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

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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 [email protected] . Contact
           points for our Offices of Congressional Relations and Public
           Affairs may be found on the last page of this report. GAO staff
           who made major 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 [email protected]

           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
[email protected].

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. ***