[Congressional Record Volume 144, Number 54 (Tuesday, May 5, 1998)]
[Senate]
[Pages S4247-S4250]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
PAY AND CHASE
Mr. GRASSLEY. Mr. President, I would like to talk about ``pay and
chase'' today. ``Pay and chase'' is a Pentagon term used to describe
another misguided policy. With pay and chase, the Pentagon pays the
bills first and then tries to track down the receipts later on.
Sometimes they find them; sometimes they don't And sometimes, they
don't even bother to look. This is not a good policy. It is un-
businesslike, and it's dangerous.
Under current law, payment is not due until a valid receipt is in
hand. A certified receipt tells you that the goods and services have in
fact been delivered.
So, to me, pay and chase is a mystery. Why, Mr. President, would
anyone--in or out of government--want to pay a bill without a receipt?
That defies understanding. It makes no sense. Unfortunately, this is
exactly what the Pentagon bureaucrats are urging Secretary of Defense
Cohen to do.
Today, pay and chase is unofficial policy. It's practiced but not
authorized by the law. But the Pentagon bureaucrats want Secretary of
Defense Cohen to change that and make it O.K.--with the law.
Secretary Cohen made his request in a letter to the Senate dated
February 2, 1998.
Mr. President, I ask unanimous consent to have his letter printed in
the Record.
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There being no objection, the letter was ordered to be printed in the
Record, as follows:
The Secretary of Defense,
Washington, DC, February 2, 1998.
Hon. Al Gore,
President of the Senate,
Washington, DC.
Dear Mr. President: I am forwarding for your consideration
draft legislation that, if enacted, would be entitled the
``Department of Defense Reform Act of 1998.'' This bill is
intended to form the core of the Defense Reform Initiative
(DRI). I request prompt action by the Congress on this
proposal.
The DRI is an exciting, sweeping reform of the ``business''
of the Department of Defense. It will affect the Department
from its corporate headquarters at the Pentagon to each
service member and his or her family throughout the world.
While aspects of our reforms can and already are being
accomplished within existing statutory authorities, the
proposed bill is crucial to implementing many of the most
important and far-reaching reform elements that will make the
Department more business oriented. The DRI will give us the
authority to use those practices that our American industry
counterparts successfully have used to become leaner and more
flexible in a world of increasing change and flexibility.
Re-engineering the Department. We will re-engineer by
adopting the best private sector business practices in
defense support activities. For example, we propose to
incorporate state-of-the-art business procedures in our
travel system. Section 301 would streamline our household
goods transportation so that simplified ``Do-it-Yourself''
(DITY) moves would be available to every service member.
Section 401 would authorize streamlined procurement payment
practices so that our civilian contractors would get prompt
and accurate payments for their goods and services. Section
403 would enable all Federal agencies more freely to use
private sector practices in the sale of surplus personal
property, alone or in conjunction with current Government
reinvention and streamlining initiatives, and to foster more
expedient and efficient disposals of property.
Consolidation. Next, we will consolidate organizations to
reduce unnecessary redundancy and to move program management
out of Pentagon corporate headquarters and back into the
field. The Office of the Secretary of Defense and defense
agency personnel will be cut, as will personnel in Department
of Defense field and related activities. Section 202 supports
this initiative by extending current force drawdown
authorities through September 30, 2003. Section 107 would
clarify that I can make organizational changes as the
National Defense University in order that I can move parts of
organizations into that structure when appropriate.
In addition to cutting the size of staffs, the DRI will
establish a number of new organizational arrangements. Among
these is a Threat Reduction & Treaty Compliance Agency
created to address the challenges of weapons of mass
destruction. Section 102 supports this initiative by
eliminating the requirement for an Assistant to the Secretary
of Defense for Nuclear and Chemical and Biological Defense
Programs. Sections 104 through 107 support another
important consolidation initiative--establishing a
Chancellor for Education and Professional Development to
raise the quality of civilian training and professional
development to world-class standards. Part of our
consolidation effort will enhance the role of the National
Guard and other Reserve elements in domestic emergency
responses. Sections 501 through 503 support this effort by
making our Reserve component and National Guard members
more available and an even closer member of our family.
Competition. We will compete many more functions now being
performed in-house, which will improve quality, cut costs,
and make the Department more responsive. While this
initiative will apply throughout the Department, some
candidates for competition include civilian and retiree
payments, personnel services, surplus property disposal,
national stockpile sales, leased property management, and
drug testing laboratories. Section 402 would permit use of
contractor employees of a contractor whose system is being
tested, to provide the analytic and logistic support in those
cases where contractor impartiality is assured.
Elimination. Finally, we will eliminate excess
infrastructure. Since the end of the Cold War, the Department
of Defense has reduced its military forces significantly, but
infrastructure cuts lag behind. The defense budget has been
reduced by 40 percent, and military personnel will have
declined by 36 percent by 2003. At the same time, after four
rounds of base closures, the Department's domestic base
structure is only 21 percent slimmer. Consequently, we need
to make more infrastructure reductions. Money is wasted on
keeping open excess installations. These resources can better
be directed to support the warfighter. Title VII of our bill
would authorize two additional rounds of base closures. Each
round will provide annual savings of $1.4 billion.
The DRI would increase direct spending annually by less
than $10 million during fiscal years 1999-2002; therefore, it
is subject to the pay-as-you-go (paygo) requirement of the
Omnibus Budget Reconciliation Act of 1990. This proposal
should be considered with other proposals in the President's
Fiscal Year 1999 Budget that together meet the paygo
requirement.
Enactment of this proposal, together with our other
management and structural changes, dramatically will enhance
our ability to improve organizational efficiency while making
more effective use of the Department's financial and
personnel resources. I urge the Congress to enact this
legislation promptly so that we can pursue these crucial
management reforms.
Sincerely,
Bill Cohen.
Mr. GRASSLEY. Making pay and chase official policy is just one small
piece of Secretary Cohen's Defense Reform Initiative or DRI package.
Secretary Cohen's pay and chase proposal is embodied in section 401 of
the DRI.
Mr. President, I ask unanimous consent to have section 401 printed in
the Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:
Section 401. Authority for Statistical Sampling To Ensure Receipt of
Goods and Services.
(a) In General.--Chapter 141 of title 10, United States
Code, is amended by inserting after section 2405 the
following new section 2406:
Sec. 2406. Statistical sampling procedures in the payment for
goods and services before verification
``(a) Verification After Payment.--Notwithstanding section
3324 of title 31, in making payments for goods or services,
the Secretary may prescribe regulations that authorize
verification, after payment, of receipt and acceptance of
goods and services. Any such regulations shall prescribe the
use of statistical sampling procedures for verification and
acceptance purposes. Such procedures shall be commensurate
with risk of loss to the Government.
``(b) Protection of Payment Officials.--Provided that
proper collection actions have been executed, a disbursing or
certifying official, who relies on the procedures established
pursuant to this section, is not liable for losses to the
Government resulting from the payment or certification of a
voucher not audited specifically because of the use of such
procedures.''.
(b) Clerical Amendment.--The table of sections for such
Chapter 141 is amended by inserting after the item relating
to section 2405 the following:
``2406 Statistical sampling procedures in the payment for goods and
services before verification.''
Mr. GRASSLEY. The Section 401 pay and chase proposal has three parts.
First, Section 401 would authorize DOD to pay bills without
receipts--with no dollar limit.
Second, Section 401 would require only random after-the-fact
verification of some receipts.
Third, disbursing officials would be relieved of all responsibility
for erroneous or fraudulent payments that could result from this
policy.
Mr. President, this is a terrible idea. Section 401 says it's OK to
pay bills without receipts. Just do it--$50,000; $500,000; $1 million;
$10 million; or $100 million. The sky's the limit. It doesn't matter
how big the bill is. Just pay it! And if you make a mistake, that's OK,
too. Not to worry.
Nobody can be held accountable for erroneous or fraudulent payments.
This proposal could not have come at a worse time. All reports from the
General Accounting Office (GAO) and Inspector General (IG) clearly
indicate that DOD's internal controls are weak or non-existent.
Not only do weak or non-existent internal controls make for easy
embezzlement, they invite it. And it seems like embezzlers are on a
rampage. That's the subject of a recent article entitled ``Embezzlement
Growth is Dramatic.'' The article was written by Mr. Gary Strauss and
appeared on page 1 of USA Today on January 13, 1998.
Mr. President, I ask unanimous consent to have this article printed
in the Record.
There being no objection, the article was ordered to be printed in
the Record, as follows:
[From USA Today, Jan. 13, 1998]
Embezzlement Growth is ``Dramatic''
(By Gary Strauss)
Wendell Doman wasn't your typical embezzler. A Mormon and
father of seven, Doman didn't steal from corporate coffers to
fund a wild spending spree, trophy mistress, gambling or drug
addition. Instead, the 37-year-old chief financial officer of
New Age music company Narada Media was thinking long term.
Sure, he spent $37,000 on a BMW he judiciously kept away
from the office. And there was the $243,500 Minneapolis home
to which he moved after quitting Milwaukee-based Narada in
February. But the bulk of the $1.13 million federal
prosecutors say he stole was squirreled in Vanaguard's Growth
and Income stock mutual fund.
[[Page S4249]]
It's unclear how many Wendell Domans lurk in the offices of
Corporate America. Only a fraction of embezzlement cases are
reported--the prime reason the Justice Department has
difficulty gauging the white-collar crime that can be among
the most troubling for businesses.
But judging from anecdotal accounts from prosecutors,
insurers and fraud specialists, 1997 may go down as a record
year for corporate embezzlement.
``There's been a dramatic increase in embezzlement across
the board, everything from small mom-and-pop shops to major
corporations,'' says Chris Franklin, who manages embezzlement
claims for Chubb, a major provider of fidelity insurance,
which covers businesses' embezzlement losses.
High six-figure and low million-dollar thefts such as
Doman's are increasingly common, says Tom Harrington, head of
the FBI's economic crimes squad in the agency's Philadelphia
office. ``I talk to my counterparts all across the country.
The amounts being embezzled are growing.''
The FBI estimates 15,700 workers were arrested for
embezzlement in 1996, up almost 25% since 1993. But the FBI
numbers probably account for just 10% of embezzlers, says
Frank Hagan, a criminology professor at Pennsylvania's
Mercyhurst College and co-author of White Collar Deviance, to
be released next year. ``These numbers aren't accepted by
criminologists because embezzling is grossly under-
reported,'' he says.
Most companies are too embarrassed to report such white-
collar crimes for fear of appearing inept, spurring more
employee theft or angering sharesholders, clients or
customers, says Sharon Parker, who's prosecuted numerous
white-collar crime cases as an assistant U.S. attorney in
Indiana. Nor are companies legally bound to report
embezzlement. Only banks are required to notify authorities.
Yet based on a recent, first-of-its kind survey of 2,600
fraud investigators. U.S. businesses lose more than $400
billion annually to fraud, nearly a third of that from
embezzlement, says Joseph Wells, head of the 20,000-member
Association of Certified Fraud Examiners.
``This reality is a problem, particularly among mid- and
upper-level managers,'' says Wells, author of Occupational
Fraud and Abuse. Wells cites decentralized operations, mid-
level management layoffs, rising computer use and a booming
economy.
The flourishing cottage industries of fraud investigation,
forensic accounting and white-collar criminal defense law
underscore embezzlement's growth.
``Business is booming,'' says Howard Silverstone, a
forensic accountant with Lindquist Avey Macdonald
Baskerville, a financial fraud investigator. ``It's up 300%-
400% since the start of the decade. And the cases we hear
about are just the tip of the iceberg. Most of the time, it's
luck that this kind of crime is even discovered.''
Hard statistical evidence aside, embezzlers are getting
more brazen.
At his recent sentencing on federal wire-fraud charges,
Doman contended he was entitled to keep about $206,000, the
earnings on the stolen money in his Vanguard account. U.S.
District Judge Charles Clevert scoffed at Doman's request,
sentenced him to 33 months in prison and ordered him to pay
Narada $1.34 million. Doman, serving time in a federal prison
in Oxford, Wis., could not be reached.
Wednesday, former Los Angeles Times editorial business
manager Charles Boesch was sentenced to four years in prison
federal charges of embezzling almost $780,000 over four
years.
Prosecutors say Boesch, 53, took the money--intended as
payments to freelance writers--over four years by submitting
bogus invoices for payment to accomplices, including his
former son-in-law.
undone by time
Doman and Boesch's thefts look like chump change compared
to the $12.5 million Francis Vitale Jr. stole from specialty
chemicals maker Engelhard over nine years.
Vitale, Engelhard's former vice president of strategic
development and corporate affairs, used the money to
accumulate one of the world's most extensive collections of
rare and antique clocks. Most of the collection was housed at
his Spring Lake, N.J., antique clock shop. It was auctioned
for $8 million to repay Engelhard's insurer.
At Engelhard, where he earned a six-figure salary and was a
member of the management committee. Vitale was ``extremely
well-respected'' until a routine audit uncovered the thefts,
says corporate spokesman Mark Dresner.
Vitale had sole discretion to approve international
marketing expenses, so he was able to fabricate more than 150
invoices for his clock shop's purchases into bills Engelhard
``owed'' for expenses. Vitale, 53, is to be sentenced
Thursday.
It's not uncommon for embezzlers to go undetected for
years, largely because managers have few supervisors holding
them accountable, says Silverstone, the forensic accountant.
That's precisely what happened at Day-Lee Foods, a
Japanese-owned meat-exporter in Santa Fe Springs, Calif. In
what may be the largest U.S. embezzlement case ever reported,
Chief Financial Officer Yasuyoshi Kato stole $95 million.
Until the scheme was uncovered by federal tax investigators
in March, Kato stole by issuing company checks to himself for
seven years. He covered the missing funds by securing
corporate loans to Day-Lee from California subsidiaries of
Japanese banks, according to court filings.
Kato, who earned $150,000 a year, had sole control over
Day-Lee's finances. That also enabled him to pay earlier
loans by arranging even more loans.
doing the cha-cha
Prosecutors contend Kato went through money like water,
buying beachfront condominiums, citrus ranches, even a
nightclub named Club Cha-Cha. Money also went to his ex-wife,
who bought a rare car dealership, jewelry and animal
menagerie that included miniature horses and sharks.
In October, Kato was sentenced to 63 months in prison. Day-
Lee's parent, Nippon Meat Packers, estimates losses,
including interest on the loans at $100 million.
What motivate embezzlers? Usually any one of a number of
vices, although experts paint a portrait of a compulsive,
obsessive person in a position of power.
Insiders at Engelhard joke about Vitale's clock fetish.
Attorneys involved in the Doman case point to a
conservative, tightly wound CPA who was paying nearly a third
of his $75,000 salary to support his ex-wife and children.
Doman also may have felt a sense of entitlement. According to
court records, he felt his bosses had reneged on a purported
offer of a 5% stake in the company before it was to be sold.
Kato's attorney, John Yzurdiaga, says Kato was merely
trying to satisfy his ex-wife's insatiable spending appetite.
But, notes Chubb's Franklin, the pilferer could be anyone.
``We've seen cases where daughters have ripped off their
father's firms,'' he says. ``You can't trust anybody.''
In virtually all cases, there are systemic problems, such
as lax internal controls, that make it all too easy to steal,
says Bart Schwartz, CEO of fraud investigator Decision
Strategies/Fair-fax International. ``In a booming economy,
everyone's looking at business opportunities. They aren't
looking internally,'' he says. ``That can allow schemes to go
on for years.''
Increasingly, companies are initiating countermeasures.
Barnes & Thornburg, a 200-member South Bend, Ind., legal
firm, formed a white-collar unit a year ago. They've advised
clients to implement compliance programs and improve internal
accounting procedures, such as requiring more than one
employee to sign checks, says unit chief George Horn.
But even Barnes & Thornburg wasn't immune. Longtime partner
Ernest Szarwark was indicted in July for mail fraud. He's
charged with stealing $500,000 over eight years by taking
fees clients paid him and not submitting them to the firm. He
also wrote himself checks from the firm's trust account.
where there's a will . . .
Ronald TerMeer, on probation after spending 18 months in
prison for embezzling $225,000 from Ohio-based Huntington
National Bank, says even with beefed up controls, greedy
employees will try to circumvent the system.
``You can probably always find a way to steal. But it
usually takes someone with obsessive, compulsive behavior to
embezzle,'' says TerMeer, the bank's former controller. ``In
my case, it was compulsive gambling and alcohol addiction.''
TerMeer has written a self-published book: From Doing Federal
Time, A Handbook for Businessmen Who are Facing Federal White
Collar Criminal Charges.
Experts fear corporate embezzlement is likely to become
more pervasive and the thefts even greater.
``Individuals believe they can perpetrate these crimes and
get away with it,'' says Chuck Owens, chief of the FBI's
financial crimes unit. ``Corporate insider fraud will remain
a substantial problem. There's a fairly high greed level out
there.''
Mr. GRASSLEY. Mr. President, this is what the article says.
``Lax internal controls'' are the cause for ``a dramatic increase in
embezzlement across the board.''
``Lax internal controls'' will be laxer-if Section 401 goes through.
Now, Mr. President, there is no magic in a receipt.
A receipt is not a leakproof defense against fraud--mainly because a
receipt is so easy to forge.
A receipt by itself is not much of a weapon.
It is just one weapon in the controller's arsenal.
To be an effective weapon, a receipt must be coupled to other control
devices--like separation of duties.
Unfortunately, at the Pentagon, receipts don't necessarily go hand-
in-hand with the other control mechanisms.
I learned that lesson in my examination of several DOD fraud cases:
The Lugas case at Reese AFB, Texas; the McGill case in Norfolk, VA;
and the Krenik case in the Pentagon.
In these cases, there was no separation of duties.
For example, I discoverd that Mr. Krenik's duties literally covered
the waterfront. He was involved in every phase of the cycle of
transactions from beginning to end. He: developed requirements for
goods and services,
[[Page S4250]]
wrote purchase orders, steered contracts to favored vendors, received
and accepted deliveries, certified contract performance by signing
receiving reports like the DD-250, and submitted invoices to the
finance office for payment.
In Mr. Krenik's organization--the 7th Communications Group--there was
no separation of duties. In that environment, it was so easy for Mr.
Krenik to fabricate phony invoices and receipts and get paid.
He said it was a piece of cake. It was just too easy.
This is what Mr. Krenik said after being apprehended:
I saw how others had manipulated the DD-250s [receipts], so
I thought I could do that also. . . . It was so easy to
generate fake billings and open the Post Office box.
I fear that Mr. Krenik was led into temptation by lax internal
controls.
With separation of duties, it would have been very difficult--if not
impossible--for him to do what he did. More scrutiny by others would
have greatly increased the probability of detection. That fear alone is
sometimes enough to deter fraud.
With duties properly separated, the goods are delivered to a central
warehouse. After a receipt is certified by an independent warehouse-
person, the goods are then turned over to the customer or user--someone
like Mr. Krenik.
In the right circumstances, a certified receipt can be a powerful
weapon, and I want the certified receipt to be a powerful weapon in the
DOD Comptroller's arsenal.
I want receipt verification to be at the top of the checklist of
things to do before making a payment.
Above all, I do not want to see this body gut DOD's internal
financial controls--or what remains of them--in the name of ``defense
reform.''
Section 401, as written, would gut DOD's remaining internal controls.
Knowing that DOD's internal controls are already weak or non-
existent, the GAO and the IG oppose Section 401, as written.
Section 401 would eliminate what's leftover, and it ``ain't'' much.
And the crooks are hard at work. We know that for a fact because
there is a new case at Dayton AFB, Ohio.
Though we don't yet have all the details on the case, it looks like a
carbon copy of the Krenik case--fraudulent invoices and receiving
reports valued at nearly $1 million.
Dayton happened, despite Air Force assurances to the contrary.
The Air Force assured me on July 18, 1997, in no uncertain terms,
that a Krenik-style operation could never happen again.
The Air Force said it had ``more internal controls to prevent this
type of action from happening again.''
I hate to say it but Dayton was happening as those words were being
placed on paper.
Weak or non-existent controls combined with heightened embezzlement
activity do not argue for Section 401.
So why push pay and chase now?
Pay and chase is a bad idea. It would make DOD's accounts more
vulnerable to theft and abuse.
They are already far too vulnerable.
What we need to do now is strengthen internal controls not weaken
them.
We need to make the certified receipt the potent anti-fraud weapon
that it should be.
DOD should not be authorized to make payments without receipts.
And those responsible must be held accountable for erroneous and
fraudulent payments--as they are today.
As I see it, there are two ways to handle Section 401:
(1) remove it entirely from the DRI package; or (2) modify it.
Mr. President, I am ready to work with the Armed Services Committee
in developing a mutually acceptable modification to Section 401.
It can be done, and I could help the Committee do it.
There is a way to do it that will serve the best interests of the
taxpayers and the Armed Forces.
I yield the floor.
Mr. GORTON. Mr. President, I ask unanimous consent to proceed as in
morning business for not to exceed 7 minutes.
The PRESIDING OFFICER. Without objection, it is so ordered.
____________________