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. 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.