As I pointed out earlier 40.6 million persons were eligible for the program in FY 1975, though only 29.4 million of them actually participated during that year. So another 12 million people could, potentially, take part in the program without any change in economic conditions. As more people learn about this program and learn how to use it—and perhaps abuse it—we can expect participation and cost to continue rising if the law is not changed to tighten eligibility and focus the program on those who need it. Any increases that might result under the current program could be dwarfed by increases caused by greater liberalization of the program. A self-certification plan, which was passed by the Senate and reported by the House Agriculture Committee (H.R. 7887) this year, would permit participants merely to sign a statement saying they believe they are eligible. This plan could raise the error rate and would invite wholesale abuse of food stamps. For example, if a family of four fraudulently collected a double or triple allotment, it would have as much as $486 in stamps to spend on food in a month. This large amount of food purchasing power is an encouragement to an abuser to seek out a "buyer of food stamps" who would pay cash for the stamps (at a discount from face value), then turn around and redeem the stamps at face value. For example, a family group in New Mexico was certified, during a five-month period, for more than $12,000 in food stamps for which they paid only $234.00. They drove around the state in a truck collecting stamps, using their real names but false addresses and claiming families of eight or nine members. Self-certification would simply provide greater opportunity for abuse of this kind. Such changes in the program would be simply unacceptable because of the cost increases they would generate. PROBLEMS OF ABUSE The Food Stamp Program, by its very nature, is prone to abuse of many kinds. Food stamps are a form of currency. This currency is in wide circulation throughout the country, and now in Puerto Rico, the Virgin Islands and other territories. Honesty in the program requires a great deal of self-policing by all those who handle the stamps. In fiscal year 1975 an average of about 17 million recipients a month received stamps, and a total of 29 million people received them during that year. The program involves thousands of project areas, and several hundred thousand wholesale and retail stores. A program of this size and participation, involving transactions in billions of dollars of legal tender, is simply fair game for abuse. Abuse is by no means limited to recipients. The evidence indicates that abusers are of three main types. First, welfare administrators and caseworkers who certify eligibility for stamps; second, recipients who obtain and use the stamps; and third, those who handle the stamps in the course of their exchange for real currency, including food store retailers and wholesalers and others. The main types of fraud and other abuse include: (1) Theft of stamps. (2) Caseworker fraud in issuance of stamps to recipients. (3) Recipient misrepresentations about income or household size, assets, value of deductions, and other factors that determine eligibility and participation. (4) Discrepancies between shipments to disbursing points and reported cash received and coupons redeemed. (5) Illegal acquisition or use of stamps by individuals, retailers, or others. (6) Counterfeiting. Examples of fraud cases are shown below which are illustrative of each of these types of abuse. Briefs of these, and other cases appear in appendix A.13 (1) Theft of food stamps may occur in the mailing and transfer of stamps or at the issuing office. -On August 6, 1974, a Columbia, South Carolina mail carrier was apprehended after duty with food stamps, intended for someone else, in his possession. Coupons worth $91,970 were burglarized from a Food Stamp Issuing Office in Youngstown, Ohio on December 29, 1972. Some of these stamps were later traced to incidents of individuals exchanging food stamps for cash. (2) Local employees who administer the program sometimes attempt to manipulate it to their personal benefit. -Several caseworkers in San Antonio, Texas conceived an elaborate scheme of issuing authorization-to-purchase cards (ATPs) to ineligible persons under their own or fictitious names. After the ineligible recipients obtained the stamps, a third group of persons collected the stamps from the ineligible persons-who were paid a fee and then returned the food stamps to the caseworkers, who apparently sold the stamps for cash. A former supervisor of the Sacramento, California Department of Social Services obtained authorization-to-purchase cards for other ineligible persons to cash. The value of food stamps received was estimated at $250,000. (3) Misrepresentations by recipients about income or household size may be unintentional or deliberate but frequently result in an overissuance of food stamps to which the recipient is not entitled. A resident of Virginia obtained food stamps from four counties in Maryland by giving false information about her residence, income and family composition. -A person in Little Rock, Arkansas, recruited individuals to apply for food stamps using false names, addresses, social security numbers and fictitious dependents. The recipients returned the stamps to the organizer of the scheme, who sold them for cash, then paid the recipients a fee. (4) Audits have turned up discrepancies in disbursements and redemption of stamps in various programs. -An audit in Cleveland, Ohio, revealed that one issuing center had overissuances of $6,476 and underissuances of $11 for five months in 1974. -An investigation of the Cook County Department of Public Aid in Illinois disclosed that many authorization-to-purchase cards for 18 See p. 49. fictitious persons were consistently cashed by certain cashiers at several currency exchanges. (5) Individuals and retailers may acquire or use stamps illegally. There are many cases in which retail stores sell ineligible non-food items such as soap, paper products, or toiletries for stamps. -A drug addict in San Francisco cashed $1,500 worth of authorization-to-purchase cards for another addict in a four-month period, and received payment for his services in food stamps and drugs. -An individual in Louisiana charged gasoline and cigarettes on account and then paid the bills with food stamps. -A woman charged with speeding in South Carolina paid her bail with food stamps. -During 12 visits to his store, a retailer in Bay City, Michigan sold investigators 172 ineligible items and he also paid them $1,081 in cash for $1,575 of food stamps. -A grocery store owner in Syracuse, New York collected authorization-to-purchase cards from approximately 75 food stamp recipients and obtained their stamps for them. The owner also purchased cards for cash and accepted food stamps for payment of past due bills. (6) A small amount of counterfeiting has occurred. -Three persons were arrested in Fullerton, California on May 28, 1974, with $350,000 of counterfeit coupons in their possession. Ultimately, counterfeit coupons worth a total of $750,000 were seized as part of the investigation. MEANS OF DISCOVERING FRAUD The system for discovering fraud and error is weakly structured and the programs of investigation, prosecution, retrieval of funds, and related administrative actions vary tremendously among the states, and are loosely coordinated at the national level. Only 14 States have laws which make abuse of food stamps a State offense. Many of the others do not even have laws that would make intentional misstatements by individual recipients a criminal violation, although most recipient fraud constitutes Federal criminal conduct under the Food Stamp Act. I will attempt briefly to sketch what I understand to be the "system" by which abusers are found out and fraud corrected. First, the state and local welfare agencies are responsible for detecting and investigating errors and fraud related to the issuance of stamps, but discovery of such cases is most often the result of audits by USDA. When complaints are received from any source, the local agencies conduct initial investigations to establish a claim. When they find, for example, that a participating household has fraudulently obtained coupons, the agency must demand repayment. Only when collections cannot be obtained administratively do these agencies go to court. But States must reimburse the Federal Government for all major losses whether or not they collect from the abuser. This is a critical fact. It means that the States have a fundamental economic reason to avoid seeking out abusers. Food stamps themselves are paid for entirely from Federal funds. A State's fiscal obligation is limited to one-half the cost of administering the program in the State. This makes food stamp disbursement attractive to States as opposed to disbursement of other funds, such as AFDC benefits of which States must pay half. However, States must pay 50 percent of the cost of any compliance efforts that would uncover and prosecute program abuse. In addition, States must also repay the Federal Government for the full cost of over-issued stamps. Thus the economies of this system create a disincentive to discovery and correction of abuse by local and State welfare agencies. Until recently, there has been no consistent, wellstaffed Federal effort to implement State compliance programs. The wide variation in the State efforts to control abuse is indicated by data on claims in the five major regions of the country. In fiscal year 1974, only 984 fraudulent claims were established in the entire northeast region of this country, where there were 3.3 million participants. By contrast, 8,281 claims were established in the southeast region, where 2.7 million persons participated. In the west only 1,867 claims were established, compared with 2.0 million participants. The same variations are seen in the number of successful prosecutions for food stamp fraud in state and local courts (Exhibit 15).1 In fiscal year 1974, only 29 cases were successfully prosecuted in the northeast, but in the southeast 238 cases were successfully prosecuted. In the west, including heavily populated California, only 18 cases were successfully prosecuted. By contrast, in the west-central states in 1974, 222 claims were successfully prosecuted and in 1975, 266 were successfully prosecuted. A major type of violation is that involving wholesale or retail establishments. These are handled mainly by the Department of Agriculture's Office of Investigations, which in fiscal year 1975 devoted about 60 man-years to a program that operates in every county. The Office of Investigations receives requests for investigation from the Food and Nutrition Service, but it also initiates monitoring and investigations are turned over to the FNS and to the USDA Office of General Counsel. FNS itself deals with the minor cases of wholesaler/retailer fraud, and those not necessarily involving willful frauds, through administrative action. In these cases, firms receive warning letters or are disqualified from the program for a period of from thirty days to three years. Most disqualifications are for six months to one year. More serious cases are considered by USDA's General Counsel, who usually determines if prosecution is appropriate and forwards the case to a local U.S. Attorney for prosecution. The U.S. Attorney reviews these cases along with many other types of criminal cases and gives them a priority in the overall program of law enforcement in his office. The most serious cases are usually prosecuted, but those involving small amounts of money or those involving relatively minor infractions are not prosecuted and are referred back to the Food and Nutrition Service for administrative action. U.S. Attorneys are reluctant to prosecute because it is difficult to obtain convictions. Many defendents are genuinely poor and unable to pay fines. The courts are often sympathetic to the individual and resist imposing the fines and sentences requested by the law. The result is that a very 14 See p. 47. small number of food stamp fraud cases reach prosecution, and even fewer reach conviction. To illustrate the problem, actual conviction data (Exhibit 16) 15 are as follows: in fiscal year 1974, 725 cases were referred to the Justice Department. In fiscal year 1975, only 688 cases were referred, even though the average monthly number of users of the program increased by 4.2 million that year! Of the 688 cases referred last year, 147 cases resulted in conviction, and some of these were carried over from earlier years. USDA has recognized this problem and has recommended that laws be changed to promote higher prosecution rates and conviction. Such changes would include reducing charges from "gross negligence" (the legal term describing a State's improper certifications) to "negligence" and reducing the penalty for food stamp violations from $5,000 to $1,000 to permit prosecutions in lower courts. Against this background, those who would point to conviction rates of less than one-tenth of one percent as evidence of an abuse-free program, are misled. In a program used by a total of 29.4 million people in fiscal 1975 it simply does not seem credible that only 0.08 percent of them abused the program. I would conclude that serious disincentives exist first to discovering and second to recouping erroneous and fraudulent certification and use of stamps. At the local level, state agencies have a negative incentive to police their programs because they must pay half the cost of the compliance effort and more important, they must repay the Federal Government for any cases of fraud they establish. Because of these disincentives, I want to re-emphasize that conviction rates are not a reliable indicator of the degree of abuse in this program. USDA AUDIT REPORTS USDA's audit activity demonstrates the extent of program maladministration at the local level. This audit program is designed to determine that: (1) program operations are efficient and desired objectives are being achieved, (2) applicable laws and regulations are being complied with, (3) resources are managed in an economical and efficient manner, and (4) financial reports and transactions are proper and correct. The USDA's Office of Audit makes recommendations for improved procedures when problems are discovered. Failure of a State to implement recommendations to correct the deficiencies is a basis for making a claim against the State for loss of funds. In 1973 the Office of Audit examined the Food Stamp Program of Los Angeles County for July that year, and the auditors found that 45 percent of the authorization-to-purchase cards were improperly issued. They found a potential program loss of at least $756,000 for the month of July alone or a possible $9 million for the County of Los Angeles for the full year. In addition, a Los Angeles County Grand Jury investigation in 1974 concluded that the program was extremely susceptible to fraud including recipient false information, government employee fraud, 15 See p. 47. |