Farm Program Payments: USDA Should Correct Weaknesses in
Regulations and Oversight to Better Ensure Recipients Do Not
Circumvent Payment Limitations (16-JUN-04, GAO-04-861T).
Farmers receive about $15 billion annually in federal payments to
help produce major crops, such as corn, cotton, rice, and wheat.
The Farm Program Payments Integrity Act of 1987 (1987 Act) limits
payments to individuals and entities--such as corporations and
partnerships--that are "actively engaged in farming." This
testimony is based on GAO's report, Farm Program Payments: USDA
Needs to Strengthen Regulations and Oversight to Better Ensure
Recipients Do Not Circumvent Payment Limitations (GAO-04-407,
April 30, 2004). Specifically, GAO (1) determined how well USDA's
regulations limit payments and (2) assessed USDA's oversight of
the 1987 Act.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-04-861T
ACCNO: A10548
TITLE: Farm Program Payments: USDA Should Correct Weaknesses in
Regulations and Oversight to Better Ensure Recipients Do Not
Circumvent Payment Limitations
DATE: 06/16/2004
SUBJECT: Agricultural policies
Agricultural programs
Eligibility criteria
Erroneous payments
Evaluation methods
Farm income stabilization programs
Farm subsidies
Fraud
Program abuses
Regulation
Standards evaluation
Transfer payments
******************************************************************
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GAO-04-861T
United States General Accounting Office
GAO Testimony
Before the Committee on Finance, U.S.
Senate
For Release on Delivery
Expected at 11:00 a.m. EDT FARM PROGRAM
Wednesday, June 16, 2004
PAYMENTS
USDA Should Correct Weaknesses in Regulations and Oversight to Better Ensure
Recipients Do Not Circumvent Payment Limitations
Statement of Lawrence J. Dyckman, Director Natural Resources and Environment
GAO-04-861T
Highlights of GAO-04-861T, testimony before the Committee on Finance, U.S.
Senate
Farmers receive about $15 billion annually in federal payments to help
produce major crops, such as corn, cotton, rice, and wheat. The Farm
Program Payments Integrity Act of 1987 (1987 Act) limits payments to
individuals and entities-such as corporations and partnerships-that are
"actively engaged in farming."
This testimony is based on GAO's report, Farm Program Payments: USDA Needs
to Strengthen Regulations and Oversight to Better Ensure Recipients Do Not
Circumvent Payment Limitations
(GAO-04-407, April 30, 2004). Specifically, GAO (1) determined how well
USDA's regulations limit payments and (2) assessed USDA's oversight of
the1987 Act.
GAO recommended, among other things, that USDA (1) develop measurable
standards for a significant contribution of active personal management;
(2) clarify regulations on what constitutes a scheme or device to
effectively evade payment limits; (3) improve its selection method for
reviewing farming operations and (4) develop controls to ensure it uses
all tools to assess compliance with the act.
USDA agreed to act on most recommendations, but it stated that its
regulations are sufficient for determining active engagement in farming
and assessing whether operations are designed to evade payment limits. We
disagree.
www.gao.gov/cgi-bin/getrpt?GAO-04-861T.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Lawrence J. Dyckman, at
(202) 512-3841or dyckmanl@gao.gov.
June 2004
FARM PROGRAM PAYMENTS
USDA Should Correct Weaknesses in Regulations and Oversight to Better Ensure
Recipients Do Not Circumvent Payment Limitations
GAO's survey of USDA's field offices showed that for the compliance
reviews the offices conducted, about 99 percent of payment recipients
asserted they met eligibility requirements through active personal
management. However, USDA's regulations to ensure recipients are actively
engaged in farming do not provide a measurable standard for what
constitutes a significant contribution of active personal management. The
figure below shows field offices' views on whether regulations describing
active personnel management could be improved. By not specifying such a
measurable standard, USDA allows individuals who may have limited
involvement with the farming operation to qualify for payments. Moreover,
USDA's regulations lack clarity as to whether certain transactions and
farming operation structures that GAO found could be considered schemes or
devices to evade, or that have the purpose of evading, payment
limitations. Under the 1987 Act, if a person has adopted such a scheme or
device, then that person is not eligible to receive payments for the year
in which the scheme or device was adopted or the following year. Because
it is not clear whether fraudulent intent must be shown to find that a
person has adopted a scheme or device, USDA may be reluctant to pursue the
question of whether certain farming operations, such as the ones GAO
found, are schemes or devices.
According to GAO's survey and review of case files, USDA is not
effectively overseeing farm payment limitation requirements. That is, USDA
does not review a valid sample of farm operation plans to determine
compliance and thus does not ensure that only eligible recipients receive
payments, and compliance reviews are often completed late. As a result,
USDA may be missing opportunities to recoup ineligible payments. For about
one-half of the farming operations GAO reviewed for 2001, field offices
did not use available tools to determine whether persons were actively
engaged in farming.
Field Offices' Views on Whether Specific Improvements Would Strengthen
Active Personal Management
Mr. Chairman and Members of the Committee:
I am pleased to be here today to discuss the Committee's interest in the
U.S. Department of Agriculture's (USDA) implementation of the Farm Program
Payments Integrity Act of 1987 (1987 Act). My testimony today is based on
our recent report on this subject, which was requested by the Chairman of
the Senate Committee on Finance and which is being publicly released
today.1
Between 1999 and 2002, USDA paid farmers an average of $15 billion
annually to help support the production of major commodities, including
corn, cotton, rice, soybeans, and wheat. These payments go to 1.3 million
producers: individuals and entities such as corporations, partnerships,
and trusts. Annually, almost two-thirds of these payments go to about 10
percent of the producers.
After hearing several concerns about farm payments going to individuals
not involved in farming, the Congress enacted the 1987 Act, which, among
other things, set eligibility conditions to limit the number of payments
going to recipients and to ensure that only individuals and entities
"actively engaged in farming" received payments. To be considered actively
engaged in farming, an individual recipient must make significant
contributions to the farming operation in two areas: (1) capital, land, or
equipment and (2) personal labor or active personal management. An entity
is considered actively engaged in farming if the entity separately makes a
significant contribution of capital, land, or equipment, and its members
collectively make a significant contribution of personal labor or active
personal management to the farming operation. For both individuals and
entities, their share of the farming operation's profits or losses must
also be commensurate with their contributions to the farming operation and
those contributions must be at risk.
My testimony today focuses on two primary issues discussed in the report:
(1) how well USDA's regulations for active engagement in farming help
limit farm program payments and (2) the effectiveness of USDA's oversight
of farm program payments' requirements for active engagement in farming.
1U.S. General Accounting Office, Farm Program Payments: USDA Needs to
Strengthen Regulations and Oversight to Better Ensure Recipients Do Not
Circumvent Payment Limitations, GAO-04-407, (Washington, D.C.: April 30,
2004).
In summary, we found the following:
o Individuals may circumvent the farm payment limitations because of
weaknesses in USDA's regulations. These regulations are designed to ensure
recipients are actively engaged in farming. However, they do not provide a
measurable standard for what constitutes a significant contribution of
active personal management. By not specifying such a measurable standard,
USDA allows individuals who may have limited involvement with the farming
operation to qualify for payments. According to our survey of USDA's field
offices, in the compliance reviews they conducted, about 99 percent of
payment recipients asserted they met eligibility requirements through
active personal management. Moreover, USDA's regulations lack clarity as
to whether certain transactions and farming operation structures that we
found could be considered schemes or devices to evade, or that have the
purpose of evading, payment limitations. Under the 1987 Act, if a person
has adopted such a scheme or device, then that person is not eligible to
receive payments for two years.
o According to our survey and review of case files, USDA is not
effectively overseeing farm program payments. That is, USDA does not
review a valid sample of farm operation plans to determine compliance and
thus does not ensure that only eligible recipients receive payments. Also,
USDA's compliance reviews are often completed late. As a result, USDA may
be missing opportunities to recoup ineligible payments. Further, for about
one-half of the farming operations we reviewed for 2001, field offices did
not use available tools to determine whether persons were actively engaged
in farming.
In our report to you, we made eight recommendations to the Secretary of
Agriculture to strengthen FSA's oversight of farmers' compliance with the
1987 Act. In commenting on the report, USDA agreed to act on most of the
recommendations. However, USDA stated that its current regulations are
sufficient for determining active engagement in farming and for assessing
whether operations are schemes or devices to evade payment limitations. We
still believe measurable standards and clarified regulations would better
assure the act's goals are realized.
Background The 1987 Act requires that an individual or entity be actively
engaged in farming in order to receive farm program payments. To be
considered actively engaged in farming, the act requires an individual or
entity to provide a significant contribution of capital, land, or
equipment, as well as a significant contribution of personal labor or
active personal management to the farming operation. Hired labor or hired
management may not be
used to meet the latter requirement. The act's definition of a "person"
eligible to receive farm program payments includes an individual, as well
as certain kinds of corporations, partnerships, trusts, or similar
entities. Recipients must also demonstrate that their contributions to the
farming operation are in proportion to their share of the operation's
profits and losses and that these contributions are at risk. The 1987 Act
also limits the number of entities through which a person can receive
program payments. Under the act, a person can receive payments as an
individual and through no more than two entities, or through three
entities and not as an individual. The statutory provision imposing this
limit is commonly known as the three-entity rule. Under the Farm Security
and Rural Investment Act of 2002, "persons"-individuals or entities-are
generally limited to a total of $180,000 annually in farm program
payments, or $360,000 if they are members of up to three entities.2
Some farming operations may reorganize to overcome payment limits to
maximize their farm program benefits. Larger farming operations and
farming operations producing crops with high payment rates, such as rice
and cotton, may establish several related entities that are eligible to
receive payments. However, each entity must be separate and distinct and
must demonstrate that it is actively engaged in farming by providing a
significant contribution of capital, land or equipment, as well as a
significant contribution of personal labor or active personal management
to the farming operation.
Within USDA, the Farm Service Agency (FSA) is responsible for enforcing
the actively engaged in farming and payment limitation rules. FSA field
offices review a sample of farming plans at the end of the year to help
monitor whether farming operations were conducted in accordance with
approved plans, including whether payment recipients met the requirement
for active engagement in farming and whether the farming operations have
the documents to demonstrate that the entities receiving payments are in
fact separate and distinct legal entities. FSA selects its sample of
farming operations based on, among other criteria, (1) whether
2Under the Farm Security and Rural Investment Act of 2002, each of the
income support programs has a separate payment limit. For example, a
recipient generally may only receive up to $40,000 in direct payments, up
to $65,000 in counter-cyclical payments, and up to $75,000 in loan
deficiency payments and marketing assistance loan gains, for a total of
$180,000 per year. Benefits received through commodity certificate gains
and marketing loan forfeitures do not count against the payment
limitations. Farm Security and Rural Investment Act of 2002, Pub. L. No.
107-171, 116 Stat. 134, 213.
Individuals May Circumvent Farm Payment Limitations Because of Weaknesses in
FSA's Regulations
the operation has undergone an organizational change in the past year by,
for example, adding another entity or partner to the operation and (2)
whether the operation receives payments above a certain threshold. These
criteria have principally resulted in sampling farming operations in areas
that produce cotton and rice-Arkansas, California, Louisiana, Mississippi,
and Texas.
Many recipients meet one of the farm program payments' eligibility
requirements by asserting that they have made a significant contribution
of active personal management. Because FSA regulations do not provide a
measurable, quantifiable standard for what constitutes a significant
management contribution, people who appear to have little involvement are
receiving farm program payments, according to our survey of FSA field
offices and our review of 86 case files. Indeed, most large farming
operations meet the requirement for personal labor or active personal
management by asserting a significant contribution of management. Survey
respondents provided information on 347 partnerships and joint ventures
for which FSA completed compliance reviews in 2001; these entities
comprised 992 recipients, such as individuals and corporations that were
members of these farming operations. Of these 992 recipients, 46 percent,
or 455, asserted that they contributed active personal management; 1
percent, or 7, asserted that they contributed personal labor; and the
remaining 53 percent (530) asserted they provided a combination of active
personal management and personal labor to meet the actively engaged in
farming requirement.
While FSA's regulations define active personal management more
specifically to include such things as arranging financing for the
operation, supervising the planting and harvesting of crops, and marketing
the crops, the regulations lack measurable criteria for what constitutes a
significant contribution of active personal management. FSA regulations
define a "significant contribution" of active personal management as
"activities that are critical to the profitability of the farming
operation, taking into consideration the individual's or entity's
commensurate share in the farming operation." In contrast, FSA provides
quantitative standards for what constitutes a significant contribution of
active personal labor, capital, land, and equipment. For example, FSA's
regulations define a significant contribution of active personal labor as
the lesser of 1,000 hours of work annually, or 50 percent of the total
hours necessary to conduct a farming operation that is comparable in size
to such individual's or entity's commensurate share in the farming
operation. By not specifying quantifiable standards for what constitutes a
significant contribution of
active personal management, FSA allows recipients who may have had limited
involvement in the farming operation to qualify for payments.
Some recipients appeared to have little involvement with the farming
operation for 26 of the 86 FSA compliance review files we examined in
which the recipients asserted they made a significant contribution of
active personal management to the farming operation. For example, in 2001,
11 partners in a general partnership operated a farm of 11,900 acres.
These partners asserted they met the actively engaged in farming
requirement by making a significant contribution of equipment and active
personal management. FSA's compliance review found that all partners of
the farming operation were actively engaged in farming and met all
requirements for the approximately $1 million the partnership collected in
farm program payments in 2001. However, our review found that the
partnership held five management meetings during the year, three in a
state other than the state where the farm was located, and two on-site
meetings at the farm. Some of the partners attended the meetings in person
while others joined the meetings by telephone conference. Although all 11
partners claimed an equal contribution of management, minutes of the
management meetings indicated seven partners participated in all five
meetings, two participated in four meetings, and two participated in three
meetings. All partners resided in states other than the state where the
farm was located, and only one partner attended all five meetings in
person. Based on our review of minutes documenting the meetings, it is
unclear whether some of the partners contributed significant active
personal management. If FSA had found that some of the partners had not
contributed active personal management, the partnership's total farm
program payments would have been reduced by about 9 percent, or $90,000,
for each partner that FSA determined was ineligible. State FSA officials
agreed that the evidence to support the management contribution for some
partners was questionable and that FSA reviewers could have taken
additional steps to confirm the contributions for these partners.
According to our survey of 535 FSA field offices, FSA could make key
improvements to strengthen the management contribution standard. These
offices reported that the management standard can be strengthened by
clarifying the standard, including providing quantifiable criteria,
certifying actual contributions, and requiring management to be on-site.3
More than
3Certifying actual contributions could include requiring an affidavit from
each recipient delineating management activities performed.
60 percent of those surveyed, for example, indicated that clarifying the
standard would be an improvement. In addition, in 2003, a USDA commission
established to look at the impact of changes to payment limitations
concluded that determining what constitutes a significant contribution of
active management is difficult and lack of clear criteria likely makes it
easier for farming operations to add recipients in order to avoid payment
limitations.4
We also found that some individuals or entities have engaged in
transactions that might constitute schemes or devices to evade payment
limitations, but neither FSA's regulations nor its guidance address
whether such transactions could constitute schemes or devices. Under the
1987 Act as amended, if the Secretary of Agriculture determines that any
person has adopted a "scheme or device" to evade, or that has the purpose
of evading, the act's provisions-in other words, the payment
limitations-then that person is not eligible to receive farm program
payments for the year the scheme or device was adopted and the following
crop year.5 According to FSA's regulations, this statutory provision
includes (1) persons who adopt or participate in adopting a scheme or
device and (2) schemes or devices that are designed to evade or have "the
effect of evading" payment limitation rules. The regulations state that a
scheme or device shall include concealing information that affects a farm
program payment application, submitting false or erroneous information, or
creating fictitious entities for the purpose of concealing the interest of
a person in a farming operation.6
We found several large farming operations that were structured as one or
more partnerships, each consisting of multiple corporations that increased
farm program payments in a questionable manner. The following two examples
illustrate how farming operations, depending on how the FSA regulations
are interpreted, might be considered to evade, or have the effect of
evading, payment limitations. In one case, we found that a family had set
up the legal structures for its farming operation and also owned the
affiliated nonfarming entities. This operation included two farming
partnerships comprising eight limited liability companies. The two
partnerships operated about 6,000 acres and collected more than $800,000
4See U.S. Department of Agriculture, Office of the Chief Economist,
Commission on the Application of Payment Limitations for Agriculture,
Report of the Commission on the Application of Payment Limitations for
Agriculture (Washington, D.C.: August 2003).
57 U.S.C. S: 1308-2.
67 C.F.R. S: 1400.5.
in farm program payments in 2001. The limited liability companies included
family and non-family members, although power of attorney for all of the
companies was granted to one family member to act on behalf of the
companies, and ultimately the farming partnerships. The operation also
included nonfarming entities-nine partnerships, a joint venture, and a
corporation-that were owned by family members. The affiliated nonfarming
entities provided the farming entities with goods and services, such as
capital, land, equipment, and administrative services. The operation also
included a crop processing entity to purchase and process the farming
operation's crop. According to our review of accounting records for the
farming operation, both farming partnerships incurred a small net loss in
2001, even though they had received more than $800,000 in farm program
payments. In contrast, average net income for similarsized farming
operations in 2001 was $298,000, according to USDA's Economic Research
Service. The records we reviewed showed that the loss occurred, in part,
because the farming operations paid above-market prices for goods and
services and received a net return from the sale of the crop to the
nonfarming entities that appeared to be lower than market prices because
of apparent excessive charges. The structure of this operation allowed the
farming operation to maximize farm program payments, but because the farm
operated at a loss these payments were not distributed to the members of
the operation. In effect, these payments were channeled to the family-held
nonfarming entities. Figure 1 shows the organizational structure of this
operation and the typical flow of transactions between farming and
nonfarming entities.
Figure 1: Large Operation Containing Farming and Nonfarming Entities
Note: Percentages shown are share of ownership.
Similarly, we found another general partnership that farmed more than
50,000 acres in 2001 and that conducted business with nonfarming entities,
including a land leasing company, an equipment dealership, a petroleum
distributorship, and crop processing companies, with close ties to the
farming partnership. The partnership, which comprised more than 30
corporations, collected more than $5 million in farm program payments in
2001.7 The shareholders who contributed the active personal management for
these corporations were officers of the corporations. Each officer
provided the active personal management for three corporations. Some of
these officers were also officers of the nonfarming entities-the entities
that provided the farming partnership goods and services such as the
capital, land, equipment, and fuel. The nonfarming entities also included
a gin as well as grain elevators to purchase and process the farming
partnership's crops. Our review of accounting records showed that even
though the farming partnership received more than $5 million in farm
payments, it incurred a net loss in 2001, which was distributed among the
corporations that comprised the partnership.8
As in the first example, factors contributing to the loss included the
abovemarket prices for goods and services charged by the nonfarming
entities and the net return from the sale of crops to nonfarming entities
that appeared to be lower than market prices because of apparent excessive
charges for storage and processing. For example, one loan made by the
nonfarming financial services entity to the farming partnership for $6
million had an interest rate of 10 percent while the prevailing interest
rate for similar loans at the time was 8 percent. Similarly, the net
receipts from the sale of the harvested crop, which were sold almost
exclusively to the nonfarming entities, were below market price. For
example, in one transaction the gross receipt was about $1 million but
after the grain elevators deducted fees for the quality of the grain and
such actions as drying and storing the grain, the net proceeds to the
farming entity were only about $500,000. In this particular operation, all
of the nonfarming entities had common ownership linked to one individual.
This individual had also set up the legal structure for the farming
entities but had no direct ownership interest in the farming entities.
It is unclear whether either of these operations falls within the
statutory definition of a scheme or device or whether either otherwise
circumvents
7In 2003, the operation divided into six new farming partnerships
comprised of the same corporations.
8The accounting records also showed that the capital (equity) account for
each of the corporations carried a negative balance, indicating multiple
years of net losses.
the payment limitation rules. State FSA officials in Arkansas, Louisiana,
Mississippi, and Texas, where many of the large farming operations are
located, believed that some large operations with relationships between
the farming and nonfarming entities were organized primarily to circumvent
payment limitations. In this manner, these farming operations may be
reflective of the organizational structures that some Members of Congress
indicated were problematic when enacting the 1987 Act and the scheme or
device provision. The House Report for the 1987 Act states: "A small
percentage of producers of program crops have developed methods to legally
circumvent these limitations to maximize their receipt of benefits for
which they are eligible. In addition to such reorganizations, other
schemes have been developed that allow passive investors to qualify for
benefits intended for legitimate farming operations."9 In our discussions
with FSA headquarters officials in February 2004 on the issue of farming
operations that circumvent the payment limitation rules, they noted that
while an operation may be legally organized, it may be misrepresenting who
in effect receives the farm program payments. FSA has no data on how many
of the types of operations that we identified exist. However, FSA is
reluctant to question these operations because it does not believe current
regulations provide a sufficient basis to take action.
Other FSA officials said that USDA could review such an operation under
the 1987 Act's scheme or device provision if it becomes aware that the
operation is using a scheme or device for the purpose of evading the
payment limitation rules. However, these FSA officials stated it is
difficult to prove fraudulent intent-which they believe is a key element
in proving scheme or device-and requires significant resources to pursue
such cases. In addition, they stated that even if FSA finds a recipient
ineligible to receive payments, its decision might be overturned on appeal
within USDA. The FSA officials noted that when FSA loses these types of
cases, the loss tends to discourage other field offices from aggressively
pursuing these types of cases.
It is not clear whether either the statutory provision or FSA's
regulations require a demonstration of fraudulent intent in order to find
that someone has adopted a scheme or device. As discussed above, the
statute limits payments if the Secretary of Agriculture determines that
any person has adopted a scheme or device "to evade, or that has the
purpose of evading,"
9H.R. Rep. No. 100-391 (1987) (emphasis added).
the farm payment limitation provisions. The regulations state that
payments may be withheld if a person "adopts or participates in adopting a
scheme or device designed to evade or that has the effect of evading" the
farm payment limitations. The regulations note that schemes or devices
shall include, for example, creating fictitious entities for the purpose
of concealing the interest of a person in a farming operation. Some have
interpreted this provision as appearing to require intentionally
fraudulent or deceitful conduct. On the other hand, FSA regulations only
provide this as one example of what FSA considers to be a scheme or
device. The regulations do not specify that all covered schemes or devices
must involve fraudulent intent. As previously stated, covered schemes or
devices under FSA regulations include those that have "the effect of
evading" payment limitation rules. Finally, guidance contained in FSA
Handbook Payment Limitations, 1-PL (Revision 1), Amendment 40, does not
clarify the matter because it does not provide any additional examples for
FSA officials of the types of arrangements that might be considered
schemes or devices. This lack of clarity over whether fraudulent intent
must be shown in order for FSA to deny payments under the scheme or device
provision of the law may be inhibiting FSA from finding that some
questionable operations are schemes or devices.
In addition to the weaknesses described above, FSA does not effectively
oversee farm program payments in five key areas, according to our analysis
of FSA compliance reviews and our survey of FSA field offices. First, FSA
does not review a valid sample of recipients to be reasonably assured of
compliance with the payment limitations. In 2001, FSA selected 1,573
farming operations from its file of 247,831 entities to review producers'
compliance with actively engaged in farming requirements. FSA's sample
selection focuses on entities that have undergone an organizational change
during the year or received large farm program payments. Field staff
responsible for these reviews seek waivers for farming operations reviewed
within the last 3 to 5 years-the time frame varies by state. As a result,
according to FSA officials, of the farming operations selected for review
each year, more than half are waived and therefore not actually reviewed.
Many of the waived cases show up year after year because FSA's sampling
methodology does not take into consideration when an operation was last
reviewed. In 2001, the latest year for which data are available, only 523
of 1,573 sampled entities were
Other Weaknesses in FSA's Oversight May Also Enable Ineligible Farmers to
Receive Program Payments
to be reviewed.10 Field offices sought and received waivers for 966
entities primarily because the entities were previously reviewed or the
farming operation involved only a husband and wife.11 According to FSA
headquarters officials, the sampling process was developed in the mid1990s
and it can be improved and better targeted.
Second, field offices do not always conduct compliance reviews in a timely
manner. Only 9 of 38 FSA state offices responsible for conducting
compliance reviews for 2001 completed the reviews and reported the results
to FSA headquarters within 12 months, as FSA policy requires.12 FSA
headquarters selected the 2001 sample on March 27, 2002, and forwarded the
selections to its state offices on April 4, 2002. FSA headquarters
required the state offices to conduct the compliance reviews and report
the results by March 31, 2003. Six of the 26 FSA state offices that failed
to report the results to headquarters had not yet begun these reviews for
470 farming operations as of summer 2003: Arkansas, California, Colorado,
Louisiana, Ohio, and South Carolina. Until we brought this matter to their
attention in July 2003, FSA headquarters staff were unaware that these six
states had not conducted compliance reviews for 2001. Similarly, they did
not know the status of the remaining 20 states. Because of this long
delay, FSA cannot reasonably assess the level of recipients' compliance
with the act and may be missing opportunities to recapture payments that
were made to ineligible recipients if a farming operation reorganizes or
ceases operations.
Third, FSA staff do not use all available tools to assess compliance. For
one-half of the case files we reviewed for 2001, field offices did not use
all available tools to determine whether persons are actively engaged in
farming. FSA compliance review policy requires field staff to interview
persons asserting that they are actively engaged in farming before making
a final eligibility decision, unless the reason for not interviewing the
10For 72 of the 1,573 sampled entities, survey respondents did not provide
information on whether the reviews for these entities were waived or will
be conducted in the future. In addition, we were unable to determine the
field offices responsible for reviewing 12 of the 1,573 sampled entities.
11State offices may waive selected compliance reviews for farming
operations that were previously reviewed and did not receive an adverse
determination, and for which the reviewing authority has no reason to
believe there have been changes that affect the original eligibility
decision.
12Three additional FSA state offices submitted the required report after
the due date.
person is obvious and adequately justified in writing.13 Indeed, 83
percent of the field offices responding to our survey indicated that
interviews are helpful in conducting compliance reviews. However, in 27 of
the 86 case files we reviewed in six states, field staff did not interview
these persons and did not adequately document why they had not done so. In
one of the states we visited, field staff had not conducted any
interviews. We also found that some field offices do not obtain and review
certain key financial information regarding the farming operation before
making final eligibility decisions. For example, our review of case files
indicated that for one-half of the farming operations, field staff did not
use financial records, such as bank statements, cancelled checks, or
accounting records, to substantiate that capital was contributed directly
to the farming operation from a fund or account separate and distinct from
that of any other individual or entity with an interest in the farming
operation, as required by FSA's policy.14 Instead, FSA staff often rely on
their personal knowledge of the individuals associated with the farming
operation to determine whether these individuals meet the requirement for
active engagement in farming.
Fourth, FSA does not consistently collect and analyze monitoring data. FSA
has not established a methodology for collecting and summarizing
compliance review data so that it can (1) reliably compare farming
operations' compliance with the actively engaged in farming requirements
from year to year and (2) assess its field offices' conduct of compliance
reviews. Under Office of Management and Budget Circular A-123, agencies
must develop and implement management controls to reasonably ensure that
they obtain, maintain, report, and use reliable and timely information for
decision-making. Because FSA has not instituted these controls, it cannot
determine whether its staff are consistently applying the payment
eligibility requirements across states and over time.
Finally, these problems are exacerbated by a lack of periodic training for
FSA staff on the payment limitations and eligibility rules. Training has
generally not been available since the mid-1990s.
In conclusion, the Farm Program Payments Integrity Act of 1987, while
enacted to limit payments to individuals and entities actively engaged in
farming, allows farming operations to maximize the receipt of federal farm
13FSA Handbook Payment Limitations, 1-PL (Revision 1), Amendment 40. 14FSA
Handbook Payment Limitations, 1-PL (Revision 1), Amendment 40.
payments as long as all recipients meet eligibility requirements. However,
we found cases where payment recipients may have developed methods to
circumvent established payment limitations. This seems contrary to the
goals of the 1987 Act and was caused by weaknesses in USDA's regulation
and oversight. The regulations need to better define what constitutes a
significant contribution of active personal management and clarify whether
fraudulent intent is necessary to find that someone has adopted a scheme
or device. Without specifying measurable standards for what constitutes a
significant contribution of active personal management, FSA allows
individuals who may have had limited involvement in the farming operation
to qualify for payments. Moreover, FSA is not providing adequate oversight
of farm program payments under its current regulations and policies.
In our report to you, we made eight recommendations to the Secretary of
Agriculture for improving FSA's oversight of compliance with the 1987 Act,
including: developing measurable requirements defining a significant
contribution of active personal management; clarifying regulations and
guidance as to what constitutes a scheme or device; improving its sampling
method for selecting farming operations for review; and developing
controls to ensure all available tools are used to assess compliance with
the act. USDA agreed to act on most of our recommendations. However, USDA
stated that its current regulations are sufficient for determining active
engagement in farming and assessing whether operations are schemes or
devices to evade payment limitations.
Mr. Chairman, this concludes my prepared statement. We would be happy to
respond to any questions that you or other Members of the Committee may
have.
For further information about this testimony, please contact Lawrence J.
Dyckman, Director, Natural Resources and Environment, (202) 512-3841, or
by email at dyckmanl@gao.gov. Ron Maxon, Thomas Cook, Cleofas Zapata,
Carol Herrnstadt Shulman, and Amy Webbink made key contributions to this
statement.
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