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THE USE AND ABUSE OF GOVERNMENT PURCHASE

CARDS

HEARING

BEFORE THE

SUBCOMMITTEE ON GOVERNMENT EFFICIENCY,

FINANCIAL MANAGEMENT AND

INTERGOVERNMENTAL RELATIONS

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

MARCH 13, 2002

Serial No. 107–129

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpo.gov/congress/house

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

BOB BARR, Georgia

DAN MILLER, Florida

DOUG OSE, California

RON LEWIS, Kentucky

JO ANN DAVIS, Virginia

TODD RUSSELL PLATTS, Pennsylvania

DAVE WELDON, Florida

CHRIS CANNON, Utah

ADAM H. PUTNAM, Florida

C.L. ‘‘BUTCH’’ OTTER, Idaho

EDWARD L. SCHROCK, Virginia

JOHN J. DUNCAN, JR., Tennessee

——— ———

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, Washington,

DC

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

THOMAS H. ALLEN, Maine

JANICE D. SCHAKOWSKY, Illinois

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

———

BERNARD SANDERS, Vermont

(Independent)

KEVIN BINGER, Staff Director

DANIEL R. MOLL, Deputy Staff Director

JAMES C. WILSON, Chief Counsel

ROBERT A. BRIGGS, Chief Clerk

PHIL SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON GOVERNMENT EFFICIENCY, FINANCIAL MANAGEMENT AND

INTERGOVERNMENTAL RELATIONS

STEPHEN HORN, California, Chairman

RON LEWIS, Kentucky

DAN MILLER, Florida

DOUG OSE, California

ADAM H. PUTNAM, Florida

JANICE D. SCHAKOWSKY, Illinois

MAJOR R. OWENS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California

J. RUSSELL GEORGE, Staff Director and Chief Counsel

JUSTIN PAULHAMUS, Clerk

DAVID MCMILLEN, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on March 13, 2002 ............................................................................ 1

Statement of:

Grassley, Hon. Charles E., a U.S. Senator from the State of Iowa .............. 9

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

General Accounting Office, accompanied by John Ryan, Special Agent,

Assistant Director, Office of Special Investigations, U.S. General Accounting Office; Captain James M. Barrett III, Civil Engineer Corps,

U.S. Navy, and Commanding Officer, Navy Public Works Center, San

Diego, CA; Captain Patricia A. Miller, Commanding Officer, Space

and Naval Warfare Systems Center, San Diego, CA; Tina W. Jonas,

Deputy Under Secretary for Financial Management, Department of

Defense; Deidre A. Lee, Director of Defense Procurement, Office of

the Under Secretary of Defense for Acquisition, Technology and Logistics, Department of Defense; and Danielle G. Brian, executive director,

Project on Government Oversight ............................................................... 21

Letters, statements, etc., submitted for the record by:

Barrett, Captain James M., III, Civil Engineer Corps, U.S. Navy, and

Commanding Officer, Navy Public Works Center, San Diego, CA, prepared statement of ........................................................................................ 76

Brian, Danielle G., executive director, Project on Government Oversight,

prepared statement of ................................................................................... 115

Grassley, Hon. Charles E., a U.S. Senator from the State of Iowa, prepared statement of ........................................................................................ 16

Horn, Hon. Stephen, a Representative in Congress from the State of

California, prepared statement of ................................................................ 3

Jonas, Tina W., Deputy Under Secretary for Financial Management, Department of Defense:

Information concerning property accountability ..................................... 126

Information concerning salary offset ....................................................... 123

Information concerning Tanya Mays ....................................................... 119

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

General Accounting Office, and John Ryan, Special Agent, Assistant

Director, Office of Special Investigations, U.S. General Accounting Office, prepared statement of ........................................................................... 25

Lee, Deidre A., Director of Defense Procurement, Office of the Under

Secretary of Defense for Acquisition, Technology and Logistics, Department of Defense, prepared statement of ..................................................... 100

Miller, Captain Patricia A., Commanding Officer, Space and Naval Warfare Systems Center, San Diego, CA, prepared statement of ................... 86

Schakowsky, Hon. Janice D., a Representative in Congress from the

State of Illinois, prepared statement of ...................................................... 7

(1)

THE USE AND ABUSE OF GOVERNMENT

PURCHASE CARDS

WEDNESDAY, MARCH 13, 2002

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON GOVERNMENT EFFICIENCY, FINANCIAL

MANAGEMENT AND INTERGOVERNMENTAL RELATIONS, COMMITTEE ON GOVERNMENT REFORM, Washington, DC.

The subcommittee met, pursuant to notice, at 9:58 a.m., in room

2154, Rayburn House Office Building, Hon. Steve Horn (chairman

of the subcommittee) presiding.

Present: Representatives Horn and Schakowsky.

Staff present: J. Russell George, staff director and chief counsel;

Bonnie Heald, deputy staff director; Justin Paulhamus, clerk; Michael Sazonoff, intern; David McMillen, minority professional staff

member; and Jean Gosa, minority assistant clerk.

Mr. HORN. A quorum being present, the Subcommittee on Government Efficiency, Financial Management and Intergovernmental

Relations will come to order.

I have long believed that oversight hearings, such as we are

holding today, shed light on important issues that need attention,

and that such light encourages those in charge to fix the problem.

I am delighted that in the audience are a number of individuals,

top executives, that are going into the purchasing acquisition for

DOD. I am delighted to have you in the hearings. I hope we can

learn something from this morning’s hearing. We are delighted

that you will look at those laws and make sure that they are put

and implemented in all of the contracts, so that they understand

how these laws are. I thank you very much for being here.

How many of you are here? Stand up, please, and see how many

are in the class. Only one, two, three, four, five, six. I thought there

would be about 30.

So thank you very much. I hope you enjoy it. Sometimes it isn’t

enjoyable, but we’ll do it.

So I have long believed that these oversight hearings, such as we

are holding today, shed light on important issues that need attention, and that such light encourages those in charge to fix the problem. In many cases, that has been a correct assumption, but you

will hear today what, in part, dismisses congressional oversight as

merely a nuisance that must be endured, but that can be ignored,

is the attitude.

On July 30, 2001, this subcommittee held a hearing examining

the government purchase card programs at two Navy units in San

Diego, the Space and Naval Warfare Systems and the Navy Public

2

Works Center. Over the last few months, the General Accounting

Office, which is the right arm of Congress for both programmatic

review as well as fiscal review, the General Accounting Office auditors and investigators have examined recent card purchases at the

two San Diego Navy units. One of the units, the Public Works Center, was cooperative in providing auditors with the documentation

and information they needed to complete their job. Equally important, this unit is making a concerted effort to identify and eliminate abusive uses of the cards.

It is another story at the Space and Naval Warfare Systems Center. According to the General Accounting Office, the Systems Center provided information that was often misleading and conflicting.

Whether it is an attitude of leadership or a pervasive culture

throughout the unit, Space and Naval Warfare Systems Center employees, most of whom are civilians, have continued using their

government-guaranteed cards to buy extravagant personal items— all at taxpayer expense.

It is about April 15th when people will be writing out the checks

to give the Federal Government a revenue source for all that is

going on with the war and with now getting Federal money for

education throughout America, where we have a first-rate education program, and the money is needed. It should not be wasted,

as it has been, for personal use. These items include designer briefcases, tote bags, and day planners from Louis Vuitton and Franklin

Covey, as well as high-quality, $30 Bose headsets for listening to

music.

This abuse is of special concern because of the desire by many

to increase temporarily the existing transaction limit on most purchase cards from $2,500 per purchase to $25,000 per transaction.

This increase would apply to purchases that relate to the war

against terrorism or defending the homeland against terrorism.

That is where the money should go. Undoubtedly, this streamlined

purchasing power might be needed. But before we consider that decision, we must be certain that proper controls are in place to stop

the abuse of public funds which occurs. It isn’t their money; it is

we the taxpayers’ money.

That said, I welcome our witnesses, and we will start. The ranking member is here? If Ms. Schakowsky comes, she will have an

opening statement.

[The prepared statement of Hon. Stephen Horn follows:]

3

4

5

Mr. HORN. Is Senator Grassley here? All right, he will be here

in 1 minute, I am told. So we will be in recess just waiting for the

Senator. If not, we will go on with the other panel.

[Recess.]

Mr. HORN. Mr. Kutz, Mr. Ryan, Captain Barrett, Captain Miller,

Deputy Under Secretary Jonas, accompanied by Deidre A. Lee, Director of Defense Procurement, and Danielle G. Brian. Let’s just

line up the way it is. That is the way we will take them, as on the

agenda, and leave a seat in the middle for Senator Grassley.

[Witnesses sworn.]

Mr. HORN. The clerk will note that the witnesses have affirmed

the oath.

We will now start. The ranking member is here and has an opening statement. So please start.

Ms. SCHAKOWSKY. Thank you, Mr. Chairman, for holding this

hearing, and I join you in welcoming our witnesses this morning.

I will address three points in my remarks this morning.

First, I am disappointed in the arrogance and disrespect for the

American public shown by the Space and Naval War Center.

Second, I am disappointed in the personnel at Naval Public

Works for the fraudulent use of purchase cards. GAO reports that

Public Works is making a serious effort at reform.

Finally, I believe that the problems we will address today are not

unique to these organizations, but rather are symptomatic of the

acquisition culture at the Department of Defense. There is an attempt to return the Defense Department to the era of the $600

hammers and $3,000 toilet seats.

GAO will report today on widespread abuse of the purchase card

system at the Space and Naval Warfare Center. Purchase cards are

used to buy luxury items like designer bags, personal digital assistants, and high-priced clothes. Purchase limit regulations were circumvented by splitting purchases to get below the limit. It would

be an understatement to say that the program was managed badly

at the Warfare Center. Management completely abdicated its responsibilities. This supposedly elite research center even tried to

justify buying Lego robots from Toys R Us as a research expenditure.

Those, however, are not the worst of the offenses. The personnel

at SPAWAR argued first that these purchases were justified. Then

they told the GAO that it didn’t matter if digital cameras and

clothes and luggage disappeared because naval regulations said

they didn’t have to account for items that are easily pilfered. In

other words, if something is easily stolen, the problem is solved by

not keeping track of those things.

This morning the commander who testified last July is not here.

The former commander retired. That, in and of itself, would not be

noteworthy. However, the events surrounding this retirement are

disturbing. The commander retired after refusing drug testing, refusing to have his car searched when he was selected for a random

search, and for trying to get two of his subordinates to lie. For

those abuses, the punishment was a $1,000 fine and retirement.

The rumor is that, once Congress looks away, he will be back at

work as a contractor—probably paid by a purchase card.

6

What we have here is an organization that is completely out of

control. There is no respect for laws or regulations. There is no accountability for fraud and abuse. When caught, they try to justify

abusive purchases. Unfortunately, the departmental response to

these problems has been weak.

Last week Congressman Davis held a hearing on a proposal to raise the purchase limit on these cards to $25,000 per purchase.

That proposal came from the Defense Department and those outside the government who provide goods and services. That would

eliminate from competitive bidding 99.5 percent of the purchases

made by the Federal Government.

We have seen this program badly abused by the two units here

today. I suspect that when GAO reports back to us this summer

on its examination across the whole Defense Department we will

see similar abuse.

The Defense Department has not been a good steward of Federal

funds. We should not put into their hands the tools to further

abuse the public trust.

There is, however, another question that must be addressed before we expand the use of purchase cards. These cards make purchasing more convenient for the government, but no one has actually looked at the cost of using these cards. Much of what is purchased with these cards could be purchased using the GSA schedule, a program where GSA negotiates lower prices because of the

volume of government purchases. GAO has told us that purchase cards will account for nearly $20

billion in purchases this fiscal year or next. If there is a 5 percent

waste in these purchases, that is $1 billion of waste.

I am requesting, and I hope that the chairman will join me in

this request, the GAO look at the purchases made using these purchase cards: How many of those items could have been purchased

from the GSA schedule? Did the agency pay more or less using the

purchase card than it would have going through the GSA?

This program is 10 years old, and GSA has never done a careful

examination of the program. Before we expand the use of purchase

cards, we should have some facts about how the system is working

today.

Again, I thank you, Mr. Chairman, for calling this hearing, and

I look forward to the testimony of our witnesses.

[The prepared statement of Hon. Janice D. Schakowsky follows:]

7

8

9

Mr. HORN. I thank you for your statement. Please work with the

staff director and the deputy staff director, Ms. Heald, on what you

have just asked. We will be glad to ask GSA and others about that.

Now is Senator Grassley here anywhere? OK, well, we are going

to start then. Oh, here we are.

Senator Grassley, we’ve got a seat for you right there. It isn’t as

comfortable as Senate chairs, but it’s the House. We are delighted

to have you here.

STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR

FROM THE STATE OF IOWA

Senator GRASSLEY. Am I sitting with friends or enemies? [Laughter.]

These folks in the defense of our country are not enemies. These

folks ought to be congratulated for what they do at this particular

time.

Mr. HORN. Yes, they have been sworn under oath. So we thought

we would put you in the middle there. You have done a great job

on this particular issue, just as you have done on many other

things.

Senator GRASSLEY. Thank you very much.

First of all, let me apologize for being late. I had a group of college kids that I got too late. I thought if we had 30 kids come from

Iowa that wanted to ask their Senator a few questions, I ought to

do that. That is the reason I am late. Thank you, Mr. Chairman.

Mr. HORN. Yes, well, bring them here, if you would like. [Laughter.]

By the way, there are 30 people here in the Executive Procurement Acquisition for DOD. They are in a course, and your testimony, mine, and the ranking member’s testimony will, we hope,

get through to them, because that is the first class that has ever

been in a hearing here. We are delighted to have them.

Senator GRASSLEY. Yes. Mr. Chairman, I am here to share my

views on the latest results of our ongoing oversight of abuse of the

Department of Defense credit card. This is a joint effort that we

have been supported by the General Accounting Office. It is an

honor and privilege for me to team up with you on such important

oversight work.

What we are doing today is putting a spotlight on a problem. In

a bureaucratic place like the Pentagon, the glare of public spotlight

is never welcome, but shedding light is the heart and soul of oversight generally, and particularly of congressional oversight. Exposure is a great remedy enhancer.

Every time I peer into the inner recesses of the Department of

Defense credit card account, I see more abuse and more fraud, and

that makes me ask myself, how bad can it be? So we need to keep

the spotlight on full power and the beam focused on the problem

until we get to the bottom of the pit and figure out what needs to

be done.

Today there are 1.7 million Department of Defense credit cards

in circulation that generate over $9 billion in expenditures annually. There are two types of cards, the purchase card and the travel

card. Most are travel cards. This is 1.4 million versus 200,500 purVerDate 11-MAY-2000 11:03 Jan 13, 2003 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 C:\DOCS\82566.TXT HGOVREF1 PsN: HGOVREF1
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chase cards. Most of the dollars are for purchase card transactions,

$6.1 billion per year versus $3 billion for the travel cards.

A credit card is a financial instrument. It is a license to spend

money. And every shred of evidence that I have seen says that the

internal controls at the Pentagon are weak or nonexistent. Credit

cards is a zero control environment, and in this environment it is

a very dangerous one. That means that there is an army, 1.7 million strong, authorized to spend money with no checks and balances. The potential for abuse and fraud is virtually unlimited.

Now I understand the thinking behind the credit cards, and the

thinking is very, very good. Unfortunately, we see the bad in the

execution of a very good policy. We want the men and women serving in the Armed Forces to have the tools that they need to carry

out their duty. A credit card is one of those modern devices that

is supposed to make it better and easier for them to get the job

done quickly and effectively without a whole lot of wasteful paperwork.

In simplifying the travel and purchase processes, each cardholder

is given authority to spend money. The authority to spend money

in the name of the taxpayer is obviously an awesome responsibility.

That authority carries heavy responsibilities. Unfortunately, this

awesome responsibility is not taken very seriously at the Pentagon.

The criticism is not directed at Secretary Rumsfeld, because he is

trying hard to cleanup a longstanding financial mess.

My criticism is directed at those employees who are supposed to

oversee the program. Department of Defense credit cards are

issued willy-nilly with no credit checks. The results are predictable

then. The cards are being abused with impunity. Department of

Defense credit cards are being taken on shopping sprees, and the

cardholders think they are immune from punishment, and they

are, Mr. Chairman.

We have zero accountability with purchase cards, zero accountability with travel cards until recently. That is the root cause of the

problem. That is why we are having this hearing today, because of

the lack of accountability. If there was accountability, it is obvious

that this stuff would not be going on.

In a moment the General Accounting Office will be telling you

just how bad it really is. The General Accounting Office has examined 300 transactions at two Navy offices in San Diego. Despite a

small sample, Mr. Chairman, the General Accounting Office has

uncovered extensive fraud and abuse, and more is being found each

day. We are looking at the tip of an iceberg.

Here’s a sample of some credit card abuse: in bars, strip joints,

gambling casinos; for large cash withdrawals from ATM machines;

clothing at upscale department stores like Macy’s and Nordstrom’s;

designer leather goods and expensive luggage; gift certificates,

$1,500 each; $200 robots at Toys R Us; groceries, kitchen appliances, home computers, and even a breast enlargement operation.

So you name it; these cards are used for it, and it is all personal

business. If they need it, they buy it with Department of Defense

plastic and keep it; no questions asked.

Now there is a proposal to raise the purchase limit from $2,500

to $25,000. If it goes up, new cars and homes might be next. The

General Accounting Office’s 300 transaction sample yielded over a

11

half million dollars in fraudulent and abusive purchases. Either the

taxpayers or the bank gets stuck with the bill, depending on which

card is used. In either case, it is bad.

For shopping done with a purchase card, the government is responsible for paying the bill, and most bills are paid promptly; no

questions asked. With purchase cards, the taxpayers are the ones

that get shafted, and get shafted right up front. To my knowledge,

the government has never asked anyone to return an unauthorized

purchase or repay the money, even when abuse is known to authorities.

Travel card expenses, by comparison, are the responsibility of individual cardholders. The taxpayer is out of the loop, at least up

front. When the cardholder incurs legitimate travel expenses, that

person is supposed to file a travel voucher, get reimbursed, and

then pass the money onto the bank, in this case, Bank of America.

All too often, cardholders simply pocket the money, tax dollars,

leaving the bank holding the bag. When the travel card is used to

cover personal expenses, what happens with alarming regularity,

those bills are paid late, very late, and sometimes never. With no

interest charges, obviously, abusers get a free ride.

The bank has equipped the Pentagon with an anti-fraud detection system. It is called EAGLS, acronym E-A-G-L-S. It gives agency program coordinators an online capability to detect unauthorized

transactions on any account. It only takes a second to determine

if a trooper is getting cash at the local ATM machine without orders, but nobody seems to be minding the store.

As I said at our hearing in July, Mr. Chairman, if the Pentagon

knows this stuff is happening, and if the Pentagon does nothing,

then that makes the Department of Defense party to bank robberies, and the robbery is still in progress. The bank is sustaining unacceptable losses, and in the end we all pay higher prices, and the

taxpayers get shafted as well. When the bank has to write-off bad

debts, tax revenues are lost.

So, Mr. Chairman, the bank has reached a breaking point. It is

losing too much money. So, on February 11, 2002, the bank fired

a warning shot across the bow. The bank is turning up the pressure. It has declared its intent to cancel the U.S. Army account,

413,029 cards, at midnight, March 25th, this month. That has really gotten somebody’s attention, and in a hurry, and so there are

now negotiations in progress.

Mr. Chairman, there then is a glimmer of hope on the horizon.

The reason for hope comes from a brand-new Department of Defense policy called salary offsets. Before I explain the new policy,

it is important to understand why the Department of Defense travel card program is teetering on the brink of disaster. As of November 2001, 46,572 Department of Defense personnel had defaulted

on more than $62 million in official travel expenses, and the bad

debt was growing at the rate of $1 million per month, making the

Department of Defense default rate six times the industry average.

For a business interested in profits, a pile of bad debt with no

accountability made for an intolerable situation, obviously. So

something had to give. In October 2001, the bank and the Department of Defense agreed to take action. The salary offset program

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then was born. There are now 31,579 accounts enrolled in the offset program. So far, offset payments total $5.2 million.

As a garnishment, the salary offsets provide some measure of accountability, but actually have limitations. For one, the money was

taken from the bank in big chunks, but it is repaid to the bank in

small chunks over a long period of time. And there are loopholes.

Ten percent of unpaid accounts will slip right through the net, due

to retirements, bankruptcies, dollar offset limits.

The bank still expects about $2 to $4 million a year to fall

through the cracks and be written off as bad debt. But that’s considered better, and it is also consistent with the industry average.

In addition, most of the older accounts in default will never be

captured by offsets. The bank will still have to eat $40 million of

unrecoverable debt. Even though there isn’t any hard data yet, the

bank expects salary offsets to reduce the default rate to negligible

levels. That’s the good news.

There is still bad news. Salary offsets are having little or no effect on high delinquency rates. Delinquencies have actually risen

with salary offsets. That is because offsets don’t kick in until 120

days plus or 4 months past billing. Payments are due within 30

days of billing. Today the Department of Defense has outstanding

balances of $370 million. About 30 percent of the dollars owed for

official travel expenses are more than 30 days past due; 15.4 percent are 60 days past due. One in five Department of Defense accounts is overdue for payment. That is four to five times the industry average.

The 3-month gap between the payment due date and offsets

means that the bank has to float a loan. It is a free loan for the

Department of Defense abusers that costs the bank $4 to $5 million

a year.

A prime driver behind delinquencies is the use of the card to

cover personal expenses. So, Mr. Chairman, you may remember at

the last hearing I mentioned several cases involving egregious use

of credit cards. Just a few of them:

A marine sergeant, A. Lopez, who ran up a $19,581 bill for personal expenses and then left the service and the unpaid bills when

his retirement was up.

A person by the name of P. Falcon, with an unpaid bill of $9,847,

including $3,100 spent at a nightclub.

A dead sailor, T. Hayes, who spent $3,521.

Q. Rivera, Army Reserve, whose wife spent $13,000 on a shopping spree in Puerto Rico.

R. Walker, Air National Guard, with an unpaid balance of

$7,428, including his wife’s gambling debts.

In the past 8 months that have passed since the hearing, only

one of these accounts has been paid off. P. Falcon paid his bill.

Every expense posted to his account was personal. He is under investigation.

The others have the same large, unpaid balances that we saw

last summer. Some are under investigation.

More aggressive offsets and late fees might help bring this kind

of abuse to a screeching halt. Some real leadership at the top

would also help. One of the most powerful elements of leadership

13

is setting an example of excellence. Setting a good example should

include paying credit card bills on time.

Officers should always set the example. Unfortunately, there are

713 commissioned officers who have defaulted on $1.1 million in

charges. All of these accounts are in charge-off status or unpaid for

7 months or more. Their ranks range from junior lieutenants up to

senior colonels and a Navy captain. Individual unpaid balances top

out at $8,000. Some of the charges on these accounts look suspicious and obviously need investigation. Commissioned officers

who run up $1.1 million in bad debts set a terrible example for the

rank-and-file.

Somebody in the Pentagon needs to come down hard on officer

scoff-laws. Credit card abuse in the military will never stop until

the officers cleanup their act. So, Mr. Chairman, I am presenting

to you a list of 713 commissioned officers who defaulted on their

accounts, along with unpaid bills for each officer. I would like to

have the committee take this, and I ask that it be placed in a confidential record at today’s hearing.

Mr. HORN. Without objection.

Senator GRASSLEY. Then I would also ask you, Mr. Chairman, to

join me in a letter to Secretary Rumsfeld, because I would like him

to see the list and determine what action should be taken in this

matter.

Mr. HORN. I am delighted to join you in that letter.

Senator GRASSLEY. OK, thank you very much.

The General Accounting Office has uncovered a disturbing case

involving alleged purchase and travel card fraud by one person,

Ms. Tanya Mays. She was assigned to the Navy Public Works Department, San Diego. Ms. Mays took her purchase card Christmas

shopping and in a few short days ran up a bill of $11,551 at

Macy’s, Nordstrom’s, and Circuit City. She bought gift certificates

worth $7,500, a Compaq computer, an Amana range—there’s nothing wrong with Amana ranges, if you pay for them; they’re made

in Iowa—[laughter]—groceries and clothing, all at taxpayers’ expense.

Mr. HORN. I’m a Target man.

Ms. SCHAKOWSKY. Actually, I have an Amana. [Laughter.]

Senator GRASSLEY. OK. She presented the bill to her Navy supervisor, who signed and certified it for payment, and it was paid in

full. She also used her travel card to buy airline tickets for her son.

The cost was $722. When Ms. Mays left the Public Works Department, she was allowed to keep her purchase card. I guess they figured that she needed help again, and they were right, she did, this

time for a personal car rental, and Public Works gladly paid the

bill.

So, Mr. Chairman, I find the Mays’ case very troublesome. She

has allegedly made a number of fraudulent purchases. Yet, there

seems to be total disregard for accountability. Ms. Mays has not

been asked to repay the money she allegedly stole. No disciplinary

action has been taken. In fact, she was moved into a bigger job and

has been given a promotion effective October 2001. She is now assigned to the Army’s top-level Financial Management Office in the

Pentagon, and I am told that she is in charge of cash integration.

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So, Mr. Chairman, when you put one of these cases under a microscope, it seems like the whole problem comes into much sharper

focus. The Tanya Mays case is not unique, and I can guarantee

that. Here’s another.

A Department of Defense employee by the name of Somchart

‘‘Nick’’ Fungcharoen, he used his travel card exclusively for personal expenses. Over a period of 2 years he charged nearly $35,000,

including medical expenses, $4,016. On the surface, it appears as

if he spent most of the money romancing a waitress he met at the

Hooters’ Bar and Grill in Jacksonville, FL. Her name was Jennifer

Gilpin.

Mr. HORN. Senator, I’m going to have to interject for a minute.

I’ve got a journal call on the floor. When you are done with that

statement, if you would come up here, and we will have Mr. Kutz

start his testimony——

Senator GRASSLEY. OK.

Mr. HORN [continuing]. And then you will have a chance to dialog with GAO.

Senator GRASSLEY. OK.

Mr. HORN. Then I will be back within the time.

Senator GRASSLEY. This gentleman used his travel card exclusively for personal expenses. Over a period of 2 years he charged

nearly $35,000, including medical expenses of $4,016. On the surface, it appears that he had used this to romance a waitress.

After they got to know each other, she asked him for money to

have a breast enlargement operation. He agreed and took her to a

surgeon, Dr. John J. Obi, M.D. Dr. Obi performed the operation

and Fungcharoen used his Department of Defense credit card to

pay the bill.

When the relationship soured, the case ended up in small claims

court, and the military man had retired on disability and wanted

his money back. The judge became alarmed that Fungcharoen testified proudly that he had used his government-issue credit card to

pay the doctor. Fungcharoen whipped out the card in the courtroom

and showed it to the judge. The judge examined the card and read

on the inscription, ‘‘For official government travel only.’’

The judge stated, in total disbelief, ‘‘You paid for this breast enlargement with a government credit card?’’ After the revelation, the

judge said, ‘‘Let’s not go there.’’

This case is unique. It is unique because the cardholder paid his

bill, though not always on time.

I have two problems with the case. First, Fungcharoen used his

card exclusively for personal business. Had he used the standard

commercial card, he would have incurred stiff interest charges and

penalty. He used the Department of Defense plastic to avoid costs

that the rest of us have to pay. He got a free loan from the bank

without asking. That is just one small step away from other worse

forms of abuse.

Second, the case underscores the total lack of oversight by the

EAGLS crew. They were asleep at the switch, and a quick EAGLS

check would have shown that he was making extensive unauthorized purchases around his home in Florida.

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And why did he have a card after retirement is obviously an important question. Like Ms. Mays, I guess he figured out that he

needed it again.

So, Mr. Chairman, accountability is the key. With no accountability, we can look forward to more egregious credit card abuse, relentless abuse. It will go on and on and on with impunity. A person

who holds up a liquor store and takes $500 in cash can go to jail

for 15 years. If he used Department of Defense plastic to steal

$12,000 with DOD plastic, like Tanya Mays allegedly did, you get

a promotion, and that just doesn’t seem to be right.

People who abuse their government credit cards have to pay a

price. Heads have to roll. When the price is right, the abuse then

will end. If the abusers are forced to repay the money with penalties, the stealing will stop.

I thank you very much, Mr. Chairman.

[The prepared statement of Senator Grassley follows:]

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Senator GRASSLEY. I will do as the chairman suggested. I will be

right up there.

We would now call upon Mr. Kutz, the Director of Financial

Management and Assurance at the General Accounting Office. Mr.

Kutz.

STATEMENTS OF GREGORY D. KUTZ, DIRECTOR, FINANCIAL

MANAGEMENT AND ASSURANCE, U.S. GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY JOHN RYAN, SPECIAL

AGENT, ASSISTANT DIRECTOR, OFFICE OF SPECIAL INVESTIGATIONS, U.S. GENERAL ACCOUNTING OFFICE; CAPTAIN

JAMES M. BARRETT III, CIVIL ENGINEER CORPS, U.S. NAVY,

AND COMMANDING OFFICER, NAVY PUBLIC WORKS CENTER,

SAN DIEGO, CA; CAPTAIN PATRICIA A. MILLER, COMMANDING OFFICER, SPACE AND NAVAL WARFARE SYSTEMS CENTER, SAN DIEGO, CA; TINA W. JONAS, DEPUTY UNDER SECRETARY FOR FINANCIAL MANAGEMENT, DEPARTMENT OF

DEFENSE; DEIDRE A. LEE, DIRECTOR OF DEFENSE PROCUREMENT, OFFICE OF THE UNDER SECRETARY OF DEFENSE FOR ACQUISITION, TECHNOLOGY AND LOGISTICS,

DEPARTMENT OF DEFENSE; AND DANIELLE G. BRIAN, EXECUTIVE DIRECTOR, PROJECT ON GOVERNMENT OVERSIGHT

Mr. KUTZ. Senator, good to see you chairing a House hearing

here. Good morning.

Senator GRASSLEY. I can’t believe it. [Laughter.]

Mr. KUTZ. It is a pleasure to be here to testify on our audit of

Navy purchase cards. With me this morning is Special Agent John

Ryan from our Office of Special Investigations.

Purchase cards were introduced to the government in the 1980’s

primarily to streamline the acquisition process for small purchases.

Usage of purchase cards has grown quickly in the Federal Government, increasing from about $2 billion in 1995 to nearly $14 billion

in 2001.

The Department of Defense purchase card activity was about $6

billion in 2001. With 230,000 purchase cards in the hands of DOD

employees, effective internal controls are necessary to protect the

government from fraud, waste, and abuse.

Senator, I have a purchase card in my hand here that is also displayed on the monitor. As you can see, it looks like a normal credit

card and can generally be used wherever Mastercard is accepted.

However, notice, as you mentioned on the travel card, this one

says, ‘‘For official government purchases only.’’

Today I will discuss our followup audit of fiscal year 2001 purchase card activity at two Navy units in the San Diego area,

SPAWAR Systems Center, which I will refer to as SPAWAR, and

the Navy Public Works Center, or Public Works. These units of primarily civilian employees serve critical roles in supporting DOD’s

mission.

Our audit focused on implementation of the purchase card program, not its design. As you mentioned, Senator, used and controlled properly, the purchase card can benefit the Federal Government. The bottom line of my testimony this morning is that for fiscal year 2001 we again found significant breakdowns in internal

controls over purchase cards at the two Navy units. These breakVerDate 11-MAY-2000 11:03 Jan 13, 2003 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 C:\DOCS\82566.TXT HGOVREF1 PsN: HGOVREF1
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downs contributed to fraudulent and abusive purchases and theft

and misuse of government property.

My testimony has three parts: first, the overall purchase card internal control environment; second, the effectiveness of key internal

controls, and, third, examples of fraudulent, improper, and abusive

purchases.

First, our work has shown that the lack of a strong internal control environment leads to the risk of improper behavior. For fiscal

year 2001, the control environment at both SPAWAR and the Public Works was ineffective. However, improvements were made by

both units, including significant reductions in the number of cardholders, increased focus on training, and reductions in credit limits.

A key factor impairing the control environment at SPAWAR was

the management tone at the top. The former commanding officer

testified last July that the purchase card program at SPAWAR had

effective management controls. By denying before this subcommittee, and later to his staff, that there was a problem, he effectively

supported the status quo.

We are encouraged by the commitment of Captain Miller, the

new commanding officer, to ensure that an effective, well-controlled

purchase card program is implemented at SPAWAR. However, we

are concerned that there will be significant cultural resistance to

change. For example, through the end of our audit, SPAWAR continued to rationalize many improper, abusive, and questionable

purchases.

A key factor in the improvements at the Public Works is the consistently proactive attitude demonstrated by Captain Barrett and

his staff.

Second, basic internal controls over the purchase card program

remain ineffective during 2001 at both units, including independent documentation of receipt of goods and services and independent

review and certification of the monthly credit card bill. Public

Works’ failure rate of 16 percent for receipt and acceptance was a

significant improvement from the 47 percent failure rate in 2000.

I will use the posterboard to illustrate how fraud can occur when

these two key internal controls fail. As you can see, this excerpt

from a purchase card bill is similar to a normal credit card statement. Most taxpayers closely review their monthly credit card bill

to ensure that all the charges are appropriate.

This extreme example is the December 1999 credit card bill that

you mentioned, Senator, for a fraud case that Agent Ryan investigated. As you can see, somebody went on a Christmas shopping

spree. This bill, which includes over $11,000 in fraudulent charges,

was approved and paid for by the Public Works. Consistent with

our 2001 findings, both controls failed, as the government never received these goods, and the bill was paid with no review. Fortunately, over a year later, the government got this money back.

However, I think you will agree this is no way to handle taxpayer

money.

Third, given the weak controls, it is not surprising, especially for

SPAWAR, that we identified potentially fraudulent, improper, and

abusive purchase card transactions in 2001. Examples of actual

and potential fraud include 1,914 compromised Navy accounts that

were previously reported that were used to purchase jewelry, pizza,

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flowers, and tires; over $10,000 of charges by a safety product vendor that SPAWAR paid, despite the fact that no goods were received, and $164,000 of purchases from another SPAWAR vendor

with no documentation that any goods or services were received.

We have provided the listing of compromised accounts, which includes 78 SPAWAR and 10 Public Works accounts that were active

to the Navy in January, and these accounts were finally canceled

earlier this month. The two vendor cases I mentioned have been referred to Agent Ryan for investigation of fraud and abuse.

We also identified the improper purchases at both SPAWAR and

Public Works. Some of these purchases represented disbursement

of government funds that have not authorized by law. Examples of

improper purchases included food, clothing, and the rental of luxury automobiles.

SPAWAR also improperly wrote 30 convenience checks over the

$2,500 limit, for a total of $347,000. After we identified wasteful

and improper usage, the Navy canceled SPAWAR’s convenience

check privileges.

In addition to fraudulent and improper charges, we identified a

number of abusive or questionable purchases by SPAWAR. These

represent purchases that were at excessive cost, of questionable

government need, or both.

For example, as shown on the posterboard, we found purchases

at SPAWAR including Louis Vuitton $250 day planners, which are

also shown on the monitor; $195 leather tote handbags, again

shown on the monitor; abusive and wasteful usage of cell phones;

luggage such as wallets, passport holders, and backpacks that were

given away; computer bags purchased in Italy and from Sky Mall

for as much as $250 each; four sets of Lego toy robots that you

mentioned, Senator, costing $200 each, none being in possession of

the government; clothing, including the $140 jacket, which is also

shown on the monitor; a $300 Bose headset that was used primarily to listen to music, and a questionable trip for 30 to Bally’s

Paris Casino in Las Vegas, at a cost to the taxpayer of $15,000 to

$20,000.

Consider this: For 2001, we audited less than 200 transactions

and found these abusive items, along with potentially fraudulent

and improper purchases. In contrast, SPAWAR’s stand-down review looked at 16,000 transactions, and, Senator, guess what they

found—nothing. No fraudulent, improper, or abusive charges.

In summary, the findings today reflect what can happen when financial management is broken and accountability is lost. These

purchase card control weaknesses are reflective of the broader financial management problems facing DOD. It is interesting to note

that there have been limited consequences for individuals that

have misused the government purchase card.

In light of the events of September 11th, and the Federal Government’s short and long-term budget challenges, it is more important than ever that DOD get the most from every dollar spent. Secretary Rumsfeld has noted that billions of dollars of resources could

be freed up for national defense priorities by eliminating wasteful

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spending. The purchase card abuse I have just described is a small

example of what he is talking about.

Senator, this concludes my testimony. Mr. Ryan and I are available for questions after the other statements.

[The prepared statement of Mr. Kutz and Mr. Ryan follows:]

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Senator GRASSLEY. It is now my privilege to invite Captain

James M. Barrett, Commanding Officer, Navy Public Works Center, San Diego, to testify. Welcome.

Captain BARRETT. Thank you, Senator. Good morning.

As you mentioned, I am Captain Jim Barrett, Commanding Officer of the Navy Public Works Center in San Diego. I assumed command of the Center on August 24, 2001. I have submitted my written testimony statement for the record.

In testimony before this subcommittee on July 30, 2001, my

predecessor stated, ‘‘I fully recognize that controls are a key element.’’ He was committed to ensuring those controls were put in

place. I am here to assure you that I have continued to address

that commitment since taking command of the Public Works Center, San Diego.

Prior to, during, and as a result of GAO’s initial audit, PWC, San

Diego, has worked tirelessly to improve the internal control environment of our purchase card program. As Mr. Kutz has mentioned, we have significantly reduced the number of cardholders;

we have significantly reduced the credit limits of our purchase

cardholders; we have greatly increased the number of approving officials that allows a more effective oversight for those cardholders.

We have published supplemental guidelines and issued a revised

command instruction on purchase card procedures. We have held

numerous training sessions to address the issues raised by GAO

during their initial audit. We have also held training sessions to

address Navy policy changes resulting from GAO’s audit.

Mr. Chairman, I believe we have improved dramatically, and we

are continuing our work to get better. That concludes my summary

statement, subject to any questions you or the other committee

members may have. Thank you, Mr. Chairman, for the opportunity

to appear today.

[The prepared statement of Captain Barrett follows:]

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Senator GRASSLEY. Thank you very much for your testimony.

I now would call Captain Patricia A. Miller, Commanding Officer, Space and Naval Warfare Systems Center, San Diego. Welcome, Captain.

Captain MILLER. Good morning. Thank you, sir. Good morning,

Senator Grassley.

As you said, I am Captain Patricia Miller, Commanding Officer,

Space and Naval Warfare Systems Center, San Diego. I assumed

command on December 8, 2001. Senator Grassley, I have prepared

a written statement, which I request be submitted for the record.

Senator GRASSLEY. It will be received.

Captain MILLER. Thank you, Senator. I will now briefly summarize my statement.

First, I sincerely appreciate GAO’s thorough and candid assessment in their recently completed command audit. As I told Mr.

Kutz, I am personally committed to changing the culture at my

command to permanently improve this important and vital program.

As you know, the GAO found both continued weakness and significant improvements in our program. We agree there was a command climate that permitted these abuses. We agree there were

several employees who used poor judgment in making purchases,

and we did not serve our employees well by providing proper oversight to prevent these abuses.

In summary, we agree with GAO’s findings. We have made significant changes to correct these deficiencies and are working hard

to implement GAO’s recommendations.

For example, we have reduced the number of cardholders by

more than 30 percent. We have dramatically increased the number

of approving officials, and are now far below the recommended Department of Defense cardholder-to-approving-official ratio. We have

ensured these approving officials are personally accountable for

statements submitted for payment and the cardholders under

them.

All approving officials and cardholders have received detailed

training on appropriate purchasing behavior. We have strengthened our internal controls by implementing a process to randomly

review purchase card transactions. We have implemented a semiannual command evaluation review to look at our processes and

procedures to identify potential problems early. In addition, GAO

has reviewed the Enterprise Resource Planning [ERP], System, and

we have implemented their recommendations.

Senator, I am personally committed to increasing our management oversight, training employees to establish a greater awareness of ethical and prudent purchases, and changing the command

climate to ensure every single employee understands their ethical

and fiduciary responsibilities. We are fully engaged in making the

necessary changes to ensure that you and the public have trust and

confidence in my command.

Senator Grassley, I appreciate the committee giving me the opportunity to address this important issue, and I am now prepared

to respond to any questions you may have. Thank you.

[The prepared statement of Captain Miller follows:]

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Senator GRASSLEY. I want to thank you for the responsible attitude toward change and correcting the problem, for both of our

Captains in command there in San Diego. Thank you very much.

It is now my pleasure to invite Tina W. Jonas, Deputy Under

Secretary for Financial Management at the Department of Defense.

Ms. Jonas.

Ms. JONAS. Thank you, Senator. I am glad to be here this morning to talk about this issue.

At the outset, let me say that the Department’s senior leadership

is seriously concerned about purchase card problems that are the

focus of this hearing this morning. We will not tolerate failure to

comply with established policies and procedures such as occurred

with the purchase cardholders at some locations. We understand

that, even if instances of fraud and abuse are caught early, they

reveal a lapse in internal management controls, and such lapses

cannot be allowed in so serious a business as America’s national

defense.

For purchase cards, the most important role of my organization,

the Comptroller’s Office, is to strengthen all internal management

controls, not merely those controls relevant to purchase cards. We

are doing this as part of an unprecedented overhaul of the Department’s financial management.

Our efforts include both long-term and short-term initiatives.

Long-term we are streamlining and standardizing the Department’s financial and non-financial systems, transforming them into

an integrated set of systems that will enable DOD leaders to get

the timely, accurate, and complete financial information that is essential to strong internal controls.

Short-term we are taking action to address immediate problems

to facilitate our long-term initiatives and to work with the Department’s senior leadership to overcome purchase card problems. For

example, the Under Secretary of Defense Comptroller, Dr. Zakheim

and the Under Secretary of Defense for Acquisition, Technology

and Logistics, Pete Aldridge, recently issued a joint memorandum

directing all components to ensure compliance with published purchase card and internal controls.

These controls are consistent with the General Accounting Office’s standards, and they include a maximum dollar limit for any

single purchase, a maximum dollar limit for the cumulative value

of all purchases made during the monthly billing cycle, limitations

on the cards used to categories of merchants, if appropriate, or to

a single merchant.

It also includes requirements for the supervisor to receive, review, and, as necessary, question and adjudicate billing differences

with each subordinate cardholder. I think this was one of the key

faults that happened at the Navy, and we are working decisively

on that problem. When implemented properly, these controls minimize losses from waste, fraud, or abuse.

In addition, in the Department’s internal management control

program, we are making the purchase card program an area of special emphasis. This will force DOD components to review their internal controls for their purchase cards and report on the adequacy

of those controls. I assure you that we will review those reports

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very carefully and followup with specific actions necessary to correct problems.

We are also working with the audit community and subject matter experts, and we have identified potential fraud indicators for

this program. For example, if the same person that makes a purchase also approves the bill for payment, this would be a red flag,

and these types of indicators are being developed and software is

being used to identify suspect transactions.

We are also building a front-end edit that the purchase card contractors will use to flag suspect transactions for review before

transactions are authorized. This is the same concept used by

major credit card companies, but it is tailored to the DOD business

model.

Beyond the specific purchase card emphasis, the scope of our

management controls extends to every activity an area of responsibility within the Department and its components, and our procedures apply to all financial, administrative, and operational controls.

This past year the Comptroller implemented the first phase of an

initiative to ratchet-up the management control program. In cooperation with the Assistant Inspector General for Auditing, we

identified major areas that other senior leaders in the Department

evaluated for coverage in the Annual Statement of Assurance in

the Reporting Cycle.

Also, this past year, for the first time, we required components

to identify the cost to correct material and systemic weaknesses,

and we required the components to specify performance metrics to

gauge success in resolving identified weaknesses. This year, again,

we will work with the Inspector General to identify issues and

trends that need to be addressed by the DOD senior leadership,

and we conduct periodic visits to component Headquarters’ internal

review organizations to ensure that they are appropriately

resourced and effectively performing their missions.

In closing, Mr. Chairman, the Department takes the matter of

internal control seriously, and our most senior leadership will manage from the top-down and ensure the correction of those deficiencies identified by the General Accounting Office and the Office

of the Inspector General.

Thank you. I would be happy to take any questions.

Mr. HORN. Thank you very much.

We now have Deidre A. Lee, the Director of Defense Procurement, Office of the Under Secretary of Defense for Acquisition,

Technology and Logistics, Department of Defense. Ms. Lee.

Ms. LEE. Good morning, Chairman Horn. I’m a last-minute addition to this hearing, to affirm Defense Procurement’s commitment

to properly manage the defense purchase card program. You and

I had a brief discussion during a hearing last week, and I just

wanted to appear before you today and affirm again that commitment.

The purchase card program is very important to the Department.

As you know, we use it for a variety of methods. It has saved transaction costs, and it has in many cases put the purchaser closer to

the requirements and shortened that timeframe. But it must be

properly managed.

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As noted, the Public Works has an improvement program and

has made some progress. The current situation at SPAWAR is unacceptable. We are working with Captain Miller and she has certainly stepped up-to-the-plate, starting in December, to try to remedy these situations.

We have a two-prong approach. The first is to address the problems at SPAWAR, and the Department has taken the following actions: The purchase cards at SPAWAR have been suspended at the

bank—that is not just through the user, but at the bank—effective

immediately. We then are going to reinstate a handful of the purchase cards to support mission-critical and essential fleet needs,

and they will be reviewed by the local commander. The program office will monitor the transactions through the bank. We can actually go through the bank and see when those cards are used and

what is turned back on, and we will do that.

Then the cards will remain suspended until Captain Miller puts

in her what we call a multi-step program, making sure people are

trained, educated, understand the commitment, understand their

responsibility. Then, little by little, with confirmation through senior leadership, we will reinstate that program and manage it very

aggressively.

We also have a training program that she has put in place, and

everyone gets remedial training. They will be reminded of their

duty to buy only minimum requirements, instead of, unfortunately,

some of these luxury items we talked about. They will be reminded

of their obligation to purchase through NIB/NISH, the blind, the

handicapped, the Federal Supply Schedules.

We will also identify the review and certification process, that

billing officials must be connected to the cardholder and know what

they’re purchasing and whether or not it applies to their job.

We also have put in place a property accounting system. So when

purchases are made, there’s a matchup: Are they there? Do we

have them?

Then there also will be a very clear statement of what the situation is for violations of using that card. We are working with

SPAWAR to do all of that.

I am very serious about remedying the situation, and I intend to

personally verify the situation improvements and report back to

you by the end of May.

Shifting to the departmentwide program, because, as GAO mentioned, we are also concerned, let’s make sure we are doing this

right across the Department, and with you, Mr. Chairman, I note

that we have the Executive Contracting Course here. I am glad for

them to hear this discussion, so they know how serious we are

about improving this program.

We have taken an approach across the Department as well. We

have identified many activities, but mainly leadership, internal

controls, and common sense are needed to use this program properly.

We are going to review all the approval and certification procedures for officials. They have been instructed to do that. We’ve also

reviewed how we appoint billing officials, how we appoint certification officials, the span of control.

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We are reviewing the establishment for account establishment:

Who should have a card? Why? For what purpose? To what

amount? And that includes the limits.

We have instructed the card managers to review the flexibilities

within the card. Can they block certain codes, certain merchant

codes, certain vendors? And they have been reminded to do that.

We are also making sure that appropriate resources are allocated. You can’t just handout the cards and then not have the resources allocated to do the oversight. So we are focusing on that

as well.

We are going to have training for all purchase card accounts and

also to emphasize leadership and oversight responsibilities. We

have also partnered with DCAA, Defense Contract Audit Agency,

the Inspector General, and have several things going on there, including an online training course that will be available by the end

of the year which specifically addresses some of the things highlighted in GAO. We are using a software program where we can

have oversight of the purchases.

We have also put in place some additional—I have asked the IG

to do an across-the-Department look. They now coordinate all purchase card reviews with the various inspector units and give us a

quarterly report on what they’ve found. We will track down those

trends and implement it across the Department program, not just

at SPAWAR or Public Works.

We also have an online software program where the cardholder

is going to have to click on each transaction. The transaction then

goes to the oversight, so that it has to follow the process of having

appropriate review.

So, Mr. Chairman, we are painfully aware of the issues with purchase cards, and I am here to personally commit that we will make

sure these cards are used appropriately and make sure that our

people understand their responsibilities, and we all live up to our

commitment to the taxpayer.

[The prepared statement of Ms. Lee follows:]

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Mr. HORN. Well, I thank you for your statement. You mentioned

accountability. Now that accountability will come up the service

line or the civilian line, or both?

Ms. LEE. Both, sir, and including the financial side, Ms. Jonas,

as well as the policy side from a procurement-specific standpoint,

myself.

Mr. HORN. Because there are also Inspectors General in the services.

Ms. LEE. Yes, sir. We have asked the DOD Inspector General to

coordinate all their audit reports and kind of look across the Department, what did each Inspector General at each service find, coordinate that and show us any trend data, any systematic problems.

Mr. HORN. So we’ve got now a program that relates to education

of these in terms of both the civilian and the service line?

Ms. LEE. Yes, sir.

Mr. HORN. Now I would like to know, what, if anything, has been

done in terms of the court martial part, and is there anything to

do with this type of bad behavior? Is there anywhere in the court

martial situation, in the code of military justice, that one can be

brought before on court martial? Otherwise, they are just laughing.

Ms. LEE. Sir, if you are talking about the removal of the commander from SPAWAR, that was for a variety of actions. I understand it was not specifically the purchase card, but we have all

kind of talked about the attitude or tone at the top that seemed

to be underlying that situation, and that was one of the issues.

Mr. HORN. Well, it’s been about 30 years since I have looked at

the court of military justice, when that was put out mostly in the

Eisenhower administration. The question is, is there language in

that one can violate and be brought up on that?

Ms. LEE. I am not personally familiar with it.

Mr. HORN. Now our last presenter is Danielle G. Brian, the executive director of Project on Government Oversight [POGO]—nothing to do with the comic ‘‘Pogo,’’ but sometimes things seem that

way. [Laughter.]

Ms. BRIAN. Mr. Chairman, thank you for inviting me to testify

at this hearing. As usual, this subcommittee is performing the very

important job of overseeing the workings of the Federal Government. If only more committee chairmen and members of committees took that part of their job as seriously as you do.

I am the director of the Project on Government Oversight

[POGO]. Our organization investigates, exposes, and seeks to remedy systemic abuses of power, mismanagement, and subservience

by the Federal Government to powerful special interests. Founded

in 1981, POGO is a politically independent, non-profit watchdog

that strives to promote a government that is accountable to the

citizenry.

Today we are talking about waste, fraud, and abuse of the Department of Defense, the agency that can’t account for $1 in $4 it

spends. I know defenders of DOD accounting procedures claim this

is an unfair criticism, that the missing $1.1 trillion is only a paper

transaction. In these days of Arthur Andersen accounting, a firm,

I might add, that continues to consult for nearly every Federal

agency, my response is, show me the money.

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We have found that Federal agencies are loath to admit they’re

making a mess of things. The Pentagon must be forced to account

for its expenditures of taxpayer dollars. I am particularly impressed when government officials such as those at the Navy Public Works put their energy into fixing a problem rather than denying or covering it up.

Thanks to the work of Senator Grassley and his staff, Chairman

Horn, and the GAO, we have been made aware of the abuses of

Federal purchase cards, one of many Federal dollar sink holes at

DOD. The GAO found that these purchase cards, as we have been

hearing, have been used to buy personal items at two San Diego

Navy installations. Despite the Pentagon’s best efforts to pretend

these were localized abuses, however, it is clear this is a systemic

problem. Across the country and in a different service, this time

the Army, similar abuses have been uncovered.

In January 2000, two enterprising reporters at the Fayetteville

Observer sent Freedom of Information Act requests for the receipts

of more than 330,000 government credit card purchases by Fort

Bragg cardholders. Among many others, they found charges of, for

example, $981 for Atlanta Braves baseball tickets, $235 for Six

Flags Magic Mountain tickets, and my personal favorite, $111 at

Victoria’s Secret.

Some may say that those who would commit fraud will do so regardless, but creating a system where the oversight is largely the

honor system is asking for trouble. One cardholder indicted for

making over $17,000 in fraudulent personal transactions commented that illegal use of the credit cards was too easy, and that

she was the sole authorizer of card purchases.

We believe that for the most part the problem is not created by

the existence of the purchase cards themselves, but with the reduced financial oversight that comes with what are called micropurchases of $2,500 or less for each transaction. However, most of

these unaccountable micro-purchases are made through the use of

these credit cards.

According to the Federal Acquisition Regulation, micro-purchases

may be awarded without soliciting competitive quotations if the

contracting officer considers the price to be reasonable. A system

that allows for non-competitive purchases without checks and balances is simply a bad idea. Allowing hundreds of thousands of government cardholders to make these purchases is lunacy.

In addition to the outright fraud committed with the use of these

purchase cards, a more damaging problem is the overcharging that

also flies below the micro-purchasing radar screen. A 2001 DOD IG

audit of micro-purchases at the Defense Supply Center in Philadelphia found that overcharging occurred in no fewer than 42 percent

of the audit sample. Among the most egregious cases of overcharging was a $409 sink that should have been purchased for $37.

Not surprisingly, both the GAO and the DOD IG have recommended strengthened internal controls to prevent such overcharging and outright fraud. But when Uncle Sam is paying the

credit card bill, there are currently far too few deterrents to keep

a credit cardholder from misusing these purchase cards.

Incredibly, in the face of these findings, another subcommittee

under Government Reform, the Subcommittee on Technology and

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Procurement Policy, held a hearing just last week on proposed legislation that would increase tenfold the micro-purchase threshold

from $2,500 to $25,000 with no additional financial oversight,

which is section 221 of the Services Acquisition Reform Act. I can

imagine the headlines that will soon follow if this bad bill becomes

law.

This proposal to increase the government purchase card micropurchasing threshold is simply a continuation of the efforts by acquisition reform lobbyists to reduce financial oversight and limit

the ability of competition and free market forces to lead to smarter

government spending. We have found that so-called acquisition reforms, which have gained currency in the past decade, have repeatedly been detrimental to oversight and accountability of Federal

procurement and have resulted in increased expense to taxpayers.

Who benefits? The contractors who have drafted this legislation.

In our recent report, ‘‘Pickpocketing the Taxpayer: The Insidious

Effects of Acquisition Reform,’’ we cite numerous findings by government auditors that show these reforms have, in fact, been deforms which limit competition and pretend prices for government

purchases are determined by commercial forces when they are not.

Mr. Chairman, I simply do not understand how we have come to

a point where the founding principles of the American economy,

free market forces and fair and open competition, are valued only

when they don’t apply to the government.

The downward spiral away from competitive purchasing and toward more acquisition from the few remaining giant defense contractors is exacerbated by the use of government credit cards. The

Office of Advocacy of the U.S. Small Business Administration is

currently studying the effects of the use of government credit cards

on small businesses.

They have already concluded, ‘‘Prior to acquisition reform, micro- purchases of $2,500 or less were reserved exclusively for small

businesses.’’ Today these purchases are no longer reserved for

small businesses because many of these purchases are being acquired through the use of the government credit card. Nearly onehalf million Federal employees may use the government credit card

with any authorized merchant. There are few, if any, acquisition

controls on the use of the card. Other than convenience, there is

very little data to reveal that the government is getting the best

price with the use of the credit card.

In conclusion, Mr. Chairman, I hope you are successful in persuading your colleagues that reduced procurement and financial

oversight at the Pentagon is not in the American public’s best interest. Thank you.

[The prepared statement of Ms. Brian follows:]

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Mr. HORN. Thank you very much. I am going to ask a few questions going this way this time [indicating].

Ms. Lee, I am wondering, what about the young woman who allegedly went on a pre-Christmas shopping spree using her government credit card? Was she reprimanded? According to the General

Accounting Office, she has moved from a government salary grade

of 11 to a grade 12. Where is she working now?

Ms. JONAS. Mr. Chairman, the woman that you are talking about

currently works for the Army, as I understand it. I have personally

spoken to the Army Comptroller about this case. I have been advised that the case was under investigation, and she has assured

me that they are checking with the General Counsel as to what

disciplinary action can be taken.

I also have spoken personally with the Navy Comptroller, Mr.

Aviles, about this case because, apparently, if I’ve got the case

right, a number of the abuses happened when this woman was

with the Navy. The NCIS investigated the case. The assistant U.S.

attorney was asked to look into it. I guess they have declined.

I would like to submit the facts for the record, if you don’t mind,

because I’m doing this almost entirely from my memory.

[The information referred to follows:]

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Ms. JONAS. But the assistant U.S. attorney apparently declined

to prosecute, and I am uncertain at this moment—you know, I’ve

heard two different facts on this, but I don’t know whether it was

because of the threshold or whether it was because of a lack of

facts.

But I am very concerned about that case. I know Sandra Pack,

who is the Army Comptroller, who is new to the building, also just

found out about this case. So we are very well aware of that case.

We are trying to look into that and see what we can do.

Mr. HORN. Well, I am sort of bemused that the Navy got away

with passing off some of its people on the Army. I can’t imagine

the Army doing that and accepting it, but they probably didn’t

know a thing about it.

Ms. JONAS. Right, yes, Mrs. Pack recently came into this job and

it is one of the things that she inherited, but she is very well aware

of it and personally assured me that she is talking with her General Counsel on ability to act against this person.

Mr. HORN. Mr. Kutz and Mr. Ryan, who is the special investigator, do you have any comments on this situation?

Mr. RYAN. The case was originally investigated by NCIS and presented to the U.S. attorney. They declined prosecution.

Mr. HORN. Now which U.S. attorney was this?

Mr. RYAN. The one in San Diego.

Mr. HORN. San Diego. Now do they have some sort of dollar

equivalent? I have seen that with some U.S. attorneys, ‘‘Oh, we

can’t be bothered with this.’’ I mean, what do we have to do, let

somebody steal $2 million? I mean it all adds up when you’ve got

little things going. But you need to have an example.

Mr. RYAN. Well, they have prosecutive decisions and they

make—— Mr. HORN. What was their criteria for not taking the case?

Mr. RYAN. I don’t know. They just decided that they weren’t

going to prosecute the case. I think we would have to ask the U.S.

Attorney’s Office in San Diego to explain their decision.

Mr. HORN. And I would like the staff to deal with the Attorney

General on this and see what the criteria is and why they’re not

doing something about it. Do we have any of these cases anywhere

else in the United States where a U.S. attorney has been given it

and has just said, ‘‘Sorry, I’ve got other things to do?’’ Mr. RYAN. Decisions on prosecution in judicial districts is a decision that is made by the U.S. attorney. The investigators present

the facts, and a decision to prosecute is left with the Department

of Justice. Each judicial district, from my experience, being an

agent with Secret Service for over 20 years, makes up their own

mind, have their own criteria, and they decide whether or not they

are going to prosecute or not prosecute. It really lies with the Department of Justice.

Mr. HORN. Mr. Kutz, when the General Accounting Office discovers some of these things, and it isn’t just this case, but it is all over

the country, does the GAO turn it over to the U.S. attorney?

Mr. KUTZ. We oftentimes refer it to Agent Ryan, who does further investigative work, and also will work up a case and then forward it to the Navy Criminal Investigative Service or another investigative group in the Department of Defense, who would then

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present it to the U.S. attorney for prosecution. That is, indeed,

what happened with the case you just described, Mr. Chairman.

Mr. HORN. How many cases have you referred to Mr. Ryan?

Mr. RYAN. Since I’ve been at GAO?

Mr. HORN. Yes, and how many are accepted?

Mr. RYAN. I really can’t give you a number on the number we

referred. We get a lot of information sent to GAO’s BroadNet, allegations of fraud and abuse. We look at them. We interview the people making the allegations. We will build a case to a certain level,

pass it onto the investigative body, either within the military or in

the Executive side, the FBI or the Secret Service, for them to followup on the cases also.

Mr. HORN. So you expect the Department of Defense in this case

or the Department of the Navy to put those papers before the U.S.

attorney?

Mr. RYAN. I believe that’s the best way to present it, yes.

Mr. HORN. Does anybody in GAO say, ‘‘We don’t want to be bothered with that?’’ Or do they let you do what you think your conscience does——

Mr. RYAN. GAO is very proactive, ever since I have been at GAO,

in pursuing, building-up these type of cases, developing the information, and making sure that the investigative bodies are fully

aware and briefed. We make all our work papers and all our interviews available to the investigative bodies.

Mr. HORN. Captain Miller, you have been put on this job. What

day did you take over?

Captain MILLER. Sir, I assumed command on Saturday, December 8, 2001.

Mr. HORN. Did you know what you were getting into? [Laughter.]

Captain MILLER. Unfortunately, yes, sir.

Mr. HORN. I’m curious, could you explain what the GAO found

where you got a highly sophisticated staff of scientists using four

toy robots to assist them in their work, and I’m just curious, are

they toys? They cost the taxpayers $800, I believe. Are they in the

Navy’s possession? Do they have a use for whatever the Navy is

working on?

Captain MILLER. Mr. Chairman, the items in question, the purchaser felt that they had a valid government use. I personally can’t

see that. That, to me, is one of those cases of poor judgment. But

the bottom line is we did not have good management controls in

place, and we did not have proper oversight, or that purchase

would never have been made.

Mr. HORN. What about the various items of clothing and expensive handbags and daybook holders that the GAO put up on the

charts? Are they listed in your inventory and are they under your

control? Can other employees use them?

Captain MILLER. No, sir, they cannot use them. Those were purchased for personal reasons. I acknowledge the GAO’s findings on

that. Again, it boils down to poor management controls and poor

oversight. We have taken positive steps, I believe, since December

8th to ensure that our training has been completed. All cardholders

and approving officials understand their responsibilities, and I believe that we should see improvements.

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Mr. HORN. Captain Barrett, do you and Captain Miller work out

some of the things that need to be done in both those commands,

or are we doing it each separately in terms of accountability, in

terms of inventory, in terms of following-up on this kind of thing?

Captain BARRETT. Mr. Chairman, it has been a relatively separate effort on our behalf. Our problems tend to be internal in nature. I won’t argue that there are opportunities for lessons learned,

and we will see if we can’t increase that dialog in the future.

Mr. HORN. Mr. Kutz, what would happen if someone in the private sector misused or fraudulently used their corporate card in

this manner? Do you know any cases, any contractors, so forth?

Mr. KUTZ. No. What we did look at was for your hearing last

summer in July, we looked at the number of cardholders or percentage of employees that held purchase cards at private sector corporations and found no more than 4 percent in large defense contractors. Now, again, they do different business than someone like

SPAWAR, who has a lot of small projects. So I can see SPAWAR

probably needing more credit cards, but I think that the industry

standard is certainly that there are a lot less credit cards in the

hands of people, and that was one of the things I will acknowledge

that the Navy took significant action on since your last hearing.

They had, at the beginning of 2001, 47,000 Navy purchase cards

outstanding, and as of September 30, 2001, they were down to

27,000. So I think the recommendations we had and the hearing

you had had a positive impact on Navy, and they took that issue

seriously.

I certainly believe that you would find stronger internal controls

in the private sector over the usage of credit cards, and probably

the disciplinary actions would be more swift and significant than

what we have seen at the Department of Defense.

Mr. HORN. Ms. Jonas, in your role as Deputy Under Secretary for

Financial Management, the Department of Defense has begun offsetting wages to repay delinquent travel card bills. That is correct,

is it?

Ms. JONAS. That is correct, yes.

Mr. HORN. Would it be possible to have a similar salary offset

for the purchase card program for cases in which the government

has inadvertently paid the bill for personal items?

Ms. JONAS. That might be very appropriate in this case. If I can

get back to the committee, we will look into it, and if that is appropriate. I will say the offset program for the travel card we hope to

have a very beneficial effect. So far, we have collected about $21

million.

In this we think it will be a significant deterrent, and we have

to do more to deter people, send the signal from the various high

levels that this is not going to be acceptable, and if you abuse a

card, whether it be a travel card or a purchase card, we will be

there and you will be paying for these things out of your own pocket, not out of the government’s pocket.

[The information referred to follows:]

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Mr. HORN. I am going to yield now 10 minutes to the ranking

member for questioning.

Ms. SCHAKOWSKY. Thank you, Mr. Chairman. I want to just say

that Americans right now have, correctly, a very high regard for

the men and women in our Armed Services, the efforts by our military to protect us against terrorist attacks and now with Homeland

Security. It would seem to me that this would be a special time of

obligation on the part of every person associated with our Defense

Department to make sure that not any of that money is squandered.

We are now going to be considering a budget that requests an

unprecedented increase in the defense budget. I think that it is

only appropriate that we scrutinize every dollar, every million dollars, every billion dollars. I think it was pointed out by Ms. Ryan

that the financial disarray within the Defense Department has

been criticized repeatedly. She mentioned the recent report. The

DOD Inspector General found that in fiscal year 2000 alone $1.2

trillion in Department-level accounting entries ‘‘were unsupported

because of documentation problems or improper because the entries

were illogical or did not follow generally accepted accounting principles.’’

When we talk about the abuses today, it seems to me that we

are talking about a culture, not just a problem here or there, but

a culture that has to be changed. I am so grateful to my chairman

for continuing and following-up on that July hearing and finding

out exactly what has happened since then.

That is why I wanted to ask Ms. Lee, the pattern of abuse that

we heard about today at SPAWAR was evident at our hearing last

summer. Why did the Department do nothing to curb this abuse

between last July and today? I mean, you sound very determined;

everything is going to be changed. You had a lot of time to do that.

Ms. LEE. Yes, Ma’am. The Navy had committed to doing some

particular changes. There was a change in command, as you know,

from that timeframe. That does not make it acceptable. We have

to be more vigilant both at the specific site level, but at the oversight level to make sure that this time we truly deliver those

changes.

Ms. SCHAKOWSKY. I know you have detailed some things, and I

hope that those will be sufficient, so that when we come back, Mr.

Chairman, and look again, that something has really happened.

Repeatedly, the Department has failed to meet the financial muster. So this is not the first time that we have heard things will be

better. I guess I don’t know any other way but to say firmly we absolutely expect them to be better.

I wanted to ask Ms. Jonas, according to officials at SPAWAR,

items like digital cameras and personal digital assistants don’t

have to be put on an inventory, and there’s no need to account for

them if they are lost or stolen. Is that Navy or DOD policy?

Ms. JONAS. I believe that may be a Navy regulation. I will have

to check our regs. But, in any circumstance, that is not acceptable.

It is government property. Whether it is $1 or whether it is $2,500,

it must be accounted for.

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I know that in the Department we have little barcodes for all the

equipment in our offices, etc., and people are responsible for those

inventories. So I will get with the Navy Comptroller to look at their

regulations, and we will review our own regulations on accounting

for property.

[The information referred to follows:]

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Ms. SCHAKOWSKY. Because officials are using that as an excuse

for the loss of these items. So are you saying that policy doesn’t

exist, that it will be changed, what?

Ms. JONAS. I will look into it to review Navy regulations, and my

own personal view on this is that there is no excuse whatsoever,

none.

Ms. SCHAKOWSKY. Does DOD have any regulations or guidance,

something in writing, that would make it clear to employees that

the purchase of luxury items like Coach briefcases is inappropriate?

Ms. JONAS. I believe Dee Lee, who is here with me, can discuss

the specifics of what they put out on the purchase card. I don’t

know if you were here—well, I discussed in my testimony, but Dr.

Zakheim and Under Secretary Aldridge have recently put out a letter on this, and what appropriate use of cards is, and strict guidance. We expect at the very top that be carried out.

Ms. SCHAKOWSKY. I mean, it would seem obvious that one doesn’t

use a government card for breast enhancement or Hooters, or

whatever. So I don’t know how one would actually state that, but

are you saying to me that, until now, it hasn’t been made explicit,

that there have not been guidelines, Ms. Lee?

Ms. LEE. Purchase of personal items is never acceptable. It is not

acceptable now.

Ms. SCHAKOWSKY. Has that been written?

Ms. LEE. Yes.

Ms. SCHAKOWSKY. Has that been in guidelines?

Ms. LEE. They are for, as it shows on the card, ‘‘For official government purposes only.’’ Purchasing any kind of personal item is

not acceptable.

Ms. SCHAKOWSKY. So, in other words, no one should have been

confused about that. So then nothing was in place to make sure

that was carried out? Is that what you are basically—— Ms. LEE. The oversight was lacking. We certainly should—— Ms. SCHAKOWSKY. Or absent?

Ms. LEE. Or absent. We should have had a billing official who

was looking at each individual’s card and saying, ‘‘What are you

buying? Why are you buying this?’’—and taking immediate action.

Mr. KUTZ. Representative, we made a recommendation, based on

the hearing last summer, that the Department come out with specific guidance on prohibited items, and they disagree with our recommendation. Ms. Lee is the one who signed that letter back to us.

So there was a specific recommendation by the General Accounting Office that they list out specifically prohibited items, because

I think their guidance is very, very general now, and you could

drive an aircraft carrier through it. I think that they need to have

very specific guidance on some of these items that it is prohibited

to buy. I don’t think it would hurt to do that, but they did disagree

with that recommendation.

Ms. SCHAKOWSKY. And, Ms. Lee, could you comment on that?

Why would you disagree with that?

Ms. LEE. Well, we will certainly relook at that, but our general

guidance was personal items are never acceptable. So if we need

to be more specific on what is a personal item, we certainly will

look at that.

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Ms. SCHAKOWSKY. Well, obviously, someone was not getting it.

Ms. LEE. Yes, Ma’am.

Ms. SCHAKOWSKY. So I think that the imagination of those using

the cards may make it hard to specifically list everything, because

who ‘‘wudda thunkit’’ on some of these items that were purchased.

Nonetheless, to reject as unnecessary on its face was patently untrue. Clearly, something was necessary. There must be something

going on. The people feel that with impunity they can charge these

things.

So I would hope that you would relook at that since it was a specific recommendation, and I appreciate your bringing that to my attention. I would hope that, rather than sending another letter declaring it unnecessary, that instead you would figure out the comprehensive list.

Let me ask you, I guess earlier you dealt with the issue of the

former commander refusing a drug test and refusing a random car

search, and trying to get, as I said in my opening statement, two

subordinates to lie for him, and the fine was a $1,000 fine and he

was allowed to retire. I am just wondering if this is typical punishment for someone who refuses a drug test in the Navy, Ms. Jonas.

Ms. JONAS. The Secretary of the Navy, obviously, you know, he

has control over the civilians and the military. I certainly, if I were

in his shoes, would be personally looking into this. I have talked

to the Assistant Secretary for Research and Development, who is

one of the senior officials in the Department of the Navy, about the

specific case and expressed my concern. I have also personally

talked numerous times to the Navy Comptroller on this. I think

they are both very concerned about it.

In part, that concern led to the new direction, the new guidance,

that Secretary Aldridge and Under Secretary Zakheim just put out.

We are very concerned about this. I cannot explain to you how concerned we are about it. But I think with respect to specific actions

taken by the Navy, I mean that is not within my purview, but if

I were in his shoes, I would have no tolerance for that.

Ms. SCHAKOWSKY. Fortunately, the Secretary of Defense has invited the Illinois delegation to meet with him tomorrow, and these

are some questions that I can bring up.

Let me, in the little time remaining, Ms. Lee, I have heard that

you hold yourself out to the rest of the Federal agencies as leaders

in providing business to the JWOD, the disabled vendors’ support.

I am wondering how you can hold yourself in the Department out

as leaders when units like SPAWAR haven’t even heard of JWOD

and aren’t using the—there’s an example of that day planner there.

Ms. LEE. They’re Javits-Wagner-O’Day, and we call them NIB

NISH, National Institute for the Blind and National Institute for

the Severely Handicapped, and do have products that are mandatory source or at least first preference for the government to buy

certain items. Among them are such things as day planners, pencils, pens, etc.

That is being addressed again in our training program. Our contracting folks here know that. Again, SPAWAR is an unacceptable

situation, and we have to remedy it.

Ms. SCHAKOWSKY. Mr. Chairman, if I could just make one more

remark—in addition, as part of our budget, we are also going to be

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looking at the reauthorization of the TANF or welfare program. I

would guarantee that we are going to spend more time looking at

every nickel that is spent that may be overpaid to a welfare mom

out there trying to raise a couple of kids, and I am not excusing

fraud or abuse anywhere, but it just seems to me, then, when we

look at a department that has asked for $400 billion, more than $1

billion a day, to be spent, then we had better pay attention to make

sure, especially at a time when our Nation is threatened, to look

at every single penny. Thank you.

Mr. HORN. I thank the ranking member.

Let me note—which one do you think, because we are going to

close it down soon? But, Mr. Kutz, Senator Grassley and the subcommittee have asked you to broaden your examination of government purchase cards to other areas of the Department of Defense.

I would not ask you to discuss this work in any particular detail.

However, I will ask you whether you are finding similar misuses

or fraudulent use of purchase cards in other areas of the Department of Defense or in other Cabinet departments.

Mr. KUTZ. Within the Department of Defense, I think, as you see

today, the actual rubber hits the road far, far outside the Beltway.

So the policy memos that come out from Headquarters oftentimes

are not that well-distributed or known by people. So I think you

are going to see, I guess, inconsistent application and inconsistent

controls across. Some will be doing well and others are going to be

more like SPAWAR. I think we are going to see a lot of interesting

things in upcoming reports.

Again, you are talking about 230,000 people holding purchase

cards, and as Senator Grassley talked about, almost 2 million people holding travel cards. That is a large program to control. Again,

one of the things that we are looking at for both of those programs

is controlling the number of cardholders out there, and particularly

with respect to the travel card, looking at the issue of the credit

checks, because really the credit checks is a key control in looking

at travel cards.

Mr. HORN. Well, the purchase card is certainly different than the

card that any of us as government officials use in our travel for the

actual ticket of the airplane and based on the per diem limits. One

can eat anywhere they want for lunch, breakfast, you name it.

That, to my knowledge, doesn’t get really very exposed one way or

the other, and it is nobody’s business where they eat. So that is not

the problem. But can they use that interest credit card to substitute for the ones we change and have in our wallet?

Mr. KUTZ. They look just like—I mean, I showed you earlier this

card here. This is the purchase card. I have a travel card myself

that I am supposed to use when I am on government travel. They

just look like a normal credit card. So you could actually easily

make a mistake if you pulled it out of your wallet and inappropriately use it without intentionally misusing it.

But it is accepted at many vendors. One of the things that the

Department has done and the banks have done is used what is

called the MCC codes to block certain vendors. That is a control

that is limited, but it is sometimes effective, preventing people

from going to certain stores and types of vendors.

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But, again, the travel card you are talking about, there’s actually

two types of travel card. There’s the individually billed card like

the one that I have, where the bill comes to my home and I pay

it myself, and then there’s also centrally billed accounts, which

large plane tickets are put on and other travel is put on. So that

is a lot more like the purchase card, and we are actually looking

at those two programs separately.

Mr. HORN. In our case here in the Congress, we might use that

or our own different one, Mastercard. Now the one the Congress

has is the Visa card. We file the papers that we took the plane

thing and the food, and all that, and that goes back through our

Office of Finance. If there’s something screwy about it, they let us

know. Sometimes it happens where one of your staff members does

that, but they certainly don’t get into this business of the interest

cards that we are talking about with the Navy here.

Do we know there is that type of abuse throughout part of the

executive branch or what? How is GAO dealing with it?

Mr. KUTZ. The other agency we have looked at comprehensively

is the Department of Education, but their program is extremely

small compared to the Department of Defense. The whole Department of Education’s program would be about the same as each one

of the Navy units we are talking about here. But there were significant findings of fraud and abuse that the General Accounting Office reported out of the Department of Education.

We are planning to look for this subcommittee at several other

executive branch agencies, and we will report back on what we find

in other agencies.

Mr. HORN. I think the Education Committee certainly has looked

at this in terms of the debt that has been created in education.

Mr. KUTZ. They were planning a hearing today actually, and it

has been postponed, but they are going to have another one on

their purchase card at Education.

Mr. HORN. Now listening to all this, do you think that the trans- action level ought to move from $2,500 to $25,000, which is in a

bill of my colleague, Mr. Davis? Ms. Lee was one of the witnesses,

and so forth. We raised these questions in that particular area.

What would GAO recommend?

Mr. KUTZ. I don’t think it would be necessary to give all 230,000 purchase cardholders at the Department of Defense a $25,000

micro-purchase limit. That does not seem to be reasonable. Would

it make sense to have a small group of tightly controlled cards have

that? Yes, that might make sense for the war on terrorism or whatever need they may have to have the larger micro-purchase limit.

But I would express significant caution to the subcommittee and

the Congress with respect to just doing this, giving the DOD a

blanket 230,000 cards with a $25,000 micro-purchase limit.

Mr. HORN. Well, I would think that those that have to—we used

to say, if the officers didn’t get a good Master Sergeant, they didn’t

get very far. Those that are in supply and procurement, when they

need to do something on the military side, then, obviously, that

level would be maybe not enough. But somehow it ought to be with

a signoff of somebody when they review the paper.

Mr. KUTZ. The Department currently has some cards that have

$25,000 single transaction limits to pay for things such as training,

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and they also have some $100,000 cards that are used for small

purchases on contract basically. So there is currently a procedure

where they have certain cards with higher limits. Now, again, that

is a little bit different than what you are talking about, which it

sounds like it is giving the entire Department a $25,000 micro-purchase for all the cards.

Mr. HORN. So what are you going to do with that, Ms. Lee? If

the bill goes through, Mr. Davis’, are there going to be blanket $25,000 cards?

Ms. LEE. If the bill passes, obviously, we will have to put it in

place with strong oversight and make sure that we do all these

things we talk about for the cards, regardless of the limit.

Mr. HORN. Well, that is good to know, but we will just have GAO

looking every other month, right?

So are there any other things you would like to say, any of you

presenters, on the record? Please tell us. If you say something’s

hogwash, I would like to clarify it. So any of you want to? GAO,

any comments? Navy?

Captain BARRETT. No, sir.

Mr. HORN. Department of Defense?

Ms. JONAS. Mr. Chairman, I would just like to say a lot of people

say they don’t want to come up and testify, but this sunshine really

does help us. I mean, as you notice and as the Congressman noted,

it is a big cultural change for the Department. There is a lot of

education that has to go on. A lot of people really truly don’t understand what the responsibilities are of having a card. We need to

get the message down to the very lowest levels. As Greg mentioned

in his testimony, sometimes it is very hard to get the message out

from the highest levels to the lowest levels, but we are committed

to doing that. We really appreciate your work here at this committee, and we will do our level best to try to correct many of these

problems.

Mr. HORN. Yes, I got a bill through on transitions between Presidencies, and they have various types of material that they bring to

not just the Cabinet members, but also the various 300 to 3,000

Presidential appointees, especially Assistant Secretaries, and so

forth. So they would be looking at the ethics, which has bogged

down every administration, because it takes so long to fill out the

forms and all the rest of it. But somehow we’ve got to get that into

those that get these very honored appointments.

Yes?

Ms. SCHAKOWSKY. Ms. Jonas, I just want to respond to what you

said, that it is clear that there are too many people who don’t understand how those cards can be used. I think they understand

perfectly. I think what they understand is that they can get away

with these kinds of purchases. I don’t think that anyone in their

right mind would think that they could take a government card

and purchase these luxury items. What they think is that I can do

it and I can get away with it. I think there has to be a much harsher approach to this, that it is fraud and it is abuse, and it has to

stop. If they don’t understand, then they have no place in our

Armed Services, in our Defense Department.

Ms. JONAS. I would agree. I didn’t mention this in my testimony.

One of the things that we are looking at, and are in discussions

132

with OMB, is a legislative proposal to hold accountable officials financially liable. We hope to be sending that over to you. But I

think that would be another significant deterrent, including the offset. I apologize if I—I think my comments were meant to intend

that we need to do a very good job at letting every individual in

the Department, every military officer, every civilian who has this

privilege know exactly, clearly, unambiguously, what the responsibilities are with the card.

Ms. SCHAKOWSKY. And what the consequences will be.

Ms. JONAS. Absolutely, yes.

Ms. SCHAKOWSKY. Thank you.

Mr. HORN. That’s good news. It looks like you are getting things

done. I have great affection and feelings for the Secretary of the

Navy. He is a first-rate person. Does he know about all this? Anybody in Defense, DOD, say, ‘‘Mr. Secretary, you ought to know

what’s going on in your Navy?’’ Ms. LEE. We have been talking with John Young, who is the

AT&L for the Secretary. I don’t know his personal

conversations—— Mr. HORN. Stop the bureaucracy bit. ATL?

Ms. LEE. Oh, Acquisition, Technology and Logistics.

Mr. HORN. Yes. Well, we humans up here don’t always know this

stuff, and we know the rigmarole that tries to get past us. [Laughter.]

But that is why I stop on everything—— Ms. LEE. Been here too long already, huh, Mr. Chairman?

Mr. HORN. Yes. Stovepipe is my other beef in the bureaucracy.

But, anyhow, I think the Deputy Under Secretary has got it moving in the right place, but I would think the Secretary of the Navy

ought to know this is going on and not be blindsided when he

comes up here for the Armed Services or whatever.

I thank you very much for that.

I am going to thank the following people who put together this

interesting hearing: J. Russell George is the staff director and chief

counsel, right behind me; Bonnie Heald, to my left, is the deputy

staff director, that put the hearing together. Justin Paulhamus is

the majority clerk, and Michael Sazonoff is the subcommittee intern. We have our court reporter, Joan Trumps. We thank you all

for helping us on this.

Ms. SCHAKOWSKY. And we thank David McMillen for his help.

Mr. HORN. Thank you. With that, we are adjourned.

[Whereupon, at 11:45 a.m., the subcommittee was adjourned, to

reconvene at the call of the Chair.]

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