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FEDERAL 9/11 ASSISTANCE TO NEW YORK:

PART I, II AND III

HEARING

BEFORE THE

SUBCOMMITTEE ON MANAGEMENT, 

INTEGRATION, AND OVERSIGHT

OF THE

COMMITTEE ON HOMELAND SECURITY 

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

July 12, 2006 and July 13, 2006

Serial No. 109–91

Printed for the use of the Committee on Homeland Security 

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html
COMMITTEE ON HOMELAND SECURITY

PETER T. KING, New York, Chairman 

DON YOUNG, Alaska 

LAMAR S. SMITH, Texas 

CURT WELDON, Pennsylvania 

CHRISTOPHER SHAYS, Connecticut 

JOHN LINDER, Georgia 

MARK E. SOUDER, Indiana 

TOM DAVIS, Virginia 

DANIEL E. LUNGREN, California 

JIM GIBBONS, Nevada 

ROB SIMMONS, Connecticut 

MIKE ROGERS, Alabama 

STEVAN PEARCE, New Mexico 

KATHERINE HARRIS, Florida 

BOBBY JINDAL, Louisiana 

DAVE G. REICHERT, Washington 

MICHAEL MCCAUL, Texas 

CHARLIE DENT, Pennsylvania 

GINNY BROWN-WAITE, Florida 

BENNIE G. THOMPSON, Mississippi 

LORETTA SANCHEZ, California 

EDWARD J. MARKEY, Massachusetts 

NORMAN D. DICKS, Washington 

JANE HARMAN, California 

PETER A. DEFAZIO, Oregon 

NITA M. LOWEY, New York 

ELEANOR HOLMES NORTON, District of 

Columbia 

ZOE LOFGREN, California 

SHEILA JACKSON-LEE, Texas 

BILL PASCRELL, JR., New Jersey 

DONNA M. CHRISTENSEN, U.S. Virgin Islands 

BOB ETHERIDGE, North Carolina 

JAMES R. LANGEVIN, Rhode Island 

KENDRICK B. MEEK, Florida 

SUBCOMMITTEE ON MANAGEMENT, INTEGRATION, AND OVERSIGHT

MIKE ROGERS, Alabama, Chairman 

JOHN LINDER, Georgia 

MARK E. SOUDER, Indiana 

TOM DAVIS, Virginia 

KATHERINE HARRIS, Florida 

DAVE G. REICHERT, Washington 

MICHAEL MCCAUL, Texas 

PETER T. KING, New York (Ex Officio) 

KENDRICK B. MEEK, Florida 

EDWARD J. MARKEY, Massachusetts 

ZOE LOFGREN, California 

SHEILA JACKSON-LEE, Texas 

BILL PASCRELL, JR., New Jersey 

BENNIE G. THOMPSON, Mississippi (Ex Officio) 
(III)

C O N T E N T S

Page 

STATEMENTS

The Honorable Mike Rogers, a Representative in Congress From the State 

of Alabama, and Chairman, Subcommittee on Management, Integration 

and Oversight: 

Oral Statement ..................................................................................................... 1

Prepared Statement ............................................................................................. 2

The Honorable Kendrick B. Meek, a Representative in Congress From the 

State of Florida, and Ranking Member, Subcommittee on Management, 

Integration and Oversight ................................................................................... 3

The Honorable Peter T. King, a Representative in Congress From the State 

of New York, and Chairman, Committee on Homeland Security .................... 5

The Honorable G. Thompson, a Representative in Congress From the State 

of Mississippi, and Ranking Member, Committee on Homeland Security ...... 6

The Honorable Nita M. Lowey, a Representative in Congress From the State 

of New York .......................................................................................................... 7

The Honorable Michael T. McCaul, a Representative in Congress From the 

State of Texas ....................................................................................................... 160

The Honorable Bill Pascrell, Jr., a Representative in Congress From the 

State New Jersey ................................................................................................. 66

WITNESSES

WEDNESDAY, JULY 12, 2006, PART I 

PANEL I 

Mr. Gregory Kutz, Director, Financial Management and Assurance, U.S. 

Government Accountability Office: 

Oral Statement ..................................................................................................... 39

Prepared Statement ............................................................................................. 41 

Mr. Joe Picciano, Deputy Director for Region II, Federal Emergency 

Management Agency, U.S. Department of Homeland Security: 

Oral Statement ..................................................................................................... 9

Prepared Statement ............................................................................................. 12

The Honorable Richard Skinner, Inspector General, U.S. Department of 

Homeland Security: 

Oral Statement ..................................................................................................... 27

Prepared Statement ............................................................................................. 30

PANEL II 

Ms. Leigh Bradley, Senior Vice President for Enterprise Risk, American Red 

Cross: 

Oral Statement ..................................................................................................... 98

Prepared Statement ............................................................................................. 101 

Mr. Neil Getnick, President, International Association of Independent 

Inspectors General: 

Oral Statement ..................................................................................................... 85

Prepared Statement ............................................................................................. 88
Page

IV

The Honorable Rose Gill Hearn, Commissioner, New York City Department 

of Investigation: 

Oral Statement ..................................................................................................... 68

Prepared Statement ............................................................................................. 73

Ms. Carie Lemack, Co-Founder, Families of September 11: 

Oral Statement ..................................................................................................... 92

Prepared Statement ............................................................................................. 94

Mr. David J. Varoli, General Counsel, New York City Department of Design 

and Construction: 

Oral Statement ..................................................................................................... 78

Prepared Statement ............................................................................................. 81 

WITNESSES 

THURSDAY, JULY 13, 2006, 10:12 A.M., PART II 

PANEL I 

Mr. Leroy Frazer, Assistant District Attorney, Chief, Special Prosecutions 

Bureau: 

Oral Statement ..................................................................................................... 145

Prepared Statement ............................................................................................. 147

Ms. Ruth, Ritzema, Special Agent in Charge for New York, Office of Inspector 

General, U.S. Department of Housing and Urban Development: 

Oral Statement ..................................................................................................... 124

Prepared Statement ............................................................................................. 125

Mr. Douglas Small, Deputy Assistant Secretary, Employment and Training, 

U.S. Department of Labor: 

Oral Statement ..................................................................................................... 137

Prepared Statement ............................................................................................. 139

The Honorable Eric Thorson, Inspector General, U.S. Small Business 

Administration: 

Oral Statement ..................................................................................................... 132

Prepared Statement ............................................................................................. 134

PANEL II 

Ms. Bettina Damiani, Project Director, Good Jobs New York: 

Oral Statement ..................................................................................................... 184

Prepared Statement ............................................................................................. 186 

Ms. Eileen Mildenberger, Chief Operating Officer, Empire State Development 

Corporation: 

Oral Statement ..................................................................................................... 169

Prepared Statement ............................................................................................. 171

Mr. Stefan Pryor, President, Lower Manhattan Development Corporation: 

Oral Statement ..................................................................................................... 172

Prepared Statement ............................................................................................. 175

Mr. John Wang, Founder and President, Asian American Business 

Development Center: 

Oral Statement ..................................................................................................... 179

Prepared Statement ............................................................................................. 181

WITNESSES

THURSDAY, JULY 13, 2006, 2:12 P.M., PART III 

PANEL I 

Mr. Bernard Cohen, Director, Lower Manhattan Recovery Office, Federal 

Transit Administration, U.S. Department of Transportation: 

Oral Statement ..................................................................................................... 205

Prepared Statement ............................................................................................. 206

Mr. Todd J. Zinser, Acting Inspector General, U.S. Department of 

Transportation: 

Oral Statement ..................................................................................................... 214

Prepared Statement ............................................................................................. 216
Page

V

PANEL II 

Mr. Ronald P. Calvosa, Director of Fraud Prevention, Lower Manhattan 

Construction Command Center: 

Oral Statement ..................................................................................................... 226

Prepared Statement ............................................................................................. 228

Mr. Michael Nestor, Director, Office of Investigations, Port Authority of New 

York and New Jersey: 

Oral Statement ..................................................................................................... 232

Prepared Statement ............................................................................................. 234

FOR THE RECORD

Submitted by the Honorable Mike Rogers: 

Investigative Report ............................................................................................. 161 

Michael J. Garcia, U.S. Attorney, Southern District of New York: .................

Prepared Statement ...................................................................................... 58

Mr. Thomas McCormack, Chair, Business Integrity Commission, New 

York, ..................................................................................................................

Prepared Statement: ..................................................................................... 202 

Mr. Leroy Frazer, Jr., Assistant District Attorney, Chief, Special Prosecutions Bureau: .....................................................................................................

Letter ............................................................................................................. 256 

APPENDIX

ADDITIONAL QUESTIONS AND RESPONSES

WEDNESDAY, JULY 12, 2006, PART I 

Responses from Hon. Richard Skinner .................................................................. 247

Responses from Mr. David J. Varoli ...................................................................... 249

Responses from Ms. Bettina Damiani .................................................................... 250

THURSDAY, JULY 13, 2006, 10:12 A.M., PART II 

Responses from the Honorable Eric Thorson ........................................................ 252

Responses from Mr. Todd J. Zinser ........................................................................ 253

THURSDAY, JULY 13, 2006, 2:12 P.M., PART III 

Responses from Mr. Michael Nestor ...................................................................... 252

(1)

LESSONS LEARNED IN FRAUD DETECTION, 

PREVENTION, AND CONTROL—RESPONSE 

PART I 

Wednesday, July 12, 2006

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON HOMELAND SECURITY, 

SUBCOMMITTEE ON MANAGEMENT, 

INTEGRATION, AND OVERSIGHT, 

Washington, DC. 

The subcommittee met, pursuant to call, at 2:05 p.m., in Room 

311, Cannon House Office Building, Hon. Mike Rogers [chairman 

of the subcommittee] presiding. 

Present: Representatives Rogers, Linder, McCaul, King (ex officio), Meek, Pascrell and Thompson (ex officio). 

Also Present: Representative Lowey. 

Mr. ROGERS. This meeting of the Management, Integration and 

Oversight Subcommittee of the Committee on Homeland Security 

is called to order. 

This afternoon we begin a series of hearings to examine the use 

and misuse of Federal disaster assistance provided to New York 

after the terrorist attacks of September 11, 2001. Before we begin, 

I do want to thank our panel guests for being with us today, and 

we look forward to your statements and answers to questions. 

As we approach the fifth anniversary of the September 11th attacks, we remember how the world witnessed an extraordinary effort by New Yorkers to respond to an extraordinary event. To help 

the city recover, the President and Congress provided approximately $20 billion for New York City. The graphics on display reflect the breakdown of the $20 billion 

both by category and the amount disbursed by each Federal agency 

involved in this effort. But while New Yorkers and the Nation 

pulled together, there were those who took advantage of this crisis 

for illegal personal gain. 

Late last year the New York Daily News and other newspapers 

reported on examples and allegations of waste, fraud, and abuse regarding the 9/11 funding. In response, Homeland Security Committee Chairman Peter King requested that this Subcommittee examine the issue. Over the past six months committee staff conducted a bipartisan review, which included numerous interviews in 

New York and Washington. The committee also examined Federal 

financial records and grantee databases. The effort was augmented 

by a special agent from the FBI, an investigative reporter and tech-
2

nical assistance from the GAO. We also received financial data 

from 16 Federal agencies. 

As part of our examination we are holding three hearings. Today’s hearing will examine programs designed for the immediate 

response to the terrorist attacks of September 11. The second hearing will focus on the programs designed to help businesses and individuals recover from 9/11, and the third and final hearing will 

look ahead at the fraud controls and programs designed to help rebuild Lower Manhattan. 

While fraud did occur, the Subcommittee found that New York 

City agencies responded by instituting numerous fraud controls. 

Prosecutors also won prison sentences up to eight years and restitutions totaling millions of dollars. 

Our goal is to learn from the New York experience so improvements can be made in future Federal assistance programs to save 

taxpayer dollars. 

[The statement of Mr. Rogers follows:]

OPENING STATEMENT OF THE HONORABLE MIKE ROGERS

JULY 12, 2007

This afternoon, we begin a series of hearings to examine the use and misuses of 

Federal disaster assistance provided to New York City after the terrorist attacks of 

September 11, 2001. 

Before we begin, I would like to welcome our distinguished witnesses, and thank 

them for taking time out of their schedules to be with us today. 

As we approach the fifth anniversary of September the Eleventh, we remember 

how the world witnessed an extraordinary effort by New Yorkers to respond to an 

extraordinary event.

To help the city recover, the President and Congress provided approximately $20 

billion dollars for New York City. 

The graphics on display reflect the break-down of the $20 billion—both by category, and the amount disbursed by each Federal agency involved in this effort. But, 

while New Yorkers and the Nation pulled together, there were those who took advantage of this crisis for illegal personal gain. 

Late last year, the New York Daily News, and other newspapers, reported on examples and allegations of waste, fraud, and abuse regarding 9/11 funding. 

In response, Homeland Security Committee Chairman Peter King requested that 

this Subcommittee examine the issue.Over the past six months, committee staff conducted a bipartisan revue, which included numerous interviews in New York and 

Washington. 

The committee also examined Federal financial records, and grantee databases. 

The effort was augmented by a special Agent from the FBI, an investigative reporter, and technical assistance from the Government Accountability Office. 

We also received financial data from 16 Federal agencies. 

As part of our examination, we are holding three hearings: 

• Today’s hearing will examine programs designed for the immediate response

to the terrorist attacks of September 11; 

• The second hearing will focus on those programs designed to help businesses 

and individuals recover from 9/11; and 

• The third hearing will look ahead at the fraud controls in programs designed 

to help rebuild Lower Manhattan. 

While fraud did occur, the subcommittee found that New York City agencies responded by instituting numerous fraud controls. 

Prosecutors also aggressively won prison sentences up to eight years, and restitutions totaling in the millions. 

Our goal is to learn from the New York experience, so improvements can be made 

in future Federal disaster assistance programs to save taxpayers’ dollars. 

I now turn to the Ranking Member for any statement he may have.

Mr. ROGERS. And now I turn to the Ranking Member for an 

opening statement. Mr. Meek. 
3

Mr. MEEK. Thank you, Mr. Chairman. I would ask at the appropriate time if you can recognize Mr. Pascrell. I am going to waive 

my statement for my opening comments, the first round of questioning, but recognize Mr. Pascrell from New Jersey at the appropriate time. 

Mr. ROGERS. The gentleman from New Jersey is recognized for 

and opening statement. 

Mr. PASCRELL. Mr. Chairman, thank you for holding these series 

of hearings over the next couple of days. This is a very important 

issue for which we are going to explore events that are long overdue, Mr. Chairman. 

That there is a lack of congressional oversight has been a deplorable trademark of the House of Representatives in recent years. 

Virtually all meaningful matters that come before our body garner 

little more than a cursory review, and, regardless of the important 

issues at hand, essentially nothing in the way of consequence or 

ramification is ever instituted. The record is clear on that. 

The Homeland Security Committee, however, is becoming an exception to the rule. We need exceptions to the rule. We have engaged in robust and vigorous oversight on a wide array of issues 

that fall under our purview. Today we continue on that track, and 

I again applaud the Chair and the Ranking Member for allowing 

us to finally focus on the topic. 

I am heartend by the enormity, by the breadth and scope of the 

investigation this subcommittee will be undertaking. Billions of 

taxpayer dollars have been allotted in the extraordinary response 

to the extraordinary tragedy of 9/11, and it is truly our moral obligation to ensure that these funds have gone to those people and 

those entities that need it most. 

We know the grim realities of September the 11th and the devastating impact on the United States, to say the least. New York 

City in particular faced an almost inconceivable challenge in its response, in its recovery and in its rebuilding, which goes on. 

And the urgent needs of the city prompted an unprecedented reaction by the Federal Government. The President requested and 

the Congress delivered $20 billion to New York City to help in response to and recovery from the attacks. These funds were disbursed by a variety of agencies and for a multitude of services 

ranging from identifying casualties, to treating the injured, to removing the 100,000 truckloads of debris, to providing assistance to 

unemployed workers and damaged businesses, to rebuilding the 

transportation and communication structure of Lower Manhattan, 

but to date no comprehensive Federal accounting of these funds 

has ever been conducted. Nor has the Congress, nor has the executive branch of government assessed the Nation’s response to this 

tragedy. The changes must come from this committee. 

Dealing with and confronting tragedy often brings out the very 

best in people. We know that for some it brings out the very worst. 

Any time money, and this was a lot of money, is involved, there 

is the potential for nefarious deeds to occur, embezzlement, fraud, 

all kinds of abuses or potentialities that are always with us, and 

the witnesses, I have just glanced over their testimony, talk about 

these very specific things. 
4

We know this, so it was imperative that the Federal agencies 

charged with disbursing the money have all appropriate safeguards 

in place, but it appears this was not necessarily the case. Scattered 

reports from an assortment of outlets have extraordinary examples 

of waste, of fraud and abuse. According to the New York Daily 

News, at least 63—over $63 million in FEMA funds for Ground 

Zero cleanup work was paid to companies accused of mob ties. This 

is unacceptable. Likewise, through the individual and family grant 

program, FEMA provided financial assistance for the replacement 

of air conditioners, vacuum cleaners, air purifiers that had been ruined by airborne residue from the collapse of the World Trade Center towers. Much of the funding for this program, which provided 

up to 17 to $150 per individual or household went to people who 

did not even live in the affected areas. 

Some reports state that millions of dollars were awarded to 

large, flourishing businesses that were not in need of assistance. 

While heavily damaged businesses were awarded as little as $,10 

similarly, as has been alleged, that money that was supposed to go 

to lower-income residents and Lower Manhattan was funneled to 

luxury housing. Each and every one of these allegations, and many 

more if true, is utterly unconscionable, I think this committee 

would conclude. 

As we move forward, I want to know what kinds of information 

sharing and cooperation took place with all of the Federal agencies 

involved in the undertaking. We have heard that the SBA disbursed as much as $121 million in duplicative loans. If true, then 

obviously information sharing was a massive problem. We saw 

what happened with Katrina. We haven’t even looked at what happened after the tragedy of 9/11. 

We also need to examine the extent that agencies performed 

their due diligence to determine whether applicants’ claims were 

accurate. It seems like this was inadequate at best. 

We must all work to ensure that any kind of ineffective oversight 

or procurement by agencies is remedied once and for all. We know 

that we have a lot of work ahead of us, and I am looking forward 

to hearing from today’s witnesses. 

And just two final points, Mr. Chairman, if I may. In the testimony of our good friend Mr. Richard Skinner, on page 4 he talks 

about the U.S. attorneys, and I get the impression—I hope he addresses this. I get the impression, I hope you will correct me if I 

am wrong or support me if I am right, that the U.S. attorneys felt 

that this was not significant enough to look after, to look into, and 

that they felt that they could not prove their cases many times. 

And the second point I want to bring up is on page 9 and 10 

when you talk about the air quality. There has been a lot written 

about what was done after this vicious attack and how FEMA 

worked with the EPA. We knew that all the records of EPA kept 

on telling us, Members of the Congress, members of the New 

York—particularly New York delegation, that everything was just 

wonderful, and yet we understand now what our first responders 

are going through. 

We cannot accept anything unless we understand and the record 

is put before us and the record is kept open, and I am telling you, 

Mr. Chairman, we are here 5 years later, and we still have held 
5

no one accountable. We still have held no one accountable as to 

what the response was and what happened in terms of that tragedy. I don’t know if I would hope we would all be in unison that 

this is not acceptable, and somebody has got to pay the price. Whoever cleared the air, and I mean cleared the air, and the air wasn’t 

clear, that is pretty simple. And as far as I am concerned, that kind 

of attack and that kind of response if not true and simply expeditious at that particular time, that person should be tried in a court. 

That person should be tried in a court. I don’t care how many titles 

they have. We are no better if we are hiding behind our titles as 

Congress, as a Congressman or Congresswoman in the 109th Congress. We are no better. 

Thank you, Mr. Chairman. 

Mr. ROGERS. I thank the gentleman. 

The Chair now recognizes the Chairman of the Full Committee, 

Mr. King of New York. 

Mr. KING. Thank you, Mr.Chairman. Let me thank you for the 

thoroughly bipartisan job that you have done on this. This is certainly a first-class investigation that was done. You and your staff 

and the people who have been assigned to this have really performed a great public service. 

As a Member of Congress who lost over 150 friends, neighbors, 

and constituents on September 11th, this issue was particularly 

significant to me. I remember being with Congressman Pascrell 

and Congresswoman Lowey just three days after September 11th 

on the 14th, being at Ground Zero and seeing the amount of devastation. I worked two blocks from there. It took me about a half 

hour to get to my borough. The devastation was so significant and 

was such an enormity that it really was beyond anyone’s comprehension. And to think that there were people who were working 

literally around the clock—you think of people who died that day, 

but also the rescue workers, those who were putting their lives on 

the line as far as the recovery effort, because it was tremendously 

dangerous for the first several weeks, and to think there were 

those taking advantage of that. Those who were coming in to make 

illicit and illegal money and to profit as a result of the worst tragedy in American history to me is as despicable as any crime can 

be. 

So these hearings are very appropriate. They are very significant. And I think we should note and acknowledge up front that 

certainly in those first several weeks there was definite influence 

of organized crime in those first two or three weeks. We had organized crime companies coming in, being involved, obviously making 

illicit profits during that time. There were phantom employees. So 

definitely things went wrong. 

On the other hand, I think it is significant to realize the effort 

that was made and things went right is that after that first two 

or three weeks of absolute devastation, very significant controls 

were imposed including dividing the area into quadrants. The fact 

that the area was a crime scene which had a large number of law 

enforcement persons there went a large way to cracking down on 

the crime that was going on, if not eliminating it entirely. That is 

why there have been so many prosecutions since then, and there 

has been significant action taken by various prosecutors—by the 
6

City Department of Investigation and numerous other authorities—

which have really gone after those who did try to profit. 

We have to look carefully to make sure that they—there can be 

lessons learned from September 11th. Mayor Giuliani had measures in place that had been implemented after those first two or 

three weeks. Anyone who was there during those first several days 

afterwards and saw the extent of the devastation and listened to 

all of the experts say that it would take at least two years for the 

cleanup to be completed, and it would cost well over a billion dollars for the cleanup to be completed. The fact is it was done in less 

than nine months—Memorial Day, eight and a half months after 

September 11th—and the cost was less than $700 million. And the 

cost had been projected in excess of 1.2 billion. So it is important 

to keep this in perspective. 

The fact is, there were a few who performed horribly. There were 

a few who committed the most scandalous crimes possible. But the 

overwhelming number of people involved—including the rescue 

workers, ordinary citizens, ordinary contractors—did do the job, 

and it was done extremely well. It really is a tribute, I believe, to 

the spirit and the heart of the people of New York in particular, 

but also the people of the United States who rallied behind us. 

Having said that, none of that mitigates the harm done by those 

who tried to profit at the expense of those who suffered so badly 

on those—on the terrible day of September 11th and the aftermath 

when they were still looking for survivors, still trying to extract 

bodies, and there were people down there stealing and robbing for 

their own selfish purposes. 

So, again, I thank Chairman Rogers and Ranking Member Meek 

for having this hearing. I think it is very significant to learn what 

happened on September 11th, but it is also if not even more important to the future to get the lessons learned from September 11th; 

if, God forbid, we ever are again affected or afflicted by a terrorist 

tragedy or a natural disaster, so that we be in a better position to 

get the job done and get it done correctly. 

Mr. ROGERS. I thank the gentleman. 

The Chair recognizes Mr. Thompson. 

Mr. THOMPSON. Thank you very much, Mr. Chairman, Ranking 

Member Meek for holding this hearing. The tragedy that befell this 

Nation on September 11, 2001, was an attack on our people and 

on our own soil. It changed the way that each of us has come to 

view the serious need for safety and security in this country. As I 

have often heard people say, 9/11 changed everything. No question 

the attacks changed the way Americans look at the world. However, it should also give—it should also have changed the way our 

government responds to an unanticipated, multidimensional catastrophe, what I call a megacatastrophe, and I am afraid it is not. 

I don’t like to be a pessimist, but as we approach the 1-year anniversary of Hurricane Katrina, I am reminded of this government’s failed response to that, making a catastrophe. One year 

later we who live in the affected areas of Mississippi, Louisiana 

and Alabama are still in the process of removing debris and trying 

to get trailers set up. There are still thousands of homes that must 

be demolished before new ones can be built, insurance settlements 
7

that must be received before homes can be demolished, and people 

that must return before any rebuilding can begin. 

Mr. Chairman, I know that there are those who will say that the 

comparison between Katrina and 9/11 is unfair. They will say that 

the enormous geographical scope of the devastation caused by 

Katrina combined with State and local jurisdictional concerns expeditiously increased the difficulty of recovery and rebuilding in these 

areas, and I will agree in part with these assessments. However, 

I also know that because of 9/11 we learned some basic processes 

and procedures that could have been put in place to help speed the 

pace of recovery for Katrina. But these practices were not used. 

In the 9/11 cleanup we learned about the importance of having 

monitors on the ground to make sure that contractors were doing 

the work that they were being paid to do. We learned it in 9/11, 

but we didn’t use it for Katrina. In 9/11 recovery we learned that 

the Federal Government needed to have a system of information 

sharing that would keep unscrupulous people from claiming multiple benefits while the true and needy are left to wait and wonder. 

We learned it from 9/11, but we didn’t use it for Katrina. 

I know that we did not learn those lessons, because the Government Accountability Office found that there may be $1 billion in 

fraud, waste and abuse associated with payments to individual contractors. These are losses to the taxpayers, Mr. Chairman that 

could have been avoided, but were not. 

Mr. Chairman, I hope that we are able to examine and record the 

lessons we learned from 9/11, but I must be realistic that a little 

learning is not an education. A true education comes when you can 

take what you have learned and put it into practice. 

Let us hope that we can put the lessons from 9/11 into practice 

before we finish the job with Katrina and especially before the next 

megacatastrophe. 

Again, I want to thank you for holding this hearing, and look forward to hearing from the witnesses over the next 2 days. 

Mr. ROGERS. I thank the gentleman. 

The Chair is asked to ask unanimous consent to have our friend 

and colleague from New York, Ms. Lowey, join us for this hearing, 

and without objection, and we would like to hear your opening 

statement if you would like the share one with us. 

Ms. LOWEY. Thank you, Mr. Chairman. I want to thank you and 

the Ranking Member of the full committee for holding this very important hearing. 

As we know, the Nation’s response to September 11th, the folks’ 

memories of charity generosity and decency, thousands of New 

Yorkers and Americans from across the country worked tirelessly 

to help our city recover, and, Mr. Chairman, Mr. Chairman King, 

I do remember our walking around that site. In fact, I will never 

forget it. 

The Federal Government contributed $2 billion to the recovery 

effort. Although this was an unprecedented amount, there was no 

coordinated effort to comprehensively account for how the funding 

was used. This opened the door for scattered incidents of inappropriate spending, which is truly a tragedy, truly outrageous, truly 

unfortunate. 
8

In the aftermath of the hurricanes, it is clear we have made little 

progress since September 11th to adequately verify claims. Not 

only will stronger accounting mechanisms enable us to better prevent waste and fraud, we will also gain a better understanding of 

what assistance methods are the most effective so we will be prepared for the next emergency. 

Members of the New York delegation had to fight for many 

months to regain $125 million for work compensation claims that 

Congress rescinded. While FEMA was awarding over $63 million to 

debris removal companies with ties to the mob, many who responded at Ground Zero were suffering from numerous health 

problems. In fact, just last week I was in Thornwood, New York, 

talking to a firefighter who is still getting outstanding care as a result of his work at 9/11. He and others had these illnesses and is 

still recovering resulting from heroic efforts working the pile after 

September 11th. 

No examination of the post-9/11 recovery would be complete 

without getting to the bottom of how the Federal Government 

mispent millions while shortchanging important programs such as 

medical treatment for first responders. I do, Mr. Chairman, look 

forward to the testimony we will hear today on the initial response. 

Instances of inappropriate spending are shameful when we consider the magnitude of the tragedy of those who lost their lives. 

Mr. Chairman, this hearing is so very important not only on this 

committee, but I also serve on the Foreign Operations Subcommittee of Appropriations, and it seems that we just can’t get 

our oversight responsibilities together. We still don’t do a good job. 

Two and a half years after the Iraq confrontation began, that finally is, and Inspector General Mr. Bowen is identifying problems 

and taking action. 

I know it is as frustrating to you, Mr. Chairman, as to our Ranking Members on both sides of the aisle that there are examples of 

this kind of fraud, this kind of abuse when the need is so very 

great. 

So I want to thank you, Mr. Chairman, for holding this hearing. 

I want to thank all of our witnesses for appearing before us, and, 

more importantly, I hope that we are going to get to the bottom of 

this because there are so many people of goodwill that responded 

to the tragedy of 9/11, and when they read about this abuse, it goes 

to the core of what is wrong about government. And we have a responsibility to make sure this is set straight and never happens 

again. So I thank you again, and I look forward to the witnesses. 

Mr. ROGERS. The Chair thanks the gentlelady and would like to 

remind all Members statements may be submitted for the record. 

And now we would like to turn to our guests. I do want to make 

the point that we expect to be called for a series of votes in the 

next 10 to 15 minutes. So what I would like to do is be able to get 

through each of your opening statements, and if they are called—

if you hear our beepers going off—between now and then we will 

stay. We will try to get through those opening statements, and we 

will recess while we go vote, and we will come back and go to the 

question and answer period. Hopefully things will work out that 

way, but that is the plan. 
9

But we are going to have two panels of distinguished guests. On 

this first panel we have before us—we are very privileged to have 

these gentlemen with us—I would like to start with Mr. Picciano. 

He is Deputy Director of Region II for the Federal Emergency Management Agency. We welcome you and look forward to your statement. I will remind all of you to keep your statement to five minutes or less, and you can submit your full statement for the record. 

But with that, welcome. 

STATEMENT OF JOE PICCIANO 

Mr. PICCIANO. Good afternoon, Chairman Rogers and Chairman 

King, Ranking Member Meek and Thompson, members of the committee. My name is Joseph Picciano, Deputy District Director of 

FEMA, about four blocks north of the World Trade Center. Our office was impacted by the event. On behalf of the Department of 

Homeland Security and FEMA, I am here to discuss FEMA’s response and recovery to the New York City area following September 11th. Although key FEMA leadership could address these 

challenges and have left FEMA, my involvement has been limited 

over the years. I will make every effort to answer your questions. 

If I am unable to answer questions, I will get back to you. 

This testimony will cover the two types of FEMA programs pertinent to the World Trade Center: public assistance, assistance to 

government; and individual assistance to individuals or victims. 

There are a total of 191 applicants for public assistance. Three 

applicants received 95 percent of all of the money. That was New 

York City, the Port Authority and the State of New York. Under 

public assistance FEMA and New York State and New York City—

and it is important to note New York State runs our public assistance program, and we support them—worked together to find ways 

within the Stafford Act to accomplish the following needs and 

maintain accountability of funds: Establish a family center for people to find their loved ones, fund the New York City Schools to replace lost instructional times, funded New York implementing 

cleanup programs for dust and debris, death and disability programs, pay for mutual aid reimbursement, pay for back pay on 

labor debris removal contracts to clean up continual unprecedented 

complex site conditions at the World Trade Center, pay for replacement of emergency response vehicles, repair schools, repair ruined 

roadways. 

FEMA took action with New York and New York City to ensure 

potential applicants understood how to apply for assistance. Assistance was done in a coordinated and effective manner to the State 

and city. The best technical staff we had were made available. 

FEMA, New York State and New York City did make a hotline to 

identify potential applicants. FEMA appointed a Deputy Federal 

Coordinating Office for long-term recovery, and we created the Federal Task Force to Support New York City and the Infrastructure 

Recovery Work Group to ensure an efficient and integrated restoration of public and private infrastructure destroyed or damaged during the disaster. 

FEMA, New York, New York City ensured quality assurance in 

public assistance programs by emphasizing quality of applications 

at the beginning of the process, additional checks and balances in 
10

our system. We developed and provided clear written guidance to 

the staff assisting applicants through public assistance and 

through the State. And FEMA’s Office of General Counsel and the 

Office of Inspector General were on site and provided us technical 

guidance and assistance during the entire process. 

Congress was very helpful. The consolidated appropriations resolution that Congress enacted allowed us to address recovery needs 

that were not clearly eligible under the Stafford Act. The total obligated under that resolution was about $2.4 billion, the 9/11 associated costs, those costs that would have been questionable under the 

Stafford Act, but this allowed us flexibility to do things which we 

normally don’t do straight time, disability pension; overtime for security; heightened security, which is a key concern in New York 

City; watershed security; and other associated costs typical of those 

I just described. There was another $90 million under that resolution for health 

monitoring of emergency service and rescue personnel, and there 

was $1 billion established for insurance coverage for New York and 

its contractors for claims arising from debris removal at the Trade 

Center. The passage of the resolution resulted in the city establishing a captive insurance company. 

FEMA also had a series of what we call interagency agreements 

with up to 12 other Federal agencies who managed other programs. 

The largest one was the Department of Transportation, who was 

responsible for rebuilding transportation systems and building the 

hub to the extent that it is going to be rebuilt to better serve New 

York City and Lower Manhattan. 

Let me move quickly to individual assistance. The most significant and costly project in this category associated with human 

service are the mortgage/rental; temporary housing; individual 

family grants, as alluded to; disaster unemployment; and crisis 

counseling. With all of the categories of spending listed above, crisis counseling was the most significant, very similar to the Oklahoma City bombing. This was a very large building administered 

by the States, and multiple States tied on to this program, and it 

was relatively successful in activities that were initiated and that 

continue. 

The largest individual assistance program in terms of financial 

cost or public interest was the Mortgage and Rental Assistance 

Program and Individual and Family Grant Programs. Both of these 

programs no longer exist. The law changed in 2000, but it was still 

in effect at the time of the World Trade Center. Mortgage and 

Rental Assistance Programs authorized temporary mortgage and 

rental payments on behalf of individuals and families who experienced a problem, and, given the need to show causality as well as 

requirements, really delayed us in doing anything with that. It 

wasn’t a program we could aggressively move forward. 

As of December 31st, FEMA had mailed out 61,000 applicants, 

and 28,000 were returned; 223 million of the total 245 million 

going to individuals came through that program for housing. 

Between 2000—April 2000 and August 2002, FEMA faced intense scrutiny and criticism concerning the MR program from both 

New York City media and elected officials. The stories centered on 

the low number of applicant rates then existing in the spring and 
11

summer in 2002. As a result, on June 28, 2002, a number of policy 

changes made by our FEMA headquarters allowed the program to 

be essentially open to all New Yorkers, expanding the impact area 

to include the borough of Manhattan. 

A letter sent to then-FEMA Joe Albaugh from seven New York 

congressional delegations applauded FEMA for loosening standards 

within the MRA program, which allowed for broader eligibility for 

those individuals impacted with their rent or mortgages. 

The Individual and Family Grant Program was the other program. The most challenging program to curtail potential fraud and 

abuse was this program. Traditionally this program helps individuals and families replace household items, provides special help. 

There is a category called ‘‘Other.’’ That is where your air conditioners fell under. 

The most difficult aspect of the IFG program was the air quality 

issue caused by the destruction of the towers. By the time determinations had been made, and it moved quickly in the first few 

months, the time determinations were made, our field teams had 

already given our verification, considering EPA warning regarding 

air qualities as well as concerns of residents. Rather than reinspect 

thousands of homes, FEMA and the State of New York accepted 

self-certifications by residents of the urgency of their need. While 

FEMA and State entered this program—let me move on to why 

some of these reasons exist. 

There are several contributing factors. EPA Dust Cleanup Program. The news and community actions encouraging New Yorkers 

to apply for the program. There was a heat wave in New York at 

the time, we are talking in May, and vendors pushing hard for the 

sale of air-cleaning purifiers and air conditioners. So we had those 

four contributing factors. 

The policy contributing factors were the introduction of the Cannot Afford Program. Inclusion of all five New York City boroughs 

was June 4, 2002, and extension of registration, November 3rd of 

2002. 

I just had one more page of some of the initiatives we took. 

FEMA took several initiatives to control fraud and abuse as described above. Our Federal Recovery Officer suspected fraud and 

initiated the first random sampling of applicants, and between January and March of 2003, over 60 percent of the applicants inspected decided to withdraw their air condition application. Many 

admitted they hadn’t owned an air conditioner prior to the World 

Trade Center disaster, or it had never been damaged. 

In February of 2003, the Federal Recovery Officer proactively 

talked about a 90 percent potential fraud level. This resulted in an 

inspector general investigation regarding statements. The findings 

indicated the abuse was not as high as 90 percent as stated, but 

acknowledged the validity of FEMA’s Home Inspection Sampling 

Program, which identified a high percentage of 60 percent. Further 

sampling efforts in coordination with IG allowed us to save 120 

million. 

It is important to note that due to FEMA’s public awareness 

campaign of fraud and abuse statements, thousands of applicants 

withdrew from the program. Importantly, Federal and State law 

enforcement and IG worked hand in hand with us. Although fraud 
12

did exist under the program, FEMA aggressively supported the 

State managing problems under unusual circumstances. 

The following is important to note. This was the first of its kind 

of environmental disaster. There are presently no air quality standards that I am aware of to guide EPA and other agencies in what 

is dirty and what is not, leading to continued confusion regarding 

future environmental and health impact. 

Finally, considering the 230,000 people who applied for IFG 

funding, that only 118,000 applicants were ultimately approved 

demonstrates our efforts along with the IFG to point out fraud and 

lower the potential for further abuse. 

Thank you. 

Mr. ROGERS. Thank you, Mr. Picciano. 

[The statement of Mr. Picciano follows:]

WEDNESDAY, JULY 12, 2006

2:00 P.M. IN 311 CANNON HOUSE OFFICE BUILDING

SUBCOMMITTEE ON MANAGEMENT, INTEGRATION, AND OVERSIGHT

HEARING

‘‘AN EXAMINATION OF FEDERAL 9/11 ASSISTANCE TO NEW YORK: LESSONS LEARNED

IN PREVENTING WASTE, FRAUD, ABUSE, AND MISMANAGEMENT, PART I’’

PREPARED STATEMENT OF JOSEPH F. PICCIANO, DEPUTY DIRECTOR, REGION II, 

FEDERAL EMERGENCY MANAGEMENT AGENCY, DEPARTMENT OF HOMELAND SECURITY

Good Morning Chairman Rogers, Ranking Member Meek and members of the 

Committee. My name is Joseph Picciano. I am the Deputy Director for Region II 

of the Department of Homeland Security’s (DHS’s) Federal Emergency Management 

Agency (FEMA) based in New York City and covering New York, New Jersey, Puerto Rico and the Virgin Islands. On behalf of FEMA and the Department of Homeland Security, I appear before you today to discuss FEMA’s disaster assistance for 

response and recovery to the New York City area following the September 11, 2001 

terrorist attacks. 

FEMA and its staff are proud of the work accomplished following the attack. The 

tragic event posed unique challenges. It tested our ability to deliver help in a timely 

and effective manner while maintaining accountability.

FEMA Responds 

Immediately following the attack, FEMA activated the Federal Response Plan, 

which brings together 28 federal agencies and the American Red Cross to assist 

local and state governments in responding to national emergencies and disasters. 

FEMA Headquarters also activated the Washington-based Emergency Support 

Team (EST) on a 24-hour basis, and Region II deployed its Emergency Response 

Team—Advance Element (ERT–A). In addition, FEMA activated the following federal assets to support response operations:

• Twenty Urban Search & Rescue Teams (FEMA) 

• U.S. Army Corps of Engineers (Power and Debris Teams) 

• Four Disaster Mortuary Teams (DMORT) 

• Four Disaster Medical Assistance Teams (DMAT) 

• One Management Support Team (MST) 

• One Deployable Portable Morgue Unit (DPMU) 

• One Veterinary Medical Team 

President Bush appointed the Federal Coordinating Officer (FCO), responsible for 

coordinating the timely delivery of Federal disaster assistance to New York State, 

local governments, and disaster victims. On September 15, 2001, FEMA established 

the Disaster Field Office (DFO) at Pier 90 on the West Side of Manhattan. It initially operated 24 hours per day and served as a base for all FEMA operations. On 

December 3, 2001, the DFO relocated to 80 Centre Street in Lower Manhattan. 

President Bush pledged at least twenty billion dollars to the City and State of 

New York. In the following 11 months, Congress passed several bills to provide approximately $20 billion in direct funding and tax benefits. This was the first time 
13

that the amount of federal assistance for a disaster was determined early in the response and recovery process. Congress allocated $8.8 billion of this twenty billion 

to FEMA to reimburse individuals, governments, and not-for-profit organizations for 

response and recovery work related to the World Trade Center (WTC) disaster. As 

of May 30, 2006, FEMA has obligated approximately $8.77 billion, leaving approximately $30.3 million remaining for distribution. These remaining funds will be used 

to bring several ongoing programs to their completion, particularly Human Services 

programs such as Mortgage Rental Assistance, Individual and Family Grants, and 

Crisis Counseling assistance for the State of New York, and funding to reimburse 

applicants for currently non-funded projects authorized by the Consolidated Appropriations Resolution, enacted February 20, 2003, P.L. 108–7 (CAR).

Public Assistance (PA) 

Although there were a total of 191 applicants with Project Worksheets (PWs), 

three applicants received approximately 95 percent of all the Stafford Act funding: 

• New York City (50 agencies received assistance); 

• The Port Authority of New York and New Jersey; and, 

• The State of New York (50+ agencies, including the MTA). 

Recognizing that the response to this tragedy was widespread, and that the New 

York State Emergency Management Office (SEMO) could not conduct a thorough 

and complete applicant briefing with such an extensive and unknown population, 

FEMA and SEMO established a Private-Non-Profit (PNP) Hotline on October 17, 

2001 to identify potential PNP applicants. FEMA staffed the call center with local 

hires who worked Monday through Friday, 8 a.m. to 6 p.m., from October 17 to November 17, 2001; however, the call center was discontinued due to extremely low 

call volume (less than 150 inquiries total). 

Based on the magnitude of the disaster and the duration of past recovery efforts 

(such as the Northridge Earthquake and Hurricane Andrew), the FCO appointed 

the Deputy FCO for Long-Term Recovery, responsible for identifying the needs of 

the community, coordinating with other federal, state, and local agencies to address 

those needs, and developing FEMA’s long-term recovery plans. 

Since the disaster recovery needs could not be solved within one program or agency, the Deputy FCO relied heavily on the creation of local and federal task forces 

to better coordinate the recovery effort. The various task forces focused on activities 

designed to immediately stimulate the development and infrastructure needs of the 

community. By bringing together all of these resources, the local agencies could immediately gain access to the resources of numerous federal agencies, and the local 

agency could promptly respond to time-sensitive problems in an effective manner. 

The primary task force was the Federal Task Force (FTF) to Support NYC. The 

FEMA Deputy FCO for Long-Term Recovery chaired this task force. It was comprised of representatives from 11 federal agencies focused on developing a complete 

understanding of the reconstruction needs of the local and state government, and 

devising a recovery solution comprehensive enough to address these needs. 

Equally important for its immediate impact on local projects was the Infrastructure Recovery Workgroup (IRWG), originally chaired jointly by SEMO and FEMA, 

and then later chaired by the Commissioner of NYC Department of Transportation. 

This task force was assembled to ensure an efficient and integrated restoration of 

public and private infrastructure destroyed or damaged by the disaster. The IRWG 

consisted of numerous federal, state, local, and private sector participants.

The Public Assistance Team 

Immediately following the disaster, Region II assigned a Public Assistance Officer 

(PAO) and deployed over 30 Disaster Assistance Employees (DAEs) to serve as Public Assistance Coordinators (PACs) and Project Officers (POs). Within two weeks of 

the disaster, Headquarters, the FCO, and the Regional Director decided to replace 

the PAO and outsource the remainder of the PA operation (with the exception of 

National Emergency Management Information System (NEMIS) positions), substituting the DAEs with its Technical Assistance Contractors (TACs). The decision 

to outsource the PA operation, the first ever for FEMA, was made for several reasons: 

• The catastrophic nature of the disaster called for deep technical expertise and 

professional management; 

• The long-term nature of the project required a high-level of consistency 

among the staff; and, 

• A fear that another terrorist attack might occur and require immediate 

FEMA resources. 

To ensure that FEMA had access the broadest available range of technical specialists, the contracting officer asked all three TAC to supply personnel.
14

Ensuring Quality 

It was recognized by FEMA and the applicants that well-written PWs, supported 

by accurate and well-documented cost analyses, and prepared in accordance with 

the Stafford Act and FEMA regulations, would reduce appeals and Office of Inspector General (OIG) audits. For that reason, quality was emphasized at the outset and 

considered extensively when disaster-specific processes were established. 

To ensure quality, and validate that agencies were requesting reimbursement for 

all they were entitled to under the law, New York City, the disaster’s largest applicant, required that all PWs, once prepared by the PAC and PO, be reviewed and 

signed-off by the agency representative, a NYC Office of Emergency Management 

representative, and an OMB representative, before being entered into NEMIS. Although FEMA was initially concerned the obligation process would be slowed, in the 

end it assured both the City and FEMA of a higher quality PW. 

On the FEMA side, three initiatives were undertaken to ensure quality: 

1. A Policy and Program Advisor position was created to provide verbal and 

written guidance to PACs and POs on eligibility questions. This advisor served 

as a critical link between PA management (the program decision makers) and 

field staff (the program implementers). Besides dealing with complex and sensitive issues, this advisor also prepared the PA Program Guidance memos for 

the PAO’s signature. 

2. FEMA developed a Quality Assurance Guide in October 2001, and disseminated it to all PACs and POs. This guide provided a series of detailed steps to 

be completed by FEMA POs during the preparation of PWs. 

3. A quality control queue was created within NEMIS. An experienced technical 

specialist, with extensive program knowledge, a background in accounting, and 

access to management, worked off-site to review every PW and confirm eligibility decisions against all applicable regulations and disaster-specific guidance; 

verify cost estimates; correct any errors or omissions; and provide feedback to 

PACs and POs, when necessary. 

In addition, FEMA’s Office of General Counsel (OGC) and the OIG were physically present at the DFO, and subsequently the Federal Recovery Office, and provided day-to-day advice to the applicants and PA management. The OGC attorney(s) 

drafted mission assignments and interagency agreements, addressed eligibility-ofapplicant issues and a myriad of other issues surrounding access rights, property 

ownership, liability, procurement, and insurance. 

The OIG staff worked proactively with PA staff and applicants to ensure a consistent level of understanding regarding the documentation and audit requirements. 

Besides attending the applicant briefings and kickoff meetings, the OIG held a three 

hour audit briefing for all NYC agencies, and frequently provided feedback to PA 

managers regarding program, policy, or process issues. The OIG also reviewed all 

9/11 Associated Cost PWs.

Consolidated Appropriation Resolution (P.L. 108–7) 

In the aftermath of the disaster, it soon became apparent that while the Stafford 

Act was generally well-suited to most response and recovery needs, there were a 

number of significant costs which were clearly ineligible. 

To address these types of projects, Congress enacted the Consolidated Appropriation Resolution of 2003 (CAR) signed into law by the President as Public Law 108–

7 on February 20, 2003, to fund: 

(1) 9/11-associated costs not reimbursable under the Stafford Act; 

(2) $90 million for long-term health monitoring of emergency services, rescue, 

and recovery personnel; and, 

(3) Up to $1 billion to establish insurance coverage for the City of New York 

and its contractors for claims arising from debris removal at the World Trade 

Center site. 

This authorization was granted contingent on funds made available under P.L. 

107–38, 107–117, and 107–206. In other words, any reimbursement for non-Stafford 

Act associated costs would come from the existing appropriations of $8.8 billion, 

after all Stafford Act-related costs had been reimbursed. By the time that the CAR 

was enacted, more than 17 months after the disaster, New York City and New York 

State had already paid many of these costs; therefore, reimbursement from FEMA 

effectively resulted in much needed budget relief for these agencies. 

In March 2003, FEMA, the City, and the State verbally agreed to the following: 

• The PA program would stop accepting costs for Stafford-eligible projects as of 

April 30, 2003; 

• The applicants would submit all Project Completion and Certification Reports 

(P.4s) no later than June 16, 2003; 
15

• FEMA would programmatically close all Stafford-eligible projects by June 30, 

2003; 

• FEMA would use the Project Worksheet to fund all 9/11 Associated Costs; 

rather than complete a P.4 certifying completion of the project and expenditure 

of the funds, the City and State would each separately sign a grant management letter certifying to abide by the Federal grant management requirements; 

• FEMA would establish a Dedicated Fund (also referred to as a Set-Aside 

Fund) for both the City and State that would include: 

(1) the estimated cost of all incomplete Stafford-eligible projects deobligated 

due to the April 30, 2003 deadline, and 

(2) an estimate for all Stafford-eligible projects not funded on a PW as of 

April 30, 2003; 

• The City and State could draw against the 9/11 Associated Costs PWs on a 

dollar by dollar basis up to the amount set-aside in their Dedicated Fund; 

• Once the City and State exhausted their respective Dedicated Funds, all remaining dollars available for 9/11 Associated Costs would be divided on a twothirds for the City, one-third for the State basis (as mutually agreed to by NYC 

and NYS); and, 

• The applicant and grantee would submit no further appeals or time extension 

requests. 

This was documented in a Joint Letter of Agreement dated June 2003. The letter 

also specified that the Port Authority would receive $448.75 million in federal funding, and that the date for the Port Authority to submit Stafford-eligible costs would 

extend beyond April 30, 2003. Since all County and PNP projects were completed 

and funded by April 30, 2003, the agreement did not affect these applicants.

Expedited Closeout 

To close out the PA Program and accelerate funding of the 9/11 Associated Costs, 

FEMA established an expedited closeout process. Unlike the traditional closeout 

process where the applicants initiate it and the grantee coordinates it, this expedited process established firm deadlines and was led by FEMA. By closely managing 

the development of P.4s, streamlining the financial reconciliation of projects, and refining the closeout database initially developed by the Region to closeout DR–1391, 

by July 2003 FEMA was able to receive and forward to the grantee signed P.4s for 

all Stafford-eligible projects. The City and State were active participants in this 

process because it quickly brought to a close the Stafford Act-eligible program, 

thereby saving the City and State considerable time and money to manage a longterm, traditional closeout, and it allowed them to promptly draw down on any remaining funds using 9/11 Associated Cost projects.

9/11 Associated Costs 

Once the closeout was complete, FEMA then worked with NYC and NYS to prepare PWs for 9/11 AssociatedCost projects. 9/11 Associated Cost projects were defined as those related to 9/11 that were not reimbursable under the Stafford Act. 

Projects such as CUNY’s Fiterman Hall and the Battery Park City sidewalk and 

road repair identified in the City and State’s dedicated fund, respectively, were not 

prepared as 9/11 Associated Cost projects because these were eligible under the 

Stafford Act. 

To determine the allocation of the CAR funding, FEMA subtracted from the $8.8 

billion all Stafford Act program expenditures to arrive at the available funding, and 

immediately deducted from that figure all the projects authorized by the CAR. 

Calculating the funds available for projects authorized by the CAR 2003 was complicated, as FEMA wanted to ensure that funds remained to meet its projected Stafford Act obligations, and still be able to expedite funding to the City and State for 

the Debris Removal Insurance Program (DRIP), expanded health care monitoring, 

and 9/11 Associated Projects—all large and costly projects. To do so, FEMA’s Stafford Act projection of $6.44 billion reflected an amount slightly higher than anticipated in certain areas—primarily for Human Services and other Administrative 

Costs—to mitigate the risk of FEMA not having enough funds to meet its Stafford 

Act obligations. This projection was refined in January 2004 when it became clear 

that additional funds could be made available to the City and State to fund 9/11 

Associated Cost PWs, and these PWs were obligated. All or a portion of these available funds may be provided in the future to NYC, NYS, and the Port Authority to 

cover additional 9/11 Associated Costs.

Port Authority 

As a result of the WTC attacks, the Port Authority suffered an estimated loss of 

$4.6 billion generated primarily by: 
16

• The collapse of seven major office buildings (including the Twin Towers) 

owned by the Port Authority; 

• The deaths of 84 Port Authority employees, including 37 PAPD police officers; 

• Damage to its PATH system; and, 

• Lost revenue. 

Since the estimated $4.6 billion loss far exceeded its insurance coverage of $1.5 

billion, FEMA, the Port Authority, and SEMO developed and implemented an Insurance Apportionment Strategy. This strategy provided immediate cash flow to the 

Port Authority for Stafford-eligible costs, while ensuring that the overall obligation 

was not duplicated by insurance benefits. 

Under the terms of the ECP, and pursuant to the June 2003 Letter of Agreement 

(LOA) reached between FEMA, NYS, and NYC: 

1. FEMA would reimburse the Port Authority for all Stafford-eligible work completed and paid for by May 31, 2003, regardless of whether the entire scope of 

eligible work had been completed; and, 

2. The Port Authority’s allocated disaster funding—whether Stafford eligible, 

Associated Costs, or Subgrantee Allowance—was capped at $448.75 million. 

Using the Insurance Apportionment Strategy, FEMA reimbursed the Port Authority for Stafford-eligible costs obligated via project worksheets, and an administrative 

allowance. These payments accounted for $400 million toward the Port Authority’s 

funding limit capped at $448.750 million. The left $48.750 million available to the 

Port Authority as reimbursement for 9/11 Associated Costs.

Facts 

In two years FEMA obligated $7.48 billion in Public Assistance and infrastructure-related costs, in three categories as shown below in Figure VI–1. (An additional 

$21 million was obligated in January and February 2004—two years and four 

months after the attacks—to fund NYC and NYS 9/11 Associated Cost PWs.)

FEMA Transfers $2.75 Billion to FTA 

The $2.75 billion transferred to FTA was combined with the US DOT’s $1.8 billion 

allocation, to create a $4.55 billion transportation fund to be administered by FTA 

and used to reconstruct and enhance Lower Manhattan’s transportation infrastructure, including roadways, subway systems, and commuter rails. The process and 

conditions of this transfer of funds is treated in greater detail later in the ‘‘Emergency Transportation—Restoration of the Lower Manhattan Intermodal System’’ 

section of this PA Summary. Q04

FEMA Obligates $2.38 Billion Under Stafford Act 

The Stafford Act obligations totaled $2.38 billion, including $.06 billion representing grant management and project administration costs. As Figure VI–2 illustrates, of the $2.32 billion obligated to traditional PA Program recipients, approximately two-thirds was awarded to NYC, with the Port Authority and New York 

State claiming the majority of the remaining third. 

Figure VI–2 Stafford Act Project Worksheet Obligations by Recipient
17

Approximately 90 percent of the reimbursed costs represented Emergency Work, 

FEMA work categories A and B (refer to Figure VI–3).

Major obligations included: 

• Debris Removal to DDC and DSNY 

• Incremental Cost Approach (ICA) for OT Labor 

• Death and Disability Benefits 

• Temporary PATH Station 

• Emergency Transportation (excludes Temporary PATH Station) 

• OCME for Victim Identification 

• Building Cleaning and Air Monitoring 

The above statistics comprise roughly 82 percent of all Emergency Work and nearly 75 percent of all funds obligated within FEMA’s traditional Stafford Public Assistance Program.
18
19

FEMA Obligates $2.37 Billion under CAR 2003

As previously discussed in Section III, the passing CAR 2003 in February 2003 

allowed for greater flexibility in disbursing federal grants to the City and State of 

New York for costs associated with the events of September11th. After budgeting 

the $1 billion for debris removal insurance and the $90 million for expanded health 

care monitoring, FEMA allocated and then obligated funds to NYC and NYS on 9/

11 Associated Cost PWs, first disposing of each entity’s Dedicated Funds, and then 

separating the remaining funds two-thirds to the City, and one-third to the State. 

As of August 3, 2004, the City had received $913 million in 9/11 Associated Costs 

and the State has received $372 million including $49 million for the Port Authority.

Backfill Labor 

Stafford Act-eligible backfill labor costs after the WTC disaster exceeded $50 million, primarily for the FDNY, NYPD, NYC Department of Sanitation, and NYC De-
20

partment of Transportation. To evaluate the eligibility of backfill costs—costs incurred by the applicant to backfill for an employee performing eligible emergency 

work—PA staff followed the November 1993 memo issued by the PA Division Chief 

regarding force account (in-house) labor. This memo outlined instances where FEMA 

could reimburse for backfill, and how this reimbursement should occur. The methodology also contained a final step to validate that the eligible disaster-related overtime and backfill overtime did not exceed the total overtime paid by the department. 

This was a critical step since some FDNY backfill overtime PWs were greater than 

ten million.

Cleaning 

The collapse of the WTC created a widespread plume of dust and debris. From 

the beginning, residents, community leaders, and City and State officials expressed 

concern that the dust may pose a threat to health and air quality. Due to these concerns, the EPA recommended to FEMA that the dust and debris be removed from 

residential units and unclean buildings in order to reduce the long-term risk of exposure to chemicals such as asbestos. 

Based on EPA’s advisement and requests from the City, FEMA provided funding 

for the exterior and/or interior cleaning of 244 buildings and 4,500 residential units 

in Lower Manhattan, and two unoccupied privately owned buildings in close proximity to the WTC site. FEMA classified this work as debris removal and based its 

eligibility determination on the EPA’s and NYC Department of Environmental Protection’s concern over the potential health threats posed by the debris, and the 

threat to the economic recovery this debris posed to lower Manhattan, as outlined 

in a letter from NYC to FEMA. 

To ensure authorized right-of-entry, as required by the Stafford Act and 42 USC 

§1A5173, the City of New York developed a request form that the building owner 

or resident needed to sign before work could commence. The authorization form included a stipulation that any insurance proceeds received for activities covered by 

the EPA/DEP’s dust cleaning program would be remitted to the federal government. 

The State Emergency Management Office maintains responsibility for notifying 

FEMA of any such remittance.

Death and Disability Benefits 

In responding to the WTC disaster, 341 FDNY firefighters, 2 FDNY EMTs, 23 

NYPD police officers, 3 State Court Officers, and 37 Port Authority police officers 

died. Their deaths were the first large-scale casualties resulting from an emergency 

response effort in FEMA’s history. For the first time, FEMA received a request that 

it reimburse applicants—the City and State of New York—for certain contractually 

obligated death benefits, increased pension contributions, and other associated costs. 

Specifically, the City and State requested reimbursement for more than $750 million 

in death and disability benefit costs, including: 

• Funeral Costs and Memorial Services; 

• Lump Sum Line of Duty Benefit Costs; 

• Increased Pension Costs Due to Line of Duty Deaths; 

• Increased Pension Costs Due to Increased Disability Retirements; and, 

• Leave Payout. 

Upon review, FEMA concluded that funeral and memorial costs, lump sum death 

benefits, and increased pension costs due to line of duty deaths, although unusual, 

were a direct result of the disaster and a cost of performing the emergency work. 

Specifically, FEMA management found $291 million to be in accordance with OMB 

Circular A–87 Attachment B, Item 11, Compensation for Personnel Services, and 

item 11d(5). 

Given the magnitude of the death benefit claims, the FEMA had an actuary review the applicant’s actuarial studies to determine the soundness of the applicant’s 

methodology and the reasonableness of the assumptions. Based on the actuary’s 

findings, which supported the applicant’s claim, FEMA authorized the reimbursements. 

FEMA reimbursed the City and State for additional death and disability benefit 

costs as 9/11 Associated Costs. 

FEMA did not approve death benefit costs for City or State employees killed as 

a result of the disaster where it could not be reasonably demonstrated that these 

individuals were performing eligible emergency work. FEMA also did not reimburse 

for State worker compensation costs as FEMA reimbursed the applicant a fringe 

rate to perform the emergency work, which included a component for workers compensation.

Debris—Time and Material Contracts 
21

The FEMA PA Debris Management Guide (FEMA 325) states that the Time and 

Material (T&M) work should be limited to a maximum of 70 hours of actual emergency debris clearance work, and shall be permitted only for work that is necessary 

immediately after the disaster has occurred when a clear scope of work cannot be 

developed. After the WTC disaster, the NYC Department of Design and Construction—the overseer of the debris removal effort—entered into time and material contracts with four construction managers (CMs) to accomplish the emergency debris 

removal, hauling tasks, building demolition, and site stabilization. The CMs operated via a letter of intent, and not a complete written contract. Each of the CMs 

was capped at $250 million. 

On September 15, 2001, FEMA approved a written waiver of policy, which allowed 

the extended use of T&M contracts based on continuing unpredictable and complex 

site conditions at the WTC. In addition, FEMA waived in part the requirement for 

competitive bidding on the basis of continuing public exigency and emergency. Due 

to these contracting circumstances, it was prudent that the federal government provide oversight to ensure that the scope of work and costs of the debris operation 

were properly controlled. In order to accomplish this, the City and FEMA established and implemented monitoring systems using resources from FEMA, Office of 

the Inspector General, the DDC, the NYC Office of Management and Budget, the 

NYC Department of Investigation, and several private auditing groups. 

In November 2001, FEMA tasked the US Army Corps of Engineers (USACE) to 

provide an independent evaluation of the contract arrangement and recommend 

whether a T&M contract was still the most feasible and cost effective contract payment basis, or whether another type of contract, such as a lump sum or unit price, 

would be more suitable. Based on USACE’s assessment and recommendation, FEMA 

extended its T&M waiver to DDC for the duration of the debris operation.

Debris Removal Insurance Program 

Generally contractors, such as the four CMs, provide their own general and professional liability insurance coverage and include the costs of insurance as part of 

their overhead. As such, these costs are generally eligible for reimbursement by 

FEMA. Because of the extreme conditions related to debris removal at the WTC, 

and the unique nature of the hazards associated with the debris removal operation, 

the CMs required a greater amount and scope of insurance coverage than is typically obtained, including coverage for environmental liability. 

The City agreed to provide a master insurance program, called the Coordinated 

Insurance Program, to cover both the debris removal contractors and employees that 

had worked at the WTC site. However, due to the impact of the disaster on the insurance market, available insurance was severely limited. The City was reimbursed 

to obtain general liability coverage and marine insurance coverage. These policies 

did not provide the City with coverage for environmental risks, such as asbestos, 

or professional liability. Although the City sought coverage for these risks, no commercial insurance was available due to the unknown environmental and health 

risks associated with the disaster. Because of the unresolved insurance issue, the 

CMs completed debris removal at the WTC without a written contract. 

The major issue for FEMA was the City’s insistence that the liability protection 

apply not only to the contractors, but also to the City for claims brought by City 

employees that had worked at the WTC site. FEMA had informally advised the City 

that the contractor-based insurance was eligible under the PA program, but the 

City-employee based insurance was not and would have to be separated in order for 

FEMA to provide funding. In addition, FEMA was concerned about the cost effectiveness of the City’s proposal. 

The passage of the CAR resulted in the City establishing a captive insurance company to process and payout any claims, and FEMA obligating $999.9 million on PW 

1554 in September 2003. The draw down of funds will not occur until all final terms 

and conditions, including the scope of coverage, have been agreed upon.

Emergency Transportation 

The WTC disaster caused unprecedented damage and disruption to New York’s 

regional transportation system. The region relies on a complex network of rail, subway, bus, bridges, tunnels, roads, and ferry lines that ties together millions of workers and residents throughout New York City and in surrounding counties in New 

York, New Jersey and Connecticut. The collapse of the WTC towers caused massive 

damage to sections of this regional transportation system which serves Lower Manhattan. This network of rail, subway, bus, and ferry lines was disrupted as a result 

of: 

1. The destruction of the Port Authority Trans-Hudson (PATH) WTC station, 

the terminal station for the PATH lines running under the Hudson River and 

serving Lower Manhattan. 
22

2. The damage to the Metropolitan Transportation Authority’s (MTA) Cortlandt 

Street Station and the N & R and 1 & 2 subway lines, all located below and 

adjacent to the WTC towers. (The MTA subway lines run underground along 

the west side of Manhattan. These subway systems were seriously impacted by 

the disaster, but unlike the PATH system, did not suffer complete destruction 

of major system components.) 

3. Alteration of surface transit routes made necessary by debris removal operations and infrastructure repairs in the vicinity of Ground Zero. 

As a direct result of the disaster, 68,000 commuters who used the WTC PATH 

station each day had to find an alternative route to work. Approximately 76,000 

commuters and residents were forced to find alternatives to their pre-9/11 subway 

routes. 

The direct damage caused by the disaster represented only a portion of the disruption to the region’s transportation system, however. The damage caused a ripple 

effect that disrupted the entire system, affecting every mode of transportation that 

served Lower Manhattan. For example, the tens of thousands of New Jersey residents who commuted to Lower Manhattan on the PATH each day were suddenly 

forced onto other modes of transportation. Overnight, the demand for ferry service 

to Lower Manhattan more than doubled, and Penn Station experienced an influx of 

new riders as commuters were forced to take New Jersey trains into Penn Station 

and then take subways downtown. This strained the capacity of existing transportation routes, created dangerous overcrowding, resulted in long waits for service, 

and caused significant damage to the region’s economy.

Restoration of the Lower Manhattan Intermodal System 

A traditional interpretation of Section 406 of the Stafford Act would have limited 

FEMA’s funding to the replacement of the WTC PATH station and other physically 

damaged elements of the system. However, a white paper was developed that provided a broader definition, within the context of the Stafford Act, of what can comprise a ‘‘damaged system,’’ which FEMA Headquarters approved. By accepting this 

definition, FEMA was able to find eligible both directly and indirectly damaged 

projects that are critical to restoring the functionality of the Lower Manhattan 

intermodal transportation system. In August 2002, this unique approach resulted in 

two critical developments: 

1. FEMA announced that $2.75 billion appropriated by Congress to FEMA’s disaster fund could be used to help restore the transportation infrastructure system in Lower Manhattan. To this amount, the Federal Transit Administration 

(FTA) added $1.8 billion, both of which were made available for transportation 

projects, for a total of $4.55 billion. 

2. FEMA and the US Department of Transportation (DOT) entered into a 

Memorandum of Agreement (MOA) in August 2002, which designates the FTA 

as the responsible agency for administering and monitoring the distribution of 

the $4.55 billion. This would enable the Federal government to assess needs 

and distribute funds in a systematic, comprehensive, and efficient manner. 

Although the MOA noted that the FTA needed to disperse the $2.75 billion in accordance with the Stafford Act, this was waived due to the passage of the Consolidated Appropriation Resolution of 2003 (CAR 2003). 

In March 2002, FEMA agreed with New York City that the emergency transportation needs of the region justified the increased costs involved in increasing the frequency of ferry services. FEMA agreed to reimburse New York City and the Port 

Authority for the operating costs of some new and expanded services initiated post 

9/11. This began a series of ferry projects aimed at providing alternatives to commuters seeking ways, other than driving and subways, to reach Lower Manhattan. 

Eventually, over $47 million was obligated for ferry service and temporary landing 

projects that provided ferry service from: 

• Hoboken to Lower Manhattan; 

• Brooklyn to Lower Manhattan; 

• Hunters Point, Queens and East River down to Lower Manhattan; and, 

• Lower Manhattan Circulator.

Family Center 

As part of its rescue and response effort, the City of New York needed to quickly 

establish space where families and friends of the victims could gather to provide or 

could obtain information about those missing or presumed dead, and where families 

of victims could apply for assistance. To meet this need, NYC established the Family 

Center at Pier 94 in Manhattan, which provided a safe and convenient location 

where families to obtain information about the missing as well as various services 

and programs. 
23

Because the Family Center provided some services similar to those of a Disaster 

Service Center, which are generally not eligible for PA funding, FEMA had to carefully consider the eligibility of the build-out and operation of the Family Center. 

Basing its decision on 44 CFR §1A206.225, FEMA determined that the costs incurred by the City to establish and operate the Family Center were eligible since 

services at the Family Center, such as providing a centralized site to fill out missing 

person reports, submit DNA samples, and begin processing death certificates, was 

an essential community service in the aftermath of this disaster. The total cost to 

build-out and manage the Family Center was approximately $10 million.

Full Replacement Value (Vehicles) 

As a result of the collapse of the WTC towers on September 11, over 200 publicly 

owned vehicles were destroyed beyond repair. Title 44 CFR §1A206.226(g) stipulates 

that eligible equipment damaged beyond repair may be replaced by ‘‘comparable 

items.’’ In interpreting this federal regulation, FEMA’s Public Assistance Guide 

states: 

When equipment, including vehicles, is not repairable, FEMA will approve the 

cost of replacement with used items that are approximately the same age, capacity, 

and condition. Replacement of an item with a new item may be approved only if 

a used item is not available within a reasonable time and distance. 

In recognition that the collapse of the WTC towers destroyed hundreds of emergency response vehicles, which significantly and adversely impacted these agencies’ 

ongoing ability to expeditiously deliver emergency services, the Federal Coordinating Officer, in a memo dated December 12, 2001, sought Headquarters’ approval 

for a disaster-specific directive aimed at fully and promptly restoring the services 

provided by these emergency vehicles, with minimal disruption to the overall recovery process. More specifically, this directive would serve to allow for the reimbursement of new, 2002 model vehicles to replace those lost in the disaster in lieu of analyzing and determining, on a case-by-case basis, whether each destroyed vehicle 

could be replaced‘‘within a reasonable time and distance.’’

The FCO’s request was granted and documented in PA Program Guidance 8, 

dated January 16, 2002. According to this guidance, the reimbursement value of a 

replacement vehicle would be: 

• Based on the estimated cost of its purchase through the applicant’s normal procurement process; and, 

• Calculated net of deductions for actual or anticipated insurance proceeds.

Lost Instructional Time 

On September 11, 2001, the collapse of the WTC forced the NYC Board of Education (BoE) to evacuate schools in Lower Manhattan and cancel classes citywide. 

Whereas most students were able to return to their respective schools on September 

13th, students attending schools within close proximity to the disaster site were displaced and unable to return to either their own school or to provisional school facilities until September 18th. In total, NYC estimated that public school students lost 

more than 15 million hours of instructional time due to school closures, delayed 

openings, and school relocations. To replace the lost instructional time, the City proposed implementing an after-school program, contingent on FEMA funding. 

While FEMA recognized that school hours were lost as a result of 9/11, a program 

contingent on FEMA funding would not satisfy the emergency work criteria per 

FEMA regulations. Ultimately, Congress directedFEMA to pay for this activity in 

House Report 107–593. FEMA obligated a $78 million Category G PW to fund an 

after-school program intended to replace the instructional time lost as a result of 

the WTC disaster.

Mutual Aid 

Not surprisingly, the response from people, non-profits, and other governmental 

jurisdictions to help NYC respond and recover was enormous. In part due to this 

response, the President declared every county in New York eligible for Category B 

emergency work. In light of every county being declared and the response of so 

many counties without a pre-disaster mutual aid agreement in place with New York 

City, FEMA found certain mutual aid arrangements eligible even though they were 

not formally established in writing prior to September 11, 2001. By doing so, several 

provisions of Policy Series 9523.6 were waived. These waivers and authorities were 

permitted only because the impact of this terrorist event was catastrophic and well 

beyond reasonable planning assumptions of the applicants, and because mutual aid 

agreements were unlikely to have been formulated with all the entities from whom 

assistance was needed. 

In reimbursing local governments within NYS who responded to the aid of NYC, 

FEMA limited the eligible costs to overtime, travel expenses, lodging, and other di-
24

rect costs, and reimbursed the mutual aid provider directly. Only applicants who 

had pre-9/11 mutual aid contracts in place that allowed payment for straight time 

were reimbursed for that cost. All mutual aid providers outside of the state had to 

have a pre-9/11 mutual aid contract in place to be reimbursed, in that case through 

NYC. The City did not request reimbursement for any in-state or out-of-state mutual aid providers because, according to NYC’s Office of Emergency Management(OEM) officials, none billed the City. 

Specific to DR–1391, the vast majority of mutual aid assistance requested by NYC 

was provided by various New York State counties. Although numerous counties 

were called upon to support the response and recovery effort, Nassau, Suffolk, Westchester, and Rockland counties incurred most of the mutual aid costs. These four 

alone accounted for approximately $10.5 million in mutual aid assistance, with Nassau County providing the bulk—over $7.2 million in mutual aid assistance.

Obtain and Maintain Insurance 

Per Section 311 of the Stafford Act and Title 44 CFR §1A206.253, following any 

disaster, and as a condition for receiving PA funds, an applicant must obtain and 

maintain insurance on those insurable facilities (including content, equipment and 

vehicles) for which PA funding had been found eligible. The insurance must be for 

the hazard that caused the damage. An applicant is exempt from this requirement 

only if the state insurance commissioner certifies that such insurance is not, per 

Section 311(a)(1) of the Stafford Act, ‘‘reasonably available, adequate, and necessary.’’ In addition, with regard to requests from public entities that they be allowed to self-insure, Section 311(a)(c) of the Stafford Act notes that only states will 

be allowed to act as self-insurers. 

Prior to 9/11, NYC did not maintain commercial insurance on NYC buildings or 

property, such as vehicles or building contents. Rather, NYC considered itself to be 

‘‘self-insured.’’ When damages or losses occurred to a NYC property, the property 

was either not repaired or replaced, or else it was replaced or repaired using funds 

appropriated from NYC revenues. 

Following 9/11, NYC requested that it be allowed to continue to self-insure and 

to be exempted from FEMA’s Obtain and Maintain Insurance requirement. NYC argued that obtaining and maintaining commercial insurance for the damaged or destroyed property eligible for PA funding would be a deviation from normal business 

practice, resulting in serious fiscal implications to NYC’s budget. On March 26, 2002 

the NYS Superintendent of Insurance issued a letter stating that NYC was self-insured, and that the type of insurance required was not reasonably available, adequate, and necessary. FEMA’s Acting Regional Director declined to recognize NYC 

as self-insured, but granted a waiver to the Obtain and Maintain requirement based 

on the NYS Superintendent of Insurance’s opinion.

Port Authority Apportionment 

One of the most complex challenges of the disaster was determining an insurance 

apportionment strategy for the Port Authority of New York and New Jersey. The 

Port Authority reported estimated losses in excess of $4.6 billion, and had $1.5 billion of insurance coverage for all insured risks on a per occurrence basis. Since the 

Port’s projected losses significantly exceeded its insurance coverage—the only applicant to whom this occurred in DR–1391—FEMA worked with the Port Authority to 

develop a funding strategy that would provide the Port Authority with cash flow, 

yet account for the Port Authority’s future insurance proceeds. 

For the first year and a half after the disaster, while estimates of the Port’s overall loss were still being developed, FEMA, NYS, and the Port Authority agreed to 

apply a 50 percent insurance reduction to each individual funding obligation. The 

implementation of this strategy allowed Stafford Act grant funds to be released in 

advance of final insurance resolution. The 50 percent was based on FEMA’s analysis 

at the time of the Port’s Preliminary Loss Assessment. 

Through subsequent developments and the Port Authority’s refinement of its 

losses, FEMA later modified its funding strategy and effectively reduced its obligation outlay to 26 percent of eligible projects. FEMA and the 

State allowed individual project reimbursements to be released with varying percentages applied for insurance proceeds. Even though the Port Authority’s loss claim 

will continue to mature, the financial model—the Insurance Apportionment Strategy—calculated the net FEMA eligible obligation at $409.88 million, representing 26 

percent of the total Stafford-eligible costs. 

In the end, the Port Authority was granted $397.97 million as Stafford Act-eligible 

costs obligated via PWs, and an administrative allowance of $2.03 million. FEMA 

was able to fully exhaust the available insurance proceeds by documenting the 

amount of eligible work and making provisions through the apportionment process, 

thus ensuring no duplication of insurance benefits.
25

Equipment and Contents Repair and Replacement 

Costs contained in this category are relatively low since its focus is the repair and 

replacement of damaged equipment, computer systems, contents and furnishings. 

More specifically, this category includes costs associated with the: 

(1) Replacement of destroyed vehicles; 

(2) Installation and replacement of telecommunication and computer systems, 

and, 

(3) Replacement of destroyed building contents and furnishings. 

The repair and replacement of larger, more permanent structures, such as buildings, water mains, and transportation components are included in the Infrastructure 

category.

Death and Disability Benefits 

Costs contained within this category are for certain contractually obligated death 

benefits, increased pension contributions, and other costs associated with the death 

or disability of emergency personnel as a direct result of the disaster. Specifically, 

this category includes costs for: 

(1) Funeral and memorial services; 

(2) Lump sum line of duty benefits; 

(3) Increased pensions due to line of duty deaths and increased disability retirements; 

(4) Leave payout to beneficiaries; and, 

Cost of living adjustments for the State’s pension contribution

Hazard Mitigation 

This category contains costs associated with FEMA’s 404 Hazard Mitigation Grant 

Program (HMGP), which for DR–1391–NY provided funds for long-term hazard mitigation measures against terrorism. Funding for HMGP is generally 15 percent of 

the total estimated Federal disaster assistance to be provided by FEMA under the 

declaration. That 15 percent is cost-shared on a 75/25 Federal/State and local ratio. 

For this event, it was capped at 5 percent of that total, limited to the disaster area, 

and intended for projects that protect infrastructure and systems essential to the 

City’s continued viability. These parameters on the HMGP were implemented due 

to the immense financial size of the disaster, particularly where the disaster assistance that serves as the basis for the HMGP allocation was provided at 100 percent 

federal expense, with no State or local cost-share. FEMA considered many projects, 

including those that: 

(1) Protect public infrastructure and utilities; 

(2) Protect key governmental and healthcare facilities; 

(3) Promote awareness initiatives; 

(4) Ensure the continuity of government and business operations; 

(5) Promote high-rise building safety; and, 

(6) Protect public landmarks.

Administration 

This category includes costs associated with administering all of the FEMA Federal grant programs for DR–1391–NY. The most significant and costly items in this 

category are those associated with: 

(1) Grant management costs (including the FTA); 

(2) FEMA administrative costs; 

(3) Contractor costs; and, 

(4)Administrative allowances.Q04

New Jersey 

Included within this category are all costs funded through EM–3169–NJ. The 

most significant and costly projects in this category were those associated with 

emergency protective measures taken by the State of New Jersey and its associated 

entities. Specifically, this category contains funds expended by New Jersey resources 

to: 

(1) Provide logistical and operational support to NYC; 

(2) Evacuate Lower Manhattan; 

(3) Transport and treat the injured; 

(4) Establish emergency staging areas for rescue and recovery operations; 

(5) Secure bridges and tunnels; and, 

(6) Manage traffic to and from New York City. 

Not included in this category are New Jersey projects that were sponsored by the 

New York State Emergency Management Office.

T2Individual and Family Grant 

Costs contained within this category are for projects in which individuals, not 

public entities, were the ultimate beneficiaries of services. The most significant and 
26

costly projects in this category are those associated with the Human Services Program, which includes costs for: 

(1) Mortgage and Rental Assistance; 

(2) Temporary Housing; 

(3) Individual and Family Grants; 

(4) Disaster Unemployment; 

(5) Crisis Counseling; and, 

(6) Disaster Food Stamps. 

Also included in this category are funds expended via Interagency Agreements for: 

(1) Expanded health care monitoring for rescue workers; 

(2) Establishment of a health registry; 

(3) Medical screening/health assessments of Federal workers; and, 

(4) Residential cleaning and sampling. 

Costs associated with operating the Family Center are also included in this category. 

While all of the categories of spending listed above are important, the Crisis 

Counseling program was the most significant FEMA had established since the 

Murrah Building bombing in Oklahoma City in 1995. As with the Oklahoma City 

experience, this program was also of a longer duration than most programs associated with disaster-related counseling. The issues and challenges to individuals and 

families such as Post-Traumatic Stress Syndrome and other mental health challenges caused by such a horrific event are manifested in the size and scope of this 

program. 

The largest program in terms of financial costs was the Mortgage and Rental Assistance (MRA) program. This program was deleted from the Stafford Act with the 

passage of the Disaster Mitigation Act of 2000. However, that Act and the provisions for the deletion of MRA were not yet in effect in September of 2001. As such, 

it was still an eligible program and available for this disaster. The MRA program 

authorized temporary mortgage or rental payments to or on behalf of individuals 

and families who experienced financial hardship caused by a major disaster. Given 

the need to show causality, as well as a requirement that the applicants have received a written notice of dispossession or eviction, this had always been a challenging program to administer. Given the population size of the immediate area impacted by this event, this was an especially difficult program to administer in both 

an urgent and equitable manner. However, despite all of those challenges, a significant number of applicants were assisted through this program. 

The most challenging program, among human services programs, was the Individual and Family Grant (IFG) program. Traditionally this program helps individuals and families to replace household items and provides special help for those 

without adequate insurance to pay for some medical and funeral expenses. The most 

difficult aspect of the IFG program was the payment for air conditioners based on 

the contaminated air quality caused by the destruction of the towers. 

By the time determinations had been made regarding air quality, most home inspections, FEMA’s chief means of verification of damage, had already been performed. The EPA’s warnings regarding the air quality were real, as were the concerns of residents. Therefore, rather than re-inspect thousands of homes, FEMA and 

the State of New York accepted self-certifications by residents as to the urgency of 

their need and to their contention that they were replacing air conditioners previously owned. 

While FEMA and the State entered into this program cognizant of the risk of 

fraud, as with many emergency- related programs, we err on the side of safety with 

the assumption that we could assure more accountability as the recovery continues. 

The aggressive, and at times deceptive, approach by vendors anxious to encourage 

purchases presented a serious complication. The fact that there was no re-inspection 

and the vendors’ approach contributed to fraud and abuse in the IFG program. Although this program was abused, it also ensured that those most in need of such 

assistance received help. 

Undeniably, the WTC disaster impelled us to move quickly and compassionately. 

However, it is also our duty to ensure that our programs provide the benefits intended under the law to eligible applicants. The experience with the September 11th 

IFG program underlines the importance of balancing compassionate service with the 

need for accountability. To provide a clear understanding of how effectively the program is operating, the States must perform inspections and, barring those, random 

eligibility samples throughout the process.
27

Conclusion 

Taken together, these project areas represent an overall picture of the damage 

and the steps taken to repair the damage and to assist the individuals, families, and 

communities who suffered the most direct pain and loss from this national event. 

Even a brief review of the different categories of spending serves as a reminder 

of the various forms of disruption and chaos caused by the event but it is also a 

reminder of the heroic work that took place. 

I appreciate the opportunity to share with you the details of FEMA’s role in response, recovery, and mitigation for the World Trade Center disaster, and I will do 

my best to answer any questions you may have.

Mr. ROGERS. We are now happy to welcome back Mr. Richard 

Skinner. He is Inspector General for the U.S. Department of Homeland Security. Welcome. 

STATEMENT OF RICHARD SKINNER 

Mr. SKINNER. Thank you. I appreciate the opportunity to be back 

here to testify on this important subject. I will try to be brief. 

On September 17th, 2001, only 6 days after 9/11, the OIG deployed a team of 24 individuals, auditors and investigators to New 

York City. The mission of the investigator was essentially to organize a multiagency task force to collectively address fraud, waste 

and abuse; review questionable applications; and moderate debris 

removal operations. 

Our investigators received over 1,100 complaints between 9/16 

and to date, and that resulted in approximately 250 active investigations. The majority of these complaints were related to fraudulent applications for the Mortgage and Rental Assistance Program. 

We worked many of these investigations jointly with the State of 

New York, other Federal agencies and local authorities. To date we 

have arrested 117 individuals, resulting in 96 convictions. Currently we have eight ongoing investigations. Our investigations have resulted in approximately $940,000 in recoveries, $6.9 million in restitutions, $2 million in fines and $8 

million in cost savings to the Federal Government. Cost savings—

we were able to stop funds from being paid to the applicant, therefore we classified those as cost savings. 

Our investigative activities closely paralleled a profile we learned 

from responding to prior catastrophic disasters. We projected that 

the first investigation would include false claims for individual assistance. During our initial meetings with representatives from 

both the U.S. Attorney’s Office in the Eastern and Southern Districts of New York, it was mutually agreed that the Manhattan 

District Attorney’s Office would prosecute the individual assistance 

cases, while the U.S. Attorney’s Office would pursue public corruption and debris removal cases. 

The most problematic cases that we tried to undertake not surprisingly dealt with the applications for air conditioners and airquality items. On October 18th, 2001, FEMA added air purifiers, 

air filters and vacuum cleaners to its list of eligible items for reimbursement. On March 22nd, 2002, FEMA and the State decided to 

add window air conditioners as an eligible item. 

Traditionally FEMA inspectors would verify damage before recommending repair or replacement of an electrical item; however, 

when air conditioners were added as an eligible item, home inspections had already been completed. FEMA then decided that it 

would not be cost-effective to have inspectors verify damage of a 
28

single property item that is a window air conditioner. Instead the 

State implemented a self-certification process. 

May 1st, 2002, FEMA authorized advance payments to applicants who were financially unable to purchase air-quality items. 

Rather than requiring receipts for such items prior to grant approval, which was traditionally required, which is still required, or 

an ability to document financial need, applicants were permitted to 

certify that they were unable to pay for the items and were asked 

to provide receipts after purchase. 

Because FEMA and State controls over these items were reduced, many applicants received assistance for which they may not 

have been eligible, which increased opportunities for fraud and 

abuse. 

In response to these concerns and at our urging, FEMA implemented a sampling program to verify eligibility and to identify 

abusers. FEMA selected two random samples, one for applicants 

who repaired or replaced air conditioners, and one of applicants 

who received advances for air-quality items. 

The first sample, as Mr. Picciano pointed out, resulted in 62 percent of the applicants that were sampled, we were unable to determine whether they were, in fact, eligible. The second sample of 

about 5,600 applications for air-quality items identified about 

1,600, 1,700 applicants, or 33 percent, who had not purchased the 

air-quality items. 

These findings and conclusions were discussed with prosecutors 

in Manhattan, the Manhattan District Attorney’s Office, who expressed concern proving criminal intent. The assistant U.S. attorneys also expressed similar concerns; specifically the low dollar 

amount of the transgressions made the cases very unattractive. 

Also coupled with that was the confusion that existed at that 

time with regards to eligibility, the guidelines that were being sent 

out that were constantly changing also lessened the ability or, at 

least the prosecutors felt, weakened their ability to prosecute. 

We reviewed many allegations and referrals concerning this matter and determined from an historical and reasonable approach 

that with few exceptions the allegations and referrals did not appear to have a great deal of prosecutorial merit. Nevertheless, we 

did have success in our opinion mitigating some of the fraud. 

As a result of FEMA’s efforts to educate the public as to the true 

intent of the individual assistance program and its home inspection 

sampling initiative, coupled with our investigative initiative which 

received considerable media coverage, more than 100,000 of the 

229,000 applicants voluntarily chose to withdraw from the program. They either returned or did not accept their grant award. 

Given that the average award was about $1,200, these actions 

helped FEMA save more than $120 million. 

Regardless—regarding debris removal, we have recognized the 

nature of debris removal operations makes it an area where unscrupulous individuals could potentially use a disaster for personal 

gain. Working jointly with Federal, State and local law enforcement officials, we were successful in prosecuting two contractors for 

false claims. All in all, however, due to the tight monitor controls 

established by the city of New York, we determined that fraud was 

not prevalent in the 9/11 debris removal operation. 
29

Regarding our auditor oversight activities, our efforts were far 

from our traditional role. That is, going in after the fact got you 

doing financial compliance items. Instead, we went in very early 

and started working very closely with the FCO, the State officials, 

local officials, working hand in hand reviewing project applications, 

reviewing accounting systems, reviewing claims to determine early 

on whether there were any improprieties with regard to their public assistance programs. Our mission was in essence one of prevention as opposed to one of reaction. 

We reviewed requests for funding and the detailed worksheets 

for all proposed projects and met with public assistance program 

staff on a regular basis. When I say regular basis, that was on a 

daily basis. We had auditors there, as many as 12 auditors at the 

DFO, for as long as 18 months, working hand in hand with the program officials. 

At FEMA’s request, we reviewed questionable bills and claims 

submitted by applicants for payment and FEMA’s implementation 

of its policy on heightened security eligibility; overtime costs; applications for enhancements to subway stations. For example, at the 

Columbus and Ninth Avenue subway station, the city had submitted a proposal to expand that subway station to handle the 

overflow as a result of 9/11. That was at a cost of $30 million. We 

reviewed that and determined it was not feasible to make that expansion because new projects were—would be complete within 4 

months by the time they completed the Columbus and Ninth Avenue station. The alternative stations would have been saving the 

government $30 million. 

Based on our experience, two things stand out most, however. 

One is the need to improve FEMA’s expedited assistance delivery 

process, and the need for better interagency coordination and data 

sharing, particularly with other Federal agencies and voluntary 

agencies involved in the delivery of disaster assistance. This cannot 

be overstressed. After 9/11, responsibilities shared among FEMA, 

EPA, the U.S. Department of Justice and voluntary agencies, just 

to illustrate, were not defined clearly enough to distinguish roles 

and establish the sequence of delivery of assistance. Recovery from 

the 9/11 bombings highlighted the need for data-sharing agreements regarding the shared roles and responsibilities among key 

agencies. This needs to be done before the disaster as opposed to 

an ad hoc basis as we did after 9/11 and as we are now doing in 

Katrina. 

Although progress has been made in this area since 9/11, much 

more needs to be done. This can be accomplished in three principal 

means: direct law enforcement access to FEMA data, computer 

matching agreements, and real-time data exchange. Hurricane. 

Katrina clearly demonstrated that law enforcement agencies 

need direct access to disaster victims’ personal information not only 

to reconnect family members and locate missing persons, but also 

to identify convicted sex offenders and fleeing felons who may have 

relocated as a result of the disaster. In support of these issues, 

FEMA published just recently, I believe just last week, a notice in 

the Federal Register adding a new routine use to its disaster recovery assistance of records that allows for greater information shar-
30

ing for Federal agencies and State and local governments. This is 

a very important first step. 

Another advantageous means of data sharing involves computer 

matching. Computer matching agreements among Federal agencies 

that provide disaster assistance are often necessary to detect fraud, 

waste and abuse. Without such agreements, the prospect for protecting the taxpayers’ dollars and prosecuting fraud is diminished. 

Mr. ROGERS. We are going to have to interrupt you. We have two 

minutes to get to the Capitol to vote. We will be back at approximately 3:15, 3:20, and we will pick back up at that point. We are 

now in recess. 

[Recess.] 

Mr. ROGERS. I call this hearing back to order and pick back up 

with Mr. Skinner. I apologize for the interruption, but there won’t 

be any more since we have finished voting on the floor for the day. 

Mr. SKINNER. Thank you and I understand. 

When we adjourned briefly, I was talking about interagency coordination and data sharing, essentially by giving law enforcement 

direct access to FEMA data, interagency matching agreements—

and which I have already commented on. 

The third point I would like to make, that it is important that 

Federal agencies with disaster assistance programs—and there are 

well over 22 to my knowledge—that they have the capability to exchange real-time information among themselves. This exchange of 

information is necessary to verify identity and eligibility as well as 

create a holistic approach for effective delivery disaster assistance. 

According to FEMA’s disaster programs, the Federal Government 

has over 90 disaster assistance programs. Real-time data sharing 

agreements can help prevent the duplication of Federal disaster assistance and ensure that disaster victims receive the full complement of disaster assistance due them. For example, data sharing 

between FEMA and the Social Security Administration and the 

Postal Service can go a long way to verify the name, Social Security 

number, and address of an individual applying for disaster assistance. These types of agreements would result, in our opinion, in 

greater intergovernmental cooperation and collaboration in the delivery of disaster assistance. 

I would like to note that we have an ongoing review of FEMA’s 

data sharing processes and procedures, and that is currently ongoing, and once we do in fact complete that review I would be happy 

to share that with the committee. 

In essence, that completes my opening remarks, and I look forward to answering any of your questions. 

Mr. ROGERS. Thank you, Mr. Skinner. 

[The statement of Mr. Skinner follows:]

PREPARED STATEMENT OF THE HONORABLE RICHARD L. SKINNER

Good afternoon Mr. Chairman and Members of the Subcommittee. I am Richard 

L. Skinner, Inspector General for the Department of Homeland Security. Thank you 

for the opportunity to be here today to discuss the work of the Office of Inspector 

General (OIG) in response to the terrorist attacks of September 11, 2001, in New 

York City. During the period of the federal response, I served as the Deputy Inspector General for the Federal Emergency Management Agency (FEMA). Subsequently, 

I became the Deputy Inspector General, and later Inspector General for the Department of Homeland Security.
31

OIG RESPONSE TO SEPTEMBER 11, 2001

The events of September 11, 2001, resulted in catastrophic loss of life and physical damage as well as loss to the business and residential infrastructure in the 

lower part of the Borough of Manhattan. FEMA applied the full range of authorized 

disaster assistance programs to address the post-disaster needs of the City of New 

York and its citizens, including grants for Public Assistance, Temporary Housing 

(specifically Mortgage and Rental Assistance), Individual and Family Grants, Disaster Unemployment Assistance, Crisis Counseling Assistance and Training, and 

Legal Services. However, due to the unique circumstances of this disaster—i.e., 

managing the consequence of a terrorist event rather than the consequences of a 

natural disaster—FEMA had to use its authorities and programs more broadly than 

ever before. As a result, FEMA’s authorities were not adequate to meet everyone’s 

expectations in recovering from the unprecedented needs created by this event. 

On September 17, 2001, our investigators arrived in New York City and met with 

the Federal Coordinating Officer, representatives of the U.S. Attorney’s Southern 

and Eastern District Office, the Manhattan District Attorney’s Office, the New York 

Police Department, the Port Authority Police Department, the City of New York Department of Investigations, and many other investigative organizations with jurisdiction over the World Trade Center disaster. The purpose of those meetings was 

to provide and receive information; explain our mission of aggressively investigating 

and recommending prosecution of anyone attempting to defraud FEMA; and, to fulfill our objectives of: • Participating in public service announcements • Conducting fraud awareness briefings • Organizing a multi-agency task force to collectively address fraud • Reviewing applications through computer matching • Monitoring debris removal • Participating in press conferences with the U.S. Attorney’s Office • Distributing FEMA fraud Hotline posters and information 

During the initial first eight months, a satellite office was established in Manhattan where our investigators worked round-the-clock, in three shifts with six agents 

per shift. In April 2002, investigators transitioned to two/12-hour shifts, and maintained six agents per shift. By February 2003, investigators were working one/12-

hour shift with six agents. The Agent in Charge of the FEMA OIG Eastern District 

Investigations Branch Office in Atlanta, Georgia provided supervisory oversight of 

the World Trade Center investigations. 

By early October 2001, we also deployed teams of auditors and inspectors from 

our headquarters and various field offices to the New York City Disaster Field Office (DFO). Our mission was to (1) assist the Federal Coordinating Officer in reviewing and assessing procedures, practices, and controls in place throughout the operation; (2) identify and prevent fraud; and (3) assure FEMA’s Director that all possible actions to protect public welfare and to ensure the efficient, effective, and economic expenditure of federal funds were undertaken. One team of auditors and inspectors worked directly with the Federal Coordinating Officer and monitored setup and operation of the DFO. Another team of auditors worked with FEMA’s public 

assistance staff while a team of inspectors worked with FEMA’s individual assistance program staff.

INVESTIGATIVE ACTIVITIES 

We received allegations of fraud in a variety of ways. While the FEMA OIG fraud 

hotline was our primary source of information, FEMA’s disaster assistance program 

staff, the Manhattan District Attorney’s Office, and other federal, state, and local 

agencies provided information. 

Our investigators received over 1,100 complaints resulting in approximately 250 

investigations, the majority of these complaints were related to fraudulent applications for Mortgage and Rental Assistance, Disaster Unemployment Assistance, and 

individual assistance. We worked many of those investigations jointly with the Social Security Administration OIG, the New York Department of Investigations, and 

other law enforcement agencies. We arrested or indicted 117 individuals resulting 

in 96 convictions, 10 dismissals, 3 warrants, and 8 investigations pending final disposition. Further, the approximate aggregate dollar amount that can be attributed 

to our investigative activity is $940,000 in recoveries, $6.9 million in restitutions, 

$2 million in fines, and $8 million in cost savings to the federal government.

Individual Assistance 

Our investigative activities in response to the World Trade Center closely paralleled a profile we learned from responding to prior catastrophic disasters. We projected that the first investigations would involve false claims for individual assistance, which included the Mortgage and Rental Assistance, Disaster Unemployment 
32

Assistance, Individual and Family Grants programs, and other associated programs 

to assist individuals affected by the disaster. 

During our initial meeting with representatives of both the U.S. Attorney in the 

Eastern and Southern Districts, it was mutually agreed that the Manhattan District 

Attorney’s Office would prosecute the smaller individual assistance cases while the 

U.S. Attorney’s offices would pursue debris removal cases. 

Examples of the individual assistance cases accepted by the Manhattan District 

Attorney’s Office were: 

• Claims for damage to residences owned by others 

• Claims for damage to a residence where no damage occurred 

• Claims for pre-existing damage 

• Claims for mortgage and rental assistance 

• Claims in the names of decedents 

• Renters filing claims purporting to be landlords

Mortgage and Rental Assistance Program 

The Mortgage and Rental Assistance (MRA) program was designed to cover rent 

or mortgage payments for victims who suffer financial hardship as a result of a 

major disaster. Victims who were unable to pay their rent or mortgage and received 

written notice of eviction or foreclosure may have been eligible for MRA grants. 

One example of an MRA-related investigation involved a person who was temporarily employed by FEMA at the Applicant Assistance Center in Manhattan. The 

employee participated in a scheme to defraud FEMA by filing false claims under the 

MRA program. To further the scheme, he and seven others obtained, or helped to 

obtain, over $1 million in MRA grants based upon applications that contained fake 

phone bills and bogus driver’s licenses, which were intended to prove residency at 

a particular location, or identified residential addresses that were actually commercial mail receiving facilities. Additionally, these individuals enlisted accomplices to 

create false documents, submit false claims, vouch for information provided to 

FEMA, and to receive grant payments. In April 2006, with the cooperation of the 

Secret Service and the Postal Inspection Service, six were arrested and charged in 

the Eastern District of New York, in a 52-count indictment to include false claims, 

conspiracy, mail fraud, wire fraud, and making false statements. Two of the individuals pleaded guilty, one remains a fugitive, and prosecution is pending on the remaining four defendants. 

Other examples of related investigations include two individuals who claimed 

damage to their personal property items from debris and smoke filled air in their 

apartment, which was located 35 blocks from the World Trade Center site. Each received $10,000 in grants from FEMA. Another individual claimed her estranged 

husband was a window washer at the World Trade Center and died in the attack. 

She received $3,200 in rental assistance before we determined the husband was 

alive and living on Long Island. All of these individuals were successfully prosecuted. 

Individual and Family Grants Program 

The Individual and Family Grants (IFG) program was designed to meet the disaster-related necessary expenses or serious needs of disaster victims which could not 

be met through other provisions of the Stafford Act; or, through other means, such 

as insurance; other federal assistance; or voluntary agency programs. Eligible expenses may include those for real and personal property, medical and dental expenses, funeral expenses, transportation needs, and other expenses specifically requested by the state. 

On October 18, 2001, air purifiers, air filters, and vacuum cleaners with high efficiency particulate air filters were added to the list of IFG eligible items. On March 

22, 2002, FEMA and the state decided to add window air conditioners as an IFG 

eligible item. Eligibility was dependent upon applicants having owned a window air 

conditioner that was damaged during the event. Traditionally, during a home inspection inspectors would verify damage before recommending the repair or replacement of an eligible item. 

However, when air conditioners were added as an IFG eligible property item, 

home inspections had been completed. FEMA then decided that it would not be cost 

effective to have inspectors verify damage of a single property item. Instead, the 

state implemented a self-certification process. Further, on May 1, 2002, FEMA and 

the state authorized advance payments to applicants who were financially unable 

to purchase air quality items. Rather than requiring receipts for such items prior 

to grant approval (which was traditionally required) or an ability to document financial need, applicants were permitted to certify that they were unable to pay for the 

items and were asked to provide receipts after purchase. 
33

On February 20, 2003, the Associated Press reported that people who did not suffer from the effects of contaminated air filed 90 percent of the applications for reimbursement of IFG eligible air quality items. The source of that figure was FEMA’s 

World Trade Center disaster recovery manager. The manager’s estimate was based 

on an assumption that, of the 225,000 applicants for air quality items, only the 

25,000 applicants that lived in Manhattan and who were eligible to participate in 

an Environmental Protection Agency home cleaning program, suffered from contaminated air. Consequently, the manager concluded that 90 percent of the applications submitted were from individuals who had not suffered from the effects of contaminated air. 

We determined there was no indication that eligible applicants did not receive assistance. However, because FEMA and state management and control over IFG eligible air quality items was reduced, many applicants received assistance for which 

they may not have been eligible, which increased opportunities for fraud and abuse. 

In response to these concerns, and at our urging, FEMA implemented a sampling 

program to verify applicant eligibility and to identify abusers. FEMA selected two 

random samples: one of applicants who repaired or replaced air conditioners, and 

one of applicants who received advances for air quality items. Although the samples 

were not designed to be statistically valid, the results suggest that a large number 

of applicants were not suffering from the effects of contaminated air. 

In January 2003, FEMA selected a sample of 4,435 people who applied for assistance to buy window air conditioners and visited their homes to verify that they had 

window air conditioners before the disaster occurred. FEMA representatives inspected damaged air conditioners or, when damaged air conditioners had been disposed of, inspected indentations left in windows by the air conditioners. The home 

inspections identified 1,704 applicants who had evidence of the prior existence of a 

window air conditioner, and 2,731 applicants, or 62%, who did not and therefore 

were probably ineligible for assistance. 

The second sample of 5,602 applications was selected in March 2003 to verify the proper use of $5.8 million in advances for air quality items. Applicants who received 

advances were required to submit receipts to the state within 30 days after receiving the funds, but FEMA said that none of the applicants included in the sample 

complied with this requirement. As of July 22, 2003, FEMA had completed 5,029 

home inspections and determined that 3,347 applicants had purchased the air quality items. FEMA referred the 1,682 applicants, or 33%, who had not purchased the 

air quality items to the state for collection. 

These findings and conclusions were discussed with Manhattan District Attorney’s 

Office prosecutors who expressed concern proving criminal intent. The prosecutors 

felt it would be their burden to prove that a subject’s intended purpose was to defraud FEMA, yet the prosecutors were not certain they could satisfy that element. 

While prosecutors did state that they would be willing to review such cases, unless 

our investigators had solid proof of intent, prosecutors would be more likely to decline prosecution. Also, prosecutors expressed concern over the low dollar amount—

about $1,200—of each potential case and over the administration of the program, 

which allowed applicants to receive funds and purchase items with no stated purchase deadline. 

The Assistant U.S. Attorneys expressed similar concerns. Specifically, the lack of 

program criteria allowing applicants to receive funds and purchase items with no 

stated purchase deadline, and the low dollar amount, made the cases very unattractive. An additional issue for the U.S. Attorney was the appearance of selective prosecution for which a logical defense would be why is the government prosecuting certain individuals when it chose not to prosecute all 200,000 of the potential fraudulent claims. 

We reviewed many allegations and referrals concerning this matter and determined, from a historical and reasonable approach, that with few exceptions, the allegations and referrals did not appear to have a great deal of prosecutorial merit. 

However, both federal and state prosecutors stated that if the case involved false 

documents, they would be more likely to prosecute those subjects. We conducted 12 

investigations, the subjects of which were prosecuted by the Manhattan District Attorney’s Office. Two individuals filed claims to obtain filters for their window air 

conditioners when in fact the high-rise building where they resided had central air 

conditioning. Another 10 individuals, when confronted by our investigators, confessed to submitting false invoices to support their claims for IFG assistance. Last, 

we investigated complaints against 16 air quality products companies for using unethical sales tactics and referred them to the New York State Attorney General’s 

office. 

Nevertheless, we did have success, in our opinion, mitigating some of the fraud. 

As a result of FEMA’s intensive efforts to educate the public as to the true intent 
34

of the IFG Program and its aggressive home inspection sampling initiative, coupled 

with our investigative initiatives, which received considerable media coverage, more 

than 100,00 of the original 229,000 applicants voluntarily chose to withdraw from 

the program. They either returned or did not accept their grant award. Given that 

the average IFG award was about $1,200, these actions helped FEMA save more 

than $120 million.

Public Assistance 

Public assistance investigations, the majority of which deal with debris removal 

and generally involve primary contractors and subcontractors, are more complex 

and take longer to complete than the individual assistance investigations. Examples 

of public assistance cases the U.S. Attorneys agreed to prosecute dealt with the removal and disposal of disaster related debris. We have long recognized that the nature of debris removal operations make it an area where unscrupulous individuals 

and firms could potentially use a disaster for personal gain. With our years of experience, we have seen contractors engaged in: 

• Submitting false debris removal invoices 

• Artificially increasing tonnage hauled 

• Inflating the number of employees 

• Falsifying labor and material costs 

• Bribery, bid-rigging, and kickbacks 

Working jointly with the Internal Revenue Service’s Criminal Investigations Division and the Postal Inspections Service, we investigated the president and owner 

of a disaster recovery and clean-up company. This individual and others were convicted in U.S. District Court of engaging in a fraud scheme to enrich themselves by 

taking advantage of federal disaster relief funds in New York and two other states. 

Specifically, the contractor was hired to provide monitoring and maintenance services at the Fresh Kills Landfill on Staten Island. The contractor misrepresented the 

hourly rates it was paying employees, and submitted false invoices for employee 

lodging and per diem. 

In another investigation, two contractors working for a trucking company were 

successfully prosecuted. All contractors are required to have a valid New York City 

permit to do business in the city. We received information that this trucking company submitted an application to remove debris and provided false information as 

to the owner of the company. Working jointly with the New York Department of Investigations, we participated in the execution of a New York State search warrant 

at two of its places of business, which produced documentation as to the true owner 

and manager of the company. One individual was arrested for submitting false documents to the City of New York for a work permit license. A second individual was 

arrested for making false statements in a deposition as to the ownership of the company. Both were convicted on multiple counts of perjury.

GENERAL MANAGEMENT OVERSIGHT ACTIVITIES 

As I briefly mentioned, our auditors and inspectors worked in direct support of 

the Federal Coordinating Officer responding to specific requests and addressing 

matters that independently came to our attention. Some of the tasks we performed 

at the Disaster Field Office related to accounting and auditing, but some were as 

varied as tracking down missing copy machines. We worked closely with a team of 

FEMA comptrollers and Office of General Counsel representatives, helping them 

with a wide assortment of financial matters. Further, we worked with other federal 

agencies, as well as with state and city organizations and voluntary agencies. Our 

support included establishing a partnership with program staff to identify and suggest courses of action regarding potential and emerging issues with duplication of 

benefits, donations management, accountable property, program limitations and administration, DFO training, and safety and security.

Public Assistance 

We responded to the World Trade Center attack as a partner with FEMA’s response and recovery components. We deployed a team of auditors to monitor public 

assistance operations and assist in reviewing requests for assistance. The team 

maintained a presence for more than 18 months after the attack, working with 

FEMA public assistance staff to ensure that recovery efforts were on track and complied with federal laws and regulations. 

Our efforts were far from the traditional role of the OIG as this was an extremely 

unique situation. We were able to contribute significantly to the effectiveness of 

FEMA’s response by providing proactive oversight rather than reactive hindsight. 

Early in the process we briefed applicants on how to qualify for FEMA assistance 

and maintain records, and we reviewed accounting systems of some of the local governments to ensure they were adequate for collecting necessary cost data. 
35

We reviewed requests for funding and the detailed worksheets for proposed 

projects and met with public assistance program staff on a regular basis to provide 

them technical assistance on allowable costs. At FEMA’s request, we reviewed questionable bills submitted by applicants for payment and FEMA’s implementation of 

its policy on heightened security eligibility. 

We did not conduct any traditional compliance audits of public assistance grants, 

nor did we audit any costs incurred under the Consolidated Appropriations Resolution Act of 2003, which provided that costs not eligible for public assistance funding, 

referred to as associated expenses, would be funded with the remainder of the $8.8 

billion of authorized FEMA funding. FEMA estimated that $7.6 billion would be required for Stafford Act purposes and $1.2 billion would be used for associated expenses. Associated expenses include such costs as local government employee salaries, heightened security costs, and the ‘‘I Love NY’’ campaign, which encouraged 

tourism and visitors to the state.

Individual Assistance 

In response to congressional inquiries, we reviewed the delivery of individual assistance in New York after September 11, 2001. The review focused on issues that 

needed to be addressed by both FEMA and Congress as they considered regulatory 

and legislative changes to improve FEMA’s delivery of assistance to victims of future terrorist attacks that result in presidential disaster declarations. The following 

is a summary of some of the issues raised during our review, FEMA’s Delivery of 

Individual Assistance Programs: New York—September 11, 2001 (December 2002).

Eligibility Issues in the Mortgage and Rental Assistance Program 

FEMA has not implemented the MRA program on a large scale because previous 

disasters did not coincide with nor result in widespread unemployment or national 

economic losses. From the inception of the MRA program until September 11, 2001, 

only $18.1 million had been awarded in 68 declared disasters, compared to approximately $76 million awarded in response to the New York World Trade Center disaster alone. Because the program was seldom used, Congress eliminated it when the 

Disaster Mitigation Act of 2000 (DMA) was enacted, making the program unavailable for disasters declared after October 14, 2002. 

FEMA had to face the challenge of implementing this program in a disaster that 

caused significant economic consequences, including not only the obvious economic 

impact of the incident itself but also the indirect economic effects felt throughout 

the nation. The language of the Stafford Act’s MRA authority established, as a criterion for assistance, a written notice of dispossession or eviction. The law was silent, however, on what constitutes a financial hardship. This omission required 

FEMA to interpret to what extent a personal financial loss constitutes a financial 

hardship, and to determine whether that hardship resulted directly from the primary effects of the attack or from the secondary effects on the nation. 

The MRA program’s limited use, the broad economic impact of this unprecedented 

event, and FEMA’s challenge to differentiate between primary and secondary economic effects contributed to difficulties in delivering timely and effective assistance. 

The MRA program was unique because it addressed limited, individual economic 

losses versus physical damage resulting from a disaster. Traditional inspection of 

damages as a basis for program eligibility determinations, therefore, did not apply 

to MRA. Individual financial hardships caused by the disaster were evaluated on 

a case-by-case basis. FEMA attempted to clarify eligibility criteria that required a 

clear link between physical damage to the business or industry caused by the disaster and an applicant’s loss of household income, work, or employment regardless 

of geographic location.

State Capability to Implement the Individual and Family Grants Program 

Applications for IFG assistance rose sharply in June 2002, as applicants requested 

assistance for air quality items. FEMA believed the increase in new applications coincided with public announcements being made by the Environmental Protection 

Agency (EPA) regarding the poor air quality in the city and the need for air-conditioning and related items because of the unusually warm spring and early summer. 

The state believed the surge in new applications coincided with the closing of assistance from many nonprofit organizations. FEMA received an average of 7,660 applications per month from June 2002 to August 2002 for air quality items. Applications 

for IFG assistance typically do not spike at this point in the recovery phase of a 

disaster. 

The unanticipated increase in applications received after June 2002 also may 

have been related to two other decisions regarding assistance for air quality items. 

First, assistance was made available to all households in the five boroughs of New 

York City. The broad geographic eligibility was not related to the areas of actual 
36

impact. A better model might have been to limit eligibility to the same areas identified by the EPA and the New York City Department of Health for purposes of the 

apartment cleaning and testing program. Had the IFG program and the EPA testing 

and cleaning program worked more closely in terms of geographic eligibility, the 

IFG program would have had reasonable and justifiable boundaries. Second, as a 

result of concerns expressed by certain advocacy groups, applicants were allowed to 

certify that they were unable to pay for the air quality items (costing as much as 

$1,600). Funding was advanced to those applicants and they were requested to provide receipts after purchase. There were few limitations placed upon who could 

qualify for this ‘‘unable to pay’’ option. As I have previously noted, this may have 

increased the likelihood of fraud and abuse.

Interagency Coordination Challenges 

I cannot stress enough the need for interagency data sharing and coordination to 

improve disaster response, recovery, and oversight. After 9/11, responsibilities 

shared among FEMA, EPA, the U.S. Department of Justice’s (DOJ) Office for Victims of Crime, and voluntary agencies, for example, were not defined clearly enough 

to distinguish roles and establish the sequence of delivery of assistance. Recovery 

from the event highlighted the need for data sharing agreements regarding shared 

roles and responsibilities among key agencies likely to respond to future criminal 

actions.

Information Data Sharing 

Although progress has been made in this area since 9/11, much more needs to be 

done. Accordingly, I would like to again emphasize the need for interagency data 

sharing and coordination through three principal means: direct access to FEMA 

data, computer matching agreements, and real-time data exchange. 

Hurricane Katrina clearly demonstrated that law enforcement needs direct access 

to disaster victims’ personal information, not only to reconnect family members and 

locate missing persons, but also to convicted sex offenders who relocated as a result 

of the disaster. Hurricane Katrina left over 5,000 children missing and more than 

2,000 unaccounted for registered sex offenders. The process employed by FEMA to 

fulfill law enforcement agency requests for FEMA records under the Privacy Act is 

untimely. The FBI has indicated that these requests sometimes take days to fulfill. 

A similar protracted process was used for governors to request information from 

FEMA to obtain data on sex offenders who relocated to their state. The HHS believes, and we agree, that evacuated, registered sex offenders are a potential threat 

to children until appropriate law enforcement has information to identify and monitor these individuals. Timely access to FEMA data can assist law enforcement in 

protecting public safety and security, such as in the apprehension of fleeing felons. 

In support of these issues, FEMA published a notice in the Federal Register, on 

July 6, 2006, adding a new routine use to its Disaster Recovery Assistance system 

of records that allows for greater information sharing with federal agencies, state 

and local governments, or other authorized entities for the purposes of reunifying 

families, locating missing children, voting, and with law enforcement entities in the 

event of circumstances involving an evacuation, sheltering, or mass relocation, for 

purposes of identifying and addressing public safety and security issues. As FEMA 

noted, these routine uses are being added to resolve any ambiguities about FEMA’s 

authority to share information under these circumstances and to ensure that necessary information can be disseminated in an efficient and effective manner. This 

is a step in the right direction. 

Another advantageous means of data sharing involves computer matching. Computer matching agreements among federal agencies that provide disaster assistance 

are often necessary to detect fraud, waste, and abuse. Agencies such as the Social 

Security Administration and the Small Business Administration, for example, have 

expressed a high degree of interest in such agreements with FEMA. An agreement 

between FEMA and the Department of Housing and Urban Development was recently executed to identify individuals who are receiving excess or duplicate housing 

assistance relating to Hurricanes Katrina and Rita. Yet, to date, only the HUD computer matching agreement has been executed, eleven months after Katrina’s landfall. Without such agreements, the prospect for protecting the taxpayer’s dollars and 

prosecuting fraud is diminished. 

One more means of data sharing I would like to convey is the real-time exchange 

of information among federal agencies that provide disaster assistance. This exchange of information is necessary to verify identity and eligibility, as well as to create a holistic approach for the effective delivery of disaster assistance. According to 

FEMA’s Guide to Recovery Programs, the federal government has over 90 disaster 

assistance programs. Real-time data sharing agreements are necessary to prevent 

the duplication of federal disaster assistance and to ensure that disaster victims re-
37

ceive the full compliment of disaster assistance needed for a timely and effective recovery. Currently, FEMA has a contract with the commercial data reseller 

ChoicePoint to authenticate the identity of disaster assistance applicants. Since 

Hurricane Katrina, approximately $4.3 million has been expended for their authentication services. Furthermore, it is our understanding that FEMA has extended 

this contract with ChoicePoint through June 2007. However, interagency data sharing agreements between federal agencies that provide disaster assistance would 

lessen the government’s reliance upon commercial data resellers such as 

ChoicePoint for identity authentication. For example, data sharing agreements between FEMA and the Social Security Administration and the Postal Service can 

verify the name, social security numbers, and address of an individual applying for 

disaster assistance. These agreements will result in greater intergovernmental collaboration in the delivery of disaster assistance, which corresponds with the intent 

of the National Response Plan and FEMA’s Strategic Plan Fiscal Years 2003–2008,

which charges FEMA to serve as the nation’s knowledge manager and coordinator 

of emergency management information. 

I would like to note that we have an ongoing review of how FEMA’s data sharing 

processes and procedures can be enhanced to promote effective and efficient disaster 

response, recovery, and oversight. We look forward to sharing our findings of this 

review with you when it is complete. The following are examples where interagency 

data sharing and coordination after the 9/11 terrorist attacks could have been approved.

Response to Residential Air Quality, Testing, and Cleaning Requires More Coordination 

EPA was aware, based on its work in the aftermath of the 1993 World Trade Center terrorist bombing, that the World Trade Center complex contained asbestos material. Neither FEMA nor New York City officials, however, initially requested that 

EPA test or clean inside buildings because neither EPA nor the New York City Department of Environmental Protection could identify any specific health or safety 

threat. EPA nevertheless advised rescue workers early after the terrorist attack 

that materials from the collapsed buildings contained irritants, and advised residents and building owners to use professional asbestos abatement contractors to 

clean significantly affected spaces. Directions on how to clean the exterior of buildings affected by dust and debris were provided to building owners by the New York 

City Department of Environmental Protection, and directions on how to clean interior spaces were provided by the New York City Department of Health. 

Neither FEMA nor EPA traditionally had been involved in testing and cleaning 

private residences. Neither agency is specifically authorized to provide such services. 

However, when a potential health and safety threat was identified and New York 

officials documented that interior testing and cleaning would beneficially impact the 

City’s economic recovery, FEMA used its debris removal authorities under the Stafford Act to provide the necessary funding. 

However, the program to test and clean residences in lower Manhattan did not 

commence until months after the disaster. Although FEMA has the responsibility 

to coordinate recovery from declared disasters, FEMA must depend on the particular expertise of the EPA in circumstances involving possible air contaminants 

or environmental hazards. EPA must confirm that such hazards constitute a public 

health and safety threat before FEMA can provide funding for emergency response. 

We suggested that FEMA be more proactive in requesting EPA to conduct necessary 

testing and/or studies to determine if a public health or safety threat exists in future, similar disasters so that cleaning efforts could begin much earlier in the recovery phase. FEMA also should address the roles of state and local agencies in such 

circumstances, as consultation with those agencies would provide useful information 

in review or evaluation.

Department of Justice Authorities Compliment FEMA Authorities 

Because the World Trade Center complex and Pentagon were declared disasters 

by the President resulting from criminal actions, both FEMA and DOJ’s Office for 

Victims of Crime had authority to provide victim assistance. FEMA’s Crisis Counseling Assistance and Training Program (CCP) providers found it necessary to offer 

support services that went beyond the normal levels of CCP mental health programs. Further, too many entities were involved at the outset to ensure coordination 

and avoid potential confusion of services provided to victims. 

The event uncovered potential DOJ–FEMA overlaps in some programs covering 

disasters that are also crime scenes. FEMA’s CCP program funds crisis counseling 

and the IFG program reimbursed victims of disasters for medical, dental, and funeral expenses. The Victims of Crime Act of 1984, as amended (42 United States 

Code § 10603), authorizes DOJ’s Office for Victims of Crime to provide financial as-
38

sistance to victims of federal crimes and of terrorism and mass violence in the form 

of (1) grants to state crime victim compensation programs to supplement state funding for reimbursement of the same out-of-pocket expenses, including mental health 

counseling; and, (2) grants to state victim assistance agencies in support of direct 

victim services such as, crisis counseling, criminal justice advocacy, shelter, and 

other emergency assistance services. Because the event was both a disaster and a 

criminal act, programs of DOJ’s office for Victims of Crime were also applicable. As 

a result, expenses medical, dental, and funeral expenses were covered by DOJ. 

FEMA, the Office for Victims of Crime, and DOJ’s Executive Office for United 

States Attorneys subscribed to a Letter of Intent to ensure that victims received 

needed services and information and to articulate services needed in responding to 

catastrophic federal crime. The Letter of Intent should serve as the foundation for 

future cooperative activities but more detailed and comprehensive guidance is necessary to ensure that services delivered to disaster victims who are also victims of 

crime are appropriate, consistent, and not duplicative. Those objectives could be accomplished through a Memorandum of Understanding between FEMA and DOJ’s 

Office for Victims of Crime that formalizes the relationship, the responsibilities and 

authorities to be applied, programs, time frames, and sequencing when a disaster 

is also a crime scene.

Coordination with Voluntary Agencies 

Voluntary Agencies (VOLAGS) typically provide immediate emergency assistance 

to victims, while FEMA addresses short and long-term recovery needs. Near the end 

of the recovery cycle, VOLAGS address victims’ unmet needs. After the September 

11, 2001 attacks, individuals donated time, resources, and money in record volumes 

to a large number of VOLAGS. The overwhelming generosity and rapid influx of 

cash donations likely contributed to the ability of VOLAGS and other groups to provide higher levels of assistance. Since so many VOLAGS, ad hoc organizations, and 

other entities not traditionally in the sequence of delivery were distributing assistance, it was difficult to collect accurate information necessary to understand the 

scope of assistance being provided. FEMA, attempting to bring order to the chaos 

created by the multitude of voluntary organizations, developed a matrix of various 

government and non-government entities. At one point, this matrix included over 

100 organizations and was used to identify their contributions to disaster recovery 

efforts and the types of assistance provided. FEMA validated the information and 

became familiar with the kinds of assistance being offered so that staff could make 

informed referrals. In spite of those efforts, FEMA was not able to assure that all 

voluntary agencies were coordinated appropriately to ensure that benefits were not 

duplicated among disaster programs, insurance benefits, and any other type of disaster assistance. 

Historically, FEMA has not considered the assistance of voluntary agencies to be 

duplicative of its assistance in most declared disasters. In response to this event, 

however, VOLAGS far exceeded their traditional role in the provision of assistance. 

FEMA, to ensure timely assistance to victims, decided to activate its own individual 

assistance program and to treat VOLAG and other non-governmental assistance as 

non-duplicative. Had FEMA expended the resources necessary to fully identify and 

quantify such assistance, the timely provision of urgently needed assistance would 

have been delayed. FEMA acknowledges, however, that some people may have received assistance for similar losses from more than one source. 

Regardless of FEMA’s decision not to identify and quantify voluntary agency assistance on a case-by case basis, the potential that duplication occurred did exist although the nature and amount of duplication remains unknown. FEMA needs to be 

better able to anticipate the proactive role non-governmental organizations will play 

in disaster recovery operations and attempt to coordinate relationships with those 

organizations through protocols such as Memorandums of Understanding to alleviate the potential for duplicating benefits. 

Improvements have been made since the 9/11 attacks. The Coordinated Assistance 

Network was established through a memorandum of understanding in 2003 and was 

first piloted during the 2004 hurricane season in Florida. The following organizations signed this document: American Red Cross, Salvation Army, Alliance of Information and Referral systems, United Way of America, United Services Group, National Voluntary Organizations Active in Disaster, and Safe Horizon. The goal of the 

Coordinated Assistance Network is to afford more efficient and effective service coordination among voluntary, as well as governmental, agencies during disaster 

events. It was designed as a communication mechanism for services providers and 

to identify any gaps or redundancies in services. The network allowed registered organizations to access information on available services and to share information on 

the levels of services delivered to individuals, families, or households. It also allowed 
39

disaster victims to explain their needs and register only once, as registration afforded disaster victims a registration with all service providers on the network. In 

response to the 2005 hurricanes in the Gulf Coast region, five organizations were 

using the network and 81,817 clients records were in the system as of September 

30, 2005. 

Mr. Chairman, this concludes my prepared remarks. I would be happy to answer 

any questions that you or the Subcommittee may have.

Mr. ROGERS. The Chair now recognizes Mr. Greg Kutz, Director 

of Financial Management and Assurance, U.S. Government Accountability Office. The floor is yours. 

STATEMENT OF GREG KUTZ 

Mr. KUTZ. Mr. Chairman, members of the subcommittee, and 

Chairman King, thank you for the opportunity to discuss fraud prevention in times of disaster. In June I testified on the massive level 

of fraud related to Hurricanes Katrina and Rita which raised questions about the integrity of disaster assistance programs. Today I 

will discuss how an effective fraud prevention program can provide 

Congress and the American taxpayers with confidence that fraud, 

waste and abuse will be minimized for future disasters. 

My testimony has two parts: first, fraud prevention; and second, 

fraud detection and investigations. My testimony relates to Katrina 

and Rita, but I do echo many of the comments of Mr. Skinner as 

it relates to September 11. 

First, our work across the government has shown that fraud prevention is the most efficient and effective means to minimize fraud, 

waste and abuse for any government program. Our testimony before the Investigative Subcommittee in June highlighted the consequences of the lack of an effective fraud prevention program for 

Katrina and Rita. Specifically, through February of 2006, we estimated $1 billion, or 16 percent, of individual assistance payments 

were fraudulent or improper. 

Fraud prevention processes and controls happen before taxpayer 

money is disbursed. For individual assistance, examples include 

validation of eligibility, fraud awareness training, system edit 

checks and inspections. The key here is fraud prevention. Once 

money is improperly disbursed, the government can only hope to 

collect a few pennies on the dollar. 

Fraud prevention for disaster assistance programs starts with 

validation of eligibility. For Katrina and Rita we reported that individual identities and property addresses were not validated up 

front. This allowed thousands of individuals to register using invalid Social Security numbers and bogus damaged property addresses. For future disasters, it is critical that eligibility data such 

as names, Social Security numbers, and primary addresses be validated up front. 

Prior to implementing any new controls and well in advance of 

any disaster, new controls must be field tested. Why? To ensure 

that they are operating as intended and that legitimate victims are 

not denied benefits. As fraud prevention controls increase, the risk 

increases that legitimate victims will be rejected. Thus, a safety net 

must be in place to quickly handle exception cases. 

Moving onto my second point. Although costly and less effective 

than fraud prevention, fraud detection monitoring and investigations are also critical. Key elements of the detection process include 
40

data mining for fraud and the establishment of fraud hotlines. Another key element of fraud prevention is the aggressive investigation and prosecution of individuals who commit fraud. Prosecuting 

those that commit fraud sends a message that stealing money from 

the government will not be tolerated for disasters. A well-publicized 

and effective prosecution strategy should serve as a preventive 

measure for future disasters. 

The Hurricane Katrina Fraud Task Force has investigated and 

indicted several hundred individuals to date. Schemes identified 

through fraud detection, investigations and prosecution should be 

fed back into the fraud prevention program for future disasters. 

In conclusion, our work has shown that there is no shortage of 

morally bankrupt individuals who will steal money from the Federal Government in times of disaster. For Katrina and Rita, it appears that at least tens of thousands of individuals took advantage 

of the opportunity to commit fraud. The government must learn 

from these costly lessons and make fraud prevention a high priority for future disasters. 

Mr. Chairman, this ends my statement. I look forward to your 

questions. 

Mr. ROGERS. Thank you, Mr. Kutz. 

[The statement of Mr. Kutz follows:]
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Mr. ROGERS. Before we start our questions, I would like to ask 

unanimous consent that the statement from the Honorable Michael 

J. Garcia, United States Attorney for the Southern District of New 

York, be included for the record. Without objection, it is so ordered. 

[The information follows:]

FOR THE RECORD

SUBMITTED BY HON. MIKE ROGERS

PREPARED STATEMENT OF THE HONORABLE MICHAEL J. GARCIA, UNITED STATES

ATTORNEY FOR THE SOUTHERN DISTRICT OF NEW YORK

PRESENTED ON JULY 12, 2006, 

I appreciate this opportunity advise the Subcommittee on the work of the United 

States Attorney’s Office for the Southern District of New York in combating fraud 

in 9/11 relief programs. We have found this review of our response to 9/11 relief 

fraud to be useful and hope that the Subcommittee finds our information helpful.

Introduction and Summary. 

United States Attorneys Office combat fraud in government programs in three 

principal ways: through criminal prosecution, which may result in fines, sentences 

of imprisonment, and orders of restitution; through civil actions seeking recovery of 

funds (up to treble damages under the False Claims Act) and, in some instances, 

civil penalties; and through a combination of criminal and civil actions. Our response to 9/11 relief fraud included enforcement actions of all three types. 

The timing of our initial response to 9/11 fraud was, inevitably, affected by our 

response to, and the dislocations to our Office occasioned by, the attack itself. Specifically, our Civil Division was physically dislocated by the attack and, after sharing office space with the Eastern District of New York for two months, was related, 

on an interim basis, in leased space in approximately November 2001. In addition, 

the Civil Division’s files remained in its old quarters, and special procedures, including physical decontamination, were required to access them. Our main office in 

Manhattan, which houses our executive staff and criminal division, was a few blocks 

further away from Ground Zero and was closed for approximately one week. Our 

supporting the criminal investigation of the attacks. Our civil efforts were also directed toward responding to terror events—specifically, numerous issues arising 

from the presence of anthrax in various Post Offices. 

In approximately February 2002 this Office initiated formation of a Trade Center 

Fraud Working Group. This Group included representatives of pertinent federal, 

state and local agencies and helped make clear the utility and importance of federal 

investigation and prosecution of fraud stemming from 9/11 relief programs. At that 

time, the United States Attorney’s Office also made clear that, in addition to its traditional role of investigating and prosecuting the larger and more complex federal 

crimes, it would accept for prosecution essentially any 9/11 fraud case. (We thereafter declined only cases involving false claims for individual air conditioner/air purifier reimbursement—which, because of their large volume (potentially thousands 

of defendants) and relatively small amounts at issue (losses in the hundreds of dollars per case, generally), we believed would constitute an inefficient use of both federal enforcement and judicial resources—and cases with insufficient evidence.) This 

Working Group met on a number of occasions, until its members became familiar 

with the contacts and resources at the United States Attorney’s Office and the different agencies and good working relationship for the investigation and referral of 

cases developed. As a result of this outreach, agencies began developing cases for 

federal prosecution. In addition, we advised on forms to be used by agencies that 

were disbursing grants and loans, and discussed methods for such agencies to share 

information. It should also be noted that, in addition to federal prosecution, the New 

York County (Manhattan) District Attorney’s Office had also been agressively prosecuting a large number of 9/11 fraud cases that had been brought to its attention. 

While, as a general matter, we believe federal enforcement is better suited to federal 

program fraud cases of any size or complexity, state prosecutors have concurrent jurisdiction over most frauds and the Manhattan District Attorney’s Office played a 

very important role in criminal 9/11 fraud enforcement. 

Our records reflect that we opened a total of 64 investigations and cases, both 

civil and criminal, involving 9/11 fraud. Not every investigation has resulted in the 

filing of a complaint or charges on the public record, and we cannot provide any in-
59

formation concerning any matter that is not on the public record. As to matters on 

the public record, criminal charges relating to 9/11 have been brought against a 

total of approximately 35 defendants in 29 separate cases filed in district court. In 

addition, civil enforcement proceedings were brought against two individuals, including one who was also charged criminally. Documents from the public record 

which contain the specifics of those cases have already been provided to the Committee staff. 

Of the defendants criminally charged, 25 cases were resolved by guilty plea; 3 resulted in guilty verdicts after trial; and the cases of 7 defendants remain pending. 

Of those found guilty, 11 received non-custodial sentences of probation or time 

served; 5 received sentences of two to six months, including one sentence of six 

months’ home confinement; 10 received sentences ranging from eighteen to ninetyseven months; and two have not yet been sentenced. Both civil cases were resolved 

by stipulations and orders of settlement in favor of the United States, in the respective amounts of $36,000 and $300,000. 

AS a general matter, our review of these cases does not reveal any particular 

‘‘pattern’’ which might help guide the response to future disaster recovery programs. 

Instead, to the extent the number of cases our Office handled provides any basis 

to generalize, we not that in the area of disaster relief programs, as with any federal 

funding program, we will expect to see a certain number of fraudulent applications 

for or misuses of funds. It may be pertinent to not that, as our evaluated as unsuited to effective and efficient criminal law enforcement or to civil enforcement by 

the U.S. Attorney’s Office, and may be more efficiently handled through administrative proceedings brought by the affected agency. And certainly the amount of fraud, 

and ease with which fraud may subsequently be proven, will depend on the amount 

of information and documentation the claimant is asked to provide at the application stage.

Mr. ROGERS. I would like to start the questions, and I would also 

point out that the Ranking Member and I have agreed to one round 

of questions for this panel since we have another panel waiting. 

Mr. Kutz, talking about prevention, I think you are right; I think 

that is the way to try to have a lesson learned that is useful. But 

when you hear Mr. Skinner’s remarks earlier about the analysis 

made with prosecutors in New York about whether to prosecute 

some of these illegalities—people ripping off the system for air conditioners, vacuum cleaners, whatever—the prosecutors say it is not 

worth pursuing. How does that help us send a signal to future potential thieves that you shouldn’t do this? 

Mr. KUTZ. Well, certainly if you are going to invest money, investing in the prevention is better than the prosecution. 

Mr. ROGERS. Isn’t letting these people know that they are going 

to be prosecuted and put in jail a means of prevention? 

Mr. KUTZ. And I was going to say that. However, once you are 

where you are with respect to having fraud out there and you identify individuals, I believe that aggressive prosecution of them does 

send a message back, especially if it is well publicized. It needs to 

be well publicized so people hear about it and maybe they will 

think twice. I think it is the criminals that are on the border. The 

career criminals might not make much difference, but the criminals 

on the border, I think it is going to make a difference. 

Mr. ROGERS. Mr. Skinner, I know that some people were sent to 

jail for several years. We had several millions of dollars recovered 

through fines and penalties. But it is disturbing to hear that prosecutors were unwilling to pursue many of these violations that you 

referenced in your opening statement. What can we do to remedy 

that for future situations like New York and like Katrina and Rita? 

Mr. SKINNER. For one thing, we can do a better job in administering our programs. Part of the problem, the prosecutors, both 

the State and local attorneys, dealt with what they considered neb-
60

ulous guidelines and what they also viewed as somewhat confusing 

or conflicting instructions that took place over a 9-month period of 

time. 

If we had very clear guidelines, if we were better prepared, and, 

in this case, what we were talking about essentially was not public 

corruption, not debris removal, not major schemes; what we were 

talking about was these individuals in the five boroughs that were 

buying air quality units and air conditioners. The cost was anywhere from $500 to $1,600. The program was administered months 

after the incident. I believe it was 9 months after 9/11 when there 

was an increase in disaster applications. It was late in June, I believe, 2002 that we received over 2,000 to 3,000 applications because of what the prosecutors believed was just somewhat vague—

although they may not have been, they certainly had the appearance or could be interpreted to be vague or conflicting guidelines. 

If we had better coordination with EPA early on, defined the requirements and made an announcement as to these are the rules 

which you will play by early on, which means interagency coordination, interagency cooperation early on in the disaster—it should 

have been before, not during the disaster, that these understandings and these arrangements have been made—we may have 

had less applications coming in that could have been fraudulent. 

But when you get—what we are talking about is 200,000 applications that had the potential of being fraudulent, and that is just 

overwhelming. 

Mr. ROGERS. Let me ask Mr. Picciano. 

Mr. KING. Picciano. 

Mr. ROGERS. I am working on it. 

Mr. KING. You have to be from New York. 

Mr. ROGERS. You have heard the news. The New York Daily 

News series it was really upsetting to hear about the things money 

was used for like these air purifiers, but also vacuum cleaners for 

anywhere in these five boroughs. We hear about that and the need 

for guidelines, yet between September 11, 2001, and Katrina last 

fall, apparently FEMA still didn’t develop these kind of guidelines 

you just heard Mr. Skinner referencing. Why? 

Mr. PICCIANO. I think—let me just go back, being involved in this 

business for 30 years, and I have been on almost every hurricane 

disaster we have had. In most cases, you know, the 99 percent rule 

occurs. In these two very significant events, our programs—and I 

have to be honest, you know, just weren’t sized up to handle these 

sort of events. 

Now, you look at the World Trade Center and the environmental 

issues that initiated the process and then what happened in 9 

months. We projected only 5,000 cases in the IFG program during 

that period. And it stayed level up until those environmental 

changes, things we have never encountered before, that changed 

how the State—and I have to reinforce—how the State managed its 

program and how we were going to deliver services to individuals 

who felt they needed it, and, as a matter of fact, requests from 

Congress to move forward and do that. 

So I have to absolutely agree with Mr. Skinner. We did change 

our standards within the Stafford Act regulations, but we did it to 

address an unusual circumstance. Hot weather, a change in what 
61

was really environmentally at issue, we had concerns not only with 

that, we had vendors that were acting inappropriately and using 

newspapers and the ability to advertise to sell this program. We 

were just confronted with an unusual situation. That program no 

longer exists. 

But in other ways, I mean, the program still is around in a new 

FEMA effort, and Katrina again pointed out that size and the type 

of events is going to require us to go back—and we are—to go back 

and reconstruct these programs to make them work. 

Mr. ROGERS. I thank the gentleman. My time has expired. The 

Chair now recognizes the Ranking Member for any questions he 

has. 

Mr. MEEK. Thank you, Mr. Chairman. I want to thank the witnesses for coming before the committee once again. I purposely 

wanted to yield to Mr. Pascrell, and I want to thank the Chairman 

and the entire committee for allowing Mrs. Lowey to come and sit 

with us and make a statement. 

Just like Mr. King, three Members have gone through the 9/11 

experience with their constituents being the victims, both directly 

and indirectly. Chairman Rogers, myself and Ranking Member 

Thompson, we are—we go through the issue of FEMA recovery, 

through natural disasters such as hurricanes and other events like 

tornadoes in our neck of the United States, but we could very well 

go through a similar thing as 9/11. It is the reason why we are 

here and the reason why we are having this hearing. 

And I want to thank not only the staff on the majority and minority side for all the work they have done, including those individuals that participated with us in looking into this effort. What we 

are talking about here, gentlemen, is what is going on right now 

as we speak on the ground in the Katrina-affected area about the 

wasteful spending. 

And you talk, Mr. Kutz, about prevention and I want to come 

back to that a little bit as it relates to the verification. Case in 

point: Congressional District 17 with hurricane Wilma, we had a 

number of individuals that applied for individual assistance for 

chain saws and for other generators, and found that individuals 

that really needed the assistance did not apply in the numbers of 

individuals who had Mercedes-Benzes and, you know, big cars and 

big houses and had the wherewithal to go out and buy these items. 

The States play a role in that because the States, like you mentioned before, authorize what is eligible, what is not eligible, in 

consultation with FEMA. The reason why we are here and the reason why I am here today, and our staff is paying attention, is that 

we need the recommendations, Mr. Skinner, that you put forward 

and other recommendations like it, because they are going to do 

what we allow them to do, and it is pulverizing to the system and 

to the people that work in it. 

Saying that, Mr. Skinner, you mentioned something about 

verification. Mr. Kutz said something about the pre-event, before 

the dollar goes out and we get pennies back on the dollar that we 

recover. The verification, you mentioned something as it relates to 

sharing information between Social Security agency, IRS, FEMA, 

to make sure that individual lives in the affected area and is a 
62

true—is eligible to be able to receive these dollars. How are we 

doing that now, and how can we improve that communications? 

Mr. SKINNER. Right now we are not doing that. I think FEMA—

and Joe may be able to answer this better than I, but I believe 

FEMA right now has a contract with ChoicePoint, and as applications come in, they may refer those applications and the information provided in those applications to ChoicePoint for verification; 

in other words, it went outside the government to do this. We do 

not now have arrangements with Social Security or the Postal 

Service or, for that matter IRS, as HUD has for its programs to 

validate that Social Security number is correct, that the address is 

correct, income as stated IS correct. I believe with the technology 

as it is today, we should be able to at the time—let’s put it this 

way. When an applicant calls in and makes application with 

FEMA, it takes approximately 20 minutes to accept that application. If we ask them at the beginning of that process for name, Social Security number, address and income, by the time we complete 

that application, we should have automatic feedback from those 

other governmental organizations validating that information: Yes, 

this person lives at that address, has this Social Security number 

and has filed returns. 

Mr. MEEK. Mr. Skinner, FEMA or GAO can chime in at any 

time. Well, I guess you wouldn’t know how much this ChoicePoint 

service costs, and can we do it in-house, verifying this, because this 

is information that can be verified. I know we use a lot of contractors in FEMA when it comes down to individual assistance. You 

can continue to elaborate, but I am trying to get down to how much 

would something like that cost, and I don’t think we need the legislative authorization to do that. That is a decision that was made 

at the Department, at FEMA; am I correct? 

Mr. PICCIANO. I can’t answer specifically. I can tell you, though, 

that in the registration process for us to handle it, we are talking 

about an event like Katrina, hundreds of thousands of applicants, 

and we use Reservists and other folks to pick up and assist us in 

contractual service. But, you know, to answer that question more 

specifically, we would have to go back and see what it would cost 

and how we could do it. 

Mr. MEEK. So we have no idea right now of what it would take 

for us to have that information, have people train in IDing, 

verifying identification, because this is a way the drill works. 

Here is a Congressman who has been there a couple of times. 

You all come down—if FEMA comes down, along with the State, 

as it relates to the response to the hurricane or whatever the event 

might have been—if it was 9/11, you mention in your testimony, 

and I read in your testimony seven Members of Congress commended you all for waiving and relaxing the rules because we have 

constituents in need, and government, as usual, is not at the point 

where it should be in response to the needs of many of the American disasters or people. 

And that is where the fog comes in because individuals that are 

there—and they should be punished, Mr. Kutz, I agree with you 

110 percent. As far as I am concerned, they should be in jail. I was 

eligible for a generator and my neighbor said, I am going to get a 

generator. Even though we were the last neighborhood to get 
63

turned on with electricity, I went to family homes because I didn’t 

want to be a part of the whole generator scenario. 

But the real issue here is making sure we are prepared for future events, and that is why I am excited about this hearing and 

excited about hearing some of the ideas. If we can do it in-house 

and sharing sensitive information—because, as you know, I am on 

the Armed Services along with the Chairman, it is a big debate 

going on with information of veterans getting out, very personal information getting out that can promote fraud. So if it doesn’t cost 

us a lot of money to have it in-house and to have our individuals 

that you all have to go out to, Reservists, firefighters—I have seen 

them—I mean these are people that just fall out of the sky. These 

are people that are trained and cleared by FEMA to go out and do 

these assistance assessments. Give them the tools they need 

through automation, they can type into some sort of computer and 

get this information, versus going out to a ChoicePoint or what 

have you for several million dollars, which I think it can be done 

in-house for a lot cheaper and can secure the information so that 

folks won’t start saying that we are selling off information to private vendors. 

But if it is something you can look into, you said at the top of 

your testimony—which I am giving you an out right now—if you 

don’t have the answer, you will get back to us, which I know you 

will, and hopefully you all can look in-house to see how that can 

be done; because I think, going to the testimony of your two colleagues there, in government of people of good will, I think that is 

something that I have seen that could possibly be something that 

can help us as we move on to future events. 

Mr. PICCIANO. Agreed. We will go back and see if we can get you 

an answer. And I will just add that, you know, time and size of 

events really makes a big difference. For example, when people do 

call up—you know, SBA is part of that process and there are other 

agencies involved in that. And what Mr. Skinner is suggesting is 

a much broader approach, ensuring that all those players are involved in that process for both preventing fraud—and also I think 

it is important, as you noted, to provide assistance to victims, because there are two ways to look at this. There is also identifying 

folks out there who need assistance that often fall through the 

gaps. 

So I can’t tell you if it can be done in-house or with a contractor, 

but we will get back to you. 

Mr. MEEK. Well, Mr. Chairman, in closing—and I thank you for 

the latitude because I want to respect the time—that we want to 

make sure before we get to the point to where this happens all over 

again, because as we speak here, it is happening right now. I know 

we have a lot of things on the ground dealing with Katrina, but it 

is happening right now. 

Case in point, Mr. Chairman: I was just watching CNN the other 

day in my office, and I noticed how they are starting to remove the 

cars in New Orleans. I was there about 3 weeks ago—and I used 

to be a State trooper—and I know when folks move these cars in 

these flatbed trucks, these big Semis, they stack three or four of 

them on top of each other; you have nine, ten cars. Mr. Chairman, 

I saw just in my office on a phone, a vision with a truck pulling 
64

off with three cars stacked on the bottom, and that is a full load, 

and the folks are waiving them off with the cars. That is taxpayer 

dollars being wasted right there. And I am just saying and I instructed staff, let’s try to get down to the bottom of who is the oversight person over that contract. I know it took forever for them to 

place this contractor and remove those cars, but it isn’t going to be 

three cars at a time. We are going to go through some of the things 

that were found in this report amongst the good, bad, and ugly, 

and we are trying to prevent it from happening. 

So if we can, that would be helpful if you can share that information, very seriously, with us, hopefully we can head down the right 

direction. 

I want to apologize to the Chairman and to the committee for 

taking so much time. Sorry. 

Mr. ROGERS. No problem. Gentleman’s time has now expired. 

I would recognize the Chair of the Full Committee, Mr. King, for 

any questions he may have. 

Mr. KING. Thank you, Mr. Chairman. And let me thank the witnesses for your testimony today. You really made a lot of sense out 

of a very complex situation. I appreciate all your efforts. 

I have two questions. I will ask them at the same time and you 

can just answer both of them. Primarily Mr. Picciano, but Mr. 

Skinner, Mr. Kutz, Ed, whatever you feel is necessary. One general 

question, one specific question. 

General question is that sometimes you get what you ask for. 

And I know here in Washington there were a lot of complaints 

after 9/11 that not enough money was going to New York quickly 

enough. As I read the testimony, it appears that for the first time, 

we actually in effect mandated FEMA to spend $8 billion. Usually 

we don’t lay out the amount, a specific amount in advance. You 

spend what is needed and just fight afterwards. The general question would be: do you think it made it more likely that sufficient 

controls would not be in place or that money, or the system, would 

be abused by actually setting that $8 billion in there, which in effect said you have to find a way to spend the $8 billion? That is 

the general question. 

And the specific question is: if you could address, you know, one 

issue which is mentioned often in New York, and that is the case 

of the photographer—I believe Mr. Greg Brown I think his name 

was, I forget the exact name who was actually hired by FEMA. I 

believe he was paid about $300,000 to take photographs of Ground 

Zero in a police helicopter. But there were no restrictions put on 

the use of those photos, and now he claims that he has the property rights to those photos. 

Using that specific example, I know it is always easy after the 

fact to come in and find the clarity in the example, but if you could 

just address that and as to whether or not that is a metaphor for 

other types of abuses and how that type of abuse can be avoided 

in the future. General question, mandating on spending the money 

and specific abuses, specifically the one regarding the photographer. 

Mr. PICCIANO. Regarding the mandated amount, I personally 

thought that was a great way to lessen the impact of fraud and 

asks our folks, both Federal, State, city, to manage that fixed 
65

amount as carefully as possible and to effectively meet the absolute 

requirements that are out there. 

And if you add that with the special resolution that was passed 

in 2003, that also assisted, because in areas oftentimes—and the 

IG can elaborate—to make the round peg fit in the square hole, 

there is a lot of manipulation of guidelines. By allowing and recognizing the need for some flexibility—which was not the case in 

Katrina—some flexibility with the resolution that was passed for 

associated cost, that was a really great tool that allowed FEMA to 

do things that were necessary. The mandated insurance run by 

Congress, getting $90 million into an organization—a system to 

manage health care for a number of impacted people. So those two 

tools were important. 

I mean, there is the issue of a match, you know, avoiding having 

a match or not, but actually capping the event on what is estimated what the costs would be I think would be a good way to 

begin to allow for stricter control of the expenditure of Federal dollars. 

Mr. KING. So there is no human tendency to say we have to 

spend this $8 billion no matter what. On balance, it was a plus to 

actually have that— 

Mr. PICCIANO. I think it was a reasonable amount of the FEMA 

share of the $20 billion, $8.8. And with that flexibility, sir, it is interesting to note that the Stafford Act still covered a majority of 

what was eligible. As it turned out there, it may have been $1 billion that was distributed as a result of the associated costs and it 

was for things that were important—heightened security, which 

was a real concern for New York City. So it was manageable, we 

could monitor it, and it was a way to get something done and with 

that flexibility, it was helpful. We obligated more money and 

quicker than any other disaster we have ever had—at least in our 

region a majority of the money was out of our pocket—into where 

it should be, State and local pockets. 

Mr. KING. Not the photographer. 

Mr. PICCIANO. Yeah. Regarding the photographer, I am just 

catching up on the facts on that because I knew it may come up. 

We did enter into a contract and, admittedly, we probably should 

have had in that contract constraints on use of that information. 

To me that is an oversight. My understanding, it was for $75,000, 

not $300,000 dollars. And most important, it was done early on in 

the event and it was done to monitor, at the request of the city, 

what first responding activity was to be able to move critical resources. So the intent was good. We made a mistake. And again, 

it was an oversight and we shouldn’t have done it. 

Mr. KING. Comments from the other two witnesses? 

Mr. SKINNER. I would just like to add to what Joe was saying. 

We could not find any correlation between the $8.8 mandatory ceiling and fraud, waste and abuse. In fact, I don’t think there was a 

correlation between the two. The fraud, waste and abuse that we 

did experience is the types of fraud, waste and abuse we see after 

every disaster. And those were the issues dealing with the individual assistance programs. The public assistance programs, we 

saw very little because of the monitoring controls that the city im-
66

posed over primarily debris removal operations, so I don’t think 

there was any correlation whatsoever. 

Mr. KUTZ. I would just add a couple things. With respect to the $8 billion, I don’t think that increases your risk necessarily of 

fraud, waste and abuse. What we had seen was some supplemental 

spending—I use Iraq as an example—is the risk of using that 

money as a get-well program for your base appropriations. So that 

would be a risk, I would say, that you might have of supplemental 

appropriations. 

Mr. KING. My understanding, it may have been $75,000 with FEMA. I think the balance of that contract with $300,000 came 

from the City’s Department of Design and Construction. Thank you 

very much. 

Mr. ROGERS. Gentleman yields back. The Chair recognizes the 

gentleman from New Jersey, Mr. Pascrell, for any questions he 

may have. 

Mr. PASCRELL. Mr. Chairman, I know we like to look to the future in how we can make things better. I would prefer to stay in 

the past today, because I want to know what happened before I 

make any of those proposals. 

Mr. Skinner, for the record, fraud occurs when there is a lack of 

monitoring or oversight or when there is collusion. Are there any 

signs in your investigation of collusion in New York City after the 

tragedy of 9/11? Collusion—and I will define that if you wish. I 

think you know what I am talking about. 

Mr. SKINNER. Could you please define that? I am not quite sure. 

Mr. PASCRELL. There are those who work for the Federal Government in the public sector who are in concert with crooks and make 

deals, either in detecting whether—what the quality of air is or detecting whether or not we can make a deal on the side and if there 

are kickbacks and things like that. So it is—

Mr. SKINNER. Public corruption. Yes, we found no evidence whatsoever to suggest that— 

Mr. PASCRELL. Did you investigate anything? 

Mr. SKINNER. We had no allegations to that effect. So to my 

knowledge, we did not have any ongoing investigation in that regard. 

Mr. MEEK. Would the gentleman yield? 

Mr. PASCRELL. Sure. 

Mr. MEEK. Mr. Skinner, is there a statute of limitations on that 

complaint or allegations for you to look into such things? 

Mr. SKINNER. There is. I believe there is. I don’t have those—the 

exact limitations on those issues. But it would be from the date of 

the actual event and the time that the crime may have been 

brought to our attention, the clock would start ticking. 

Mr. PASCRELL. Mr. Skinner, you are—just for the record, just to 

clarify, are you saying that no public officials came forward to place 

before you accusations that something was going on within the contract letting in New York City after 9/11? You are saying that, for 

a fact, no public employees came forward to you? Not to you personally? 

Mr. SKINNER. Personally, yes. I would have to go back. Like I 

said, we had over 1,000 complaints, nearly 1,200 complaints that 

we registered. I would have to go back and review each and every 
67

one of those to see if in fact that was the case. But there is nothing 

to my knowledge at this point that anyone came to us suggesting 

there was collusion involving Federal officials with regards to kickbacks or any other type of scheme involving contracts. 

Mr. PASCRELL. How closely did you examine what went on in 

monitoring the air in the vicinity of the Twin Towers, in terms of 

the Twin Towers? Who monitored it and who decided how much 

money would be spent, and did you examine the conclusion that 

the EPA came to that the air was—all was clear? 

Mr. SKINNER. Our office did not specifically monitor the conclusions with regards to EPA. However, I do believe that the EPA OIG 

did in fact take a look at this. What we did look at was when was 

the EPA brought in, how much did they know, and which—and 

what was FEMA’s relationship and role with regards to the air 

quality. 

Mr. PASCRELL. So you didn’t put yourself—you are not in the position of making a judgment concerning the review of EPA concerning the air quality? You did not make that decision? EPA made 

that decision? 

Mr. SKINNER. That is correct. 

Mr. PASCRELL. And there was no other oversight in that decision; 

yes or no? 

Mr. SKINNER. Not by our office. But there was—EPA OIG was 

on site and was somewhat involved. I do believe they did issue a 

report involving the EPA’s decisions and role in 9/11. 

Mr. PASCRELL. Mr. Kutz—thank you. 

Mr. Kutz, you talked about fraud prevention and the three things 

that were necessary, which you use as standard: the direction monitoring, the data mining, and then you said something to the effect 

of investigation; the investigative part of that point number two. 

Was there an aggressive investigation as far as you are concerned 

with the subject that we are talking about today? 

GAO is providing to the Congress of the United States your oversight into what was done and whether it was done properly or not. 

Can you say—can you put on the record that in your estimation 

that the DHS had a thorough investigation, that the inspector general’s office had a thorough investigation of all the matters that are 

before this committee today? 

Mr. KUTZ. I don’t have any knowledge on September 11. I 

couldn’t speak to that. 

Mr. PASCRELL. Who would have? 

Mr. KUTZ. I would have to get back to you on that. I don’t think 

we can speak to that, though. 

Mr. PASCRELL. Why not? 

Mr. KUTZ. Well, we have looked at specific things, but I don’t 

think we have looked at that scope of that type of work for September 11. Again, with Katrina/Rita, I could speak more specifically on that. 

Mr. PASCRELL. We have to do our job in order to come to conclusions which this committee will come to. I hope you understand 

why I am asking the question. Who should I look to? Who should 

I ask? Who would know? 

Mr. KUTZ. Well, I think Mr. Skinner would know. Whether he—

Mr. PASCRELL. Let me ask you this for the record—thank you. 
68

Let me ask, Mr. Skinner, do you think that a thorough investigation took place into the matters that are before this committee 

today? 

Mr. SKINNER. Yes. 

Mr. PASCRELL. You do. I have no further right now, Mr. Chairman. 

Mr. ROGERS. I thank the gentleman. I would remind the panelists that most of the Members will probably have some questions 

for you all that they will submit to you, and the record will be left 

open for the next 10 days for that purpose. If you do receive written inquiries, I would ask you to respond to those, in writing, to 

the Committee for us. 

I know I am going to have some additional questions. As you 

know, we are limited to one round of questions today, specifically 

because we do have another panel. I want to be respectful of your 

time as well as the next panel’s time, but I must say I am very 

disturbed about the failure to prosecute many of these people, and 

I want to do what we can to rectify that in the future. I am going 

to be looking for information from you all as to specifically what 

do you think we can do to make sure that after future disasters, 

whether natural or otherwise, that we have put in place the framework to ensure that everybody who takes advantage of that circumstance criminally is prosecuted. And it seems to me that even 

if it is a small crime, a relatively small—like, for example, getting 

a vacuum cleaner that you weren’t entitled to get or an air conditioner or whatever, air purification system, that local DAs—even 

one—local is relative, you know; New York’s District Attorney’s office is huge, but they aren’t worried about resources. If we have to 

get additional prosecutors to provide them the money to prosecute 

these crimes, we need to be able to do that. But we need to know 

that they are going to be successful prosecutions. 

So I really do look to you all to give us some guidelines on that. 

This Committee is going to be releasing a report a little later this 

year and information like that from you all will be helpful. And 

with that, this panel is excused, and I thank you. 

The Chair now calls up the second panel. 

Mr. ROGERS. Again, I want to thank all of our panelists for making the time to be here and we look forward to your statements. 

I also would remind you all that your entire statement can be submitted for the record. And if you would like to summarize, we 

would ask you to keep your opening statement to five minutes or 

less to permit more opportunities for questions. 

Mr. ROGERS. The Chair now calls the Honorable Rose Gill Hearn, 

Commissioner of the New York City Department of Investigation, 

for your opening statement. 

STATEMENT OF ROSE GILL HEARN 

Ms. HEARN. Good afternoon Chairman Rogers, Congressman 

Meek, Chairman King, Congressman Thompson, members of the 

committee. It is a privilege to address this committee and describe 

the foresight of and efforts made by the city of New York to prevent fraud and waste in connection with the cleanup of the World 

Trade Center site immediately following the destruction of the 

Twin Towers and surrounding buildings. 
69

New York City’s experience demonstrates that the proactive 

measures taken were highly effective in detecting and preventing 

fraud and waste without compromising the ability of the emergency 

efforts to proceed with remarkable efficiency. 

Appointed by Mayor Michael Bloomberg, I am the Commissioner 

of the New York City Department of Investigation, known as DOI, 

which is one of the oldest law enforcement agencies in the country. 

Created in the wake of the ‘‘Boss’’ Tweed scandals of the 19th century, DOI is an agency of New York City’s government charged 

with routing out, but, perhaps more importantly, preventing corruption within or impacting city government. Thus we do not just 

try to catch criminals after they have committed crimes, but we 

also devote a substantial amount of our resources to preventing 

crimes before they happen and to preventing the needless loss of 

precious city resources through waste and inefficiency. 

DOI offices are located on Maiden Lane just up the block from 

what was the World Trade Center. On the morning of September 

11 DOI personnel and detectives responded to the scene to help 

with the evacuation of the buildings. When the towers collapsed, 

the cloud of dust and smoke came rushing down Maiden Lane and 

debris rained down on our building. For days thereafter, DOI personnel became part of the on-site digging and security operation. 

My own experience included seeing the apocalyptical sight at the 

World Trade Center, people jumping from the fire line 70 stories 

high in the North Tower, followed by the explosion of the second 

plane into the South Tower, and the collapse of the towers as if 

they were sand castles. The city then mobilized in an extraordinary 

way and DOI was part of that mobilization. 

In the aftermath of the 9/11 terrorist attacks on the World Trade 

Center, the city had to undertake a cleanup operation that was unprecedented in scope and cost. Moreover, it was recognized that the 

city’s cleanup would have to be safe, include a sensitive ongoing 

search for remains, and allow businesses and residents to return 

swiftly to the densely populated Wall Street financial district, 

whose economic viability was crucial not only to the city but to the 

country as a whole. 

To achieve the goals of the World Trade Center cleanup, it was 

understood that vast amounts of government money would have to 

be spent and spent quickly. Indeed, some of the members of this 

committee were instrumental in seeing that New York received the 

money it needed for the historic cleanup and recovery effort. 

However, experience has taught us that the expenditure of large 

sums of money in an emergency situation increases the likelihood 

of fraud inefficiency and price gouging. Accordingly, based on the 

concerns of the possibilities of fraud and corruption in all aspects 

of the cleanup effort, Mayor Rudolph Giuliani’s Office asked DOI 

to put in place a monitoring program to prevent exploitation of the 

emergency situation by unscrupulous firms and individuals. That 

initiative was continued by Mayor Bloomberg who took office on 

January 1, 2002 and, with it, responsibility for the site and its 

cleanup which was completed in July 2002. Mayor Bloomberg required DOI and the other agencies to continue to be vigilant and 

proactive about corruption and waste issues at the site, a priority 

in the Bloomberg administration. 
70

DOI had already established under nonemergency circumstances 

such a procedure for monitoring various municipal projects. For example, construction projects within the city where there had been 

a particular concern about corruption. Thus, DOI drew on that experience in putting a monitoring program together for the World 

Trade Center site, but of course on a much larger scale. 

In order to accomplish and better manage the necessary cleanup, 

the city divided the 16-acre World Trade Center site, Ground Zero, 

into four quadrants. A construction manager was retained for each 

of the four quadrants, and I have supplied a map of Ground Zero 

as divided into the quadrants. The construction managers were 

paid based on labor, time and materials they used to carry out the 

cleanup. 

The construction managers in turn had hundreds of subcontractors throughout Ground Zero; for example, truckers, waste disposal 

and demolition companies, industries with a long history of organized crime involvement. Thus, these contracts were not only enormous, but as time and material contracts they presented specific 

vulnerabilities to fraud and abuse from unscrupulous contractors, 

subcontractors and suppliers from which the city needed to protect 

itself. 

In addition, the work of the contractors and oversight of that 

work was complicated by the multiple activities going on at Ground 

Zero during the cleanup due to the fact that the 16-acre site was 

a crime scene with an active recovery effort underway for the remains of the thousands of victims of the disaster. In combination 

with the fact that the work was to be carried out under the direction of four construction managers rather than one, the potential 

for fraud was increased. Thus, the purpose of the DOI monitoring 

program was, to the best of our ability, to ensure that the city 

knew what work was being performed at the site and that the billing was appropriate and legitimate. 

The Ground Zero cleanup was remarkably well coordinated and 

ultimately well accomplished because one agency, the city’s Department of Design and Construction, DDC, was given the responsibility of managing the project. DDC is the city’s construction and 

engineering expert. 

As will be described in more detail by my colleague, David 

Varoli, all four of the Ground Zero construction managers reported 

to DDC. Thus, given that DOI was tasked with monitoring the four 

construction managers, we collaborated closely with DDC. DOI created and implemented the World Trade Center integrity compliance monitorship program which was in place by early October 

2001. This program required each of the four Ground Zero construction managers to retain an on-site integrity monitor selected 

by DOI. Through DOI, each integrity monitor had the authority to 

review and audit all of the books and records of the contractors 

working at the site and to maintain a physical presence at the site. 

By virtue of this oversight program, the integrity monitors scrutinized the contractors’ activities in real time and functioned as the 

city’s eyes and ears. 

DOI also required the monitors to establish a hotline number 

where anyone could call with concerns or information. A key feature to the effectiveness of the monitors was that they reported di-
71

rectly to DOI on all contractor activities. Thus, if there were any 

issues or problems, they were addressed immediately. DDC was included in many of those discussions and received regular reports as 

well. 

DDC also required an auditing firm to assist its engineering 

audit operation with auditing and payment issues. Together with 

the monitors, this was an endeavor intended to create strong oversight to detect and prevent fraud and waste. The integrity monitor 

model requires specialized firms with legal accounting law enforcement and investigative expertise. Because this model had been 

used in New York City by DOI, we were fortunate to have a number of highly qualified firms ready to pick from, whose work we 

were already very familiar with. One of the monitors, Neil Getnick, 

is here with us today and I am grateful to him for being here. 

Initially the integrity monitors maintained an on-site presence at 

Ground Zero on a 24-hour basis, seven days a week. While time 

does not permit me to list the specific tasks the monitors engaged 

in day to day, generally their duties fell into the categories of deterrence, detection, and documentation. In order to perform these 

duties, the integrity monitors reviewed books and records, identified and corrected adequate financial and quality controls, analyzed 

financial records to ensure accuracy and basic contract compliance, 

assisted with clarifying agency policies at the site, analyzed laws 

and contracts, gathered intelligence for the law enforcement community, detected and corrected incompetence, and monitored the 

day-to-ay work on the site. And they did all of this with a sensitivity to the city’s needs for efficiency, speed, and cost control. 

While it should be noted that the vast majority of contractors on 

the site performed their work exceptionally well and with integrity, 

as a result of all of these types of intensive investigating and auditing efforts and more, the integrity monitors prevented a significant 

amount of waste, fraud and abuse in the Ground Zero cleanup. To 

a significant degree, the prevention came as a result of their presence on the site alone, which in and of itself served as a deterrent 

to misconduct. For example, the sign-n sheets at the site from the 

earliest days of the cleanup prior to the arrival of the monitors contained the names of individuals who allegedly did work at the site, 

who were associated with organized crime. Moreover, some of those 

early sign-n sheets also contain the names of alleged workers on 

multiple sign-n sheets for work done, impossibly, on the same date 

and the same time. However, when the four monitors went into 

place and the CMs and subcontractors all knew the monitors were 

closely analyzing such items, those probable illegitimate and duplicative labor costs were no longer showing up on the payroll records 

billed to the city, indeed corroborating the fact that the monitor 

served as a deterrent. 

Early on at the cleanup, DOI was advised by a local prosecutor 

of an intercepted conversation between two organized crime associates in which they lamented the on-ite presence of the monitors at 

the World Trade Center and that that was making it impossible for 

anyone to overbill the city via the usual scams because the site was 

being so closely scrutinized. 

We could not have said it better ourselves. In addition to the deterrence of the type of willful misconduct lamented in that inter-
72

cepted phone call, it is clear that the integrity monitors’ activities 

further prevented waste and abuse through the establishment of 

proper recordkeeping systems, their physical presence on the site, 

and their frequent auditing of the billings. 

While as with the general deterrence, it is difficult to precisely 

quantify the savings resulting from the institution of good recordkeeping procedures, direct observations and the quick detection of 

problems through the frequent audits, the fact is that significant 

savings resulted. For example, based on the submission and review 

of required documentation, the integrity monitors found evidence 

that purchased equipment initially billed to the city was also listed 

as equipment leased to the city. Thus, the city was being charged 

a rental fee on equipment it had already purchased. As a result, 

these charges would not only be disallowed, a quantifiable savings, 

but future improper billings on this equipment would not occur, a 

more-dificult-of-quantify but clear savings nonetheless. 

Similarly, a review of required documentation by the integrity 

monitors revealed that requests for payment for rental equipment 

at times included fuel costs where such costs were already built 

into the rental fees. Again, these costs would be disallowed quantifiable, and not billed going forward less quantifiable. 

In another instance, the integrity monitors on-site spot checks resulted in a clear but difficult-to-quantify savings. Some debris removal trucks were found to be operating with broken odometers. 

Had the trucks been allowed to continue to operate with this type 

of mechanical failure, they could have easily deviated from their 

approved truck routes, a problem observed with some trucking 

from the outset of the debris removal activity. The work of the integrity monitors resulted in the early detection and systemic correction of this problem and thereby reduced the ability of unscrupulous truckers to misdirect the debris or misuse the free dump 

tickets they were given in conjunction with their Ground Zero 

work. 

The integrity monitors’ background checks on contractors also resulted in the indictment of two principals of a carting firm working 

at Ground Zero by the Manhattan District Attorney’s office for 

lying about their ties to organized crime and documents filed with 

the city. Not surprisingly, invoices submitted by that same carting 

firm were identified by the integrity monitors as containing numerous instances of overbilling by that contractor. 

Significant quantifiable savings through the identification and 

correction of sloppy and sometimes willfully abusive practices were 

also achieved by the integrity monitors. For example, in one instance, bills submitted to the city for payment by one subcontractor 

were so fraught with errors and improper markups of heavy equipment and services and lack of documentation authorizing the performance of services and labor charges that they were reduced by 

two-thirds; from $2.6 million originally billed, reduced to $795,000. 

In another instance after a long discussion concerning various 

billing issues between a monitor and a subcontractor, based on the 

monitor’s review of the records, the subcontractor agreed to revise 

prior billing submissions, estimating it to an adjustment—downward adjustment of $1 million. 
73

These are just a few examples to highlight the kinds of activities 

engaged in by the integrity monitors in connection with the World 

Trade Center cleanup and the savings to the government that resulted from those activities. 

It is clear that as a result of the World Trade Center integrity 

compliance monitorship program, the government saved a significant amount of money by preventing and curtailing fraudulent activity, waste and abuse of public funds. In total, we have estimated 

that based on their extensive work and forensic analysis, the integrity monitors recommended in excess of $47 million in cost savings 

and that their very presence on the Ground Zero site and their frequent audits produced additional significant savings that cannot be 

quantified. All of these efforts not only protected public tax money 

but helped to preserve the faith of the taxpayers and the quality 

and integrity of government services. 

In conclusion, DOI makes the following recommendations to the 

Federal Government: 

Have a list of preexisting known, experienced, and vetted monitors in various fields of expertise and disciplines by locality. 

Put an integrity monitor in place at the outset of any situation 

that will call for a large costly government response operation so 

that proper recordkeeping and work procedures can be instituted to 

create a culture of legal compliance within the operation and ensure accurate accountability to the government. 

Three, have the integrity monitors report to a government oversight agency with a broad governmental mandate encompassing fiscal integrity and law enforcement. For example, in New York, it 

was DOI. 

And then, four, closely working with the integrity monitors and 

the other government entities concerned with addressing the emergency at issue throughout the duration of the project. 

Thank you for this opportunity to speak to you today, and I 

would be happy to answer your questions. 

Mr. ROGERS. Thank you, Ms. Hearn. 

[The statement of Ms. Hearn follows:]

PREPARED STATEMENT OF ROSE GILL HEARN

Good afternoon Chairman Rogers, Congressman Meek, Members of the Committee. It is a privilege to address this Committee and describe the foresight of and 

efforts made by the City of New York to prevent fraud and waste in connection with 

the clean up of the World Trade Center site immediately following the destruction 

of the Twin Towers and surrounding buildings. New York City’s experience demonstrates that the proactive measures taken were highly effective in detecting and 

preventing fraud and waste, without compromising the ability of the emergency efforts to proceed with remarkable efficiency. 

Appointed by Mayor Michael R. Bloomberg, I am the Commissioner of the New 

York City Department of Investigation, known as DOI, which is one of the oldest 

law-enforcement agencies in the country. Created in the wake of the Boss Tweed 

scandals of the 19th century, DOI is an agency of New York City’s government 

charged with rooting out, but perhaps more importantly, preventing corruption 

within or impacting City government. That mission is a challenging one as New 

York City is one of the largest employers with one of the largest budgets in the 

country. DOI often works with the federal and state prosecutors who have jurisdiction over the City of New York. We work jointly with other law enforcement agencies such as the New York City Police Department, the FBI and the federal Postal 

Inspectors. DOI is also empowered by law to investigate and report on potential corruption hazards and to advise the Mayor and the other branches of City government 

on measures they should take to prevent corruption and the waste of City funds. 
74

Thus, we do not just try to catch criminals after they have committed crimes, but 

we also devote a substantial amount of our resources to preventing crimes before 

they happen and to preventing the needless loss of precious City resources through 

waste and inefficiency. 

DOI offices are located on Maiden Lane just up the block from what was the 

World Trade Center. On the morning of September 11th, DOI personnel and detectives responded to the scene to help with the evacuation of the buildings. When the 

Towers collapsed, the cloud of dust and smoke came rushing down Maiden Lane, 

and debris rained down on our building. For days thereafter, DOI personnel became 

part of the on-site digging and security operation. My own experience included seeing the apocalyptical sight at the World Trade Center: people jumping from the 

fireline seventy stories high in the North Tower; followed by the explosion of the 

second plane into the South Tower; and the collapse of the Towers as if they were 

sandcastles. The City then mobilized in an extraordinary way, and DOI was part 

of that. 

In the aftermath of the 9/11 terrorist attack on the World Trade Center, the City 

had to undertake a clean-up operation that was unprecedented in scope and cost. 

Moreover, it was recognized that the City’s clean-up would have to be safe, include 

a sensitive on-going search for remains, and allow businesses and residents to return swiftly to the densely populated Wall Street financial district, whose economic 

viability was crucial, not only to the City, but to the Country as a whole. 

To achieve the goals of the World Trade Center clean-up, it was understood that 

vast amounts of government money would have to be spent and spent quickly. Indeed, some of the members of this Committee were instrumental in seeing that New 

York received the money it needed for the historic clean-up and recovery effort. 

However, experience has taught us that the expenditure of large sums of government money in an emergency situation increases the likelihood of fraud, inefficiency 

and price gouging. Accordingly, based on the concerns of the possibilities of fraud 

and corruption in all aspects of the clean-up effort, Mayor Rudolph Giuliani’s office 

asked DOI to put in place a monitoring program to prevent exploitation of the emergency situation by unscrupulous firms and individuals. That initiative was continued by Mayor Bloomberg, who took office on January 1, 2002, and with it responsibility for the site and its clean-up, which was completed in July 2002. Mayor 

Bloomberg required DOI and the other agencies to continue to be vigilant and 

proactive about corruption and waste issues at the site, a priority in the Bloomberg 

Administration. 

DOI had already established under non-emergency circumstances such a procedure for monitoring various municipal projects, for example, construction projects 

within the City, where there had been a particular concern about corruption. Thus, 

DOI drew on that experience in putting a monitoring program together for the 

World Trade Center site but, of course, on a much larger scale. 

In order to accomplish and better manage the necessary clean-up, the City divided 

the 16-acre World Trade Center site, Ground Zero, into four quadrants. A construction manager, or CM, was retained for each of the four quadrants. (A map of 

Ground Zero as divided into the quadrants is attached to my written materials.) The 

Cbs were paid based on the labor, time and materials they used to carry out the 

clean-up. The CMs, in turn, had hundreds of subcontractors throughout Ground 

Zero, for example, truckers, waste disposal, and demolition companies—industries 

with a long history of organized crime involvement. 

Thus, these contracts were not only enormous, but as ‘‘time and materials’’ contracts, they presented specific vulnerabilities to fraud and abuse from unscrupulous 

contractors, subcontractors and suppliers from which the City needed to protect 

itself. In addition, the work of the contractors and oversight of that work, was complicated by the multiple activities going on at Ground Zero during the clean-up due 

to the fact that the 16-acre site was a crime scene with an active recovery effort 

underway for the remains of the thousands of victims of the disaster. In combination with the fact that the work was to be carried out under the direction of four 

CMs, rather than one, the potential for fraud was increased. Thus, the purpose of 

the DOI monitoring program was, to the best of our ability, ensure that the City 

knew what work was being performed at the site and that the billing was appropriate and legitimate. 

The Ground Zero clean-up was remarkably well-coordinated and ultimately wellaccomplished because one agency, the City’s Department of Design and Construction 

(DDC), was given the responsibility of managing the project. DDC is the City’s construction and engineering expert. All four of the Ground Zero CMs reported to DDC. 

Thus, given that DOI was tasked with monitoring the four CMs, we collaborated 

closely with DDC. 
75

DOI created and implemented the World Trade Center Integrity Compliance 

Monitorship Program, which was in place by early October 2001. This program required each of the four Ground Zero CMs to retain an onsite ‘‘Integrity Monitor’’ 

selected by DOI. Through DOI, each Integrity Monitor had the authority to review 

and audit all of the books and records of the contractors working at the site, and 

to maintain a physical presence on the site, including around the perimeter of 

Ground Zero. By virtue of this oversight program, the Integrity Monitors scrutinized 

the contractors’ activities in real time and functioned as the City’s eyes and ears. 

DOI also required the Monitors to establish a hotline number where anyone could 

call with concerns or information. A key feature to the effectiveness of the Monitors 

was that they reported directly to DOI on the contractors activities. Thus, if there 

were any issues or problems, they were addressed immediately. Reports of their 

findings were made on a frequent basis to DOI, which set up a trailer right at 

Ground Zero where meetings could readily and frequently take place. DDC was included in many of those discussions and received regular reports as well. DDC also 

hired an auditing firm to assist its Engineering Audit operation with auditing and 

payment issues. Together with the Monitors, this created strong oversight to detect 

and prevent fraud and waste. 

The Integrity Monitors were themselves closely monitored by DOI in order to ensure that they were performing the kind of work that was really needed by the City, 

and in order to enable DOI to act on their findings quickly when necessary. The 

Monitors had to be tethered to a pivotal government oversight agency like DOI 

would make them a much less effective and useful tool. 

DOI’s Integrity Monitor program was a good government step because it was preventive in nature. By embedding the Monitors with the individual contractors, the 

monitoring program prevented fraud and waste by any contractors that were unscrupulous or sloppy, both: (1) instituting proper record keeping and work procedures to create a culture of legal compliance within each contractor’s operations; and 

(2) ensuring accurate accountability to the City. 

The Integrity Monitor model requires specialized firms with legal, accounting, law 

enforcement and investigative expertise. Because this model had been used in New 

York City by DOI, we were fortunate to have a number of highly qualified firms 

ready from which to pick, with whose work we were already very familiar. . The 

Monitors selected by DOI, who did an outstanding job under very difficult circumstances, were four of the New York areas leading monitoring firms: Getnick & 

Getnick for the Turner Construction quadrant; Stier, Anderson and Malone, LLC for 

the AMEC Construction quadrant; Decision Strategies for the Tully Construction 

quadrant; and Thacher Associates, LLC for the Bovis Lend Lease quadrant. 

Thus, DDC was responsible for overseeing the operations of the four CMs, subcontractors and suppliers performing work at Ground Zero, and under the direction 

of DOI, the four Monitors maintained oversight of those activities. 

DOI oversaw the work of the Monitors by reviewing the results of their investigations and audits and by helping to direct and focus their activities. DOI held joint 

meetings with all of the Monitors together every week in order to facilitate the dissemination of information among the Monitors and to ensure the coordination of 

joint efforts. This was particularly important because the coordination helped to ensure that the decentralization of the clean-up effort did not in itself breed fraudulent 

schemes, such as having individual workers reported on the payrolls of different 

companies for work performed at the same time or subcontractors double bill for 

work through multiple CMs. DOI was also in constant communication with DDC 

and other government agencies, to make sure that information obtained by the Integrity Monitors was communicated quickly to the entities that most needed it. Finally, DOI communicated with the other area law enforcement and prosecutorial 

agencies on matters disclosed by the Integrity Monitors and ensured an appropriate 

flow of information between these agencies and the Monitors. 

Initially, the Integrity Monitors maintained an on-site presence at Ground Zero 

on a 24-hour basis, seven days a week. Their duties fell into general categories of: 

deterrence, detection and documentation. In order to perform these duties, the Integrity Monitors engaged in legal, investigative, forensic accounting and engineering 

analysis. To perform their jobs, they reviewed books and records; identified and corrected inadequate financial and quality controls; analyzed financial records to ensure accuracy and basic contract compliance; assisted with clarifying agency policies 

at the site; analyzed laws and contracts; gathered intelligence for the law enforcement community; detected and corrected incompetence; and monitored the day to 

day work on the site. And they did all of this with a sensitivity to the City’s needs 

for efficiency, speed and cost control. 

Specific investigative, auditing and monitoring activities engaged in by the Integrity Monitors included: 
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• Background checks on companies and individuals working at Ground Zero; • Establishment of a hotline to enable anonymous tips and to field complaints 

from workers on the site; 

• Observation of employees sign-in/sign-out procedures and reviewing sign-in 

and sign-out sheets; 

• Interviews of employees on-site; • Reviewing payrolls to ensure that there were no fictitious employees on the 

payroll, through comparisons of payroll records with payroll checks issued and 

payroll records with the daily sign-in/sign-out sheets; 

• Reviewing payrolls for prevailing wage violations and other labor law violations; 

• Monitor swipe card system at the site for employees; • Monitor equipment on site to verify its presence and use; ensure billings conformed accordingly; 

• Auditing inventories of equipment on site and verifying whether it was rented 

or owned by the company, and verifying that the City was properly billed accordingly; 

• Monitor GPS tracking system for trucks removing debris; • Conducting spot checks and surveillances of supplies, equipment, activities at 

the site; 

• Monitoring of material deliveries; • Reviewing truck manifests; • Verifying that materials that were ordered were in fact delivered; • Verifying that the materials that were ordered and delivered were in fact job 

related; 

• Verifying that the costs of materials were not inflated through forensic audits; • Reviewing invoices and verifying that appropriate mark-ups were made, that 

there were no computational errors, and that there was no over billing and/or 

double billing; 

While it should be noted that the vast majority of contractors on the site performed their work exceptionally well and with integrity, as a result of all of these 

types of intensive investigating and auditing efforts and more, the Integrity Monitors prevented a significant amount of waste, fraud and abuse in the Ground Zero 

clean-up. To a significant degree, the prevention came as a result of their presence 

on the site alone, which in and of itself, served as a deterrent to misconduct. For 

example, the sign-in sheets at the site from the earliest days of the clean-up prior 

to the arrival of the monitors, contained the names of individuals who allegedly did 

work at the site who were associated with organized crime. Moreover, some of those 

early sign-in sheets also contained the names of alleged workers on multiple signin sheets for work done (impossibly) at the same dates and times. However, when 

the four Monitors went into place and the CMs and the subcontractors all knew the 

Monitors were closely analyzing such items, these probable illegitimate and duplicative labor costs were no longer showing up on the payroll records billed to the City. 

Indeed, corroborating the fact that the Monitors served as a deterrent, early on 

during the clean-up, DOI was advised by a local prosecutor of an intercepted conversation between two organized crime associates in which they lamented that the 

on-site presence of the Monitors at the World Trade Center site was making it impossible for anyone to overbill the City via the usual scams, because the site was 

being so closely scrutinized. We couldn’t have said it better ourselves. 

In addition to the deterrence of the type of willful misconduct lamented in that 

intercepted phone call, it is clear that the Integrity Monitors’ activities further prevented waste and abuse through the establishment of proper record keeping systems, their physical presence on the site and their frequent audits of the billings. 

While, as with the general deterrence, it is difficult to precisely quantify the savings 

resulted from the institution of good record keeping procedures, direct observations 

and the quick detection of problems through frequent audits, the fact that significant savings that resulted from these activities is clear. For example, based on the 

submission and review of required documentation, the Integrity Monitors found evidence that purchased equipment initially billed to the City was also listed as equipment leased to the City. Thus, the City was being charged a rental fee on equipment 

it had already purchased and for which it had already been paid. As a result, these 

charges would not only then be disallowed (a quantifiable savings) but future improper billings on this equipment would not occur (a more difficult to quantify but 

clear savings nonetheless). Similarly, a review of required documentation by the Integrity Monitors revealed that requests for payments for rental equipment at times 

included fuel costs where such costs were built into the rental fees. Again, these 

costs would be disallowed (easily quantifiable savings) and not billed going forward 

(more difficult to quantify). 
77

In another instance, the Integrity Monitors on-site spot checks resulted in a clear, 

but difficult to quantify, savings. Some debris-removal trucks were found to be operating with broken odometers. Had the trucks been allowed to continue to operate 

with this type of mechanical failure, they could have easily deviated from their approved travel routes, a problem observed with some trucking from the outset of the 

debris removal activity. The work of the Integrity Monitors resulted in the early detection and systemic correction of this problem and thereby reduced the ability of 

unscrupulous truckers to misdirect the debris or misuse the free dump tickets they 

were given in connection with their work at Ground Zero. 

The Integrity Monitors background checks on contractors also resulted in the indictment of two principals of a Yonkers carting firm working at Ground Zero by the 

Manhattan District Attorney’s office for lying about their ties to organized crime in 

documents filed with the City. Not surprisingly, invoices submitted by this same 

carting firm were identified by the Integrity Monitors as containing numerous instances of over-billing by that contractor. 

Significant quantifiable savings through the identification and correction of sloppy, and sometimes willfully abusive, practices were also achieved by the Integrity 

Monitors. For example, in one instance, bills submitted to the City for payment by 

one subcontractor were so fraught with errors and improper mark-ups of heavy 

equipment and services, and lack of documentation authorizing the performance of 

services and labor charges, that they were reduced by two thirds—from $2.6 million 

originally billed to $795,000. In another instance, after long discussions concerning 

various billing issues between a Monitor and a subcontractor based on the Monitor’s 

review of the records, the subcontractor agreed to revise prior billing submissions—

translating to an estimated downward adjustment of $1 million. 

In yet another example, one Integrity Monitor examining subcontractor invoices 

submitted to the City totaling more than $7.3 million, identified over-billing in the 

amount of $3 million, or almost 42% of the total invoice. In another type of overbilling uncovered and stopped by the Integrity Monitors, certain subcontractors were 

found to have impermissibly marked-up their bills beyond the 10% allowed for overhead and the 10% allowed for profit. . 

Double billing for workers, time and materials were caught through the Integrity 

Monitors’ frequent audits and on-site observations. So, for instance, the Monitors 

caught a subcontractor submitting invoices for debris removal at two different locations at exactly the same time, using the exact same vehicles and drivers. This matter, among others, was referred to the local prosecutor’s office. 

These are just a few examples to highlight the kinds of activities engaged in by 

the Integrity Monitors in connection with the World Trade Center clean-up and the 

savings to the government that resulted from those activities. They clearly demonstrate the effectiveness of the Integrity Monitor model, where the Monitors are 

embedded in a project from the beginning, and where they report directly to a government agency that ensures the appropriate focus of their work and the quick and 

effective dissemination of their findings. 

It is clear that, as a result of the World Trade Center Integrity Compliance 

Monitorship Program, the government saved a significant amount of money by preventing and curtailing fraudulent activity, waste and abuse of public funds. In total, 

we have estimated that, based on their extensive work and forensic analysis, the 

Integrity Monitors recommended in excess of $47 million in cost savings and that 

their very presence on the Ground Zero site and their frequent audits produced additional significant savings that cannot be quantified. All of these efforts not only 

protected public tax money, but helped to preserve the faith of the taxpayers in the 

quality and integrity of government services. 

In conclusion, DOI makes the following recommendations to the Federal Government: (1) have a list of pre-existing list of known, experienced and vetted monitors 

in various fields of expertise and disciplines; (2) put an integrity monitor in place 

at the outset of any situation that will call for a large, costly government response 

operation, so that proper record keeping and work procedures can be instituted to 

create a culture of legal compliance within the operation, and ensure accurate accountability to the government; (3) have the integrity monitor(s) report to a government oversight agency with a broad governmental mandate encompassing fiscal integrity and law enforcement (e.g., in New York it was DOI); and then (4) closely 

work with the integrity monitors and the other government entities concerned with 

addressing the emergency at issue throughout the duration of the project. 

Thank you for this opportunity to speak to you today. At this time, I would be 

pleased to answer any questions that the Committee members or other representatives may have.
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Mr. ROGERS. The Chair now recognizes Mr. David Varoli, General Counsel of the New York City Department of Design and Construction, for your statement. And I would remind all witnesses, we 

have full written copies of your opening statements. If you could 

just summarize them briefly, it would give more time for questions 

and answers. With that, Mr. Varoli. Did I pronounce that correctly, 

I hope? 

STATEMENT OF DAVID J. VAROLI 

Mr. VAROLI. You did. 

Thank you, Chairman Rogers, Congressman Meek, Congressman 

King and Congressman Pascrell. Members of the committee, good 

afternoon and thank you for inviting me to testify before you. It is 

both an honor and a privilege to be here today. I want to thank 

you, Chairman Rogers and Ranking Member Meek, for calling this 

hearing and I also want to thank Congressman King for his opening remarks in which you recognize the work of DDC. Also Congressman Pascrell, as you mention in one of your questions you are 

here to study the past. 

I believe that is probably why I have been invited, since I have 

no law enforcement background, and I am here to talk about the 

past. Interestingly on my way here today, I passed the National Archive Building and there are two very good quotes in front of that 

building. The first says, ‘‘The past is our prologue, ‘‘and the other 

quote is, ‘‘Study the past.’’

I am here today to discuss the recovering cleanup efforts in the 

city following the terrorist attacks of September 11, which was the 
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largest unplanned demolition project in American history. Every 

day the city, specifically DDC in this regards, encountered, head 

on, unpredictable and complex site situations and responded with 

both innovation and comprehensiveness to these issues. Yet from 

the outset, the city’s objective was for the work to be done in conformity with FEMA standards in order to minimize the cost and financial exposure to the taxpayers of both the city and the country. 

I would like to take a few moments to first lay out for you a brief 

description of who and what DDC is and what the city looked like 

on September 10 and 11, and then I would like to describe in detail 

how the city cleaned up the site, all in the 5-minute parameters. 

DDC is actually celebrating its tenth anniversary this month. We 

were created back in 1996 by the former mayor to specifically oversee the work of the building of New York City and its infrastructure. We design and construct the city’s sewers, water mains, roadways. Pretty much you name it, in any kind of city, like Washington, D.C. or any of the districts you gentlemen come from, we 

build that kind of infrastructure. We have expertise in the fields 

of engineering, architecture and construction services. We work 

with some of the best and the biggest private sector firms, and we 

also work with some of the new ones and some of the smaller 

firms. Our business is to know the construction business and to deliver the quality and cost-efficient services to our clients and ultimate users, the people of the city of New York. 

As you heard from my colleague, Commissioner Rose Gill Hearn, 

DOI is also similar in that regards to DDC. They have the expertise and they know their business very well, which is finding and 

routing out fraud, waste and corruption. As will be described in 

greater detail, I will talk about the four construction managers and 

specifically the work of KPMG which was hired by DDC as one of 

our auditors. Before I go into any description of what happened on 

September 11 and for those next 9 months, I would just like to put 

into perspective what the city looked like on September 10 and 

September 11. 

As everyone knows what the weather conditions were on those 

two days, they happen to be some of the more beautiful days in 

September. The sun was shining, the skies were blue, and everything was good in both the city and the country. And then everything changed the morning of September 11. At that point in time, 

the city did not have expertise in demolition or in debris removal. 

But we did have what we would call a strong executive branch, and 

with that executive branch we had very strong expertise in the different agencies, DDC, DOI, and some of the other agencies. 

And this is a very important point worth stressing, because this 

expertise, when called upon, was there and was ready to take on 

the challenges of September 11. 

Mr. VAROLI. My perspective is both a personal and professional 

one, and I won’t elaborate too much because it is in my written testimony, but I was there that day, and it was a very interesting day 

both for myself and my family. And so it is interesting to hear 

some of the stories of what FEMA was telling, some of the issues 

what they encountered, because I did, too, myself. 
80

There were many success stores following the attacks. Two of 

those stories are how the city cleaned up the debris in such a short 

time and how the city worked to detect and prevent fraud. 

We believe that the recovery, demolition and clean-up was a success for the following reasons: First, all branches of the government, Federal, State and local, gave one entity, DDC, responsibility 

for managing the administrative, financial, legislative aspects of 

the project; and second, the event of the tragedy forged a strong 

partnership between the three levels of government and further 

forged a strong partnership between DDC, the construction managers and the over 200 subcontractors that worked on that project. 

With the responsibility of managing the project, DDC then looked 

to the experts both in house in our own agencies and in the city 

in general. 

As I see my time is running out, I would like to just jump ahead 

to talk about the work that KPMG did with DDC. By hiring 

KPMG, DDC set up an engineering audit monitoring system which 

worked hand in hand with the monitors that Commissioner Hearn 

had just described, and I believe having the KPMG on board with 

their own in-house expertise of engineering auditors enabled us 

from the beginning to focus on the issues of what we were considering, which were the payment requisitions, how these documents 

were going to come into our agencies, how they were going to be 

reviewed and passed on both to FEMA’s projects staff and then ultimately the auditors for FEMA. 

And the roles and the work that KPMG did, which I will just 

take a couple of seconds to describe, is very important to understand for, I believe, the committee and for maybe future rules that 

this committee may recommend. 

Specifically what KPMG did was to—and I apologize for turning 

on the pages—was to provide their audit expertise in the areas of 

prevailing wage verification of actual number of persons working 

based on shift logs on the 24 hours per day, 7 days a week. We only 

took 1 day off, and the irony of that situation is the day we took 

off was the day Flight 587, the Rockaway Queens flight crashed, 

and so it was not a day off in the end. But every other day we 

worked for the entire 9 months. 

KPMG also did a determination on the usage on a given shift by 

established categories, operational-in-use, standby-staffed by an operator to be employed when directed, and idle, being serviced or repaired; verification of costs of material, rental and cost of equipment based on costs and rental rates in effect on September 10th, 

2001; certification of cost of personnel; and certification of marine 

transport. 

I will jump quickly now to my conclusions. Everything, again, I 

am saying is in the written testimony. 

I guess I would like to again thank the committee for the opportunity for, one, for convening these hearings and inviting me. I 

would also like to highlight some of the issues we encountered during the 9 months it took us to complete the recovery; first and foremost, the issue of how this country will respond, God forbid, to another act of war on its shores. 

I believe the destruction that follows an act of war should be 

treated differently than a natural disaster. The work that was done 
81

at the World Trade Center was performed under a criminal investigation the entire time. There were times when the construction 

crews had to stop its work to allow the FBI, ATF, Secret Service, 

FDNY and the NYPD to search for some items. We had to respond 

to a lot of Federal rules and regulations as administered by FEMA 

that had been created over time by flood and hurricane damage. 

These policies did not fit the mold here. In the end, after seven 

meetings and the act of writing letters, we would receive an exception to a set policy or regulation, but there has to be a better way. 

In closing, like a lot of other people, I have read the stories of 

how this Nation responded to the world wars that scarred our 

country in the prior century. What I take from those stories was 

the ideal that a democratic and diverse Nation such as ours can 

and will rise up to meet any challenge. After my personal experiences on September 11th, it is funny to say that, but I consider myself both lucky and proud to be in New York, to live in New York, 

and to work there. I witnessed firsthand the best in people following the day’s attacks. Similar to how the Federal Government 

and private industry responded to the call by President Roosevelt 

at the start of World War II, the government of the city, the people 

of the city and the private industry of the city answered a call on 

behalf of itself and the country. 

Thank you. 

Mr. ROGERS. Thank you, Mr. Varoli. 

[The statement of Mr. Varoli follows:]

PREPARED STATEMENT OF DAVID J. VAROLI

Chairman Rogers; Congressman Meek; members of the committee: Good afternoon. Thank you for inviting me to testify before you, it is both an honor and privilege to be here today on behalf of the City of New York, Mayor Michael R. 

Bloomberg, Commissioner David J. Burney, AIA, and the City’s Department of Design and Construction. 

I want to thank you, Chairman Rogers, for calling this hearing. 

Today’s hearing is entitled ‘‘9/11 Federal Assistance to New York: Lessons 

Learned in Fraud Detection, Prevention, and Control.’’ As the Counsel to the City’s 

Department of Design and Construction (‘‘DDC’’), I am here today to discuss the recovery and clean-up efforts of the City following the terrorist attacks of September 

11, 2001, which was the largest unplanned demolition project in American history. 

Every day the City encountered head on an unpredictable and complex site and responded with innovation and comprehensiveness to all issues. Yet, from the outset, 

the City’s objective was for the work to be done in conformity to FEMA standards 

in order to minimize the costs and financial exposure to the taxpayers of the City 

and the country. 

This July, DDC is celebrating its 10th anniversary. DDC was created to oversee 

the work of building and repairing the City’s municipal infrastructure. DDC designs 

and constructs the City’s sewers, water mains, roadways, police and fire stations, 

daycare centers, jails, municipal offices, and a variety of other structures in support 

of the City’s infrastructure. We have expertise in the fields of engineering, architecture, and construction services. We work with some of the best and biggest private 

sector firms in the world. In addition, DDC works with a lot of small and new firms. 

Our business is to know the construction business and to deliver quality and cost 

efficient services to our clients and the ultimate users—the people of New York City. 

As you have heard from my colleague, Commissioner Rose Gill Hearn, DOI is 

similar to DDC in that it also has an expertise and it knows its business very well, 

which is finding and rooting out fraud, waste, and corruption. DOI has created a 

system of inspector generals that are placed in each agency and has established a 

sophisticated infrastructure to monitor and combat government corruption both on 

the inside and in the vendor community. 

As will be described in greater detail, DDC immediately hired four construction 

management firms—Bovis Lend Lease, Tully Construction, AMEC, and Turner Construction (who I’ll refer to as the ‘‘Construction Managers’’). The Construction Man-
82

agers were engaged to manage the debris removal and coordinate the work of the 

many trades working at the site. Moreover, DDC immediately issued a task order 

against a requirements contract for the auditing services of KPMG to assist in the 

engineering audit functions traditionally handled by DDC. DOI and its private inspector generals (who I’ll refer to as the ‘‘Monitors’’) monitored the Construction 

Managers’ compliance with the City’s laws, regulations, and policies from an integrity perspective. This included background checks of all major principals; investigations of potentially fraudulent matters; surveillance and review of day-to-day operations; verification of payroll reports to comply with DDC policies and prevailing 

wage laws; operating an integrity hotline to receive 24/7 allegations of misconduct 

or violations; making recommendations to the Construction Managers and DDC; 

and, verifying payments to subcontractors and vendors. The Monitors functioned 

independently of DDC and reported their findings directly to DOI, which then forwarded pertinent information to DDC. 

Before I describe the system put into place by DDC, DOI, and the rest of the City, 

I want to first set the stage by going back in time to the day before September 11th. 

It was a Monday, September 10th. The weather in the City was outstanding. The 

skies were clear blue and the sun shone brightly. Similar to the weather on September 11th, it was a beautiful summer day even though it was already the third 

day of public school. On September 10th the City did not have a plan to deal with 

an act of war against the City. However, the City did have in place a form of government that encouraged expertise in certain fields. The City, with a strong executive branch, was separated into a series of agencies with, for the most part, single 

missions and goals. This is an important point worth stressing. City agencies like 

DDC and DOI are experts at what they do and, over time, have created systems 

and contracts to provide their services in an efficient manner. For example, the City 

has experts in the following municipal services—sanitation, emergencies, health, 

construction, law, environment, police, fire and the prevention of corruption at the 

government level, to name just a few. 

On the morning of September 11th, the day was starting as good as it ended the 

night before. A suit jacket was all that was needed and kids were still wearing 

shorts to school. The Hudson River was sparkling as the sun rose above the skyscrapers from the East. By 8:40, public school children were in school and most people were at work or commuting to work. Then, as we all know, in a matter of minutes, the world changed for New York City, Pennsylvania, Washington, D.C., and 

the United States of America. We had all been attacked and violated. A war had 

been brought to our doorsteps and into our backyards. After the first Tower fell that 

morning, the clear blue skies were immediately replaced with a thick dark haze of 

dust. We lost more than our clear blue skies and Sun that morning. 

My perspective is both a personal and professional one. You see, I was there the 

day our country’s world changed. I was in Tower 1 and Building 5, after the two 

planes hit, searching for my two-year old and his daycare classmates. Later that 

morning, my children and I saw the brave men and women jump from the towers, 

and at 9:59 in the morning I fell on top of my children in an attempt to protect 

them from the falling debris as the South Tower fell. My perspective also comes 

from having lived across the street from the World Trade Center and having my 

children’s daycare set up in Building 5. During the clean-up, DDC and the other 

governmental agencies operated out of my children’s elementary school at Public 

School 89. In fact, my office was my daughter’s classroom. It is a day my family, 

my city, and my country will never forget. 

There are many success stories that followed the City’s and the country’s response 

following the attacks. Two of the success stories are how the City cleaned up the 

debris in such a short time and how the City worked to detect and prevent fraud. 

We believe that the recovery, demolition, and clean-up was a success for the following reasons: first, all branches of government—Federal, State, and local—gave 

one entity—DDC—responsibility for managing the administrative, financial, and 

legal aspects of the project; and second, the events of the tragedy forged a strong 

partnership between the three levels of government and further forged a strong 

partnership between DDC, the Construction Managers, and the over 200 subcontractors. With the responsibility for managing the project, DDC then looked to 

the respective experts in-house and in City government in each of the fields of administrative, financial, technical, and legal and brought them on the team—the 

City’s Department of Investigation, to name one of the most important agencies, 

worked closely with DDC. Moreover, in the middle of all the chaos following the attacks, the City put into place one of the best proactive fraud prevention programs, 

whereby the City utilized the best men and women, and technology available to 

monitor every aspect of the project. The institution of the Monitors by DOI and the 

retention of KPMG by DDC earlier on established a certain tone for the project of 
83

respect and an expectation of law-abiding behavior. These two steps created a system of verification and reconciliation of all payment requisitions, and extensive field 

monitoring work. 

DDC worked with a team of public and private entities in the attempted recovery 

of survivors once the Towers fell, and DDC lead a team of public and private entities in the deconstruction of the war-damaged buildings and in the removal of the 

ensuing construction debris. DDC’s mission was clear—assist the City in restoring 

order to the City by cleaning up the debris in a timely and cost effective manner. 

The recovery aspect of the City’s job did not meet any of our dreams, expectations, 

or prayers. Once the Towers fell, we did not find any survivors. We did not find 

alive any of the people who did not evacuate in time or any of our Police or Fire 

that had not gotten out in time. Words cannot express how we all felt as the days 

turned into a month and we had found no survivors. 

As for the demolition and debris removal work, the cleanup of the World Trade 

Center site far exceeded anyone’s expectations. In the aftermath of the tragic loss 

of life, safety was the City’s number one priority as we proceeded to demolish the 

remaining buildings and cart off the debris. Another key priority was to prevent 

fraud and theft. Thanks to extraordinary efforts by the City and all of its agencies, 

its contractors and consultants, and cooperating state and federal agencies, the City 

had an excellent safety and fraud prevention record. 

Early projections had the City cleaning up the site for two or more years. In fact, 

the City finished cleaning up the site in nine months. The City worked for twentyfour hours a day, seven days a week, for nine full months. The only day off was 

on November 12, 2001. The irony of that day was that the Commissioner, First Deputy Commissioner, myself, and a skeletal crew of DDC employees who reported for 

work to catch up on paperwork, immediately dropped everything and went out to 

the Rockaways, Queens, following the crash of Flight 587 to aid in the recovery. As 

for the World Trade Center project, in a matter of days DDC had created a crude 

management structure, which then materialized into a clear management structure 

with an organization chart. In nine months, DDC demolished the wrecks of the remaining structures—Buildings 3, 4, 5, 6, and 7, and the skeletal walls of Towers 

1 and 2, and DDC removed 1,642,116 or slightly over one and a half million tons 

of heavy steel and debris. 

Together, DDC and DOI, with the assistance of the Monitors and KPMG, instituted a program to monitor any attempts at fraud or waste, while at the same time 

never stopping the debris removal process. Furthermore, DDC and DOI put into action our respective expertise, with the assistance of many other City agencies, State 

agencies and Federal agencies. To name just a few of the other City agencies that 

played an important role there was the City’s Office of Emergency Management, Police Department, Fire Department, Buildings Department, Environmental Protection 

Department, Transportation Department, as well as the Port Authority of New York 

and New Jersey. 

It is important to understand that in a normal ‘‘planned’’ demolition and debris 

clean-up project, architects and engineers study the as-builts and other related blueprints of the building to be taken down. Experts in how to bring down a building 

in a neat fashion are retained and consulted. Prior to any demolition work, the contents of a building are emptied, the area around the building is restricted, and only 

a limited work crew is allowed nearby the site both during and after the demolition. 

The end result is usually a controlled and self-contained destruction, with no loss 

of life and limited external property damage. 

None of this happened before September 11th. We have all seen the pictures and 

film footage. War brings chaos and in the City on September 11, we were surrounded by tons of chaos. 

In addition to having people still in the buildings as they came down, the buildings were loaded with all of their contents. The City did not have the time to study 

the buildings before they came down. There was nothing controlled about how the 

buildings came down. In fact, it was the complete opposite. Chaos was the order of 

the day. As I mentioned earlier, I lived nearby the World Trade Center. In my 

apartment, every surface was covered in the dust and debris from the collapse of 

the Towers. And, as I also stated earlier, the City was faced with the largest unplanned demolition project—7 direct buildings destroyed, including two of the largest office towers in the world, plus damage to numerous nearby buildings, and, most 

sadly, the unprecedented loss of life and destruction of families—parents faced with 

burying their children, spouses faced with burying their spouses, and children faced 

with the reality that their parents are gone forever, as well as their childhood innocence. 

As we now know, DDC was placed in charge of coordinating the deconstruction 

of the remaining structures and to remove all debris. DDC’s approach was to hire 
84

the four Construction Managers and to break down the 16-acre site into 4 quadrants 

or areas. This enabled the agency to track and coordinate the flow of labor and 

equipment onto and off the site, and to monitor daily and nightly the amount of 

progress made. DDC contacted four of the largest construction firms in the City who 

had either prior experience in the area, New York City, or the World Trade Center 

complex. Every morning and evening the City’s best construction people—private 

and public—would meet in a kindergarten classroom and discuss what work was to 

be done that day and to review what had taken place during the prior twelve hours. 

Having these meetings in a kindergarten classroom sitting in chairs appropriate for 

a six year old was good for comic relief at such a sad time. 

When all this started, no one knew what we were looking at in the sense of time 

to complete and cost. DDC recognized very early on that it would need help in dealing with all of the auditing and payment issues. The City had in place a contract 

with KPMG, a large accounting firm for consultanting purposes. The firm also has 

a construction and forensics auditing division. DDC utilized KPMG to work with 

DDC’s engineering audit officer to institute an audit engineering team for the entire 

project. I have not mentioned this earlier, but please keep in mind that during the 

nine months DDC worked on the project, DDC also continued to service all of its 

other clients and kept on building the City’s infrastructure in the rest of the City 

(DDC manages a current portfolio of design and construction projects in the billions 

of dollars). In addition, DOI continued its mission with regards to all other City 

agencies. 

What does a nine-month demolition and recovery clean-up project mean in terms 

of sheer numbers and dollars? The City paid the four Construction Managers cumulatively almost a half billion dollars or to be precise $476,907,125.54. As I stated 

earlier, the City removed 1,642,116 or slightly over one and a half million tons of 

steel and heavy debris. The daily average of men and women working at the site 

ranged from 1,096 people in the early months to 346 people in the last month. In 

total, 2,400,000 man-hours were expended during the project. Hundreds of pieces of 

equipment from the largest crane in New York City history to small hand tools were 

used throughout the project. In addition to the four Construction Managers that reported directly to DDC, there were approximately 200 different subcontractors and 

consultants working on the project. Included in the $476,907,125.54 paid to the Construction managers, was $24,661,101.93 paid to DOI’s Monitors. DDC also paid KPMG $15,315,507.29 for all 

of its services. In the fall of 2001, DDC installed a Global Positioning System in all 

trucks—private and public—that came onto and left the site. In addition, in the winter of 2002, DDC instituted an electronic check-in system to gain access to the site. 

This system instituted on January 31, 2002 reported 5174 people accessing the site 

in the remaining months of DDC’s demolition and debris removal operation. 

DDC and DOI instituted a lot of innovative procedures to ensure compliance and 

accuracy. The use of KPMG is one example of an innovative procedure. For example, 

KPMG provided audit expertise in prevailing wage compliance and documentation; 

verification of actual numbers of personnel working based on shift logs 24/7; determination of equipment usage on a given shift by established categories—operational-in-use, standby-staffed by an operator to be deployed when directed, and 

idle-being serviced or repaired; verification of costs of material, rental and owned 

equipment based on costs and rental rates in effect on September 10, 2001; 

verification of costs of professional personnel on established salary and benefit 

schedules; and certification of marine transport of debris loads by examination of 

vessel logs. 

With regards to reviewing the payment requisitions submitted by the four Construction Managers, DDC and KPMG in consultation with DOI and its Monitors, 

FEMA, and the four Construction Managers, put into place a payment requisition 

review process as follows: 

An innovative detailed system of checks and balances was instituted by DDC and 

DOI to ensure that the taxpayers’ money was spent in accordance with FEMA’s and 

DDC’s policies and regulations. DDC’s engineering audit officer and KPMG, would 

audit a sample from each payment requisition for each subcontractor cost category 

to assure proper documentation exists and there is agreement; check for proper 

equipment rates, labor rates, material prices and markups in compliance with industry standards, and prevailing wage prices; take withholdings of payment on a 

percentage basis per issue identified; enter all findings into a central electronic 

database; and submit a report to DDC and the Construction Manager for review and 

comment. DOI and its Monitors would review the payment requisitions submitted 

by the Construction Manager as they relate to fraud, waste, and abuse. DDC would 

send field monitors, who were not auditors, out to cross reference the payment requisition with their daily field logs for agreement; DDC’s project managers, who also 
85

were not auditors, reviewed the payment requisition packages for reasonableness of 

expenses, agreement with costs with field reports, and supporting documentation; 

and, the DDC project managers would also recommend withholdings to DDC’s engineering audit officer. FEMA would review the payment requisitions for accuracy, 

agreement with proper source documents, and eligibility of cost items for reimbursement and scope of work; and would also use their own field monitors to verify the 

daily reports. 

With regards to tracking the time and material tickets submitted by the approximately 200 subcontractors, DDC and KPMG created a very detailed methodology. 

Each group in the process had a unique focus and role. The system or methodology 

worked as follows: KPMG’s role was to assess and enhance processes and controls 

over field operations, including time and materials data capture and processing; and 

to monitor and sample debris removal cost data on a daily basis. DOI’s Monitors’ 

also had a role. The Monitors focus was to review supporting documentation for all 

subcontractor payment requisitions for fraud, waste, or abuse. DDC’s project managers’ role was to monitor all documentation so that the work was completed in a 

timely and cost-effective manner, and to ensure that payment requisitions contain 

supporting documentation. And, finally, FEMA’s role was to monitor documentation 

to ensure that work being performed and billed for was eligible for payment by the 

Federal government, and was reasonable and cost-effective. 

To follow through on each of these important roles, a detailed procedure was instituted by DDC. For example, KPMG fulfilled its role by breaking out its review into 

three distinct parts—labor, equipment, and materials. For labor, it would take random, 10% samples of names from shift sign-in sheets and physically verified that 

the workers were present. For equipment, it checked that all large equipment from 

the Construction Manager’s equipment logs were present and entered their findings 

with the following notation—working, standby, or idle. As for material, it would collect daily a copy of receiving slips and make notes in their daily observation logs, 

and report findings to DDC’s engineering audit officer. DOI’s Monitors, as already 

highlighted by Commissioner Rose Gill Hearn, also had a comprehensive system to 

review all labor, equipment, and materials. 

As I conclude my testimony today, again I would to take this opportunity to thank 

the Committee for convening these Hearings. I would also like to highlight some of 

the issues we encountered during the nine months it took us to complete the recovery, demolition, and debris clean-up. 

First, and foremost, the issue of how this country will respond, God forbid, to another act of war on its shores. I believe the destruction that follows an act of war 

should be treated differently than a natural disaster. As Commissioner Gill Hearn 

mentioned, the work done at World Trade Center was performed under a criminal 

investigation the entire time. There were times when a construction crew had to 

stop work to allow the FBI, ATF, Secret Service, FDNY, and/or NYPD search for 

some item. 

Moreover, we had to respond to a lot of different federal rules and regulations as 

administered by FEMA that had been created over time in response to flood and 

hurricane damage. These policies and regulations did not fit the mold here. In the 

end, after several meetings and the act of writing letters, we would receive an exemption to a set policy or regulation. But there has to be a better way. 

In closing, like a lot of other people, I have read the stories of how this nation 

responded to the World Wars that scarred the prior century. What I took from those 

stories was the ideal that a democratic and diverse nation such as ours can and will 

rise up to meet any challenge. After my personal experiences on September 11th, 

it is funny to say this, but I consider myself lucky to be in New York and to work 

for the City of New York. I witnessed first hand the best in people following that 

day’s attacks. Similar to how the federal government and private industry responded to the call by President Roosevelt at the start of World War II, the government of the City and the private industry located in New York City also answered 

a call on behalf of itself and the country.

Mr. ROGERS. The Chair now recognizes Mr. Neil Getnick, President of the International Association of Independent Private Sector 

Inspectors General. 

STATEMENT OF NEIL GETNICK 

Mr. GETNICK. Thank you. Good afternoon, Mr. Chairman, Chairman King, and members of the subcommittee. My name is Neil 

Getnick. I am an attorney, the managing partner of the law firm 
86

of Getnick & Getnick, which is located in New York, and I am really—it is a privilege to be here and an honor to appear before you 

to speak about my firm’s participation as an integrity monitor in 

the clean-up and recovery effort which took place at the site of the 

World Trade Center after terrorist attacks upon our Nation on September 11th. 

I am speaking today in my capacity as my law firm. I am also 

the president of the International Association of Independent Private Sector Inspectors General. IPSIG is another term for integrity 

monitors, and among other things, it is IPSIG that established a 

code of ethics which its members follow when acting as integrity 

monitors which proved crucial during the World Trade Center site 

disaster clean-up. 

An effective integrity monitor does not duplicate or supplant the 

functions of a construction manager, contractors or governmental 

agencies working at a disaster relief site. Rather, we use a multidisciplinary approach bringing to a project unique knowledge and 

expertise in the following areas: legal, investigative, auditing, loss 

prevention and other project-specific requirements such as engineering and environmental. We utilize these specific skill sets to 

review and monitor policies, procedures, practices in the areas of 

record keeping and billing as well as for the actual field work, and 

then the integrity monitor evaluates these procedures, and work 

progress to assess efficiency and accuracy and compliance with all 

applicable laws, rules and regulations. 

It reports its findings to an assigned governmental agency as was 

the case in the World Trade Center. The integrity monitors reported to the Department of Investigation. Much of that information which was so reported was subsequently shared with the monitored companies themselves and other governmental agencies in 

the project, and integrity monitor in many cases—this was certainly true at the World Trade Center—works with the monitored 

parties to develop programs and procedures which prevent corrupt 

practices, ensure compliance with all pertinent laws and regulations, and promote the efficient and cost-effective completion of the 

project. 

So let me give you an example. When a building issue was discovered which did not fall into the category of potential criminal 

behavior, the integrity monitor brought this issue to the attention 

of the construction manager and to the Department of Design and 

Construction discussing ways to avoid that problem in the future, 

and the billing was then adjusted to reflect the proper amount. So 

this was an example of how it facilitated corrections and improvements so that the city was not overbilled. 

On the other hand, in cases where corrupt and fraudulent behavior was suspected, whether that was in a billing or constructionrelated matter, the integrity monitor reported on that to the Department of Investigation and then worked with it and the appropriate law enforcement agencies to assist in the investigation and, 

in some instances, the ultimate prosecution of the responsible parties. And I do want to point out that there were such prosecutions, 

although it may not be that every office with prosecutorial power 

pursued every case, but rather there was a division of labor. 
87

Because of the unique role and skill set of the integrity monitors, 

we were able to add assistance to governmental agencies as well 

as to serve as a deterrent to those seeking to take advantage of the 

disaster situation for their own selfish gain. The members of the 

teams had expertise in legal, investigative, forensic accounting 

work, and were former government lawyers, police officers and accountants with much experience working in law enforcement and 

on criminal investigations. We were in the field on a daily basis. 

I am going to stop and say if there is one thing that is going to 

be taken away from this testimony today, I hope it is going to be 

the words ‘‘real-time basis.’’ It is the only way to get the job done. 

You can’t come back 6 months later, you can’t come back a year 

later, and do an effective audit. You are not going to find ghost employees a year later. You are not going to find which equipment is 

not being used although it is being billed for a year later during 

a static audit. But we were in the field on a daily basis observing 

the work in progress, speaking with the workers on the site, monitoring a complaint hotline 24 hours a day, gathering significant intelligence. 

We reviewed billing submissions. We checked back-up documentation. We visited the home office of subcontractors where appropriate, compared the billings submission with our own observations in the field, and then using this approach, we worked together with the Department of Investigation and the other governmental and private agencies on the project to then expose and prevent the waste, fraud and abuse. 

I have highlighted in my written testimony specific types of improper and often criminal behavior which can take place during the 

clean-up and recovery phase of a disaster site. If you wish, we can 

go into more detail during the question-and-answer period. But suffice it to say that behavior includes improper billing for payroll and 

labor, equipment and materials; safety and environmental issues; 

problems involving subcontractors; and issues involving site security and management of the project. And to the extent that these 

issues were encountered at the World Trade Center site clean-up, 

they were successfully addressed by the integrity monitors working 

together with the government. 

And to pick up on both Commissioner Hearn and General Counsel Varoli, my personal experience, and I have worked with government for many, many years as a former prosecutor, I have never 

had an experience like this. Never. The Department of Investigation, the Department of Design and Construction, FEMA, the local 

prosecutors’ offices, the Federal prosecutor’s office, they were truly 

working together, truly working together. 

Take the monitors. We were all competitors with each other, and 

KPMG as well. It was a collaborative experience of the private sector and the public sector meeting regularly and getting the job 

done. And here is the main point, and if we want to go into it during question and answers, let us do it, because I can say that with 

respect to the disaster clean-up, it is clear that the money that was 

spent on 9/11 disaster relief at the World Trade Center site was, 

in fact, spent for its intended purpose. We started out with a goal: 

Get it done. We had below budget, ahead of time and to spec, and 

those goals were met. 
88

I understand the Homeland Security Committee is considering 

legislation which will address fraud prevention and disaster relief 

programs. I simply refer you to my written testimony with some 

suggestions and recommendations that I think would be very helpful in applying the lessons learned on a going-forward basis. 

Again, as we have seen with the World Trade Center recovery 

and clean-up after 9/11, integrity monitors there were able to detect and report improper behavior on a real-time basis, which is 

what led to significant public savings. The use of integrity monitors 

and IPSIG in future disaster relief sites will have the same impacts 

and will ensure the money designated for disaster recovery will be 

used for its intended purpose. 

I thank you for the opportunity to address you on this important 

topic, and I am happy to answer any questions you may have. 

Mr. ROGERS. Thank you, Mr. Getnick, for your testimony.

[The statement of Mr. Getnick follows:]

PREPARED STATETMENT OF NEIL V. GETNICK

Good afternoon Chairman King, Chairman Rogers, and members of the Subcommittee. My name is Neil Getnick, and I am an attorney and the Managing Partner of the law firm, Getnick & Getnick, which is located in New York City. It is 

a privilege and an honor for me to appear before you today to speak about my firm’s 

participation as an Integrity Monitor in the clean-up and recovery effort which took 

place at the site of the WorId Trade Center after the terrorist attacks upon our Nation on September 11th. I am especially honored to appear this afternoon with New 

York City’s Commissioner of the Department of Investigation, Rose Gill Hearn. The 

Department of Investigation has long utilized Integrity Monitors to assist New York 

City in fighting fraud, waste and abuse in City projects and departments, and was 

responsible for the appointment of Integrity Monitors to participate in the clean-up 

and recovery effort at Ground Zero. 

New York City has shown that government can join together with private individuals, serving as Integrity Monitors, to effectively and economically combat and prevent fraud, not only in the area of disaster relief, but also in the regular day-today business of government. Historically, the use of Integrity Monitors was an essential component of the City’s campaign to combat mob infiltration and corrupt influence in key industries and markets, such as wholesale food markets, commercial 

carting, and school construction. The Integrity Monitors proved highly effective and 

the City expanded their use. Examples of this are found not only in the disaster 

relief effort at Ground Zero, which I will address in more detail shortly, but also 

in situations where the City enters into contracts with private business and has a 

concern that there is the potential for misuse of taxpayer funds, and therefore appoints an Integrity Monitor to oversee a particular contractor or project. New York 

City’s innovative use of private individuals and firms as Integrity Monitors is an 

example of government and the private sector working together for the public good 

in a cost-effective manner. 

Although I am speaking today in my capacity as the Managing Partner of Getnick 

& Getnick, I am also the President of the International Association of Independent 

Private Sector Inspectors General (‘‘IAIPSIG’’). IAIPSIG is a nonprofit professional 

association whose mission is to preserve and promote integrity, honesty, impartiality and professionalism in the work of IPSIGs, monitors and independent investigators. An IPSIG is an independent, private sector firm (as opposed to a governmental agency) that possesses legal, auditing, investigative, and loss prevention 

skills, that is employed by an organization (i) to ensure that organization’s compliance with relevant laws and regulations, and (ii) to deter, prevent, uncover, and report unethical and illegal conduct committed by the organization itself, occurring 

within the organization, or committed against the organization. Notably, an IPSIG 

may be hired voluntarily by an organization or it may be imposed upon an organization by compulsory process such as a licensing order or contract issued by a governmental agency, by court order, or pursuant to the terms of a deferred prosecution 

agreement. The IPSIG may also, in appropriate cases, participate with management 

in enhancing the economy, efficiency and effectiveness of the organization. Members 

of the IAIPSIG adhere to a comprehensive Code of Ethics and have been appointed 
89

as Integrity Monitors by local, state and federal agencies, as well as voluntarily retained by private industry. 

When I speak about Integrity Monitors today, I am speaking about an IPSIG 

which has been imposed upon an organization, and in the case of disaster assistance 

we are referring to construction management firms and general contractors, as a 

condition set forth in the contract to provide disaster relief services. This was the 

situation that existed at Ground Zero. 

After the attack on the World Trade Center on 9/11, Mayor Giuliani and top New 

York City officials realized that, as with any construction-type project, the potential 

for fraudulent and abusive behavior was present at Ground Zero. The City was determined not to allow that type of behavior to occur. Within a few weeks after the 

disaster the New York City Department of Investigation reached-out to private 

firms with extensive past experience as Integrity Monitors on City projects and in 

short order put into place an Integrity Monitor program to oversee the recovery and 

clean-up process. There were four construction management companies assigned to 

oversee the disaster clean-up, and the site was divided into four quadrants with 

each construction manager assigned to a particular quadrant. Our firm, Getnick & 

Getnick, was assigned as the Integrity Monitor to oversee the work performed on 

the quadrant assigned to the joint venture between Turner Construction Company 

and Plaza Construction Corporation. The other three Integrity Monitors were 

Thacher Associates, LLC, assigned to monitor Bovis Lend Lease; Stier, Anderson 

and Malone, LLC assigned to monitor AMEC Construction Management, and DSFX 

(Decision Strategies) assigned to monitor Tully Construction. Each of the four monitors were well known to the Department of Investigation, having been pre-qualified 

to serve as Integrity Monitors in the past and having successfully handled other 

monitorship assignments for the City. 

It is important to note what the appropriate role of an Integrity Monitor is, and 

is not, at a disaster relief site. There are many participants from the private and 

public sectors who take part in a disaster relief project. There is a construction manager whose job is to: manage the day-to-day operations on the work site; hire and 

supervise all subcontractors; interact with the relevant governmental agencies overseeing the project; prepare daily information logs; prepare billing requisitions; in addition to other responsibilities. Typically, a government agency with in-house engineering capability oversees the performance of work by the construction managers 

and the subcontractors working under them. At the World Trade Center, the New 

York City Department of Design and Construction performed this task. Numerous 

governmental agencies inspected the work for compliance with applicable laws, rules 

and regulations, such as OSHA requirements and safety and environmental regulations. At the World Trade Center site, in addition to the New York City Police and 

Fire Departments, various federal agencies were present on a daily basis, including 

representatives from the Federal Emergency Management Agency, the Environmental Protection Agency, the Occupational Safety and Health Administration, and 

the Federal Bureau of Investigation, among others. 

An effective Integrity Monitor does not duplicate or supplant the functions of 

these other participants in the project. Rather, an Integrity Monitor uses a multidisciplinary approach, bringing to a project its unique knowledge and expertise in 

the following areas: (i) legal, (ii) investigative, (iii) auditing, (iv) loss prevention, and 

(v) other project-specific requirements such as engineering, environmental, etc. The 

Integrity Monitor utilizes these specific skill sets to review and monitor policies, procedures, and practices in the area of record-keeping and billing, as well as for the 

actual field work. The Integrity Monitor evaluates these procedures and work 

progress to assess efficiency, accuracy and compliance with all applicable law, rules 

and regulations. It reports its findings to the assigned governmental agency, as in 

the case of the World Trade Center the Integrity Monitors reported to the Department of Investigation. Much of the information reported to the Department of Investigation was subsequently shared with the monitored companies and the other governmental agencies involved in the project. An Integrity Monitor in many cases, and 

this was certainly true at the World Trade Center, works with the monitored parties 

to develop programs and procedures which prevent corrupt practices, ensure compliance with all pertinent laws and regulations, and promote the efficient and cost-effective completion of the project. For example, when a billing issue was discovered 

which did not fall into the category of potential criminal behavior, the Integrity 

Monitor brought the issue to the attention of the construction manager and the Department of Design and Construction, discussed ways to avoid that problem in the 

future, and the billing was adjusted to reflect the proper amount. This is an example of how the Integrity Monitor facilitated corrections and improvements so that 

the City was not overbilled. In cases where corrupt and fraudulent behavior was 

suspected, whether in the area of billing or construction-related matters, the Integ-
90

rity Monitors reported the matter to the Department of Investigation and then 

worked with it and the appropriate law enforcement agencies to assist in the investigation and in some instances, ultimate prosecution, of the responsible parties. 

Because of the unique role and skill set of the four Integrity Monitors assigned 

to the recovery and clean-up at Ground Zero, we were able to provide coordinated 

assistance to the companies and governmental agencies working at the site, as well 

as to serve as a deterrent to those seeking to take advantage of the disaster situation for their own selfish gain. Members of the Integrity Monitor teams had expertise in legal, investigative and forensic accounting work and were former government lawyers, police officers and accountants with many years of experience working in law enforcement and on criminal investigations. We were in the field on a 

daily basis, observing the work in progress, speaking with the workers on the site, 

monitoring a complaint hotline 24 hours a day, and gathering significant intelligence. We reviewed billing submissions, checked back-up documentation, visited 

home offices of subcontractors when appropriate, and compared the billing submissions with our own observations in the field. Using this approach, we worked together with the Department of Investigation and the other governmental and private agencies on the project, to expose and prevent waste, fraud and abuse. 

My firm has been appointed or retained as an IPSIG and Integrity Monitor on 

numerous federal, state and local projects across a wide variety of industries. Based 

on that experience generally, and at the World Trade Center disaster site specifically, I would like to highlight for you the types of improper and often criminal behavior which can take place during the clean-up and recovery phase of a disaster 

site, which, because of its emergency nature, is typically billed on a time and materials basis, as opposed to a fixed price basis following a competitive bidding process. 

• Improper Payroll and Labor Billing: (1) ghost employees on the payroll; (2) employees who sign-in and out of the work site but who go to off-site work locations 

during the day, often to work on private jobs in nearby areas; (3) employees who 

‘‘loan’’ their identity to others who work in their place and receive a portion of the 

wages, with the balance being pocketed by the employee named on the books; (4) 

excess labor present on site resulting in inefficient use of work force, i.e., workers 

on site who are not being utilized; (5) contractors paying employees substandard 

wages and billing the government at a higher rate; (6) bribes to union officials to 

permit non-payment of pension and welfare benefits to union employees; (7) inflating the amount of union benefit payments in labor bills submitted to the government; (8) work slow-down to incur overtime pay. 

• Improper Equipment Billing: (1) billing for equipment not present at the site; 

(2) billing for equipment present at the site which is either unnecessary or is not 

functioning and in need of repair; (3) billing for repairs which were not performed 

or which were occasioned by off-site use; (4) billing for inflated rates higher than 

those permitted by contract; (5) billing for inflated rates higher than those charged 

on private work; (6) double-billing of equipment; (7) excessive and inaccurate billing 

for fuel needed to operate equipment on site. 

• Improper Materials Billing: (1) billing for substandard materials required for 

proper job performance; (2) inflating the price of materials purchased for the site; 

(3) inadequate inventory control resulting in billing for materials which are removed 

from the job site and used at a different location; (4) double-billing for materials; 

(5) kick-back schemes and bribes resulting in inflated prices for materials used on 

the work site. 

• Safety and Environmental Issues: (1) failure to properly train employees in safety procedures and use of equipment, and to enforce those procedures on the job site; 

(2) failure to properly dispose of hazardous waste material; (3) billing for substandard and ineffective environmental monitoring and testing; (4) performance of 

unnecessary and duplicative environmental monitoring and testing; (5) billing for 

safety equipment not utilized at the disaster site; (6) utilization of machinery and 

equipment on site which does not comply with current safety and environmental 

standards; (7) failure to maintain adequate site records and logs to determine 

whether required site safety and environmental standards are met. 

• Subcontractors: (1) selection of subcontractors based on improper criteria which 

does not include ability and pricing, such as payment of bribes, personal relationships, etc.; (2) improper mark-up of subcontractor billings; (3) retention of subcontractors unqualified and incapable of providing required services; (4) improper 

vetting of subcontractors’ qualifications and background. 

• Security: (1) insufficient site security and spotty enforcement of security regulations, such as failing to check identification and to inspect deliveries, allowing for 

unauthorized personnel and goods on work-site; (2) theft of property from site due 

to inadequate security, inventory control and theft prevention procedures; (3) inad-
91

equate coordination between various organizations and individuals responsible for 

site security. 

• Management of proiect: (1) relationships between construction managers and 

subcontractors which prevent objective evaluation of job performance; (2) corruption 

of supervisory personnel by bribes, threats, etc., (3) inadequate supervision and implementation of appropriate procedures to prevent fraud, waste, abuse, and violations of rules and regulations; (4) inability to perform necessary tasks and assignments. 

Many of these kinds of activities were identified as issues or potential problems 

by the Integrity Monitors at the World Trade Center clean-up and recovery project, 

and have been encountered during other monitorships we have worked on in the 

past. Due to the multidisciplinary approach and extensive experience in combating 

fraudulent and criminal activity on construction and other government projects 

which the Integrity Monitors brought to bear on this challenging task, and our partnership with City Government, we were able to identify and address these problems, 

and, when appropriate, work with law enforcement agencies to gather evidence for 

criminal prosecution. As a result, the money spent on 9/11 disaster relief at the 

World Trade Center site was spent for its intended purpose. 

I understand that the Committee on Homeland Security is considering legislation 

which will address fraud prevention in disaster relief programs. Based on our extensive experience in working as an Integrity Monitor and IPSIG on various governmental assignments, we offer the following suggestions with respect to that proposed legislation: 

• A list of pre-qualified organizations which can act as Integrity Monitors should 

be established so that qualified individuals can quickly mobilize to monitor disaster 

relief programs. These organizations should have among its members individuals 

with legal, investigative, forensic auditing and loss preventions skills, and have extensive experience in acting as Integrity Monitors on other government projects. 

• The obligations and duties of an Integrity Monitor at a disaster recovery site 

should be clearly delineated, and should include adherence to a Code of Ethics such 

as the one followed by members of the IAIPSIG (copy attached to this testimony). 

• The construction manager or contractor overseeing the disaster relief project 

should be required as a condition of its contract with the government to cooperate 

with the Integrity Monitor, including providing access to all books and records and 

access to all personnel, and require all of its subcontractors to do the same. The four 

construction managers working at the World Trade Center disaster site entered into 

such agreements with each of their respective Integrity Monitors as a condition of 

the CMs providing construction services at the site. 

• The hallmark of an IPSIG and an Integrity Monitor is its independence. Integrity Monitors should have no prior business or personal relationships with the monitored entity which would create a conflict of interest, or even the appearance of one. 

• Indemnification should be provided to the Integrity Monitor, similar to the type 

of indemnification provided to public officials acting during the course of their official duties. 

• Payment to the Integrity Monitor for services provided should be guaranteed on 

a regular basis to ensure that the Integrity Monitor is not thwarted in carrying out 

its obligations by companies that might withhold or delay payment in an attempt 

to deter the Integrity Monitor from performing its duties. 

Any construction project, even one which is anticipated and planned in advance, 

is susceptible to fraud, waste and abuse. By its very nature, a disaster recovery 

project is more vulnerable to this type of conduct. As we have seen with the World 

Trade Center recovery and clean-up after 9/11, however, the appointment of Integrity Monitors allowed the City of New York to detect improper behavior on a realtime basis, and not just after the fact. This enabled the City to remedy problems 

and bad practices quickly, and thus save significant sums of money. Even more 

noteworthy, however, is the preventive effect the Integrity Monitors had at Ground 

Zero in stopping fraudulent and wasteful conduct before it occurred by their presence and involvement at the site. This deterrent effect is invaluable. The use of Integrity Monitors at future disaster relief sites will have the same impact and will 

ensure that the money designated for disaster recovery is used for its intended purpose. 

Thank you for the opportunity to address you this afternoon on this very important topic. I am happy to answer any questions you may have for me at this time.

Mr. ROGERS. The Chair recognizes Ms. Carie Lemack, cofounder 

of Families of September 11th. Welcome. 
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STATEMENT OF CARIE LEMACK 

Ms. LEMACK. Thank you, Chairman Rogers. Thank you, Chairman King. Thank you, Congressman Pascrell. I am glad you are all 

here today. 

Obviously I recognize I come at this from a different perspective 

not because I am wearing pink and everyone else is wearing black, 

but because I am one of a victim’s family members from 9/11, and 

I actually brought my mom with me today. This is my Judy 

Larocque. She was on American Airlines Flight 11. This picture 

was taken 3 weeks before she was killed. She was almost 51. She 

would have been 51 on October 27th. And after my mom’s murder, 

I decided that I wanted to make sure that the victims’ needs were 

met, and also that we could harvest our power together to make 

sure that what happened on 9/11 never happened again. And as 

such, I, alongside of the family members, including my sister, 

founded Families of September 11th. We are a national organization. We have 2,300 members from I believe now 49 States, and we 

also have members from 9 different countries. So I am cofounder 

of Families of September 11th. 

But I am going to talk to you about a personal experience that 

I had and some of my suggestions so you can make sure what happened after 9/11 with the funds doesn’t happen again. 

I am sure you might remember that after September 11th, you 

passed the Airline Stabilization Act, and among other things, it 

created the Victim Compensation Fund, and this fund, we call it 

the VCF, gave the family members two choices. They could either 

retain their rights to sue anyone that they thought would be—was 

negligent in the acts that happened on September 11th, or they 

could give up those rights for an undisclosed sum of money, taxfree money, but undisclosed. Some have. My sister and I had to 

think very hard about it, but it was quite clear what we were going 

to do. We were taught by my mom to be accountable when we 

messed up. We had to fix it and admit it to and make sure it didn’t 

happen again, and we did not feel that the airlines and others were 

doing that, so we decided that the only way we were going to find 

transparency and find accountability was to go through a discovery 

process, which means you have to go to court. So we decided we 

were not going to partake in the Victim Compensation Fund. 

Unfortunately, unbeknownst to us, my ex-stepfather, my mom’s 

ex-husband Wayne Larocque, did not find this kind of accountability was necessary, and he was more interested in money. We 

were lucky enough that the Department of Justice had a very 

transparent system where you could monitor who was applying for 

the Victim Compensation Fund in your loved one’s name, and I vividly remember sitting in my mom’s study one day talking on the 

phone with my sister and with an attorney and thinking, wow, I 

was president of Families of September 11th. At the time I was 

sending out notices at the time saying, you should be diligent, keep 

track of anyone if they fraudulently applied, and I decided to do the 

same thing. And there was my ex-stepfather’s name. I was furious, 

as you can imagine, because he was jeopardizing our opportunity 

to seek litigation because the airlines are trying to throw anyone 

out of the suit even if they had been fraudulently applying for the 

victim compensation funds. 
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We were lucky that Justice had this transparent system. We contacted the appropriate authorities. They looked into his file and 

recognized that he had not even admitted that my mom had two 

daughters, and obviously they denied his application. So this was 

a success story. 

But what it highlights is the fact that other aid agencies don’t 

have any kind of transfer. With all due respect to my colleague, the 

American Red Cross, they did not have this. The United Way did 

not have this, and to this day I have no idea what he applied for 

and received in my mom’s name. He was due nothing legally. 

So what can you do about it? Well, you all oversee the Department of Homeland Security, and I was shocked when I found out 

that DHS does not have a victim’s assistance unit, which means 

while DHS was created to look out for the risks that face this country, no one is thinking about the fact that risks don’t only affect 

bridges and buildings and planes, they affect real people, and we 

need somebody at DHS thinking about those people afterwards. We 

can protect a bridge as much as we want, but what happens when 

some bad person goes after it and those people who are affected by 

that tragedy? There is no one at DHS thinking about those things. 

If we had an Office of Victims Assistance, which I believe is 

going to be in your authorization bill next Wednesday, so I hope 

that you look at this and consider it very strongly, this Office of 

Victims Assistance could have a database, a system that could collect information much like the Department of Justice did with the 

Victim Compensation Fund. They could allow family members to 

apply, to fill out their financial information once instead of multiple 

times like we had to do. We spent hours and hours at the Family 

Assistance Center. We spent hours on the phone oftentimes with 

volunteers with aid organizations who had no idea how to help us 

because they had bitten off. 

This system could make sure that that doesn’t happen. It is a 

single application, and then you would find out what are you eligible for. It is much like the Fast Web college scholarship system 

where students can enter their financial information, and all of the 

different scholarships that they are eligible for can pop up, and 

they can pick those. 

And this is an opt-in system. We don’t want to see a system 

where family members here have to be opted out. They would have 

to be educated on the system. They would have to be educated on 

the pros and cons and make a decision. To have them—to make 

them learn about a whole new system and have to master and 

make a decision about themselves is something we don’t want to 

see happen. 

So I hope you will consider creating this database, single implementation opt-in database, that can be used in the future because 

it will prevent fraud. It will permit families who are in the best position to know that fraud is being committed to see the fraud depicted. It lets people know and makes sure we can prevent it. 

And my last point, and again with all due respect, fraud works 

in both ways. And I hope that you will be able to help the family 

members if there is another disaster, because after 9/11 the American Red Cross had billboards, they had advertisements, they had 

little pop-up ads on the computer, said they were going to collect 
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money and help the victims of 9/11. What they weren’t telling everyone, they were only going to help a subset. They had chosen not 

to help the victims of the families on the planes, which included 

my family, which went away when my mom’s friends gave money 

to that fund. They thought it was going to help us pay the mortgage, but it wasn’t. We weren’t in a position to explain that to 

them. 

We ended up fighting the Red Cross on that. Bill O’Reilly got involved, and they changed their minds, which was great, but it 

shouldn’t be incumbent on victims to help the aid agencies to tell 

them what to do. 

So I hope you will look at what not only the data is, but what 

the aid agencies are going to do, what they say they are going to 

do. We are talking about fraud today, which is important, but also 

the unmet needs. There are people in New York who are sick who 

are not getting help. There are mental health benefits who are not 

going out to family members, and I can’t even get mine paid for. 

So at some point I hope we look at those issues as well. 

Thank you very much. 

[The statement of Ms. Lemack follows:]

PREPARED STATEMENT OF CARIE LEMACK

It is an honor to be given the opportunity to testify in front of the House Committee on Homeland Security’s Subcommittee on Management, Integration and 

Oversight. I would especially like to thank Chairman Rogers and his impressive 

staff for inviting me here today. The work you do in overseeing the Department of 

Homeland Security is vital to ensuring that our nation’s protectors remain focused 

and prepared for the threats our country faces. 

Today we are not here to talk about these threats, though they remain constant 

and require our continued vigilance. Today we are here to talk about our response 

when these threats strike, and how to more effectively deploy aid to those in need. 

A quick note; while I am a co-founder of Families of September 11, today I speak 

as a daughter of a 9/11 victim. My views are my own and have not been voted on 

or endorsed by the Families of September 11 board of directors, of which I am a 

member. 

There are three things that I believe responders need to keep in mind when trying 

to eliminate fraud and inappropriate use of funds for terrorism victims. First, we 

have to recognize that in the United States today, ‘‘family’’ is not just the traditional 

husband, wife and 2.5 kids. There are couples who never married, but have made 

lifelong commitments to each other; re-married fathers, with children from both a 

current and previous marriage. There are young workers who support their elderly 

parents and disabled siblings. When administering aid, an organization or government agency has to be able to take non-traditional familial structures into account. 

Accordingly, if an aid organization advertises that it is collecting and distributing 

donations for disaster victims, it must abide by its promotions. The agency cannot 

choose which subset of victims to support after the fact. If they advertise to help 

all victims, they must help all victims. 

Another issue that must be addressed is how a recipient can monitor and report 

fraud. Those who are collecting aid and managing the flow of funds for their family 

are in the best position to identify when something is amiss, but oftentimes, at least 

in the majority of cases after 9/11, there was no way for the head of household to 

know who else was applying for, and receiving aid in the name of the victim. Information should be available to the victims and their family representative, not held 

in secret by the agencies that are unequipped to handle the tremendous influx of 

requests and inquiries. 

Lastly, any type of aid distribution should go through an opt-in database system, 

not one that is opt-out. That is, let the families decide who sees their personal financial information and which groups they would like to apply to for aid, instead of 

automatically giving their private information to all aid organizations that then decide which programs they are eligible for. This process will also help families detect 

and prevent fraud in their loved one’s name. The opt-in system should be used in 

concert with a single application, instead of the system used after 9/11, when each 
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aid agency had its own application that required hours of duplicating efforts from 

the families the aid was supposed to help. 

These three issues became clear to me after my personal experiences with post9/11 aid. My mother, Judy Larocque, was the CEO of Market Perspectives, a small 

market research firm employing approximately 20 people in Framingham, MA, my 

hometown seventeen miles west of Boston. Mom was 50 in September 2001, about 

to turn 51 on October 27th. She had two daughters; my older sister, Danielle, who 

at the time lived in Chicago, and me. 

Mom’s dream was to get both her daughters back home after we left Massachusetts for college in California. In the fall of 2001, it looked like her dream was going 

to come true. On Labor Day weekend, Danielle and her boyfriend, now husband 

Ross, came to Boston to visit. I took Mom to a Red Sox-Yankees game, we ate lobster and steamers, and we enjoyed a peaceful weekend spending time together. 

When Danielle and Ross left to return to Chicago, Ross told Danielle he thought 

he could definitely live in Boston. Mom and I were ecstatic. 

On September 10th, Mom was as proud as ever. Danielle taught her first class 

as an adjunct professor at Northwestern Law School that day, and Mom beamed. 

When I called her late that night, I woke her up. Even in her sleepy state, the first 

question she asked me was ‘‘Did you call and congratulate your sister?’’ Of course 

the answer was yes. We were as close as any mother and daughters can be. Mom 

made sure of that. Whenever Danielle and I fought, she made us hug, and told us 

‘‘you are always going to be sisters, that will never change’’. 

That bond became even stronger after 9/11. There are not words to describe the 

pain and grief of losing Mom, my best friend, my confidant, my comforter, my rock. 

We all know of the horrors of that day, September 11, 2001, so I will not go into 

that any further. Instead, I will focus on the troubles we encountered after 9/11. 

Immediately, we began to understand that the methods in place to deal with victims’ families are not made for today’s familial structure. Mom was recently divorced, and since Danielle and I were not considered dependents, Mom was treated 

as a single woman with no children. I cannot even begin to imagine how furious 

that designation would make her. 

American Airlines was the first organization we came in contact with that treated 

us differently. They kept me on hold for hours, never confirming Mom was on Flight 

11. At one point, I remember thinking that she could not have been on that flight, 

because an airline would not treat victims? family members this poorly. Unfortunately, I was wrong on multiple counts. 

When Danielle asked for help in getting home to Boston from Chicago, the American Airlines representative gave her the number for Amtrak, and told her that the 

trains were all booked. We then learned that Mom’s name was released to the 

media sometime in the afternoon of 9/11, even though we had expressly asked 

American Airlines not to give out her name. 

Only later did we find out that there was a lot of information we were not told 

about. There was a meeting at Logan Airport on the morning of the 12th that we 

were not invited to. The only explanation for the omission was that we were not 

considered immediate family, though we can never really know if that is why information was kept from us. 

Perhaps all of this would have been different had Mom had a husband. Instead, 

she had two daughters in their twenties, trying their best to handle her affairs, but 

not considered her children by aid agencies and the like. 

As we struggled with that hurdle, we also learned that the specifics of her murder 

were being taken into account, without our prior knowledge, to determine if her 

family was eligible for aid. To prevent improper practices, organizations need to 

make clearer their criteria and procedures ahead of time to ensure all families receive appropriate treatment. 

This lesson became apparent in the American Red Cross’ decision not to give aid 

to the families of those who loved ones perished on the four planes. They claimed 

that the airlines? legal obligations would be substantial enough to help those families. They did this without alerting the public, all the while collecting donations in 

the name of the ‘‘9/11 victims and their families’’. 

The ramifications of this decision may not be immediately apparent, but they 

were severe. Suddenly, many of Mom’s friends who donated to the American Red 

Cross asked us about the aid we were getting to help pay Mom’s mortgage on our 

childhood home. When I had to tell them we were not eligible for the aid, they became angry, frustrated, and wanted me to provide the explanation. 

It seemed that everywhere we went, we saw solicitations for the American Red 

Cross. It was incredibly painful to feel like a second-class victim’s family member, 

as if we were not good enough for the generosity that the American public put forth. 

When we went to Framingham’s Town Hall to get copies of our birth certificates 
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to apply for Mom’s death certificate, we were faced with another reminder of our 

low status. There on the counter was an appeal to help the victims in New York 

and Washington by giving to the Red Cross. When we asked if the woman at the 

counter knew there were victims right here at home, her eyes welled with tears. 

Families need to be accepted as what they are. When an ad is placed saying an 

organization is raising money to help victims? families, it must either specify which 

type of families, or be open to all affected families. To this day, all the scholarship 

money that was raised for the ‘‘children’’ of 9/11 victims only goes to dependent children of a certain age. I was a 27-year-old daughter of a 9/11 victim, but was deemed 

ineligible for any 9/11-related scholarships or aid when I began graduate school in 

2002. I may not be what most considered when they donated money for 9/11 children, but there is no doubt in my mind, nor would there be in my mother’s, that 

I lost a parent on 9/11. 

As a co-founder of Families of September 11, a national organization of 9/11 victims’ family members, survivors and concerned members of the public, I heard the 

stories of many non-traditional family members who fell through the cracks of aid 

organizations in the months following 9/11. There were the engaged, some of whom 

were supposed to be married only four days after the attacks, who were not eligible 

for most types of aid. I remember vividly speaking with a woman whose ex-husband 

had remarried before he was killed on 9/11, so that the new wife received all of the 

aid. The problem occurred because the man had fathered children with both women, 

and the first wife was unable to collect money to help her young son. The story of 

a couple who chose not to marry, but lived together for seventeen years comes to 

mind, with the victims’ parents getting aid, but not the partner who was left with 

bills and a mortgage. This scenario was played out over and over again with many 

of the gay and lesbian victims whose partners were left with no legal and varying 

social status to receive aid. 

Aid organizations must recognize the differing aspects of American families as we 

know them today. They must be flexible and accommodating. To its credit, the 

American Red Cross and United Way did finally come around and begin to help 

non-traditional families. But this change came only after tremendous pressure. It 

should not be the responsibility of the victims to have to actively lobby those who 

are purporting to help them. Instead, the aid organizations should welcome their 

input and act on it, not resist it until Bill O’Reilly or his counterparts repeatedly 

attack their practices on national television. 

The Department of Homeland Security (DHS) could play a crucial role in solving 

this problem. Currently, there is no Office of Victim Assistance in DHS, which 

means that while there are lots of people thinking about how to deal with preventing and immediately responding to a disaster, there is no one trained to deal 

with the people a disaster might affect. If DHS has trained professionals on hand 

who specialize in assisting disaster victims, perhaps the good people at American 

Airlines and other corporations can leave victim support to those better suited. 

The designation of who is eligible for aid, and who is not often walks a thin line. 

We are all aware of the reports of limousine drivers and mistresses who racked in 

large sums of money from aid organizations because they were able to prove, however tenuously that they suffered losses after 9/11. But there are some programs, 

and some individuals for whom this designation is crystal clear. What is less precise, however, is how to identify and respond to them. 

After Congress created the Victim Compensation Fund (VCF), families were faced 

with a difficult decision: should they give up their right to pursue litigation against 

those liable in their loved one’s death in order to receive an unknown amount of 

money from the government? This was made even more difficult by the fact that 

when the regulations for the VCF were finalized, there was strong resistance in 

Washington against any type of in depth investigation into the 9/11 attacks. How 

could a family decide whether or not to pursue litigation, when we had no way of 

knowing what really went wrong? 

For Danielle and me, however, this decision was simple. We knew that we had 

to pursue litigation in order to get to the truth, and therefore do our part to ensure 

that what happened to Mom and nearly three thousand others would never happen 

again. If the airlines, security companies and others had been forthcoming, we 

might have chosen differently, but based on their secretive behavior, we felt it was 

our obligation to shed light on the truth in our call for accountability. 

There was someone who did not share our sentiments. He wanted to collect 

money, and was not interested in seeking the truth. His name is Wayne Larocque, 

and he is Mom’s ex-husband. 

One day while on the phone with an attorney and my sister, I decided to look 

at the list the Department of Justice had created of those who had applied for the 

fund. At the time I was President of Families of September 11, and I felt an obliga-
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tion to do what I had advised our members to do; stay informed, be diligent, and 

make sure no one was fraudulently applying to the VCF in your loved one’s name. 

When I saw Wayne’s name on the list, applying on behalf of Mom, I was shocked. 

That disbelief soon turned to action, and Danielle and I quickly contacted VCF officials. As I understood it, Wayne applied, and in his application, he failed to mention 

that Mom had two daughters who were her legal next of kin. 

We were not allowed to see Wayne’s application, although we did contact the 

proper authorities to ensure that Mom’s rights, and our own were not violated and 

that no fraud was ultimately committed. His application could have jeopardized our 

participation in a lawsuit; the airlines have tried to have any family that even minimally applied to the VCF thrown out of the pending litigation. 

Even today, I have no way of knowing what other money Wayne applied for and 

received. Perhaps there is none. But if he was willing to go the trouble of filling 

out the VCF form (which was much more involved that most aid applications), I can 

only imagine how easy it might have been for him to collect other money. Without 

having access to information regarding who applied for and received money in 

Mom’s name, I can have no way of knowing if any fraud was committed, and therefore cannot report and deter it. 

There are systems that are very exact when determining how to compensate victims’ families. Worker’s compensation for example, does a terrific job of knowing exactly how much each family gets, and to whom it goes. I know this, since we were 

not eligible for worker’s compensation aid, but Mom’s mother, my grandmother, 

was. Based on my experiences with it, I feel very confident that little to no fraud 

got through the their system, nor the system the Social Security program uses. I 

do not believe it is too much to ask aid agencies to have some sort of system that 

could allow a victims? family to know who is asking for and receiving aid in a victim’s name, in an effort to curb fraud. In the case of the VCF, this type of transparency clearly worked. 

This database should be part of an opt-in system that could be used to streamline 

aid distribution. After 9/11, Americans, and for that matter, people from across the 

globe, showed their patriotism, unity and compassion in a generous outpouring of 

support and donations. Speaking for myself and my family, we were overwhelmed 

with the selfless giving of time, money and love from our neighbors, friends, communities and fellow Americans. 

The job of collecting and distributing the aid was not an easy one. Those agencies 

that stepped up to the plate and volunteered to house and give out the money might 

not have been fully aware of the difficult task that lay before them. 

On the Tuesday before Thanksgiving 2001, I drove from Boston to New York City 

for a meeting with other 9/11 family members and New York Attorney General Elliot Spitzer to discuss how to streamline the aid distribution process. He suggested 

creating a database of 9/11 families? financial information, so that the aid organizations could review our status and decide how best to divvy up the aid. 

I agreed that idea of a database was useful, but thought it should work in the 

opposite direction. The families needed one list of aid agencies with a common application, that told them the criteria and amount of aid each agency was offering. This 

way, families could fill out one form, and could then decide to which organizations 

they wanted their application sent. For many families, the idea of deciding which 

agency was able to see their information was extremely important. 

Unfortunately, we were unsuccessful in creating this database. As I understood 

it, the aid agencies did not want to collaborate in drafting and approving a single 

application and did not like the opt-in idea. 

The result was that families had to spend hours on the phone, or in queue at the 

Family Assistance Center, repeating the same information over and over again to 

different aid agencies. Not only was it frustrating to the families, it also led to an 

environment that could foster fraud. There was no way to keep track of which agency was paying which bill for a family, possibly resulting in multiple payments, 

whether intentional or not. 

For future events requiring aid distribution, I highly recommend the opt-in, single 

application approach. Families have every right to know who sees their financial information, which an opt-in system provides. Using an opt-out approach assumes 

that every family completely understands the complicated system—after suffering a 

traumatic loss, this is just one more unnecessary burden to place on a grieving, 

overwhelmed family. 

A single application is a seemingly simple, yet hard to implement process. Each 

aid agency uses its own, slightly modified approach, and there is no overseeing authority to make them all collaborate for the benefit of the recipients. If Congress 

can get them to work together now, before another event, perhaps the victims of 
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the next catastrophe will receive an improved, more streamlined and easier to use 

response process. 

This is an area that DHS could address. If an office of victim assistance is created, it could house a ready-to-be-deployed database that will immediately serve disaster victims. With one data collection point, families are spared the unenviable 

task of repeating their personal data, and are capable of monitoring aid activity for 

their family. This office could also develop rules and strategies for dealing with any 

fraud that is detected and increase family-approved information sharing among 

agencies and aid organizations. 

The generosity demonstrated by the public towards 9/11 victims? families and survivors was tremendous and deserves to be lauded. However, the treatment of the 

aid after it was collected was less then perfect. We need to learn from the mistakes 

committed in the past to improve the process for the future. 

Mom always taught Danielle and me to be accountable for our actions. If we erred 

in some way, we did our best to admit it, correct it, and make sure it didn’t happen 

again. I can think of no better way to honor my mom than to apply this same standard to post-9/11 aid and response. This is why I fought so hard for the creation of 

the 9/11 Commission, and again for the implementation of its recommendations, and 

that is why I am here today to work with you to create the best aid response we 

can for the future. 

Thank you very much for this opportunity to speak before you. I am happy to take 

any questions.

Mr. PASCRELL. Mr. Chairman, I just want to make a point on 

what we just said. We read about these things and the families of 

the victims. It would seem to me that this committee needs to go 

on record as soon as possible, our Chair and our Ranking Member, 

that we will do anything that we can practically to respond to what 

Ms. Lemack has just stated. I mean, I can’t fathom. I can believe 

it, but I can’t fathom this thing. The families are not being responded to this late. As you well know, first responders have been 

given the runaround over and over again. I alluded to that before, 

but I don’t want this to be about first responders because we are 

talking about the families of the victims. 

I would beg you to make sure that you do everything in your 

power. I know your heart is in the right place. I know it will be 

done. 

Mr. ROGERS. We are going to do our part. I thank the gentleman. 

Also, again, I want the thank Ms. Lemack, and now turn to the 

only panelist that we have today who doesn’t believe I have an accent. She is also a fellow Alabamian, from north Alabama, however, but Huntsville, Alabama, and a graduate of the University of 

Alabama. 

We welcome you, Ms. Leigh Bradley. Leigh is the Senior Vice 

President of Enterprise Risk for the American Red Cross. 

Welcome. We look forward to your statement. 

STATEMENT OF LEIGH BRADLEY 

Ms. BRADLEY. Thank you so much Mr. Chairman, Member Meek 

and Congressman Pascrell. I want to thank you all for providing 

me the opportunity to appear before you today to discuss the American Red Cross’s response to the attacks on America on September 

11, 2001. 

In my current job as the senior vice president for enterprise risk 

of the American Red Cross, I am charged with managing the Red 

Cross’s internal audit department and overseeing the Red Cross’s 

compliance investigations, ethics, and corporate safety policies and 

programs. Seated behind me today are two senior Red Cross investigators: Teila Brewer, who is vice president for investigations, 
99

compliance and ethics; and Frank Fravilla, director of the hurricane investigative unit and also 9/11 fraud investigator. I want to 

acknowledge the work that these two individuals do every day to 

ensure that we protect Red Cross assets. 

I also want to acknowledge my colleague Alan Goodman, who is 

the executive director of the American Red Cross September 11 recovery program, which we refer to as SRP. For the past 4 years, 

Alan has been at the helm of this program, which has provided 

longer-term recovery to nearly 60,000 individuals and families, including—and I would like to underscore this for the record—families of the deceased, including those who were on the planes that 

were crashed into buildings on 9/11. We assist the physically injured rescue and recovery workers and their families and people 

who are living or working in the areas of the attacks. And what 

I am going to do is ask my good friend to my right to meet with 

Alan Goodman after our testimony today just to make sure that we 

have met her needs and the needs of her family. 

It is important to note that each day the American Red Cross responds to disasters and communities across the Nation. In fact, we 

respond to more than 70,000 disasters each year. The vast majority 

of disasters we respond to are single-family house fires. We also respond to large-scale disasters such as hurricanes, floods, tornadoes 

and manmade events. There is one constant in all response operations, and that is to ensure the immediate emergency needs of our 

clients are met. 

Almost immediately after the first plane struck the World Trade 

Center, Red Cross volunteers and personnel were on the scene. 

The response by the American public to 9/11 is nothing short of 

extraordinary. Tens of thousands volunteered with the Red Cross, 

and tens of thousands mailed financial contributions. In total, the 

Red Cross received more than $1 billion in contributions. The intent of our donors was to ensure that this money was earmarked 

for the victims of 9/11, and to that end we created a segregated 

cause known as the Liberty Disaster Relief Fund. 

The American Red Cross had two phases of response to the tragic events of 9/11. The first phase was known as the relief operation 

phase and ran through October 1st of 2002. The second phase encompassed the long-term recovery effort dating from October the 

2nd, 2002, to the present, and that is referred to as our September 

11th Recovery Program, or, as I mentioned, SRP. As a result of 

these efforts, the Red Cross has provided support to nearly 60,000 

individuals and families directly affected by the September 11th 

terrorist attacks. 

Now I would like to speak just briefly but more specifically about 

fraud detection, prevention and controls. 

Waste, fraud and abuse are very serious issues to the American 

Red Cross, and why is that? Because as an independent nonprofit 

agency, we rely on the donations of the American public to provide 

services free of charge to victims of disaster. We therefore work extremely hard to prevent and detect fraud in order to be good stewards of donated dollars and in-kind benefits. 

Despite our prevention and detection efforts, however, we did experience fraud during our response to 9/11. Some of the schemes 

that we found included individuals fraudulently claiming that a 
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loved one had died; sometimes creating a new identity as their 

own, using their real identity as the deceased individual. In one instance we had a father claim that one of his children had died, 

using the childhood picture of himself as a young man to prove the 

existence of his fabricated son. And another instance, several of 

these, we had individuals claim that they had been injured in the 

affected area, most notably the World Trade Center, only to find 

out later that they had never been near Ground Zero. 

Now, that is some interesting anecdotal information. Some statistics may be helpful to give a more comprehensive overview of our 

9/11 fraud experience. 

To date we have received 1,473 allegations of wrongdoing, mostly 

fraud. Thus far we have obtained 140 criminal convictions. Currently we have 20 pending legal cases, meaning they are at the 

grand jury about to be tried. We have 213 remaining cases that are 

still being investigated, some of those investigated by the Red 

Cross, some of them by a variety of law enforcement agencies. 

The American Red Cross to date has collected $380,000 in courtordered restitution, with a potential of future restitution in excess 

of several million dollars. Fraud as a percentage of the money we 

collected, which is just shy of $1.1 billion, is less than 1 percent. 

It is fair to say that despite our strong efforts to prevent and detect fraud, 9/11 demonstrated for the American Red Cross the need 

for tighter internal controls and required our organization to 

strengthen its fraud prevention and detection mechanisms. In my 

written testimony I provide a number of detailed descriptions of 

improvements made by the Red Cross after our response to 9/11. 

However, I would like to briefly highlight four of the most significant changes that were implemented to help prevent fraud from occurring in the future. 

There are four of them: Donor 7, that was a new initiative; second, a new Client Assistance System, we call it CAS; third, a Coordinated Assistance Network, we call that CAN; and a concerned 

connection line, which is basically our nationwide whistleblower 

hotline. 

As a direct result of the enormous public generosity in the wake 

of 9/11, we created a national initiative to ensure conformity with 

donor intent; in other words, a standardized system to ensure that 

donated moneys were applied in such a way as to honor the intention of the donation. Donor DIRECT, which stands for Donor Intent 

Recognition, Confirmation and Trust, provides affirmative confirmation and acknowledgment to ensure that donations are directed as intended. 

Second, and I believe this one is the most important, we created 

the Client Assistance System, or CAS, which is a single IT system 

to track in real time client assistance provided to disaster victims. 

During 2003, as a result of a major lesson learned from 9/11, we 

built a system that could handle up to 300,000 cases of individual 

financial assistance. That was five times the amount of assistance 

provided during 9/11. During the 2005 response to Hurricanes 

Katrina, Rita and Wilma, we saw more than 1.4 million cases of 

financial assistance. Our system was basically swamped, and as a 

result we have enhanced CAS software so that we now have a sin-
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gle system of records to support financial assistance to upwards of 

2 million cases. 

This is so important because unless you have a real-time ability 

to determine whether someone has come to you and already received financial assistance—and people can make a career of applying for duplicate, triplicate payments, as we saw to some extent 

during our response to Katrina, Rita and Wilma. 

Third, one of the great successes to come out of the entire nongovernmental organizations community’s response to 9/11 was the 

development of the Coordinated Assistance Network, meaning 

CAN. Working with other voluntary agencies, and at the urging of 

the GAO, the Coordinated Assistance Network provides a framework and tools to make casework management easier and more efficient through advanced collaboration. Specifically CAN allows us 

to share client information among a group of agencies that conduct 

casework using a single secure Website, provided, of course, that 

we have the client’s permission to share that information, and can 

also add additional safeguards to prevent fraud. 

Finally, we have implemented a whistleblower hotline that we 

call the Concerned Connection Hotline. It is for use by volunteers, 

employees and clients who can confidentially report through a 24-

hour toll-free number any suspected fraud, waste, abuse or related 

wrongdoing. 

Mr. Chairman, members of the committee, we continue to strive 

as an organization to ensure that we have the best methods in 

place to detect and prevent fraud from occurring. As an independent nonprofit agency, this is critical to our future. Obviously 

during times of disasters, we must consistently and responsibly 

steer the money that we are given by the American people, and we 

must be able to demonstrate to our donors that we vigilantly protect our assets against fraud. 

I thank the committee for holding this hearing today and providing me the opportunity to share with you some of the ongoing 

efforts of the American Red Cross since 9/11 to ensure that we continue to meet the expectations of the American public during times 

of disaster, and I am happy to answer any questions that you may 

have. 

Mr. ROGERS. Thank you, Ms. Bradley. 

[The statement of Ms. Bradley follows:]

PREPARED STATEMENT OF LEIGH A. BRADLEY

Chairman Rogers, Congressman Meek, and Members of the Committee, my name 

is Leigh Bradley and I am the Senior Vice President for Enterprise Risk at the 

American Red Cross. 

I want to thank you for providing me with the opportunity to appear before you 

today to talk about the American Red Cross response to the attacks of September 

11th—work that is ongoing to this very day. I appreciate the opportunity to share 

with you our lessons learned regarding fraud prevention, detection, and controls. 

The attacks on the United States that occurred on September 11, 2001, tested the 

American Red Cross and America in ways we had not experienced as an organization or as a nation. It is a day that will remain burned into the minds of all who 

witnessed on national television two of our nation’s tallest and proudest buildings 

fall more than 100 stories, a massive inferno at the Pentagon and a plane crash in 

a remote field in Shanksville, Pennsylvania. Thousands of innocent people died on 

September 11, including members of the first response community who put their 

lives at risk to save others. Since September 11, thousands more have since suffered 

from the physical and emotional stress of responding to these vicious attacks. All 
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who witnessed this day will remember where they were, what they were doing, and 

will always recount their feelings and emotions as we, as a nation, were overcome 

with grief. 

The American Red Cross had been America’s partner in disaster preparedness, 

prevention and response for nearly 120 years on that fateful day in September. In 

our long history, we have aided soldiers on the battlefield, supported victims of all 

disasters, and provided support to first responders. 

Our experience in the aftermath of the Oklahoma City Bombings in 1995 helped 

to prepare us for this day. Almost immediately after the first plane struck the World 

Trade Center, Red Cross volunteers and personnel were on the scene ready to aid 

in the response. 

I want to acknowledge the work of Alan Goodman who is with me today. Alan 

is the Executive Director of the American Red Cross September 11th Recovery Program (SRP). For the past four years, Alan has been at the helm of this program, 

which has provided longer term recovery to tens of thousands of individuals and 

families, including families of the deceased, the physically injured rescue and recovery workers and their families, and people who were living or working in the areas 

of the attacks.

Response to September 11, 2001

One year after the terrorist attacks occurred on 9/11, the American Red Cross 

issued a report to the American people regarding the activities of the Red Cross, 

the Liberty Disaster Relief Fund, and the execution of the September 11th Recovery 

Program. Included in this report was a chronology of our response, which is attached to my testimony. (Appendix I) 

Before I discuss the Red Cross response to 9/11 and some of the lessons learned, 

it is important that I briefly share what the Red Cross traditionally does during 

times of disaster and how this response differed. 

The American Red Cross responds to disasters in communities across the nation 

each and every day. In fact, we respond to more than 70,000 disasters each year. 

The vast majority of disasters we respond to are single family home fires. We also 

respond to large-scale disasters, such as hurricanes, floods, tornadoes, and manmade events. There is one constant in all of our response operations and that is to 

ensure the immediate emergency needs of our clients are met. 

Individual client assistance has been provided by the American Red Cross for as 

long as the organization has been in existence. Red Cross individual client assistance includes much more than just financial support. In fact, traditional individual 

client assistance has been based on a cadre of services to ensure that the health 

and welfare needs of our clients are met. This includes feeding and sheltering operations, mental health assistance, first aid, and relief and recovery referrals. We 

partner with other nongovernmental organizations, the for profit community, and 

with all levels of government to ensure that the emergency needs of disaster victims 

are met. In each response, our first priority is to ensure that those affected by disaster have a safe shelter and are provided with the basic necessities of life. 

The next priority is to assist families in taking the first steps toward recovery. 

This is the purpose and concern that individual client assistance is designed to 

serve. It has long been the case that while shelter, feeding and the distribution of 

critical items are sufficient to stabilize individuals and families, it is not sufficient 

to meet all short term emergency needs necessary for disaster victims to begin their 

individual road to recovery. Critical items of assistance such as resources for food, 

changes of clothing and bedding bridge the gap between mass care activities and 

the receipt of state and federal recovery assistance. This allows a family a modicum 

of independence and a flexible resource for the types of essential items mentioned 

above. Ultimately, within the framework of disaster assistance provided by other 

agencies, as well as state and federal programs, individual client assistance helps 

bridge the gap between mass care activities and loans, temporary housing, and 

other assistance. 

The response of the American public in the wake of 9/11 was extraordinary. When 

thousands of Americans needed help following the attacks, tens of thousands volunteered with the Red Cross, and tens of thousands made financial contributions. The 

American Red Cross received more than $1 billion in contributions. While the Red 

Cross often provides financial assistance for the immediate emergency needs of our 

clients, the intent of our donors was to ensure this money was earmarked for the 

victims of 9/11. 

To that end, we created the Liberty Disaster Relief Fund as a distinct and segregated fund for those financial donations and to assist those directly affected by 

the September 11th attacks. Former Senate Majority Leader George Mitchell was 

appointed as the independent overseer of the fund. Under the distribution plan, and 
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consistent with the Red Cross mission of providing immediate emergency disaster 

relief, the majority of funds were to be distributed to the families of those who were 

killed in the September 11 attacks, those who were seriously injured, and others directly affected by the disaster. 

For an organization that is accustomed to providing de minimus amounts of financial assistance—money that is meant to provide for immediate emergency needs 

such as a change of clothes, toiletries, or diapers for children—this meant providing 

much larger sums of money. 

The American Red Cross had two phases of response to the tragic events of September 11. Phase One represents the immediate response to the terrorist attacks, 

dating from September 11, 2001 through October 1, 2002, and is referred to as the 

Relief Operation Phase. Phase Two encompasses the long term recovery effort, dating from October 2, 2002 to the present, and is referred to as September 11th Recovery Program (SRP) Phase.

Relief Operation Phase 

• Family Gift Program #1 (FGP I)—The FGP I provided three months of 

rent, food, utilities and other ongoing expenses to family members of those missing, deceased, or injured from the World Trade Center (WTC), Pentagon, or 

Shanksville, Pennsylvania events.

SRP Phase 

• Family Gift Program #2 (FGP II)—The FGP II began on December 6, 

2001, and provided six months of living expenses to family members and injured clients who received FGP I and nine months of expenses to clients who 

initially sought financial assistance after December 2002. 

• Family Gift #3 (FGP III)—FGP I and FGP II met the early financial needs 

of the victims covered under the Family Gift Program. The first two gifts were 

designed to cover the first nine months of living expenses and these gifts were 

all disbursed prior to June 30, 2002. In January 2002, the Cross determined 

that the Family Gift Program should also cover unmet essential living expenses 

for an entire year through September 11, 2002. The third Family Gift (FGP III) 

was created to cover expenses for the months ending on September 11, 2002. 

The third Family Gift (FGP III) was created to cover expenses for the months 

ending on September 11, 2002. No funds were distributed for FGP III until July 

of 2002. 

Specifically, FGP III granted expenses, depending on whether or not clients received the previous two gifts, to financially dependent immediate and extended family members of decedents, child guardians, and the ‘‘seriously injured.’’ The ‘‘seriously injured’’ were defined as individuals who were in the immediate vicinity of the 

WTC, the Pentagon or the Pennsylvania crash site on 9/11 and as a result suffered 

a verifiable, serious physical injury or illness for which they were admitted to a hospital for at least 24 hours between 9/11 and 9/18/01. The FGP III ended on June 

15, 2004. 

• The Supplemental Gift Program—The Supplemental Gift Program began 

in August 2002. Each estate and seriously injured client was originally eligible 

to receive a gift of $45,000 to be distributed to those individuals named as executors or administrators of the estate. In November 13, 2002, the Liberty Committee approved an increase of the gift amount to $55,000. 

To be eligible for the Supplemental Gift, injured clients must have met the FGP 

III criteria and additionally have been totally disabled for 90 consecutive days. Gifts 

to estates were awarded with the agreed upon restriction that they be distributed 

only to individual beneficiaries, rather than to charities or academic institutions. 

Supplemental gifts made to the seriously injured have no other restrictions following verification of eligibility. 

• Special Circumstances Gift Program (SCG)—The SCG Program is a 

needs-based gift provided to seriously injured who qualified for the Supplemental Gift as well as financially dependent extended, nontraditional, and traditional family members who were eligible for the FGP III, had not received 

substantial amounts of assistance from other sources, and continued to have 

unmet needs. All awards were determined by a Review Committee on a caseby-case basis, taking into account the individual’s unmet financial needs, the 

level of dependence on the deceased and any 9/11 related special circumstance. 

The SCG ended in December 2004. 

• Disaster Responders—Clients who were officially deployed as disaster responders to the WTC, Pentagon, or Pennsylvania are eligible to receive all of 

the above benefits if they meet other specific criteria, such as for injury or economic need. 
104

1These figures represent contributions and expenditures through March 31, 2006 and are the 

most current data available. The next report of the Liberty Disaster Relief Fund will be released 

on the fifth anniversary of 9/11 on September 11, 2006. 

• Additional Assistance—An additional assistance program began in April 

2003 to assist disabled individuals and family members. Eligible clients were 

able to receive up to six months of financial assistance for demonstrated unmet, 

essential housing and living expenses. This program ended in December 2005. 

To be eligible, family members were required to demonstrate financial need and 

one of the following: financial dependence upon the decedent, a mental health condition that led to a continuous 90-day period of disability, or had been appointed the 

legal guardian of the minor child/children of a decedent. Disabled individuals were 

required to have suffered a 90-day disabling respiratory, mental health or physical 

disability and demonstrate financial need.

Joint Relief Operation Phase and SRP Phase 

• Displaced Residents—Clients whose primary residence was south of Canal 

Street in Manhattan and who were displaced from their homes, had their homes 

damaged, or had access to their homes disrupted were eligible to receive assistance which may include relocation, temporary housing costs, rent/mortgage, 

cleaning, moving, storage, and air purifiers. 

• Economically Impacted—Clients who worked below Canal Street in Manhattan and were unemployed due to the 9/11 attacks were eligible for three 

months of assistance with rent, food, and utilities until February 7, 2002. After 

February 7th, clients were eligible for a one month grant disbursed according 

to household size. The last day for economically impacted clients to register for 

Red Cross assistance was March 28, 2002. 

In total, the September 11 Recovery Program has provided support to nearly 

60,000 individuals and families directly affected by the September 11 terrorist attacks. While the direct services provided by SRP, including financial assistance and 

referral to social work agencies for case management needs, ended on December 30, 

2005, the program had been established around five major initiatives: 

• Long Term Mental Health Services—based on financial need, this program provided financial assistance for services including individual, group and 

family counseling; psychotropic medication coverage; hospitalization; and inpatient and outpatient substance abuse treatment. Programming will continue 

through the end of 2007. 

• Long Term Health Care Services—this program provided financial assistance and clinical case management for uncovered health expenses directly related to injuries or illnesses caused or exacerbated by the events of 9/11. 

• Family Support Services—This program provided individualized support 

and guidance to eligible families to ensure that they had access to the resources 

they needed for their recovery. Trained Red Cross Family Support specialists 

assisted with determining health care and mental health needs, identifying resources, making referrals, providing assistance through three financial assistance programs, identifying long-term needs and planning for the future. 

• Assistance to Residences—For displaced residents with ongoing needs, the 

Red Cross provided air purifiers and HEPA vacuums, helped to relocate individuals and families, and provided reimbursement for expenses incurred during 

displacement. In addition, this program offered mental health assistance to affected residents who experienced emotional trauma as a result of 9/11. 

• Communication Coordination—To help meet the needs of those affected 

by the September 11 attacks and maximize efficient use of resources, the Red 

Cross coordinated with other groups including community organizations, constituency groups, advocacy organizations, local elected officials, faith-based and 

interfaith organizations, and other nonprofit and government agencies providing 

direct services and benefits to those affected. The Red Cross is a founding member of the 9/11 United Services Group (USG), which coordinated 13 service 

agencies to help ensure that those affected by the events of September 11 were 

able to get the help they need. The Red Cross assisted the USG in developing 

a shared database that has helped various charities provide financial assistance 

and services to victims of the September 11 attack more efficiently. 

At the end of the first quarter of 2006,1 the Liberty Disaster Relief Fund had collected a total of $1.080 billion. Approximately $738 million of the funds received has 

been expended in financial assistance to those directly affected; $159 million has 

been expended for immediate and long-term program costs; $66 million has been ex-
105

pended for indirect services; and about $60 million has been used for fund stewardship. As of the end of March, 2006, $55 million remained in the Liberty Fund. 

The Red Cross will use the balance remaining in the Liberty Disaster Relief Fund 

to support non-profit agencies that can deliver a variety of services to the people 

whose lives were the most seriously affected by the terrorist attacks in the communities where they live and work. These services include mental health and wellness 

for adults, adolescents and children; health diagnosis and treatment for rescue and 

recovery workers; financial assistance; and community recovery in lower Manhattan.

Fraud Prevention, Detection and Controls 

Waste, fraud and abuse are very serious issues to the American Red Cross. As 

an independent nonprofit agency, we rely on the donations of the American public 

to provide services free of charge to victims of disaster. We have an obligation to 

our donors to ensure that we are good stewards of the donated dollar. The Red 

Cross treats its obligation to deter and detect fraud or abuse with the utmost seriousness and when appropriate seeks prosecution of fraudulent activity to the fullest 

extent of the law. 

During times of disasters there are individuals who take advantage of the generosity of the American people and of the very agencies and institutions that provide 

services to those in need. That has held true in all Red Cross disaster responses, 

and unfortunately, it was evident during our response to September 11. Attached 

to my testimony are examples of fraud that we witnessed as an organization during 

our response to September 11. (Appendix II) 

We learned a number of valuable lessons in our response to 9/11 and have implemented a number of changes in the Red Cross response to disasters and to prevent, 

detect and control fraud. I will address some of the lessons learned and elaborate 

on fraud prevention, detection and controls that have been put in place as a result 

of our response to 9/11. 

But first let me describe the 9/11 compliance and enforcement response. 1,473 

cases were investigated by the Red Cross involving actual or potential allegations 

of fraud, and many of these cases were referred to federal, state and local prosecutors for full investigation and prosecution. There were some cases that were not pursued by law enforcement and these were reviewed by the Red Cross for possible civil 

prosecution as I discuss below.

Methods of Prevention 

The Red Cross executed a number of policies and methods to mitigate fraud from 

occurring. These include: 

1. Except where immediate assistance was necessary, require applicants for assistance to document financial need and/or injury caused or exacerbated by the 

disaster. 

2. For every eligibility requirement, we established a corresponding documentation requirement that was specific and enforced. 

3. Required applicants to affirm that the information provided and recorded in 

the case file was accurate and true. 

4. Whether automated or manual processes, developed more effective case tracking mechanisms to detect and track fraud and ensure that those not entitled 

to benefits did not receive them. 

5. Implemented at the outset of any disaster relief effort the types of fraud detection and prevention efforts, including cooperation with other charities and 

governmental entities. 

6. Make certain that all decisions about program design and eligibility criteria 

were made by a centralized authority and were communicated to the field clearly, in writing. 

7. Developed forms and procedures that minimize discretion for case workers 

and clearly articulated the ground rules for discretionary decisions by supervisors. 

8. Delineated clearly the responsibilities of all those involved in the review and 

approval process by making clear that someone was obliged to make sure all 

necessary information and documentation was provided.

Methods of Detection 

Detection of fraud in the aftermath of September 11th occurred in a variety of 

ways. The most prevalent and successful methods include: 

1. Casework—Many cases involved the presentation of false documents, false 

identities and false victims. 

2. Internal Controls—Disaster Accounting was alerted to duplication of benefits, forged checks, changes in address, etc. 
106

3. Neighbors, Family Members and Associates—Individuals would alert the 

Red Cross to the possibility of fraudulent claims, which were investigated. 

4. Law Enforcement—Red Cross was alerted to on-going investigations involving FEMA, NYPD and NYFD as to the possibility of fraud. 

5. Case Audit Unit—would discover inconsistent data, documentation and 

statements, which would lead to further investigation. 

The Red Cross identified 20 cases as possible targets for civil suits. Hogan & 

Hartson LLP, a nationally recognized law firm, represented the Red Cross in these 

civil proceedings on a pro bono basis. After further investigation on these 20 cases, 

we decided to refrain from pursuing ten of the 20 cases because of factors, such as 

an inability to locate and serve the defendant with legal process or the defendant 

did not have sufficient financial assets that could satisfy a judgment. However, we 

filed suit in the remaining 10 cases. The total amount sought to recover in these 

10 cases is $111,352. As of this date, two cases have been completed, with $25,894 

recovered through settlements. There is a settlement in a third case for $15,600, 

with monthly payments of $100 for 156 months. The defendant made the first payment but has defaulted on remaining payments. We have filed a motion with the 

court to enforce the settlement agreement, which is pending. We have obtained a 

default judgment in a fourth case and we are moving forward with the appropriate 

procedures to garnish the defendant’s wages. The remaining six cases are in various 

stages of active litigation. 

One of the lessons that the Red Cross learned from 9/11 was the need to more 

aggressively pursue fraud perpetrated against the Red Cross though the civil court 

process and to include verifying that Red Cross insurers kept their commitments to 

pay fraud claims filed by the Red Cross. Two cases illustrate this point. 

• In the Southeastern Connecticut Chapter matter, the Red Cross filed an employee dishonesty claim with Royal Insurance Company arising out of the embezzlement of 9/11 funds by the Executive Director of the Southeastern Connecticut Chapter. The Red Cross filed a claim with Royal for $173,657, the total 

amount of the loss, even though the local prosecutor valued the provable loss 

as $120,000. In December, 2003, the Red Cross reached a settlement of our 

claim with Royal for $97,710. The policy at the time had a deductible of 

$50,000, so we received from Royal $47,710. It was determined between the 

Chapter and Red Cross National Headquarters that the Liberty Fund would receive 79% of this settlement. 

• In the Hudson County Chapter matter, the Executive Director of the Chapter 

embezzled $1,113,577 from the Chapter that was a provable loss. With additional costs associated with the embezzlement that were covered by our fidelity 

loss policy, the total claim submitted to Royal Insurance was $2,490,593.70. 

Royal Insurance paid part of the claim in the amount of $1,676,024.65 in August, 2003, leaving $787,796 as an amount that Royal said was not covered by 

the policy. The Red Cross filed suit against Royal and the case was settled for 

$475,000 in November, 2003. Thus, the total amount recovered from Royal in 

this matter was $2,151,024.65. 

The Red Cross will continue to work with federal, state and local law enforcement 

regarding fraud against the Red Cross and will actively pursue in the civil courts 

those provable cases not prosecuted in the criminal courts. The Red Cross also will 

file appropriate claims with its insurance companies and will pursue claims for any 

fraud losses against those insurance companies that wrongfully deny claims.

Methods of Controls 

The detection and prevention of fraud is a small, but important component of the 

design of a disaster relief program. The September 11th Program provides myriad 

examples of the kinds of fraud that people will try to perpetrate if substantial sums 

of money are available. Many types of fraud can be minimized by taking proper 

steps in the design and controls of the eligibility criteria and documentation requirements for the programs. 

In developing a response to any disaster, the Red Cross must do at least two 

things; 1) define the individuals who are eligible to receive assistance and; 2) define 

the assistance that each will receive. 

An important issue for defining eligibility is creating an authoritative list of those 

who are entitled to benefits/assistance. This was an ongoing problem for all of the 

charities that responded to the September 11 attacks. In a future disaster, it will 

be important for the charities and governmental entities to work together to develop 

a comprehensive list of those injured, deceased, and entitled to benefits. Where an 

individual seeks benefits for a relative who is not on the list, some additional documentation should be required. Additionally, documentation beyond a simple assertion that an individual was killed must be provided for claims of death. Many of 
107

the significant cases of fraud against the Red Cross (in dollar terms) occurred when 

people falsely claimed that a loved one had been killed. 

A well-designed program with appropriate levels of controls should balance the interest in minimizing fraud with the interest in ensuring that victims receive assistance without undue administrative burden. 

Failure to obtain adequate documentation or documentation of any kind was a 

significant problem in the early Family Gift Programs (FGP I; FGP II) when the 

standards of ‘‘assumed’’ and ‘‘attested’’ eligibility were utilized. Many case files have 

nothing (other than case worker notes) to substantiate the claims made or the assistance provided. This problem was rectified when the ‘‘demonstrated’’ eligibility 

standard was used for the final family gift distribution. Although there are numerous examples of individuals who forged documents, a substantive amount of fraud 

was committed by those who lied, but were never asked to provide documentation 

to back up their claims. A number of additional suspected fraud cases were identified when applicants were unable to provide the required documentation to substantiate their additional claims of ongoing financial assistance. 

Finally, those who design future financial assistance programs must be cognizant 

that the ability often given to case workers to be creative and flexible in helping 

applicants to obtain benefits or assistance often has the effect of encouraging case 

workers to bend or break rules for eligibility. To the extent such flexibility is encouraged, it should be done at the supervisory level and it should be clear that flexibility 

cannot result in providing additional funds to those who are not eligible.

Coordinated Assistance Network (CAN) 

One of the great successes to come out of the entire nongovernmental organization 

community’s response to 9/11 was the development of the Coordinated Assistance 

Network (CAN). Our experiences in 9/11 showed clearly that having clients find 

their way through a web of service providers caused added confusion in an already 

trying time. Several disaster clients were lost within the improvised system; others 

were shuttled from appointment to appointment, having to tell their painful story 

time and time again. 

The Coordinated Assistance Network provides the framework and tools to make 

casework management easier and more efficient though advanced collaboration and 

also adds additional safeguards to prevent fraud. CAN enables disaster clients to 

visit any one of the participating organizations, tell their story, provide required 

documentation, and—with their permission—have that information shared automatically with the partner agencies that are able to assist them. Through a secure, 

web-based system, an agency can instantly review each client’s specific situation 

and the services received—in real time—helping to provide better services to the client, eliminate duplication of benefits, and measurably lessen the burden for each 

participating agency.

Since 9/11

In addition to the valuable lessons we have learned and incorporated as a result 

of our response to 9/11, our nation has continued to see individuals take advantage 

of the generosity of the American public and the agencies responsible for helping 

victims recover from disaster. This past year, the American Red Cross provided assistance to more than 1.4 million families impacted by the devastation wrought by 

Hurricanes Katrina, Rita and Wilma. $1.2 billion of emergency financial assistance 

was provided to those million families. To stop those that attempt to cheat the system, the Red Cross participates in the Department of Justice’s Hurricane Katrina 

Fraud Task Force, which also includes members from the FBI, the United States 

Secret Service, the Federal Trade Commission, the Postal Inspector’s Office, and the 

Executive Office of the United States Attorneys, among others. The Red Cross is assisting in hundreds of investigations now in progress. Every resource is precious to 

the Red Cross and we are taking every measure to aggressively pursue any illegal 

activity. To date, there have been 76 indictments and 55 convictions. 

As of June 14, we are investigating 7,109 cases of suspected and actual fraud. 

These represent a combination of cases turned over to law enforcement and cases 

being investigated internally. We estimate the potential of approximately $9.5 million in cases stemming from this fraud. 

There were instances where individuals or families received duplicative assistance 

that was neither fraud nor abuse on behalf of our clients, but rather a simple oversight or human error. I am pleased to report to this Committee today that as of May 

1, 2006, the American Red Cross had collected $2.3 million in returned assistance 

from clients who had received duplicate payments. 

As a result of the fraud we have experienced during and since 9/11 and the 2005 

hurricane season, the American Red Cross is incorporating even stronger controls 

to mitigate future abuses. These include improvements to our Client Assistance Sys-
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tem (CAS) software, with reporting enhancements to provide a single system of 

record to support the delivery of assistance to those in need; and improvements in 

chapter advance procedures and new monitoring and control processes to support 

the use of the cash-enabled client assistance cards (CAC).

Closing Remarks 

Mr. Chairman, Congressman Meeks, and Members of the Committee, I want to 

thank you again for providing me the opportunity to share with you our experiences 

in our response to September 11. The American Red Cross provided assistance to 

nearly 60,000 individuals and families impacted by the devastating attacks on 

America on September 11, 2001. As the September 11th Recovery Program begins 

to wind down nearly five years after the first plane struck the World Trade Center, 

the American Red Cross continues to respond to disasters, both natural and manmade, each day in communities across the country. 

We are proud to be America’s partner in disaster prevention, preparedness, and 

response, and we urge all Americans to be prepared for whatever disaster may 

strike. 

I am happy to respond to any questions you may have.

Mr. ROGERS. And I would like to start with the questions, but 

first, I would like to make an acknowledgment. In listening to Ms. 

Hearn, Mr. Varoli, and Mr. Getnick, what you had to say with regard to the debris removal after the attack in New York City, was 

accurate from all of our staff’s efforts. It appears that that was a 

shining moment for the City, and FEMA did an exceptional job in 

removing that debris under budget, far under budget, in half the 

time it was anticipated. So that really was a time, as you put it, 

when folks were working in collaboration and in a proficient way. 

Having said that, Mr. Varoli, according to media reports that had 

to do with what spurred these hearings, there is at least $63.2 million in FEMA money for Ground Zero clean-up that was paid to 

companies accused of mob ties. Is this accurate, and if so, how did 

it occur? 

Mr. VAROLI. I am stumbling in response because I don’t know 

where that number came from. I am not familiar with the 63.2 or 

who the contractors were. I would maybe look to Commissioner 

Hearn if she is aware of that number. I am not. 

Mr. ROGERS. Set aside the amount. Mob ties at all. Were you 

aware of any mob activity in the debris removal activities? 

Mr. VAROLI. I personally was not aware. The way DDC was set 

up, and I tried to highlight in the testimony, we were there to provide the expertise of the construction and the engineering issues 

that arose. We looked to KPMG as our assistant, as the engineering audit outsource firm, and we looked to DHS with the expertise 

in rooting out foreign corruption, and I believe they also looked to 

and relied upon the monitors, so maybe I would refer to Mr. 

Getnick. 

Mr. ROGERS. Mr. Getnick, are you aware of any mob ties to debris removal activities? 

Mr. GETNICK. Yes. I would like to speak to that because I think 

it goes to the heart of the inquiry. This morning it goes to the remarks of Congressman Pascrell at the start of the hearing today. 

Just so we identify where Getnick & Getnick fit into the process, 

the World Trade Center site was divided up into four quadrants, 

and on each of those quadrants there was a construction manager. 

And so we were one of the four integrity monitors assigned to the 

quadrant which was the Turner Construction site. 
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So, for example, you mentioned the Daily News article. I am 

going to speak to the Turner quadrant, and that is sufficient, because in the Daily News article they identified $26.7 million of the 

moneys you are talking about. 

What the article map of Ground Zero was supposed to say back 

on December 5th was that Turner Construction hired a contracting 

company that was owned by an individual who was a reputed 

Lucchese associate, one of the five families who was indicted in 

1995 on charges of using a bogus minority-owned business to legally win government work, and as the article then goes on to say, 

charges were later dismissed. And this contractor was—contracting 

company was paid $26.7 million. 

So that is the nature of the allegations with respect to that particular quadrant, and if you take your figure, you have the same 

type of methodology which you build up. 

And what I really want to get into is the nuts and bolts of how 

you deal with a situation like that real-time, real situation. Let us 

dig down and see what we have and what we don’t have there, because exactly what was reported was exactly what the monitors uncovered. 

We have a company 6 years earlier where an individual who is 

in a principal position was indicted for a crime that did not result 

in a conviction. So you don’t have a convicted company. You don’t 

have a company that is currently under indictment. You have a 

company that has an individual who is a reputed Mafia associate, 

and what do you do with that? 

Well, here is what they do with it. First of all, you have to use 

your intelligence, literally your intelligence and your intelligence 

sources to find out about it right away, which is exactly what we 

did. And then when you find out about it, you report it. You report 

it to DHSOI, you report it to DDC, and you essentially set up a 

triage just the way you have a triage in an emergency room: Here 

are your serious cases, the next ones, the least serious cases. And 

you go, this is a serious case. We have to be on top of that. We 

have to see who is this contractor now subcontracting to, and sure 

enough you look at the subcontractor, and one of the subcontractors 

we found again is a very similar situation. You look at the principal. The father of the principal was indicted but not convicted. So 

again, you are not going to be in a situation to throw someone like 

that off the project. You can’t debar the company, but you can certainly dig down and make sure that you are concentrating your resources there. 

So in that particular situation, we did just that by using investigators in the field, by using forensic accountants who are going 

to the home office examining some records, and then using lawyers 

to put that together from an evidentiary point of view. 

Mr. ROGERS. Do you believe the $63 million figure is accurate? 

Mr. GETNICK. It is possible that number is accurate. We have to 

understand what the number represents. So, for example, in the 

case that I just said, we started out with an initial requisition, 

which was a $2 million requisition, worked at it, sat down and 

knocked out the problematic billings to under $800,000. 

So now we are going to ask a question: What happened to the 

$800,000? Did that get paid to a company that at one time was 
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under an indictment that never got convicted; that used a subcontractor; that in turn the father of the current owner was indicted 

for a case who was never convicted? Yes. That is where the 

$800,000 went. 

But the important thing is that the $800,000, which was less 

than half of what was billed, was an appropriate amount to pay for 

work that was actually performed. And the $1.2-plus million never 

got paid. And guess what? That requisition came in less time and 

less problems because everyone understood real time, real basis, 

these questions were being asked. 

So I think at the end of the day the fair answer to the question 

is that money was paid, but that money was not paid to companies 

that were convicted. That money was not paid to members of the 

Mafia. That money was paid after it was scrutinized to make sure 

it was going for its intended purpose. 

Mr. ROGERS. Ms. Hearn, would you concur with Mr. Getnick’s observations? 

Ms. HEARN. I do, and I discussed it with him at length. And I 

think that the Daily News articles are a terrific illustration of why 

DOI needed to be down at the site doing what it did. 

I think that everybody knows that former Mayor Giuliani is a 

former Federal prosecutor and an organized crime prosecutor at 

that, and he recognized early on as surely as night follows day that 

organized crime would be looking to get into Ground Zero. Billing 

schemes are perpetrated on U.S. companies under nonemergency 

circumstances. Billing schemes in the construction business, demolition trade, waste business, which is what this project was, are 

pervasive with organized crime. 

We knew what we were up against, and that is why we were 

down there. And that is why we had a presence at the four quadrants for which I gave you a diagram, physically out there counting 

heads, who is there, what equipment is there. Equipment is being 

moved around every hour, every day. What are we being billed for? 

Who are you, Mr. Truck Driver, and so forth and so on, doing best 

efforts to figure out who was down there. And without issuing a 

press release, I can tell you that some of the individuals and companies listed in the Daily News articles were, as we say, invited off 

the site. 

Mr. ROGERS. Thank you very much. My time has expired. 

The Chair now recognizes the Ranking Member and any questions he may have. 

Mr. MEEK. Thank you so very much, and I want to commend all 

of you for your efforts in your different areas of involvement with 

this whole recovery, and also understanding of what has happened 

and how we can improve on what is good, and also hopefully do 

without those setbacks that we found along the way. 

Ms. Bradley, I wanted to ask you a question about the Red 

Cross. The Red Cross plays a very strong role in the recovery process. We have FEMA and all of these other agencies that are responding, but it is the only entity outside of the General Baptist 

Convention—I think they come in third or fourth as it relates to 

recovery efforts out there. Southern Baptists. I’m sorry—that respond mainly with food and not assistance. You can correct me 

about who comes in second or third. 
111

But when it came down to this event, the issue of fraud, I believe 

you were here for the first panel, and we have talked about the 

past. We are talking about the future at the same time, and we are 

talking about the present. As we speak now, several hundreds of 

miles away from here along the gulf coast, a lot of this is still being 

played out with Red Cross, FEMA, a number of other agencies, and 

to be able to stop the fraud from happening, we have to know that 

we have put things in place to stop it in every way. 

I was trying to find out in the panel of trying to get the panelists, 

I guess, to work together, and especially FEMA, to give us some 

direction on what they are doing as it relates to verifying real residency. Now, we know that some folks are out there, and they are 

going to say some things, and when the folks—well, the individuals 

go out and they say, I am going to lie, I am going to try to steal. 

That is a hard will and desire to toss water on, especially when 

they are there knowing that everyone else is running around and 

the pressure is on to get dollars out the door. 

I am saying all of that to say that I couldn’t help but take a look 

at your testimony on page 5 where you talked about your civil case. 

I think 20 of them were identified; 10 of them were actually prosecuted. I think $111,000 were recovered. 

I believe on the Website it said you helped 60,000 individuals as 

it relates to the whole 9/11 experience. 

Looking at that, I know you use another statistic, over 100-someodd people or 90-something were prosecuted. These individuals are 

carrying out fraud. They hit them well in the pocket. Why did the 

Red Cross only go after so far those that were involved in fraud civilly? 

Ms. BRADLEY. Let me first explain to you. I think it is an important context to give to the discussion. At the American Red Cross 

every day we balance two vitally important missions, and one is 

getting emergency assistance into the hands of disaster victims, 

whether it is a natural disaster or manmade disaster. But equally 

important is making sure that we are going to have money to perform those missions. So we have got to constantly assure our donors that we are vigilantly protecting our assets, meaning their 

money. So there is a constant balance of trying to look at the situation, and particularly in the chaos of the first few days or weeks 

of a catastrophic disaster, we have to make some determinations 

on whether or not we are going to err on the side of getting services 

relief into the hands of people who so desperately need it versus 

making sure that we have an ironclad system. And the hope every 

day when we come to work is that we sort of strike just the right 

balance, meaning that there will always be ways for criminals to 

infiltrate our system. 

So the idea right now, particularly after Katrina, Rita and 

Wilma, at the Red Cross is to provide as much capability to prevent fraud as we possibly can, and that is why I mentioned our 

CAS system. It is a computer, it is an IT system that allows—it 

is all in one place, and you can upload client information so that 

if Leigh Bradley takes your client information, your ID, it is going 

to go into our IT system so you can’t go 100 miles down the road 

and try to convince us that you have never gotten any assistance 

from the Red Cross before, because somebody is going to know 
112

right there in front of them on a computer screen that, wait a 

minute, let me ask you a few questions. Did you, in fact, receive 

client assistance just a week ago, let us say, in Montgomery, Alabama? 

Mr. MEEK. I don’t want to cut you off, but I was mainly asking 

my question towards the civil cases. Why only 20 and why only 10 

were—you decided to move forth on all of the fraud cases, and the 

reason why I am asking the question is that so many Americans 

did pull their debit card and credit card out of their wallets and 

call the Red Cross, and it is like even individuals that lived in the 

New York area, and I have constituents who do the same things 

with Wilma, Katrina. I personally did it, and when you hear about 

the fraud, it is like the incident taking place all over again. It is 

like you are being victimized again even though it may be small. 

I think it is important to say that we have very—we have strong 

fraud prevention in place; not only are we going to go after criminally, but go after in a civil way so that we hit them in a way they 

hit us, and us meaning the people of goodwill, Red Cross donors 

and all. That was my question. But I hear exactly what you are 

saying in your system. 

I just want to go back to what you were answering, another question. In your system do you have the ability to find Social Security 

numbers and verifying addresses with your in-house system that 

you have at the Red Cross now with your CAN system? 

Ms. BRADLEY. We, too, like FEMA, used ChoicePoint during 

Katrina, Wilma and Rita. We don’t have the kind of database that 

would be required not—it is not so much to check Social Security 

numbers, it is a special database that allows us to ask additional 

questions. Maybe you come in to see me, you don’t have your wallet. You have to leave your house without anything. Maybe you 

have never owned a home before. So you come to me and you say, 

I need assistance, and our system might have some information 

about you, some specific, uniquely identifying information about 

you. But in order for us to verify and authenticate your identification, we need a much more complete and robust data system, and 

it doesn’t have to be ChoicePoint. We happen to contract with them 

because we felt like that they had really sort of the best product 

on the market at the time. And that is how we conduct identification verification and authentication. 

And then to answer your question about the civil cases, because 

I definitely want to make sure that everyone is clear, I feel like we 

are about as vigilant as any organization in this country in pursuing cases, and the only reason we are pursuing some of the cases 

civilly is because we have exhausted the criminal remedy, and we 

can’t seem to get those cases prosecuted, but we don’t want to give 

up even though it is 2006. 

So as I said earlier, we have—we received 1,473 allegations of 

wrongdoing, and we continue—as I mentioned, we have 213 remaining cases that are being investigated. We have 20 pending 

cases that hopefully will go to trial soon that we will have resolved. 

So we continue to work hard on the criminal side of the house, but 

when we don’t get the relief that we are seeking from the criminal 

justice system, we will pursue them civilly. 
113

We have also hired Hogan & Hartson, a nationally recognized 

law firm, to work up all of the civil cases for us, and I want to report to you—I am happy to report to you they are doing all of that 

work on a pro bono basis, and there will be more cases. But I will 

admit that if the scales are weighted, they were certainly weighted 

on the criminal side, and I will tell you why: Because we found out 

that it had a real deterrent affect for us. 

Let me give you a quick example. In 9/11 we didn’t have any clients return money to us. In Katrina, Rita, and Wilma, we have had 

over $2 million in client assistance returned to us already without 

even asking them to do this. And we believe it is the determination 

of pursuing these cases in the criminal arena that has helped us 

get the money back, and we will pursue other options, too. I hope 

that—

Mr. MEEK. Thank you very much. We were trying to figure out 

the system of verifying. Thank you. My time is well overdue. 

Thank you. 

Mr. ROGERS. The gentleman’s time has expired. 

The Chair will recognize Mr. King for any questions he may 

have. 

Mr. KING. I want to thank all of the witnesses for their testimony 

today and for what they have contributed, I believe, to a very 

worthwhile hearing. 

Ms. Lemack, are you a resident of New York State? 

Ms. LEMACK. No. 

Mr. KING. They are entitled to lifetime mental health coverage 

through the New York State Compensation Fund. 

Ms. LEMACK. It might be capped at $25,000. At least that is how 

it is in Massachusetts. 

Mr. KING. It is my understanding it is lifetime. 

Ms. LEMACK. I was saying in Massachusetts the Victim Com- pensation Act is capped at $25,000. 

Mr. KING. My understanding is it is unlimited. 

Ms. LEMACK. In Massachusetts it is also per family, so if you 

have five children in one family, they are all drawing off of that. 

Mr. KING. I thought I would maybe give you some free advice. 

Ms. LEMACK. Trying to get me to move. 

Mr. KING. Love to have you in New York. 

I think it is important to put this in perspective, because as 

someone who was close, I was able to watch a lot of what went on. 

I thought the recovery effort considering everything was monumental, and it really did represent the best of the City and of its 

people, and I think it is unfortunate that even though they are isolated, that any event at all has put any kind of a cloud over that. 

But I think it is very significant that considering the absolute enormity of the devastation, what was done was done as quickly as it 

was. And it is important to note that—I mean the City employees 

who contributed, you talk about the employees, EMS workers, design and construction, DOI, you can go through the whole list of 

City employers were there day after day. As far as I know, there 

was not even payroll missed by the City. People didn’t lose work. 

They were there, and I think it is something that should really be 

brought out, and you did a good job of putting this all into perspective. 
114

Especially, Mr. Varoli. I was reading your written testimony. I 

think it is important for people to realize what was going on at 

that time and what the City was confronted with and how it overcame so much. I think it is extraordinary. 

Let me take you back to September 10th, and if you can go back 

to September 10th and recite any laws or regulations or any procedures, I would ask any of the three of you what you would have 

done if you can go back to that day, which would have prevented 

as much of the fraud and abuse that did exist, and I am putting 

it in context. I believe in the overall picture it was not significant, 

but again, even $1 wasted funds in the face of such a tragedy is 

wrong. But if you can go back to September 10th, 2001, what 

changes would you have made, whether it is a city charter or regulations or, you know, provisions applying to disasters, construction 

projects, that could have perhaps avoided some of that fraud that 

did occur, I guess, down the line? 

Ms. HEARN. We have in place at DOI at any given time a 

precleared, prevetted list of monitors in various fields of discipline 

that are ready to go in any situation. The City School Construction 

Authority Inspector General has a precleared, prequalified list of 

contractors and subcontractors ready to go to build schools in the 

city, and so that list was drawn upon when folks were being put 

in place for 9/11. 

There is an agency in the city of New York which is called now 

the Business Integrity Commission. I believe that you received 

some written testimony from them. At the time they were called 

the Trade Waste Association. They are a small city agency whose 

job is to keep mob-related trade waste and haulers out of licensed 

city business, and so that is an agency that was in place with a 

database of licensed carters and debris removers. That was drawn 

upon on 9/11. 

So I think that the answer is—it is a conceptual one. It is not 

a specific one. It is that whatever you can do to not have to scramble when the disaster hits is helpful. And the city, you know, drew 

upon those different existing procedures that were in place to deal 

with our nonemergency matters that come up in such a large city. 

And then, of course, you had unbelievably strong leadership in city 

government at the time, and you did have a formidable prosecutor. 

Mary Jo White was the U.S. Attorney of the Southern District at 

the time. I was working for her at the time. I was a Deputy Chief 

of the Criminal Division in the Southern District up until December 31st, 2001, and then I became the DOI Commissioner. 

So really everybody just mobilized both to try and prevent what 

we surely knew was to be a magnet for fraud and organized crime, 

and I think that the early days or weeks at the site were probably 

pretty chaotic. And I think that it probably took until October or 

so for all of these different enforcement mechanisms to get their 

arms around the situation, but they then did take control and got 

a handle on who and what was down there, and there was scrutinizing billing. And it is not news that there is mob ties in the construction business, but we sure made our best effort to make sure 

there were no indicted companies down there or anybody who we 

knew or learned who was of that ilk working down there. 
115

Now, there were companies listed in the Daily News article that 

were paid various moneys, and the monitors would tell you that 

every nickel of those moneys paid out to those firms was scrutinized beyond belief by the monitors, and not just looking at a piece 

of paper, but by being down there and comparing what they saw 

with boots-on-the-ground kind of surveillance to what was being 

billed for. 

And so I don’t want to speak for Mr. Getnick. He is one of the 

monitors from one of the quadrants. He can attest to this himself, 

but he has told me, and the other monitors have said the same, 

that they feel that any money that went out towards those expenditures in the Daily News articles were for services that were rendered. Who they were rendered by, you know, associates of who 

they were rendered by notwithstanding, they were for services rendered. And any companies that really were not companies that 

DOI, the monitors felt should not be down there, even if they were 

rendering services, they were invited off the site, as I have said. 

Mr. KING. Mr. Varoli. 

Mr. VAROLI. It is an incredible question and I am not sure I can 

answer it fully. I guess what I would suggest is what would have 

been helpful on September 10, some way of having in place contracts with contractors, so the situation that arose, which I believe 

came up in the previous panel, with the one photographer in 

FEMA would not have occurred if there were set contracts or at 

least forms of contracts in place either by FEMA or by the city of 

New York saying, okay, these are the emergency contracts. 

In addition, what I think was helpful and what I spent most of 

my time working on was dealing with the contractual issues specifically with the construction managers and vis-a-vis the subcontractors. There were lots of issues and concerns expressed by 

the construction managers and by the city of New York to some degree on the issues of insurance and identification. And if that had 

been dealt with up front on September 10, and if we had onboard 

or on the shelf what sometimes we refer to requirements of an 

emergency contractor in place who has the coordination and skills 

and ability to take on the debris management side, that would 

have I think saved some additional time. 

Again, we did this in 9 months. Original projection, 2 years. We did this less—I think the dollars come out to $467 million. Again, 

we were looking at—at least over a billion dollars. So it is hard to 

say, you know, we could have done that much better. But those are 

some of the things I can think of off the top of my head. 

Mr. KING. Thank you. Mr. Getnick. 

Mr. GETNICK. Yes thank you. 

I understand that the committee is considering legislation which 

will address fraud prevention in disaster relief programs. So I want 

to speak to the whole point of integrity monitors and this term I 

have been using, IPSIG, and say that when I am speaking about 

integrity monitors and IPSIG, it is not a generic term. It is Independent Private Sector Inspector General that meets the standards 

and code of ethics of the International Association of Independent 

Private Sector Inspectors General. It is really very very important 

because it is a methodology that is tried and true, and it works, 

and it distinguishes the multidisciplinary approach we are talking 
116

about that works so well from what might normally be a CPA-style 

audit, which might be fine for certain—but not for what we are 

doing here. 

There are six things, specifically six items I will point out, and 

I will summarize because they are in my written remarks. 

First, as Commissioner Gill Hearn said, with respect to integrity 

monitors as well, a list of pre—I am saying legislation should require, one, a list of prequalified organizations which can act as integrity monitors so that qualified individuals can quickly mobilize 

to monitor disaster relief programs. And these organizations have 

to have members with multidisciplinary skills, legal investigative 

forensic auditing loss prevention skills, and extensive experience in 

acting as integrity monitors on other government projects. 

Two, the obligations and the duties of the integrity monitor at a 

disaster recovery site should be clearly delineated and adhere to a 

code of ethics such as one followed by members of the IA IPSIG, 

and that code is attached to my testimony today. 

Third, the construction manager or the contractor overseeing the 

disaster relief program should be required, as a condition of its contract with the government, to cooperate with the integrity monitor. 

So you don’t get to work on a Federal disaster relief project unless 

you have signed on that you will provide access to all books and 

records, access to all personnel, and you are going to—very important—require all your subcontractors and your subcontractors of 

your subcontractors to do the same. 

The biggest problem is you have a general contractor and construction manager, and everyone recognizes the name and recognizes the company and life is great, but they don’t do the work. It 

is the sub, and the sub of the sub, and the sub of the sub. They 

all have to be in the program. And as you work up the chain of 

authority, everyone has to understand they are responsible for 

what went on below. 

Fourth, the hallmark of an IPSIG and integrity monitor is its 

independence. Integrity monitors should have no prior business or 

personal relationships with the monitored entity which would create a conflict of interest or the appearance of one. 

Fifth, indemnification should be provided to the integrity monitor 

similar to the same kind of indemnification provided to public officials during the course of their official duties. I have been there. 

I can tell you that when you tell people you are going to take $2 

million off your bill, the first thing they are going to say is, we are 

going to sue you and you are basically going to spend the rest of 

your life in court; now let’s negotiate. 

Well, we don’t give into that sort of thing, and the other integrity 

monitors didn’t give into that sort of thing. But you need the builtin statutory indemnification to make that work. 

And likewise of that, although it may appear self-serving for me 

to say this, it is quite important, six, that the payment to the integrity monitor services should be guaranteed on a regular basis to 

see that the integrity monitor is not thwarted in carrying out its 

obligations by companies that are withholding or delaying payment 

in an attempt to deter the integrity monitor from performing its 

duties. 
117

And I should mention one other thing. There was one other monitor we are not talking about today so far, and that is DOI, which 

monitored the monitors to make sure that our bills were very carefully scrutinized and that there was nothing being paid for by the 

city in connection with the integrity monitors’ bills that wasn’t 

thought through and discussed to make sure that real value was 

being delivered. 

Mr. KING. Thank you very much. Thanks, Mr. Chairman. 

Mr. ROGERS. Thank you. The Chair now recognizes the gentleman from New Jersey, Mr. Pascrell, for questions he may have. 

Mr. PASCRELL. Thank you, Mr. Chairman. I thank all the folks 

who testified today. I wanted to say to Ms. Lemack that—two 

things. The ports bill had a Victims Assistance Office. Hopefully, 

we are going to get that done. But the authorization bill includes 

the Victims Assistance Office within the policy, Office of Homeland 

Security. So because of your efforts and because of the FBI, I think 

we are going to have exactly what you have asked for if we get this 

thing passed, and we move like a dinosaur. So let’s stay on our 

case and keep on wagging our tails. 

I had a couple questions, if I may, Mr. Chairman, and that is I 

want to ask Mr. Varoli, what is happening to the Deutsche Bank? 

Mr. VAROLI. Well, I am glad to say that the Department of Design and Construction is not involved in the Deutsche Bank. 

Mr. PASCRELL. You are glad to say? 

Mr. VAROLI. I am. There are a lot of issues with that bank, and 

actually it is being handled by the Lower Manhattan Development 

Corporation. The Department of Design and Construction has no 

involvement with that piece of property. 

Mr. PASCRELL. Who is going to be held responsible—maybe you 

can tell me this—for the fact that 5 years after this disaster, we 

have found body parts in the Deutsche Bank, and that they can’t 

get it all out of their own way to start to really do the work there. 

Who is responsible for that? 

Mr. VAROLI. It is my understanding, Congressman, that the 

Lower Manhattan Development Corporation will be here tomorrow, 

and they are the entity. 

Mr. PASCRELL. Oh, okay. I didn’t know that. I am sorry. 

Mr. VAROLI. I didn’t know it either until Commissioner Gill 

Hearn whispered it to me. 

Mr. PASCRELL. I would like to ask some questions to Mr. Getnick. 

I listened very carefully to what you had to say. How did Turner, 

AMEC, Bovis and Tully get selected? 

Mr. GETNICK. I can’t answer that question. 

Mr. VAROLI. I can answer that question. As I mentioned in my 

testimony, both in the written and in the oral, the Department of 

Design and Construction is there in the city of New York to know 

the business of construction and engineering. The entities that 

were selected, the majority of the four, I believe we have done business with three of them—actually extensive— 

Mr. PASCRELL. They are pretty famous. 

Mr. VAROLI. They are very large firm. 

Mr. PASCRELL. Why were they selected? There were a lot of other 

large companies. Who decided this? 
118

Mr. VAROLI. My commissioner and the first deputy commissioner, 

and this was all done on the fly. This was done that evening when 

we were searching for lights to bring to the site to start this search 

for the victims. I can tell you off the top of my head, for example, 

Tully Construction—Tully Construction was in the middle of finishing up a project that they had just done on route 9A, which was 

a State contract, and 9A runs right through or right past the World 

Trade Center. 

Mr. PASCRELL. Right in the central area, so they were already on 

site. 

Mr. VAROLI. They were already on site. Bovis Lend Lease was a 

company we had worked with when a beam had fallen out of Yankee Stadium, and they knew our emergency procedures. And we 

did a lot of business with them, so we called them. Turner Construction is another large international construction company that 

has done a lot. 

Mr. PASCRELL. I am familiar with all these companies. I just 

want to know who selected them, because going back to what Ms. 

Lemack said, we are going to do everything we can to bring transparency to the whole process so we know why certain companies, 

multinational companies, are chosen for specific jobs. I think that 

is important for the public to know, and as— 

Getting back to Mr. Getnick, you are right. The further you get 

away from the event, the more difficult it is to get the truth. So 

let’s go back the best we can to these contracts that were under 

scrutiny, under questioned companies. Just because a company is 

indicted and is not charged—may be charged with something else 

or might be convicted on something else; correct, Mr. Getnick? 

Mr. GETNICK. Yes. 

Mr. PASCRELL. May be charged, may be indicted with certain 

charges, or certain charges may be made. And then in order not to 

be found guilty of those charges, you plead guilty to a lesser offense. 

Mr. GETNICK. That could be the case. That was not the case in 

the example I gave earlier. 

Mr. PASCRELL. On none of the cases, is that what you are saying? 

Let me put the question this way— 

Mr. GETNICK. What I was asked about and can testify about our quadrant, the moneys that were paid, that $26.7 million that was 

designated to a particular contractor and the sub, that was not the 

case. 

Mr. PASCRELL. So you are only talking about your quadrant, and 

you can’t speak for the other? 

Mr. GETNICK. I can’t speak to the others with specificity, but I 

can say that was generally— 

Mr. PASCRELL. You can understand my question. You can be 

charged on one—on some specific charges and then not be found 

guilty on those charges. So you know, you say they were not found 

guilty on these charges, as an example, as a generality. But you 

could—you could plead guilty on a lesser charge. 

Mr. GETNICK. Yes. And let’s be very specific as to those other 

quadrants. There were, in fact, other companies that were found 

that did not meet the qualifications that should have been met. 

Mr. PASCRELL. And why didn’t they? 
119

Mr. GETNICK. They were thrown off. 

Mr. PASCRELL. Why didn’t they? 

Mr. GETNICK. In one case, one company was convicted of a crime 

post-9/11, but during the cleanup. And so as a result of that, midstream that company was removed from the site. 

Mr. PASCRELL. So, you know, you understand the questions and 

why we are asking those kinds of questions. How those companies 

got on site to begin with is interesting also because they might 

have been thrown off, but the fact was they were there. They were 

thrown off for very specific reasons. 

Mr. GETNICK. Fair enough. 

Mr. PASCRELL. Okay. I just wanted to clarify that issue. But 

again, going back to the point—transparency should be our guideline here, and I think you would agree, and I think from what your 

testimony—I read your testimony again, and I think that is what 

you are trying to get at. So everybody knows what is going on. 

Mr. GETNICK. I agree completely. I just also want to point out— 

Mr. PASCRELL. Sure. 

Mr. GETNICK. —the practical aspects of gaining transparency, 

and I don’t want to give away any proprietary secrets, but some of 

the stuff isn’t really that difficult if you get to it at the time and 

do it right. And I probably wouldn’t feel right if I didn’t acknowledge the fact of a particular— 

Mr. PASCRELL. But we are asking the questions 5 years after—

5 years after the fact. 

Mr. GETNICK. Yeah. But one of the good answers you are going 

to get after the fact is on the 9/11 cleanup, those things did take 

place real-time. And I was going to say, I have the benefit of working with a fellow by the name of Joe Peppi, and Joe Peppi is a 

former member of the DA squad in Manhattan. He is chief of our 

investigations and he just has this extraordinary practical insight 

of how you investigate in way that produces practical results. So 

we knew that this is essentially a debris removal project and the 

real dollars were going to be concentrated in the trucking. That is 

where the real dollars were. And the question is, how do you go 

about doing that? How do you develop your data ways? And you 

know what Joe Peppi said? Joe Peppi said, we have to get guys on 

these trucks. I said, What do you mean, we have to get guys on 

these trucks? He said, Look, we have people on the DA’s squad, we 

have got people from the major K squad, we have got people from 

the intelligence squad, and we have people from the Organized 

Crime Control Bureau. If I can’t get one of my former detectives 

on a truck and take a 3-hour trip from the site to Fresh Kills and 

back, and by the end of that trip have enough of a relationship 

with the driver to say how much are you getting paid per hour, 

what are you getting paid on the weekend, what are you getting 

paid for overtime, and what are you getting paid into your pension 

and benefit funds, well, something is wrong. And guess what? 

Nothing was wrong, because he put those people on those trucks 

and each time for each 3-hour investment of time up and back, we 

came up with that information. That is the database. That is the 

database by which you know what every contractor and what every 

subcontractor is really doing by way of their payments, and that 

is what we are talking when we talk about payroll fraud. 
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So when we saw the certified payrolls come back, we knew this 

company has the individual listed and they have the truck listed 

and they have the rate listed and they have all the payments listed 

and they have got it signed off and they have it certified; except 

for one big problem, which was that we were on the truck talking 

to the driver, and we know that that driver wasn’t getting paid 

that amount, and we know that those benefits were never being 

paid, and some of those people are coming from different geographical areas and they are never going to see any of those benefit 

funds. So guess what? We sat down and then we began to basically 

say you have got two choices, you can submit this certified payroll, 

in which case we will take it from you, or you can rework it. That 

is the choice you have. And most people understood that that 

choice was the difference between being prosecuted and the ability 

to go forward and continue to work the site. 

Mr. PASCRELL. You know, I must say, Mr. Chairman, most people in the hauling business are honest working people. 

Mr. GETNICK. That is absolutely the case. When you say most 

people are honest— 

Mr. PASCRELL. So I don’t want to imply—son the other hand, we 

are not naive. And we must follow through on our own abilities, or 

hopefully abilities to monitor these kinds of situations so we know 

where the public’s money is being spent. And that is the basis of 

our aggressiveness. Nothing more. 

Mr. GETNICK. I completely agree with you, Congressman. I just 

want to say one other thing. When we ask the question, How do 

people get to that site, let’s just go back on how people got to that 

site. Any person who had a heavy piece of equipment who was in 

the geographical area was headed towards that site. People just 

showed up. You have lights, you have my lights. You have a truck; 

here is my truck. 

Everyone was just pitching in on those early hours, and my first 

memory of being on that site was watching someone in a crane that 

was just basically moving to the left, picking up dirt and moving 

to the right and dumping it at a speed which I don’t understand 

how the person didn’t get motion sickness; and it didn’t stop, and 

I said, well, you know when does this guy stop? They said he just 

doesn’t stop. 

So that is what we were dealing with. And, yes, we did get on 

top of the fraud, we did get on top of the waste, we did get on top 

of the abuse. But you make the most important point, which is the 

people who came to that site were, by and large, honest, hardworking people. And the most important thing that we did was to 

basically let that legacy be the legacy of the World Trade Center 

cleanup as opposed to a very small minority that would have taken 

it in a different direction. 

Mr. PASCRELL. Thank you Mr. Chairman. 

Mr. ROGERS. I thank the gentleman. Also I thank the panelists 

for your valuable time and contribution to the hearing. I would also 

remind you, as I did the first panel, that many Members are not 

here because they have other committee hearings. They, along with 

Members that were here, will have additional questions that they 

will probably submit to you. The record will be left open for 10 

days. I would ask you that if you all are provided additional ques-
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tions, that you reply to those in writing so that we can submit 

them for the record and help us to produce a really good report. 

Your presence here today has been very valuable, and I do appreciate it. And with that, this hearing is adjourned. 

[Whereupon, at 5:55 p.m., the Subcommittee was adjourned.] 

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LSSONS LEARNED IN PREVENTING WASTE, 

FRAUD, ABUSE, AND MISMANAGEMENT 

PART II 

Thursday, July 13, 2006

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON HOMELAND SECURITY, 

SUBCOMMITTEE ON MANAGEMENT, 

INTEGRATION AND OVERSIGHT, 

Washington, DC. 

The subcommittee met, pursuant to call, at 10:12 a.m., in Room 

311, Cannon House Office Building, Hon. Mike Rogers [chairman 

of the subcommittee] presiding. 

Present: Representatives Rogers, King, McCaul, Meek, Pascrell, 

and Lowey. 

Mr. ROGERS. [Presiding.] This hearing of the Management, Integration and Oversight Subcommittee of the Committee on Homeland Security is called to order. 

This morning, we are holding our second of a series of three 

hearings as a part of the Subcommittee’s examination of the use 

and misuse of $20 billion in Federal aid provided to New York City 

in the aftermath of the September 11th terrorist attack. 

This hearing will review programs that provided Federal funding 

to individuals, businesses, and organizations to recover from the 

devastation. And in the interest of time, the Ranking Member and 

I have both agreed to forego opening statements. 

We would like to welcome our witnesses, especially those from 

New York, and thank them for taking time out of their busy schedules to be with us today. We would remind all witnesses that your 

entire opening statements have been submitted in writing. All 

Members have a copy of those. 

And for the purposes of your opening statement now, I would ask 

that you try to limit your remarks to five minutes or less, to summarize so that we will have more time for interaction and questions and answers. 

So with that, the Chair calls the first panel and recognizes Ms. 

Ruth Ritzema, Special Agent in Charge of the New York Department of Housing and Urban Development Office of Inspector General. 

Welcome.
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STATEMENT OF RUTH RITZEMA 

Ms. RITZEMA. Good morning. 

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. 

The New York HUD OIG office of investigations, of which I am 

the special agent in charge, was located at 6 World Trade Center. 

It housed approximately 35 special agents, forensic auditors, and 

support staff. 

On that morning, half our staff was working in the office when 

the first plane hit the north tower. As I stood and watched massive 

destruction and our office burn, I realized how lucky we were that 

none of our staff was injured or lost. 

From the very first hours, we teamed up with the Federal Bureau of Investigation and assisted in searching for evidence and 

conducting the investigation of the terrorist incident. In the aftermath, Congress gave HUD $3.4 billion in Community Development 

Block Grants disaster aid for New York City. 

The Empire State Development Corporation, ESDC, was allocated $700 million. The Lower Manhattan Development Corporation, LMDC, was allocated $2.7 billion. 

The Congress required that we audit the funds every 6 months 

to ensure that ESDC and LMDC had adequate financial management systems and adequate block grant monitoring procedures. 

Early collaboration with other agencies was important to the success of our auditing efforts. Coordination with Small Business Administration resulted in minimizing duplication of benefits. We also 

coordinated with the Federal Emergency Management Agency and 

the Internal Revenue Service. 

The unusual nature of this audit recognized that the funds needed to be dispersed quickly. Early in the program, our audits identified weaknesses and internal controls and program design. We audited on an almost real-time basis that gave the auditee an early 

opportunity to take corrective action and improve controls. 

To date, we have audited over $1 billion in disbursements. The 

result of these audits include findings of duplications of benefits 

and payments, of overpayments, of ineligible and unsupported 

costs, and of improvements needed in collection efforts. 

As a federal agent, of course, fraud is my biggest concern. 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. 

The U.S. Attorney’s World Trade Center Fraud Working Group 

was established to address all types of immediate and mid-term 

grant relief fraud and included many local and federal law enforcement agencies. 

The working group attempted to, among other things, identify all 

the various agency dollars, de-conflict cases, use automation to detect criminal activity, pass on criminal trends to enable better 

training, identify legal weaknesses in the various programs, pass 

on recommendations to make the programs more fraud resistant, 

and coordinate amnesty programs, as well as, of course, facilitate 

federal, state and local prosecutions. 
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Our offices worked over 115 matters. And although a number of 

our cases have been completed, we still have 64 cases that are active under investigation. 

One example is a case involving an individual who claimed his 

executive search firm sustained damage at Two World Trade Center. He was convicted on 18 counts of defrauding nearly $350,000 

from private and government agencies of disaster benefits. Using 

forged documents, he received Business Recovery Grants for nonexistent equipment that belonged to a property that he never 

leased and was supposedly lost when the tower collapsed. 

Prior to the start of major construction efforts, the construction 

integrity team was established to evaluate vulnerabilities and improper activities regarding the rebuilding of Lower Manhattan. 

This team worked on many projects, including setting up a fraud 

prevention hotline, vetting contractors and subcontractors, developing and providing fraud awareness training, and supporting the 

use of independent private-sector inspector generals or monitors. 

The destruction and aftermath of Gulf Coast hurricanes challenged the HUD OIG with a task even more daunting than the reconstruction of Lower Manhattan. New York City received from 

HUD nearly $3.5 billion; at this juncture, the Gulf Coast states 

have received almost $17 billion. 

Many of the lessons learned from our 9/11 experiences are being 

applied to our response to the hurricanes in the Gulf Coast. Like 

New York, in the Gulf Coast we are conducting audits at an early 

stage, training state and local entities in program fraud awareness, 

participating in joint teams, setting up hotlines and fraud awareness campaigns, and promoting the vetting contractors and subcontractors, as well as the use of independent private-sector IGs or 

monitors. 

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 has accomplished since the 

onset of this tragic and trying event. We remain committed to the 

department’s mission of providing safe, decent, sanitary and affordable housing and of providing economic development for our country’s communities. 

I look forward to answering questions that members may have. 

[The statement of Ms. Ritzema follows:]

PREPARED STATEMENT OF RUTH A. RITZEMA

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 11th 

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, 
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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 

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 de-
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velop 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 subrecipient 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: 
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• 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 
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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. 63rd 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 21st 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 11th Experiences 

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 
130

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 

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 
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from HUD. With post-September 11th relief efforts: there were only two major ‘‘pass 

through’’ entities of CDBG funds; there were far fewer prospective grantees and subgrantees, 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 

11th 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 

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, de-
132

cent, 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.

Mr. ROGERS. Thank you, Ms. Ritzema. 

The Chair now recognizes the Honorable Eric Thorson, Inspector 

General for the Small Business Administration, for your statement. 

Welcome. 

STATEMENT OF ERIC THORSON 

Mr. THORSON. Chairman Rogers, Ranking Member Meek, and 

distinguished members of the subcommittee, thank you for inviting 

me to discuss the efforts by our office to oversee the SBA’s response 

to the September 11th terrorist attacks. 

The attacks not only caused tragic loss of life, but also greatly 

disrupted the national economy. The SBA responded with two economic assistance programs. 

First, SBA guaranteed loans made by lenders to affected small 

businesses under what is known as the Supplemental Terrorist Activities Relief Program, or more commonly known as STAR loans. 

Second, SBA made direct disaster loans with no lender involved to 

affected small businesses. 

My testimony today discusses our oversight of these two programs. 

First, the STAR loan program. Congress authorized SBA to guarantee loans to small businesses adversely affected by the 9/11 attacks and their aftermath. This was seen as a program to assist 

businesses throughout the country that were harmed by the economic consequences of the attacks. 

Congress provided authority for SBA to guarantee up to $4.5 billion in loans. In the fall of 2005, the Senate Small Business and 

Entrepreneurship Committee and the SBA Administrator asked 

the OIG to review the STAR program. We conducted an audit to 

determine whether borrowers were eligible to receive STAR loans 

and whether SBA established adequate controls to verify borrower 

eligibility. 

We reviewed a statistically meaningful sample of 59 STAR loans 

made by 27 different lenders. Based upon a review of the lenders’ 

loan files and discussion with available borrowers, we were not 

able to determine whether 50 of the 59 borrowers, or 85 percent in 

the sample, were adversely affected by the 9/11 attacks and their 

aftermath. 

For a small number of these loans, the lender failed to prepare 

any justification to document borrower eligibility, which was required by the SBA and their procedures. For many others, the 

lenders’ eligibility justification was either vague or contradicted 

other information in the lenders’ files. 

Further, of 42 borrowers that we were able to interview, only two 

stated they were even aware that they had received a STAR loan; 

36 borrowers said they were not asked or could not recall being 

asked about the impact of the attacks on their businesses. 

In trying to establish the reason behind these findings, we found 

that SBA did not implement adequate internal controls to ensure 

that only eligible borrowers obtained these loans. SBA did issue 
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program guidance, requiring lenders to prepare and file written 

justifications showing borrower eligibility. 

However, after only limited lender participation, SBA began to 

vigorously promote the program to pursuade lenders to approve the 

STAR loans. These officials advised lenders that virtually every 

small business had suffered some direct or indirect adverse impact 

and could likely, therefore, qualify for a STAR loan. 

Further, SBA officials assured lenders that the agency would not 

second-guess their eligibility justifications; in fact, SBA did not require lenders to provide their eligibility justifications to the agency 

and therefore had no way of knowing whether lenders were making 

good decisions or not. 

It is important to note that we did not find that any businesses 

legitimately affected by the 9/11 attacks were precluded from obtaining a STAR loan. In fact, when the loan program appropriation 

expired in January of 2003, program funds were still available and 

were then transferred to the regular 7(a) loan program. 

As a result of our audit, we recommended SBA, for future special 

programs where SBA guaranteed loans are used for disaster relief, 

to: first, require loan applicants to submit statements justifying 

how the business was harmed by the disaster; second require lenders to verify applicant claims of injury and fully document borrower 

eligibility in detail; and third, implement controls to verify lender 

compliance. 

In addition to the STAR loan program, SBA made disaster loans 

to businesses affected by the 9/11 attacks. Under the disaster loan, 

SBA is authorized to fund repairs of damage to homes and businesses and to provide economic injury loans to provide working 

capital. 

We initiated a proactive investigative program because we believed that these loans were particularly vulnerable to fraud. Our 

investigative effort involved the OIG’s auditing division, which 

screened a sample of the loans that had gone into default, to identify indicators of fraud. Where the auditors flagged potential fraud, 

loans were then referred to the OIG investigations division for additional action. 

Based on this investigative program, as well as referrals from 

other sources, we opened 51 cases on loans valued at approximately 

$20 million. Thus far, we have closed 37 cases, with 14 still open. 

We have obtained 10 indictments, 10 convictions and over $1 million in restitution and settlements. 

The types of fraud we identified involved: claiming losses even 

though their companies were not located in the disaster area; false 

claims related to personal property or equipment damage; and misuse of disaster loan proceeds. 

We did obtain a prison sentence and financial restitution from 

both the president and the managing partner of a business that received a disaster loan based upon false claims that the company 

had been located in the World Trade Center. 

Although fraud will inevitably occur when there are governmental benefits, these efforts highlight the need for agencies to balance the need to get money to victims of disasters, such as 9/11 attacks, balancing that against implementing strong controls to pre-
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vent fraud and abuse. Once that money has been distributed, it is 

extremely difficult or impossible to get back. 

I thank you for the opportunity to be here today, and I will look 

forward to answering your questions. 

[The statement of Mr. Thorson follows:]

PREPARED STATEMENT OF ERIC M. THORSON

Introduction. Chairman Rogers, Ranking Member Meek, distinguished Members 

of the Subcommittee, thank you for inviting me here today to discuss the efforts by 

the Small Business Administration (SBA) Office of Inspector General (OIG) in connection with the SBA’s response to the September 11th terrorist attacks. September 

11, 2001, was a day in American history that we can never forget. Beyond the tragic 

loss of life, the terrorist attacks disrupted the economy of the United States. The 

SBA responded to the economic downturn by providing guaranties on loans made 

by private lenders through the Section 7(a) Loan Guaranty program, and by making 

loans directly to affected small businesses under the Disaster Loan program. My 

testimony today addresses the OIG’s efforts to review the efficiency and management of these 9/11 assistance programs and to prosecute wrongdoers who took advantage of this national tragedy by obtaining loans through fraudulent means. 

Overview of the OIG’s Audit of the STAR Loan Program. In January 2002, Congress authorized SBA to provide financial assistance to small businesses that were 

affected by the 9/11 attacks and their aftermath through what is known as the Supplemental Terrorist Activity Relief or ‘‘STAR’’ loan program. Newspaper articles in 

the Fall of 2005 raised questions as to whether borrowers obtained STAR loans even 

though they had not been affected by the terrorist attacks. As a result, Senator 

Snowe, who chairs the Senate Small Business and Entrepreneurship Committee, 

and the SBA Administrator asked the OIG to review this program. The audit objectives were to determine if STAR loan recipients were appropriately qualified to receive STAR loans and if SBA established and implemented proper administrative 

procedures to verify STAR loan recipient eligibility. However, before getting into the 

results of our review, let me provide a short background on the STAR loan program, 

which was administered under the Section 7(a) Loan Guaranty program. 

Overview of 7(a) Program. Under the Section 7(a) of the Small Business Act, SBA 

may guaranty up to 85 percent of a loan made by an authorized lender to a small 

business. This program is known as the ‘‘7(a) program.’’ In 1983, SBA implemented 

the Preferred Lenders Program (PLP) which allows designated lenders to process, 

service, and liquidate SBA-guarantied loans with reduced SBA oversight and, as 

SBA’s budget for salaries and expenses has shrunk over the past decade, the Agency 

has increasingly delegated this authority to lenders. 

Loans made under the 7(a) program that go into default are individually reviewed 

by SBA to determine whether the lender complied with the Agency’s lending requirements. Generally, this review is the primary means that SBA uses to determine lender compliance with Agency regulations and requirements. If it is determined that the lender did not comply materially with SBA’s regulations, SBA can 

negotiate a settlement of the guaranty amount or deny payment of the guaranty entirely. 

The STAR Loan Program. Under the STAR loan program, SBA was authorized 

by Congress to charge lenders reduced fees for guaranties on loans made to small 

businesses which were deemed ‘‘adversely affected’’ by the September 11th terrorist 

attacks and their aftermath. Although the term ‘‘adversely affected’’ was not defined, Congressional staff and SBA program managers appear to agree that Congress intended the program to benefit not only those businesses that were directly 

impacted by the attacks, i.e., firms located near the World Trade Center or the Pentagon, but also businesses across the country that were harmed by the economic 

consequences of the attacks. Congress appropriated $75 million for the STAR loan 

program, which provided authority for SBA to guaranty up to $4.5 billion in loans. 

Funds were available from January 11, 2002, through January 10, 2003. 

SBA Guidance on the STAR Loan Program. SBA issued guidance on the STAR 

loan program that defined an ‘‘adversely affected small business’’ as any business 

that ‘‘suffered economic harm or disruption of its business operations as a direct or 

indirect result of the terrorist attacks . . . .’’ Qualifying businesses were not limited 

to a ‘‘particular geographic area or to any specific type of business.’’ SBA procedures 

required lenders to determine that the loan applicant was adversely affected by the 

terrorist attacks and to prepare and maintain in its loan file ‘‘a write-up summarizing the analysis and its conclusion that the loan is eligible for the STAR program.’’ The guidance made clear that a lender would be deemed not to have met 
135

its responsibility for determining that a borrower was adversely affected if the lender did not provide a narrative justification demonstrating the basis for its conclusion. Borrowers were permitted to use STAR loan funds for any purpose authorized 

for 7(a) loans. Lenders also had authority to reclassify loans made under the regular 

7(a) program as STAR loans if the borrower was eligible. 

Our review found that lenders were initially reluctant to use the STAR loan program due to concerns that SBA would second guess their justifications and deny 

payment of the loan guaranty. Congressional staff expressed concern about the lenders’ lack of interest in the program and urged SBA to promote the use of the program. SBA reacted by vigorously promoting the program through articles in trade 

journals, speeches at lender conferences, and by directing its district offices throughout the country to contact local lenders to persuade them to approve STAR loans. 

SBA advised lenders that a very large percentage of small businesses could qualify 

for STAR loans and assured lenders that SBA would not second guess their justifications. 

OIG Audit of the STAR Loan Program. The OIG conducted an audit of a statistical sample of 59 STAR loans from the universe of 7,058 STAR loans approved between January 11, 2002 and January 10, 2003, to determine whether loan recipients 

were eligible to receive the loans. There were 27 lenders included in the sample. 

Using accepted statistical methodology, the audit results could be projected with 95 

percent certainty. For 50 of the 59 borrowers (85 percent) in the sample, we were 

unable to determine from the lenders’ loan files and discussion with available borrowers whether the borrowers were adversely affected by the 9/11 attacks and their 

aftermath, as required for STAR loan eligibility. For these 50 loans, the required 

justification was either (1) missing—5 loans; (2) merely a conclusion with no support—4 loans; (3) based on the adverse affects suffered by the business being purchased with a STAR loan rather than the ‘‘loan applicant’’ and SBA procedures did 

not specify whether such loans could qualify—11 loans; (4) contrary to documentation in the lender’s loan file or borrower statements—21 loans; or (5) vague and neither contrary to nor supported by documentation in the lender’s loan file or borrower statements—9 loans. Although these results do not necessarily show that the 

50 borrowers were ineligible for the program, they indicate that lenders failed to 

prepare adequate justifications and obtain supporting documentation to determine 

eligibility. 

Further, of 42 borrowers that we were able to contact, only two stated they were 

aware that they had received a STAR loan. Thirty-six borrowers said they were not 

asked, or could not recall if they were asked, about the impact of the attacks on 

their businesses. We concluded that, in many cases, funds appropriated for guaranties on loans to small businesses adversely affected by the terrorist attacks may not 

have been used for that purpose. 

Inadequacy of SBA Program Controls. In trying to establish the reasons behind 

these findings, we determined that SBA did not implement adequate internal controls and oversight to ensure that only eligible borrowers obtained STAR loans. Although SBA established guidance for the program requiring lenders to prepare and 

file written justifications showing borrower eligibility, senior SBA officials, in order 

to encourage the use of the STAR loan program, broadened the scope of program 

eligibility. Public statements made by senior SBA officials conveyed SBA’s expansive 

interpretation of the term ‘‘adversely affected’’ and that SBA believed that virtually 

every small business had suffered some direct or indirect adverse impact and could 

likely qualify for a STAR loan. Further, SBA officials reassured lenders that the 

Agency would not second guess their eligibility justifications. SBA also did not require lenders to provide their justifications to the Agency, either at the time a loan 

was made or at the time that a lender requested SBA to honor the guaranty on a 

defaulted loan. 

I should note that, although the SBA guaranties may not have been used for appropriated purposes, we did not find that any businesses legitimately affected by the 

9/11 attacks were precluded from obtaining a STAR loan. Indeed, when the STAR 

loan program appropriation expired in January 2003, funds for the program were 

still available and were transferred to the regular 7(a) loan program. Therefore, it 

does not appear that eligible businesses were prevented from receiving STAR loans 

due to a lack of funds. Furthermore, the default rate for STAR loans does not appear excessive in comparison to similar SBA-guarantied loans. As of September 30, 

2005, only 8 percent of disbursed STAR loans approved between January 11, 2002, 

and January 10, 2003, had been transferred to liquidation status, while 10 percent 

of the 7(a) loans approved during the same time period had been transferred to liquidation status. 

Lessons Learned. What were the lessons learned from this review? For future special programs where 7(a) loans are used for nationwide disaster relief, the OIG rec-
136

ommended that SBA: (1) require loan applicants to justify how the business was 

harmed by the disaster; (2) require lenders to obtain supporting documentation to 

verify applicant claims of injury and provide detailed justifications showing applicant eligibility; and (3) implement effective internal controls and program oversight 

to ensure borrower eligibility and lender compliance. Specifically related to the 

STAR loan program, the OIG recommended that the Agency: (1) implement procedures to require lenders to submit STAR loan justifications when seeking SBA’s 

purchase of a STAR loan guaranty; (2) establish criteria to provide more definitive 

guidance and examples for purchase reviewers to use in determining what constitutes an inadequate justification for STAR eligibility; (3) for future purchase requests, determine whether STAR loans that contain inadequate justifications can be 

reclassified as 7(a) loans or whether SBA can deny lender requests for purchase of 

the guaranties under SBA regulations; and (4) review guaranties the Agency has already paid under the STAR loan program to determine whether lenders were paid 

despite the absence of adequate borrower eligibility justifications. If there is inadequate justification, we recommended that the Agency determine whether SBA 

should reclassify the loan as a 7(a) loan or seek recovery of the guaranties from the 

lenders. 

Disaster Loans for Businesses Hurt by 9/11. The Small Business Act also permits 

SBA to make direct loans to victims of declared disasters. Disaster loans, which are 

available to businesses and to homeowners, can be used to fund repairs of physical 

damage to homes and businesses, and to provide working capital to disaster-impacted businesses to allow them to pay their bills or otherwise fund operational 

needs. These latter loans are known as Economic Injury Disaster Loans (EIDL). 

These loans are made at a low interest rate, generally less than 4 percent, with generous repayment terms, which can last up to 30 years. In order to make Federal 

assistance available to more businesses that were impacted by the September 11th 

terrorist attacks, and not just those located in the declared disaster areas, SBA expanded the EIDL program to assist small businesses located outside the declared 

disaster areas. SBA disbursed over $1.1 billion in 9/11 disaster loans. 

9/11 Disaster Loan Fraud. In 2003, the OIG began a proactive review of defaulted 

9/11 EIDLs to assess whether there was fraud involved in obtaining or using loan 

proceeds. Inevitably, some of these disaster loans involved fraud due to loan transactions being expedited in order to provide quick relief to disaster victims. The 

OIG’s Auditing Division screened a sample of defaulted 9/11 loans to identify indicators of fraud. Where indicators existed, these loans were then examined further by 

investigators. Based on these referrals, as well as those from other sources such as 

OIG Hotline, Office of Disaster Assistance, other law enforcement, etc., the OIG’s 

Investigations Division opened 51 cases on loans valued at approximately $20 million. Thus far, 37 cases have been closed, and 14 cases are in an open status at various stages of investigation. There have been 10 indictments, 10 convictions, and 

over $1 million in restitution and settlements. 

The types of fraud schemes we identified in these cases included individuals and 

businesses claiming losses even though their companies were not located in the disaster area, false claims related to personal property or equipment damage, misuse 

of the disaster loan proceeds, and false statements concerning financial status. For 

example, in one case, the president and the managing partner of a business received 

an SBA disaster loan by falsely claiming that their company had been located at 

the World Trade Center. In fact, the business was not located there on September 

11, 2001, and the individuals were salaried employees of another company at the 

time. They were sentenced to incarceration and ordered to pay a combined total of 

$618,000 in restitution. 

OIG Finding Regarding SBA Collection of 9/11 Disaster Loans. While the auditors were screening defaulted loan files, it became apparent that SBA was not always pursuing collection timely. Therefore, the OIG conducted a review to determine if delinquent 9/11 disaster loans were serviced appropriately. As of September 

30, 2004, 1,495 of these loans, valued at $208.8 million, were delinquent. The Office 

of Management and Budget (OMB) requires that agencies promptly act on the collection of delinquent debts, using all available collection tools to maximize collections. Since 1993, SBA has employed the issuance of demand letters as an important part of the loan liquidation process. 

The OIG reviewed a sample of delinquent loans and found that SBA sent pre-demand or demand letters to only 4 of the 17 borrowers who should have received 

them. We found that insufficient staffing of SBA’s liquidation center prevented personnel from following proper collection methods. Instead of properly issuing pre-demand and demand letters to collect delinquent loan funds, personnel were used to 

service bankruptcies, collateral activities, and/or borrower initiated offers of compromise. 
137

OIG Recommendations on Proper Debt Collection. The OIG recommended that the 

Agency revise its procedures to direct servicing centers to send timely pre-demand 

and demand letters to delinquent borrowers and to maintain copies of these letters 

in loan files. Additionally, we recommended that the Agency ensure that sufficient 

staff resources are devoted to liquidation center activities to fulfill the debt collection responsibilities required by OMB. Attention to the collection of funds when a 

loan is delinquent must be part of SBA’s most basic responsibilities. 

Conclusion. Thank you for the opportunity to comment. I look forward to answering any questions that you may have.

Mr. ROGERS. Thank you, Inspector Thorson. 

The Chair now recognizes Mr. Douglas Small, Deputy Assistant 

Secretary of the Employment and Training Administration of the 

Department of Labor, for your statement. Thank you. 

STATEMENT OF DOUGLAS SMALL 

Mr. SMALL. Mr. Chairman and members of the subcommittee, 

good morning. I am pleased to have the opportunity to testify here 

before you today on behalf of the U.S. Department of Labor’s Employment and Training Administration to discuss the agency’s response to the terrorist attacks of September 11, 2001, the lessons 

that we have learned about disaster preparedness and program 

oversight as a result of that terrible tragedy. 

The Employment and Training Administration is responsible for 

an array of programs and services to assist workers who have lost 

their jobs or might lose their jobs as a result of a disaster. These 

include the Unemployment Compensation Program, also known as 

unemployment insurance, the Disaster Unemployment Assistance 

Program, national emergency grants, and training services and employment services available through about 3,500 one-stop career 

centers. 

These career centers are positioned to serve disaster victims because they are geographically dispersed, and they are staffed by 

trained professionals, and their focus is on individual assistance. 

Each of us who served our nation during the time of the terrorist 

attacks of September 11th were faced with unprecedented challenges and problems that demanded immediate results, and generally those results were delivered. I would like to highlight federal 

assistance to New York following the terrorist attacks. 

Labor Secretary Elaine Chao and Assistant Secretary Emily 

DeRocco acted swiftly to ensure that the state had resources to 

meet the needs of workers whose employment was permanently or 

temporarily impaired by the terrorist attack. 

Secretary Chao awarded a $25 million national emergency grant 

to New York. Congress provided those funds in the 2001 emergency 

supplemental appropriations. That bill also included $175 million 

in workers compensation programs, and an earmark for $32.5 million for the Consortium of Worker Education. 

New York was also allocated $7.6 million in emergency funding 

for administrative costs associated with processing unemployment 

claims. The department has also made funds available to Virginia 

and other states that were dealing with economic aftershocks and 

industry layoffs resulting from the terrorist attacks. 

In response to the unique circumstances related to those attacks, 

the department issued emergency regulations to permit individuals 

who were unemployed due to the closure of Washington National 
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Airport eligible for disaster and employment assistance. The deadline for applying for disaster and employment assistance was extended from the 26 to 39 weeks, as well for any individuals who 

lost their jobs as a result of the attacks. 

State agencies in New York and Virginia were able to handle the 

unemployment compensation and disaster unemployment assistance claims. New York was able to handle them through telephone 

calls that enabled them to be able to process those claims through 

their call center in upstate New York, since the center in downtown New York City was temporarily closed due to the damage of 

the attacks. 

Virginia actually set up a temporary claims center at the Ronald 

Reagan Washington National Airport, which was closed following 

those attacks. That was staffed by volunteers from the U.S. Department of Labor and neighboring states that helped in the processing 

of those claims. 

As a grant-making agency, the Employment and Training Administration follows detailed written procedures to strengthen safeguards and the integrity of the grant-making process. 

We supported the post–9/11 recommendations of the Office of the 

Inspector General, which asked us to more clearly delineate roles 

and responsibilities for personnel of the various departments at the 

Employment and Training Administration and at Labor. As a result, we issued guidance on the roles and responsibilities for the 

Employment and Training Administration for all phases of grant 

administration. 

With respect to unemployment compensation, the department requires each state to operate a benefit payment control program 

that prevents, detects and recovers improper payments. The department recently established a performance measure for improper 

payments. 

In addition, the president’s 2006 and 2007 fiscal year budget proposals contain a program integrity proposal that, if enacted, would 

help states reduce improper payments and produce significant cost 

savings, while protecting those who are eligible, especially in the 

event of a massive disaster like September 11th. 

I would just to briefly say that the lessons learned from 9/11 

helped us considerably in our responses to Hurricane Katrina. We 

were able to respond immediately with national emergency grants. 

We applied over $206 million immediately to states that were impacted and evacuee host states, as well. And we were able to provide unemployment compensation and disaster employment assistance to approximately 293,000 people who received over $784 million in unemployment compensation. 

We have also created a number of tools to assist in proper monitoring and oversight. 

In conclusion, I would like to say that the terrorist attacks and 

the hurricanes each were large catastrophic events were different 

and required a unique response, and that we must develop many 

different strategies if we are going to rapidly respond to different 

circumstances as they arise. 

We have developed new tools. We have an electronic application 

system for national emergency grants to expedite that processing. 

We have developed a core monitoring guide that helps us look at 
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disasters and monitor them more effectively and to try to help people become more rapidly re-employed. 

Additionally, we are in the process of developing a couple of tools 

that we think will be effective: community blueprints, and strategic 

action for regional transformation teams, which we think could assist states, immediately looking at the economic impact of these 

disasters. 

Mr. Chairman, this concludes my testimony, and I am prepared 

to respond to any questions that you may have at this time. 

Thank you. 

[The statement of Mr. Small follows:]

PREPARED STATEMENT OF DOUGLAS F. SMALL

Good morning. Chairman Rogers, Ranking Member Meek and distinguished members of the Subcommittee, thank you for this opportunity to discuss the Department 

of Labor’s Employment and Training Administration’s response to the terrorist attacks of September 11, 2001. 

In the aftermath of that terrible tragedy, the Employment and Training Administration (ETA) engaged in a number of activities to ensure that the affected workers 

received income support, job training, job search assistance, and other employment 

related services. Today, I will testify about these activities, and the lessons we 

learned about disaster preparedness and program oversight during that time period. 

I would also like to take this opportunity to discuss a very different kind of disaster—Hurricane Katrina, and the lessons that we learned from responding to the 

vast devastation and displacement that it left in its wake. Finally, I will share with 

the subcommittee how these lessons have helped shape our future disaster response 

and oversight activities. 

ETA is responsible for an array of programs and services to assist workers who 

have lost or might lose their jobs as a result of disasters. These include the Unemployment Compensation program (UC), Disaster Unemployment Assistance (DUA), 

National Emergency Grants (NEGs), and the wide variety of employment and training services that are available through One–Stop Career Centers. 

Before I go into more detail about our disaster response and oversight activities 

after the terrorist attacks of September 11, 2001, I would like to give a brief overview of each of the programs I have just mentioned. The UC program provides temporary partial income support (also known as unemployment insurance) to laid-off 

workers to help ensure that some of the basic necessities of life are met while the 

individuals look for work. It is also an important economic stabilization tool. Benefits are provided for up to 26 weeks in most states and the benefit amount is based 

on past work and wages. During periods of high unemployment, up to 13 additional 

weeks of benefits are available under the Extended Benefits program. In general, 

UC is available to workers who have significant recent work experience and are unemployed through no fault of their own. 

The UC program is a federal-state partnership based upon Federal law, but administered by state employees under state law. Federal law defines certain requirements and each state designs its own UC program within the framework of the Federal requirements. The primary functions of the Federal government include: setting 

broad overall policy for administration of the UC program; monitoring state performance; and providing technical assistance when necessary. The primary functions 

of states include: taking claims; determining eligibility; and ensuring timely payment of benefits to unemployed workers. 

The DUA program provides financial assistance to individuals who are not eligible 

for regular UC (such as the self-employed and recent entrants to the labor market) 

and whose employment has been interrupted as a direct result of a major disaster. 

DUA benefits are triggered when the President declares a major disaster in specified areas of a state. 

NEGs are funded through the Secretary’s reserve as authorized under the Workforce Investment Act of 1998 (WIA). In response to a natural disaster, states can 

apply for NEG funds to provide temporary disaster relief employment for individuals who have lost their jobs as a result of the disaster, are eligible dislocated workers, or are otherwise unemployed. This temporary employment is to work on 

projects that provide food, clothing, shelter and other humanitarian assistance for 

disaster victims as well as to conduct demolition, cleaning, repair, renovation and 

reconstruction of damaged or destroyed public structures, facilities and lands located 
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in the disaster area. The funds may also be used to provide other employment and 

training activities. Once FEMA has declared a disaster eligible for public assistance 

under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, a state 

may submit an application for NEG disaster funds. A short application process for 

disaster relief NEGs is in place for States to request funds to respond to immediate 

needs. 

One-Stop Career Centers are the local access point for employment and training 

services, such as job search and placement services, job vacancy listings, career 

planning and guidance, and supportive services. Over a dozen federal programs are 

partners in the One–Stop Career Center system. Currently, there are almost 3,500 

comprehensive and affiliate One–Stop Career Centers around the country.

ETA’s Response to 9/11

All of us who served our nation during the time of the September 11 attacks vividly recall the pervasive atmosphere of urgency, ‘‘can-do’’ improvisation, broad generosity, and concern for those who were suffering. All of us in government, including 

the Department of Labor, were faced with new challenges and problems that demanded immediate results—and generally, those results were delivered. 

Following the terrorist attacks on the World Trade Center and the Pentagon on September 11, 2001, the Secretary of Labor awarded a $25 million National Emergency Grant (NEG) to New York to assist approximately 6,900 dislocated workers 

from industries directly impacted in New York City by the disaster. Temporary jobs 

were not created as a result of the nature of the disaster and the health hazards 

involved. The NEG funds originated in the 2001 Emergency Supplemental Appropriations Act for Recovery from and Response to Terrorist Attacks in the United 

States (Public Law 107–38). The state of New York subcontracted with 17 organizations to provide employment and training services. The Secretary also awarded a National Emergency Grant to Virginia for $3.5 million, which served approximately 5,000 workers, including those from airline and related industries. Several grants were awarded to states that were impacted by layoffs in the airline and related industries dealing with the economic aftershocks of 

the terrorist attacks of September 11, 2001. They included NEG awards to Minnesota for $8 million (to serve approximately 2,500 workers), Illinois for $5 million 

(to serve approximately 2,375 workers), Florida for $3.4 million (to serve approximately 2,000 workers), New Jersey for $3.2 million (to serve approximately 2,500 

workers), and Massachusetts for $2.4 million (to serve approximately 600 workers). The Emergency Supplemental Appropriations Act also provided $175 million for New York Workers Compensation Programs, and included an earmark for $32.5 million to the Consortium for Worker Education, a New York City based organization. New York was also allocated $7.6 million in emergency funding for administrative 

costs associated with processing unemployment compensation. The allocations were 

made in two installments of $3.1 million and $4.5 million. 

ETA Regional Office staff provided technical support to New York State, which 

not only experienced more than a 100% increase in unemployment insurance claims, 

but was also restricted by the peripheral physical damage in New York City. The 

ETA Regional Office also coordinated activities between affected state agencies and 

FEMA and provided Federal staff to the city’s disaster center to assist with UC 

claims.

The state agencies in New York and Virginia were able to handle state UC and 

DUA claims filing. New York handled claims filing primarily by telephone and as 

a result was able to process UC claims through its upstate call center even though 

its New York City call center was closed temporarily due to damage from the attacks. Virginia (which took claims in person) set up a temporary claims center at 

the Ronald Reagan Washington National Airport, which was closed for a period following the attacks. Volunteers from the U.S. Department of Labor and neighboring 

states helped Virginia staff this temporary claims center which handled UC claims 

primarily from airport workers. 

In response to the unique circumstances related to the terrorist attacks, the Department of Labor issued emergency regulations to permit individuals who were unemployed due to the closure of the airport to be eligible for DUA. In addition, the 

deadline for applying for DUA was extended in New York. Congress also extended 

DUA benefits from 26 to 39 weeks for individuals who lost their jobs because of the 

terrorist attacks on 9/11. Approximately 3,400 people received $14 million in DUA.

Oversight Activities 

Grant making in a time of crisis requires an equal emphasis on expediency and 

efficiency. ETA follows detailed, written procedures for each of its grants, and continuously upgrades these safeguards to strengthen the integrity of the grant-making 

process. 
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Following recommendations by the Office of the Inspector General (OIG) to more 

clearly delineate the roles and responsibilities of personnel in various departmental 

offices with respect to the grant process, especially in emergency situations, ETA 

issued a new Employment and Training Order (ETO) in 2003. This ETO clarified 

the roles and responsibilities within ETA for grant administration, including the Regional Office federal project officer responsibilities. To further strengthen oversight 

and financial management of NEGs, ETA also issued internal guidance on the roles 

and responsibilities for the grant awards, covering all aspects of the administrative 

process, including the assurance that the process is efficient and transparent. This 

includes monitoring of NEG projects for compliance with the grant fiscal and program requirements to avoid fraud and abuse. 

Finally, with respect to UC, the Department requires each state to operate a Benefit Payment Control program that prevents, detects, and recovers improper UC 

payments. States utilize a wide array of tools to detect potential improper UC payments including in-depth investigations and cross-matches with databases from 

other government agencies to determine, among other things, if individuals are still 

receiving UC after they returned to work. The Department recently established a 

new performance measure for improper UC payments, which was consistent with 

recommendations of the OIG. The Department also has provided state UC agencies 

with funds to use the latest technology to detect potential improper payments. Since 

each state UC agency already had this oversight system in place before 9/11, they 

did not have to create a new oversight program after the attacks to determine if 

UC benefits were improperly paid. In addition, the President’s fiscal year 2006 and 

fiscal year 2007 budget proposals have included UC program integrity proposals 

which, if enacted, would help states reduce improper UC payments and produce significant cost savings while protecting UC for those who are eligible, especially in the 

event of a massive disaster like September 11.

ETA’s Response to Hurricane Katrina 

Although Hurricane Katrina was a disaster of a very different nature than the 

9/11 tragedy, ETA’s activities were informed by our experience handling services 

after the terrorist attacks on September 11, 2001. In New York and Virginia, the 

disaster was mainly localized, and the state infrastructure for the state workforce 

investment system remained largely intact. During Hurricane Katrina, the states 

that were primarily affected—Alabama, Louisiana and Mississippi—experienced severe loss of infrastructure, and the displacement of workforce system staff. As a result the state workforce systems were not able to readily respond—even, in one case, 

to be able to electronically submit an application for a NEG. 

ETA has had substantial experience with disasters caused by hurricanes, yet this 

experience did not fully prepare the agency to respond to a disaster of the magnitude of Hurricane Katrina in which state infrastructure was devastated. In addition to the large numbers of persons who lost their employment due to the devastation, significant numbers of persons evacuated the immediate areas of devastation 

and relocated to other nearby states, causing new and different challenges for the 

workforce system. 

ETA responded quickly with NEGs and other resources to the affected states and 

evacuee host states. A total of $236 million was awarded in NEGs to states for the 

2005 Gulf Coast Hurricanes. 

The UC and the DUA programs provided crucial financial assistance to victims 

of hurricanes Katrina and Rita. ETA estimates that approximately 293,000 people 

received $784 million in UC in the areas affected by the hurricanes. Approximately 

197,000 people received $395 million in DUA. 

After the Hurricanes, ETA was in close contact with state officials in the impacted 

states and provided a wide array of assistance including: 

• Quick distribution of $44 million in UC administrative grants to help Louisiana, Mississippi, and Alabama repair and replace damaged infrastructure for 

the UC program and to expand their capacity to process a surge in claims; 

• Extending the time allowed for individuals to apply for DUA and to provide 

documentation of wages and employment because of the difficulties many evacuees faced; 

• Recruiting states to help Louisiana and Mississippi with claims filing via a 

toll-free phone number that routed calls from unemployed workers in Louisiana 

and Mississippi to call centers in other states; and 

• Working with the U.S. Department of Health and Human Services (HHS) to 

expedite Mississippi and Louisiana obtaining authorization to cross-match their 

UC claims against the National Directory of New Hires (NDNH). (UC beneficiaries who continue to claim benefits after returning to work are the number 
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one cause of UC overpayments and the NDNH includes information on all new 

hires nationwide.) 

In addition, Congress enacted legislation providing $500 million to Alabama, Louisiana, and Mississippi to help pay the costs of regular UC benefits. Congress also 

enacted the Katrina Emergency Assistance Act of 2005 which extended DUA benefits from 26 up to 39 weeks for victims of Hurricanes Katrina and Rita. (Along with 

DUA recipients, individuals who received their full entitlement to UC were potentially eligible for 13 additional weeks of benefits.) Congress also enacted the Flexibility for Displaced Workers Act (Public Law 109–72), which provided additional 

flexibility for serving disaster affected individuals using NEG funds. 

The Department and ETA spearheaded several other initiatives to help displaced 

workers and impacted communities. These included: 

• Implementing the Pathways to Construction Employment Initiative to support economic revitalization in Louisiana and Mississippi through a partnership 

between each state’s workforce agency and the community college system to establish and operate construction career pathways. Each state was awarded $5 

million to implement the projects. 

• Awarding High Growth Job Training Grants to Alabama, Louisiana, Mississippi, and Texas to train workers for jobs and careers in critical industries 

such as construction, energy, health care, transportation, and safety/security. 

Each state received $3 million to implement these projects. 

• Awarding $63 million in Community–Based Job Training Initiative grants to 

35 community colleges in the Gulf Coast and the Southeast whose programs 

will be critical to rebuilding the regional economy. 

• Developing the Reintegration Counselor Program, which deployed highly 

skilled counselors to increase the capacity of One–Stop Career Centers in serving hundreds of thousands of individuals displaced from their families and jobs. 

ETA provided $13,500,000 to fund more than 150 counselors in Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, Missouri, Oklahoma, Tennessee, Texas and Virginia. 

• Deploying Disability Program Navigators to assist individuals with disabilities in the affected region ($5 million was awarded to support this initiative). 

• Implementing the Hurricane Recovery Coach, an innovative online tutorial 

developed for workers, businesses, and reintegration counselors/workforce staff 

impacted by the Hurricanes Katrina and Rita. The Hurricane Recovery Coach 

identifies common employment and recovery issues facing evacuees and others 

who have been affected by the hurricanes and provides step-by-step instructions 

to help users find resources to related information. 

• Forming the Mississippi/Manpower partnership between One–Stop Career 

Centers and Manpower, Inc. to encourage evacuees to return home to work and 

to certify an evacuee’s work readiness skills. This program created ‘‘Coming 

Home Portfolios’’ that include job training, support services and employment opportunities. 

• Providing waiver flexibility to seven states to help states target services to 

affected individuals and local areas. A total of 46 WIA waivers and three Workflex Plans were approved for the states of Alabama, Arkansas, Georgia, Louisiana, Mississippi, and Texas.

One-Stop Career Center System 

One-Stops Career Centers were uniquely positioned to be an access point for services for Hurricane victims, because they were geographically dispersed and already 

the focus for individuals seeking unemployment and disaster benefits and searching 

for temporary or full-time employment. One–Stop Career Center staff are trained 

and experienced in serving a wide range of customers with multiple needs. 

In addition to the almost 3,500 One–Stop Career Centers around the country, 

many states have developed the capacity to provide mobile One–Stop services, particularly in remote areas. This was a service that was critical during the massive 

displacement resulting from Hurricane Katrina, when dozens of mobile career centers were deployed to provide service at evacuee shelters. After Hurricane Katrina, 

evacuees were in every state in shelters and were rapidly moving into new communities. The One–Stop Career Centers and affiliates nationwide served as access 

points for benefits and services for evacuees while away from home or in their new 

hometown. One–Stop Career Centers also helped evacuees connect to jobs across 

state boundaries. 

During the disaster and in its aftermath, One–Stop Centers had the capacity to 

broadcast employment and career opportunities nationwide with an array of Internet-based tools to assist during the disaster. These web tools included the 
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CareerOneStop comprehensive Web site: www.careeronestop.org and 

www.servicelocator.org.

One-Stop Career Centers also supported FEMA in identifying the skilled and specialized workforce necessary to help in recovery and disaster relief efforts.

Monitoring and Oversight of Katrina Activities 

ETA has developed several tools to ensure that proper monitoring and oversight 

is taking place in the aftermath of Hurricane Katrina. First, ETA’s regional offices 

produce a weekly stewardship report on all key activities. This report was initially 

required by the Office of Management and Budget (OMB) in September 2005 to document the agency’s analysis and response to the financial risks posed by the huge 

rapid response required in the aftermath of the Katrina disaster. Required information included: 

• Identification of abnormal risks presented by the emergency for fraud, waste 

and abuse of funds/assets; 

• Evaluation of the effectiveness of existing controls to prevent/detect each risk; 

• Additional controls to be implemented for the emergency; and 

• Normal and/or additional monitoring of programs and transactions to be used 

to track the effectiveness of implemented controls. 

DOL senior management requested the Office of the Chief Financial Officer 

(OCFO) to recast the OMB report into a weekly report which would specifically 

identify and track DOL financial control issues relating to Katrina recovery efforts. 

In response, the Employment and Training Administration developed a reporting 

process which includes: 

a. Reports from the regional offices on Katrina related events: 

i. Significant actions for the week; 

ii. New issues identified as affecting timeliness of response or vulnerability 

to fraud, waste and abuse; 

iii. Status of progress in addressing issues requiring on-going efforts to 

ameliorate the risk; 

iv. Any other information pertinent to the Katrina recovery effort financial 

situation, such as Office of Inspector General investigations, State officials/

agencies’ communications or investigations, etc. 

b. Reports from the program offices on Katrina related issues involving policy 

or other high-level responses. 

c. Status of funding and expenditure for each Katrina related grant or program. 

This report is presented weekly to the Deputy Secretary of Labor to keep senior 

management apprised of the financial status of the recovery effort and to highlight 

possible or actual vulnerabilities and the efforts of DOL towards abating those 

vulnerabilities. 

For NEG projects, this report looks at overall participant enrollments and financial draw downs for both direct disaster projects and for evacuee projects. This report also looks at all major monitoring activities as well as any issues identified by 

the states or by regions that need resolution including policy issues, grant actions 

and similar matters that affect the success of the disaster response.

Regional Monitoring, Oversight and Technical Assistance 

Since Hurricane Katrina, ETA has been involved in significant on the ground support to affected states. ETA Regional Office staff has monitored affected states on 

their DUA programs in accordance with the Secretary’s standards, and has provided 

numerous onsite and remote technical assistance, in addition to actual onsite monitoring and oversight since the onset of Katrina and Rita. 

Immediately after the Hurricane hit, the Dallas Regional Office formed an internal Hurricane Team to work directly with Louisiana Department of Labor officials 

to provide onsite and remote technical assistance, oversight and monitoring, and act 

as a liaison to obtain assistance from other states and regions for technology and 

staffing support. To date, the members of this team have made 68 separate and 

joint onsite technical assistance and monitoring visits to states in the region in response to Hurricanes Katrina and Rita. The team has also assisted the Louisiana 

Department of Labor in implementing and carrying out the new National Directory 

of New Hires for cross matching UI and DUA claimants across state lines to help 

alleviate fraud and abuse of UI and DUA funds.

Lessons Learned in the Aftermath of 9/11 and Hurricane Katrina 

As a result of the terrorist attacks of September 11, 2001, and impact on the Gulf 

Coast in 2005 from Hurricanes Katrina and Rita, we have learned that each large 

catastrophic event is different and that we must develop a wide array of tools so 

that we are able to rapidly respond to different circumstances as they arise. Although there are many things we can do to prepare for a disaster, we have also 
144

learned that events of this magnitude always entail circumstances that may not be 

foreseen. For example, after September 11th, there was a need to change DUA regulations in order to serve workers who were unemployed due to the closure of Ronald 

Reagan Washington National Airport. The mass relocation of victims of Hurricane 

Katrina required new and different responses, including unprecedented coordination 

between states to handle claims for UC and DUA. 

We learned that in times of disaster, it is critical for the workforce system to collaborate with other government agencies and have access to information about resources that these agencies can provide. For example, in the aftermath of the Hurricanes, dislocated individuals who could be engaged in NEG funded temporary disaster projects required housing since most housing in the affected areas was destroyed. The workforce system can arrange for recruitment and placement, but did 

not have ready access to information about when individuals would become eligible 

for housing assistance, making the job placement situation difficult. 

Another lesson that we learned from these disasters is that telephone and internet claim filing for UC and DUA benefits provides needed flexibility in the aftermath of a destructive event. Although states have gradually stopped taking claims 

in person, not all states have adopted telephone and internet claims filing systems. 

The Department has encouraged states to adopt these systems by providing them 

with implementation grants. As of March 2001, 22 states had implemented telephone claims filing operations and 8 states had implemented internet claims filing 

operations. Since 2001, we have given states over $15 million for telephone and 

internet claims filing systems. Now, 38 states have telephone claims filing operations and 43 states have internet claims filing operations.

Remaining Challenges 

Although we have made a tremendous amount of progress in our disaster preparedness, there are still some remaining challenges that we have identified, which 

include: 

Streamlining DUA Funding. Although DUA is funded by FEMA, the Department of Labor is 

responsible for administering the program through the state agencies that administer state UC programs. 

The basic concept is simple—FEMA transfers funds to the Department which, in turn, gives funds to the 

affected states to pay DUA benefits and administrative costs. The process involves multiple levels of review 

and approval by FEMA and DOL before needed funds are authorized for transfer. As a result, there have 

been instances when states were forced to delay DUA payments because funding was received late. An 

important challenge is to streamline the approval and fund issuance process so DUA funds can reach disaster stricken states as soon as they are needed to make payments.

Developing Business and Disaster Recovery Plans. Hurricanes, fires, floods, earthquakes, and tornadoes, as well as physical and cyber terrorism, computer and telecommunications failures, 

and pandemics could cause mass unemployment that exceed the claims processing capacity of the impacted 

states. After Hurricane Katrina, we learned that most states do not have plans for providing services after 

a mass unemployment inducing disaster or when the UC agency headquarters are destroyed. Thus, a remaining challenge is the development of business continuity and disaster recovery plans that address loss 

of communication, loss of computer processing capability, and loss of primary workspace, and ways in which 

essential business functions will continue until normal capability is restored and vital facilities are accessible.

Developing Cooperative Agreements between States. During Katrina, several states 

provided support to the impacted states, yet there were initial problems associated with how assisting 

states would be reimbursed for assistance provided such as staffing and mobile one-stop systems. In the 

future, ETA believes that it is important to encourage states to establish a set of protocols and cooperative 

arrangements to deliver services when the home state is unable.

Developing and Implementing DUA Internet Claims System. Hurricanes Katrina 

and Rita highlighted the gap in operating efficiency between UC and DUA claims processing. It is important 

to automate DUA claims processing and integrate those systems with state UC systems.

Sharing Information between Agencies to Locate Victims and Provide 

Services. Hurricane Katrina highlighted the barriers to information sharing between federal agencies. This 

is a challenge because without this information sharing it is more difficult to locate disaster victims and 

provide needed services.

Next Steps 

As a result of disaster planning since 9/11 and Katrina, ETA has developed several new policies and tools which can be utilized in a future emergency. We have 

also developed the ability to catalyze a wide array of partners working collaboratively in support of disaster response activities. 

We have also examined several approaches to providing assistance in the event 

of disasters to support communities in times of economic shock; we are currently 

developing STrategic Action for Regional Transformation (‘‘START’’) Teams of senior 
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ETA officials that can get on site quickly and bring information and resources to 

assist in the development of a state and local response. ETA is also developing Community Blueprints designed to support communities suffering economic shocks to reassess their economic landscape and develop response and growth strategies. We 

have also compiled a comprehensive Federal Resource Guide that catalogues resources and services available across the federal government to help individuals and 

communities.

Conclusion 

The September 11, 2001 terrorist attacks and the 2005 Hurricane Season created 

challenges unlike any we have seen before. In response to these challenges, we have 

developed new tools to provide technical assistance to affected states; monitor and 

oversee how funds are being spent; and help displaced workers access income support and other services, and become quickly reemployed. In addition we have developed tools to assist communities dealing with the economic impact of these disasters. We will continue to devote significant time and resources to developing these 

tools further and preparing for potential disasters. 

Mr. Chairman, this concludes my testimony. Again, I appreciate the opportunity 

to appear before you on behalf of the Employment and Training Administration. I 

am prepared to respond to any questions that you may have at this time. Thank 

you.

Mr. ROGERS. Thank you, Mr. Small, for your statement. 

The Chair now recognizes a good Alabamian, Mr. Leroy Frazer, 

Bureau Chief of the Special Prosecutions Bureau of the New York 

County District Attorney’s office. He is a former student at 

Talladega College and Tuskegee University, both of which are in 

my district. 

So as with one of our panelists yesterday, he doesn’t think I have 

an accent. 

Mr. FRAZER. Of course not, Mr. Chairman. 

Mr. ROGERS. Welcome, Mr. Frazer. 

STATEMENT OF LEROY FRAZER 

Mr. FRAZER. Thank you. 

Mr. Chairman and members of the subcommittee, I appreciate 

this opportunity to appear before you today to testify on behalf of 

the Honorable Robert M. Morgenthau, the district attorney of New 

York County, regarding the fraud cases our office prosecuted in the 

wake of the September 11th attacks. 

The horrific attacks on September 11th led to an unprecedented 

outpouring of charitable donations by the American people. These 

donations and the aid designated by Congress were administered 

primarily by FEMA, the American Red Cross, Safe Horizons Corporation, and some other charitable organizations. 

At a time when countless acts of heroism were exhibited, others 

tried to profit from the confusion. I appear before you to relay our 

efforts in combating fraud in the aftermath of the September 11th 

attacks on our nation. 

To that end, the Manhattan District Attorney’s office prosecuted 

approximately 539 September 11th-related cases, with approximately 98 percent of them fraud-related, with proceeds totaling 

over $5.8 million. We also learned some valuable lessons on how 

to detect and combat such fraud and how, in the future, we can 

seek to prevent it from occurring in the first place. 

Initially we met with the inspector general from FEMA who informed us that it is not uncommon in instances of national disasters that people unaffected by the disaster submit fraudulent applications for aid. To address that, we felt it was important to cen-
146

tralize investigative efforts both within and without the office in 

order to be effective. 

Next, we determined that the principal organizations that were 

distributing funds, as I said, were FEMA, American Red Cross, 

Safe Horizons and the Robin Hood Foundation. We arranged to 

have a contact person at each of these organizations for purposes 

of receiving grand jury subpoenas and coordinating the dissemination of information. 

We also coordinated with local law enforcement and federal law 

enforcement. We called a meeting, and we had representatives 

from the following agencies: FEMA, Social Security, Postal Inspectors, FBI, Secret Service, INS, the New York State attorney general, the New York State Insurance Department, NYPD, New York 

City Department of Investigation, and New York City Law Department. 

Once again, individuals were designated to ensure the coordinated flow of information. 

The initial wave of arrests came about because a worker or workers at the Port Authority of New York and New Jersey alerted the 

agency’s inspector general that some of its workers were applying 

for aid from the Red Cross, claiming they had lost days’ work due 

to 9/11. 

Even though Port Authority offices were located in the World 

Trade Center, the Port Authority had relocated its workers, and no 

one lost even a single day’s pay. 

We investigated the allegations and, in November of 2001, initially arrested twelve individuals for lying to Red Cross and Safe 

Horizons about losing work. A further investigation resulted in a 

dozen more being charged 2 months later, totaling thefts of about 

just under $20,000. 

As a result of a coordinated, multi-agency investigation, in March 

of 2002, we announced charges against 22 people for filing for 

death certificates falsely claiming that members of their family had 

died in the attacks. Fourteen of the defendants received funds totaling in excess of $750,000, while the other eight were caught before they were able to receive any funds. 

An example of those cases was one Michigan man who claimed 

that his brother had died at the World Trade Center. In that instance, he preyed upon the person at Red Cross, who was there to 

help and to try and give him what he deserved. And he used that 

against her and against the charity by coming up with a number 

of different reasons why they needed additional funds. 

Another man, a Queens man, invented a 13th child out of 12 

children, and we found out later that he used aliases from two of 

his children, who were serving time in different states. He also received a significant amount of money from the charities as a result 

of that. He went to trial, and he was convicted after trial. 

Additional prosecutions demonstrated the extent that individuals 

would go in order to fraudulently obtain funds. 

One such person who went so far as to actually, not only submit 

DNA samples that were fake, but also have a funeral, a memorial 

service, and submit the name in order to collect money, and had 

the charities pay for those things. 
147

Finally, I would tell you—my time is running out. I would like 

to move ahead and say that there were some obvious problems that 

arose in the investigation and prosecution of September 11th fraud 

cases. Many of the charity’s volunteers were from different parts of 

the country, which made it more difficult to contact witnesses to investigate cases and sufficiently prepare them for grand jury proceedings. 

Additionally, due to the high volume of applications processed, 

volunteers were not always able to recall the details of every interview conducted. It would be helpful in the future if there were a 

training program for relief workers, including an orientation program regarding tools to employ to detect fraud in screening applications for aid. 

While it is difficult to detect a fraudulent claim at the outset, the 

more supporting documentation obtained from a claimant the better equipped we would be to investigate and prosecute a fraudulent 

claim. 

Moreover, there should be prominent and conspicuous language 

on all applications for aid warning that statements are done under 

a penalty of perjury and, if false statements are made, the claimant 

will be prosecuted. In addition, it would be prudent to require that 

declarations of loss contain a notary’s signature. 

Nevertheless, despite numerous instances of fraud, it was evident from interviewing employees and volunteers of the relief agencies that each of them was committed to assisting victims of the 

September 11th disaster in an expeditious manner. 

The New York County district attorney’s office has been successful in prosecuting those who unlawfully attempted to enrich themselves by taking advantage of the tragedy that affected our nation. 

Those who made a calculated decision to take money and profit 

from confusion during a time of a national crisis were apprehended 

and punished. 

As a result of the district attorney’s prosecutions, we believe an 

important message was conveyed to the public that those who 

thought they could profit from the World Trade Center aftermath 

were mistaken. 

Thank you. 

[The statement of Mr. Frazer follows:]

PREPARED STATEMENT OF LEROY FRAZER

Mr. Chairman and members of the Sub-Committee, I am Leroy Frazer, Jr., Bureau Chief of the Special Prosecutions Bureau in the Manhattan District Attorney’s 

Office. I appreciate this opportunity to appear before you today to testify on behalf 

of Robert M. Morgenthau, the District Attorney of New York County, regarding the 

fraud cases our office prosecuted in the wake of the September 11th attacks. Permit 

me to introduce to the members of the subcommittee my Deputy Bureau Chief, Joan 

Delaney. 

The horrific attacks on September 11, 2001 led to an unprecedented out pouring 

of charitable donations by the American people. These donations and the aid designated by Congress were administered primarily by FEMA, the American Red 

Cross and Safe Horizons Corporation. At a time when countless acts of heroism 

were exhibited, others tried to profit from the confusion. 

I appear before you to relay our efforts in combating fraud in the aftermath of 

the 9/11 attacks on our nation. Although the amount of fraud detected represented 

a small percentage of the funds allocated, we felt and still feel that it is essential 

for the public to know that there would be a strong effort to detect and prosecute 

individuals responsible for taking advantage of a national tragedy to line their own 

pockets. To that end the Manhattan District Attorney’s office prosecuted 539 Sep-
148

tember 11th related cases, with approximately 98% of them fraud-related with proceeds totaling over $5.8 million dollars. We also learned some valuable lessons on 

how to detect and combat such fraud and how, in the future, we can seek to prevent 

it from occurring in the first place. 

In the immediate aftermath of the attacks it was clear that most New Yorkers 

wanted to help in any way possible. Long lines formed throughout the city to give 

blood only to find out that, unfortunately, there was not going to be a significant 

need. Some donated supplies to the search and rescue workers at ground zero while 

still others volunteered to distribute food and supplies, or to help affected people fill 

out forms to request aid. However as we soon learned, along with those who wanted 

to help, came others who sought to prey upon tragedy to promote their own self interests. 

Initially we met with the Inspector General from FEMA who informed us that it 

is not uncommon in instances of national disasters that people unaffected by the 

disaster submit fraudulent applications for aid. To address that we felt it was important to centralize investigative efforts both within and without the office in order 

to be effective. Towards that end Mr. Morgenthau directed that the frauds committed against the charities be handled principally by one section of the office, the 

Special Prosecutions Bureau. Next we determined that the principal organizations 

that were distributing funds were FEMA, American Red Cross, Safe Horizons and 

the Robin Hood Foundation. We arranged to have contact persons at each for purposes of receiving grand jury subpoenas when needed and coordinating the dissemination of information. 

We also coordinated the efforts of law enforcement. A meeting was called with 

representatives from the following agencies: FEMA, Social Security, Postal Inspectors, FBI, Secret Service, INS, New York State Attorney General, the New York 

State Insurance Department, NYPD, NYC Department of Investigation, and NYC 

Department of Law. Once again individuals were designated to ensure the coordinated flow of information. This proved to be essential in our prosecutions because 

most defendants applied to several different charities and many lived outside of 

New York City. 

The initial wave of arrests came about because a worker from the Port Authority 

of New York and New Jersey alerted the agency’s Inspector General that some of 

its workers were applying for aid from the Red Cross claiming that they lost days 

at work due to 9/11. Even though Port Authority offices were located in the World 

Trade Center, the Port Authority had relocated its workers and no one lost even 

a single day’s pay. We investigated the allegations and on November 8, 2001 arrested twelve workers for lying to the Red Cross and Safe Horizons in order to receive relief funds. Further investigation resulted in a dozen more being charged two 

months later. The thefts totaled $19,582. 

I indicated earlier the citizens of New York City volunteered to help in any way 

possible. A group of lawyers volunteered to help victim’s families fill out the paperwork to expedite death certificates. This valuable program was coordinated by the 

NYC Law Department, but there were those who took unfair advantage of it. As 

a result of a coordinated multi-agency investigation on March 21, 2002 we announced charges against 22 people for filing for death certificates falsely claiming 

that members of their family died in the attacks. Fourteen of the defendants received funds totaling $759,465, while the other eight were caught before they received any funds. These cases included: 

• A Michigan man, Daniel Djoro, who reported that his brother, Daniel Zagbre, 

had been at the World trade center for a business meeting at the time of the 

attacks. Daniel Zagbre was in fact a fictitious name the defendant himself had 

used in the past. Djoro obtained $272,800 from the Red Cross and Safe Horizon. 

Dijoro pled guilty and was sentenced to 4 years in jail. 

• A Queens’s man, Cyril Kendall, reported that his 13th child had accompanied 

him to a job interview at the World Trade Center and had perished in the attack. The investigation revealed that the child never existed and in fact the 

name he had given had been used in the past as an alias by two of his other 

12 children. Kendall received a total of $190,000 from Red Cross and Safe Horizon. Upon conviction after trial Kendall was sentenced to 30 years in jail. 

• A Utah man, Ricardo Frutos, claimed that a brother, niece and nephew died 

at the World Trade Center. The investigation revealed that the people reported 

dead had never existed, a fact which was confirmed by family members. Frutos 

received $47,257 from Red Cross. He pled guilty and was sentenced to 3 years 

in jail. 

Additional prosecutions demonstrated the extent that individuals would go in 

order to fraudulently obtain funds. One such person was Carlton McNish who reported that his wife, Jisley McNish, went to work that morning at Cantor Fitzgerald 
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and never returned home. He reported this to the New York City Police Department 

on October 3, 2001 and then submitted DNA from a hairbrush and a comb to the 

New York City Office of the Chief Medical Examiner’s Office on October 5, 2001. 

McNish then went to Pier 94 on October 16, 2001 and met with a volunteer attorney 

who helped him fill out an affidavit to apply for a death certificate. In the affidavit, 

the defendant claimed that his wife went to work that morning at Cantor Fitzgerald 

and that she called him at around 9:30 a.m. to tell him that an airplane had hit 

the building, that the building was filling with smoke and that she and several coworker’s were trying to leave. He claimed that she never returned home that day. 

The affidavit was ultimately filed with the New York City Corporation Counsel. The 

wife’s name was included on the City’s official list of missing persons and the name 

appears on the World Trade Center memorial. 

The defendant submitted a copy of this affidavit and a picture of his ‘‘deceased 

wife’’ to the Medical Examiner’s office. He submitted an affidavit to the American 

Red Cross, Safe Horizon and the Salvation Army, claiming that he was in need of 

financial assistance because he was dependent on his wife’s income and obligated 

to support their three children. From October 2001 to January 2002, the defendant 

received $68,000 from the American Red Cross, $30,000 from Safe Horizon, and 

$1,000 from the Salvation Army. In addition, he received $5,000 from the Robin 

Hood Foundation because his wife’s name was on the Mayor’s official list of missing 

persons. The defendant also called in an application to the Federal Emergency Management Administration, but did not get any money after the certification form that 

was mailed to him was returned unsigned. 

Meanwhile, in November of 2001, the defendant went to a funeral home in the 

Bronx and arranged a memorial service for his deceased wife which occurred in December of 2002. He gave the funeral home a photo of the woman which was used 

in the memorial program detailing the life of ‘‘Jasclliny McNish.’’ The funeral home 

helped the defendant apply to the Crime Victim’s Assistance Board in Albany to get 

funds to pay for the memorial service. The defendant also submitted the funeral bill 

to the American Red Cross and Safe Horizon and received money from both charities for the full amount of the bill which totaled $6,279. The American Red Cross 

became suspicious when as of March of 2002; the defendant could not provide documentation for his ‘‘children’’ or for his wife’s employment at Cantor Fitzgerald. They 

contacted Cantor Fitzgerald and were informed that no one by the name ‘‘Jocelyn 

McNish’’ (the name the defendant gave the American Red Cross) or ‘‘Jasclliny 

McNish’’ (the name on the affidavit) ever worked for Cantor Fitzgerald. At the same 

time, the NYPD was investigating the defendant’s missing person report because he 

could not confirm the spelling of his wife’s name, her employment and various other 

pertinent details that should have been known to him. 

During the course of the investigation, it was discovered that the defendant was 

not married to anyone by the name of Jasclliny, Jisley or Jocelyn McNish, and that 

he did not have three minor children as he claimed on his various applications for 

relief. There is no evidence that, even though her name was read from the list of 

those killed at the World Trade Center during the 2002 and 2003 memorial services, 

the woman the defendant claimed to be his deceased wife ever existed. McNish pled 

guilty and was sentenced to 7 years in jail. 

Woodrow Flemming was a 48 year old homeless man who resided in a city shelter. 

He claimed to have been a vendor in the World Trade Center area and produced 

a W–2 form purportedly from Woodrow Flemming and Associates and a forged letter 

on the letterhead of an attorney attesting to the fact that the attorney had purchased books from him. Upon receiving close to $10,000 in aid, Flemming recruited 

several additional ‘‘employees’’ from the shelter and brought them to the relief center, supplied them with similar forged documents, and paid them between $100 and 

$1100 in order to turn over their relief checks to him. In total, Flemming stole $108, 

905. Each defendant eventually pled guilty and Flemming was sentenced to 12 

years in jail. 

A similar case involved a business called K.C.’s Barbershop which was located approximately four blocks from the World Trade Center. It actually was a very small 

shop with room for one barber’s chair, yet 11 barbers submitted documentation 

claiming to have worked there and each one was prosecuted. 

Beatrice Kaufman had a business and residence in the affected area. She owned 

a temporary employment agency and had planned to combine and renovate two 

apartments. During the summer of 2001 she had made arrangements to stay at the 

Helmsley Carlton Hotel during the construction period and was due to relocate 

there on September 11, 2001. Construction had begun prior to 9/11 and she was living in her home in the Hamptons, where she remained on 9/11. After returning to 

the city post 9/11, Kaufman submitted identical bills for her hotel fees and living 

expenses to her personal and business insurance carriers, as well as FEMA, falsely 
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claiming that the World Trade Center attacks had caused her to suddenly and unexpectedly evacuate her apartment and that her agency had lost valuable contracts 

due to the attacks. She told her insurers and FEMA that she was physically and 

emotionally unable to return to her apartment until February 2002, a date which 

happened to coincide with the completion of the renovation. In total she received 

$108,713 from her insurance companies and $5,940 from FEMA. She pled guilty and 

received a sentence of 6 months jail and 4 1/2 years probation. 

Finally I will tell you about thefts from the city’s Municipal Credit Union (MCU). 

MCU’s membership is open to, among others, employees of the city, state and federal governments and employees in the health care industry, and is located at 22 

Cortlandt Street, near where the World Trade Center towers stood. As a result of 

the collapse of the towers, MCU’s own ATM machines were disabled and MCU 

intermittently lost its computer link to the New York Cash Exchange (NYSE) network which administers bank-to-bank transactions and processes ATM transactions, 

including withdrawals. When the link to the NYCE network was interrupted, NYCE 

had no ability to access MCU account balances to ensure that there were sufficient 

funds to cover a withdrawal when a member withdrew cash using his MCU-issued 

ATM card or used as a Visa credit card. Upon learning this MCU made a determination not to shut down its entire ATM operation because of the hardship it 

might impose on members, particularly those adversely affected by the tragedy, but 

rather to allow NYCE to continue to dispense cash to MCU account holders. Although the vast majority of its members abided by this short term ‘‘honor system,’’ 

a number of them withdrew amounts of money far in excess of their normal balances. Initial estimates for unauthorized withdrawals totaled 4000 employees and 

as much as $15 million. MCU offered those who had overdrawn an opportunity to 

convert the unauthorized withdrawals to personal loans and many did. Subsequently our office, working with the NYC Department of Investigation and NYPD, 

arrested 101 individuals who illegally withdrew amounts in excess of $7500. Examples of their cases are: • Terry Hutchinson-Jones, a nurse at Manhattan Psychiatric Center, never had 

a positive end of month balance in the eight months prior to 9/11. Despite the 

fact that she had a negative account balance for all that time, she made 54 

ATM cash withdrawals between September 18th and the end of October, leaving 

her with a balance of -$18,111.01. Twenty-three of those withdrawals were for 

$500 each; for example, she made two withdrawals of $500 each from the same 

branch of Banco Popular on October 4th, 5th, 6th, 7th, 8th, and 9th, among 

other withdrawals. 

• James Allen, an employee of the Housing Authority, never had an end of month account balance that exceeded $130 in the eight months prior to 9/11. 

Nonetheless, he made 53 ATM withdrawals ranging from $20 to $300 each, and 

charged 101 Visa purchases using his Municipal Credit Union ATM card between September 19th and October 22nd. The Visa purchases were at stores including Foot Locker, Jimmy Jazz, Joy Joy Jewelry, Bronx BBQ, Hot Booz Liquor and the 216th Street Motel. As a result of this activity, this individual’s account balance was -$10,378.70 as of the end of October, 2001. 

• An employee of Mt. Sinai Hospital never had an end of month account balance that exceeded $95 in the six months prior to 9/11. Despite that, he made 

91 ATM withdrawals from September 16th to October 30th, when his account 

balance reached -$10,757.37. Sixty-one of those withdrawals were for $100. For 

example, on September 16th, he made one cash withdrawal of $20, followed by 

four more for $40 each, and followed by three for $100 each, all from the same 

ATM location. The next day, September 17th, he made three cash withdrawals 

of $100 each from the same Chase branch in the Bronx; two more $100 withdrawals were made from the same Chase branch on September 18th. On September 19th, he made two $100 cash withdrawals and used his ATM card to 

make six debit purchases, including the purchase of two Metro cards. By October 2nd, and in the days that followed, many of his cash withdrawals were for 

$200 each. 

• Another Municipal Credit Union member never had an end of month account 

balance that exceeded $566 in the eight months prior to 9/11. Nevertheless, he 

made 50 ATM withdrawals totaling $8,700 between September 16th and November 8th. He also used his MCU card to make 89 Visa purchases at stores 

including Gap, Cookies Department Store, Leather World, Barefoot Shoes, 

Jeans Plus, Dynasty Restaurant, and BX Sports. As a result of this activity, his 

account balance was —$12,570.75 at the end of November, 2001. 

Subsequent to first round of arrests, a substantial number of members contacted 

the Municipal Credit Union to convert their unauthorized withdrawals to personal 

loans and begin repayments. Ten months later we conducted a second round of ar-
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rests targeting those individuals who had taken amounts in excess of $5000. We 

found these group arrests were an effective tool in getting people to take responsibility for their actions. 

There were some obvious problems that arose in the investigation and prosecution 

of the 9/11 fraud cases. Many of the charity’s volunteers were from different parts 

of the country which made it more difficult to contact witnesses to investigate cases 

and sufficiently prepare them for Grand Jury proceedings. Additionally, due to the 

high volume of applications processed, volunteers were not always able to recall the 

details of every interview conducted. It would be helpful in the future if there was 

a training program for relief workers, including an orientation program regarding 

tools to employ to detect fraud in screening applications for aid. While it is difficult 

to detect a fraudulent claim at the outset, the more supporting documentation obtained from a claimant the better equipped we would be to investigate and prosecute a fraudulent claim. Moreover, there should be prominent and conspicuous language on all applications for aid warning that the statements made are done so 

under a penalty of perjury and, if false statements are made, the claimant will be 

prosecuted. In addition, it would be prudent to require that declarations of loss contain a notary’s signature. Nevertheless, despite numerous instances of fraud, it was 

evident from interviewing employees and volunteers of the relief agencies, that each 

of them was committed to assisting victims of the 9/11 disaster in an expeditious 

manner. 

The New York County District Attorney’s Office has been successful in prosecuting those who unlawfully attempted to enrich themselves by taking advantage 

of the tragedy that affected our nation. Those who made a calculated decision to 

take money and profit from the confusion during a time of a national crisis were 

apprehended and punished. As a result of the District Attorney’s prosecutions, an 

important message was conveyed to the public that those who thought they could 

profit from the World Trade Center aftermath were mistaken. 

I would be pleased to answer any questions.

Mr. ROGERS. Thank you, Mr. Frazer. And in addition to being a 

great Alabamian, I understand from the staff that today is your 

birthday. So on behalf of all the Committee, happy birthday. No 

tough questions for you. 

[Laughter.] 

Mr. FRAZER. Thank you very much. 

Mr. ROGERS. But I would like to start with the questioning, and 

with you. 

Yesterday, in our first hearing on the response in New York City, 

one of my frustrations, as I learned from Mr. Skinner’s testimony, 

was that because of a host of problems with the structuring of current laws and documentation around this Federal aid, many of the 

criminal acts that came out of the distribution process of the aid 

could not be prosecuted. 

Unfortunately, one local news organization construed that as a 

criticism from me of the D.A.’s office in Manhattan, when it could 

not have been further from the truth. I am critical of the set of circumstances that prohibited or impinged on the D.A.’s ability to successfully prosecute. 

What I am after, as one of many things, out of this series of 

hearings is to find out what we can do differently to ensure, in the 

future, that district attorneys and attorneys general are able to 

successfully prosecute every criminal act that arises out of a postdisaster aid circumstance. 

So I would offer that to you to say: what in your mind and your 

experience could we do to make sure that your office and offices 

like yours around the country are able to prosecute every criminal 

act that arises out of these post-disaster relief circumstances? 
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Mr. FRAZER. Well, first of all, of course, Mr. Chairman, resources 

are always needed in order to look at additional instances of crime 

that more likely comes about when an incident like this happens. 

Mr. ROGERS. Let me stop you there and ask this question: would 

your office—and let’s talk about yours for the example I am offering—be able to retain private attorneys to come in a deputy capacity to work as prosecutors to help you during a surge period of 

time? 

For example, if you felt like in post-disaster, for the next 18 

months or 36 months, you were going to have a large swell of cases 

to pursue—far beyond what your office could do under its current 

manning and budget—would you be able to take a temporary 

source of money to deal with just those cases and reach out into 

your community for additional resources to prosecute those cases 

that, subsequent to that, would be able to then go back into their 

private endeavors? 

Is that a realistic option? 

Mr. FRAZER. Sir, it is a realistic option that we would be able to 

get experienced attorneys that would be able to come on and prosecute those cases. Yes, we would either, as you suggest, get private 

attorneys to be hired as assistant district attorneys or even move 

some of the attorneys within the office, and focus on this type of 

work, and supplement their work by hiring additional attorneys. 

The goal there would be to get the best prosecutions that we can 

in order to achieve the goals that you speak about. 

Mr. ROGERS. But the bottom line is, if you had some additional 

funding post-disaster for disaster-related prosecutions, you could 

use temporary money to meet that need and ensure that everybody 

was prosecuted—or let me put it this way—nobody was not prosecuted for lack of resources? 

Mr. FRAZER. The short answer to that is, yes, we can always use 

additional resources. 

Mr. ROGERS. Now, we come back to the threshold concern that 

I had yesterday. And that is, what I understood from our panelists 

yesterday, was that the primary reason that the District Attorney’s 

office did not prosecute individuals after relief was not so much resources available to them, it was that they didn’t feel like they 

could have a successful prosecution, because in several of the instances they didn’t think they could prove intent. 

What I am looking for is tangible suggestions, given the abuses 

that you are familiar with, as to what we could do to tighten the 

language or documentation to ensure that you could successfully 

prosecute some of the abuses you referred to in your testimony. 

Mr. FRAZER. Yes. Again, your key word was ‘‘documentation.’’ 

There was some prosecutions were intent was an issue. And in 

order to address that, one would require additional documentation 

that is clear language that was relied on in order for the money 

to be turned over to that individual. 

So therefore if, in fact, we can prove that this representation that 

was relied on as false, then we can prove the intent that person 

had in order to—that they lied in order to get the funds. 

In addition, the way a program is actually set up and the language and the parameters that are set up have to be clear and distinct, and it would be helpful, of course, if, in fact, one is ask for 
153

either proof of damage or that inspections are done prior to any 

grants being given in specific instances. 

Mr. ROGERS. Let me ask you, if an individual who was seeking 

post-disaster aid were required to sign some sort of acknowledgement upon their request that it was, in fact, a legitimate acknowledgement, a legitimate request, would that be sufficient to allow 

you to prosecute, if you could prove that, in fact, it was not a legitimate claim? 

Mr. FRAZER. Well, yes and no. It is difficult to answer that, only 

because in some instances on a number of the forms that the charity had there was a line that was an acknowledgement that was 

there to be signed. However, it wasn’t clear that the charity relied 

on specific things in order to turn over the money. 

Mr. ROGERS. So you would have to have the charity then sign an 

acknowledgement that it relied on an underlying application as a 

part of its distribution? 

Mr. FRAZER. Yes, that would be helpful. 

Mr. ROGERS. And those two acknowledgements together would 

give you the nexus for prosecution? 

Mr. FRAZER. That is correct, sir. 

Mr. ROGERS. Okay, thank you. And my time has expired. 

The Chair now recognizes the Ranking Member, Mr. Meek of 

Florida, for his questions. 

Mr. MEEK. Thank you, Mr. Chairman. 

I wanted to not only welcome but thank the panel for coming before us. And these hearings have been very helpful, not only for our 

staff, but also for the members. 

We are charged with the obligation and the duty to not only legislate, but also recommend new ways of how we can prevent the 

loss of not only taxpayers’ dollars, but also those individuals that 

donate to the Red Cross or what have you, or individual assistance, 

as it relates to FEMA or the SBA. 

I guess, well, my questions are going to go along the lines 

of?hopefully you can give me some feedback that will be able to 

help us in preventing fraud in the future. 

I know that FEMA and a number of agencies, mainly around the 

area of law enforcement, they had these TOPOFF programs that 

move throughout the country where they exercise an event, need 

it be a hurricane or a terrorist attack. Has there been such a program to go through a dry run, as it relates to fraud? 

Some of the things—and Mr. Frazer talked about training and 

assistance and attorneys. Is there such a program? Are you all 

doing that in New York now, saying, ‘‘Okay, let’s just say an event 

took place. What are our next steps or lessons learned from the last 

event?’’ Has that taken place? 

Mr. THORSON. I will pick up on this. For SBA, I think as all of 

the people on the panel said, I think we have all tried to learn from 

9/11 and translate that to what is going on in the Gulf. 

From the OIG’s point of view, we have made recommendations 

to both SBA, and in working with other agencies such as HUD, for 

instance, on issues such as data-sharing and making sure that duplicative payments aren’t made. 

On the prosecution side or the investigative side, one of the 

things that we have tried to do is to learn from the different kinds 
154

of cases that originated out of the 9/11 disaster loans. And, in fact, 

our office has just this month established a new region, which will 

run from Florida, through Mississippi, Alabama, and Louisiana, 

headquartered in New Orleans, with both auditors and investigators, to develop some of these kinds of cases. 

All of these relate to lessons that were learned out of 9/11, as 

well. 

Mr. MEEK. And I am glad to hear that some thought and action 

has gone into that. But I guess pretty much the answer to my 

question is that right now we don’t have something in place—when 

I say ‘‘we,’’ the federal government and local government working 

together, and local law enforcement together—in preventing. 

We had the Government Accountability Office represented yesterday on the panel, and he said there is, like, pennies of recovery 

on every dollar that is stolen, or taken, as it relates to fraud. I am 

thinking that, as this committee starts to look at this and as we 

start to move into our authorization bill for next week, maybe, just 

maybe we need to put some language in there that would give 

some direction to, not only the federal agencies, to work with the 

local agencies and how we can before the crime invest the time 

that we would invest in a terrorist attack or in a hurricane or what 

have you. 

Because all of that is the same. I mean, if you are going to prepare, you are going to prepare. And you have to prepare, and you 

are not going to be able to share. You will be able to share information prior to the event, if it ever happens, better than sharing it 

after the event and trying to figure out, ‘‘Okay, how can we information share?’’ And then the stovepipes start, and we run into a 

problem. 

This was identified in the 9/11 report. And in your position, you 

know, in your office, you see this all the time. And I am pretty sure 

in offices similar to yours in other agencies, they say, ‘‘Well, that 

was in a report, and I told them that this would happen, or we 

should do this.’’

Is there such a program now? If not, maybe we need to—I know 

it can be beneficial, from what I am hearing here, as it relates to 

information, as it relates to prosecution. 

The chairman, you heard he wants to make sure we prosecute 

as many cases as possible. Well, that is going to take a little pregame. You know, it is going to take some practice to make sure 

that we are all familiar with one another, and the forms, and the 

people to call when we do have an event. 

I am sorry, you wanted to—

Mr. THORSON. Well, I think I was sort of saying the same thing, 

only I probably didn’t go into as much detail. The Department of 

Justice has an entire task force put together, and it isn’t just to 

look backwards. It is to try and figure out how to be ready again. 

In describing the region that our I.G. office set up, it is not by 

coincidence that it includes Florida, Alabama and Mississippi. That 

is for the future. We know there are going to be more disasters. We 

know that Florida, Alabama, Mississippi, that area, every hurricane season we are going to get hit. And we have to be ready to 

be able to address that. 
155

So these are proactive moves. And the work that is being done 

with, as I mentioned, HUD, and the Department of Justice, and 

others, it really is with the future in mind, as to not just how to 

handle what is going on right now, but what can we do and do better? 

The Katrina Fraud Task Force, for instance, that is a great example of learning lessons out of 9/11 and translating them to what 

is going on today. 

And even though, to address your question a little bit more accurately, even though it is a past event, when you look at Katrina, 

the truth is: What they are doing and what all of the IGs are doing 

in particular, and other agencies, in their disaster responses will 

translate into what is coming. And, unfortunately, we know it will 

come. 

Mr. MEEK. My time is up. But just in closing, I still think it is 

important, even in a place like San Francisco, I mean, for the federal government to have a TOPOFF program and prevent fraud in 

a non-event. Katrina, it is happened. The task forces are there. The 

task force is still going on, I am pretty sure, in the New York City 

area. 

But what is happening in Las Vegas, Nevada? I mean, the local 

government folks, those are the folks that kind of put their hands 

up saying, ‘‘Okay, now how do we do this, I mean, and work with 

you at the same time, and share information?’’ They know how to 

prosecute, but how do we work together as a team? 

And so said that maybe that may be an exercise that we need 

to go through, because we know in these areas, especially as it relates to the threat level when you talk about terrorism, we pretty 

much know where these individuals may think about carrying out 

an act. 

So if we are doing that in a TOPOFF program, as it relates to 

that first responders, fraud, it will be great if someone comes before this committee and says, ‘‘Guess what, Congressman? We went 

through this with Newark Police Department—well, not only police 

department in Newark, prosecutor’s office—and we have this. And 

so we were familiar with it.’’

Even if it is over a video conference or what have you, we can 

still get together with the technology and automation that we have, 

because what I am hearing here is not rocket scientist stuff. It is 

we just need to communicate better. We need to know what the 

next person knows, and that is what the panel said yesterday. 

Well, it would be good if we could share information as though 

it is something we have to write off to MIT for, but it is something 

that we can do and it just takes some due diligence. 

But I appreciate your response. 

Mr. Chairman, I have gone over my time. Thank you. 

Mr. ROGERS. The gentleman yields back. 

The Chair now recognizes the Chairman of the Full Committee, 

Mr. King of New York. 

Mr. KING. Thank you, Chairman Rogers. 

I want to thank all of the witnesses for your testimony this 

morning. It has been very helpful, and I appreciate the public service you performed. 
156

I really only have, I guess, two main questions. I know that 

sometimes in the past privacy concerns have made it difficult for 

government agencies, prosecutors to go after, you know, the guilty. 

I was just wondering if, in this case, whether or not, for instance, 

charities or even other government agencies, that their refusal to 

disclose information on victims because of privacy concerns in any 

way hindered your efforts at prosecution or in doing an effective 

order? 

I guess we will start with Ms. Ritzema and then work our way 

down. 

Ms. RITZEMA. Yes, Chairman. We did have challenges with the 

Privacy Act’s provisions. As I stated, we had a working group, a 

grant fraud working group that got together with all of the IGs and 

then other law enforcement entities to coordinate our investigations and our investigative resources. 

Because of the Privacy Act, we were not able to conduct any kind 

of matches of that data that would have really helped us streamline in evaluating where fraud trends were and where actual fraud 

cases were. We were very primitive in 9/11. We actually had to 

bring lists of our bad guys and say, ‘‘Okay, can you guys run these 

against your lists and see if they applied to your programs?’’ and 

so on, because of the privacy considerations. 

Now, there are ways of getting around those, but it was very 

cumbersome. And we needed to do this stuff right away. As you 

probably know, it is very time-consuming. 

For Katrina, we had our—having learned from 9/11, our general 

counsel was able to recognize what we would need to do to start 

to do some of that, and we have entered into a MOU with FEMA 

at this juncture so that we will be able to share some information. 

And we will continue to work on those MOUs. 

But it is a very cumbersome, long-term project. And if we could 

find a way—if Congress could do something that allowed for disasters, we could streamline this process, it would be very helpful in 

ferreting out fraud. 

Mr. KING. I will be interested in what the other witnesses have 

to say, but I think it would be worthwhile for me to follow up to 

give us some ideas as to how you feel we could, you know, alleviate 

those concerns without violating privacy rights, but at the same 

time not allowing, you know, the guilty to hide behind privacy 

laws. 

Ms. RITZEMA. Yes, sir. Our legal counsel has done a lot of work 

so that we could provide that information to the committee. 

Mr. KING. Thank you very much. 

Mr. Thorson? Anybody else want to comment on that or? 

Mr. SMALL. With regard to fraud prevention, as far as grant administration, we had some difficulty with Hurricane Katrina, in the 

fact that so many of the evacuees were moving into different areas, 

and old line boundaries in states and other federal agency jurisdictions made us realize that we need better communication and collaboration between agencies and in sharing of information in general, in order to make sure that we don’t duplicate service delivery 

and we make sure that people are recipients and getting the benefits they deserve as expediently as possible. 
157

Mr. FRAZER. We also saw instances where privacy issues might 

be raised, but we could get around it, of course, with a grand jury 

subpoena when necessary. However, when someone is claiming 

that they had to receive medical care, or someone in their family 

did, or psychiatric care as a result of it, that presented certain 

issues at times. 

I would suggest that either attach to a form a waiver paragraph 

or an additional page of a waiver saying that that person who is 

receiving the funds gives up any right to privacy as it relates to 

the giving of these funds or issues that arise out of the granting 

of the funds. 

Mr. KING. Thank you. 

Mr. Thorson, do you have any comments on that? 

Mr. THORSON. The whole data-sharing issue is one that is being 

discussed between SBA and many other federal agencies. And I 

would go along with what the other comments that have been 

made here this morning; it really is a big issue. 

We are involved right now in the idea of how to make sure that 

the loans aren’t duplicative with, say, HUD grants or others, and 

the Privacy Act issues and sharing of data issues require a major 

effort to get through that. 

Mr. KING. Thank you. 

My time is about to expire. I just want to add to what Chairman 

Rogers said to Mr. Frazer about the New York District Attorney’s 

office. I mean, this is a model District Attorneys office in the country going back to Frank Hogan, and certainly Robert Morgenthau 

for, I guess, the last 25, 30 years. 

I mean, two legends who really—and that office is known as the 

premier prosecutor’s office in the country. And I just wanted to emphasize what Chairman Rogers said. And this has nothing to do 

with politics, with both Mr. Hogan and Mr. Morgenthau of the 

other party, not that the office has ever been political at all, but 

just very professional. 

And I want to again commend your office for the work that you 

have done in so many ways, so many regards over the years. 

I yield back the balance of my time. 

Mr. ROGERS. The gentleman yields back. 

The Chair now recognizes the Ranking Member. 

Mr. MEEK. Thank you, Mr. Chairman. 

I would ask unanimous consent to seat Ms. Lowey and participate in the subcommittee hearing. 

Mr. ROGERS. Without objection, so ordered. 

The gentleman from New Jersey, Mr. Pascrell, is now recognized 

for any questions he may have. 

Mr. PASCRELL. Thank you. 

For any member of the committee, I would like to know if you 

had any resistance when you initiated your review of what was 

going on in the individual departments, any resistance at all from 

anybody? Would you tell us about it if there was any? 

Ms. RITZEMA. No, sir, we worked with HUD and with the Empire 

State Development Corporation, ESDC. Again, it was congressionally mandated. It was written in the language, and it was going to 

get done. Everyone understood that right from the start, so there 

was no problems. 
158

Mr. PASCRELL. So none of you in each of your activities had any 

resistance from anybody? Is that correct or incorrect? 

Ms. RITZEMA. Yes. 

Mr. PASCRELL. Thank you. 

Mr. Thorson, as of late 2004, you had—in your department, that 

is, in U.S. small business department—had about 1 percent of all 

the $20 billion that was allocated and committed to New York City. 

That was your slice of this, 1 percent. 

And out of the $250 million, you had about 1,500 loans that add 

up to about $208 million, which were delinquent. So, in other 

words, two-thirds of all the loans that went through your department, went through small business, were delinquent at that point. 

Is that correct? Am I reading the record correctly? 

Mr. THORSON. I am not sure what exactly the statistics are. I 

don’t have that in front of me, but I am not doubting your numbers. 

Mr. PASCRELL. Well, it says that there are $208.8 million in delinquent loans out of—and you only had $250 million to begin with. 

Unless my numbers are incorrect, and I don’t think that they are, 

that is quite a chunk of what you were allocated. Now, what is the 

reason for that primarily? 

Mr. THORSON. Actually, there could be any number of reasons, 

but one of the things that we do in these cases is to come in and 

try and look at the loans that have defaulted and review them—

actually on many different loan programs—and try and find out exactly what the problem is. 

On disaster loans, where those are made directly—

Mr. PASCRELL. Well, you have had some years to figure that out. 

Tell us what the reasons on. 

Mr. THORSON. Well, one of the things that we look for is, if you 

are talking about loans that are made—for instance, I mentioned 

the STAR loans, which are made by lenders, one of the things that 

we go back and do—because, in that case, SBA pays a guarantee, 

a major portion of the loan to that lender in case of a default—

what the I.G.’s office does is to go back and try and determine 

whether the bank or lending agency that made those loans fulfilled 

all the requirements upon them in order to make those loans. 

If there is a default, then the idea is to get the money, the government portion back, and to assess why those loans defaulted. I 

can’t address exactly what the reasons were for that particular 

case, but it is something that we do on a regular basis. 

Mr. PASCRELL. Well, here is 2 years later. I mean, I quoted you 

figures up to the end of 2004. I am asking you, 2 years later, has 

the money been recovered? Can you answer the question, yes or 

no? 

Mr. THORSON. I am sure not all of it has been, absolutely. 

Mr. PASCRELL. Mr. Chairman, one of the major areas within the 

commitment of the $20 billion is the $5 billion to the Liberty Zone 

tax benefits. We don’t have anybody testifying about that, and I 

know it is fairly complex. 

And I was wondering before I go on with my further questions, 

can we can get any information, because that was a pretty big 

chunk, obviously, one-fourth of the entire $20 billion? 
159

The only thing that exceeded that was FEMA. Through FEMA, we allocated $8.8 billion. Right next to that was this tax program, 

but I don’t see any information about it. Is there a reason for that? 

Mr. ROGERS. Yes, sir, it is being reviewed by our staff, and we 

do intend to put language in our final report on that specific issue. 

Mr. PASCRELL. Are we going to have anybody testifying in the future concerning that program? 

Mr. ROGERS. Not that I am aware of. 

Mr. PASCRELL. Because you are talking about a lot of money 

here. 

Mr. ROGERS. Well, and the staff have been conducting some pretty extensive interviews on these subjects, but we only have so 

many people on our panels. And, you know, we are holding three 

hearings, and all hearings have had two panels full of folks that 

have been very helpful. But we just couldn’t get everybody that we 

wanted to on these panels. 

Mr. PASCRELL. I have one question to ask Mr. Small. Would you 

allow me to do that? 

Mr. ROGERS. Absolutely. 

Mr. PASCRELL. Labor Department. I have a very jaundiced view 

of the Labor Department, so excuse me jaundiced view. 

There are unique circumstances, you write, Mr. Small, related to 

the terrorist attacks. The Department of Labor issued emergency 

regulations to permit individuals who were unemployed due to the 

closure of the airport to be eligible for disaster unemployment assistance. 

The deadline for applying for that assistance was extended in 

New York City, correct me if I am wrong. Congress extended the 

DUA benefits from 26 to 39 weeks for individuals who lost their 

jobs. Was that adequate enough? Are there people out there after 

that deadline was reached who fell in the category of not being able 

to find work? 

Mr. SMALL. We do not believe so, and I will say why. First of all, with New York, we gave out a $25 million national emergency 

grant. 

Mr. PASCRELL. Right. 

Mr. SMALL. Of that $25 million, and $5 million was returned. 

With the state of Virginia, it was $3.5 million for a national emergency grant. We transferred a lot of funding in for the unemployment compensation and the disaster employment, and basically 

supported the other industries, such as the airline industry in several different states. 

And we basically believe that the lessons we learned were just 

that we had to be more expedient and make sure that we had, you 

know, coverage for everyone, but we believe that we covered those 

that were seeking assistance. 

Mr. PASCRELL. Were there any of those dollars used in Manhattan not pertaining to the airport, but those folks who lost their 

jobs, in terms of assistance? 

Mr. SMALL. Yes, in New York alone, we know that there was an 

increase by 100 percent of filings of unemployment claims. 

Mr. PASCRELL. Right. 

Mr. SMALL. So based on the data that we have, again those filings that were done for New York were always done by phone. The 
160

fact that that was done that way enabled them to process those 

claims through New York State processing centers outside of New 

York City. 

So we believe that everyone was covered that needed assistance, 

as well as being able to staff from our federal regional offices in 

New York City assistance for those call centers. 

Mr. PASCRELL. Thank you very much. 

Thank you, Mr. Chairman. 

Mr. ROGERS. I think the gentleman’s time is expired. 

The Chair now recognizes the gentleman from Texas, Mr. 

McCaul, for his questions. 

Mr. MCCAUL. Thank you, Mr. Chairman. I believe this is yet another example of waste, fraud and abuse at the expense of the 

American taxpayer and ultimately an insult to the real victims of 

September the 11th and the tragic events. 

I want to focus on the STAR loan program. A local television station in my hometown of Austin, KVUE–24, did an investigative report into the program. And the results were disturbing. 

It revealed that a frozen custard stand received $635,000. A car 

repair shop received $1.2 million. A motor and sailboat dealer received over a million dollars. And a shoe store received over 

$500,000. This is all in the Austin area. In total, 122 Austin-area 

businesses in Texas received over $47 million in STAR loans. 

The congressional intent of the STAR loan program was to give 

loans to businesses, small businesses, that had been adversely affected and impacted by the September the 11th terrorist attacks. 

Now, I believe one could hardly argue that these loans are in any 

way, shape or form related to the September 11th attacks. 

So my question is to Inspector Thorson. It is my understanding 

that the SBA officials in this matter urged lenders to broaden the 

eligibility of this program. Now, I would like to know: Who are 

these SBA officials? And will there be any accountability for these 

loans? 

Mr. THORSON. First of all, on the intent, the congressional intent 

was something that we felt was important, and we did research. 

And we are not able to really find that, except for the fact that we 

did learn that it was not intended to be strictly geographically limited to New York or Washington, where the events took place. 

I was not with SBA when those stories came out, my—first I was 

that I was heading for something where these types of stories were 

going to play a part in my life. And here we are. 

But I was offended by these stories. But I will tell you one thing 

that I did learn: To the small businesses that were affected, they 

take a bit of a different viewpoint. And I am not going to justify 

some of this, because I can’t, but I want to give you a couple of examples. 

A dog boutique or something similar to that, whose major business is providing kennel service. People kennel their dogs when 

they travel. There was no travel. 

Now, that may seem a stretch, but if you look at it from the 

small businessman’s point of view, in a broad definition of adversely affected, you can see where they are coming from. 

One of the ones that I laughed at was somebody mentioned a 

doughnut shop some place. And, well, how in the world can that 
161

have affected? Well, what if that doughnut shop was located in the 

concourse of an airport? Airports were shut down. 

So, again, I am not trying to justify some of these things, but the 

point I am trying to make is that if you take these down to the 

grassroots level and you look at these individual cases, there is not 

always a clear cut horror story behind them. 

And, in fact, sometimes the justification is actually pretty sound, 

even though on first glance you wouldn’t think so. 

There is no question that the officials at SBA, some of them, did 

encourage the lenders to broaden this program, and part of that 

was because they were receiving criticism that people weren’t using 

this program that had been initiated by the Congress and they 

wanted to provide funds and get these loans out there. 

Mr. MCCAUL. If I could interject, when the individuals who received these loans—as my time is running out—the individuals 

who did receive these loans, when they were interviewed, they 

knew nothing about the STAR loan program. They said there was 

absolutely no connection between their business and the tragic 

events of September the 11th, and yet they did receive these loans. 

Did the SBA make any effort to determine or verify the eligibility 

of these applicants? 

Mr. THORSON. They really left that—and this was one of the 

things we pointed out in our report—they really left that up to the 

lenders. They put all of that onto them. They did define what the 

lender was supposed to do, but there was no oversight. And we 

don’t feel there was any oversight of those lenders to provide the 

justification that was required. 

And that gets to the point you just made, because the truth is, 

how can you provide justification without explaining to the borrower why you are asking for it, which would be to tell them what 

kind of loan they are getting? 

So your point is well taken. And logic would tell you that you 

would have to tell this individual why he is getting the type of loan 

he has, but the truth is some of them had no idea it was. And some 

borrowers were offended that they were participating in a program 

that was designed for 9/11 victims. 

Mr. MCCAUL. I would ask that your office look at these individuals in the SBA who apparently went against congressional intent 

and ensure that this doesn’t happen again, in the event we have 

another tragic event in this country. 

And, Mr. Chairman, I would like to ask for unanimous consent 

to enter into the record the transcript from the investigative report. 

Mr. ROGERS. Without objection, so ordered. 

[The transcript follows:]

FOR THE RECORD

SUBMITTED FOR THE RECORD BY HON. MICHAEL T. MCCAUL

KVUE ANCHOR INTRO 

IN TONIGHT’S DEFENDERS REPORT, A LOOK AT THE WAY THE 

GOVERNMENT IS SPENDING YOUR MONEY. 

AFTER SEPTEMBER 11TH, CONGRESS PASSED LEGISLATION ALLOCATING 

MORE THAN A BILLION DOLLARS TO SMALL BUSINESSES DIRECTLY 

IMPACTED BY THE TERRORIST ATTACKS. 
162

MORE THAN HALF OF THAT MONEY WENT TO BUSINESSES IN NEW YORK 

CITY. 

THEN—CONGRESS PASSED MORE LEGISLATION FOR SMALL BUSINESSES 

ADVERSLEY AFFECTED. 

AND AS YOUR ABOUT TO SEE, MILLIONS OF THAT MONEY ENDED UP 

HERE IN CENTRAL TEXAS. 

KVUE SCRIPT 

4 YEARS AND 182 MORNINGS AFTER THE TERROR

AFTER THE DEATH OF AMERICA’S TWIN TOWERS AND NEARLY 3 

THOUSAND OF ITS PEOPLE

SIGNS OF ECONOMIC RECOVERY ARE EMERGING EVEN—SOME 1700 MILES 

AWAY—IN TEXAS’ CAPITOL CITY.

BUT, THE BLUEPRINT FOR RECOVERY—HAS ITS SHARE OF PROBLEMS.

TAKE THE SMALL BUSINESS ADMINISTRATION’S STAR LOAN PROGRAM 

FOR EXAMPLE.

IN JANUARY OF 2002—CONGRESS PASSED LEGISLATION FOR A 3.7

BILLION DOLLAR LOAN PROGRAM DESIGNED TO HELP SMALL 

BUSINESSES ADVERSELY AFFECTED BY 9-11 AND ITS AFTERMATH. ‘‘STAR’’ 

STANDS FOR SUPPLEMENTAL TERRORIST ACTIVITY 

RELIEF. IT’S IMPORTANT TO NOTE—

BUSINESSES NATIONWIDE WERE ELIGIBLE—

AND IN CENTRAL TEXAS, PUBLIC RECORDS REVEAL 122 BUSINESS 

OWNERS RECEIVED OVER $47, MILLION 789,100 DOLLARS IN STAR LOAN 

FUNDING.

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¶(--SOT--tape 1 gary @ 17:27) 

′′weather-all this is gary′′

AMONG THEM, GARY WILLIAMSON--THE OWNER OF WEATHER--ALL--

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¶(--SOT--tape 1 gary :51) 

′′we’re a manufacturer of electrical enclosures.′′

GARY SAYS HE UNDERSTANDS WHY YOU MIGHT QUESTION HIS 

BUSINESS’S ELIGIBLITY FOR TERRORISM RELIEF FUNDING--BECAUSE HE 

QUESTIONS IT TOO!

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¶(--SOT--GARY TAPE 1 4:38 TO 4:42) 

′′i didn’t know anything until you gave me that letter that it was for 9-11 type 

situation.′′

[STAND UP] 

GARY RECIVED ONE OF 95 CERTFIED LETTERS I SENT TO LOCAL 

BUSINESS OWNERS WHO WERE GRANTED STAR LOANS. I OFFERED 

THEM AN OPPORTUNITY TO EXPLAIN WHY THEY FELT THEIR 

BUSINESS WAS ADVERSELY AFFECTED BY TERRORISM. ONLY 7 

PEOPLE RESPONED TO THE LETTER AND GARY WAS ONE OF THEM.

HE SAYS HE HAD NO IDEA HIS LOAN--FOR 430 thousand DOLLARS--WAS 

BASED SOLEY ON HIS ECONOMIC STATUS AFTER 9-11.

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¶(--SOT--GARY TAPE 1 24:33 TO 24:39) 

′′if they said hardship for 9-11 hardship i would have said no we don’t qualify--which 

we don’t.′′

HIS PROOF--HIS APPLICATION WAS FOR A START UP LOAN. HE WASN’T 

SUFFERING FROM ECONOMIC HARDSHIP--HE WAS TRYING TO BUY HIS 

OWN BUSINESS.

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¶(--SOT--GARY TAPE 1 9:05 TO 9:09) 

′′--i’m not so sure that was te smartest thing to do to buy a business then.′′

AND GARY IS HARDLY THE EXCEPTION.

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¶(--SOT--JACK JOHNSON @ 2:54) 

′′this is the first time i’ve ever heard of it′′

JACK JOHNSON OWNS AUTOMATION ENERGY TECHNOLOGY IN SOUTH 

AUSTIN. HE WAS GRANTED A 15 THOUSAND DOLLAR STAR LOAN IN 

SEPTEMBER OF 2002. 

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¶(--SOT--JACK 5:09 TO 5:12) 

′′ANY QUESTIONS EVER ASKED OF YOU ABOUT TERRORISM? no nothing.′′

HE SAYS HIS LENDER--WELLS FARGO BANK NEVER TOLD HIM HE WAS 

APPLYING FOR TERRORISM RELIEF AND HIS LOAN APPROVAL LETTER 

CONFIRMS IT.

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¶(--SOT-nats of jack reading letter @ 22:26-) 

′′subject to SBA loan eligibility...′′

IT DETAILS THE DOCUMENTATION REQUIRED TO RECEIVE THE FUNDS--

AND NOT ONCE--IS THE STAR LOAN PROGRAM OR TERRORISM EVER MENTIONED.

AND LOOK AT SOME OF THE OTHER CENTRAL TEXAS BUSINESSES 

GRANTED STAR LOANS. 

THE KWIK KAR LUBE AND TUNE ON WEST PARMER--WAS GRANTED 1.189 

MIL. 

AUSTIN BOAT AND MOTORS ON HIGHWAY 620 WAS APPROVED FOR 1.015 

MIL IN TERRORISM RELIEF. 

SHAKE’S FROZEN CUSTARD OF CEDAR PARK RECEIVED 634,400. 

AND KARA-VEL SHOE STORES IN AUSTIN WAS GIVEN A TOTAL OF 570

THOUSAND DOLLARS--ALL IN TERRORISM RELIEV FUNDING

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¶(--2 SOT--MCCAUL @ 13:58 14:02) 
164

′′get the SBA officials to testify before Congress about what were yu thinking???′′

US REPRESENTATIVE, MICHAEL MCCAUL SERVES ON THE COMMITTEE 

FOR HOMELAND SECURITY IN WASHINGTON. HE SAYS AN INVESTIGATION 

WILL BE LAUNCHED INTO THE ACTIONS OF THE S-B-A.

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¶(--SOT--MCCAUL @ 1:32 TO 1:43) 

′′initially you think--well why did these businesses apply for this 9-11 emergency 

loan program and the fact of the matter is they didn’t even have any knowledge that 

that’s what happended.′′

MCCAUL SAYS THERE ARE 2 PROBLEMS TO INVESTIGATE. 1--WHY 

BUSINESSES NOT ADVERSLY IMPACTED BY 9-11 RECEIVED TERRORISM 

RELIEF AND 2--WHY THEY WERE GRANTED A STAR LOAN WITHOUT THEIR 

KNOWLEDGED--

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¶(--SOT--MCCAUL 1:44) 

′′i really fault the small business administration and the higher ranking officials.′′

IN OCTOBER OF 2005--MY REQUEST FOR AN ON CAMERA INTERVIEW WITH 

THE SBA WAS DENIED. BUT, I DID RECEIVE THIS WRITTEN STATMENT 

FROM MICHAEL STAMLER--THE MEDIA RELATIONS MANAGER IN 

WASHINGTON.

HE SAYS--IN PART--THE LENDER MUST FIND THAT THE LOAN APPLICANT 

WAS ADVERSELY AFFECTED BY THE TERRORIST EVENTS OF SEPTEMBER 

11, 2001 AND PREPARE AND MAINTAIN IN ITS LOAN FILE A WRITE UP 

SUMMARIZING ITS ANALYSIS AND ITS CONCLUSION THAT THE LOAN IS 

ELIGBLE FOR THE STAR PROGRAM.

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¶(--SOT--JACK JOHNSON 4:39)

′′DO YOU RECALL EVER CONTRIBUTING TO A FILE AT ALL FOR 

TERRORISM RELIEF? i don not!′′

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¶(--SOT--GARY TAPE 1 @ 6:47 TO 6:50) 

′′i never said anyting about 9-11 or anyting about that′′.

I ALSO ASKED HOW THE SBA RESPONDS TO ALLEGATIONS THAT TEXAS 

BUSINESSES RECEIVED A STAR LOAN-WITHOUT MEETING THE 

QUALIFICATIONS-- THE RESPONSES--

′′IF YOUR STATION IS INTERESTED IN TRYING TO SHAME DECENT LOCAL 

BUSINESS OWNERS WHO APPLIED FOR THE LOANS IN GOOD FAITH YOU 

SHOULD RECONSIDER. THE LOANS ARE PERFORMING QUITE WELL, AND 

IT IS LIKELY THAT THERE WILL END UP BEING VERY LITTLE IMPACT ON 

TAXPAYERS.

3 MONTHS AFTER THAT STATMENT--THE SMALL BUSINESS ADMINISTRATION’S INSPECTOR GENERAL RELEASED THE RESULTS OF AN INTERNAL 

AUDIT THAT REVEALED--′′SBA DID NOT IMPLEMENT ADEQUATE INTERNAL 

CONTROLS AND OVERSIGHT OF THE STAR PROGRAM TO ENSURE THAT 

ONLY ELIGIBLE BORROWERS OBTAINED STAR LOANS′′. IT ALSO STATES 

′′AID MAY HAVE BEEN DISBURSED TO BUSINESSES THAT MAY NOT HAVE 
165

BEEN IMPACTED BY SEPTEMBER 11TH AT ALL--AND ONLY 4.7 PERCENT OF 

STAR LOAN RECIPIENTS WERE EVEN AWARE THAT THEY HAD RECEIVED 

LOANS THROUGH THE STAR PROGRAM′′.

AFTER THE RELEASE OF THIS AUDIT--I OFFERED THE SBA ANOTHER ON 

CAMERA INTERVIEW TO CLARIFY THEIR ORIGINAL STATEMENTS AND INFORMATION. NONE OF MY PHONE CALLS AND WRITTEN REQUESTS HAVE 

BEEN ACKNOWLEDGED.

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¶(--SOT--MCCAUL TAPE 1 @ 2:08 TO 2:16) 

′′we’re going to be taking a close look at these officials and bring them before 

congress and have them testify before our committee and they’re going to have to 

answer the hard questions.′′

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¶(--SOT--GARY @ 24:51 TAPE 1) 

′′if I knew the money was allocated strictly for 9-11 the people in NY qualify--I 

don’t′′

GARY BELIEVES HIS VOICE REPRESENTS HUNDREDS--POSSIBLY 

THOUSANDS ACROSS THE COUNTRY--ALL FROM BUSINESS OWNERS WHO 

FEEL THEY WERE MISLED BY THE FEDERAL GOVERNMENT.

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¶(--SOT--GARY 16:55 to 17:00) 

′′why are they telling the banks 1 thing and you another--why? that doesn’t make 

any sense′′

KVUE TAG 

WELLS FARGO ISSUES A STATEMENT ABOUT THIS STORY--SAYING--IN 

PART 

′′The SBA encouraged lenders to utilize a broad and inclusive definition 

of small businesses impacted by these events to help spur an economic 

recovery, and we are confident that Wells Fargo fully complied with those 

directives.′′

WE’D ALSO LIKE TO REITERATE, THE SMALL BUSINESS OWNERS WHO 

RECEIVED STAR LOANS DID NOTHING WRONG BY RECEIVING THE SBA 

FUNDING. THEY SIMPLY DIDN’T KNOW WHAT THEY WERE RECEIVING. 

AND THE SBA MAINTAINS STAR DID NOT TAKE AWAY ANYTHING FROM 

NEW YORK DISASTER VICTIMS--SINCE THEY WERE GIVEN FUNDING 

UNDER A COMPLETELY DIFFERENT PROGRAM.

Mr. ROGERS. The gentleman’s time is expired. 

The Chair now recognizes the gentlelady from New York, Ms. 

Lowey, for any questions she may have. 

Welcome. 

Mrs. LOWEY. Thank you. Thank you very much, Mr. Chairman. 

And I wanted to be here because, as my colleagues would say, 

I really believe that support for these programs through the 18 

years that I have been in the Congress are undermined because of 

the constant focus on waste, fraud and abuse. And I keep wondering, what have we learned? What can we do differently? 

And I have a few questions in that regard. First of all, Mr. 

Thorson, when the STAR loan program was proposed, were you in-
166

volved? Did you propose any kind of controls? Because you have 

been working on these issues, and I would imagine that something 

could be learned from your experience. 

So rather than ‘‘gotcha’’ at the end—and then I am going to get 

to Mr. Frazer, because that is your job—did they reject some of 

your proposals? It seems we never learn. 

And then I would want to know from Mr. Frazer, are there some 

fraud cases that you have been working on where we did get them 

and given them penalties? And if you had been brought in, someone like yourselves, at the beginning of these programs, could you 

have recommended controls to be put in place? 

I think I mentioned at another hearing it was astonishing to me 

that, 2 1/2 years after the Iraq war has been prosecuted, we finally, 

because of I.G. Bowen, have put in computers. Well, isn’t that interesting: 2 1/2 years, they are finally tracking the expenses. 

So my question again is, to Mr. Thorson, were you consulted? Did 

you have proposals? Did they listen? Were they rejected? 

And what do you think you have learned, Mr. Frazer, that we 

could put in place before to avoid some of these high-profile frauds? 

Mr. THORSON. Well, first of all—and I really hate saying this, because it sounds like I am trying to duck your question. I am not—

Mrs. LOWEY. So don’t. 

Mr. THORSON. I have been with the SBA about 3 months, so I 

wasn’t there when this program was done, but I am going to try 

and answer your question the best I can anyway. And forgive me 

for saying that, because I do feel like—

Mrs. LOWEY. Forgive me for not knowing. 

Mr. THORSON. One of the things that we do want to do in our 

office is to work with the agency and, to use your term, to not just 

have a ‘‘gotcha’’ at the end. There were things that I think I would 

have recognized, because I did read—I knew I was coming to the 

agency at that point, and I knew I wanted to read everything I 

could about it. 

And one of the things that I think we would all learn—and this 

includes the Congress—the definitions. When you specify these programs, the definitions need to be very clear. 

And if they are not clear, then the agency needs to request clarification and to make sure that the intent of what they are trying 

to do with this program is executed properly and not just broadened to the point to satisfy whatever the latest pressure was. 

I think, in this particular case, having been on the other side of 

the dais for a number of years, both in the House and the Senate, 

and done a lot of hearings, I would have recognized this was really 

a program that had potential for disaster. 

Mrs. LOWEY. Now, you recognized it. What about the people running the program? Have they ever run a program before? They 

didn’t recognize it? They didn’t—

Mr. THORSON. I think what happened, in trying to get these 

loans out and affect the national economy, not just these local geographical areas hit, I think they took the stance that almost any 

business in this country was affected economically by what happened. I think that summarizes their feeling. 
167

Whether that was a valid statement or not, I guess we could debate for a long time. I think it probably, from our reports, shows 

they maybe went a little too far in how they did that. 

But I really think part of their problem was the lack of oversight 

on the lenders. Once they basically freed the lenders up to go and 

say anybody can have these loans, because almost by definition 

they felt that any business could qualify and would be affected in 

some adverse way. 

Well, we know that is not true. I mean, there were some businesses that were not affected. But I think what happened is, in 

their desire to really expand the program, which was certainly the 

pressure they were receiving, that they, first of all, broadened it too 

far and, second of all, did not provide enough oversight over the 

lenders who took that as the incentive to just let it go to anybody, 

no matter what the justification. 

Mrs. LOWEY. Thank you. 

Mr. FRAZER. Yes. One of the key things that we did learn as a 

result of all of our investigations was, besides the documentation 

that we have talked about already, if at the time?when the people 

from the charities, the volunteers and the workers came and started, they were affecting people like ourselves. 

And they were feeling the brunt of the tragedy. And they came, 

and they wanted to give out money and to give aid to those who 

were deserving. 

And I think that if, in fact, prior to their actually sitting at the 

table to give out money, they go through some training?not so 

much training, even a lecture series where they are able to hear 

about certain fraud indicators to look out for, maybe tell them 

about some prior prosecutions or incidents that has happened in 

the past, then there would somehow be?the desire to give and help 

would be tempered by the fact that some people are looking to take 

advantage of them. 

I think that would be useful in the future. 

Mrs. LOWEY. Thank you, Mr. Chairman. I hope, as a result of 

these excellent hearings you are holding, that we can learn something so that next year or the next incident we are still not talking 

about waste, fraud and abuse. Thank you very much, Mr. Chairman. 

Mr. ROGERS. Thank you. The gentlelady’s time is expired. 

The Ranking Member is recognized. 

Mr. MEEK. Thank you, Mr. Chairman. 

Ms. Lowey, I know that along the airlines, especially being a 

ranking member of a subcommittee and an appropriations committee, many times?and someone has gone through this quite a bit 

in Florida, especially in south Florida, as it relates to hurricane—

the reason why I was asking the question of what happens prior 

to the event, because after the event I know what happens. 

Legislation in haste. Policymakers calling folks that are sitting 

at the dais saying, ‘‘What are you doing? Why don’t we have those 

dollars out there? Why do we have this pot of money still sitting 

there?’’

And it is 2 or 3 months later, and then they start to push of running these dollars through. And then it is the victimization of the 

taxpayer all over again. 
168

And I am hoping through this report—and I mentioned the authorization bill that may not be the proper vehicle for next week. 

But as we start to close the book on this report, maybe, just maybe, 

Mr. Chairman, we can—I know the Small Business Committee has 

done some work, and one of your New Yorkers is the ranking member there. 

They have had to do some work. And I am hoping that our staff 

would talk with them about the work they have done on the STAR 

program and programs like it, so that we don’t find ourselves doing 

this all over again. 

I just have a strange feeling that this is happening right now in 

the Gulf. A number of the programs that we have now—with all 

due respect to all the law enforcement agencies we have there to 

watch them—it is being carried out right now. 

So we have to legislate and put some sort of guidance and parameters in what I may call non-event times prior to the event, because after the event, you know, the bill goes from the committee 

to the floor within the same week. 

The Department of Homeland Security slammed together in 

haste, not well-thought-out. And we are going through the process 

now of trying to correct that very slowly. 

So I just wanted to say that out loud, Mr. Chairman, because I 

believe that we should in order report hopefully use that as a guiding—some sort of set of guiding principles that can hopefully go 

into legislation. 

We don’t want to nail folks down to where they can’t turn right 

or left when you have to make a decision, but we also expect for 

goodwill and common sense to prevail and say that, ‘‘Well, this 

doesn’t sound right,’’ especially with this STAR program. 

I didn’t really want to get into that personally in my comments 

today, but it is so very, very important as it relates to the integrity 

of the whole process of preventing fraud in the future. 

Thank you, Mr. Chairman. 

Mr. ROGERS. Thank you. 

And that is the intent of this subcommittee’s efforts and the reason why Chairman King asked us to investigate this. We do intend 

to come up with a report that is meaningful and does make a difference for the future. 

With that, I would like to remind all panelists—first of all, thank 

you for your time and your participation. It has been of great help 

to us in our efforts. 

We would like to remind you that other Members and some of 

the Members who are here, since we only did one round of questions, may have some additional questions for you, which they will 

submit to you. I would ask that you respond to those in writing. 

We are going to leave the record open for 10 days for that purpose. 

And with that, thank you. And this panel is excused. 

The Chair now recognizes the second panel. And we would like 

to welcome you and thank you for your time and participation. 

Our first witness will be Ms. Eileen Mildenberger, Chief Operating Officer of the Empire State Development Corporation, for 

your statement. 

As I have told the earlier panel, if you all were here, your entire 

written statement has been submitted, and all Members have a 
169

copy. So we would ask that you summarize—try to keep your remarks to five minutes or less—so that we will have more time for 

questions and answers. 

Mr. KING. Mr. Chairman? 

Mr. ROGERS. Chairman King? 

Mr. KING. Mr. Chairman, I would just like to make a statement 

for the record that my son worked for Ms. Mildenberger at the Empire State Development Corporation in 1996 and 1997. 

So while I don’t see any conflict of interests or any impropriety, 

I will recuse myself for any questioning of Ms. Mildenberger. And 

I will not question any of the witnesses regarding ESDC. 

Mr. ROGERS. Understood. Thank you, Mr. Chairman. 

Ms. Mildenberger, the floor is yours. 

STATEMENT OF EILEEN MILDENBERGER 

Ms. MILDENBERGER. Thank you for the opportunity to discuss 

Empire State Development, the state’s lead economic development 

agency’s efforts and initiatives following the 2001 terrorist attacks 

on the World Trade Center. 

I am pleased to report that Manhattan is once again a vibrant 

center of commerce. I would like to review where we have come 

and what we have done. 

On September 10, 2001, the district of south of 14th Street had 

20,000 small businesses and 103 large businesses, with had more 

than 500 employees each. Large firms amounted to only 0.5 percent 

of all of the businesses, but employed 42 percent of all the workers. 

Following September 11th, virtually all of these companies, and 

a half million employees, were affected. While the physical impact 

of the 9/11 attacks was geographically limited to the blocks near 

the World Trade Center, the attacks had a far more substantial 

economic impact. An independent source estimated 64,000 jobs 

could be permanently lost. 

Governor Pataki’s initiative to establish a unified federal, state, 

and city command, and to designate Empire State Development as 

the lead agency for economic recovery, under the leadership of our 

chairman, Charles Gargano, made it possible for New York State 

to implement a quick and effective response to the attacks, the 

goals of which were to keep businesses in Lower Manhattan and 

to preserve New York’s position as the global center for finance. 

Within 48 hours of the attacks, ESD set up a walk-in center in 

New York City and 1–800 number to field inquiries about assistance for businesses. These were in operation before the fires at the 

Trade Center were put out. 

Using state funds, ESD guaranteed $33 million in bridge loans, 

and we also had a substantial grants program. We did this knowing that federal funds would soon be on the way. 

The Department of Housing and Urban Development’s Community Development Block Grant was identified as the most appropriate vehicle to fund New York’s economic recovery efforts. 

Thanks to quick action by Congress, substantial federal resources 

were made available for this. 

Our efforts had two primary objectives. The first was to help 

businesses make up the loss of working capital. And the second 
170

was to provide incentives for businesses to return to or remain in 

Lower Manhattan. 

With $1.2 billion in HUD funds, we created three large programs, the first of which was the Job Creation and Retention grant 

program, intended to retain and attract anchor firms. Seventy-two 

large companies accepted grants, totaling $292 million, the results 

of which created more than 70,000 jobs in Manhattan and a total 

of 91,000 jobs throughout New York City. 

Four-and-a-half months after the attacks began, we also provided 

assistance to small businesses through the Business Recovery 

Grant program. Over a half-a-billion dollars, $563 million, was provided through these programs for small businesses located south of 

14th Street. 

In addition to that, 6 months later we started another small 

firm, an Attraction and Retention Grant program, which provided 

over $115 million to 2,200 small businesses. These firms employ 

over 37,000 people, one-third of whom which are low-income or lowwage earners. In addition, other programs for small businesses resulted in $42 million of loans and $5 million in technical assistance. 

I just want to emphasize for today’s meeting that carefully followed federal rules, including development of an action plan that 

was reviewed and approved by New York City, the Department of 

Housing and Urban Development, and widely circulated for public 

comment before the plans were implemented. 

Our economic development staff took pride and took efforts to 

make sure that each request that was asked for assistance was 

carefully reviewed. The BRG program, for instance, had at least 

five different independent reviews. The large grant program underwent a thorough economic analysis and approval by our board of 

directors. 

HUD inspectors general concluded, ‘‘ESDC generally disbursed 

the CDBG disaster funds to eligible applicants in accordance with 

the HUD-approved action plan.’’

In recognizing the time of the subcommittee, I just want to say 

that, with great care was taken to ensure that we had a fair and 

efficient process, balanced with documentation and accountability. 

We often pursued third-party verification prior to awarding 

grants, which included: asking applicants to provide tax information; site visits to the business locations; speaking with landlords; 

also, coordinating with the State Department of Labor to confirm 

that they had employees at that location, which were reported prior 

to the attacks. 

Today, less than 5 years after September 11th, businesses have 

returned and a residential influx has taken place in New York, in 

Lower Manhattan. Specifically, the Lower Manhattan office market 

is showing signs of sustained recovery, with the vacancy rate downtown that dropped from nearly 14 percent at the beginning of 2005 

to currently near 10.5 percent. 

ESD recognizes that we have contributed a lot and we still have 

a lot to do. We are proud of accomplishments thus far, and through 

the leadership and vision of Governor Pataki, Mayors Giuliani, 

Bloomberg, our congressional delegation and their colleagues, we 

have not only helped to renew Lower Manhattan, but we have re-
171

built the confidence of the business community in one of the most 

important parts of our city, state, and country. 

Thank you very much. 

[The statement of Ms. Mildenberger follows:]

PREPARED STATEMENT OF EILEEN MILDENBERGER

Thank you for the opportunity to provide testimony on Empire State Development’s economic recovery initiatives following the terrorist attacks on the World 

Trade Center. I am pleased to report that lower Manhattan is once again a vibrant 

center of commerce. 

Let me review how far we’ve come and what we’ve done. 

On September 10, 2001, the district of south of 14th Street had 20,000 small businesses and 103 large businesses with more than 500 employees each. Large firms 

amounted to only half of 1% of all the businesses in the area, but employed 42 percent of all workers. 

Following September 11th, virtually all of these companies—and a half million 

employees—were affected. 

While the physical impact of the 9/11 attacks was geographically limited to the 

blocks near the World Trade Center, the attacks had a far more substantial economic impact. An independent source estimated 64,000 jobs could be permanently 

lost. 

Governor Pataki’s initiative to establish a unified Federal/state/city command, and 

to designate Empire State Development as the lead agency for economic recovery, 

made it possible for New York State to implement a quick and effective response 

to the attacks, the goals of which were to keep businesses in lower Manhattan and 

to preserve New York’s position as the global center for finance. 

Within 48 hours of the attacks, ESD had set up a walk-in center in New York 

City and 1–800 number to field inquiries about assistance for businesses. These 

were in operation before the fires at the Trade Center were out. 

Using State funds, we guaranteed $33 million in bridge loans from banks to nearly 1,000 qualified small businesses. We instituted a grant program for retail businesses, approving more than 3,000 applications and $13 million in grants. 

It soon was clear that Federal help would be needed. The Department of Housing 

and Urban Development’s Community Development Block Grant was identified as 

the most appropriate vehicle to fund New York’s economic recovery efforts. Thanks 

to quick action by Congress, substantial federal resources were made available. 

Our effort had two primary objectives: To help small businesses make up the loss 

of working capital, and to provide incentives for businesses to return to, or remain 

in, lower Manhattan. 

With $1.2 billion in HUD funds, we created our three largest programs. 

The Job Creation and Retention Program (JCRP) was intended to retain and attract large ‘‘anchor’’ firms. Seventy-seven companies accepted grants totaling $292 

million. They have committed to retain and create more than 70,000 jobs in lower 

Manhattan and a total of 91,000 jobs citywide. Four and one-half months after the 

attacks, we began providing $563 million in business recovery grants to compensate 

small business loss. Business Recovery Grants were available to eligible businesses 

south of 14th Street with fewer than 500 employees and with unreimbursed economic losses. In addition, $13 million was allocated to large businesses that employ 

200 workers or less at their downtown locations. 

BRG provided assistance to more than 14,000 businesses. The average grant was 

nearly $39,000 and compensated only 16.8% of the average firm’s loss. 

Six months after the attacks, we began the Small Firm Attraction and Retention 

Grant (SFARG) program. Through SFARG, we have disbursed nearly $115 million 

to 2,200 small businesses that made a 5 year lease commitment to stay in lower 

Manhattan. These firms employ over 37,000, nearly 1/3 of whom are low-wage earners. Second grant disbursements, totaling $42 million, to eligible companies that 

stay downtown, will take the program into mid-2007. In other programs, we provided $42 million in business recovery loans and nearly $5 million for technical 

services for small businesses. 

We carefully followed Federal rules, including development of an action plan that 

was reviewed and approved by New York City and the Department of Housing and 

Urban Development, and widely circulated for public comment. 

Our economic development staff reviewed every request for assistance. Each BRG 

grant received at least five different reviews. JCRP grants underwent a thorough 

economic analysis and approval from our Board of Directors. HUD’s Inspector Gen-
172

eral concluded, ‘‘ESDC generally disbursed the CDBG disaster assistance funds to 

eligible applicants in accordance with the HUD approved action plan.’’ 

Great care was taken to ensure a fair and efficient process, balanced with careful 

documentation and accountability. We often pursued third-party verification prior to 

awarding funds. This included: reviewing the Port Authority’s master list of World 

Trade Center tenants; requested tax information from the IRS; site visits; speaking 

with landlords; and confirming employee numbers with the State Department of 

Labor. 

Where fraud has been detected, ESD has worked closely with law enforcement. 

As of this time, only two cases have gone to trial. 

Our initiatives to help rebuild the lower Manhattan economy taught some important lessons. Among them: 

• Building relatively simple-to-administer and simple-to-apply-for assistance 

programs with objective, transparent rules understandable to potential grant 

recipients. 

• Scaling programs to match organizational capacity. 

• Establishing procedures to catch errors and potential fraud. 

• Recognizing that some federal and state loan programs are not well-suited to 

the purpose of disaster recovery. 

Today, less than five years after September 11th, businesses have returned, and 

a residential influx has taken place in lower Manhattan. 

Specifically, the lower Manhattan office market is showing signs of sustained recovery. The vacancy rate downtown dropped from nearly 14% at the beginning of 

2005 to 10.6% at year end, its lowest level since September 11th. In the past year, 

the number of downtown businesses increased by 6%. 

With the recovery of the area’s business economy, lower Manhattan has become 

home to a burgeoning residential community. Today, there are more than 20,000 

residential units south of Chambers Street, a 10% increase over 2004. 29 developments are under construction, adding almost 4,000 new units in the next few years. 

And tourism in New York City is at a record high, with 41 million visitors in 

2005, and visitor spending at $21 billion in 2004. 

ESD’s assistance has contributed to this new vitality. 

We have more to do, of course, but are proud of what has been accomplished thus 

far. Through the leadership and vision of Governor Pataki, Mayors Giuliani and 

Bloomberg and our Congressional Delegation and their colleagues, we have not only 

helped renew lower Manhattan, but we have rebuilt the confidence of the business 

and residential community in one of the most important parts of our city, State, and 

country. 

Thank you.

Mr. ROGERS. Thank you, Ms. Mildenberger, for your statement. 

The Chair now recognizes Mr. Stefan Pryor, President of the 

Lower Manhattan Development Corporation, to testify. Mr. Pryor 

is accompanied by a member of the board of LMDC, Mr. Thomas 

Johnson, who serves as Chairman of LMDC’s Audit and Finance 

Committee. And I understand he is in the audience. 

With that, welcome, Mr. Pryor, and we look forward to your 

statement. 

STATEMENT OF STEFAN PRYOR 

Mr. PRYOR. Thank you. 

Chairman Rogers, Ranking Member Meek, Committee Chairman 

King, I want to thank you very much for this opportunity to testify 

on the revitalization and the resurgence of Lower Manhattan after 

September 11th. 

And I would particularly like to thank this subcommittee and the 

United States Congress as a whole for your support throughout the 

recovery and rebuilding period. We couldn’t be in this position, in 

which we have made tremendous progress, without your tremendous help. 

LMDC was created following September 11th to help plan and 

coordinate the rebuilding of Lower Manhattan. We are a subsidiary 
173

of Empire State Development Corporation, and our Board of Directors is appointed by George Pataki and Mayor Bloomberg. 

Congress allocated $2.783 billion of the $21 billion total aid package to the LMDC for our efforts. 

Today, I will give you a brief description of some of LMDC’s activities, centered on ensuring the development of a revitalized, 

21st-century downtown. I will then describe the climate of accountability and controls we have established at LMDC to ensure integrity in the implementation of these priorities. 

The scene in Lower Manhattan has changed so significantly in 

less than 5 years that people often forget what we did experience 

in 2001. We suffered, of course, the unconscionable, tragic loss of 

2,749 people at the World Trade Center on September 11th. 

On the days immediately following, I remember well how my 

own residential street, which is about a block from the World Trade 

Center, was affected. There were military personnel in the street; 

you had to stop and show I.D. to get to your home. 

To say the least, there were deterrents to remaining downtown. 

In fact, there were concerns that we would have a permanent exodus from downtown as a result of the events. 

I witnessed moving vans lining the streets, as residential vacancy rates were reported as high as 50 percent in some of the residential buildings. Businesses were moving away, fearing Lower 

Manhattan would never again be a thriving commercial district. 

We lost 60,000 to 80,000 jobs as a result. Of course, the 10 million square feet of office space at the World Trade Center itself was 

destroyed. These are the negative images and tough conditions that 

were part of our daily experience downtown, those of us who live 

and work there and, in the aftermath of September 11th, were also 

broadcast across the world. 

So again there were some who questioned whether it would ever 

be possible to recover. Yet, in less than 5 years since September 

11th, we have already seen significant progress. 

On the World Trade Center site itself, LMDC selected the master 

plan for the site, a plan that continues to guide the rebuilding 

today and is well on its way to implementation. As a function of 

the master plan, for example, we have witnessed the construction 

and opening of Seven World Trade Center, the last building to fall 

on September 11th and the first to rise again. 

The construction of the Freedom Tower has become. And the 

Santiago Calatrava-designed transportation hub at the World 

Trade Center, which was crushed—the original version thereof was 

crushed on September 11th—the construction is under way with a 

temporary service already operational. 

LMDC also guided the process for the selection of the heart of 

the master plan, the memorial, and we have since led the planning 

and design efforts there. And we have already begun site preparation work on the construction of a memorial. 

It was very clear from the beginning of our planning and public 

outreach that making Lower Manhattan viable would require more 

than rebuilding the Trade Center itself, so engaged in a number of 

initiatives beyond the World Trade Center site to ensure that we 

created an environment that, over the long term, could sustain 
174

businesses and residents, and we believe we have done so. You are 

familiar with a number of our programs. 

I would like to actually jump to the controls that we put in place 

to describe to you how we have ensured integrity along the way, 

in the course of our work. 

Our board of directors provides oversight and clear direction to 

management. The board itself consists of distinguished citizens, 

corporate executives, government officials and community leaders. 

As a subset of our board, our audit and finance committee is cochaired by Tom Johnson. 

Tom has been introduced to you, and he is the retired chairman 

and CEO of GreenPoint Bank. And he is also the father of Scott 

Johnson, who was lost on September 11th. 

And Larry Babbio, the vice chairman and president of Verizon, 

they co-chair our audit committee. We met as recently as yesterday. They are a very active committee, and we are grateful for 

their support and help in making sure that we have a clean operation. 

The second layer of controls are day-to-day project managers and 

attorneys who monitor their assigned projects all the way through 

implementation. Those are members of our staff. 

Third, our compliance monitoring department performs riskbased reviews on LMDC sub-recipient relationships, focusing on 

both HUD and LMDC compliance. 

Fourth, our internal audit department objectively evaluates and 

reports on risks and controls weaknesses directly. Working directly 

with the board’s audit and finance committee, the internal auditor 

himself reports to Tom Johnson, not to me. 

As a fifth level of oversight, LMDC retains external auditors to 

review LMDC’s general purpose financial statements. 

Sixth, HUD’s Office of Block Grant Assistance conducts semi-annual monitoring reviews of LMDC management’s performance, concentrating on program compliance. I know there are representatives of that office here in the audience today, and they are involved and is much more active than those period reviews. 

Finally, the HUD Office of the Inspector General has had a very 

active role. And these audit results are reported every 6 months, 

so we work closely with that office, as well. 

Beyond that, beyond those seven layers, LMDC has established 

a department to conduct proactive investigations. On our staff, we 

hired investigators, a former assistant U.S. attorney, who, working 

with our general counsel, herself a former assistant U.S. attorney, 

has brought forward cases proactively. 

For example, in the case of our residential grant program, some 

of which you have heard about in the written testimony that has 

been submitted, to make sure that we detect, uncover and bring 

forward for prosecution cases of fraud, so that these things happen 

as part of our system rather than a reaction to what we are doing. 

In conclusion, if I may, Mr. Chairman—I know that my time is 

expired—I wanted to just state that, through the public process, 

the very expensive public consultation that we did, through the setting of priorities, and through this multi-layered system of controls, 

we believe that we are making real progress, something the nation 

can be proud of. 
175

And we conducted an economic analysis of the impact of our 

work. And I would like to point out that, through the series of investments that you are helping to make that we already have on 

the ground, by 2025, we except economic output will increase to 

$23.2 billion, and that ranged to $25 billion, annually, and increase 

employment by maybe in excess of 100,000 people as a result of 

these interventions downtown. 

Remember, we lost 60,000 to 80,000 jobs in an instant on September 11th, so the idea that we can resurge and regain our positions as the financial capital of the world is so very important. And 

we think we are many steps in that direction. 

Thank you, Mr. Chairman. 

[The statement of Mr. Pryor follows:]

PREPARED STATEMENT OF STEFAN PRYOR

Thank you for this opportunity to testify on the redevelopment and resurgence of 

Lower Manhattan. 

LMDC was created following September 11th to help plan and coordinate the rebuilding of Lower Manhattan. We are a subsidiary of the Empire State Development 

Corporation, and our Board of Directors is appointed by the New York State Governor, George Pataki, and the New York City Mayor, Michael Bloomberg. Congress 

allocated $2.783 billion of the $21 billion total aid package to the LMDC for our efforts. 

The scene in Lower Manhattan has changed so significantly in less than five 

years that people often forget what we faced in 2001. We suffered the unconscionable, tragic loss of 2,749 people at the World Trade Center on September 11th. On 

the days immediately following, I remember well how my own residential street, 

about a block from Ground Zero, was cordoned off; we had to enter our homes 

through military checkpoints. I witnessed moving vans lining the streets as residential vacancy rates soared as high as 50% in some buildings. And businesses were 

moving away, fearing Lower Manhattan would never again be a thriving commercial 

district. Sixty to 80,000 jobs disappeared, along with 10 million square feet of office 

space at the World Trade Center site, and Lower Manhattan slipped from the third 

to the fourth largest central business district in the country. These are the negative 

images, tough conditions, and dire predictions that, for those of us who live and 

work downtown, were part of our daily experience. And these are the images, conditions and predictions that, in the aftermath of 9/11, were broadcast across the 

world. 

As a result, there were some who questioned whether it would ever be possible 

to truly recover. Yet in less than five years since September 11th we have already 

seen significant progress. We’ve witnessed the construction and opening of 7 World 

Trade Center—the last building to fall on September 11th and the first to rise 

again. A block away, Goldman Sachs is building its world headquarters right next 

to American Express and Verizon, who remained downtown, determined that it 

would be rebuilt. Inside the World Trade Center site, the construction of the World 

Trade Center Transportation Hub is under way, as is the site preparation for the 

Memorial and the construction of the Freedom Tower. Surrounding the World Trade 

Center site, the West Street Southern Promenade (a remade portion of the highway 

that abuts the site) opened to the public last week, and the new Fulton Transit Center is under construction—along with other revitalization projects beyond the World 

Trade Center site. The value of construction now underway or soon to begin totals 

$10 billion, with over $20 billion to be invested over the next five years. 

My testimony today will focus on the climate of accountability and control we 

have established at LMDC. In talking to you about our oversight and controls, I 

would like to outline our public process briefly, how it led to the establishment of 

our priorities, and how our controls have ensured integrity in the implementation 

of those priorities—and in the development of a revitalized 21st century central 

business district. 

We take great pride that LMDC has led one of the most extensive public processes 

ever undertaken by a government agency. We believe our public process has been 

essential to ensuring our Federal funding is spent properly and on the most meritorious projects. We have held over 200 public meetings over the past five years. 

Some of those meetings have been broadcast live over the Internet, allowing people 

from around the world to view our planning activities and provide their comments 
176

and suggestions. All of our draft plans are subject to public comment and then revised to take that comment into account. 

We have also held hundreds of meetings with community groups and advisory 

councils which represent the various communities impacted by September 11th and 

the rebuilding—including victims’ families, survivors, residential and business community leaders, elected officials, planners, architects, and other stakeholders. This 

remarkable level of public participation has been highly effective. It is impossible 

to create an agenda that pleases all constituencies all of the time—but what we 

have demonstrated is a public agency’s plans benefit from more rather than less 

public input and that a comprehensive outreach and feedback process lead to results 

that have credibility and, as a result, durability. 

To begin, LMDC responded immediately to the public’s concerns about retaining 

and attracting residents and businesses. The program played a central role in restoring occupancy rates to more than 95%, as well as in spurring new investment. 

A survey of residents conducted by the Alliance for Downtown NY found that nearly 

32% of all current residents living below Chambers Street had moved to the area 

between September 2001 and May 2003. Among those new residents, a majority—

51%—said LMDC’s grant had been a factor in their decision to move to Lower Manhattan. The program infused $226 million in grants to more than 65,000 households. 

Battery Park City today boasts its highest occupancy rate in its history, and Lower 

Manhattan is the fastest growing residential market in the city. 

To attract and retain businesses downtown, the LMDC also provided funding to 

ESDC, which administered a variety of grant programs and employee training assistance programs that played a major role in the promising commercial reports we 

see today. You will hear more about these programs from our ESDC colleagues, but 

I want to point out briefly that according to Cushman and Wakefield, more than 

850,000 square feet of new leases were signed in Lower Manhattan during the 

fourth quarter of 2005—and this figure does not include Goldman Sachs’ new 1.9 

million square foot headquarters. 

Following our immediate residential and business recovery efforts, LMDC made 

a conscious decision based on public input to use the remainder of our funds on investments that would drive long-term economic growth. We knew we would have to 

create conditions that would not only result in the restoration of the 60 to 80,000 

jobs lost, but would also provide for a durable and vital environment that would ensure those jobs would be secured over the long term. Our plans emerged from public 

input and trends of cities around the world that indicated that successful central 

business districts are increasingly also vibrant, active live and work communities. 

When we embarked on the selection of a Master Plan for the World Trade Center 

site, we began by holding public forums with live webcasts throughout the New 

York City regions. One of these forums—‘‘Listening to the City’’—brought more than 

5,000 people together in one location to consider what should be built on the World 

Trade Center site. That process resulted in LMDC’s selection of Daniel Libeskind’s 

Master Plan in 2002—a plan that continues to guide the rebuilding today. We believe the public input that drove this process was crucial to the Master Plan’s longterm viability. While the LMDC is not directly responsible for the construction of 

these buildings, we are proud that Libeskind’s Master Plan for the site has endured, 

and that it is well on its way to implementation. 

The selection of the centerpiece of the site, the Memorial, was also the result of 

extensive public input. LMDC’s Families Advisory Council helped shape the principles upon which the design was selected, and we held an open international competition in 2003. In a true testament to the extraordinary level of interest in the 

Memorial’s creation, we received 5,201 submissions. A prestigious Memorial Jury selected the winner in January 2004—a design called ‘‘Reflecting Absence.’’ We recently made modifications to the Memorial design and its companion museum to ensure that these important centerpieces of downtown will be delivered on budget and 

on schedule for opening on September 11, 2009, while remaining true to the vision 

selected in 2004. The Memorial must and will be a magnificent and fitting tribute 

to those we lost. 

We are proud that all of our stakeholders played an important role in the creation 

of this moving tribute. A recent NY State Supreme Court decision found that the 

LMDC’s public outreach on the Memorial has been ‘‘exhaustive and beyond anything required by law,’’ noting also that we have acted in a ‘‘commendable and sensitive manner.’’ 

It was clear from the beginning of our planning and public outreach that making 

Lower Manhattan viable and attractive in the long term would require more than 

financial incentives and the rebuilding of the World Trade Center site itself. We realized we had to transform Lower Manhattan’s neighborhoods to make them viable 

and attractive to residents and visitors—as well as competitive in the attraction of 
177

businesses in order to create the 21st century downtown I’ve referenced. For example, with our funding, over 20 park and open spaces have been either created or 

renovated. We have also provided funding for major projects like the downtown segment of Hudson River Park and the East River Waterfront which, together with 

Battery Park, will surround Lower Manhattan’s shore lines on all three sides with 

over 10 consecutive miles of green spaces, boardwalks, esplanades, cultural activities, urban beaches, and active piers. 

As another example of our off-site funding recipients, one of the hardest hit areas 

of Lower Manhattan after September 11th was Chinatown. Because of Chinatown’s 

unique needs in the aftermath of September 11th, we hired a community liaison 

dedicated exclusively to this neighborhood, and created a Chinatown working group 

consisting of representatives of the neighborhood to determine what the community 

itself saw as its priorities. The LMDC acted quickly to kick off an award-winning 

tourism promotion campaign that has brought millions of new visitors to the neighborhood to shop, eat, and visit Chinatown’s cultural institutions. We funded and 

launched several important initiatives in the Chinatown community, including: • The community’s first ever Local Development Corporation, a coordinating vehicle for the neighborhood’s recovery 

• a comprehensive Clean Streets Program—addressing the number one concern 

cited by Chinatown residents and businesses 

• construction of the Chinatown visitor kiosk to guide newcomers to the neighborhood 

• Major traffic and transportation plans to improve conditions created in part 

by post–9/11 security 

• The rehabilitation of parks including Columbus Park and its historic pavilion • Plans for a Chinatown arts center • $40 million in Residential Grant disbursements • $60 million in Business Recovery grants. 

These are only a few of the LMDC’s Chinatown initiatives, which taken together total more than $170 million in funding commitments. 

In Chinatown, the Lower East Side, and other areas of Lower Manhattan, we 

made a pledge that we would commit $50 million of our funds to affordable housing—one of the largest allocations to affordable housing by a government entity in 

recent years. We are proud to say we are living up to that commitment with five 

diverse projects that will generate and preserve nearly 3,000 units of affordable 

housing. 

These particular projects offer just a glimpse of how our funding has addressed 

the needs voiced by the public. I’d now like to say a few words about how our funding is distributed, and the controls that guide our process. All of our activities are 

framed according to HUD rules, and as a result, the public and Congress have reviewed our plans through the Partial Action Plan process. 

Once funding is allocated, we place enormous emphasis on ensuring that the 

money is spent properly. We have instituted seven layers of controls on our projects. 

An effective internal control environment starts with the tone set at the highest organizational level: 

• At the LMDC, our Board of Directors provides oversight and clear direction 

to LMDC management. The Board itself consists of distinguished citizens—corporate executives, government officials, and community leaders. Following approval by the Board’s Audit and Finance Committee, the full Board must approve every funding allocation. Our Audit and Finance Committee is CoChaired by Tom Johnson—the retied Chairman and CEO of GreenPoint Bank 

and GreenPoint Financial Corporation, and father of Scott Johnson, who was 

lost on September 11th—and Larry Babbio, the Vice Chairman and President 

of Verizon. Our Board has instituted private-sector style accountability by drawing upon their expertise in these matters and applying them to the operation 

of our agency. 

• In addition to Board oversight, we have multiple layers of protections, beginning with day-to-day project managers and attorneys assigned to each project 

who not only craft the agreements but also monitor the projects throughout 

their implementation, ensuring recipients comply with all HUD and LMDC requirements and adhere to the program activities, budgets, and other requirements of the agreements. 

• In addition to our Board and the project management structure, the third 

layer of oversight is provided by our compliance/monitoring department, which 

performs risk-based reviews on LMDC subrecipient relationships focusing on 

both HUD and LMDC compliance. 

• A fourth level is provided by the LMDC’s internal audit department, whose 

primary mission is to objectively evaluate and report on risks and control weak-
178

nesses. This department reports directly to the Board’s Audit and Finance Committee, ensuring independence and promoting comprehensive audit coverage. 

• In addition to our extensive internal controls, we also implement a variety of 

external measures. As a fifth level of oversight, LMDC retains external auditors 

to review LMDC’s general purpose financial statements. 

• A sixth level of oversight is provided by HUD’s Office of Block Grant Assistance, which conducts semi-annual monitoring reviews of LMDC management’s 

performance, concentrating on program compliance. To date HUD Monitoring 

has issued six reports. The last three reports identified no ‘‘Findings’’ or ‘‘Concerns’’ and noted that findings identified in the earlier reports were all resolved. 

In the last two reports, Mr. Richard J. Kennedy, Director, Office of Block Grant 

Assistance, commended LMDC on its ‘‘exemplary administration of its grant 

programs.’’

• The HUD Office of Inspector General provides the seventh oversight role, performing continuous audit procedures of LMDC and its major grants. These 

audit results are reported every six months to LMDC, the HUD Director of 

CDBG Grants, and Congress. HUD IG has dedicated four to eight auditors to 

review LMDC. To date they have issued six Audit Reports the most recent of 

which identified one finding that has already been resolved with no monetary 

exposure to the LMDC. 

In addition to these seven layers of oversight, review, and audit controls, LMDC 

established a department to conduct investigations and assist in the performance of 

background checks, and formulate policies to prevent or detect fraud or other criminal activity. This department was created by our former Chief Investigator, who is 

a former Assistant US Attorney; our General Counsel, herself a former Assistant 

US Attorney; and a former NYPD Detective of more than 20 years’ experience, who 

continues to run the department today. The investigations staff also manages an external integrity monitor, a firm of professionals who review existing procedures and 

processes for fraud, corruption, cost abuse, safety, and environmental risks. 

Although these are our standard, comprehensive procedures, we have customized 

procedures for particular programs when necessary. For example, in the Residential 

Grant Program, the LMDC proactively brought eight cases forward that were subsequently prosecuted by the U.S. Attorney’s Office for the Southern District of New 

York. All defendants were charged in complaints with violations of federal law: (1) 

18 U.S.C. Section 641 (fraudulent acceptance of federal funds) and 18 U.S.C. Section 

1341 (mail fraud). The control mechanism in many of these cases was returned 

mail. As a further control, grant recipients were required to re-certify every six 

months. 

We are proud that our controls have created an environment of integrity and have 

ensured that we operate a tightly-run organization. The HUD Office of Block Grant 

Assistance commends us in their reports ‘‘for successfully carrying out [our] commitment to high quality management of [our] grant programs.’’ We believe that the 

LMDC can and will serve as a model to other agencies in other parts of the country. 

Two weeks ago, HUD Inspector General Kenneth Donohue testified before the U.S. 

Senate Homeland Security and Government Affairs Subcommittee on Federal Financial Management, Government Information, and International Security, stating, 

‘‘I have seen the success of active monitoring efforts with ‘monitors’ used by the 

Lower Manhattan Development Corporation in preventing waste and fraud in post–

9/11 rebuilding activities and I have testified previously to this effective concept for 

use in disaster relief efforts in the Gulf States.’’ 

In closing, I would like to thank the members of this Subcommittee and the 

United States Congress as a whole for your support for the post-9/11 rebuilding. We 

are confident that the public processes we implemented—in combination with our 

multi-layered approach to oversight, review, and audit—are ensuring that the 

public’s funds are being managed with the utmost integrity—and with favorable results. During the next few years, the benefits of LMDC’s investments are likely to 

be compounded, as the impact of major investments in developments underway at 

the World Trade Center site and transportation infrastructure build on the impacts 

of investments made before. Economic analysts have estimated that by 2025, the 

major development projects undertaken by the LMDC, drawing upon your $2.8 billion in resources, will increase economic output in New York City by $19.4 to $21.4 

billion annually, and increase employment by 98,700 jobs. If we take into account 

total program spending, including investments made in Lower Manhattan by our 

partner agencies and organizations, the ongoing impact in 2025 rises to $23.2 to 

$25.2 billion in annual economic impact, and 116,000 to 131,000 jobs. These investments will position Lower Manhattan as a thriving 21st century downtown, ensure 

that it serves as a key economic engine for the nation, and—indeed—secures its position as the financial capital of the world. 
179

We thank you for your partnership in the mission of rebuilding and revitalizing 

Lower Manhattan.

Mr. ROGERS. Thank you, Mr. Pryor, for your statement. 

The Chair now recognizes Mr. John Wang, Founder and President of the Asian-American Business Development Center, for your 

statement. 

Welcome, Mr. Wang. 

STATEMENT OF JOHN WANG 

Mr. WANG. Thank you, Mr. Chairman and members of the committee. I appreciate the opportunity to be invited to testify before 

the committee on how one community, namely Chinatown, fared in 

the aftermath of the September 11th terrorist attack on the World 

Trade Center in New York City. 

Tens of billions of dollars appropriated by the Congress were directed into the city, to help rebuild its economy, but Chinatown received a negligible amount. 

My name is John Wang. I am president of the Asian–American 

Business Development Center, which was founded in 1994 to assist 

Asian–American-owned businesses to build capacity and improve 

skills in order for them to compete in the mainstream marketplace. 

By 2001, Chinatown had already been a major tourist attraction 

for decades, and yet it was also a community at risk, because of 

increasing isolation from the mainstream economy, outdated business practices, and the effects of a deepening economic recession 

that the city was experiencing. 

And while you can see that Chinatown is about a dozen city 

blocks away from the World Trade Center, the impact was immediate. New Yorkers stayed at home; tourists stayed away from New 

York City; no one was going to Chinatown. 

That affected 400 restaurants, 500 retail outlets of various kinds, 

200 street vendors, 300 manufacturers, 250 jewelry stores, just to 

name some of the types of business. Chinatown virtually shut 

down. 

Yet the government failed to recognize the need of the community and provide appropriate assistance. Just to cite a few examples, 6 months after September 11, the garment industry, a backbone of the Chinatown economy, 12 percent of factories closing. 

Over 1,000 garment workers lost their jobs, and another 5,000 

workers were working only 2 or 3 days per week. Restaurants, the 

other lifeblood of Chinatown economy, the businesses were dropping anywhere between 20 to 40 percent. 

Over 250 jewelry stores, that they also lost a tremendous amount 

of business, despite offering 20 percent to 40 percent discounts to 

attract customers. 

Then the SARS crisis took place in early 2003. It was a double 

whammy to Chinatown. 

In April 2003, 18 months after September 11th, AABDC surveyed over 200 businesses throughout Chinatown, including restaurants, jewelry stores, beauty salons, retail establishments. And 

here are some findings. 

Ninety-seven percent of the businesses surveyed said that business was down from pre–September 11th levels. Sixty-four percent 
180

said there were fewer tourists. Eighty percent said the tourists 

were spending less. 

But most damning of all was that business owners in Chinatown 

felt they have been completely overlooked and ignored since September 11th, and more recently with the impact of SARS. 

Looking to survive, many businesses applied for government assistance. And according to the 2003 survey, only 20 percent of businesses surveyed had received any disaster-related loans. 

These loans came mostly from the Small Business Administra- tion, and the median loan amount was $23,000. Sixty-two percent 

had received the WTC Business Recovery Grant. However, the median grant amount was much lower, at $1,896. 

Another grant program, the Small Firm Attraction and Retention 

Grant, was not widely available to many of the businesses. Only 11 

percent of the businesses received the SFARG, with a median grant 

amount of $7,000. And ninety-nine percent of those surveyed felt 

that government was not doing enough to help Chinatown. 

It should not be a surprise to any observer of the Lower Manhattan disaster relief program to understand how Chinatown community felt the way it did. Chinatown is a vibrant part of the New 

York City, yet the Chinatown community was not invited to participate, nor was it given an opportunity to provide input, on how the 

programs should be designed to address the needs and provide 

meaningful assistance to community residents and businesses. 

With the formation of the Lower Manhattan Development Corporation, no community representative was considered, let alone selected, to sit on the board of LMDC. And to this day, there is still 

no representation on the board of LMDC for the Chinatown community. 

The result was a community poorly served by the programs that 

were not designed with it in mind. Let me give you couple of examples of programs developed. 

One, the main shopping street in Chinatown is Canal Street. Yet, 

it is baffling that a program supposedly to help small businesses 

would use Canal Street as a boundary to define those on the south 

side of the street were eligible for financial assistance and those on 

the north were not. 

In a community of immigrants, where there is much transition, 

landlords were notoriously reluctant to give long-term leases, so 

why is there a program which demanded a 5-year lease in order 

to qualify to apply for assistance? 

In June 2003, AABDC undertook another study of these two programs I mentioned earlier, the Business Recovery Grant and 

SFARG. And that study finds that less than half of the 731 businesses that sought assistance from AABDC received a grant. And 

more than half of those who received a grant received only $3,000 

in Business Recovery Grant or the Small Firm Attraction and Retention Grant. 

In total, over $3.1 million in grant monies have been awarded to 

347 businesses as the AABDC have assisted. To put this matter in 

perspective, when compared to the Empire State Development Corporation’s preliminary numbers from March 2003, the average 

Business Recovery Grant to Lower Manhattan businesses was 

$33,680 as compared to only $7,829 for Chinatown businesses. And 
181

one Lower Manhattan corporation, American Express, alone received $22 million. 

In conclusion, I wish to reiterate the point I have repeatedly 

raised with anyone who is willing to listen, that to revitalize, and 

maintain, expand Chinatown is money well-spent. Not only is it 

one of the most important economic, social, political centers of Chinese–Americans, but it is also a major tourist attraction in New 

York City. 

But it will require some bold thinking and innovative planning 

to revitalize Chinatown. Short-term and temporary promotional activities will not be enough. And I have in my testimony provided 

some of the solutions I thought that could be help to Chinatown. 

And I thank the committee for giving me this opportunity to testify here today. 

[The statement of Mr. Wang follows:]

PREPARED STATEMENT OF JOHN WANG

Ladies and Gentlemen, I appreciate the opportunity to be invited to testify before 

this committee on how one community, namely Chinatown, fared in the aftermath 

of the September 11th terrorist attacks on the World Trade Center in New York 

City. Tens of billions of dollars appropriated by the Congress were directed into the 

city, to help rebuild its economy, but Chinatown received a negligible amount. 

My name is John Wang. I am President of the Asian American Business Development Center, a 501(c)(3) not-for-profit organization that was established in 1994 in 

New York City with a grant from the Small Business Administration. I set up 

AABDC in Chinatown to assist Asian-owned businesses to build capacity and improve skills in order for them to be able to compete in the mainstream marketplace. 

For 10 years, we have worked hand-in-hand with the businesses in the area. 

Chinatown in New York City is the largest and oldest in the United States. It 

is a community of immigrants since the 1870s, and from 1965 to 1970 the population of Chinatown nearly doubled, rising from around 20,000 to almost 35,000. 

Since then it’s population has increased by 500% to around 180,000 today. By 2001, 

Chinatown had already been a major tourist attraction for decades, and yet it was 

also a community at risk because of increasing isolation from the mainstream economy, outdated business practices and the effects of a deepening economic recession 

that the city was experiencing. 

While you will see (please refer to map) that Chinatown is about a dozen city 

blocks away from the World Trade Center, the impact was immediate—New Yorkers 

stayed at home, tourists stayed away from New York City. No one was going to 

Chinatown. That affected 400 restaurants, 500 retail outlets of various kinds, 200 

street vendors, 300 manufacturers, 250 jewelry stores, just to name some of the 

types of businesses. Chinatown virtually started to close down. 

Yet the government failed to recognize the devastation suffered by 

Chinatown and did not include the community in the ‘major disaster zone’. 

Just to cite a few examples, six months after September 11: 

• the garment industry, a backbone of the Chinatown economy, hit the lowest 

point in its long history with 12% of factories closing (30 in number); over 1,000 garment workers lost their jobs and another 5,000 workers were working only 2 to 3 

days per week. It has since further declined. 

• Restaurants, the other lifeblood of Chinatown’s economy, were reeling from a 

shortage of customers—lack of tourists combined with the loss of spending by garment workers. Despite some promotional activities during the Lunar New Year in 

February 2002, businesses were continuing to decline, showing losses of 20% to 40%. 

• One of Chinatown’s attractions was its abundance of small shops selling items 

at low prices. Walk-in activity and sales had dropped by as much as 50%. 

• Over 250 jewelry stores that lined Canal Street and the Bowery, which competed with the city’s Diamond District on 47th Street in terms of variety and prices, 

saw business drop, despite offering from 20% to 40% discounts to attract customers. 

The SARs crisis took place in early 2003, and it was a double whammy to Chinatown. In April 2003, 18 months after September 11th, AABDC surveyed over 200 

businesses throughout Chinatown including restaurants, jewelry stores, beauty salons, retail establishments, professional offices, and garment manufacturers. Here 

are some findings: 
182

• 97% of the businesses surveyed said that business was down from pre-September 11th levels. • When asked specifically about the impact of SARS, 84% said that their business 

had dropped because of the SARS crisis. • Travel agencies in Chinatown were especially hit hard by the perceived threat 

of SARS, some reported that they were about to go out of business. • As a whole, owners were reporting that business was down by over 30%, with 

many down by 50-60%. • The drop in the number of tourists coming to New York City was one of the 

major reasons for the steep decrease in business • 64% said there were fewer tourists. • 80% said the tourists were spending less. • But most damning of all was that business owners in Chinatown felt they have 

been completely overlooked and ignored since September 11th and more recently 

with the impact of SARS. 

Looking to survive, many businesses applied for government assistance. Yet, according to the 2003 survey: • only some had received loans and/or grants and many did not qualify for assist- ance. • For those who did qualify, most received very little in the amount of grant 

money and even fewer have received loans. • For example, only 20% of businesses surveyed had received any disaster-related 

loans. • These loans came mostly from the Small Business Administration and the me- dian loan amount was $23,000. • 62% had received the WTC Business Recovery Grant (BRG). However, the me- dian grant amount was much lower at $1,896. • Another grant program, the WTC Small Firm Attraction and Retention Grant 

(SFARG), was not widely available. Only 11% of businesses received the SFARG 

with a median grant amount of $7,000. • 99% of those surveyed felt that government was not doing enough to help 

Chinatown. 

It should not be a surprise to any observer of the Lower Manhattan disaster relief 

program to understand how the Chinatown community felt the way it did. Chinatown is a vibrant part of New York City, yet the Chinatown community was not 

invited to participate nor was it given an opportunity to provide input on how the 

programs should be designed to address the needs and provide meaningful assistance to community residents and businesses. Even longstanding problems such as 

garbage, parking and traffic around Chinatown were not addressed. 

With the formation of the Lower Manhattan Development Corporation, no community representative was considered, let alone selected, to sit on the board of 

LMDC and to this very day there is still no representation on the board of LMDC 

for the Chinatown community. 

The result was a community poorly served by programs that were not designed 

with it in mind. Let me give you couple of examples of programs developed by the 

Empire State Development Corporation (New York State’s economic development 

agency and parent agency of LMDC): 

• The main shopping street in Chinatown is Canal Street. Yet, it is baffling that 

a program supposedly to help small businesses, would use Canal Street as a boundary to define that those on the south side of the street were eligible for financial 

assistance and those on the north were not! 

• In a community of immigrants, where there is much transition, landlords were 

notoriously reluctant to give long term leases to tenants, so why is there a program 

which demanded a five-year lease in order to qualify to apply for assistance? 

A short while ago I mentioned two grant programs - the World Trade Center Business Recovery Grant (‘‘BRG’’) and the Small Firm Attraction and Retention Grant 

(‘‘SFARG’’). In June 2003, AABDC undertook a study of these two federal grant programs, based on 731 businesses that had sought assistance from AABDC. The report, ‘‘AABDC Financial Assistance Center: Findings from the Application Process 

for the World Trade Center Business Recovery Grant and Small Firm Attraction 

and Retention Grant Programs,’’ found that: 

• less than half of the 731 businesses that sought assistance received a grant—

46.4% received BRG and 23.1% received SFARG. 

• and more than half of those who received a grant, received only $3,000 in 

BRG and/or SFARG. 

• Because so many businesses that sought assistance were small businesses 

(85.2%) with less than $300,000 in annual gross revenues and less than ten employees (87%), the overwhelming majority (205 out of 339 businesses) received 
183

less than $3,000 in BRG and less than $9,000 in SFARG (25 out of 39 businesses). 

• In total, over $3.1 million in grant monies have been awarded to 347 busi- nesses—$2.7 million in BRG and $463,000 in SFARG. 

• 56.2% of businesses received less than $3,000 in total grant money. • The BRG awards ranged from $100 to $150,000 with the average grant award of $2,195 for businesses with less than $300K in annual gross revenue. 

• Certain types of businesses were more likely than others to receive a grant. 

For example, laundromats (66.7%) were much more likely than car services 

(3.6%) to receive a BRG. Car service, street vendors and laundromats were not 

granted a SFARG. 

To put this into perspective, when compared to the Empire State Development 

Corporation’s preliminary numbers from March 2003: • the average BRG award to Lower Manhattan businesses was $33,680 as com- pared to only $7,829 for Chinatown businesses 

• and one Lower Manhattan corporation, American Express, alone received $22 

million in grant money. 

The report analyzed problems with the two grant programs and offered some recommendations that many business owners believe would help them in receiving the 

financial assistance these programs had intended. I will not go into detail here, as 

I have submitted a copy of the report along with my testimony for the Committee 

to review. 

In conclusion, I wish to reiterate points I have repeatedly raised with anyone who 

is willing to listen, that to revitalize, maintain and expand Chinatown is money well 

spent. Not only is it one of the most important economic, social and political centers 

of Chinese Americans, but it is also a major tourist attraction in New York City. 

But it will require some bold thinking and innovative planning. To revitalize Chinatown, short term and temporary promotional activities will not be enough. What is 

needed are forward-looking strategies and a long-range plan that can bring Chinatown into the 21st century. 

While there is a general consensus that Chinatown will require targeted government and private sector interventions to stimulate its economy and ensure its future 

prospects, there is no commitment from state or city government to undertake a 

comprehensive action. 

As Federal, State and City agencies turn to rebuilding Lower Manhattan, a primary concern should be on finding ways to stop the marginalizing of Chinatown’s 

businesses and reverse its decline. It needs access to the funding, tools and networks needed to be part of New York City and State’s economic recovery and to participate in the 21st century economy. 

Here, as I have done elsewhere, I would propose: 

(1) an economic development strategy for Chinatown needs to be formulated, 

based on a number of comprehensive studies conducted post-9/11 by several community organizations; 

(2) the New York City Department of City Planning, in consultation with the community, should conduct a land use and zoning study to understand how the community’s past development has shaped current land use and analyze the best and most 

appropriate use to promote future economic development; 

(3) a commercial development and investment strategy is needed to maximize 

Chinatown’s strategic location and its links to the worldwide Chinese and Asian 

community where Chinatown, part of a global marketplace, is ideally situated to be 

an international business and trade center. 

This clearly and unmistakably aligns Chinatown’s economic with that of New 

York City and State and failure to take Chinatown into consideration in rebuilding 

Lower Manhattan is at city and state’s own peril. 

I thank the committee for giving me this opportunity to testify today.

35501.034

Background on Asian American Business Development Center 

AABDC is a 501(c)(3) not-for-profit organization that was established in 1994 with 

a grant from the Small Business Administration. AABDC’s mission is to advance 

the capacity of Asian-owned businesses in areas needed to enable such businesses 

to compete in the mainstream marketplace. 

AABDC acts upon its mission by: 

• Providing information and technical assistance through consulting services, 

workshops, seminars, and conferences; 

• Improving access to procurement opportunities; 

• Increasing international trade opportunities; 

• Increasing access to current technology and technology training; 
184

• Providing a valuable networking structure that promotes visibility and access; 

and 

• Facilitating and promoting strategic ventures between Asian and non-Asian 

businesses. 

Major programmatic areas undertaken by AABDC to serve the small business 

community include:

ASIAN BUSINESS PARTNERSHIPS 

In its efforts to assist Asian American businesses to compete in the mainstream 

marketplace, AABDC actively develops alliances and partnerships with public agencies(such as U.S. Small Business Administration and Port Authority of NY & NJ), 

Empire State Development Corporation, NYC Department of Small Business Services and private sectors organizations to provide better access to information, resources and markets.

US-CHINA TRADE RELATIONS 

A key part of AABDC’s strategy is facilitating business opportunities between 

Asian American business owners and firms in Asia and connects firms in Asia with 

corporate decision-makers here in the U.S. To meet that objective, AABDC organizes 

trade delegations to and from Asia and maintains close relationships with Asian officials and business representatives stationed in the United States.

NEW MAJORITY ALLIANCE 

In partnership with the Harlem Business Alliance (HBA) and the Institute for 

Multicultural Business, Inc., AABDC launched a New Majority Initiative providing 

means for Asian American, African American and Hispanic American business owners to build economic alliances with Fortune 500 companies.

Mr. ROGERS. Thank you, Mr. Wang, for your statement. 

The Chair now recognizes Ms. Bettina Damiani? 

Ms. DAMIANI. Damiani. 

Mr. ROGERS. Damiani. 

STATEMENT OF BETTINA DAMIANI, PROJECT DIRECTOR, 

GOOD JOBS NEW YORK 

Ms. DAMIANI. Thank you. 

Good morning, and thank you for inviting me to testify about the 

allocation of federal funds after the September 11, 2001, attacks on 

New York City. My name is Bettina Damiani, and I direct Good 

Jobs New York. 

I am here to discuss how Congress—able to process where subsidies were granted to large companies and luxury housing developers with minimal input from New Yorkers. This was egregious, 

concerning that the brunt of the economic attacks were felt in lowwage industries, such as restaurants, air transport, retail, and garment manufacturing. 

Federal resources did little help ease workers or the heroic cops, 

firefighters and rescue workers we saw on television the following 

weeks after the attack. For instance, Congress removed requirements that public hearings be held and that the majority of funds 

must benefit low-and moderate-income communities. 

New York took full advantage of these waivers by creating a 

process for distributing funds that was not respectful of inclusiveness, transparency or equity. 

ESDC, under the authority of Governor Pataki, and its subsidiary, LMDC, were charged with distributing these funds. The 

boards of these organizations are comprised of corporate executives 

and real estate interests. And LMDC board, charged with allocating over $2 billion in cash grants, didn’t include experts from affordable housing or workforce development. 
185

And aside from one community member, there was no community representation. And as we just heard, Chinatown has been 

completely ignored, as well as the Lower East Side community. 

The limited vision of these boards resulted in the lack of response to those who needed it most, like workers from the famed 

Windows on the World restaurant, located in the World Trade Center. A collaborative effort by some of the workers to open a restaurant called Colors led them to apply for LMDC funds. 

After getting the runaround for years, the group finally opened 

a restaurant in Greenwich village, but without any 9/11 funds. 

They might do fine there, but there is no synergy between them 

and being part of the rebuilding effort. 

It was not surprising, considering the composition of the board 

and the lack of framework and deadline associated with the LMDC 

process. Those with ties to the board members seemingly had much 

better luck. Board members recuse themselves from votes at least 

27 times, as over $100 million went to groups they were associated 

with. 

We have never implied that board members did anything illegal. 

Nevertheless, this large number of recusals is an appearance of favoritism. Additionally, almost every vote was unanimously approved, raising questions about whether the important decisions 

were really being made. 

Maybe if Congress hadn’t waived the income requirements 9/11 

funds would have aided those who truly need assistance to start or 

expand small businesses. Instead, hundreds of millions of dollars in 

cash were handed to some of the biggest names in business, including Bank of New York, Deloitte and Touche, and Goldman Sachs, 

even while high-profile recipients, like American Express and HIP 

Health care stated publicly that their desire to go downtown had 

nothing to do with those grants. 

The lack of public hearings—the LMDC has held one on the allocation of CDBG grants, which was last year—has denied New 

Yorkers a key empowerment tool at a historic moment. The 

LMDC’s decisions to opt for a write-in comment period instead of 

public hearings prevents a more accountable, face-to-face dialogue 

between the public and board members and is a deterrent to broad, 

public participation. 

However, LMDC has made steps towards better transparency 

and fairer allocations by funding improvements in parks in Chinatown and the Lower East Side, and finally last year released a 

framework towards neighborhood groups and promote open space. 

Another lost opportunity was Congress’s design of Liberty Bonds. 

Removing the requirement that 20 percent of the units be for lowand moderate-income tenants shows disregard for New York City’s 

notorious affordable housing crisis. 

I think the majority of Americans would be vexed to learn that 

the rents in 9/11-subsidized studio apartments often start at $2,000 

a month. And a handful of affordable studios start at around 

$1,500 a month. Clearly, the influx of this new residential community is a wealthy one that is being subsidized by federal resources. 

Officials’ response to the affordable housing crisis was $50 million to create 232 units and preserve about 3,000 units. But to put 

this in perspective, the Bank of New York received $40 million 
186

1Fiscal Policy Institute, The Employment Impact of the September 11 World Trade Center 

Attacks: Updated Estimates based on the Benchmarked Employment Data, March 8, 2002. 

cash from the same pot of money after 9/11. We gave cash to a 

bank after 9/11, when small business in Chinatown were struggling 

and people can’t afford to pay their rent. 

Regarding the commercial Liberty Bonds, Congress restricted 

their use to commercial real estate projects, mostly located in the 

Liberty Zone. And outside the zone, projects had to include at least 

100,000 square feet of commercial space. 

This tax-exempt financing tool could have been used to diversify 

our economy by supporting smaller growing businesses. Instead, 

the bonds went to finance high-end office space, such as $1.65 billion in Liberty Bonds for Goldman Sachs downtown and $650 million for Bank of America to locate in one of the most desirable 

blocks in one of the most premier business districts in the world, 

midtown Manhattan. 

The early design of release and recovery programs had a lasting 

impact on the fairness of the rebuilding. In the future, it is critical 

for local groups to be at the decisionmaking table in the early 

stages of program design. This will help to ensure a broad array 

of businesses and individuals do benefit. 

Thank you very much. 

[The statement of Ms. Damiani follows:]

PREPARED STATEMENT OF BETTINA DAMIANI, PROJECT DIRECTOR, GOOD JOBS NEW

YORK

Good morning and thank you for inviting me to testify about the allocation of Federal funds after the September 11, 2001 attacks on New York City. 

My name is Bettina Damiani, and I direct Good Jobs New York, a project of Good 

Jobs First (GJF) and the Fiscal Policy Institute (FPI). FPI focuses on tax, budget, 

economic and related public policy issues in New York State and Good Jobs First 

is a national resource center on accountable development and smart growth for 

working families based here in Washington, DC. 

Shortly after the September 11, 2001 attacks on Lower Manhattan, GJNY 

launched ‘‘Reconstruction Watch’’ to track the resources earmarked for economic development, corporate retention and job creation. GJNY had been created two years 

earlier to monitor economic development incentives in New York City, so we were 

uniquely qualified to help bring transparency to these new resources. 

Reconstruction Watch assists New Yorkers with research and policy analysis on 

the redevelopment of Lower Manhattan. Through our research, website 

(www.reconstructionwatch.net) and publications we provide timely information to 

grassroots groups, small business and civic associations, housing groups, labor 

unions, and environmentalists to help them more effectively participate in this massive process reshaping the rebuilding of our city.

Who Was Impacted by the Attacks 

It was assumed by most Americans and public officials that the economic brunt 

of the harm from the attacks would fall on the Finance, Insurance and Real Estate 

(FIRE) sector due to the location of the attacks at the World Trade Center. Though 

workers across the spectrum faced hardships after 9/11, many of the resulting layoffs were concentrated in low- and moderate-wage industries such as restaurants, 

air transport, hotel, retail, building services and garment manufacturing.1

The economic devastation affected thousands of small businesses in New York 

City, especially those located in Lower Manhattan—below 14th Street—that were 

physically isolated when parts of the area was closed off to traffic for weeks after 

the after the attacks. Within Lower Manhattan, the low-income, immigrant neighborhoods of Chinatown and the Lower East Side suffered severe economic consequences due to their proximity to Ground Zero. Additionally the attacks created 

disruptions that affected the larger city economy and businesses and workers in all 

five boroughs. The garment industry—largely based in Chinatown—was the indus-
187

2 Ibid. 

3 According to a study by researchers at the Fiscal Policy Institute, the higher incidence of 

9/11-induced unemployment and underemployment among workers in low-wage occupations 

meant that household wage earnings fell by double digits in New York City in the six months 

after the attacks. James A. Parrott and Oliver D. Cooke, ‘‘The Economic Impact of 9/11 on New 

York City’s Low-Wage Workers and Households,’’ in Howard Chernick, ed., Resilient City, The 

Economic Impact of 9/11, New York: Russell Sage Foundation, 2005.

try hardest hit by reduced work volume and hundreds of small manufacturers and 

contractors were placed in peril.2

Low-wage workers throughout New York City were also impacted. According to 

an analysis by the Fiscal Policy Institute, 60% of the workers who were likely to 

have been laid off had an average wage of only $11.00 and hour, and over 60% of 

unemployment claims filed in the weeks following September 11, 2001 that were related to the attacks came from residents of the Bronx, Brooklyn, and Queens. 

Queens, home to our city’s two airports saw a staggering decline of jobs and work 

hours.3

Inequitable Resource Distribution 

Despite the harms to low- and moderate-income workers and neighborhoods after 

9/11, a disproportionate amount of rebuilding funds have been allocated to build luxury rental housing and to retain large, profitable corporations, including some that 

admitted they never intended to leave New York or that they planned to return. 

For example: • While Americans praised courageous firefighters, police, and emergency personnel for their rescue efforts, Federal resources that could have provided housing for them and other moderate-income working New Yorkers within Lower 

Manhattan have instead created thousands of luxury rental units. 

• While the Chinatown garment industry was withering, officials doled out cash grants to large firms such as $25 million to American Express and $40 million 

to Bank of New York. Adding salt to the wounds, after receiving the money 

American Express publicly stated that it planned to return to Manhattan even 

without the funds. 

Without a doubt, large firms play a vital role in our city and nation’s economy 

and deserve serious consideration in the rebuilding effort. Any productive planning 

effort would be responsive to the whole spectrum of businesses and community 

needs. Yet after 9/11, Federal rebuilding incentives have grossly favored high-end 

jobs and housing. 

This inequitable distribution of resources was enabled by broad waivers approved 

by Congress that loosened longstanding regulations on how federal development 

funds could be spent. These waivers created a process by which enormous subsidies 

were granted with minimal input from New York taxpayers in an alarmingly unaccountable fashion and gave public officials, notably Governor Pataki, carte blanche 

to provide subsidies to large companies and luxury housing developers. 

Simply stated, economic development programs designed with 9/11 resources 

failed to help those who needed it most because the interests of low- and moderateincome New Yorkers were officially excluded as a required consideration in the programs’ outcome. 

The majority of GJNY’s research and our testimony today focuses on two post-9/

11 funding sources—Community Development Block Grants and Liberty Bonds. Together, these programs accounted for nearly $10.7 billion in rebuilding resources. A 

more extensive list of programs that made up the $20 billion Federal economic development package is located on our website—www.goodjobsny.org. 

We focused on these programs because they were mostly discretionary programs 

(excluding some of the business recovery grants). That is, they provided local officials with choice regarding the recipient and size of the subsidies and required public comment, either written or public testimony, prior the disbursement of funds. 

In my testimony today, I intend to bring to your attention specific policy decisions 

made by Congress regarding the use of CDBG and Liberty Bonds, and to examine 

the consequences of these programs when they were implemented on the local and 

state level with minimal guidelines and oversight. 

Congress and the CDBG Program: What Went Wrong? 

While Good Jobs New York acknowledges that Congress intended to provide New 

York with flexible and streamlined rebuilding programs, it should not have been at 

the expense of public input and the equitable distribution of resources. 
188

4 Available at http://www.goodjobsny.org/recllinks.htm 5 Available at http://www.hud.gov/offices/cpd/communitydevelopment/programs/

6Good Jobs New York, The LMDC—They’re in the Money; We’re in the Dark: A Review of 

The Lower Manhattan Development Corporation’s Use of 9/11 Funds, August 2004. 7 Ibid. 

8 Errol Louis, The 9–11 Black Hole, New York Daily News, July 6, 2004. 

For instance, GJNY has repeatedly and publicly questioned why Congress waived 

the following requirements pertaining to Community Development Block Grants: 4

• The majority of Community Development Block Grant (CDBG) funds must be 

for activities that benefit low—and moderate-income communities; 

• Public hearings must be held prior to the allocation of funds in an effort to 

‘‘empower’’ members of the community. 

The elimination of these particular provisions amounts to an abandonment of legislative responsibility and oversight that suggests indifference to the principles inscribed in the programs’ goals.5

They’re in the Money—The Lower Manhattan Development Corporation 

Indeed, Congress’ decision to remove regulations on the allocation of CDBG funds 

created an environment where funds administered by the Lower Manhattan Development Corporation (LMDC) need not consider public input or equity. 

The LMDC was specifically created by the Empire State Development Corporation 

(the economic development authority directed by Governor Pataki) to implement the 

programs and allocate the cash grants after the attacks and therefore should have 

been respectful of inclusiveness and transparency. Instead, state officials took full 

advantage of the federal waivers by implementing restricted public comment opportunities and allocating a disproportionate amount of funds to prominent firms. 

For most of its existence, the 16-member board of the LMDC—half appointed by 

the mayor and the half by the governor—was composed mostly of large-company executives and real estate interests. The LMDC clearly should be a board that equally 

represents all communities and businesses impacted by the attacks. However, with 

no representatives from Chinatown and the Lower East Side, and no advocates or 

experts from the fields of housing or workforce development, the LMDC proceeded 

to implement the redevelopment plans of the city’s politically-connected elite, particularly in the interest of real estate. 

In fact, LMDC Board members’ companies, organizations, and affiliates benefited 

from the programs so routinely that board members had to recuse themselves from 

voting on projects at least twenty-seven times. Including: 

• Nearly $5 million went to the Downtown Alliance, a businesses organization 

that board member Carl Weisbrod was President of until last July. An additional $9 million went to organizations Mr. Weisbrod had ties with.6

• $3.5 million has gone to the Tribeca Film Festival. Board member Madelyn 

Wils at the time was president and CEO of the Tribeca Film Institute. Approximately another $9 million went to organization Ms. Wils had ties to.7

As we point out in our 2004 study, ‘‘They’re in the Money We’re in the Dark: A 

Review of The Lower Manhattan Development Corporation’s Use of 9/11 Funds’’

board members have not done anything illegal. Board members were careful to 

recuse themselves when proposals submitted by their organizations or by organizations on whose boards they serve were presented. Nevertheless, these recusals gave 

the appearance of favoritism. 

But, the significance of those recusals is diminished when one takes into account 

the context in which they occurred. There was little chance that the recusals would 

have made a difference in the outcome of the votes, given that aside from recusals, 

LMDC board members have unanimously voted to approve all allocation proposals 

that made it to a vote. This raises questions regarding whether proposals were publicly being evaluated on their merits. 

While the composition of the board seemed to help organizations that had ties to 

LMDC board members, those groups representing low-income and unemployed people were left baffled by a lack of clear guidelines and timeframes.8

Even service workers from the World Trade Center were denied an opportunity 

to apply for funds when a collaborative group of employees from Windows on the 

World—the famed restaurant that was located on the top of the World Trade Center 

Tower—submitted an application for $1 million to open a restaurant in Lower Manhattan. 

After getting the runaround for years and delaying the opening of the restaurant—called Colors—the group wound up smaller than they would have been 

and the restaurant is not in Lower Manhattan, where they would have liked to locate. Instead it opened in Greenwich Village, where they may do fine but there’s 
189

9 Edward Wyatt and Joseph P. Fried, Two Years Later, the Money; Downtown Grants Found 

To Favor Investment Field, The New York Times, September 8, 2003. 10 link to outcome report 11LMDC press release, June 16, 2005. 

not the synergy of them helping the rebuilding effort and the rebuilding effort helping them. 

Unfortunately, even a program established to help small businesses—Small Business Recovery Grants—was exploited by savvy firms. A program geared towards 

small businesses conjures up images of the local pizzeria, the cobbler or restaurant. 

Yet, a New York Times report showed that a majority of these grants were allocated 

to wealthy law firms and brokerage houses.9

Ultimately, there were startling consequences to the federal decision to waive the 

requirement that a minimal percentage of CDBG funds be directed toward activities 

that benefit low-income residents. Hundreds of millions of dollars in Community Development Block Grants were handed to some of the biggest names in business, including Bank of New York, Deloitte & Touche, and Goldman Sachs, even while high 

profile recipients such as American Express and HIP Healthcare publicly stated 

that these subsidies had no impact on the decision to move back downtown. Historically, incentives rarely influence site-location decisions for such large firms, but 

these funds could have made an enormous impact for struggling businesses such as 

those in Chinatown.

Waiving Public Participation 

The Congressional waiver allowing CDBG grants to be allocated without a public 

hearing left those wanting to support or protest a proposal with no outlet and denied New Yorkers a key empowerment tool at a historic moment. 

The LMDC decision to opt for a two-week write-in comment period instead of public hearings prevented a more accountable, face-to-face dialog between the public 

and board members and was ultimately a deterrent to broad public participation. 

It’s not as if people weren’t interested. Leading citywide organizations like the Regional Plan Association, Pratt Institute Center for Community and Environmental 

Development and New York University along with LMDC helped sponsor the historic ‘‘Listening to the City’’ public event held in the summer of 2002. This was an 

opportunity for the LMDC to creatively explore rebuilding options based on the 

input of over 5,000 New Yorkers, who overwhelmingly indicated that affordable 

housing and quality jobs were top priorities. While the LMDC cites its financial support for the event in almost every HUD report, it fails to describe how, or if, it plans 

to integrate the comments into its programming. The programs established and recipients of LMDC grants demonstrate that the agency has been largely unresponsive to these demands.10

This is a similar problem with the invitation only workshops the LMDC held 

throughout Lower Manhattan in the summer of 2003. Outcomes of these workshop 

were presented a year after the meetings. And, consistent with the ‘‘Listening to the 

City’’ experience, the LMDC has been largely unresponsive to the housing and employment concerns of lower-income neighborhoods. 

A particular point of contention is the unfilled promise of CDBG grants for affordable housing. Affordable housing has repeatedly ranked high on the list of demands 

for rebuilding. In July of 2003, then HUD Secretary Mel Martinez joined Mayor 

Bloomberg and Governor Pataki to announce $50 million in CDBG funds for affordable housing in Lower Manhattan. 

Then last year, officials ‘‘renewed’’ LMDC’s commitment for affordable housing 

pledging $50 million for the preservation of nearly 3,000 units and the creation of 

at most 232 units.11 A housing study commissioned in September 2002, initially to 

be performed by the Weitzman Group for $700,000 was later transferred to the NYC 

Housing Development Corporation for a reduced cost of $490,000. However, the 

study has never been made public. 

Several other key documents have not been made public, such as other planning, 

budget and financial reports. Without the public having access to completed studies, 

there is no ability to monitor the findings of the reports or to determine how they 

are being used to guide the ongoing distribution of resources. 

While far from being equitable, the LMDC has made steps towards better transparency and fairer allocation of resources. 

• Two years ago, the public comment period was extended from two weeks to 

one month; 

• LMDC has funded improvements to parks in Chinatown and the Lower East 

Side; 

• A public hearing was held in the spring of 2005; 
190

12Over $3 billion of Liberty Bonds has been reserved for the World Trade Center site. 13Matthew Schuerman and Tom McGeveran, The View From 7: As Tower Tops, Goldman 

Sacks, New York Observer, April 11, 2005. 14 Additional details at http://www.goodjobsny.org/GSlnews.htm 15Details of the Bank of New York subsidy are available on GJNY database of deals, http:/

/www.goodjobsny.org/deals.htm

• Last year the LMDC released a framework and deadlines for the allocation 

of the remaining $800,000 in funds available at the time to assist cultural institutions and to promote open space, including a major project along the East 

River. Currently, there is an estimated $225,000 remaining; 

• From its inception the LMDC has posted copies of board minutes and the 

board meeting schedule on its site as well as copies of reports to the US Department of Housing and Urban Renewal.

Congress and Liberty Bonds: What Went Wrong? 

Tax-exempt bonds are often an invaluable resource for a wide range of businesses 

that require government assistance to finance capital projects, such as mass transit. 

However, it would not be an understatement to say that the allocation of $8 billion 

in Private Activity Bonds—aka Liberty Bonds—has greatly benefited the real estate 

industry at the expense of low and moderate-income New Yorkers. 

Split between residential and commercial, the Congressional design of the Liberty 

Bond program all but ensured that the bonds would exclusively subsidize large real 

estate projects while neglecting the affordable housing crisis in New York City and 

the capital needs of industrial businesses and small commercial developments outside Lower Manhattan. 

As explained below, the vast majority of Liberty Bonds were used to finance highend office space and luxury housing.

Liberty Bonds: Commercial Use 

• Congress restricted the use of Liberty Bonds to commercial real estate 

projects mostly located in the Liberty Zone; 

• For the $2 billion in bonds that could be used outside the Liberty Zone, 

projects must include at least 100,000 square feet commercial space. 

While this tax-exempt financing tool could have served to diversify the New York 

City economy by supporting smaller, growing businesses, all of the commercial Liberty Bonds were used to finance high-end office space and to a lesser extent, hotels. 

It is understandable that after the attacks, efforts to promote building—in a brick 

and mortar sense—would be pushed. Construction jobs in New York City, especially 

in Lower Manhattan are good paying union jobs. However, this alone does not justify the unnecessary use of the bonds to finance Class-A office developments in the 

most desirable office markets in the world. 

For example, why did officials approve $650 million in Liberty Bonds for Bank 

of America in midtown Manhattan over Chinatown? If bonds were allocated based 

on need, and more businesses were eligible, a broader group of firms might have 

benefited. 

To date the largest allocation of Liberty Bonds was for $1.65 billion issued for 

Goldman Sachs to remain downtown, where the company has been located for 136 

years.12 A Goldman spokesperson had said that the company would only look to 

build its new headquarters in Manhattan 13—leaving open the possibility of a move 

to midtown—after the firm expressed legitimate security concerns related to a proposed tunnel under the potential site of its building. 

Clearly, Goldman with profits of $10.10 billion last quarter wasn’t hinging its 

headquarters bets on cheap financing. What it lacked—and needed to make a sound 

location decision—was a clear understanding of the rebuilding process from public 

officials. Not until Goldman considered a move to midtown did the Governor address 

the firms’ valid security concerns of a proposed tunnel near where the firm wanted 

to build. After announcing a tunnel would not be built, Goldman received a consolation prize—an increase of $650 million from the originally proposed $1 billion in 

Liberty Bonds for a total of $1.65 billion, $25 million in CDBG funds and up to $150 

million in tax breaks.14

GJNY did approve of $114 million in Liberty Bonds for the developer Forest City 

Ratner to develop a commercial office tower in Brooklyn that now houses Bank of 

New York. We felt that the percentage of Liberty Bonds that could be allocated outside of Lower Manhattan fit purposes like these—helping to create environments for 

businesses in other areas of New York City to help limit firms from leave the city 

immediately after 9/11.15

Liberty Bonds-Residential Use 
191

16Liberty Bond Housing Coalition statement: http://www.goodjobsny.org/reclsignlon.htm. 17 According to the 2000 U.S. Census. 18Liberty Bond Housing Coalition statement: http://www.goodjobsny.org/reclsignlon.htm. 19David Dunlap, Liberty Bonds’ Yield: a New Downtown, The New York Times, May 30, 2004. 20 New York City Housing Development Corporation press release, July 17, 2003.

• Normally, Federal government requires housing projects financed with federally tax-exempt bonds to set aside 20 percent of the units for affordable housing—this was waived for Liberty Bonds. 

The vast majority of housing units built with Liberty Bonds are market rate and 

unaffordable to New Yorkers. Nearly all of the units rent at market rates ranging 

from studios for $2,062 per month to three-bedrooms for $6,267 per month. Many 

of the projects will set aside only 5% of the units in each building for non-market 

rates. While non-market, these units are targeted to households that earn approximately $94,200 per year for a family of four with rents ranging from $1,649/month 

for a studio to $2,449/month for a three-bedroom.16

These apartments are out of reach to the vast majority of New Yorkers whose median household income is $38,293.17 This includes New York City police officers, 

firefighters and teachers. 

The small non-market rent set-aside and the high income requirement make these 

proposals a major departure from the long-standing ‘‘80/20’’ affordable housing program of the New York State Housing Finance Agency (NYSHFA), the agency that 

allocated Gov. Pataki’s portion of the Liberty Bonds. The 80/20 program, which 

meets the Federal Tax Code requirements for housing financed with federally taxexempt bonds, sets 20% of the units aside for households making at most, half the 

NYC Area Median Income. In contrast, the Liberty Bond Program sets aside units 

for households earning 50% more than the New York City Area Median Income.18

With skyrocketing rents, Lower Manhattan has become the most desirable place 

to live in New York City, though unaffordable.19 In fact, the approximately 350 

units set aside for moderate income are mostly studios and one-bedrooms. 

The New York City Housing Development Corporation (HDC) didn’t set aside the 

5% non-market rate units the state did in its allocation. Instead, HDC charged a 

3% developers fee on the bond application that would then be used for developing 

affordable housing in other areas of the city. 

While Mayor Bloomberg certainly deserves credit for thinking outside the box and 

generating new revenues for affordable housing, it is unfair to relegate low and 

moderate-income New Yorkers to the periphery of our city.20 Catering to developers 

and landlords by creating only luxury housing with Liberty Bonds has exacerbated 

the gentrification pressures on Chinatown and the Lower East Side. 

The Byzantine Process of Liberty Bond Allocation 

The complexity of allocating Liberty Bonds via four different authorities (described in the chart) diluted the public’s ability to participate. Fortunately, the 1986 

Tax Equity and Fiscal Responsibility Act (TEFRA) requires a hearing prior to the 

allocation of private activity bonds. Therefore, the IDA, LDC, HDC, and HFA did 

hold hearings. However, each differed in its public hearing announcement procedure, access to materials prior to hearings, and final voting by board members. 

Tracking these disparate hearings and procedures was a Kafkaesque. Public hearing notices were posted in different publications; places, dates and times of hearings 

and board meetings varied. 

To its credit, the LMDC does have regular board meetings and provides details 

of proposed expenditures but it does not have a public hearing process. Instead, the 

agency held invitation-only workshops and just one public hearing last spring. 

Even those authorities with intact public hearing processes don’t equal a democratic decision making process: 

• In March, 2003, the New York State Housing Finance Agency refused to provide GJNY copies of materials prior to a hearing on the allocation Liberty 

Bonds. The result was our research analyst hand-copying the materials while 

being closely watched by an HFA staff member. 

• In May, 2003, public testimony was given by several groups at the New York 

City Housing Development Corporation regarding the allocation of Liberty 

Bonds to build a luxury apartment. Board members approved the project having 

never witnessed the testimony—since they don’t attend the hearings—and having never even been given copies of the testimony.
192

21Governor Pataki press release, July 29, 2004. 

Disaster Relief Funds and UI Funds 

Though not under the appropriation of CDBG or Liberty Bonds, it would be remiss to exclude the very serious problems with which funds were allocated to displaced workers. Mimicking the irrational ‘‘Liberty Zone’’ for businesses recovery 

funds, only workers living in Manhattan had access to mortgage and rental assistance programs. Again, the workers in the remaining four boroughs, where left to 

fend for themselves. The baggage handler in Kew Gardens had no recourse since 

his or her place of employment was in Queens. 

For an economy the size of New York City, many workers make a living in the 

cash economy—waiting tables, working part-time or as consultants. All these workers fell through the safety net that is unemployment insurance.

Lessons Learned: There’s Still Hope 

In New York, there were very positive lessons—such as the extraordinary rescue, 

recovery, and cleanup effort after the collapse of the buildings. In the years following the attacks, community members came together eager to participate in the 

rebuilding with their neighbors. Yet, there were negative lessons, such as the vast 

waste of resources in tax breaks and corporate retention deals. 

There are also very big decisions that years later are still far from settled. The 

early design of relief and recovery programs had a lasting impact on the fairness 

of the rebuilding effort. Structures and systems were ‘‘cast in stone’’ that should 

have promoted broad civic participation in the rebuilding process, but instead made 

the process very undemocratic. In the future, it is critical for Congress to consult 

a broad coalition of local groups in the early stages of program design, so that 

groups representing an array of business and individual needs can be an active part 

of the process. 

Despite the skewed allocation of cash grants, there is still an opportunity to use 

9/11 to create a dynamic and inclusive Lower Manhattan. There are approximately 

$2 billion of unused tax credits available to New York. New York City was promised 

these funds and they should be allocated as soon as possible.21

Governor George Pataki and other public officials continue to push for a $6 billion 

rail link that would improve job access for Long Island residents while the City’s 

unemployment rate remains high. This costly rail link proposal, possibly funded 

with 9/11 rebuilding resources, has ranked behind local transportation needs when 

Lower Manhattan residents have been asked for their rebuilding priorities, even at 

LMDC- sponsored events. 

This would not be a bad idea in the future, but not yet. Chinatown residents still 

struggle with infrastructure needs, not to mention the clogged artery of Canal 

Street, a major thoroughfare for Lower Manhattan.

Mr. ROGERS. Thank you, Ms. Damiani. I failed to introduce you 

as the Project Director for Good Jobs New York. 

We are going to have a round of questions now. And I would like 

to start first with Mr. Wang. 

You made reference in your written statement to some proposals 

that you would suggest to remedy these concerns in the future. The 

first one is that an economic development strategy for Chinatown 

needs to be formulated based on a number of comprehensive studies conducted post–9/11. 

Would that economic strategy come out of the Lower Manhattan 

Development office? Or where would that come from, in your view? 

Mr. WANG. Well, I think, working with LMDC and the ESD, then 

I think that the community together can put—also with the city of 

New York, we can formulate an economic development strategy to 

help to revitalize the community. And there are a number of different proposals that have been submitted to LMDC. And so, of 

course—

Mr. ROGERS. And how have those been responded to? 
193

Mr. WANG. Well, I think that this so far has not been the comprehensive kind of approach to how to revitalize the community. I 

think, certainly, recognizing ESD and LMDC have been doing, you 

know, different kind of work, cleaning up Chinatown and addressing some of the traffic issues. 

But then the whole issue, I guess, is, how do we make sure that 

communities that have long been standing, over 100 years, in the 

city, that can be revitalized and continue to contribute? 

Mr. ROGERS. What I am looking for, and what this Subcommittee 

has been working on is, to take lessons from what happened post9/11—to put in place good policy in the future to make sure that 

we don’t have the same missteps in the future, post-disaster. And 

I hope there is never another one in New York City, but wherever 

it happens. 

So I guess what I am looking for from you is some policy guidelines that we could embrace. 

Mr. WANG. I think what is important is to have the community 

representative involved in the LMDC or ESD, in the policymaking 

decision—

Mr. ROGERS. Ms. Mildenberger, do you know of any criteria that 

were followed to ensure that there was representation, more broad 

representation, on groups that you helped form? 

Ms. MILDENBERGER. Absolutely. In fact, what we did with the 

small business programs was we had several people who spoke different languages, many dialects of Chinese. We also communicated 

the programs in the local papers in Chinese. 

And another thing that we did was we provided technical assistance. And of 22 firms that helped us provide technical assistance, 

we made sure we selected five competent firms that helped with 

specifically only businesses in Chinatown. 

Mr. ROGERS. Well, my question is though, the Lower Manhattan 

Development Corporation doesn’t have apparently this representation on their board, and they answer to you, don’t they? 

Mr. Pryor? 

Mr. PRYOR. Yes, if I may. Thank you, Mr. Chairman. 

In fact, there are a number of mechanisms through which Chinatown has been very deliberately and specifically involved in our 

process. Starting with we had?despite some testimony that was 

made earlier, we have had over 200 public meetings, including public meetings, forums where there was extensive input taken in 

Chinatown, right in the neighborhood. 

We have a standing working group, an advisory group, of our 

agency which includes a wide range of Chinatown organizations 

and individuals. It meets on a very frequent basis. 

And what they have informed, Mr. Chairman, is a whole series of initiatives, totaling $170 million for improvements in Chinatown. 

Mr. ROGERS. But you don’t have any Asian–Americans on your 

board? 

Mr. PRYOR. No. 

Mr. ROGERS. I do want to?before my time runs out, I want to 

visit another topic with Ms. Mildenberger. 

And you made reference to this in your opening statement. The 

HUD OIG found that ESDC did not have systems in place to prevent the disbursement of Business Recovery Grants to companies 
194

that received disaster loans for the same purposes from the Small 

Business Administration, which was in violation of the Stafford 

Act. 

According to an analysis of data obtained by this Subcommittee, 

as many as 2,390 Business Recovery Grants were issued to 1,229 

businesses that also received a total of 1,489 disaster loans for the 

same purposes from the SBA. 

My question is: what adjustments did ESDC make to the Business Recovery Grant program, when this kind of duplication was 

brought to its attention? 

Ms. MILDENBERGER. Absolutely. Thank you for raising that point. 

When it came to ESD’s—when we became aware of the Stafford 

Act violation, what we did was we worked hand-in-hand with HUD, 

and we worked hand-in-hand with SBA. 

Any applicant who received both BRG funds from ESD and received an SBA loan, what we did was we made sure that we went 

back and had the applicant testify, pretty much fill out an application, which listed their economic damage. 

What we then had to do was to make sure that the damage exceeded any monies that they received from insurance proceeds, 

from Empire State Development proceeds, and from SBA loan proceeds. So there was the ability for recipients to receive both an 

SBA loan and a recovery grant—

Mr. ROGERS. And then did it, in fact, happen extensively? 

Ms. MILDENBERGER. Absolutely, it happened. And it happened 

because the economic loss suffered by those applicants was far exceeded by any assistance that was given under the federal programs. 

In a handful of cases, if federal funds were given over the economic loss, we recovered those funds. 

Mr. ROGERS. And my last question: what recommendation would 

you make to better prevent duplicative payments in the future? 

Ms. MILDENBERGER. I think that is a very, very question. And I 

think we work hand-in-hand with HUD. We were running from 

September 12th on to try and formulate programs. Communication, 

as Member Meek had said earlier, is the key. 

We run a state agency. We weren’t familiar with every federal 

program, vice versa with HUD. When we then got talking with 

SBA, with HUD, we had a very good communication and just making each other aware of different potential red flags would make 

the businesses receive money in a more efficient way, with less 

hassle. 

So I think keep that door of communication open between federal, state and city is hugely important. 

Mr. ROGERS. Thank you very much. My time is expired. 

The Chair now recognizes the Ranking Member, Mr. Meek, for 

any questions he may have. 

Mr. MEEK. Thank you so very much, Mr. Chairman. 

And I want to thank the panel for coming before us. 

Yesterday, we had the response. And today, in our first round is 

recovery. And later on, it will be about—well, now it is about rebuilding. 

And I think that what we have here is a situation—and it usually happens in these instances—‘‘underserved communities’’ or 
195

business communities are left behind. Meanwhile, the individuals 

that were prepared financially to be a part of the decisionmaking, 

and knew who to call, and know how to get on certain boards or 

access got there. 

I would just say, as more of constructive from what I have 

heard?because we will not get to the bottom of the issues between 

the left and the right side of the table here today. But I can say 

that the access and having folks sit on the board is very, very important. 

Mr. Pryor, how many folks do you have on your board, sir? 

Mr. PRYOR. We have 12 members of our board. 

Mr. MEEK. Okay. So it is like what you may consider a diverse 

board, based on the area of interests? 

Mr. PRYOR. Yes, it is a diverse board. 

Mr. MEEK. When you say that, what is the diversity? 

Mr. PRYOR. There are representatives that would be inclusive of 

multiple sectors, inclusive of the business sector, the community 

board, which is the local-most representative body of residents in 

the immediate vicinity of Ground Zero. We have a representative 

of labor, of the building trades unions. 

We have representatives of other kind of leading citizens from 

the private and public sector. And we have government representatives, as well. 

In response to the chairman’s question earlier, I should have 

stated that a point in time we did have an Asian–American member of our board. She happens to have left the board for professional pursuits. But I think it is quite important to note that, beyond our board, there are many mechanisms through which our 

agency has reached out to the community and consulted in the 

course of our decisionmaking. 

Mr. MEEK. I just want to—as someone who has been around this 

for a little while and heard similar discussions of folks feeling left 

behind. And Mr. Wang made some very strong comments in his not 

only printed statement, but also verbal. 

And I think it is important for future programs and for us to be 

able to put federal dollars out there, taxpayers’ dollars. And obviously it is a local New York scene, also, as it relates to accountability and fair play. 

It is very, very important, because that is the reason why we are 

going through this process, so that we can learn from past mistakes. 

One other issue—I am trying to remember. I don’t want to say 

Good Jobs New York or what have you. I will call you by your first 

name. 

Ms. DAMIANI. It is Bettina Damiani. 

Mr. MEEK. That is correct. I just want to make sure for the 

record that, when it is printed, that they will know who I am talking to. 

You mentioned something as it relates to not only the Ground 

Zero area, but small businesses that have been trying to penetrate, 

‘‘the bureaucracy’’ or the agencies that are actually giving the dollars. I am pretty sure you were here for the discussion on the 

STAR program and a number of programs that are out there. 
196

And I know that it turns the stomach of those that are trying, 

that are there, that would like to take advantage of the opportunities. The opportunities are still there. It is not something that, 

even though it was 5 years ago, it is still there, as it relates to 

small businesses being able to hopefully take advantage of these 

two entities that are there and other agencies that are out there. 

What are you finding now, in the people that you are representing? What are you finding now is the biggest impediment of 

them being able to access these dollars? 

Ms. DAMIANI. The two funding sources that we follow most closely were Liberty Bonds and the Community Development Block 

Grants. There are pretty much no more Liberty Bonds available. 

They have all been allocated. 

The residential bonds went relatively quickly, compared to the 

commercial bonds, which, depending on what is happening at the 

World Trade Center site, you can pretty much say have all been 

allocated. 

Access is the different—many, many different authorities that 

are allocating these funds. While the LMDC was very much dominant around the cash grants, it is like alphabet soup. It is the IDA, 

the EDC, the LDC, you know, the HDC, the HFA, each having a 

completely different process in which to provide public participation 

and to apply for these funds. 

So unless you are already very well-versed in how to access these 

kind of resources, there wasn’t a really great opportunity to encourage an entrepreneurial spirit, so to speak, to get people that might 

have the desire to participate in the rebuilding, to become more involved. It was a very burdensome process. 

Mr. MEEK. I still feel that maybe I don’t know all I need to know 

because I am not there on the ground. There are opportunities that 

are still ongoing that would be able to assist businesses if they 

needed, am I correct? 

Ms. DAMIANI. There are some. And I think the ESDC and LMDC 

can be more detailed about that. There is some money going on directly in the areas I mentioned on the Lower East Side currently. 

And there is some money that is still being given out just recently. There was money given out to a large firm in Lower Manhattan. 

Mr. MEEK. If I may, Mr. Chairman, Mr. Wang, I wanted to ask 

you, sir, ongoing. If you had to leave this hearing here today and 

you came to report, but if you had—if you wanted to take a very 

takeaways back, especially having the representatives from organizations that can be a part of the solution of your, obviously, constituency or membership or what have you, what will be—you are 

asked today to be able to resolve some of the ongoing issues? 

Obviously, Mr. Pryor, in a very confident way said that they have 

tried to reach out, that they have advisory committees, that there 

was an Asian–American on the board at one time. That person has 

now left to pursue other opportunities. 

What will be those takeaways? Because I think that this is educational for us, but sometimes we have these hearings, and things 

are said, and in many cases resolved, if can be resolved. Obviously, 

this is something that takes place in New York. Now it is an issue 

that has been brought to the table here in the capital. 
197

What are two of the things that you think that will help the 

businesses? Because there is a fast death, as it relates to businesses closing, and a slow one. And I believe you probably still 

have some membership in the Chinatown community. 

Mr. WANG. Well, one thing, as Mr. Chairman pointed out, I think 

it is important to have a representative from the community to sit 

on the LMDC board, because you are at the table, you are able to 

contribute, and you are able to have input, and you are able to help 

them make a decision. 

And second, I think as a couple of days ago, Mr. Pryor and I, we 

had a discussion in terms of how to help the businesses locally, because in the Lower Manhattan in the next 10 years there is about 

$50 billion investment in rebuilding of the Lower Manhattan. 

And then I suggest to him that perhaps we can have a ‘‘Buy from 

Chinatown’’ program, and that every contractor that gets a contractor in rebuilding Lower Manhattan—for every dollar they 

spend, spend, you know, a cent in buying goods and services from 

Chinatown. That can do tremendous good in helping to revitalize 

the community’s business. 

Mr. MEEK. Thank you very much. 

Mr. Chairman, I think that efforts are all efforts of good will. 

And I know that, as we start moving towards closing the books on 

our report, that hopefully it will help us in the future. 

I go back to, again—and I have said in the two previous hearings 

that it is important—and especially for Chairman King—that we, 

especially from someone like myself from South Florida that goes 

through these hurricanes constantly and we are in this mode of recovery, and assistance, and we will rebuild. 

And you have sisters, women of the storm in New Orleans. You 

have all of these groups that kind of come together. 

State, federal and local governments invest dollars into these entities to continue the spirit of rebuilding and recovery. But it is important that we give them some sort of direction. I think our role 

is to make sure that everyone can be in the same fish tank and 

not gobbled up, a big fish gobbling the so-called small fish. 

And they don’t have the opportunity to have representation. I 

know that we believe, when we pass things here in the Congress, 

that there is goodwill a broad application will prevail, and sometimes, in some cases, it doesn’t. 

And that is one of the great debates we are having now, as it relates to the reauthorization of the Voting Rights Act, making sure 

that those that need protection, historically, get that protection 

until we get to a point that we know that we live in an environment and a world where goodwill will prevail without the parameters. 

We are not there yet, and it is not just talking about what is 

happening in New York, but it is what is happening in the country. 

So I look forward again, and I want to thank you all for coming 

before us today. 

Mr. ROGERS. I thank the gentleman. 

The Chair now recognizes the Chairman of the Full Committee, 

Mr. King, for his questions. 

Mr. KING. Thank you, Chairman Rogers. 
198

And let me commend you and the Ranking Member for the extraordinary progress you have made over the last day, in learning 

to walk through the minefield of New York’s ethnic names. You are 

really making a lot of progress. And I knew a million Damianis 

growing up, but I guess you guys didn’t. 

As I said before, I will restrict my questions to Mr. Wang and 

Ms. Damiani. 

Obviously, after September 11th, one of the intentions was to 

keep political pressures away from the distribution of funds and 

the decisions being made. I am wondering, though, if we are planning for the future, should there, in fact, maybe be some more political involvement? 

For instance, most of the area affected by September 11th is represented by the Speaker of the New York State Assembly. I am 

wondering, for instance, what impact or input he had into this—

whether you could go to him during this time? 

The community boards, how much of a role do they play? And do 

you think they should have a larger role, or will that just make it 

more confusing to have local politicians—should there be this set 

aside, in effect, between local politics and the board? Or do you 

think it would be better to have more local input? 

And I will just ask Mr. Wang and Ms. Damiani. 

Mr. WANG. Well, of course, as to the speaker’s role, I think the 

probably speaker can better answer. I am sure that in his office he 

has certainly spent quite a bit of time in helping the community. 

And I think that certainly the political process—you know, elected representative of the community certainly is important. And obviously the councilman has also been involved—he is the chair of 

the Lower Manhattan Development Committee and the city council. 

But the question also, I think, you know, is important and I keep 

coming back to is the community needs to have a voice at the table, 

so that the need and the problem can be heard. And then the program can be developed to address the specific needs of the community. 

Mr. KING. Ms. Damiani? 

Ms. DAMIANI. I think it is sort of a double-edged sword. Yes, 

there should be more representation on the board where people can 

be held accountable, and often that is elected officials. People get 

to vote them in or vote them out. 

So it would have been, in certain instances, very helpful to have 

some elected officials that represent the area on the board. 

Councilmember Gerson, who represents the area, is not on the 

LMDC board. 

There are three community boards that represent the area, Community Board One, Two and Three. The one representative is from 

Community Board One, which represents Tribeca, with an average 

household income of over $110,000 a year. Community Boards Two 

and Three are less and around $30,000 a year. 

So, yes, I think having representatives from Community Board 

Two and Three would have helped to balance the scales a little bit, 

and also having elected officials that represent the area would have 

helped bring some more accountability. 
199

Mr. KING. Now, having the Speaker of the Assembly representing 

the area, was he able to provide any assistance to you? Like, when 

you had individual issues, did you go to him? 

Mr. WANG. Yes, certainly, I think the speaker recently?most recently, I think, helped to the Empire Zone, which is one of the new 

ESDC programs in New York State. To designate Chinatown as an 

Empire Zone, and we are certainly anticipating that program to 

take affect, and then there is some of the benefits that can help the 

community to recover, revitalize. 

And, you know, Speaker Silver, I think, in many instances he 

has been representing the community for a long time, and he has 

oftentimes spoke out on behalf of the community. 

Mr. KING. I have no further questions. 

Mr. ROGERS. As I told the earlier panel, I want to thank you for 

your time and commitment for being here. Your written statements 

are very helpful to us, and your cooperation with our staff in interviews has been very helpful in this process. 

We will have, I am sure, written questions submitted to you posthearing. We are going to leave the record open for 10 days. And 

if you all are provided with questions, I would ask that you respond 

to those in writing within that 10 days so that we can have the 

benefit of that as we continue to work toward this report. 

And with that, we thank you for your attendance. And we are 

in adjournment. 

[Whereupon, at 12:15 p.m., the subcommittee was adjourned.] 

(201)

LESSONS LEARNED IN PREVENTING WASTE, 

FRAUD, ABUSE, AND MISMANAGEMENT 

PART III 

Thursday, July 13, 2006

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON HOMELAND SECURITY, SUBCOMMITTEE ON MANAGEMENT, INTEGRATION AND OVERSIGHT, Washington, DC. 

The subcommittee met, pursuant to call, at 2:12 p.m., in Room 

311, Cannon House Office Building, Hon. Mike Rogers [chairman 

of the subcommittee] presiding. 

Present: Representatives Rogers, King, Meek and Pascrell. 

Mr. ROGERS. [Presiding.] The Committee on Homeland Security’s 

Subcommittee on Management, Integration and Oversight will 

come to order. 

This afternoon, we are holding our final hearing to examine the 

status and use of approximately $20 billion in Federal aid provided 

to New York City after September 11. This hearing will look ahead 

at what fraud controls are in place for the use of Federal 9/11 assistance to help rebuild the infrastructure in Lower Manhattan. 

In the interest of time, the Ranking Member and I have agreed 

to forego opening statements. And also because we are going to be 

called for a series of votes in the not-too-distant future, we have 

agreed to combine the two panels into one panel, and then we will 

allow two rounds of questions for the Members. 

We want to welcome our witnesses and thank you for taking the 

time to be here with us today in your busy schedules. 

Before we begin, I would like to ask unanimous consent that a 

written statement from the Honorable Thomas McCormack, Chairman of the New York City Business Integrity Commission, be included in the record. Without objection, so ordered.
202

[The statement of Mr. McCormack follows:]

FOR THE RECORD

SUBMITTED BY HON. MIKE ROGERS

PREPARED STATEMENT OF THOMAS MCCORMACK, CHAIR OF THE BUSINESS INTEGRITY

COMMISSION OF THE CITY OF NEW YORK

THURSDAY, JULY 13, 2006 

Good morning Subcommittee Chair Rogers, Committee Chair King, and members 

of the Subcommittee on Management, Integration, and Oversight of the House Committee on Homeland Security. Thank you for the opportunity to testify concerning 

the role of the New York City Business Integrity Commission (‘‘BIC’’) in the detection, prevention and control of fraud during the World Trade Center disaster in New 

York City on and after September 11, 2001. I will begin with a broad overview of 

what BIC is and what it does. 

In November 2001, a New York City charter revision measure created a new commission to incorporate into one City agency the then-separate functions of the 

former New York City Trade Waste Commission, the former Gambling Control Commission, and the regulation of public wholesale food markets in the City of New 

York. Each of these separate initiatives had been in existence before this new charter agency, the Business Integrity Commission, was created to consolidate them. 

BIC is both a law enforcement and regulatory agency. It provides oversight of the 

private waste carting industry, public wholesale food markets, and shipboard gambling, which, currently, is an inactive industry in New York City. New York City 

law requires a license or registration for a company or individual to operate a business in any of these industries. BIC investigates the backgrounds of applicants for 

these licenses or registrations before making determinations to grant or deny the 

applications. Our statute requires that applicants for licenses or registrations possess good character, honesty and integrity, in order to receive permission to operate 

in the City. 

BIC’s mission is to eliminate the influence of organized crime and other forms of 

criminality and corruption from the industries it regulates. BIC achieves this mandate in three ways: background investigation, criminal investigation, and regulatory 

enforcement. BIC’s professional staff consists of a squad of New York City Police 

Department (‘‘NYPD’’) detectives detached to BIC by the NYPD Organized Crime 

Investigation Division (‘‘OCID’’), attorneys, investigators, and forensic auditors. 

BIC’s investigative and legal staff routinely works closely with all City, State and 

Federal law enforcement agencies and prosecutors to conduct criminal investigations, and to gather information essential to the vetting of applications for licenses 

and registrations. 

BIC’s predecessor agency was the Trade Waste Commission (‘‘TWC’’), which I 

mentioned earlier. Created by New York City Local Law 42 of 1996, TWC’s specific 

mission was to eliminate the control of organized crime over the private carting industry in the City of New York. Major prosecutions of private carters, most notably 

a 1996 prosecution by the District Attorney of New York County, had found that 

an organized crime-controlled cartel had dominated the carting industry for several 

decades. This cartel restricted competition, controlled prices and allocated the commercial customers of private carters into specific geographic areas where the carters 

were designated to operate. When carters sought to obtain customers outside their 

assigned areas, the cartel, which functioned as a group of trade associations, resolved disputes among carters and required ‘‘compensation payments’’ from certain 

carters who took other carters customers, with a percentage of the money flowing 

back to the organized crime families that controlled the specific areas in which the 

carters were permitted to operate. Since its inception, the commission has granted 

hundreds of carting licenses and registrations to applicants after fully investigating 

and vetting their backgrounds. These licensees and registrants now compete for the 

accounts of commercial waste customers in the City of New York. 

As law enforcement officers, many members of TWC were drawn immediately into 

the City’s response to the catastrophe at the World Trade Center on September 11, 

2001. Many TWC members participated in the search and recovery efforts at the 

place that quickly came to be known as Ground Zero, as soon as that undertaking 

began. It became clear that, as the agency that regulated private carters—an industry whose services were critical to the clean-up of the area—TWC would have three 

roles in the restoration of the site. 
203

These three roles were: 1) the coordination of the movement of private carters at 

Ground Zero to cart away debris, as well as the oversight of other carters providing 

general private sanitation to businesses in Lower Manhattan as a whole, during a 

period in which the area was subject to the highest security measures in its history; 

2) the formulation of a long-term plan for debris haulage by qualified carters at the 

site; 3) the conduct of criminal and administrative investigations into the activities 

of private carters associated with the clean-up project. 

First, regarding the effort to coordinate carters’ movements, shortly after the collapse of the World Trade Center, private carting companies in the Greater Metropolitan area began offering their services to assist in the efforts to remove debris 

from the site. As you know, this job was unprecedented in its scope and challenge. 

The City established a command center in a building that sits on a pier in Midtown 

Manhattan, and, each of the City, State and Federal agencies that participated in 

the search, recovery and clean-up operations functioned in that location. TWC temporarily relocated its office to this command center. In fact, TWC’s actual office, 

which was located just across the street from New York’s City Hall, was closed for 

many weeks after the fall of the World Trade Center, because it stood in an area 

that had been impacted by the collapse. 

From this command center, TWC worked around the clock with a host of government agencies, like the NYPD, New York State Police, the Federal Bureau of Investigation (‘‘FBI’’), the New York City Department of Investigation (‘‘DOI’’), the Federal Emergency Management Agency (FEMA), and the National Guard, to coordinate the movements of carters in the highly-secure Ground Zero and adjoining areas 

in which they had to work. There were checkpoints and security clearances, and moment-to-moment interfacing with law enforcement and military personnel on the 

streets to ensure that these critical carting operations moved along smoothly, but 

always in strict compliance with security requirements. This coordination continued 

for the duration of the clean-up initiative. 

With respect to the requirement for a long-term plan for debris haulage, TWC’s 

role as regulator of the private carting industry was to ensure that the companies 

participating in the clean-up would meet our statutory requirement to possess good 

character, honesty and integrity. A good number of the carters who hauled debris 

from Ground Zero began the work as volunteers on the site in the hours after the 

collapse. Many had come to the scene of the disaster with their trucks from cities 

and towns in the Greater Metropolitan area where, obviously, they had not needed 

a New York City license to operate. Thus, they had not been vetted by TWC. Given 

the fact that their participation in the World Trade Center clean-up placed them 

in the City of New York, TWC’s task was to identify carters who had not applied 

for TWC licenses or registrations, notify them to apply, and vet them. In an effort 

to preclude disruptions to the vital clean-up operation, we granted temporary permission to operate to each unlicensed carter who submitted an application to us, 

while we investigated their backgrounds. 

And then, we had our law enforcement role to discharge. We worked closely with 

the NYPD, the New York State Organized Crime Task Force, the FBI, and DOI to 

pursue a number of leads concerning trucking activities at Ground Zero. 

Shortly after the clean-up began, there were allegations that members of organized crime were mounting an effort to steal scrap metal from the World Trade Center to sell as recycled steel. TWC, NYPD, the New Jersey State Attorney General’s 

Office and DOI investigated this information. We conducted intensive surveillance 

of trucks leaving the World Trade Center with steel recovered from the debris. 

As you know, in the days after the attack on and the collapse of the World Trade 

Center, the City made available its Fresh Kills Landfill on Staten Island to accept 

all of the debris from the site. Consequently, all debris and steel from the World 

Trade Center should have found its way to Fresh Kills, either by truck at the beginning of the operation, or by truck or barge as the effort broadened. 

During the course of this investigation, we located a few loads of World Trade 

Center steel in scrap yards in New Jersey and Long Island. We worked closely with 

the New York County District Attorney Rackets Bureau and obtained several search 

warrants to enter these yards, inventory the material and reclaim it. In fact, at all 

of the locations where we recovered the steel, we made arrangements with the New 

York City Department of Sanitation (‘‘DSNY’’), to deploy the City’s own trucks to 

these out-of-city facilities, re-load the steel on to DSNY vehicles and transport the 

material to Fresh Kills. We turned our evidence over to the New York County District Attorney who convened a grand jury to hear the case. My understanding is that 

this Grand Jury returned no indictment. 

As law enforcement intelligence about companies on the site developed, the City 

decided to apply oversight over the demolition, excavation and debris-removal contractors working on the project by retaining Independent Private Sector Inspectors 
204

General (‘‘IPSIGS’’) to vet and investigate contractors on the jobs. DOI took the lead 

in retaining, directing and supervising these IPSIG’s. TWC worked very closely with 

DOI and the Lower Manhattan Construction Command Center (‘‘LMCCC’’) in vetting all of the carters who worked on the project. Currently, LMCCC has copies of 

our lists of carters who are licensed or registered to operate in the City. By using 

these lists to select carters for prospective work in the Ground Zero areas, LMCCC 

will have the benefit of retaining carting companies whose backgrounds have been 

fully vetted and who have received permission to operate as the result of that vetting. 

As the clean-up of Ground Zero progressed in late 2001 and early 2002, TWC and 

OCID detectives continued to pursue investigations. We attended regular meetings 

in the office of the New York County District Attorney with DOI investigators to 

discuss these investigations. Investigators from FEMA’s Office of the Inspector General also participated in these meetings. In order to ensure that there would be no 

further diversion of World Trade Center steel, TWC and OCID assigned their investigators to man posts each night to monitor data provided by Global Positioning System devices that were installed on private carters’ trucks under DOI’s direction. I 

believe this surveillance system and investigative oversight achieved their purpose. 

There were no additional reports of World Trade Center steel diversion for the duration of the clean-up project. 

I think the lesson learned from this experience regarding the detection, prevention and control of fraud is not substantially different from similar lessons learned 

by members of the law enforcement community in other major operations in which 

I have participated. Major issues bring together many parties, simply as a result 

of their magnitude and importance. Each agency naturally brings to the problem the 

objectives of its own mission and the training and expertise of its members. Each 

agency will pursue a course of action shaped by its mission, training and expertise. 

But, each agency must cooperate with the other members of the team to reach the 

mutually-agreed objective. And, they need to have that realization from the outset. 

For example, the FBI and military at Ground Zero had grave concerns about nonessential traffic in the area after the attack. But, the clean-up was vital, and the 

City had to prevent harm to public health and safety. There were hundreds of stores 

and restaurants in the area surrounding Ground Zero that had simply stopped operating in the hours after the attack. Freezers and refrigerators stocked with perishable food became inoperable. Food began rotting, and the private carters who normally service these commercial establishments could not pursue business as normal. 

Careful coordination that was mindful of public health as well as public security 

was necessary to move these carters in and out of certain areas. The task fell to 

the City Department of Sanitation to collect commercial waste in the most challenging circumstances. 

TWC and other city agencies and the federal personnel charged with ensuring security worked together to find ways to get private sanitation companies through the 

streets, or, when that measure could not succeed, to get City personnel and trucks 

to do the job. These logistics were not easy to implement, but the alternative was 

to be at loggerheads. The measures succeeded in the end, because the different 

members of the team-all of whom brought different mandates and approaches to the 

problem- kept the goal in mind: our mission was to clean-up Ground Zero, while addressing the various valid concerns and the different methods each member brought 

to the issue. 

As you know, the clean-up of Ground Zero, which appeared to be a daunting task 

in the days following September 11, was fully completed on schedule. Based on that 

fact, I must think that our approach to the detection, prevention and control of potential fraud against the project was successful as well. 

This concludes my prepared testimony. Thank you.

Mr. ROGERS. The Chair now calls the first panel, and recognizes 

Bernard Cohen, Director of the Lower Manhattan Recovery Office, 

of the Federal Transit Administration, for your statement. 

I would remind you, Mr. Cohen and all members of the panel, 

that your entire written statement has been provided to every 

Member and it will be included in the record. So if you would like 

to summarize your statement in the opening, that would be sufficient and allow us more time for questioning. 

With that, Mr. Cohen, welcome, and we look forward to your 

statement. 
205

STATEMENT OF BERNARD COHEN 

Mr. COHEN. I am pleased to testify to testify on the substantial 

progress that we are making in the lower Manhattan transportation recovery effort. 

The terrorist attack of September 11, 2001, crippled lower Manhattan’s transportation infrastructure. We lost the Port Authorityoperated PATH line from New Jersey to the World Trade Center 

and the WTC PATH station. Two New York City subway lines were 

heavily damaged, along with Route 9A West Street, a major arterial highway. 

Shortly after President Bush declared New York a national disaster area, Congress appropriated $20 billion for many aspects of 

lower Manhattan’s recovery, out of which $4.55 billion was budgeted for transportation needs. That recovery effort still benefits 

today from sound decisions that the FTA and other public agencies 

made immediately after the president’s declaration, including a 

proactive commitment to coordination. 

For example, after we created a dedicated office in lower Manhattan, FTA worked to establish ‘‘one-stop shopping’’ for federal 

transportation funds. Working with FEMA, FTA assumed the role 

of lead federal agency for all transportation recovery projects and 

moved transportation funding and projects forward. In that capacity, FTA formulated a straightforward, but challenging mission to 

streamline transit recovery, while maintaining our stewardship of 

federal taxpayer dollars. 

A total of $4 billion of the $4.55 billion budget has now been 

committed to lower Manhattan transportation projects. That is 91 

percent of all program dollars available. I am very pleased to report 

that all of the three major fully funded transit projects for which 

initial grants were made are under construction today. With these 

three projects, the federal government and lower Manhattan have 

seized the opportunity not only to recovery, but to improve transit. 

Construction began in March of this year on the permanent 

World Trade Center PATH terminal. The terminal is scheduled for 

completion in June of 2011, and the display you see to my left is 

a depiction of the Santiago Calatrava design for the new permanent PATH terminal that is now under construction at the World 

Trade Center site. 

FTA has also provided a $478 million grant to develop a stateof-the-art World Trade Site Security Center that will screen all vehicles. This facility will ensure that vehicles serving the buildings 

or parking in the center will not be used as weapons. 

In July of 2005, the Metropolitan Transportation Authority 

began construction of the multi-level Fulton Street Transit Center, 

which serves 275,000 people a day. Completion of construction is 

scheduled for June of 2009, and the slide you see to my left shows 

the piece of equipment that is driving the secant piles that will be 

the prelude to the excavation for the new corridor that will connect 

the Fulton Street complex to the World Trade Center site. 

Also in December of 2003, FTA awarded MTA a grant of up to 

$420 million for the South Ferry Terminal Station, the last station 

at the southern end of the IRT 1 subway line. Construction began 

in March 2005 and should be completed in April 2008. 
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What you see to my left is the excavation for the new station 

which will have three entrances instead of one; will be accessible 

to people with disabilities, which the current station is not; and 

will modernize one of the most outdated stations in the New York 

City subway system. I should add that there are two agreements 

with FHWA. LMRO is also providing $287 million toward the reconstruction of Route 9A West Street. 

Community leaders envision these transit projects as anchors of 

the overall economic and social recovery effort that is unfolding 

today and will continue in to the next decade. We have been the 

beneficiaries of a broad recognition that transportation is the first 

chapter in the lower Manhattan success story. 

The LMRO office has also made a priority of working collaboratively with other major players in transportation reconstruction, 

which was crucial in the project selection process. Because we 

worked closely with the committee formed by Governor Pataki to 

select projects, we have been able to advance well-designed transit 

projects that have been inspired optimism and investment dollars 

to rebuild. 

Recognizing the unique nature of lower Manhattan’s recovery, we 

have employed a number of innovative practices. For example, FTA 

adopted a novel risk-based oversight approach to management that 

anticipates and mitigates risks, rather than trying to undo problems after the fact. Throughout this process, the LMRO office has 

endeavored to streamline the process, even as we have exercised a 

truly exceptional level of active oversight, paying close attention to 

costs, scheduled, design development, financial systems, and procurement procedures for every project. 

The lower Manhattan transit recovery is as much a story of 

building relationships as it is of building stations, road, and rail. 

From the start, we made coordination a priority. Our dual focus on 

streamlining and stewardship has paid off. When complete, the 

major projects now under way will transform the transportation 

landscape in lower Manhattan. They will make the system dramatically more visible, secure, navigable, accessible, and customerfriendly. 

We have already made significant progress, and we remain committed to getting the job done for New Yorkers and all Americans. 

Thank you. 

[The statement of Mr. Cohen follows:]

PREPARED STATEMENT OF BERNARD COHEN

Thank you, Mr. Chairman and members of the committee. I am pleased to join 

this panel, and to have an opportunity to testify on the progress we are making in 

the Lower Manhattan transportation recovery effort. My name is Bernard Cohen, 

Director of the Federal Transit Administration’s (FTA) Lower Manhattan Recovery 

Office (LMRO). 

The terrorist attacks of September 11, 2001, crippled Lower Manhattan’s transportation infrastructure. The worst of this devastation was not visible above ground. 

Lower Manhattan lost the PATH line from New Jersey to the World Trade Center—

operated by the Port Authority of New York and New Jersey (Port Authority) that 

had carried an average of 67,000 passengers daily. Debris from the Twin Towers 

crushed the PATH World Trade Center station—the gateway to New York City for 

so many. Two New York City subway lines were heavily damaged, along with a 

major arterial highway. Remarkably, despite the scale of this destruction, not a single life was lost on transit due to the terrorist attacks on that day. 
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Shortly after 9/11, President Bush declared New York a national disaster area. Congress appropriated $20 billion for many aspects of Lower Manhattan’s recovery, 

out of which they budgeted $4.55 billion for transportation needs. An additional 

$200 million for ferry facilities and rail infrastructure was appropriated by Congress 

and made part of the overall transportation recovery effort. 

That recovery effort still benefits today from sound decisions that public agencies 

made immediately after the President’s declaration. The most elemental of these decisions was a proactive commitment to coordination. Nine months after the attacks, 

FTA established a beachhead in Lower Manhattan—a dedicated office that strengthened lines of communication and collaboration in Lower Manhattan. FTA worked to 

establish ‘‘one-stop shopping’’ for Federal transportation funds, to ease administrative burdens on project sponsors. Through a Memorandum of Agreement with the 

Federal Emergency Management Agency (FEMA), FTA became the lead agency to 

move transportation money and projects forward. 

When we became the lead agency in this effort, we formulated a straightforward 

but challenging mission: to streamline transit recovery while maintaining responsible stewardship of taxpayer dollars, and exceptional oversight. Unlike other FTAfunded projects, the Lower Manhattan projects are almost entirely Federally funded, 

so we felt the stewardship obligation just as keenly as the imperative that we revive 

Lower Manhattan’s transit lifelines as quickly as possible. 

We also recognized that we would have to operate simultaneously in two ‘‘time 

zones’’—the immediate and the long term—to meet the transit needs of Lower Manhattan. 

The LMRO has now obligated most of the money entrusted to Lower Manhattan transportation. A total of $4 billion of the $4.55 billion budget has been committed 

to projects. This figure includes a reserve for each project as a prudent measure of 

stewardship to ensure that we have the resources in place to complete our program. 

I am very pleased to report that all of the three major, fully-funded transit 

projects for which initial grants were made are under construction today. These 

projects promise not only to improve service, but also to enhance dramatically the 

passenger convenience and visibility of transit in Lower Manhattan. Indeed, the 

United States, determined to come back from the 9/11 attacks stronger than ever, 

resolved not just to reconstruct Lower Manhattan’s infrastructure as it existed before, but to improve upon it. The recovery presented Lower Manhattan with an opportunity to modernize and rationalize its infamous ‘‘spaghetti bowl’’ tangle of transit lines. The Federal Government and Lower Manhattan have seized that opportunity. We are creating a vastly more visible, navigable, seamless, and customerfriendly system for Lower Manhattan. 

Construction began in March of this year on the permanent World Trade Center PATH terminal. Since 2003, FTA has awarded the Port Authority up to $2.2 billion 

for the PATH terminal, and project sponsors completed their environmental review 

in June 2005. In addition to restoring commuter service, the project includes pedestrian connections to the Fulton Street Transit Center and the World Financial Center. The Port Authority has engaged the renowned architect Santiago Calatrava to 

design the PATH terminal, which many have come to regard as the Grand Central 

Station of Lower Manhattan, a transit focal point. The majestic glass and steel terminal is scheduled for completion in June 2011. 

FTA has also provided a $478 million grant to develop a state of the art World 

Trade Center Site Security Center that will screen all vehicles for security threats 

and provide parking for tour buses. This facility will ensure that vehicles servicing 

the buildings or parking in the Center will not be used as weapons. 

In July 2005, the Metropolitan Transportation Authority (MTA) began construction of the Fulton Street Transit Center, used by 275,000 people a day. The construction agreement between FTA and MTA provides for up to $847 million in Federal funds. This grant will fully fund a multi-level complex of stations that will 

serve 12 different subway lines. The existing maze of narrow ramps, stairs, and 

platforms will be transformed into a more spacious and rational configuration. A 

prominent transit center will replace street entrances previously hidden inside 

buildings. MTA was awarded this grant in December 2003. The environmental review for Fulton was completed in November 2004, and completion of construction 

is scheduled for June 2009. 

Also in December 2003, FTA awarded MTA a grant up to $420 million for the 

South Ferry Terminal Station, the last station at the southern end of the IRT 1 subway line. This project will eliminate the tight-curve platforms that prevent operators from opening the doors on the rear five cars of their trains. It will increase the 

number of entrances from one to three, and make the station accessible to disabled 

passengers. Construction on the terminal began in March 2005, and should be completed by April 2008. 
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I should add that LMRO is also providing $287 million toward the cost of rebuilding Route 9A/West Street, the major north-south state arterial highway that runs 

down the West Side of Lower Manhattan. FTA and the Federal Highway Administration have executed two Memoranda of Agreement in the last two years to provide 

for the transfer of funds and outline the oversight responsibilities of each agency. 

This roadway project is already under construction and is scheduled to be completed 

by June 2009. 

Community leaders envision these transit projects as anchors of the overall recovery effort that is unfolding today, and will continue into the next decade. 

Over the last four years, many of our office’s priorities have also been Lower Manhattan’s priorities. The economic renaissance in many respects begins with the vanguard of transit systems that can carry riders, visitors, and workers into and out 

of the area. We have been the beneficiaries of a broad understanding that transportation is a first chapter in the Lower Manhattan success story. 

The LMRO has also made a priority of working collaboratively with other major 

players in transportation reconstruction, which was crucial in the project selection 

process. FTA worked closely with a committee formed by Governor Pataki and including key city and state transportation agencies, as well as the Lower Manhattan 

Development Corporation. This committee generated the initial list of transportation 

recovery projects from which our three projects were selected. Because of this collaboration, we have been able to advance well-designed, well-received transit 

projects. In turn, the business community has responded with a burst of optimism 

to renovate and build in Lower Manhattan. 

As construction progresses on the three major transit projects, Lower Manhattan 

has become an incubator for innovations and lessons learned that can benefit other 

transit systems and projects. 

Certainly, the Lower Manhattan context rewards innovation, and creative ways 

of doing business. FTA adopted a novel, risk-based oversight approach to management. We undertook formal risk assessments early in the development of each 

project, and tailored our oversight accordingly. We focused on the preemption of 

risks rather than the mitigation of problems after the fact. We established reserves 

for our projects based on our risk assessments in order to ensure that sufficient resources will be in place to complete the recovery projects. 

Throughout this entire process, the LMRO has endeavored to exercise a truly exceptional level of proactive oversight. Specifically, this means that we have paid 

close attention to costs and schedules at every step. We have given project sponsors 

approval to move through various phases of design and development. We have entered into construction agreements when sponsors have been ready to begin work. 

And, we have carefully scrutinized and reviewed procurement procedures and financial systems. 

We have applied the same extraordinary degree of oversight to transit security 

in Lower Manhattan. FTA has been centrally involved in, and well aware of, key 

security design features for all of the projects, from the earliest phases of work. Security features are being integrated into the very design of these projects. FTA retained a consultant to review security documents that we required our project sponsors to prepare, including threat and vulnerability assessments, construction site security plans, security management plans, and design guidelines. 

To meet environmental standards while advancing these important projects as 

quickly as possible, we worked closely with project sponsors to create an active environmental oversight approach. We adapted a Cumulative Effects Analysis approach 

to assess the overall environmental impact of all of the transit projects in Lower 

Manhattan. Our project sponsors, in turn, have made a landmark agreement to implement aggressive mitigations for those effects. Collaborating with project sponsors, 

we established one single, consistent set of methodologies, data, sources, and assumptions for all of the projects. These shared assumptions allowed for comparability across projects, and vastly shortened the time traditionally needed to prepare and review environmental documents. 

None of these was a ‘‘cookie cutter’’ approach. In our environmental streamlining, 

risk assessment, and project oversight, we have drawn on our collective experience 

and our creativity to customize solutions that fit specific projects. 

The Lower Manhattan transit recovery is as much a story of building relationships as it is of building track, road, and rail. From the start, we have focused on 

coordination and regular communication with state and local officials, public and 

private project sponsors, other Federal agencies, the business community, organizations representing the families of the victims of 9/11, and other major players in this 

complex undertaking. That legacy of coordination endures today in the Lower Manhattan Construction Command Center (LMCCC), which is funded largely through 

an FTA grant. The LMCCC began as a voluntary collaboration among project spon-
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sors dedicated to minimizing the negative impact of overlapping construction 

projects on an already-fragile community. The LMCCC emerged from that undertaking as a formal organization that, today, coordinates construction logistics. The 

LMCCC formalizes the kind of coordination that has characterized the transit recovery effort from its earliest days. 

FTA’s dual focus on streamlining and stewardship has paid off. Four years after 

we first established a beachhead in Lower Manhattan, we have committed the bulk 

of the Federal transit money to three major, popularly-acclaimed transit projects, for 

which construction is already well underway. When complete, these projects will 

transform—even revolutionize—the transit landscape in Lower Manhattan. They 

will make the transit system dramatically more iconic, secure, accessible, and customer-friendly than it was in pre–9/11 days. 

On behalf of the entire LMRO and FTA, thank you for this opportunity to update 

you on our progress. Now I’d be happy to answer any questions.
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Mr. ROGERS. Thank you, Mr. Cohen, for your statement. 

The Chair now recognizes Mr. Todd Zinser, Acting Inspector 

General of the Department of Transportation, for your statement. 

Mr. Zinser? 

STATEMENT OF TODD ZINSER, ACTING INSPECTOR GENERAL, 

U.S. DEPARTMENT OF TRANSPORTATION 

Mr. ZINSER. Thank you, Mr. Chairman, Mr. King, Mr. Pascrell. 

We commend the subcommittee for holding this series of hearings 

and appreciate the opportunity to testify on the importance of vigorous oversight of major transportation projects like those under 

way in lower Manhattan. 

The destruction caused by the terrorist attack is a tragic reminder of the importance of transportation in our daily lives and 

why they remain prime targets for terrorists. Today, we will address key lessons learned from our work on transportation infrastructure projects across the country that should be applied, and in 

some cases are already being applied to the reconstruction of lower 

Manhattan. 

Our audit work on transportation infrastructure projects has primarily focused on projects costing more than $1 billion, or so-called 

mega-projects. For example, for the past several years at the direction of Congress we have audited the annual finance plan of the 

$14.6 billion ‘‘big dig’’ project in Boston, and 15 months ago in April 

of 2005, as a result of a review of the tunnel leaks on that project, 

we testified that the project could consider a project-wide construction quality review. 
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Our criminal and civil fraud investigations have focused on highway, transit, and airport projects where there are indications of 

fraud, regardless of the size of the project. We have investigated 

schemes including false claims for material and labor, product substitution, bribery, schemes involving disadvantaged business enterprises, and in some instances of payoffs to organized crime. 

Over the last few years, our report on top management challenges in the department has pointed to the need for FTA and the 

Federal Highway Administration to strengthen their oversight and 

stewardship of the more than $30 billion in transit and highway 

funds spent each year, and they have been taking steps to do so. 

FTA’s Lower Manhattan Recovery Office has the lead oversight 

role for DOT on lower Manhattan reconstruction. The office and its 

oversight activities are funded by nearly $90 million FTA received 

as part of the disaster funding. 

We strongly supported this funding, and in our view it is critical 

in any future disaster that some portion, even if it is just 1 percent, 

of the disaster funding be set aside for oversight activities. OIG’s 

role in lower Manhattan will be to provide an independent perspective on the projects and the oversight activities of the agencies involved. To do this, we have informed the department and would 

like the subcommittee to know that we have established an OIGlower Manhattan transportation oversight team based in our New 

York regional office located just north of Canal Street in Manhattan. 

Our investigative work on transportation infrastructure projects 

has resulted in two primary lessons. First, build coalitions with 

other federal, state and local law enforcement agencies and program officials to prevent and detect fraud. This is already under 

way by the establishment of the lower Manhattan construction integrity team, where a comprehensive range of federal, state and 

local agencies have developed measures to prevent fraud, such as 

recommended practices for vetting potential contractors. 

Second, take aggressive action to prevent and detect fraud and 

have strong policies in place to send the message that fraud will 

not be tolerated. Program staff should be alert and promptly report 

suspected fraud. U.S. Attorney’s offices should be educated and in 

some cases, even though fraud cases may not meet their prosecutorial threshold, they should prosecute cases. This is a strong deterrent. 

Finally, suspension and debarment policies like the one implemented by Secretary Mineta at DOT in 2005 are important tools 

to protect taxpayer dollars from irresponsible contractors and can 

deter future fraud. 

Our audit work on mega-projects has resulted in identification of 

several tools that should be applied to these projects. First, prepare 

reliable cost estimates. This will be especially critical for lower 

Manhattan because the total amount of federal funding for the five 

transportation projects under way is currently fixed at $4.55 billion. Project managers must have reliable and current cost estimates, track them closely and aggressively control costs. Otherwise, costs could easily exceed the current federal funding commitment and it is unclear what the source of additional funds would 

be. 
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Second, focus on project and financial management by using 

sound oversight practices such as FTA’s use of project management 

oversight contractors. 

Third, prepare regularly updated finance plans to identify costs, 

scheduled, funding sources and risks to a project, or in the case of 

lower Manhattan, ensure that each project has something analogous to a realistic, regularly updated finance plan. 

Fourth, actively use value engineering to control costs by analyzing and implementing design alternatives. This is already being 

applied, resulting in the identification of $67 million in potential 

savings on the design of the Fulton Street Transit Center. 

Fifth, carefully manage project schedules to minimize costly 

delays, including the use of integrated master schedules to coordinate the work of numerous contractors and subcontractors on large 

projects. 

Finally, recover overpayments from contractors and have a 

strong cost recovery program in place to recover the costs of construction claims caused by design and engineering errors or omissions. 

Mr. Chairman, those are our lessons learned on all the work that 

we have done over the years. This concludes our prepared remarks. 

We would be happy to answer any questions. 

[The statement of Mr. Zinser follows:]

PREPARED STATEMENT OF TODD J. ZINSER

Mr. Chairman, Ranking Member, and Members of the Subcommittee: 

We appreciate this opportunity to testify today on the importance of vigorous 

oversight of major transportation projects like those underway in the reconstruction 

of Lower Manhattan. The terrorist attacks of September 11, 2001 caused unprecedented damage to New York City’s transportation infrastructure, including the Port 

Authority Trans–Hudson (PATH) terminal and the Route 9A (West Street) highway 

near the World Trade Center site. The destruction caused by these attacks is a tragic reminder of the importance of transportation systems in our everyday lives and 

why these systems remain prime targets to terrorists. 

Our testimony today will address important lessons learned from our work on federally funded transportation projects across the country that should be applied, and 

in some cases are already being applied, to the reconstruction of Lower Manhattan. 

Primarily, our audit work at the Office of Inspector General (OIG) has focused on 

mega-projects, that is, those infrastructure projects costing more than $1 billion, 

while our criminal and civil fraud investigations have focused on highway, transit, 

and airport projects where there are indications of fraud regardless of the size of 

the project. 

Based on this body of work, we believe that certain sound investigative, management, and oversight practices should be considered wherever major transportation 

construction may be undertaken. This seems especially important in the reconstruction of Lower Manhattan. With the loss of life and with such significant parts of 

the transportation system destroyed at the hands of terrorists, we should do all we 

can to ensure that the residents of New York and the American tax payers get the 

most from the Federal funding being invested and that these projects are free of 

fraud. 

Accordingly, we have informed the Department and would like you, Mr. Chairman, and the Subcommittee to know that we have established an OIG Lower Manhattan Transportation Oversight Team to support oversight of Lower Manhattan 

projects. Although we are a relatively small OIG with limited resources, compared 

to the approximately $55 billion that the U.S. Department of Transportation (DOT) 

spends annually, we are now able to redeploy resources and expertise from our work 

on Boston’s $14.6 billion Central Artery/Tunnel Project, which is nearly complete. 

In response to the extensive devastation caused by the September 11 attacks, the 

Federal Government dedicated $4.55 billion for projects to reconstruct and enhance 

Lower Manhattan’s transportation infrastructure. These high-priority projects will 

require vigilant oversight by DOT, state and local governments, and transit agen-
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1 Report PT–2006–007, DOT’s 2006 Top Management Challenges, November, 18 2005. The report can be accessed on our website at http://www.oig.dot.gov/item.jsp?id=1701. 

cies. The projects are massive in scale and will require oversight of numerous contractors and subcontractors, tracking costs and schedules, and preventing fraud, 

among other things. 

Over the last few years, our management challenges reports to the Secretary and 

Congress have pointed to the need for the Federal Highway Administration (FHWA) 

and the Federal Transit Administration (FTA) to strengthen stewardship over investments in highway and transit projects.1 As we reported to the Secretary in November 2005, a 1-percent improvement in the efficiency with which states managed 

the $700 billion investment in highway projects over the last 6 years would have 

yielded an additional $7 billion for other infrastructure improvements. Thus, improving efficiency in even a small percentage of the funds invested in the reconstruction of Lower Manhattan could result in millions of dollars in savings. FHWA 

and FTA have been working to strengthen their oversight practices. 

Other infrastructure projects in the New York Metropolitan area will add to the 

challenges DOT faces. Significant amounts of Federal funding are also being dedicated to other ongoing transportation projects in the area, most notably the largescale East Side Access and the Second Avenue Subway projects. Although these 

projects are not being funded with the $4.55 billion, they are still large and complex 

and will need proactive DOT oversight. Adding to the challenge, these transportation projects will have to compete with many other projects in New York City for 

contractors, workers, and materials—making it even more important to focus on 

sound project and financial management. Overall, within the next 5 years, more 

than $20 billion in construction work will likely be underway in all of Lower Manhattan. 

OIG’s role in Lower Manhattan will be to provide an independent perspective on 

these projects and the oversight activities of the agencies involved. When our audit 

work identifies issues, we will alert Federal, state, and local officials—as we have 

done on many other large transportation projects. When we receive allegations of 

fraud, we will investigate them and refer cases to the U.S. Attorney. In this regard, 

our testimony today will focus on the following oversight issues to consider as the 

reconstruction of Lower Manhattan continues, and key lessons learned that could 

be applied to other major transportation projects. • DOT must ensure active oversight of Lower Manhattan projects until 

they are completed. Effective day-to-day oversight of the large, complex transportation projects in Lower Manhattan and across the country is critical to ensuring 

that projects are completed on time, within budget, safely, and free from waste, 

fraud, or abuse. FTA has the lead on Lower Manhattan reconstruction and will be 

challenged by providing sufficient oversight of the projects involved. Accordingly, as 

part of the Federal commitment, FTA has received nearly $90 million of dedicated 

funding to do so. 

To carry out its oversight responsibilities in Lower Manhattan, FTA has created 

a special oversight office, the Lower Manhattan Recovery Office. The Lower Manhattan Recovery Office is separate from FTA’s New York field office and its sole purpose is to oversee these high priority projects in Lower Manhattan. The Lower Manhattan Recovery Office should employ all of the oversight mechanisms and expertise 

at its disposal to closely monitor these projects and, most importantly, quickly mitigate problems as they arise. Doing so will help ensure that the projects are delivered in a timely manner and within the federally funded amount. 

In overview, it is critical in any future disaster that the Federal agency or agencies in charge of reconstruction receive, as part of the emergency funding, a sufficient and dedicated amount of funding to provide oversight. • Key lessons learned by our investigators are that Federal, state, and 

local law enforcement agencies must build coalitions to combat fraud in 

large transportation projects and take aggressive action against those who 

defraud the government. History has shown that substantial infusions of funding 

into an area for relief and/or reconstruction efforts, such as those related to the September 11, 2001 attacks, increase the risk of fraud. Our special agents have investigated criminal schemes nationwide on large transportation projects like those in 

New York City, including false claims for materials and labor, product substitution, 

collusive bidding, money laundering, tax fraud, bribes, schemes involving disadvantaged business enterprises, and, in some instances, payoffs to organized crime. 

Since 1999, our New York Office has conducted approximately 31 investigations 

related to highway and transit construction/infrastructure projects in the New York 

City Metropolitan area. Since 1999, these cases have produced 42 indictments, 26 

convictions, and actual or pending financial recoveries of over $33 million. Our work 
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has also resulted in Federal debarments or suspensions of numerous companies. For 

example, the owners of three family-owned construction firms in the New York Metropolitan area were debarred in 2002 for 3 years by FHWA. Also, following their 

2001 guilty pleas they were ordered to forfeit $5 million for their part in a large 

scam involving payoffs to organized crime. 

Our investigative work in New York and across the country offers important lessons learned to help combat schemes like these. 

First, build coalitions with other Federal, state, and local law enforcement agencies—as well as program officials—to prevent and detect fraud. Building these coalitions allows law enforcement and investigative agencies, as well as program officials, to leverage resources, share information and expertise, and undertake joint 

initiatives. This is already underway in Lower Manhattan with the Lower Manhattan Construction Integrity Team (LMCIT), which was an idea suggested by the 

Lower Manhattan Development Corporation. We were a founding member of this 

group, which was formally started in 2004 to prevent fraud in Lower Manhattan 

publicly-funded projects. Members now include a comprehensive range of Federal, 

state, and local agencies. This group has developed an array of measures for the 

prevention of fraud, including recommended practices for the process of vetting potential contractors, information sharing, fraud awareness training for contractors? 

supervisors and managers, employee screening and access control to the World 

Trade Center site, and use of integrity monitors. 

Second, take aggressive action to combat fraudulent activity and have strong policies in place to send a message that defrauding the U.S. Government will not be tolerated. There are many ways to take aggressive action to prevent fraud and protect 

tax payer dollars. For one, Federal, state, and local program staff should always be 

alert to possible instances of fraud and use existing mechanisms, such as fraud hotlines, to report suspected fraud early on. Timely reporting of possible fraud is critical so allegations may be promptly investigated. For example, we maintain a hotline that can be accessed at http://www.oig.dot.gov/Hotline. Tips specifically related to Lower Manhattan projects can be submitted at www.LowerManhattan.info. 

It is important that when investigators identify fraud and collect sufficient evidence related to criminal schemes or civil fraud that the U.S. Attorney’s Office act 

upon it. In some instances, they should accept cases for prosecution that may not 

otherwise meet their prosecutorial threshold (e.g., the dollar amount of the fraudulent activity) as a deterrent to others who might attempt to defraud the government. 

Finally, in 2005, Secretary Mineta signed a DOT-wide order strengthening the 

Department’s suspension and debarment policies. Such policies prevent individuals 

or contractors who have been indicted or convicted of fraud from receiving Federal 

contracts for a period of time. We believe that such policies are critical to protecting 

tax payer dollars from irresponsible contractors. 

• A key lesson learned from our auditors is that a set of sound management and oversight tools should be used by Federal, state, and local agencies to ensure that large transportation projects are completed effectively 

and efficiently. These tools are fundamental and universally applicable to all federally funded transportation projects. It will be important to rigorously employ them 

in the reconstruction of Lower Manhattan. 

They include ensuring that sound project and financial management practices are 

in place, preparing reliable cost estimates, carefully managing project schedules to 

minimize costly delays, implementing more cost-effective engineering alternatives, 

and recovering overpayments from contractors and promptly resolving construction 

claims. For example, because the total Federal funding allocated to the various 

Lower Manhattan projects is currently fixed, it will be even more critical for Federal, state, and local officials to have reliable cost estimates and track them closely. 

The Lower Manhattan Recovery Office has adopted a risk management approach 

to keep costs within estimates. This risk analysis process was applied early in 

project development to focus on identifying and mitigating project risks and keeping 

costs within the Federal funding allocated for each project. If higher costs are estimated along the way, FTA requires the grantee to develop a recovery plan to find 

ways to keep costs within the funding allocations. This is a smart move. Such a cost 

containment action already occurred on the Fulton Street project, requiring a 

project-wide cost recovery plan to address such budget issues as remaining real estate acquisition and tenant relocations, a possible re-design of the Transit Center, 

and environmental requirements for building deconstruction. Unless costs are aggressively controlled, the costs could easily exceed the $4.55 billion currently allocated by the Federal Government, and it is not clear what funding sources would 

cover those increased costs.
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DOT Must Ensure Active Oversight of Lower Manhattan Projects Until 

They Are Completed The Federal Government dedicated $4.55 billion to fund large-scale projects to reconstruct and enhance Lower Manhattan’s transportation infrastructure. Of this 

amount, $2.75 billion came from the Federal Emergency Management Agency 

(FEMA) and $1.8 billion came from FTA. Through an agreement with FEMA, FTA 

was given lead responsibility for distributing and overseeing the use of the $4.55 

billion. 

The ongoing projects are the Permanent World Trade Center PATH Terminal, 

Fulton Street Transit Center, South Ferry Terminal Station, the World Trade Center Vehicle Security Center, and the Route 9A/West Street/Promenade highway 

project (FHWA also dedicated some funding to this highway project in addition to 

the portion being funded out of the $4.55 billion and FHWA has oversight responsibilities as well). More information on these projects is provided in the exhibit at 

the end of my statement. Of the $4.55 billion, nearly $90 million has been dedicated to FTA’s oversight activities. We support this move and believe a dedicated funding stream for Federal 

agency oversight should be replicated in any funding decisions for future disasters 

and emergencies. 

DOT agencies—whether it is FTA or FHWA—should serve as a key line of defense 

in protecting tax payer dollars. In 2002, FTA created the Lower Manhattan Recovery Office separate from its New York regional office, which is unique within FTA. 

The Lower Manhattan Recovery Office is responsible for coordinating DOT resources 

and working with state and local partners to provide project oversight and technical 

assistance. We supported the creation of this office at the time and it may be a 

model to consider should future disasters necessitate massive transportation-related 

reconstruction. 

FTA’s Lower Manhattan Recovery Office has hired several contractors to assist 

in its oversight responsibilities. For example, it hired a financial management oversight contractor (FMOC), which was used at the beginning of the projects to review 

the financial statements, accounting systems, and internal financial management of 

grantees. Currently, the FMOC is used on an as-needed basis. It also hired project 

management oversight contractors (PMOC) who are charged with regularly monitoring major transportation projects and providing feedback to Federal officials 

should any problems arise. This is an institutionalized approach at FTA. The Lower 

Manhattan Recovery Office’s strategy has been to provide one PMOC to each grantee. For example, there is a PMOC for the New York State Metropolitan Transportation Authority’s (MTA) Fulton Street Transit Center and South Ferry Station 

projects. The PMOC for each project is charged with conducting risk assessments 

for projects, reviewing cost and schedules, and assessing each grantee’s plans for the 

project. Lower Manhattan Recovery Office staff told us the PMOCs attend grantee 

meetings and report back to them, conduct on-site reviews several times a week to 

look at construction materials, and review quality assurance on the project. A key 

point is that the Office must ensure that it fully analyzes the results of the contractors? reports, take action where appropriate, and exercise its own oversight role in 

addition to the contractors’ work. 

A PMOC may also contract with other experts, as needed, to assist in performing 

certain important duties. For example, the Lower Manhattan Recovery Office determined that its PMOC on the Fulton Street Transit Center did not have expertise 

to ensure that MTA met the requirements of the Federal Relocation Assistance Act. 

Accordingly, the Lower Manhattan Recovery Office directed the PMOC to hire an 

outside consultant to evaluate MTA’s relocation program for businesses and residents who are being displaced by construction of the Fulton Street Transit Center. 

Key Lessons Learned by Our Investigators are That Federal, State, and 

Local Law Enforcement Agencies Must Build Coalitions to Combat Fraud 

in Large Transportation Projects and Take Aggressive Action Against 

Those Who Defraud the Government 

History has shown that substantial infusions of funding into an area for relief 

and/or reconstruction efforts, such as those related to the September 11, 2001 attacks, increase the risk of fraud. Our special agents have investigated criminal 

schemes associated with transportation projects across the country, including false 

claims for materials and labor, product substitution, collusive bidding, money laundering, tax fraud, bribes, schemes involving disadvantaged business enterprises, 

and, in some instances, payoffs to organized crime. 

Since October 2002, our nationwide investigations related to surface transportation projects have resulted in 150 indictments, 91 convictions, $57.64 million in 

fines, restitutions, and recoveries, and 94 suspensions or debarments. It is important to consider that investigating and collecting sufficient evidence to support pros-
220

ecution of white collar crimes like these is a labor intensive process that, in some 

cases, can take years. 

The following examples illustrate the types of schemes we have detected on major 

transportation projects across the country, which investigators, program officials, 

and even the public should watch for in future projects. • Payoffs. The owners of three family-owned construction firms in the New York 

Metropolitan area were debarred in 2002 for 3 years by FHWA. Also, following their 

2001 guilty pleas they were ordered to forfeit $5 million for their part in a large 

scam involving payoffs to organized crime. They issued corporate checks to subcontractors as payment for fraudulent invoices. These payments were then returned 

to them as cash. • Product substitution. Our investigators worked with the Federal Bureau of 

Investigation (FBI), as well as state and FHWA officials, on a case involving a Connecticut concrete manufacturer that was fined and forced to pay restitution for falsely certifying that concrete catch basins used on a major highway project met contract specifications. The manufacturer pled guilty in 2005 and was fined and forced 

to pay restitution totaling half a million dollars. • Bid-rigging. Four executives of two Wisconsin contractors, both of their companies, and an employee of a third company were sentenced in 2005 to a combined 

total of over $3 million in fines and restitution and imprisoned, for a bid-rigging 

scheme. Competitors unlawfully decided who was to receive which roadway or airport job. They submitted complementary bids to create the false appearance of competition on approximately $100 million in publicly-funded projects. • Bribery. In one of our joint cases in New York City, the co-owner of a prime 

contractor pled guilty in 2006 to conspiring to bribe an inspector to facilitate approximately $1 million of over-billing on a roadway milling contract. As part of the 

plea agreement, the defendant and his company agreed not to bid on any Federal, 

state or city-funded project for a period of 5 years. • False Statements. Several Ohio transportation inspectors were convicted during 2003–2005 for making false statements regarding the quantity and/or quality of 

bridge-painting work performed by contractors on Federal-aid projects. The inspectors received illegal payments to overlook improprieties, such as the use of inferior 

paint and failure to properly sandblast or contain lead and hazardous paint waste. • Prevailing Wage Fraud. The largest highway landscaping company in Min- nesota, which was the prime contractor on over $4 million in federally funded highway construction projects as well as a subcontractor on numerous others, and its 

president, were sentenced in 2006 for conspiring to defraud the government by creating and certifying false records that concealed its failure to pay workers at the 

prevailing wage rate. • Disadvantaged Business Enterprise (DBE) Fraud. A certified DBE firm in 

New York was found to have been used as a ‘‘false front’’ on about 3 dozen subcontracts valued at approximately $21 million and submitted false certified payrolls. 

In 2001, the principal of the company pled guilty to conspiracy charges in the case. 

Our investigative work in New York and across the country offers important lessons learned to help combat schemes like these. 

First, build coalitions with other Federal, state, and local law enforcement agencies—as well as program officials—to prevent and detect fraud.

Building broad, interagency coalitions allows law enforcement and investigative 

agencies, as well as program officials, to share information, leverage expertise and 

resources, and undertake important joint initiatives. States and localities are the 

first line of defense against fraud and the Federal law enforcement community 

should work closely with them. Also, law enforcement should work closely with program officials at all levels of government, who can be the first to detect early indications of fraudulent activity. We are involved in a number of collaborative partnerships across the country and two in the New York City Metropolitan area are worth 

mentioning as key success stories that could be replicated elsewhere. Accordingly, 

we have tried to spread the word about these initiatives to other parts of the country. 

• For example, we are founding partners in an interagency working group, the 

Lower Manhattan Construction Integrity Team (LMCIT). It was established in 2004 

at the suggestion of the Lower Manhattan Development Corporation to prevent 

fraud in Lower Manhattan publicly-funded projects. The group has grown and now 

includes a comprehensive range of oversight agencies. In addition to us, it includes 

the Lower Manhattan Construction Command Center, the Lower Manhattan Development Corporation, the New York City Department of Investigation, the New York 

City Business Integrity Commission, the New York State OIG, the New York State 

Metropolitan Transportation Authority’s OIG and Chief Compliance Officer, the OIG 

of the Port Authority of New York and New Jersey, and the OIGs of the U.S. De-
221

partments of Labor and Housing and Urban Development (HUD). LMCIT has developed a range of measures for the prevention of fraud, including best practices for 

the process of vetting potential contractors, information sharing, fraud awareness 

training for contractors? supervisors and managers, employee screening and access 

control to the World Trade Center site, and the use of integrity monitors (also referred to as IPSIGs, or Independent Private Sector Inspectors General) to supplement existing oversight resources. LMCIT members also share a joint fraud complaint hotline, which can be accessed at www.LowerManhattan.info. • Further, since 1999, we have been a founding member of the Long Island Federal Construction Fraud Task Force, established by the Office of the U.S. Attorney 

for the Eastern District of New York. This Task Force was organized to coordinate 

investigations into fraud and public corruption in the construction industry on Long 

Island. The Task Force presently consists of prosecutors and agents from our Office 

of Investigations, the Internal Revenue Service Criminal Investigation Division, Department of Labor OIG, FBI, the Postal Inspection Service, the New York City Department of Investigation, and the OIG of the Port Authority of New York and New 

Jersey. Of the approximately 22 pending New York City Metropolitan-area construction investigations in our New York Office, more than half are being conducted 

under the auspices of this Task Force. The impact of the work of the Long Island 

task force extends beyond the New York City Metropolitan area. The unprecedented 

success of the Task Force has led to repeated requests that its members participate 

in speaking engagements, presenting insights, investigative strategies, and techniques to other law enforcement and oversight organizations. To date, members of 

the Task Force have participated in 14 conferences in 10 states. • The importance of building coalitions among Federal, state, and local law enforcement agencies can also be seen in the areas affected by Hurricane Katrina. For 

example, we and other Federal OIGs are fully integrated into the Hurricane Katrina 

Fraud Task Force, which was created by the Attorney General of the United States 

to detect and deter fraud against the U.S. Government in efforts to rebuild the Gulf 

Coast and provide emergency relief for the residents there. The Task Force has mobilized to bring prosecutions as quickly as possible to send a strong message of deterrence. We are also an active member of a special task force headed by the U.S. 

Department of Homeland Security OIG that coordinates the Hurricane Katrina-related auditing and investigative activities of the other Federal OIGs. 

We believe it is important that our investigative activities in the areas devastated 

by Hurricane Katrina are coordinated, information is shared, and that we maximize 

our limited resources. Our agents have conducted approximately 50 fraud awareness 

briefings for various oversight providers, FHWA, state transportation department 

staff, and trade association officials as part of our hurricane-related fraud prevention activities. 

Second, take aggressive action to combat fraudulent activity and have 

strong policies in place to send a message that defrauding the U.S. Government will not be tolerated. Recognizing the fraud risks inherent in large-scale 

construction projects, it is critical that investigative agencies at all levels of government take aggressive action to combat fraud and abuse of government funds. 

• In 2005, Secretary Mineta signed a DOT-wide order strengthening the Department’s suspension and debarment policies. Such policies prevent individuals or contractors who have been indicted or convicted of fraud from receiving Federal contracts for a period of time. We believe that such policies are critical to protecting 

tax payer dollars from irresponsible contractors. Secretary Mineta deserves great 

credit for pushing for these improvements and for focusing on reducing fraud, waste, 

and abuse in DOT programs. It is important for all Federal agencies to evaluate 

their suspension and debarment policies and assess what steps can be taken to 

strengthen them. 

• There are other ways to take aggressive action to prevent fraud and protect tax 

payer dollars. For one, Federal, state, and local program staff should always be alert 

to possible instances of fraud and utilize existing mechanisms to report suspected 

fraud early on. Timely reporting of possible fraud is critical so allegations may be 

investigated by law enforcement officials and, if warranted, they may take prompt 

action. Such fraud reporting mechanisms include internal agency procedures or 

fraud hotlines. We believe that program staff and investigators should always maintain an open flow of information. For example, we maintain a waste, fraud, and 

abuse hotline that can be accessed at http://www.oig.dot.gov/Hotline. 

• Finally, it is important that when investigators identify fraud and collect sufficient evidence related to criminal schemes or civil fraud that the U.S. Attorney’s Office act upon it. For example, in 2003, the United States Attorney in Manhattan announced the arrests of two individuals for devising schemes to fraudulently obtain 

HUD September 11-related grant funds of $5,316 and $3,750. Even though the 
222

amount of money involved in the fraud was relatively small, actions like these send 

a message to those considering similar schemes. 

In another example, at the direction of the Attorney General, Offices of the U.S. 

Attorneys have been aggressively prosecuting individuals who engage in Hurricane 

Katrina-related fraud, for example, through debit cards issued to hurricane victims 

to pay for recovery costs, even though the individual dollar amounts involved are 

relatively low. In some cases, it is important for the U.S. Attorney’s Office to accept 

cases for prosecution that may not otherwise meet their prosecutorial threshold 

(e.g., the dollar amount of the fraudulent activity) as a deterrent to those who might 

attempt to defraud the government. 

A Key Lesson Learned from Our Auditors is That a Set of Sound Management and Oversight Tools Should Be Used by Federal, State, and Local 

Agencies to Ensure That Large Transportation Projects are Completed Effectively and Efficiently 

Based on our years of work auditing major transportation projects across the 

country, we believe a set of sound management and oversight tools should be considered wherever major construction occurs. These tools are fundamental and universally applicable to all federally funded transportation projects. It will be important 

to rigorously employ them in the reconstruction of Lower Manhattan. 

Prepare reliable cost estimates. In some cases, project approvals may be secured on the strength of cost estimates prepared before the design package is substantially complete and which contain figures that are far too preliminary. In the 

past, we have found that cost estimates for major projects did not include such routine items as construction management, design, allowances for inflation, or contingency reserves. Great care must be taken to assure that these preliminary cost estimates are understood for what they are, and that they do not serve as the predicate 

for project approval unless they are thoroughly examined and found to be reliable 

and complete. 

Over the years, we have reported on dramatic increases in the costs of highway 

and transit projects—in some cases after construction had begun and they had already received significant Federal funding. A recent example of unreliable cost estimating on the highway side is the San Francisco–Oakland Bay Bridge (East Span) 

project, where costs nearly doubled from $2.6 billion to $5.1 billion. Also, the finance 

plans for the Project had not been thoroughly reviewed as envisioned by FHWA 

guidance. On the transit side, we reported in 2001 that the cost estimates for the 

Seattle Central Light Rail Link Project went from $2.5 billion to $4.1 billion in just 

7 months. 

Because the Federal funding allocated to the various Lower Manhattan projects 

is currently fixed, it will be even more critical for Federal, state, and local officials 

to have reliable cost estimates and track them closely. In addition, these high-priority projects are on a very fast track and in some cases designs have been altered 

along the way. Thus, it is important to maintain reliable cost estimates and update 

them as events change. FTA officials told us they are aggressively using a risk management approach to keep costs within estimates and that risk analysis was applied 

early in project development. If higher costs are estimated along the way, FTA requires the grantee to develop a recovery plan to find ways to keep costs within the 

funding allocations. Such a cost containment action already occurred on the Fulton 

Street project, requiring a project-wide cost recovery plan to address such budget 

issues as remaining real estate acquisition and tenant relocations, a possible re-design of the Transit Center, and environmental requirements for building 

deconstruction. Unless costs are aggressively controlled, the costs could easily exceed the $4.55 billion currently allocated by the Federal Government, and it is not 

clear what funding sources would cover those increased costs. 

Focus on Project Management and Financial Oversight of Transportation 

Projects. Early and continuous oversight by Federal agencies of states’ project and 

financial management practices are key to controlling project costs, preventing 

delays, and reducing the potential for safety and environmental problems. FTA and 

FHWA have different approaches to overseeing large transportation projects. 

Transit Projects. FTA has institutionalized the use of project management oversight contractors (PMOCs) and financial management oversight contractors 

(FMOCs) to oversee large transit projects and to report to its in-house staff on findings and needed corrective actions. They are third-party contractors who look at 

FTA-funded projects in accordance with FTA guidance. FMOCs are used to evaluate 

a grantee’s financial condition and its financial capability to construct, operate, and 

maintain a project. A PMOC is retained by FTA to evaluate a grantee’s technical 

capacity to build, operate, and maintain a project, and to monitor the grantee’s implementation of a project. This is essentially a sound approach that can provide 

early warnings of cost, schedule, and quality problems. 
223

In addition, FTA requires that grantees submit a project management plan. The 

plan, submitted in support of an application for a full funding grant agreement, 

demonstrates a grantee’s technical capacity to build, operate, and maintain the 

project, together with the grantee’s existing transit system. A project management 

plan is an evolving document, first prepared during preliminary engineering, which 

follows a project through final design, construction, and revenue operations. 

We have seen both the strengths and the weaknesses of the PMOC program in 

our work on Puerto Rico’s Tren Urbano project in 2000 and 2002. Our May 2000 

review of Tren Urbano found that the PMOC had discovered and raised important 

schedule and construction quality issues. However, during our March 2002 audit we 

found that Tren Urbano officials consistently reported that the estimated cost of the 

project was $1.9 billion. We discovered that the estimated costs had actually increased by 10 percent, but the PMOC had accepted Tren Urbano’s prior representations without checking them. All of the Lower Manhattan transit projects have a 

PMOC assigned to them and an FMOC is retained on as-needed basis, which is 

critically important. FTA should ensure that the PMOCs are aggressively monitoring the projects and that recommendations made by the PMOCs are fully analyzed by the Lower Manhattan Recovery Office and expeditiously addressed. 

• Highway Projects. Historically, FHWA focused on detailed engineering activities and not on project management and financial oversight. FHWA performed contract-level administration and engineering activities, such as approving contract 

change orders and deciding on the location and wording of highway signs. Over the 

past several years, FHWA has taken important steps to change its focus. 

As we noted in our DOT 2006 Top Management Challenges report (issued in November 2005), we have seen positive signs that FHWA is committed to improving 

its oversight of transportation dollars and is implementing new oversight programs. 

For example, FHWA has established a new Financial Integrity Review and Evaluation program. This program calls for FHWA division offices to perform oversight of 

state management practices, including assessing management risks, reviewing financial management processes, and spot checking a sample of payments on highway 

projects to ensure that Federal funds are properly managed. Sustained and effective 

implementation of this should be a priority for FHWA. 

Moreover, Congress also made several important changes in the 2005 Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users 

(SAFETEA–LU) that are intended to strengthen FHWA oversight. For example, finance plans are required for projects exceeding $100 million in total cost. Another 

change is that the $1 billion threshold defining major projects was lowered to $500 

million. Such major projects are now required to have project management plans in 

addition to the previously required finance plans. We strongly support these actions. 

The purpose of the new project management plan program is to serve as a ‘‘roadmap’’ to help the project delivery team maintain a constant focus toward delivering 

the major project in an efficient and effective manner by clearly defining the roles, 

responsibilities, processes, and activities. The project management plan is supposed 

to be a living document in which revisions will be issued as the project progresses 

in order to add, modify, or delete provisions that will result in the most effectively 

managed project. These revisions and updates to the project management plan will 

occur prior to issuing the environmental decision, prior to authorization of Federalaid funds for right of way acquisition, and prior to authorization of Federal-aid 

funds for construction. 

Prepare Finance Plans to Identify Cost, Schedule, Funding and Risks to 

a Project. A finance plan is a management tool that is vital in providing project 

managers and the public with information on how much a project is expected to 

cost, when it will be completed, whether adequate funding is committed to the 

project, and whether there are risks to completing the project on time and within 

budget. Regularly updated finance plans provide current information about project 

costs, financing, schedule, and technical issues to enable Congress, the Department, 

states, project managers, and the public to continually evaluate the progress of a 

project. Recognizing how significant and critical this basic oversight tool is, in 

SAFETEA–LU Congress changed FHWA’s policy regarding finance plans. Previously, only Major Projects (those over $1 billion at the time) were required to have 

finance plans. Now, all projects over $100 million will be required to have finance 

plans. This was a positive move. 

While the transit projects under the Lower Manhattan Recovery Office’s supervision are not required to have finance plans, the office has implemented construction agreements. According to FTA, these agreements were implemented to help expedite these projects and are analogous to a finance plan. Construction agreements 

delineate key terms of the projects, including development and recovery plans. The 
224

construction agreement for each project is reviewed frequently and must have: (1) 

a recovery plan, (2) risk assessment process and, (3) a project reserve. 

One of the five projects in Lower Manhattan (Route 9A) is mostly a highway 

project that is being managed by FHWA—even though it is being partially funded 

with FTA dollars. FTA and FHWA have entered into two memoranda of agreement 

laying out the types of oversight that FHWA will be expected to provide, which are 

different from FHWA’s regular oversight mechanisms and more similar to the forms 

of oversight that would typically be found on an FTA project, including a PMOC on 

the Route 9A Project, which it normally would not do. FTA’s agreement with FHWA 

stipulates that this project must have a finance plan. 

Implement More Cost–Effective Engineering Alternatives. Since 1970, 

many industries and Government agencies have successfully employed value engineering programs to control costs on major projects. The purpose of these programs 

is to objectively review all reasonable alternatives during the design phase to find 

more cost-effective alternatives. For example, FHWA’s value engineering program, 

established in 1997, requires that a study be performed on all Federal-aid National 

Highway System projects with an estimated cost of $25 million or more and on 

other projects where using value engineering has a high potential for cost savings. 

Some states have been using value engineering effectively. However, our ongoing 

work on value engineering indicates states could be saving tens of millions of dollars 

if they would use value engineering studies on more projects and more frequently 

adopt the recommendations made during studies that are conducted. 

FTA also requires value engineering. To its credit, some of the Lower Manhattan 

Recovery Office-supervised projects have already had such studies performed and 

the staff told us that recommendations have been implemented. For example, according to Lower Manhattan Recovery Office officials, savings based on accepted 

value engineering recommendations related to the Fulton Street Transit Center are 

estimated to be nearly $67 million. 

Manage Project Schedules to Minimize Costly Delays. Transportation 

projects have become larger and more technically complex in the last decade and 

require coordination of the activities of multiple contractors working in a confined 

construction area. Accordingly, managing project schedules is a critical function in 

efforts to minimize cost growth. The key is to maintain a master schedule that ties 

together the work of all the contractors and identifies and tracks the costs of labor, 

material, and equipment resources required to complete each task. Master schedules 

are referred to as integrated, resource-loaded schedules. These schedules can identify and prevent schedule conflicts before they occur and can track progress on individual tasks, allowing early action to prevent or mitigate delays, thereby reducing 

or preventing cost increases. 

Failure to maintain integrated resource-loaded schedules has led to unanticipated 

project delays and increased costs. For example, in the past we reported that the 

failure to maintain integrated, resource-loaded schedules led to unanticipated delays 

and increased costs on the Springfield Interchange Project in Virginia, including $49 

million that were added to project costs. 

Effectively managing project schedules will be especially important in Lower Manhattan due to the pressing need to get these high-priority projects up and running 

as quickly as possible and ensure that costs stay within existing Federal allocations. 

The significance of managing schedules in the case of Lower Manhattan cannot be 

overstated, as each of these projects is large, complex, has expedited time frames, 

and will likely require the coordination of numerous contractors and subcontractors 

all at once. For example, we were informed by FTA that the Permanent World 

Trade Center PATH Terminal involves four contracts—three relatively small ones 

and the major construction management/general contractor (CMGC) contract. The 

CMGC currently has 4 prime contractor firms and at least 10 subcontractors. FTA 

staff told us they expect the number of subcontractors to grow over time. 

Recover Overpayments from Contractors and Promptly Resolve Construction Claims to Control Project Costs. Change orders to contracts are initiated by the project or contractors in response to changes in the project’s scope or 

differing site conditions. However, some change orders are a result of design errors 

or omissions caused by consultant engineers. Recovery of funds paid on these 

change orders offers an opportunity to reduce project costs. Maintaining tight control over change orders and promptly resolving outstanding construction claims are 

key to controlling project costs. Past projects, such as Boston’s Central Artery/Tunnel Project, might have been able to significantly reduce costs by aggressively pursuing opportunities to recover costs of design errors or omissions caused by engineering consultants. For example, in 2004 we reported that the Project had 4,805 

outstanding claims with a total value of approximately $194 million, of which 11 

percent were over 4 years old. 
225

Timely resolution of change orders is important because the longer the issues remain unresolved, the more difficult it becomes for project managers to determine 

whether the change orders were caused by design errors or omissions. Maintaining 

supporting documentation is also critical. In the case of Lower Manhattan, project 

managers should make sure they have a process in place for aggressively pursuing 

opportunities for cost recovery in a timely fashion to maximize savings. We were informed that the Lower Manhattan Recovery Office has already performed a change 

order review on the Fulton Street project and plans to pursue cost recovery in the 

future, where appropriate. 

In conclusion, DOT has a critical role in the reconstruction of Lower Manhattan. 

Over the past several years, the Department has significantly strengthened its oversight of major transportation projects. Now it is critical that all of us at DOT vigorously employ the oversight tools and resources we have at our disposal and apply 

the lessons we have learned from past projects to get the most for the tax payer 

dollars that have been invested in the reconstruction of Lower Manhattan. 

This concludes our prepared remarks. We would be happy to answer any questions you may have.

Exhibit: High Priority Projects Funded with the $4.55 Billion the Federal Government 

Dedicated to Lower Manhattan Reconstruction 

Project and Description 

Project Sponsor & 

Federal Oversight 

Responsibility 

Baseline Cost 

Estimate & 

Funding Sources 

Baseline Schedule 

for Completion 

Permanent World Trade Center PATH 

Terminal. This project will serve the PATH 

subway system, and includes pedestrian 

connections to the Fulton Street Transit 

Center to the east and to the World 

Financial Center and the World Financial 

Center Ferry Terminal under Route 9A 

(West Street) to the west. Additional 

scope of this project includes the 

retaining walls at the World Trade Center 

site, and the security hardening of the 

transportation facilities..

Port Authority of 

New York & New 

Jersey.

FTA oversees it 

through the 

Lower Manhattan Recovery Office.

Cost: $2.2 billion 

($1.92 billion 

in Federal 

funding and 

$300 million 

in PANYNJ insurance 

money).

2011

Fulton Street Transit Center. This project is 

a multi-level complex of stations to serve 

12 different subway lines and over 

275,000 daily commuter trips. The 

existing maze of narrow ramps, stairs 

and platforms will be transformed, 

allowing for easier transfers, better 

access from street level, and will have a 

direct link to the new PATH Terminal and 

the World Trade Center site..

New York State 

Metropolitan 

Transportation 

Authority..

FTA oversees it 

through the 

Lower Manhattan Recovery Office.

$847 million (All 

Federal funding).

2010

South Ferry Terminal Station. This project 

will replace the functionally obsolete 

station under Battery Park that serves 

Staten Island Ferry riders. The project will 

convert the single track, 5-car loop 

station into a 2-track, 10-car, stub end 

two-platform terminal with new access 

for disabled riders and better connections 

to the renovated Staten Island ferry 

terminal and the R and W subway lines..

New York State 

Metropolitan 

Transportation 

Authority..

FTA oversees it 

through the 

Lower Manhattan Recovery Office.

$420 million (All 

Federal Funding).

2008
226

Exhibit: High Priority Projects Funded with the $4.55 Billion the Federal Government 

Dedicated to Lower Manhattan Reconstruction—Continued

Project and Description 

Project Sponsor & 

Federal Oversight 

Responsibility 

Baseline Cost 

Estimate & 

Funding Sources 

Baseline Schedule 

for Completion 

Route 9A Promenade South/ West Side.

This project will rebuild the major northsouth arterial roadway in Lower 

Manhattan between Chambers Street and 

Battery Place, with the southern end of 

the project known as Promenade South. 

The eastern sidewalk will be widened 

where feasible to improve accessibility, 

provide street trees, and add aesthetic 

enhancements. On the west side, along 

the new Promenade and adjacent to 

Battery Park City, a series of unique 

urban spaces are envisioned and are 

being developed for varied uses..

New York State Department of 

Transportation..

FTA’s Lower Manhattan Recovery 

Office and FHWA 

share oversight 

responsibilities 

through memoranda of agreement.

$352 million (All 

Federal Funding).

2009 

[Note: a small 

section of this 

project has been 

substantially 

completed.]

World Trade Center Vehicle Security 

Center. This project is a vehicle securityscreening center for the World Trade 

Center site. The security center will 

screen all vehicles for security threats 

and will be a vital component to the 

World Trade Center Master Plan..

New York State 

Metropolitan 

Transportation 

Authority..

FTA oversees it 

through the 

Lower Manhattan Recovery Office.

$478 million (All 

Federal funding).

2010

Mr. ROGERS. Thank you, Mr. Zinser. 

The Chair now recognizes Mr. Ron Calvosa, Director of Fraud 

Prevention for the Lower Manhattan Construction Command Center, for your opening statement. Welcome. 

STATEMENT OF RON CALVOSA 

Mr. CALVOSA. Thank you. 

Chairman Rogers, Ranking Member Meek, Chairman King, 

members of the subcommittee, thank you for the opportunity to testify today on behalf of the Lower Manhattan Construction Command Center and its executive director, Charles Maikish. I am 

here to discuss the fraud prevention measures being instituted 

around construction activities in lower Manhattan, including many 

projects funded by federal grants. 

On November 22, 2004, New York Governor George Pataki and 

New York City Mayor Bloomberg issued executive orders establishing the command center as a central point of control for all 

large construction projects. As mandated by the governor and the 

mayor, the command center is charged with the coordination and 

oversight of construction projects in lower Manhattan south of 

Canal Street from the Hudson to the East River. 

The command center has also been given responsibility for overall fraud prevention regarding construction projects under its jurisdiction. There is $9.99 billion worth of construction work in 

progress or ready to commence within a three-block radius of the 

World Trade Center site. Within the next 5 years, more than $20 
227

billion in construction work will be under way in all of lower Manhattan south of Canal Street. 

The current fraud prevention program is comprised of the following six measures. First, in order to fulfill the responsibility of 

fraud prevention, the executive orders mandate that the command 

center work with the lower Manhattan construction integrity team, 

or LMCIT. LMCIT is a group of inspectors general with oversight 

responsibility for agencies performing work in lower Manhattan, or 

whose agencies fund projects in lower Manhattan. This unique 

group of federal, state and local investigative offices work collaboratively to ensure that measures are taken to prevent, detect and 

eliminate fraud across the various agencies and projects. 

Second, the executive orders direct the command center to receive allegations of corruption or criminal activity through the creation of a fraud prevention hotline, which has been established 

along with an online complaint forum on the command center’s 

Web site. The command center has also developed a campaign to 

publicize the hotline. 

Third, the command center, along with members of LMCIT, including the offices of inspectors general for the United States Department of Transportation, the Port Authority of New York and 

New Jersey, and the State of New York, developed a fraud prevention training module for presentation to contractors and consultants, supervisory and managerial employees, about prohibited conduct. 

Fourth involves the vetting of contractors. The various agencies 

awarding lower Manhattan construction contracts have primary responsibility for ensuring that business entities and their principals 

have the necessary integrity to receive public works contracts. The 

command center developed a list of best practices for conducting an 

integrity review and recommended that the contracting agencies 

perform these checks. In addition, the command center also recommended an enhanced level of review for lower Manhattan 

projects as to the threshold trigger for conducting an integrity review. 

Moreover, the command center recommended that information 

sharing done among LMCIT members become part of the overall 

standard vetting process by having LMCIT members search their 

internal databases for any derogatory information on proposed contractors or subcontractors. Each member is able to provide non-confidential information about ongoing or closed investigations for the 

LMCIT members. 

Fifth, with an acute awareness of the need for security at lower 

Manhattan construction sites, especially the World Trade Center 

site, a concern about the possible infiltration of organized crime 

onto construction projects, and an overall concern regarding the 

backgrounds of construction workers, the command center has 

worked with the inspector general’s office for the Port Authority of 

New York and New Jersey and organized labor to determine the 

feasibility of conducting background checks on contractor employees. A protocol has been developed and is being implemented. 

Sixth, integrity monitors. Also known as independent private sector inspectors general or IPSIGs, have proven to be a valuable tool 

for preventing fraud. Integrity monitors will be an important com-
228

ponent of the overall fraud prevention program for lower Manhattan. Integrity monitors are already being utilized on some of lower 

Manhattan’s construction projects and there are plans to expand 

their use on other projects. My colleague Michael Nestor of the Port 

Authority inspector general’s office will provide more details about 

this topic next. 

The steps indicated above are an outline and a beginning for the 

lower Manhattan fraud prevention program. The program will be 

elastic, adapting itself to address specific areas and needs. Future 

initiatives are under development. These include the development 

of a master database of all contractors and subcontractors, consultants and sub-consultants working on construction projects in lower 

Manhattan, and the development of a standardized contract language to address fraud prevention concerns. 

The ultimate goal is not only to have lower Manhattan rebuilt, 

but to have it rebuilt with integrity. 

This concludes my testimony. I would be glad to answer any 

questions that you have. 

[The statement of Mr. Calvosa follows:]

PREPARED STATEMENT OF RONALD P. CALVOSA

Chairman Rogers, Ranking Member Meek, and Members of the Subcommittee: 

I. INTRODUCTION 

Thank you for the opportunity to testify today on behalf of the Lower Manhattan 

Construction Command Center and its Executive Director Charles J. Maikish. (Biographies of Charles J. Maikish and Ronald P. Calvosa are attached as Exhibit 1). I 

am here to discuss the Fraud Prevention measures being instituted around the construction activities involved in the rebuilding of Lower Manhattan. There are many 

projects ongoing or planned for Lower Manhattan, some involving grants of federal 

funds. It is essential that the work proceed with the utmost integrity.

II. SUMMARY 

The Lower Manhattan Construction Command Center has been given responsibility for overall fraud prevention regarding construction projects under its jurisdiction. It has already formulated a plan and is implementing that plan in an effort 

to eliminate the opportunity for wrongdoing.

There are six measures comprising the current fraud prevention program. These 

are: 

(1)Lower Manhattan Construction Integrity Team 

(2)Fraud Prevention Hotline 

(3)Fraud Awareness Training 

(4)Vetting of contractors 

(5)Contractor Employee Screening and Access Control 

(6)Integrity Monitors 

The fraud prevention program will be discussed in detail including the steps that 

have been taken thus far and will conclude with future steps that are planned. First 

I would like to provide this subcommittee with a description of the Lower Manhattan Construction Command Center.

III. LOWER MANHATTAN CONSTRUCTION COMMAND CENTER 

On November 22, 2004, concerned about the potential impacts of the large amount 

of construction projects underway or planned for the constricted area of Lower Manhattan during the reconstruction after the September 11 attack, New York Governor 

George Pataki and New York City Mayor Michael Bloomberg issued Executive Orders No. 133 and 53, respectively. They established a central point of control for all 

large construction projects—the Lower Manhattan Construction Command Center 

(‘‘LMCCC’’). The purpose of the LMCCC, as stated in the Executive Orders, is to 

‘‘. . .coordinate between all construction located in Lower Manhattan [including] all 

construction projects beginning from 2004 to 2010 valued at over $25 million . . . 

work requiring governmental action or permit, and construction requiring work directly in City or State streets or highways.’’ (The Executive Orders are attached as 

Exhibit 2). 
229

As mandated by the Governor and the Mayor, the LMCCC is charged with the 

coordination and oversight of construction projects in Lower Manhattan south of 

Canal Street from the Hudson to the East River. It will bring together private developers, public agencies and authorities, utilities, businesses and resident representatives in one physical location. The LMCCC and its Executive Director will provide 

a forum for expeditious and consistent decision-making on disputes among agencies, 

a key element to ensure a successful rebuilding. Simply put, the mission of the 

LMCCC is to facilitate, mitigate and communicate. 

Significantly, the Executive Orders directed the LMCCC to perform a fraud prevention function and to employ a Fraud Prevention Director.

IV. SCOPE OF PROJECTS 

There is $9.99 billion in construction work in progress or ready to commence within a three block radius of the World Trade Center site. Within the next five years, 

more than $20 billion in construction work will be underway in all of Lower Manhattan, south of Canal Street. 

This translates into a need for in excess of two million cubic yards of concrete; 

more than 200,000 concrete trucks; and a projected daily construction workforce of 

6,500 for the next three to five years. 

Projects south of Canal Street in Lower Manhattan include the rebuilding of the 

World Trade Center Site with the erection of the Freedom Tower and three other 

towers. In addition, a new Port Authority of New York & New Jersey PATH Transportation Hub will be built on that site, as well as, the Memorial and Museum. A 

Performing Arts Center will also be constructed on the site. 

Other projects in the area include the deconstruction of 130 Liberty Street, (the 

former Deutsche Bank building), and the construction of a fifth tower and vehicle 

security center in its place. In addition, work being done with Federal Transit Administration (‘‘FTA’’) funds includes the creation of a new Fulton Street Transit 

Center and a new South Ferry Subway Station. Federal Highway Administration 

funding is being used to develop Route 9A. Moreover, various street reconstruction 

projects are either underway or scheduled to commence. These projects are the responsibility of a number of agencies including the Port Authority of New York & 

New Jersey; the Lower Manhattan Development Corporation; the Metropolitan 

Transportation Authority; the New York State Department of Transportation; and 

the New York City Departments of Transportation and Design & Construction. 

In addition to public projects, there are numerous private development projects 

in the area, as well. (A map of planned and ongoing Lower Manhattan projects is 

attached as Exhibit 3).

V. THE FRAUD PREVENTION PROGRAM 

1. Lower Manhattan Construction Integrity Team 

In order to fulfill the responsibility of fraud prevention, the Executive Orders 

mandate that the LMCCC work with the various Inspectors General that comprise 

the Lower Manhattan Construction Integrity Team (‘‘LMCIT’’). 

In early 2004, a group of Inspectors General with oversight responsibility for 

agencies performing work in Lower Manhattan, or whose agencies issue funds for 

projects in Lower Manhattan gathered together at the invitation of the Vice President of Investigations for the Lower Manhattan Development Corporation 

(‘‘LMDC’’), to form LMCIT. The group was formed in mutual recognition of the inherent risks and heightened opportunities for fraud against the projects of all the 

affected agencies. There was also mutual recognition to jointly explore what could 

be done cooperatively for the benefit of all the programs. In addition, the group assisted LMDC in developing fraud prevention measures for LMDC’s programs. 

With the advent of construction, LMCIT has become more focused in its mission 

to work collaboratively toward its goal of preventing fraud across the various agencies and projects. In my capacity as LMCCC’s Fraud Prevention Director, I chair 

the LMCIT meetings and coordinate its fraud prevention efforts. 

LMCIT is comprised of the Office of Inspector General for the State of New York; 

the New York City Department of Investigation; the Offices of Inspectors General 

for the Port Authority of New York & New Jersey; the Metropolitan Transportation 

Authority; the United States Department of Transportation; and the United States 

Department of Housing and Urban Development. Additionally, the Lower Manhattan Development Corporation’s Investigations Unit is also a represented on LMCIT, 

as well as the New York City Business Integrity Commission, the Office of Inspector 

General for the United States Department of Labor and the Chief Compliance Officer for the Metropolitan Transportation Authority. 

LMCIT serves as the backbone for the Fraud Prevention Program. This unique 

group of federal, state and local investigative offices is relied upon to ensure that 

measures are taken to prevent, detect and eliminate fraud.
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2. Fraud Prevention Hotline 

The Executive Orders directed LMCCC to receive allegations of corruption or 

criminal activity by or on behalf of any agency employee, public official, contractor 

employee, agent, subcontractor, vendor, or labor official through the establishment 

of a Lower Manhattan Fraud Prevention Hotline. 

A contract, funded by the FTA, was awarded to an Integrity Hotline service provider, to work with LMCCC in establishing a complaint hotline for the receipt of 

telephone complaints from a variety of sources, including construction workers and 

members of the public. 

The Hotline service provider receives calls, records and transmits complaints to 

LMCCC. In addition, a database of complaints is accessible to LMCCC through the 

Internet. Incoming complaints are reviewed and referred to the appropriate Inspector General’s office having jurisdiction over the matter. 

The Hotline serves as a cornerstone for the Fraud Prevention Program, providing 

a ready outlet for complainants to provide information about potential wrongdoing. 

Once the Hotline was created, LMCCC began a campaign to publicize the existence of the Hotline. Posters were created and placed at various jobsites in Lower 

Manhattan. (A copy of the Hotline Poster is attached as Exhibit 4). In addition, a 

full page advertisement (back cover) for the Hotline was recently placed in neighborhood newspaper’s annual community handbook. 

In addition, the Hotline number has been placed on the back of identification/access cards for workers on one of the Lower Manhattan projects. 

To further enhance the opportunity to report alleged fraudulent activity, an online complaint form was launched on LMCCC’s website, www.LowerManhattan.info. 

This form provides the opportunity to make a report via the web. The complaint 

form can also be printed and mailed to LMCCC. 

Whether the complaint is made via the Hotline, the Internet, or by mail, a complainant may choose to be anonymous, or to supply their contact information. In all 

instances, maintaining confidentiality is paramount. 

In the near future, additional steps will be taken to publicize the Hotline and 

web-based complaint form.

3. Fraud Awareness Training 

LMCCC along with members of LMCIT, including the Offices of Inspectors General for the United States Department of Transportation; the Port Authority of New 

York & New Jersey; and State of New York, developed a fraud prevention training 

module for presentation to contractors and their employees. 

The training was modeled after training typically given in the New York area to 

government employees in agencies involved in the contracting process. While common in the public sector, this sort of training heretofore had rarely been provided 

to contractor staff. Similar to the training given to public agency employees, this 

training is to provide information about prohibited conduct. For example, contractor 

employees are told what penalties they face if they offer or give bribes or gratuities 

to public employees. In addition, they are told that submitting false documents, failure to pay the correct wages, or engaging in other fraudulent activity can result in 

criminal charges, civil action, and administrative sanctions. The administrative 

sanctions (e.g., being placed on an ineligible or suspended bidders list) can have serious detrimental effects on a business entity’s ability to receive future publicly 

funded contracts. 

The target audience for this training is contractor employees in managerial or supervisory positions. The training has been rolled out and additional training sessions are being scheduled. A record is kept of all those receiving the training.

4. Vetting of Contractors 

The various agencies awarding Lower Manhattan construction contracts have primary responsibility for ensuring that business entities and their principals have the 

necessary integrity to receive public works contracts. In an attempt to attain a uniform standard for conducting an integrity review, LMCCC surveyed each contracting agency to determine what steps were being taken as part of their integrity 

review of contractors. The survey results indicated that most agencies were performing similar checks. LMCCC reviewed the results and developed a list of best 

practices for conducting a rigorous integrity review. LMCCC recommended that the 

contracting agencies perform these checks uniformly. 

Moreover, LMCCC also recommended an enhanced level of review for Lower Manhattan projects, far exceeding the requirements and practices of the contracting 

agencies as to the threshold trigger for conducting an integrity review. These recommendations included performing checks on multiple-tiered subcontractors, as well 

as general contractors and first-tier subcontractors. 
231

In addition, LMCCC recommended that information sharing done among LMCIT 

members become part of the overall standard vetting process. LMCCC recommended 

that the vetting process include a search by LMCIT members of their internal databases for any derogatory information on proposed contractors/subcontractors. This 

part of the check is very valuable as each member is able to provide non-confidential 

information about ongoing or closed investigations to other LMCIT members in 

order to assist contracting agencies in their decision making process. 

LMCCC serves as the facilitator for vetting amongst LMCIT members. Requests 

for name checks are received, logged, disseminated and tracked to completion. 

LMCCC communicates the results of the name checks to the requestor. To date, 

LMCCC has facilitated name check requests on a total of nearly 350 business entities and individuals.

5. Contractor Employee Screening and Access Control 

With an acute awareness for the need for security at Lower Manhattan construction sites, especially the World Trade Center site; a concern about the possible infiltration of organized crime onto construction projects; and an overall concern regarding the backgrounds of construction workers, LMCCC has worked with the Inspector 

General’s Office for the Port Authority of New York & New Jersey, and organized 

labor, to determine the feasibility of conducting background checks on contractor 

employees. A plan was developed and with comments and suggestions of LMCIT 

members a protocol was developed. 

In order to be granted access to the construction sites, employees will have to submit to background screening that will include a cross check against the terrorist 

watch-list. In addition, criminal record searches will be conducted to determine if 

a prospective worker has a criminal conviction or outstanding criminal charge in the 

key areas such as organized crime, theft, and violence. Workers who clear these 

checks will be issued an access card. 

Initially the program will be implemented at the World Trade Center site, but we 

are hopeful that we will be able to extend the program to other construction projects 

in Lower Manhattan.

6. Integrity Monitors 

Integrity Monitors, also known as Independent Private Sector Inspectors General 

or ‘‘IPSIGs’’, have proven to be a valuable tool for preventing fraud. They serve as 

a supplement to contracting agencies’ existing safeguards, such as, auditing provided by both internal and external auditors. They also supplement existing investigative resources of an Inspector General’s office. Integrity Monitors provide a 

multi-disciplined approach to the oversight of construction projects. They typically 

bring together legal, audit/accounting, investigative, engineering and environmental 

expertise. Integrity Monitors will be an important component of the overall Fraud 

Prevention Program for Lower Manhattan. 

Integrity Monitors are generally used for two specific purposes. They can be utilized to address an integrity issue pertaining to a specific business entity. They can 

also be utilized to ensure the integrity of a particular project. We will see the use 

of Integrity Monitors in both of these ways with regard to Lower Manhattan construction projects. 

LMCCC is uniquely positioned to coordinate the activities of Integrity Monitors 

in Lower Manhattan. Working with the Inspectors General, or other officials overseeing the work of the Integrity Monitors, the LMCCC’s Fraud Prevention Director 

will be made aware of particular problems or areas of concern that may be develop, 

or be uncovered, regarding a particular individual, business entity or project. Working with LMCIT, LMCCC will be able to communicate the issues to other members 

in the group that may have similar issues. The goal, of course, is to prevent problems or address them should they be detected. 

Integrity Monitors are already being utilized on some Lower Manhattan construction projects and there are plans to expand their use on other projects. At present, 

there is an Integrity Monitor overseeing the deconstruction work on the Lower Manhattan Development Corporation’s 130 Liberty Street project. The Metropolitan 

Transportation Authority has a compliance monitor in place regarding its contracts 

for the construction of the Fulton Street Transit Center and South Ferry Subway 

Station. In addition, the Port Authority of New York & New Jersey is in the process 

of hiring an Integrity Monitor to oversee the construction of the new PATH Transportation Hub and other Port Authority projects.

IV. CONCLUSION 

The steps indicated above are an outline and a beginning for the Lower Manhattan Fraud Prevention Program. The Program will be elastic, adapting itself to address specific areas and needs. Future initiatives are under development. These in-
232

clude the development of a master database of all contractors, subcontractors, consultants and subconsultants working on construction projects in Lower Manhattan, 

and the development of standardized contract language to address fraud prevention 

concerns. 

The ultimate goal is not only to have Lower Manhattan rebuilt, but to have it 

rebuilt with integrity. 

This concludes my testimony. I would be glad to answer any questions that you 

have.

Mr. ROGERS. Thank you, Mr. Calvosa, for your statement. 

The Chair now recognizes Mr. Michael Nestor, Director of the Office of Investigations of the Port Authority of New York and New 

Jersey Office of Inspector General. 

Welcome, Mr. Nestor. We look forward to your statement. 

STATEMENT OF MICHAEL NESTOR 

Mr. NESTOR. Thank you. 

Chairman Rogers, Ranking Member Meek and Congressman 

King, thank you for the opportunity to testify today before the subcommittee on behalf of the Port Authority of New York and New 

Jersey, and its Office of Inspector General. I am here to discuss my 

office’s role in fraud prevention and detection related to the funds 

expended by the Port Authority following the 9/11 disaster, as well 

as the rebuilding that has already commenced at the World Trade 

Center site. 

As you know, the Port Authority owns the World Trade Center 

site and had occupied approximately 20 floors in the north tower 

of the Trade Center, with my office situated on the 77th floor. 

When the first plane hit the north tower on 9/11, I was with some 

of my staff in our office just a few floors below impact. Having been 

able to evacuate minutes prior to the building’s collapse, the Office 

of Inspector General was extremely fortunate not to have lost any 

staff. However, as you know, the Port Authority lost 37 police officers and 38 civilian employees. 

I will describe for you a few investigations that the OIG conducted in which we found individuals, including Port Authority employees, who took advantage of the disaster. I will also explain the 

steps we are taking to prevent fraud during the multi-billion dollar 

rebuilding on the World Trade Center site over the next number 

of years. 

Acting on information we received just a few weeks following the 

terrorist attack, the OIG conducted an investigation that determined that 23 employees fraudulently received a total of $32,980 

of benefits from both the American Red Cross and Safe Horizons 

by misrepresenting that they lost their jobs due to the disaster. All 

employees were arrested and pled guilty to criminal larceny 

charges and either resigned or were terminated from employment 

with the Port Authority. 

In December 2004, 17 men and three companies were indicted on 

racketeering charges for defrauding the Port Authority involving 

asbestos abatement contract work. One aspect of the indictment involved the contract covering the maintenance and cleaning of 

World Trade Center artifacts after the attacks. The indictment 

charged a company for stealing $104,000 from the Port Authority 

on that contract through the inclusion of ghost employees on the 

payrolls. This scheme was carried out with the assistance of a cor-
233

rupt Port Authority contract employee assigned to oversee this 

project on behalf of the Port Authority. 

This contract employee was also charge in this indictment for removing samples of known asbestos, contaminated materials from a 

different job site that the subject company was working on, and 

substituting these samples for negative samples he had taken from 

the World Trade Center artifacts, so that the company’s Port Authority contract and his ability to receive further bribe payments 

from the company would be extended. This employee pleaded guilty 

to both schemes. The case against the company is still pending. 

In August 2002, the OIG commenced a joint investigation with 

the United States Attorney for the Southern District of New York 

and the inspector general for the Department of Homeland Security 

into an allegation that New York Waterways, a New Jersey-based 

ferry provider, fraudulently billed the Port Authority and FEMA 

for ferry service provided following 9/11 as the result of damage to 

the Port Authority Trans–Hudson, PATH, system. 

As this is an ongoing investigation, I can’t comment any further 

on it. However, Mr. Chairman, upon completion of the investigation, which should be shortly, I will report back to the subcommittee, as I believe the results will be of interest to you. 

Equally important are our efforts to prevent and deter fraud following a disaster and during the rebuilding and recovery from a 

disaster. We are taking a proactive approach with the new World 

Trade Center HUB project, and that is get involved early-on. As 

you have heard from Mr. Calvosa, we are working closely together 

on a fraud prevention program which includes an integrity awareness program which the OIG was the first to begin presenting to 

contractors at the World Trade Center site. 

Our partnership with other inspectors general, vetting of contractors, background screening of contractor employees, and access control on which the Port Authority has taken the lead at the site, and 

the use of integrity monitors. So as not to repeat the details of each 

that you have already heard from Mr. Calvosa, I would like to concentrate my remaining time on the use of integrity monitors. 

Due to the enormous amount of money being spent on the rebuilding of the World Trade Center site, the Port Authority has determined that additional measures and resources are required to 

assist the Port Authority and the OIG in its fraud prevention efforts. Integrity monitors were successfully used at Ground Zero 

after the 9/11 attack during the cleanup to oversee the four construction managers. They were instrumental in minimizing and deterring fraud during that effort. We are now in the final stages of 

selecting an integrity monitor for the new $2.2 billion World Trade 

Center Transportation HUB project. 

We are considering the use of monitors for additional projects on 

the site. The integrity monitor will assist with the review of existing procedures for fraud and corruption risks, recommend and assist in implementing procedures designed to mitigate those risks 

identified, conduct forensic reviews of payment requisitions, and 

provide investigative services as necessary and directed by my office in such areas as labor racketeering, compliance with state and 

federal labor laws, worker safety, environmental plans and procedures. 
234

In conclusion, the above investigations and fraud prevention 

measures exhibit the Port Authority’s commitment to accomplishing its goals and rebuilding the World Trade Center site with 

the utmost of integrity. 

Thank you for the opportunity to present my testimony before 

your subcommittee. I would be happy to answer any questions. 

[The statement of Mr. Nestor follows:]

PREPARED STATEMENT OF MICHAEL NESTOR

Chairman Rogers, Ranking Member Meek, and Members of the Subcommittee:

I. INTRODUCTION 

Thank you for the opportunity to testify today before the Subcommittee on behalf 

of The Port Authority of New York & New Jersey (‘‘Port Authority’’) and its Inspector General Robert E. Van Etten. I am here to discuss my office’s role in fraud prevention and detection related to the funds expended by the Port Authority following 

the 9/11 disaster, as well as during the rebuilding that will take place, and has already commenced, at the World Trade Center Site.

II. SUMMARY 

As you know, the Port Authority owns the World Trade Center Site and had occupied approximately twenty floors in the North Tower of the Trade Center, with my 

office situated on the 77th floor. When the first plane hit the North Tower on 9/

11, I was with some of my staff in our office, just a few floors below impact. Having 

been able to evacuate minutes prior to the building collapse, the Office of Inspector 

General (‘‘OIG’’) was extremely fortunate not to have lost any staff; however, as you 

know, the Port Authority lost thirty-seven (37) police officers and thirty-eight (38) 

civilian employees. 

The OIG quickly found itself a new home and continued to fulfill our mission in 

detecting and preventing fraud, as we have been doing for the Port Authority since 

its establishment in 1992. With more vigor, purpose, and conviction we turned our 

attention to ensure that no one, and in particular any Port Authority employee or 

anyone doing business with the Port Authority, would take advantage of such a 

tragedy to enrich themselves. 

I will describe for you a few investigations that the OIG conducted in which we 

found, unfortunately, individuals, including Port Authority employees, who took advantage of the disaster to enrich themselves. I will also explain the steps we are 

taking to prevent fraud during the multi-billion dollar rebuilding of the World Trade 

Center Site over the next number of years.

III. POST 9/11 FRAUD INVESTIGATIONS 

A. Financial Assistance Claims Fraud by Port Authority Employees 

Acting on information we received from a Port Authority employee just a few 

weeks following the terrorist attack, the OIG commenced an investigation into allegations that a number of Port Authority employees filed claims of unemployment 

as the result of the 9/11 terrorist attacks with the American Red Cross. In fact, all 

Port Authority employees received their uninterrupted full salaries after 9/11, and 

were clearly not eligible to receive unemployment benefits due to the disaster. 

Our investigation determined that twenty-three (23) employees fraudulently applied for benefits to both the American Red Cross and Safe Horizons by misrepresenting that they lost their jobs due to the disaster. As a result, they fraudulently 

received monetary aid from the American Red Cross and Safe Horizons for a total 

fraud of $32,980. 

All twenty-three (23) employees were arrested and plead guilty to criminal larceny 

charges and either resigned or were terminated from their employment with the 

Port Authority.

B. Fraud Against the Port Authority and FEMA by New York Waterway 

In August 2002, the OIG commenced a joint investigation with the United States 

Attorney for the Southern District of New York and the Inspector General for the 

Department of Homeland Security, into an allegation that NY Waterway, a New 

Jersey based ferry service provider, fraudulently billed the Port Authority and 

FEMA for ferry service provided following 9/11 as the result of damage to the Port 

Authority Trans–Hudson (‘‘PATH’’) system. 
235

As this is an ongoing investigation, I cannot comment any further on it. However, 

Mr. Chairman, upon completion of the investigation, which should be shortly, I will 

report back to the Subcommittee as I believe the results will be of interest to you.

C. Over-Billing Fraud by Contractor Responsible for the Maintenance 

and Cleaning of the World Trade Center Artifacts After the Attacks 

In December 2004, Inspector General Robert E. Van Etten and Manhattan District Attorney Robert Morgenthau announced the indictment of seventeen (17) men 

and three companies on racketeering charges for defrauding the Port Authority and 

other public agencies involving asbestos abatement contract work. One aspect of the 

indictment involved a contract award covering the maintenance and cleaning of 

World Trade Center artifacts after the attacks. These artifacts, which consisted of, 

among other things, pieces of structural steel, crushed police and fire vehicles, and 

the antenna from One World Trade Center, were stored at JFK’s Hangar 17. 

The indictment charged a company for stealing money from the Port Authority 

on that contract through the inclusion of ghost employees on the payrolls. Normally, 

there were two to three ghost employees a day for the duration of the job, which 

lasted from February 2002 until February 2004. The amount stolen through the 

ghost employee scheme was more than $104,000. This scheme was carried out with 

the assistance of a corrupt Port Authority contract employee assigned to oversee this 

project on behalf of the Port Authority. 

This contract employee was also charged in this indictment for removing samples 

of known asbestos contaminated materials from a different jobsite that the subject 

company was working on and substituting those samples for negative samples he 

had taken from the World Trade Center artifacts at Hangar 17, so that the company’s Port Authority contract and his ability to receive further bribe payments 

from the company, would be extended. 

This contract employee plead guilty to both schemes. The first in which he received $100 per day for allowing the ghost employees to be placed on the payroll; 

and the second where he switched contaminated asbestos samples. The case is still 

pending against the company. 

This is another example of individuals taking advantage of disasters to enrich 

themselves, and why the Inspector General community must be vigilant in our pursuit of frauds following disasters. 

We need to be proactive and creative when devising investigative ideas following 

disasters. This must be accomplished prior to a disaster so that investigative plans 

are already in place and ready to be implemented immediately after a disaster. 

Whether they are computer-matching programs to monitor the issuance of financial 

benefits, specialized programs to monitor contracts that are being awarded, or the 

review of payment requisitions for services, materials and goods—planning is critical to successfully detecting fraud and could be most helpful in deterring it as well.

IV. FRAUD PREVENTION PROGRAM FOR THE REBUILDING OF THE 

WORLD TRADE CENTER SITE 

Equally important are our efforts to prevent and deter fraud following a disaster 

and during the rebuilding and recovery from a disaster. We are taking a proactive 

approach with the new World Trade Center Transportation HUB project, and that 

is to get involved early on. We believe strongly in our preventive role and that we 

should be at the table with the agency in such an important and costly project in 

developing fraud prevention programs and controls. We have found that the agency 

welcomes our ‘‘real time’’ input and advice when developing policies, procedures, and 

strategies as opposed to waiting until those developed fail and we come in afterwards and play the ‘‘I got you’’ game. Not here. Although we have formed a strong 

working relationship with the agency on this project, we feel that we have not compromised our independent role as the IG. We have found them to be most supportive 

of the recommendations and suggestions we make. 

There will be a number of levels of oversight, and of a different variety, provided 

to the project by: the United States Department of Transportation’s Federal Transit 

Administration; the Port Authority’s Project Management staff; the Port Authority’s 

hired Construction Manager; as well as the Port Authority’s Internal Audit Department. The Audit Department, which is a component of the Inspector General’s Office, will be auditing certain components of the project. Nevertheless, the Port Authority desired a comprehensive fraud prevention program for a project of this size 

and cost. 

Our current fraud prevention program, which is fluid so that we can continue to 

enhance it, includes: an Integrity Awareness Program; a partnership with other Inspectors General and the Fraud Prevention Director at the Lower Manhattan Construction Command Center; vetting of contractors; background screening of contract 
236

employees and access control; and the use of Integrity Monitors. I will discuss each 

of these in more detail.

A. The Integrity Awareness Program 

As the result of prior corruption investigations and prosecutions that the OIG conducted, and placing a high value on the preventive side of our mission, we have doubled our efforts in educating Port Authority employees on what their ethical obligations are as public employees and officials. Therefore, approximately two years ago, 

we rolled out a new Integrity Awareness Program that all Port Authority employees 

must attend. The Program includes a presentation that reviews for employees their 

responsibility to abide by the Port Authority’s Ethical Standards and the consequences of their failure to do so. The Program explains the three primary reasons 

why people make bad decisions: financial pressure, rationalization and opportunity; 

emphasizes implications of these decisions: financial loss, embarrassment, incarceration and their responsibilities to the Port, co-workers and themselves. The Program 

explains, in laymen’s terms, Internal Controls and why they are important. The objective is early prevention, diagnoses and resolution, thereby avoiding a potential 

loss of the Port’s most valuable asset—its employees. 

This Program has been modified so that it is geared to construction contractors 

as well. In May, we began to present this program to the Construction Manager and 

General Contractor for the Port Authority’s New World Trade Center Transportation HUB. The presentation is being given to all supervisory staff from the field 

superintendent to the highest level individual on the project from each company. All 

contractors, including all lower-tiered subcontractors working on all Port Authority 

World Trade Center projects, will have to attend this presentation. The Port Authority contractors are the first to receive any such training at the Site.

B. Lower Manhattan Construction Integrity Team 

The OIG has been a member of a group of Inspectors General that have oversight 

responsibility for agencies performing work in Lower Manhattan or who are funding 

projects in Lower Manhattan. This group, referred to as the Lower Manhattan Construction Integrity Team, formed in early 2004 in recognition of the risks posed by 

the huge amount of money that was going to be spent on the rebuilding program 

in Lower Manhattan, and the Inspectors General desire to get ahead of the curve 

in attempting to prevent fraud. The Fraud Prevention Director of the Lower Manhattan Construction Command Center, who is here today also to testify before the 

Subcommittee, chairs the Lower Manhattan Construction Integrity Team. We have 

worked extremely close with the Director in each of the areas of the Fraud Prevention Program that both he and I will describe today. 

The Lower Manhattan Construction Command Center coordinates a Fraud Prevention Hotline for Lower Manhattan Construction Projects on behalf of the Lower 

Manhattan Construction Integrity Team; therefore, the Port Authority takes advantage of that hotline. Any fraud complaint that the Hotline receives pertaining to any 

Port Authority project at the World Trade Center Site is forwarded to my office for 

investigation. While the OIG has its own Fraud Hotline, we support Lower Manhattan Construction Command Center’s efforts in having one Fraud Hotline for all 

Lower Manhattan construction projects to make it easier for the public to know 

where to call with complaints.

C. Vetting of Contractors 

In order to ensure that the Port Authority is contracting to do business at the 

World Trade Center Site only with responsible entities, or persons possessing the 

requisite honesty and integrity, the Port Authority and OIG are conducting integrity 

reviews of all contractors and subcontractors, including lower-tiered subcontractors 

receiving awards over a particular dollar threshold. To assist in the vetting, the IG 

community is consulted, coordinating these checks through the Lower Manhattan 

Construction Integrity Team to determine if there is any derogatory information 

that can be shared with the agency.

D. Contractor Employee Screening and Access Control 

In an effort to tighten security at the World Trade Center Site, both to restrict 

access to those individuals that have criminal and/or terrorist related backgrounds 

unfavorable to the interests of the Port Authority, we have commenced performing 

screening on contractor employees seeking access to the Site. After passing the 

background screening process, personnel will go through a one-hour prerequisite 

training class on World Trade Center Site Rules and Regulations. The training class 

will be held on Site and will emphasize Site security and safety. After passing a 

test, personnel will be issued a new World Trace Center ID card providing them access to the Site. 
237

I would just like to comment, without going into details for security reasons, that 

security at the Site during the construction phase will be extremely tight. The Port 

Authority has been working with the Senior Advisor to the Governor for Counter–

Terrorism, James Kallstrom, and security consultants to ensure that all the necessary and appropriate precautions are taken.

E. Use of Integrity Monitors 

Due to the enormous amount of money being spent in the rebuilding of the World 

Trade Center Site, the Port Authority has determined that additional measures are 

required to assist the OIG in its fraud prevention efforts. 

Integrity Monitors are independent organizations that bring together various disciplines of expertise such as legal; auditing/accounting; investigative; engineering; 

environmental; and others. They have been used in New York City for the last ten 

plus years for contractors with integrity issues that were awarded contracts but required additional oversight. 

Integrity Monitors were successfully used at Ground Zero during the cleanup to 

oversee the four Construction Managers. They were instrumental in minimizing and 

deterring fraud during that effort. 

The Port Authority has also begun to use them successfully over the last year. 

We have used them a number of times where contractors with pending integrity 

matters (for example: pending investigations, indictments, etc.) were required to accept the services of an Integrity Monitor to be awarded the contract. The Monitor 

would be selected by the Port Authority, report to the OIG, but be paid for by the 

contractor. 

Based upon our positive experience with the Monitors, and the positive results at 

Ground Zero during the cleanup, the Port Authority has decided to utilize them to 

assist the OIG in its efforts to prevent and detect fraud during the rebuilding at 

the World Trade Center Site.

The Integrity Monitor will: 

• Conduct a review of all existing procedures and processes for fraud, corruption, cost abuse, safety, and environmental risks; 

• Recommend and assist in implementing procedures designed to mitigate all 

risks identified in its initial review; 

• Conduct forensic reviews of payment requisitions and supporting documentation, payments, change-orders; and 

• Provide investigative services, as necessary and directed by my office, including: conduct in-field investigations and on-site monitoring of construction work; 

investigate and evaluate construction contractor use of the labor, compliance 

with collective bargaining agreements, and compliance with state and federal 

labor laws; review and monitor worker safety and environmental plans and procedures; compliance with M/WBE requirements and goals; and conduct investigations into illegal conduct by Port Authority contractor staff, and others. 

We are in the final stages of selecting an Integrity Monitor for the new $2.2 billion World Trade Center Transportation HUB Project. There might be additional 

projects at the Site that we will require a Monitor as well.

V. CONCLUSION 

The above investigations and fraud prevention measures exhibit the Port 

Authority’s commitment to accomplishing its goals in rebuilding the World Trade 

Center Site with the utmost of integrity. We owe it to the citizens of New York City, 

the Metropolitan Region, the United States, and those that lost their lives on 9/11. 

Thank you for the opportunity to present my testimony before your Subcommittee. 

This ends my testimony. 

I would be happy to answer any questions.

Mr. ROGERS. I thank you, Mr. Nestor. 

We will next have a few questions. I would like to start off. 

Mr. Zinser, in your comments you talked about the need to be 

able to recover funds, overpayments, and other types of funds. Do 

you require, or were their bond requirements that would enable 

you to be able to reach back and capture those funds, if in fact they 

were due? How would you extract that money from some companies 

that may, as you know, just disappear? 

Mr. ZINSER. Yes, Bernard may be able to help with that also, but 

normally what happens, there are bonds that are required, but 
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there is also a retainage, a certain percentage of retainage that the 

government holds back on these contracts. 

Mr. ROGERS. That is usually 10 percent. Do you think that is sufficient in contracts like these? 

Mr. ZINSER. I think our experience so far is that that is pretty 

much a good figure, but one of the things that the reviews of finance plans ought to do is identify whether or not retainage and 

contingencies are adequate given the current status of the project. 

Mr. ROGERS. Okay. Mr. Cohen, did you have some thoughts on 

that? 

Mr. COHEN. All I would add is that a lot of it also has to do with 

the way in which the project builders write their contracts with 

their contractors and with their designers. It is hard to go after a 

designer for making errors if you haven’t already built into the contract language that says you will go after them for that kind of a 

problem. 

So I think it is both what Mr. Zinser talked about, but it also 

has to do with making sure that the agencies put some teeth into 

the contracts with their own vendors to make sure that they have 

the contractual ability to do that. 

Mr. ROGERS. Based on your experience, is that kind of ‘‘teeth,’’ 

as you put it, in the language of these contracts already? 

Mr. COHEN. I think there is a ways to go to sharpen the teeth 

a little bit. I think that my experience has been that very often the 

language is not all that clear and very often it is an issue that kind 

of just never gets the attention that it needs to have. I think it is 

worth looking at that. 

Mr. ROGERS. You know, it seems to me that that recommendation is kind of an administrative recommendation. That doesn’t 

really require a policy change from the Federal government. Maybe 

I am wrong, but as you know, this Committee has been holding 

these hearings and conducting these interviews and investigations 

for the last several months in the hopes of putting together a report that is going to have a series of recommendations in it. 

As far as policy changes—things that you would recommend that 

we look at changing about our Federal policy when it comes to 

these type events and the aftermath—what, if anything, would you 

recommend that we seriously consider as a policy change? 

Mr. COHEN. I think that certainly one of the lessons learned from 

our experience in New York is, and this may be more administrative than policy, is really thinking through the way in which we do 

oversight of projects and really being smart about the kinds of 

issues that projects typically encounter, and tailoring the oversight 

to the risks that are inherent in the particular projects, whether 

they are in New York or California or Florida, and really looking 

at the real world of what it takes to get projects built, and trying 

to make sure that the way in which we are doing oversight really 

pays attention to those kinds of issues. 

We are trying to be very vigilant in lower Manhattan about making sure that we are really looking at projects before the problems 

arise, trying to anticipate the risks, trying to see what can be done 

to avoid or mitigate those risks, and not wait until it has become 

such a problem that it becomes very difficult to solve. 

Mr. ROGERS. Mr. Zinser, did you have a comment? 
239

Mr. ZINSER. Yes, Mr. Chairman. I think what comes to my mind 

are really two things. One I mentioned in my remarks, is some way 

to mandate that disaster funding include money set aside for oversight activities, some percentage. FTA’s program right now, they 

are allowed to take a 1 percent drawdown for oversight activities 

from any full-funding grant agreement or program activity like 

that. So that would be one thing. 

The other thing I think the committee could consider is these 

projects are so massive and extend out for so many years that I 

think the committee should consider extending a statute of limitations on offenses, either the ability to go after the contractors for 

cost recovery efforts or even for criminal penalties. 

Mr. ROGERS. When you talk about this oversight, these boots-onthe-ground, are you referring to the same concept Mr. Nestor was 

describing as far as integrity monitors? Are we talking about the 

same thing? 

Mr. ZINSER. Yes, sir. I think that is all in the same concept. 

Mr. ROGERS. Okay. My time is up. The Chair recognizes the 

Ranking Member, Mr. Meek, for any questions he may have. 

Mr. MEEK. Thank you, Mr. Chairman. 

I would like to thank the witnesses for coming before us and the 

testimony that you have given. 

Mr. Zinser, I just want to go right back to many of the projects 

that you have going on in the lower Manhattan area. Do you have 

a tip-line of folks who call with fraud? I guess that across the board 

here. And how does that work and how have you advertised individuals, everyday Joes and Sues, to call in when they think they 

see fraud taking place or they know something, but they just don’t 

know who to call? Has that been an effective measure in helping 

you prosecute and go after fraud? 

Mr. ZINSER. Sir, at the Department of Transportation, we have 

a fraud hotline that we advertise for all of DOT and all of our programs, and that is both the phone, email, and a Web site. It is my 

understanding that the command center, Mr. Calvosa’s operation, 

has set up a similar hotline. I think it is only less than a year in 

operation or a few months in operation. I have also been told that 

they have taken steps to advertise it, but I would probably need 

to defer to him to give you the details of that. 

Mr. MEEK. Yes, sir? 

Mr. CALVOSA. Congressman, we have established a hotline as required by executive orders. It was established back in December of 

2005. It cover all lower Manhattan construction projects. We have 

taken steps to advertise that hotline by creating posters and posting them at the job sites. We have also placed stickers on the back 

of identification access cards, giving the workers the phone number. We placed an advertisement on the back of a downtown Manhattan summer publication, the Community Handbook, a full-page 

advertisement of the hotline poster. 

So we have taken steps and the plan is for the command center 

to receive those allegations that may come in and refer them to the 

appropriate inspector general office handling the project. 

Mr. MEEK. We had a couple of earlier panels, and maybe you had 

an opportunity to see the one we had at 10 a.m., or be a part of 

that. And when we finish with our report, hopefully all of you will 
240

get a copy of it. I know the chairman will let you know that our 

record will be open for a number of days as it relates to recommendations. 

I know many times, especially in the quote-unquote ‘‘law enforcement community,’’ or ‘‘we are watching you community,’’ after an 

event it is just not natural and it is kind of an inside little secret 

there, it is not natural for law enforcement agencies to share information on a normal basis. I am not saying you don’t have the will 

or the desire to do so, but it is just not a natural thing. 

We find between maybe now going on the fourth panel or fifth 

panel, communications seems to be the tie-in here. One policymaker said we can’t legislate morals and character; we can’t legislate folks to meet all at the same coffee keg or whatever, or hot 

water keg or what have you. But we can encourage the kind of 

communications on some of these cases. 

I know some of you work together on a task force looking at 

fraud, how can we get to the bottom of it. But anything towards 

those lines will help us as we try to put forth policy to encourage 

things to happen, like we are trying to do in the area of the 9/11 

report, first responders, intelligence agencies, talking to one another. We have tried to do a lot of that here in Washington. 

On this fraud end, it is one of the most frustrating pieces, well, 

part of this committee oversight management, and for integration 

management. It is one of the most difficult parts, because we hear 

a lot about what has already happened, and what has happened. 

And when I look at the statistics here, of all of your testimony and 

the notes from your testimony, you all are going after the bad guys 

and gals, but somebody got away. I am thinking a majority, it is 

almost like speeders. When I was a trooper, I stopped five people 

doing 80 miles per hour, and at least 30 of them got by. 

I am saying that somewhere in here, someone has gotten away 

with something and we haven’t been able to get that individual due 

to the fact when you have an event, one of you mentioned, when 

you have an event, folks are going to come and they are going to 

try to take advantage of it. 

Of that universe that is out there, is it an issue of staffing when 

it comes down to it? Because as we look at the federal agencies 

that are here, your budgets run based on your projection of the 

need of your office at that time. An event takes place, then nine 

times out of ten you take folks off of other priorities and projects 

and you try to deal with that. That is the immediate fire. 

Someone mentioned something about the 1 percent or expanding 

the statute of limitations. I think that is an excellent idea. I posed 

that question yesterday as it relates to some federal folks that 

might have had something to do with misleading information. The 

statute of limitations on that should be extended and it is a natural 

thing and we should do it. 

But as it relates to the staffing issue, we are going through this 

now with the Department of Homeland Security and with the inspector general’s office trying to do on the ground in the Gulf right 

now. They are sending a task force down, but I know they rob 

Peter to pay Paul to do that. 

Any recommendations on how that could happen, when you do 

have an event you know you have to monitor? We know you are 
241

going to have to put a temporary team there, but to replace that 

team or make that team permanent as it relates to the projects 

that we are talking about, you mentioned several years. I mean, it 

is going to take several years to rebuild. 

Do you have a plan or recommendations on how we can do that 

in a meaningful way, and to be able to justify the expansion of government? That is a big debate right now. Government is getting 

bigger. There are a number of folks in Congress that would like to 

see it smaller, but in this case it is protecting the taxpayers’ 

money. I don’t see them as bureaucrats. I seem them as protecting 

the taxpayers’ money when it comes down to this kind of oversight. 

Mr. ZINSER. Sir, let me try to address that. 

I think one tool that has been talked about here, Mr. Nestor 

talked about it, and hopefully this doesn’t sound like heresy, but 

I think that the idea of independent private sector IGs is a good 

idea. You can use cash to go out and retain their services. They 

don’t become permanent employees. FTA’s process is similar to 

that, with these project management oversight contractors who are 

third-party engineer or consultant-types. 

The key, though, is that the government people then have to 

oversee what those folks are doing, and they have to take responsibility. They have to read their reports. They have to understand 

their reports. They have to take action on their recommendations. 

In that way, the federal government, in our case, can leverage resources without really building up the federal staff level, so to 

speak. 

Mr. MEEK. Okay, thank you. 

Mr. COHEN. Could I just add thing? That is, at least in the case 

of our office, the staffing for our office was provided for in that percentage of administrative oversight that was embedded in the appropriations legislation. So we are not, as you say, robbing Peter 

to pay Paul in this particular instance. This is a dedicated office 

in lower Manhattan only focusing on the lower Manhattan projects, 

not focusing on the rest of FTA business and not depending, in 

New York at least, on other FTA staff who have other commitments. 

So I don’t know that it is model that you can apply across the 

board to every situation, but certainly we had an extraordinary situation in New York in 2001, and we have an unusual situation in 

that these are 100 percent federally funded projects. So I think it 

was deemed back in 2002 prudent to establish an office like this, 

to make sure that the federal investment was being protected, and 

to make sure that other elements of the FTA program were not 

paying a price for the attention that was being paid to the lower 

Manhattan projects. 

Mr. MEEK. Thank you, Mr. Chairman. 

Mr. ROGERS. The gentleman’s time has expired. 

The Chair now recognizes the Chairman of the Full Committee, 

Mr. King of New York, for any questions he may have. 

Mr. KING. Thank you, Chairman Rogers. 

I want to thank all the witnesses for their testimony today. Mr. 

Nestor, through you, I would like to acknowledge the tremendous 

sacrifice made by the Port Authority on September 11. It was 37 

police officers, 38 civilians. Neil Levin was a personal friend of 
242

mine, and I guess a legend in the police department. Captain 

Cathy Meyers was a neighbor of mine. We still talk about her in 

the neighborhood. 

Let me just ask the four of you really, collectively. We are talking about $10 billion in construction works in progress, a total of $20 

billion over the next several years, in really a very confined area, 

an extraordinary amount of construction work. We can understand 

if there are problems at first, you know, after September 11, what 

went on as far as organized crime or corruption. 

But do you feel now that, do all of you feel that you have your 

programs in place to absolutely minimize corruption? Is there anything you need from us? And also along those lines, with all of the 

multitude of government and private agencies that have some involvement here, do you feel there is sufficient cooperation? 

Mr. NESTOR. If I may, I would like to answer that question. We 

have our plans in effect now with the other agencies. However, 

there is something I feel that Congress can do for us, and that is 

to legislate the fact that we can fingerprint the people going into 

the site. As of now, we haven’t got the authority to fingerprint anybody working in the sensitive areas, such as like at the airports, 

JFK, LaGuardia or Newark. Anybody who wants to work at that 

airport has to be fingerprinted and run through a criminal history 

check. We can’t do that. We don’t have that authority. I think that 

is something that would be very, very helpful for us to have. 

Mr. KING. Would you have to get that from Congress? Or would 

that be New Jersey and New York? 

Mr. NESTOR. It would have to be legislated through Congress. I 

believe it is legislated through Congress for the airports. 

Mr. KING. It is? Okay. It is certainly something worth considering, because again I would think it is as much of a threat at the 

World Trade Center as far as employees as you would have at the 

airport. 

Mr. NESTOR. Right. 

Mr. KING. I think it is certainly worth considering. 

Any other? 

Mr. ZINSER. Yes, sir. I actually do think that the relationships 

that have been established and the systems that have been set up 

and the organizations in place are fairly promising in terms of 

being able to both try to prevent fraud, and once we find allegations of fraud, I think the communication channels are open sufficiently where we will be able to come together to investigate those 

allegations. So I think it is pretty promising. 

Mr. CALVOSA. I think with the federal, state and local offices we 

have put together, whose agencies are running the projects, who 

are funding the projects, we have tried to cover the base basically 

in putting a team together to put measures in place such as the 

hotline and the training and the use of integrity monitors, as I addressed previously, that this is really the way to put best efforts 

together and the best measures to prevent fraud on all these 

projects. 

Mr. KING. On the transportation money, approximately how 

much of it has been spent so far? 

Mr. COHEN. We have, of the $4.55 billion, obligated to projects 

just a little over $4 billion of the $4.55 billion. And that is for the 
243

Fulton project, the South Ferry project, the PATH project, the WTC 

Security Center that I mentioned in my testimony, and the rebuilding of Route 9A West Street. We anticipate that we will be making 

a grant to the Federal Highway Administration of an additional 

$200 million in the very near future to pay for the balance of the 

Route 9A project, so that will take us to about $4.2 billion. 

The rest of that money right now we are holding in reserve. 

There is actually some reserve built into some of the project budgets of the projects I just mentioned. We have added some additional 

funds into reserve based on our risk assessments and based on 

what we think it is going to cost to complete these projects. 

We believe that it is probably going to cost more to complete 

these projects than the current budgets would indicate. We believe 

that it is probably going to take longer to complete these projects 

than their current schedule would indicate. That is based on the 

independent analysis, risk analysis that we have done. So we want 

to make sure that the resources are there because these were onetime appropriations, and to my knowledge there is no more money 

after the $4.55 billion is exhausted. 

Mr. ZINSER. Sir, I think, just to answer your question, I think 

about $600 million has actually been spent so far. That is my understanding. 

Mr. KING. Are there any trends or patterns showing themselves 

that cause concern? 

Mr. ZINSER. Unfortunately, I can’t tell you that because we 

haven’t done that analysis yet. 

Mr. KING. Fine, okay. One final question, how much of the transportation work—future work—is contingent upon the project itself 

at Ground Zero getting started and/or being completed? You know, 

the reconstruction of the towers. 

Mr. COHEN. Yes. We have had extensive discussion with the Port 

Authority and with the governor’s office about making sure that 

the PATH project proceeds. It is almost fully designed. It is a very 

complicated site. There is a lot of interdependence between the 

projects, and there has been a tremendous amount of work done to 

look at design issues and to look at cost-sharing issues. But we 

have sent a very clear message to the state of New York that says 

we want to see the transportation projects move forward. We have 

to get that transportation system rebuilt if it is going to support 

all the rest of the economic development that is going on, or that 

is planned to go on. 

So I am pretty confident that the Port Authority has a green 

light to build their project, even though there is still some issues 

to be worked out with some of the surrounding projects. 

Mr. KING. Thank you, Mr. Chairman. 

Mr. ROGERS. Thank you. 

Mr. Zinser made reference to something that was a common 

theme to what we have heard from earlier panels, particularly one 

from early this morning that had to do with the District Attorney’s 

office in Manhattan. That is that in these post-disaster environments, there is a surge of need that is extraordinary and not necessarily going to be a permanent need. We were talking this morning in terms of the need to prosecute people who take advantage 
244

of these circumstances criminally, things that you were referring 

to, Mr. Nestor. 

But once you have prosecuted that surge of cases, the demand 

of that office is going to come back down to normal levels of work. 

In thinking about that principle you made reference to a little 

while ago, that you may just be able to contract some of these inspectors or integrity officers from outside. 

Mr. Zinser has told us his thoughts that that is a practical option. I am curious from the rest of you. Do you think it is a practical option for us to make contingency plans that in the event of 

a disaster—whether it is manmade or any other kind of disaster—

that we will fund third-party resources—whether it is prosecutorial 

resources, engineering resources, audit resources—and that would 

be useful as opposed to a burden? 

I will start with Mr. Nestor, and then I would like to hear from 

the rest of you, please. 

Mr. NESTOR. I think it is vital that anytime federal money goes 

out that a monitor be in place from the very beginning. I don’t 

think we would be having discussions on some of the cases that I 

have discussed if there were a monitor to begin with. I think it is 

vital. I don’t know if you should have a cap or some amount that 

goes out, but I believe that you would have a monitor monitoring 

everything. But the monitor also has to report to the appropriate 

inspector general who will decide where the prosecution goes, or if 

there is a prosecution. 

Mr. ROGERS. So the fact that the monitor is a private resource, 

in your view, as long as they are being supervised by an inspector 

general who comes under the auspices of the public entity, is not 

a problem, practical problem. 

Mr. NESTOR. Not a problem. I think it is a strong tool. In fact, 

we are almost ready to award a monitorship to the $2.2 billion 

PATH project now, who will report directly to us. And anytime they 

see anything that they don’t feel is right in any way, shape or direction, they will report to us, and then we will launch appropriate 

investigations that would be necessary. 

Mr. ROGERS. What of the others? Mr. Calvosa? 

Mr. CALVOSA. I would have to echo the same statements, Mr. 

Chairman. The subcommittee heard the success story, I believe 

yesterday, of the Department of Investigation’s use of integrity 

monitors at Ground Zero after the 9/11 attacks. I was part of that 

operation. I was a member of the Department of Investigation at 

the time. They are vital in supplementing the staff of the various 

investigative offices that could be involved, and also the contracting 

agencies own staff, whether they have internal auditors or external 

auditors. 

Integrity monitors bring together various disciplines, including 

legal, investigative, auditing, accounting, other expertise such as 

possibly engineering, environmental. They could bring these various disciplines together to assist that agency. 

I have to echo the prior comments also, that they must report in 

to an agency of government, whether it be an inspector general’s 

office primarily, for oversight; that they do their work and are allowed to do their work, but that they receive themselves strict 

oversight and direction as far as where they should be looking, 
245

what activities they should be taking, and working together with 

their contracting agency itself to develop an overall plan for fraud 

prevention initially, then beyond that, investigative work out in the 

field, auditing work looking at books and records, and bringing it 

all together. 

Mr. ROGERS. Mr. Cohen? 

Mr. COHEN. Well, let me say that the FTA, of course, is not a 

law enforcement agency. It is not an investigative agency. We are 

a grant-making agency. Our primary interest is in investing federal 

dollars into good transit projects and making sure they are built on 

time and on-budget. We obviously have an interest in making sure 

that all of those resources go toward what they are supposed to be 

paying for. 

So toward that end, I would say that the notion of integrity monitor, and there are probably other examples of this, is an insurance 

policy for us. It is a way of making sure that a much larger federal 

investment into brick and mortar and rail is getting the payoff that 

it is supposed to be getting. 

So I think that the community of people who know about this 

stuff a lot more than I do have a lot of confidence in this. We have 

indicated that we think this would be an appropriate and eligible 

use of our grant funds should someone ask us to provide the funding for that. 

Mr. ROGERS. Our Committee has been looking, and the Ranking 

Member and I are both from the coast, and we have to deal with 

the hurricane season every year. It is a reality for us that we know 

it is going to happen. We don’t know how big it is going to be, but 

we are going to have them every year. Post–Katrina and–Rita, we 

have looked at the possibility of doing some pre-event bidding and 

selecting vendors who will provide transportation, debris removal, 

all those things in advance with pre-negotiated prices. 

I offer that reference just to say, do you think that it is viable 

not only for the Federal government to say we are going to make 

monies available, but to work in concert with local entities to ask 

that you have prearranged, or that we prearrange, which entities 

would be eligible, so that we don’t go out looking for folks to be integrity monitors after the attack on whatever city; that we have 

people regionally or whatever. 

Is it practical to set up those kind of assets ahead of time, to 

know who is qualified to do this kind of integrity monitoring, to 

pre-negotiate bids and to keep those renewed every year? Hopefully, you never need them, but if you do, you have boots on the 

ground early. Because one of the things that we learned yesterday 

in one of our hearings was that one of the few shining stars of 

FEMA in post–9/11 was their debris removal efforts, and that was 

in large part because of the city administration’s leadership. 

They were familiar with organized crime in their efforts to try 

to get in on contracts. Because of that experience and the fact that 

they knew how to keep it from happening, we were able to see that 

debris removed in less than half the time than was initially projected and under half the cost, because they had boots on the 

ground—as you made reference earlier—people who knew what to 

look for and basically interfered with some unscrupulous individuals getting their teeth into that. 
246

So I am just trying to think if there is a way that we can do that 

in other areas as well, and it seems like this is an area ripe for 

opportunity. I am pleased to hear that you all think that using 

third-party individuals, who are not necessarily under the Federal 

umbrella and who would only be temporary, is a practical solution. 

With that, I will cease discussion and turn to my Ranking Member for any further questions he may have. 

The gentleman from New York, do you have any additional questions? 

Mr. KING. Actually, just a statement. 

I want to again thank you for your testimony. All of us have a 

lot invested in this to make sure that it works—people from New 

York and people around the country. There is such an enormous 

amount of money and such a tragic loss of life on September 11. 

So for many reasons, it is important that all these projects go forward with as little corruption as possible, with as much integrity 

as possible. 

We know that you are going to do your jobs. So I would just ask 

that if any of you or any of your agencies or departments feel you 

do need additional assistance from us, if you do need additional 

weapons or tools, to come to us and ask. This Committee in a bipartisan way is committed to making sure that these projects go 

forward in the right way and the most efficient way and most effective way and the most honest way. 

So I am just saying, whether it is Republicans or Democrats on 

this Committee, whether it is the Subcommittee or the full Committee, for you to know that all of us are asking you to come forward after the hearings are over or whenever, as long as these 

projects are around, to let us know what we can do to help you. 

And also, if you have any thoughts as far as other tragedies that 

may be occurring around the country where you feel there are lessons learned from Ground Zero that can be applied there, please 

let us know. 

Again, I thank you for your testimony, and I thank you for all 

the work you have done. 

I yield back, Mr. Chairman. 

Mr. ROGERS. I thank the Chairman. 

I would remind you all that the record will be left open for 10 

days. Members may have additional questions that they would like 

to submit to you. If you do have additional questions provided to 

you, if you would respond to those in writing for the record, that 

would be helpful. 

Chairman King is absolutely correct. It may be a few days from 

now, a few weeks from now, and you just have an idea that, you 

know, this would be a great thing to help us in the future, if you 

would reach out and let us know. This is the Management and 

Oversight Subcommittee, and we are continuously working on 

these kinds of things to try to make sure we improve and we are 

better prepared as a Nation, so we would love to hear from you. 

You are a valuable resource, and we thank you for your time. 

With that, the Committee is adjourned. 

[Whereupon, at 3:07 p.m., the subcommittee was adjourned.] 
(247)

A P P E N D I X

HON. RICHARD SKINNER RESPONSES TO HON. MIKE ROGERS QUESTIONS

JULY 12, 2007, PART I 

The Port Authority of New York/New Jersey (Port Authority) issued five FEMAfunded contracts—three of which were not competitively bid—to a private company 

called New York Waterway to operate ferries between New Jersey and New York 

as an alternative to PATH rail lines damaged in the attacks. FEMA authorized at 

least $29.8 million for these contracts. NY Waterways has recently agreed to a $1.2 

million settlement of civil fraud charges.

Question 1.: What steps did FEMA take to monitor those funds once they 

were disbursed? 

Answer: With regard to New York Waterways, the investigation was conducted 

by the Office of Inspector General for the Port Authority of New York and New Jersey and prosecuted by the United States Attorney’s Office (USAO) for the Southern 

District of New York. We respectfully request that questions relating to the New 

York Waterways investigation be directed to either the Port Authority OIG or the 

USAO’s office.

Question 2: What can FEMA do to better track funds it disburses to state 

and local agencies to ensure that the funds are used properly? 

Answer: There is no simple answer to this question. FEMA has been deficient 

in grants management for many years. Grants management is one of the major 

management challenges that the IG has repeatedly identified for FEMA, and much 

of our audit work is focused on identifying problems and helping FEMA improve its 

grants management. FEMA has been making progress, but much remains to be 

done. The states have to be a major player in monitoring how state components and 

local governments spend FEMA grant funds. Also, FEMA’s regional offices must 

perform more oversight. They must require more accurate progress reports from 

grant recipients and monitor them more closely. Helping FEMA accounting for disaster recovery grants will be a major function of the new DHS OIG Office of Disaster Assistance Oversight. 

Many of the problems that occurred in the administration and management of 

Federal assistance funding after 9/11, re-occurred after Hurricanes Katrina and 

Rita.

• In your view, has FEMA adequately attempted to address these 

issues? 

Answer: A major problem with FEMA’s implementation of its individual assistance program after 9/11 was that FEMA reduced its managerial controls over the 

program. For example, FEMA did not conduct home inspections to ensure that applicants actually owned air conditioners prior to reimbursing them for repairs and 

replacement. FEMA also provided advanced payments for air quality items rather 

than requiring receipts prior to reimbursing applicants. Similar weaknesses occurred in FEMA’s individual assistance program implementation after Katrina. In 

April, we reported that FEMA’s controls were either not implemented or ineffective 

in preventing overpayments (Reimbursement for Other Needs Assistance Items, GC–

HQ–06–34). That report covered generators, vacuum cleaners, air quality items, and 

chainsaws. For some items, FEMA’s payment processing system defaulted to a maximum allowable amount, and applicants were reimbursed that amount even though 

they actually paid less for the item. FEMA reimbursed applicants for approximately 

106,000 generators using an automatic disbursement process that, in most cases, 

paid a fixed amount rather than the amount the applicants actually paid for the 

generators. 

FEMA has generally agreed with our recommendations, for both our 9/11 work 

and our Katrina work, to improve managerial controls over its individual assistance 

program. We are aware that FEMA is working toward improving the program, but 

we have not yet evaluated its progress. We are conducting a review in fiscal year 
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1 All other voluntary organizations are positioned under the National Voluntary Organizations 

Active in Disaster as support agencies. Other ESF–6 support agencies include: the Departments 

of Agriculture, Defense, Health and Human Services, Homeland Security, Housing and Urban 

Development, Interior, Justice, Labor, Transportation, Treasury, Veterans Affairs, General Services Administration, Office of Personnel Management, Small Business Administration, Social Security Administration, U.S. Postal Service, and Corporation for National and Community Service. 2Mass care includes activities to provide sheltering, feeding, and emergency first aid; housing 

addresses both shorter and longer-term needs of displaced disaster victims; and human services 

covers a range of programs, such as crisis counseling, benefit processing for FEMA’s Individuals 

and Households Program, disaster unemployment, and identifies support for persons with special needs. 

2007 of ‘‘Fraud Vulnerability of FEMA’s Individual Assistance Program.’’ Upon completing that review, we will be able to more accurately assess FEMA’s progress in 

improving the program.

FEMA officials admitted to the FEMA OIG that FEMA may have dispensed 9/11 

assistance to people who received assistance for the same goods or services from 

charities. After 9/11, the Office of Inspector General and the GAO recommended 

that FEMA work more closely with other government agencies and charities to better coordinate responses to future disasters. Yet a GAO report last month (June, 

2006) found disagreements between FEMA and the Red Cross regarding roles and 

responsibilities.

Question 1: Did FEMA take steps to implement the recommendations of 

your office after 9/11 to ‘‘coordinate relationships with those organizations 

through protocols such as Memorandums of Understanding to alleviate the 

potential for duplicating benefits?’’

Response: Yes, improvements have been made since the September 11, 2001, attacks. The Coordinated Assistance Network was established through a memorandum of understanding in 2003 and was first piloted during the 2004 hurricane 

season in Florida. The following organizations signed this document: American Red 

Cross, Salvation Army, Alliance of Information and Referral systems, United Way 

of America, United Services Group, National Voluntary Organizations Active in Disaster, and Safe Horizon. The goal of the Coordinated Assistance Network is to afford 

more efficient and effective service coordination among voluntary, as well as governmental, agencies during disaster events. It was designed as a communication mechanism for services providers and to identify any gaps or redundancies in services. 

The network allowed registered organizations to access information on available 

services and to share information on the levels of services delivered to individuals, 

families, or households. It also allowed disaster victims to explain their needs and 

register only once, as registration afforded disaster victims a registration with all 

service providers on the network. In response to the 2005 hurricanes in the Gulf 

Coast region, five organizations were using the network and 81,817 clients records 

were in the system as of September 30, 2005.

Question 2: If so, why did we see these same problems in the response 

to Hurricanes Katrina and Rita? 

Response: Under the National Response Plan (NRP), FEMA is designated as the 

coordinator for Emergency Support Function (ESF)–6, Mass Care, Housing, and 

Human Services. Both it and the American Red Cross (ARC) are primary agencies—

the ARC for mass care functions and FEMA for housing and human services functions.1 Both support governmental and nongovernmental efforts to address non-medical needs of individuals and families affected by an Incident of National Significance or other disaster event.2

Identifying the number and location of evacuees, as well as the need for shelters, 

was initially difficult for FEMA in its ESF–6 role. As Hurricane Katrina was the 

first activation of ESF–6 under the NRP, the roles and responsibilities that had 

been more defined under the Federal Response Plan for the mass care function, 

were not yet clearly defined or established under the NRP. Both FEMA and the 

ARC must work together, along with other governmental and nongovernmental organizations within the ESF–6 structure, to define the expectations each has for its 

role and area of responsibility. For example, a senior ARC official told us it is responsible for the coordination and reporting only of ARC mass care operations. 

FEMA, on the other hand, said it was relying heavily on the ARC to coordinate 

mass care operations and reporting that was inclusive of other ESF–6 support agencies. Establishing a working group, in coordination and consultation with all ESF–

6 primary and support agencies, to serve as a forum to resolve coordination issues 
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experienced during Hurricane Katrina is prudent and would assist in defining roles 

and realizing expectations. 

In our March 2006 report, A Performance Review of FEMA’s Disaster Management 

Activities in Response to Hurricane Katrina—OIG–06–32, we recommend that FEMA 

establish an ESF–6 working group to define the explicit roles and responsibilities for 

each agency, develop standard operating procedures, and implement a concept of operations plan for response activities that address all levels of disasters. 

In response to our recommendation, we were informed that an ESF–6 working 

group was established in February 2006 and meets monthly. The group is led by 

FEMA and includes the ESF–6 primary and support agencies. Several ESF–6 improvement initiatives are currently underway, including developing roles and responsibilities, standard operating procedures, and a concept of operations as suggested in our recommendation. FEMA said progress has also been made in the 

ESF–6 areas of staffing, training and exercises, logistics support planning, finalizing 

the FEMA–ARC Memorandum of Understanding, and improving the Disaster Welfare Inquiry system. Further, an ESF–6 Mass Care Policy Seminar was held in late 

June 2006 to further solidify policies and operating concepts. Participants included 

FEMA, ARC, other principal non-governmental organizations, applicable other federal agencies, and several Department of Homeland Security representatives. 

We will continue to monitor the implementation of these initiatives to determine 

whether FEMA’s actions are sufficient to effectively resolve our recommendation. 

MR. DAVID J. VAROLI RESPONSES TO HON. MIKE ROGERS QUESTIONS

JULY 12, 2007, PART I 

Question 1: In your view, were FEMA’s standards sufficient to ensure 

that the potential for fraud was minimized? 

Response: The City of New York has developed a system of governing agencies, 

staffed with professionals, with expertise in design and construction, public works 

contracting, investigation, police, fire, sanitation, and traffic enforcement, to name 

just a few. The terrorist attacks of September 11, 2001, were unlike anything the 

City and our nation had ever witnessed. Similarly, the aftermath created by these 

attacks was a new phenomenon for the City and FEMA. Prior to that fateful day, 

FEMA’s experience and expertise was in responding to floods, hurricanes, tornadoes, 

and other nature-based calamities and disasters. FEMA did not have any experience 

with a domestic war and the devastation that follows a man-made attack. Notwithstanding, FEMA did have established guidelines and principles as to how a basic 

debris clean-up job may be contracted and paid for. Due to the unique nature of this 

incident, both in its size and impact, the City consulted daily with FEMA representatives in New York, and where appropriate, sought guidance, assistance, and, in 

certain cases, exemptions, from headquarters in Washington, D.C. with regards to 

these guidelines and policies. Moreover, the City quickly did its homework and evaluated prior natural disasters and how FEMA compensated and audited other municipalities’ contracting practices. 

The City, on its own initiative, but in consultation with FEMA, instituted a number of fraud prevention practices during the clean-up of the debris. Some of these 

fraud prevention practices were instituted early on and others evolved as the cleanup of the debris continued non-stop, seven days a week, 24 hours a day. These fraud 

prevention initiatives included, among other things, the: 

• hiring of independent private inspector generals or the ′′monitors′′ for each of 

the four construction managers and all of the subcontractors in their quadrant; 

• installation and use of global positioning systems in trucks carting debris off 

of the site; 

• installation and use of employee card swiping machines to track the arrival 

and departure times of the contractors’ and their employees; 

• installation of a 24-hour integrity telephone where anyone could call in and 

leave an anonymous tip that there may be some fraud-like activity taking place; 

and 

• hiring of KPMG to assist engineering audit officer and his team by providing 

professional staff and expertise in creating contracting and audit protocols for what 

items would be reimbursable and what paperwork would be required before a payment could be issued. The expenditure of public funds, whether the funding source 

is from the federal, state or City government, is a serious matter to the City. To 

address this issue, the City has established a system of procurement and ethic rules 

to safeguard the integrity of the procurement system and protect against corruption, 

waste, fraud, and abuse. In addition, the City has an agency dedicated to finding 

and preventing fraud in the awarding and administering of City contracts -the De-
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partment of Investigation. Moreover, the City has a system of internal, but independent, inspector generals, who are placed at each agency. Further, the City has 

experience working with independent inspector generals that have been retained by 

contractors who seek to be deemed a responsible vendor.

Question 2: Was the hiring of KPMG by the Department of Design and 

Construction (DDC) at the direction of FEMA or was this a DDC initiative? 

Response: The City had in place a contract with KPMG to provide audit-related 

professional services. The City issued a task order against this pre-established contract and hired KPMG to provide professional services to engineering audit officer 

and his team. This was a City initiative. However, the City consulted with FEMA 

to ensure that the costs incurred by KPMG would be reimbursed by FEMA and 

would withstand an audit by FEMA. 

SUBMITTED BY BETTINA DAMIANI, JULY 13, 2006, PART II 

ANALYSIS OF THE LIBERTY BOND PROGRAM

Liberty Bonds: Background 

The allocation of $8 billion in triple tax-exempt Liberty Bonds ($1.6 billion for the 

creation of residential rental housing and the remainder for the development of commercial development) has primarily benefited the real estate industry, with the vast 

majority of bonds being used to finance high-end office space and luxury housing. 

The Congressional design of the Liberty Bond program enabled New York City 

and State officials to exclusively subsidize large real estate projects while neglecting 

the city’s affordable housing crisis and the capital needs of growing, industrial businesses and commercial developments outside of Manhattan.

Procedural Issues Relating to Liberty Bonds 

• The complexity of distributing resources through four different public authorities diluted the public’s ability to participate. 

The New York City Industrial Development Agency, the New York City Housing 

Development Corporation, the New York State Liberty Development Corporation 

and Housing Finance Agency were charged with allocating the Liberty Bonds. Fortunately, the 1986 Tax Equity and Fiscal Responsibility Act (TEFRA) requires a 

hearing prior to the allocation of private activity bonds. However, each authority differed in its practices regarding public hearing announcements and access to materials. 

Tracking these disparate hearings and procedures was difficult because public 

hearing notices were posted in different publications and places, dates, and times 

of hearings meetings varied, with the exception of the New York City Industrial Development Agency. For example: 

March 2003: The New York State Housing Finance Agency refused to provide 

GJNY with copies of materials prior to a hearing on the allocation of Liberty 

Bonds. Instead, our Research Analyst was forced to hand-copy materials while 

being closely watched by an HFA staff member.

May 2003: Public testimony was given by several groups at the New York City 

Housing Development Corporation regarding the allocation of Liberty Bonds to 

build a luxury apartment. Board members approved the project having never 

witnessed the testimony—since they don’t attend the hearings—and having 

never even been given copies of the testimony.

Commercial Use of Liberty Bonds ($6.4 billion) 

• Congress restricted the use of Liberty Bonds to commercial real estate 

projects mostly located in the Liberty Zone; 

• For the $2 billion in bonds that could be used outside the Liberty Zone, 

projects must include at least 100,000 square feet of commercial space. 

While this tax-exempt financing tool could have served to diversify the city’s larger economy by supporting smaller, growing businesses, nearly all of the commercial 

Liberty Bonds have been used to finance high-end office space for the most profitable companies in the world. 

For instance, $1.65 billion in Liberty Bonds were allocated to build a new headquarters for Sachs in Lower Manhattan, where the company has been located for 

the past 13 6 years. With profits of $10.10 billion last quarter, clearly wasn’t hinging its decision to remain downtown on 1 related financing. What the company 

lacked—and needed to make a sound location decision—was a clear understanding 

of the rebuilding process from public officials. 

Not until considered a move to Midtown did the Governor address valid security 

concerns of a proposed tunnel under the site of the new building. After resolving 
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the security issue by canceling the tunnel plan, received an increase of $650 million 

from the originally proposed $1 billion in Liberty Bonds for a subsidy package $1.65 

billion in tax-exempt bonds, $25 million in 9/11 Community Development Block 

Grants, and up to $150 million in city and state tax breaks. 

On the other hand the nearby low-income, immigrant neighborhood of Chinatown 

incurred severe economic harm from the attacks, especially in terms of the garment 

industry. Yet the Liberty Zone—the area where the majority of the Liberty Bonds 

must be spent-was drawn through the center of Chinatown. If bonds were allocated 

based on need, and more projects were eligible, a broader group of firms might have 

benefited. 

Restricting the majority of the bonds to Lower Manhattan also discouraged the 

use of resources to pursue the laudable policy of promoting growth within business 

districts outside of Manhattan, which would have been an appropriate measure considering the widespread economic impacts of the attacks and the possibility that 

back-office space would move outside New York City after the attacks. Congress did allow for $2 billion of Liberty Bonds to be used outside the Liberty Zone and in fact, Good Jobs New York supported the use of $114 million in bonds 

for the developer Forest City Ratner to build an office tower in Downtown Brooklyn. 

At the same time, however, Congress’ stipulation that projects outside the zone 

must include at least 100,000 square feet of commercial space may have encouraged 

local authorities to subsidize projects least in need of public financing. For instance, 

$650 million in Liberty Bonds were awarded to Bank of America to locate to one 

of the most desirable blocks in one of the premier business districts in the world—

Midtown Manhattan.

Residential Use of Liberty Bonds ($1.6 billion) • Normally, the Federal government requires housing projects financed with 

federally tax-exempt bonds to set aside 20 percent of the units for affordable 

housing for a minimum of 15 years. This statute did not apply to Liberty Bonds. 

The vast majority of housing units built with Liberty Bonds are market rate and 

unaffordable to New Yorkers. Nearly all of the units rent at market rates ranging 

from studios for $2,062 per month to three-bedrooms for $6,267 per month. The 

projects subsidized by the New York Housing Finance Agency set aside only 5% of 

the units in each building for non-market rates—this is different than affordable—

as these units are targeted to households that earn approximately $94,200 per year 

with rents ranging from for a studio to for a three-bedroom. 

These apartments are out of reach to the vast majority of New Yorkers, whose median household income is $38,293. This includes New York City police officers, 

firefighters, teachers, rescue and recovery personnel who are rightfully totted as the 

heroes of 9/11 but are deliberately excluded from a rebuilt Lower Manhattan. 

The small non-market rent set-aside and the high income requirement make these 

proposals a major departure from the long-standing ‘‘80/20’’ affordable housing program of the New York State Housing Finance Agency (NYSHFA), the agency that 

allocated the state’s portion of the Liberty Bonds. The 80/20 program, which meets 

the Federal Tax Code requirements for housing financed with federally tax-exempt 

bonds, sets 20% of the units aside for households making at most, half the NYC 

Area Median Income. In contrast, the Liberty Bond program sets aside units for 

households earning 50% more than the New York City Area Median Income. 

Unlike the state, the New York City Housing Development Corporation (HDC) did 

not set aside 5% of the units at a non-market rate. Instead, HDC charged a 3% developers fee on the bond application that would then be used for developing affordable housing in other areas of the city. 

While Mayor Bloomberg certainly deserves credit for thinking outside the box and 

generating new revenues for affordable housing, it is unfair to relegate low and income New Yorkers to the periphery of our city. Catering to developments and landlords by creating only luxury housing with Liberty Bonds has exacerbated the 

gentrification pressures on Chinatown and the Lower East Side, and contributed to 

the overall unaffordability of Tribeca and the Financial District.

Recommendations 

Understanding that in light of the fact the Liberty Bond program could set a 

standard for the allocation of Federal in future disasters—Liberty Bonds were often 

suggested as a rebuilding tool for the hurricane tom Gulf Coast region—GJNY offers 

the following reflections for how the program could have been improved: 

• The Liberty Bonds set aside for housing projects should have created a significant percentage of new, truly affordable rental units; 

• Large commercial projects which received Liberty Bonds should have been required to create or retain quality jobs that pay a living wage as a condition to 

ensure employees don’t have to rely on public services such as food stamps or 
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Medicaid. Why give a company the advantage of a subsidy without ensuring 

that the resulting jobs pay a decent wage with full-time hours and health care? 

• The Liberty Bond program should have been directed toward smaller projects 

in Lower Manhattan and in other parts of the city that needed access to taxexempt financing. Many growing businesses (before and after 9/11) have the potential for growth yet struggle with New York City’s hyper competitive real estate market. 

• Leaders should take into consideration the fact that the attacks affected the 

region’s economy and businesses in all five boroughs. For example the borough 

of Queens is home to New York City’s two airports. Smaller businesses and 

their employees that support the airline industry were negatively impacted. Liberty Bonds could have been used as part of a comprehensive strategy for recovery—and long term improvement—of all types of businesses throughout the 

city. 

JULY 13, 2007, PART II 

MR. ERIC M. THORSON RESPONSES TO HON. MIKE ROGERS QUESTIONS

Supplemental question: 

HON. MIKE ROGERS. ‘‘You indicated the only lenders that could issue STAR loans 

were those in pre-approved ‘Preferred Lenders Program.’ This allowed designated 

lenders to process SBA-guaranteed loans with reduced oversight. 

What types of sanctions are there for preferred lenders who improperly 

issued STAR loans to businesses that were not affected by 9/11? Have any 

sanctions been issued?’’

Response: Let me clarify that the STAR Loan Program was available to all lenders participating in all components of the Section 7(a) program, not only lenders in 

the Preferred Lenders Program (PLP). As set forth in our audit report on the STAR 

Loan Program, SBA exercised virtually no oversight of lenders making STAR loans 

because the Agency did not review whether lenders were making valid determinations that borrowers were eligible for STAR loans. 

SBA has various sanctions for lenders that fail to comply with requirements for 

participation in the Section 7(a) Program. These include: (1) upon loan default, a 

complete or partial denial of a lender’s request for payment of a loan guarantee; (2) 

termination of a lender’s right to participate in a component of the Section 7(a) program (for example, suspending a lender from the PLP); or (3) termination of a lender’s right to participate in the Section 7(a) program altogether. 

The Agency responded to our STAR loan audit report by advising that it did not 

object to our recommendation which included denial of a STAR loan guarantee if 

a loan defaults and the lender failed to adequately document borrower eligibility. 

SBA, however, is still finalizing criteria for evaluating the adequacy of STAR loan 

justifications and have requested additional information from the lender to support 

the STAR determination. Therefore, to date, there have been no partial or full denials based on inadequate STAR justifications. Further, we are not aware of any instance where the Agency has issued a sanction against a lender either for failing 

to document borrower eligibility or for inadequately documenting eligibility. 

MR. MICHAEL NESTOR RESPONSES TO HON. MIKE ROGERS QUESTIONS

JULY 13, 2007, PART III 

Question 1: Does the Port Authority Inspector General monitor the appropriateness of sole source contracts such as that issued to Waterways? 

Response: The Inspector General does not formally monitor all sole source contracts awarded by the Port Authority.

What does that review entail? Our Audit Department, which is part of the Inspector General’s Office, performs procurement audits, which include examining the 

propriety of the type of procurement they are auditing, which include sole source 

procurements. The Audit Department also reviews on a monthly basis, all items on 

the Commissioner’s Board agenda, and if a sole source is included, there is some 

discussion about that item.

Question 2: Would you please describe your office’s Ethic’s and Integrity 

Training program? 

The Integrity Awareness Program includes a power point presentation that reviews for employees their responsibility to abide by the Port Authority’s Ethical 

Standards and the consequences of their failure to do so. A review of the some of 
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the common violations is discussed, for example, gratuities, bribery, and conflicts of 

interest. 

The Program explains. the three primary reasons why people make bad decisions: 

financial pressure, rationalization and opportunity; emphasizes implications of these 

decisions: financial loss, embarrassment, incarceration and failure to meet their responsibilities to the Port, co-workers and themselves. 

The Program explains, in laymen’s terms, Internal Controls and why they are important. The objective is early prevention, diagnosis and resolution, thereby avoiding 

a potential loss of the Port’s most valuable asset: its employees.

a. Have you seen a decrease in employee violations since this training 

was initiated? 

We have seen a decrease in employee violations in one particular area of the 

agency, toll collectors. We have concentrated our efforts in this area over the 

last few years making a number of arrests for stealing. The number of violations has decreased dramatically. We attribute that decrease to the deterrent 

effect that the arrests have offered, the awareness training provided, as well as 

increased oversight by management.

Has the number of investigations decreased since its implementation?

In fact we’ve seen the number of investigations increase because the trainings 

have prompted a number of the employees that attended the training to contact 

the office with information of wrongdoing. 

b. In your written you advised the Committee that Ethics and Integrity training 

is being provided to contractors in addition to Port Authority employees.

Is this training mandated by Port Authority or is it voluntary? 

While the training is not mandated by the contract between the Port Authority 

and the contractors, each contractor has readily cooperated by attending it, and 

it is anticipated that all future contractors awarded contracts will attend without objection. 

MR. TODD J. ZINSER RESPONSES TO HON. MIKE ROGERS QUESTIONS

JULY 13, 2006

This is in response to the questions attached to your August 17, 2006 letter regarding our July 13, 2006 testimony, Lower Manhattan Reconstruction: Lessons 

Learned from Large Transportation Projects. 

As reported in our testimony, we are now stepping up our oversight of all 5 Lower 

Manhattan recovery projects: 

• The Route 9A/West Street Project, 

• The Permanent World Trade Center PATH Terminal, 

• The Fulton Street Transit Center, 

• The South Ferry Terminal Station, and 

• The World Trade Center Vehicle Security Center. 

Specifically, on August 28, 2006, we announced a new effort to perform major 

project monitoring for all of these Lower Manhattan recovery projects. The primary 

objectives of this effort will be to assess (1) the status of each project, including 

costs, funding, schedules, and management and (2) any risks that may adversely impact their completion. As part of the monitoring effort, the team will look at issues 

related to the Lower Manhattan Recovery Office’s oversight of these projects, 

including coordination between FTA and FHWA on the Route 9A/West Street 

Project, and the activities of the project management oversight contractors that are 

assigned to each project. 

Our responses to your two questions follow.

Question 1: Do the roles and responsibilities of FTA and FHWA for the 

Route 9A Project complicate your oversight procedures? 

To date, the dual responsibilities of the Federal Transit Administration (FTA) and 

the Federal Highway Administration (FHWA) have not hindered our ability to review the Route 9A/West Street project. As we discussed in our written statement, 

a portion ($287 million) of the $4.55 billion in Lower Manhattan recovery funds that 

FTA is overseeing is dedicated to the Route 9A/West Street Project, along with $65 

million in FHWA emergency relief funds. Accordingly, FTA and FHWA share oversight. Federal oversight for the other 4 projects that are being funded with the $4.55 

billion is being provided solely by FTA, so coordination between FTA and FHWA 

is not an issue with these projects. FTA created the Lower Manhattan Recovery Office, which is separate from FTA’s New York field office, to oversee use of the $4.55 

billion. 
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1 Report Number AV–2006–032, ‘‘Internal Controls Over the Emergency Disaster Relief Transportation Services Contract,’’ January 20, 2006; Report Number AV–2006–051, Internal Controls 

Over Payments for Emergency Disaster Relief Transportation Services,’’ Jun 30, 2006; and Report Number MH–2006–065, ‘‘Audit of the Mississippi Department of Transportation’s Award 

of Selected Hurricane Katrina Emergency Repair Contracts,’’ September 6, 2006. 

FTA and FHWA executed two Memoranda of Agreement (MOA) regarding the 

Route 9A/West Street Project in the last two years to provide for the transfer of 

funds and to outline the oversight responsibilities of each agency for each segment. 

The MOAs clearly distinguish the roles of FTA and FHWA to ensure the projects 

are completed on-time and within budget. 

As the agency responsible for overall stewardship of the $4.55 billion, FTA negotiated the MOAs for FHWA to perform additional oversight that FHWA normally 

would not do. For example, FTA assigned a project management oversight contractor to the Route 9A/West Street Project, which is standard for larger FTA 

projects but is not typical on FHWA projects. The project management oversight 

contractor is charged with regularly monitoring the project and providing feedback 

to Federal officials should any problems arise.

Question 2: What recommendations would you make to enhance fraud 

prevention and detection? 

As we stated in our testimony, the Department should do all that it can to ensure 

that the taxpayers get the most from the Federal funding being invested and that 

these projects are free of fraud. These high-priority projects will require vigilant 

oversight by the Department, state and local governments, and transit agencies. In 

addition to the recommendations in our written statement, we would like to make 

a few other key points.

Dedicated Funding for Oversight in Emergency Relief Legislation 

We recommend that future emergency relief legislation specify that a portion of 

the funding be dedicated to audit or other oversight. As we discussed in our July 

2006 statement, history has shown that substantial infusions of funding into an 

area for relief and/or reconstruction efforts, such as those related to the September 

11, 2001 attacks, increase the risk of fraud. Therefore, it is our view that in any 

future disaster, the Federal agencies in charge of reconstruction should receive a 

sufficient and dedicated amount to provide oversight. 

Of the $4.55 billion in FTA funding dedicated to the Lower Manhattan reconstruction, nearly $90 million has been dedicated to oversight activities, a move that we 

support. To carry out its oversight responsibilities in Lower Manhattan, FTA has 

created a special oversight office, the Lower Manhattan Recovery Office. The Lower 

Manhattan Recovery Office is separate from FTA’s New York field office, reporting 

directly to the Administrator, and its sole purpose is to oversee these high priority 

projects in Lower Manhattan. The Lower Manhattan Recovery Office should employ 

all of the oversight mechanisms and expertise at its disposal to closely monitor these 

projects and, most importantly, quickly mitigate problems as they arise. Doing so 

will help ensure that the projects are delivered in a timely manner and within the 

federally funded amount.

Authorization of the Use of Independent Private Sector Inspectors General (IPSIGs) 

We believe that future emergency relief legislation should authorize agencies to 

use IPSIGs to supplement their existing oversight capabilities as necessary. IPSIGs 

are monitors with legal, auditing, investigative, and loss prevention skills that are 

employed by a government entity to ensure compliance with relevant laws, regulations, and contracts. They can help to deter, prevent, uncover, and report unethical 

or illegal conduct. 

As reported in our July 2006 statement, the New York State Metropolitan Transportation Authority and the Port Authority of New York and New Jersey either 

have IPSIGs in place, or are in the process or hiring IPSIGs, to act as compliance 

monitors for their respective Lower Manhattan Reconstruction projects. More importantly, the Lower Manhattan Recovery Office must ensure that its staff receives, reviews, and acts upon the findings of any IPSIGs for all of the Lower Manhattan 

projects. To be effective, it is critical that the Federal agencies and grantees seriously consider issues raised by IPSIGs and, if warranted, take action to address 

these issues.

Strengthening of Contracting Practices in Emergency Contracts 

Our Hurricane Katrina-related audit work 1 has led to several recommendations 

for strengthening of emergency-related contracts. We believe that some of these recommendations have government-wide applicability, and that legislation mandating 
255

the issuance of guidance applicable to all federal disaster relief would be appropriate. Some effective practices include the following. 

• Establish pre-negotiated emergency repair contracts with multiple contractors 

to ensure quick responses and fair and reasonable pricing prior to the emergency. 

• Prioritize emergency repair contracts to strongly encourage states to first use 

expedited, competitively-bid awards; use negotiated, cost-plus contract awards 

when competition is not feasible; and use high-risk lump-sum contract awards 

only under extreme emergency circumstances. 

• Require contractors to provide appropriate support for non-competitive price 

proposals, such as cost and pricing data to support proposals for lump-sum contracts, and advise states to conduct cost/price analysis before award. 

• Set baseline fair and reasonable prices prior to emergencies, using such methods as market surveys. 

• Provide alternative methods for computing equipment usage rates in negotiated, cost-plus contracts when standard industry information, such as the 

Rental Rate Blue Book, is not available. 

• Require a contract statement of the right to limit Federal participation when 

contract prices are determined not to be fair and reasonable. 

• To receive payment, ensure that a contractor’s invoices show precisely 

what goods and services it provided and that these invoices are reconciled with 

documentation prepared by government personnel at field locations that clearly 

show what good and services were actually received. 

Ensuring proper use of Federal dollars in an emergency situation is critical. To 

accomplish this objective, one possibility is for Congress to require a contract provision for independent audits in emergency situations. Specifically, Congress could require independent audits of (1) incurred costs on cost-plus contracts; (2) contractor 

justification for subcontractor selection in competitive subcontract awards; (3) support for verbal quotes over $100,000; and (4) cost and pricing data, and the evaluation of the data, in lump-sum awards. These audits could be conducted by the Defense Contract Audit Agency (DCAA), which has been particularly effective at providing standardized contract audit services to Defense Department components and 

other Federal agencies, including the Department of Transportation (DOT). In the 

past, DOT’s decision to engage DCAA has been a sound business approach for protecting the Federal Government’s interests.
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