Food Stamp Trafficking: FNS Could Enhance Program Integrity by Better Targeting Stores Likely to Traffic and Increasing Penalties
Published: 2006-10-13T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Every year, food stamp recipients exchange hundreds of millions of dollars in benefits for cash instead of food with retailers across the country, a practice known as trafficking. From 2000 to 2005, the Food Stamp Program has grown from $15 billion to $29 billion in benefits. During this period of time, the U.S. Department of Agriculture's (USDA) Food and Nutrition Service (FNS) replaced paper food stamp coupons with electronic benefit transfer (EBT) cards that work much like a debit card at the grocery checkout counter. Given these program changes and continuing retailer fraud, GAO was asked to provide information on (1) what is known about the extent and nature of retailer food stamp trafficking, (2) the efforts of federal agencies to combat such trafficking, and (3) program vulnerabilities. To do this, GAO interviewed agency officials, visited 10 field offices, conducted case file reviews, and analyzed data from the FNS retailer database.
section_title: What GAO Found
paragraphs: FNS's estimates suggest trafficking declined between 1995 and 2005 from 3.8 cents per dollar of benefits redeemed to 1.0 cent, resulting in an estimated $241 million in food stamps trafficked in 2005. The rate of trafficking in small grocery and convenience stores is 7.6 cents per dollar, significantly higher than the rate for large stores, where it is estimated to be 0.2 cents per dollar. In addition, the use of EBT cards has changed the way some benefits are trafficked, for example eliminating middlemen who used to collect and redeem large amounts of paper coupons from program participants willing to sell them. FNS has taken advantage of EBT data to improve its ability to detect and disqualify trafficking retailers, while law enforcement agencies have conducted a decreasing number of investigations. Cases using only EBT transaction data now account for more than half of trafficking disqualifications, supplementing traditional, but more time-consuming, undercover investigations. Other federal entities, such as the USDA's Inspector General and the U.S. Secret Service, have reduced the number of traffickers they pursue in recent years and focused their efforts on high-impact cases. This has resulted in fewer cases referred for federal prosecution and fewer federal convictions for retailer trafficking. Despite FNS progress, the program remains vulnerable because retailers can enter the program intending to traffic, often without fear of severe criminal penalties. FNS authorizes some stores with limited food supplies so that low-income participants in areas with few supermarkets have access to food, but may not inspect these stores again for 5 years unless there is some indication of a problem. Oversight of early operations is important because newly authorized retailers can quickly ramp up the amount of benefits they traffic. One location that FNS disqualified for trafficking redeemed almost $650,000 in 9 months. In addition, FNS has not conducted analyses to identify high risk areas and to target its limited compliance-monitoring resources. Furthermore, disqualification, FNS's most severe penalty, may not be a sufficient deterrent, and FNS must rely upon others for prosecution. Finally, states' failing to pursue trafficking recipients leaves a pool of recipients willing to traffic when a disqualified store reopens.

section_title: Letter
paragraphs: Every year, food stamp recipients exchange hundreds of millions of  Every year, food stamp recipients exchange hundreds of millions of  dollars in benefits for cash instead of food with authorized retailers across  dollars in benefits for cash instead of food with authorized retailers across  the country, a practice known as trafficking. In a typical trafficking  the country, a practice known as trafficking. In a typical trafficking  situation, a retailer gives a food stamp recipient a discounted amount of  situation, a retailer gives a food stamp recipient a discounted amount of  cash—commonly 50 cents on the dollar—in exchange for food stamp  cash—commonly 50 cents on the dollar—in exchange for food stamp  benefits and pockets the difference. By trafficking, retailers commit fraud  benefits and pockets the difference. By trafficking, retailers commit fraud  and undermine the primary purpose of the program, which is to help  and undermine the primary purpose of the program, which is to help  provide food to low-income individuals and families. Recipients who  provide food to low-income individuals and families. Recipients who  traffic deprive themselves and their families of the intended nutritional  traffic deprive themselves and their families of the intended nutritional  benefits.  benefits.
In recent years, the Food Stamp Program has grown tremendously. From  In recent years, the Food Stamp Program has grown tremendously. From  2000 to 2005, the program—administered by the Food and Nutrition  2000 to 2005, the program—administered by the Food and Nutrition  Service (FNS) of the U.S. Department of Agriculture (USDA), in  Service (FNS) of the U.S. Department of Agriculture (USDA), in  partnership with the states—has grown from $15 billion in benefits  partnership with the states—has grown from $15 billion in benefits  provided to 17 million individuals to $29 billion in benefits to nearly   provided to 17 million individuals to $29 billion in benefits to nearly   26 million individuals. Almost one in every 12 Americans participates in  26 million individuals. Almost one in every 12 Americans participates in  the program. During this period of time, FNS and the states completed  the program. During this period of time, FNS and the states completed  replacing paper food stamp coupons with electronic benefit transfer  (EBT) cards that work much like a debit card at the grocery checkout  counter. This EBT transaction provides a wealth of new electronic  information to FNS officials, who are responsible for monitoring food  stamp retailers and sanctioning those who traffic. Given these major  changes in the program and continued concern about retailer fraud and  abuse, you asked us to provide information on (1) what is known about  the extent and nature of retailer food stamp trafficking, (2) the efforts of  federal agencies to combat such trafficking, and (3) the program  vulnerabilities that continue to exist.
To report on what is known about the extent of trafficking, we used four  FNS estimates of food stamp trafficking. The four estimates, which were  the best available data on this subject, covered the calendar years 1993,  1996 to 1998, 1999 to 2002, and 2002 to 2005. The methodology FNS used  to develop these estimates has some limitations; the estimates do not  provide a precise measure of food stamp trafficking. However, they can  be used to provide an indication of the magnitude of food stamp  trafficking and the change in the rate over time.
To understand the nature of trafficking, assess the efforts to combat it, and  identify continued program vulnerabilities, we conducted interviews with  the following program stakeholders: officials from FNS headquarters and  regional offices; other officials responsible for investigating food stamp  trafficking including the USDA’s Office of the Inspector General (OIG) and  the U.S. Secret Service; food stamp advocates and researchers; officials  from industry associations and EBT contractors; and officials from  selected state law enforcement bureaus. In addition, we obtained relevant  information from the state audit, comptroller, and treasurer community.  We selected and visited 10 FNS field offices (Chicago, Ill.; Dallas, Tex.;  Denver, Colo.; Detroit, Mich.; Los Angeles, Calif.; New York, N.Y.;  Portland, Ore.; Sacramento, Calif.; Tallahassee, Fla and Towson, Md.)  located in the seven FNS regions. We selected these offices to achieve  variation in geographical distribution, the ages of the states’ EBT systems,  and the number of stores that were disqualified from participating in the  program for trafficking. At each office, we conducted semistructured  interviews with FNS officials and used a case file review tool to review  nonprobability samples of files for 163 retailers that were disqualified for  trafficking in fiscal year 2005. We also interviewed officials from seven of  the states where we made our field office visits.
In addition, to identify efforts to combat trafficking, we analyzed FNS’s  authorized retailer database, the Store Tracking and Redemption System,  to determine the number of permanent trafficking disqualifications by  store address, to calculate the time between a store’s initial authorization  and its first disqualification for fiscal years 1996 through 2005, and to  determine the number of sanction actions that had been taken against a  retailer leading up to the retailer’s being permanently disqualified. To  ensure the accuracy of the FNS data we analyzed, we interviewed agency  officials to identify and resolve any inconsistencies that could affect our  work. In addition, we reviewed documentation on how these data were  gathered and maintained. Based on the collective information from our  assessment, we determined the data are sufficiently reliable for enhancing  our understanding of continuing program vulnerabilities and agency  efforts in combating trafficking. We conducted our work between July  2005 and June 2006 in accordance with generally accepted government  auditing standards.
subsections: section_title: Background
paragraphs: The federal Food Stamp Program is intended to help low-income  individuals and families obtain a more nutritious diet by supplementing  their income with benefits to purchase nutritious food such as meat, dairy,  fruits, and vegetables, but not items such as soap, tobacco, or alcohol. The  Food and Nutrition Service (FNS) pays the full cost of food stamp benefits  and shares the states’ administrative costs—with FNS usually paying  approximately 50 percent—and is responsible for promulgating program  regulations and ensuring that state officials administer the program in  compliance with program rules. The states administer the program by  determining whether households meet the program’s income and asset  requirements, calculating monthly benefits for qualified households, and  issuing benefits to participants on an electronic benefits card.
In fiscal year 2005, the Food Stamp Program issued almost $28.6 billion in  benefits to about 25.7 million individuals participating in the program, and  the maximum monthly food stamp benefit for a household of four living in  the continental United States was $506. As shown in figure 1, the increase  in the average monthly participation of food stamp recipients in 2005  continues a recent upward trend in the number of people receiving  benefits.
subsections: section_title: Retailer Authorization
paragraphs: Retailers are the front line for determining which goods can be purchased  and for ensuring the integrity of the food stamp transaction. FNS operates  44 field offices throughout the country, and they have the primary  responsibility for authorizing retailers to participate in the Food Stamp  Program. To become an authorized retailer, a store must offer on a  continuing basis a variety of foods in each of the four staple food  categories—meats, poultry or fish; breads or cereals; vegetables or fruits;  and dairy products—or 50 percent of its sales must be in a staple group  such as meat or bakery items. However, the regulations do not specify  how many food items retailers should stock. The store owner submits an  application and includes forms of identification such as copies of the  owner’s Social Security card, driver’s license, business license, liquor  license, and alien resident card. The FNS field office program specialist  then checks the applicant’s Social Security number against FNS’s database  of retailers, the Store Tracking and Redemption System, to see if the  applicant has previously been sanctioned in the Food Stamp Program. The  application also collects information on the type of business, store hours,  number of employees, number of cash registers, the types of staple foods  offered, and the estimated annual amount of gross sales and eligible food  stamp sales.
If the application is complete, most field offices will forward a request to  the private contractor employed by FNS to conduct on-site inspections  that verify the information in the application and provide additional  information for the approval process. The contractor visits the store and  submits a map of the store layout, the inspection form, and photographs of  the outside and inside of the store and its inventory. The contractor  reports information on the type of store and its location, access to parking,  the number of cash registers and EBT point-of-sale devices, whether  shopping carts or baskets are available, and the availability of nonfood  stock and services offered, such as liquor, tobacco, gasoline, check  cashing, and lottery tickets. As part of the inspection, the contractor also  evaluates the general store conditions and notes problems—such as empty  coolers and shelves, dusty cans and expired or outdated foods—that could  indicate that this may not be a viable grocery operation. Upon receiving  favorable information from the contractor, the FNS program specialist  authorizes the store to participate in the Food Stamp Program for 5 years.  Unless a problem arises with the store, it typically would not be   re-inspected until it applies for reauthorization.
At the end of fiscal year 2005, more than 160,000 retailers were authorized  to accept food stamp benefits. During the fiscal year, almost 24,000 new  stores were authorized, 30,000 were reauthorized and almost 17,000 left  the program, most for voluntary reasons. As shown in table 1,  supermarkets account for only about 22 percent of the authorized stores  but redeem the lion’s share of food stamp benefits. FNS defines a  supermarket as a store with $2 million of gross sales, three or more cash  registers, and coded as a supermarket on its food stamp application.  for allowable foods. The Personal Responsibility and Work Opportunity  Reconciliation Act of 1996 (PRWORA), however, required each state  agency to implement an EBT system to electronically distribute food  stamp benefits, and the last state completed its implementation in fiscal  year 2004. Under the EBT system, food stamp recipients receive an EBT  card imprinted with their name and a personal account number, and food  stamp benefits are automatically credited to the recipients’ accounts once  a month. As shown on the left in figure 2, in a legitimate food stamp  transaction, recipients run their EBT card, which works much like a debit  card, through an electronic point-of-sale machine at the grocery checkout  counter, and enter their secret personal identification number to access  their food stamp accounts and to authorize the transfer of food stamp  benefits from a federal account to the retailer’s account to pay for the  eligible food items. The legitimate transaction contrasts with a trafficking  transaction portrayed on the right, in which recipients swipe their EBT  card, but instead of buying groceries, they receive a discounted amount of  cash and the retailer pockets the difference.
section_title: Monitoring, Investigating, and Prosecuting Retailer Fraud
paragraphs: In addition to approving retailers to participate in the program, FNS has  the primary responsibility for monitoring their compliance with  requirements and administratively disqualifying those who are found to  have trafficked food stamp benefits. FNS headquarters officials collect and  monitor EBT transaction data to detect suspicious patterns of transactions  by retailers. They then send any leads to FNS program specialists in the  field office who either work the cases themselves or refer them to  undercover investigators in the Retailer Investigations Branch to pursue  by attempting to traffic food stamps for cash.
FNS notifies the USDA’s Office of the Inspector General (OIG) before the  field office specialist or undercover investigator develops a case, and the  OIG may choose to open an investigation on this case on its own for  possible criminal prosecution. The OIG may also work with the US Secret  Service, the Federal Bureau of Investigation, or other agencies to  investigate retailers for criminal prosecution. Secret Service officials told  us they have a memorandum of understanding with the USDA that allows  them to initiate food-stamp-trafficking investigations on their own,  provided they notify the OIG of all the investigations in which an  authorized retailer is targeted.
When trafficking is proved, FNS penalizes the store owners, usually by  permanent program disqualification but in limited circumstances they may  receive civil money penalties. Store owners who sell ineligible goods but  do not traffic are generally subject to a 1-year temporary program  disqualification. If a field office specialist finds that a retailer has  trafficked, the specialist sends a letter to the retailer detailing the charges  and the intended penalty. If the Retailer Investigations Branch succeeds in  trafficking food stamps with a retailer, it first refers the case to the OIG,  which then decides whether it will investigate the case further for possible  prosecution by the US Attorney’s office or by state and local prosecutors  or refer the case back to the FNS field office to complete the  disqualification action.
The retailer may attempt to rebut the charges, but if the retailer does not  respond or cannot provide a reasonable explanation for the specific  charges, then a letter is sent executing the program disqualification. The  retailer may appeal the decision, first to the Administrative Review Branch  at FNS headquarters and later to the appropriate federal district court.
section_title: Monitoring, Investigating, and Prosecuting Recipient Fraud
paragraphs: In addition to administering the day-to-day operation of the Food Stamp  Program, states also have the primary responsibility for monitoring  recipients’ compliance with the program’s requirements and investigating  any case of alleged intentional program violation. This includes cases of  ineligible persons attempting to obtain food stamps or applicants  deliberately providing false information in an attempt to receive more  benefits than they should as well as cases in which recipients traffic their  food stamp benefits. States must ensure that appropriate cases are acted  upon, either through administrative disqualification hearings or referral to  a court of appropriate jurisdiction, in accordance with the procedures  outlined in the Food Stamp Program regulations.
section_title: FNS Estimates Suggest That the Rate of Food Stamp Trafficking Has Declined and That It Occurs More Frequently in Smaller Stores
paragraphs: FNS estimates that the rate of food stamp trafficking was 1.0 cent on the  dollar for calendar years 2002 to 2005. Overall, the estimated rate of  trafficking at small stores is much higher than the estimated rate for  supermarkets and large groceries, which redeem most food stamp  benefits. Furthermore, the implementation of EBT eliminated the role of  the middleman by requiring personal identification numbers each time the  EBT card is used.
subsections: section_title: FNS Reports That the Rate of Food Stamp Trafficking Declined between 1995 and 2005
paragraphs: FNS’s most recent estimate suggests that the food-stamp-trafficking rate  was 1.0 cent on the dollar for calendar years 2002 to 2005 and that this rate  and the total estimated benefits trafficked have declined in recent years.  FNS’ first trafficking study in 1995 estimated that about 3.8 cents of every  dollar of food stamp benefits issued was trafficked in 1993. As shown in  table 2, subsequent FNS studies estimated that this trafficking rate  continued to decline.
The trafficking exchange rate that retailers offer for food stamp benefits  can vary from place to place. While retailers generally offer recipients  about 50 cents for each dollar of benefits, in New York City we were told  by an FNS undercover investigator that the exchange rate is about   70 cents, and in a few locations, some retailers will exchange one dollar of  cash for one dollar of benefits as an accommodation to the food stamp  recipient.
section_title: Most Trafficking Still Occurs in Small Stores
paragraphs: FNS studies suggest that small convenience and grocery stores continue to  be the most common sites for trafficking. Small stores, including small  grocery, convenience, specialty, and gas/grocery stores have an estimated  trafficking rate of 7.6 cents per dollar. In contrast, supermarkets and large  grocery stores have an estimated rate of 0.2 cents per dollar. However,  because supermarkets account for the lion’s share of food stamp benefit  redemptions, even at this lower rate, over $49 million of benefits may have  been trafficked in supermarkets and large grocery stores in fiscal year  2005. Most FNS field officials we interviewed told us these findings  reflected their experience. They characterized a typical trafficking case at  their field office occurring at a convenience, small grocery, or gas/grocery  store located in an urban area where the store owner traffics with familiar  neighborhood food stamp recipients.
section_title: EBT Has Changed How Food Stamps Are Trafficked
paragraphs: The nationwide implementation of EBT has changed the way some food  stamp benefits are trafficked. Previously, in addition to trafficking  conducted directly between store owners and recipients, middlemen could  wait around public assistance offices or subsidized housing complexes to  purchase large numbers of food stamp coupons at a discounted rate  directly from recipients. The coupons might also change hands among  multiple middlemen, with each taking a cut, before ultimately being  exchanged for cash from a willing retailer. Field office officials told us that  EBT has largely eliminated the middleman because retailers must now  have the recipients’ EBT card and personal identification number to  conduct a trafficking transaction. As a result, some recipients have  adapted their trafficking behavior to the new EBT environment. For  example, one field office official told us that some food stamp recipients  now stand outside of stores offering to loan their EBT cards to shoppers  entering the store. In this situation, the shopper would purchase groceries  using the card and return it and a discounted amount of cash to the  recipient upon leaving the store. During our field office visit to  Tallahassee, a GAO analyst was approached in his hotel parking lot by a  would-be trafficker offering such a transaction.
section_title: FNS Has Taken Advantage of New EBT Data to Improve Retailer Monitoring, While Other Federal Entities Have Focused on Fewer, High-Impact Investigations
paragraphs: FNS has taken advantage of new technology to improve its monitoring and  sanctioning of food stamp retailers, but other federal agencies’ have been  investigating and prosecuting fewer traffickers. With the implementation  of EBT, FNS has supplemented its traditional undercover investigations by  the Retailer Investigations Branch with cases developed by analyzing EBT  transaction data. These EBT cases now account for more than half of the  permanent disqualifications by FNS (see fig. 3 below). Although the  number of trafficking disqualifications based on undercover investigations  has declined, these investigations continue to play a key role in combating  trafficking. However, as FNS’s ability to detect trafficking has improved,  the number of suspected traffickers investigated by other federal entities,  such as the USDA Inspector General and the U.S. Secret Service have  declined. These entities have focused more on a smaller number of high- impact investigations. As a result, retailers who traffic are less likely to  face severe penalties or prosecution.
subsections: section_title: EBT Has Provided FNS with Powerful New Tools to Supplement Traditional Retailer Trafficking Investigations
paragraphs: The nationwide implementation of EBT has given FNS powerful new tools  to supplement its traditional undercover investigations of retailers  suspected of trafficking food stamp benefits. FNS traditionally sent its  investigators into stores numerous times over a period of months to  attempt to traffic benefits. However, PRWORA gave FNS the authority to  charge retailers with trafficking in cases based solely on EBT transaction  evidence, called “paper cases.” A major advantage of paper cases is that  they can be prepared relatively quickly and without multiple store visits.  These paper cases accounted for the majority of FNS’s 841 trafficking  disqualifications in fiscal year 2005.
As part of the monitoring process, FNS collects each month’s food stamp  transaction data from the states’ EBT processors and adds the data to its  EBT transaction database for analysis. Six months’ worth of EBT  transactions—about 500 million—are available on line. Information on  the amount of the transaction is reported. Information on the items being  purchased is not available through EBT. The system scans these data to  flag transactions or sets of transactions that fit a certain set of criteria  defined by established patterns of fraudulent activity. The system then  generates a monthly “Watch List” of retailers with suspicious transaction  patterns incongruent with a store’s particular type of retail operation.
The Watch List is sent out to the responsible FNS field office for follow-up.  In the field offices, program specialists begin their work on paper cases by  reviewing the Watch List and leads from other sources, such as the state  food stamp agency, the state EBT processors, and law enforcement  agencies. Using experience with the retailers in the area, program  specialists may determine that suspicious transactions for some retailers  are explainable. In such cases, the specialist may take no further action or  schedule a later review of the store’s transactions. In cases for which they  cannot explain the suspicious transactions, program specialists determine  which retailers they will pursue as paper cases. If the program specialist is  unable to develop a paper case, the case may be referred to the Retailer  Investigations Branch for an undercover investigation.
After deciding to open a paper case, FNS obtains clearance from the OIG  to pursue the case, and then the program specialist uses FNS data and a  variety of other resources to gather evidence. Program specialists  generally use 3 months of EBT data to show suspicious patterns. In the  case files we reviewed, charge letters typically contained hundreds of  examples of suspicious transactions, although FNS guidance does not  specify the number of transactions necessary to support a case. Specialists  also review FNS historical data on retailers to check for such things as  prior program violations. In addition, these specialists obtain more  current transaction data as well as information on recipients suspected of  trafficking with the retailer, through state Food Stamp Program databases.  Many specialists supplement these data with online resources, such as  mapping software to identify suspicious shopping patterns. Program  specialists can also consult the photos taken at the time of authorization to  assess whether conditions in the store support the volume of food stamp  redemptions claimed. Figure 4 shows the limited counter space and the  single cash register of a store that claimed food stamp redemptions of  almost $200,000 per month and was later disqualified for trafficking. Such  information enables the program specialists to corroborate conclusions  they have drawn based on patterns in the EBT transaction data.
In addition, most program specialists in the offices we visited told us they  also visit the store once before charging a retailer with trafficking. Some  store visits allow the program specialist to check for possible explanations  for the suspicious transaction patterns, while others corroborate the  suspicion that the stores are in business to traffic. For example, during one  store visit, program specialists found cans of food on the shelves with  thick layers of dust, many items that had passed their expiration dates, and  jars of spaghetti sauce so old that the contents had separated.
The store owner may attempt to rebut the charges. For example, a store  owner may claim to have extended credit to recipients so they could  purchase food until they received their next month’s food stamp benefits,  and the high-dollar transactions were repayment of the credit. Although  extending credit is also a violation of program rules, it carries a lesser  penalty—temporary disqualification—than trafficking. If the owner is  unable to rebut the charges, and the program specialist disqualifies the  store, the store owner may appeal to the Administrative Review Branch. In  2005, about 6 percent of the permanent disqualifications were modified or  reversed by the branch.
The length of time between a new store’s authorization and its first  disqualification has decreased over the last 10 years. Stores that received a  temporary or permanent disqualification in 1996 had been open an average  of about 8.7 years, but by 2005, that average had dropped to 6.3 years. Two  factors may have contributed to this 28 percent decrease in length of time  between authorization and disqualification: improved FNS monitoring of  the program and use of EBT transaction data or more store owners who  begin to traffic food stamps sooner. The officer-in-charge of the Chicago  field office believes that in her area an increasing number of store owners  are trafficking immediately after authorization. We analyzed FNS’s  authorized retailer data for stores in the Chicago area and found that the  average time between authorization and a store’s first temporary or  permanent disqualification dropped by nearly half. In 1996, it took a  Chicago store about 5 years to receive a term or permanent  disqualification, and in 2005, it was just 2.6 years.
section_title: Investigations by the Retailer Investigations Branch Account for Fewer Trafficking Disqualifications, but Still Play a Key Role in Combating Trafficking
paragraphs: The number of Retailer Investigations Branch undercover trafficking  investigations has declined, but these investigations are often used in  cases where EBT data alone are not enough to prove a retailer is  trafficking. The investigators initiate cases based on requests from FNS  field offices, their own review of the Watch List, or leads from state or  local law enforcement agencies. Like the paper case process, FNS consults  with the OIG before opening a case. To build a case, the investigators  make undercover visits to the store to determine whether the retailer is  selling ineligible goods or trafficking food stamps. If a retailer sells the  investigator ineligible goods but does not traffic, the resulting temporary  disqualification from the program for selling ineligibles can create a  deterrent effect on the disqualified store owner, other store owners, and  trafficking recipients, because such penalties often become known in the  community.
Personal safety can be a concern for investigators. One investigator told us  that there are some stores, especially in urban areas, where it would be  dangerous to attempt an undercover investigation.
Although cases in which the Retailer Investigations Branch finds  trafficking are routinely referred to the OIG for possible prosecution, in  most cases the OIG returns the case to the field office for administrative  disqualification. As with paper cases, the field office sends a charge letter,  detailing the dates on which the retailer sold ineligibles or trafficked food  stamp benefits, and the retailer may attempt to rebut the charges. Once  disqualified, the retailer can appeal the penalty to the Administrative  Review Branch. If no violation is found, the Retailer Investigations Branch  refers the case to the field office to determine whether to continue  investigating.
section_title: OIG and Other Federal Entities Are Conducting Fewer Retailer Trafficking Investigations and Fewer Retailers Are Prosecuted
paragraphs: In recent years, the USDA OIG has opened a decreasing number of food- stamp-trafficking investigations and has focused on high-impact  investigations. In 2000, the OIG opened 179 trafficking investigations,  while in 2005 it opened 77. According to OIG, this has occurred both  because of a lack of resources—the number of OIG investigators has  dropped by 28 percent since 1997—and because the OIG has focused its  resources on high-impact investigations such as those with large-scale  trafficking, those involving other criminal activity, or those involving  possible terrorist connections since September 11, 2001. In addition, OIG  officials told us that it can take up to 5 years to investigate and prosecute a  store owner, and the process of developing an investigation for  prosecution further strains limited resources.
Other federal agencies are also conducting fewer retailer food stamp  trafficking investigations. The US Secret Service used to take on  investigations when large amounts of food stamp coupons were being  trafficked. However, its involvement in retailer trafficking investigations is  rare because the Secret Service finds that large trafficking investigations  are less common since the implementation of EBT. EBT cards typically  only have a few hundred dollars of benefits each month, so it takes many  transactions for a dishonest store owner to traffic a large amount of  money. However, in large trafficking investigations or those where a  retailer is believed to be diverting profits from trafficking to terrorist  causes, the Secret Service or the FBI might work with the OIG and other  agencies on a sting operation or a joint task force. For example, the OIG  and FBI worked jointly with state and local law enforcement authorities in  Florida on an investigation involving store owners who were ordered to  pay $2.6 million in restitution to the USDA and went to prison after  pleading guilty to trafficking over $3 million in food stamp benefits. OIG  officials told us they were actively conducting task force investigations  with other federal, state and local law enforcement authorities.   If an investigation is accepted and developed for prosecution by a law  enforcement entity, there is still no guarantee that the trafficker will be  prosecuted. Most US Attorneys’ offices will not prosecute a retailer unless  a great deal of money is involved, although the threshold varies from one  region to another, according to federal law enforcement officials. Thus,  prosecuting the store owners is a challenge.
Figure 5 shows a decline in recent years in the number of investigations  deemed serious enough to be referred by the OIG to the US Attorney for  prosecution, down from 202 in fiscal year 2001 to 21 in 2005. These data  illustrate the relatively small number of store owners who have faced  prosecution for trafficking in recent years, particularly in light of the   841 owners who were disqualified in fiscal year 2005. These data also  show that the proportion of investigations accepted by the US Attorney for  prosecution has been increasing in recent years. OIG officials told us they  believe they are better targeting investigations for referral.
With fewer retailers prosecuted, the number of convictions has also  declined. Because of the length of time it takes to prosecute a case, there  is a lag between the time when a trafficking investigation is accepted by  the US Attorney for prosecution and the time when a retailer is convicted.  Thus, it is not possible to compare the figures for investigations accepted  for prosecution and those resulting in convictions in the same year.  However, as shown in figure 6, the number of convictions resulting from  investigations by the OIG has declined from 260 in 2000 to 94 in 2005.
section_title: Despite the Progress That Has Been Made against Trafficking, Vulnerabilities Still Exist in the Program
paragraphs: Despite the declining FNS estimates of retailer trafficking, retailers can  still enter the program intending to traffic and do so, often without fear of  severe criminal penalties. Minimal food stock requirements for  authorization and a lack of FNS oversight of contractor inspections may  allow dishonest retailers into the program, and delays in access to  transaction data may allow retailers to traffic large amounts for several  months undetected. In addition, some retailers have adapted their  trafficking behaviors to avoid detection while others have found new ways  to exploit the EBT technology. FNS does not yet have an overall strategy  to target its monitoring resources to high risk areas. Moreover, the  available FNS penalties for trafficking may not be sufficient to deter  retailers from trafficking, and the states’ lack of focus on recipient  trafficking can also facilitate trafficking.
subsections: section_title: Minimal Requirements for Authorization and Lack of Oversight of Contractor Inspections May Allow Corrupt Retailers into the Program
paragraphs: Minimal food stock requirements may allow corrupt retailers to enter the  program, yet their stocks will not likely be checked for 5 years absent the  indication of a problem. FNS field office officials told us their first priority  is getting stores into the program to ensure needy people have access to  food. In part because large grocery stores are sometimes scarce in urban,  low-income areas, officials may allow stores with minimal food stock that  meet the minimum FNS requirements to become authorized food stamp  retailers. Officials told us that when a retailer only stocks small quantities  of eligible food items, such as just a few cans of one kind of vegetable, it is  often an indication of the intent to traffic. However, FNS regulations do  not specify the amount of food items that would constitute sufficient  stock. The officer-in-charge of a large urban field office expressed  frustration with this lack of specificity. Many authorized stores in her area  are gas-and-grocery combinations or convenience stores and some of  these stores stock only one item from each required food group. However,  she said the field office cannot deny these stores authorization based upon  minimal food stock because, in her experience, the denial would be  overturned if appealed. Another official at an FNS regional office told us  about a store that was denied authorization in that region. According to  this official, the denial was overturned by the Administrative Review  Branch when the reviewing officer determined that a single can of corn  sufficed as one of the three different products required in the fruit or  vegetable food group. In addition, Secret Service officials said that some  merchants quickly learn that they do not need to restock their stores to  continue to redeem food stamps because stores aren’t routinely checked  for 5 years unless there is some indication of a problem with the store.  Staff in one of the 10 FNS field offices we visited told us that they have to  authorize some retailers who seem suspicious, but they perform post- authorization visits of these stores to ensure they are legitimate.
During the authorization process, FNS field offices rely on contractors to  inspect stores to ensure they meet program requirements, but FNS does  not independently verify the inspectors’ reports. The inspector provides  the final check that a store exists, it has food in each of the required food  groups, and the information provided on the application for authorization  to become a food stamp retailer is correct. However, at one field office, a  contract inspector was submitting false reports, allowing dishonest  retailers into the program.
Oversight of retailers’ entry into the program and early operations is  important because newly authorized retailers can quickly ramp up the  amount of food stamps they traffic, and there is no limit on the value of  food stamps a retailer can redeem in 1 month. At one field office location  where retailers are often innovative in their trafficking schemes, FNS  officials noticed that some retailers quickly escalated their trafficking  within 2 to 3 months after their initial authorization. As shown in figure 7,  one disqualified retailer’s case file we reviewed at that field office showed  the store went from $500 in monthly food stamp redemptions to almost  $200,000 within 6 months. Redemption activity dropped precipitously after  the trafficking charge letter was sent to the retailer in late October. In its  application for food stamp authorization, this retailer estimated he would  have $180,000 of total annual food sales, yet the retailer was redeeming  more than that each month in food stamp benefits before being caught in a  Retailer Investigations Branch investigation.
section_title: Delays in Access to Transaction Data Allow Trafficking to Continue for Months Undetected
paragraphs: Although EBT implementation provides FNS with valuable transaction  data to identify potential trafficking, an FNS headquarters official said  monitoring and identification of traffickers will be improved once program  specialists have faster access to transaction data to detect suspicious  ramp-up activity. Currently, FNS receives each state’s EBT transaction  data monthly on disk from the states’ EBT contractors. Using this process,  the program specialists would not be aware of a retailer’s rapid ramp-up  activity until they had 2 months’ worth of transaction data, in the third  month after the retailer’s authorization. Then, following the normal case  development process, a charge letter would not be sent to the store until  the fourth month, leading to possible disqualification in the fifth month.  According to this official, as retailers learned that FNS would eventually  discover them by analyzing their EBT transactions, they responded by  ramping up their trafficking activity more quickly to make a quick profit  before FNS could take action.
FNS officials told us they believe that the solution to combating rapid  ramp-up trafficking is for FNS to receive EBT transaction data daily. FNS  systems could then monitor the data more quickly and produce daily  reports of rapidly increasing amounts of retailer transactions called “spike  reports.” In order for FNS to receive so much data on a daily basis, it is  working on building large data pipelines from the states’ EBT processors  and developing its ability to manage that data before the end of this year.  In the interim, FNS is piloting the use of spike reports using monthly data.
section_title: Retailers Are Developing New Trafficking Schemes under EBT
paragraphs: As some retailers have become familiar with FNS’s monitoring techniques,  they have adapted their trafficking patterns to avoid detection. Unlike  those who quickly ramp up their trafficking behavior for quick profit  before detection through FNS monitoring, other retailers have adjusted to  EBT monitoring by manipulating trafficking transactions to prevent  detection by FNS analysis of transaction patterns. One field official said  that there is a large network of trafficking retailers in her field office area  that dissects the charge letters sent to traffickers to determine what  analyses FNS conducts and to teach other retailers how to elude  detection. Secret Service officials confirmed the existence of fraud  networks in this area and said that one ringleader will recruit, encourage,  and reward an entire family and the friends of that family for trafficking  food stamp benefits.
Some retailers have also found new ways to exploit the EBT technology  and continue to traffic. In her July 2003 testimony, the USDA Inspector  General reported that her office had recently identified a fraudulent  scheme that, while rare, appeared to be growing in the Food Stamp  Program. The OIG noticed that some authorized retailers were moving  their point-of-sale terminals to an unauthorized location, such as an  unauthorized store or apartment, for trafficking purposes. In its  Semiannual Report to Congress for the first half of fiscal year 2004, the  OIG reports that four individuals moved the authorized terminals to  different locations in Chicago so they could exchange cash for food stamp  benefits away from the authorized stores and possible detection. This  allowed them to conduct a large number of transactions one after another.  These individuals had been sentenced to serve from 15 to 57 months in  prison and ordered to pay $29.1 million in restitution for defrauding the  Food Stamp Program in this way from the fall of 1997 through August  2001. OIG headquarters officials told us that moving authorized and  unauthorized terminals remains a significant area of concern because of  the large volume of money that could be redeemed quickly.
section_title: FNS Has Not Taken the Next Steps to Target Its Monitoring Resources to High Risk Areas
paragraphs: FNS has not taken the steps to ensure that it identifies those areas or  stores that are at highest risk for trafficking so that it can allocate its  resources accordingly. FNS has made good use of EBT transaction data to  produce its Watch List to identify suspicious transaction patterns and  target certain stores. It has also established task forces of undercover  investigators when it identifies geographic areas needing additional  coverage. However, it is now at a point where it can begin to formulate  more sophisticated analyses to identify high risk areas and target its  resources. For example, certain states have a disproportionate share of the  disqualified stores compared with the number of food stamp recipients in  their states, yet it is not clear whether these numbers indicate that  trafficking is more common in those states or whether FNS program  specialists and investigators have engaged in more intensive pursuit of  traffickers in those areas. Our analysis of FNS’s database of retailers  showed that of the 9,808 stores permanently disqualified from the Food  Stamp Program, about 35 percent were in just 4 states: New York, Illinois,  Texas, and Florida, and yet about 26 percent of food stamp recipients lived  in those states. However, FNS headquarters officials did not know the  number of program specialists in the field offices in these states who  devote a portion of their time to monitoring food stamp transactions and  initiating paper cases. Moreover, FNS officials believe there are probably  other areas of the country where trafficking is occurring that may warrant  further attention or additional resources, such as California, where fewer  than 5 percent of all permanent store disqualifications occurred and about  8 percent of food stamp recipients live. However, FNS officials have not  yet developed a clear strategy or criteria to systematically identify those  areas and reallocate resources in response.
In addition, some retailers and store locations have a history of program  violations that lead up to permanent disqualifications, but FNS did not  have a system in place to ensure these stores were quickly targeted for  heightened attention. Our analysis showed that, of the 9,808 stores that  had been permanently disqualified from the program, about 90 percent  were disqualified for their first detected offense. However, 9.4 percent of  the disqualified retailers had shown early indications of problems before  being disqualified. About 4.3 percent of these retailers had received a civil  money penalty, 4.3 percent had received a warning letter for program  violations, and 0.8 percent had received a temporary disqualification.  Most of these stores were small and may present a higher risk of future  trafficking than others, yet FNS does not necessarily target them for  speedy attention.
Further, some store locations may be at risk of trafficking because a series  of different owners had trafficked there. After an owner was disqualified,  field office officials told us the store would reopen under new owners who  continued to traffic with the store’s clientele. One field office official  would like to be able to bar these repeat store locations, while another  suggested a 90-day waiting period before a new owner of a disqualified  store location could qualify as an authorized food stamp retailer. As table 3  shows, our analysis of FNS’s database of retailers found that about 174, or  1.8 percent, of the store addresses had a series of different owners over  time who had been permanently disqualified for trafficking at that same  location, totaling 369 separate disqualifications. In one case, a store in the  District of Columbia had 10 different owners who were each disqualified  for trafficking, consuming FNS’s limited compliance-monitoring resources.
Our analysis of the data on these stores with multiple disqualified owners  indicates that FNS officials found this type of trafficking in a handful of  cities and states. Almost 60 percent of repeat store locations were in six  states and 44 percent were in 8 cities, often concentrated in small areas.  For example, as figure 8 shows, 14 repeat store locations were clustered in  downtown areas of both Brooklyn and Baltimore. However, it is not clear  whether these data indicate heightened efforts of compliance staff or  whether trafficking is more common in these areas. Regardless, early  monitoring of high-risk locations when stores change hands could be an  efficient use of resources.
Efficient use of resources is particularly important because available  compliance-monitoring resources have decreased in recent years. As the  importance of paper cases has grown, the compliance-monitoring  workload has gradually shifted to field office program specialists at a time  when overall program resources have dwindled. Officials said the number  of field investigators and field staff nationwide, which includes program  specialists, has declined over the last 10 years.
section_title: Available FNS Penalties May Not Deter Traffickers
paragraphs: FNS penalties alone may not be sufficient to deter traffickers. The most  severe FNS penalty that most traffickers face is disqualification from the  program, and FNS must rely on other entities to conduct investigations  that could lead to prosecution. For example, in the food-stamp-trafficking  ramp-up case previously cited, this retailer redeemed almost $650,000 of  food stamps over the course of 9 months before being disqualified from  the program in November 2004. As of August 2006, there was no active  investigation of this retailer.
Because of the time it takes to develop an investigation for prosecution  and the costs associated with doing so, a natural tension exists between  the goal of disqualifying a retailer as quickly as possible to prevent further  trafficking and seeking prosecution of the retailer to recover losses and  deter other traffickers. One FNS field office official said it can take months  or even years to investigate a case for prosecution and in the meantime the  store continues to traffic. FNS can disqualify a retailer relatively quickly— thereby saving federal dollars from misuse—compared with the time OIG  needs to investigate a case for referral for prosecution. However, if  prosecution is successful, a retailer’s assets and profits from trafficking  can be seized, providing a potential deterrent to others considering  trafficking.
section_title: States’ Lack of Focus on Recipient Trafficking Can Facilitate Vendor Trafficking
paragraphs: Paper cases often identify recipients suspected to have trafficked their  food stamp benefits with a dishonest retailer, and some FNS field offices  send a list of those recipients to the appropriate state. In response, some  states actively pursue and disqualify these recipients. For example,  Illinois has used these lists to disqualify more than 3,000 of the almost  20,000 suspected recipients referred to them since 1999 through FNS  retailer investigations. In addition to pursuing recipients who are  suspected of trafficking, one state told us it uses some recipients charged  with trafficking to gather evidence against retailers.
However, FNS field offices do not always send lists of suspected individual  traffickers to states or counties administering the program, and not all  states investigate the individuals on these lists. Officials from four FNS  field offices we visited said they don’t send the list of recipients suspected  of trafficking to the states or counties administering the program. Other  field office officials said they send the lists to their states, but they are not  acted upon because states do not have the resources to conduct  investigations into recipients who may be trafficking. FNS headquarters  officials also believe that not many states are acting on the lists they  receive because it is difficult and potentially costly to prove individual  cases of recipient trafficking. One field office official said that store  owners represent only half of the problem and that states could do more  to address trafficking. If states could reduce recipients’ trafficking, it  would curb retailer trafficking as well.
Instead of focusing on food stamp recipients who traffic their benefits,  states are using their resources to focus on recipients who improperly  collect benefits, according to FNS officials. The current incentive  structure for the states includes performance bonuses to reward states for  correcting payment errors and reducing error rates. In addition, states are  penalized financially if their error rates reach a specific threshold for   2 years in a row. States that do investigate recipient traffickers can keep  35 percent of any monies they recover; however, it may be difficult to  recover the funds, and the amount recovered may be minimal. When a  state proves a recipient has trafficked, the recipient can no longer receive  benefits, but other members of the family can. States can try to recover  some of the benefits trafficked by deducting a set amount from the family  benefits each month. However, pursuing recipients who traffic can be  costly and time-consuming. Taken together, these factors can result in  states’ choosing to focus on improper benefit payments rather than  recipient trafficking. This inaction by some states allows recipients  suspected of trafficking to continue the practice, and such inaction also  leaves a pool of recipients ready and willing to traffic their benefits as  soon as a disqualified store reopens under new management. In fact,  California field office staffs have begun to track suspected trafficking  recipients from a disqualified store to a new store, where they begin  exhibiting the same patterns.
section_title: Conclusions
paragraphs: In the Food Stamp Program, stores are the frontline for ensuring that  recipients use food stamps to purchase appropriate food items, and these  stores operate with no day-to-day oversight. Although the vast majority of  stores do not traffic food stamp benefits, each year millions of dollars of  program benefits that were awarded to provide food to needy individuals  and families are trafficked. FNS, using EBT data, has made significant  progress in taking advantage of new opportunities to monitor and  disqualify traffickers. However, because store owners can begin trafficking  as soon as they are authorized to participate in the program, pocketing  large sums of cash for months before FNS can detect potentially  suspicious transaction patterns, early monitoring and detection are critical  to curbing larger losses to the program. FNS has at its fingertips a wealth  of information that could help it develop additional criteria to target  certain stores or geographic areas for early or more heightened  monitoring, including the presence of low food stocks, the location of  repeat offender stores, areas of recipient trafficking, and areas with  evidence of organized fraudulent activity. FNS’s loss of monitoring staff in  recent years magnifies the need to ensure that compliance-monitoring  resources are focused on those stores and geographic areas at greatest  risk of trafficking. A more focused effort to target and disqualify these  stores could help FNS meet its continuing challenge of ensuring that  stores are available and operating in areas of high need while still  maintaining program integrity.
Yet, as EBT has limited the amount of benefits that can be trafficked at  one time, there is less chance the retailer or the recipient will be  prosecuted. There is no easy solution to this lack of deterrence. Law  enforcement agencies are making decisions to efficiently use their  resources by targeting larger or more critical cases. And FNS currently  does not have authority to impose stiffer penalties on retailers other than  program disqualification or in limited situations, civil money penalties in  lieu of disqualification. Food stamp trafficking will continue to be lucrative  for retailers as long as the potential rewards outweigh the penalties and  there are recipients willing to exchange their benefits for cash and  resources are not used for investigations and penalizing recipients.
section_title: Recommendations
paragraphs: We recommend that the Secretary of the Department of Agriculture direct  FNS to take the following five actions.
To help ensure that its limited compliance-monitoring resources are used  efficiently, FNS should    develop additional criteria to help identify stores most likely to traffic and  their locations; conduct risk assessments, using compliance and other  data, to systematically identify stores and areas that meet these criteria;  and allocate resources accordingly, and   provide more targeted and early oversight of stores that meet these  criteria, such as conducting early monitoring or follow-up inspections.
To provide further deterrence for trafficking, FNS should    develop a strategy to increase the penalties for trafficking, working with  the OIG as needed. If these penalties entail additional authority, consider  developing legislative proposals for program reauthorization in 2007.
To promote state efforts to pursue recipients suspected of trafficking and  thereby reduce the pool of recipient traffickers, FNS should:    ensure that FNS field offices report to states those recipients who are  suspected of trafficking with disqualified retailers, and revisit the incentive structure to incorporate additional provisions to  encourage states to investigate and take action against recipients who  traffic.
section_title: Agency Comments
paragraphs: We provided a draft of this report to the U.S. Department of Agriculture  and the U.S. Secret Service for review and comment. On September 5,  2006, FNS officials provided us with their oral comments. The officials  generally agreed with our findings, conclusions, and recommendations.  However, FNS officials raised a concern regarding our recommendations  on more efficient use of their compliance-monitoring resources. They  stated they believe they do have a strategy for targeting resources through  their use of the Watch List, which helps them identify suspicious  transaction patterns and target certain stores, combined with their ability  to establish task forces of investigators when they identify geographic  areas needing additional coverage. We believe that FNS has made good  progress in its use of EBT transaction data; however, it is now at a point  where it can begin to formulate more sophisticated analyses. For example,  these analyses could combine EBT transaction data with other available  data, such as information on stores with minimal inventory and stores with  a past history of trafficking, to develop criteria to better and more quickly  identify stores at risk of trafficking. In addition, FNS could also take  advantage of more sophisticated analysis tools, such as certain mapping  programs,to better identify those areas where trafficking is more  prevalent. Finally, to increase the likelihood of success, FNS will need to  combine the expertise of its field investigators and its program specialists  and then allocate these resources to monitor those stores at the greatest  risk of trafficking. FNS and OIG officials also provided technical  comments, which we incorporated where appropriate.
The U.S. Secret Service did not provide us with formal comments but told  us it concurred with the findings in our report and that it agreed with our  recommendation that additional work needs to be done to increase  existing penalties for trafficking.
We are sending copies of this report to the Secretary of Agriculture,  appropriate congressional committees, and other interested parties. We  will also make copies available to others upon request. In addition, the  report will be available at no charge on GAO’s Web site at  http://www.gao.gov.
If you or your staff have any questions regarding this report, please  contact me at (202) 512-7215 or nilsens@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 contributors to this  report are listed in appendix I.
section_title: Appendix I: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Kay Brown, Assistant Director;  Gloria Hernandezsaunders; Kevin Jackson; Kevin Kumanga,   Analyst-in-Charge; Crystal Lazcano; Jesus Moreno; Phil Reiff; Ramon  Rodriguez; Eden Savino; Dan Schwimer; Vanessa Taylor; Rachael Valliere;  and Jill Yost.
section_title: Related GAO Products
paragraphs: Improper Payments: Federal and State Coordination Needed to Report  National Improper Payment Estimates on Federal Programs.  GAO-06-347. Washington, D.C.: April 14, 2006.
Food Stamp Program: States Have Made Progress Reducing Payment  Errors, and Further Challenges Remain. GAO-05-245. Washington, D.C.:  May 5, 2005.
Food Stamp Program: Farm Bill Options Ease Administrative Burden,  but Opportunities Exist to Streamline Participant Reporting Rules  among Programs. GAO-04-916. Washington, D.C.: September 16, 2004.
Food Stamp Program: Steps Have Been Taken to Increase Participation  of Working Families, but Better Tracking of Efforts Is Needed.  GAO-04-346. Washington, D.C.: March 5, 2004.
Financial Management: Coordinated Approach Needed to Address the  Government’s Improper Payments Problems. GAO-02-749. Washington,  D.C.: August 9, 2002.
Food Stamp Program: States’ Use of Options and Waivers to Improve  Program Administration and Promote Access. GAO-02-409. Washington,  D.C.: February 22, 2002.
Executive Guide: Strategies to Manage Improper Payments: Learning  from Public and Private Sector Organizations. GAO-02-69G. Washington,  D.C.: October 2001.
Food Stamp Program: States Seek to Reduce Payment Errors and  Program Complexity. GAO-01-272. Washington D.C.: January 19, 2001.
Food Stamp Program: Better Use of Electronic Data Could Result in  Disqualifying More Recipients Who Traffick Benefits. GAO/RCED-00-61.  Washington D.C.: March 7, 2000.
Food Assistance: Reducing the Trafficking of Food Stamp Benefits.  GAO/T-RCED-00-250. Washington D.C.: July 19, 2000.
Food Stamp Program: Information on Trafficking Food Stamp Benefits.  GAO/RCED-98-77. Washington D.C.: March 26, 1998.