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THE USE AND ABUSE OF GOVERNMENT CREDIT

CARDS AT THE DEPARTMENT OF THE NAVY

HEARING

BEFORE THE

SUBCOMMITTEE ON GOVERNMENT EFFICIENCY,

FINANCIAL MANAGEMENT AND

INTERGOVERNMENTAL RELATIONS

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

OCTOBER 8, 2002

Serial No. 107–236

Printed for the use of the Committee on Government Reform

(

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

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

BOB BARR, Georgia

DAN MILLER, Florida

DOUG OSE, California

RON LEWIS, Kentucky

JO ANN DAVIS, Virginia

TODD RUSSELL PLATTS, Pennsylvania

DAVE WELDON, Florida

CHRIS CANNON, Utah

ADAM H. PUTNAM, Florida

C.L. ‘‘BUTCH’’ OTTER, Idaho

EDWARD L. SCHROCK, Virginia

JOHN J. DUNCAN, JR., Tennessee

JOHN SULLIVAN, Oklahoma

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, Washington,

DC

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

THOMAS H. ALLEN, Maine

JANICE D. SCHAKOWSKY, Illinois

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

——— ———

———

BERNARD SANDERS, Vermont

(Independent)

KEVIN BINGER, Staff Director

DANIEL R. MOLL, Deputy Staff Director

JAMES C. WILSON, Chief Counsel

ROBERT A. BRIGGS, Chief Clerk

PHIL SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON GOVERNMENT EFFICIENCY, FINANCIAL MANAGEMENT AND

INTERGOVERNMENTAL RELATIONS

STEPHEN HORN, California, Chairman

RON LEWIS, Kentucky

DOUG OSE, California

ADAM H. PUTNAM, Florida

JOHN SULLIVAN, Oklahoma

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

BONNIE HEALD, Staff Director

DAN CONSTELLO, Professional Staff Member

CHRIS BARKLEY, Clerk

DAVID MCMILLEN, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on October 8, 2002 ............................................................................ 1

Statement of:

Aviles, Dionel, Assistant Secretary of the navy, Financial Management

and Comptroller ............................................................................................ 97

Grassley, Hon. Charles, a Representative in Congress from the State

of Iowa ........................................................................................................... 5

Kutz, Greg, Director, Financial Management and Assurance, U.S. General Accounting Office; Special Agent John Ryan, Assistant Director,

Office of Special Investigations, U.S. General Accounting Office; and

Rear Admiral Robert Cowley, Deputy for Acquisition and Business

Management, Research Development and Acquisition, Office of the Assistant Secretary of the Navy ...................................................................... 18

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

Aviles, Dionel, Assistant Secretary of the navy, Financial Management

and Comptroller, prepared statement of ..................................................... 100

Grassley, Hon. Charles, a Representative in Congress from the State

of Iowa, prepared statement of .................................................................... 11

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

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

Kutz, Greg, Director, Financial Management and Assurance, U.S. General Accounting Office, prepared statement of ........................................... 21

(1)

THE USE AND ABUSE OF GOVERNMENT

CREDIT CARDS AT THE DEPARTMENT OF

THE NAVY

TUESDAY, OCTOBER 8, 2002

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON GOVERNMENT EFFICIENCY, FINANCIAL

MANAGEMENT AND INTERGOVERNMENTAL RELATIONS,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 2 p.m., in room

2247, Rayburn House Office Building, Hon. Stephen Horn (chairman of the subcommittee) presiding.

Present: Representatives Horn, and Schakowsky.

Staff present: Bonnie Heald, staff director; Henry Wray, senior

counsel; Dan Daly, counsel; Dan Costello, professional staff member; Chris Barkley, clerk; Ursula Wojciechowski and Juliana

French, interns; David McMillen, minority professional staff member; and Jean Gosa, minority clerk.

Mr. HORN. We are going to swear in people, so I’m going to start

on panel two. And panel one is Senator Grassley, and that will

come when he gets here.

So let me just get Greg Kutz, Special Agent John Ryan, Rear Admiral Robert Cowley and Special—let’s see, the Honorable Dionel

Aviles, Assistant Secretary of the Navy for Financial Management,

Comptroller. And come behind the table there, and if you would

please raise your right hand—and any staff that are going to whisper in your ear. And the clerk will also get the ones in the back.

[Witnesses sworn.]

Mr. HORN. I want to get the staff because they will be wonderful

people to put in the hearing.

So a quorum being present, this hearing of the Subcommittee on

Government Efficiency, Financial Management and Intergovernmental Relations will come to order.

Today’s hearing is on the use and misuse of government-issued

credit cards at the Department of the Navy. This hearing is the

fifth in a series of subcommittee hearings to examine the purchase

card and travel card programs at the Department of Defense.

These programs were created to save taxpayers’ money by streamlining the government’s cumbersome procurement and travel procedures. However, over the past year-and-a-half, this subcommittee

has heard so many examples of fraudulent and abusive use of these

programs that it is impossible to know whether the programs have

saved any money at all.

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Up to now, the Department of Defense has failed miserably to

monitor the use of these cards. One employee who went on a

$12,000 shopping spree at the government’s expense was never disciplined. As I remember, it was a Navy person; and then she was

dropped off by the Army. In fact, she was promoted. Others have

used their government-guaranteed credit cards to buy such items

as jewelry, expensive radios, designer briefcases and flowers. Travel cards, which are to be used for only official government travel

expenses, have been used at gentlemen’s clubs, gambling casinos,

cruise ships, and, as you will hear today, even at brothels.

You will also hear the failure to review one cardholder’s statement, allowed that employee to make more than $250,000 in unauthorized and illegal purchases over a 10-month period. That employee spent thousands of dollars on Internet purchases, prepaid

toll tags, remote-controlled helicopters, and even a dog.

Until the subcommittee began this investigation 11⁄2 years ago,

no one seemed to notice these abuses or seemed to care. Records

were missing. Equipment bought with the government credit cards

was nowhere to be found. Monthly bills were rubber stamped for

payment by overworked officials, who were responsible for hundreds of monthly credit card statements in addition to their other

duties.

The subcommittee focused on the Department of Defense because

this one Department accounts for 65 percent of all purchase and

travel cards issued by the entire Federal Government. Since the

subcommittee began this investigation with the able help of the Accounting Office headed by the Comptroller General of the United

States, the Department of Defense has taken several significant

steps to strengthen its control over the purchase card program. The

Department has cut the number of credit cards it issues. It has

also limited the number of accounts each approving officer panels.

In addition, the Department is developing a plan that will provide

a foundation for credit card programs throughout the department.

Meanwhile, the Departments of the Army and Navy have rewritten

their purchase card policies and procedures manuals.

The Department of Defense is also beginning to gain better control over its travel card program. Deadbeat employees who fail to

pay their travel card bills will get their wages garnished. Those

who write bad checks to pay their credit card bills will lose those

cards.

These are all the steps in the right direction, but much more

needs to be done. It will take a sustained effort from the Secretary’s office down to the local commanders and supervisors to

clean up this mess. And that is precisely what Congress expects

and the American taxpayers demand.

That said, I will welcome our witnesses today and I will look forward to discussing strategies for resolving this egregious situation.

I happened to be in the Pentagon this morning and Secretary

Rumsfeld and I had a number of comments on this. He is outraged

by what’s going on; and when the war is over, why, I think he will

really move things along.

So we have Mr. Grassley, who has worked on this with us, and

we’re glad to have him here.

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

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Senator GRASSLEY. Mr. Chairman, did you want me to start?

Mr. HORN. Yes.

STATEMENT OF HON. CHARLES GRASSLEY, A

REPRESENTATIVE IN CONGRESS FROM THE STATE OF IOWA

Senator GRASSLEY. Thank you very much. I am sorry I missed

your opening comments, or at least part of them. This is our fourth

and final hearing on the joint oversight investigation of the Department of Defense credit card abuse. It has obviously been an honor

and privilege for me to conduct oversight with the distinguished

company that you make, Mr. Chairman. From day one, this has

been a team effort and you have been a leader. With you up front

in the driver’s seat, we have accomplished much of our mission. We

have done everything in our power to ensure that the taxpayers’

money is spent wisely; most importantly, according to law. Our success is due to your outstanding leadership, and I thank you from

the bottom of my heart. When you step down at the end of the session, you will be missed, especially by this Senator from Iowa.

Your departure will leave a gaping hole in our frontlines, and it

is going to be very hard to fill it. Courage is in such short supply

in the area of congressional oversight. As I have repeatedly stated,

you have put the glare of the public spotlight on a very dark corner

of the Pentagon. In a huge bureaucracy, like the Pentagon is, daylight is never welcome. In fact, it is feared and hated. But shedding

light on a problem like credit card abuse is the heart and soul of

oversight. Our purpose from the beginning was to determine the

scope of abuse and then figure out how to put a stop to it all. You

have so graciously provided the venue where we could do what had

to be done.

Mr. Chairman, we started this investigation more than 2 years

ago. Yes, it’s true we have come a long ways. We have seen the

promised land, but we’re not yet there. We have much more work

to do before we get to the end of the road. At our first hearing July

30, 2001, we examined a sample of fiscal year 2000 purchase card

transactions collected from two Navy organizations in the San

Diego area. We found zero controls, extensive abuse, and total disregard for accountability. The Navy dismissed our findings as a

few, in their words, ‘‘unique and isolated cases.’’ Not to worry, we

were told. We don’t have a problem, is what the Navy said. And

obviously the implication was one rotten apple doesn’t make the

whole barrel bad.

Then we had our second hearing 8 months later, March 13, this

year. We went back to the same two Navy units for a second look.

We examined a more current sample of fiscal year 2001 transactions. And guess what we found? Results were the same, or

maybe even worse. No effective controls, extensive abuse, and no

accountability. After this go-around, the Navy started singing a different tune. Yes, we have a problem is kind of what they said. And

I hope those words were spoken with sincerity and not just for our

benefit.

Mr. Chairman, our second hearing hit home hard. Department of

Defense and other government agencies started scrambling for

cover. Six days after our second hearing, Secretary Rumsfeld set up

a charge card task force to clean up the mess. And I have thanked

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Secretary Rumsfeld for his quick action on that. He seems like a

Secretary of Defense—as he stated in his September 10, 2001

speech at the Navy War College, that, you know, we’re spending

the taxpayers’ money. I never really heard a Secretary of Defense

much concerned about that. And this Secretary of Defense wants

to get more bang for our dollar.

And particularly when you’re in an economy of winning a war—

I mean, when you’re in an effort to win the war on terrorism, or

any other war, we all have to be pulling together, and that obviously includes the people with credit cards in the Defense Department.

Now, after that charge card task force was set up, then 2 months

later, on May 7 this year, the Office of Management and Budget

announced a crackdown on credit card abusers. OMB threatened to

close 23⁄10 million government credit accounts unless the agencies

involved started controlling employee abuses. Inspectors general

throughout the government launched a series of investigations directed at suspected credit card abuse. Then we had mandatory salary offsets, involuntary paycheck deductions taking effect. Offsets

reduced Bank of America’s annual credit card loss from $20 million

per year down to $4 million a year. So all the people at the Department of Defense violating and misusing credit cards were dragged

then, in a sense, to the teller’s window with cash in hand to pay

long, overdue bills.

Then, Mr. Chairman, we had our third hearing, July 13, this

year. We examined a much larger sample of Army travel and purchase card transactions made in fiscal year 2001 along with some

from this fiscal year 2002. Once again, we got the same results: No

controls, extensive abuse, no accountability.

After our third hearing, I was contacted by my distinguished colleague from West Virginia, Senator Byrd. He had seen the news

coverage of your hearing, Mr. Chairman, and wanted to put a stop

to the abuse. The use of Defense Department travel cards to pay

for lap dancing at Bottoms Up Lounge really got Senator Byrd energized. He suggested that we team up on a credit card amendment

on the Department of Defense appropriation bills. And that was a

golden opportunity, and I grabbed it because of the respect that he

has in the U.S. Senate to get things done.

Our amendment does several things. It puts the lid on Department of Defense credit cards, fiscal year 2003, at 11⁄2 million. It

makes credit card checks mandatory. It requires disciplinary action

for abuse, and prohibits the use of credit cards in places like the

Bottoms Up Lounge, and casinos.

Our amendment was adopted by the Senate July 31. So, Mr.

Chairman, as I said at the beginning, we have come a long ways.

We have accomplished a lot. We have had an impact. We have good

momentum, but the final outcome is obviously, like so many things

in government, still in doubt. We are definitely moving in the right

direction, but we don’t have change itself. Real reform is still somewhere down the road.

We must be certain that our impact is lasting and meaningful,

and I would like to see a permanent solution. But how do we get

from where we are today to a more lasting solution?

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In a moment Mr. Greg Kutz—and I hope I’m pronouncing his

name right—of the General Accounting Office will be presenting

his report on Navy and Air Force travel and purchase card transactions. Mr. Kutz is about to tell us the same story we heard at

hearing No. 1, hearing No. 2, and hearing No. 3.

The same identical pattern of abuse is apparent in this new General Accounting Office data. So the problems, Mr. Chairman, are

systemic. This time we looked at a much bigger sample and, once

again, the results are strikingly similar. Once again, the bottom

line is the same: no controls, extensive abuse, no accountability.

Failure rates for the Navy and Marine Corps on a standardized set

of control tests were near 100 percent in key areas. Admittedly, the

Air Force did slightly better. Overall, the General Accounting Office gave the Air Force a grade of C. The Army, Navy, and Marine

Corps, by comparison, earned a grade of F.

The new data did, however, point up one slight variation in pattern of abuse. The General Accounting Office once again found

thousands of dollars in new travel card charges for lap dancing at

gentlemen’s clubs like the Cheetah Club. However, this time

around there was a new twist. The General Accounting Office

found abuse taken to new depths. The General Accounting Office

discovered thousands of dollars in travel card charges for the procurement of services from prostitutes in Nevada. At least 53 Navy,

Marine, and Air Force personnel got their official travel cards

swiped at such places as Salt Well, Madam Butterfly and the

Chicken Ranch.

The reports delivered today by Mr. Kutz constitute the final

phase of our oversight investigation. That means the General Accounting Office’s work is just about done. For over 2 years now, the

GAO has been hammering away at a hunk of the Department of

Defense iron on the congressional anvil. That is exactly what the

GAO was set up to do, and they did it well.

So it makes me happy to see the General Accounting Office doing

its job. The GAO has been conducting a root canal operation that

has been slow, methodical, very unpleasant, especially for credit

card abusers and those responsible for curbing that abuse. The

General Accounting Office’s persistent probing at bases all around

the country has created a lot of pressure and, of course, apprehension.

The General Accounting Office, as we know, has fangs and has

sunk them deeply into this problem. But all of a sudden, Mr.

Chairman, when you lower your gavel and close this hearing, the

pressure will drop to zero or close to it. So that worries me. What’s

going to happen? So in shifting gears in order to keep moving down

the road toward credit card reform, we must do that: shift gears.

I don’t want to see all of your good work go down the tubes. I don’t

want to see the Department of Defense credit card operation get

back to business as usual. I don’t want all the good work to amount

to nothing more than some simple ripple on the proverbial Pentagon pond. I will do everything possible to keep that from happening, but I am going to need all the help we can get.

Thankfully, Mr. Chairman, I now think I know where the help

may come from, because we have a new team coming on the field

to play. The new team has a new coach, and the new coach has a

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new philosophy on how the game is supposed to be played. The

new coach’s name is Joe Schmitz. He is the newly appointed Inspector General of the Defense Department. He seems to speak

softly, but I think he carries a big stick. Until now the Department

of Defense IG has been AWOL on the credit card abuse, and that’s

changing fast. Under Joe Schmitz, the Inspector General is going

to be proactive. The future looks brighter.

The IG looks like he is really ready to grab the bull by the horns,

and the man who is supposed to get the job done is Army Colonel

Bill Kelley. He works for Mr. Schmitz. Colonel Kelley strikes me

as a person who intends to succeed. He wants accountability as

much as I do. The future of our oversight work may now be in

Colonel Kelley’s hands.

Colonel Kelley is proceeding cautiously one step at a time. He envisions a plan with four phases. Phase one is essentially complete.

His data mining operation is already up and running. Data mining

is nothing more than a computer program that can search through

a pool of transactions and identify and cull out suspicious charges.

These are then subjected to further examination. In the first cut,

Colonel Kelley’s data mining operation checked 12 million purchase

card transactions made between October 2000 and December 2001.

Some 12,257 charges made by 1,571 cardholders got flagged. They

just didn’t smell right. More may be added to that list.

As the data miners drilled deeper and checked out these charges,

62 potential fraud cases popped up onto the radar screen. Criminality ranged from $15 all the way up to 1.7 million. All 62 cases have

been referred to the Department of Defense criminal investigative

units, the Defense Criminal Investigative Unit, the Naval Criminal

Investigative Unit, the Criminal Investigative Division of the

Army, and the Office of Special Investigations, Air Force. Forty of

these cases were already known to authorities. That’s a reality

check. It tells us that the Department of Defense data mining operation works according to the specs.

Colonel Kelley’s data mining also discovered another important

piece of information. While the Department of Defense authorities

were aware of 40 of the 62 suspected fraud cases detected by data

miners, most, if not all, were dead in the water. Nothing was being

done. But no longer. Action is now underway across the board. In

addition, Colonel Kelley’s data miners uncovered hundreds of unauthorized and improper charges. These have been referred to senior

management for possible disciplinary action. Now that’s a description of phase one.

I will go to phase 2. The more current sample of 7 million purchase card transactions will be surveyed covering the period January 2002 to August 2002. The scope of this review will be expanded

to include overseas locations and nonappropriated funds activities.

Data mining will be extended to travel card transactions during

phase 3.

Negotiations are already underway with the Bank of America to

obtain data for some 35 million transactions starting in September

2002 and looking back 16 months. There’s a problem with the Bank

of America, because they want $12,000 for the data package; it

seems to me they could contribute that to the Federal Government.

But I am not involved in those negotiations.

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Colonel Kelley thinks that $12,000 is a ripoff, and he believes

that access to that data is provided for under the travel card contract, and wants the banks to hand it over free of charge.

So then we go to phase 4, which I would say is the automatic

pilot approach of colonel Kelley. This is going to be more challenging. The goal is to set up a real-time, continuous, sustained, data

mining operation covering all credit card transactions. Colonel

Kelley wants to put data mining on auto pilot, and the final solution then must still be worked out in to the future somewhere. So

it’s not entirely on paper at this point and we don’t have a schedule

for it yet, but Colonel Kelley hopes that the Department of Defense

and the General Services Administration can work together to create such long-term solutions.

GSA is very impressed with the Department of Defense data

mining operation and is working hard to create a comparable governmentwide data mining operation. He says that Commerce and

Treasury Departments are ready to jump on the bandwagon, but

that’s just the beginning.

So you have seen some benefit of your investigations just within

the Department of Defense, Mr. Chairman, extending into other departments of government already. Phase 4 is the key, of course, to

effective oversight down the road. What we’re talking about, Mr.

Chairman, is moving from today’s snapshots in time, like those

done by the Department of Defense and the General Accounting Office, to a fully automated data mining operation. Colonel Kelley believes we have the wherewithal to do it right and to do it soon. It’s

technically feasible. We just need to find the money, the people,

and the organization to get the job done. Once the cardholders understand their transactions are under constant surveillance, all the

abuse will come to a screeching halt.

That may be naive for me to say that, but at least ongoing checks

are going to keep it to a very minimum. There are always a few

clever ones out there, of course, who will figure out some way of

gaming the system.

Now, Mr. Chairman, as I have said at other hearings, there’s a

value to hearing government credit cards, and we began these

hearings by emphasizing that fact. So I will end on the same note.

Government credit cards can work in the right kind of environment. The thinking behind credit cards at the Department of Defense is good: reduce paperwork, save money and streamline the

process; make it quicker and easier for the troops to carry out the

mission.

When the Defense Department started down the credit card road,

the whole idea was to adopt the best practices of the commercial

sector. In the private sector, credit cards are a big success. That’s

because the control environment is very, very good. Somebody is always minding the store. Bills are reconciled and paid promptly.

And in corporate America, if you abuse your credit card, you either

lose it or get fired. So there’s a need for trust and accountability.

The control environment in the Pentagon is entirely different.

That very key point has been repeatedly hammered home at each

of our hearings. Every shred of evidence presented by Mr. Kutz and

the General Accounting Office clearly indicates that there are no

effective controls in place today and little or no accountability.

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Since credit cards are low-control financial instruments, credit

cards require a high level of trust and accountability. Trust and accountability have to be the cornerstone of any successful credit card

program. The total absence of credit checks for the Department of

Defense cardholders erodes trust and it breeds mistrust and it invites abuse.

The General Accounting Office data invariably shows that the

worst abusers have had bad credit records stretching way back in

time, records that are ignored by the Pentagon managers. The

standard credit check should be a starting point, just like it is in

the private sector. A clean report means you get a card. A bad report means no card. A satisfactory credit check, then, of course is

a building block for trust and confidence.

Department of Defense’s no-credit-card-check policy is history, I

hope, because it will be dead if the Byrd-Grassley amendment is

adopted in conference and becomes the law of the land. Issuing

credit cards willy-nilly , with no credit checks, no controls, no accountability, and monthly spending limits of up to $100,000 is a

recipe for disaster. It just doesn’t work. It leaves the door wide

open to fraud and abuse. If the Department of Defense wants this

program to succeed, then the Department of Defense needs to get

on the stick and make the controls work. With effective controls

and with some accountability, credit cards will work like they’re

supposed to work.

Mr. Chairman, I am glad to be with you one last time on this

issue. I would like to wish you well in retirement. And I hate to

say it, but this is a bid farewell, at least not for a friendship, but

our working relationship as Members across the Rotunda. So I say

good luck and Godspeed to you. It has been a privilege working

with you, and I thank you for your outstanding leadership.

[The prepared statement of Senator Grassley follows:]

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Mr. HORN. Thank you very much, Senator. You have a lot of

things on your plate in the Senate where you chair a major committee. And you will have to keep on with our friends, and the

General Accounting Office will have to keep on when they get the

attention of the administration on this. When you think of all the

problems we have in America with families that don’t have enough

things to eat on the table.

So we thank you for coming and we will ask our panel two,

which is Greg Kutz, Director of Financial Management and Assurance, U.S. General Accounting Office; Special Agent John Ryan,

Assistant Director, Office of Special Investigations, U.S. General

Accounting Office; and Rear Admiral Robert Cowley, Deputy for

Acquisition and Business Management Research Development and

Acquisition, Office of the Assistant Secretary of the Navy.

We now have the ranking member here, Mrs. Schakowsky, the

gentlewoman from Illinois, who takes a great interest in these

fraudulent type of activities within the Federal Government when

a lot of people in Illinois, just as California, could use that money

for valid things. But right now, we’re talking about people who are

doing invalid and fraudulent things. So glad to have you here.

Ms. SCHAKOWSKY. Thank you, Mr. Chairman. As we conclude the

hearing on this issue in this Congress, I believe we have made considerable progress. These hearings have exposed major flaws in a

relatively new program. These hearings have developed a clear understanding of the causes for those problems and we are in the

process of setting out clear solutions to many of the problems that

program management uncovered in these investigations.

The GAO has been extremely helpful in developing the materials

for these hearings, as well as keeping us well informed as how the

investigations progressed. Our staffs have worked together in a collegial fashion, with the clear intent of carrying out our institutional

obligations. These hearings are a model for how our Founding Fathers envisioned congressional oversight.

I will be and have been seeking, Mr. Chairman, every opportunity to credit you for this and for your great work. It’s my understanding that our staffs are working on a report, and if time permits we’ll be able to bring that report before the full committee tomorrow.

Despite GAO’s indications in today’s testimony that there is some

improvement at the Navy, I find the lack of management oversight

and control of the travel and purchase card programs at the Navy

an embarrassment. From our first hearing to the GAO report before us today, the Navy has abdicated its managerial responsibility.

At our first hearing on purchase cards at the Navy Space Research Center in San Diego, the commander of the Center told the

subcommittee that his organization had effectively managed the

purchase card program for 10 years. He went on to say, ‘‘We firmly

believe the purchases being made are for legitimate government

purchases and ultimately benefit our customers.’’

At that hearing, GAO reported on improper purchases, including

home improvement items from Home Depot, numerous items from

Wal-Mart laptop computers, Palm Pilots, DVD players, an air conditioner, clothing, jewelry, eye glasses, pet supplies, and pizza.

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The GAO reported at the Space Warfare Center, ‘‘The control

breakdowns related to the frauds were so pervasive that the total

amount of these frauds could not be determined.’’

Is this what the Navy calls a well-run program? We were told

later that the commander who made those statements was gone,

only to discover that ‘‘gone’’ meant that he had changed offices. Is

that what the Navy calls accountability?

At our next hearing nearly 9 months later, it was more of the

same. The Navy insisted the program was well run, and GAO

found purchases like Lego robot kits and Palm Pilots. To make

matters worse, many of the items purchased with government purchase cards could not be found when the GAO went to look for

them. The Navy explained that it was Navy policy not to inventory

items that are easily stolen. Is this what the Navy calls responsibility? I couldn’t believe that was true.

And when the representatives of the Defense Department testified before us, I asked if that was DOD policy and was assured it

was not. Despite what DOD said, the Navy still doesn’t believe it

needs to keep track of $500 cameras or $300 Palm Pilots.

Ethical standards at an agency are set at the top. Where is the

Navy command in setting these ethical standards? The problems in

the government travel card program are somewhat different, and

here Congress must shoulder some of the blame. Congress passed

a law that required agencies to issue government travel cards for

all employees traveling on official business. We have learned that

unlike the business environment, which was the model for this legislation, government travel is quite different. Nowhere is this more

apparent than at DOD, where default and delinquency rates are

well above the civilian average, and the Navy is among the worst

in DOD.

As we all know, many of the men and women who put their lives

on the line to defend our freedom and security are quite young.

Many of them are just out of high school, with little experience

with independence and responsibility. We then ship them around

the world, often on commercial airlines, and give them a government credit card to pay the way.

We put guns into the hands of these men and women, and then

give them extensive training on how to use those guns properly.

We put many of our Nation’s most closely guarded secrets of national security into the hands of these men and women, and make

sure they are well aware of the consequences of divulging those secrets. But we put these powerful financial instruments into their

pockets and provide no training in how to manage them, and there

is no consequence for misuse.

This is a management failure. There is one thing that comes up

over and over at DOD, at the Education Department and at HUD.

The management of these agencies was happy to get rid of the employees in the contracting offices and happy to get rid of the complications of providing employees with cash for government travel.

However, management then turned its back on these programs. It

is not surprising that these programs are in trouble.

The Navy should be ashamed of the contents of the GAO testimony before us today. Just listen to a few of the conclusions:

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Critical internal controls were ineffective. Little evidence cardholders screened for required vendors. Little evidence of independent receipt and acceptance of item purchased. Little evidence that

monthly purchase cards were reconciled prior to payment. Major

commands failed to maintain accountability for pilferable items.

Potentially fraudulent, improper, and abusive transaction.

The testimony on travel cards is much the same. Delinquency

rates are high. Write-offs are substantial. Soldiers pay with bad

checks. Travel cards are misused and no one is held accountable.

The list goes on and on.

The Navy is not the only agency with these problems, but there

is no solace in having company in disgrace. The ethical standards

are set at the top by those who come before us to testify, and the

failures reported by the GAO are an embarrassment that these

managers should feel as deeply as those caught in the act. Just as

it is our patriotic duty to do whatever is necessary to protect this

Nation and to guarantee its security, it is also our patriotic duty

to ensure that every taxpayer dollar spent is accounted for.

Those precious dollars represent the hard work of the American

public and must be spent wisely and with responsibility to ensure

that our Armed Forces are capable of carrying out the important

and challenging missions with which they are charged.

Mr. Chairman, I appreciate your indulgence in allowing this

lengthy opening statement. Thank you.

Mr. HORN. We have Mr. Kutz as the Director for Financial Management and Assurance, U.S. General Accounting Office.

STATEMENTS OF GREG KUTZ, DIRECTOR, FINANCIAL MANAGEMENT AND ASSURANCE, U.S. GENERAL ACCOUNTING OFFICE; SPECIAL AGENT JOHN RYAN, ASSISTANT DIRECTOR,

OFFICE OF SPECIAL INVESTIGATIONS, U.S. GENERAL ACCOUNTING OFFICE; AND REAR ADMIRAL ROBERT COWLEY,

DEPUTY FOR ACQUISITION AND BUSINESS MANAGEMENT,

RESEARCH DEVELOPMENT AND ACQUISITION, OFFICE OF

THE ASSISTANT SECRETARY OF THE NAVY

Mr. KUTZ. Mr. Chairman and Representative Schakowsky, it is

a pleasure to be here to discuss our audit of the Navy purchase

card program first. With me is Special Agent John Ryan from our

Office of Special Investigations.

DOD has the largest purchase card program in the Federal Government. As of July 2002, DOD had 212,000 purchase cards, which

is about 55 percent of the Federal Government’s total.

Today I will discuss our fourth in a series of audits of the DOD

purchase card program. My testimony includes the results of our

audit of the Navy, which includes the Marine Corps. I want to

thank the Navy and Marine Corps for their cooperation throughout

this audit.

The bottom line of my testimony is that the control breakdowns

that we identified at the two units in San Diego are indicative of

systemic Navy-wide problems. As a result, the Navy purchase card

program is vulnerable to fraud, waste and abuse.

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

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key internal controls; and third, fraudulent, improper, and abusive

activity.

First, for fiscal year 2001 and into 2002, we found a weak overall

control environment. The Navy has not provided for an adequate

infrastructure to effectively oversee and manage the purchase card

program. Specifically, we found approving officials with unreasonable spans of control, excessive spending limits, inconsistent and

ineffective training, and weak or nonexistent monitoring and auditing.

The Navy has taken significant actions to improve the control environment over the program. Some of the more significant steps include, as shown on the poster board, reducing the number of purchase cards from 59,000 to 25,000, a reduction of nearly 60 percent;

corresponding improvements in the span of control for approving

officials to cardholders; reductions in spending limits at the four

commands that we audited by about $140 million; improvements in

the training program; and actions taken or planned on all 29 of our

recommendations from our November 2001 report and a commitment to take action on the recommendations in our report that’s

being issued today. Continuation of these improvements would further improve management of the program.

Second, for fiscal year 2001, based on statistical sampling, we

found key internal controls failed from 58 to 98 percent of the time.

For example, oftentimes approving officials certified the monthly

bill for payment without examining cardholder supporting documents. For many of the Navy fraud cases identified in our report,

the certification of the monthly bill by the approving official was

nothing more than a rubber stamp. Another area of concern at one

location was missing documentation. Specifically, Camp Lejeune

was unable to identify support for 29 transactions for $50,000.

These unsupported purchases included vendors such as rental car

companies, gift stores, and a stereo store.

We continued to find accountability problems for property purchased with the credit card, including items such as computers and

digital cameras. On a positive note, Camp Lejeune was able to find

all 16 items from our statistical samples.

However, the three Navy case study sites could not locate 35 of

98 property acquisitions from our samples. For example, for one

large computer buy at the Atlantic Fleet, they could not confirm

the location of 187 computers and 87 flat panel monitors.

Third, given the weak controls, it is not surprising that we identified potentially fraudulent, improper, and abusive charges. The

fraud cases in our report relate primarily to the Atlantic Fleet and

Camp Lejeune. We found cardholder fraud, vendor fraud, and

fraudulent usage of compromised purchase card accounts. One

large case at the Atlantic Fleet in Norfolk included cardholders

conspiring with at least seven vendors to submit about $89,000 in

bogus and inflated invoices. Cardholders received bribes and kickbacks because of their positions as Navy buyers.

We also found that the Pacific Fleet provided five government

purchase cards to employees of a private consulting firm. From

March 1999 to November 2001, these five purchase cards were

used for $230,000 of charges for airline tickets, hotels, rental cars,

restaurants, flowers, and golf outings. This consulting company

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used the purchase card to avoid paying State sales taxes and obtained the Federal Government discount on airline tickets and

hotel rooms. Within a week of our inquiry, the Pacific Fleet canceled these cards. We have referred this company to DOD for further investigation.

Another case of potential vendor fraud related to 75 charges for $164,000 that the Navy paid for in advance of receiving the goods

and services. Most of these charges were at or near the $2,500

micropurchase limit. We found that for two charges, no services

were ever provided, while in other cases the actual services provided were far less than the $2,500 paid for by the Navy. For one

$2,500 charge, the vendor’s own records indicated that only $72 of

services were ever provided.

These cases clearly demonstrate that the breakdowns in purchase card controls leave Navy and the DOD vulnerable to vendor

fraud.

In addition to fraudulent purchases, we also identified a significant number of improper and abusive purchases. Examples as

shown on the poster board are food, including $7,000 of charges at

a Norfolk hotel for local NAVSEA employees; clothing, including

slacks shirts and a leather flight jacket; cell phone waste and

abuse, including monthly charges for a cell phone that had been returned to the vendor 13 months earlier; unneeded computers, including 22 purchased in April 2001 that were still in the original

boxes in June 2002; designer leather goods, including totes and a

folio that cost $300 at the Coach Store; 90 Palm Pilots costing

$32,000, 14 of which had not been issued 20 months after the date

of purchase; and Bose equipment, including $300 headsets used to

listen to music and $350 clock radios purchased for officers’ quarters. For these purchases, we generally found no documented justification. Rather, the Navy generally provided us with after-thefact rationalization for the purchases.

We also found that the Navy has not maximized its buying power when using the purchase card. For 122 vendors, each with over $1

million of 2001 business, the Navy had not negotiated reduced

price contracts. We believe that the Navy could better leverage its

buying power and negotiate discounts with these vendors.

In summary, our testimony shows what can happen when financial management is broken and accountability is lost. The Navy

has taken significant positive steps to improve the purchase card

program. I applaud the Navy for their actions to date and their

constructive approach to dealing with these issues.

Secretary Rumsfeld has noted that transforming DOD’s processes

could save 5 percent of DOD’s budget, about $15 to $20 billion annually. One small example of that transformation would be improving the management of the purchase card program. Maximizing the

benefits of this program could save DOD millions of dollars annually. As we have said before, the effectiveness of our military force

is second to none. I would challenge the Navy to achieve that same

level of success with its financial management, including that of

the purchase card program.

Mr. Chairman, that ends my statement. Agent Ryan and I will

be happy to answer questions after the Admiral goes.

[The prepared statement of Mr. Kutz follows:]

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Mr. HORN. This is Rear Admiral Cowley, Deputy for Acquisition

and Business Management, Research Development and Acquisition, Office of the Assistant Secretary of the Navy. Admiral, we are

glad to have you here.

Admiral COWLEY. Mr. Chairman and distinguished members of

the committee, thank you for the opportunity to discuss the Department of the Navy’s purchase card program. I am Rear Admiral

Bob Cowley, Deputy for Acquisition and Business Management for

the Assistant Secretary of the Navy for Research Development and

Acquisition. In this capacity I am responsible for the establishment

of the Department of Navy policies and oversight for the purchase

card program.

I am aware of and I am very concerned about the internal control

and oversight issues identified by the General Accounting Office regarding the Department of the Navy purchase card program.

First let me say that I believe increasing the effectiveness of the

Department of Navy purchase card operations and improving internal controls and oversight, thus preventing waste, fraud and abuse,

are synonymous. Let me assure you that the Department of the

Navy personnel and the purchase card program have been working

diligently to streamline purchasing and improve controls and oversight.

The Department of the Navy continues to aggressively address

the policy training and internal control weaknesses identified by

the General Accounting Office. Over the past 6 months, we have

implemented many improvements. Specifically, we have established

and reinforced and engaged in supporting from the top; made

progress on implementing the DOD task force recommendations;

reinforced and strengthened our written purchase card policies and

procedures; completely revised and distributed training materials;

enforced compliance with internal controls, including span of control and credit limits; and increased the use of technology to detect

misuse and abuse.

The Department recognizes that proper management and compliance of any program must be led from the top. We have engaged

Department leadership in taking a proactive role in oversight, discipline, and setting a supportive command environment. The command environment which sets high expectations for integrity, program compliance, and prudent use of taxpayers’ dollars is absolutely critical to the success of the program. The Navy’s high standards have been clearly communicated to the Department’s command leadership.

The Department of the Navy has established and proactively enforces control for the oversight and management of the program,

from the major command level to the local activity cardholder. We

have set the span of control to be no more than seven cardholders

per one approving official. All Department of the Navy approving

officials are now compliant with this control. Credit limits have

been reduced to be more in line with historic spending patterns,

thus minimizing the potential for fraud and misuse.

Finally, the Department of the Navy has implemented an internal data mining capability using commercial off-the-shelf software.

This software emulates the methodology and criteria employed by

the General Accounting Office to uncover questionable transVerDate 11-MAY-2000 10:12 Sep 04, 2003 Jkt 000000 PO 00000 Frm 00088 Fmt 6633 Sfmt 6633 D:\DOCS\88886.TXT HGOVREF1 PsN: HGOVREF1
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actions. I am confident the program management policies, procedures, and controls that are now in place are addressing the program weaknesses highlighted by the General Accounting Office,

and are comparable to the best practices of the private industry.

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

service members and civilian employees. I commend the General

Accounting Office for identifying opportunities for the Department

of the Navy to improve our program and I am committed to the

continuous improvement of the program.

Mr. Chairman, that concludes my statement and I will be

pleased to answer your questions, sir.

Mr. HORN. I am going to start with you, Admiral, in terms of

some questions. Admiral, how extensive is the fraud and abuse in

the Navy’s purchase card program? Do we know?

Admiral COWLEY. Sir, we have implemented a data mining capability, as I just indicated. And in addition, we also are pursuing another recommendation from the General Accounting Office to engage the Naval Audit Service in a periodic forensic audit program

that will allow us to assess the effectiveness of our management

controls and to allow us to build a program baseline against which

we can identify trends in our performance and begin to get our

arms around the actual extent of the conduct.

Mr. HORN. Well, you don’t sound like you’ve got a lot of sanctions

here. What sort of sanctions have you imposed on people in your

command?

Admiral COWLEY. Individual commanders, commanding officers,

and supervisors are empowered to administer the disciplinary process on a case-by-case basis. Disciplinary and other actions in response to purchase card misconduct is a matter of command and

supervisory discretion. And what the Navy is doing in this area,

specifically the Office of the Judge Advocate General and the Office

of the Assistant Secretary of the Navy for Manpower and Reserve

Affairs, is developing a set of guidelines to be used by commanders,

commanding officers and supervisors. Without dictating which action must be taken, it will provide them with guidelines in dealing

with purchase card misconduct in the future.

Mr. HORN. Admiral, how many captains are below you in the Research Development and Acquisition group?

Admiral COWLEY. How many captains are below me?

Mr. HORN. Yes.

Admiral COWLEY. There are three.

Mr. HORN. What has happened to them now and what kind of

supervisory network do they have for their command?

Admiral COWLEY. None of them are in a command position, sir.

They are in staff positions.

Mr. HORN. So they’re staff. So where’s the first line under you?

Admiral COWLEY. The first line under us is the eschelon 2 command, sir.

Mr. HORN. I couldn’t hear you. What?

Admiral COWLEY. The eschelon 2 command.

Mr. HORN. How many in that command?

Admiral COWLEY. We have Naval Sea Systems Command, the

Naval Air Systems Command, Space and Naval War Systems ComVerDate 11-MAY-2000 10:12 Sep 04, 2003 Jkt 000000 PO 00000 Frm 00089 Fmt 6633 Sfmt 6633 D:\DOCS\88886.TXT HGOVREF1 PsN: HGOVREF1
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mand, the Naval Supplies Systems Command, and the Naval Facilities Command.

Mr. HORN. In your capacity, and you are testifying, what kind of

supervisory actions have they taken in their particular command?

Admiral COWLEY. Beginning over a year ago, there have been a

series of communications to the commanders requiring that they

certify the internal controls in place at their commands, and, in addition, require that they certify the training of the individual participants in each of the watch stations in the purchase card program. They have in fact come in with those certifications.

Mr. HORN. Does anybody check—at what level does somebody

check to see that this isn’t frivolous, and all the rest of the things

we have seen in this organization. What has been told? So what

do you see there?

Admiral COWLEY. The management controls are within the discretion of the commanders. However, as indicated earlier, in line

with assessing the proper management, we are beginning a program of—with the Naval Audit Service for periodic surprise forensic audit to ensure that indeed, these controls are in fact implemented and are in fact operative on an ongoing basis.

Mr. HORN. What enlisted type or officer type do your supervisors

look at, the people in that command? I mean, we have to get down

to the nitty-gritty. Nothing’s going to happen—it isn’t the way I see

it—with the Navy unless they get with it. There are millions of dollars down the drain, and everybody’s coming up here all the time

with the authorizing and the appropriating committee, saying we

need all this money for getting all this research and development

and acquisition. That’s your bailiwick over there. And the question

is, where do you get a little money which you could use and put

it to the research development? So what is the best way to get at

this? You’ve got two captains that are staff. So how many people

report to them?

Admiral COWLEY. It’s a very small number on our staff.

Mr. HORN. Well, I’m sure it might be, but even on that, who

signs off on that—you, the captains, is there somebody else involved?

Admiral COWLEY. We have an APC, an Activity Program Coordinator, who reviews the purchase card program within the Office of

the Assistant Secretary of the Navy for Research Development and

Acquisition.

Mr. HORN. So the Assistant Secretary, then, has the way of looking at the paper and seeing if it’s not very quick? And is that the

way it works with the Assistant Secretary?

Admiral COWLEY. The purchase card programs are set up within

each command activity and are monitored on the basis of each command activity. I know I can address the programs on a number of

the ships. In fact, they are set up—the supply officer, who is usually an O4 or O5 oversees the purchase card program. Each activity

has, depending upon the person populating the command activity,

established programs with what stations.

Mr. HORN. Representative Terry has asked us to ask this question of Navy witnesses, and here it is: Is the Navy aware that it

could use outside companies with expertise in the credit card business to assist it in gaining better control of the credit card proVerDate 11-MAY-2000 10:12 Sep 04, 2003 Jkt 000000 PO 00000 Frm 00090 Fmt 6633 Sfmt 6633 D:\DOCS\88886.TXT HGOVREF1 PsN: HGOVREF1
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grams? Has the Navy ever used such type of organization? Do you

think it’s worthwhile to explore and get something done?

Admiral COWLEY. Yes, sir, we do believe that. In fact we have

two prototypes currently ongoing where we have procured data

mining software, the same software used by the General Accounting Office, to allow us to review suspect purchases. So we are pursuing technology solutions to better enable us to manage the program; yes, sir.

Mr. HORN. Admiral, we continue to hear reports from the General Accounting Office that the Navy loses computers. They aren’t

alone in the executive branch. I think we had 1,000 disappear in

IRS. And that’s the tax collector. And flat panel monitors, digital

cameras, video equipment, the list goes on and on. Why doesn’t the

Navy believe in accounting for expensive items such as these that

can be easily stolen?

Admiral COWLEY. We do believe in accounting for expensive

items that are pilferable or easily convertible to personal use. We

believe records should be kept. In the past our instruction has not

been in alignment with the financial management regulation or

with the DOD regulation. We are bringing our instruction in alignment with those regulations which will require for accounting of

those pilferable items.

Mr. HORN. What is your highest figure that you consider an expensive one and one that ought to be looked at?

Admiral COWLEY. The capital threshold is $5,000. However, my

concern with picking a particular dollar threshold would be the

level at which people would then account for the material. Rather,

we would rather have the individual commanding officers look at

material, regardless of dollar value, that would fall into that

pilferable material category; material which is critical to their mission accomplishment or is otherwise hard for them to repair and

replace.

Mr. HORN. I take it these are computers that are lap computers.

Admiral COWLEY. They may be, sir.

Mr. HORN. Where people can carry it and off it goes?

Admiral COWLEY. That would be included.

Mr. HORN. And the digital cameras and the flat panel monitors

and the videotaping, some people have a great basement where

they must have had all this equipment in there. It’s the taxpayers’.

And the taxpayers say, gee, I would love a little bit like that, but

you can’t.

Mr. KUTZ. Mr. Chairman, if I could add, one of the things that

gets at your previous point is the fact that the management of this

program is very decentralized. What happens with this program

happens far, far outside the Beltway. This is not an inside-the-Beltway program. The spending is going on and the control of property

is far outside. It is at the bases and the commands across the country.

And I believe that the admiral’s position that the Navy believes

this should be accounted for may be true as an organization, but

if you actually go out there to the locations in the field, that view

isn’t necessarily shared across the Navy. And that becomes one of

the challenges the admiral faces in instituting change here, is that

the culture right now is that this is not important and this is not

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something people are evaluated on. This is not something the NAvy

has ever done before.

So that is going to be a challenge for them to actually get accountability for this property, because for years people have not

been doing it.

Mr. HORN. And it’s very tough to break into the culture.

Mr. KUTZ. And it is very difficult with the purchase card, when

you are buying in some cases one or two items versus having it received at a central warehouse, to establish that accountability.

What it requires is the purchaser to make a phone call or call the

property book people and make sure that the property is actually

entered into the property records and bar-coded. So it takes an

extra step you wouldn’t necessarily have when you have centralized

receiving of property.

Mr. HORN. Admiral, how do you plan to ensure that the changes

you’re making will result in a long-term improvement of the purchase card program?

Admiral COWLEY. Well, we have included in our enhanced training, in our improved training requirement for accounting pilferable

material, and we intend to use our forensic audit program to ensure compliance with the management controls that are in place.

Mr. HORN. Is anybody trying to get in the Naval Academy at Annapolis? Is there an ethics question? Is there a fraud bit? It seems

to me if you’re going to have very fine—and you do have very fine

people there, but they need to know that if you’re going to be a

naval officer, you’ve got to be aware of your responsibilities, and

what sanctions, and how you would deal with it. That’s reality.

Now, does anybody know whether Annapolis has any of this, before these young people get out in the Pentagon or the base or

whatever it is? That’s where it starts.

Admiral COWLEY. Yes, sir.

Mr. HORN. And if you miss it, they’ll say, hey, we do this all the

time and that’s baloney. You’ve got to cut through it and you’ve got

to make sure that the money put to it by the taxpayers will still

be around until somebody’s walking off with it. So that’s our worry.

I went to many a hearing like this with Admiral Rickover and

my counterpart, Mr. Chet Hollifield, and he turned Annapolis—the

Navy Academy at Annapolis—around, and so did Admiral Rickover,

and they made a major contact in the feeling there.

And so I just would suggest that you might in what—you’re talking with the Secretary of the Navy, he’s a first-rate person, and he

might want to take a look at this and say what kind of ethics, what

kind of this and that ought to be at least one credit in the Annapolis. Same with West Point. And that would help. Then people

would know, gee, there is something out there besides just leaping

up ladders.

So, Mr. Ryan, you’ve been a very able person, checking all of

these things. You investigated a company that the Navy paid in advance for goods and services that were never provided. I believe the

company is Digital Wizards in San Diego. Isn’t that fraud?

Shouldn’t we be investigating all the Digital Wizard’s business

transactions with the Federal Government?

Mr. RYAN. Mr. Chairman, based on previous testimony we had

given, the full committee asked us to look into Digital Wizard. The

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committee sent a letter to Digital Wizard, asking for their work papers that directly related to the transactions submitted for those

$2,500 transactions. At the time there were 75 transactions that

we needed to look at. We sent agents to San Diego. We looked at

the paperwork as associated to those transactions. And it was troubling to us because we truly believed, based on the paperwork that

we saw, that the government was paying and not receiving what

they should have been getting. Several transactions that were

$2,500, there was no work papers to support that anything was

done. Other transactions for $2,500 had support papers for, as Mr.

Kutz said $75; some for $600; some for a $1,000. So based on that,

Agent Hill and the SPAWAR’s people started to look at those 75

transactions. We truly believe, just based on that 75, that the government was overcharged $34,000.

We also uncovered during the course of the investigation——

Ms. SCHAKOWSKY. Mr. Chairman, if you will yield, is this for

product or for services?

Mr. RYAN. Services. Also during the course of the investigation,

we looked at—we found an additional 120 transactions that we felt

needed to be investigated. We passed those on to SPAWAR. After

consultation with the staffs, we contacted DCAA.

Mr. HORN. DCAA is the Defense Contract Agency.

Mr. RYAN. We contacted them. We’re discussing Digital Wizard

with them with their field people in California. They have other

contracts in excess of $10 million with SPAWAR. We believe that

DCAA should look into all the transactions associated with Digital

Wizard.

Mr. HORN. Mr. Kutz, anything you want to add on this?

Mr. KUTZ. In addition to the vendor possibly taking advantage—

and again it’s potential fraud, I don’t know if we can conclude it’s

fraud at this point, a vendor possibly taking advantage of the situation—the Navy is at fault for not looking to see that they ever received the goods and services. For each one of these transactions

in violation of the Navy’s own policy, they were paid in advance;

in other words, they ran them against the credit card before the

services were provided, and then nobody ever checked to see

whether $2,500 was ever provided in services.

So the Navy is also at fault here, in addition to potentially a vendor being responsible for this whole situation.

Mr. HORN. Mr. Kutz, through your work on this issue, do you

think that the Navy really knows the extent of fraud, waste and

abuse in its purchase card program?

Mr. KUTZ. As the admiral said, with respect to the fraud that’s

out there that they’re aware of, that there are investigations that

are outstanding or cases that have been closed, they don’t know

what they know. In other words, they don’t know what cases are

out there. And he’s talking about trying to put together some sort

of a data base that can accumulate that information for purposes

of learning and understanding what kinds of fraud have been perpetrated over time.

They also don’t know what they don’t know. And that is the more

troubling part here with the kind of control environment that you

have over the purchase card program, is that the amount of unknown fraud that the preventive and detective controls are not

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catching could be significant, could be much more than what they

actually know. So at the end of the day, they don’t know in total,

but the more troubling part is they need to do a better job of knowing what they know, which are the cases outstanding. And I believe

that they agree with us. We have made a recommendation to them

on that, and I am hopeful they will implement that recommendation.

Mr. HORN. You found that the Navy has taken appropriate disciplinary action against the cardholders, but who else in the misuse

of their purchase cards? And did it slop over into other services

or——

Mr. KUTZ. With respect to discipline on the purchase card program, our report says we found no evidence of disciplinary action

against anyone that had improper or abusive charges. We did find

evidence when there was fraud, they did take actions. There were

investigations and prosecutions and people have gone to jail. But

for the improper or abusive charges, there has been no evidence of

disciplinary action. I believe in one case, a cardholder had their

card taken away.

So I would say based on our work, there has not been disciplinary action, and certainly that is something we have recommended

that they take a strong look at. Try to get some guidelines out

there for some suggested possible disciplinary action for different

kinds of offenses that the commands can use so we can see some

sort of consistency of application of discipline.

But again, you have an environment right now where people out

there know they can get away with it and nothing has happened

to date. I would say for the improper charges—we talked about the

Lego toy robots, the clothes, food, etc., I am not aware of—except

for one case of the leather flight jacket—any money being repaid

to the Federal Government.

Mr. HORN. Do you believe the Defense Department’s management of its cellular telephones is an area in which there may be

extensive waste and abuse?

Mr. KUTZ. Yes, that is something we have seen across the services. In my opening statement, I mentioned the case where they

had turned the cell phone in 13 months earlier but were still paying the monthly cell phone charge. We have also seen lots of abuse

of the cell phones where people are improperly using them for personal calls, business.

We saw for SPAWAR—Mr. Ryan and I both looked at—that they

handed out 60 or 70 cell phones to contractors who then were using

them uncontrolled. And again, given that the contractors weren’t

given any instructions as to how to use the cell phones, they were

using them for friends and family.

The control problems are out there. There are some units that

have done a better job of controlling this. But Mr. Chairman, the

issue is nobody is looking at the monthly bill to make sure that the

charges on there are for official government telephone calls. We

have hundreds of dollars of cell phone calls coming in on individual

monthly statements that are very questionable.

Mr. HORN. Mr. Kutz, we have seen delinquency rates ranging

from 10 percent to 18 percent in the Navy and Army travel card

programs. Delinquency at civilian agencies appear to average from

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4 to 8 percent. How do these rates compare to corporate travel programs?

Mr. KUTZ. You are speaking of the travel program?

Mr. HORN. Yes.

Mr. KUTZ. With respect to the travel program, the Navy’s and

the government rates, as far as we can see—and the government

rates are significantly higher than private-sector corporate travel

programs. The banks were unwilling or unable to give us the information on what their actual delinquency rates were, and I guess

that is proprietary information. But based on discussions with one

company who does not want to be disclosed, their delinquency rate

was less than 1 percent.

At the General Accounting Office, our rates fluctuate between

zero and 1 percent. But to be fair to the services, I don’t think that

would be a proper comparison. We have a much different demographic makeup of our people that hold credit cards, as do corporations. And so I believe that the rate that the services have tried

to shoot for is 4 percent, which we have no evidence of whether

that is good or bad, but given what we have at this point, that may

be a reasonable delinquency rate for them.

Mr. HORN. Mr. Ryan, in one of the cases you investigated, fraud

was committed on a government travel account held by a cardholder who had died in 1999. Can you explain how these charges

were made and why the account was not shut down?

Mr. RYAN. Yes. That was a travel card account. What had happened was the cardholder was killed. At the same time of his

death, there was the reissuing of his travel card. What had happened was the travel card went to his address that he had at the

time he had died. However, his family had moved.

It was forwarded back to the bank with a forwarding address, at

which time the bank immediately sent the card to the forwarding

address. Family members got ahold of the card, activated it

through an automated system, and proceeded to use the card. It

was due to the attention of the APC at the time who noticed that

the card was being used in the vicinity of where the cardholder

lived, contacted the commander, the commander advised the APC

that the gentleman had died. But in the meantime the card was

used extensively for fraud.

We investigated it and were able to take pictures from the ATM

machine, provide those pictures and the other evidence to the Secret Service in the region where the fraud took place, and it is my

understanding they are investigating it.

Mr. HORN. Now I yield to the gentlewoman from Illinois and the

ranking member, Ms. Schakowsky.

Ms. SCHAKOWSKY. Thank you, Mr. Chairman.

I heard you say, Admiral Cowley, that you do believe that cameras and Palm Pilots, etc., should be inventoried and tracked, etc.

But it was my understanding, Mr. Kutz, that last week when staff

met, that was one of the GAO recommendations, but I thought that

the Navy was in disagreement. Am I misunderstanding that? In

disagreement with that recommendation? I’m just confused about

where we really stand on that.

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Mr. KUTZ. I believe initially they were in disagreement with that,

but I believe now they would concur, and they are going to adopt

the DOD-wide policy.

Ms. SCHAKOWSKY. So beginning now, going forward? Or has that

been—because that has not been my understanding, that you are

going to look at those transactions.

Admiral COWLEY. Ma’am, my staff has looked at a draft of the

instruction that would bring us in line with the DOD regulation

and the financial management regulation, and I expect that will be

issued within the near term. So we will be in compliance.

Ms. SCHAKOWSKY. How soon is near term, because we keep having these hearings, and we keep hearing the same thing over and

over again?

Admiral COWLEY. Ninety days, ma’am.

Ms. SCHAKOWSKY. Within 90 days that will be the policy, and

then you will begin to track those?

Admiral COWLEY. No, ma’am. We expect to aggressively pursue

this and begin to track it as the training and information is put

out to our individual cardholders.

Ms. SCHAKOWSKY. So what is the 90 days?

Admiral COWLEY. It’s for the instruction to be signed.

Ms. SCHAKOWSKY. But you will begin implementing this plan immediately?

Admiral COWLEY. Yes, ma’am, through our Department of the

Navy Business Office, which is the program manager for the purchase card.

Ms. SCHAKOWSKY. Some of my colleagues have suggested that on

these kinds of purchases, like the Bose clock radios, the designer

leather goods, the $2,200 flat-panel monitors, etc., that officers like

yourself should be held financially responsible for these abuses, or

that we should hold the approving officer financially responsible for

improper purchases. What do you think of those kind of proposals

that somebody is going to pay?

Admiral COWLEY. I believe that is within the discretion of the individual commanders, commanding officers and the supervisors

over those officers.

Ms. SCHAKOWSKY. Has that ever happened?

Admiral COWLEY. I have no knowledge of that, ma’am.

Mr. KUTZ. Representative Schakowsky, there is one case where

there was a leather flight jacket purchased that, after we discussed

it with the individual involved, they repaid it, but as part of our

work, we have only seen it once.

Ms. SCHAKOWSKY. That is the individual cardholder who paid it

back? Is that what you are saying?

Mr. KUTZ. I believe it was the person who authorized the cardholder to do it in that case.

Ms. SCHAKOWSKY. Let me ask you then about disciplinary action

of any sort on the others who have been guilty not so much of

fraud, but these kinds of abusive purchases. How can the Navy

come before us in the face of only one example of an individual

being in any way held accountable? What kind of a message does

that send about how we manage our affairs and spend taxpayer

dollars?

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Admiral COWLEY. Well, ma’am, I can address several cases of

fraud where individuals were in-fact court-martialed.

Ms. SCHAKOWSKY. Not fraud. I am talking about these kinds of

clearly abusive purchases, not fraud. Are we going to just look the

other way and say that is OK?

Admiral COWLEY. No, ma’am. We are not. As Mr. Kutz has indicated, this is a decentralized process, and as I indicated earlier, the

Judge Advocate General and the Office of the Assistant Secretary

of Navy for Manpower Reserve Affairs are, in fact, developing a

schedule, a guideline for people to use in reviewing these cases,

and without dictating actual action, they will provide commanders

with a baseline from which to execute their disciplinary responsibilities.

Ms. SCHAKOWSKY. I don’t know, with all due respect, you know,

I have not been here a long time, but thanks to the chairman, even

in the short period that I have been on this committee, we have

had hearing after hearing, and we hear those kinds of word. Oh,

we’re going to begin to establish procedures that will then result

in blah, blah, blah. And yet no one to date through the whole period—except for one person—of these hearings has ever been held

accountable. And we are in a period of time—I don’t mean to vent

totally on you, Admiral, but here you are. But we have, you know,

$300 billion a year in the Department of Defense, and we are about

to likely add another $50 billion to that. And as the Senator from

my State used to say, $34,000—this is not exact words—here and

there, pretty soon $24,000 here, $24,000 there, you start to get real

money. And it seems that everywhere you look there is $10,000,

$100,000, $1 million. And pretty soon it adds up to real money.

And I am ready for someone to come back and not talk about

process by saying, we have punished this many cases, and we have

seen a reduction in this many cases of abuse, rather than constantly talking about what is going to be done.

When do you think you will be able to come back to us and say,

we have disciplined so many people, and this is how much money

we think we have saved the government as a result?

Admiral COWLEY. Ma’am, I’d like to be able to tell you that now.

I believe the guidelines will be out in the December timeframe.

Ms. SCHAKOWSKY. And so then how soon will we be able to see

results? If we held a hearing, unfortunately not with this chairman

because of his retirement, but another hearing, when do you think

that we will see some real results?

Admiral COWLEY. I think with the enhanced training that we

have out there, I think in the near term. I’m not able to give an

exact date, ma’am.

Ms. SCHAKOWSKY. Well, we will be back. Some of us will be back.

Mr. HORN. What is a near term and a long term in dealing with

Congress? I mean, the reason they sent you here is they are going

to give you another star if you can get through it all. Well, what

are we talking about, 2 months, 3 months?

Admiral COWLEY. Six months, sir.

Mr. HORN. Six months?

Admiral COWLEY. Yes, sir.

Ms. SCHAKOWSKY. I see that there has been a reduction in the

number of people that have credit cards. What has been the criVerDate 11-MAY-2000 10:12 Sep 04, 2003 Jkt 000000 PO 00000 Frm 00097 Fmt 6633 Sfmt 6633 D:\DOCS\88886.TXT HGOVREF1 PsN: HGOVREF1
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teria in reducing the numbers, and are any kind of credit checks

involved in that? Are these more categorical rather than individual?

Admiral COWLEY. The needs of the commander are what informs

the number of purchase cards out there. We have, in fact, as Mr.

Kutz indicated, significantly reduced the number of cards, about 32

percent by my look, coming down from 29,000 to 22,000 cardholders, and that is based on the command’s needs.

Ms. SCHAKOWSKY. Mr. Kutz, is this at all based on increased

management controls, or is this categorical?

Mr. KUTZ. I would say it is a positive step. I believe that they

went back and scrubbed who actually needed to have a card, and

so they have done it based on an instructed, disciplined look, and

it is a very positive step, and it provides them the ability to better

control this program.

Ms. SCHAKOWSKY. But, again, would individuals be disqualified

because of past behavior, or is it more this category of employee no

longer needs a card?

Mr. KUTZ. It is not necessarily category. I think it is more that

you don’t need three people in a unit with a card, or you don’t need

people in a certain group, or you only need 1 card for every 40 people in a group or something; whereas I don’t know anything with

respect to how they have cut cards. We haven’t seen evidence of

cutting cards for the discipline or people misusing.

Ms. SCHAKOWSKY. Or prescreening?

Mr. KUTZ. No, they are not prescreening for that. No.

Ms. SCHAKOWSKY. Let me see if there were other questions that

I have here.

Well, let me ask you Mr. Kutz, when we talk about the disciplinary action, how do you envision that DOD would appropriately

deal with the discipline of abuse? Not fraud, I’m talking about

abuse of the purchase card.

Mr. KUTZ. Well, what we’ve recommended is the guidelines that

the admiral mentioned where they would develop some guidelines

that commands could use to apply to various situations. The issue

is going to be getting the commands to apply those guidelines in

the real world when someone actually does an abuse and actually

identify the abuse in the first place.

One thing that is interesting about the improper and abusive

charges that you mentioned, that for the most part they were authorized. That’s why they’re not fraud, generally. So you have the

cultural issue, too, about what should we and shouldn’t we buy

with taxpayer funds. We shouldn’t necessarily be buying food,

clothing, luggage, Lego toy robots, etc., with taxpayer funds.

Ms. SCHAKOWSKY. I have a letter that I am going to give to you,

and after this I will ask the chairman if he wants to cosign, to

begin an investigation on the issue of vendor fraud in the purchase

card program, because it is clear from the little bit of look that you

have given, that some vendors are submitting charges against purchase card accounts where no goods or services were delivered. And

I think it is really important that we take a look at that to determine the extent of the problem and report back to us. But it sounds

like you have begun to do a little bit of that look. I wonder if you

wanted to comment on what you think we might find.

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Mr. RYAN. I think in the situation we are dealing with purchase

cards, I hear a lot of we’re going to buy this program and we are

going to do this and we’re going to do that. I think that when you

get down to it, where the rubber meets the road, it falls upon the

employee to bring a new employee in who is trusted, can make

good decisions, and is accountable for the actions that they get involved in. We see, a lot of the investigations that we looked at, that

the approving official, the cardholder, they have questionable backgrounds. They have financial problems, bankruptcies, failure to pay

their bills or not making good decisions. These are the agents of

the government. These are the people that we’re giving the card to

to use to make the right decisions.

I think from the conversations I have had with the admiral, I

think some of the ideas are wonderful about bringing in naval

audit. I think it is great to have naval criminal investigators come

in and join in a partnership to help the Navy identify the potential

vendor fraud cases and the contractual fraud cases.

But I also think that it’s important that establishing a good

basis, a good foundation, the foundation starts with the people who

are using the cards and approving these transactions. If we can

start there and make improvements, I think the admiral is headed

in the right direction by bringing naval audit in to do surprise audits on certain units, having the criminal investigators investigate

potential fraud cases, see if there is intent. And I think it will lead

to exactly the vendor fraud situation that you are asking us to look

at, because we’re going to have vendors that are billing two and

three times, four times. You have vendors that are using the credit

card to steal the government’s money, because if the cardholder is

not paying any attention, they are going to pay the bill. We’re getting bills for services, and we’re not going out and checking it.

So I think that what you are asking is what we have started to

do. We have started to see. We have been able to work and do a

lot of data mining and use that information to start to develop

where we need to go.

Ms. SCHAKOWSKY. But one thing about what you just said gets

back a little bit to the question I was asking earlier. Do any of

these protocols, these new procedures that we’re establishing, deal

with checking out the individuals as opposed to saying within a

unit only so many people get a credit card? Are we going to have

a screening process for individuals so that we can prevent the

fraud in the first place or the abuse in the first place?

Admiral COWLEY. Well, ma’am, we don’t have a credentialing

process to speak of. However, in the training material that we have

recently distributed, there is a process whereby there is—the accepting official would nominate cardholders, nominates personnel

to become cardholders. So indeed there is a process. The individual

who best knows that employee or the individual nominated to become a cardholder would have some knowledge of them from their

working with them daily.

Ms. SCHAKOWSKY. What do we know about the nominator, someone who makes the determination on who gets the cards? Look, I’m

not interested in establishing some sort of a ‘‘Big Brother’’ routine

here, but if we’re putting in the hands of individuals the opportunity to use taxpayer dollars to a large extent, I want to know

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that we have checked these people at some level and that there is

some process at least that we look into their ability to exercise that

authority correctly. It doesn’t sound like anything in the new procedures you are setting up go to the individual level. I just want to

suggest, based on what I’m hearing, that’s a really important thing

to do.

I have one more question. Mr. Kutz, you said something, and I

did not quite get it; 58 to 90 percent of the time in something you

checked. What was that?

Mr. KUTZ. That was our statistical samples over the basic controls we tested for screening for vendors, independent receipt and

acceptance, proper approval of the credit card bill by the approving

official. And that is where we found the failure rates of 58 to 98

percent. And that is where the documented evidence was not there

to show that it was done for that percentage of the statistically selected transactions that we looked at. And again, there may be instances where the documentation—the person did it, but did not

document it. But in many cases it was clear, based on discussions,

span of control or whatever, that the people had not done their job

with respect to the purchase card.

So that’s a very high failure rate though, but consistent with

what we reported on the Army 2 months ago.

Ms. SCHAKOWSKY. Right. But this is for services, whether or not

services were rendered for the money that was spent?

Mr. KUTZ. That would be one—yes, because when you are doing

the independent receipt and acceptance or the review of the monthly credit card bill, you would be making sure that goods and service

were provided. So, yes. That would be an example and the fraud

case that we talked about earlier would be an example of where

those controls broke down.

Ms. SCHAKOWSKY. Admiral, when we’re looking at 58 to 98 percent, that is a huge challenge in front of you. What is an acceptable

number do you think? We’re talking about 4 percent, but——

Mr. KUTZ. That was on delinquencies.

Ms. SCHAKOWSKY. On delinquencies. What is an acceptable rate?

Obviously anything lower than that will show progress. Where are

you aiming to get to?

Admiral COWLEY. I don’t believe any number is an acceptable

rate there, ma’am. I think we should continue to try to improve the

process by identifying those vulnerabilities in the process——

Ms. SCHAKOWSKY. In some cases——

Admiral COWLEY [continuing]. And mediate them.

Ms. SCHAKOWSKY. In some cases almost 100 percent bad.

Admiral COWLEY. Yes, ma’am.

Ms. SCHAKOWSKY. We have a lot of work to do. Thank you.

Mr. HORN. The honorable Dionel Aviles, Assistant Secretary of

the Navy, Financial Management and Comptroller, if you could

come in and join the club. We will keep the three witnesses and

add the Assistant Secretary.

The Assistant Secretary was nominated by President George

Bush, June 12, 2001. He has had a rich career here in the executive branch. He served in the National Security Division of the Office of Management and Budget, and he has been a budget examiner for Navy procurement for their search and development proVerDate 11-MAY-2000 10:12 Sep 04, 2003 Jkt 000000 PO 00000 Frm 00100 Fmt 6633 Sfmt 6633 D:\DOCS\88886.TXT HGOVREF1 PsN: HGOVREF1
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grams, and he probably met the admiral somewhere in that. He

was a program engineer in the private sector as well as the public

sector.

So since you’re the one that really knows financial management,

and comptroller is a key position, if you could give us some

thoughts on that and what you’re doing in the Navy to either solve

this thing of purchase cards and travel card and give us your

thinking.

The Assistant Secretary and then——

STATEMENT OF DIONEL AVILES, ASSISTANT SECRETARY OF

THE NAVY, FINANCIAL MANAGEMENT AND COMPTROLLER

Mr. AVILES. Thank you, Mr. Chairman.

Mr. HORN. Do you have to leave?

Mr. AVILES. Happy to defer to my fellow witnesses from GAO.

Mr. Chairman, thank you for the opportunity to discuss the Department of Navy Government Travel Charge Card Program and

our recent efforts made to improve its performance.

I am Dionel Aviles, the Assistant Secretary of the Navy for Financial Management and Comptroller, and in this capacity I am responsible for the Department of Navy policies associated with the

Government Travel Charge Card Program.

As you will likely hear from the GAO witnesses, there have been

several instances of delinquency and misuse in the Navy’s travel

card program. I share your concerns about these problems and

thank you for focusing attention to this most serious issue.

I would like to tell you about some of the corrective actions that

we’re taking to improve the program. As was discussed at a previous hearing, we use two types of travel accounts—centrally and

individually billed—in our travel card programs. Since the individually billed accounts, those held by our sailors, marines and civilians, are the ones that involve the incidents of delinquency and

misuse that we will hear about, I will confine my remarks to those

accounts.

Individually billed accounts are issued by the bank in the name

of the individual who is solely responsible for the timely payment

of all charges made on the account with their personal funds. Cardholders sign an agreement that makes them personally responsible

for payment in full of the amount indicated on the monthly statement. The overwhelming majority of our cardholders adhere to this

agreement by using the travel card properly and paying the

amount they owe promptly.

Regrettably a small percentage of our cardholders do not follow

the rules or in some cases, due to circumstances they may not be

able to control, are unable to pay their balances in a timely fashion. To address the problem, we are taking aggressive action to reduce incidents of misuse and delinquencies.

Examples of these efforts include, No. 1, strengthen controls.

Last April we established a new delinquency goal for all commands

of not more than 4 percent of the total dollars outstanding on our

total of accounts being more than 60 days past the billing date.

Commands failing to meet this goal are required to implement additional remedial actions that include deactivation of card accounts

until just prior to an individual’s travel, conducting spot checks for

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inappropriate card use, and increasing spot checks if a pattern of

possible misuse arises.

Earlier this year I sent out over 7,000 letters to each cardholder

who was 60 days or more delinquent past the billing date, urging

them to pay their bill, alerting them to the consequences of continued delinquency, and providing a point of contact in my office for

questions.

Three, command attention. I have met with the senior leadership—this is at the two- and three-star admiral level—of all the

major commands failing to meet the delinquency goal discussed

above, requiring them to provide specific actions that they are taking to improve performance. These regular performance reviews

will continue for commands that fail to meet the delinquency goal.

No. 4, deactivation upon transfer. I have directed that all commands include travel card managers in their personnel checkout

procedures to ensure accounts do not remain active when cardholders depart an organization. This change should discourage the

use of the card during permanent change of station moves, which

normally take a longer period of time to reimburse than the temporary duty travel for which the card was intended.

Five, misclassification of merchants. I have asked that the DOD

travel card program manager review and change potential erroneous merchant codes. You will hear from the GAO witnesses of

cases where merchants with improperly classified codes are making

it difficult for travel card managers to spot incidents of misuse.

No. 6, debit card option. We are working with the Department

of Treasury to prepare a prefunded or debit travel card pilot program to determine if it may be a viable alternative to the current

charge card program for at least some of our members. Last March

the Under Secretary of Defense Comptroller established a charge

card task force to evaluate the Department’s purchase and travel

card programs. The task force’s preliminary recommendations for

the travel card were released in June, and we are working to implement those recommendations. For example, we have begun a

pilot program to identify potential misuse by monitoring unusual

activity. Accounts identified for potential misuse are immediately

deactivated until travel card managers or the cardholders are contacted to confirm the transactions.

To further automate this process, we have procured the same

software used by the GAO to conduct their data mining efforts. We

are canceling accounts with no activity for the proceeding 12

months. This effort has resulted in the cancelation of over 80,000

card accounts. These are in addition to over 40,000 accounts closed

by previous Navy reviews.

Last May we held a training conference for more than 350 east

coast travel managers, and we have scheduled another one for November for west coast managers, and I have over 300 attendees

signed up. We are also developing tailored computer-based training

for all cardholders, travel card managers, commanding officers, and

supervisors.

Additionally, the task force recommended the use of the split disbursement method of payment. This is where a portion of the travel entitlement goes directly to the bank on behalf of the cardholder.

The Navy strongly supports and encourages the use of split disVerDate 11-MAY-2000 10:12 Sep 04, 2003 Jkt 000000 PO 00000 Frm 00102 Fmt 6633 Sfmt 6633 D:\DOCS\88886.TXT HGOVREF1 PsN: HGOVREF1
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bursement and believes this can go a long way toward resolving delinquency issues.

Some of the problems experienced with the Government Travel

Charge Card Program can be traced to its implementation. At its

inception, many of the people in the Navy and the Marine Corps

thought that every sailor, marine and civilian in the Department

were required to have and use the travel card. Many commanders

thought that we had contracted with the bank to manage this program, and their personal attention was not required. Many cardholders did not understand their ultimate obligation to pay their

charge card bill and the restrictions placed on the use of the card.

The confluence of these misperceptions helped to get us where we

are today.

In closing, only the persistent and pervasive involvement of the

Department of the Navy’s senior leadership and commanders will

improve this program. I can’t promise you that the changes that we

have made to date will be enough to correct all of the problems

that you will hear about today. Indeed with this type of card, we

will always have some level of delinquency and misuse. However,

I do believe that we’re changing perceptions about this program

and beginning to fix some of its problems, and I promise you that

I will not relent in focusing my personal attention on this problem.

Thank you, Mr. Chairman. This concludes my remarks, and I

stand ready to answer any questions that you may have.

[The prepared statement of Mr. Aviles follows:]

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Mr. HORN. I have just one question for you, and then we will

move back to the Comptroller General.

You’re on the task force for the Navy. Were you also on the task

force that the Secretary of Defense set up to deal with this?

Mr. AVILES. Yes, sir. That is Dr. Zakheim, the Under Secretary

of Defense Comptroller, was charged by the Secretary of Defense

to lead that effort, and so the Department of Navy did participate

with the DOD staff in developing those recommendations for the

task force.

Mr. HORN. Do you think since that task force is still going—isn’t

it?

Mr. AVILES. Yes, sir. They have reported out their initial recommendation. I don’t know if it is going to remain a standing task

force or whether the intent would be to stand that down and report

back through our normal reporting chains on changes that we have

made. In my case, for the travel card program that would be

through the Under Secretary of Defense Comptroller’s Office.

Mr. HORN. So you feel that you’re moving along in the Navy.

How about the Army and the rest?

Mr. AVILES. I don’t have specific information with respect to

changes that are being made for the Army and the Air Force, sir.

Mr. HORN. When will that defense one pull together and go after

all the services and then come in with another recommendation?

Mr. AVILES. Sir, many of the task force recommendations were

not specific to any individual services. So, for instance, encouraging

the use of the split disbursement option, that applies to all services, that they are encouraging that; additional—making available

additional training materials, ensuring that is available for all persons involved in the process, not just the program coordinators or

travel card managers, but also commanding officers, individual

cardholders, to ensure that everyone understands their responsibility under the program.

Mr. HORN. Does the Navy have any idea how extensive the fraud

and abuse is in its travel card program?

Mr. AVILES. Mr. Chairman, I don’t know that—I think that gets

into what Mr. Kutz quantified as not knowing the unknowable. In

many cases we rely upon safeguards that are built into the system,

controls that are intended to prevent or preclude misuse of the

card. For instance, merchant category codes that are intended to

allow the travel card to be used only in certain types of activities,

we have evidence where some of those codes have been misrepresented. Whether that was intentional on the part of the vendor or

not, it has the practical effect of defeating that control.

Additionally, we rely heavily on agency program coordinators,

those managers, to look at transactions after the fact to detect instances where the card may have been misused. But again, that is

not a leading indicator, that is a lagging indicator. We depend

heavily on those internal controls, the safeguards built into the

card with respect to limitation requirements for preauthorization

and merchant category codes, as the principal line of defense for

preventing misuse.

Mr. HORN. I’m going to go now for Mr. Kutz of GAO, and then

I will get back do you.

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The General Accounting Office has done a fine job over the

months, so tell us what you know about the travel card situation.

Mr. KUTZ. OK, Mr. Chairman, I will get right to our bottom line,

which is that we did find significant breakdowns in controls over

the Navy’s travel program. These breakdowns contributed to substantial delinquencies and charge-offs and also contributed to

fraudulent and abusive activity.

I’m going to talk about three parts here to our testimony: first,

the delinquencies and charge-offs; second, fraud and abuse; and

third, internal controls.

First, we found substantial delinquencies and charge-offs of Navy

travel accounts. Most Navy travel cardholders properly used their

card and paid the bill on time. However, as you can see on the

posterboard, the Navy, which is the blue line, has a high delinquency rate. Following the blue line you will see that for the eight

quarters ending March 31, 2002, the Navy’s delinquency rate fluctuated between 10 and 18 percent.

Mr. HORN. Is the yellow the Army?

Mr. KUTZ. Yes, the yellow is the Army. And the Navy’s rates

here, as you can see, just about mirrored those of the Army. And

the Army, as we mentioned those at the last hearing, is the highest

in the Federal Government.

Navy’s rates were also, as you can see, 6 percentage points higher than civilian agencies.

In addition, nearly $17 million of Navy accounts have been

charged off. These delinquencies and charge-offs have cost the

Navy millions of dollars in lost rebates, higher fees, and substantial

resources spent pursuing and collecting past due accounts.

This second posterboard shows that we found the Navy’s delinquency and charge-off problems relate to young, low- and midlevel

enlisted military personnel. The high volume of travel and 20 percent delinquency rate for the E4 to E6 rank have had a significant

impact on Navy’s high delinquency rates. The E4 to E6 in the Navy

are petty officers, and for the Marine Corps are corporals to staff

sergeants. Pay levels for these personnel, excluding supplements

such as housing, are $18,000 to $27,000 a year.

As Mr. Aviles noted, DOD, the Navy, and the major commands

within the Navy have taken a number of actions to reduce the delinquencies. For example, the Wage and Salary Offset Program has

resulted in nearly $20 million of collections of past due and

charged-off balances, and about $5 million of that, Mr. Chairman,

relates to the Navy and the Marines.

In addition, DOD has been working, as Mr. Aviles noted, on legislation that would authorize mandatory usage of the split payment

disbursement process. We agree that mandating this process would

significantly reduce the delinquencies at Navy and DOD.

Second, the fraud and abuse that were mention are extensive,

with nearly 14,000 Navy accounts charged off in the last 3 years

and thousands more delinquent. In addition, we estimate that 7 to

26 percent of the transactions at the 3 case study sites that we audited were not for official government travel.

Potential fraud related to individuals who wrote three or more

nonsufficient funds checks to the bank as payment for their travel

card bill. For the 18 months ending March 31, 2002, 5,100 Navy

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personnel wrote NSF or bounced checks, while more than 250 may

have committed bank fraud by writing 3 or more NSF checks to the

Bank of America.

Abuse of the Navy travel card was significant with purchases of

jewelry, adult entertainment, gambling, cruises and tickets to

sporting events. For example, we identified 247 transactions for

over $28,000 at gentlemen’s clubs such as Mr. Magoo’s in Jacksonville, Florida, and Cheetah’s Lounge in Las Vegas. In addition, tickets were purchased to see the Los Angeles Lakers and the New

York Yankees.

Fifty Navy personal also used their government travel cards to

pay for prostitution at two Nevada brothels. One of these brothels

is located near Fallon Naval Air Station. The 79 charges we identified at this brothel showed up on the credit card bill as bar or restaurant charges for James Fine Dining. However, based upon further investigation, these charges were for prostitution at a legalized brothel known as the Salt Wells Villa. Account balances for 11

of these 50 cardholders were later charged off or put into the salary

offset program.

As we talked about today, we found little evidence of disciplinary

action against Navy personnel that misused the travel card. Of the

57 cardholders with the most significant fraud and abuse that we

looked at, 20 of them had evidence of disciplinary action. One cardholder who wrote $20,000 of NSF checks and had their account balance charged off was recently promoted.

Mr. HORN. Were these in the service or in the Civil Service?

Mr. KUTZ. Service. This was a service person.

Mr. HORN. OK. Now, as I’ve got it, you reported that 50 cardholders used their travel card to pay prostitutes, and another 147

made almost $29,000 worth of charges at gentlemen’s clubs. Some

of the charges were for very large dollar amounts. How could this

go undetected, I would ask the Navy? Fallon is a naval air station,

isn’t it?

Mr. AVILES. That is correct, sir.

Mr. HORN. Well, it sounds like they have a great party out there.

But the question comes, if it is the gentlemen’s club, and it is serving a lunch or a dinner, the General Accounting Office wouldn’t

worry about that one, I take it.

Mr. KUTZ. If the travel card was used to buy a drink, that would

not necessarily be an improper use of the card. Drinks and dinner,

that would be an official usage of the card.

Mr. HORN. Well, any others you want to have, Special Agent

Ryan? What have you found?

Mr. RYAN. A lot of things.

Mr. HORN. You look like a happy guy.

Mr. RYAN. Thank you, Mr. Chairman.

Mr. Chairman, what we would say is that there are several

things. When we deal with the gentlemen’s clubs, the gentlemen’s

clubs, in my opinion, are basically deceiving a lot of people when

they conduct transactions by selling cash. They were signed up by

a merchant bank as a merchant to do bar and restaurant charges.

What we are finding in the cases not only with the Navy, but in

the Army, and found them with the Air Force, too, is that they’re

selling cash to these soldiers for 10 percent. They are avoiding—

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the soldier is avoiding being limited on the amount of cash that

they can get because there are limits on his ATM withdrawals.

Then they are submitting these transaction slips, these merchants are submitting these transaction slips to the merchant bank

for $600, $700 even $1,000, saying they provided food and drinks.

That is just not true.

We found with the case with Salt Wells, because of the data mining techniques that we did with the Army, we decided to look at

MCC codes because we felt there was deceptive MCC codes, and in

this case we came across James Fine Dining under a bar merchant

code. But the dollar amounts, as you mentioned, were very, very

high, so we actually presumed that it was for gambling. We started

doing our investigation and contacted the sheriff’s departments in

a lot of the counties that we were looking at and found out that

they had never heard of James Fine Dining, but they were aware

of a place in Fallon called Salt Wells Villas, which was a brothel.

We contacted the merchant bank and found out that James Fine

Dining was another name that was used, and the reason we were

told that they went to that was to provide confidentiality to the

cardholders who were coming in and getting services.

I think in some respects there is a part of deception on the part

of the merchant bank in disguising exactly what that merchant is

doing. Salt Wells doesn’t serve any food, they do serve drinks, but

yet they classify it as James Fine Dining. We found a lot of instances like this, Chicken Ranch, Madam Butterfly’s and other gentlemen’s clubs selling cash, making statements to banks saying

that they are providing food and drinks when in reality they are

selling cash. And as part of the investigations that you asked us

to look at——

Mr. HORN. Now, who has to relate that—which regulatory organ

in Nevada or in the U.S. executive branch, who classifies these

things?

Mr. RYAN. Well, as a criminal investigator for well over 20 years,

I believe a false statement to a financial institution is a crime. I

believe that when a merchant submits a transaction slip, he is

making a false statement if you can prove that he never intended

to provide, in this particular case, food and drinks. I believe that

executive law enforcement should look at that.

Mr. Kutz and I have traveled to South Carolina and have discussed this exact issue with law enforcement personnel in that

State, and I think they are taking it under advisement. I think

that your hearings have uncovered this. And I think it is something that law enforcement should look at.

Mr. HORN. Mr. Secretary, why weren’t these charges detected?

Do we know? In that part? Did you get the report from GAO?

Mr. AVILES. Sir, we definitely got cueing from GAO with respect

to these specific instances. I would note, however, particularly in

the case that Special Agent Ryan has indicated, it was not readily

apparent if this was not a restaurant because of the merchant category coding. I don’t know what expectation we can have for an

agency or an activity program coordinator, that card manager who

may be hundreds of thousands of miles away at a different duty

station, to understand the possibility that this was somehow being

deceptively or erroneously being represented.

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Mr. HORN. Do you think something can be done when you find

these things, and if so, who would you—is it the bank people that

have this classification?

Mr. AVILES. Yes, sir, yes. I have communicated with both the Department—the Defense Finance and Accounting Service and the

travel card program manager for the Department of Defense with

respect to this issue with transactions being processed against

blocked merchant category codes, as you heard Mr. Kutz testify.

There is no legitimate travel-related expense in a jewelry store, yet

we have found instances where transactions have been processed

at jewelry stores on a travel card. That is not supposed to happen.

We’re asking them to take a look at that and help us understand

how that can happen, and clearly in cases where we believe that

the merchant is being either erroneously represented or deceptively

using an erroneous category code to reveal the—to conceal the true

nature of the business.

Mr. KUTZ. Mr. Chairman, with respect to the brothels, it was

particularly difficult for them to catch, because the 49 individuals

that went to the Salt Wells Villa in Fallon were all on official travel. They were not from the local command. They were from out of

town on official travel on official orders. So that makes it particularly difficult to determine that they were misusing the credit card,

because it would have appeared to an APC looking at transactions

as if it were a restaurant.

Mr. AVILES. And please keep in mind many different commands

were represented here, so it is not a single individual noticing a

high degree of activity at a particular merchant.

Mr. HORN. The Navy could be considering activating cards when

the cardholders travel, and then deactivating them when the travel

assignment ends. What is the problem with that, or are you thinking about that?

Mr. AVILES. Sir, we have actually already implemented that for

commands that are executing above our target delinquency metric

of 4 percent. This was—our initial corrective actions were intended

to try to address the high delinquency rates that we were observing, try to focus command attention to that. And as I indicated,

two- and three-star admirals come and see me on a regular basis

if their delinquency rate is high. Those are some spirited conversations with respect to how they intend to get back into alignment.

I would like to point out as an example, the deputy commander

at CINC land fleet publishes delinquency statistics for subordinate

commands in the fleet. This is an incredible motivating tool, I believe, when commanders understand that their seniors are taking

a hard look at this, evaluating their performance, and posting it up

there for the entire world to see. I have high hopes that this would

result in much improved performance on delinquency.

I believe that by tackling delinquency first, it is usually a harbinger for other types of misuse. I don’t want to put words in the GAO

witness’ mouth, but clearly if you have got a high delinquency, you

may have other problems as well, so that is what we have been focused on.

Mr. HORN. So is that the best we can do on the travel cards?

Mr. AVILES. Absolutely not, sir. Absolutely not. Our current statistic for delinquency as we compute it for the month of September

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2002 is that we are running about 81⁄2 percent delinquency metric.

So we’re not where we need to be as a department. What I have

indicated is that we are focusing command attention at the appropriate level. I am actively engaged to an extent that I think is

somewhat disconcerting to some of the commanders in the Navy

that I am paying so close attention to this, and I don’t intend to

let go.

This is nothing to be—excuse me—this program has the promise

to deliver for us incredible flexibility and savings. I think, as I indicated earlier, there was tremendous misperception when it was

rolled out that we were contracting this out and that individual

commands didn’t have to be involved. That is not the case.

Mr. HORN. Mr. Ryan, your General Accounting Office testimony

notes that a second class petty officer reservist, whose civilian job

was with the U.S. Postal Service, made phony charges on his government travel card and effectively floated a loan to his limousine

company. Could you elaborate on this scheme and what has happened?

Mr. RYAN. In this particular case, a gentleman was granted a

travel card. Our investigation determined that he filed and became

owner of a limousine service. The evidence indicates that when he

needed money, he would take his travel card and run it through

his limousine service. The limousine service would then get the

cash. Either he would pay it back, or if he got extra cash during

the month, he would go ahead and do a credit back to his travel

card account. In some cases he was delinquent, and he floated himself 60-day loans.

He was interviewed. He admitted it, that he used the card for

personal use. He used it to go to vacation. He used it for cash. But

the one thing about it, he was not charged off. He paid his bill. But

he did—he was delinquent. He leads up to that 8 percent or 14 percent that we are talking about. He abused and misused his card.

Mr. HORN. Mr. Secretary, I think that putting something up on

the command deck, or something where people can see it, is a good

way to warn people. Do you think the Navy is going far enough in

disciplining cardholders who blatantly misuse their cards for personal items, gentlemen’s clubs and gambling? What is your thinking on that?

Mr. AVILES. Sir, as the admiral had indicated with the purchase

card, when we discover incidents of misuse of either the travel card

or the purchase card, we report that information to the appropriate

chain of command for disciplinary action. It would be inappropriate

for me to try and dictate a disciplinary outcome to satisfy my desires. We rely heavily upon military commanders to make those

judgment calls.

In some cases with respect to travel card delinquency, there may

be perfectly reasonable instances for that. One of the things that

we have found with certain types of our intelligence units, a member will go on travel and, because of the nature of the assignment,

be unable to file a travel claim in a timely fashion. If this happens

on short notice, and he has not made prior arrangements for settlement of that account, he can find himself in a delinquent status.

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The commander needs to be able to have some discretion, some

ability to exercise judgment on a case-by-case basis as to who constitutes an abuse versus an innocent mistake.

Mr. HORN. Now, you are part of the people that are over in the

Pentagon who have been cleared by the U.S. Senate? To what degree does the service command know about all of this? In other

words, the Chief of Naval Operations, how much does he know?

Mr. AVILES. Sir, the Chief of Naval Operations and Commandant

of the Marine Corps, we keep their staffs apprised of information

within these programs. We have a component, as their individual

commands are executing this, and I am the one that is meeting

with these—we call them echelon two commands, those major commands—they come in to report their delinquency status, those

staffs are apprised of our activities. Additionally, in cases of apparent misuse or severe delinquency on a card, those chains of commands are informed of our findings for appropriate action.

Mr. HORN. And you think the other services operate about the

same way?

Mr. AVILES. I have no knowledge of how the Army and the Air

Force operate, sir. I presume it is a similar situation.

Mr. HORN. I just wondered if the service line, all they have to

do is send to a CINC, and they could handle a lot of these questions. And that would be the best way, if people are having a career in the Navy and they have to know that these fraud and waste

things are important.

Mr. AVILES. Sir, I think it is consistent with any service culture

that the commander sets the tone. As the admiral indicated in his

statement, it is the tone from the top. If you understand that your

superior looks at this and evaluates your performance on the basis

of it, performance will generally improve.

Mr. HORN. Well, this has been an interesting afternoon, and we

will probably have a hearing 3 or 4 months from now. So we would

like to know, GAO, if we can get the next hearing on that and see

where you might have looked again, or go to another part of another service or whatever. So I would hope that you would keep the

heat on until we get it turned over. And maybe the civilian side

also ought to be looked at so we can get things moving. So thank

you.

I want to thank the people that have been helpful in putting this

hearing together. Bonnie Heald is the staff director of the subcommittee; Henry Wray, the senior counsel; Dan Daly, the counsel—put your hand up. There he is. And Dan Costello, who is right

next to me, professional staff that did most of the work on the

questions; and Chris Barkley, got a lot to do after this one, and

that is majority clerk. There he is. And Ursula Wojciechowski, intern. There she is. And Juliana French, another intern. They are

down working below.

Minority staff, David McMillen, professional staff. He has been

there for a while. And Jean Gosa is the minority clerk. And there

you are.

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The court reporters have been Nancy O’Rourke and Joe Strickland—it took a lot of people to keep after all of you. So thank you

very much, and we now adjourn.

[Whereupon, at 4:05 p.m., the subcommittee was adjourned.]

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