[Federal Register Volume 64, Number 52 (Thursday, March 18, 1999)]
[Rules and Regulations]
[Pages 13311-13325]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-6465]



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  Federal Register / Vol. 64, No. 52 / Thursday, March 18, 1999 / Rules 
and Regulations  

[[Page 13311]]


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DEPARTMENT OF AGRICULTURE

Food and Nutrition Service, USDA

7 CFR Part 246

RIN 0584-AC50


Special Supplemental Nutrition Program for Women, Infants and 
Children (WIC): WIC/Food Stamp Program (FSP) Vendor Disqualification

AGENCY: Food and Nutrition Service, USDA.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: This final rule amends regulations governing the Special 
Supplemental Nutrition Program for Women, Infants and Children (WIC) to 
mandate uniform sanctions across State agencies for the most serious 
WIC Program vendor violations. The implementation of these mandatory 
sanctions is intended to curb vendor-related fraud and abuse in the WIC 
Program and to promote WIC and FSP coordination in the disqualification 
of vendors and retailers who violate program rules. This rule also 
implements a mandate of the Personal Responsibility and Work 
Opportunity Reconciliation Act of 1996, which requires the 
disqualification of WIC vendors who are disqualified from the FSP.

DATES: This regulation is effective May 17, 1999. State agencies must 
fully implement the provisions of this rule no later than May 17, 2000, 
except that Sec. 246.15 (concerning civil money penalties and fines as 
program income) must be implemented no later than October 1, 1999.

FOR FURTHER INFORMATION CONTACT: Barbara Hallman, Supplemental Food 
Programs Division, Food and Nutrition Service, USDA, 3101 Park Center 
Drive, Room 542, Alexandria, Virginia 22302. (703) 305-2730.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

    This final rule has been determined to be not significant for 
purposes of Executive Order 12866 and therefore has not been reviewed 
by the Office of Management and Budget.

Regulatory Flexibility Act

    This final rule has been reviewed with regard to the requirements 
of the Regulatory Flexibility Act (5 U.S.C. 601-612). Samuel Chambers, 
Jr., Administrator of the Food and Nutrition Service (FNS), has 
certified that this rule will not have a significant impact on a 
substantial number of small entities. This rule will only impact WIC 
vendors who have committed fraud and abuse against the WIC Program or 
who have been disqualified from the FSP. While some of these vendors 
may be small entities, the number affected will not be substantial.

Paperwork Reduction Act

    This final rule imposes no new reporting or recordkeeping 
requirements that are subject to OMB review in accordance with the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3501-20).

Executive Order 12372

    The Special Supplemental Nutrition Program for Women, Infants and 
Children is listed in the Catalog of Federal Domestic Assistance 
Programs under 10.577. For reasons set forth in the final rule in 7 CFR 
part 3015, subpart V, and related notice (48 FR 29115), this program is 
included in the scope of Executive Order 12372, which requires 
intergovernmental consultation with State and local officials.

Executive Order 12988

    This final rule has been reviewed under Executive Order 12988, 
Civil Justice Reform. This rule is intended to have preemptive effect 
with respect to any State or local laws, regulations or policies which 
conflict with its provisions or which would otherwise impede its full 
implementation. This rule is not intended to have retroactive effect 
unless so specified in the DATES paragraph of the final rule. Prior to 
any judicial challenge to the application of provisions of this rule, 
all applicable administrative procedures must be exhausted.

Public Law 104-4

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Pub. 
Law (Pub. L.) 104-4, establishes requirements for Federal agencies to 
assess the effects of their regulatory actions on State, local and 
tribal governments and the private sector. Under section 202 of the 
UMRA, FNS generally must prepare a written statement, including a cost-
benefit analysis, for proposed and final rules with ``Federal 
mandates'' that may result in expenditures to State, local or tribal 
governments, in the aggregate, or the private sector, of $100 million 
or more in any one year. When such a statement is needed for a rule, 
section 205 of the UMRA generally requires FNS to identify and consider 
a reasonable number of regulatory alternatives and adopt the least 
costly, more cost-effective or least burdensome alternative that 
achieves the objectives of the rule.
    This rule contains no Federal mandates (under the regulatory 
provisions of Title II of the UMRA) for State, local and tribal 
governments or the private sector of $100 million or more in any one 
year. Thus, this rule is not subject to the requirements of sections 
202 and 205 of the UMRA.

Good Cause Determination

    Most of the provisions in this final rule were subject to a 90-day 
public comment period that commenced on April 20, 1998 with the 
publication of a proposed rule in the Federal Register. In addition to 
the provisions proposed in the April 20, 1998 rule, this rule at 
Sec. 246.12(k)(1)(i) implements the provisions in section 203(p)(1) of 
the William F. Goodling Child Nutrition Reauthorization Act of 1998, 
Pub. L. 105-336 (Goodling Act), concerning permanent disqualification 
of vendors convicted of trafficking or selling firearms, ammunition, 
explosives, or controlled substances in exchange for food instruments. 
Section 203(p)(2) of the Goodling Act requires the Secretary to publish 
a proposed rule to carry out these provisions no later than March 1, 
1999 and a final rule no later than March 1, 2000.
    Section 246.12(k)(1)(i) allows only minimal discretion in its 
implementation. Further, the substance of this provision overlaps and 
is intertwined with the issues proposed in

[[Page 13312]]

the April 20, 1998 rule. Therefore, to separately propose these 
provisions is unnecessary and contrary to public interest. The 
Administrator has determined pursuant to 5 U.S.C. 553(b) that there is 
good cause to publish the provisions of this rule concerning sanctions 
for convictions for trafficking and illegal sales without prior public 
comment.

Background

    On April 20, 1998, the Department published a proposed rule at 63 
FR 19415 to establish mandatory WIC sanctions for the most serious WIC 
Program violations. These WIC violations are deemed to be so serious 
that, under current FSP regulations, they also result in the loss of 
FSP authorization in response to the WIC Program disqualification. The 
April 20, 1998 rule also proposed to implement the requirement of 
section 729(j) of the Personal Responsibility and Work Opportunity 
Reconciliation Act of 1996, Pub. L. 104-193 (PRWORA). As authorized by 
the law, the proposal would have required a WIC State agency to 
disqualify a WIC vendor who had been disqualified from the FSP, unless 
the State agency determined that such disqualification would create 
hardship for WIC participant access. In these situations, the State 
agency would have been required to impose a civil money penalty (CMP) 
in accordance with a formula established in the proposed rule. The rule 
also proposed the removal of the current three-year limit on WIC vendor 
disqualification, thus permitting permanent WIC vendor disqualification 
under specified circumstances.
    A total of twenty-six comment letters were received during the 
comment period, which ended on July 20, 1998. The Department has given 
all comments careful consideration in the development of this final 
rule and would like to thank all commenters who responded to the 
proposal. Following is a discussion of each provision, as proposed, 
comments received, and an explanation of the provisions set forth in 
this final rule.

Implementation

    As noted above, the amendment to Sec. 246.15 (concerning civil 
money penalties and fines as program income) must be implemented no 
later than October 1, 1999. The Department has decided to require 
implementation no later than October 1, 1999 to coincide with fiscal 
year financial reporting for the WIC Program. In addition, this will 
give State agencies that have been using these funds in other ways the 
time to make the necessary budgeting adjustments.
    The remaining amendments are effective May 17, 1999, but are not 
required to be implemented for a full year (by May 17, 2000). 
Establishing separate effective and implementation dates recognizes the 
variations among the operations of State agencies and gives them 
flexibility in implementation methods. For example, a State agency for 
which all vendor agreements are scheduled to be renewed in December 
1999 might decide that it is most feasible and efficient to wait until 
then to implement the new sanction and appeal provisions. This way, the 
State agency could make the necessary changes to the new agreements 
without having to amend the current agreements. Another State agency 
that enters into agreements on a rolling basis may decide to amend the 
agreements as new ones are entered into, provided that agreements 
reflecting the new requirements are in place for all vendors prior to 
May 17, 2000, even if it means amending some agreements that will not 
expire prior to that date. Another approach would be to send a notice 
to all vendors informing them of the new provisions and offering them 
the option to either agree to the amendments to their agreements or to 
terminate their agreements. The year-long implementation period should 
give State agencies sufficient lead time to plan for an orderly 
replacement of any vendors that terminate their agreements because they 
do not agree to the new provisions.
    The mandatory sanctions in this rule apply only to violations 
committed after the State agency has provided notice to a vendor of the 
new provisions, as discussed above. This means that if a vendor 
committed a trafficking violation prior to the time the State agency 
provided notice of the new six-year disqualification period for 
trafficking, the new mandatory sanction would not apply. Instead, the 
State agency would impose whatever sanction the State agency has 
previously imposed for trafficking. Furthermore, only mandatory 
sanctions imposed under the conditions of this final rule count toward 
the number of sanctions that trigger the doubling of sanctions, as 
provided under Sec. 246.12(k)(1)(v) and (vi).
    State agencies may implement, independent of the remainder of this 
rule, the provision concerning the disqualification of WIC vendors who 
have been disqualified from the FSP (Sec. 246.12(k)(1)(vii)) and the 
associated change to the WIC appeal procedures (Sec. 246.18(a)(1)(ii)). 
However, this provision may be implemented only if two conditions are 
met: (1) The FSP disqualification occurs after the effective date of 
this rule and (2) the vendor received notice prior to his opportunity 
to appeal the FSP disqualification that such disqualification may 
result in a WIC disqualification that is not be subject to 
administrative or judicial review under the WIC Program. The new 
provision limiting WIC appeals would not apply to any FSP or WIC 
appeals already in process.

Definition of Food Instrument

    In recognition of emerging technology in the retail food delivery 
area relative to electronic benefits transfer (EBT), the Department 
proposed to revise the definition of ``food instrument'' to include an 
EBT transfer card. The proposed rule's definition read: ``Food 
instrument means a voucher, check, electronic benefits transfer card 
(EBT), coupon or other document which is used by a participant to 
obtain supplemental foods.'' One commenter was concerned that the 
reference to ``participant'' in this definition excluded the approved 
use of WIC food instruments by a participant's proxy or by an 
undercover agent. The commenter suggested that the phrase ``used by a 
participant'' be deleted from the definition of a food instrument. The 
commenter also suggested that the definition of ``participants'' be 
amended to include a WIC customer, proxy, or an undercover investigator 
posing as any of the above.
    To avoid confusion, the Department has revised the definition of 
food instrument to remove the reference to participants. The Department 
does not, however, believe that it is necessary to revise the 
definition of ``participants'' to include a proxy or an undercover 
agent. Current regulations are already clear about the types of 
activities a proxy may perform on behalf of a participant. For example, 
current regulations at Sec. 246.12(o) provide that a proxy may transact 
food instruments on behalf of a participant. Also, because undercover 
investigators are under the direction of the WIC State agency, there is 
no need to prescribe exactly the activities investigators may perform 
while posing as a participant.

Disqualification of WIC Vendors as a Result of FSP Disqualification

    Current regulations at Sec. 246.12(k)(1)(iii) give State agencies 
the option to disqualify a vendor who has been disqualified from 
another FNS program. Section 729(j) of the PRWORA amended section 17 of 
the Child

[[Page 13313]]

Nutrition Act of 1966 (CNA) (42 U.S.C. 1786) by adding a new section 
(n) that requires the Secretary to issue regulations providing criteria 
for the disqualification of WIC vendors who have been disqualified in 
the FSP. This provision states that the WIC disqualification shall be 
for the same length of time as the FSP disqualification, may begin at 
the same time or a later date than the FSP disqualification, and shall 
not be subject to administrative or judicial review. To implement this 
provision of the PRWORA and to strengthen program integrity, the 
proposed rule would have required mandatory disqualification of WIC 
vendors who had been disqualified from the FSP, unless the State agency 
determined that disqualification of the vendor would result in hardship 
for participant access. Commenters overwhelmingly supported this 
provision as proposed. Therefore, the proposal has been adopted with 
only technical changes to make clear that a WIC disqualification or CMP 
in lieu of disqualification based on an FSP disqualification is a 
mandatory sanction.

Disqualification of WIC Vendors as a Result of FSP Civil Money 
Penalties

    Current program regulations (Sec. 246.12(k)(1)(iii) and (iv)) allow 
but do not require a State agency to disqualify a WIC vendor who is 
currently disqualified from any FNS program or who has been assessed an 
FSP CMP in lieu of disqualification. As noted above, the proposed rule 
would have required WIC State agencies to disqualify a vendor from WIC 
who has been disqualified from the FSP, unless such disqualification 
would result in hardship for participant access, in which case WIC 
State agencies would be required to impose a CMP. The proposed rule 
would have retained for WIC State agencies the option of disqualifying 
a vendor who had been assessed an FSP CMP in lieu of disqualification.
    Several commenters requested that an FSP CMP be treated in the same 
manner as an FSP disqualification. That is, State agencies should be 
required to impose WIC Program disqualifications based on FSP CMPs and 
that such actions should not be subject to review under the WIC 
Program. Because the law only authorizes WIC disqualification without 
any administrative or judicial appeal for actions based specifically on 
an FSP disqualification, there is no legal basis to limit appeals for 
WIC actions based on FSP CMPs in the same manner as FSP 
disqualifications. However, the Department believes a violation that 
warrants disqualification under FSP rules is a serious violation, 
regardless of whether the FSP imposes a disqualification or a CMP in 
lieu of disqualification due to participant hardship. As such, this 
final rule retains the State agency option in Sec. 246.12(k)(2)(ii) to 
disqualify a vendor against whom the FSP has assessed a CMP in lieu of 
disqualification due to participant hardship. Further, the Department 
wishes to note that an FSP participant hardship determination in no way 
obligates the WIC State agency to also conclude that disqualification 
of a vendor would result in inadequate WIC participant access. Although 
many WIC participants also participate in the FSP, the WIC Program and 
the FSP generally serve different populations. Consequently, there may 
be instances where disqualification would result in hardship for FSP 
participants but would not result in inadequate participant access for 
WIC participants. In these instances, the WIC State agency may choose 
to disqualify the violative vendor, provided the State agency documents 
its WIC participant access determination in the vendor's case file and 
provides prior notice to the vendor of the possibility of such 
disqualification in the vendor agreement.
    In addition, this final rule makes clear that this provision only 
applies to FSP CMPs that are imposed in lieu of disqualification due to 
participant hardship. FSP CMPs imposed for other reasons may not be 
used as grounds to disqualify a WIC vendor. For example, an FSP 
transfer of ownership CMP would not warrant a WIC disqualification 
because these CMPs are imposed after a store has already been 
disqualified. In addition, a State agency may not disqualify a vendor 
for an FSP CMP imposed in lieu of a permanent disqualification for 
trafficking based on an FNS finding that the store has an effective 
compliance program.
    The final rule clarifies that the option to impose a WIC 
disqualification based on an FSP CMP is considered a State agency-
established sanction rather than a mandatory sanction.
    The Department also wishes to clarify that WIC State agencies may 
not impose a WIC CMP in response to an FSP CMP. The only sanction 
available to the WIC State agency in response to an FSP CMP is WIC 
disqualification, as explained above, and that is permitted solely in 
cases where the FSP CMP is assessed due to FSP participant hardship.
    A vendor may not request an administrative review of a WIC 
disqualification based on an FSP disqualification. However, a vendor 
may request an administrative review of a WIC disqualification based on 
an FSP CMP. The areas subject to review include: whether the vendor was 
assessed a CMP in lieu of disqualification by the FSP, whether the FSP 
CMP was imposed due to participant hardship, and whether the vendor 
agreement included the required notification that the vendor was 
potentially subject to WIC disqualification based on an FSP CMP. 
However, neither the FSP decision to impose a CMP in lieu of 
disqualification nor the State agency's WIC participant access 
determination are subject to administrative review under the WIC 
Program.

Length of Disqualification

    The April 20, 1998 rule proposed to amend the current regulations 
to remove the three-year maximum disqualification period reflected in 
Sec. 246.12(k)(1)(ii). This change was proposed in part to accommodate 
section 17(n) of the CNA (as amended by the PRWORA), which provides 
that a WIC disqualification based on an FSP disqualification shall be 
for the same length of time as the FSP disqualification and may begin 
at the same time or at a later date than the FSP disqualification. In 
addition, the change was proposed to accommodate the other WIC 
mandatory sanctions, which include disqualification for periods longer 
than three years. No negative comments were received on this change. 
Therefore, this rule removes the three-year limitation from the 
regulations. This permits both reciprocal permanent disqualification, 
as required by the PRWORA, and other mandatory sanctions that impose 
disqualification periods in excess of three years.

Mandatory WIC Vendor Sanctions

    The proposed rule would have established nine program violations 
that warrant mandatory sanctions in addition to the mandatory 
reciprocal sanction requiring the disqualification of a WIC vendor as a 
result of an FSP disqualification. The WIC violations were based on the 
seven WIC Program violations that, pursuant to current Sec. 278.1(o) of 
the FSP regulations, result in the loss of a retailer's FSP 
authorization. In the proposal, three modifications were made to the 
seven violations adopted from the current FSP regulations. Violations 
for ``trafficking'' and ``the sale of alcohol or alcoholic beverages or 
tobacco products in exchange for WIC food instruments'' were added to 
the list of violations that would result in a mandatory WIC sanction. 
The word ``cash'' was deleted

[[Page 13314]]

from the ``exchanging WIC food instruments for cash or credit'' 
violation, because exchanging food instruments for cash was already 
included in the proposed violation for trafficking.
    Only one commenter opposed the establishment of uniform sanctions 
for serious violations. Although most commenters supported uniform 
sanctions, clarifications were requested on the difference between an 
investigation, a violation, and a sanction, and the number of 
incidences of each violation that trigger a mandatory sanction. For 
purposes of this final rule, an investigation is a method used by the 
State agency to determine if violations are occurring. A violation is 
an infraction of program regulations or other requirements. A sanction 
is an administrative action taken as a result of a violation. For a 
mandatory sanction, this rule requires a State agency to impose either 
a disqualification or a CMP in lieu of disqualification. Multiple 
violations detected during a single investigation may result in a 
mandatory sanction of either a disqualification for the most serious 
violation or multiple CMPs.
    Regarding the number of incidences of each violation that trigger a 
mandatory sanction, the Department has determined that some violations 
are so serious that only one incidence warrants disqualification. For 
example, trafficking and the sale of alcohol or tobacco products are 
flagrant violations of program rules and completely undermine program 
goals. As such, this final rule requires a mandatory sanction for one 
incidence of either of these violations. All the other violations 
require a pattern of incidences to warrant a mandatory sanction. To set 
a specific number of incidences that constitutes a pattern for each 
violation would fail to account for the extent of the fraud or abuse 
being committed. For example, if a vendor overcharged $20 on a gallon 
of milk, the number of incidences required to demonstrate a pattern of 
the violation would be less than for a vendor who overcharged 5 cents 
on a gallon of milk. It is therefore left to the discretion of the 
State agency to determine the number of incidences that reflect a 
pattern, based on the type and severity of violation.
    Finally, the Department proposed in Sec. 246.12(k)(1)(iv) that the 
State agency would not have to provide the vendor with prior notice 
that violations were occurring and the possible consequences of the 
violations prior to implementing any of the mandatory sanctions. Two 
commenters opposed this provision. One commenter opposed this provision 
because it would be contrary to State legislative reform that includes 
a mandate to notify vendors of such violations and give them an 
opportunity to correct problems before imposing any sanctions. The 
other commenter suggested retention of current language that allows the 
State agency to provide a vendor with prior warning and an opportunity 
to correct the problem.
    The Department decided to adopt the provision with minor 
modifications to distinguish between prior warning and prior notice. 
The State agency must provide a vendor with prior notice (i.e. the 
notice of administrative action) at least fifteen days prior to the 
effective date of a sanction, except for a disqualification imposed for 
the ``vendors convicted for trafficking/illegal sales'' violation, 
which is required by statute to be effective on the date of receipt of 
the notice of administrative action. The final rule at 
Sec. 246.12(k)(3) reads: ``The State agency does not have to provide 
the vendor with prior warning that violations were occurring before 
imposing any of the sanctions in this paragraph (k).'' The location of 
the provision in the final rule clarifies that it applies to both 
mandatory and State agency-established sanctions. The provision clearly 
makes the use of prior warning a State agency option. However, such 
prior warning cannot be provided for the trafficking violations or 
``the sale of alcohol or alcoholic beverages or tobacco products'' 
violation because these violations warrant a mandatory sanction for the 
first incidence. Also, while prior warning for other violations may be 
acceptable for the first incidence, continual use of such warning 
undermines the State agency's fraud and abuse investigation and 
prevention efforts.
    Below is a chart illustrating the mandatory sanctions required by 
this final rule and a discussion of the WIC violations that warrant a 
mandatory sanction.

----------------------------------------------------------------------------------------------------------------
            WIC violation*                    Proposed rule  sanction                Final rule sanction
----------------------------------------------------------------------------------------------------------------
Vendors convicted of trafficking/       Not proposed/Non-discretionary.....  Permanent.
 illegal sales.
Administrative finding of trafficking/  Permanent..........................  6 years.
 illegal sales.
Sale of alcoholic beverages or tobacco  3 years............................  3 years.
 products.
Claiming reimbursement in excess of     3 years............................  3 years.
 documented inventory.
Overcharging..........................  3 years............................  3 years.
Outside of authorized channels,         3 years............................  3 years.
 including unauthorized vendors or
 persons.
Supplemental food not received........  3 years............................  3 years.
Credit or non-food items..............  1 year.............................  3 years.
Unauthorized food items**.............  3 years............................  1 year
2nd mandatory sanction, excluding       Double sanction....................  Double sanction.
 sanctions for trafficking convictions
 & FSP DQs.
3rd mandatory sanction, excluding       Permanent..........................  Double sanction & no CMP option.
 sanctions for trafficking convictions
 & FSP DQs.
Disqualification from FSP.............  Same as FSP DQ.....................  Same as FSP DQ.
----------------------------------------------------------------------------------------------------------------
*All violations require a pattern of incidences to warrant a mandatory sanction, except the violations for
  ``vendors convicted of trafficking/illegal sales,'' an administrative finding of ``trafficking/illegal
  sales,'' and ``the sale of alcohol or alcoholic beverages or tobacco products,'' which only require one
  incidence to warrant a mandatory sanction.
**The violation for ``unauthorized food items'' was not a separate violation under the proposal. It would have
  been considered under the violation: ``Charging for food items not received by the WIC customer or for food
  provided in excess of those listed on the food instrument.''

I. Trafficking or Illegal Sales

    On October 31, 1998, the President signed the Goodling Act, which 
includes a non-discretionary provision regarding the permanent 
disqualification of ``vendors convicted of trafficking or illegal 
sales.'' (Conviction means an action by a criminal court and not an 
administrative finding by the State agency or its review office.)
    This provision has been included in the final rule with only minor 
revisions to make it consistent with current WIC

[[Page 13315]]

terminology. The law mandates that the permanent disqualification for 
convicted vendors shall be effective on the date of receipt of the 
notice of administrative action. Further, the law specifies that 
convicted vendors are not entitled to receive any compensation for 
revenues lost as a result of a disqualification which is later 
overturned. Finally, the law allows a State agency, at its discretion, 
to assess a CMP in lieu of permanent disqualification if: (1) The State 
agency determines that the disqualification would result in inadequate 
participant access; or (2) the State agency determines that the vendor 
had, at the time of the violation, an effective policy and program in 
place to prevent this type of violation, and the ownership of the 
vendor was not aware of, did not approve of, and was not involved in 
the conduct of the violation. State agencies may choose to implement 
one, both, or neither of the two options for assessing CMPs in lieu of 
disqualification based on a conviction for trafficking or illegal 
sales. The option(s) selected by the State agency must be reflected in 
the State Plan. These new provisions are at Sec. Sec. 246.12(k)(1)(i) 
and 246.4(a)(14)(v).
    The inclusion of this legislative mandate necessitated 
modifications to the proposed rule with respect to two violations that 
would have resulted in permanent disqualification. First, the length of 
disqualification for an administrative finding of the trafficking 
violation has been reduced in the final rule from the proposed 
permanent disqualification to a six-year disqualification. (An 
administrative finding of trafficking is a trafficking violation that 
has not resulted in a conviction for trafficking by a court of law, 
either because the officials responsible for criminal prosecution have 
declined to prosecute the matter or because the criminal action is not 
complete.) In addition, the length of disqualification for a third 
mandatory sanction has been reduced in the final rule from the proposed 
permanent disqualification to a sanction equal to double the 
disqualification period for the current violation with no option to 
impose a CMP. These sanctions were modified to set them apart from the 
permanent disqualification required by the Goodling Act for vendors 
convicted of trafficking or illegal sales.
    In the proposed rule, trafficking was defined as the ``buying or 
selling of WIC food instruments for cash or consideration other than 
eligible food.'' Twelve commenters indicated that this definition needs 
further clarification. Three commented that the phrase ``or 
consideration other than eligible food'' could be interpreted to 
include other less egregious violations, such as the violation for 
exchanging non-food items for food instruments. One commenter pointed 
out that, under the proposed rule, selling a non-WIC cereal (``other 
than eligible food'') could be considered trafficking. In response to 
these concerns, the Department has deleted the phrase ``or 
consideration other than eligible food'' from the definition of the 
trafficking violation in this final rule.

II. Sale of Alcoholic Beverages or Tobacco Products

    Under the proposal, a vendor would have been disqualified for three 
years for the sale of alcohol or alcoholic beverages or tobacco 
products in exchange for food instruments. Commenters generally agreed 
with the proposal. One commenter suggested that selling alcohol is as 
intolerable as selling illicit drugs or firearms for food instruments, 
and because of the immediate danger alcohol poses to the fetus, a 
permanent disqualification is warranted. Another commenter suggested 
that lottery tickets and gasoline be added to this violation, because 
selling these non-food items is just as egregious as selling alcohol or 
tobacco products. In this final rule, the Department has retained a 
three-year disqualification for this violation. As stated earlier in 
this preamble, in recognition of their obvious inappropriate nature 
with respect to the WIC Program, only one incidence of the sale of 
alcohol or alcoholic beverages or tobacco products in exchange for food 
instruments is necessary to trigger the mandatory sanction for this 
violation. In addition, as discussed below, the mandatory sanction for 
exchanging non-food items for food instruments has been increased to 
three years in this final rule, thus accommodating the commenter's 
concern regarding other non-food items.

III. Claiming Reimbursement in Excess of Documented Inventory

    In response to the proposed violation for claiming reimbursement in 
excess of documented inventory, commenters requested clarification of 
the term ``documented inventory.'' One commenter asserted that many 
small rural stores will not have detailed documentation regarding their 
monthly inventories. Like any business, a retail store is required for 
tax purposes to maintain records on its purchases, receipts, and 
inventory. Although the type of recordkeeping may vary based on the 
size of a store, all vendors should have up-to-date inventory records. 
Current regulations at Sec. 246.12(i)(4) include ``review of inventory 
records'' as one of the review methods for on-site monitoring visits. 
This method of review can be used to detect vendors who are, for 
example, redeeming food instruments for unauthorized stores, exchanging 
unauthorized food or non-food items for food instruments, or 
trafficking.
    The final rule requires a pattern of this violation in order to 
trigger a mandatory sanction. A pattern for this violation can be 
established during a single review where a vendor's records indicate 
that the store's redemptions for a specific food item exceed its 
documented inventory for a number of months. The requirement of a 
pattern for this violation also responds to a commenter who suggested 
graduated sanctions based on the severity of the inventory shortfall. 
The evidence necessary to show a pattern of abuse for this violation 
depends on the magnitude of the shortfalls and the period of time over 
which they occur. For example, a pattern can be established over a 
short period of disproportionately large inventory shortfalls or over 
an extended period of time of small inventory shortfalls.

IV. Overcharging

    On the proposed violation for ``charging WIC customers more for 
food than non-WIC customers or charging more than the current shelf or 
contract price,'' commenters were concerned about establishing a 
pattern for this violation, distinguishing between outright fraud and 
abuse and inadvertent human error, and having a sanction that is 
appropriate for the violation. As noted above in this preamble, the 
Department has modified this violation in the final rule to establish 
that a pattern of incidences is necessary to warrant a mandatory 
sanction. In addition, the Department has clarified that the evidence 
necessary to establish a pattern is influenced by both the severity and 
number of the incidences of a violation.
    The intent to commit a violation versus inadvertent human error is 
not a distinction that State agencies must establish in order to impose 
sanctions, including sanctions for overcharging. The vendor sanctions 
are not criminal; they are imposed in order to protect the integrity of 
the WIC Program. If stores consistently overcharge customers for 
purchases, customers take their business elsewhere regardless of 
whether the overcharges are intentional or inadvertent. Likewise, when 
a pattern of overcharging is established, the State agency will be 
required to impose a mandatory sanction on the vendor

[[Page 13316]]

regardless of whether the violation is intentional or inadvertent. 
Current regulations at Sec. 246.12(f)(2)(ix), which cover the 
requirements for vendor agreements, state: ``The food vendor shall be 
accountable for actions of employees in the utilization of food 
instruments or provision of supplemental foods.'' The WIC Program has 
limited resources and cannot tolerate vendors whose employment 
practices repeatedly result in direct losses to the Program.
    Six commenters questioned the severity of the sanction for this 
violation. Overcharging is one of the most common vendor violations. 
Funds lost through overcharges could otherwise be used to serve more 
participants. As such, the sanction for this type of violation must be 
sufficient to deter this type of fraud and abuse. Consequently, the 
Department has retained the three-year sanction for this violation in 
the final rule.
    One commenter suggested that vendors should be granted the 
opportunity to correct overcharging problems as outlined in 
Sec. 246.12(r)(5)(iii) in the current regulations, which states: ``When 
payment for a food instrument is denied or delayed, or a claim for 
reimbursement is assessed, the affected food vendor shall have the 
opportunity to correct or justify the overcharge or error.* * *'' 
Another commenter noted that the regulations already require vendors to 
refund the difference between their reported price for the food package 
and the actual redemption price. The violation, as written in this 
final rule, does not prohibit the State agency from pursuing claims for 
overcharging before it rises to a level where it warrants a mandatory 
sanction. The mandatory sanction for this violation is only triggered 
when a pattern of overcharging is established. However, permitting 
vendors to just pay claims when the State agency detects overcharges 
provides vendors with no incentive to ensure that overcharging does not 
occur in the first place.

V. Outside of Authorized Channels and Unauthorized Persons

    Several commenters requested a clarification that would distinguish 
the violation for ``accepting WIC food instruments from unauthorized 
persons'' from the violations for ``trafficking'' and ``receiving, 
transacting, and/or redeeming WIC food instruments outside of 
authorized channels.'' One commenter requested that the Department 
establish procedures a vendor must follow to verify an authorized 
person. Another commenter pointed out that some State agencies do not 
use WIC identification cards and rely on banks to return WIC checks to 
vendors when the signatures do not match. Due to the variety of methods 
used by State agencies to document and verify participants, it is 
impractical for the Department to establish a single set of procedures 
to verify an authorized person. As noted above in the Definition of 
Food Instrument section of this preamble, the only persons authorized 
to use food instruments to obtain supplemental foods are participants, 
designated proxies, and undercover investigators. Nevertheless, even 
participants can be unauthorized persons if they are transacting 
someone else's food instruments. In response to commenters' concerns, 
the Department consolidated the ``unauthorized person'' and ``outside 
authorized channels'' violations into a single violation in the final 
rule at Sec. 246.12(k)(1)(iii)(D). This violation reads: ``A pattern of 
receiving, transacting, and/or redeeming food instruments outside of 
authorized channels, including the use of an unauthorized vendor and/or 
an unauthorized person.'' This violation includes situations in which a 
vendor, who owns more than one store, not all of which are authorized, 
accepts food instruments at an unauthorized store and redeems them 
through an authorized store.

VI. Supplemental Food Not Received

    Commenters suggested several revisions to the sanction for the 
violation ``charging for food items not received by the WIC customer or 
for food provided in excess of those listed on the food instrument.'' 
One commenter suggested that the violation be modified to read: ``* * * 
for non-substitutionary foods provided in excess.* * *'' Another 
commenter requested that the violation differentiate between a minor 
violation, such as being shorted a dozen eggs, and a more significant 
violation, such as receiving nothing for a food instrument. The 
commenter suggested that only the more significant violation should 
warrant a three-year disqualification.
    To accommodate commenters' concerns, the Department has deleted the 
phrase ``charging for food provided in excess of those listed on the 
food instrument'' from this violation and included it as part of a new 
violation, discussed below in the Unauthorized Food Items section of 
this preamble. The violation now reads ``a pattern of charging for 
supplemental food not received by the participant.'' The Department has 
retained the three-year disqualification for this violation, 
notwithstanding commenters' concerns about the severity of the 
sanction. The Department believes that charging for supplemental food 
not received is comparable to ``overcharging'' and thus should carry 
the same sanction. Nevertheless, ``charging for supplemental food not 
received'' is distinct enough from ``overcharging'' to justify its 
being a separate violation. For example, a vendor may charge the State 
agency the full price on a food instrument, even though the participant 
chose not to purchase several items listed on the food instrument. This 
would be an incidence of the charging for supplemental food not 
received by the participant. On the other hand, a participant may 
receive all of the food items listed on the food instrument, but the 
vendor charges more for the items than the current shelf prices. This 
would be an incidence of overcharging. In the final rule, these 
violations will result in three-year sanctions.

VII. Credit or Non-Food Items

    Under the proposed rule, ``exchanging WIC food instruments for 
credit'' would trigger a one-year sanction. One commenter requested 
that the term ``credit'' be defined. Another commenter indicated that 
providing credit in exchange for food instruments is comparable to 
trafficking and suggested that the credit violation warrants a more 
severe sanction. Commenters expressed similar concerns about the 
proposed one-year sanction for ``exchanging non-food items, other than 
alcohol or alcoholic beverages or tobacco, for WIC food instruments.''
    In response to commenters' suggestions, the Department has 
consolidated the two proposed violations into a single violation in the 
final rule at Sec. 246.12(k)(1)(iii)(F). This violation reads: ``a 
pattern of providing credit or non-food items, other than alcohol, 
alcoholic beverages, tobacco products, cash, firearms, ammunition, 
explosives or controlled substances as defined in 21 U.S.C. 802, in 
exchange for food instruments.'' The Department also increased the 
sanction for this violation to a three-year disqualification. 
Consolidating the violations recognizes that providing credit in 
exchange for food instruments is essentially granting the participant 
access to any item in a store, including non-food items. As such, the 
Department concurs with the commenter who suggested that a more severe 
sanction is warranted for this violation. The Department wishes to 
clarify that if a vendor allows the credit to be used for the purchase 
of alcohol

[[Page 13317]]

or alcoholic beverages or tobacco products, then the vendor's actions 
fall under the ``alcohol/tobacco'' violation, which triggers a sanction 
after one incidence. In addition, if a vendor allows the credit to be 
used for any of the items included in the trafficking violation, then 
the vendor's actions fall under that violation, which also triggers a 
sanction after one incidence.

VIII. Unauthorized Food Items

    Under the proposal, providing unauthorized food items in exchange 
for food instruments would fall under the violation for ``charging for 
* * * food provided in excess of those listed on the food instrument,'' 
which would warrant a three-year mandatory sanction. Comments from the 
vendor community expressed concern that the sanction was too severe for 
the violation. They suggested that the final rule make a clear 
distinction between incidences of minor ``substitution'' of food items 
and exchanging non-food items for food instruments. Further, they 
suggested that substitution of food items should result in a lesser 
sanction. In response to these concerns, the Department has inserted a 
new violation in the final rule at Sec. 246.12(k)(1)(iv) that reads: 
``a pattern of providing unauthorized food items in exchange for food 
instruments, including charging for supplemental food provided in 
excess of those listed on the food instrument.'' Rather than including 
it in the violation for ``charging for supplemental food not received 
by the participant,'' the Department decided to include ``charging for 
supplemental food provided in excess of those listed on the food 
instrument'' in this violation because such food is technically 
unauthorized.
    The distinction made in this final rule between unauthorized food 
items and non-food items is consistent with program goals and 
strengthens the uniformity of the mandatory sanction system. 
Nevertheless, the Department wishes to make clear that it does not 
consider ``providing unauthorized food items in exchange for food 
instruments'' (i.e. ``substitution'') to be a minor violation. The WIC 
Program is a nutrition assistance program that provides specific foods 
to participants in order to improve their health and nutritional well-
being. In addition, one-fourth of participants are able to receive 
program benefits due to rebates from manufacturers. Substituting 
unauthorized food items for WIC-approved food items may undermine State 
agency contracts with rebate manufacturers and is contrary to the 
mission and goals of the WIC Program.

Treatment of Mandatory Sanctions

    One commenter suggested that the sanctions for WIC violations be 
additive within a single investigation. Rather than make 
disqualification periods additive, the Department established lengths 
of disqualification for the mandatory sanctions that are appropriate 
for the severity of the violations. As such, State agencies no longer 
need to establish multiple violations during an investigation in order 
to justify the length of disqualification. In situations in which a 
vendor is found to have committed multiple violations during the course 
of a single investigation, while all violations must be reflected in 
the notice of administrative action to the vendor, including State 
agency-established violations, the length of disqualification for a 
mandatory sanction shall be determined by the most serious violation. 
This approach recognizes that one investigation results in one 
disqualification, which represents a fair balance of both the 
Department's desire to address program violations and the vendor 
community's concern regarding the lengths of disqualification periods.
    However, as discussed below in the Formula for Calculating Civil 
Money Penalties section of this preamble, the Goodling Act recognizes 
that multiple violations may occur during a single investigation and, 
thus, established limits on CMPs for both violations and investigations 
involving vendors convicted of trafficking/illegal sales. For 
consistency, the Department decided to adopt this approach for all 
CMPs, including those imposed as a result of State agency-established 
sanctions. Thus, in situations in which the State agency determines 
that disqualification of the vendor will result in inadequate 
participant access, the State agency must impose a sanction that 
includes CMPs for each violation that warrants a mandatory sanction.
    The proposed rule included a provision to double the mandatory 
sanction if the vendor had been assessed a previous sanction. Four 
commenters requested clarification of this provision. Two commenters 
asked whether the second sanction had to be for the same violation as 
the first. One commenter asked whether the doubling applies to the more 
serious of the first and second sanctions or whether it only applies to 
the second sanction. Another commenter asked whether the doubling 
occurs if the first sanction is a State agency-established sanction. To 
clarify this provision in the final rule at Sec. 246.12(k)(1)(v), the 
Department has revised it to read: ``When a vendor, who previously has 
been assessed a sanction for any of the violations in paragraphs 
(k)(1)(ii) through (k)(1)(iv) of this section, receives another 
sanction for any of these violations, the State agency shall double the 
second sanction. Civil money penalties may only be doubled up to the 
limits allowed under paragraph (k)(1)(x)(C) of this section'' (i.e., 
$10,000 per violation and $40,000 per investigation). This revision 
clarifies that while both the first and second sanction must be 
mandatory sanctions, they do not need to be for the same violation. The 
final rule also clarifies that it is the sanction for the second 
violation that is doubled. However, mandatory sanctions for vendors 
convicted of trafficking/illegal sales and those based on FSP 
disqualification do not count toward this provision and cannot be 
doubled. In addition, State agency-established sanctions do not count 
toward this provision.
    As noted earlier, the sanction for a vendor's third mandatory 
sanction for a WIC violation has been revised in the final rule at 
Sec. 246.12(k)(1)(vi). The provision now reads: ``When a vendor, who 
previously has been assessed two or more sanctions for any of the 
violations listed in paragraphs (k)(1)(ii) through (k)(1)(iv) of this 
section, receives another sanction for any of these violations, the 
State agency shall double the third sanction and all subsequent 
sanctions. The State agency shall not impose civil money penalties in 
lieu of disqualification for third or subsequent sanctions for 
violations listed in (k)(1)(ii) through (k)(1)(iv) of this section.'' 
No CMP option is allowed in these cases because by a third or 
subsequent sanction the State agency should have had time to make other 
arrangements to ensure adequate participant access. In addition, the 
Department specifically omitted the violation for vendors convicted of 
trafficking/illegal sales contained in paragraph (k)(1)(i) of this 
final rule from the CMP prohibition portion of this provision. This 
omission was made to reflect the requirement in the Goodling Act that 
gives the State agency the option to impose a CMP in lieu of permanent 
disqualification for this violation. However, as noted in the 
conference report that accompanied the Goodling Act, Congress expressed 
its expectation that State agencies should take the strongest possible 
action against each vendor who has been repeatedly convicted of 
trafficking or illegal sales of food instruments.

[[Page 13318]]

State Agency Vendor Sanctions

    Recognizing that there are other violations in addition to those 
covered by the mandatory sanctions, the Department has left the 
authority to establish sanctions for any additional violations to State 
agency discretion, as long as vendors are made aware of such violations 
and sanctions prior to their imposition. Under the proposed rule at 
Sec. 246.12(k)(1)(vi), the period of disqualification for State agency-
established violations would be limited to six months. Six commenters 
requested more State agency discretion regarding State agency 
sanctions. As discussed in the Mandatory WIC Vendor Sanctions and 
Participant Access sections of this preamble, the final rule provides 
State agencies with little discretion in the imposition and disposition 
of the mandatory sanctions. This restriction of discretion ensures 
uniformity in the application of the mandatory sanctions across the WIC 
Program. However, the Department is sensitive to commenters' requests 
for more discretion with regard to State agency sanctions. To balance 
the restriction of discretion regarding mandatory sanctions, the 
Department decided to provide State agencies with as much discretion as 
possible in the imposition and disposition of State agency sanctions in 
this final rule.
    Seven commenters requested that the sanction period for State 
agency sanctions be increased to one year. Two commenters suggested 
that the three-year maximum disqualification period contained in the 
current regulations should apply to State agency sanctions. One 
commenter indicated that a six-month limit was not appropriate unless 
State agency sanctions were additive. Another commenter requested 
clarification of whether State agency sanctions may be doubled and 
whether State agencies may permanently disqualify vendors for non-
compliance with State agency sanctions.
    To address these comments, the Department made several 
modifications in the final rule. The maximum disqualification period 
for State agency sanctions has been increased from six months to one 
year. In addition, State agency sanctions may be additive within an 
investigation or doubled, provided that the total disqualification 
period does not exceed one year per investigation and that any fines or 
CMPs imposed do not exceed $10,000 per violation and $40,000 per 
investigation. As required for the mandatory sanctions, when a vendor 
fails to comply with the terms of a CMP imposed in lieu of 
disqualification for a State agency-established violation, such as 
failing to pay the CMP, the State agency must disqualify the vendor for 
the length of time corresponding to the violation for which the 
sanction was assessed. The provisions regarding State agency sanctions 
have been moved to Sec. 246.12(k)(2) of the final rule and include the 
State agency option to disqualify vendors who have been assessed an FSP 
CMP for hardship.
    One commenter requested clarification of whether State agency 
sanctions may be added to a mandatory sanction required by this rule. 
As noted above in the Treatment of Mandatory Sanctions section, State 
agency sanctions may not be added to a mandatory sanction within the 
same investigation. However, State agencies may impose State agency 
sanctions from the same investigation in situations where mandatory 
sanctions are not upheld on appeal. Another point the Department has 
clarified in the final rule is that State agency sanctions do not count 
toward the provisions in Sec. 246.12(k)(1)(v) and (vi) of the final 
rule, which cover vendors who have been assessed two or more mandatory 
sanctions.
    One commenter requested that the Department provide some examples 
of possible State agency sanctions. Several commenters suggested 
violations that they believe warrant State agency sanctions. These 
suggested violations include redeeming food instruments outside of 
valid dates, selling stale-dated WIC food items, and charging sales 
tax. This list is not intended to be exhaustive but to give State 
agencies and other interested parties an idea of the types of 
violations that could be included in a State agency sanction schedule. 
Any State agency-established sanctions must be reflected in the State 
Plan under the description of the State agency's food delivery system, 
as currently required in Sec. 246.4(a)(14). The final rule also makes 
clear that State agency sanctions may include fines, disqualification, 
or CMPs in lieu of disqualification.

Voluntary Withdrawal or Non-renewal in Lieu of Disqualification

    Under Sec. 246.12(k)(2) of the proposed rule, State agencies would 
not be able to accept voluntary withdrawal or use non-renewal of a 
vendor agreement as an alternative to disqualification. This provision 
was proposed in response to a September 1995 OIG audit that revealed 
that some WIC State agencies allowed vendors to voluntarily withdraw 
from the WIC Program in lieu of disqualification. In addition, some 
State agencies opted not to renew abusive vendors' contracts or 
agreements rather than disqualify them for violations that warrant 
disqualification. The Department does not support these practices, 
because they allow a vendor to circumvent reciprocal disqualification 
from the FSP. Enhanced cooperation between WIC and the FSP in the 
detection and removal of abusive vendors and retailers will result in 
more effective and efficient vendor/retailer management in both 
programs.
    Most commenters supported this provision, provided that it only 
applies to the mandatory sanctions required by this rule. It was the 
Department's intent that the provision only apply to mandatory 
sanctions, because only mandatory sanctions trigger a reciprocal FSP 
action. As such, in Sec. 246.12(k)(1)(viii), the final rule prohibits a 
State agency from either accepting voluntary withdrawal or using non-
renewal as an alternative to imposing a mandatory sanction. When a 
State agency establishes that a vendor has committed a violation that 
warrants a mandatory sanction, the State agency is required to either 
disqualify the vendor or impose a CMP in lieu of disqualification due 
to inadequate participant access. State agencies continue to have the 
discretion to allow the use of voluntary withdrawal and non-renewal in 
connection with State agency-established sanctions.
    Two commenters suggested that State agencies be permitted to use 
voluntary withdrawal in special circumstances, such as when a witness 
is not able to testify at an administrative review. The Department 
recognizes that on occasion circumstances may arise that impair the 
State agency's ability to successfully defend its action during an 
administrative review. Rather than grant exceptions to the rules, the 
Department believes that, when extenuating circumstances arise, the 
State agency should attempt to reschedule or postpone the review. The 
intent of this regulation is to provide State agencies and vendors with 
clear, firm, uniform rules for mandatory sanctions and administrative 
review procedures. As such, the commenter's suggestion is not adopted.
    One commenter suggested that the Department clarify that a vendor 
may not voluntarily withdraw to avoid paying a CMP. As noted below in 
the Payment of Civil Money Penalties section of this preamble, the 
Department has added a paragraph in the final regulations at 
Sec. 246.12(k)(6) that addresses this issue. If a vendor does not pay a 
CMP or voluntarily withdraws to avoid paying a CMP, the State agency 
must impose a disqualification

[[Page 13319]]

corresponding to the violation for which the CMP was assessed and 
notify the vendor of such disqualification.

Participant Access

    The impact on participants' access to supplemental foods has always 
been a primary consideration for State agencies when determining 
whether to disqualify a violative vendor or to impose a CMP in lieu of 
disqualification. A participant access determination is, in fact, the 
only means available to State agencies to ensure that the sanction 
imposed is in the best interests of the Program. Several commenters 
noted the various terms used in the current regulations and the 
proposed rule to describe these determinations, including ``inadequate 
participant access,'' ``participant hardship,'' and ``undue hardship.'' 
One commenter suggested the Department use ``undue hardship.'' Another 
commenter asserted that State agencies should determine ``participant 
hardship, not participant inconvenience.'' The general consensus among 
commenters was that the terminology should be consistent throughout the 
regulations. In response to this request, the term ``inadequate 
participant access'' has been used throughout the final rule. The 
Department decided this term most closely describes the type of 
determination that State agencies are required to make.
    Several commenters requested that the Department either clearly 
define the term ``participant access'' or establish specific criteria 
for State agencies' participant access determinations. In addition, 
Congress mandated in section 203(p)(1) of the Goodling Act that the 
Secretary establish criteria for ``hardship to participants'' 
determinations that may apply to vendors convicted of trafficking/
illegal sales. The Department decided that any established criteria 
should apply to all participant access determinations, not just 
participant access determinations for vendors convicted of trafficking/
illegal sales. However, a formal regulatory definition of ``participant 
access'' that includes all possible criteria for such determinations is 
inappropriate because it would not be flexible enough to apply to the 
variety of geographical areas where the WIC Program operates. What may 
be acceptable criteria for rural areas may be unreasonable for urban 
areas and vice versa.
    To address this issue, the final rule in Sec. 246.12(k)(8) 
requires: ``When making participant access determinations, the State 
agency shall, at a minimum, consider the availability of other 
authorized vendors in the same area as the violative vendor and any 
geographic barriers to using such vendors.'' This requirement focuses 
on the two central questions of these determinations: (1) Is there an 
adequate number of authorized vendors operating in the area to meet 
participant demand? and (2) Are there any specific geographic barriers 
that would significantly restrict participants access to using those 
authorized vendors? If the answers to these questions indicate that 
disqualification of the vendor would result in inadequate participant 
access, then the State agency must impose a CMP in lieu of 
disqualification (except that the State agency may not impose a CMP in 
lieu of disqualification either as a result of an FSP CMP or for a 
third or subsequent sanction as specified in Sec. 246.12(k)(1)(vi)).
    Current regulations at Sec. 246.12(k)(1)(iv) require State agencies 
to document participant access determinations in cases of WIC 
disqualification for FSP CMPs, and current Sec. 246.12(k)(1)(v) 
requires these determinations be made prior to disqualifying a vendor. 
However, neither provision provides specific guidance as to the 
documentation of these determinations. The proposed rule at 
Sec. 246.12(k)(1)(viii) intended to clarify that a State agency must 
include in the file of each vendor, for whom participant access is 
required to be considered, a written record of its participation access 
determination and any supporting justification. Under the final rule, 
these determinations and their documentation are required for all 
mandatory sanctions, except for the vendors convicted of trafficking/
illegal sales violation in Sec. 246.12(k)(1)(i). Participant access 
determinations and their documentation are required for vendors 
convicted of trafficking/illegal sales only if the State agency chooses 
to exercise its option to consider participant access in determining 
the sanction for this violation. Participant access determinations and 
documentation are also required for WIC disqualification based on FSP 
CMPs, if the State agency chooses to exercise this option. Although not 
required, the Department also recommends that State agencies conduct 
and document participant access determinations prior to imposing 
disqualifications or CMPs for other State agency-established sanctions.
    One commenter suggested that requiring State agencies to document 
participant access determinations is illegal under the Paperwork 
Reduction Act because it imposes an additional file burden on State 
agencies. This is not the case because participant access 
determinations, often targeted by vendors during administrative 
reviews, have always been required to be documented in vendors' files. 
The reason why the proposed rule explicitly stated that participant 
access determinations must be documented in vendors' files is because 
State agencies might have decided that documentation of these 
determinations would no longer be necessary, since they would no longer 
be subject to administrative review. Although no longer subject to 
administrative review, participant access determinations continue to be 
the only means of determining whether to impose a disqualification or a 
CMP and are still subject to audit. Further, if necessary, these 
determinations could become part of court proceedings. In the final 
rule, the documentation requirements for participant access 
determinations are reflected in Sec. 246.12(k)(1)(i), (k)(1)(ix), and 
(k)(2)(ii)(B).
    One commenter rebutted the statement in the proposed rule's 
preamble that State agencies are uniquely qualified to determine 
whether the disqualification of a specific vendor would result in 
inadequate participant access. Nevertheless, State agencies are 
uniquely qualified to make participant access determinations, because 
their primary concern is WIC Program participants. Whereas vendors know 
the volume of their own WIC business, only State agencies know the 
geographic distribution of WIC participants and of other WIC-authorized 
vendors, which are the primary criteria for making participant access 
determinations. The Department strongly believes that State agencies 
are in the best position to make participant access determinations that 
are in the best interests of program participants. In addition, the 
Department strongly believes that administrative reviews should focus 
on whether a vendor committed the violation(s) of which it has been 
accused, rather than whether a violative vendor agrees with a State 
agency's participant access determination. Consequently, the final rule 
maintains that State agencies' participant access determinations are 
not subject to administrative review.

Formula for Calculating Civil Money Penalties

    To ensure that State agencies use a consistent method to determine 
the amount of a CMP imposed in lieu of disqualification, the Department 
proposed in Sec. 246.12(k)(1)(x) a formula for calculating a CMP. The 
proposed formula is similar to the one used by the FSP and several WIC 
State agencies. Commenters generally supported the

[[Page 13320]]

use of a standard formula to calculate CMPs. As such, the final rule 
retains the provision with minor modifications.
    The formula in the final rule is revised to establish a $40,000 per 
investigation cap on CMPs. Section 203(p)(1) of the Goodling Act 
amended section 17(o)(4)(B) of the CNA to mandate that the total amount 
of CMPs, imposed for violations investigated as part of a single 
investigation concerning vendors convicted of trafficking in food 
instruments or selling firearms, ammunition, explosives, or controlled 
substances in exchange for food instruments, must not exceed $40,000. 
The Department has decided to adopt the $40,000 per investigation cap 
for all CMPs, including those imposed as a result of State agency-
established sanctions. As noted above in the Treatment of Mandatory 
Sanctions section of this preamble, for the mandatory sanctions listed 
in Sec. 246.12(k)(1)(ii) through (k)(1)(iv), the length of the 
disqualification period that is imposed for violations investigated as 
part of a single investigation may not exceed the disqualification 
period corresponding to the most serious violation. However, in cases 
in which the State agency is required to impose a CMP in lieu of 
disqualification because of inadequate participant access, the State 
agency must impose a sanction that includes CMPs for each violation 
that warrants a mandatory sanction, provided that the amount of the CMP 
for each violation does not exceed $10,000 and the total amount of the 
CMPs imposed as a result of a single investigation does not exceed 
$40,000.
    One commenter requested that the Department clarify whether the CMP 
formula applies to State agency-established sanctions. The final rule 
makes clear in Sec. 246.12(k)(1)(x) that the CMP formula only applies 
to the mandatory sanctions required by this rule. For State agency 
sanctions, State agencies may use either this CMP formula or their own 
formula. However, for consistency, the Department has adopted the 
$10,000 per violation and $40,000 per investigation maximums for all 
CMPs, including CMPs resulting from State agency sanctions.
    One commenter requested a clarification of what is meant by ``the 
month during which the store was charged with violations.'' Three 
commenters suggested that the CMP formula should be modified to allow 
for six months of redemption data rather than the proposed twelve 
months. In response to these comments, the final rule in 
Sec. 246.12(k)(1)(x)(A) reads: ``Determine the vendor's average monthly 
redemptions for at least the 6-month period ending with the month 
immediately preceding the month during which the notice of 
administrative action is dated.''
    Another commenter asked how to calculate a redemption average for a 
vendor who has been authorized under the WIC Program for less than 
twelve months. The Department recognizes that some flexibility in the 
application of the CMP formula is necessary. For example, if a vendor 
has been on the Program for three months or was closed for several 
months for renovations, the State agency will need to modify the 
formula to use available data to calculate an average that reflects the 
vendor's monthly redemptions. Generally, the State agency should use 
the same standard for all vendors and only modify the formula to 
address unusual circumstances.
    Two commenters requested clarification of how to calculate a CMP in 
lieu of permanent disqualification. The commenters were unsure what to 
use in the last step of the formula for ``the number of months for 
which the store would have been disqualified.'' In recognition of the 
fact that permanent disqualification in the WIC Program is only imposed 
for the most severe violations--vendors convicted of trafficking/
illegal sales and permanent disqualification from the FSP--the 
Department decided to require the maximum CMP allowed for such 
violations under the Secretary's authority as set in section 203(p)(1) 
of the Goodling Act. The final rule at Sec. 246.12(k)(1)(x)(C) reads in 
part: ``For a violation that warrants permanent disqualification, the 
amount of the civil money penalty shall be $10,000.''
    The final CMP formula is as follows: (1) Determine the vendor's 
average monthly redemptions for at least the 6-month period ending with 
the month immediately preceding the month during which the notice of 
administrative action is dated; (2) Multiply the average monthly 
redemptions figure by 10 percent (.10); and (3) Multiply the product 
from Step 2 by the number of months for which the store would have been 
disqualified. This is the amount of the CMP, provided that it does not 
exceed $10,000. In addition, the total amount of CMPs imposed for 
violations investigated as part of a single investigation must not 
exceed $40,000. Following is an example using this methodology:

Monthly WIC Redemptions

Jan.--$10,000
Feb.--$8,500
Mar.--$12,300
Apr.--$9,000
May--$7,000
June--$5,000
July--$6,000
Aug.--$4,000
Sept.--$5,500
Oct.--$7,000
Nov.--$7,000
Dec.--$5,000

Average Monthly Redemptions.................................   $7,192.00
Multiply by 10 percent......................................       x .10
                                                             -----------
                                                                 $719.00
Proposed disqualification period=1 year or 12 months:.......        x 12
                                                             -----------
Civil Money Penalty.........................................   $8,630.00
 

Payment of Civil Money Penalties

    The final rule also makes clear in Sec. 246.12(k)(5) that State 
agencies may use installment plans for the collection of CMPs and 
fines. State agencies must ensure that they are complying with Federal 
and State laws concerning the collection of interest on such debts. 
Section 246.12(k)(6) of the final rule makes clear that if a vendor 
does not pay, only partially pays, or fails to timely pay a CMP, the 
State agency must disqualify the vendor for the length of the 
disqualification corresponding to the violation for which the CMP was 
assessed (for a period corresponding to the most serious violation in 
cases where a mandatory sanction included the imposition of multiple 
CMPs as a result of a single investigation). ``Failure to timely pay a 
CMP'' includes the failure to pay a CMP in accordance with an 
installment plan approved by a State agency. This section is not 
intended to usurp a State agency's prerogative to revise an installment 
plan to accommodate a vendor who has a valid reason for missing a 
payment. These two provisions apply to both mandatory and State agency-
established sanctions.

Disposition of Civil Money Penalties

    Under the proposal at Sec. 246.15(b), money collected from the 
imposition of CMPs or vendor fines would be treated as program income. 
Commenters were generally split on their support of or opposition to 
this provision. Those opposing wanted State agencies to retain the 
current flexibility to use the revenue generated from the fines and 
penalties as they deem appropriate. The Department believes that fines 
and penalties imposed as a result of WIC Program violations, including 
any interest collected as a result of such fines and penalties, should 
be used to support WIC Program objectives. As such, this final rule 
requires that fines and CMPs be treated as program income.

[[Page 13321]]

Vendor Appeals

    Under the proposed rule, regulations at Sec. 246.18(a)(1)(ii) would 
be revised to implement section 729(j) of the PRWORA, which provides 
that WIC vendors who are disqualified as a result of their 
disqualification as retailers from the FSP are not entitled to 
administrative or judicial review in the WIC Program. No comments that 
specifically opposed this provision were received. In the final rule, 
minor revisions were made to the proposed language to make it 
consistent with current WIC terminology regarding participant access.
    In addition, the Department wishes to clarify that while section 
729(j) of the PRWORA eliminates the WIC administrative review for 
vendors who are disqualified from WIC as a result of FSP 
disqualification, it does not eliminate administrative review for 
vendors who are disqualified from WIC based on an FSP CMP. While 
regulations at Sec. 246.12(k)(2)(ii) allow WIC disqualification based 
on FSP CMPs for hardship, State agencies that use this option must 
continue to offer vendors disqualified under this provision an 
opportunity to appeal the WIC disqualification. However, neither the 
FSP decision to impose a CMP in lieu of disqualification nor the WIC 
State agency's participant access determination are subject to 
administrative review under the WIC Program. The areas subject to 
review include: whether the vendor was assessed a CMP in lieu of 
disqualification by the FSP, whether the FSP CMP was imposed due to 
``participant hardship,'' and whether the vendor agreement included the 
required notice that the vendor was potentially subject to WIC 
disqualification based on an FSP CMP.
    In response to the proposed rule, one commenter asked whether 
vendors may continue to redeem WIC food instruments during the appeals 
process. Under Sec. 246.18(b)(1) of the current regulations, the State 
agency must provide the vendor with written notification of an 
administrative action not less than 15 days in advance of the effective 
date of the action. The State agency has discretion to make the action 
effective any time after the 15-day notice period has expired. The 
State agency's decision about when to make a disqualification effective 
determines whether a vendor may continue WIC operations during an 
appeal. For example, if a State agency decides to make its 
disqualification action effective 20 days after the notice of 
administrative action is received, then once that date passes, a vendor 
would not be able to redeem food instruments, even if the vendor had an 
appeal pending.
    Another commenter asked whether vendor agreements may be renewed 
during the appeals process. If a vendor's agreement will expire during 
the administrative appeal process, the State agency should make the 
disqualification effective no later than the agreement's expiration. 
This is necessary to avoid the incongruous result of approving a vendor 
for reauthorization immediately after having made the decision to 
disqualify the same vendor.
    As noted below in the Vendor Agreements section of this preamble, 
Sec. 246.18(b) is revised to require the State agency to advise vendors 
of possible FSP disqualification based on WIC violations in the WIC 
notice of administrative action. In addition to this change, the words 
``if any'' were inserted into Sec. 246.18(b)(1) of the final rule to 
recognize that there are certain actions, such as WIC disqualification 
based on FSP disqualification, that are no longer subject to review.

Vendor Agreements

    Under the proposal, State agencies would be required to add a 
provision to the vendor agreement or contract to advise vendors that 
disqualification from the FSP will result in disqualification from the 
WIC Program or, under certain circumstances, assessment of a CMP in 
lieu of disqualification. Commenters supported this provision. As such, 
this final rule adds paragraph (f)(2)(xix) to Sec. 246.12 to require a 
statement to this effect in the vendor agreement. One commenter 
suggested that the Department add language to this section to cover the 
situation in which a State agency imposes a CMP in lieu of 
disqualification for a WIC Program violation. In response to this 
comment and to provide notice to vendors of the full range of mandatory 
sanctions, a new paragraph (f)(2)(xxi) has been added to Sec. 246.12. 
This paragraph reads: ``The State agency shall disqualify a vendor for 
the mandatory sanctions listed in paragraphs (k)(1)(ii) through 
(k)(1)(iv) of this section. However, if the State agency determines 
that disqualification of the vendor would result in inadequate 
participant access, the State agency shall impose a civil money penalty 
in lieu of disqualification, except that, as provided in paragraph 
(k)(1)(vi) of this section, the State agency shall not impose a civil 
money penalty in lieu of disqualification for third or subsequent 
sanctions for violations in paragraphs (k)(1)(ii) through (k)(1)(iv) of 
this section.''
    In addition to the above changes to this section, a new paragraph 
(f)(2)(xx) has been added to 246.12 in order to provide notice to 
vendors of the non-discretionary provision of the Goodling Act, which 
mandates permanent disqualification for WIC vendors convicted of 
trafficking or illegal sales of firearms, ammunition, explosives, or 
controlled substances. The final rule also amends 
Sec. 246.12(f)(2)(xviii) to provide vendors notice that 
disqualification of a vendor based on a FSP disqualification and the 
State agency's participant access determinations are not subject to 
review. A new paragraph, (f)(2)(xxii), also has been added to 
Sec. 246.12 in order to provide notification in the vendor agreement 
that disqualification from WIC may result in a disqualification in the 
FSP that is not subject to administrative or judicial review in the 
FSP.

Timely Referral of WIC Disqualified Vendors

    To remove disqualified WIC vendors from participating as retailers 
in the FSP, FNS Instruction 906-1, issued December 1, 1988, requires 
the State agency to provide information on disqualified WIC vendors to 
the appropriate FNS office within 15 days after the date a vendor's 
opportunity to file for a WIC administrative appeal has expired or all 
of a vendor's WIC administrative appeals have been exhausted. To 
strengthen the Department's effort to ensure that reciprocal 
disqualification actions are taken in a timely manner, the 15-day 
notification period required by FNS Instruction 906-1 was included in 
the proposed rule at Sec. 246.12(k)(3). The proposed rule also amended 
Sec. 246.18(b)(1) to require the State agency to include in the 
notification of administrative action a statement that reads: ``This 
disqualification from WIC may result in disqualification as a retailer 
in the Food Stamp Program.'' To remind vendors that this type of 
reciprocal disqualification may not subject to appeal under the FSP, 
the following sentence was added to the notification statement in the 
final rule: ``Such disqualification may not subject to administrative 
or judicial review under the Food Stamp Program.''
    In its May 6, 1998 proposed rule, the FSP proposed, under 
Sec. 278.6(e)(8)(ii)(B), would require the WIC State agency to provide 
FNS with a signed and dated copy of the notice informing vendors that 
they could be disqualified from the FSP based on WIC violations. In

[[Page 13322]]

addition, the FSP proposed rule would require that such notice be 
provided to vendors prior to their time to request administrative 
review. To meet this requirement, the State agency would need to 
provide the appropriate FNS office with a copy of the notice of 
administrative action sent to a violative vendor. One method of meeting 
this requirement would be to provide FNS with a copy of the notice of 
administrative action at the same time it is sent to the vendor and 
then follow-up with FNS within fifteen days of the date the action is 
final. Another method would be to send FNS a copy of the vendor's 
notice of administrative action, which includes a notation that the 
action is final, within fifteen days of the date the action is final. A 
State agency, which sends vendors a notice of administrative action 
followed by a formal notice of disqualification, could meet this 
requirement in a timely manner by providing FNS with copies of both 
notices at the same time they are sent to vendors.
    While six commenters supported the proposed 15-day notification 
period, one commenter suggested that it be extended to thirty days to 
account for scheduling and staffing constraints. The Department 
believes that a 15-day notification period is both reasonable and 
preferable and that with current technologies, including fax and e-
mail, State agencies should be able to design a system to notify FNS in 
a timely manner. Therefore, the final rule retains the 15-day 
notification requirement in Sec. 246.12(k)(1)(xi) and requires the 
State agency to send a copy of FNS the notice of administrative action. 
The final rule deletes judicial review from this provision in order to 
initiate the 15-day period at either the expiration of a vendor's time 
to file for an administrative review or the exhaustion of all of a 
vendor's administrative reviews. This change is being made in order to 
be consistent with the original requirements outlined in FNS 
Instruction 906-1 and to avoid undue delays between the time of the 
actual WIC disqualification and the reciprocal FSP disqualification. 
This would also eliminate the need for each State agency to determine 
the full range of potential bases for judicial review and the 
corresponding time periods in which the requests for judicial review 
must be filed.
    An additional change is made by the final rule regarding notifying 
FNS of WIC CMPs. While the May 6, 1998 FSP proposed rule would not 
specifically mandate FSP disqualifications based on WIC CMPs, the WIC 
violation underlying a CMP in lieu of WIC disqualification could be 
used as a basis for a FSP disqualification. Therefore, the final rule 
requires WIC State agencies to notify FNS of WIC vendors who have been 
assessed CMPs in lieu of disqualification and the length of the 
disqualification periods corresponding to the vendors' violations.

List of Subjects in 7 CFR Part 246

    Administrative practice and procedure, Civil rights, Food 
assistance programs, Food donations, Grant programs-health, Grant 
programs-social programs, Indians, Infants and children, Maternal and 
child health, Nutrition, Nutrition education, Penalties, Public 
assistance programs, Reporting and recordkeeping requirements, WIC, 
Women.

    For the reasons set forth in the preamble, 7 CFR part 246 is 
amended as follows:

PART 246-SPECIAL SUPPLEMENTAL NUTRITION PROGRAM FOR WOMEN, INFANTS 
AND CHILDREN

    1. The authority citation for part 246 continues to read as 
follows:

    Authority: 42 U.S.C. 1786.

    2. In Sec. 246.2, the definition of ``Food instrument'' is revised 
to read as follows:


Sec. 246.2  Definitions.

* * * * *
    Food instrument means a voucher, check, electronic benefits 
transfer card (EBT), coupon or other document which is used to obtain 
supplemental foods.
* * * * *
    3. In Sec. 246.4, paragraphs (a)(14)(v) through (a)(14)(x) are 
redesignated as paragraphs (a)(14)(vi) through (a)(14)(xi), and a new 
paragraph (a)(14)(v) is added to read as follows:


Sec. 246.4  State Plan.

    (a) * * *
    (14) * * *
    (v) The option exercised by the State agency to sanction vendors 
pursuant to Sec. 246.12(k)(1)(i).
* * * * *
    4. In Sec. 246.12:
    a. paragraph (f)(2)(xviii) is revised;
    b. paragraphs (f)(2)(xix) and (f)(2)(xx) are redesignated as 
paragraphs (f)(2)(xxiii) and (f)(2)(xxiv), respectively;
    c. new paragraphs (f)(2)(xix), (f)(2)(xx), (f)(2)(xxi), and 
(f)(2)(xxii) are added;
    d. paragraph (f)(3) is revised; and
    e. paragraph (k) is revised.
    The revisions and additions read as follows:


Sec. 246.12  Food delivery systems.

* * * * *
    (f) * * *
    (2) * * *
    (xviii) The State agency may disqualify a vendor or impose a civil 
money penalty in lieu of disqualification for reasons of program abuse. 
The State agency does not have to provide the vendor with prior warning 
that violations were occurring before imposing such sanctions. The 
vendor has the right to appeal a State agency decision pertaining to 
disqualification, denial of application to participate, or other 
adverse actions that affect participation during the contract or 
agreement performance period; except that, expiration of a contract or 
agreement with a vendor, disqualification of a vendor as a result of 
disqualification from the Food Stamp Program, and the State agency's 
determination regarding participant access are not subject to review.
    (xix) The State agency shall disqualify a vendor who has been 
disqualified from the Food Stamp Program. However, if the State agency 
determines that disqualification of the vendor would result in 
inadequate participant access, the State agency shall impose a civil 
money penalty in lieu of WIC disqualification.
    (xx) The State agency shall permanently disqualify a vendor 
convicted of trafficking in food instruments or selling firearms, 
ammunition, explosives, or controlled substances (as defined in section 
102 of the Controlled Substances Act (21 U.S.C. 802)) in exchange for 
food instruments. A vendor shall not be entitled to receive any 
compensation for revenues lost as a result of such violation. If 
reflected in its State Plan, the State agency shall impose a civil 
money penalty in lieu of a disqualification for this violation when it 
determines, in its sole discretion, and documents (in accordance with 
paragraph (k)(8) of this section) that--
    (A) disqualification of the vendor would result in inadequate 
participant access; or
    (B) the vendor had, at the time of the violation, an effective 
policy and program in effect to prevent trafficking; and the ownership 
of the vendor was not aware of, did not approve of, and was not 
involved in the conduct of the violation.
    (xxi) The State agency shall disqualify a vendor for the mandatory 
sanctions listed in paragraphs (k)(1)(ii) through (k)(1)(iv) of this 
section. However, if the State agency determines that disqualification 
of the vendor would result in inadequate participant access, the State 
agency shall impose a civil money penalty in lieu of

[[Page 13323]]

disqualification, except that, as provided in paragraph (k)(1)(vi) of 
this section, the State agency shall not impose a civil money penalty 
in lieu of disqualification for third or subsequent sanctions for 
violations in paragraphs (k)(1)(ii) through (k)(1)(iv) of this section.
    (xxii) Disqualification from the WIC Program may result in 
disqualification as a retailer in the Food Stamp Program. Such 
disqualification may not be subject to administrative or judicial 
review under the Food Stamp Program.
* * * * *
    (3) Other provisions shall be added to the contracts or agreements 
to implement the State agency options in paragraphs (k)(2)(i), 
(k)(2)(ii), and (r)(5)(iv) of this section.
* * * * *
    (k) Participant and vendor sanctions.
    (1) Mandatory vendor sanctions.
    (i) Permanent disqualification. The State agency shall permanently 
disqualify a vendor convicted of trafficking in food instruments or 
selling firearms, ammunition, explosives, or controlled substances (as 
defined in section 102 of the Controlled Substances Act (21 U.S.C. 
802)) in exchange for food instruments. A vendor shall not be entitled 
to receive any compensation for revenues lost as a result of such 
violation. If reflected in its State Plan, the State agency shall 
impose a civil money penalty in lieu of a disqualification for this 
violation when it determines, in its sole discretion, and documents (in 
accordance with paragraph (k)(8) of this section) that--
    (A) Disqualification of the vendor would result in inadequate 
participant access; or
    (B) The vendor had, at the time of the violation, an effective 
policy and program in effect to prevent trafficking; and the ownership 
of the vendor was not aware of, did not approve of, and was not 
involved in the conduct of the violation.
    (ii) Six-year disqualification. The State agency shall disqualify a 
vendor for six years for: one incidence of buying or selling food 
instruments for cash (trafficking); or one incidence of selling 
firearms, ammunition, explosives, or controlled substances as defined 
in 21 U.S.C. 802, in exchange for food instruments.
    (iii) Three-year disqualification. The State agency shall 
disqualify a vendor for three years for:
    (A) One incidence of the sale of alcohol or alcoholic beverages or 
tobacco products in exchange for food instruments; or
    (B) A pattern of claiming reimbursement for the sale of an amount 
of a specific supplemental food item which exceeds the store's 
documented inventory of that supplemental food item for a specific 
period of time; or
    (C) A pattern of charging participants more for supplemental food 
than non-WIC customers or charging participants more than the current 
shelf or contract price; or
    (D) A pattern of receiving, transacting and/or redeeming food 
instruments outside of authorized channels, including the use of an 
unauthorized vendor and/or an unauthorized person; or
    (E) A pattern of charging for supplemental food not received by the 
participant; or
    (F) A pattern of providing credit or non-food items, other than 
alcohol, alcoholic beverages, tobacco products, cash, firearms, 
ammunition, explosives, or controlled substances as defined in 21 
U.S.C. 802, in exchange for food instruments.
    (iv) One-year disqualification. The State agency shall disqualify a 
vendor for one year for a pattern of providing unauthorized food items 
in exchange for food instruments, including charging for supplemental 
food provided in excess of those listed on the food instrument.
    (v) Second mandatory sanction. When a vendor, who previously has 
been assessed a sanction for any of the violations in paragraphs 
(k)(1)(ii) through (k)(1)(iv) of this section, receives another 
sanction for any of these violations, the State agency shall double the 
second sanction. Civil money penalties may only be doubled up to the 
limits allowed under paragraph (k)(1)(x)(C) of this section.
    (vi) Third or subsequent mandatory sanction. When a vendor, who 
previously has been assessed two or more sanctions for any of the 
violations listed in paragraphs (k)(1)(ii) through (k)(1)(iv) of this 
section, receives another sanction for any of these violations, the 
State agency shall double the third sanction and all subsequent 
sanctions. The State agency shall not impose civil money penalties in 
lieu of disqualification for third or subsequent sanctions for 
violations listed in paragraphs (k)(1)(ii) through (k)(1)(iv) of this 
section.
    (vii) Disqualification based on a Food Stamp Program 
disqualification. The State agency shall disqualify a vendor who has 
been disqualified from the Food Stamp Program. The disqualification 
shall be for the same length of time as the Food Stamp Program 
disqualification, may begin at a later date than the Food Stamp Program 
disqualification, and shall not be subject to administrative or 
judicial review under the WIC Program.
    (viii) Voluntary withdrawal or nonrenewal of agreement. The State 
agency shall not accept voluntary withdrawal of the vendor from the 
Program as an alternative to disqualification for the violations listed 
in paragraphs (k)(1)(i) through (k)(1)(iv) of this section, but shall 
enter the disqualification on the record. In addition, the State agency 
shall not use nonrenewal of the vendor agreement as an alternative to 
disqualification.
    (ix) Participant access determinations. Prior to disqualifying a 
vendor for a Food Stamp Program disqualification pursuant to paragraph 
(k)(1)(vii) of this section or for any of the violations listed in 
paragraphs (k)(1)(ii) through (k)(1)(iv) of this section, the State 
agency shall determine if disqualification of the vendor would result 
in inadequate participant access. The participant access determination 
shall be made in accordance with paragraph (k)(8) of this section. If 
the State agency determines that disqualification of the vendor would 
result in inadequate participant access, the State agency shall impose 
a civil money penalty in lieu of disqualification. However, as provided 
in paragraph (k)(1)(vi) of this section, the State agency shall not 
impose a civil money penalty in lieu of disqualification for third or 
subsequent sanctions for violations in paragraphs (k)(1)(ii) through 
(k)(1)(iv) of this section. The State agency shall include 
documentation of its participant access determination and any 
supporting documentation in the file of each vendor who is disqualified 
or receives a civil money penalty in lieu of disqualification.
    (x) Civil money penalty formula. For each violation subject to a 
mandatory sanction, the State agency shall use the following formula to 
calculate a civil money penalty imposed in lieu of disqualification:
    (A) Determine the vendor's average monthly redemptions for at least 
the 6-month period ending with the month immediately preceding the 
month during which the notice of administrative action is dated;
    (B) Multiply the average monthly redemptions figure by 10 percent 
(.10);
    (C) Multiply the product from paragraph (k)(1)(x)(B) of this 
section by the number of months for which the store would have been 
disqualified. This is the amount of the civil money penalty, provided 
that the civil money penalty shall not exceed $10,000 for each 
violation. For a violation that warrants permanent disqualification,

[[Page 13324]]

the amount of the civil money penalty shall be $10,000. When during the 
course of a single investigation the State agency determines a vendor 
has committed multiple violations, the State agency shall impose a CMP 
for each violation. The total amount of civil money penalties imposed 
for violations investigated as part of a single investigation shall not 
exceed $40,000.
    (xi) Notification to FNS. The State agency shall provide the 
appropriate FNS office with a copy of the notice of administrative 
action and information on vendors it has either disqualified or imposed 
a civil money penalty in lieu of disqualification for any of the 
violations listed in paragraphs (k)(1)(i) through (k)(1)(iv) of this 
section. This information shall include the name of the vendor, 
address, identification number, the type of violation(s), and the 
length of disqualification or the length of the disqualification 
corresponding to the violation for which the civil money penalty was 
assessed, and shall be provided within 15 days after the vendor's 
opportunity to file for a WIC administrative review has expired or all 
of the vendor's WIC administrative reviews have been completed.
    (xii) Multiple violations during a single investigation. When 
during the course of a single investigation the State agency determines 
a vendor has committed multiple violations (which may include 
violations subject to State agency sanctions), the State agency shall 
disqualify the vendor for the period corresponding to the most serious 
mandatory violation. However, the State agency shall include all 
violations in the notice of administration action. If a mandatory 
sanction is not upheld on appeal, then the State agency may impose a 
State agency-established sanction.
    (2) State agency vendor sanctions.
    (i) The State agency may impose sanctions for violations that are 
not specified in paragraphs (k)(1)(i) through (k)(1)(iv) of this 
section as long as such violations and sanctions are included in the 
vendor agreement. State agency sanctions may include disqualifications, 
civil money penalties assessed in lieu of disqualification, and fines. 
The total period of disqualification imposed for State agency 
violations investigated as part of a single investigation may not 
exceed one year. A civil money penalty or fine shall not exceed $10,000 
for each violation. The total amount of civil money penalties imposed 
for violations investigated as part of a single investigation shall not 
exceed $40,000.
    (ii) The State agency may disqualify a vendor who has been assessed 
a civil money penalty for hardship in the Food Stamp Program, as 
provided under 7 CFR 278.6. The length of such disqualification shall 
correspond to the period for which the vendor would otherwise have been 
disqualified in the Food Stamp Program. If a State agency decides to 
exercise this option, the State agency shall:
    (A) Include notification that it will take such disqualification 
action in its vendor agreement, in accordance with paragraph (f)(3) of 
this section; and
    (B) Determine if disqualification of the vendor would result in 
inadequate participant access in accordance with paragraph (k)(8) of 
this section. If the State agency determines that disqualification of 
the vendor would result in inadequate participant access, the State 
agency shall not disqualify the vendor or impose a civil money penalty 
in lieu of disqualification. The State agency shall include 
documentation of its participant access determination and any 
supporting documentation in each vendor's file.
    (3) Prior warning. The State agency does not have to provide the 
vendor with prior warning that violations were occurring before 
imposing any of the sanctions in this paragraph (k).
    (4) Appeal procedures. The State agency shall provide adequate 
procedures for vendors to appeal a disqualification from participation 
under the Program as specified in Sec. 246.18.
    (5) Installment plans. The State agency may use installment plans 
for the collection of civil money penalties and fines.
    (6) Failure to pay a civil money penalty. If a vendor does not pay, 
only partially pays, or fails to timely pay a civil money penalty 
assessed in lieu of disqualification, the State agency shall disqualify 
the vendor for the length of the disqualification corresponding to the 
violation for which the civil money penalty was assessed (for a period 
corresponding to the most serious violation in cases where a mandatory 
sanction included the imposition of multiple civil money penalties as a 
result of a single investigation).
    (7) Actions in addition to sanctions. Vendors may be subject to 
actions in addition to the sanctions in this section, such as claims 
for improper or overcharged food instruments and penalties outlined in 
Sec. 246.23, in the case of deliberate fraud.
    (8) Participant access determination criteria. When making 
participant access determinations, the State agency shall consider, at 
a minimum, the availability of other authorized vendors in the same 
area as the violative vendor and any geographic barriers to using such 
vendors.
    (9) Participant sanctions. The State agency shall establish 
procedures designed to control participant abuse of the Program. 
Participant abuse includes, but is not limited to, intentionally making 
false or misleading statements or intentionally misrepresenting, 
concealing or withholding facts to obtain benefits; sale of 
supplemental foods or food instruments to, or exchange with, other 
individuals or entities; receipt from food vendors of cash or credit 
toward purchase of unauthorized food or other items of value in lieu of 
authorized supplemental foods; and physical abuse, or threat of 
physical abuse, of clinic or vendor staff. The State agency shall 
establish sanctions for participant abuse. Such sanctions may, at the 
discretion of the State agency, include disqualification from the 
Program for a period up to three months. Warnings may be given prior to 
the imposition of sanctions. Before a participant is disqualified from 
the Program for alleged abuse, that participant shall be given full 
opportunity to appeal a disqualification as set forth in Sec. 246.9.
    (10) Referral for prosecution. The State agency shall refer food 
vendors and participants who abuse the Program to Federal, State or 
local authorities for prosecution under applicable statutes, where 
appropriate.
* * * * *
    5. In Sec. 246.15, a sentence is added to the end of paragraph (b) 
to read as follows:


Sec. 246.15  Program income other than grants.

* * * * *
    (b) * * * Money received by the State agency as a result of civil 
money penalties or fines assessed against a vendor and any interest 
charged in the collection of these penalties and fines shall be 
considered as program income.
    6. In Sec. 246.18:
    a. paragraph (a)(1) is revised;
    b. the first sentence of paragraph (a)(3) is revised;
    c. paragraph (b)(1) is revised.
    The revisions read as follows:


Sec. 246.18  Administrative appeal of State agency decisions.

    (a) * * *
    (1) The right of appeal shall be granted when a local agency's or a 
vendor's application to participate is denied or, during the course of 
the contract or agreement, when a local agency or vendor is 
disqualified or any other adverse action which affects participation is 
taken. The following are exceptions to this provision:

[[Page 13325]]

    (i) Expiration of a contract or agreement with a vendor and the 
State agency's determination regarding participant access shall not be 
subject to administrative review; and
    (ii) Disqualification of a vendor as a result of disqualification 
from the Food Stamp Program shall not be subject to administrative or 
judicial review.
* * * * *
    (3) Except for disqualifications assessed under 
Sec. 246.12(k)(1)(i), which shall be made effective on the date of 
receipt of the notice of administrative action, the State agency may 
take adverse action against a vendor after the 15-day advance 
notification period mandated by paragraph (b)(1) of this section has 
elapsed. * * *
    (b) * * *
    (1) Written notification of the administrative action, the 
procedures to file for an administrative review, if any, the cause(s) 
for and the effective date of the action. Such notification shall be 
provided to participating vendors not less than 15 days in advance of 
the effective date of the action. When a vendor is disqualified due in 
whole or in part to violations specified in Sec. 246.12(k)(1), such 
notification shall include the following statement: ``This 
disqualification from WIC may result in disqualification as a retailer 
in the Food Stamp Program. Such disqualification may not be subject to 
administrative or judicial review under the Food Stamp Program.'' In 
the case of disqualification of local agencies, the State agency shall 
provide not less than 60 days advance notice of pending action.
* * * * *
    Dated: March 12, 1999.
Samuel Chambers, Jr.,
Administrator.
[FR Doc. 99-6465 Filed 3-17-99; 8:45 am]
BILLING CODE 3410-30-P