Farm Program Payments
USDA Should Correct Weaknesses in Regulations and Oversight to Better Ensure Recipients Do Not Circumvent Payment Limitations Gao ID: GAO-04-861T June 16, 2004Farmers receive about $15 billion annually in federal payments to help produce major crops, such as corn, cotton, rice, and wheat. The Farm Program Payments Integrity Act of 1987 (1987 Act) limits payments to individuals and entities--such as corporations and partnerships--that are "actively engaged in farming." This testimony is based on GAO's report, Farm Program Payments: USDA Needs to Strengthen Regulations and Oversight to Better Ensure Recipients Do Not Circumvent Payment Limitations (GAO-04-407, April 30, 2004). Specifically, GAO (1) determined how well USDA's regulations limit payments and (2) assessed USDA's oversight of the 1987 Act.
GAO's survey of USDA's field offices showed that for the compliance reviews the offices conducted, about 99 percent of payment recipients asserted they met eligibility requirements through active personal management. However, USDA's regulations to ensure recipients are actively engaged in farming do not provide a measurable standard for what constitutes a significant contribution of active personal management. By not specifying such a measurable standard, USDA allows individuals who may have limited involvement with the farming operation to qualify for payments. Moreover, USDA's regulations lack clarity as to whether certain transactions and farming operation structures that GAO found could be considered schemes or devices to evade, or that have the purpose of evading, payment limitations. Under the 1987 Act, if a person has adopted such a scheme or device, then that person is not eligible to receive payments for the year in which the scheme or device was adopted or the following year. Because it is not clear whether fraudulent intent must be shown to find that a person has adopted a scheme or device, USDA may be reluctant to pursue the question of whether certain farming operations, such as the ones GAO found, are schemes or devices. According to GAO's survey and review of case files, USDA is not effectively overseeing farm payment limitation requirements. That is, USDA does not review a valid sample of farm operation plans to determine compliance and thus does not ensure that only eligible recipients receive payments, and compliance reviews are often completed late. As a result, USDA may be missing opportunities to recoup ineligible payments. For about one-half of the farming operations GAO reviewed for 2001, field offices did not use available tools to determine whether persons were actively engaged in farming.
GAO-04-861T, Farm Program Payments: USDA Should Correct Weaknesses in Regulations and Oversight to Better Ensure Recipients Do Not Circumvent Payment Limitations
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Testimony:
Before the Committee on Finance, U.S. Senate:
United States General Accounting Office:
GAO:
For Release on Delivery Expected at 11:00 a.m. EDT:
Wednesday, June 16, 2004:
Farm Program Payments:
USDA Should Correct Weaknesses in Regulations and Oversight to Better
Ensure Recipients Do Not Circumvent Payment Limitations:
Statement of Lawrence J. Dyckman, Director, Natural Resources and
Environment:
GAO-04-861T:
GAO Highlights:
Highlights of GAO-04-861T, testimony before the Committee on Finance,
U.S. Senate
Why GAO Did This Study:
Farmers receive about $15 billion annually in federal payments to help
produce major crops, such as corn, cotton, rice, and wheat. The Farm
Program Payments Integrity Act of 1987 (1987 Act) limits payments to
individuals and entities”such as corporations and partnerships”that are
’actively engaged in farming.“
This testimony is based on GAO‘s report, Farm Program Payments: USDA
Needs to Strengthen Regulations and Oversight to Better Ensure
Recipients Do Not Circumvent Payment Limitations (GAO-04-407, April 30,
2004). Specifically, GAO (1) determined how well USDA‘s regulations
limit payments and (2) assessed USDA‘s oversight of the 1987 Act.
What GAO Found:
GAO‘s survey of USDA‘s field offices showed that for the compliance
reviews the offices conducted, about 99 percent of payment recipients
asserted they met eligibility requirements through active personal
management. However, USDA‘s regulations to ensure recipients are
actively engaged in farming do not provide a measurable standard for
what constitutes a significant contribution of active personal
management. The figure below shows field offices‘ views on whether
regulations describing active personnel management could be improved.
By not specifying such a measurable standard, USDA allows individuals
who may have limited involvement with the farming operation to qualify
for payments. Moreover, USDA‘s regulations lack clarity as to whether
certain transactions and farming operation structures that GAO found
could be considered schemes or devices to evade, or that have the
purpose of evading, payment limitations. Under the 1987 Act, if a
person has adopted such a scheme or device, then that person is not
eligible to receive payments for the year in which the scheme or device
was adopted or the following year. Because it is not clear whether
fraudulent intent must be shown to find that a person has adopted a
scheme or device, USDA may be reluctant to pursue the question of
whether certain farming operations, such as the ones GAO found, are
schemes or devices.
According to GAO‘s survey and review of case files, USDA is not
effectively overseeing farm payment limitation requirements. That is,
USDA does not review a valid sample of farm operation plans to
determine compliance and thus does not ensure that only eligible
recipients receive payments, and compliance reviews are often completed
late. As a result, USDA may be missing opportunities to recoup
ineligible payments. For about one-half of the farming operations GAO
reviewed for 2001, field offices did not use available tools to
determine whether persons were actively engaged in farming.
Field Offices‘ Views on Whether Specific Improvements Would Strengthen
Active Personal Management:
[See PDF for image]
[End of figure]
What GAO Recommends:
GAO recommended, among other things, that USDA (1) develop measurable
standards for a significant contribution of active personal management;
(2) clarify regulations on what constitutes a scheme or device to
effectively evade payment limits; (3) improve its selection method for
reviewing farming operations and (4) develop controls to ensure it uses
all tools to assess compliance with the act.
USDA agreed to act on most recommendations, but it stated that its
regulations are sufficient for determining active engagement in
farming and assessing whether operations are designed to evade payment
limits. We disagree.
www.gao.gov/cgi-bin/getrpt?GAO-04-861T.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Lawrence J. Dyckman, at
(202) 512-3841or dyckmanl@gao.gov.
[End of section]
Mr. Chairman and Members of the Committee:
I am pleased to be here today to discuss the Committee's interest in
the U.S. Department of Agriculture's (USDA) implementation of the Farm
Program Payments Integrity Act of 1987 (1987 Act). My testimony today
is based on our recent report on this subject, which was requested by
the Chairman of the Senate Committee on Finance and which is being
publicly released today.[Footnote 1]
Between 1999 and 2002, USDA paid farmers an average of $15 billion
annually to help support the production of major commodities, including
corn, cotton, rice, soybeans, and wheat. These payments go to 1.3
million producers: individuals and entities such as corporations,
partnerships, and trusts. Annually, almost two-thirds of these payments
go to about 10 percent of the producers.
After hearing several concerns about farm payments going to individuals
not involved in farming, the Congress enacted the 1987 Act, which,
among other things, set eligibility conditions to limit the number of
payments going to recipients and to ensure that only individuals and
entities "actively engaged in farming" received payments. To be
considered actively engaged in farming, an individual recipient must
make significant contributions to the farming operation in two areas:
(1) capital, land, or equipment and (2) personal labor or active
personal management. An entity is considered actively engaged in
farming if the entity separately makes a significant contribution of
capital, land, or equipment, and its members collectively make a
significant contribution of personal labor or active personal
management to the farming operation. For both individuals and entities,
their share of the farming operation's profits or losses must also be
commensurate with their contributions to the farming operation and
those contributions must be at risk.
My testimony today focuses on two primary issues discussed in the
report: (1) how well USDA's regulations for active engagement in
farming help limit farm program payments and (2) the effectiveness of
USDA's oversight of farm program payments' requirements for active
engagement in farming.
In summary, we found the following:
* Individuals may circumvent the farm payment limitations because of
weaknesses in USDA's regulations. These regulations are designed to
ensure recipients are actively engaged in farming. However, they do not
provide a measurable standard for what constitutes a significant
contribution of active personal management. By not specifying such a
measurable standard, USDA allows individuals who may have limited
involvement with the farming operation to qualify for payments.
According to our survey of USDA's field offices, in the compliance
reviews they conducted, about 99 percent of payment recipients asserted
they met eligibility requirements through active personal management.
Moreover, USDA's regulations lack clarity as to whether certain
transactions and farming operation structures that we found could be
considered schemes or devices to evade, or that have the purpose of
evading, payment limitations. Under the 1987 Act, if a person has
adopted such a scheme or device, then that person is not eligible to
receive payments for two years.
* According to our survey and review of case files, USDA is not
effectively overseeing farm program payments. That is, USDA does not
review a valid sample of farm operation plans to determine compliance
and thus does not ensure that only eligible recipients receive
payments. Also, USDA's compliance reviews are often completed late. As
a result, USDA may be missing opportunities to recoup ineligible
payments. Further, for about one-half of the farming operations we
reviewed for 2001, field offices did not use available tools to
determine whether persons were actively engaged in farming.
In our report to you, we made eight recommendations to the Secretary of
Agriculture to strengthen FSA's oversight of farmers' compliance with
the 1987 Act. In commenting on the report, USDA agreed to act on most
of the recommendations. However, USDA stated that its current
regulations are sufficient for determining active engagement in farming
and for assessing whether operations are schemes or devices to evade
payment limitations. We still believe measurable standards and
clarified regulations would better assure the act's goals are realized.
Background:
The 1987 Act requires that an individual or entity be actively engaged
in farming in order to receive farm program payments. To be considered
actively engaged in farming, the act requires an individual or entity
to provide a significant contribution of capital, land, or equipment,
as well as a significant contribution of personal labor or active
personal management to the farming operation. Hired labor or hired
management may not be used to meet the latter requirement. The act's
definition of a "person" eligible to receive farm program payments
includes an individual, as well as certain kinds of corporations,
partnerships, trusts, or similar entities. Recipients must also
demonstrate that their contributions to the farming operation are in
proportion to their share of the operation's profits and losses and
that these contributions are at risk. The 1987 Act also limits the
number of entities through which a person can receive program payments.
Under the act, a person can receive payments as an individual and
through no more than two entities, or through three entities and not as
an individual. The statutory provision imposing this limit is commonly
known as the three-entity rule. Under the Farm Security and Rural
Investment Act of 2002, "persons"--individuals or entities--are
generally limited to a total of $180,000 annually in farm program
payments, or $360,000 if they are members of up to three
entities.[Footnote 2]
Some farming operations may reorganize to overcome payment limits to
maximize their farm program benefits. Larger farming operations and
farming operations producing crops with high payment rates, such as
rice and cotton, may establish several related entities that are
eligible to receive payments. However, each entity must be separate and
distinct and must demonstrate that it is actively engaged in farming by
providing a significant contribution of capital, land or equipment, as
well as a significant contribution of personal labor or active personal
management to the farming operation.
Within USDA, the Farm Service Agency (FSA) is responsible for enforcing
the actively engaged in farming and payment limitation rules. FSA field
offices review a sample of farming plans at the end of the year to help
monitor whether farming operations were conducted in accordance with
approved plans, including whether payment recipients met the
requirement for active engagement in farming and whether the farming
operations have the documents to demonstrate that the entities
receiving payments are in fact separate and distinct legal entities.
FSA selects its sample of farming operations based on, among other
criteria, (1) whether the operation has undergone an organizational
change in the past year by, for example, adding another entity or
partner to the operation and (2) whether the operation receives
payments above a certain threshold. These criteria have principally
resulted in sampling farming operations in areas that produce cotton
and rice--Arkansas, California, Louisiana, Mississippi, and Texas.
Individuals May Circumvent Farm Payment Limitations Because of
Weaknesses in FSA's Regulations:
Many recipients meet one of the farm program payments' eligibility
requirements by asserting that they have made a significant
contribution of active personal management. Because FSA regulations do
not provide a measurable, quantifiable standard for what constitutes a
significant management contribution, people who appear to have little
involvement are receiving farm program payments, according to our
survey of FSA field offices and our review of 86 case files. Indeed,
most large farming operations meet the requirement for personal labor
or active personal management by asserting a significant contribution
of management. Survey respondents provided information on 347
partnerships and joint ventures for which FSA completed compliance
reviews in 2001; these entities comprised 992 recipients, such as
individuals and corporations that were members of these farming
operations. Of these 992 recipients, 46 percent, or 455, asserted that
they contributed active personal management; 1 percent, or 7, asserted
that they contributed personal labor; and the remaining 53 percent
(530) asserted they provided a combination of active personal
management and personal labor to meet the actively engaged in farming
requirement.
While FSA's regulations define active personal management more
specifically to include such things as arranging financing for the
operation, supervising the planting and harvesting of crops, and
marketing the crops, the regulations lack measurable criteria for what
constitutes a significant contribution of active personal management.
FSA regulations define a "significant contribution" of active personal
management as "activities that are critical to the profitability of the
farming operation, taking into consideration the individual's or
entity's commensurate share in the farming operation." In contrast, FSA
provides quantitative standards for what constitutes a significant
contribution of active personal labor, capital, land, and equipment.
For example, FSA's regulations define a significant contribution of
active personal labor as the lesser of 1,000 hours of work annually, or
50 percent of the total hours necessary to conduct a farming operation
that is comparable in size to such individual's or entity's
commensurate share in the farming operation. By not specifying
quantifiable standards for what constitutes a significant contribution
of active personal management, FSA allows recipients who may have had
limited involvement in the farming operation to qualify for payments.
Some recipients appeared to have little involvement with the farming
operation for 26 of the 86 FSA compliance review files we examined in
which the recipients asserted they made a significant contribution of
active personal management to the farming operation. For example, in
2001, 11 partners in a general partnership operated a farm of 11,900
acres. These partners asserted they met the actively engaged in farming
requirement by making a significant contribution of equipment and
active personal management. FSA's compliance review found that all
partners of the farming operation were actively engaged in farming and
met all requirements for the approximately $1 million the partnership
collected in farm program payments in 2001. However, our review found
that the partnership held five management meetings during the year,
three in a state other than the state where the farm was located, and
two on-site meetings at the farm. Some of the partners attended the
meetings in person while others joined the meetings by telephone
conference. Although all 11 partners claimed an equal contribution of
management, minutes of the management meetings indicated seven partners
participated in all five meetings, two participated in four meetings,
and two participated in three meetings. All partners resided in states
other than the state where the farm was located, and only one partner
attended all five meetings in person. Based on our review of minutes
documenting the meetings, it is unclear whether some of the partners
contributed significant active personal management. If FSA had found
that some of the partners had not contributed active personal
management, the partnership's total farm program payments would have
been reduced by about 9 percent, or $90,000, for each partner that FSA
determined was ineligible. State FSA officials agreed that the evidence
to support the management contribution for some partners was
questionable and that FSA reviewers could have taken additional steps
to confirm the contributions for these partners.
According to our survey of 535 FSA field offices, FSA could make key
improvements to strengthen the management contribution standard. These
offices reported that the management standard can be strengthened by
clarifying the standard, including providing quantifiable criteria,
certifying actual contributions, and requiring management to be on-
site.[Footnote 3] More than 60 percent of those surveyed, for example,
indicated that clarifying the standard would be an improvement. In
addition, in 2003, a USDA commission established to look at the impact
of changes to payment limitations concluded that determining what
constitutes a significant contribution of active management is
difficult and lack of clear criteria likely makes it easier for farming
operations to add recipients in order to avoid payment
limitations.[Footnote 4]
We also found that some individuals or entities have engaged in
transactions that might constitute schemes or devices to evade payment
limitations, but neither FSA's regulations nor its guidance address
whether such transactions could constitute schemes or devices. Under
the 1987 Act as amended, if the Secretary of Agriculture determines
that any person has adopted a "scheme or device" to evade, or that has
the purpose of evading, the act's provisions--in other words, the
payment limitations--then that person is not eligible to receive farm
program payments for the year the scheme or device was adopted and the
following crop year.[Footnote 5] According to FSA's regulations, this
statutory provision includes (1) persons who adopt or participate in
adopting a scheme or device and (2) schemes or devices that are
designed to evade or have "the effect of evading" payment limitation
rules. The regulations state that a scheme or device shall include
concealing information that affects a farm program payment application,
submitting false or erroneous information, or creating fictitious
entities for the purpose of concealing the interest of a person in a
farming operation.[Footnote 6]
We found several large farming operations that were structured as one
or more partnerships, each consisting of multiple corporations that
increased farm program payments in a questionable manner. The following
two examples illustrate how farming operations, depending on how the
FSA regulations are interpreted, might be considered to evade, or have
the effect of evading, payment limitations. In one case, we found that
a family had set up the legal structures for its farming operation and
also owned the affiliated nonfarming entities. This operation included
two farming partnerships comprising eight limited liability companies.
The two partnerships operated about 6,000 acres and collected more than
$800,000 in farm program payments in 2001. The limited liability
companies included family and non-family members, although power of
attorney for all of the companies was granted to one family member to
act on behalf of the companies, and ultimately the farming
partnerships. The operation also included nonfarming entities--nine
partnerships, a joint venture, and a corporation--that were owned by
family members. The affiliated nonfarming entities provided the farming
entities with goods and services, such as capital, land, equipment, and
administrative services. The operation also included a crop processing
entity to purchase and process the farming operation's crop. According
to our review of accounting records for the farming operation, both
farming partnerships incurred a small net loss in 2001, even though
they had received more than $800,000 in farm program payments. In
contrast, average net income for similar-sized farming operations in
2001 was $298,000, according to USDA's Economic Research Service. The
records we reviewed showed that the loss occurred, in part, because the
farming operations paid above-market prices for goods and services and
received a net return from the sale of the crop to the nonfarming
entities that appeared to be lower than market prices because of
apparent excessive charges. The structure of this operation allowed the
farming operation to maximize farm program payments, but because the
farm operated at a loss these payments were not distributed to the
members of the operation. In effect, these payments were channeled to
the family-held nonfarming entities. Figure 1 shows the organizational
structure of this operation and the typical flow of transactions
between farming and nonfarming entities.
Figure 1: Large Operation Containing Farming and Nonfarming Entities:
[See PDF for image]
Note: Percentages shown are share of ownership.
[End of figure]
Similarly, we found another general partnership that farmed more than
50,000 acres in 2001 and that conducted business with nonfarming
entities, including a land leasing company, an equipment dealership, a
petroleum distributorship, and crop processing companies, with close
ties to the farming partnership. The partnership, which comprised more
than 30 corporations, collected more than $5 million in farm program
payments in 2001.[Footnote 7] The shareholders who contributed the
active personal management for these corporations were officers of the
corporations. Each officer provided the active personal management for
three corporations. Some of these officers were also officers of the
nonfarming entities--the entities that provided the farming partnership
goods and services such as the capital, land, equipment, and fuel. The
nonfarming entities also included a gin as well as grain elevators to
purchase and process the farming partnership's crops. Our review of
accounting records showed that even though the farming partnership
received more than $5 million in farm payments, it incurred a net loss
in 2001, which was distributed among the corporations that comprised
the partnership.[Footnote 8]
As in the first example, factors contributing to the loss included the
above-market prices for goods and services charged by the nonfarming
entities and the net return from the sale of crops to nonfarming
entities that appeared to be lower than market prices because of
apparent excessive charges for storage and processing. For example, one
loan made by the nonfarming financial services entity to the farming
partnership for $6 million had an interest rate of 10 percent while the
prevailing interest rate for similar loans at the time was 8 percent.
Similarly, the net receipts from the sale of the harvested crop, which
were sold almost exclusively to the nonfarming entities, were below
market price. For example, in one transaction the gross receipt was
about $1 million but after the grain elevators deducted fees for the
quality of the grain and such actions as drying and storing the grain,
the net proceeds to the farming entity were only about $500,000. In
this particular operation, all of the nonfarming entities had common
ownership linked to one individual. This individual had also set up the
legal structure for the farming entities but had no direct ownership
interest in the farming entities.
It is unclear whether either of these operations falls within the
statutory definition of a scheme or device or whether either otherwise
circumvents the payment limitation rules. State FSA officials in
Arkansas, Louisiana, Mississippi, and Texas, where many of the large
farming operations are located, believed that some large operations
with relationships between the farming and nonfarming entities were
organized primarily to circumvent payment limitations. In this manner,
these farming operations may be reflective of the organizational
structures that some Members of Congress indicated were problematic
when enacting the 1987 Act and the scheme or device provision. The
House Report for the 1987 Act states: "A small percentage of producers
of program crops have developed methods to legally circumvent these
limitations to maximize their receipt of benefits for which they are
eligible. In addition to such reorganizations, other schemes have been
developed that allow passive investors to qualify for benefits intended
for legitimate farming operations."[Footnote 9] In our discussions with
FSA headquarters officials in February 2004 on the issue of farming
operations that circumvent the payment limitation rules, they noted
that while an operation may be legally organized, it may be
misrepresenting who in effect receives the farm program payments. FSA
has no data on how many of the types of operations that we identified
exist. However, FSA is reluctant to question these operations because
it does not believe current regulations provide a sufficient basis to
take action.
Other FSA officials said that USDA could review such an operation under
the 1987 Act's scheme or device provision if it becomes aware that the
operation is using a scheme or device for the purpose of evading the
payment limitation rules. However, these FSA officials stated it is
difficult to prove fraudulent intent--which they believe is a key
element in proving scheme or device--and requires significant resources
to pursue such cases. In addition, they stated that even if FSA finds a
recipient ineligible to receive payments, its decision might be
overturned on appeal within USDA. The FSA officials noted that when FSA
loses these types of cases, the loss tends to discourage other field
offices from aggressively pursuing these types of cases.
It is not clear whether either the statutory provision or FSA's
regulations require a demonstration of fraudulent intent in order to
find that someone has adopted a scheme or device. As discussed above,
the statute limits payments if the Secretary of Agriculture determines
that any person has adopted a scheme or device "to evade, or that has
the purpose of evading," the farm payment limitation provisions. The
regulations state that payments may be withheld if a person "adopts or
participates in adopting a scheme or device designed to evade or that
has the effect of evading" the farm payment limitations. The
regulations note that schemes or devices shall include, for example,
creating fictitious entities for the purpose of concealing the interest
of a person in a farming operation. Some have interpreted this
provision as appearing to require intentionally fraudulent or deceitful
conduct. On the other hand, FSA regulations only provide this as one
example of what FSA considers to be a scheme or device. The regulations
do not specify that all covered schemes or devices must involve
fraudulent intent. As previously stated, covered schemes or devices
under FSA regulations include those that have "the effect of evading"
payment limitation rules. Finally, guidance contained in FSA Handbook
Payment Limitations, 1-PL (Revision 1), Amendment 40, does not clarify
the matter because it does not provide any additional examples for FSA
officials of the types of arrangements that might be considered schemes
or devices. This lack of clarity over whether fraudulent intent must be
shown in order for FSA to deny payments under the scheme or device
provision of the law may be inhibiting FSA from finding that some
questionable operations are schemes or devices.
Other Weaknesses in FSA's Oversight May Also Enable Ineligible Farmers
to Receive Program Payments:
In addition to the weaknesses described above, FSA does not effectively
oversee farm program payments in five key areas, according to our
analysis of FSA compliance reviews and our survey of FSA field offices.
First, FSA does not review a valid sample of recipients to be
reasonably assured of compliance with the payment limitations. In 2001,
FSA selected 1,573 farming operations from its file of 247,831 entities
to review producers' compliance with actively engaged in farming
requirements. FSA's sample selection focuses on entities that have
undergone an organizational change during the year or received large
farm program payments. Field staff responsible for these reviews seek
waivers for farming operations reviewed within the last 3 to 5 years--
the time frame varies by state. As a result, according to FSA
officials, of the farming operations selected for review each year,
more than half are waived and therefore not actually reviewed. Many of
the waived cases show up year after year because FSA's sampling
methodology does not take into consideration when an operation was last
reviewed. In 2001, the latest year for which data are available, only
523 of 1,573 sampled entities were to be reviewed[Footnote 10]. Field
offices sought and received waivers for 966 entities primarily because
the entities were previously reviewed or the farming operation involved
only a husband and wif[Footnote 11]e. According to FSA headquarters
officials, the sampling process was developed in the mid-1990s and it
can be improved and better targeted.
Second, field offices do not always conduct compliance reviews in a
timely manner. Only 9 of 38 FSA state offices responsible for
conducting compliance reviews for 2001 completed the reviews and
reported the results to FSA headquarters within 12 months, as FSA
policy requires.[Footnote 12] FSA headquarters selected the 2001 sample
on March 27, 2002, and forwarded the selections to its state offices on
April 4, 2002. FSA headquarters required the state offices to conduct
the compliance reviews and report the results by March 31, 2003. Six of
the 26 FSA state offices that failed to report the results to
headquarters had not yet begun these reviews for 470 farming operations
as of summer 2003: Arkansas, California, Colorado, Louisiana, Ohio, and
South Carolina. Until we brought this matter to their attention in July
2003, FSA headquarters staff were unaware that these six states had not
conducted compliance reviews for 2001. Similarly, they did not know the
status of the remaining 20 states. Because of this long delay, FSA
cannot reasonably assess the level of recipients' compliance with the
act and may be missing opportunities to recapture payments that were
made to ineligible recipients if a farming operation reorganizes or
ceases operations.
Third, FSA staff do not use all available tools to assess compliance.
For one-half of the case files we reviewed for 2001, field offices did
not use all available tools to determine whether persons are actively
engaged in farming. FSA compliance review policy requires field staff
to interview persons asserting that they are actively engaged in
farming before making a final eligibility decision, unless the reason
for not interviewing the person is obvious and adequately justified in
writing[Footnote 13]. Indeed, 83 percent of the field offices
responding to our survey indicated that interviews are helpful in
conducting compliance reviews. However, in 27 of the 86 case files we
reviewed in six states, field staff did not interview these persons and
did not adequately document why they had not done so. In one of the
states we visited, field staff had not conducted any interviews. We
also found that some field offices do not obtain and review certain key
financial information regarding the farming operation before making
final eligibility decisions. For example, our review of case files
indicated that for one-half of the farming operations, field staff did
not use financial records, such as bank statements, cancelled checks,
or accounting records, to substantiate that capital was contributed
directly to the farming operation from a fund or account separate and
distinct from that of any other individual or entity with an interest
in the farming operation, as required by FSA's polic[Footnote 14]y.
Instead, FSA staff often rely on their personal knowledge of the
individuals associated with the farming operation to determine whether
these individuals meet the requirement for active engagement in
farming.
Fourth, FSA does not consistently collect and analyze monitoring data.
FSA has not established a methodology for collecting and summarizing
compliance review data so that it can (1) reliably compare farming
operations' compliance with the actively engaged in farming
requirements from year to year and (2) assess its field offices'
conduct of compliance reviews. Under Office of Management and Budget
Circular A-123, agencies must develop and implement management controls
to reasonably ensure that they obtain, maintain, report, and use
reliable and timely information for decision-making. Because FSA has
not instituted these controls, it cannot determine whether its staff
are consistently applying the payment eligibility requirements across
states and over time.
Finally, these problems are exacerbated by a lack of periodic training
for FSA staff on the payment limitations and eligibility rules.
Training has generally not been available since the mid-1990s.
In conclusion, the Farm Program Payments Integrity Act of 1987, while
enacted to limit payments to individuals and entities actively engaged
in farming, allows farming operations to maximize the receipt of
federal farm payments as long as all recipients meet eligibility
requirements. However, we found cases where payment recipients may have
developed methods to circumvent established payment limitations. This
seems contrary to the goals of the 1987 Act and was caused by
weaknesses in USDA's regulation and oversight. The regulations need to
better define what constitutes a significant contribution of active
personal management and clarify whether fraudulent intent is necessary
to find that someone has adopted a scheme or device. Without specifying
measurable standards for what constitutes a significant contribution of
active personal management, FSA allows individuals who may have had
limited involvement in the farming operation to qualify for payments.
Moreover, FSA is not providing adequate oversight of farm program
payments under its current regulations and policies.
In our report to you, we made eight recommendations to the Secretary of
Agriculture for improving FSA's oversight of compliance with the 1987
Act, including: developing measurable requirements defining a
significant contribution of active personal management; clarifying
regulations and guidance as to what constitutes a scheme or device;
improving its sampling method for selecting farming operations for
review; and developing controls to ensure all available tools are used
to assess compliance with the act. USDA agreed to act on most of our
recommendations. However, USDA stated that its current regulations are
sufficient for determining active engagement in farming and assessing
whether operations are schemes or devices to evade payment limitations.
Mr. Chairman, this concludes my prepared statement. We would be happy
to respond to any questions that you or other Members of the Committee
may have.
For further information about this testimony, please contact Lawrence
J. Dyckman, Director, Natural Resources and Environment, (202) 512-
3841, or by email at dyckmanl@gao.gov. Ron Maxon, Thomas Cook, Cleofas
Zapata, Carol Herrnstadt Shulman, and Amy Webbink made key
contributions to this statement.
FOOTNOTES
[1] U.S. General Accounting Office, Farm Program Payments: USDA Needs
to Strengthen Regulations and Oversight to Better Ensure Recipients Do
Not Circumvent Payment Limitations, GAO-04-407, (Washington, D.C.:
April 30, 2004).
[2] Under the Farm Security and Rural Investment Act of 2002, each of
the income support programs has a separate payment limit. For example,
a recipient generally may only receive up to $40,000 in direct
payments, up to $65,000 in counter-cyclical payments, and up to $75,000
in loan deficiency payments and marketing assistance loan gains, for a
total of $180,000 per year. Benefits received through commodity
certificate gains and marketing loan forfeitures do not count against
the payment limitations. Farm Security and Rural Investment Act of
2002, Pub. L. No. 107-171, 116 Stat. 134, 213.
[3] Certifying actual contributions could include requiring an
affidavit from each recipient delineating management activities
performed.
[4] See U.S. Department of Agriculture, Office of the Chief Economist,
Commission on the Application of Payment Limitations for Agriculture,
Report of the Commission on the Application of Payment Limitations for
Agriculture (Washington, D.C.: August 2003).
[5] 7 U.S.C. § 1308-2.
[6] 7 C.F.R. § 1400.5.
[7] In 2003, the operation divided into six new farming partnerships
comprised of the same corporations.
[8] The accounting records also showed that the capital (equity)
account for each of the corporations carried a negative balance,
indicating multiple years of net losses.
[9] H.R. Rep. No. 100-391 (1987) (emphasis added).
[10] For 72 of the 1,573 sampled entities, survey respondents did not
provide information on whether the reviews for these entities were
waived or will be conducted in the future. In addition, we were unable
to determine the field offices responsible for reviewing 12 of the
1,573 sampled entities.
[11] State offices may waive selected compliance reviews for farming
operations that were previously reviewed and did not receive an adverse
determination, and for which the reviewing authority has no reason to
believe there have been changes that affect the original eligibility
decision.
[12] Three additional FSA state offices submitted the required report
after the due date.
[13] FSA Handbook Payment Limitations, 1-PL (Revision 1), Amendment 40.
[14] FSA Handbook Payment Limitations, 1-PL (Revision 1), Amendment 40.
