Travel Cards: Control Weaknesses Leave Navy Vulnerable to Fraud and Abuse
Published: 2002-10-08T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: This testimony discusses the Department of the Navy's internal controls over the government travel card program. The Navy's average delinquency rate of 12 percent over the last 2 years is nearly identical to the Army's, which has the highest delinquency rate in the Department of Defense, and 6 percentage points higher than that of federal civilian agencies. The Navy's overall delinquency and charge-off problems, which have cost the Navy millions in lost rebates and higher fees, are primarily associated with lower-paid, enlisted military personnel. In addition, lack of management emphasis and oversight has resulted in management failure to promptly detect and address instances of potentially fraudulent and abusive activities related to the travel card program. During fiscal year 2001 and the first 6 months of fiscal year 2002, over 250 Navy personnel might have committed bank fraud by writing three or more nonsufficient fund checks to Bank of America, while many others abused the travel card program by failing to pay Bank of America charges or using the card for inappropriate transactions such as for prostitution and gambling. However, because Navy management was often not aware of these activities, disciplinary actions were not consistently taken against these cardholders. GAO also found a significant relationship between travel card fraud, abuse, and delinquencies and individuals with substantial card history problems. Many cardholders whose accounts were charged off or put in salary offset had bankruptcies and accounts placed in collection prior to receiving the card. The Navy's practice of authorizing a travel card to be issued to virtually anyone who asked for it compounded an already existing problem by giving those with a history of bad financial management additional credit.
section_title: What GAO Found
paragraphs: Although GAO found that Navy management had taken some corrective actions to address delinquencies and misuse, additional preventive solutions are necessary if Navy is to effectively address these issues.

section_title: Letter
paragraphs: Thank you for the opportunity to discuss the Department of the Navy’s  (including the United States Marine Corps) 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 card. As a result of your hearing  and our work on internal control over purchase card transactions at two  Navy sites, 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. We previously testified on the  Army travel card program in July 2002. This written statement discusses  the results of our Navy travel card program audit. We plan to follow up on  this testimony and issue a detailed report with recommendations on the  results of our audit. We will report to you separately on the results of our  Air Force travel card audit.
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.  During fiscal year 2001, the Navy had about $510 million in travel card  charges and about 395,000 individually billed travel card accounts at the  end of fiscal year 2001. 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 Navy 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 perspective on (1) the reported magnitude and  impact of delinquent and charged-off Navy travel card accounts for fiscal  year 2001 and the first 6 months of fiscal year 2002, along with an analysis  of related causes, (2) potentially fraudulent and abusive activity related to  the Navy travel card during the same period, (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 Navy’s travel program, and  (5) the status of DOD and Navy corrective actions. Details on our scope  and methodology are included in appendix I.
In summary, the Navy’s average delinquency rate of about 12 percent over  the last 2 years is nearly identical to the Army’s, which has the highest  delinquency rate in DOD, and about 6 percentage points higher than that  of federal civilian agencies.  The Navy’s overall delinquency and charge-off  problems, which have cost the Navy millions in lost rebates and higher  fees, are primarily associated with lower-paid, enlisted military personnel.  In addition, lack of management emphasis and oversight has resulted in  management failure to promptly detect and address instances of  potentially fraudulent and abusive activities related to the travel card  program. For example, during fiscal year 2001 and the first 6 months of  fiscal year 2002, over 250 Navy personnel might have committed bank  fraud by writing three or more nonsufficient fund (NSF) checks to Bank of  America, while many others abused the travel card program by failing to  pay Bank of America charges and/or using the card for inappropriate  transactions such as for prostitution and gambling. However, because  Navy management was often not aware of these activities, disciplinary  actions were not consistently taken against these cardholders. We also  found a significant relationship between travel card fraud, abuse, and  delinquencies and individuals with substantial credit history problems. For  example, many cardholders whose accounts were charged off or put in  salary offset had bankruptcies and accounts placed in collection prior to  receiving the card. The Navy’s practice of authorizing a travel card to be  issued to virtually anyone who asked for it compounded an already  existing problem by giving those with a history of bad financial  management additional credit. While we found that Navy management had  taken some corrective actions to address delinquencies and misuse,  additional preventive solutions are necessary if Navy is to effectively  address these issues.
subsections: section_title: Travel Card Delinquencies and Charge-offs
paragraphs: Most Navy cardholders properly used their travel cards and paid amounts  owed to Bank of America in a timely manner. However, as shown in    figure 1, the Navy’s average delinquency rate was nearly identical to the  Army’s, which, as we have previously testified, is the highest delinquency  rate in the government. The Navy’s quarterly delinquency rate fluctuated  from 10 to 18 percent, and on average was about 6 percentage points  higher than that of federal civilian agencies. As of March 31, 2002, over  8,400 Navy cardholders had $6 million in delinquent debt.
We also found substantial charge-offs of Navy 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  13,800 Navy travel card accounts with $16.6 million of bad debt. Recent  task order modifications allow Bank of America to institute a salary offset  against DOD military personnel members whose travel card accounts were  previously charged off or are more than 120 days past due.  As a result, as  of July 31, 2002, Bank of America had recovered $5.2 million in Navy  government travel card bad debts.  The high level of delinquencies and  charge-offs have also cost the Navy millions of dollars in lost rebates,  higher fees, and substantial resources spent pursuing and collecting past  due accounts.   For example, we estimate that in fiscal year 2001,  delinquencies and charge-offs cost the Navy $1.5 million in lost rebates,  and will cost about $1.3 million in increased automated teller machines  (ATM) fees annually.
As shown in figure 2, the travel cardholder’s rank or grade (and  associated pay) is a strong predictor of delinquency problems. We found  that the Navy’s overall delinquency and charge-off problems are primarily  associated with young, low- and mid-level enlisted military personnel with  basic pay levels ranging from $12,000 to $27,000.
According to Navy officials, low- and mid-level enlisted military personnel  comprise the bulk of the operational forces and are generally young, often  deployed, and have limited financial experience and resources. It is  therefore not surprising to see a higher level of outstanding balances and  delinquent amounts due for these personnel. Figure 2 also shows that, in  contrast, the delinquency rate for civilians employed by the Navy is  substantially lower. As of September 30, 2001, the delinquency rate of low-  and mid-level enlisted personnel was almost 22 percent, compared to a  Navy civilian rate of slightly more than 5 percent. This rate is comparable  to the non-DOD civilian delinquency rate of 5 percent.
The case study sites we audited exhibited this pattern. For example, at  Camp Lejeune, a principal training location for Marine air and ground  forces, over one-half of the cardholders are enlisted personnel.  Representative of the Navy’s higher delinquency rate, Camp Lejeune’s  quarterly delinquency rate for the 18-month period ending March 31, 2002,  averaged over 15 percent and was close to 10 percent as of March 31, 2002.  In contrast, at Puget Sound Navy Shipyard, where the mission is to repair  and modernize Navy ships, civilian personnel earning more than $38,000 a  year made up 84 percent of total government travel card holders and  accounted for 86 percent of total fiscal year 2001 travel card transactions.  This site’s delinquency rate had declined to below 5 percent as of March  31, 2002.
In combination with these demographic factors, a weak overall control  environment, flawed policies and procedures, and a lack of adherence to  valid policies and procedures contributed to the significant delinquencies  and charge-offs. Further discussion of these breakdowns is provided later  in this testimony.
section_title: Potentially Fraudulent and Abusive Travel Card Activity
paragraphs: Our work identified numerous instances of potentially fraudulent and  abusive activity related to the travel card. During fiscal year 2001 and the  first 6 months of fiscal year 2002, over 5,100 Navy employees wrote at least  one nonsufficient fund (NSF), or “bounced” check, to Bank of America as  payment for their travel card bills. Of these, over 250 wrote 3 or more NSF  checks, a potentially fraudulent act. Appendix III provides a table  summarizing 10 examples, along with more detailed descriptions of  selected cases in which cardholders might have committed fraud by  writing 3 or more NSF checks to Bank of America. These 10 accounts were  subsequently charged-off or placed in salary offset or voluntary fixed  payment agreements with Bank of America.
We also found that the government cards were used for numerous abusive  transactions that were clearly not for the purpose of government travel. As  discussed further in appendix I, we used data mining tools to identify  transactions we believed to be potentially fraudulent or abusive based  upon the nature, amount, merchant, and other identifying characteristics  of the transaction. Through this procedure, we identified thousands of  suspect transactions. Table 1 illustrates a few of the types of abusive  transactions and the amounts charged to the government travel card in  fiscal year 2001 and the first 6 months of fiscal year 2002 that were not for  valid government travel. Government travel cards were used for purchases  in categories as diverse as legalized prostitution services, jewelry,  gentlemen’s clubs, gambling, cruises, and tickets to sporting and other  events. The number of instances and amounts shown includes both cases  in which the cardholders paid the bills and instances in which they did not  pay the bills.
We found that 50 cardholders used their government travel card to  purchase over $13,000 in prostitution services from two legalized brothels  in Nevada. Charges were processed by these establishments’ merchant  bank, and authorized by Bank of America, in part because a control  afforded by the merchant category code (MCC), which identifies the  nature of the transactions and is used by DOD and other agencies to block  improper purchases, was circumvented by the establishments. In these  cases, the transactions were coded to appear as restaurant and dining or  bar charges. For example, the merchant James Fine Dining, which actually  operates as a brothel known as Salt Wells Villa, characterizes its services  as restaurant charges, which are allowable and not blocked by the MCC  control. According to one assistant manager at the establishment, this is  done to protect the confidentiality of its customers. Additionally, the  account balances for 11 of the 50 cardholders purchasing services from  these establishments were later charged off or put into salary offset. For  example, one sailor, an E-2 seaman apprentice, charged over $2,200 at this  brothel during a 30-day period. The sailor separated from the Navy, and his  account balance of more than $3,600 was eventually charged off.
We also found instances of abusive travel card activity where Navy  cardholders used their cards at 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 example, we found that an E-5  second class petty officer circumvented ATM cash withdrawal limits by  charging, in a single transaction, $2,420 to the government travel card and  receiving $2,200 in cash. Subsequently, the club received payment from  Bank of America for a $2,420 restaurant charge. Another cardholder, an E- 7 chief petty officer, obtained more than $7,000 in cash from these  establishments. For fiscal year 2001 and through March 2002, 137 Navy  cardholders made charges totaling almost $29,000 at these establishments.
These transactions represented abusive use of the travel cards that were  clearly unrelated to official government travel. There should be no  misunderstanding by Navy personnel that personal use of the card is not  permitted. In fact, the standard government travel card used by most Navy  personnel is clearly marked “For Official Government Travel Only” on the  face of the card. Additionally, upon receipt of their travel cards, all Navy  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 three sites we  audited, we estimated that personal use of the government travel card  ranged from almost 7 percent of fiscal year 2001 transactions at one site to  over 26 percent at another site. As shown in appendix V, cardholders who  abused the card but paid the bill also used the government travel cards for  the same transaction types discussed in table 1.
Personal use of the card also increases the risk of charge-offs related to  abusive purchases, which are costly to the government and the taxpayer.  Our work found that charged-off accounts included both those of (1)  cardholders who were reimbursed by the Navy for official travel expenses  but failed to pay Bank of America for the related charges, thus pocketing  the reimbursement, and (2) those 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  abusive travel card activity where the account was charged off or placed  in salary offset or voluntary fixed payment agreements with Bank of  America.
Furthermore, as detailed by the 10 examples 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, an E-5 second class petty officer reservist, whose civilian job  was with the U.S. Postal Service, admitted making phony charges of over  $7,200 to operate his own limousine service. In these transactions, the  sailor used the travel card to pay for bogus services from his own  limousine company during the first few days of the card statement cycle.  By the second day after the charges were posted, Bank of America would  have deposited funds—available for the business’ immediate use—into the  limousine business’ bank account. Then, just before the travel card bill  became due, the limousine business credited the charge back to the  sailor’s government travel card and repaid the funds to Bank of America.  This series of transactions had no impact on the travel card balance, yet  allowed the business to have an interest-free loan for a period. This  pattern was continued over several account cycles. Navy officials were  unaware of these transactions until we brought them to their attention and  are currently considering what, if any, action should be taken against the  cardholder.
section_title: Abusive Travel Card Activity Not Consistently Linked to Disciplinary Action and Security Clearances
paragraphs: We did not always find documented evidence of disciplinary actions taken  by Navy commanders and supervisors against cardholders who wrote NSF  checks or had their accounts charged off or placed in salary offset. Of the  57 cardholders fitting these categories that we selected through data  mining, we did not find any documented evidence that 37 had been  disciplined. For example, a lieutenant commander (O-4) with the Naval Air  Reserve used his travel card for personal purchases in California and  frequent personal trips to Mexico. The individual did not pay his account  when due and was placed in salary offset in October 2001. Although the  agency program coordinator (APC) responsible for program oversight had  apprised management of this officer’s abuse of the travel card, and had  initiated actions to take away the cardholder’s security clearance,  management had not taken any administrative action against this  cardholder. In addition, of the 10 individuals who abused the card but paid  their bills, only 1 was disciplined. Appendixes III, IV, and V provide further  details of the extent of disciplinary actions taken against some of the  cardholders we examined.
In addition, we found that 27 of these same 57 travel cardholders we  examined whose accounts were charged off or placed in salary offset as of  March 31, 2002, still had active secret or top-secret security clearances in  August 2002. Some of the Navy personnel holding security clearances who  have had difficulty paying their travel card bills may present security risks  to the Navy. DOD rules provide that an individual’s finances are one of the  factors to be considered in whether an individual should be entrusted with  a security clearance. However, we found that Navy security officials were  unaware of these financial issues and consequently could not consider  their potential effect on whether these individuals should continue to  receive a security clearance. We have referred cases identified from our  audit to the U.S. Navy Central Adjudication Facility (commonly referred to  as Navy CAF) for its continued investigation.
section_title: Key Internal Control Breakdowns
paragraphs: For fiscal year 2001, we identified significant breakdowns in key internal  controls over individually billed travel cards. The breakdowns stemmed  from a weak overall control environment, a lack of focus on oversight and  management of the travel card program, and a lack of adherence to valid  policies and procedures. These breakdowns contributed to the significant  delinquencies and charge-offs of Navy employee account balances and  potentially fraudulent and abusive activity related to the travel card. In  contrast, one Navy unit we audited with a low average delinquency rate (4  percent) attributed its relative success to constant monitoring of  delinquencies and to some monitoring of inappropriate travel card use.
We found that in fiscal year 2001, management at the three case study  locations we audited focused primarily on reducing delinquencies. In  general, management placed little 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 Navy travel card policies and procedures  and (2) limited internal 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 Navy’s travel card program.  In many areas, the existing guidance was not sufficiently detailed to  provide clear, consistent travel management procedures to be followed.  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 requires  continued management emphasis, oversight, and improvement by the  DOD. Independent internal audits should continue to be an integral  component of management controls.” However, no internal review report  had been issued since fiscal year 1999 concerning the Navy’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 an exemption from the requirement  to use travel cards for certain groups or individuals with poor credit  histories, we found that the Navy’s practice was to facilitate Bank of  America issuing travel cards—with few credit restrictions—to all  applicants regardless of whether they have a history of credit problems.  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 Navy travel card holders included charged-off credit  cards, bankruptcies, judgments, accounts in collections, and repeated use  of NSF checks.
Also, a key element of internal control, which, if effectively implemented,  may reduce the risk and occurrence of delinquent accounts, is frequent  account monitoring by the APC. However, some APCs, who have the key  responsibility for managing and overseeing travel card holders’ activities,  were essentially set up to fail in their duties. Some were assigned APC  responsibilities as collateral duties and given little time to perform these  duties, while other full-time APCs had responsibilities for a large number  of cardholders. When an APC is unable to focus on managing travel card  usage because of the high number of cardholders or the extent of other  duties, the rate of delinquency and potentially abusive and fraudulent  transactions is adversely affected. For example, at Camp Lejeune, where  the delinquency rate was over 15 percent, the six APCs we interviewed  were given the role as “other duty as assigned,” with most spending less  than 20 percent of their available time to perform their APC  responsibilities.
In addition, a lack of management focus and priority on ensuring proper  training for APCs resulted in some APCs being unfamiliar with the  capabilities of Bank of America’s credit card database that would help  them to manage and oversee the travel card program. For example, one  APC did not know that she could access reports that would help identify  credit card misuse and thus enable the responsible supervisors or  commanders to counsel cardholders before they became delinquency  problems. With the large span of control, minimal time allotted to perform  this duty, and lack of adequate training, we found that APCs generally  were ineffective in carrying out their key travel card program management  and oversight responsibilities.
In contrast, a Navy unit we visited—Patuxent River—showed that  constant monitoring of delinquency by a knowledgeable APC contributed  to a lower delinquency rate. The APC at this unit had responsibility for  approximately 1,200 to 1,500 active travelers monthly, but APC duties  were her only responsibility. The APC informed us that she constantly  monitored the government travel card program. For example, she  reviewed delinquency reports several times a month to identify and  promptly alert cardholders and supervisors about the status of delinquent  accounts. She also told us that less frequently, but still on a monthly basis,  she monitored transactions in the Bank of America database for improper  and abusive uses of the card and sent out notices to the cardholders and  the cardholders’ supervisors if such transactions were identified. She also  emphasized the use of the split disbursement payment process (split  disbursements) whenever possible. Consequently, the delinquency rate for  this unit was consistently lower than the Navy-wide rate and the civilian  agency rate.
Another area of weakness in internal controls relates to the process over  the cancellation and/or deactivation of cards in case of death, retirement,  or separation from the service. These ineffective controls allowed  continued use of the government travel card for personal purposes, which  in some instances led to charge-offs, thereby contributing to increased  costs to the government. For example,  In one Navy unit, a cardholder died in October 1999. However, ineffective  controls over the notification process resulted in the APC not being aware  that this had occurred. Therefore, the APC did not take actions to cancel  this individual’s government travel card account. Consequently, in October  2000, when the old card was about to expire, Bank of America mailed a  new card to the address of record. When the card was returned with a  forwarding address, the bank remailed the card and the personal  identification number used to activate the card to the new address without  performing other verification procedures. The card was activated in mid- December 2000, and within a month, 81 fraudulent transactions for hotel,  food, and gas totaling about $3,600 were charged to the card. In January  2001, in the course of her monthly travel card monitoring, the APC noticed  suspicious charges in the vicinity of the cardholder’s post-of-duty. The  APC took immediate action to deactivate the card, thus preventing  additional charges from occurring. Upon learning of the cardholder’s  death from further discussion with the cardholder’s unit, the APC  immediately reported the case to a Bank of America fraud investigator.  Investigations revealed that a family member of the cardholder might have  made these charges. No payment was ever made on this account, and the  entire amount was subsequently charged off. We referred this case to the  U.S. Secret Service Credit Card Task Force for further investigation and  potential prosecution.
A chief warrant officer (W-3) at Naval Air Systems Command Atlantic  repeatedly used his travel card after his retirement on December 1, 2000.  The cardholder currently works for a private company. The cardholder  used the government travel card, since his retirement, to make charges  totaling $44,000 for hotels, car rentals, restaurants, and airline tickets. In a  number of instances, the cardholder was able to obtain the government  rate—which can be substantially lower than the commercial rate—for  lodging in San Diego, Philadelphia, and Cincinnati. Because the Navy does  not routinely monitor cardholders’ transaction reports for abusive activity  and because this particular account was always paid in full, they did not  detect the abusive activity. Bank of America data showed that the  cardholder’s account was still open in early September 2002 and thus  available for further charges.
In another instance, a mechanic trainee at the Puget Sound Naval Shipyard  was convicted of a felony conviction for illegal possession of a firearm in  October 2000 and placed on indefinite suspension by his employer in  November 2000. However, neither the security office, which took action  against the employee, nor the office where the individual worked notified  the APC to cancel or deactivate the cardholder’s government travel card  account. Following his suspension, the cardholder used the government  travel card to make numerous cash withdrawals and gas purchases  totaling almost $4,700. The APC was not aware of these abusive charges  until the monthly delinquency review identified the account as being  delinquent. The account balance of $1,600 was subsequently charged off in  January 2002. Although security officers at the Puget Sound Naval  Shipyard referred the case to Navy CAF in October 2000, our work  indicated as of August 2002, the suspended employee continued to  maintain a secret clearance, despite the account charge-off and felony  conviction.
Table 2 summarizes our statistical tests of four key control activities  related to basic travel transaction and voucher processing at three Navy  locations. We concluded that the control was effective if the projected  failure rate was from 0 to 5 percent. If the projected failure rate was from 6  to 10 percent, we concluded that the control was partially effective. We  considered controls with projected failure rates greater than 10 percent to  be ineffective.
Although we found significant failure rates at all three case study sites for  the requirement that vouchers be filed within 5 working days of travel  completion, this did not have an impact on these units’ delinquency rates.  However, we found substantial errors in travel voucher processing that  resulted in both overpayment and underpayment of the amount that  cardholders should have received for their official travel expenses. At  times, these errors were substantial in comparison with the total voucher  amounts. For example, we found data entry errors that resulted, in one  case, in an overpayment of more than $1,700 to the traveler. In another  case, failure to carefully scrutinize supporting documentation resulted in  an overpayment to a traveler of more than $1,000 for cell phone calls, for  which the traveler did not submit detailed documentation to support what  were claimed to be calls made for business purposes. As a result of our  work, the Navy unit has taken actions to recover these overpayments.
subsections: section_title: Corrective Actions
paragraphs: DOD has taken a number of actions focused on reducing delinquencies.  For example, the Department of the Navy had established a goal of a  delinquency rate of no more than 4 percent. Beginning in November 2001,  DOD implemented a system of wage and retirement payment offset for  many employees. It also began encouraging the use of split  disbursements—a payment process by which cardholders elect to have all  or part of their reimbursements sent directly to Bank of America. This  payment method is a standard practice of many private sector employers.  Although split disbursements have the potential to significantly reduce  delinquencies, this payment process is strictly voluntary at DOD.  According to Bank of America, split disbursements accounted for 30  percent of total payments made by Navy employees in June 2002. This rate  represented a large increase over fiscal year 2001, when only 16 percent of  Navy payments were made through split disbursements. As a result of  these actions, the Navy experienced a significant drop in charged-off  accounts in the first half of fiscal year 2002.
The Navy has also initiated actions to improve the management of travel  card usage. The Navy has a three-pronged approach to address travel card  issues: (1) provide clear procedural guidance to APCs and travelers,  available on the Internet, (2) provide regular training to APCs, and (3)  enforce proper use and oversight of the travel card through data mining to  identify problem areas and abuses. Further, to reduce the risk of card  misuse, the Navy has also begun to deactivate cards while travelers are not  on travel status and close a number of inactive cards, and plans to close  inactive cards semi-annually to eliminate credit risk exposure. The Navy is  also pursuing the use of “pre-funded” debit or stored value cards for high- risk travelers—funds would be available on the cards when travel orders  were issued in an amount authorized on the order.
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 2002 and provided our  perspectives on both programs. The task force issued its final report on  June 27, 2002. To date, many of the actions that DOD has taken primarily  address the symptoms rather than the underlying causes of the problems  with the program. Specifically, actions to date have focused on dealing  with accounts that are seriously delinquent, which are “back-end” or  detective controls rather than preventive controls. To effectively reform  the travel program, DOD and the Navy will need to work to prevent  potentially fraudulent and abusive activity and severe credit problems with  the travel card. We are encouraged that the DOD Comptroller recently  took action to deactivate the travel cards of all cardholders who have not  been on official government travel within the last 6 months. However,  additional preventive solutions are necessary if DOD is to effectively  address these issues.
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 Navy travel cards.  For example, we plan to include recommendations that will address  actions needed in the areas of exempting individuals with histories 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; taking appropriate  disciplinary action against employees who commit fraud or abuse of the  travel card; ensuring that information on travel card fraud or abuse of  cardholders with secret or top-secret security clearances is provided to  appropriate security officials for consideration in whether such clearances  should be suspended or revoked; and moving towards mandating use of  the split disbursement payment process. The defense authorization bill for  fiscal year 2003 passed by the Senate reflected a move in this direction.  This bill would change the voluntary use of split disbursements by  authorizing the Secretary of Defense to require that any part of an  employee’s travel allowance be disbursed directly to the employee’s travel  card issuer for payment of official travel expenses. The defense  authorization bill for fiscal year 2003 passed by the House does not  contain comparable authority. As of September 12, 2002, the bill (H.R.  4546) was in conference.
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: Contact and Acknowledgments
paragraphs: For further information regarding this testimony, please contact Gregory  D. Kutz at (202) 512-9505 or kutzg@gao.gov or John J. Ryan at (202) 512- 9587 or ryanj@gao.gov.
section_title: Appendix I: Scope and Methodology
paragraphs: We used as our primary criteria applicable laws and regulations, including  the Travel and Transportation Reform Act of 1998, the General Services  Administration’s Federal Travel Regulation, and the DOD Financial  Management Regulations, Volume 9, Travel Policies and Procedures. We  also used as criteria our Standards for Internal Control in the 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 our internal control  standards to the practices followed by management at our three case  study locations.
To assess the magnitude and impact of delinquent and charged-off  accounts, we compared the Navy’s delinquency and charge-off rates to  those of other DOD services and agencies and federal civilian agencies. We  also analyzed the trends in the delinquency and charge-off data from the  third quarter of fiscal year 2000 through the first half of fiscal year 2002. In  addition, we obtained and analyzed Bank of America data to determine the  extent to which Navy travel card holders wrote NSF checks to pay their  travel card bills. We also obtained documented evidence of disciplinary  action against cardholders with accounts that were in charge-off or salary  offset status or had NSF checks written in payment of those accounts. We  accepted hard copy file information and verbal confirmation by  independent judge advocate general officials as documented evidence of  disciplinary action.
We also used data mining to identify Navy individually billed travel card  transactions for audit. Our data mining procedures covered the universe of  individually billed Navy travel card activity during fiscal year 2001 and the  first 6 months of fiscal year 2002, 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 card.
To assess the overall control environment for the travel card program at  the Department of the Navy, 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 Navy, Defense Finance and Accounting Service (DFAS),  Bank of America, and the General Services Administration, and by  reviewing applicable policies and procedures and program guidance they  provided. We visited three Navy units to “walk through” the travel process,  including the management of travel card usage and delinquency, and the  preparation, examination, and approval of travel vouchers for payment.  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.
To test the implementation of key controls over individually billed Navy  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 Navy travel card transactions to  review random samples of transactions at three Navy 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 a random sample of travel card transactions to  audit at each of the three Navy case study units. Each sampled transaction  was subsequently weighted in the analysis to account statistically for all  charged transactions at each of the three units, including those that were  not selected.
We selected three Navy locations for testing controls over travel card  activity based on the relative amount of travel card activity at the three  Navy commands and at the units under these commands, the number and  percentage of delinquent accounts, and the number and percentage of  charged-off accounts. Each of the units within the commands was selected  because of the relative size of the unit within the respective command.
Table 3 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 three case study sites to assess whether the system of internal  control over the transactions was effective, as well as to provide an  estimate, by unit, of the percentage of transactions that were not for  official government travel. 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 travel  voucher. We considered transactions not related to authorized travel to be  abuse 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 Navy cardholders.
Table 4 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 5 shows the results of our test for effectiveness of controls in place  over the accuracy of travel voucher payments.
Table 6 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, Navy managers, including the Assistant  Secretary of the Navy (Financial Management and Comptroller) officials,  unit commanders, and APCs; and Bank of America officials on the details  of our audit, including our findings and their implications. We  incorporated their comments where appropriate. We did not audit the  general or application controls associated with the electronic data  processing of Navy travel card transactions. We conducted our audit work  from January 2002 through September 2002 in accordance with U.S.  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 Navy for improving internal controls over travel card activity.
section_title: Appendix II: Navy Personnel Grade, Rank, and Associated Basic Pay Rates
paragraphs: Tables 7, 8, and 9 show the grade, rank (where relevant), and the  associated basic pay rates for fiscal year 2001 for the Navy’s and Marine  Corp’s military personnel and civilian personnel.
section_title: Appendix V: Abusive Travel Card Activity Where Cardholders Paid the Bills
paragraphs: Table 12 shows cases of travel card use for personal expenses where the  cardholder paid the bill.