FOOD ASSISTANCE

Reducing the

Trafficking of Food

Stamp Benefits

Statement of Lawrence J. Dyckman,

Director, Food and Agriculture Issues,

Resources, Community, and Economic Development Division

United States General Accounting Office

GAO Testimony

Before the Task Force on Welfare, Committee on the

Budget, House of Representatives

For Release on Delivery

Expected at 1:00 p.m. EDT

Wednesday

July 19, 2000

GAO/T-RCED-00-250
1

Mr. Chairman and Members of the Task Force:

Thank you for the opportunity to present our observations on how to reduce the improper

trafficking of food stamp benefits—exchanging food stamps for cash or certain nonfood

items. As you know, the Food Stamp Program, one of the nation’s largest assistance

programs for low-income Americans, provided $16 billion in benefits to about 18 million

recipients in 1999. And, like many programs, the Food Stamp Program is susceptible to

fraud, waste, and abuse. When benefits are improperly exchanged for cash, the storeowner

gives a recipient a discounted cash payment (often 50 cents on the dollar) for food stamp

benefits. The storeowner then redeems the benefits at full face value from the government.

Until the mid-1990s, most recipients were provided coupons to purchase food, but currently

about 70 percent of all benefits are provided electronically through a card that works much

like a debit card at the grocery checkout counter. All the transactions are recorded in

databases that can be analyzed to identify trafficking. The U. S. Department of Agriculture’s

(USDA) Food and Nutrition Service (FNS), in partnership with the states, administers the

Food Stamp Program.

Our testimony today focuses on various aspects of the trafficking problem that we have

addressed over the past 3 years.1In particular, we have reported on (1) federal efforts to

identify storeowners who engage in trafficking, (2) the amount of penalties assessed and

collected against these storeowners, and (3) the extent to which states with statewide

electronic benefit transfer (EBT) systems are identifying and disqualifying recipients who

engage in trafficking.

In summary, we found the following:

• FNS and USDA’s Office of Inspector General (OIG) use a variety of databases to analyze

transaction patterns to identify suspect traffickers. They then conduct costly and timeconsuming investigations to confirm actual trafficking. While FNS and the OIG have

1

Food Stamp Program: Information on Trafficking Food Stamp Benefits (GAO/RCED-98-77, Mar. 26, 1998);

Food Stamp Program: Storeowners Seldom Pay Financial Penalties Owed for Program Violations

(GAO/RCED-99-91, May 11, 1999); and Food Stamp Program: Better Use of Electronic Data Could Result in
2

identified thousands of storeowners who have trafficked benefits, there are

opportunities to identify additional trafficking storeowners who are likely to be engaged

in trafficking by more effectively using EBT data. Under the Personal Responsibility and

Work Opportunity Reconciliation Act of 1996, federal agencies may use EBT data alone,

without the expense of conducting an uncover investigation, to take action against

storeowners violating the requirements of the Food Stamp Program.

• Storeowners generally did not pay the financial penalties they were assessed for

trafficking. For example, from 1993 through 1998, FNS and the courts assessed or levied

about $78 million in financial penalties and interest against storeowners for violating

Food Stamp Program regulations, primarily for trafficking. However, they collected only

$11.5 million, or about 13 percent of the total penalties. FNS wrote off as uncollectible

another $49 million, or 55 percent, of the total assessed or levied. The remaining debt

was pending collection at the time of our review.

• Most states with statewide EBT systems were not analyzing EBT data to identify

recipients who may have been trafficking food stamp benefits. Of the 29 states with

statewide electronic benefit systems, as of April 1, 1999, only 4--Florida, Missouri, South

Carolina, and Texas--independently analyzed their electronic databases to identify

suspect recipients. Additionally, since 1994, USDA’s OIG has identified about 34,000

suspected traffickers in Maryland and provided this information to that state. All five of

these states invested the resources to investigate suspect recipients and disqualify those

engaged in trafficking. During 1998 and 1999, these five states were responsible for

disqualifying about 99 percent of the 6,873 individuals nationwide who were removed

from the Food Stamp Program for trafficking.

In recent reports, we have recommended various ways that FNS can improve its debt

collection activities and better use electronic data to identify suspected storeowner and

recipient traffickers. We have also recommended that FNS use electronic data to routinely

develop reliable estimates of the extent of trafficking and establish goals and strategies for

Disqualifying More Recipients Who Traffic Benefits (GAO/RCED-00-61, Mar. 7, 2000).
3

reducing recipient trafficking on the basis of these estimates. Appendix I lists our

recommendations and describes the actions FNS has taken to address them.

Background

FNS administers the Food Stamp Program in partnership with the states. It 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 storeowners' compliance

with the program's requirements. Its 58 field offices assess financial penalties against

storeowners who violate program regulations.2

Storeowners violate the program’s

requirements when they accept food stamps for nonfood items such as paper towels, accept

food stamp benefits when they are not authorized to participate in the program, or traffick

in food stamp benefits. The states are specifically responsible for investigating recipients

alleged to be engaged in trafficking and for disqualifying those found trafficking.

According to a 1995 FNS study, about $815 million, or about 4 percent of the food stamps

issued, was trafficked at 9 percent of authorized retail stores during fiscal year 1993.3The

study found that most trafficking occurred in small grocery stores. Last week, FNS released

an updated study.4This study estimated that stores trafficked about $660 million a year, or

about 31⁄2 cents of every dollar of food stamp benefits issued, and that most trafficking

occurred in small stores. Our 1998 analysis of 432 trafficking cases found comparable

results--most trafficking occurred in small stores. Data on the extent of trafficking between

parties prior to reaching authorized retailers are unavailable.

2

Food stamp state agencies establish debts against program recipients to recover benefits they receive in

excess of the level that was appropriate. According to FNS officials, debt owed by recipients is approximately

95 percent of the agency’s accounts receivable.

3

The Extent of Trafficking in the Food Stamp Program, FNS, Aug. 1995. This study analyzed data from the

Store Investigation and Monitoring System database, which contains information on the stores suspected of

trafficking.

4

The Extent of Trafficking in the Food Stamp Program: An Update, FNS, Mar. 2000.
4

In addition to determining the eligibility of individuals applying for food stamps, the states

are responsible for investigating recipients alleged to be engaged in trafficking and for

disqualifying those found trafficking. Typically, a recipient found guilty of trafficking is

disqualified from the program for 1 year for the first offense, 2 years for the second offense,

and permanently for the third offense or for trafficking an amount that exceeds $500.5 To

disqualify an individual from the program, the states often conduct costly, time-consuming

investigations--interviews with the suspect, undercover observations of transactions, and a

more detailed analysis of the recipient’s shopping habits.

Recipients use food stamp coupons or an electronic benefit transfer card to pay for

allowable foods. Food stamp electronic systems use the same electronic fund transfer

technology that many grocery stores use for their debit card payment systems. After a food

stamp recipient receives a card and a personal identification number, the recipient

purchases food by authorizing the transfer of the food stamp benefits from a federal account

to a retailer’s account. At the grocery checkout counter, the recipient's card is run through

an electronic reader, and the recipient enters a personal identification number to access the

food stamp account.

Under the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, all

states must implement EBT systems by October 1, 2002, unless USDA waives the

requirement. Currently, 37 states and the District of Columbia have statewide EBT systems.

Federal Efforts to Identify Storeowners Who Engage in Trafficking

FNS and USDA’s OIG use a variety of sources, including EBT databases and USDA’s fraud

hotline, to analyze transaction patterns to identify suspect traffickers. This initial effort is

generally followed up with costly and time-consuming investigations, including undercover

investigations, to confirm actual trafficking. Through these efforts, FNS and the OIG have

identified thousands of storeowners who have trafficked benefits. The OIG has reported

5

In some states, trafficking can also be prosecuted in state courts.
5

that it spends about 50 percent of its investigative resources on addressing trafficking and

oversight of the Food Stamp Program—the single largest program administered by USDA.

We found that FNS could have identified additional storeowners who violated program

regulations if it more effectively used EBT data. For example, each month FNS prepares a

list of hundreds of stores in each region that appear to be highly likely to be violating

program regulations, such as trafficking. Two of the six FNS field offices we visited further

analyzed the data and took administrative action to penalize offending storeowners.

However, the four other FNS field offices were not sure what to do with the data. Moreover,

the head of one of the field offices told us that one monthly report indicated that over 100 of

the stores in her area were probably engaged in trafficking, but she lacked the resources to

further analyze the data on any of these stores and take action against them. Further, FNS

had no feedback system to inform headquarters of how many of the stores on the list of

likely traffickers were actually reviewed in detail. Such information would enable

headquarters officials to know the extent to which the listings were examined. At the time

of our review, FNS had no assurance that the stores on the monthly lists were consistently

reviewed.

FNS had made limited use of this information because it had not developed an effective plan

for reviewing and acting upon the data, including designating responsible staff. FNS

officials told us that they need more personnel to analyze the data on stores that are likely to

be trafficking food stamp benefits. Greater use of EBT data would enable FNS to better

leverage its enforcement resources. Moreover, the Personal Responsibility and Work

Opportunity Reconciliation Act of 1996 permits FNS to use EBT data alone, without the

expense of conducting an uncover investigation, to take action against storeowners violating

the requirements of the Food Stamp Program.

To improve FNS field offices’ use of EBT data, we recommended that FNS develop guidance

for its field offices for use in reviewing EBT data to identify and assess penalties against

storeowners who violate Food Stamp Program regulations. FNS agreed and has initiated

corrective actions to implement the recommendation.
6

Amount of Storeowner Financial Penalties Assessed and Collected

We found that FNS almost always assessed penalties against storeowners when its

investigations showed that storeowners had violated requirements of the Food Stamp

Program. However, storeowners generally did not pay the financial penalties they were

assessed for trafficking. For example, from 1993 through 1998, FNS and the courts assessed

or levied about $78 million in financial penalties and interest against storeowners for

violating Food Stamp Program regulations, primarily for trafficking. However, they

collected only $11.5 million, or about 13 percent of the total penalties. FNS wrote off as

uncollectible another $49 million, or 55 percent of the total assessed or levied. The

remaining debt was pending collection at the time of our review.

According to agency officials, this small percentage of fines collected (13 percent) reflects

the difficulties involved in collecting this type of debt, such as problems in locating debtors

as well as their refusal to pay.6 However, weaknesses in the agency’s debt collection

procedures and practices also contributed to low collections. For example, FNS has not

consistently implemented federal policies, practices, and procedures that are designed to

ensure the effective management and collection of debt. FNS has not consistently and

aggressively collected debt, assessed interest on unpaid debt, written off uncollectible debt

in a timely manner, or established procedures to identify the causes of delinquencies and

develop the correction actions needed.

To improve FNS’ debt collection activities, we recommended that FNS develop the

corrective actions needed to make its debt collection more effective. FNS agreed and has

initiated corrective actions to implement the recommendation.

6

These problems are particularly acute for collecting debt from storeowners who were penalized for

unauthorized participation in the Food Stamp Program. In these cases, FNS may not have information that

would facilitate debt collection, such as Social Security numbers, because the storeowners never applied to

FNS to become authorized retailers. Furthermore, FNS cannot use one of its tools for encouraging debt

payment—threatening to remove the storeowner from the program—in these types of cases.
7

Extent to Which States Use EBT Systems to Identify and Disqualify Recipients Who

Traffick

Of the 29 states with statewide electronic benefit systems, as of April 1, 1999, only 4--Florida,

Missouri, South Carolina, and Texas--independently analyzed their electronic databases to

identify suspect recipients. These states viewed this activity as essential to their efforts to

improve the integrity of the Food Stamp Program. Additionally, since 1994, USDA’s Office

of Inspector General has identified about 34,000 suspected traffickers in Maryland and

provided this information to that state.7 All five of these states relied upon the results of

detailed analysis of EBT databases to identify suspect recipients and invested the resources

necessary to investigate these recipients and disqualify those engaged in trafficking. For

example, for fiscal years 1998 and 1999, these five states were responsible for disqualifying

about 99 percent of the 6,873 individuals nationwide who were removed from the Food

Stamp Program for trafficking benefits. Although not as aggressive, nine other states

investigated suspect recipients--identified by other sources, such as FNS through its efforts

in disqualifying storeowners--and disqualified those who engaged in trafficking. The

remaining 15 states did not disqualify any recipient for trafficking during the 2-year period.

Florida and Texas analyze their EBT data to identify stores likely to be engaged in

trafficking and then identify likely trafficking recipients using those stores. As a result,

Texas identified hundreds of recipients suspected of trafficking at stores identified as likely

to be engaged in trafficking. On the other hand, FNS generally limits its identification of

food stamp recipients to the few cases that it needs to support its actions against a

storeowner. After recipients are identified as suspected traffickers, the states investigate to

confirm whether trafficking actually occurred before disqualifying those found to be

trafficking.

Other states take a different approach. For example, Missouri identifies suspect recipient

traffickers by profiling all recipients in the EBT database without regard to specific stores.

7

The Office of Inspector General analyzes EBT data to generate a list of all suspect recipients associated with

storeowners who have been convicted of trafficking. This list is more complete than the information FNS

would provide to states in connection with its investigation of trafficking storeowners.
8

From January through August 1999, Missouri identified about 500 recipients suspected of

trafficking food stamp benefits. Since 1994, Maryland has disqualified about 7,700 recipients

out of about 34,000 referred by OIG as possible traffickers, including 3,000 during fiscal

years 1998 and 1999. These referrals were associated with eight storeowners who were

convicted for trafficking.

Of the 15 states that had not taken any action against trafficking recipients, 5 had received

referrals of suspected recipients from FNS. According to officials in these states, they did

not investigate suspect recipients because the investigations were time-consuming and

costly and it was not cost-effective to do so. The officials in the five states that disqualified

about 99 percent of all those removed from the program nationwide for trafficking agreed

that acting against suspect traffickers was not cost-effective. However, these officials and

FNS officials agree that identifying suspect recipients and disqualifying those who traffic is

an essential activity for maintaining the integrity of the Food Stamp Program. They maintain

that their efforts act as a deterrent by discouraging other recipients from engaging in

trafficking. In this regard, FNS has established improving the integrity of the program as a

major goal in complying with the principles of the Government Performance and Results Act

of 1993 (Results Act).

Although EBT data have been available in varying degrees since 1993 to analyze food stamp

transactions for trafficking, FNS has only recently taken steps to encourage the states to

target recipients engaged in trafficking. In July 1999, FNS instructed its seven regional

offices to prepare plans on how to work with states to best use the EBT data now available

to identify, investigate, and disqualify trafficking recipients. We reviewed the seven draft

plans that were developed and found that they were all different, but they generally included

such activities as defining the federal and state roles for identifying recipients suspected of

trafficking and developing processes for routinely sharing information. All these plans

provide that FNS would submit to the states the names of suspect recipients associated with

storeowners disqualified from the program. However, states could target a more extensive

list of suspect recipients for investigation. FNS’ plans do not set goals for the number of

recipients to be investigated and/or disqualified. Furthermore, none of the draft plans
9

described how they contributed to FNS’ overall effort to reduce trafficking. The FNS

regions are just beginning to implement the plans.

In our March 2000 report, we reported that FNS was not able to measure the effectiveness of

its or the states’ efforts in reducing the overall level of trafficking because it lacked current,

reliable information on the extent of trafficking. FNS’ estimate, developed in 1995, used

1993 data and did not rely on EBT data. With the introduction of EBT systems in 1993, FNS

has an important tool for developing current estimates of the extent of trafficking at the

local, state, and national levels. Using these estimates, FNS could establish goals for

reducing trafficking on the basis, for example, of the value of benefits trafficked each year.

FNS could then develop strategies to efficiently and effectively reduce trafficking and use

EBT data to measure the extent to which it was achieving its goals. On July 13, 2000, FNS

released an update to its 1995 study. The new study estimated stores to be trafficking at

$660 million, about 31⁄2 cents on every dollar of food stamp benefits provided.

FNS’ actions to help the states reduce recipient trafficking was not being guided by the best

available estimate of the extent of trafficking, which would enable it to better set

appropriate goals and strategies, as prescribed by the Results Act. Instead, as proposed in

the draft regional plans, FNS would work with the states only to investigate the number of

suspect recipients identified as being involved with specific trafficking storeowners. In its

fiscal year 2000 performance plan, FNS’ goal is to disqualify 1,201 stores annually. FNS

could realize this goal but not substantially reduce the overall level of trafficking because

the stores disqualified might be those stores with relatively low levels of trafficking. FNS

has not set priorities for targeting the trafficking stores--for example, based on the volume of

transactions and/or the value of the benefits trafficked. If FNS set such priorities and

identified these storeowners, additional states might have an incentive to examine more

suspect recipients purchasing at these stores because the likelihood of recipient trafficking

would be greater.

To help states improve their review of EBT data and to obtain a reliable estimate of the

extent of trafficking, we recommended that FNS (1) determine the best techniques for using
10

EBT data to identify suspected recipient traffickers and work with states to implement these

techniques and (2) use EBT data to periodically develop reliable estimates of the extent of

trafficking and use these estimates to develop goals and appropriate strategies for reducing

trafficking. FNS agreed and has initiated corrective actions to implement both of these

recommendations.

----

This concludes my statement. I would be pleased to answer any questions that you may

have.

Contact and Acknowledgment

For future contacts regarding this testimony, please contact Lawrence J. Dyckman on (202)

512-5138. Individuals making key contributions to this testimony and/or to the reports on

which it was based include Ron E. Wood, John Boyle, and Richard B. Shargots.
Appendix I

11

Recommendations Contained in GAO

Reports and Subsequent Agency Actions

Food Stamp Program: Storeowners Seldom Pay Financial Penalties Owed for

Program Violations, (GAO/RCED-99-91, May 11, 1999)

GAO Recommendations

To improve the integrity of the Food Stamp Program, we recommended that the Secretary of

Agriculture direct the Administrator, Food and Nutrition Service (FNS), to

• develop guidance that specifies its field staff’s responsibilities, duties, and guidelines in

reviewing data on electronic benefit transfers to identify and assess penalties against

storeowners who violate Food Stamp Program regulations;

• develop the corrective actions necessary, as required by the Federal Claims Collection

Standards, to help prevent delinquencies and defaults, and determine the priority and

resources it needs to assign to make debt collection more effective; and

• complete the actions needed to refer delinquent debts with storeowner taxpayer

identification numbers to Treasury electronically in a timely manner.

Agency Action

FNS agreed with each of the GAO recommendations and has initiated actions to implement

them. Regarding the first recommendation, FNS has issued several policy memorandums to

the field and plans to issue a set of national guidelines for field staff use when reviewing and

analyzing EBT data. Regarding the second recommendation, FNS has developed and

implemented a strategy to refer all appropriate delinquent retailer debt, including retailer

Taxpayer Identification Numbers, to the Treasury Department for collection. Regarding the
Appendix I

12

third recommendation, FNS is developing the computer software necessary for the

electronic transmission of retailer debt to the Treasury Department.

Food Stamp Program: Better Use of Electronic Data Could Result in Disqualifying

More Recipients Who Traffic Benefits (GAO/RCED-00-61, March 7, 2000)

GAO Recommendations

To improve the integrity of the Food Stamp Program, we recommended that the Secretary of

Agriculture direct the Administrator of the Food and Nutrition Service to

• work with the five states currently using EBT data to determine the best techniques for

using these data to identify suspected recipient traffickers and work with the other states

with statewide EBT systems to implement the best techniques, as appropriate, and

• use EBT data to periodically develop reliable estimates of the extent of trafficking and

use these estimates to develop goals and appropriate strategies for reducing trafficking.

Agency Action

FNS agreed with both of the GAO recommendations and has initiated actions to implement

them. FNS stated that it fully agrees with GAO’s recommendation to work with the five

states which have been identified as currently using EBT data to identify suspected recipient

traffickers and with the other states with statewide EBT systems to implement the best

techniques, as appropriate. In the near future, FNS expects to publish a final regulation on

recipient claims, which will provide an increased financial incentive for states to be more

aggressive in the pursuit of recipients who traffic in EBT benefits. Under this new

regulation, states will be able to retain 35 percent of each collection.

With regard to the second recommendation, FNS agreed and, in July 2000, has issued an

update to its 1995 report on the extent of food stamp trafficking. FNS also reported that it

would use these estimates to develop goals and appropriate strategies for reducing

trafficking. However, according to FNS, current law explicitly prohibits FNS from using
Appendix I

13

Food Stamp Program funds to conduct studies and evaluations. FNS stated that restoration

of funding to conduct this work is critical to effective implementation of this

recommendation.

(150196)
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