Crop Insurance: Actions Needed to Reduce Program's Vulnerability to Fraud, Waste, and Abuse
Published: 2005-09-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Federal crop insurance protects producers against losses from natural disasters. In 2004, the crop insurance program provided $47 billion in coverage, at a cost of $3.6 billion, including an estimated $160 million in losses from fraud and abuse. The U.S. Department of Agriculture's (USDA) Risk Management Agency (RMA) administers this program with private insurers. The Agricultural Risk Protection Act of 2000 (ARPA) provided new tools to monitor and control abuses, such as having USDA's Farm Service Agency (FSA) conduct field inspections. GAO assessed, among other things, the (1) effectiveness of USDA's processes to address program fraud and abuse and (2) extent to which the program's design makes it vulnerable to abuse.
section_title: What GAO Found
paragraphs: While RMA employs a range of processes to help prevent and detect fraud, waste, and abuse and has reported more than $300 million in savings over the past 4 years in the crop insurance program, GAO found that RMA does not effectively use all the tools it has available. Inspections during the growing season are not being used to maximum effect. Between 2001 and 2004, FSA conducted only 64 percent of the inspections RMA had requested. Without inspections, producers may falsely claim crop losses. RMA's data analysis of the largest farming operations is incomplete. According to GAO's analysis, in 2003, about 21,000 of the largest farming operations in the program did not report individuals or entities with an ownership interest in these operations. As a result, USDA should be able to recover up to $74 million in claims payments. FSA did not give RMA access to the data needed to identify such individuals or entities. RMA is not effectively overseeing insurance companies' quality assurance programs. GAO's review of 120 cases showed that companies completed only 75 percent of the required reviews and those that were conducted were largely paper exercises. RMA has infrequently used its new sanction authority to address program abuses. RMA has not issued regulations to implement its new sanction authority under ARPA. RMA imposed only 114 sanctions from 2001 through 2004. Annually, RMA identifies about 3,000 questionable claims, not all of which are necessarily sanctionable. Eight recent crop insurance fraud cases, investigated by USDA's Office of Inspector General and resulting in criminal prosecutions between June 2003 and April 2005, reflect these issues. Totaling $3 million in insurance claims, these cases show how producers, sometimes in collusion with insurance agents and others, falsely claim prevented planting, weather damage, and low production. In some cases, producers hid or moved production from one field to another. Several of these cases also demonstrate the importance of having FSA and RMA work together to identify and share information on questionable farming practices/activities. RMA's regulations, as well as statutory requirements, create program design problems that hinder RMA officials' efforts to reduce program abuse. For example, RMA's regulations allow producers to insure fields individually rather than all fields combined. This option enables producers to "switch" reporting of yield among fields to either make false claims or build up a higher yield history on a field to increase its eligibility for higher insurance guarantees. High premium subsidies, established by statute, may also limit RMA's ability to control program abuse because the subsidies shield producers from the full effect of paying higher premiums associated with frequent or larger claims.

section_title: Letter
paragraphs: Federal crop insurance is part of the overall safety net of programs for  American farmers. It provides protection for participating farmers against  the financial losses caused by droughts, floods, or other natural disasters.  Farmers’ participation is voluntary, but the federal government encourages  it by subsidizing the insurance premiums. In 2004, the crop insurance  program provided $47 billion in insurance coverage for over 200 million  acres of farmland at a cost of $3.6 billion to the federal government,  including an estimated $160 million resulting from fraud, waste, and abuse.
The U.S. Department of Agriculture’s (USDA) Risk Management Agency  (RMA), which supervises Federal Crop Insurance Corporation (FCIC)  operations, has overall responsibility for administering the crop insurance  program. RMA oversees the development of new insurance products and  the expansion of existing insurance products to new areas to help farmers  reduce the chance of financial loss. RMA is also responsible for ensuring  that the program is carried out efficiently and effectively and for protecting  against fraud, waste, and abuse. In this regard, RMA uses a broad range of  tools, including compliance reviews, data mining, and on-site field  inspections. RMA administers the program in partnership with private  insurance companies that share a percentage of the risk of loss or  opportunity for gain associated with each insurance policy written. RMA  acts as a reinsurer—reinsurance is sometimes referred to as insurance for  insurance companies—for a portion of all policies the federal crop  insurance program covers. In addition, RMA pays companies a percentage  of the premium on policies sold to cover the administrative costs of selling  and servicing these policies. In turn, insurance companies use this money  to pay commissions to their agents who sell the policies and fees to  adjusters when claims are filed.
Insurance companies are responsible for reporting to RMA on policy  activity, such as applications for insurance, reports of acres planted, and  notices of loss. Insurance companies, as part of their contractual  agreement with RMA, also have an important role to play in ensuring that  the policies they issue are administered fairly and accurately. For example,  insurance companies must conduct quality assurance reviews, such as field  inspections for policies with a claim equal to or greater than $100,000, to  examine whether the claims they have paid are in compliance with policy  provisions. RMA conducts a regular nationwide review of insurance  companies’ compliance with the crop insurance program’s procedures to  ensure that companies’ quality assurance programs are in place.
RMA receives policy information from the insurance companies through its  computerized acceptance system. Using this system, RMA checks all  policies for completeness and accuracy. In 2004, RMA provided crop  insurance on 1.2 million policies and paid claims on 330,000 of these  policies through 17 insurance companies. The Federal Crop Insurance Act,  as amended, requires RMA to set crop insurance premiums at actuarially  sufficient rates, defined as a long-run loss ratio target of no more than  1.075. A loss ratio is calculated as claims paid divided by total premiums  collected. A loss ratio greater than 1.00 indicates that the program paid  more in claims than was collected in premiums.
Generally, producers can purchase crop insurance to insure up to 85  percent of their normal harvest (yield). This yield is calculated by looking  at a producer’s actual production history. To obtain insurance and receive  claims payments, producers must comply with the crop insurance  program’s provisions. Specifically, they must accurately report to their  insurance company the number of acres planted; meet deadlines specified  in the policy (e.g., for planting and harvesting crops); pay premiums when  due (generally at the end of the growing season); and report any crop  losses immediately. Producers are also obligated to exercise good farming  practices to minimize the potential for losses and to report their Social  Security numbers and the Social Security numbers of all persons with an  ownership interest of 10 percent or more in the farming operation (e.g., a  corporation) holding the policy.
Over the years, concerns have arisen that some producers may have  abused the crop insurance program by allowing crops to fail through  neglect or deliberate actions in order to collect insurance and that some  insurance companies have not exercised due diligence in investigating  losses and paying claims.
In part to improve compliance with, and the integrity of, the crop insurance  program, Congress enacted the Agricultural Risk Protection Act of 2000  (known as ARPA). This act provided RMA and the USDA’s Farm Service  Agency (FSA) with new tools for monitoring and controlling program  abuses. (FSA, which has an extensive field office structure, is generally  responsible for helping producers enroll in agricultural support programs,  overseeing these programs, and issuing program payments.)  Specifically,  ARPA required the Secretary of Agriculture to develop and implement a  coordinated plan for FSA to assist RMA in the ongoing monitoring of the  crop insurance program, including conducting fact-finding into allegations  of program fraud, waste, or abuse; reporting the results of any such fact- finding to RMA; and assisting RMA and approved insurance companies in  auditing a statistically appropriate number of claims made under any  policy. Furthermore, ARPA required the Secretary of Agriculture to use  information technologies, such as data mining and data warehousing, to  administer and enforce the crop insurance program. Data mining is the  analysis of data to establish relationships and identify patterns, while data  warehousing is storing gathered data so that it can be easily analyzed,  extracted, synthesized or otherwise used. RMA conducts data mining to  target compliance reviews and investigations on suspect claims. Under  USDA guidance, developed pursuant to a requirement in ARPA, RMA is to  annually provide FSA and the insurance providers with a list of producers  exhibiting high loss ratios, high frequency and severity of losses, or who are  suspected of poor farming practices. RMA provides this list—called the  spot-check list—every April to the appropriate FSA state offices for  distribution to FSA county offices. The FSA county office is to conduct  reviews on the larger of the first 10 producers or the top 5 percent of the  producers on the list. Staff in FSA county offices review these cases for  potential fraud, waste, and abuse by inspecting fields insured by the listed  producers. They then refer the results of these inspections to RMA, which  provides the results to the insurance companies holding the policies for the  producers for further review or investigation, if appropriate. Finally, ARPA  gave RMA additional authority to impose sanctions for program abuses.
In addition, under the Improper Payments Information Act of 2002, RMA  has to provide an estimate of error rates associated with program payments  and report on action to reduce improper payments. RMA estimates  improper payments to be about 5 percent of the claims paid annually. RMA  acknowledges that this estimate is not based on a tested methodology and  revised its sampling methodology, beginning in 2004, to provide a more  accurate estimate. The Office of Management and Budget (OMB) has  accepted RMA’s proposed sampling methodology, which is to include a 3- year review cycle of insurance companies, to determine the federal crop  insurance program’s error rate, and satisfy the statutory requirements of  the Improper Payments Information Act. RMA’s 3-year review cycle will  assess insurance companies’ adherence to their contract with RMA, quality  control guidelines, and RMA-approved policies and procedures.
You asked us to examine RMA’s procedures for assuring integrity in the  crop insurance program. As agreed with your office, we (1) assessed the  effectiveness of USDA’s procedures and processes to prevent and detect  fraud, waste, and abuse in selling and servicing crop insurance policies; (2)  determined the extent to which program design issues may make the  program more vulnerable to fraud, waste, and abuse; and (3) determined  the effectiveness of USDA’s procedures to assure program integrity in  developing new crop insurance products. Also, as you requested, we  provided examples of recent crop insurance fraud prosecutions to show  the types of actions that producers, agents, and loss adjusters have used to  circumvent RMA’s procedures.
To address these issues, we reviewed relevant statutory provisions and  RMA’s regulations and guidelines for managing the crop insurance program  and spoke with RMA and FSA officials in headquarters and field offices. We  also reviewed relevant reports, including RMA’s most recent annual report  to Congress in 2002. To assess the effectiveness of USDA’s procedures and  processes to prevent and detect fraud, waste, and abuse in selling and  servicing crop insurance policies, we examined a nonrandom sample of 120  insurance claims from the 2,794 claims that RMA identified as having  notable policy irregularities and warranting a field inspection in both 2003  and 2004. Of these 120 claims, 100 were the largest claims paid, and 20 were  selected to ensure that all data mining selection criteria were represented,  including producers who frequently receive payments because they claim  that adverse weather conditions prevented them from planting their crop,  as well as policy irregularities that suggested collusion among agents,  adjusters, and producers.
We also conducted two surveys. In the first, we surveyed all 829 FSA  county officials responsible for conducting field inspections in 2003 to  assess the effectiveness of USDA’s procedures and processes to prevent  and detect fraud, waste, and abuse in selling and servicing crop insurance  policies. In the second, we surveyed a stratified, random sample of 935 of  the approximately 13,000 crop insurance sales agents to solicit their views  on control weaknesses and suggestions for improving oversight of the crop  insurance program. This sample methodology allows us to project the  survey results to all crop insurance agents. We received responses from 92  percent of the 829 FSA officials in the first survey and 76 percent of the 935  insurance agents in the second survey. To determine the extent to which  program design issues may contribute to fraud, waste, and abuse in the  crop insurance program, we conducted a qualitative assessment of  economic studies. We also discussed these issues with USDA officials in  headquarters and field offices. To determine the effectiveness of RMA’s  procedures for assuring program integrity in developing and expanding  crop insurance products, we evaluated the agency’s policies, procedures,  and other pertinent documents to identify the controls in place to assure  program integrity. We selected a nonrandom sample of 16 developmental  and expansion programs between 1998 and 2002 to determine whether they  complied with RMA’s policies and procedures; the sample included policies  with low and high claims experience to determine if loss experience was  affected by compliance with procedures.
To show the types of actions that producers, agents, and loss adjusters  have used to circumvent RMA’s procedures, our Office of Forensic Audits  and Special Investigations (FSI) reviewed eight cases of crop insurance  fraud prosecuted between June 2003 and April 2005. To research these  cases, it reviewed USDA’s Inspector General’s case files, spoke with  representatives from the U.S. Department of Justice, and reviewed relevant  reports, court papers, and other documentation. FSI conducted its  investigation from February through June 2005 in accordance with quality  standards for investigations as set forth by the President’s Council on  Integrity and Efficiency.
We conducted our review from July 2004 through August 2005, according to  generally accepted government auditing standards, which included an  assessment of data reliability and internal controls. Appendix I contains  more detailed information on our scope and methodology.
subsections: section_title: Background
paragraphs: Farming is an inherently risky enterprise. In conducting their operations,  producers are exposed to both production and price risks. Crop insurance  is one method producers can use to protect themselves against these risks.  Over the years, the federal government has played an active role in helping  to mitigate the effects of these risks on farm income by promoting the use  of crop insurance. Appendix II contains information on the crop insurance  program from 1981 to 2004.
Under the program, participating producers are assigned (1) a “normal”  crop yield based on their actual production history and (2) a price for their  commodity based on estimated market conditions. Producers can then  select a percentage of their normal yield to be insured and a percentage of  the price they wish to receive when crop losses exceed the selected loss  threshold. The following example illustrates how a claim payment is  determined. A producer whose normal crop production averages 100  bushels of corn per acre and who chooses to buy insurance at the 75  percent coverage level will be guaranteed 75 percent of 100 bushels, or 75  bushels per acre. Assuming that the producer had chosen the maximum  price coverage and that RMA had estimated the market price for corn at $2  per bushel, the producer would have total coverage of $150 per acre.  Should something like drought cut the producer’s actual harvest to 25  bushels, the producer will be paid for the loss of 50 bushels per acre—the  difference between the insured production level of 75 bushels and the  actual production of 25 bushels. The insurance would pay the producer’s  claim at $2 x 50 bushels, or $100.
In addition, under the crop insurance program’s “prevented planting”  provision, insurance companies pay producers who were unable to plant  the insured crop because of an insured cause of loss that is general in their  surrounding area, such as weather conditions causing wet fields, and that  prevents other producers from planting acreages with similar  characteristics. These producers are entitled to claim payments that  generally range from 50 to 70 percent of the coverage they purchased,  depending on the crop.
Critical to the success of the crop insurance program is aligning the  premium rates with the risk each producer represents. The risk associated  with growing a particular crop varies from location to location, from farm  to farm, and from producer to producer. If the rates are too high for the risk  represented, producers are less likely to purchase insurance, lowering the  program’s income from premiums. Conversely, if the rates are too low,  producers are more likely to purchase crop insurance, but because the  rates are too low, the income from premiums will be insufficient to cover  the claims. Economists refer to this situation as adverse selection.
To align crop insurance premium rates with the risk represented, RMA  establishes rates that vary by crop, location (county), farm, and producer.  RMA’s objective is to set the rates that each producer pays according to the  risk associated with the producer’s location, crop, and past production. For  the major field crops, RMA begins its premium rate-setting process by  looking at past crop insurance experience for each county and state. On the  basis of that historical experience, RMA sets a premium rate for each crop  in each county at the 65 percent coverage level for average production.  Using this premium rate, RMA makes adjustments to establish rates for  other coverage levels. RMA also adjusts premium rates to assume  producers will insure individual fields, called “optional units,” rather than all fields combined, called “basic units.” RMA uses an algorithm to make  adjustments to establish premium rates for producers whose production  levels are higher or lower than the county’s average. According to RMA,  this latter adjustment is based on the assumption that producers with  higher-than-average production levels are less likely to experience losses.  Finally, to encourage participation in the crop insurance program, the  federal government subsidizes the premiums.
Moreover, for producers that do not have a sufficient number of years—at  least 4—of actual production history records, RMA uses the historical  average county yield (called a transitional yield), adjusted by a factor based  on the number of years for which the producers have provided records.  Producers may also substitute the transitional yield for actual yields in  disaster years. In general, RMA sets a floor under a producer’s annual yield  so that a yield in any year cannot fall below 60 percent of the transitional  yield for that crop.
RMA establishes the terms and conditions that the private insurance  companies selling and servicing crop insurance policies are to use through  a contract called the standard reinsurance agreement (SRA). The SRA is a  cooperative financial assistance agreement between RMA, through the  FCIC, and the private crop insurance companies to deliver federal crop  insurance under the authority of the Federal Crop Insurance Act. The SRA  establishes the minimum training, quality control review procedures, and  performance standards required of all insurance providers in delivering any  policy insured or reinsured under the Federal Crop Insurance Act, as  amended. For example, under the SRA, companies must provide training to  their sales agents that includes information on how to recognize common  indicators of misrepresentation or abuse, review anomalies identified by  FCIC that suggest an unusual claims pattern, and report all cases of  suspected misrepresentation, fraud, waste, or abuse.
To distinguish among different levels of risk, the SRA establishes three  reinsurance funds with commensurate requirements for the amount of risk  companies can cede back to FCIC:  assigned risk, developmental, and  commercial. FCIC created the assigned risk fund for the riskiest policies.
Under the SRA, insurance companies may include individual policies in this  fund up to limits established for each state. Beginning in 2005, the  maximum amount of premium and associated liability for claims payments  that can be allocated to the assigned risk fund varies from 25 percent in  some states (e.g., Illinois, Indiana, and Iowa) to 75 percent in others (e.g.,  Mississippi, North Dakota, and Texas). Companies must retain 15 to 25  percent of the policies’ premiums and associated liability for claims  payments for policies in this fund, depending on the state.
RMA is responsible for ensuring that the federal crop insurance program is  carried out efficiently and effectively and for protecting against fraud,  waste, and abuse in the program. In this regard, RMA uses a broad range of  tools, including compliance reviews, company quality assurance reviews,  data mining, and FSA field inspections. RMA has a compliance staff of 78  employees in six field locations to review company quality assurance  activities and investigate anomalous claims payments. For their part,  insurance companies must conduct quality assurance reviews, such as  program or field reviews, for policies with a claim RMA has identified as  anomalous and policies with a claim equal to or greater than $100,000;  these reviews are to determine whether the claims they have paid are in  compliance with policy provisions.
In 2004, RMA initiated a new operational review program that provides for  extensive review of each insurance provider’s operation every 3 years.  RMA’s 3-year review cycle will assess insurance providers’ adherence to  their contract with RMA, quality control guidelines, and RMA-approved  policies and procedures. This review will differ from prior reviews in that  RMA will direct the companies to investigate policies that RMA has  identified as having anomalous claims and require RMA to assess a  statistical sample of additional policies. In the past, the insurance  companies reviewed a statistical sample of claims and policies, and RMA  examined the results of the companies’ reviews.
To strengthen oversight at the local level, RMA conducts data mining and  uses past loss experience to develop a sample of producers with notable  policy irregularities, such as unusually high or frequent losses. Staff in FSA  county offices review these cases for potential fraud, waste, and abuse by  inspecting the fields of the producers on the list. Figure 1 shows the  location of producers RMA identified for field inspections in 2003.
Congress enacted ARPA, amending the Federal Crop Insurance Act, in part,  to improve compliance with, and the integrity of, the crop insurance  program. ARPA expanded RMA’s authority to impose sanctions in two  ways. First, it provided RMA authority to impose sanctions against  producers, agents, loss adjusters, and insurance companies that willfully  and intentionally provide false or inaccurate information to FCIC or to an  approved insurance provider. (Previously, RMA had authority to impose  sanctions only on individuals who willfully and intentionally provided false  information.)  Second, ARPA provided authority to impose sanctions  against producers, agents, loss adjusters, and insurance companies for  willfully and intentionally failing to comply with any other FCIC  requirement. RMA has the authority to disqualify producers who have  committed a violation not only from the insurance program but also from  most other farm programs for up to 5 years. RMA can also impose a civil  fine for each violation, up to the financial gain the individual obtained as a  result of the false or inaccurate information provided or of the  noncompliance, or $10,000, whichever is greater. Working with RMA’s  regional compliance offices, RMA’s sanctions office processes requests for  sanctions from the field offices and forwards the findings and  recommendations to RMA’s appeals and litigation office. Following this  office’s review, USDA’s Office of General Counsel provides a legal opinion  on the sanction request. After consulting with the Office of General  Counsel, if the Administrator of RMA considers the case valid, RMA files a  complaint with USDA’s Administrative Law Office. At the defendant’s  request, the Administrative Law Office will hold a hearing, after which the  administrative law judge will render a decision.
ARPA also increased the percentage share of the premium the government  pays for most coverage levels of crop insurance, beginning with the 2001  crop year. Although the percentage of the premium the government pays  declines as producers select higher levels of coverage, the government  contribution significantly increases for all levels of coverage, particularly  for the highest levels of coverage. For example, as shown in table 1, the  share of the premium paid by the government rose from 42 to 59 percent of  the premium for 65 percent coverage.
section_title: RMA Has Strengthened Procedures for Preventing Questionable Claims, but the Program Remains Vulnerable to Abuse
paragraphs: Since ARPA, RMA has taken a number of steps to improve its procedures  and processes to prevent and detect fraud, waste, and abuse in selling and  servicing crop insurance policies. Most notably, RMA reports that data  mining analyses and subsequent communication to producers resulted in a  decline of at least $300 million in questionable claims payments from 2001  to 2004. However, we found that RMA is not effectively using all of the tools  it has available and that producers and others can continue to take  advantage of the program. We identified weaknesses in four key areas:  (1)  field inspections, (2) analysis that excludes many large farming operations  when producers do not report their interest in them, (3) quality assurance  reviews, and (4) imposition of sanctions. Weaknesses in these areas  continue to leave the program vulnerable to questionable claims, and  insurance companies and RMA cannot always determine the validity of a  claim to minimize fraud, waste, and abuse. We also found that RMA’s  insurance information system does not always identify policies that fail to  comply with policy provisions and that RMA’s implementation approach  may not always respond to unanticipated vulnerabilities in a timely  manner.
subsections: section_title: Data Mining and Other Actions Have Improved RMA’s Ability to Manage the Crop Insurance Program
paragraphs: Each year, RMA develops a list of producers whose operations warrant an  on-site inspection (the spot-check list) during the growing season because  data mining uncovered patterns in their claims that are consistent with the  potential for fraud and abuse. For example, the list includes  producers, agents, and adjusters linked in irregular behavior that   producers who for several consecutive years received most of their crop  insurance payments from prevented planting indemnity payments;  producers who appear to have claimed the production amounts for  multiple fields as only one field’s yield, thereby creating an artificial loss  on their other field(s); and  producers who, in comparison with their peers, have excessive  harvested losses over many years.
Since RMA began using data mining in 2001, it has identified about 3,000  producers annually who warrant an on-site inspection because of  anomalous claims patterns. In addition, RMA annually performs about 100  special analyses to identify areas of potential vulnerability and trends in the  program.
RMA provides the list of producers from its spot-check list to the  appropriate FSA state offices for distribution to FSA county offices, as well  as to the insurance company selling the policy to the producer. Staff in FSA  county offices advise the selected producers that they have been identified  for an inspection as a result of data mining and conduct field inspections  during the growing season. In conducting these inspections, inspectors are  to determine the tillage method used; weed control practices; type and  amount of fertilizer applied; weather conditions; and how the inspected  crop compares with others in the area. As a result of these inspections and  other information, RMA reported total cost savings of $312 million,  primarily in the form of estimated payments avoided:  $48 million in 2001,  $112 million in 2002, $81 million in 2003, and $71 million in 2004. For  example, according to RMA, claims payments to producers identified for an  inspection decreased nationwide from $234 million in 2001 to $122 million  in 2002. According to RMA, some of the producers on the list bought less  insurance and a few dropped crop insurance entirely, but most simply  changed their behavior regarding loss claims.
section_title: Field Inspections Specified in RMA’s Coordination Plan Are Not Being Used to Maximum Effect
paragraphs: ARPA required USDA to have a plan for FSA to assist RMA and approved  insurance providers in auditing a statistically appropriate number of crop  insurance claims. Under USDA guidance, developed pursuant to this  requirement, RMA is to annually provide a list of producers who exhibit  high loss ratios and high frequency and severity of losses or who are  suspected of poor farming practices. Upon receipt of this list, the FSA  county office is to review the first 10 producers or the top 5 percent of the  producers on the list, whichever is larger. If less than 10 producers are on  the list, then FSA is to check all of them. All the lists that RMA has  provided to FSA county offices include 10 or fewer producers, but FSA is  not conducting field inspections for all producers on the list. Between 2001  and 2004, producers filed about 380,000 claims annually. RMA’s data mining  identified about 1 percent of these claims as questionable and needing  inspection.
Overall, FSA conducted only 64 percent of the inspections RMA requested  from 2001 to 2004. Specifically, FSA submitted inspection reports for only  70 percent of the inspections RMA requested in 2001 (1,737 requested), 49  percent in 2002 (3,303 requested), 67 percent in 2003 (3,094 requested), and  73 percent in 2004 (3,832 requested). During this period, FSA offices in nine  states failed to conduct any of the field inspections RMA had requested in  one or more of the years. Until we brought this matter to their attention in  September 2004, FSA headquarters officials were unaware that these nine  states had not conducted field inspections for one or more of the years.  According to FSA officials in five states we contacted, county directors are  reluctant to conduct field inspections because they believe RMA and  insurance companies do not use the information to deny claims for  producers who do not employ good farming practices. As such, they  believe it does not make sense for them to spend time conducting these  reviews. However, by not conducting all requested inspections, FSA is  missing opportunities to identify producers who file unwarranted claims.
For their part, FSA inspectors believe they would be more effective in  determining fraud, waste, and abuse if they received information from RMA  on the claims patterns RMA’s data mining has identified as questionable.  For example, of the 3,832 claims RMA identified for field inspections in  2004, approximately two-thirds were selected for anomalous claims  patterns associated with fraud, such as switching information on  production yields from one insured field to another. About 80 percent of  the FSA inspectors we surveyed believed that receiving more information  from RMA would help them be more effective in detecting fraud, waste,  and abuse when they conduct field inspections. (See app. III for a summary  of the results of our survey of FSA inspectors.)  Additionally, several FSA  inspectors surveyed provided written comments regarding the need for  feedback. As one respondent noted, there is little incentive to document  field inspection findings because FSA rarely learns what, if any, action was  taken. Another respondent commented that he would like feedback from  RMA on how useful the inspections have been. He would like to avoid  spending time on inspections that may not be useful to RMA. RMA  headquarters officials acknowledged that providing feedback to FSA  inspectors might help improve the quality of the field inspections. Similarly,  company officials told us that information from RMA’s data mining would  help claims adjusters pay particular attention to determining the total  production for the producer’s farming operation and differences between  fields with and without losses.
Although FSA inspectors cited a lack of communication with RMA on  specific cases and findings as a major impediment to completing  inspections, they also identified other reasons. As figure 2 shows, the most  commonly cited reason was “not having enough time.”
We discussed the reported lack of time with FSA headquarters officials,  who advised us that field offices’ broad range of responsibilities provide  limited time for field inspections in support of RMA. They said our survey  results taken as a whole underscore the importance of effective  communication and information sharing between RMA and FSA to  maximize the effectiveness of field inspectors’ work.
FSA’s field inspections also do not always occur in a timely manner and,  therefore, FSA inspectors may miss opportunities to detect abuse during  the growing season. RMA generally provides its spot-check list to FSA in  April, at the start of the growing season. USDA guidance directs FSA staff  to perform at least two field inspections—one within 30 days of the final  planting date and one before harvest—on a minimum of one representative  tract. FSA selects a representative tract for each crop listed by RMA on the spot-check list. However, about 17 percent of FSA inspectors reported that  they received RMA’s request for a field inspection more than 30 days after  the final planting date. In some cases, inspection requests came in as much  as 6 months later.
Additionally, insurance companies may receive the results of some field  inspections too late to determine the validity of the claim. After FSA county  offices conduct the field inspections, they report the findings to RMA,  which then provides the results to the insurance companies holding the  policies for the producers. According to company officials, they are unable  to use the results of some field inspections because the information is  received months after the claim was paid. For example, in one claim file we  reviewed, on November 24, 2003, RMA referred to an insurance company a  soybean producer in Ohio who had received claims payments in each of the  past 5 years and was suspected of underreporting his production in 2003.  FSA’s field inspection, conducted in September just prior to harvest, found  the crop to be “above average to average” for the county and did not  identify any concerns regarding the crop’s expected yield. To determine  whether the producer underreported production, the insurance company  needed to conduct a preharvest appraisal of the producer’s fields. While the  insurance company conducted a quality assurance review of the claim, it  received RMA’s reports after the producer harvested the soybeans—too  late to conduct preharvest appraisals to validate production.
FSA may also be missing opportunities to provide RMA with critical  information to assess a claim’s validity. In reviewing claims, we found that  FSA frequently inspects only one tract, but that tract was not always the  tract on which a claim was filed. In written comments on our survey,  several FSA inspectors reported that they believe conducting a growing  season inspection on more than one tract is necessary to ensure the  monitoring program is effective. However, these inspectors also noted that  conducting inspections on more than one tract of land would place  additional demands on their time.
section_title: RMA’s Analysis to Detect Potential Program Fraud and Abuse for Many Large Farming Operations Is Incomplete
paragraphs: RMA’s data mining excludes many large farming operations because  producers fail to report other individuals’ and entities’ interests in these  operations. However, these entities, such as partnerships and corporations,  may include individuals who are also members of one or more other  entities. Because it does not know the ownership interests in these farming  operations, RMA cannot readily identify potential fraud. For example,  producers who are members of more than one farming operation may have  the opportunity to move production from one operation to another to file  unwarranted claims, without RMA’s knowledge that these producers  participate in more than one farming operation.
These farming operations do not always report other individuals or entities  who hold or acquire a beneficial interest of 10 percent or more in the  insured operation, as required by RMA regulations. RMA was unaware that  these entities had failed to fully disclose ownership interest because it has  not been given access to the FSA data file identifying a producer’s  ownership interest in other farming operations. However, ARPA requires  the Secretary of Agriculture to develop and implement a coordinated plan  for RMA and FSA to reconcile all relevant information received by either  agency from a producer who obtains crop insurance coverage. The  Secretary of Agriculture also must require RMA and FSA to reconcile this  producer-derived information on at least an annual basis, starting with the  2001 crop year, to identify and address any discrepancies. We were able to  obtain the FSA data file and determine whether (1) farming operations  report all members who have a substantial beneficial interest in the  operation, (2) these farming operations file questionable crop insurance  claims, and (3) agents or claims adjusters had financial interests in the  claim. As shown in table 2, of the 69,184 entities that had crop insurance  policies in 2003 and that were in both RMA’s and FSA’s databases, 21,310, or  30.8 percent, did not report one or more members who held a beneficial  interest of 10 percent or more in the farming operation holding the policy.
RMA should be able to recover a portion of the $224.8 million in claims paid  to the 21,310 entities that failed to disclose the ownership interest of one or  more members in 2003. According to RMA regulations, if the policyholder  fails to disclose the ownership interest in the farming operation as  required, the policyholder must repay the amount of the claims payment  that is proportionate to the interest of the person who was not disclosed.   The average ownership interest of the persons not disclosed for the 21,310  entities was 33 percent; as a result, RMA should be able to recover up to  $74 million in claims payments.
According to our analysis of RMA’s and FSA’s databases, results were  similar for 2004—20,659 entities failed to disclose the ownership interest of  one or more members. As a result, RMA should be able to recover up to $70  million in claims payments. In addition, we identified 24 crop insurance  agents who sold policies to farming entities in which the agents held a  substantial beneficial interest but failed to report their ownership interest  to RMA as required. These farming entities received $978,912 in claims  payments in 2003 and 2004.
RMA regulations require that, if a person who is not reported is also  ineligible to participate in the crop insurance program, the crop insurance  policy is void, and the policyholder must repay the entire claims payment.  For example, a person can be ineligible because of delinquent debt, such as  unpaid premiums, to RMA or insurance companies. For 2003 and 2004,  using FSA’s data, we found that nine farming operations contained one or  more members participating in the crop insurance program who RMA had  determined were ineligible to participate.
If RMA had complete information on entity ownership interests, it could  strengthen the review of some of the largest claims. For example, in  analyzing the 21,310 entities failing to disclose ownership interest in 2003,  we found 210 entities with questionable insurance claims totaling $11.1  million on 244 policies. Furthermore, we identified one claims adjuster who  adjusted a policy in 2004 with claims payments of $91,094 for a farming  operation in which he held a beneficial interest of 33 percent. RMA  guidance prohibits conflict-of-interest activities. Among other things,  insurance providers are not to permit adjusters to adjust a claim of a party  in which the adjuster has a material or financial interest. Without FSA’s  entity data, RMA is missing opportunities to identify potentially fraudulent  behavior in these operations.
Furthermore, an internal RMA study found that entities that purchase crop  insurance for only 1 or 2 years have higher claims experience than entities  that participate continuously over a number of years. According to FSA  officials in two states we contacted, some entities are apparently created  temporarily to avoid tracking by RMA, making it difficult for RMA to  identify questionable claims patterns over time. They told us that after  these entities participate in the crop insurance program for a few years,  they are dissolved, and the farming operations are reestablished under new  entity names.
section_title: RMA Cannot Effectively Assess Insurance Companies’ Performance Because of Weaknesses in Quality Assurance Reviews
paragraphs: RMA also looks to insurance companies that are selling and servicing crop  insurance to help them ensure program compliance and minimize losses.  RMA guidance states that insurance providers will provide oversight to  properly underwrite the federal crop insurance program, including  implementing a quality control program, conducting quality control  reviews, and submitting an annual report to FCIC. However, RMA is not  effectively overseeing insurance companies’ quality assurance programs  and, for the claims we reviewed, it does not appear that most companies  are rigorously carrying out their quality assurance functions. For example,  80 of the 120 insurance claim files we reviewed claimed more than $100,000  in crop losses or met some other significant criteria; RMA’s guidance states  that the insurance provider must conduct a quality assurance review for  such claims. However, the insurance companies conducted reviews on only  59 of these claims, and the reviews were largely paper exercises, such as  computational verifications, rather than comprehensive analysis of the  claim.
In 2002, USDA’s OIG reported that RMA’s efforts to develop a quality  control review system had been rendered ineffective by the absence of a  policy establishing what the system should measure and what standards of  accountability should apply. The Inspector General noted that RMA had  not (1) determined whether it should measure each insurance company’s  performance, (2) established an acceptable standard error rate to hold  companies accountable for excessive errors, and (3) defined an error so  that error rates or improper payment measurements were meaningful. As a  result, the Inspector General stated, RMA is no closer to having a fully  developed and reliable quality control review system to evaluate the  delivery of the federal crop insurance program than it was in 1993, when  the Inspector General recommended that RMA develop and implement  such a system. Similarly, in 1999, we recommended that RMA improve its  methodology for estimating error rates for claims payments. We reported  that such information is essential for evaluating the crop insurance  program’s effectiveness over time and for providing controls over claims  payments.
RMA’s own most recent internal review reached a similar conclusion. In  September 2002, RMA’s Deputy Administrator for Compliance reported that  RMA needed to significantly revise its guidance to accomplish meaningful  quality assurance reviews with measurable results. This conclusion was  based on a review of 17 insurance providers’ compliance with FCIC’s  quality assurance requirements. For example, the Deputy Administrator  noted, RMA’s guidance did not define the type and amount of  documentation needed to meet review requirements and to support the  insurance companies’ review results and conclusions. Furthermore,  because the insurance companies relied heavily on the use of check sheets  to document and report the results of their reviews, rather than inspecting  fields, RMA could not confirm that quality assurance reviews were  performed as required. According to RMA officials, RMA is working with a  contractor to incorporate the report’s recommendations and revise its  guidance. As of August 2005, RMA had not issued revised guidance on the  companies’ conduct of quality assurance reviews.
section_title: RMA May Be Missing Opportunities to Impose Sanctions Because It Has Not Developed Regulations Implementing its Expanded Authority to Impose Sanctions under ARPA
paragraphs: While ARPA expanded RMA’s authority to impose sanctions on producers,  agents, and adjusters who abuse the crop insurance program, RMA has  only used this authority on a limited basis. RMA has imposed sanctions on  individuals who have provided false or inaccurate information, but it has  not used its new authority to impose sanctions on individuals who willfully  and intentionally fail to comply with FCIC requirements. Under ARPA,  RMA has authority to impose sanctions on agents, loss adjusters, approved  insurance providers, and others who willfully and intentionally (1) provide  false or inaccurate information or (2) fail to comply with other FCIC  requirements. Earlier legislation allowed RMA to impose sanctions only on  individuals who willfully and intentionally provided false information.  ARPA provides RMA with the authority to disqualify producers who have  committed a material violation from receiving benefits under the insurance  program and from most other farm programs for up to 5 years. Previously,  RMA had authority to disqualify producers from purchasing catastrophic  risk protection or receiving noninsured assistance for up to 2 years and  from receiving any other benefit under the crop insurance program for up  to 10 years. The new legislation also provides RMA with greater flexibility  to impose civil fines.
ARPA expanded RMA’s authority to impose sanctions in order to improve  compliance with, and the integrity of, the crop insurance program.  However, as table 3 shows, except for 2004, RMA imposed few sanctions  even though it has identified about 3,000 suspicious claim payments each  year since 2001. From 2001 to 2004, RMA imposed 114 sanctions.
According to RMA officials, RMA’s ability to impose sanctions is limited  because it has not developed regulations to implement its new authority  under ARPA to impose sanctions on individuals who willfully and  intentionally fail to comply with an FCIC requirement. RMA’s sanctions  office submitted draft regulations to USDA’s Office of General Counsel in  2001 and again in 2003. However, the Office of General Counsel has not  approved the draft regulations. RMA headquarters officials we spoke with  in April 2005 told us that the number of sanctions has not substantially  increased because regulations have not been promulgated to establish  what constitutes an FCIC requirement and how USDA will determine that a  material violation has occurred or what process would be followed before  imposing sanctions. RMA officials told us that they will give priority to  issuing regulations implementing the sanctions authorized under ARPA.
Furthermore, since ARPA, the number of RMA referrals to USDA’s OIG has  declined from a high of 37 in 2000 to 14 in 2004. Crop insurance  investigations opened by OIG have declined from 40 in 2000 to 12 in 2004,  as shown in table 4. The table also shows the number of convictions, on  average, is less than 10 per year.
As table 4 also shows, while the number of referrals to the Department of  Justice has increased, the Department of Justice has declined more cases  than it has accepted since 2000. According to Department of Justice  officials, the factors considered when accepting a case include sufficiency  of the evidence, complexity of the case, whether the fraudulent activity is  part of a pattern or scheme, and workload and resources that would be  needed to investigate and prosecute the case. These officials told us that  crop insurance fraud cases are highly complex and involve a significant  number of documents that must be reviewed and presented in court.  Furthermore, the dollar value of crop insurance cases frequently is not as  large as in other cases, such as drug trafficking or some white-collar  crimes. Finally, the officials noted, some cases require a full-time auditor to  guide the prosecutors in reviewing the insurance and financial documents  to facilitate presentation to the jury in the trial.
Insurance agents we surveyed and company officials we contacted  believed that RMA needs to more aggressively seek to penalize those  producers, agents, and adjusters that abuse the program. (See app. IV for a  summary of the results of our survey of crop insurance agents.)
section_title: Other Weaknesses Affect the Crop Insurance Program’s Vulnerability
paragraphs: We found two other weaknesses in the crop insurance program that leave it  vulnerable to abuse. First, while RMA has made some improvements to  verify data in its information system, the system still contains inaccurate  data and does not always identify inaccurate claims payments.  Consequently, RMA has a greater risk of accepting policies that have  erroneous information and of paying for excessive losses. Second,  production yields can change when producers change farming practices,  but RMA may not also respond promptly to the resulting change in yields,  which can lead to excessive claims payments.
subsections: section_title: RMA’s Insurance Information System Contains Inaccurate Data and Does Not Always Identify Inaccurate Claims Payments
paragraphs: RMA uses its insurance information system to reduce its vulnerability to  fraud and abuse. Among other things, this system is to provide a means of  validating data to ensure that reimbursements are made on accurate  information. OMB guidance states that financial management systems shall  be designed with consistent internal controls over data entry, transaction  processing, and reporting to ensure that information is valid and that  federal resources are protected. Without proper controls, an agency risks  the possibility of processing irregularities. RMA has made improvements in  its verification checks to try to ensure accurate information, but some  weaknesses remain.
Even though RMA is aware of the need for accurate data, we found that, at  times, RMA’s insurance information system contained inaccurate data. The  system contained inaccuracies because RMA had not established adequate  verification checks in making annual adjustments to reflect changes to the  crop insurance program.
Each year RMA’s program automation group reviews system requirements  for needed system changes in response to annual program and policy  changes. In addition, the group seeks input on needed improvements,  based on prior years’ problems, from RMA program users and insurance  company representatives. This process has been helpful in improving the  overall accuracy of the data in the system. For example, RMA has made the  following changes to its insurance information system since 1999:  In 1999, RMA implemented a verification check to identify policies that  are on the same acreage but have two different insurance providers.
In 2001, RMA began weekly automated reporting on producers with  duplicate policies.
In 2002, RMA implemented a verification check to (1) identify producers  with unrealistic crop yield reports and (2) ensure that crop yield would  be verified when producers changed to a new insurance provider.
In 2003, RMA implemented a verification check to validate producers’  claims that they were new participants in the crop insurance program.
In 2004, RMA implemented a verification check to identify and eliminate  duplicate policies for the same producer with more than one insurance  provider.
Each of these improvements addressed a specific information system  weakness that had been identified in prior years, and each improvement  reduced the likelihood of improper crop insurance payments.
Nevertheless, we found that certain insurance policies, called written  agreements—unique policies RMA regional offices develop to meet a local  producer’s specific needs—would bypass all of the verification checks that  other policies undergo. Policy information from the written agreements is  provided to the insurance companies, but not all the specific policy data  are entered into RMA’s information system. In fact, we found that some of  the policies had extremely low insurance premium rates, resulting in  understated premiums. For example, a policy we reviewed showed that the  total premium was $1,555 for liability coverage of about $520,000, but the  correct total premium should have been $155,473. For crop years 2003 and  2004, RMA had 8,511 written agreement policies with a total liability of over  $400 million in its insurance information system. Because these types of  policies bypass all system checks, other errors could occur.
After we advised RMA of this problem, it reported that it changed the  information system to check for unusually low premium rates. However, in  order to conduct all the necessary verification checks on written policies,  RMA will have to conduct time-consuming coordination efforts with its  regional offices and the program automation group.
We also found, in cases of a partial loss, claims payments were made that  were higher than a specific unit’s insurance liability. RMA officials stated  that the insurance information system contains an edit check to ensure that  the total claim is not greater than the total liability. However, we found that  the system did not have an edit check to ensure that, in cases of a partial  loss, claims paid for each insured optional unit were not higher than the  total liability for those fields. When we reported this issue to RMA, it said  that it would modify its system. However, due to a number of complexities  associated with this change, RMA said that the change would not be  implemented until the 2006 crop year.
In addition, for 2001 to 2004, we found 14 producers enrolled in the crop  insurance program who RMA had determined were ineligible to participate  in the program. RMA officials stated that the insurance information system  contains an edit check to identify producers determined ineligible to  participate in the crop insurance program. Nevertheless, our analysis found  that RMA’s system does not identify all producers ineligible to participate in  the crop insurance program. These ineligible producers received about  $145,000 in claims payments.
section_title: RMA Did Not Always Account for Changes in Farming Practices in a Timely Manner
paragraphs: According to a 2003 RMA study, RMA overpaid claims between 2000 and  2002 in wheat-producing counties in Oregon and Washington because of a  program vulnerability. Overpayments occurred because RMA did not begin  reducing producers’ relatively high insurance guarantees to take into  consideration a change in farming practices that began in 1996. This change  resulted in lower yields on insured fields that had a higher yield history and  insurance guarantee. RMA began to take this change into account in  farming practices with the 2004 crop year, but it does not expect to fully  resolve this issue until about 2014. RMA officials told us that if they were to  fully adjust producers’ insurance guarantees to reflect the lower yields in  just a year, the agency would still be legally obligated to provide the higher  guarantee because guarantees are based on a 10-year historical average.  Under the Federal Crop Insurance Act, as amended, RMA is to provide  yield coverage based on the actual production history of the crop over at  least the past 4 years, building up to the previous 10-year period.
Before 1996, producers could insure their wheat crop for a higher yield if  they agreed to allow insured fields to lie fallow for 1 to 2 years between  plantings, a practice called “summer fallow,” rather than plant these fields  every year (continuous cropping). This practice is used in semiarid regions,  primarily to conserve moisture for the next season. By not planting,  producers could allow the soil to recover moisture and, it is expected,  produce a higher yield when the field is later planted.
Until 1996, RMA knew which practices producers followed. However, in  1996, USDA’s National Agricultural Statistics Service (NASS) changed the  way it reported information on producers’ farming practices. NASS had  been collecting and reporting county data on wheat yields by whether  producers allowed their fields to lie fallow in alternate years or planted  them every year. In 1996, when NASS stopped reporting yield data by type  of production practice, RMA stopped distinguishing between producers’  production practices. RMA allowed producers to continue to insure their  wheat at the higher yield level associated with summer fallow practices,  whether or not the producers periodically let fields lie fallow or planted  them every year.
Under the Federal Crop Insurance Act, producers are assigned a yield  based on production records. Between 1995 and 2000, many wheat  producers in Oregon and Washington shifted their farming practices to  planting fields every year while using the higher summer fallow production  records to establish their insured yield. During this period, the number of  insured acres in the Oregon counties alone rose from 4,535 to 108,569.  However, RMA did not adjust its coverage to take into account the lower  yields associated with fields planted every year. Consequently, producers  received an insurance guarantee based on a history of yields from fields  that had been fallow in alternate years, even though now they planted these  fields every year, which made them unlikely to achieve the higher yields of  a summer fallow practice. According to RMA’s data, a summer fallow  practice provides producers yields that are up to 33 percent higher than  annual planting practice. For example, a producer who grew an average of  40 bushels of wheat per acre using the summer fallow production practice  may have the potential to grow only 30 bushels per acre using annual  planting practice. Since RMA allows producers to use production history  from summer fallow practices to establish insurable yields for annual crop  production, the producer in this example can grow 30 bushels annually and  make an insurance claim for the other 10 bushels (although over time the  actual production history will decrease, reducing the producer’s ability to  file a claim). RMA’s data mining showed that producers took advantage of  this program vulnerability. Excessive insurance guarantees for some  producers may have contributed to higher claims.
Beginning with the 2004 crop year, RMA decided to offer insurance for  wheat in these counties by the practice producers employed, either a  summer fallow practice or continuous cropping practice. While this  decision should reduce program vulnerability, the problem will only be  eliminated gradually. RMA did not require producers to recertify their  historical acreage and production by separate practice to correct the  insurance guarantee. RMA officials agreed that some producers will  continue receiving claims payments based on an inflated “normal” yield  history until the production history is corrected with actual yields over the  next 10 years.
section_title: RMA’s Regulations and Statutory Requirements Hinder RMA Officials’ Efforts to Reduce Abuse in the Crop Insurance Program
paragraphs: RMA’s regulations, as well as statutory mandates, have created a program  design that can impede RMA officials’ efforts to prevent and detect fraud,  waste, and abuse in a number of ways. First, in terms of RMA’s regulations,  producers can insure their fields individually instead of insuring all fields  combined, which makes it easier for them to switch production among  fields, either to make false insurance claims or to build up a higher yield  history on a particular field in order to increase its eligibility for higher  future insurance guarantees. In addition, companies participating in the  crop insurance program bear minimal risk on some of the policies they sell  and service, giving the companies little incentive to rigorously challenge  questionable claims on these policies. In terms of statutory requirements,  RMA must offer producers “prevented planting” coverage—coverage if an  insured crop is prevented from being planted—but it is often difficult to  determine whether the producer had the opportunity to plant a crop.  Furthermore, statutorily established premium subsidies are high and,  therefore, may shield high-risk producers from the full effect of paying  higher premiums.
subsections: section_title: Option to Allow Producers to Insure Each of Their Fields Separately May Contribute to Program Abuse
paragraphs: Many patterns of producer fraud, waste, and abuse are possible if  producers manipulate how they report production from separately insured  units. Under RMA’s regulations, producers can insure production of a crop  on each optional unit or insure an entire basic unit. With separately insured  optional units, for example, if hail damages a crop on one field, producers  receive an insurance indemnity to cover the hail losses. However, if  producers insured their entire crop in a single basic insurance unit, the hail  losses may not have caused the production yield of all units combined to  have been below the level guaranteed by the insurance and, therefore,  would not warrant an indemnity payment.
However, separately insured optional units make it easier for producers to  report production from one field that was actually produced on a second  field in order to make false insurance claims or to build up a higher yield  history on a particular field to increase its eligibility for higher future  insurance guarantees. Since claims payments for optional units are based  upon the yield in each field, rather than the yield for the entire farm, the  result of this misreporting is to generate or increase claims on the first field  while enhancing the yield for future insurance guarantees on the second  field. In a future period, the producer reallocates production from the  second field to the first field, thus increasing indemnities on the second  field while rebuilding the yield of the first field. Insurance companies or  RMA could increase inspection activity in an attempt to reduce  occurrences of production switching, but increased activity would raise the  costs of administering the program.
According to a 2002 RMA study, relative losses per unit increase as the  number of separately insured optional units increases. Furthermore,  given the similarities in a producer’s separately insured units, the study  could not identify any credible reasons, in the absence of fraud, waste, or  abuse, that the losses should increase with increases in the number of  separately insured units. Finally, the study concluded that such loss  patterns are unlikely to occur naturally. According to an RMA official,  gathering the evidence to support a yield-switching fraud case requires  considerable resources, especially for large farming operations.
Furthermore, the official noted, in order to prove production switching,  adjusters would need to appraise all of a producer’s fields just before  harvest.
In 2003, RMA identified 2,371 suspicious claims, 273 of which (about 12  percent) had patterns associated with switching production among fields.  Furthermore, in our review of claim files, we identified 10 producers with  patterns of claims associated with this type of fraud. Table 5 highlights a  pattern of claims suggesting yield switching, as shown by the production  history for a producer farming over 2,000 acres of irrigated cotton in west  Texas. Generally, this producer insured a yield of about 700 pounds per  unit. To the extent an individual unit reports production below the  insurance guarantee, the producer is paid an indemnity.
For example, in 2001 the producer harvested the crop on Unit 101 with a  reported yield of 1,419 pounds of cotton per acre and reported losses on  the remaining three units, thereby obtaining claims payments of over  $500,000. It appears some of the production from the three units with  claims for losses was shifted to the unit with the high production. By  building up a higher yield history on Unit 101, the producer increased the  insurance guarantee on this unit for 2002 and beyond. In 2002, the producer  claimed a loss on Unit 101, as well three other units, obtaining claims  payments of over $400,000. In 2003, the pattern was repeated, resulting in  claims payments of more than $600,000.
FSA’s field inspection of Unit 101 in 2003, conducted in September just  prior to harvest, found that the “cotton looked good and was comparable  with other fields in the area.” Nonetheless, the insurance company paid the  claims on the units to the producer in December 2003 and January 2004.
Moreover, we found that the producer in this case—a farming operation set  up as a general partnership—leased land from the owner of the cotton gin  where the farming operation sold its cotton and where the cotton gin  recorded the production levels that the farming operation used to  substantiate its claims. The owner of the gin also provided the partnership  with loan security to obtain operating capital. Furthermore, one of the  partners in the farming operation, who had a power of attorney to sign  documents on behalf of the partnership, was also employed in the office of  the cotton gin. We referred this case to RMA for follow-up investigation,  which reported that there was not enough evidence of abuse to refer the  case for sanction or prosecution.
In his 2003 loss review, however, the claims adjuster questioned the  producer’s farming practices, prompting the insurance company to perform  a preharvest inspection in 2004. The producer did not file a claim in 2004. In  2005, RMA and insurance company representatives performed joint  preharvest appraisals on this producer’s fields in anticipation of a filing for  a claim. No claim had been filed for 2005 at the time we completed our  review.
section_title: Minimal Risk Sharing on Some Policies May Not Provide Insurance Companies Strong Incentive to Carry Out Their Responsibilities under the Program
paragraphs: Insurance companies participating in the crop insurance program share a  percentage of the risk of loss or opportunity for gain on each insurance  policy they write, but the federal government ultimately bears a high share  of the risk. Under the SRA, insurance companies are allowed to assign  policies to one of three risk funds—assigned risk, developmental, or  commercial. The SRA provides some criteria for designating policies to  these funds. For the assigned risk fund, the companies cede up to 85  percent of the premium and associated liability for claims payments to the  government and share a limited portion of the gains and losses on the  policies they retain. Economic incentives to control program costs  associated with fraud, waste, and abuse are commensurate with financial  exposure. Therefore, for policies placed in the assigned risk fund,  companies have far less incentive to investigate claims than the federal  government would. For example, in one claim file we reviewed, an  insurance company official characterized the producer as filing frequent,  questionable claims; however, the company paid a claim of over $500,000.
The official indicated that if the company vigorously challenged the claim,  the producer would have defended his claim just as vigorously, and the  company would have potentially incurred significant litigation expenses,  which RMA does not reimburse. In the company’s opinion, it was less  costly to pay the claim. In 2003, companies placed about 19 percent of the  policies they wrote in the assigned risk fund and about 69 percent in the  commercial fund. However, for those producers on RMA’s spot-check list,  about 47 percent of the policies were in the assigned risk fund, and 38  percent were in the commercial fund.
section_title: RMA and Insurance Companies Have Difficulty Determining Potential Abuse Associated with Prevented Planting Coverage
paragraphs: Under the Federal Crop Insurance Act, as amended, RMA must offer  prevented planting coverage. Under the act and its implementing  regulations, RMA allows claims for prevented planting if producers cannot  plant due to an insured cause of loss that is general in the surrounding area  and that prevents other producers from planting acreage with similar  characteristics. Claims for prevented planting are paid at a reduced level,  recognizing that producers do not incur all production costs associated  with planting and harvesting a crop. However, determining whether  producers can plant their crop may be difficult. Annually, RMA pays about  $300 million in claims for prevented planting.
In written comments on our survey, 25 FSA inspectors reported that they  believe some producers in their county who claimed prevented planting  losses never intended to plant or did not make a good faith attempt to plant  their crop. Additionally, in some cases, it appears that the insurance  company’s claims adjusters may not exercise due diligence in evaluating  prevented planting claims. For example, a producer in south Texas  received claims payments of over $21,000 for prevented planting claims for  corn in 2003 and 2004. The producer claimed that excess rainfall made his  fields too wet to plant. However, according to a June 2004 FSA field  inspection report, there was no evidence the producer had made any  attempt to prepare the fields for planting in either the 2003 or 2004 growing  seasons. The FSA inspection report noted, and photographs showed, the  fields contained permanent grasses and 5-foot tall weeds, as well as large  hay bales from the prior growing season. In addition, rainfall for the county  in April and May, 2003, was well below normal, and there was no evidence  that the producer had ordered seed in anticipation of planting. Moreover, in  2003, of the 66 corn policies in the county, the producer’s policy had the  only claim for prevented planting. Because the cause of loss was not  general to the area, the producer should not have received payment on the  claim. Similarly, in 2004, the producer filed one of only three claims for  prevented planting of the 55 corn policies in the county. According to an  official of the insurance company that sold and serviced this policy,  prevented planting claims are paid early in the growing season, and  because information on other companies’ claims experience is unavailable,  it is difficult to assess whether producers’ claims are due to an insured  cause of loss that is general in the surrounding area and that prevents other  producers from planting acreage with similar characteristics. On the basis  of our review, RMA investigated the 2003 and 2004 prevented planting  claims for this producer and subsequently directed the insurance company  to seek reimbursement for the 2003 claim payment.
section_title: High Premium Subsidies May Inhibit RMA’s Ability to Control Program Abuse
paragraphs: To encourage program participation, ARPA increased premium subsidies— the share of the premium paid by the government—but this increase may  hamper RMA’s ability to control program waste and abuse. Premium  subsidies are calculated as a percentage of the total premium, and  producers pay only between 33 to 62 percent of the policy premium,  depending on coverage level. High premium subsidies shield producers  from the full effect of paying higher premiums. Because premium rates are  higher in riskier areas and for riskier crops, the subsidy structure transfers  more federal dollars to those who produce riskier crops or farm in riskier  areas.
In addition, premium rates are higher for producers who choose to insure  their fields separately under optional units, rather than all fields combined,  because the frequency of claims payments is higher on the separately  insured units. Again, however, because of high premium subsidies,  producers pay only a fraction of the higher premium. Thus, the subsidy  structure creates a disincentive for producers to insure all fields combined.  Over one-half (56 percent) of the crop insurance agents responding to our  survey believed that charging higher premiums for producers with a  pattern of high or frequent claims would discourage fraud, waste, and  abuse in the crop insurance program.
Finally, in disaster years, ARPA increases insurance protection by allowing  producers to substitute a percentage of the historical average county yield  for actual yields. As a result of ARPA, RMA sets a floor under producers’  annual yields so that yields in any year cannot fall below 60 percent of the  historical average county yield (called the transitional yield) for that crop.  Consequently, the amount of crop insured against loss is at least 60 percent  of the average county yield, giving producers higher coverage than  experience would allow. Although RMA sets a higher premium for  producers because of actual production losses, because of high premium  subsidies producers pay only a fraction of the higher premium. Thus, the  subsidy structure creates an incentive for producers to insure at the higher  level of protection.
section_title: Recently Prosecuted Crop Insurance Fraud Cases Highlight Program Vulnerabilities
paragraphs: Eight recent crop insurance fraud cases that were investigated by USDA’s  OIG and resulted in criminal prosecution between June 2003 and April 2005  reflect some of the issues we identified. The cases show how producers,  sometimes in collusion with others, falsely report planting, claims of  damage and production to try to circumvent RMA’s procedures. In some  cases, producers hid production or switched it from one field to another.  Several of these cases also demonstrate the importance of having FSA and  RMA work together to identify and share information on questionable  farming practices/activities. Table 6 summarizes these eight cases, which  accounted for $3.1 million in fraudulent claims payments. These cases,  which were researched and analyzed by our Office of Forensic Audits and  Special Investigations, are described here and in more detail in appendix V.
These eight crop insurance cases are described as follows:  Case 1. The subject of this investigation, a producer in Tennessee, in  1999 improperly obtained crop insurance coverage for his tomato crop  and received a claims payment for losses that had not occurred.  Moreover, this producer was ineligible to participate in the crop  insurance program because he had not paid a past premium. In order to  hide the fact that he was the true grower of 1999 tomato crops in two  Tennessee counties, he used his wife’s name on crop insurance  documents. In addition, his wife filed a report with the insurance  company claiming a higher level of acreage planted to inflate the value  of any subsequent insurance claim. An insurance adjuster assisted the  producer by fraudulently signing forms showing he inspected and  measured the nonexistent crops and that his observations supported the  wife’s claimed loss.
Case 2. A producer planted a wheat crop after the planting deadline,  which made the crop ineligible for crop insurance. He reported,  however, that the crop had been planted before the deadline and falsely  claimed crop losses because of hail, heat, and drought. Furthermore, the  producer did not have an ownership interest in the crop. Instead, the  producer’s brother leased the farm land and paid the cost of planting,  and the brother’s wife owned the insurance agency that issued the  insurance policy on the crop. FSA filed a complaint with RMA because  FSA officials had observed that the crop was planted  past the planting  deadline.
Case 3. Two producers conspired to file fraudulent crop insurance  claims, stating that their bean crops had been damaged by excessive  moisture. They underreported the crop yield to the insurance company  and hid production by delivering the harvest to processing plants using  false names. The scheme was discovered by OIG during a fraud  detection survey at a grain elevator. Investigators reviewed the sales of  uninsured crops and identified production sold under other names that  actually belonged to the two producers.
Case 4. A farming partnership filed fraudulent insurance claims of crop  losses for cotton, wheat, and grain sorghum that were never planted.  The producer, who also owned an insurance agency formed a farming  partnership with other family members for these acres, and the  producer’s insurance agency wrote insurance policies for the farming  partnership. Two insurance adjusters, who did not visit any of the fields,  filed false appraisal and production worksheets verifying the losses. A  seed dealer also prepared false receipts to support the producer’s  planting claims. However, inconsistent statements on documents  submitted to FSA led to an inspection of the farming operation, and  inspectors found little evidence of planting. A subsequent investigation  resulted in admissions of guilt.
Case 5. The manager of a grain elevator conspired with producers to sell  their wheat at discounted prices by providing them with false  documentation showing that a large portion of their crop was damaged  by weather and below weight. The manager also falsified documents,  stating that the crop was of lower quality and provided falsified samples  of severely damaged wheat to mislead insurance adjusters. Producers  could then collect crop insurance and disaster payments from the  federal government.
Case 6. Two crop insurance agents conspired with producers to inflate  actual production histories, which allowed the producers to receive  higher indemnity payments on insurance claims. The agents backdated  an insurance application, created a false insurance policy based on a  fictitious yield rate, and had the producers sign blank insurance  documents. This fraud was identified through an OIG hotline complaint.
Case 7. An investigation was initiated following an OIG hotline  complaint that a producer had reported different crop yields to FSA and  RMA. OIG determined that the producer had, among other things, (1)  filed four false insurance claims, stating that he had experienced a failed  harvest and needed to replant; (2) filed claims on crops in which he had  no ownership interest; (3) inflated the size of a corn crop loss; and (4)  filed a claim in which he underreported the yield.
Case 8. Producers falsely claimed they (1) were prevented from planting  because of excess moisture and (2) had planted crops that they did not  plant and claimed losses on these crops. The producers also filed claims  in which they underreported the yield and for crops in which they had  no interest. In order to report a crop loss and manipulate their yields,  the producers sold crops using other people’s names. These schemes  were discovered during the course of a bankruptcy fraud investigation  involving some of the producers.
section_title: RMA’s Failure to Follow Its Guidelines Has Resulted in Program Losses for Some New and Expanded Crop Insurance Products
paragraphs: RMA has not always developed or expanded crop insurance products  according to its guidelines, thereby contributing to program losses. RMA’s  guidelines (1) identify RMA’s mission for expanding the crop insurance  program; (2) outline the process and procedures by which the RMA  responds to requests to add a new insurance program; (3) specify data  submission requirements for analysis of the new program request; and (4)  establish the framework RMA will use to implement, maintain, and  evaluate a new program expansion. According to RMA, these guidelines  are intended to ensure producer interest and crop suitability and to  minimize exposure to loss. We found that, in some instances when RMA did  not follow its guidelines, it had higher claims and loss ratios.
Most of the newly developed and expanded products we reviewed—15 of  the 16 products—were developed under the guidelines RMA had in place  before ARPA. Under these guidelines, RMA officials are to obtain  information documenting, among other things, the following:  significant grower interest in the insurance coverage;  the crop’s economic significance;   actuarial sufficiency and data availability (e.g., producer acreage, crop  yield, production cost, and weather data);  a risk profile and analysis (e.g., perils affecting the crop, production  experience, available markets, and product viability);  agronomic, aquatic, and horticultural suitability (e.g., commercial life  cycle of the crop, rotation requirements, whether the crop is an annual,  biennial, or perennial);  marketing potential (e.g., market characteristics, risks, and   implementation parameters (e.g., crop year for implementation and  number of states).
Under ARPA, the FCIC Board of Directors is required to have actuarial and  underwriting experts independently review policies, plans of insurance,  and related materials before approving new products.
Of the 16 crop insurance products we reviewed, 11 were newly developed,  and 5 were expansions of an existing crop into a new geographic area.   RMA’s overall loss ratio for the 16 pilot crop products was about 2.0 (or  $2.00 in claims paid for every $1.00 in premium). Four of the 16 cases we  reviewed had loss ratios of 1.0 or less. (See app. VI for a comparison of loss  ratios for these 16 crop insurance products.)  In 12 of the 16 cases, it  appeared that RMA followed its guidelines in terms of documenting the  proposed insured crops’ past production experience, crop suitability,  potential for loss, and implementation parameters. However, for the cases  in which RMA did not follow its guidelines, the products experienced  claims in excess of premiums of over $50 million.
For example, FCIC’s Board of Directors approved coverage of fall-planted  watermelons as part of a broader watermelon insurance pilot program  covering watermelon production in seven states and 15 counties for spring-  and fall-planted watermelons—without considering all the factors called  for under its guidelines—such as a horticultural study. Such a  consideration would have provided assurance that the proposed product  was actuarially sound, according to the OIG. Overall, the watermelon  pilot program had over $51 million in claims payments in 1999, its first year  of operations, and had a loss ratio (claims paid divided by premiums) of  5.8. Of the claims payments in 1999, $21.1 million, or 44 percent, was for  fall-planted watermelons in the three Texas counties. According to the  Inspector General, a horticultural analysis would have shown that fall  watermelons were a high-risk crop in that region of Texas. The product was  discontinued after a year. In responding to the Inspector General about its  offering of insurance for fall-planted watermelons in Texas, RMA  commented that a shortage of experienced staff was a major factor  contributing to the agency’s lack of adherence to its guidelines.
In another case—the apple quality option policy—the FCIC Board of  Directors quickly approved this product despite a number of questions  suggesting the need for additional study. The approved product, which  insured a higher grade of apples than existing apple crop policies,  experienced large losses. In determining whether to approve this product,  the Board of Directors contracted for studies from five independent  companies. One of the studies reported 10 major concerns about the  product, including incomplete documentation, the large number of  counties in the pilot program (approximately 86 percent of the apple crop),  and an understated premium rate. Three of the other four reviewers raised  similar concerns. The other reviewer supported the proposal with minor  reservations. Even with these concerns, the FCIC Board of Directors  quickly approved the pilot without additional analyses. The claims for this  product for crop years 2001 through 2003 were about $4.4 million, and the  product had a loss ratio of 2.6. RMA officials contend that the loss ratio can  primarily be attributed to some apple producers in California, who may  have abused the system. According to RMA officials, the Board of Directors  discussed the concerns raised by the studies but still approved the request  for the pilot. A delay in approval might have delayed the pilot’s  implementation for a year. As of August 2005, RMA was moving to contract  with independent reviewers to evaluate the apple quality option pilot  program including its actuarial soundness and whether it effectively meets  the needs of apple producers.
Upon approval by the FCIC Board of Directors, new products have a  probationary period—generally 1 to 3 years. Under RMA guidelines, newly  developed products are to be examined annually to see that they are  meeting performance goals—such as producer participation by year, state,  county, and insurance company; loss ratios; and appropriate premiums.  RMA is to make adjustments if warranted and determine whether the  product should be continued or terminated.
According to RMA officials, in lieu of a formal review, RMA informally  collects data on each new insurance product by at least annually  corresponding with RMA regional offices and outside sources. They said  that annual reviews are only of limited value in providing the information  RMA needs to determine the viability of a product because it takes several  years to get a clear picture of how well an insurance product will perform.
The lack of an annual evaluation did not appear to significantly affect  future years’ loss experience for most of the 11 new products we reviewed.  However, timely annual evaluation of the sweet potato program might have  saved the federal crop insurance program several million dollars. The  sweet potato program’s loss ratio from 1998 through 2002 ranged from 2.3  to 5.2, but RMA waited until 2003 before making changes to it and made  additional changes for the 2004 crop year. From 1998 to 2003, the sweet  potato program recorded claims of $47 million compared with premiums of  about $12 million. An evaluation completed in 2003 suggested that the high  dollar claims for this product could not fully be attributed to weather  conditions but rather suggested potential fraud or abuse. Earlier, more  timely reviews could have identified the irregular claims activity in selected  counties and might have averted the claims payments. In October 2004, the  FCIC Board of Directors terminated the existing sweet potato pilot  program and implemented a new program that included reduced coverage  and increased growing experience requirements for participation. In May  2005, the Inspector General reported on RMA’s failure to follow its  procedures for performing new product reviews, including the sweet  potato pilot program, and recommended that RMA improve the timeliness  of its evaluations for new products.
section_title: Conclusions
paragraphs: Federal crop insurance plays an invaluable role in assuring the nation’s  farmers that their crops will be protected from natural disasters. However,  the importance of the program and the significant role it plays in U.S.  agriculture is frequently overshadowed by controversy associated with  fraud, waste, and abuse in the program. In recent years, with the assistance  of the new tools in ARPA, RMA has made progress in strengthening a  number of program elements and thereby reducing fraud, waste, and  abuse, as well as the amount of funds paid in error.
Still, we identified weaknesses in how RMA, FSA, and insurance companies  carry out their program responsibilities, and these weaknesses continue to  leave the program vulnerable to questionable claims and missed  opportunities to prevent losses to the federal government. Lack of timely,  useful communication between RMA and FSA has resulted in insufficient  information sharing between the two agencies, as well as with the  insurance companies and insufficient inspections of land with suspicious  claims. Furthermore, RMA has not been given access by FSA to key  information on producers who have a beneficial interest in one or more  farming operations. As a result, many of the largest farming operations are  not closely scrutinized in the crop insurance program. Many of these  farming entities fail to disclose producers having an ownership interest in  the entity and who may be ineligible to participate in the federal crop  insurance program. In addition, insurance companies’ quality control  reviews of claims are weak because RMA does not effectively oversee the  companies’ quality assurance efforts leaving the crop insurance program  susceptible to fraud and abuse. Finally, RMA has used one of its key  enforcement tools—sanctions against producers, agents, and companies— on a very limited scale because, 4 years after ARPA, it has not promulgated  regulations establishing how it will impose some of the additional  sanctions authorized under ARPA.
We recognize that the crop insurance regulations or statutory provisions  are intended to strengthen protection for producers. However, in many  cases, RMA has difficulty ensuring that these provisions are not abused.  RMA has opportunities to improve the program’s design by eliminating the  option of insuring fields (optional units) for producers who have a history  of high losses in comparison with other producers growing the same crop  in the same area. The program’s high premium subsidies, specified in the  Federal Crop Insurance Act, as amended by ARPA, may also limit RMA’s  ability to control program abuse because the subsidies shield producers  from the full effect of paying higher premiums associated with frequent or  larger claims.
Periodic lapses in program management when developing and expanding  new crop insurance products limit the effectiveness of RMA’s guidelines  and can cause unnecessary losses to the crop insurance program.  Generally, when RMA followed its guidelines, new products incurred fewer  losses. ARPA provided RMA with a new, seemingly more rigorous process  to review new products. However, the new process cannot succeed unless  RMA more closely follows its guidelines.
The crop insurance program is designed to accommodate the needs of all  of America’s producers. Fraud, waste, and abuse can cause producers to  pay more for crop insurance and hurt the reputation of the program.  Further reducing vulnerability to fraud, waste, and abuse in the crop  insurance program will require a coordinated effort among the agencies  and companies managing the program—RMA, FSA, and the participating  insurance companies. Each agency and the companies have an important  role in monitoring agent, adjuster, and producer actions and in sharing key  program information with one another.
section_title: Matter for Congressional Consideration
paragraphs: To better protect the crop insurance program from fraud, waste, and abuse,  Congress should consider allowing RMA to reduce premium subsidies— and hence raise the insurance premiums—for producers who consistently  have claims that are irregular in comparison with other producers growing  the same crop in the same location.
section_title: Recommendations for Executive Action
paragraphs: To better ensure that field inspections are used to the maximum effect to  address fraud, waste, and abuse in the federal crop insurance program, we  recommend that the Secretary of Agriculture take the following eight  actions. Specifically, we recommend that the Secretary direct the  Administrators of RMA and FSA to create an action plan to ensure that  FSA field offices conduct all inspections called for under agency   RMA informs FSA field inspectors of the suspect claim patterns that  they are to investigate; and  FSA inspections are conducted in a timely manner, and inspection  results are reported expeditiously to insurance companies.
We further recommend that the Secretary of Agriculture  promulgate regulations to implement its expanded authority under  ARPA to impose sanctions;   direct FSA to share producer-derived information with RMA for data  mining to administer and enforce the requirements of the crop  insurance program;   direct RMA to determine if payments have been made to ineligible  producers or to entities that failed to disclose ownership interests and, if  so, to recover the appropriate amounts;   direct RMA to strengthen its oversight of the insurance companies’  implementation of the quality control review system; and  direct RMA to reduce the insurance guarantee or eliminate optional unit  coverage for producers who consistently have claims that are irregular  in comparison with other producers growing the same crop in the same  location.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided USDA with a draft of this report for its review and comment.  We received written comments from USDA’s Under Secretary for Farm and  Foreign Agricultural Services. The department agreed to act on most of our  recommendations, including (1) ensuring that inspections are conducted in  a timely manner, and that inspection results are reported expeditiously to  insurance companies; (2) directing FSA to share producer-derived  information with RMA; (3) directing RMA to determine if payments have  been made to ineligible producers or to entities that failed to disclose  ownership interests and, if so, to recover the appropriate amounts; and (4)  directing RMA to strengthen its oversight of the insurance companies’  implementation of the quality control review system.
With respect to issuing regulations to implement its expanded authority  under ARPA to impose sanctions, USDA agreed that promulgation of  ARPA-based sanction regulations would enhance RMA’s sanctions efforts.  However, USDA stated that it was incorrect to suggest that the lack of  regulations is a critical impediment to imposing sanctions. USDA also  stated that there has been a learning curve since ARPA was enacted but  that it has been imposing sanctions under its ARPA authority since 2000  and that it has made “significant and steady progress” in both the numbers  and types of sanctions imposed. Our report indicates that USDA has  imposed some sanctions since the enactment of ARPA. However, the  number of sanctions imposed by RMA has not increased appreciably since  the enactment of ARPA. For example, RMA imposed an average of less than  20 sanctions annually from 1996 to 2000, and an average of less than 20  sanctions annually from 2001 to 2005, except for 2004 (67), which was an  exception. While not all questionable claims payments are necessarily  sanctionable, RMA has identified about 3,000 questionable payments  annually since beginning data mining in 2001. We continue to believe RMA  has not fully exercised its new authority.
Under ARPA, RMA has new authority to impose sanctions on agents, loss  adjusters, approved insurance providers, and others who willfully and  intentionally fail to comply with an FCIC program requirement. In April  2005, RMA officials told us that the number of sanctions has not  substantially increased in part because regulations have not been  promulgated under ARPA. Subsequently, an official from USDA’s Office of  General Counsel told us that RMA had not imposed any sanctions under its  new authority to do so on the basis of a failure to comply with an FCIC  program requirement. This official indicated that regulations were needed  to establish what constitutes an FCIC program requirement, how USDA  will determine that a material violation has occurred, and what process will  be followed before imposing sanctions under this provision. USDA does  not dispute the report's findings that no sanctions have been imposed  under this sanction provision of ARPA.
USDA disagreed with our recommendation to ensure that FSA field offices  conduct all inspections called for under agency guidance because FSA did  not have sufficient resources to complete all of these inspections. Given  the potentially high payoff from providing greater assistance to RMA, we  believe that FSA may want to conduct a study to determine the costs and  benefits of making staff available for crop insurance inspections.
USDA also disagreed with our recommendation to reduce the insurance  guarantee or eliminate optional unit coverage for producers who  consistently file claims that are irregular in comparison with other  producers growing the same crop in the same location. USDA stated that  this recommendation represented a disproportionate response,  considering the small number of producers identified as yield switching  each year and that adoption of our recommendation would not be cost- effective. We agree that the number of policies identified annually as having  patterns consistent with yield switching is small in comparison with the  number of policies in the crop insurance program. However, we believe it is  possible to narrowly tailor an underwriting rule so that it would target only  a few producers each year and would entail few resources. Such a tool  would provide RMA with another means to discourage producers from  abusing the program. Thus, we continue to believe it is reasonable for RMA  to reduce the insurance guarantee or eliminate optional unit coverage for  producers who consistently file and receive questionable claims payments.
USDA also provided technical corrections, which we have incorporated  into this report as appropriate. USDA’s written comments are presented in  appendix VII.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to appropriate  Congressional Committees; the Secretary of Agriculture; the Director,  Office of Management and Budget; and other interested parties. In addition,  this report will be available at no charge on the GAO Web site at  http://www.gao.gov.
If you have any questions about this report, please contact me at (202) 512- 3841 or robinsonr@gao.gov. Contact points for our Offices of Congressional  Relations and Public Affairs may be found on the last page of this report.  GAO staff who made major contributions to this report are listed in  appendix VIII.
section_title: Objectives, Scope, and Methodology
paragraphs: At the request of the Chairman of the Senate Committee on Homeland  Security and Governmental Affairs, we examined the U.S. Department of  Agriculture (USDA) Risk Management Agency’s (RMA) procedures for  assuring integrity in the crop insurance program.  Specifically, we agreed to  (1) assess the effectiveness of USDA’s procedures and processes to prevent  and detect fraud, waste, and abuse in selling and servicing crop insurance  policies; (2) determine the extent to which program design issues may  make the program more vulnerable to fraud, waste, and abuse; and (3)  determine the effectiveness of USDA’s procedures to assure program  integrity in developing new crop insurance products.
To assess the effectiveness of USDA’s procedures and processes to prevent  and detect fraud, waste, and abuse in the selling and servicing of crop  insurance policies, we examined a nonrandom sample of 120 insurance  claims from the 2,794 claims that RMA identified as warranting a field  inspection in 2004.  Of these 120 claims, 100 were the largest claims paid,  and 20 were selected to ensure representation of all data analysis selection  criteria.  To review the claims, we visited seven insurance companies and  contacted three others to request the claim files.  We also examined the  guidance that RMA and USDA’s Farm Service Agency (FSA) field offices  use to implement the requirements of the Agricultural Risk Protection Act  of 2000 (ARPA), including the FSA/RMA Handbook FCIC Program  Integrity, 4-RM.  In addition, we examined guidance that RMA uses to  ensure compliance with the Federal Crop Insurance Act, including relevant  laws; regulations and agency policy, including the 2003 Crop Insurance  Handbook; Manual 14, Guidelines and Expectations for Delivery of the  Federal Crop Insurance Program; loss adjustment manuals; crop  insurance handbooks; and related managers’ bulletins and notices.
In addition, we conducted two surveys.  To assess the effectiveness of RMA  and FSA’s coordinated monitoring efforts at the local level, we conducted a  Web-based survey of all 829 FSA county officials who were responsible for  conducting field inspections in 2003.  The survey contained 17 questions  that asked for opinions and assessments of (1) preharvest and growing  season inspections; (2) training and education on crop insurance; (3) the  findings and actions taken by RMA; and (4) FSA’s role in reducing fraud,  waste, and abuse in crop insurance.  In developing the questionnaire, we  met with officials in FSA headquarters to gain a thorough understanding of  the coordinated plan FSA uses to assist RMA in monitoring the crop  insurance program.  We also shared a draft copy of the questionnaire with  these officials, who provided us with comments, including technical  corrections.  We then pretested the questionnaire with FSA officials in two  county offices each in Texas and Georgia, as well as with officials in one  office each in Maryland, Minnesota, and North Dakota.  During these  pretests, we asked the officials to complete the Web-based survey as we  observed the process.  After completing the survey, we interviewed the  respondents to ensure that (1) questions were clear and unambiguous, (2)  terms we used were precise, (3) the questionnaire did not place an undue  burden on the FSA county officials completing it, and (4) the questionnaire  was independent and unbiased.  On the basis of the feedback from the  pretests, we modified the questions, as appropriate.
The questionnaire was posted on GAO’s survey Web site.  When the survey  was activated, the officials who had been selected to participate were  informed of its availability with an e-mail message that contained a unique  user name and password.  This allowed respondents to log on and fill out a  questionnaire but did not allow respondents access to the questionnaires of  others.  The survey was available from December 9, 2004, until March 11,  2005.  We received responses for 92 percent of the 829 FSA officials.   Results of the survey to FSA county officials are summarized in appendix  III.
To solicit crop insurance agents’ views on control weaknesses and  suggestions for improving oversight of the crop insurance program, we  developed a questionnaire that was mailed to crop insurance agents.  In  developing the questionnaire, we met with officials in RMA headquarters to  gain a thorough understanding of internal controls in the crop insurance  program.  We also shared a draft copy of the questionnaire with these  officials who provided us comments, including technical corrections.  We  then pretested the questionnaire with five crop insurance agents in Texas,  five agents in Georgia, and five agents in North Dakota.  During each  pretest we interviewed the respondent to make sure that the (1) questions  were clear and unambiguous, (2) questionnaire terms were precise, (3)  questionnaire did not place an undue burden on the agents completing it,  and (4) questionnaire was independent and unbiased.  The survey was  mailed to the crop insurance agents on December 21, 2004.
Because of the large number of agents (more than 13,000) that participate  in the crop insurance program, we used a probability sample.  Before  sampling, agents were grouped by the dollar amount of policies sold in  2003.  The number of agents sampled from each group was proportionate  to the number of agents in the group.  The final number of agents selected  was 951.  However, because of incorrect addresses or other information,  the final sample was 935.  We received responses from 76 percent of these  935 insurance agents.
The results from the survey are presented as estimates, each with a  measurable precision, or sampling error, that may be expressed as a  plus/minus figure.  By adding the sampling error to and subtracting it from  the estimate, we developed upper and lower bounds for each estimate.  The  range between these two estimates is called the confidence interval.   Sampling errors and confidence intervals are stated at a certain confidence  level, in this case, 95 percent.  For example, a confidence interval at the 95  percent confidence level means that in 95 out of 100 cases, the sampling  procedure would produce a confidence interval that would include the  estimated value.  Results of the survey are summarized in appendix IV.
At our request, the Center for Agribusiness Excellence in Stephenville,  Texas, conducted data mining on RMA’s crop insurance databases and  FSA’s computer databases for farming operations receiving commodity  program payments.  For these operations, the databases contain detailed  information on the individuals that are members or beneficiaries, their  share of payments, and additional organizational details.  We asked the  Center for Agribusiness Excellence to determine whether (1) policyholders  report all farming operations in which they have a substantial beneficial  interest, (2) certain farming operations manipulate production among  affiliated farming entities to file questionable crop insurance claims, and  (3) conflicts of interest exist for members of farming operations who are  also agents or claims adjusters.  In addition, for policyholders identified as  not having reported all farming operations in which they have a substantial  beneficial interest, we asked the Center for Agribusiness Excellence to  determine whether any of these policyholders had been identified by RMA  as ineligible to participate in the crop insurance program.
To determine the extent to which program design issues may make the  program more vulnerable to fraud, waste, and abuse, we conducted a  qualitative assessment of economic studies.  We also discussed these issues  with USDA program officials in headquarters and with field office officials  who conduct inspections during the growing season.
To examine practices recently employed by producers, agents, and  adjusters to defraud the federal crop insurance program, GAO’s Office of  Forensic Audits and Special Investigations (FSI) asked USDA’s Office of  Inspector General (OIG) to provide the names of all crop insurance fraud  cases they had investigated in the preceding 2 years that resulted in  criminal prosecution.  OIG identified eight cases of crop insurance fraud  prosecuted between June 2003 and April 2005.  FSI reviewed OIG’s case  files for these cases, spoke with representatives from the U.S. Department  of Justice, and reviewed relevant reports, court papers, and other  documentation on these cases.  FSI conducted its investigation from  February through June 2005 in accordance with quality standards for  investigations as set forth by the President’s Council on Integrity and  Efficiency.
Finally, to determine the effectiveness of USDA’s procedures in assuring  program integrity in developing new crop insurance programs, we  evaluated the agency’s policies, procedures, and other pertinent documents  to determine what controls were in place to assure program integrity.   Specifically, for developmental products, we reviewed RMA’s New Program  Development Handbook and, for expansion of existing products, we  reviewed RMA’s General Guidelines and Criteria for Submitting County  Crop Program Expansion Requests.  We reviewed these RMA guidelines to  determine the types of analyses expected and the process that was to be  followed in order to establish a new or expansion product.  We also spoke  with RMA’s product development and expansion officials.  We selected a  nonrandom sample of 16 products that were developed (11 products) or  expanded (5 products) during 1998 and 2002 and compared the work  performed and documented with the appropriate RMA guidance.  The 11  products included 5 products with the highest loss ratios (over $3 claims  paid for every $1 of premiums) and 6 products with low loss ratios (less  than $3 in claims paid for every $1 of premiums).
We conducted our review from July 2004 through August 2005 according to  generally accepted government auditing standards, which included an  assessment of data reliability and internal controls.
section_title: Selected Information on the Federal Crop Insurance Program, 1981-2004
section_title: Results of Implementation of the Agricultural Risk Protection Act of 2000: Survey of FSA County Directors of USDA
paragraphs: Q1. Do you feel that you clearly understand RMA's expectations regarding conducting growing season inspections (spot checks)?
Uncertain (percent)
Probably not (percent)
Definitely not (percent)
No response (percent)
Q2. In your opinion, are most producers in your county aware of growing season inspections that are conducted on the fields of other  producers?
Uncertain (percent)
Probably not (percent)
Definitely not (percent)
No opinion (percent)
No response (percent)
Q3. In your opinion, have growing season inspections in your county increased compliance of most producers with crop insurance  provisions?
Uncertain (percent)
Probably not (percent)
Definitely not (percent)
No opinion (percent)
No response (percent)
Q4. During the past two years have you observed a potential non-compliance situation during the normal course of your official duties?
No response (percent)
Q5. During the past two years, when you observed a potential non-compliance situation during the normal course of your official duties,  how often did you initiate CCC Form 2007 (Report of Crop Insurance Non-compliance)?
About half of the time (percent)
Some of the time (percent)
Never or almost never (percent)
No response (percent)
Q6. When did you receive RMA's request(s) for 2003 growing season inspection(s) (spot checks)?
Q6 other. If you checked "Other" in Question 6 above, please explain in the textbox below.
Q7. During the past 4 years, have you received any training/education on federal crop insurance?
No response (percent)
742 Q8. How adequate was the training/education you received on federal crop insurance?
Neither adequate nor inadequate (percent)
Somewhat inadequate (percent)
Very inadequate (percent)
No response (percent)
Q9. Do you think that you need more training/education on federal crop insurance?
Uncertain (percent)
Probably not (percent)
Definitely not (percent)
No opinion (percent)
No response (percent)
Q10. During the past 4 years, have you received any training/education (either in-class or on-line) on conducting growing season  inspections (spot checks)?
No response (percent)
Q11. How adequate was the training/education you have received on conducting growing season inspections (spot checks)?
Neither adequate nor inadequate (percent)
Somewhat inadequate (percent)
Very inadequate (percent)
No response (percent)
Q12. Do you think that you need more training/education on conducting growing season inspections (spot checks)?
Uncertain (percent)
Probably not (percent)
Definitely not (percent)
No opinion (percent)
No response (percent)
Q13. Do any of the following make it difficult for you to conduct growing season and preharvest inspections?
No (percent)
Uncertain (percent)
No response (percent)
Q13 other. If you checked "Other" in Question 13 above, please explain in the textbox below.
Q14. Would feedback from RMA following growing season inspections help you be more effective in reducing fraud, waste, and abuse in  the crop insurance program in your county?
Uncertain (percent)
Probably not (percent)
Definitely not (percent)
No response (percent)
Q15. In your opinion, do any of the following areas of the FSA/RMA Handbook FCIC Program Integrity 4-RM need to be improved?
No (percent)
Uncertain (percent)
No response (percent)
Q15 other. If you checked "Other" in Question 15 above, please explain in the textbox below.
Q16. In your opinion, how effective are RMA and FSA in coordinating their efforts to reduce fraud, waste, and abuse in the crop insurance  program?
Moderately effective (percent)
Somewhat effective (percent)
Slightly effective or not effective (percent)
No opinion (percent)
No response (percent)
Q17. In your opinion, with respect to reducing fraud, waste, and abuse in the crop insurance program, how effective is the coordination of  your State FSA Office with your County Office?
Moderately effective (percent)
Somewhat effective (percent)
Slightly effective or not effective (percent)
No opinion (percent)
No response (percent)
Q18. If you would like to make any additional comments concerning the crop insurance program or RMA's and FSA's efforts to combat  fraud, waste, and abuse and ensure integrity and compliance, please enter your comments in the textbox below.
This appendix presents the questionnaire that was sent to crop insurance  agents and the results of our survey. The results are presented in terms of  the estimates of the responses we would have received to the questions in  our survey if we had surveyed all agents selling crop insurance. Because of  the large number of crop insurance agents, we used a sample (probability  sample). Before sampling, agents were grouped by the dollar amount of  policies sold in 2003. The number of agents sampled from each group was  proportionate to the number of agents in the group. The final sample  consisted of 935 agents.
The survey results that we present are estimates, each with a measurable  precision, or sampling error, that may be expressed as a plus/minus figure.  By adding the sampling error to and subtracting it from the estimate, we  develop upper and lower bounds for each estimate. The range between  these two estimates is called the confidence interval. Sampling errors and  confidence intervals are stated at a certain confidence level, in this case, 95  percent. For example, a confidence interval at the 95 percent confidence  level means that in 95 out of 100 cases, the sampling procedure would  produce a confidence interval that would include the estimated value.
U.S. Government Accountability Office  Washington, D.C.
Agriculture Risk Protection Act (ARPA).  The  Act requires USDA’s Risk Management Agency  (RMA) to actively work with insurance  companies to improve compliance and integrity  in the federal crop insurance program.
United States.  The purpose of this survey is to  following staff in our Dallas, TX office:  collect information that will help GAO assess  how well actions, taken by RMA and insurance  companies to comply with this act, are working.
It is important that you respond so that views of  crop insurance agents from all regions of the  country are represented in the results.  Your  answers will be combined with those of other  respondents and summarized in our report to the  Congress.
We will notify you when our report is released  will not release individual identifiable responses  and provide information on how to request a free  unless requested by the Congress or compelled by  copy. law. 1. Based on your own experiences, what effect do the following features of the crop insurance  program have on fraud, waste, and abuse?  (Please check one answer in each row.)
Effect on Fraud, Waste, or Abuse  in the Crop Insurance Program 1. (e.g., GRP and GRIP) (1-5) (2-7) (29-39) (5-12) (4-10) (11-18) (26-36)
2. (1-6) (5-11) (39-50) (27-38) (6-12) (0-3) (2-6) (cups, floors, adjustments) (2-7) (14-23) (41-52) (14-23) (6-13) (0-1) (1-6)
4. (3-8) (17-26) (40-51) (9-16) (6-12) (0-3) (4-10) number of all entities (e.g.,  5. (2-7) (1-4) (22-32) (25-35) (29-40) (0-1) (1-5)
6.
Service Agency (FSA) (1-5) (1-5) (18-27) (38-50) (19-29) (0-2) (2-7)
7. Other (Please specify.)
The number of responses to  this item was too small to  confidence intervals. associated with that response. -1-  2.
In your opinion, what effect would the following potential changes to the crop insurance  program have on fraud, waste, or abuse?  (Please check one answer in each row.)
Effect on Fraud, Waste, or Abuse in  1. (0-3) (4-10) (57-67) (11-18) (2-7) (0-1) (8-16)
2. (1-4) (2-7) (35-46) (31-42) (8-15) (0-2) (3-8)
3. (3-8) (4-10) (23-33) (28-38) (22-31) (0-0) (1-4) with few or low claims  4. (2-7) (8-15) (22-31) (31-41) (15-24) (0-1) (1-6)
Retention of 10 years of  5. (0-3) (3-8) (49-60) (24-34) (5-11) (0-1) (1-5)
6. adjusters (in addition to  (0-3) (2-7) (49-60) (19-28) (5-12) (0-2) (5-12) any state certification)  7. Other (Please specify.) to this item was too small  intervals.  associated with that response. -2-  3.
Insurance companies are required to conduct the reviews and inspections listed below.  What  effect do you believe these mandatory reviews and inspections by insurance companies have on  fraud, waste, and abuse in the crop insurance program?  (Please check one answer in each row.)
Effect on Fraud, Waste, or Abuse  in the Crop Insurance Program 1. (1-5) (2-7) (26-36) (39-50) (13-22) (0-0) (0-3)
2. (2-7) (2-8) (10-17) (37-48) (26-36) (0-1) (2-8)
Reviews of a sample of  3. (1-4) (3-9) (23-33) (47-58) (7-14) (0-0) (1-4) “Conflict of interest”  reviews for all claims by  4. (1-5) (1-6) (36-46) (25-35) (14-23) (0-2) (2-7)
5. (2-8) (2-7) (15-23) (34-44) (25-36) (0-1) (1-6) or greater than $100,000  Reviews of a sample of  6. simplified (express) (0-3) (1-5) (39-50) (35-46) (5-12) (0-1) (2-7) claims (claims of $10,000  or less)
Reviews of a sample of  7. (1-4) (1-6) (26-37) (41-52) (7-14) (0-1) (4-10)
8. replant claims (for 50  (0-2) (2-6) (45-56) (25-35) (5-11) (0-1) (4-11) acres or less)
Reviews of a sample of  9. (1-5) (3-9) (29-39) (36-47) (9-17) (0-1) (2-7) to or greater than 150%  of prior year’s APH  associated with that response. -3-  4.
In the past two years, have you been aware of any of the following RMA activities?  (Check yes,  no, or uncertain for each activity.)
Have you Been Aware of  RMA Activity?
RMA analyzing crop insurance policies and claims across many years  1. (“data mining”) to uncover patterns that suggest crop insurance fraud or  (34-44) (44-54) (9-16) abuse.
RMA analyzing insurance policies and claims to identify relationships  2. among producers, agents and adjusters that indicate possibly fraudulent  (40-51) (39-51) (7-14) claims. 3.  RMA using infrared aerial photography to monitor crops in your area. (15-23) (59-70) (12-21)
FSA conducting growing season inspections (spot checks) of producers in  4. your area who were identified by RMA as warranting on-site inspections. (26-35) (49-60) (11-19)
subsections: section_title: 5. Based on your experiences, what effect do
paragraphs: you believe RMA’s data mining efforts will  have on fraud, waste, and abuse in crop  insurance?  (Please check one.) (1)   Greatly encourage  (2)   Somewhat encourage  (3)   Little or no effect  (4)   Somewhat discourage  (5)   Greatly discourage  (6)   No basis to judge  1 (0-3)  6 (3-9)  26 (21-31)  35 (30-40)  16 (12-20)  16 (12-21)
section_title: 6. Have the insurance companies you write for
paragraphs: included information about data mining  sessions in their training modules?  (Please check one.) (1)  Yes  (2)  No  (3)  Uncertain  49 (43-54)  22 (17-27)  29 (24-35)  percentages.  Numbers in parentheses are the  confidence intervals associated with that response. -4-  The following information will help us in analyzing the results of this survey.  7. How many years have you been selling  8. What percentage of the insurance  crop insurance?  (Please check one.) policies you write are for crop (1)   Less than 1 year  (2)   1 to 5 years  (3)   6 to 10 years  (4)   11 to 15 years  (5)   16 to 20 years  (6)   20 to 30 years  (7)   More than 30 years  2 (0-4) yourself only, not for an insurance  agency.)  (Please check one.)
18 (14-23)
46 (41-51)
25 (20-30)
12 (9-16)
17 (13-21)  18 (13-22) (1)  1-25%  (2)  26-50%  (3)  51-75%  (4)  76-100%  6 (4-9)  36 (31-41)
17 (13-21)  4 (2-7)
9. How many hours of crop insurance  received in 2004?  (Please check one.) (1)  0 (zero) hours  (2)  1 to 3 hours  (3)  4 to 12 hours  (4)  13 to 20 hours  (5)  More than 20 hours  2 (1-5)  3 (1-5)  61 (56-66)  22 (18-27)  11 (8-15) intervals associated with that response.  10.  Please add any comments or suggestions you have regarding improving program compliance and  integrity in the federal crop insurance program.  (Please use the space below or on the back of this  page for your comments or, if you prefer, attach a separate page.)
When Our Report is Issued . . .
How should we notify you?
By email.  Please provide your email  address:________________________________________________    By mail.  Please provide address correction, if  needed:_________________________________________    Please do not notify me.
section_title: Crop Insurance Fraud Cases Criminally Prosecuted, June 2003 to April 2005
paragraphs: This appendix presents GAO’s Office of Forensic Audits and Special  Investigations description of eight cases of crop insurance fraud  investigated by U.S. Department of Agriculture’s (USDA) Office of  Inspector General (OIG) and criminally prosecuted between June 2003 and  April 2005.
Based on results from data mining, OIG, and USDA’s Farm Service Agency  (FSA) and Risk Management Agency (RMA) conducted field inspections on  a producer in Tennessee. Problems identified during the inspection of the  producer’s farm were reported to the insurance company that provided the  policy.
In 1999, the producer improperly obtained crop insurance coverage for his  tomato crop and received a claims payment for losses that had not  occurred. The producer was ineligible to participate in the crop insurance  program because he had not paid a past premium. In order to hide the fact  that he was the true grower of 1999 tomato production in two Tennessee  counties, he used his wife’s name on crop insurance documents. In  addition, his wife filed a report with the insurance company claiming a  higher level of acreage planted to inflate the value of any subsequent  insurance claim. An insurance adjuster assisted the producer by  fraudulently signing forms showing he inspected and measured the crops  and that his observations supported the wife’s claimed loss.
The producer’s wife received $57,155 in crop insurance payments for losses  claimed on the 1999 tomato crop. In September 2003, the producer pled  guilty to six counts of making false statements on loan or credit  applications and one count each of conspiracy to defraud the government,  making false statements, and making false claims. He was sentenced to 3  years probation and ordered to pay $57,155 in restitution to RMA.
Following up on OIG hotline complaints, USDA initiated an investigation of  a wheat producer in Georgia. In February 2000, the Georgia producer  claimed a loss of 400 acres of wheat because of heavy hail damage and a  hot and dry growing season. He had previously reported that the wheat had  been planted by the planting deadline—December 15, 1999. The lease for  the land, however, was not effective until January 2000, and the owner of  the land confirmed that he did not allow any crops to be planted before the  lease began. Other witnesses corroborated that the wheat on this land was  not planted until sometime in early 2000—after the planting deadline. The  producer received a $39,826 claims payment for the reported loss.
The USDA investigation revealed that the producer’s brother worked for  the insurance company that insured the wheat crop, and the policy was  actually sold through a crop insurance agency owned by the brother’s wife.  Records subpoenaed from the wife’s insurance agency disclosed additional  policies issued to the subject. Crop insurance claims payments on those  policies for the 2000 crop year exceeded $400,000. The investigation also  determined that the insurance adjusters for these claims were contract  adjusters for the brother’s employer.
On June 30, 2003, the producer pled guilty in federal district court to  making false statements on loan or credit applications. He was sentenced  to 1 day in prison and ordered to pay $39,826 in restitution to RMA.
An OIG-initiated fraud detection survey of grain elevators disclosed  irregularities at a Minnesota grain elevator and led to the investigation of  two Minnesota producers. In 1997 and 1998, these producers grew pinto  bean and black turtle bean crops that were covered by federal crop  insurance. The producers falsely claimed that their crops had been  damaged by excessive moisture and underreported the amount of beans  that were harvested and sold for processing. They also arranged for the  harvested beans to be sold using false names so that the insurance adjuster  would not be able to link them to this production. Production information  was also omitted from production worksheets. The producers received  claims payments of $435,087 for losses.
In June 2003, each of the producers pled guilty to felony theft and entered  into civil agreements under the False Claims Act. The producers were  disqualified from the crop insurance program for 1 year and paid restitution  of $435,087 and civil penalties of $10,000.
This case originated when FSA filed a complaint with RMA about a crop  insurance agent who was also a producer in Wilbarger County, Texas. The  producer and other family members were in a farming partnership and  obtained six crop insurance policies for crop year 1999 that covered about  6,500 acres of wheat, cotton, and grain sorghum. All of the policies were  issued through the producer’s own insurance agency.
The producer gave an adjuster a schedule of insurance forms with  predetermined figures to be used on appraisal and production worksheets  for the wheat, cotton, and grain crops. The adjuster later admitted that he  did not visit any of the fields to conduct appraisals or to verify crop  production. In addition, the producer had a seed dealer prepare false  receipts to support his claim that he had purchased seed to plant the crops.  The producer and adjuster falsified crop insurance loss documents and  collected $630,000 in fraudulent claims payments for crops that the  producer had not planted.
In February 2004, the producer was convicted of multiple counts of making  false claims to the government and a related conspiracy charge. He was  sentenced to 41 months in prison, to be followed by 3 years of supervised  release and ordered to pay $448,000 in restitution to RMA. In November  2004, the insurance adjuster pled guilty to one count of conspiracy and  received a sentence of 2 years probation, including in-home confinement  and was ordered to pay $447,230 in restitution to RMA.
RMA investigated the manager of a northwestern Minnesota grain elevator  when it noticed suspicious adjustments in grain quality. The manager of the  grain elevator was charged with providing North Dakota farmers with false  documents that were used to obtain over $1 million in fraudulent crop  insurance payments from RMA and over $350,000 in improper crop disaster  payments from FSA.
The manager persuaded producers to sell their wheat at discounted prices  to his grain elevator company and then provided the producers with false  documents that purposefully undervalued the wheat’s weight and quality.  The manager also directed company employees to create samples of  severely damaged wheat to mislead insurance adjusters and to create  records that misled USDA about the amount of wheat at the elevator. This  falsification enabled the producers to fraudulently collect crop insurance  and crop disaster payments.
The manager was convicted of conspiracy to defraud USDA and two counts  of false statements in February 2003 and was subsequently sentenced to 46  months in prison and ordered to make restitution in the amount of  $751,758. He also was to remain on supervised release for 3 years after  serving his prison term.
Following an OIG hotline complaint, investigators found that two crop  insurance agents had falsified crop insurance documents for a producer,  thereby enabling the producer to file false crop insurance claims. For  example, the agents backdated the producer’s crop insurance application,  created a false insurance policy based on a fictitious yield rate, and allowed  the producer to report fictitious actual yield rates on their insurance  application.
On August 30, 2004, the agents pled guilty to one count of conspiracy to  submit false statements to RMA. Both agents were sentenced to a year’s  probation and ordered to pay fines of $5,000 and $2,000, respectively.
OIG followed up on an FSA referral that an Ohio producer reported  different crop yields to FSA and RMA. The producer filed four false crop  insurance claims and received payments totaling approximately $19,000  between May and December 1999. The producer claimed losses for crops  that he did not own. The producer also inflated an insurance claim for a  loss on his corn crop.
In September 2004, the producer pled guilty to one count of making a false  insurance claim. He was sentenced to 24 months probation, 40 hours of  community service, and ordered to pay $2,899 in restitution.
This case involves fraudulent crop insurance and farm program payments  and was triggered by a fraud investigation following a bankruptcy filing in  July 2000. Between 1997 and 2003, an Iowa couple, aided by other family  members, friends, and employees, executed fraud schemes that resulted in  crop insurance payments of $912,364. The co-conspiritors made false  representations. Specifically, they falsely certified to  a prevented planting loss of 1,478 acres in corn and soybeans in several  counties because of excessive moisture; they received about $100,000 in  claims payments; and satellite imagery and testimonial evidence later  confirmed that this claim was false; and  a loss of approximately 332 acres of soybeans in one county in Iowa  when, in fact, satellite imagery evidence indicated only approximately  71 acres of soybeans was planted; $17,000 was paid on this claim; and  RMA also paid $88,000 for false crop losses in three other counties in  2001.
During this period, the family was also submitting false claims for crop  disaster assistance and received $86,000 in payments.
The investigation is continuing, although the co-conspirators have pled  guilty to some charges, agreed to pay restitution in some instances, and are  barred from participating in USDA’s farm programs. Officials involved in  the investigation and prosecution of this case note that these fraudulent  activities were facilitated by the direct participation of the crop insurance  agent who provided the policy to the couple.
section_title: Comparison of Loss Ratios for Crop Development and Expansion Products
paragraphs: Malting barley option B provides producers who grow malting barley under contract with a brewer  additional price and quality insurance beyond feed barley coverage.
section_title: Comments from the U.S. Department of Agriculture
paragraphs: The following are GAO’s comments on the letter from the U.S. Department  of Agriculture dated September 15, 2005.
subsections: section_title: GAO Comments
paragraphs: 1. We have clarified the language in the Highlights section of this report to  note the distinctions in the analyses. As we state in this report, the U.S.  Department of Agriculture’s (USDA) Risk Management Agency (RMA)  is using data mining to administer and enforce the crop insurance  program and to analyze patterns that suggest fraudulent activity, such  as unusually high or frequent claims payments. However, RMA’s  analysis is incomplete with regard to the largest farming operations— those that include multiple partnerships and joint ventures. RMA’s  analysis excludes comparisons of farming operations’ reported  ownership interest with data that has been validated by USDA’s Farm  Service Agency (FSA). Because it does not know the ownership  interests in these farming operations, RMA cannot readily identify  potential fraud. For example, producers who are members of more  than one farming operation may have the opportunity to move  production from one operation to another to file unwarranted claims,  without RMA’s knowledge that these producers participate in more  than one farming operation.  2. We have changed the text in the Highlights section to more accurately  reflect our findings, deleting the term “fraudulent.”  As detailed in this  report, RMA regulations require policyholders to report individuals and  entities with a beneficial interest in their farming operation. If a  policyholder fails to disclose an ownership interest, then the  policyholder must repay the amount of the claims payment that is  proportionate to the interest of the person that was not disclosed. Our  findings indicate that USDA should be able to recover up to $74 million  in such claims payments for 2003.  3. We have clarified the language in the Highlights section. We recognize  in this report that the annual spot-check list of 3,000 questionable  claims is used to prevent unwarranted claims payments by monitoring  anomalous producers during the growing season for the year they are  identified. The 3,000 questionable claims represent producers who  consistently file claims and receive payments that are irregular in  comparison with other producers growing the same crop in the same  location. While not all of these policy irregularities are necessarily  sanctionable, the 3,000 questionable claims provide a general reference  in comparison with the 114 sanctions RMA imposed from 2001 through  2004.  4. The Agricultural Risk Protection Act of 2000 (ARPA) requires the  Secretary of Agriculture to develop and implement a coordinated plan  for FSA to assist RMA in the ongoing monitoring of the crop insurance  program, including conducting fact-finding into allegations of program  fraud, waste, or abuse and reporting the results of any such fact-finding  to RMA. USDA guidance states that FSA county offices are to conduct  growing season inspections on the larger of the first 10 producers or  the top 5 percent of the producers identified by RMA. However, as we  report, FSA conducted only 64 percent of the monitoring inspections  RMA requested between 2001 and 2004, and FSA offices in nine states  did not conduct any of the inspections RMA requested in one or more  of these years. Given the potentially high payoff from assisting RMA in  monitoring the crop insurance program and conducting inspections,  FSA may want to conduct a study to determine the costs and benefits of  making staff available for crop insurance inspections. 5. We agree that RMA has imposed sanctions since the enactment of  ARPA. However, we continue to believe RMA has not fully exercised its  new authority. Under ARPA, RMA has the authority to impose sanctions  on agents, loss adjusters, approved insurance providers, and others  who willfully and intentionally (1) provide false or inaccurate  information or (2) fail to comply with other Federal Crop Insurance  Corporation (FCIC) requirements. The number of sanctions imposed by  RMA has not increased appreciably since enactment of ARPA. For  example, RMA imposed an average of less than 20 sanctions annually  from 1996 to 2000, and an average of less than 20 sanctions annually  from 2001 to 2005, except for 2004 (67), which was an aberration. While  not all questionable claims are necessarily sanctionable, RMA has  identified about 3,000 questionable payments annually since beginning  data mining in 2001.
In discussing this report’s findings with RMA in April 2005, officials told  us that the number of sanctions has not substantially increased, in part  because regulations have not been promulgated under ARPA.  According to an official in USDA’s Office of General Counsel, RMA had  imposed sanctions under the provisions of ARPA that were similar to  RMA’s previous authority to impose sanctions. RMA had authority, prior  to ARPA, to impose sanctions on individuals who willfully and  intentionally provide false information and had promulgated  regulations for imposing sanctions on this basis. (See 7 C.F.R. §§  400.454, 718.11, and 1405.8.)  However, according to this official, it had  not imposed any sanctions under its new authority to do so for failure  to comply with an FCIC program requirement. This official indicated  that regulations were needed to establish what constituted an FCIC  requirement, how USDA will determine that a material violation has  occurred, and what process would be followed before imposing  sanctions. USDA does not dispute the report’s findings that no  sanctions have been imposed under this provision of ARPA. 6. Our recommendation that FSA share producer-derived information  with RMA for data mining to administer and enforce the requirements  of the crop insurance program is based on a current lack of information  sharing between FSA and RMA. As we report, many farming operations  do not always certify individuals or entities who hold or acquire a  beneficial interest of 10 percent or more in the insured operation, as  required by RMA regulations. RMA was unaware that these entities had  failed to fully disclose ownership interest because it had not been given  access by FSA to the data file identifying a producer’s ownership  interest in other farming operations. Furthermore, although USDA is  developing a system—called the Common Information Management  System-—to allow FSA and RMA to share producer information, as of  September 2005, USDA had not decided whether the data elements  necessary to identify a producer’s ownership interest in a farming  operation would be included in the new system. Therefore, we continue  to believe that FSA needs to make this information available to RMA  and that RMA should conduct data mining on this information to  identify producers having a pattern of anomalous claims payments. 7. Our recommendation is directed at providing RMA with an additional  tool to address producers who seem to experience losses year after  year when other similarly situated producers do not. Such a tool would  complement RMA’s current focus on preventing producers from  committing future abuses by providing an incentive to not commit the  abuse in the first place. For example, eliminating optional unit coverage  for a year for a producer who exhibits a clear pattern of yield switching,  as we present in this report, would discourage the abuse. Removing the  means that enables a producer to commit abuse may act as a deterrent.
Furthermore, the costs of fraud, waste, and abuse to the crop insurance  program from farms with optional units can be significant, according to  a 2002 RMA study. The study estimated the additional indemnities  associated with fraud, waste, and abuse were $131 million for 1996 to  2000 for farms insuring with optional units on wheat and barley in  North Dakota and cotton in west Texas. We agree with USDA that the  number of policies identified annually as having patterns consistent  with yield switching is small in comparison with the number of policies  in the crop insurance program. However, we believe it is possible to  narrowly tailor an underwriting rule so that it would target only a few  producers each year and would entail few resources. Such a rule would  also reduce reliance on RMA’s broad-brush approach of assessing a 10  percent premium surcharge on all producers with optional units to  cover the additional indemnities that are attributable to optional units.  Thus, we continue to consider it reasonable for RMA to reduce the  insurance guarantee or eliminate optional unit coverage for producers  who consistently have claims that are irregular in comparison with  other producers growing the same crop in the same location.
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Jeanne Barger, Thomas Cook,  Ronald E. Maxon Jr., Lynn Musser, Carol Herrnstadt Shulman, and Amy  Webbink made key contributions to this report. Important contributions  were also made by Stephen Brown and Paul Desaulniers.
We also wish to give special tribute to our dear friend and colleague,  Cleofas Zapata Jr., who died tragically near the conclusion of our work.  Cleo dedicated his life to public service, first as a member of the U.S. Air  Force, and then as an analyst for 24 years with GAO. Cleo’s career with  GAO was characterized by his strong desire to make government programs  more effective and efficient and to weed out fraud, waste, and abuse. But it  was his humor, kindness, and respect for all human beings that inspired his  co-workers, who held him in the highest esteem and miss him greatly.
section_title: Related GAO Products
paragraphs: Crop Insurance: USDA Needs to Improve Oversight of Insurance  Companies and Develop a Policy to Address Any Future Insolvencies.   GAO-04-517. Washington, D.C.: June 1, 2004.
Crop Insurance: USDA Needs a Better Estimate of Improper Payments to  Strengthen Controls of Claims. GAO/RCED-99-266. Washington, D.C.:  September 22, 1999.
Crop Insurance: USDA’s Progress in Expanding Insurance for Specialty  Crops. GAO/RCED-99-67. Washington, D.C.: April 16, 1999.
Crop Insurance: Federal Program Faces Insurability and Design  Problems. GAO/RCED-93-98. Washington, D.C.: May 24, 1993.
Crop Insurance: Program Has Not Fostered Significant Risk-Sharing by  Insurance Companies. GAO/RCED-92-25. Washington, D.C.: January 13,  1992.