[House Prints 109-C]
[From the U.S. Government Printing Office]


109th Congress                                                Committee
                            COMMITTEE PRINT                   
 2d Session                                                 Print 109-C
_______________________________________________________________________



 
AN EXAMINATION OF FEDERAL 9/11 ASSISTANCE TO NEW YORK: LESSONS LEARNED 
         IN PREVENTING WASTE, FRAUD, ABUSE, AND LAX MANAGEMENT

                               __________

                             A STAFF REPORT

                      SUBCOMMITTEE ON MANAGEMENT,

                       INTEGRATION, AND OVERSIGHT

                                 of the

                     COMMITTEE ON HOMELAND SECURITY

                     U.S. HOUSE OF REPRESENTATIVES

                             109th CONGRESS

[GRAPHIC] [TIFF OMITTED] TONGRESS.#13


                              August 2006



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                     COMMITTEE ON HOMELAND SECURITY

                  Peter T. King, California, Chairman
DON YOUNG, Alaska                    BENNIE G. THOMPSON, Mississippi
LAMAR S. SMITH, Texas                LORETTA SANCHEZ, California
CURT WELDON, Pennsylvania, Vice      EDWARD J. MARKEY, Massachusetts
    Chairman                         NORMAN D. DICKS, Washington
CHRISTOPHER SHAYS, Connecticut       JANE HARMAN, California
PETER T. KING, New York              PETER A. DEFAZIO, Oregon
JOHN LINDER, Georgia                 NITA M. LOWEY, New York
MARK E. SOUDER, Indiana              ELEANOR HOLMES NORTON, District of 
TOM DAVIS, Virginia                      Columbia
DANIEL E. LUNGREN, California        ZOE LOFGREN, California
JIM GIBBONS, Nevada                  SHEILA JACKSON-LEE, Texas
ROB SIMMONS, Connecticut             BILL PASCRELL, Jr., New Jersey
MIKE ROGERS, Alabama                 DONNA M. CHRISTENSEN, U.S. Virgin 
STEVAN PEARCE, New Mexico                Islands
KATHERINE HARRIS, Florida            BOB ETHERIDGE, North Carolina
BOBBY JINDAL, Louisiana              JAMES R. LANGEVIN, Rhode Island
DAVE G. REICHERT, Washington         KENDRICK B. MEEK, Florida
MICHAEL MCCAUL, Texas
CHARLIE DENT, Pennsylvania
                                 ------                                

         Subcommittee on Management, Integration, and Oversight

                     Mike Rogers, Alabama, Chairman
CHRISTOPHER SHAYS, Connecticut       KENDRICK B. MEEK, Florida
JOHN LINDER, Georgia                 EDWARD J. MARKEY, Massachusetts
TOM DAVIS, Virginia                  ZOE LOFGREN, California
KATHERINE HARRIS, Florida            SHEILA JACKSON-LEE, Texas
DAVE G. REICHERT, Washington         DONNA M. CHRISTENSEN, U.S. Virgin 
MICHAEL MCCAUL, Texas                    Islands
CHARLIE DENT, Pennsylvania           BENNIE G. THOMPSON, Mississippi Ex 
CHRISTOPHER COX, California Ex           Officio
    Officio

                             Majority Staff

            Michael J. Russell, Subcommittee Staff Director
        Heather E. Hogg, Subcommittee Professional Staff Member
           Julie Schmidt, Subcommittee Legislative Assistant
                        Matthew McCabe, Counsel
                       Kerry A. Kinirons, Counsel
                   Danielle Rosengarten, Legal Intern
                    Michael S. Twinchek, Chief Clerk

                             Minority Staff

          Rosaline Cohen, Counsel and Subcommittee Coordinator
            Cherri L. Branson, Senior Investigative Counsel
                       Jeffrey E. Greene, Counsel
               Todd A. Levett, Professional Staff Member

                            Fellow/Detailee

 Ken Vogel, Legislative Fellow, American Political Science Association
      Joanne Madden, Supervisory Special Agent, Federal Bureau of 
                             Investigation
                         Letter of Transmittal

                          House of Representatives,
                            Committee on Homeland Security,
                                   Washington, DC, August 10, 2006.
    To the Members of the Committee on Homeland Security: Last 
December, I tasked the Subcommittee on Management, Integration, 
and Oversight to conduct an examination of allegations of 
waste, fraud, and abuse of Federal funds provided to New York 
in the aftermath of the September 11th attacks. Attached for 
your review is the Subcommittee's report entitled, ``An 
Examination of Federal 9/11 Assistance to New York: Lessons 
Learned in Preventing Waste, Fraud, Abuse, and Lax 
Management.''
    I urge you to examine this bipartisan report, which sets 
forth the findings of the Subcommittee's six month review and 
proposes legislative changes to strengthen Federal assistance 
programs for use in the aftermath of future disasters. I look 
forward to working with you as we seek to improve Federal 
disaster assistance programs in light of this and other recent 
reports of waste, fraud, and abuse in these programs.
            Sincerely,
                                             Peter T. King,
                                                          Chairman.

                         Letter of Transmittal

        House of Representatives, Committee on Homeland 
            Security, Subcommittee on Management, 
            Integration, and Oversight,
                                    Washington, DC, August 9, 2006.
    To the Chairman of the Committee on Homeland Security: It 
is our pleasure to present you with a bipartisan staff report 
entitled ``An Examination of Federal 9/11 Assistance to New 
York: Lessons Learned in Preventing Waste, Fraud, Abuse, and 
Lax Management.''
    Forwarded by Members of the Subcommittee on Management, 
Integration, and Oversight, this report details the 
Subcommittee's examination into the use and misuse of 
approximately $20 billion in Federal assistance allocated to 
New York to respond to, recover from, and rebuild after, the 
terrorist attacks of September 11, 2001.
    Additionally, the report sets forth the findings of the 
Subcommittee's six month review, which culminated in a series 
of three Subcommittee hearings held on July 12 and 13, 2006. 
The Subcommittee hearings focused on issues of response, 
recovery, and rebuilding, taking testimony from 22 witnesses 
representing Federal, State, and local government agencies, 
non-profit aid organizations, business groups, and government 
watchdog groups.
    It is our hope that findings contained in this report will 
form the basis of Federal legislation implementing lessons 
learned from the 9/11 experience in New York City. If 
implemented, the reforms may deter and prevent fraud in future 
major disasters that require a Federal response.
    We appreciate your consideration of this report, and look 
forward to working with the Members of the full Committee to 
pass legislation implementing recommendations contained in the 
report.
            Sincerely,
                                   Mike Rogers,
                                           Chairman, Subcommittee on 
                                               Management, Integration, 
                                               and Oversight.
                                   Kendrick Meek,
                                           Ranking Member, Subcommittee 
                                               on Management, 
                                               Integration, and 
                                               Oversight.
                                   John Linder.
                                   Mark E. Souder.
                                   Katherine Harris.
                                   Dave G. Reichert.
                                   Michael T. McCaul.
                                   Sheila Jackson-Lee.
                                   Bill Pascrell, Jr.
                                   Bennie G. Thompson.


                            C O N T E N T S

                              ----------                              
                                                                   Page
 I. Introduction:
        The Need for Oversight...................................     3
        The Subcommittee's Examination...........................     4
        Accounting for the $20 Billion...........................     5
        Subcommittee Findings....................................    11
II. Response:
        Tragedy Prompted Unprecedented Response, New Approaches..    12
        Debris Removal: Formidable Effort for Monumental Task....    14
        Testing and Cleaning.....................................    23
        Individual Assistance....................................    23
        Mortgage and Rental Assistance...........................    26
        Crisis Counseling........................................    27
        Unemployment Assistance..................................    28
        Temporary Transportation.................................    29
        Coordination Between and Among the Federal Government, 
            Charities, and Voluntary Agencies....................    29
III.Recovery:

        Federal Government Reaction..............................    32
        Housing and Urban Development Community Development Block 
            Grant-Funded Programs................................    34
        Business Recovery Grants.................................    38
        Residential Grant Program................................    39
        Job Creation and Retention Program.......................    40
        Small Firm Attraction and Retention Grant Program........    40
        Small Business Administration Programs: STAR Loan Program    41
        Disaster Loans...........................................    42
        Department of Labor Programs.............................    42
IV. Rebuilding:
        Five ``Mega-Projects'': Lower Manhattan's Transportation 
            Infrastructure.......................................    44
        Internal Controls........................................    55
        External Controls........................................    56
 V. Conclusion.......................................................58

                               Appendices

A. Agency Budget Tables..........................................    61
B. Convictions for Fraudulent Activity...........................    67
C. Summary of Lower Manhattan Development Corporation Commitments 
  to the Revitalization of Chinatown.............................    71
D. Prepared Witness Statements for the Subcommittee on 
  Management, Integration, and Oversight hearings ``An 
  Examination of Federal 9/11 Assistance to New York: Lessons 
  Learned in Fraud Detection, Prevention, and Control.''.........    75
    Part I--Response--July 12, 2006..............................    77
    Part II--Recovery--July 13, 2006.............................   145
    Part III--Rebuilding--July 13, 2006..........................   179
E. Acronyms......................................................   200


109th Congress                                                Committee
                            COMMITTEE PRINT
 2d Session                                                 Print 109-C

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




AN EXAMINATION OF FEDERAL 9/11 ASSISTANCE TO NEW YORK: LESSONS LEARNED 
         IN PREVENTING WASTE, FRAUD, ABUSE, AND LAX MANAGEMENT

                                _______
                                



 Mr. Peter T. King, from the Committee on Homeland Security, submitted 
                             the following

                              STAFF REPORT

                              Introduction

    The September 11, 2001, terrorist attacks in New York City, 
Northern Virginia, and Southwestern Pennsylvania resulted in 
what was, at the time, the costliest disaster in the history of 
the United States. The financial and emotional toll of the 
attacks were especially felt in New York City, where Al-Qa'ida 
hijackers crashed two passenger jets into the World Trade 
Center. The attack collapsed the twin towers, killing 2,749 
people,\1\ injuring thousands more, and leaving many others 
homeless. Indeed, New York City witnessed the elimination of as 
many as 100,000 jobs,\2\ and dealt with the need to remove 1.63 
million tons of debris \3\ strewn across 16 acres of Lower 
Manhattan, and repair damage to major electrical, communication 
and transportation infrastructures.
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    \1\ Subcommittee Staff Telephone Interview with Ms. Ellen Borakov, 
Director of Public Affairs, New York City Medical Center Office of the 
Chief Medical Examiner, conducted Aug. 8, 2006.
    \2\ The New York State Assembly Ways and Means Committee estimated 
that of the 125,300 jobs lost in New York in the 4th quarter of 2001, 
80 percent resulted from the 9/11 terrorist attacks. U.S. General 
Accounting Office, Review of Studies of the Economic Impact of the 
September 11, 2001 Terrorist Attacks on the World Trade Center, GAO-02-
700R, May 29, 2002 at 13 citing New York State Assembly Ways and Means 
Committee, ``New York State Economic Report,'' Mar. 2002.
    \3\ Review of EPA and FEMA Responses to the September 11, 2001 
Attacks Before the Senate Comm. on Environment and Public Works, 107th 
Cong. (2002) (statement of Mr. Joseph Allbaugh, Director, Federal 
Emergency Management Agency) (hereinafter Allbaugh Written Testimony).

[GRAPHIC] [TIFF OMITTED] T9452.001

    The response to the disaster was remarkable. At the urging 
of the New York Congressional Delegation, the President 
requested and Congress appropriated approximately $20 billion 
to the State of New York to assist the response, recovery, and 
rebuilding efforts in the wake of the attacks. Congress pressed 
the Federal agencies responsible for administering the disaster 
relief to expeditiously process funds so that the funds would 
reach those impacted by the attacks as quickly as possible, and 
granted the agencies greater flexibility to do so. Federal 
agencies, in turn, found themselves in the difficult position 
of using existing disaster recovery programs in unfamiliar 
ways, implementing new programs, and stretching existing 
authority to take on new tasks.\4\
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    \4\ Neither the Federal Emergency Management Agency (FEMA) nor the 
Environmental Protection Agency (EPA) had previously coordinated post-
disaster indoor contaminant-cleaning efforts and neither was 
specifically authorized to do so. However, working together, the 
agencies undertook such an effort in New York City after the September 
11th terrorist attacks under FEMA's Stafford Act debris removal 
authority. Federal Emergency Management Agency Office of Inspector 
General, FEMA's Delivery of Individual Assistance Programs: New York--
September 11, 2001, Dec. 2002 at 25 (hereinafter FEMA's Delivery of 
Individual Assistance Programs).
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    Agencies loosened regulations and expanded eligibility for 
programs, some of which dispensed more assistance to victims of 
September 11, 2001 (9/11) in New York than they had in response 
to all previous disasters combined.\5\ To date, Federal 
agencies, partnering with State and local agencies, have 
disbursed approximately $13.7 billion of these funds for 
services ranging from treating the injured and providing 
temporary housing to removing 100,000 truckloads of debris.\6\ 
Funds have also been used to provide assistance to unemployed 
workers and affected businesses, and to rebuild the 
transportation, communication, and utility infrastructures of 
Lower Manhattan. The majority of the balance of the $20 billion 
is dedicated to the rebuilding of Lower Manhattan's 
transportation infrastructure.
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    \5\ Prior to 9/11, the largest Department of Housing and Urban 
Development (HUD) Community Development Block Grant (CDBG) 
appropriation for disaster recovery was about $500 million, which was 
the amount allocated for both the 1997 Midwest floods and 1994 
Northridge, California earthquake. Subcommittee Staff briefing with Mr. 
Jan Opper et al., Director of Disaster Recovery and Special Issues, 
U.S. Department of Housing and Development, May 26, 2006, in 
Washington, D.C. (hereinafter Opper Briefing). In addition, from the 
inception of FEMA's Mortgage and Rental Assistance Program until 9/11, 
the agency has awarded only $18.1 million to victims of 68 declared 
disasters, compared to $76 million to the victims of 9/11 in New York. 
See, FEMA's Delivery of Individual Assistance Programs, supra note 4 at 
9.
    \6\ Allbaugh Written Testimony, supra note 3.
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    In addition to governmental assistance, charities assisting 
in the recovery from the attacks also received unprecedented 
donations and dispensed more and broader services than for any 
previous disaster.\7\ The role of these charities and issues 
related to disbursement of Federal assistance are discussed 
herein.
---------------------------------------------------------------------------
    \7\ U.S. General Accounting Office, More Effective Collaboration 
Could Enhance Charitable Organizations' Contributions in Disasters, 
GAO-03-259, Dec. 19, 2002 at 7 (hereinafter More Effective 
Collaboration Could Enhance Charitable Organizations' Contributions in 
Disasters).
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                         THE NEED FOR OVERSIGHT

    Even as New Yorkers and all levels of government struggled 
to respond to this event, some sought to take advantage of the 
tragedy for financial gain. From a man who collected nearly 
$300,000 in Federal loans after claiming his two 
telecommunications companies, which moved out of the World 
Trade Center in July 2001, sustained physical damage in the 
attacks,\8\ to two employees of the New York City Medical 
Examiner's Office accused of embezzling Federal funds intended 
to help identify victims' remains,\9\ unscrupulous individuals 
tried any number of ways to take advantage of the massive 
outpouring of Federal and private funds in response to the 
disaster.
---------------------------------------------------------------------------
    \8\ U.S. Small Business Administration, Summary of Convictions--
Fraud Related to 9/11 Disaster Loans, received by Subcommittee Staff on 
Feb. 9, 2006.
    \9\ Press Release, U.S. Attorney for the S.D.N.Y., U.S. Arrests Two 
Former City Employees for Defrauding New York City Medical Examiner's 
Office (Dec. 9, 2005).
---------------------------------------------------------------------------
    This report is intended to fill a vacuum in the nation's 
understanding of how the money set aside for New York City was 
administered. Despite documented instances of fraud, waste, and 
abuse, no Congressional Committee or other government oversight 
group has ever catalogued the full nature and scope of the 
Federal assistance to New York City. This report also develops 
recommendations to enhance response and improve controls across 
the Federal government, based on the lessons learned from the 
9/11 response, recovery, and rebuilding effort in New York 
City. To fill this gap, Committee on Homeland Security 
Chairman, Peter T. King, directed the Subcommittee on 
Management, Integration, and Oversight (MIO) to conduct a 
comprehensive examination of how the $20 billion in Federal 9/
11 assistance directed to New York City was utilized, with 
special emphasis on allegations of mismanagement that resulted 
in waste, fraud, and abuse.\10\ This report sets forth the 
findings of the Subcommittee's six month investigation, which 
culminated in a series of three Subcommittee hearings held on 
July 12 and 13, 2006. These hearings focused on issues of 
response, recovery, and rebuilding, and involved testimony from 
22 witnesses representing Federal, state, and local government 
agencies, non-profit aid organizations, business groups, and 
government watchdogs.\11\ The findings contained in this report 
are the basis for forthcoming legislation to act upon the 
lessons learned from the 
9/11 experience in New York City as detailed in this report.
---------------------------------------------------------------------------
    \10\ In December 2005, the New York Daily News published a lengthy 
series of articles outlining a wide range of examples and allegations 
of misuse of 9/11 funding. Examples included the influence of organized 
crime in debris removal at Ground Zero, the use of ghost and shadow 
employees by contractors, kick-backs and embezzlement, unfair 
allocation of recovery funds to big businesses, and inappropriate uses 
of 9/11 disaster assistance funds.
    \11\ The prepared statements submitted by 20 witnesses for the 
Subcommittee's series of hearings on July 12-13, 2006 may be found at 
the end of this Report. Two additional statements submitted for the 
record from the Honorable Michael J. Garcia, United States Attorney for 
the Southern District of New York, and the Honorable Thomas McCormack, 
Chairman of the New York City Business Integrity Commission, may be 
found in the forthcoming official hearing record available from the 
Government Printing Office.
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                     THE SUBCOMMITTEE'S EXAMINATION

    The Subcommittee's bipartisan review included a 
retrospective examination of funding already spent on the 
initial response to the 9/11 attacks; an examination of funds 
spent on the recovery of businesses and residences in Lower 
Manhattan; and a prospective examination of fraud controls in 
place for the balance of 9/11 monies to be spent on rebuilding 
Lower Manhattan's infrastructure.
    In preparation for this report, the Subcommittee reviewed 
allegations of waste, fraud, and abuse in the media, government 
audits, and analyses by community and watchdog groups. 
Subcommittee staff also conducted numerous site visits, 
interviews, and conference calls with officials from Federal, 
state, and local agencies that received Federal 9/11 funds, or 
investigated or prosecuted cases involving the funds. Through 
its analysis of grant data, indictments, Federal audits, and 
reports by media and government oversight groups, the 
Subcommittee has catalogued specific cases of fraud, waste, and 
abuse; determined whether assistance could have been disbursed 
more efficiently or effectively; and assessed various anti-
fraud mechanisms that were put in place after 9/11 for possible 
replication in future disaster assistance situations.
    The Subcommittee closely scrutinized--and this report 
discusses--the projects to be funded by the more than $6 
billion remaining from the $20 billion, and the controls in 
place to ensure the money is spent appropriately and 
efficiently. The Subcommittee has also compiled a 
representative sampling of indictments, prosecutions, and 
convictions for frauds perpetrated with respect to 
9/11 assistance funds. In addition, the Subcommittee has 
completed an accounting of all Federal funds, with technical 
assistance from the Government Accountability Office (GAO).

                     ACCOUNTING FOR THE $20 BILLION

    On September 14, 2001, Congress passed the Emergency 
Supplemental Appropriations Act for Recovery from and Response 
to Terrorist Attacks on the United States, FY 2001 (P.L. 107-
38), which made available $40 billion ``to provide assistance 
to the victims of the attacks,'' to improve local preparedness 
for mitigating and responding to the attacks, to pursue and 
prosecute those involved in terrorism, to increase national 
security, and to repair public facilities and transportation 
systems damaged by the attacks. The Act further provided that 
not less than one half of the $40 billion would be designated 
for ``disaster recovery activities and assistance related to 
the terrorist acts in New York, Virginia, and Pennsylvania on 
September 11, 2001.'' The $20 billion in Federal assistance 
appropriated to the New York City area to address the impact of 
the 9/11 attacks marked the first time the Federal government 
set a target amount of disaster assistance near the beginning 
of the response and recovery process. The appropriations Act 
also stipulated that the remaining $20 billion would be 
obligated ``only when enacted in a subsequent emergency 
appropriations bill as a condition for the availability of 
funds.''
    Over the subsequent 11 months, Congress passed several 
bills to provide an estimated $20 billion in direct funding and 
tax benefits. Specifically, Congress approved the Department of 
Defense Appropriations Act (P.L. 107-117) on January 10, 2002, 
as well as a second emergency supplemental appropriation (P.L. 
107-206), on August 2, 2002.
    The $20 billion in Federal aid slated for New York was 
provided primarily through four channels: the Federal Emergency 
Management Agency (FEMA), the U.S. Department of Housing and 
Urban Development (HUD), the U.S. Department of Transportation 
(DOT), and the Liberty Zone tax benefits--a set of tax benefits 
targeted to stabilize and restore the economy of Lower 
Manhattan. Together, these sources provided 96 percent, or 
$19.63 billion, of the committed Federal aid to the New York 
City area.
    In its October 2003 report, the GAO provided a preliminary 
review of the use of the $20 billion grouped in the following 
categories:
     Initial Response--search and rescue operations, 
debris removal, temporary utility system repairs, etc. One 
billion dollars was set aside to establish an insurance fund to 
cover claims resulting from debris removal operations.
     Compensation for Losses--individual assistance for 
housing costs, loans to businesses to cover economic losses, 
and funding for disaster-related costs incurred by New York 
City and New York State.
     Infrastructure Restoration and Improvement--
restoration and enhancement of transportation systems in Lower 
Manhattan and permanent utility repair.
     Economic Revitalization--Liberty Zone tax 
benefits, small business loans, and business attraction and 
retention programs.
    As part of its examination, the Subcommittee obtained an 
updated accounting from each Federal agency involved in 
disbursing 9/11 funds. Based on that financial data, and with 
technical assistance from GAO, the Subcommittee updated GAO's 
original four categories as depicted below.
[GRAPHIC] [TIFF OMITTED] T9452.002

    Based on the financial data provided by Federal agencies 
and a review of appropriations acts, the Subcommittee compiled 
the accounting of funds, with Federal agencies ranked in order 
of the amount of 9/11 funds for which they are responsible 
(highest to lowest).
[GRAPHIC] [TIFF OMITTED] T9452.003

    The Subcommittee further analyzed the current status of 9/
11 funds appropriated to the primary Federal agencies involved 
in the response, recovery, and rebuilding of New York City 
after the terrorist attacks. This analysis includes the total 
amount of funds committed, obligated, and disbursed.\12\ The 
chart below reflects these three categories for the primary 
Federal agencies involved.
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    \12\ For the purposes of this report, funds are ``committed'' once 
they are designated for a specific purpose. ``Obligated'' funds have 
been set aside for a particular contract or purchase order. Commitments 
and obligations may also differ due to rescissions, transfers (once 
programs close), and de-obligations. ``Disbursed'' means the funds have 
been expended.

               BREAKOUT OF FUNDING IDENTIFIED FOR NEW YORK
                    [Figures in millions of dollars]
------------------------------------------------------------------------
    Major Contributing Agency       Committed    Obligated    Disbursed
------------------------------------------------------------------------
FEMA............................       $8798          $8780        $5798
HUD.............................        3107           3107         1723
DOT.............................        2353           1850          490
SBA.............................         197.1          182          181
LABOR...........................         241            105          103
HHS.............................         121            121          121
DOJ.............................          75             70           68
                                 ---------------------------------------
      Total.....................      14,892.1       14,215        8,484
------------------------------------------------------------------------
Figures Represent Approximate Amounts.
Column Names Are Intended for Representational Purposes Only.

    The Subcommittee focused its examination on the controls 
implemented by the Federal agencies to which Congress 
appropriated the greatest amount of funding, as well as the 
state and local agencies and charitable organizations with 
which those Federal agencies partnered. The Federal agencies 
and the amounts they were appropriated are as follows:
          Federal Emergency Management Agency (FEMA) $8.799 
        billion
          U.S. Department of Housing and Urban Development 
        (HUD) $3.483 billion
          U.S. Department of Transportation (DOT) $2.366 
        billion
          U.S. Small Business Administration (SBA) $250 million
          U.S. Department of Labor (DOL) $249 million
          U.S. Department of Health and Human Services (HHS) 
        $120 million
          U.S. Department of Justice (DOJ) $75 million
    The state and local agencies that disbursed the largest 
amounts of Federal 9/11 funds and, as such, were a major focus 
of the Subcommittee's inquiry, include:
          The Port Authority of New York and New Jersey (Port 
        Authority)
          Empire State Development Corporation (ESDC)
          Lower Manhattan Development Corporation (LMDC)
          New York City Department of Design and Construction 
        (DDC)
    The Subcommittee also examined the roles played by private 
relief agencies, generally, and the American Red Cross, in 
particular, in disbursing assistance, as well as the role FEMA 
played in coordinating the assistance provided by voluntary and 
charitable agencies.

                         SUBCOMMITTEE FINDINGS

    In its examination of these Federal, state, and local 
agencies, as well as voluntary and charitable organizations, 
the Subcommittee carefully considered the balance between the 
need to expeditiously supply assistance to disaster victims, 
and the need to maintain controls over the programs through 
which that assistance is disbursed. It is the sense of the 
Subcommittee that these goals are not mutually exclusive, and 
that both can be accomplished through effective management and 
oversight.
    This report incorporates lessons learned by the 
Subcommittee through its examination of the 9/11 response. 
These lessons are presented as legislative recommendations that 
the Subcommittee believes could improve the management and 
oversight of financial assistance to respond to future 
disasters. The report identifies effective management and 
oversight mechanisms--or ``best practices''--employed in the 
response to 9/11, as well as systemic problems exposed in the 
response that opened the door to waste, fraud, and abuse. The 
report identifies steps that were taken to address some of 
these systemic problems, but also points out instances in which 
problems were not addressed and, as a result, plagued the 
responses to subsequent disasters, most notably Hurricanes 
Katrina and Rita. If these problems are not remedied, they will 
continue to keep the door open to waste, fraud, and abuse in 
the responses to future disasters.
    The major systemic problems, common to disaster response, 
identified by the Subcommittee include:
          (1) lack of information sharing and cooperation;
          (2) inadequate verification prior to disbursing 
        funds;
          (3) duplicative payments;
          (4) relaxed or ineffective controls; and
          (5) weak oversight of procurement.
    The Subcommittee also identified ten ``best practices'' 
used in the aftermath of the September 11th attacks, and urges 
their use in future events:
          (1) private integrity monitors;
          (2) database searches to screen contractors;
          (3) mandatory regular audits;
          (4) dedicated temporary oversight office;
          (5) full-time Independent Coordination Agency that 
        prevents fraud;
          (6) temporary Fraud Prevention Task Force;
          (7) fraud awareness training;
          (8) fraud tip lines;
          (9) controlled electronic access to disaster sites; 
        and
          (10) contractor employee screening.
    In the chapters that follow, this report will not only 
undertake an in-depth discussion of the systemic problems in 
disaster response, recovery, and rebuilding, but will also 
analyze the effectiveness of systems implemented by Federal, 
state, and local agencies, and voluntary organizations to 
prevent waste, fraud, and abuse.
    As our nation approaches the fifth anniversary of the 9/11 
attacks, this report, in a small way, memorializes the 
extraordinary efforts of New Yorkers, as well as personnel on 
the Federal, state, and city levels to respond to an 
extraordinary situation. The lessons learned from their 
experiences provide valuable insight about the importance of 
establishing controls in the provision of disaster assistance. 
The Subcommittee believes the enactment of disaster assistance 
reforms based on lessons learned from the response to 9/11 is 
one way in which something positive can be derived from the 
horrific events of 9/11.

                                Response


        TRAGEDY PROMPTED UNPRECEDENTED RESPONSE, NEW APPROACHES

    The immediate response to the attacks by Americans, 
charitable organizations, and all levels of government was 
unprecedented. The Federal response, directed by FEMA, focused 
on: debris removal at the Ground Zero site; environmental 
testing and cleaning the inside of residences; individual 
assistance, including grants for medical and dental costs, 
funeral costs, transportation needs, and air conditioners and 
other air quality improvement equipment; temporary housing 
assistance to displaced individuals; crisis counseling; 
unemployment assistance; legal services; temporary 
transportation to and from Lower Manhattan; and coordination 
between and among the Federal government and charitable 
agencies.

Unique circumstances and scope of response increased need for oversight

    It is the sense of the Subcommittee that at least four 
unique elements of the 9/11 response in New York City created a 
need for the establishment of more aggressive controls to 
reduce or eliminate waste, fraud, and abuse than had been put 
in place for previous disasters.
    First, FEMA funded 100 percent of all public disaster 
assistance provided to New York. FEMA usually requires state 
and local governments to pay a matching share of up to 25 
percent.\13\ The 9/11 response marked the first disaster 
response for which FEMA announced at the beginning of recovery 
and rebuilding efforts it would fund 100 percent of the public 
assistance program.\14\ FEMA officials are generally reluctant 
to recommend a 100-percent Federal share for rebuilding 
projects because requiring state or local governments to pay 
some percentage of costs creates an incentive for them to 
control costs and root out waste and abuse, FEMA officials told 
the GAO.\15\
---------------------------------------------------------------------------
    \13\ U.S. General Accounting Office, Disaster Assistance: 
Information on FEMA's Post 9/11 Public Assistance to the New York City 
Area, GAO-03-926, Aug. 29, 2003 at 24 (hereinafter Disaster 
Assistance).
    \14\ Id.
    \15\ Id. at 25.
---------------------------------------------------------------------------
    Second, the Federal government appropriated $20 billion for 
New York prior to any estimates of the response, recovery, or 
rebuilding costs. This, in effect, preset the spending level 
for agencies. Eventually, the difficulties agencies experienced 
as they tried to expend $20 billion led Congress to alter the 
range of allowable uses of Federal disaster funds to include 
activities that are not normally permitted under the Robert T. 
Stafford Disaster Relief and Emergency Assistance Act (P.L. 93-
288). The decision to permit FEMA to pay not only New York 
State's and New York City's traditionally reimbursable 
expenses, but also their ``associated costs,'' enabled FEMA to 
spend down the funds more rapidly. Non-traditional uses of 
disaster funds included a public awareness campaign called ``I 
Love New York,'' designed to attract tourists back to the area 
after 9/11, and payments to fund the pensions of New York City 
police and fire department personnel.\16\ When asked by Members 
and staff of the Subcommittee, FEMA and the other Federal 
agencies denied that they felt pressured to spend the $20 
billion.\17\
---------------------------------------------------------------------------
    \16\ Id. at 5.
    \17\ See, House Homeland Security Subcommittee on Management 
Integration and Oversight Holds Hearing on Fraud in September 11 
Assistance: Recovery, CQ Transcripts, July 13, 2006, available at 
http://www.cq.com (last visited Aug. 4, 2006).
---------------------------------------------------------------------------
    Third, Federal agencies utilized existing disaster recovery 
programs for new purposes, implemented new and untested 
programs, expanded their authority to address never-before-
handled tasks, loosened regulations, expanded recipient 
eligibility for certain programs, and utilized some programs to 
a greater extent than in all previous disasters combined. For 
example, prior to 9/11, neither FEMA nor the Environmental 
Protection Agency (EPA) had coordinated post-disaster indoor 
contaminant-cleaning efforts. However, this assistance was 
provided for homes polluted by debris from the World Trade 
Center collapse.\18\ In addition, FEMA's Mortgage and Rental 
Assistance program, a pre-existing program that had been used 
prior to 9/11 to award just $18.1 million to victims of 68 
previously declared disasters, provided $76 million to the 
victims of 9/11 in New York.\19\
---------------------------------------------------------------------------
    \18\ FEMA's Delivery of Individual Assistance Programs, supra note 
4 at 25.
    \19\ Id. at 9.
---------------------------------------------------------------------------
    Fourth, organized crime is reputed to have a continuing 
influence in New York City, particularly in the trucking, 
demolition, and waste disposal industries, which handled the 
bulk of the debris removal from the site of the World Trade 
Center.
    It is the sense of the Subcommittee that the exigent 
circumstances after 9/11 exposed systemic problems pertaining 
to the Federal oversight of immediate disaster response 
programs, grantees, and charities, making the funds susceptible 
to waste, fraud, and abuse. In his testimony before the 
Subcommittee, Department of Homeland Security Inspector General 
(Deputy Inspector General of FEMA at the time of 9/11) Richard 
Skinner stated that ``The fraud, waste and abuse that [occurred 
after 9/11 were] the same types of fraud, waste, and abuse we 
see after every disaster.'' \20\
---------------------------------------------------------------------------
    \20\ Written Testimony submitted by the Honorable Richard Skinner 
before the Subcommittee on Management, Integration, and Oversight 
hearing entitled, ``Federal 9/11 Assistance to New York: Lessons 
Learned in Fraud Detection, Prevention, and Control.'' Part 1 
``Response,'' July 12, 2006, at 6 (hereinafter Skinner Written 
Testimony).
---------------------------------------------------------------------------
    Further, it is the sense of the Subcommittee that the State 
and City governments performed admirably as stewards of Federal 
taxpayer dollars given the extraordinary circumstances, though 
this report identifies a few instances in which the State and 
City could have better handled programs.
    For their part, charities and private organizations 
assisting in the recovery received an outpouring of donations 
and provided more and wider services than for any previous 
disaster.\21\ But the Subcommittee found those services were 
susceptible to fraud and duplication with the assistance 
provided by other voluntary organizations and government 
agencies.
---------------------------------------------------------------------------
    \21\ More Effective Collaboration Could Enhance Charitable 
Organizations' Contributions in Disasters, supra note 7, at 2.
---------------------------------------------------------------------------

         DEBRIS REMOVAL: FORMIDABLE EFFORT FOR MONUMENTAL TASK

    The terrorist attacks of 9/11 left a tangled, burning 
mountain of steel and other debris rising 11 stories above 
street level and descending seven stories below it at Ground 
Zero--the site where the World Trade Center once stood. The 
removal of that 1.63 million tons, or 100,000 truckloads, of 
debris \22\ was a monumental task made more difficult by a 
chaotic mix of grief, urgency, unsafe conditions, some unsavory 
contractors, and the American impulse to volunteer.
---------------------------------------------------------------------------
    \22\ Allbaugh Written Testimony, supra note 3.
---------------------------------------------------------------------------
    While the wreckage continued to burn for three months, \23\ 
debris removal proceeded around the clock. This task was made 
more difficult by the magnitude of the destruction and by 
Ground Zero's unique status as both a disaster site and a crime 
scene. In the first two weeks, debris removal was slowed 
further by the ongoing search for survivors amidst the 
wreckage.\24\ When there was no longer a chance of finding 
survivors, the work proceeded slowly because of the need to 
carefully sort and screen debris for the remains and personal 
effects of victims, as well as criminal evidence.
---------------------------------------------------------------------------
    \23\ Mae M. Cheng and Curtis L. Taylor, WTC Fires Almost Out; FDNY 
Won't Declare Site ``Under Control,'' Newsday, Dec. 20, 2001, at A61.
    \24\ Michael Cooper, A Nation Challenged: The Trade Center; 
Giuliani Declares That Finding Anyone Still Alive in the Rubble Would 
Be ``a Miracle,'' N.Y. Times, Sept. 25, 2001, at B9.
---------------------------------------------------------------------------
    Initially, private contractors from across the country 
poured into New York from as far away as Washington State to 
help with the search and rescue and debris removal work, \25\ 
and most began working without contracts. This frenzied 
environment allowed corrupt subcontractors--including some 
affiliated with organized crime--to infiltrate Ground Zero and 
engage in fraudulent activities. For instance, several 
contractors were accused of diverting debris shipments; 
submitting charges to the government for the work of so-called 
``ghost employees,'' fictitious individuals who were said to 
have worked on the site; and submitting charges for broken or 
non-existent equipment. These illicit activities occurred 
primarily before New York City secured the area and employed an 
innovative system for eradicating waste, fraud, and abuse at 
the site, which included the deployment of private integrity 
monitors known as Independent Private Sector Inspectors General 
(IPSIGs).
---------------------------------------------------------------------------
    \25\ Subcommittee Staff Briefing with Mr. David Varoli, General 
Counsel, New York City Department of Design and Construction, Mar. 20, 
2006, in New York, New York (hereinafter DDC Briefing).
---------------------------------------------------------------------------
    Other difficulties were caused by New York City's inability 
to sign contracts with the private companies handling most of 
the debris removal because private insurers would not cover the 
potential liability claims stemming from the risky work.\26\ 
That discouraged contractors from signing traditional 
contracts. In response, FEMA waived key internal contracting 
controls intended in part to prevent contractors from over-
billing agencies disbursing FEMA funds.
---------------------------------------------------------------------------
    \26\ Disaster Assistance, supra note 13, at 15-16.
---------------------------------------------------------------------------
    Still, the debris removal was completed in less than half 
the time and for about half the cost originally projected. 
Originally expected to take two years \27\ at a cost of $1.2 
billion, \28\ the work was finished in nine months \29\ at a 
cost of $636 million.\30\
---------------------------------------------------------------------------
    \27\ DDC Briefing, supra note 25.
    \28\ Allbaugh Written Testimony, supra note 3.
    \29\ Disaster Assistance, supra note 13, at 12.
    \30\ Allbaugh Written Testimony, supra note 3.
---------------------------------------------------------------------------
    In his September 2002 testimony before the Senate Committee 
on Environment and Public Works, then-FEMA Director Joseph 
Allbaugh lauded the efficiency of the New York City and FEMA 
employees who oversaw the debris removal, which he said was 
performed without serious loss of life or injury. ``Thanks to 
the men and women of the New York City Department of 
Sanitation, Department of Design and Construction along with 
our FEMA employees, they did an extraordinary job by cutting 
that projected cost of debris removal by almost half,'' 
Director Allbaugh said, calling the work ``an incredible 
task.''
[GRAPHIC] [TIFF OMITTED] T9452.004

Organized crime infiltration in the Ground Zero clean-up?

    Because of the urgency of the situation at Ground Zero, the 
New York City Department of Design and Construction (DDC), 
which managed the debris-removal operations, was not able to 
start screening contractors and subcontractors through the New 
York City Vendor Information Exchange System (VENDEX) until 
three months after the attacks.\31\ VENDEX is a database with 
background information on all contractors who bid on New York 
City contracts and subcontracts valued at $100,000 or more, and 
sole source contracts valued at $10,000 or more, and/or whose 
aggregate business with New York City in the preceding 12 
months totals $100,000 or more.\32\
---------------------------------------------------------------------------
    \31\ DDC Briefing, supra note 25.
    \32\ New York Mayor's Office of Contract Services, Contractor 
Responsibility--How the City Ensures that Its Contractors are 
Responsible, available at http://www.nyc.gov/html/moc/html/
contractor.html (last visited August 3, 2006).
---------------------------------------------------------------------------
    The inability to screen companies in this environment 
allowed some subcontractors with links to organized crime or 
records of unsavory business practices, including--according to 
media reports--at least one barred from City or Federal 
contracting, \33\ to receive payments for debris-removal and 
shipping work. Experts testifying before the Subcommittee could 
not verify the accuracy of assertions in the media that at 
least $63.2 million in FEMA funds for Ground Zero cleanup work 
was paid to companies with mob ties.\34\ However, Mr. Neil 
Getnick, a private integrity monitor hired by DDC to monitor 
part of the debris removal, stated that $63.2 million could 
have gone to companies accused of mob ties. Since private 
integrity monitors probed many layers of association, Mr. 
Getnick noted at the July 12, 2006, Subcommittee hearing one 
example where private integrity monitors discovered that a 
subcontractor's father once was indicted--but not convicted--on 
mafia-related charges. Additionally, Mr. Getnick and others 
involved in Ground Zero oversight contended it was possible 
that companies accused of mob ties capably and honestly 
performed the work for which they were paid.
---------------------------------------------------------------------------
    \33\ Laquila Construction is barred from winning contracts for both 
the City of New York and the Federal government. See, Russ Buettner et 
al., Exposed: Map of Ground Zero Spoils: Where the Money Went to Clear 
Trade Center Debris, N.Y. Daily News, Dec. 5, 2005, at 24.
    \34\ Russ Buettner et al., Towers Fell, Mob Schemes Began: How 
Organized Crime Divvied Up Ground Zero Work, N.Y. Daily News, Dec. 5, 
2005, at 4.
---------------------------------------------------------------------------
    Elements of the construction, trucking, demolition, and 
waste disposal industries in New York City have reputed ties to 
organized crime. Without the IPSIGs at Ground Zero, New York 
City Commissioner of Investigations Ms. Rose Gill Hearn said 
``it would have been a free-for-all.'' \35\ Commissioner Hearn 
testified before the Subcommittee that a local prosecutor 
informed her office of an intercepted conversation between two 
organized crime associates. They lamented that the on-site 
presence and close scrutiny of the monitors at the World Trade 
Center was making it impossible for anyone to overbill New York 
City using the usual scams.\36\
---------------------------------------------------------------------------
    \35\ Subcommittee Staff Briefing with Ms. Rose Gill Hearn, 
Commissioner of Investigations, New York City Department of 
Investigations, Feb. 24, 2006, in New York, New York (hereinafter Gill 
Hearn Briefing).
    \36\ Written Testimony submitted by Ms. Rose Gill Hearn before the 
Subcommittee on Management, Integration, and Oversight hearing 
entitled, ``Federal 9/11 Assistance to New York: Lessons Learned in 
Fraud Detection, Prevention, and Control.'' Part 1 ``Response,'' July 
13, 2006, at 12 (hereinafter Gill Hearn Written Testimony).
---------------------------------------------------------------------------

Congress and FEMA adapt to unique circumstances

    FEMA paid the U.S. Army Corps of Engineers $72 million to 
sort debris for remains and personal belongings that could 
identify victims and for criminal evidence related to the 
attacks--an endeavor in which the Federal Bureau of 
Investigation (FBI) also participated.\37\ The sifting 
operation occurred at the Fresh Kills landfill in Staten 
Island, New York. Officials intended for all debris to be 
shipped directly to the landfill by barge and truck. However, 
private integrity monitors found that some truckers diverted 
debris to sell to scrap yards, paused mid-route for long 
periods of time, or otherwise delayed the trip to increase fees 
generated by hourly billing, a practice known as ``cooping.''
---------------------------------------------------------------------------
    \37\ Disaster Assistance, supra note 13, at 14-15.
---------------------------------------------------------------------------
    ``Time and materials' hourly payments, which are generally 
disfavored in government contracting, were necessitated because 
DDC and contractors could not agree on contractual payment 
arrangements after several private insurance companies declined 
liability coverage for the risky work.\38\ New York City asked 
Congress to indemnify it against potential claims stemming from 
most injuries or deaths at Ground Zero in much the same way 
Congress indemnified the airlines against potential lawsuits 
brought by the survivors of 9/11 victims, \39\ but proposed 
legislation was not enacted.\40\ Instead, after the debris 
removal was finished, Congress authorized FEMA to set aside $1 
billion for a government-backed insurance fund to cover 
contractors and New York City for liability claims resulting 
from debris-removal work.\41\ The move was unprecedented but 
could prove necessary in light of the class action lawsuit 
filed on behalf of 8,000 plaintiff firefighters, police 
officers, and construction workers claiming they were harmed by 
exposure to toxic substances while working at Ground Zero and 
seeking compensation from New York City.\42\
---------------------------------------------------------------------------
    \38\ Id. at 15-16.
    \39\ DDC Briefing, supra note 25.
    \40\ World Trade Center Worker and Contractor Protection Act of 
2001, H.R. 3503, 107th Cong. (2001).
    \41\ Pub. L. No. 108-7 (Consolidated Appropriations Resolution, 
2003).
    \42\ Anthony DePalma, 9/11 Suit Tests New York Stand on Immunity, 
N.Y. Times, June 23, 2006, at B1.
---------------------------------------------------------------------------
    Because New York City could not sign traditional contracts 
with the companies removing and shipping the debris, FEMA 
allowed DDC to continue paying contractors on a time-and-
materials basis indefinitely. FEMA's internal guidelines only 
permitted time-and-materials contracting for the first 70 hours 
after a disaster, partly because those contracts do not 
incentivize efficiency and thus become more prone to waste, 
fraud, and abuse.\43\
---------------------------------------------------------------------------
    \43\ Subcommittee Staff Telephone Interview with Mr. Dennis R. 
White, Deputy Special Inspector General, Department of Homeland 
Security, conducted July 5, 2006 (hereinafter White Telephone 
Interview).
---------------------------------------------------------------------------
    ``Time and materials contracting is something that's 
frowned upon in government contracting. It's used only in cases 
of emergencies,'' Mr. Dennis R. White, a Department of Homeland 
Security (DHS) Deputy Special Inspector General who worked in 
the FEMA Office of Inspector General's (OIG) New York City 
field office after 9/11, told Subcommittee staff.\44\ ``The 
problem is that it encourages the contractors to take as many 
hours as possible because they get paid by the hour.''
---------------------------------------------------------------------------
    \44\ Id.
---------------------------------------------------------------------------

Best practice: Private integrity monitoring caught and deterred fraud

    The removal of cost-control incentives on private 
contracts, combined with the chaos at Ground Zero, made it 
exceedingly important for the government to exercise oversight 
and implement stringent controls over debris-removal 
operations. FEMA's OIG asserted that it initially stationed 
people at the four exits of the site of the World Trade Center 
to track the shipments of debris to ensure they were not 
diverted.\45\ On October 4, 2001, the administration of former 
New York City Mayor Rudolph Giuliani announced it had 
dispatched four integrity monitoring companies to oversee the 
four construction management companies hired to clean up the 
four Ground Zero quadrants.\46\ This action came just days 
after a grand jury began hearing testimony about truck drivers 
allegedly diverting debris shipments to scrap yards to sell 
instead of to the landfill to be sifted.
---------------------------------------------------------------------------
    \45\ Id.
    \46\ Jennifer Steinhauer, A Nation Challenged: City Hall, 4 
Companies Are Hired to Oversee Contractors, N.Y. Times, Oct. 5, 2001, 
at B11.
[GRAPHIC] [TIFF OMITTED] T9452.005

    The World Trade Center Integrity Compliance Monitorship 
Program, which was continued by Mayor Giuliani's successor, 
Mayor Michael Bloomberg, hired four private integrity monitor 
companies--Decision Strategies/Fairfax International; Getnick & 
Getnick; Stier, Anderson & Malone; and Thacher Associates--all 
of which were run by former prosecutors. Known as Independent 
Private Sector Inspectors General (IPSIGs) the companies 
employed an innovative approach to contract management first 
utilized in New York in the 1990s for public school 
construction projects. Working with the New York City 
Department of Investigation (DoI), FEMA, and DDC, the IPSIGs 
used forensic auditing, surveillance, interviews, informants, 
global position system tracking of trucks, background checks, 
and other investigative techniques to screen subcontractors and 
ensure they were utilizing the appropriate equipment and 
workers, accurately billing the government, and hauling debris 
to the appropriate destination.
    The private integrity monitors' performance of background 
checks on contractors, using New York City's VENDEX database 
and independent means, proved a useful tool. The checks 
resulted in the indictments by the Manhattan District 
Attorney's office of two principals of a Yonkers carting firm 
working at Ground Zero who allegedly lied about their ties to 
organized crime in documents filed with New York City. The 
private integrity monitors also identified numerous instances 
of over-billing by this firm.\47\
---------------------------------------------------------------------------
    \47\ Id.
---------------------------------------------------------------------------
    Private integrity monitors had never previously been 
deployed on such a large scale \48\ and, by all accounts, their 
deployment in the debris removal context was an overwhelming 
success. Private integrity monitors identified a number of 
contractors with ties to organized crime which were 
subsequently removed from the site, found trucks cooping while 
on the clock, \49\ flagged several attempted frauds that were 
referred for prosecution, recovered $47 million in over-billing 
by contractors and subcontractors, and saved immeasurably more 
money by deterring fraud.\50\
---------------------------------------------------------------------------
    \48\ Gill Hearn Briefing, supra note 35.
    \49\ Subcommittee Staff Briefing with Mr. Neil Getnick et al., 
Independent Private Sector Inspectors General, Mar. 21, 2006, in New 
York, New York.
    \50\ Gill Hearn Written Testimony, supra note 36.
---------------------------------------------------------------------------
    The World Trade Center Integrity Compliance Monitorship 
Program was effective in large part because it was preventive. 
By embedding private integrity monitors with the individual 
contractors, the monitoring program prevented fraud and abuse 
by contractors that were unscrupulous or sloppy in their 
accounting. In addition, the monitoring ensured proper record 
keeping and established internal controls, which created a 
culture of compliance within each contractor's operations and 
ensured accountability to New York City.
    DoI and the monitors took several steps to bolster the 
effectiveness of the monitoring program. First, they met 
regularly with one another and with law enforcement agencies. 
Second, they set up an electronic key-card system to track each 
person who accessed the site. Third, they established a fraud 
hotline, which received 80 tip calls.\51\ Together, these 
controls increased the effectiveness of the private integrity 
monitor program and enhanced the overall vigilance against 
fraud and waste during the debris removal. It is the sense of 
the Subcommittee that private integrity monitors should be 
incorporated into future disaster response oversight, 
particularly in instances requiring debris removal.
---------------------------------------------------------------------------
    \51\ Gill Hearn Briefing, supra note 35.
---------------------------------------------------------------------------
    High-ranking officials in the DHS OIG office said debris-
removal work has always posed oversight problems for FEMA, but 
the removal of debris from Ground Zero was among the agency's 
best run projects.\52\ In the Subcommittee's judgment, that 
success resulted from the presence of private integrity 
monitors and occurred in spite of very challenging conditions.
---------------------------------------------------------------------------
    \52\ Subcommittee Staff Briefing with the Honorable Richard L. 
Skinner, Inspector General, Department of Homeland Security, June 28, 
2006, in Washington, D.C. (hereinafter Skinner Briefing); White 
Telephone Interview, supra note 44. Mr. Skinner stated that debris 
removal poses challenges. Mr. White stated that the 9/11 debris removal 
was among the best ever run.
---------------------------------------------------------------------------

Hard lesson learned: Costly oversight in aerial photography contract

    Not every part of the response phase paralleled the success 
of the private integrity monitoring program. For example, FEMA 
contracted with a photographer to take aerial photographs of 
Ground Zero without checking the photographer's background or 
experience and without including in the contract standard 
language giving FEMA title and ownership of the photographs. As 
a result, the photographer was able to copyright 30,000 
photographs and 34 minutes of video of Ground Zero that he took 
from a New York City Police Department helicopter while also 
receiving $300,000 from FEMA and the DDC. He sold 36 of the 
photographs to LIFE Books, which printed them in a 2002 book. A 
lawyer for the photographer reportedly sent New York City a 
letter warning that it could not use the photographs without 
the photographer's permission.\53\
---------------------------------------------------------------------------
    \53\ Greg B. Smith, Shameful Abuse of 9-11 Footage, N.Y. Daily 
News, Feb. 12, 2006, at 6 (hereinafter Shameful Abuse of 9-11 Footage).
---------------------------------------------------------------------------
    According to an interview the photographer gave to LIFE 
Books, a representative from FEMA called the photographer at 
2:00 a.m. on September 15, 2001, after spotting his ad in a 
phone book, and asked if he had ever taken aerial photographs. 
LIFE Books quoted the photographer as saying:

          I said ``yes,'' and we all know now that I had never 
        taken aerial photos before. I guess the reason I said 
        yes was because I have gotten all kinds of strange 
        calls from my photography business ad in the yellow 
        pages. When you have a yellow pages ad in New York 
        City, you can just imagine the kind of calls you might 
        get.'' \54\
---------------------------------------------------------------------------
    \54\ Interview by Life.com with Gregg Brown, Photographer, New 
York, New York, available at http://www.life.com/life/lifebooks/
amspirit/brown.html (last visited August 3, 2006).

FEMA could not identify the FEMA employees responsible for 
awarding the contract. FEMA did not offer a satisfactory answer 
to the Subcommittee's repeated queries about whether FEMA 
typically includes clauses in contracts ceding title and 
ownership to the agency,\55\ though Mr. Joe Picciano, Deputy 
Director for the FEMA regional office that includes New York, 
testified before the Subcommittee on July 12, 2006, that the 
failure to include such a clause was an oversight.
---------------------------------------------------------------------------
    \55\ According to Adrian Sevier, FEMA does not engage in much 
direct contracting and does not have standard contract language. FEMA 
did not respond to Subcommittee Staff inquiries requesting additional 
information about FEMA contracting practices, generally, or the 9/11 
aerial photography contract, specifically. In a subsequent telephone 
interview in April 2006, a FEMA representative said contractors are 
normally required to cede title and ownership of their work, but also 
said most photographers dealing with FEMA do not give up ownership of 
their photographs. Subcommittee Staff briefing with Mr. Adrian Sevier, 
Acting Deputy General Counsel, Federal Emergency Management Agency, 
Mar. 24, 2006, in Washington, D.C.
---------------------------------------------------------------------------
    The photography began under FEMA's direction on September 
15, 2001.\56\ In November 2001, the DDC assumed the contract 
and asked the photographer to cede title and ownership to New 
York City, which the photographer refused.\57\ The DDC revoked 
the photographer's access to the helicopter on May 10, 
2002.\58\
---------------------------------------------------------------------------
    \56\ Shameful Abuse of 9-11 Footage, supra note 53.
    \57\ DDC Briefing, supra note 25.
    \58\ Shameful Abuse of 9-11 Footage, supra note 53.
---------------------------------------------------------------------------
    The photographs and the video footage were commissioned to 
assist the rescue effort by tracking the plumes of smoke 
emanating from the rubble at Ground Zero and to record the 
event for posterity. However, to view the photographs and the 
video, members of the public must file a request with New York 
City under New York State's Freedom of Information Law \59\ or 
go to the U.S. Copyright Office, located in the Madison 
Building of the Library of Congress in Washington, D.C., 
because the photographer owns the images and video.\60\
---------------------------------------------------------------------------
    \59\ DDC Briefing, supra note 25.
    \60\ Greg Smith, Only Playing in D.C., N.Y. Daily News, Feb. 12, 
2006, at 7.
---------------------------------------------------------------------------

                          TESTING AND CLEANING

    FEMA and the Environmental Protection Agency (EPA) entered 
into two interagency agreements to detect and remove 
potentially harmful materials scattered by the World Trade 
Center collapse from private residences in Lower Manhattan. 
Neither agency had previously provided such services after a 
disaster, nor was either specifically authorized to do so. 
However, after residents in the area complained for months 
about the pollution, the EPA and New York City formed task 
forces to examine the issue.

Systemic problem: Lack of interagency coordination

    Months after the attacks, FEMA implemented an indoor 
testing and cleaning program with the EPA by invoking its 
Stafford Act authority for debris removal. Though the deadline 
to register for the program was extended twice to December 28, 
2002, residents expressed frustration with delays and 
difficulties obtaining information and registering for the 
program.\61\ According to the FEMA OIG, difficulties resulted 
in part because FEMA failed to request that EPA conduct the 
necessary testing to determine whether debris posed a public 
health or safety threat. The EPA was required to confirm that 
disaster dust and debris posed health and safety risks before 
FEMA could provide funding for cleanup. However, FEMA failed to 
coordinate with EPA to ensure that the required assessments 
were conducted in a timely manner.\62\
---------------------------------------------------------------------------
    \61\ FEMA's Delivery of Individual Assistance Programs, supra note 
4 at 24.
    \62\ Id. at 25.
---------------------------------------------------------------------------

                         INDIVIDUAL ASSISTANCE

    Lax management and weak oversight plagued some of FEMA's 
individual assistance programs, including Individual and Family 
Grants, Temporary Housing Assistance, and Crisis Counseling. In 
at least one case--FEMA's Air Quality Program--the result was 
rampant waste, fraud, and abuse. This program and others were 
the subject of critical reports by the media, FEMA's OIG, and, 
after the establishment of DHS, the DHS Office of Inspector 
General (DHS OIG).
    DHS Inspector General Richard Skinner told Subcommittee 
staff that FEMA did not require state and local agencies 
receiving FEMA grants to have proper oversight plans in place 
to prevent waste, fraud, and abuse among subgrantees.\63\ As 
opposed to in-depth reports citing potential problems, Mr. 
Skinner said FEMA allowed its grantees to file reports that 
were mere numerical tallies. According to Mr. Skinner, FEMA 
would benefit from Congressional mandates for quarterly reports 
to Congressional Appropriations Committees, much like HUD's 
reporting requirement which proved to be effective during its 
response to 9/11, as discussed below.
---------------------------------------------------------------------------
    \63\ Skinner Briefing, supra note 52.
---------------------------------------------------------------------------
    It is the sense of the Subcommittee that FEMA failed to 
grasp the lessons learned from 9/11. For example, the FEMA OIG 
recommended changes to the Individual and Family Grants (IFG) 
program, which funded the Air Quality Program. FEMA relaxed the 
programmatic controls associated with this program which was 
intended to reimburse applicants for costs associated with air 
conditioners, air purifiers, and vacuums. The FEMA OIG found 
that the program was vulnerable to fraud and abuse, partly 
because of lax oversight by FEMA and the New York State 
Department of Labor, which administered the program.\64\ Yet, 
according to the GAO, following Hurricanes Katrina and Rita, 
the successor to the IFG program paid as much as $1.4 billion 
in fraudulent assistance for inappropriate expenditures such as 
season football tickets, a $200 bottle of Dom Perignon 
champagne purchased at a Hooter's restaurant, and ``Girls Gone 
Wild Videos.'' \65\
---------------------------------------------------------------------------
    \64\ U.S. Department of Homeland Security Office of Inspector 
General, The Federal Emergency Management Agency's Individual and 
Family Grant Program Management at the World Trade Center Disaster, 
OIG-04-49, Sept. 2004, at 7 (hereinafter FEMA's Individual and Family 
Grant Program Management).
    \65\ Written Testimony submitted by Mr. Gregory D. Kutz before the 
Committee on Homeland Security, Subcommittee on Investigations hearing 
entitled, ``Waste, Fraud, and Abuse in the Aftermath of Hurricane 
Katrina,'' June 14, 2006, at 25.
---------------------------------------------------------------------------
    The ability to detect fraud, waste, and abuse in FEMA-
administered programs ends three years after the last 
expenditure of funds. At that time, the OIG's authority to 
audit a program and disallow costs ceases.\66\ Once the three 
years have passed, state and local governments may archive, 
destroy, or deny Federal agencies access to grant records.\67\ 
DHS OIG Skinner advised the Subcommittee staff that his agency 
does not intend to conduct additional audits of the major FEMA 
programs that administered funds for the 9/11 recovery.\68\
---------------------------------------------------------------------------
    \66\ ``Pursuant to 44 CFR 13.42, states are required to retain 
records, including source documentation, to support expenditures/costs 
incurred against the grant award, for 3 years from the date of 
submission to FEMA of the Financial Status Report. The State is 
responsible for resolving questioned costs that may result from an 
audit conducted during the three-year record retention period and for 
returning disallowed costs of ineligible activities.'' 44 C.F.R. 
Sec. 206.120 (2006).
    \67\ Skinner Briefing, supra note 52.
    \68\ Id.
---------------------------------------------------------------------------

Systemic problem: Inadequate verification prior to disbursing funds

    Normally, FEMA requires that disaster victims apply and be 
denied for Small Business Administration (SBA) disaster loans 
before disbursing funds from the IFG program. However, FEMA and 
New York State categorized air conditioners, air purifiers, 
filters, and vacuum cleaners in a way that exempted them from 
the SBA loan application requirement.\69\ That designation 
permitted those items to be purchased with air quality grants 
regardless of SBA consideration.
---------------------------------------------------------------------------
    \69\ Id.
---------------------------------------------------------------------------
    Typically, FEMA inspects property that applicants claim was 
damaged or destroyed in a disaster before issuing IFGs to 
replace the property. In March 2002, FEMA waived that 
requirement for air conditioners purchased through the air 
quality program after determining it would be impractical to 
verify damage to individual units.\70\ Instead, New York State 
implemented a self-certification process requiring applicants 
to describe the circumstances associated with the repair or 
replacement of items and to submit supporting receipts. 
According to the FEMA OIG, this shift, combined with promotions 
by stores selling eligible items and misleading notices in 
community foreign-language newspapers, significantly increased 
the number of applications and may have increased the 
likelihood of fraud and abuse.\71\ In a random sample of 4,435 
IFG applications to replace damaged window air conditioners, 
FEMA found that 2,731--or 62 percent--of the units were likely 
ineligible.\72\
---------------------------------------------------------------------------
    \70\ Air conditioners were added to the list of reimbursable items 
after home inspections had already been completed and FEMA determined 
it would not be cost effective to send inspectors back to homes to 
inspect air conditioners. FEMA's Individual and Family Grant Program 
Management, supra note 64, at 6.
    \71\ Id. at 8.
    \72\ Id.
---------------------------------------------------------------------------
    FEMA typically requires receipts or similar records to 
verify that IFG funds will be used for essential needs prior to 
disbursement. In May 2002, FEMA and New York State authorized 
advance payments to applicants who could not afford items 
covered by the Air Quality Program. FEMA asked applicants to 
provide receipts after purchasing approved items,\73\ but by 
March 2003, FEMA found none of a randomly selected group of 
5,602 cash-advance recipients (who had received a total of $5.8 
million in assistance) had submitted receipts.\74\ In July 
2003, FEMA determined that 1,682--or 33 percent--of a random 
inspection of 5,029 recipients had not purchased air 
conditioners. These cases were referred for collection.\75\
---------------------------------------------------------------------------
    \73\ Id. at 6-7.
    \74\ Id. at 8.
    \75\ Id.
---------------------------------------------------------------------------
    Mr. Skinner credited efforts by his office as well as 
FEMA's sampling and home inspection program with prompting 
100,000 of the original 229,000 applicants to voluntarily 
withdraw from the program.\76\
---------------------------------------------------------------------------
    \76\ Skinner Written Testimony, supra note 20.
---------------------------------------------------------------------------

Best practice: Demonstrate intolerance for fraud by prosecuting small 
        cases

    The Manhattan District Attorney's Office and the U.S. 
Attorney's Office largely declined to prosecute cases of 
alleged fraud against the Air Quality Program in part because 
the frauds involved small sums of money and in part because 
prosecutors determined the program's regulations were too lax 
to prove violations.\77\ The Manhattan District Attorney's 
Office did prosecute 12 cases investigated by Federal 
auditors.\78\ Prosecutors also pursued other 9/11 fraud cases 
involving less than the typical monetary thresholds to send a 
message that fraud against disaster funds would not be 
tolerated. (See Appendix B for convictions of fraudulent 
activity associated with 9/11 assistance.)
---------------------------------------------------------------------------
    \77\ Id. at 5.
    \78\ Id. at 6.
---------------------------------------------------------------------------
    Subcommittee staff has been told that prosecutors' offices 
often lack the resources to prosecute the surge in post-
disaster cases that result from frauds perpetrated against 
disaster assistance programs. Given that certain kinds of fraud 
occur after every disaster, \79\ Subcommittee Chairman Mike 
Rogers stated that prosecutors' offices should assess their 
needs in the event of a disaster. Chairman Rogers further 
asserted it would be worth considering setting aside a 
percentage of total Federal disaster-response funds 
appropriated to assist prosecutors' offices in handling fraud 
cases associated with disaster relief. \80\
---------------------------------------------------------------------------
    \79\ Id.
    \80\ See, House Homeland Security Subcommittee on Management 
Integration and Oversight Holds Hearing on Fraud in September 11 
Assistance: Recovery, CQ Transcripts, July 13, 2006, available at 
http://www.cq.com (last visited Aug. 8, 2006).
---------------------------------------------------------------------------

Systemic problem: Lack of information sharing and cooperation

    The FEMA OIG found that FEMA's Air Quality Program would 
have been better served by limiting eligibility to the areas 
identified by the EPA and New York City's Department of Health 
as affected by toxic debris, rather than providing grants to 
households in all five boroughs of New York City.\81\ 
Specifically, FEMA could have utilized a map of the smoke 
plumes from Ground Zero to designate eligible geographic areas. 
``If the IFG Program and the EPA testing and cleaning program 
had worked more closely together in terms of geographic 
eligibility, the prog ram would have had reasonable and 
justifiable boundaries,'' according to the FEMA OIG.\82\
---------------------------------------------------------------------------
    \81\ FEMA's Delivery of Individual Assistance Programs, supra note 
4 at 20.
    \82\ Id.
---------------------------------------------------------------------------

                     MORTGAGE AND RENTAL ASSISTANCE

    FEMA administered its Mortgage and Rental Assistance (MRA) 
program to provide as much as 18 months of mortgage or rental 
payments to 9/11 victims. During implementation, FEMA changed 
the eligibility criteria from aiding people who lost at least 
25 percent of their incomes ``as a result'' of the catastrophe 
to those who lost 25 percent of their incomes ``as a direct 
result'' of the attacks.\83\
---------------------------------------------------------------------------
    \83\ FEMA's Delivery of Individual Assistance Programs, supra note 
4 at 11.
---------------------------------------------------------------------------

Systemic problem: Ineffective oversight

    According to one media report, FEMA failed to explain how 
the agency defined ``direct result.'' It also did not provide a 
place on the MRA application for applicants to explain why 
their job loss was a ``direct result'' of the attacks, or even 
to list their employers' addresses. FEMA also did not provide 
its employees with guidelines explaining how to determine which 
applicants were directly affected by the attacks.\84\ Most 
denials of assistance appear to have resulted from 
misinformation or misunderstanding about eligibility or the 
specific benefits covered, and/or the application process, 
according to the FEMA OIG.\85\ The New York Times identified 
some of the rejected applications. Among them were the 
following:
---------------------------------------------------------------------------
    \84\ Diana B. Henriques and David Barstow, Change in Rules Barred 
Many From Sept 11 Disaster Relief, N.Y. Times, Apr. 26, 2002, at A1.
    \85\ FEMA's Delivery of Individual Assistance Programs, supra note 
4 at 35.
---------------------------------------------------------------------------
     Hundreds of Chinatown seamstresses, Manhattan 
hotel workers and taxi drivers were denied MRA funds.
     FEMA denied MRA funds to a disabled veteran who 
sold hats and gloves on the sidewalks of lower Broadway, though 
he provided sworn statements from shopkeepers confirming that 
he was a regular vendor in the area.
     An applicant ``who had worked at a restaurant on 
the concourse of the World Trade Center, supplied the 
restaurant's name and his supervisor's telephone number at work 
* * * was denied aid because an agency evaluator could not get 
through on the telephone to the now nonexistent restaurant.'' 
\86\
---------------------------------------------------------------------------
    \86\ Henriques and Barstow, supra note 84.
---------------------------------------------------------------------------
    There were also examples of fraudulent applications to the 
MRA program. For example, according to the Manhattan District 
Attorney's Office, an attorney and his girlfriend created false 
documents to show that the girlfriend had lost her job and was 
being evicted from her apartment. She then filed claims for 
assistance and received $70,000 from FEMA, the Red Cross, and 
Safe Horizon. In reality, she had not lost her job and was 
living with her boyfriend in New Jersey.\87\
---------------------------------------------------------------------------
    \87\ Press Release, District Attorney of New York County, People 
vs. 26 Individuals--WTC Charity Fraud (Nov. 13, 2002).
---------------------------------------------------------------------------
    After media reports in April 2002 showed seven out of 10 
applications for the MRA program had been denied, \88\ FEMA 
took steps to remedy and expand the program. FEMA re-examined 
all 7,323 rejected applications, deemed 1,625--or 22.2 
percent--eligible and requested additional documentation for 
3,126--or 42.7 percent.\89\ FEMA modified MRA applications to 
allow applicants to explain how their economic hardship was a 
direct result of the attacks, and eliminated the requirement 
that self-employed applicants and business owners be rejected 
by the SBA before applying for assistance under the MRA 
program.\90\ FEMA also expanded the geographic area of 
eligibility in late June 2002, a little more than one month 
before Congress passed a bill doing the same.\91\
---------------------------------------------------------------------------
    \88\ Henriques and Barstow, supra note 84.
    \89\ FEMA's Delivery of Individual Assistance Programs, supra note 
4, at 13.
    \90\ Id. at 14.
    \91\ Id.
---------------------------------------------------------------------------
    Ultimately, FEMA's MRA program provided more than four 
times the amount of financial assistance to New York's 9/11 
victims than the program had delivered to all victims of 
previous disasters since its inception.\92\ FEMA's Inspector 
General said the program would need to be altered if it were to 
be revived.\93\
---------------------------------------------------------------------------
    \92\ From the inception of FEMA's Mortgage and Rental Assistance 
program until Sept. 11, 2001, it has awarded only $18.1 million to 
victims of 68 declared disasters compared to $76 million to the victims 
of 9/11 in New York. See, FEMA's Delivery of Individual Assistance 
Programs, supra note 4, at 9.
    \93\ Id.
---------------------------------------------------------------------------

                           CRISIS COUNSELING

    The Stafford Act authorizes FEMA to fund professional 
counseling to treat mental health problems caused or aggravated 
by a disaster or its aftermath. In addition, the U.S. 
Department of Justice (DOJ) can fund professional counseling to 
treat mental health problems caused or aggravated by a crime or 
its aftermath. Since the 9/11 attacks are considered to be a 
crime resulting in a disaster, both programs applied.

Systemic problem: Lack of information sharing and cooperation

    FEMA and DOJ failed to coordinate to ensure that 
individuals psychologically impacted by the 9/11 attacks did 
not receive duplicative services funded by the two agencies, 
according to the FEMA OIG.\94\ Shortly after 9/11, the two 
agencies reached a verbal agreement on the sequence of delivery 
of services. However, the FEMA OIG wrote, ``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.'' \95\ The FEMA 
OIG encouraged the agencies to enter into a Memorandum of 
Understanding formalizing their relationship, their respective 
responsibilities and authorizations, as well as programs, time 
frames, and sequencing to apply when a disaster is also a crime 
scene. It was not until 2006, four years after the OIG made its 
recommendation, when FEMA and DOJ executed a Letter of Intent 
discussing services needed in responding to catastrophic 
Federal crimes.\96\
---------------------------------------------------------------------------
    \94\ Id. at 28.
    \95\ Id.
    \96\ Skinner Briefing, supra note 52.
---------------------------------------------------------------------------

                        UNEMPLOYMENT ASSISTANCE

    The U.S. Department of Labor (DOL) administers the FEMA-
funded Disaster Unemployment Assistance (DUA) program to 
provide assistance to any person left unemployed by a disaster 
who is not eligible for regular State Unemployment Insurance or 
other supplemental income. DOL after 9/11 expanded the program 
by:
           allowing disaster unemployment benefits to a 
        broader range of survivors than in past disasters;
           extending application periods;
           loosening documentation standards; and
           extending the duration of benefits by 13 
        weeks.\97\
---------------------------------------------------------------------------
    \97\ FEMA's Delivery of Individual Assistance Programs, supra note 
4, at 35.
---------------------------------------------------------------------------
    Nevertheless, DOL experienced a historically 
disproportionate denial rate for DUA, \98\ and advocacy groups 
complained in public forums that eligibility was unjustly 
limited and that improper processing excluded eligible 
applicants.\99\ According to the FEMA OIG, after examining New 
York State records, DOL officials determined denial decisions 
were consistent with guidelines and regulations, but that 
``most denials appear to have resulted from misinformation or 
misunderstanding about eligibility or the specific benefits 
covered, and/or the application process.'' \100\
---------------------------------------------------------------------------
    \98\ Id.
    \99\ Id. at 45-46.
    \100\ Id.
---------------------------------------------------------------------------

Systemic Problem: Lack of information sharing and cooperation

    The FEMA OIG indicated FEMA should have made information 
available earlier in multi-lingual formats \101\ and that 
outreach shortcomings may have resulted in misunderstandings 
over eligibility for the DUA program. But, the FEMA OIG 
stressed, the agency's post-9/11 outreach program was the most 
comprehensive in agency history.\102\ At its peak, the outreach 
program included 107 FEMA representatives and 32 DOJ outreach 
workers, as well as a helpline, a toll-free registration line, 
disaster service centers which disseminated information in 17 
languages, and extensive advertisements in various mediums--
even on the marquees of Madison Square Garden and the NASDAQ 
Stock Exchange.
---------------------------------------------------------------------------
    \101\ ``Advertisements were placed in foreign press papers in 
August 2002, in mainstream papers in November 2002, and on buses and 
subways in December 2002.'' FEMA's Delivery of Individual Assistance 
Programs, supra note 4, at 34.
    \102\ Id. at 33.
---------------------------------------------------------------------------

                        TEMPORARY TRANSPORTATION

    The Port Authority of New York and New Jersey (Port 
Authority) issued five FEMA-funded contracts 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.

Systemic Problem: Ineffective oversight of procurement

    Between March 2002 and April 2003, FEMA authorized at least 
$29.8 million for increased ferry service and new ferry 
terminals. FEMA disbursed the funds through the New York State 
Emergency Management Office to the Port Authority, \103\ and 
according to the DHS OIG, FEMA had no direct contact with the 
company.\104\
---------------------------------------------------------------------------
    \103\ Email from Ms. Tamara Faulkner, Congressional and Media 
Liaison, Department of Homeland Security Office of Inspector General, 
to Subcommittee Staff (Apr. 11, 2006).
    \104\ Id.
---------------------------------------------------------------------------
    Three of the five contracts issued to New York Waterway 
were not competitively bid. Given that the Port Authority had 
an existing contract with New York Waterway since 1988, \105\ 
from the Port Authority's perspective, the no-bid contracts 
were justified. Port Authority Chief Operating Officer Ernesto 
Butcher told Subcommittee staff that New York Waterway ``was 
the most logical choice'' to do the work.\106\ ``Their effort 
was a Herculean one in terms of providing the services to move 
people back and forth across the river,'' Mr. Butcher 
said.\107\
---------------------------------------------------------------------------
    \105\ Id.
    \106\ Subcommittee Staff Telephone Interview with Mr. Ernesto 
Butcher, Chief Operating Officer, Port Authority of New York and New 
Jersey, conducted May 26, 2006.
    \107\ Id.
---------------------------------------------------------------------------
    The Department of Justice, in cooperation with the Port 
Authority Office of Inspector General (Port Authority OIG), 
brought civil fraud charges against the company alleging New 
York Waterway over-billed the government. The government 
accused the company of submitting false bills to the Port 
Authority for expenses it never incurred, overstating its 
profit margin, and inflating its incremental costs. The company 
agreed in July 2006 to settle the charges for $1.2 million, 
without admitting wrongdoing.\108\
---------------------------------------------------------------------------
    \108\ Press Release, U.S. Attorney for the S.D.N.Y., Ferry Operator 
to Pay $1.2 Million to Settle Civil Charges That it Defrauded the 
Government After the September 11 Terrorist Attacks (July 17, 2005).
---------------------------------------------------------------------------

 COORDINATION BETWEEN AND AMONG THE FEDERAL GOVERNMENT, CHARITIES, AND 
                           VOLUNTARY AGENCIES

    As Americans sought to help after the 9/11 attacks, many 
made contributions to charities and voluntary agencies. Surveys 
suggest as many as two-thirds of American households donated 
money to voluntary agencies aiding in the response. Reports 
from 35 such charities and agencies show that they received an 
estimated $2.7 billion in contributions within 14 months after 
the attacks.\109\ Voluntary agencies made a significant 
contribution to the recovery. In New York, these agencies 
provided direct cash assistance and services including 
counseling to families of those killed, disaster relief 
workers, and those left unemployed or homeless by the attacks.
---------------------------------------------------------------------------
    \109\ More Effective Collaboration Could Enhance Charitable 
Organizations' Contributions in Disasters, supra note 7, at 7.
---------------------------------------------------------------------------

Systemic problem: Lack of information sharing and cooperation

    Pursuant to the Stafford Act, FEMA is charged with 
coordinating the administration of relief with the American Red 
Cross, the Salvation Army, the Mennonite Disaster Service, and 
other relief or disaster assistance organizations, as well as 
with state and local governments \110\ to avoid duplication of 
benefits.\111\ The Subcommittee found that despite efforts by 
the voluntary agencies and by FEMA to coordinate assistance to 
prevent fraud and avoid duplicate payments, the assistance 
provided by voluntary agencies was susceptible to fraud.
---------------------------------------------------------------------------
    \110\ 42 U.S.C. Sec. 5121 et seq. (2000).
    \111\ FEMA's Delivery of Individual Assistance Programs, supra note 
4, at 31.
---------------------------------------------------------------------------
    For example, according to the Manhattan District Attorney's 
Office, one applicant for assistance from FEMA, the Red Cross, 
and Safe Horizon claimed his income decreased by more than 
$100,000 due to the attacks. In reality, the individual, who 
had assets in excess of $1 million, saw his income increase 
from $137,198 in 2001 to more than $200,000 in 2002. According 
to the Manhattan District Attorney's office, his fraudulent 
applications initially went undetected, however, and he 
received nearly $60,000 in assistance.\112\
---------------------------------------------------------------------------
    \112\ Press Release, District Attorney of New York County, People 
vs. Charles Cadorette (July 31, 2003).
---------------------------------------------------------------------------
    FEMA took several steps to coordinate the services and 
assistance provided by traditional voluntary agencies, as well 
as others not traditionally involved in the delivery of 
assistance. These efforts were hampered, however, by the 
unprecedented influx of contributions to the voluntary agencies 
and by privacy laws prohibiting the sharing of information 
between and among voluntary and government agencies.\113\ FEMA 
officials conceded to the FEMA OIG that some people may have 
received duplicative assistance from governmental agencies and 
from the voluntary organizations.\114\
---------------------------------------------------------------------------
    \113\ More Effective Collaboration Could Enhance Charitable 
Organizations' Contributions in Disasters, supra note 7, at 21.
    \114\ FEMA's Delivery of Individual Assistance Programs, supra note 
4, at 32.
---------------------------------------------------------------------------
    ``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 Memoranda of 
Understanding to alleviate the potential for duplicating 
benefits,'' the FEMA OIG recommended.\115\ In a December 2002 
report, the GAO recommended that FEMA convene a working group 
of officials from key charitable and voluntary groups and 
Federal, state, and local officials to help reduce fraud and 
build cooperation in charitable responses to future disasters. 
The GAO specifically suggested that the group develop and adopt 
a common application form and confidentiality agreement for use 
in disasters and strategies for enhancing public education 
regarding charitable giving.\116\
---------------------------------------------------------------------------
    \115\ Id.
    \116\ More Effective Collaboration Could Enhance Charitable 
Organizations' Contributions in Disasters, supra note 7, at 21.
---------------------------------------------------------------------------
    Despite the coordination problems that occurred after 9/11, 
similar problems plagued the responses of FEMA and the Red 
Cross to Hurricanes Katrina and Rita, according to a June 2006 
GAO report. GAO found that disagreements between the 
organizations about their roles and responsibilities ``created 
tension between FEMA and the Red Cross and affected the 
organizations' working relationship,'' \117\ hindering their 
ability to coordinate relief efforts for Hurricanes Katrina and 
Rita. The report also found that as of May 24, 2006--one week 
before the start of the 2006 hurricane season--FEMA and the Red 
Cross had yet to reach agreement on key responsibilities.\118\
---------------------------------------------------------------------------
    \117\ U.S. General Accounting Office, HURRICANES KATRINA AND RITA: 
Coordination Between FEMA and the Red Cross Should be Improved for the 
2006 Hurricane Season, GAO-06-712, June 8, 2006 at 3.
    \118\ Id.
---------------------------------------------------------------------------

                                Recovery

    The economic, physical, and psychological damage wrought by 
the 9/11 attacks in New York City is difficult to fathom. In 
addition to the loss of life, injuries, and physical 
destruction, the attacks dealt a substantial blow to the 
residential neighborhoods of Lower Manhattan. Due to the 
importance of the financial, insurance, and real estate 
industries of Lower Manhattan, the impact of 9/11 reverberated 
throughout the economies of not only New York City and the 
surrounding area, but the nation as a whole.
    Estimates of economic losses range from $54 billion to $105 
billion.\119\ A study by the Milken Institute, a non-profit 
fiscal research group, estimated that as a result of the 
attacks, the economy of the New York-New Jersey metropolitan 
area sustained income losses of about $2.7 billion in 2001 
alone, while all metropolitan areas in the country sustained 
losses of about $191 billion.\120\ By some estimates, the 
attacks eliminated as many as 100,000 jobs \121\ in the New 
York area and more than 10 million square feet of office space 
in Lower Manhattan.\122\ As a result, Lower Manhattan slipped 
from the third to the fourth largest central business district 
in the nation.\123\
---------------------------------------------------------------------------
    \119\ U.S. General Accounting Office, Review of Studies of the 
Economic Impact of the September 11, 2001 Terrorist Attacks on the 
World Trade Center, GAO-02-700R, May 29, 2002 at 12. (These estimates 
include direct and indirect costs of lost income brought about by 
business closing and related spending reductions.)
    \120\ Id. at 2-3.
    \121\ The New York State Assembly Ways and Means Committee 
estimated that of the 125,300 jobs lost in New York in the 4th quarter 
of 2001, 80 percent resulted from the 9/11 terrorist attacks. U.S. 
General Accounting Office, Review of Studies of the Economic Impact of 
the September 11, 2001 Terrorist Attacks on the World Trade Center, 
GAO-02-700R, May 29, 2002 at 13 citing New York State Assembly Ways and 
Means Committee, ``New York State Economic Report,'' Mar. 2002.
    \122\ Written Testimony submitted by Mr. Stefan Pryor before the 
Subcommittee on Management, Integration, and Oversight hearing 
entitled, ``Federal 9/11 Assistance to New York: Lessons Learned in 
Fraud Detection, Prevention, and Control.'' Part 1 ``Recovery,'' July 
13, 2006, at 2 (hereinafter Pryor Written Testimony).
    \123\ Id.
---------------------------------------------------------------------------
    The impact of the terrorist attacks on the neighborhoods of 
Lower Manhattan was evidenced by the decrease in downtown 
occupancy rates. In the months after 9/11, occupancy rates 
downtown, which includes the communities nearest to the World 
Trade Center site, were estimated to have declined to 60 
percent, from a pre-9/11 rate of 95 percent.\124\
---------------------------------------------------------------------------
    \124\ Email from Mr. David J. Herbenick, Legislative Specialist, 
Department of Housing and Urban Development, to Subcommittee Staff 
(June 23, 2006).
---------------------------------------------------------------------------

                      FEDERAL GOVERNMENT REACTION

    In response to the economic devastation to the 
neighborhoods of Lower Manhattan, Congress appropriated 
previously unprecedented sums to the U.S. Department of Housing 
and Urban Development (HUD) for disaster response. The U.S. 
Small Business Administration (SBA), the U.S. Department of 
Labor (DOL), and other Federal agencies also received funding 
to help compensate individuals, businesses, and other groups 
for losses resulting from the attacks. Additionally, Congress 
authorized more than $5 billion in Liberty Zone tax incentives 
designed to spur redevelopment in Lower Manhattan. This was the 
first geographically-targeted tax program in response to a 
disaster.\125\
---------------------------------------------------------------------------
    \125\ U.S. General Accounting Office, September 11: Overview of 
Federal Disaster Assistance to the New York City Area, GAO-04-72, 
October 31, 2003 at 86.
---------------------------------------------------------------------------

U.S. Department of Housing and Urban Development (HUD)

    In three appropriations acts,\126\ Congress directed HUD to 
administer $3.483 billion through its Community Development 
Block Grant (CDBG) program to New York State to assist 
individuals, businesses, groups, and utilities that sustained 
physical or economic damage from the terrorist attacks. This 
marked by far the largest appropriation of HUD funds for 
disaster recovery,\127\ though the appropriation was 
subsequently surpassed by the $17 billion in HUD assistance to 
the Gulf states for the recovery effort following Hurricanes 
Katrina and Rita.\128\ HUD issued the grants to New York State, 
which authorized the funds be disbursed by two state public 
benefit corporations,\129\ the Empire State Development 
Corporation (ESDC) and an ESDC subsidiary formed specifically 
to disburse HUD funds for 9/11 recovery efforts, the Lower 
Manhattan Development Corporation (LMDC).
---------------------------------------------------------------------------
    \126\ (1) Pub. L. No.107-73 (2001): $700 million appropriated by 
Congress November 26, 2001, granted to the ESDC February 2002. (2) 
P.L.107-117 (2002): $2 billion appropriated by Congress January 10, 
2002, granted to the LMDC June 2002. (3) Pub. L. No.107-206 (2002): 
$783 million appropriated by Congress August 2, 2002, granted to the 
LMDC Sept. 2003.
    \127\ Prior to 9/11, the largest Department of Housing and Urban 
Development (HUD) Community Development Block Grant (CDBG) 
appropriation for disaster recovery was about $500 million, which was 
the amount allocated for both the 1997 Midwest floods and 1994 
Northridge, California earthquake. The $3.483 billion CDBG 
appropriation for 9/11 recovery has been eclipsed by the $17 billion 
appropriated for the recovery from Hurricanes Katrina and Rita. Opper 
Briefing, supra note 5.
    \128\ Written Testimony submitted by Ms. Ruth Ritzema before the 
Subcommittee on Management, Integration, and Oversight hearing 
entitled, ``Federal 9/11 Assistance to New York: Lessons Learned in 
Fraud Detection, Prevention, and Control.'' Part 2 ``Recovery,'' July 
13, 2006, at 10.
    \129\ 1-A N.Y. Pub Auth. Sec. Sec. 50-51.
---------------------------------------------------------------------------
    Major ESDC and LMDC initiatives administered using HUD 
funds include:
       Utility Restoration and Infrastructure 
Rebuilding;
       Residential Grant Program (RGP);
       Business Assistance Grants;
       Business Recovery Grants (BRG);
       Job Creation and Retention Program (JCRP);
       Small Firm Attraction and Retention Grants 
(SFARG);
       Technical Assistance for Small Businesses;
       Business Information Program;
       NYC Housing Preservation District for affordable 
mixed-income housing;
       Cultural Enhancement Fund;
       Ferry service;
       Disproportionate Loss of Workforce (DLW); and
       Other specific improvement projects.\130\
---------------------------------------------------------------------------
    \130\ The improvement projects include: the Downtown Alliance 
Streetscape, New York Stock Exchange security and improvements, West 
Street Pedestrian Crossing, Parks and Open Spaces, Hudson River Park 
and East River Waterfront, Columbus Park Pavilion Renovation, Marketing 
History/Heritage Museum, Millennium High School, Public Service 
Activities, Lower Manhattan Community Outreach, Pace University Green 
Roof Project, Chinatown Tourism and Marketing, and Lower Manhattan 
Information.
---------------------------------------------------------------------------

U.S. Small Business Administration (SBA)

    In the wake of 9/11, the SBA and Congress adjusted SBA's 
direct and guaranteed loan programs to make them more 
responsive to the needs of those impacted by the attacks. SBA 
expanded the eligibility of the Economic Injury Disaster Loan 
Program--which provides direct loans to repair physical damage 
and provides working capital to home- and business-owners who 
suffer losses in a disaster--to permit loans to businesses 
located outside the boundaries of the declared disaster areas. 
In addition, in January 2002, Congress authorized the SBA to 
guaranty up to $4.5 billion \131\ in loans made by private 
sector lenders to small businesses ``adversely affected by the 
September 11, 2001 terrorist attacks and their aftermath'' 
\132\ through the Supplemental Terrorist Activity Relief (STAR) 
Loan Program.
---------------------------------------------------------------------------
    \131\ The actual appropriation was for $75 million, which allowed 
the SBA to guarantee $4.5 billion worth of loans, based upon historical 
default rates and program costs offset through fees paid by lenders to 
obtain an SBA guaranty. That is why the amount of money appropriated to 
fund the STAR loan program was substantially less than the total 
lending authority for the program.
    \132\ Pub. L. No. 107-117 (2002).
---------------------------------------------------------------------------

U.S. Department of Labor (DOL)

    In addition to the Disaster Unemployment Assistance 
administered by DOL using FEMA funds (discussed in the 
``Response'' section), DOL made grants to retrain and help 
workers left unemployed by the attacks secure new employment. 
Grants were also provided to the New York State Workers' 
Compensation Board to process claims related to the terrorist 
attacks.

Liberty Zone tax incentives

    Congress authorized more than $5 billion in tax incentives 
designed to spur redevelopment in Lower Manhattan, including 
the New York Liberty Bond (Liberty Bond) program. The Liberty 
Bond program granted New York State and New York City the 
authority to issue up to $8 billion in low-cost, tax-exempt 
private activity bonds, which in turn created $1.8 billion in 
funding for New York City. That funding has been used for 
residential, commercial, utility, and retail development in New 
York City's Liberty Zone, which runs south of Canal Street 
between East Broadway and Grand Street.

HOUSING AND URBAN DEVELOPMENT COMMUNITY DEVELOPMENT BLOCK GRANT-FUNDED 
                                PROGRAMS

Well-crafted State and local systems eased disbursement

    The Subcommittee found that both ESDC and LMDC generally 
performed well. ESDC had procedures in place and experience in 
using government funds to administer economic development 
programs. LMDC, a new agency, created procedures parallel to 
those developed by ESDC.\133\
---------------------------------------------------------------------------
    \133\ Opper Briefing, supra note 5.
---------------------------------------------------------------------------
    Testifying before the Subcommittee on July 13, 2006, Ms. 
Eileen Mildenberger, ESDC's Chief Operating Officer, stated 
that her staff reviewed each request for assistance and 
utilized third-party verification when awarding grants. This 
third-party verification included: a request for tax 
information; site visits to business locations; conversations 
with landlords; and obtaining information from the New York 
State Department of Labor to confirm employment.\134\ In 
addition, at the recommendation of the HUD OIG, ESDC hired a 
consultant to audit the 4,100 Business Recovery Grants it 
awarded.\135\ The consultant concluded that 98 percent of the 
grants were awarded based on accurate estimates.
---------------------------------------------------------------------------
    \134\ Written Testimony submitted by Ms. Eileen Mildenberger before 
the Subcommittee on Management Integration and Oversight hearing 
entitled, ``Federal 9/11 Assistance to New York: Lessons Learned in 
Fraud Detection, Prevention, and Control.'' Part 2 ``Recovery,'' July 
13, 2006, at 4 (hereinafter Mildenberger Written Testimony).
    \135\ U.S. Department of Housing and Urban Development Office of 
Inspector General, Office of Audit, Interim Report on Community 
Development Block Grant; Disaster Funds, Memorandum No. 2002-NY-1802, 
May 22, 2002 at 5 (hereinafter HUD Interim Report).
---------------------------------------------------------------------------
    As part of the Subcommittee staff's examination of LMDC's 
fraud controls, the Subcommittee staff learned that LMDC has a 
``three-layer'' approach.\136\ The first layer is LMDC's Audit 
and Finance Committee, composed of LMDC Board Members, which 
evaluates all funding proposals prior to submission to the full 
board.\137\ As part of the evaluation process, the Committee 
evaluates financial controls and incorporates input from the 
HUD OIG. Contracts are reviewed by LMDC's General Counsel. 
Contracts over $50,000 are reviewed by LMDC's president and 
approved by the board. Other controls at this level include 
background checks on prime contractors and careful monitoring 
of the procurement process.
---------------------------------------------------------------------------
    \136\ Subcommittee Staff Briefing with Mr. Stefan Pryor et al., 
President, Lower Manhattan Development Corporation, Feb. 23, 2006, in 
New York, New York.
    \137\ Id.
---------------------------------------------------------------------------
    The second layer of LMDC's fraud controls includes 
compliance with HUD and LMDC guidelines and financial 
monitoring.\138\ The third layer is a proactive approach which 
focuses on investigations.\139\ LMDC works closely with, and 
refers cases to, the New York City Department of Investigation, 
the U.S. Attorney for the Southern District of New York, and 
the HUD OIG.\140\ In addition, Subcommittee staff were advised 
that LMDC conducts an internal audit program, which includes 
ongoing reviews of internal controls and regular reports to 
LMDC's audit committee.\141\
---------------------------------------------------------------------------
    \138\ Id.
    \139\ Id.
    \140\ Id.
    \141\ Id.
---------------------------------------------------------------------------

Push to expeditiously disburse funds

    Congress took steps to ensure that HUD and its grantees, 
ESDC and LMDC, quickly disbursed CDBG funds to those harmed by 
9/11. Congress required that applicants for Business Recovery 
Grants (BRG) receive a response to their request within 45 days 
of application submission.
    In order to expedite the disbursement of funds, Congress 
also included a provision in the initial emergency supplemental 
appropriation authorizing the HUD Secretary to waive or alter 
any CDBG statutes or regulations ``except for requirements 
related to fair housing, nondiscrimination, labor standards, 
and the environment.'' \142\ There were 19 waivers in all, 
which allowed expedited disbursement of funds through the 
Partial Action Plan system. Under this system, LMDC is required 
to submit interim proposals, known as Partial Action Plans, to 
HUD for pre-approval prior to awarding funds. A high-ranking 
HUD Disaster Recovery official said the waivers were necessary, 
particularly early in the response, because ``disasters aren't 
typical.* * * We do not really grant waivers lightly.'' \143\ 
He conceded though, that the waivers became less necessary 
three years after the disaster.
---------------------------------------------------------------------------
    \142\ Pub. L. No. 107-73 (2001).
    \143\ Opper Briefing, supra note 5.
---------------------------------------------------------------------------
    The Secretary granted waivers in the following areas:
     Low-income requirement: HUD waived the requirement 
that 70 percent of CDBG funds be used for activities benefiting 
people of low- to moderate-incomes.\144\ The waiver language 
added ``HUD expects the grantee [New York State] will make a 
good faith effort to maximize benefits for low- to moderate- 
income persons, and maintain documentation of such efforts.'' 
\145\ According to the high-ranking HUD Disaster Recovery 
official, this waiver was necessary because the areas nearest 
the World Trade Center site contained a heavy concentration of 
businesses in the financial, insurance, and real estate 
sectors.\146\
---------------------------------------------------------------------------
    \144\ 67 Fed. Reg. 4164 (Jan. 28, 2002) (Waiver No. 1).
    \145\ Id.
    \146\ Opper Briefing, supra, note 5.
---------------------------------------------------------------------------
     Public input: HUD waived certain citizen input 
requirements, replacing them with ``Streamlined Citizen 
Participation Requirements,'' which were enumerated in the 
Federal Register.\147\ The requirements ``do not mandate public 
hearings, but do provide for a reasonable opportunity for 
citizen comment and for ongoing citizen access to information 
about the use of grant funds.'' \148\ This waiver was used to 
reduce the period during which the public can comment on action 
plans (typically 30 days) to 15 days.\149\ LMDC provided 
mechanisms for public input, including a town hall-style 
meeting. A high-ranking HUD Disaster Recovery official said the 
grant processes established by both LMDC and ESDC included more 
public input than most non-disaster CDBG disbursements. ``They 
went above and beyond what the regular requirements would have 
been for CDBG funds,'' the official said.\150\
---------------------------------------------------------------------------
    \147\ 67 Fed. Reg. 4164 (Jan. 28, 2002) (Waiver No. 2).
    \148\ Id.
    \149\ Opper Briefing, supra note 5.
    \150\ Id.
---------------------------------------------------------------------------

Outside criticism: Waivers allowed closed process that favored big 
        companies

    Media and nonprofit groups criticized ESDC and LMDC grant 
processes for being too secretive in their decision-making and 
unresponsive to public input.\151\ Ms. Bettina Damiani, Project 
Director for Good Jobs New York, a nonprofit government 
oversight group that closely followed the 9/11 recovery 
process, testified before the Subcommittee on July 13, 2006, 
that the waivers created a process by which subsidies were 
granted with little accountability and minimal input from New 
York taxpayers.
---------------------------------------------------------------------------
    \151\ Russ Buettner et al., Ground Zero: $2.7B Money Pot; LMDC 
Pouring Fed Dollars Into Site--With No Results, N.Y. Daily News, Dec. 
6, 2005, at 42. See also, Heidi Evans and David Saltonstall, Mike Adds 
to Call for Big Probe, N.Y. Daily News, Dec. 6, 2005, at 7. See also, 
Russ Buettner et al., Towers Fell, Mob Schemes Began: How Organized 
Crime Divvied Up Ground Zero Work, N.Y. Daily News, Dec. 5, 2005, at 4. 
See also, 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, at 15-19.
---------------------------------------------------------------------------
    Also testifying on July 13, 2006, was Mr. John Wang, 
President of the Lower Manhattan-based Asian American Business 
Development Center--a nonprofit group created in 1994 to help 
businesses in New York City's Chinatown neighborhood--who 
stated that Chinatown had no representative on the board of 
LMDC.\152\ He told the Subcommittee that the application and 
funding processes did not accommodate the distinct needs of 
Chinatown's mostly small businesses. As a result, he believes 
Chinatown did not receive a proportional share of CDBG funds, 
despite the neighborhood's close proximity to the World Trade 
Center. According to an LMDC official, Chinatown was among the 
neighborhoods most impacted by the attacks.\153\
---------------------------------------------------------------------------
    \152\ Written Testimony submitted by Mr. John Wang before the 
Subcommittee on Management, Integration, and Oversight hearing 
entitled, ``Federal 9/11 Assistance to New York: Lessons Learned in 
Fraud Detention, Prevention, and Control.'' Part 1 ``Recovery,'' July 
13, 2006, at 3 (hereinafter Wang Written Testimony).
    \153\ Pryor Written Testimony, supra note 122.
---------------------------------------------------------------------------
    According to a June 2003 survey of 731 Chinatown business 
owners who had sought help from the Asian American Business 
Development Center,\154\ less than half of the businesses that 
sought assistance from LMDC received a grant. More than half of 
those that did receive a grant received only $3,000 in 
assistance. According to information the Asian American 
Business Development Center received from ESDC in March 2003, 
the average grant award to Lower Manhattan businesses was 
$33,680 as compared to only $7,829 for Chinatown businesses. 
Despite testimony from LMDC President Stefan Pryor that 
Chinatown received more than $170 million from LMDC alone,\155\ 
Mr. John Wang contended the neighborhood did not receive the 
assistance it needed.\156\ (For an inventory of LMDC's major 
projects benefitting Chinatown, see Appendix C.)
---------------------------------------------------------------------------
    \154\ Asian American Business Development Center, 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, June 2003, at 1.
    \155\ Prior Written Testimony, supra note 122.
    \156\ Wang Written Testimony, supra note 152.
---------------------------------------------------------------------------

Best practice: Fraud prevention task force and regular audits

    Officials from investigative and enforcement divisions of 
Federal, state, and local agencies involved in 9/11 recovery 
efforts participated in two informal fraud prevention task 
forces: the Lower Manhattan Construction Integrity Team, which 
continues to meet, and the World Trade Center Fraud Working 
Group. The World Trade Center Fraud Working Group convened in 
December 2001 to discuss concerns regarding the susceptibility 
of grants and contracts issued in response to the attacks to 
fraud. Many members of the group later formed the Construction 
Integrity Team to deal with fraud concerns related to the 
contracts to rebuild Lower Manhattan.
    Members of the World Trade Center Working Group included:
           U.S. Department of Housing and Urban 
        Development--OIG
           U.S. Department of Labor--OIG
           U.S. Department of Transportation--OIG
           U.S. Department of Energy--OIG
           Federal Emergency Management Agency--OIG
           U.S. Small Business Administration--OIG
           Social Security Administration--OIG
           U.S. Environmental Protection Agency--OIG
           Internal Revenue Service--Criminal 
        Investigation Division
           United States Postal Inspection Service
           New York City Department of Investigation
           Lower Manhattan Development Corporation
           State of New York--OIG
           State of New York Insurance Department
           Port Authority of New York and New Jersey--
        OIG
           Metropolitan Transit Authority--OIG
           New York City Business Integrity Commission
           Metropolitan Transit Authority, Chief 
        Compliance Officer
           United States Attorney's Office, Southern 
        District of New York
           Manhattan District Attorney's Office
    The Department of Justice initiated a Hurricane Katrina 
Fraud Task Force to preemptively eliminate fraud in the Gulf 
states' recovery from Hurricanes Katrina and Rita. This task 
force includes many of the same members as the World Trade 
Center Working Group. It is the sense of the Subcommittee that 
such groups should be institutionalized to monitor responses to 
future disasters.
    Additionally, Congress required the HUD OIG to conduct an 
audit every six months of the CDBG funds provided to New York 
State after the terrorist attacks of September 11, 2001.\157\ 
It is the sense of the Subcommittee that these audits were 
particularly effective in identifying systemic weaknesses, 
promoting better management, and preventing waste, fraud, and 
abuse, and should be replicated for future Federal disaster 
assistance programs.
---------------------------------------------------------------------------
    \157\ H.R. Conf. Rep. No. 107-350, at 456 (2001).
---------------------------------------------------------------------------

Best practice: Fraud awareness training

    The HUD OIG provided fraud awareness training to agencies 
administering grants, including ESDC and LMDC. The training 
included fraud detection techniques, particularly before grants 
were disbursed, as well as tips to identify fraud indicators. 
According to Ms. Ruth Ritzema, the Special Agent in Charge of 
the HUD OIG New York Field Office, the training helped to 
prevent or mitigate a number of potential frauds, as well as to 
uncover and provide evidence of criminal activity. It is the 
sense of the Subcommittee that fraud training should be 
provided to employees and volunteers of state, local, and 
voluntary agencies that disburse Federal disaster assistance 
funds or award contracts.

                        BUSINESS RECOVERY GRANTS

    Four and one-half months after the attacks, ESDC began 
providing $563 million in business recovery grants (BRGs) to 
compensate small businesses for their losses. LMDC later 
disbursed BRGs as well. If a business was located south of 14th 
Street, had fewer than 500 employees, and had unreimbursed 
economic losses, it was eligible for assistance. In addition, 
$13 million was allocated to large businesses that employ 200 
workers or less at their downtown locations. BRGs provided 
assistance to more than 14,000 businesses. The average grant 
was nearly $39,000 and compensated only 16.8 percent of the 
average firm's loss.\158\
---------------------------------------------------------------------------
    \158\ Mildenberger Written Testimony, supra note 134.
---------------------------------------------------------------------------
    In reviewing how ESDC determined eligibility, Subcommittee 
staff learned that ESDC based its decisions on the size of a 
company's ``economic loss,'' rather than following a ``claims 
adjustment'' approach as had been used in prior disasters.\159\ 
In determining the amount of financial assistance, ESDC 
developed a formula which considered: (1) in which of four 
zones the company was located; (2) the company's gross revenue; 
and (3) the extent of economic loss which the grant could not 
exceed.\160\ Under this formula, small businesses that had 
limited revenue received small grants.\161\ In addition, 
Subcommittee staff learned that ESDC used gross revenue in its 
calculation because it was the ``least complicated.'' \162\ 
This approach, however, had the effect of favoring large 
companies.\163\
---------------------------------------------------------------------------
    \159\ Subcommittee Staff briefing with Mr. John Bacheller, et al., 
Executive Vice President and Senior Deputy Commissioner, Empire State 
Development Corporation, Feb. 23, 2006, in New York, New York.
    \160\ Id.
    \161\ Id.
    \162\ Id.
    \163\ Id.
---------------------------------------------------------------------------
    The Subcommittee and the HUD OIG identified a number of 
systemic problems in the BRG program.

Systemic problem: Failure to coordinate funding

    The inability of ESDC and LMDC to reach agreement quickly 
on a funding issue was partly to blame for the ESDC's delayed 
disbursement of $54.5 million in BRGs, which a media report 
indicated made it difficult for some businesses to stay 
afloat.\164\
---------------------------------------------------------------------------
    \164\ Lore Croghan, Grant Delays Threatening Firm's Survival; WTC 
Recovery Payments Postponed Again; Downtown Businesses Make Drastic 
Cuts, Crains N.Y. Bus., July 28, 2003, at 1.
---------------------------------------------------------------------------
    The BRGs, which had been awarded to 1,714 first time 
recipients and 452 companies expecting supplements to earlier 
awards, had initially been scheduled for distribution in March 
2003. The date was pushed back to April 2003, then to June 
2003, then to July 2003, and finally to August 2003.\165\ This 
violated the Congressional mandate that all applications for 
CDBG funds be fulfilled or rejected within 45 days after 
applications are submitted.
---------------------------------------------------------------------------
    \165\ Id.
---------------------------------------------------------------------------
    This significant delay occurred because ESDC had 
applications for more BRG money than could be funded by the 
$340 million originally allocated to the program and needed 
money from LMDC to continue the program. ``It took us many, 
many, many meetings with LMDC to get those funds,'' an ESDC 
official told Subcommittee staff.\166\ LMDC eventually signed 
off on the transfer in LMDC Partial Action Plan (PAP) No. 2, 
which provided $150 million to fund ESDC's BRG program and was 
approved by HUD on November 22, 2002.\167\ LMDC's Partial 
Action Plan (PAP) No. 4, approved by HUD on August 6, 2003, 
provided an additional $74.5 million to fund the program.\168\
---------------------------------------------------------------------------
    \166\ Subcommittee Staff Telephone Interview with Mr. John 
Bacheller, Executive Vice President and Senior Deputy Commissioner, 
Empire State Development Corporation, conducted June 22, 2006 
(hereinafter Bacheller Telephone Interview). ESDC Officials Ms. Amy 
Schoch and Ms. Susanna Stein also participated in the interview.
    \167\ Email from Ms. Helen Albert, Deputy Assistant Inspector 
General, Department of Housing and Urban Development Office of 
Inspector General New York Field Office, to Subcommittee Staff (June 
14, 2006) (hereinafter HUD OIG Email).
    \168\ Id.
---------------------------------------------------------------------------

Systemic problem: Inadequate verification before payments

    ESDC issued BRGs totaling $110 million to 4,100 businesses 
before it began using a new application form requiring a 
detailed itemization of economic losses.\169\ While CDBG 
regulations do not contain requirements that businesses prove 
economic losses,\170\ ESDC's lack of verification is contrary 
to the guidance for calculating business interruption losses 
provided by the Senate Report accompanying the appropriation of 
CDBG funds that went to ESDC.\171\ At the recommendation of the 
HUD OIG, ESDC hired a consultant to audit the 4,100 
grants.\172\ The consultant concluded that 98 percent of the 
grants were awarded based on accurate estimates. The HUD OIG, 
however, sampled 170 of the grants and found 13 applications 
conflicted with IRS records. HUD OIG referred the 13 to its New 
York Office of Investigation.\173\
---------------------------------------------------------------------------
    \169\ Id.
    \170\ Opper Briefing, supra note 5.
    \171\ S. Rep. No. 107-109, at 206 (2001).
    \172\ HUD Interim Report, supra note 135.
    \173\ HUD OIG Email, supra note 167.
---------------------------------------------------------------------------
    One noteworthy case--not among the 170 grant recipients 
audited by the HUD OIG--was New York Waterway, the ferry 
company discussed above, that in July 2006 paid $1.2 million to 
settle a civil fraud case in which it was accused of over-
billing the Federal government.\174\ The company received three 
Business Recovery Grants totaling $358,188, despite the fact 
that it had benefited from a drastic increase in ferry service 
after the terrorist attacks forced the suspension of PATH rail 
service between New Jersey and New York. The company, which did 
not admit wrongdoing in the settlement, claimed in its ESDC 
application that it had lost $8.6 million from September 11, 
2001, through the end of the year.\175\
---------------------------------------------------------------------------
    \174\ Press Release, U.S. Attorney for the S.D.N.Y., Ferry Operator 
to Pay $1.2 Million to Settle Civil Charges That it Defrauded the 
Government After the September 11 Terrorist Attacks (July 17, 2005).
    \175\ Charles V. Bagli, Ridership Up, But Ferry Company Got 9/11 
Aid, N.Y. Times, May 6, 2003, at B3.
---------------------------------------------------------------------------

                       RESIDENTIAL GRANT PROGRAM

    The Residential Grant Program (RGP) offered grants to 
encourage individuals to renew existing leases, sign new 
leases, or purchase residences in Lower Manhattan.

Systemic problem: Inadequate verification before payments

    According to the HUD OIG New York Regional Office, LMDC 
made duplicate payments through its Residential Grant Program 
and did not maintain proper documentation related to the 
program. The HUD OIG referred 10 cases for prosecution.\176\
---------------------------------------------------------------------------
    \176\ Subcommittee Staff Briefing with Mr. Edgar Moore et al., 
Regional Inspector General for Audit, Department of Housing and Urban 
Development Office of Inspector General New York Regional Office, Feb. 
24, 2006, in Washington, D.C.
---------------------------------------------------------------------------

                   JOB CREATION AND RETENTION PROGRAM

    The Job Creation and Retention Program (JCRP) was intended 
to attract and retain large ``anchor'' firms. Twenty-seven 
companies accepted grants totaling $292 million. They committed 
to retain and create more than 70,000 jobs in Lower Manhattan 
and a total of 91,000 jobs throughout New York City.\177\
---------------------------------------------------------------------------
    \177\ Mildenberger Written Testimony, supra note 135.
---------------------------------------------------------------------------

Outside criticism: Inequitable distribution of funds

    Media and nonprofit oversight groups were critical of JCRP 
for facilitating large grants to companies that they alleged 
either did not need the money to stay afloat or would have 
stayed in New York City without the grants.
    For example:
     American Express received a $25 million JCRP grant 
six months after it stated publicly that it would return all 
its employees to Lower Manhattan, according to the New York 
Daily News.\178\
---------------------------------------------------------------------------
    \178\ Russ Buettner et al., Rich Got Richer As Poor Got Crumbs, 
N.Y. Daily News, Dec. 4, 2005, at 32.
---------------------------------------------------------------------------
     Health Insurance Plan of New York received a $12 
million JCRP grant to move from midtown to Lower Manhattan, 
though the New York Daily News reported the company had been 
looking to expand in the area for more than a year.\179\
---------------------------------------------------------------------------
    \179\ Id.
---------------------------------------------------------------------------
     The Bank of New York received $40 million, and the 
New York Daily News reported that, though the bank retained 
7,700 jobs in New York City, it is moving 1,400 of them out of 
Lower Manhattan to Brooklyn.\180\
---------------------------------------------------------------------------
    \180\ Id.
---------------------------------------------------------------------------
    ESDC and HUD officials responded that such large firms are 
anchor tenants critical to the economies of New York City and 
the region.

           SMALL FIRM ATTRACTION AND RETENTION GRANT PROGRAM

    The Small Firm Attraction and Retention Grant program 
disbursed nearly $115 million to 2,200 small businesses that 
made five-year lease commitments to stay in Lower Manhattan. 
These firms employ over 37,000 people, nearly one-third 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.\181\
---------------------------------------------------------------------------
    \181\ Mildenberger Written Testimony, supra note 134.
---------------------------------------------------------------------------

                 SMALL BUSINESS ADMINISTRATION PROGRAMS

                           STAR LOAN PROGRAM

    In January 2002, Congress authorized the SBA to guaranty up 
to $4.5 billion \182\ in loans made by private-sector lenders 
to small businesses ``adversely affected by the September 11, 
2001 terrorist attacks and their aftermath'' \183\ through the 
Supplemental Terrorist Activity Relief (STAR) Loan Program.
---------------------------------------------------------------------------
    \182\ The actual appropriation was for $75 million, which allowed 
the SBA to guarantee $4.5 billion worth of loans, based upon historical 
default rates and program costs offset through fees paid by lenders to 
obtain an SBA guaranty. That is why the amount of money appropriated to 
fund the STAR loan program was substantially less than the total 
lending authority for the program.
    \183\ Pub. L. No. 107-117 (2002).
---------------------------------------------------------------------------

Systemic problem: Inadequate oversight

    SBA failed to provide adequate oversight of the STAR Loan 
Program to ensure it met the Congressional mandate that it 
guaranty loans to small businesses ``adversely affected by the 
September 11, 2001 terrorist attacks and their aftermath.'' 
\184\ SBA encouraged lenders to liberally interpret the term 
``adversely affected'' when evaluating eligibility for the 
program. SBA also did not require lenders to ask borrowers 
whether they were affected by 9/11 and, therefore, eligible for 
STAR loans. Nor did SBA require lenders to submit documentation 
to justify why a loan was eligible for the STAR loan program. 
This left the SBA unable to check the loans before they were 
issued.
---------------------------------------------------------------------------
    \184\ Id.
---------------------------------------------------------------------------
    While SBA made STAR loans more cost-effective for lenders 
to encourage them to make the loans more affordable to 
borrowers,\185\ SBA's failure to regularly track the fees 
lenders charge borrowers undermined this effort.\186\ As a 
result, lenders who were already urged to push the bounds of 
eligibility for this program, found a new incentive to 
originate STAR loans--they could collect higher fees on STAR 
loans than they could on other SBA loans.
---------------------------------------------------------------------------
    \185\ U.S. General Accounting Office, Small Business Administration 
Response to September 11 Victims and Performance Measures for Disaster 
Lending, GAO-03-385, Jan. 29, 2003 at 15.
    \186\ Subcommittee Staff Briefing with Mr. Peter McClintock, et 
al., Acting Inspector General, Small Business Administration Office of 
Inspector General, Feb. 9, 2006, in Washington, D.C.
---------------------------------------------------------------------------

Systemic problem: Inadequate verification before payments

    Lenders issued 9/11 loans to ineligible businesses. Private 
sector lenders approved by SBA \187\ aggressively steered 
businesses--including those not affected by 9/11--into the SBA-
backed STAR loan program, presumably violating the intent, if 
not the letter, of the program. Many lenders likely failed to 
inform borrowers their loans were from a program intended for 
businesses hurt by the terrorist attacks, and, according to an 
examination of a representative sample of STAR loans by the SBA 
Office of Inspector General (OIG), a majority of borrowers were 
unaware they had received loans from such a program.\188\ The 
sample also found lenders did not document how the recipients 
were impacted by 9/11, and the SBA did not check for such 
documentation before the loans were issued.
---------------------------------------------------------------------------
    \187\ STAR loans could only be issued by private sector lenders in 
SBA's Preferred Lenders Program, which allowed designated lenders to 
process, service, and liquidate SBA-guaranteed loans with reduced 
oversight from SBA.
    \188\ See, U.S. Small Business Administration, Audit of SBA's 
Administration of the Supplemental Terrorist Activity Relief Loan 
Program, Rep. No. 6-09, Dec. 23, 2005.
---------------------------------------------------------------------------
    The SBA OIG placed considerable blame on SBA for the 
program's shortcomings. The OIG found that SBA failed to 
adequately oversee the program and encouraged lenders to 
liberally interpret eligibility guidelines. According to the 
SBA OIG audit examining a statistical sample of 59 STAR loans: 
\189\
---------------------------------------------------------------------------
    \189\ See, Id.
---------------------------------------------------------------------------
           Only nine recipients were appropriately 
        qualified to receive STAR loans.
           In five cases, there was no justification of 
        eligibility for the loan in the lenders' files.
           In 21 cases, the justification in the files 
        was contradicted by interviews with the businesses or 
        other information in the loan files.
           Of the 42 businesses that auditors were able 
        to interview:
           Only two were aware they had received a STAR 
        loan.
           25 said they were not adversely affected by 
        9/11.
           36 said they were not asked or could not 
        recall if they were asked whether they were adversely 
        affected by 9/11.
    While media reports and a 2003 GAO audit indicated that 
businesses hurt by the terrorist attacks were denied 
loans,\190\ the Subcommittee's review found that no eligible 
applicants were denied loans because of lack of funds. In fact, 
there was money remaining when the program statutorily sunset.
---------------------------------------------------------------------------
    \190\ See, Geoff Earle, City Firms Stiffed in 9/11-Loan Outrage, 
N.Y. Post, Nov. 7, 2005, at 2. See also, U.S. General Accounting 
Office, Business owners testified that SBA's existing disaster program 
did not have the ability to provide loans to small businesses within 
the disaster areas, Audit, Aug. 2003, at 14.
---------------------------------------------------------------------------

                             DISASTER LOANS

    The SBA expanded the eligibility of the Economic Injury 
Disaster Loan Program--which provides direct loans to repair 
physical damage and provides working capital to home- and 
business-owners who suffer losses in a disaster--to allow loans 
to businesses located outside the declared disaster areas.

Systemic problems: Relaxed controls

    According to the SBA OIG, SBA did not follow its own 
procedures for pursuing collection of delinquent disaster loans 
issued to 9/11 victims. As of September 30, 2004, 1,495 
disaster loans to 
9/11 victims, valued at $208.8 million, were delinquent.\191\ 
Letters demanding payment are an important and required part of 
SBA's collection process, but when the OIG reviewed a sample of 
delinquent loans, it found SBA had sent such letters to only 
four of the 17 borrowers who should have received them.\192\
---------------------------------------------------------------------------
    \191\ Written Testimony submitted by Mr. Eric M. Thorson before the 
Subcommittee on Management, Integration, and Oversight hearing 
entitled, ``Federal 9/11 Assistance to New York: Lessons Learned in 
Fraud Detection, Prevention, and Control.'' Part 2 ``Recovery,'' July 
13, 2006, at 4.
    \192\ Id.
---------------------------------------------------------------------------

                      DEPARTMENT OF LABOR PROGRAMS

    The U.S. Department of Labor made grants to retrain and 
gain employment for workers left unemployed by the attacks and 
to the New York State Workers' Compensation Board to process 
claims related to the terrorist attacks.

Systemic problem: Inadequate oversight

    Similar to the STAR loan program, worker training programs 
administered by DOL also did not receive adequate oversight. 
According to the GAO, DOL failed to properly monitor a $125 
million grant to the New York State Workers' Compensation 
Board, leading to the misspending of a portion of the grant. 
Congress had earmarked the $125 million ``for the processing of 
claims related to the terrorist attacks,'' \193\ according to 
the GAO.\194\ The Workers' Compensation Board, however, at the 
direction of the New York State Legislature,\195\ spent $44 
million of these funds to reimburse two other state agencies 
\196\ for expenses they incurred paying claims to victims of 
the World Trade Center attack. GAO found these expenditures 
violated the terms of the congressional appropriation.\197\ GAO 
recommended that DOL recover the $44 million or retroactively 
reclassify it to approve its use to reimburse the two state 
agencies. The fiscal year 2006 appropriations bill for DOL 
retroactively approved the use of the $44 million to reimburse 
the two agencies.\198\
---------------------------------------------------------------------------
    \193\ The grant was part of a $175 million appropriation to DOL's 
Employment and Training Administration made by Congress in Pub. L. 
No.107-117 (2002) under the heading, ``Workers Compensation Programs,'' 
which was to be obligated from amounts previously made available in 
Pub. L. No.107-38 (2001).
    \194\ See, U.S. General Accounting Office, Department of Labor-
Grant to New York Worker' Compensation Board, Decision File No. B-
303927, June 7, 2005 (hereinafter Department of Labor-Grant to New York 
Worker' Compensation Board).
    \195\ 2003 N.Y. Laws, A.B. 7265, S.B. 3377, Mar. 23, 2003.
    \196\ The Board paid $28 million to the New York Crime Victims 
Board and $16 million to the New York State Insurance Fund.
    \197\ Department of Labor-Grant to New York Worker' Compensation 
Board, supra note 194.
    \198\ Pub. L. No. 109-149 (2005).
---------------------------------------------------------------------------

Systemic problem: Ineffective oversight of procurement

    According to the DOL OIG, DOL became improperly involved in 
Chinatown Manpower Project, Inc.'s subcontracting of a $1.1 
million contract it received. DOL awarded a $25 million 
Workforce Investment Act National Emergency Grant to the New 
York State Department of Labor to provide training services to 
workers who lost their jobs as a result of the attack on the 
World Trade Center. The New York State DOL contracted with the 
Chinatown Manpower Project to provide services in Chinatown 
related to the grant. According to an audit by the DOL OIG, DOL 
became improperly involved in the subcontracting process, 
resulting in subcontracts being awarded without proper 
competition to vendors in Chinatown, including to two 
organizations to which the DOL Regional Representative in New 
York had long-term personal ties. The DOL OIG concluded that 
this violated Federal procurement rules and created the 
appearance of favoritism.\199\
---------------------------------------------------------------------------
    \199\ See, U.S. Department of Labor Office of Inspector General, 
Departmental Involvement in Chinatown Manpower Project, Inc. 
Contributed to Circumvention of Procurement Rules, Rep. No. 02-05-202-
01-001, Aug. 25, 2005.
---------------------------------------------------------------------------

                               Rebuilding

    The 9/11 terrorist attacks crippled the transportation, 
communication, and utility infrastructure of Lower Manhattan 
and impacted much of the surrounding area. New York City 
streets disappeared beneath rubble, a major arterial highway 
was heavily damaged, and debris temporarily blocked tunnels to 
motor vehicle traffic. Below the ground, the collapse of the 
towers and World Trade Center Tower 7 destroyed the Port 
Authority commuter rail station and subway stations that ran 
beneath the buildings.
    The electrical, gas, steam, and telecommunications utility 
infrastructures in Lower Manhattan were also heavily damaged, 
resulting in extensive disruptions in service. Utility 
companies responded quickly to provide emergency service to all 
customers, which was eventually improved and made 
permanent.\200\ The New York City Comptroller's Office 
estimated that utility repair costs for AT&T and Verizon alone 
would be $2 billion.\201\ In response, Congress appropriated 
$750 million to compensate utility companies for this work 
\202\ so consumers would not have to bear the costs. To date, 
most--if not all--of this designated funding has been spent.
---------------------------------------------------------------------------
    \200\ Daily Message, Secretary Martinez Announces $783 Million in 
Aid to New York for Post-9/11 Restoration (Sept. 17, 2003).
    \201\ U.S. General Accounting Office, Review of Studies of the 
Economic Impact of the September 11, 2001 Terrorist Attacks on the 
World Trade Center, GAO-02-700R, May 29, 2002 at 14.
    \202\  Pub. L. No. 107-206 (2002). (Chapter 13 appropriated $783 
million to HUD, of which $750 million went to the LMDC for the Utility 
Restoration and Infrastructure Rebuilding Program.)
---------------------------------------------------------------------------
    Of the $20 billion appropriated by Congress to assist New 
York after 9/11, more than $6 billion remains to be spent. Most 
of the more than $6 billion of unspent funds is committed to 
rebuilding projects, with transportation infrastructure 
projects slated to receive a majority of the funds. Also 
remaining is more than $2 billion in under-utilized Liberty 
Zone tax incentives. New York State officials have requested 
these funds be redirected by Congress to fund transportation 
projects in New York City.\203\
---------------------------------------------------------------------------
    \203\ Subcommittee Staff Telephone Interview with Mr. James A. 
Mazzarella, Director, State of New York Office of Federal Affairs, 
conducted July 7, 2006.
---------------------------------------------------------------------------

FIVE ``MEGA-PROJECTS'': LOWER MANHATTAN'S TRANSPORTATION INFRASTRUCTURE

    Lower Manhattan is perhaps more reliant on public 
transportation than any other city in the United States. About 
80 percent of the 350,000 people who commute to work in Lower 
Manhattan do so using public transportation--the highest 
percentage of any commercial district in the nation.\204\ The 
terrorist attacks eliminated the routes most of those commuters 
used prior to 9/11. The Port Authority Trans-Hudson (PATH) line 
between New Jersey and the World Trade Center alone had carried 
an average of 67,000 passengers daily before it was destroyed 
on 9/11.\205\
---------------------------------------------------------------------------
    \204\ Disaster Assistance, supra note 13, at 16.
    \205\ Written Testimony submitted by Mr. Bernard Cohen before the 
Subcommittee on Management, Integration, and Oversight hearing 
entitled, ``Federal 9/11 Assistance to New York: Lessons Learned in 
Fraud Detection, Prevention, and Control.'' Part 3 ``Rebuilding,'' July 
13, 2006, at 1 (hereinafter Cohen Written Testimony).
[GRAPHIC] [TIFF OMITTED] T9452.006

[GRAPHIC] [TIFF OMITTED] T9452.007

    After the attacks, DOT and FEMA committed a combined $5.1 
billion to restore and enhance New York's transportation 
infrastructure. FEMA allocated $2.75 billion, with DOT 
providing the rest through two of its sub-agencies: the Federal 
Highway Administration (FHWA) and the Federal Transit 
Administration (FTA).
    New York committed funding primarily to five mega-projects 
in Lower Manhattan: a new PATH terminal; a World Trade Center 
Site Security Center to screen vehicles entering the World 
Trade Center site and provide parking for tour buses; a Fulton 
Street Transit Center to replace the existing subway station; a 
reconfiguration of the South Ferry Terminal subway station; and 
a realignment of Route 9A (the West Side Highway)/West Street, 
the major north-south state arterial highway along the west 
side of Lower Manhattan.
    Those mega-projects and the total Federal allocations to 
date are as follows:
           Permanent World Trade Center PATH terminal: 
        $1.92 billion (The Port Authority will fund $300 
        million from insurance payments it received for its 9/
        11 losses)
           World Trade Center Site Security Center: 
        $478 million
           Fulton Street Transit Center: $847 million
           South Ferry Terminal Station: $420 million
           Route 9A/West Street: $287 million
        [GRAPHIC] [TIFF OMITTED] T9452.008
        
Unique Federal funding of Lower Manhattan transportation mega-projects

    The Federal approach to funding these projects differed in 
three key ways from other post-disaster transportation 
projects.
    First, the projects are almost entirely Federally-funded. 
As FEMA officials informed the GAO, FEMA is typically reluctant 
to recommend a 100-percent Federal share for rebuilding or 
recovery projects because requiring state or local governments 
to pay some percentage of the costs creates an incentive for 
them to control costs and root out waste, fraud, and 
abuse.\206\
---------------------------------------------------------------------------
    \206\ Disaster Assistance, supra note 13, at 25.
---------------------------------------------------------------------------
    Second, most of the projects will not just rebuild damaged 
or destroyed facilities, but will also make improvements to the 
transportation infrastructure. Mr. Bernard Cohen, the Federal 
Transit Administration's official leading the agency's 
oversight of Lower Manhattan mega-projects, testified before 
the Subcommittee on July 13, 2006, that ``[t]he recovery 
presented Lower Manhattan with an opportunity to modernize and 
rationalize its infamous spaghetti bowl tangle of transit 
lines.'' \207\ This scope change represents a departure from 
the Stafford Act directive that Federal disaster assistance 
funds be spent only to repair, restore, reconstruct, or replace 
damaged facilities.
---------------------------------------------------------------------------
    \207\ Cohen Written Testimony, supra note 205, at 2.
---------------------------------------------------------------------------
    For example, the design of the new World Trade Center PATH 
terminal, which began construction in March 2006 and is 
scheduled for completion in June 2011, has been compared to 
that of Grand Central Station. The majestic glass and steel 
terminal, designed by renowned architect Santiago Calatrava, 
will include new underground pedestrian walkways linked to 
another transit hub and a major building.\208\
---------------------------------------------------------------------------
    \208\ Id.
    [GRAPHIC] [TIFF OMITTED] T9452.009
    
    Other Federally-funded plans call for a new multi-level 
transit center serving 12 different subway lines to replace the 
old Fulton Street Station's maze of narrow ramps, stairs, 
platforms, and street entrances. The New York State 
Metropolitan Transportation Authority began construction in 
July 2005 on the new Fulton Street Transit Center. Construction 
is scheduled for completion in June 2009.\209\ The New York 
State Metropolitan Transportation Authority is also 
reconfiguring the South Ferry Terminal Subway Station to 
eliminate the tight-curve platforms that prevented operators 
from opening the doors on the rear five cars of their trains. 
The new design will also increase the number of entrances from 
one to three and make the station accessible to disabled 
passengers.\210\
---------------------------------------------------------------------------
    \209\ Id.
    \210\ Id.
    [GRAPHIC] [TIFF OMITTED] T9452.010
    
    [GRAPHIC] [TIFF OMITTED] T9452.011
    
    Third, because the funding for transportation projects came 
from the total $20 billion Federal aid package appropriated to 
help New York respond to, recover from, and rebuild after 9/11, 
the Federal funding allocated to Lower Manhattan mega-projects 
is finite. If costs exceed the fixed Federal funding, it is not 
clear what funding sources will cover any increases.
    The Subcommittee's research has shown that the need for 
effective internal and external oversight of the five Lower 
Manhattan mega-projects is heightened for several reasons:
     The projects will be paid for primarily using 
Federal funds.
     They will improve--not just replace--previous 
infrastructure.
     The funding is capped, so that cost overruns could 
be problematic.
     Simultaneous construction of multiple, major 
projects in a limited geographic area will demand extraordinary 
coordination and oversight.
    The Federally-funded mega-projects will have to compete 
with many other New York City construction projects--both 
prompted by 9/11 and otherwise--for contractors, labor, and 
materials. According to the DOT Office of Inspector General 
(OIG), within the next five years, more than $20 billion in 
construction work will likely be underway in Lower 
Manhattan.\211\ This work will require more than two million 
cubic yards of concrete, more than 200,000 concrete trucks, and 
a daily construction workforce of 6,500 for the next three to 
five years.\212\
---------------------------------------------------------------------------
    \211\ Written Testimony submitted by Mr. Todd J. Zinser before the 
Subcommittee on Management, Integration, and Oversight hearing 
entitled, ``Federal 9/11 Assistance to New York: Lessons Learned in 
Fraud Detection, Prevention, and Control.'' Part 3 ``Rebuilding,'' July 
13, 2006, at 2 (hereinafter Zinser Written Testimony).
    \212\ Written Testimony submitted by Mr. Ronald P. Calvosa before 
the Subcommittee on Management, Integration, and Oversight hearing 
entitled, ``Federal 9/11 Assistance to New York: Lessons Learned in 
Fraud Detection, Prevention, and Control.'' Part 3 ``Rebuilding,'' July 
13, 2006, at 3 (hereinafter Calvosa Written Testimony).
---------------------------------------------------------------------------
    In general, when substantial infusions of funding are 
directed to an area for reconstruction efforts, it increases 
the risk of fraud.\213\ In New York City, that is especially 
true due to the lingering influence of organized crime in the 
construction, trucking, demolition, and waste disposal 
industries. Additionally, rebuilding in densely-developed, 
public transit-reliant Lower Manhattan presents logistical 
challenges, not least of which is an inability to seal off the 
area from traffic and human congestion due to the area's status 
as the center of the financial industry.
---------------------------------------------------------------------------
    \213\ Id.
---------------------------------------------------------------------------
    Heightened attention should be paid to these projects 
because of the aforementioned factors and because of the fact 
that the DOT OIG recently cited the need for the FTA and the 
FHWA to strengthen their stewardship of Federal funding of 
highway and transit projects.\214\ The Subcommittee believes 
that the FTA and the various other Federal and state agencies 
involved in the mega-projects have established strong oversight 
mechanisms and internal control systems. Some of these are 
innovative and, if they perform well, may serve as a model for 
future disaster recovery efforts.
---------------------------------------------------------------------------
    \214\ U.S. Department of Transportation Office of Inspector 
General, DOT's 2006 Top Management Challenges, Rep. PT-2006-007, Nov. 
18, 2005 at 5.
---------------------------------------------------------------------------
    The DOT OIG recommended several steps that could be 
replicated to prevent fraud in ``mega-projects' in other parts 
of the country. These steps include: (1) establish a single 
complaint hotline; (2) conduct background checks on 
contractors, including contractor databases (e.g., VENDEX in 
New York City), the Federal debarment list, Occupational Safety 
and Health Administration (OSHA) violations, and licensing 
agencies; (3) design an employee background screening system in 
consultation with unions; (4) create a fraud awareness training 
program; and (5) utilize private independent integrity 
monitors.\215\
---------------------------------------------------------------------------
    \215\ Subcommittee Staff Briefing with Mr. Theodore Alves et al., 
Principal Assistant Inspector General for Auditing and Evaluation, U.S. 
Department of Transportation Office of Inspector General, June 20, 
2006, in Washington, D.C.
---------------------------------------------------------------------------

                           INTERNAL CONTROLS

    Through a Memorandum of Agreement with FEMA, FTA was 
designated as the lead agency to administer all Federally-
funded transportation projects in Lower Manhattan. To carry out 
its responsibilities, in 2002 FTA established a special 
oversight office, the Lower Manhattan Recovery Office (LMRO), 
exclusively to oversee the Lower Manhattan mega-projects.
    The FTA received nearly $90 million in dedicated funding 
for oversight.\216\ The LMRO coordinates the resources of the 
various agencies involved, including the Port Authority, the 
New York State Department of Transportation, and the New York 
State Metropolitan Transportation Authority by offering 
technical and logistical assistance and allowing for ``one-stop 
shopping'' for Federal transportation funds.
---------------------------------------------------------------------------
    \216\ Zinser Written Testimony, supra note 211.
---------------------------------------------------------------------------
    In a meeting with Subcommittee staff, FTA officials 
indicated they had encountered no fraudulent activity thus far 
in the use of Federal 9/11 financial assistance. They 
attributed this, in part, to establishment of the LMRO in July 
2002. The Office conducts rigorous project oversight that 
includes: (1) an oversight team leader; (2) project engineers; 
(3) a procurement consultant; (4) a financial management 
consultant; and (5) easy access to FTA headquarters legal 
staff. \217\ The Director of the Office recommended to 
Subcommittee staff the following key factors that control fraud 
in the use of 9/11 funds:
---------------------------------------------------------------------------
    \217\ Subcommittee Staff Briefing with Mr. Bernard Cohen, Director, 
Lower Manhattan Recovery Office, Federal Transit Administration, Feb. 
22, 2006, in Washington, D.C.
---------------------------------------------------------------------------
           establishment of a fraud hotline in the 
        Lower Manhattan Construction Command Center (LMCCC);
           the LMCCC Director of Security is an 
        experienced fraud fighter, who works with all agencies 
        involved in rebuilding on fraud prevention;
           a task force of Federal, state, and local 
        Inspectors General in Lower Manhattan meets at least 
        monthly;
           fraud prevention training is conducted; and
           private integrity monitors are hired and 
        deployed by the Metropolitan Transit Authority.\218\
---------------------------------------------------------------------------
    \218\ Id.
---------------------------------------------------------------------------
    In addition, as part of its examination of fraud controls 
for the remaining balance of 9/11 funding, the Subcommittee 
staff confirmed that FTA has adopted a ``risk management 
approach'' for the Lower Manhattan recovery projects.\219\ FTA 
officials told Subcommittee staff that FTA will: (1) apply a 
risk analysis ``in early project development for all LMRO 
projects''; (2) ``focus project management on identification, 
assessment and mitigation of risks'; and (3) conduct 
``continuous assessment of project scope, budget and schedule 
based on risk status.'' \220\
---------------------------------------------------------------------------
    \219\ Id.
    \220\ Id.
---------------------------------------------------------------------------
    As part of its risk analysis to control costs, FTA advised 
Subcommittee staff of the types of budget and scheduling risks 
that will be considered. These include: ``security; utilities; 
historic preservation; risks due to project scope; risks due to 
cost escalation; construction risks; real estate and other 
property risks; and project coordination risks.'' \221\
---------------------------------------------------------------------------
    \221\ Id.
---------------------------------------------------------------------------

Best practice: Dedicated temporary oversight office

    The Subcommittee recommends allocating a certain percentage 
of disaster-recovery mega-project funds to establish a special 
oversight office within the Federal agency with primary 
jurisdiction over the relevant mega-projects. The FTA's LMRO 
could provide a working model for such an office.
    The Subcommittee believes two types of cost-control 
techniques employed by LMRO warrant discussion. Per FTA's 
requirements, LMRO utilizes value-engineering studies to 
objectively review all reasonable alternatives during the 
design phase in order to find more cost-effective alternatives. 
LMRO has already implemented recommendations from such studies 
and officials told the DOT OIG the recommendations have saved 
nearly $67 million on the Fulton Street Transit Center project 
alone.\222\ Additionally, a risk-management approach is 
intended to keep costs within estimates and avoid overruns that 
would price projects over the fixed amounts the Federal 
government has appropriated.\223\
---------------------------------------------------------------------------
    \222\ Zinser Written Testimony, supra note 211, at 15.
    \223\ Id. at 5.
---------------------------------------------------------------------------
    The FHWA and FTA transfer funding on a reimbursement basis. 
Accordingly, grantees must meet certain guidelines to receive 
reimbursement, and FHWA conducts physical oversight and process 
reviews to ensure those guidelines are met. As an added layer 
of oversight, FHWA has requirements in place to monitor a 
state's expenditures. If a funding recipient fails to comply 
with the FHWA's guidelines, FHWA has the capability to recover 
funds.

                           EXTERNAL CONTROLS

    In testimony before the Subcommittee on July 13, 2006, 
Acting DOT Inspector General Todd J. Zinser announced that his 
agency had established an OIG Lower Manhattan Transportation 
Oversight Team specifically to support oversight of the 9/11 
recovery mega-projects in Lower Manhattan. Team members and 
resources were redeployed from the DOT OIG's work on the $14.6 
billion Central Artery/Tunnel Project--or ``Big Dig''--in 
Boston.\224\
---------------------------------------------------------------------------
    \224\ Id.
---------------------------------------------------------------------------

Best practice: Temporary fraud prevention task force drawn from other 
        agencies

    The Lower Manhattan Construction Integrity Team was 
established in 2004 to prevent fraud in publicly-funded 
projects in Lower Manhattan. It includes the DOT OIG, LMCCC, 
LMDC, 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 
OIG and Chief Compliance Officer, the Port Authority OIG, and 
the OIGs of the U.S. Departments of Labor (DOL) and Housing and 
Urban Development (HUD).
    The Lower Manhattan Construction Integrity Team has 
developed a range of measures for the prevention of fraud, 
including best practices for screening 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 private 
integrity monitors to supplement existing oversight resources. 
The Lower Manhattan Construction Integrity Team members also 
maintain a joint fraud complaint hotline, which can be accessed 
at www.LowerManhattan.info.\225\ A similar task force, the 
Hurricane Katrina Fraud Task Force, subsequently was formed to 
monitor the hurricane recovery efforts in the Gulf states.\226\
---------------------------------------------------------------------------
    \225\ Id. at 9.
    \226\ Id.
---------------------------------------------------------------------------

Best practice: Full-time independent coordination agency that prevents 
        fraud

    The Lower Manhattan Construction Command Center (LMCCC) 
began as a voluntary collaboration among project sponsors 
intended to coordinate overlapping construction projects.\227\ 
On November 22, 2004, New York Governor George Pataki and New 
York City Mayor Michael Bloomberg issued parallel executive 
orders to establish the LMCCC as a formal, full-time oversight 
agency. According to those orders, the LMCCC was created 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.'' \228\ Funded 
mostly through a $6.5 million FTA grant, the LMCCC brings 
together private developers, public agencies and authorities, 
utilities, businesses, and resident representatives in one 
physical location to resolve disputes among agencies, 
coordinate construction logistics, and prevent fraud.\229\
---------------------------------------------------------------------------
    \227\ Cohen Written Testimony, supra note 205, at 4.
    \228\ New York Governor George E. Pataki, Establishing the Lower 
Manhattan Construction Command Center, Exec. Order 133, Nov. 22, 2004; 
New York City Mayor Michael R. Bloomberg, Creation of the Lower 
Manhattan Construction Command Center, Exec. Order 53, Nov. 22, 2004.
    \229\ Calvosa Written Testimony, supra note 212, at 3.
---------------------------------------------------------------------------

Best practice: Fraud awareness training

    LMCCC, together with members of the Lower Manhattan 
Construction Integrity Team, developed a fraud prevention 
training module for presentation to contractors and employees 
to provide information about prohibited conduct. For example, 
contractor employees are informed of the penalties for bribing 
public servants, submitting false documents, paying incorrect 
wages, or engaging in other fraudulent activity.\230\ While 
common among public sector employees, this sort of training has 
rarely been provided to contractor staff.\231\ The Subcommittee 
recommends mandating this training for employees of contractors 
working on future disaster recovery mega-projects.
---------------------------------------------------------------------------
    \230\ Id. at 5.
    \231\ Id.
---------------------------------------------------------------------------

Best practice: Contractor employee screening and access control

    LMCCC, in collaboration with the Port Authority OIG and 
organized labor, conducts background checks on contractor 
employees at Lower Manhattan construction sites, especially the 
World Trade Center site. 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 and criminal record searches to determine if 
prospective workers have been convicted or charged with certain 
crimes. Workers cleared by the checks will be issued an access 
card. Initially, the access control program will be implemented 
only at the World Trade Center site. However, LMCCC hopes to 
extend it to other construction projects in Lower 
Manhattan.\232\
---------------------------------------------------------------------------
    \232\ Id. at 7.
---------------------------------------------------------------------------

Best practice: Private integrity monitors

    Borrowing from the successful debris removal protocols 
developed at the World Trade Center site, LMDC has retained a 
private integrity monitor to oversee the demolition of a 
building located at 130 Liberty Street. The New York State 
Metropolitan Transportation Authority has retained compliance 
monitors at its Fulton Street Transit Center and South Ferry 
Subway Station projects. The Port Authority plans to hire an 
integrity monitor to oversee the construction of the new World 
Trade Center PATH terminal.
    It is the sense of the Subcommittee that replicating the 
use of private integrity monitors, as was done for not only 
debris removal, but also for mega-project construction, is 
likely to significantly deter and prevent fraud. As noted 
above, the Subcommittee recommends the use of private integrity 
monitors in future major disaster recovery efforts.

                               Conclusion

    The terrorist attacks of September 11, 2001, have left a 
lasting impact not only on New York City, Northern Virginia, 
Southwestern Pennsylvania, but also on the Nation as a whole. 
The outpouring of support for victims of the attacks and their 
families was unparalleled. At that time, people across the 
country and around the world reached out to offer support in 
any way they could. Unfortunately, unscrupulous individuals 
sought to exploit the disaster for their own financial benefit.
    Under the direction of Subcommittee Chairman Mike Rogers 
and Ranking Member Kendrick B. Meek, bipartisan Subcommittee 
staff--augmented by a FBI Supervisory Special Agent and an 
investigative journalist on detail to the Subcommittee--
conducted a six-month review, with technical assistance 
provided by the Government Accountability Office. Through its 
review, the Subcommittee has concluded that there are important 
lessons to be learned from the Federal Government's and New 
York's response to 9/11--both systemic problems which require 
attention and best practices worthy of replication.
    This report makes recommendations for how those lessons can 
be incorporated into the planning for and response to major 
natural disasters and potential future terrorist attacks to 
help ensure assistance programs are more cost-effective. In 
addition to this report, the Subcommittee plans to develop 
legislation to implement many of this report's recommendations 
so that future disaster assistance programs can benefit from 
the lessons learned in New York City after the attacks of 
September 11, 2001. It is the Subcommittee's view that many of 
the best practices identified in this report, if in place prior 
to last year's hurricane season, could have prevented waste, 
fraud and abuse in disaster assistance programs responding to 
Hurricanes Katrina and Rita.
                               APPENDIX A

                          Agency Budget Tables

                   FEDERAL EMERGENCY MANAGEMENT AGENCY
                    [Figures in millions of dollars]
------------------------------------------------------------------------
                                      Total        Total        Total
             Activity               committed    obligated    disbursed
------------------------------------------------------------------------
                        Initial Disaster Response

Search and rescue operations.....           22           22           22
Debris removal operations........        1,718        1,718        1,718
Emergency transportation measures          482          482          482
Testing and cleaning efforts \1\.           94           94           89
Other initial response services..          212          205          121

           Compensation for Disaster-Related Costs and Losses

Total assistance for State, City,        2,981        2,980        2,702
 and other organizations.........
    Assistance for the State,            1,256        1,256        1,256
     City, and other
     organizations...............
    Reimbursement of associated          1,258        1,257        1,257
     costs authorized by Congress
    Hazard mitigation grants.....          307          307           31
    Other administrative costs...          160          160          158
Total assistance for individuals           539          529          529
 and families....................
    Mortgage and rental                    222          222          222
     assistance..................
    Crisis Counseling............          164          154          154
    Individual and family grants.          105          105          105
    Other individual assistance..           48           48           48

               Infrastructure Restoration and Improvement

Restoring and enhancing the Lower        2,750        2,750          135
 Manhattan transportation system
 \2\.............................
                                  --------------------------------------
      Total \3\..................        8,798        8,780        5,798
------------------------------------------------------------------------
\1\ The funds allocated for testing and cleaning include all FEMA
  transfers to the Environmental Protection Agency (EPA).
\2\ From FEMA's perspective, the funds for the restoration of
  Manhattan's transit system were obligated upon the execution of the
  Interagency Agreement that committed these funds to the Department of
  Transportation (DOT). DOT estimates that from the funds available to
  restore and enhance Lower Manhattan's transportation system,
\3\ All figures are current as of December 31, 2005.


            U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
                    (Figures in millions of dollars)
------------------------------------------------------------------------
                                      Total        Total        Total
             Activity               committed    obligated    disbursed
------------------------------------------------------------------------
                     Initial Response Assistance \4\

Temporary utility repairs........         250           250          160
           Compensation for Disaster-Related Costs and Losses

Residential grants for                     281          281          236
 individuals and families........
Business recovery grants and               624          624          554
 loans...........................
Compensation to businesses for              43           43           43
 disproportionate losses.........
Compensation to businesses for              33           33           33
 disproportionate loss of
 workforce.......................
Bridge loans.....................            5            5            0
Technical assistance grants......            5            5            4
Business information program ....            5            5            4
               Infrastructure Restoration and Improvement

Rebuilding and improving Lower               4            0            0
 Manhattan transportation system.
Permanent utility infrastructure           500          500           33
 repairs.........................
Short-term capital projects......           68            0            0
                     Economic Revitalization Efforts

Job creation and retention grants          320          320          232
 ................................
Small firm attraction and                  155          155          110
 retention grants................
Other planning efforts...........          93            93           66
                  Other Economic Revitalization Efforts

Parks and open space improvements           31           31            8
Affordable housing construction             50           50            0
 and improvements................
Memorial and cultural programs...          370          370          206
Tourism..........................           10           10            7
Employment training and public               8            8            5
 service activities..............
Other economic revitalization              324          324           22
 improvements ...................
    Total \5\....................       3,107         3,107        1,723
------------------------------------------------------------------------
\4\ Congress appropriated $3.48 billion to HUD; as of February 6, 2006,
  HUD had committed $3.107 billion to specific purposes. Thus, $376
  million has not yet been committed to a specific activity.
\5\ All figures are current as of February 6, 2006.


                    U.S. DEPARTMENT OF TRANSPORTATION
                    [Figures in millions of dollars]
------------------------------------------------------------------------
                                      Total        Total        Total
             Activity               committed    obligated    disbursed
------------------------------------------------------------------------
                       Initial Response Assistance

Federal Transit Administration's           100          100           76
 (FTA) emergency transportation
 measures........................

               Infrastructure Restoration and Improvement

Restoring and enhancing the Lower        5,003        4,041          551
 Manhattan transportation system
 \6\.............................
    Transit projects.............        1,800        1,397          220
    Transit projects to be               2,750        2,291          137
     reimbursed by FEMA \7\......
    Street resurfacing and                 242          160           77
     reconstruction..............
    Ferry projects...............          100           93           50
    Rail safety projects.........          100          100           67
                                  --------------------------------------
        Total \8\................        2,353        1,850          490
------------------------------------------------------------------------
\6\ Not including projects reimbursed by FEMA, DOT committee $2.242
  billion, of which $1.75 billion was obligated and $414 million was
  disbursed.
\7\ FEMA reimbursements are not included in DOT funding totals.
\8\ All figures are current as of December 31, 2005.


                   U.S. SMALL BUSINESS ADMINISTRATION
                    [Figures in millions of dollars]
------------------------------------------------------------------------
                                      Total        Total        Total
            Activity                committed    obligated    disbursed
------------------------------------------------------------------------
           Compensation for Disaster-Related Costs and Losses

Supplemental Terrorist Activity           75             41           40
 Relief (STAR) Subsidy..........
World Trade Center/Pentagon              135            116          116
 Subsidy........................
World Trade Center/Pentagon               40             25           25
 Administration.................
SBA funds from initial                   250
 appropriation..................
Funds Transferred Out...........          51.4
Subtotal........................         198.6
Funds Rescinded.................           1.5
------------------------------------------------------------------------
      Total funds available         \10\ 197.1          182          181
       after rescission and
       transfer \9\.............
------------------------------------------------------------------------
\9\ All figures are current as of June 23, 2006. Following the initial
  $250 million appropriation, the total commitments for the SBA loan
  programs were reduced from the STAR program by $1.5 million in FY
  2006. In addition, $51.4 million of unused emergency funding was
  transferred to pre-9/11 loan programs and other programs at the
  closure of the STAR loan and the World Trade Center/Pentagon (WTCP)
  programs ($27.4 million was transferred to STAR 7(a) loans in FY03;
  $15 million to the regular disaster loans from WTCP in FY04; and $9
  million for WTCP Administration transferred back to the Treasury and
  Office of Management and Budget (OMB). Because the STAR loan and WTCP
  programs have closed, $14,976,000 of unobligated funds are no longer
  available--$5 million for STAR loans; $3.8 million for WTCP
  Subsidiary; and $6.192 million for WTCP administration. SBA's FY07
  budget proposed the return of these unobligated amounts to the
  Treasury and Office of Management and Budget. In addition, the $1
  million from the Start Subsidy Budget Authority that was obligated but
  not disbursed is no longer available.
\10\ The effective amount of ``committed'' funds is composed of $46.102
  million from the STAR loan program, $119.968 million from WTCP
  Subsidy; and $31 million WTCP administration.


                        U.S. DEPARTMENT OF LABOR
                    [Figures in millions of dollars]
------------------------------------------------------------------------
                                      Total        Total        Total
            Activity                committed    obligated    disbursed
------------------------------------------------------------------------
           Compensation for Disaster-Related Costs and Losses

Funds Allocated to DOL Programs:
    Assistance to DOL for                   6             6            6
     management, salaries and
     expenses...................
    Reimbursement for                       2             2            2
     Occupational Safety and
     Health Administration/
     Employee Benefits Security
     Administration salaries and
     expenses...................
New York Agencies:
    New York State Unemployment           7.6             1            1
     Insurance Fund.............
    New York State Training and          57.5            49           49
     Employment Services
     Operations.................
    New York State Workers                175            55           53
     Compensation...............
    Total Initial Funding to DOL        249.1           113          111
Total Assistance Allocated to             241           105          103
 New York \11\..................
Subsequent Funding Activity:
    Rescinded Funds.............       (122.2)  ...........  ...........
    Funds Returned to New York             50   ...........  ...........
     through Supplemental
     Appropriations \12\........
    Subtotal of Funds Made              168.8   ...........  ...........
     Available to New York......
    Funds De-obligated at New           (12.8)  ...........  ...........
     York City's Request........
------------------------------------------------------------------------
\11\ All figures are current as of February 15, 2006.
\12\ Congress rescinded $122.3 million from the initial $249 million
  appropriated to DOL, recovering $2.3 million from New York State
  Unemployment Insurance and $120 million from the New York State
  Workers Compensation Fund. After appeals from New York, $50 million
  was returned through DOL and the remaining $75 million through the
  U.S. Department of Health and Human Services.


              U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES
                    [Figures in millions of dollars]
------------------------------------------------------------------------
                                    Total         Total         Total
           Activity               committed     obligated     disbursed
------------------------------------------------------------------------
                       Initial Response Assistance

Centers for Disease Control             10            10            10
 and Prevention--Enhancing lab
 security.....................
Centers for Disease Control             10            10            10
 and Prevention--Environmental
 hazard control...............
Centers for Disease Control              3             3             3
 and Prevention--Medical
 supplies.....................
Substance Abuse and Mental              28            28            28
 Health Services
 Administration (SAMHSA) \13\.
Administration on Children and          23.7          23.7          23.7
 Families \14\................
Administration on Aging--                1.3           1.3           1.3
 Senior Citizen Centers.......
                               -----------------------------------------
      Total Initial Response            76            76            76
       Assistance.............

           Compensation for Disaster-Related Costs and Losses

Health Resources and Services           45            45            45
 Administration (HRSA) for
 Health Centers...............
                               -----------------------------------------
      Total \15\..............         121           121           121
------------------------------------------------------------------------
\13\ New York City received $22 million of the $28 million allocated to
  SAMHSA, according to information obtained by Management, Integration,
  and Oversight Subcommittee staff by telephone call with officials of
  the U.S. Department of Health and Human Services, May 16, 2006
  (hereafter referred to as ``May 16 telephone call'').
\14\ New York State received a majority of the funds allocated to the
  Administration on Children and Families, but some funding was also
  provided to Pennsylvania, Virginia, and Washington, D.C. HHS was
  unable to provide the exact allocation of funds by state, according to
  May 16 telephone call.
\15\ All figures are current as of May 16, 2006.


                       U.S. DEPARTMENT OF JUSTICE
                    [Figures in millions of dollars]
------------------------------------------------------------------------
                                      Total        Total        Total
             Activity               committed    obligated    disbursed
------------------------------------------------------------------------
           Compensation for Disaster-Related Costs and Losses

Office of Justice Programs--                 7            7            7
 funding for various assistance
 programs \16\...................
Salaries and Expenses for the                7            7            7
 General Litigation Division.....
                                  --------------------------------------
    Total Assistance for state,             14           14           14
     city, and other
     organizations...............
Victim Compensation..............           54           54           54
Office of Justice Programs--                24           24           24
 funding to the New York Crime
 Victims Board...................
Office of Justice Programs--                30           30           30
 Formula Grants to the New York
 Crime Victims Board.............
                                  --------------------------------------
    Total Assistance for                    54           54           54
     Individuals and Families
     \17\........................
      Total \18\.................           75           70           68
------------------------------------------------------------------------
\16\ This includes a $7 million obligation to New York University for
  ``NYU Center Catastrophe,'' $38,271 to Nassau County to implement the
  Law Enforcement Tribute Act, and $367,291 to New York City for the
  County and Municipal Agency Domestic Preparedness Equipment Program.
\17\ The Department of Justice (DOJ) also obligated and disbursed
  $246,518.56 for crisis counseling.
\18\ All figures are current as of March 31, 2006. DOJ's grants
  accounted for $63 million of its $68 million in commitments for
  assistance, while salaries and expenses accounted for $7 million.
  Approximately $5 million in commitments remained unspecified as of
  March 31, 2006. Thus, the obligated amounts total approximately $70
  million ($7 million in salaries and expenses and $63 million in
  grants). In addition to the $75 million in DOJ funds from the original
  $20 billion in assistance to New York, DOJ has provided over $300
  million in direct and indirect assistance to New York City and New
  York State in response to 9/11 through Office of Justice Programs
  (OJP) funding, OJP formula grants, U.S. Attorneys Assistance, and COPS
  grants.

                    U.S. Department of the Treasury

    The Government Accountability Office reported that Treasury 
received $26 million of the initial $20 billion in emergency 
funds provided to New York City. Treasury advised the 
Subcommittee that it could not confirm that figure because it 
had lost its ability to track the funding following the 2003 
reorganization that resulted in the transfer of the Federal Law 
Enforcement Training Center, U.S. Customs Service, and the U.S. 
Secret Service from Treasury to the newly created Department of 
Homeland Security.
    However, Treasury advised that the expended funds were 
primarily used to reestablish the Lower Manhattan offices of 
the U.S. Secret Service, the Internal Revenue Service, and the 
Treasury Inspector General for Tax Administration.

                  U.S. GENERAL SERVICES ADMINISTRATION
                    [Figures in millions of dollars]
------------------------------------------------------------------------
                                      Total        Total        Total
             Activity               committed    obligated    disbursed
------------------------------------------------------------------------
           Compensation for Disaster-Related Costs and Losses

Security upgrades at the New York          4.5          4.5          4.5
 Civic Center....................
Other Accommodations to GSA               26.7         26.7         26.7
 Tenants.........................
                                  ======================================
    Total assistance for GSA              31.2         31.2         31.2
     tenants.....................
                                  --------------------------------------
Other security costs, including            1.6          1.6          1.6
 overtime, hiring of guards,
 equipment purchases, and
 updating communications systems.
                                  --------------------------------------
      Total \19\.................         32.8         32.8         32.8
------------------------------------------------------------------------
\19\ All figures are current as of June 30, 2006.

                U.S. Securities and Exchange Commission

Total Funds Allocated to the SEC \20\...................     $20,705,000
Funds Obligated by the SEC..............................      20,694,428
Funds Expended by the SEC...............................      15,131,898
Funds Available to the SEC..............................       5,562,530

\20\ All figures are current as of June 7, 2006.
---------------------------------------------------------------------------

              U.S. Commodities Futures Trading Commission

Total Funds Allocated to the CFTC \21\..................     $17,100,000
Funds Expended the CFTC.................................      10,618,162
Unexpended Funds........................................       6,481,838
Unliquidated Obligations................................       5,666,473
Available Funds.........................................         815,365

\21\ All figures are current as of June 22, 2006.
---------------------------------------------------------------------------

                      U.S. Department of Education

Funds Allocated to the Department of Education \22\.....     $10,900,000
Funds Allocated to New York City through Project School 
    Emergency Response to Violence (SERV)...............       4,200,000
Funds Allocated to New York State.......................       1,700,000
Funds Allocated for New York City Extended Services.....       5,000,000

\22\ All figures are current as of June 15, 2006.
---------------------------------------------------------------------------

                      U.S. Department of Commerce

Economic Development Administration Grants:
    Grant to the Empire State Development Corporation to 
      produce an emergency planning process and 
      redevelopment strategy for immediate survival and 
      long-term business development....................      $1,000,000
National Telecommunication and Information 
    Administration Grants:
    Grant to Educational Broadcasting Corporation, Inc. 
      to replace transmission equipment of WNET-TV, 
      Channel 13, which was destroyed in the attacks....       6,429,502
    Grants to WNYC Radio to replace transmission 
      equipment of WNYC-FM..............................       1,421,969
Total Funds Allocated to the Department of Commerce \23\       9,250,000

\23\ All figures are current as of June 12, 2006.
---------------------------------------------------------------------------

                  U.S. Social Security Administration

    The Government Accountability Office reported that the 
Social Security Administration (SSA) received $4 million. The 
SSA disputed that figure to the Subcommittee staff, and 
asserted that it received $2.5 million.
    The SSA advised that it used the funding to reestablish its 
Lower Manhattan offices.

              U.S. Equal Employment Opportunity Commission

Funds Allocated to the EEOC \24\........................      $1,310,000
Funds Expended by the EEOC..............................       1,308,000
Funds Available to the EEOC.............................           2,000

\24\ All figures are current as of June 7, 2006.
---------------------------------------------------------------------------

              U.S. Office of National Drug Control Policy

    On December 3, 2001, the ONDCP approved a grant awarding 
the New York City District Attorney's Office $2.3 million to 
reestablish the Lower Manhattan office of the New York-New 
Jersey High Intensity Drug Trafficking Area (HIDTA).
    The HIDTA used the funding to locate and renovate its new 
office space and purchase equipment.

            U.S. Department of Housing and Urban Development


                    Office of the Inspector General

    HUD OIG received and obligated $1,000,000 in Emergency 
Relief Funds for disaster recovery activities and assistance 
related to terrorist acts in New York.
    HUD OIG used these funds to reconstitute its investigation 
office located in New York City. These costs included 
rebuilding the structure of its offices as well as for the 
purchase of vehicles, a phone system, office equipment, 
furniture, and computers.
    HUD OIG reported that all allocated funds have been 
dispersed and expended.

                               APPENDIX B

    Note: Names of individuals have been redacted.

                                       CONVICTIONS FOR FRAUDULENT ACTIVITY
----------------------------------------------------------------------------------------------------------------
                                                                   Date of                          Restitution/
    Date charged            Charges            Jurisdiction       conviction        Sentence          recovery
----------------------------------------------------------------------------------------------------------------
5/23/2002..........  18 U.S.C. 641.......  SDNY................    5/23/2002  3 months............    $26,140.00
2/20/2003..........  18 U.S.C. 287.......  SDNY................    3/26/2003  probation...........       $11,683
1/26/2004..........  18 U.S.C. 641/1341..  SDNY................    9/15/2004  probation...........        $5,250
5/11/2004..........  18 U.S.C. 64          SDNY................    4/25/2005  18 months...........       $45,251
                      1,1001,1343-12
                      counts.
10/1/2001..........  Attempted Theft.....  Lexington, KY.......    3/15/2002  60 months probation.  ............
11/8/2001..........  Offering a False      New York County.....    8/28/2002  Diversion...........          $975
                      Instrument (FI).
11/8/2001..........  Offering a False      New York County.....    8/27/2002  Restitution & Cond.         $2,420
                      Instrument.                                              Disch.
11/8/2001..........  Offering a False      New York County.....    11/4/2002  Restitution & Cond.         $1,250
                      Instrument.                                              Disch.
11/8/2001..........  Offering a False      New York County.....    8/28/2002  Conditional           ............
                      Instrument.                                              Discharge.
11/8/2001..........  Offering a False      New York County.....    11/4/2002  Restitution & Cond.         $1,145
                      Instrument.                                              Disch.
11/8/2001..........  Offering a False      New York County.....    11/4/2002  Restitution & Cond.         $1,530
                      Instrument.                                              Disch.
11/8/2001..........  Offering a False      New York County.....    11/4/2002  Restitution & Cond.           $550
                      Instrument.                                              Disch.
11/8/2001..........  Offering a False      New York County.....    8/27/2002  Restitution & Cond.         $1,125
                      Instrument.                                              Disch.
11/8/2001..........  Offering a False      New York County.....    8/28/2002  60 months probation.          $735
                      Instrument.
1/28/2002..........  Offering a False      New York County.....    8/27/2002  60 months probation.        $6,508
                      Instrument.
1/28/2002..........  Offering a False      New York County.....    8/27/2002  36 months probation.        $8,740
                      Instrument.
1/28/2002..........  Offering a False      New York County.....    3/19/2003  60 months probation.  ............
                      Instrument.
1/28/2002..........  Offering a False      New York County.....    3/19/2003  60 months probation.  ............
                      Instrument.
4/8/2002...........  Offering a False      New York County.....    4/14/2003  60 months probation.        $5,753
                      Instrument.
11/8/2001..........  Offering a False      New York County.....     4/8/2003  36 months probation.          $671
                      Instrument.
1/8/2002...........  Offering a False      New York County.....    8/27/2002  Restitution & Cond.         $1,268
                      Instrument.                                              Disch.
2/8/2002...........  Offering a False      EDNY................    5/23/2002  3 months confinement        $6,508
                      Instrument.
4/1/2002...........  Offering a False      New York County.....    8/27/2002  Restitution & Cond.        $11,451
                      Instrument.                                              Disch.
4/5/2002...........  Offering a False      New York County.....     4/5/2002  12 months             ............
                      Instrument.                                              confinement.
11/3/2001..........  Offering a False      New York County.....     7/9/2002  1 month probation...  ............
                      Instrument.
10/2/2002..........  False Claim.........  ND-GA...............     8/6/2004  21 months                     $400
                                                                               confinement.
4/8/2002...........  Offering a False      New York County.....    5/14/2002  5 months confinement       $11,194
                      Instrument.
4/7/2002...........  Offering a False      New York County.....    12/2/2002  36 months probation.  ............
                      Instrument.
1/7/2002...........  Offering a False      New York County.....    6/21/2002  10 days community     ............
                      Instrument.                                              service.
4/2/2002...........  Offering a False      New York County.....   12/16/2003  conditional           ............
                      Instrument.                                              Discharge.
3/19/2002..........  Offering a False      New York County.....     2/5/2003  12 months probation.  ............
                      Instrument.
3/19/2002..........  Offering a False      New York County.....    11/5/2002  Restitution & Cond.        $31,000
                      Instrument.                                              Disch.
4/4/2002...........  Offering a False      New York County.....    10/1/2002  6 months confinement        $3,438
                      Instrument.
4/11/2002..........  Offering a False      New York County.....    4/22/2002  36 months probation.  ............
                      Instrument.
2/20/2003..........  Offering a False      New York County.....    9/15/2003  6 months confinement       $11,783
                      Instrument.
6/19/2002..........  Offering a False      New York County.....   10/31/2002  36 months probation.  ............
                      Instrument.
5/31/2002..........  Offering a False      New York County.....    8/22/2002  54 months             ............
                      Instrument.                                              confinement.
6/19/2002..........  Offering a False      New York County.....     3/3/2003  Restitution & Cond.         $1,000
                      Instrument.                                              Disch.
6/18/2002..........  Offering a False      New York County.....     4/2/2003  60 months probation.  ............
                      Instrument.
6/19/2002..........  Offering a False      New York County.....    2/19/2003  12 months probation.          $712
                      Instrument.
6/26/2002..........  Theft by deception..  Camden Cty, NJ......    11/7/2003  10 years confinement  ............
3/20/2002..........  Offering a FI,        New York County.....     9/3/2003  5 years probation...  ............
                      GrandLar.
6/19/2002..........  Offering a False      New York County.....    3/13/2003  3 years probation...  ............
                      Instrument.
3/20/2002..........  Offering a FI,        New York County.....     8/7/2003  3-6 years             ............
                      GrandLar.                                                confinement.
6/19/2002..........  Offering a False      New York County.....    3/23/2004  100 hours community   ............
                      Instrument.                                              service.
11/13/2002.........  Offering a FI,        New York County.....    11/5/2003  2-6 years prison....
                      GrandLar.
11/13/2002.........  Offering a FI,        New York County.....    11/5/2003  1 year prison.......  ............
                      GrandLar.
6/19/2002..........  Grand Larceny.......  New York County.....    6/20/2003  36 months probation.  ............
11/13/2002.........  Grand Larceny.......  New York County.....    4/15/2003  1 1/2-4 years prison  ............
4/10/2003..........  Forgery, False        New York County.....     1/6/2004  Counseling..........  ............
                      BusRec.
11/13/2002.........  Grand Larceny.......  New York County.....    9/29/2003  2-4 years prison....  ............
3/17/2003..........  Grand Larceny.......  SDNY................    6/12/2003  6 month probation...  ............
4/9/2003...........  Grand Larceny.......  New York County.....    12/8/2003  5 years probation...        $9,366
3/17/2005..........  18 U.S.C. 1341/641..  SDNY................     5/3/2005  3 years probation...        $1,168
11/23/2004.........  18 U.S.C. 1343/1957.  SDNY................     6/8/2005  18 months...........       $18,500
7/6/2005...........  31USC3729...........  SDNY................          n/a  n/a.................      $300,000
12/17/2002.........  18 U.S.C. 371, 1001,  SDNY................    10/3/2003  51 months...........      $373,228
                      1341.
12/17/2002.........  18 U.S.C. 371, 1001,  SDNY................    10/3/2003  33 months...........      $373,228
                      1341.
11/24/2003.........  18 U.S.C. 641.......  SDNY................    8/25/2004  24 months...........      $170,108
6/21/2004..........  18 U.S.C. 641.......  SDNY................    7/19/2004  probation...........       $26,250
7/1/2003...........  18 U.S.C. 641.......  SDNY................    4/15/2004  probation...........  ............
5/29/2003..........  18 U.S.C. 641.......  SDNY................    5/29/2003  probation...........  ............
8/25/2003..........  18 U.S.C. 1341......  SDNY................    10/1/2003  probation...........          $250
8/18/2003..........  18 U.S.C. 641/1341..  SDNY................    9/29/2003  6 months............  ............
12/9/2003..........  18 U.S.C. 641/1341..  SDNY................     2/5/2004  2 months............        $2,228
12/8/2004..........  18 U.S.C. 641.......  SDNY................    3/11/2005  pending.............  ............
8/25/2004..........  18 U.S.C. 1341......  SDNY................    8/25/2004  house/arr...........        $3,683
7/1/2005...........  18 U.S.C. 641.......  SDNY................   11/14/2005  time serv...........  ............
                     42 U.S.C. 408.......  ....................  ...........  ....................  ............
3/16/2005..........  31 U.S.C. 3729......  SDNY................          n/a  n/a.................       $36,500
8/19/2002..........  18 U.S.C. 371/1341..  SDNY................    6/16/2003  97 months...........      $504,869
12/22/2003.........  18 U.S.C. 371/1343..  SDNY................    6/10/2004  21 months...........       $73,430
1/26/2004..........  18 U.S.C. 641/841...  SDNY................     6/9/2004  48 months...........       $31,718
3/8/2005...........  18 U.S.C. 1341/1001.  SDNY................    9/16/2005  pending.............  ............
                     18 U.S.C. 287.......  DNJ.................    2/28/2006  30 months...........  ............
5/26/2004..........  18 U.S.C. 1001......  SDNY................    8/31/2004  4 months............  ............
3/13/2002..........  Grand Larceny.......  New York County.....  ...........  ....................      $190,867
3/25/2002..........  Grand Larceny.......  New York County.....  ...........  ....................       $21,500
3/26/2002..........  Grand Larceny.......  New York County.....  ...........  ....................      $272,800
                     Fraud...............  New York County.....  ...........  ....................       $89,599
                     Forgery.............  New York County.....  ...........  ....................  ............
                     false records.......  New York County.....  ...........  ....................  ............
                     Forgery.............  New York County.....  ...........  ....................       $31,000
                     Forgery.............  New York County.....  ...........  ....................       $41,761
                     Forgery.............  New York County.....  ...........  ....................       $13,500
                     Forgery.............  New York County.....  ...........  ....................        $4,000
                     fraud...............  New York County.....  ...........  ....................       $10,000
                     fraud...............  New York County.....  ...........  ....................        $3,300
                     false records.......  New York County.....  ...........  ....................        $4,000
                     grand Larceny,        New York County.....  ...........  ....................   $108,905.28
                      forgery.
                     grand Larceny,        New York County.....  ...........  ....................  ............
                      forgery.
                     grand larceny.......  New York County.....  ...........  ....................       $20,774
                     grand Larceny,        New York County.....  ...........  ....................     $3,966.67
                      Forgery.
                     fraud...............  New York County.....  ...........  ....................       $10,994
                     grand larceny.......  New York County.....  ...........  ....................        $4,500
                     Forgery.............  New York County.....  ...........  ....................  ............
                     larceny, forgery....  New York County.....  ...........  ....................          $685
                     ....................  New York County.....  ...........  ....................       $12,170
11/13/2002.........  Theft...............  New York County.....  ...........  ....................       $70,000
11/13/2002.........  Theft...............  New York County.....  ...........  ....................        $8,000
11/13/2002.........  Theft...............  New York County.....  ...........  ....................   $114,653.09
11/13/2002.........  Theft...............  New York County.....  ...........  ....................       $45,283
11/13/2002.........  Theft...............  New York County.....  ...........  ....................       $45,176
11/13/2002.........  Theft...............  New York County.....  ...........  ....................          $400
11/13/2002.........  Theft...............  New York County.....  ...........  ....................          $400
11/13/2002.........  Theft...............  New York County.....  ...........  ....................          $950
11/13/2002.........  Theft...............  New York County.....  ...........  ....................        $4,000
11/13/2002.........  Theft...............  New York County.....  ...........  ....................        $4,400
11/13/2002.........  Theft...............  New York County.....  ...........  ....................        $3,000
11/13/2002.........  Theft...............  New York County.....  ...........  ....................        $3,780
11/13/2002.........  Theft...............  New York County.....  ...........  ....................        $3,850
11/13/2002.........  Theft...............  New York County.....  ...........  ....................        $9,226
11/13/2002.........  Theft...............  New York County.....  ...........  ....................          $800
11/13/2002.........  Theft...............  New York County.....  ...........  ....................
11/13/2002.........  Theft...............  New York County.....  ...........  ....................       $35,875
11/13/2002.........  Theft...............  New York County.....  ...........  ....................
11/13/2002.........  Theft...............  New York County.....  ...........  ....................    $46,490.52
11/13/2002.........  Theft...............  New York County.....  ...........  ....................     $8,092.92
11/13/2002.........  Theft...............  New York County.....  ...........  ....................    $12,323.60
11/13/2002.........  Theft...............  New York County.....  ...........  ....................       $31,000
3/21/2002..........  ....................  New York County.....
3/21/2002..........  ....................  New York County.....  ...........  ....................       $14,000
3/21/2002..........  ....................  New York County.....  ...........  ....................       $16,381
2/2/2005...........  fraud...............  New York County.....
8/5/2002...........  Theft...............  New York County.....
8/5/2002...........  Theft...............  New York County.....
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................       $18,995
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................        $6,900
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................        $8,808
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................        $8,129
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................        $6,607
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................        $6,607
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................        $5,000
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................        $3,936
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................        $4,650
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................        $2,328
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................        $9,366
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................        $4,458
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................          $499
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................           N/A
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................        $3,298
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................       $14,057
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................        $6,508
7/31/2003..........  Fraud...............  New York County.....  ...........  ....................    $59,192.36
8/27/2003..........  Fraud...............  New York County.....  ...........  ....................      $135,000
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................       $11,854
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................        $4,684
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................           N/A
6/18/2003..........  Grand Larceny.......  New York County.....  ...........  ....................      5,899.00
6/18/2003..........  Grand Larceny.......  New York County.....  ...........  ....................      5,149.28
6/18/2003..........  Grand Larceny.......  New York County.....  ...........  ....................      5,094.59
6/18/2003..........  Grand Larceny.......  New York County.....  ...........  ....................      7,715.45
6/18/2003..........  Grand Larceny.......  New York County.....  ...........  ....................      7,353.82
6/18/2003..........  Grand Larceny.......  New York County.....                 ..................     $7,336.50
6/18/2003..........  Grand Larceny.......  New York County.....                 ..................     $6,096.75
6/18/2003..........  Grand Larceny.......  New York County.....                 ..................     $5,044.75
6/18/2003..........  Grand Larceny.......  New York County.....                 ..................     $5,655.00
6/18/2003..........  Grand Larceny.......  New York County.....                 ..................     $7,499.75
12/3/2003..........  Grand & Petty         New York County.....                 ..................       $15,205
                      Larceny/Fraud.
12/3/2003..........  Grand & Petty         New York County.....                 ..................        $6,602
                      Larceny/Fraud.
12/3/2003..........  Grand & Petty         New York County.....                 ..................        $1,117
                      Larceny/Fraud.
12/3/2003..........  Grand & Petty         New York County.....                 ..................        $4,989
                      Larceny/Fraud.
12/3/2003..........  Grand & Petty         New York County.....                 ..................        $8,361
                      Larceny/Fraud.
12/3/2003..........  Grand & Petty         New York County.....                 ..................        $2,500
                      Larceny/Fraud.
12/3/2003..........  Grand & Petty         New York County.....                 ..................        $4,477
                      Larceny/Fraud.
12/3/2003..........  Grand & Petty         New York County.....                 ..................        $4,093
                      Larceny/Fraud.
12/3/2003..........  Grand & Petty         New York County.....                 ..................        $5,398
                      Larceny/Fraud.
12/3/2003..........  Grand & Petty         New York County.....                 ..................        $3,499
                      Larceny/Fraud.
----------------------------------------------------------------------------------------------------------------
18 U.S.C. 286: Conspiracy to defraud the government with respect to claims.
18 U.S.C. 287: False, fictious, or fraudulent claims.
18 U.S.C. 371: Conspiracy to commit offense or defraud the U.S.
18 U.S.C. 641: Embezzlement.
18 U.S.C. 666: Theft or bribery concerning programs receiving federal funds.
18 U.S.C. 841: Manufacture, distribution, or storage of explosive materials.
18 U.S.C. 1001: False statements.
18 U.S.C. 1341: Mail fraud.
18 U.S.C. 1343: Wire fraud.
18 U.S.C. 1349: Attempt and Conspiracy.
18 U.S.C. 3147: Penalty for offense committed while on release.
18 U.S.C. 3551: Sentencing.
31 U.S.C. 3729: False Claims.
42 U.S.C. 408: Receiving Increased payments.
Relevant Abbreviations: SDNY = U.S. Attorney's Office for the Southern District of New York; EDNY = U.S.
  Attorney's Office for the Eastern District of New York; New York County = Manhattan District Attorney's
  Office; ND-GA = Northern District of Georgia; DNJ = District of New Jersey.


                               APPENDIX C

 Summary of Lower Manhattan Development Corporation Commitments to the 
                      Revitalization of Chinatown

                         Over $171 Million \23\
---------------------------------------------------------------------------

    \23\ Information provided by the Lower Manhattan Development 
Corporation to the Subcommittee on Management, Integration, and 
Oversight on July 21, 2006.
---------------------------------------------------------------------------

                          ECONOMIC DEVELOPMENT

Chinatown Partnership LDC: $1.6 million
     The Chinatown Partnership Local Development 
Corporation (LDC) is a community-based not-for-profit 
organization that was formed in 2004 as a result of the Rebuild 
Chinatown Initiative (RCI), a comprehensive community 
assessment and planning initiative that was conducted by Asian 
Americans for Equality (AAFE) to address the needs of Chinatown 
in the aftermath of September 11th. Funding for the LDC is also 
provided by the September 11th Fund.
     The creation of the Chinatown Partnership LDC--a 
single organization that has brought together major civic 
organizations, cultural institutions, and businesses in the 
community--marks a significant milestone for the neighborhood.
     The CPLDC's goal is to improve business conditions 
by making Chinatown a cleaner, safer, more attractive place to 
conduct business by strengthening connections between commerce 
and culture.
Clean Streets Program: $5.4 million
    This supplemental cleaning program for the Chinatown 
community is the outgrowth of a major survey of more than 3,000 
Chinatown residents and businesses following 9/11, which found 
that improving cleanliness, reducing odors and removing 
graffiti is the top priority for the neighborhood. The campaign 
builds on and incorporates the efforts of the Council for a 
Cleaner Chinatown, a non-profit community group founded over 
ten years ago. The program is administered by the Chinatown 
Partnership with assistance from the New York City Department 
of Small Business Services.

                                TOURISM

Explore Chinatown Tourism Campaign: $1,160,000
     The campaign, officially launched on May 10, 2004, 
is intended to build awareness and increase revenues for 
Chinatown businesses. The campaign includes an international 
public relations and advertising campaign; a website 
(www.explorechinatown.com); a visitor information kiosk on 
Canal St., and special events. The campaign has won numerous 
awards in the marketing, travel and public relations 
industries.
     On October 15, 2005, more than 50,000 people 
attended the third ``Taste of Chinatown.'' Taste of Chinatown 
included tasting stations and cultural and family oriented 
activities to entertain visitors. A Chinatown to China 
sweepstakes was also held.
     A post event survey of 51 participating businesses 
conducted by Asian Women indicated the benefit of the event. 
Some of the survey's findings included: over $85,000 was 
generated in tasting plate sales and related inside sales 
during the event; 100% of those surveyed said they would 
participate in the next Taste of Chinatown and felt that the 
street closure for the event was very effective and worthwhile.
Chinatown Visitor Kiosk: $216,000
     In 2005 alone over 165,000 people visited the 
Chinatown kiosk.

                                CULTURE

Cultural Enhancement Funds for Chinatown: More than $1.5 million
    LMDC funded cultural projects in Chinatown have the 
potential to attract visitors from around the world; attract 
world-class artists and performers; support cultural richness 
and diversity; and enrich the lives of Chinatown residents and 
workers.
     $135,000 for Asian American Arts Center--founded 
in 1974, the center explores the interplay between contemporary 
American and Asian culture and art through exhibition, 
presentation, and education. LMDC funds will assist the 
organization in digitizing and increasing public access to this 
important archive.
     $140,000 for Asian Americans for Equality and 
Chinatown Partnership LDC for CREATE (Committee to Revitalize 
and Enrich the Arts of Tomorrow's Economy)--Embodies an 
unprecedented effort among diverse Chinatown arts and cultural 
institutions, civic members, and community leaders to unify 
around the vision of developing a major cultural and performing 
arts center in Chinatown. LMDC funding will support Phase II of 
the planning effort for CREATE. LMDC also funded Phase I with a 
$150,000 grant.
     $800,000 for Downtown Community Television 
Center--Located on the border of Chinatown, the center 
increases access to media by producing documentaries, providing 
educational programming on film, and training students in film-
making free of charge. LMDC funds will assist with the build-
out of DCTV's lower level space, allowing for the creation of a 
120-seat screening room dedicated to documentary film and 
additional classrooms.
     $50,000 for H.T. Dance Company--Supports Asian-
American and contemporary dance through artistic creation, arts 
education, and presentation. LMDC funds will provide technical 
equipment to create a multi-media center at the organization's 
home in Chinatown.
     $200,000 for Museum of Chinese in the Americas 
(MoCA)--Founded in 1980, the MoCA is the first full-time, 
professionally-staffed museum dedicated to reclaiming, 
preserving, and interpreting the history and culture of Chinese 
and their descendants in the Western Hemisphere. LMDC funds 
will support the pre-design phase of a new 12,500-square-foot 
museum designed by Maya Lin at 215 Center Street.
     $100,000 for National Dance Institute--This art-
based education program engages children and professional 
artists in the creation of dances and performances of high 
quality. Since its founding in 1976 by Jacques d'Amboise, NDI 
has introduced more than half a million fourth, fifth, and 
sixth grade public school students in the New York metropolitan 
area to the magic of dance. NDI seeks to create a permanent 
home and expand its program with a Center for Learning and the 
Arts in Chinatown. LMDC funds will support site search and 
project development.
     $150,000 for New York Chinese Cultural Center--
Teaches and preserves traditional Chinese performing arts. 
NYCCC hosts the country's only full-time professional school of 
Chinese dance, offering a comprehensive curriculum of more than 
1,000 classes and workshops annually. LMDC funding will support 
the reconfiguration of the Chinatown organization's performing 
arts space to increase programming capacity and strengthen the 
organization's administrative and management facilities.

                       TRAFFIC AND TRANSPORTATION

Chatham Square Study and Implementation: $25 million

     In 2004 the LMDC worked with the community to 
identify traffic problems in Chinatown. The Chinatown Access & 
Circulation Study recommended a new configuration for Chatham 
Square to improve pedestrian safety and vehicular flow within 
Chinatown--based on community input.
     Currently the LMDC is working with the City of New 
York to further prepare the proposal for implementation.

Chinatown/Brooklyn Bridge Study:

     As part of its efforts to revitalize downtown, the 
LMDC has developed a plan to better integrate the Chinatown 
community and the area around the Brooklyn Bridge Anchorage, 
located to the east of Chinatown, with the rest of Lower 
Manhattan.
     The main elements of the plan include five 
components developed from 14 public outreach meetings related 
to Chinatown circulation and access problems.

                           AFFORDABLE HOUSING

Chinatown/Lower East Side Acquisition Grant Program: $16 million

     This Department of Housing Preservation and 
Development (HPD) administered program will enable non-profit 
property managers to acquire and preserve low-to-moderate 
income residential buildings in Chinatown and the Lower East 
Side.

Knickerbocker Towers: $5 million

     This 1,600 unit complex consists primarily of low 
and moderate income residents. LMDC's funding will enable the 
complex to make necessary capital improvements without 
increasing rents or applying an assessment, helping to preserve 
the affordability of the project.

                          PARKS AND OPEN SPACE

Parks Renovations: $20 million

           Columbus Park--$3.25 million
           James Madison--$2.12 million
           Sara D. Roosevelt--$7.75 million
           Pike/Allen Street Mall--$5.93 million
           Albert Smith Playground--$1.6 million
    Chinatown will also benefit from LMDC's $150 million 
commitment to the East River Waterfront Project. Chinatown's 
waterfront will receive major improvements as part of this 
comprehensive program.

Residential Grant Program: Chinatown $40 Million

    The Residential Grant Program seeks to compensate 
individuals for the extraordinary expenses they may have 
incurred as a result of the disaster, as well as creates 
incentives for individuals and families to rent, purchase, or 
remain in housing in Lower Manhattan.

The WTC Business Recovery Grant Program: Chinatown $60 million

    The WTC Business Recovery Grant Program, established by 
ESDC with funding from LMDC, provided grants to businesses 
(including not-for-profit organizations) with fewer than 500 
employees, located in Manhattan south of 14th Street, to 
compensate them for economic losses resulting from the 
disaster, thereby assisting in the retention of thousands of 
jobs both directly and indirectly.

                               APPENDIX D

                               Statements
   ``An Examination of Federall 9/11 Assistance to New York: Lessons 
     Learned in Preventing Waste, Fraud, Abuse, and Mismanagement''
               Wednesday, July 12, 2006, Part I--Response
                               Witnesses
                                PANEL I

                                                                   Page
Mr. Greg Kutz, Director, Financial Management and Assurance, U.S. 
  Government Accountability Office...............................   101
Mr. Joe Picciano, Deputy Director for Region II, Federal 
  Emergency Management Agency, U.S. Department of Homeland 
  Security.......................................................    77
The Honorable Richard Skinner, Inspector General, U.S. Department 
  of Homeland Security...........................................    92

                                PANEL II

 Ms. Leigh Bradley, Senior Vice President for Enterprise Risk, 
  American Red Cross.............................................   134
 Mr. Neil Getnick, President, International Association of 
  Independent Inspectors General.................................   126
 The Honorable Rose Gill Hearn, Commissioner, New York City 
  Department of Investigation....................................   118
 Ms. Carie Lemack, Co-Founder, Families of September 11..........   130
 Mr. David J. Varoli, General Counsel, New York City Department 
  of Design and Construction.....................................   122

         Thursday, July 13, 2006, 10:00 a.m., Part II--Response
                               Witnesses
                                PANEL I

Mr. Leroy Frazer, Bureau Chief, Special Prosecutions Bureau, New 
  York County District Attorney's Office.........................   160
 Ms. Ruth, Ritzema, Special Agent in Charge for New York, Office 
  of Inspector General, U.S. Department of Housing and Urban 
  Development....................................................   145
 Mr. Douglas Small, Deputy Assistant Secretary, Employment and 
  Training, U.S. Department of Labor.............................   154
 The Honorable Eric Thorson, Inspector General, U.S. Small 
  Business Administration........................................   151

                                PANEL II

Ms. Bettina Damiani, Project Director, Good Jobs New York........   172
Ms. Eileen Mildenberger, Chief Operating Officer, Empire State 
  Development Corporation........................................   164
Mr. Stefan Pryor, President, Lower Manhattan Development 
  Corporation....................................................   166
Mr. John Wang, Founder and President, Asian American Business 
  Development Center.............................................   169

         Thursday, July 13, 2006, 2:00 a.m., Part III--Response
                               Witnesses
                                PANEL I

Mr. Bernard Cohen, Director, Lower Manhattan Recovery Office, 
  Federal Transit Administration, U.S. Department of 
  Transportation.................................................   189
Mr. Todd J. Zinser, Acting Inspector General, U.S. Department of 
  Transportation.................................................   179

                                PANEL II

Mr. Ronald P. Calvosa, Director of Fraud Prevention, Lower 
  Manhattan Construction Command Center..........................   191
Mr. Michael Nestor, Director, Office of Investigations, Port 
  Authority of New York and New Jersey...........................   195
                        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-
                               Response''

                               Witnesses

 Prepared Statement of Mr. 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 $8.77billion, 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] T9452.012

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.

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] T9452.013
    
    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.
    Figure VI-3 below illustrates Stafford Act Project Worksheet 
Obligations by Category of Work
[GRAPHIC] [TIFF OMITTED] T9452.014

[GRAPHIC] [TIFF OMITTED] T9452.015


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. 5173, 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. 206.225, 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. 206.226(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 206.253, 
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.

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.

Individual 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.

 Prepared Statement of Mr. Richard L. Skinner, Inspector General, U.S. 
                    Department of Homeland Security

    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.
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Prepared Statement of the Honorable Rose Gill Hearn, Commissioner, New 
                 York City Department of Investigation

    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. Attachment

 Prepared Statement of Mr. David J. Varoli, General Counsel, New City 
                 Department of Design and Construction

    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.

  Prepared Statement of Mr. Neil V. Getnick, President, International 
             Association of Independent Inspectors General

    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.

    Prepared Statement of Ms. Carie Lemack, Co-Founder, Families of 
                              September 11

    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.

 Prepared Statement of Ms. Leigh A. Bradley, Senior Vice President for 
                  Enterprise Rusk, American Red Cross

    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.

Appendix I
September 11, 2001
         Four airplanes are hijacked and crash into the twin 
        World Trade Center towers, the Pentagon, and an open area near 
        Shanksville, Pennsylvania. The terrorist attacks affect tens of 
        thousands of victims and their family members throughout the 
        United States. Millions more across the country and around the 
        world are overcome by grief, fear, and compassion.
         Within minutes, the American Red Cross immediately 
        responds. More than 6,000 trained disaster volunteers are 
        mobilized. Emergency Response Vehicles are deployed to help 
        victims and rescue workers.
         When the towers collapse, an Emergency Response 
        Vehicle from the Red Cross in Greater New York is hit with 
        debris and rubble. There is great concern throughout the 
        organization for the welfare of the staff.
         Volunteers open 13 shelters in the New York area for 
        people left homeless or stranded.
         Volunteer mental health professionals trained in 
        disaster response are dispatched to the shelters, crash sites, 
        the flights' points of origin and destination, and other major 
        transportation hubs, providing physical and emotional support 
        to the victims, their families, rescue and recovery workers and 
        thousands of others affected by the tragedy.
         After the FAA grounds all commercial traffic in the 
        United States, Red Cross chapters across the country help 
        hundreds of thousands of travelers stranded at airports 
        nationwide.
         Respite centers are established near the crash sites 
        to provide the police officers, firefighters, rescue and 
        recovery workers, and others with places to turn for physical 
        and emotional relief.
         The Red Cross begins taking spontaneous donations to 
        help the victims of the attacks and their families. Individuals 
        and businesses in America and around the world begin donating 
        money and blood in record numbers.
         The Red Cross blood donation line receives more than a 
        million calls. (The most received previously in one day was 
        3,000.)

September 12, 2001
         The City of New York opens the Compassion Center for 
        families whose loved ones are missing. There, the Red Cross 
        provides mental health counseling and meals.
         The Red Cross sets up a phone bank at the offices of 
        PBS affiliate WNET Channel 13. Mental health volunteers take 
        calls there from people in need of assistance. At Red Cross 
        headquarters, a 24-hour Emergency Communications Center is 
        activated.
         At the request of the White House, the Red Cross mans 
        a blood drive for White House staff.

September 13, 2001
         Within one day, volunteers answer more than 13,000 
        calls at the Emergency Communications Center.
         A special Amtrak train containing relief supplies 
        leaves Union Station in Washington, D.C., bound for New York.
         At the request of Congress, the Red Cross commences a 
        two-day blood drive in Senate and House office buildings.

September 15, 2001
         Three new mental health brochures are released to help 
        people around the country address and cope with the emotional 
        trauma created by the disasters.

September 16, 2001
         Working with Microsoft and Compaq, the Red Cross 
        launches the Family Registration Web, an online network to help 
        unite loved ones with survivors of the attacks.

September 17, 2001
         Acting in part on counsel from the Red Cross, the City 
        of New York moves the Compassion Center to a new location where 
        it becomes the Family Assistance Center. The Red Cross 
        continues to play a major role, offering financial assistance, 
        bereavement counseling, guidance and help with gathering 
        information. Red Cross crisis counselors are aboard all 
        shuttles carrying family members to the center. In addition, 
        the Red Cross provides meals for both families and workers.
         When the world financial market reopens, Red Cross 
        mental health volunteers are at major transportation hubs to 
        offer counseling, provide mental health information and to let 
        people know that help is available.

September 18, 2001
         Eighteen teams of Red Cross workers go door-to-door in 
        the Restricted Zone in downtown New York to assist residents 
        who choose to stay in the area. Each team is made up of six 
        people and includes a mental health professional, a disaster 
        specialist, and a family service worker.

September 20, 2001
         The Red Cross establishes the Liberty Disaster Relief 
        Fund as a separate, segregated account to fund relief services 
        related to the September 11 attacks.
         The Red Cross commences a series of blood drives at 
        federal departments, including Commerce, Health and Human 
        Services, Justice, Transportation and Defense.

September 23, 2001
         The Red Cross launches an unprecedented Emergency 
        Family Gift Program to help families of the deceased and 
        seriously injured meet their immediate financial needs. This 
        gift program assesses each family's needs and provides a grant 
        for living expenses such as food, clothing, utilities, mortgage 
        or rent payments, funeral, and related expenses. The program 
        places funds in the hands of families, often within one 
        business day.

September 27, 2001
         The Red Cross launches a nationwide, toll-free hotline 
        offering assistance and referral information for anyone seeking 
        help from the Red Cross. 1-866-GET-INFO and a call center in 
        Virginia become important components of the overall Red Cross 
        response to September 11.

October 9, 2001
         By the end of the fourth week, the Red Cross has 
        served 5,854,373 meals, answered 64,211 hotline calls, and 
        helped people affected by the disaster by making 61,104 mental 
        health contacts and 31,717 disaster health contacts.

October 12, 2001
         The Red Cross announces that at least $300 million 
        will be needed for the Red Cross response. Because future 
        terrorist attacks seem imminent, the announcement states that 
        funds raised will be spent on other terrorist-relief programs, 
        including a strategic blood reserve, Armed Forces services, and 
        community outreach.

October 31, 2001
         The Red Cross ceases active fund-raising for the 
        Liberty Disaster Fund. At this point, the organization has 
        received more than $500 million in September 11-related 
        donations.

November 6, 2001
         In testimony before Congressional and Federal 
        officials, the Red Cross announces that it has spent or 
        committed close to $154 million in less than seven weeks. 
        Within that short time frame, the organization has already 
        helped 25,000 families affected by the September 11 terrorist 
        attacks, provided more than 10 million meals and snacks to 
        families, police officers, firefighters, investigators, and 
        rescue and recovery workers. Trained mental health workers also 
        have provided emotional support to more than 144,000 people.

November 11, 2001
         The Red Cross in Greater New York commences a two-day 
        training seminar for more than 700 tri-state mental health 
        professionals who interact with citizens affected by the events 
        of September 11.

November 12, 2001
         On the second day of the training seminar, Red Cross 
        volunteers on staff at the event are quickly mobilized to serve 
        the needs of victims of a plane crash in Belle Harbor, Queens, 
        a neighborhood that has already lost a number of residents to 
        the September 11 terrorist attacks.

November 14, 2001
         With nearly $550 million in the Liberty Disaster 
        Relief Fund, the Red Cross announces that it will use the fund 
        to meet the immediate and long-term needs of the victims of the 
        September 11 terrorist attacks exclusively.

December 4, 2001
         The Red Cross extends its financial assistance to 
        economically affected individuals to cover the cost of rent or 
        mortgage, utilities and food for up to three months.

December 27, 2001
         The Red Cross names Senator George Mitchell, former 
        Senate Majority Leader, as the independent overseer of the 
        Liberty Disaster Fund to ensure donors that their contributions 
        will meet the ongoing and long-term needs of the families 
        affected by the September 11 terrorist attacks.
         The Red Cross announces that it will spend $317.5 
        million by the end of 2001 on aid to more than 36,000 families 
        affected by the September 11 terrorist attacks.
         At this point, the Red Cross has received more than 
        $667 million in donations to the Liberty Disaster Fund, which 
        has grown by more than $100 million since the organization 
        stopped soliciting donations.

January 31, 2002
         Senator George Mitchell and the Red Cross announce the 
        Liberty Disaster Fund Distribution Plan. This plan calls for 
        distributing the majority of funds to those directly affected 
        by the disasters and reserves a portion of the fund to respond 
        to long-term needs of the families, rescue workers, and others 
        affected by the disasters. Senator Mitchell also announces 
        plans to expand the direct Family Gift Program to cover 
        expenses for up to one full year.

March 11, 2002
         Six months after the terrorist attacks, the Red Cross 
        has received $930 million in contributions, of which it has 
        expended more than $550 million to date. The organization has 
        distributed $169 million to more than 3,200 families of the 
        deceased and those seriously injured. More than 51,000 families 
        displaced by the attacks have received $270 million. An 
        additional $94 million has funded the provision of 14 million 
        meals, mental health services to 232,000 people and health 
        services to 129,000 people.

May 1, 2002
         Senator George Mitchell releases the first of his 
        quarterly reports on the distribution of the Liberty Disaster 
        Fund. The report states that the Red Cross ``fairly responds to 
        the needs of victims, complies with the intentions of Red Cross 
        donors, and is consistent with the Red Cross mission of 
        providing emergency disaster relief.''
         Despite having discontinued solicitation of 
        contributions for the Liberty Disaster Fund for many months, 
        continued donations bring the fund's size to more than $950 
        million, nearly double the amount received when the Red Cross 
        stopped soliciting donations.

June 5, 2002
         The Red Cross announces a series of bold changes in 
        its disaster fund-raising practices. The national initiative 
        expands efforts to educate donors about the Red Cross General 
        Disaster Relief Fund and institutes a new system of affirmative 
        confirmation and acknowledgement to ensure all disaster-related 
        donations are directed as intended. The program is called Donor 
        DIRECT, which stands for D(onor) I(ntent) RE(cognition), 
        C(onfirmation) and T(rust).

June 21, 2002
         The Red Cross announces the start of the final phase 
        of the Family Gift Program. The Red Cross also announces the 
        Supplemental (Estate) Gift Program, which will provide one-time 
        gifts of $45,000 to the estates of those who were killed in the 
        attacks, as well as to those who were seriously injured.

August 1, 2002
         Senator Mitchell releases the second quarterly Liberty 
        Disaster Relief Fund report, which finds that the Red Cross 
        continues to distribute the fund properly to meet the needs of 
        the families and individuals affected by the September 11 
        terrorist attacks. More contributions bring the total receipts 
        to the Liberty Disaster Fund to $988 million.

August 22, 2002
         The Red Cross announces the details of its September 
        11 Recovery Program. The Program will allocate more than $133 
        million to provide services over a period of three to five 
        years to the families most directly affected by the September 
        11 attacks. These funds are to be used primarily to help pay 
        for mental health and uncovered health care services, as well 
        as family support and assistance to affected residents in 
        downtown Manhattan.

September 11, 2002
         As the nation marks the one-year anniversary of the 
        terrorist attacks of September 11, 2001, the Red Cross 
        continues to help provide family support, mental health, and 
        spiritual counseling for affected families and individuals. In 
        addition to providing support on the day of the anniversary, 
        the Red Cross is also offering assistance to help pay the 
        expenses for families who wish to travel to a memorial service 
        that will take place in affected cities across the country but 
        who might not otherwise have the means to attend.
         Within one year, $643 million has been distributed or 
        committed to those directly affected by the September 11 
        disasters. Another $200 million is projected to be distributed 
        by year's end depending on the pace of family responses 
        received and the processing and verification of necessary 
        documentation.
Appendix II
Examples of fraudulent cases:
    October 2002 Daniel Djoro reported that his brother, ``Daniel 
Zagbre,'' had perished while at the World Trade Center for a business 
meeting. He produced his ``brother's'' Social Security number and 
driver's license to prove ``Zagbre's'' existence. We had flown him from 
Lansing, Michigan to New York City to retrieve the death certificate. 
But ``Daniel Zagbre'' was in fact a fictitious name the defendant 
himself had used. Djoro eventually defrauded the Red Cross and Safe 
Horizon out of $269,000, of which he has repaid $138,000. (Prosecuted 
by Manhattan DA)
    August 2003 Cyril Kendall, a father of 12 children, claimed that a 
13th child had died in the WTC attack. He told the Red Cross and Safe 
Horizon that his son was in the North Tower for a job interview with 
the American Bureau of Shipping, a legitimate company. To prove the 
existence of his ``son,'' Cyril showed Red Cross workers a picture of 
himself as a young man. He stole over $119,000 from September 11th 
Recovery Program and $190,000 in total. (Prosecuted by the Manhattan 
DA)

    January 2004 Terry Smith received over $136,000 from the Red Cross 
after claiming his wife died on 9/11 while visiting a friend at the 
WTC. He also claimed that he and his wife had 10 children and needed 
the funds for health care and child care. Our staff became suspicious 
when he was reluctant to produce a New York death certificate. His wife 
was actually deported to Jamaica in 1999. (Prosecuted by the US 
Attorney, Southern District, California)

    November 2004 Donna Miller claimed that her husband, Michael, died 
in the attack on the World Trade Center. When she was unable to provide 
documentation of Michael's death, the September 11th Recovery Program 
contacted the authorities in Michigan. After further investigation by 
the Kent County Sheriff's Department, Detective Steve Moon found that 
her deceased husband was actually still alive. She collected over 
$98,000 from the Red Cross and Safe Horizon. (Prosecuted by the Kent 
County (MI) District Attorney)
    Jonathan Finkelstein received $51,000 for injuries he said he 
suffered as a volunteer paramedic at Ground Zero. However, the 
September 11th Recovery Program learned that not only was he never at 
the World Trade Center site, but the documentation supporting his 
injury claims was forged by his wife at the doctor's office where she 
worked. He repaid the $51,000 in court-ordered restitution upon 
pleading guilty to the charges. (Prosecuted by the Manhattan District 
Attorney).
                        Thursday, July 13, 2006

             10:00 a.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 II-
                               Response''

                               Witnesses

Prepared Statement of Ms. Ruth A. Ritzema, Special Agent in charge for 
 New York, Office of Inspector General, U.S. Department of Housing and 
                           Urban Development

    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.

  Prepared Statement of Mr. Eric M. Thorson, Inspector General, U.S. 
                     Small Business Administration

    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.

Prepared Statement of Mr. Douglas F. Small, Deputy Assistant Secretary, 
           Employment and Training, U.S. Department of Labor

    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.
    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.

  Prepared Statement of Mr. Leroy Frazer, Jr., Bureau Chief, Special 
    Prosecutions Bureau, New York, County District Attorney's Office

    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 
voluntered 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' 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 A TM 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.

Prepared Statement of Ms. Eileen Mildenberger, Chief Operating Officer, 
                  Empire State Development Corporation

    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.

  Prepared Statement of Mr. Stefan Pryor, President, Lower Manhattan 
                        Development Corporation

    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.

   Prepared Statement of Mr. John Wang, Founder and President, Asian 
                  American Business Development Center

    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.FOLIO
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.

Prepared Statement of Ms. 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:
         On 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.
                        Thursday, July 13, 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 III-
                               Response''

                               Witnesses

  Prepared Statement of Mr. Todd J. Zinser, Acting Inspector General, 
                   U.S. Department of Transportation

    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..
----------------------------------------------------------------------------------------------------------------

  Prepared Statement of Mr. Bernard Cohen, Director, Lower Manhattan 
  Recovery Office, Federal Transit Administration, U.S. Department of 
                             Transportation

    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.

    Prepared Statement of Mr. Ronald P. Calvosa, Director of Fraud 
        Prevention, Lower Manhattan Construction Command Center

    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.

     Prepared Statement of Mr. Michael Nestor, Director, Office of 
       Investigations, Port Authority of New York and New Jersey

    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.

                               APPENDIX E

                                Acronyms

    BRG  Business Recovery Grants
    CDBG  Community Development Block Grant
    CDC  Centers for Disease Control and Prevention
    DDC  New York City Department of Design and Construction
    DHS  U.S. Department of Homeland Security
    DLW  Disproportionate Loss of Workforce
    DOD  U.S. Department of Defense
    DOE  U.S.. Department of Energy
    DOI  New York City Department of Investigation
    DOJ  U.S. Department of Justice
    DOL  U.S. Department of Labor
    DOT  U.S. Department of Transportation
    DUA  Disaster Unemployment Assistance
    EPA  Environmental Protection Agency
    ESDC  Empire State Development Corporation
    FBI  Federal Bureau of Investigation
    FEMA  Federal Emergency Management Agency
    FHWA  Federal Highway Administration
    FTA  Federal Transit Administration
    GAO  Government Accountability Office
    HHS  U.S. Department of Health and Human Services
    HUD  U.S. Department of Housing and Urban Development
    IFG  Individual and Family Grants
    IPSIG  Independent Private Sector Inspector General
    JCRP  Job Creation and Retention Program
    LMDC  Lower Manhattan Development Corporation
    LMRO  Lower Manhattan Recovery Office
    LMCCC  Lower Manhattan Construction Command Center
    MRA  Mortgage and Rental Assistance
    OIG  Office of Inspector General
    OSHA  Occupational Safety and Health Administration
    PATH  Port Authority Trans-Hudson
    Port Authority  Port Authority of New York and New Jersey
    RGP  Residential Grant Program
    SBA  U.S. Small Business Administration
    STAR  Supplemental Terrorist Activity Relief
    VENDEX  New York City Vendor Information Exchange System
    WTC  WorId Trade Center