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Testimony: 

Before the Subcommittee on General Farm Commodities and Risk 
Management, Committee on Agriculture, House of Representatives: 

United States Government Accountability Office: 

GAO: 

For Release on Delivery Expected at 10:00 a.m. EDT: 

Thursday, June 15, 2006: 

Crop Insurance: 

More Needs To Be Done to Reduce Program's Vulnerability to Fraud, 
Waste, and Abuse: 

Statement of Daniel Bertoni, Acting Director: 
Natural Resources and Environment: 

GAO-06-878T: 

GAO Highlights: 

Highlights of GAO-06-878T, testimony before the Subcommittee on General 
Farm Commodities and Risk Management, Committee on Agriculture, House 
of Representatives. 

Why GAO Did This Study: 

The U.S. Dept. of Agriculture’s (USDA) Risk Management Agency (RMA) 
administers the federal crop insurance program in partnership with 
private insurers. In 2005, the program cost $2.7 billion, including an 
estimated $117 million in losses from fraud, waste, and abuse. The 
Agricultural Risk Protection Act of 2000 (ARPA) provided new tools to 
monitor and control abuses, such as providing RMA sanction authority to 
address program abuse and having USDA’s Farm Service Agency (FSA) 
inspect farmers’ fields. This testimony is based on GAO’s September 30, 
2005, report, Crop Insurance: Actions Needed to Reduce Program’s 
Vulnerability to Fraud, Waste, and Abuse (GAO-05-528). GAO assessed (1) 
USDA’s processes to address fraud, waste, and abuse, and (2) the extent 
to which the program’s design makes it vulnerable to abuse. 

What GAO Found: 

RMA has taken a number of steps to improve its procedures and processes 
to address fraud, waste and abuse in selling and servicing crop 
insurance policies and has reported more than $300 million in savings 
from 2001 to 2004. However, RMA is not effectively using all of its 
tools. GAO identified weaknesses in four key areas: 

* FSA inspections during the growing season are not being used to 
maximum effect. Between 2001 and 2004, FSA conducted only 64 percent of 
the inspections RMA had requested. Without inspections, farmers may 
falsely claim crop losses.

* RMA’s data analysis of the largest farming operations is incomplete. 
According to GAO’s analysis, in 2003 about 21,000 of the largest 
farming operations in the program did not report individuals or 
entities with an ownership interest in these operations as required. 
Without this information RMA was unaware of ownership interests that 
could help it prevent potential program abuse. FSA did not give RMA 
access to the data needed to identify such individuals or entities. 
USDA should be able to recover up to $74 million in improper claims 
payments.

* RMA is not effectively overseeing insurance companies’ efforts to 
control program abuse. GAO’s review of 120 cases showed that companies 
did not complete all of the required quality assurance reviews of 
claims and those that were conducted were largely paper exercises. 

* RMA has infrequently used its new sanction authority to address 
program abuse. RMA has not issued regulations to implement its new 
sanction authority under ARPA and imposed only 114 sanctions from 2001 
through 2004, although it annually identifies about 3,000 questionable 
claims, not all of which are necessarily sanctionable. 

RMA’s regulations to implement the crop insurance program, as well as 
some statutory requirements, create program design problems that hinder 
RMA’s efforts to reduce program abuse. For example, RMA’s regulations 
allow farmers to insure fields individually rather than all fields 
combined. This option enables farmers to “switch” reporting of yield 
among fields to either make false claims or build up a higher yield 
history on a field to increase its eligibility for higher insurance 
guarantees. High premium subsidies, established by statute, may also 
limit RMA’s ability to control program abuse because the subsidies 
shield farmers from the full effect of paying higher premiums 
associated with frequent claims. 

Eight recent crop insurance fraud cases, investigated by USDA’s Office 
of Inspector General and resulting in criminal prosecutions between 
June 2003 and April 2005, reflect the issues GAO noted. These cases 
show how farmers, sometimes in collusion with insurance agents and 
others, falsely claim prevented planting and low production. Several of 
these cases also demonstrate the importance of having FSA and RMA work 
together to identify and share information on questionable farming 
practices/activities. 

What GAO Recommends: 

GAO suggested that the Congress consider reducing premium subsidies to 
farmers who repeatedly file questionable claims. GAO recommended that 
USDA (1) improve field inspections, (2) recover payments from 
operations that failed to disclose farmers’ ownership interests, (3) 
strengthen oversight of insurers’ use of quality controls, and (4) 
issue regulations for expanded sanction authority. USDA agreed with 
most of GAO’s recommendations. However, it stated that it had 
insufficient resources to conduct all inspections. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-878T]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Daniel Bertoni at (202) 
512-3841 or bertonid@gao.gov. 

[End of Section] 

Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here today to discuss USDA's efforts to address 
fraud, waste, and abuse in the Federal Crop Insurance Program. My 
testimony today is based on our September 2005, report to the Chairman 
of the Committee on Homeland Security and Governmental 
Affairs.[Footnote 1] As you know, federal crop insurance is part of the 
overall safety net of programs for American farmers. It provides 
protection against financial losses caused by droughts, floods, or 
other natural disasters. In 2005, the crop insurance program provided 
$44 billion in insurance coverage for over 200 million acres of 
farmland at a cost of $2.7 billion to the federal government, including 
$117 million estimated by the U.S. Department of Agriculture's (USDA) 
Risk Management Agency (RMA) to have resulted from fraud, waste, and 
abuse. 

RMA, which supervises the Federal Crop Insurance Corporation's (FCIC) 
operations, has overall responsibility for administering the crop 
insurance program, including protecting against fraud, waste, and 
abuse. RMA partners with private insurance companies that sell and 
service the insurance policies. 

In part, to improve the integrity of the crop insurance program, 
Congress enacted the Agricultural Risk Protection Act of 2000 (known as 
ARPA). This act provided RMA and USDA's Farm Service Agency (FSA) with 
new tools for monitoring and controlling program abuses. ARPA required 
the Secretary of Agriculture to develop and implement a coordinated 
plan for FSA to assist RMA in the ongoing monitoring of the crop 
insurance program and to use information technologies, such as data 
mining--the analysis of data to establish relationships and identify 
patterns--to administer and enforce the program. 

However, concerns have arisen that some farmers may have abused the 
crop insurance program by allowing crops to fail through neglect or 
deliberate actions in order to collect insurance and that some 
insurance companies have not exercised due diligence in investigating 
losses and paying claims. My testimony today focuses on two primary 
issues discussed in the September 2005 report: (1) the effectiveness of 
USDA's procedures and processes to prevent and detect fraud, waste, and 
abuse in selling and servicing crop insurance policies, and (2) the 
extent to which program design issues may make the program more 
vulnerable to fraud, waste, and abuse.[Footnote 2] 

In summary, since the enactment of ARPA, RMA has taken a number of 
steps to improve its procedures and processes to prevent and detect 
fraud, waste, and abuse in the crop insurance program. Most notably, 
RMA reports that data mining analyses and subsequent communication to 
farmers resulted in a decline of at least $300 million in questionable 
claims payments from 2001 to 2004. However, we found that RMA is not 
effectively using all of the tools it has available and that farmers 
and others can continue to take advantage of the program. We identified 
weaknesses in four key areas: (1) field inspections, (2) data mining 
processes that exclude many large farming operations when farmers do 
not report their interest in them, (3) quality assurance reviews 
conducted by insurance companies, and (4) imposition of sanctions. 
Weaknesses in these areas continue to leave the program vulnerable to 
questionable claims, and insurance companies and RMA cannot always 
determine the validity of a claim to minimize fraud, waste, and abuse. 

We also found that the program's design, as laid out in RMA's 
regulations or as required by statute, can impede RMA officials' 
efforts to prevent and detect fraud, waste, and abuse in a number of 
ways. In terms of RMA's regulations, farmers can insure their fields 
individually instead of insuring all fields combined, which makes it 
easier for them to switch production among fields, either to make false 
insurance claims or to build up a higher yield history on a particular 
field in order to increase its eligibility for higher future insurance 
guarantees. Moreover, companies participating in the crop insurance 
program bear minimal risk on some of the policies they sell and 
service, giving the companies little incentive to rigorously challenge 
questionable claims on these policies. In terms of statutory 
requirements, RMA is obligated by law to offer farmers "prevented 
planting" coverage--coverage if an insured crop is prevented from being 
planted--but it is often difficult to determine whether the farmer had 
the opportunity to plant a crop. Furthermore, statutorily established 
premium subsidies are high and, therefore, may shield high-risk farmers 
from the full effect of paying higher premiums. 

Our report highlighted eight recent crop insurance fraud cases that 
reflect some of the issues we identified. These cases, totaling $3.1 
million in insurance claims, were investigated by USDA's Office of 
Inspector General (OIG) and resulted in criminal prosecutions between 
June 2003 and April 2005. The cases show how farmers, sometimes in 
collusion with insurance agents and others, falsely claim prevented 
planting, weather damage, and low production. Some of the cases show 
farmers hiding or moving production from one field to another. Several 
of these cases also demonstrate the importance of having FSA and RMA 
work together to identify and share information on questionable farming 
practices/activities. 

In our report, we made several recommendations to the Secretary of 
Agriculture to strengthen procedures and processes to prevent and 
detect fraud, waste, and abuse in the crop insurance program. We also 
noted that the Congress should consider allowing RMA to reduce premium 
subsidies for farmers who consistently have claims that are irregular 
in comparison with other farmers growing the same crop in the same 
location. 

Background: 

In conducting their operations, farmers are exposed to both production 
and price risks. Over the years, the federal government has played an 
active role in helping to mitigate the effects of these risks on farm 
income by promoting the use of crop insurance. 

RMA administers the federal crop insurance program in partnership with 
private insurance companies that sell the insurance policies to farmers 
and adjust any claims. The companies also share in a percentage of the 
risk of loss or opportunity for gain associated with each insurance 
policy written. 

Under the program, participating farmers are assigned (1) a "normal" 
crop yield based on their actual production history and (2) a price for 
their commodity based on estimated market conditions. Farmers can then 
select a percentage of their normal yield to be insured and a 
percentage of the price they wish to receive if crop losses exceed the 
selected loss threshold. In addition, under the crop insurance 
program's "prevented planting" provision, insurance companies pay 
farmers who were unable to plant the insured crop because of an insured 
cause of loss that is general to their surrounding area, such as 
weather conditions causing wet fields, and that had prevented other 
farmers from planting fields with similar characteristics. These 
farmers are entitled to claims payments that generally range from 50 to 
70 percent of the coverage they purchased, depending on the crop. 

RMA establishes the terms and conditions that the private insurance 
companies selling and servicing crop insurance policies are to use 
through a contract called the standard reinsurance agreement (SRA). The 
SRA establishes the minimum training, quality control review 
procedures, and performance standards required of all insurance 
providers in delivering any policy insured or reinsured under the 
Federal Crop Insurance Act, as amended. 

RMA is responsible for ensuring that the federal crop insurance program 
is carried out efficiently and effectively and for protecting against 
fraud, waste, and abuse in the program. In this regard, RMA uses a 
broad range of tools, including RMA compliance reviews of companies' 
procedures, companies' quality assurance reviews of claims, data 
mining, and FSA inspections of farmers' fields. Insurance companies 
must conduct quality assurance reviews of claims that RMA has 
identified as anomalous or of those claims that are $100,000 or more to 
determine whether the claims they have paid are in compliance with 
policy provisions. 

The Congress enacted ARPA, amending the Federal Crop Insurance Act, in 
part, to improve compliance with, and the integrity of, the crop 
insurance program. Among other things, ARPA expanded RMA's authority to 
impose sanctions against farmers, agents, loss adjusters, and insurance 
companies that willfully and intentionally provide false or inaccurate 
information to FCIC or to an approved insurance provider. It also 
provided authority to impose civil fines for violations. ARPA also 
increased the percentage share of the premium the government pays for 
most coverage levels of crop insurance, beginning with the 2001 crop 
year. Although the percentage of the premium the government pays 
declines as farmers select higher levels of coverage, the government 
contribution significantly increases for all levels of coverage, 
particularly for the highest levels of coverage. For example, the 
government now pays fully one-half of the premium for farmers who 
choose to insure their crop at 75-percent coverage. 

RMA Has Strengthened Procedures for Preventing Questionable Claims, but 
the Program Remains Vulnerable to Potential Abuse: 

RMA has taken a number of steps to improve its procedures and processes 
to prevent and detect fraud, waste, and abuse, such as data mining, 
expanded field inspections and quality assurance reviews. In 
particular, RMA now develops a list of farmers each year whose 
operations warrant an on-site inspection during the growing season 
because data mining uncovered patterns in their claims that are 
consistent with the potential for fraud and abuse. For example, the 
list includes: 

* farmers, agents, and adjusters linked in irregular behavior that 
suggests collusion; 

* farmers who for several consecutive years received most of their crop 
insurance payments from prevented planting indemnity payments; 

* farmers who appear to have claimed the production amounts for 
multiple fields as only one field's yield, thereby creating an 
artificial loss on their other field(s); 
and: 

* farmers who, in comparison with their peers, have excessive harvested 
losses over many years. 

Since RMA began performing this data mining in 2001, it has identified 
about 3,000 farmers annually who warrant an on-site inspection because 
of anomalous claims patterns. In addition, RMA annually performs about 
100 data manipulations to identify areas of potential vulnerability and 
trends in the program. 

RMA also provides the names of farmers from its list of suspect claims 
for inspection to the appropriate FSA state office for distribution to 
FSA county offices, as well as to the insurance company selling the 
policy to the farmer. As a result of these inspections and other 
information, RMA reported total cost savings of $312 million from 2001 
to 2004, primarily in the form of estimated payments avoided. For 
example, according to RMA, claims payments to farmers identified for an 
inspection decreased nationwide from $234 million in 2001 to $122 
million in 2002. According to RMA, some of the farmers on the list for 
filing suspect claims bought less insurance and a few dropped crop 
insurance entirely, but most simply changed their behavior regarding 
loss claims. 

However, our review showed that RMA is not effectively using all of the 
tools it has available and that some farmers and others continue to 
take advantage of the program, as the following discussion indicates. 

Inspections during the growing season are not being used to maximum 
effect. Although FSA is assisting RMA as required under ARPA, by 
conducting field inspections, FSA is not doing so in accordance with 
USDA guidance. Between 2001 and 2004, farmers filed claims on about 
380,000 policies annually, and RMA's data mining identified about 1 
percent of these claims as questionable and needing FSA inspection. 
Under USDA guidance, FSA should have conducted all of the requested 
inspections, but instead conducted only 64 percent of them; 
FSA inspectors said that they did not conduct all requested inspections 
primarily because they did not have sufficient time. Moreover, between 
2001 and 2004, FSA offices in nine states did not conduct any of the 
field inspections RMA requested in one or more of the years. Until we 
brought this matter to their attention in September 2004, FSA 
headquarters officials were unaware that the requested inspections in 
these nine states had not been conducted. Furthermore, FSA may not be 
as effective as possible in conducting field inspections because RMA 
does not provide it with information on the nature of the suspected 
abusive behavior or the results of follow-up investigations. About 80 
percent of the FSA inspectors we surveyed believe that receiving more 
information from RMA would help them be more effective in detecting 
fraud, waste, and abuse. Finally, these inspections do not always occur 
in a timely fashion, which would help detect abuse during the growing 
season. Because of these problems, the insurance companies and RMA 
cannot always determine the validity of a claim. 

RMA's data analysis of the largest farming operations is incomplete. 
RMA's data mining analysis excludes comparisons of the largest farming 
operations--including those organized as partnerships and joint 
ventures. These entities may include individuals who are also members 
of one or more other entities. Because it does not know the ownership 
interests in the largest farming operations, RMA cannot readily 
identify potential fraud. For example, farmers who are members of more 
than one farming operation could move production from one operation to 
another to file unwarranted claims, without RMA's knowledge that these 
farmers participate in more than one farming operation. RMA cannot make 
these comparisons because it has not been given access to similar data 
that FSA maintains. However, ARPA requires the Secretary of Agriculture 
to develop and implement a coordinated plan for RMA and FSA to 
reconcile all relevant information received by either agency from a 
farmer who obtains crop insurance coverage. 

Using FSA data, we examined the extent to which (1) farming operations 
report all members who have a substantial beneficial interest in the 
operation, (2) these farming operations file questionable crop 
insurance claims, and (3) agents or claims adjusters had financial 
interests in the claim.[Footnote 3] We found that of the 69,184 
entities that had crop insurance policies in 2003 and that were in both 
RMA's and FSA's databases, 21,310, or about 31 percent, did not report 
one or more members who held a beneficial interest of 10 percent or 
more in the farming operation holding the policy--for a total of $224.8 
million in claims paid. 

RMA should be able to recover a portion of these payments. According to 
RMA regulations, if the policyholder fails to disclose an ownership 
interest in the farming operation, the policyholder must repay the 
amount of the claims payment that is proportionate to the interest of 
the person who was not disclosed.[Footnote 4] The average ownership 
interest of the persons not disclosed for the 21,310 entities was 33 
percent; as a result, RMA should be able to recover up to $74 million 
in claims payments. Our analysis of RMA's and FSA's databases for 2004 
showed similar results. Of the 21,310 entities failing to disclose 
ownership interest in 2003, we found 210 entities with suspicious 
insurance claims totaling $11.1 million. In addition, we identified 24 
crop insurance agents who sold policies to farming entities in which 
the agents held a substantial beneficial interest but failed to report 
their ownership interest to RMA as required.[Footnote 5] These farming 
entities received $978,912 in claims payments in 2003 and 2004. 

RMA is not effectively overseeing insurance companies' quality 
assurance programs. RMA guidance requires insurance companies to 
provide oversight to properly underwrite the federal crop insurance 
program, including implementing a quality control program, conducting 
quality control reviews, and submitting an annual report to FCIC. 
However, RMA is not effectively overseeing insurance companies' quality 
assurance programs, and for the claims we reviewed, it does not appear 
that most companies are rigorously carrying out their quality assurance 
functions. For example, 80 of the 120 insurance claim files we reviewed 
claimed more than $100,000 in crop losses or met some other significant 
criteria; RMA's guidance states that the insurance provider must 
conduct a quality assurance review for such claims. However, the 
insurance companies conducted reviews on only 59 of these claims, and 
the reviews were largely paper exercises, such as computational 
verifications, rather than comprehensive analysis of the claim. RMA did 
not ensure that companies conducted all reviews called for under its 
guidance and did not examine the quality of the companies' reviews. 

RMA has infrequently used its new sanction authority to address program 
abuses. Although ARPA expanded RMA's authority to impose sanctions on 
farmers, agents, and adjusters who willfully and intentionally provide 
false or inaccurate information or fail to comply with other FCIC 
program requirements, RMA has only used this authority on a limited 
basis. RMA has identified about 3,000 farmers with suspicious claims 
payments--notable policy irregularities compared with other farmers 
growing the same crop in the same county--each year since the enactment 
of ARPA. While not all of these policy irregularities were necessarily 
sanctionable, RMA imposed only 114 sanctions from 2001 through 2004. 
According to RMA officials, RMA requested and imposed few sanctions 
because it had not issued regulations to implement its expanded 
authority under ARPA. Without regulations, RMA has not established what 
constitutes an "FCIC requirement" and how it will determine that a 
violation has occurred or what procedural process it will follow before 
imposing sanctions. Insurance agents we surveyed and company officials 
we contacted believe that RMA needs to more aggressively seek to 
penalize those farmers, agents, and adjusters who abuse the program. 
RMA officials told us that they will give priority to issuing 
regulations implementing the sanctions authorized under ARPA. 

RMA's Regulations and Some Statutory Requirements Hinder Efforts to 
Reduce Abuse in the Crop Insurance Program: 

While RMA can improve its day-to-day oversight of the federal crop 
insurance program in a number of ways, the program's design, as laid 
out in RMA's regulations or as required by statute, hinders officials' 
efforts to administer certain program provisions to prevent fraud, 
waste, and abuse, as the following discussion indicates. 

RMA's regulations allow farmers the option of insuring their fields 
individually rather than combined as one unit. Under RMA's regulations, 
farmers can insure production of a crop on each optional unit or insure 
an entire basic unit. Farmers may want to insure fields separately out 
of concern that they would experience losses in a certain field because 
of local weather conditions, such as hail or flooding. If farmers 
instead insured their entire crop in a single basic insurance unit, the 
hail losses may not have caused the production yield of all units 
combined to have been below the level guaranteed by the insurance and, 
therefore, would not warrant an indemnity payment. Although optional 
units provide farmers added protection against loss, this coverage 
option increases the potential for fraud and abuse in the crop 
insurance program. 

Insuring fields separately enables farmers to "switch" production among 
fields--reporting production of a crop from one field that was actually 
produced on another field--either to make false insurance claims based 
on low production or to build up a higher yield history on a particular 
field in order to increase its eligibility for higher future insurance 
guarantees. Of the 2,371 farmers identified through data mining as 
having irregular claims in 2003, 12 percent were suspected of switching 
production among their fields. Furthermore, in our review of claim 
files, we identified 10 farmers with patterns of claims associated with 
this type of fraud. 

According to a 2002 RMA study, relative losses per unit increase as the 
number of separately insured optional units increases.[Footnote 6] 
However, according to an RMA official, gathering the evidence to 
support a yield-switching fraud case requires considerable resources, 
especially for large farming operations. 

In some cases, insurance companies have little incentive to rigorously 
challenge questionable claims. Insurance companies participating in the 
crop insurance program share a percentage of the risk of loss or 
opportunity for gain on each insurance policy they write, but the 
federal government ultimately bears a high share of the risk. Under the 
SRA, insurance companies are allowed to assign policies to one of three 
risk funds--assigned risk, developmental, or commercial. The SRA 
provides some criteria for designating policies to these funds. For the 
assigned risk fund, the companies cede up to 85 percent of the premium 
and associated liability for claims payments to the government and 
share a limited portion of the gains and losses on the policies they 
retain. For the developmental and commercial funds, the companies cede 
a smaller percent of the premium and associated liability for claims 
payments to the government and share a larger portion of the gains and 
losses on the policies they retain.[Footnote 7] 

Economic incentives to control program costs associated with fraud, 
waste, and abuse are commensurate with financial exposure. Therefore, 
for policies placed in the assigned risk fund, companies have far less 
financial incentive to investigate suspect claims. For example, in one 
claim file we reviewed, an insurance company official characterized the 
farmer as filing frequent, questionable claims; 
however, the company paid a claim of over $500,000. The official 
indicated that if the company vigorously challenged the claim, the 
farmer would have defended his claim just as vigorously, and the 
company would have potentially incurred significant litigation 
expenses, which RMA does not specifically reimburse. With this cost and 
reimbursement structure, in the company's opinion, it was less costly 
to pay the claim. 

RMA and insurance companies have difficulty determining potential abuse 
associated with prevented planting coverage. Under the Federal Crop 
Insurance Act, as amended, RMA must offer prevented planting coverage. 
RMA allows claims for prevented planting if farmers cannot plant due to 
an insured cause of loss that is general in the surrounding area and 
that prevents other farmers from planting acreage with similar 
characteristics.[Footnote 8] Claims for prevented planting are paid at 
a reduced level, recognizing that farmers do not incur all production 
costs associated with planting and harvesting a crop. However, 
determining whether farmers can plant their crop may be difficult. 
Annually, RMA pays about $300 million in claims for prevented planting. 

Twenty-five of the FSA county officials that provided us written 
comments on this issue reported that they believe some farmers in their 
county who claimed prevented planting losses never intended to plant or 
did not make a good faith attempt to plant their crop. Additionally, in 
some cases, it appears that the insurance company's claims adjusters 
may not exercise due diligence in evaluating prevented planting claims. 
For example, a farmer in south Texas received claims payments of over 
$21,000 for prevented planting claims for corn in 2003 and 2004. The 
farmer claimed that excess rainfall made his fields too wet to plant. 
However, according to a June 2004 FSA field inspection report, there 
was no evidence the farmer had made any attempt to prepare the fields 
for planting in either the 2003 or 2004 growing season. Among other 
things, the FSA inspection report noted, and photographs showed, the 
fields contained permanent grasses and 5-foot tall weeds, as well as 
large hay bales from the prior growing season. In response to our 
review, RMA investigated the 2003 and 2004 prevented planting claims 
for this farmer and subsequently directed the insurance company to seek 
reimbursement for the 2003 claims payment. 

High premium subsidies may inhibit RMA's ability to control program 
abuse. To encourage program participation, ARPA increased premium 
subsidies--the share of the premium paid by the government--but this 
increase may hamper RMA's ability to control program fraud, waste, and 
abuse. Premium subsidies are calculated as a percentage of the total 
premium, and farmers pay only between 33 to 62 percent of the policy 
premium, depending on coverage level. High premium subsidies shield 
farmers from the full effect of paying higher premiums. Because premium 
rates are higher in riskier areas and for riskier crops, the subsidy 
structure transfers more federal dollars to those who produce riskier 
crops or farm in riskier areas. 

In addition, premium rates are higher for farmers who choose to insure 
their fields separately under optional units, rather than all fields 
combined, because the frequency of claims payments is higher on the 
separately insured units. Again, however, because of high premium 
subsidies, farmers pay only a fraction of the higher premium. Thus, the 
subsidy structure creates a disincentive for farmers to insure all 
fields combined. Over one-half (56 percent) of the crop insurance 
agents responding to our survey believed that charging higher premiums 
for farmers with a pattern of high or frequent claims would discourage 
fraud, waste, and abuse in the crop insurance program. 

Recently Prosecuted Crop Insurance Fraud Cases Highlight Program 
Vulnerabilities: 

Some of the issues we identified are reflected in eight recent crop 
insurance fraud cases that USDA's Office of Inspector General (OIG) 
investigated and that resulted in criminal prosecution between June 
2003 and April 2005. The cases show how a few farmers, sometimes in 
collusion with others, falsely report planting, claims of damage, and 
production to try to circumvent RMA's procedures. In some cases, 
farmers hid production or switched it from one field to another. 
Several of these cases also demonstrate the importance of having FSA 
and RMA work together to identify and share information on questionable 
farming practices/activities. Table 1 summarizes these eight cases, 
which accounted for $3.1 million in fraudulent claims payments. These 
cases were researched and analyzed by our Office of Forensic Audits and 
Special Investigations. 

Table 1: Crop Insurance Fraud Cases Investigated by the USDA/OIG and 
Resulting in Criminal Prosecution, June 2003 to April 2005: 

Case: 1; 
Fraud allegation: Failure to plant; 
How detected: OIG/RMA/ FSA identified irregularities through joint data 
mining effort and follow-up inspection; 
Collusion: Possible. Insurance adjuster indicted for falsely verifying 
losses; 
Fraudulent claims payments: $57,155. 

Case: 2; 
Fraud allegation: False claim of crop damage from hail, heat, and 
drought; 
How detected: RMA and FSA received complaints and initiated review; 
Collusion: Possible. Insurance policy purchased from agency owned by a 
sister-in-law; 
Fraudulent claims payments: 39,826. 

Case: 3; 
Fraud allegation: False claim of crop damage from excessive moisture; 
How detected: OIG initiated. Fraud detection survey of grain elevator 
disclosed irregularities; 
Collusion: No; 
Fraudulent claims payments: 435,087. 

Case: 4; 
Fraud allegation: Failure to plant; 
How detected: FSA filed complaint with RMA; 
Collusion: Yes. Insured was also agent and issued policies through his 
agency. Insurance adjusters falsified forms. Seed dealers also provided 
false receipts; 
Fraudulent claims payments: 630,000. 

Case: 5; 
Fraud allegation: False claim of crop damage; 
How detected: RMA noticed suspicious adjustments in grain quality by 
grain elevator company; 
Collusion: Yes. Farmer and grain elevator operator; 
Fraudulent claims payments: 1,000,000. 

Case: 6; 
Fraud allegation: False crop yield history to inflate insurance claim; 
How detected: OIG hotline complaint; 
Collusion: Yes. Insurance agents pled guilty to falsifying insurance 
documents; 
Fraudulent claims payments: [A]. 

Case: 7; 
Fraud allegation: No ownership interest in crops; 
underreporting of crop yield; 
How detected: OIG hotline complaint; 
Collusion: No; 
Fraudulent claims payments: 19,000. 

Case: 8; 
Fraud allegation: Failure to plant; 
false claim of moisture damage; 
concealing production; 
How detected: Bankruptcy fraud investigation revealed insurance fraud; 
Collusion: Ongoing investigation of insurance representatives; 
Fraudulent claims payments: $912,364. 

Source: GAO's analysis of USDA and U.S. Department of Justice case 
information. 

[A] Data not available. 

[End of table] 

In conclusion, Mr. Chairman, federal crop insurance plays an invaluable 
role in assuring the nation's farmers that their crops will be 
protected from natural disasters. However, fraud, waste, and abuse can 
result in higher program costs and hurt the reputation of the program. 
In recent years, with the assistance of the new tools in ARPA, RMA has 
made progress in strengthening a number of program elements and thereby 
reducing fraud, waste, and abuse, as well as the amount of funds paid 
in error. 

Still, the weaknesses we identified in how RMA, FSA, and insurance 
companies carry out their program responsibilities continue to leave 
the program vulnerable to questionable claims and missed opportunities 
to prevent losses to the federal government. In addition, RMA may be 
able to reduce program vulnerability and costs by improving aspects of 
the program's design. 

In our report, we said that the Congress may wish to consider allowing 
RMA to reduce premium subsidies--and hence raise the insurance 
premiums--for farmers who consistently have claims that are irregular 
in comparison with other farmers growing the same crop in the same 
location. We made eight recommendations to the Secretary of Agriculture 
to strengthen program oversight and reduce vulnerability to fraud, 
waste and abuse, including improved sharing of information between RMA 
and FSA, improved inspection practices, regulations to implement 
sanctions, and stronger oversight of companies' quality control 
procedures. USDA agreed to act on most of our recommendations. However, 
it disagreed with our recommendation to ensure that FSA field offices 
conduct all inspections called for under agency guidance, stating that 
FSA did not have sufficient resources to complete all of these 
inspections. USDA also disagreed with our recommendation to reduce the 
insurance guarantee or eliminate optional unit coverage for farmers who 
consistently have filed claims that are irregular in comparison with 
other farmers growing the same crop in the same location. We continue 
to believe that it is reasonable for USDA to use all tools at its 
disposal and that our recommendations will reduce the federal crop 
insurance program's vulnerability to fraud, waste, and abuse. 

Mr. Chairman, this concludes my prepared statement. We would be happy 
to respond to any questions that your or other Members of the 
Subcommittee may have. 

Contact and Staff Acknowledgments: 

Contact points for our Offices of Congressional Relations and Public 
Affairs may be found on the last page of this statement. For further 
information about this testimony, please contact Daniel Bertoni, Acting 
Director, Natural Resources and Environment, (202) 512-3841 or by email 
at bertonid@gao.gov. Key contributors to this statement were Ron Maxon, 
Thomas Cook, and Carol Herrnstadt Shulman. 

FOOTNOTES 

[1] GAO, Crop Insurance: Actions Needed to Reduce Program's 
Vulnerability to Fraud, Waste, and Abuse, GAO-05-528 (Washington, D.C.: 
September 30, 2005). 

[2] Our September 2005 report also addressed the effectiveness of 
USDA's procedures to assure program integrity in developing new crop 
insurance products. 

[3] The Center for Agribusiness Excellence conducted this analysis at 
our request. The Center, located at Tarleton State University in 
Stephenville, Texas, provides research, training, and resources for 
data warehousing and data mining of agribusiness and agriculture data. 
The Center provides data mining of crop insurance data for RMA. 

[4] 7 C.F.R. § 457.8. 

[5] RMA guidance Manual 14, Guidelines and Expectations for Delivery of 
the Federal Crop Insurance Program states that insurance companies must 
conduct conflict-of-interest reviews for all crop insurance claims of 
individuals directly associated with the federal crop insurance 
program. However, without knowledge that these insurance agents held a 
substantial beneficial interest of 10 percent or more in entities that 
received claims payments, insurance companies may not have conducted 
the reviews in 2003 and 2004. As of August 2005, RMA could not confirm 
that these reviews had been conducted. 

[6] Final Research Report For Multiple Year Coverage, Task Order # RMA- 
RED-01-06, Watts and Associates, Inc., June 27, 2002. 

[7] In 2003, companies placed about 19 percent of the policies they 
wrote in the assigned risk fund and about 69 percent in the commercial 
fund. However, for those farmers on RMA's inspection list, about 47 
percent of the policies were in the assigned risk fund, and 38 percent 
were in the commercial fund. 

[8] 7 C.F.R. § 457.8. 

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