United StatesDepartment ofAgriculture

Office ofInspectorGeneral

No. 47

August 2002

Office ofInspector GeneralSemiannual Reportto CongressFY 2002—First Half

The U.S. Department of Agriculture prohibits discrimination in all its programs and activities on the basis of race, color, national origin,sex, religion, age, disability, political beliefs, sexual orientation, or marital or family status. (Not all prohibited bases apply to all pro-grams.) Persons with disabilities who require alternative means for communication of program information (Braille, large print, audiotape,etc.) should contact USDA’s TARGET Center at 202-720-2600 (voice and TDD).

To file a complaint of discrimination, write USDA, Director, Office of Civil Rights, Room 326-W, Whitten Building, 1400 IndependenceAvenue, SW, Washington, D.C. 20250-9410 or call (202) 720-5964 (voice and TDD). USDA is an equal opportunity provider andemployer.

On the cover: The graphics depict “Old Glory,” the American flag; the U.S. Department of Agriculture (USDA) flag; and the Office ofInspector General (OIG) logo. The design symbolizes the unity of the Nation’s populace with USDA agencies and OIG functions in theaftermath of the events of September 11, 2001, and the subsequent anthrax attacks.

Contents

OIG in the Post-9/11 World .................................................................................................................................... 1Summaries of Audit and Investigative Activities ................................................................................................ 5Homeland Security

Front-Line Vulnerabilities ..................................................................................................................................... 6Information Technology ....................................................................................................................................... 8

Financial Management and AccountabilityEffective Financial Management .......................................................................................................................... 11Financial-Related Audits ...................................................................................................................................... 12

Abuse of USDA Programs and OperationsProtecting the Food Supply ................................................................................................................................. 15Public Corruption ................................................................................................................................................. 16Food, Nutrition, and Consumer Services ............................................................................................................. 16Food and Nutrition Service .................................................................................................................................. 16Food Stamp Program .......................................................................................................................................... 16Child Nutrition Programs ...................................................................................................................................... 19Commodity Distribution Program ......................................................................................................................... 20Farm and Foreign Agricultural Services .............................................................................................................. 20Risk Management Agency ................................................................................................................................... 20Farm Service Agency .......................................................................................................................................... 21Foreign Agricultural Service ................................................................................................................................. 22Natural Resources and Environment ................................................................................................................... 23Forest Service ...................................................................................................................................................... 23Natural Resources Conservation Service ............................................................................................................ 24Rural Development .............................................................................................................................................. 24Rural Business-Cooperative Service ................................................................................................................... 24Rural Housing Service ......................................................................................................................................... 25Research, Education, and Economics ................................................................................................................. 26Cooperative State Research, Education, and Extension Service ........................................................................ 26

Statistical DataAudits Without Management Decision ................................................................................................................. 27Indictments and Convictions ................................................................................................................................ 35Office of Inspector General Hotline ...................................................................................................................... 36Freedom of Information Act and Privacy Act Requests ....................................................................................... 37

Appendix I: Inventory of Audit Reports Issued With Questioned Costs and Loans ..................................................................................................................... 38Appendix II: Inventory of Audit Reports Issued With Recommendations That Funds Be Put to Better Use .............................................................................. 39Appendix III: Summary of Audit Reports Released Between October 1, 2001, and March 31, 2002 ................................................................................................................. 40

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On September 11, 2001, everything changed about theway we do business in the U.S. Department ofAgriculture (USDA) Office of Inspector General (OIG).Or did it?

Homeland Security

As detailed in our last Semiannual Report to Congress,the events of September 11 and the subsequentanthrax attacks gave new urgency to the issues ofsecurity over USDA’s infrastructure and the agriculturaleconomy. OIG continues to direct its resources towardtwo fronts—maintaining the integrity of Departmentprograms and helping the Department strengthen itsdefenses against activities that might threatenGovernment facilities, production agriculture, and theNation’s food supply.

This might seem to constitute a radical shift for OIG,and our priorities certainly have changed. On closerinspection, however, OIG essentially is maintaining itstraditional role. We continue to perform reviews thatinvolve the Department’s role in protecting the foodsupply, enhancing cybersecurity, ensuring financialintegrity—this is not the recently discovered terrain of analarming new world, but familiar ground OIG has beenpatrolling throughout its watch. The intensity may haveratcheted up a notch or two and the scope expanded,but the vision and focus have been steady and levelthroughout OIG’s history.

This is our 47th Semiannual Report to Congress andcovers the period October 1, 2001, through March 31,2002. As you will see in the body of this report, we havebeen quite active this reporting period in identifying andexamining areas critical to the Department’s and,ultimately, the Nation’s safety and security. We haveemployed a three-pronged, analytical approach infocusing our audit and investigative resources in thepost-9/11 world. We started by asking ourselves thefundamental questions about matters under ourpurview:

• What could terrorists use as a weapon?• What could terrorists target?• What could terrorists use to finance their activities?

The answers led us to the laboratories, airfields, andcomputers of USDA, the Winter Olympic Games, andelectronic money streams that derive from benefitsprograms and could empty into terrorist coffers. After we

OIG in the Post-9/11 World

identified the vulnerable areas, we set out to assist theDepartment in three clearly defined ways: SecuringUSDA materials from becoming potential weapons,protecting USDA assets that might be potential targets,and ensuring that USDA funds are not used to supportterrorist activities.

Securing Potential Weapons

During this reporting period, OIG investigators andauditors responded quickly to address potentialvulnerabilities involving biological agents. In general, wefound that USDA’s laboratories needed better plans andprocedures for inventory control, physical security,personnel security, and biosecurity incident response.OIG currently is reviewing security over other USDAmaterials—chemical agents, radioactive materials,genetically engineered organisms—that could pose arisk either to public health or the economy if usedinappropriately. We are capitalizing on the experienceand expertise attained in this area by our pastinvestigations of vandalism by ecoterrorists at USDAfacilities.

We also alerted the Forest Service (FS) to thevulnerability of its aircraft, including air tankers, as wellas aircraft facilities. We are currently reviewing securityover the Forest Service’s explosive material.

Protecting Potential Targets

OIG provided a law enforcement presence at the 2002Winter Olympic Games in Salt Lake City, Utah. Themission of OIG was to help protect the food prepared forthe athletes and visitors to the games, the generalpublic, and USDA personnel and assets on theWasatch-Cache National Forest and around Salt LakeCity.

Our work in securing U.S. agriculture began well beforeSeptember 11. We reported last period on theDepartment’s efforts to protect American agriculturefrom the introduction of Foot and Mouth Disease (FMD)after an outbreak in the United Kingdom. OIG personnelvisited the United Kingdom to gain first-hand knowledgeof measures needed to investigate criminal activityshould FMD spread to the United States. This led tothree initiatives: Joining other Federal agencies to forma Federal Law Enforcement Working Group on foreignanimal and plant diseases; initiating a DepartmentProtocols Working Group to develop standardized

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diagnostic and forensic procedures relating to laboratoryanalyses and investigations of threats against U.S.production agriculture, with the goal of providing USDAagencies and employees guidance on the appropriateprocedures to be followed in response to such threats;and establishing emergency response teams toinvestigate possible criminal activity should outbreakssuch as FMD occur.

We now are reviewing the Animal and Plant HealthInspection Service’s (APHIS) agricultural importsinspection system for potential areas of misuse,including permits it issues to import or move animal andplant pathogens used for research purposes. At thesame time, we are looking at the Food Safety andInspection Service’s (FSIS) reinspection of importedmeat and poultry products as they enter the UnitedStates, as well as equivalency determinations of foreigninspection systems in terms of the Hazard Analysis andCritical Control Point System and microbial producttesting.

The Department’s cybersystems, buildings, utilities, andtransportation networks are also potential targets. Wefound that USDA’s plans for infrastructure protectionwere properly formulated but incomplete.

Denying Access to Funds

To aid the effort to stem terrorist funding, OIG is activelysupporting “Operation Green Quest,” aimed at freezingassets, seizing cash, and launching criminalprosecutions against those who financially aid and abetterrorist activities. In this initiative, OIG investigators areworking to prevent USDA program funds and assets,especially proceeds from food stamp trafficking, frombeing funneled to terrorists through money-smuggling ormoney-laundering schemes. Our emphasis is onstopping the use of funds as early as possible in theillicit process.

Our long and extensive experience in this area hasenhanced our ability to contribute significantly to thisinitiative. Of concern since September 11 are those foodstamp trafficking cases where the money trail has ledoverseas or where investigations have revealed aconnection to the Middle East. We also found thatterrorists may have tried to use USDA program moneyto fund terrorist acts. An alleged Middle Easternbusinessman applied for—and was denied—a USDAloan to buy aircraft and start a crop-dusting service in

Florida. That person reportedly was named asMohammad Atta, one of the masterminds behind theSeptember 11 attacks.

Joint Task Forces and Outreach

Cooperation among law enforcement agencies isessential to respond effectively to terrorism. OIGcontinues to cultivate and capitalize on its long-established contacts and relationships with otherFederal, State, and local law enforcement authorities toprotect USDA programs and resources. We take part inmany of the 44 Joint Terrorism Task Forces that havebeen established across the country.

OIG managers also meet routinely with other USDAagency representatives and draw upon them to shareany concerns that arise with homeland security. Inconjunction with these contacts, OIG has established anoutreach program designed to bring OIG together withconstituent groups at the State and local levels, bothgovernmental and nongovernmental, to encourage themto report security issues to OIG. Our goal is to enlist theaid of all USDA employees and agriculturalcommunities, from managers to the grassroots, inkeeping OIG informed of suspicious acts or people. Wehave met not only with law enforcement and healthofficials, but also with industry and farm organizations,as well as regional shipping and trucking associationsand the Southeastern Intergovernmental Audit Forum.We have received very favorable feedback from thesecontacts, and they have led to additional liaison work.

Financial Management and Accountability

As important as helping protect the Department’s assetsand resources is our traditional work to ensure thatavailable resources are being employed with economy,efficiency, and effectiveness. In order to be effective,management must have reliable and timely financialinformation. The need for this information resoundsthroughout all of the Department’s activities, from themore obvious stewardship over assets, fiduciaryresponsibilities, and budgeting, to operational matterssuch as performance measurement. The Departmentmust know how much money has been received, spent,and is needed; where its assets are and when theyneed to be repaired or replaced; and the costs of itsoperations. Although the Department received adisclaimer of opinion from OIG for the eighthconsecutive year, the opinions of some of the major

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entities subject to audit improved in FY 2001. However,some opinion improvements came about primarilybecause of OIG and agency personnel efforts tosignificantly adjust reported financial data after the endof the fiscal year. Unless the accuracy of the underlyingfinancial data of these programs improves greatly, thedata will still not be useful to the agency managers, andsuch adjustments after the end of the fiscal year may benecessary again.

Abuse of USDA Programs and Operations

We worked a number of criminal cases this period thataddressed the continuing threats to consumers causedwhen unscrupulous businesses place profit abovepublic safety. These cases involved, among othermatters, illegal interstate shipment of swine, foodtampering, and the impersonation of a Federalcompliance officer. At the same time, OIG remainedvigilant in countering public corruption and workplaceviolence. Two corruption cases ended in the successfulprosecution of employees for theft and embezzlement.Several food stamp cases yielded significant prisonterms and millions of dollars in asset forfeiture andrestitution to the Government. Other investigations ofmisappropriation or misuse of USDA funds involvedcrop insurance fraud and farm loan illegalities.

We audited the Risk Management Agency’s qualitycontrol review system and the Farm Service Agency’sQuality Loss Program. We looked at the ForestService’s National Fire Plan and continued to monitorthe oversight of land exchanges. We also found thatadditional controls are needed in the ConservationReserve Enhancement Program. Our ongoing work inthe Business and Industry Loan Program hasuncovered significant management control weaknesses.

Legislative Review

Pursuant to duties and responsibilities as assigned bythe Inspector General Act, we have also reviewedexisting and proposed legislation relating to theprograms and operations of the Department. As part ofsuch review, we have identified legislative initiatives thatwe determined were important for the Department andmore importantly for the protection of the Nation’sagricultural sector. One such initiative dealt withheightened penalties for certain violations of the PlantProtection Act. That initiative came to fruition with thepassage of the Farm Security and Rural Investment Act

of 2002, which contained such a provision. Anothersuch initiative dealt with the need for authority for theSecretary to list and regulate biological agents andtoxins that potentially pose a severe threat to animal orplant health, or the products thereof. This proposal wasincorporated into the Bioterrorism Preparedness Act of2002, which became law on June 12, 2002.

Business Process Reengineering

Gaining economies and efficiencies in our own work is avery high priority, as it enables us to maximize ourlimited resources. During the last 6 months, we havecontinued the work of reviewing our business processesand reengineering them to enhance our ability to carryout our mission. We believe OIG can audit andinvestigate more efficiently if we streamline ourprocesses and employ state-of-the-art informationtechnology (IT). We are progressing rapidly toward adetailed strategic plan that will allow us to equip andtrain our employees and add additional resources, bothhuman and technological, so that OIG can maintain itslevel of quality, reliability, production, and service in itsoperations. One proposed modernization involvesautomated audit work paper files and an electronic casemanagement system for investigations, which wouldreap significant savings in staff time, as well as reviewand coordination. In addition, we recognize that weneed more highly trained and specialized personnel,such as computer specialists for cyber investigationsand systems engineers, as well as auditors and specialagents well-versed in information technology.

The Outlook

We have identified weaknesses and vulnerabilities insuch areas as security over biological agents at USDAlaboratories, security over FS aircraft and aircraftfacilities, and security over information technologysystems and reported them to the Department. TheDepartment is acting to address them and has received$328 million to continue to strengthen homelandsecurity planning and preparedness. The AgriculturalResearch Service, FSIS, and APHIS are receiving thebulk of this funding. OIG will monitor the expenditure ofthese monies to ensure they are used for homelandsecurity purposes.

Funding for key enhancements the Department hasplanned includes $177 million to make physical andoperational security improvements at critical USDA

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locations; $23 million for USDA’s Plum Islandlaboratory; $35 million to strengthen programs toexclude agricultural pests and diseases at U.S. borders;$16.5 million to increase monitoring of meat and poultryoperations, and expand technical capabilities; $15.3million to improve rapid detection of animal diseasessuch as FMD; and $43 million in grants and assistanceto States for improved coordination and homelandsecurity protection and preparedness.

OIG is hopeful that with this significant infusion offunding the Department will be able to correctweaknesses identified. As part of our role in securingAmerican agriculture, we will continue—as always—toaudit the agencies and work with them to ensure thatthe necessary corrective actions are taken.

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Summary of Audit ActivitiesReports Issued ................................................................................................................................................. 49

Audits Performed by OIG .................................................................................... 44Evaluations Performed by OIG ........................................................................... 1Audits Performed Under the Single Audit Act ..................................................... 0Audits Performed by Others ................................................................................ 4

Management Decisions Made Number of Reports ............................................................................................................................................ 54 Number of Recommendations .......................................................................................................................... 408

Total Dollar Impact (Millions) .......................................................................................................................... $115.5Questioned/Unsupported Costs .......................................................................................... $93.5a,b

Recommended for Recovery .............................................................................. $8.8Not Recommended for Recovery ........................................................................ $84.7Funds To Be Put to Better Use ............................................................................................ $22.1

a These were the amounts the auditees agreed to at the time of management decision.b The recoveries realized could change as the auditees implement the agreed-upon corrective action plan and seek recovery of amounts recorded

as debts due the Department.

Summary of Investigative ActivitiesReports Issued ................................................................................................................................................... 210Cases Opened ................................................................................................................................................... 239Cases Closed ..................................................................................................................................................... 244Cases Referred for Prosecution ......................................................................................................................... 258

Impact of InvestigationsIndictments .................................................................................................................................................... 213Convictions .................................................................................................................................................... 225a

Searches ........................................................................................................................................................ 24Arrests ........................................................................................................................................................... 184b

Total Dollar Impact (Millions) .......................................................................................................................... $23.8 Recoveries/Collections ............................................................................................................ $ 6.7c

Restitutions ............................................................................................................................. $15.4d

Fines ....................................................................................................................................... $ 0.8e

Claims Established .................................................................................................................. $ 0.6f

Cost Avoidance ....................................................................................................................... $ 0.3g

Administrative SanctionsEmployees ..................................................................................................................................................... 18Businesses/Persons ...................................................................................................................................... 142

a Includes convictions and pretrial diversions. Also, the period of time to obtain court action on an indictment varies widely; therefore,the 225 convictions do not necessarily relate to the 213 indictments.

b Includes 76 Operation Talon arrests and 108 arrests not related to Operation Talon.c Includes money received by USDA or other Government agencies as a result of OIG investigations.d Restitutions are court-ordered repayments of money lost through a crime or program abuse.e Fines are court-ordered penalties.f Claims established are agency demands for repayment of USDA benefits.g Consists of loans or benefits not granted as the result of an OIG investigation.

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As expressed in our previous Semiannual Report toCongress, one of OIG’s chief missions is to ensure thesafety of the American food supply and to protect theU.S. agriculture infrastructure from possible harm due tothe accidental or intentional introduction of foreign pestsand diseases. The events of September 11 and thesubsequent anthrax attacks gave new urgency to theissues of security over USDA’s infrastructure and theagricultural economy. OIG developed a three-pronged,analytical approach to focus its audit and investigativeresources on USDA assets terrorists could use asweapons, terrorists might target, or terrorists might useto finance their activities.

FRONT-LINE VULNERABILITIES

OIG Agents Active in World Trade CenterCounterterrorism Task Forces

Following the tragic attack on the World Trade Centeron September 11, OIG reassigned a number of specialagents to the New York Counterterrorism Task Force toassist in the investigation of the World Trade Centerattack and related investigations. These agents followedup on bomb threats, interviewed witnesses, surveilledsubjects and investigated leads involving terrorismsuspects, conducted numerous interviews of individualson the Federal Bureau of Investigation’s (FBI) watch list,and performed whatever tasks were assigned inresponding to the high state of emergency that existedlast fall.

OIG stationed a special agent at the FBI StrategicInvestigation Operations Center in Washington, D.C., asthe liaison for all USDA-related inquiries andinvestigative matters, and to coordinate criminalinvestigative efforts and intelligence informationregarding incidents of domestic and internationalterrorism. Across the country, more than 30 specialagents assisted criminal investigative efforts ofmultiagency counterterrorism and financial task forces,including “Operation Green Quest,” a multiagencynational project ordered by President Bush to targetbusinesses sending funds overseas to terrorist groups.

OIG special agents conducted numerous inquiriesinvolving biological threats at USDA-operated and/or -funded facilities, as well as threats made by USDAemployees. Many involved anthrax hoaxes. Twosubjects face potential criminal prosecution and/or

Homeland Security

agency personnel action for making false reports ofanthrax hoaxes and food contamination at USDA-inspected plants. Agents also visited over 50 USDA-operated or -funded laboratories and research facilitiesacross the United States. The special agents visited thelaboratories and facilities to evaluate the facilities’vulnerability to terrorism, security measures for trackingand controlling the access of foreign scientists andresearchers, and the security and accountability ofhazardous and pathogenic materials.

Florida Business Owner Pleads Guilty in Visa Scam

A former co-owner of a Florida physician recruitmentcompany pled guilty in Federal court in December 2001to a three-count criminal complaint, involving fraud inobtaining immigrant visas, false statements to a Federalagency, and income tax evasion. This business ownerwas involved in a multifaceted scheme that targetedforeign physicians holding J-1 Visa status in the UnitedStates. A majority of the physicians using this companysubmitted waiver requests to USDA as part of a processallowing them to work in the United States, with the goalof gaining permanent resident status in this country. Theapplications sent to USDA and other Federal agenciesroutinely contained false information, much of it createdat the recruitment company. This continuinginvestigation is being conducted in conjunction with theFlorida Department of Law Enforcement, Immigrationand Naturalization Service (INS), the U.S. Departmentof Health and Human Services OIG, the StateDepartment OIG, and the Internal Revenue Service(IRS).

Policies and Inventories Needed To ManageBiosecurity at USDA Laboratories

USDA performs research in laboratories across thecountry in which it uses and stores biohazardousmaterial—organisms that in the wrong hands couldpose a risk to human health and agricultural productionin the United States. Beginning in April 2001, weaudited security at these laboratories. As a result of theSeptember 11 terrorist attacks, we expanded the scopeof our audit to include additional locations andaccelerated the fieldwork, completing it in February2002. The Department previously had emphasized theprotection of laboratory personnel from hazardousmaterial and had issued no policies and procedures forsecurity at the laboratories or to centralize control offield unit practices involving the use and storage ofbiological agents.

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Of particular concern was the absence of a consolidateddatabase to identify the location and risk levels of thebiological agents at laboratories, as well as theappropriate level of security. Although required, not alllaboratories maintained an inventory of their biologicalagents, and few of those inventories maintained wereaccurate. At one laboratory, a vial listed in inventory, butnot found in storage, was said to contain about 3 billiondoses of one virus, a pathogen of considerable risk tohumans and cattle. This laboratory had not updated itsinventory of high-risk agents since 1997. In addition, thislaboratory had reported that it was no longer workingwith high-risk pathogens, but we found that it continuedto store and experiment with two viruses, bothconsidered high-risk by the Department. We did findthat anthrax was not used or stored in any location notdesignated properly.

Security measures at nearly half the 125 USDAlaboratories located at 91 different sites neededimprovement. Some laboratories lacked alarm systems,security fences, and surveillance cameras. Securityupgrades that had been funded were not properlyprioritized. For example, the security survey at twoagencies’ collocated laboratories recommendedperimeter fencing. However, the higher biosafety levellaboratories for both agencies remained unfenced dueto funding constraints, while the lower level laboratorieswere fenced. Inadequate access controls allowedscientists and researchers not involved with USDAresearch—including non-U.S. citizens—to enter unitswhere biological agents were stored. Due to an absenceof departmental policy and a backlog of securitybackground checks, access to research was routinelygranted to researchers, both domestic and foreign, forwhom background checks had not been completed.One laboratory considered a visa equivalent to abackground check.

The Department has engaged a contractor to assesslaboratory security at selected sites and to develop amanual to provide the methodology and framework forassessing and improving the biosecurity of high-consequence microbial agents and toxins, both withinUSDA facilities and during the movement of suchagents.

On November 9, 2001, the Department adopted a set ofpolicies and procedures standards for inventory control,physical security, personnel security, and biosecurityincident response recommended by a task force. Thedocument establishes policy for all pathogens deemed

of particular sensitivity by USDA, whether thosepathogens had previously been identified as high-risk ornot. The Department is currently finalizing the policiesand procedures into a Departmental Regulation.

We recommended that the Department quicklyimplement the policies and procedures established byits task force, complete a centralized database of all itsbiohazardous material, assess the risks associated witheach laboratory site, and determine appropriate securitymeasures. We also recommended that agencies limitaccess to high-risk biohazardous material and that theDepartment determine which security backgroundchecks are needed for such access, as well as reducethe backlog of those checks.

During our audit, additional congressional funding wasprovided to strengthen the Department’s biosecurity atits laboratories. The agencies generally committedthemselves to perform the needed laboratory-by-laboratory risk assessments and implement the taskforce policy on sensitive pathogens. We are workingwith the agencies to ensure they perform suchassessments, consolidate their inventories at theagency and Department levels, and implement taskforce policies at all laboratories with biological agentsthat are considered sensitive, not just those termed“high-risk.”

Improvements Needed in Security of FS Aircraft andAircraft Facilities

From October 2001 through January 2002, we reviewedthe Forest Service’s security over aircraft, including theair tankers used for aerial dispersal of flame retardantchemicals during firefighting operations. During thepeak fire season, FS could have up to 51 largemultiengine aircraft at its aircraft facilities, some capableof delivering up to 3,000 gallons of fire retardant at 1time. We also reviewed physical security at the facilitieswhere these aircraft are based.

We determined that FS-owned and -operated aircraftwere vulnerable to theft. One FS official stated that aqualified pilot could easily steal almost any aircraft inAmerica and that aircraft are more easily stolen than theaverage new car with a computerized ignition system.Furthermore, FS and contractor aircraft are usuallyparked in open areas of public airports. Many of theseairports are in sparsely populated areas and havelimited security.

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Prior to September 11, FS had not assessed the risks oftheft and misuse of its own aircraft, contracted airtankers, or State forestry aircraft, because it did notrecognize the possibility of such risk. Nor had FSprovided guidance either to air tanker contractors or toState officials regarding potential threats againstaircraft.

Besides using public airports, FS maintains 73 air basesof its own, used largely at the peak of the fire season.During the fire season, air tankers need to be in aconstant state of readiness in order to respond timely.Consequently, there are limits to how the tankersthemselves can be physically secured while on thebase. For this reason, FS needs to take a critical looknot only at the security of its aircraft but also at thesecurity of the bases themselves. We found that FS hadnot developed minimum standards for securing thesebases. Four of the seven air tanker bases we visitedhad only a chain link fence around the compounds andhad not secured all the gates. Increased security of theaircraft facilities would make the aircraft less vulnerableto theft or misuse while not interfering with the airtankers’ ability to respond timely.

We concluded that FS officials should immediatelyperform a risk analysis, identifying significant threatsand potential actions to mitigate those threats. The riskassessment should be coordinated with riskassessments to be performed by other Federal, State,and local partner agencies. FS also needs to developminimum security standards for the facilities at whichthe aircraft are based and determine which additionalsecurity features are needed to achieve the minimumstandard. Because some of the facilities receivedfunding under the National Fire Plan, such funding maybe available to improve security at the facilities.

We recommended that FS develop minimum-securitystandards for its aircraft and aircraft facilities andestablish a timeframe for meeting the standards. Wefurther recommended that FS ensure that new air tankercontracts incorporate appropriate security provisionsprior to award for the fiscal year (FY) 2002 fire season.

FS agreed with our findings and recommendations.Since the September terrorist attacks, FS hasrecognized the need to develop minimum-securitystandards and expects to develop them once theDepartment’s Chief of Physical Security completes hisreview of the Forest Service’s aircraft facilities. It is

working with the Federal Aviation Administration andcontractors on a package of security devices to secureboth its individual aircraft and the facilities where theyare based.

OIG Provides Law Enforcement Presence at WinterOlympic Games

For well over a year, OIG prepared to provide an activeinvestigative and intelligence-gathering presence duringthe 2002 Salt Lake City Winter Olympic Games(February 8-24, 2002) and worked closely with manyUSDA agencies to help with their preparations. For 6weeks, nine OIG special agents worked around theclock in key positions at the Winter Games to provide alaw enforcement presence and add their investigativeexpertise in matters affecting USDA. Four OIG agentswere assigned to the FBI’s Olympic Intelligence Center(OIC), while the rest gathered intelligence with otherState, local, and Federal law enforcement officers nearthe Snow Basin Ski Area, on National Forest land. OIGworked closely with FSIS concerning food safetymatters and with departmental officials and other USDAagencies to protect the more than 80 USDA facilitieslocated in the Salt Lake City and Wasatch Mountaincorridor. OIG agents assigned to OIC responded tohundreds of referrals for information from the FBI.

INFORMATION TECHNOLOGY

Communications and IT are among the Department’sprimary assets, and Department computer systemshave been a target of hackers in the past.Consequently, OIG had been involved in strengthening

OIG special agents provided a law enforcement presence at the 2002Winter Olympic Games in Salt Lake City. OIG photo.

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the Department’s security of this technology well beforeSeptember 11. We initiated a multiyear program prior tothe new millennium and intensified our effortssubsequent to the September 11 attacks. To date, wehave reviewed, or are in the process of reviewing, nineseparate IT systems within USDA.

One of the more significant dangers USDA faces is anattack, whether by terrorists seeking to destroy uniquedatabases or more typical criminals seeking economicgain. The Department has numerous information assetsthat include market-sensitive data on the agriculturaleconomy and commodities, program, signup andparticipation data, personal information on customersand employees, and accounting data. The dependenceon IT and the Internet has exposed USDA’s billions ofdollars in assets and its critical infrastructure topredators who use a new form of weapon against theDepartment’s programs and operations. The informationand related systems face unprecedented levels of riskfrom intentional or accidental disruption, disclosure,damage, or manipulation. Public confidence in thesecurity and confidentiality of the Department’sinformation and technology is essential. While theDepartment has taken positive action by developing aplan to strengthen USDA information security, ouraudits continue to identify deficiencies in USDA’ssecurity posture. The following sections depict some ofthose deficiencies.

Audits To Strengthen USDA’s IT Security

• Weaknesses Identified in AMS’s Ability To Protect ItsCritical IT Resources

Our audit identified numerous potential systemsweaknesses on the Agricultural Marketing Service’s(AMS) network that could be exploited both frominside the network and externally through theInternet. System configurations or computer settingsused by AMS unnecessarily increased the risk to thesystem, and hardware components were added tothe network without authorization. We recommendedthat AMS strengthen its controls to ensure that onlyauthorized users have access to its computersystems and that adequate controls are in place overthe application and operating system change controlprocess, including supervisory approval, segregationof duties, and documentation of testing results.Prompt action by AMS has mitigated a majority of theweaknesses.

• Controls Inadequate Over ARS’s IT Resources

We identified numerous and significant potentialweaknesses in the Agricultural Research Service’s(ARS) ability to adequately protect its IT resourcesfrom potential disruptions at each site we visited.These included potential vulnerabilities related toARS’s IT equipment and networks, as well asweaknesses in ARS’s system security administration.Because a standard security policy was not in place,ARS’s systems and networks were vulnerable tocyber-related attacks. ARS has stated it is committedto resolving the various security issues identified andhas initiated actions to resolve the potentialvulnerabilities reported.

• Security Over NRCS’s IT Resources

The Natural Resources Conservation Service(NRCS) had not updated its agency security programto reflect its current IT infrastructure or disseminateddepartmental security policies and procedures to allits offices. It had neither conducted risk assessmentsor annual security reviews to ensure that the agencywas in compliance with current security guidelines,nor determined whether those policies remainedappropriate. Most of the sites we visited had notconducted periodic assessments or establishedsecurity and contingency plans. We identified morethan 2,500 potential network vulnerabilities. NRCSalso needs to improve logical and physical accesscontrols, and controls to prevent unauthorized accessto critical or sensitive data were inadequate. NRCScomputer operating systems were not capable oflogging off terminals after a predetermined period ofinactivity, and one location had not establishedcontrols to detect or prevent unauthorized physicalaccess during business hours.

• FSA Management Needed To Increase Involvementin Computer Security

Farm Service Agency (FSA) management needed toincrease its involvement in computer security tominimize the threat of penetration of payment anddata systems. We found an FSA computer that wasused to access prohibited Internet Web sites by thesupervisor of a wiring contractor team. That team hadbeen left unattended in the office after regularworking hours. We also found logon identificationnumbers shared with visitors and an unexplained

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extra systems administrator (unlimited access) logon.Some sites relied primarily on a single individual forsystems administration and security.

We found physical security weaknesses at mostsites, including unlockable and unlocked doors andaccess by too many people to the room housing thecomputer servers, because a division separate fromthe operational division controlled access authority.Our scans of 121 network components disclosed 252potential weaknesses that could make FSA systemssubject to attack. Risk assessments were notcompleted at the required intervals, and securityplans did not provide a management structureindicating system responsibilities. Moreover,contingency planning was treated perfunctorily, andplans were not always updated to reflect significantchanges or tested annually.

• Information Security at NASS

We conducted an audit of information security at theNational Agricultural Statistics Service (NASS).Paper copies of e-mails alleging computer securitybreaches and the misuse of sensitive NASSinformation were provided to NASS management byNASS employees. NASS managers immediately

made this information available to OIG and requestedan audit. Our audit identified material weaknesses inthe NASS computer network, but nothing came to ourattention during the review that indicated the securitybreaches had occurred or that NASS employees hadused the computer weaknesses identified forpersonal gain.

The weaknesses we identified included (1)vulnerabilities on NASS network devices, (2) theneed to strengthen its firewall administration andsecurity over remote access to its network resources,and (3) the need to ensure that only authorized usershave access to its network resources.

We recommended that NASS (1) take correctiveactions on the vulnerabilities identified on its network,(2) develop and implement a policy to periodicallyreview the firewall configuration and remove ormodify firewall rules as necessary, and (3) strengthenits logical access controls by reconciling useraccounts to authorized users and eliminate the use ofgeneric user accounts. NASS has corrected asubstantial number of the problems found, and hasaggressively implemented plans to correct theremaining areas of concern. We acceptedmanagement decisions on all recommendations.

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EFFECTIVE FINANCIAL MANAGEMENT

In order to be effective, management must have reliableand timely financial information. The need for thisinformation resounds throughout all of the Department’sactivities, from the more obvious stewardship overassets, fiduciary responsibilities, and budgeting, tooperational matters such as performance measurement.For the Department to properly fulfill its mission andotherwise serve the public, it must know how muchmoney has been received, spent, and is needed. It mustknow where its assets are and when they need to berepaired or replaced. It must know the costs of itsoperations to identify where efficiencies and economiesneed to be implemented.

Although the Department received a disclaimer ofopinion on its financial statement from OIG for theeighth consecutive year, our audit opinions of thefinancial statements of some of USDA’s major agenciesdid improve in FY 2001. For the most part, however, theoverall caliber of financial information did not improve.The opinion for the Commodity Credit Corporation(CCC), for example, came about primarily because of“heroic” efforts by OIG and agency personnel tosignificantly adjust the reported financial data after thefiscal year actually ended. Improved opinions garneredin this manner can actually confuse the reader of afinancial statement audit report into concluding accurateand timely financial data was available to managersthroughout the year when it was not. As the ComptrollerGeneral recently testified:

Irrespective of the unqualified opinions on theirfinancial statements, many agencies do not havetimely, accurate, and useful financial informationand sound controls with which to make informeddecisions and to ensure accountability on anongoing basis. While agencies are making someprogress in obtaining unqualified audit opinions onannual financial statements, many of theseopinions were obtained by expending significantresources on extensive ad hoc procedures andmaking billions of dollars in adjustments to derivefinancial statements months after the end of afiscal year.... The need for such time-consumingprocedures primarily results from inadequatefinancial management systems.

Financial Management and Accountability

Various laws mandate the framework for strong financialmanagement. The Department’s achievement of theserequirements has been lacking, and, as a result,disclaimers of opinion have resulted. For example, theFederal Managers’ Financial Integrity Act (FMFIA) of1982 required internal controls to be established toensure, in part, that “assets are safeguarded andexpenditures are properly accounted for.” Office ofManagement and Budget Circular No. 123,implementing FMFIA, requires that internal controlsystems ensure that “reliable and timely information isobtained, maintained, reported, and used for decisionmaking.” Further, the Federal Financial ManagementImprovement Act (FFMIA) of 1996 requires that systemscomply with applicable Federal accounting standardsand other requirements. Adherence to these legislatedmandates would greatly enhance the Department’spotential to achieve an unqualified opinion on itsfinancial statements, but, even more importantly,provide agency managers “timely, accurate, and usefulfinancial information” which would enable them to bettermanage the Department’s programs and operations.

Financial Statement Audits

The Chief Financial Officers Act of 1990 and theGovernment Management Reform Act of 1994 requireUSDA to prepare and audit financial statements. Wedisclaimed on the Department’s consolidatedstatements for the eighth consecutive year (FY 1994-FY 2001). We also disclaimed on the Forest Service’sfinancial statements for the fifth consecutive year(FY 1997-FY 2001). The Federal Crop InsuranceCorporation (FCIC), the Rural Telephone Bank, andRural Development received an unqualified opinion ontheir FY 2001 statements, which means their financialstatements fairly presented their financial position.Although CCC received an unqualified opinion oncertain statements, we disclaimed on others. Thefollowing depict some of the problems:

• USDA’s Consolidated Financial Statements for FY2001: Disclaimer of Opinion

During FY 2001, the Department achieved severalmajor successes in improving its overall financialmanagement. Actions by the Office of the ChiefFinancial Officer (OCFO) and the National FinancialCenter (NFC) enabled us to remove our qualificationon “Credit Program Receivables, Net” and increasedthe reliability of the “Fund Balance With Treasury”

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line item (though problems persist in this area). As ofFY 2002, approximately 98 percent (in terms of valueof accounts) of the Department has been brought intothe Foundation Financial Information System (FFIS),mitigating the financial management problemsreported in the Central Accounting System (CAS).Only two agencies remain outside FFIS.

Despite these efforts, we were unable to give anopinion on the Department’s FY 2001 financialstatements. The Department did not submit auditablefinancial statements on time, and, based on the auditcoverage we were able to complete, we concludedthat overall the Department could not providesufficient, competent evidential matter to supportnumerous material line items on its financialstatements.

• FY 2001 CCC Financial Statements: VaryingOpinions

We issued an unqualified opinion on CCC’s BalanceSheet, Statement of Changes in Net Position, andConsolidated Statement of Net Costs. However, wedisclaimed an audit opinion on the CombinedStatements of Budgetary Resources and Financing.We continued to find significant errors, which werecorrected once adjustments were booked, in CCC’saccounting records for its foreign loan accountingoperations and domestic accounting operations. OIGhas informed CCC officials in the last seven financialstatement audits that substantial improvements infinancial management, systems, and operations mustbe made, but CCC has not taken sufficient action.

• FY 2001 FS Financial Statements: Disclaimer ofOpinion

FS was unable to provide sufficient, competentevidential matter to support amounts reported in itsFY 2001 financial statements. The agency had notperformed sufficient analyses and reconciliations ofits financial system to ensure the accuracy ofamounts recorded in the general ledger and thesubsidiary (detailed) ledgers. Therefore, theunaudited financial statements provided to us onNovember 15, 2001, contained numerous errors, andthe accompanying footnotes were incomplete.Significant control weaknesses in the general ledgerand the subsidiary systems greatly reduced thereliability of account balances reported on the

financial statements. FS management had notestablished a reliable and effective business processto prepare the financial statements. Internal controlsover the agency’s financial reporting process wereinadequate, controls were insufficient to safeguardassets, and financial systems did not substantiallycomply with FFMIA. Thus, we concluded the financialstatements were unreliable.

• FY 2001 Rural Development Mission Area FinancialStatements: Unqualified Opinion

In FY 2001, we issued our first unqualified opinionsince FY 1993 on the Rural Development MissionArea’s financial statements. Although RuralDevelopment’s and the Department’s efforts resultedin substantial progress, the financial managementproblems were not overcome until substantially afterthe end of the 2001 fiscal year. Accordingly, theinformation to manage the programs was notavailable when it was needed. The unqualifiedopinion was achieved because the financial databecame “fairly presented” only after substantial after-the-fact adjustments. Our audit also disclosedseveral internal control weaknesses, such asestimates in budget submissions and the need forimprovements in estimating future loan losses, whichneed to be corrected to foster economy andefficiency and ensure the reliability of the financialdata in future periods.

FINANCIAL-RELATED AUDITS

Federal Financial Management Improvement Act

USDA’s financial management systems, as a whole, donot substantially comply with the requirements of FFMIA(i.e., Federal accounting requirements). USDA, asrequired by law, has developed an overall remediationplan, with detailed plans in effect for RuralDevelopment, CCC, FS, and OCFO/NFC. TheDepartment’s plan is long term in nature. Generally, theremedial action implementation dates have beenextended an additional year, to the end of FY 2004,because of the agencies’ inability to comply withapplicable accounting standards and resolve theDepartment’s financial management problems. Althoughthe Department has been able to mitigate some of thesesystems weaknesses through laborious manualintervention, the Department’s inability to achieve an

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unqualified opinion stems in large part from itsnoncompliance with FFMIA. Ultimately, the goal is thatthe Department know whether it has properly accountedfor the money it has collected, the cost of operations,and assets of well over $100 billion.

Rural Development’s Compliance With FMFIAReporting Requirements

FMFIA requires agencies to evaluate their systems ofinternal control, and identify and correct materialweaknesses. We reviewed Rural Development’sprocess and found that it was not adequate to fulfill therequirements. Our review disclosed two primary causalfactors: the agency had no quantitative criteria on whatconstitutes a material weakness, and the methodologyRural Development employed to assess internalcontrols needed to be expanded and enhanced. As aresult, the vast preponderance of material weaknessesreported by Rural Development over the past 10 years(20 of 23, or 87 percent) were identified by OIG and theGeneral Accounting Office, not by Rural Development’sself-assessments. Moreover, Rural Development, in theabsence of quantitative criteria, opted not to report aweakness that it identified internally regarding apotential shortfall of $850 million needed to ensure thatrural rental housing was safe and sanitary for low-income residents. In our opinion, this weakness wasmaterial and should have been reported. Thecomputational model OIG uses to determine materialitythresholds to guide the conduct of financial statementaudits generated a materiality level of only $1.2 millionfor the Rural Rental Housing Program. In other words,anything in excess of the $1.2 million would beconsidered material.

The control objectives and techniques to identifymaterial internal control weaknesses did not includecoverage of all significant areas, and RuralDevelopment assessed only an overall risk level foreach program being reviewed. The lack of riskassessment for individual controls meant that high-riskareas would not be reviewed as often as needed, andresources might be disproportionately diverted to low-risk areas. Ultimately, OIG’s goal is that managers notbe forced to make decisions “in the dark” without solidfinancial data.

We recommended that Rural Development develop andimplement a definition of a material weakness thatcontains both qualitative and quantitative characteristics

and properly reflects the relative risk and significance ofdeficiencies. Rural Development also needs to developclear and comprehensive control objectives andtechniques, as well as accompanying review guides,that will adequately monitor the effectiveness of itsprograms. Furthermore, we recommended that RuralDevelopment establish risk level assessments forindividual control objectives and use them to determinethe scope of its internal control reviews.

Rural Development did not agree that it should developand implement a definition of material weakness thatcontains both qualitative and quantitativecharacteristics. Rural Development contends that it willconsider this action if the departmental guidance isrevised to require it. We will pursue this matter with theDepartment. Rural Development did agree that it shoulddevelop clear and comprehensive control objectives andtechniques that adequately monitor the effectiveness ofits programs. Rural Development agreed to establishrisk level assessments for individual control objectivesand use them to determine the scope of its internalreviews.

Selected IT General Controls at NFC NeedStrengthening

NFC’s Application System Division (ASD) maintains thecomputer applications that process data for the systemsthat disbursed or authorized more than $43 billion insalary and administrative payments in FY 2001.Including USDA, the system provides administrative andfinancial services to more than 120 agencies and450,000 employees. NFC application change controlswere not operating as effectively as needed to ensurethat all modifications to applications maintained by ASDwere properly tested and approved prior toimplementation. This could result in erroneous databeing processed, which could lead to losses or incorrectoutcomes in various payments and accounting systemsthat ASD maintains.

We previously reported, and continued to find, thatmodifications were made to application programsmaintained by NFC without adequate authorization andtesting, which resulted in data being processedincorrectly. NFC also permits production changes to bemade through special processing, which allows changesto production data outside the normal methods andcontrols. This increases the risk that production datacould be inappropriately modified. We further identified

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weaknesses in other IT general controls specific to theSpecial Payroll Processing System (SPPS). Forexample, access to SPPS and other information in theproduction payroll/personnel databases was notadequately restricted, and we noted security gaps.

We recommended that NFC establish controls andguidance to ensure that user approval is obtained forfunctional requirements documents, software testing isadequately documented, and acceptance testing isperformed for application changes.

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Abuses of USDA Programs and Operations

PROTECTING THE FOOD SUPPLY

One of the primary challenges facing USDA is to protectU.S. agriculture and ensure safe and wholesome meatand poultry. OIG’s work ranges from detecting criminalsmuggling of plants, animals, vegetables, fruits, andmeats from overseas to investigating reports of illegalactivity at meat and poultry processing plants tofollowing up on reports of adulterated products in stores.We also can never ignore the continuing threats toconsumers caused when some unscrupulousbusinesses place profit above public safety, failing toreport and destroy food contaminated by dangerouspathogens or even actively adulterating food to increasetheir profit. The following are cases OIG has pursued.

Hog Dealer Pleads Guilty to Illegal InterstateShipment

A Tennessee hog dealer pled guilty in March 2002 toFederal wire fraud and false statement charges relatingto his 1997 sale and transportation of over 2,000 swine,worth more than $200,000, to buyers in California whohad been assured that the swine originated inTennessee, which is free of the pseudorabies virus. Thedealer, in fact, had shipped the swine from several otherStates that were under Federal restrictions on theinterstate shipment of hogs due to outbreaks of thevirus. A Tennessee Doctor of Veterinary Medicine isawaiting trial on charges that he assisted the hog dealerby preparing fraudulent Tennessee health certificatesfor the interstate shipments. Sentencing of the hogdealer is scheduled for later this year.

Officers of Meat Company Plead Guilty to WireFraud Charges

The former president and the former comptroller of acompany with offices in New Jersey and Florida, whichsold meat to domestic and foreign buyers, have pledguilty to wire fraud charges relating to false informationthat the company provided to a lender. Of specificconcern were false inventory claims concerning morethan 480,000 pounds of beef trimmings, fat, and otherby-products that were relabeled, creating the impressionthe boxes contained premium meat. The value of thismeat inventory was reported by company officials to beapproximately $4.9 million, when the true value was aslittle as $90,000.

Fast Food Customer Tampers With Take-HomeProduct

In Tennessee, an OIG investigation resulted in acustomer of a retail fast food chicken restaurantadmitting that she had violated Federal antitamperinglaws by placing prescribed medications within the take-home product she had purchased in February 2000.She falsely reported to the restaurant and local policethat she found the medications when she bit into theproduct. In December 2001, she was placed in a pretrialdiversion program and received 18 months’ probation.

Individual Impersonates FSIS Compliance Officer

In June 1998, an individual purporting to be a USDAFederal compliance officer conducted bogus inspectionsat two retail facilities in Kentwood, Michigan. Theindividual demanded to inspect pizza being sold to thegeneral public and made threats of closing down thebusinesses for selling products in violation of USDAregulations. Specifically, he contended theestablishments were selling pizza with a meat toppingthat was not from a USDA-inspected source.Investigators determined that the imposter was acontract employee of a federally inspectedestablishment in Detroit, and the inspections were ascare tactic by the company to regain accounts lost to acompetitor. The subject admitted to conducting thefraudulent inspections in violation of the law and agreedto participate in a pretrial diversion program for 1 year.

Dairy Pays $650,000 in Milk Adulteration Case

In October 2001, a Virginia dairy agreed to a pretrialdiversion in which it would pay $650,000 in restitution,following a joint investigation by OIG and the U.S. Foodand Drug Administration’s Office of CriminalInvestigations. On occasion, the dairy was not properlytesting milk for the presence of antibiotics in bulk milktanker trucks that delivered raw milk for processing,and, as a result, 2 percent milk fat and whole milkproducts containing antibiotics were shipped ininterstate commerce. Random sampling conducted bythe Tennessee Department of Agriculture detectedantibiotics in milk packaged by the dairy, whichvoluntarily recalled 2 percent milk fat products.However, the company failed to recall all the whole milkproducts adulterated by antibiotics. The adulterated milkcaused no known illness or injuries. In addition to therestitution, the agreement required the dairy to

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implement an intensive monitoring and educationprogram to ensure that antibiotic-tainted milk is detectedand destroyed.

PUBLIC CORRUPTION

Another continuing priority for OIG is the investigation ofcriminal acts committed by USDA employees. We haveidentified approximately 55,000 USDA employeeswhose positions place them in direct contact with thepublic. The percentage of wrongdoers is small, but tomaintain the public trust, internal controls must be inplace and operating. During the past 6 months, publiccorruption investigations resulted in 5 convictions ofcurrent or former USDA employees and 18 personnelactions. Descriptions of some recent investigationsfollow.

Former FS Technician Sentenced for Theft

A former FS communications technician in the State ofWashington has been sentenced to 18 months inprison, to be followed by 2 years’ probation, fined$3,000, and ordered to pay $4,000 in restitution afterpleading guilty to theft of Government property. Theemployee illegally obtained radio and electronicsequipment from the Defense Reutilization andMarketing Office (DRMO) in Fort Lewis, Washington,and resold some of the equipment for personal gain.Our joint investigation with FS Law Enforcement andInvestigations agents disclosed that, from the early1990s until 2000, the employee screened and acquiredover $9 million worth of Federal excess property fromDRMO. DRMO property worth approximately $1.5million and FS property worth more than $150,000,mostly radio equipment and related parts, wererecovered from the employee’s residence in August2000. The employee, an amateur radio operator,admitted to having sold some of the equipment forpersonal gain.

Administrative Support Assistant Pleads Guilty toEmbezzlement of Public Money

A former administrative support assistant for APHISPlant Protection and Quarantine in Niles, Michigan, pledguilty to one count of embezzlement of public money.She was sentenced to 3 years’ probation, 4 months’home detention, and 300 hours of community service,and ordered to pay restitution of $14,000 and a $100special assessment fee. She must also participate in a

program of mental health treatment specificallyaddressing anger management and conflict resolution.From March 1994 to June 1997, the employee used theoffice IMPAC Visa charge card to make at least 75unauthorized personal purchases at 13 separate retailestablishments, totaling approximately $14,000. Beforesentencing, she retired from her position in Governmentservice.

Guilty Plea by Individual Posing as USDA Employee

A Washington, D.C., man has signed a plea agreementadmitting to a scheme in which he represented himselfand others as USDA employees in April 2001 in order todefraud hotels and limousine companies of $23,000 inservices. The defendant committed wire fraud incarrying out the scheme by obtaining the USDA logofrom the USDA Web site, using it to create USDAletterhead, and arranging direct bill credit by usingtelephones and faxes. The defendant is on Federalprobation for like offenses in the past and is being heldfor trial on similar charges in Georgia. The defendantwill be arrested on a Federal warrant upon release inGeorgia.

FOOD, NUTRITION, AND CONSUMERSERVICES

FOOD AND NUTRITION SERVICE (FNS)

FNS administers the Department’s food assistanceprograms, which include the Food Stamp Program(FSP); the Child Nutrition Programs (CNP); the SpecialSupplemental Nutrition Program for Women, Infants,and Children (WIC); and the Food Donation Programs.The bulk of FNS’ $38 billion funding for FY 2002 goes toFSP ($22.9 billion), CNP ($10.3 billion), and WIC ($4.5billion).

FOOD STAMP PROGRAM

Monitoring of the Electronic Benefits Transfer (EBT)System Continues

Currently, 43 States and the District of Columbia useEBT systems to deliver food stamp benefits. Forty of thesystems have been implemented statewide, includingthe District of Columbia. About 84 percent of all FSPbenefits are being issued via EBT.

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This reporting period, we found that FNS’s oversight ofNew York’s EBT system and operations was adequateoverall. However, controls over system access, use ofmanagement reports, and recipient access to benefitsneeded improvement. The State agency had notestablished adequate controls over EBT system accessand use of system access reports, resulting in anincreased risk of unauthorized access to EBT benefits.EBT management reports were not effectively used bythe State to monitor the EBT system, which could resultin suspicious EBT activity not being detected andresearched. Contrary to FSP regulations, the Stateagency did not convert FSP benefits to cash or coupons

More than $15 million in food stamp and WIC fraud originated fromthis store in Cleveland. OIG photo.

This toolbox filled with more than $400,000 in cash was seized underasset forfeiture statutes in the same case in Cleveland. OIG photo.

This house, with an estimated value of more than $300,000, wasseized under asset forfeiture statutes in the Cleveland case. OIGphoto.

This house was also seized for asset forfeiture in the Cleveland case.OIG photo.

when recipients left the project area, and recipientswere not notified of the State’s policy to expungebenefits after 270 days of inactivity. FNS and the Stateagency are implementing corrective actions.

Three Will Serve Prison Time in $15.3 Million FoodStamp and WIC Fraud Case

Two individuals in Cleveland, Ohio, pled guilty to $3.5million in food stamp and WIC fraud and were eachsentenced to serve 3-1/2 years in prison. The wife of themain subject also pled guilty to a misdemeanor count offood stamp trafficking and agreed to voluntary lifetime

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debarment from participation in both programs. Thesethree individuals forfeited approximately $2.5 million inassets, including cash, vehicles, bank accounts, realestate, and store assets. The group was estimated tohave committed over $15.3 million in food stamp andWIC fraud since 1995. Two other indicted co-conspirators fled and remain fugitives. This investigationwas worked jointly with the U.S. Secret Service, the FBI,the IRS, the INS, the U.S. Customs Service, the U.S.Postal Inspection Service, the Cleveland PoliceDepartment, the Ohio Department of Taxation, and theOhio Department of Public Safety.

Illegal FSP Redemption Case Yields $4 MillionRestitution, Prison Sentence

The husband and wife owners of a grocery store in NewYork City were ordered to pay $4 million in restitution toUSDA following their guilty pleas to charges of makingillegal food stamp redemptions and committing theft ofpublic funds. The couple reported to State and Federalagencies that their grocery store had revenues ofbetween $500,000 and $600,000 when they actuallyredeemed well over $2 million in food stamps in 1995and 1996. The couple also trafficked food stamps duringundercover operations. The husband was sentenced to13 months in prison and the wife to 3 years’ probation.

$2.6 Million Restitution Ordered in EBT Fraud

The owner and an employee of an authorized producetruck that serviced the Philadelphia, Pennsylvania, areapled guilty to food stamp access device fraud andrelated charges for food stamp EBT trafficking from May1998 through November 1999. The owner wassentenced to 9 months’ imprisonment, as well as3 months’ home confinement, and ordered to pay$1.3 million in restitution. The employee was sentencedin January 2002 to 6 months’ home confinement with 5years’ probation and ordered to pay $1.3 million inrestitution. Approximately 200 food stamp recipientswho exchanged EBT benefits for cash with the ownerand his employee were referred to the PennsylvaniaOIG for further action. This investigation was workedjointly with the IRS.

Three Brothers Arrested in WIC and EBT Fraud

As reported in a previous period, three brothers werearrested after OIG agents executed search warrants attheir residence and store, identified as the highest WIC

redeemer in North Carolina. The store deposited$542,000 in WIC benefits and $176,550 in EBT benefitsover 3 years from 1998 through 2000. Multipleundercover transactions involving WIC vouchers andEBT cards led to a 329-count indictment, as well asseizure of bank accounts, cash, and an automobile inMay 2001. All three defendants have now pled guiltyand received sentences ranging from 24 to 38 monthsin jail during this reporting period. Restitution was set atmore than $553,500. Two of the defendants facedeportation upon completion of their prison terms.Additional defendants are to be indicted. OIG, the IRS,and the Greenville, North Carolina, Police Departmentinvestigated this case jointly.

Family Members Go to Federal Prison for FoodStamp Trafficking

Five family members, who owned several grocerystores in the Fort Worth, Texas, area, received Federalprison terms ranging from 8 to 46 months for foodstamp EBT trafficking and conspiracy. The family isestimated to have committed more than $1 million infood stamp fraud from December 1996 through April1999 by illegally trafficking in EBT benefits at fourgrocery stores they owned. The subjects were orderedto pay restitution totaling $1.3 million. This investigationwas conducted jointly with the IRS.

Owner Pleads Guilty in $300,000 EBT Fraud

In February 2002, the owner of a small authorized storein Chester, Pennsylvania, pled guilty to EBT traffickingand was sentenced to 8 months’ home confinement andordered to pay more than $167,000 in restitution. Theowner illegally purchased more than $300,000 in EBTbenefits. Approximately 750 food stamp recipients whoexchanged EBT benefits for cash with the owner werereferred to the Pennsylvania OIG for further action.

Operation Talon Arrests Continue

Operation Talon was designed and implemented byOIG to locate and apprehend fugitives who are foodstamp recipients. As of March 31, 2002, OperationTalon had resulted in 7,981 arrests of fugitive felonsduring joint OIG, Federal, State, and local lawenforcement operations throughout the country. Seriouscrimes perpetrated by those arrested include homicide-related offenses (murder, attempted murder,manslaughter), sex offenses (child molestation, rape,

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attempted rape), kidnapping/abduction, assault,robbery, and drug/narcotics violations.

Florida Needs To Improve Corrective ActionProcess

We evaluated Florida’s corrective action planning forreducing food stamp payment error rates and itsmanagement of food stamp claim activities for FYs 1999and 2000. In FY 1999, the State’s error rate was 9.43percent, equating to $76 million of improperly issuedfood stamp benefits. Although the average caseload pereligibility worker had declined 39 percent since FY1996, the error rate had not significantly decreased.

The State’s plans did not contain mandatory elementsand components to detail deficiencies, correctiveactions, and results. The plans were generally “tocontinue” the same actions year to year with “ongoing”completion dates. The State also had not taken actionsto improve its claim management activities. In January1994, we reported that the State did not timely processclaim referrals—resulting in a 7-year backlog—orrequire recoupment of some established claims fromhouseholds. These conditions had not been corrected.

We estimated that, as of July 2000, almost 29,000 newclaims, valued at $14.7 million, were backlogged, andmore than 13 years would be needed to establish theclaims unless additional resources are employed. TheState did not always code claims for allotment reductionor enter them into the system so that recoupment couldtake place, resulting in 5,041 claims, valued at $1.1million, not being recouped. The State also understatedits claims receivable balance reported to FNS by about$1.7 million. FNS has instructed the State to undertakethe necessary corrective actions.

CHILD NUTRITION PROGRAMS

Cooperative Buying Group Did Not Comply WithFederal Competition Regulations

School districts join together to establish largecooperative buying groups to realize cost savings,quality, and consistency of food products. Our review ofthree cooperatives in two States from August 2000through May 2001 disclosed that one group in NorthCarolina did not always conduct procurementtransactions for the National School Lunch Program

(NSLP) in a manner that provided for open and freecompetition. It did not solicit or request bids for certainfood and nonfood products from manufacturers butpurchased those items from their contracted serviceprovider. The cooperative purchased numerous foodand nonfood products from its service provider thatwere not included on the secondary bid list of therequest for proposal, an unacceptable practice. FromJuly 1 through October 31, 2000, it purchased over$408,000 in food and nonfood products from its serviceproviders without regard to open and free competition.FNS agreed with our recommendation to recover themoney.

State Agencies Did Not Ensure Required CACFPAudits Were Completed

From our review of FY 2000 and FY 2001 (throughMarch 31, 2001) activities, we determined that neitherthe Michigan nor Ohio State agencies had tracked thesources of all Federal funding received by participatingnonprofit institutions. Thus, the States could not confirmthat all single audit requirements were being met byinstitutions that received over $97 million in Child andAdult Care Food Program (CACFP) funding. No one inMichigan or Ohio had been assigned to determinewhich subgrantees in CACFP should receive a singleaudit based on funding received from all Federalsources. CACFP program agencies were tracking singleaudit performance of their subgrantees only whenCACFP funding exceeded $300,000. In neither Statedid program agencies determine single auditcompliance when CACFP funding was less than$300,000. FNS and the State agencies have initiatedcorrective actions to address the deficiencies.

CACFP Sponsor Claimed Improper Costs,Inadequately Monitored Centers

A CACFP sponsor in Wisconsin inflated administrativecosts during FYs 2000 and 2001 by entering into less-than-arms-length leases for kitchen equipment, deliveryvans, and rental space. Although regulations limit costsin transactions where one party is able to substantiallycontrol the other, the sponsor leased its own equipmentback from its fully owned subsidiary at rates that wouldnearly double the cost of the equipment over the termsof the leases. The corporation, from which the sponsorleased its office space, shared its officers and board ofdirectors with the sponsor and charged the organizationrental fees that were higher than comparable costs. If

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allowed to run their full terms, the leases will cost theprogram about $359,000 in excess costs for the vans(5-year lease) and equipment (10-year lease) with anadditional $924,000 for the rental space (7-year lease).Funds to be put to better use totaled nearly $1.3 million.

The sponsor also did not perform 112 of the 393monitoring site visits required by regulations for FY2000. Because of inadequate monitoring by thesponsor, 13 of the 26 child care centers we visitedclaimed excessive meals for reimbursement, more than3,100 meals during May 2000 were served to ineligiblechildren, and 1 center claimed lunches for school-agechildren who did not participate in the lunch mealservice. Excessive reimbursements for the months wereviewed totaled $8,800.

FNS and the State agency officials generally agreedwith the findings and recommendations.

COMMODITY DISTRIBUTION PROGRAM

Food Vendor and Employee Defraud USDACommodity Recipient

The executive director of a soup kitchen—which servedboth as a food distribution center for the underprivilegedand as a branch of a ministry in Detroit, Michigan—conspired with a food vendor to defraud theorganization. The food kitchen relies primarily on privatedonations, although it also receives USDA commoditiesand Federal Emergency Management Agency grants.Specifically, the soup kitchen employee requested thevendor to supply false and inflated invoices for food hedelivered daily to the ministry. The vendor agreed to“kick-back” cash to the employee when he was paid forthe invoices. In October 2001, the soup kitchenemployee pled guilty to program fraud and wassentenced to 14 months in prison and ordered to payrestitution of over $828,000. The vendor pled guilty tothe same charge in January 2002 and was sentenced to24 months in prison and ordered to pay restitution jointlyand severally with the coconspirator. This investigationwas worked jointly with the U.S. Postal InspectionService, which initially received a Whistleblowercomplaint about the scheme.

FARM AND FOREIGN AGRICULTURALSERVICES

RISK MANAGEMENT AGENCY (RMA)

RMA administers the Federal Crop InsuranceCorporation and oversees all programs authorizedunder the Federal Crop Insurance Act. RMA’s 2001crop-year liability exceeded $36 billion. FCIC is a whollyowned Government corporation that offers subsidizedmultiple-peril and revenue crop insurance through aprivate delivery system by means of insurancecompanies. Its FY 2001 Government cost, afterproducer-paid premiums of $1.3 billion, is estimated at$3 billion.

Reliable QC Review Process Needed To EvaluateCrop Insurance Program

From May 2000 through April 2001, we reviewed RMA’squality control (QC) review system and found that RMAcontinues an 8-year struggle to develop and implementa reliable system capable of evaluating private sectordelivery of Federal crop insurance. Until RMA answersbasic policy questions (what constitutes an error, theamount of improper payments made, at what levelprogram delivery should be assessed) and implementsa long-term plan of action, it may continue to expect theFederal Crop Insurance Program to suffer fromunreported errors and abuses, as well as frequentlyundetected dollar losses. Consequently, an effective QCreview system must be in place to ensureimplementation of the Agricultural Risk Protection Act of2000 and is critical under the requirements of theGovernment Performance and Results Act (GPRA).RMA did not identify the absence of a reliable QCreview system as a material internal control weaknessin its FMFIA report.

The crop insurance delivery system relies on the privateinsurance companies as the first line for QC, but wewere not able to identify an industrywide standard orone suitable model. However, one based on FNS’ssystem could prove satisfactory, as FNS relies onStates to measure the accuracy of their ownperformance, tests samples to verify measurements,and most importantly, holds States accountable for theirperformance through sanctions or requiring that Statesinvest their funds to correct their weaknesses.

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We recommended that the RMA Administrator seeklegislation to mandate a QC review system to evaluateprivate sector delivery of the Federal Crop InsuranceProgram, implement basic program policy decisions toinclude meaningful performance measures, and developa long-term QC plan of action. We also recommendedthat RMA define and describe its QC systemauthoritatively by regulation and report the absence of areliable system as a material internal control weaknessunder FMFIA.

RMA believes that a legislative process is lengthy andtime-consuming and has proposed to award a contractto study its delivery process and the underlyingagreement. RMA also plans to study and analyze itscontractual agreements for program delivery, whichincludes the QC system, and has indicated that the newsystem will include goals and objectives to evaluateperformance and measure results. RMA agrees thatimprovements can be made to the current system butdisagrees with reporting its unreliability as a materialweakness. We maintain our opinion on that matter andcontinue to work with the agency to resolve the issue.

False Crop Insurance Claims Net Prison Terms forProducers

As reported in a previous period, at least six producersand a crop insurance adjuster in Texas conspired tosubmit false claims in 1999 to RMA regarding over20,000 acres of cotton and grain sorghum,subsequently receiving over $1.1 million in insuranceindemnities. Four producers and an insurance adjusterhave now been remanded to Federal prison for periodsranging from 12 to 24 months, and restitution of morethan $685,000 has been ordered.

Producer Receives Prison Term for Crop InsuranceFraud

As reported in a previous period, a Texas producer andhis wife, an insurance agent, conspired with others toconceal true ownership in various crops in order toavoid paying the higher insurance premiums of theNonstandard Classification System. The producer hasnow been sentenced to 33 months in Federal prison,followed by 3 years’ supervised release, ordered to payrestitution of nearly $600,000, and fined $10,000. Theproducer is barred from participating in USDA programsuntil the conclusion of his sentence. His wife received asimilar sentence.

Insurance Company Pays Treble Damages andPenalties for False Claims

In October, a large issuer of multiperil crop insurancepolicies in Minnesota settled with the United States forpayment of false claims submitted by a loss adjusteremployed by the company. The insurance companybecame aware of allegations that the claims werefraudulent but did not report the suspected fraud toRMA. The insurance company agreed to pay trebledamages and six civil penalties under the False ClaimsAct, totaling more than $323,600. The settlementagreement also included a Corporate Compliance Plan,which required the company to establish a specialinvestigative unit that functions independently of thecompany’s crop insurance division to investigateallegations of fraud, regularly provide RMA data on cropinsurance claims that appear to be fraudulent, developand provide annual fraud prevention training toemployees, and promptly take all corrective action whennotified by USDA of any violation of crop insuranceprogram regulations.

FARM SERVICE AGENCY

FSA supports American agriculture and the Americanpublic through agricultural commodity, farm loan,conservation, environmental, and emergencyassistance, as well as domestic and international foodassistance programs. The FY 2002 budgeted programlevel for FSA is estimated at over $26 billion, includingmore than $21 billion for operations funded by theCommodity Credit Corporation, a Governmentcorporation.

FSA Implementation of QLP Was Generally Effective

The Quality Loss Program (QLP) was a supplementalquality program enacted in 2001 to provide assistanceto producers where 2000 Crop Disaster Program (CDP)quality payments were inadequate or nonexistent.Quality payments earned under CDP were subtractedfrom QLP and QLP–Apple and Potatoes (QLP-AP)payments. Our fieldwork, conducted from August toDecember 2001, concluded that FSA proceduresgenerally were effective in administering QLP and QLP-AP. Although FSA’s acceptance testing disclosed minorformatting problems with program software, we did notidentify any resultant payment or production calculationirregularities. Crop insurance linkage requirements were

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met by 2000 CDP applicants, and FSA outreach effortsat the sampled county offices were adequate.

Thirty Individuals Arrested and Three Sentenced toLong Jail Terms for Victimizing Farmers; $1 Millionin Stolen Property Recovered

As reported in a previous period, 30 members of anorganized group were arrested in the Dayton, Ohio,area for their participation in a conspiracy to steal farmequipment and other items from farmers in Ohio,Kentucky, and Indiana. Beginning in July 2000, the OIGcase agent and other members of the Organized CrimeInvestigations Commission Task Force 00-3 infiltratedthis criminal organization. The investigation found thatthe criminal organization was responsible for more than$5 million in farm-related or rural property thefts. Thetask force has now recovered more than $1 millionworth of the stolen property. To date, 30 individualshave been arrested and indicted, 23 have pled guilty,1 has been found guilty by jury trial, and 27 searchwarrants have been executed. The top three ringleadershave been sentenced to jail terms of 9 years, 6 years,and 2 years.

OIG positively identified 30 farms participating in FSAprograms that this criminal organization victimized in 12counties in Ohio, 5 counties in Indiana, and 1 county inKentucky. Property stolen included tractors,automobiles, generators, tools, weapons, and all-terrainvehicles. Much of the stolen property was collateral forfarm-owned property or operating loans and/or businessand industry loans.

The task force consists of agents and officers from OIG,the National Insurance Crime Bureau, the FBI, andseveral Ohio law enforcement agencies: theMontgomery County Sheriff’s Office, the CentervillePolice Department, the Miamisburg Police Department,the Moraine Police Department, and the Dayton PoliceDepartment. Numerous other law enforcement agenciesare supporting the task force.

Former Co-Op Manager Convicted of Embezzlement

The former manager of a farm cooperative in Oklahomawas convicted of embezzling co-op funds that includedCCC-owned grain proceeds and was sentenced to 70months in Federal prison and ordered to pay restitutionof $2.1 million. He created a fictitious vendor, issuedmore than $2 million in co-op checks to this entity fromMarch 1997 to December 1999, and used “arbitrage

contracts” to cover the CCC and other co-op grains.This investigation was conducted jointly with the FBI.

Father and Sons Plead Guilty to Conversion of FSACollateral

In California, a father and his two sons are awaitingsentencing after each pled guilty to unauthorizeddisposition of Government collateral. The threeindividuals had originally been indicted for conspiracy tomake false statements to FSA officials in conjunctionwith a $200,000 operating loan but pled guilty to lessercharges as part of a plea agreement. Our investigationdisclosed that, in 1994, the father received a settlementfrom USDA on a $100,000 loan by falsely stating that hehad transferred his interest in the family farm to his twosons. The two sons later applied for and received a$200,000 operating loan by falsely stating that theirfather had no interest in the farm. All three subjectssubsequently declared bankruptcy and defaulted ontheir loans.

Farmer Convicted After 3-Day Trial

A Minnesota farmer and former agribusiness radiocommentator was convicted in October 2001 ofconverting more that $400,000 in grain that securedloans he had received from USDA through CCC. Duringa 3-day trial, the Government showed the farmer hadillegally sold grain securing his loans. In response, thefarmer said that, because he was known widely in theagribusiness community, his conversion of the grainwould draw attention to what he believed to be aproblem with farm policy. However, under cross-examination, the farmer acknowledged he decided toprotest the farm policy only after receiving his last loanfrom CCC. He went on to admit that he used theproceeds from the sale of Government collateral to paypersonal bills and made no effort to publicize hisprotest. Sentencing is pending.

FOREIGN AGRICULTURAL SERVICE (FAS)

FAS represents the interest of U.S. farmers and thefood and agricultural sector abroad. Most notably, itseeks improved market access for U.S. products,carries out food aid and market-related technicalassistance programs, and mobilizes expertise foragriculturally led economic growth in developingnations.

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Four Convicted in False Export Diversion Scheme

Four individuals in New Jersey pled guilty to felonycharges for their participation in export diversionschemes negatively affecting the Sugar To Be Re-Exported in Sugar- Containing Product Program. In thiscase, in the mid-1990s, the four individuals and othersparticipated in a scheme to buy sugar-containingproducts at the discounted price by fraudulentlyrepresenting that the products were for export and hadbeen exported. In fact, the products were neverexported and were sold to retailers and wholesalers inthe United States. The participants in the schemepocketed the difference between the discounted pricefraudulently obtained from the manufacturers and thehigher price the goods went for on the U.S. market. FASofficials have revoked over 1.4 million pounds’ worth ofsugar credits valued at nearly $145,500. Sentencing ispending.

NATURAL RESOURCES AND ENVIRONMENT

FOREST SERVICE

FS has the responsibility for providing leadership in theprotection, management, and use of the Nation’s forestsand grasslands on public and private lands. The FY2002 budget for FS is projected at $4.9 billion, whilereceipts generated through timber sales and otheractivities are estimated at about $598 million.

Deficiencies Identified During FS Implementation ofthe National Fire Plan

Prompted by the extensive summer wildfires, onSeptember 8, 2000, the Secretaries of Agriculture andthe Interior issued a report known as the National FirePlan, which provided the overall framework forimplementing fire management and forest healthprograms. In October 2000, $1.1 billion in additionalfunding for FS was approved to implement the NationalFire Plan. This more than doubled the FS firefightingbudget to over $2 billion.

Our review was conducted from April 1 through August2001 and determined that FS would not achieve itsmost efficient level for firefighting because initial fundingestimates were underestimated. The system used tomake the estimated funding needs did not have all the

essential cost data and updated indirect cost data. As aresult, two FS regions needed an additional $42 million.As of May 25, 2001, FS reported that all its regions hadfiled midyear funding requests for an additional $80million. The FS Chief directed regional foresters todevelop contingency plans that could include delayingthe acquisitions of equipment or postponing the hiring offirefighting personnel. On November 2, 2001, FSreported that the FY 2001 fire season provided savingsin fire preparedness that offset the shortfall. AlthoughFS was unable to reach its most efficient level inFY 2001, actions are being taken to reach that goal in2002.

Firefighters retreating from wildfire. FS photo.

The FS Washington office had not established controlsto ensure that National Fire Plan funds were used torehabilitate and restore areas burned by the wildfires of2000. During our review in the northern region, wequestioned the propriety of using approximately $2.5million of rehabilitation and restoration program funds toplan commercial timber sales, administer mushroomharvests, and rehabilitate and restore areas burned in1998. FS regions had proposed 582 restoration projectsnationwide totaling $260 million, far in excess of the$142 million appropriated in FY 2001. Any funds put toimproper uses will reduce FS’s ability to restore andrehabilitate areas burned by the wildfires of 2000.

FS generally concurred with our recommendations andstated that it plans to clarify the project selection criteriato address our concerns and institute a review processto ensure that only those projects that meet the criteriaare approved and implemented.

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FS Oversight Over Land Exchanges Was Effective

We continued to review the progress that FS has madein strengthening its controls over the land exchangeprogram. From June through October 2001, we auditedthe operations of the National Land AdjustmentOversight Team (NLAT) in reviewing land exchangetransactions. NLAT was created by the FS Washingtonoffice in response to our prior audits, which disclosedlarge land exchange transactions in two regions that didnot comply with laws and regulations and hadquestionable appraisals.

We reviewed 12 pending and approved land exchangetransactions, valued at over $45 million, that werereviewed by NLAT in 3 regions. We found examples inall three regions where the NLAT review was effective inpreventing questionable land exchange transactionsfrom proceeding through the approval process. Ourreview concluded that the NLAT review was an effectivecontrol to ensure that land exchange transactions wereconsistent with national standards and that the public’sinterests were protected. Its effectiveness would beenhanced if updates and revisions to existinglandownership policies and procedures, drafted by FS inresponse to our prior audits, were finalized in the FSmanual and handbook.

NATURAL RESOURCES CONSERVATIONSERVICE (NRCS)

NRCS provides technical assistance through localconservation districts to individuals, communities,watershed groups, and tribal governments, as well asFederal, State, and local agencies. The agency’s workfocuses on erosion reduction, water qualityimprovements, wetlands restoration and protection, fishand wildlife habitat improvement, range management,stream restoration, and water management.

Additional CREP Controls Needed

In some instances, NRCS was not completing some ofthe annual status reviews on Conservation ReserveEnhancement Program (CREP) contracts as required,so FSA did not have reasonable assurance thatconservation plans were being timely or properlyapplied. FSA also had not established requirements toascertain acreages enrolled under associated Stateeasements. This could result in the improper enrollmentof such acreages in other available Federal programs,

such as the Conservation Reserve Program, duringperiods covered by State easements. The situationprevented FSA from identifying and resolving anyassociated acreage differences. Our fieldwork wasconducted in August and September 2000.

We recommended that FSA direct State offices toprovide feedback where NRCS was not fulfilling itsstatus review responsibilities. This included exploringalternatives for ensuring compliance with this programrequirement. We also recommended that FSA assessthe need to require participating State entities to furnishdata on the location and length of State easements inconjunction with CREP. This included directing theIllinois State office to correct cited acreage differences.

FSA agreed and intends to strengthen the status reviewprovisions in its technical assistance reimbursableagreement with NRCS for FY 2002. FSA will begin aprocess to track, monitor, and evaluate all statusreviews in FY 2002. FSA is willing to work with its StateCREP partners to request that they provide aerialphotography and a timeframe for their easementagreements to the administering county FSA office. FSAwill issue a notice in August 2002 to ensure that anydifferences between FSA acreages and land surveymeasurement acreages are handled consistently.

RURAL DEVELOPMENT

RURAL BUSINESS-COOPERATIVE SERVICE(RBS)

RBS enhances the quality of life for rural residentsthrough grants or loans to rural-based cooperatives andbusinesses and through partnerships with ruralcommunities. RBS national staff and RuralDevelopment State office staff promote stable businessenvironments in rural America through financialassistance, business promotion, and technicalassistance, as well as research, education, andinformation.

Ongoing Work in the B&I Loan Program isUncovering Significant Management ControlWeaknesses

Our ongoing reviews in 12 States covering FYs 1997 to2001 have disclosed serious management controlweaknesses that are resulting in significant monetary

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losses to the Business and Industry (B&I) LoanProgram. RBS lacks effective controls to ensure that (1)collateral is properly valued and secured, (2) financiallytroubled borrowers do not receive loan funds, and (3)loan funds are used only for authorized purposes. Weattribute this to inadequate appraisals of collateral,inaccurate feasibility studies, improper financial andcredit analyses, and a lack of followup to verify andinspect collateral. We have questioned almost$29 million in loan losses so far, and recommended therecovery of over $18 million of those funds.

RBS suspended the State Director’s loanmakingauthority in one State after we reported seriousdeficiencies in a Management Alert to the Administrator.In another State, RBS incurred almost $2 million inunnecessary losses because the lender had notadequately secured the collateral for two loans. The twoborrowers had disposed of the collateral without theknowledge or approval of the lender or RBS. We areplanning to recommend measures that will improve theeffectiveness of existing management controls in theloanmaking and servicing processes. We will also beproposing additional management controls that willimprove the integrity of the B&I Loan Program.

Empowerment Zone Officials Violated Conflict ofInterest Policy

Several board members of one Kentucky EmpowermentZone (EZ) violated conflict-of-interest policy by notdisclosing employment or business relationships with acompany that benefited from EZ funds. For example,one board member did not reveal to other EZ boardmembers that he had obtained employment at aprocessing company that subsequently benefited from$475,000 in EZ funds. In that case, the EZ funds weredisbursed for a water project that would benefit thehayfield operation of the processing company where theEZ board member had just gained employment. AnotherEZ board member’s company entered into a $485,000laundry contract with the same processing plant thathad received EZ funds. Our audit covered the period1999 to January 2001.

An EZ Director diverted Government funds to himselfthat should have benefited EZ. The Director worked ona U.S. Department of Labor (DOL) initiative for whichDOL agreed to reimburse EZ for the Director’s time.However, when EZ was reimbursed, the EZ Directorsubsequently withdrew the funds from the EZ accountand paid himself. The same Director also hired an

acquaintance to develop a water-testing project withoutthe knowledge of the board members. The project costEZ over $16,000 and turned out to be useless. Overall,the EZ Director diverted and mismanaged over $34,000of EZ funds.

Rural Development agreed with our recommendationsto improve the EZ’s conflict-of-interest policy. However,it did not agree with our recommendation to recover the$34,000 from the EZ Director as his employment withEZ had been terminated.

RURAL HOUSING SERVICE (RHS)

RHS is responsible for making available decent, safe,sanitary, and affordable housing and communityfacilities through loans and grants for rural single-familyhousing, apartment complexes, fire stations, libraries,hospitals, and clinics. For FY 2001, program funding forRHS loans and grants totaled $6.6 billion.

Apartment Manager Sentenced for ConvertingEscrow Funds

A Missouri man pled guilty and was sentenced to serve18 months in prison and pay nearly $220,000 inrestitution for converting funds belonging to the RuralDevelopment-funded apartment complexes hemanaged. He had been indicted on 15 counts, includingmail fraud, false statements, and embezzlement. From1995 to 2000, the man converted $225,000 in reserveaccount funds to his own use, primarily to support agambling habit. In an effort to feign the existence ofreserve funds, the man counterfeited certificates ofdeposit and provided copies to RHS.

Resident Manager Pleads Guilty to Equity Skimming

In FY 1998, OIG and Rural Development began a jointreview of the Multi-Family Housing (Section 515)Programs nationwide. After an audit revealed financialdiscrepancies in a project in Canton, Mississippi, ourinvestigation showed that the resident manager hadsubmitted false and inflated invoices to RuralDevelopment for maintenance. Not only was theresident manager part owner of the project, but he alsoowned the maintenance company. From May 1996 toDecember 1997, he forged 194 checks worth more than$123,000. Sentencing is pending after the residentmanager pled guilty to equity skimming.

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RESEARCH, EDUCATION, AND ECONOMICS

COOPERATIVE STATE RESEARCH,EDUCATION, AND EXTENSION SERVICE(CSREES)

The mission of CSREES is to benefit people,communities, and the Nation through cooperative workwith agency partners and customers to advanceresearch, extension, and higher education in the foodand agricultural sciences and related environmental andhuman sciences.

Woman Sentenced for Stealing More Than $715,000in USDA Funds

An employee of a nonprofit organization in Atlanta,Georgia, which received funding through CSREES, pledguilty to fraud in January 2001 and was sentenced to

The resident manager at this project pled guilty to equity skimming (see previous page). OIG photo.

41 months’ imprisonment, followed by 3 years’supervised release. She was also ordered to pay morethan $715,000 in restitution to CSREES and $11,000 inrestitution to a bank. The employee issuedapproximately $715,000 worth of checks to herself, hercreditors, and her limited liability corporation, a maledance troupe, from February 1996 through July 2001.Through her position as accounting and personnelmanager, the employee generated the fraudulentchecks and forged the signatures of persons who hadsignatory authority for the nonprofit agency’s accounts.While on bond pending sentencing, she worked foranother company and forged signatures on $6,000worth of that company’s checks. Her bond was revoked,and she was arrested.

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Statistical Data

FNS 05/11/01 1. NSLP - Food 3,572,137 3,572,137Service ManagementCompanies(27601-12-KC)*

09/06/01 2. NSLP - Food 3,537,912 3,198,926Service ManagementCompanies - MWR(27601-24-Ch)*

FS 05/04/01 3. FY 2000 FS Financial 1,305,600,000 1,305,600,000Statements (08401-11-At)

05/29/01 4. Northeastern Research 2,388,107 2,046,566Station Accounting forTimber Sales (08007-1-At)

FSA 05/24/01 5. FSA Payment Limitations - 0 0Majority Stockholders ofCorporations (03099-27-Te)

07/30/01 6. 1999 Crop Disaster Program 950,891 950,891(03099-42-KC)

Multiagency 07/11/01 7. FY 2000 NFC Review of 0 0Internal Controls(11401-7-FM)

RBS 08/31/01 8. Lender Servicing of B&I 2,350,965 2,350,965Guaranteed Loans - Stateof Arizona, Lender A(34601-2-SF)

09/12/01 9. Lender Servicing of B&I 2,365,000 2,365,000Guaranteed Loans - Stateof Arizona, Lender B(34601-4-SF)

AUDITS WITHOUT MANAGEMENT DECISION

The following audits did not have management decisions made within the 6-month limit imposed by Congress.Narratives for new entries follow this table. An asterisk (*) indicates that an audit is pending judicial, legal, orinvestigative proceedings that must be completed before the agency can act to complete management decisions.

New Since Last Reporting Period

Amount WithTotal Value No Mgmt.at Issuance Decision

Agency Date Issued Title of Report (in dollars) (in dollars)

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Amount WithTotal Value No Mgmt.at Issuance Decision

Agency Date Issued Title of Report (in dollars) (in dollars)

09/14/01 10. B&I Loan Program, 4,052,351 4,052,351Omnivest Resources, Inc.,Fort Gaines, GA (34099-2-At)

RHS 09/28/01 11. RRH Program, Insurance 596,665 562,515Expenses - Phase II(04601-4-KC)

RMA 05/21/01 12. Review of Written 1,565,730 1,565,730Agreements (05002-1-Te)

08/15/01 13. Indemnity Payments to Prune 7,182 7,182Producers in California -Producer B (05099-5-SF)

08/17/01 14. RMA Watermelon Claims 1,506,620 1,506,620in South Texas (05601-7-Te)

Previously Reported but Not Yet Resolved

These audits are still pending agency action or are under judicial, legal, or investigative proceedings. Details on therecommendations where management decisions had not been reached have been reported in previous SemiannualReports to Congress. Agencies have been informed of actions that must be taken to reach management decision, but,for various reasons, the actions have not been completed. The appropriate Under and Assistant Secretaries havebeen notified of those audits without management decisions.

ARS 02/08/99 15. Audit of J.A. Jones 160,233 160,233Management Services,CY 1994 and 1995(02017-4-At)

Civil Rights 09/30/98 16. Evaluation of CR Efforts 0 0To Reduce ComplaintsBacklog (60801-1-HQ)

03/24/99 17. Evaluation of CR Management 0 0of Settlement Agreements(60801-2-HQ)

03/10/00 18. Office of CR Management of 0 0Employment Complaints(60801-3-HQ)

03/10/00 19. Status of Implementation of 0 0Recommendations Made inPrior Evaluations of ProgramComplaints (60801-4-HQ)

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Amount WithTotal Value No Mgmt.at Issuance Decision

Agency Date Issued Title of Report (in dollars) (in dollars)

CSREES 03/27/97 20. Use of 4-H Program Funds - 5,633 0University of Illinois(13011-1-Ch)

FNS 03/22/00 21. CACFP - National Initiative 319,279 0To Identify Problem Sponsors -Wildwood (27010-3-KC)

FS 03/31/97 22. Research Cooperative and 468,547 468,547Cost Reimbursable Agreements(08601-18-SF)

09/24/98 23. Assistance Agreements 7,098,026 0to Nonprofit Organizations(08801-2-Te)

FSA 09/28/95 24. Disaster Assistance Payments, 1,805,828 1,672,929Lauderdale, TN (03006-4-At)

01/02/96 25. 1993 Crop Disaster 2,469,829 2,203,261Payments Brooks/Jim Hogg, TX(03006-1-Te)

05/02/96 26. Disaster Assistance Program - 2,177,640 2,145,5331994, Thomas County, GA(03006-13-At)*

03/30/99 27. Payment Limitation - Mitchell 881,924 881,924County, GA(03006-20-At)

08/22/00 28. LaFlore County FSA 228,764 228,764Office Disaster Programs(03006-20-Te)*

FSIS 06/21/00 29. Implementation of the Hazard 0 0Analysis and Critical ControlPoint System (24001-3-At)

06/21/00 30. Imported Meat and Poultry 0 0Inspection Process (24088-3-Hy)

Multiagency 09/30/98 31. CSREES Managing Facilities 3,824,211 2,651,292Construction Grants(50601-5-At)

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Amount WithTotal Value No Mgmt.at Issuance Decision

Agency Date Issued Title of Report (in dollars) (in dollars)

03/31/99 32. Private Voluntary 18,629,558 18,501,064Organization Accountability(50801-6-At)

09/28/00 33. Crop Loss Disaster 10,728,872 1,660,630Assistance Program(50801-3-KC)

NRCS 03/31/00 34. NRCS Contracting, 784,562 264,434Procurement, and DisbursementActivities (10601-1-Te)*

OCIO 03/03/01 35. Security Over USDA IT 0 0Resources Needs Improvement(50099-27-FM)

RBS 10/01/99 36. Business and Industry Loan - 595,511 595,511Indiana Farms (34099-3-Ch)

07/11/00 37. Rural Business Enterprise 1,620,256 1,620,256Grant - Vivero Caimito Project(34004-4-Hy)

Rural 02/01/99 38. FY 1998 Rural 9,529,862,000 0Development Development Financial

Statements (50401-28-FM)

RHS 01/08/99 39. RRH Program - Dujardin 195,694 195,694Property Management, Inc.,Everett, WA (04801-5-SF)*

03/25/99 40. Guaranteed Rural Housing 139,220,122 215,030Loan Program (04601-2-At)

04/20/99 41. RRH Program - Owner/ 346,685 346,685Manager, Olympia, WA(04801-6-SF)*

05/25/00 42. RRH Nationwide Initiative 4,922,879 483,288in MO, St. Louis, MO(04801-2-KC)

12/18/00 43. RRH Program Insurance 924,751 924,751Expenses, MS (04801-6-KC)

RMA 09/30/97 44. Crop Insurance on Fresh 15,082,744 0Market Tomatoes(05099-1-At)

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Amount WithTotal Value No Mgmt.at Issuance Decision

Agency Date Issued Title of Report (in dollars) (in dollars)

12/16/98 45. Crop Insurance on 3,963,468 3,676,476Nurseries (05099-2-At)*

03/30/00 46. FY 1999 FCIC Financial 0 0Statements (05401-8-FM)

02/28/01 47. FY 2000 FCIC Financial 0 0Statements (05401-2-Hq)

03/12/01 48. RMA/FCIC FY 2000Financial Statements,Report on Management Issues 0 0(05401-2-Hq)

03/14/01 49. Crop Insurance for 2,254,014 2,254,014Specialty Crops(05601-4-At)

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1. NSLP - Food Service Management Companies,Issued May 11, 2001

FNS should advise the State agency to require schoolfood authorities to take corrective actions on the foodservice management company reviewed; however,because we referred the company for investigation,these actions cannot begin until authorized. FNS isworking with the State agency to obtain correctiveaction on all the recommendations.

2. NSLP - Food Service Management Companies –Midwest Region, Issued September 6, 2001

We recommended that the FNS regional office, inconjunction with OIG Investigations, work with one of itsState agencies to collect $236,749 from a food servicemanagement company for costs charged to schools,which exceeded actual costs. We also recommendedthat the regional office work with OIG Investigations andthe U.S. attorney’s office to collect over $2.9 millionfrom another management company, representing thevalue of USDA-donated commodities not credited to theschools. In both instances, the intent of therecommendations was to pass the collected funds backthrough to the affected schools for use in their foodservice programs. FNS has agreed to take therecommended actions but cannot do so during theongoing investigations.

3. FY 2000 FS Financial Statements, Issued May 4,2001

Due to limitations on the scope of our audit, we wereunable to express an opinion on the FS financialstatements. FS was unable to provide essentialinformation on time, and we were unable to obtain othersufficient competent evidential matter. FS personnelhave been working to improve FS accounting systemsand processes, and to adopt new accounting standardsissued by OMB. However, much work remains,including the need to ensure that (1) sufficient full-timestaff is assigned to compile and complete the financialstatements timely and accurately and (2) regions andunits adhere to agencywide accounting policies andprocedures. We continue to work closely with FS.

Audits Without Management Decision - Narrative for New Entries

4. Northeastern Research Station Accounting forTimber Sales, Issued May 29, 2001

We recommended FS award and administer timbersales for the Fernow Experimental Forest through theMonongahela National Forest. We also recommendedFS pay $341,541 to the State of West Virginia forreceipts collected between 1988 and 1999 and return tothe Treasury $2,046,566 for timber sale proceedsretained by the station. We recommended FS consultwith the Department’s Office of the General Counsel(OGC) to determine if augmentation of appropriationhad occurred. FS agreed with our first recommendationto pay $341,541 to the State of West Virginia. FS hasagreed to take corrective action on money retained bythe station depending upon the outcome of OGC’sdetermination. We are awaiting a further reply from FS.

5. FSA Payment Limitations - MajorityStockholders of Corporations,Issued May 24, 2001

We found about 36 percent of majority stockholders andtheir corporations were not combined as required inFSA’s automated system to be one “person” for 1998and/or 1999 payment limitation purposes. Werecommended FSA program its automated system tocombine majority stockholders with their corporations inthe combined producer account file. In the interim, werecommended FSA generate and send monthlyexception/error (not combined) reports to county officesfor corrective action and that the FSA national officemonitor the monthly corrections. FSA subsequentlyidentified and corrected such “person” determinationsfor the 1998 through 2001 program years.

To reach management decision, we need assurancefrom FSA that it will program its automated system toautomatically combine majority stockholders with theircorporations or, at a minimum, perform edit checks toensure that such person determinations are properlyentered or are otherwise properly controlled. In theinterim, FSA should perform at least annual reviews andcorrections of the “person” determinations. We areworking with FSA to achieve management decision.

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6. 1999 Crop Disaster Program, Issued July 30,2001

We reported to FSA and RMA that some producersreceived excessive Crop Disaster Program benefitsbased on inflated crop insurance indemnities. Theagencies had not implemented procedures adequate tonotify one another of corrections to, or flaws in, recordscommon to the crop insurance and disaster programs.FSA amended its procedures to change data whenprovided corrected information by RMA and to provideto RMA corrected program information resulting fromFSA reviews. RMA has not provided an official writtenresponse to the report.

In order to reach management decision, we needdocumentation that RMA has implemented proceduresreciprocal to those implemented by FSA. The agenciesshould also collect excessive disaster and cropinsurance benefits identified by the audit. We continueto work with the agencies to resolve these issues.

7. FY 2000 NFC Review of Internal Controls, IssuedJuly 11, 2001

Our review resulted in a qualified opinion. We noted thatactions taken by OCFO were sufficient to reduce therisk associated with several previously reportedweaknesses; however, other prior material controlweaknesses related to the legacy Central AccountingSystem and its feeder systems continued to exist.Management decision has not been reached on onerecommendation, which relates to the reconciliation ofFFIS to the feeder systems. Specifically, therecommendation seeks that OCFO (1) ensure thatoutput reports from FFIS are obtained to enable feedersystem data to be reconciled with the FFIS generalledger and (2) perform the reconciliations. We arecontinuing to work with OCFO to resolve this issue.

8. Lender Servicing of B&I Guaranteed Loans -State of Arizona, Lender A, IssuedAugust 31, 2001

The lender did not obtain sufficient collateral to protectthe Government’s loan guarantee. The lender’sappraisal of the collateral used a method that valued itequally with its worth to the user/owner while inoperation and earning revenue. The initial appraisalvalued the collateral at $168,000. RBS instructed thelender to use the “value in place” appraisal method,which increased the collateral value to $3.5 million. The

RBS national office has approved the “value in use”method only if the appraisal meets the UniformStandards of Professional Appraisal Practices.However, the Rural Development State officedetermined that the appraisal did not meet thesestandards. We have recommended that RBS require theborrower to obtain $2,350,965 of additional collateral tosecure the loan.

9. Lender Servicing of B&I Guaranteed Loans -State of Arizona, Lender B, IssuedSeptember 12, 2001

The lender had been negligent in servicing theguarantee loan by not ensuring that proper inspectionswere performed on a hotel financed with RBS’sguaranteed loan. Further, the lender had not ensuredthat the contractor completed construction according tobuilding plans. The borrower’s independent engineer,retained to pursue legal action, determined the hotelwould never receive a certificate for safe occupancy andshould be razed. We have recommended that RBSrescind the $2,365,000 loan guarantee.

10. B&I Loan Program, Omnivest Resources Inc.,Fort Gaines, GA, Issued September 14, 2001

We reviewed the loan at Rural Development’s requestbecause the borrower had defaulted less than a yearafter loan closing. We found that the lender improperlyevaluated the borrower’s eligibility, inappropriatelymonitored the use of loan funds, and inadequatelyserviced the loan by failing to perform servicing reviews.We identified a conflict of interest for the loan packager,who also serviced the loan for the lender. The loanpackager prepared analyses using preliminary salesdata, which it submitted to the lender. The lender thencertified to Rural Development that the borrower hadcomplied with conditions required to issue theguarantee. We recommended Rural Developmentrescind the loan guarantee, recover the $4,052,351 paidwhen it purchased the loan guarantee from thesecondary market, debar the loan packager, anddevelop regulations concerning loan packagers andpotential conflict of issuance issues.

11. Rural Rental Housing Program, InsuranceExpenses - Phase II, Issued September 28, 2001

We determined that four of five Mississippi managementcompanies excessively charged projects $596,665 forunallowable insurance expenses. In some cases, the

34

management companies had close relationships withinsurance vendors and violated their fiduciaryresponsibility to limit expenses to what was actual,reasonable, and necessary. Two managementcompanies had inflated premiums by $420,246 andapplied those funds to personal accounts. Threemanagement companies improperly paid their $79,442of workers’ compensation insurance expenses withproject funds. Three management companies paid$66,865 of unallowable insurance expenses, such asfidelity bonds or excessive commissions. Threemanagement companies did not timely deposit $29,133of indemnities into project accounts. Two managementcompanies charged projects $979 for improperexpenses.

12. Review of Written Agreements, Issued May 21,2001

We found that a producer and his son providedpotentially false and misleading production history tojustify their requested written agreements for potatoes inCochran County, Texas. The producer certified tohaving several years of potato production in Gains,Parmer, and Cochran Counties. However, after verifyinghis production history, we found that he misrepresentedhis production when applying for the writtenagreements. We recommended that RMA takeadministrative action to recover crop insuranceindemnities totaling $1,565,730 from the producers andto pursue any other civil remedies that may beappropriate. The agency has referred the case to theU.S. attorney’s office for civil enforcement. The agencywill wait for a determination from the U.S. attorney’soffice before pursuing further administrative action.

13. Indemnity Payments to Prune Producers inCalifornia - Producer B, Issued August 15, 2001

We determined that the insurance provider made errorsin both the 1998 and 1999 insurance claims forproducer B. The insurance provider used an incorrectunit structure and overstated acreages to calculate the1998 indemnity. In calculating the 1999 indemnity, theinsurance provider understated production. As a resultof the above errors, the producer was overpaid $504 forcrop year (CY) 1998 and overpaid $6,678 for CY 1999.We recommended RMA collect the overpayments andinstruct the provider to correct the acreage and yields.

14. RMA Watermelon Claims in South Texas, IssuedAugust 17, 2001

We reviewed 13 of the 79 CY 1999 watermelon policiesin Texas involving 11 producers that filed 18 claimstotaling $20,083,215. Our audit disclosed that 5 of the18 claims filed by 3 of the 11 producers did not meeteligibility requirements for participation in the CY 1999watermelon pilot crop insurance program. Twoproducers with three claims did not meet the cropeligibility requirements in that they did not have therequired production experience. Also, one producerplanted watermelons on land that had not been plantedand harvested in 1 of the previous 3 years, and anotherplanted watermelons on land that had been planted to amelon crop for more than 2 consecutive crop years. Asa result, three producers received excessive indemnitiesof $1,506,620.

We recommended that RMA determine whether thethree producers met the applicable crop and acreageeligibility requirements for the insured crops forparticipation in the CY 1999 pilot watermelon cropinsurance program. If requirements were not met, werecommended RMA collect $1,506,620 in overpaymentsto the producers. RMA concurred with therecommendations. One of RMA’s regional complianceoffices is reviewing the audit findings and is requestingthat OGC provide an independent opinion regarding theproducers’ eligibility.

35

Between October 1, 2001, and March 31, 2002, OIGcompleted 210 investigations. We referred 258 cases toFederal, State, and local prosecutors for their decision.

During the reporting period, our investigations led to213 indictments and 225 convictions. The period of timeto obtain court action on an indictment varies widely;therefore, the 225 convictions do not necessarily relateto the 213 indictments. Fines, recoveries/collections,restitutions, claims established, cost avoidance, andadministrative penalties resulting from our investigationstotaled about $23.8 million.

The following is a breakdown, by agency, of indictmentsand convictions for the reporting period.

Indictments and Convictions

Indictments and ConvictionsOctober 1, 2001 - March 31, 2002

Agency Indictments Convictions *

AMS 0 3APHIS 7 3ARS 2 2CSREES 1 0FAS 3 1FNS 152 170FS 3 3FSA 20 18FSIS 14 7GIPSA 0 1NRCS 2 0RBS 1 0RHS 3 8RMA 5 9

___ ___Totals 213 225

*This category includes pretrial diversions.

36

The OIG Hotline serves as a national receiving point forreports from both employees and the general public ofsuspected incidents of fraud, waste, mismanagement,and abuse in USDA programs and operations. Duringthis reporting period, the OIG Hotline received1,096 complaints, which included allegations ofparticipant fraud, employee misconduct, andmismanagement, as well as opinions about USDAprograms. Figure 1 displays the volume and type of thecomplaints we received, and figure 2 displays thedisposition of those complaints.

Office of Inspector General Hotline

Hotline ComplaintsOctober 1, 2001, to March 31, 2002(Total = 1,096)

Disposition of ComplaintsOctober 1, 2001, to March 31, 2002

Figure 1 Figure 2

ParticipantFraud661

Bribery6

Health/Safety

23Opinion/

Information86

EmployeeMisconduct

183

Waste/Mismanagement

137

Referred toFNS for Tracking

268

Referred toUSDA Agencies

for Response419

Referred toState Agency

93

Referred toOther Law

EnforcementAgencies

2

Referred toOIG Audit orInvestigations

for Review46

Filed WithoutReferral-

InsufficientInformation

41

Referred toUSDA or OtherAgencies for Information-

No Response Needed

227

37

Number of FOIA/PA Requests Received 151

Number of FOIA/PA Requests Processed: 149

Number of Requests Granted in Full 35Number of Requests Granted in Part 49Number of Requests Not Granted 44

Reasons for Denial:

No Records Available 13Requests Denied in Full 17Referrals to Other Agencies 20

Requests for OIG Reports From Congressand Other Government Agencies

Received 38Processed 41

Appeals Processed 4

Appeals Completely Upheld 3Appeals Partially Reversed 1Appeals Completely Reversed 0

Number of OIG Reports/Documents 82Released in Response to Requests

NOTE: A request may involve more than one report.

During this 6-month period, 34 audit reports werepublished on the Internet at the OIG Web site:www.usda.gov/oig.

Freedom of Information Act (FOIA) and Privacy Act (PA) Requests for the Period October 1,2001 to March 31, 2002

38

INVENTORY OF AUDIT REPORTS ISSUEDWITH QUESTIONED COSTS AND LOANS

BETWEEN OCTOBER 1, 2001, AND MARCH 31, 2002

DOLLAR VALUES

QUESTIONED UNSUPPORTEDa

NUMBER COSTS AND LOANS COSTS AND LOANS

A. FOR WHICH NO MANAGEMENT 55 $213,449,337 $50,509,289DECISION HAD BEEN MADEBY OCTOBER 1, 2001

B. WHICH WERE ISSUED DURING 14 57,319,801 36,923,095THIS REPORTING PERIOD

TOTALS 69 $270,769,138 $87,432,384

C. FOR WHICH A MANAGEMENT 24DECISION WAS MADE DURINGTHIS REPORTING PERIOD

(1) DOLLAR VALUE OFDISALLOWED COSTS

RECOMMENDED FOR RECOVERY $8,764,149 $123,162

NOT RECOMMENDED FOR RECOVERY $84,719,130 $126,707

(2) DOLLAR VALUE OF 25,422,057 2,144,632COSTS NOT DISALLOWED

D. FOR WHICH NO MANAGEMENT 45 152,787,145 85,037,883DECISION HAS BEEN MADE BYTHE END OF THIS REPORTINGPERIOD

REPORTS FOR WHICH NO 34 100,139,829 48,114,788MANAGEMENT DECISION WASMADE WITHIN 6 MONTHSOF ISSUANCE

aUnsupported values are included in questioned values.

Appendix I

39

INVENTORY OF AUDIT REPORTS ISSUEDWITH RECOMMENDATIONS THAT FUNDS BE PUT TO BETTER USE

BETWEEN OCTOBER 1, 2001, AND MARCH 31, 2002

NUMBER DOLLAR VALUE

A. FOR WHICH NO MANAGEMENT 14 $161,239,622DECISION HAD BEEN MADEBY OCTOBER 1, 2001

B. WHICH WERE ISSUED DURING 8 24,485,728THE REPORTING PERIOD

TOTALS 22 $185,725,350

C. FOR WHICH A MANAGEMENT 8DECISION WAS MADE DURINGTHE REPORTING PERIOD

(1) DOLLAR VALUE OF $22,055,018DISALLOWED COSTS

(2) DOLLAR VALUE OF 257,049COSTS NOT DISALLOWED

D. FOR WHICH NO MANAGEMENT 14 163,424,541DECISION HAS BEEN MADE BYTHE END OF THE REPORTINGPERIOD

REPORTS FOR WHICH NO 8 141,379,109MANAGEMENT DECISION WASMADE WITHIN 6 MONTHSOF ISSUANCE

Appendix II

40

SUMMARY OF AUDIT REPORTS RELEASEDBETWEEN OCTOBER 1, 2001, AND MARCH 31, 2002

DURING THE 6-MONTH PERIOD BETWEEN OCTOBER 1, 2001, AND MARCH 31, 2002, THE OFFICE OFINSPECTOR GENERAL ISSUED 49 AUDIT REPORTS, INCLUDING 4 PERFORMED BY OTHERS.

THE FOLLOWING IS A SUMMARY OF THOSE AUDITS BY AGENCY:

QUESTIONED UNSUPPORTEDa FUNDS BEAUDITS COSTS COSTS PUT TO

AGENCY RELEASED AND LOANS AND LOANS BETTER USE

AGRICULTURAL MARKETING SERVICE 1AGRICULTURAL RESEARCH SERVICE 1FARM SERVICE AGENCY 2RURAL HOUSING SERVICE 5 $171,569RISK MANAGEMENT AGENCY 2COMMODITY CREDIT CORPORATION 1 $19,586FOREST SERVICE 6 $2,566,899NATURAL RESOURCES CONSERVATION

SERVICE 1OFFICE OF THE CHIEF FINANCIAL OFFICER 2RURAL TELEPHONE BANK 1NATIONAL AGRICULTURAL STATISTICS SERVICE 1FOOD AND NUTRITION SERVICE 10 $37,648,131 $36,923,095 $16,970,411RURAL BUSINESS-COOPERATIVE SERVICE 7 $16,669,202 $7,455,435MULTIAGENCY 3RURAL DEVELOPMENT 6 $264,000 $40,296

TOTALS 49 $57,319,801 $36,923,095 $24,485,728

TOTAL COMPLETED:SINGLE AGENCY AUDIT 45MULTIAGENCY AUDIT 3SINGLE AGENCY EVALUATION 1MULTIAGENCY EVALUATION 0

TOTAL RELEASED NATIONWIDE 49

TOTAL COMPLETED UNDER CONTRACTb 4

TOTAL SINGLE AUDIT ISSUEDc 0

aUnsupported values are included in questioned valuesbIndicates audits performed by otherscIndicates audits completed as Single Audit

Appendix III

41

AUDIT REPORTS RELEASED AND ASSOCIATED MONETARY VALUESBETWEEN OCTOBER 1, 2001, AND MARCH 31, 2002

QUESTIONED UNSUPPORTED FUNDS BEAUDIT NUMBER COSTS COSTS PUT TORELEASE DATE TITLE AND LOANS AND LOANS BETTER USE

AGRICULTURAL MARKETING SERVICE

01-099-0001-FM SECURITY OVER INFORMATION TECHNOLOGY 2002/03/29 RESOURCES AT AMS

TOTAL: AGRICULTURAL MARKETING SERVICE 1

AGRICULTURAL RESEARCH SERVICE

02-099-0001-FM IT SECURITY AT THE AGRICULTURAL RESEARCH 2001/12/04 SERVICE

TOTAL: AGRICULTURAL RESEARCH SERVICE 1

FARM SERVICE AGENCY

03-099-0045-KC CONSERVATION RESERVE ENHANCEMENT PROGRAM 2001/10/25 (CREP) 03-099-0047-KC SECURITY OVER FSA/CCC INFORMATION TECHNOLOGY 2001/10/31 RESOURCES

TOTAL: FARM SERVICE AGENCY 2

RURAL HOUSING SERVICE

04-005-0008-SF CITRUS MANOR DEVELOPMENT - FINANCIAL 2002/03/18 STATEMENT AUDIT FOR YEAR ENDED 12/31/01 04-005-0009-SF PARKVIEW PROPERTIES - FINANCIAL STATEMENT 2002/03/18 AUDIT FOR YEAR ENDED 12/31/01 04-099-0002-AT OVERSIGHT AND MONITORING OF RURAL EMPOWERMENT $136,276 2001/11/02 ZONES/ENTERPRISE COMMUNITIES 04-099-0003-KC 2001 FINANCIAL STATEMENT FIELD CONFIRMATIONS $874 2002/02/25 IN NEBRASKA 04-801-0010-AT KENTUCKY HIGHLANDS EMPOWERMENT ZONE $34,419 2002/03/22

TOTAL: RURAL HOUSING SERVICE 5 $171,569

RISK MANAGEMENT AGENCY

05-099-0014-KC RMA INSURANCE SERVICE/PARTNERING EFFORTS 2002/03/15 INCLUDING MANUAL 14 05-401-0009-FM FY 2001 FCIC/RMA FINANCIAL STATEMENTS 2002/02/25

TOTAL: RISK MANAGEMENT AGENCY 2

COMMODITY CREDIT CORPORATION

06-401-0004-KC CCC FISCAL YEAR 2001 FINANCIAL STATEMENTS $19,586 2002/02/26

TOTAL: COMMODITY CREDIT CORPORATION 1 $19,586

FOREST SERVICE

08-001-0002-HQ FOREST SERVICE AVIATION SECURITY OVER 2002/03/29 AIRCRAFT AND AIRCRAFT FACILITIES 08-017-0003-HY ADVERTISING COUNCIL, INC. INCURRED COST AUDIT 2001/10/18 OF FS GRANT NOS. 92-CA-149 & 97-CA-073 08-017-0010-KC MATCOM - CONTRACT AUDIT $66,899 2001/11/14

42

AUDIT REPORTS RELEASED AND ASSOCIATED MONETARY VALUESBETWEEN OCTOBER 1, 2001, AND MARCH 31, 2002

QUESTIONED UNSUPPORTED FUNDS BEAUDIT NUMBER COSTS COSTS PUT TORELEASE DATE TITLE AND LOANS AND LOANS BETTER USE

08-401-0012-AT FY 2001 FS FINANCIAL STATEMENTS 2002/02/26 08-601-0026-SF IMPLEMENTATION OF NATIONAL FIRE PLAN - SURVEY $2,500,000 2001/11/26 08-601-0027-SF REVIEW OF FS NATIONAL LANDOWNERSHIP 2002/03/28 ADJUSTMENT TEAM EFFECTIVENESS

TOTAL: FOREST SERVICE 6 $2,566,899

NATURAL RESOURCES CONSERVATION SERVICE 10-099-0001-TE SECURITY OVER INFORMATION TECHNOLOGY 2002/02/01 RESOURCES

TOTAL: NATURAL RESOURCES CONSERVATION SERVICE 1

OFFICE OF THE CHIEF FINANCIAL OFFICER

11-401-0009-FM REVIEW OF NFC IT APPLICATION CONTROLS 2002/03/18 11-401-0011-FM AGREED UPON PROC. RETIREMENT, HEALTH BENEFITS 2001/12/14 & LIFE INS. WITHLD. CONTRIB. SUBMITTED TO OPM

TOTAL: OFFICE OF THE CHIEF FINANCIAL OFFICER 2

RURAL TELEPHONE BANK

15-401-0001-FM FY 2001 RTB FINANCIAL STATEMENTS 2002/02/19

TOTAL: RURAL TELEPHONE BANK 1

NATIONAL AGRICULTURAL STATISTICS SERVICE

26-099-0002-FM INFORMATION TECHNOLOGY SECURITY AT NASS 2002/03/25

TOTAL: NATIONAL AGRICULTURAL STATISTICS SERVICE 1

FOOD AND NUTRITION SERVICE

27-002-0014-CH STATES’ OVERSIGHT OF CHILD AND ADULT CARE 2002/01/14 FOOD PROGRAM SPONSORS 27-004-0003-AT FLORIDA FOOD STAMP PROGRAM $15,443,610 2001/11/09 27-010-0003-AT NSLP PROCUREMENT PROCESS $408,485 2002/02/15 27-010-0006-KC CACFP - WILDWOOD, INC.- PHASE II $36,895,611 $36,895,611 2001/11/21 27-010-0008-KC CACFP - OVERSIGHT OF CENTER $27,484 $27,484 2001/11/21 27-010-0024-SF CACFP - CRYSTAL STAIRS INC. 2002/01/09 27-099-0016-HY EBT SYSTEM - NEW YORK 2001/12/07 27-099-0022-CH CACFP - OPPORTUNITY INDUSTRIAL COUNCIL OF $8,840 $1,468,673 2002/02/22 GREATER MILWAUKEE 27-601-0011-HY SERVICE DYNAMICS/FINE HOST FSMC $58,128 2002/03/28 NEWARK, NJ SFA 27-601-0013-KC NSLP FSMC CHARTWELL’S FOOD SERVICE MANAGEMENT $307,711 2002/03/29 COMPANY

TOTAL: FOOD AND NUTRITION SERVICE 10 $37,648,131 $36,923,095 $16,970,411

43

AUDIT REPORTS RELEASED AND ASSOCIATED MONETARY VALUESBETWEEN OCTOBER 1, 2001, AND MARCH 31, 2002

QUESTIONED UNSUPPORTED FUNDS BEAUDIT NUMBER COSTS COSTS PUT TORELEASE DATE TITLE AND LOANS AND LOANS BETTER USE

RURAL BUSINESS-COOPERATIVE SERVICE

34-004-0003-CH LENDER SERVICING OF B&I GUARANTEED LOANS, OHIO 2001/10/09 34-601-0003-AT LENDER SERVICING OF B&I GUARANTEED LOANS $1,536,060 2002/01/28 34-601-0003-SF LENDER SERVICING OF B&I GUARANTEED LOANS - 2001/12/12 CALIFORNIA - LENDER A 34-601-0006-TE LENDER SERVICING OF B&I GUARANTEED LOANS IN $2,400,000 2001/11/02 MASSACHUSETTS 34-601-0008-TE LENDER SERVICING OF B&I GUARANTEED LOANS - $7,353,018 $3,519,375 2002/02/19 SOUTH CAROLINA 34-601-0009-TE LENDER SERVICING OF B&I GUARANTEED LOANS - $4,000,000 2001/11/29 MAINE 34-601-0011-TE LENDER SERVICING OF B&I GUARANTEED LOANS - $5,316,184 2001/12/27 TEXAS

TOTAL: RURAL BUSINESS-COOPERATIVE SERVICE 7 $16,669,202 $7,455,435

MULTIAGENCY

50-099-0004-HQ USDA’S PHYSICAL CRITICAL INFRASTRUCTURE 2001/10/16 PROGRAM 50-099-0013-AT CONTROLS OVER ACCIDENTAL AND CLANDESTINE 2002/03/29 RELEASE OF BIOHAZARDS 50-401-0043-FM FY 2001 USDA FINANCIAL STATEMENTS 2002/02/26

TOTAL: MULTIAGENCY 3

RURAL DEVELOPMENT

85-401-0001-AT FISCAL YEAR 2001 RURAL DEVELOPMENT FINANCIAL 2001/12/14 STATEMENT AUDIT 85-401-0001-SF RURAL DEVELOPMENT FY 2001 FINANCIAL $264,000 2002/02/28 STATEMENTS 85-401-0001-TE FISCAL YEAR 2001 RURAL DEVELOPMENT FINANCIAL 2002/02/25 STATEMENTS 85-401-0003-CH FISCAL YEAR 2001 RURAL DEVELOPMENT FINANCIAL $40,296 2001/11/28 STATEMENT AUDIT - FIELD CONFIRMATIONS 85-401-0004-CH COMPLIANCE WITH FMFIA REQUIREMENTS 2002/03/20 85-401-0006-CH FISCAL YEAR 2001 RURAL DEVELOPMENT FINANCIAL 2002/02/27 STATEMENT AUDIT

TOTAL: RURAL DEVELOPMENT 6 $264,000 $40,296

TOTAL: RELEASE - NATIONWIDE 49 $57,319,801 $36,923,095 $24,485,728

Abbreviations of OrganizationsAMS Agricultural Marketing ServiceAPHIS Animal and Plant Health Inspection ServiceARS Agricultural Research ServiceCCC Commodity Credit CorporationCR Office of Civil RightsCSREES Cooperative State Research, Education, and Extension ServiceDOL U.S. Department of LaborDRMO Defense Reutilization and Marketing OfficeFAS Foreign Agricultural ServiceFBI Federal Bureau of InvestigationFCIC Federal Crop Insurance CorporationFNS Food and Nutrition ServiceFS Forest ServiceFSA Farm Service AgencyFSIS Food Safety and Inspection ServiceGIPSA Grain Inspection, Packers, and Stockyards AdministrationIRS Internal Revenue ServiceNASS National Agricultural Statistics ServiceNFC National Finance CenterNRCS Natural Resources Conservation ServiceOCFO Office of the Chief Financial OfficerOCIO Office of the Chief Information OfficerOGC Office of the General CounselOIG Office of Inspector GeneralRBS Rural Business-Cooperative ServiceRHS Rural Housing ServiceRMA Risk Management AgencyUSDA U.S. Department of Agriculture

U.S. DEPARTMENT OF AGRICULTUREOFFICE OF INSPECTOR GENERALSTOP 23091400 INDEPENDENCE AVE., SWWASHINGTON, DC 20250-2309

www.usda.gov/oig