Civil Fines and Penalties Debt: Review of OSM's Management and	 
Collection Processes (31-DEC-01, GAO-02-211).			 
								 
This report focuses on debt collection processes and procedures  
used by the Department of Health and Human Service's Centers for 
Medicare and Medicaid Services (CMS). GAO discusses (1) the	 
primary reasons for the growth in civil monetary penalties owed  
to CMS; (2) whether CMS' receivables for civil monetary penalties
have financial accountability and reporting issues similar to	 
those of its other receivables; (3) whether adequate processes	 
exist to collect this debt; and (4) what roles, if any, the	 
Office of Management and Budget and the Treasury Department play 
in overseeing and monitoring CMS' collection of civil monetary	 
penalties debt. 						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-211 					        
    ACCNO:   A02627						        
  TITLE:     Civil Fines and Penalties Debt: Review of OSM's	      
Management and Collection Processes				 
     DATE:   12/31/2001 
  SUBJECT:   Debt collection					 
	     Federal agencies					 
	     Internal controls					 
	     Strategic planning 				 
	     Reporting requirements				 
	     Collection procedures				 
	     OSM Civil Fines and Penalties Program		 
	     OSM Civil Penalty Accounting Control		 
	     System						 
								 

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GAO-02-211
     
A

Report to the Ranking Minority Member, Permanent Subcommittee on
Investigations, Committee on

Governmental Affairs, U. S. Senate

December 2001 CIVIL FINES AND PENALTIES DEBT Review of OSM?s Management and
Collection Processes

GAO- 02- 211

Letter 1 Results in Brief 2 Scope and Methodology 3 Background 4 Poor
Financial Condition of CFP Debtors Is the Primary Reason for

Low Collection Rates and Significant Write- Offs 8 Overall Adequacy of CFP
Debt Collection Processes Cannot Be

Determined, But Such Processes Can Be Strengthened 11 OMB?s and Treasury?s
Roles in the Oversight and Monitoring of CFP

Debt 15 Conclusion 15 Recommendations for Executive Action 16 Agency
Comments and Our Evaluation 16

Appendixes

Appendix I: Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs 18

Appendix II: Comments From the Office of Surface Mining of the Department of
the Interior 67 GAO?s Comments 70

Lett er

December 31, 2001 The Honorable Susan M. Collins Ranking Minority Member
Permanent Subcommittee on Investigations Committee on Governmental Affairs
United States Senate

Dear Senator Collins: On December 14, 2001, we briefed your office on our
review of selected federal agencies? management and collection of civil
fines and penalties (CFP) debt. 1 As agreed to with your staff, this work
focused on the debt collection processes and procedures used by the
Department of the

Treasury?s U. S. Customs Service, the Department of the Interior?s Office of
Surface Mining (OSM), and the Department of Health and Human Services?
Centers for Medicare and Medicaid Services (CMS). 2 This report summarizes
the information presented in our December 14, 2001, briefing on OSM?s
collection of CFP debt. The briefing slides are in appendix I. We will
report separately on our work on Customs and CMS. As discussed with your
staff, our objectives were to determine (1) the primary reasons for the low
collection rates and significant write- offs of OSM?s CFP debt, (2) whether
adequate processes exist at OSM to collect CFP debt, and (3) what role, if
any, the Office of Management and Budget (OMB) and Treasury play in
overseeing OSM?s collection of CFP debt.

1 This work was part of a broad review that also looked at the management
and collection of criminal fines and penalties at the Department of Justice
and the U. S. Courts. See Criminal Debt: Oversight and Actions Needed to
Address Deficiencies in the Collection Processes (GAO- 01- 664, July 16,
2001). 2 Formerly the Health Care Financing Administration.

Results in Brief The primary reason for low collection rates and significant
write- offs of OSM?s CFP debt is the poor financial condition of certain CFP
debtors. We reported in 1989 that the majority of OSM?s CFP receivables were
related to inactive mine sites or to mining operators who were either
bankrupt or no

longer mining. 3 According to OSM, most uncollected CFP receivables continue
to be associated with mining companies that are not financially viable.
Viable companies generally correct violations before they are assessed
large- dollar civil penalties that accrue when violations go unabated.
Companies in poor financial condition, however, are typically

unable to correct violations and therefore incur large CFP debts. OSM?s
annual collection rates for CFP receivables have remained low since 1996 and
are similar to the rates we found for fiscal years 1986 through 1988, the

period covered in our 1989 report. A lack of documentation for about 65
percent of the 184 CFP case files selected for testing prevented us from
determining the overall adequacy of OSM?s past and present CFP debt
collection processes. However, we did note several areas where OSM?s CFP
debt collection policies and procedures can be strengthened. Specifically,
for the 64 CFP case files (35 percent) that were available for our review,
we found that OSM did not always follow its procedures for (1) writing off
debt as currently not collectible that was delinquent for over 2 years and
had been referred to either the Interior?s Office of the Solicitor or to
Treasury, (2) documenting

the determination that a debtor is unable to immediately pay a debt in full
for cases involving installment agreements, and (3) obtaining the required
approval from the Department of Justice before writing off delinquent debt
greater than or equal to $100,000. We also found that limitations on OSM?s
legal authority to deny mining permits to applicants whose owners or
controllers have uncorrected violations or unpaid CFP may reduce the
agency?s ability to achieve its program objective of maximizing compliance
with surface mining laws.

OMB and Treasury are provided with information helpful in performing their
oversight roles. However, OMB stated that it had broad oversight
responsibility in monitoring and evaluating governmentwide debt collection
activities. OMB further stated that it is the specific responsibility of the
agency to monitor, manage, and collect CFP debt and the

3 Department of the Interior: Collection of Civil Penalty Fees (GAO/ AFMD-
89- 73, August 16, 1989).

responsibility of the agency?s Office of the Inspector General to provide
oversight through the audit of the agency?s debt collection activities. In
addition, Treasury officials stated that they rely on the agencies to
determine what debt should be referred to Treasury for collection and

offsets, as required by the Debt Collection Improvement Act of 1996, and
accordingly, OSM does refer delinquent CFP debts to Treasury.

Our recommendations are designed to enable OSM to determine if changes in
surface mining laws are needed and to strengthen its CFP debt collection
policies and procedures. In commenting on a draft of the briefing slides,

OSM agreed with our recommendations and stated that it will continue to
explore all policy, regulatory, and legislative options that could improve
its ability to keep applicants responsible for uncorrected violations and

unpaid debts from receiving permits to mine coal. OSM also provided, and we
evaluated, general comments that related to specific detailed information
that OSM thought was important aspects of its surface mining program.

Scope and To determine the primary reason for the low collection rates and
significant Methodology

write- offs of CFP debt, we obtained and reviewed OSM?s audited financial
statements, annual reports, and other financial information related to its
CFP collection activities, and we analyzed OSM?s CFP receivables and related
accounts and information for fiscal years 1997 through 2000. We interviewed
OSM officials for their perspective on the results of our review

and analysis of this information. To determine whether adequate processes
exist to collect CFP debt, we acquired an understanding of OSM?s CFP debt
collection policies and procedures, as well as applicable federal laws and
regulations. We were provided access to OSM?s Civil Penalty Accounting
Control System database. The database contained a universe of 490 cases that
had CFP

receivables balances reduced to zero by collection or write- off (closed
cases) during fiscal years 1999 and 2000 or were outstanding (open cases)
CFP receivables balances as of September 30, 2000. We further stratified

the database into cases representing debts greater than or equal to $100,000
(high- dollar cases) and those representing debts less than $100,000. We
selected for review all nine high- dollar cases and a random statistical
sample of 175 cases with initial receivable amounts less than $100,000. We
did not independently verify the completeness or accuracy of financial data
or test information security controls over the systems used to compile

these data because such verification was not necessary for the purposes of
this request. OSM was unable to provide documentation of collection
specialists? actions for 120 of the 184 CFP cases selected. 4 As a result of
this scope limitation, we could not project our findings to the entire
universe of cases nor conclude on the overall adequacy of OSM?s past and
present debt collection processes. Our findings therefore relate only to the
applicable attributes in the 64 cases for which OSM had documentation of
collection

specialists? actions. We interviewed OSM officials to obtain explanations
for significant trends we observed and for findings and instances of
noncompliance with its policies and procedures we identified during our

review of the available cases. To determine what role, if any, OMB and
Treasury play in overseeing and monitoring the government?s collection of
civil debt, we interviewed OMB and Treasury officials. We performed our
review primarily in Denver, Colorado, from January 2001 through August 2001
in accordance with U. S. generally accepted government auditing standards.
Prior to our December 14, 2001, briefing to your office on the results of
our work, we provided

Interior, OSM, Treasury, and OMB with a draft of our detailed briefing
slides for review and comments, which contained recommendations to the
Acting Director of OSM. The comments received are discussed in the ?Agency
Comments and Our Evaluation? section of this report, on the

?Agency Comments? slide, and are incorporated in the report as applicable.
OSM?s letter is reprinted in appendix II.

Background The Surface Mining Control and Reclamation Act of 1977 (SMCRA)
established OSM to administer and enforce a nationwide program to protect
society and the environment from the adverse effects of surface coal mining
operations and to promote the reclamation of unreclaimed mining areas. Under
Titles IV and V of SMCRA, OSM administers and enforces nationwide surface
mining laws.

Title IV of SMCRA authorizes OSM to collect quarterly Abandoned Mine Land
(AML) reclamation fees. SMCRA also requires that coal mine operators obtain
permits from OSM or the responsible state regulatory

4 We are 95- percent confident that the actual proportion of cases for which
OSM has no documentation of collection specialist actions is 64. 4 percent
(plus or minus 5.6 percent).

authority before undertaking any mining activity. These permits identify
parties that actively mine coal and become the basis for OSM to generate
Coal Reclamation Fee Reports (Form OSM- 1), which are used to collect AML
fees. Title V of SMCRA authorizes OSM to enforce environmental and
reclamation standards for coal mining. Violations of these standards,
referred to as ?on the ground? (mine site) violations, typically involve
harm to the environment. Section 518 of SMCRA authorizes OSM to assess CFP

for violations of Titles IV and V. OSM is to issue a Notice of Violation to
(1) Title IV violators for unpaid reclamation fees or for not filing a Form
OSM- 1 and (2) Title V violators for noncompliance with environmental and
reclamation standards. If the

violation is not corrected within a specified time, OSM is to issue a
Failure to Abate Cessation Order, which requires that mining operations
cease and the violation be abated immediately.

OSM?s assessment unit is to review each violation cited to determine the
appropriate CFP amount to assess for a violation and bases its determination
on a point system directly related to the cited mine

operator?s history of previous violations, including the seriousness of such
violations, damage caused, negligence involved, and good faith in attempting
to achieve compliance. Once the assessment amount is determined, OSM is to
issue a Notice of Proposed Assessment (NOPA) to

the mining operator. The assessment amount in the NOPA becomes the official
CFP assessment when OSM issues a Final Order. The Final Order is to be
issued within 30 days of the operator?s receipt of the NOPA, unless the

operator appeals. Under SMCRA, CFP can be assessed only after the cited mine
operator has had an opportunity to have a public hearing, which may include
a potentially lengthy appeals process.

Since 1995, OSM has recorded proposed assessments as CFP receivables when
(1) payment is made for the full amount of the assessment when the NOPA is
issued, (2) a Final Order (First Demand Letter) is issued, (3) a payment
plan is entered into, or (4) a final appeal decision has been made. The
occurrence of any one of these events is to result in the establishment of
an account receivable.

If a payment is not made in 15 days after OSM mails the Final Order, OSM is
to issue a Second Demand Letter. The Second Demand Letter is to be followed
15 days later by a Final Demand Letter. Thus, all three demand letters are
to be sent within 30 days. OSM is to classify CFP debt as delinquent if
payment is not received within 30 days of the Final Order.

Once a CFP receivable is established, OSM is to enter the CFP debt into the
Civil Penalty Accounting and Control System, and a collection specialist
begins collection activity. Upon receipt of the Citation File, the
collection

specialist is to create a Collection Specialist Case File (CS File), or an
Entity File if the violator has multiple CFP debts, to document collection
actions taken on the CFP debt. The collection specialist then is to perform
(1) a full compliance check on the entity to identify all outstanding debt
or (2) skip tracing activity to locate the debtor and obtain the mailing
address and telephone numbers of the entity involved. The collection
specialist also is supposed to call the debtor and document each attempt at
contact

with the debtor. If a debtor is unable to pay the debt in full, the
collection specialist may offer an installment agreement or, under certain
conditions, a compromise settlement. For either an installment agreement or
a compromise

settlement, the collection specialist is supposed to research the debtor?s
ability to pay, document his or her determination of the debtor?s ability to
pay, and have that determination reviewed and approved by other OSM staff.

If the debt remains unpaid, the collection specialist can refer the debt to
the Solicitor if, for example, (1) the debt needs to be consolidated with
debts previously referred to Solicitor, (2) the debtor files for bankruptcy,
or (3) the debtor strongly disputes responsibility for the debt or raises a
legal challenge that will likely result in litigation. The collection
specialist can also refer the CFP debt to Treasury for collection and offset
if (1) the debtor does not respond to direct collection efforts by paying in
full, (2) the

debtor cannot be located, (3) the debtor defaults on a payment agreement and
does not correct the default, or (4) the debt has been delinquent for 180
days or more.

If CFP debt remains uncollected after referrals to the Solicitor and
Treasury, the Solicitor or Treasury can recommend that the debt be written
off. The collection specialist would then terminate collection activity on
the debt and write off the receivable. Reasons for the termination of
collection activity and write- off of the CFP debt include (1) substantial
amounts are uncollected, (2) the debtor cannot be located, (3) the cost of
collection will exceed the amount recoverable, (4) the statue of limitations

has expired, or (5) the case is without merit or there is insufficient
evidence. The Department of Justice must approve the write- off of any CFP
debt that is greater than or equal to $100,000. During fiscal year 2000,

OSM began writing off CFP debt referred to the Solicitor that was delinquent
more than 2 years and classifying it as currently not collectible (CNC). 5
In January 2000, OSM established formal guidance to write off such debts. In
March 2001, OSM established formal guidance to write off other active debt
that is referred to Treasury and has been delinquent more than 2 years. 6
OSM also is to include all unpaid CFP debt in its Applicant Violation System
to track the debt?s status once the debt becomes delinquent.

OSM has a history of low collection rates for its CFP debt. In 1987, we
reported that the financial quality of OSM?s CFP debts made them difficult
to collect. 7 We noted that for fiscal year 1986, OSM reported about $158
million in CFP receivables, of which $155 million was reported as
delinquent. OSM also designated about 52 percent of the CFP receivables as
uncollectible at that time.

In 1989, we reported that OSM had $38 million in CFP receivables as of
September 30, 1988, after removing about $136 million of CFP receivables
from fiscal years 1986 through 1988 that were deemed uncollectible and for
which collection activities were terminated. 8 Of this CFP receivables

5 CNC debts are debts the agency has written off for accounting purposes but
has not discharged. Collection action can still be taken on such debts. 6 In
November 2000, OMB revised Circular A- 129 to make it mandatory that
agencies write off debts over 2 years old unless documented and justified to
OMB in consultation with Treasury.

7 Debt Collection: Interior?s Efforts to Collect Delinquent Royalties,
Fines, and Assessments (GAO/ AFMD- 87- 21BR, June 18, 1987). 8 GAO/ AFMD-
89- 73, August 16, 1989.

balance, OSM reported approximately 99 percent as delinquent and designated
about 90 percent as uncollectible.

After writing off about $10.8 million of CFP debts during fiscal year 2000,
including about $9.3 million, about 86 percent of the $10.8 million, of
debts more than 10 years old, OSM reported a CFP receivables balance of
approximately $1. 3 million as of September 30, 2000. Of this year- end
receivable balance, OSM reported more than 92 percent as delinquent and

designated about 88 percent as uncollectible. Poor Financial Our review of
OSM?s CFP receivables information revealed that the poor Condition of CFP
financial condition of CFP debtors is the primary reason for low collection

rates and significant write- offs. In 1989, we reported on the poor
financial Debtors Is the Primary quality of OSM?s CFP debt and the
difficulties the agency faces in collecting Reason for Low

CFP receivables from mining companies that are not financially viable.
Collection Rates and

Specifically, we reported that OSM might never experience a high rate of
collection for CFP debt because the majority of its CFP receivables were
Significant Write- Offs associated with inactive mine sites or mining
operators who were either bankrupt or no longer mining and the debt had to
be written off. We also reported that OSM?s overall annual collection rates
combined for both

Titles IV and V CFP receivables were approximately 1 percent for the 3 years
from fiscal year 1986 through fiscal year 1988, 9 which were about the same
as those for the 4 years from fiscal year 1997 through fiscal year 2000.

9 The original annual collection rates, based on the method used in our 1989
report, were calculated by dividing the reported collections for each fiscal
year by the sum of the beginning receivables balances from each fiscal year
and net assessments recorded each fiscal year, including principal and
interest.

During our fieldwork, OSM officials stated that the collection rates should
not be calculated using the beginning receivables balances because such
balances included a significant amount of old CFP receivables, including

principal assessments and interest, that remained uncollected from prior
years and which OSM eventually wrote off. Even though we recalculated OSM?s
combined annual collection rates without the beginning balances, the
modified annual collection rates remained low at approximately 5 percent 10
for the 4 years from fiscal year 1997 through fiscal year 2000. After we
recalculated OSM?s collection rates using its modified method for the 3
years ended in fiscal year 1988, we found that the annual collection rates
were similar to the rates calculated for the 4 years ended in fiscal year
2000.

We also previously reported in 1987 that most of OSM?s CFP delinquencies
were several years old and therefore difficult to collect. 11 As industry
statistics show, the likelihood of recovering amounts owed decreases
dramatically as the age of the delinquency increases. During our review of
the high- dollar debts, for example, we observed that eight out of the nine
high- dollar debts averaged approximately 19 years in total processing time-
from the issuance of the citation to the point at which the debt was
eventually written off.

Our current analysis of OSM?s information clearly shows that the conditions
we reported in 1987, regarding low collection rates, and in 1989, regarding
older debt not being collected, still exist. Our analysis also showed that
77 percent and 95 percent of all CFP debt that was available to be collected
12 were written off for the 3 years ended in fiscal year 1988 and

the 4 years ended in fiscal year 2000, respectively. OSM officials stated
that viable companies correct violations before they incur large civil
penalties. Companies that are in weak financial condition often fail to
correct the

initial violation and therefore receive cessation orders and incur large 10
The modified annual collection rates, based on OSM?s methodology, were
calculated by dividing the reported collections for each fiscal year by the
net assessments recorded for each fiscal year. 11 GAO/ AFMD- 87- 21BR, June
18, 1987.

12 All CFP debts that were available for collection during the 3 years from
fiscal years 1986 through 1988 and the 4 years from fiscal years 1997
through 2000, consisted of the CFP receivables balances as of October 1,
1985, and October 1, 1996, plus all net assessments recorded during the 3
years ended in fiscal year 1988 and the 4 years ended in fiscal year 2000,
respectively.

penalties. As a result, these CFP debts are often deemed uncollectible and
eventually are written off.

Over the 4 years covering fiscal years 1997 through 2000, OSM:

 wrote off about $37.1 million in CFP receivables (plus another $12.6
million in fiscal year 1996);

 annually estimated between 88 and 99 percent of its reported CFP
receivables as uncollectible;

 recorded fewer CFP assessments each year, dropping from about $2. 8
million in fiscal year 1997 to about $591,000 in fiscal year 2000, of which
the principal portion of new CFP assessments went from $680,320 for 111 new
debts in fiscal year 1997 to $180, 370 for 22 new debts in fiscal year 2000;
and

 collected about $616,000 in CFP receivables. As a result of the
significant amounts written off, collections received, and fewer recorded
number and dollar value of assessments over the 4 years, OSM?s reported CFP
receivables balance decreased from about $27 million as of October 1, 1996,
to about $1.3 million as of September 30, 2000. According to OSM?s records
for the 4 years from fiscal year 1997 through fiscal year 2000,
approximately $35 million, 94 percent of the $37.1 million of CFP debt, for
which collection activity was terminated and the receivables were written
off, was delinquent more than 2 years. OSM records indicated the following
reasons that most CFP debts were written off.

 $22. 8 million was written off after the Solicitor?s or Treasury?s
recommendation because they were unable to collect, including debt from
companies that had filed for bankruptcy, were bankrupt, or were no longer
mining;

 $4. 6 million was written off after OSM classified the CFP debt as
currently not collectible after being delinquent more than 2 years;

 $3. 7 million was written off after compromise settlements were reached
and companies defaulted on the CFP debts; and

 $3. 4 million was written off after the statute of limitations for the
violation had expired, for which OSM stated that the CFP debt was over 5
years old, a suit was not filed, and the government can no longer file a
suit for collection. OSM believes that low CFP collection rates do not
fairly indicate the effectiveness of the CFP program. OSM?s Strategic Plan
states that the

purpose of the CFP program is to maximize compliance with mining laws. OSM
officials said that, although collecting CFP is an important objective,
maximizing revenue from CFP collections is less important to management

than achieving compliance with mining laws. OSM routinely writes off or
accepts an offer- in- compromise for large dollar amounts of Title IV CFP
debt when the agency has met its enforcement objectives. For example, even
though its records continue to reflect low collection rates, OSM officials
stated that 72 percent of notices of violations from fiscal years

1997 through 2000 were abated and 99 percent of Title IV reclamation fees
were collected during fiscal year 2000. OSM officials also stated that with
the decline in the numbers and amounts of new Title IV and V CFP debts in
fiscal year 2000, they expect the number and amount of new CFP assessments
to remain low for the following reasons.

 OSM now actively works with companies to prevent problems from occurring.

 Changes in the mining industry have resulted in better mining practices
and fewer violations.

 OSM?s oversight of state regulatory programs now focuses on results rather
than activities, such as issuing citations.

 OSM compliance auditors work with companies to resolve Title IV SMCRA
violations before issuing a citation. Overall Adequacy of

While the lack of documentation of collection specialist actions prevented
CFP Debt Collection

us from determining the overall adequacy of OSM?s past and present CFP debt
collection processes, we did, however, find instances in which OSM Processes
Cannot Be

did not follow certain of its debt collection policies and procedures. Thus,
Determined, But Such

we believe these CFP debt collection processes can be strengthened in
Processes Can Be those areas. We also found that limitations in OSM?s legal
authority to deny permits to certain applicants with unabated violations
reduce the agency?s

Strengthened ability to achieve its program objective of maximizing
compliance with surface mining laws.

Lack of Documentation Of the 184 CFP cases selected to test the extent to
which OSM followed its debt collection policies and procedures,
documentation of OSM collection specialists? activity for 120- almost two-
thirds- was unavailable. During fiscal years 1994 and 1995, OSM scanned into
an optical imaging system the

collection specialists? case files for which they had completed their
collection actions. The original documentation was destroyed after OSM used
the scanned documents to archive these records. In 1998, the read/ write
feature of the imaging system broke, and the vendor went out of business.
OSM officials stated that the system could not be repaired or replaced and
the contents of the scanned documents were no longer available.

An OSM official stated that almost all original documentation of collection
specialists? activities has been maintained since fiscal year 1997 and that
OSM is working on guidance that calls for archiving documents for 5 years

and imaging only key documents. The testing of the 64 of the 184 CFP debts
with available documentation provided evidence that OSM has maintained the
collection specialists? documentation for the debts where collection
activity is still ongoing since the imaging problem in 1998.

In addition to preventing us from determining the extent to which OSM did or
did not follow its CFP debt collection policies and procedures, the lack of
documentation prevented us from appropriately projecting findings to the
universe of CFP debt from the selected cases for which adequate
documentation was available. Consequently, we were unable to determine

the overall adequacy of OSM?s CFP debt collection process. 13 Lack of
Compliance with

Although the lack of documentation precluded us from determining the Debt
Collection Policies and overall adequacy of OSM?s past and present CFP debt
collection processes, Procedures

we did identify instances in which OSM did not comply with its own debt
collection policies and procedures, 14 including the following:

 Of the 24 CFP debts that were delinquent more than 2 years and referred to
the Solicitor or Treasury, 17 had not been written off as currently not
collectible. Of these 17 CFP debts, 15 were referred to the Treasury and
were not written off as currently not collectible until we brought them to
OSM?s attention in April 2001. 15 OSM subsequently established 13 We are 95-
percent confident that the actual proportion of cases for which OSM has no
documentation of collection specialist activity is 64. 4 percent (plus or
minus 5.6 percent).

14 Because of the scope limitation, we were not able to project our findings
to the entire universe of cases. However, we are presenting the results of
the 64 cases we did review. These results should not be used as a basis for
concluding about the adequacy of OSM?s debt collection process.

specific formal guidance for writing off such debts that are more than 2
years old and had been referred to the Treasury.

 Of the 32 CFP debts that were delinquent less than 2 years, 4 were
incorrectly written off as currently not collectible. In response, OSM
stated that the debts were prematurely written off in error even though the
collection actions being pursued by the Solicitor were not affected for
three of the debts and the fourth debt was subsequently recommended to be
written off by the Solicitor since the company was

defunct and the owner was deceased.

 All five CFP debts with installment agreements issued between fiscal years
1994 and 1997 lacked the required documentation to support OSM?s
determination that the debtor was unable to immediately pay in full.
However, in August 2000, OSM began requiring management approval of payment
agreements and developed an installment agreement worksheet to be used by
the collection specialist. The worksheet requires that such supporting
documentation be maintained.

 Of the nine high- dollar delinquent debts, two were written off and the
cases terminated without the required approval of the Department of Justice.
After we informed OSM officials, they reclassified the debts as

currently not collectible because the debts were more than 2 years old.
Limited Regulatory

Section 510( c) of SMCRA prohibits the issuance of mining permits to
Authority Under SMCRA applicants who are responsible for unabated
violations: ?Where . . . information available to the regulatory authority
indicates that any surface coal mining operation owned or controlled by the
applicant is currently in violation of this Act . . . the permit shall not
be issued.? An unpaid CFP debt is considered an unabated violation. One
purpose of this provision is to

induce violators to correct violations and pay CFP. In 1997, the U. S. Court
of Appeals for the D. C. Circuit invalidated an OSM regulation that blocked
the issuance of a permit to any surface coal mining operation owned or
controlled by either the applicant or a person who owns or controls the
applicant that is currently in violation of SMCRA (upstream owners or
controllers). The court ruled that the regulation was inconsistent with the
authority conferred on OSM by section 510( c) of

15 In November 2000, OMB revised Circular A- 129 to make it mandatory that
agencies writeoff debts over 2 years old unless documented and justified to
OMB in consultation with Treasury.

SMCRA. This ruling limits OSM?s ability to deny permits to certain
applicants associated with SMCRA violations.

OSM officials stated that since the court decision, OSM and the states have
issued permits to three applicants who would have been denied permits under
the regulation the court invalidated. OSM further stated that the denials
would have been based on an upstream owner or controller violation, when at
the time of the applications for new permits, the

upstream owners or controllers were linked to unabated violations. These
unabated violations included unpaid principal portions of CFP receivables
balances totaling approximately $31,600 and another $122,697 of unpaid
abandoned mine land fees and reclamation costs. 16 For example, OSM stated
that its Knoxville office issued a new surface mining permit in December
2000 to an applicant that consisted of three 30percent shareholders and one
10- percent shareholder. The shareholders were also managers of the limited
liability company. Three of the

shareholders had unabated SMCRA violations.

 One of the 30- percent shareholders was issued two cessation orders in
1984 and was also convicted by a Tennessee jury of a criminal offense of
continuing to conduct mining operations without a permit and failing to stop
after notification by authorities. The shareholder?s federal violations were
corrected, but the principal portion of the CFP, approximately $7, 800,
remained unpaid.

 Another of the 30- percent shareholders and the 10- percent shareholder
are principals (shareholders/ officers) in a company that owns 33. 3 percent
of another company that was an operator for a third company that was issued
a notice of violation in 1994 and a cessation order in 1995. The violations
were corrected, but the principal portion of the CFP, approximately $23,800,
remained unpaid.

This limitation on OSM?s authority to deny the issuance of permits to
applicants whose upstream owners or controllers have unabated SMCRA
violations may reduce OSM?s ability to achieve compliance with SMCRA,
including correction of violations and collection of unpaid CFP.

16 OSM provided only the amount of the principal portion of the CFP
receivable. Officials stated that the interest, administrative costs,
penalties, and postjudgment portions were not readily available and that
total CFP receivable amounts were generally equal to double the principal
portion.

OMB?s and Treasury?s OMB and Treasury are provided with information useful
in performing their Roles in the Oversight

debt oversight roles through OSM?s reporting of CFP receivables and referral
of CFP debt to Treasury for collection. With respect to reporting of and
Monitoring of CFP

CFP receivables, OSM reports total receivable amounts in its audited Debt

financial statements that include its CFP receivables. In addition, OSM
reports annual CFP collections and the year- end CFP receivable balance in
the financial management section of its annual report, which it submits to
OMB and Treasury. In accordance with the requirements of the Debt Collection
Improvement Act of 1996, OSM annually reports CFP

receivables information, including annual collection activity, delinquent
debt, and estimated amounts deemed uncollectible, to Treasury as part of the
Report of Receivables Due from the Public.

In discussions with OMB officials, they emphasized that OMB?s oversight is
broad and consists of monitoring and evaluating governmentwide credit
management, debt collection activities, and federal agency performance. OMB
also stated that it is the specific responsibility of the agency Chief
Financial Officer and program managers to manage and be accountable for the
debt collection of their agency?s credit portfolios in accordance with
applicable federal debt statutes, regulations, and guidance. OMB added that
it is the (1) role of each agency to specifically monitor and collect its
civil penalty debt regardless of dollar magnitude and (2) responsibility of
each agency?s Office of the Inspector General to provide oversight through

audit of the agency?s debt collection activities. Regarding the referral of
CFP debt to Treasury, the Debt Collection Improvement Act of 1996 also
requires that federal agencies transfer eligible nontax debt or claims 17
delinquent more than 180 days to Treasury for collection actions. Treasury
officials stated that they rely on agencies

to determine what debt should be referred to Treasury for collection and
offsets, as required by the act, and OSM does refer delinquent CFP debts to
Treasury for collection action.

Conclusion The poor financial condition of CFP debtors is the primary reason
that a significant amount of OSM?s CFP receivables continue to be delinquent
and, in most cases, are deemed uncollectible and eventually written off. 17
Claims include debts owed to the United States or debts being collected by
the United States on behalf of others.

While a lack of documentation of its collection specialists? activities
precluded us from determining the overall adequacy of OSM?s past and present
debt collection processes and the poor financial condition of CFP debtors
makes substantial improvements in collection rates problematic, OSM could
strengthen its debt collection process by better adhering to certain of its
own CFP debt collection policies and procedures. We also

found that OSM?s inability to prevent upstream owners and controllers of
companies with unabated SMCRA violations from obtaining new mining permits
could reduce the effectiveness of OSM?s CFP program.

Recommendations for We recommend that the Secretary of the Interior direct
the Acting Director

Executive Action of the Office of Surface Mining to take the following
actions:

 Evaluate the potential significance of the court decision to limit OSM?s
ability to deny new permits to applicants whose upstream owners and
controllers have unabated SMCRA violations. If a change in SMCRA is needed
to expand OSM?s authority to deny new permits to applicants whose upstream
owners and controllers have uncorrected violations or

unpaid CFP, work with the Congress to determine the appropriate legislative
action to take.

 Monitor to ensure effective implementation of OSM?s new guidance on the

 write- off of CFP debt that is referred to either the Solicitor or
Treasury and delinquent more than 2 years by classifying the debt as
currently not collectible and

 maintenance, in cases involving installment agreements, of documentation
used to determine a debtor?s inability to immediately pay CFP debt in full.

 Reinforce to its CFP collection and management personnel the need to fully
adhere to CFP debt collection policies and procedures for obtaining the
required approval from the Department of Justice to terminate collection
efforts and write- off delinquent CFP debt greater than or equal to
$100,000.

Agency Comments and In commenting on a draft of our detailed briefing
slides, OSM agreed with

Our Evaluation our recommendations and stated that it will continue to
explore all policy, regulatory, and legislative options with the potential
to improve its ability

to keep applicants responsible for uncorrected violations and unpaid debt
from receiving permits to mine coal. OSM, OMB, and Treasury also

provided additional technical comments and suggestions that were
incorporated as appropriate. We are sending copies of this report and
briefing slides to the Chairman of your Subcommittee as well as to the
Chairman and Ranking Minority Member of the Senate Committee on Governmental
Affairs. We will also provide copies to the Secretary of the Interior, the
Acting Director of the Office of Surface Mining, the Secretary of the
Treasury, and the Director of the Office of Management and Budget. Copies
will also be made available to others upon request. If you have any
questions about this report, please contact me at (202) 512- 3406 or Steven
Haughton, Assistant Director, at (202) 512- 5999. Additional key
contributors to this assignment were John Lord, William Wright, David

Grindstaff, Richard Cambosos, Mike LaForge, Miguel Lujuan, and Robin Hodge.
Sincerely yours,

Gary T. Engel Director Financial Management and Assurance

Appendi xes Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on

Appendi x I

Governmental Affairs Financial Management and Assurance Team

Review of Office of Surface Mining s Management and Collection of Civil
Fines and

Penalties

Briefing to the Permanen Subcommittee on Investigations, Senate Commi tee on
Governmental Affairs

December 14, 2001 1

Contents

 Objectives

 Overview

 Background

 Scope and Methodology

 Poor Financial Condition of Certain CFP Debtors is the Primary Reason for
Low Collection Rates and Significant Write- offs

 Overall Adequacy of CFP Debt Collection Process Cannot Be Determined, But
Such Processes Can Be Strengthened

 OMB?s and Treasury?s Role in the Oversight and Monitoring of CFP Debt

 Conclusion

 Recommendations

 Agency Comments

2

Objectives

 You expressed concern over low collection rates for and significant write-
offs of civil fines and penalties (CFP) debt at the Department of Interior?s
(Interior) Office of Surface Mining (OSM).

 You requested that we determine

 the primary reason for the low collection rates and significant writeoffs
of OSM?s CFP debt,

 whether adequate processes exist at OSM to collect CFP debt, and

 what role, if any, the Office of Management and Budget (OMB) or the
Department of Treasury play in overseeing OSM?s collection of CFP debt.

3

Overview

 We found the following.

 The primary reason for the low collection rates for and significant write-
offs of CFP debt is the poor financial condition of certain CFP debtors.

 A lack of certain documentation prevented us from determining the overall
adequacy of OSM?s past and present CFP debt collection process, but such
processes can be strengthened. In addition, the extent of OSM?s legislative
authority could reduce the effectiveness of OSM?s ability to achieve its
program objective of maximizing compliance with surface mining laws.

4

Overview ( cont d)

 OMB and Treasury are provided with information useful in performing CFP
debt oversight roles. However, OMB stated that it has broad oversight
responsibility and that each agency has specific responsibility to monitor,
manage, and collect CFP debt while it is the responsibility of the agency?s
Office of the Inspector General to provide oversight through the audit of
the agency?s debt collection activities. Treasury stated that it relies on
agencies to determine what debt should be referred to Treasury for
collection actions, as required by the Debt Collection Improvement Act of
1996 (DCIA) and OSM does refer delinquent CFP debts to Treasury.

5

Background

 The Surface Mining Control and Reclamation Act of 1977 (SMCRA) established
OSM to administer and enforce a nationwide program to protect society and
the environment from the adverse effects of surface coal mining operations
and to promote the reclamation of unreclaimed mining areas.

 Title IV of SMCRA authorizes OSM to collect quarterly abandoned mine land
(AML) reclamation fees. SMCRA also requires coal mine operators to obtain
permits from OSM, or the responsible state regulatory authority, prior to
any mining activity. These permits identify parties actively mining coal and
become the basis for OSM to generate Coal Reclamation Fee Reports (Form OSM-
1), that are used to collect AML fees.

6

Background ( cont d)

 Title V of SMCRA authorizes OSM to enforce environmental and reclamation
standards for coal mining. Failure by coal mine operators to comply with
these standards are referred to as ?on the ground? (mine



site) violations and typically involve harm to the environment  Section 518
authorizes OSM to assess CFP for violations of Title IV and V of SMCRA.

 OSM is to issue a Notice of Violation (NOV) to violators for (1) Title IV
unpaid reclamation fees or for not filing an OSM- 1 report and (2) Title V
noncompliance with SMCRA from inspections of mining operations.

7

Background ( cont d)

 OSM then is to issue a Failure to Abate Cessation Order (CO), which
requires that mining operations cease and the violation be abated
immediately, if the violation is not corrected within a specified time
period.

 OSM?s assessment unit is to review each citation to determine the
appropriate penalty amount to be assessed for a violation based on a point
system directly related to the history of previous violations, including the
seriousness of such violations, extent of damage, negligence and good faith
in attempting to achieve compliance.

 After OSM determines the amount of the assessment, it is to issue a Notice
of Proposed Assessment (NOPA) that becomes the official civil penalty debt
in a ?Final Order? that is to be issued within 30 days of receipt of the
NOPA, unless appealed.

8

Background ( cont d)

 Under SMCRA, CFP can only be assessed after the cited mine operator has
been given an opportunity for a public hearing, which may include a
potentially lengthy appeals process.

 Since 1995, OSM records a proposed assessment as a CFP receivable when any
one of the following events occur that establish an amount owed to OSM:

 payments are made for the full amount of the assessment when a NOPA is
issued,

 a Final Order (First Demand Letter) is issued,

 a payment plan is entered into, or

 the final appeal decision has been made.

9

Background ( cont d)

 OSM is to issue a Second Demand Letter 15 days after it mails the Final
Order which is to be followed by a Final Demand Letter in 15 more days.
Thus, all 3 demand letters are required to be sent in a 30- day period.

 OSM is to classify CFP debt as delinquent if the payment is not received
within 30 days of the Final Order.

 Once a CFP receivable is established, OSM is to input the CFP debt into
the Civil Penalty Accounting and Control System (CPACS) and a Collection
Specialist (CS) begins collection activity.

10

Background ( cont d)

 Upon receipt of the Citation File, the CS is to create a ?Collection

Specialist Case File? (CS File) or an ?Entity File? if the violator has
multiple CFP debts, to document collection actions taken on the CFP debt.
Then the CS is to perform a ?full compliance check? to identify all
outstanding debt or ?skip tracing? to locate a debtor. The CS also is to
call the debtor and document each time there is an attempt or actual contact
with the debtor.

 If the debtor is unable to pay the debt in full, the CS may offer an
installment agreement or under certain conditions, a compromise settlement.
Both are to be researched to determine the debtors ability to pay,
documented as to the decision rendered, and reviewed and approved by other
OSM staff.

11

Background ( cont d)

 If the debt is unpaid, the CS can take one of the following possible
actions

 refer the CFP debt to the Interior Office of the Solicitor (Solicitor) if,
for example

(1) the debt needs to be consolidated with debts previously referred to the
Solicitor,

(2) the debtor files for bankruptcy, or (3) the debtor strongly disputes
responsibility for the debt or raises

a legal challenge showing a high likelihood for litigation.

12

Background ( cont d)

 refer the CFP debt to Treasury for collection and offset if (1) the debtor
does not respond to direct collection efforts by

paying in full, (2) the debtor cannot be located, (3) the debtor defaults in
a payment agreement and does not

correct the default, or (4) the debt has been delinquent for 180 days.

 If CFP debt remains uncollected after referrals to the Solicitor and
Treasury, the Solicitor or Treasury can recommend that the debt be written
off. The CS would then terminate collection activity on the CFP debt and
write- off the CFP receivable for reasons that include

13

Background ( cont d)

(1) substantial amounts are not collected, (2) the debtor can not be
located, (3) the cost of collection will exceed the amount recoverable, (4)
the statute of limitations have expired, or (5) the case is without merit or
there was insufficient evidence.

The Department of Justice must approve the write off of all CFP debts
greater than or equal to $100,000.

 During fiscal year (FY) 2000, OSM began writing off CFP debt referred to
the Solicitor for collection action that was delinquent over 2 years and
classifying it as currently not collectible (CNC). In January 2000, OSM
established formal guidance to write off such debts as CNC. In March 2001,
OSM established formal guidance to write off debt referred to Treasury for
collection action that is delinquent over 2 years as CNC. 1 1 In November
2000, OMB Revised Circular A- 129 to make it mandatory that agencies write
off debts over two years old unless

14

documented and justified to OMB in consultation with Treasury.

Background ( cont d)

 OSM is to include unpaid CFP debt in its Applicant Violator System to
track the debts status once the debt becomes delinquent.

OSM has a history of low collection rates for its CFP debt. In 1987, we
reported 2 that the financial quality of OSM?s CFP debts make them difficult
to collect. We noted that for FY 1986, OSM reported about $158 million in
CFP receivables, of which $155 million was reported as delinquent. OSM
designated about 52 percent of these CFP receivables as uncollectible at
that time.

In 1989, we reported 3 that OSM had $38 million in CFP receivables, as of
September 30, 1988, after terminating collection activities from FY 1986 to
FY 1988 on CFP debts totaling about $136 million that it considered
uncollectible. Of this CFP receivable balance, OSM reported about 99 percent
as delinquent and designated about 90 percent as uncollectible.

2 Debt Collection: Interior?s Efforts to Collect Delinquent Royalties,
Fines, and Assessments (GAO/ AFMD- 87- 21BR, June 1987)

15

3 Department of Interior: Collection of Civil Penalty Fees (GAO/ AFMD- 89-
73, August 1989)

Background ( cont d)

After writing off about $10.8 million of CFP debts during FY 2000, including
about $9.3 million, or about 86 percent of the $10. 8 million, of debts more
than 10 years old, OSM reported a CFP receivable balance of approximately
$1.3 million as of September 30, 2000. Of this year- end receivable balance,
OSM reported more than 92 percent as delinquent and designated about 88
percent as uncollectible.

16

Scope and Methodology

 To accomplish our objectives we

 Obtained and reviewed OSM?s audited financial statements, annual reports,
and other financial information that relate to its CFP collection
activities.

 Analyzed OSM?s CFP receivables and related accounts and information for FY
1997 through FY 2000.

Obtained an understanding of OSM?s CFP debt collection policies and
procedures, and applicable federal rules and regulations.

17

Scope and Methodology ( cont d)

Obtained access to OSM?s CPACS database of 490 cases for which the CFP
receivable balances were reduced to zero by collection or writeoff (closed)
during FYs 1999 and 2000 or that had outstanding (open) CFP receivable
balances as of September 30, 2000.

Stratified the database into cases equal to or greater than $100,000 (high
dollar debts) and less than $100,000.

In order to review OSM?s CFP debt collection process we selected the
following 184 open or closed cases

 all 9 high- dollar debts and

 a random statistical sample of 175 CFP cases with initial receivable
amounts less than $100,000.

18

Scope and Methodology ( cont d)

OSM was not able to provide documentation of collection specialist actions
for 120 of the 184 cases we selected for our review. 4

Due to the lack of documentation for a significant portion of our sample, we
were not able to project our findings to the entire universe of cases
(discussed later).

As a result of this scope limitation, we were unable to conclude on the
overall adequacy of OSM?s past and present CFP debt collection processes and
have thus presented our findings as they relate to the applicable attributes
in the 64 cases for which OSM had documentation.

4 We are 95 percent confident that the actual proportion of cases for which
OSM has no documentation of collection specialist actions is 64.4 percent
(plus or minus 5.6 percent).

19

Scope and Methodology ( cont d)

Interviewed OSM officials to obtain explanations for observed trends, and
identified findings and exceptions to policies and procedures.

Interviewed OMB and Treasury officials to determine what role, if any, OMB
and Treasury play in overseeing and monitoring the government?s collection
of civil debts.

We did not independently verify the completeness or accuracy of financial
data or test information security controls over the systems used to compile
these data because that verification was not necessary for the purposes of
this request.

20

Scope and Methodology ( cont d)

Provided Interior, OSM, OMB, and Treasury with a draft of our detailed
briefing slides, which contained recommendations to the Acting Director of
OSM for review and comment. The comments received are discussed on the
?Agency Comments? slides or incorporated into the slides as applicable.

Performed our work primarily in Denver, CO between January 2001 and August
2001 in accordance with U. S. generally accepted government auditing
standards.

21

Poor Financial Condition of CFP Debtors is the Primary Reason for Low
Collection Rates and Significant Write- offs

We previously reported on the poor financial quality of OSM?s CFP debt and
the difficulties the agency faces in collecting CFP receivables from mining
companies that are not financially viable.

In 1989, we reported that OSM may never experience a high rate of collection
because the majority of its CFP receivables related to inactive mine sites
or mining operators who were either bankrupt or no longer mining. We also
reported that OSM?s overall annual collection rates combined for both Title
IV and V CFP receivables was approximately one percent for the 3- year
period for FY 1986 through 1988, 5 which is about the same rate collected
for the 4- year period for FY 1997 through FY 2000.

5 The annual collection rates, as per the method used in our1989 report,
were calculated by dividing reported collections

22

made each year by the sum of the beginning receivable balance from each year
and net assessments for each year, including principal and interest.

Poor Financial Condition of CFP Debtors is the Primary Reason for Low
Collection Rates and Significant Write- offs ( cont d)

 During our fieldwork, OSM officials stated that the collection rates
should not be calculated using the beginning receivable balances because
such balances included the significant amount of old CFP receivables,
including principal assessments and interest, that remained uncollected from
prior years of which OSM eventually wrote off. Even though we recalculated
OSM?s combined annual collection rates without the beginning receivable
balances, the revised annual collection rates remained low at approximately
5 percent 6 for the 4- year period ended in 2000. After we recalculated
OSM?s collection rates using its modified method for the 3- year period
ended in 1988, we found that the annual collection rates were similar to the
rates calculated for the 4- year period ended in 2000.

6 The modified annual collection rates, based on OSM?s methodology, were
calculated by dividing the reported collections made each year by the net
assessments for each year.

23

Poor Financial Condition of CFP Debtors is the Primary Reason for Low
Collection Rates and Significant Write- offs ( cont d)  In 1987, we
reported that most of OSM?s CFP delinquencies were several

years old and therefore, were difficult to collect. As industry statistics
have shown, the likelihood of recovering amounts owed decreases dramatically
with the age of delinquency.

 During our limited review, we observed that 8 of the 9 high- dollar debts
averaged approximately 19 years for the total processing time from the
issuance of the citation to the point at which the debt was eventually
terminated (written off).

 Based on our analysis of information provided to us by OSM, collection
rates remain low and older debts are still not collected. Our analysis also
showed that 77 and 95 percent of all CFP debt that was available to be
collected 7 were written off for the 3- year period ended in FY 1988 and the
4- year period ended in FY 2000, respectively. 7 All available CFP debts
consisted of the CFP receivable balances for the beginning of FY 1986 and FY
1997 plus all net

24

assessments recorded during the 3- year period ended in FY 1988 and the 4-
year period ended in FY 2000, respectively.

Poor Financial Condition of CFP Debtors is the Primary Reason for Low
Collection Rates and Significant Write- offs ( cont d) OSM officials stated
that viable companies correct violations before they

incur large civil penalties and that companies that are typically not in
good financial condition often do not correct the initial violation and
therefore receive cessation orders and incur large civil penalties. This has
lead to these CFP debts being deemed uncollectible and eventually written
off.

Over the 4- year period covering from FY 1997 through FY 2000, OSM has

 written- off about $37. 1 million in CFP receivables (plus another $12.6
million in FY 1996),

 annually estimated between 88 and 99 percent of its reported CFP
receivables as uncollectible,

 recorded less CFP assessments each year, going from about $2. 8 million in
FY 1997 to $591,000 in FY 2000, 8 and

 collected about $616,000 in CFP receivables. 8 The principal portion of
new CFP assessments went from $680,320 for 111 new debts in FY 1997 to
$180,370 for 22 new

25

debts in FY 2000.

Poor Financial Condition of CFP Debtors is the Primary Reason for Low
Collection Rates and Significant Write- offs ( cont d)

 As a result of the significant write offs, collections, and fewer recorded
numbers and dollars of assessments over the 4 year period, OSM?s reported
CFP receivables balance has decreased from about $27.3 million as of October
1, 1996, to about $1.3 million as of September 30, 2000.

According to OSM data, from FY 1997 through FY 2000, about $35 million or 94
percent of the $37.1 million of CFP debt that collection activity was
terminated and receivables were written off was delinquent more than 2
years. OSM wrote off most of the CFP debts for the following reasons

 $22.8 million for inability to collect, including companies that have
filed for bankruptcy, are bankrupt, or are no longer mining.

 $4. 6 million that was classified as currently not collectible after being
delinquent for more than 2 years,

 $3. 7 million after a compromise was reached, and

 $3. 4 million due to expiration of statute of limitations.

26

Poor Financial Condition of CFP Debtors is the Primary Reason for Low
Collection Rates and Significant Write- offs ( cont d)

 OSM does not believe that low collection rates and significant write- offs
are a fair indication of the effectiveness of the CFP program. The agency?s
Strategic Plan states that the purpose of its CFP program is to maximize
compliance with mining laws.

 OSM officials stated that, while collecting CFP is an important objective
for OSM, maximizing revenues from the collection of CFP is not as important
to management as achieving compliance with mining laws. OSM routinely writes
off or accepts an offer- in- compromise of large dollar amounts on Title IV
CFP debt when its enforcement objectives have been met. For example, even
though collection rates on CFP debts remained low, OSM officials stated that
72 percent of notices of violations between FY 1997 and 2000 were abated and
99 percent of Title IV reclamation fees were collected during FY 2000.

27

Poor Financial Condition of CFP Debtors is the Primary Reason for Low
Collection Rates and Significant Write- offs ( cont d)

 OSM officials also stated that with the decline in the number and amount
of new Title IV and V CFP debts in FY 2000, they expect the number and
amount of new CFP assessments to remain low in the future because

 OSM is now actively working with companies to prevent problems from
occurring,

 The mining industry has undergone change resulting in better mining
practices and fewer violations,

 OSM has changed the way it oversees state regulatory programs to focus on
results instead of activities such as issuing citations, and

 OSM compliance auditors work with companies to resolve Title IV SMCRA
violations before issuing a citation.

28

Overall Adequacy of CFP Debt Collection Processes Can Not Be Determined, But
Such Processes Can Be Strengthened

 The scope limitation prevented us from determining the overall adequacy of
OSM?s past and present CFP debt collection processes. However, such CFP debt
collection processes can be strengthened in certain areas where we found
several instances that OSM did not follow various internal debt collection
policies and procedures.

 In addition, the extent of OSM?s legislative authority could reduce the
effectiveness of OSM?s ability to achieve its program objective of
maximizing compliance with surface mining laws.

29

Overall Adequacy of CFP Debt Collection Processes Can Not Be Determined, But
Such Processes Can Be Strengthened - Scope Limitation

OSM did not retain documentation of certain CFP collection files for 120 out
of the 184 cases that we selected for testing.

During FYs 1994 and 1995, OSM scanned CS files, for cases that CS had
completed its collection process, into an optical imaging system and
destroyed the original documentation. OSM destroyed the original
documentation after it used the scanned documents to archive these files.
However, the read/ write feature of the imaging system broke in 1998 and the
vendor went out of business. OSM officials stated that the system?s feature
could not be repaired or replaced; thus, those documents were no longer
available.

An OSM official stated that since the imaging problem, they have maintained
most original documentation and are working on guidance for archiving
documents for 5 years and only imaging key documents.

30

Overall Adequacy of CFP Debt Collection Processes Can Not Be Determined, But
Such Processes Can Be Strengthened - Scope Limitation ( cont d)

The testing of the 64 CFP debts with available documentation provided
evidence that OSM has maintained CS documentation for the debts with
collection activity since the imaging problem.

As a result of the lack of documentation, we were unable to test about 2/ 3
of the sampled cases we selected for review to determine the extent to which
OSM did or did not follow its CFP debt collection policies and procedures.
Additionally, this scope limitation precluded our ability to appropriately
project findings for those cases for which we had sufficient documentation
for our review to the universe of CFP debts. Consequently, we are unable to
conclude on the overall adequacy of OSM?s CFP debt collection processes. 9

9 We are 95 percent confident that the actual proportion of cases for which
OSM has no documentation of collection

31

specialist actions is 64.4 percent (plus or minus 5.6 percent).

Overall Adequacy of CFP Debt Collection Processes Can Not Be Determined, But
Such Processes Can Be Strengthened - Noncompliance

Although we could not determine the overall adequacy of OSM?s CFP past and
present debt collection processes, we identified several instances where OSM
did not comply with its own debt collection policies and procedures, 10
including the following

17 out of 24 CFP debts that were delinquent more than 2 years and referred
to the Solicitor or Treasury were not written off as CNC. Fifteen of the CFP
debts were referred to Treasury and due to oversight, were not written off
as CNC until we brought it to OSM?s attention, wherein, OSM subsequently
established specific formal guidance for the write- off of such types of
debts.

4 out of 32 CFP debts that were delinquent less than 2 years were
incorrectly written off as CNC. 10 Because of the scope limitation discussed
earlier, we were not able to project our findings to the entire universe of
cases. However, we are presenting the results of the cases we did review.
These results should not be used as a basis for

32

concluding about the adequacy of OSM?s debt collection process.

Overall Adequacy of CFP Debt Collection Processes Can Not Be Determined, But
Such Processes Can Be Strengthened - Noncompliance ( cont d)

5 of 5 CFP debts involving installment agreements issued between 1994 and
1997 did not have documentation supporting the debtor?s inability to
immediately pay in full. However, in August 2000, OSM began requiring
management approval of installment agreements and developed an installment
agreement worksheet to be used by CS that requires that such documentation
be maintained.

2 out of the 9 high- dollar delinquent debts were written off and the cases
terminated without the required approval from the Department of Justice.
After we informed OSM officials of this situation, they subsequently
reclassified the debts as CNC since the debts were over 2 years old.

33

Overall Adequacy of CFP Debt Collection Processes Can Not Be Determined, But
Such Processes Can Be Strengthened - OSM s Legislative Authority

 Section 510( c) of SMCRA prohibits the issuance of mining permits to
applicants who are responsible for unabated violations. An unpaid CFP debt
is treated as an unabated violation. One of the purposes of a denial of a
new permit is to induce violators to correct violations and pay CFP.

 Section 510( c) reads: Where?. information available to the regulatory
authority indicates that any surface coal mining operation owned or
controlled by the applicant is currently in violation of this Act?. the
permit shall not be issued.

34

Overall Adequacy of CFP Debt Collection Processes Can Not Be Determined, But
Such Processes Can Be Strengthened- OSM s Legislative Authority( con d)

 In 1997, the U. S. Court of Appeals for the D. C. Circuit invalidated an
OSM regulation that blocked the issuance of a permit to any surface coal
mining operation owned or controlled by either the applicant or by a person
who owns or controls the applicant that is currently in violation of the
SMCRA (upstream owner or controller). The court ruled that the regulation
was inconsistent with the authority conferred on OSM by section 510( c) of
SMCRA.

 As a result, Section 510( c) of SMCRA limits OSM?s ability to deny permits
to certain applicants associated with SMCRA violations.

35

Overall Adequacy of CFP Debt Collection Processes Can Not Be Determined, But
Such Processes Can Be Strengthened- OSM s Legislative Authority( con d)

 Since this court decision, OSM stated it and the States have issued
permits to three applicants where ?they would have been denied? under the
regulations the court invalidated. OSM further stated that the denials would
have been based on an upstream owner or controller violation, where at the
time of the applications for new permits, the upstream owners or controllers
were linked to unabated violations, including the unpaid principal portion
11 of the CFP receivable balances totaling approximately $31,600, plus
another $122,697 of unpaid AML fees and reclamation costs.

 For example, OSM stated that its Knoxville office issued an applicant a
new surface mining permit in December 2000. The applicant was comprised of
three 30 percent and one 10 percent shareholders, who were also managers of
the limited liability company. Three of the shareholders had unabated
violations. 11 OSM provided only the principal portion of the CFP receivable
and stated that the interest, administrative costs, penalties,

36

and post judgements portions were not readily available and that generally,
the total CFP receivable amounts were equal to double the principal portion.

Overall Adequacy of CFP Debt Collection Processes Can Not Be Determined, But
Such Processes Can Be Strengthened- OSM s Legislative Authority ( cont d)

 One of the 30 percent shareholders was issued 2 COs in 1984, and was
convicted by a Tennessee jury of a criminal offense of continuing to conduct
surface coal mining operations without a permit and failing to stop after
being notified by the authorities. The federal violations have been
corrected, but the principal portion of CFP totaling approximately $7,800
remains unpaid, and

 One of the other 30 percent shareholders and the 10 percent shareholder
are principals (shareholders/ officers) in a company that owns 33.3 percent
of another company that was an operator for a third company that was issued
a NOV and CO in 1994 and 1995, respectively. The violations have been
corrected, but the principal portion of CFP totaling approximately $23,800
remains unpaid.

37

Overall Adequacy of CFP Debt Collection Processes Can Not Be Determined, But
Such Processes Can Be Strengthened- OSM s Legislative Authority ( cont d)

 This limitation in OSM?s ability to deny the issuance of permits to
applicants whose upstream owners or controllers have unabated SMCRA
violations may reduce OSM?s ability to achieve compliance with SMCRA,
including the correction of violations and the collection of unpaid CFP.

38

OMB s and Treasury s Roles in the Oversight and Monitoring of CFP Debt

Reporting of CFP Receivables

OSM reports total receivable amounts in its audited financial statements,
which includes CFP receivable amounts. In addition, OSM reports annual CFP
collections and the year- end receivables balance in the financial
management section of its annual report, which is submitted to OMB and
Treasury.

In accordance with requirements of the Debt Collection Improvement Act of
1996 (DCIA), OSM annually reports CFP receivables information, including
annual collection activity, delinquent debt, and estimated uncollectibles,
to Treasury as part of the Report of Receivables Due from the Public.

OMB and Treasury are provided with information useful in performing CFP debt
oversight roles.

39

OMB s and Treasury s Roles in the Oversight and Monitoring of CFP Debt (
cont d)

However, in discussions with OMB officials, they emphasized that OMB?s
oversight is broad and consists of monitoring and evaluating government-
wide credit management, debt collection activities, and federal agency
performance. OMB also stated that it is the specific responsibility of the
agency Chief Financial Officer and program managers to manage and be
accountable for the debt collection of their agency?s credit portfolios in
accordance with applicable federal debt statutes, regulations, and guidance.
OMB further added that it is the role of each agency to specifically monitor
and collect their civil penalty debt regardless of dollar magnitude and the
responsibility of each agency?s Office of the Inspector General to provide
oversight through audit of agency?s debt collection activities.

40

OMB s and Treasury s Roles in the Oversight and Monitoring of CFP Debt (
cont d)

Referral of CFP Debt to Treasury

DCIA requires federal agencies to transfer eligible non- tax debt or claims
over 180 days delinquent to Treasury for collection action.

Treasury officials stated that they rely on the agencies to determine what
debt should be referred to Treasury for collection action, as required by
DCIA.

OSM?s policy is to refer CFP debt to Treasury for collection action.

41

Conclusion

The poor financial condition of CFP debtors is the primary reason that OSM
continues to experience significantly delinquent, and in most cases,
uncollectible CFP receivables that are eventually written off. While a lack
of documentation of certain collection specialist actions prevented us from
determining the adequacy of OSM?s past and present debt collection processes
and the poor financial condition of CFP debtors makes substantial
improvement in collection rates problematic, opportunities exist for OSM to
strengthen its debt collection processes through better adherence to certain
of its own debt collection policies and procedures. Additionally, OSM?s
inability to prevent owners and controllers of companies with unabated
violations from obtaining new mining permits could reduce the effectiveness
of its CFP program.

42

Recommendations

 We recommend that the Secretary of Interior direct the Acting Director of
OSM to take the following actions

Evaluate the potential significance of the court decision on OSM?s ability
to limit new permits to applicants with upstream owners and controllers with
unabated SMCRA violations. If a change in SMCRA is needed that would expand
OSM?s authority to deny a new permit to applicants whose upstream owners and
controllers have uncorrected violations and/ or unpaid CFP, work with the
Congress to determine the appropriate legislative action to take.

Monitor to ensure the effective implementation of its new guidance on:

writing off CFP debt referred to either SOL or Treasury and over 2 years
delinquent by classifying the debt as CNC and

43

Recommendations ( cont d)

maintaining documentation used to determine debtor?s inability to
immediately pay CPF debt in full for cases involving installment agreements.

reinforce to its CFP collection and management personnel the need to fully
adhere to CFP debt collection policies and procedures for obtaining the
required approval from the Department of Justice to terminate collection
efforts and write off delinquent CFP debt greater than or equal to $100,000.

44

Agency Comments

In commenting on a draft of these briefing slides, OSM agreed with our
recommendations and stated that it will continue to explore all policy,
regulatory, and legislative options with the potential to improve its
ability to keep applicants responsible for uncorrected violations and unpaid
debt from receiving permits to mine coal.

OSM stated that during our May 17, 2001, exit conference, we acknowledged
that the instances of non- compliance with debt collection policies and
procedures we found did not have a material impact on collections. In
addition, OSM also stated that there is ample evidence that OSM?s current
procedures are effective and controls are sound, which it stated, was based
on 64 cases out of only 81 cases with outstanding CFP receivables as of the
end of FY 2000.

45

Agency Comments ( con d)

As we stated in our Scope and Methodology section, we selected a total of
184 open and closed CFP cases from a total of 490 cases. Although we did
state at the exit conference that the instances of non- compliance may not
have affected OSM?s ability to collect the CFP debts, the fact remains that
these instances have resulted in misstatements in OSM?s reported CFP
receivables. Further and more importantly, because of the lack of
documentation of the collection specialists? actions for the majority of the
sampled cases, we are unable to assess whether there were material instances
of non- compliance with OSM?s past and present debt collection policies and
procedures.

46

Agency Comments ( con d)

 OSM then stated that the primary reason for the low collection rates was
the poor financial condition of CFP debtors, not the poor quality of CFP
debt. We agree that the primary reason for the low collection rates was the
poor financial condition of certain CFP debtors instead of poor financial
quality of CFP debts. Poor financial quality of CFP debts is typically
caused by the poor financial condition of the related debtors. As a result,
we revised our report and slides except where we refer to our 1987 report
that described this issue as poor financial quality.

 OSM stated that our high level summarized report obscures important
aspects of the program, by not including the number of debts collected,
differentiating between Title IV and V debts, measuring collection rates by
age of debt, and focusing on the current process. In particular, OSM stated
that collection rates should be calculated only on the principal portion of
the net assessments recorded as CFP receivables.

47

Agency Comments ( con d)

 As such, OSM again modified its method and recalculated its combined
annual collection rates at approximately 11 percent - 4 percent for Title IV
and 17 percent for Title V - based on only the principal portion of the net
assessments from the CFP receivables for the 4- year period ended in fiscal
year 2000. Both modified calculation methods used by OSM inappropriately
overstate its annual collection rates. Each method uses only the new CFP net
assessments or just the principal portion of new CFP debts and
inappropriately excludes current CFP debts that are a part of the beginning
receivable balances and earned interest and late charges on the current
debts that were recorded during the 4- year period ended in fiscal year
2000. Regardless of the method used to calculate collection rates, the main
point remains that each collection rate is low and when the same method was
applied for both the 3- year period ended in FY 1988 and the 4- year period
ended in FY 2000, the collection rates were similar and did not show any
significant increase from one period to the other. 12

12 A comparison of the collection rates for the 3- year period ended in FY
1988, based on the second modified calculation method, could not be made
since the principal portions of net assessments recorded during the 3- year
period were not

48

available.

Agency Comments ( con d)

 While we incorporated some of the suggested CFP detail that OSM provided
in its response, the other suggestions were not incorporated because they
did not agree with the detailed information provided to us during our
review. In addition, the suggestions focused primarily on the principal
portion of CFP debts, which as we stated, overstates collection rates.
Furthermore, it does not change our conclusion as to the primary reason for
OSM?s low collection rates and its significant amount of CFP debts that were
written off, which continued to represent a significant amount of the CFP
receivables available for collection from the 3- year period ended in FY
1988 and the 4- year period ended in FY 2000.

49

Comments From the Office of Surface Mining

Appendi x II

of the Department of the Interior See comment 1. See comment 2. See comment
3.

See comment 4.

See comment 4. See comment 5. See comment 4.

See comment 6. See comment 7.

See comment 7. See comment 6. See comment 8.

GAO?s Comments The following are our comments on the Office of Surface
Mining?s letter dated October 1, 2001. 1. Although we did state at the exit
conference that the instances of

noncompliance may not have affected OSM?s ability to collect the CFP debts,
the fact remains that these instances have resulted in misstatements of
OSM?s reported CFP receivables. Further and more importantly, because of the
lack of documentation of the collection

specialists? actions for two- thirds of the sampled cases, we are unable to
assess whether there were material instances of noncompliance with OSM?s
past and present debt collection policies and procedures.

2. The draft briefing slides already discussed the policies and procedures
established by OSM to write- off cases over 2 years old as currently not
collectible and we included OSM?s management approval of payment agreements
and development of an installment agreement worksheet in

the briefing slides. The steps taken by OSM to address the identified areas
of noncompliance are also discussed in the report. 3. We agree that the
primary reason for the low collection rates was the poor financial condition
of certain CFP debtors. Poor financial quality of CFP debts is typically
caused by the poor financial condition of the related debtors. As a result,
we revised our report and slides except where we refer to our 1987 report
that described this issue as poor financial quality.

4. We incorporated several of OSM?s suggested CFP detail related to the
number of debts collected, differentiating between Title IV and V debts,
measuring collection rates by age of debt, and focusing on the current

process into our briefing slides and reports. However, the other suggestions
were not incorporated because they did not agree with the detailed
information provided to us during our review. In addition, the suggestions
focused primarily on the principal portion of CFP debts,

which as we stated at the May 17, 2001, exit conference, overstates OSM?s
overall collection rates. Further, it does not change our conclusion as to
the primary reason for OSM?s low collection rates and the significant amount
of CFP debts that were written off during both the 3 years ended in fiscal
year 1988 and the 4 years ended in fiscal year 2000.

5. OSM modified its calculation method from the one discussed in the
briefing slides. OSM recalculated its combined annual collection rates at
approximately 11 percent- 4 percent for Title IV and 17 percent for

Title V- based on only the principal portion of the net assessments from the
CFP receivables for the 4 years ended in fiscal year 2000. Both modified
calculation methods used by OSM inappropriately overstate its annual
collection rates. Each method uses only the new CFP net assessments or just
the principal portion of new CFP debts and inappropriately excludes current
CFP debts that are a part of the beginning receivable balances and earned
interest and late charges on

the current debts that were recorded during the 4 years ended in fiscal year
2000. Regardless of the method used to calculate collection rates, the main
point remains that each collection rate is low and when the same method was
applied for both the 3 years ended in fiscal year 1988 and the 4 years ended
in fiscal year 2000, the collection rates were similar and did not show any
significant increase from one period to the other. 18

6. The ?Primary Reason? section of the briefing slides and report were
revised and include the changes in the number and amount of the new CFP
principal assessments from fiscal year 1997 to fiscal year 2000. 7. As
stated in the ?Scope and Methodology? section, we selected a total of 184
open and closed CFP cases from a total of 490 cases. And as

stated in GAO Comment no. 1, the lack of documentation of the collection
specialists? actions for two- thirds of the sampled cases prevented us from
determining whether there were material instances

of noncompliance with OSM?s past and present debt collection policies and
procedures. 8. See ?Agency Comments and Our Evaluation? section.

18 A comparison of the collection rates for the 3 years ended in fiscal year
1988, based on the second modified calculation method, could not be made
since the principal portions of net assessments recorded during the 3 years
were not available.

191001

a

GAO United States General Accounting Office

Page i GAO- 02- 211 OSM's Civil Fines and Penalties Debt

Contents

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Appendix I

Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

Page 19 GAO- 02- 211 OSM's Civil Fines and Penalties Debt

Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Appendix I Briefing to the Permanent Subcommittee on Investigations, Senate
Committee on Governmental Affairs

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Page 67 GAO- 02- 211 OSM's Civil Fines and Penalties Debt

Appendix II

Appendix II Comments From the Office of Surface Mining of the Department of
the Interior

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Appendix II Comments From the Office of Surface Mining of the Department of
the Interior

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Appendix II Comments From the Office of Surface Mining of the Department of
the Interior

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Appendix II Comments From the Office of Surface Mining of the Department of
the Interior

Page 71 GAO- 02- 211 OSM's Civil Fines and Penalties Debt

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