Background

The Food Stamp Program helps recipients—individuals and families with low incomes—to obtain a more nutritious diet by providing food stamp benefits to supplement the funds they have to spend on food. Recipients must use their food stamp benefits to purchase only allowable food products from retail food stores that FNS authorizes to participate in the program.
FNS administers the program in partnership with the states. FNS funds all of the program’s food stamp benefits and about 50 percent of the states’ administrative costs. FNS is primarily responsible for developing the program’s policies and guidelines, authorizing retail food stores to participate in the program, and monitoring retailers’ compliance with the program’s requirements. The states are responsible for handling the day-to-day operation and management of the program, including such duties as certifying the eligibility of individuals or households to participate in the program, delivering the benefits to recipients, and monitoring recipients’ compliance with the program’s requirements.
Recipients use food stamp coupons or an electronic benefit transfer (EBT) card to pay for allowable foods. EBT systems that provide food stamp benefits to recipients use the same electronic funds transfer technology that many grocery stores use for their debit card payment systems. A food stamp recipient receives an EBT card and a personal identification number, and the recipient authorizes transfer of the food stamp benefits from a federal account to a retailer account to pay for the food received. At the grocery checkout counter, the recipient’s card is run through an electronic reader and the recipient enters the secret personal identification number to access the food stamp account.
The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 mandates that all states implement EBT systems before October 1, 2002, unless USDA waives the requirement. As of March 1998, 16 states had implemented EBT systems statewide. Twelve of these states deliver multiple program benefits with their EBT systems, including other federal and state programs. Additionally, 14 states use EBT systems in selected counties, and most of these states are in the process of expanding these systems statewide. All the remaining states are in the process of implementing EBT systems. Collectively, EBT systems supply about 40 percent of all food stamp benefits.

	Trafficking Accounts for a Relatively Small Percentage of the Total Program and Occurs Mostly in Small Stores

According to a 1995 FNS study, about $815 million, or about 4 percent of the food stamps issued, was trafficked—exchanged for cash—by about 9 percent of the authorized retailers during fiscal year 1993. Supermarkets and large grocery stores redeemed 82.5 percent of all food stamp benefits and had an average trafficking rate of 1.9 percent of the benefits redeemed. In contrast, smaller stores redeemed 17.5 percent of the benefits and had an average trafficking rate of 13.0 percent of the benefits redeemed. Table 1 shows the percentage of benefits redeemed and trafficking rates by type of store.
In addition, this study found that privately owned stores had much higher trafficking rates than publicly owned stores (i.e., retailers whose stock is traded publicly). For example, publicly owned stores had an average trafficking rate of .2 percent of redemptions. In comparison, privately owned stores had an average trafficking rate of 5.3 percent of redemptions. Like FNS, we found, in our analysis of the 432 cases of food stamp trafficking, that most trafficking occurred in small privately owned retail stores. About 98 percent of the stores engaged in trafficking were small groceries. Only seven stores, about 2 percent, were supermarkets with over $2 million in gross sales.
The amount of trafficking may have changed since FNS conducted its 1995 study, which did not consider the effect of EBT. Since then, about 40 percent of food stamp benefits nationwide are supplied electronically, which allows easier identification of food stamp trafficking. Therefore, an analysis of the extent of trafficking using electronic data may indicate that violations are now occurring at a greater or lesser rate.

	USDA and Justice Are Primarily Responsible for Minimizing Food Stamp Trafficking

USDA is primarily responsible for monitoring the Food Stamp Program to detect trafficking and for imposing administrative sanctions. Justice is responsible for prosecuting cases referred to it by federal agencies. Each agency’s responsibilities are summarized below.

		USDA Identifies Food Stamp Traffickers and Imposes Administrative Sanctions

Within USDA, FNS and the Office of Inspector General (OIG) are responsible for monitoring program compliance by the approximately 185,000 stores currently authorized to redeem food stamps. While both agencies identify and investigate possible food stamp trafficking, FNS has the sole authority to impose administrative sanctions on violators, and the OIG concentrates on potential criminal investigations.
FNS and OIG identify possible violators through several sources: allegations from USDA’s hotline and analyses of data in FNS’ Store Tracking and Redemption System (STARS) and EBT systems. Of these sources, STARS provides the most comprehensive information. FNS and the OIG use this system to monitor stores’ redemptions of food stamps and to identify retailers for investigation. STARS has a profile of each store, including sales volume, and tracks monthly food stamp redemptions. FNS uses this system to ensure that store owners caught trafficking and disqualified from the Food Stamp Program do not reenter the program. However, FNS officials told us that they do not currently track clerks caught trafficking to keep them out of the program or to help prosecute repeat offenders. They said that FNS plans to implement a system later this year to track these clerks.
More recently, FNS and the OIG have begun using data from state EBT systems to identify possible cases of food stamp trafficking. More specifically, all states using EBT systems must provide their data on food stamp transactions to FNS for analysis. These data include the date, time, and amount of the sale; the store authorization number and cashier number; and the recipient’s identification number. Both FNS and OIG personnel analyze the EBT data using a computer program that identifies individual transactions or transaction patterns that indicate trafficking may be occurring. The use of EBT data has a particular advantage: Under the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, federal agencies may use EBT data alone, without the expense of conducting an undercover investigation, to take action against retailers violating the requirements of the Food Stamp Program. USDA has cited the implementation of EBT systems as a significant step forward in identifying and combating food stamp trafficking.
Once retail stores are identified as possible violators, FNS’ Compliance Branch, the OIG, or both conduct an investigation. Violations of the Food Stamp Act include trading food stamp benefits for cash (at a discount, such as 70 cents on the dollar) or for nonfood items. FNS takes administrative action against identified violators, such as disqualifying them from the program permanently or temporarily and/or imposing civil fines up to $40,000. FNS also refers cases to the OIG when it believes that a significant amount of trafficking has been occurring at a store and that a more complex case needs to be developed for prosecution.
FNS investigated over 38,700 retail stores during fiscal years 1990 through 1997 and found violations of the Food Stamp Program in about 17,600 stores. Table 2 shows that FNS identified over 5,700 trafficking cases during this period. It also shows that for the same period, the OIG accepted only about one-fifth of those cases for investigation, primarily because it did not have the resources to investigate a larger number of cases. The FNS cases not investigated by the OIG were returned to FNS, which can take administrative action against the violators.
Within USDA, the OIG is responsible for all criminal investigations and for coordinating the trafficking cases with the Department of Justice and other federal, state, and local agencies. The OIG investigates cases referred from FNS and initiates its own investigations using sources similar to FNS’. Table 3 shows that during fiscal years 1990 through 1997, the OIG reported on 5,551 investigations.
In addition to the investigations conducted by FNS and the OIG, the states sometimes work with these federal agencies to investigate retailers’ fraud or abuse in the program. For example, under agreements with states’ law enforcement agencies, FNS provides the states with food stamp coupons to use in conducting their own trafficking investigations. According to FNS, although it has established agreements with 32 states, only 10 have conducted sustained efforts against food stamp trafficking.

		Department of Justice Is Involved With Significant Food Stamp Trafficking Cases

The OIG has the sole authority for referring trafficking cases to federal, state, or local authorities for prosecution under criminal statutes. Criminal penalties can include fines of up to $250,000 and/or jail sentences of up to 20 years. According to USDA data, during fiscal years 1990 through 1997, Justice and state and local governments prosecuted about 2,650 trafficking cases that had been investigated by the OIG, resulting in about 4,800 indictments, 4,300 convictions, and over $70 million in fines, restitutions, and recoveries. Justice can prosecute traffickers criminally and may pursue civil recovery under the False Claims Act. Justice has 93 U.S. attorneys, one in each federal judicial district, who decide whether to prosecute individual cases of food stamp trafficking. In addition, Justice’s Civil Division also has the authority to prosecute traffickers. According to Justice officials, U.S. attorneys have wide discretion to establish priorities based on the needs of their local jurisdictions and the guidelines set forth in The Principles of Federal Prosecution, as well as various national initiatives and priorities. Therefore, U.S. attorneys prosecute some food stamp trafficking cases while referring others to state or local prosecutors. However, we noted that many food stamp trafficking cases are not prosecuted by federal, state, or local prosecutors.
In the absence of criminal prosecution, both the OIG and FNS refer significant trafficking cases to the Department of Justice for action under civil statutes. Civil money penalties, which come under the False Claims Act, can include fines of between $5,000 to $10,000 plus damages of three times the amount of food stamps involved in the trafficking. During fiscal year 1997, 82 settlements of false claims, which USDA had referred to Justice, amounted to civil money penalties of about $1.2 million. Since 1992, when USDA began referring cases to Justice, 566 false claims totaling over $5.9 million have been settled.

	Clerks Are Involved in Trafficking Food Stamps More Often Than Store Owners, and Penalties Vary

Our analysis of the 432 cases of food stamp trafficking shows that store owners alone were involved in 40 percent of the cases, clerks alone were involved in 47 percent of the cases, and store owners and clerks together were involved in 13 percent of the cases. In every case, FNS disqualified the store owner from participating in the Food Stamp Program or assessed a monetary penalty against the store owner. Additionally, federal, state and local courts took action against store owners in 92 cases and store clerks in 43 cases. Court-ordered penalties ranged from fines to jail sentences.
FNS took administrative action against the store owners in all 432 cases we reviewed. The large number of actions against store owners reflects the fact that, under the Food Stamp Program, store owners are legally responsible for any trafficking occurring in their stores, regardless of who was involved. Specifically, store owners in 410 cases were permanently disqualified from the program, owners in 18 cases were temporarily disqualified, and owners in 4 cases paid civil money penalties to FNS in lieu of being disqualified. In addition, FNS assessed administrative financial penalties totaling $1,077,062 against store owners in 175 cases. (See app. I for more information on the administrative actions FNS took against the 432 store owners.)
In addition to FNS’ administrative penalties, federal, state, or local courts took action against store owners in 92 of the 432 cases we reviewed. In 16 cases, store owners were sentenced to jail. Most of these store owners were sentenced to less than 1 year in jail, although sentences ranged from 1 day to 2,310 days. Store owners were fined by courts in 53 cases, and in 30 cases owners were assessed fines of less than $1,000. Owners in 18 cases were assessed fines ranging from $1,001 to $10,000, and owners in 5 cases were assessed fines of over $10,000. The two largest fines were $240,745 and $24,040. According to FNS and OIG officials, the lack of resources at the OIG to conduct investigations to develop sufficient information necessary for prosecution and conviction has limited the number of court actions taken. (See app. II for more details of the court actions taken against the 432 store owners.)
The following examples illustrate the court actions taken against store owners for trafficking:
One store owner redeemed $4,145 in food stamp benefits for $2,050 in cash and was sentenced to 1 day in jail; another store owner redeemed $4,639 in food stamps for $2,783 in cash and received no punishment other than permanent disqualification; and another store owner redeemed $8,620 in food stamps for $4,310 in cash and received no punishment.
Unlike store owners, store clerks who violate food stamp trafficking laws are not subject to FNS’ administrative actions. Clerks, however, can be prosecuted in federal, state, or local courts. Store clerks were caught trafficking by USDA investigators in 260 cases.
However, clerks received court-ordered actions in 43 cases, or about 17 percent of those cases. Financial penalties for 33 cases totaled $36,541, ranging from $50 to $2,793. Jail sentences in nine cases ranged from 1 day to 3-1/2 years, although most sentences were for less than 1 year. (See app. III for more information on the court actions taken against the store clerks.)
The following examples illustrate the court actions taken against clerks for trafficking:
One store clerk redeemed $390 in food stamp benefits for $200 in cash and was sentenced to 1 day in jail; three clerks in one store redeemed $5,600 in food stamp benefits for $3,440 in cash, and none were punished; and one clerk redeemed $885 in food stamp benefits for $532 in cash and was not punished.

	Agency Comments

We provided a draft of this report to the U.S. Department of Agriculture for its review and comment. We met with Food and Nutrition Service officials, including the Director, Benefits Redemption Division, and officials from the Office of Inspector General, including the Director, Program Investigations Division. The Department concurred with the report’s findings. We also provided Department of Justice officials an opportunity to comment on the sections of the report dealing with Justice. The officials of both departments provided a number of editorial and technical comments, which we have incorporated into the report where appropriate.

	Scope and Methodology

To identify information on the extent of retailer trafficking and the characteristics of the stores engaged in such trafficking, we obtained and used USDA’s 1995 report on the extent of trafficking in the Food Stamp Program and interviewed the USDA personnel responsible for that study. This study was a one-time study to estimate the extent of trafficking. We also collected information on the impact EBT has had on identifying food stamp trafficking by contacting USDA officials in eight states that had statewide EBT systems at the time we began our review.
To determine the roles and efforts of various federal agencies in minimizing food stamp trafficking by retailers, we interviewed and obtained information from officials of the departments of Agriculture and Justice. Specifically, we gathered information on their responsibilities relating to food stamp trafficking and obtained data on the number of trafficking cases the two agencies have identified and for which the store owners and clerks were punished, either administratively or through the courts over the last 8 years.
To determine whether store owners or clerks were generally caught for trafficking food stamps and the extent of discipline for the trafficking, we reviewed USDA’s files in six states—California, Florida, Georgia, New York, South Carolina, and Texas—to identify who committed the trafficking, who was disciplined, and what disciplinary action they received. We selected these states because they currently distribute about 40 percent of the total food stamp benefits and because some of these states delivered benefits by statewide EBT systems while others did not. We obtained a computer printout from FNS headquarters of all trafficking cases in those six states in which a store owner was disqualified from the Food Stamp Program between July 1, 1996, and June 30, 1997. We then worked with personnel in FNS’ regional and state offices to identify additional cases in which store owners paid a civil money penalty in lieu of being disqualified from the program. We also worked with these officials to verify the accuracy and completeness of the data.
We conducted our review from April 1997 through March 1998 in accordance with generally accepted government auditing standards.
As arranged with your office, unless you publicly announce its content earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will make copies available to appropriate congressional committees; the Secretary of Agriculture; the Attorney General of the United States; and other interested parties. We will also make copies available to others on request.
Please contact me at (202) 512-5138 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix IV.

FNS’ Administrative Actions Taken Against Store Owners in the 432 Trafficking Cases Reviewed

Court Actions Taken Against Store Owners in 92 of the 432 Trafficking Cases Reviewed

Not applicable.

Court Actions Taken Against Store Clerks in 43 of the 432 Trafficking Cases Reviewed

Not applicable.

Major Contributors to This Report

	Resources, Community, and Economic Development Division, Washington, D.C.

Ron E. Wood, Assistant Director Richard B. Shargots John K. Boyle Jacqueline A. Cook Dennis P. Dunphy William F. Mayo Carol Herrnstadt Shulman The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent.
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Summary:
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed food stamp trafficking at the retail level, focusing on: (1) the extent of retailer trafficking and the characteristics of the stores engaged in such trafficking; (2) the roles and efforts of federal agencies in minimizing food stamp trafficking by retailers; and (3) whether store owners or clerks were generally caught for trafficking food stamps and the extent of discipline for the trafficking.

What GAO Found

GAO noted that: (1) according to the most recent Food and Nutrition Service (FNS) study available, about $815 million, or about 4 percent of the food stamps issued, was trafficked at retail stores during fiscal year 1993; (2) supermarkets and large grocery stores redeemed 82.5 percent of all food stamp benefits and had a combined trafficking rate of 1.9 percent of all benefits redeemed; (3) smaller grocery stores redeemed 17.5 percent of the benefits and had a combined trafficking rate of 13 percent of the benefits redeemed; (4) this study did not reflect the electronic redemption of food stamps; (5) therefore, an analysis of the extent of trafficking that includes electronic data may detect that violations are now occurring at a greater or lesser rate; (6) the Department of Agriculture (USDA) and Department of Justice (DOJ) are the principal federal agencies responsible for minimizing food stamp trafficking by retailers; (7) within USDA, both the FNS and the Office of Inspector General (OIG) are responsible for identifying and investigating retail stores engaged in trafficking; (8) FNS can take administrative actions against store owners engaged in trafficking, including disqualifying them from participating in the program and assessing fines; (9) OIG conducts criminal investigations and can refer store owners or clerks engaged in trafficking to DOJ or state or local governments for prosecution; (10) during fiscal years 1990 through 1997, FNS identified food stamp trafficking in over 5,700 retail stores, OIG investigated and reported on 5,551 trafficking cases, and DOJ and state and local governments prosecuted about 2,650 cases referred by OIG; (11) DOJ, in some jurisdictions, will pursue civil actions against store owners to collect money under the False Claims Act when it has not allocated resources to conduct criminal prosecutions or when it has a case in which the evidence for criminal prosecution is insufficient; (12) since 1992, when USDA began referring cases to DOJ, 566 false claims totalling over $5.9 million have been settled; (13) in the 432 food stamp trafficking cases GAO reviewed, store owners alone were caught trafficking in about 40 percent of the cases, and store owners and clerks together were caught trafficking in 13 percent of the cases; and (14) FNS permanently or temporarily disqualified the owners caught trafficking from participating in the Food Stamp Program in 428 cases and assessed financial penalities totalling $1.1 million against owners in 175 cases.