Travel Cards: Control Weaknesses Leave Army Vulnerable to Potential Fraud and Abuse
Published: 2002-07-17T00:00:00

Fast Facts:

Highlights:
section_title: What GAO Found
paragraphs: In fiscal year 2001, the Army had 430,000 individually billed travel card accounts, and about $619 million in related charges. Most Army cardholders properly used their travel cards and promptly paid amounts owed. However, the Army's delinquency rate is higher than any other Department of Defense (DOD) component or executive branch agency. GAO also identified numerous instances of potentially fraudulent and abusive activity related to the travel cards. During fiscal year 2001, at least 200 Army employees wrote three or more nonsufficient funds or "bounced" checks to Bank of America as payment for their travel bills--potentially fraudulent acts. GAO found little evidence of documented disciplinary action against Army personnel who misused the card, or that Army travel program managers or supervisors were even aware that travel cards were being used for personal use. For fiscal year 2001, the Army had significant breakdowns in key internal controls over individually billed travel cards that stemmed from a weak overall environment, flawed policies and procedures, and a lack of adherence to valid policies and procedures. These breakdowns contributed to the significant delinquencies and charge-offs of Army employee account balances and potentially fraudulent and abusive activity related to the travel cards. DOD has taken a number of actions focused on reducing delinquencies. As a result of these actions, Army experienced a significant drop in charged-off accounts in the first half of fiscal year 2002.

section_title: Letter
paragraphs: Thank you for the opportunity to discuss the Army's internal controls over  the government travel card program.  This Subcommittee held a hearing in  May 2001 that identified substantial delinquencies and charge-offs related  to the Department of Defense (DOD) travel cards.  As a result of your  hearing and our work on internal control over purchase card transactions  at two Navy sites in San Diego, California, and continuing concern about  fraud, waste, and abuse in DOD's use of both travel and purchase cards,  you requested more comprehensive audits of both programs.  As part of  this requested work, this testimony focuses on the Army travel card  program.  We plan to issue a detailed report with recommendations on the  results of our audit.  In addition, we will report to you separately on the  results of our Navy and Air Force travel card program audits when  completed.
The intent of the travel card program, which is administered by a  contractor (Bank of America), was to improve convenience for the traveler  and to reduce the government's costs of administering travel.  In fiscal year  2001, the Army had about 430,000 individually billed travel card accounts,  and about $619 million in related travel card charges.  The individually  billed travel card program is significantly different from the purchase card  program in that cardholders are directly responsible for all charges  incurred on their travel cards and the monthly bill is sent to the cardholder  for payment.  The cardholder is responsible for submitting a properly  documented voucher and is reimbursed by the Army for all valid expenses  related to official government travel.  In contrast, all purchase card charges  are billed directly to the government for monthly payment.
Today, I will provide my perspectives on (1) the reported magnitude and  impact of delinquent and charged off Army travel card accounts for fiscal  year 2001 and the first 6 months of fiscal year 2002, along with an analysis  of related causes, (2) whether indications existed of potentially fraudulent  and abusive activity related to the Army travel card during fiscal year 2001,  (3) whether abusive activity associated with the travel card is effectively  linked to disciplinary actions and security clearances, (4) the effectiveness  of the overall control environment and key internal controls for the Army's  travel program, and (5) the status of DOD and Army corrective actions.  While our audit identified examples of potentially fraudulent and abusive  travel card activity, our work was not designed to identify, and we cannot  determine, the extent of potentially fraudulent and abusive activity.   Appendix I provides more detailed information on our scope and  methodology.
subsections: section_title: Travel Card Delinquencies and Charge-offs
paragraphs: Most Army cardholders properly used their travel cards and paid amounts  owed to Bank of America promptly.  However, we found that the Army's  delinquency rate is higher than any other DOD component or executive  branch agency in the federal government.  As shown in figure 1, for the  eight quarters ending March 31, 2002, the Army's delinquency rate  fluctuated from 10 to 18 percent, and on average was about 5 percent  higher than the rest of DOD and 7 percent higher than federal civilian  agencies.  As of March 31, 2002, over 11,000 Army cardholders had  $8.4 million in delinquent debt.
We also found substantial charge-offs of Army travel card accounts.  Since  the inception of the travel charge card task order between DOD and Bank  of America on November 30, 1998, Bank of America has charged off over  23,000 Army travel card accounts with nearly $34 million of bad debt.  As  shown in figure 2, the travel cardholder's grade (and associated pay) is a  strong predictor of delinquency problems.  We found that the Army's  delinquency and charge-off problems are primarily associated with young,  low- and midlevel enlisted military personnel with basic pay levels ranging  from $11,000 to $26,000.  A more detailed explanation of each of these  grades along with their associated basic pay rates is provided in appendix  II.
These delinquencies and charge-offs have cost the Army millions of dollars  in lost rebates, higher fees, and substantial resources spent pursuing and  collecting past-due accounts.   For example, we estimated that in fiscal year  2001, delinquencies and charge-offs cost the Army $2.4 million in lost  rebates, and will cost $1.4 million in increased automated teller machine  (ATM) fees annually.
section_title: Potentially Fraudulent and Abusive Travel Card Activity
paragraphs: Our work also identified numerous instances of potentially fraudulent and  abusive activity related to the travel card.  We found that during fiscal year  2001 at least 200 Army employees wrote three or more nonsufficient funds  (NSF) or “bounced” checks to Bank of America as payment for their travel  card bills—a potentially fraudulent act.  Appendix III provides a table  summarizing 10 examples, along with more detailed descriptions, of cases  in which cardholders wrote three or more NSF checks to Bank of America  and had their travel card accounts subsequently charged off.  For example,  in one case, an Army employee from Ft. Jackson, who was convicted for  writing NSF checks prior to receiving the government travel card, wrote  over 86 NSF checks to Bank of America.
Further, we found instances in which cardholders abused their travel cards  by using them to purchase a wide variety of personal goods or services that  were unrelated to official government travel.  As shown in figure 3,  government travel cards are clearly marked, “For Official Government  Travel Only.”
In addition, before receipt of their travel cards, all Army cardholders are  required to sign a statement of understanding that the card is to be used  only for authorized official government travel expenses.  However, as part  of our statistical sampling results at the four sites we audited, we estimated  that personal use of the government travel card ranged from 15 percent of  fiscal year 2001 transactions at one site to 45 percent at another site.   Government travel cards were used to pay for such diverse goods and  services as dating and escort services; casino and Internet gambling;  cruises; tickets to musical and sporting events; personal clothing; closing  costs on a home purchase; and, in one case, the purchase of a used  automobile.  For example, we were able to determine that, during fiscal  year 2001, approximately $45,000 was spent Army-wide to purchase cruise  packages or to pay for a variety of activities or services on cruise ships.  We  found that charged-off accounts included both those of (1) cardholders  who were reimbursed by the Army for official travel expenses but failed to  pay Bank of America for the related charges, thus pocketing the  reimbursements, and (2) cardholders who used their travel cards for  personal purchases for which they did not pay Bank of America.  Appendix  IV provides a summary table and supporting narrative describing examples  of both types of abusive travel card activity.
As detailed in appendix V, we also found instances in which cardholders  used their travel cards for personal purposes, but paid their travel card bills  when they became due.  For example, we found that a Lieutenant Colonel  used his travel card to purchase accommodations and tickets to attend the  Tournament of Roses in Pasadena, California. These cardholders benefited  by, in effect, getting interest-free loans.  Personal use of the cards increases  the risk of charge-offs related to abusive purchases, which are costly to the  government and the taxpayer.
We also found several instances of abusive travel card activity where Army  cardholders used their cards at questionable establishments such as  gentlemen's clubs, which provide adult entertainment.  Further, these clubs  were used to convert the travel card to cash by supplying cardholders with  actual cash or “club cash” for a 10 percent fee.  For instance, a cardholder  may charge $330 to the government travel card at one of these clubs and  receive $300 in cash.  Subsequently, the club receives payment from Bank  of America for a $330 restaurant charge.  For fiscal year 2001, we identified  about 200 individuals who charged almost $38,000 at these establishments.   For example, we found that 1 cardholder obtained more than $5,000 in cash  from these establishments.
section_title: Abusive Travel Card Activity Not Effectively Linked to Disciplinary Action and Security Clearances
paragraphs: We found little evidence of documented disciplinary action against Army  personnel who misused the card, or that Army travel program managers or  supervisors were even aware that Army personnel were using their travel  cards for personal use.  For example, a civilian employee working at the  Pentagon on a classified program used her travel card for personal  purchases of about $3,600 and subsequently wrote four NSF checks for  over $7,700 to Bank of America.  The cardholder's account was  subsequently charged-off when the cardholder failed to pay the bill.  The  employee's supervisor was not aware that the employee had any potentially  fraudulent and abusive activity related to the travel card.  In another  example, a California National Guardsman with over $5,400 of charge-offs  associated with authorized travel, for which the Army reimbursed the  cardholder, was subsequently promoted from a Major to a Lieutenant  Colonel.
In addition, we found that 38 of 105 travel cardholders we examined that  had their accounts charged-off still had active secret or top-secret  clearances as of June 2002.  Some of the Army personnel holding security  clearances who have had difficulty paying their travel card bills may  present security risks to the Army.  Army regulations provide that an  individual's finances are one of the key factors to be considered in whether  an individual should continue to be entrusted with a secret or top-secret  clearance.  However, we found that Army security officials were unaware  of these financial issues and consequently could not consider their  potential effect on whether these individuals should continue to receive  security clearances.
section_title: Key Internal Control Breakdowns
paragraphs: For fiscal year 2001, the Army had significant breakdowns in key internal  controls over individually billed travel cards.  The breakdowns stemmed  from a weak overall control environment, flawed policies and procedures,  and a lack of adherence to valid policies and procedures.  These  breakdowns contributed to the significant delinquencies and charge-offs of  Army employee account balances and potentially fraudulent and abusive  activity related to the travel cards.
At the four units we audited, we found management was focused primarily  on delinquencies and often only after severe problems were discovered and  major commands began demanding improved performance in reducing the  amount of such delinquencies.  There were few indications that  management placed any emphasis on controls designed to prevent or  provide for early detection of travel card misuse.  In addition, we identified  two key overall control environment weaknesses:  (1) the lack of clear,  sufficiently detailed policies and procedures and (2) limited travel card  audit and program oversight.  First, the units we audited used DOD's travel  management regulations (DOD Financial Management Regulation,  volume 9, chapter 3) as the primary source of policy guidance for  management of Army's travel card program.  However, in many areas, the  existing guidance was not sufficiently detailed to provide clear, consistent  travel management procedures to be followed across all Army units.   Second, as recognized in the DOD Inspector General's March 2002  summary report on the DOD travel card program, “ecause of its dollar  magnitude and mandated use, the DOD travel card program remains an  area needing continued emphasis, oversight, and improvement.   Independent internal audits should continue to be an integral component of  management controls.”  However, the DOD Inspector General report noted  that only two internal review reports were issued from fiscal year 1999  through fiscal year 2001 concerning the Army's travel card program.
We found that this overall weak control environment contributed to design  flaws and weaknesses in a number of management control areas needed  for an effective travel card program.  For example, many problems we  identified were the result of ineffective controls over issuance of travel  cards.  Although DOD's policy allows denial of travel cards for certain  groups or individuals with poor credit histories, we found that, without  exception, the Army processed all travel card applications it received,  regardless of an applicant’s credit history. For the cases we reviewed, we  found a significant correlation between travel card fraud, abuse, and  delinquencies and individuals with substantial credit history problems.   The prior and current credit problems we identified for Army travel  cardholders included charged-off credit card and automobile loans,  defaulted and foreclosed mortgages, bankruptcies, and convictions for  writing NSF checks.
Also, agency program coordinators (APCs), who have the key  responsibility for managing and overseeing travel cardholders' activities,  are essentially set up to fail in their duties because they are given  substantial responsibility for a large number of cardholders—for example  up to 1,000 cardholders per APC—and little time to do this collateral duty.   Military personnel who are responsible for and rated on other job  responsibilities—such as airport security—are given the APC role as “other  duty as assigned.”  With a high level of APC turnover (particularly military  APCs, which at one of the locations we audited were reassigned about  every 6 months), and only minimal time allotted to perform this collateral  duty, we found that APCs generally were ineffective in carrying out their  key travel card program management and oversight responsibilities.
Table 1 summarizes our statistical tests of four key control activities  related to basic travel transaction and voucher processing at four Army  locations.
Substantial delays in travel voucher reimbursements to cardholders can  have a significant impact on high delinquency rates.  For example, such  delays at the California National Guard contributed to the high delinquency  rate for that unit.  We found a substantial number of California National  Guard employees and several employees at other units audited who may  have been due payments for late fees because their reimbursements were  late.  We also found errors in travel voucher processing that resulted in  both overpayment and underpayment of the amounts that cardholders  should have received for their official travel expenses.
section_title: Corrective Actions
paragraphs: DOD has taken a number of actions focused on reducing delinquencies.  In  October 2000, the Vice Chief of Staff of the Army issued a directive to cut  the Army's delinquencies by 50 percent by the end of March 2001.  Further,  the Vice Chief of Staff established a goal of a delinquency rate of no more  than 4 percent of active cardholders as soon as possible and ordered  commanders throughout the Army to provide additional attention to the  government travel card program.  Beginning in November 2001, DOD began  a salary and military retirement offset program—similar to garnishment.   As a result of these actions, Army experienced a significant drop in  charged-off accounts in the first half of fiscal year 2002.  In addition, DOD  has encouraged cardholders to make greater use of split pay  disbursements.  This payment method, by which cardholders elect to have  all or part of their reimbursement sent directly to Bank of America, has the  potential to significantly reduce delinquencies.  Split disbursements are a  standard practice of many private sector companies.  DOD reported that  for about 27 percent of the travel vouchers paid in April 2002 at one of its  major disbursing centers, cardholders elected this payment option.
Further, the DOD Comptroller created a DOD Charge Card Task Force to  address management issues related to DOD's purchase and travel card  programs.  We met with the task force in June and provided our  perspectives on both programs.  The task force issued its final report on  June 27, 2002.  However, we have not yet had an opportunity to review the  report's findings in detail.  To date, many of the actions that DOD has taken  primarily address the symptoms or “back-end” result of delinquency and  charge-offs after they have already occurred.  We are encouraged by the  DOD Comptroller's recent announcement concerning the cancellation of  all travel cards of cardholders who have not been on official government  travel within the last 12 months.  Actions to implement additional “front- end” or preventive controls will be critical if DOD is to effectively address  the high delinquency rates and charge-offs, as well as potentially fraudulent  and abusive activity, discussed in this testimony.
To that end, we will be issuing a related report in this area with specific  recommendations, including a number of preventive actions that, if  effectively implemented, should substantially reduce delinquencies and  potentially fraudulent and abusive activity related to the travel cards.  For  example, we plan to include recommendations that will address actions  needed in the areas of exempting individuals with a history of financial  problems from the requirement to use a travel card; providing sufficient  infrastructure to effectively manage and provide day-to-day monitoring of  travel card activity related to the program; deactivating cards when  employees are not on official travel; moving towards mandating use of split  disbursements; providing strong, consistent disciplinary action to  employees who commit fraud or abuse the travel cards; and ensuring that  information on any financial problems related to the travel cards of any  cardholders with secret or top-secret security clearances is provided to  appropriate security officials to consider in determining whether such  clearances should be suspended or revoked.
Mr. Chairman, Members of the Subcommittee, and Senator Grassley, this  concludes my prepared statement.  I would be pleased to respond to any  questions that you may have.
section_title: Contacts and Acknowledgments
paragraphs: For future contacts regarding this testimony, please contact Gregory D.  Kutz at (202) 512-9095 or kutzg@gao.gov or John J. Ryan at (202) 512-9587  or ryanj@gao.gov.
section_title: Scope and Methodology
paragraphs: We used as our primary criteria applicable laws and regulations, including  the Travel and Transportation Reform Act of 1998 (Public Law 105-264),  the General Services Administration's (GSA) Federal Travel Regulation,  and the Department of Defense Financial Management Regulations,  Volume 9, Travel Policies and Procedures.  We also used as criteria our  Standards for Internal Control in Federal Government; and our Guide to  Evaluating and Testing Controls Over Sensitive Payments.  To assess  the management control environment, we applied the fundamental  concepts and standards in the GAO internal control standards to the  practices followed by management in the six areas reviewed.
To assess the magnitude and impact of delinquent and charged-off  accounts, we compared the Army's delinquency and charge-off rates to  other DOD services and the other executive branch agencies in the federal  government.  We also analyzed the trends in the delinquency and charge-off  data from fiscal year 2000 through the first half of fiscal year 2002.
We also used data mining to identify Army individually billed travel card  transactions for audit.  Our data mining procedures covered the universe of  individually billed Army travel card activity during fiscal year 2001 and  identified transactions that we believed were potentially fraudulent or  abusive.  However, our work was not designed to identify, and we did not  determine, the extent of any potentially fraudulent or abusive activity  related to the travel cards.
To assess the overall control environment for the travel card program at the  Department of the Army, we obtained an understanding of the travel  process, including travel card management and oversight, by interviewing  officials from the Office of the Undersecretary of Defense Comptroller,  Department of the Army; Defense Finance and Accounting Service (DFAS);  Bank of America; and GSA, and reviewing applicable policies and  procedures and program guidance they provided.  We visited four Army  units to “walk through” the travel process including the management of  travel card usage and delinquency.  We visited the DFAS Orlando location  to “walk through” the voucher review and payment process used for two of  the four Army locations we tested. We also assessed actions taken to  reduce the severity of travel card delinquencies and charge-offs.  Further,  we contacted one of the three largest U.S. credit bureaus to obtain credit  history data and information on how credit scoring models are developed  and used by the credit industry for credit reporting.  At each of the Army  locations we audited, we also used our review of policies and procedures  and the results of our walk throughs of travel processes and other  observations to assess the effectiveness of controls over segregation of  duties among persons responsible for preparing travel vouchers,  processing and approving travel vouchers, and certifying travel voucher  payments.
To test the implementation of key controls over individually billed Army  travel card transactions processed through the travel system—including  the travel order, travel voucher, and payment processes—we obtained and  used the database of fiscal year 2001 Army travel card transactions to  review random samples of transactions at four Army locations.  Because  our objective was to test controls over travel card expenses, we excluded  credits and miscellaneous debits (such as fees) from the population of  transactions used to select random samples of travel card transactions to  review at each of four Army units we audited.  Each sampled transaction  was subsequently weighted in the analysis to account statistically for all  charged transactions at each of the four units, including those transactions  that were not selected for review at those locations.
We selected the four Army locations for testing controls over travel card  activity based on the relative size of travel card activity at the 13 Army  commands and of the units under these commands, the number and  percentage of delinquent accounts, and the number and percentage of  accounts charged-off.  We selected two units from Army's Forces  Command because that command represented approximately 19 percent of  travel card activity, 22 percent of the delinquent accounts, and 28 percent  of accounts charged-off during fiscal year 2001 across the Army.  We also  selected an Army National Guard location because the Army National  Guard represented 13 percent of the total travel card activity, 22 percent of  the delinquent accounts, and 15 percent of charge-offs for fiscal year 2001.   The Special Operations Command represents about 6 percent of Army's  charge card activity, 5 percent of the delinquent accounts and 4 percent of  Army travel card accounts charged-off in fiscal year 2001.  Each of the units  within the commands was selected because of the relative size of the unit  within the respective command.  Table 2 presents the sites selected and the  universe of fiscal year 2001 transactions at each location.
We performed tests on statistical samples of travel card transactions at  each of the four case study sites to assess whether the system of internal  control over the transactions was effective and to provide an estimate of  the percentage of transactions that were not for official government travel  by unit.  For each transaction in our statistical sample, we assessed  whether (1) there was an approved travel order prior to the trip, (2) the  travel voucher payment was accurate, (3) the travel voucher was submitted  within 5 days of the completion of travel, and (4) the travel voucher was  paid within 30 days of the submission of an approved voucher.  We  considered transactions not related to authorized travel to be abusive and  incurred for personal purposes.  The results of the samples of these control  attributes, as well as the estimate for personal use—or abuse—related to  travel card activity, can be projected to the population of transactions at  the respective test case study site only, not to the population of travel card  transactions for all Army cardholders.
Table 3 shows the results of our test of the key control related to the  authorization of travel (approved travel orders were prepared prior to  dates of travel).
Table 4 shows the results of our test for effectiveness of controls in place  over the accuracy of travel voucher payments.
Table 5 shows the results of our tests of two key controls related to timely  processing of claims for reimbursement of expenses related to government  travel—timely submission of the travel voucher by the employee and timely  approval and payment processing.
To determine if cardholders were reimbursed within 30 days, we used  payment dates provided by DFAS.  We did not independently validate the  accuracy of these reported payment dates.
We briefed DOD managers, including officials in DOD's Defense Finance  and Accounting Service, and Army Managers including Assistant Secretary  of the Army (Financial Management and Comptroller) officials, Army  Forces Command and Special Operations Command Unit Commanders,  unit-level APCs, and Army National Guard Bureau management and the  California National Guard Adjutant General, and Bank of America officials  on the details of our review, including our objectives, scope, and  methodology and our findings and conclusions.  We incorporated their  comments where appropriate.  With the exception of our limited review of  access controls at the California National Guard, we did not review the  general or application controls associated with the electronic data  processing of Army travel card transactions.  We conducted our audit work  from December 2001 through July 2002 in accordance with generally  accepted government auditing standards, and we performed our  investigative work in accordance with standards prescribed by the  President's Council on Integrity and Efficiency.  Following this testimony,  we plan to issue a report, which will include recommendations to DOD and  the Army for improving internal controls over travel card activity.
section_title: Army Personnel Grade, Rank, and Associated Basic Pay Rates
paragraphs: Tables 6 and 7 show the grade, rank (where relevant), and the associated  basic pay rates for 2001 for the Army's military and civilian personnel,  respectively.
section_title: Nonsufficient Fund Checks Written to Bank of America