Food Assistance: Reducing Food Stamp Benefit Overpayments and Trafficking
(Testimony, 10/30/97, GAO/T-RCED-98-37).

The Food Stamp Program, one of the nation's largest welfare programs, is
the single largest program run by the U.S. Department of Agriculture
(USDA). In fiscal year 1997, the government provided $21 billion worth
of food stamps to about 24 million recipients. Reviews by GAO, USDA's
Office of Inspector General, and others have provided ample evidence
that the system for delivering food stamps is vulnerable to, and is
being victimized by, significant fraud, waste, and abuse. This testimony
discusses fraud, waste, and abuse in the Food Stamp Program from three
perspectives: (1) the nature and the extent of the problem; (2) the
roles and the responsibilities of the major federal agencies that are
seeking to minimize it; and (3) the potential of electronic benefits
transfer, which would replace traditional food stamp coupons with a
debit card, to reduce it.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-RCED-98-37
     TITLE:  Food Assistance: Reducing Food Stamp Benefit Overpayments 
             and Trafficking
      DATE:  10/30/97
   SUBJECT:  Retail facilities
             Federal/state relations
             Overpayments
             Fraud
             Investigations by federal agencies
             State-administered programs
             Program abuses
             Electronic funds transfer
             Food relief programs
IDENTIFIER:  Food Stamp Program
             FCS Store Tracking and Redemption System
             USDA Food Stamp Quality Control System
             
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Cover
================================================================ COVER


Before the Subcommittee on Department Operations, Nutrition, and
Foreign Agriculture, Committee on Agriculture, House of
Representatives

For Release
on Delivery
Expected at
10:00 a.m.  EST
Thursday
October 30, 1997

FOOD ASSISTANCE - REDUCING FOOD
STAMP BENEFIT OVERPAYMENTS AND
TRAFFICKING

Statement of Robert A.  Robinson, Director
Food and Agriculture Issues,
Resources, Community, and Economic
Development Division

GAO/T-RCED-98-37

GAO/RCED-98-37T


(150279)


Abbreviations
=============================================================== ABBREV

  USDA -
  EBT -
  OIG -
  FCS -
  QC -

============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

Thank you for the opportunity to discuss our work on fraud, waste,
and abuse in the U.S.  Department of Agriculture's (USDA) Food Stamp
Program.  The program is one of the nation's largest welfare programs
and the largest single program administered by USDA.  In fiscal year
1997, about $21 billion in food stamps were provided to about 24
million recipients,\1 down slightly from recent years.  Reviews by
GAO, USDA's Office of Inspector General (OIG), and others have
produced ample evidence that the system for delivering food stamps is
vulnerable to, and is being victimized by, significant fraud, waste,
and abuse. 

Today, we will discuss fraud, waste, and abuse in the Food Stamp
Program from three perspectives:  (1) the nature and extent of the
problem, (2) the roles and responsibilities of the major federal
agencies involved in minimizing it, and (3) the potential of
electronic benefits transfer (EBT)--a system of benefit delivery that
replaces the traditional food stamp coupons with a debit card--to
reduce it. 

In summary, we found the following: 

  -- Fraud, waste, and abuse in the Food Stamp Program takes two
     primary forms:  (1) overpayments to food stamp recipients and
     (2) the use of food stamps to obtain cash or other non-food
     items--a process known as trafficking.  According to USDA, in
     fiscal year 1996, the most current year for which data are
     available, about $1.5 billion was paid out to individuals who
     either should not have received any food stamps at all or who
     received more than they were entitled to receive.  These
     overpayments represented nearly 7 percent of the approximately
     $22 billion in food stamps provided.  Overpayments are caused by
     both inadvertent and intentional errors made by recipients and
     errors made by state caseworkers.  In addition, program
     regulations specify that recipients use food stamps only to
     purchase food from authorized retailers.  However, USDA has
     recently estimated that up to $815 million in food stamps,
     approximately 4 percent of the food stamps issued, were traded
     for cash in fiscal year 1993 through retail stores participating
     in the program.  Numerous retailers are caught each year paying
     food stamp recipients a discounted value of the stamps (for
     example, 70 cents on the dollar) and then redeeming the stamps
     at full face value from the government.  There are no reliable
     data on the extent of trafficking that occurs before the food
     stamps are redeemed by an authorized retailer. 

  -- USDA's Food and Consumer Service (FCS) administers the Food
     Stamp Program in partnership with the states.  The states are
     responsible for the day-to-day operation of the program,
     including meeting with applicants and determining their
     eligibility and benefit levels.  FCS provides nationwide
     criteria for determining eligibility for assistance and the
     amount of food stamps recipients are entitled to receive.  It
     monitors the accuracy of state benefit determinations and
     operates a system of incentives and sanctions to encourage
     states to reduce the number of errors.  FCS also approves
     retailers to participate in the program and monitors and
     investigates their activities to identify those potentially
     violating program regulations.  The Department's OIG devotes a
     substantial share of its audit and investigative resources to
     identifying program irregularities, especially trafficking. 

  -- EBT systems have the potential to reduce some aspects of the
     fraud, waste, and abuse in the Food Stamp Program but not
     others.  By providing a clear "paper trail" of all food stamp
     transactions, EBT systems help reviewers identify trafficking
     activities and remove and/or prosecute retailers engaged in such
     activities.  These systems also address problems associated with
     food stamp theft.  Because EBT is a benefit delivery system,
     however, it cannot address the substantial problems associated
     with determining eligibility for food stamps or establishing
     benefit levels. 


--------------------
\1 For this testimony, food stamps refers to the benefits provided in
the form of coupons or through electronic benefits transfer. 


   NATURE AND EXTENT OF FRAUD,
   WASTE, AND ABUSE
---------------------------------------------------------- Chapter 0:1

The two main areas of fraud, waste, and abuse involve (1) overpayment
of food stamp benefits and (2) trafficking. 

Concerning the first area, overpayments occur when ineligible persons
are provided food stamps and when eligible persons are provided more
than they are entitled to receive.  In 1996, for example, the states
overpaid recipients an estimated $1.5 billion--or 6.92 percent--of
the approximately $22 billion in food stamps issued.  Overpayments
occur for two reasons.  First, recipients make errors, either
inadvertent or intentional, in providing information to the state
caseworker about the recipient household's size, income, assets, or
other pertinent information needed to determine the household's
eligibility and benefit level.  Second, state caseworkers make errors
in determining either an applicant's eligibility for food stamps or
the appropriate level of benefits.  According to 1996 data, recipient
errors accounted for 57 percent of the overpayments--36 percent were
unintentional errors and 21 percent were intentional.  The remaining
43 percent of the overpayments were caused by caseworkers' errors. 
It should be noted that errors by participants and caseworkers can
also result in underpayments.  FCS' data show that food stamp
recipients were underpaid approximately $518 million in fiscal year
1996. 

In March 1997, we reported on one specific example of food stamp
overpayments--payments involving violations of the federal
regulations that prohibit inmates of correctional institutions from
participating in the Food Stamp Program.\2 By matching automated food
stamp and prison records in four states--California, Florida, New
York, and Texas--we identified over 12,000 inmates who were included
in the households receiving food stamps in fiscal year 1995.  These
households improperly collected an estimated $3.5 million in food
stamps.  Subsequently, in August 1997, the Balanced Budget Act of
1997 (P.  L.  105-33, Aug.  5, 1997) included a provision directing
the states to ensure that individuals who are under federal, state,
or local detention for more than 30 days are not participating in the
Food Stamp Program.  In response to a request from the Senate
Committee on Agriculture, Nutrition, and Forestry, we are currently
examining the potential for computer matching to identify other
ineligible populations participating in the program. 

With respect to trafficking--the second main area of fraud, waste and
abuse--program regulations specify that participants must use food
stamps only to purchase food items from the retailers authorized by
FCS to accept food stamps.  Once they receive them, authorized
retailers are required to forward food stamps directly to financial
institutions for redemption.  However, numerous federal and state
officials told us that food stamps have essentially become a second
currency exchanged by some recipients for cash or non-food items. 
Trafficked food stamps may change hands several times, but all food
stamps must eventually flow through an authorized retailer because
only such a retailer can redeem food stamps for cash from the
government.  Numerous retailers are caught each year accepting food
stamps from recipients, giving them a discounted value of the stamps
in cash (for example, 70 cents on the dollar), and then redeeming the
stamps at full face value from the government. 

Data on the extent of trafficking between parties prior to reaching
authorized retailers are unavailable.  However, a 1995 FCS study\3

estimated that up to $815 million, or about 4 percent of the food
stamps issued, was exchanged for cash by authorized retailers during
fiscal year 1993.  The study found that supermarkets, where over
three-fourths of all food stamps are redeemed, have low trafficking
rates compared with other types of retailers.  The trafficking rate
reported for publicly owned supermarkets (i.e., a company whose stock
trades publicly) was less than 0.1 percent of food stamp redemptions,
and the rate reported for privately owned supermarkets was 2.6
percent.  By comparison, the trafficking rate for small, privately
owned food retailers and privately owned retailers that do not stock
a full line of food was 15.1 percent of the food stamps they
redeemed. 


--------------------
\2 Food Stamps:  Substantial Overpayments Result From Prisoners
Counted as Household Members (GAO/RCED-97-54, Mar.  10, 1997). 

\3 The Extent of Trafficking in the Food Stamp Program, U.S. 
Department of Agriculture, Food and Consumer Service, Aug.  19, 1995. 


   ROLES AND RESPONSIBILITIES OF
   THE FEDERAL AGENCIES IN
   MINIMIZING FRAUD, WASTE, AND
   ABUSE
---------------------------------------------------------- Chapter 0:2

The Food Stamp Program is administered by USDA's FCS in partnership
with the states.  FCS provides nationwide criteria for determining
who is eligible for assistance and the amount of benefits recipients
are entitled to receive.  The states are responsible for the
day-to-day operation of the program, including meeting with
applicants and determining their eligibility and benefit levels.  In
making these decisions, state caseworkers rely on documentation
provided by households and information obtained in interviews with
the applicants.  FCS is also responsible for authorizing retailers to
redeem food stamps as well as for monitoring program compliance by
the approximately 190,000 stores currently authorized to redeem food
stamps.  FCS and USDA's OIG are responsible for investigating
retailers suspected of violating program regulations.  The OIG
performs all the criminal investigations of the Food Stamp Program
conducted by USDA and coordinates investigative activities with other
federal agencies.  Others--such as the Federal Bureau of
Investigation (FBI), the U.S.  Postal Service, and the U.S.  Secret
Service--as well as the states assist in combatting fraud. 

The Food Stamp Program's Quality Control (QC) System is FCS' primary
tool for evaluating the states' performance in issuing benefits and
determining the level of overpayments.  Under the QC System, the
states must review a sample of their household cases each year to
determine the accuracy of the eligibility and benefit determinations
made by state caseworkers and the extent of payment errors--both
overpayments and underpayments.  FCS reviews a subsample of each
state's sample to ensure the accuracy of the states' efforts.  FCS
then determines the official error rate for each state and a national
error rate.  If an individual state's error rate exceeds the national
error rate, FCS can sanction the state by requiring it to reimburse
the federal government for a portion of the erroneous payments.  On
the other hand, states that have low error rates are eligible for
additional reimbursement from the federal government--referred to as
enhanced funding. 

According to USDA's data, overpayments in the Food Stamp Program have
declined since 1993.  At the national level, the overpayment error
rate has decreased from 8.27 percent in fiscal year 1993 to 6.92
percent in fiscal year 1996.  The 1996 overpayment error rate is the
lowest level ever achieved in the program.  Since 1995, FCS has
increased its emphasis on achieving payment accuracy and has employed
various initiatives to assist the states in reducing the number of
errors.  The Congress appropriated over $3 million for these
initiatives.  Specifically, FCS' activities include sponsoring
national, regional, and state conferences; providing direct technical
assistance to the states; and facilitating the exchange of state
information on effective strategies for determining accurate
payments.  As we reported in 1995,\4 while technical assistance and
related steps are undoubtedly useful, the single most critical factor
in reducing overpayments is the commitment of the managers of the
states' Food Stamp Programs to aggressively address the error rate
problem. 

Supplementing its efforts to help the states reduce errors, FCS has
implemented a new strategy for conducting its sanction activities. 
Historically, for a variety of reasons, the states with high error
rates paid little of the sanction penalties FCS imposed.  Beginning
in 1996, FCS reached agreement with some of these states regarding
more than $404 million in penalties owed for unacceptable error rates
that occurred in fiscal years 1992 through 1996.  FCS agreed to
reduce this penalty to $135 million and entered into settlement
agreements with these states that establish performance goals tied to
payment accuracy.  Of the $135 million sanction liability, the states
are required to invest almost $35 million in activities that directly
lead to the reduction of their error rates.  If a state meets its
performance goals as set out in the agreement, its share of the
remaining $100 million liability will be waived.  According to FCS,
as a result of these settlements, the states are more actively
engaged in activities to reduce errors, which should continue to have
a positive effect on improving payment accuracy. 

With respect to trafficking, our 1995 report stated that FCS'
controls and procedures for authorizing and monitoring the retailers
that participate in the Food Stamp Program did not deter or prevent
retailers from trafficking in food stamps.  Stores that did not meet
eligibility criteria were being admitted to the program because the
process for authorizing them was flawed.  The single most effective
deterrent to preventing ineligible retailers from being authorized is
a preauthorization on-site visit.  However, because of insufficient
time or resources, FCS made few visits before authorizing stores to
participate in the program.  Furthermore, FCS' monitoring process was
inadequate to detect authorized retailers that were violating program
regulations.  Reports on retailers' activities, such as total food
sales and food stamp redemptions, were often untimely or inaccurate
and of limited utility in identifying retailers' trafficking.  In
addition, we reported that FCS had only 46 investigators nationwide
to conduct investigations of retailers suspected of trafficking or
violating other program regulations. 

Since our report, FCS has initiated several actions to reduce
trafficking in the program.  For example, FCS has contracted with a
number of different companies to make 35,000 to 40,000 store visits
by the end of fiscal year 1998.  These visits will be made primarily
to new stores requesting approval to participate in the program and
to stores requesting reauthorization to participate in the program. 
In addition, FCS reports that it has improved its Store Tracking and
Redemption System by, for example, developing a profile that enables
FCS to better identify stores that may be trafficking in food stamps
or selling ineligible items.  The system also includes information on
sanctions taken against the stores that violate program regulations. 
The system is used to screen all new applications for participation
in the program in order to keep ineligible retailers from returning
to the program during a period in which they are disqualified.  The
system is also used to monitor stores' redemptions and to identify
retailers for investigation or other administrative actions.  For the
states using EBT systems, FCS has developed an automated system that
identifies transaction patterns in EBT data that indicate trafficking
violations. 

In addition to FCS' oversight activities, USDA's OIG investigates
retailers that illegally use food stamp benefits and coordinates its
investigative activities with other federal and state agencies.  For
example, the OIG is currently looking at food stamp trafficking with
state and local agencies in about 30 locations nationwide.  The OIG
has also taken an active role in monitoring and reviewing EBT systems
and developing the automated system to analyze EBT data to identify
fraud in the Food Stamp Program. 

Outside of USDA, a number of federal investigative agencies also play
a role in the process.  For example, the FBI investigates criminal
violations of USDA programs if the violation has involved bribery,
organized crime, or major fraud perpetrated by federal employees. 
The FBI focuses its investigations on links between food stamp
trafficking and other criminal activities under the Bureau's
jurisdiction, such as narcotics, terrorism, and white-collar crime. 
The U.S.  Postal Inspection Service has primary responsibility for
enforcing laws concerning property in the custody of the U.S.  Postal
Service.  The Postal Inspection Service's main investigative focus
for the Food Stamp Program is the theft of food stamps and EBT cards
from the Postal Service's custody prior to receipt by the food stamp
recipient.  Finally, the U.S.  Secret Service investigates food stamp
counterfeiting and makes recommendations on security measures
relating to EBT cards. 

States are responsible for investigating and prosecuting individuals
suspected of falsifying information in order to obtain food stamps
and misusing their food stamps--such as selling their stamps for
cash.  States sometimes work with FCS or USDA's OIG to investigate
retailers' fraud and abuse in the program.  In an effort to
supplement federal efforts to investigate retailers, FCS has used
State Law Enforcement Bureau agreements.  Under these agreements, FCS
provides the states with food stamp coupons to use in conducting
their own trafficking investigations.  FCS has established agreements
with 32 states, but only 10 states have conducted sustained efforts
against food stamp trafficking. 


--------------------
\4 Food Assistance:  Reducing Food Stamp Benefit Overpayments and
Trafficking (GAO/RCED-95-198, June 23, 1995). 


   OBSERVATIONS ON THE USE OF
   ELECTRONIC BENEFITS TRANSFER
   SYSTEMS
---------------------------------------------------------- Chapter 0:3

Food stamp benefits have historically been distributed in the form of
printed coupons.  In Reading, Pennsylvania, in 1984, however, FCS
piloted the use of an alternative delivery system--EBT.  Since this
pilot, there has been increasing interest in moving to EBT systems. 
Under such systems, recipients receive plastic debit cards to obtain
their food stamps and pay for purchases through point-of-sale
terminals installed at check-out counters in food stores.  At the
time of the purchase, recipients enter a personal identification
number.  The EBT computer then verifies that sufficient funds exist
in the recipient's food stamp account, debits the purchase amount
from the recipient's account, and credits it to the retailer's
account.  At the end of each business day, the authorized sales are
totaled and funds are transferred electronically to the retailer's
bank account.  Currently, 11 states have implemented EBT systems
statewide.  Eight of these states deliver multiple program benefits
with their EBT system, including other federal and state programs. 
Additionally, 16 states use EBT systems in selected counties.  All
the remaining states are in the process of implementing EBT systems. 
Collectively, EBT systems supply almost 20 percent of all food
stamps. 

By eliminating paper coupons that may be lost, sold without any
record of the sale, or stolen, EBT systems can help cut back on food
stamp fraud.  EBT systems reduce the likelihood of benefit theft.  Of
most importance, however, EBT systems create an electronic record of
each food stamp transaction, making it easier to identify and
document instances where food stamp benefits are trafficked.  EBT
data include the following information on each transaction:  the
exact time of day, the amount, the recipient's identity, the store's
identity, and the specific cash register in the store.  Reviewers can
use these data to identify suspicious transactions or transaction
patterns.  Since 1991, USDA's OIG has opened 234 cases involving food
stamp trafficking as a result of analyzing EBT data.  The stores
involved in these cases redeemed over $70 million in EBT food stamps,
of which the OIG identified over $27 million as being fraudulent. 

The August 1996 Welfare Reform Act explicitly states that EBT data
alone can be used as evidence to take action against retailers
violating the Food Stamp Act.  As a result, FCS can now use EBT data
to levy administrative sanctions against retailers caught
trafficking, such as permanently barring them from the program and
imposing fiscal penalties, without the expense of criminal
investigation and prosecution.  The legislation also mandated
nationwide implementation of EBT systems by October 1, 2002. 

While EBT systems make a major contribution to reducing certain
aspects of food stamp fraud, they will not eliminate all fraud.  Even
in states where EBT systems have been implemented statewide,
trafficking is still occurring.  In such cases, a store owner accepts
a card, gives the recipient a discounted value of the benefits in the
recipient's account in cash, then claims the full value of the
benefits from the government.  Furthermore, because EBT systems are
simply another vehicle for distributing benefits, they cannot correct
fraud, waste, and abuse that occurs during the process of determining
eligibility and benefit levels.  Unless better ways are found to
verify applicant-supplied information and to avoid errors made by
state caseworkers, individuals will continue to receive benefits to
which they are not entitled, regardless of whether these benefits are
distributed by coupon or EBT systems. 

In addition, moving to EBT systems is not without costs.  Substantial
investments must be made in computer systems, point-of-sale
terminals, and other hardware.  FCS reported that initially EBT
systems were more expensive to operate than conventional coupon
systems.  More recent estimates suggest that EBT systems have become
more cost competitive.  EBT costs are expected to continue to
diminish as the technology becomes more widely used. 

In any event, however, as we reported in 1994\5 and continue to
believe today, EBT systems will likely be most cost effective if they
are used to deliver food stamps in conjunction with other federal and
state assistance programs such as Temporary Assistance to Needy
Families and the Special Supplemental Nutrition Program for Women,
Infants and Children.  In this way, overhead costs can be spread
across a larger program volume and serve the purposes of multiple
programs. 


--------------------
\5 Food Assistance:  Potential Impacts of Alternative Systems for
Delivering Food Stamp Program Benefits (GAO/RCED-95-13, Dec.  16,
1994). 


-------------------------------------------------------- Chapter 0:3.1

Thank you again for the opportunity to appear before you today.  We
would be pleased to answer any questions you may have. 


*** End of document. ***