon learning this MCU made a determination
not to shut down its entire ATM operation because of the hardship it
might impose on members, particularly those adversely affected by the
tragedy, but rather to allow NYCE to continue to dispense cash to MCU
account holders. Although the vast majority of its members abided by
this short term ``honor system,'' a number of them withdrew amounts of
money far in excess of their normal balances. Initial estimates for
unauthorized withdrawals totaled 4000 employees and as much as $15
million. MCU offered those who had overdrawn an opportunity to convert
the unauthorized withdrawals to personal loans and many did.
Subsequently our office, working with the NYC Department of
Investigation and NYPD, arrested 101 individuals who illegally withdrew
amounts in excess of $7500. Examples of their cases are:
Terry Hutchinson-Jones, a nurse at Manhattan
Psychiatric Center, never had a positive end of month balance
in the eight months prior to 9/11. Despite the fact that she
had a negative account balance for all that time, she made 54
ATM cash withdrawals between September 18th and the end of
October, leaving her with a balance of -$18,111.01. Twenty-
three of those withdrawals were for $500 each; for example, she
made two withdrawals of $500 each from the same branch of Banco
Popular on October 4th, 5th, 6th, 7th, 8th, and 9th, among
other withdrawals.
James Allen, an employee of the Housing Authority,
never had an end of month account balance that exceeded $130 in
the eight months prior to 9/11. Nonetheless, he made 53 ATM
withdrawals ranging from $20 to $300 each, and charged 101 Visa
purchases using his Municipal Credit Union ATM card between
September 19th and October 22nd. The Visa purchases were at
stores including Foot Locker, Jimmy Jazz, Joy Joy Jewelry,
Bronx BBQ, Hot Booz Liquor and the 216th Street Motel. As a
result of this activity, this individual's account balance was
-$10,378.70 as of the end of October, 2001.
An employee of Mt. Sinai Hospital never had an end of
month account balance that exceeded $95 in the six months prior
to 9/11. Despite that, he made 91 ATM withdrawals from
September 16th to October 30th, when his account balance
reached -$10,757.37. Sixty-one of those withdrawals were for
$100. For example, on September 16th, he made one cash
withdrawal of $20, followed by four more for $40 each, and
followed by three for $100 each, all from the same ATM
location. The next day, September 17th, he made three cash
withdrawals of $100 each from the same Chase branch in the
Bronx; two more $100 withdrawals were made from the same Chase
branch on September 18th. On September 19th, he made two $100
cash withdrawals and used his ATM card to make six debit
purchases, including the purchase of two Metro cards. By
October 2nd, and in the days that followed, many of his cash
withdrawals were for $200 each.
Another Municipal Credit Union member never had an end
of month account balance that exceeded $566 in the eight months
prior to 9/11. Nevertheless, he made 50 ATM withdrawals
totaling $8,700 between September 16th and November 8th. He
also used his MCU card to make 89 Visa purchases at stores
including Gap, Cookies Department Store, Leather World,
Barefoot Shoes, Jeans Plus, Dynasty Restaurant, and BX Sports.
As a result of this activity, his account balance was --
$12,570.75 at the end of November, 2001.
Subsequent to first round of arrests, a substantial number of
members contacted the Municipal Credit Union to convert their
unauthorized withdrawals to personal loans and begin repayments. Ten
months later we conducted a second round of arrests targeting those
individuals who had taken amounts in excess of $5000. We found these
group arrests were an effective tool in getting people to take
responsibility for their actions.
There were some obvious problems that arose in the investigation
and prosecution of the 9/11 fraud cases. Many of the charity's
volunteers were from different parts of the country which made it more
difficult to contact witnesses to investigate cases and sufficiently
prepare them for Grand Jury proceedings. Additionally, due to the high
volume of applications processed, volunteers were not always able to
recall the details of every interview conducted. It would be helpful in
the future if there was a training program for relief workers,
including an orientation program regarding tools to employ to detect
fraud in screening applications for aid. While it is difficult to
detect a fraudulent claim at the outset, the more supporting
documentation obtained from a claimant the better equipped we would be
to investigate and prosecute a fraudulent claim. Moreover, there should
be prominent and conspicuous language on all applications for aid
warning that the statements made are done so under a penalty of perjury
and, if false statements are made, the claimant will be prosecuted. In
addition, it would be prudent to require that declarations of loss
contain a notary's signature. Nevertheless, despite numerous instances
of fraud, it was evident from interviewing employees and volunteers of
the relief agencies, that each of them was committed to assisting
victims of the 9/11 disaster in an expeditious manner.
The New York County District Attorney's Office has been successful
in prosecuting those who unlawfully attempted to enrich themselves by
taking advantage of the tragedy that affected our nation. Those who
made a calculated decision to take money and profit from the confusion
during a time of a national crisis were apprehended and punished. As a
result of the District Attorney's prosecutions, an important message
was conveyed to the public that those who thought they could profit
from the World Trade Center aftermath were mistaken.
I would be pleased to answer any questions.
Mr. Rogers. Thank you, Mr. Frazer. And in addition to being
a great Alabamian, I understand from the staff that today is
your birthday. So on behalf of all the Committee, happy
birthday. No tough questions for you.
[Laughter.]
Mr. Frazer. Thank you very much.
Mr. Rogers. But I would like to start with the questioning,
and with you.
Yesterday, in our first hearing on the response in New York
City, one of my frustrations, as I learned from Mr. Skinner's
testimony, was that because of a host of problems with the
structuring of current laws and documentation around this
Federal aid, many of the criminal acts that came out of the
distribution process of the aid could not be prosecuted.
Unfortunately, one local news organization construed that
as a criticism from me of the D.A.'s office in Manhattan, when
it could not have been further from the truth. I am critical of
the set of circumstances that prohibited or impinged on the
D.A.'s ability to successfully prosecute.
What I am after, as one of many things, out of this series
of hearings is to find out what we can do differently to
ensure, in the future, that district attorneys and attorneys
general are able to successfully prosecute every criminal act
that arises out of a post-disaster aid circumstance.
So I would offer that to you to say: what in your mind and
your experience could we do to make sure that your office and
offices like yours around the country are able to prosecute
every criminal act that arises out of these post-disaster
relief circumstances?
Mr. Frazer. Well, first of all, of course, Mr. Chairman,
resources are always needed in order to look at additional
instances of crime that more likely comes about when an
incident like this happens.
Mr. Rogers. Let me stop you there and ask this question:
would your office--and let's talk about yours for the example I
am offering--be able to retain private attorneys to come in a
deputy capacity to work as prosecutors to help you during a
surge period of time?
For example, if you felt like in post-disaster, for the
next 18 months or 36 months, you were going to have a large
swell of cases to pursue--far beyond what your office could do
under its current manning and budget--would you be able to take
a temporary source of money to deal with just those cases and
reach out into your community for additional resources to
prosecute those cases that, subsequent to that, would be able
to then go back into their private endeavors?
Is that a realistic option?
Mr. Frazer. Sir, it is a realistic option that we would be
able to get experienced attorneys that would be able to come on
and prosecute those cases. Yes, we would either, as you
suggest, get private attorneys to be hired as assistant
district attorneys or even move some of the attorneys within
the office, and focus on this type of work, and supplement
their work by hiring additional attorneys.
The goal there would be to get the best prosecutions that
we can in order to achieve the goals that you speak about.
Mr. Rogers. But the bottom line is, if you had some
additional funding post-disaster for disaster-related
prosecutions, you could use temporary money to meet that need
and ensure that everybody was prosecuted--or let me put it this
way--nobody was not prosecuted for lack of resources?
Mr. Frazer. The short answer to that is, yes, we can always
use additional resources.
Mr. Rogers. Now, we come back to the threshold concern that
I had yesterday. And that is, what I understood from our
panelists yesterday, was that the primary reason that the
District Attorney's office did not prosecute individuals after
relief was not so much resources available to them, it was that
they didn't feel like they could have a successful prosecution,
because in several of the instances they didn't think they
could prove intent.
What I am looking for is tangible suggestions, given the
abuses that you are familiar with, as to what we could do to
tighten the language or documentation to ensure that you could
successfully prosecute some of the abuses you referred to in
your testimony.
Mr. Frazer. Yes. Again, your key word was
``documentation.'' There was some prosecutions were intent was
an issue. And in order to address that, one would require
additional documentation that is clear language that was relied
on in order for the money to be turned over to that individual.
So therefore if, in fact, we can prove that this
representation that was relied on as false, then we can prove
the intent that person had in order to--that they lied in order
to get the funds.
In addition, the way a program is actually set up and the
language and the parameters that are set up have to be clear
and distinct, and it would be helpful, of course, if, in fact,
one is ask for either proof of damage or that inspections are
done prior to any grants being given in specific instances.
Mr. Rogers. Let me ask you, if an individual who was
seeking post-disaster aid were required to sign some sort of
acknowledgement upon their request that it was, in fact, a
legitimate acknowledgement, a legitimate request, would that be
sufficient to allow you to prosecute, if you could prove that,
in fact, it was not a legitimate claim?
Mr. Frazer. Well, yes and no. It is difficult to answer
that, only because in some instances on a number of the forms
that the charity had there was a line that was an
acknowledgement that was there to be signed. However, it wasn't
clear that the charity relied on specific things in order to
turn over the money.
Mr. Rogers. So you would have to have the charity then sign
an acknowledgement that it relied on an underlying application
as a part of its distribution?
Mr. Frazer. Yes, that would be helpful.
Mr. Rogers. And those two acknowledgements together would
give you the nexus for prosecution?
Mr. Frazer. That is correct, sir.
Mr. Rogers. Okay, thank you. And my time has expired.
The Chair now recognizes the Ranking Member, Mr. Meek of
Florida, for his questions.
Mr. Meek. Thank you, Mr. Chairman.
I wanted to not only welcome but thank the panel for coming
before us. And these hearings have been very helpful, not only
for our staff, but also for the members.
We are charged with the obligation and the duty to not only
legislate, but also recommend new ways of how we can prevent
the loss of not only taxpayers' dollars, but also those
individuals that donate to the Red Cross or what have you, or
individual assistance, as it relates to FEMA or the SBA.
I guess, well, my questions are going to go along the lines
of?hopefully you can give me some feedback that will be able to
help us in preventing fraud in the future.
I know that FEMA and a number of agencies, mainly around
the area of law enforcement, they had these TOPOFF programs
that move throughout the country where they exercise an event,
need it be a hurricane or a terrorist attack. Has there been
such a program to go through a dry run, as it relates to fraud?
Some of the things--and Mr. Frazer talked about training
and assistance and attorneys. Is there such a program? Are you
all doing that in New York now, saying, ``Okay, let's just say
an event took place. What are our next steps or lessons learned
from the last event?'' Has that taken place?
Mr. Thorson. I will pick up on this. For SBA, I think as
all of the people on the panel said, I think we have all tried
to learn from 9/11 and translate that to what is going on in
the Gulf.
From the OIG's point of view, we have made recommendations
to both SBA, and in working with other agencies such as HUD,
for instance, on issues such as data-sharing and making sure
that duplicative payments aren't made.
On the prosecution side or the investigative side, one of
the things that we have tried to do is to learn from the
different kinds of cases that originated out of the 9/11
disaster loans. And, in fact, our office has just this month
established a new region, which will run from Florida, through
Mississippi, Alabama, and Louisiana, headquartered in New
Orleans, with both auditors and investigators, to develop some
of these kinds of cases.
All of these relate to lessons that were learned out of 9/
11, as well.
Mr. Meek. And I am glad to hear that some thought and
action has gone into that. But I guess pretty much the answer
to my question is that right now we don't have something in
place--when I say ``we,'' the federal government and local
government working together, and local law enforcement
together--in preventing.
We had the Government Accountability Office represented
yesterday on the panel, and he said there is, like, pennies of
recovery on every dollar that is stolen, or taken, as it
relates to fraud. I am thinking that, as this committee starts
to look at this and as we start to move into our authorization
bill for next week, maybe, just maybe we need to put some
language in there that would give some direction to, not only
the federal agencies, to work with the local agencies and how
we can before the crime invest the time that we would invest in
a terrorist attack or in a hurricane or what have you.
Because all of that is the same. I mean, if you are going
to prepare, you are going to prepare. And you have to prepare,
and you are not going to be able to share. You will be able to
share information prior to the event, if it ever happens,
better than sharing it after the event and trying to figure
out, ``Okay, how can we information share?'' And then the
stovepipes start, and we run into a problem.
This was identified in the 9/11 report. And in your
position, you know, in your office, you see this all the time.
And I am pretty sure in offices similar to yours in other
agencies, they say, ``Well, that was in a report, and I told
them that this would happen, or we should do this.''
Is there such a program now? If not, maybe we need to--I
know it can be beneficial, from what I am hearing here, as it
relates to information, as it relates to prosecution.
The chairman, you heard he wants to make sure we prosecute
as many cases as possible. Well, that is going to take a little
pre-game. You know, it is going to take some practice to make
sure that we are all familiar with one another, and the forms,
and the people to call when we do have an event.
I am sorry, you wanted to--
Mr. Thorson. Well, I think I was sort of saying the same
thing, only I probably didn't go into as much detail. The
Department of Justice has an entire task force put together,
and it isn't just to look backwards. It is to try and figure
out how to be ready again.
In describing the region that our I.G. office set up, it is
not by coincidence that it includes Florida, Alabama and
Mississippi. That is for the future. We know there are going to
be more disasters. We know that Florida, Alabama, Mississippi,
that area, every hurricane season we are going to get hit. And
we have to be ready to be able to address that.
So these are proactive moves. And the work that is being
done with, as I mentioned, HUD, and the Department of Justice,
and others, it really is with the future in mind, as to not
just how to handle what is going on right now, but what can we
do and do better?
The Katrina Fraud Task Force, for instance, that is a great
example of learning lessons out of 9/11 and translating them to
what is going on today.
And even though, to address your question a little bit more
accurately, even though it is a past event, when you look at
Katrina, the truth is: What they are doing and what all of the
IGs are doing in particular, and other agencies, in their
disaster responses will translate into what is coming. And,
unfortunately, we know it will come.
Mr. Meek. My time is up. But just in closing, I still think
it is important, even in a place like San Francisco, I mean,
for the federal government to have a TOPOFF program and prevent
fraud in a non-event. Katrina, it is happened. The task forces
are there. The task force is still going on, I am pretty sure,
in the New York City area.
But what is happening in Las Vegas, Nevada? I mean, the
local government folks, those are the folks that kind of put
their hands up saying, ``Okay, now how do we do this, I mean,
and work with you at the same time, and share information?''
They know how to prosecute, but how do we work together as a
team?
And so said that maybe that may be an exercise that we need
to go through, because we know in these areas, especially as it
relates to the threat level when you talk about terrorism, we
pretty much know where these individuals may think about
carrying out an act.
So if we are doing that in a TOPOFF program, as it relates
to that first responders, fraud, it will be great if someone
comes before this committee and says, ``Guess what,
Congressman? We went through this with Newark Police
Department--well, not only police department in Newark,
prosecutor's office--and we have this. And so we were familiar
with it.''
Even if it is over a video conference or what have you, we
can still get together with the technology and automation that
we have, because what I am hearing here is not rocket scientist
stuff. It is we just need to communicate better. We need to
know what the next person knows, and that is what the panel
said yesterday.
Well, it would be good if we could share information as
though it is something we have to write off to MIT for, but it
is something that we can do and it just takes some due
diligence.
But I appreciate your response.
Mr. Chairman, I have gone over my time. Thank you.
Mr. Rogers. The gentleman yields back.
The Chair now recognizes the Chairman of the Full
Committee, Mr. King of New York.
Mr. King. Thank you, Chairman Rogers.
I want to thank all of the witnesses for your testimony
this morning. It has been very helpful, and I appreciate the
public service you performed.
I really only have, I guess, two main questions. I know
that sometimes in the past privacy concerns have made it
difficult for government agencies, prosecutors to go after, you
know, the guilty.
I was just wondering if, in this case, whether or not, for
instance, charities or even other government agencies, that
their refusal to disclose information on victims because of
privacy concerns in any way hindered your efforts at
prosecution or in doing an effective order?
I guess we will start with Ms. Ritzema and then work our
way down.
Ms. Ritzema. Yes, Chairman. We did have challenges with the
Privacy Act's provisions. As I stated, we had a working group,
a grant fraud working group that got together with all of the
IGs and then other law enforcement entities to coordinate our
investigations and our investigative resources.
Because of the Privacy Act, we were not able to conduct any
kind of matches of that data that would have really helped us
streamline in evaluating where fraud trends were and where
actual fraud cases were. We were very primitive in 9/11. We
actually had to bring lists of our bad guys and say, ``Okay,
can you guys run these against your lists and see if they
applied to your programs?'' and so on, because of the privacy
considerations.
Now, there are ways of getting around those, but it was
very cumbersome. And we needed to do this stuff right away. As
you probably know, it is very time-consuming.
For Katrina, we had our--having learned from 9/11, our
general counsel was able to recognize what we would need to do
to start to do some of that, and we have entered into a MOU
with FEMA at this juncture so that we will be able to share
some information. And we will continue to work on those MOUs.
But it is a very cumbersome, long-term project. And if we
could find a way--if Congress could do something that allowed
for disasters, we could streamline this process, it would be
very helpful in ferreting out fraud.
Mr. King. I will be interested in what the other witnesses
have to say, but I think it would be worthwhile for me to
follow up to give us some ideas as to how you feel we could,
you know, alleviate those concerns without violating privacy
rights, but at the same time not allowing, you know, the guilty
to hide behind privacy laws.
Ms. Ritzema. Yes, sir. Our legal counsel has done a lot of
work so that we could provide that information to the
committee.
Mr. King. Thank you very much.
Mr. Thorson? Anybody else want to comment on that or?
Mr. Small. With regard to fraud prevention, as far as grant
administration, we had some difficulty with Hurricane Katrina,
in the fact that so many of the evacuees were moving into
different areas, and old line boundaries in states and other
federal agency jurisdictions made us realize that we need
better communication and collaboration between agencies and in
sharing of information in general, in order to make sure that
we don't duplicate service delivery and we make sure that
people are recipients and getting the benefits they deserve as
expediently as possible.
Mr. Frazer. We also saw instances where privacy issues
might be raised, but we could get around it, of course, with a
grand jury subpoena when necessary. However, when someone is
claiming that they had to receive medical care, or someone in
their family did, or psychiatric care as a result of it, that
presented certain issues at times.
I would suggest that either attach to a form a waiver
paragraph or an additional page of a waiver saying that that
person who is receiving the funds gives up any right to privacy
as it relates to the giving of these funds or issues that arise
out of the granting of the funds.
Mr. King. Thank you.
Mr. Thorson, do you have any comments on that?
Mr. Thorson. The whole data-sharing issue is one that is
being discussed between SBA and many other federal agencies.
And I would go along with what the other comments that have
been made here this morning; it really is a big issue.
We are involved right now in the idea of how to make sure
that the loans aren't duplicative with, say, HUD grants or
others, and the Privacy Act issues and sharing of data issues
require a major effort to get through that.
Mr. King. Thank you.
My time is about to expire. I just want to add to what
Chairman Rogers said to Mr. Frazer about the New York District
Attorney's office. I mean, this is a model District Attorneys
office in the country going back to Frank Hogan, and certainly
Robert Morgenthau for, I guess, the last 25, 30 years.
I mean, two legends who really--and that office is known as
the premier prosecutor's office in the country. And I just
wanted to emphasize what Chairman Rogers said. And this has
nothing to do with politics, with both Mr. Hogan and Mr.
Morgenthau of the other party, not that the office has ever
been political at all, but just very professional.
And I want to again commend your office for the work that
you have done in so many ways, so many regards over the years.
I yield back the balance of my time.
Mr. Rogers. The gentleman yields back.
The Chair now recognizes the Ranking Member.
Mr. Meek. Thank you, Mr. Chairman.
I would ask unanimous consent to seat Ms. Lowey and
participate in the subcommittee hearing.
Mr. Rogers. Without objection, so ordered.
The gentleman from New Jersey, Mr. Pascrell, is now
recognized for any questions he may have.
Mr. Pascrell. Thank you.
For any member of the committee, I would like to know if
you had any resistance when you initiated your review of what
was going on in the individual departments, any resistance at
all from anybody? Would you tell us about it if there was any?
Ms. Ritzema. No, sir, we worked with HUD and with the
Empire State Development Corporation, ESDC. Again, it was
congressionally mandated. It was written in the language, and
it was going to get done. Everyone understood that right from
the start, so there was no problems.
Mr. Pascrell. So none of you in each of your activities had
any resistance from anybody? Is that correct or incorrect?
Ms. Ritzema. Yes.
Mr. Pascrell. Thank you.
Mr. Thorson, as of late 2004, you had--in your department,
that is, in U.S. small business department--had about 1 percent
of all the $20 billion that was allocated and committed to New
York City. That was your slice of this, 1 percent.
And out of the $250 million, you had about 1,500 loans that
add up to about $208 million, which were delinquent. So, in
other words, two-thirds of all the loans that went through your
department, went through small business, were delinquent at
that point.
Is that correct? Am I reading the record correctly?
Mr. Thorson. I am not sure what exactly the statistics are.
I don't have that in front of me, but I am not doubting your
numbers.
Mr. Pascrell. Well, it says that there are $208.8 million
in delinquent loans out of--and you only had $250 million to
begin with. Unless my numbers are incorrect, and I don't think
that they are, that is quite a chunk of what you were
allocated. Now, what is the reason for that primarily?
Mr. Thorson. Actually, there could be any number of
reasons, but one of the things that we do in these cases is to
come in and try and look at the loans that have defaulted and
review them--actually on many different loan programs--and try
and find out exactly what the problem is.
On disaster loans, where those are made directly--
Mr. Pascrell. Well, you have had some years to figure that
out. Tell us what the reasons on.
Mr. Thorson. Well, one of the things that we look for is,
if you are talking about loans that are made--for instance, I
mentioned the STAR loans, which are made by lenders, one of the
things that we go back and do--because, in that case, SBA pays
a guarantee, a major portion of the loan to that lender in case
of a default--what the I.G.'s office does is to go back and try
and determine whether the bank or lending agency that made
those loans fulfilled all the requirements upon them in order
to make those loans.
If there is a default, then the idea is to get the money,
the government portion back, and to assess why those loans
defaulted. I can't address exactly what the reasons were for
that particular case, but it is something that we do on a
regular basis.
Mr. Pascrell. Well, here is 2 years later. I mean, I quoted
you figures up to the end of 2004. I am asking you, 2 years
later, has the money been recovered? Can you answer the
question, yes or no?
Mr. Thorson. I am sure not all of it has been, absolutely.
Mr. Pascrell. Mr. Chairman, one of the major areas within
the commitment of the $20 billion is the $5 billion to the
Liberty Zone tax benefits. We don't have anybody testifying
about that, and I know it is fairly complex.
And I was wondering before I go on with my further
questions, can we can get any information, because that was a
pretty big chunk, obviously, one-fourth of the entire $20
billion?
The only thing that exceeded that was FEMA. Through FEMA,
we allocated $8.8 billion. Right next to that was this tax
program, but I don't see any information about it. Is there a
reason for that?
Mr. Rogers. Yes, sir, it is being reviewed by our staff,
and we do intend to put language in our final report on that
specific issue.
Mr. Pascrell. Are we going to have anybody testifying in
the future concerning that program?
Mr. Rogers. Not that I am aware of.
Mr. Pascrell. Because you are talking about a lot of money
here.
Mr. Rogers. Well, and the staff have been conducting some
pretty extensive interviews on these subjects, but we only have
so many people on our panels. And, you know, we are holding
three hearings, and all hearings have had two panels full of
folks that have been very helpful. But we just couldn't get
everybody that we wanted to on these panels.
Mr. Pascrell. I have one question to ask Mr. Small. Would
you allow me to do that?
Mr. Rogers. Absolutely.
Mr. Pascrell. Labor Department. I have a very jaundiced
view of the Labor Department, so excuse me jaundiced view.
There are unique circumstances, you write, Mr. Small,
related to the terrorist attacks. The Department of Labor
issued emergency regulations to permit individuals who were
unemployed due to the closure of the airport to be eligible for
disaster unemployment assistance.
The deadline for applying for that assistance was extended
in New York City, correct me if I am wrong. Congress extended
the DUA benefits from 26 to 39 weeks for individuals who lost
their jobs. Was that adequate enough? Are there people out
there after that deadline was reached who fell in the category
of not being able to find work?
Mr. Small. We do not believe so, and I will say why. First
of all, with New York, we gave out a $25 million national
emergency grant.
Mr. Pascrell. Right.
Mr. Small. Of that $25 million, and $5 million was
returned. With the state of Virginia, it was $3.5 million for a
national emergency grant. We transferred a lot of funding in
for the unemployment compensation and the disaster employment,
and basically supported the other industries, such as the
airline industry in several different states.
And we basically believe that the lessons we learned were
just that we had to be more expedient and make sure that we
had, you know, coverage for everyone, but we believe that we
covered those that were seeking assistance.
Mr. Pascrell. Were there any of those dollars used in
Manhattan not pertaining to the airport, but those folks who
lost their jobs, in terms of assistance?
Mr. Small. Yes, in New York alone, we know that there was
an increase by 100 percent of filings of unemployment claims.
Mr. Pascrell. Right.
Mr. Small. So based on the data that we have, again those
filings that were done for New York were always done by phone.
The fact that that was done that way enabled them to process
those claims through New York State processing centers outside
of New York City.
So we believe that everyone was covered that needed
assistance, as well as being able to staff from our federal
regional offices in New York City assistance for those call
centers.
Mr. Pascrell. Thank you very much.
Thank you, Mr. Chairman.
Mr. Rogers. I think the gentleman's time is expired.
The Chair now recognizes the gentleman from Texas, Mr.
McCaul, for his questions.
Mr. McCaul. Thank you, Mr. Chairman. I believe this is yet
another example of waste, fraud and abuse at the expense of the
American taxpayer and ultimately an insult to the real victims
of September the 11th and the tragic events.
I want to focus on the STAR loan program. A local
television station in my hometown of Austin, KVUE-24, did an
investigative report into the program. And the results were
disturbing.
It revealed that a frozen custard stand received $635,000.
A car repair shop received $1.2 million. A motor and sailboat
dealer received over a million dollars. And a shoe store
received over $500,000. This is all in the Austin area. In
total, 122 Austin-area businesses in Texas received over $47
million in STAR loans.
The congressional intent of the STAR loan program was to
give loans to businesses, small businesses, that had been
adversely affected and impacted by the September the 11th
terrorist attacks. Now, I believe one could hardly argue that
these loans are in any way, shape or form related to the
September 11th attacks.
So my question is to Inspector Thorson. It is my
understanding that the SBA officials in this matter urged
lenders to broaden the eligibility of this program. Now, I
would like to know: Who are these SBA officials? And will there
be any accountability for these loans?
Mr. Thorson. First of all, on the intent, the congressional
intent was something that we felt was important, and we did
research. And we are not able to really find that, except for
the fact that we did learn that it was not intended to be
strictly geographically limited to New York or Washington,
where the events took place.
I was not with SBA when those stories came out, my--first I
was that I was heading for something where these types of
stories were going to play a part in my life. And here we are.
But I was offended by these stories. But I will tell you
one thing that I did learn: To the small businesses that were
affected, they take a bit of a different viewpoint. And I am
not going to justify some of this, because I can't, but I want
to give you a couple of examples.
A dog boutique or something similar to that, whose major
business is providing kennel service. People kennel their dogs
when they travel. There was no travel.
Now, that may seem a stretch, but if you look at it from
the small businessman's point of view, in a broad definition of
adversely affected, you can see where they are coming from.
One of the ones that I laughed at was somebody mentioned a
doughnut shop some place. And, well, how in the world can that
have affected? Well, what if that doughnut shop was located in
the concourse of an airport? Airports were shut down.
So, again, I am not trying to justify some of these things,
but the point I am trying to make is that if you take these
down to the grassroots level and you look at these individual
cases, there is not always a clear cut horror story behind
them.
And, in fact, sometimes the justification is actually
pretty sound, even though on first glance you wouldn't think
so.
There is no question that the officials at SBA, some of
them, did encourage the lenders to broaden this program, and
part of that was because they were receiving criticism that
people weren't using this program that had been initiated by
the Congress and they wanted to provide funds and get these
loans out there.
Mr. McCaul. If I could interject, when the individuals who
received these loans--as my time is running out--the
individuals who did receive these loans, when they were
interviewed, they knew nothing about the STAR loan program.
They said there was absolutely no connection between their
business and the tragic events of September the 11th, and yet
they did receive these loans.
Did the SBA make any effort to determine or verify the
eligibility of these applicants?
Mr. Thorson. They really left that--and this was one of the
things we pointed out in our report--they really left that up
to the lenders. They put all of that onto them. They did define
what the lender was supposed to do, but there was no oversight.
And we don't feel there was any oversight of those lenders to
provide the justification that was required.
And that gets to the point you just made, because the truth
is, how can you provide justification without explaining to the
borrower why you are asking for it, which would be to tell them
what kind of loan they are getting?
So your point is well taken. And logic would tell you that
you would have to tell this individual why he is getting the
type of loan he has, but the truth is some of them had no idea
it was. And some borrowers were offended that they were
participating in a program that was designed for 9/11 victims.
Mr. McCaul. I would ask that your office look at these
individuals in the SBA who apparently went against
congressional intent and ensure that this doesn't happen again,
in the event we have another tragic event in this country.
And, Mr. Chairman, I would like to ask for unanimous
consent to enter into the record the transcript from the
investigative report.
Mr. Rogers. Without objection, so ordered.
[The transcript follows:]
For the Record
Submitted for the Record by Hon. Michael T. McCaul
KVUE ANCHOR INTRO
IN TONIGHT'S DEFENDERS REPORT, A LOOK AT THE WAY THE
GOVERNMENT IS SPENDING YOUR MONEY.
AFTER SEPTEMBER 11TH, CONGRESS PASSED LEGISLATION ALLOCATING
MORE THAN A BILLION DOLLARS TO SMALL BUSINESSES DIRECTLY
IMPACTED BY THE TERRORIST ATTACKS.
MORE THAN HALF OF THAT MONEY WENT TO BUSINESSES IN NEW YORK CITY.
THEN--CONGRESS PASSED MORE LEGISLATION FOR SMALL BUSINESSES ADVERSLEY
AFFECTED.
AND AS YOUR ABOUT TO SEE, MILLIONS OF THAT MONEY ENDED UP HERE IN
CENTRAL TEXAS.
KVUE SCRIPT
4 YEARS AND 182 MORNINGS AFTER THE TERROR
AFTER THE DEATH OF AMERICA'S TWIN TOWERS AND NEARLY 3 THOUSAND OF ITS
PEOPLE
SIGNS OF ECONOMIC RECOVERY ARE EMERGING EVEN--SOME 1700 MILES
AWAY--IN TEXAS' CAPITOL CITY.
BUT, THE BLUEPRINT FOR RECOVERY--HAS ITS SHARE OF PROBLEMS.
TAKE THE SMALL BUSINESS ADMINISTRATION'S STAR LOAN PROGRAM FOR EXAMPLE.
IN JANUARY OF 2002--CONGRESS PASSED LEGISLATION FOR A 3.7
BILLION DOLLAR LOAN PROGRAM DESIGNED TO HELP SMALL BUSINESSES ADVERSELY
AFFECTED BY 9-11 AND ITS AFTERMATH. ``STAR'' STANDS FOR SUPPLEMENTAL
TERRORIST ACTIVITY
RELIEF. IT'S IMPORTANT TO NOTE--
BUSINESSES NATIONWIDE WERE ELIGIBLE--
AND IN CENTRAL TEXAS, PUBLIC RECORDS REVEAL 122 BUSINESS
OWNERS RECEIVED OVER $47, MILLION 789,100 DOLLARS IN STAR LOAN FUNDING.
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para.(--SOT--tape 1 gary @ 17:27)
"weather-all this is gary"
AMONG THEM, GARY WILLIAMSON--THE OWNER OF WEATHER--ALL--
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para.(--SOT--tape 1 gary :51)
"we're a manufacturer of electrical enclosures."
GARY SAYS HE UNDERSTANDS WHY YOU MIGHT QUESTION HIS BUSINESS'S
ELIGIBLITY FOR TERRORISM RELIEF FUNDING--BECAUSE HE QUESTIONS IT TOO!
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TAPE: TC:
para.(--SOT--GARY TAPE 1 4:38 TO 4:42)
"i didn't know anything until you gave me that letter that it was for
9-11 type situation."
[STAND UP]
GARY RECIVED ONE OF 95 CERTFIED LETTERS I SENT TO LOCAL
BUSINESS OWNERS WHO WERE GRANTED STAR LOANS. I OFFERED
THEM AN OPPORTUNITY TO EXPLAIN WHY THEY FELT THEIR
BUSINESS WAS ADVERSELY AFFECTED BY TERRORISM. ONLY 7
PEOPLE RESPONED TO THE LETTER AND GARY WAS ONE OF THEM.
HE SAYS HE HAD NO IDEA HIS LOAN--FOR 430 thousand DOLLARS--WAS
BASED SOLEY ON HIS ECONOMIC STATUS AFTER 9-11.
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TAPE: TC:
para.(--SOT--GARY TAPE 1 24:33 TO 24:39)
"if they said hardship for 9-11 hardship i would have said no we don't
qualify--which we don't."
HIS PROOF--HIS APPLICATION WAS FOR A START UP LOAN. HE WASN'T SUFFERING
FROM ECONOMIC HARDSHIP--HE WAS TRYING TO BUY HIS OWN BUSINESS.
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TAPE: TC:
para.(--SOT--GARY TAPE 1 9:05 TO 9:09)
"--i'm not so sure that was te smartest thing to do to buy a business
then."
AND GARY IS HARDLY THE EXCEPTION.
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TAPE: TC:
para.(--SOT--JACK JOHNSON @ 2:54)
"this is the first time i've ever heard of it"
JACK JOHNSON OWNS AUTOMATION ENERGY TECHNOLOGY IN SOUTH
AUSTIN. HE WAS GRANTED A 15 THOUSAND DOLLAR STAR LOAN IN
SEPTEMBER OF 2002.
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para.(--SOT--JACK 5:09 TO 5:12)
"ANY QUESTIONS EVER ASKED OF YOU ABOUT TERRORISM? no nothing."
HE SAYS HIS LENDER--WELLS FARGO BANK NEVER TOLD HIM HE WAS
APPLYING FOR TERRORISM RELIEF AND HIS LOAN APPROVAL LETTER
CONFIRMS IT.
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TAPE: TC:
para.(--SOT-nats of jack reading letter @ 22:26-)
"subject to SBA loan eligibility..."
IT DETAILS THE DOCUMENTATION REQUIRED TO RECEIVE THE FUNDS--AND NOT
ONCE--IS THE STAR LOAN PROGRAM OR TERRORISM EVER MENTIONED.
AND LOOK AT SOME OF THE OTHER CENTRAL TEXAS BUSINESSES
GRANTED STAR LOANS.
THE KWIK KAR LUBE AND TUNE ON WEST PARMER--WAS GRANTED 1.189 MIL.
AUSTIN BOAT AND MOTORS ON HIGHWAY 620 WAS APPROVED FOR 1.015 MIL IN
TERRORISM RELIEF.
SHAKE'S FROZEN CUSTARD OF CEDAR PARK RECEIVED 634,400.
AND KARA-VEL SHOE STORES IN AUSTIN WAS GIVEN A TOTAL OF 570
THOUSAND DOLLARS--ALL IN TERRORISM RELIEV FUNDING
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para.(--2 SOT--MCCAUL @ 13:58 14:02)
"get the SBA officials to testify before Congress about what were yu
thinking???"
US REPRESENTATIVE, MICHAEL MCCAUL SERVES ON THE COMMITTEE FOR HOMELAND
SECURITY IN WASHINGTON. HE SAYS AN INVESTIGATION WILL BE LAUNCHED INTO
THE ACTIONS OF THE S-B-A.
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para.(--SOT--MCCAUL @ 1:32 TO 1:43)
"initially you think--well why did these businesses apply for this 9-11
emergency loan program and the fact of the matter is they didn't even
have any knowledge that that's what happended."
MCCAUL SAYS THERE ARE 2 PROBLEMS TO INVESTIGATE. 1--WHY
BUSINESSES NOT ADVERSLY IMPACTED BY 9-11 RECEIVED TERRORISM RELIEF AND
2--WHY THEY WERE GRANTED A STAR LOAN WITHOUT THEIR KNOWLEDGED--
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TAPE: TC:
para.(--SOT--MCCAUL 1:44)
"i really fault the small business administration and the higher
ranking officials."
IN OCTOBER OF 2005--MY REQUEST FOR AN ON CAMERA INTERVIEW WITH THE SBA
WAS DENIED. BUT, I DID RECEIVE THIS WRITTEN STATMENT FROM MICHAEL
STAMLER--THE MEDIA RELATIONS MANAGER IN WASHINGTON.
HE SAYS--IN PART--THE LENDER MUST FIND THAT THE LOAN APPLICANT WAS
ADVERSELY AFFECTED BY THE TERRORIST EVENTS OF SEPTEMBER 11, 2001 AND
PREPARE AND MAINTAIN IN ITS LOAN FILE A WRITE UP SUMMARIZING ITS
ANALYSIS AND ITS CONCLUSION THAT THE LOAN IS ELIGBLE FOR THE STAR
PROGRAM.
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para.(--SOT--JACK JOHNSON 4:39)
"DO YOU RECALL EVER CONTRIBUTING TO A FILE AT ALL FOR TERRORISM RELIEF?
i don not!"
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TAPE: TC:
para.(--SOT--GARY TAPE 1 @ 6:47 TO 6:50)
"i never said anyting about 9-11 or anyting about that".
I ALSO ASKED HOW THE SBA RESPONDS TO ALLEGATIONS THAT TEXAS BUSINESSES
RECEIVED A STAR LOAN-WITHOUT MEETING THE QUALIFICATIONS-- THE
RESPONSES--
"IF YOUR STATION IS INTERESTED IN TRYING TO SHAME DECENT LOCAL BUSINESS
OWNERS WHO APPLIED FOR THE LOANS IN GOOD FAITH YOU SHOULD RECONSIDER.
THE LOANS ARE PERFORMING QUITE WELL, AND IT IS LIKELY THAT THERE WILL
END UP BEING VERY LITTLE IMPACT ON TAXPAYERS.
3 MONTHS AFTER THAT STATMENT--THE SMALL BUSINESS ADMINISTRATION'S
INSPECTOR GENERAL RELEASED THE RESULTS OF AN INTERNAL AUDIT THAT
REVEALED--"SBA DID NOT IMPLEMENT ADEQUATE INTERNAL CONTROLS AND
OVERSIGHT OF THE STAR PROGRAM TO ENSURE THAT ONLY ELIGIBLE BORROWERS
OBTAINED STAR LOANS". IT ALSO STATES "AID MAY HAVE BEEN DISBURSED TO
BUSINESSES THAT MAY NOT HAVE BEEN IMPACTED BY SEPTEMBER 11TH AT ALL--
AND ONLY 4.7 PERCENT OF STAR LOAN RECIPIENTS WERE EVEN AWARE THAT THEY
HAD RECEIVED LOANS THROUGH THE STAR PROGRAM".
AFTER THE RELEASE OF THIS AUDIT--I OFFERED THE SBA ANOTHER ON
CAMERA INTERVIEW TO CLARIFY THEIR ORIGINAL STATEMENTS AND INFORMATION.
NONE OF MY PHONE CALLS AND WRITTEN REQUESTS HAVE BEEN ACKNOWLEDGED.
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TAPE: TC:
para.(--SOT--MCCAUL TAPE 1 @ 2:08 TO 2:16)
"we're going to be taking a close look at these officials and bring
them before
congress and have them testify before our committee and they're going
to have to answer the hard questions."
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TAPE: TC:
para.(--SOT--GARY @ 24:51 TAPE 1)
"if I knew the money was allocated strictly for 9-11 the people in NY
qualify--I don't"
GARY BELIEVES HIS VOICE REPRESENTS HUNDREDS--POSSIBLY THOUSANDS ACROSS
THE COUNTRY--ALL FROM BUSINESS OWNERS WHO FEEL THEY WERE MISLED BY THE
FEDERAL GOVERNMENT.
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TAKE SOT
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TAPE: TC:
para.(--SOT--GARY 16:55 to 17:00)
"why are they telling the banks 1 thing and you another--why? that
doesn't make any sense"
KVUE TAG
WELLS FARGO ISSUES A STATEMENT ABOUT THIS STORY--SAYING--IN PART
"The SBA encouraged lenders to utilize a broad and inclusive definition
of small businesses impacted by these events to help spur an economic
recovery, and we are confident that Wells Fargo fully complied with
those directives."
WE'D ALSO LIKE TO REITERATE, THE SMALL BUSINESS OWNERS WHO
RECEIVED STAR LOANS DID NOTHING WRONG BY RECEIVING THE SBA
FUNDING. THEY SIMPLY DIDN'T KNOW WHAT THEY WERE RECEIVING.
AND THE SBA MAINTAINS STAR DID NOT TAKE AWAY ANYTHING FROM
NEW YORK DISASTER VICTIMS--SINCE THEY WERE GIVEN FUNDING
UNDER A COMPLETELY DIFFERENT PROGRAM.
Mr. Rogers. The gentleman's time is expired.
The Chair now recognizes the gentlelady from New York, Ms.
Lowey, for any questions she may have.
Welcome.
Mrs. Lowey. Thank you. Thank you very much, Mr. Chairman.
And I wanted to be here because, as my colleagues would
say, I really believe that support for these programs through
the 18 years that I have been in the Congress are undermined
because of the constant focus on waste, fraud and abuse. And I
keep wondering, what have we learned? What can we do
differently?
And I have a few questions in that regard. First of all,
Mr. Thorson, when the STAR loan program was proposed, were you
involved? Did you propose any kind of controls? Because you
have been working on these issues, and I would imagine that
something could be learned from your experience.
So rather than ``gotcha'' at the end--and then I am going
to get to Mr. Frazer, because that is your job--did they reject
some of your proposals? It seems we never learn.
And then I would want to know from Mr. Frazer, are there
some fraud cases that you have been working on where we did get
them and given them penalties? And if you had been brought in,
someone like yourselves, at the beginning of these programs,
could you have recommended controls to be put in place?
I think I mentioned at another hearing it was astonishing
to me that, 2 1/2 years after the Iraq war has been prosecuted,
we finally, because of I.G. Bowen, have put in computers. Well,
isn't that interesting: 2 1/2 years, they are finally tracking
the expenses.
So my question again is, to Mr. Thorson, were you
consulted? Did you have proposals? Did they listen? Were they
rejected?
And what do you think you have learned, Mr. Frazer, that we
could put in place before to avoid some of these high-profile
frauds?
Mr. Thorson. Well, first of all--and I really hate saying
this, because it sounds like I am trying to duck your question.
I am not--
Mrs. Lowey. So don't.
Mr. Thorson. I have been with the SBA about 3 months, so I
wasn't there when this program was done, but I am going to try
and answer your question the best I can anyway. And forgive me
for saying that, because I do feel like--
Mrs. Lowey. Forgive me for not knowing.
Mr. Thorson. One of the things that we do want to do in our
office is to work with the agency and, to use your term, to not
just have a ``gotcha'' at the end. There were things that I
think I would have recognized, because I did read--I knew I was
coming to the agency at that point, and I knew I wanted to read
everything I could about it.
And one of the things that I think we would all learn--and
this includes the Congress--the definitions. When you specify
these programs, the definitions need to be very clear.
And if they are not clear, then the agency needs to request
clarification and to make sure that the intent of what they are
trying to do with this program is executed properly and not
just broadened to the point to satisfy whatever the latest
pressure was.
I think, in this particular case, having been on the other
side of the dais for a number of years, both in the House and
the Senate, and done a lot of hearings, I would have recognized
this was really a program that had potential for disaster.
Mrs. Lowey. Now, you recognized it. What about the people
running the program? Have they ever run a program before? They
didn't recognize it? They didn't--
Mr. Thorson. I think what happened, in trying to get these
loans out and affect the national economy, not just these local
geographical areas hit, I think they took the stance that
almost any business in this country was affected economically
by what happened. I think that summarizes their feeling.
Whether that was a valid statement or not, I guess we could
debate for a long time. I think it probably, from our reports,
shows they maybe went a little too far in how they did that.
But I really think part of their problem was the lack of
oversight on the lenders. Once they basically freed the lenders
up to go and say anybody can have these loans, because almost
by definition they felt that any business could qualify and
would be affected in some adverse way.
Well, we know that is not true. I mean, there were some
businesses that were not affected. But I think what happened
is, in their desire to really expand the program, which was
certainly the pressure they were receiving, that they, first of
all, broadened it too far and, second of all, did not provide
enough oversight over the lenders who took that as the
incentive to just let it go to anybody, no matter what the
justification.
Mrs. Lowey. Thank you.
Mr. Frazer. Yes. One of the key things that we did learn as
a result of all of our investigations was, besides the
documentation that we have talked about already, if at the
time?when the people from the charities, the volunteers and the
workers came and started, they were affecting people like
ourselves.
And they were feeling the brunt of the tragedy. And they
came, and they wanted to give out money and to give aid to
those who were deserving.
And I think that if, in fact, prior to their actually
sitting at the table to give out money, they go through some
training?not so much training, even a lecture series where they
are able to hear about certain fraud indicators to look out
for, maybe tell them about some prior prosecutions or incidents
that has happened in the past, then there would somehow be?the
desire to give and help would be tempered by the fact that some
people are looking to take advantage of them.
I think that would be useful in the future.
Mrs. Lowey. Thank you, Mr. Chairman. I hope, as a result of
these excellent hearings you are holding, that we can learn
something so that next year or the next incident we are still
not talking about waste, fraud and abuse. Thank you very much,
Mr. Chairman.
Mr. Rogers. Thank you. The gentlelady's time is expired.
The Ranking Member is recognized.
Mr. Meek. Thank you, Mr. Chairman.
Ms. Lowey, I know that along the airlines, especially being
a ranking member of a subcommittee and an appropriations
committee, many times?and someone has gone through this quite a
bit in Florida, especially in south Florida, as it relates to
hurricane--the reason why I was asking the question of what
happens prior to the event, because after the event I know what
happens.
Legislation in haste. Policymakers calling folks that are
sitting at the dais saying, ``What are you doing? Why don't we
have those dollars out there? Why do we have this pot of money
still sitting there?''
And it is 2 or 3 months later, and then they start to push
of running these dollars through. And then it is the
victimization of the taxpayer all over again.
And I am hoping through this report--and I mentioned the
authorization bill that may not be the proper vehicle for next
week. But as we start to close the book on this report, maybe,
just maybe, Mr. Chairman, we can--I know the Small Business
Committee has done some work, and one of your New Yorkers is
the ranking member there.
They have had to do some work. And I am hoping that our
staff would talk with them about the work they have done on the
STAR program and programs like it, so that we don't find
ourselves doing this all over again.
I just have a strange feeling that this is happening right
now in the Gulf. A number of the programs that we have now--
with all due respect to all the law enforcement agencies we
have there to watch them--it is being carried out right now.
So we have to legislate and put some sort of guidance and
parameters in what I may call non-event times prior to the
event, because after the event, you know, the bill goes from
the committee to the floor within the same week.
The Department of Homeland Security slammed together in
haste, not well-thought-out. And we are going through the
process now of trying to correct that very slowly.
So I just wanted to say that out loud, Mr. Chairman,
because I believe that we should in order report hopefully use
that as a guiding--some sort of set of guiding principles that
can hopefully go into legislation.
We don't want to nail folks down to where they can't turn
right or left when you have to make a decision, but we also
expect for goodwill and common sense to prevail and say that,
``Well, this doesn't sound right,'' especially with this STAR
program.
I didn't really want to get into that personally in my
comments today, but it is so very, very important as it relates
to the integrity of the whole process of preventing fraud in
the future.
Thank you, Mr. Chairman.
Mr. Rogers. Thank you.
And that is the intent of this subcommittee's efforts and
the reason why Chairman King asked us to investigate this. We
do intend to come up with a report that is meaningful and does
make a difference for the future.
With that, I would like to remind all panelists--first of
all, thank you for your time and your participation. It has
been of great help to us in our efforts.
We would like to remind you that other Members and some of
the Members who are here, since we only did one round of
questions, may have some additional questions for you, which
they will submit to you. I would ask that you respond to those
in writing. We are going to leave the record open for 10 days
for that purpose.
And with that, thank you. And this panel is excused.
The Chair now recognizes the second panel. And we would
like to welcome you and thank you for your time and
participation.
Our first witness will be Ms. Eileen Mildenberger, Chief
Operating Officer of the Empire State Development Corporation,
for your statement.
As I have told the earlier panel, if you all were here,
your entire written statement has been submitted, and all
Members have a copy. So we would ask that you summarize--try to
keep your remarks to five minutes or less--so that we will have
more time for questions and answers.
Mr. King. Mr. Chairman?
Mr. Rogers. Chairman King?
Mr. King. Mr. Chairman, I would just like to make a
statement for the record that my son worked for Ms.
Mildenberger at the Empire State Development Corporation in
1996 and 1997.
So while I don't see any conflict of interests or any
impropriety, I will recuse myself for any questioning of Ms.
Mildenberger. And I will not question any of the witnesses
regarding ESDC.
Mr. Rogers. Understood. Thank you, Mr. Chairman.
Ms. Mildenberger, the floor is yours.
STATEMENT OF EILEEN MILDENBERGER
Ms. Mildenberger. Thank you for the opportunity to discuss
Empire State Development, the state's lead economic development
agency's efforts and initiatives following the 2001 terrorist
attacks on the World Trade Center.
I am pleased to report that Manhattan is once again a
vibrant center of commerce. I would like to review where we
have come and what we have done.
On September 10, 2001, the district of south of 14th Street
had 20,000 small businesses and 103 large businesses, with had
more than 500 employees each. Large firms amounted to only 0.5
percent of all of the businesses, but employed 42 percent of
all the workers.
Following September 11th, virtually all of these companies,
and a half million employees, were affected. While the physical
impact of the 9/11 attacks was geographically limited to the
blocks near the World Trade Center, the attacks had a far more
substantial economic impact. An independent source estimated
64,000 jobs could be permanently lost.
Governor Pataki's initiative to establish a unified
federal, state, and city command, and to designate Empire State
Development as the lead agency for economic recovery, under the
leadership of our chairman, Charles Gargano, made it possible
for New York State to implement a quick and effective response
to the attacks, the goals of which were to keep businesses in
Lower Manhattan and to preserve New York's position as the
global center for finance.
Within 48 hours of the attacks, ESD set up a walk-in center
in New York City and 1-800 number to field inquiries about
assistance for businesses. These were in operation before the
fires at the Trade Center were put out.
Using state funds, ESD guaranteed $33 million in bridge
loans, and we also had a substantial grants program. We did
this knowing that federal funds would soon be on the way.
The Department of Housing and Urban Development's Community
Development Block Grant was identified as the most appropriate
vehicle to fund New York's economic recovery efforts. Thanks to
quick action by Congress, substantial federal resources were
made available for this.
Our efforts had two primary objectives. The first was to
help businesses make up the loss of working capital. And the
second was to provide incentives for businesses to return to or
remain in Lower Manhattan.
With $1.2 billion in HUD funds, we created three large
programs, the first of which was the Job Creation and Retention
grant program, intended to retain and attract anchor firms.
Seventy-two large companies accepted grants, totaling $292
million, the results of which created more than 70,000 jobs in
Manhattan and a total of 91,000 jobs throughout New York City.
Four-and-a-half months after the attacks began, we also
provided assistance to small businesses through the Business
Recovery Grant program. Over a half-a-billion dollars, $563
million, was provided through these programs for small
businesses located south of 14th Street.
In addition to that, 6 months later we started another
small firm, an Attraction and Retention Grant program, which
provided over $115 million to 2,200 small businesses. These
firms employ over 37,000 people, one-third of whom which are
low-income or low-wage earners.
In addition, other programs for small businesses resulted
in $42 million of loans and $5 million in technical assistance.
I just want to emphasize for today's meeting that carefully
followed federal rules, including development of an action plan
that was reviewed and approved by New York City, the Department
of Housing and Urban Development, and widely circulated for
public comment before the plans were implemented.
Our economic development staff took pride and took efforts
to make sure that each request that was asked for assistance
was carefully reviewed. The BRG program, for instance, had at
least five different independent reviews. The large grant
program underwent a thorough economic analysis and approval by
our board of directors.
HUD inspectors general concluded, ``ESDC generally
disbursed the CDBG disaster funds to eligible applicants in
accordance with the HUD-approved action plan.''
In recognizing the time of the subcommittee, I just want to
say that, with great care was taken to ensure that we had a
fair and efficient process, balanced with documentation and
accountability.
We often pursued third-party verification prior to awarding
grants, which included: asking applicants to provide tax
information; site visits to the business locations; speaking
with landlords; also, coordinating with the State Department of
Labor to confirm that they had employees at that location,
which were reported prior to the attacks.
Today, less than 5 years after September 11th, businesses
have returned and a residential influx has taken place in New
York, in Lower Manhattan. Specifically, the Lower Manhattan
office market is showing signs of sustained recovery, with the
vacancy rate downtown that dropped from nearly 14 percent at
the beginning of 2005 to currently near 10.5 percent.
ESD recognizes that we have contributed a lot and we still
have a lot to do. We are proud of accomplishments thus far, and
through the leadership and vision of Governor Pataki, Mayors
Giuliani, Bloomberg, our congressional delegation and their
colleagues, we have not only helped to renew Lower Manhattan,
but we have rebuilt the confidence of the business community in
one of the most important parts of our city, state, and
country.
Thank you very much.
[The statement of Ms. Mildenberger follows:]
Prepared Statement of Eileen Mildenberger
Thank you for the opportunity to provide testimony on Empire State
Development's economic recovery initiatives following the terrorist
attacks on the World Trade Center. I am pleased to report that lower
Manhattan is once again a vibrant center of commerce.
Let me review how far we've come and what we've done.
On September 10, 2001, the district of south of 14th Street had
20,000 small businesses and 103 large businesses with more than 500
employees each. Large firms amounted to only half of 1% of all the
businesses in the area, but employed 42 percent of all workers.
Following September 11th, virtually all of these companies--and a
half million employees--were affected.
While the physical impact of the 9/11 attacks was geographically
limited to the blocks near the World Trade Center, the attacks had a
far more substantial economic impact. An independent source estimated
64,000 jobs could be permanently lost.
Governor Pataki's initiative to establish a unified Federal/state/
city command, and to designate Empire State Development as the lead
agency for economic recovery, made it possible for New York State to
implement a quick and effective response to the attacks, the goals of
which were to keep businesses in lower Manhattan and to preserve New
York's position as the global center for finance.
Within 48 hours of the attacks, ESD had set up a walk-in center in
New York City and 1-800 number to field inquiries about assistance for
businesses. These were in operation before the fires at the Trade
Center were out.
Using State funds, we guaranteed $33 million in bridge loans from
banks to nearly 1,000 qualified small businesses. We instituted a grant
program for retail businesses, approving more than 3,000 applications
and $13 million in grants.
It soon was clear that Federal help would be needed. The Department
of Housing and Urban Development's Community Development Block Grant
was identified as the most appropriate vehicle to fund New York's
economic recovery efforts. Thanks to quick action by Congress,
substantial federal resources were made available.
Our effort had two primary objectives: To help small businesses
make up the loss of working capital, and to provide incentives for
businesses to return to, or remain in, lower Manhattan.
With $1.2 billion in HUD funds, we created our three largest
programs.
The Job Creation and Retention Program (JCRP) was intended to
retain and attract large ``anchor'' firms. Seventy-seven companies
accepted grants totaling $292 million. They have committed to retain
and create more than 70,000 jobs in lower Manhattan and a total of
91,000 jobs citywide. Four and one-half months after the attacks, we
began providing $563 million in business recovery grants to compensate
small business loss. Business Recovery Grants were available to
eligible businesses south of 14th Street with fewer than 500 employees
and with unreimbursed economic losses. In addition, $13 million was
allocated to large businesses that employ 200 workers or less at their
downtown locations.
BRG provided assistance to more than 14,000 businesses. The average
grant was nearly $39,000 and compensated only 16.8% of the average
firm's loss.
Six months after the attacks, we began the Small Firm Attraction
and Retention Grant (SFARG) program. Through SFARG, we have disbursed
nearly $115 million to 2,200 small businesses that made a 5 year lease
commitment to stay in lower Manhattan. These firms employ over 37,000,
nearly 1/3 of whom are low-wage earners. Second grant disbursements,
totaling $42 million, to eligible companies that stay downtown, will
take the program into mid-2007. In other programs, we provided $42
million in business recovery loans and nearly $5 million for technical
services for small businesses.
We carefully followed Federal rules, including development of an
action plan that was reviewed and approved by New York City and the
Department of Housing and Urban Development, and widely circulated for
public comment.
Our economic development staff reviewed every request for
assistance. Each BRG grant received at least five different reviews.
JCRP grants underwent a thorough economic analysis and approval from
our Board of Directors. HUD's Inspector General concluded, ``ESDC
generally disbursed the CDBG disaster assistance funds to eligible
applicants in accordance with the HUD approved action plan.''
Great care was taken to ensure a fair and efficient process,
balanced with careful documentation and accountability. We often
pursued third-party verification prior to awarding funds. This
included: reviewing the Port Authority's master list of World Trade
Center tenants; requested tax information from the IRS; site visits;
speaking with landlords; and confirming employee numbers with the State
Department of Labor.
Where fraud has been detected, ESD has worked closely with law
enforcement. As of this time, only two cases have gone to trial.
Our initiatives to help rebuild the lower Manhattan economy taught
some important lessons. Among them:
Building relatively simple-to-administer and simple-
to-apply-for assistance programs with objective, transparent
rules understandable to potential grant recipients.
Scaling programs to match organizational capacity.
Establishing procedures to catch errors and potential
fraud.
Recognizing that some federal and state loan programs
are not well-suited to the purpose of disaster recovery.
Today, less than five years after September 11th, businesses have
returned, and a residential influx has taken place in lower Manhattan.
Specifically, the lower Manhattan office market is showing signs of
sustained recovery. The vacancy rate downtown dropped from nearly 14%
at the beginning of 2005 to 10.6% at year end, its lowest level since
September 11th. In the past year, the number of downtown businesses
increased by 6%.
With the recovery of the area's business economy, lower Manhattan
has become home to a burgeoning residential community. Today, there are
more than 20,000 residential units south of Chambers Street, a 10%
increase over 2004. 29 developments are under construction, adding
almost 4,000 new units in the next few years.
And tourism in New York City is at a record high, with 41 million
visitors in 2005, and visitor spending at $21 billion in 2004.
ESD's assistance has contributed to this new vitality.
We have more to do, of course, but are proud of what has been
accomplished thus far. Through the leadership and vision of Governor
Pataki, Mayors Giuliani and Bloomberg and our Congressional Delegation
and their colleagues, we have not only helped renew lower Manhattan,
but we have rebuilt the confidence of the business and residential
community in one of the most important parts of our city, State, and
country.
Thank you.
Mr. Rogers. Thank you, Ms. Mildenberger, for your
statement.
The Chair now recognizes Mr. Stefan Pryor, President of the
Lower Manhattan Development Corporation, to testify. Mr. Pryor
is accompanied by a member of the board of LMDC, Mr. Thomas
Johnson, who serves as Chairman of LMDC's Audit and Finance
Committee. And I understand he is in the audience.
With that, welcome, Mr. Pryor, and we look forward to your
statement.
STATEMENT OF STEFAN PRYOR
Mr. Pryor. Thank you.
Chairman Rogers, Ranking Member Meek, Committee Chairman
King, I want to thank you very much for this opportunity to
testify on the revitalization and the resurgence of Lower
Manhattan after September 11th.
And I would particularly like to thank this subcommittee
and the United States Congress as a whole for your support
throughout the recovery and rebuilding period. We couldn't be
in this position, in which we have made tremendous progress,
without your tremendous help.
LMDC was created following September 11th to help plan and
coordinate the rebuilding of Lower Manhattan. We are a
subsidiary of Empire State Development Corporation, and our
Board of Directors is appointed by George Pataki and Mayor
Bloomberg.
Congress allocated $2.783 billion of the $21 billion total
aid package to the LMDC for our efforts.
Today, I will give you a brief description of some of
LMDC's activities, centered on ensuring the development of a
revitalized, 21st-century downtown. I will then describe the
climate of accountability and controls we have established at
LMDC to ensure integrity in the implementation of these
priorities.
The scene in Lower Manhattan has changed so significantly
in less than 5 years that people often forget what we did
experience in 2001. We suffered, of course, the unconscionable,
tragic loss of 2,749 people at the World Trade Center on
September 11th.
On the days immediately following, I remember well how my
own residential street, which is about a block from the World
Trade Center, was affected. There were military personnel in
the street; you had to stop and show I.D. to get to your home.
To say the least, there were deterrents to remaining
downtown. In fact, there were concerns that we would have a
permanent exodus from downtown as a result of the events.
I witnessed moving vans lining the streets, as residential
vacancy rates were reported as high as 50 percent in some of
the residential buildings. Businesses were moving away, fearing
Lower Manhattan would never again be a thriving commercial
district.
We lost 60,000 to 80,000 jobs as a result. Of course, the
10 million square feet of office space at the World Trade
Center itself was destroyed. These are the negative images and
tough conditions that were part of our daily experience
downtown, those of us who live and work there and, in the
aftermath of September 11th, were also broadcast across the
world.
So again there were some who questioned whether it would
ever be possible to recover. Yet, in less than 5 years since
September 11th, we have already seen significant progress.
On the World Trade Center site itself, LMDC selected the
master plan for the site, a plan that continues to guide the
rebuilding today and is well on its way to implementation. As a
function of the master plan, for example, we have witnessed the
construction and opening of Seven World Trade Center, the last
building to fall on September 11th and the first to rise again.
The construction of the Freedom Tower has become. And the
Santiago Calatrava-designed transportation hub at the World
Trade Center, which was crushed--the original version thereof
was crushed on September 11th--the construction is under way
with a temporary service already operational.
LMDC also guided the process for the selection of the heart
of the master plan, the memorial, and we have since led the
planning and design efforts there. And we have already begun
site preparation work on the construction of a memorial.
It was very clear from the beginning of our planning and
public outreach that making Lower Manhattan viable would
require more than rebuilding the Trade Center itself, so
engaged in a number of initiatives beyond the World Trade
Center site to ensure that we created an environment that, over
the long term, could sustain businesses and residents, and we
believe we have done so. You are familiar with a number of our
programs.
I would like to actually jump to the controls that we put
in place to describe to you how we have ensured integrity along
the way, in the course of our work.
Our board of directors provides oversight and clear
direction to management. The board itself consists of
distinguished citizens, corporate executives, government
officials and community leaders. As a subset of our board, our
audit and finance committee is co-chaired by Tom Johnson.
Tom has been introduced to you, and he is the retired
chairman and CEO of GreenPoint Bank. And he is also the father
of Scott Johnson, who was lost on September 11th.
And Larry Babbio, the vice chairman and president of
Verizon, they co-chair our audit committee. We met as recently
as yesterday. They are a very active committee, and we are
grateful for their support and help in making sure that we have
a clean operation.
The second layer of controls are day-to-day project
managers and attorneys who monitor their assigned projects all
the way through implementation. Those are members of our staff.
Third, our compliance monitoring department performs risk-
based reviews on LMDC sub-recipient relationships, focusing on
both HUD and LMDC compliance.
Fourth, our internal audit department objectively evaluates
and reports on risks and controls weaknesses directly. Working
directly with the board's audit and finance committee, the
internal auditor himself reports to Tom Johnson, not to me.
As a fifth level of oversight, LMDC retains external
auditors to review LMDC's general purpose financial statements.
Sixth, HUD's Office of Block Grant Assistance conducts
semi-annual monitoring reviews of LMDC management's
performance, concentrating on program compliance. I know there
are representatives of that office here in the audience today,
and they are involved and is much more active than those period
reviews.
Finally, the HUD Office of the Inspector General has had a
very active role. And these audit results are reported every 6
months, so we work closely with that office, as well.
Beyond that, beyond those seven layers, LMDC has
established a department to conduct proactive investigations.
On our staff, we hired investigators, a former assistant U.S.
attorney, who, working with our general counsel, herself a
former assistant U.S. attorney, has brought forward cases
proactively.
For example, in the case of our residential grant program,
some of which you have heard about in the written testimony
that has been submitted, to make sure that we detect, uncover
and bring forward for prosecution cases of fraud, so that these
things happen as part of our system rather than a reaction to
what we are doing.
In conclusion, if I may, Mr. Chairman--I know that my time
is expired--I wanted to just state that, through the public
process, the very expensive public consultation that we did,
through the setting of priorities, and through this multi-
layered system of controls, we believe that we are making real
progress, something the nation can be proud of.
And we conducted an economic analysis of the impact of our
work. And I would like to point out that, through the series of
investments that you are helping to make that we already have
on the ground, by 2025, we except economic output will increase
to $23.2 billion, and that ranged to $25 billion, annually, and
increase employment by maybe in excess of 100,000 people as a
result of these interventions downtown.
Remember, we lost 60,000 to 80,000 jobs in an instant on
September 11th, so the idea that we can resurge and regain our
positions as the financial capital of the world is so very
important. And we think we are many steps in that direction.
Thank you, Mr. Chairman.
[The statement of Mr. Pryor follows:]
Prepared Statement of Stefan Pryor
Thank you for this opportunity to testify on the redevelopment and
resurgence of Lower Manhattan.
LMDC was created following September 11th to help plan and
coordinate the rebuilding of Lower Manhattan. We are a subsidiary of
the Empire State Development Corporation, and our Board of Directors is
appointed by the New York State Governor, George Pataki, and the New
York City Mayor, Michael Bloomberg. Congress allocated $2.783 billion
of the $21 billion total aid package to the LMDC for our efforts.
The scene in Lower Manhattan has changed so significantly in less
than five years that people often forget what we faced in 2001. We
suffered the unconscionable, tragic loss of 2,749 people at the World
Trade Center on September 11th. On the days immediately following, I
remember well how my own residential street, about a block from Ground
Zero, was cordoned off; we had to enter our homes through military
checkpoints. I witnessed moving vans lining the streets as residential
vacancy rates soared as high as 50% in some buildings. And businesses
were moving away, fearing Lower Manhattan would never again be a
thriving commercial district. Sixty to 80,000 jobs disappeared, along
with 10 million square feet of office space at the World Trade Center
site, and Lower Manhattan slipped from the third to the fourth largest
central business district in the country. These are the negative
images, tough conditions, and dire predictions that, for those of us
who live and work downtown, were part of our daily experience. And
these are the images, conditions and predictions that, in the aftermath
of 9/11, were broadcast across the world.
As a result, there were some who questioned whether it would ever
be possible to truly recover. Yet in less than five years since
September 11th we have already seen significant progress. We've
witnessed the construction and opening of 7 World Trade Center--the
last building to fall on September 11th and the first to rise again. A
block away, Goldman Sachs is building its world headquarters right next
to American Express and Verizon, who remained downtown, determined that
it would be rebuilt. Inside the World Trade Center site, the
construction of the World Trade Center Transportation Hub is under way,
as is the site preparation for the Memorial and the construction of the
Freedom Tower. Surrounding the World Trade Center site, the West Street
Southern Promenade (a remade portion of the highway that abuts the
site) opened to the public last week, and the new Fulton Transit Center
is under construction--along with other revitalization projects beyond
the World Trade Center site. The value of construction now underway or
soon to begin totals $10 billion, with over $20 billion to be invested
over the next five years.
My testimony today will focus on the climate of accountability and
control we have established at LMDC. In talking to you about our
oversight and controls, I would like to outline our public process
briefly, how it led to the establishment of our priorities, and how our
controls have ensured integrity in the implementation of those
priorities--and in the development of a revitalized 21st century
central business district.
We take great pride that LMDC has led one of the most extensive
public processes ever undertaken by a government agency. We believe our
public process has been essential to ensuring our Federal funding is
spent properly and on the most meritorious projects. We have held over
200 public meetings over the past five years. Some of those meetings
have been broadcast live over the Internet, allowing people from around
the world to view our planning activities and provide their comments
and suggestions. All of our draft plans are subject to public comment
and then revised to take that comment into account.
We have also held hundreds of meetings with community groups and
advisory councils which represent the various communities impacted by
September 11th and the rebuilding--including victims' families,
survivors, residential and business community leaders, elected
officials, planners, architects, and other stakeholders. This
remarkable level of public participation has been highly effective. It
is impossible to create an agenda that pleases all constituencies all
of the time--but what we have demonstrated is a public agency's plans
benefit from more rather than less public input and that a
comprehensive outreach and feedback process lead to results that have
credibility and, as a result, durability.
To begin, LMDC responded immediately to the public's concerns about
retaining and attracting residents and businesses. The program played a
central role in restoring occupancy rates to more than 95%, as well as
in spurring new investment. A survey of residents conducted by the
Alliance for Downtown NY found that nearly 32% of all current residents
living below Chambers Street had moved to the area between September
2001 and May 2003. Among those new residents, a majority--51%--said
LMDC's grant had been a factor in their decision to move to Lower
Manhattan. The program infused $226 million in grants to more than
65,000 households. Battery Park City today boasts its highest occupancy
rate in its history, and Lower Manhattan is the fastest growing
residential market in the city.
To attract and retain businesses downtown, the LMDC also provided
funding to ESDC, which administered a variety of grant programs and
employee training assistance programs that played a major role in the
promising commercial reports we see today. You will hear more about
these programs from our ESDC colleagues, but I want to point out
briefly that according to Cushman and Wakefield, more than 850,000
square feet of new leases were signed in Lower Manhattan during the
fourth quarter of 2005--and this figure does not include Goldman Sachs'
new 1.9 million square foot headquarters.
Following our immediate residential and business recovery efforts,
LMDC made a conscious decision based on public input to use the
remainder of our funds on investments that would drive long-term
economic growth. We knew we would have to create conditions that would
not only result in the restoration of the 60 to 80,000 jobs lost, but
would also provide for a durable and vital environment that would
ensure those jobs would be secured over the long term. Our plans
emerged from public input and trends of cities around the world that
indicated that successful central business districts are increasingly
also vibrant, active live and work communities.
When we embarked on the selection of a Master Plan for the World
Trade Center site, we began by holding public forums with live webcasts
throughout the New York City regions. One of these forums--``Listening
to the City''--brought more than 5,000 people together in one location
to consider what should be built on the World Trade Center site. That
process resulted in LMDC's selection of Daniel Libeskind's Master Plan
in 2002--a plan that continues to guide the rebuilding today. We
believe the public input that drove this process was crucial to the
Master Plan's long-term viability. While the LMDC is not directly
responsible for the construction of these buildings, we are proud that
Libeskind's Master Plan for the site has endured, and that it is well
on its way to implementation.
The selection of the centerpiece of the site, the Memorial, was
also the result of extensive public input. LMDC's Families Advisory
Council helped shape the principles upon which the design was selected,
and we held an open international competition in 2003. In a true
testament to the extraordinary level of interest in the Memorial's
creation, we received 5,201 submissions. A prestigious Memorial Jury
selected the winner in January 2004--a design called ``Reflecting
Absence.'' We recently made modifications to the Memorial design and
its companion museum to ensure that these important centerpieces of
downtown will be delivered on budget and on schedule for opening on
September 11, 2009, while remaining true to the vision selected in
2004. The Memorial must and will be a magnificent and fitting tribute
to those we lost.
We are proud that all of our stakeholders played an important role
in the creation of this moving tribute. A recent NY State Supreme Court
decision found that the LMDC's public outreach on the Memorial has been
``exhaustive and beyond anything required by law,'' noting also that we
have acted in a ``commendable and sensitive manner.''
It was clear from the beginning of our planning and public outreach
that making Lower Manhattan viable and attractive in the long term
would require more than financial incentives and the rebuilding of the
World Trade Center site itself. We realized we had to transform Lower
Manhattan's neighborhoods to make them viable and attractive to
residents and visitors--as well as competitive in the attraction of
businesses in order to create the 21st century downtown I've
referenced. For example, with our funding, over 20 park and open spaces
have been either created or renovated. We have also provided funding
for major projects like the downtown segment of Hudson River Park and
the East River Waterfront which, together with Battery Park, will
surround Lower Manhattan's shore lines on all three sides with over 10
consecutive miles of green spaces, boardwalks, esplanades, cultural
activities, urban beaches, and active piers.
As another example of our off-site funding recipients, one of the
hardest hit areas of Lower Manhattan after September 11th was
Chinatown. Because of Chinatown's unique needs in the aftermath of
September 11th, we hired a community liaison dedicated exclusively to
this neighborhood, and created a Chinatown working group consisting of
representatives of the neighborhood to determine what the community
itself saw as its priorities. The LMDC acted quickly to kick off an
award-winning tourism promotion campaign that has brought millions of
new visitors to the neighborhood to shop, eat, and visit Chinatown's
cultural institutions. We funded and launched several important
initiatives in the Chinatown community, including:
The community's first ever Local Development
Corporation, a coordinating vehicle for the neighborhood's
recovery
a comprehensive Clean Streets Program--addressing the
number one concern cited by Chinatown residents and businesses
construction of the Chinatown visitor kiosk to guide
newcomers to the neighborhood
Major traffic and transportation plans to improve
conditions created in part by post-9/11 security
The rehabilitation of parks including Columbus Park
and its historic pavilion
Plans for a Chinatown arts center
$40 million in Residential Grant disbursements
$60 million in Business Recovery grants.
These are only a few of the LMDC's Chinatown initiatives, which
taken together total more than $170 million in funding commitments.
In Chinatown, the Lower East Side, and other areas of Lower
Manhattan, we made a pledge that we would commit $50 million of our
funds to affordable housing--one of the largest allocations to
affordable housing by a government entity in recent years. We are proud
to say we are living up to that commitment with five diverse projects
that will generate and preserve nearly 3,000 units of affordable
housing.
These particular projects offer just a glimpse of how our funding
has addressed the needs voiced by the public. I'd now like to say a few
words about how our funding is distributed, and the controls that guide
our process. All of our activities are framed according to HUD rules,
and as a result, the public and Congress have reviewed our plans
through the Partial Action Plan process.
Once funding is allocated, we place enormous emphasis on ensuring
that the money is spent properly. We have instituted seven layers of
controls on our projects. An effective internal control environment
starts with the tone set at the highest organizational level:
At the LMDC, our Board of Directors provides oversight
and clear direction to LMDC management. The Board itself
consists of distinguished citizens--corporate executives,
government officials, and community leaders. Following approval
by the Board's Audit and Finance Committee, the full Board must
approve every funding allocation. Our Audit and Finance
Committee is Co-Chaired by Tom Johnson--the retied Chairman and
CEO of GreenPoint Bank and GreenPoint Financial Corporation,
and father of Scott Johnson, who was lost on September 11th--
and Larry Babbio, the Vice Chairman and President of Verizon.
Our Board has instituted private-sector style accountability by
drawing upon their expertise in these matters and applying them
to the operation of our agency.
In addition to Board oversight, we have multiple
layers of protections, beginning with day-to-day project
managers and attorneys assigned to each project who not only
craft the agreements but also monitor the projects throughout
their implementation, ensuring recipients comply with all HUD
and LMDC requirements and adhere to the program activities,
budgets, and other requirements of the agreements.
In addition to our Board and the project management
structure, the third layer of oversight is provided by our
compliance/monitoring department, which performs risk-based
reviews on LMDC subrecipient relationships focusing on both HUD
and LMDC compliance.
A fourth level is provided by the LMDC's internal
audit department, whose primary mission is to objectively
evaluate and report on risks and control weaknesses. This
department reports directly to the Board's Audit and Finance
Committee, ensuring independence and promoting comprehensive
audit coverage.
In addition to our extensive internal controls, we
also implement a variety of external measures. As a fifth level
of oversight, LMDC retains external auditors to review LMDC's
general purpose financial statements.
A sixth level of oversight is provided by HUD's Office
of Block Grant Assistance, which conducts semi-annual
monitoring reviews of LMDC management's performance,
concentrating on program compliance. To date HUD Monitoring has
issued six reports. The last three reports identified no
``Findings'' or ``Concerns'' and noted that findings identified
in the earlier reports were all resolved. In the last two
reports, Mr. Richard J. Kennedy, Director, Office of Block
Grant Assistance, commended LMDC on its ``exemplary
administration of its grant programs.''
The HUD Office of Inspector General provides the
seventh oversight role, performing continuous audit procedures
of LMDC and its major grants. These audit results are reported
every six months to LMDC, the HUD Director of CDBG Grants, and
Congress. HUD IG has dedicated four to eight auditors to review
LMDC. To date they have issued six Audit Reports the most
recent of which identified one finding that has already been
resolved with no monetary exposure to the LMDC.
In addition to these seven layers of oversight, review, and audit
controls, LMDC established a department to conduct investigations and
assist in the performance of background checks, and formulate policies
to prevent or detect fraud or other criminal activity. This department
was created by our former Chief Investigator, who is a former Assistant
US Attorney; our General Counsel, herself a former Assistant US
Attorney; and a former NYPD Detective of more than 20 years'
experience, who continues to run the department today. The
investigations staff also manages an external integrity monitor, a firm
of professionals who review existing procedures and processes for
fraud, corruption, cost abuse, safety, and environmental risks.
Although these are our standard, comprehensive procedures, we have
customized procedures for particular programs when necessary. For
example, in the Residential Grant Program, the LMDC proactively brought
eight cases forward that were subsequently prosecuted by the U.S.
Attorney's Office for the Southern District of New York. All defendants
were charged in complaints with violations of federal law: (1) 18
U.S.C. Section 641 (fraudulent acceptance of federal funds) and 18
U.S.C. Section 1341 (mail fraud). The control mechanism in many of
these cases was returned mail. As a further control, grant recipients
were required to re-certify every six months.
We are proud that our controls have created an environment of
integrity and have ensured that we operate a tightly-run organization.
The HUD Office of Block Grant Assistance commends us in their reports
``for successfully carrying out [our] commitment to high quality
management of [our] grant programs.'' We believe that the LMDC can and
will serve as a model to other agencies in other parts of the country.
Two weeks ago, HUD Inspector General Kenneth Donohue testified before
the U.S. Senate Homeland Security and Government Affairs Subcommittee
on Federal Financial Management, Government Information, and
International Security, stating, ``I have seen the success of active
monitoring efforts with `monitors' used by the Lower Manhattan
Development Corporation in preventing waste and fraud in post-9/11
rebuilding activities and I have testified previously to this effective
concept for use in disaster relief efforts in the Gulf States.''
In closing, I would like to thank the members of this Subcommittee
and the United States Congress as a whole for your support for the
post-9/11 rebuilding. We are confident that the public processes we
implemented--in combination with our multi-layered approach to
oversight, review, and audit--are ensuring that the public's funds are
being managed with the utmost integrity--and with favorable results.
During the next few years, the benefits of LMDC's investments are
likely to be compounded, as the impact of major investments in
developments underway at the World Trade Center site and transportation
infrastructure build on the impacts of investments made before.
Economic analysts have estimated that by 2025, the major development
projects undertaken by the LMDC, drawing upon your $2.8 billion in
resources, will increase economic output in New York City by $19.4 to
$21.4 billion annually, and increase employment by 98,700 jobs. If we
take into account total program spending, including investments made in
Lower Manhattan by our partner agencies and organizations, the ongoing
impact in 2025 rises to $23.2 to $25.2 billion in annual economic
impact, and 116,000 to 131,000 jobs. These investments will position
Lower Manhattan as a thriving 21st century downtown, ensure that it
serves as a key economic engine for the nation, and--indeed--secures
its position as the financial capital of the world.
We thank you for your partnership in the mission of rebuilding and
revitalizing Lower Manhattan.
Mr. Rogers. Thank you, Mr. Pryor, for your statement.
The Chair now recognizes Mr. John Wang, Founder and
President of the Asian-American Business Development Center,
for your statement.
Welcome, Mr. Wang.
STATEMENT OF JOHN WANG
Mr. Wang. Thank you, Mr. Chairman and members of the
committee. I appreciate the opportunity to be invited to
testify before the committee on how one community, namely
Chinatown, fared in the aftermath of the September 11th
terrorist attack on the World Trade Center in New York City.
Tens of billions of dollars appropriated by the Congress
were directed into the city, to help rebuild its economy, but
Chinatown received a negligible amount.
My name is John Wang. I am president of the Asian-American
Business Development Center, which was founded in 1994 to
assist Asian-American-owned businesses to build capacity and
improve skills in order for them to compete in the mainstream
marketplace.
By 2001, Chinatown had already been a major tourist
attraction for decades, and yet it was also a community at
risk, because of increasing isolation from the mainstream
economy, outdated business practices, and the effects of a
deepening economic recession that the city was experiencing.
And while you can see that Chinatown is about a dozen city
blocks away from the World Trade Center, the impact was
immediate. New Yorkers stayed at home; tourists stayed away
from New York City; no one was going to Chinatown.
That affected 400 restaurants, 500 retail outlets of
various kinds, 200 street vendors, 300 manufacturers, 250
jewelry stores, just to name some of the types of business.
Chinatown virtually shut down.
Yet the government failed to recognize the need of the
community and provide appropriate assistance. Just to cite a
few examples, 6 months after September 11, the garment
industry, a backbone of the Chinatown economy, 12 percent of
factories closing.
Over 1,000 garment workers lost their jobs, and another
5,000 workers were working only 2 or 3 days per week.
Restaurants, the other lifeblood of Chinatown economy, the
businesses were dropping anywhere between 20 to 40 percent.
Over 250 jewelry stores, that they also lost a tremendous
amount of business, despite offering 20 percent to 40 percent
discounts to attract customers.
Then the SARS crisis took place in early 2003. It was a
double whammy to Chinatown.
In April 2003, 18 months after September 11th, AABDC
surveyed over 200 businesses throughout Chinatown, including
restaurants, jewelry stores, beauty salons, retail
establishments. And here are some findings.
Ninety-seven percent of the businesses surveyed said that
business was down from pre-September 11th levels. Sixty-four
percent said there were fewer tourists. Eighty percent said the
tourists were spending less.
But most damning of all was that business owners in
Chinatown felt they have been completely overlooked and ignored
since September 11th, and more recently with the impact of
SARS.
Looking to survive, many businesses applied for government
assistance. And according to the 2003 survey, only 20 percent
of businesses surveyed had received any disaster-related loans.
These loans came mostly from the Small Business
Administration, and the median loan amount was $23,000. Sixty-
two percent had received the WTC Business Recovery Grant.
However, the median grant amount was much lower, at $1,896.
Another grant program, the Small Firm Attraction and
Retention Grant, was not widely available to many of the
businesses. Only 11 percent of the businesses received the
SFARG, with a median grant amount of $7,000. And ninety-nine
percent of those surveyed felt that government was not doing
enough to help Chinatown.
It should not be a surprise to any observer of the Lower
Manhattan disaster relief program to understand how Chinatown
community felt the way it did. Chinatown is a vibrant part of
the New York City, yet the Chinatown community was not invited
to participate, nor was it given an opportunity to provide
input, on how the programs should be designed to address the
needs and provide meaningful assistance to community residents
and businesses.
With the formation of the Lower Manhattan Development
Corporation, no community representative was considered, let
alone selected, to sit on the board of LMDC. And to this day,
there is still no representation on the board of LMDC for the
Chinatown community.
The result was a community poorly served by the programs
that were not designed with it in mind. Let me give you couple
of examples of programs developed.
One, the main shopping street in Chinatown is Canal Street.
Yet, it is baffling that a program supposedly to help small
businesses would use Canal Street as a boundary to define those
on the south side of the street were eligible for financial
assistance and those on the north were not.
In a community of immigrants, where there is much
transition, landlords were notoriously reluctant to give long-
term leases, so why is there a program which demanded a 5-year
lease in order to qualify to apply for assistance?
In June 2003, AABDC undertook another study of these two
programs I mentioned earlier, the Business Recovery Grant and
SFARG. And that study finds that less than half of the 731
businesses that sought assistance from AABDC received a grant.
And more than half of those who received a grant received only
$3,000 in Business Recovery Grant or the Small Firm Attraction
and Retention Grant.
In total, over $3.1 million in grant monies have been
awarded to 347 businesses as the AABDC have assisted. To put
this matter in perspective, when compared to the Empire State
Development Corporation's preliminary numbers from March 2003,
the average Business Recovery Grant to Lower Manhattan
businesses was $33,680 as compared to only $7,829 for Chinatown
businesses. And one Lower Manhattan corporation, American
Express, alone received $22 million.
In conclusion, I wish to reiterate the point I have
repeatedly raised with anyone who is willing to listen, that to
revitalize, and maintain, expand Chinatown is money well-spent.
Not only is it one of the most important economic, social,
political centers of Chinese-Americans, but it is also a major
tourist attraction in New York City.
But it will require some bold thinking and innovative
planning to revitalize Chinatown. Short-term and temporary
promotional activities will not be enough. And I have in my
testimony provided some of the solutions I thought that could
be help to Chinatown.
And I thank the committee for giving me this opportunity to
testify here today.
[The statement of Mr. Wang follows:]
Prepared Statement of John Wang
Ladies and Gentlemen, I appreciate the opportunity to be invited to
testify before this committee on how one community, namely Chinatown,
fared in the aftermath of the September 11th terrorist attacks on the
World Trade Center in New York City. Tens of billions of dollars
appropriated by the Congress were directed into the city, to help
rebuild its economy, but Chinatown received a negligible amount.
My name is John Wang. I am President of the Asian American Business
Development Center, a 501(c)(3) not-for-profit organization that was
established in 1994 in New York City with a grant from the Small
Business Administration. I set up AABDC in Chinatown to assist Asian-
owned businesses to build capacity and improve skills in order for them
to be able to compete in the mainstream marketplace. For 10 years, we
have worked hand-in-hand with the businesses in the area.
Chinatown in New York City is the largest and oldest in the United
States. It is a community of immigrants since the 1870s, and from 1965
to 1970 the population of Chinatown nearly doubled, rising from around
20,000 to almost 35,000. Since then it's population has increased by
500% to around 180,000 today. By 2001, Chinatown had already been a
major tourist attraction for decades, and yet it was also a community
at risk because of increasing isolation from the mainstream economy,
outdated business practices and the effects of a deepening economic
recession that the city was experiencing.
While you will see (please refer to map) that Chinatown is about a
dozen city blocks away from the World Trade Center, the impact was
immediate--New Yorkers stayed at home, tourists stayed away from New
York City. No one was going to Chinatown. That affected 400
restaurants, 500 retail outlets of various kinds, 200 street vendors,
300 manufacturers, 250 jewelry stores, just to name some of the types
of businesses. Chinatown virtually started to close down.
Yet the government failed to recognize the devastation suffered by
Chinatown and did not include the community in the `major disaster
zone'.
Just to cite a few examples, six months after September 11:
the garment industry, a backbone of the Chinatown economy,
hit the lowest point in its long history with 12% of factories closing
(30 in number); over 1,000 garment workers lost their jobs and another
5,000 workers were working only 2 to 3 days per week. It has since
further declined.
Restaurants, the other lifeblood of Chinatown's economy,
were reeling from a shortage of customers--lack of tourists combined
with the loss of spending by garment workers. Despite some promotional
activities during the Lunar New Year in February 2002, businesses were
continuing to decline, showing losses of 20% to 40%.
One of Chinatown's attractions was its abundance of small
shops selling items at low prices. Walk-in activity and sales had
dropped by as much as 50%.
Over 250 jewelry stores that lined Canal Street and the
Bowery, which competed with the city's Diamond District on 47th Street
in terms of variety and prices, saw business drop, despite offering
from 20% to 40% discounts to attract customers.
The SARs crisis took place in early 2003, and it was a double
whammy to Chinatown. In April 2003, 18 months after September 11th,
AABDC surveyed over 200 businesses throughout Chinatown including
restaurants, jewelry stores, beauty salons, retail establishments,
professional offices, and garment manufacturers. Here are some
findings:
97% of the businesses surveyed said that business was down
from pre-September 11th levels.
When asked specifically about the impact of SARS, 84% said
that their business had dropped because of the SARS crisis.
Travel agencies in Chinatown were especially hit hard by
the perceived threat of SARS, some reported that they were about to go
out of business.
As a whole, owners were reporting that business was down
by over 30%, with many down by 50-60%.
The drop in the number of tourists coming to New York City
was one of the major reasons for the steep decrease in business
64% said there were fewer tourists.
80% said the tourists were spending less.
But most damning of all was that business owners in
Chinatown felt they have been completely overlooked and ignored since
September 11th and more recently with the impact of SARS.
Looking to survive, many businesses applied for government
assistance. Yet, according to the 2003 survey:
only some had received loans and/or grants and many did
not qualify for assistance.
For those who did qualify, most received very little in
the amount of grant money and even fewer have received loans.
For example, only 20% of businesses surveyed had received
any disaster-related loans.
These loans came mostly from the Small Business
Administration and the median loan amount was $23,000.
62% had received the WTC Business Recovery Grant (BRG).
However, the median grant amount was much lower at $1,896.
Another grant program, the WTC Small Firm Attraction and
Retention Grant (SFARG), was not widely available. Only 11% of
businesses received the SFARG with a median grant amount of $7,000.
99% of those surveyed felt that government was not doing
enough to help Chinatown.
It should not be a surprise to any observer of the Lower Manhattan
disaster relief program to understand how the Chinatown community felt
the way it did. Chinatown is a vibrant part of New York City, yet the
Chinatown community was not invited to participate nor was it given an
opportunity to provide input on how the programs should be designed to
address the needs and provide meaningful assistance to community
residents and businesses. Even longstanding problems such as garbage,
parking and traffic around Chinatown were not addressed.
With the formation of the Lower Manhattan Development Corporation,
no community representative was considered, let alone selected, to sit
on the board of LMDC and to this very day there is still no
representation on the board of LMDC for the Chinatown community.
The result was a community poorly served by programs that were not
designed with it in mind. Let me give you couple of examples of
programs developed by the Empire State Development Corporation (New
York State's economic development agency and parent agency of LMDC):
The main shopping street in Chinatown is Canal Street.
Yet, it is baffling that a program supposedly to help small businesses,
would use Canal Street as a boundary to define that those on the south
side of the street were eligible for financial assistance and those on
the north were not!
In a community of immigrants, where there is much
transition, landlords were notoriously reluctant to give long term
leases to tenants, so why is there a program which demanded a five-year
lease in order to qualify to apply for assistance?
A short while ago I mentioned two grant programs - the World Trade
Center Business Recovery Grant (``BRG'') and the Small Firm Attraction
and Retention Grant (``SFARG''). In June 2003, AABDC undertook a study
of these two federal grant programs, based on 731 businesses that had
sought assistance from AABDC. The report, ``AABDC Financial Assistance
Center: Findings from the Application Process for the World Trade
Center Business Recovery Grant and Small Firm Attraction and Retention
Grant Programs,'' found that:
less than half of the 731 businesses that sought
assistance received a grant--46.4% received BRG and 23.1%
received SFARG.
and more than half of those who received a grant,
received only $3,000 in BRG and/or SFARG.
Because so many businesses that sought assistance were
small businesses (85.2%) with less than $300,000 in annual
gross revenues and less than ten employees (87%), the
overwhelming majority (205 out of 339 businesses) received less
than $3,000 in BRG and less than $9,000 in SFARG (25 out of 39
businesses).
In total, over $3.1 million in grant monies have been
awarded to 347 businesses--$2.7 million in BRG and $463,000 in
SFARG.
56.2% of businesses received less than $3,000 in total
grant money.
The BRG awards ranged from $100 to $150,000 with the
average grant award of $2,195 for businesses with less than
$300K in annual gross revenue.
Certain types of businesses were more likely than
others to receive a grant. For example, laundromats (66.7%)
were much more likely than car services (3.6%) to receive a
BRG. Car service, street vendors and laundromats were not
granted a SFARG.
To put this into perspective, when compared to the Empire State
Development Corporation's preliminary numbers from March 2003:
the average BRG award to Lower Manhattan businesses
was $33,680 as compared to only $7,829 for Chinatown businesses
and one Lower Manhattan corporation, American Express,
alone received $22 million in grant money.
The report analyzed problems with the two grant programs and
offered some recommendations that many business owners believe would
help them in receiving the financial assistance these programs had
intended. I will not go into detail here, as I have submitted a copy of
the report along with my testimony for the Committee to review.
In conclusion, I wish to reiterate points I have repeatedly raised
with anyone who is willing to listen, that to revitalize, maintain and
expand Chinatown is money well spent. Not only is it one of the most
important economic, social and political centers of Chinese Americans,
but it is also a major tourist attraction in New York City. But it will
require some bold thinking and innovative planning. To revitalize
Chinatown, short term and temporary promotional activities will not be
enough. What is needed are forward-looking strategies and a long-range
plan that can bring Chinatown into the 21st century.
While there is a general consensus that Chinatown will require
targeted government and private sector interventions to stimulate its
economy and ensure its future prospects, there is no commitment from
state or city government to undertake a comprehensive action.
As Federal, State and City agencies turn to rebuilding Lower
Manhattan, a primary concern should be on finding ways to stop the
marginalizing of Chinatown's businesses and reverse its decline. It
needs access to the funding, tools and networks needed to be part of
New York City and State's economic recovery and to participate in the
21st century economy.
Here, as I have done elsewhere, I would propose:
(1) an economic development strategy for Chinatown needs to be
formulated, based on a number of comprehensive studies conducted post-
9/11 by several community organizations;
(2) the New York City Department of City Planning, in consultation
with the community, should conduct a land use and zoning study to
understand how the community's past development has shaped current land
use and analyze the best and most appropriate use to promote future
economic development;
(3) a commercial development and investment strategy is needed to
maximize Chinatown's strategic location and its links to the worldwide
Chinese and Asian community where Chinatown, part of a global
marketplace, is ideally situated to be an international business and
trade center.
This clearly and unmistakably aligns Chinatown's economic with that
of New York City and State and failure to take Chinatown into
consideration in rebuilding Lower Manhattan is at city and state's own
peril.
I thank the committee for giving me this opportunity to testify
today.
[GRAPHIC] [TIFF OMITTED] T5501.034
Background on Asian American Business Development Center
AABDC is a 501(c)(3) not-for-profit organization that was
established in 1994 with a grant from the Small Business
Administration. AABDC's mission is to advance the capacity of Asian-
owned businesses in areas needed to enable such businesses to compete
in the mainstream marketplace.
AABDC acts upon its mission by:
Providing information and technical assistance through
consulting services, workshops, seminars, and conferences;
Improving access to procurement opportunities;
Increasing international trade opportunities;
Increasing access to current technology and technology
training;
Providing a valuable networking structure that
promotes visibility and access; and
Facilitating and promoting strategic ventures between
Asian and non-Asian businesses.
Major programmatic areas undertaken by AABDC to serve the small
business community include:
ASIAN BUSINESS PARTNERSHIPS
In its efforts to assist Asian American businesses to compete in
the mainstream marketplace, AABDC actively develops alliances and
partnerships with public agencies(such as U.S. Small Business
Administration and Port Authority of NY & NJ), Empire State Development
Corporation, NYC Department of Small Business Services and private
sectors organizations to provide better access to information,
resources and markets.
US-CHINA TRADE RELATIONS
A key part of AABDC's strategy is facilitating business
opportunities between Asian American business owners and firms in Asia
and connects firms in Asia with corporate decision-makers here in the
U.S. To meet that objective, AABDC organizes trade delegations to and
from Asia and maintains close relationships with Asian officials and
business representatives stationed in the United States.
NEW MAJORITY ALLIANCE
In partnership with the Harlem Business Alliance (HBA) and the
Institute for Multicultural Business, Inc., AABDC launched a New
Majority Initiative providing means for Asian American, African
American and Hispanic American business owners to build economic
alliances with Fortune 500 companies.
Mr. Rogers. Thank you, Mr. Wang, for your statement.
The Chair now recognizes Ms. Bettina Damiani?
Ms. Damiani. Damiani.
Mr. Rogers. Damiani.
STATEMENT OF BETTINA DAMIANI, PROJECT DIRECTOR, GOOD JOBS NEW
YORK
Ms. Damiani. Thank you.
Good morning, and thank you for inviting me to testify
about the allocation of federal funds after the September 11,
2001, attacks on New York City. My name is Bettina Damiani, and
I direct Good Jobs New York.
I am here to discuss how Congress--able to process where
subsidies were granted to large companies and luxury housing
developers with minimal input from New Yorkers. This was
egregious, concerning that the brunt of the economic attacks
were felt in low-wage industries, such as restaurants, air
transport, retail, and garment manufacturing.
Federal resources did little help ease workers or the
heroic cops, firefighters and rescue workers we saw on
television the following weeks after the attack. For instance,
Congress removed requirements that public hearings be held and
that the majority of funds must benefit low-and moderate-income
communities.
New York took full advantage of these waivers by creating a
process for distributing funds that was not respectful of
inclusiveness, transparency or equity.
ESDC, under the authority of Governor Pataki, and its
subsidiary, LMDC, were charged with distributing these funds.
The boards of these organizations are comprised of corporate
executives and real estate interests. And LMDC board, charged
with allocating over $2 billion in cash grants, didn't include
experts from affordable housing or workforce development.
And aside from one community member, there was no community
representation. And as we just heard, Chinatown has been
completely ignored, as well as the Lower East Side community.
The limited vision of these boards resulted in the lack of
response to those who needed it most, like workers from the
famed Windows on the World restaurant, located in the World
Trade Center. A collaborative effort by some of the workers to
open a restaurant called Colors led them to apply for LMDC
funds.
After getting the runaround for years, the group finally
opened a restaurant in Greenwich village, but without any 9/11
funds. They might do fine there, but there is no synergy
between them and being part of the rebuilding effort.
It was not surprising, considering the composition of the
board and the lack of framework and deadline associated with
the LMDC process. Those with ties to the board members
seemingly had much better luck. Board members recuse themselves
from votes at least 27 times, as over $100 million went to
groups they were associated with.
We have never implied that board members did anything
illegal. Nevertheless, this large number of recusals is an
appearance of favoritism. Additionally, almost every vote was
unanimously approved, raising questions about whether the
important decisions were really being made.
Maybe if Congress hadn't waived the income requirements 9/
11 funds would have aided those who truly need assistance to
start or expand small businesses. Instead, hundreds of millions
of dollars in cash were handed to some of the biggest names in
business, including Bank of New York, Deloitte and Touche, and
Goldman Sachs, even while high-profile recipients, like
American Express and HIP Health care stated publicly that their
desire to go downtown had nothing to do with those grants.
The lack of public hearings--the LMDC has held one on the
allocation of CDBG grants, which was last year--has denied New
Yorkers a key empowerment tool at a historic moment. The LMDC's
decisions to opt for a write-in comment period instead of
public hearings prevents a more accountable, face-to-face
dialogue between the public and board members and is a
deterrent to broad, public participation.
However, LMDC has made steps towards better transparency
and fairer allocations by funding improvements in parks in
Chinatown and the Lower East Side, and finally last year
released a framework towards neighborhood groups and promote
open space.
Another lost opportunity was Congress's design of Liberty
Bonds. Removing the requirement that 20 percent of the units be
for low-and moderate-income tenants shows disregard for New
York City's notorious affordable housing crisis.
I think the majority of Americans would be vexed to learn
that the rents in 9/11-subsidized studio apartments often start
at $2,000 a month. And a handful of affordable studios start at
around $1,500 a month. Clearly, the influx of this new
residential community is a wealthy one that is being subsidized
by federal resources.
Officials' response to the affordable housing crisis was
$50 million to create 232 units and preserve about 3,000 units.
But to put this in perspective, the Bank of New York received
$40 million cash from the same pot of money after 9/11. We gave
cash to a bank after 9/11, when small business in Chinatown
were struggling and people can't afford to pay their rent.
Regarding the commercial Liberty Bonds, Congress restricted
their use to commercial real estate projects, mostly located in
the Liberty Zone. And outside the zone, projects had to include
at least 100,000 square feet of commercial space.
This tax-exempt financing tool could have been used to
diversify our economy by supporting smaller growing businesses.
Instead, the bonds went to finance high-end office space, such
as $1.65 billion in Liberty Bonds for Goldman Sachs downtown
and $650 million for Bank of America to locate in one of the
most desirable blocks in one of the most premier business
districts in the world, midtown Manhattan.
The early design of release and recovery programs had a
lasting impact on the fairness of the rebuilding. In the
future, it is critical for local groups to be at the
decisionmaking table in the early stages of program design.
This will help to ensure a broad array of businesses and
individuals do benefit.
Thank you very much.
[The statement of Ms. Damiani follows:]
Prepared Statement of Bettina Damiani, Project Director, Good Jobs New
York
Good morning and thank you for inviting me to testify about the
allocation of Federal funds after the September 11, 2001 attacks on New
York City.
My name is Bettina Damiani, and I direct Good Jobs New York, a
project of Good Jobs First (GJF) and the Fiscal Policy Institute (FPI).
FPI focuses on tax, budget, economic and related public policy issues
in New York State and Good Jobs First is a national resource center on
accountable development and smart growth for working families based
here in Washington, DC.
Shortly after the September 11, 2001 attacks on Lower Manhattan,
GJNY launched ``Reconstruction Watch'' to track the resources earmarked
for economic development, corporate retention and job creation. GJNY
had been created two years earlier to monitor economic development
incentives in New York City, so we were uniquely qualified to help
bring transparency to these new resources.
Reconstruction Watch assists New Yorkers with research and policy
analysis on the redevelopment of Lower Manhattan. Through our research,
website (www.reconstructionwatch.net) and publications we provide
timely information to grassroots groups, small business and civic
associations, housing groups, labor unions, and environmentalists to
help them more effectively participate in this massive process
reshaping the rebuilding of our city.
Who Was Impacted by the Attacks
It was assumed by most Americans and public officials that the
economic brunt of the harm from the attacks would fall on the Finance,
Insurance and Real Estate (FIRE) sector due to the location of the
attacks at the World Trade Center. Though workers across the spectrum
faced hardships after 9/11, many of the resulting layoffs were
concentrated in low- and moderate-wage industries such as restaurants,
air transport, hotel, retail, building services and garment
manufacturing.\1\
---------------------------------------------------------------------------
\1\ Fiscal Policy Institute, The Employment Impact of the September
11 World Trade Center Attacks: Updated Estimates based on the
Benchmarked Employment Data, March 8, 2002.
---------------------------------------------------------------------------
The economic devastation affected thousands of small businesses in
New York City, especially those located in Lower Manhattan--below 14th
Street--that were physically isolated when parts of the area was closed
off to traffic for weeks after the after the attacks. Within Lower
Manhattan, the low-income, immigrant neighborhoods of Chinatown and the
Lower East Side suffered severe economic consequences due to their
proximity to Ground Zero. Additionally the attacks created disruptions
that affected the larger city economy and businesses and workers in all
five boroughs. The garment industry--largely based in Chinatown--was
the industry hardest hit by reduced work volume and hundreds of small
manufacturers and contractors were placed in peril.\2\
---------------------------------------------------------------------------
\2\ Ibid.
---------------------------------------------------------------------------
Low-wage workers throughout New York City were also impacted.
According to an analysis by the Fiscal Policy Institute, 60% of the
workers who were likely to have been laid off had an average wage of
only $11.00 and hour, and over 60% of unemployment claims filed in the
weeks following September 11, 2001 that were related to the attacks
came from residents of the Bronx, Brooklyn, and Queens. Queens, home to
our city's two airports saw a staggering decline of jobs and work
hours.\3\
---------------------------------------------------------------------------
\3\ According to a study by researchers at the Fiscal Policy
Institute, the higher incidence of 9/11-induced unemployment and
underemployment among workers in low-wage occupations meant that
household wage earnings fell by double digits in New York City in the
six months after the attacks. James A. Parrott and Oliver D. Cooke,
``The Economic Impact of 9/11 on New York City's Low-Wage Workers and
Households,'' in Howard Chernick, ed., Resilient City, The Economic
Impact of 9/11, New York: Russell Sage Foundation, 2005.
Inequitable Resource Distribution
Despite the harms to low- and moderate-income workers and
neighborhoods after 9/11, a disproportionate amount of rebuilding funds
have been allocated to build luxury rental housing and to retain large,
profitable corporations, including some that admitted they never
intended to leave New York or that they planned to return. For example:
While Americans praised courageous firefighters,
police, and emergency personnel for their rescue efforts,
Federal resources that could have provided housing for them and
other moderate-income working New Yorkers within Lower
Manhattan have instead created thousands of luxury rental
units.
While the Chinatown garment industry was withering,
officials doled out cash grants to large firms such as $25
million to American Express and $40 million to Bank of New
York. Adding salt to the wounds, after receiving the money
American Express publicly stated that it planned to return to
Manhattan even without the funds.
Without a doubt, large firms play a vital role in our city and
nation's economy and deserve serious consideration in the rebuilding
effort. Any productive planning effort would be responsive to the whole
spectrum of businesses and community needs. Yet after 9/11, Federal
rebuilding incentives have grossly favored high-end jobs and housing.
This inequitable distribution of resources was enabled by broad
waivers approved by Congress that loosened longstanding regulations on
how federal development funds could be spent. These waivers created a
process by which enormous subsidies were granted with minimal input
from New York taxpayers in an alarmingly unaccountable fashion and gave
public officials, notably Governor Pataki, carte blanche to provide
subsidies to large companies and luxury housing developers.
Simply stated, economic development programs designed with 9/11
resources failed to help those who needed it most because the interests
of low- and moderate-income New Yorkers were officially excluded as a
required consideration in the programs' outcome.
The majority of GJNY's research and our testimony today focuses on
two post-9/11 funding sources--Community Development Block Grants and
Liberty Bonds. Together, these programs accounted for nearly $10.7
billion in rebuilding resources. A more extensive list of programs that
made up the $20 billion Federal economic development package is located
on our website--www.goodjobsny.org.
We focused on these programs because they were mostly discretionary
programs (excluding some of the business recovery grants). That is,
they provided local officials with choice regarding the recipient and
size of the subsidies and required public comment, either written or
public testimony, prior the disbursement of funds.
In my testimony today, I intend to bring to your attention specific
policy decisions made by Congress regarding the use of CDBG and Liberty
Bonds, and to examine the consequences of these programs when they were
implemented on the local and state level with minimal guidelines and
oversight.
Congress and the CDBG Program: What Went Wrong?
While Good Jobs New York acknowledges that Congress intended to
provide New York with flexible and streamlined rebuilding programs, it
should not have been at the expense of public input and the equitable
distribution of resources.
For instance, GJNY has repeatedly and publicly questioned why
Congress waived the following requirements pertaining to Community
Development Block Grants: \4\
---------------------------------------------------------------------------
\4\ Available at http://www.goodjobsny.org/rec_links.htm
---------------------------------------------------------------------------
The majority of Community Development Block Grant
(CDBG) funds must be for activities that benefit low--and
moderate-income communities;
Public hearings must be held prior to the allocation
of funds in an effort to ``empower'' members of the community.
The elimination of these particular provisions amounts to an
abandonment of legislative responsibility and oversight that suggests
indifference to the principles inscribed in the programs' goals.\5\
---------------------------------------------------------------------------
\5\ Available at http://www.hud.gov/offices/cpd/
communitydevelopment/programs/
---------------------------------------------------------------------------
They're in the Money--The Lower Manhattan Development Corporation
Indeed, Congress' decision to remove regulations on the allocation
of CDBG funds created an environment where funds administered by the
Lower Manhattan Development Corporation (LMDC) need not consider public
input or equity.
The LMDC was specifically created by the Empire State Development
Corporation (the economic development authority directed by Governor
Pataki) to implement the programs and allocate the cash grants after
the attacks and therefore should have been respectful of inclusiveness
and transparency. Instead, state officials took full advantage of the
federal waivers by implementing restricted public comment opportunities
and allocating a disproportionate amount of funds to prominent firms.
For most of its existence, the 16-member board of the LMDC--half
appointed by the mayor and the half by the governor--was composed
mostly of large-company executives and real estate interests. The LMDC
clearly should be a board that equally represents all communities and
businesses impacted by the attacks. However, with no representatives
from Chinatown and the Lower East Side, and no advocates or experts
from the fields of housing or workforce development, the LMDC proceeded
to implement the redevelopment plans of the city's politically-
connected elite, particularly in the interest of real estate.
In fact, LMDC Board members' companies, organizations, and
affiliates benefited from the programs so routinely that board members
had to recuse themselves from voting on projects at least twenty-seven
times. Including:
Nearly $5 million went to the Downtown Alliance, a
businesses organization that board member Carl Weisbrod was
President of until last July. An additional $9 million went to
organizations Mr. Weisbrod had ties with.\6\
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\6\ Good Jobs New York, The LMDC--They're in the Money; We're in
the Dark: A Review of The Lower Manhattan Development Corporation's Use
of 9/11 Funds, August 2004.
---------------------------------------------------------------------------
$3.5 million has gone to the Tribeca Film Festival.
Board member Madelyn Wils at the time was president and CEO of
the Tribeca Film Institute. Approximately another $9 million
went to organization Ms. Wils had ties to.\7\
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\7\ Ibid.
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As we point out in our 2004 study, ``They're in the Money We're in
the Dark: A Review of The Lower Manhattan Development Corporation's Use
of 9/11 Funds'' board members have not done anything illegal. Board
members were careful to recuse themselves when proposals submitted by
their organizations or by organizations on whose boards they serve were
presented. Nevertheless, these recusals gave the appearance of
favoritism.
But, the significance of those recusals is diminished when one
takes into account the context in which they occurred. There was little
chance that the recusals would have made a difference in the outcome of
the votes, given that aside from recusals, LMDC board members have
unanimously voted to approve all allocation proposals that made it to a
vote. This raises questions regarding whether proposals were publicly
being evaluated on their merits.
While the composition of the board seemed to help organizations
that had ties to LMDC board members, those groups representing low-
income and unemployed people were left baffled by a lack of clear
guidelines and timeframes.\8\
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\8\ Errol Louis, The 9-11 Black Hole, New York Daily News, July 6,
2004.
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Even service workers from the World Trade Center were denied an
opportunity to apply for funds when a collaborative group of employees
from Windows on the World--the famed restaurant that was located on the
top of the World Trade Center Tower--submitted an application for $1
million to open a restaurant in Lower Manhattan.
After getting the runaround for years and delaying the opening of
the restaurant--called Colors--the group wound up smaller than they
would have been and the restaurant is not in Lower Manhattan, where
they would have liked to locate. Instead it opened in Greenwich
Village, where they may do fine but there's not the synergy of them
helping the rebuilding effort and the rebuilding effort helping them.
Unfortunately, even a program established to help small
businesses--Small Business Recovery Grants--was exploited by savvy
firms. A program geared towards small businesses conjures up images of
the local pizzeria, the cobbler or restaurant. Yet, a New York Times
report showed that a majority of these grants were allocated to wealthy
law firms and brokerage houses.\9\
---------------------------------------------------------------------------
\9\ Edward Wyatt and Joseph P. Fried, Two Years Later, the Money;
Downtown Grants Found To Favor Investment Field, The New York Times,
September 8, 2003.
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Ultimately, there were startling consequences to the federal
decision to waive the requirement that a minimal percentage of CDBG
funds be directed toward activities that benefit low-income residents.
Hundreds of millions of dollars in Community Development Block Grants
were handed to some of the biggest names in business, including Bank of
New York, Deloitte & Touche, and Goldman Sachs, even while high profile
recipients such as American Express and HIP Healthcare publicly stated
that these subsidies had no impact on the decision to move back
downtown. Historically, incentives rarely influence site-location
decisions for such large firms, but these funds could have made an
enormous impact for struggling businesses such as those in Chinatown.
Waiving Public Participation
The Congressional waiver allowing CDBG grants to be allocated
without a public hearing left those wanting to support or protest a
proposal with no outlet and denied New Yorkers a key empowerment tool
at a historic moment.
The LMDC decision to opt for a two-week write-in comment period
instead of public hearings prevented a more accountable, face-to-face
dialog between the public and board members and was ultimately a
deterrent to broad public participation.
It's not as if people weren't interested. Leading citywide
organizations like the Regional Plan Association, Pratt Institute
Center for Community and Environmental Development and New York
University along with LMDC helped sponsor the historic ``Listening to
the City'' public event held in the summer of 2002. This was an
opportunity for the LMDC to creatively explore rebuilding options based
on the input of over 5,000 New Yorkers, who overwhelmingly indicated
that affordable housing and quality jobs were top priorities. While the
LMDC cites its financial support for the event in almost every HUD
report, it fails to describe how, or if, it plans to integrate the
comments into its programming. The programs established and recipients
of LMDC grants demonstrate that the agency has been largely
unresponsive to these demands.\10\
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\10\ link to outcome report
---------------------------------------------------------------------------
This is a similar problem with the invitation only workshops the
LMDC held throughout Lower Manhattan in the summer of 2003. Outcomes of
these workshop were presented a year after the meetings. And,
consistent with the ``Listening to the City'' experience, the LMDC has
been largely unresponsive to the housing and employment concerns of
lower-income neighborhoods.
A particular point of contention is the unfilled promise of CDBG
grants for affordable housing. Affordable housing has repeatedly ranked
high on the list of demands for rebuilding. In July of 2003, then HUD
Secretary Mel Martinez joined Mayor Bloomberg and Governor Pataki to
announce $50 million in CDBG funds for affordable housing in Lower
Manhattan.
Then last year, officials ``renewed'' LMDC's commitment for
affordable housing pledging $50 million for the preservation of nearly
3,000 units and the creation of at most 232 units.\11\ A housing study
commissioned in September 2002, initially to be performed by the
Weitzman Group for $700,000 was later transferred to the NYC Housing
Development Corporation for a reduced cost of $490,000. However, the
study has never been made public.
---------------------------------------------------------------------------
\11\ LMDC press release, June 16, 2005.
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Several other key documents have not been made public, such as
other planning, budget and financial reports. Without the public having
access to completed studies, there is no ability to monitor the
findings of the reports or to determine how they are being used to
guide the ongoing distribution of resources.
While far from being equitable, the LMDC has made steps towards
better transparency and fairer allocation of resources.
Two years ago, the public comment period was extended
from two weeks to one month;
LMDC has funded improvements to parks in Chinatown and
the Lower East Side;
A public hearing was held in the spring of 2005;
Last year the LMDC released a framework and deadlines
for the allocation of the remaining $800,000 in funds available
at the time to assist cultural institutions and to promote open
space, including a major project along the East River.
Currently, there is an estimated $225,000 remaining;
From its inception the LMDC has posted copies of board
minutes and the board meeting schedule on its site as well as
copies of reports to the US Department of Housing and Urban
Renewal.
Congress and Liberty Bonds: What Went Wrong?
Tax-exempt bonds are often an invaluable resource for a wide range
of businesses that require government assistance to finance capital
projects, such as mass transit. However, it would not be an
understatement to say that the allocation of $8 billion in Private
Activity Bonds--aka Liberty Bonds--has greatly benefited the real
estate industry at the expense of low and moderate-income New Yorkers.
Split between residential and commercial, the Congressional design
of the Liberty Bond program all but ensured that the bonds would
exclusively subsidize large real estate projects while neglecting the
affordable housing crisis in New York City and the capital needs of
industrial businesses and small commercial developments outside Lower
Manhattan.
As explained below, the vast majority of Liberty Bonds were used to
finance high-end office space and luxury housing.
Liberty Bonds: Commercial Use
Congress restricted the use of Liberty Bonds to
commercial real estate projects mostly located in the Liberty
Zone;
For the $2 billion in bonds that could be used outside
the Liberty Zone, projects must include at least 100,000 square
feet commercial space.
While this tax-exempt financing tool could have served to diversify
the New York City economy by supporting smaller, growing businesses,
all of the commercial Liberty Bonds were used to finance high-end
office space and to a lesser extent, hotels. It is understandable that
after the attacks, efforts to promote building--in a brick and mortar
sense--would be pushed. Construction jobs in New York City, especially
in Lower Manhattan are good paying union jobs. However, this alone does
not justify the unnecessary use of the bonds to finance Class-A office
developments in the most desirable office markets in the world.
For example, why did officials approve $650 million in Liberty
Bonds for Bank of America in midtown Manhattan over Chinatown? If bonds
were allocated based on need, and more businesses were eligible, a
broader group of firms might have benefited.
To date the largest allocation of Liberty Bonds was for $1.65
billion issued for Goldman Sachs to remain downtown, where the company
has been located for 136 years.\12\ A Goldman spokesperson had said
that the company would only look to build its new headquarters in
Manhattan \13\--leaving open the possibility of a move to midtown--
after the firm expressed legitimate security concerns related to a
proposed tunnel under the potential site of its building.
---------------------------------------------------------------------------
\12\ Over $3 billion of Liberty Bonds has been reserved for the
World Trade Center site.
\13\ Matthew Schuerman and Tom McGeveran, The View From 7: As Tower
Tops, Goldman Sacks, New York Observer, April 11, 2005.
---------------------------------------------------------------------------
Clearly, Goldman with profits of $10.10 billion last quarter wasn't
hinging its headquarters bets on cheap financing. What it lacked--and
needed to make a sound location decision--was a clear understanding of
the rebuilding process from public officials. Not until Goldman
considered a move to midtown did the Governor address the firms' valid
security concerns of a proposed tunnel near where the firm wanted to
build. After announcing a tunnel would not be built, Goldman received a
consolation prize--an increase of $650 million from the originally
proposed $1 billion in Liberty Bonds for a total of $1.65 billion, $25
million in CDBG funds and up to $150 million in tax breaks.\14\
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\14\ Additional details at http://www.goodjobsny.org/GS_news.htm
---------------------------------------------------------------------------
GJNY did approve of $114 million in Liberty Bonds for the developer
Forest City Ratner to develop a commercial office tower in Brooklyn
that now houses Bank of New York. We felt that the percentage of
Liberty Bonds that could be allocated outside of Lower Manhattan fit
purposes like these--helping to create environments for businesses in
other areas of New York City to help limit firms from leave the city
immediately after 9/11.\15\
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\15\ Details of the Bank of New York subsidy are available on GJNY
database of deals, http://www.goodjobsny.org/deals.htm
Liberty Bonds-Residential Use
Normally, Federal government requires housing projects
financed with federally tax-exempt bonds to set aside 20
percent of the units for affordable housing--this was waived
for Liberty Bonds.
The vast majority of housing units built with Liberty Bonds are
market rate and unaffordable to New Yorkers. Nearly all of the units
rent at market rates ranging from studios for $2,062 per month to
three-bedrooms for $6,267 per month. Many of the projects will set
aside only 5% of the units in each building for non-market rates. While
non-market, these units are targeted to households that earn
approximately $94,200 per year for a family of four with rents ranging
from $1,649/month for a studio to $2,449/month for a three-bedroom.\16\
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\16\ Liberty Bond Housing Coalition statement: http://
www.goodjobsny.org/rec_sign_on.htm.
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These apartments are out of reach to the vast majority of New
Yorkers whose median household income is $38,293.\17\ This includes New
York City police officers, firefighters and teachers.
---------------------------------------------------------------------------
\17\ According to the 2000 U.S. Census.
---------------------------------------------------------------------------
The small non-market rent set-aside and the high income requirement
make these proposals a major departure from the long-standing ``80/20''
affordable housing program of the New York State Housing Finance Agency
(NYSHFA), the agency that allocated Gov. Pataki's portion of the
Liberty Bonds. The 80/20 program, which meets the Federal Tax Code
requirements for housing financed with federally tax-exempt bonds, sets
20% of the units aside for households making at most, half the NYC Area
Median Income. In contrast, the Liberty Bond Program sets aside units
for households earning 50% more than the New York City Area Median
Income.\18\
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\18\ Liberty Bond Housing Coalition statement: http://
www.goodjobsny.org/rec_sign_on.htm.
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With skyrocketing rents, Lower Manhattan has become the most
desirable place to live in New York City, though unaffordable.\19\ In
fact, the approximately 350 units set aside for moderate income are
mostly studios and one-bedrooms.
---------------------------------------------------------------------------
\19\ David Dunlap, Liberty Bonds' Yield: a New Downtown, The New
York Times, May 30, 2004.
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The New York City Housing Development Corporation (HDC) didn't set
aside the 5% non-market rate units the state did in its allocation.
Instead, HDC charged a 3% developers fee on the bond application that
would then be used for developing affordable housing in other areas of
the city.
While Mayor Bloomberg certainly deserves credit for thinking
outside the box and generating new revenues for affordable housing, it
is unfair to relegate low and moderate-income New Yorkers to the
periphery of our city.\20\ Catering to developers and landlords by
creating only luxury housing with Liberty Bonds has exacerbated the
gentrification pressures on Chinatown and the Lower East Side.
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\20\ New York City Housing Development Corporation press release,
July 17, 2003.
The Byzantine Process of Liberty Bond Allocation
The complexity of allocating Liberty Bonds via four different
authorities (described in the chart) diluted the public's ability to
participate. Fortunately, the 1986 Tax Equity and Fiscal Responsibility
Act (TEFRA) requires a hearing prior to the allocation of private
activity bonds. Therefore, the IDA, LDC, HDC, and HFA did hold
hearings. However, each differed in its public hearing announcement
procedure, access to materials prior to hearings, and final voting by
board members.
Tracking these disparate hearings and procedures was a Kafkaesque.
Public hearing notices were posted in different publications; places,
dates and times of hearings and board meetings varied.
To its credit, the LMDC does have regular board meetings and
provides details of proposed expenditures but it does not have a public
hearing process. Instead, the agency held invitation-only workshops and
just one public hearing last spring.
Even those authorities with intact public hearing processes don't
equal a democratic decision making process:
In March, 2003, the New York State Housing Finance
Agency refused to provide GJNY copies of materials prior to a
hearing on the allocation Liberty Bonds. The result was our
research analyst hand-copying the materials while being closely
watched by an HFA staff member.
In May, 2003, public testimony was given by several
groups at the New York City Housing Development Corporation
regarding the allocation of Liberty Bonds to build a luxury
apartment. Board members approved the project having never
witnessed the testimony--since they don't attend the hearings--
and having never even been given copies of the testimony.
Disaster Relief Funds and UI Funds
Though not under the appropriation of CDBG or Liberty Bonds, it
would be remiss to exclude the very serious problems with which funds
were allocated to displaced workers. Mimicking the irrational ``Liberty
Zone'' for businesses recovery funds, only workers living in Manhattan
had access to mortgage and rental assistance programs. Again, the
workers in the remaining four boroughs, where left to fend for
themselves. The baggage handler in Kew Gardens had no recourse since
his or her place of employment was in Queens.
For an economy the size of New York City, many workers make a
living in the cash economy--waiting tables, working part-time or as
consultants. All these workers fell through the safety net that is
unemployment insurance.
Lessons Learned: There's Still Hope
In New York, there were very positive lessons--such as the
extraordinary rescue, recovery, and cleanup effort after the collapse
of the buildings. In the years following the attacks, community members
came together eager to participate in the rebuilding with their
neighbors. Yet, there were negative lessons, such as the vast waste of
resources in tax breaks and corporate retention deals.
There are also very big decisions that years later are still far
from settled. The early design of relief and recovery programs had a
lasting impact on the fairness of the rebuilding effort. Structures and
systems were ``cast in stone'' that should have promoted broad civic
participation in the rebuilding process, but instead made the process
very undemocratic. In the future, it is critical for Congress to
consult a broad coalition of local groups in the early stages of
program design, so that groups representing an array of business and
individual needs can be an active part of the process.
Despite the skewed allocation of cash grants, there is still an
opportunity to use 9/11 to create a dynamic and inclusive Lower
Manhattan. There are approximately $2 billion of unused tax credits
available to New York. New York City was promised these funds and they
should be allocated as soon as possible.\21\
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\21\ Governor Pataki press release, July 29, 2004.
---------------------------------------------------------------------------
Governor George Pataki and other public officials continue to push
for a $6 billion rail link that would improve job access for Long
Island residents while the City's unemployment rate remains high. This
costly rail link proposal, possibly funded with 9/11 rebuilding
resources, has ranked behind local transportation needs when Lower
Manhattan residents have been asked for their rebuilding priorities,
even at LMDC- sponsored events.
This would not be a bad idea in the future, but not yet. Chinatown
residents still struggle with infrastructure needs, not to mention the
clogged artery of Canal Street, a major thoroughfare for Lower
Manhattan.
Mr. Rogers. Thank you, Ms. Damiani. I failed to introduce
you as the Project Director for Good Jobs New York.
We are going to have a round of questions now. And I would
like to start first with Mr. Wang.
You made reference in your written statement to some
proposals that you would suggest to remedy these concerns in
the future. The first one is that an economic development
strategy for Chinatown needs to be formulated based on a number
of comprehensive studies conducted post-9/11.
Would that economic strategy come out of the Lower
Manhattan Development office? Or where would that come from, in
your view?
Mr. Wang. Well, I think, working with LMDC and the ESD,
then I think that the community together can put--also with the
city of New York, we can formulate an economic development
strategy to help to revitalize the community. And there are a
number of different proposals that have been submitted to LMDC.
And so, of course--
Mr. Rogers. And how have those been responded to?
Mr. Wang. Well, I think that this so far has not been the
comprehensive kind of approach to how to revitalize the
community. I think, certainly, recognizing ESD and LMDC have
been doing, you know, different kind of work, cleaning up
Chinatown and addressing some of the traffic issues.
But then the whole issue, I guess, is, how do we make sure
that communities that have long been standing, over 100 years,
in the city, that can be revitalized and continue to
contribute?
Mr. Rogers. What I am looking for, and what this
Subcommittee has been working on is, to take lessons from what
happened post-9/11--to put in place good policy in the future
to make sure that we don't have the same missteps in the
future, post-disaster. And I hope there is never another one in
New York City, but wherever it happens.
So I guess what I am looking for from you is some policy
guidelines that we could embrace.
Mr. Wang. I think what is important is to have the
community representative involved in the LMDC or ESD, in the
policymaking decision--
Mr. Rogers. Ms. Mildenberger, do you know of any criteria
that were followed to ensure that there was representation,
more broad representation, on groups that you helped form?
Ms. Mildenberger. Absolutely. In fact, what we did with the
small business programs was we had several people who spoke
different languages, many dialects of Chinese. We also
communicated the programs in the local papers in Chinese.
And another thing that we did was we provided technical
assistance. And of 22 firms that helped us provide technical
assistance, we made sure we selected five competent firms that
helped with specifically only businesses in Chinatown.
Mr. Rogers. Well, my question is though, the Lower
Manhattan Development Corporation doesn't have apparently this
representation on their board, and they answer to you, don't
they?
Mr. Pryor?
Mr. Pryor. Yes, if I may. Thank you, Mr. Chairman.
In fact, there are a number of mechanisms through which
Chinatown has been very deliberately and specifically involved
in our process. Starting with we had?despite some testimony
that was made earlier, we have had over 200 public meetings,
including public meetings, forums where there was extensive
input taken in Chinatown, right in the neighborhood.
We have a standing working group, an advisory group, of our
agency which includes a wide range of Chinatown organizations
and individuals. It meets on a very frequent basis.
And what they have informed, Mr. Chairman, is a whole
series of initiatives, totaling $170 million for improvements
in Chinatown.
Mr. Rogers. But you don't have any Asian-Americans on your
board?
Mr. Pryor. No.
Mr. Rogers. I do want to?before my time runs out, I want to
visit another topic with Ms. Mildenberger.
And you made reference to this in your opening statement.
The HUD OIG found that ESDC did not have systems in place to
prevent the disbursement of Business Recovery Grants to
companies that received disaster loans for the same purposes
from the Small Business Administration, which was in violation
of the Stafford Act.
According to an analysis of data obtained by this
Subcommittee, as many as 2,390 Business Recovery Grants were
issued to 1,229 businesses that also received a total of 1,489
disaster loans for the same purposes from the SBA.
My question is: what adjustments did ESDC make to the
Business Recovery Grant program, when this kind of duplication
was brought to its attention?
Ms. Mildenberger. Absolutely. Thank you for raising that
point.
When it came to ESD's--when we became aware of the Stafford
Act violation, what we did was we worked hand-in-hand with HUD,
and we worked hand-in-hand with SBA.
Any applicant who received both BRG funds from ESD and
received an SBA loan, what we did was we made sure that we went
back and had the applicant testify, pretty much fill out an
application, which listed their economic damage.
What we then had to do was to make sure that the damage
exceeded any monies that they received from insurance proceeds,
from Empire State Development proceeds, and from SBA loan
proceeds. So there was the ability for recipients to receive
both an SBA loan and a recovery grant--
Mr. Rogers. And then did it, in fact, happen extensively?
Ms. Mildenberger. Absolutely, it happened. And it happened
because the economic loss suffered by those applicants was far
exceeded by any assistance that was given under the federal
programs.
In a handful of cases, if federal funds were given over the
economic loss, we recovered those funds.
Mr. Rogers. And my last question: what recommendation would
you make to better prevent duplicative payments in the future?
Ms. Mildenberger. I think that is a very, very question.
And I think we work hand-in-hand with HUD. We were running from
September 12th on to try and formulate programs. Communication,
as Member Meek had said earlier, is the key.
We run a state agency. We weren't familiar with every
federal program, vice versa with HUD. When we then got talking
with SBA, with HUD, we had a very good communication and just
making each other aware of different potential red flags would
make the businesses receive money in a more efficient way, with
less hassle.
So I think keep that door of communication open between
federal, state and city is hugely important.
Mr. Rogers. Thank you very much. My time is expired.
The Chair now recognizes the Ranking Member, Mr. Meek, for
any questions he may have.
Mr. Meek. Thank you so very much, Mr. Chairman.
And I want to thank the panel for coming before us.
Yesterday, we had the response. And today, in our first
round is recovery. And later on, it will be about--well, now it
is about rebuilding.
And I think that what we have here is a situation--and it
usually happens in these instances--``underserved communities''
or business communities are left behind. Meanwhile, the
individuals that were prepared financially to be a part of the
decisionmaking, and knew who to call, and know how to get on
certain boards or access got there.
I would just say, as more of constructive from what I have
heard?because we will not get to the bottom of the issues
between the left and the right side of the table here today.
But I can say that the access and having folks sit on the board
is very, very important.
Mr. Pryor, how many folks do you have on your board, sir?
Mr. Pryor. We have 12 members of our board.
Mr. Meek. Okay. So it is like what you may consider a
diverse board, based on the area of interests?
Mr. Pryor. Yes, it is a diverse board.
Mr. Meek. When you say that, what is the diversity?
Mr. Pryor. There are representatives that would be
inclusive of multiple sectors, inclusive of the business
sector, the community board, which is the local-most
representative body of residents in the immediate vicinity of
Ground Zero. We have a representative of labor, of the building
trades unions.
We have representatives of other kind of leading citizens
from the private and public sector. And we have government
representatives, as well.
In response to the chairman's question earlier, I should
have stated that a point in time we did have an Asian-American
member of our board. She happens to have left the board for
professional pursuits. But I think it is quite important to
note that, beyond our board, there are many mechanisms through
which our agency has reached out to the community and consulted
in the course of our decisionmaking.
Mr. Meek. I just want to--as someone who has been around
this for a little while and heard similar discussions of folks
feeling left behind. And Mr. Wang made some very strong
comments in his not only printed statement, but also verbal.
And I think it is important for future programs and for us
to be able to put federal dollars out there, taxpayers'
dollars. And obviously it is a local New York scene, also, as
it relates to accountability and fair play.
It is very, very important, because that is the reason why
we are going through this process, so that we can learn from
past mistakes.
One other issue--I am trying to remember. I don't want to
say Good Jobs New York or what have you. I will call you by
your first name.
Ms. Damiani. It is Bettina Damiani.
Mr. Meek. That is correct. I just want to make sure for the
record that, when it is printed, that they will know who I am
talking to.
You mentioned something as it relates to not only the
Ground Zero area, but small businesses that have been trying to
penetrate, ``the bureaucracy'' or the agencies that are
actually giving the dollars. I am pretty sure you were here for
the discussion on the STAR program and a number of programs
that are out there.
And I know that it turns the stomach of those that are
trying, that are there, that would like to take advantage of
the opportunities. The opportunities are still there. It is not
something that, even though it was 5 years ago, it is still
there, as it relates to small businesses being able to
hopefully take advantage of these two entities that are there
and other agencies that are out there.
What are you finding now, in the people that you are
representing? What are you finding now is the biggest
impediment of them being able to access these dollars?
Ms. Damiani. The two funding sources that we follow most
closely were Liberty Bonds and the Community Development Block
Grants. There are pretty much no more Liberty Bonds available.
They have all been allocated.
The residential bonds went relatively quickly, compared to
the commercial bonds, which, depending on what is happening at
the World Trade Center site, you can pretty much say have all
been allocated.
Access is the different--many, many different authorities
that are allocating these funds. While the LMDC was very much
dominant around the cash grants, it is like alphabet soup. It
is the IDA, the EDC, the LDC, you know, the HDC, the HFA, each
having a completely different process in which to provide
public participation and to apply for these funds.
So unless you are already very well-versed in how to access
these kind of resources, there wasn't a really great
opportunity to encourage an entrepreneurial spirit, so to
speak, to get people that might have the desire to participate
in the rebuilding, to become more involved. It was a very
burdensome process.
Mr. Meek. I still feel that maybe I don't know all I need
to know because I am not there on the ground. There are
opportunities that are still ongoing that would be able to
assist businesses if they needed, am I correct?
Ms. Damiani. There are some. And I think the ESDC and LMDC
can be more detailed about that. There is some money going on
directly in the areas I mentioned on the Lower East Side
currently.
And there is some money that is still being given out just
recently. There was money given out to a large firm in Lower
Manhattan.
Mr. Meek. If I may, Mr. Chairman, Mr. Wang, I wanted to ask
you, sir, ongoing. If you had to leave this hearing here today
and you came to report, but if you had--if you wanted to take a
very takeaways back, especially having the representatives from
organizations that can be a part of the solution of your,
obviously, constituency or membership or what have you, what
will be--you are asked today to be able to resolve some of the
ongoing issues?
Obviously, Mr. Pryor, in a very confident way said that
they have tried to reach out, that they have advisory
committees, that there was an Asian-American on the board at
one time. That person has now left to pursue other
opportunities.
What will be those takeaways? Because I think that this is
educational for us, but sometimes we have these hearings, and
things are said, and in many cases resolved, if can be
resolved. Obviously, this is something that takes place in New
York. Now it is an issue that has been brought to the table
here in the capital.
What are two of the things that you think that will help
the businesses? Because there is a fast death, as it relates to
businesses closing, and a slow one. And I believe you probably
still have some membership in the Chinatown community.
Mr. Wang. Well, one thing, as Mr. Chairman pointed out, I
think it is important to have a representative from the
community to sit on the LMDC board, because you are at the
table, you are able to contribute, and you are able to have
input, and you are able to help them make a decision.
And second, I think as a couple of days ago, Mr. Pryor and
I, we had a discussion in terms of how to help the businesses
locally, because in the Lower Manhattan in the next 10 years
there is about $50 billion investment in rebuilding of the
Lower Manhattan.
And then I suggest to him that perhaps we can have a ``Buy
from Chinatown'' program, and that every contractor that gets a
contractor in rebuilding Lower Manhattan--for every dollar they
spend, spend, you know, a cent in buying goods and services
from Chinatown. That can do tremendous good in helping to
revitalize the community's business.
Mr. Meek. Thank you very much.
Mr. Chairman, I think that efforts are all efforts of good
will. And I know that, as we start moving towards closing the
books on our report, that hopefully it will help us in the
future.
I go back to, again--and I have said in the two previous
hearings that it is important--and especially for Chairman
King--that we, especially from someone like myself from South
Florida that goes through these hurricanes constantly and we
are in this mode of recovery, and assistance, and we will
rebuild.
And you have sisters, women of the storm in New Orleans.
You have all of these groups that kind of come together.
State, federal and local governments invest dollars into
these entities to continue the spirit of rebuilding and
recovery. But it is important that we give them some sort of
direction. I think our role is to make sure that everyone can
be in the same fish tank and not gobbled up, a big fish
gobbling the so-called small fish.
And they don't have the opportunity to have representation.
I know that we believe, when we pass things here in the
Congress, that there is goodwill a broad application will
prevail, and sometimes, in some cases, it doesn't.
And that is one of the great debates we are having now, as
it relates to the reauthorization of the Voting Rights Act,
making sure that those that need protection, historically, get
that protection until we get to a point that we know that we
live in an environment and a world where goodwill will prevail
without the parameters.
We are not there yet, and it is not just talking about what
is happening in New York, but it is what is happening in the
country.
So I look forward again, and I want to thank you all for
coming before us today.
Mr. Rogers. I thank the gentleman.
The Chair now recognizes the Chairman of the Full
Committee, Mr. King, for his questions.
Mr. King. Thank you, Chairman Rogers.
And let me commend you and the Ranking Member for the
extraordinary progress you have made over the last day, in
learning to walk through the minefield of New York's ethnic
names. You are really making a lot of progress. And I knew a
million Damianis growing up, but I guess you guys didn't.
As I said before, I will restrict my questions to Mr. Wang
and Ms. Damiani.
Obviously, after September 11th, one of the intentions was
to keep political pressures away from the distribution of funds
and the decisions being made. I am wondering, though, if we are
planning for the future, should there, in fact, maybe be some
more political involvement?
For instance, most of the area affected by September 11th
is represented by the Speaker of the New York State Assembly. I
am wondering, for instance, what impact or input he had into
this--whether you could go to him during this time?
The community boards, how much of a role do they play? And
do you think they should have a larger role, or will that just
make it more confusing to have local politicians--should there
be this set aside, in effect, between local politics and the
board? Or do you think it would be better to have more local
input?
And I will just ask Mr. Wang and Ms. Damiani.
Mr. Wang. Well, of course, as to the speaker's role, I
think the probably speaker can better answer. I am sure that in
his office he has certainly spent quite a bit of time in
helping the community.
And I think that certainly the political process--you know,
elected representative of the community certainly is important.
And obviously the councilman has also been involved--he is the
chair of the Lower Manhattan Development Committee and the city
council.
But the question also, I think, you know, is important and
I keep coming back to is the community needs to have a voice at
the table, so that the need and the problem can be heard. And
then the program can be developed to address the specific needs
of the community.
Mr. King. Ms. Damiani?
Ms. Damiani. I think it is sort of a double-edged sword.
Yes, there should be more representation on the board where
people can be held accountable, and often that is elected
officials. People get to vote them in or vote them out.
So it would have been, in certain instances, very helpful
to have some elected officials that represent the area on the
board. Councilmember Gerson, who represents the area, is not on
the LMDC board.
There are three community boards that represent the area,
Community Board One, Two and Three. The one representative is
from Community Board One, which represents Tribeca, with an
average household income of over $110,000 a year. Community
Boards Two and Three are less and around $30,000 a year.
So, yes, I think having representatives from Community
Board Two and Three would have helped to balance the scales a
little bit, and also having elected officials that represent
the area would have helped bring some more accountability.
Mr. King. Now, having the Speaker of the Assembly
representing the area, was he able to provide any assistance to
you? Like, when you had individual issues, did you go to him?
Mr. Wang. Yes, certainly, I think the speaker recently?most
recently, I think, helped to the Empire Zone, which is one of
the new ESDC programs in New York State. To designate Chinatown
as an Empire Zone, and we are certainly anticipating that
program to take affect, and then there is some of the benefits
that can help the community to recover, revitalize.
And, you know, Speaker Silver, I think, in many instances
he has been representing the community for a long time, and he
has oftentimes spoke out on behalf of the community.
Mr. King. I have no further questions.
Mr. Rogers. As I told the earlier panel, I want to thank
you for your time and commitment for being here. Your written
statements are very helpful to us, and your cooperation with
our staff in interviews has been very helpful in this process.
We will have, I am sure, written questions submitted to you
post-hearing. We are going to leave the record open for 10
days. And if you all are provided with questions, I would ask
that you respond to those in writing within that 10 days so
that we can have the benefit of that as we continue to work
toward this report.
And with that, we thank you for your attendance. And we are
in adjournment.
[Whereupon, at 12:15 p.m., the subcommittee was adjourned.]
LESSONS LEARNED IN PREVENTING WASTE, FRAUD, ABUSE, AND MISMANAGEMENT
PART III
----------
Thursday, July 13, 2006
U.S. House of Representatives,
Committee on Homeland Security,
Subcommittee on Management,
Integration and Oversight,
Washington, DC.
The subcommittee met, pursuant to call, at 2:12 p.m., in
Room 311, Cannon House Office Building, Hon. Mike Rogers
[chairman of the subcommittee] presiding.
Present: Representatives Rogers, King, Meek and Pascrell.
Mr. Rogers. [Presiding.] The Committee on Homeland
Security's Subcommittee on Management, Integration and
Oversight will come to order.
This afternoon, we are holding our final hearing to examine
the status and use of approximately $20 billion in Federal aid
provided to New York City after September 11. This hearing will
look ahead at what fraud controls are in place for the use of
Federal 9/11 assistance to help rebuild the infrastructure in
Lower Manhattan.
In the interest of time, the Ranking Member and I have
agreed to forego opening statements. And also because we are
going to be called for a series of votes in the not-too-distant
future, we have agreed to combine the two panels into one
panel, and then we will allow two rounds of questions for the
Members.
We want to welcome our witnesses and thank you for taking
the time to be here with us today in your busy schedules.
Before we begin, I would like to ask unanimous consent that
a written statement from the Honorable Thomas McCormack,
Chairman of the New York City Business Integrity Commission, be
included in the record. Without objection, so ordered.
[The statement of Mr. McCormack follows:]
For the Record
Submitted by Hon. Mike Rogers
Prepared Statement of Thomas McCormack, Chair of the Business Integrity
Commission of the City of New York
Thursday, July 13, 2006
Good morning Subcommittee Chair Rogers, Committee Chair King, and
members of the Subcommittee on Management, Integration, and Oversight
of the House Committee on Homeland Security. Thank you for the
opportunity to testify concerning the role of the New York City
Business Integrity Commission (``BIC'') in the detection, prevention
and control of fraud during the World Trade Center disaster in New York
City on and after September 11, 2001. I will begin with a broad
overview of what BIC is and what it does.
In November 2001, a New York City charter revision measure created
a new commission to incorporate into one City agency the then-separate
functions of the former New York City Trade Waste Commission, the
former Gambling Control Commission, and the regulation of public
wholesale food markets in the City of New York. Each of these separate
initiatives had been in existence before this new charter agency, the
Business Integrity Commission, was created to consolidate them.
BIC is both a law enforcement and regulatory agency. It provides
oversight of the private waste carting industry, public wholesale food
markets, and shipboard gambling, which, currently, is an inactive
industry in New York City. New York City law requires a license or
registration for a company or individual to operate a business in any
of these industries. BIC investigates the backgrounds of applicants for
these licenses or registrations before making determinations to grant
or deny the applications. Our statute requires that applicants for
licenses or registrations possess good character, honesty and
integrity, in order to receive permission to operate in the City.
BIC's mission is to eliminate the influence of organized crime and
other forms of criminality and corruption from the industries it
regulates. BIC achieves this mandate in three ways: background
investigation, criminal investigation, and regulatory enforcement.
BIC's professional staff consists of a squad of New York City Police
Department (``NYPD'') detectives detached to BIC by the NYPD Organized
Crime Investigation Division (``OCID''), attorneys, investigators, and
forensic auditors. BIC's investigative and legal staff routinely works
closely with all City, State and Federal law enforcement agencies and
prosecutors to conduct criminal investigations, and to gather
information essential to the vetting of applications for licenses and
registrations.
BIC's predecessor agency was the Trade Waste Commission (``TWC''),
which I mentioned earlier. Created by New York City Local Law 42 of
1996, TWC's specific mission was to eliminate the control of organized
crime over the private carting industry in the City of New York. Major
prosecutions of private carters, most notably a 1996 prosecution by the
District Attorney of New York County, had found that an organized
crime-controlled cartel had dominated the carting industry for several
decades. This cartel restricted competition, controlled prices and
allocated the commercial customers of private carters into specific
geographic areas where the carters were designated to operate. When
carters sought to obtain customers outside their assigned areas, the
cartel, which functioned as a group of trade associations, resolved
disputes among carters and required ``compensation payments'' from
certain carters who took other carters customers, with a percentage of
the money flowing back to the organized crime families that controlled
the specific areas in which the carters were permitted to operate.
Since its inception, the commission has granted hundreds of carting
licenses and registrations to applicants after fully investigating and
vetting their backgrounds. These licensees and registrants now compete
for the accounts of commercial waste customers in the City of New York.
As law enforcement officers, many members of TWC were drawn
immediately into the City's response to the catastrophe at the World
Trade Center on September 11, 2001. Many TWC members participated in
the search and recovery efforts at the place that quickly came to be
known as Ground Zero, as soon as that undertaking began. It became
clear that, as the agency that regulated private carters--an industry
whose services were critical to the clean-up of the area--TWC would
have three roles in the restoration of the site.
These three roles were: 1) the coordination of the movement of
private carters at Ground Zero to cart away debris, as well as the
oversight of other carters providing general private sanitation to
businesses in Lower Manhattan as a whole, during a period in which the
area was subject to the highest security measures in its history; 2)
the formulation of a long-term plan for debris haulage by qualified
carters at the site; 3) the conduct of criminal and administrative
investigations into the activities of private carters associated with
the clean-up project.
First, regarding the effort to coordinate carters' movements,
shortly after the collapse of the World Trade Center, private carting
companies in the Greater Metropolitan area began offering their
services to assist in the efforts to remove debris from the site. As
you know, this job was unprecedented in its scope and challenge. The
City established a command center in a building that sits on a pier in
Midtown Manhattan, and, each of the City, State and Federal agencies
that participated in the search, recovery and clean-up operations
functioned in that location. TWC temporarily relocated its office to
this command center. In fact, TWC's actual office, which was located
just across the street from New York's City Hall, was closed for many
weeks after the fall of the World Trade Center, because it stood in an
area that had been impacted by the collapse.
From this command center, TWC worked around the clock with a host
of government agencies, like the NYPD, New York State Police, the
Federal Bureau of Investigation (``FBI''), the New York City Department
of Investigation (``DOI''), the Federal Emergency Management Agency
(FEMA), and the National Guard, to coordinate the movements of carters
in the highly-secure Ground Zero and adjoining areas in which they had
to work. There were checkpoints and security clearances, and moment-to-
moment interfacing with law enforcement and military personnel on the
streets to ensure that these critical carting operations moved along
smoothly, but always in strict compliance with security requirements.
This coordination continued for the duration of the clean-up
initiative.
With respect to the requirement for a long-term plan for debris
haulage, TWC's role as regulator of the private carting industry was to
ensure that the companies participating in the clean-up would meet our
statutory requirement to possess good character, honesty and integrity.
A good number of the carters who hauled debris from Ground Zero began
the work as volunteers on the site in the hours after the collapse.
Many had come to the scene of the disaster with their trucks from
cities and towns in the Greater Metropolitan area where, obviously,
they had not needed a New York City license to operate. Thus, they had
not been vetted by TWC. Given the fact that their participation in the
World Trade Center clean-up placed them in the City of New York, TWC's
task was to identify carters who had not applied for TWC licenses or
registrations, notify them to apply, and vet them. In an effort to
preclude disruptions to the vital clean-up operation, we granted
temporary permission to operate to each unlicensed carter who submitted
an application to us, while we investigated their backgrounds.
And then, we had our law enforcement role to discharge. We worked
closely with the NYPD, the New York State Organized Crime Task Force,
the FBI, and DOI to pursue a number of leads concerning trucking
activities at Ground Zero.
Shortly after the clean-up began, there were allegations that
members of organized crime were mounting an effort to steal scrap metal
from the World Trade Center to sell as recycled steel. TWC, NYPD, the
New Jersey State Attorney General's Office and DOI investigated this
information. We conducted intensive surveillance of trucks leaving the
World Trade Center with steel recovered from the debris.
As you know, in the days after the attack on and the collapse of
the World Trade Center, the City made available its Fresh Kills
Landfill on Staten Island to accept all of the debris from the site.
Consequently, all debris and steel from the World Trade Center should
have found its way to Fresh Kills, either by truck at the beginning of
the operation, or by truck or barge as the effort broadened.
During the course of this investigation, we located a few loads of
World Trade Center steel in scrap yards in New Jersey and Long Island.
We worked closely with the New York County District Attorney Rackets
Bureau and obtained several search warrants to enter these yards,
inventory the material and reclaim it. In fact, at all of the locations
where we recovered the steel, we made arrangements with the New York
City Department of Sanitation (``DSNY''), to deploy the City's own
trucks to these out-of-city facilities, re-load the steel on to DSNY
vehicles and transport the material to Fresh Kills. We turned our
evidence over to the New York County District Attorney who convened a
grand jury to hear the case. My understanding is that this Grand Jury
returned no indictment.
As law enforcement intelligence about companies on the site
developed, the City decided to apply oversight over the demolition,
excavation and debris-removal contractors working on the project by
retaining Independent Private Sector Inspectors General (``IPSIGS'') to
vet and investigate contractors on the jobs. DOI took the lead in
retaining, directing and supervising these IPSIG's. TWC worked very
closely with DOI and the Lower Manhattan Construction Command Center
(``LMCCC'') in vetting all of the carters who worked on the project.
Currently, LMCCC has copies of our lists of carters who are licensed or
registered to operate in the City. By using these lists to select
carters for prospective work in the Ground Zero areas, LMCCC will have
the benefit of retaining carting companies whose backgrounds have been
fully vetted and who have received permission to operate as the result
of that vetting.
As the clean-up of Ground Zero progressed in late 2001 and early
2002, TWC and OCID detectives continued to pursue investigations. We
attended regular meetings in the office of the New York County District
Attorney with DOI investigators to discuss these investigations.
Investigators from FEMA's Office of the Inspector General also
participated in these meetings. In order to ensure that there would be
no further diversion of World Trade Center steel, TWC and OCID assigned
their investigators to man posts each night to monitor data provided by
Global Positioning System devices that were installed on private
carters' trucks under DOI's direction. I believe this surveillance
system and investigative oversight achieved their purpose. There were
no additional reports of World Trade Center steel diversion for the
duration of the clean-up project.
I think the lesson learned from this experience regarding the
detection, prevention and control of fraud is not substantially
different from similar lessons learned by members of the law
enforcement community in other major operations in which I have
participated. Major issues bring together many parties, simply as a
result of their magnitude and importance. Each agency naturally brings
to the problem the objectives of its own mission and the training and
expertise of its members. Each agency will pursue a course of action
shaped by its mission, training and expertise. But, each agency must
cooperate with the other members of the team to reach the mutually-
agreed objective. And, they need to have that realization from the
outset.
For example, the FBI and military at Ground Zero had grave concerns
about non-essential traffic in the area after the attack. But, the
clean-up was vital, and the City had to prevent harm to public health
and safety. There were hundreds of stores and restaurants in the area
surrounding Ground Zero that had simply stopped operating in the hours
after the attack. Freezers and refrigerators stocked with perishable
food became inoperable. Food began rotting, and the private carters who
normally service these commercial establishments could not pursue
business as normal. Careful coordination that was mindful of public
health as well as public security was necessary to move these carters
in and out of certain areas. The task fell to the City Department of
Sanitation to collect commercial waste in the most challenging
circumstances.
TWC and other city agencies and the federal personnel charged with
ensuring security worked together to find ways to get private
sanitation companies through the streets, or, when that measure could
not succeed, to get City personnel and trucks to do the job. These
logistics were not easy to implement, but the alternative was to be at
loggerheads. The measures succeeded in the end, because the different
members of the team-all of whom brought different mandates and
approaches to the problem- kept the goal in mind: our mission was to
clean-up Ground Zero, while addressing the various valid concerns and
the different methods each member brought to the issue.
As you know, the clean-up of Ground Zero, which appeared to be a
daunting task in the days following September 11, was fully completed
on schedule. Based on that fact, I must think that our approach to the
detection, prevention and control of potential fraud against the
project was successful as well.
This concludes my prepared testimony. Thank you.
Mr. Rogers. The Chair now calls the first panel, and
recognizes Bernard Cohen, Director of the Lower Manhattan
Recovery Office, of the Federal Transit Administration, for
your statement.
I would remind you, Mr. Cohen and all members of the panel,
that your entire written statement has been provided to every
Member and it will be included in the record. So if you would
like to summarize your statement in the opening, that would be
sufficient and allow us more time for questioning.
With that, Mr. Cohen, welcome, and we look forward to your
statement.
STATEMENT OF BERNARD COHEN
Mr. Cohen. I am pleased to testify to testify on the
substantial progress that we are making in the lower Manhattan
transportation recovery effort.
The terrorist attack of September 11, 2001, crippled lower
Manhattan's transportation infrastructure. We lost the Port
Authority-operated PATH line from New Jersey to the World Trade
Center and the WTC PATH station. Two New York City subway lines
were heavily damaged, along with Route 9A West Street, a major
arterial highway.
Shortly after President Bush declared New York a national
disaster area, Congress appropriated $20 billion for many
aspects of lower Manhattan's recovery, out of which $4.55
billion was budgeted for transportation needs. That recovery
effort still benefits today from sound decisions that the FTA
and other public agencies made immediately after the
president's declaration, including a proactive commitment to
coordination.
For example, after we created a dedicated office in lower
Manhattan, FTA worked to establish ``one-stop shopping'' for
federal transportation funds. Working with FEMA, FTA assumed
the role of lead federal agency for all transportation recovery
projects and moved transportation funding and projects forward.
In that capacity, FTA formulated a straightforward, but
challenging mission to streamline transit recovery, while
maintaining our stewardship of federal taxpayer dollars.
A total of $4 billion of the $4.55 billion budget has now
been committed to lower Manhattan transportation projects. That
is 91 percent of all program dollars available. I am very
pleased to report that all of the three major fully funded
transit projects for which initial grants were made are under
construction today. With these three projects, the federal
government and lower Manhattan have seized the opportunity not
only to recovery, but to improve transit.
Construction began in March of this year on the permanent
World Trade Center PATH terminal. The terminal is scheduled for
completion in June of 2011, and the display you see to my left
is a depiction of the Santiago Calatrava design for the new
permanent PATH terminal that is now under construction at the
World Trade Center site.
FTA has also provided a $478 million grant to develop a
state-of-the-art World Trade Site Security Center that will
screen all vehicles. This facility will ensure that vehicles
serving the buildings or parking in the center will not be used
as weapons.
In July of 2005, the Metropolitan Transportation Authority
began construction of the multi-level Fulton Street Transit
Center, which serves 275,000 people a day. Completion of
construction is scheduled for June of 2009, and the slide you
see to my left shows the piece of equipment that is driving the
secant piles that will be the prelude to the excavation for the
new corridor that will connect the Fulton Street complex to the
World Trade Center site.
Also in December of 2003, FTA awarded MTA a grant of up to
$420 million for the South Ferry Terminal Station, the last
station at the southern end of the IRT 1 subway line.
Construction began in March 2005 and should be completed in
April 2008.
What you see to my left is the excavation for the new
station which will have three entrances instead of one; will be
accessible to people with disabilities, which the current
station is not; and will modernize one of the most outdated
stations in the New York City subway system. I should add that
there are two agreements with FHWA. LMRO is also providing $287
million toward the reconstruction of Route 9A West Street.
Community leaders envision these transit projects as
anchors of the overall economic and social recovery effort that
is unfolding today and will continue in to the next decade. We
have been the beneficiaries of a broad recognition that
transportation is the first chapter in the lower Manhattan
success story.
The LMRO office has also made a priority of working
collaboratively with other major players in transportation
reconstruction, which was crucial in the project selection
process. Because we worked closely with the committee formed by
Governor Pataki to select projects, we have been able to
advance well-designed transit projects that have been inspired
optimism and investment dollars to rebuild.
Recognizing the unique nature of lower Manhattan's
recovery, we have employed a number of innovative practices.
For example, FTA adopted a novel risk-based oversight approach
to management that anticipates and mitigates risks, rather than
trying to undo problems after the fact. Throughout this
process, the LMRO office has endeavored to streamline the
process, even as we have exercised a truly exceptional level of
active oversight, paying close attention to costs, scheduled,
design development, financial systems, and procurement
procedures for every project.
The lower Manhattan transit recovery is as much a story of
building relationships as it is of building stations, road, and
rail. From the start, we made coordination a priority. Our dual
focus on streamlining and stewardship has paid off. When
complete, the major projects now under way will transform the
transportation landscape in lower Manhattan. They will make the
system dramatically more visible, secure, navigable,
accessible, and customer-friendly.
We have already made significant progress, and we remain
committed to getting the job done for New Yorkers and all
Americans.
Thank you.
[The statement of Mr. Cohen follows:]
Prepared Statement of Bernard Cohen
Thank you, Mr. Chairman and members of the committee. I am pleased
to join this panel, and to have an opportunity to testify on the
progress we are making in the Lower Manhattan transportation recovery
effort. My name is Bernard Cohen, Director of the Federal Transit
Administration's (FTA) Lower Manhattan Recovery Office (LMRO).
The terrorist attacks of September 11, 2001, crippled Lower
Manhattan's transportation infrastructure. The worst of this
devastation was not visible above ground. Lower Manhattan lost the PATH
line from New Jersey to the World Trade Center--operated by the Port
Authority of New York and New Jersey (Port Authority) that had carried
an average of 67,000 passengers daily. Debris from the Twin Towers
crushed the PATH World Trade Center station--the gateway to New York
City for so many. Two New York City subway lines were heavily damaged,
along with a major arterial highway. Remarkably, despite the scale of
this destruction, not a single life was lost on transit due to the
terrorist attacks on that day.
Shortly after 9/11, President Bush declared New York a national
disaster area. Congress appropriated $20 billion for many aspects of
Lower Manhattan's recovery, out of which they budgeted $4.55 billion
for transportation needs. An additional $200 million for ferry
facilities and rail infrastructure was appropriated by Congress and
made part of the overall transportation recovery effort.
That recovery effort still benefits today from sound decisions that
public agencies made immediately after the President's declaration. The
most elemental of these decisions was a proactive commitment to
coordination. Nine months after the attacks, FTA established a
beachhead in Lower Manhattan--a dedicated office that strengthened
lines of communication and collaboration in Lower Manhattan. FTA worked
to establish ``one-stop shopping'' for Federal transportation funds, to
ease administrative burdens on project sponsors. Through a Memorandum
of Agreement with the Federal Emergency Management Agency (FEMA), FTA
became the lead agency to move transportation money and projects
forward.
When we became the lead agency in this effort, we formulated a
straightforward but challenging mission: to streamline transit recovery
while maintaining responsible stewardship of taxpayer dollars, and
exceptional oversight. Unlike other FTA-funded projects, the Lower
Manhattan projects are almost entirely Federally funded, so we felt the
stewardship obligation just as keenly as the imperative that we revive
Lower Manhattan's transit lifelines as quickly as possible.
We also recognized that we would have to operate simultaneously in
two ``time zones''--the immediate and the long term--to meet the
transit needs of Lower Manhattan.
The LMRO has now obligated most of the money entrusted to Lower
Manhattan transportation. A total of $4 billion of the $4.55 billion
budget has been committed to projects. This figure includes a reserve
for each project as a prudent measure of stewardship to ensure that we
have the resources in place to complete our program.
I am very pleased to report that all of the three major, fully-
funded transit projects for which initial grants were made are under
construction today. These projects promise not only to improve service,
but also to enhance dramatically the passenger convenience and
visibility of transit in Lower Manhattan. Indeed, the United States,
determined to come back from the 9/11 attacks stronger than ever,
resolved not just to reconstruct Lower Manhattan's infrastructure as it
existed before, but to improve upon it. The recovery presented Lower
Manhattan with an opportunity to modernize and rationalize its infamous
``spaghetti bowl'' tangle of transit lines. The Federal Government and
Lower Manhattan have seized that opportunity. We are creating a vastly
more visible, navigable, seamless, and customer-friendly system for
Lower Manhattan.
Construction began in March of this year on the permanent World
Trade Center PATH terminal. Since 2003, FTA has awarded the Port
Authority up to $2.2 billion for the PATH terminal, and project
sponsors completed their environmental review in June 2005. In addition
to restoring commuter service, the project includes pedestrian
connections to the Fulton Street Transit Center and the World Financial
Center. The Port Authority has engaged the renowned architect Santiago
Calatrava to design the PATH terminal, which many have come to regard
as the Grand Central Station of Lower Manhattan, a transit focal point.
The majestic glass and steel terminal is scheduled for completion in
June 2011.
FTA has also provided a $478 million grant to develop a state of
the art World Trade Center Site Security Center that will screen all
vehicles for security threats and provide parking for tour buses. This
facility will ensure that vehicles servicing the buildings or parking
in the Center will not be used as weapons.
In July 2005, the Metropolitan Transportation Authority (MTA) began
construction of the Fulton Street Transit Center, used by 275,000
people a day. The construction agreement between FTA and MTA provides
for up to $847 million in Federal funds. This grant will fully fund a
multi-level complex of stations that will serve 12 different subway
lines. The existing maze of narrow ramps, stairs, and platforms will be
transformed into a more spacious and rational configuration. A
prominent transit center will replace street entrances previously
hidden inside buildings. MTA was awarded this grant in December 2003.
The environmental review for Fulton was completed in November 2004, and
completion of construction is scheduled for June 2009.
Also in December 2003, FTA awarded MTA a grant up to $420 million
for the South Ferry Terminal Station, the last station at the southern
end of the IRT 1 subway line. This project will eliminate the tight-
curve platforms that prevent operators from opening the doors on the
rear five cars of their trains. It will increase the number of
entrances from one to three, and make the station accessible to
disabled passengers. Construction on the terminal began in March 2005,
and should be completed by April 2008.
I should add that LMRO is also providing $287 million toward the
cost of rebuilding Route 9A/West Street, the major north-south state
arterial highway that runs down the West Side of Lower Manhattan. FTA
and the Federal Highway Administration have executed two Memoranda of
Agreement in the last two years to provide for the transfer of funds
and outline the oversight responsibilities of each agency. This roadway
project is already under construction and is scheduled to be completed
by June 2009.
Community leaders envision these transit projects as anchors of the
overall recovery effort that is unfolding today, and will continue into
the next decade.
Over the last four years, many of our office's priorities have also
been Lower Manhattan's priorities. The economic renaissance in many
respects begins with the vanguard of transit systems that can carry
riders, visitors, and workers into and out of the area. We have been
the beneficiaries of a broad understanding that transportation is a
first chapter in the Lower Manhattan success story.
The LMRO has also made a priority of working collaboratively with
other major players in transportation reconstruction, which was crucial
in the project selection process. FTA worked closely with a committee
formed by Governor Pataki and including key city and state
transportation agencies, as well as the Lower Manhattan Development
Corporation. This committee generated the initial list of
transportation recovery projects from which our three projects were
selected. Because of this collaboration, we have been able to advance
well-designed, well-received transit projects. In turn, the business
community has responded with a burst of optimism to renovate and build
in Lower Manhattan.
As construction progresses on the three major transit projects,
Lower Manhattan has become an incubator for innovations and lessons
learned that can benefit other transit systems and projects.
Certainly, the Lower Manhattan context rewards innovation, and
creative ways of doing business. FTA adopted a novel, risk-based
oversight approach to management. We undertook formal risk assessments
early in the development of each project, and tailored our oversight
accordingly. We focused on the preemption of risks rather than the
mitigation of problems after the fact. We established reserves for our
projects based on our risk assessments in order to ensure that
sufficient resources will be in place to complete the recovery
projects.
Throughout this entire process, the LMRO has endeavored to exercise
a truly exceptional level of proactive oversight. Specifically, this
means that we have paid close attention to costs and schedules at every
step. We have given project sponsors approval to move through various
phases of design and development. We have entered into construction
agreements when sponsors have been ready to begin work. And, we have
carefully scrutinized and reviewed procurement procedures and financial
systems.
We have applied the same extraordinary degree of oversight to
transit security in Lower Manhattan. FTA has been centrally involved
in, and well aware of, key security design features for all of the
projects, from the earliest phases of work. Security features are being
integrated into the very design of these projects. FTA retained a
consultant to review security documents that we required our project
sponsors to prepare, including threat and vulnerability assessments,
construction site security plans, security management plans, and design
guidelines.
To meet environmental standards while advancing these important
projects as quickly as possible, we worked closely with project
sponsors to create an active environmental oversight approach. We
adapted a Cumulative Effects Analysis approach to assess the overall
environmental impact of all of the transit projects in Lower Manhattan.
Our project sponsors, in turn, have made a landmark agreement to
implement aggressive mitigations for those effects. Collaborating with
project sponsors, we established one single, consistent set of
methodologies, data, sources, and assumptions for all of the projects.
These shared assumptions allowed for comparability across projects, and
vastly shortened the time traditionally needed to prepare and review
environmental documents.
None of these was a ``cookie cutter'' approach. In our
environmental streamlining, risk assessment, and project oversight, we
have drawn on our collective experience and our creativity to customize
solutions that fit specific projects.
The Lower Manhattan transit recovery is as much a story of building
relationships as it is of building track, road, and rail. From the
start, we have focused on coordination and regular communication with
state and local officials, public and private project sponsors, other
Federal agencies, the business community, organizations representing
the families of the victims of 9/11, and other major players in this
complex undertaking. That legacy of coordination endures today in the
Lower Manhattan Construction Command Center (LMCCC), which is funded
largely through an FTA grant. The LMCCC began as a voluntary
collaboration among project sponsors dedicated to minimizing the
negative impact of overlapping construction projects on an already-
fragile community. The LMCCC emerged from that undertaking as a formal
organization that, today, coordinates construction logistics. The LMCCC
formalizes the kind of coordination that has characterized the transit
recovery effort from its earliest days.
FTA's dual focus on streamlining and stewardship has paid off. Four
years after we first established a beachhead in Lower Manhattan, we
have committed the bulk of the Federal transit money to three major,
popularly-acclaimed transit projects, for which construction is already
well underway. When complete, these projects will transform--even
revolutionize--the transit landscape in Lower Manhattan. They will make
the transit system dramatically more iconic, secure, accessible, and
customer-friendly than it was in pre-9/11 days.
On behalf of the entire LMRO and FTA, thank you for this
opportunity to update you on our progress. Now I'd be happy to answer
any questions.
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Mr. Rogers. Thank you, Mr. Cohen, for your statement.
The Chair now recognizes Mr. Todd Zinser, Acting Inspector
General of the Department of Transportation, for your
statement. Mr. Zinser?
STATEMENT OF TODD ZINSER, ACTING INSPECTOR GENERAL, U.S.
DEPARTMENT OF TRANSPORTATION
Mr. Zinser. Thank you, Mr. Chairman, Mr. King, Mr.
Pascrell. We commend the subcommittee for holding this series
of hearings and appreciate the opportunity to testify on the
importance of vigorous oversight of major transportation
projects like those under way in lower Manhattan.
The destruction caused by the terrorist attack is a tragic
reminder of the importance of transportation in our daily lives
and why they remain prime targets for terrorists. Today, we
will address key lessons learned from our work on
transportation infrastructure projects across the country that
should be applied, and in some cases are already being applied
to the reconstruction of lower Manhattan.
Our audit work on transportation infrastructure projects
has primarily focused on projects costing more than $1 billion,
or so-called mega-projects. For example, for the past several
years at the direction of Congress we have audited the annual
finance plan of the $14.6 billion ``big dig'' project in
Boston, and 15 months ago in April of 2005, as a result of a
review of the tunnel leaks on that project, we testified that
the project could consider a project-wide construction quality
review.
Our criminal and civil fraud investigations have focused on
highway, transit, and airport projects where there are
indications of fraud, regardless of the size of the project. We
have investigated schemes including false claims for material
and labor, product substitution, bribery, schemes involving
disadvantaged business enterprises, and in some instances of
payoffs to organized crime.
Over the last few years, our report on top management
challenges in the department has pointed to the need for FTA
and the Federal Highway Administration to strengthen their
oversight and stewardship of the more than $30 billion in
transit and highway funds spent each year, and they have been
taking steps to do so. FTA's Lower Manhattan Recovery Office
has the lead oversight role for DOT on lower Manhattan
reconstruction. The office and its oversight activities are
funded by nearly $90 million FTA received as part of the
disaster funding.
We strongly supported this funding, and in our view it is
critical in any future disaster that some portion, even if it
is just 1 percent, of the disaster funding be set aside for
oversight activities. OIG's role in lower Manhattan will be to
provide an independent perspective on the projects and the
oversight activities of the agencies involved. To do this, we
have informed the department and would like the subcommittee to
know that we have established an OIG-lower Manhattan
transportation oversight team based in our New York regional
office located just north of Canal Street in Manhattan.
Our investigative work on transportation infrastructure
projects has resulted in two primary lessons. First, build
coalitions with other federal, state and local law enforcement
agencies and program officials to prevent and detect fraud.
This is already under way by the establishment of the lower
Manhattan construction integrity team, where a comprehensive
range of federal, state and local agencies have developed
measures to prevent fraud, such as recommended practices for
vetting potential contractors.
Second, take aggressive action to prevent and detect fraud
and have strong policies in place to send the message that
fraud will not be tolerated. Program staff should be alert and
promptly report suspected fraud. U.S. Attorney's offices should
be educated and in some cases, even though fraud cases may not
meet their prosecutorial threshold, they should prosecute
cases. This is a strong deterrent.
Finally, suspension and debarment policies like the one
implemented by Secretary Mineta at DOT in 2005 are important
tools to protect taxpayer dollars from irresponsible
contractors and can deter future fraud.
Our audit work on mega-projects has resulted in
identification of several tools that should be applied to these
projects. First, prepare reliable cost estimates. This will be
especially critical for lower Manhattan because the total
amount of federal funding for the five transportation projects
under way is currently fixed at $4.55 billion. Project managers
must have reliable and current cost estimates, track them
closely and aggressively control costs. Otherwise, costs could
easily exceed the current federal funding commitment and it is
unclear what the source of additional funds would be.
Second, focus on project and financial management by using
sound oversight practices such as FTA's use of project
management oversight contractors.
Third, prepare regularly updated finance plans to identify
costs, scheduled, funding sources and risks to a project, or in
the case of lower Manhattan, ensure that each project has
something analogous to a realistic, regularly updated finance
plan.
Fourth, actively use value engineering to control costs by
analyzing and implementing design alternatives. This is already
being applied, resulting in the identification of $67 million
in potential savings on the design of the Fulton Street Transit
Center.
Fifth, carefully manage project schedules to minimize
costly delays, including the use of integrated master schedules
to coordinate the work of numerous contractors and
subcontractors on large projects.
Finally, recover overpayments from contractors and have a
strong cost recovery program in place to recover the costs of
construction claims caused by design and engineering errors or
omissions.
Mr. Chairman, those are our lessons learned on all the work
that we have done over the years. This concludes our prepared
remarks. We would be happy to answer any questions.
[The statement of Mr. Zinser follows:]
Prepared Statement of Todd J. Zinser
Mr. Chairman, Ranking Member, and Members of the Subcommittee:
We appreciate this opportunity to testify today on the importance
of vigorous oversight of major transportation projects like those
underway in the reconstruction of Lower Manhattan. The terrorist
attacks of September 11, 2001 caused unprecedented damage to New York
City's transportation infrastructure, including the Port Authority
Trans-Hudson (PATH) terminal and the Route 9A (West Street) highway
near the World Trade Center site. The destruction caused by these
attacks is a tragic reminder of the importance of transportation
systems in our everyday lives and why these systems remain prime
targets to terrorists.
Our testimony today will address important lessons learned from our
work on federally funded transportation projects across the country
that should be applied, and in some cases are already being applied, to
the reconstruction of Lower Manhattan. Primarily, our audit work at the
Office of Inspector General (OIG) has focused on mega-projects, that
is, those infrastructure projects costing more than $1 billion, while
our criminal and civil fraud investigations have focused on highway,
transit, and airport projects where there are indications of fraud
regardless of the size of the project.
Based on this body of work, we believe that certain sound
investigative, management, and oversight practices should be considered
wherever major transportation construction may be undertaken. This
seems especially important in the reconstruction of Lower Manhattan.
With the loss of life and with such significant parts of the
transportation system destroyed at the hands of terrorists, we should
do all we can to ensure that the residents of New York and the American
tax payers get the most from the Federal funding being invested and
that these projects are free of fraud.
Accordingly, we have informed the Department and would like you,
Mr. Chairman, and the Subcommittee to know that we have established an
OIG Lower Manhattan Transportation Oversight Team to support oversight
of Lower Manhattan projects. Although we are a relatively small OIG
with limited resources, compared to the approximately $55 billion that
the U.S. Department of Transportation (DOT) spends annually, we are now
able to redeploy resources and expertise from our work on Boston's
$14.6 billion Central Artery/Tunnel Project, which is nearly complete.
In response to the extensive devastation caused by the September 11
attacks, the Federal Government dedicated $4.55 billion for projects to
reconstruct and enhance Lower Manhattan's transportation
infrastructure. These high-priority projects will require vigilant
oversight by DOT, state and local governments, and transit agencies.
The projects are massive in scale and will require oversight of
numerous contractors and subcontractors, tracking costs and schedules,
and preventing fraud, among other things.
Over the last few years, our management challenges reports to the
Secretary and Congress have pointed to the need for the Federal Highway
Administration (FHWA) and the Federal Transit Administration (FTA) to
strengthen stewardship over investments in highway and transit
projects.\1\ As we reported to the Secretary in November 2005, a 1-
percent improvement in the efficiency with which states managed the
$700 billion investment in highway projects over the last 6 years would
have yielded an additional $7 billion for other infrastructure
improvements. Thus, improving efficiency in even a small percentage of
the funds invested in the reconstruction of Lower Manhattan could
result in millions of dollars in savings. FHWA and FTA have been
working to strengthen their oversight practices.
---------------------------------------------------------------------------
\1\ Report PT-2006-007, DOT's 2006 Top Management Challenges,
November, 18 2005. The report can be accessed on our website at http://
www.oig.dot.gov/item.jsp?id=1701.
---------------------------------------------------------------------------
Other infrastructure projects in the New York Metropolitan area
will add to the challenges DOT faces. Significant amounts of Federal
funding are also being dedicated to other ongoing transportation
projects in the area, most notably the large-scale East Side Access and
the Second Avenue Subway projects. Although these projects are not
being funded with the $4.55 billion, they are still large and complex
and will need proactive DOT oversight. Adding to the challenge, these
transportation projects will have to compete with many other projects
in New York City for contractors, workers, and materials--making it
even more important to focus on sound project and financial management.
Overall, within the next 5 years, more than $20 billion in construction
work will likely be underway in all of Lower Manhattan.
OIG's role in Lower Manhattan will be to provide an independent
perspective on these projects and the oversight activities of the
agencies involved. When our audit work identifies issues, we will alert
Federal, state, and local officials--as we have done on many other
large transportation projects. When we receive allegations of fraud, we
will investigate them and refer cases to the U.S. Attorney. In this
regard, our testimony today will focus on the following oversight
issues to consider as the reconstruction of Lower Manhattan continues,
and key lessons learned that could be applied to other major
transportation projects.
DOT must ensure active oversight of Lower Manhattan
projects until they are completed. Effective day-to-day oversight of
the large, complex transportation projects in Lower Manhattan and
across the country is critical to ensuring that projects are completed
on time, within budget, safely, and free from waste, fraud, or abuse.
FTA has the lead on Lower Manhattan reconstruction and will be
challenged by providing sufficient oversight of the projects involved.
Accordingly, as part of the Federal commitment, FTA has received nearly
$90 million of dedicated funding to do so.
To carry out its oversight responsibilities in Lower Manhattan, FTA
has created a special oversight office, the Lower Manhattan Recovery
Office. The Lower Manhattan Recovery Office is separate from FTA's New
York field office and its sole purpose is to oversee these high
priority projects in Lower Manhattan. The Lower Manhattan Recovery
Office should employ all of the oversight mechanisms and expertise at
its disposal to closely monitor these projects and, most importantly,
quickly mitigate problems as they arise. Doing so will help ensure that
the projects are delivered in a timely manner and within the federally
funded amount.
In overview, it is critical in any future disaster that the Federal
agency or agencies in charge of reconstruction receive, as part of the
emergency funding, a sufficient and dedicated amount of funding to
provide oversight.
Key lessons learned by our investigators are that Federal,
state, and local law enforcement agencies must build coalitions to
combat fraud in large transportation projects and take aggressive
action against those who defraud the government. History has shown that
substantial infusions of funding into an area for relief and/or
reconstruction efforts, such as those related to the September 11, 2001
attacks, increase the risk of fraud. Our special agents have
investigated criminal schemes nationwide on large transportation
projects like those in New York City, including false claims for
materials and labor, product substitution, collusive bidding, money
laundering, tax fraud, bribes, schemes involving disadvantaged business
enterprises, and, in some instances, payoffs to organized crime.
Since 1999, our New York Office has conducted approximately 31
investigations related to highway and transit construction/
infrastructure projects in the New York City Metropolitan area. Since
1999, these cases have produced 42 indictments, 26 convictions, and
actual or pending financial recoveries of over $33 million. Our work
has also resulted in Federal debarments or suspensions of numerous
companies. For example, the owners of three family-owned construction
firms in the New York Metropolitan area were debarred in 2002 for 3
years by FHWA. Also, following their 2001 guilty pleas they were
ordered to forfeit $5 million for their part in a large scam involving
payoffs to organized crime.
Our investigative work in New York and across the country offers
important lessons learned to help combat schemes like these.
First, build coalitions with other Federal, state, and local law
enforcement agencies--as well as program officials--to prevent and
detect fraud. Building these coalitions allows law enforcement and
investigative agencies, as well as program officials, to leverage
resources, share information and expertise, and undertake joint
initiatives. This is already underway in Lower Manhattan with the Lower
Manhattan Construction Integrity Team (LMCIT), which was an idea
suggested by the Lower Manhattan Development Corporation. We were a
founding member of this group, which was formally started in 2004 to
prevent fraud in Lower Manhattan publicly-funded projects. Members now
include a comprehensive range of Federal, state, and local agencies.
This group has developed an array of measures for the prevention of
fraud, including recommended practices for the process of vetting
potential contractors, information sharing, fraud awareness training
for contractors? supervisors and managers, employee screening and
access control to the World Trade Center site, and use of integrity
monitors.
Second, take aggressive action to combat fraudulent activity and
have strong policies in place to send a message that defrauding the
U.S. Government will not be tolerated. There are many ways to take
aggressive action to prevent fraud and protect tax payer dollars. For
one, Federal, state, and local program staff should always be alert to
possible instances of fraud and use existing mechanisms, such as fraud
hotlines, to report suspected fraud early on. Timely reporting of
possible fraud is critical so allegations may be promptly investigated.
For example, we maintain a hotline that can be accessed at http://
www.oig.dot.gov/Hotline. Tips specifically related to Lower Manhattan
projects can be submitted at www.LowerManhattan.info.
It is important that when investigators identify fraud and collect
sufficient evidence related to criminal schemes or civil fraud that the
U.S. Attorney's Office act upon it. In some instances, they should
accept cases for prosecution that may not otherwise meet their
prosecutorial threshold (e.g., the dollar amount of the fraudulent
activity) as a deterrent to others who might attempt to defraud the
government.
Finally, in 2005, Secretary Mineta signed a DOT-wide order
strengthening the Department's suspension and debarment policies. Such
policies prevent individuals or contractors who have been indicted or
convicted of fraud from receiving Federal contracts for a period of
time. We believe that such policies are critical to protecting tax
payer dollars from irresponsible contractors.
A key lesson learned from our auditors is that a set of
sound management and oversight tools should be used by Federal, state,
and local agencies to ensure that large transportation projects are
completed effectively and efficiently. These tools are fundamental and
universally applicable to all federally funded transportation projects.
It will be important to rigorously employ them in the reconstruction of
Lower Manhattan.
They include ensuring that sound project and financial management
practices are in place, preparing reliable cost estimates, carefully
managing project schedules to minimize costly delays, implementing more
cost-effective engineering alternatives, and recovering overpayments
from contractors and promptly resolving construction claims. For
example, because the total Federal funding allocated to the various
Lower Manhattan projects is currently fixed, it will be even more
critical for Federal, state, and local officials to have reliable cost
estimates and track them closely.
The Lower Manhattan Recovery Office has adopted a risk management
approach to keep costs within estimates. This risk analysis process was
applied early in project development to focus on identifying and
mitigating project risks and keeping costs within the Federal funding
allocated for each project. If higher costs are estimated along the
way, FTA requires the grantee to develop a recovery plan to find ways
to keep costs within the funding allocations. This is a smart move.
Such a cost containment action already occurred on the Fulton Street
project, requiring a project-wide cost recovery plan to address such
budget issues as remaining real estate acquisition and tenant
relocations, a possible re-design of the Transit Center, and
environmental requirements for building deconstruction. Unless costs
are aggressively controlled, the costs could easily exceed the $4.55
billion currently allocated by the Federal Government, and it is not
clear what funding sources would cover those increased costs.
DOT Must Ensure Active Oversight of Lower Manhattan Projects Until
They Are Completed
The Federal Government dedicated $4.55 billion to fund large-scale
projects to reconstruct and enhance Lower Manhattan's transportation
infrastructure. Of this amount, $2.75 billion came from the Federal
Emergency Management Agency (FEMA) and $1.8 billion came from FTA.
Through an agreement with FEMA, FTA was given lead responsibility for
distributing and overseeing the use of the $4.55 billion.
The ongoing projects are the Permanent World Trade Center PATH
Terminal, Fulton Street Transit Center, South Ferry Terminal Station,
the World Trade Center Vehicle Security Center, and the Route 9A/West
Street/Promenade highway project (FHWA also dedicated some funding to
this highway project in addition to the portion being funded out of the
$4.55 billion and FHWA has oversight responsibilities as well). More
information on these projects is provided in the exhibit at the end of
my statement.
Of the $4.55 billion, nearly $90 million has been dedicated to
FTA's oversight activities. We support this move and believe a
dedicated funding stream for Federal agency oversight should be
replicated in any funding decisions for future disasters and
emergencies.
DOT agencies--whether it is FTA or FHWA--should serve as a key line
of defense in protecting tax payer dollars. In 2002, FTA created the
Lower Manhattan Recovery Office separate from its New York regional
office, which is unique within FTA. The Lower Manhattan Recovery Office
is responsible for coordinating DOT resources and working with state
and local partners to provide project oversight and technical
assistance. We supported the creation of this office at the time and it
may be a model to consider should future disasters necessitate massive
transportation-related reconstruction.
FTA's Lower Manhattan Recovery Office has hired several contractors
to assist in its oversight responsibilities. For example, it hired a
financial management oversight contractor (FMOC), which was used at the
beginning of the projects to review the financial statements,
accounting systems, and internal financial management of grantees.
Currently, the FMOC is used on an as-needed basis. It also hired
project management oversight contractors (PMOC) who are charged with
regularly monitoring major transportation projects and providing
feedback to Federal officials should any problems arise. This is an
institutionalized approach at FTA. The Lower Manhattan Recovery
Office's strategy has been to provide one PMOC to each grantee. For
example, there is a PMOC for the New York State Metropolitan
Transportation Authority's (MTA) Fulton Street Transit Center and South
Ferry Station projects. The PMOC for each project is charged with
conducting risk assessments for projects, reviewing cost and schedules,
and assessing each grantee's plans for the project. Lower Manhattan
Recovery Office staff told us the PMOCs attend grantee meetings and
report back to them, conduct on-site reviews several times a week to
look at construction materials, and review quality assurance on the
project. A key point is that the Office must ensure that it fully
analyzes the results of the contractors? reports, take action where
appropriate, and exercise its own oversight role in addition to the
contractors' work.
A PMOC may also contract with other experts, as needed, to assist
in performing certain important duties. For example, the Lower
Manhattan Recovery Office determined that its PMOC on the Fulton Street
Transit Center did not have expertise to ensure that MTA met the
requirements of the Federal Relocation Assistance Act. Accordingly, the
Lower Manhattan Recovery Office directed the PMOC to hire an outside
consultant to evaluate MTA's relocation program for businesses and
residents who are being displaced by construction of the Fulton Street
Transit Center.
Key Lessons Learned by Our Investigators are That Federal, State,
and Local Law Enforcement Agencies Must Build Coalitions to Combat
Fraud in Large Transportation Projects and Take Aggressive Action
Against Those Who Defraud the Government
History has shown that substantial infusions of funding into an
area for relief and/or reconstruction efforts, such as those related to
the September 11, 2001 attacks, increase the risk of fraud. Our special
agents have investigated criminal schemes associated with
transportation projects across the country, including false claims for
materials and labor, product substitution, collusive bidding, money
laundering, tax fraud, bribes, schemes involving disadvantaged business
enterprises, and, in some instances, payoffs to organized crime.
Since October 2002, our nationwide investigations related to
surface transportation projects have resulted in 150 indictments, 91
convictions, $57.64 million in fines, restitutions, and recoveries, and
94 suspensions or debarments. It is important to consider that
investigating and collecting sufficient evidence to support prosecution
of white collar crimes like these is a labor intensive process that, in
some cases, can take years.
The following examples illustrate the types of schemes we have
detected on major transportation projects across the country, which
investigators, program officials, and even the public should watch for
in future projects.
Payoffs. The owners of three family-owned construction
firms in the New York Metropolitan area were debarred in 2002 for 3
years by FHWA. Also, following their 2001 guilty pleas they were
ordered to forfeit $5 million for their part in a large scam involving
payoffs to organized crime. They issued corporate checks to
subcontractors as payment for fraudulent invoices. These payments were
then returned to them as cash.
Product substitution. Our investigators worked with the
Federal Bureau of Investigation (FBI), as well as state and FHWA
officials, on a case involving a Connecticut concrete manufacturer that
was fined and forced to pay restitution for falsely certifying that
concrete catch basins used on a major highway project met contract
specifications. The manufacturer pled guilty in 2005 and was fined and
forced to pay restitution totaling half a million dollars.