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

Letter

Travel Card Delinquencies and Charge-offs

Most Army cardholders properly used their travel cards and paid amounts owed to Bank of America promptly. However, we found that the Army's delinquency rate is higher than any other DOD component or executive branch agency in the federal government. As shown in figure 1, for the eight quarters ending March 31, 2002, the Army's delinquency rate fluctuated from 10 to 18 percent, and on average was about 5 percent higher than the rest of DOD and 7 percent higher than federal civilian agencies. As of March 31, 2002, over 11,000 Army cardholders had $8.4 million in delinquent debt.

We also found substantial charge-offs of Army travel card accounts. Since the inception of the travel charge card task order between DOD and Bank of America on November 30, 1998, Bank of America has charged off over 23,000 Army travel card accounts with nearly $34 million of bad debt. As shown in figure 2, the travel cardholder's grade (and associated pay) is a strong predictor of delinquency problems. We found that the Army's delinquency and charge-off problems are primarily associated with young, low- and midlevel enlisted military personnel with basic pay levels ranging from $11,000 to $26,000. A more detailed explanation of each of these grades along with their associated basic pay rates is provided in appendix II.

These delinquencies and charge-offs have cost the Army millions of dollars in lost rebates, higher fees, and substantial resources spent pursuing and collecting past-due accounts. For example, we estimated that in fiscal year 2001, delinquencies and charge-offs cost the Army $2.4 million in lost rebates, and will cost $1.4 million in increased automated teller machine (ATM) fees annually.

Potentially Fraudulent and Abusive Travel Card Activity

Our work also identified numerous instances of potentially fraudulent and abusive activity related to the travel card. We found that during fiscal year 2001 at least 200 Army employees wrote three or more nonsufficient funds (NSF) or “bounced” checks to Bank of America as payment for their travel card bills—a potentially fraudulent act. Appendix III provides a table summarizing 10 examples, along with more detailed descriptions, of cases in which cardholders wrote three or more NSF checks to Bank of America and had their travel card accounts subsequently charged off. For example, in one case, an Army employee from Ft. Jackson, who was convicted for writing NSF checks prior to receiving the government travel card, wrote over 86 NSF checks to Bank of America.

Further, we found instances in which cardholders abused their travel cards by using them to purchase a wide variety of personal goods or services that were unrelated to official government travel. As shown in figure 3, government travel cards are clearly marked, “For Official Government Travel Only.”

In addition, before receipt of their travel cards, all Army cardholders are required to sign a statement of understanding that the card is to be used only for authorized official government travel expenses. However, as part of our statistical sampling results at the four sites we audited, we estimated that personal use of the government travel card ranged from 15 percent of fiscal year 2001 transactions at one site to 45 percent at another site. Government travel cards were used to pay for such diverse goods and services as dating and escort services; casino and Internet gambling; cruises; tickets to musical and sporting events; personal clothing; closing costs on a home purchase; and, in one case, the purchase of a used automobile. For example, we were able to determine that, during fiscal year 2001, approximately $45,000 was spent Army-wide to purchase cruise packages or to pay for a variety of activities or services on cruise ships. We found that charged-off accounts included both those of (1) cardholders who were reimbursed by the Army for official travel expenses but failed to pay Bank of America for the related charges, thus pocketing the reimbursements, and (2) cardholders who used their travel cards for personal purchases for which they did not pay Bank of America. Appendix IV provides a summary table and supporting narrative describing examples of both types of abusive travel card activity.

As detailed in appendix V, we also found instances in which cardholders used their travel cards for personal purposes, but paid their travel card bills when they became due. For example, we found that a Lieutenant Colonel used his travel card to purchase accommodations and tickets to attend the Tournament of Roses in Pasadena, California. These cardholders benefited by, in effect, getting interest-free loans. Personal use of the cards increases the risk of charge-offs related to abusive purchases, which are costly to the government and the taxpayer.

We also found several instances of abusive travel card activity where Army cardholders used their cards at questionable establishments such as gentlemen's clubs, which provide adult entertainment. Further, these clubs were used to convert the travel card to cash by supplying cardholders with actual cash or “club cash” for a 10 percent fee. For instance, a cardholder may charge $330 to the government travel card at one of these clubs and receive $300 in cash. Subsequently, the club receives payment from Bank of America for a $330 restaurant charge. For fiscal year 2001, we identified about 200 individuals who charged almost $38,000 at these establishments. For example, we found that 1 cardholder obtained more than $5,000 in cash from these establishments.

Abusive Travel Card Activity Not Effectively Linked to Disciplinary Action and Security Clearances

We found little evidence of documented disciplinary action against Army personnel who misused the card, or that Army travel program managers or supervisors were even aware that Army personnel were using their travel cards for personal use. For example, a civilian employee working at the Pentagon on a classified program used her travel card for personal purchases of about $3,600 and subsequently wrote four NSF checks for over $7,700 to Bank of America. The cardholder's account was subsequently charged-off when the cardholder failed to pay the bill. The employee's supervisor was not aware that the employee had any potentially fraudulent and abusive activity related to the travel card. In another example, a California National Guardsman with over $5,400 of charge-offs associated with authorized travel, for which the Army reimbursed the cardholder, was subsequently promoted from a Major to a Lieutenant Colonel.

In addition, we found that 38 of 105 travel cardholders we examined that had their accounts charged-off still had active secret or top-secret clearances as of June 2002. Some of the Army personnel holding security clearances who have had difficulty paying their travel card bills may present security risks to the Army. Army regulations provide that an individual's finances are one of the key factors to be considered in whether an individual should continue to be entrusted with a secret or top-secret clearance. However, we found that Army security officials were unaware of these financial issues and consequently could not consider their potential effect on whether these individuals should continue to receive security clearances.

Key Internal Control Breakdowns

For fiscal year 2001, the Army had significant breakdowns in key internal controls over individually billed travel cards. The breakdowns stemmed from a weak overall control environment, flawed policies and procedures, and a lack of adherence to valid policies and procedures. These breakdowns contributed to the significant delinquencies and charge-offs of Army employee account balances and potentially fraudulent and abusive activity related to the travel cards.

At the four units we audited, we found management was focused primarily on delinquencies and often only after severe problems were discovered and major commands began demanding improved performance in reducing the amount of such delinquencies. There were few indications that management placed any emphasis on controls designed to prevent or provide for early detection of travel card misuse. In addition, we identified two key overall control environment weaknesses: (1) the lack of clear, sufficiently detailed policies and procedures and (2) limited travel card audit and program oversight. First, the units we audited used DOD's travel management regulations (DOD Financial Management Regulation, volume 9, chapter 3) as the primary source of policy guidance for management of Army's travel card program. However, in many areas, the existing guidance was not sufficiently detailed to provide clear, consistent travel management procedures to be followed across all Army units. Second, as recognized in the DOD Inspector General's March 2002 summary report on the DOD travel card program, “ecause of its dollar magnitude and mandated use, the DOD travel card program remains an area needing continued emphasis, oversight, and improvement. Independent internal audits should continue to be an integral component of management controls.” However, the DOD Inspector General report noted that only two internal review reports were issued from fiscal year 1999 through fiscal year 2001 concerning the Army's travel card program.

We found that this overall weak control environment contributed to design flaws and weaknesses in a number of management control areas needed for an effective travel card program. For example, many problems we identified were the result of ineffective controls over issuance of travel cards. Although DOD's policy allows denial of travel cards for certain groups or individuals with poor credit histories, we found that, without exception, the Army processed all travel card applications it received, regardless of an applicant’s credit history. For the cases we reviewed, we found a significant correlation between travel card fraud, abuse, and delinquencies and individuals with substantial credit history problems. The prior and current credit problems we identified for Army travel cardholders included charged-off credit card and automobile loans, defaulted and foreclosed mortgages, bankruptcies, and convictions for writing NSF checks.

Also, agency program coordinators (APCs), who have the key responsibility for managing and overseeing travel cardholders' activities, are essentially set up to fail in their duties because they are given substantial responsibility for a large number of cardholders—for example up to 1,000 cardholders per APC—and little time to do this collateral duty. Military personnel who are responsible for and rated on other job responsibilities—such as airport security—are given the APC role as “other duty as assigned.” With a high level of APC turnover (particularly military APCs, which at one of the locations we audited were reassigned about every 6 months), and only minimal time allotted to perform this collateral duty, we found that APCs generally were ineffective in carrying out their key travel card program management and oversight responsibilities.

Table 1 summarizes our statistical tests of four key control activities related to basic travel transaction and voucher processing at four Army locations.

Substantial delays in travel voucher reimbursements to cardholders can have a significant impact on high delinquency rates. For example, such delays at the California National Guard contributed to the high delinquency rate for that unit. We found a substantial number of California National Guard employees and several employees at other units audited who may have been due payments for late fees because their reimbursements were late. We also found errors in travel voucher processing that resulted in both overpayment and underpayment of the amounts that cardholders should have received for their official travel expenses.

Corrective Actions

DOD has taken a number of actions focused on reducing delinquencies. In October 2000, the Vice Chief of Staff of the Army issued a directive to cut the Army's delinquencies by 50 percent by the end of March 2001. Further, the Vice Chief of Staff established a goal of a delinquency rate of no more than 4 percent of active cardholders as soon as possible and ordered commanders throughout the Army to provide additional attention to the government travel card program. Beginning in November 2001, DOD began a salary and military retirement offset program—similar to garnishment. As a result of these actions, Army experienced a significant drop in charged-off accounts in the first half of fiscal year 2002. In addition, DOD has encouraged cardholders to make greater use of split pay disbursements. This payment method, by which cardholders elect to have all or part of their reimbursement sent directly to Bank of America, has the potential to significantly reduce delinquencies. Split disbursements are a standard practice of many private sector companies. DOD reported that for about 27 percent of the travel vouchers paid in April 2002 at one of its major disbursing centers, cardholders elected this payment option.

Further, the DOD Comptroller created a DOD Charge Card Task Force to address management issues related to DOD's purchase and travel card programs. We met with the task force in June and provided our perspectives on both programs. The task force issued its final report on June 27, 2002. However, we have not yet had an opportunity to review the report's findings in detail. To date, many of the actions that DOD has taken primarily address the symptoms or “back-end” result of delinquency and charge-offs after they have already occurred. We are encouraged by the DOD Comptroller's recent announcement concerning the cancellation of all travel cards of cardholders who have not been on official government travel within the last 12 months. Actions to implement additional “front- end” or preventive controls will be critical if DOD is to effectively address the high delinquency rates and charge-offs, as well as potentially fraudulent and abusive activity, discussed in this testimony.

To that end, we will be issuing a related report in this area with specific recommendations, including a number of preventive actions that, if effectively implemented, should substantially reduce delinquencies and potentially fraudulent and abusive activity related to the travel cards. For example, we plan to include recommendations that will address actions needed in the areas of exempting individuals with a history of financial problems from the requirement to use a travel card; providing sufficient infrastructure to effectively manage and provide day-to-day monitoring of travel card activity related to the program; deactivating cards when employees are not on official travel; moving towards mandating use of split disbursements; providing strong, consistent disciplinary action to employees who commit fraud or abuse the travel cards; and ensuring that information on any financial problems related to the travel cards of any cardholders with secret or top-secret security clearances is provided to appropriate security officials to consider in determining whether such clearances should be suspended or revoked.

Mr. Chairman, Members of the Subcommittee, and Senator Grassley, this concludes my prepared statement. I would be pleased to respond to any questions that you may have.

Contacts and Acknowledgments

For future contacts regarding this testimony, please contact Gregory D. Kutz at (202) 512-9095 or kutzg@gao.gov or John J. Ryan at (202) 512-9587 or ryanj@gao.gov.

Scope and Methodology

We used as our primary criteria applicable laws and regulations, including the Travel and Transportation Reform Act of 1998 (Public Law 105-264), the General Services Administration's (GSA) Federal Travel Regulation, and the Department of Defense Financial Management Regulations, Volume 9, Travel Policies and Procedures. We also used as criteria our Standards for Internal Control in Federal Government; and our Guide to Evaluating and Testing Controls Over Sensitive Payments. To assess the management control environment, we applied the fundamental concepts and standards in the GAO internal control standards to the practices followed by management in the six areas reviewed.

To assess the magnitude and impact of delinquent and charged-off accounts, we compared the Army's delinquency and charge-off rates to other DOD services and the other executive branch agencies in the federal government. We also analyzed the trends in the delinquency and charge-off data from fiscal year 2000 through the first half of fiscal year 2002.

We also used data mining to identify Army individually billed travel card transactions for audit. Our data mining procedures covered the universe of individually billed Army travel card activity during fiscal year 2001 and identified transactions that we believed were potentially fraudulent or abusive. However, our work was not designed to identify, and we did not determine, the extent of any potentially fraudulent or abusive activity related to the travel cards.

To assess the overall control environment for the travel card program at the Department of the Army, we obtained an understanding of the travel process, including travel card management and oversight, by interviewing officials from the Office of the Undersecretary of Defense Comptroller, Department of the Army; Defense Finance and Accounting Service (DFAS); Bank of America; and GSA, and reviewing applicable policies and procedures and program guidance they provided. We visited four Army units to “walk through” the travel process including the management of travel card usage and delinquency. We visited the DFAS Orlando location to “walk through” the voucher review and payment process used for two of the four Army locations we tested. We also assessed actions taken to reduce the severity of travel card delinquencies and charge-offs. Further, we contacted one of the three largest U.S. credit bureaus to obtain credit history data and information on how credit scoring models are developed and used by the credit industry for credit reporting. At each of the Army locations we audited, we also used our review of policies and procedures and the results of our walk throughs of travel processes and other observations to assess the effectiveness of controls over segregation of duties among persons responsible for preparing travel vouchers, processing and approving travel vouchers, and certifying travel voucher payments.

To test the implementation of key controls over individually billed Army travel card transactions processed through the travel system—including the travel order, travel voucher, and payment processes—we obtained and used the database of fiscal year 2001 Army travel card transactions to review random samples of transactions at four Army locations. Because our objective was to test controls over travel card expenses, we excluded credits and miscellaneous debits (such as fees) from the population of transactions used to select random samples of travel card transactions to review at each of four Army units we audited. Each sampled transaction was subsequently weighted in the analysis to account statistically for all charged transactions at each of the four units, including those transactions that were not selected for review at those locations.

We selected the four Army locations for testing controls over travel card activity based on the relative size of travel card activity at the 13 Army commands and of the units under these commands, the number and percentage of delinquent accounts, and the number and percentage of accounts charged-off. We selected two units from Army's Forces Command because that command represented approximately 19 percent of travel card activity, 22 percent of the delinquent accounts, and 28 percent of accounts charged-off during fiscal year 2001 across the Army. We also selected an Army National Guard location because the Army National Guard represented 13 percent of the total travel card activity, 22 percent of the delinquent accounts, and 15 percent of charge-offs for fiscal year 2001. The Special Operations Command represents about 6 percent of Army's charge card activity, 5 percent of the delinquent accounts and 4 percent of Army travel card accounts charged-off in fiscal year 2001. Each of the units within the commands was selected because of the relative size of the unit within the respective command. Table 2 presents the sites selected and the universe of fiscal year 2001 transactions at each location.

We performed tests on statistical samples of travel card transactions at each of the four case study sites to assess whether the system of internal control over the transactions was effective and to provide an estimate of the percentage of transactions that were not for official government travel by unit. For each transaction in our statistical sample, we assessed whether (1) there was an approved travel order prior to the trip, (2) the travel voucher payment was accurate, (3) the travel voucher was submitted within 5 days of the completion of travel, and (4) the travel voucher was paid within 30 days of the submission of an approved voucher. We considered transactions not related to authorized travel to be abusive and incurred for personal purposes. The results of the samples of these control attributes, as well as the estimate for personal use—or abuse—related to travel card activity, can be projected to the population of transactions at the respective test case study site only, not to the population of travel card transactions for all Army cardholders.

Table 3 shows the results of our test of the key control related to the authorization of travel (approved travel orders were prepared prior to dates of travel).

Table 4 shows the results of our test for effectiveness of controls in place over the accuracy of travel voucher payments.

Table 5 shows the results of our tests of two key controls related to timely processing of claims for reimbursement of expenses related to government travel—timely submission of the travel voucher by the employee and timely approval and payment processing.

To determine if cardholders were reimbursed within 30 days, we used payment dates provided by DFAS. We did not independently validate the accuracy of these reported payment dates.

We briefed DOD managers, including officials in DOD's Defense Finance and Accounting Service, and Army Managers including Assistant Secretary of the Army (Financial Management and Comptroller) officials, Army Forces Command and Special Operations Command Unit Commanders, unit-level APCs, and Army National Guard Bureau management and the California National Guard Adjutant General, and Bank of America officials on the details of our review, including our objectives, scope, and methodology and our findings and conclusions. We incorporated their comments where appropriate. With the exception of our limited review of access controls at the California National Guard, we did not review the general or application controls associated with the electronic data processing of Army travel card transactions. We conducted our audit work from December 2001 through July 2002 in accordance with generally accepted government auditing standards, and we performed our investigative work in accordance with standards prescribed by the President's Council on Integrity and Efficiency. Following this testimony, we plan to issue a report, which will include recommendations to DOD and the Army for improving internal controls over travel card activity.

Army Personnel Grade, Rank, and Associated Basic Pay Rates

Tables 6 and 7 show the grade, rank (where relevant), and the associated basic pay rates for 2001 for the Army's military and civilian personnel, respectively.

Nonsufficient Fund Checks Written to Bank of America