Travel Cards: Control Weaknesses Leave Navy Vulnerable to Fraud  
and Abuse (08-OCT-02, GAO-03-148T).				 
                                                                 
This testimony discusses the Department of the Navy's internal	 
controls over the government travel card program. The Navy's	 
average delinquency rate of 12 percent over the last 2 years is  
nearly identical to the Army's, which has the highest delinquency
rate in the Department of Defense, and 6 percentage points higher
than that of federal civilian agencies. The Navy's overall	 
delinquency and charge-off problems, which have cost the Navy	 
millions in lost rebates and higher fees, are primarily 	 
associated with lower-paid, enlisted military personnel. In	 
addition, lack of management emphasis and oversight has resulted 
in management failure to promptly detect and address instances of
potentially fraudulent and abusive activities related to the	 
travel card program. During fiscal year 2001 and the first 6	 
months of fiscal year 2002, over 250 Navy personnel might have	 
committed bank fraud by writing three or more nonsufficient fund 
checks to Bank of America, while many others abused the travel	 
card program by failing to pay Bank of America charges or using  
the card for inappropriate  transactions such as for prostitution
and gambling. However, because Navy management was often not	 
aware of these activities, disciplinary actions were not	 
consistently taken against these cardholders. GAO also found a	 
significant relationship between travel card fraud, abuse, and	 
delinquencies and individuals with substantial card history	 
problems. Many cardholders whose accounts were charged off or put
in salary offset had bankruptcies and accounts placed in	 
collection prior to receiving the card. The Navy's practice of	 
authorizing a travel card to be issued to virtually anyone who	 
asked for it compounded an already existing problem by giving	 
those with a history of bad financial management additional	 
credit. Although GAO found that Navy management had taken some	 
corrective actions to address delinquencies and misuse, 	 
additional preventive solutions are necessary if Navy is to	 
effectively address these issues.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-148T					        
    ACCNO:   A05257						        
  TITLE:     Travel Cards: Control Weaknesses Leave Navy Vulnerable to
Fraud and Abuse 						 
     DATE:   10/08/2002 
  SUBJECT:   Fraud						 
	     Program abuses					 
	     Credit						 
	     Credit sales					 
	     Naval procurement					 
	     Internal controls					 
	     Navy Travel Card Program				 

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GAO-03-148T

Testimony Before the Subcommittee on Government Efficiency, Financial
Management and Intergovernmental Relations, Committee on Government
Reform, House

of Representatives

United States General Accounting Office GAO For Release on Delivery
Expected at 2 p. m. Tuesday, October 8, 2002 TRAVEL CARDS

Control Weaknesses Leave Navy Vulnerable to Fraud and Abuse

Statement of Gregory D. Kutz Director, Financial Management and Assurance

John J. Ryan Assistant Director, Office of Special Investigations GAO- 03-
148T

Page 1 GAO- 03- 148T Mr. Chairman, Members of the Subcommittee, and
Senator Grassley: Thank you for the opportunity to discuss the Department
of the Navy*s

(including the United States Marine Corps) internal controls over the
government travel card program. This subcommittee held a hearing in May
2001 that identified substantial delinquencies and charge- offs related to
the Department of Defense (DOD) travel card. As a result of your hearing
and our work on internal control over purchase card transactions at two
Navy sites, 1 and continuing concern about fraud, waste, and abuse in
DOD*s use of both travel and purchase cards, you requested more
comprehensive audits of both programs. We previously testified on the

Army travel card program in July 2002. 2 This written statement discusses
the results of our Navy travel card program audit. We plan to follow up on
this testimony and issue a detailed report with recommendations on the
results of our audit. We will report to you separately on the results of
our Air Force travel card audit.

The intent of the travel card program, which is administered by a
contractor (Bank of America), was to improve convenience for the traveler
and to reduce the government*s costs of administering travel. During
fiscal year 2001, the Navy had about $510 million in travel card charges
and about 395,000 individually billed travel card accounts at the end of
fiscal year 2001. 3 The individually billed travel card program is
significantly different from the purchase card program in that cardholders

are directly responsible for all charges incurred on their travel cards
and the monthly bill is sent to the cardholder for payment. The cardholder
is responsible for submitting a properly documented voucher and is
reimbursed by the Navy for all valid expenses related to official

1 U. S. General Accounting Office, Purchase Cards: Control Weaknesses
Leave Two Navy Units Vulnerable to Fraud and Abuse, GAO- 01- 995T
(Washington, D. C.: July 30, 2001); Purchase Cards: Control Weaknesses
Leave Two Navy Units Vulnerable to Fraud and Abuse, GAO- 02- 32
(Washington, D. C.: Nov. 30, 2001); and q Purchase Cards: Continued
Control Weaknesses Leave Two Navy Units Vulnerable to Fraud and Abuse,
GAO- 02- 506T (Washington, D. C.: Mar. 13, 2002). 2 U. S. General
Accounting Office, Travel Cards: Control Weaknesses Leave Army Vulnerable
to Potential Fraud and Abuse, GAO- 02- 863T (Washington, D. C.: July 17,
2002). 3 The travel card program includes both individually billed
accounts* that is, accounts held by and paid by individual cardholders
based on reimbursement of expenses incurred while on official government
travel* and centrally billed accounts that are used to purchase
transportation or for the travel expenses of a unit and are paid directly
by the government. This testimony covers transactions charged to
individually billed accounts only.

Page 2 GAO- 03- 148T government travel. In contrast, all purchase card
charges are billed directly to the government for monthly payment.

Today, I will provide my perspective on (1) the reported magnitude and
impact of delinquent and charged- off Navy travel card accounts for fiscal
year 2001 and the first 6 months of fiscal year 2002, along with an
analysis of related causes, (2) potentially fraudulent and abusive
activity related to the Navy travel card during the same period, (3)
whether abusive activity

associated with the travel card is effectively linked to disciplinary
actions and security clearances, (4) the effectiveness of the overall
control environment and key internal controls for the Navy*s travel
program, and (5) the status of DOD and Navy corrective actions. Details on
our scope and methodology are included in appendix I. In summary, the
Navy*s average delinquency rate of about 12 percent over

the last 2 years is nearly identical to the Army*s, which has the highest
delinquency rate in DOD, and about 6 percentage points higher than that of
federal civilian agencies. The Navy*s overall delinquency and charge- off
problems, which have cost the Navy millions in lost rebates and higher

fees, are primarily associated with lower- paid, enlisted military
personnel. In addition, lack of management emphasis and oversight has
resulted in management failure to promptly detect and address instances of
potentially fraudulent and abusive activities related to the travel card
program. For example, during fiscal year 2001 and the first 6 months of
fiscal year 2002, over 250 Navy personnel might have committed bank fraud
by writing three or more nonsufficient fund (NSF) checks to Bank of
America, while many others abused the travel card program by failing to

pay Bank of America charges and/ or using the card for inappropriate
transactions such as for prostitution and gambling. However, because Navy
management was often not aware of these activities, disciplinary actions
were not consistently taken against these cardholders. We also found a
significant relationship between travel card fraud, abuse, and
delinquencies and individuals with substantial credit history problems.
For example, many cardholders whose accounts were charged off or put in
salary offset 4 had bankruptcies and accounts placed in collection prior
to receiving the card. The Navy*s practice of authorizing a travel card to
be issued to virtually anyone who asked for it compounded an already

existing problem by giving those with a history of bad financial 4 This
program, similar to a garnishment, allows DOD to collect amounts owed by
payroll deduction.

Page 3 GAO- 03- 148T management additional credit. While we found that
Navy management had taken some corrective actions to address delinquencies
and misuse,

additional preventive solutions are necessary if Navy is to effectively
address these issues. Most Navy cardholders properly used their travel
cards and paid amounts owed to Bank of America in a timely manner.
However, as shown in figure 1, the Navy*s average delinquency rate was
nearly identical to the Army*s, which, as we have previously testified, is
the highest delinquency rate in the government. The Navy*s quarterly
delinquency rate fluctuated from 10 to 18 percent, and on average was
about 6 percentage points higher than that of federal civilian agencies.
As of March 31, 2002, over 8,400 Navy cardholders had $6 million in
delinquent debt. Travel Card Delinquencies and

Charge- offs

Page 4 GAO- 03- 148T Figure 1: Navy/ Marine Corps v. Army, Other DOD, and
Non- DOD Civilian Agencies* Travel Card Delinquency Rates for the 2 Year
Period Ending March 31, 2002

Source: Bank of America and General Services Administration data. We also
found substantial charge- offs of Navy travel card accounts. Since the
inception of the travel charge card task order between DOD and Bank of
America on November 30, 1998, Bank of America has charged off over 13,800
Navy travel card accounts with $16.6 million of bad debt. Recent

task order modifications allow Bank of America to institute a salary
offset against DOD military personnel members whose travel card accounts
were previously charged off or are more than 120 days past due. As a
result, as of July 31, 2002, Bank of America had recovered $5.2 million in
Navy

government travel card bad debts. The high level of delinquencies and
charge- offs have also cost the Navy millions of dollars in lost rebates,
higher fees, and substantial resources spent pursuing and collecting past
due accounts. For example, we estimate that in fiscal year 2001,
delinquencies and charge- offs cost the Navy $1.5 million in lost rebates,

Page 5 GAO- 03- 148T and will cost about $1.3 million in increased
automated teller machines (ATM) fees 5 annually.

As shown in figure 2, the travel cardholder*s rank or grade 6 (and
associated pay) is a strong predictor of delinquency problems. We found
that the Navy*s overall delinquency and charge- off problems are primarily
associated with young, low- and mid- level enlisted military personnel
with basic pay levels ranging from $12,000 to $27,000.

Figure 2: Navy Delinquent and Total Outstanding Travel Card Balances for
Military and Civilian Employees as of September 30, 2001

Source: GAO analysis of Bank of America data. According to Navy officials,
low- and mid- level enlisted military personnel comprise the bulk of the
operational forces and are generally young, often deployed, and have
limited financial experience and resources. It is therefore not surprising
to see a higher level of outstanding balances and delinquent amounts due
for these personnel. Figure 2 also shows that, in

5 For each cash withdrawal at ATMs, cardholders are charged a fee of a set
amount or percentage of the amount of the withdrawal. 6 A more detailed
explanation of each of these grades along with their associated basic pay
rates is provided in appendix II.

Page 6 GAO- 03- 148T contrast, the delinquency rate for civilians employed
by the Navy is substantially lower. As of September 30, 2001, the
delinquency rate of low- and mid- level enlisted personnel was almost 22
percent, compared to a Navy civilian rate of slightly more than 5 percent.
This rate is comparable

to the non- DOD civilian delinquency rate of 5 percent. The case study
sites we audited exhibited this pattern. For example, at Camp Lejeune, a
principal training location for Marine air and ground forces, over one-
half of the cardholders are enlisted personnel. Representative of the
Navy*s higher delinquency rate, Camp Lejeune*s quarterly delinquency rate
for the 18- month period ending March 31, 2002, averaged over 15 percent
and was close to 10 percent as of March 31, 2002. In contrast, at Puget
Sound Navy Shipyard, where the mission is to repair and modernize Navy
ships, civilian personnel earning more than $38,000 a year made up 84
percent of total government travel card holders and accounted for 86
percent of total fiscal year 2001 travel card transactions. This site*s
delinquency rate had declined to below 5 percent as of March 31, 2002.

In combination with these demographic factors, a weak overall control
environment, flawed policies and procedures, and a lack of adherence to
valid policies and procedures contributed to the significant delinquencies
and charge- offs. Further discussion of these breakdowns is provided later
in this testimony.

Page 7 GAO- 03- 148T Our work identified numerous instances of potentially
fraudulent 7 and abusive activity 8 related to the travel card. During
fiscal year 2001 and the

first 6 months of fiscal year 2002, over 5,100 Navy employees wrote at
least one nonsufficient fund (NSF), or *bounced* check, to Bank of America
as payment for their travel card bills. Of these, over 250 9 wrote 3 or
more NSF checks, a potentially fraudulent act. 10 Appendix III provides a
table summarizing 10 examples, along with more detailed descriptions of
selected cases in which cardholders might have committed fraud by

writing 3 or more NSF checks to Bank of America. These 10 accounts were
subsequently charged- off 11 or placed in salary offset or voluntary fixed
payment agreements with Bank of America. We also found that the government
cards were used for numerous abusive transactions that were clearly not
for the purpose of government travel. As discussed further in appendix I,
we used data mining tools to identify transactions we believed to be
potentially fraudulent or abusive based

upon the nature, amount, merchant, and other identifying characteristics
of the transaction. Through this procedure, we identified thousands of
suspect transactions. Table 1 illustrates a few of the types of abusive
transactions and the amounts charged to the government travel card in
fiscal year 2001 and the first 6 months of fiscal year 2002 that were not
for valid government travel. Government travel cards were used for
purchases in categories as diverse as legalized prostitution services,
jewelry, 7 We considered any scheme or pattern of activity related to the
use of the travel card, in

apparent violation of federal or state criminal code, as a potentially
fraudulent activity. 8 We considered abusive travel card activity to
include (1) personal use of the card* any use other than for official
government travel* regardless of whether the cardholder paid the bill and
(2) cases in which cardholders were reimbursed for official travel and
then did not

pay Bank of America, thus benefiting personally. In both types of
activities in which the cardholder did not pay the bill, we considered
abuses to include those situations in which cardholders* accounts were
eventually charged off by Bank of America, or referred to salary offset or
a fixed pay agreement. Some of the travel card activity that we
categorized as abusive would be potentially fraudulent if it can be
established that the cardholder violated any element of federal or state
criminal code.

9 Of the over 250 cardholders who wrote 3 or more NSF checks, 100 had
accounts that were eventually charged off or put in salary offset. 10
Knowingly writing checks against closed accounts or writing three or more
NSF checks is potential bank fraud under 18 U. S. C. 1344. Further, it is
a violation of the Uniform Code of Military Justice article 123a when a
soldier makes, draws, or utters (verbally authorizes) a check, draft, or
order without sufficient funds and does so with intent to defraud. 11 Some
cardholders whose accounts were charged off have since been referred to
the

salary offset program or entered into fixed payment agreement with Bank of
America. Potentially Fraudulent and Abusive Travel

Card Activity

Page 8 GAO- 03- 148T gentlemen*s clubs, gambling, cruises, and tickets to
sporting and other events. The number of instances and amounts shown
includes both cases

in which the cardholders paid the bills and instances in which they did
not pay the bills.

Table 1: Examples of Navy- wide Abusive Travel Card Activity, Fiscal Year
2001 through March 31, 2002

Category Examples of vendors Number of transactions Dollar

amount

Legalized brothels James Fine Dining, Chicken Ranch 80 $13,250 Jewelry Kay
Jewelers, Zales Jewelers 199 20,800 Gentlemen*s clubs Spearmint Rhino, Mr.
Magoo*s Lounge, Cheetah*s Lounge 247 28,700

Gambling, including Internet www. proccy2, Seinpost Holding, GCA (cash
advance) 80 34,250 Cruises Carnival, Disney, Norwegian,

Princess 72 38,300 Entertainment (sporting events, theatre, concerts) NY
Yankees, LA Lakers, Atlanta

Braves, Phantom of the Opera, other Ticketmaster purchases 502 71,400
Source: GAO analysis of Bank of America data. We found that 50 cardholders
used their government travel card to

purchase over $13,000 in prostitution services from two legalized brothels
in Nevada. Charges were processed by these establishments* merchant bank,
and authorized by Bank of America, in part because a control afforded by
the merchant category code (MCC), 12 which identifies the nature of the
transactions and is used by DOD and other agencies to block improper
purchases, was circumvented by the establishments. In these

cases, the transactions were coded to appear as restaurant and dining or
bar charges. For example, the merchant James Fine Dining, which actually
operates as a brothel known as Salt Wells Villa, characterizes its
services as restaurant charges, which are allowable and not blocked by the
MCC

control. According to one assistant manager at the establishment, this is
done to protect the confidentiality of its customers. Additionally, the
account balances for 11 of the 50 cardholders purchasing services from
these establishments were later charged off or put into salary offset. For

12 MCCs are established by the banking industry for commercial and
consumer reporting purposes. Currently, about 800 category codes are used
to identify the nature of the merchants* businesses or trades, such as
airlines, hotels, ATMs, jewelry stores, casinos, gentlemen*s clubs, and
theatres.

Page 9 GAO- 03- 148T example, one sailor, an E- 2 seaman apprentice,
charged over $2,200 at this brothel during a 30- day period. The sailor
separated from the Navy, and his account balance of more than $3,600 was
eventually charged off.

We also found instances of abusive travel card activity where Navy
cardholders used their cards at establishments such as gentlemen*s clubs,
which provide adult entertainment. Further, these clubs were used to
convert the travel card to cash by supplying cardholders with actual cash
or *club cash* 13 for a 10 percent fee. For example, we found that an E- 5

second class petty officer circumvented ATM cash withdrawal limits 14 by
charging, in a single transaction, $2,420 to the government travel card
and receiving $2,200 in cash. Subsequently, the club received payment from
Bank of America for a $2,420 restaurant charge. Another cardholder, an E7

chief petty officer, obtained more than $7,000 in cash from these
establishments. For fiscal year 2001 and through March 2002, 137 Navy
cardholders made charges totaling almost $29,000 at these establishments.
These transactions represented abusive use of the travel cards that were
clearly unrelated to official government travel. There should be no
misunderstanding by Navy personnel that personal use of the card is not
permitted. In fact, the standard government travel card used by most Navy
personnel is clearly marked *For Official Government Travel Only* on the

face of the card. Additionally, upon receipt of their travel cards, all
Navy cardholders are required to sign a statement of understanding that
the card is to be used only for authorized official government travel
expenses.

However, as part of our statistical sampling results at the three sites we
audited, we estimated that personal use of the government travel card
ranged from almost 7 percent of fiscal year 2001 transactions at one site
to over 26 percent at another site. 15 As shown in appendix V, cardholders
who

13 Club cash is used to tip dancers, waitresses, and bartenders, but
cannot be exchanged for currency. 14 Typically, the ATM limit for a 1-
month cycle is set at $500 for a standard card and $200 for a restricted
card. 15 We considered personal use to include (1) any transaction charged
to the government travel card that was not supported by a valid travel
order and (2) any transaction for which

the Navy was unable to provide supporting documentation. The following are
the personal use estimates for the 3 case study locations: Camp Lejeune,
U. S. Marine Forces Atlantic, 26.6 percent; Patuxent River Air Station,
Air Systems Command, 10. 8 percent; and Puget Sound Naval Shipyard, Sea
Systems Command, 6. 6 percent.

Page 10 GAO- 03- 148T abused the card but paid the bill also used the
government travel cards for the same transaction types discussed in table
1.

Personal use of the card also increases the risk of charge- offs related
to abusive purchases, which are costly to the government and the taxpayer.
Our work found that charged- off accounts included both those of (1)
cardholders who were reimbursed by the Navy for official travel expenses
but failed to pay Bank of America for the related charges, thus pocketing
the reimbursement, and (2) those who used their travel cards for personal
purchases for which they did not pay Bank of America. Appendix IV provides
a summary table and supporting narrative describing examples of abusive
travel card activity where the account was charged off or placed

in salary offset or voluntary fixed payment agreements with Bank of
America.

Furthermore, as detailed by the 10 examples in appendix V, we also found
instances in which cardholders used their travel cards for personal
purposes, but paid their travel card bills when they became due. For
example, an E- 5 second class petty officer reservist, whose civilian job
was with the U. S. Postal Service, admitted making phony charges of over
$7,200 to operate his own limousine service. In these transactions, the
sailor used the travel card to pay for bogus services from his own
limousine company during the first few days of the card statement cycle.
By the second day after the charges were posted, Bank of America would
have deposited funds* available for the business* immediate use* into the
limousine business* bank account. Then, just before the travel card bill
became due, the limousine business credited the charge back to the

sailor*s government travel card and repaid the funds to Bank of America.
This series of transactions had no impact on the travel card balance, yet
allowed the business to have an interest- free loan for a period. This
pattern was continued over several account cycles. Navy officials were
unaware of these transactions until we brought them to their attention and
are currently considering what, if any, action should be taken against the

cardholder.

Page 11 GAO- 03- 148T We did not always find documented evidence of
disciplinary actions taken by Navy commanders and supervisors against
cardholders who wrote NSF checks or had their accounts charged off or
placed in salary offset. Of the

57 cardholders fitting these categories that we selected through data
mining, we did not find any documented evidence that 37 had been
disciplined. For example, a lieutenant commander (O- 4) with the Naval Air
Reserve used his travel card for personal purchases in California and
frequent personal trips to Mexico. The individual did not pay his account
when due and was placed in salary offset in October 2001. Although the
agency program coordinator (APC) responsible for program oversight had
apprised management of this officer*s abuse of the travel card, and had

initiated actions to take away the cardholder*s security clearance,
management had not taken any administrative action against this
cardholder. In addition, of the 10 individuals who abused the card but
paid their bills, only 1 was disciplined. Appendixes III, IV, and V
provide further details of the extent of disciplinary actions taken
against some of the cardholders we examined.

In addition, we found that 27 of these same 57 travel cardholders we
examined whose accounts were charged off or placed in salary offset as of
March 31, 2002, still had active secret or top- secret security clearances
in August 2002. Some of the Navy personnel holding security clearances who
have had difficulty paying their travel card bills may present security
risks to the Navy. DOD rules provide that an individual*s finances are one
of the factors to be considered in whether an individual should be
entrusted with a security clearance. However, we found that Navy security
officials were unaware of these financial issues and consequently could
not consider

their potential effect on whether these individuals should continue to
receive a security clearance. We have referred cases identified from our
audit to the U. S. Navy Central Adjudication Facility (commonly referred
to as Navy CAF) for its continued investigation. For fiscal year 2001, we
identified significant breakdowns in key internal controls over
individually billed travel cards. The breakdowns stemmed from a weak
overall control environment, a lack of focus on oversight and management
of the travel card program, and a lack of adherence to valid policies and
procedures. These breakdowns contributed to the significant delinquencies
and charge- offs of Navy employee account balances and

potentially fraudulent and abusive activity related to the travel card. In
contrast, one Navy unit we audited with a low average delinquency rate (4
percent) attributed its relative success to constant monitoring of
delinquencies and to some monitoring of inappropriate travel card use.
Abusive Travel Card

Activity Not Consistently Linked to Disciplinary Action and Security
Clearances

Key Internal Control Breakdowns

Page 12 GAO- 03- 148T We found that in fiscal year 2001, management at the
three case study locations we audited focused primarily on reducing
delinquencies. In general, management placed little emphasis on controls
designed to

prevent, or provide for early detection of, travel card misuse. In
addition, we identified two key overall control environment weaknesses:
(1) the lack of clear, sufficiently detailed Navy travel card policies and
procedures and (2) limited internal travel card audit and program
oversight. First, the units we audited used DOD*s travel management
regulations ( DOD Financial Management Regulation, volume 9, chapter 3) as
the primary

source of policy guidance for management of Navy*s travel card program. In
many areas, the existing guidance was not sufficiently detailed to provide
clear, consistent travel management procedures to be followed. Second, as
recognized in the DOD Inspector General*s March 2002 summary report 16 on
the DOD travel card program, *[ b] ecause of its dollar magnitude and
mandated use, the DOD travel card program requires continued management
emphasis, oversight, and improvement by the

DOD. Independent internal audits should continue to be an integral
component of management controls.* However, no internal review report had
been issued since fiscal year 1999 concerning the Navy*s travel card
program. We found that this overall weak control environment contributed
to design flaws and weaknesses in a number of management control areas
needed

for an effective travel card program. For example, many problems we
identified were the result of ineffective controls over issuance of travel
cards. Although DOD*s policy allows an exemption from the requirement to
use travel cards for certain groups or individuals with poor credit
histories, we found that the Navy*s practice was to facilitate Bank of
America issuing travel cards* with few credit restrictions* to all
applicants regardless of whether they have a history of credit problems.

For the cases we reviewed, we found a significant correlation between
travel card fraud, abuse, and delinquencies and individuals with
substantial credit history problems. The prior and current credit problems
we identified for Navy travel card holders included charged- off credit
cards, bankruptcies, judgments, accounts in collections, and repeated use

of NSF checks. 16 Department of Defense Office of Inspector General ,
Acquisition: Summary of DOD Travel Card Program Audit Coverage, D- 2002-
065 (Washington, D. C.: Mar. 18, 2002).

Page 13 GAO- 03- 148T Also, a key element of internal control, which, if
effectively implemented, may reduce the risk and occurrence of delinquent
accounts, is frequent account monitoring by the APC. However, some APCs,
who have the key

responsibility for managing and overseeing travel card holders*
activities, were essentially set up to fail in their duties. Some were
assigned APC responsibilities as collateral duties and given little time
to perform these duties, while other full- time APCs had responsibilities
for a large number of cardholders. When an APC is unable to focus on
managing travel card usage because of the high number of cardholders or
the extent of other duties, the rate of delinquency and potentially
abusive and fraudulent transactions is adversely affected. For example, at
Camp Lejeune, where the delinquency rate was over 15 percent, the six APCs
we interviewed

were given the role as *other duty as assigned,* with most spending less
than 20 percent of their available time to perform their APC
responsibilities.

In addition, a lack of management focus and priority on ensuring proper
training for APCs resulted in some APCs being unfamiliar with the
capabilities of Bank of America*s credit card database that would help
them to manage and oversee the travel card program. For example, one APC
did not know that she could access reports that would help identify

credit card misuse and thus enable the responsible supervisors or
commanders to counsel cardholders before they became delinquency problems.
With the large span of control, minimal time allotted to perform this
duty, and lack of adequate training, we found that APCs generally were
ineffective in carrying out their key travel card program management and
oversight responsibilities.

In contrast, a Navy unit we visited* Patuxent River* showed that constant
monitoring of delinquency by a knowledgeable APC contributed to a lower
delinquency rate. The APC at this unit had responsibility for
approximately 1, 200 to 1,500 active travelers monthly, but APC duties
were her only responsibility. The APC informed us that she constantly
monitored the government travel card program. For example, she

reviewed delinquency reports several times a month to identify and
promptly alert cardholders and supervisors about the status of delinquent
accounts. She also told us that less frequently, but still on a monthly
basis,

she monitored transactions in the Bank of America database for improper
and abusive uses of the card and sent out notices to the cardholders and
the cardholders* supervisors if such transactions were identified. She
also

Page 14 GAO- 03- 148T emphasized the use of the split disbursement payment
process 17 (split disbursements) whenever possible. Consequently, the
delinquency rate for this unit was consistently lower than the Navy- wide
rate and the civilian

agency rate. Another area of weakness in internal controls relates to the
process over the cancellation and/ or deactivation of cards in case of
death, retirement, or separation from the service. These ineffective
controls allowed continued use of the government travel card for personal
purposes, which in some instances led to charge- offs, thereby
contributing to increased

costs to the government. For example,

 In one Navy unit, a cardholder died in October 1999. However,
ineffective controls over the notification process resulted in the APC not
being aware that this had occurred. Therefore, the APC did not take
actions to cancel this individual*s government travel card account.
Consequently, in October 2000, when the old card was about to expire, Bank
of America mailed a

new card to the address of record. When the card was returned with a
forwarding address, the bank remailed the card and the personal
identification number used to activate the card to the new address without

performing other verification procedures. The card was activated in
midDecember 2000, and within a month, 81 fraudulent transactions for
hotel, food, and gas totaling about $3,600 were charged to the card. In
January

2001, in the course of her monthly travel card monitoring, the APC noticed
suspicious charges in the vicinity of the cardholder*s post- of- duty. The
APC took immediate action to deactivate the card, thus preventing
additional charges from occurring. Upon learning of the cardholder*s death
from further discussion with the cardholder*s unit, the APC immediately
reported the case to a Bank of America fraud investigator. Investigations
revealed that a family member of the cardholder might have made these
charges. No payment was ever made on this account, and the

entire amount was subsequently charged off. We referred this case to the
U. S. Secret Service Credit Card Task Force for further investigation and
potential prosecution.

 A chief warrant officer (W- 3) at Naval Air Systems Command Atlantic
repeatedly used his travel card after his retirement on December 1, 2000.
The cardholder currently works for a private company. The cardholder used
the government travel card, since his retirement, to make charges

17 Split disbursement is a payment method by which cardholders elect to
have all or part of their reimbursements sent directly to Bank of America.

Page 15 GAO- 03- 148T totaling $44,000 for hotels, car rentals,
restaurants, and airline tickets. In a number of instances, the cardholder
was able to obtain the government

rate* which can be substantially lower than the commercial rate* for
lodging in San Diego, Philadelphia, and Cincinnati. Because the Navy does
not routinely monitor cardholders* transaction reports for abusive
activity

and because this particular account was always paid in full, they did not
detect the abusive activity. Bank of America data showed that the
cardholder*s account was still open in early September 2002 and thus
available for further charges.

 In another instance, a mechanic trainee at the Puget Sound Naval
Shipyard was convicted of a felony conviction for illegal possession of a
firearm in October 2000 and placed on indefinite suspension by his
employer in

November 2000. However, neither the security office, which took action
against the employee, nor the office where the individual worked notified
the APC to cancel or deactivate the cardholder*s government travel card
account. Following his suspension, the cardholder used the government
travel card to make numerous cash withdrawals and gas purchases

totaling almost $4,700. The APC was not aware of these abusive charges
until the monthly delinquency review identified the account as being
delinquent. The account balance of $1,600 was subsequently charged off in
January 2002. Although security officers at the Puget Sound Naval Shipyard
referred the case to Navy CAF in October 2000, our work

indicated as of August 2002, the suspended employee continued to maintain
a secret clearance, despite the account charge- off and felony conviction.

Table 2 summarizes our statistical tests of four key control activities
related to basic travel transaction and voucher processing at three Navy
locations. We concluded that the control was effective if the projected
failure rate was from 0 to 5 percent. If the projected failure rate was
from 6 to 10 percent, we concluded that the control was partially
effective. We considered controls with projected failure rates greater
than 10 percent to be ineffective.

Page 16 GAO- 03- 148T Table 2: Results of Testing of Key Internal Controls
Percentage of failure Navy unit Travel orders are

approved prior to travel Travel voucher reimbursements are accurate

Travel vouchers are submitted within

5 days of travel completion

Travel vouchers are paid within 30 days of submission

Camp Lejeune, U. S. Marine Forces Atlantic 11 33 11 3 Patuxent River Air
Station, Air Systems Command 3 35 36 1 Puget Sound Naval Shipyard, Sea
Systems Command 49 a 40 34 1

Note: The numbers in the table represent point estimate percentages for
the number of failures in the population based on our sampling tests. The
confidence intervals for our sampling estimates are presented in appendix
I of this testimony. a The high failure rate is attributable to
management*s failure to maintain copies of the original signed travel
orders, which were sent to the travelers. Source: GAO analysis. Although
we found significant failure rates at all three case study sites for

the requirement that vouchers be filed within 5 working days of travel
completion, this did not have an impact on these units* delinquency rates.
However, we found substantial errors in travel voucher processing that
resulted in both overpayment and underpayment of the amount that
cardholders should have received for their official travel expenses. At
times, these errors were substantial in comparison with the total voucher

amounts. For example, we found data entry errors that resulted, in one
case, in an overpayment of more than $1,700 to the traveler. In another
case, failure to carefully scrutinize supporting documentation resulted in
an overpayment to a traveler of more than $1,000 for cell phone calls, for

which the traveler did not submit detailed documentation to support what
were claimed to be calls made for business purposes. As a result of our
work, the Navy unit has taken actions to recover these overpayments.

DOD has taken a number of actions focused on reducing delinquencies. For
example, the Department of the Navy had established a goal of a
delinquency rate of no more than 4 percent. 18 Beginning in November 2001,

18 For this delinquency rate calculation, the Navy is using the number of
delinquent accounts compared to the total number of active accounts. The
dollar amount method we used to calculate delinquency rates is the
industry standard and was also used by the DOD Charge Card Task Force.
Corrective Actions

Page 17 GAO- 03- 148T DOD implemented a system of wage and retirement
payment offset for many employees. It also began encouraging the use of
split disbursements* a payment process by which cardholders elect to have
all or part of their reimbursements sent directly to Bank of America. This
payment method is a standard practice of many private sector employers.

Although split disbursements have the potential to significantly reduce
delinquencies, this payment process is strictly voluntary at DOD.
According to Bank of America, split disbursements accounted for 30 percent
of total payments made by Navy employees in June 2002. This rate
represented a large increase over fiscal year 2001, when only 16 percent
of

Navy payments were made through split disbursements. As a result of these
actions, the Navy experienced a significant drop in charged- off accounts
in the first half of fiscal year 2002. The Navy has also initiated actions
to improve the management of travel card usage. The Navy has a three-
pronged approach to address travel card issues: (1) provide clear
procedural guidance to APCs and travelers, available on the Internet, (2)
provide regular training to APCs, and (3) enforce proper use and oversight
of the travel card through data mining to identify problem areas and
abuses. Further, to reduce the risk of card misuse, the Navy has also
begun to deactivate cards while travelers are not on travel status and
close a number of inactive cards, and plans to close

inactive cards semi- annually to eliminate credit risk exposure. The Navy
is also pursuing the use of *pre- funded* debit or stored value cards for
highrisk travelers* funds would be available on the cards when travel
orders were issued in an amount authorized on the order. Further, the DOD
Comptroller created a DOD Charge Card Task Force to address management
issues related to DOD*s purchase and travel card

programs. We met with the task force in June 2002 and provided our
perspectives on both programs. The task force issued its final report on
June 27, 2002. To date, many of the actions that DOD has taken primarily
address the symptoms rather than the underlying causes of the problems
with the program. Specifically, actions to date have focused on dealing

with accounts that are seriously delinquent, which are *back- end* or
detective controls rather than preventive controls. To effectively reform
the travel program, DOD and the Navy will need to work to prevent
potentially fraudulent and abusive activity and severe credit problems
with the travel card. We are encouraged that the DOD Comptroller recently

took action to deactivate the travel cards of all cardholders who have not
been on official government travel within the last 6 months. However,
additional preventive solutions are necessary if DOD is to effectively
address these issues.

Page 18 GAO- 03- 148T To that end, we will be issuing a related report in
this area with specific recommendations, including a number of preventive
actions that, if effectively implemented, should substantially reduce
delinquencies and potentially fraudulent and abusive activity related to
Navy travel cards.

For example, we plan to include recommendations that will address actions
needed in the areas of exempting individuals with histories of financial
problems from the requirement to use a travel card; providing sufficient
infrastructure to effectively manage and provide day- to- day monitoring
of travel card activity related to the program; deactivating

cards when employees are not on official travel; taking appropriate
disciplinary action against employees who commit fraud or abuse of the
travel card; ensuring that information on travel card fraud or abuse of
cardholders with secret or top- secret security clearances is provided to
appropriate security officials for consideration in whether such
clearances should be suspended or revoked; and moving towards mandating
use of the split disbursement payment process. The defense authorization
bill for

fiscal year 2003 passed by the Senate reflected a move in this direction.
This bill would change the voluntary use of split disbursements by
authorizing the Secretary of Defense to require that any part of an
employee*s travel allowance be disbursed directly to the employee*s travel
card issuer for payment of official travel expenses. The defense
authorization bill for fiscal year 2003 passed by the House does not
contain comparable authority. As of September 12, 2002, the bill (H. R.
4546) was in conference. Mr. Chairman, Members of the Subcommittee, and
Senator Grassley, this concludes my prepared statement. I would be pleased
to respond to any

questions that you may have. For further information regarding this
testimony, please contact Gregory D. Kutz at (202) 512- 9505 or kutzg@
gao. gov or John J. Ryan at (202) 5129587 or ryanj@ gao. gov. Contact and
Acknowledgments

Page 19 GAO- 03- 148T We used as our primary criteria applicable laws and
regulations, including the Travel and Transportation Reform Act of 1998, 1
the General Services

Administration*s Federal Travel Regulation, 2 and the DOD Financial
Management Regulations, Volume 9, Travel Policies and Procedures. We also
used as criteria our Standards for Internal Control in the Federal
Government 3 and our Guide to Evaluating and Testing Controls Over
Sensitive Payments. 4 To assess the management control environment, we
applied the fundamental concepts and standards in our internal control
standards to the practices followed by management at our three case study
locations.

To assess the magnitude and impact of delinquent and charged- off
accounts, we compared the Navy*s delinquency and charge- off rates to
those of other DOD services and agencies and federal civilian agencies. We
also analyzed the trends in the delinquency and charge- off data from the
third quarter of fiscal year 2000 through the first half of fiscal year
2002. In addition, we obtained and analyzed Bank of America data to
determine the extent to which Navy travel card holders wrote NSF checks to
pay their travel card bills. We also obtained documented evidence of
disciplinary action against cardholders with accounts that were in charge-
off or salary offset status or had NSF checks written in payment of those
accounts. We accepted hard copy file information and verbal confirmation
by independent judge advocate general officials as documented evidence of
disciplinary action.

1 Travel and Transportation Reform Act of 1998 (Public Law 105- 264, Oct.
19, 1998) includes requirements that federal employees use federal travel
charge cards for all payments of expenses of official government travel
and that employees be reimbursed within 30 days of submitting proper
travel vouchers. The act also allows for the offset of pay for employees
with undisputed travel card charge delinquencies in an amount up to 15
percent of the amount of disposable pay of the employee for a pay period.
2 Federal Travel Regulation, 41 Code of Federal Regulations, chapters 300-
304, issued by the Administrator of General Services, governs travel and
transportation allowances and relocation allowances for federal civilian
employees. 3 Standards for Internal Control in Federal Government (GAO/
AIMD- 00- 21. 3. 1) was prepared to fulfill our statutory requirement
under 31 U. S. C. 3512 (c), (d), the Federal

Managers* Financial Integrity Act, to issue standards that provide the
overall framework for establishing and maintaining internal control and
for identifying and addressing major performance and management challenges
and areas at greatest risk of fraud, waste, abuse, and mismanagement. 4
Guide to Evaluating and Testing Controls Over Sensitive Payments (GAO/
AFMD- 8.1.2) provides a framework for evaluating and testing the
effectiveness of internal controls that have been established in various
sensitive payment areas. Appendix I: Scope and Methodology

Page 20 GAO- 03- 148T We also used data mining to identify Navy
individually billed travel card transactions for audit. Our data mining
procedures covered the universe of individually billed Navy travel card
activity during fiscal year 2001 and the

first 6 months of fiscal year 2002, and identified transactions that we
believed were potentially fraudulent or abusive. However, our work was not
designed to identify, and we did not determine, the extent of any
potentially fraudulent or abusive activity related to the travel card. To
assess the overall control environment for the travel card program at the
Department of the Navy, we obtained an understanding of the travel

process, including travel card management and oversight, by interviewing
officials from the Office of the Undersecretary of Defense (Comptroller),
Department of the Navy, Defense Finance and Accounting Service (DFAS),
Bank of America, and the General Services Administration, and by

reviewing applicable policies and procedures and program guidance they
provided. We visited three Navy units to *walk through* the travel
process, including the management of travel card usage and delinquency,
and the preparation, examination, and approval of travel vouchers for
payment. We also assessed actions taken to reduce the severity of travel
card delinquencies and charge- offs. Further, we contacted one of the
three largest U. S. credit bureaus to obtain credit history data and
information on how credit scoring models are developed and used by the
credit industry for credit reporting.

To test the implementation of key controls over individually billed Navy
travel card transactions processed through the travel system* including
the travel order, travel voucher, and payment processes* we obtained and
used the database of fiscal year 2001 Navy travel card transactions to
review random samples of transactions at three Navy locations. Because our
objective was to test controls over travel card expenses, we excluded
credits and miscellaneous debits (such as fees) from the population of
transactions used to select a random sample of travel card transactions to
audit at each of the three Navy case study units. Each sampled transaction

was subsequently weighted in the analysis to account statistically for all
charged transactions at each of the three units, including those that were
not selected.

We selected three Navy locations for testing controls over travel card
activity based on the relative amount of travel card activity at the three
Navy commands and at the units under these commands, the number and

percentage of delinquent accounts, and the number and percentage of
charged- off accounts. Each of the units within the commands was selected
because of the relative size of the unit within the respective command.

Page 21 GAO- 03- 148T Table 3 presents the sites selected and the universe
of fiscal year 2001 transactions at each location. 5 Table 3: Universe of
Fiscal Year 2001 Travel Transactions at Navy Units Tested

Navy unit tested Number of fiscal year 2001 travel transactions a Dollar
value of fiscal year 2001 travel transactions a Camp Lejeune, U. S. Marine
Forces Atlantic 14,209 $ 1,747,316

Patuxent River Air Station, Air Systems Command 179,547 20,335,864 Puget
Sound Naval Shipyard, Sea Systems Command 80,583 11,025,669

a Transactions represent charges for sales and cash advances and exclude
credits and fees. Source: GAO analysis based on Bank of America data. We
performed tests on statistical samples of travel card transactions at each
of the three case study sites to assess whether the system of internal
control over the transactions was effective, as well as to provide an
estimate, by unit, of the percentage of transactions that were not for
official government travel. For each transaction in our statistical
sample, we assessed whether (1) there was an approved travel order prior
to the trip, (2) the travel voucher payment was accurate, (3) the travel
voucher was submitted within 5 days of the completion of travel, and (4)
the travel

voucher was paid within 30 days of the submission of an approved travel
voucher. We considered transactions not related to authorized travel to be
abuse and incurred for personal purposes. The results of the samples of
these control attributes, as well as the estimate for personal use* or

abuse* related to travel card activity, can be projected to the population
5 The universes from which we selected our samples included some
transactions that were not supported by travel orders or vouchers, such as
personal charges made by a cardholder. We excluded such transactions from
our selections used to test travel order, voucher, and payment process
controls. However, we included such transactions to project the percentage
of personal use transactions.

Page 22 GAO- 03- 148T of transactions at the respective test case study
site only, 6 not to the population of travel card transactions for all
Navy cardholders. Table 4 shows the results of our test of the key control
related to the

authorization of travel (approved travel orders were prepared prior to
dates of travel).

Table 4: Estimate of Fiscal Year 2001 Transactions That Failed Control
Tests for Approved Travel Approved travel order Navy unit tested

Number of failed Transactions

Estimated failure rate (95% confidence

interval)

Camp Lejeune 11 of 96 11.5%

(5.9%, 19.6%) Patuxent River Air Station 3 of 96 3.1%

(0.6%, 8.9%) Puget Sound Naval Shipyard 47 of 96

49.0% (38.6%, 59.4)%

Source: GAO analysis Table 5 shows the results of our test for
effectiveness of controls in place over the accuracy of travel voucher
payments.

6 At Camp Lejeune, we found that 38 of 143 transactions appeared to be
personal (projecting to an estimated 26. 6 percent with a 95 percent
confidence interval from 19. 5 percent to 34. 6 percent). At Patuxent
River Air Station, we found that 13 of 120

transactions appeared to be personal (projecting to an estimated 10.8
percent with a 95 percent confidence interval from 5.9 percent to 17.8
percent). At Puget Sound Naval Shipyard, we found that 8 of 121
transactions appeared to be personal (projecting to an estimated 6.6
percent with a 95 percent confidence interval from 2.9 percent to 12. 6
percent).

Page 23 GAO- 03- 148T Table 5: Estimate of Fiscal Year 2001 Transactions
that Failed Control Tests for Accurate Travel Voucher Payments Effective
voucher review and accurate

reimbursement to traveler Navy unit tested Number of failed

transactions Estimated

failure rate (95% confidence interval)

Camp Lejeune 14 of 43 32.6%

(19.1%, 48.5%) Patuxent River Air Station 34 of 96

35.4% (25.9%, 45.8%)

Puget Sound Naval Shipyard 38 of 96 39.6%

(29.8%, 50.1%) Source: GAO analysis Table 6 shows the results of our tests
of two key controls related to timely processing of claims for
reimbursement of expenses related to

government travel* timely submission of the travel voucher by the employee
and timely approval and payment processing.

Table 6: Estimate of Fiscal Year 2001 Transactions that Failed Control
Tests for Timely Submission and Processing of Travel Vouchers

Timely voucher submission by employee (5- day rule)

Timely reimbursement to the traveler (30- day rule) Navy unit tested
Number of failed

transactions Estimated

failure rate (95% confidence interval)

Number of failed transactions

Estimated failure rate (95% confidence

interval)

Camp Lejeune 11 of 96 11.5%

(5.9%, 19.6%) 3 of 96 3.1% (0.6%, 8.9%)

Patuxent River Air Station 35 of 96 36.5%

(26.9%, 46.9%) 1 of 96 1.0% (0.03%, 5.7%)

Puget Sound Naval Shipyard 33 of 96 34.4%

(25.0%, 44.8%) 1 of 96 1.0% (0.03%, 5.7%)

Source: GAO analysis To determine if cardholders were reimbursed within 30
days, we used payment dates provided by DFAS. We did not independently
validate the accuracy of these reported payment dates.

We briefed DOD managers, Navy managers, including the Assistant Secretary
of the Navy (Financial Management and Comptroller) officials, unit
commanders, and APCs; and Bank of America officials on the details

Page 24 GAO- 03- 148T of our audit, including our findings and their
implications. We incorporated their comments where appropriate. We did not
audit the general or application controls associated with the electronic
data

processing of Navy travel card transactions. We conducted our audit work
from January 2002 through September 2002 in accordance with U. S.
generally accepted government auditing standards, and we performed our
investigative work in accordance with standards prescribed by the
President*s Council on Integrity and Efficiency. Following this testimony,
we plan to issue a report, which will include recommendations to DOD and
the Navy for improving internal controls over travel card activity.

Page 25 GAO- 03- 148T Tables 7, 8, and 9 show the grade, rank (where
relevant), and the associated basic pay rates for fiscal year 2001 for the
Navy*s and Marine Corp*s military personnel and civilian personnel. Table
7: Navy Military Grades, Ranks, and Associated Basic Pay Rates for Fiscal
Year 2001

Military grade Military rank Fiscal year 2001 pay Enlisted personnel

E- 1 to E- 3 Seaman recruit to seaman $11,976 to $14,973 E- 4 to E- 6
Petty officer 3rd class to 1st class $17,931 to $26,860 E- 7 to E- 9 Chief
petty officer to master chief petty

officer $31,739 to $45,514

Officers a WO- 2 to WO- 4 Warrant officer $37,722 to $53,514 O- 1 to O- 3
Ensign to lieutenant $27,398 to $44,649 O- 4 to O- 6 Lieutenant commander
to captain $54,476 to $83,982 O- 7 to O- 10 Admiral $98,257 to $127,695 a
Officers* ranks include warrant officers (denoted by WO) and commissioned
officers (denoted by O)

Source: U. S. Navy. Table 8: Marine Corp Military Grades, Ranks, and
Associated Basic Pay Rates for Fiscal Year 2001 Military grade Military
rank Fiscal year 2001 pay Enlisted personnel

E- 1 to E- 3 Private to lance corporal $11,871 to $15,093 E- 4 to E- 6
Corporal to staff sergeant $17,675 to $26,018 E- 7 to E- 9 Gunnery
sergeant to sergeant major or

master gunnery sergeant $31,533 to $46,646

Officers a WO- 1 to WO- 5 Warrant officer $32,098 to $59,587 O- 1 to O- 3
2nd lieutenant to captain $25,653 to $45,120 O- 4 to O- 6 Major,
lieutenant colonel, and colonel $56,951 to $85,628 O- 7 to O- 10 General
$98,484 to $130,200 a Officers* ranks include warrant officers (denoted by
WO) and commissioned officers (denoted by O)

Source: U. S. Navy. Appendix II: Navy Personnel Grade, Rank, and
Associated Basic Pay Rates

Page 26 GAO- 03- 148T Table 9: Navy Civilian Grades and Associated Basic
Pay Rates for Fiscal Year 2001 Civilian grade Fiscal year 2001 pay

General schedule employees

GS- 1 to GS- 3 $16,181 to $20,093 GS- 4 to GS- 5 $22,559 to $25,241 GS- 6
to GS- 8 $28,131 to $34,625 GS- 9 to GS- 12 $38,240 to $55,455 GS- 13 to
GS- 15 $65,949 to $91,667

Senior executive service

ES- 01 to ES- 06 $111,650 to $125,700 Note: Basic pay rates shown are the
midpoint of the range of pay for each grade and does not factor in
locality pay received in geographic areas with higher cost- of- living.
Source: Office of Personnel Management.

Page 27 GAO- 03- 148T Table 10: Examples of Cases in Which Cardholders
Wrote Three or More NSF Checks During Fiscal Year 2001 and the First 6
Months of Fiscal Year 2002 and Accounts Were Subsequently Charged Off or
Referred to Salary Offset or Voluntary Fixed Pay Terms

Cardholder Total amount

(number) of NSF checks Total amount

charged- off (CO), in salary offset (SO) or voluntary fixed pay (FP) Grade
Unit Credit history problems

Documented disciplinary action

1 $61,004 (12)

SO * $20,535 E- 5 U. S. Pacific Fleet,

Honolulu Multiple bankruptcies and numerous charge- offs prior

to card issuance Administrative

counseling/ warning 2 37,150

(15) FP * $4,094

E- 6 Naval Recruiting, Omaha Multiple judgments and

merchandise repossession prior to card issuance

None 3 23,894

(9) SO * $11,310

E- 6 U. S. Marine Corps, Marine Aircraft Group 12, Japan

Charged- off and referral to collection prior to card issuance; one
account in collection and one charged

off prior to card issuance Dishonorable discharge

for misconduct directly related to travel card misuse 4 22,873

(11) CO * $2,579

E- 4 U. S. Transportation Command, Illinois

None prior to card issuance Prosecution pending for travel card misuse and
absence without leave 5 20,052

(9) CO * $4,589;

account in SO E- 5 Mobile Inshore Undersea

Warfare, San Jose Charged- off account prior to

card issuance; delinquencies since card issuance

None; promotion to E- 6 after charge- off; pending investigation for
desertion, theft and

issuance of NSF checks 6 18,148

(13) CO * $7,229

GS- 11 Navy Inventory Control Point * Mechanicsburg Bankruptcies and
charge- offs prior to card issuance;

delinquencies since card issuance None; cardholder

retired 7 10,908

(16) CO * $1,381

E- 5 Navy Seals, San Diego None prior to card issuance;

delinquencies since card issuance Administrative action

related to travel card abuse; honorable discharge

8 8,231 (6)

SO * $4,530; account paid off Sept. 2002

E- 8 U. S. Marine Corps, Camp Lejeune

Charged- off account prior to card issuance Counseling; article 15

pending for credit card misuse 9 5,785

(4) CO * $4,923

E- 4 Navy and Marine Corps Reserve Center, Bessemer

Bankruptcies and judgment prior to card issuance; serious delinquencies
since card issuance

None 10 3,250

(12) CO * $5,347;

account in FP E- 4 Naval Air Warfare Center, Patuxent

River Bankruptcy and charged- off

account prior to card issuance; delinquencies since card issuance None

Note: NSF includes those accounts with nonsufficient funds, closed
accounts, stop payment orders, and those accounts not located. Source: GAO
analysis. Appendix III: NSF Checks Written to Bank of America

Page 28 GAO- 03- 148T The 10 cardholders in table 10 wrote a total of 107
checks that were returned by Bank of America because they were NSF, drawn
on closed accounts, and/ or had payments stopped for other reasons. These
checks

totaled over $211,000. Eight of the 10 cardholders had significant credit
problems prior to card issuance, such as charged- off multiple
bankruptcies, charged- off credit card accounts, accounts in collection,
and serious delinquencies. Two of the cardholders did not have credit
problems prior to card issuance, one of which, experienced serious
financial problems after issuance of the Bank of America travel card. The
following provides detailed information on some of these cases.

 Cardholder #1 was a petty officer second class with the U. S. Pacific
Fleet in Honolulu. The cardholder wrote 12 NSF checks totaling more than
$61,000 for payment on his Bank of America travel card account. These
checks were written partly to cover charges incurred while on official
travel, but records showed that the cardholder made many more charges at
convenience stores, restaurants, gas stations, and travel agencies in the
vicinity of his hometown. An examination of the cardholder*s credit
history also revealed that, prior to receiving his government travel card
in May 2000, the cardholder filed multiple bankruptcies and had multiple
charge- offs. Despite his financial history, the cardholder was issued a
standard card, with a credit limit of $5,000, instead of a restricted card
with a lower credit limit. From March 2001 through December 2001, the
cardholder wrote about one

NSF check a month, with three of these NSF checks totaling more than
$12,500 written in the month of December 2001 alone. Industry regulations
require that an account be credited immediately upon receipt of a check.

Consequently, when Bank of America posted the NSF checks, the accounts
appeared to have been paid, which provided credit to the cardholder to
make additional purchases. Thus, by writing NSF checks, and submitting NSF
payments over the phone, which Bank of America had to credit to his travel
card account, the petty officer was able to, in effect, increase his
credit limit to more than $20,000* a practice known as

*boosting.* He used each of these successive increases in his effective
credit limit to charge additional items on his travel card. However,
despite the repeated NSF checks written throughout 2001, the individual
was able to continue making charges through December 2001.

Bank of America subsequently notified the cardholder*s APC of the NSF
check problems. Because the cardholder was considered a good sailor, he
was given administrative counseling for potential fraud and abuses related
to his travel card. The terms of the administrative counseling specified
that

Page 29 GAO- 03- 148T the cardholder would face a court- martial and be
separated from the Navy in case of continued abuse of the credit card or
any other misconduct.  Cardholder #5 is a petty officer (E- 05) assigned
to the Naval Reserve

Forces in San Jose. Prior to receiving the Bank of America travel card in
June 2000, the individual had a number of unpaid accounts with other
creditors. The individual was given a restricted card with a credit limit
of $2,000, which should have been issued in *inactive* status and only

activated when needed for travel. However, records showed that the
cardholder was able to make about 130 separate purchases and ATM
transactions in the vicinity of his hometown while not on official travel.
These transactions totaled more than $5, 000. In addition, from September

2000 through December 2001, the cardholder wrote eight NSF checks and one
stop payment check totaling $20,051 to Bank of America. During fiscal year
2001, not a single valid payment was made to the Bank of America for

this account. The cardholder had an unpaid balance of $4,922 at the time
his account was charged off in July 2002. The cardholder also had three
other unrelated charge- offs in July 2002.

We found no documentation that disciplinary actions had been taken against
the cardholder. The APC assigned to the cardholder told us that he had
received little training for his APC responsibility, which is a collateral
duty. He recalled advising the cardholder once to pay off his travel card

balance. Although a Bank of America official informed us that access to
NSF check information had been available to APCs since 2000, the APC said
he was not aware of the NSF checks written by the cardholder. The APC also
informed us that he was not aware that the cardholder*s account was
charged off until he was notified by Bank of America. Despite having his
Bank of America account charged- off and other financial problems, the

cardholder was recently promoted from petty officer second class (E- 5) to
petty officer first class (E- 6). 1 His account had been referred to
salary offset.

1 Subsequent to his promotion, the cardholder did not report to duty. His
command is taking action to declare him a deserter. He is also a subject
of law enforcement agencies* investigations.

Page 30 GAO- 03- 148T Table 11: Examples of Abusive Travel Card Activity
Where Accounts Were Charged- Off or Placed in Salary Offset Card

holder Grade Unit Total amount

charged- off (CO) or in salary offset (SO)

Transactions contributing to charge off or salary offset Credit history
problems

Documented disciplinary action

1 E- 5 U. S. Marine Corps Reserve, Camp Lejeune

CO * $19,971 Did not use reimbursement

to pay travel card charges; numerous large cash withdrawals

Account charge- offs, referral to collection agency, and other account

delinquency prior to card issuance None; court

martial being considered

2 E- 7 Naval Shore Intermediate Maintenance Activity, Mayport

SO * 11,190 ATM withdrawals totaling $15,000 from October 2000 through
July 2001;

nearly $7, 000 in cash and other expenses at Platinum Plus and Mr. Magoo
gentlemen*s clubs

Bankruptcy, account charge- offs and serious credit card delinquency prior
to card issuance

None 3 E- 4 LeMoore

Naval Air Station

CO * 8,036 Over $6,250 of computer equipment from Best Buy

and other Web sites Numerous unpaid

accounts prior to card issuance and charge- off on the American Express

card Administrative discharge in lieu

of court- martial for misuse of the travel card and other offenses 4 O- 5
Naval and

Marine Corps Reserve Center, Washington, D. C.

SO * 5,678 Over $700 worth of

candles and cookware; over $1,400 charged to D. B. Entertainment, which

owns Baby Dolls and other adult entertainment clubs

Numerous account charge- offs, delinquencies, and bankruptcy prior to card
issuance

None 5 E- 3 Marine Forces Reserve, San

Diego CO * 4,041

$3,800 at local restaurants and $1, 400 in ATM withdrawals over a 2-

month period Serious delinquencies, unpaid accounts, and

referrals to collection agencies prior to card issuance

Court- martialed for misuse of the government travel card; appeal ongoing
6 O- 6 Naval and

Marine Corps Reserve Center, Washington, D. C.

CO * 3,511 $2,000 in cash withdrawals

and nearly $1, 500 at local grocery and drug stores None None

7 WS- 10 a Puget Sound Naval Shipyard,

Naval Sea Systems Command

CO - 3,243

Numerous personal charges, including groceries, gasoline, cash advances,
and $150 at

Bethel Animal Hospital None prior; serious credit card delinquencies and

mortgage foreclosure in 2001 and 2002

Removal from employment due to unauthorized absence and travel card misuse
8 GS- 12 Naval Air

Systems Command, Patuxent River

SO * 1,202 Airline tickets totaling $608 Serious delinquencies, account
charge- offs, mortgage foreclosure in

2000, bankruptcies prior to and since card issuance

None

Appendix IV: Abusive Travel Card Activity Where Accounts Were Charged Off
or Placed in Salary Offset

Page 31 GAO- 03- 148T Card holder Grade Unit

Total amount charged- off (CO) or in

salary offset (SO)

Transactions contributing to charge off or salary offset Credit history
problems

Documented disciplinary action

9 O- 05 Marine Forces Reserve, New Orleans

SO * 1,674 Car rental transactions and

numerous charges at local restaurants Serious delinquencies

prior to and since card issuance

None 10 E- 06 U. S. Marine

Corps, Camp Lejeune CO * 672

Unauthorized use of card for charges associated with permanent change of

station move Serious delinquency and

bad debts at the time of card issuance

None a Wage supervisors designation used to denote supervisory workers on
hourly salary. Source: GAO analysis. Eight of the 10 cardholders included
in table 11 had significant credit problems prior to card issuance, such
as charged- off credit card accounts,

mortgage foreclosures, bankruptcies, serious delinquencies, unpaid
accounts, and referrals to collection agencies. One cardholder had similar
problems subsequent to issuance of the Bank of America travel card.

 Cardholder #1 was a sergeant (E- 05) with the U. S. Marine Corps Reserve
assigned at Camp Lejeune. Despite a history of credit problems, which
included several charged- off and delinquent commercial credit accounts,
Bank of America issued the cardholder a standard card, with a credit limit
of $10,000, in March 2000. The cardholder was deployed to Europe in August
2000 and his credit limit was increased to $20,000. Within a month of his
deployment, the cardholder had charged $10, 700 to the card, including
$8,500 in ATM withdrawals. Although the cardholder received reimbursements
for his travel expenses, he failed to settle his account in full. In
December 2000, the cardholder informed the APC that his account

was 30 days past due and promised to pay the full outstanding balance. He
again failed to do so and his account balance of $11,467 went delinquent
in January 2001. The APC did not deactivate the travel card account but
put the cardholder in *mission critical* status and raised the credit
limit to $25,000 so the cardholder would have access to funds to return to
the United States. Consequently, when the account was closed on February
8, 2001, the outstanding balance had increased to $19,971. The APC
admitted to us that he failed to carefully monitor this account. No
disciplinary

action was taken against the cardholder, who had returned to civilian
life; however, judicial action against the cardholder is pending. We have
referred this matter to the DOD*s Office of Inspector General for
appropriate action.

Page 32 GAO- 03- 148T In addition, our review indicated that the
cardholder might have filed a fraudulent travel voucher in January 2001.
This travel voucher claimed

reimbursement for expenses in Germany over the holiday period from late
December 2000 to early January 2001, allegedly for official purposes.
However, Bank of America data showed that the government travel card
belonging to this cardholder was used to make transactions in the vicinity
of the traveler*s hometown during this holiday period. It appeared that
the cardholder might have returned to the United States for the holiday,
yet continued to claim expenses as if he was still in Germany, a
potentially fraudulent act.  Cardholder # 3 was a petty officer third
class assigned to the LeMoore

Naval Air Station in California. Our review indicated that the cardholder
had numerous unpaid cable, medical, and communication accounts and serious
delinquency of more than $5,000 on his personal credit card account prior
to receiving the travel card. The unit to which the cardholder was
assigned had a policy of activating the government travel card only when a
cardholder travels. However, from February through

April 2001, while not on travel, the cardholder purchased over $6,250
worth of electronic and computer equipment from Best Buy and various Web
sites using the government travel card. The cardholder did not pay his
balance and thus came to the attention of the APC when his name appeared
in the delinquency report. Upon determining that the cardholder was able
to use the card when not on travel, the APC contacted Bank of America,
which was unable to inform the APC as to who had activated the account.
The cardholder*s balance of more than $8,000 was charged off, and he was
granted an administrative separation in lieu of a court- martial for
offenses unrelated to the travel card misuse, including absence without
leave, making false statements, and stealing government property of less
than $100.

 Cardholder #4 was a commander (O- 05) with the Naval Reserves assigned
to the Naval and Marine Corps Reserve Center in Washington, D. C. Our
review showed that Bank of America issued the cardholder a standard

card in May 2000, although the cardholder*s credit history indicated
serious financial problems before and at the time of card issuance. For
example, in October 1998, the cardholder filed Chapter 7 bankruptcy with
only $37,169 in assets against $542,063 in liabilities. Further, in
January 2000, right before the Bank of America card was issued, an account
with a balance of more than $30, 000 was charged off. This high- ranking
Navy officer continued, since the issuance of the government travel card,
a pattern of delinquencies on numerous accounts, and in one instance had
merchandise repossessed for nonpayment.

Page 33 GAO- 03- 148T During fiscal year 2001 and the first 3 months of
fiscal year 2002, the cardholder used the government travel card to make
numerous personal

transactions. Transactions included more than $1,400 to D. B.
Entertainment, which owns Baby Dolls Saloon, a gentlemen*s club in Dallas,
and more than $700 to Wearever cookware and Partylite Gifts, a

manufacturer of candles and candle accessories. A delinquency letter was
sent to the cardholder on August 9, 2002, when the account was 120 days
past due; however, no documentation existed to indicate that any action

was taken prior to this date. Although the cardholder had been placed in
salary offset, no other disciplinary action had been taken against the
cardholder.

Page 34 GAO- 03- 148T Table 12 shows cases of travel card use for personal
expenses where the cardholder paid the bill. Table 12: Examples of Abusive
Travel Card Activity Where the Cardholders Paid the Bills

Card holder Unit Grade Vendor Amount Nature of transaction

Documented disciplinary action

1 PEO Theatre Air and Surface, Naval Sea Systems Command,

Washington D. C. GS- 15 Seinpost Holdings Over $23,000 in charges 35
transactions for Internet

gambling Written reprimand 2 Mobile Inshore

Undersea Warfare, Newport

E- 5 Cardholder*s Limousine Service 8,622 Bogus charges of $7,222 to
cardholder*s own limousine company

None 3 Portsmouth

Naval Shipyard WG- 10 a Herbal Life 6,758 17 purchases of vitamins and
health supplements None 4 Naval Undersea

Warfare Center, Newport ND- 05 b Carnival Cruise 3,790 Alaskan cruise for
2 for 7 nights None

5 U. S. Naval Academy, Annapolis MIDN c Best Buy 2,442 Home electronics
None

6 U. S. Marine Corps, Camp Pendleton

E- 07 United Vacation 1,326 United Airlines plane ticket for cardholder*s
spouse None

7 U. S. Marine Corps, Camp Pendleton

E- 06 DeAngelo Tax Service 800 For preparation of 1997

through 2000 tax returns None 8 Naval Reserves Forces Command,

Virginia E- 07 Ticketmaster 460 4 concert tickets to the

Backstreet Boys None 9 Norfolk Naval Air Station E- 04 Fredricks of

Hollywood 184 Women*s lingerie None 10 Naval Medical

Research Center, San Antonio

E- 4 GTEAir 148 Airplane telephone call None a Wage grade system used for
workers who are on hourly salary. b Scientific and engineering career path
equivalent to GS- 14 to GS- 15. c Midshipmen are cadets in training to
become Navy officers. They may receive stipends while in college. Source:
GAO analysis. Appendix V: Abusive Travel Card Activity Where Cardholders
Paid the Bills (192076)

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