    Food Stamp Trafficking: FNS Could Enhance Program Integrity by
    Better Targeting Stores Likely to Traffic and Increasing
    Penalties (13-OCT-06, GAO-07-53).

    Every year, food stamp recipients exchange hundreds of millions
    of dollars in benefits for cash instead of food with retailers
    across the country, a practice known as trafficking. From 2000 to
    2005, the Food Stamp Program has grown from $15 billion to $29
    billion in benefits. During this period of time, the U.S.
    Department of Agriculture's (USDA) Food and Nutrition Service
    (FNS) replaced paper food stamp coupons with electronic benefit
    transfer (EBT) cards that work much like a debit card at the
    grocery checkout counter. Given these program changes and
    continuing retailer fraud, GAO was asked to provide information
    on (1) what is known about the extent and nature of retailer food
    stamp trafficking, (2) the efforts of federal agencies to combat
    such trafficking, and (3) program vulnerabilities. To do this,
    GAO interviewed agency officials, visited 10 field offices,
    conducted case file reviews, and analyzed data from the FNS
    retailer database.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-07-53
        ACCNO:   A62125
      TITLE:     Food Stamp Trafficking: FNS Could Enhance Program
    Integrity by Better Targeting Stores Likely to Traffic and
    Increasing Penalties
         DATE:   10/13/2006
      SUBJECT:   Criminal investigation
    	     Databases
    	     Electronic benefits transfers
    	     Fraud
    	     Investigations by federal agencies
    	     Monitoring
    	     Program evaluation
    	     Regulation
    	     Government agency oversight
    	     Food Stamp Program
    	     Store Tracking and Redemption System

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    GAO-07-53

         * Results in Brief
         * Background
              * Retailer Authorization
              * Use of EBT and Trafficking
              * Monitoring, Investigating, and Prosecuting Retailer Fraud
              * Monitoring, Investigating, and Prosecuting Recipient Fraud
         * FNS Estimates Suggest That the Rate of Food Stamp Traffickin
              * FNS Reports That the Rate of Food Stamp Trafficking Declined
              * Most Trafficking Still Occurs in Small Stores
              * EBT Has Changed How Food Stamps Are Trafficked
         * FNS Has Taken Advantage of New EBT Data to Improve Retailer
              * EBT Has Provided FNS with Powerful New Tools to Supplement T
              * Investigations by the Retailer Investigations Branch Account
              * OIG and Other Federal Entities Are Conducting Fewer Retailer
         * Despite the Progress That Has Been Made against Trafficking,
              * Minimal Requirements for Authorization and Lack of Oversight
              * Delays in Access to Transaction Data Allow Trafficking to Co
              * Retailers Are Developing New Trafficking Schemes under EBT
              * FNS Has Not Taken the Next Steps to Target Its Monitoring Re
              * Available FNS Penalties May Not Deter Traffickers
              * States' Lack of Focus on Recipient Trafficking Can Facilitat
         * Conclusions
         * Recommendations
         * Agency Comments
         * GAO Contact
         * 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

    Report to Congressional Committees

    United States Government Accountability Office

    GAO

    October 2006

    FOOD STAMP TRAFFICKING

    FNS Could Enhance Program Integrity by Better Targeting Stores Likely to
    Traffic and Increasing Penalties

    GAO-07-53

    Contents

    Letter 1

    Results in Brief 4
    Background 6
    FNS Estimates Suggest That the Rate of Food Stamp Trafficking Has Declined
    and That It Occurs More Frequently in Smaller Stores 12
    FNS Has Taken Advantage of New EBT Data to Improve Retailer Monitoring,
    While Other Federal Entities Have Focused on Fewer, High-Impact
    Investigations 14
    Despite the Progress That Has Been Made against Trafficking,
    Vulnerabilities Still Exist in the Program 22
    Conclusions 32
    Recommendations 32
    Agency Comments 33
    Appendix I GAO Contact and Staff Acknowledgments 35
    Related GAO Products 36

    Tables

    Table 1: Percentage of Authorized Stores and Food Stamp Redemptions by
    Store Category for Fiscal Year 2005 9
    Table 2: FNS Estimates Suggest That the Trafficking Rate Has Declined 13
    Table 3: Some Store Locations Have Had Multiple Retailers That Engaged in
    Trafficking 28

    Figures

    Figure 1: Food Stamp Participation Has Increased Since Fiscal Year 2000 7
    Figure 2: Legitimate Food Stamp Transaction Compared to Trafficking
    Transaction 10
    Figure 3: As Trafficking Disqualifications Based on EBT Data Have
    Increased, Those Based on Undercover Investigations Have Decreased 15
    Figure 4: Limited Counter Area and Single Cash Register of a Store
    Disqualified for Trafficking 17
    Figure 5: Trafficking Investigations Referred to the US Attorney and
    Accepted for Prosecution for Fiscal Years 2000 to 2005 21
    Figure 6: Fiscal Year Totals for Trafficking Convictions Resulting from
    OIG Investigations 22
    Figure 7: Food Stamp Redemptions of a Newly Authorized Store Disqualified
    for Trafficking 24
    Figure 8: Map of Stores Repeatedly Disqualified for Trafficking in
    Brooklyn and Baltimore 29

    Abbreviations

    EBT Electronic Benefits Transfer

    FNS Food and Nutrition Service

    OIG Office of the Inspector General

    PRWORA Personal Responsibility and Work Opportunity Reconciliation Act of
    1996

    USDA U.S. Department of Agriculture

    This is a work of the U.S. government and is not subject to copyright
    protection in the United States. It may be reproduced and distributed in
    its entirety without further permission from GAO. However, because this
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    separately.

    United States Government Accountability Office

    Washington, DC 20548

    October 13, 2006 October 13, 2006

    The Honorable Saxby Chambliss Chairman The Honorable Tom Harkin Ranking
    Democratic Member Committee on Agriculture, Nutrition, and Forestry United
    States Senate The Honorable Saxby Chambliss Chairman The Honorable Tom
    Harkin Ranking Democratic Member Committee on Agriculture, Nutrition, and
    Forestry United States Senate

    The Honorable Collin C. Peterson Ranking Minority Member Committee on
    Agriculture House of Representatives The Honorable Collin C. Peterson
    Ranking Minority Member Committee on Agriculture House of Representatives

    The Honorable Gil Gutknecht Chairman The Honorable Joe Baca Ranking
    Minority Member Subcommittee on Department Operations, Oversight, Dairy,
    Nutrition and Forestry Committee on Agriculture House of Representatives
    The Honorable Gil Gutknecht Chairman The Honorable Joe Baca Ranking
    Minority Member Subcommittee on Department Operations, Oversight, Dairy,
    Nutrition and Forestry Committee on Agriculture House of Representatives

    Every year, food stamp recipients exchange hundreds of millions of dollars
    in benefits for cash instead of food with authorized retailers across the
    country, a practice known as trafficking. In a typical trafficking
    situation, a retailer gives a food stamp recipient a discounted amount of
    cash-commonly 50 cents on the dollar-in exchange for food stamp benefits
    and pockets the difference. By trafficking, retailers commit fraud and
    undermine the primary purpose of the program, which is to help provide
    food to low-income individuals and families. Recipients who traffic
    deprive themselves and their families of the intended nutritional
    benefits. Every year, food stamp recipients exchange hundreds of millions
    of dollars in benefits for cash instead of food with authorized retailers
    across the country, a practice known as trafficking. In a typical
    trafficking situation, a retailer gives a food stamp recipient a
    discounted amount of cash-commonly 50 cents on the dollar-in exchange for
    food stamp benefits and pockets the difference. By trafficking, retailers
    commit fraud and undermine the primary purpose of the program, which is to
    help provide food to low-income individuals and families. Recipients who
    traffic deprive themselves and their families of the intended nutritional
    benefits.

    In recent years, the Food Stamp Program has grown tremendously. From 2000
    to 2005, the program-administered by the Food and Nutrition Service (FNS)
    of the U.S. Department of Agriculture (USDA), in partnership with the
    states-has grown from $15 billion in benefits provided to 17 million
    individuals to $29 billion in benefits to nearly 26 million individuals.
    Almost one in every 12 Americans participates in the program. During this
    period of time, FNS and the states completed In recent years, the Food
    Stamp Program has grown tremendously. From 2000 to 2005, the
    program-administered by the Food and Nutrition Service (FNS) of the U.S.
    Department of Agriculture (USDA), in partnership with the states-has grown
    from $15 billion in benefits provided to 17 million individuals to $29
    billion in benefits to nearly 26 million individuals. Almost one in every
    12 Americans participates in the program. During this period of time, FNS
    and the states completed replacing paper food stamp coupons with
    electronic benefit transfer (EBT) cards that work much like a debit card
    at the grocery checkout counter. This EBT transaction provides a wealth of
    new electronic information to FNS officials, who are responsible for
    monitoring food stamp retailers and sanctioning those who traffic. Given
    these major changes in the program and continued concern about retailer
    fraud and abuse, you asked us to provide information on (1) what is known
    about the extent and nature of retailer food stamp trafficking, (2) the
    efforts of federal agencies to combat such trafficking, and (3) the
    program vulnerabilities that continue to exist.

    To report on what is known about the extent of trafficking, we used four
    FNS estimates of food stamp trafficking. The four estimates, which were
    the best available data on this subject, covered the calendar years 1993,
    1996 to 1998, 1999 to 2002, and 2002 to 2005.1 The methodology FNS used to
    develop these estimates has some limitations; the estimates do not provide
    a precise measure of food stamp trafficking.2 However, they can be used to
    provide an indication of the magnitude of food stamp trafficking and the
    change in the rate over time.3

    1 U.S. Department of Agriculture, Office of Analysis and Evaluation, The
    Extent of Trafficking in the Food Stamp Program (August 1995); The Extent
    of Trafficking in the Food Stamp Program: An Update (March 2000); The
    Extent of Trafficking in the Food Stamp Program: 1999-2002 (July 2003);
    and The Extent of Trafficking in the Food Stamp Program: 2002-2005
    (September 2006).

    2 For example, FNS did not randomly select a sample of retailers to
    produce its estimates. Instead, it selected those retailers who had been
    investigated for trafficking and used this group to analyze and calculate
    the trafficking rate. FNS believes its trafficking estimates likely
    overstate the amount of dollars diverted by trafficking because FNS based
    its estimates on retailers already suspected of trafficking. However, it
    is possible that trafficking occurs among stores outside of the pool of
    suspected traffickers. To the extent that this occurs, FNS' estimates
    could understate actual trafficking. Also, this approach does not ensure
    that each retailer has a known probability of being selected in the
    sample, which undermines the ability to statistically generalize to a
    larger population.

    3 FNS used a relatively consistent method for each estimate; however, to
    improve its 1999-2002 estimate, FNS included retailers suspected of
    trafficking and disqualified on the basis of certain EBT transactions. To
    be more reflective of all its trafficking-related activities, for its
    2002-2005 estimate, FNS used a number of additional data sources. These
    sources include closed cases on FNS's Watch List and retailers
    investigated by the OIG, the U.S. Department of Justice, the states, and
    other entities. While the additional data sources in the most recent
    estimate provide a broader range of trafficking investigations, this
    adjustment could also contribute to a lower estimate as the Watch List,
    for example, contains retailers that demonstrate a lesser level of
    suspicious behavior than retailers used for prior estimates.

    To understand the nature of trafficking, assess the efforts to combat it,
    and identify continued program vulnerabilities, we conducted interviews
    with the following program stakeholders: officials from FNS headquarters
    and regional offices; other officials responsible for investigating food
    stamp trafficking including the USDA's Office of the Inspector General
    (OIG) and the U.S. Secret Service; food stamp advocates and researchers;
    officials from industry associations and EBT contractors; and officials
    from selected state law enforcement bureaus. In addition, we obtained
    relevant information from the state audit, comptroller, and treasurer
    community. We selected and visited 10 FNS field offices (Chicago, Ill.;
    Dallas, Tex.; Denver, Colo.; Detroit, Mich.; Los Angeles, Calif.; New
    York, N.Y.; Portland, Ore.; Sacramento, Calif.; Tallahassee, Fla and
    Towson, Md.) located in the seven FNS regions. We selected these offices
    to achieve variation in geographical distribution, the ages of the states'
    EBT systems, and the number of stores that were disqualified from
    participating in the program for trafficking. At each office, we conducted
    semistructured interviews with FNS officials and used a case file review
    tool to review nonprobability samples of files for 163 retailers that were
    disqualified for trafficking in fiscal year 2005. We also interviewed
    officials from seven of the states where we made our field office visits.

    In addition, to identify efforts to combat trafficking, we analyzed FNS's
    authorized retailer database, the Store Tracking and Redemption System, to
    determine the number of permanent trafficking disqualifications by store
    address, to calculate the time between a store's initial authorization and
    its first disqualification for fiscal years 1996 through 2005, and to
    determine the number of sanction actions that had been taken against a
    retailer leading up to the retailer's being permanently disqualified. To
    ensure the accuracy of the FNS data we analyzed, we interviewed agency
    officials to identify and resolve any inconsistencies that could affect
    our work. In addition, we reviewed documentation on how these data were
    gathered and maintained. Based on the collective information from our
    assessment, we determined the data are sufficiently reliable for enhancing
    our understanding of continuing program vulnerabilities and agency efforts
    in combating trafficking. We conducted our work between July 2005 and June
    2006 in accordance with generally accepted government auditing standards.

                                    Results in Brief

    FNS estimates that about 1.0 cent per dollar of benefits redeemed in 2005
    were trafficked; this trafficking usually occurred in small convenience
    and grocery stores and often, we found, between store owners and food
    stamp recipients with whom they were familiar. The national rate of food
    stamp trafficking declined from about 3.8 cents per dollar of benefits
    redeemed in 1993 to about 1.0 cent per dollar during the years 2002 to
    2005. However, even at that lower rate, FNS estimates that about
    $241million in food stamp benefits would have been trafficked annually in
    those years. The rate of trafficking in small stores remains higher-an
    estimated 7.6 cents per dollar-than the rate for large stores-an estimated
    0.2 cents per dollar. Since the nationwide implementation of EBT, the way
    some food stamp benefits are trafficked has changed. Previously, in
    addition to trafficking conducted directly between store owners and
    recipients, middlemen purchased large numbers of food stamp coupons at a
    discounted rate directly from recipients and then exchanged the coupons
    for cash from a retailer. EBT has largely eliminated the middleman.
    Retailers now must have the recipients' EBT card and personal
    identification number to conduct a trafficking transaction and are likely
    to limit their trafficking transactions to people from their neighborhood
    or with whom they are familiar.

    FNS has taken advantage of EBT and other new technology to improve its
    ability to detect trafficking and disqualify retailers who traffic, while
    law enforcement agencies have investigated and referred for prosecution a
    decreasing number of traffickers, instead focusing their efforts on fewer
    high-impact investigations. To pursue traffickers, FNS traditionally sent
    its undercover investigators into stores to attempt to traffic benefits.
    Now, EBT transaction data allow FNS to act on cases based solely on
    suspicious transaction patterns. For these cases, FNS applies established
    criteria to its data to identify individual stores with exceptional
    patterns of EBT transactions for that store's particular type of retail
    operation. Cases using EBT data can be prepared in the office relatively
    quickly and now account for more of the 841 retailers that were
    permanently disqualified for trafficking in fiscal year 2005 than
    undercover investigations. However, undercover investigations still play
    an important role when EBT transaction data are insufficient to build a
    case against a retailer suspected of food stamp trafficking. In addition,
    retailer trafficking investigations by other federal entities, such as
    USDA's Inspector General and the U.S. Secret Service, have declined in
    recent years, resulting in fewer referrals for prosecutions of retailers
    that traffic. For example, the number of trafficking investigations opened
    by the Inspector General declined from 179 in 2000 to 77 in 2005, and the
    number of investigations it referred for prosecution to the Department of
    Justice declined as well. Ultimately, the number of federal convictions
    for retailer trafficking has also declined. Federal law enforcement
    officials told us that they are increasingly focused on high-impact
    investigations, such as those focused on large-scale trafficking or
    involving other criminal activity.

    Despite the progress FNS has made in combating retailer trafficking, the
    Food Stamp Program remains vulnerable because retailers can enter the
    program intending to traffic and do so, often without fear of severe
    criminal penalties, as the declining number of investigations referred for
    prosecution suggests. FNS field office officials told us their first
    priority is getting stores into the program to ensure needy people have
    access to food, and therefore they sometimes authorize stores that stock
    limited food supplies but meet the minimum requirements in areas with few
    larger grocery stores. However, once authorized, some dishonest retailers
    do not maintain adequate food stock and focus more on trafficking food
    stamp benefits than on selling groceries, according to FNS officials, and
    5 years may pass before FNS checks the stock again unless there is an
    indication of a problem with the store. In addition, while EBT has aided
    FNS's monitoring ability, some retailers have adapted their behaviors to
    avoid detection and found new ways to exploit the EBT technology. For
    instance, individuals can obtain point-of-sale machines and conduct
    illegal food stamp transactions in unauthorized stores or apartments. Yet,
    despite dwindling staff resources, FNS has not conducted the analyses to
    identify high risk areas and to target their compliance-monitoring
    resources to the areas of highest risk. Furthermore, current FNS
    food-stamp-trafficking penalties may not be sufficient to deter
    traffickers, because the most severe penalty most traffickers face is
    disqualification from the program and FNS must rely upon others for
    prosecution. Finally, if recipients suspected of trafficking are not
    investigated by the states, it may leave a pool of recipients ready and
    willing to traffic their benefits as soon as a disqualified store reopens
    under new management.

    To reduce program vulnerabilities and help FNS better target its limited
    compliance-monitoring resources, we are making recommendations to the
    Secretary of the Department of Agriculture to require FNS to develop
    additional criteria to identify stores most likely to traffic, use these
    criteria to conduct risk assessments, and provide more targeted and early
    oversight of stores determined most likely to engage in trafficking. Also,
    we are recommending that FNS work to develop a strategy to increase the
    penalties for trafficking, working with the Inspector General as needed.
    In addition, we are recommending steps to promote state efforts to pursue
    recipients suspected of trafficking. The Department of Agriculture
    officials generally agreed with our findings, conclusions, and
    recommendations but noted they believe they do have a strategy for
    targeting resources through their use of EBT transaction data to identify
    suspicious transaction patterns. We believe that FNS has made good
    progress in its use of EBT transaction data; however, it is now at a point
    where it can begin to formulate more sophisticated analyses.

                                       Background

    The federal Food Stamp Program is intended to help low-income individuals
    and families obtain a more nutritious diet by supplementing their income
    with benefits to purchase nutritious food such as meat, dairy, fruits, and
    vegetables, but not items such as soap, tobacco, or alcohol. The Food and
    Nutrition Service (FNS) pays the full cost of food stamp benefits and
    shares the states' administrative costs-with FNS usually paying
    approximately 50 percent-and is responsible for promulgating program
    regulations and ensuring that state officials administer the program in
    compliance with program rules.4 The states administer the program by
    determining whether households meet the program's income and asset
    requirements, calculating monthly benefits for qualified households, and
    issuing benefits to participants on an electronic benefits card.

    In fiscal year 2005, the Food Stamp Program issued almost $28.6 billion in
    benefits to about 25.7 million individuals participating in the program,
    and the maximum monthly food stamp benefit for a household of four living
    in the continental United States was $506. As shown in figure 1, the
    increase in the average monthly participation of food stamp recipients in
    2005 continues a recent upward trend in the number of people receiving
    benefits.

    4 Reimbursements for food stamp administrative costs in 44 states are
    adjusted each year to subtract certain food stamp administrative costs
    that have already been factored into these states' TANF grants. As a
    result, these states receive less than 50 percent of their administrative
    costs. See GAO, Food Stamp Program: States Face Reduced Federal
    Reimbursement for Administrative Costs, RCED/AIMD-99-231 (Washington D.C.:
    July 23, 1999)

    Figure 1: Food Stamp Participation Has Increased Since Fiscal Year 2000

    Retailer Authorization

    Retailers are the front line for determining which goods can be purchased
    and for ensuring the integrity of the food stamp transaction. FNS operates
    44 field offices throughout the country, and they have the primary
    responsibility for authorizing retailers to participate in the Food Stamp
    Program. To become an authorized retailer, a store must offer on a
    continuing basis a variety of foods in each of the four staple food
    categories-meats, poultry or fish; breads or cereals; vegetables or
    fruits; and dairy products-or 50 percent of its sales must be in a staple
    group such as meat or bakery items. However, the regulations do not
    specify how many food items retailers should stock. The store owner
    submits an application and includes forms of identification such as copies
    of the owner's Social Security card, driver's license, business license,
    liquor license, and alien resident card. The FNS field office program
    specialist then checks the applicant's Social Security number against
    FNS's database of retailers, the Store Tracking and Redemption System, to
    see if the applicant has previously been sanctioned in the Food Stamp
    Program. The application also collects information on the type of
    business, store hours, number of employees, number of cash registers, the
    types of staple foods offered, and the estimated annual amount of gross
    sales and eligible food stamp sales.

    If the application is complete, most field offices will forward a request
    to the private contractor employed by FNS to conduct on-site inspections
    that verify the information in the application and provide additional
    information for the approval process. The contractor visits the store and
    submits a map of the store layout, the inspection form, and photographs of
    the outside and inside of the store and its inventory. The contractor
    reports information on the type of store and its location, access to
    parking, the number of cash registers and EBT point-of-sale devices,5
    whether shopping carts or baskets are available, and the availability of
    nonfood stock and services offered, such as liquor, tobacco, gasoline,
    check cashing, and lottery tickets. As part of the inspection, the
    contractor also evaluates the general store conditions and notes
    problems-such as empty coolers and shelves, dusty cans and expired or
    outdated foods-that could indicate that this may not be a viable grocery
    operation. Upon receiving favorable information from the contractor, the
    FNS program specialist authorizes the store to participate in the Food
    Stamp Program for 5 years. Unless a problem arises with the store, it
    typically would not be re-inspected until it applies for reauthorization.

    At the end of fiscal year 2005, more than 160,000 retailers were
    authorized to accept food stamp benefits. During the fiscal year, almost
    24,000 new stores were authorized, 30,000 were reauthorized and almost
    17,000 left the program, most for voluntary reasons.6 As shown in table 1,
    supermarkets account for only about 22 percent of the authorized stores
    but redeem the lion's share of food stamp benefits. FNS defines a
    supermarket as a store with $2 million of gross sales, three or more cash
    registers, and coded as a supermarket on its food stamp application.

    5 Point-of-sale devices or terminals read the recipient identification
    information from the magnetic strip on the back of the food stamp EBT
    card. That information, along with the amount of the purchase, would be
    sent to the state's EBT contractor for approval of the transaction.

    6 Voluntary reasons include changes in store ownership, changes in the
    nature of the store, or store closings. Involuntary reasons include the
    store no longer meets the basic eligibility requirements for authorization
    or the store had no redemption activity.

    Table 1: Percentage of Authorized Stores and Food Stamp Redemptions by
    Store Category for Fiscal Year 2005

                           Percentage of total     Percentage of total food stamp
    Type of firm           authorized firms                   dollars redeemed
    Supermarkets                      22.34                              86.44
    Grocery stores                    21.59                               6.57
    Convenience stores                19.95                               1.86
    Combination storesa               22.17                               1.95
    All other storesb                 12.31                               2.97
    Meal servicesc                     1.64                                .21

    Source: FNS data.

    aThis category includes stores such as grocery/gas, grocery/bar,
    grocery/restaurant, and grocery/merchandise.

    bThis category includes farmers markets, produce stands, wholesalers,
    co-located retailers, drug stores, specialty food stores, health/natural
    food stores, non-profit food-buying co-ops, military commissaries, and
    delivery routes.

    cThis category includes drug and alcohol treatment centers, group homes,
    and communal dining facilities or meals on wheels for seniors.

    Use of EBT and Trafficking

    Prior to EBT, recipients used highly negotiable food stamp coupons to pay
    for allowable foods. The Personal Responsibility and Work Opportunity
    Reconciliation Act of 1996 (PRWORA), however, required each state agency
    to implement an EBT system to electronically distribute food stamp
    benefits, and the last state completed its implementation in fiscal year
    2004. Under the EBT system, food stamp recipients receive an EBT card
    imprinted with their name and a personal account number, and food stamp
    benefits are automatically credited to the recipients' accounts once a
    month. As shown on the left in figure 2, in a legitimate food stamp
    transaction, recipients run their EBT card, which works much like a debit
    card, through an electronic point-of-sale machine at the grocery checkout
    counter, and enter their secret personal identification number to access
    their food stamp accounts and to authorize the transfer of food stamp
    benefits from a federal account to the retailer's account to pay for the
    eligible food items. The legitimate transaction contrasts with a
    trafficking transaction portrayed on the right, in which recipients swipe
    their EBT card, but instead of buying groceries, they receive a discounted
    amount of cash and the retailer pockets the difference.

    Figure 2: Legitimate Food Stamp Transaction Compared to Trafficking
    Transaction

    Monitoring, Investigating, and Prosecuting Retailer Fraud

    In addition to approving retailers to participate in the program, FNS has
    the primary responsibility for monitoring their compliance with
    requirements and administratively disqualifying those who are found to
    have trafficked food stamp benefits. FNS headquarters officials collect
    and monitor EBT transaction data to detect suspicious patterns of
    transactions by retailers. They then send any leads to FNS program
    specialists in the field office who either work the cases themselves or
    refer them to undercover investigators in the Retailer Investigations
    Branch to pursue by attempting to traffic food stamps for cash.

    FNS notifies the USDA's Office of the Inspector General (OIG) before the
    field office specialist or undercover investigator develops a case, and
    the OIG may choose to open an investigation on this case on its own for
    possible criminal prosecution. The OIG may also work with the US Secret
    Service, the Federal Bureau of Investigation, or other agencies to
    investigate retailers for criminal prosecution.7 Secret Service officials
    told us they have a memorandum of understanding with the USDA that allows
    them to initiate food-stamp-trafficking investigations on their own,
    provided they notify the OIG of all the investigations in which an
    authorized retailer is targeted.

    When trafficking is proved, FNS penalizes the store owners, usually by
    permanent program disqualification but in limited circumstances they may
    receive civil money penalties.8 Store owners who sell ineligible goods but
    do not traffic are generally subject to a 1-year temporary program
    disqualification.9 If a field office specialist finds that a retailer has
    trafficked, the specialist sends a letter to the retailer detailing the
    charges and the intended penalty. If the Retailer Investigations Branch
    succeeds in trafficking food stamps with a retailer, it first refers the
    case to the OIG, which then decides whether it will investigate the case
    further for possible prosecution by the US Attorney's office or by state
    and local prosecutors or refer the case back to the FNS field office to
    complete the disqualification action.

    7 The Secret Service was originally given authority to participate in food
    stamp investigations because food stamps were considered the same as
    currency, and the Secret Service is responsible for investigating currency
    violations such as counterfeiting. With the move to EBT, Secret Service
    authority derives from the use of an EBT card as an access device to
    commit fraud.

    8 If the retailer had taken proper measures and can prove he was not
    involved in the trafficking, rather than permanent disqualification, FNS
    may impose a civil money penalty. Civil money penalties may also be
    imposed against disqualified owners who sell their stores before the
    expiration of the disqualification period, because they have not completed
    their program suspension penalty.

    9 FNS officials said it is more common for a store to receive a 6-month
    temporary disqualification because they are unable to determine whether
    the ineligible goods were sold by the store owner or a store employee.

    The retailer may attempt to rebut the charges, but if the retailer does
    not respond or cannot provide a reasonable explanation for the specific
    charges, then a letter is sent executing the program disqualification. The
    retailer may appeal the decision, first to the Administrative Review
    Branch at FNS headquarters and later to the appropriate federal district
    court.

    Monitoring, Investigating, and Prosecuting Recipient Fraud

    In addition to administering the day-to-day operation of the Food Stamp
    Program, states also have the primary responsibility for monitoring
    recipients' compliance with the program's requirements and investigating
    any case of alleged intentional program violation. This includes cases of
    ineligible persons attempting to obtain food stamps or applicants
    deliberately providing false information in an attempt to receive more
    benefits than they should as well as cases in which recipients traffic
    their food stamp benefits. States must ensure that appropriate cases are
    acted upon, either through administrative disqualification hearings or
    referral to a court of appropriate jurisdiction, in accordance with the
    procedures outlined in the Food Stamp Program regulations.

     FNS Estimates Suggest That the Rate of Food Stamp Trafficking Has Declined and
                    That It Occurs More Frequently in Smaller Stores

    FNS estimates that the rate of food stamp trafficking was 1.0 cent on the
    dollar for calendar years 2002 to 2005. Overall, the estimated rate of
    trafficking at small stores is much higher than the estimated rate for
    supermarkets and large groceries, which redeem most food stamp benefits.
    Furthermore, the implementation of EBT eliminated the role of the
    middleman by requiring personal identification numbers each time the EBT
    card is used.

    FNS Reports That the Rate of Food Stamp Trafficking Declined between 1995 and
    2005

    FNS's most recent estimate suggests that the food-stamp-trafficking rate
    was 1.0 cent on the dollar for calendar years 2002 to 2005 and that this
    rate and the total estimated benefits trafficked have declined in recent
    years. FNS' first trafficking study in 1995 estimated that about 3.8 cents
    of every dollar of food stamp benefits issued was trafficked in 1993. As
    shown in table 2, subsequent FNS studies estimated that this trafficking
    rate continued to decline.

    Table 2: FNS Estimates Suggest That the Trafficking Rate Has Declined

    Millions of dollars
                            Estimated      Food stamp         Estimated amount of
    Calendar year trafficking rate benefits issued         benefits trafficked
    period              percentage        annually                    annually
    1993                       3.8          21,100                         812
    1996-1998                  3.5         19,627a                         657
    1999-2002                  2.5         16,139a                         393
    2002-2005                  1.0         23,213a                         241

    Source: FNS studies and GAO calculation.

    aFNS reported that they annualized redemption data over the period of the
    study but did not provide the annualized figures. We calculated the three-
    and four-year average of benefits redeemed for comparative purposes.

    The trafficking exchange rate that retailers offer for food stamp benefits
    can vary from place to place. While retailers generally offer recipients
    about 50 cents for each dollar of benefits, in New York City we were told
    by an FNS undercover investigator that the exchange rate is about 70
    cents, and in a few locations, some retailers will exchange one dollar of
    cash for one dollar of benefits as an accommodation to the food stamp
    recipient.

    Most Trafficking Still Occurs in Small Stores

    FNS studies suggest that small convenience and grocery stores continue to
    be the most common sites for trafficking. Small stores, including small
    grocery, convenience, specialty, and gas/grocery stores have an estimated
    trafficking rate of 7.6 cents per dollar. In contrast, supermarkets and
    large grocery stores have an estimated rate of 0.2 cents per dollar.
    However, because supermarkets account for the lion's share of food stamp
    benefit redemptions, even at this lower rate, over $49 million of benefits
    may have been trafficked in supermarkets and large grocery stores in
    fiscal year 2005. Most FNS field officials we interviewed told us these
    findings reflected their experience. They characterized a typical
    trafficking case at their field office occurring at a convenience, small
    grocery, or gas/grocery store located in an urban area where the store
    owner traffics with familiar neighborhood food stamp recipients.

    EBT Has Changed How Food Stamps Are Trafficked

    The nationwide implementation of EBT has changed the way some food stamp
    benefits are trafficked. Previously, in addition to trafficking conducted
    directly between store owners and recipients, middlemen could wait around
    public assistance offices or subsidized housing complexes to purchase
    large numbers of food stamp coupons at a discounted rate directly from
    recipients. The coupons might also change hands among multiple middlemen,
    with each taking a cut, before ultimately being exchanged for cash from a
    willing retailer. Field office officials told us that EBT has largely
    eliminated the middleman because retailers must now have the recipients'
    EBT card and personal identification number to conduct a trafficking
    transaction. As a result, some recipients have adapted their trafficking
    behavior to the new EBT environment. For example, one field office
    official told us that some food stamp recipients now stand outside of
    stores offering to loan their EBT cards to shoppers entering the store. In
    this situation, the shopper would purchase groceries using the card and
    return it and a discounted amount of cash to the recipient upon leaving
    the store. During our field office visit to Tallahassee, a GAO analyst was
    approached in his hotel parking lot by a would-be trafficker offering such
    a transaction.

     FNS Has Taken Advantage of New EBT Data to Improve Retailer Monitoring, While
        Other Federal Entities Have Focused on Fewer, High-Impact Investigations

    FNS has taken advantage of new technology to improve its monitoring and
    sanctioning of food stamp retailers, but other federal agencies' have been
    investigating and prosecuting fewer traffickers. With the implementation
    of EBT, FNS has supplemented its traditional undercover investigations by
    the Retailer Investigations Branch with cases developed by analyzing EBT
    transaction data. These EBT cases now account for more than half of the
    permanent disqualifications by FNS (see fig. 3 below).10 Although the
    number of trafficking disqualifications based on undercover investigations
    has declined, these investigations continue to play a key role in
    combating trafficking. However, as FNS's ability to detect trafficking has
    improved, the number of suspected traffickers investigated by other
    federal entities, such as the USDA Inspector General and the U.S. Secret
    Service have declined. These entities have focused more on a smaller
    number of high-impact investigations. As a result, retailers who traffic
    are less likely to face severe penalties or prosecution.

    10 According to FNS officials, at least 90 percent of non-Retailer
    Investigations Branch trafficking disqualifications result from paper
    cases. Other disqualifications may result from the OIG and state law
    enforcement investigations.

    Figure 3: As Trafficking Disqualifications Based on EBT Data Have
    Increased, Those Based on Undercover Investigations Have Decreased

    EBT Has Provided FNS with Powerful New Tools to Supplement Traditional Retailer
    Trafficking Investigations

    The nationwide implementation of EBT has given FNS powerful new tools to
    supplement its traditional undercover investigations of retailers
    suspected of trafficking food stamp benefits. FNS traditionally sent its
    investigators into stores numerous times over a period of months to
    attempt to traffic benefits. However, PRWORA gave FNS the authority to
    charge retailers with trafficking in cases based solely on EBT transaction
    evidence, called "paper cases." A major advantage of paper cases is that
    they can be prepared relatively quickly and without multiple store visits.
    These paper cases accounted for the majority of FNS's 841 trafficking
    disqualifications in fiscal year 2005.

    As part of the monitoring process, FNS collects each month's food stamp
    transaction data from the states' EBT processors and adds the data to its
    EBT transaction database for analysis. Six months' worth of EBT
    transactions-about 500 million-are available on line.11 Information on the
    amount of the transaction is reported. Information on the items being
    purchased is not available through EBT. The system scans these data to
    flag transactions or sets of transactions that fit a certain set of
    criteria defined by established patterns of fraudulent activity. The
    system then generates a monthly "Watch List" of retailers with suspicious
    transaction patterns incongruent with a store's particular type of retail
    operation.12

    The Watch List is sent out to the responsible FNS field office for
    follow-up. In the field offices, program specialists begin their work on
    paper cases by reviewing the Watch List and leads from other sources, such
    as the state food stamp agency, the state EBT processors, and law
    enforcement agencies. Using experience with the retailers in the area,
    program specialists may determine that suspicious transactions for some
    retailers are explainable. In such cases, the specialist may take no
    further action or schedule a later review of the store's transactions. In
    cases for which they cannot explain the suspicious transactions, program
    specialists determine which retailers they will pursue as paper cases. If
    the program specialist is unable to develop a paper case, the case may be
    referred to the Retailer Investigations Branch for an undercover
    investigation.

    After deciding to open a paper case, FNS obtains clearance from the OIG to
    pursue the case, and then the program specialist uses FNS data and a
    variety of other resources to gather evidence. Program specialists
    generally use 3 months of EBT data to show suspicious patterns. In the
    case files we reviewed, charge letters typically contained hundreds of
    examples of suspicious transactions, although FNS guidance does not
    specify the number of transactions necessary to support a case.
    Specialists also review FNS historical data on retailers to check for such
    things as prior program violations.13 In addition, these specialists
    obtain more current transaction data as well as information on recipients
    suspected of trafficking with the retailer, through state Food Stamp
    Program databases. Many specialists supplement these data with online
    resources, such as mapping software to identify suspicious shopping
    patterns. Program specialists can also consult the photos taken at the
    time of authorization to assess whether conditions in the store support
    the volume of food stamp redemptions claimed. Figure 4 shows the limited
    counter space and the single cash register of a store that claimed food
    stamp redemptions of almost $200,000 per month and was later disqualified
    for trafficking. Such information enables the program specialists to
    corroborate conclusions they have drawn based on patterns in the EBT
    transaction data.

    11 FNS has retained archives of all state EBT transaction data from the
    beginning of each state's EBT system, and if program specialists request
    older data, FNS can e-mail it to the field office within hours.

    12 Although FNS's EBT transaction data system analyzes all transaction
    data, large stores are not included on Watch Lists, because FNS's data
    show that large stores are rarely involved in trafficking.

    13 Additional historical data can be requested by field office staff as
    necessary.

    Figure 4: Limited Counter Area and Single Cash Register of a Store
    Disqualified for Trafficking

    In addition, most program specialists in the offices we visited told us
    they also visit the store once before charging a retailer with
    trafficking. Some store visits allow the program specialist to check for
    possible explanations for the suspicious transaction patterns, while
    others corroborate the suspicion that the stores are in business to
    traffic. For example, during one store visit, program specialists found
    cans of food on the shelves with thick layers of dust, many items that had
    passed their expiration dates, and jars of spaghetti sauce so old that the
    contents had separated.

    The store owner may attempt to rebut the charges. For example, a store
    owner may claim to have extended credit to recipients so they could
    purchase food until they received their next month's food stamp benefits,
    and the high-dollar transactions were repayment of the credit. Although
    extending credit is also a violation of program rules, it carries a lesser
    penalty-temporary disqualification-than trafficking. If the owner is
    unable to rebut the charges, and the program specialist disqualifies the
    store, the store owner may appeal to the Administrative Review Branch. In
    2005, about 6 percent of the permanent disqualifications were modified or
    reversed by the branch.

    The length of time between a new store's authorization and its first
    disqualification has decreased over the last 10 years. Stores that
    received a temporary or permanent disqualification in 1996 had been open
    an average of about 8.7 years, but by 2005, that average had dropped to
    6.3 years. Two factors may have contributed to this 28 percent decrease in
    length of time between authorization and disqualification: improved FNS
    monitoring of the program and use of EBT transaction data or more store
    owners who begin to traffic food stamps sooner. The officer-in-charge of
    the Chicago field office believes that in her area an increasing number of
    store owners are trafficking immediately after authorization. We analyzed
    FNS's authorized retailer data for stores in the Chicago area and found
    that the average time between authorization and a store's first temporary
    or permanent disqualification dropped by nearly half. In 1996, it took a
    Chicago store about 5 years to receive a term or permanent
    disqualification, and in 2005, it was just 2.6 years.

    Investigations by the Retailer Investigations Branch Account for Fewer
    Trafficking Disqualifications, but Still Play a Key Role in Combating
    Trafficking

    The number of Retailer Investigations Branch undercover trafficking
    investigations has declined, but these investigations are often used in
    cases where EBT data alone are not enough to prove a retailer is
    trafficking. The investigators initiate cases based on requests from FNS
    field offices, their own review of the Watch List, or leads from state or
    local law enforcement agencies. Like the paper case process, FNS consults
    with the OIG before opening a case. To build a case, the investigators
    make undercover visits to the store to determine whether the retailer is
    selling ineligible goods or trafficking food stamps. If a retailer sells
    the investigator ineligible goods but does not traffic, the resulting
    temporary disqualification from the program for selling ineligibles can
    create a deterrent effect on the disqualified store owner, other store
    owners, and trafficking recipients, because such penalties often become
    known in the community.

    Personal safety can be a concern for investigators. One investigator told
    us that there are some stores, especially in urban areas, where it would
    be dangerous to attempt an undercover investigation.

    Although cases in which the Retailer Investigations Branch finds
    trafficking are routinely referred to the OIG for possible prosecution, in
    most cases the OIG returns the case to the field office for administrative
    disqualification. As with paper cases, the field office sends a charge
    letter, detailing the dates on which the retailer sold ineligibles or
    trafficked food stamp benefits, and the retailer may attempt to rebut the
    charges. Once disqualified, the retailer can appeal the penalty to the
    Administrative Review Branch. If no violation is found, the Retailer
    Investigations Branch refers the case to the field office to determine
    whether to continue investigating.

    OIG and Other Federal Entities Are Conducting Fewer Retailer Trafficking
    Investigations and Fewer Retailers Are Prosecuted

    In recent years, the USDA OIG has opened a decreasing number of
    food-stamp-trafficking investigations and has focused on high-impact
    investigations. In 2000, the OIG opened 179 trafficking investigations,
    while in 2005 it opened 77. According to OIG, this has occurred both
    because of a lack of resources-the number of OIG investigators has dropped
    by 28 percent since 1997-and because the OIG has focused its resources on
    high-impact investigations such as those with large-scale trafficking,
    those involving other criminal activity, or those involving possible
    terrorist connections since September 11, 2001. In addition, OIG officials
    told us that it can take up to 5 years to investigate and prosecute a
    store owner, and the process of developing an investigation for
    prosecution further strains limited resources.

    Other federal agencies are also conducting fewer retailer food stamp
    trafficking investigations. The US Secret Service used to take on
    investigations when large amounts of food stamp coupons were being
    trafficked. However, its involvement in retailer trafficking
    investigations is rare because the Secret Service finds that large
    trafficking investigations are less common since the implementation of
    EBT. EBT cards typically only have a few hundred dollars of benefits each
    month, so it takes many transactions for a dishonest store owner to
    traffic a large amount of money. However, in large trafficking
    investigations or those where a retailer is believed to be diverting
    profits from trafficking to terrorist causes, the Secret Service or the
    FBI might work with the OIG and other agencies on a sting operation or a
    joint task force. For example, the OIG and FBI worked jointly with state
    and local law enforcement authorities in Florida on an investigation
    involving store owners who were ordered to pay $2.6 million in restitution
    to the USDA and went to prison after pleading guilty to trafficking over
    $3 million in food stamp benefits. OIG officials told us they were
    actively conducting task force investigations with other federal, state
    and local law enforcement authorities.

    If an investigation is accepted and developed for prosecution by a law
    enforcement entity, there is still no guarantee that the trafficker will
    be prosecuted. Most US Attorneys' offices will not prosecute a retailer
    unless a great deal of money is involved, although the threshold varies
    from one region to another, according to federal law enforcement
    officials. Thus, prosecuting the store owners is a challenge.

    Figure 5 shows a decline in recent years in the number of investigations
    deemed serious enough to be referred by the OIG to the US Attorney for
    prosecution, down from 202 in fiscal year 2001 to 21 in 2005. These data
    illustrate the relatively small number of store owners who have faced
    prosecution for trafficking in recent years, particularly in light of the
    841 owners who were disqualified in fiscal year 2005. These data also show
    that the proportion of investigations accepted by the US Attorney for
    prosecution has been increasing in recent years. OIG officials told us
    they believe they are better targeting investigations for referral.

    Figure 5: Trafficking Investigations Referred to the US Attorney and
    Accepted for Prosecution for Fiscal Years 2000 to 2005

    With fewer retailers prosecuted, the number of convictions has also
    declined. Because of the length of time it takes to prosecute a case,
    there is a lag between the time when a trafficking investigation is
    accepted by the US Attorney for prosecution and the time when a retailer
    is convicted. Thus, it is not possible to compare the figures for
    investigations accepted for prosecution and those resulting in convictions
    in the same year. However, as shown in figure 6, the number of convictions
    resulting from investigations by the OIG has declined from 260 in 2000 to
    94 in 2005.

    Figure 6: Fiscal Year Totals for Trafficking Convictions Resulting from
    OIG Investigations

    Note: Convictions are for retail store owners and employees and not for
    stores; some stores have multiple owners.

      Despite the Progress That Has Been Made against Trafficking, Vulnerabilities
                               Still Exist in the Program

    Despite the declining FNS estimates of retailer trafficking, retailers can
    still enter the program intending to traffic and do so, often without fear
    of severe criminal penalties. Minimal food stock requirements for
    authorization and a lack of FNS oversight of contractor inspections may
    allow dishonest retailers into the program, and delays in access to
    transaction data may allow retailers to traffic large amounts for several
    months undetected. In addition, some retailers have adapted their
    trafficking behaviors to avoid detection while others have found new ways
    to exploit the EBT technology. FNS does not yet have an overall strategy
    to target its monitoring resources to high risk areas. Moreover, the
    available FNS penalties for trafficking may not be sufficient to deter
    retailers from trafficking, and the states' lack of focus on recipient
    trafficking can also facilitate trafficking.

    Minimal Requirements for Authorization and Lack of Oversight of Contractor
    Inspections May Allow Corrupt Retailers into the Program

    Minimal food stock requirements may allow corrupt retailers to enter the
    program, yet their stocks will not likely be checked for 5 years absent
    the indication of a problem. FNS field office officials told us their
    first priority is getting stores into the program to ensure needy people
    have access to food. In part because large grocery stores are sometimes
    scarce in urban, low-income areas, officials may allow stores with minimal
    food stock that meet the minimum FNS requirements to become authorized
    food stamp retailers. Officials told us that when a retailer only stocks
    small quantities of eligible food items, such as just a few cans of one
    kind of vegetable, it is often an indication of the intent to traffic.
    However, FNS regulations do not specify the amount of food items that
    would constitute sufficient stock. The officer-in-charge of a large urban
    field office expressed frustration with this lack of specificity. Many
    authorized stores in her area are gas-and-grocery combinations or
    convenience stores and some of these stores stock only one item from each
    required food group. However, she said the field office cannot deny these
    stores authorization based upon minimal food stock because, in her
    experience, the denial would be overturned if appealed. Another official
    at an FNS regional office told us about a store that was denied
    authorization in that region. According to this official, the denial was
    overturned by the Administrative Review Branch when the reviewing officer
    determined that a single can of corn sufficed as one of the three
    different products required in the fruit or vegetable food group. In
    addition, Secret Service officials said that some merchants quickly learn
    that they do not need to restock their stores to continue to redeem food
    stamps because stores aren't routinely checked for 5 years unless there is
    some indication of a problem with the store. Staff in one of the 10 FNS
    field offices we visited told us that they have to authorize some
    retailers who seem suspicious, but they perform post-authorization visits
    of these stores to ensure they are legitimate.

    During the authorization process, FNS field offices rely on contractors to
    inspect stores to ensure they meet program requirements, but FNS does not
    independently verify the inspectors' reports. The inspector provides the
    final check that a store exists, it has food in each of the required food
    groups, and the information provided on the application for authorization
    to become a food stamp retailer is correct. However, at one field office,
    a contract inspector was submitting false reports, allowing dishonest
    retailers into the program.

    Oversight of retailers' entry into the program and early operations is
    important because newly authorized retailers can quickly ramp up the
    amount of food stamps they traffic, and there is no limit on the value of
    food stamps a retailer can redeem in 1 month. At one field office location
    where retailers are often innovative in their trafficking schemes, FNS
    officials noticed that some retailers quickly escalated their trafficking
    within 2 to 3 months after their initial authorization. As shown in figure
    7, one disqualified retailer's case file we reviewed at that field office
    showed the store went from $500 in monthly food stamp redemptions to
    almost $200,000 within 6 months. Redemption activity dropped precipitously
    after the trafficking charge letter was sent to the retailer in late
    October. In its application for food stamp authorization, this retailer
    estimated he would have $180,000 of total annual food sales, yet the
    retailer was redeeming more than that each month in food stamp benefits
    before being caught in a Retailer Investigations Branch investigation.

    Figure 7: Food Stamp Redemptions of a Newly Authorized Store Disqualified
    for Trafficking

    Delays in Access to Transaction Data Allow Trafficking to Continue for Months
    Undetected

    Although EBT implementation provides FNS with valuable transaction data to
    identify potential trafficking, an FNS headquarters official said
    monitoring and identification of traffickers will be improved once program
    specialists have faster access to transaction data to detect suspicious
    ramp-up activity. Currently, FNS receives each state's EBT transaction
    data monthly on disk from the states' EBT contractors. Using this process,
    the program specialists would not be aware of a retailer's rapid ramp-up
    activity until they had 2 months' worth of transaction data, in the third
    month after the retailer's authorization. Then, following the normal case
    development process, a charge letter would not be sent to the store until
    the fourth month, leading to possible disqualification in the fifth month.
    According to this official, as retailers learned that FNS would eventually
    discover them by analyzing their EBT transactions, they responded by
    ramping up their trafficking activity more quickly to make a quick profit
    before FNS could take action.

    FNS officials told us they believe that the solution to combating rapid
    ramp-up trafficking is for FNS to receive EBT transaction data daily. FNS
    systems could then monitor the data more quickly and produce daily reports
    of rapidly increasing amounts of retailer transactions called "spike
    reports." In order for FNS to receive so much data on a daily basis, it is
    working on building large data pipelines from the states' EBT processors
    and developing its ability to manage that data before the end of this
    year. In the interim, FNS is piloting the use of spike reports using
    monthly data.

    Retailers Are Developing New Trafficking Schemes under EBT

    As some retailers have become familiar with FNS's monitoring techniques,
    they have adapted their trafficking patterns to avoid detection. Unlike
    those who quickly ramp up their trafficking behavior for quick profit
    before detection through FNS monitoring, other retailers have adjusted to
    EBT monitoring by manipulating trafficking transactions to prevent
    detection by FNS analysis of transaction patterns. One field official said
    that there is a large network of trafficking retailers in her field office
    area that dissects the charge letters sent to traffickers to determine
    what analyses FNS conducts and to teach other retailers how to elude
    detection. Secret Service officials confirmed the existence of fraud
    networks in this area and said that one ringleader will recruit,
    encourage, and reward an entire family and the friends of that family for
    trafficking food stamp benefits.

    Some retailers have also found new ways to exploit the EBT technology and
    continue to traffic. In her July 2003 testimony, the USDA Inspector
    General reported that her office had recently identified a fraudulent
    scheme that, while rare, appeared to be growing in the Food Stamp
    Program.14 The OIG noticed that some authorized retailers were moving
    their point-of-sale terminals to an unauthorized location, such as an
    unauthorized store or apartment, for trafficking purposes. In its
    Semiannual Report to Congress for the first half of fiscal year 2004, the
    OIG reports that four individuals moved the authorized terminals to
    different locations in Chicago so they could exchange cash for food stamp
    benefits away from the authorized stores and possible detection. This
    allowed them to conduct a large number of transactions one after another.
    These individuals had been sentenced to serve from 15 to 57 months in
    prison and ordered to pay $29.1 million in restitution for defrauding the
    Food Stamp Program in this way from the fall of 1997 through August 2001.
    OIG headquarters officials told us that moving authorized and unauthorized
    terminals remains a significant area of concern because of the large
    volume of money that could be redeemed quickly.

    14 U.S. Congress, House Committee on the Budget, Fraud, Waste and Abuse in
    Mandatory Spending Programs (July 9, 2003).

    FNS Has Not Taken the Next Steps to Target Its Monitoring Resources to High Risk
    Areas

    FNS has not taken the steps to ensure that it identifies those areas or
    stores that are at highest risk for trafficking so that it can allocate
    its resources accordingly. FNS has made good use of EBT transaction data
    to produce its Watch List to identify suspicious transaction patterns and
    target certain stores. It has also established task forces of undercover
    investigators when it identifies geographic areas needing additional
    coverage. However, it is now at a point where it can begin to formulate
    more sophisticated analyses to identify high risk areas and target its
    resources. For example, certain states have a disproportionate share of
    the disqualified stores compared with the number of food stamp recipients
    in their states, yet it is not clear whether these numbers indicate that
    trafficking is more common in those states or whether FNS program
    specialists and investigators have engaged in more intensive pursuit of
    traffickers in those areas. Our analysis of FNS's database of retailers
    showed that of the 9,808 stores permanently disqualified from the Food
    Stamp Program, about 35 percent were in just 4 states: New York, Illinois,
    Texas, and Florida, and yet about 26 percent of food stamp recipients
    lived in those states. However, FNS headquarters officials did not know
    the number of program specialists in the field offices in these states who
    devote a portion of their time to monitoring food stamp transactions and
    initiating paper cases.15 Moreover, FNS officials believe there are
    probably other areas of the country where trafficking is occurring that
    may warrant further attention or additional resources, such as California,
    where fewer than 5 percent of all permanent store disqualifications
    occurred and about 8 percent of food stamp recipients live. However, FNS
    officials have not yet developed a clear strategy or criteria to
    systematically identify those areas and reallocate resources in response.

    15 Program specialists also devote time to other duties, but the range and
    extent of other duties vary from field office to field office.

    In addition, some retailers and store locations have a history of program
    violations that lead up to permanent disqualifications, but FNS did not
    have a system in place to ensure these stores were quickly targeted for
    heightened attention. Our analysis showed that, of the 9,808 stores that
    had been permanently disqualified from the program, about 90 percent were
    disqualified for their first detected offense. However, 9.4 percent of the
    disqualified retailers had shown early indications of problems before
    being disqualified. About 4.3 percent of these retailers had received a
    civil money penalty, 4.3 percent had received a warning letter for program
    violations, and 0.8 percent had received a temporary
    disqualification.16,17 Most of these stores were small and may present a
    higher risk of future trafficking than others, yet FNS does not
    necessarily target them for speedy attention.

    Further, some store locations may be at risk of trafficking because a
    series of different owners had trafficked there. After an owner was
    disqualified, field office officials told us the store would reopen under
    new owners who continued to traffic with the store's clientele. One field
    office official would like to be able to bar these repeat store locations,
    while another suggested a 90-day waiting period before a new owner of a
    disqualified store location could qualify as an authorized food stamp
    retailer. As table 3 shows, our analysis of FNS's database of retailers
    found that about 174, or 1.8 percent, of the store addresses had a series
    of different owners over time who had been permanently disqualified for
    trafficking at that same location, totaling 369 separate
    disqualifications. In one case, a store in the District of Columbia had 10
    different owners who were each disqualified for trafficking, consuming
    FNS's limited compliance-monitoring resources.

    16 Civil money penalties may be imposed against a store in lieu of
    disqualification. FNS collected almost $1.7 million in civil money
    penalties in fiscal year 2005.

    17 Warning letters are sent for lesser violations of program regulations
    such as charging food stamp recipients higher prices than other customers
    or when the evidence is too limited to warrant a disqualification.
    Temporary disqualifications are generally for selling ineligible goods
    such as paper plates, tobacco or alcohol or providing credit to food stamp
    recipients.

    Table 3: Some Store Locations Have Had Multiple Retailers That Engaged in
    Trafficking

    Number of different owners at same address          Number of disqualified
    disqualified                                                     addresses
    2                                                                      162
    3                                                                       10
    5                                                                        1
    10                                                                       1
    Total                                                                  174

    Source: GAO analysis of FNS data.

    Our analysis of the data on these stores with multiple disqualified owners
    indicates that FNS officials found this type of trafficking in a handful
    of cities and states. Almost 60 percent of repeat store locations were in
    six states and 44 percent were in 8 cities, often concentrated in small
    areas. For example, as figure 8 shows, 14 repeat store locations were
    clustered in downtown areas of both Brooklyn and Baltimore. However, it is
    not clear whether these data indicate heightened efforts of compliance
    staff or whether trafficking is more common in these areas. Regardless,
    early monitoring of high-risk locations when stores change hands could be
    an efficient use of resources.

    Figure 8: Map of Stores Repeatedly Disqualified for Trafficking in
    Brooklyn and Baltimore

    Efficient use of resources is particularly important because available
    compliance-monitoring resources have decreased in recent years. As the
    importance of paper cases has grown, the compliance-monitoring workload
    has gradually shifted to field office program specialists at a time when
    overall program resources have dwindled. Officials said the number of
    field investigators and field staff nationwide, which includes program
    specialists, has declined over the last 10 years.

    Available FNS Penalties May Not Deter Traffickers

    FNS penalties alone may not be sufficient to deter traffickers. The most
    severe FNS penalty that most traffickers face is disqualification from the
    program, and FNS must rely on other entities to conduct investigations
    that could lead to prosecution. For example, in the food-stamp-trafficking
    ramp-up case previously cited, this retailer redeemed almost $650,000 of
    food stamps over the course of 9 months before being disqualified from the
    program in November 2004. As of August 2006, there was no active
    investigation of this retailer.

    Because of the time it takes to develop an investigation for prosecution
    and the costs associated with doing so, a natural tension exists between
    the goal of disqualifying a retailer as quickly as possible to prevent
    further trafficking and seeking prosecution of the retailer to recover
    losses and deter other traffickers. One FNS field office official said it
    can take months or even years to investigate a case for prosecution and in
    the meantime the store continues to traffic. FNS can disqualify a retailer
    relatively quickly-thereby saving federal dollars from misuse-compared
    with the time OIG needs to investigate a case for referral for
    prosecution. However, if prosecution is successful, a retailer's assets
    and profits from trafficking can be seized, providing a potential
    deterrent to others considering trafficking.

    States' Lack of Focus on Recipient Trafficking Can Facilitate Vendor Trafficking

    Paper cases often identify recipients suspected to have trafficked their
    food stamp benefits with a dishonest retailer, and some FNS field offices
    send a list of those recipients to the appropriate state. In response,
    some states actively pursue and disqualify these recipients.18 For
    example, Illinois has used these lists to disqualify more than 3,000 of
    the almost 20,000 suspected recipients referred to them since 1999 through
    FNS retailer investigations. In addition to pursuing recipients who are
    suspected of trafficking, one state told us it uses some recipients
    charged with trafficking to gather evidence against retailers.

    However, FNS field offices do not always send lists of suspected
    individual traffickers to states or counties administering the program,
    and not all states investigate the individuals on these lists. Officials
    from four FNS field offices we visited said they don't send the list of
    recipients suspected of trafficking to the states or counties
    administering the program. Other field office officials said they send the
    lists to their states, but they are not acted upon because states do not
    have the resources to conduct investigations into recipients who may be
    trafficking. FNS headquarters officials also believe that not many states
    are acting on the lists they receive because it is difficult and
    potentially costly to prove individual cases of recipient trafficking. One
    field office official said that store owners represent only half of the
    problem and that states could do more to address trafficking. If states
    could reduce recipients' trafficking, it would curb retailer trafficking
    as well.

    18 The states are responsible for conducting a hearing for recipients
    caught trafficking. A recipient who is found to have trafficked faces
    disqualification from the Food Stamp Program: 12 months for a first
    offense, 24 months for a second offense, and permanently for a third
    offense.

    Instead of focusing on food stamp recipients who traffic their benefits,
    states are using their resources to focus on recipients who improperly
    collect benefits, according to FNS officials.19 The current incentive
    structure for the states includes performance bonuses to reward states for
    correcting payment errors and reducing error rates. In addition, states
    are penalized financially if their error rates reach a specific threshold
    for 2 years in a row.20 States that do investigate recipient traffickers
    can keep 35 percent of any monies they recover; however, it may be
    difficult to recover the funds, and the amount recovered may be minimal.
    When a state proves a recipient has trafficked, the recipient can no
    longer receive benefits, but other members of the family can. States can
    try to recover some of the benefits trafficked by deducting a set amount
    from the family benefits each month. However, pursuing recipients who
    traffic can be costly and time-consuming.21 Taken together, these factors
    can result in states' choosing to focus on improper benefit payments
    rather than recipient trafficking. This inaction by some states allows
    recipients suspected of trafficking to continue the practice, and such
    inaction also leaves a pool of recipients ready and willing to traffic
    their benefits as soon as a disqualified store reopens under new
    management. In fact, California field office staffs have begun to track
    suspected trafficking recipients from a disqualified store to a new store,
    where they begin exhibiting the same patterns.

    19 In fiscal year 2004, states reported that they completed almost 746,000
    food stamp fraud investigations resulting in over 55,000 recipient
    disqualification determinations. They do not, however, report the number
    of cases involving recipients who trafficked versus the number who
    obtained benefits fraudulently.

    20 States are penalized when there is a 95 percent statistical probability
    that that their error rates exceeds 105 percent of the national average
    for 2 consecutive years. The penalty is equal to 10 percent of the cost of
    errors above 6 percent. For more information, see GAO, Food Stamp Program:
    States Have Made Progress Reducing Payment Errors, and Further Challenges
    Remain, GAO-05-245 (Washington, D.C.: May 5, 2005).

    21 In addition, the Omnibus Budget Reconciliation Act of 1993, Pub. L. No.
    103-66, reduced the administrative reimbursement for all investigations
    and prosecutions from 75 to 50 percent.

                                      Conclusions

    In the Food Stamp Program, stores are the frontline for ensuring that
    recipients use food stamps to purchase appropriate food items, and these
    stores operate with no day-to-day oversight. Although the vast majority of
    stores do not traffic food stamp benefits, each year millions of dollars
    of program benefits that were awarded to provide food to needy individuals
    and families are trafficked. FNS, using EBT data, has made significant
    progress in taking advantage of new opportunities to monitor and
    disqualify traffickers. However, because store owners can begin
    trafficking as soon as they are authorized to participate in the program,
    pocketing large sums of cash for months before FNS can detect potentially
    suspicious transaction patterns, early monitoring and detection are
    critical to curbing larger losses to the program. FNS has at its
    fingertips a wealth of information that could help it develop additional
    criteria to target certain stores or geographic areas for early or more
    heightened monitoring, including the presence of low food stocks, the
    location of repeat offender stores, areas of recipient trafficking, and
    areas with evidence of organized fraudulent activity. FNS's loss of
    monitoring staff in recent years magnifies the need to ensure that
    compliance-monitoring resources are focused on those stores and geographic
    areas at greatest risk of trafficking. A more focused effort to target and
    disqualify these stores could help FNS meet its continuing challenge of
    ensuring that stores are available and operating in areas of high need
    while still maintaining program integrity.

    Yet, as EBT has limited the amount of benefits that can be trafficked at
    one time, there is less chance the retailer or the recipient will be
    prosecuted. There is no easy solution to this lack of deterrence. Law
    enforcement agencies are making decisions to efficiently use their
    resources by targeting larger or more critical cases. And FNS currently
    does not have authority to impose stiffer penalties on retailers other
    than program disqualification or in limited situations, civil money
    penalties in lieu of disqualification. Food stamp trafficking will
    continue to be lucrative for retailers as long as the potential rewards
    outweigh the penalties and there are recipients willing to exchange their
    benefits for cash and resources are not used for investigations and
    penalizing recipients.

                                    Recommendations

    We recommend that the Secretary of the Department of Agriculture direct
    FNS to take the following five actions.

    To help ensure that its limited compliance-monitoring resources are used
    efficiently, FNS should

               o  develop additional criteria to help identify stores most likely
               to traffic and their locations; conduct risk assessments, using
               compliance and other data, to systematically identify stores and
               areas that meet these criteria; and allocate resources
               accordingly, and

               o  provide more targeted and early oversight of stores that meet
               these criteria, such as conducting early monitoring or follow-up
               inspections.

               To provide further deterrence for trafficking, FNS should

               o  develop a strategy to increase the penalties for trafficking,
               working with the OIG as needed. If these penalties entail
               additional authority, consider developing legislative proposals
               for program reauthorization in 2007.

               To promote state efforts to pursue recipients suspected of
               trafficking and thereby reduce the pool of recipient traffickers,
               FNS should:

               o  ensure that FNS field offices report to states those recipients
               who are suspected of trafficking with disqualified retailers, and

               o  revisit the incentive structure to incorporate additional
               provisions to encourage states to investigate and take action
               against recipients who traffic.

               Agency Comments

    			  We provided a draft of this report to the U.S. Department of
               Agriculture and the U.S. Secret Service for review and comment. On
               September 5, 2006, FNS officials provided us with their oral
               comments. The officials generally agreed with our findings,
               conclusions, and recommendations. However, FNS officials raised a
               concern regarding our recommendations on more efficient use of
               their compliance-monitoring resources. They stated they believe
               they do have a strategy for targeting resources through their use
               of the Watch List, which helps them identify suspicious
               transaction patterns and target certain stores, combined with
               their ability to establish task forces of investigators when they
               identify geographic areas needing additional coverage. We believe
               that FNS has made good progress in its use of EBT transaction
               data; however, it is now at a point where it can begin to
               formulate more sophisticated analyses. For example, these analyses
               could combine EBT transaction data with other available data, such
               as information on stores with minimal inventory and stores with a
               past history of trafficking, to develop criteria to better and
               more quickly identify stores at risk of trafficking. In addition,
               FNS could also take advantage of more sophisticated analysis
               tools, such as certain mapping programs,to better identify those
               areas where trafficking is more prevalent. Finally, to increase
               the likelihood of success, FNS will need to combine the expertise
               of its field investigators and its program specialists and then
               allocate these resources to monitor those stores at the greatest
               risk of trafficking. FNS and OIG officials also provided technical
               comments, which we incorporated where appropriate.

               The U.S. Secret Service did not provide us with formal comments
               but told us it concurred with the findings in our report and that
               it agreed with our recommendation that additional work needs to be
               done to increase existing penalties for trafficking.

               We are sending copies of this report to the Secretary of
               Agriculture, appropriate congressional committees, and other
               interested parties. We will also make copies available to others
               upon request. In addition, the report will be available at no
               charge on GAO's Web site at http://www.gao.gov .

               If you or your staff have any questions regarding this report,
               please contact me at (202) 512-7215 or nilsens@gao.gov . 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 contributors to this report are listed in appendix
               I.

               Sigurd R. Nilsen
    			  Director, Education, Workforce, and Income
               Security Issues

               Appendix I: GAO Contact and Staff Acknowledgments

    			  GAO Contact

    			  Sigurd R. Nilsen (202) 512-7215 or nilsens@gao.gov

               Staff Acknowledgments

    			  In addition to the contact named above, Kay Brown, Assistant
               Director; Gloria Hernandezsaunders; Kevin Jackson; Kevin Kumanga,
               Analyst-in-Charge; Crystal Lazcano; Jesus Moreno; Phil Reiff;
               Ramon Rodriguez; Eden Savino; Dan Schwimer; Vanessa Taylor;
               Rachael Valliere; and Jill Yost.

               Related GAO Products

    			  Improper Payments: Federal and State Coordination Needed to Report
               National Improper Payment Estimates on Federal Programs.
               GAO-06-347 . Washington, D.C.: April 14, 2006.

               Food Stamp Program: States Have Made Progress Reducing Payment
               Errors, and Further Challenges Remain. GAO-05-245 . Washington,
               D.C.: May 5, 2005.

               Food Stamp Program: Farm Bill Options Ease Administrative Burden,
               but Opportunities Exist to Streamline Participant Reporting Rules
               among Programs. GAO-04-916 . Washington, D.C.: September 16, 2004.

               Food Stamp Program: Steps Have Been Taken to Increase
               Participation of Working Families, but Better Tracking of Efforts
               Is Needed. GAO-04-346 . Washington, D.C.: March 5, 2004.

               Financial Management: Coordinated Approach Needed to Address the
               Government's Improper Payments Problems. GAO-02-749 . Washington,
               D.C.: August 9, 2002.

               Food Stamp Program: States' Use of Options and Waivers to Improve
               Program Administration and Promote Access. GAO-02-409 .
               Washington, D.C.: February 22, 2002.

               Executive Guide: Strategies to Manage Improper Payments: Learning
               from Public and Private Sector Organizations. GAO-02-69G .
               Washington, D.C.: October 2001.

               Food Stamp Program: States Seek to Reduce Payment Errors and
               Program Complexity. GAO-01-272 . Washington D.C.: January 19,
               2001.

               Food Stamp Program: Better Use of Electronic Data Could Result in
               Disqualifying More Recipients Who Traffick Benefits.
               GAO/RCED-00-61 . Washington D.C.: March 7, 2000.

               Food Assistance: Reducing the Trafficking of Food Stamp Benefits.
               GAO/T-RCED-00-250 . Washington D.C.: July 19, 2000.

               Food Stamp Program: Information on Trafficking Food Stamp
               Benefits. GAO/RCED-98-77 . Washington D.C.: March 26, 1998.

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    www.gao.gov/cgi-bin/getrpt? GAO-07-53 .

    To view the full product, including the scope
    and methodology, click on the link above.

    For more information, contact Sigurd Nilsen at (202) 512-7215 or
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    Highlights of GAO-07-53 , a report to congressional committees

    October 2006

    FOOD STAMP TRAFFICKING

    FNS Could Enhance Program Integrity by Better Targeting Stores Likely to
    Traffic and Increasing Penalties

    Every year, food stamp recipients exchange hundreds of millions of dollars
    in benefits for cash instead of food with retailers across the country, a
    practice known as trafficking. From 2000 to 2005, the Food Stamp Program
    has grown from $15 billion to $29 billion in benefits. During this period
    of time, the U.S. Department of Agriculture's (USDA) Food and Nutrition
    Service (FNS) replaced paper food stamp coupons with electronic benefit
    transfer (EBT) cards that work much like a debit card at the grocery
    checkout counter. Given these program changes and continuing retailer
    fraud, GAO was asked to provide information on (1) what is known about the
    extent and nature of retailer food stamp trafficking, (2) the efforts of
    federal agencies to combat such trafficking, and (3) program
    vulnerabilities. To do this, GAO interviewed agency officials, visited 10
    field offices, conducted case file reviews, and analyzed data from the FNS
    retailer database.

    What GAO Recommends

    To reduce program vulnerabilities, GAO recommends that FNS take additional
    steps to target and provide early oversight of stores most likely to
    traffic; develop a strategy to increase penalties for trafficking, working
    with the USDA Inspector General as needed; and promote state efforts to
    pursue recipients suspected of trafficking. FNS generally agreed with
    findings, conclusions and recommendations.

    FNS's estimates suggest trafficking declined between 1995 and 2005 from
    3.8 cents per dollar of benefits redeemed to 1.0 cent, resulting in an
    estimated $241 million in food stamps trafficked in 2005. The rate of
    trafficking in small grocery and convenience stores is 7.6 cents per
    dollar, significantly higher than the rate for large stores, where it is
    estimated to be 0.2 cents per dollar. In addition, the use of EBT cards
    has changed the way some benefits are trafficked, for example eliminating
    middlemen who used to collect and redeem large amounts of paper coupons
    from program participants willing to sell them.

    FNS has taken advantage of EBT data to improve its ability to detect and
    disqualify trafficking retailers, while law enforcement agencies have
    conducted a decreasing number of investigations. Cases using only EBT
    transaction data now account for more than half of trafficking
    disqualifications, supplementing traditional, but more time-consuming,
    undercover investigations. Other federal entities, such as the USDA's
    Inspector General and the U.S. Secret Service, have reduced the number of
    traffickers they pursue in recent years and focused their efforts on high-
    impact cases. This has resulted in fewer cases referred for federal
    prosecution and fewer federal convictions for retailer trafficking.

    Despite FNS progress, the program remains vulnerable because retailers can
    enter the program intending to traffic, often without fear of severe
    criminal penalties. FNS authorizes some stores with limited food supplies
    so that low- income participants in areas with few supermarkets have
    access to food, but may not inspect these stores again for 5 years unless
    there issome indication of a problem. Oversight of early operations is
    important because newly authorized retailers can quickly ramp up the
    amount of benefits they traffic. One location that FNS disqualified for
    trafficking redeemed almost $650,000 in 9 months. In addition, FNS has not
    conducted analyses to identify high risk areas and to target its limited
    compliance-monitoring resources. Furthermore, disqualification, FNS's most
    severe penalty, may not be a sufficient deterrent, and FNS must rely upon
    others for prosecution. Finally, states' failing to pursue trafficking
    recipients leaves a pool of recipients willing to traffic when a
    disqualified store reopens.

    This Disqualified Store, with Its Limited Counter Area and Single Cash
    Register, Redeemed Over $190,000 of Food Stamp Benefits in One Month
    *** End of document. ***