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STATEMENT OF RUTH A. RITZEMA

**Special Agent in Charge**

**New York Field Office**

**Office of the Inspector General**

**U.S. Department of Housing**

**and Urban Development**

**BEFORE THE**

**HOUSE COMMITTEE ON HOMELAND SECURITY,**

**SUBCOMMITTEE ON MANAGEMENT,**

**INTEGRATIONAND OVERSIGHT**

**UNITED STATES HOUSE OF REPRESENTATIVES**

**JULY 13, 2006**

**Statement of Ruth Ritzema**

**Special Agent in Charge, New York Field Office**

**Office of the Inspector General**

**Department of Housing and Urban Development**

**Before the House Committee on Homeland Security,**

**Subcommittee on Management, Integration, and Oversight**

Chairman Rogers, Ranking Member Meek, members of the Subcommittee; thank
you for inviting me to testify today on the lessons learned after the
events of September 11, 2001. Although this hearing is about the
oversight efforts in fraud detection, prevention and control, which I
will elaborate in great detail on, I wanted to start off my testimony by
quickly sharing with you how the events of that day directly and
intimately impacted me.

# Events of September 11^th^

The Department of Housing and Urban Development's Office of Inspector
General (HUD OIG) Office of Investigations, of which I am the Special
Agent in Charge, was at 6 World Trade Center. It housed approximately
thirty-five HUD OIG employees -- special agents, forensic auditors and
support staff.

On that morning, fortuitously, our New York City special agents were out
of the office at a quarterly firearms qualification. Unfortunately, our
forensic auditors and support staff were on site when the first plane
hit the North Tower, which was adjacent to our office. All of the
auditors and support staff in the building heard the explosion and one
of our secretaries, who saw pieces of the plane and building fall,
immediately told everyone to evacuate prior to any alarms going off.
They fled across the street near the financial district where they
watched the building burn. The group became separated when the second
plane went into the South Tower.

Four of my special agents from our regional sub-office in Buffalo, New
York, had flown in for their firearms qualification and they were to
meet at our building at 9:00 a.m. for case reviews. The agents were
traveling on the subway and made a lucky mistake by getting off at City
Hall instead of the next exit that would have put them in the basement
of the World Trade Center complex at exactly the wrong time.

I had meetings scheduled for that day in New Jersey and was across the
river when I received a page from an agent about a fire at the World
Trade Center. When I heard on the radio about the second plane going in,
and worried about my own people, I immediately headed into the City
using the shoulder of the New Jersey Turnpike to bypass the stopped
traffic. As I approached the extension, I could see the towers on fire.
I repeatedly tried to get through to headquarters, the staff or the
offices, but as hard as I tried I only got a busy signal.

As I was driving towards the City, the first of the two towers collapsed
before my eyes and I heard on the radio that the Pentagon had also been
attacked. I drove through the Holland Tunnel to the federal building
located at 26 Federal Plaza, which is six blocks away from the World
Trade Center and is also where the HUD OIG Office of Audit is located. A
Federal Bureau of Investigations (FBI) agent told me that the emergency
law enforcement command post was setting up at the church adjacent to
the World Trade Center complex.

Running down Broadway, I was struck by how surreal the whole situation
appeared. The beautiful cloudless day had turned all dark with soot and
smoke in the air. People tried to turn me away from Ground Zero until I
threw on my "Federal Agent" vest cover. I stopped from time to time to
try to get help for a couple of people who had pretty serious burns. I
then continued to run to the command post to check and make sure that
our people were out safe. I just arrived at the church adjacent to the
towers when the second tower collapsed literally right in front of me.

At that point, I have no memory of what happened during the collapse. My
next memory is being about a block away with firemen all around and
hearing screaming radio transmissions of firemen who were getting buried
and were desperately trying to give their coordinates; "we're at two
o'clock from the fountain" (the fountain was located in the middle of
the plaza). After the air cleared some, another FBI agent saw me and
told me that we were rallying in Chinatown and he and I ran there.

I immediately agreed to work with and assist the FBI in any capacity.
Our Assistant Special Agents in Charge (ASACs) had rallied our agents
and were standing by for instruction. One of my ASAC's and I went back
to what was formerly our office and watched the building burn. Shortly
thereafter, 7 World Trade Center collapsed. Training from my years in
the military kicked in as we dispersed and established security
perimeters to deal with the rumors and false reports swirling about in
the dark mist of that day. Thankfully, and most importantly, we
accounted for our people, but we had lost everything else -- our
evidence, all our case files, and our equipment. The HUD OIG had
previously suffered a tragedy when one of our special agents died in the
Oklahoma City bombing and I was very grateful how lucky we were
considering our proximity to the devastation.

A command post was set up at 290 Broadway and it seemed that every law
enforcement-related agency was in that room with a phone that rarely
worked and a handwritten piece of paper taped in front of their table to
identify their agency. Our OIG agents were stationed all over the city
\-- at command post, airports, Ground Zero or whatever other hot spot
came up. They also searched for evidence with rakes, shovels and gloved
hands at the landfill in Staten Island. This command post was move to
the "Intrepid" in the Hudson River and to a garage on the West Side
Highway where for the next few months our special agents continued to
assist in the terrorist investigation and to transition back to
HUD-related oversight activities.

**[Auditing Activities]{.underline}**

In the aftermath, Congress authorized HUD to provide the State of New
York with \$3.483 billion in Community Development Block Grant (CDBG)
disaster assistance to aid recovery and revitalization and earmarked at
least \$500 million of this to compensate small businesses, nonprofit
organizations, and individuals for economic losses. Out of these funds,
the Empire State Development Corporation (ESDC), designated by New York
State to develop and administer economic and business recovery grant and
loan programs, was allocated \$700 million. The Lower Manhattan
Development Corporation (LMDC), established to administer and develop
programs to rebuild and revitalize lower Manhattan, was allocated
\$2.783 billion.

Direction from the legislation insisted on speed in assisting businesses
located in lower Manhattan hardest hit by the attack. For instance,
applicants for Business Recovery Grants (BRG) were required to have a
response to their request within 45 days of application submission.
Congress also insisted on the utmost integrity from the program and
required that the HUD OIG maintain a continuous audit activity of funds
allocated to the rebuilding efforts. The Congress required that we
report on the expenditure of the funds every six months. Our audit
objectives to fulfill this mandate were to determine whether ESDC and
LMDC:

-   Disbursed the CDBG disaster funds to applicants in a timely manner;

-   Disbursed the CDBG disaster funds to eligible applicants in
    accordance with HUD-approved action plans;

-   Had financial management systems to adequately safeguard the funds;
    and

-   Developed and implemented adequate procedures for monitoring the
    CDBG disaster assistance programs.

HUD OIG called for a meeting with Inspectors General from all the
affected agencies to begin investigative and auditing coordination and
cooperation in the New York/New Jersey office. Early collaboration with
other agencies was important to the success of our auditing efforts. As
a result, procedures were developed that provided that if an entity
already received a Small Business Administration (SBA) grant and applied
for a BRG grant, that entity could not receive a BRG grant if the total
of both grants exceeded its economic loss. Likewise, we met with Federal
Emergency Management Agency (FEMA) officials to also work on the issue
of duplication of benefits among our programs.

We further collaborated with the Internal Revenue Service (IRS) to
obtain a copy of an applicant's tax transcript, which was then used to
verify that the tax information included on the application for
computing economic loss was accurate. We discovered that some applicants
did not file a tax return but still submitted a tax return on their BRG
application and/or they sometimes included a higher taxable income than
what was actually filed with the IRS in order to inflate economic loss.
The auditors referred these over for investigation.

Additionally, we coordinated with the Social Security Administration
(SSA) to test whether the social security numbers from our audit sample
were legitimate. If our auditors discovered a discrepancy (i.e., the age
of applicant did not agree with the age registered with the SSA), they
referred it to investigations. In general, if the auditors detected any
suspicious information during the course of its financial review, for
instance, in the ESDC's Business Retention Grant (BRG) or Small Firm
Attraction and Retention Grant (SFARG) programs or in the LMDC's
Residential Grant program, it referred it to investigations for further
review. This greatly enhanced anti-fraud and abuse endeavors.

HUD OIG auditors took a proactive approach that stressed prevention of
fraud and abuse, as opposed to solely a detection emphasis whereby
audits would take place long after the funds had been expended. The
unusual nature of this audit recognized that the funds needed to be
disbursed quickly and that Congress had waived the pre-set CDBG
statutory requirements that governed the parameters of who were to
receive grants. Early in the program our audits identified significant
weaknesses in internal controls and program design. We conducted audits
in an almost real-time basis that gave the auditee an early opportunity
to take corrective action and improve controls and procedures for future
expenditures. Audits were started no more than six months after the
disbursements had been made. While this was resource intensive and
caused a strain on our other operations as we had not been given any
additional funds to undertake this initiative, we felt it was important
that we remain aggressive and in the forefront.

To date, we have audited over \$1 billion dollars in disbursements. The
results of these audits include findings of duplication of benefits and
payments; of overpayments; of ineligible and unsupported costs, and of
improvements needed in collection efforts. For example, our audit work
found that over \$2 million had been disbursed to the Hudson River Park
Improvements Program contrary to the terms of the sub-recipient
agreement.

In furthering our early collaborative work with the SBA, only eight
months after the attack, we issued an interim audit report noting the
duplication of benefits between SBA loans and the ESDC's BRG program. We
also reported on concerns we had with the calculation of recipients'
economic loss amounts for the BRG program. As a response, ESDC developed
procedures and formulas that tried to prevent duplication. ESDC also
revised its application for the BRG program to require recipients to
itemize the amount of claimed economic loss. In addition, it has
responded by:

-   Revising and enhancing controls and procedures to minimize
    ineligible and incorrect grant payments;

-   Instituting additional efforts to collect grant overpayments;

-   Hiring additional internal audit and investigative staff; and

-   Establishing an audit staff of retired New York State Department of
    Public Service Commission employees to review the claims submitted
    by utility companies under the Utility Restoration and
    Infrastructure Rebuilding Program (i.e., they have completed audits
    of claims for two utility companies and disallowed in excess of \$33
    million of the companies' \$99 million claim for reimbursement).

### 

### Investigative Activities

In addition to our audit work evaluating operational and administrative
controls and other financial matters, we are also intensively involved
in anti-fraud and abuse efforts. We have grouped our efforts into the
three general areas of HUD expenses: immediate disaster relief funding,
mid-term grant relief, and long term rebuilding expenditures. Our Office
of Investigation works in cooperation with the Office of the United
States Attorney to prosecute recipients that have fraudulently obtained
CDBG funds. We have established working relationships with other federal
agencies and State and city entities. Very early on, due in large part
to what our auditors were initially finding, we met with the U.S.
Attorney's office to discuss the vulnerabilities and fraud patterns that
were identified.

Originally established as an informal group by the U.S. Attorney's
office, the World Trade Center Fraud Working Group solidified and began
to meet monthly to discuss fraud concerns and share information on
schemes. The working group was made up of high-level management that
allowed for the discussion of complex matters and encouraged an
environment where issues were expeditiously addressed. The working group
attempted to, among other things, identify all the various agency
dollars flowing into lower Manhattan, de-conflict cases, use automation
to detect criminal activity, pass on criminal trends to enable better
training, coordinate cases for maximum impact, identify legal weaknesses
in the various programs and pass on recommendations to make them more
fraud resistant, coordinate amnesty programs, and facilitate federal,
State and local prosecutions.

This concentration of law enforcement and prosecutorial efforts resulted
in the arrest and conviction of many perpetrators and also generated
publicity that we believe had, to some extent, a deterrent effect.
Members of the group included the:

-   Office of the United States Attorney's-Southern District of New York

-   Office of the Manhattan District Attorney

-   Department of Labor-Office of Inspector General

-   Department of Transportation-Office of Inspector General

-   Federal Emergency and Management Agency--Office of Inspector General

-   Small Business Administration-Office of Inspector General

-   Social Security Administration--Office of the Inspector General

-   Environmental Protection Agency--Office of Inspector General

-   Internal Revenue Service -- Criminal Investigation Division

-   U.S. Postal Inspection Service

-   New York City Department of Investigation

-   Lower Manhattan Development Corporation

-   State of New York- Office of Inspector General

-   State of New York Insurance Department

Through our joint efforts, we have identified a number of types of
potential criminal vulnerabilities that relate to the disaster
assistance funding for lower Manhattan. These include:

1.  False Statements and Claims

2.  Wire Fraud

3.  Mail Fraud

4.  Theft or Bribery

5.  Tax Evasion

6.  Bid Rigging

7.  Prevailing Wage Fraud

8.  No Show Jobs

9.  Artificial Price Market Inflation

10. Contract Fraud: Invoicing and Double Billing

11. Environmental Crimes

12. False Payrolls

13. Public Corruption

14. Embezzlement

15. Insurance Fraud

16. Collusion

17. Kickbacks

Every day our HUD OIG agents are at work on cases of fraud stemming from
disaster funding for lower Manhattan. We received over 115 referrals as
well as work we initiated. Although a number of our cases have been
completed, we still have 62 cases open that are under investigation.

An example is the case against an individual who claimed his executive
search firm sustained damage at 2 World Trade Center. He was convicted
on 18 counts of defrauding nearly \$350,000 from private and government
agencies of disaster benefits including grants and loans. FEMA, SBA, HUD
and the Red Cross were among the targets of his fraud. Using forged
documents, he received Business Recovery Grants for non-existent
equipment that was supposedly lost when the tower collapsed.

In a further example, as I speak to you today, there is a trial that is
proceeding against a man who submitted fraudulent applications to
government programs, received \$118,000 that he was not entitled to, and
applied for another grant when his scheme was uncovered. The amount of
the grant award was calculated on the size of the business's expenses.
So while his business was eligible for funds, he padded his application
with thousands of dollars of phony expenses. He included lists of fake
employees, business expenses, social security numbers, checks, wage
reports that he supposedly filed with New York State \-- but never did,
lease agreements, and signatures that were forged onto other documents.

Another case involved a Maryland man, who was sentenced to 24 months
incarceration, to 26 months of probation, was ordered to pay restitution
of \$170,000, voluntarily forfeited \$280,000 to the government, and was
fined \$10,200 for obtaining Business Recovery Grants claiming he had a
business in lower Manhattan. In reality, the floor he claimed he was on
was actually entirely occupied by a city agency. He offered a tax return
that listed his business in lower Manhattan and reported gross earnings
of \$3.3 million. Our investigation proved he had no business in lower
Manhattan but worked from his home in Maryland and that the business
reported minimal gross earnings.

Two other instances illustrate some of the early matters we were
investigating. A New Jersey resident, who sublet his unit in lower
Manhattan, fraudulently submitted a two-year commitment grant
application, claiming he resided at his apartment on Pearl Street. A
Manhattan woman claimed she lived on St. John Street and intended to
stay in her apartment until the following year. In reality, she had
moved uptown to W. 63^rd^ Street. She had given LMDC a doctored lease
and repeatedly lied about her address.

A case of public corruption was brought against an official of the New
York State Division of Housing and Community Renewal. This official
illegally obtained a LMDC Residential Retention Grant saying his father
lived with him in lower Manhattan and he then sublet the unit at market
rent prices.

Moreover, we found individuals who thought they would have easy access
to money by establishing phony addresses. One such individual gave his
address as 121 Reade Street, when in fact he lived further uptown on
West 21^st^ Street. This cost him a \$2,000 fine, 200 hours of community
service and one year's probation.

The LMDC Residential Grant Program received more than 40,000
applications and distributed more than \$235 million. With each
successful prosecution, we hoped that people who had lied to receive
grant money had become anxious. To give these people a limited chance to
come forward, a Fraudulent Grant Recipient Amnesty program was
established. To date, over 160 households have returned money to the
program.

#### [Lessons Learned from September 11^th^ Experiences]{.underline}

In addition to the establishment of a joint fraud working group, there
are a number of initiatives that occurred, some of which we helped
facilitate, which we believe are important to fraud detection, control
and prevention.

A lower Manhattan Construction Command Center was organized to
coordinate all construction valued at over \$25 million. As a result, a
**Construction Integrity Team** was established which, among other
things, consists of federal and local OIGs working in cooperation to
evaluate vulnerabilities and improper activities. It has shared
information so as to assist each of the contracting agencies in vetting
contractors and subcontractors and to ensure the integrity of the
process. It has set up an information campaign to deter fraudulent
activity. It is also a productive venue to share facts on fraudulent and
abusive trends. As construction and redevelopment begins, we anticipate
that we will see more fraud and abuse involving contractors as HUD's
funding moves away from benefit reimbursement to development efforts.

In order to provide a mechanism for the State and City to receive
information on potential improper activity relating to construction, a
**Fraud Prevention Hotline** was created under the direction and control
of the Command Center. It was designed to receive allegations of
corruption or criminal activity by any agency employee, public official,
contractor employee, agent, subcontractor, vendor, or labor official.
This hotline began operations in 2005. Posters publicizing the hotline
are, and will be, located in all construction work sites and trailers. A
press release was issued to inform the public. In addition, flyers are
inserted in paychecks and stickers are placed on the back of employee
identification cards in order to highlight the hotline's presence.
Moreover, a website was created that contains a complaint form.

We also cooperated on a project that has established an employee
**baseline background check** from third party databases that is
overseen by a screening company. The background review will search for
organized crime connections, terrorism ties, any previous histories of
violence in construction, and theft and integrity issues. While
recognizing that some employees involved in construction may have had
past criminal problems, this check will try to evaluate the nature of
the crimes committed. It is important that the unions buy in to this
process, as they did so with this project, or it will be very difficult
to undertake.

Our oversight efforts have shown that the most effective way to proceed
is to have monitoring be constant, continuous and at all the different
levels of activity. **Monitors** should be concerned with: funds
disbursement from the U.S. Treasury to State financial institutions;
disbursements from the grantee to the sub-grantees; invoices and
paperwork of the grantees and sub-grantees; timely reports for award and
expenses; and timely reports on fraud prevention.

As I believe you have heard about in previous testimony, we also
advocate the use of integrity monitors, also sometimes known as
**Independent Private Sector Inspectors General** (IPSIGs). These are
monitors with legal, auditing, investigative and loss prevention skills
that are employed usually by a government entity to ensure compliance
with relevant laws, regulations and contracts. They can be helpful in
the procurement or licensing phase of contracts and can assist in the
vetting of initial contractors. In general, they act to deter, prevent,
uncover and report unethical or illegal conduct that is especially
useful if agency resources are inadequate to handle the response needed.

The HUD OIG labored to provide useful **fraud awareness training** to
granting agencies. We gathered trends in criminal activity from a host
of other law enforcement agencies in order to facilitate our training.
We worked together with the ESDC and LMDC to train them on fraud
detection techniques, particularly before grants were disbursed, as well
as on identifying fraud indicators. This enabled the grantees to
subsequently identify possible fraud and retain the necessary
documentation for prosecution. We established a rapport that was
designed to receive referrals from them on a timely basis. Although hard
to measure, we believe these joint efforts helped to prevent, or to
mitigate, a number of potential frauds as well as to uncover, and
provide, evidence of criminal activity. We are currently working on a
training module that will be geared to the contracting community as
rebuilding efforts begin in earnest and that will include instruction in
areas such as bribery awareness, false invoice detection, and bid
rigging schemes. Throughout the grant implementation and distribution
process, we continually educated the grantees on how to structure their
application forms in a manner that would positively identify the
applicant to reduce the potential for fraudulent applications and that
would enumerate on the form the penalties for committing fraud.

From an auditing standpoint, we also believe there were important
lessons learned. We believe it beneficial to: coordinate with other
auditing entities to prevent overlap and duplication; hold meetings with
auditees when new programs begin; utilize consultants or experts when
necessary; use statistical sampling to better estimate results; discuss
results early with auditees and local agency officials to prevent
surprises; establish a relationship such that auditees will notify OIGs
immediately upon the discovery of fraud; and work closely with
investigators to get referrals to them quickly.

**[Oversight of Hurricane-related Disaster Relief Efforts]{.underline}**

The destruction and aftermath of Hurricanes Katrina, Wilma and Rita
challenge the HUD OIG with a task even more daunting than the
reconstruction of lower Manhattan following the September 11th attack.
Once again, an area of our nation has been hit by an unexpected disaster
that has taxed emergency services and redirected federal Inspectors
General toward assisting local government and overseeing the expenditure
of a large amount of federal money. However, it also important to
understand that there are differences, as they relate to our oversight
efforts, between these two disasters.

From a HUD standpoint, New York City received approximately \$3.5
billion. At this juncture, the Gulf Coast States have received almost
\$17 billion in assistance from HUD. With post-September 11^th^ relief
efforts: there were only two major "pass through" entities of CDBG
funds; there were far fewer prospective grantees and sub-grantees, there
was a limited land area to consider; and the oversight activities were,
to some extent, more controllable. With the post-hurricane relief
efforts: there is a multitude of "pass through" entities of CDBG funds
in numerous States; there are thousands of grantees and sub-grantees;
there is a huge land area of effected devastation; and, consequently,
there is a much more arduous task for oversight.

Though we had some disaster experience with Hurricane Andrew in Florida
a number of years back, we were definitely on a learning curve with our
September 11th oversight activities. Each of our encounters have taught
us some general lessons including probably the most important lesson \--
that OIG teams on the ground, and at headquarters, must be proactive
rather than reactive. This posture extends to collaboration. Joint task
forces combine assets, manpower, information technology, budgets and
other agency specialties to monitor expenditures and to attack
fraudulent and criminal activities. To be truly effective, an OIG must
continuously work to prevent waste, fraud and abuse by acting in real
time and in a purposeful way to have a deterrent effect. Some of our
best practices garnered from September 11^th^ have become invaluable to
us in this current effort. These include endeavors such as:

-   Criminal investigators and auditors training State and local
    entities on how to uncover fraud, how to identify fraud indicators,
    how to retain necessary documentation; and how to make referrals to
    appropriate law enforcement;

-   Participating in joint teams, such as grant fraud task forces and
    construction integrity teams;

-   Setting up of hotlines and information campaigns on how to report
    fraud; and

-   Properly vetting contractors and subcontractors and creating a
    clearinghouse database, as well as systems to conduct employee
    background checks.

In particular, we have especially honed our training capabilities over
time and are providing in-depth and varied instructional opportunities
on topics such as fraud detection in disaster relief settings to a host
of entities in the effected Gulf Coast area. The first State to submit
their plan was the State of Mississippi through their agency, the
Mississippi Development Authority (MDA). The MDA met on several
occasions with the HUD OIG to discuss their plan, listen to our
concerns, and to be briefed by HUD OIG audit and investigative managers
on the potential for scams and how to deal with application fraud, such
as false statements, identity theft and false documents. In addition, as
part of our fraud awareness efforts, the HUD OIG educated MDA contract
appraisers hired to assess property damage on fraud red flags.
Homeowners applying for grant money received a HUD OIG fraud awareness
bulletin as part of their application packet.

Though not the focus of this testimony, I would like to inform the
Subcommittee that while we are working together to put controls in place
we do, however, still have some concerns. From an audit oversight
standpoint, the MDA plan, oversight and monitoring of grant funds ceases
after the State has issued "compensation" funds to the homeowner "to be
used at the discretion of the homeowner." The MDA plan is concerned with
the funds to the point when they are given to the homeowner, at which
point they are allowed to work through their personal disaster recovery
as they see fit. We do not think that monitoring and oversight should
end at this phase and we have remaining concerns about how
"compensation" plan that basically reimburses will spur the rebuilding
of now blighted communities. What is to become of these communities in
the future?

In general, our Office of Investigation down in the Gulf Coast region
has created a far reaching fraud prevention program designed to: (1)
create a training course for other agents/auditors and program officials
to teach them to identify fraud specifically in CDBG programs; (2)
sponsor fraud prevention meetings between HUD OIG and the major programs
of HUD; and (3) sponsor fraud prevention meetings between the HUD OIG
and industry groups such as the Mortgage Bankers Association, the Public
Housing Authorities Directors Association; and the National Association
of Housing and Redevelopment Officials.

As part of this prevention program, the HUD OIG also created a
Suspicious Activity Report (SAR) that will be given to HUD grantees,
sub-grantees, and others associated with delivering disaster funds. The
SAR is a method of informing HUD OIG of suspected irregularities in the
delivery of HUD program money.

**[Conclusion]{.underline}**

In closing I would like to thank the Subcommittee for the opportunity to
talk about the work that the agents, auditors, attorneys and support
people of the HUD OIG have accomplished since the onset of this tragic
and trying event. Our people do it because we are committed to the
Department's mission of providing safe, decent, sanitary and affordable
housing for the Nation, and of providing economic development for our
country's communities. I look forward to answering questions that
members may have.