Food Stamp Trafficking
FNS Could Enhance Program Integrity by Better Targeting Stores Likely to Traffic and Increasing Penalties
Gao ID: GAO-07-53 October 13, 2006
Every year, food stamp recipients exchange hundreds of millions of dollars in benefits for cash instead of food with retailers across the country, a practice known as trafficking. From 2000 to 2005, the Food Stamp Program has grown from $15 billion to $29 billion in benefits. During this period of time, the U.S. Department of Agriculture's (USDA) Food and Nutrition Service (FNS) replaced paper food stamp coupons with electronic benefit transfer (EBT) cards that work much like a debit card at the grocery checkout counter. Given these program changes and continuing retailer fraud, GAO was asked to provide information on (1) what is known about the extent and nature of retailer food stamp trafficking, (2) the efforts of federal agencies to combat such trafficking, and (3) program vulnerabilities. To do this, GAO interviewed agency officials, visited 10 field offices, conducted case file reviews, and analyzed data from the FNS retailer database.
FNS's estimates suggest trafficking declined between 1995 and 2005 from 3.8 cents per dollar of benefits redeemed to 1.0 cent, resulting in an estimated $241 million in food stamps trafficked in 2005. The rate of trafficking in small grocery and convenience stores is 7.6 cents per dollar, significantly higher than the rate for large stores, where it is estimated to be 0.2 cents per dollar. In addition, the use of EBT cards has changed the way some benefits are trafficked, for example eliminating middlemen who used to collect and redeem large amounts of paper coupons from program participants willing to sell them. FNS has taken advantage of EBT data to improve its ability to detect and disqualify trafficking retailers, while law enforcement agencies have conducted a decreasing number of investigations. Cases using only EBT transaction data now account for more than half of trafficking disqualifications, supplementing traditional, but more time-consuming, undercover investigations. Other federal entities, such as the USDA's Inspector General and the U.S. Secret Service, have reduced the number of traffickers they pursue in recent years and focused their efforts on high-impact cases. This has resulted in fewer cases referred for federal prosecution and fewer federal convictions for retailer trafficking. Despite FNS progress, the program remains vulnerable because retailers can enter the program intending to traffic, often without fear of severe criminal penalties. FNS authorizes some stores with limited food supplies so that low-income participants in areas with few supermarkets have access to food, but may not inspect these stores again for 5 years unless there is some indication of a problem. Oversight of early operations is important because newly authorized retailers can quickly ramp up the amount of benefits they traffic. One location that FNS disqualified for trafficking redeemed almost $650,000 in 9 months. In addition, FNS has not conducted analyses to identify high risk areas and to target its limited compliance-monitoring resources. Furthermore, disqualification, FNS's most severe penalty, may not be a sufficient deterrent, and FNS must rely upon others for prosecution. Finally, states' failing to pursue trafficking recipients leaves a pool of recipients willing to traffic when a disqualified store reopens.
Recommendations
Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
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GAO-07-53, Food Stamp Trafficking: FNS Could Enhance Program Integrity by Better Targeting Stores Likely to Traffic and Increasing Penalties
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by Better Targeting Stores Likely to Traffic and Increasing Penalties'
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
October 2006:
Food Stamp Trafficking:
FNS Could Enhance Program Integrity by Better Targeting Stores Likely
to Traffic and Increasing Penalties:
Food Stamp Trafficking:
GAO-07-53:
GAO Highlights:
Highlights of GAO-07-53, a report to congressional committees
Why GAO Did This Study:
Every year, food stamp recipients exchange hundreds of millions of
dollars in benefits for cash instead of food with retailers across the
country, a practice known as trafficking. From 2000 to 2005, the Food
Stamp Program has grown from $15 billion to $29 billion in benefits.
During this period of time, the U.S. Department of Agriculture‘s (USDA)
Food and Nutrition Service (FNS) replaced paper food stamp coupons with
electronic benefit transfer (EBT) cards that work much like a debit
card at the grocery checkout counter. Given these program changes and
continuing retailer fraud, GAO was asked to provide information on (1)
what is known about the extent and nature of retailer food stamp
trafficking, (2) the efforts of federal agencies to combat such
trafficking, and (3) program vulnerabilities. To do this, GAO
interviewed agency officials, visited 10 field offices, conducted case
file reviews, and analyzed data from the FNS retailer database.
What GAO Found:
FNS‘s estimates suggest trafficking declined between 1995 and 2005 from
3.8 cents per dollar of benefits redeemed to 1.0 cent, resulting in an
estimated $241 million in food stamps trafficked in 2005. The rate of
trafficking in small grocery and convenience stores is 7.6 cents per
dollar, significantly higher than the rate for large stores, where it
is estimated to be 0.2 cents per dollar. In addition, the use of EBT
cards has changed the way some benefits are trafficked, for example
eliminating middlemen who used to collect and redeem large amounts of
paper coupons from program participants willing to sell them. FNS has
taken advantage of EBT data to improve its ability to detect and
disqualify trafficking retailers, while law enforcement agencies have
conducted a decreasing number of investigations. Cases using only EBT
transaction data now account for more than half of trafficking
disqualifications, supplementing traditional, but more time-consuming,
undercover investigations. Other federal entities, such as the USDA‘s
Inspector General and the U.S. Secret Service, have reduced the number
of traffickers they pursue in recent years and focused their efforts on
high- impact cases. This has resulted in fewer cases referred for
federal prosecution and fewer federal convictions for retailer
trafficking. Despite FNS progress, the program remains vulnerable
because retailers can enter the program intending to traffic, often
without fear of severe criminal penalties. FNS authorizes some stores
with limited food supplies so that low- income participants in areas
with few supermarkets have access to food, but may not inspect these
stores again for 5 years unless there is some indication of a problem.
Oversight of early operations is important because newly authorized
retailers can quickly ramp up the amount of benefits they traffic. One
location that FNS disqualified for trafficking redeemed almost $650,000
in 9 months. In addition, FNS has not conducted analyses to identify
high risk areas and to target its limited compliance-monitoring
resources. Furthermore, disqualification, FNS‘s most severe penalty,
may not be a sufficient deterrent, and FNS must rely upon others for
prosecution. Finally, states‘ failing to pursue trafficking recipients
leaves a pool of recipients willing to traffic when a disqualified
store reopens.
Figure: This Disqualified Store, with Its Limited Counter Area and
Single Cash Register, Redeemed over $190,000 of Food Stamp Benefits in
One Month:
[See PDF for Image]
Source: FNS.
[End of Figure]
What GAO Recommends:
To reduce program vulnerabilities, GAO recommends that FNS take
additional steps to target and provide early oversight of stores most
likely to traffic; develop a strategy to increase penalties for
trafficking, working with the USDA Inspector General as needed; and
promote state efforts to pursue recipients suspected of trafficking.
FNS generally agreed with findings, conclusions and recommendations.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-53].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Sigurd Nilsen at (202)
512-7215 or nilsens@gao.gov.
[End of Section]
Contents:
Letter:
Results in Brief:
Background:
FNS Estimates Suggest That the Rate of Food Stamp Trafficking Has
Declined and That It Occurs More Frequently in Smaller Stores:
FNS Has Taken Advantage of New EBT Data to Improve Retailer Monitoring,
While Other Federal Entities Have Focused on Fewer, High-Impact
Investigations:
Despite the Progress That Has Been Made against Trafficking,
Vulnerabilities Still Exist in the Program:
Conclusions:
Recommendations:
Agency Comments:
Appendix I: GAO Contact and Staff Acknowledgments:
Related GAO Products:
Tables:
Table 1: Percentage of Authorized Stores and Food Stamp Redemptions by
Store Category for Fiscal Year 2005:
Table 2: FNS Estimates Suggest That the Trafficking Rate Has Declined:
Table 3: Some Store Locations Have Had Multiple Retailers That Engaged
in Trafficking:
Figures:
Figure 1: Food Stamp Participation Has Increased Since Fiscal Year
2000:
Figure 2: Legitimate Food Stamp Transaction Compared to Trafficking
Transaction:
Figure 3: As Trafficking Disqualifications Based on EBT Data Have
Increased, Those Based on Undercover Investigations Have Decreased:
Figure 4: Limited Counter Area and Single Cash Register of a Store
Disqualified for Trafficking:
Figure 5: Trafficking Investigations Referred to the US Attorney and
Accepted for Prosecution for Fiscal Years 2000 to 2005:
Figure 6: Fiscal Year Totals for Trafficking Convictions Resulting from
OIG Investigations:
Figure 7: Food Stamp Redemptions of a Newly Authorized Store
Disqualified for Trafficking:
Figure 8: Map of Stores Repeatedly Disqualified for Trafficking in
Brooklyn and Baltimore:
Abbreviations:
EBT: Electronic Benefits Transfer:
FNS: Food and Nutrition Service:
OIG: Office of the Inspector General:
PRWORA: Personal Responsibility and Work Opportunity Reconciliation Act
of 1996:
USDA: U.S. Department of Agriculture:
United States Government Accountability Office:
Washington, DC 20548:
October 13, 2006:
The Honorable Saxby Chambliss:
Chairman:
The Honorable Tom Harkin:
Ranking Democratic Member:
Committee on Agriculture, Nutrition, and Forestry:
United States Senate:
The Honorable Collin C. Peterson:
Ranking Minority Member:
Committee on Agriculture:
House of Representatives:
The Honorable Gil Gutknecht:
Chairman:
The Honorable Joe Baca:
Ranking Minority Member:
Subcommittee on Department Operations, Oversight, Dairy, Nutrition and
Forestry:
Committee on Agriculture:
House of Representatives:
Every year, food stamp recipients exchange hundreds of millions of
dollars in benefits for cash instead of food with authorized retailers
across the country, a practice known as trafficking. In a typical
trafficking situation, a retailer gives a food stamp recipient a
discounted amount of cash--commonly 50 cents on the dollar--in exchange
for food stamp benefits and pockets the difference. By trafficking,
retailers commit fraud and undermine the primary purpose of the
program, which is to help provide food to low-income individuals and
families. Recipients who traffic deprive themselves and their families
of the intended nutritional benefits.
In recent years, the Food Stamp Program has grown tremendously. From
2000 to 2005, the program--administered by the Food and Nutrition
Service (FNS) of the U.S. Department of Agriculture (USDA), in
partnership with the states--has grown from $15 billion in benefits
provided to 17 million individuals to $29 billion in benefits to nearly
26 million individuals. Almost one in every 12 Americans participates
in the program. During this period of time, FNS and the states
completed replacing paper food stamp coupons with electronic benefit
transfer (EBT) cards that work much like a debit card at the grocery
checkout counter. This EBT transaction provides a wealth of new
electronic information to FNS officials, who are responsible for
monitoring food stamp retailers and sanctioning those who traffic.
Given these major changes in the program and continued concern about
retailer fraud and abuse, you asked us to provide information on (1)
what is known about the extent and nature of retailer food stamp
trafficking, (2) the efforts of federal agencies to combat such
trafficking, and (3) the program vulnerabilities that continue to
exist.
To report on what is known about the extent of trafficking, we used
four FNS estimates of food stamp trafficking. The four estimates, which
were the best available data on this subject, covered the calendar
years 1993, 1996 to 1998, 1999 to 2002, and 2002 to 2005.[Footnote 1]
The methodology FNS used to develop these estimates has some
limitations; the estimates do not provide a precise measure of food
stamp trafficking.[Footnote 2] However, they can be used to provide an
indication of the magnitude of food stamp trafficking and the change in
the rate over time.[Footnote 3]
To understand the nature of trafficking, assess the efforts to combat
it, and identify continued program vulnerabilities, we conducted
interviews with the following program stakeholders: officials from FNS
headquarters and regional offices; other officials responsible for
investigating food stamp trafficking including the USDA's Office of the
Inspector General (OIG) and the U.S. Secret Service; food stamp
advocates and researchers; officials from industry associations and EBT
contractors; and officials from selected state law enforcement bureaus.
In addition, we obtained relevant information from the state audit,
comptroller, and treasurer community. We selected and visited 10 FNS
field offices (Chicago, Ill; Dallas, Tex; Denver, Colo; Detroit, Mich;
Los Angeles, Calif; New York, N.Y; Portland, Ore; Sacramento, Calif;
Tallahassee, Fla and Towson, Md.) located in the seven FNS regions. We
selected these offices to achieve variation in geographical
distribution, the ages of the states' EBT systems, and the number of
stores that were disqualified from participating in the program for
trafficking. At each office, we conducted semistructured interviews
with FNS officials and used a case file review tool to review
nonprobability samples of files for 163 retailers that were
disqualified for trafficking in fiscal year 2005. We also interviewed
officials from seven of the states where we made our field office
visits.
In addition, to identify efforts to combat trafficking, we analyzed
FNS's authorized retailer database, the Store Tracking and Redemption
System, to determine the number of permanent trafficking
disqualifications by store address, to calculate the time between a
store's initial authorization and its first disqualification for fiscal
years 1996 through 2005, and to determine the number of sanction
actions that had been taken against a retailer leading up to the
retailer's being permanently disqualified. To ensure the accuracy of
the FNS data we analyzed, we interviewed agency officials to identify
and resolve any inconsistencies that could affect our work. In
addition, we reviewed documentation on how these data were gathered and
maintained. Based on the collective information from our assessment, we
determined the data are sufficiently reliable for enhancing our
understanding of continuing program vulnerabilities and agency efforts
in combating trafficking. We conducted our work between July 2005 and
June 2006 in accordance with generally accepted government auditing
standards.
Results in Brief:
FNS estimates that about 1.0 cent per dollar of benefits redeemed in
2005 were trafficked; this trafficking usually occurred in small
convenience and grocery stores and often, we found, between store
owners and food stamp recipients with whom they were familiar. The
national rate of food stamp trafficking declined from about 3.8 cents
per dollar of benefits redeemed in 1993 to about 1.0 cent per dollar
during the years 2002 to 2005. However, even at that lower rate, FNS
estimates that about $241million in food stamp benefits would have been
trafficked annually in those years. The rate of trafficking in small
stores remains higher--an estimated 7.6 cents per dollar--than the rate
for large stores--an estimated 0.2 cents per dollar. Since the
nationwide implementation of EBT, the way some food stamp benefits are
trafficked has changed. Previously, in addition to trafficking
conducted directly between store owners and recipients, middlemen
purchased large numbers of food stamp coupons at a discounted rate
directly from recipients and then exchanged the coupons for cash from a
retailer. EBT has largely eliminated the middleman. Retailers now must
have the recipients' EBT card and personal identification number to
conduct a trafficking transaction and are likely to limit their
trafficking transactions to people from their neighborhood or with whom
they are familiar.
FNS has taken advantage of EBT and other new technology to improve its
ability to detect trafficking and disqualify retailers who traffic,
while law enforcement agencies have investigated and referred for
prosecution a decreasing number of traffickers, instead focusing their
efforts on fewer high-impact investigations. To pursue traffickers, FNS
traditionally sent its undercover investigators into stores to attempt
to traffic benefits. Now, EBT transaction data allow FNS to act on
cases based solely on suspicious transaction patterns. For these cases,
FNS applies established criteria to its data to identify individual
stores with exceptional patterns of EBT transactions for that store's
particular type of retail operation. Cases using EBT data can be
prepared in the office relatively quickly and now account for more of
the 841 retailers that were permanently disqualified for trafficking in
fiscal year 2005 than undercover investigations. However, undercover
investigations still play an important role when EBT transaction data
are insufficient to build a case against a retailer suspected of food
stamp trafficking. In addition, retailer trafficking investigations by
other federal entities, such as USDA's Inspector General and the U.S.
Secret Service, have declined in recent years, resulting in fewer
referrals for prosecutions of retailers that traffic. For example, the
number of trafficking investigations opened by the Inspector General
declined from 179 in 2000 to 77 in 2005, and the number of
investigations it referred for prosecution to the Department of Justice
declined as well. Ultimately, the number of federal convictions for
retailer trafficking has also declined. Federal law enforcement
officials told us that they are increasingly focused on high-impact
investigations, such as those focused on large-scale trafficking or
involving other criminal activity.
Despite the progress FNS has made in combating retailer trafficking,
the Food Stamp Program remains vulnerable because retailers can enter
the program intending to traffic and do so, often without fear of
severe criminal penalties, as the declining number of investigations
referred for prosecution suggests. FNS field office officials told us
their first priority is getting stores into the program to ensure needy
people have access to food, and therefore they sometimes authorize
stores that stock limited food supplies but meet the minimum
requirements in areas with few larger grocery stores. However, once
authorized, some dishonest retailers do not maintain adequate food
stock and focus more on trafficking food stamp benefits than on selling
groceries, according to FNS officials, and 5 years may pass before FNS
checks the stock again unless there is an indication of a problem with
the store. In addition, while EBT has aided FNS's monitoring ability,
some retailers have adapted their behaviors to avoid detection and
found new ways to exploit the EBT technology. For instance, individuals
can obtain point-of-sale machines and conduct illegal food stamp
transactions in unauthorized stores or apartments. Yet, despite
dwindling staff resources, FNS has not conducted the analyses to
identify high risk areas and to target their compliance-monitoring
resources to the areas of highest risk. Furthermore, current FNS food-
stamp-trafficking penalties may not be sufficient to deter traffickers,
because the most severe penalty most traffickers face is
disqualification from the program and FNS must rely upon others for
prosecution. Finally, if recipients suspected of trafficking are not
investigated by the states, it may leave a pool of recipients ready and
willing to traffic their benefits as soon as a disqualified store
reopens under new management.
To reduce program vulnerabilities and help FNS better target its
limited compliance-monitoring resources, we are making recommendations
to the Secretary of the Department of Agriculture to require FNS to
develop additional criteria to identify stores most likely to traffic,
use these criteria to conduct risk assessments, and provide more
targeted and early oversight of stores determined most likely to engage
in trafficking. Also, we are recommending that FNS work to develop a
strategy to increase the penalties for trafficking, working with the
Inspector General as needed. In addition, we are recommending steps to
promote state efforts to pursue recipients suspected of trafficking.
The Department of Agriculture officials generally agreed with our
findings, conclusions, and recommendations but noted they believe they
do have a strategy for targeting resources through their use of EBT
transaction data to identify suspicious transaction patterns. We
believe that FNS has made good progress in its use of EBT transaction
data; however, it is now at a point where it can begin to formulate
more sophisticated analyses.
Background:
The federal Food Stamp Program is intended to help low-income
individuals and families obtain a more nutritious diet by supplementing
their income with benefits to purchase nutritious food such as meat,
dairy, fruits, and vegetables, but not items such as soap, tobacco, or
alcohol. The Food and Nutrition Service (FNS) pays the full cost of
food stamp benefits and shares the states' administrative costs--with
FNS usually paying approximately 50 percent--and is responsible for
promulgating program regulations and ensuring that state officials
administer the program in compliance with program rules.[Footnote 4]
The states administer the program by determining whether households
meet the program's income and asset requirements, calculating monthly
benefits for qualified households, and issuing benefits to participants
on an electronic benefits card.
In fiscal year 2005, the Food Stamp Program issued almost $28.6 billion
in benefits to about 25.7 million individuals participating in the
program, and the maximum monthly food stamp benefit for a household of
four living in the continental United States was $506. As shown in
figure 1, the increase in the average monthly participation of food
stamp recipients in 2005 continues a recent upward trend in the number
of people receiving benefits.
Figure 1: Food Stamp Participation Has Increased Since Fiscal Year
2000:
[See PDF for image]
Source: FNS.
[End of figure]
Retailer Authorization:
Retailers are the front line for determining which goods can be
purchased and for ensuring the integrity of the food stamp transaction.
FNS operates 44 field offices throughout the country, and they have the
primary responsibility for authorizing retailers to participate in the
Food Stamp Program. To become an authorized retailer, a store must
offer on a continuing basis a variety of foods in each of the four
staple food categories--meats, poultry or fish; breads or cereals;
vegetables or fruits; and dairy products--or 50 percent of its sales
must be in a staple group such as meat or bakery items. However, the
regulations do not specify how many food items retailers should stock.
The store owner submits an application and includes forms of
identification such as copies of the owner's Social Security card,
driver's license, business license, liquor license, and alien resident
card. The FNS field office program specialist then checks the
applicant's Social Security number against FNS's database of retailers,
the Store Tracking and Redemption System, to see if the applicant has
previously been sanctioned in the Food Stamp Program. The application
also collects information on the type of business, store hours, number
of employees, number of cash registers, the types of staple foods
offered, and the estimated annual amount of gross sales and eligible
food stamp sales.
If the application is complete, most field offices will forward a
request to the private contractor employed by FNS to conduct on-site
inspections that verify the information in the application and provide
additional information for the approval process. The contractor visits
the store and submits a map of the store layout, the inspection form,
and photographs of the outside and inside of the store and its
inventory. The contractor reports information on the type of store and
its location, access to parking, the number of cash registers and EBT
point-of-sale devices,[Footnote 5] whether shopping carts or baskets
are available, and the availability of nonfood stock and services
offered, such as liquor, tobacco, gasoline, check cashing, and lottery
tickets. As part of the inspection, the contractor also evaluates the
general store conditions and notes problems--such as empty coolers and
shelves, dusty cans and expired or outdated foods--that could indicate
that this may not be a viable grocery operation. Upon receiving
favorable information from the contractor, the FNS program specialist
authorizes the store to participate in the Food Stamp Program for 5
years. Unless a problem arises with the store, it typically would not
be re-inspected until it applies for reauthorization.
At the end of fiscal year 2005, more than 160,000 retailers were
authorized to accept food stamp benefits. During the fiscal year,
almost 24,000 new stores were authorized, 30,000 were reauthorized and
almost 17,000 left the program, most for voluntary reasons.[Footnote 6]
As shown in table 1, supermarkets account for only about 22 percent of
the authorized stores but redeem the lion's share of food stamp
benefits. FNS defines a supermarket as a store with $2 million of gross
sales, three or more cash registers, and coded as a supermarket on its
food stamp application.
Table 1: Percentage of Authorized Stores and Food Stamp Redemptions by
Store Category for Fiscal Year 2005:
Type of firm: Supermarkets;
Percentage of total authorized firms: 22.34;
Percentage of total food stamp dollars redeemed: 86.44.
Type of firm: Grocery stores;
Percentage of total authorized firms: 21.59;
Percentage of total food stamp dollars redeemed: 6.57.
Type of firm: Convenience stores;
Percentage of total authorized firms: 19.95;
Percentage of total food stamp dollars redeemed: 1.86.
Type of firm: Combination stores[A];
Percentage of total authorized firms: 22.17;
Percentage of total food stamp dollars redeemed: 1.95.
Type of firm: All other stores[B];
Percentage of total authorized firms: 12.31;
Percentage of total food stamp dollars redeemed: 2.97.
Type of firm: Meal services[C];
Percentage of total authorized firms: 1.64;
Percentage of total food stamp dollars redeemed: .21.
Source: FNS data.
[A] This category includes stores such as grocery/gas, grocery/bar,
grocery/restaurant, and grocery/merchandise.
[B] This category includes farmers markets, produce stands,
wholesalers, co-located retailers, drug stores, specialty food stores,
health/natural food stores, non-profit food-buying co-ops, military
commissaries, and delivery routes.
[C] This category includes drug and alcohol treatment centers, group
homes, and communal dining facilities or meals on wheels for seniors.
[End of table]
Use of EBT and Trafficking:
Prior to EBT, recipients used highly negotiable food stamp coupons to
pay for allowable foods. The Personal Responsibility and Work
Opportunity Reconciliation Act of 1996 (PRWORA), however, required each
state agency to implement an EBT system to electronically distribute
food stamp benefits, and the last state completed its implementation in
fiscal year 2004. Under the EBT system, food stamp recipients receive
an EBT card imprinted with their name and a personal account number,
and food stamp benefits are automatically credited to the recipients'
accounts once a month. As shown on the left in figure 2, in a
legitimate food stamp transaction, recipients run their EBT card, which
works much like a debit card, through an electronic point-of-sale
machine at the grocery checkout counter, and enter their secret
personal identification number to access their food stamp accounts and
to authorize the transfer of food stamp benefits from a federal account
to the retailer's account to pay for the eligible food items. The
legitimate transaction contrasts with a trafficking transaction
portrayed on the right, in which recipients swipe their EBT card, but
instead of buying groceries, they receive a discounted amount of cash
and the retailer pockets the difference.
Figure 2: Legitimate Food Stamp Transaction Compared to Trafficking
Transaction:
[See PDF for image]
Source: GAO.
[End of figure]
Monitoring, Investigating, and Prosecuting Retailer Fraud:
In addition to approving retailers to participate in the program, FNS
has the primary responsibility for monitoring their compliance with
requirements and administratively disqualifying those who are found to
have trafficked food stamp benefits. FNS headquarters officials collect
and monitor EBT transaction data to detect suspicious patterns of
transactions by retailers. They then send any leads to FNS program
specialists in the field office who either work the cases themselves or
refer them to undercover investigators in the Retailer Investigations
Branch to pursue by attempting to traffic food stamps for cash.
FNS notifies the USDA's Office of the Inspector General (OIG) before
the field office specialist or undercover investigator develops a case,
and the OIG may choose to open an investigation on this case on its own
for possible criminal prosecution. The OIG may also work with the US
Secret Service, the Federal Bureau of Investigation, or other agencies
to investigate retailers for criminal prosecution.[Footnote 7] Secret
Service officials told us they have a memorandum of understanding with
the USDA that allows them to initiate food-stamp-trafficking
investigations on their own, provided they notify the OIG of all the
investigations in which an authorized retailer is targeted.
When trafficking is proved, FNS penalizes the store owners, usually by
permanent program disqualification but in limited circumstances they
may receive civil money penalties.[Footnote 8] Store owners who sell
ineligible goods but do not traffic are generally subject to a 1-year
temporary program disqualification.[Footnote 9] If a field office
specialist finds that a retailer has trafficked, the specialist sends a
letter to the retailer detailing the charges and the intended penalty.
If the Retailer Investigations Branch succeeds in trafficking food
stamps with a retailer, it first refers the case to the OIG, which then
decides whether it will investigate the case further for possible
prosecution by the US Attorney's office or by state and local
prosecutors or refer the case back to the FNS field office to complete
the disqualification action.
The retailer may attempt to rebut the charges, but if the retailer does
not respond or cannot provide a reasonable explanation for the specific
charges, then a letter is sent executing the program disqualification.
The retailer may appeal the decision, first to the Administrative
Review Branch at FNS headquarters and later to the appropriate federal
district court.
Monitoring, Investigating, and Prosecuting Recipient Fraud:
In addition to administering the day-to-day operation of the Food Stamp
Program, states also have the primary responsibility for monitoring
recipients' compliance with the program's requirements and
investigating any case of alleged intentional program violation. This
includes cases of ineligible persons attempting to obtain food stamps
or applicants deliberately providing false information in an attempt to
receive more benefits than they should as well as cases in which
recipients traffic their food stamp benefits. States must ensure that
appropriate cases are acted upon, either through administrative
disqualification hearings or referral to a court of appropriate
jurisdiction, in accordance with the procedures outlined in the Food
Stamp Program regulations.
FNS Estimates Suggest That the Rate of Food Stamp Trafficking Has
Declined and That It Occurs More Frequently in Smaller Stores:
FNS estimates that the rate of food stamp trafficking was 1.0 cent on
the dollar for calendar years 2002 to 2005. Overall, the estimated rate
of trafficking at small stores is much higher than the estimated rate
for supermarkets and large groceries, which redeem most food stamp
benefits. Furthermore, the implementation of EBT eliminated the role of
the middleman by requiring personal identification numbers each time
the EBT card is used.
FNS Reports That the Rate of Food Stamp Trafficking Declined between
1995 and 2005:
FNS's most recent estimate suggests that the food-stamp-trafficking
rate was 1.0 cent on the dollar for calendar years 2002 to 2005 and
that this rate and the total estimated benefits trafficked have
declined in recent years. FNS' first trafficking study in 1995
estimated that about 3.8 cents of every dollar of food stamp benefits
issued was trafficked in 1993. As shown in table 2, subsequent FNS
studies estimated that this trafficking rate continued to decline.
Table 2: FNS Estimates Suggest That the Trafficking Rate Has Declined:
Millions of dollars.
Calendar year period: 1993;
Estimated trafficking rate percentage: 3.8;
Food stamp benefits issued annually: 21,100;
Estimated amount of benefits trafficked annually: 812.
Calendar year period: 1996-1998;
Estimated trafficking rate percentage: 3.5;
Food stamp benefits issued annually: 19,627[A];
Estimated amount of benefits trafficked annually: 657.
Calendar year period: 1999-2002;
Estimated trafficking rate percentage: 2.5;
Food stamp benefits issued annually: 16,139[A];
Estimated amount of benefits trafficked annually: 393.
Calendar year period: 2002-2005;
Estimated trafficking rate percentage: 1.0;
Food stamp benefits issued annually: 23,213[A];
Estimated amount of benefits trafficked annually: 241.
Source: FNS studies and GAO calculation.
[A] FNS reported that they annualized redemption data over the period
of the study but did not provide the annualized figures. We calculated
the three-and four-year average of benefits redeemed for comparative
purposes.
[End of table]
The trafficking exchange rate that retailers offer for food stamp
benefits can vary from place to place. While retailers generally offer
recipients about 50 cents for each dollar of benefits, in New York City
we were told by an FNS undercover investigator that the exchange rate
is about 70 cents, and in a few locations, some retailers will exchange
one dollar of cash for one dollar of benefits as an accommodation to
the food stamp recipient.
Most Trafficking Still Occurs in Small Stores:
FNS studies suggest that small convenience and grocery stores continue
to be the most common sites for trafficking. Small stores, including
small grocery, convenience, specialty, and gas/grocery stores have an
estimated trafficking rate of 7.6 cents per dollar. In contrast,
supermarkets and large grocery stores have an estimated rate of 0.2
cents per dollar. However, because supermarkets account for the lion's
share of food stamp benefit redemptions, even at this lower rate, over
$49 million of benefits may have been trafficked in supermarkets and
large grocery stores in fiscal year 2005. Most FNS field officials we
interviewed told us these findings reflected their experience. They
characterized a typical trafficking case at their field office
occurring at a convenience, small grocery, or gas/grocery store located
in an urban area where the store owner traffics with familiar
neighborhood food stamp recipients.
EBT Has Changed How Food Stamps Are Trafficked:
The nationwide implementation of EBT has changed the way some food
stamp benefits are trafficked. Previously, in addition to trafficking
conducted directly between store owners and recipients, middlemen could
wait around public assistance offices or subsidized housing complexes
to purchase large numbers of food stamp coupons at a discounted rate
directly from recipients. The coupons might also change hands among
multiple middlemen, with each taking a cut, before ultimately being
exchanged for cash from a willing retailer. Field office officials told
us that EBT has largely eliminated the middleman because retailers must
now have the recipients' EBT card and personal identification number to
conduct a trafficking transaction. As a result, some recipients have
adapted their trafficking behavior to the new EBT environment. For
example, one field office official told us that some food stamp
recipients now stand outside of stores offering to loan their EBT cards
to shoppers entering the store. In this situation, the shopper would
purchase groceries using the card and return it and a discounted amount
of cash to the recipient upon leaving the store. During our field
office visit to Tallahassee, a GAO analyst was approached in his hotel
parking lot by a would-be trafficker offering such a transaction.
FNS Has Taken Advantage of New EBT Data to Improve Retailer Monitoring,
While Other Federal Entities Have Focused on Fewer, High-Impact
Investigations:
FNS has taken advantage of new technology to improve its monitoring and
sanctioning of food stamp retailers, but other federal agencies' have
been investigating and prosecuting fewer traffickers. With the
implementation of EBT, FNS has supplemented its traditional undercover
investigations by the Retailer Investigations Branch with cases
developed by analyzing EBT transaction data. These EBT cases now
account for more than half of the permanent disqualifications by FNS
(see fig. 3 below).[Footnote 10] Although the number of trafficking
disqualifications based on undercover investigations has declined,
these investigations continue to play a key role in combating
trafficking. However, as FNS's ability to detect trafficking has
improved, the number of suspected traffickers investigated by other
federal entities, such as the USDA Inspector General and the U.S.
Secret Service have declined. These entities have focused more on a
smaller number of high-impact investigations. As a result, retailers
who traffic are less likely to face severe penalties or prosecution.
Figure 3: As Trafficking Disqualifications Based on EBT Data Have
Increased, Those Based on Undercover Investigations Have Decreased:
[See PDF for image]
Source: FNS.
[End of figure]
EBT Has Provided FNS with Powerful New Tools to Supplement Traditional
Retailer Trafficking Investigations:
The nationwide implementation of EBT has given FNS powerful new tools
to supplement its traditional undercover investigations of retailers
suspected of trafficking food stamp benefits. FNS traditionally sent
its investigators into stores numerous times over a period of months to
attempt to traffic benefits. However, PRWORA gave FNS the authority to
charge retailers with trafficking in cases based solely on EBT
transaction evidence, called "paper cases." A major advantage of paper
cases is that they can be prepared relatively quickly and without
multiple store visits. These paper cases accounted for the majority of
FNS's 841 trafficking disqualifications in fiscal year 2005.
As part of the monitoring process, FNS collects each month's food stamp
transaction data from the states' EBT processors and adds the data to
its EBT transaction database for analysis. Six months' worth of EBT
transactions--about 500 million--are available on line.[Footnote 11]
Information on the amount of the transaction is reported. Information
on the items being purchased is not available through EBT. The system
scans these data to flag transactions or sets of transactions that fit
a certain set of criteria defined by established patterns of fraudulent
activity. The system then generates a monthly "Watch List" of retailers
with suspicious transaction patterns incongruent with a store's
particular type of retail operation.[Footnote 12]
The Watch List is sent out to the responsible FNS field office for
follow-up. In the field offices, program specialists begin their work
on paper cases by reviewing the Watch List and leads from other
sources, such as the state food stamp agency, the state EBT processors,
and law enforcement agencies. Using experience with the retailers in
the area, program specialists may determine that suspicious
transactions for some retailers are explainable. In such cases, the
specialist may take no further action or schedule a later review of the
store's transactions. In cases for which they cannot explain the
suspicious transactions, program specialists determine which retailers
they will pursue as paper cases. If the program specialist is unable to
develop a paper case, the case may be referred to the Retailer
Investigations Branch for an undercover investigation.
After deciding to open a paper case, FNS obtains clearance from the OIG
to pursue the case, and then the program specialist uses FNS data and a
variety of other resources to gather evidence. Program specialists
generally use 3 months of EBT data to show suspicious patterns. In the
case files we reviewed, charge letters typically contained hundreds of
examples of suspicious transactions, although FNS guidance does not
specify the number of transactions necessary to support a case.
Specialists also review FNS historical data on retailers to check for
such things as prior program violations.[Footnote 13] In addition,
these specialists obtain more current transaction data as well as
information on recipients suspected of trafficking with the retailer,
through state Food Stamp Program databases. Many specialists supplement
these data with online resources, such as mapping software to identify
suspicious shopping patterns. Program specialists can also consult the
photos taken at the time of authorization to assess whether conditions
in the store support the volume of food stamp redemptions claimed.
Figure 4 shows the limited counter space and the single cash register
of a store that claimed food stamp redemptions of almost $200,000 per
month and was later disqualified for trafficking. Such information
enables the program specialists to corroborate conclusions they have
drawn based on patterns in the EBT transaction data.
Figure 4: Limited Counter Area and Single Cash Register of a Store
Disqualified for Trafficking:
[See PDF for image]
Source: FNS.
[End of figure]
In addition, most program specialists in the offices we visited told us
they also visit the store once before charging a retailer with
trafficking. Some store visits allow the program specialist to check
for possible explanations for the suspicious transaction patterns,
while others corroborate the suspicion that the stores are in business
to traffic. For example, during one store visit, program specialists
found cans of food on the shelves with thick layers of dust, many items
that had passed their expiration dates, and jars of spaghetti sauce so
old that the contents had separated.
The store owner may attempt to rebut the charges. For example, a store
owner may claim to have extended credit to recipients so they could
purchase food until they received their next month's food stamp
benefits, and the high-dollar transactions were repayment of the
credit. Although extending credit is also a violation of program rules,
it carries a lesser penalty--temporary disqualification--than
trafficking. If the owner is unable to rebut the charges, and the
program specialist disqualifies the store, the store owner may appeal
to the Administrative Review Branch. In 2005, about 6 percent of the
permanent disqualifications were modified or reversed by the branch.
The length of time between a new store's authorization and its first
disqualification has decreased over the last 10 years. Stores that
received a temporary or permanent disqualification in 1996 had been
open an average of about 8.7 years, but by 2005, that average had
dropped to 6.3 years. Two factors may have contributed to this 28
percent decrease in length of time between authorization and
disqualification: improved FNS monitoring of the program and use of EBT
transaction data or more store owners who begin to traffic food stamps
sooner. The officer-in-charge of the Chicago field office believes that
in her area an increasing number of store owners are trafficking
immediately after authorization. We analyzed FNS's authorized retailer
data for stores in the Chicago area and found that the average time
between authorization and a store's first temporary or permanent
disqualification dropped by nearly half. In 1996, it took a Chicago
store about 5 years to receive a term or permanent disqualification,
and in 2005, it was just 2.6 years.
Investigations by the Retailer Investigations Branch Account for Fewer
Trafficking Disqualifications, but Still Play a Key Role in Combating
Trafficking:
The number of Retailer Investigations Branch undercover trafficking
investigations has declined, but these investigations are often used in
cases where EBT data alone are not enough to prove a retailer is
trafficking. The investigators initiate cases based on requests from
FNS field offices, their own review of the Watch List, or leads from
state or local law enforcement agencies. Like the paper case process,
FNS consults with the OIG before opening a case. To build a case, the
investigators make undercover visits to the store to determine whether
the retailer is selling ineligible goods or trafficking food stamps. If
a retailer sells the investigator ineligible goods but does not
traffic, the resulting temporary disqualification from the program for
selling ineligibles can create a deterrent effect on the disqualified
store owner, other store owners, and trafficking recipients, because
such penalties often become known in the community.
Personal safety can be a concern for investigators. One investigator
told us that there are some stores, especially in urban areas, where it
would be dangerous to attempt an undercover investigation.
Although cases in which the Retailer Investigations Branch finds
trafficking are routinely referred to the OIG for possible prosecution,
in most cases the OIG returns the case to the field office for
administrative disqualification. As with paper cases, the field office
sends a charge letter, detailing the dates on which the retailer sold
ineligibles or trafficked food stamp benefits, and the retailer may
attempt to rebut the charges. Once disqualified, the retailer can
appeal the penalty to the Administrative Review Branch. If no violation
is found, the Retailer Investigations Branch refers the case to the
field office to determine whether to continue investigating.
OIG and Other Federal Entities Are Conducting Fewer Retailer
Trafficking Investigations and Fewer Retailers Are Prosecuted:
In recent years, the USDA OIG has opened a decreasing number of food-
stamp-trafficking investigations and has focused on high-impact
investigations. In 2000, the OIG opened 179 trafficking investigations,
while in 2005 it opened 77. According to OIG, this has occurred both
because of a lack of resources--the number of OIG investigators has
dropped by 28 percent since 1997--and because the OIG has focused its
resources on high-impact investigations such as those with large-scale
trafficking, those involving other criminal activity, or those
involving possible terrorist connections since September 11, 2001. In
addition, OIG officials told us that it can take up to 5 years to
investigate and prosecute a store owner, and the process of developing
an investigation for prosecution further strains limited resources.
Other federal agencies are also conducting fewer retailer food stamp
trafficking investigations. The US Secret Service used to take on
investigations when large amounts of food stamp coupons were being
trafficked. However, its involvement in retailer trafficking
investigations is rare because the Secret Service finds that large
trafficking investigations are less common since the implementation of
EBT. EBT cards typically only have a few hundred dollars of benefits
each month, so it takes many transactions for a dishonest store owner
to traffic a large amount of money. However, in large trafficking
investigations or those where a retailer is believed to be diverting
profits from trafficking to terrorist causes, the Secret Service or the
FBI might work with the OIG and other agencies on a sting operation or
a joint task force. For example, the OIG and FBI worked jointly with
state and local law enforcement authorities in Florida on an
investigation involving store owners who were ordered to pay $2.6
million in restitution to the USDA and went to prison after pleading
guilty to trafficking over $3 million in food stamp benefits. OIG
officials told us they were actively conducting task force
investigations with other federal, state and local law enforcement
authorities. If an investigation is accepted and developed for
prosecution by a law enforcement entity, there is still no guarantee
that the trafficker will be prosecuted. Most US Attorneys' offices will
not prosecute a retailer unless a great deal of money is involved,
although the threshold varies from one region to another, according to
federal law enforcement officials. Thus, prosecuting the store owners
is a challenge.
Figure 5 shows a decline in recent years in the number of
investigations deemed serious enough to be referred by the OIG to the
US Attorney for prosecution, down from 202 in fiscal year 2001 to 21 in
2005. These data illustrate the relatively small number of store owners
who have faced prosecution for trafficking in recent years,
particularly in light of the 841 owners who were disqualified in fiscal
year 2005. These data also show that the proportion of investigations
accepted by the US Attorney for prosecution has been increasing in
recent years. OIG officials told us they believe they are better
targeting investigations for referral.
Figure 5: Trafficking Investigations Referred to the US Attorney and
Accepted for Prosecution for Fiscal Years 2000 to 2005:
[See PDF for image]
Source: USDA OIG.
[End of figure]
With fewer retailers prosecuted, the number of convictions has also
declined. Because of the length of time it takes to prosecute a case,
there is a lag between the time when a trafficking investigation is
accepted by the US Attorney for prosecution and the time when a
retailer is convicted. Thus, it is not possible to compare the figures
for investigations accepted for prosecution and those resulting in
convictions in the same year. However, as shown in figure 6, the number
of convictions resulting from investigations by the OIG has declined
from 260 in 2000 to 94 in 2005.
Figure 6: Fiscal Year Totals for Trafficking Convictions Resulting from
OIG Investigations:
[See PDF for image]
Source: USDA OIG.
Note: Convictions are for retail store owners and employees and not for
stores; some stores have multiple owners.
[End of figure]
Despite the Progress That Has Been Made against Trafficking,
Vulnerabilities Still Exist in the Program:
Despite the declining FNS estimates of retailer trafficking, retailers
can still enter the program intending to traffic and do so, often
without fear of severe criminal penalties. Minimal food stock
requirements for authorization and a lack of FNS oversight of
contractor inspections may allow dishonest retailers into the program,
and delays in access to transaction data may allow retailers to traffic
large amounts for several months undetected. In addition, some
retailers have adapted their trafficking behaviors to avoid detection
while others have found new ways to exploit the EBT technology. FNS
does not yet have an overall strategy to target its monitoring
resources to high risk areas. Moreover, the available FNS penalties for
trafficking may not be sufficient to deter retailers from trafficking,
and the states' lack of focus on recipient trafficking can also
facilitate trafficking.
Minimal Requirements for Authorization and Lack of Oversight of
Contractor Inspections May Allow Corrupt Retailers into the Program:
Minimal food stock requirements may allow corrupt retailers to enter
the program, yet their stocks will not likely be checked for 5 years
absent the indication of a problem. FNS field office officials told us
their first priority is getting stores into the program to ensure needy
people have access to food. In part because large grocery stores are
sometimes scarce in urban, low-income areas, officials may allow stores
with minimal food stock that meet the minimum FNS requirements to
become authorized food stamp retailers. Officials told us that when a
retailer only stocks small quantities of eligible food items, such as
just a few cans of one kind of vegetable, it is often an indication of
the intent to traffic. However, FNS regulations do not specify the
amount of food items that would constitute sufficient stock. The
officer-in-charge of a large urban field office expressed frustration
with this lack of specificity. Many authorized stores in her area are
gas-and-grocery combinations or convenience stores and some of these
stores stock only one item from each required food group. However, she
said the field office cannot deny these stores authorization based upon
minimal food stock because, in her experience, the denial would be
overturned if appealed. Another official at an FNS regional office told
us about a store that was denied authorization in that region.
According to this official, the denial was overturned by the
Administrative Review Branch when the reviewing officer determined that
a single can of corn sufficed as one of the three different products
required in the fruit or vegetable food group. In addition, Secret
Service officials said that some merchants quickly learn that they do
not need to restock their stores to continue to redeem food stamps
because stores aren't routinely checked for 5 years unless there is
some indication of a problem with the store. Staff in one of the 10 FNS
field offices we visited told us that they have to authorize some
retailers who seem suspicious, but they perform post-authorization
visits of these stores to ensure they are legitimate.
During the authorization process, FNS field offices rely on contractors
to inspect stores to ensure they meet program requirements, but FNS
does not independently verify the inspectors' reports. The inspector
provides the final check that a store exists, it has food in each of
the required food groups, and the information provided on the
application for authorization to become a food stamp retailer is
correct. However, at one field office, a contract inspector was
submitting false reports, allowing dishonest retailers into the
program.
Oversight of retailers' entry into the program and early operations is
important because newly authorized retailers can quickly ramp up the
amount of food stamps they traffic, and there is no limit on the value
of food stamps a retailer can redeem in 1 month. At one field office
location where retailers are often innovative in their trafficking
schemes, FNS officials noticed that some retailers quickly escalated
their trafficking within 2 to 3 months after their initial
authorization. As shown in figure 7, one disqualified retailer's case
file we reviewed at that field office showed the store went from $500
in monthly food stamp redemptions to almost $200,000 within 6 months.
Redemption activity dropped precipitously after the trafficking charge
letter was sent to the retailer in late October. In its application for
food stamp authorization, this retailer estimated he would have
$180,000 of total annual food sales, yet the retailer was redeeming
more than that each month in food stamp benefits before being caught in
a Retailer Investigations Branch investigation.
Figure 7: Food Stamp Redemptions of a Newly Authorized Store
Disqualified for Trafficking:
[See PDF for image]
Source: GAO analysis of FNS case file.
[End of figure]
Delays in Access to Transaction Data Allow Trafficking to Continue for
Months Undetected:
Although EBT implementation provides FNS with valuable transaction data
to identify potential trafficking, an FNS headquarters official said
monitoring and identification of traffickers will be improved once
program specialists have faster access to transaction data to detect
suspicious ramp-up activity. Currently, FNS receives each state's EBT
transaction data monthly on disk from the states' EBT contractors.
Using this process, the program specialists would not be aware of a
retailer's rapid ramp-up activity until they had 2 months' worth of
transaction data, in the third month after the retailer's
authorization. Then, following the normal case development process, a
charge letter would not be sent to the store until the fourth month,
leading to possible disqualification in the fifth month. According to
this official, as retailers learned that FNS would eventually discover
them by analyzing their EBT transactions, they responded by ramping up
their trafficking activity more quickly to make a quick profit before
FNS could take action.
FNS officials told us they believe that the solution to combating rapid
ramp-up trafficking is for FNS to receive EBT transaction data daily.
FNS systems could then monitor the data more quickly and produce daily
reports of rapidly increasing amounts of retailer transactions called
"spike reports." In order for FNS to receive so much data on a daily
basis, it is working on building large data pipelines from the states'
EBT processors and developing its ability to manage that data before
the end of this year. In the interim, FNS is piloting the use of spike
reports using monthly data.
Retailers Are Developing New Trafficking Schemes under EBT:
As some retailers have become familiar with FNS's monitoring
techniques, they have adapted their trafficking patterns to avoid
detection. Unlike those who quickly ramp up their trafficking behavior
for quick profit before detection through FNS monitoring, other
retailers have adjusted to EBT monitoring by manipulating trafficking
transactions to prevent detection by FNS analysis of transaction
patterns. One field official said that there is a large network of
trafficking retailers in her field office area that dissects the charge
letters sent to traffickers to determine what analyses FNS conducts and
to teach other retailers how to elude detection. Secret Service
officials confirmed the existence of fraud networks in this area and
said that one ringleader will recruit, encourage, and reward an entire
family and the friends of that family for trafficking food stamp
benefits.
Some retailers have also found new ways to exploit the EBT technology
and continue to traffic. In her July 2003 testimony, the USDA Inspector
General reported that her office had recently identified a fraudulent
scheme that, while rare, appeared to be growing in the Food Stamp
Program.[Footnote 14] The OIG noticed that some authorized retailers
were moving their point-of-sale terminals to an unauthorized location,
such as an unauthorized store or apartment, for trafficking purposes.
In its Semiannual Report to Congress for the first half of fiscal year
2004, the OIG reports that four individuals moved the authorized
terminals to different locations in Chicago so they could exchange cash
for food stamp benefits away from the authorized stores and possible
detection. This allowed them to conduct a large number of transactions
one after another. These individuals had been sentenced to serve from
15 to 57 months in prison and ordered to pay $29.1 million in
restitution for defrauding the Food Stamp Program in this way from the
fall of 1997 through August 2001. OIG headquarters officials told us
that moving authorized and unauthorized terminals remains a significant
area of concern because of the large volume of money that could be
redeemed quickly.
FNS Has Not Taken the Next Steps to Target Its Monitoring Resources to
High Risk Areas:
FNS has not taken the steps to ensure that it identifies those areas or
stores that are at highest risk for trafficking so that it can allocate
its resources accordingly. FNS has made good use of EBT transaction
data to produce its Watch List to identify suspicious transaction
patterns and target certain stores. It has also established task forces
of undercover investigators when it identifies geographic areas needing
additional coverage. However, it is now at a point where it can begin
to formulate more sophisticated analyses to identify high risk areas
and target its resources. For example, certain states have a
disproportionate share of the disqualified stores compared with the
number of food stamp recipients in their states, yet it is not clear
whether these numbers indicate that trafficking is more common in those
states or whether FNS program specialists and investigators have
engaged in more intensive pursuit of traffickers in those areas. Our
analysis of FNS's database of retailers showed that of the 9,808 stores
permanently disqualified from the Food Stamp Program, about 35 percent
were in just 4 states: New York, Illinois, Texas, and Florida, and yet
about 26 percent of food stamp recipients lived in those states.
However, FNS headquarters officials did not know the number of program
specialists in the field offices in these states who devote a portion
of their time to monitoring food stamp transactions and initiating
paper cases[Footnote 15]. Moreover, FNS officials believe there are
probably other areas of the country where trafficking is occurring that
may warrant further attention or additional resources, such as
California, where fewer than 5 percent of all permanent store
disqualifications occurred and about 8 percent of food stamp recipients
live. However, FNS officials have not yet developed a clear strategy or
criteria to systematically identify those areas and reallocate
resources in response.
In addition, some retailers and store locations have a history of
program violations that lead up to permanent disqualifications, but FNS
did not have a system in place to ensure these stores were quickly
targeted for heightened attention. Our analysis showed that, of the
9,808 stores that had been permanently disqualified from the program,
about 90 percent were disqualified for their first detected offense.
However, 9.4 percent of the disqualified retailers had shown early
indications of problems before being disqualified. About 4.3 percent of
these retailers had received a civil money penalty, 4.3 percent had
received a warning letter for program violations, and 0.8 percent had
received a temporary disqualification.[Footnote 16],[Footnote 17] Most
of these stores were small and may present a higher risk of future
trafficking than others, yet FNS does not necessarily target them for
speedy attention.
Further, some store locations may be at risk of trafficking because a
series of different owners had trafficked there. After an owner was
disqualified, field office officials told us the store would reopen
under new owners who continued to traffic with the store's clientele.
One field office official would like to be able to bar these repeat
store locations, while another suggested a 90-day waiting period before
a new owner of a disqualified store location could qualify as an
authorized food stamp retailer. As table 3 shows, our analysis of FNS's
database of retailers found that about 174, or 1.8 percent, of the
store addresses had a series of different owners over time who had been
permanently disqualified for trafficking at that same location,
totaling 369 separate disqualifications. In one case, a store in the
District of Columbia had 10 different owners who were each disqualified
for trafficking, consuming FNS's limited compliance-monitoring
resources.
Table 3: Some Store Locations Have Had Multiple Retailers That Engaged
in Trafficking:
Number of different owners at same address disqualified: 2;
Number of disqualified addresses: 162.
Number of different owners at same address disqualified: 3;
Number of disqualified addresses: 10.
Number of different owners at same address disqualified: 5;
Number of disqualified addresses: 1.
Number of different owners at same address disqualified: 10;
Number of disqualified addresses: 1.
Number of different owners at same address disqualified: Total;
Number of disqualified addresses: 174.
Source: GAO analysis of FNS data.
[End of table]
Our analysis of the data on these stores with multiple disqualified
owners indicates that FNS officials found this type of trafficking in a
handful of cities and states. Almost 60 percent of repeat store
locations were in six states and 44 percent were in 8 cities, often
concentrated in small areas. For example, as figure 8 shows, 14 repeat
store locations were clustered in downtown areas of both Brooklyn and
Baltimore. However, it is not clear whether these data indicate
heightened efforts of compliance staff or whether trafficking is more
common in these areas. Regardless, early monitoring of high-risk
locations when stores change hands could be an efficient use of
resources.
Figure 8: Map of Stores Repeatedly Disqualified for Trafficking in
Brooklyn and Baltimore:
[See PDF for image]
Source: GAO analysis of FNS data.
[End of figure]
Efficient use of resources is particularly important because available
compliance-monitoring resources have decreased in recent years. As the
importance of paper cases has grown, the compliance-monitoring workload
has gradually shifted to field office program specialists at a time
when overall program resources have dwindled. Officials said the number
of field investigators and field staff nationwide, which includes
program specialists, has declined over the last 10 years.
Available FNS Penalties May Not Deter Traffickers:
FNS penalties alone may not be sufficient to deter traffickers. The
most severe FNS penalty that most traffickers face is disqualification
from the program, and FNS must rely on other entities to conduct
investigations that could lead to prosecution. For example, in the food-
stamp-trafficking ramp-up case previously cited, this retailer redeemed
almost $650,000 of food stamps over the course of 9 months before being
disqualified from the program in November 2004. As of August 2006,
there was no active investigation of this retailer.
Because of the time it takes to develop an investigation for
prosecution and the costs associated with doing so, a natural tension
exists between the goal of disqualifying a retailer as quickly as
possible to prevent further trafficking and seeking prosecution of the
retailer to recover losses and deter other traffickers. One FNS field
office official said it can take months or even years to investigate a
case for prosecution and in the meantime the store continues to
traffic. FNS can disqualify a retailer relatively quickly--thereby
saving federal dollars from misuse--compared with the time OIG needs to
investigate a case for referral for prosecution. However, if
prosecution is successful, a retailer's assets and profits from
trafficking can be seized, providing a potential deterrent to others
considering trafficking.
States' Lack of Focus on Recipient Trafficking Can Facilitate Vendor
Trafficking:
Paper cases often identify recipients suspected to have trafficked
their food stamp benefits with a dishonest retailer, and some FNS field
offices send a list of those recipients to the appropriate state. In
response, some states actively pursue and disqualify these
recipients.[Footnote 18] For example, Illinois has used these lists to
disqualify more than 3,000 of the almost 20,000 suspected recipients
referred to them since 1999 through FNS retailer investigations. In
addition to pursuing recipients who are suspected of trafficking, one
state told us it uses some recipients charged with trafficking to
gather evidence against retailers.
However, FNS field offices do not always send lists of suspected
individual traffickers to states or counties administering the program,
and not all states investigate the individuals on these lists.
Officials from four FNS field offices we visited said they don't send
the list of recipients suspected of trafficking to the states or
counties administering the program. Other field office officials said
they send the lists to their states, but they are not acted upon
because states do not have the resources to conduct investigations into
recipients who may be trafficking. FNS headquarters officials also
believe that not many states are acting on the lists they receive
because it is difficult and potentially costly to prove individual
cases of recipient trafficking. One field office official said that
store owners represent only half of the problem and that states could
do more to address trafficking. If states could reduce recipients'
trafficking, it would curb retailer trafficking as well.
Instead of focusing on food stamp recipients who traffic their
benefits, states are using their resources to focus on recipients who
improperly collect benefits, according to FNS officials.[Footnote 19]
The current incentive structure for the states includes performance
bonuses to reward states for correcting payment errors and reducing
error rates. In addition, states are penalized financially if their
error rates reach a specific threshold for 2 years in a row.[Footnote
20] States that do investigate recipient traffickers can keep 35
percent of any monies they recover; however, it may be difficult to
recover the funds, and the amount recovered may be minimal. When a
state proves a recipient has trafficked, the recipient can no longer
receive benefits, but other members of the family can. States can try
to recover some of the benefits trafficked by deducting a set amount
from the family benefits each month. However, pursuing recipients who
traffic can be costly and time-consuming.[Footnote 21] Taken together,
these factors can result in states' choosing to focus on improper
benefit payments rather than recipient trafficking. This inaction by
some states allows recipients suspected of trafficking to continue the
practice, and such inaction also leaves a pool of recipients ready and
willing to traffic their benefits as soon as a disqualified store
reopens under new management. In fact, California field office staffs
have begun to track suspected trafficking recipients from a
disqualified store to a new store, where they begin exhibiting the same
patterns.
Conclusions:
In the Food Stamp Program, stores are the frontline for ensuring that
recipients use food stamps to purchase appropriate food items, and
these stores operate with no day-to-day oversight. Although the vast
majority of stores do not traffic food stamp benefits, each year
millions of dollars of program benefits that were awarded to provide
food to needy individuals and families are trafficked. FNS, using EBT
data, has made significant progress in taking advantage of new
opportunities to monitor and disqualify traffickers. However, because
store owners can begin trafficking as soon as they are authorized to
participate in the program, pocketing large sums of cash for months
before FNS can detect potentially suspicious transaction patterns,
early monitoring and detection are critical to curbing larger losses to
the program. FNS has at its fingertips a wealth of information that
could help it develop additional criteria to target certain stores or
geographic areas for early or more heightened monitoring, including the
presence of low food stocks, the location of repeat offender stores,
areas of recipient trafficking, and areas with evidence of organized
fraudulent activity. FNS's loss of monitoring staff in recent years
magnifies the need to ensure that compliance-monitoring resources are
focused on those stores and geographic areas at greatest risk of
trafficking. A more focused effort to target and disqualify these
stores could help FNS meet its continuing challenge of ensuring that
stores are available and operating in areas of high need while still
maintaining program integrity.
Yet, as EBT has limited the amount of benefits that can be trafficked
at one time, there is less chance the retailer or the recipient will be
prosecuted. There is no easy solution to this lack of deterrence. Law
enforcement agencies are making decisions to efficiently use their
resources by targeting larger or more critical cases. And FNS currently
does not have authority to impose stiffer penalties on retailers other
than program disqualification or in limited situations, civil money
penalties in lieu of disqualification. Food stamp trafficking will
continue to be lucrative for retailers as long as the potential rewards
outweigh the penalties and there are recipients willing to exchange
their benefits for cash and resources are not used for investigations
and penalizing recipients.
Recommendations:
We recommend that the Secretary of the Department of Agriculture direct
FNS to take the following five actions.
To help ensure that its limited compliance-monitoring resources are
used efficiently, FNS should:
* develop additional criteria to help identify stores most likely to
traffic and their locations; conduct risk assessments, using compliance
and other data, to systematically identify stores and areas that meet
these criteria; and allocate resources accordingly, and:
* provide more targeted and early oversight of stores that meet these
criteria, such as conducting early monitoring or follow-up inspections.
To provide further deterrence for trafficking, FNS should:
* develop a strategy to increase the penalties for trafficking, working
with the OIG as needed. If these penalties entail additional authority,
consider developing legislative proposals for program reauthorization
in 2007.
To promote state efforts to pursue recipients suspected of trafficking
and thereby reduce the pool of recipient traffickers, FNS should:
* ensure that FNS field offices report to states those recipients who
are suspected of trafficking with disqualified retailers, and:
* revisit the incentive structure to incorporate additional provisions
to encourage states to investigate and take action against recipients
who traffic.
Agency Comments:
We provided a draft of this report to the U.S. Department of
Agriculture and the U.S. Secret Service for review and comment. On
September 5, 2006, FNS officials provided us with their oral comments.
The officials generally agreed with our findings, conclusions, and
recommendations. However, FNS officials raised a concern regarding our
recommendations on more efficient use of their compliance-monitoring
resources. They stated they believe they do have a strategy for
targeting resources through their use of the Watch List, which helps
them identify suspicious transaction patterns and target certain
stores, combined with their ability to establish task forces of
investigators when they identify geographic areas needing additional
coverage. We believe that FNS has made good progress in its use of EBT
transaction data; however, it is now at a point where it can begin to
formulate more sophisticated analyses. For example, these analyses
could combine EBT transaction data with other available data, such as
information on stores with minimal inventory and stores with a past
history of trafficking, to develop criteria to better and more quickly
identify stores at risk of trafficking. In addition, FNS could also
take advantage of more sophisticated analysis tools, such as certain
mapping programs,to better identify those areas where trafficking is
more prevalent. Finally, to increase the likelihood of success, FNS
will need to combine the expertise of its field investigators and its
program specialists and then allocate these resources to monitor those
stores at the greatest risk of trafficking. FNS and OIG officials also
provided technical comments, which we incorporated where appropriate.
The U.S. Secret Service did not provide us with formal comments but
told us it concurred with the findings in our report and that it agreed
with our recommendation that additional work needs to be done to
increase existing penalties for trafficking.
We are sending copies of this report to the Secretary of Agriculture,
appropriate congressional committees, and other interested parties. We
will also make copies available to others upon request. In addition,
the report will be available at no charge on GAO's Web site at
[Hyperlink, http://www.gao.gov].
If you or your staff have any questions regarding this report, please
contact me at (202) 512-7215 or nilsens@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. GAO staff who made major contributors to
this report are listed in appendix I.
Signed by:
Sigurd R. Nilsen:
Director, Education, Workforce, and Income Security Issues:
[End of section]
Appendix I: GAO Contact and Staff Acknowledgments:
GAO Contact:
Sigurd R. Nilsen (202) 512-7215 or nilsens@gao.gov:
Staff Acknowledgments:
In addition to the contact named above, Kay Brown, Assistant Director;
Gloria Hernandezsaunders; Kevin Jackson; Kevin Kumanga, Analyst-in-
Charge; Crystal Lazcano; Jesus Moreno; Phil Reiff; Ramon Rodriguez;
Eden Savino; Dan Schwimer; Vanessa Taylor; Rachael Valliere; and Jill
Yost.
[End of section]
Related GAO Products:
Improper Payments: Federal and State Coordination Needed to Report
National Improper Payment Estimates on Federal Programs. GAO-06-347.
Washington, D.C.: April 14, 2006.
Food Stamp Program: States Have Made Progress Reducing Payment Errors,
and Further Challenges Remain. GAO-05-245. Washington, D.C.: May 5,
2005.
Food Stamp Program: Farm Bill Options Ease Administrative Burden, but
Opportunities Exist to Streamline Participant Reporting Rules among
Programs. GAO-04-916. Washington, D.C.: September 16, 2004.
Food Stamp Program: Steps Have Been Taken to Increase Participation of
Working Families, but Better Tracking of Efforts Is Needed. GAO-04-346.
Washington, D.C.: March 5, 2004.
Financial Management: Coordinated Approach Needed to Address the
Government's Improper Payments Problems. GAO-02-749. Washington, D.C.:
August 9, 2002.
Food Stamp Program: States' Use of Options and Waivers to Improve
Program Administration and Promote Access. GAO-02-409. Washington,
D.C.: February 22, 2002.
Executive Guide: Strategies to Manage Improper Payments: Learning from
Public and Private Sector Organizations. GAO-02-69G. Washington, D.C.:
October 2001.
Food Stamp Program: States Seek to Reduce Payment Errors and Program
Complexity. GAO-01-272. Washington D.C.: January 19, 2001.
Food Stamp Program: Better Use of Electronic Data Could Result in
Disqualifying More Recipients Who Traffick Benefits. GAO/RCED-00-61.
Washington D.C.: March 7, 2000.
Food Assistance: Reducing the Trafficking of Food Stamp Benefits. GAO/
T-RCED-00-250. Washington D.C.: July 19, 2000.
Food Stamp Program: Information on Trafficking Food Stamp Benefits.
GAO/RCED-98-77. Washington D.C.: March 26, 1998.
FOOTNOTES
[1] U.S. Department of Agriculture, Office of Analysis and Evaluation,
The Extent of Trafficking in the Food Stamp Program (August 1995); The
Extent of Trafficking in the Food Stamp Program: An Update (March
2000); The Extent of Trafficking in the Food Stamp Program: 1999-2002
(July 2003); and The Extent of Trafficking in the Food Stamp Program:
2002-2005 (September 2006).
[2] For example, FNS did not randomly select a sample of retailers to
produce its estimates. Instead, it selected those retailers who had
been investigated for trafficking and used this group to analyze and
calculate the trafficking rate. FNS believes its trafficking estimates
likely overstate the amount of dollars diverted by trafficking because
FNS based its estimates on retailers already suspected of trafficking.
However, it is possible that trafficking occurs among stores outside of
the pool of suspected traffickers. To the extent that this occurs, FNS'
estimates could understate actual trafficking. Also, this approach does
not ensure that each retailer has a known probability of being selected
in the sample, which undermines the ability to statistically generalize
to a larger population.
[3] FNS used a relatively consistent method for each estimate; however,
to improve its 1999-2002 estimate, FNS included retailers suspected of
trafficking and disqualified on the basis of certain EBT transactions.
To be more reflective of all its trafficking-related activities, for
its 2002-2005 estimate, FNS used a number of additional data sources.
These sources include closed cases on FNS's Watch List and retailers
investigated by the OIG, the U.S. Department of Justice, the states,
and other entities. While the additional data sources in the most
recent estimate provide a broader range of trafficking investigations,
this adjustment could also contribute to a lower estimate as the Watch
List, for example, contains retailers that demonstrate a lesser level
of suspicious behavior than retailers used for prior estimates.
[4]Reimbursements for food stamp administrative costs in 44 states are
adjusted each year to subtract certain food stamp administrative costs
that have already been factored into these states' TANF grants. As a
result, these states receive less than 50 percent of their
administrative costs. See GAO, Food Stamp Program: States Face Reduced
Federal Reimbursement for Administrative Costs, RCED/AIMD-99-231
(Washington D.C.: July 23, 1999):
[5] Point-of-sale devices or terminals read the recipient
identification information from the magnetic strip on the back of the
food stamp EBT card. That information, along with the amount of the
purchase, would be sent to the state's EBT contractor for approval of
the transaction.
[6] Voluntary reasons include changes in store ownership, changes in
the nature of the store, or store closings. Involuntary reasons include
the store no longer meets the basic eligibility requirements for
authorization or the store had no redemption activity.
[7] The Secret Service was originally given authority to participate in
food stamp investigations because food stamps were considered the same
as currency, and the Secret Service is responsible for investigating
currency violations such as counterfeiting. With the move to EBT,
Secret Service authority derives from the use of an EBT card as an
access device to commit fraud.
[8] If the retailer had taken proper measures and can prove he was not
involved in the trafficking, rather than permanent disqualification,
FNS may impose a civil money penalty. Civil money penalties may also be
imposed against disqualified owners who sell their stores before the
expiration of the disqualification period, because they have not
completed their program suspension penalty.
[9] FNS officials said it is more common for a store to receive a 6-
month temporary disqualification because they are unable to determine
whether the ineligible goods were sold by the store owner or a store
employee.
[10] According to FNS officials, at least 90 percent of non-Retailer
Investigations Branch trafficking disqualifications result from paper
cases. Other disqualifications may result from the OIG and state law
enforcement investigations.
[11] FNS has retained archives of all state EBT transaction data from
the beginning of each state's EBT system, and if program specialists
request older data, FNS can e-mail it to the field office within hours.
[12] Although FNS's EBT transaction data system analyzes all
transaction data, large stores are not included on Watch Lists, because
FNS's data show that large stores are rarely involved in trafficking.
[13] Additional historical data can be requested by field office staff
as necessary.
[14] U.S. Congress, House Committee on the Budget, Fraud, Waste and
Abuse in Mandatory Spending Programs (July 9, 2003).
[15] Program specialists also devote time to other duties, but the
range and extent of other duties vary from field office to field
office.
[16] Civil money penalties may be imposed against a store in lieu of
disqualification. FNS collected almost $1.7 million in civil money
penalties in fiscal year 2005.
[17] Warning letters are sent for lesser violations of program
regulations such as charging food stamp recipients higher prices than
other customers or when the evidence is too limited to warrant a
disqualification. Temporary disqualifications are generally for selling
ineligible goods such as paper plates, tobacco or alcohol or providing
credit to food stamp recipients.
[18] The states are responsible for conducting a hearing for recipients
caught trafficking. A recipient who is found to have trafficked faces
disqualification from the Food Stamp Program: 12 months for a first
offense, 24 months for a second offense, and permanently for a third
offense.
[19] In fiscal year 2004, states reported that they completed almost
746,000 food stamp fraud investigations resulting in over 55,000
recipient disqualification determinations. They do not, however, report
the number of cases involving recipients who trafficked versus the
number who obtained benefits fraudulently.
[20] States are penalized when there is a 95 percent statistical
probability that that their error rates exceeds 105 percent of the
national average for 2 consecutive years. The penalty is equal to 10
percent of the cost of errors above 6 percent. For more information,
see GAO, Food Stamp Program: States Have Made Progress Reducing Payment
Errors, and Further Challenges Remain, GAO-05-245 (Washington, D.C.:
May 5, 2005).
[21] In addition, the Omnibus Budget Reconciliation Act of 1993, Pub.
L. No. 103-66, reduced the administrative reimbursement for all
investigations and prosecutions from 75 to 50 percent.
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