United StatesDepartment ofAgriculture

Office ofInspectorGeneral

No. 42

NOVEMBER 1999

Office ofInspector GeneralSemiannual Reportto CongressFY 1999—Second Half

www.usda.gov/oig

Report to theSecretary on Crop

Insurance Reform

Milk DealersPlead Guiltyto Conspiracy

Convicted in

Child Care

Fraud Scheme

Crop Insurance

Coverage for Pima

Cotton, Popcorn,

and Corn

Audit of CACFPFinds SeriousIrregularities

Sentenced forFood Stamp Fraud

Presidential Initiative:

Operation Kiddie Care

Thunderbird

Lodge Land

Exchange

On the cover: Increasingly, our work has captured the attention of the news media. For some of our most outstanding results, we haveissued news releases and participated in news conferences for the print and electronic media. On the cover are representative excerptsof headlines from releases issued during this reporting period, as well as titles from audit reports posted on our Internet site(www.usda.gov/oig), which is continually being updated. See the main text for summaries of such high-impact results we are discussingin this report.

The U.S. Department of Agriculture (USDA) prohibits discrimination in all its programs and activities on the basis of race, color, nationalorigin, gender, religion, age, disability, political beliefs, sexual orientation, and marital or family status. (Not all prohibited bases apply toall programs.) Persons with disabilities who require alternative means for communication of program information (Braille, large print,audiotape, etc.) should contact USDA’s TARGET Center at 202-720-2600 (voice and TDD).

To file a complaint of discrimination, write USDA, Director, Office of Civil Rights, Room 326-W, Whitten Building, 1400 IndependenceAvenue, SW, Washington, DC 20250-9410 or call (202) 720-5964 (voice or TDD). USDA is an equal opportunity provider and employer.

UNITED STATES DEPARTMENT OF AGRICULTURE

OFFICE OF INSPECTOR GENERAL

Washington D.C. 20250

October 21, 1999 The Honorable Dan Glickman Secretary of Agriculture Washington, D.C. 20250 Dear Mr. Secretary: I am pleased to submit the Office of Inspector General's Semiannual Report to Congress summarizing our activities for the 6-month period which ended September 30, 1999. During this period, our audits and investigations yielded approximately $42 million in recoveries, collections, restitutions, fines, claims established, and costs avoided. Further, management agreed to put nearly $107 million to better use. We also identified approximately $72 million in questioned costs that cannot be recovered. In addition, our investigations produced 208 indictments and 332 convictions. We are again reporting on several of our Presidential initiatives, one of them for the first time. OIG has begun a Presidential initiative to counteract smuggling of animals and plants which could endanger the Nation's food supply through the introduction of diseases and plant pests. The number of arrests during Operation Talon continues to climb, with notable results in Texas and Colorado. As an outgrowth of Operation "Kiddie Care," we are emphasizing the need for regulatory and legislative changes in the Child and Adult Care Food Program. I extend my continuing appreciation to you, the Deputy Secretary, and the Congress for your support in furthering our mutual efforts to improve the integrity and efficiency of the Department's programs and operations. Sincerely, (Signed) ROGER C. VIADERO Inspector General Enclosure

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Contents

PageExecutive Summary ............................................................................................................................................... 1Summaries of Audit and Investigative Activities ................................................................................................ 4Update of Presidential Initiatives

Initiative Against Smuggling ................................................................................................................................. 5Operation Talon ................................................................................................................................................... 5Operation “Kiddie Care” ....................................................................................................................................... 6

Farm and Foreign Agricultural ServicesFarm Service Agency .......................................................................................................................................... 9Risk Management Agency ................................................................................................................................... 12Foreign Agricultural Service ................................................................................................................................. 14

Food, Nutrition, and Consumer ServicesFood and Nutrition Service .................................................................................................................................. 15Food Stamp Program .......................................................................................................................................... 15Child Nutrition Programs ...................................................................................................................................... 19Special Supplemental Nutrition Program for Women, Infants, and Children ....................................................... 21

Food SafetyFood Safety and Inspection Service .................................................................................................................... 22

Marketing and Regulatory ProgramsAgricultural Marketing Service ............................................................................................................................. 24Animal and Plant Health Inspection Service ........................................................................................................ 24

Natural Resources and EnvironmentForest Service ...................................................................................................................................................... 26Natural Resources Conservation Service ............................................................................................................ 27

Rural DevelopmentRural Housing Service ......................................................................................................................................... 28Rural Utilities Service ........................................................................................................................................... 29Rural Business-Cooperative Service ................................................................................................................... 29

Financial, Administrative, and Information TechnologyFinancial Management ........................................................................................................................................ 31Information Technology ....................................................................................................................................... 33Administrative Operations .................................................................................................................................... 33Government Performance and Results Act ......................................................................................................... 34

Employee Integrity Investigations ........................................................................................................................ 36Statistical Data

Audits Without Management Decision ................................................................................................................. 37Indictments and Convictions ................................................................................................................................ 47The Office of Inspector General Hotline .............................................................................................................. 48Freedom of Information Act and Privacy Act Requests ....................................................................................... 49

Appendix I: Inventory of Audit Reports IssuedWith Questioned Costs and Loans .................................................................................................................. 50

Appendix II: Inventory of Audit Reports IssuedWith Recommendations That Funds Be Put to Better Use ............................................................................ 51

Appendix III: Summary of Audit Reports Released BetweenApril 1 and September 30, 1999 ........................................................................................................................ 52

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Executive Summary

This is the 42nd Semiannual Report of the Office ofInspector General (OIG), U.S. Department of Agriculture(USDA), pursuant to the provisions of the InspectorGeneral Act of 1978 (Public Law 95-452), as amended.This report covers the period April 1 throughSeptember 30, 1999.

In accordance with the requirements of the InspectorGeneral Act, this report describes matters relating to theDepartment’s programs and operations which occurredduring the reporting period. These include significantproblems, abuses, and deficiencies; significantrecommendations for corrective action; prior significantrecommendations unimplemented; prosecutorialreferrals; information or assistance refused; a list ofaudit reports; a summary of significant reports; tables onquestioned costs and funds to be put to better use;previous audit reports unresolved; significant revisedmanagement decisions; any significant managementdecision disagreements; and a review of legislation andregulations.

Monetary Results

During this reporting period, we issued 55 audit andevaluation reports and reached management decisionson 56. Based on this work, management officialsagreed to recover $10.9 million and to put an additional$106.8 million to better use.

We also issued 257 reports of investigation during thisperiod. Our investigative efforts resulted in208 indictments, 332 convictions, and approximately$31.5 million in recoveries, fines, restitutions, claimsestablished, and cost avoidance.

Ongoing Presidential Initiatives

We are again reporting on several of our Presidentialinitiatives, one of them for the first time. OIG has beguna Presidential initiative to counteract smuggling ofanimals and plants which could endanger the Nation’sfood supply through the introduction of diseases andplant pests. In one case in Washington State, aCanadian citizen pled guilty to smuggling 444 pounds ofprohibited Asian fruit into the United States.

The number of arrests during Operation Talon continuesto climb, with notable results in Texas and Colorado. Asof September 30, 1999, Operation Talon had resulted in4,801 arrests of fugitive felons during joint OIG/Stateand local law enforcement operations.

As an outgrowth of Operation “Kiddie Care,” we areemphasizing the need for regulatory and legislativechanges in the Child and Adult Care Food Program(CACFP). In our national audit report, we made23 recommendations to eliminate the structural programflaws, strengthen internal controls, and clarify programrequirements in CACFP. We also recommended thatalternative methods of delivery be studied.

Twenty sponsoring organizations receivingapproximately $42.3 million annually in food andadministrative funds have been terminated fromCACFP. Thirty-four individuals have pled guilty or wereconvicted, and 29 individuals were sentenced for theirillegal activities. Among those recently convicted afterinvestigation by OIG were the president and assistant ofa day care operation in Michigan. They were foundguilty of fraud, embezzlement, conspiracy, and moneylaundering related to defrauding CACFP of an estimated$17 million between 1989 and 1993. The jury alsoawarded forfeiture of more than $1.1 million in cash andthree properties.

Investigative Efforts

As reported last period, in a complex food stamptrafficking conspiracy involving 20 authorized stores inNew York City, food stamps worth $63 million werefraudulently redeemed by 44 defendants. In an updateto this case and as a result of the financial investigation,three bank officers were indicted.

Four cotton exporters participated in a conspiracy todefraud the Commodity Credit Corporation (CCC). Twocotton companies based in Texas pled guilty to variouscharges and were fined and ordered to pay restitutiontotaling $1,067,575. Two other companies based inTennessee have entered guilty pleas to similar criminalcharges, and their sentencings are pending.

A Pennsylvania dairy labeled and sold as “skim milk”more than 19 million pounds of a “reconstituted skimmilk” which had been made from skim milk powder andwater. The company filed false reports which resultedin a $1 million loss to the Milk Market Administrator.The three defendants, who were officers of thecompany, pled guilty to conspiring to misbrand milk withintent to defraud and mislead consumers, andincreasing the company’s profits by mislabeling thereconstituted skim milk. The officers were eachsentenced in U.S. District Court to 3 years’ probation,100 hours of community service, and a total fine of

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$5,250. The Government also has a pending civil suitagainst the company.

In Nevada, the relative of a former Farm ServiceAgency (FSA) County Executive Director (CED) wasawaiting sentencing after having been convicted by ajury in U.S. district court of receiving stolen property.However, a Federal judge subsequently granted thedefendant’s motion for a judgment of acquittal. TheU.S. Attorney for the District of Nevada is preparing anappeal of the judge’s decision. The former CED, whocommitted suicide upon learning of our investigation,embezzled over $1 million from CCC between May1992 and her death in October 1997.

In West Virginia, nine individuals, including twoemployees of the FSA Agricultural Credit Team, wereconvicted for defrauding the Government ofapproximately $2 million in FSA guaranteed loan funds.Eight of the nine individuals have been sentenced. Allseven loan recipients were ordered to make fullrestitution. The two FSA employees have resigned fromGovernment service.

Three Georgia farmers believed to be the mastermindsin a disaster fraud scheme that netted them and12 relatives and friends approximately $1.6 million inunentitled disaster payments have each pled guilty toone count of conspiracy to launder money.

Audit Efforts

We have found that reinsured companies were notproperly servicing catastrophic risk protection (CAT)policies. Our review showed that the program isallowing limited-resource producers who had coveragein the past to slip away from the program and farmwithout crop protection. Generally, we question whetherthe CAT Program is a viable means of protection tofarmers having catastrophic crop losses. We also foundthat the Risk Management Agency (RMA) did not takean active role in monitoring the transfer and servicing ofCAT Program policies, a continuing concern. Withoutimprovements in the CAT Program, producerparticipation will likely continue to decline, and theeffectiveness of the program as protection againstcatastrophic losses for producers, especially small andsocially disadvantaged farmers, will diminish further.

Since January 1999, OIG has attended regularmeetings on the implementation of the agreements toprovide food aid assistance to Russia and participatedon a U.S. Government Interagency Team Trip to Russiain May 1999 as an observer. We found that, in general,the Russian Government officials and other relatedparties appeared to be committed to ensuring theprogram was carried out properly, the staff of theAmerican Embassy was committed to providing thenecessary monitoring effort over the program, and agood working relationship had been establishedbetween the Foreign Agricultural Service (FAS) andEuropean Union staff in Moscow. We found someareas that need improvement and will provide feedbackon the Russian food aid program as it continues.

In 7 States, we found that 147 of 230 statisticallyselected Food Stamp Program participants whoseSocial Security number (SSN) appeared in more than1 State received food stamp benefits in more than1 State simultaneously. We projected that an estimated888 participants received excess food stamp benefitstotaling about $394,000. We also projected that anestimated 273 heads of household receivedapproximately $376,000 in improper benefits becausethey certified more than 1 household in more than1 State. The Food and Nutrition Service (FNS)concurred with our recommendations and findings andis conducting a study on the feasibility of establishing anationwide data base to prevent dual participation.

We found controls were not adequate to ensure thattransportation and export (T&E) shipments were exitingthe country as required or that agricultural productswere not diverted to U.S. markets en route to the portsof exit. We identified 199 T&E shipments, 11 percent ofthe shipments entering the country between April andNovember 1998, that could not be accounted for. Wefurther learned that, in certain instances when T&Eshipments arrive at the ports of exit, some truck driversfrequently hand the inspectors broken seals. In suchinstances, there is no guarantee that some of theproduct was not diverted to U.S. markets.

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Our review of the internal control structure at the Officeof the Chief Financial Officer’s National Finance Center(OCFO/NFC) in effect as of September 30, 1997,resulted in an adverse opinion. During fiscal year(FY) 1998, in response to our audit, OCFO/NFC begancomprehensive, time-phased corrective actions, whichwe assisted with and actively monitored. Based onimprovements, we issued a qualified opinion as ofSeptember 30, 1998, although some weaknessesremained.

Since 1992, we have reported on the many severe andlongstanding financial management problems within theDepartment. To aid in correcting these problems, theDepartment is implementing the Foundation FinancialInformation System (FFIS) to replace the CentralAccounting System (CAS) at OCFO/NFC. Our currentreview disclosed that several CAS weaknesses, andprior decisions by OCFO management to interfacemany of the OCFO/NFC “feeder” systems, haveresulted in substantial FFIS implementation problems.OCFO has made numerous and substantive changes to

correct the serious impediments to the effectiveimplementation of FFIS. However, much work remains,and it is important that identified deficiencies becorrected in a timely manner.

Year 2000 testing is essential to provide reasonableassurance that new or modified systems process datescorrectly and will not jeopardize an agency’s ability toperform core business operations after the millenniumchange. We found that not all of the agencies wereadequately documenting the system validation efforts orhaving Independent Verification and Validation (IV&V)reviews performed for each of the Departmental PrioritySystems. The Office of the Chief Information Officerpromptly reinstructed the agencies regarding theimportance of appropriately documenting all phases ofthe testing activities and required the agencies to, at aminimum, conduct an IV&V for each of theDepartmental Priority Systems. Additional actionsregarding data exchange agreements at NFC are still tobe provided.

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Summary of Audit Activities

Reports Issued ................................................................................................................................................. 55Audits Performed by OIG ............................................................................... 31Evaluations Performed by OIG ....................................................................... 15Audits Performed Under the Single Audit Act................................................. 4Audits Performed by Others ........................................................................... 5

Management Decisions MadeNumber of Reports ........................................................................................................................................ 56Number of Recommendations ....................................................................................................................... 348

Total Dollar Impact (Millions) .......................................................................................................................... $189.9Questioned/Unsupported Costs ............................................................................................. $83.1ab

Recommended for Recovery .......................................................................... $10.9Not Recommended for Recovery ................................................................... $72.2

Funds To Be Put to Better Use .............................................................................................. $106.8

aThese were the amounts the auditees agreed to at the time of management decision.bThe recoveries realized could change as the auditees implement the agreed-upon corrective action plan and seek recovery of amounts recordedas debts due the Department.

Summary of Investigative Activities

Reports Issued ................................................................................................................................................... 257Cases Opened ................................................................................................................................................... 311Cases Closed ..................................................................................................................................................... 302Cases Referred for Prosecution ......................................................................................................................... 197

Impact of InvestigationsIndictments .................................................................................................................................................... 208Convictions .................................................................................................................................................... 332Searches ........................................................................................................................................................ 114Arrests ........................................................................................................................................................... 1,170

Total Dollar Impact (Millions) .......................................................................................................................... $31.5Recoveries/Collections .......................................................................................................... $5.3c

Restitutions ............................................................................................................................ $12.0d

Fines ...................................................................................................................................... $4.6e

Claims Established ................................................................................................................ $2.5f

Cost Avoidance ...................................................................................................................... $7.1h

Administrative SanctionsEmployees ..................................................................................................................................................... 38Businesses/Persons ...................................................................................................................................... 1,575

aIncludes convictions and pretrial diversions. Also, the period of time to obtain court action on an indictment varies widely; therefore, the 332 convictions do not necessarily relate to the 208 indictments.bIncludes 947 Operation Talon arrests and 223 arrests not related to Operation Talon.cIncludes money received by USDA or other Government agencies as a result of OIG investigations.dRestitutions are court-ordered repayments of money lost through a crime or program abuse.eFines are court-ordered penalties.fClaims established are agency demands for repayment of USDA benefits.gThis category consists of loans or benefits not granted as the result of an OIG investigation.

a

b

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Update of Presidential Initiatives

We are again reporting on several of our Presidentialinitiatives, one of them for the first time. OIG has beguna Presidential initiative to counteract smuggling ofanimals and plants which could endanger the Nation’sfood supply through the introduction of diseases andplant pests. The number of arrests during OperationTalon continues to climb, with notable results in Texasand Colorado. As an outgrowth of Operation “KiddieCare,” we are emphasizing the need for regulatory andlegislative changes in the Child and Adult Care FoodProgram (CACFP).

New Presidential Initiative To CounterAnimal and Plant Smuggling

OIG has begun a Presidential initiative to counteractsmuggling of animals and plants. Smuggling orshipment through deceit of produce, plants, animals,and birds is an increasingly serious problem toAmerican agriculture because of the pests and diseasesinadvertently introduced. Such illegal activities can costbillions of dollars in destroyed crops, underminedagricultural markets, and lost jobs. Pests and diseasesthat threaten the United States through smuggling ormislabeling include insect pests (Mediterranean fruit fly,oriental fruit fly), livestock diseases (bovine spongiformencephalopathy and brucellosis), avian and plantdiseases, and noxious weeds.

In one case in Washington State, a Canadian citizenpled guilty to smuggling prohibited fruit into the UnitedStates. The individual had been stopped at the Lynden,Washington, port of entry. During a search of hisvehicle, 444 pounds of prohibited Asian fruit (primarilymangosteens, sugar apples, rambutan, and langsat)were discovered hidden in the cargo area of his stationwagon as well as inside the walls of the cargo area. Hewas subsequently indicted by a Federal grand jury, andan arrest warrant was issued. A few months later, hewas arrested when he attempted to enter the UnitedStates at the Sumas, Washington, border crossing. Atthe time of his arrest, he had three cases of prohibitedlongans and lychees in his car. We worked this casewith assistance from the Animal and Plant HealthInspection Service and U.S. Customs inspectors.

Arrests Continue To Climb in Operation Talon

Operation Talon was designed and implemented byOIG to locate and apprehend fugitives, many of themviolent offenders, who are current or former food stamprecipients. As of September 30, 1999, Operation Talonhad resulted in 4,801 arrests of fugitive felons duringjoint OIG/State and local law enforcement operations.Figure 1 highlights overall results as of September 30,1999.

Figure 1Operation Talon - Total for All Phases

Offense Total Arrests Offense Total Arrests

Murder 20 Kidnapping 1,188

Attempted Murder 13 Assault 1,264

Child Molestation 24 Robbery 1,136

Rape 11 Drugs 1,187

Attempted Rape 2 Other 3,136

Total Arrests: 4,801

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In specific results, OIG agents, along with Texas Stateand local law enforcement officers, arrested a total of333 fugitives in a separate phase of Operation Talondubbed “Waltz Across Texas.” During this phase,12 different Texas counties were identified by OIG.The law enforcement felony fugitive files in thesecounties were matched with the Texas Department ofHuman Services’ food stamp recipient records, whichresulted in the location and apprehension of thesefugitives. The matching of records began in April 1999,culminating with arrests through July 1999. The TexasDepartment of Human Services OIG providedinvaluable assistance in this operation.

Operation Talon was also successfully conducted inDenver, Colorado, and the counties located in the “FrontRange” of Colorado, which resulted in the arrest of111 fugitive felons and 120 felony warrants cleared.

Operation “Kiddie Care” Finds UnscrupulousSponsors, Inherent Flaws in CACFP

Operation “Kiddie Care,” our Presidential Initiative toidentify, remove, and prosecute unscrupulous CACFPsponsoring organizations (sponsors), continues to besuccessful. The focus of the Operation is now onimproving program delivery and oversight. After aninterim report on Operation “Kiddie Care” was issued onApril 22, 1998, a formal audit report was issued inAugust 1999, urging needed regulatory and legislativechanges to CACFP. Operation “Kiddie Care” willprobably continue through at least September 2000.Meanwhile, the cases of serious deficiencies andcriminal activities continue to mount.

• To date, we have identified 40 sponsors withprogram deficiencies so serious that they should beterminated from CACFP if they fail to correct theshortcomings. These 40 sponsors have beenreceiving approximately $78.6 million annually in foodand administrative funds.

• There are now 38 active investigations of individualsand sponsors of CACFP.

• Twenty sponsors receiving approximately$42.3 million annually in food and administrativefunds have been terminated from CACFP.

• Fifty-four individuals have been charged with crimes.Thirty-four individuals have pled guilty or wereconvicted, and 29 individuals were sentenced fortheir illegal activities.

Among those recently convicted were the president andassistant of a day care operation in Michigan, and theowners of a sponsorship in California. In the Michigancase, the operation’s president (a former Detroit schoolboard member and an attorney) and her assistant werefound guilty of fraud, embezzlement, conspiracy, andmoney laundering related to defrauding CACFP of anestimated $17 million between 1989 and 1993. The juryalso awarded forfeiture of more than $1.1 million in cashand three properties. The operation employed inflatedmeal-count sheets and falsified supportingdocumentation. Sentencing is pending. While theinvestigation began prior to the start of Operation“Kiddie Care,” the results are indicative of the types andmagnitude of problems in CACFP.

In the California case, the executive director andassistant executive director of the sponsoringorganization were convicted by a jury in U.S. DistrictCourt of mail fraud for illegally obtaining in excess of$85,000 in CACFP funds. Our investigation disclosedthat the subjects concealed their ownership of an officebuilding in order to claim unauthorized rental expenses,claimed unauthorized maintenance costs, and inflatedother administrative expenses while operating theircompany. Their organization sponsored nearly 1,000day care centers in the San Diego area. Sentencing ispending.

We believe our findings demonstrate a need fordramatic changes in CACFP. In our National Report onProgram Abuses in CACFP, we concluded thatfundamental flaws exist in the current design of theprogram’s delivery system.

• The system encourages sponsors to seek newproviders at the expense of integrity. The moreproviders a sponsor has, the more costs forreimbursement it can claim. This creates competitionamong sponsors for providers and discouragessponsors from enforcing the CACFP requirements.

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• Sponsors are not required to maintain a reasonableratio of monitors to providers. The fewer monitors asponsor has, the more of its limited administrativereimbursements it can spend on executive salariesand benefits.

• Some States allow sponsors of day care centers toretain food money (up to 30 percent ofreimbursements) to pay for administrative costs.There is no clear provision in the regulationsspecifying how administrative costs of thesesponsors should be reimbursed. (By contrast, costsfor administering day care homes are paid directly tosponsors and are separate from the homes’ foodreimbursement.) Thus, sponsors were able to retainsubstantial funds that in many cases directlycontributed to the personal enrichment of theirofficers.

We also questioned the oversight that States wereproviding to the sponsors. We found that the CaliforniaState agency did not complete all required audits ofsponsors on time, and managers routinely left auditsunassigned. Since FY 1994-1995, the number ofuncompleted audits has steadily grown, rising to77 percent of the total required audits in FY 1996-1997.

Completed audits, including those performed by CPA’sunder contract, exhibited various deficiencies in theaudit process. We recommended that FNS requireCalifornia to implement a system to ensure audits arecompleted and discrepancies resolved in a timelymanner. California should also implement a qualitycontrol process to ensure that Government auditingstandards are met.

In terms of general oversight, we concluded that FNSneeded to better codify its CACFP requirements. Stateagencies and sponsors alike generally did notunderstand all that was required of the sponsors toadminister the program, leading to some seriousdeficiencies and many questionable claims.

In our national audit report, we made 23 recommen-dations to eliminate the structural program flaws,strengthen internal controls, and clarify programrequirements in CACFP. In addition to such a redesign,we also recommended that FNS study alternativemethods of delivering a meal program to children andadults in day care, specifically one that addresses theproblems with private, nonprofit sponsors.

Figure 2 shows the status, as of September 30, 1999, ofour investigations of sponsors and providers.

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Figure 2Status of Investigations of Sponsors and Providers as of September 30, 1999

Individuals IndividualsSponsors Indicted or Who Pled

Audits Terminated Named in a Guilty orInvestigations Audits in From the Criminal Were Individuals

State 1 in Progress Completed Progress Program Information 2 Convicted Sentenced

Alabama 1

Arizona 1 2 1 1 1

Arkansas 1

California 8 9 5 19 13 13

Colorado 1 1

Florida 2 1 1

Idaho 1 1 1 1 1

Illinois 3

Louisiana 2 2 1

Maine 1 1

Michigan 1 1 2 1

Mississippi 1

Missouri 1

Nevada 1

New Mexico 6 1 8 1 1

New York 3 1 1 1 1 1 1

NorthCarolina 1

Ohio 2 1 1 12 10 10

Oregon 1 1

Pennsylvania 3 1 2 13 13

Tennessee 3 2 3 1 1

Texas 1

Utah 1 2 1 4 1

Washington 2 1 1 2 3 1

Wisconsin 1 2 1

TOTALS 38 321 4 20 54 34 291Four audit surveys were also performed in Arkansas, Illinois, and Indiana, but the findings did not warrant audit reports.2An information is a formal accusation of a crime made by a prosecuting officer, as differentiated from an indictment by a grand jury.3The subject died before sentencing, and the conviction was dismissed.

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Farm and Foreign Agricultural Services

FARM SERVICE AGENCY (FSA)

The Omnibus Consolidated and SupplementalEmergency Appropriations Act for FY 1999 (Public Law105-277) included $2.4 billion for the Agricultural CreditInsurance Fund Program Account, as well as asupplemental $3 billion for market loss assistance,$2.4 million for crop losses, and hundreds of millions ofdollars for other help. The Commodity CreditCorporation (CCC), a Government corporation, funds allother program operations with estimated expendituresof $8.4 billion.

Potential Problems Identified in Implementation ofthe Crop Loss Disaster Assistance Program(CLDAP)

We have continued our efforts in monitoring CLDAP andworking with FSA and the Risk Management Agency(RMA) in its implementation. During this phase of ourreview, we discussed with officials of both agencies thefollowing areas that needed immediate attention:(1) conversion of RMA’s production count from a dollaramount to a measurable unit for certain crops;(2) establishment of FSA State office crop yields, rates,and factors; (3) improvement of outreach efforts in someStates; (4) processing disputed records; (5) establish-ment of maximum-loss levels; and (6) FSA county officeconcerns about the reliability of RMA crop insurancedata. In addition, in the FSA county offices where ourreviews were performed, we provided FSA with updateson the workload resulting from CLDAP. As a result ofthese discussions, the agencies were able to maketimely program modifications and reduce or precludeimproper program payments.

FSA and RMA agreed with our recommendation todevelop and implement procedures and regulations thatrequire them to resolve cases where crop insurancerecords are materially different from production recordsmaintained by FSA. We are now summarizing ourfieldwork on the implementation and compliance phasesand coordinating with FSA’s compliance staff to avoidduplicative efforts.

Catfish Producers in Louisiana Submitted FalseInformation To Obtain Disaster Assistance UnderCLDAP

At the request of the Louisiana FSA State office, wereviewed claims for catfish losses at one parish office

and found that four of the five producers we reviewedhad submitted false or highly questionable informationabout 1998 crop-year losses. Consequently, programpayments of $223,300 were not disbursed by FSA. Wealso questioned the maximum-loss level established byanother parish office because it did not follow properprocedures in setting the rate and the level was notconsistent with surrounding parishes. In response tothe audit, that parish office changed the level to anamount we considered reasonable.

Based on our findings, projected payments were notissued, and no further action is required. Also, thecounty committees at these offices were reconsideringthe maximum-loss levels they had previously set. TheLouisiana FSA State office agreed with our findings andrecommendations.

Noninsured Crop Disaster Assistance Program(NAP) Loss Verifications and Controls OverPayments Inadequate

We reviewed NAP operations in California, Oklahoma,Florida, and Georgia, sampling 98 payments totalingabout $2.4 million. We found that the reportedproduction used to determine claims for losses wassubmitted long after reported losses occurred and theextent of disaster loss was not, or could not be, verifiedby FSA because FSA did not, or could not, verifyharvested production sold to vendors. Also, informationused to verify harvested production for forage could notbe verified.

Underreported production and misrepresentations ofgrazing resulted in excessive payments totaling$89,500. Further, program payments were computedmanually, contributing to the high payment error rate of32 percent, on 31 of 98 payments. The county officeerrors resulted in overpayments of more than $200,000which were forgiven under the finality rule.

We recommended that FSA make field crop appraisalsfor fruits and vegetables when the method of marketingwould prevent the verification of all production. We alsorecommended that the system of determining forageproduction be improved to allow verification of theelements used to determine the extent of the disasterloss. In addition, we recommended that FSA issuespot-check procedures which include a verification ofreported marketed production and that a computerizedsystem for computing payments be developed toprevent such a high rate of payment errors.

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FSA has taken action to collect the overpayments ifrelief was not granted under appropriate reliefprovisions. Procedures revised since our audit shouldimprove the verification of losses, and new spot-checkrequirements have been put in place for verification ofproduction. FSA also agreed that a computerizedpayment system was needed and has taken action toimplement the corrective action.

Nearly One-Quarter of the Commodity LoansChecked in One State Were Not Properly Secured

CCC is required to support the price of variouscommodities through loans to producers withcommodities offered as collateral. We found that 16 ofthe 70 loans we reviewed were short on collateral orsecured by collateral which was either out of conditionor in danger of becoming so due to storage problems,which affected $763,000 in collateral. We found1 county office failed to take action on 13 spot checksthat disclosed over 42,000 bushels of missing collateralvalued at over $143,000. The county also failed to takeaction against borrowers on 23 loans where theborrowers had removed loan collateral totaling$298,000 without prior authorization. The county officefailed to make all required spot checks but submittedreports to the State office which showed that all spotchecks had been made. Our audit also disclosed that,in cases where unauthorized removals of collateral orother program violations were committed by countyoffice committee members, FSA had no proceduresrequiring referral to the State committee.

We recommended that all cases involving programviolations by county office committee members bereferred to the State Committee for a decision, theapplicable handbook be amended to conform withregulations, loan principal and liquidated damagestotaling over $520,000 from producers with collateralshortages identified in our spot checks be collected bythe Minnesota State office, decisions be properlydocumented, and monitoring over spot checks beincreased. The FSA national office agreed with ourrecommendations and has begun implementingcorrective actions. The Minnesota State office agreedwith certain recommendations but disagreed with theneed to implement some controls. The committees inthe counties we audited waived the additional liquidateddamages which we recommended they collect fromproducers who violated their loan agreements; however,the committees have been instructed by the State officeto review these decisions by December 31, 1999.

Livestock Assistance Program (LAP) ImplementedWithout Problems

Under Public Law 105-277, $200 million wasappropriated for LAP to provide direct payments toeligible livestock owners who suffered grazing lossesdue to natural disaster conditions during calendar year1998. Our evaluation revealed that FSA implementedLAP in Georgia, Montana, Nebraska, Oklahoma, andTexas without appreciable problems relating to countyoffice or producer eligibility, program determinations,and/or the accuracy of payments. However, weidentified two applicants in Georgia who exceeded the$2.5 million maximum gross revenue limitation andcould have received LAP payments totaling about$14,500. The State office agreed that the twoapplicants were ineligible for LAP assistance andreminded all county offices to ensure applicants do notexceed the gross revenue limitation. There were norecommendations to the agency.

Farm Loan Program Loanmaking and Loan-Servicing Actions Violate New Provisions

FSA did not implement adequate controls to ensureloans were processed and servicing actions completedin accordance with the Federal Agriculture Improvementand Reform (FAIR) Act of 1996. We identified24 borrowers who had prior debt forgiveness and thenreceived direct and guaranteed loans totaling$4.1 million after April 4, 1996, when the new statutewent into effect.

We questioned the propriety of additional loans totaling$20.1 million made to 196 borrowers. However, theirloan application dates were not recorded in the database, so agency officials will have to review each loanfile to determine whether the application was filedbefore April 4, 1996. Further, FSA had canceled$1.2 million through debt settlement for three Texasborrowers who had previously received debtforgiveness of Farm Loan Program loans.

We recommended FSA collect the $4.1 million inunauthorized assistance and determine the propriety ofthe $20.1 million in question. We also recommendedthat FSA refer the three loan-servicing cases to theOffice of the General Counsel (OGC) for an opinion onthe collectability of the $1.2 million in unauthorizedassistance. Further, we recommended that FSAimplement controls which will ensure loanmaking andloan-servicing actions are processed in compliance with

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current provisions. The agency agreed to recover theunauthorized loan assistance and implement computercontrols to prevent further unauthorized assistance.

Producer Payments Not Always Offset AgainstOutstanding Debt

We tested the application of administrative offsetprovisions in four Texas counties to determine whetherdebts had been properly collected from FY 1998 FSAprogram payments. Ten producers (24 percent)received over $87,000 (43 percent) in payments thatshould have been offset. Of those, six receivedpayments totaling over $23,000 that were not offsetbecause of communication problems in county offices,and four received payments totaling over $64,000 thatwere not offset because of administrative oversightproblems.

We recommended that (1) county offices be instructedto offset future FSA program payments to the10 producers until their claims are liquidated or loanaccounts become current, (2) an administrative noticebe issued to require an updated administrative offset listbe provided to FSA county offices on a periodic basis,(3) district directors be required to make reviews to helpensure payments due debtors are properly offset, and(4) the Texas State office be instructed to request OGCto review 1 case (in bankruptcy) to determine if futureprogram payments may be offset. The agency agreedwith our recommendations. Action has been taken toliquidate most of the claims; alternatively, the loanamounts are now current because the loans wererestructured. In one case, corrective action was nottaken based on advice from OGC.

Million Dollar Embezzlement From FSA CountyOffice

In Nevada, the relative of a former FSA CountyExecutive Director (CED) was awaiting sentencing afterhaving been convicted by a jury in U.S. district court ofreceiving stolen property. However, a Federal judgesubsequently granted the defendant’s motion for ajudgment of acquittal. The U.S. Attorney for the Districtof Nevada is preparing an appeal of the judge’sdecision. The former CED, who committed suicideupon learning of our investigation, embezzled over$1 million from CCC between May 1992 and her deathin October 1997. Most of the embezzled funds were

routed through a bank account which the former CEDestablished under the guise of an official FSA account.The former CED diverted funds, supposedly provided tolocal producers, into the unauthorized account andsubsequently transferred the monies into other bankaccounts which she and/or her relative controlled. Thisinvestigation was conducted jointly with the FederalBureau of Investigation (FBI).

Farmer Caught Substituting Cattle

A Texas farmer was sentenced to 3 years’ probationwith 6 months’ home confinement and ordered to pay$33,000 in restitution. The farmer initially received a$196,000 FSA guaranteed loan for the purchase ofdairy cattle and operating expenses during March 1995and defaulted on the loan during December 1995. Thedairy herd, which had been purchased during March for$1,250 per head, was liquidated during October 1995for an average of $271 per head. Investigation showedthat, just prior to the liquidation, the farmer substituted“cull” (inferior quality) cows for his good ones.

Arkansas Sheriff and Banker Indicted for LoanFraud

A current Arkansas county sheriff and a bank presidentwere indicted in Federal court for making falsestatements with regard to a $121,000 FSA emergencyfarm operating loan made to the sheriff to pay debtsowed the bank and to raise a 1996 crop. Theinvestigation disclosed that the sheriff did not grow acrop after the FSA loan was disbursed and used about$44,000 of the loan to pay personal debts. Also, theapproval of the FSA loan was based on a writtenstatement from the bank president that the bank wasgoing to make a loan to the sheriff, which did not occur.The sheriff pled guilty and awaits sentencing, while atrial date for the banker is pending. This investigationwas worked jointly with the FBI.

Texas Farmer Pleads Guilty to Conversion ofMortgaged Property

A Texas farmer pled guilty in Federal court to a chargeof unauthorized conversion of mortgaged property. Hewas placed on 3 years’ probation and ordered to makerestitution of nearly $40,000. The investigation showedthat the farmer unlawfully disposed of about $149,000 inFSA-mortgaged property.

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Four Companies Guilty of Violating the UplandCotton Domestic User/Exporter Program

Four cotton exporters participated in a conspiracy todefraud CCC. Two cotton companies based inLubbock, Texas, pled guilty to charges of making falsestatements and claims, mail and wire fraud, and moneylaundering. Both companies were fined and ordered topay restitution totaling $1,067,575. Two cottoncompanies based in Memphis, Tennessee, haveentered guilty pleas to similar criminal charges, andtheir sentencings are pending.

Three Georgia Farmers Plead Guilty to $1.6 MillionDisaster Program Fraud

Three Mitchell County, Georgia, farmers believed to bethe masterminds in a disaster fraud scheme that nettedthem and 12 relatives and friends approximately$1.6 million in unentitled disaster payments have eachpled guilty to one count of conspiracy to launder money.The defendants filed fraudulent claims to receive FSAdisaster payments for themselves and the others andsubmitted fictitious seed invoices to support thefraudulent claims.

NINE INDIVIDUALS CONVICTED IN FARM LOAN SCHEMENINE INDIVIDUALS CONVICTED IN FARM LOAN SCHEME

In West Virginia, nine individuals, including twoemployees of the FSA Agricultural Credit Team, wereconvicted for defrauding the Government ofapproximately $2 million in FSA guaranteed loan funds.The loans were obligated by FSA based on falseinformation submitted by the applicants. The twoemployees of the Agricultural Credit Team assisted theloan applicants by forging signatures and/ormanipulating figures on official FSA documents for thepurpose of making the applicants qualify for loans.Eight of the nine individuals have been sentenced. Allseven loan recipients were ordered to make fullrestitution. The two FSA employees have resigned fromGovernment service.

Farmer Pleads Guilty to Making False Statements

A Missouri farmer pled guilty to making false statementsto FSA as a result of his efforts to evade paymentlimitation provisions. The farmer alleged to FSA that hewas actively farming when, in fact, he was not. Hefalsified FSA documents on his behalf and on behalf ofa relative, without the relative’s knowledge, in order toillegally obtain disaster and deficiency payments. As a

result, the subject and his relative received more than$112,400 in unentitled 1993 and 1994 programpayments. The subject had the payments assigned tothe landowner. Sentencing is pending. Theinvestigation against other involved persons continues.

RISK MANAGEMENT AGENCY (RMA)

RMA supervises the Federal Crop InsuranceCorporation (FCIC) and oversees all programsauthorized under the Federal Crop Insurance Act. FCICis a wholly owned Government corporation that offerssubsidized multiple-peril and revenue crop insurancethrough a private delivery system by means of reinsuredcompanies. RMA’s FY 2000 program income, lessunderwriting gains, is estimated at $1.6 billion inpremiums (of which about $872 million is in the form ofpremium subsidy) and $1.8 billion in indemnities.

Reinsured Companies Were Not Properly ServicingCAT Policies

The FAIR Act authorized the Secretary to transfer CATcoverage from FSA offices to private insurancecompanies. Our review showed that the program isallowing limited-resource producers who had coveragein the past to slip away from the program and farmwithout crop protection. The participation of limited-resource farmers declined about 78 percent in just ayear, between 1997 and 1998, or the same period whenreinsured companies assumed sole delivery of the CATProgram. Of limited-resource producers who droppedfrom the program, over half of those still eligible forcoverage had received inadequate servicing by thereinsured companies. Producers remaining in theprogram tended to be those with larger acreages whocould contribute more per policy to the reinsuredcompanies’ underwriting gains.

Generally, we question whether the CAT Program is aviable means of protection to farmers havingcatastrophic crop losses. Within our 8-State universe of84,028 CAT Program policies, we estimate that onlyabout 42,000 of the transferred policies were retainedby the private reinsured companies. Despite shrinkingenrollment, it cost over $2 to deliver the CAT Programfor every $1 paid out to producers for crop losses($506 million versus $250 million) from 1995 through1998.

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We also found that RMA did not take an active role inmonitoring the transfer and servicing of CAT Programpolicies, a continuing concern. RMA has not addresseddeficiencies reported since 1997, despite assurancesthat it would. In June 1998, we further reported in amanagement alert that reinsured companies were notproviding any special servicing to limited-resourceproducers and that RMA had not provided any guidanceto the companies on how to service the limited-resourceproducers who were flagged during the transferprocess. Again, RMA did not take any action to addressthe servicing of the limited-resource producers.

Without improvements in the CAT Program, producerparticipation will likely continue to decline, and theeffectiveness of the program as protection againstcatastrophic losses for producers, especially small andsocially disadvantaged farmers, will diminish further.We recommended that RMA concentrate its efforts onimproving the CAT Program policies, consider analternative CAT Program delivery system (with limited-resource producers to be provided special servicing inthe interim), and follow up as recommended to helpensure that assigned tasks, such as the transfer of theCAT policies, are accomplished properly.

RMA does not agree with OIG regarding the reasonscited for the dropoff rate of limited-resource producers.RMA stated that while instances of substandard servicemay have occurred, the quality of servicing CAT policiesby reinsured companies was not the primary factor inthe reduction of participation. Therefore, instead ofrequiring special servicing by the reinsured companies,RMA has asked Congress for authority to develop aprogram that might better meet the producers’ needs,but Congress has not provided this authority.Furthermore, RMA stated that the reinsured companieshad made efforts to service these individuals, and thatother actions by RMA, such as conducting outreachprograms and monitoring CAT servicing, addressed ourrecommendations.

Large Insurance Indemnities Paid on NoninsurablePotatoes

Based on a complaint, we initiated an audit of allegedabuse of crop insurance on potatoes by a producer inGaines County, Texas. We found evidence that theseed varieties purchased from a firm in North Dakotaused by the insured were not of the type adaptable toproduce a crop in the Gaines County area of Texas, inviolation of policy provisions. Therefore, we questioned

almost $616,000 of the indemnity payment of over$771,000 on 380 of the 490 acres planted in 1998.Based on historical losses on this farm, indications oflow-quality potato seed used, and a questionably highinsurance payment price, the claim also raised thequestion of whether the insured planted the potatoesonly for the insurance indemnity.

We recommended that RMA collect about $616,000 inoverpayments, determine whether insurance coverageshould be terminated based on the prior years’ losses,and establish controls to ensure that insurancecoverage for potatoes is limited to the acreage plantedwith a variety adapted to the area where planted. RMAhas taken actions to obtain recovery of theoverpayment. RMA also agreed to take action toimplement the other recommendations or provide uswith alternative solutions for correcting the problem.

Questionable Crop Insurance Coverage for ThreeNonirrigated Crops In Texas

A hotline complaint alleged that crop-year 1998transitional yields (T-yields), which are based onhistorical averages, for nonirrigated pima cotton inReagan, Glasscock, Midland, and Upton Counties,Texas, were overstated, resulting in program abuse andfinancial losses to the Government. We expanded thescope of our review to include nonirrigated practices forcorn in Tom Green County, Texas, and popcorn in theRio Grande Valley in Texas.

We found that the viability of raising these crops withoutirrigation is questionable and that RMA had establishedcrop insurance yields and rates significantly higher thancould be expected from harvesting the crops, leading toproducers without past production histories “farming theinsurance program.” In August 1998, we issued RMA amanagement alert, pointing out that we agreed withRMA regional service officials that nonirrigatedinsurance coverage for these crops in the threeaforementioned areas of Texas should be terminated.RMA agreed to do so, starting with the 1999 crop year,which would result in about $20 million in savings in1999 if all 1998 conditions remained the same.

We recommended that RMA use information fromestablished sources to set reasonable T-yields,document actuarial files to show how T-yields aredetermined, eliminate the 10-percent cap provision forT-yields RMA incorrectly established, and formulate afeedback mechanism for the reinsured companies to

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provide input on the reasonableness and viability ofnewly created rates and yields for crops/practices notpreviously produced in an area. We have reachedmanagement decision on these recommendations.

Cooperative Pays $850,000 To Settle Claim

A California agricultural cooperative paid over $850,000to the Government to settle a claim by RMA/FCICregarding 1994 raisin crop insurance indemnitypayments. The Government alleged that in 1994 thecooperative and 48 of its members and growerswrongfully represented that certain raisins could not bereconditioned due to rain damage. Based on thisrepresentation, the members/producers receivedindemnity insurance payments for the raisins whichwere, in fact, reconditioned and sold. Later in the year,the cooperative shared dividends with the members/producers based, in part, on the proceeds from the saleof the reconditioned raisins.

FOREIGN AGRICULTURAL SERVICE (FAS)

FAS represents the interest of U.S. farmers and thefood and agricultural sector abroad. Most notably, itseeks improved market access for U.S. products,carries out food aid and market-related technicalassistance programs, and mobilizes expertise foragriculturally led economic growth in developingnations.

Observations on the Implementation of the RussianFood Aid Agreements

In December 1998, the United States and the RussianFederation signed agreements for USDA to providefood aid assistance to Russia, totaling several millionmetric tons of commodities. Since January 1999, OIGhas attended regular meetings led by FAS on theimplementation of the agreements and participated on aU.S. Government Interagency Team Trip to Russia inMay 1999 as an observer. The itinerary, established byFAS, limited the scope of our activities. Nonetheless,we found that, in general, the Russian Governmentofficials and other related parties appeared to becommitted to ensuring the program was carried outproperly, the staff of the American Embassy wascommitted to providing the necessary monitoring effortover the program, and a good working relationship hadbeen established between FAS and European Union(EU) staff in Moscow.

Our trip report stated that the Moscow Bilateral WorkingGroup needed to better document the information itused to make decisions as well as to follow up, andbetter define, coordinate, and document assistance inmonitoring the food aid effort received from otherRussian Ministries and EU Moscow representatives. Inaddition, FAS needed to ensure that changes to fooddistribution plans were controlled; verify its trackingreports contain clear, complete, and accurateinformation; determine the specific level of shipmentmonitoring acceptable; and confirm local Russian mediarepresentatives were aware that food distributioninformation was available on the Internet. We willprovide feedback to FAS on the Russian food aidprogram as it continues.

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Food, Nutrition, and Consumer Services

FOOD AND NUTRITION SERVICE (FNS)

FNS administers the Department’s food assistanceprograms, which include the Food Stamp Program(FSP); the Child Nutrition Programs (CNP); the SpecialSupplemental Nutrition Program for Women, Infants,and Children (WIC); and the Food Donation Programs.These programs are designed to provide people in needwith a more nutritious diet, improve the eating habits ofthe Nation’s children, and stabilize farm prices throughthe purchase and distribution of surplus food. FNS’funding for FY 1999 is $35 billion. Three FNS programsreceive the bulk of this funding: FSP ($21 billion), CNP($9 billion), and WIC ($4 billion).

FOOD STAMP PROGRAM

Monitoring of Electronic Benefits Transfer (EBT)System Continues

Currently, 40 States and the District of Columbia useEBT systems to deliver food stamp benefits. Thirty-fourof the systems have been implemented statewide,including the District of Columbia. About 67 percent ofall FSP benefits are being issued via EBT. During thissemiannual period, we completed EBT system auditwork in Oregon, Colorado, Missouri, and Minnesota.The EBT systems were successfully implemented in allfour States; however, controls needed to bestrengthened in some areas.

• Oregon - The State agency had not performedreconciliations to ensure that food stampauthorizations matched the food stamp settlementdata with the Account Management Agent data at theFederal Reserve, resulting in a difference of$2.3 million. We also noted an inadequateseparation of duties for persons authorized toapprove food stamp benefits and those authorizedto issue EBT cards. We recommended that the$2.3 million difference be reconciled and thatprocedures ensure separation of duties.

• Colorado - A State issuance system error caused anestimated $730,000 in food stamp benefits to beissued to about 10,000 ineligible individuals.Controls were not in place to correct the erroneousbenefit file that had been transmitted to thecontractor. Also, the State agency was not timely inexpunging food stamp benefits that had not been

accessed within the allotted timeframes. The Stateagency had developed neither an EBT securitymanual nor an administrative procedure manual, andthe State agency needed to strengthen controls overaccess to the EBT system. We recommended thatFNS require the State agency to (1) continue workingto establish procedures which would allow the Stateagency to delete or correct a benefit file if it containedincorrect data and was transmitted to the EBTprocessor, (2) establish and implement writtenprocedures to monitor logon ID’s and cancel them asappropriate, and (3) take necessary action to ensurethat food stamp benefits which have not beenaccessed by households within the time guidelinesare expunged.

• Missouri - FNS and the State agency needed toimprove controls over access to the EBT system,specifically for persons no longer employed. Also,State agency claim recoupment records were notinternally reconciled to ensure accurate data wasreported to FNS. We recommended use of writtenprocedures to monitor logon ID’s and user accesspermission and cancel them when appropriate.

• Minnesota - The State agency needed to improvecontrols over access to the EBT system; it had notreviewed the system to identify, and remove from thesystem, users who no longer needed access. Inaddition, the contractor had not provided severalsystem reports required by the contract andnecessary for the State agency to adequately monitorthe system. We recommended that the State agencyimplement procedures to periodically reconcile userson the EBT system and to require the contractor toprovide all system reports which are required by thecontract.

FNS’ Computer-Based System Needs To BetterIdentify Food Stamp Fraud By Retailers Using EBT

With the implementation of EBT, FNS established acomputerized system called the Anti-Fraud LocatorUsing EBT Transactions (ALERT) to monitor retailers’EBT transactions and identify potentially fraudulenttransactions. We determined that FNS needs toconsider new approaches to combat retailer fraud, withgreater emphasis on advanced computer technology asopposed to the labor-intensive analyses required for theALERT system. We identified certain deficiencies whichlimited the system’s effectiveness. Redemptiontransaction data were not available on ALERT for 30 or

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more days after redemptions occurred, delaying anypossible enforcement action. Also, the system omittedcertain low-volume retailers from its scans because theywere inaccurately classified as supermarkets, which arebelieved to have a low incidence of fraud. Finally, FNShad not issued procedures or guidelines on how theALERT system should be used, even though the systemitself is now available nationwide.

We recommended that FNS study how best toimplement advanced computer technology to bothsimplify its monitoring of EBT retailers and to quicken itsability to detect and remove retailers committing fraud orother program violations. We also recommended thatFNS consult with ALERT users for possibleimprovements to the system and that FNS issue writtenprocedures and guidelines to assist the users inobtaining the maximum benefit from the system.Finally, we made recommendations to correct specifictechnical problems noted with the ALERT system. FNSagreed with the findings, is taking action to correct theproblems noted, and has agreed to conduct studies toidentify possibilities for using advanced computertechnology in combating food stamp fraud.

Participants Received FSP Benefits in More ThanOne State at the Same Time

In Nebraska, Kansas, Iowa, Missouri, Indiana, Illinois,and Wisconsin, we found that 147 of 230 statisticallyselected FSP participants whose Social Securitynumber (SSN) appeared in more than 1 State receivedfood stamp benefits in more than 1 Statesimultaneously, resulting in overissuances of $43,000.Projected to the audit universe, an estimated 888participants received excess food stamp benefitstotaling about $394,000. Benefits totaling an additional$56,000 were paid to members of households wherethe head of household had certified more than onehousehold in more than one State. Projected to theaudit universe, an estimated 273 heads of householdreceived approximately $376,000 in improper benefitsbecause they certified more than 1 household in morethan 1 State. We recommended that FNS establishclaims to recover the identified overpayments, reviewthe remaining participants in the universe to determine ifthey are dual-participating in FSP, and establish anationwide data base to prevent dual participation. FNSconcurred with our recommendations and findings andis conducting a study on the feasibility of establishing anationwide data base.

Georgia Was Deficient in Management of the FoodStamp Employment and Training Program

The Welfare Reform Act limited the participation of able-bodied adults without dependents (ABAWD) in FSP tono more than 3 out of every 36 months. Each State isrequired to implement an employment and training(E&T) program to ensure that ABAWD’s are involved inactivities that will eventually lead to paid employmentand decreased dependency on assistance programs.To assist States with their E&T efforts, FNS provides100-percent Federal grants, of which at least 80 percentmust be spent to serve ABAWD’s. States arereimbursed at fixed rates for providing E&T services toABAWD’s except for nine States, including Georgia,which are allowed to spend the E&T grant funds withoutconsideration of fixed rates.

We found that errors in Georgia’s methodology forallocating costs among benefiting programs led toovercharges to the E&T program of about $3.7 millionfor FY 1998, and the State drew down about $922,000in excess of the 20 percent for non-ABAWD relatedexpenses.

During the audit, we advised FNS of the improperFY 1998 charges. FNS and the State made fiscaladjustments to the E&T accounts, totaling about$4.6 million. The adjustments resulted in a net recoveryof $2.7 million in overclaimed FNS funds. Because thecost allocation deficiencies were ongoing in FY 1999,FNS will have to validate the 1999 costs and recoverany overclaimed amounts. The State also did not limitABAWD participation in FSP to 3 out of 36 months. Amonthly average of approximately 466 ABAWD’simproperly participated in FSP for more than 3 monthsand received ineligible food stamp benefits estimated at$400,000 for FY 1998.

We concluded that Georgia was not a viable candidatefor FNS’ study of alternatives to the nationallyprescribed fixed reimbursement rates, because theState had not managed its E&T program efficiently andeconomically. As a result of our recommendation, FNSrevoked Georgia’s authorization to use alternativereimbursement procedures to claim E&T costs andstarted paying the State the fixed reimbursement rates,which will ensure economy and efficiency of theprogram and save about $1 million for FY 1999.

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We recommended that FNS recover the overclaimedcosts and overissued food stamp benefits. We alsomade a series of recommendations to improve theState’s fiscal and administrative controls. FNS agreedwith the recommendations and initiated correctiveactions.

Individuals Plead Guilty to Food Stamp and EBTFraud in Maryland

Following his conviction for trafficking in food stampbenefits, the owner of a liquor store in Baltimore,Maryland, surrendered his EBT terminal to an OIGagent at his sentencing and was disqualified by FNSfrom participating in FSP. However, the store ownerand his wife continued to traffic by telephoning to threeauthorized store owners/employees additional EBT cardnumbers, personal identification numbers (PIN), and theamounts of the illegal transactions. Illegal transactionswith more than 2,900 food stamp recipients who visitedthe unauthorized liquor store totaled over $544,000.The owners and an employee of the three authorizedstores, along with the liquor store owner and his wife,have pled guilty.

Store Owner Flees after Jury Conviction

The owner of a small retail grocery store in Baltimore,Maryland, was found guilty of illegally traffickingapproximately $700,000 in food stamp benefits between1996 and 1998. The owner subsequently slipped out ofhis alarm bracelet while being monitored by pretrialservices personnel and failed to appear in court forsentencing. His lawyer informed the court that he didnot know the whereabouts of his client. We believe hehas fled to Morocco and is inclined, given the pendingcourt action, not to return to the United States. Theowner was sentenced “in absentia” to 4 years’incarceration, 2 years of supervised release, and$700,000 in restitution. A second subject in this casehas also been charged and is a fugitive.

$63 Million in New York City Food Stamp Fraud

As reported last period, in a complex food stamptrafficking conspiracy involving 20 authorized stores inNew York City, food stamps worth $63 million werefraudulently redeemed by 44 defendants. In an updateto this case and as a result of the financial investigation,three bank officers were indicted by the U.S. Attorney’sOffice for the Southern District of New York for bankfraud and stealing public funds. Indictments ofadditional bank officials are anticipated.

Seven Involved in Food Stamp Fraud Convicted inOhio

A joint undercover investigation in Ohio revealed sevenindividuals were involved in a conspiracy to traffic foodstamps. They exchanged the stamps for cash, stolenautomobiles, and automobiles purchased for thesubjects, which were later falsely reported as stolen tolocal law enforcement and the insurance companies.Food stamps, $95,400 worth of automobiles, numerousautomobile parts, several illegal weapons, and cocainewere seized from the individuals. The seven wereconvicted on various charges and sentenced to termsranging from probation to 5 years in State prison.Forfeiture of all cash, weapons, and automobiles wasordered by the court. One of the seized vehicles isbeing used by USDA. This case was worked jointly withthe Ohio Organized Crime Commission, the FBI, theMontgomery County Sheriff’s office, and the MorainePolice Department.

International Fugitive Apprehended

A Warren, Ohio, retailer, after being charged inDecember 1996 with conspiracy to launder $2.2 millionover 4 years, fled the country to avoid prosecution.Investigation by OIG and Internal Revenue Service(IRS) agents discovered the retailer had reentered thecountry in February 1999. He was discovered to be inLittle Rock, Arkansas, attempting to buy new foodstores, where OIG agents arrested him. He pled guiltyand was sentenced to 5 years’ imprisonment. Thiscase was worked jointly with the IRS CriminalInvestigation Division.

Store Owner Convicted of Fraudulently Redeeming$600,000 in USDA Food Stamps

The owner of a food store pled guilty to redeemingapproximately $600,000 in food stamps over 9 months.The owner used 3 different aliases to open 15 bankaccounts around Chicago. The owner deposited theillegally obtained food stamps he had received fromother merchants and food store owners in exchange forcash. Record analysis showed that, over 4 months, theowner deposited more than $223,000 in food stamps foranother store operator who was not authorized toaccept food stamps. The owner was sentenced toserve 10 months in prison, followed by 3 years’supervised release, and ordered to pay restitution of$525,600.

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Store Manager Convicted of Conspiring ToFraudulently Redeem $1.2 Million in Food Stamps

The owner of a food store and his brother were indictedfor conspiring to fraudulently redeem more than$1.2 million in food stamps over 10 months. Thebrothers opened eight bank accounts around Chicagoand deposited the illegally obtained food stamps thatwere received from other merchants and food storeowners in exchange for cash. A record analysisrevealed that approximately $295,000 of the over$1.2 million redeemed through the store resulted fromlegitimate sales. The owner, who fled the countryprior to sentencing on bank fraud charges, is a fugitive.His brother was convicted and sentenced to serve37 months in prison, followed by 3 years’ supervisedrelease, and ordered to pay restitution of $1 million.

Store Owner and 17 Others Convicted in MassiveFood Stamp and Narcotics Trafficking Operation

The investigation of a major Detroit, Michigan, narcoticsand food stamp trafficker and his lieutenants resulted inthe arrest and conviction of 18 members of theorganization. The head of the organization hadtrafficked narcotics for over 20 years in the area andwas seemingly “untouchable” until he mentioned that hewas interested in buying food stamps. He insulatedhimself from drug trafficking by never conducting anydeals himself; he would deal only through hislieutenants. During the course of the investigation, hebought $23,000 in food stamps directly from anundercover officer. After the food stamp deals, heagreed to the sale of narcotics to the officer, after whichhe was arrested. He was released on bond and shortlyafter was murdered, gangland style, along with hisgirlfriend. The rest of his organization had beenarrested at the same time in a city-wide drug sweep.Their convictions for drug and/or food stamp traffickingled to sentences which ranged from a maximum of lifein prison without parole to a minimum of 5 months inprison. The store owner involved pled guilty to foodstamp and drug trafficking but failed to appear forsentencing and is a fugitive. The neutralization of thismajor drug trafficking enterprise has significantlystemmed the flow of narcotics in the Detroit area. Thisinvestigation was conducted jointly with the OrganizedCrime Drug Enforcement Task Force, composed ofOIG, the Drug Enforcement Administration, the IRS, andthe Detroit Police Department.

Street Gang Members Convicted in Welfare OfficeBurglaries

Our investigation resulted in the arrests and convictionsof 14 individuals for their involvement in the theft of$728,000 in food stamps from 4 county welfare officesin Indiana. Sentences ranged from 1 year of probationto 20 years in prison, with $1.1 million in restitution. Theinvestigation showed street gang members stole thefood stamps from county welfare offices and tradedabout $500,000 worth of food stamps to other gangmembers for cocaine, marijuana, firearms, and cash.The remaining food stamps were traded to twoindividuals for cash, marijuana, firearms, andexplosives. This investigation was worked jointly withthe Indianapolis Safe Streets Gang Task Force (whichincludes the FBI; the Bureau of Alcohol, Tobacco, andFirearms; and the Indianapolis Police Department); theIRS Criminal Investigation Division; the Indiana StatePolice; the Kentucky State Police; the Marion CountySheriff’s office; and USDA’s Forest Service.

Miami Store Owner Ordered To Pay MultimillionDollar Penalties for Fraud

In Miami, Florida, the owner of a small retail grocerystore redeemed approximately $5.8 million in foodstamps over 4 years. Evidence was developed duringthe investigation that the store owner was redeemingfood stamps for several other grocery stores in SouthFlorida which were not authorized to participate in FSP.During 1997, the owner’s total food stamp redemptionsexceeded the store’s food sales by $752,600. In April1999, a U.S. District Court judge issued a $2.2 millionsummary civil judgment against the owner for violationsof FSP. In addition, FNS assessed a $10,000 civilmoney penalty against the store owner and revoked hisauthorization to accept food stamps.

Hawaii Food Stamp Trafficking Ring Prosecuted

In Hawaii, five individuals involved in an organized foodstamp trafficking operation in Honolulu have pled guiltyto food stamp trafficking, conspiracy, money laundering,and tax evasion. An additional 15 individuals and4 corporations are awaiting trial. Our investigationdisclosed that the corporations’ officers financed large-scale purchases of food stamps by “runners” who, inturn, resold the food stamps to various other retailers aswell as those financing the operation. The defendants

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pleading guilty admitted to having trafficked andlaundered in excess of $200,000 in food stampcoupons.

This investigation was conducted jointly with the FBI,the Honolulu Police Department, and the U.S.Immigration and Naturalization Service, with additionalassistance provided by the U.S. Postal InspectionService and the U.S. Customs Service (Customs).

Six Sentenced in $2 Million EBT Food StampBenefits Fraud

Six family members were sentenced in Houston, Texas,for food stamp fraud, money laundering, conspiracy,and criminal forfeiture. A 2-year investigation disclosedthat the subjects illegally accepted and redeemed inexcess of $2 million in food stamp benefits via EBT.The scheme involved the sale of benefits for cash byrecipients at two unauthorized storefront locations. Theemployees of the storefront locations would call twoauthorized stores and read the numbers imprinted onthe recipient’s EBT card, the corresponding PIN, andthe transaction amount to employees at the authorizedstores. The employees at the authorized stores wouldthen manually enter the information into the point-of-sale device, which gave the appearance that therecipient had actually purchased groceries at theauthorized retailer. This investigation was workedjointly with the Texas Department of Human ServicesOIG, the IRS, and the U.S. Secret Service. Thesentences of the six subjects ranged from 27 months’imprisonment to 97 months’ imprisonment. In addition,$2 million was ordered in restitution, individually andseverally.

Jail Time Handed Down for Trafficking in EBTBenefits for Drugs

Two subjects were sentenced in Beaumont, Texas,for trafficking in EBT food stamp benefits in exchangefor “crack” cocaine. One subject was sentenced to46 months in jail, and the other subject was sentencedto 18 months in jail. These investigations were workedjointly by OIG and the Cleveland, Texas, PoliceDepartment.

CHILD NUTRITION PROGRAMS

Inadequate Storage Jeopardizes USDA-DonatedCommodities

In addition to cash reimbursements for meals servedunder the National School Lunch and BreakfastPrograms (NSLP and SBP), schools are entitled toreceive USDA-donated commodities such as meats,fruits, vegetables, grains, and dairy products. Stateagencies are responsible for storing the commoditiesunder conditions prescribed by FNS until they aredistributed to the schools. For each commodity, FNShas established a “Best If Used By” (BIUB) date;commodities retained in storage significantly past thisdate may be of reduced quality and nutritional value.We evaluated applicable procedures and practices inIllinois, Wisconsin, and California.

• Of the 241 various commodities we reviewed, all orportions of 46 commodities which were valued atover $560,000 had been stored in State agencywarehouses beyond their established BIUB dates.Warehouses did not ensure that the oldestcommodities were shipped first, and State agenciesdid not always limit their commodity orders toquantities that could be used within a reasonableperiod of time. Furthermore, State agency and FNSregional officials did not always use the BIUB datesas a guideline for distributing commodities.

• Although frozen commodities are required to bestored at zero degrees Fahrenheit or below, somecommodities at the warehouse which handles frozencommodities for 75 percent of the schools in Illinoiswere being stored at or above 20 degreesFahrenheit. Some freezers at that warehouse werenot designed to freeze foods at any temperaturebelow zero degrees even under optimum conditions.We noted similar, though less serious conditions, atother warehouses in both Wisconsin and California.The California warehouses were not always takingdaily temperature readings in the freezers to ensureproper storage conditions.

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We recommended that FNS review and update itsexisting BIUB dates and require that States use them asa basis for distributing commodities. We alsorecommended that FNS require States to ordercommodities in quantities that can be used within theperiods established by the BIUB dates and thatwarehouses use the first-in-first-out method whendistributing commodities. Finally, we recommendedFNS require State agencies and warehouses to improvetheir existing controls to ensure commodities are storedat the proper temperatures.

FNS agreed with our findings and is undertaking amajor overhaul of its procedures for commoditydistribution. This will include revised BIUB dates andrequirements for increased monitoring by Stateagencies.

Puerto Rico Department of Education’s SchoolLunch Financial Management System Continues ToBe Inadequate

Our current audit disclosed that the Puerto RicoDepartment of Education still has not developed asound financial management system to ensure accuratefinancial accountability and reporting, as recommendedin 1992. State agency and school food authorityfunctions had been separated; State agencyexpenditures and State administrative expensematching requirements were accounted for in separatecost centers. However, FNS meal reimbursement andDepartment of Education appropriated funds used topay for school food authority functions continued to beaccounted for as State agency revenue andexpenditures. We concluded that the financial status ofthe programs was materially misstated, limiting theability of FNS and Department of Education officials tomake sound fiscal decisions or effectively manageprogram expenditures.

The Department of Education was appropriated$10 million less than needed to pay all liabilities incurredduring school year 1997, overstated its expenditurestoward the State revenue matching requirement inschool year 1997 by over $61 million, anddid not meet its 1997 State revenue matching

requirement (funding of $11.5 million is subject torepayment to FNS). Further, in FY 1997 it understatedthe amount of NSLP and SBP unliquidated obligationsby $23 million and overstated its total outlays by$942,000. In addition, its computerized accountingsystem incorrectly classified 1997 NSLP and SBPexpenditures of $30 million, did not record and reportunliquidated obligations of up to $23 million, and did notconsistently account for all costs, because appropriatedfunds were accounted for on a school year basis whileFNS reimbursement is accounted for on a fiscal yearbasis.

We recommended that FNS require the Puerto RicoDepartment of Education to budget, appropriate funds,and account for its direct liability for feeding all childrenfree of charge, separate and distinct from all otherNSLP and SBP costs. FNS needs to determinewhether the failure to meet the matching requirementshould result in recall of funding, totaling $11.5 million,and recover the funds if deemed appropriate. FNSshould also require the Department of Education todevelop and implement written instructions for preparingfinancial status reports and revise its computerizedaccounting system to accurately record and report allNSLP and SBP costs and unliquidated obligations byschool year and fiscal year. FNS is in agreement withthe recommendations and is awaiting the Department ofEducation’s response before issuing a letter ofdetermination on the audit results.

Error Rate in NSLP Eligibility Leaves ProgramVulnerable to Abuse

In 1997, we reported that many school food authorities(SFA) participating in NSLP in Illinois were notincreasing their sample sizes when they found highpercentages of households reporting incorrect incomesor failing to respond to verification requests.Regulations allow, but do not require, SFA’s to expandtheir sampling when they find high error rates. Weprojected that SFA’s in Illinois were improperlyauthorized to receive free or reduced-price meals whichcost USDA $31.2 million per year. This is 18.9 percentof the amount received by Illinois in 1995 asreimbursement for NSLP.

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We recommended that FNS establish a threshold forthe maximum percentage of errors allowable during theverification process and require additional samplingwhen that percentage was exceeded. FNS respondedthat it did not want to require additional verificationsbased on our audit results in only one State.Subsequently, at our request, FNS contacted Stateagencies and obtained error-rate information for majorcities to assist in making a decision on ourrecommendations. The information gathered by FNSreinforced our findings in Illinois. The average error ratebased on the data gathered was 26 percent—exceedingthe error rate reported in our Illinois audit. FNS believesthat any regulatory change must be supported bytesting alternative approaches. Therefore, FNS hasrequested $2 million in each of its FY 2000 and 2001budgets so that it can test several alternatives to currentrequirements while still minimizing additionaladministrative burdens it would have to place onprogram cooperators. We have accepted FNS’management decision and proposed evaluation plan.However, because of the high error rates identified, weconsider this program to be highly vulnerable to abuse,and we will continue to monitor it closely until additionalverification procedures have been implemented.

SPECIAL SUPPLEMENTAL NUTRITIONPROGRAM FOR WOMEN, INFANTS, ANDCHILDREN (WIC)

Custodian Pleads Guilty to Theft of WIC Vouchers

A custodian at a WIC clinic in Dallas, Texas, through laxsecurity measures, was able to steal 359 WIC foodvouchers valued at $19,830. The stolen WIC voucherswere redeemed for baby formula and then sold at adiscount to neighborhood grocery stores. Thecustodian was sentenced to 18 months in prison,followed by 3 years’ supervised release. Restitution of$1,700 was also ordered.

Department of Health Employee Pleads Guilty toTheft

In Georgia, a Department of Heath clerk responsible foradministering WIC pled guilty to creating $49,945 infraudulent WIC vouchers and converting them to herown use. This investigation was conducted jointly withthe Georgia Department of Human Resources, Office ofFraud and Abuse. The investigation disclosed that 77fictitious infants, including 21 sets of twins, were createdby the clerk in a scheme to defraud WIC from October1994 to August 1996. The clerk issued 1,073 fraudulentWIC vouchers and redeemed them for infant formula,which she resold to small retail grocery stores in theAtlanta area. While the investigation was in progress,the clerk resigned from her position. As a result ofentering a guilty plea, she was sentenced to 1 year ofincarceration, followed by 3 years of supervised release,and ordered to pay $47,945 in restitution.

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Food Safety

We recommended that FSIS (1) assign unacceptableratings to State programs with documented serious andwidespread sanitation deficiencies at plants, (2) use itscomprehensive review results to identify and providealternatives to correct problems noted in the States’food safety inspection programs, and (3) require theStates to provide annual reports that assess theeffectiveness of the State inspection programs inmeeting the food safety standards required by theirState Performance Plans. FSIS concurred with ourconclusions and recommendations and agreed toimplement corrective actions.

Arkansas Meat Processing Plant Investigated forContamination With Listeria MonocytogenesBacteria

As a result of a joint investigation with FSIS Complianceand OIG, a total of about 30 million pounds of potentiallytainted hot dogs and sandwich meat was deemed unfitfor human consumption and ordered to be destroyed.In December 1998, plant operations at an Arkansasmeat processing plant were suspended by FSIS forsanitation problems dealing with listeria monocytogenes(LM) bacteria. The plant produced about 600,000pounds of product per week, which consisted offrankfurters (hot dogs) and cold cuts. The plant didbusiness with large food stores and the military. OnJanuary 22, 1999, the plant voluntarily recalled all itsproduct produced from July 1998 to December 1998,about 30 million pounds of potentially tainted hot dogsand sandwich meats. Subsequently, the recalledproduct was deemed unfit for human consumption andwas destroyed. The criminal investigation by OIG iscontinuing.

FOOD SAFETY AND INSPECTION SERVICE(FSIS)

FSIS administers a comprehensive system of inspectionlaws to ensure that meat, poultry, and egg productsmoving in interstate and foreign commerce for use ashuman food are safe, wholesome, and accuratelylabeled. FSIS’ appropriation for FY 1999 totaledapproximately $617 million.

FSIS Oversight of State-Operated Meat and PoultryInspection Programs Needs Further Improvements

Under the State-Federal Cooperative InspectionProgram, individual States are authorized to inspectmeat and poultry products sold solely within theirboundaries, provided that their food safety requirementsare at least equal to those of the Federal Government.FSIS retains an oversight role and provides assistance.Our current audit work was performed at FSISheadquarters, the State meat-inspection offices forseveral States, and at 18 of the 613 State-inspectedplants.

Although FSIS has taken significant steps to correct theproblems identified in a previous review, additionalimprovements are still needed. FSIS needs to ensurethat acceptable ratings are not given to State programswith identified sanitary deficiencies or to States that donot take adequate corrective actions to address serioussanitation problems. FSIS further needs to strengthenits comprehensive review program and developrecommendations to place greater emphasis onidentifying and correcting the cause of problems foundat State-inspected establishments.

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One of the sewing needles was found in this piece of meat. Sioux City (Iowa) Police Department photo.

The Misbranding of Meat Results in SignificantFines and Restitution

In an update to a Philadelphia, Pennsylvania, casepreviously reported, two owners of a large meatcompany were sentenced for skimming $2.7 millionfrom the company cash register and concealing thisincome in their tax returns, as well as misbrandingcheaper cuts of beef and pork. The two owners wereordered to pay a total of $1.5 million in restitution andfined $724,000. In addition, one owner was sentencedto serve 60 days’ imprisonment, the other 1 year ofhome confinement, and each 5 years’ probation. Thisinvestigation was worked jointly with the FBI, IRS, andDefense Criminal Investigative Service.

One Person Indicted After Needles Found in Food

An OIG investigation of sewing needles found in groundbeef, fruit, and bakery items (see photo) in an Iowagrocery store led to the indictment of one individual on aFederal criminal charge of tampering with food product.Eighteen OIG criminal investigators, in cooperation withthe local police department, worked round-the-clock forup to 4 weeks in an effort to identify the individualresponsible for this serious threat to the health andsafety of the area population. Due to the immediateresponse of our investigators, no injuries resulted fromthese criminal acts. A trial date has yet to be set.

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Marketing and Regulatory Programs

AGRICULTURAL MARKETING SERVICE(AMS)

AMS enhances the marketing and distribution ofagricultural products by collecting and disseminatinginformation about commodity markets, administeringmarketing orders, establishing grading standards, andproviding inspection and grading services. AMS’funding level for FY 1999 is approximately $243 million.

Officers of Pennsylvania Milk Dealer Plead Guilty toDefrauding the Public

A Pennsylvania dairy labeled and sold as “skim milk”more than 19 million pounds of a “reconstituted skimmilk” which had been made from skim milk powder andwater. From January 1993 through December 1997,the company filed 60 false monthly reports with the MilkMarket Administrator (MMA), AMS, which resulted in a$1 million loss to the MMA. The three defendants, whowere officers of the company, pled guilty to conspiring tomisbrand milk with intent to defraud and misleadconsumers, and increasing the company’s profits bymislabeling the reconstituted skim milk. It was sold toFederal institutions, local school districts participating inNSLP, and the general public. The company alsoroutinely underfilled milk containers, mixed old milk withnew milk and gave it a new freshness date, and placedfalse freshness dates on milk during production. Theofficers were each sentenced in U.S. District Court to3 years’ probation, 100 hours of community service, anda total fine of $5,250. The Government also has apending civil suit against the company. This was a jointinvestigation with the MMA, AMS Compliance staff, andthe Office of Criminal Investigation for the U.S. Foodand Drug Administration (FDA). Sentencing is pending.

Fruit Juice Producer Agrees to $500,000 Settlement

A Buffalo, New York, fruit juice producer agreed to a$500,000 settlement with USDA. The agreement wasreached to avoid litigation under the False Claims Act.Between 1994 and 1997, the company entered intocontracts with AMS to provide canned fruit juice fordistribution to needy families and other relatedprograms. The contracts contained a domestic contentclause, which required the juice to be 100-percentgrown, produced, and packaged in the United States orPuerto Rico. The company produced juice whichcontained foreign grape juice concentrate and falsely

certified that the product met the domestic contentrequirements. The company agreed to pay $400,000,with the $100,000 balance forgiven upon satisfactorycompletion of a compliance program. This investigationwas worked jointly with AMS.

ANIMAL AND PLANT HEALTH INSPECTIONSERVICE (APHIS)

Through inspections, APHIS protects the Nation’slivestock and crops against diseases and pests andpreserves the marketability of U.S. agricultural productsat home and abroad. APHIS’ obligations for FY 1999are estimated to total over $590 million.

Controls Over Transportation and Export ShipmentsNeed To Be Strengthened

The North American Free Trade Agreement (NAFTA)allows transportation and export (T&E) shipments ofagricultural products to pass through the United Statesen route to other countries. In some instances, certainof these commodities would not otherwise be allowedinto the country because they would not pass USDAinspection requirements. To minimize this threat, T&Eshipments are sealed by APHIS inspectors prior toentering the country. Shipments are required to leavethe country at a specified port of exit within a giventimeframe. At the exit port, the seals are inspected toensure that the shipments are intact and no productshave been offloaded. T&E shipments are bonded andtracked by Customs, and this bond is to be forfeited ifthe shipment does not exit the country as required.APHIS’ Plant Protection and Quarantine is responsiblefor implementing controls at the 33 border crossings,along with 26 seaports and international airports.

We found that APHIS did not have adequate controls toensure that T&E shipments were exiting the country asrequired or that agricultural products were not divertedto U.S. markets en route to the ports of exit. Weidentified 199 T&E shipments, 11 percent of theshipments entering the country between April andNovember 1998, that could not be accounted for.Although APHIS indicated that it was aware of themissing shipments, no action was taken to resolve theirstatus since APHIS relied on Customs to follow up onmissing shipments. We further learned that, in certaininstances when T&E shipments arrive at the ports ofexit, some truck drivers frequently hand the inspectors

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be taken, (2) coordinate more closely with Customs inmonitoring T&E shipments, and (3) assess fines againstprogram violators and seek authority to levy fines inexcess of the current $1,000 limit. APHIS agreed withour recommendations and is implementing correctiveactions.

Dog Kennel Owner Pleads Guilty to Threatening aFederal Official

In North Dakota, a dog kennel owner pled guilty to afelony count of threatening to assault an APHIS AnimalCare inspector in an attempt to prevent the inspectorfrom performing the required inspections at the kennel.During the interview with OIG, the subject admitted thathe had threatened to kill the inspector, and thenproceeded to make another threat. Sentencing ispending.

the broken seals. In such instances, there is noguarantee that some of the product was not diverted toU.S. markets.

Review of APHIS’ enforcement policies and proceduresrevealed APHIS’ instructions do not stipulate thatmonetary penalties be assessed against brokers whoseT&E shipments do not exit the country as required orwho have tampered with APHIS seals. No fines wereassessed against any of the brokers responsible for the199 aforementioned shipments. The only monetarypenalty to the brokers is the forfeiture of the Customsbond, and, according to Customs officials, the amountsforfeited are frequently reduced after initial assessment.

We recommended that APHIS (1) strengthen itscontrols to track T&E shipments and to documentinstances where official seals are tampered with so thatappropriate investigative and enforcement actions can

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Natural Resources and Environment

FOREST SERVICE (FS)

FS has the responsibility for providing leadership in theprotection, management, and use of the Nation’sgrassland and aquatic ecosystems on public and privatelands. The National Forest System covers 191.8 millionacres of forest, grass, and shrub lands. FS alsocooperates with State and local government and privatelandowners in the management of forest resources andprovides leadership in forest and rangeland research.The FY 1999 budget for FS is projected at $3.4 billion,while receipts generated through timber sales and otheractivities are estimated at about $850 million.

Unresolved Issues Could Expose FS to SignificantLiabilities in Pending $50 Million Land Exchange

We reviewed the land exchange of the ThunderbirdLodge estate at Lake Tahoe, which includes about140 acres of lakefront property, a stone mansion, andassorted buildings, appraised at about $50 million.Because FS’ mission to preserve wilderness areas doesnot include maintaining improvements in those areas,FS required that a reservation be added to the deedwhich would sever the building improvements from theland before completion of the exchange. In the case ofthe aging structure on the Thunderbird estate (seephoto), the cost of maintenance is conservativelyestimated at $300,000 per year. To alleviate FS’concerns regarding maintenance, the private firmexchanging the land to FS arranged for the University ofNevada, Reno (UNR), to purchase the improvementsfor use as a research facility.

We reviewed the reservation that was added to thedeed and found that it did not sufficiently clear FS ofliability regarding maintenance of the improvements.The reservation provided that if its terms were notcomplied with, the improvements would revert to FSownership. The reservation did provide that thereservation holder would bear the cost of removing theimprovements, but we subsequently found that theirremoval might not be possible due to the historicalstatus conferred on them by the Nevada State HistoricalPreservation Office.

During our review, UNR abandoned plans to buy theexisting improvements and build a research facilityadjacent to them. We were notified that a nonprofitgroup, the Thunderbird Preservation Society, would buythe improvements. The Society was recently formedwith the financial assistance of the private firmexchanging the land with FS.

FS could be exposed to a total liability of up to $3 millionif it proceeds with the land exchange without resolvingwho is responsible for maintaining the improvements.We recommended that, before accepting title to theThunderbird Lodge estate, the private firm providesufficient endowment funds (approximately $6 million) toFS for maintaining the historical structures for 40 years(the term of the current reservation) or restore the landto its original natural state. Our evaluation alsoquestioned the feasibility of the proposed use by UNRof the Thunderbird site because of problems associatedwith building expansion proposed by UNR, requiredwater rights, and additional sewer facilities needed.

FS stated that our report was instrumental in assistingits regional staff in their coordination with the proponent,OGC, and the Bureau of Land Management. As aresult, additional terms and conditions were added tothe deed reservation. FS has concurred with allrecommendations except for the establishment of anendowment fund. Instead, FS, with OGC’sconcurrence, has required that the proponent furnish a10-year performance bond in the amount of $2.3 millionto cover the maintenance and the eventual removal ofthe improvements should the private party default onthe current agreement relating to the Thunderbird Lodgeimprovements. We agreed with all the managementactions proposed by FS to resolve our recommendations.

The cost of maintenance for the aging structure on the ThunderbirdLodge estate is conservatively estimated at $300,000 per year. OIGphoto.

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NATURAL RESOURCES CONSERVATIONSERVICE (NRCS)

NRCS provides technical assistance through localconservation districts to individuals, communities,watershed groups, and tribal governments; Federal,State and local agencies; and others. The agency’swork focuses on erosion reduction, water qualityimprovements, wetlands restoration and protection, fishand wildlife habitat improvement, range management,stream restoration, water management, and othernatural resource problems.

Waste Management Systems in Ohio

In response to a request from a Congressman based onconcerns raised by a constituent, we reviewed selectedanimal waste management systems in Ohio. Assistedby two independent experts, we reviewed six projectsand found that NRCS had designed and promotedenvironmentally safe animal waste managementsystems (AWMS), following generally acceptedengineering standards. We also found that the formerNRCS Ohio State Conservationist had inappropriatelyapproved a payment of $28,000 to two farmers inJune 1996, after they and their representativescomplained that their NRCS-designed AWMS did notfunction properly. NRCS decided to settle the farmers’claim rather than spend funds to contest a possiblecourt case. While NRCS was authorized to fix thenonfunctioning system if the flaw was found to be aresult of NRCS’ design, NRCS was not authorized toexpend funds to settle a court case. We did notrecommend that the farmers repay the $28,000because NRCS made the offer and there was nowrongdoing on the part of the farmers.

Fraudulent Contract Appeal Results in a Conviction

In Harrisburg, Pennsylvania, the superintendent of amajor construction company pled guilty to criminalcharges regarding the submission of false documents toUSDA and the Board of Contract Appeals. A contractorentered into an agreement with NRCS for theconstruction of the Lost River Watershed flood controlproject in West Virginia. During the construction in 1994and 1996, the contractor incurred additional expensesof over $5.9 million in order to repair an emergencyspillway. The contractor claimed NRCS officials wereaware of the emergency repairs and had approvedthese additional expenses. NRCS denied thecontractor’s request, which resulted in an appeal to theUSDA Board of Contract Appeals. One of thecontractor’s supporting documents in the appeal wasthe superintendent’s diary, indicating dates,conversations with NRCS officials, and approvals foradditional expenses. However, forensic examination ofthe diary revealed that some entries were actually madefrom 10 to 16 months after the date of the entry.

The superintendent was sentenced to 1 year ofprobation, ordered to pay restitution of $18,000 to coverthe cost of prosecution, and fined $6,000. Thecontractor entered into an agreement with NRCS todismiss the $5.9 million claim.

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Rural Development

Rural Development programs are designed to meet thediverse needs of rural communities with a variety ofloan, loan guarantee, and grant programs, plustechnical assistance, cooperative development, andrural housing assistance. Rural Development loanprograms have an outstanding portfolio of direct andguaranteed loans totaling $79 billion.

RURAL HOUSING SERVICE (RHS)

RHS is responsible for making available decent, safe,sanitary, and affordable housing and communityfacilities by making loans and grants for rural single-family housing and apartment complexes, fire stations,libraries, hospitals, and clinics. For FY 1998, programfunding for RHS loans and grants totaled $5 billion. Asof September 30, 1998, RHS had an outstanding directloan portfolio totaling $29.6 billion. An additional110,000 borrowers had obtained guaranteed single-family housing and community facilities loans totaling$7.2 billion.

Reserve Accounts Underfunded and ImproperCosts Charged to Projects

A management company allowed the reserve accountsfor 12 apartment complexes to accumulate a netunderfunding of over $109,000 as of December 31,1997. The underfunding occurred in part becauseoperational expenses for calendar years 1996 and 1997of almost $37,000 were paid by two projects that shouldhave been covered by the management fees. Inaddition, the identity-of-interest maintenance companyovercharged two projects over $42,000 for unsupportedmaintenance expenses in 1996 and 1997. Themaintenance company was unable to provide evidenceshowing that services were performed and/or that partsand supplies were purchased and used on thoseprojects.

We recommended that RHS develop and initiate aworkout plan with the management company to restorethe reserve accounts to the required balances for theunderfunded projects. We also recommended that RHSrequire the management company to reimburse theprojects just over $79,000 for unallowable andunsupported costs. Further, we recommended thatRHS review the 1997 maintenance expenses of threeadditional projects to identify and recover any improper/

unsupported charges by the maintenance company.The agency has concurred with the recommendations.

Management Company Misused Reserve andTenant Security Deposit Funds

Prompted by concerns about how a general partner anda management company were managing andmaintaining 11 properties, the Rural DevelopmentTexas State Director asked OIG to audit the properties.We found the management company misused almost$74,000 in reserve funds and almost $21,000 in securitydeposits. Instead of depositing the funds in restrictivereserve and security deposit accounts for the properties,the management company deposited the funds into theunrestricted operating accounts of the properties. Inaddition, we determined the bank released the $74,000from nine properties’ supervised bank reserve accountsto the general partner without obtaining RHSauthorization.

We recommended that RHS consult with OGC anddetermine the appropriate collection effort to recover the$74,000 from the management company and the bankfor unauthorized release and misuse of reserve funds.In addition, RHS was to require the managementcompany to reimburse $21,000 for the misuse ofsecurity deposit funds. Rural Development has issueddemand letters to the management company and thebank requesting reimbursement of misused reserve andsecurity deposit funds.

Irregularities Attributed to Management CompanyEmployees

Officials of a property management company reportedto Rural Development in March 1998 that over $79,000in program funds had been improperly removed fromthe project accounts of 38 Louisiana and 9 Texas RuralRental Housing (RRH) projects. Shortly after ourfieldwork began in April 1998, the company reportedfurther irregularities attributed to two former employees.A company executive caused an affiliate to receivealmost $64,000 from 27 Louisiana and 8 Texas RRHprojects from payments based upon inadequatelysupported invoices. Another employee had allegedlystolen checks payable to 39 Louisiana and 17 TexasRRH projects and former tenants within those projects,totaling over $10,000.

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We further identified 41 RRH projects in Louisiana and9 in Texas that in January 1997 had inappropriately paidanother approximately $24,000 for unsupported chargesto the affiliate discussed above. The managementcompany and the affiliate reimbursed the RRH projectsfor the unsupported charges and alleged thefts.

In addition, the management company could notadequately support more than $850,000 it had causedthe RRH projects to pay for goods and services itprovided during calendar years 1996 and 1997. Also,the management company’s executives did not discloseall affiliates to Rural Development officials or maintainadequate fire and casualty insurance for the RRHprojects. Of the 68 Louisiana projects, 52 wereunderinsured more than $11 million in 1997. Themanagement company did not issue IRS forms 1099 for1996 and 1997 payments as required, unnecessarilyexposing the RRH projects to fines and penalties.

All the incidences of improper payments and allegedtheft have been referred to an assistant U.S. attorneyfor prosecution and are under investigation. The Stateoffice officials generally concurred with the findings andwill coordinate with OIG before taking any administrativeactions.

RRH Project Owner Pleads Guilty to Fraud

A South Dakota man was sentenced to 10 months’incarceration and ordered to pay $55,300 in restitutionfor defrauding the RRH program. The man, who ownedfive RRH projects, converted approximately $70,000from RRH accounts, which he then used to purchaseprecious metals. The borrower maintained that hedistrusted the Federal Government and believed that ifhe placed the funds into a supervised bank account, theFederal Government would seize the funds to pay offthe national debt.

RURAL UTILITIES SERVICE (RUS)

RUS seeks to improve the quality of life in rural Americathrough a variety of loan, loan guarantee, and grantprograms for electric energy, telecommunications(including distance learning and telemedicine), andwater and waste projects. As of September 30, 1999,electric borrowers have received over $58.2 billion indirect loans and guaranteed loans; telecommunicationsborrowers have received over $13.1 billion in indirect

loans and guaranteed loans; and water and wasteborrowers have received a total of $22.7 billion inindirect loans, guaranteed loans, and grants.

Improved Controls Needed Over Water and WasteGrants in Alaska

The Water and Waste Disposal Systems Grant Programfor Rural Alaskan Villages provides rural Alaskancommunities grants to remedy dire sanitationconditions. We found that (1) the Rural DevelopmentState office already destroyed the project files forseveral projects even though the projects had not beencompleted and a final report issued, (2) grantees werenot using RUS grant funds within a reasonable time,and (3) grantees were not returning to RUS either theinterest they earned on their RUS grant funds or theexcess grant funds remaining at the completion of theirprojects.

We recommended that all disbursements of grant fundsrequested by the grantee cover no more than 90 days,non-Rural Development agencies involved with projectssubmit interim reports accounting for grant funds, andall records pertaining to grant awards be kept for aminimum of 3 years after issuance of the final report.RUS officials agreed to implement most of our auditrecommendations.

Guilty Pleas in Water Authority Embezzlement Case

Two former employees of a municipal water district inPennsylvania pled guilty in Federal court to embezzling$20,520 in funds in 1996 and 1997. The two employeesregularly overbilled commercial water uses, whileskimming off cash payments received at the office fromresidential customers. The water fees and cashpayments were in part collateral for a revenue bondunderwritten by USDA which allowed the district tofinance a dam and water treatment plant for themunicipality.

RURAL BUSINESS-COOPERATIVE SERVICE(RBS)

RBS programs are designed to enhance the quality oflife for all rural residents by assisting cooperatives andbusinesses through partnership with rural communities.RBS does this by promoting a stable businessenvironment in rural America through financial

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assistance, sound business planning, technicalassistance, research, education, and information. Themultiagency empowerment zone program under RuralDevelopment’s direction attempts to revitalize andrebuild poor communities in the rural heartland.

More Direction Needed in Rio Grande ValleyEmpowerment Zone

The Rio Grande Valley Empowerment Zone (RGVEZ) inTexas received $40 million in flexible social serviceblock grant funds from the Department of Health andHuman Services. Because of a complaint regardingRGVEZ’s business affairs, we reviewed the zone’soperations. We determined that most of the allegations

were unfounded, but that the zone’s management hadmade loans to two organizations not physically locatedin the appropriate subzones though geographicallyclose and serving the zone’s residents. Further,environmental assessments had not been performed fortwo of the four projects which needed assessments.Also, USDA needs to provide RGVEZ specific guidanceon how to comply with National Environmental PolicyAct procedures. The zone officials and the Texas StateRural Development Agency concurred with the findings.Rural Development’s National Office of CommunityDevelopment has requested guidance from OGCregarding USDA oversight responsibility for theempowerment zones’ implementation of the NationalEnvironmental Policy Act.

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Financial, Administrative, andInformation Technology

accurate financial statements and cost data necessaryto manage departmental programs. To aid in correctingthese problems, the Department is implementing theFoundation Financial Information System (FFIS) toreplace the Central Accounting System (CAS) at OCFO/NFC.

The OCFO appropriated fund and Forest ServiceRegions 6, 10, and Pacific Northwest ExperimentStation began using FFIS on October 1, 1997, and RMAbegan on October 1, 1998. The remaining offices of FSand FSIS are scheduled to begin using FFIS onOctober 1, 1999, and the remaining USDA agenciesare scheduled to begin in FY 2004.

Our current review disclosed that several CASweaknesses, and prior decisions by OCFOmanagement to interface many of the OCFO/NFC“feeder” systems, have resulted in substantial FFISimplementation problems. For example, the FFIS“feeder” system accounting posting models are notsufficiently documented to enable an effective andefficient evaluation and have been found, in somecases, to be in error. There is a critical need toconsolidate and reengineer the functions of the OCFO/NFC “feeder” systems. These systems are old andlabor intensive, frequently provide bad data, and areexpensive to operate.

In addition, we found other FFIS problems, includingweaknesses in FFIS trial balance reporting from FFISand internal controls over FFIS manual adjustments andreconciliations.

OCFO has made numerous and substantive changes tocorrect the serious impediments to the effectiveimplementation of FFIS. For example, an entire newproject team, with recognized expertise in projectimplementation, has been brought in. However, muchwork remains, and it is important that identifieddeficiencies be corrected in a timely manner.

We recommended that OCFO, in consultation with theAssistant Secretary for Administration and departmentalusers, analyze the need for each “feeder” system and,based on the analysis, develop long-range plans toconsolidate, integrate, and/or reengineer the “feeder”systems. In addition, we recommended that OCFO takecorrective actions on the weaknesses we identified anddevelop a project management process that will ensureall identified problems are corrected in a timely manner.OCFO generally concurred with our review results.

FINANCIAL MANAGEMENT

Internal Control Review Results in a QualifiedOpinion

Our review of the internal control structure at the Officeof the Chief Financial Officer’s National Finance Center(OCFO/NFC) in effect as of September 30, 1997,resulted in an adverse opinion because of weaknessesin such critical areas as Office of Management andBudget (OMB) Circular No. A-130 certifications, accessand security over OCFO/NFC systems, systemdocumentation, and accounting reconciliations andadjustments. During FY 1998, in response to our audit,OCFO/NFC began comprehensive, time-phasedcorrective actions, which we assisted with and activelymonitored. Based on improvements, we issued aqualified opinion as of September 30, 1998.

Our review disclosed that material weaknessesremained in the areas of accounting adjustments andreconciliations, systems documentation, andconformance with the U.S. Standard General Ledger.In addition, the U.S. General Accounting Office (GAO)noted that serious access control weaknesses affectedOCFO/NFC’s ability to prevent and/or detectunauthorized changes to payroll and other paymentdata or computer software, to control electronic accessto Thrift Savings Program account information, and torestrict physical access to sensitive computing areas.

We received general concurrence with ourrecommendations that OCFO/NFC improve the controlsrelated to (1) documentation associated with OMBCircular No. A-130 reviews; (2) third-party reviews ofpayments made through the Miscellaneous PaymentSystem; (3) accounting for Online Payments andCollections; (4) reconciliations of personal property,suspense, Fund Balance with Treasury, and accountsreceivable balances; (5) the manual adjustmentprocess; (6) the production deviation process;(7) accounting for allowance for losses on accountsreceivables; and (8) systems documentation.

Effective Implementation of FFIS Will ReduceUSDA’s Many Financial Management Problems

Since 1992, we have reported on the many severe andlongstanding financial management problems within theDepartment. These problems have significantlyimpacted the ability of Department officials to prepare

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Controls Needed Over Servicing and Accountabilityof Sold Rural Housing Loans

In 1987, Rural Development (then the Farmers HomeAdministration) received $1.75 billion from the sale ofapproximately 141,000 single family housing loans, aswell as a subordinate interest in a Trust. Our reviewdisclosed that control policies and procedures need tobe developed by Rural Development in order to providereasonable assurance that (1) it is receiving the funds itis entitled to from the Trust, (2) the Government fundsadvanced to the Trust were properly used, and (3) thebalance of $14 million retained by the Trust isnecessary for continued Trust operations.

Further, although Rural Development agreed previouslyto review the Trust operations on at least a 3-year cycle,it has not performed any reviews since 1993. Thisreduces Rural Development’s assurance that the loanssold are being serviced in accordance with the policiesand terms of the Trust agreement.

We recommended that Rural Development (1) establishinternal control policies and procedures relating tooversight of Trust fund operations, and (2) perform areview of funds advanced to and received by the Trustto assure that funds used by the Trust were proper andthat the Government funds retained by the Trust are stillappropriate.

Federal Financial Management Improvement Act(FFMIA) of 1996

Not all major components of USDA currently complywith FFMIA requirements. As required by law, adepartmentwide remediation plan has been developedwhich includes the various actions needed to achievecompliance and the planned completion dates. Inaddition to the overall plan, the Department has detailedplans for CCC, Rural Development, and FFIS.Individual remediation plans have also been requestedfrom FS and NFC, but these plans have not beenfinalized.

FFMIA requires that we report semiannually on theDepartment’s adherence to intermediate datesestablished in its remediation plan. In our lastsemiannual report, we stated that the Department wasin compliance with its overall plan and that the plan was

long-term in nature, with many completion dates in the2001 and 2002 timeframes. Recent updates to the planhave now extended completion dates into the 2003timeframe.

The extension is primarily due to revised implemen-tation schedules for remedial actions planned by RuralDevelopment to correct system nonconformances. Forseveral nonconformances, the mission area reportedthat delays in implementing the New Guaranteed LoanSystem have extended the completion dates fromSeptember 2001 to September 2003. Other interimdates in Rural Development’s plan have been revisedfor reasons such as higher priority automation initiatives(Y2K) and redesign of the Community, Utilities, andBusiness System and the Program Loan AccountingSystem.

Financial Consulting Continues To Assist ForestService

During our initial FY 1999 consulting visits to 17 FSregional, forest, and station offices, we continued to finddata quality deficiencies in (1) the capitalized costs ofreal and personal property and (2) accounts payableand undelivered orders. FS continues to make progresswith its physical inventories of real and personalproperty. The noted exceptions are identical to thosereported to FS in prior years’ consulting reports. Inaddition, our initial review of trial balances from the newFFIS accounting system data warehouse identifiednumerous abnormal account balances and out-of-balance conditions. These conditions, if not corrected,would preclude improvement in FS’ financial statementsand audit opinion.

• Real and Personal Property - We continued to findhigh rates of misstated and unsupported capitalizedcosts and in-service dates for real and personalproperty. We also advised FS of our concerns thatmany field units will not be able to complete physicalinventories of real properties (roads, bridges, trails)and adequately verify capitalized costs and in-servicedates with prescribed supporting documentation bySeptember 30, 1999.

• Accounts Payable and Undelivered Orders - Theseaccounts, as of September 30, 1998, continued tohave high error rates.

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• FFIS Trial Balances - We reviewed FS trial balancereports generated from the FFIS data warehouse forthe period ending February 1999. Our initial reviewsfound widespread noncompliance with the StandardGeneral Ledger requirements. These noncomplianceconditions indicate problems with data quality and/orFFIS processing and must be researched todetermine their cause. Without correction, thesedeficiencies could preclude FS from preparingfinancial statements which present fairly its financialcondition and results of operations.

We advised FS to provide additional guidance to fieldunits on real property accounting requirements andissue supplemental or revised pages to its desk guidewhere needed. We also advised FS to research thecause of abnormal and out-of-balance conditions inFFIS accounts and are assisting FS with this work.

INFORMATION TECHNOLOGY

Agency Validation Efforts Need Improvement

Year 2000 testing is essential to provide reasonableassurance that new or modified systems process datescorrectly and will not jeopardize an agency’s ability toperform core business operations after the millenniumchange. Until thorough system validation has beenperformed, there is no certainty that changes arecomplete or correct.

We found that not all of the agencies were adequatelydocumenting the system validation efforts or havingIndependent Verification and Validation (IV&V) reviewsperformed for each of the Departmental PrioritySystems. We did find that most of the agencies hadtaken appropriate actions to resolve the previouslyreported weaknesses in identifying, monitoring, andtesting data exchanges with the data exchangepartners. One notable exception was at NFC, where weconcluded that additional efforts were needed to obtainformal data exchange agreements and carry out end-to-end testing with the Center’s data exchange partners.We recommended OCIO immediately instruct theagencies that all testing activities must be appropriatelydocumented; clarify to each agency the requirementthat, at a minimum, agencies are to conduct an IV&V for

each of their Departmental Priority Systems; and directNFC to obtain formal data exchange agreements withits data exchange partners.

OCIO promptly reinstructed the agencies regarding theimportance of appropriately documenting all phases ofthe testing activities and required the agencies to, at aminimum, conduct an IV&V for each of theDepartmental Priority Systems. Additional actionsregarding data exchange agreements at NFC are still tobe provided.

ADMINISTRATIVE OPERATIONS

More Needed To Assist Former Employees onWorkers’ Compensation in Returning to Work

The Federal Employees’ Compensation Act providesworkers’ compensation benefits for Federal civilianemployees who sustain injuries or diseases while on thejob. In a 1992 audit, we reported that USDA and itsagencies were not monitoring long-term claimants orproviding them job placement assistance once they hadrecovered from their injuries. In our current evaluation,we found the agencies had not arranged for periodicreviews of all long-term claimant files, as had beenindicated would occur in the response to our 1992 auditreport.

Not until July 1998 had an agency performed extensivereviews of its long-term claimant files. Our followupreview showed that a projected 168 of the work-capableclaimants from the prior audit continued to receiveworkers’ compensation benefits, estimated at$19.2 million from 1992 through 1998, and will receivean estimated $51.2 million over their remaining lifeexpectancies if measures are not taken to return themto work.

We recommended that agencies review the cases of alllong-term claimants and provide job placementassistance to those with work capabilities. We made aseries of recommendations to improve controls over theprogram. The agency generally agreed with ourrecommendations.

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GOVERNMENT PERFORMANCE ANDRESULTS ACT (GPRA) OF 1993

Results of Reviews

In response to a Congressional request, we initiated anongoing examination of agencies’ activities pursuant toGPRA. The results of review for this period follow.

Food and Nutrition Service

We examined a segment of FNS’ Strategic Goal dealingwith the Child and Adult Care Food Program (CACFP).Specifically, we reviewed Goal 4.2.1., “Better targetedand higher quality program reviews of sponsors andproviders by State agencies” and the associatedIndicator “Number of reviews conducted.”

We have provided extensive audit coverage of CACFPfor the past several years. A substantial entry on ourwork in CACFP can be found in our section onPresidential initiatives. Our reviews have disclosedsignificant, widespread problems which have greatlyundermined the integrity of the program. Our auditsfound that a primary cause for this extensive fraud andabuse was minimal State oversight of sponsor activities.Accordingly, we determined that the GPRA Goalreviewed is valid. The performance measure, however,is vague and does not include any quantitativemeasurement data (the FY 1999 and FY 2000indicators were cited only as “to be determined”).

Due to the absence of quantitative data, we could notverify the data sources. Further, the GPRA Plan notesthat in order to achieve the Performance Goal, FNSmust (1) develop and issue program integrityregulations and guidance materials to States, (2)increase its oversight of State agency programmanagement, and (3) conduct a study to obtain data oncurrent State and sponsor performance.

According to agency officials, program integrityregulations have been developed but are awaitingreview by OGC. The proposed regulations areexpected to be issued in draft by the 1st quarter ofFY 2000, and in final form by September 2000. FNShas developed guidance materials; for example,information highlighting the most vulnerable programareas has been forwarded to State agencies for theiruse. In addition, a training program for State reviewersand USDA personnel involved in CACFP has beenestablished.

Forest Service

We examined a segment of the FS’ Strategic Goal to“ensure organizational effectiveness.” Specifically, wereviewed Management Initiative 3.4., “A sound financialsystem which supports resource decisions with timely,accurate information and financial expertise.”

We have performed annual financial statement audits ofFS since 1990. For the past 3 years we have issued adisclaimer of opinion because the agency has beenunable to prepare statements which can be audited, asthoroughly discussed in previous semiannual reportsand congressional hearings. Accordingly, we concludethe initiative developed to rectify this weakness to bevalid. The primary performance measures put forth byFS to fulfill this initiative are (1) FFIS implemented,(2) Real Property Inventory completed, (3) Timber SaleAccounting system implemented, and (4) financialmanagement reports developed.

The indicators associated with these measures lackquantitative data; instead, they are prescribed on anattribute (yes/no) basis. FFIS represents a criticalcorrective action to achieve the initiative; the Plan callsfor three pilot units to be on FFIS by FY 1999, and thiswas accomplished. The Plan states the Real PropertyInventory was to be completed in FY 1999; the agencyasserted in August 1999 that this target had been met.We have not yet verified completion of this essentialmeasure but will do so in our performance of theFY 1999 financial audit. The Timber Sale Accountingsystem measure is misstated in that the system wasimplemented several years ago; our discussions withagency officials disclosed that the measure actuallydealt with the system being made Y2K compliant, anaction only tangentially related to the Goal. Lastly, thedevelopment of the financial management reports,again according to agency officials (the Plan isnondescriptive in this regard) pertains to FFIS reports.Although reports have been generated by the newsystem, the measure does not appear to be discretefrom the first one delineated.

Risk Management Agency

We examined a segment of RMA’s Strategic PlanObjective to “Improve program integrity and protecttaxpayers’ funds.” Specifically, we reviewed Goal 4,“Reduce program vulnerabilities.”

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We have performed numerous audits in recent yearsthat have evaluated RMA’s policies and procedures,program delivery systems, and compliance andoversight activities. Our reviews have disclosedinherent program vulnerabilities to dollar losses andinefficiencies. As a result, we concluded that the GPRAGoal is valid. The key indicators supporting this Goalare (1) crop insurance loss ratio and (2) total error rate,including the rate of erroneous payments, rate ofprogram vulnerability, and rate of program deliveryerrors.

The crop insurance loss ratio, which measures actuarialsoundness, and the associated quantitative targetsappear to be reasonable. The source of the datareported is the agency’s claims data base, which we

have not verified, but plan to do so in upcoming audits.The “error rate” indicator is valid in terms of a measureto reduce vulnerabilities. We question the datareported, however, in that for every year depicted in theplan (1997 through 2000) the error rate shown is4.83 percent. In our estimation, targeted rates need tobe developed which would show program improvement(i.e., a reduction in the rate). Further, the rate itself mayneed to be reassessed; our analysis disclosed that themethodology used to establish the rate excluded actualproduction history data, which could significantly skewresults. Further, GAO questioned the adequacy of thesample size taken by RMA in compiling the data; toolimited a sample can inflate variability and hence reduceaccuracy.

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Employee Integrity Investigations

A top priority for OIG is the investigation of seriousallegations of employee misconduct. During the past6 months, such investigations resulted in 12 convictionsof current or former USDA employees and 38 personnelactions. Some recent investigations follow.

FSA Employee Pleads Guilty to Theft of $99,000 inGovernment Property

In Alexandria, Virginia, an FSA employee pled guilty toembezzling over $99,000 in travel advance funds andwas sentenced to 5 months’ incarceration, 3 years’supervised release, and restitution of $99,085. FromFebruary 1997 to June 1998, the employee submitted24 false travel authorization/advances for payment, allusing names of relatives or associates. The employeewas removed from FSA.

FSA Employee Who Embezzled $276,000 IsSentenced

As previously reported, a Kansas FSA county officeprogram assistant pled guilty to charges that she hadissued CCC checks to herself, disguised asadministrative payments, to embezzle more than$276,000. She has since been sentenced to serve18 months in prison, followed by 3 years of supervisedrelease, and was ordered to pay restitution of $276,680.

NRCS Employee Convicted of Conflict of Interestand Conversion of Property

An NRCS District Conservationist was convicted inNorth Carolina on charges of conflict of interest and theconversion of property of landowners to his own use. Ina criminal conflict of interest, he sold filter fabric materialto landowners for conservation plans that he designed

or supervised while performing his NRCS duties andconcealed doing so by putting the sales in the businessname of his wife’s beauty salon. As part of his officialduties, he also designed and supervised conservationplans for fencing on farms but recommended a businesspartner to do the fencing work and then assisted thepartner in putting in the fencing and shared in theprofits. In addition, he designed, supervised, andapproved conservation plans for a partnership with hiswife and concealed his interest from USDA. Further, hewrongfully benefited from the sale of logs that wereremoved from flood cleanup projects he supervised forNRCS. After his conviction, the employee resignedfrom NRCS and is awaiting sentencing.

NRCS Employee Convicted of Theft

A search warrant at the home of an NRCS computerspecialist in Illinois revealed that the employee hadstolen U.S. Air Force computer components and aUSDA computer not assigned to him. The employeewas convicted and sentenced to 12 months’ probationfor theft. The individual was previously a civilianemployee with the Air Force. This investigation wasworked jointly with the U.S. Air Force, Office of SpecialInvestigations.

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Statistical Data

AUDITS WITHOUT MANAGEMENT DECISION

The following audits did not have management decisions made within the 6-month limit imposed by Congress.Narratives for new entries follow this table. An asterisk (*) indicates that an audit is pending judicial, legal, orinvestigative proceedings which must be completed before the agency can act to complete management decisions.

New Since Last Reporting Period

Amount WithTotal Value No Mgmt.at Issuance Decision

Agency Date Issued Title of Report (in dollars) (in dollars)

AARCC 01/27/99 1. FY 1997 AARCC Financial 0 0Statements (37401-2-FM)

ARS 02/08/99 2. JA Jones Management Services 160,233 160,233CY’s 1994 and 1995 IncurredCost (02017-4-At)

FAS 03/30/99 3. PVO Grant Fund 18,629,558 18,629,558Accountability (50801-6-At)

FNS 12/07/98 4. CACFP - Family Day Care 338,100 338,100Services, Inc. -West Palm Beach, FL(27601-7-At)*

FS 01/05/99 5. Timber Sale Environmental 0 0Analysis Requirements(08801-10-At)

02/23/99 6. FY 1998 FS Financial 0 0Statements (08401-8-At)

FSA 03/30/99 7. Payment Limitation - 881,924 881,924Mitchell County, GA(03006-20-At)*

Multiagency 02/01/99 8. FY 1998 Rural Development 0 0Financial Statements(50401-28-FM)

NRCS 03/22/99 9. Controls Over the Award and 0 0Administration of CooperativeAgreements (10015-1-Hy)

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Amount WithTotal Value No Mgmt.at Issuance Decision

Agency Date Issued Title of Report (in dollars) (in dollars)

OCFO 03/25/98 10. Verification of Data Input 27,259 27,259Into NFC Payroll/PersonnelSystem (50099-11-FM)

02/22/99 11. FY 1998 USDA Consolidated 0 0Financial Statements(50401-30-FM)

RHS 11/09/98 12. RRH - Nationwide Initiative 41,509 41,509in NE - Seldin Company,Omaha, NE (04801-4-KC)*

01/08/99 13. RRH Program - Dujardin 195,694 195,694Property Management, Inc.,Everett, WA (04801-5-SF)*

01/15/99 14. RRH - Initiative in North 183,957 183,957Carolina (04801-4-At)

01/25/99 15. RRH Program Operations at 5,670 4,431College View Apts., BeltonTX (04099-8-Te)

02/13/99 16. RRH - Initiative in North 109,653 109,653Carolina (04801-7-At)

03/12/99 17. RRH - Nationwide Initiative - 82,324 81,646Pennsylvania (04801-3-Hy)

03/25/99 18. Guaranteed Rural Housing 139,220,122 215,030Loan Program (04601-2-At)

03/31/99 19. RRH - Nationwide Initiative in 233,958 233,958NE - Bosley Management, Inc.,Sheridan, WY (04801-3-KC)

RMA 12/16/98 20. Nursery Crop Insurance 3,963,468 3,963,468Program (05099-2-At)

03/10/99 21. FY 1998 FCIC Financial 0 0Statements Report onManagement Issues(05401-6-FM)

03/15/99 22. Prevented Planting of 158,430 158,4301996 Insured Crops(05601-5-Te)

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Amount WithTotal Value No Mgmt.at Issuance Decision

Agency Date Issued Title of Report (in dollars) (in dollars)

Previously Reported but Not Yet Resolved

These audits are still pending agency action or are under judicial, legal, or investigative proceedings. Details on therecommendations where management decisions had not been reached have been reported in previous SemiannualReports to Congress. Agencies have been informed of actions that must be taken to reach management decision, butfor various reasons, the actions have not been completed. The appropriate Under and Assistant Secretaries havebeen notified of those audits without management decisions.

AARCC 09/30/96 23. AARC Cooperative Agreement 0 0With Agro-Fibers, Inc.(34099-1-At)*

AMS 09/24/98 24. National Fluid Milk Processor 0 0Promotion Program (01001-3-Ch)*

CSREES 03/27/97 25. Use of 4-H Program Funds - 5,633 0University of Illinois(13011-1-Ch)*

03/31/98 26. National Research Initiative 32,757,862 32,757,862Competitive Grants Program(13601-1-At)

09/30/98 27. Use of CSREES Grant Funds 1,424,983 1,239,314by Prairie View A&MUniversity (13011-2-Te)

FNS 03/21/97 28. Establishment and 1,908,988 1,908,988Collection of FoodStamp Claims (27002-2-Te)

07/08/97 29. Reinvestment of 50,150,541 25,157,504Quality ControlPenalties (27099-4-At)

09/22/97 30. Child and Adult Care 56,296 56,296Food Program - SponsorAbuses (27601-7-KC)*

09/30/97 31. Food Stamp Program - 0 0Reporting Accuracy ofClaims Activity(27601-12-Ch)

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Amount WithTotal Value No Mgmt.at Issuance Decision

Agency Date Issued Title of Report (in dollars) (in dollars)

FS 07/18/96 32. FY 1995 FS Financial 1,150,183,750 1,150,183,750Statements (08401-4-At)*

09/30/96 33. Real and Personal Property 0 0Issues (08801-3-At)*

03/31/97 34. Research Cooperative 468,547 468,547and Cost ReimbursableAgreements (08601-18-SF)*

07/13/98 35. FY 1997 FS Financial 0 0Statements (08401-7-At)*

08/05/98 36. Humboldt/Toiyabe National 0 0Forest Land AdjustmentProgram (08003-2-SF)*

08/19/98 37. Review of FS’ Retroactive 0 0Redistribution (08801-4-Hq)*

08/26/98 38. Improvements on the 0 0Zephyr Cove LandExchange (08003-4-SF)

09/24/98 39. FS Assistance Agreements 7,098,026 3,086,023With Nonprofit Organizations(08801-2-Te)

FSA 09/30/93 40. Disaster Payments 5,273,795 1,482,759Mitchell County, GA(03097-2-At)*

03/31/95 41. Disaster Assistance 484,972 364,552Program, 1993 NonprogramCrops, Yuba County, CA(03600-26-SF)

09/07/95 42. A&B Professional 628,976 628,976Consulting, Inc.(03004-1-At)

09/07/95 43. Large Operators’ Compliance 165,069 165,069With Payment LimitationProvisions in StephensonCounty, IL, and RockCounty, WI (03099-8-KC)

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Amount WithTotal Value No Mgmt.at Issuance Decision

Agency Date Issued Title of Report (in dollars) (in dollars)

09/18/95 44. Management of the 75,175,410 909,437Dade County, FL, FSAOffice (03006-1-At)

09/28/95 45. Disaster Assistance 1,805,828 1,805,828Payments, Lauderdale, TN(03006-4-At)*

01/02/96 46. 1993 Crop Disaster 2,469,829 2,418,167Payments, Brooks/Jim Hogg Cos., Texas(03006-1-Te)*

05/02/96 47. Disaster Assistance 2,177,640 2,145,533Program - 1994,Thomas County, GA(03006-13-At)*

09/18/96 48. Emergency Feed Program 626,182 115,425in Texas (03601-7-Te)*

09/30/96 49. 1994 Disaster Assis- 2,666,383 2,601,692tance Program - Maine(03601-1-Hy)*

03/31/98 50. Reorganization of Payment 542,807 542,807Limitation in HidalgoCounty, TX (03601-23-Te)

04/30/98 51. Reeves County Office 1,365,640 421,152Operations - Texas(03801-36-Te)

06/11/98 52. Noninsured Assistance 110,679 76,160Program Payments for 1996Crop Year Losses(03601-24-Te)

09/30/98 53. Wool and Mohair Payment 2,432,112 2,432,112Limitation in Val VerdeCounty, TX (03099-20-Te)*

Multiagency 09/30/98 54. CSREES - Managing 3,824,211 3,281,534Facilities ConstructionGrants (50601-5-At)

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Amount WithTotal Value No Mgmt.at Issuance Decision

Agency Date Issued Title of Report (in dollars) (in dollars)

OCFO 07/16/98 55. FY 1997 USDA Financial 0 0Statements (50401-24-FM)*

RHS 08/10/98 56. Self-Help Housing Program - 0 0Grizzly Hollow Project,Galt, CA (04801-2-SF)*

RMA 09/30/97 57. Crop Insurance on 15,082,744 444,910Fresh Market Tomatoes(05099-1-At)

03/03/98 58. Transfer of CAT 0 0Policies to ReinsuredCompanies (05099-1-KC)

04/10/98 59. Crop Insurance 126,787 78,996Claims (05601-1-KC)

07/14/98 60. Quality Control for 0 0Crop InsuranceDeterminations(05099-2-KC)

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Audits Without Management Decision - Narrative for New Entries

1. FY 1997 AARCC Financial Statements, IssuedJanuary 27, 1999

All of the report’s 32 recommendations remain withoutmanagement decisions. AARCC’s response did notaddress full and timely corrective actions. We haveadvised AARCC of the specific information needed oneach recommendation.

2. JA Jones Management Services, CY’s 1994 and1995 Incurred Cost, Issued February 8, 1999

The Defense Contract Audit Agency reported that thecontractor overclaimed $160,223 due to excessiveoverhead cost allocations. OIG and the AgriculturalResearch Service (ARS) provided the contractoropportunities to justify its claim, but the contractor couldnot support the overclaim amounts. ARS agrees withthe audit findings but is negotiating with the contractor.

3. PVO Grant Fund Accountability, IssuedMarch 30, 1999

We questioned the use of CCC commodities and ad-ministrative funds totaling $18.3 million to one privatevoluntary organization (PVO) and $264,439 of admin-istrative funds paid to three other PVO’s. We also foundthat FAS needed to strengthen operating controls overthe Food for Progress Program. We are currentlyassessing FAS’ most recent response to determine ifmanagement decision is now achieved for all recom-mendations.

4. CACFP - Family Day Care Services, Inc. - WestPalm Beach, FL, Issued December 7, 1998

The audit questioned program payments and admin-istrative costs paid to the sponsor because of inflatedmeal counts and unaccounted for disbursements. As aresult of the audit, the sponsor was terminated from theprogram. Because the sponsor’s activities are undercriminal investigation, any corrective actions must becoordinated with the investigation.

5. Timber Sale Environmental AnalysisRequirements, Issued January 5, 1999

One recommendation remains unresolved. Werecommended that FS report the environmental analysisand implementation monitoring process as a materialweakness in the Department’s Federal Manager’sFinancial Integrity Act (FMFIA) report. FS respondedthat the appropriate time to assess whether itsenvironmental analysis and implementation monitoringwould be reported is following completion of specificreviews it plans of the environmental analysis process.We concurred with FS’ alternative action; however, toreach management decision, we need to review FS’plans and agree that its analysis will provide sufficientinformation to make a decision whether to include orexclude this issue in its FMFIA report.

6. FY 1998 FS Financial Statements, IssuedFebruary 23, 1999

FS and OIG personnel have been working to improveFS accounting systems and processes and to adoptnew accounting standards issued by OMB. Oneprimary objective is to enable FS to prepare timely andaccurate financial statements and ultimately receiveunqualified audit opinions on those statements. FS hasbegun to implement a new real property accountingsystem and will begin converting field offices to the newdepartmental general ledger system. Implementationtimeframes for (a) the new general ledger, (b) improve-ments in FS accounting subsystems, and (c) newaccounting standards will extend into FY 2000. FS iscontinuing to work toward improving its financialstatements. However, much work remains including theneed to (1) ensure that sufficient, full-time staff isassigned to compile and complete the financialstatements timely and accurately and (2) ensure thatregions and units adhere to agencywide accountingpolicies and procedures. We continue to work closelywith FS to ensure that longstanding deficiencies in itsaccounting systems and controls are eliminated.

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7. Payment Limitation - Mitchell County, GA,Issued March 30, 1999

The audit identified 12 producers who receivedquestionable 1996 and 1997 Agricultural MarketTransition Act payments totaling $881,924 partly byusing schemes or devices to evade maximum paymentlimitation provisions. The matter was referred to OIGInvestigations in May 1999, and further action ispending the completion of the investigation.

8. FY 1998 Rural Development FinancialStatements, Issued February 1, 1999

The open recommendation relates to compliance withthe Debt Collection Improvement Act and addressesreporting debt to Treasury for offset, as well asdeveloping a methodology to maximize the usage oftools for barring ineligible borrowers from receivingFederal loans. Rural Development cites a legal opinionthat current regulations do not provide authority toreport debt related to defaulted guaranteed loans andrepurchased guaranteed loans. We do not believe thelegal opinion prohibits revising the regulations. Also,Rural Development’s response did not adequatelyaddress developing a methodology to prevent loans toineligible borrowers.

9. Controls Over the Award and Administration ofCooperative Agreements, Issued March 22, 1999

There was no documentation to determine the selectionprocess used to award cooperative agreements. Inaddition, NRCS has not competitively awardedcooperative grants exceeding $75,000 as required bylaw. We recommended that NRCS develop proceduresfor awarding cooperative agreements that would ensurethe best use of Government funds in accomplishingprogram objectives, documenting the selection process,and when applicable, providing a justification that a non-competitive award is in the best interest of theGovernment. We also recommended NRCS developprocedures to ensure that cooperative agreementsexceeding $75,000 are competitively awarded.

NRCS has developed a handbook; however, itsresponse did not provide specific citations allowing us toassess whether the handbook might be responsive toour recommendations. NRCS also indicated that itcould not require mandatory use for all employees. Inaddition, NRCS believed that the 1999 Agricultural

Appropriations Act exempted it from the Federal Grantsand Cooperative Agreements Act of 1977. We do notagree with this assessment and have informed NRCSan OGC legal opinion will be needed for clarification.We also advised them of what is needed to reachmanagement decision on the other recommendations.

10. Verification of Data Input Into NFC Payroll/Personnel System, Issued March 25, 1998

Of the 21 recommendations, 7 have not reachedmanagement decision. The agency has been advisedof the information needed, which includes implemen-tation dates for three of the recommendations and morespecific information on the actions planned or taken forthe remaining recommendations.

11. FY 1998 USDA Consolidated FinancialStatements, Issued February 22, 1999

Seven recommendations remain without managementdecision. We reported that the Department’s ability toprovide accurate and reliable information on its financialoperations is impacted by many serious financialmanagement system problems. The Department’sexisting financial information system comprises sixadministrative and program accounting systemsoperated by various USDA agencies. This system doesnot always process and report departmentwide financialinformation accurately. The system was not integratedwith its subsystems and did not substantially complywith the three requirements of the Federal FinancialManagement Improvement Act. We also reportedweaknesses in the processes and procedures used bythe Department’s lending agencies to estimate andreestimate loan subsidy costs since 1992.

12. RRH - Nationwide Initiative in NE - SeldinCompany, Omaha, NE, Issued November 9, 1998

The results of the audit were referred for investigation.RHS and the Rural Development State office have beeninstructed to take no further action pending completionof the investigation.

13. RRH Program - Dujardin Property Management,Inc., Everett, WA, Issued January 8, 1999

The results of the audit were referred for investigation.RHS and the Rural Development State office have beeninstructed to take no further action pending completionof the investigation.

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14. RRH - Initiative in North Carolina, IssuedJanuary 15, 1999

The results of the audit were referred to an assistantU.S. attorney (AUSA) for investigation. The AUSA hasdecided not to pursue civil action. We are working withRural Development to ensure the managementcompany refunds $183,957 to nine projects forexcessive operating and maintenance costs.

15. RRH Program Operations at College View Apts.,Belton, TX, Issued January 25, 1999

We can reach management decision on this audit whenwe receive acknowledgment of payment or that anaccounts receivable has been established for recoveryof the excessive interest and rental assistance receivedby the property on behalf of ineligible college studenttenants living in subsidized units.

16. RRH - Initiative in North Carolina, IssuedFebruary 13, 1999

At the time the report was issued, we requested thatRHS delay administrative action since the managementcompany had been referred for possible civil action. OnJune 9, we advised RHS that an AUSA had decided notto pursue civil action. Thus, RHS was free to takeappropriate administrative action. As a result of acomplex fee-splitting arrangement, the borrowers werepaid $9,000 of the projects’ funds with an additional$97,501 at risk of being paid. We need documentationthat the borrowers have been advised, in writing, torefund to the projects $9,000 plus any subsequentpayments.

Projects were improperly charged $3,955 for borrowers’administrative expenses. Also, the management agentcollected $3,152 in unallowable costs charged to theprojects. To reach management decision, we need tobe provided the dates by which the managementcompany will be required to review the annual reports,provide corrected reports, and refund any excessmanagement and unallowable costs charged to theprojects.

17. RRH - Nationwide Initiative - Pennsylvania,Issued March 12, 1999

The management agent improperly chargedunallowable and duplicate operating costs to eightprojects. The Pennsylvania State Rural DevelopmentOffice issued a letter requiring reimbursement of thereserve accounts. The management agent met withState office officials and provided additional information.We continue to work with RHS to determine the properamount to be reimbursed.

18. Guaranteed Rural Housing Loan Program,Issued March 25, 1999

On August 23, 1999, RHS provided additionalinformation to support management decision for thenine open recommendations. We are reviewing thisnew information.

19. RRH - Nationwide Initiative in NE - BosleyManagement, Inc., Sheridan, WY, IssuedMarch 31, 1999

The results of the audit were referred for investigation.RHS and the Rural Development State office have beeninstructed to take no further action pending completionof the investigation.

20. Nursery Crop Insurance Program, IssuedDecember 16, 1998

The audit disclosed that the Nursery Crop InsuranceProgram had been poorly managed by the reinsuredcompanies and abused by sales agents, loss adjusters,and producers. The report included 16 recommen-dations addressing the problems disclosed, withquestionable costs totaling $4 million. Managementdecisions have not been reached on seven of therecommendations, for which we have requestedadditional information.

46

21. FY 1998 FCIC Financial Statements Report onManagement Issues, Issued March 10, 1999

The remaining recommendation requires the agency tocontinue working with OGC to implement therecommended corrective actions for transferringCatastrophic Risk Protection policies to privatereinsured companies. In order to achieve managementdecision, the agency needs to provide a timeframe forcompleting actions and has been unable to establish it.We continue to work with the agency.

22. Prevented Planting of 1996 Insured Crops,Issued March 15, 1999

We reported that controls were not in place to preventabuse, as insureds were not required to report lossesuntil after substitute crops were planted. Therefore,there was not sufficient time for insured companies toinspect acreages to determine whether disasterconditions actually caused prevented planting. Wequestioned claims totaling $134,612 on 30 policies thatincluded acreage (1) left flooded for crawfish production,

(2) involved in double cropping, (3) not planted due tomanagement decision, (4) that exceeded the FSA baseacreage, and (5) not suitable for agricultural production.Our review also disclosed questioned payments of$23,818 on three policies with acreage under water,idle, or otherwise not suitable for agricultural production.

We further found cases where loss adjusters adjustedclaims when they had conflicts of interest with theinsureds. We recommended that action be taken tohave reinsured companies improve the loss adjustmentand internal control reviews of prevented plantedclaims. Also, we recommended that RMA establishcontrols to prevent adjusters from adjusting claims whenthey have conflicts of interest with the insureds. Wefurther recommended collection of the $158,430 inquestioned claims. RMA has initiated actions to obtainmanagement decisions on the audit recommendations.

We reached management decision on two of thereport’s six recommendations on March 15. However,RMA has not replied to any of the remaining open auditrecommendations. We are waiting for additionalinformation and documents from RMA.

47

Indictments and Convictions

Between April 1 and September 30, 1999, OIGcompleted 257 investigations. We referred 197 casesto Federal, State, and local prosecutors for theirdecision.

During the reporting period, our investigations led to208 indictments and 332 convictions. The period oftime to obtain court action on an indictment varieswidely; therefore, the 332 convictions do not necessarilyrelate to the 208 indictments. Fines, recoveries/collections, restitutions, claims established, and costavoidance resulting from our investigations totaledabout $31.5 million.

The following is a breakdown, by agency, of indictmentsand convictions for the reporting period.

Indictments and ConvictionsApril 1 - September 30, 1999

Agency Indictments Convictions *

AMS 4 30APHIS 3 8ARS 1 1FSA 17 26FNS 171 251FS 1 0NRCS 2 5OIG 1 0RBS 2 3RHS 4 3RMA 2 3SEC 0 1Other** 0 1

___ ___Totals 208 332

* This category includes pretrial diversions.**This category includes cases involving non-USDA/affiliated agencies(one conviction).

48

The Office of Inspector General Hotline

The OIG Hotline serves as a national receiving point forreports from both employees and the general public ofsuspected incidents of fraud, waste, mismanagement,and abuse in USDA programs and operations. Duringthis reporting period, the OIG Hotline received764 complaints, which included allegations of participantfraud, employee misconduct, and mismanagement, aswell as opinions about USDA programs. Figure 3displays the volume and type of the complaints wereceived, and figure 4 displays the disposition of thosecomplaints.

Hotline ComplaintsApril 1 to September 30, 1999(Total = 764)

Disposition of ComplaintsApril 1 to September 30, 1999

Figure 3 Figure 4

ParticipantFraud445

Bribery2

Health/Safety

7Opinion/

Information80

EmployeeMisconduct

146

Waste/Mismanagement

83

Referred toFNS for Tracking

200

Referred toUSDA Agencies

for Response296

ComplaintReferred to

State Agency57

Referred toOther Law

EnforcementAgencies

6

Referred toOIG Audit orInvestigations

for Review49

Filed WithoutReferral-

InsufficientInformation

22

Referred toUSDA or OtherAgencies for Information-

No Response Needed

134

Reprisal1

49

Freedom of Information Act (FOIA) and Privacy Act (PA) Requestsfor the Period April 1 to September 30, 1999

Number of FOIA/PA Requests Received 315

Number of FOIA/PA Requests Processed: 319

Number of Requests Granted in Full 169 Number of Requests Granted in Part 84 Number of Requests Not Granted 69

Reasons for Denial:

No Records Available 28 Requests Denied in Full 24 Referrals 18_______________________________________________

Requests for OIG Reports From Congressand Other Government Agencies

Received 111 Processed 105_______________________________________________

Appeals Processed 10

Appeals Granted 0 Appeals Denied in Full 10 Appeals Denied in Part 0

_______________________________________________

Number of OIG Reports Released 346in Response to Requests

NOTE: A request may involve more than one report.

50

Appendix I

INVENTORY OF AUDIT REPORTS ISSUEDWITH QUESTIONED COSTS AND LOANS

DOLLAR VALUES

QUESTIONED UNSUPPORTED*NUMBER COSTS AND LOANS COSTS AND LOANS

A. FOR WHICH NO MANAGEMENT 68 $272,805,220 $48,003,010DECISION HAD BEEN MADEBY APRIL 1, 1999

B. WHICH WERE ISSUED DURING 22 $69,975,055 $26,686,847THIS REPORTING PERIOD

TOTALS 90 $342,780,275 $74,689,857

C. FOR WHICH A MANAGEMENT 32DECISION WAS MADE DURINGTHIS REPORTING PERIOD

(1) DOLLAR VALUE OFDISALLOWED COSTS

RECOMMENDED FOR RECOVERY $10,911,924 $1,173,639

NOT RECOMMENDED FOR RECOVERY $72,215,285 $39,832

(2) DOLLAR VALUE OF $12,922,516 $2,626,463COSTS NOT DISALLOWED

D. FOR WHICH NO MANAGEMENT 58 $246,746,433 $70,854,550DECISION HAS BEEN MADE BYTHE END OF THIS REPORTINGPERIOD

REPORTS FOR WHICH NO 41 $197,225,182 $44,350,333MANAGEMENT DECISION WASMADE WITHIN 6 MONTHSOF ISSUANCE

*Unsupported values are included in questioned values.

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Appendix II

INVENTORY OF AUDIT REPORTS ISSUEDWITH RECOMMENDATIONS THAT FUNDS BE PUT TO BETTER USE

NUMBER DOLLAR VALUE

A. FOR WHICH NO MANAGEMENT 21 $238,276,781DECISION HAD BEEN MADEBY APRIL 1, 1999

B. WHICH WERE ISSUED DURING 12 $131,551,974THE REPORTING PERIOD

TOTALS 33 $369,828,755

C. FOR WHICH A MANAGEMENT 11DECISION WAS MADE DURINGTHE REPORTING PERIOD

(1) DOLLAR VALUE OF $106,764,899DISALLOWED COSTS

(2) DOLLAR VALUE OF $9,750,947COSTS NOT DISALLOWED

D. FOR WHICH NO MANAGEMENT 22 $253,312,909DECISION HAS BEEN MADE BYTHE END OF THE REPORTINGPERIOD

REPORTS FOR WHICH NO 15 $205,127,794MANAGEMENT DECISION WASMADE WITHIN 6 MONTHSOF ISSUANCE

52

Appendix III

SUMMARY OF AUDIT REPORTS RELEASEDBETWEEN APRIL 1 AND SEPTEMBER 30, 1999

DURING THE 6-MONTH PERIOD BETWEEN APRIL 1 AND SEPTEMBER 30, 1999, THE OFFICE OF INSPECTORGENERAL ISSUED 55 AUDIT REPORTS, INCLUDING 5 PERFORMED BY OTHERS.

THE FOLLOWING IS A SUMMARY OF THOSE AUDITS BY AGENCY:

QUESTIONED UNSUPPORTEDa FUNDS BEREPORTS COSTS COSTS PUT TO

AGENCY RELEASED AND LOANS AND LOANS BETTER USE

AGRICULTURAL RESEARCH SERVICE 1 $20,504 $18,356FARM SERVICE AGENCY 8 $26,041,615 $20,248,829 $87,422RURAL HOUSING SERVICE 6 $1,814,109 $12,006,101RISK MANAGEMENT AGENCY 3 $615,771 $20,000,000FOREST SERVICE 2 $203,118 $203,118 $12,000,000RURAL UTILITIES SERVICE 1 $2,528,212 $2,518,083NATURAL RESOURCES CONSERVATION

SERVICE 2 $103,421OFFICE OF THE CHIEF FINANCIAL OFFICER 1FOOD SAFETY AND INSPECTION SERVICE 1FOOD AND NUTRITION SERVICE 17 $19,544,412 $3,697,343 $35,961,765ANIMAL AND PLANT HEALTH 1

INSPECTION SERVICERURAL BUSINESS-COOPERATIVE SERVICE 1MULTIAGENCY 11 $19,207,314 $1,118 $51,393,265

TOTALS 55 $69,975,055 $26,686,847 $131,551,974

TOTAL COMPLETED:SINGLE AGENCY AUDIT 33MULTIAGENCY AUDIT 7SINGLE AGENCY EVALUATION 11MULTIAGENCY EVALUATION 4

TOTAL RELEASED NATIONWIDE 55

TOTAL COMPLETED UNDER CONTRACTb 5

TOTAL SINGLE AUDIT ISSUEDc 4

aUnsupported values are included in questioned values.bIndicates audits performed by others.cIndicates audits completed as Single Audit.

53

AUDIT REPORTS RELEASED AND ASSOCIATED MONETARY VALUESBETWEEN APRIL 1 AND SEPTEMBER 30, 1999

QUESTIONED UNSUPPORTED FUNDS BEAUDIT NUMBER COSTS COSTS PUT TORELEASE DATE TITLE AND LOANS AND LOANS BETTER USE

AGRICULTURAL RESEARCH SERVICE

02-017-0002-SF CLOSEOUT AUDIT-GLOBAL ASSOCIATES, OAKLAND, CA $20,504 $18,356 1999/06/25

TOTAL: AGRICULTURAL RESEARCH SERVICE 1 $20,504 $18,356

FARM SERVICE AGENCY

03-006-0013-CH EVALUATION OF SECURITY AND REPAYMENT OF $521,606 1999/08/10 COMMODITY LOANS 03-099-0031-KC PRICE SUPPORT LOANS IN NEBRASKA $178,911 $164,274 1999/04/23 03-099-0034-KC LOAN DEFICIENCY PAYMENTS 1999/05/25 03-601-0016-KC SMALL HOG OPERATION PAYMENT 1999/07/27 03-601-0028-TE 1996 FAIR ACT PROVISIONS AFFECTING FARM LOAN $25,341,098 $20,084,555 1999/05/17 PROGRAMS DIRECT LOAN SERVICING 03-601-0029-TE ADMINISTRATIVE OFFSET $87,422 1999/05/04 03-601-0032-TE CROP YEAR 1996 NONINSURED CROP DISASTER 1999/05/21 ASSISTANCE PAYMENTS - NATIONWIDE 03-801-0037-TE LIVESTOCK ASSISTANCE PROGRAM 1999/07/23

TOTAL: FARM SERVICE AGENCY 8 $26,041,615 $20,248,829 $87,422

RURAL HOUSING SERVICE

04-099-0007-TE MFH PROGRAM - MEDLOCK SOUTHWEST MANAGEMENT $94,823 1999/06/03 CORPORATION 04-801-0001-FM SERVICING AND ACCOUNTABILITY OF SOLD RURAL 1999/09/23 HOUSING LOANS 04-801-0004-HY RRH - NATIONWIDE INITIATIVE - NEW YORK $259,079 1999/05/20 04-801-0006-SF RRH PROGRAM - RON TABER (OWNER/MANAGER), $346,685 1999/04/20 OLYMPIA, WA 04-801-0011-TE RRH INITIATIVE - CALHOUN PROPERTY MGMT. (LA) $1,034,459 $11,896,622 1999/09/23 04-801-0012-TE RRH INITIATIVE - HY-CITE MANAGEMENT (TX) $79,063 $109,479 1999/05/26

TOTAL: RURAL HOUSING SERVICE 6 $1,814,109 $12,006,101

RISK MANAGEMENT AGENCY

05-001-0002-TE CROP INSURANCE FOR PIMA COTTON, POPCORN, AND $20,000,000 1999/04/16 CORN FOR CROP YEARS 1997 AND 1998 IN TEXAS 05-099-0002-TE CROP YEAR 1998 POTATO CROP INSURANCE CLAIMS $615,771 1999/08/05 IN GAINES COUNTY, TX 05-099-0006-KC SERVICING OF CAT POLICIES 1999/09/30

TOTAL: RISK MANAGEMENT AGENCY 3 $615,771 $20,000,000

FOREST SERVICE

08-017-0005-KC MANAGEMENT ASSISTANCE CORP OF AMERICA - $203,118 $203,118 1999/09/29 CONTRACT CLOSEOUT

54

AUDIT REPORTS RELEASED AND ASSOCIATED MONETARY VALUESBETWEEN APRIL 1 AND SEPTEMBER 30, 1999

QUESTIONED UNSUPPORTED FUNDS BEAUDIT NUMBER COSTS COSTS PUT TORELEASE DATE TITLE AND LOANS AND LOANS BETTER USE

08-801-0005-SF THUNDERBIRD LODGE LAND EXCHANGE $12,000,000 1999/04/30

TOTAL: FOREST SERVICE 2 $203,118 $203,118 $12,000,000

RURAL UTILITIES SERVICE

09-005-0002-SF WATER AND WASTE DISPOSAL SYSTEMS GRANTS IN $2,528,212 $2,518,083 1999/07/02 ALASKA

TOTAL: RURAL UTILITIES SERVICE 1 $2,528,212 $2,518,083

NATURAL RESOURCES CONSERVATION SERVICE

10-006-0001-CH REVIEW OF SELECTED WASTE MANAGEMENT 1999/08/31 SYSTEMS IN OHIO 10-017-0003-KC ZAK DIRT, INC. - CONTRACT AUDIT $103,421 1999/08/16 FT. COLLINS, CO

TOTAL: NATURAL RESOURCES CONSERVATION SERVICE 2 $103,421

OFFICE OF THE CHIEF FINANCIAL OFFICER

11-401-0004-FM FY 1998 NATIONAL FINANCE CENTER REVIEW OF 1999/09/29 INTERNAL CONTROL STRUCTURE

TOTAL: OFFICE THE CHIEF FINANCIAL OFFICER 1

FOOD SAFETY AND INSPECTION SERVICE

24-099-0001-CH FEDERAL/STATE MEAT AND POULTRY INSPECTION 1999/05/17 AGREEMENTS

TOTAL: FOOD SAFETY AND INSPECTION SERVICE 1

FOOD AND NUTRITION SERVICE

27-010-0016-SF CACFP - B.R.I.D.G.E.S., POMONA, CA $2,828 1999/08/19 27-010-0017-SF CACFP - A FINE DAY CARE, THOUSAND OAKS, CA. $85,464 $58,501 1999/07/08 27-010-0019-HY NATIONAL SCHOOL LUNCH PROGRAM IN $11,535,456 1999/09/21 PUERTO RICO 27-017-0016-HY AMERICAN BANK NOTE COMPANY 1999/06/28 27-099-0012-SF NUTRITION ASSISTANCE PROGRAM IN AMERICAN $16,612 $16,612 1999/09/27 SAMOA - PAYMENTS TO VENDORS 27-099-0017-CH CACFP - DISCOVERY CHILD CARE, INC., $969,579 1999/07/30 LA CROSSE, WI 27-099-0018-CH MONITORING OF THE ELECTRONIC BENEFITS TRANSFER 1999/09/28 SYSTEM IN MINNESOTA 27-601-0007-SF CHILD AND ADULT CARE FOOD PROGRAM - $34,551,576 1999/08/23 NATIONAL REPORT 27-601-0008-AT REGIONAL FOOD STAMP EMPLOYMENT AND TRAINING $6,834,587 $3,680,731 $1,057,549 1999/09/15 PROGRAM 27-601-0009-KC FOOD STAMP PROGRAM - CROSS STATE MATCH $99,886 $294,139 1999/07/29 27-601-0009-SF CACFP - QUALITY OF AUDIT WORK - CALIFORNIA 1999/08/05 DEPARTMENT OF EDUCATION

55

AUDIT REPORTS RELEASED AND ASSOCIATED MONETARY VALUESBETWEEN APRIL 1 AND SEPTEMBER 30, 1999

QUESTIONED UNSUPPORTED FUNDS BEAUDIT NUMBER COSTS COSTS PUT TORELEASE DATE TITLE AND LOANS AND LOANS BETTER USE

27-601-0014-CH STORAGE AND CONTROLS OVER USDA-DONATED 1999/05/26 COMMODITIES - CALIFORNIA 27-601-0016-CH ADEQUACY OF RETAILER MONITORING EFFORTS 1999/07/12 27-601-0019-CH CONTROLS OVER USDA-DONATED COMMODITIES NSLP AND 1999/09/30 SBP 27-801-0003-KC MONITORING EBT SYSTEM DEVELOPMENT IN MISSOURI 1999/07/26 27-801-0003-SF STATE OF OREGON - EBT SYSTEM DEVELOPMENT 1999/09/27 REVIEW 27-801-0004-KC MONITORING COLORADO EBT SYSTEM DEVELOPMENT 1999/09/30

TOTAL: FOOD AND NUTRITION SERVICE 17 $19,544,412 $3,697,343 $35,961,765

ANIMAL AND PLANT HEALTH INSPECTION SERVICE

33-099-0003-CH PLANT PROTECTION AND QUARANTINE BORDER AND 1999/08/31 PORT INSPECTIONS

TOTAL: ANIMAL AND PLANT HEALTH 1 INSPECTION SERVICE

RURAL BUSINESS-COOPERATIVE SERVICE

34-801-0003-TE RIO GRANDE VALLEY EMPOWERMENT ZONE 1999/09/22

TOTAL: RURAL BUSINESS-COOPERATIVE SERVICE 1

MULTIAGENCY

50-018-0013-SF A-133 AUDIT OF THE CITY OF SAN JOSE 1999/06/03 FYE JUNE 30, 1998 50-020-0069-HY GOVERNOR’S OFFICE FOR ELDERLY AFFAIRS, $449 1999/08/30 A-128, SFYE SEPTEMBER 30, 1996 50-020-0070-HY COMMONWEALTH OF PUERTO RICO - DEPT. OF FAMILY $1,118 $1,118 1999/08/26 A-128, JUNE 30, 1994 AND JUNE 30, 1995 50-021-0001-SF A-133 STATE OF HAWAII - DEPARTMENT OF 1999/09/27 AGRICULTURE, FYE JUNE 30, 1998 50-099-0006-KC WETLANDS RESERVE PROGRAM SPECIAL WETLAND AND 1999/05/25 ENVIRONMENTAL EASEMENT ENHANCEMENT ACTIVITIES 50-099-0009-AT CONTROL OF WORKER’S COMPENSATION COSTS $19,205,747 $51,169,958 1999/08/10 50-099-0021-FM REVIEW OF YEAR 2000 PROJECT - PHASE III 1999/09/30 50-801-0001-HQ REVIEW OF THE DEPARTMENT’S FINAL ACTION 1999/07/09 PROCESS 50-801-0002-TE FOOD CONSUMER PROGRAMS - RESEARCH, 1999/07/26 DEMONSTRATION, AND EVALUATION PROJECTS 50-801-0007-FM EFFECTIVE IMPLEMENTATION OF FFIS WILL REDUCE 1999/09/29 USDA’S MANY FINANCIAL MANAGEMENT SYSTEM PROBLEMS 50-801-0009-TE CROP LOSS DISASTER ASSISTANCE PROGRAM IN $223,307 1999/08/02 LOUISIANA - PHASE II

TOTAL: MULTIAGENCY 11 $19,207,314 $1,118 $51,393,265

TOTAL: RELEASE - NATIONWIDE 55 $69,975,055 $26,686,847 $131,551,974

Abbreviations of OrganizationsAARCC Alternative Agricultural Research and Commercialization CorporationAMS Agricultural Marketing ServiceAPHIS Animal and Plant Health Inspection ServiceARS Agricultural Research ServiceCCC Commodity Credit CorporationCSREES Cooperative State Research, Education, and Extension ServiceEU European UnionFAS Foreign Agricultural ServiceFBI Federal Bureau of InvestigationFCIC Federal Crop Insurance CorporationFDA U.S. Food and Drug AdministrationFNS Food and Nutrition ServiceFS Forest ServiceFSA Farm Service AgencyFSIS Food Safety and Inspection ServiceGAO U.S. General Accounting OfficeIRS Internal Revenue ServiceNFC National Finance CenterNRCS Natural Resources Conservation ServiceOCFO Office of the Chief Financial OfficerOGC Office of the General CounselOIG Office of Inspector GeneralOMB Office of Management and BudgetRBS Rural Business-Cooperative ServiceRGVEZ Rio Grande Valley Empowerment ZoneRHS Rural Housing ServiceRMA Risk Management AgencyRUS Rural Utilities ServiceSEC Office of the SecretaryUNR University of Nevada, RenoUSDA U.S. Department of Agriculture