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THE USE AND ABUSE OF GOVERNMENT PURCHASE

CARDS: IS ANYONE WATCHING?

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

FIRST SESSION

JULY 30, 2001

Serial No. 107–62

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

JOE SCARBOROUGH, Florida

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, 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

——— ———

———

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

BONNIE HEALD, Director of Communications/Professional Staff Member

SCOTT R. FAGAN, Clerk

DAVID MCMILLEN, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on July 30, 2001 ............................................................................... 1

Statement of:

Grassley, Hon. Charles E., a U.S. Senator from the State of Iowa .............. 2

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

General Accounting Office, accompanied by Robert Hast, Managing

Director, Special Investigations, U.S. General Accounting Office; Ernest

L. Valdes, Commanding Officer, Space and Naval Warfare Systems

Center, San Diego, CA (SPAWAR); John E. Surash, Commanding Officer, Navy Public Works Center, San Diego, CA; Keith W. Lippert,

Director, Defense Logistics Agency, former Commanding Officer, Naval

Supply Systems Command (NAVSUP), accompanied by Larry Glascoe,

Executive Director, Navy Supply Systems Command; Jerry Hinton,

Director of Finance, Defense Finance and Accounting Service; Patricia

Mead, Acting Deputy Assistant Commissioner, Office of Acquisition,

Federal Supply Service, General Services Administration, accompanied

by Sue McIver, Director, Services Acquisition Center, Federal Supply

Service, General Services Administration; and Deidra Lee, Director

of Defense Procurement, Department of Defense ...................................... 13

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

Grassley, Hon. Charles E., a U.S. Senator from the State of Iowa, prepared statement of ........................................................................................ 7

Hinton, Jerry, Director of Finance, Defense Finance and Accounting Service, prepared statement of ............................................................................ 61

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

General Accounting Office, prepared statement of .................................... 17

Lippert, Keith W., Director, Defense Logistics Agency, former Commanding Officer, Naval Supply Systems Command (NAVSUP), prepared

statement of ................................................................................................... 54

Mead, Patricia, Acting Deputy Assistant Commissioner, Office of Acquisition, Federal Supply Service, General Services Administration, prepared statement of ........................................................................................ 67

Surash, John E., Commanding Officer, Navy Public Works Center, San

Diego, CA, prepared statement of ............................................................... 46

Valdes, Ernest L., Commanding Officer, Space and Naval Warfare Systems Center, San Diego, CA (SPAWAR), prepared statement of ............. 35

(1)

THE USE AND ABUSE OF GOVERNMENT

PURCHASE CARDS: IS ANYONE WATCHING?

MONDAY, JULY 30, 2001

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 10 a.m., in room

2154, Rayburn House Office Building, Hon. Stephen Horn (chairman of the subcommittee) presiding.

Present: Representative Horn.

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

Bonnie Heald, professional staff member and director of communications; Scott Fagan, assistant to the subcommittee; Chris Barkley, staff assistant; Davidson Hulfish, Samantha Archey, Fred

Ephraim, and Christopher Armato, interns; David McMillen, minority professional staff member; and Jean Gosa, minority assistant clerk.

Mr. HORN. This hearing of the Subcommittee on Government Efficiency, Financial Management and Intergovernmental Relations

will come to order. For the last 61⁄2 years, I have chaired the

subcomittee that ensures that taxpayer dollars are being used efficiently and effectively. Yet time after time this subcommittee has

received reports that Federal departments and agencies have not

been good stewards of billions of dollars provided by hard-working

taxpayers. Sometimes the allegations have been attributed to poor

accounting procedures. Other times they have been attributed to

flagrant mismanagement. In the case of the Department of Defense, there seems to have developed a culture throughout previous

administrations that encompasses both of these elements.

This is the second time in less than a week that representatives

from the Department of Defense have appeared before this subcommittee to defend illegal or otherwise improper uses of its roughly $325 billion budget. Last week we learned that some Defense

Department officials have been illegally tapping closed appropriations accounts despite a 10-year-old law that prohibits such actions.

Today we will examine the government’s purchase card programs

at two Navy units within the Department of Defense, the Space

and Naval Warfare Systems Center and the Navy Public Works

Center. Both are based in San Diego, CA. This investigation was

initiated by our first witness, Senator Charles Grassley from Iowa.

Our second witness will come from the General Accounting Office.

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Last year the Department of Defense used purchase cards,

MasterCards or VISA cards, for more than 10 million transactions

valued at $5.5 billion. That figure represents more than one-third

of the entire government’s purchase card transactions, which to- taled $15 billion in fiscal year 2000. Unlike the government’s travel

card program in which the cardholder pays the bill, the purchase

card bills are paid by the Federal Government.

This credit card program was designed to save money by eliminating bureaucracy and paperwork associated with making small

purchases. As defined by the General Services Administration,

small purchases are those under $2,500. In addition, Federal agencies can receive rebates from the banks that issue the cards when

the bills are paid promptly. Those benefits, however, do not consider the cost of fraudulent or improper use of the cards for personal expenses, and in the cases we will examine today, they fail

to consider the cost of proper oversight and management of the programs. Most reasonable people would hardly construe these as legitimate and necessary government expenses, and all taxpayers

would agree.

Senator Grassley and I have asked the General Accounting Office

to expand its investigation of the government purchase card program as well as the travel card program. If the misuse and outright fraud found in these two Navy facilities are indicative of the

governmentwide programs, then the cost of the programs may far

outweigh its benefits.

Our witnesses today have been involved in the implementation

and oversight of the government’s purchase card program. In addition, we will hear testimony from witnesses who are responsible for

the two Navy purchase programs audited by the General Accounting Office. We want to know how these abuses were allowed to

occur and what is now being done to stop them.

I welcome all of you, and we now look forward to your testimony.

We will start with the gentleman from Iowa, Senator Grassley, who

is the one that first picked this up, and he’s got a very good reputation for looking at misuse of the taxpayers’ money. We are delighted to have him with an opening statement, and we would like

him to come with us when that statement is over and join us here

for the question period.

And it is a pleasure to have you here, Senator.

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

FROM THE STATE OF IOWA

Senator GRASSLEY. Thank you, Mr. Chairman, and I want to

compliment you for doing a thorough job of our Constitutional responsibilities of oversight to see that money is spent according to

the Constitution and congressional policy, and to make sure that

the laws are faithfully executed. I’m glad to join you in that effort.

And so I thank you for inviting me to testify on credit card abuse.

It’s an honor and privilege to be here, and especially to work with

you on a very important issue.

As the chairman knows, in recent years I have become increasingly concerned about the total breakdown of the internal financial

controls at the Defense Department. My concerns are reinforced by

the continuous stream of audits issued by the General Accounting

3

Office and the DOD’s Inspector General. These audits consistently

show that sloppy accounting and nonexistent internal controls

leave the Department of Defense’s financial resources vulnerable to

theft and to abuse.

In 1997–1998, as chairman of the Judiciary Subcommittee on Administrative Oversight, I conducted my own review of internal controls at the Department of Defense. I issued a report and held a

hearing. I came away from the experience convinced that there

were no effective internal controls in place. Stealing money was a

piece of cake. Fraudulent activity, if detected, was detected by

chance and not, oddly enough, as a result of effective internal controls.

This work taught me one very important lesson about government bookkeeping. Bookkeeping is the key to controlling the

money. If your books of account are accurate and complete, it’s easy

to follow the money trail, and that makes it hard then to steal

money, and that’s how it should be. By contrast, if your bookkeeping is sloppy and nonexistent, as it is at the Pentagon today,

then there is no money trail, and that makes it easy to steal

money. And that’s exactly why I’m so concerned about the Pentagon’s mushrooming credit card operation. Credit cards weaken controls, erase the audit trail.

Mr. Chairman, I’d like to focus on the dangers of credit card proliferation in what I will characterize as a zero-control environment.

Today there are over 1.8 million Department of Defense cards in

circulation that generate about $9 billion a year in expenditures.

A credit card is a license to spend money. Any person with a credit

card is authorized to spend money with no checks and balances. In

the past, Department of Defense employees needed a phony invoice

to trigger a fraudulent check, and getting a fraudulent Treasury

check took some doing. Well, now that obstacle is gone. Credit

cards then provide a shortcut to the cash pile. The Pentagon is giving everyone a big scoop shovel and telling them to rip into the national money sack and do it at both ends.

The Department of Defense created an army of spenders. With

the Department of Defense credit card in hand, they have almost

unlimited authority to spend money. There are no controls, no responsibilities, no accountability. If they want to spend money, they

go to the nearest ATM machine or use a DOD convenience check

to get cash, and they’re doing it with alarming regularity. If they

need a new computer or a Palm Pilot, they go to CompUSA and

charge it and keep it. If they need something for the house, they

go to Home Depot and charge it. If they feel like a night out on

the town, they go to a night club and charge it. Pentagon credit

cards are being taken on a shopping spree, and the taxpayers are

footing the bill.

The General Accounting Office testimony today, I think, will

clearly show that no one is minding the store. No one is checking

to see if the goods and services charged to a purchase card account

were received. And no one is checking to verify the charges if they

were legitimate, and that is required by law.

The General Accounting Office reports that purchase cards are

being used to buy expensive items for personal use with no accountable records. There were over 500 known purchase card fraud

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cases in the last 2 years alone, and with just a small sample, the

General Accounting Office found more. The worst part of it, Mr.

Chairman, is no one seems to care. The Defense Finance and Accounting Service simply pays the bill in full, no questions asked.

Mr. Chairman, I know you have looked at the Department of Defense travel cards, and they remain a festering problem. They need

more attention. And they offer us a rare glimpse at a root cause

of the Department of Defense control problem. As I said, credit

cards are a license to spend money, and they’re being issued with

no road test. They’re being issued willy-nilly, with no credit checks.

Mr. Chairman, that may sound like that’s got to be wrong, but

that’s true. There are no credit checks. Even purchase cards with a $100,000 limit are issued with no credit check. One credit card

company, the Bank of America, identifies high-risk individuals, but

the bank’s appraisal in the case of the military is irrelevant. At the

Pentagon, everyone gets a card.

This is a fatal flaw in the program. It leaves the door wide open

to fraud and abuse. Military and civilian personnel who could

never qualify for credit suddenly find themselves with unlimited

credit on a government credit card.

The application form itself helps to set the stage for fraud and

abuse. It’s right up front on the application. No credit check is an

option, and all the applicant has to do is check box B, ‘‘no credit

check.’’ When first-time cardholders see this, they must lick their

chops, obviously.

No credit check is the same as no control. A ‘‘no credit check, everybody gets a travel card’’ policy is causing account delinquencies

to go ballistic. As you know, Mr. Chairman, there are over 43,000

Department of Defense employees, civilian and military, who have

defaulted on more than $59 million in charges for what is supposed

to be authorized travel. This, of course, is a black mark on the

Armed Forces. The Department of Defense is supposed to pay the

cardholder, but the money doesn’t always get to the bank. The government has no liability for unpaid balances, and the bank has no

collection authority and earns no interest. The bank has to write

off the delinquencies, thus take a loss, and the losses are mounting

fast. They now exceed $200 million.

There is the case of the marine sergeant who ran up a $20,000

bill and then left the service and the unpaid bill when his enlistment was up. That case is not unique. There is a soldier who spent

$3,100 in a night club, the dead sailor who spent $3,565, an Army

reservist’s wife who spent $13,053 on a shopping spree in Puerto

Rico.

The marine sergeant, Sergeant X, was initially issued a restricted card in March 2000 because of a questionable credit record.

The restricted status put the lid on Sergeant X’s credit allowance,

but not for long. On March 21st, the Marine Corps arbitrarily

raised his credit limit from $2,500 to $10,000. The higher limit precipitated a spending spree. Then the alarm bells went off at the

bank. There was a fraud alert on August 3rd due to, ‘‘unusual account activity.’’

Two weeks later Sergeant X got special permission to make

charges on a blocked merchant category code [MCC], at a civilian

clothes store like Macy’s. The next day, August 18th, Sergeant X’s

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credit limit was raised again to $20,000. Then Sergeant X’s account

became past due and then delinquent.

Now, despite all the red warning flags, the Marine Corps raised

Sergeant X’s credit limit one last time, January 29, 2001. This time it went to $25,000.

In just one 2-month period, Sergeant X made cash withdrawals totaling $8,500. The bank thinks he was using the cash withdrawals to make payments on his credit card account. Finally, in February, Sergeant X’s credit was revoked. Mr. Chairman, the Marine

Corps was warned, but looked the other way while Sergeant X

robbed the bank.

Mr. Chairman, I hope you will join me in asking the Inspector

General to examine these cases and determine whether the Department of Defense is paying for unauthorized expenses and whether

others could be involved in stealing money. The driver behind the

delinquencies are cash withdrawals from the ATM machines for

personal use. Over 20 percent of all Department of Defense travel

card transactions are cash transactions. Now, this is five times the

industry average. Most cash transactions go delinquent and are

written off as bad debt.

Attempted access to blocked MCC codes like Sergeant X’s case is

a tip-off. It’s the warning flag. Many MCCs are blocked, like online gambling casinos, Toys R Us and the like. The bank knows

when a card is used to gain access to a blocked MCC code. The

banks also know that an unsuccessful hit on a blocked MCC code

is almost always followed immediately by a successful hit at the

nearest ATM machine. ATMs are used to circumvent the blocked

MCC code to make an unauthorized purchase.

Mr. Chairman, the bank gave the Pentagon an antifraud control

device. It’s called by the acronym EAGLS, E-A-G-L-S. It provides

an online capability to detect suspicious account activity and delinquency; information needed to take corrective action, in other

words. Daily account activities on EAGLS should be watched like

a hawk. If Sergeant X was getting cash at the ATM machine without travel orders, his access to the cash machine should have been

shut down. Unfortunately, EAGLS control is ignored. Nobody uses

it.

The thinking behind the Department of Defense credit card explosion is good. Reduce the paperwork. Save money to streamline

the process. Adopt best practices of the commercial sector. In the

private sector credit cards are big business. That’s because the control environment is good. Monthly bills are reconciled and are paid

promptly. In corporate America, if you abuse your card, you lose it

or you get fired.

In the Pentagon there is no accountability and no control. Trust

and accountability are key ingredients in any credit card program.

Trust and accountability go hand in hand because a credit card

provides direct unrestricted access to cash. Credit cards create a

low-control environment. The credit card environment requires a

high degree and level of trust and accountability.

Mr. Chairman, the low-control credit card environment is incompatible with the zero-control environment at the Pentagon. Issuing

credit cards willy-nilly with no credit checks in a zero-control environment is a recipe for disaster, and that’s exactly where we are

6

today, Mr. Chairman, a disaster, and Bank of America is holding

the bag, and the bank can only blame itself for being in such a predicament. The bank signed the contract. The bank agreed to assume all the risk and all the responsibility, but with absolutely no

authority. All the authority rests squarely in the hands of the Pentagon. The contracts give the Department of Defense absolutely

vital authority over the bank’s decisions. On the most important

decisions of all, whether to do credit checks, the Pentagon is forcing

the bank to adopt worst business practices of the public sector. The

contract mandates the policy. There shall be no control filter with

credit checks. Everybody gets a card, even those with bad credit

records.

Mr. Chairman, the ‘‘no credit checks, everybody gets a card’’ policy allows the abuser to rob the bank, and the Department of Defense is backing them up. That is causing the bank to sustain unacceptable losses. Bank of America’s predecessor, American Express, endured the same fate. So something has to give. It seems

like the current arrangement is very unworkable.

I know that the Department of Defense is trying to fine-tune the

process, but recent improvements are very modest. The root cause

of the problem remains untouched: no control and no credit checks.

If the Department of Defense is serious about adopting the best

practices of the commercial sector, then the Department of Defense

has to do an about-face maneuver. The Department of Defense

must give the bank authority to decide who can be trusted with a

card and what the credit limit should be on each account. This rule

should apply to travel as well as purchase cards. I think that this

would solve the problem. I think that is the key, Mr. Chairman.

Modify the contract to allow credit checks and regulate limits. It

seems to be very simple.

In closing, Mr. Chairman, Secretary Rumsfeld has made a personal commitment to clean up the financial mess at the Pentagon.

Obviously, he is just getting started, and we know how things take

several years, and it may be that is true with Secretary Rumsfeld’s

best efforts before we see results. I support his efforts 100 percent

and look forward to some very good results. So nothing I have said

here today should be taken as criticism of Secretary Rumsfeld. The

problems I have addressed are the result of decisions made in previous administrations and mainly by former Deputy Secretary of

Defense Hamre.

I thank you, Mr. Chairman.

Mr. HORN. We thank you, Senator, and please join us here.

[The prepared statement of Senator Grassley follows:]

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Mr. HORN. And we will now bring all of the witnesses and administer the oath, and also we will tell you about how this—I

would like all of the assistants that will be whispering in various

ears to also take the oath so I don’t have to interrupt this testimony, and so just get them all, and the clerk will take the names.

Please raise your right hands.

[Witnesses sworn.]

Mr. HORN. So I just want to make sure we have all the witnesses

here, and the first will be Mr. Kutz of the U.S. General Accounting

Office, accompanied by Robert Hast, Managing Director, Special Investigations, U.S. General Accounting Office; Captain Ernest L.

Valdes, Commander, Space and Naval Warfare Systems Center in

San Diego; Captain John E. Surash, the Commanding Officer,

Navy Public Works Center, San Diego; and Vice Admiral Keith W.

Lippert, the Director of the Defense Logistics Agency, former commanding officer, Naval Supply Systems Command, and he is accompanied by Larry Glascoe, Executive Director of the Navy Supply Systems Command; Jerry Hinton, Director of Finance, Defense

Finance and Accounting Service; Patricia Mead, the Acting Deputy

Assistant Commissioner, Federal Supply Service, General Services

Administration, accompanied by Sue McIver, the Director, Services

Acquisition Center, Federal Supply Service, General Services Administration; and we have Deidra Lee, Director of Defense Procurement, Department of Defense.

And we will now start with the gentleman with the U.S. GAO,

General Accounting Office. That reports, for those of you that are

not familiar with them, to the Comptroller General of the United

States, and it is an arm of the Congress, the legislative branch, and

they do excellent work, and we’re both—Senator Grassley and I

have certainly made great use out of the GAO in our years in the

Congress.

So we will now start in with Mr. Kutz, the Director of Financial

Management and Assurance.

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STATEMENTS OF GREGORY D. KUTZ, DIRECTOR, FINANCIAL

MANAGEMENT AND ASSURANCE, U.S. GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY ROBERT HAST, MANAGING

DIRECTOR, SPECIAL INVESTIGATIONS, U.S. GENERAL ACCOUNTING OFFICE; ERNEST L. VALDES, COMMANDING OFFICER, SPACE AND NAVAL WARFARE SYSTEMS CENTER, SAN

DIEGO, CA (SPAWAR); JOHN E. SURASH, COMMANDING OFFICER, NAVY PUBLIC WORKS CENTER, SAN DIEGO, CA; KEITH

W. LIPPERT, DIRECTOR, DEFENSE LOGISTICS AGENCY,

FORMER COMMANDING OFFICER, NAVAL SUPPLY SYSTEMS

COMMAND (NAVSUP), ACCOMPANIED BY LARRY GLASCOE,

EXECUTIVE DIRECTOR, NAVY SUPPLY SYSTEMS COMMAND;

JERRY HINTON, DIRECTOR OF FINANCE, DEFENSE FINANCE

AND ACCOUNTING SERVICE; PATRICIA MEAD, ACTING DEPUTY ASSISTANT COMMISSIONER, OFFICE OF ACQUISITION,

FEDERAL SUPPLY SERVICE, GENERAL SERVICES ADMINISTRATION, ACCOMPANIED BY SUE McIVER, DIRECTOR, SERVICES ACQUISITION CENTER, FEDERAL SUPPLY SERVICE,

GENERAL SERVICES ADMINISTRATION; AND DEIDRA LEE,

DIRECTOR OF DEFENSE PROCUREMENT, DEPARTMENT OF

DEFENSE

Mr. KUTZ. Mr. Chairman and Senator Grassley, good morning.

It’s a pleasure to be here to testify on the results of our audit of

Navy purchase cards. With me this morning is Bob Hast, Managing Director of our Office of Special Investigations and an expert

in credit card security issues.

Purchase cards were introduced into the government in the

1980’s primarily to streamline the acquisition process for small

purchases. Usage of purchase cards is growing quickly in the Federal Government, increasing from about $2 billion in 1995 to about

$12 billion in 2000. DOD purchase cards usage in fiscal year 2000

was about $5 billion.

With rapid growth in the usage of purchase cards, establishment

of effective internal controls is critical to prevent fraud, waste and

abuse. I have a purchase card in my hand here that Citibank was

kind enough to provide for today’s hearing. As you can see, it looks

like a normal credit card. Navy’s card is a MasterCard and can be

used wherever MasterCard is accepted; however, notice that it

says, ‘‘For official U.S. Government purchases only.’’

As requested initially by Senator Grassley, our audit focused on

Navy purchase card activity in the San Diego area using a case

study approach at SPAWAR Systems Center, or SPAWAR, and

Navy Public Works Center, or Public Works. These two Navy activities, which provide goods and services to their Navy clients, had

about $68 million of purchase card activity in fiscal year 2000.

The bottom line of my testimony this morning is that we found

significant breakdowns in Navy purchase card controls in the San

Diego area. These breakdowns contributed to fraudulent and abusive spending 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, fraudulent and abusive usage of purchase

cards.

14

First, we found an ineffective overall internal control environment at SPAWAR and Public Works. Our work has shown that the

lack of a strong internal control environment leads to the risk of

improper behavior. For example, neither SPAWAR nor Public

Works had effective policies over the issuance of purchase cards.

Any employee having supervisor approval could basically get a purchase card. As a result, as shown on the posterboard, we found a

proliferation of purchase cards, with 36 percent of SPAWAR and 16

percent of Public Works employees holding purchase cards. In contrast, we found that for six large defense contractors, no more than

4 percent of employees held purchase cards, and at GAO, about 2

percent of our employees hold purchase cards. This control breakdown resulted in over 1,700 cardholders, each with a monthly

spending limit of over $20,000. We found no compelling reason why

over 1,700 individuals were given the power to make purchasing

decisions for the Federal Government.

We found other overall internal control weaknesses relating to

rebate management, training, and the usage of internal audits. In

fact, at SPAWAR, we found evidence that management ignored internal review results that demonstrated some of the very same

problems that we found.

Second, with the ineffective overall control environment I just described, it is not surprising that the four basic controls we tested

were ineffective. These controls include independent documentation

of receipt of goods, independent certification of the monthly credit

card bill, timely recording of purchases into the accounting records,

and recording of property purchases into the property inventory

records. These four controls are intended to provide reasonable assurance as to the integrity of purchase card transactions.

As shown on the posterboard, we estimate control failure rates

of 35 to 100 percent for fiscal year 2000. The primary problem we

found was that Navy employees were simply not following basic

policies and procedures. For example, for 65 percent of SPAWAR

and 47 percent of Public Works transactions, we found no evidence

that a person independent of the cardholder validated that goods

and services were received. This control is intended to minimize

the risk, for example, of employees going on a personal shopping

spree. Unfortunately, the high failure rate for fiscal year 2000

clearly shows that this control was ineffective.

In addition, SPAWAR and Public Works did not record property

purchases in inventory records as required by Navy policy. When

we asked to inspect 65 items from our sample, the two commands

could not provide conclusive evidence that 31 items, including

laptop computers and a digital camera, were in possession of the

government. One of the 31 items was a video conferencing camera

reported as stolen. For this item we found that the responsible

Public Works employee had received and deposited in his personal

checking account $2,500 from a personal insurance claim. Only

after being confronted by our investigators did the employee reimburse the government with a personal check.

Third, we found fraudulent and abusive transactions involving

Navy San Diego activities, including SPAWAR and Public Works.

Weak internal controls contributed to five recent cases of alleged

purchase card fraud related to Navy activities in the San Diego

15

area. Two of these related to Public Works. These purchase card

fraud cases, which so far total over $660,000, involve numerous

purchases of items for personal gain. Examples included home improvement items from the Home Depot, laptop computers, Palm Pilots, DVD players, an air conditioner, clothing, jewelry, eyeglasses

and pet supplies. The control breakdowns related to these frauds

were so pervasive that the total dollar amount could not be determined. One cardholder sentenced to 15 months in prison commented that illegal usage of the purchase card was ‘‘too easy.’’

Another of the Navy purchase card fraud cases involved compromise of as many as 2,600 purchase cards for Navy activities in

the San Diego area. Navy investigators were only able to obtain a

partial list of 681 compromised accounts. The account numbers

showed up on a computer printer at a community college library

in San Diego in 1999. However, the Navy has not yet canceled the

compromised accounts. Rather, they’re only canceling the accounts

as fraudulent activity is identified. Navy investigators estimated

that as of January 2001, at least 27 alleged suspects used 30 of the

compromised account numbers. These suspects made more than

$27,000 in fraudulent purchases of pizza, jewelry, phone calls, tires

and flowers.

With ineffective internal controls, preventing and detecting

fraudulent purchases for compromised accounts will be virtually

impossible. As of May 21, 2001, we identified 22 compromised

SPAWAR accounts that are still active. We also found transactions

at SPAWAR and Public Works that we believe are potentially

fraudulent or abusive. As shown on the posterboard, the potentially

fraudulent purchases include personal items such as cosmetics

from Mary Kay, and gift certificates from Nordstrom. It is unclear

whether these purchases were made by Navy employees, or were

due to compromised accounts. The ineffective monthly certification

control resulted in payment of these obviously unauthorized purchases. However, we found evidence that the Navy subsequently

received credit from Citibank for these items.

We referred all potentially fraudulent transactions to Mr. Hast

and his team for further investigation. The abusive purchases relate primary to SPAWAR and include items where the purchase

was at an excessive cost, questionable government need, or both.

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

items such as flat-panel computer monitors costing from $800 to

$2,500 each. We believe the cost of these monitors is excessive

when compared to standard GSA monitors that cost about $300

each. In addition, we found items purchased that were of questionable government need, including Palm Pilots, designer Palm Pilot

carrying cases, and a leather briefcase from the Coach store. Accessories were also purchased for the Palm Pilots, including keyboards, travel kits, additional memory, modems and belt clips. We

found no documentation to justify these as valid government purchases. Rather, it appears that these purchases were often made to

satisfy the personal preferences of purchase card holders.

In summary, we found that Navy’s management of the purchase

card program in the San Diego area is simply not acceptable. We

found significant problems with every aspect of the program that

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we reviewed. These problems contributed to fraudulent and abusive

usage of purchase cards.

I testified before this subcommittee in May on the importance of

fixing DOD’s serious financial management problems. Last week we testified that DOD made $615 million of illegal and improper

adjustments to closed appropriations accounts. Today, you see another example of what can happen when financial management is

broken and accountability is lost.

The individuals here from the Navy appear to be very capable

people who can fix these problems. To do so, they will need to demonstrate leadership in this area and establish accountability, proper incentives and consequences for their employees to ensure proper behavior. We will be issuing a report with recommendations

after this hearing. We are available to work with the Navy to implement those recommendations.

Mr. Chairman, that ends my statement. Mr. Hast and I would

be happy to answer questions after the others give their statements.

Mr. HORN. Well, thank you very much for that presentation. We

have faith in the GAO and you just do a marvelous job. So thank

you.

[The prepared statement of Mr. Kutz follows:]

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Mr. HORN. Our next witness is Captain Ernest L. Valdes, the

Commander of the Space and Naval Warfare Systems Center in

San Diego, otherwise known as SPAWAR.

Go ahead, Mr. Valdes.

Captain VALDES. Mr. Chairman, Senator Grassley, thank you for

the opportunity to discuss the Navy purchase card program. I entered a full statement to the committee, and I’d like to provide a

summary statement at this time.

Mr. HORN. Without objection, it’s in the record. I might add,

when you’re called, the whole statement goes in automatically.

Captain VALDES. Thank you.

Mr. HORN. And we’d like you to summarize it.

Captain VALDES. Yes, sir.

Mr. HORN. Because the sooner we can summarize it and get into

a dialog with Senator Grassley and myself and any others that

want to appear, and so we want to get a positive way.

Captain VALDES. Thank you, Mr. Chairman.

I’m Captain Ernest Valdes, commanding officer, Space and Naval

Warfare Systems Center, San Diego. It’s my job to command an organization whose mission is to provide the joint warfighter with the

technology to collect, process, display and transfer information necessary to conduct military operations.

My command is one of the many Navy activities that uses and

relies on the government purchase card program. We are a major

command within the Navy and employ a workforce of approximately 80 military and 3,400 civilian government personnel consisting primarily of scientists, engineers and computer specialists.

My command manages more than 1,000 projects both large and

small, in research and development, testing evaluation, installation

and in-service engineering in support of the Navy and Marine

Corps. For fiscal year 2000, SSC revenues were over $1.2 billion.

The Navy’s purchase card program greatly facilitates the timely

and efficient response to our fleet and customer needs and is crucial to fulfilling our mission in support of naval forces. For over 10

years, SSC San Diego has effectively managed the purchase card

program that makes over 50,000 purchases a year valued at approximately $45 million per year. The success of our program is

based upon effective management controls and in the trust we have

in our cardholders, who are career Civil Service employees or Active Duty service members.

We firmly believe the purchases being made are for legitimate

government purposes. For example, during an upgrade of the operations center of USS Blue Ridge, a command and control ship forward-deployed in Japan, our team of engineers and technicians

found computer and local area network components requiring immediate replacement or repair. During this effort, which includes

an installation of an entire network on board the command ship,

and a major upgrade to its command and control system, we placed

30 people on board the Blue Ridge for over 3 weeks working around

the clock to complete this effort. The use of the purchase card resulted in immediate government savings by allowing the team to

quickly procure necessary items and contributed significantly to the

successful upgrade of Blue Ridge, accomplished in time for an upcoming operational exercise.

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In addition to the trust we place in our cardholders, we have

management controls to oversee the program. These management

controls include as a first line of defense responsibility of the cardholder to review and challenge any discrepancies on their monthly

card statements. Approving officials then review their individual

cardholder statements as a second line of review. My command’s

agency program coordinator further reviews a random sample of

cardholder statements each month, contacting cardholders and

their supervisors when deficiencies are noted, including taking the

action of revoking the card for misuse or, in other areas, disciplinary action to the cardholder.

Given the significant size of this program, we conduct regular reviews that occasionally reveal misuse or compromise of the purchase card. For example, our internal review process disclosed an

employee’s misuse of a purchase card for personal items while on

travel. In this and other similar cases, cardholder authority was revoked. We also rely on our workforce to do the right thing and report cases of purchase card abuse, either directly to their supervisor or through hotline calls.

We have seen a few cases that revealed compromise of a purchase card by third parties outside the Navy; that is, the card number was stolen. And this resulted in the purchase of cosmetics and

items at a record music store. In these instances of compromise or

stolen purchase cards, the affected cardholders immediately reported and disputed the charges, and the cases were resolved in

favor of the cardholders. And I refer to the Mary Kay issue that

the GAO discussed earlier. That was an incident of a stolen credit

card number.

I will now address the specific GAO findings and address weaknesses in the program that merit attention and followup action.

Our first action was to review the number of purchase cardholders

at my command, and we have reduced the number of cardholders

at the center by 18 percent. Our existing program is to require that

all cardholders receive training prior to receiving the purchase

card. We experienced a backlog in refresher training, and I intend

to correct that problem by accelerating the training schedule to

complete all training and refresher training by the end of the fiscal

year.

SSC San Diego relies on the following procedure and management control to execute our program and combat vulnerability to

abuse: First, a mandatory initial training program and following

refresher training every 2 years—these are existing management

controls at the Center; supervisory oversight of cardholders’ use

and need; cardholder review of their monthly statements; approving officials’ review of the individual cardholder’s statement.

We conduct random reviews every month by the agency program

coordinator, and we have an aggressive action plan to correct deficiencies through counseling, retraining, and cardholder revocation

for the serious cases. Mr. Chairman, we conduct formal investigations and pursue disciplinary action.

Finally, SSC San Diego has recognized that the purchase card

program was a manual, paper-intensive process that would benefit

from the employment of modern e-business solutions. My command

recently implemented an enterprise resource planning system inVerDate 11-MAY-2000 11:19 May 01, 2002 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 C:\DOCS\78830.TXT HGOVREF1 PsN: HGOVREF1
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corporating best commercial practices and utilizing commercial offthe-shelf software. This system will substantially improve our business processes at the command, including the purchase card program, and significantly improve our documentation issues that the

GAO auditors highlighted.

In conclusion, Mr. Chairman, the purchase card program is vital

to the successful implementation of SSC San Diego’s mission to

support our Navy and Marine Corps team. I also believe the implementation of enterprise resource planning will greatly improve the

management tools available to oversee the program, while providing our workforce the necessary flexibility to accomplish the Center’s mission in support of our Naval forces.

Mr. Chairman, Senator, thank you for giving me this opportunity

to address the committee, and I’ll address questions at any time,

sir.

[The prepared statement of Captain Valdes follows:]

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Mr. HORN. I think at this point we’re going to yield to Senator

Grassley, because he has another appointment coming, and he’ll

question you and some of the others, even though you haven’t had

a chance to give your testimony at this point.

Senator GRASSLEY. I have my questions of the General Accounting Office, but I hope that before the day is over, we hear that part

of the solution to the issues that we have before us is that we are

going to give the normal commercial way of checking credit for the

issue of the credit cards to have the authority to issue credit cards

to those that have good credit risk as opposed to everybody. And

I hope the Defense Department would look to the banks for that

normal commercial way of doing business.

Mr. Kutz, in 1997–1998, you provided extensive support for my

review of internal controls at the Department of Defense. We discovered that supporting documentation like receiving reports simply did not exist. At the conclusion of that review, which was in

September 1998, Mr. Hamre launched the purchase card initiative.

Purchase cards eliminate the need for receiving reports.

Do you think that the Department of Defense answers to the internal control problems that we uncovered in 1998?

Mr. KUTZ. I believe most of the problems we found were actually

implementation of policies and procedures. As part of this study,

we found certain flaws in policies and procedures, but for the most

part, the controls that we looked at were adequate. The issue was

that the employees were either not doing the control or not leaving

a documentation trail that shows that they did the control. We believe that the problems that we found are for the most part the employee following mostly valid policies and procedures.

Senator GRASSLEY. OK. The General Accounting Office has documented extensive misuse of purchase cards. To what extent have

you checked the Department of Defense payment records to verify

that taxpayer dollars have been used to cover unauthorized purchases?

Mr. KUTZ. As part of this review, we audited the underlying

records for these two locations. We’re doing a DOD-wide purchase

card review for you and Chairman Horn, as was discussed earlier

today. So beyond what we found at these two locations, as you

mentioned in your opening statement, we’re aware that for the 2-

year period there are 500 or so potential frauds DOD-wide. But beyond these two locations, we really can’t speak to other findings or

issues with respect to the purchase card program at DOD.

Senator GRASSLEY. Has anyone examined the Department of Defense payment records to determine if the Department of Defense

is using tax dollars to cover unauthorized charges on travel card

accounts? And this is in regard also to my asking the internal—

or the Inspector General to do an examination of the most egregious cases, like Sergeant X that I talked about in my opening comments.

Mr. KUTZ. We’re doing a DOD-wide audit of travel cards for you

and Chairman Horn. And again, beyond that, I know Chairman

Horn had a hearing on that in the spring, and the issues with respect to the delinquency of the Department were discussed extensively. Beyond that, we’re in the middle of putting a plan together

to look at this DOD-wide, and we will look at all aspects of manVerDate 11-MAY-2000 11:19 May 01, 2002 Jkt 000000 PO 00000 Frm 00046 Fmt 6633 Sfmt 6633 C:\DOCS\78830.TXT HGOVREF1 PsN: HGOVREF1
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agement of the travel card program at the Department and hopefully report back to you and Chairman Horn in the Spring.

Senator GRASSLEY. And, Mr. Chairman, that will be the last of

my questioning, but, once again, I want to thank you for your leadership in this area and would pledge to continue to work with you.

Mr. HORN. Well, it’s always a pleasure to work with you. When

I was a Senate staff member in the early 1960’s, there was Senator

Williams of Delaware, and he was the one that really looked after

all this, and I’m glad to see that your fine work goes in Senator

Williams doing it. And they woke up when he came in asking questions, and I think that hopefully they will get your questions and

get the point.

In the group 2 days ago, I said we’re going to have another hearing in 3 months. We’re not going to just let this drift. And we’re

going to do that until the Pentagon gets organized and starts doing

what any corporate group would do. So we need to get you on

track. And when the Bank of America came in to see me, I said,

goodbye, folks. Don’t even talk to me about it; that, you know,

you’ve taken that risk, and you should have—you should have done

just what the Bank of America would have done to its own people.

So thank you.

So we’ll go down the line now and get everybody’s testimony

then. I’ve got a whole series of questions.

So Captain John E. Surash, the commanding officer for the Navy

Public Works Center in San Diego.

Captain SURASH. Good morning, Mr. Chairman. I’m Captain

Jack Surash, commanding officer of Navy Public Works Center in

San Diego. Sir, we provide the full range of Public Works services

to the Navy and Marine Corps activities in the San Diego area.

These services are provided to over 3,000 buildings on seven major

bases, as well as military family housing located at several off-base

sites. These commands and activities, including support for the

many ships at the waterfront in San Diego Bay, consist of over 400

clients located in a 200-square-mile area. We must operate our

business with the same price, quality, customer service and competitiveness issues that challenge and motivate all commercial

businesses.

The Public Works Center employs a workforce consisting of 14

military and approximately 1,700 civilian and contractor personnel.

Prior to the introduction of purchase cards, we obtained materiel

requirements through a central procurement office. Frankly, this

was a very cumbersome, bureaucratic, expensive and slow procedure.

The purchase card plays a critical role in handling our daily operations in support of the Navy fleet and Marine Corps. During fiscal year 2000, my cardholders made over 56,000 purchase card

transactions valued at approximately $30 million. The purchase

card replaced a procurement system that was not cost or time-effective for small dollar purchases.

Mr. Chairman, in 1999 my command’s internal review process

uncovered several areas of concern. To determine whether these

concerns were unique or systemic, we took the rather extraordinary

step of requesting a review of our purchase card program by the

Naval Audit Service. The auditors periodically updated me on these

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findings, and, based on their updates, I directed a number of

changes be put in place.

In September 2000, we published a completely reviewed purchase card instruction which strengthened internal control procedures. I instructed my agency program coordinator to conduct

stand-down training for all cardholders, supervisors and approving

officials. Purchase cards were suspended for any employee who did

not attend this training. I also required my agency program coordinator to conduct refresher training on an annual basis for all cardholders, supervisors and approving officials. We reviewed the number of purchase cardholders, resulting in an approximate 30 percent reduction from about 360 down to 247 cardholders.

As a part of our new process, we now require the cardholder, the

supervisor and the approving official to sign a certification on each

monthly cardholder statement. I tasked my supervisors to review

the cardholder package and provided them with a checklist to aid

their review. I directed that all original purchase card documents

be maintained in one central location, so that if the need arose, all

documents could be easily retrievable. I also strengthened internal

controls for the dispute process.

GAO’s audit covered fiscal year 2000. Mr. Chairman, I would

point out that this is approximately the same period that the Naval

Audit Service was conducting their review of my command. However, based on the GAO review, I learned there were a couple of

areas that still needed to be addressed, so as a result of their investigation, I took the following action: A key issue was ensuring separation of functions between the person ordering material and the

person receiving and accepting it. Our program had allowed cardholders to order and receive materials and services so long as

someone else had made the original request for the material. I

have now issued a revision to that policy that strictly requires that

someone other than the cardholder accept and receive material and

services.

Although our cardholders had received the required training, I

issued contracting warrants based upon the training they took. The

training records were discarded at the time we issued the new instruction, and we conducted stand-down training. I have now directed that all future training and contracting warrants be maintained for historical audit purposes. In addition, I’ve added another

person to my command’s internal review staff and initiated a program where they independently perform a review of the purchase

card program every month.

The GAO presented a list of 39 questionable purchases. Mr.

Chairman, we were already aware of 20 of these, all from three

cardholders, as a result of our normal internal investigations. All

20 transactions were being handled through appropriate means involving our internal review office, consultation with the Naval

Criminal Investigation Office and our own legal counsel.

Research on the additional 19 transactions, 12 were, in fact,

proper; 2 were disputed, and credits were received; and 2 involved

cardholders using the wrong card by mistake. The final three were

valid official requirements; however, the purchase card was the incorrect procurement tool to use. In addition, the General Accounting Office identified 21 purchases that had been improperly spread

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to stay under purchase card thresholds. Further research shows

that 12 were, in fact, split purchases.

Mr. Chairman, however, much of the work at the Public Works

Center is task-oriented. Purchases are made based on requirements

that are known at a specific point in time. As work progresses,

similar requirements may become evident, and purchases are made

to fulfill the additional requirements. In these cases it may appear

that purchases have been split to circumvent the purchase limits,

when, in fact, the purchases were made based on requirements as

they were known at the time. However, this is an area that we

know we have to continually watch, and I have directed my people

to do so.

In summary, Mr. Chairman, we have previously recognized that

management and control of our purchase card program required increased attention. The General Accounting Office pointed out some

additional areas where revisions to the program were needed, and

we are quickly making those changes.

The purchase card program provides my command a flexible and

powerful procurement method, one I truly believe makes us more

responsive and cost-effective in meeting Navy and Marine Corps requirements. I fully recognize that proper controls are a key element, and I am committed to ensuring these controls are in place.

This concludes my summary statement, Mr. Chairman.

Mr. HORN. Thank you very much.

[The prepared statement of Captain Surash follows:]

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Mr. HORN. And we now go to Vice Admiral Keith W. Lippert, Director of Defense Logistics Agency, former commanding officer,

Navy Supply Systems Command.

Admiral LIPPERT. Mr. Chairman, thank you for the opportunity

today to discuss the Department of the Navy Purchase Card Program. I am Vice Admiral Keith Lippert, currently serving as the

Director of the Defense Logistics Agency. I took over on July 20th.

I previously served as the Commander of Naval Supply Systems

Command, or NAVSUP, from August 1999 to July 11, 2001.

NAVSUP is the Department of the Navy’s purchase card program manager, and in this capacity we are responsible for the establishment of Navy and Marine Corps policies and procedures for

use of the purchase card and the management of purchase card

services provided by Citibank. I am aware that there are issues

surrounding the purchase card program. The Department of the

Navy is addressing these issues, and I am confident that the policies, procedures and metrics that are in place to manage this 12-

year-old purchase card program are adequate and comparable to

the best practices of private industry. However, there can be improvements.

The General Accounting Office noted during their outbrief to the

Department of the Navy that its written purchase card policies and

procedures are generally adequate. The Department of the Navy

recognizes that program execution is not always perfect. Oversight

procedures, however, exist to identify and address areas of concern.

The Department of the Navy’s Purchase Card Program is very

successful overall and represents a significant business revolution

in how the Department of the Navy purchases supplies and services. The card allows the purchase of commercially available supplies and services without the delay incident to the traditional purchasing process. The purchase card also reduces costs by consolidating transactions into a single monthly invoice for payment.

The Department of the Navy’s reliance on the purchase card continues to grow. Today the Department of the Navy buys 99 percent

of all requirements valued at $2,500 or less through the purchase

card. And throughout the Navy and Marine Corps and in every

commanding activity, there are more than 30,000 purchase cards

with 9,100 approving officials and 1,800 agency program coordinators providing management and oversight.

The Department of the Navy purchase card policy establishes the

structure and procedures used to manage the card program. The

Department of the Navy’s purchase card policy is available in hardcopy and on the Naval Supply Systems Command Web site, making it readily accessible to all. The Department of the Navy’s policy

establishes controls for the oversight and management of the program from the Department of Navy’s major command level to the

local activity cardholder. The controls cannot completely eliminate

the occurrence of misuse. They can, however, deter and identify

misuse.

The greatest strength of the system is employee honesty. The

workforce is relied upon to properly use the card and to report misuse. The Department of the Navy’s Purchase Card Program is

structured in a way to place responsibility and accountability at

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the lowest possible level, and the Department of the Navy trusts

that its employees will execute these responsibilities with integrity.

There are three separate processes that provide checks and balances. The first is the establishment of accountability at the various levels of the program. The program establishes oversight responsibility for each level of the subsequent levels below them. This

structure is similar to that used by Citibank for its corporate customers and creates a multitiered network of oversight.

The first tier, is the agency program coordinator, establishes

cardholder limits and restricts vendor lists and conducts a semiannual review of purchase card use. Also resident at the local level

is the approving official, who certifies all purchase invoices prior to

payment.

Another level of oversight is performed by the Department of the

Navy’s contracting personnel. Contracting personnel approve and

monitor execution of purchase card activities. Financial management policy also establishes procedures for funds control. Additional reviews are also conducted by the Navy and DOD Inspector

General and audit services.

And finally, CitiBank, the Department of the Navy’s bank card

contractor, constantly monitors purchase card transactions. Since

the inception of the purchase card contract with Citibank in November 1998, the Department of the Navy has made over 7 million

credit card transactions. It is interesting to note that the commercial benchmark for vendor fraud and compromised card activity is

0.06 percent to 0.09 percent of the total dollar value spent. The Department of the Navy’s rate is less than half of the commercial

benchmark. One measure of the effectiveness of our oversight is

that since November 1998, only 38 cases of fraudulent activity have

been reported by the Naval Criminal Investigative Service.

I would like now to address some of the Department’s initiatives

to improve our purchase card program.

First, the Department of the Navy is in the process of moving

from a manual purchase card process to a fully automated purchase card system, such as the Enterprise Resource Planning System.

Second, the Department of the Navy has increased training of

the Department of the Navy’s employees to reinforce proper purchase card usage.

And finally, the Department of the Navy is implementing electronic management tools such as Citibank’s newly fielded dynamic

reporting system that will permit it to better analyze purchase card

transaction data.

In conclusion, the purchase card is a vital acquisition tool for its

service members and civilian employees. I commend the General

Accounting Office audit team for identifying opportunities for the

Department of the Navy to improve an extremely complex program.

The Department of the Navy has taken actions to improve its existing program.

This concludes my statement, and I am readily available to answer your questions, sir. Thank you very much.

Mr. HORN. We thank you very much.

[The prepared statement of Admiral Lippert follows:]

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Mr. HORN. We now go to Jerry Hinton, the Director of Finance

for Defense Finance and Accounting Service.

Mr. HINTON. Good morning, Mr. Chairman. My name is Jerry

Hinton, and I’m the Director of Finance for Defense Finance and

Accounting Service. I welcome the opportunity to discuss with you

the responsibilities for paying purchase card bills at DFAS.

DFAS purchase card payment process is in accordance with the

DOD Financial Management Regulation and DOD policy memorandum. Specifically, DFAS performs a prepayment audit review or

audits before charge card payments are made. Their prepayment

review includes checking for the procurement identification number

[PIN], and, if needed, the subprocurement instrument identification

number [SPIIN]. We check for the payees’ names and addresses.

We check that the invoice date is later than the purchase order

date, that the invoice is originally invoiced, that the estimated pay

date is correct, that the appropriate payment office is identified by

the line of accounting reference, that the prompt payment or certification is provided, that the correct amount is being paid to include interest where applicable, and that only the charge that is

certified by the approving official is being paid.

In the case of the Navy, the entitlement system, which is called

the Standard Accounting and Reporting System [STARS] One Pay,

automatically schedules the payment through a disbursing module

to make the payment when required.

Now I would like to address the GAO draft that discussed duplicate payments for charge card invoices. We have confirmed some

duplicate charge payments were made at DFAS San Diego during

the period covered by the audit. Most of these payments were

caused by Citibank error. Shortly after the duplicates were discovered, Citibank systemically corrected the problem that had contributed to the duplicate payments. All duplicate payments identified

were recovered from Citibank.

Mr. Chairman, that concludes my remarks, and I’ll be happy to

answer any questions.

Mr. HORN. Thank you.

[The prepared statement of Mr. Hinton follows:]

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Mr. HORN. And we now have Patricia Mead, the Acting Deputy

Assistant Commissioner, Office of Acquisition, Federal Supply

Service, General Services Administration.

Ms. MEAD. Good morning, Mr. Chairman and members of the

subcommittee. I am Patricia Mead, Acting Deputy Assistant Commissioner, Office of Acquisition of the Federal Supply Service. I am

pleased to be here on behalf of the General Services Administration

to discuss the governmentwide purchase card program.

GSA has been responsible for contracting for purchase card services since 1989. The most recent purchase card contracts were

awarded in 1998 to five banks as part of the GSA Smart Pay Program. The purchase card was initially adopted as a management

tool. The purchase card replaced the paper-based, time-consuming

purchase order process for small dollar procurements.

Now, as the primary payment and procurement method for purchases under $2,500, the purchase card currently saves the government approximately $1.2 billion annually in administrative costs.

In addition to these administrative savings, the government received refunds from GSA contractor banks in excess of $50 million

last year based on total purchase card charges of $12 billion.

Because the GSA Smart Pay Program was designed as a managerial tool, agencies have numerous tools for oversight of the program. GSA mandated that contractors provide electronic reports to

agency managers. These reports are secure and easy to access via

the Internet. Agencies use these reports to assist in the identification of questionable transactions; for example, split purchases, improper cardholder limits exceeding the cardholder’s contract warrant authority, and fraudulent activity.

While all payment mechanisms are subject to a certain degree of

risk, GSA has built safeguards and systematic controls into the

program designed to minimize risk. For example, when accounts

are set-up, agencies determine what limits to set on each transaction. They are able to set limits by dollar amount per transaction, number of transactions per month, total per month and the

types of businesses at which the purchase card may be used.

In addition, the agency decides to whom a purchase card should

be issued; any limits on the use of the card; approval procedures;

roles and responsibilities; and degree of agency program oversight.

Most agencies establish their operating procedures at the Department level with further refinements in the field locations.

The controls GSA established in the contracts with the banks operate at multiple levels. Each cardholder with account activity in

a given billing cycle receives a statement from his or her bank at

the end of the cycle. This statement is a critical control. The cardholder receives training to understand the importance of promptly

reviewing and approving the accuracy of the statement in accordance with agency policy. Operationally, after the cardholder reviews the statement, it is routed to an approving official or certifying official who approves the statement. This review is intended to

validate all transactions as proper. Training has been established

for all reviewing officials, emphasizing the need to report suspected

card misuse to the agency program coordinator or to the Inspector

General for further action.

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Liability for transactions made by authorized cardholders rests

with the government. If the card is used by an authorized cardholder to make an unauthorized purchase, the Government is liable

for payment, and the agency is responsible for taking appropriate

action against the cardholder.

The contract provides for agency program coordinators to oversee

the program. The role of the agency program coordinator includes

ensuring that cardholders properly use the card and monitor account activity. Because GSA Smart Pay is a critical managerial

tool, agency program coordinators receive numerous reports on

cardholder activity from the banks. To simplify the oversight process, transactions can be segregated by dollar amount, merchant

type and frequency of transactions with specific merchants. Although reports can be helpful in identifying questionable purchases, reviewing and approval of transactions at the local level

continues to be our most effective control mechanism.

GSA recognizes that cardholder training is essential to ensuring

proper use of the card. GSA provides online cardholder training

free to all purchase cardholders. The training discusses how to

make purchases with the card, roles and responsibilities of cardholders and ethical conduct. Many agencies choose to supplement

this training with written, oral or online training of cardholders on

agency procedures.

GSA requires that all contractors participate in an annual training conference for purchase card program coordinators. Subjects of

the annual training conference include electronic reporting tools,

industry best practices, fraud monitoring and card management

controls. The contractors are also required to provide onsite training to agency program coordinators. Written training materials

provided by the contractors include cardholder guides and agency

program coordinator guides. These address authorized uses of the

card and responsibilities of the cardholder and the agency program

coordinator.

As part of a continuing effort to improve the card program, GSA

has recently formed a purchase card roundtable comprised of 25

agencies, which will address issues of concern, including fraud and

program audits. This is an opportunity for agencies to share experiences and learn from each other.

Finally, there is a full electronic record of all transactions under

the GSA Smart Pay Program. This electronic footprint makes fraud

or misuse far easier to detect than any paper-based environment.

A strong training program, state-of-the-art tools and a detailed review structure give Federal agencies all the tools and internal controls necessary to effectively run the purchase card program.

But as stated in the recent GAO Report on Strategies to Manage

Improper Payments, people make internal controls work, and responsibility for good internal controls rests with all managers.

Agencies must use the tools GSA has made available. GSA will

continue to work with our industry partners and our customer

agencies to minimize risk to the Government and ensure proper

use of the cards.

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Mr. Chairman, that concludes my prepared remarks today. I

would be happy to answer any questions you may have. Thank you.

Mr. HORN. Thank you.

[The prepared statement of Ms. Mead follows:]

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Mr. HORN. Our last presenter is Deidra Lee, Director of Defense

Procurement for the Department of Defense. And I gather you do

not have a written statement because you have been out of town,

and you came back for this hearing, so thank you for coming.

Ms. LEE. Good morning, Mr. Chairman. It’s a pleasure to see you

again. We have worked together on some other issues. I do not

have a written statement for the record, as you mentioned, but I

am here to tell you that I would like to assure you that the Department of Defense takes financial responsibility very, very seriously.

We will look into these issues regarding the purchase card and

other financial issues that have been raised. And I certainly look

forward to working with GAO, the services, and this committee to

make sure we have demonstrated to the taxpayer that we are

spending their dollar wisely.

Mr. HORN. We thank you for that, and we’ll now go to questions.

And let’s start with Mr. Kutz.

You have heard this testimony. Do you think they’ll solve the

problem, or is this just talk?

Mr. KUTZ. As I said earlier, I know Captain Valdes mentioned

his enterprise resource system off-the-shelf package that’s being

implemented. I think that will certainly help automate some of the

processes. But what we’re talking about here, Mr. Chairman, is a

people issue, a leadership issue and an accountability issue, and I

think they have clearly the capability to do it. I have read the

backgrounds of these folks. They have done fine service to our

country, and I certainly don’t have any doubt that they can fix the

problems, but it’s going to take attention and, you know, some of

their precious time. And I’m sure they are busy with lots of things

in the positions that they’re in, but they are going to have to spend

probably a little bit more time on this type of issue to make it happen.

Mr. HORN. What do you think we should do, have a 3-month rule

for this group also, and will you be doing a check and repeating

what you have already done, put in your blue cover, and see if the

recommendations are being implemented; or is this——

Mr. KUTZ. We could certainly do that. As we said earlier, we are

looking at this issue beyond these two locations for you in a broader study of DOD purchase card usage. But certainly we would hope

to work with these folks to deal with the recommendations and find

valid ways to implement them. And if you would like us to report

back to you this fall on that, we would be happy to do that.

Mr. HORN. Let’s get it done by November 1. And then in the

meantime, you are going through two more operations, I take it.

Mr. KUTZ. We’ll probably look beyond that. We had not looked at

the Army or the Air Force, So we will probably take a look at Army

and Air Force. I think of the 500 potential frauds that Senator

Grassley mentioned, I believe 322 of them, based on my notes, are

Army-related. So probably Army is the place that we will focus

some case studies on in the immediate or short term.

Mr. HORN. Admiral Lippert, it’s your responsibility, I take it,

now throughout the Defense Department, and you would have the

same policies for the Navy that you will for the Army and the Air

Force?

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Admiral LIPPERT. From NAVSUP’s perspective, we set the policy

for the Navy, and now as Director of the Defense Logistics Agency,

I will be setting the policies within the Defense Logistics Agency,

which is separate from the rest of the Department of Defense.

Mr. HORN. But that is the right button to press if something happened?

Admiral LIPPERT. Yes, sir.

Mr. HORN. So I’m sure you will solve that problem.

Mr. Kutz, in Admiral Lippert’s testimony, he said the Navy rate

of vendor fraud and compromised card activities is less than half

of the commercial benchmark. Given your findings, do you think he

is correct?

Mr. HAST. Mr. Chairman—— Mr. HORN. Mr. Hast is assistant to Mr. Kutz.

Mr. HAST. In listening to the Vice Admiral’s testimony, he stated

that commercial fraud at Citibank is between 6 and 9 percent.

Admiral LIPPERT. That was 0.06 and 0.09 percent.

Mr. HAST. Actually, it’s 0.006 and 0.009. Those are basis points.

And the credit card industry is running fraud at about 6 to 9 basis

points. We did not check to see whether the Navy’s was half of

that, but if they are 0.04, that would be significantly higher than

what the credit card industry is, which is 0.006 to 0.009.

Admiral LIPPERT. The numbers I was quoting were correct. As I

said, it’s 0.06 percent, which is not 6 percent, but 0.06 of 1 percent.

And the numbers that we got are quoted from Citibank.

Mr. HORN. What’s the best thing GAO can give to the Admiral

that is the most important thing for him to look at in the next 3

months?

Mr. KUTZ. Probably reducing the number of purchase cards or

taking a long hard look at why there are this many purchase cards

out there. It does appear for the Navy that there’s 47,000 or 48,000

purchase cards based on what we found in the records. I think

there needs to be a look to see if that is something that is really

controllable, or is that just way too many purchase cards to control.

So I think the first line of defense here would be looking to make

sure that we have the right number of cardholders, because the

more cardholders you have, the harder it’s going to be to train

them, to monitor them, to review their transactions, etc. So, again,

I would recommend that as the first thing to take a look at here.

One other thing, and Mr. Hast can probably expand on this, is

that those compromised accounts that I mentioned are still live out

there, and I think somebody needs to immediately cancel those accounts.

And, Bob, do you want to add to that?

Admiral LIPPERT. Could I address that point, Mr. Chairman? The

accounts he is referring to were identified by us in the Naval

Criminal Investigative Service, and they asked us to keep those accounts open while they are doing an investigation. So why they are

still open is, based upon their suggestions and direction to us, is

that it’s an ongoing investigation.

Mr. HORN. Any comment?

Mr. HAST. I understand that law enforcement would need some

of those accounts to stay open, but when you have 2,600 accounts

open, you have the vulnerability of almost $230 million worth of

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fraud if they got into the wrong hands and someone was able to

exploit that. I think that’s an awful lot of vulnerability to leave sitting out there.

Mr. HORN. Well, I must say it seems to be that they’re getting

very high priced items, computer hand-held this and that, and they

can go out and just simply say, Well, we needed it for whatever we

did, and instead, they are making a few bucks on the side. Is that

what you saw in some of this?

Mr. HAST. Yes. Those were some of the types of cases that we

reviewed.

Mr. HORN. And if you were in the Admiral’s place, what would

you do? Would you just say, look, you are doing it for the Navy or

the Army or the Air Force, we expect you to use that card in that

way and not go out and make yourself a fortune.

Mr. HAST. I am sure those controls are in place and those expectations are in place. I think that working with the credit card industry—and as I said, they are—working with Citibank on the

front-end-loaded software that recognizes abnormal purchases and

recognizes fraud is really the way to go. The credit card industry,

when they found fraud creeping up, put a lot of money into research and development and developed front-end-loaded fraud control, and they have been successful since 1984 until the present in

lowering fraud from close to 30 basis points down to 7 or 8 basis

points.

So I do believe that technology and working with the industry on

the front-end-loaded system are the way to go.

Mr. HORN. When the GIA started looking at this, did they have

any reports from the Inspector General of the Navy or Defense or

Army or Air Force? Where are the Inspectors General on these?

Mr. KUTZ. The DOD Inspector General is doing a Departmentwide study that has not been released. There were several Naval

Audit Service audits done of the Public Works, and I don’t know

if they were requested by the captain or not. It sounds like they

maybe were. One of those was issued in December 1999 and had

some of the issues that we found for 2000. The other one was done

for fiscal 2000. And I believe that the captain was briefed on that,

and we do not know the results. So he may be able to elaborate

on what the Naval Audit Service found with respect to Public

Works.

Mr. HORN. Admiral, when the GAO noted that 2,600 purchase

card accounts were compromised, and many of these accounts had

been hit for items such as jewelry, pizza and other inappropriate

purchases, why hasn’t the Navy canceled those accounts and just

let them work their way back?

Admiral LIPPERT. Mr. Chairman, that is the direction that we

have from the Naval Criminal Investigative Services, to keep those

accounts open while they are doing an ongoing investigation for

fraud. So that’s why we haven’t canceled those immediately.

Mr. HORN. So that service of the Navy is working on this?

Admiral LIPPERT. Yes, sir. Yes, sir.

Mr. HORN. And then I guess, Mr. Hast, why did the Office of

Special Investigations get involved in the compromised card number case? Did you develop information that would help to identify

the source of the compromised numbers or what?

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Mr. HAST. Yes. As part of GAO’s review of the Navy Purchase

Card Program, the Office of Special Investigations was asked to review ongoing Naval Criminal Investigative Service investigations.

One investigation was the one with the 2,600 cards, and we are especially interested in that because that seemed to have the greatest

vulnerability. While NCIS initiated an investigation with a Secret

Service task force, we conducted an investigation in which we developed information to help NCIS identify the source of the 2,600

numbers. Specifically, we are able to identify that the addresses on

the list were shipping addresses, and they were a number of merchants that kept this type of information. NCIS has now identified

that merchant who has verified that the list came from their data

base and that two former employees were targets.

Mr. HORN. Ms. Lee, as the Director of Defense Procurement, tell

me how your office can solve this problem, and do you have ground

rules?

Ms. LEE. Yes, sir, we do. We have Department-wide policy, Department of Defense-wide policy on how the purchase card is to be

used. As was discussed by GAO and others, we set the Department-wide policy, which is then implemented at the various services, at the various units. It certainly does run along these lines,

which is make sure that people that need the card have the card;

that their supervisor is aware of it; review of their purchases; and

overall review of the system. And we will certainly take a look at

where, if anything, we need to strengthen those policies, including

training for both the individuals and the supervisors, to make sure

we are protecting the cards.

Mr. HORN. Had you had any knowledge of what was going on

here in the last couple of months?

Ms. LEE. Yes, sir, I was aware there was a review ongoing at

those particular units. I was also aware that we have various IG

looks periodically, and also that our regular procurement reviews

that the services conduct of their various units, they look at their

purchase card programs.

Mr. HORN. Well, did you call in the various service IGs, the very

service—people on the financial side? How do you operate on behalf

of the Secretary of Defense?

Ms. LEE. Periodically, certainly as these kind of issues arise or

as we find them from our normal review process, we try to put

out—and we discussed that I have an interdepartmental staff

where all the services come together, and we talk about these kinds

of issues and what they’re doing at each service level. I also meet

with the other defense agencies, who do, although not represented

by the major services—we have a good number of people out there

in that area as well. We look at what our overall policies are and

periodically put out updates, reminders, and additional information

to the whole Department for the purchase card program.

Mr. HORN. Do you have other situations like this, and if so, what

are you going to do about it?

Ms. LEE. Mr. Chairman, we certainly are going to make sure

that every time in every instance when there is a purchase card

issue or a perceived issue that we investigate the appropriate circumstances and take the appropriate action. As has been menVerDate 11-MAY-2000 11:19 May 01, 2002 Jkt 000000 PO 00000 Frm 00078 Fmt 6633 Sfmt 6633 C:\DOCS\78830.TXT HGOVREF1 PsN: HGOVREF1
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tioned here, the purchase cards are a valuable tool. We just want

to make sure people are using them correctly.

Mr. KUTZ. Mr. Chairman, last week, just for your information,

GAO testified on purchase card problems at the Department of

Education. And so that is another place that we are aware of that

has some of the same types of issues as we reported on here.

Mr. HORN. Well, I thank you on that.

Captain Valdes, going back to your computer purchases, you told

GAO that the acquisition of flat panel monitors, which cost between $800 and $2,500, that that was justifiable because they use

less energy than the traditional 17-inch monitors, which cost approximately $300. Could you share with the subcommittee the

study showing that the savings in electricity offsets the additional

cost of a flat panel monitor?

Captain VALDES. Yes, Mr. Chairman. The benefits are in power

savings. We have seen numbers upwards of 75 percent, And the recent Consumer Reports indicates such. But it’s not just an electricity savings. That is important in California, as you might imagine. But it’s just not——

Mr. HORN. I advise people to take a candle to California.

Captain VALDES. I’ve got one in my briefcase.

We buy these flat panels for shipboard use. We put a whole network of ultrathin monitors on board USS Coronado, the flagship

for the Third Fleet, and the purpose there was to save space, reduce the heat on board the ship, and to maximize the efficiency of

the space that’s available to the crew members, which already are

very tight quarters.

So there’s a number of benefits to the flat panel display. The

price is coming down significantly, and we feel in many areas with

power savings—it’s also fairly immune—well, it is immune to electromagnetic radiation effects. So if you have a CRT, and you are

a high-powered transmitter, for example, you will see distortion

with a standard CRT. With a flat panel you won’t.

So from a military point of view and from a space, electricity and

weight point of view, it becomes very important for the Marine

Corps. We use vans for radar air traffic control—these are very

small vans, Mr. Chairman. And we use flat panels to save limited

space in those vans.

I’m also prepared to discuss some of the GAO findings as they

relate to fraud if you feel it’s necessary.

Mr. HORN. Do you think the computers should be bought one,

two at a time, or do you think the Navy should buy computers in

bulk like other government agencies in order to get the best prices?

Captain VALDES. That is a valid point, Mr. Chairman. I am going

to look into how we might improve our procurement process with

respect to bulk versus individually. Right now we buy these systems by project because that’s the way the accounting works in the

Navy Working Capital Fund Command. And I have over 1,000 different projects at the Command. So the challenge there is going to

be to align the dollars with the project to make it work. But I’ll

look into that.

Mr. HORN. How many Palm Pilots did you have to give away, as

it seems to be?

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Captain VALDES. Sir, we have used Palm Pilots, just like most

folks in business do, to improve the efficiency and effectiveness of

the worker.

Mr. HORN. And what do you find that does for you?

Mr. VALDES. Well, what it does is it allows people to manage

their time effectively. It allows them to retrieve data fairly quickly.

I use it personally to be able to manage my time during the day.

Mr. HORN. Well, is it everybody that has to have one?

Captain VALDES. No, sir.

Mr. HORN. I see some of that here, too. But it just seems to me

that not everybody has to carry one of these around. There can be

a scheduler that does that.

Captain VALDES. That is a valid point. For all purchases, we require that the supervisor or approving official approve the purchase. And so if an engineer or a scientist feels he needs a Palm

Pilot, or one of our legal or professional staff members, then the supervisor will make that determination, sir.

Mr. HORN. Now you haven’t had that up to now, so is this a new

policy?

Captain VALDES. No, sir. We have always had the policy where

the approving official makes a determination on every purchase.

That’s been a long-standing policy at the Center and in accordance

with Navy and DOD policy.

Mr. HORN. Who has to sign-off on a Palm Pilot?

Captain VALDES. The supervisor and approving official.

Mr. HORN. And what rank would that be?

Captain VALDES. A typical supervisor is an engineer, roughly at

what we call the DP–3 level, DP–4 level. So it is a senior supervisor engineer with typically 10 to 15 years of experience in government service. So that’s really the level of approval that occurs.

Mr. HORN. So this is in the senior Civil Service?

Captain VALDES. Yes, sir. It is individuals who have seniority

within Navy.

Mr. HORN. How about the uniformed?

Captain VALDES. Well, it’s a similar approval. We only have 80

military personnel, so it’s typically a smaller group of people, but

it’s a senior-level person. In the case of if a lieutenant needs a

Palm Pilot, it will be his or her supervisor.

Mr. HORN. What did they do before they had a Palm Pilot?

Captain VALDES. They carried a lot of paper.

Mr. HORN. Are you thinking of a slide rule?

Captain VALDES. Slide rules and paper.

Mr. HORN. Seems to me you have got to make some tough judgments, and these are little toys for a lot of people. And gee, you

know, I am at such and such a level, and look, I’ve got a Palm

Pilot.

Captain VALDES. Mr. Chairman, I’m going to look into it within

my command.

Mr. HORN. Meanwhile the taxpayers are making out their 1040’s

and all.

Could you give us some examples where you feel the organization’s purchase card program was effectively managed, and what

are you going to do about it, real fast?

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Captain VALDES. Yes, sir. Our management is, as I mentioned,

at various different levels. We have management controls across

the command. I mentioned the approval authority. I mentioned the

supervisory controls. My plan is to reduce the number of cardholders. I’ve already reduced it by 18 percent. I intend to approve

training. We currently train every cardholder before the card is

issued, and we have a very good track record in making sure that

every cardholder gets training before the card is issued.

What we need to improve on is refresher training, and I’m going

to work to improve that posture in my command.

Mr. HORN. When was that training implemented?

Captain VALDES. We’ve always had that policy at the command.

Mr. HORN. Well, if you’ve had that policy, and we’ve got fraud,

I don’t know why we can’t get a new system.

Captain VALDES. Yes, sir. When the GAO came to my command,

they looked at all the folks that were carrying cards, and we provided them with assurances and documentation that they’re all

trained. Where we’re weak is on some of the documentation to

prove that the individual is trained. But all of the members of my

command are trained prior to receiving a card.

The other areas are refresher training—it’s required every 2

years. And we will work hard to catch up in that area.

Mr. HORN. For those that seem to be mall happy, do we just take

the scissors and cut the card in half? It would save a lot of taxpayers’ money.

Captain VALDES. Yes, sir. In the cases that GAO has highlighted

and other cases that I’m aware of from our own internal controls,

we revoke the card immediately.

Mr. HORN. Mr. Kutz, is there anything you want to add?

Mr. KUTZ. I am sure what Captain Valdes said about the flat

panel monitors is probably accurate, but I would note that we

found them in the accounting department and with secretaries

also. So I am not sure how that relates to the mission he was talking about.

Captain VALDES. That was the power savings aspect.

Mr. KUTZ. And I did read the same Consumer Report in July,

and I think according to that report, the entire cost of operating a

normal computer for 5 years is about $57. So I would like to see

his study that demonstrates the cost benefit of the electricity savings.

But I do think the Navy needs to look at what they’re buying

with the purchase card. If we are going out and buying one and

two computers at a time, are we paying full retail, and are we getting the full benefit of having the—or are we outweighing the savings that we’ve got from the streamlined acquisition process? The

same thing with Palm Pilots. Whether they are a valid Government

item or not, I am not certain. I know a lot of people that have

them, and I’m not sure of anyone I know in the government or the

private sector that has actually paid for them.

So you need to take a hard look at what is actually being purchased and if the purchase card is the right vehicle for it, because

my understanding is that buying computers in bulk results in substantial savings. And I know at GAO, we buy them 400, 500 at a

time.

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Captain VALDES. Right now, our numbers show that roughly 10

percent of our total computer buys is flat panels. So it is not a pervasive issue throughout the command. It’s roughly 10 percent. But

I’ll look into decreasing that number.

Mr. HORN. Captain Surash, the General Accounting Office noted

that one of your employees effectively stole $2,500 by accepting a

personal reimbursement from an insurance claim for stolen government property. Now, what action has the Navy taken against this

individual for pocketing the reimbursement that belonged to the

government?

Captain SURASH. Mr. Chairman, we were aware of a number of

the issues that GAO had discovered. That one, though, was one we

were not aware of, and I’ve disciplined—administrative discipline is

quite possible. That is currently under review. We just found out

about that a very short time ago, sir.

Mr. HORN. Was it just one case, or do you know about more

cases?

Captain SURASH. That is the only case with those particulars

that I’m aware of, sir.

Mr. HORN. Now, some of your employees were buying at Macy’s,

Nordstrom and Sam Goody. I don’t know who Sam Goody is, so enlighten me.

Captain SURASH. Sir, the Nordstrom buy was actually safety

shoes. We provide our—we’re mainly a blue collar workforce. Our

1,700 folks for the most part are blue collar and not white collar

and out maintaining bases, and a lot of our folks need safety shoes,

and we pay for their safety shoes. In this particular case, we had

one of my female employees purchase a set of safety shoes at Nordstrom for $99.95, sir.

Mr. KUTZ. We were talking about three gift certificates for

$1,500. We are OK with the safety boots. We didn’t question the

safety boots.

Captain SURASH. On that, sir, there is a case the General Accounting Office discovered seven purchases that sparked their interest all from the same individual. Actually, there were a total of

22 transactions that we were already aware of and taking action

on this individual.

The action we took was we referred this case to the Naval Criminal Investigative Service. That—I do not have the final outcome of

that particular investigation.

At my command, sir, we have canceled 54 cards. Some of that

was because we had some employees leave, but it was also because

of misuse. I currently have 30 cards suspended as of the close of

business Friday, and these were because our internal review process now has found things that we don’t like are going on. There are

three individuals that misuse was so serious that essentially I tried

to fire them. In the Civil Service system, I issued a notice of proposed removal. And one individual was, in fact, fired, one resigned,

and one was able to retire before I could complete administrative

action on him, sir.

Mr. HORN. Well, thank you. And that started last Friday? Nothing like a good old congressional hearing for some action.

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Captain SURASH. That is not—those aren’t actions since last Friday. The actions that I’m talking about are within the last year,

sir.

As I mentioned in my testimony, we did a major overhaul at my

command effective in the fall of 2000. And unfortunately, the GAO

review of things at my command was essentially before my major

changes were put in place. I don’t want to sit here to tell you that

I’ve got a perfect running process, but it is much improved from

what GAO saw during their onsite last year.

Mr. HORN. Mr. Hinton, you’ve paid the bills. Do you have some

kind of auditing control that would send up a red flag if a bill came

through with large purchases made at Macy’s or Nordstrom?

Mr. HINTON. The way the system works today, we see the bills,

but not the details behind it, we do not have the details available

to us. We rely on the process that the Department has in place,

that the certifying official, those people that have signed-off on

these purchases, have looked at them and reviewed them.

Mr. HORN. Wouldn’t common sense in your organization say,

wow, there’s a real red light here? DFAS, what good is it? I mean,

if you can’t look at the check and say, good heavens, $2,500 for

this? And, you know, especially when you see Macy’s and Nordstrom.

Mr. HINTON. As I said earlier, we cannot see that as Macy’s. We

receive a certification from the particular service that says—under

the Certifying Officers Act, that responsibility rests with the person

that does the certification. We have attempted to go in and look at

some merchant category codes. We did a study—we have an operation to go in and look at some of the transactions, but they are

normally after the buys and more after the fact as opposed to before the payment is made.

Mr. HORN. Well, when you get that—it’s really a purchase order

of sorts, isn’t it?

Mr. HINTON. Yes, sir.

Mr. HORN. Or are they paying it out-of-their-pocket and then

turning it in? I don’t think so.

It just seems to me, DFAS is—you know, they’ve fouled things

up for the last 10 years that I know about in Columbus where that

place was just a mess. Now, I know you’ve improved that. And they

were knocking off $1 million checks to people. And when they

threw up their hands and said, I didn’t have that contract, I mean,

good heavens.

What can your operation do, and why can’t it do something?

Mr. HINTON. Well, thanks Mr. Chairman, for recognizing some

improvements in Columbus. I would just like to say just like the

people mentioned at the table, DFAS is a part of the Department

and will look at ways we can also improve our processes as well.

Mr. HORN. Well, that’s where I raised the flag of why the Inspectors General didn’t check this sooner. And it seems to me we put

them in there so they can get at things like this. So good old General Accounting Office comes in and does it.

Mr. Kutz, anything you want to add to this?

Mr. KUTZ. With respect to preventing the payments of vendors

like Nordstrom, Macy’s, etc., the key control there is the monthly

certification, which doesn’t take place at DFAS. That takes place

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at the activity. And that’s why it is important that each month, before the bill is paid, things like the Nordstrom, Macy’s, etc., get

flagged so you don’t pay them. Rather than the pay-and-chase type

of situation where you pay it, and then you go back and try find

out later whether you had overpaid for things that weren’t yours

or were improper purchases. So that is the key control to making

sure that you don’t pay improper payments.

Mr. HORN. And, Ms. Mead, does GSA have this problem throughout the Federal Government, or what’s your reading on this?

Ms. MEAD. We’re not aware of it going on unless an agency reports it to us.

Mr. HORN. So you’ve setup a training program?

Ms. MEAD. We have a training program, and we have extensive

electronic reports that enable the agencies to make their controls

work. The data is available and very visible.

Mr. HORN. Well, are you sure that those training exercises are

being done?

Ms. MEAD. I am sure they are being done. We’re not sure that

the things that people are learning are being put into effect.

Mr. HORN. Well, what would you do about it? Can you help

them? I mean, you’re putting training in, and then it seems to me

that every agency has an Inspector General. And I can certainly

ask, is the training being done? Now, is that training by GSA, or

is it by the agency?

Ms. MEAD. GSA makes training available on a Web site, and the

contract requires that the banks provide training to the agencies.

So we do know people who attend the training once a year at the

annual training conference.

Mr. HORN. OK. So, could they find whether training has occurred

or not just by asking the question?

Ms. MEAD. Of each of the Department agencies?

Mr. HORN. Each Department. You’re there because centralization

and the Hoover Commission said, hey, we can save money for the

taxpayers. Now that we find it, nobody seems to care much about

it. And GSA ought to. You’ve got a very fine Administrator there,

and I would think he would get at this.

Ms. MEAD. We see our role as putting the tools in the hands of

the agencies so that they can have effective controls.

Mr. HORN. So you’ve got a model training program; is that it?

Ms. MEAD. We think we have a good training program.

Mr. HORN. Could you file for us at this point in the record just

to see what it’s like? Give it to the staff and we will put that in

the hearing record. Thank you.

Anybody else want to make any points on this that we haven’t

asked? This is your chance.

Mr. KUTZ. Mr. Chairman, there are two more I would make. One

other thing that Senator Grassley pointed out is management of

the issue of credit limits for individual employees on a monthly

basis. That’s something that the Navy probably needs to take a

look at from the standpoint of should everybody have a $20,000 or

$25,000 limit, or are there some that maybe could get by with a

couple thousand dollars a month limit, which, as Mr. Hast said

earlier, reduces your exposure?

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The other idea that was raised, and I’ll let Mr. Hast expand on

it, is the issue of credit checks, which probably does have some

merit, because some of the frauds that we have seen are for people

that had prior credit problems that were then given a government

credit card and then committed frauds.

Mr. HORN. Mr. Hast.

Mr. HAST. I agree. I think it would be prudent that prior to giving someone a government credit card with a very high credit limit

on it, we would check their credit and make sure that they behave

responsibly in their personal life. I think someone who doesn’t behave responsibly in their private life is much more likely not to behave responsibly with the public’s money.

Mr. HORN. Who do you see should do that credit check? Is it the

bank? Is it the Navy or the Army or the Air Force?

Mr. HAST. Whoever is issuing those cards. Whichever command

is actually giving out the cards should set up a mechanism that

they’re able to do credit checks, and they’re very easily done now

by computer. They don’t take a long time, and they are not very

expensive.

Mr. HORN. Well, is it easy for them to get the check? And if so,

do they have to pay a fee for it?

Mr. HAST. They would have to pay a fee for it.

Mr. HORN. What is the fee?

Mr. HAST. I would have to look. I’m not positive.

Mr. HORN. Well, perhaps Captain Surash and Captain Valdes

would know.

Captain SURASH. I’m not familiar with a fee for credit check.

Mr. HORN. Well, maybe that’s because nobody’s ever done it. But

let’s look into that, and we ought to check on people’s credit.

Captain VALDES. Mr. Chairman, I would like to briefly discuss

the abuse issue, with your permission.

The GAO came to audit my command in August of last year.

They spent 10 months. The total period of the audit was 10 months

long. During that time they looked at 50,000 transactions, and they

used an automated tool for that, which we are trying to get from

them, on how to automatically review 50,000 transactions. But

they started with Citibank data, from what I understand. And they

found 78 cases of suspicious vendors—what they term suspicious

vendors; 78 cases out of 50,000. Now we have—of those 50,000

transactions, they resulted in 6,000 vendors, and then they looked

at each vendor to determine whether or not it was a suspicious

case or suspicious transaction.

I had our legal inspector general look at the GAO list, and they

found the following: Of the 78 vendors and transactions that were

suspicious from the GAO’s point of view, the vast majority, 62

cases on the list, were for legitimate government purchases and

transactions. There were six cases of stolen cards or third-party

fraud. There were five cases in the GAO list that we found through

our Inspector General and legal to be cardholder misuse; not fraud,

but misuse. The total value of that misuse was $2,107. Every dollar

is important. I take this seriously. But just to put it in perspective,

it’s $2,107 out of $45 million in transactions. There were four cases

of erroneous use of the card, and there was one possible billing

error.

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In summary, out of 50,000 transactions, a total of $45 million,

GAO data itself revealed five cases of cardholder misuse for a total

of $2,107.

I’m taking action, and I’ve already taken action on many of these

cases, and I am going to pursue it. But I just wanted to make sure

we put it in perspective, because I do not feel we have a problem— a serious abuse and fraud problem. In fact, I’m pretty proud of our

workforce. I’m proud of their honesty and integrity. Over 99.98 percent of our purchases are for legitimate government use.

Thank you, Mr. Chairman.

Mr. HORN. Mr. Kutz, do you want to comment?

Mr. KUTZ. We only looked at supporting documentation for the

two commands now for 400 to 500—or 4/10 to 5/10 of 1 percent of

the transactions. What the captain is talking about are our automated tools where we downloaded information from Citibank into

our system to scan it for obviously abusive-type things, such as the

Coach store, which popped out when we did that. We didn’t look

at 50,000 transactions. We scanned through for obviously fraudulent or improper types of things. So to say that we looked at 50,000

transactions and have no problem with anything but what we

found is a mischaracterization of our findings.

Captain VALDES. Sir, I did not say they looked at every transaction. What I said is that they scanned 50,000 transactions for all

vendors. From that, they were able to pull 6,000 vendors that our

command uses. And from that, they looked at 6,000 vendors and

determined that there were 78 suspicious vendors or transactions.

And that’s the methodology that they used.

Mr. HORN. And that is the one that you are using, too; is that

correct?

Captain VALDES. What I would like to do with that automated

tool—right now, we do all this by hand. It’s a manual process. I

mentioned the Enterprise Resource Planning will help me automate that process, but I am also interested in tools to detect abuse,

and whatever tools I can be provided with, I will use.

Mr. HORN. Is GAO able to transfer that material?

Captain VALDES. They have given us enough information to be

able to find that tool, yes, sir.

Mr. HORN. Any other comments?

Well, Captain, this is the last comment I’ll ask. Your staff justified the purchase of a leather briefcase from the Coach Store as

being more durable and thus less expensive in the long run than

other briefcases. Do you believe the Federal Government should be

buying all of its employees briefcases from the Coach Store?

Captain VALDES. No, sir. That was abuse of a purchase card. I

have written a letter of caution to the employee, and she’s a good

employee, Mr. Chairman. She probably made an honest mistake

and happened to be at Nordstrom and purchased that bag, and I

think she’ll do better next time.

Mr. HORN. I won’t comment on that.

Let’s see. In closing, we will check back 3 months from now, just

as we’re doing with the last group from the Pentagon this last

week. With the advent of the new administration, we anticipate the

type of problem we have been discussing today will be resolved.

Secretary Rumsfeld has been very clear in his desire to make the

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Department of Defense accountable for the money it spends, and I

want to be equally clear in my endorsement of that policy. The examination of government-issued purchase cards has only just

begun.

I want to thank all of our witnesses today. I am sure there are

ways you would have preferred to spend this morning. Let’s hope

there won’t be need for another hearing on these two programs.

I would like to thank the staff who put this hearing together, and

this is on our side and the minority: J. Russell George behind me,

staff director/chief counsel; Bonnie Heald, to my left, your right,

professional staff member and director of communications; Scott

Fagan, assistant to the subcommittee; Chris Barkley, staff assistant; Davidson Hulfish, intern; Samantha Archey, intern; Fred

Ephraim, intern; Christopher Armato, intern.

Minority staff: David McMillan, minority professional staff member; Michele Ash, minority counsel; Jean Gosa, minority clerk; and

Christina Smith, Nancy O’Rourke and Lori Chetakian, our court

reporters.

So we will have a hearing where we can go over these things

about 3 months from now. So we will be looking for that. So with

that, we’re adjourned.

[Whereupon, at 12 noon, the subcommittee was adjourned.]

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