Crop Insurance: More Needs To Be Done to Reduce Program's	 
Vulnerability to Fraud, Waste, and Abuse (15-JUN-06,		 
GAO-06-878T).							 
                                                                 
The U.S. Dept. of Agriculture's (USDA) Risk Management Agency	 
(RMA) administers the federal crop insurance program in 	 
partnership with private insurers. In 2005, the program cost $2.7
billion, including an estimated $117 million in losses from	 
fraud, waste, and abuse. The Agricultural Risk Protection Act of 
2000 (ARPA) provided new tools to monitor and control abuses,	 
such as providing RMA sanction authority to address program abuse
and having USDA's Farm Service Agency (FSA) inspect farmers'	 
fields. This testimony is based on GAO's September 30, 2005,	 
report, Crop Insurance: Actions Needed to Reduce Program's	 
Vulnerability to Fraud, Waste, and Abuse (GAO-05-528). GAO	 
assessed (1) USDA's processes to address fraud, waste, and abuse,
and (2) the extent to which the program's design makes it	 
vulnerable to abuse.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-878T					        
    ACCNO:   A55566						        
  TITLE:     Crop Insurance: More Needs To Be Done to Reduce Program's
Vulnerability to Fraud, Waste, and Abuse			 
     DATE:   06/15/2006 
  SUBJECT:   Agricultural policies				 
	     Agricultural programs				 
	     Crop insurance					 
	     Fraud						 
	     Insurance claims					 
	     Insurance losses					 
	     Internal controls					 
	     Investigations by federal agencies 		 
	     Monitoring 					 
	     Program abuses					 
	     Program evaluation 				 
	     Questionable payments				 
	     Risk management					 
	     Sanctions						 
	     Federal Crop Insurance Program			 

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GAO-06-878T

     

     * Background
     * RMA Has Strengthened Procedures for Preventing Questionable
     * RMA's Regulations and Some Statutory Requirements Hinder Eff
     * Recently Prosecuted Crop Insurance Fraud Cases Highlight Pro
     * Contact and Staff Acknowledgments
     * GAO's Mission
     * Obtaining Copies of GAO Reports and Testimony
          * Order by Mail or Phone
     * To Report Fraud, Waste, and Abuse in Federal Programs
     * Congressional Relations
     * Public Affairs

Testimony

Before the Subcommittee on General Farm Commodities and Risk Management,
Committee on Agriculture, House of Representatives

United States Government Accountability Office

GAO

For Release on Delivery Expected at 10:00 a.m. EDT

Thursday, June 15, 2006

CROP INSURANCE

More Needs To Be Done to Reduce Program's Vulnerability to Fraud, Waste,
and Abuse

Statement of Daniel Bertoni, Acting Director Natural Resources and
Environment

GAO-06-878T

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss USDA's efforts to address fraud,
waste, and abuse in the Federal Crop Insurance Program. My testimony today
is based on our September 2005, report to the Chairman of the Committee on
Homeland Security and Governmental Affairs.1 As you know, federal crop
insurance is part of the overall safety net of programs for American
farmers. It provides protection against financial losses caused by
droughts, floods, or other natural disasters. In 2005, the crop insurance
program provided $44 billion in insurance coverage for over 200 million
acres of farmland at a cost of $2.7 billion to the federal government,
including $117 million estimated by the U.S. Department of Agriculture's
(USDA) Risk Management Agency (RMA) to have resulted from fraud, waste,
and abuse.

RMA, which supervises the Federal Crop Insurance Corporation's (FCIC)
operations, has overall responsibility for administering the crop
insurance program, including protecting against fraud, waste, and abuse.
RMA partners with private insurance companies that sell and service the
insurance policies.

In part, to improve the integrity of the crop insurance program, Congress
enacted the Agricultural Risk Protection Act of 2000 (known as ARPA). This
act provided RMA and USDA's Farm Service Agency (FSA) with new tools for
monitoring and controlling program abuses. 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 and to use
information technologies, such as data mining-the analysis of data to
establish relationships and identify patterns-to administer and enforce
the program.

However, concerns have arisen that some farmers 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. My testimony today focuses on two primary issues discussed in the
September 2005 report: (1) the effectiveness of USDA's procedures and
processes to prevent and detect fraud, waste, and abuse in selling and
servicing crop insurance policies, and (2) the extent to which program
design issues may make the program more vulnerable to fraud, waste, and
abuse.2

1GAO, Crop Insurance: Actions Needed to Reduce Program's Vulnerability to
Fraud, Waste, and Abuse, GAO-05-528 (Washington, D.C.: September 30,
2005).

In summary, since the enactment of ARPA, RMA has taken a number of steps
to improve its procedures and processes to prevent and detect fraud,
waste, and abuse in the crop insurance program. Most notably, RMA reports
that data mining analyses and subsequent communication to farmers 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 farmers and others can continue to
take advantage of the program. We identified weaknesses in four key areas:
(1) field inspections, (2) data mining processes that exclude many large
farming operations when farmers do not report their interest in them, (3)
quality assurance reviews conducted by insurance companies, 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 the program's design, as laid out in RMA's regulations
or as required by statute, can impede RMA officials' efforts to prevent
and detect fraud, waste, and abuse in a number of ways. In terms of RMA's
regulations, farmers 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. Moreover, 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 is obligated by law to offer farmers
"prevented planting" coverage-coverage if an insured crop is prevented
from being planted-but it is often difficult to determine whether the
farmer had the opportunity to plant a crop. Furthermore, statutorily
established premium subsidies are high and, therefore, may shield
high-risk farmers from the full effect of paying higher premiums.

2Our September 2005 report also addressed the effectiveness of USDA's
procedures to assure program integrity in developing new crop insurance
products.

Our report highlighted eight recent crop insurance fraud cases that
reflect some of the issues we identified. These cases, totaling $3.1
million in insurance claims, were investigated by USDA's Office of
Inspector General (OIG) and resulted in criminal prosecutions between June
2003 and April 2005. The cases show how farmers, sometimes in collusion
with insurance agents and others, falsely claim prevented planting,
weather damage, and low production. Some of the cases show farmers 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.

In our report, we made several recommendations to the Secretary of
Agriculture to strengthen procedures and processes to prevent and detect
fraud, waste, and abuse in the crop insurance program. We also noted that
the Congress should consider allowing RMA to reduce premium subsidies for
farmers who consistently have claims that are irregular in comparison with
other farmers growing the same crop in the same location.

                                   Background

In conducting their operations, farmers are exposed to both production and
price 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.

RMA administers the federal crop insurance program in partnership with
private insurance companies that sell the insurance policies to farmers
and adjust any claims. The companies also share in a percentage of the
risk of loss or opportunity for gain associated with each insurance policy
written.

Under the program, participating farmers 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. Farmers can then select a
percentage of their normal yield to be insured and a percentage of the
price they wish to receive if crop losses exceed the selected loss
threshold. In addition, under the crop insurance program's "prevented
planting" provision, insurance companies pay farmers who were unable to
plant the insured crop because of an insured cause of loss that is general
to their surrounding area, such as weather conditions causing wet fields,
and that had prevented other farmers from planting fields with similar
characteristics. These farmers are entitled to claims payments that
generally range from 50 to 70 percent of the coverage they purchased,
depending on the 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
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.

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 RMA compliance reviews of companies' procedures,
companies' quality assurance reviews of claims, data mining, and FSA
inspections of farmers' fields. Insurance companies must conduct quality
assurance reviews of claims that RMA has identified as anomalous or of
those claims that are $100,000 or more to determine whether the claims
they have paid are in compliance with policy provisions.

The Congress enacted ARPA, amending the Federal Crop Insurance Act, in
part, to improve compliance with, and the integrity of, the crop insurance
program. Among other things, ARPA expanded RMA's authority to impose
sanctions against farmers, agents, loss adjusters, and insurance companies
that willfully and intentionally provide false or inaccurate information
to FCIC or to an approved insurance provider. It also provided authority
to impose civil fines for violations. 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 farmers select higher levels
of coverage, the government contribution significantly increases for all
levels of coverage, particularly for the highest levels of coverage. For
example, the government now pays fully one-half of the premium for farmers
who choose to insure their crop at 75-percent coverage.

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

RMA has taken a number of steps to improve its procedures and processes to
prevent and detect fraud, waste, and abuse, such as data mining, expanded
field inspections and quality assurance reviews. In particular, RMA now
develops a list of farmers each year whose operations warrant an on-site
inspection 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  farmers, agents, and adjusters linked in irregular behavior
           that suggests collusion;

           o  farmers who for several consecutive years received most of
           their crop insurance payments from prevented planting indemnity
           payments;

           o  farmers 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  farmers who, in comparison with their peers, have excessive
           harvested losses over many years.

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

           RMA also provides the names of farmers from its list of suspect
           claims for inspection to the appropriate FSA state office for
           distribution to FSA county offices, as well as to the insurance
           company selling the policy to the farmer. As a result of these
           inspections and other information, RMA reported total cost savings
           of $312 million from 2001 to 2004, primarily in the form of
           estimated payments avoided. For example, according to RMA, claims
           payments to farmers identified for an inspection decreased
           nationwide from $234 million in 2001 to $122 million in 2002.
           According to RMA, some of the farmers on the list for filing
           suspect claims bought less insurance and a few dropped crop
           insurance entirely, but most simply changed their behavior
           regarding loss claims.

           However, our review showed that RMA is not effectively using all
           of the tools it has available and that some farmers and others
           continue to take advantage of the program, as the following
           discussion indicates.

           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, farmers
           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, but instead conducted
           only 64 percent of them; FSA inspectors said that they did not
           conduct all requested inspections primarily because they did not
           have sufficient time. Moreover, 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 the requested inspections in these
           nine states had not been conducted. Furthermore, FSA may not be as
           effective as possible in conducting field inspections because RMA
           does not provide it 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. 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.

           RMA's data analysis of the largest farming operations is
           incomplete. RMA's data mining analysis excludes comparisons of the
           largest farming operations-including those organized as
           partnerships and joint ventures. These entities may include
           individuals who are also members of one or more other entities.
           Because it does not know the ownership interests in the largest
           farming operations, RMA cannot readily identify potential fraud.
           For example, farmers who are members of more than one farming
           operation could move production from one operation to another to
           file unwarranted claims, without RMA's knowledge that these
           farmers participate in more than one farming operation. RMA cannot
           make these comparisons because it has not been given access to
           similar data that FSA maintains. 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 farmer who obtains crop insurance
           coverage.

           Using FSA data, we examined the extent to which (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.3 We found that 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 about 31
           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-for a total of $224.8 million in claims paid.

           RMA should be able to recover a portion of these payments.
           According to RMA regulations, if the policyholder fails to
           disclose an ownership interest in the farming operation, the
           policyholder must repay the amount of the claims payment that is
           proportionate to the interest of the person who was not
           disclosed.4 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.
           Our analysis of RMA's and FSA's databases for 2004 showed similar
           results. Of the 21,310 entities failing to disclose ownership
           interest in 2003, we found 210 entities with suspicious insurance
           claims totaling $11.1 million. 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.5 These farming
           entities received $978,912 in claims payments in 2003 and 2004.

           RMA is not effectively overseeing insurance companies' quality
           assurance programs. RMA guidance requires insurance companies to
           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. 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 has infrequently used its new sanction authority to address
           program abuses. Although ARPA expanded RMA's authority to impose
           sanctions on farmers, agents, and adjusters who willfully and
           intentionally provide false or inaccurate information or fail to
           comply with other FCIC program requirements, RMA has only used
           this authority on a limited basis. RMA has identified about 3,000
           farmers with suspicious claims payments-notable policy
           irregularities compared with other farmers 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 imposed only 114 sanctions from 2001 through
           2004. According to RMA officials, RMA requested and imposed few
           sanctions because it had 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 farmers, 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.

           RMAï¿½s Regulations and Some Statutory Requirements Hinder Efforts
		            to Reduce Abuse in the Crop Insurance Program
		   
		   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
           officials' efforts to administer certain program provisions to
           prevent fraud, waste, and abuse, as the following discussion
           indicates.

           RMA's regulations allow farmers the option of insuring their
           fields individually rather than combined as one unit. Under RMA's
           regulations, farmers can insure production of a crop on each
           optional unit or insure an entire basic unit. Farmers may want to
           insure fields separately out of concern that they would experience
           losses in a certain field because of local weather conditions,
           such as hail or flooding. If farmers instead 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. Although optional units
           provide farmers added protection against loss, this coverage
           option increases the potential for fraud and abuse in the crop
           insurance program.

           Insuring fields separately enables farmers 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
           farmers identified through data mining as having irregular claims
           in 2003, 12 percent were suspected of switching production among
           their fields. Furthermore, in our review of claim files, we
           identified 10 farmers with patterns of claims associated with this
           type of fraud.

           According to a 2002 RMA study, relative losses per unit increase
           as the number of separately insured optional units increases.6
           However, according to an RMA official, gathering the evidence to
           support a yield-switching fraud case requires considerable
           resources, especially for large farming operations.

           In some cases, insurance companies have little incentive to
           rigorously challenge questionable claims. 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. For the developmental and commercial funds, the companies
           cede a smaller percent of the premium and associated liability for
           claims payments to the government and share a larger portion of
           the gains and losses on the policies they retain.7

           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 financial incentive to investigate suspect
           claims. For example, in one claim file we reviewed, an insurance
           company official characterized the farmer as filing frequent,
           questionable claims; however, the company paid a claim of over
           $500,000. The official indicated that if the company vigorously
           challenged the claim, the farmer would have defended his claim
           just as vigorously, and the company would have potentially
           incurred significant litigation expenses, which RMA does not
           specifically reimburse. With this cost and reimbursement
           structure, in the company's opinion, it was less costly to pay the
           claim.

           RMA and insurance companies have difficulty determining potential
           abuse associated with prevented planting coverage. Under the
           Federal Crop Insurance Act, as amended, RMA must offer prevented
           planting coverage. RMA allows claims for prevented planting if
           farmers cannot plant due to an insured cause of loss that is
           general in the surrounding area and that prevents other farmers
           from planting acreage with similar characteristics.8 Claims for
           prevented planting are paid at a reduced level, recognizing that
           farmers do not incur all production costs associated with planting
           and harvesting a crop. However, determining whether farmers can
           plant their crop may be difficult. Annually, RMA pays about $300
           million in claims for prevented planting.

           Twenty-five of the FSA county officials that provided us written
           comments on this issue reported that they believe some farmers 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 farmer in
           south Texas received claims payments of over $21,000 for prevented
           planting claims for corn in 2003 and 2004. The farmer 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 farmer had made any attempt to prepare the fields for
           planting in either the 2003 or 2004 growing season. Among other
           things, 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 response
           to our review, RMA investigated the 2003 and 2004 prevented
           planting claims for this farmer and subsequently directed the
           insurance company to seek reimbursement for the 2003 claims
           payment.

           High premium subsidies may inhibit RMA's ability to control
           program abuse. 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 fraud, waste, and abuse. Premium subsidies are calculated
           as a percentage of the total premium, and farmers pay only between
           33 to 62 percent of the policy premium, depending on coverage
           level. High premium subsidies shield farmers 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 farmers 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, farmers pay only a fraction of the higher
           premium. Thus, the subsidy structure creates a disincentive for
           farmers 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 farmers with a pattern of high
           or frequent claims would discourage fraud, waste, and abuse in the
           crop insurance program.

           Recently Prosecuted Crop Insurance Fraud Cases Highlight 
		                   Program Vulnerabilities
		   
		   Some of the issues we identified are reflected in eight recent
           crop insurance fraud cases that USDA's Office of Inspector General
           (OIG) investigated and that resulted in criminal prosecution
           between June 2003 and April 2005. The cases show how a few
           farmers, sometimes in collusion with others, falsely report
           planting, claims of damage, and production to try to circumvent
           RMA's procedures. In some cases, farmers 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 1 summarizes these eight cases, which
           accounted for $3.1 million in fraudulent claims payments. These
           cases were researched and analyzed by our Office of Forensic
           Audits and Special Investigations.

3The Center for Agribusiness Excellence conducted this analysis at our
request. 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.

47 C.F.R. S: 457.8.

5RMA 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.

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

6Final Research Report For Multiple Year Coverage, Task Order #
RMA-RED-01-06, Watts and Associates, Inc., June 27, 2002.

7In 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 farmers on RMA's inspection list, about 47 percent of
the policies were in the assigned risk fund, and 38 percent were in the
commercial fund.

87 C.F.R. S: 457.8.

Recently Prosecuted Crop Insurance Fraud Cases Highlight Program Vulnerabilities

Table 1: Crop Insurance Fraud Cases Investigated by the USDA/OIG and
Resulting in Criminal Prosecution, June 2003 to April 2005

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

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

aData not available.

In conclusion, Mr. Chairman, federal crop insurance plays an invaluable
role in assuring the nation's farmers that their crops will be protected
from natural disasters. However, fraud, waste, and abuse can result in
higher program costs and hurt the reputation of 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, the weaknesses we identified in how RMA, FSA, and insurance
companies carry out their program responsibilities continue to leave the
program vulnerable to questionable claims and missed opportunities to
prevent losses to the federal government. In addition, RMA may be able to
reduce program vulnerability and costs by improving aspects of the
program's design.

In our report, we said that the Congress may wish to consider allowing RMA
to reduce premium subsidies-and hence raise the insurance premiums-for
farmers who consistently have claims that are irregular in comparison with
other farmers growing the same crop in the same location. We made eight
recommendations to the Secretary of Agriculture to strengthen program
oversight and reduce vulnerability to fraud, waste and abuse, including
improved sharing of information between RMA and FSA, improved inspection
practices, regulations to implement sanctions, and stronger oversight of
companies' quality control procedures. USDA agreed to act on most of our
recommendations. However, it disagreed with our recommendation to ensure
that FSA field offices conduct all inspections called for under agency
guidance, stating that FSA did not have sufficient resources to complete
all of these inspections. USDA also disagreed with our recommendation to
reduce the insurance guarantee or eliminate optional unit coverage for
farmers who consistently have filed claims that are irregular in
comparison with other farmers growing the same crop in the same location.
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, waste, and abuse.

Mr. Chairman, this concludes my prepared statement. We would be happy to
respond to any questions that your or other Members of the Subcommittee
may have.

                       Contact and Staff Acknowledgments

Contact points for our Offices of Congressional Relations and Public
Affairs may be found on the last page of this statement. For further
information about this testimony, please contact Daniel Bertoni, Acting
Director, Natural Resources and Environment, (202) 512-3841 or by email at
[email protected] . Key contributors to this statement were Ron Maxon,
Thomas Cook, and Carol Herrnstadt Shulman.

(360727) (360727)

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Highlights of GAO-06-878T , testimony before the Subcommittee on General
Farm Commodities and Risk Management, Committee on Agriculture, House of
Representatives

June 2006

CROP INSURANCE

More Needs to Be Done to Reduce Program's Vulnerability to Fraud, Waste,
and Abuse

The U.S. Dept. of Agriculture's (USDA) Risk Management Agency (RMA)
administers the federal crop insurance program in partnership with private
insurers. In 2005, the program cost $2.7 billion, including an estimated
$117 million in losses from fraud, waste, and abuse. The Agricultural Risk
Protection Act of 2000 (ARPA) provided new tools to monitor and control
abuses, such as providing RMA sanction authority to address program abuse
and having USDA's Farm Service Agency (FSA) inspect farmers' fields. This
testimony is based on GAO's September 30, 2005, report, Crop Insurance:
Actions Needed to Reduce Program's Vulnerability to Fraud, Waste, and
Abuse (GAO-05-528). GAO assessed (1) USDA's processes to address fraud,
waste, and abuse, and (2) the extent to which the program's design makes
it vulnerable to abuse.

What GAO Recommends

GAO suggested that the Congress consider reducing premium subsidies to
farmers who repeatedly file questionable claims. GAO recommended that USDA
(1) improve field inspections, (2) recover payments from operations that
failed to disclose farmers' ownership interests, (3) strengthen oversight
of insurers' use of quality controls, and (4) issue regulations for
expanded sanction authority.

USDA agreed with most of GAO's recommendations. However, it stated that it
had insufficient resources to conduct all inspections.

RMA has taken a number of steps to improve its procedures and processes to
address fraud, waste and abuse in selling and servicing crop insurance
policies and has reported more than $300 million in savings from 2001 to
2004. However, RMA is not effectively using all of its tools. GAO
identified weaknesses in four key areas:

           o  FSA 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,
           farmers 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 required. Without this information RMA was unaware
           of ownership interests that could help it prevent potential
           program abuse. FSA did not give RMA access to the data needed to
           identify such individuals or entities. USDA should be able to
           recover up to $74 million in improper claims payments.
           o  RMA is not effectively overseeing insurance companies' efforts
           to control program abuse. GAO's review of 120 cases showed that
           companies did not complete all of the required quality assurance
           reviews of claims and those that were conducted were largely paper
           exercises.
           o  RMA has infrequently used its new sanction authority to address
           program abuse. RMA has not issued regulations to implement its new
           sanction authority under ARPA and imposed only 114 sanctions from
           2001 through 2004, although it annually identifies about 3,000
           questionable claims, not all of which are necessarily
           sanctionable.

RMA's regulations to implement the crop insurance program, as well as some
statutory requirements, create program design problems that hinder RMA's
efforts to reduce program abuse. For example, RMA's regulations allow
farmers to insure fields individually rather than all fields combined.
This option enables farmers 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 farmers from the full effect of
paying higher premiums associated with frequent claims.

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 the issues GAO noted. These cases show how
farmers, sometimes in collusion with insurance agents and others, falsely
claim prevented planting and low production. 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.
*** End of document. ***