"Once again, the bottom line is the same: no controls, extensive abuse and no accountability," Grassley said. "This time around there was a new twist. The houses of prostitution are a new low in government credit card abuse."
Grassley has worked to expose Defense Department credit card abuse since the summer of 2001. The General Accounting Office has documented a series of abuses throughout the military, including payments for expensive leather brief cases, visits to "gentlemen's clubs," and clothing from department stores.
In the latest review, the audit agency found the Navy logged 80 transactions totaling $13,250 at two Nevada houses of prostitution; 199 purchases for $20,800 at two jewelry stores; 247 transactions totaling $28,700 at three adult clubs; 80 gambling transactions for $34,250; 72 cruises for $38,300; and 502 purchases of tickets, worth $71,400, to entertainment events, including "The Phantom of the Opera," New York Yankees and Atlanta Braves baseball games and Los Angeles Lakers basketball games. Some of the credit-card wielding employees paid back the charges out of their own funds, but others did not.
Grassley said he hopes such transgressions will end and pointed to some successes in cracking down on abuse. He said putting a stop to abuse will require constant vigilance from Congress, military leaders, and government auditors.
"In the private sector, credit cards are a big success," Grassley said. "That's because the control environment is good. Somebody is always minding the store. Bills are reconciled and paid promptly. In corporate America, if you abuse your card, you either lose it or get fired. If the Defense Department wants this program to succeed, it needs to get on the stick and make the controls work."
Grassley's testimony at a hearing on credit card abuse follows.
Chairman Steve Horn's Contributions to Oversight
Mr. Chairman, this is our fourth and, perhaps, our final hearing on the joint oversight investigation of Department of Defense (DOD) credit card abuse.
It has been an honor and privilege for me to conduct oversight in such distinguished company.
From day one, this has been a team effort, and you have been our leader. With you up front in the driver's seat, we have accomplished our mission. We have done everything in our power to ensure that the taxpayers' money is spent wisely and according to law.
Our success is due largely to your outstanding leadership. I thank you from the bottom of my heart.
When you step down at the end of the session, you will be missed ? especially by the Senator from Iowa.
Your departure will leave a gaping hole in our front lines, and it's going to be very hard to fill it. Courage is in such short supply around here.
As I have repeatedly stated, you have put the glare of the public spotlight on a very dark corner of the Pentagon.In a huge bureaucracy like the Pentagon, daylight is never welcome. In fact, it is feared and even hated.
But shedding light on a problem like credit card abuse is the heart and soul of oversight.
Our purpose from the beginning was to determine the scope of abuse and then figure out how to put a stop to it. You have so graciously provided the venue where we could do what had to be done.
Progress and Accomplishments
Mr. Chairman, we started this investigation more than two years ago. Yes, it's true, we have come a long way. We have seen the Promised Land, but we are not there yet. We have much more work to do before we get to the end of the road.
At our first hearing on July 30, 2001, we examined a sample of FY2000 purchase card transactions collected from two Navy organizations in the San Diego area.
We found zero controls, extensive abuse and a total disregard for accountability.
The Navy dismissed our findings as a few "unique and isolated" cases. Not to worry, the Navy said. We don't have a problem. One rotten apple doesn't make the whole barrel bad.
Then came our second hearing 8 months later ? on March 13, 2002.
We went back to the same two Navy units for a second look. We examined a more current sample of FY2001 transactions.
Well, guess what? The results were the same or worse: no effective controls, extensive abuse, and no accountability.
After this go around, the Navy started singing a different tune: "Yes, we have a problem." I hope those words were spoken with sincerity and not just for our benefit.
Mr. Chairman, our second hearing hit home hard. DOD and other government agencies started scrambling for cover.
--Six days after our second hearing, Secretary Rumsfeld set up a Charge Card Task Force to clean up the mess.
--Two months later ? on May 7, 2002 ? the Office of Management and Budget (OMB) announced a crackdown of credit card abusers.
OMB threatened to close 2.3 million government credit card accounts unless the agencies involved started controlling employee abuses.
--Inspectors General throughout the government launched a series of investigations directed at suspected credit card abuse.
--Mandatory salary offsets ? involuntary paycheck deductions ? began to take effect.
Offsets reduced Bank of America's annual credit losses from $20 million per year to $4 million per year.
--DOD scofflaws were dragged to the teller's window with cash in hand to pay long-overdue bills.
At our third hearing on July 17, 2002, we examined a much larger sample of Army travel and purchase card transactions made in FY2001 along with some FY2002 data.
Once again, we got the same results: No controls, extensive abuse, and no accountability.
Byrd-Grassley Amendment
After our third hearing, I was contacted by my distinguished colleague from West Virginia, Senator Byrd. He had seen the news coverage of our hearing and wanted to put a stop to the abuse.
The use of DOD travel cards to pay for "lap dancing" at the Bottoms Up Lounge really got him energized.
Senator Byrd suggested that we team up on a credit card amendment on the DOD appropriations bill. That was a golden opportunity, and I grabbed it.
Our amendment does several things.
It puts a lid on DOD credit cards in FY 2003 at 1.5 million. It makes credit checks mandatory. It requires disciplinary action for abuse, and prohibits the use of credit cards in places like the Bottoms Up Lounge and casinos.
Our amendment was adopted by the Senate on July 31, 2002.
Future Uncertainties
So Mr. Chairman, as I said at the beginning, we have come a long way. We have accomplished a lot. We have had an impact.
We have good momentum, but the final outcome is still in doubt. We are definitely moving in the right direction, but we don't have change itself.
Real reform is still somewhere down the road.
We must be certain that our impact is lasting and meaningful. I would like to see a permanent solution.
But how do we get from where we are today to a more lasting solution?
GAO's Latest Findings
In a moment, Mr. Greg Kutz of the General Accounting Office (GAO) will be presenting his report on Navy and Air Force travel and purchase card transactions.
Mr. Kutz is about to tell us the same story we heard at hearing number 1, hearing number 2 and hearing number 3. The same identical pattern of abuse is apparent in the new GAO data.Mr. Chairman, the problems are systemic.
This time we looked at a much bigger sample. But once again, the results are strikingly similar.
Once again the bottom line is the same: No controls, extensive abuse, and no accountability.
Failure rates for the Navy and Marine Corps on a standardized set of control tests were near 100 percent in key areas.Admittedly, the Air Force did slightly better.
Overall, the GAO gave the Air Force a grade of C. The Army, Navy, and Marine Corps, by comparison, earned a grade of F.
The new data did, however, point up one slight variation in the pattern of abuse.
The GAO once again found thousands of dollars in new travel card charges for lap dancing at gentlemen's clubs like the Cheetah Club.
However, this time around there was a new twist. The GAO found abuse taken to new depths.
GAO discovered thousands of dollars in travel card charges for the procurement of services from prostitutes in Nevada.
At least 53 Navy, Marine, and Air Force personnel got their official travel cards swiped at such places as the Salt Well, Madam Butterfly, and the Chicken Ranch.
The reports delivered today by Mr. Kutz constitute the final phase of our oversight investigation. That means the GAO's work is just about done.
For over two years now, the GAO has been hammering away on a hunk of DOD iron on the congressional anvil. That is exactly what the GAO was set up to do, and they did it well.
It makes me happy to see the GAO doing its job.
The GAO has been conducting a root canal operation. It has been slow, methodical, and very unpleasant -- especially for the credit card abusers and those responsible for curbing their abuses.
The GAO's persistent probing at bases all around the country has created a lot of pressure and apprehension. GAO has fangs, and it has sunk them deeply into the problem.
Pressure Drops to Zero After Hearing
But all of a sudden, Mr. Chairman, when you lower your gavel and close this hearing, the pressure will drop to zero ? or close to it.
That worries me. What will happen then?
Time to Shift Gears
In order to keep moving down the road toward credit card reform, we need to shift gears.
I don't want to see all our good work go down the tubes. I don't want to see the DOD credit card operation get back to "business as usual."
I don't want all our good work to amount to nothing more than a ripple on the proverbial Pentagon pond.
I will do everything possible to keep that from happening. But I am going to need all the help I can get.
Thankfully, Mr. Chairman, I now think I know where the help may come from.
DOD IG Gets Proactive
A new team is coming on to the field of play. The new team has a new coach. And the new coach has a new philosophy on how the game is supposed to be played. The new coach's name is Joe Schmitz. He is the newly appointed Inspector General (IG) at the Defense Department.
Mr. Schmitz seems to speak softly, but he carries a big stick.Until now, the DOD IG has been AWOL on credit card abuse.
But that's changing fast. Under Joe Schmitz, the IG is getting proactive.
The future looks so much brighter.
The IG looks like he is ready to grab the bull by the horns. And the man who is supposed to get the job done is Army Colonel Bill Kelley. He works for Mr. Schmitz.
Colonel Kelley strikes me as a person who intends to succeed. He wants accountability as much as I do.
The future of our oversight work may now be in Colonel Kelley's hands.
Search For Long-Term Solution
Colonel Kelley is proceeding cautiously ? one step at a time. He envisions a plan with four phases.
Phase one is essentially complete.
His data mining operation is already up and running.
Data mining is nothing more than a computer program that can search through a pool of millions of transactions and identify and cull out suspicious charges. These are then subjected to further examination.
In the first cut, Colonel Kelley's data mining operation checked 12 million purchase card transactions made between October 2000 and December 2001.
Some 12,257 charges made by 1,571 cardholders got "flagged." They just didn't smell right. More may be added to the list.
As the data miners "drilled" deeper and checked out these charges, 62 potential fraud cases popped up on the radar screen.
Criminality ranged from $15.00 all the way up to $1.7 million.
All 62 cases have been referred to DOD's criminal investigative units: DCIS [Defense Criminal Investigative Service], NCIS [Naval Criminal Investigative Service], CID [Criminal Investigative Division - Army], and OSI [Office of Special Investigations - Air Force].
40 of these cases were already known to authorities. That's a reality check. It tells us that the DOD data mining operation works according to specs.
Colonel Kelley's data miners also discovered another important piece of information.
While DOD authorities were aware of 40 of the 62 suspected fraud cases detected by data miners, most ? if not all ? were dead in the water. Nothing was being done. No longer. Action is now underway across-the-board.
In addition, Colonel Kelley's data miners uncovered "hundreds" of unauthorized and improper charges. These have been referred to senior management for possible disciplinary action.
In Phase Two, a more current sample of 7 million purchase card transactions will be surveyed covering the period January 2002 to August 2002. The scope of this review will be expanded to include overseas locations and non-appropriated fund activities.
During Phase Three, data mining will be extended to travel card transactions.
Negotiations are already underway with Bank of America to obtain data for some 35 million transactions, starting in September 2002 and looking back 16 months.
A problem has arisen because Bank of America wants $12,000.00 for the data package.
Colonel Kelley thinks that's a rip off. Colonel Kelley believes that access to that data is provided for under the travel card contract and wants the bank to hand it over free of charge.
Putting Data Mining on Auto-Pilot
The final phase ? Phase Four ? will be more challenging. The goal is to set up a real-time, continuous, sustained data mining operation covering all credit card transactions.
Colonel Kelley wants to put data mining on auto-pilot or something like that.
The final solution is still out in the future somewhere. We don't know when we might get there.
Colonel Kelley hopes that DOD and GSA [General Services Administration] can work together to create a long-term solution.
GSA is so far very impressed with the DOD data mining operation and is working hard to create a comparable government-wide data mining operation.
He says that the Commerce and Treasury Departments are ready to jump on the bandwagon. But that's just the beginning.
Phase Four is the key to effective oversight down the road.
What we are talking about, Mr. Chairman, is moving from today's snap shots in time ? like those done by DOD and GAO, to a fully automated data mining operation.
Colonel Kelley believes that we have the wherewithal to do it right now today. It's technically feasible. We just need to find the money, the people, and right organization to get the job done.
Once the cardholders understand that their transactions are under constant surveillance, all the abuse will come to a screeching halt ? at least it will be held to a very minimum.
There are always a few clever ones out there who know how to game the system.
Value of Government Credit Cards
Mr. Chairman, we began these hearings by emphasizing the importance of government credit cards.
I would like to end on that same note.
Government credit cards can work in the right kind of environment.
The thinking behind the DOD credit cards is good: reduce paperwork, save money, and streamline the process. Make it quicker and easier for the troops to carry out the mission.
When DOD started down the credit card road, the whole idea was to adopt the best practices of the commercial sector.
In the private sector, credit cards are a big success. That's because the control environment is good. Somebody is always "minding the store." Bills are reconciled and paid promptly. In corporate America, if you abuse your card, you either lose it or get fired.
Need for Trust and Accountability
The control environment at the Pentagon is entirely different.
That very key point has been repeatedly hammered home at each of our hearings.
Every shred of evidence presented by Mr. Kutz and the GAO clearly indicates that there are no effective controls in place today and little or no accountability.
Since credit cards are low control financial instruments, credit cards require a high-level of trust and accountability. Trust and accountability must be the cornerstone of any successful credit card program.
The total absence of credit checks for DOD cardholders erodes trust. It breeds mistrust and invites abuse.
The GAO data invariably shows that the worst abusers have bad credit records stretching way back in time - records that are ignored by Pentagon managers.
A standard credit check should be the starting point - just like in the private sector. A "clean" report means you get a card. A "bad" report means no card. A satisfactory credit check is the building block for trust and confidence.
DOD's no-credit-check policy is history, I hope. It will be dead if the Byrd-Grassley amendment is adopted in conference and becomes the law of the land.
Issuing credit cards "willy nilly" with no credit checks, no controls, no accountability, and monthly spending limits of up to $100,000.00 is a recipe for disaster. It just doesn't work. It leaves the door wide open to fraud and abuse.
If DOD wants this program to succeed, then DOD needs to get on the stick and make the controls work.
With effective controls and some accountability, credit cards will work like they are supposed to work.
Progress on XXXXXX Case
Mr. Chairman, before I conclude my testimony today, I am happy to report some forward movement on the XXXXXX case.
I discussed this case in great detail at the last hearing.
As you may remember, her government credit cards were used to make a large number of fraudulent purchases.
I testified that the Naval Criminal Investigative Service [NCIS] had really dropped the ball and allowed the evidence trail to go cold.
Well. All that has now changed. The new IG, Joe Schmitz, has assured me that this case will now get the attention it needs and deserves.
Closing Remarks
Mr. Chairman, that concludes my statement.
I would like to wish you well in retirement. I hate to say it, but I must now bid you farewell.
Good luck and God Speed. It has been an honor and privilege working with you. Thank you for your outstanding leadership.