Federal Farm Programs: USDA Needs to Strengthen Management	 
Controls to Prevent Improper Payments to Estates and Deceased	 
Individuals (24-JUL-07, GAO-07-1137T).				 
                                                                 
Farmers receive about $20 billion annually in federal farm	 
program payments, which go to individuals and "entities,"	 
including corporations, partnerships, and estates. Under certain 
conditions, estates may receive payments for the first 2 years	 
after an individual's death. For later years, the U.S. Department
of Agriculture (USDA) must determine that the estate is not being
kept open primarily to receive farm program payments. This	 
testimony is based on GAO's report, Federal Farm Programs: USDA  
Needs to Strengthen Controls to Prevent Improper Payments to	 
Estates and Deceased Individuals (GAO-07-818, July 9, 2007). GAO 
discusses the extent to which USDA (1) follows its regulations	 
that are intended to provide reasonable assurance that farm	 
program payments go only to eligible estates and (2) makes	 
improper payments to deceased individuals.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-1137T					        
    ACCNO:   A73213						        
  TITLE:     Federal Farm Programs: USDA Needs to Strengthen	      
Management Controls to Prevent Improper Payments to Estates and  
Deceased Individuals						 
     DATE:   07/24/2007 
  SUBJECT:   Cost analysis					 
	     Eligibility determinations 			 
	     Erroneous payments 				 
	     Federal regulations				 
	     Financial management				 
	     Internal controls					 
	     Overpayments					 
	     Program evaluation 				 

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GAO-07-1137T

   

     * [1]FSA Does Not Systematically Determine the Eligibility of Est
     * [2]Without Appropriate Management Controls, FSA Cannot Be Assur

          * [3]FSA Made Millions of Dollars in Farm Program Payments to Dec
          * [4]Complex Farming Operations Raise the Potential for Improper

     * [5]Conclusions
     * [6]Contact and Staff Acknowledgments
     * [7]GAO's Mission
     * [8]Obtaining Copies of GAO Reports and Testimony

          * [9]Order by Mail or Phone

     * [10]To Report Fraud, Waste, and Abuse in Federal Programs
     * [11]Congressional Relations
     * [12]Public Affairs

Testimony

Before the Committee on Finance,
U.S. Senate

United States Government Accountability Office

GAO

For Release on Delivery
Expected at 10:00 a.m. EDT
Tuesday, July 24, 2007

FEDERAL FARM PROGRAMS

USDA Needs to Strengthen Management Controls to Prevent Improper Payments
to Estates and Deceased Individuals

Statement of Lisa Shames, Director
Natural Resources and Environment

GAO-07-1137T

Mr. Chairman and Members of the Committee:

I am pleased to be here today to discuss the U.S. Department of
Agriculture's (USDA) actions to prevent improper payments to estates and
deceased individuals. My testimony today is based on our report just
released on this subject, which was requested by the Ranking Member of the
Senate Committee on Finance.1 Farmers receive about $20 billion annually
in federal farm program payments for crop subsidies, conservation
practices, and disasters. The magnitude of these payments, along with our
work showing that USDA's enforcement of support program rules is not
always effective, is why we observed in November 2006, that USDA needs to
provide better oversight of farm program payments.2 Without better
oversight to ensure that farm program funds are spent as economically,
efficiently, and effectively as possible, we pointed out, USDA has little
assurance that these funds benefit the agricultural sector as intended.

Currently, farm program payments go to 1.7 million recipients, both
individuals and "entities," including corporations, partnerships, and
estates. The Agricultural Reconciliation Act of 1987 (1987 Act) limits
payments to individuals and entities that are "actively engaged in
farming." We reported in 2004 that because USDA's regulations ensuring
that recipients are actively engaged in farming do not specify measurable
standards, they allow individuals with limited involvement in farming to
qualify for farm program payments.3 Individuals may receive farm program
payments indirectly through as many as three entities.4

1GAO, Federal Farm Programs: USDA Needs to Strengthen Controls to Prevent
Improper Payments to Estates and Deceased Individuals, [13]GAO-07-818
(Washington, D.C.: July 9, 2007).

2GAO, Suggested Areas for Oversight for the 110th Congress,
[14]GAO-07-235R  (Washington, D.C.: Nov. 17, 2006).

3GAO, Farm Program Payments: USDA Needs to Strengthen Regulations and
Oversight to Better Ensure Recipients Do Not Circumvent Payment
Limitations, GAO-04-407 (Washington, D.C.: April 30, 2004). We recommended
that USDA strengthen its regulations for active engagement in farming.

4Under the "three-entity rule," a person--an individual or entity--can
receive program payments through no more than three entities in which the
person holds a substantial beneficial interest. A person can receive
payments (1) as an individual and as a member of no more than two entities
or (2) through three entities and not as an individual. FSA defines a
substantial beneficial interest as 10 percent or more.

From 1999 through 2005, USDA, through its Farm Service Agency (FSA), made
124 million farm program payments totaling about $130 billion. Over $200
million of this amount went to nearly 42,000 estates. Under certain
conditions, estates may receive payments for the first 2 years after an
individual's death. For later years, FSA must determine that the estate is
not being kept open primarily to receive farm program payments.

Today, I would like to discuss the two key findings in our report. First,
FSA made farm program payments to estates more than 2 years after
recipients had died without determining whether the estates were being
kept open primarily for the purpose of receiving these payments, as its
regulations require. As a result, FSA cannot be assured that farm program
payments made to these estates are proper. According to FSA field
officials, many eligibility determinations were either not done or not
done thoroughly, in part because of a lack of sufficient personnel and
time, as well as competing priorities for carrying out farm programs.

Second, we found that FSA unknowingly paid $1.1 billion in farm program
payments in the names of 172,801 deceased individuals (either as an
individual or as a member of an entity) from 1999 through 2005. FSA cannot
be assured that the farm payments it made are proper because it does not
have management controls, such as computer matching, to verify that it is
not making payments to deceased individuals. Instead, FSA relies on
self-certifications by farming operations that the information provided is
accurate and that the operations will inform FSA of any changes, including
the death of an operation's member.

We have referred the cases of improper payments we identified to USDA's
Office of Inspector General for further investigation. USDA agreed with
our recommendations for improving USDA's ability to prevent improper
payments to estates and deceased individuals and already has begun to take
actions to implement them. In particular, USDA has directed its field
offices to review the eligibility of all estates that have been open for
more than 2 years and requested 2007 farm program payments.

We conducted our review from June 2006 through May 2007 in accordance with
generally accepted government auditing standards. To perform our work, we
reviewed a nonrandom sample of estates based, in part, on the amount of
payments an estate received. We also compared the payment recipients in
USDA's databases with individuals that the Social Security Administration
has identified as deceased in its Death Master File.

FSA Does Not Systematically Determine the Eligibility of Estates for Farm
Program Payments and Cannot Be Assured That Payments Are Proper

While many estates are kept open for legitimate reasons, we found that FSA
field offices do not systematically determine the eligibility of all
estates kept open for more than 2 years, as regulations require, and when
they do conduct eligibility determinations, the quality of the
determinations varies. Without performing annual determinations, an
essential management control, FSA cannot identify estates being kept open
primarily to receive these payments and be assured that the payments are
proper.

Generally, under the 1987 Act, once a person dies, farm program payments
may continue to that person's estate under certain conditions. For most
farm program payments, USDA regulations allow an estate to receive
payments for the first 2 years after the death of the individual if the
estate meets certain eligibility requirements for active engagement in
farming. Following these 2 years, the estate can continue to receive
program payments if it meets the active engagement in farming requirement
and the local field office determines that the estate is not being kept
open primarily to continue receiving program payments. Estates are
commonly kept open for longer than 2 years because of, among other things,
asset distribution and probate complications, and tax and debt
obligations. However, FSA must annually determine that the estate is still
active and that obtaining farm program payments is not the primary reason
it remains open.

Our review of FSA case file documents found the following.

First, we found FSA did not consistently make the required annual
determinations. Only 39 of the 181 estates we reviewed received annual
eligibility determinations for each year they were kept open beyond the
initial 2 years FSA automatically allows, although we found shortcomings
with these determinations, as discussed below. In addition, 69 of the 181
estates had at least one annual determination between 1999 and 2005, but
not with the frequency required. Indeed, the longer an estate was kept
open, the less likely it was to receive all required determinations. For
example, only 2 of the 36 estates requiring a determination every year
over the 7-year period, 1999 through 2005, received all seven required
determinations.

FSA did not conduct any program eligibility determinations for 73, or 40
percent, of the 181 estates that required a determination from 1999
through 2005. Because FSA did not conduct the required determinations, the
extent to which these estates remained open for reasons other than for
obtaining program payments is not known. Sixteen of these 73 estates
received more than $200,000 in farm program payments and 4 received more
than $500,000 during this period. In addition, 22 of the 73 estates had
received no eligibility determinations during the 7-year period we
reviewed, and these estates had been open and receiving payments for more
than 10 years. In one case, we found that the estate has been open since
1973.

The following estates received farm program payments but did not receive
FSA eligibility determinations for the period we reviewed:

           o A North Dakota estate received farm program payments totaling
           $741,000 from 1999 through 2003.

           o An Alabama estate--opened since 1981--received payments totaling
           $567,000 from 1999 through 2005.

           o Two estates in Georgia--opened since 1989 and 1996,
           respectively--received payments totaling more than $330,000 each,
           from 1999 through 2005.

           o A New Mexico estate, open since 1991, received $320,000 from
           1999 through 2005.

           Second, even when FSA conducted at least one eligibility
           determination, we found shortcomings. FSA sometimes approved
           eligibility for payments when the estate had provided insufficient
           information--that is, either no information or vague information.
           For example, in 20 of the 108 that received at least one
           eligibility determination, the minutes of FSA county committee
           meetings indicated approval of eligibility for payments to these
           estates, but the associated files did not contain any documents
           that explained why the estate remained active. FSA also approved
           eligibility on the basis of insufficient explanations for keeping
           the estate open. In five cases, executors explained that they did
           not want to close the estate but did not explain why. In a sixth
           case, documentation stated that the estate was remaining active
           upon the advice of its lawyers and accountants, but did not
           explain why.

           Some FSA field offices approved program payments to groups of
           estates kept open after 2 years without any apparent
           determination. In one case in Georgia, minutes of an FSA county
           committee meeting listed 107 estates as eligible for payments by
           stating that the county committee approved all estates open over 2
           years. Two of the estates on this list of 107 were part of the
           sample that we reviewed in detail. In addition, another 10 estates
           in our sample, from nine different FSA field offices, were also
           approved for payments without any indication that even a cursory
           determination had been conducted.

           Third, the extent to which FSA field offices make eligibility
           determinations varies from state to state, which suggests that FSA
           is not consistently implementing its eligibility rules. Overall,
           FSA field offices in 16 of the 26 states we reviewed made less
           than one-half of the required determinations of their estates from
           1999 to 2005. The percentage of estates reviewed by FSA ranged
           from 0 to 100 percent in the states we reviewed.

           Eligibility determinations could also uncover other problems.
           Under the three-entity rule, individuals receiving program
           payments may not hold a substantial beneficial interest in more
           than two entities also receiving payments. However, because a
           beneficiary of an Arkansas estate we reviewed received farm
           program payments through the estate in 2005, as well as through
           three other entities, the beneficiary was able to receive payments
           beyond what the three-entity rule would have allowed. FSA was
           unaware of this situation until we brought it to officials'
           attention, and FSA has begun taking steps to recover any improper
           payments. Had FSA conducted any eligibility determinations for
           this estate during the period, it might have determined that the
           estate was not eligible for these payments, preventing the
           beneficiary from receiving what amounted to a payment through a
           fourth entity.

           We informed FSA of the problems we uncovered during the course of
           our review. According to FSA field officials, a lack of sufficient
           personnel and time, and competing priorities for carrying out farm
           programs explain, in part, why many determinations were either not
           conducted or not conducted thoroughly. Nevertheless, officials
           told us that they would investigate these cases for potential
           receipt of improper payments and would start collection
           proceedings if they found improper payments.
			  
			  Without Appropriate Management Controls, FSA Cannot Be Assured
			  That It Is Not Making Payments to Deceased Individuals

           FSA cannot be assured that millions of dollars in farm program
           payments it made to thousands of deceased individuals from fiscal
           years 1999 through 2005 were proper because it does not have
           appropriate management controls, such as computer matching, to
           verify that it is not making payments to deceased individuals. In
           particular, FSA is not matching recipients listed in its payment
           databases with individuals listed as deceased in the Social
           Security Administration's Death Master File. In addition, complex
           farming operations, such as corporations or general partnerships
           with embedded entities, make it difficult for FSA to prevent
           improper payments to deceased individuals.
			  
			  FSA Made Millions of Dollars in Farm Program Payments to Deceased
			  Individuals from Fiscal Years 1999 through 2005

           FSA paid $1.1 billion in farm program payments in the names of
           172,801 deceased individuals--either as individuals or as members
           of entities, from fiscal years 1999 through 2005, according to our
           matching of FSA's payment databases with the Social Security
           Administration's Death Master File. Of the $1.1 billion in farm
           payments, 40 percent went to individuals who had been dead for 3
           or more years, and 19 percent went to individuals who had been
           dead for 7 or more years. Figure 1 shows the number of years in
           which FSA made farm program payments after an individual had died
           and the value of those payments.

           Figure 1: Number of Years and Value of Farm Program Payments Made
           after Individuals' Deaths, Fiscal Years 1999 through 2005

           Note: Farm program payments made through entities are based on
           program year data.

           aIncludes payments made 1 day after death to 1 year after death.

           We identified several instances in which FSA's lack of management
           controls resulted in improper payments to deceased individuals.
           For example, FSA provided more than $400,000 in farm program
           payments from 1999 through 2005 to an Illinois farming operation
           on the basis of the ownership interest of an individual who had
           died in 1995.5 According to FSA's records, the farming operation
           consisted of about 1,900 cropland acres producing mostly corn and
           soybeans. It was organized as a corporation with four
           shareholders, with the deceased individual owning a 40.3-percent
           interest in the entity. Nonetheless, we found that the deceased
           individual had resided in Florida. Another member of this farming
           operation, who resided in Illinois and had signature authority for
           the operation, updated the operating plan most recently in 2004
           but failed to notify FSA of the individual's death. The farming
           operation therefore continued to qualify for farm program payments
           on behalf of the deceased individual. As noted earlier, FSA
           requires farming operations to certify that they will notify FSA
           of any change in their operation and to provide true and correct
           information. According to USDA regulations, failure to do so may
           result in forfeiture of payments and an assessment of a penalty.
           FSA recognized this problem in December 2006 when the children of
           the deceased individual contacted the FSA field office to obtain
           signature authority for the operation. FSA has begun proceedings
           to collect the improper payments.

           USDA recognizes that its farm programs have management control
           weaknesses, making them vulnerable to significant improper
           payments. In its FY 2006 Performance and Accountability Report to
           the Office of Management and Budget, USDA reported that poor
           management controls led to improper payments to some farmers, in
           part because of incorrect or missing paperwork.6 In addition, as
           part of its reporting of improper payments information, USDA
           identified six FSA programs susceptible to significant risk of
           improper payments with estimated improper payments totaling over
           $2.8 billion in fiscal year 2006, as shown in table 1.
			  
5In addition, before the period of our review the operation received farm
program payments on behalf of the deceased individual from 1995 through
1998.

6See U.S. Department of Agriculture, FY 2006 Performance and
Accountability Report (Washington, D.C.: Nov. 15, 2006).

           Table 1: USDA Estimates of Improper Payments, Fiscal Year 2006
			  
Dollars in millions                                                        
                                             Estimated improper Percent error 
Program                                             payments          rate 
Direct and Counter-Cyclical Payments                                       
Program                                                 $424          4.96 
Conservation Reserve Program                              64          3.53 
Disaster assistance programsa                            291         12.30 
Noninsured Assistance Programb                            25         22.94 
Loan deficiency payments provided under                                    
the Marketing Assistance Loan Program                    443          9.25 
Other benefits provided under the                                          
Marketing Assistance Loan Program                      1,611         20.26 
Total/average                                         $2,858         11.17 

           Source: USDA's FY 2006 Performance and Accountability Report.

           Note: USDA's estimates include improper payments made to deceased
           individuals but USDA does not separate these payments from other
           improper payments.

           aDisaster assistance payments are direct federal payments to crop
           producers when either planting is prevented or crop yields are
           abnormally low because of adverse weather and related conditions.

           bThe Noninsured Assistance Program provides financial assistance
           to producers of non-insured crops when low yields, loss of
           inventory, or prevented planting occur due to natural disasters.
           Assistance is limited to crops not eligible for coverage under the
           federal crop insurance program.
			  
			  Complex Farming Operations Raise the Potential for Improper Payments
			  to Deceased Individuals

           Farm program payments made to deceased individuals
           indirectly--that is, as members of farming entities--represent a
           disproportionately high share of post-death payments.
           Specifically, payments to deceased individuals through entities
           accounted for $648 million--or 58 percent of the $1.1 billion in
           payments made to all deceased individuals from 1999 through 2005.
           In contrast, payments to all individuals through entities
           accounted for $35.6 billion--or 27 percent of the $130 billion in
           farm program payments FSA provided from 1999 through 2005.

           The complex nature of some types of farming entities, in
           particular, corporations and general partnerships, increases the
           potential for improper payments. For example, a significant
           portion of farm program payments went to deceased individuals who
           were members of corporations and general partnerships. Deceased
           individuals identified as members of corporations and general
           partnerships received nearly three-quarters of the $648 million
           that went to deceased individuals in all entities. The remaining
           one-quarter of payments went to deceased individuals of other
           types of entities, including estates, joint ventures, limited
           partnerships, and trusts. With regard to the number of deceased
           individuals who received farm program payments through entities,
           they were most often members of corporations and general
           partnerships. Specifically, of the 39,834 deceased individuals who
           received farm program payments through entities, about 57 percent
           were listed in FSA's databases as members of corporations or
           general partnerships.

           Furthermore, of the 172,801 deceased individuals identified as
           receiving farm program payments, 5,081 received more than one
           payment because (1) they were a member of more than one entity, or
           (2) they received payments as an individual and were a member of
           one or more entities.

           According to FSA field officials, complex farming operations, such
           as corporations and general partnerships with embedded entities,
           make it difficult for FSA to prevent making improper payments to
           deceased individuals. In particular, in many large farming
           operations, one individual often holds signature authority for the
           entire farming operation, which may include multiple members or
           entities. This individual may be the only contact FSA has with the
           operation; therefore, FSA cannot always know that each member of
           the operation is represented accurately to FSA by the signing
           individual for two key reasons. First, it relies on the farming
           operation to self-certify that the information provided is
           accurate and that the operation will inform FSA of any operating
           plan changes, which would include the death of an operation's
           member. Such notification would provide USDA with current
           information to determine the eligibility of the operation to
           receive the payments. Second, FSA has no management controls, such
           as computer matching of its payment databases with the Social
           Security Administration's Death Master File, to verify that an
           ongoing farming operation has failed to report the death of a
           member.
			  
			  Conclusions

           FSA has a formidable task--ensuring that billions of dollars in
           program payments are made only to estates and individuals that are
           eligible to receive them. The shortcomings we have identified
           underscore the need for improved oversight of federal farm
           programs. Such oversight can help to ensure that program funds are
           spent as economically, efficiently, and effectively as possible,
           and that they benefit those engaged in farming as intended.
			  
			  In our report, we recommended that USDA conduct all required
           annual estate eligibility determinations, implement management
           controls to verify that an individual receiving program payments
           has not died, and determine if improper payments have been made to
           deceased individuals or to entities that failed to disclose the
           death of a member, and if so, recover the appropriate amounts.
           USDA agreed with these recommendations and has already begun
           actions to implement them.

           Mr. Chairman, this concludes my prepared statement. I would be
           pleased to respond to any questions that you or other Members of
           the Committee 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 testimony.
           For further information about this testimony, please contact Lisa
           Shames, Director, Natural Resources and Environment, (202)
           512-3841 or [15][email protected] . Key contributors to this
           testimony were James R. Jones, Jr., Assistant Director; Thomas M.
           Cook; and Carol Herrnstadt Shulman.
			  
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Highlights of GAO-07-1137T, a testimony before the Committee on Finance,
U.S. Senate

July 24, 2007

FEDERAL FARM PROGRAMS

USDA Needs to Strengthen Management Controls to Prevent Improper Payments
to Estates and Deceased Individuals

Farmers receive about $20 billion annually in federal farm program
payments, which go to individuals and "entities," including corporations,
partnerships, and estates. Under certain conditions, estates may receive
payments for the first 2 years after an individual's death. For later
years, the U.S. Department of Agriculture (USDA) must determine that the
estate is not being kept open primarily to receive farm program payments.

This testimony is based on GAO's report, Federal Farm Programs:

USDA Needs to Strengthen Controls to Prevent Improper Payments to Estates
and Deceased Individuals (GAO-07-818, July 9, 2007). GAO discusses the
extent to which USDA (1) follows its regulations that are intended to
provide reasonable assurance that farm program payments go only to
eligible estates and (2) makes improper payments to deceased individuals.

[22]What GAO Recommends

GAO recommended that USDA conduct all required annual estate eligibility
determinations, implement management controls to verify that an individual
receiving program payments has not died, and in cases of improper
payments, recover the appropriate amounts. USDA agreed with these
recommendations and has begun actions to implement them, such as directing
its field offices to review the eligibility of all estates open for more
than 2 years.

USDA has made farm program payments to estates more than 2 years after
recipients died, without determining, as its regulations require, whether
the estates were kept open to receive these payments. As a result, USDA
cannot be assured that farm payments are not going to estates kept open
primarily to obtain these payments. From 1999 through 2005, USDA did not
conduct any of the required eligibility determinations for 73, or 40
percent, of the 181 estates GAO reviewed. Sixteen of these 73 estates had
each received more than $200,000 in farm payments, and 4 had each received
more than $500,000. Only 39 of the 181 estates received all annual
determinations as required. Even when FSA conducted determinations, we
found shortcomings. For example, some USDA field offices approved groups
of estates for payments without reviewing each estate individually or
without a documented explanation for keeping the estate open.

USDA also cannot be assured that it is not making improper payments to
deceased individuals. For 1999 through 2005, USDA paid $1.1 billion in
farm payments in the names of 172,801 deceased individuals (either as an
individual recipient or as a member of an entity). Of this total, 40
percent went to those who had been dead for 3 or more years, and 19
percent to those dead for 7 or more years. Most of these payments were
made to deceased individuals indirectly (i.e., as members of farming
entities). For example, over one-half of the $1.1 billion in payments went
through entities from 1999 through 2005. In one case, USDA paid a member
of an entity--deceased since 1995--over $400,000 in payments for 1999
through 2005. USDA relies on a farming operation's self-certification that
the information it provides USDA is accurate; operations are also required
to notify USDA of any changes, such as the death of a member. Such
notification would provide USDA with current information to determine the
eligibility of the operation to receive payments. The complex nature of
some farming operations--such as entities embedded within other
entities--can make it difficult for USDA to avoid making payments to
deceased individuals.

Number of Deceased Individuals Receiving Farm Payments through Entities,
1999-2005

References

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