Crop Insurance: Actions Needed to Reduce Program's Vulnerability 
to Fraud, Waste, and Abuse (30-SEP-05, GAO-05-528).		 
                                                                 
Federal crop insurance protects producers against losses from	 
natural disasters. In 2004, the crop insurance program provided  
$47 billion in coverage, at a cost of $3.6 billion, including an 
estimated $160 million in losses from fraud and abuse. The U.S.  
Department of Agriculture's (USDA) Risk Management Agency (RMA)  
administers this program with private insurers. The Agricultural 
Risk Protection Act of 2000 (ARPA) provided new tools to monitor 
and control abuses, such as having USDA's Farm Service Agency	 
(FSA) conduct field inspections. GAO assessed, among other	 
things, the (1) effectiveness of USDA's processes to address	 
program fraud and abuse and (2) extent to which the program's	 
design makes it vulnerable to abuse.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-528 					        
    ACCNO:   A38799						        
  TITLE:     Crop Insurance: Actions Needed to Reduce Program's       
Vulnerability to Fraud, Waste, and Abuse			 
     DATE:   09/30/2005 
  SUBJECT:   Agricultural policies				 
	     Agricultural programs				 
	     Disaster recovery					 
	     Disaster relief aid				 
	     Fraud						 
	     Insurance						 
	     Insurance claims					 
	     Insurance losses					 
	     Monitoring 					 
	     Natural disasters					 
	     Program abuses					 
	     Program evaluation 				 
	     Internal controls					 
	     Risk management					 
	     Questionable payments				 
	     Investigations by federal agencies 		 
	     Federal Crop Insurance Program			 

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******************************************************************
GAO-05-528

     

     * Report to the Chairman, Committee on Homeland Security and
       Governmental Affairs, U.S. Senate
          * September 2005
     * CROP INSURANCE
          * Actions Needed to Reduce Program's Vulnerability to Fraud, Waste,
            and Abuse
     * Contents
          * Results in Brief
          * Background
          * RMA Has Strengthened Procedures for Preventing Questionable
            Claims, but the Program Remains Vulnerable to Abuse
               * Data Mining and Other Actions Have Improved RMA's Ability to
                 Manage the Crop Insurance Program
               * Field Inspections Specified in RMA's Coordination Plan Are
                 Not Being Used to Maximum Effect
               * RMA's Analysis to Detect Potential Program Fraud and Abuse
                 for Many Large Farming Operations Is Incomplete
               * RMA Cannot Effectively Assess Insurance Companies'
                 Performance Because of Weaknesses in Quality Assurance
                 Reviews
               * RMA May Be Missing Opportunities to Impose Sanctions Because
                 It Has Not Developed Regulations Implementing its Expanded
                 Authority to Impose Sanctions under ARPA
               * Other Weaknesses Affect the Crop Insurance Program's
                 Vulnerability
                    * RMA's Insurance Information System Contains Inaccurate
                      Data and Does Not Always Identify Inaccurate Claims
                      Payments
                    * RMA Did Not Always Account for Changes in Farming
                      Practices in a Timely Manner
          * RMA's Regulations and Statutory Requirements Hinder RMA
            Officials' Efforts to Reduce Abuse in the Crop Insurance Program
               * Option to Allow Producers to Insure Each of Their Fields
                 Separately May Contribute to Program Abuse
               * Minimal Risk Sharing on Some Policies May Not Provide
                 Insurance Companies Strong Incentive to Carry Out Their
                 Responsibilities under the Program
               * RMA and Insurance Companies Have Difficulty Determining
                 Potential Abuse Associated with Prevented Planting Coverage
               * High Premium Subsidies May Inhibit RMA's Ability to Control
                 Program Abuse
               * Recently Prosecuted Crop Insurance Fraud Cases Highlight
                 Program Vulnerabilities
          * RMA's Failure to Follow Its Guidelines Has Resulted in Program
            Losses for Some New and Expanded Crop Insurance Products
          * Conclusions
          * Matter for Congressional Consideration
          * Recommendations for Executive Action
          * Agency Comments and Our Evaluation
     * Objectives, Scope, and Methodology
     * Selected Information on the Federal Crop Insurance Program, 1981-2004
     * Results of Implementation of the Agricultural Risk Protection Act of
       2000: Survey of FSA County Directors of USDA
     * Results of Improving Compliance and Integrity in the Federal Crop
       Insurance Program: Survey of Crop Insurance Agents
     * Crop Insurance Fraud Cases Criminally Prosecuted, June 2003 to April
       2005
          * Case 1
          * Case 2
          * Case 3
          * Case 4
          * Case 5
          * Case 6
          * Case 7
          * Case 8
     * Comparison of Loss Ratios for Crop Development and Expansion Products
     * Comments from the U.S. Department of Agriculture
          * GAO Comments
     * GAO Contact and Staff Acknowledgments
     * Related GAO Products

                 United States Government Accountability Office

Report to the Chairman, Committee on Homeland Security and Governmental
Affairs, U.S. Senate

September 2005

CROP INSURANCE

  Actions Needed to Reduce Program's Vulnerability to Fraud, Waste, and Abuse

                                       a

GAO-05-528

CROP INSURANCE

Actions Needed to Reduce Program's Vulnerability to Fraud, Waste, and
Abuse

  What GAO Found

While RMA employs a range of processes to help prevent and detect fraud,
waste, and abuse and has reported more than $300 million in savings over
the past 4 years in the crop insurance program, GAO found that RMA does
not effectively use all the tools it has available. Specifically:

     o Inspections during the growing season are not being used to maximum
       effect. Between 2001 and 2004, FSA conducted only 64 percent of the
       inspections RMA had requested. Without inspections, producers may
       falsely claim crop losses.
     o RMA's data analysis of the largest farming operations is incomplete.
       According to GAO's analysis, in 2003, about 21,000 of the largest
       farming operations in the program did not report individuals or
       entities with an ownership interest in these operations. As a result,
       USDA should be able to recover up to $74 million in claims payments.
       FSA did not give RMA access to the data needed to identify such
       individuals or entities.
     o RMA is not effectively overseeing insurance companies' quality
       assurance programs. GAO's review of 120 cases showed that companies
       completed only 75 percent of the required reviews and those that were
       conducted were largely paper exercises.
     o RMA has infrequently used its new sanction authority to address
       program abuses. RMA has not issued regulations to implement its new
       sanction authority under ARPA. RMA imposed only 114 sanctions from
       2001 through 2004. Annually, RMA identifies about 3,000 questionable
       claims, not all of which are necessarily sanctionable.

Eight recent crop insurance fraud cases, investigated by USDA's Office of
Inspector General and resulting in criminal prosecutions between June 2003
and April 2005, reflect these issues. Totaling $3 million in insurance
claims, these cases show how producers, sometimes in collusion with
insurance agents and others, falsely claim prevented planting, weather
damage, and low production. In some cases, producers hid or moved
production from one field to another. Several of these cases also
demonstrate the importance of having FSA and RMA work together to identify
and share information on questionable farming practices/activities.

RMA's regulations, as well as statutory requirements, create program
design problems that hinder RMA officials' efforts to reduce program
abuse. For example, RMA's regulations allow producers to insure fields
individually rather than all fields combined. This option enables
producers to "switch" reporting of yield among fields to either make false
claims or build up a higher yield history on a field to increase its
eligibility for higher insurance guarantees. High premium subsidies,
established by statute, may also limit RMA's ability to control program
abuse because the subsidies shield producers from the full effect of
paying higher premiums associated with frequent or larger claims.

                 United States Government Accountability Office

                                    Contents

Letter                                                                   1 
           Results in Brief                                                 6 
           Background                                                      11 
               RMA Has Strengthened Procedures for Preventing Questionable 
                 Claims, but the Program Remains Vulnerable to Abuse       17 
               RMA's Regulations and Statutory Requirements Hinder RMA     
              Officials' Efforts to Reduce Abuse in the Crop Insurance     
           Program                                                         35 
            RMA's Failure to Follow Its Guidelines Has Resulted in Program 
                   Losses for Some New and Expanded Crop Insurance         
           Products                                                        45 
           Conclusions                                                     48 
                       Matter for Congressional Consideration              50 
                        Recommendations for Executive Action               50 
           Agency Comments and Our Evaluation                              51 

Appendixes                                                           
                 Appendix I: Objectives, Scope, and Methodology            54 
                Appendix II: Selected Information on the Federal Crop         
                             Insurance Program, 1981-2004                  58
              Appendix III:  Results of Implementation of the                 
                             Agricultural Risk Protection Act of 2000:  
                             Survey of FSA County Directors of USDA        59
                Appendix IV: Results of Improving Compliance and              
                             Integrity in the Federal Crop Insurance    
                             Program: Survey of Crop Insurance Agents      65
                 Appendix V: Crop Insurance Fraud Cases Criminally            
                             Prosecuted, June 2003 to April 2005           72
                Appendix VI: Comparison of Loss Ratios for Crop               
                             Development and Expansion Products            77
              Appendix VII:  Comments from the U.S. Department of       78 86 
                             Agriculture GAO Comments                   
              Appendix VIII: GAO Contact and Staff Acknowledgments         90 

  Related GAO Products

Contents

Tables   Table 1: Premium Subsidies Before and After ARPA               17 
            Table 2: Crop Insurance Policyholders Failing to Disclose      
                     Ownership Interest, by Entity Type, Crop Year 2003    24 
            Table 3: RMA Sanctions Requested and Imposed, Crop Years 2001  
                     to 2005                                               29 
            Table 4: Number of USDA OIG Crop Insurance Investigations,     
                     Number of Referrals to the Department of Justice, and 
                     Case Disposition, Fiscal Years 1996 to 2005           30 
              Table 5: Production Reported by an Irrigated Cotton Producer 
                             Indicating Yield Switching                    37 
            Table 6: Crop Insurance Fraud Cases Investigated by the USDA/  
                   OIG and Resulting in Criminal Prosecution, June 2003 to 
                       April 2005                                          42 
Figures   Figure 1: Location of Producers Identified by RMA for Field      
                       Inspections, 2003                                   15
             Figure 2: FSA Inspectors' Primary Reasons for Not Conducting  
                        Field Inspections of Producers with Notable Policy 
                                   Irregularities                          21 

                                 Abbreviations

       ARPA       Agricultural Risk Protection Act of 2000               
       FCIC       Federal Crop Insurance Corporation                     
       FSA        Farm Service Agency                                    
       FSI        Office of Forensic Audits and Special Investigations   
       NASS       National Agricultural Statistics Service               
       OIG        Office of Inspector General                            
       OMB        Office of Management and Budget                        
       RMA        Risk Management Agency                                 
       SRA        Standard Reinsurance Agreement                         
       USDA       U.S. Department of Agriculture                         

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A

United States Government Accountability Office Washington, D.C. 20548

September 30, 2005

The Honorable Susan M. Collins Chairman, Committee on Homeland Security

and Governmental Affairs United States Senate

Dear Chairman Collins:

Federal crop insurance is part of the overall safety net of programs for
American farmers. It provides protection for participating farmers against
the financial losses caused by droughts, floods, or other natural
disasters. Farmers' participation is voluntary, but the federal government
encourages it by subsidizing the insurance premiums. In 2004, the crop
insurance program provided $47 billion in insurance coverage for over 200
million acres of farmland at a cost of $3.6 billion to the federal
government, including an estimated $160 million resulting from fraud,
waste, and abuse.

The U.S. Department of Agriculture's (USDA) Risk Management Agency (RMA),
which supervises Federal Crop Insurance Corporation (FCIC) operations, has
overall responsibility for administering the crop insurance program. RMA
oversees the development of new insurance products and the expansion of
existing insurance products to new areas to help farmers reduce the chance
of financial loss. RMA is also responsible for ensuring that the program
is carried out efficiently and effectively and for protecting against
fraud, waste, and abuse. In this regard, RMA uses a broad range of tools,
including compliance reviews, data mining, and on-site field inspections.
RMA administers the program in partnership with private insurance
companies that share a percentage of the risk of loss or opportunity for
gain associated with each insurance policy written. RMA acts as a
reinsurer-reinsurance is sometimes referred to as insurance for insurance
companies-for a portion of all policies the federal crop insurance program
covers. In addition, RMA pays companies a percentage of the premium on
policies sold to cover the administrative costs of selling and servicing
these policies. In turn, insurance companies use this money to pay
commissions to their agents who sell the policies and fees to adjusters
when claims are filed.

Insurance companies are responsible for reporting to RMA on policy
activity, such as applications for insurance, reports of acres planted,
and notices of loss. Insurance companies, as part of their contractual
agreement with RMA, also have an important role to play in ensuring that
the policies they issue are administered fairly and accurately. For
example, insurance companies must conduct quality assurance reviews, such
as field inspections for policies with a claim equal to or greater than
$100,000, to examine whether the claims they have paid are in compliance
with policy provisions. RMA conducts a regular nationwide review of
insurance companies' compliance with the crop insurance program's
procedures to ensure that companies' quality assurance programs are in
place.

RMA receives policy information from the insurance companies through its
computerized acceptance system. Using this system, RMA checks all policies
for completeness and accuracy. In 2004, RMA provided crop insurance on 1.2
million policies and paid claims on 330,000 of these policies through 17
insurance companies. The Federal Crop Insurance Act, as amended, requires
RMA to set crop insurance premiums at actuarially sufficient rates,
defined as a long-run loss ratio target of no more than 1.075. A loss
ratio is calculated as claims paid divided by total premiums collected. A
loss ratio greater than 1.00 indicates that the program paid more in
claims than was collected in premiums.

Generally, producers can purchase crop insurance to insure up to 85
percent of their normal harvest (yield). This yield is calculated by
looking at a producer's actual production history. To obtain insurance and
receive claims payments, producers must comply with the crop insurance
program's provisions. Specifically, they must accurately report to their
insurance company the number of acres planted; meet deadlines specified in
the policy (e.g., for planting and harvesting crops); pay premiums when
due (generally at the end of the growing season); and report any crop
losses immediately. Producers are also obligated to exercise good farming
practices to minimize the potential for losses and to report their Social
Security numbers and the Social Security numbers of all persons with an
ownership interest of 10 percent or more in the farming operation (e.g., a
corporation) holding the policy.

Over the years, concerns have arisen that some producers may have abused
the crop insurance program by allowing crops to fail through neglect or
deliberate actions in order to collect insurance and that some insurance
companies have not exercised due diligence in investigating losses and
paying claims.1

In part to improve compliance with, and the integrity of, the crop
insurance program, Congress enacted the Agricultural Risk Protection Act
of 2000 (known as ARPA). This act provided RMA and the USDA's Farm Service
Agency (FSA) with new tools for monitoring and controlling program abuses.
(FSA, which has an extensive field office structure, is generally
responsible for helping producers enroll in agricultural support programs,
overseeing these programs, and issuing program payments.) Specifically,
ARPA required the Secretary of Agriculture to develop and implement a
coordinated plan for FSA to assist RMA in the ongoing monitoring of the
crop insurance program, including conducting fact-finding into allegations
of program fraud, waste, or abuse; reporting the results of any such
fact-finding to RMA; and assisting RMA and approved insurance companies in
auditing a statistically appropriate number of claims made under any
policy. Furthermore, ARPA required the Secretary of Agriculture to use
information technologies, such as data mining and data warehousing, to
administer and enforce the crop insurance program. Data mining is the
analysis of data to establish relationships and identify patterns, while
data warehousing is storing gathered data so that it can be easily
analyzed, extracted, synthesized or otherwise used. RMA conducts data
mining to target compliance reviews and investigations on suspect claims.
Under USDA guidance, developed pursuant to a requirement in ARPA, RMA is
to annually provide FSA and the insurance providers with a list of
producers exhibiting high loss ratios, high frequency and severity of
losses, or who are suspected of poor farming practices. RMA provides this
list-called the spot-check list-every April to the appropriate FSA state
offices for distribution to FSA county offices. The FSA county office is
to conduct reviews on the larger of the first 10 producers or the top 5
percent of the

1According to the USDA Inspector General, fraud is commonly perpetrated
through false certification of one or more of the basic data elements
essential for determining program eligibility and amounts of benefits. In
RMA cases, the scheme typically involves a conspiracy between an insurance
company representative and a producer. Abuse is more subjective and occurs
when a participant's actions defeat the intent of the program, although no
law, regulation, or contract provision is actually violated. Waste, on the
other hand, occurs when there are flaws in the program design that
inevitably invite abuse by the program participants. GAO has previously
reported on the potential for fraud, waste, and abuse in the federal crop
insurance program. See Related GAO Products.

producers on the list. Staff in FSA county offices review these cases for
potential fraud, waste, and abuse by inspecting fields insured by the
listed producers. They then refer the results of these inspections to RMA,
which provides the results to the insurance companies holding the policies
for the producers for further review or investigation, if appropriate.
Finally, ARPA gave RMA additional authority to impose sanctions for
program abuses.

In addition, under the Improper Payments Information Act of 2002, RMA has
to provide an estimate of error rates associated with program payments and
report on action to reduce improper payments.2 RMA estimates improper
payments to be about 5 percent of the claims paid annually. RMA
acknowledges that this estimate is not based on a tested methodology and
revised its sampling methodology, beginning in 2004, to provide a more
accurate estimate. The Office of Management and Budget (OMB) has accepted
RMA's proposed sampling methodology, which is to include a 3year review
cycle of insurance companies, to determine the federal crop insurance
program's error rate, and satisfy the statutory requirements of the
Improper Payments Information Act. RMA's 3-year review cycle will assess
insurance companies' adherence to their contract with RMA, quality control
guidelines, and RMA-approved policies and procedures.

You asked us to examine RMA's procedures for assuring integrity in the
crop insurance program. As agreed with your office, we (1) assessed the
effectiveness of USDA's procedures and processes to prevent and detect
fraud, waste, and abuse in selling and servicing crop insurance policies;
(2) determined the extent to which program design issues may make the
program more vulnerable to fraud, waste, and abuse; and (3) determined the
effectiveness of USDA's procedures to assure program integrity in
developing new crop insurance products. Also, as you requested, we
provided examples of recent crop insurance fraud prosecutions to show the
types of actions that producers, agents, and loss adjusters have used to
circumvent RMA's procedures.

To address these issues, we reviewed relevant statutory provisions and
RMA's regulations and guidelines for managing the crop insurance program
and spoke with RMA and FSA officials in headquarters and field offices. We
also reviewed relevant reports, including RMA's most recent annual report
to Congress in 2002. To assess the effectiveness of USDA's procedures and
processes to prevent and detect fraud, waste, and abuse in selling and

2Pub. L. No. 107-300, 116 Stat. 2350 (2002).

servicing crop insurance policies, we examined a nonrandom sample of 120
insurance claims from the 2,794 claims that RMA identified as having
notable policy irregularities and warranting a field inspection in both
2003 and 2004. Of these 120 claims, 100 were the largest claims paid, and
20 were selected to ensure that all data mining selection criteria were
represented, including producers who frequently receive payments because
they claim that adverse weather conditions prevented them from planting
their crop, as well as policy irregularities that suggested collusion
among agents, adjusters, and producers.

We also conducted two surveys. In the first, we surveyed all 829 FSA
county officials responsible for conducting field inspections in 2003 to
assess the effectiveness of USDA's procedures and processes to prevent and
detect fraud, waste, and abuse in selling and servicing crop insurance
policies. In the second, we surveyed a stratified, random sample of 935 of
the approximately 13,000 crop insurance sales agents to solicit their
views on control weaknesses and suggestions for improving oversight of the
crop insurance program. This sample methodology allows us to project the
survey results to all crop insurance agents. We received responses from 92
percent of the 829 FSA officials in the first survey and 76 percent of the
935 insurance agents in the second survey. To determine the extent to
which program design issues may contribute to fraud, waste, and abuse in
the crop insurance program, we conducted a qualitative assessment of
economic studies. We also discussed these issues with USDA officials in
headquarters and field offices. To determine the effectiveness of RMA's
procedures for assuring program integrity in developing and expanding crop
insurance products, we evaluated the agency's policies, procedures, and
other pertinent documents to identify the controls in place to assure
program integrity. We selected a nonrandom sample of 16 developmental and
expansion programs between 1998 and 2002 to determine whether they
complied with RMA's policies and procedures; the sample included policies
with low and high claims experience to determine if loss experience was
affected by compliance with procedures.

To show the types of actions that producers, agents, and loss adjusters
have used to circumvent RMA's procedures, our Office of Forensic Audits
and Special Investigations (FSI) reviewed eight cases of crop insurance
fraud prosecuted between June 2003 and April 2005. To research these
cases, it reviewed USDA's Inspector General's case files, spoke with
representatives from the U.S. Department of Justice, and reviewed relevant
reports, court papers, and other documentation. FSI conducted its
investigation from February through June 2005 in accordance with quality
standards for investigations as set forth by the President's Council on
Integrity and Efficiency.

We conducted our review from July 2004 through August 2005, according to
generally accepted government auditing standards, which included an
assessment of data reliability and internal controls. Appendix I contains
more detailed information on our scope and methodology.

Employing a broad range of processes to prevent and detect fraud, waste,

  Results in Brief

and abuse in the crop insurance program, RMA has reported that
questionable claims payments fell more than $300 million over the past 4
years. However, our review showed that RMA is not effectively using all of
the tools it has available and that producers and others continue to take
advantage of the program. In addition, program design issues, including
insuring individual fields, risk-sharing provisions, and prevented
planting can impede RMA's effort to ensure program integrity.
Specifically:

        * Inspections during the growing season are not being used to maximum
          effect. Although FSA is assisting RMA, as required under ARPA, by
          conducting field inspections, FSA is not doing so in accordance
          with USDA guidance. Between 2001 and 2004, producers filed claims
          on about 380,000 policies annually, and RMA's data mining
          identified about 1 percent of these claims as questionable and
          needing FSA inspection. Under USDA guidance, FSA should have
          conducted all of the requested inspections. However, FSA conducted
          only 64 percent of the inspections RMA requested; FSA inspectors
          said that they did not conduct all requested inspections primarily
          because they did not have sufficient time. Between 2001 and 2004,
          FSA offices in nine states did not conduct any of the field
          inspections RMA requested in one or more of the years. Until we
          brought this matter to their attention in September 2004, FSA
          headquarters officials were unaware that FSA offices in these nine
          states had not conducted field inspections for one or more of the
          years. FSA may not be as effective as possible in conducting field
          inspections because RMA does not provide FSA with information on
          the nature of the suspected abusive behavior or the results of
          follow-up investigations. About 80 percent of the FSA inspectors we
          surveyed believe that receiving more information from RMA would
          help them be more effective in detecting fraud, waste, and abuse.
          In addition, FSA state officials told us that inspectors are
          reluctant to conduct field inspections because they believe RMA and
          insurance companies do not use the information to deny claims for
          producers who do not employ
        * good farming practices. Finally, these inspections do not always
          occur in a timely fashion, which would help detect abuse during the
          growing season. Because of these problems, the insurance companies
          and RMA cannot always determine the validity of a claim.
     o RMA's data analysis of the largest farming operations is incomplete.
       As required by ARPA, RMA is using data mining to administer and
       enforce the crop insurance program and to analyze patterns that
       suggest fraudulent activity, such as unusually high or frequent
       claims. However, RMA's analysis excludes comparisons of the largest
       farming operations-including those organized as partnerships and joint
       ventures. RMA cannot make these comparisons because producers do not
       always report the individuals or entities having a beneficial interest
       of 10 percent or more in the farming operation holding the policy, as
       required. RMA's database does not identify a producer's ownership
       interest in other farming operations, and it has not been given access
       to similar data that FSA maintains. According to our review of FSA's
       database for 2003, 21,310 entities, or 31 percent of the entities we
       analyzed, did not report to RMA one or more individuals or entities
       who had a beneficial interest in their farming operation, as RMA
       regulations require. RMA should be able to recover up to $74 million
       in claims paid to these 21,310 entities-the amount of claims paid in
       proportion to the interest of the member who was not reported.
       Additionally, through data mining, we identified 115 of these 21,310
       entities with questionable insurance claims totaling $9.2 million.
       Finally, we identified nine farming entities that had one or more
       owners who had previously been ruled ineligible to participate in the
       federal crop insurance program because, for example, they had not paid
       their insurance premium. We have referred this information to RMA for
       further investigation. As our analysis indicates, without access to
       FSA's database, RMA is missing opportunities to compare claims
       experience among these large operations and to identify potentially
       fraudulent behavior.
     o RMA is not effectively overseeing insurance companies' quality
       assurance programs. Eighty of the 120 insurance claim files we
       reviewed should have received a quality assurance review because, for
       example, they claimed more than $100,000 in crop losses. However, we
       found the insurance companies conducted reviews on only 59 of these
       claims. Furthermore, the reviews were largely paper exercises, such as
       computational verifications, rather than comprehensive claim analysis.
       RMA did not ensure that companies conducted all reviews called for
       under its guidance and did not examine the quality of the companies'

      reviews. RMA officials acknowledged that their agency's guidance for

       conducting quality assurance reviews needs revision to improve the

compliance program. They noted RMA is working with a contractor to

revise its guidance.

o  RMA has infrequently used its new sanction authority to address program
abuses. RMA has not fully used its new authority under ARPA to sanction
producers, insurance agents, and claims adjusters who willingly and
intentionally provide false or inaccurate information or fail to comply
with other FCIC program requirements. RMA has identified about 3,000
producers with suspicious claim payments-notable policy irregularities
compared with other producers growing the same crop in the same
county-each year since the enactment of ARPA. While not all of these
policy irregularities were necessarily sanctionable, RMA has imposed only
114 sanctions from 2001 through 2004. RMA's referrals to USDA's Inspector
General declined from a high of 37 in 2000 to 14 in 2004. According to RMA
officials, RMA has requested and imposed few sanctions because it has not
issued regulations to implement its expanded authority under ARPA. Without
regulations, RMA has not established what constitutes an "FCIC
requirement" and how it will determine that a violation has occurred or
what procedural process it will follow before imposing sanctions.
Insurance agents we surveyed and company officials we contacted believe
that RMA needs to more aggressively seek to penalize those producers,
agents, and adjusters who abuse the program. RMA officials told us that
they will give priority to issuing regulations implementing the sanctions
authorized under ARPA.

We also found that RMA's insurance information system contains inaccurate
data and does not always identify inaccurate claims payments and that RMA
did not always account for changes in farming practices in a timely
manner.

While RMA can improve its day-to-day oversight of the federal crop
insurance program in a number of ways, the program's design, as laid out
in RMA's regulations or as required by statute, hinders RMA officials'
efforts to administer certain program provisions to prevent fraud, waste,
and abuse. Specifically:

        * RMA's regulations allow producers the option of insuring their
          fields individually rather than combined as one unit. Producers may
          want to insure fields separately out of concern that they would
          experience
        * losses in a certain field because of localized weather conditions,
          such as hail or flooding. Insuring fields separately provides
          greater assurance that such losses will be covered. However,
          insuring fields separately enables producers to "switch" production
          among fields-reporting production of a crop from one field that was
          actually produced on another field-either to make false insurance
          claims based on low production or to build up a higher yield
          history on a particular field in order to increase its eligibility
          for higher future insurance guarantees. Of the 2,371 producers
          included on RMA's list of producers with irregular claims in 2003,
          12 percent were suspected of switching production among their
          fields.
     o To induce insurance companies to deliver crop insurance to all
       eligible producers, RMA's regulations allow the companies to place
       producers with frequent or high claims in an insurance fund that
       shifts almost all of the risk associated with these claims to the
       federal government. Accordingly, the companies have less incentive to
       rigorously challenge questionable claims.
     o RMA is statutorily required to offer producers "prevented planting"
       coverage. With this coverage, producers can file claims if they are
       unable to plant the crop because of an insured cause of loss, such as
       too much rain causing wet fields. However, as RMA and company
       officials told us, it is often difficult to determine whether the
       producer had the opportunity to plant a crop, hampering their ability
       to hold down fraudulent claims.
     o The statutorily established premium subsidies can be as high as 67
       percent and, therefore, may also inhibit RMA's ability to control
       program abuse. High premium subsidies shield producers from the full
       effect of paying higher premiums associated with frequent or larger
       claims because the subsidies significantly reduce producers' premiums.
       Over one-half of the crop insurance agents responding to our survey
       believed that crop insurance should cost more for producers with a
       pattern of claims that are higher or more frequent in comparison with
       other producers for the same crop in the same location to discourage
       fraud, waste, and abuse in the program.

Eight recent crop insurance fraud cases, investigated by USDA's Office of
Inspector General (OIG) and resulting in criminal prosecutions between
June 2003 and April 2005, reflect issues we identified. These eight cases,
totaling $3.1 million in insurance claims, show how producers, sometimes
in collusion with insurance agents and others, falsely claim prevented
planting, weather damage, and low production. Some of the cases show
producers hiding or moving production from one field to another. Several
of these cases also demonstrate the importance of having FSA and RMA work
together to identify and share information on questionable farming
practices/activities.

When developing and expanding new crop insurance products, RMA did not
always follow its guidelines, which, according to USDA, were designed,
among other things, to minimize exposure to loss. As a result, claims and
loss ratios have been substantially higher for some new crop products. For
example, for the fall-planted watermelon program launched in southern
Texas, RMA approved the product without completing all data collection and
reviews of data called for under its guidelines. RMA paid more than $20
million for fall-planted watermelon claims in 1999. RMA cited a shortage
of experienced staff as a major factor contributing to its failure to
follow its guidelines. In addition, we found that RMA did not always
annually evaluate these new products, as laid out in its guidelines. In
most cases, this lack of oversight did not appear to result in
significantly greater losses. However, in the sweet potato program, a
timely evaluation of the loss experience might have averted the payment of
several million dollars in claims. According to RMA officials, they do not
typically conduct annual reviews, as the guidelines state they are to do,
because they believe they need several years of loss experience to
adequately evaluate a new product.

To better protect the crop insurance program from fraud, waste, and abuse,
Congress should consider allowing RMA to reduce premium subsidies for
producers who consistently have claims that are irregular in comparison
with other producers growing the same crop in the same location. We are
also making a number of recommendations to the Secretary of Agriculture to
improve RMA's and FSA's implementation of ARPA and oversight of the crop
insurance program. Among other things, we are recommending that the
Secretary of Agriculture direct the Administrators of RMA and FSA to
develop an action plan to improve the effectiveness of the inspections
conducted during the growing season. We are also recommending that the
Secretary of Agriculture direct FSA to share producer-derived information
with RMA to administer and enforce requirements of the crop insurance
program. Lastly, we are recommending that the Secretary of Agriculture
promulgate regulations implementing the expanded authority under ARPA to
impose sanctions and direct RMA to eliminate optional unit coverage for
producers who use this coverage to frequently file questionable claims and
receive payments.

We provided a draft of this report to USDA for its review and comment.
USDA agreed to act on most of our recommendations, but it disagreed with
two of them. For example, USDA agreed to take steps to improve the
effectiveness of its growing season inspections and to strengthen
oversight of crop insurance providers' implementation of quality control
reviews. It also agreed that promulgating regulations to implement the
expanded authority under ARPA to impose sanctions would enhance RMA's
sanctions efforts, although it did not believe that the lack of
regulations has precluded it from using ARPA's authority to impose
sanctions. USDA disagreed with our recommendation that FSA field offices
conduct all inspections called for under agency guidance because it
believes FSA does not have sufficient resources to complete all of these
inspections. USDA may want to study the costs and benefits of conducting
these inspections. USDA also disagreed with our recommendation to
eliminate optional unit coverage for producers who received payments for
questionable claims because, among other things, it did not believe
eliminating such coverage would be prudent or cost-effective. However, we
continue to believe that it is reasonable for USDA to use all tools at its
disposal and that our recommendations will reduce the federal crop
insurance program's vulnerability to fraud and abuse. Our detailed
response to USDA's comments appears at the end of this letter and
following USDA's written comments in appendix VII.

Farming is an inherently risky enterprise. In conducting their operations,

  Background

producers are exposed to both production and price risks. Crop insurance
is one method producers can use to protect themselves against these risks.
Over the years, the federal government has played an active role in
helping to mitigate the effects of these risks on farm income by promoting
the use of crop insurance. Appendix II contains information on the crop
insurance program from 1981 to 2004.

Under the program, participating producers are assigned (1) a "normal"
crop yield based on their actual production history and (2) a price for
their commodity based on estimated market conditions. Producers can then
select a percentage of their normal yield to be insured and a percentage
of the price they wish to receive when crop losses exceed the selected
loss threshold. The following example illustrates how a claim payment is
determined. A producer whose normal crop production averages 100 bushels
of corn per acre and who chooses to buy insurance at the 75 percent
coverage level will be guaranteed 75 percent of 100 bushels, or 75 bushels
per acre. Assuming that the producer had chosen the maximum price coverage
and that RMA had estimated the market price for corn at $2 per bushel, the
producer would have total coverage of $150 per acre. Should something like
drought cut the producer's actual harvest to 25 bushels, the producer will
be paid for the loss of 50 bushels per acre-the difference between the
insured production level of 75 bushels and the actual production of 25
bushels. The insurance would pay the producer's claim at $2 x 50 bushels,
or $100.

In addition, under the crop insurance program's "prevented planting"
provision, insurance companies pay producers who were unable to plant the
insured crop because of an insured cause of loss that is general in their
surrounding area, such as weather conditions causing wet fields, and that
prevents other producers from planting acreages with similar
characteristics. These producers are entitled to claim payments that
generally range from 50 to 70 percent of the coverage they purchased,
depending on the crop.

Critical to the success of the crop insurance program is aligning the
premium rates with the risk each producer represents. The risk associated
with growing a particular crop varies from location to location, from farm
to farm, and from producer to producer. If the rates are too high for the
risk represented, producers are less likely to purchase insurance,
lowering the program's income from premiums. Conversely, if the rates are
too low, producers are more likely to purchase crop insurance, but because
the rates are too low, the income from premiums will be insufficient to
cover the claims. Economists refer to this situation as adverse selection.

To align crop insurance premium rates with the risk represented, RMA
establishes rates that vary by crop, location (county), farm, and
producer. RMA's objective is to set the rates that each producer pays
according to the risk associated with the producer's location, crop, and
past production. For the major field crops, RMA begins its premium
rate-setting process by looking at past crop insurance experience for each
county and state. On the basis of that historical experience, RMA sets a
premium rate for each crop in each county at the 65 percent coverage level
for average production. Using this premium rate, RMA makes adjustments to
establish rates for other coverage levels. RMA also adjusts premium rates
to assume producers will insure individual fields, called "optional
units," rather than all fields combined, called "basic units."3 RMA uses
an algorithm to make adjustments to establish premium rates for producers
whose production levels are higher or lower than the county's average.
According to RMA, this latter adjustment is based on the assumption that
producers with higher-than-average production levels are less likely to
experience losses. Finally, to encourage participation in the crop
insurance program, the federal government subsidizes the premiums.

Moreover, for producers that do not have a sufficient number of years-at
least 4-of actual production history records, RMA uses the historical
average county yield (called a transitional yield), adjusted by a factor
based on the number of years for which the producers have provided
records. Producers may also substitute the transitional yield for actual
yields in disaster years. In general, RMA sets a floor under a producer's
annual yield so that a yield in any year cannot fall below 60 percent of
the transitional yield for that crop.

RMA establishes the terms and conditions that the private insurance
companies selling and servicing crop insurance policies are to use through
a contract called the standard reinsurance agreement (SRA). The SRA is a
cooperative financial assistance agreement between RMA, through the FCIC,
and the private crop insurance companies to deliver federal crop insurance
under the authority of the Federal Crop Insurance Act. The SRA establishes
the minimum training, quality control review procedures, and performance
standards required of all insurance providers in delivering any policy
insured or reinsured under the Federal Crop Insurance Act, as amended. For
example, under the SRA, companies must provide training to their sales
agents that includes information on how to recognize common indicators of
misrepresentation or abuse, review anomalies identified by FCIC that
suggest an unusual claims pattern, and report all cases of suspected
misrepresentation, fraud, waste, or abuse.

To distinguish among different levels of risk, the SRA establishes three
reinsurance funds with commensurate requirements for the amount of risk
companies can cede back to FCIC: assigned risk, developmental, and
commercial. FCIC created the assigned risk fund for the riskiest policies.

3In general, RMA permits producers to establish optional units by land
section or FSA farm serial number and by irrigated and nonirrigated
practices. Optional units may be established only if each optional unit is
located on noncontiguous land, unless otherwise allowed by written
agreement. In addition, producers who insure all their fields together in
a basic unit receive a 10 percent discount on the premium they pay.

Page 13 GAO-05-528 Crop Insurance

Under the SRA, insurance companies may include individual policies in this
fund up to limits established for each state. Beginning in 2005, the
maximum amount of premium and associated liability for claims payments
that can be allocated to the assigned risk fund varies from 25 percent in
some states (e.g., Illinois, Indiana, and Iowa) to 75 percent in others
(e.g., Mississippi, North Dakota, and Texas). Companies must retain 15 to
25 percent of the policies' premiums and associated liability for claims
payments for policies in this fund, depending on the state.

RMA is responsible for ensuring that the federal crop insurance program is
carried out efficiently and effectively and for protecting against fraud,
waste, and abuse in the program. In this regard, RMA uses a broad range of
tools, including compliance reviews, company quality assurance reviews,
data mining, and FSA field inspections. RMA has a compliance staff of 78
employees in six field locations to review company quality assurance
activities and investigate anomalous claims payments. For their part,
insurance companies must conduct quality assurance reviews, such as
program or field reviews, for policies with a claim RMA has identified as
anomalous and policies with a claim equal to or greater than $100,000;
these reviews are to determine whether the claims they have paid are in
compliance with policy provisions.

In 2004, RMA initiated a new operational review program that provides for
extensive review of each insurance provider's operation every 3 years.
RMA's 3-year review cycle will assess insurance providers' adherence to
their contract with RMA, quality control guidelines, and RMA-approved
policies and procedures. This review will differ from prior reviews in
that RMA will direct the companies to investigate policies that RMA has
identified as having anomalous claims and require RMA to assess a
statistical sample of additional policies. In the past, the insurance
companies reviewed a statistical sample of claims and policies, and RMA
examined the results of the companies' reviews.

To strengthen oversight at the local level, RMA conducts data mining and
uses past loss experience to develop a sample of producers with notable
policy irregularities, such as unusually high or frequent losses. Staff in
FSA county offices review these cases for potential fraud, waste, and
abuse by inspecting the fields of the producers on the list. Figure 1
shows the location of producers RMA identified for field inspections in
2003.

willfully and intentionally failing to comply with any other FCIC
requirement. RMA has the authority to disqualify producers who have
committed a violation not only from the insurance program but also from
most other farm programs for up to 5 years. RMA can also impose a civil
fine for each violation, up to the financial gain the individual obtained
as a result of the false or inaccurate information provided or of the
noncompliance, or $10,000, whichever is greater. Working with RMA's
regional compliance offices, RMA's sanctions office processes requests for
sanctions from the field offices and forwards the findings and
recommendations to RMA's appeals and litigation office. Following this
office's review, USDA's Office of General Counsel provides a legal opinion
on the sanction request. After consulting with the Office of General
Counsel, if the Administrator of RMA considers the case valid, RMA files a
complaint with USDA's Administrative Law Office. At the defendant's
request, the Administrative Law Office will hold a hearing, after which
the administrative law judge will render a decision.

ARPA also increased the percentage share of the premium the government
pays for most coverage levels of crop insurance, beginning with the 2001
crop year. Although the percentage of the premium the government pays
declines as producers select higher levels of coverage, the government
contribution significantly increases for all levels of coverage,
particularly for the highest levels of coverage. For example, as shown in
table 1, the share of the premium paid by the government rose from 42 to
59 percent of the premium for 65 percent coverage.4

4Additionally, ARPA requires USDA to subsidize revenue insurance products
at the same rate as the level of subsidy provided for a basic crop
insurance policy. Revenue insurance products provide coverage to producers
against lost revenues (or incomes) caused by low prices, low yields, or a
combination of low prices and low yields. An indemnity is paid to a
producer when any combination of yield and price results in revenue that
is less than a pre-specified revenue guarantee.

Page 16 GAO-05-528 Crop Insurance

  RMA Has Strengthened Procedures for Preventing Questionable Claims, but the
  Program Remains Vulnerable to Abuse

                Table 1: Premium Subsidies Before and After ARPA

Percentage of coverage Percentage of premium paid by the government
selected by producer Before ARPAa After ARPA

                                    50 5567

                                    55 4664

                                    60 3864

                                    65 4259

                                    70 3259

                                    75 2455

                                    80 1748

                                    85 1338

Source: RMA.

aFor crop years 1999 and 2000, the actual premium subsidy was higher than
shown. Under emergency supplemental acts, producers received an additional
30 percent discount in 1999 and 25 percent discount in 2000.

Since ARPA, RMA has taken a number of steps to improve its procedures and
processes to prevent and detect fraud, waste, and abuse in selling and
servicing crop insurance policies. Most notably, RMA reports that data
mining analyses and subsequent communication to producers resulted in a
decline of at least $300 million in questionable claims payments from 2001
to 2004. However, we found that RMA is not effectively using all of the
tools it has available and that producers and others can continue to take
advantage of the program. We identified weaknesses in four key areas: (1)
field inspections, (2) analysis that excludes many large farming
operations when producers do not report their interest in them, (3)
quality assurance reviews, and (4) imposition of sanctions. Weaknesses in
these areas continue to leave the program vulnerable to questionable
claims, and insurance companies and RMA cannot always determine the
validity of a claim to minimize fraud, waste, and abuse. We also found
that RMA's insurance information system does not always identify policies
that fail to comply with policy provisions and that RMA's implementation
approach may not always respond to unanticipated vulnerabilities in a
timely manner.

    Data Mining and Other Actions Have Improved RMA's Ability to Manage the Crop
    Insurance Program

Each year, RMA develops a list of producers whose operations warrant an
on-site inspection (the spot-check list) during the growing season because
data mining uncovered patterns in their claims that are consistent with
the potential for fraud and abuse. For example, the list includes

     o producers, agents, and adjusters linked in irregular behavior that
       suggests collusion;
     o producers who for several consecutive years received most of their
       crop insurance payments from prevented planting indemnity payments;
     o producers who appear to have claimed the production amounts for
       multiple fields as only one field's yield, thereby creating an
       artificial loss on their other field(s); and
     o producers who, in comparison with their peers, have excessive
       harvested losses over many years.

Since RMA began using data mining in 2001, it has identified about 3,000
producers annually who warrant an on-site inspection because of anomalous
claims patterns. In addition, RMA annually performs about 100 special
analyses to identify areas of potential vulnerability and trends in the
program.

RMA provides the list of producers from its spot-check list to the
appropriate FSA state offices for distribution to FSA county offices, as
well as to the insurance company selling the policy to the producer. Staff
in FSA county offices advise the selected producers that they have been
identified for an inspection as a result of data mining and conduct field
inspections during the growing season. In conducting these inspections,
inspectors are to determine the tillage method used; weed control
practices; type and amount of fertilizer applied; weather conditions; and
how the inspected crop compares with others in the area. As a result of
these inspections and other information, RMA reported total cost savings
of $312 million, primarily in the form of estimated payments avoided: $48
million in 2001, $112 million in 2002, $81 million in 2003, and $71
million in 2004. For example, according to RMA, claims payments to
producers identified for an inspection decreased nationwide from $234
million in 2001 to $122 million in 2002. According to RMA, some of the
producers on the list bought less insurance and a few dropped crop
insurance entirely, but most simply changed their behavior regarding loss
claims.

    Field Inspections Specified in RMA's Coordination Plan Are Not Being Used to
    Maximum Effect

ARPA required USDA to have a plan for FSA to assist RMA and approved
insurance providers in auditing a statistically appropriate number of crop
insurance claims. Under USDA guidance, developed pursuant to this
requirement, RMA is to annually provide a list of producers who exhibit
high loss ratios and high frequency and severity of losses or who are
suspected of poor farming practices. Upon receipt of this list, the FSA
county office is to review the first 10 producers or the top 5 percent of
the producers on the list, whichever is larger. If less than 10 producers
are on the list, then FSA is to check all of them.5 All the lists that RMA
has provided to FSA county offices include 10 or fewer producers, but FSA
is not conducting field inspections for all producers on the list. Between
2001 and 2004, producers filed about 380,000 claims annually. RMA's data
mining identified about 1 percent of these claims as questionable and
needing inspection.

Overall, FSA conducted only 64 percent of the inspections RMA requested
from 2001 to 2004. Specifically, FSA submitted inspection reports for only
70 percent of the inspections RMA requested in 2001 (1,737 requested), 49
percent in 2002 (3,303 requested), 67 percent in 2003 (3,094 requested),
and 73 percent in 2004 (3,832 requested). During this period, FSA offices
in nine states failed to conduct any of the field inspections RMA had
requested in one or more of the years. Until we brought this matter to
their attention in September 2004, FSA headquarters officials were unaware
that these nine states had not conducted field inspections for one or more
of the years. According to FSA officials in five states we contacted,
county directors are reluctant to conduct field inspections because they
believe RMA and insurance companies do not use the information to deny
claims for producers who do not employ good farming practices. As such,
they believe it does not make sense for them to spend time conducting
these reviews. However, by not conducting all requested inspections, FSA
is missing opportunities to identify producers who file unwarranted
claims.

For their part, FSA inspectors believe they would be more effective in
determining fraud, waste, and abuse if they received information from RMA
on the claims patterns RMA's data mining has identified as questionable.
For example, of the 3,832 claims RMA identified for field inspections in
2004, approximately two-thirds were selected for anomalous claims patterns
associated with fraud, such as switching information on

5FSA/RMA Handbook, FCIC Program Integrity, 4-RM.

production yields from one insured field to another. About 80 percent of
the FSA inspectors we surveyed believed that receiving more information
from RMA would help them be more effective in detecting fraud, waste, and
abuse when they conduct field inspections. (See app. III for a summary of
the results of our survey of FSA inspectors.) Additionally, several FSA
inspectors surveyed provided written comments regarding the need for
feedback. As one respondent noted, there is little incentive to document
field inspection findings because FSA rarely learns what, if any, action
was taken. Another respondent commented that he would like feedback from
RMA on how useful the inspections have been. He would like to avoid
spending time on inspections that may not be useful to RMA. RMA
headquarters officials acknowledged that providing feedback to FSA
inspectors might help improve the quality of the field inspections.
Similarly, company officials told us that information from RMA's data
mining would help claims adjusters pay particular attention to determining
the total production for the producer's farming operation and differences
between fields with and without losses.

Although FSA inspectors cited a lack of communication with RMA on specific
cases and findings as a major impediment to completing inspections, they
also identified other reasons. As figure 2 shows, the most commonly cited
reason was "not having enough time."

Figure 2: FSA Inspectors' Primary Reasons for Not Conducting Field
Inspections of Producers with Notable Policy Irregularities

Percentage

on findings Reasons for not conducting field inspections

Source: GAO.

We discussed the reported lack of time with FSA headquarters officials,
who advised us that field offices' broad range of responsibilities provide
limited time for field inspections in support of RMA. They said our survey
results taken as a whole underscore the importance of effective
communication and information sharing between RMA and FSA to maximize the
effectiveness of field inspectors' work.

FSA's field inspections also do not always occur in a timely manner and,
therefore, FSA inspectors may miss opportunities to detect abuse during
the growing season. RMA generally provides its spot-check list to FSA in
April, at the start of the growing season. USDA guidance directs FSA staff
to perform at least two field inspections-one within 30 days of the final
planting date and one before harvest-on a minimum of one representative
tract. FSA selects a representative tract for each crop listed by RMA on
the spot-check list.6 However, about 17 percent of FSA inspectors reported
that they received RMA's request for a field inspection more than 30 days
after the final planting date. In some cases, inspection requests came in
as much as 6 months later.

Additionally, insurance companies may receive the results of some field
inspections too late to determine the validity of the claim. After FSA
county offices conduct the field inspections, they report the findings to
RMA, which then provides the results to the insurance companies holding
the policies for the producers. According to company officials, they are
unable to use the results of some field inspections because the
information is received months after the claim was paid. For example, in
one claim file we reviewed, on November 24, 2003, RMA referred to an
insurance company a soybean producer in Ohio who had received claims
payments in each of the past 5 years and was suspected of underreporting
his production in 2003. FSA's field inspection, conducted in September
just prior to harvest, found the crop to be "above average to average" for
the county and did not identify any concerns regarding the crop's expected
yield. To determine whether the producer underreported production, the
insurance company needed to conduct a preharvest appraisal of the
producer's fields. While the insurance company conducted a quality
assurance review of the claim, it received RMA's reports after the
producer harvested the soybeans-too late to conduct preharvest appraisals
to validate production.7

FSA may also be missing opportunities to provide RMA with critical
information to assess a claim's validity. In reviewing claims, we found
that FSA frequently inspects only one tract, but that tract was not always
the tract on which a claim was filed. In written comments on our survey,
several FSA inspectors reported that they believe conducting a growing
season inspection on more than one tract is necessary to ensure the

6FSA/RMA Handbook, FCIC Program Integrity, 4-RM. The final planting date
is the date contained in the special provisions for the insured crop by
which the crop must initially be planted in order to be insured for the
full production guarantee or the amount of insurance per acre.

7A company official stated that because this producer was on the
spot-check list, the company had contacted the local FSA office at the
beginning of the growing season requesting copies of growing season
inspection reports when they were completed. However, the company did not
follow up with FSA at the end of the growing season. In addition, although
the company received RMA's referral too late to conduct preharvest
appraisals, the company received the information before the producer filed
the claim (December 2, 2003) and company paid it (January 16, 2004).
However, it does not appear that the company used the referral information
to question the producer's claim.

    RMA's Analysis to Detect Potential Program Fraud and Abuse for Many Large
    Farming Operations Is Incomplete

monitoring program is effective. However, these inspectors also noted that
conducting inspections on more than one tract of land would place
additional demands on their time.

RMA's data mining excludes many large farming operations because producers
fail to report other individuals' and entities' interests in these
operations. However, these entities, such as partnerships and
corporations, may include individuals who are also members of one or more
other entities. Because it does not know the ownership interests in these
farming operations, RMA cannot readily identify potential fraud. For
example, producers who are members of more than one farming operation may
have the opportunity to move production from one operation to another to
file unwarranted claims, without RMA's knowledge that these producers
participate in more than one farming operation.

These farming operations do not always report other individuals or
entities who hold or acquire a beneficial interest of 10 percent or more
in the insured operation, as required by RMA regulations. RMA was unaware
that these entities had failed to fully disclose ownership interest
because it has not been given access to the FSA data file identifying a
producer's ownership interest in other farming operations. However, ARPA
requires the Secretary of Agriculture to develop and implement a
coordinated plan for RMA and FSA to reconcile all relevant information
received by either agency from a producer who obtains crop insurance
coverage. The Secretary of Agriculture also must require RMA and FSA to
reconcile this producer-derived information on at least an annual basis,
starting with the 2001 crop year, to identify and address any
discrepancies. We were able to obtain the FSA data file and determine
whether (1) farming operations report all members who have a substantial
beneficial interest in the operation, (2) these farming operations file
questionable crop insurance claims, and (3) agents or claims adjusters had
financial interests in the claim.8 As shown in table 2, of the 69,184
entities that had crop insurance policies in 2003 and that were in both
RMA's and FSA's databases, 21,310, or

30.8 percent, did not report one or more members who held a beneficial
interest of 10 percent or more in the farming operation holding the
policy.

8The Center for Agribusiness Excellence conducted this analysis at the
request of GAO. The Center, located at Tarleton State University in
Stephenville, Texas, provides research, training, and resources for data
warehousing and data mining of agribusiness and agriculture data. The
Center provides data mining of crop insurance data for RMA.

Page 23 GAO-05-528 Crop Insurance

Table 2: Crop Insurance Policyholders Failing to Disclose Ownership
Interest, by Entity Type, Crop Year 2003

                                                           Number of entities
Entity type of       Number of entities failing to disclose                
policyholder         analyzeda          ownership interestb     Percentage
Corporation                      38,463                  12,130       31.5 
General partnership              24,780                   7,486       30.2 
Limited partnership               4,401                   1,479       33.6 
Sole proprietorshipc              1,540                     215       14.0 
Total                            69,184                 21,310d       30.8 

Sources: GAO analysis of RMA and FSA data.

aWe excluded trusts and joint ventures from the analysis because RMA and
FSA use conflicting definitions. We then identified 69,184 entities in
both the FSA and RMA files. FSA's database for ownership in entities
contained 345,421 entities for 2003, and the RMA database contained
112,467 entities that could have one or more members holding a beneficial
interest of 10 percent or more.

bEntities and members in the RMA database were compared against the FSA
database. If the entity or any member that held a beneficial interest of
10 percent or more as reported in the FSA database did not match the RMA
database, the policy was identified as an entity failing to disclose
ownership interest.

cSole proprietors operate farming entities using an employer tax
identification number and may conduct business under an assumed name.

dOf the 21,310 entities failing to disclose ownership interest, 5,848
entities had members with tax identification numbers that differed by one
digit in the RMA and FSA databases.

RMA should be able to recover a portion of the $224.8 million in claims
paid to the 21,310 entities that failed to disclose the ownership interest
of one or more members in 2003. According to RMA regulations, if the
policyholder fails to disclose the ownership interest in the farming
operation as required, the policyholder must repay the amount of the
claims payment that is proportionate to the interest of the person who was
not disclosed.9 The average ownership interest of the persons not
disclosed for the 21,310 entities was 33 percent; as a result, RMA should
be able to recover up to $74 million in claims payments.

97 C.F.R. S: 457.8.

According to our analysis of RMA's and FSA's databases, results were
similar for 2004-20,659 entities failed to disclose the ownership interest
of one or more members. As a result, RMA should be able to recover up to
$70 million in claims payments. In addition, we identified 24 crop
insurance agents who sold policies to farming entities in which the agents
held a substantial beneficial interest but failed to report their
ownership interest to RMA as required.10 These farming entities received
$978,912 in claims payments in 2003 and 2004.

RMA regulations require that, if a person who is not reported is also
ineligible to participate in the crop insurance program, the crop
insurance policy is void, and the policyholder must repay the entire
claims payment. For example, a person can be ineligible because of
delinquent debt, such as unpaid premiums, to RMA or insurance companies.
For 2003 and 2004, using FSA's data, we found that nine farming operations
contained one or more members participating in the crop insurance program
who RMA had determined were ineligible to participate.

10In addition, RMA guidance Manual 14, Guidelines and Expectations for
Delivery of the Federal Crop Insurance Program states that insurance
companies must conduct conflict-of-interest reviews for all crop insurance
claims of individuals directly associated with the federal crop insurance
program. However, without knowledge that these insurance agents held a
substantial beneficial interest of 10 percent or more in entities that
received claims payments, insurance companies may not have conducted the
reviews in 2003 and 2004. As of August 2005, RMA could not confirm that
these reviews had been conducted.

If RMA had complete information on entity ownership interests, it could
strengthen the review of some of the largest claims. For example, in
analyzing the 21,310 entities failing to disclose ownership interest in
2003, we found 210 entities with questionable insurance claims totaling
$11.1 million on 244 policies. Furthermore, we identified one claims
adjuster who adjusted a policy in 2004 with claims payments of $91,094 for
a farming operation in which he held a beneficial interest of 33
percent.11 RMA guidance prohibits conflict-of-interest activities. Among
other things, insurance providers are not to permit adjusters to adjust a
claim of a party in which the adjuster has a material or financial
interest.12 Without FSA's entity data, RMA is missing opportunities to
identify potentially fraudulent behavior in these operations.

Furthermore, an internal RMA study found that entities that purchase crop
insurance for only 1 or 2 years have higher claims experience than
entities that participate continuously over a number of years.13 According
to FSA officials in two states we contacted, some entities are apparently
created temporarily to avoid tracking by RMA, making it difficult for RMA
to identify questionable claims patterns over time. They told us that
after these entities participate in the crop insurance program for a few
years, they are dissolved, and the farming operations are reestablished
under new entity names.

11We also identified an additional 12 claims adjusters who adjusted 13
policies in 2003 and 2004 with claims payments of $173,292 for farming
operations in which they held a beneficial interest of 10 percent or more
and who disclosed this information to RMA. In May 2005, we referred the
names of these 12 adjusters to RMA for further investigation. RMA found
that 11 of the adjusters did not adjust policies for farming operations in
which they held a beneficial interest, but that erroneous information in
RMA's databases made it appear that the adjusters had engaged in
conflict-of-interest activities. As of August 2005, RMA had not completed
its investigation for the remaining claims adjuster.

12RMA Loss Adjustment Manual (LAM) Standards Handbook, 2003 and Succeeding
Years.

13Final Research Report For Multiple Year Coverage, Task Order #
RMA-RED-01-06, Watts and Associates, Inc., June 27, 2002.

    RMA Cannot Effectively Assess Insurance Companies' Performance Because of
    Weaknesses in Quality Assurance Reviews

RMA also looks to insurance companies that are selling and servicing crop
insurance to help them ensure program compliance and minimize losses. RMA
guidance states that insurance providers will provide oversight to
properly underwrite the federal crop insurance program, including
implementing a quality control program, conducting quality control
reviews, and submitting an annual report to FCIC. However, RMA is not
effectively overseeing insurance companies' quality assurance programs
and, for the claims we reviewed, it does not appear that most companies
are rigorously carrying out their quality assurance functions. For
example, 80 of the 120 insurance claim files we reviewed claimed more than
$100,000 in crop losses or met some other significant criteria; RMA's
guidance states that the insurance provider must conduct a quality
assurance review for such claims. However, the insurance companies
conducted reviews on only 59 of these claims, and the reviews were largely
paper exercises, such as computational verifications, rather than
comprehensive analysis of the claim.

In 2002, USDA's OIG reported that RMA's efforts to develop a quality
control review system had been rendered ineffective by the absence of a
policy establishing what the system should measure and what standards of
accountability should apply.14 The Inspector General noted that RMA had
not (1) determined whether it should measure each insurance company's
performance, (2) established an acceptable standard error rate to hold
companies accountable for excessive errors, and (3) defined an error so
that error rates or improper payment measurements were meaningful. As a
result, the Inspector General stated, RMA is no closer to having a fully
developed and reliable quality control review system to evaluate the
delivery of the federal crop insurance program than it was in 1993, when
the Inspector General recommended that RMA develop and implement such a
system. Similarly, in 1999, we recommended that RMA improve its
methodology for estimating error rates for claims payments.15 We reported
that such information is essential for evaluating the crop insurance
program's effectiveness over time and for providing controls over claims
payments.

14See U.S. Department of Agriculture, Office of Inspector General,
Monitoring of RMA's Implementation of Manual 14 Reviews/Quality Control
Review System, Audit Report No. 05099-14-KC (Washington, D.C.: Mar. 15,
2002).

15GAO, Crop Insurance: USDA Needs a Better Estimate of Improper Payments
to Strengthen Controls of Claims, GAO/RCED-99-266 (Washington, D.C.: Sept.
22, 1999).

Page 27 GAO-05-528 Crop Insurance

    RMA May Be Missing Opportunities to Impose Sanctions Because It Has Not
    Developed Regulations Implementing its Expanded Authority to Impose
    Sanctions under ARPA

RMA's own most recent internal review reached a similar conclusion. In
September 2002, RMA's Deputy Administrator for Compliance reported that
RMA needed to significantly revise its guidance to accomplish meaningful
quality assurance reviews with measurable results. This conclusion was
based on a review of 17 insurance providers' compliance with FCIC's
quality assurance requirements. For example, the Deputy Administrator
noted, RMA's guidance did not define the type and amount of documentation
needed to meet review requirements and to support the insurance companies'
review results and conclusions. Furthermore, because the insurance
companies relied heavily on the use of check sheets to document and report
the results of their reviews, rather than inspecting fields, RMA could not
confirm that quality assurance reviews were performed as required.
According to RMA officials, RMA is working with a contractor to
incorporate the report's recommendations and revise its guidance. As of
August 2005, RMA had not issued revised guidance on the companies' conduct
of quality assurance reviews.

While ARPA expanded RMA's authority to impose sanctions on producers,
agents, and adjusters who abuse the crop insurance program, RMA has only
used this authority on a limited basis. RMA has imposed sanctions on
individuals who have provided false or inaccurate information, but it has
not used its new authority to impose sanctions on individuals who
willfully and intentionally fail to comply with FCIC requirements. Under
ARPA, RMA has authority to impose sanctions on agents, loss adjusters,
approved insurance providers, and others who willfully and intentionally
(1) provide false or inaccurate information or (2) fail to comply with
other FCIC requirements. Earlier legislation allowed RMA to impose
sanctions only on individuals who willfully and intentionally provided
false information. ARPA provides RMA with the authority to disqualify
producers who have committed a material violation from receiving benefits
under the insurance program and from most other farm programs for up to 5
years. Previously, RMA had authority to disqualify producers from
purchasing catastrophic risk protection or receiving noninsured assistance
for up to 2 years and from receiving any other benefit under the crop
insurance program for up to 10 years. The new legislation also provides
RMA with greater flexibility to impose civil fines.

ARPA expanded RMA's authority to impose sanctions in order to improve
compliance with, and the integrity of, the crop insurance program.
However, as table 3 shows, except for 2004, RMA imposed few sanctions even
though it has identified about 3,000 suspicious claim payments each year
since 2001. From 2001 to 2004, RMA imposed 114 sanctions.

     Table 3: RMA Sanctions Requested and Imposed, Crop Years 2001 to 2005

Action                  1996 1997 1998 1999 2000 2001 2002 2003 2004 2005a 
Requests for sanctions     b   22   27   27   16   15   83   56   81    21 
Sanctions imposed          8   16   28    8   10    9   19   19   67    14 

Source: RMA.

Note: Sanctions requested and imposed include civil fines,
disqualifications, debarments, and suspensions. A civil fine may be
imposed against a producer, agent, loss adjuster, an approved insurance
company, or other person that willfully and intentionally provides any
false or inaccurate information to RMA or to an approved insurance
provider with respect to a policy or plan of insurance or willfully and
intentionally fails to comply with an RMA requirement. The fine may be
imposed for each violation in an amount not to exceed the greater of
$10,000 or the amount of financial gain obtained as a result of the false
or inaccurate information or the noncompliance. In the case of a violation
committed by an agent, loss adjuster, an approved insurance company, or
other person (other than a producer), the violator may be disqualified for
up to 5 years from participating in the USDA crop insurance program. In
the case of a violation committed by a producer, the producer may be
disqualified for up to 5 years from receiving any monetary or nonmonetary
benefit under both the crop insurance program and other farm programs,
such as price supports.

aData as of July 2005.

bData not available.

According to RMA officials, RMA's ability to impose sanctions is limited
because it has not developed regulations to implement its new authority
under ARPA to impose sanctions on individuals who willfully and
intentionally fail to comply with an FCIC requirement. RMA's sanctions
office submitted draft regulations to USDA's Office of General Counsel in
2001 and again in 2003. However, the Office of General Counsel has not
approved the draft regulations. RMA headquarters officials we spoke with
in April 2005 told us that the number of sanctions has not substantially
increased because regulations have not been promulgated to establish what
constitutes an FCIC requirement and how USDA will determine that a
material violation has occurred or what process would be followed before
imposing sanctions. RMA officials told us that they will give priority to
issuing regulations implementing the sanctions authorized under ARPA.

Furthermore, since ARPA, the number of RMA referrals to USDA's OIG has
declined from a high of 37 in 2000 to 14 in 2004. Crop insurance
investigations opened by OIG have declined from 40 in 2000 to 12 in 2004,
as shown in table 4. The table also shows the number of convictions, on
average, is less than 10 per year.

Table 4: Number of USDA OIG Crop Insurance Investigations, Number of
Referrals to the Department of Justice, and Case Disposition, Fiscal Years
1996 to 2005

Dollars in millions
                       1996 1997   1998  1999 2000 2001  2002 2003 2004 2005a 
RMA referrals to      12  20     12    18    37    28  16   14    14     8 
USDA's OIG                                                           
OIG investigations    27  19     13    24    40    18  16     8   12    11 
opened                                                               
Disposition of OIG referrals to the                                  
Department of Justice                                                
Referred                   1  6    3     8    3    28  13   14     7     5 
Accepted                   1  6    3     7    2    14    7    2    1     3 
Declined                   0  0    0     1    1    14    6  10     3     1 
Pending                    0  0    0     0    0     0    0    2    3     1 
Department of Justice disposition                                    
Indictments             10    6  12      2   11    13    6  15    15     2 
Convictions              9  11      2    6    4     5  14     8    9     6 
Dollar impactb        $1.4 $1.7 $0.1  $1.9 $2.0 $14.0 $1.9 $0.7 $1.7  $9.7 

Source: USDA's OIG.

aData as of August 2005.

bIncludes recoveries/collections, restitutions, fines, claims established
to demand repayment of USDA benefits, and cost avoidance.

As table 4 also shows, while the number of referrals to the Department of
Justice has increased, the Department of Justice has declined more cases
than it has accepted since 2000.16 According to Department of Justice
officials, the factors considered when accepting a case include
sufficiency of the evidence, complexity of the case, whether the
fraudulent activity is part of a pattern or scheme, and workload and
resources that would be needed to investigate and prosecute the case.
These officials told us that crop insurance fraud cases are highly complex
and involve a significant number of documents that must be reviewed and
presented in court. Furthermore, the dollar value of crop insurance cases
frequently is not as large as in other cases, such as drug trafficking or
some white-collar

16The federal government has sought indictments based on a conspiracy to
defraud the government or making false statements to the federal
government under 18 U.S.C. S: 371 and 18 U.S.C. S: 1014, respectively.

Page 30 GAO-05-528 Crop Insurance

    Other Weaknesses Affect the Crop Insurance Program's Vulnerability

RMA's Insurance Information System Contains Inaccurate Data and Does Not
Always Identify Inaccurate Claims Payments

crimes. Finally, the officials noted, some cases require a full-time
auditor to guide the prosecutors in reviewing the insurance and financial
documents to facilitate presentation to the jury in the trial.

Insurance agents we surveyed and company officials we contacted believed
that RMA needs to more aggressively seek to penalize those producers,
agents, and adjusters that abuse the program. (See app. IV for a summary
of the results of our survey of crop insurance agents.)

We found two other weaknesses in the crop insurance program that leave it
vulnerable to abuse. First, while RMA has made some improvements to verify
data in its information system, the system still contains inaccurate data
and does not always identify inaccurate claims payments. Consequently, RMA
has a greater risk of accepting policies that have erroneous information
and of paying for excessive losses. Second, production yields can change
when producers change farming practices, but RMA may not also respond
promptly to the resulting change in yields, which can lead to excessive
claims payments.

RMA uses its insurance information system to reduce its vulnerability to
fraud and abuse. Among other things, this system is to provide a means of
validating data to ensure that reimbursements are made on accurate
information. OMB guidance states that financial management systems shall
be designed with consistent internal controls over data entry, transaction
processing, and reporting to ensure that information is valid and that
federal resources are protected.17 Without proper controls, an agency
risks the possibility of processing irregularities. RMA has made
improvements in its verification checks to try to ensure accurate
information, but some weaknesses remain.

Even though RMA is aware of the need for accurate data, we found that, at
times, RMA's insurance information system contained inaccurate data. The
system contained inaccuracies because RMA had not established adequate
verification checks in making annual adjustments to reflect changes to the
crop insurance program.

17See Office of Management and Budget, Financial Management Systems,
Circular No. A127 Revised, (Washington, D.C.: July 23, 1993).

Page 31 GAO-05-528 Crop Insurance

Each year RMA's program automation group reviews system requirements for
needed system changes in response to annual program and policy changes. In
addition, the group seeks input on needed improvements, based on prior
years' problems, from RMA program users and insurance company
representatives. This process has been helpful in improving the overall
accuracy of the data in the system. For example, RMA has made the
following changes to its insurance information system since 1999:

     o In 1999, RMA implemented a verification check to identify policies
       that are on the same acreage but have two different insurance
       providers.
     o In 2001, RMA began weekly automated reporting on producers with
       duplicate policies.
     o In 2002, RMA implemented a verification check to (1) identify
       producers with unrealistic crop yield reports and (2) ensure that crop
       yield would be verified when producers changed to a new insurance
       provider.
     o In 2003, RMA implemented a verification check to validate producers'
       claims that they were new participants in the crop insurance
       program.18
     o In 2004, RMA implemented a verification check to identify and
       eliminate duplicate policies for the same producer with more than one
       insurance provider.

Each of these improvements addressed a specific information system
weakness that had been identified in prior years, and each improvement
reduced the likelihood of improper crop insurance payments.

Nevertheless, we found that certain insurance policies, called written
agreements-unique policies RMA regional offices develop to meet a local
producer's specific needs-would bypass all of the verification checks that
other policies undergo. Policy information from the written agreements is
provided to the insurance companies, but not all the specific policy data
are entered into RMA's information system. In fact, we found that some of
the policies had extremely low insurance premium rates, resulting in
understated premiums. For example, a policy we reviewed showed that the

18New participants, who have no history of production in the crop
insurance programs, get assigned the county average yield for determining
their insurance guarantee, which also affects their premium costs.

Page 32 GAO-05-528 Crop Insurance

RMA Did Not Always Account for Changes in Farming Practices in a Timely
Manner

total premium was $1,555 for liability coverage of about $520,000, but the
correct total premium should have been $155,473. For crop years 2003 and
2004, RMA had 8,511 written agreement policies with a total liability of
over $400 million in its insurance information system. Because these types
of policies bypass all system checks, other errors could occur.

After we advised RMA of this problem, it reported that it changed the
information system to check for unusually low premium rates. However, in
order to conduct all the necessary verification checks on written
policies, RMA will have to conduct time-consuming coordination efforts
with its regional offices and the program automation group.

We also found, in cases of a partial loss, claims payments were made that
were higher than a specific unit's insurance liability. RMA officials
stated that the insurance information system contains an edit check to
ensure that the total claim is not greater than the total liability.
However, we found that the system did not have an edit check to ensure
that, in cases of a partial loss, claims paid for each insured optional
unit were not higher than the total liability for those fields. When we
reported this issue to RMA, it said that it would modify its system.
However, due to a number of complexities associated with this change, RMA
said that the change would not be implemented until the 2006 crop year.

In addition, for 2001 to 2004, we found 14 producers enrolled in the crop
insurance program who RMA had determined were ineligible to participate in
the program. RMA officials stated that the insurance information system
contains an edit check to identify producers determined ineligible to
participate in the crop insurance program. Nevertheless, our analysis
found that RMA's system does not identify all producers ineligible to
participate in the crop insurance program. These ineligible producers
received about $145,000 in claims payments.

According to a 2003 RMA study, RMA overpaid claims between 2000 and 2002
in wheat-producing counties in Oregon and Washington because of a program
vulnerability. Overpayments occurred because RMA did not begin reducing
producers' relatively high insurance guarantees to take into consideration
a change in farming practices that began in 1996. This change resulted in
lower yields on insured fields that had a higher yield history and
insurance guarantee. RMA began to take this change into account in farming
practices with the 2004 crop year, but it does not expect to fully resolve
this issue until about 2014. RMA officials told us that if they were to
fully adjust producers' insurance guarantees to reflect the lower yields
in just a year, the agency would still be legally obligated to provide the
higher guarantee because guarantees are based on a 10-year historical
average. Under the Federal Crop Insurance Act, as amended, RMA is to
provide yield coverage based on the actual production history of the crop
over at least the past 4 years, building up to the previous 10-year
period.

Before 1996, producers could insure their wheat crop for a higher yield if
they agreed to allow insured fields to lie fallow for 1 to 2 years between
plantings, a practice called "summer fallow," rather than plant these
fields every year (continuous cropping). This practice is used in semiarid
regions, primarily to conserve moisture for the next season. By not
planting, producers could allow the soil to recover moisture and, it is
expected, produce a higher yield when the field is later planted.

Until 1996, RMA knew which practices producers followed. However, in 1996,
USDA's National Agricultural Statistics Service (NASS) changed the way it
reported information on producers' farming practices.19 NASS had been
collecting and reporting county data on wheat yields by whether producers
allowed their fields to lie fallow in alternate years or planted them
every year. In 1996, when NASS stopped reporting yield data by type of
production practice, RMA stopped distinguishing between producers'
production practices. RMA allowed producers to continue to insure their
wheat at the higher yield level associated with summer fallow practices,
whether or not the producers periodically let fields lie fallow or planted
them every year.

Under the Federal Crop Insurance Act, producers are assigned a yield based
on production records. Between 1995 and 2000, many wheat producers in
Oregon and Washington shifted their farming practices to planting fields
every year while using the higher summer fallow production records to
establish their insured yield. During this period, the number of insured
acres in the Oregon counties alone rose from 4,535 to 108,569. However,
RMA did not adjust its coverage to take into account the lower yields
associated with fields planted every year. Consequently, producers
received an insurance guarantee based on a history of yields from fields
that had been fallow in alternate years, even though now they planted
these fields every year, which made them unlikely to achieve the higher
yields of a summer fallow practice. According to RMA's data, a summer
fallow

19NASS collects and reports production data for major crops in most
counties nationwide. RMA uses these data to establish a normal crop yield.

Page 34 GAO-05-528 Crop Insurance

  RMA's Regulations and Statutory Requirements Hinder RMA Officials' Efforts to
  Reduce Abuse in the Crop Insurance Program

practice provides producers yields that are up to 33 percent higher than
annual planting practice. For example, a producer who grew an average of
40 bushels of wheat per acre using the summer fallow production practice
may have the potential to grow only 30 bushels per acre using annual
planting practice. Since RMA allows producers to use production history
from summer fallow practices to establish insurable yields for annual crop
production, the producer in this example can grow 30 bushels annually and
make an insurance claim for the other 10 bushels (although over time the
actual production history will decrease, reducing the producer's ability
to file a claim). RMA's data mining showed that producers took advantage
of this program vulnerability. Excessive insurance guarantees for some
producers may have contributed to higher claims.

Beginning with the 2004 crop year, RMA decided to offer insurance for
wheat in these counties by the practice producers employed, either a
summer fallow practice or continuous cropping practice. While this
decision should reduce program vulnerability, the problem will only be
eliminated gradually. RMA did not require producers to recertify their
historical acreage and production by separate practice to correct the
insurance guarantee. RMA officials agreed that some producers will
continue receiving claims payments based on an inflated "normal" yield
history until the production history is corrected with actual yields over
the next 10 years.

RMA's regulations, as well as statutory mandates, have created a program
design that can impede RMA officials' efforts to prevent and detect fraud,
waste, and abuse in a number of ways. First, in terms of RMA's
regulations, producers can insure their fields individually instead of
insuring all fields combined, which makes it easier for them to switch
production among fields, either to make false insurance claims or to build
up a higher yield history on a particular field in order to increase its
eligibility for higher future insurance guarantees. In addition, companies
participating in the crop insurance program bear minimal risk on some of
the policies they sell and service, giving the companies little incentive
to rigorously challenge questionable claims on these policies. In terms of
statutory requirements, RMA must offer producers "prevented planting"
coverage-coverage if an insured crop is prevented from being planted-but
it is often difficult to determine whether the producer had the
opportunity to plant a crop. Furthermore, statutorily established premium
subsidies are high and, therefore, may shield high-risk producers from the
full effect of paying higher premiums.

    Option to Allow Producers to Insure Each of Their Fields Separately May
    Contribute to Program Abuse

Many patterns of producer fraud, waste, and abuse are possible if
producers manipulate how they report production from separately insured
units. Under RMA's regulations, producers can insure production of a crop
on each optional unit or insure an entire basic unit. With separately
insured optional units, for example, if hail damages a crop on one field,
producers receive an insurance indemnity to cover the hail losses.
However, if producers insured their entire crop in a single basic
insurance unit, the hail losses may not have caused the production yield
of all units combined to have been below the level guaranteed by the
insurance and, therefore, would not warrant an indemnity payment.

However, separately insured optional units make it easier for producers to
report production from one field that was actually produced on a second
field in order to make false insurance claims or to build up a higher
yield history on a particular field to increase its eligibility for higher
future insurance guarantees.20 Since claims payments for optional units
are based upon the yield in each field, rather than the yield for the
entire farm, the result of this misreporting is to generate or increase
claims on the first field while enhancing the yield for future insurance
guarantees on the second field. In a future period, the producer
reallocates production from the second field to the first field, thus
increasing indemnities on the second field while rebuilding the yield of
the first field. Insurance companies or RMA could increase inspection
activity in an attempt to reduce occurrences of production switching, but
increased activity would raise the costs of administering the program.

According to a 2002 RMA study, relative losses per unit increase as the
number of separately insured optional units increases.21 Furthermore,
given the similarities in a producer's separately insured units, the study
could not identify any credible reasons, in the absence of fraud, waste,
or abuse, that the losses should increase with increases in the number of
separately insured units. Finally, the study concluded that such loss
patterns are unlikely to occur naturally. According to an RMA official,
gathering the evidence to support a yield-switching fraud case requires
considerable resources, especially for large farming operations.

20RMA regulations state that optional units are not available to a
producer who does not provide acceptable production reports for at least
the most recent crop year.

21Final Research Report For Multiple Year Coverage, Task Order #
RMA-RED-01-06, Watts and Associates, Inc., June 27, 2002.

Page 36 GAO-05-528 Crop Insurance

Furthermore, the official noted, in order to prove production switching,
adjusters would need to appraise all of a producer's fields just before
harvest.

In 2003, RMA identified 2,371 suspicious claims, 273 of which (about 12
percent) had patterns associated with switching production among fields.
Furthermore, in our review of claim files, we identified 10 producers with
patterns of claims associated with this type of fraud. Table 5 highlights
a pattern of claims suggesting yield switching, as shown by the production
history for a producer farming over 2,000 acres of irrigated cotton in
west Texas. Generally, this producer insured a yield of about 700 pounds
per unit. To the extent an individual unit reports production below the
insurance guarantee, the producer is paid an indemnity.

Table 5: Production Reported by an Irrigated Cotton Producer Indicating
Yield Switching

                                              Production per acre (in pounds)
Unit identifier            Crop year 2001 Crop year 2002    Crop year 2003
101                                 1,419              113             184
102                                   156            1,769             366
103                                   208              230           1,523
104                                   303              387             183
105                                     a              445             166
Claim payment       
received                                  $539,233  $450,077      $639,457 

Source: GAO analysis of RMA's claim data.

aUnit number 105 was not insured in crop year 2001.

For example, in 2001 the producer harvested the crop on Unit 101 with a
reported yield of 1,419 pounds of cotton per acre and reported losses on
the remaining three units, thereby obtaining claims payments of over
$500,000. It appears some of the production from the three units with
claims for losses was shifted to the unit with the high production. By
building up a higher yield history on Unit 101, the producer increased the
insurance guarantee on this unit for 2002 and beyond. In 2002, the
producer claimed a loss on Unit 101, as well three other units, obtaining
claims payments of over $400,000. In 2003, the pattern was repeated,
resulting in claims payments of more than $600,000.

    Minimal Risk Sharing on Some Policies May Not Provide Insurance Companies
    Strong Incentive to Carry Out Their Responsibilities under the Program

FSA's field inspection of Unit 101 in 2003, conducted in September just
prior to harvest, found that the "cotton looked good and was comparable
with other fields in the area." Nonetheless, the insurance company paid
the claims on the units to the producer in December 2003 and January 2004.

Moreover, we found that the producer in this case-a farming operation set
up as a general partnership-leased land from the owner of the cotton gin
where the farming operation sold its cotton and where the cotton gin
recorded the production levels that the farming operation used to
substantiate its claims. The owner of the gin also provided the
partnership with loan security to obtain operating capital. Furthermore,
one of the partners in the farming operation, who had a power of attorney
to sign documents on behalf of the partnership, was also employed in the
office of the cotton gin. We referred this case to RMA for follow-up
investigation, which reported that there was not enough evidence of abuse
to refer the case for sanction or prosecution.

In his 2003 loss review, however, the claims adjuster questioned the
producer's farming practices, prompting the insurance company to perform a
preharvest inspection in 2004. The producer did not file a claim in 2004.
In 2005, RMA and insurance company representatives performed joint
preharvest appraisals on this producer's fields in anticipation of a
filing for a claim. No claim had been filed for 2005 at the time we
completed our review.

Insurance companies participating in the crop insurance program share a
percentage of the risk of loss or opportunity for gain on each insurance
policy they write, but the federal government ultimately bears a high
share of the risk. Under the SRA, insurance companies are allowed to
assign policies to one of three risk funds-assigned risk, developmental,
or commercial. The SRA provides some criteria for designating policies to
these funds. For the assigned risk fund, the companies cede up to 85
percent of the premium and associated liability for claims payments to the
government and share a limited portion of the gains and losses on the
policies they retain. Economic incentives to control program costs
associated with fraud, waste, and abuse are commensurate with financial
exposure. Therefore, for policies placed in the assigned risk fund,
companies have far less incentive to investigate claims than the federal
government would. For example, in one claim file we reviewed, an insurance
company official characterized the producer as filing frequent,
questionable claims; however, the company paid a claim of over $500,000.

    RMA and Insurance Companies Have Difficulty Determining Potential Abuse
    Associated with Prevented Planting Coverage

The official indicated that if the company vigorously challenged the
claim, the producer would have defended his claim just as vigorously, and
the company would have potentially incurred significant litigation
expenses, which RMA does not reimburse. In the company's opinion, it was
less costly to pay the claim. In 2003, companies placed about 19 percent
of the policies they wrote in the assigned risk fund and about 69 percent
in the commercial fund. However, for those producers on RMA's spot-check
list, about 47 percent of the policies were in the assigned risk fund, and
38 percent were in the commercial fund.

Under the Federal Crop Insurance Act, as amended, RMA must offer prevented
planting coverage. Under the act and its implementing regulations, RMA
allows claims for prevented planting if producers cannot plant due to an
insured cause of loss that is general in the surrounding area and that
prevents other producers from planting acreage with similar
characteristics.22 Claims for prevented planting are paid at a reduced
level, recognizing that producers do not incur all production costs
associated with planting and harvesting a crop. However, determining
whether producers can plant their crop may be difficult. Annually, RMA
pays about $300 million in claims for prevented planting.

In written comments on our survey, 25 FSA inspectors reported that they
believe some producers in their county who claimed prevented planting
losses never intended to plant or did not make a good faith attempt to
plant their crop. Additionally, in some cases, it appears that the
insurance company's claims adjusters may not exercise due diligence in
evaluating prevented planting claims. For example, a producer in south
Texas received claims payments of over $21,000 for prevented planting
claims for corn in 2003 and 2004. The producer claimed that excess
rainfall made his fields too wet to plant. However, according to a June
2004 FSA field inspection report, there was no evidence the producer had
made any attempt to prepare the fields for planting in either the 2003 or
2004 growing seasons. The FSA inspection report noted, and photographs
showed, the fields contained permanent grasses and 5-foot tall weeds, as
well as large hay bales from the prior growing season. In addition,
rainfall for the county in April and May, 2003, was well below normal, and
there was no evidence that the producer had ordered seed in anticipation
of planting. Moreover, in

227 C.F.R. S: 457.8.

    High Premium Subsidies May Inhibit RMA's Ability to Control Program Abuse

2003, of the 66 corn policies in the county, the producer's policy had the
only claim for prevented planting. Because the cause of loss was not
general to the area, the producer should not have received payment on the
claim. Similarly, in 2004, the producer filed one of only three claims for
prevented planting of the 55 corn policies in the county. According to an
official of the insurance company that sold and serviced this policy,
prevented planting claims are paid early in the growing season, and
because information on other companies' claims experience is unavailable,
it is difficult to assess whether producers' claims are due to an insured
cause of loss that is general in the surrounding area and that prevents
other producers from planting acreage with similar characteristics. On the
basis of our review, RMA investigated the 2003 and 2004 prevented planting
claims for this producer and subsequently directed the insurance company
to seek reimbursement for the 2003 claim payment.

To encourage program participation, ARPA increased premium subsidies- the
share of the premium paid by the government-but this increase may hamper
RMA's ability to control program waste and abuse. Premium subsidies are
calculated as a percentage of the total premium, and producers pay only
between 33 to 62 percent of the policy premium, depending on coverage
level. High premium subsidies shield producers from the full effect of
paying higher premiums. Because premium rates are higher in riskier areas
and for riskier crops, the subsidy structure transfers more federal
dollars to those who produce riskier crops or farm in riskier areas.

In addition, premium rates are higher for producers who choose to insure
their fields separately under optional units, rather than all fields
combined, because the frequency of claims payments is higher on the
separately insured units. Again, however, because of high premium
subsidies, producers pay only a fraction of the higher premium. Thus, the
subsidy structure creates a disincentive for producers to insure all
fields combined. Over one-half (56 percent) of the crop insurance agents
responding to our survey believed that charging higher premiums for
producers with a pattern of high or frequent claims would discourage
fraud, waste, and abuse in the crop insurance program.

Finally, in disaster years, ARPA increases insurance protection by
allowing producers to substitute a percentage of the historical average
county yield for actual yields. As a result of ARPA, RMA sets a floor
under producers' annual yields so that yields in any year cannot fall
below 60 percent of the

    Recently Prosecuted Crop Insurance Fraud Cases Highlight Program
    Vulnerabilities

historical average county yield (called the transitional yield) for that
crop. Consequently, the amount of crop insured against loss is at least 60
percent of the average county yield, giving producers higher coverage than
experience would allow. Although RMA sets a higher premium for producers
because of actual production losses, because of high premium subsidies
producers pay only a fraction of the higher premium. Thus, the subsidy
structure creates an incentive for producers to insure at the higher level
of protection.

Eight recent crop insurance fraud cases that were investigated by USDA's
OIG and resulted in criminal prosecution between June 2003 and April 2005
reflect some of the issues we identified. The cases show how producers,
sometimes in collusion with others, falsely report planting, claims of
damage and production to try to circumvent RMA's procedures. In some
cases, producers hid production or switched it from one field to another.
Several of these cases also demonstrate the importance of having FSA and
RMA work together to identify and share information on questionable
farming practices/activities. Table 6 summarizes these eight cases, which
accounted for $3.1 million in fraudulent claims payments. These cases,
which were researched and analyzed by our Office of Forensic Audits and
Special Investigations, are described here and in more detail in appendix
V.

 Table 6: Crop Insurance Fraud Cases Investigated by the USDA/OIG and Resulting
                  in Criminal Prosecution, June 2003 to April

                                                                   Fraudulent
Case Fraud allegation  How detected         Collusion               claims 
                                                                     payments 
                          OIG/RMA/FSA          Possible. Insurance            
1.   Failure to plant. identified           adjuster               $57,155
                          irregularities                           
                          through joint data   indicted for        
                          mining effort and    falsely verifying   
                          follow-up                                
                          inspection.          losses.             
2.   False claim of    RMA and FSA received Possible. Insurance     39,826 
        crop              complaints and       policy              
        damage from hail, initiated review.    purchased from      
                    heat,                      agency owned by     
        and drought.                           a sister-in-law.    
        False claim of    OIG initiated. Fraud                                
3.   crop              detection survey of  No.                    435,087
                          grain                                    
              damage from elevator disclosed                       
                excessive irregularities.                          
        moisture.                                                  
4.   Failure to plant. FSA filed complaint  Yes. Insured was       630,000 
                          with RMA.            also agent and      
                                               issued policies     
                                               through his         
                                               agency. Insurance   
                                               adjusters           
                                               falsified forms.    
                                               Seed dealers also   
                                               provided false      
                                               receipts.           
        False claim of    RMA noticed          Yes. Farmer and                
5.   crop              suspicious           grain elevator       1,000,000
                          adjustments in grain                     
        damage.           quality by grain     operator.           
                          elevator company.                        
6.   False crop yield  OIG hotline          Yes. Insurance               a 
        history           complaint.           agents pled guilty  
        to inflate                             to falsifying       
        insurance                              insurance           
                                               documents.          
        claim.                                                     
7.        No ownership OIG hotline          No.                     19,000 
              interest in complaint.                               
                   crops;                                          
        underreporting of                                          
        crop yield.                                                
        Failure to plant; Bankruptcy fraud     Ongoing                        
8.   false             investigation        investigation of      $912,364
                          revealed                                 
        claim of moisture insurance fraud.     insurance           
                                               representatives.    
        damage;                                                    
        concealing                                                 
        production.                                                

Sources: GAO's analysis of USDA and U.S. Department of Justice case
information.

aData not available.

These eight crop insurance cases are described as follows:

        * Case 1. The subject of this investigation, a producer in Tennessee,
          in 1999 improperly obtained crop insurance coverage for his tomato
          crop and received a claims payment for losses that had not
          occurred. Moreover, this producer was ineligible to participate in
          the crop insurance program because he had not paid a past premium.
          In order to hide the fact that he was the true grower of 1999
          tomato crops in two Tennessee counties, he used his wife's name on
          crop insurance documents. In addition, his wife filed a report with
          the insurance company claiming a higher level of acreage planted to
          inflate the value
        * of any subsequent insurance claim. An insurance adjuster assisted
          the producer by fraudulently signing forms showing he inspected and
          measured the nonexistent crops and that his observations supported
          the wife's claimed loss.
     o Case 2. A producer planted a wheat crop after the planting deadline,
       which made the crop ineligible for crop insurance. He reported,
       however, that the crop had been planted before the deadline and
       falsely claimed crop losses because of hail, heat, and drought.
       Furthermore, the producer did not have an ownership interest in the
       crop. Instead, the producer's brother leased the farm land and paid
       the cost of planting, and the brother's wife owned the insurance
       agency that issued the insurance policy on the crop. FSA filed a
       complaint with RMA because FSA officials had observed that the crop
       was planted past the planting deadline.
     o Case 3. Two producers conspired to file fraudulent crop insurance
       claims, stating that their bean crops had been damaged by excessive
       moisture. They underreported the crop yield to the insurance company
       and hid production by delivering the harvest to processing plants
       using false names. The scheme was discovered by OIG during a fraud
       detection survey at a grain elevator. Investigators reviewed the sales
       of uninsured crops and identified production sold under other names
       that actually belonged to the two producers.
     o Case 4. A farming partnership filed fraudulent insurance claims of
       crop losses for cotton, wheat, and grain sorghum that were never
       planted. The producer, who also owned an insurance agency formed a
       farming partnership with other family members for these acres, and the
       producer's insurance agency wrote insurance policies for the farming
       partnership. Two insurance adjusters, who did not visit any of the
       fields, filed false appraisal and production worksheets verifying the
       losses. A seed dealer also prepared false receipts to support the
       producer's planting claims. However, inconsistent statements on
       documents submitted to FSA led to an inspection of the farming
       operation, and inspectors found little evidence of planting. A
       subsequent investigation resulted in admissions of guilt.
          * Case 5. The manager of a grain elevator conspired with producers
            to sell their wheat at discounted prices by providing them with
            false documentation showing that a large portion of their crop
            was damaged by weather and below weight. The manager also
            falsified documents,
          * stating that the crop was of lower quality and provided falsified
            samples of severely damaged wheat to mislead insurance adjusters.
            Producers could then collect crop insurance and disaster payments
            from the federal government.
     o Case 6. Two crop insurance agents conspired with producers to inflate
       actual production histories, which allowed the producers to receive
       higher indemnity payments on insurance claims. The agents backdated an
       insurance application, created a false insurance policy based on a
       fictitious yield rate, and had the producers sign blank insurance
       documents. This fraud was identified through an OIG hotline complaint.
     o Case 7. An investigation was initiated following an OIG hotline
       complaint that a producer had reported different crop yields to FSA
       and RMA. OIG determined that the producer had, among other things, (1)
       filed four false insurance claims, stating that he had experienced a
       failed harvest and needed to replant; (2) filed claims on crops in
       which he had no ownership interest; (3) inflated the size of a corn
       crop loss; and (4) filed a claim in which he underreported the yield.
     o Case 8. Producers falsely claimed they (1) were prevented from
       planting because of excess moisture and (2) had planted crops that
       they did not plant and claimed losses on these crops. The producers
       also filed claims in which they underreported the yield and for crops
       in which they had no interest. In order to report a crop loss and
       manipulate their yields, the producers sold crops using other people's
       names. These schemes were discovered during the course of a bankruptcy
       fraud investigation involving some of the producers.

  RMA's Failure to Follow Its Guidelines Has Resulted in Program Losses for Some
  New and Expanded Crop Insurance Products

RMA has not always developed or expanded crop insurance products according
to its guidelines, thereby contributing to program losses. RMA's
guidelines (1) identify RMA's mission for expanding the crop insurance
program; (2) outline the process and procedures by which the RMA responds
to requests to add a new insurance program; (3) specify data submission
requirements for analysis of the new program request; and (4) establish
the framework RMA will use to implement, maintain, and evaluate a new
program expansion.23 According to RMA, these guidelines are intended to
ensure producer interest and crop suitability and to minimize exposure to
loss. We found that, in some instances when RMA did not follow its
guidelines, it had higher claims and loss ratios.

Most of the newly developed and expanded products we reviewed-15 of the 16
products-were developed under the guidelines RMA had in place before ARPA.
Under these guidelines, RMA officials are to obtain information
documenting, among other things, the following:

     o significant grower interest in the insurance coverage;
     o the crop's economic significance;
     o actuarial sufficiency and data availability (e.g., producer acreage,
       crop yield, production cost, and weather data);
     o a risk profile and analysis (e.g., perils affecting the crop,
       production experience, available markets, and product viability);
     o agronomic, aquatic, and horticultural suitability (e.g., commercial
       life cycle of the crop, rotation requirements, whether the crop is an
       annual, biennial, or perennial);
     o marketing potential (e.g., market characteristics, risks, and
       competition); and
     o implementation parameters (e.g., crop year for implementation and
       number of states).

23USDA Risk Management Agency, New Program Development Handbook,
FCIC-23010, October 1997.

Page 45 GAO-05-528 Crop Insurance

Under ARPA, the FCIC Board of Directors is required to have actuarial and
underwriting experts independently review policies, plans of insurance,
and related materials before approving new products.

Of the 16 crop insurance products we reviewed, 11 were newly developed,
and 5 were expansions of an existing crop into a new geographic area.24
RMA's overall loss ratio for the 16 pilot crop products was about 2.0 (or
$2.00 in claims paid for every $1.00 in premium). Four of the 16 cases we
reviewed had loss ratios of 1.0 or less. (See app. VI for a comparison of
loss ratios for these 16 crop insurance products.) In 12 of the 16 cases,
it appeared that RMA followed its guidelines in terms of documenting the
proposed insured crops' past production experience, crop suitability,
potential for loss, and implementation parameters. However, for the cases
in which RMA did not follow its guidelines, the products experienced
claims in excess of premiums of over $50 million.

For example, FCIC's Board of Directors approved coverage of fall-planted
watermelons as part of a broader watermelon insurance pilot program
covering watermelon production in seven states and 15 counties for spring-
and fall-planted watermelons-without considering all the factors called
for under its guidelines-such as a horticultural study. Such a
consideration would have provided assurance that the proposed product was
actuarially sound, according to the OIG.25 Overall, the watermelon pilot
program had over $51 million in claims payments in 1999, its first year of
operations, and had a loss ratio (claims paid divided by premiums) of

5.8. Of the claims payments in 1999, $21.1 million, or 44 percent, was for
fall-planted watermelons in the three Texas counties. According to the
Inspector General, a horticultural analysis would have shown that fall
watermelons were a high-risk crop in that region of Texas. The product was
discontinued after a year. In responding to the Inspector General about
its offering of insurance for fall-planted watermelons in Texas, RMA

24For example, in 1999, RMA introduced a program for sweet cherries, which
had not previously been eligible for crop insurance. RMA had experience
with the other five products we reviewed but expanded these products to
new counties in selected states. For example, in 1998, RMA expanded crop
insurance on onions in Texas to producers in 11 new counties that
previously did not have the option of insurance for this crop.

25See U.S. Department of Agriculture, Office of Inspector General, Risk
Management Agency Viability of Fall Watermelons in Texas and Their
Inclusion in the 1999 Watermelon Insurance Pilot Program, Audit Report No.
05601-8-Te (Washington, D.C.: Sept. 30, 2002).

commented that a shortage of experienced staff was a major factor
contributing to the agency's lack of adherence to its guidelines.

In another case-the apple quality option policy-the FCIC Board of
Directors quickly approved this product despite a number of questions
suggesting the need for additional study. The approved product, which
insured a higher grade of apples than existing apple crop policies,
experienced large losses. In determining whether to approve this product,
the Board of Directors contracted for studies from five independent
companies. One of the studies reported 10 major concerns about the
product, including incomplete documentation, the large number of counties
in the pilot program (approximately 86 percent of the apple crop), and an
understated premium rate. Three of the other four reviewers raised similar
concerns. The other reviewer supported the proposal with minor
reservations. Even with these concerns, the FCIC Board of Directors
quickly approved the pilot without additional analyses. The claims for
this product for crop years 2001 through 2003 were about $4.4 million, and
the product had a loss ratio of 2.6. RMA officials contend that the loss
ratio can primarily be attributed to some apple producers in California,
who may have abused the system. According to RMA officials, the Board of
Directors discussed the concerns raised by the studies but still approved
the request for the pilot. A delay in approval might have delayed the
pilot's implementation for a year. As of August 2005, RMA was moving to
contract with independent reviewers to evaluate the apple quality option
pilot program including its actuarial soundness and whether it effectively
meets the needs of apple producers.

Upon approval by the FCIC Board of Directors, new products have a
probationary period-generally 1 to 3 years. Under RMA guidelines, newly
developed products are to be examined annually to see that they are
meeting performance goals-such as producer participation by year, state,
county, and insurance company; loss ratios; and appropriate premiums. RMA
is to make adjustments if warranted and determine whether the product
should be continued or terminated.

According to RMA officials, in lieu of a formal review, RMA informally
collects data on each new insurance product by at least annually
corresponding with RMA regional offices and outside sources. They said
that annual reviews are only of limited value in providing the information
RMA needs to determine the viability of a product because it takes several
years to get a clear picture of how well an insurance product will
perform.

                                  Conclusions

The lack of an annual evaluation did not appear to significantly affect
future years' loss experience for most of the 11 new products we reviewed.
However, timely annual evaluation of the sweet potato program might have
saved the federal crop insurance program several million dollars. The
sweet potato program's loss ratio from 1998 through 2002 ranged from 2.3
to 5.2, but RMA waited until 2003 before making changes to it and made
additional changes for the 2004 crop year. From 1998 to 2003, the sweet
potato program recorded claims of $47 million compared with premiums of
about $12 million. An evaluation completed in 2003 suggested that the high
dollar claims for this product could not fully be attributed to weather
conditions but rather suggested potential fraud or abuse. Earlier, more
timely reviews could have identified the irregular claims activity in
selected counties and might have averted the claims payments. In October
2004, the FCIC Board of Directors terminated the existing sweet potato
pilot program and implemented a new program that included reduced coverage
and increased growing experience requirements for participation. In May
2005, the Inspector General reported on RMA's failure to follow its
procedures for performing new product reviews, including the sweet potato
pilot program, and recommended that RMA improve the timeliness of its
evaluations for new products.26

Federal crop insurance plays an invaluable role in assuring the nation's
farmers that their crops will be protected from natural disasters.
However, the importance of the program and the significant role it plays
in U.S. agriculture is frequently overshadowed by controversy associated
with fraud, waste, and abuse in the program. In recent years, with the
assistance of the new tools in ARPA, RMA has made progress in
strengthening a number of program elements and thereby reducing fraud,
waste, and abuse, as well as the amount of funds paid in error.

Still, we identified weaknesses in how RMA, FSA, and insurance companies
carry out their program responsibilities, and these weaknesses continue to
leave the program vulnerable to questionable claims and missed
opportunities to prevent losses to the federal government. Lack of timely,
useful communication between RMA and FSA has resulted in insufficient
information sharing between the two agencies, as well as with the

26See U.S. Department of Agriculture, Office of Inspector General, Risk
Management Agency Survey of Pilot Programs, Audit Report No. 05601-12-Te
(Washington, D.C.: May 24, 2005).

Page 48 GAO-05-528 Crop Insurance

insurance companies and insufficient inspections of land with suspicious
claims. Furthermore, RMA has not been given access by FSA to key
information on producers who have a beneficial interest in one or more
farming operations. As a result, many of the largest farming operations
are not closely scrutinized in the crop insurance program. Many of these
farming entities fail to disclose producers having an ownership interest
in the entity and who may be ineligible to participate in the federal crop
insurance program. In addition, insurance companies' quality control
reviews of claims are weak because RMA does not effectively oversee the
companies' quality assurance efforts leaving the crop insurance program
susceptible to fraud and abuse. Finally, RMA has used one of its key
enforcement tools-sanctions against producers, agents, and companies- on a
very limited scale because, 4 years after ARPA, it has not promulgated
regulations establishing how it will impose some of the additional
sanctions authorized under ARPA.

We recognize that the crop insurance regulations or statutory provisions
are intended to strengthen protection for producers. However, in many
cases, RMA has difficulty ensuring that these provisions are not abused.
RMA has opportunities to improve the program's design by eliminating the
option of insuring fields (optional units) for producers who have a
history of high losses in comparison with other producers growing the same
crop in the same area. The program's high premium subsidies, specified in
the Federal Crop Insurance Act, as amended by ARPA, may also limit RMA's
ability to control program abuse because the subsidies shield producers
from the full effect of paying higher premiums associated with frequent or
larger claims.

Periodic lapses in program management when developing and expanding new
crop insurance products limit the effectiveness of RMA's guidelines and
can cause unnecessary losses to the crop insurance program. Generally,
when RMA followed its guidelines, new products incurred fewer losses. ARPA
provided RMA with a new, seemingly more rigorous process to review new
products. However, the new process cannot succeed unless RMA more closely
follows its guidelines.

The crop insurance program is designed to accommodate the needs of all of
America's producers. Fraud, waste, and abuse can cause producers to pay
more for crop insurance and hurt the reputation of the program. Further
reducing vulnerability to fraud, waste, and abuse in the crop insurance
program will require a coordinated effort among the agencies and companies
managing the program-RMA, FSA, and the participating insurance companies.
Each agency and the companies have an important role in monitoring agent,
adjuster, and producer actions and in sharing key program information with
one another.

To better protect the crop insurance program from fraud, waste, and abuse,
Congress should consider allowing RMA to reduce premium subsidies- and
hence raise the insurance premiums-for producers who consistently have
claims that are irregular in comparison with other producers growing the
same crop in the same location.

Matter for Congressional Consideration

  Recommendations for Executive Action

To better ensure that field inspections are used to the maximum effect to
address fraud, waste, and abuse in the federal crop insurance program, we
recommend that the Secretary of Agriculture take the following eight
actions. Specifically, we recommend that the Secretary direct the
Administrators of RMA and FSA to create an action plan to ensure that

     o FSA field offices conduct all inspections called for under agency
       guidance;
     o RMA informs FSA field inspectors of the suspect claim patterns that
       they are to investigate; and
          * FSA inspections are conducted in a timely manner, and inspection
            results are reported expeditiously to insurance companies.
          * We further recommend that the Secretary of Agriculture
     o promulgate regulations to implement its expanded authority under ARPA
       to impose sanctions;
     o direct FSA to share producer-derived information with RMA for data
       mining to administer and enforce the requirements of the crop
       insurance program;
     o direct RMA to determine if payments have been made to ineligible
       producers or to entities that failed to disclose ownership interests
       and, if so, to recover the appropriate amounts;

  Agency Comments and Our Evaluation

     o direct RMA to strengthen its oversight of the insurance companies'
       implementation of the quality control review system; and
     o direct RMA to reduce the insurance guarantee or eliminate optional
       unit coverage for producers who consistently have claims that are
       irregular in comparison with other producers growing the same crop in
       the same location.

We provided USDA with a draft of this report for its review and comment.
We received written comments from USDA's Under Secretary for Farm and
Foreign Agricultural Services. The department agreed to act on most of our
recommendations, including (1) ensuring that inspections are conducted in
a timely manner, and that inspection results are reported expeditiously to
insurance companies; (2) directing FSA to share producer-derived
information with RMA; (3) directing RMA to determine if payments have been
made to ineligible producers or to entities that failed to disclose
ownership interests and, if so, to recover the appropriate amounts; and
(4) directing RMA to strengthen its oversight of the insurance companies'
implementation of the quality control review system.

With respect to issuing regulations to implement its expanded authority
under ARPA to impose sanctions, USDA agreed that promulgation of
ARPA-based sanction regulations would enhance RMA's sanctions efforts.
However, USDA stated that it was incorrect to suggest that the lack of
regulations is a critical impediment to imposing sanctions. USDA also
stated that there has been a learning curve since ARPA was enacted but
that it has been imposing sanctions under its ARPA authority since 2000
and that it has made "significant and steady progress" in both the numbers
and types of sanctions imposed. Our report indicates that USDA has imposed
some sanctions since the enactment of ARPA. However, the number of
sanctions imposed by RMA has not increased appreciably since the enactment
of ARPA. For example, RMA imposed an average of less than 20 sanctions
annually from 1996 to 2000, and an average of less than 20 sanctions
annually from 2001 to 2005, except for 2004 (67), which was an exception.
While not all questionable claims payments are necessarily sanctionable,
RMA has identified about 3,000 questionable payments annually since
beginning data mining in 2001. We continue to believe RMA has not fully
exercised its new authority.

Under ARPA, RMA has new authority to impose sanctions on agents, loss
adjusters, approved insurance providers, and others who willfully and
intentionally fail to comply with an FCIC program requirement. In April
2005, RMA officials told us that the number of sanctions has not
substantially increased in part because regulations have not been
promulgated under ARPA. Subsequently, an official from USDA's Office of
General Counsel told us that RMA had not imposed any sanctions under its
new authority to do so on the basis of a failure to comply with an FCIC
program requirement. This official indicated that regulations were needed
to establish what constitutes an FCIC program requirement, how USDA will
determine that a material violation has occurred, and what process will be
followed before imposing sanctions under this provision. USDA does not
dispute the report's findings that no sanctions have been imposed under
this sanction provision of ARPA.

USDA disagreed with our recommendation to ensure that FSA field offices
conduct all inspections called for under agency guidance because FSA did
not have sufficient resources to complete all of these inspections. Given
the potentially high payoff from providing greater assistance to RMA, we
believe that FSA may want to conduct a study to determine the costs and
benefits of making staff available for crop insurance inspections.

USDA also disagreed with our recommendation to reduce the insurance
guarantee or eliminate optional unit coverage for producers who
consistently file claims that are irregular in comparison with other
producers growing the same crop in the same location. USDA stated that
this recommendation represented a disproportionate response, considering
the small number of producers identified as yield switching each year and
that adoption of our recommendation would not be cost-effective. We agree
that the number of policies identified annually as having patterns
consistent with yield switching is small in comparison with the number of
policies in the crop insurance program. However, we believe it is possible
to narrowly tailor an underwriting rule so that it would target only a few
producers each year and would entail few resources. Such a tool would
provide RMA with another means to discourage producers from abusing the
program. Thus, we continue to believe it is reasonable for RMA to reduce
the insurance guarantee or eliminate optional unit coverage for producers
who consistently file and receive questionable claims payments.

USDA also provided technical corrections, which we have incorporated into
this report as appropriate. USDA's written comments are presented in
appendix VII.

As agreed with your office, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 30 days from
the report date. At that time, we will send copies of this report to
appropriate Congressional Committees; the Secretary of Agriculture; the
Director, Office of Management and Budget; and other interested parties.
In addition, this report will be available at no charge on the GAO Web
site at

h ttp://www.gao.gov.

If you have any questions about this report, please contact me at (202)
5123841 or [email protected]. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report. GAO staff who made major contributions to this report are
listed in appendix VIII.

Sincerely yours,

Robert A. Robinson

Managing Director, Natural Resources and Environment

Appendix I

                       Objectives, Scope, and Methodology

At the request of the Chairman of the Senate Committee on Homeland
Security and Governmental Affairs, we examined the U.S. Department of
Agriculture (USDA) Risk Management Agency's (RMA) procedures for assuring
integrity in the crop insurance program. Specifically, we agreed to

(1) assess the effectiveness of USDA's procedures and processes to prevent
and detect fraud, waste, and abuse in selling and servicing crop insurance
policies; (2) determine the extent to which program design issues may make
the program more vulnerable to fraud, waste, and abuse; and (3) determine
the effectiveness of USDA's procedures to assure program integrity in
developing new crop insurance products.

To assess the effectiveness of USDA's procedures and processes to prevent
and detect fraud, waste, and abuse in the selling and servicing of crop
insurance policies, we examined a nonrandom sample of 120 insurance claims
from the 2,794 claims that RMA identified as warranting a field inspection
in 2004. Of these 120 claims, 100 were the largest claims paid, and 20
were selected to ensure representation of all data analysis selection
criteria. To review the claims, we visited seven insurance companies and
contacted three others to request the claim files. We also examined the
guidance that RMA and USDA's Farm Service Agency (FSA) field offices use
to implement the requirements of the Agricultural Risk Protection Act of
2000 (ARPA), including the FSA/RMA Handbook FCIC Program Integrity, 4-RM.
In addition, we examined guidance that RMA uses to ensure compliance with
the Federal Crop Insurance Act, including relevant laws; regulations and
agency policy, including the 2003 Crop Insurance Handbook; Manual 14,
Guidelines and Expectations for Delivery of the Federal Crop Insurance
Program; loss adjustment manuals; crop insurance handbooks; and related
managers' bulletins and notices.

In addition, we conducted two surveys. To assess the effectiveness of RMA
and FSA's coordinated monitoring efforts at the local level, we conducted
a Web-based survey of all 829 FSA county officials who were responsible
for conducting field inspections in 2003. The survey contained 17
questions that asked for opinions and assessments of (1) preharvest and
growing season inspections; (2) training and education on crop insurance;
(3) the findings and actions taken by RMA; and (4) FSA's role in reducing
fraud, waste, and abuse in crop insurance. In developing the
questionnaire, we met with officials in FSA headquarters to gain a
thorough understanding of the coordinated plan FSA uses to assist RMA in
monitoring the crop insurance program. We also shared a draft copy of the
questionnaire with these officials, who provided us with comments,
including technical corrections. We then pretested the questionnaire with
FSA officials in two

Appendix I Objectives, Scope, and Methodology

county offices each in Texas and Georgia, as well as with officials in one
office each in Maryland, Minnesota, and North Dakota. During these
pretests, we asked the officials to complete the Web-based survey as we
observed the process. After completing the survey, we interviewed the
respondents to ensure that (1) questions were clear and unambiguous, (2)
terms we used were precise, (3) the questionnaire did not place an undue
burden on the FSA county officials completing it, and (4) the
questionnaire was independent and unbiased. On the basis of the feedback
from the pretests, we modified the questions, as appropriate.

The questionnaire was posted on GAO's survey Web site. When the survey was
activated, the officials who had been selected to participate were
informed of its availability with an e-mail message that contained a
unique user name and password. This allowed respondents to log on and fill
out a questionnaire but did not allow respondents access to the
questionnaires of others. The survey was available from December 9, 2004,
until March 11, 2005. We received responses for 92 percent of the 829 FSA
officials. Results of the survey to FSA county officials are summarized in
appendix

To solicit crop insurance agents' views on control weaknesses and
suggestions for improving oversight of the crop insurance program, we
developed a questionnaire that was mailed to crop insurance agents. In
developing the questionnaire, we met with officials in RMA headquarters to
gain a thorough understanding of internal controls in the crop insurance
program. We also shared a draft copy of the questionnaire with these
officials who provided us comments, including technical corrections. We
then pretested the questionnaire with five crop insurance agents in Texas,
five agents in Georgia, and five agents in North Dakota. During each
pretest we interviewed the respondent to make sure that the (1) questions
were clear and unambiguous, (2) questionnaire terms were precise, (3)
questionnaire did not place an undue burden on the agents completing it,
and (4) questionnaire was independent and unbiased. The survey was mailed
to the crop insurance agents on December 21, 2004.

1In addition to responding to our survey questions, many of these field
officials also provided us with written comments. Because these written
comments were voluminous, they have not been included in appendix III.

Page 55 GAO-05-528 Crop Insurance Appendix I Objectives, Scope, and
Methodology

Because of the large number of agents (more than 13,000) that participate
in the crop insurance program, we used a probability sample. Before
sampling, agents were grouped by the dollar amount of policies sold in
2003. The number of agents sampled from each group was proportionate to
the number of agents in the group. The final number of agents selected was
951. However, because of incorrect addresses or other information, the
final sample was 935. We received responses from 76 percent of these 935
insurance agents.

The results from the survey are presented as estimates, each with a
measurable precision, or sampling error, that may be expressed as a
plus/minus figure. By adding the sampling error to and subtracting it from
the estimate, we developed upper and lower bounds for each estimate. The
range between these two estimates is called the confidence interval.
Sampling errors and confidence intervals are stated at a certain
confidence level, in this case, 95 percent. For example, a confidence
interval at the 95 percent confidence level means that in 95 out of 100
cases, the sampling procedure would produce a confidence interval that
would include the estimated value. Results of the survey are summarized in
appendix IV.2

At our request, the Center for Agribusiness Excellence in Stephenville,
Texas, conducted data mining on RMA's crop insurance databases and FSA's
computer databases for farming operations receiving commodity program
payments. For these operations, the databases contain detailed information
on the individuals that are members or beneficiaries, their share of
payments, and additional organizational details. We asked the Center for
Agribusiness Excellence to determine whether (1) policyholders report all
farming operations in which they have a substantial beneficial interest,
(2) certain farming operations manipulate production among affiliated
farming entities to file questionable crop insurance claims, and

(3) conflicts of interest exist for members of farming operations who are
also agents or claims adjusters. In addition, for policyholders identified
as not having reported all farming operations in which they have a
substantial beneficial interest, we asked the Center for Agribusiness
Excellence to determine whether any of these policyholders had been
identified by RMA as ineligible to participate in the crop insurance
program.

2In addition to responding to our survey questions, many of these
insurance agents provided us with written comments. Because these written
comments were voluminous, they have not been included in appendix IV.

Page 56 GAO-05-528 Crop Insurance Appendix I Objectives, Scope, and
Methodology

To determine the extent to which program design issues may make the
program more vulnerable to fraud, waste, and abuse, we conducted a
qualitative assessment of economic studies. We also discussed these issues
with USDA program officials in headquarters and with field office
officials who conduct inspections during the growing season.

To examine practices recently employed by producers, agents, and adjusters
to defraud the federal crop insurance program, GAO's Office of Forensic
Audits and Special Investigations (FSI) asked USDA's Office of Inspector
General (OIG) to provide the names of all crop insurance fraud cases they
had investigated in the preceding 2 years that resulted in criminal
prosecution. OIG identified eight cases of crop insurance fraud prosecuted
between June 2003 and April 2005. FSI reviewed OIG's case files for these
cases, spoke with representatives from the U.S. Department of Justice, and
reviewed relevant reports, court papers, and other documentation on these
cases. FSI conducted its investigation from February through June 2005 in
accordance with quality standards for investigations as set forth by the
President's Council on Integrity and Efficiency.

Finally, to determine the effectiveness of USDA's procedures in assuring
program integrity in developing new crop insurance programs, we evaluated
the agency's policies, procedures, and other pertinent documents to
determine what controls were in place to assure program integrity.
Specifically, for developmental products, we reviewed RMA's New Program
Development Handbook and, for expansion of existing products, we reviewed
RMA's General Guidelines and Criteria for Submitting County Crop Program
Expansion Requests. We reviewed these RMA guidelines to determine the
types of analyses expected and the process that was to be followed in
order to establish a new or expansion product. We also spoke with RMA's
product development and expansion officials. We selected a nonrandom
sample of 16 products that were developed (11 products) or expanded (5
products) during 1998 and 2002 and compared the work performed and
documented with the appropriate RMA guidance. The 11 products included 5
products with the highest loss ratios (over $3 claims paid for every $1 of
premiums) and 6 products with low loss ratios (less than $3 in claims paid
for every $1 of premiums).

We conducted our review from July 2004 through August 2005 according to
generally accepted government auditing standards, which included an
assessment of data reliability and internal controls.

Appendix II

Selected Information on the Federal Crop Insurance Program, 1981-2004

      (in                        Total             Producer Claims   loss   Producer 
      thousands)                 premium           premium  paid     ratioa loss     
      Acres and                                                      Total  ratiob   
      dollars in                                                            
      millions                                                              
Year  Policies   Acres Liability          Subsidy                           
1981       416.8 45.0  $5,981.2    $376.8    $47.0  $329.8   $407.3    1.08     1.23 
1982       386.0 42.7    6,124.9    396.1     91.3    304.8  529.1     1.34     1.74 
1983       310.0 27.9    4,369.9    285.8     63.7    222.1  583.7     2.04     2.63 
1984       389.8 42.7    6,619.6    433.9     98.3    335.6  638.4     1.47     1.90 
1985       414.6 48.6    7,159.9    439.8    100.1    339.7  683.1     1.55     2.01 
1986       406.9 48.7    6,230.0    379.7     88.1    291.6  615.7     1.62     2.11 
1987       433.9 49.1    6,094.9    365.1     87.6    277.5  369.8     1.01     1.33 
1988       461.0 55.6    6,964.7    436.4    108.0    328.4 1,067.6    2.45     3.25 
1989       948.6 101.6 13,535.8     814.3    205.0    609.3 1,212.2    1.49     1.99 
1990       894.8 101.4 12,828.4     836.5    215.3    621.2  973.0     1.16     1.57 
1991       706.8 82.4  11,216.0     737.0    190.1    546.9  955.3     1.30     1.75 
1992       663.4 83.1  11,334.1     758.8    196.7    562.1  918.2     1.21     1.63 
1993       679.2 83.7  11,353.4     755.7    200.0    555.7 1,655.5    2.19     2.98 
1994       800.9 99.6  13,608.4     949.4    254.9    694.5  601.1     0.63     0.87 
1995     2,034.3 220.5 23,728.5  1,543.3     889.4    653.9 1,567.7    1.02     2.40 
1996     1,615.2 204.9 26,876.8  1,838.6     982.1    856.5 1,492.7    0.81     1.74 
1997     1,319.8 182.2 25,459.0  1,775.4     902.8    872.6  993.6     0.56     1.14 
1998     1,242.7 181.8 27,921.4  1,875.9     946.3    929.6 1,677.5    0.89     1.80 
1999     1,288.8 196.9 30,939.5  2,310.1   1,394.0    916.1 2,434.7    1.05     2.66 
2000     1,323.2 206.5 34,443.8  2,540.2   1,365.8 1,174.4  2,594.8    1.02     2.21 
2001     1,297.9 211.3 36,730.3  2,961.8   1,771.7 1,190.1  2,960.2    1.00     2.49 
2002     1,259.5 214.9 37,335.0  2,916.3   1,741.8 1,174.5  4,066.9    1.39     3.46 
2003     1,241.5 217.4 40,619.0  3,431.2   2,041.9 1,389.3  3,254.6    0.95     2.34 
2004     1,228.8 221.1 46,615.5  4,186.2   2,477.4 1,708.8  3,110.9    0.74     1.82 
1981-94                                                                     
average  565.2   65.2    8,815.8    569.0    139.0    429.9  800.7     1.41     1.86 
average  1,385.2                                                            
1995-04          205.8 $33,066.9 $2,537.9 $1,451.3 $1,086.6 $2,415.4 0.95   2.30     

Source: RMA. Note: GAO analysis of RMA's data. aClaims paid (indemnity)
divided by total premium. bClaims paid (indemnity) divided by producer
premium.

Appendix III

Results of Implementation of the Agricultural Risk Protection Act of 2000:
Survey of FSA County Directors of USDA

    Q1. Do you feel that you clearly understand RMA's expectations regarding
              conducting growing season inspections (spot checks)?

Number Definitely yes Probably yes Uncertain Probably not Definitely not
No response of (percent) (percent) (percent) (percent) (percent) (percent)
respondents

43.1 4.7 1.7 0.8 0.0 743

Q2. In your opinion, are most producers in your county aware of growing
season inspections that are conducted on the fields of other producers?

                                                                             Number
Definitely Probably  Uncertain Probably  Definitely    No     No                 of 
yes           yes              not       not         opinion  response  
(percent)  (percent) (percent) (percent)  (percent) (percent) (percent) respondents 
6.5             25.6      15.3      43.6        8.7       0.1       0.1         743 

Q3. In your opinion, have growing season inspections in your county
increased compliance of most producers with crop insurance provisions?

                                                                             Number
Definitely Probably  Uncertain Probably  Definitely    No     No                 of 
yes           yes              not       not         opinion  response  
(percent)  (percent) (percent) (percent)  (percent) (percent) (percent) respondents 
3.4             25.2      32.2      32.0        5.5       1.5       0.3         743 

Q4. During the past two years have you observed a potential non-compliance
          situation during the normal course of your official duties?

                                                                       Number
Yes                                 No No response                      of 
(percent)                    (percent)          (percent)      respondents 
28.1                              68.4                3.5              743 

Q5. During the past two years, when you observed a potential
non-compliance situation during the normal course of your official duties,
how often did you initiate CCC Form 2007 (Report of Crop Insurance
Non-compliance)?

Always or     Most of About half Some of    Never or                Number 
                     the of         the                           
almost           time   the time      time almost    No                 of 
always                                     never     response  
(percent)   (percent)  (percent) (percent) (percent) (percent) respondents 
52.8             11.5        2.0       5.6      13.9      14.3         252 

Appendix III Results of Implementation of the Agricultural Risk Protection
Act of 2000: Survey of FSA County Directors of USDA

Q6. When did you receive RMA's request(s) for 2003 growing season inspection(s)
                                 (spot checks)?

                                                Number of Percent respondents

Before planting season 40.5 743

During planting season 25.2 743

Less than 30 days after final planting date 6.5 743

More than 30 days after final planting date but before harvest 14.9 743

During or after harvest 2.0 743

Don't remember and there is no record of time request was received 2.7 743

Other ( Please specify below. ) 7.0 743

                              No response 1.1 743

Q6 other. If you checked "Other" in Question 6 above, please explain in
the textbox below.

Writing Number comment of (percent) respondents

8.1 743

Q7. During the past 4 years, have you received any training/education on
federal crop insurance?

                                                                       Number
Yes                                 No No response                      of 
(percent)                    (percent)          (percent)      respondents 
82.9                              15.5                1.6              742 

Appendix III Results of Implementation of the Agricultural Risk Protection
Act of 2000: Survey of FSA County Directors of USDA

Q8. How adequate was the training/education you received on federal crop
insurance?
                          Neither                                             
                         adequate                                             
Very      Somewhat         nor   Somewhat       Very No        
adequate  adequate  inadequate inadequate inadequate response    Number of
(percent) (percent)  (percent)  (percent)  (percent) (percent) respondents
28.6           52.8        9.9        5.9        0.8       1.9         625 

     Q9. Do you think that you need more training/education on federal crop
                                   insurance?

                                                                             Number
Definitely Probably  Uncertain Probably  Definitely    No     No                 of 
yes           yes              not       not         opinion  response  
(percent)  (percent) (percent) (percent)  (percent) (percent) (percent) respondents 
16.0            49.1      13.6      17.9        2.7       0.5       0.1         742 

Q10. During the past 4 years, have you received any training/education
(either in-class or on-line) on conducting growing season inspections
(spot checks)?

                                                                       Number
Yes                                 No No response                      of 
(percent)                    (percent)          (percent)      respondents 
56.0                              41.2                2.8              741 

  Q11. How adequate was the training/education you have received on conducting
                   growing season inspections (spot checks)?

                                    Neither
              Somewhat adequate    Somewhat        Very                Number 
                       nor                                        
Very       adequate inadequate inadequate inadequate No                 of 
adequate                                             response  
(percent) (percent)  (percent) (percent)   (percent) (percent) respondents 
19.6           55.2       11.4        6.0        1.1       6.7         464 

 Q12. Do you think that you need more training/education on conducting growing
                       season inspections (spot checks)?

                                                                             Number
Definitely Probably  Uncertain Probably  Definitely    No     No                 of 
yes           yes              not       not         opinion  response  
(percent)  (percent) (percent) (percent)  (percent) (percent) (percent) respondents 
17.3            44.3      10.0      23.3        4.0       0.7       0.4         741 

Appendix III Results of Implementation of the Agricultural Risk Protection
Act of 2000: Survey of FSA County Directors of USDA

Q13. Do any of the following make it difficult for you to conduct growing season
                          and preharvest inspections?

Yes No (percent) (percent)

              Number Uncertain No response of (percent) (percent) respondents

a.
           Quality of the guidance from FSA 12.5 78.9 6.5 2.2 738

b.
           Quality of the guidance from RMA 25.4 63.2 8.6 2.9 736

c.
           Inspection requests received late 30.7 62.3 3.9 3.2 727

d.
           Not a priority with your supervisor 3.4 86.3 4.8 5.6 735

e.
           Not a priority with state office 3.3 86.5 5.9 4.4 735

f.
           Findings not acted on 17.1 60.9 16.6 5.5 731

g.
           No explanation or follow-up from RMA on findings 33.7 50.0 11.4
           4.9 736

h.
           You are uncomfortable in assisting RMA with enforcement 17.9 75.3
           5.3 1.5 738

i.
           Not enough time 49.1 45.7 2.8 2.4 740

j.
           Other (Please specify below.) 28.8 33.5 2.1 35.6 340

Q13 other. If you checked "Other" in Question 13 above, please explain in
the textbox below.

Writing Number comment of (percent) respondents

13.9 743

 Appendix III Results of Implementation of the Agricultural Risk Protection Act
                of 2000: Survey of FSA County Directors of USDA

Q14. Would feedback from RMA following growing season inspections help you
be more effective in reducing fraud, waste, and abuse in the crop
insurance program in your county?

Number Definitely yes Probably yes Uncertain Probably not Definitely not
No response of (percent) (percent) (percent) (percent) (percent) (percent)
respondents

44.6 11.1 8.8 0.7 0.4 740

Q15. In your opinion, do any of the following areas of the FSA/RMA Handbook FCIC
                  Program Integrity 4-RM need to be improved?

                                                                       Number
                       Yes          No  Uncertain  No response             of 
                 (percent)  (percent)    (percent)     (percent)  respondents 
a. Part 1: Basic                                              
provisions (pp.                                               
1.1 -1.7)           5.6        70.8        17.8           5.7          734 
b. Part 2:                                                    
Referrals and                                                 
Investigations                                                
(pp. 2.1 - 2.59)   17.1        58.5        18.8           5.6          733 
c. Part 3:                                                    
Claims Audit                                                  
(pp. 3.1 - 3.9)    12.2        57.1        24.0           6.8          722 
d. Part 5: State                                              
Technical                                                     
Committee                                                     
(STC)                                                         
Consultation                                                  
(pp. 5.1 - 5.59)    6.6        57.6        26.9           8.9          728 
e. Part 6: Data                                               
Reconciliation                                                
(pp. 6.1 -                                                    
6.185)             19.0        52.9        21.4           6.7          733 
f. Other (Please                                              
specify below.)     8.2        36.3        13.0          42.6          331 

Q15 other. If you checked "Other" in Question 15 above, please explain in
the textbox below.

Writing Number comment of (percent) respondents

4.4 743

 Appendix III Results of Implementation of the Agricultural Risk Protection Act
                of 2000: Survey of FSA County Directors of USDA

Q16. In your opinion, how effective are RMA and FSA in coordinating their
efforts to reduce fraud, waste, and abuse in the crop insurance program?

Extremely Moderately effective Very effective effective (percent)
(percent) (percent) Slightly

Somewhat effective or Number effective not effective No opinion No
response of (percent) (percent) (percent) (percent) respondents

                      1.6 16.2 31.4 27.6 17.6 5.1 0.5 740

Q17. In your opinion, with respect to reducing fraud, waste, and abuse in
the crop insurance program, how effective is the coordination of your
State FSA Office with your County Office?

                                     Slightly
Extremely           Moderately Somewhat  effective                          Number 
                                            or                         
effective   Very    effective  effective    not       No     No                 of 
          effective                      effective  opinion  response  
(percent) (percent) (percent)  (percent) (percent) (percent) (percent) respondents 
9.4            43.3       25.3      11.3       6.1       4.2       0.4         742 

Q18. If you would like to make any additional comments concerning the crop
insurance program or RMA's and FSA's efforts to combat fraud, waste, and
abuse and ensure integrity and compliance, please enter your comments in
the textbox below.

Writing Number comment of (percent) respondents

40.8 743

Appendix IV

Results of Improving Compliance and Integrity in the Federal Crop Insurance
Program: Survey of Crop Insurance Agents

This appendix presents the questionnaire that was sent to crop insurance
agents and the results of our survey. The results are presented in terms
of the estimates of the responses we would have received to the questions
in our survey if we had surveyed all agents selling crop insurance.
Because of the large number of crop insurance agents, we used a sample
(probability sample). Before sampling, agents were grouped by the dollar
amount of policies sold in 2003. The number of agents sampled from each
group was proportionate to the number of agents in the group. The final
sample consisted of 935 agents.

The survey results that we present are estimates, each with a measurable
precision, or sampling error, that may be expressed as a plus/minus
figure. By adding the sampling error to and subtracting it from the
estimate, we develop upper and lower bounds for each estimate. The range
between these two estimates is called the confidence interval. Sampling
errors and confidence intervals are stated at a certain confidence level,
in this case, 95 percent. For example, a confidence interval at the 95
percent confidence level means that in 95 out of 100 cases, the sampling
procedure would produce a confidence interval that would include the
estimated value.

Appendix IV Results of Improving Compliance and Integrity in the Federal
Crop Insurance Program: Survey of Crop Insurance Agents Appendix IV
Results of Improving Compliance and Integrity in the Federal Crop
Insurance Program: Survey of Crop Insurance Agents

1. Based on your own experiences, what effect do the following features of the crop
insurance program have on fraud, waste, and abuse? (Please check one answer in each row.)
                  Effect on Fraud, Waste, or Abuse in the Crop Insurance Program
Features of Crop                                                                   No      
Insurance Program                       Little                          Not        basis   
                  Greatly    Somewhat   or no   Somewhat    Greatly     applicable to      
                  encourages encourages effect  discourages discourages in my area judge   
1. Area-loss                                                                               
insurance plans   2 (1-5)    4 (2-7)    34      8 (5-12)    7 (4-10)    14 (11-18) 31      
(e.g., GRP and                          (29-39)                                    (26-36)
GRIP)                                                                              
2. APH yield                                                                               
limitations/yield                       45                                         
floors (cups,     3 (1-6)    7 (5-11)   (39-50) 32 (27-38)  9 (6-12)    1 (0-3)    3 (2-6)
floors,                                                                            
adjustments)                                                                       
3. Optional units 4 (2-7)    19 (14-23) 47      18 (14-23)  9 (6-13)    0 (0-1)    3 (1-6) 
                                        (41-52)                                    
4. Claims for                           45                                         7       
prevented         5 (3-8)    21 (17-26) (40-51) 12 (9-16)   9 (6-12)    1 (0-3)    (4-10)  
planting                                                                           
5. Requiring                                                                               
Social Security                                                                    
number of all                           27                                         
entities (e.g.,   4 (2-7)    2 (1-4)    (22-32) 30 (25-35)  34 (29-40)  0 (0-1)    3 (1-5)
spouse) engaged                                                                    
in farming                                                                         
operation                                                                          
6. Spot checks by                       23                                                 
Farm Service      2 (1-5)    2 (1-5)    (18-27) 44 (38-50)  24 (19-29)  1 (0-2)    4 (2-7)
Agency (FSA)                                                                       
7. Other (Please                                                                   
specify.) The                                                                      
number of                                                                          
responses to this                                                                  
item was too                                                                       
small to                                                                           
calculate                                                                          
weighted means                                                                     
and confidence                                                                     
intervals.                                                                         

Note: The numbers in each cell are estimated percentages. Numbers in
parentheses are the confidence intervals associated with that response.

                                      -1-

Appendix IV Results of Improving Compliance and Integrity in the Federal
Crop Insurance Program: Survey of Crop Insurance Agents

2. In your opinion, what effect would the following potential changes to the crop
insurance program have on fraud, waste, or abuse? (Please check one answer in each
row.)          
               Effect on Fraud, Waste, or Abuse in the Crop Insurance Program
                                                                            No     
Potential                          Little                        Not        basis  
Program        Greatly   Somewhat  or no   Somewhat   Greatly    applicable to     
Changes        encourage encourage effect  discourage discourage in my area judge  
1. Additional                                                                      
financial                                                                          
risk-sharing   1 (0-3)   6 (4-10)  62      14 (11-18) 4 (2-7)    0 (0-1)    12
by crop                            (57-67)                                  (8-16)
insurance                                                                   
companies                                                                   
2. Increased                                                                       
monitoring of  2 (1-4)   4 (2-7)   41      36 (31-42) 11 (8-15)  0 (0-2)    5      
claims                             (35-46)                                  (3-8)
adjusters                                                                   
3. Lower                                                                           
premium                                                                            
payments for   5 (3-8)   6 (4-10)  28      33 (28-38) 26 (22-31) 0 (0-0)    2
producers with                     (23-33)                                  (1-4)
few or low                                                                  
claims                                                                      
4. Higher                                                                          
premium                                                                            
payments for   4 (2-7)   11 (8-15) 27      36 (31-41) 19 (15-24) 0 (0-1)    3
producers with                     (22-31)                                  (1-6)
frequent or                                                                 
severe claims                                                               
5. Retention                                                                       
of 10 years of                                                                     
production                                                                  
records by     1 (0-3)   5 (3-8)   55      29 (24-34) 7 (5-11)   0 (0-1)    3
producer to                        (49-60)                                  (1-5)
permit                                                                      
verification                                                                
of APH                                                                      
6. Require RMA                                                                     
certification                                                                      
of claims                          54                                       8
adjusters (in  1 (0-3)   4 (2-7)   (49-60) 23 (19-28) 8 (5-12)   0 (0-2)    (5-12)
addition to                                                                 
any state                                                                   
certification)                                                              
7. Other                                                                    
(Please                                                                     
specify.) The                                                               
number of                                                                   
responses to                                                                
this item was                                                               
too small to                                                                
calculate                                                                   
weighted means                                                              
and confidence                                                              
intervals.                                                                  

Note: The numbers in each cell are estimated percentages. Numbers in
parentheses are the confidence intervals associated with that response.

                                      -2-

Appendix IV Results of Improving Compliance and Integrity in the Federal
Crop Insurance Program: Survey of Crop Insurance Agents

                       Page 69 GAO-05-528 Crop Insurance

3. Insurance companies are required to conduct the reviews and inspections listed
below. What effect do you believe these mandatory reviews and inspections by insurance
companies have on fraud, waste, and abuse in the crop insurance program? (Please check
one answer in each row.)
  Mandatory               
 Reviews and   
 Inspections   Effect on Fraud, Waste, or Abuse in the Crop Insurance Program
  Currently                                                          Not               
    Being                                                            applicable No     
 Conducted by                        Little                          in my area basis  
  Insurance    Greatly    Somewhat   or no   Somewhat    Greatly                to     
  Companies    encourages encourages effect  discourages discourages            judge
1. Field                                                                               
inspections of                                                                         
a sample of                                                                     
crop insurance 3 (1-5)    4 (2-7)    31      44 (39-50)  17 (13-22)  0 (0-0)    1
policies to                          (26-36)                                    (0-3)
verify                                                                          
reported                                                                        
acreage                                                                         
2. Preharvest                                                                          
and growing                                                                            
season                               13                                         5
inspections    4 (2-7)    4 (2-8)    (10-17) 43 (37-48)  31 (26-36)  0 (0-1)    (2-8)
for insureds                                                                    
with frequent                                                                   
crop losses                                                                     
3. Reviews of                                                                          
a sample of                          28                                         2      
randomly       2 (1-4)    5 (3-9)    (23-33) 53 (47-58)  10 (7-14)   0 (0-0)    (1-4)
selected                                                                        
claims                                                                          
4. "Conflict                                                                           
of interest"                                                                           
reviews for                                                                     
all claims by                                                                   
individuals    3 (1-5)    3 (1-6)    41      30 (25-35)  18 (14-23)  0 (0-2)    4
directly                             (36-46)                                    (2-7)
associated                                                                      
with the crop                                                                   
insurance                                                                       
program                                                                         
5. Reviews of                                                                          
all crop                                                                               
insurance      4 (2-8)    4 (2-7)    19      39 (34-44)  30 (25-36)  0 (0-1)    3
claims equal                         (15-23)                                    (1-6)
to or greater                                                                   
than $100,000                                                                   
6. Reviews of                                                                          
a sample of                                                                            
insured                                                                         
entities with                                                                   
claims                               44                                         4
adjusted under 1 (0-3)    2 (1-5)    (39-50) 40 (35-46)  8 (5-12)    0 (0-1)    (2-7)
simplified                                                                      
(express)                                                                       
claims (claims                                                                  
of $10,000 or                                                                   
less)                                                                           
7. Reviews of                                                                          
a sample of    2 (1-4)    3 (1-6)    31      47 (41-52)  10 (7-14)   1 (0-1)    6      
prevented                            (26-37)                                    (4-10)
plant claims                                                                    
8. Reviews of                                                                          
self-certified                       50                                         7      
replant claims 1 (0-2)    4 (2-6)    (45-56) 30 (25-35)  8 (5-11)    0 (0-1)    (4-11)
(for 50 acres                                                                   
or less)                                                                        
9. Reviews of                                                                          
a sample of                                                                            
policies where                                                                  
current year                         34                                         4
production is  3 (1-5)    5 (3-9)    (29-39) 42 (36-47)  13 (9-17)   0 (0-1)    (2-7)
equal to or                                                                     
greater than                                                                    
150% of prior                                                                   
year's APH                                                                      

Note: The numbers in each cell are estimated percentages. Numbers in
parentheses are the confidence intervals associated with that response.

                                       -3

Appendix IV Results of Improving Compliance and Integrity in the Federal
Crop Insurance Program: Survey of Crop Insurance Agents

4. In the past two years, have you been aware of any of the following RMA
activities? (Check yes, no, or uncertain for each activity.)
                                                   Have you Been Aware of RMA
                                                   Activity?
Activities                                        Yes      No    Uncertain 
1. RMA analyzing crop insurance policies and                               
claims across many years ("data mining") to     39       49      12 (9-16)
uncover patterns that suggest crop insurance    (34-44)  (44-54) 
fraud or abuse.                                                  
2. RMA analyzing insurance policies and claims                             
to identify relationships among producers,      45       45      10 (7-14)
agents and adjusters that indicate possibly     (40-51)  (39-51) 
fraudulent claims.                                               
3. RMA using infrared aerial photography to     19       64      16        
monitor crops in your area.                     (15-23)  (59-70) (12-21)   
4. FSA conducting growing season inspections                               
(spot checks) of producers in your area who     31       55      15        
were identified by RMA as warranting on-site    (26-35)  (49-60) (11-19)
inspections.                                                     

5. Based on your experiences, what effect do you believe RMA's data mining
efforts will have on fraud, waste, and abuse in crop insurance? (Please
check one.)

(1)
           __ Greatly encourage 1 (0-3)

(2)
           __ Somewhat encourage 6 (3-9)

(3)
           __ Little or no effect 26 (21-31)

(4)
           __ Somewhat discourage 35 (30-40)

(5)
           __ Greatly discourage 16 (12-20)

(6)
           __ No basis to judge 16 (12-21)

6. Have the insurance companies you write for included information about
data mining sessions in their training modules? (Please check one.)

(1)
           __ Yes 49 (43-54)

(2)
           __ No 22 (17-27)

(3)
           __ Uncertain 29 (24-35)

Note: The numbers in each cell are estimated percentages. Numbers in
parentheses are the confidence intervals associated with that response.

-4-

Appendix IV Results of Improving Compliance and Integrity in the Federal
Crop Insurance Program: Survey of Crop Insurance Agents

  Background Information

The following information will help us in analyzing the results of this
survey.

  7. How many years have you been selling crop insurance? (Please check one.)

(1)
           __ Less than 1 year

(2)
           __ 1 to 5 years

(3)
           __ 6 to 10 years

(4)
           __ 11 to 15 years

(5)
           __ 16 to 20 years

(6)
           __ 20 to 30 years

(7)
           __ More than 30 years

2 (0-4) 18 (14-23) 25 (20-30) 17 (13-21) 18 (13-22) 17 (13-21) 4 (2-7)

8. What percentage of the insurance policies you write are for crop
insurance? (Note: Please answer for yourself only, not for an insurance
agency.) (Please check one.)

(1)
           __ 1-25% 46 (41-51)

(2)
           __ 26-50% 12 (9-16)

(3)
           __ 51-75% 6 (4-9)

(4)
           __ 76-100% 36 (31-41)

9. How many hours of crop insurance classroom training/education have you
received in 2004? (Please check one.)

(1)
           __ 0 (zero) hours 2 (1-5)

(2)
           __ 1 to 3 hours 3 (1-5)

(3)
           __ 4 to 12 hours 61 (56-66)

(4)
           __ 13 to 20 hours 22 (18-27)

(5)
           __ More than 20 hours 11 (8-15)

Note: The numbers in each cell are estimated percentages. Numbers in
parentheses are the confidence intervals associated with that response.

10. Please add any comments or suggestions you have regarding improving
program compliance and integrity in the federal crop insurance program.
(Please use the space below or on the back of this page for your comments
or, if you prefer, attach a separate page.)

    When Our Report is Issued . . .

How should we notify you?

[ ] By email. AE Please provide your email
address:________________________________________________ [ ] By mail. AE
Please provide address correction, if
needed:_________________________________________ [ ] Please do not notify
me.

                                      -5-

Appendix V

Crop Insurance Fraud Cases Criminally Prosecuted, June 2003 to April 2005

This appendix presents GAO's Office of Forensic Audits and Special
Investigations description of eight cases of crop insurance fraud
investigated by U.S. Department of Agriculture's (USDA) Office of
Inspector General (OIG) and criminally prosecuted between June 2003 and
April 2005.

Case 1

Based on results from data mining, OIG, and USDA's Farm Service Agency
(FSA) and Risk Management Agency (RMA) conducted field inspections on a
producer in Tennessee. Problems identified during the inspection of the
producer's farm were reported to the insurance company that provided the
policy.

In 1999, the producer improperly obtained crop insurance coverage for his
tomato crop and received a claims payment for losses that had not
occurred. The producer was ineligible to participate in the crop insurance
program because he had not paid a past premium. In order to hide the fact
that he was the true grower of 1999 tomato production in two Tennessee
counties, he used his wife's name on crop insurance documents. In
addition, his wife filed a report with the insurance company claiming a
higher level of acreage planted to inflate the value of any subsequent
insurance claim. An insurance adjuster assisted the producer by
fraudulently signing forms showing he inspected and measured the crops and
that his observations supported the wife's claimed loss.

The producer's wife received $57,155 in crop insurance payments for losses
claimed on the 1999 tomato crop. In September 2003, the producer pled
guilty to six counts of making false statements on loan or credit
applications and one count each of conspiracy to defraud the government,
making false statements, and making false claims. He was sentenced to 3
years probation and ordered to pay $57,155 in restitution to RMA.

Case 2

Following up on OIG hotline complaints, USDA initiated an investigation of
a wheat producer in Georgia. In February 2000, the Georgia producer
claimed a loss of 400 acres of wheat because of heavy hail damage and a
hot and dry growing season. He had previously reported that the wheat had
been planted by the planting deadline-December 15, 1999. The lease for the
land, however, was not effective until January 2000, and the owner of the
land confirmed that he did not allow any crops to be planted before the

Appendix V Crop Insurance Fraud Cases Criminally Prosecuted, June 2003 to
April 2005

lease began. Other witnesses corroborated that the wheat on this land was
not planted until sometime in early 2000-after the planting deadline. The
producer received a $39,826 claims payment for the reported loss.

The USDA investigation revealed that the producer's brother worked for the
insurance company that insured the wheat crop, and the policy was actually
sold through a crop insurance agency owned by the brother's wife. Records
subpoenaed from the wife's insurance agency disclosed additional policies
issued to the subject. Crop insurance claims payments on those policies
for the 2000 crop year exceeded $400,000. The investigation also
determined that the insurance adjusters for these claims were contract
adjusters for the brother's employer.

On June 30, 2003, the producer pled guilty in federal district court to
making false statements on loan or credit applications. He was sentenced
to 1 day in prison and ordered to pay $39,826 in restitution to RMA.

Case 3

An OIG-initiated fraud detection survey of grain elevators disclosed
irregularities at a Minnesota grain elevator and led to the investigation
of two Minnesota producers. In 1997 and 1998, these producers grew pinto
bean and black turtle bean crops that were covered by federal crop
insurance. The producers falsely claimed that their crops had been damaged
by excessive moisture and underreported the amount of beans that were
harvested and sold for processing. They also arranged for the harvested
beans to be sold using false names so that the insurance adjuster would
not be able to link them to this production. Production information was
also omitted from production worksheets. The producers received claims
payments of $435,087 for losses.

In June 2003, each of the producers pled guilty to felony theft and
entered into civil agreements under the False Claims Act. The producers
were disqualified from the crop insurance program for 1 year and paid
restitution of $435,087 and civil penalties of $10,000.

Case 4

This case originated when FSA filed a complaint with RMA about a crop
insurance agent who was also a producer in Wilbarger County, Texas. The
producer and other family members were in a farming partnership and
obtained six crop insurance policies for crop year 1999 that covered about

Appendix V Crop Insurance Fraud Cases Criminally Prosecuted, June 2003 to
April 2005

6,500 acres of wheat, cotton, and grain sorghum. All of the policies were
issued through the producer's own insurance agency.

The producer gave an adjuster a schedule of insurance forms with
predetermined figures to be used on appraisal and production worksheets
for the wheat, cotton, and grain crops. The adjuster later admitted that
he did not visit any of the fields to conduct appraisals or to verify crop
production. In addition, the producer had a seed dealer prepare false
receipts to support his claim that he had purchased seed to plant the
crops. The producer and adjuster falsified crop insurance loss documents
and collected $630,000 in fraudulent claims payments for crops that the
producer had not planted.

In February 2004, the producer was convicted of multiple counts of making
false claims to the government and a related conspiracy charge. He was
sentenced to 41 months in prison, to be followed by 3 years of supervised
release and ordered to pay $448,000 in restitution to RMA. In November
2004, the insurance adjuster pled guilty to one count of conspiracy and
received a sentence of 2 years probation, including in-home confinement
and was ordered to pay $447,230 in restitution to RMA.

Case 5

RMA investigated the manager of a northwestern Minnesota grain elevator
when it noticed suspicious adjustments in grain quality. The manager of
the grain elevator was charged with providing North Dakota farmers with
false documents that were used to obtain over $1 million in fraudulent
crop insurance payments from RMA and over $350,000 in improper crop
disaster payments from FSA.

The manager persuaded producers to sell their wheat at discounted prices
to his grain elevator company and then provided the producers with false
documents that purposefully undervalued the wheat's weight and quality.
The manager also directed company employees to create samples of severely
damaged wheat to mislead insurance adjusters and to create records that
misled USDA about the amount of wheat at the elevator. This falsification
enabled the producers to fraudulently collect crop insurance and crop
disaster payments.

The manager was convicted of conspiracy to defraud USDA and two counts of
false statements in February 2003 and was subsequently sentenced to 46
months in prison and ordered to make restitution in the amount of

Appendix V Crop Insurance Fraud Cases Criminally Prosecuted, June 2003 to
April 2005

$751,758. He also was to remain on supervised release for 3 years after
serving his prison term.

Case 6

Following an OIG hotline complaint, investigators found that two crop
insurance agents had falsified crop insurance documents for a producer,
thereby enabling the producer to file false crop insurance claims. For
example, the agents backdated the producer's crop insurance application,
created a false insurance policy based on a fictitious yield rate, and
allowed the producer to report fictitious actual yield rates on their
insurance application.

On August 30, 2004, the agents pled guilty to one count of conspiracy to
submit false statements to RMA. Both agents were sentenced to a year's
probation and ordered to pay fines of $5,000 and $2,000, respectively.

Case 7

OIG followed up on an FSA referral that an Ohio producer reported
different crop yields to FSA and RMA. The producer filed four false crop
insurance claims and received payments totaling approximately $19,000
between May and December 1999. The producer claimed losses for crops that
he did not own. The producer also inflated an insurance claim for a loss
on his corn crop.

In September 2004, the producer pled guilty to one count of making a false
insurance claim. He was sentenced to 24 months probation, 40 hours of
community service, and ordered to pay $2,899 in restitution.

Case 8

This case involves fraudulent crop insurance and farm program payments and
was triggered by a fraud investigation following a bankruptcy filing in
July 2000. Between 1997 and 2003, an Iowa couple, aided by other family
members, friends, and employees, executed fraud schemes that resulted in
crop insurance payments of $912,364.1 The co-conspiritors made false
representations. Specifically, they falsely certified to

1These producers and others also received $746,700 in federal farm program
benefits through fraudulent schemes.

Page 75 GAO-05-528 Crop Insurance Appendix V Crop Insurance Fraud Cases
Criminally Prosecuted, June 2003 to April 2005

     o a prevented planting loss of 1,478 acres in corn and soybeans in
       several counties because of excessive moisture; they received about
       $100,000 in claims payments; and satellite imagery and testimonial
       evidence later confirmed that this claim was false; and
     o a loss of approximately 332 acres of soybeans in one county in Iowa
       when, in fact, satellite imagery evidence indicated only approximately
       71 acres of soybeans was planted; $17,000 was paid on this claim; and
       RMA also paid $88,000 for false crop losses in three other counties in
       2001.

During this period, the family was also submitting false claims for crop
disaster assistance and received $86,000 in payments.

The investigation is continuing, although the co-conspirators have pled
guilty to some charges, agreed to pay restitution in some instances, and
are barred from participating in USDA's farm programs. Officials involved
in the investigation and prosecution of this case note that these
fraudulent activities were facilitated by the direct participation of the
crop insurance agent who provided the policy to the couple.

Appendix VI

Comparison of Loss Ratios for Crop Development and Expansion Products

Dollars in millions

Crop Newly          Years with    Total       Liability Claims    Loss     
developed products  data          premium               paid      ratio    
Apple quality           2001-2003       $ 1.7  $ 19.9     $ 4.4        2.6 
option                                                            
Avocados                1998-2003        23.1   148.3      1.9         0.1 
Blueberries             2000-2003         6.7   81.4       3.2         0.5 
Cherries                1999-2003        22.7   247.7     22.2         1.0 
Livestock               2002-2003         4.2   89.7       6.2         1.5 
Malting barley          1998-2003        14.0   132.9     38.7         2.8 
option Ba                                                         
Pecan-revenue           1998-2003        16.9   207.0      7.1         0.4 
Rangeland-group         1999-2003         6.9   154.9     29.5         4.3 
risk plan                                                         
Sweet potatoes          1998-2003        11.6   126.3     47.0         4.1 
Watermelons                  1999         8.8   67.1      51.1         5.8 
Wheat-income            1998-2003         7.9   68.8      31.4         4.0 
protection                                                        
Expansion products                                                
Onions in Georgia       1998-2003        15.2   151.5     21.8         1.4 
Forage in Minnesota     1998-2003         4.5   68.3      10.3         2.3 
Soybeans in             1999-2003         1.2    6.0       5.0         4.2 
Oklahoma                                                          
Onions in Texas         1998-2003        16.4   119.1     31.5         1.9 
Peanuts in Texas        1998-2002         1.8   11.9       8.4         4.6 

Source: RMA.

aMalting barley option B provides producers who grow malting barley under
contract with a brewer additional price and quality insurance beyond feed
barley coverage.

Appendix VII

Comments from the U.S. Department of Agriculture

Note: GAO comments supplementing those in the report text appear at the
end of this appendix.

Appendix VII Comments from the U.S. Department of Agriculture

                                 See comment 1.

                                 See comment 2.

Appendix VII Comments from the U.S. Department of Agriculture

                                 See comment 3.

                                 See comment 4.

Appendix VII Comments from the U.S. Department of Agriculture

                                 See comment 5.

Appendix VII Comments from the U.S. Department of Agriculture

                                 See comment 6.

Appendix VII Comments from the U.S. Department of Agriculture Appendix VII
Comments from the U.S. Department of Agriculture

                                 See comment 7.

Appendix VII Comments from the U.S. Department of Agriculture Appendix VII
Comments from the U.S. Department of Agriculture

The following are GAO's comments on the letter from the U.S. Department of
Agriculture dated September 15, 2005.

                       Page 86 GAO-05-528 Crop Insurance

GAO Comments 1. We have clarified the language in the Highlights section   
                   of this report to                                          
                   note the distinctions in the analyses. As we state in this 
                   report, the U.S.                                           
                   Department of Agriculture's (USDA) Risk Management Agency  
                   (RMA)                                                      
                   is using data mining to administer and enforce the crop    
                   insurance                                                  
                   program and to analyze patterns that suggest fraudulent    
                   activity, such                                             
                   as unusually high or frequent claims payments. However,    
                   RMA's                                                      
                   analysis is incomplete with regard to the largest farming  
                   operations-                                                
                   those that include multiple partnerships and joint         
                   ventures. RMA's                                            
                   analysis excludes comparisons of farming operations'       
                   reported                                                   
                   ownership interest with data that has been validated by    
                   USDA's Farm                                                
                   Service Agency (FSA). Because it does not know the         
                   ownership                                                  
                   interests in these farming operations, RMA cannot readily  
                   identify                                                   
                   potential fraud. For example, producers who are members of 
                   more                                                       
                   than one farming operation may have the opportunity to     
                   move                                                       
                   production from one operation to another to file           
                   unwarranted claims,                                        
                   without RMA's knowledge that these producers participate   
                   in more                                                    
                   than one farming operation.                                
                   We have changed the text in the Highlights section to more 
                2. accurately                                                 
                   reflect our findings, deleting the term "fraudulent." As   
                   detailed in this                                           
                   report, RMA regulations require policyholders to report    
                   individuals and                                            
                   entities with a beneficial interest in their farming       
                   operation. If a                                            
                   policyholder fails to disclose an ownership interest, then 
                   the                                                        
                   policyholder must repay the amount of the claims payment   
                   that is                                                    
                   proportionate to the interest of the person that was not   
                   disclosed. Our                                             
                   findings indicate that USDA should be able to recover up   
                   to $74 million                                             
                   in such claims payments for 2003.                          
                   We have clarified the language in the Highlights section.  
                3. We recognize                                               
                   in this report that the annual spot-check list of 3,000    
                   questionable                                               
                   claims is used to prevent unwarranted claims payments by   
                   monitoring                                                 
                   anomalous producers during the growing season for the year 
                   they are                                                   
                   identified. The 3,000 questionable claims represent        
                   producers who                                              
                   consistently file claims and receive payments that are     
                   irregular in                                               
                   comparison with other producers growing the same crop in   
                   the same                                                   
                   location. While not all of these policy irregularities are 
                   necessarily                                                
                   sanctionable, the 3,000 questionable claims provide a      
                   general reference                                          

Appendix VII Comments from the U.S. Department of Agriculture

in comparison with the 114 sanctions RMA imposed from 2001 through 2004.

1. The Agricultural Risk Protection Act of 2000 (ARPA) requires the
       Secretary of Agriculture to develop and implement a coordinated plan
       for FSA to assist RMA in the ongoing monitoring of the crop insurance
       program, including conducting fact-finding into allegations of program
       fraud, waste, or abuse and reporting the results of any such
       fact-finding to RMA. USDA guidance states that FSA county offices are
       to conduct growing season inspections on the larger of the first 10
       producers or the top 5 percent of the producers identified by RMA.
       However, as we report, FSA conducted only 64 percent of the monitoring
       inspections RMA requested between 2001 and 2004, and FSA offices in
       nine states did not conduct any of the inspections RMA requested in
       one or more of these years. Given the potentially high payoff from
       assisting RMA in monitoring the crop insurance program and conducting
       inspections, FSA may want to conduct a study to determine the costs
       and benefits of making staff available for crop insurance inspections.
2. We agree that RMA has imposed sanctions since the enactment of ARPA.
       However, we continue to believe RMA has not fully exercised its new
       authority. Under ARPA, RMA has the authority to impose sanctions on
       agents, loss adjusters, approved insurance providers, and others who
       willfully and intentionally (1) provide false or inaccurate
       information or (2) fail to comply with other Federal Crop Insurance
       Corporation (FCIC) requirements. The number of sanctions imposed by
       RMA has not increased appreciably since enactment of ARPA. For
       example, RMA imposed an average of less than 20 sanctions annually
       from 1996 to 2000, and an average of less than 20 sanctions annually
       from 2001 to 2005, except for 2004 (67), which was an aberration.
       While not all questionable claims are necessarily sanctionable, RMA
       has identified about 3,000 questionable payments annually since
       beginning data mining in 2001.

In discussing this report's findings with RMA in April 2005, officials
told us that the number of sanctions has not substantially increased, in
part because regulations have not been promulgated under ARPA. According
to an official in USDA's Office of General Counsel, RMA had imposed
sanctions under the provisions of ARPA that were similar to RMA's previous
authority to impose sanctions. RMA had authority, prior to ARPA, to impose
sanctions on individuals who willfully and intentionally provide false
information and had promulgated

Appendix VII Comments from the U.S. Department of Agriculture

regulations for imposing sanctions on this basis. (See 7 C.F.R. S:S:
400.454, 718.11, and 1405.8.) However, according to this official, it had
not imposed any sanctions under its new authority to do so for failure to
comply with an FCIC program requirement. This official indicated that
regulations were needed to establish what constituted an FCIC requirement,
how USDA will determine that a material violation has occurred, and what
process would be followed before imposing sanctions. USDA does not dispute
the report's findings that no sanctions have been imposed under this
provision of ARPA.

1. Our recommendation that FSA share producer-derived information with
       RMA for data mining to administer and enforce the requirements of the
       crop insurance program is based on a current lack of information
       sharing between FSA and RMA. As we report, many farming operations do
       not always certify individuals or entities who hold or acquire a
       beneficial interest of 10 percent or more in the insured operation, as
       required by RMA regulations. RMA was unaware that these entities had
       failed to fully disclose ownership interest because it had not been
       given access by FSA to the data file identifying a producer's
       ownership interest in other farming operations. Furthermore, although
       USDA is developing a system-called the Common Information Management
       System--to allow FSA and RMA to share producer information, as of
       September 2005, USDA had not decided whether the data elements
       necessary to identify a producer's ownership interest in a farming
       operation would be included in the new system. Therefore, we continue
       to believe that FSA needs to make this information available to RMA
       and that RMA should conduct data mining on this information to
       identify producers having a pattern of anomalous claims payments.
2. Our recommendation is directed at providing RMA with an additional
       tool to address producers who seem to experience losses year after
       year when other similarly situated producers do not. Such a tool would
       complement RMA's current focus on preventing producers from committing
       future abuses by providing an incentive to not commit the abuse in the
       first place. For example, eliminating optional unit coverage for a
       year for a producer who exhibits a clear pattern of yield switching,
       as we present in this report, would discourage the abuse. Removing the
       means that enables a producer to commit abuse may act as a deterrent.

Appendix VII Comments from the U.S. Department of Agriculture

Furthermore, the costs of fraud, waste, and abuse to the crop insurance
program from farms with optional units can be significant, according to a
2002 RMA study.1 The study estimated the additional indemnities associated
with fraud, waste, and abuse were $131 million for 1996 to 2000 for farms
insuring with optional units on wheat and barley in North Dakota and
cotton in west Texas. We agree with USDA that the number of policies
identified annually as having patterns consistent with yield switching is
small in comparison with the number of policies in the crop insurance
program. However, we believe it is possible to narrowly tailor an
underwriting rule so that it would target only a few producers each year
and would entail few resources. Such a rule would also reduce reliance on
RMA's broad-brush approach of assessing a 10 percent premium surcharge on
all producers with optional units to cover the additional indemnities that
are attributable to optional units. Thus, we continue to consider it
reasonable for RMA to reduce the insurance guarantee or eliminate optional
unit coverage for producers who consistently have claims that are
irregular in comparison with other producers growing the same crop in the
same location.

1Final Research Report For Multiple Year Coverage, Task Order #
RMA-RED-01-06, Watts and Associates, Inc., June 27, 2002.

Page 89 GAO-05-528 Crop Insurance

Appendix VIII

                     GAO Contact and Staff Acknowledgments

Robert A. Robinson (202) 512-3841

GAO Contact

  Staff Acknowledgments

In addition to the individual named above, Jeanne Barger, Thomas Cook,
Ronald E. Maxon Jr., Lynn Musser, Carol Herrnstadt Shulman, and Amy
Webbink made key contributions to this report. Important contributions
were also made by Stephen Brown and Paul Desaulniers.

We also wish to give special tribute to our dear friend and colleague,
Cleofas Zapata Jr., who died tragically near the conclusion of our work.
Cleo dedicated his life to public service, first as a member of the U.S.
Air Force, and then as an analyst for 24 years with GAO. Cleo's career
with GAO was characterized by his strong desire to make government
programs more effective and efficient and to weed out fraud, waste, and
abuse. But it was his humor, kindness, and respect for all human beings
that inspired his co-workers, who held him in the highest esteem and miss
him greatly.

Related GAO Products

Crop Insurance: USDA Needs to Improve Oversight of Insurance Companies and
Develop a Policy to Address Any Future Insolvencies. GAO-04-517.
Washington, D.C.: June 1, 2004.

Crop Insurance: USDA Needs a Better Estimate of Improper Payments to
Strengthen Controls of Claims. GAO/RCED-99-266 . Washington, D.C.:
September 22, 1999.

Crop Insurance: USDA's Progress in Expanding Insurance for Specialty
Crops. GAO/RCED-99-67 . Washington, D.C.: April 16, 1999.

Crop Insurance: Federal Program Faces Insurability and Design Problems.
GAO/RCED-93-98. Washington, D.C.: May 24, 1993.

Crop Insurance: Program Has Not Fostered Significant Risk-Sharing by
Insurance Companies. GAO/RCED-92-25 . Washington, D.C.: January 13, 1992.

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