[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/
                               index.html

                               __________

                    U.S. GOVERNMENT PRINTING OFFICE
35-501                      WASHINGTON : 2007
_____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
Fax: (202) 512ï¿½092104 Mail: Stop IDCC, Washington, DC 20402ï¿½0900012007


                     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

                              ----------                              
                                                                   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

                              ----------                              


                        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:]

    [GRAPHIC] [TIFF OMITTED] T5501.016
    
    [GRAPHIC] [TIFF OMITTED] T5501.017
    
    [GRAPHIC] [TIFF OMITTED] T5501.018
    
    [GRAPHIC] [TIFF OMITTED] T5501.019
    
    [GRAPHIC] [TIFF OMITTED] T5501.020
    
    [GRAPHIC] [TIFF OMITTED] T5501.021
    
    [GRAPHIC] [TIFF OMITTED] T5501.022
    
    [GRAPHIC] [TIFF OMITTED] T5501.023
    
    [GRAPHIC] [TIFF OMITTED] T5501.024
    
    [GRAPHIC] [TIFF OMITTED] T5501.025
    
    [GRAPHIC] [TIFF OMITTED] T5501.026
    
    [GRAPHIC] [TIFF OMITTED] T5501.027
    
    [GRAPHIC] [TIFF OMITTED] T5501.028
    
    [GRAPHIC] [TIFF OMITTED] T5501.029
    
    [GRAPHIC] [TIFF OMITTED] T5501.030
    
    [GRAPHIC] [TIFF OMITTED] T5501.031
    
    [GRAPHIC] [TIFF OMITTED] T5501.032
    
    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.

0 ]] C1.5 G 0 [[
TAKE SOT
TRUNS=
OUTCUE:
TAPE: TC:
para.(--SOT--tape 1 gary @ 17:27)
"weather-all this is gary"

AMONG THEM, GARY WILLIAMSON--THE OWNER OF WEATHER--ALL--

1 ]] C1.5 G 0 [[
TAKE SOT
TRUNS=
OUTCUE:
TAPE: TC:
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!

2 ]] C1.5 G 0 [[
TAKE SOT
TRUNS=
OUTCUE:
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.

3 ]] C1.5 G 0 [[
TAKE SOT
TRUNS=
OUTCUE:
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.

4 ]] C1.5 G 0 [[
TAKE SOT
TRUNS=
OUTCUE:
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.

5 ]] C1.5 G 0 [[
TAKE SOT
TRUNS=
OUTCUE:
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.
6 ]] C1.5 G 0 [[
TAKE SOT
TRUNS=
OUTCUE:
TAPE: TC:
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.

7 ]] C1.5 G 0 [[
TAKE SOT
TRUNS=
OUTCUE:
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

8 ]] C1.5 G 0 [[
TAKE SOT
TRUNS=
OUTCUE:
TAPE: TC:
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.

9 ]] C1.5 G 0 [[
TAKE SOT
TRUNS=
OUTCUE:
TAPE: TC:
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--
10 ]] C1.5 G 0 [[
TAKE SOT
TRUNS=
OUTCUE:
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.

11 ]] C1.5 G 0 [[
TAKE SOT
TRUNS=
OUTCUE:
TAPE: TC:
para.(--SOT--JACK JOHNSON 4:39)

"DO YOU RECALL EVER CONTRIBUTING TO A FILE AT ALL FOR TERRORISM RELIEF? 
i don not!"

12 ]] C1.5 G 0 [[
TAKE SOT
TRUNS=
OUTCUE:
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.

13 ]] C1.5 G 0 [[
TAKE SOT
TRUNS=
OUTCUE:
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."

14 ]] C1.5 G 0 [[
TAKE SOT
TRUNS=
OUTCUE:
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.

15 ]] C1.5 G 0 [[
TAKE SOT
TRUNS=
OUTCUE:
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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \7\ Ibid.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \8\ Errol Louis, The 9-11 Black Hole, New York Daily News, July 6, 
2004.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \16\ Liberty Bond Housing Coalition statement: http://
www.goodjobsny.org/rec_sign_on.htm.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \18\ Liberty Bond Housing Coalition statement: http://
www.goodjobsny.org/rec_sign_on.htm.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.

[GRAPHIC] [TIFF OMITTED] T5501.001

[GRAPHIC] [TIFF OMITTED] T5501.004

[GRAPHIC] [TIFF OMITTED] T5501.006

[GRAPHIC] [TIFF OMITTED] T5501.007

[GRAPHIC] [TIFF OMITTED] T5501.008

[GRAPHIC] [TIFF OMITTED] T5501.010

[GRAPHIC] [TIFF OMITTED] T5501.011

[GRAPHIC] [TIFF OMITTED] T5501.009

[GRAPHIC] [TIFF OMITTED] T5501.002

[GRAPHIC] [TIFF OMITTED] T5501.003


    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.
     Bid-rigging. Four executives of two Wisconsin contractors, 
both of their companies, and an employee of a third company were 
sentenced in 2005 to a combined total of over $3 million in fines and 
restitution and imprisoned, for a bid-rigging scheme. Competitors 
unlawfully decided who was to receive which roadway or airport job. 
They submitted complementary bids to create the false appearance of 
competition on approximately $100 million in publicly-funded projects.
     Bribery. In one of our joint cases in New York City, the 
co-owner of a prime contractor pled guilty in 2006 to conspiring to 
bribe an inspector to facilitate approximately $1 million of over-
billing on a roadway milling contract. As part of the plea agreement, 
the defendant and his company agreed not to bid on any Federal, state 
or city-funded project for a period of 5 years.
     False Statements. Several Ohio transportation inspectors 
were convicted during 2003-2005 for making false statements regarding 
the quantity and/or quality of bridge-painting work performed by 
contractors on Federal-aid projects. The inspectors received illegal 
payments to overlook improprieties, such as the use of inferior paint 
and failure to properly sandblast or contain lead and hazardous paint 
waste.
     Prevailing Wage Fraud. The largest highway landscaping 
company in Minnesota, which was the prime contractor on over $4 million 
in federally funded highway construction projects as well as a 
subcontractor on numerous others, and its president, were sentenced in 
2006 for conspiring to defraud the government by creating and 
certifying false records that concealed its failure to pay workers at 
the prevailing wage rate.
     Disadvantaged Business Enterprise (DBE) Fraud. A certified 
DBE firm in New York was found to have been used as a ``false front'' 
on about 3 dozen sub-contracts valued at approximately $21 million and 
submitted false certified payrolls. In 2001, the principal of the 
company pled guilty to conspiracy charges in the case.
    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 broad, interagency coalitions allows law 
enforcement and investigative agencies, as well as program officials, 
to share information, leverage expertise and resources, and undertake 
important joint initiatives. States and localities are the first line 
of defense against fraud and the Federal law enforcement community 
should work closely with them. Also, law enforcement should work 
closely with program officials at all levels of government, who can be 
the first to detect early indications of fraudulent activity. We are 
involved in a number of collaborative partnerships across the country 
and two in the New York City Metropolitan area are worth mentioning as 
key success stories that could be replicated elsewhere. Accordingly, we 
have tried to spread the word about these initiatives to other parts of 
the country.
     For example, we are founding partners in an interagency 
working group, the Lower Manhattan Construction Integrity Team (LMCIT). 
It was established in 2004 at the suggestion of the Lower Manhattan 
Development Corporation to prevent fraud in Lower Manhattan publicly-
funded projects. The group has grown and now includes a comprehensive 
range of oversight agencies. In addition to us, it includes the Lower 
Manhattan Construction Command Center, the Lower Manhattan Development 
Corporation, the New York City Department of Investigation, the New 
York City Business Integrity Commission, the New York State OIG, the 
New York State Metropolitan Transportation Authority's OIG and Chief 
Compliance Officer, the OIG of the Port Authority of New York and New 
Jersey, and the OIGs of the U.S. Departments of Labor and Housing and 
Urban Development (HUD). LMCIT has developed a range of measures for 
the prevention of fraud, including best 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 the use of 
integrity monitors (also referred to as IPSIGs, or Independent Private 
Sector Inspectors General) to supplement existing oversight resources. 
LMCIT members also share a joint fraud complaint hotline, which can be 
accessed at www.LowerManhattan.info.
     Further, since 1999, we have been a founding member of the 
Long Island Federal Construction Fraud Task Force, established by the 
Office of the U.S. Attorney for the Eastern District of New York. This 
Task Force was organized to coordinate investigations into fraud and 
public corruption in the construction industry on Long Island. The Task 
Force presently consists of prosecutors and agents from our Office of 
Investigations, the Internal Revenue Service Criminal Investigation 
Division, Department of Labor OIG, FBI, the Postal Inspection Service, 
the New York City Department of Investigation, and the OIG of the Port 
Authority of New York and New Jersey. Of the approximately 22 pending 
New York City Metropolitan-area construction investigations in our New 
York Office, more than half are being conducted under the auspices of 
this Task Force. The impact of the work of the Long Island task force 
extends beyond the New York City Metropolitan area. The unprecedented 
success of the Task Force has led to repeated requests that its members 
participate in speaking engagements, presenting insights, investigative 
strategies, and techniques to other law enforcement and oversight 
organizations. To date, members of the Task Force have participated in 
14 conferences in 10 states.
     The importance of building coalitions among Federal, 
state, and local law enforcement agencies can also be seen in the areas 
affected by Hurricane Katrina. For example, we and other Federal OIGs 
are fully integrated into the Hurricane Katrina Fraud Task Force, which 
was created by the Attorney General of the United States to detect and 
deter fraud against the U.S. Government in efforts to rebuild the Gulf 
Coast and provide emergency relief for the residents there. The Task 
Force has mobilized to bring prosecutions as quickly as possible to 
send a strong message of deterrence. We are also an active member of a 
special task force headed by the U.S. Department of Homeland Security 
OIG that coordinates the Hurricane Katrina-related auditing and 
investigative activities of the other Federal OIGs.
    We believe it is important that our investigative activities in the 
areas devastated by Hurricane Katrina are coordinated, information is 
shared, and that we maximize our limited resources. Our agents have 
conducted approximately 50 fraud awareness briefings for various 
oversight providers, FHWA, state transportation department staff, and 
trade association officials as part of our hurricane-related fraud 
prevention activities.
    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. Recognizing the fraud risks 
inherent in large-scale construction projects, it is critical that 
investigative agencies at all levels of government take aggressive 
action to combat fraud and abuse of government funds.
     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. Secretary Mineta deserves 
great credit for pushing for these improvements and for focusing on 
reducing fraud, waste, and abuse in DOT programs. It is important for 
all Federal agencies to evaluate their suspension and debarment 
policies and assess what steps can be taken to strengthen them.
     There are other 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 
utilize existing mechanisms to report suspected fraud early on. Timely 
reporting of possible fraud is critical so allegations may be 
investigated by law enforcement officials and, if warranted, they may 
take prompt action. Such fraud reporting mechanisms include internal 
agency procedures or fraud hotlines. We believe that program staff and 
investigators should always maintain an open flow of information. For 
example, we maintain a waste, fraud, and abuse hotline that can be 
accessed at http://www.oig.dot.gov/Hotline.
     Finally, 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. For example, 
in 2003, the United States Attorney in Manhattan announced the arrests 
of two individuals for devising schemes to fraudulently obtain HUD 
September 11-related grant funds of $5,316 and $3,750. Even though the 
amount of money involved in the fraud was relatively small, actions 
like these send a message to those considering similar schemes.
    In another example, at the direction of the Attorney General, 
Offices of the U.S. Attorneys have been aggressively prosecuting 
individuals who engage in Hurricane Katrina-related fraud, for example, 
through debit cards issued to hurricane victims to pay for recovery 
costs, even though the individual dollar amounts involved are 
relatively low. In some cases, it is important for the U.S. Attorney's 
Office to 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 those who might attempt to 
defraud the government.
    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
    Based on our years of work auditing major transportation projects 
across the country, we believe a set of sound management and oversight 
tools should be considered wherever major construction occurs. 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.
    Prepare reliable cost estimates. In some cases, project approvals 
may be secured on the strength of cost estimates prepared before the 
design package is substantially complete and which contain figures that 
are far too preliminary. In the past, we have found that cost estimates 
for major projects did not include such routine items as construction 
management, design, allowances for inflation, or contingency reserves. 
Great care must be taken to assure that these preliminary cost 
estimates are understood for what they are, and that they do not serve 
as the predicate for project approval unless they are thoroughly 
examined and found to be reliable and complete.
    Over the years, we have reported on dramatic increases in the costs 
of highway and transit projects--in some cases after construction had 
begun and they had already received significant Federal funding. A 
recent example of unreliable cost estimating on the highway side is the 
San Francisco-Oakland Bay Bridge (East Span) project, where costs 
nearly doubled from $2.6 billion to $5.1 billion. Also, the finance 
plans for the Project had not been thoroughly reviewed as envisioned by 
FHWA guidance. On the transit side, we reported in 2001 that the cost 
estimates for the Seattle Central Light Rail Link Project went from 
$2.5 billion to $4.1 billion in just 7 months.
    Because the 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. In addition, these high-priority projects are 
on a very fast track and in some cases designs have been altered along 
the way. Thus, it is important to maintain reliable cost estimates and 
update them as events change. FTA officials told us they are 
aggressively using a risk management approach to keep costs within 
estimates and that risk analysis was applied early in project 
development. 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. 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.
    Focus on Project Management and Financial Oversight of 
Transportation Projects. Early and continuous oversight by Federal 
agencies of states' project and financial management practices are key 
to controlling project costs, preventing delays, and reducing the 
potential for safety and environmental problems. FTA and FHWA have 
different approaches to overseeing large transportation projects.
    Transit Projects. FTA has institutionalized the use of project 
management oversight contractors (PMOCs) and financial management 
oversight contractors (FMOCs) to oversee large transit projects and to 
report to its in-house staff on findings and needed corrective actions. 
They are third-party contractors who look at FTA-funded projects in 
accordance with FTA guidance. FMOCs are used to evaluate a grantee's 
financial condition and its financial capability to construct, operate, 
and maintain a project. A PMOC is retained by FTA to evaluate a 
grantee's technical capacity to build, operate, and maintain a project, 
and to monitor the grantee's implementation of a project. This is 
essentially a sound approach that can provide early warnings of cost, 
schedule, and quality problems.
    In addition, FTA requires that grantees submit a project management 
plan. The plan, submitted in support of an application for a full 
funding grant agreement, demonstrates a grantee's technical capacity to 
build, operate, and maintain the project, together with the grantee's 
existing transit system. A project management plan is an evolving 
document, first prepared during preliminary engineering, which follows 
a project through final design, construction, and revenue operations.
    We have seen both the strengths and the weaknesses of the PMOC 
program in our work on Puerto Rico's Tren Urbano project in 2000 and 
2002. Our May 2000 review of Tren Urbano found that the PMOC had 
discovered and raised important schedule and construction quality 
issues. However, during our March 2002 audit we found that Tren Urbano 
officials consistently reported that the estimated cost of the project 
was $1.9 billion. We discovered that the estimated costs had actually 
increased by 10 percent, but the PMOC had accepted Tren Urbano's prior 
representations without checking them. All of the Lower Manhattan 
transit projects have a PMOC assigned to them and an FMOC is retained 
on as-needed basis, which is critically important. FTA should ensure 
that the PMOCs are aggressively monitoring the projects and that 
recommendations made by the PMOCs are fully analyzed by the Lower 
Manhattan Recovery Office and expeditiously addressed.
     Highway Projects. Historically, FHWA focused on detailed 
engineering activities and not on project management and financial 
oversight. FHWA performed contract-level administration and engineering 
activities, such as approving contract change orders and deciding on 
the location and wording of highway signs. Over the past several years, 
FHWA has taken important steps to change its focus.
    As we noted in our DOT 2006 Top Management Challenges report 
(issued in November 2005), we have seen positive signs that FHWA is 
committed to improving its oversight of transportation dollars and is 
implementing new oversight programs. For example, FHWA has established 
a new Financial Integrity Review and Evaluation program. This program 
calls for FHWA division offices to perform oversight of state 
management practices, including assessing management risks, reviewing 
financial management processes, and spot checking a sample of payments 
on highway projects to ensure that Federal funds are properly managed. 
Sustained and effective implementation of this should be a priority for 
FHWA.
    Moreover, Congress also made several important changes in the 2005 
Safe, Accountable, Flexible, Efficient Transportation Equity Act: A 
Legacy for Users (SAFETEA-LU) that are intended to strengthen FHWA 
oversight. For example, finance plans are required for projects 
exceeding $100 million in total cost. Another change is that the $1 
billion threshold defining major projects was lowered to $500 million. 
Such major projects are now required to have project management plans 
in addition to the previously required finance plans. We strongly 
support these actions.
    The purpose of the new project management plan program is to serve 
as a ``roadmap'' to help the project delivery team maintain a constant 
focus toward delivering the major project in an efficient and effective 
manner by clearly defining the roles, responsibilities, processes, and 
activities. The project management plan is supposed to be a living 
document in which revisions will be issued as the project progresses in 
order to add, modify, or delete provisions that will result in the most 
effectively managed project. These revisions and updates to the project 
management plan will occur prior to issuing the environmental decision, 
prior to authorization of Federal-aid funds for right of way 
acquisition, and prior to authorization of Federal-aid funds for 
construction.
    Prepare Finance Plans to Identify Cost, Schedule, Funding and Risks 
to a Project. A finance plan is a management tool that is vital in 
providing project managers and the public with information on how much 
a project is expected to cost, when it will be completed, whether 
adequate funding is committed to the project, and whether there are 
risks to completing the project on time and within budget. Regularly 
updated finance plans provide current information about project costs, 
financing, schedule, and technical issues to enable Congress, the 
Department, states, project managers, and the public to continually 
evaluate the progress of a project. Recognizing how significant and 
critical this basic oversight tool is, in SAFETEA-LU Congress changed 
FHWA's policy regarding finance plans. Previously, only Major Projects 
(those over $1 billion at the time) were required to have finance 
plans. Now, all projects over $100 million will be required to have 
finance plans. This was a positive move.
    While the transit projects under the Lower Manhattan Recovery 
Office's supervision are not required to have finance plans, the office 
has implemented construction agreements. According to FTA, these 
agreements were implemented to help expedite these projects and are 
analogous to a finance plan. Construction agreements delineate key 
terms of the projects, including development and recovery plans. The 
construction agreement for each project is reviewed frequently and must 
have: (1) a recovery plan, (2) risk assessment process and, (3) a 
project reserve.
    One of the five projects in Lower Manhattan (Route 9A) is mostly a 
highway project that is being managed by FHWA--even though it is being 
partially funded with FTA dollars. FTA and FHWA have entered into two 
memoranda of agreement laying out the types of oversight that FHWA will 
be expected to provide, which are different from FHWA's regular 
oversight mechanisms and more similar to the forms of oversight that 
would typically be found on an FTA project, including a PMOC on the 
Route 9A Project, which it normally would not do. FTA's agreement with 
FHWA stipulates that this project must have a finance plan.
    Implement More Cost-Effective Engineering Alternatives. Since 1970, 
many industries and Government agencies have successfully employed 
value engineering programs to control costs on major projects. The 
purpose of these programs is to objectively review all reasonable 
alternatives during the design phase to find more cost-effective 
alternatives. For example, FHWA's value engineering program, 
established in 1997, requires that a study be performed on all Federal-
aid National Highway System projects with an estimated cost of $25 
million or more and on other projects where using value engineering has 
a high potential for cost savings.
    Some states have been using value engineering effectively. However, 
our ongoing work on value engineering indicates states could be saving 
tens of millions of dollars if they would use value engineering studies 
on more projects and more frequently adopt the recommendations made 
during studies that are conducted.
    FTA also requires value engineering. To its credit, some of the 
Lower Manhattan Recovery Office-supervised projects have already had 
such studies performed and the staff told us that recommendations have 
been implemented. For example, according to Lower Manhattan Recovery 
Office officials, savings based on accepted value engineering 
recommendations related to the Fulton Street Transit Center are 
estimated to be nearly $67 million.
    Manage Project Schedules to Minimize Costly Delays. Transportation 
projects have become larger and more technically complex in the last 
decade and require coordination of the activities of multiple 
contractors working in a confined construction area. Accordingly, 
managing project schedules is a critical function in efforts to 
minimize cost growth. The key is to maintain a master schedule that 
ties together the work of all the contractors and identifies and tracks 
the costs of labor, material, and equipment resources required to 
complete each task. Master schedules are referred to as integrated, 
resource-loaded schedules. These schedules can identify and prevent 
schedule conflicts before they occur and can track progress on 
individual tasks, allowing early action to prevent or mitigate delays, 
thereby reducing or preventing cost increases.
    Failure to maintain integrated resource-loaded schedules has led to 
unanticipated project delays and increased costs. For example, in the 
past we reported that the failure to maintain integrated, resource-
loaded schedules led to unanticipated delays and increased costs on the 
Springfield Interchange Project in Virginia, including $49 million that 
were added to project costs.
    Effectively managing project schedules will be especially important 
in Lower Manhattan due to the pressing need to get these high-priority 
projects up and running as quickly as possible and ensure that costs 
stay within existing Federal allocations. The significance of managing 
schedules in the case of Lower Manhattan cannot be overstated, as each 
of these projects is large, complex, has expedited time frames, and 
will likely require the coordination of numerous contractors and 
subcontractors all at once. For example, we were informed by FTA that 
the Permanent World Trade Center PATH Terminal involves four 
contracts--three relatively small ones and the major construction 
management/general contractor (CMGC) contract. The CMGC currently has 4 
prime contractor firms and at least 10 subcontractors. FTA staff told 
us they expect the number of subcontractors to grow over time.
    Recover Overpayments from Contractors and Promptly Resolve 
Construction Claims to Control Project Costs. Change orders to 
contracts are initiated by the project or contractors in response to 
changes in the project's scope or differing site conditions. However, 
some change orders are a result of design errors or omissions caused by 
consultant engineers. Recovery of funds paid on these change orders 
offers an opportunity to reduce project costs. Maintaining tight 
control over change orders and promptly resolving outstanding 
construction claims are key to controlling project costs. Past 
projects, such as Boston's Central Artery/Tunnel Project, might have 
been able to significantly reduce costs by aggressively pursuing 
opportunities to recover costs of design errors or omissions caused by 
engineering consultants. For example, in 2004 we reported that the 
Project had 4,805 outstanding claims with a total value of 
approximately $194 million, of which 11 percent were over 4 years old.
    Timely resolution of change orders is important because the longer 
the issues remain unresolved, the more difficult it becomes for project 
managers to determine whether the change orders were caused by design 
errors or omissions. Maintaining supporting documentation is also 
critical. In the case of Lower Manhattan, project managers should make 
sure they have a process in place for aggressively pursuing 
opportunities for cost recovery in a timely fashion to maximize 
savings. We were informed that the Lower Manhattan Recovery Office has 
already performed a change order review on the Fulton Street project 
and plans to pursue cost recovery in the future, where appropriate.
    In conclusion, DOT has a critical role in the reconstruction of 
Lower Manhattan. Over the past several years, the Department has 
significantly strengthened its oversight of major transportation 
projects. Now it is critical that all of us at DOT vigorously employ 
the oversight tools and resources we have at our disposal and apply the 
lessons we have learned from past projects to get the most for the tax 
payer dollars that have been invested in the reconstruction of Lower 
Manhattan.
    This concludes our prepared remarks. We would be happy to answer 
any questions you may have.

     Exhibit: High Priority Projects Funded with the $4.55 Billion the Federal Government Dedicated to Lower
                                            Manhattan Reconstruction
----------------------------------------------------------------------------------------------------------------
                                        Project Sponsor & Federal   Baseline Cost Estimate &   Baseline Schedule
        Project and Description          Oversight Responsibility       Funding Sources         for Completion
----------------------------------------------------------------------------------------------------------------
Permanent World Trade Center PATH       Port Authority of New      Cost: $2.2 billion ($1.92               2011
 Terminal. This project will serve the   York & New Jersey.         billion in Federal
 PATH subway system, and includes       FTA oversees it through     funding and $300 million
 pedestrian connections to the Fulton    the Lower Manhattan        in PANYNJ insurance
 Street Transit Center to the east and   Recovery Office.           money).
 to the World Financial Center and the
 World Financial Center Ferry Terminal
 under Route 9A (West Street) to the
 west. Additional scope of this
 project includes the retaining walls
 at the World Trade Center site, and
 the security hardening of the
 transportation facilities..
----------------------------------------------------------------------------------------------------------------
Fulton Street Transit Center. This      New York State             $847 million (All Federal               2010
 project is a multi-level complex of     Metropolitan               funding).
 stations to serve 12 different subway   Transportation
 lines and over 275,000 daily commuter   Authority..
 trips. The existing maze of narrow     FTA oversees it through
 ramps, stairs and platforms will be     the Lower Manhattan
 transformed, allowing for easier        Recovery Office.
 transfers, better access from street
 level, and will have a direct link to
 the new PATH Terminal and the World
 Trade Center site..
----------------------------------------------------------------------------------------------------------------
South Ferry Terminal Station. This      New York State             $420 million (All Federal               2008
 project will replace the functionally   Metropolitan               Funding).
 obsolete station under Battery Park     Transportation
 that serves Staten Island Ferry         Authority..
 riders. The project will convert the   FTA oversees it through
 single track, 5-car loop station into   the Lower Manhattan
 a 2-track, 10-car, stub end two-        Recovery Office.
 platform terminal with new access for
 disabled riders and better
 connections to the renovated Staten
 Island ferry terminal and the R and W
 subway lines..
----------------------------------------------------------------------------------------------------------------
Route 9A Promenade South/ West Side.    New York State Department  $352 million (All Federal               2009
 This project will rebuild the major     of Transportation..        Funding).                    [Note: a small
 north-south arterial roadway in Lower  FTA's Lower Manhattan                                   section of this
 Manhattan between Chambers Street and   Recovery Office and FHWA                              project has been
 Battery Place, with the southern end    share oversight                                          substantially
 of the project known as Promenade       responsibilities through                                   completed.]
 South. The eastern sidewalk will be     memoranda of agreement.
 widened where feasible to improve
 accessibility, provide street trees,
 and add aesthetic enhancements. On
 the west side, along the new
 Promenade and adjacent to Battery
 Park City, a series of unique urban
 spaces are envisioned and are being
 developed for varied uses..
----------------------------------------------------------------------------------------------------------------
World Trade Center Vehicle Security     New York State             $478 million (All Federal               2010
 Center. This project is a vehicle       Metropolitan               funding).
 security-screening center for the       Transportation
 World Trade Center site. The security   Authority..
 center will screen all vehicles for    FTA oversees it through
 security threats and will be a vital    the Lower Manhattan
 component to the World Trade Center     Recovery Office.
 Master Plan..
----------------------------------------------------------------------------------------------------------------


    Mr. Rogers. Thank you, Mr. Zinser.
    The Chair now recognizes Mr. Ron Calvosa, Director of Fraud 
Prevention for the Lower Manhattan Construction Command Center, 
for your opening statement. Welcome.

                    STATEMENT OF RON CALVOSA

    Mr. Calvosa. Thank you.
    Chairman Rogers, Ranking Member Meek, Chairman King, 
members of the subcommittee, thank you for the opportunity to 
testify today on behalf of the Lower Manhattan Construction 
Command Center and its executive director, Charles Maikish. I 
am here to discuss the fraud prevention measures being 
instituted around construction activities in lower Manhattan, 
including many projects funded by federal grants.
    On November 22, 2004, New York Governor George Pataki and 
New York City Mayor Bloomberg issued executive orders 
establishing the command center as a central point of control 
for all large construction projects. As mandated by the 
governor and the mayor, the command center is charged with the 
coordination and oversight of construction projects in lower 
Manhattan south of Canal Street from the Hudson to the East 
River.
    The command center has also been given responsibility for 
overall fraud prevention regarding construction projects under 
its jurisdiction. There is $9.99 billion worth of construction 
work in progress or ready to commence within a three-block 
radius of the World Trade Center site. Within the next 5 years, 
more than $20 billion in construction work will be under way in 
all of lower Manhattan south of Canal Street.
    The current fraud prevention program is comprised of the 
following six measures. First, in order to fulfill the 
responsibility of fraud prevention, the executive orders 
mandate that the command center work with the lower Manhattan 
construction integrity team, or LMCIT. LMCIT is a group of 
inspectors general with oversight responsibility for agencies 
performing work in lower Manhattan, or whose agencies fund 
projects in lower Manhattan. This unique group of federal, 
state and local investigative offices work collaboratively to 
ensure that measures are taken to prevent, detect and eliminate 
fraud across the various agencies and projects.
    Second, the executive orders direct the command center to 
receive allegations of corruption or criminal activity through 
the creation of a fraud prevention hotline, which has been 
established along with an online complaint forum on the command 
center's Web site. The command center has also developed a 
campaign to publicize the hotline.
    Third, the command center, along with members of LMCIT, 
including the offices of inspectors general for the United 
States Department of Transportation, the Port Authority of New 
York and New Jersey, and the State of New York, developed a 
fraud prevention training module for presentation to 
contractors and consultants, supervisory and managerial 
employees, about prohibited conduct.
    Fourth involves the vetting of contractors. The various 
agencies awarding lower Manhattan construction contracts have 
primary responsibility for ensuring that business entities and 
their principals have the necessary integrity to receive public 
works contracts. The command center developed a list of best 
practices for conducting an integrity review and recommended 
that the contracting agencies perform these checks. In 
addition, the command center also recommended an enhanced level 
of review for lower Manhattan projects as to the threshold 
trigger for conducting an integrity review.
    Moreover, the command center recommended that information 
sharing done among LMCIT members become part of the overall 
standard vetting process by having LMCIT members search their 
internal databases for any derogatory information on proposed 
contractors or subcontractors. Each member is able to provide 
non-confidential information about ongoing or closed 
investigations for the LMCIT members.
    Fifth, with an acute awareness of the need for security at 
lower Manhattan construction sites, especially the World Trade 
Center site, a concern about the possible infiltration of 
organized crime onto construction projects, and an overall 
concern regarding the backgrounds of construction workers, the 
command center has worked with the inspector general's office 
for the Port Authority of New York and New Jersey and organized 
labor to determine the feasibility of conducting background 
checks on contractor employees. A protocol has been developed 
and is being implemented.
    Sixth, integrity monitors. Also known as independent 
private sector inspectors general or IPSIGs, have proven to be 
a valuable tool for preventing fraud. Integrity monitors will 
be an important component of the overall fraud prevention 
program for lower Manhattan. Integrity monitors are already 
being utilized on some of lower Manhattan's construction 
projects and there are plans to expand their use on other 
projects. My colleague Michael Nestor of the Port Authority 
inspector general's office will provide more details about this 
topic next.
    The steps indicated above are an outline and a beginning 
for the lower Manhattan fraud prevention program. The program 
will be elastic, adapting itself to address specific areas and 
needs. Future initiatives are under development. These include 
the development of a master database of all contractors and 
subcontractors, consultants and sub-consultants working on 
construction projects in lower Manhattan, and the development 
of a standardized contract language to address fraud prevention 
concerns.
    The ultimate goal is not only to have lower Manhattan 
rebuilt, but to have it rebuilt with integrity.
    This concludes my testimony. I would be glad to answer any 
questions that you have.
    [The statement of Mr. Calvosa follows:]

                Prepared Statement of Ronald P. Calvosa

    Chairman Rogers, Ranking Member Meek, and Members of the 
Subcommittee:
I. INTRODUCTION
    Thank you for the opportunity to testify today on behalf of the 
Lower Manhattan Construction Command Center and its Executive Director 
Charles J. Maikish. (Biographies of Charles J. Maikish and Ronald P. 
Calvosa are attached as Exhibit 1). I am here to discuss the Fraud 
Prevention measures being instituted around the construction activities 
involved in the rebuilding of Lower Manhattan. There are many projects 
ongoing or planned for Lower Manhattan, some involving grants of 
federal funds. It is essential that the work proceed with the utmost 
integrity.

    II. SUMMARY
    The Lower Manhattan Construction Command Center has been given 
responsibility for overall fraud prevention regarding construction 
projects under its jurisdiction. It has already formulated a plan and 
is implementing that plan in an effort to eliminate the opportunity for 
wrongdoing.

    There are six measures comprising the current fraud prevention 
program. These are:
        (1)Lower Manhattan Construction Integrity Team
        (2)Fraud Prevention Hotline
        (3)Fraud Awareness Training
        (4)Vetting of contractors
        (5)Contractor Employee Screening and Access Control
        (6)Integrity Monitors
    The fraud prevention program will be discussed in detail including 
the steps that have been taken thus far and will conclude with future 
steps that are planned. First I would like to provide this subcommittee 
with a description of the Lower Manhattan Construction Command Center.

    III. LOWER MANHATTAN CONSTRUCTION COMMAND CENTER
    On November 22, 2004, concerned about the potential impacts of the 
large amount of construction projects underway or planned for the 
constricted area of Lower Manhattan during the reconstruction after the 
September 11 attack, New York Governor George Pataki and New York City 
Mayor Michael Bloomberg issued Executive Orders No. 133 and 53, 
respectively. They established a central point of control for all large 
construction projects--the Lower Manhattan Construction Command Center 
(``LMCCC''). The purpose of the LMCCC, as stated in the Executive 
Orders, is to ``. . .coordinate between all construction located in 
Lower Manhattan [including] all construction projects beginning from 
2004 to 2010 valued at over $25 million . . . work requiring 
governmental action or permit, and construction requiring work directly 
in City or State streets or highways.'' (The Executive Orders are 
attached as Exhibit 2).
    As mandated by the Governor and the Mayor, the LMCCC is charged 
with the coordination and oversight of construction projects in Lower 
Manhattan south of Canal Street from the Hudson to the East River. It 
will bring together private developers, public agencies and 
authorities, utilities, businesses and resident representatives in one 
physical location. The LMCCC and its Executive Director will provide a 
forum for expeditious and consistent decision-making on disputes among 
agencies, a key element to ensure a successful rebuilding. Simply put, 
the mission of the LMCCC is to facilitate, mitigate and communicate.
    Significantly, the Executive Orders directed the LMCCC to perform a 
fraud prevention function and to employ a Fraud Prevention Director.

    IV. SCOPE OF PROJECTS
    There is $9.99 billion in construction work in progress or ready to 
commence within a three block radius of the World Trade Center site. 
Within the next five years, more than $20 billion in construction work 
will be underway in all of Lower Manhattan, south of Canal Street.
    This translates into a need for in excess of two million cubic 
yards of concrete; more than 200,000 concrete trucks; and a projected 
daily construction workforce of 6,500 for the next three to five years.
    Projects south of Canal Street in Lower Manhattan include the 
rebuilding of the World Trade Center Site with the erection of the 
Freedom Tower and three other towers. In addition, a new Port Authority 
of New York & New Jersey PATH Transportation Hub will be built on that 
site, as well as, the Memorial and Museum. A Performing Arts Center 
will also be constructed on the site.
    Other projects in the area include the deconstruction of 130 
Liberty Street, (the former Deutsche Bank building), and the 
construction of a fifth tower and vehicle security center in its place. 
In addition, work being done with Federal Transit Administration 
(``FTA'') funds includes the creation of a new Fulton Street Transit 
Center and a new South Ferry Subway Station. Federal Highway 
Administration funding is being used to develop Route 9A. Moreover, 
various street reconstruction projects are either underway or scheduled 
to commence. These projects are the responsibility of a number of 
agencies including the Port Authority of New York & New Jersey; the 
Lower Manhattan Development Corporation; the Metropolitan 
Transportation Authority; the New York State Department of 
Transportation; and the New York City Departments of Transportation and 
Design & Construction.
    In addition to public projects, there are numerous private 
development projects in the area, as well. (A map of planned and 
ongoing Lower Manhattan projects is attached as Exhibit 3).

    V. THE FRAUD PREVENTION PROGRAM
    1. Lower Manhattan Construction Integrity Team
    In order to fulfill the responsibility of fraud prevention, the 
Executive Orders mandate that the LMCCC work with the various 
Inspectors General that comprise the Lower Manhattan Construction 
Integrity Team (``LMCIT'').
    In early 2004, a group of Inspectors General with oversight 
responsibility for agencies performing work in Lower Manhattan, or 
whose agencies issue funds for projects in Lower Manhattan gathered 
together at the invitation of the Vice President of Investigations for 
the Lower Manhattan Development Corporation (``LMDC''), to form LMCIT. 
The group was formed in mutual recognition of the inherent risks and 
heightened opportunities for fraud against the projects of all the 
affected agencies. There was also mutual recognition to jointly explore 
what could be done cooperatively for the benefit of all the programs. 
In addition, the group assisted LMDC in developing fraud prevention 
measures for LMDC's programs.
    With the advent of construction, LMCIT has become more focused in 
its mission to work collaboratively toward its goal of preventing fraud 
across the various agencies and projects. In my capacity as LMCCC's 
Fraud Prevention Director, I chair the LMCIT meetings and coordinate 
its fraud prevention efforts.
    LMCIT is comprised of the Office of Inspector General for the State 
of New York; the New York City Department of Investigation; the Offices 
of Inspectors General for the Port Authority of New York & New Jersey; 
the Metropolitan Transportation Authority; the United States Department 
of Transportation; and the United States Department of Housing and 
Urban Development. Additionally, the Lower Manhattan Development 
Corporation's Investigations Unit is also a represented on LMCIT, as 
well as the New York City Business Integrity Commission, the Office of 
Inspector General for the United States Department of Labor and the 
Chief Compliance Officer for the Metropolitan Transportation Authority.
    LMCIT serves as the backbone for the Fraud Prevention Program. This 
unique group of federal, state and local investigative offices is 
relied upon to ensure that measures are taken to prevent, detect and 
eliminate fraud.

    2. Fraud Prevention Hotline
    The Executive Orders directed LMCCC to receive allegations of 
corruption or criminal activity by or on behalf of any agency employee, 
public official, contractor employee, agent, subcontractor, vendor, or 
labor official through the establishment of a Lower Manhattan Fraud 
Prevention Hotline.
    A contract, funded by the FTA, was awarded to an Integrity Hotline 
service provider, to work with LMCCC in establishing a complaint 
hotline for the receipt of telephone complaints from a variety of 
sources, including construction workers and members of the public.
    The Hotline service provider receives calls, records and transmits 
complaints to LMCCC. In addition, a database of complaints is 
accessible to LMCCC through the Internet. Incoming complaints are 
reviewed and referred to the appropriate Inspector General's office 
having jurisdiction over the matter.
    The Hotline serves as a cornerstone for the Fraud Prevention 
Program, providing a ready outlet for complainants to provide 
information about potential wrongdoing.
    Once the Hotline was created, LMCCC began a campaign to publicize 
the existence of the Hotline. Posters were created and placed at 
various jobsites in Lower Manhattan. (A copy of the Hotline Poster is 
attached as Exhibit 4). In addition, a full page advertisement (back 
cover) for the Hotline was recently placed in neighborhood newspaper's 
annual community handbook.
    In addition, the Hotline number has been placed on the back of 
identification/access cards for workers on one of the Lower Manhattan 
projects.
    To further enhance the opportunity to report alleged fraudulent 
activity, an on-line complaint form was launched on LMCCC's website, 
www.LowerManhattan.info. This form provides the opportunity to make a 
report via the web. The complaint form can also be printed and mailed 
to LMCCC.
    Whether the complaint is made via the Hotline, the Internet, or by 
mail, a complainant may choose to be anonymous, or to supply their 
contact information. In all instances, maintaining confidentiality is 
paramount.
    In the near future, additional steps will be taken to publicize the 
Hotline and web-based complaint form.

    3. Fraud Awareness Training
    LMCCC along with members of LMCIT, including the Offices of 
Inspectors General for the United States Department of Transportation; 
the Port Authority of New York & New Jersey; and State of New York, 
developed a fraud prevention training module for presentation to 
contractors and their employees.
    The training was modeled after training typically given in the New 
York area to government employees in agencies involved in the 
contracting process. While common in the public sector, this sort of 
training heretofore had rarely been provided to contractor staff. 
Similar to the training given to public agency employees, this training 
is to provide information about prohibited conduct. For example, 
contractor employees are told what penalties they face if they offer or 
give bribes or gratuities to public employees. In addition, they are 
told that submitting false documents, failure to pay the correct wages, 
or engaging in other fraudulent activity can result in criminal 
charges, civil action, and administrative sanctions. The administrative 
sanctions (e.g., being placed on an ineligible or suspended bidders 
list) can have serious detrimental effects on a business entity's 
ability to receive future publicly funded contracts.
    The target audience for this training is contractor employees in 
managerial or supervisory positions. The training has been rolled out 
and additional training sessions are being scheduled. A record is kept 
of all those receiving the training.

    4. Vetting of Contractors
    The various agencies awarding Lower Manhattan construction 
contracts have primary responsibility for ensuring that business 
entities and their principals have the necessary integrity to receive 
public works contracts. In an attempt to attain a uniform standard for 
conducting an integrity review, LMCCC surveyed each contracting agency 
to determine what steps were being taken as part of their integrity 
review of contractors. The survey results indicated that most agencies 
were performing similar checks. LMCCC reviewed the results and 
developed a list of best practices for conducting a rigorous integrity 
review. LMCCC recommended that the contracting agencies perform these 
checks uniformly.
    Moreover, LMCCC also recommended an enhanced level of review for 
Lower Manhattan projects, far exceeding the requirements and practices 
of the contracting agencies as to the threshold trigger for conducting 
an integrity review. These recommendations included performing checks 
on multiple-tiered subcontractors, as well as general contractors and 
first-tier subcontractors.
    In addition, LMCCC recommended that information sharing done among 
LMCIT members become part of the overall standard vetting process. 
LMCCC recommended that the vetting process include a search by LMCIT 
members of their internal databases for any derogatory information on 
proposed contractors/subcontractors. This part of the check is very 
valuable as each member is able to provide non-confidential information 
about ongoing or closed investigations to other LMCIT members in order 
to assist contracting agencies in their decision making process.
    LMCCC serves as the facilitator for vetting amongst LMCIT members. 
Requests for name checks are received, logged, disseminated and tracked 
to completion. LMCCC communicates the results of the name checks to the 
requestor. To date, LMCCC has facilitated name check requests on a 
total of nearly 350 business entities and individuals.

    5. Contractor Employee Screening and Access Control
    With an acute awareness for the need for security at Lower 
Manhattan construction sites, especially the World Trade Center site; a 
concern about the possible infiltration of organized crime onto 
construction projects; and an overall concern regarding the backgrounds 
of construction workers, LMCCC has worked with the Inspector General's 
Office for the Port Authority of New York & New Jersey, and organized 
labor, to determine the feasibility of conducting background checks on 
contractor employees. A plan was developed and with comments and 
suggestions of LMCIT members a protocol was developed.
    In order to be granted access to the construction sites, employees 
will have to submit to background screening that will include a cross 
check against the terrorist watch-list. In addition, criminal record 
searches will be conducted to determine if a prospective worker has a 
criminal conviction or outstanding criminal charge in the key areas 
such as organized crime, theft, and violence. Workers who clear these 
checks will be issued an access card.
    Initially the program will be implemented at the World Trade Center 
site, but we are hopeful that we will be able to extend the program to 
other construction projects in Lower Manhattan.

    6. Integrity Monitors
    Integrity Monitors, also known as Independent Private Sector 
Inspectors General or ``IPSIGs'', have proven to be a valuable tool for 
preventing fraud. They serve as a supplement to contracting agencies' 
existing safeguards, such as, auditing provided by both internal and 
external auditors. They also supplement existing investigative 
resources of an Inspector General's office. Integrity Monitors provide 
a multi-disciplined approach to the oversight of construction projects. 
They typically bring together legal, audit/accounting, investigative, 
engineering and environmental expertise. Integrity Monitors will be an 
important component of the overall Fraud Prevention Program for Lower 
Manhattan.
    Integrity Monitors are generally used for two specific purposes. 
They can be utilized to address an integrity issue pertaining to a 
specific business entity. They can also be utilized to ensure the 
integrity of a particular project. We will see the use of Integrity 
Monitors in both of these ways with regard to Lower Manhattan 
construction projects.
    LMCCC is uniquely positioned to coordinate the activities of 
Integrity Monitors in Lower Manhattan. Working with the Inspectors 
General, or other officials overseeing the work of the Integrity 
Monitors, the LMCCC's Fraud Prevention Director will be made aware of 
particular problems or areas of concern that may be develop, or be 
uncovered, regarding a particular individual, business entity or 
project. Working with LMCIT, LMCCC will be able to communicate the 
issues to other members in the group that may have similar issues. The 
goal, of course, is to prevent problems or address them should they be 
detected.
    Integrity Monitors are already being utilized on some Lower 
Manhattan construction projects and there are plans to expand their use 
on other projects. At present, there is an Integrity Monitor overseeing 
the deconstruction work on the Lower Manhattan Development 
Corporation's 130 Liberty Street project. The Metropolitan 
Transportation Authority has a compliance monitor in place regarding 
its contracts for the construction of the Fulton Street Transit Center 
and South Ferry Subway Station. In addition, the Port Authority of New 
York & New Jersey is in the process of hiring an Integrity Monitor to 
oversee the construction of the new PATH Transportation Hub and other 
Port Authority projects.

IV. CONCLUSION
    The steps indicated above are an outline and a beginning for the 
Lower Manhattan Fraud Prevention Program. The Program will be elastic, 
adapting itself to address specific areas and needs. Future initiatives 
are under development. These include the development of a master 
database of all contractors, subcontractors, consultants and 
subconsultants working on construction projects in Lower Manhattan, and 
the development of standardized contract language to address fraud 
prevention concerns.
    The ultimate goal is not only to have Lower Manhattan rebuilt, but 
to have it rebuilt with integrity.
    This concludes my testimony. I would be glad to answer any 
questions that you have.

    Mr. Rogers. Thank you, Mr. Calvosa, for your statement.
    The Chair now recognizes Mr. Michael Nestor, Director of 
the Office of Investigations of the Port Authority of New York 
and New Jersey Office of Inspector General.
    Welcome, Mr. Nestor. We look forward to your statement.

                  STATEMENT OF MICHAEL NESTOR

    Mr. Nestor. Thank you.
    Chairman Rogers, Ranking Member Meek and Congressman King, 
thank you for the opportunity to testify today before the 
subcommittee on behalf of the Port Authority of New York and 
New Jersey, and its Office of Inspector General. I am here to 
discuss my office's role in fraud prevention and detection 
related to the funds expended by the Port Authority following 
the 9/11 disaster, as well as the rebuilding that has already 
commenced at the World Trade Center site.
    As you know, the Port Authority owns the World Trade Center 
site and had occupied approximately 20 floors in the north 
tower of the Trade Center, with my office situated on the 77th 
floor. When the first plane hit the north tower on 9/11, I was 
with some of my staff in our office just a few floors below 
impact. Having been able to evacuate minutes prior to the 
building's collapse, the Office of Inspector General was 
extremely fortunate not to have lost any staff. However, as you 
know, the Port Authority lost 37 police officers and 38 
civilian employees.
    I will describe for you a few investigations that the OIG 
conducted in which we found individuals, including Port 
Authority employees, who took advantage of the disaster. I will 
also explain the steps we are taking to prevent fraud during 
the multi-billion dollar rebuilding on the World Trade Center 
site over the next number of years.
    Acting on information we received just a few weeks 
following the terrorist attack, the OIG conducted an 
investigation that determined that 23 employees fraudulently 
received a total of $32,980 of benefits from both the American 
Red Cross and Safe Horizons by misrepresenting that they lost 
their jobs due to the disaster. All employees were arrested and 
pled guilty to criminal larceny charges and either resigned or 
were terminated from employment with the Port Authority.
    In December 2004, 17 men and three companies were indicted 
on racketeering charges for defrauding the Port Authority 
involving asbestos abatement contract work. One aspect of the 
indictment involved the contract covering the maintenance and 
cleaning of World Trade Center artifacts after the attacks. The 
indictment charged a company for stealing $104,000 from the 
Port Authority on that contract through the inclusion of ghost 
employees on the payrolls. This scheme was carried out with the 
assistance of a corrupt Port Authority contract employee 
assigned to oversee this project on behalf of the Port 
Authority.
    This contract employee was also charge in this indictment 
for removing samples of known asbestos, contaminated materials 
from a different job site that the subject company was working 
on, and substituting these samples for negative samples he had 
taken from the World Trade Center artifacts, so that the 
company's Port Authority contract and his ability to receive 
further bribe payments from the company would be extended. This 
employee pleaded guilty to both schemes. The case against the 
company is still pending.
    In August 2002, the OIG commenced a joint investigation 
with the United States Attorney for the Southern District of 
New York and the inspector general for the Department of 
Homeland Security into an allegation that New York Waterways, a 
New Jersey-based ferry provider, fraudulently billed the Port 
Authority and FEMA for ferry service provided following 9/11 as 
the result of damage to the Port Authority Trans-Hudson, PATH, 
system.
    As this is an ongoing investigation, I can't comment any 
further on it. However, Mr. Chairman, upon completion of the 
investigation, which should be shortly, I will report back to 
the subcommittee, as I believe the results will be of interest 
to you.
    Equally important are our efforts to prevent and deter 
fraud following a disaster and during the rebuilding and 
recovery from a disaster. We are taking a proactive approach 
with the new World Trade Center HUB project, and that is get 
involved early-on. As you have heard from Mr. Calvosa, we are 
working closely together on a fraud prevention program which 
includes an integrity awareness program which the OIG was the 
first to begin presenting to contractors at the World Trade 
Center site.
    Our partnership with other inspectors general, vetting of 
contractors, background screening of contractor employees, and 
access control on which the Port Authority has taken the lead 
at the site, and the use of integrity monitors. So as not to 
repeat the details of each that you have already heard from Mr. 
Calvosa, I would like to concentrate my remaining time on the 
use of integrity monitors.
    Due to the enormous amount of money being spent on the 
rebuilding of the World Trade Center site, the Port Authority 
has determined that additional measures and resources are 
required to assist the Port Authority and the OIG in its fraud 
prevention efforts. Integrity monitors were successfully used 
at Ground Zero after the 9/11 attack during the cleanup to 
oversee the four construction managers. They were instrumental 
in minimizing and deterring fraud during that effort. We are 
now in the final stages of selecting an integrity monitor for 
the new $2.2 billion World Trade Center Transportation HUB 
project.
    We are considering the use of monitors for additional 
projects on the site. The integrity monitor will assist with 
the review of existing procedures for fraud and corruption 
risks, recommend and assist in implementing procedures designed 
to mitigate those risks identified, conduct forensic reviews of 
payment requisitions, and provide investigative services as 
necessary and directed by my office in such areas as labor 
racketeering, compliance with state and federal labor laws, 
worker safety, environmental plans and procedures.
    In conclusion, the above investigations and fraud 
prevention measures exhibit the Port Authority's commitment to 
accomplishing its goals and rebuilding the World Trade Center 
site with the utmost of integrity.
    Thank you for the opportunity to present my testimony 
before your subcommittee. I would be happy to answer any 
questions.
    [The statement of Mr. Nestor follows:]

                  Prepared Statement of Michael Nestor

    Chairman Rogers, Ranking Member Meek, and Members of the 
Subcommittee:

I. INTRODUCTION
    Thank you for the opportunity to testify today before the 
Subcommittee on behalf of The Port Authority of New York & New Jersey 
(``Port Authority'') and its Inspector General Robert E. Van Etten. I 
am here to discuss my office's role in fraud prevention and detection 
related to the funds expended by the Port Authority following the 9/11 
disaster, as well as during the rebuilding that will take place, and 
has already commenced, at the World Trade Center Site.

II. SUMMARY
    As you know, the Port Authority owns the World Trade Center Site 
and had occupied approximately twenty floors in the North Tower of the 
Trade Center, with my office situated on the 77th floor. When the first 
plane hit the North Tower on 9/11, I was with some of my staff in our 
office, just a few floors below impact. Having been able to evacuate 
minutes prior to the building collapse, the Office of Inspector General 
(``OIG'') was extremely fortunate not to have lost any staff; however, 
as you know, the Port Authority lost thirty-seven (37) police officers 
and thirty-eight (38) civilian employees.
    The OIG quickly found itself a new home and continued to fulfill 
our mission in detecting and preventing fraud, as we have been doing 
for the Port Authority since its establishment in 1992. With more 
vigor, purpose, and conviction we turned our attention to ensure that 
no one, and in particular any Port Authority employee or anyone doing 
business with the Port Authority, would take advantage of such a 
tragedy to enrich themselves.
    I will describe for you a few investigations that the OIG conducted 
in which we found, unfortunately, individuals, including Port Authority 
employees, who took advantage of the disaster to enrich themselves. I 
will also explain the steps we are taking to prevent fraud during the 
multi-billion dollar rebuilding of the World Trade Center Site over the 
next number of years.

III. POST 9/11 FRAUD INVESTIGATIONS
    A. Financial Assistance Claims Fraud by Port Authority Employees
    Acting on information we received from a Port Authority employee 
just a few weeks following the terrorist attack, the OIG commenced an 
investigation into allegations that a number of Port Authority 
employees filed claims of unemployment as the result of the 9/11 
terrorist attacks with the American Red Cross. In fact, all Port 
Authority employees received their uninterrupted full salaries after 9/
11, and were clearly not eligible to receive unemployment benefits due 
to the disaster.
    Our investigation determined that twenty-three (23) employees 
fraudulently applied for benefits to both the American Red Cross and 
Safe Horizons by misrepresenting that they lost their jobs due to the 
disaster. As a result, they fraudulently received monetary aid from the 
American Red Cross and Safe Horizons for a total fraud of $32,980.
    All twenty-three (23) employees were arrested and plead guilty to 
criminal larceny charges and either resigned or were terminated from 
their employment with the Port Authority.

    B. Fraud Against the Port Authority and FEMA by New York Waterway
    In August 2002, the OIG commenced a joint investigation with the 
United States Attorney for the Southern District of New York and the 
Inspector General for the Department of Homeland Security, into an 
allegation that NY Waterway, a New Jersey based ferry service provider, 
fraudulently billed the Port Authority and FEMA for ferry service 
provided following 9/11 as the result of damage to the Port Authority 
Trans-Hudson (``PATH'') system.
    As this is an ongoing investigation, I cannot comment any further 
on it. However, Mr. Chairman, upon completion of the investigation, 
which should be shortly, I will report back to the Subcommittee as I 
believe the results will be of interest to you.

    C. Over-Billing Fraud by Contractor Responsible for the Maintenance 
and Cleaning of the World Trade Center Artifacts After the Attacks
    In December 2004, Inspector General Robert E. Van Etten and 
Manhattan District Attorney Robert Morgenthau announced the indictment 
of seventeen (17) men and three companies on racketeering charges for 
defrauding the Port Authority and other public agencies involving 
asbestos abatement contract work. One aspect of the indictment involved 
a contract award covering the maintenance and cleaning of World Trade 
Center artifacts after the attacks. These artifacts, which consisted 
of, among other things, pieces of structural steel, crushed police and 
fire vehicles, and the antenna from One World Trade Center, were stored 
at JFK's Hangar 17.
    The indictment charged a company for stealing money from the Port 
Authority on that contract through the inclusion of ghost employees on 
the payrolls. Normally, there were two to three ghost employees a day 
for the duration of the job, which lasted from February 2002 until 
February 2004. The amount stolen through the ghost employee scheme was 
more than $104,000. This scheme was carried out with the assistance of 
a corrupt Port Authority contract employee assigned to oversee this 
project on behalf of the Port Authority.
    This contract employee was also charged in this indictment for 
removing samples of known asbestos contaminated materials from a 
different jobsite that the subject company was working on and 
substituting those samples for negative samples he had taken from the 
World Trade Center artifacts at Hangar 17, so that the company's Port 
Authority contract and his ability to receive further bribe payments 
from the company, would be extended.
    This contract employee plead guilty to both schemes. The first in 
which he received $100 per day for allowing the ghost employees to be 
placed on the payroll; and the second where he switched contaminated 
asbestos samples. The case is still pending against the company.
    This is another example of individuals taking advantage of 
disasters to enrich themselves, and why the Inspector General community 
must be vigilant in our pursuit of frauds following disasters.
    We need to be proactive and creative when devising investigative 
ideas following disasters. This must be accomplished prior to a 
disaster so that investigative plans are already in place and ready to 
be implemented immediately after a disaster. Whether they are computer-
matching programs to monitor the issuance of financial benefits, 
specialized programs to monitor contracts that are being awarded, or 
the review of payment requisitions for services, materials and goods--
planning is critical to successfully detecting fraud and could be most 
helpful in deterring it as well.

IV. FRAUD PREVENTION PROGRAM FOR THE REBUILDING OF THE WORLD TRADE 
CENTER SITE
    Equally important are our efforts to prevent and deter fraud 
following a disaster and during the rebuilding and recovery from a 
disaster. We are taking a proactive approach with the new World Trade 
Center Transportation HUB project, and that is to get involved early 
on. We believe strongly in our preventive role and that we should be at 
the table with the agency in such an important and costly project in 
developing fraud prevention programs and controls. We have found that 
the agency welcomes our ``real time'' input and advice when developing 
policies, procedures, and strategies as opposed to waiting until those 
developed fail and we come in afterwards and play the ``I got you'' 
game. Not here. Although we have formed a strong working relationship 
with the agency on this project, we feel that we have not compromised 
our independent role as the IG. We have found them to be most 
supportive of the recommendations and suggestions we make.
    There will be a number of levels of oversight, and of a different 
variety, provided to the project by: the United States Department of 
Transportation's Federal Transit Administration; the Port Authority's 
Project Management staff; the Port Authority's hired Construction 
Manager; as well as the Port Authority's Internal Audit Department. The 
Audit Department, which is a component of the Inspector General's 
Office, will be auditing certain components of the project. 
Nevertheless, the Port Authority desired a comprehensive fraud 
prevention program for a project of this size and cost.
    Our current fraud prevention program, which is fluid so that we can 
continue to enhance it, includes: an Integrity Awareness Program; a 
partnership with other Inspectors General and the Fraud Prevention 
Director at the Lower Manhattan Construction Command Center; vetting of 
contractors; background screening of contract employees and access 
control; and the use of Integrity Monitors. I will discuss each of 
these in more detail.

    A. The Integrity Awareness Program
    As the result of prior corruption investigations and prosecutions 
that the OIG conducted, and placing a high value on the preventive side 
of our mission, we have doubled our efforts in educating Port Authority 
employees on what their ethical obligations are as public employees and 
officials. Therefore, approximately two years ago, we rolled out a new 
Integrity Awareness Program that all Port Authority employees must 
attend. The Program includes a presentation that reviews for employees 
their responsibility to abide by the Port Authority's Ethical Standards 
and the consequences of their failure to do so. The Program explains 
the three primary reasons why people make bad decisions: financial 
pressure, rationalization and opportunity; emphasizes implications of 
these decisions: financial loss, embarrassment, incarceration and their 
responsibilities to the Port, co-workers and themselves. The Program 
explains, in laymen's terms, Internal Controls and why they are 
important. The objective is early prevention, diagnoses and resolution, 
thereby avoiding a potential loss of the Port's most valuable asset--
its employees.
    This Program has been modified so that it is geared to construction 
contractors as well. In May, we began to present this program to the 
Construction Manager and General Contractor for the Port Authority's 
New World Trade Center Transportation HUB. The presentation is being 
given to all supervisory staff from the field superintendent to the 
highest level individual on the project from each company. All 
contractors, including all lower-tiered subcontractors working on all 
Port Authority World Trade Center projects, will have to attend this 
presentation. The Port Authority contractors are the first to receive 
any such training at the Site.

    B. Lower Manhattan Construction Integrity Team
    The OIG has been a member of a group of Inspectors General that 
have oversight responsibility for agencies performing work in Lower 
Manhattan or who are funding projects in Lower Manhattan. This group, 
referred to as the Lower Manhattan Construction Integrity Team, formed 
in early 2004 in recognition of the risks posed by the huge amount of 
money that was going to be spent on the rebuilding program in Lower 
Manhattan, and the Inspectors General desire to get ahead of the curve 
in attempting to prevent fraud. The Fraud Prevention Director of the 
Lower Manhattan Construction Command Center, who is here today also to 
testify before the Subcommittee, chairs the Lower Manhattan 
Construction Integrity Team. We have worked extremely close with the 
Director in each of the areas of the Fraud Prevention Program that both 
he and I will describe today.
    The Lower Manhattan Construction Command Center coordinates a Fraud 
Prevention Hotline for Lower Manhattan Construction Projects on behalf 
of the Lower Manhattan Construction Integrity Team; therefore, the Port 
Authority takes advantage of that hotline. Any fraud complaint that the 
Hotline receives pertaining to any Port Authority project at the World 
Trade Center Site is forwarded to my office for investigation. While 
the OIG has its own Fraud Hotline, we support Lower Manhattan 
Construction Command Center's efforts in having one Fraud Hotline for 
all Lower Manhattan construction projects to make it easier for the 
public to know where to call with complaints.

    C. Vetting of Contractors
    In order to ensure that the Port Authority is contracting to do 
business at the World Trade Center Site only with responsible entities, 
or persons possessing the requisite honesty and integrity, the Port 
Authority and OIG are conducting integrity reviews of all contractors 
and subcontractors, including lower-tiered subcontractors receiving 
awards over a particular dollar threshold. To assist in the vetting, 
the IG community is consulted, coordinating these checks through the 
Lower Manhattan Construction Integrity Team to determine if there is 
any derogatory information that can be shared with the agency.

    D. Contractor Employee Screening and Access Control
    In an effort to tighten security at the World Trade Center Site, 
both to restrict access to those individuals that have criminal and/or 
terrorist related backgrounds unfavorable to the interests of the Port 
Authority, we have commenced performing screening on contractor 
employees seeking access to the Site. After passing the background 
screening process, personnel will go through a one-hour prerequisite 
training class on World Trade Center Site Rules and Regulations. The 
training class will be held on Site and will emphasize Site security 
and safety. After passing a test, personnel will be issued a new World 
Trace Center ID card providing them access to the Site.
    I would just like to comment, without going into details for 
security reasons, that security at the Site during the construction 
phase will be extremely tight. The Port Authority has been working with 
the Senior Advisor to the Governor for Counter-Terrorism, James 
Kallstrom, and security consultants to ensure that all the necessary 
and appropriate precautions are taken.

    E. Use of Integrity Monitors
    Due to the enormous amount of money being spent in the rebuilding 
of the World Trade Center Site, the Port Authority has determined that 
additional measures are required to assist the OIG in its fraud 
prevention efforts.
    Integrity Monitors are independent organizations that bring 
together various disciplines of expertise such as legal; auditing/
accounting; investigative; engineering; environmental; and others. They 
have been used in New York City for the last ten plus years for 
contractors with integrity issues that were awarded contracts but 
required additional oversight.
    Integrity Monitors were successfully used at Ground Zero during the 
cleanup to oversee the four Construction Managers. They were 
instrumental in minimizing and deterring fraud during that effort.
    The Port Authority has also begun to use them successfully over the 
last year. We have used them a number of times where contractors with 
pending integrity matters (for example: pending investigations, 
indictments, etc.) were required to accept the services of an Integrity 
Monitor to be awarded the contract. The Monitor would be selected by 
the Port Authority, report to the OIG, but be paid for by the 
contractor.
    Based upon our positive experience with the Monitors, and the 
positive results at Ground Zero during the cleanup, the Port Authority 
has decided to utilize them to assist the OIG in its efforts to prevent 
and detect fraud during the rebuilding at the World Trade Center Site.

    The Integrity Monitor will:
         Conduct a review of all existing procedures and 
        processes for fraud, corruption, cost abuse, safety, and 
        environmental risks;
         Recommend and assist in implementing procedures 
        designed to mitigate all risks identified in its initial 
        review;
         Conduct forensic reviews of payment requisitions and 
        supporting documentation, payments, change-orders; and
         Provide investigative services, as necessary and 
        directed by my office, including: conduct in-field 
        investigations and on-site monitoring of construction work; 
        investigate and evaluate construction contractor use of the 
        labor, compliance with collective bargaining agreements, and 
        compliance with state and federal labor laws; review and 
        monitor worker safety and environmental plans and procedures; 
        compliance with M/WBE requirements and goals; and conduct 
        investigations into illegal conduct by Port Authority 
        contractor staff, and others.
    We are in the final stages of selecting an Integrity Monitor for 
the new $2.2 billion World Trade Center Transportation HUB Project. 
There might be additional projects at the Site that we will require a 
Monitor as well.

    V. CONCLUSION
    The above investigations and fraud prevention measures exhibit the 
Port Authority's commitment to accomplishing its goals in rebuilding 
the World Trade Center Site with the utmost of integrity. We owe it to 
the citizens of New York City, the Metropolitan Region, the United 
States, and those that lost their lives on 9/11.
    Thank you for the opportunity to present my testimony before your 
Subcommittee. This ends my testimony.
    I would be happy to answer any questions.

    Mr. Rogers. I thank you, Mr. Nestor.
    We will next have a few questions. I would like to start 
off.
    Mr. Zinser, in your comments you talked about the need to 
be able to recover funds, overpayments, and other types of 
funds. Do you require, or were their bond requirements that 
would enable you to be able to reach back and capture those 
funds, if in fact they were due? How would you extract that 
money from some companies that may, as you know, just 
disappear?
    Mr. Zinser. Yes, Bernard may be able to help with that 
also, but normally what happens, there are bonds that are 
required, but there is also a retainage, a certain percentage 
of retainage that the government holds back on these contracts.
    Mr. Rogers. That is usually 10 percent. Do you think that 
is sufficient in contracts like these?
    Mr. Zinser. I think our experience so far is that that is 
pretty much a good figure, but one of the things that the 
reviews of finance plans ought to do is identify whether or not 
retainage and contingencies are adequate given the current 
status of the project.
    Mr. Rogers. Okay. Mr. Cohen, did you have some thoughts on 
that?
    Mr. Cohen. All I would add is that a lot of it also has to 
do with the way in which the project builders write their 
contracts with their contractors and with their designers. It 
is hard to go after a designer for making errors if you haven't 
already built into the contract language that says you will go 
after them for that kind of a problem.
    So I think it is both what Mr. Zinser talked about, but it 
also has to do with making sure that the agencies put some 
teeth into the contracts with their own vendors to make sure 
that they have the contractual ability to do that.
    Mr. Rogers. Based on your experience, is that kind of 
``teeth,'' as you put it, in the language of these contracts 
already?
    Mr. Cohen. I think there is a ways to go to sharpen the 
teeth a little bit. I think that my experience has been that 
very often the language is not all that clear and very often it 
is an issue that kind of just never gets the attention that it 
needs to have. I think it is worth looking at that.
    Mr. Rogers. You know, it seems to me that that 
recommendation is kind of an administrative recommendation. 
That doesn't really require a policy change from the Federal 
government. Maybe I am wrong, but as you know, this Committee 
has been holding these hearings and conducting these interviews 
and investigations for the last several months in the hopes of 
putting together a report that is going to have a series of 
recommendations in it.
    As far as policy changes--things that you would recommend 
that we look at changing about our Federal policy when it comes 
to these type events and the aftermath--what, if anything, 
would you recommend that we seriously consider as a policy 
change?
    Mr. Cohen. I think that certainly one of the lessons 
learned from our experience in New York is, and this may be 
more administrative than policy, is really thinking through the 
way in which we do oversight of projects and really being smart 
about the kinds of issues that projects typically encounter, 
and tailoring the oversight to the risks that are inherent in 
the particular projects, whether they are in New York or 
California or Florida, and really looking at the real world of 
what it takes to get projects built, and trying to make sure 
that the way in which we are doing oversight really pays 
attention to those kinds of issues.
    We are trying to be very vigilant in lower Manhattan about 
making sure that we are really looking at projects before the 
problems arise, trying to anticipate the risks, trying to see 
what can be done to avoid or mitigate those risks, and not wait 
until it has become such a problem that it becomes very 
difficult to solve.
    Mr. Rogers. Mr. Zinser, did you have a comment?
    Mr. Zinser. Yes, Mr. Chairman. I think what comes to my 
mind are really two things. One I mentioned in my remarks, is 
some way to mandate that disaster funding include money set 
aside for oversight activities, some percentage. FTA's program 
right now, they are allowed to take a 1 percent drawdown for 
oversight activities from any full-funding grant agreement or 
program activity like that. So that would be one thing.
    The other thing I think the committee could consider is 
these projects are so massive and extend out for so many years 
that I think the committee should consider extending a statute 
of limitations on offenses, either the ability to go after the 
contractors for cost recovery efforts or even for criminal 
penalties.
    Mr. Rogers. When you talk about this oversight, these 
boots-on-the-ground, are you referring to the same concept Mr. 
Nestor was describing as far as integrity monitors? Are we 
talking about the same thing?
    Mr. Zinser. Yes, sir. I think that is all in the same 
concept.
    Mr. Rogers. Okay. My time is up. The Chair recognizes the 
Ranking Member, Mr. Meek, for any questions he may have.
    Mr. Meek. Thank you, Mr. Chairman.
    I would like to thank the witnesses for coming before us 
and the testimony that you have given.
    Mr. Zinser, I just want to go right back to many of the 
projects that you have going on in the lower Manhattan area. Do 
you have a tip-line of folks who call with fraud? I guess that 
across the board here. And how does that work and how have you 
advertised individuals, everyday Joes and Sues, to call in when 
they think they see fraud taking place or they know something, 
but they just don't know who to call? Has that been an 
effective measure in helping you prosecute and go after fraud?
    Mr. Zinser. Sir, at the Department of Transportation, we 
have a fraud hotline that we advertise for all of DOT and all 
of our programs, and that is both the phone, email, and a Web 
site. It is my understanding that the command center, Mr. 
Calvosa's operation, has set up a similar hotline. I think it 
is only less than a year in operation or a few months in 
operation. I have also been told that they have taken steps to 
advertise it, but I would probably need to defer to him to give 
you the details of that.
    Mr. Meek. Yes, sir?
    Mr. Calvosa. Congressman, we have established a hotline as 
required by executive orders. It was established back in 
December of 2005. It cover all lower Manhattan construction 
projects. We have taken steps to advertise that hotline by 
creating posters and posting them at the job sites. We have 
also placed stickers on the back of identification access 
cards, giving the workers the phone number. We placed an 
advertisement on the back of a downtown Manhattan summer 
publication, the Community Handbook, a full-page advertisement 
of the hotline poster.
    So we have taken steps and the plan is for the command 
center to receive those allegations that may come in and refer 
them to the appropriate inspector general office handling the 
project.
    Mr. Meek. We had a couple of earlier panels, and maybe you 
had an opportunity to see the one we had at 10 a.m., or be a 
part of that. And when we finish with our report, hopefully all 
of you will get a copy of it. I know the chairman will let you 
know that our record will be open for a number of days as it 
relates to recommendations.
    I know many times, especially in the quote-unquote ``law 
enforcement community,'' or ``we are watching you community,'' 
after an event it is just not natural and it is kind of an 
inside little secret there, it is not natural for law 
enforcement agencies to share information on a normal basis. I 
am not saying you don't have the will or the desire to do so, 
but it is just not a natural thing.
    We find between maybe now going on the fourth panel or 
fifth panel, communications seems to be the tie-in here. One 
policymaker said we can't legislate morals and character; we 
can't legislate folks to meet all at the same coffee keg or 
whatever, or hot water keg or what have you. But we can 
encourage the kind of communications on some of these cases.
    I know some of you work together on a task force looking at 
fraud, how can we get to the bottom of it. But anything towards 
those lines will help us as we try to put forth policy to 
encourage things to happen, like we are trying to do in the 
area of the 9/11 report, first responders, intelligence 
agencies, talking to one another. We have tried to do a lot of 
that here in Washington.
    On this fraud end, it is one of the most frustrating 
pieces, well, part of this committee oversight management, and 
for integration management. It is one of the most difficult 
parts, because we hear a lot about what has already happened, 
and what has happened. And when I look at the statistics here, 
of all of your testimony and the notes from your testimony, you 
all are going after the bad guys and gals, but somebody got 
away. I am thinking a majority, it is almost like speeders. 
When I was a trooper, I stopped five people doing 80 miles per 
hour, and at least 30 of them got by.
    I am saying that somewhere in here, someone has gotten away 
with something and we haven't been able to get that individual 
due to the fact when you have an event, one of you mentioned, 
when you have an event, folks are going to come and they are 
going to try to take advantage of it.
    Of that universe that is out there, is it an issue of 
staffing when it comes down to it? Because as we look at the 
federal agencies that are here, your budgets run based on your 
projection of the need of your office at that time. An event 
takes place, then nine times out of ten you take folks off of 
other priorities and projects and you try to deal with that. 
That is the immediate fire.
    Someone mentioned something about the 1 percent or 
expanding the statute of limitations. I think that is an 
excellent idea. I posed that question yesterday as it relates 
to some federal folks that might have had something to do with 
misleading information. The statute of limitations on that 
should be extended and it is a natural thing and we should do 
it.
    But as it relates to the staffing issue, we are going 
through this now with the Department of Homeland Security and 
with the inspector general's office trying to do on the ground 
in the Gulf right now. They are sending a task force down, but 
I know they rob Peter to pay Paul to do that.
    Any recommendations on how that could happen, when you do 
have an event you know you have to monitor? We know you are 
going to have to put a temporary team there, but to replace 
that team or make that team permanent as it relates to the 
projects that we are talking about, you mentioned several 
years. I mean, it is going to take several years to rebuild.
    Do you have a plan or recommendations on how we can do that 
in a meaningful way, and to be able to justify the expansion of 
government? That is a big debate right now. Government is 
getting bigger. There are a number of folks in Congress that 
would like to see it smaller, but in this case it is protecting 
the taxpayers' money. I don't see them as bureaucrats. I seem 
them as protecting the taxpayers' money when it comes down to 
this kind of oversight.
    Mr. Zinser. Sir, let me try to address that.
    I think one tool that has been talked about here, Mr. 
Nestor talked about it, and hopefully this doesn't sound like 
heresy, but I think that the idea of independent private sector 
IGs is a good idea. You can use cash to go out and retain their 
services. They don't become permanent employees. FTA's process 
is similar to that, with these project management oversight 
contractors who are third-party engineer or consultant-types.
    The key, though, is that the government people then have to 
oversee what those folks are doing, and they have to take 
responsibility. They have to read their reports. They have to 
understand their reports. They have to take action on their 
recommendations. In that way, the federal government, in our 
case, can leverage resources without really building up the 
federal staff level, so to speak.
    Mr. Meek. Okay, thank you.
    Mr. Cohen. Could I just add thing? That is, at least in the 
case of our office, the staffing for our office was provided 
for in that percentage of administrative oversight that was 
embedded in the appropriations legislation. So we are not, as 
you say, robbing Peter to pay Paul in this particular instance. 
This is a dedicated office in lower Manhattan only focusing on 
the lower Manhattan projects, not focusing on the rest of FTA 
business and not depending, in New York at least, on other FTA 
staff who have other commitments.
    So I don't know that it is model that you can apply across 
the board to every situation, but certainly we had an 
extraordinary situation in New York in 2001, and we have an 
unusual situation in that these are 100 percent federally 
funded projects. So I think it was deemed back in 2002 prudent 
to establish an office like this, to make sure that the federal 
investment was being protected, and to make sure that other 
elements of the FTA program were not paying a price for the 
attention that was being paid to the lower Manhattan projects.
    Mr. Meek. Thank you, Mr. Chairman.
    Mr. Rogers. The gentleman's time has expired.
    The Chair now recognizes the Chairman of the Full 
Committee, Mr. King of New York, for any questions he may have.
    Mr. King. Thank you, Chairman Rogers.
    I want to thank all the witnesses for their testimony 
today. Mr. Nestor, through you, I would like to acknowledge the 
tremendous sacrifice made by the Port Authority on September 
11. It was 37 police officers, 38 civilians. Neil Levin was a 
personal friend of mine, and I guess a legend in the police 
department. Captain Cathy Meyers was a neighbor of mine. We 
still talk about her in the neighborhood.
    Let me just ask the four of you really, collectively. We 
are talking about $10 billion in construction works in 
progress, a total of $20 billion over the next several years, 
in really a very confined area, an extraordinary amount of 
construction work. We can understand if there are problems at 
first, you know, after September 11, what went on as far as 
organized crime or corruption.
    But do you feel now that, do all of you feel that you have 
your programs in place to absolutely minimize corruption? Is 
there anything you need from us? And also along those lines, 
with all of the multitude of government and private agencies 
that have some involvement here, do you feel there is 
sufficient cooperation?
    Mr. Nestor. If I may, I would like to answer that question. 
We have our plans in effect now with the other agencies. 
However, there is something I feel that Congress can do for us, 
and that is to legislate the fact that we can fingerprint the 
people going into the site. As of now, we haven't got the 
authority to fingerprint anybody working in the sensitive 
areas, such as like at the airports, JFK, LaGuardia or Newark. 
Anybody who wants to work at that airport has to be 
fingerprinted and run through a criminal history check. We 
can't do that. We don't have that authority. I think that is 
something that would be very, very helpful for us to have.
    Mr. King. Would you have to get that from Congress? Or 
would that be New Jersey and New York?
    Mr. Nestor. It would have to be legislated through 
Congress. I believe it is legislated through Congress for the 
airports.
    Mr. King. It is? Okay. It is certainly something worth 
considering, because again I would think it is as much of a 
threat at the World Trade Center as far as employees as you 
would have at the airport.
    Mr. Nestor. Right.
    Mr. King. I think it is certainly worth considering.
    Any other?
    Mr. Zinser. Yes, sir. I actually do think that the 
relationships that have been established and the systems that 
have been set up and the organizations in place are fairly 
promising in terms of being able to both try to prevent fraud, 
and once we find allegations of fraud, I think the 
communication channels are open sufficiently where we will be 
able to come together to investigate those allegations. So I 
think it is pretty promising.
    Mr. Calvosa. I think with the federal, state and local 
offices we have put together, whose agencies are running the 
projects, who are funding the projects, we have tried to cover 
the base basically in putting a team together to put measures 
in place such as the hotline and the training and the use of 
integrity monitors, as I addressed previously, that this is 
really the way to put best efforts together and the best 
measures to prevent fraud on all these projects.
    Mr. King. On the transportation money, approximately how 
much of it has been spent so far?
    Mr. Cohen. We have, of the $4.55 billion, obligated to 
projects just a little over $4 billion of the $4.55 billion. 
And that is for the Fulton project, the South Ferry project, 
the PATH project, the WTC Security Center that I mentioned in 
my testimony, and the rebuilding of Route 9A West Street. We 
anticipate that we will be making a grant to the Federal 
Highway Administration of an additional $200 million in the 
very near future to pay for the balance of the Route 9A 
project, so that will take us to about $4.2 billion.
    The rest of that money right now we are holding in reserve. 
There is actually some reserve built into some of the project 
budgets of the projects I just mentioned. We have added some 
additional funds into reserve based on our risk assessments and 
based on what we think it is going to cost to complete these 
projects.
    We believe that it is probably going to cost more to 
complete these projects than the current budgets would 
indicate. We believe that it is probably going to take longer 
to complete these projects than their current schedule would 
indicate. That is based on the independent analysis, risk 
analysis that we have done. So we want to make sure that the 
resources are there because these were one-time appropriations, 
and to my knowledge there is no more money after the $4.55 
billion is exhausted.
    Mr. Zinser. Sir, I think, just to answer your question, I 
think about $600 million has actually been spent so far. That 
is my understanding.
    Mr. King. Are there any trends or patterns showing 
themselves that cause concern?
    Mr. Zinser. Unfortunately, I can't tell you that because we 
haven't done that analysis yet.
    Mr. King. Fine, okay. One final question, how much of the 
transportation work--future work--is contingent upon the 
project itself at Ground Zero getting started and/or being 
completed? You know, the reconstruction of the towers.
    Mr. Cohen. Yes. We have had extensive discussion with the 
Port Authority and with the governor's office about making sure 
that the PATH project proceeds. It is almost fully designed. It 
is a very complicated site. There is a lot of interdependence 
between the projects, and there has been a tremendous amount of 
work done to look at design issues and to look at cost-sharing 
issues. But we have sent a very clear message to the state of 
New York that says we want to see the transportation projects 
move forward. We have to get that transportation system rebuilt 
if it is going to support all the rest of the economic 
development that is going on, or that is planned to go on.
    So I am pretty confident that the Port Authority has a 
green light to build their project, even though there is still 
some issues to be worked out with some of the surrounding 
projects.
    Mr. King. Thank you, Mr. Chairman.
    Mr. Rogers. Thank you.
    Mr. Zinser made reference to something that was a common 
theme to what we have heard from earlier panels, particularly 
one from early this morning that had to do with the District 
Attorney's office in Manhattan. That is that in these post-
disaster environments, there is a surge of need that is 
extraordinary and not necessarily going to be a permanent need. 
We were talking this morning in terms of the need to prosecute 
people who take advantage of these circumstances criminally, 
things that you were referring to, Mr. Nestor.
    But once you have prosecuted that surge of cases, the 
demand of that office is going to come back down to normal 
levels of work. In thinking about that principle you made 
reference to a little while ago, that you may just be able to 
contract some of these inspectors or integrity officers from 
outside.
    Mr. Zinser has told us his thoughts that that is a 
practical option. I am curious from the rest of you. Do you 
think it is a practical option for us to make contingency plans 
that in the event of a disaster--whether it is manmade or any 
other kind of disaster--that we will fund third-party 
resources--whether it is prosecutorial resources, engineering 
resources, audit resources--and that would be useful as opposed 
to a burden?
    I will start with Mr. Nestor, and then I would like to hear 
from the rest of you, please.
    Mr. Nestor. I think it is vital that anytime federal money 
goes out that a monitor be in place from the very beginning. I 
don't think we would be having discussions on some of the cases 
that I have discussed if there were a monitor to begin with. I 
think it is vital. I don't know if you should have a cap or 
some amount that goes out, but I believe that you would have a 
monitor monitoring everything. But the monitor also has to 
report to the appropriate inspector general who will decide 
where the prosecution goes, or if there is a prosecution.
    Mr. Rogers. So the fact that the monitor is a private 
resource, in your view, as long as they are being supervised by 
an inspector general who comes under the auspices of the public 
entity, is not a problem, practical problem.
    Mr. Nestor. Not a problem. I think it is a strong tool. In 
fact, we are almost ready to award a monitorship to the $2.2 
billion PATH project now, who will report directly to us. And 
anytime they see anything that they don't feel is right in any 
way, shape or direction, they will report to us, and then we 
will launch appropriate investigations that would be necessary.
    Mr. Rogers. What of the others? Mr. Calvosa?
    Mr. Calvosa. I would have to echo the same statements, Mr. 
Chairman. The subcommittee heard the success story, I believe 
yesterday, of the Department of Investigation's use of 
integrity monitors at Ground Zero after the 9/11 attacks. I was 
part of that operation. I was a member of the Department of 
Investigation at the time. They are vital in supplementing the 
staff of the various investigative offices that could be 
involved, and also the contracting agencies own staff, whether 
they have internal auditors or external auditors.
    Integrity monitors bring together various disciplines, 
including legal, investigative, auditing, accounting, other 
expertise such as possibly engineering, environmental. They 
could bring these various disciplines together to assist that 
agency.
    I have to echo the prior comments also, that they must 
report in to an agency of government, whether it be an 
inspector general's office primarily, for oversight; that they 
do their work and are allowed to do their work, but that they 
receive themselves strict oversight and direction as far as 
where they should be looking, what activities they should be 
taking, and working together with their contracting agency 
itself to develop an overall plan for fraud prevention 
initially, then beyond that, investigative work out in the 
field, auditing work looking at books and records, and bringing 
it all together.
    Mr. Rogers. Mr. Cohen?
    Mr. Cohen. Well, let me say that the FTA, of course, is not 
a law enforcement agency. It is not an investigative agency. We 
are a grant-making agency. Our primary interest is in investing 
federal dollars into good transit projects and making sure they 
are built on time and on-budget. We obviously have an interest 
in making sure that all of those resources go toward what they 
are supposed to be paying for.
    So toward that end, I would say that the notion of 
integrity monitor, and there are probably other examples of 
this, is an insurance policy for us. It is a way of making sure 
that a much larger federal investment into brick and mortar and 
rail is getting the payoff that it is supposed to be getting.
    So I think that the community of people who know about this 
stuff a lot more than I do have a lot of confidence in this. We 
have indicated that we think this would be an appropriate and 
eligible use of our grant funds should someone ask us to 
provide the funding for that.
    Mr. Rogers. Our Committee has been looking, and the Ranking 
Member and I are both from the coast, and we have to deal with 
the hurricane season every year. It is a reality for us that we 
know it is going to happen. We don't know how big it is going 
to be, but we are going to have them every year. Post-Katrina 
and-Rita, we have looked at the possibility of doing some pre-
event bidding and selecting vendors who will provide 
transportation, debris removal, all those things in advance 
with pre-negotiated prices.
    I offer that reference just to say, do you think that it is 
viable not only for the Federal government to say we are going 
to make monies available, but to work in concert with local 
entities to ask that you have prearranged, or that we 
prearrange, which entities would be eligible, so that we don't 
go out looking for folks to be integrity monitors after the 
attack on whatever city; that we have people regionally or 
whatever.
    Is it practical to set up those kind of assets ahead of 
time, to know who is qualified to do this kind of integrity 
monitoring, to pre-negotiate bids and to keep those renewed 
every year? Hopefully, you never need them, but if you do, you 
have boots on the ground early. Because one of the things that 
we learned yesterday in one of our hearings was that one of the 
few shining stars of FEMA in post-9/11 was their debris removal 
efforts, and that was in large part because of the city 
administration's leadership.
    They were familiar with organized crime in their efforts to 
try to get in on contracts. Because of that experience and the 
fact that they knew how to keep it from happening, we were able 
to see that debris removed in less than half the time than was 
initially projected and under half the cost, because they had 
boots on the ground--as you made reference earlier--people who 
knew what to look for and basically interfered with some 
unscrupulous individuals getting their teeth into that.
    So I am just trying to think if there is a way that we can 
do that in other areas as well, and it seems like this is an 
area ripe for opportunity. I am pleased to hear that you all 
think that using third-party individuals, who are not 
necessarily under the Federal umbrella and who would only be 
temporary, is a practical solution.
    With that, I will cease discussion and turn to my Ranking 
Member for any further questions he may have.
    The gentleman from New York, do you have any additional 
questions?
    Mr. King. Actually, just a statement.
    I want to again thank you for your testimony. All of us 
have a lot invested in this to make sure that it works--people 
from New York and people around the country. There is such an 
enormous amount of money and such a tragic loss of life on 
September 11. So for many reasons, it is important that all 
these projects go forward with as little corruption as 
possible, with as much integrity as possible.
    We know that you are going to do your jobs. So I would just 
ask that if any of you or any of your agencies or departments 
feel you do need additional assistance from us, if you do need 
additional weapons or tools, to come to us and ask. This 
Committee in a bipartisan way is committed to making sure that 
these projects go forward in the right way and the most 
efficient way and most effective way and the most honest way.
    So I am just saying, whether it is Republicans or Democrats 
on this Committee, whether it is the Subcommittee or the full 
Committee, for you to know that all of us are asking you to 
come forward after the hearings are over or whenever, as long 
as these projects are around, to let us know what we can do to 
help you. And also, if you have any thoughts as far as other 
tragedies that may be occurring around the country where you 
feel there are lessons learned from Ground Zero that can be 
applied there, please let us know.
    Again, I thank you for your testimony, and I thank you for 
all the work you have done.
    I yield back, Mr. Chairman.
    Mr. Rogers. I thank the Chairman.
    I would remind you all that the record will be left open 
for 10 days. Members may have additional questions that they 
would like to submit to you. If you do have additional 
questions provided to you, if you would respond to those in 
writing for the record, that would be helpful.
    Chairman King is absolutely correct. It may be a few days 
from now, a few weeks from now, and you just have an idea that, 
you know, this would be a great thing to help us in the future, 
if you would reach out and let us know. This is the Management 
and Oversight Subcommittee, and we are continuously working on 
these kinds of things to try to make sure we improve and we are 
better prepared as a Nation, so we would love to hear from you. 
You are a valuable resource, and we thank you for your time.
    With that, the Committee is adjourned.
    [Whereupon, at 3:07 p.m., the subcommittee was adjourned.]


                            A P P E N D I X

      Hon. Richard Skinner Responses to Hon. Mike Rogers Questions

                         July 12, 2007, Part I

    The Port Authority of New York/New Jersey (Port Authority) issued 
five FEMA-funded contracts--three of which were not competitively bid--
to a private company called New York Waterway to operate ferries 
between New Jersey and New York as an alternative to PATH rail lines 
damaged in the attacks. FEMA authorized at least $29.8 million for 
these contracts. NY Waterways has recently agreed to a $1.2 million 
settlement of civil fraud charges.

    Question 1.: What steps did FEMA take to monitor those funds once 
they were disbursed?
    Answer: With regard to New York Waterways, the investigation was 
conducted by the Office of Inspector General for the Port Authority of 
New York and New Jersey and prosecuted by the United States Attorney's 
Office (USAO) for the Southern District of New York. We respectfully 
request that questions relating to the New York Waterways investigation 
be directed to either the Port Authority OIG or the USAO's office.

    Question 2: What can FEMA do to better track funds it disburses to 
state and local agencies to ensure that the funds are used properly?
    Answer: There is no simple answer to this question. FEMA has been 
deficient in grants management for many years. Grants management is one 
of the major management challenges that the IG has repeatedly 
identified for FEMA, and much of our audit work is focused on 
identifying problems and helping FEMA improve its grants management. 
FEMA has been making progress, but much remains to be done. The states 
have to be a major player in monitoring how state components and local 
governments spend FEMA grant funds. Also, FEMA's regional offices must 
perform more oversight. They must require more accurate progress 
reports from grant recipients and monitor them more closely. Helping 
FEMA accounting for disaster recovery grants will be a major function 
of the new DHS OIG Office of Disaster Assistance Oversight.
    Many of the problems that occurred in the administration and 
management of Federal assistance funding after 9/11, re-occurred after 
Hurricanes Katrina and Rita.

         In your view, has FEMA adequately attempted to address 
        these issues?
    Answer: A major problem with FEMA's implementation of its 
individual assistance program after 9/11 was that FEMA reduced its 
managerial controls over the program. For example, FEMA did not conduct 
home inspections to ensure that applicants actually owned air 
conditioners prior to reimbursing them for repairs and replacement. 
FEMA also provided advanced payments for air quality items rather than 
requiring receipts prior to reimbursing applicants. Similar weaknesses 
occurred in FEMA's individual assistance program implementation after 
Katrina. In April, we reported that FEMA's controls were either not 
implemented or ineffective in preventing overpayments (Reimbursement 
for Other Needs Assistance Items, GC-HQ-06-34). That report covered 
generators, vacuum cleaners, air quality items, and chainsaws. For some 
items, FEMA's payment processing system defaulted to a maximum 
allowable amount, and applicants were reimbursed that amount even 
though they actually paid less for the item. FEMA reimbursed applicants 
for approximately 106,000 generators using an automatic disbursement 
process that, in most cases, paid a fixed amount rather than the amount 
the applicants actually paid for the generators.
    FEMA has generally agreed with our recommendations, for both our 9/
11 work and our Katrina work, to improve managerial controls over its 
individual assistance program. We are aware that FEMA is working toward 
improving the program, but we have not yet evaluated its progress. We 
are conducting a review in fiscal year 2007 of ``Fraud Vulnerability of 
FEMA's Individual Assistance Program.'' Upon completing that review, we 
will be able to more accurately assess FEMA's progress in improving the 
program.

    FEMA officials admitted to the FEMA OIG that FEMA may have 
dispensed 9/11 assistance to people who received assistance for the 
same goods or services from charities. After 9/11, the Office of 
Inspector General and the GAO recommended that FEMA work more closely 
with other government agencies and charities to better coordinate 
responses to future disasters. Yet a GAO report last month (June, 2006) 
found disagreements between FEMA and the Red Cross regarding roles and 
responsibilities.

    Question 1: Did FEMA take steps to implement the recommendations of 
your office after 9/11 to ``coordinate relationships with those 
organizations through protocols such as Memorandums of Understanding to 
alleviate the potential for duplicating benefits?''
    Response: Yes, improvements have been made since the September 11, 
2001, 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.

    Question 2: If so, why did we see these same problems in the 
response to Hurricanes Katrina and Rita?
    Response: Under the National Response Plan (NRP), FEMA is 
designated as the coordinator for Emergency Support Function (ESF)-6, 
Mass Care, Housing, and Human Services. Both it and the American Red 
Cross (ARC) are primary agencies--the ARC for mass care functions and 
FEMA for housing and human services functions.\1\ Both support 
governmental and nongovernmental efforts to address non-medical needs 
of individuals and families affected by an Incident of National 
Significance or other disaster event.\2\
---------------------------------------------------------------------------
    \1\ All other voluntary organizations are positioned under the 
National Voluntary Organizations Active in Disaster as support 
agencies. Other ESF-6 support agencies include: the Departments of 
Agriculture, Defense, Health and Human Services, Homeland Security, 
Housing and Urban Development, Interior, Justice, Labor, 
Transportation, Treasury, Veterans Affairs, General Services 
Administration, Office of Personnel Management, Small Business 
Administration, Social Security Administration, U.S. Postal Service, 
and Corporation for National and Community Service.
    \2\ Mass care includes activities to provide sheltering, feeding, 
and emergency first aid; housing addresses both shorter and longer-term 
needs of displaced disaster victims; and human services covers a range 
of programs, such as crisis counseling, benefit processing for FEMA's 
Individuals and Households Program, disaster unemployment, and 
identifies support for persons with special needs.
---------------------------------------------------------------------------
    Identifying the number and location of evacuees, as well as the 
need for shelters, was initially difficult for FEMA in its ESF-6 role. 
As Hurricane Katrina was the first activation of ESF-6 under the NRP, 
the roles and responsibilities that had been more defined under the 
Federal Response Plan for the mass care function, were not yet clearly 
defined or established under the NRP. Both FEMA and the ARC must work 
together, along with other governmental and nongovernmental 
organizations within the ESF-6 structure, to define the expectations 
each has for its role and area of responsibility. For example, a senior 
ARC official told us it is responsible for the coordination and 
reporting only of ARC mass care operations. FEMA, on the other hand, 
said it was relying heavily on the ARC to coordinate mass care 
operations and reporting that was inclusive of other ESF-6 support 
agencies. Establishing a working group, in coordination and 
consultation with all ESF-6 primary and support agencies, to serve as a 
forum to resolve coordination issues experienced during Hurricane 
Katrina is prudent and would assist in defining roles and realizing 
expectations.
    In our March 2006 report, A Performance Review of FEMA's Disaster 
Management Activities in Response to Hurricane Katrina--OIG-06-32, we 
recommend that FEMA establish an ESF-6 working group to define the 
explicit roles and responsibilities for each agency, develop standard 
operating procedures, and implement a concept of operations plan for 
response activities that address all levels of disasters.
    In response to our recommendation, we were informed that an ESF-6 
working group was established in February 2006 and meets monthly. The 
group is led by FEMA and includes the ESF-6 primary and support 
agencies. Several ESF-6 improvement initiatives are currently underway, 
including developing roles and responsibilities, standard operating 
procedures, and a concept of operations as suggested in our 
recommendation. FEMA said progress has also been made in the ESF-6 
areas of staffing, training and exercises, logistics support planning, 
finalizing the FEMA-ARC Memorandum of Understanding, and improving the 
Disaster Welfare Inquiry system. Further, an ESF-6 Mass Care Policy 
Seminar was held in late June 2006 to further solidify policies and 
operating concepts. Participants included FEMA, ARC, other principal 
non-governmental organizations, applicable other federal agencies, and 
several Department of Homeland Security representatives.
    We will continue to monitor the implementation of these initiatives 
to determine whether FEMA's actions are sufficient to effectively 
resolve our recommendation.

      MR. David J. Varoli Responses to Hon. Mike Rogers Questions

                         July 12, 2007, Part I

    Question 1: In your view, were FEMA's standards sufficient to 
ensure that the potential for fraud was minimized?
    Response: The City of New York has developed a system of governing 
agencies, staffed with professionals, with expertise in design and 
construction, public works contracting, investigation, police, fire, 
sanitation, and traffic enforcement, to name just a few. The terrorist 
attacks of September 11, 2001, were unlike anything the City and our 
nation had ever witnessed. Similarly, the aftermath created by these 
attacks was a new phenomenon for the City and FEMA. Prior to that 
fateful day, FEMA's experience and expertise was in responding to 
floods, hurricanes, tornadoes, and other nature-based calamities and 
disasters. FEMA did not have any experience with a domestic war and the 
devastation that follows a man-made attack. Notwithstanding, FEMA did 
have established guidelines and principles as to how a basic debris 
clean-up job may be contracted and paid for. Due to the unique nature 
of this incident, both in its size and impact, the City consulted daily 
with FEMA representatives in New York, and where appropriate, sought 
guidance, assistance, and, in certain cases, exemptions, from 
headquarters in Washington, D.C. with regards to these guidelines and 
policies. Moreover, the City quickly did its homework and evaluated 
prior natural disasters and how FEMA compensated and audited other 
municipalities' contracting practices.
    The City, on its own initiative, but in consultation with FEMA, 
instituted a number of fraud prevention practices during the clean-up 
of the debris. Some of these fraud prevention practices were instituted 
early on and others evolved as the clean-up of the debris continued 
non-stop, seven days a week, 24 hours a day. These fraud prevention 
initiatives included, among other things, the:
         hiring of independent private inspector generals or 
        the "monitors" for each of the four construction managers and 
        all of the subcontractors in their quadrant;
         installation and use of global positioning systems in 
        trucks carting debris off of the site;
         installation and use of employee card swiping machines 
        to track the arrival and departure times of the contractors' 
        and their employees;
         installation of a 24-hour integrity telephone where 
        anyone could call in and leave an anonymous tip that there may 
        be some fraud-like activity taking place; and
     hiring of KPMG to assist engineering audit officer and his 
team by providing professional staff and expertise in creating 
contracting and audit protocols for what items would be reimbursable 
and what paperwork would be required before a payment could be issued. 
The expenditure of public funds, whether the funding source is from the 
federal, state or City government, is a serious matter to the City. To 
address this issue, the City has established a system of procurement 
and ethic rules to safeguard the integrity of the procurement system 
and protect against corruption, waste, fraud, and abuse. In addition, 
the City has an agency dedicated to finding and preventing fraud in the 
awarding and administering of City contracts -the Department of 
Investigation. Moreover, the City has a system of internal, but 
independent, inspector generals, who are placed at each agency. 
Further, the City has experience working with independent inspector 
generals that have been retained by contractors who seek to be deemed a 
responsible vendor.

    Question 2: Was the hiring of KPMG by the Department of Design and 
Construction (DDC) at the direction of FEMA or was this a DDC 
initiative?
    Response: The City had in place a contract with KPMG to provide 
audit-related professional services. The City issued a task order 
against this pre-established contract and hired KPMG to provide 
professional services to engineering audit officer and his team. This 
was a City initiative. However, the City consulted with FEMA to ensure 
that the costs incurred by KPMG would be reimbursed by FEMA and would 
withstand an audit by FEMA.

          Submitted by Bettina Damiani, July 13, 2006, Part II

                  Analysis of the Liberty Bond Program

Liberty Bonds: Background
    The allocation of $8 billion in triple tax-exempt Liberty Bonds 
($1.6 billion for the creation of residential rental housing and the 
remainder for the development of commercial development) has primarily 
benefited the real estate industry, with the vast majority of bonds 
being used to finance high-end office space and luxury housing.
    The Congressional design of the Liberty Bond program enabled New 
York City and State officials to exclusively subsidize large real 
estate projects while neglecting the city's affordable housing crisis 
and the capital needs of growing, industrial businesses and commercial 
developments outside of Manhattan.

Procedural Issues Relating to Liberty Bonds
         The complexity of distributing resources through four 
        different public authorities diluted the public's ability to 
        participate.
    The New York City Industrial Development Agency, the New York City 
Housing Development Corporation, the New York State Liberty Development 
Corporation and Housing Finance Agency were charged with allocating the 
Liberty Bonds. Fortunately, the 1986 Tax Equity and Fiscal 
Responsibility Act (TEFRA) requires a hearing prior to the allocation 
of private activity bonds. However, each authority differed in its 
practices regarding public hearing announcements and access to 
materials.
    Tracking these disparate hearings and procedures was difficult 
because public hearing notices were posted in different publications 
and places, dates, and times of hearings meetings varied, with the 
exception of the New York City Industrial Development Agency. For 
example:
        March 2003: The New York State Housing Finance Agency refused 
        to provide GJNY with copies of materials prior to a hearing on 
        the allocation of Liberty Bonds. Instead, our Research Analyst 
        was forced to hand-copy materials while being closely watched 
        by an HFA staff member.

        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.

Commercial Use of Liberty Bonds ($6.4 billion)
         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 of commercial space.
    While this tax-exempt financing tool could have served to diversify 
the city's larger economy by supporting smaller, growing businesses, 
nearly all of the commercial Liberty Bonds have been used to finance 
high-end office space for the most profitable companies in the world.
    For instance, $1.65 billion in Liberty Bonds were allocated to 
build a new headquarters for Sachs in Lower Manhattan, where the 
company has been located for the past 13 6 years. With profits of 
$10.10 billion last quarter, clearly wasn't hinging its decision to 
remain downtown on 1 related financing. What the company lacked--and 
needed to make a sound location decision--was a clear understanding of 
the rebuilding process from public officials.
    Not until considered a move to Midtown did the Governor address 
valid security concerns of a proposed tunnel under the site of the new 
building. After resolving the security issue by canceling the tunnel 
plan, received an increase of $650 million from the originally proposed 
$1 billion in Liberty Bonds for a subsidy package $1.65 billion in tax-
exempt bonds, $25 million in 9/11 Community Development Block Grants, 
and up to $150 million in city and state tax breaks.
    On the other hand the nearby low-income, immigrant neighborhood of 
Chinatown incurred severe economic harm from the attacks, especially in 
terms of the garment industry. Yet the Liberty Zone--the area where the 
majority of the Liberty Bonds must be spent-was drawn through the 
center of Chinatown. If bonds were allocated based on need, and more 
projects were eligible, a broader group of firms might have benefited.
    Restricting the majority of the bonds to Lower Manhattan also 
discouraged the use of resources to pursue the laudable policy of 
promoting growth within business districts outside of Manhattan, which 
would have been an appropriate measure considering the widespread 
economic impacts of the attacks and the possibility that back-office 
space would move outside New York City after the attacks.
    Congress did allow for $2 billion of Liberty Bonds to be used 
outside the Liberty Zone and in fact, Good Jobs New York supported the 
use of $114 million in bonds for the developer Forest City Ratner to 
build an office tower in Downtown Brooklyn.
    At the same time, however, Congress' stipulation that projects 
outside the zone must include at least 100,000 square feet of 
commercial space may have encouraged local authorities to subsidize 
projects least in need of public financing. For instance, $650 million 
in Liberty Bonds were awarded to Bank of America to locate to one of 
the most desirable blocks in one of the premier business districts in 
the world--Midtown Manhattan.

Residential Use of Liberty Bonds ($1.6 billion)
         Normally, the Federal government requires housing 
        projects financed with federally tax-exempt bonds to set aside 
        20 percent of the units for affordable housing for a minimum of 
        15 years. This statute did not apply to 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. The projects subsidized by the New 
York Housing Finance Agency set aside only 5% of the units in each 
building for non-market rates--this is different than affordable--as 
these units are targeted to households that earn approximately $94,200 
per year with rents ranging from for a studio to for a three-bedroom.
    These apartments are out of reach to the vast majority of New 
Yorkers, whose median household income is $38,293. This includes New 
York City police officers, firefighters, teachers, rescue and recovery 
personnel who are rightfully totted as the heroes of 9/11 but are 
deliberately excluded from a rebuilt Lower Manhattan.
    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 the state'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.
    Unlike the state, the New York City Housing Development Corporation 
(HDC) did not set aside 5% of the units at a non-market rate. 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 income New Yorkers to the periphery of 
our city. Catering to developments and landlords by creating only 
luxury housing with Liberty Bonds has exacerbated the gentrification 
pressures on Chinatown and the Lower East Side, and contributed to the 
overall unaffordability of Tribeca and the Financial District.

Recommendations
    Understanding that in light of the fact the Liberty Bond program 
could set a standard for the allocation of Federal in future 
disasters--Liberty Bonds were often suggested as a rebuilding tool for 
the hurricane tom Gulf Coast region--GJNY offers the following 
reflections for how the program could have been improved:
         The Liberty Bonds set aside for housing projects 
        should have created a significant percentage of new, truly 
        affordable rental units;
         Large commercial projects which received Liberty Bonds 
        should have been required to create or retain quality jobs that 
        pay a living wage as a condition to ensure employees don't have 
        to rely on public services such as food stamps or Medicaid. Why 
        give a company the advantage of a subsidy without ensuring that 
        the resulting jobs pay a decent wage with full-time hours and 
        health care?
         The Liberty Bond program should have been directed 
        toward smaller projects in Lower Manhattan and in other parts 
        of the city that needed access to tax-exempt financing. Many 
        growing businesses (before and after 9/11) have the potential 
        for growth yet struggle with New York City's hyper competitive 
        real estate market.
         Leaders should take into consideration the fact that 
        the attacks affected the region's economy and businesses in all 
        five boroughs. For example the borough of Queens is home to New 
        York City's two airports. Smaller businesses and their 
        employees that support the airline industry were negatively 
        impacted. Liberty Bonds could have been used as part of a 
        comprehensive strategy for recovery--and long term 
        improvement--of all types of businesses throughout the city.

                         July 13, 2007, Part II

      Mr. Eric M. Thorson Responses to Hon. Mike Rogers Questions

Supplemental question:
    Hon. Mike Rogers. ``You indicated the only lenders that could issue 
STAR loans were those in pre-approved `Preferred Lenders Program.' This 
allowed designated lenders to process SBA-guaranteed loans with reduced 
oversight.
    What types of sanctions are there for preferred lenders who 
improperly issued STAR loans to businesses that were not affected by 9/
11? Have any sanctions been issued?''
    Response: Let me clarify that the STAR Loan Program was available 
to all lenders participating in all components of the Section 7(a) 
program, not only lenders in the Preferred Lenders Program (PLP). As 
set forth in our audit report on the STAR Loan Program, SBA exercised 
virtually no oversight of lenders making STAR loans because the Agency 
did not review whether lenders were making valid determinations that 
borrowers were eligible for STAR loans.
    SBA has various sanctions for lenders that fail to comply with 
requirements for participation in the Section 7(a) Program. These 
include: (1) upon loan default, a complete or partial denial of a 
lender's request for payment of a loan guarantee; (2) termination of a 
lender's right to participate in a component of the Section 7(a) 
program (for example, suspending a lender from the PLP); or (3) 
termination of a lender's right to participate in the Section 7(a) 
program altogether.
    The Agency responded to our STAR loan audit report by advising that 
it did not object to our recommendation which included denial of a STAR 
loan guarantee if a loan defaults and the lender failed to adequately 
document borrower eligibility. SBA, however, is still finalizing 
criteria for evaluating the adequacy of STAR loan justifications and 
have requested additional information from the lender to support the 
STAR determination. Therefore, to date, there have been no partial or 
full denials based on inadequate STAR justifications. Further, we are 
not aware of any instance where the Agency has issued a sanction 
against a lender either for failing to document borrower eligibility or 
for inadequately documenting eligibility.

       Mr. Michael Nestor Responses to Hon. Mike Rogers Questions

                        July 13, 2007, Part III

    Question 1: Does the Port Authority Inspector General monitor the 
appropriateness of sole source contracts such as that issued to 
Waterways?
    Response: The Inspector General does not formally monitor all sole 
source contracts awarded by the Port Authority.

    What does that review entail? Our Audit Department, which is part 
of the Inspector General's Office, performs procurement audits, which 
include examining the propriety of the type of procurement they are 
auditing, which include sole source procurements. The Audit Department 
also reviews on a monthly basis, all items on the Commissioner's Board 
agenda, and if a sole source is included, there is some discussion 
about that item.

    Question 2: Would you please describe your office's Ethic's and 
Integrity Training program?
    The Integrity Awareness Program includes a power point presentation 
that reviews for employees their responsibility to abide by the Port 
Authority's Ethical Standards and the consequences of their failure to 
do so. A review of the some of the common violations is discussed, for 
example, gratuities, bribery, and conflicts of interest.
    The Program explains. the three primary reasons why people make bad 
decisions: financial pressure, rationalization and opportunity; 
emphasizes implications of these decisions: financial loss, 
embarrassment, incarceration and failure to meet their responsibilities 
to the Port, co-workers and themselves.
    The Program explains, in laymen's terms, Internal Controls and why 
they are important. The objective is early prevention, diagnosis and 
resolution, thereby avoiding a potential loss of the Port's most 
valuable asset: its employees.

        a. Have you seen a decrease in employee violations since this 
        training was initiated?
        We have seen a decrease in employee violations in one 
        particular area of the agency, toll collectors. We have 
        concentrated our efforts in this area over the last few years 
        making a number of arrests for stealing. The number of 
        violations has decreased dramatically. We attribute that 
        decrease to the deterrent effect that the arrests have offered, 
        the awareness training provided, as well as increased oversight 
        by management.

        Has the number of investigations decreased since its 
        implementation?
        In fact we've seen the number of investigations increase 
        because the trainings have prompted a number of the employees 
        that attended the training to contact the office with 
        information of wrongdoing.
        b. In your written you advised the Committee that Ethics and 
        Integrity training is being provided to contractors in addition 
        to Port Authority employees.

        Is this training mandated by Port Authority or is it voluntary?
        While the training is not mandated by the contract between the 
        Port Authority and the contractors, each contractor has readily 
        cooperated by attending it, and it is anticipated that all 
        future contractors awarded contracts will attend without 
        objection.

       Mr. Todd J. Zinser Responses to Hon. Mike Rogers Questions

                             July 13, 2006

    This is in response to the questions attached to your August 17, 
2006 letter regarding our July 13, 2006 testimony, Lower Manhattan 
Reconstruction: Lessons Learned from Large Transportation Projects.
    As reported in our testimony, we are now stepping up our oversight 
of all 5 Lower Manhattan recovery projects:
         The Route 9A/West Street Project,
         The Permanent World Trade Center PATH Terminal,
         The Fulton Street Transit Center,
         The South Ferry Terminal Station, and
         The World Trade Center Vehicle Security Center.
    Specifically, on August 28, 2006, we announced a new effort to 
perform major project monitoring for all of these Lower Manhattan 
recovery projects. The primary objectives of this effort will be to 
assess (1) the status of each project, including costs, funding, 
schedules, and management and (2) any risks that may adversely impact 
their completion. As part of the monitoring effort, the team will look 
at issues related to the Lower Manhattan Recovery Office’s 
oversight of these projects, including coordination between FTA and 
FHWA on the Route 9A/West Street Project, and the activities of the 
project management oversight contractors that are assigned to each 
project.
    Our responses to your two questions follow.

    Question 1: Do the roles and responsibilities of FTA and FHWA for 
the Route 9A Project complicate your oversight procedures?
    To date, the dual responsibilities of the Federal Transit 
Administration (FTA) and the Federal Highway Administration (FHWA) have 
not hindered our ability to review the Route 9A/West Street project. As 
we discussed in our written statement, a portion ($287 million) of the 
$4.55 billion in Lower Manhattan recovery funds that FTA is overseeing 
is dedicated to the Route 9A/West Street Project, along with $65 
million in FHWA emergency relief funds. Accordingly, FTA and FHWA share 
oversight. Federal oversight for the other 4 projects that are being 
funded with the $4.55 billion is being provided solely by FTA, so 
coordination between FTA and FHWA is not an issue with these projects. 
FTA created the Lower Manhattan Recovery Office, which is separate from 
FTA's New York field office, to oversee use of the $4.55 billion.
    FTA and FHWA executed two Memoranda of Agreement (MOA) regarding 
the Route 9A/West Street Project in the last two years to provide for 
the transfer of funds and to outline the oversight responsibilities of 
each agency for each segment. The MOAs clearly distinguish the roles of 
FTA and FHWA to ensure the projects are completed on-time and within 
budget.
    As the agency responsible for overall stewardship of the $4.55 
billion, FTA negotiated the MOAs for FHWA to perform additional 
oversight that FHWA normally would not do. For example, FTA assigned a 
project management oversight contractor to the Route 9A/West Street 
Project, which is standard for larger FTA projects but is not typical 
on FHWA projects. The project management oversight contractor is 
charged with regularly monitoring the project and providing feedback to 
Federal officials should any problems arise.

    Question 2: What recommendations would you make to enhance fraud 
prevention and detection?
    As we stated in our testimony, the Department should do all that it 
can to ensure that the taxpayers get the most from the Federal funding 
being invested and that these projects are free of fraud. These high-
priority projects will require vigilant oversight by the Department, 
state and local governments, and transit agencies. In addition to the 
recommendations in our written statement, we would like to make a few 
other key points.

Dedicated Funding for Oversight in Emergency Relief Legislation
    We recommend that future emergency relief legislation specify that 
a portion of the funding be dedicated to audit or other oversight. As 
we discussed in our July 2006 statement, 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. Therefore, it is our view that in 
any future disaster, the Federal agencies in charge of reconstruction 
should receive a sufficient and dedicated amount to provide oversight.
    Of the $4.55 billion in FTA funding dedicated to the Lower 
Manhattan reconstruction, nearly $90 million has been dedicated to 
oversight activities, a move that we support. 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, reporting directly to the Administrator, 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.

Authorization of the Use of Independent Private Sector Inspectors 
General (IPSIGs)
    We believe that future emergency relief legislation should 
authorize agencies to use IPSIGs to supplement their existing oversight 
capabilities as necessary. IPSIGs are monitors with legal, auditing, 
investigative, and loss prevention skills that are employed by a 
government entity to ensure compliance with relevant laws, regulations, 
and contracts. They can help to deter, prevent, uncover, and report 
unethical or illegal conduct.
    As reported in our July 2006 statement, the New York State 
Metropolitan Transportation Authority and the Port Authority of New 
York and New Jersey either have IPSIGs in place, or are in the process 
or hiring IPSIGs, to act as compliance monitors for their respective 
Lower Manhattan Reconstruction projects. More importantly, the Lower 
Manhattan Recovery Office must ensure that its staff receives, reviews, 
and acts upon the findings of any IPSIGs for all of the Lower Manhattan 
projects. To be effective, it is critical that the Federal agencies and 
grantees seriously consider issues raised by IPSIGs and, if warranted, 
take action to address these issues.

Strengthening of Contracting Practices in Emergency Contracts
    Our Hurricane Katrina-related audit work \1\ has led to several 
recommendations for strengthening of emergency-related contracts. We 
believe that some of these recommendations have government-wide 
applicability, and that legislation mandating the issuance of guidance 
applicable to all federal disaster relief would be appropriate. Some 
effective practices include the following.
---------------------------------------------------------------------------
    \1\ Report Number AV-2006-032, ``Internal Controls Over the 
Emergency Disaster Relief Transportation Services Contract,'' January 
20, 2006; Report Number AV-2006-051, Internal Controls Over Payments 
for Emergency Disaster Relief Transportation Services,'' Jun 30, 2006; 
and Report Number MH-2006-065, ``Audit of the Mississippi Department of 
Transportation's Award of Selected Hurricane Katrina Emergency Repair 
Contracts,'' September 6, 2006.
---------------------------------------------------------------------------
         Establish pre-negotiated emergency repair contracts 
        with multiple contractors to ensure quick responses and fair 
        and reasonable pricing prior to the emergency.
         Prioritize emergency repair contracts to strongly 
        encourage states to first use expedited, competitively-bid 
        awards; use negotiated, cost-plus contract awards when 
        competition is not feasible; and use high-risk lump-sum 
        contract awards only under extreme emergency circumstances.
         Require contractors to provide appropriate support for 
        non-competitive price proposals, such as cost and pricing data 
        to support proposals for lump-sum contracts, and advise states 
        to conduct cost/price analysis before award.
         Set baseline fair and reasonable prices prior to 
        emergencies, using such methods as market surveys.
         Provide alternative methods for computing equipment 
        usage rates in negotiated, cost-plus contracts when standard 
        industry information, such as the Rental Rate Blue Book, is not 
        available.
         Require a contract statement of the right to limit 
        Federal participation when contract prices are determined not 
        to be fair and reasonable.
         To receive payment, ensure that a contractor’s 
        invoices show precisely what goods and services it provided and 
        that these invoices are reconciled with documentation prepared 
        by government personnel at field locations that clearly show 
        what good and services were actually received.
    Ensuring proper use of Federal dollars in an emergency situation is 
critical. To accomplish this objective, one possibility is for Congress 
to require a contract provision for independent audits in emergency 
situations. Specifically, Congress could require independent audits of 
(1) incurred costs on cost-plus contracts; (2) contractor justification 
for subcontractor selection in competitive subcontract awards; (3) 
support for verbal quotes over $100,000; and (4) cost and pricing data, 
and the evaluation of the data, in lump-sum awards. These audits could 
be conducted by the Defense Contract Audit Agency (DCAA), which has 
been particularly effective at providing standardized contract audit 
services to Defense Department components and other Federal agencies, 
including the Department of Transportation (DOT). In the past, DOT's 
decision to engage DCAA has been a sound business approach for 
protecting the Federal Government's interests. 
[GRAPHIC] [TIFF OMITTED] T5501.033

                                 
