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entitled 'Food Stamp Trafficking: FNS Could Enhance Program Integrity 
by Better Targeting Stores Likely to Traffic and Increasing Penalties' 
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Report to Congressional Committees: 

United States Government Accountability Office: 

GAO: 

October 2006: 

Food Stamp Trafficking: 

FNS Could Enhance Program Integrity by Better Targeting Stores Likely 
to Traffic and Increasing Penalties: 

Food Stamp Trafficking: 

GAO-07-53: 

GAO Highlights: 

Highlights of GAO-07-53, a report to congressional committees 

Why GAO Did This Study: 

Every year, food stamp recipients exchange hundreds of millions of 
dollars in benefits for cash instead of food with retailers across the 
country, a practice known as trafficking. From 2000 to 2005, the Food 
Stamp Program has grown from $15 billion to $29 billion in benefits. 
During this period of time, the U.S. Department of Agriculture’s (USDA) 
Food and Nutrition Service (FNS) replaced paper food stamp coupons with 
electronic benefit transfer (EBT) cards that work much like a debit 
card at the grocery checkout counter. Given these program changes and 
continuing retailer fraud, GAO was asked to provide information on (1) 
what is known about the extent and nature of retailer food stamp 
trafficking, (2) the efforts of federal agencies to combat such 
trafficking, and (3) program vulnerabilities. To do this, GAO 
interviewed agency officials, visited 10 field offices, conducted case 
file reviews, and analyzed data from the FNS retailer database. 

What GAO Found: 

FNS’s estimates suggest trafficking declined between 1995 and 2005 from 
3.8 cents per dollar of benefits redeemed to 1.0 cent, resulting in an 
estimated $241 million in food stamps trafficked in 2005. The rate of 
trafficking in small grocery and convenience stores is 7.6 cents per 
dollar, significantly higher than the rate for large stores, where it 
is estimated to be 0.2 cents per dollar. In addition, the use of EBT 
cards has changed the way some benefits are trafficked, for example 
eliminating middlemen who used to collect and redeem large amounts of 
paper coupons from program participants willing to sell them. FNS has 
taken advantage of EBT data to improve its ability to detect and 
disqualify trafficking retailers, while law enforcement agencies have 
conducted a decreasing number of investigations. Cases using only EBT 
transaction data now account for more than half of trafficking 
disqualifications, supplementing traditional, but more time-consuming, 
undercover investigations. Other federal entities, such as the USDA’s 
Inspector General and the U.S. Secret Service, have reduced the number 
of traffickers they pursue in recent years and focused their efforts on 
high- impact cases. This has resulted in fewer cases referred for 
federal prosecution and fewer federal convictions for retailer 
trafficking. Despite FNS progress, the program remains vulnerable 
because retailers can enter the program intending to traffic, often 
without fear of severe criminal penalties. FNS authorizes some stores 
with limited food supplies so that low- income participants in areas 
with few supermarkets have access to food, but may not inspect these 
stores again for 5 years unless there is some indication of a problem. 
Oversight of early operations is important because newly authorized 
retailers can quickly ramp up the amount of benefits they traffic. One 
location that FNS disqualified for trafficking redeemed almost $650,000 
in 9 months. In addition, FNS has not conducted analyses to identify 
high risk areas and to target its limited compliance-monitoring 
resources. Furthermore, disqualification, FNS’s most severe penalty, 
may not be a sufficient deterrent, and FNS must rely upon others for 
prosecution. Finally, states’ failing to pursue trafficking recipients 
leaves a pool of recipients willing to traffic when a disqualified 
store reopens. 

Figure: This Disqualified Store, with Its Limited Counter Area and 
Single Cash Register, Redeemed over $190,000 of Food Stamp Benefits in 
One Month: 

[See PDF for Image] 

Source: FNS. 

[End of Figure] 

What GAO Recommends: 

To reduce program vulnerabilities, GAO recommends that FNS take 
additional steps to target and provide early oversight of stores most 
likely to traffic; develop a strategy to increase penalties for 
trafficking, working with the USDA Inspector General as needed; and 
promote state efforts to pursue recipients suspected of trafficking. 
FNS generally agreed with findings, conclusions and recommendations. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-53]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Sigurd Nilsen at (202) 
512-7215 or nilsens@gao.gov. 

[End of Section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

FNS Estimates Suggest That the Rate of Food Stamp Trafficking Has 
Declined and That It Occurs More Frequently in Smaller Stores: 

FNS Has Taken Advantage of New EBT Data to Improve Retailer Monitoring, 
While Other Federal Entities Have Focused on Fewer, High-Impact 
Investigations: 

Despite the Progress That Has Been Made against Trafficking, 
Vulnerabilities Still Exist in the Program: 

Conclusions: 

Recommendations: 

Agency Comments: 

Appendix I: GAO Contact and Staff Acknowledgments: 

Related GAO Products: 

Tables: 

Table 1: Percentage of Authorized Stores and Food Stamp Redemptions by 
Store Category for Fiscal Year 2005: 

Table 2: FNS Estimates Suggest That the Trafficking Rate Has Declined: 

Table 3: Some Store Locations Have Had Multiple Retailers That Engaged 
in Trafficking: 

Figures: 

Figure 1: Food Stamp Participation Has Increased Since Fiscal Year 
2000: 

Figure 2: Legitimate Food Stamp Transaction Compared to Trafficking 
Transaction: 

Figure 3: As Trafficking Disqualifications Based on EBT Data Have 
Increased, Those Based on Undercover Investigations Have Decreased: 

Figure 4: Limited Counter Area and Single Cash Register of a Store 
Disqualified for Trafficking: 

Figure 5: Trafficking Investigations Referred to the US Attorney and 
Accepted for Prosecution for Fiscal Years 2000 to 2005: 

Figure 6: Fiscal Year Totals for Trafficking Convictions Resulting from 
OIG Investigations: 

Figure 7: Food Stamp Redemptions of a Newly Authorized Store 
Disqualified for Trafficking: 

Figure 8: Map of Stores Repeatedly Disqualified for Trafficking in 
Brooklyn and Baltimore: 

Abbreviations: 

EBT: Electronic Benefits Transfer: 

FNS: Food and Nutrition Service: 

OIG: Office of the Inspector General: 

PRWORA: Personal Responsibility and Work Opportunity Reconciliation Act 
of 1996: 

USDA: U.S. Department of Agriculture: 

United States Government Accountability Office: 
Washington, DC 20548: 

October 13, 2006: 

The Honorable Saxby Chambliss: 
Chairman: 
The Honorable Tom Harkin: 
Ranking Democratic Member: 
Committee on Agriculture, Nutrition, and Forestry: 
United States Senate: 

The Honorable Collin C. Peterson: 
Ranking Minority Member: 
Committee on Agriculture: 
House of Representatives: 

The Honorable Gil Gutknecht: 
Chairman: 
The Honorable Joe Baca: 
Ranking Minority Member: 
Subcommittee on Department Operations, Oversight, Dairy, Nutrition and 
Forestry: 
Committee on Agriculture: 
House of Representatives: 

Every year, food stamp recipients exchange hundreds of millions of 
dollars in benefits for cash instead of food with authorized retailers 
across the country, a practice known as trafficking. In a typical 
trafficking situation, a retailer gives a food stamp recipient a 
discounted amount of cash--commonly 50 cents on the dollar--in exchange 
for food stamp benefits and pockets the difference. By trafficking, 
retailers commit fraud and undermine the primary purpose of the 
program, which is to help provide food to low-income individuals and 
families. Recipients who traffic deprive themselves and their families 
of the intended nutritional benefits. 

In recent years, the Food Stamp Program has grown tremendously. From 
2000 to 2005, the program--administered by the Food and Nutrition 
Service (FNS) of the U.S. Department of Agriculture (USDA), in 
partnership with the states--has grown from $15 billion in benefits 
provided to 17 million individuals to $29 billion in benefits to nearly 
26 million individuals. Almost one in every 12 Americans participates 
in the program. During this period of time, FNS and the states 
completed replacing paper food stamp coupons with electronic benefit 
transfer (EBT) cards that work much like a debit card at the grocery 
checkout counter. This EBT transaction provides a wealth of new 
electronic information to FNS officials, who are responsible for 
monitoring food stamp retailers and sanctioning those who traffic. 
Given these major changes in the program and continued concern about 
retailer fraud and abuse, you asked us to provide information on (1) 
what is known about the extent and nature of retailer food stamp 
trafficking, (2) the efforts of federal agencies to combat such 
trafficking, and (3) the program vulnerabilities that continue to 
exist. 

To report on what is known about the extent of trafficking, we used 
four FNS estimates of food stamp trafficking. The four estimates, which 
were the best available data on this subject, covered the calendar 
years 1993, 1996 to 1998, 1999 to 2002, and 2002 to 2005.[Footnote 1] 
The methodology FNS used to develop these estimates has some 
limitations; the estimates do not provide a precise measure of food 
stamp trafficking.[Footnote 2] However, they can be used to provide an 
indication of the magnitude of food stamp trafficking and the change in 
the rate over time.[Footnote 3] 

To understand the nature of trafficking, assess the efforts to combat 
it, and identify continued program vulnerabilities, we conducted 
interviews with the following program stakeholders: officials from FNS 
headquarters and regional offices; other officials responsible for 
investigating food stamp trafficking including the USDA's Office of the 
Inspector General (OIG) and the U.S. Secret Service; food stamp 
advocates and researchers; officials from industry associations and EBT 
contractors; and officials from selected state law enforcement bureaus. 
In addition, we obtained relevant information from the state audit, 
comptroller, and treasurer community. We selected and visited 10 FNS 
field offices (Chicago, Ill; Dallas, Tex; Denver, Colo; Detroit, Mich; 
Los Angeles, Calif; New York, N.Y; Portland, Ore; Sacramento, Calif; 
Tallahassee, Fla and Towson, Md.) located in the seven FNS regions. We 
selected these offices to achieve variation in geographical 
distribution, the ages of the states' EBT systems, and the number of 
stores that were disqualified from participating in the program for 
trafficking. At each office, we conducted semistructured interviews 
with FNS officials and used a case file review tool to review 
nonprobability samples of files for 163 retailers that were 
disqualified for trafficking in fiscal year 2005. We also interviewed 
officials from seven of the states where we made our field office 
visits. 

In addition, to identify efforts to combat trafficking, we analyzed 
FNS's authorized retailer database, the Store Tracking and Redemption 
System, to determine the number of permanent trafficking 
disqualifications by store address, to calculate the time between a 
store's initial authorization and its first disqualification for fiscal 
years 1996 through 2005, and to determine the number of sanction 
actions that had been taken against a retailer leading up to the 
retailer's being permanently disqualified. To ensure the accuracy of 
the FNS data we analyzed, we interviewed agency officials to identify 
and resolve any inconsistencies that could affect our work. In 
addition, we reviewed documentation on how these data were gathered and 
maintained. Based on the collective information from our assessment, we 
determined the data are sufficiently reliable for enhancing our 
understanding of continuing program vulnerabilities and agency efforts 
in combating trafficking. We conducted our work between July 2005 and 
June 2006 in accordance with generally accepted government auditing 
standards. 

Results in Brief: 

FNS estimates that about 1.0 cent per dollar of benefits redeemed in 
2005 were trafficked; this trafficking usually occurred in small 
convenience and grocery stores and often, we found, between store 
owners and food stamp recipients with whom they were familiar. The 
national rate of food stamp trafficking declined from about 3.8 cents 
per dollar of benefits redeemed in 1993 to about 1.0 cent per dollar 
during the years 2002 to 2005. However, even at that lower rate, FNS 
estimates that about $241million in food stamp benefits would have been 
trafficked annually in those years. The rate of trafficking in small 
stores remains higher--an estimated 7.6 cents per dollar--than the rate 
for large stores--an estimated 0.2 cents per dollar. Since the 
nationwide implementation of EBT, the way some food stamp benefits are 
trafficked has changed. Previously, in addition to trafficking 
conducted directly between store owners and recipients, middlemen 
purchased large numbers of food stamp coupons at a discounted rate 
directly from recipients and then exchanged the coupons for cash from a 
retailer. EBT has largely eliminated the middleman. Retailers now must 
have the recipients' EBT card and personal identification number to 
conduct a trafficking transaction and are likely to limit their 
trafficking transactions to people from their neighborhood or with whom 
they are familiar. 

FNS has taken advantage of EBT and other new technology to improve its 
ability to detect trafficking and disqualify retailers who traffic, 
while law enforcement agencies have investigated and referred for 
prosecution a decreasing number of traffickers, instead focusing their 
efforts on fewer high-impact investigations. To pursue traffickers, FNS 
traditionally sent its undercover investigators into stores to attempt 
to traffic benefits. Now, EBT transaction data allow FNS to act on 
cases based solely on suspicious transaction patterns. For these cases, 
FNS applies established criteria to its data to identify individual 
stores with exceptional patterns of EBT transactions for that store's 
particular type of retail operation. Cases using EBT data can be 
prepared in the office relatively quickly and now account for more of 
the 841 retailers that were permanently disqualified for trafficking in 
fiscal year 2005 than undercover investigations. However, undercover 
investigations still play an important role when EBT transaction data 
are insufficient to build a case against a retailer suspected of food 
stamp trafficking. In addition, retailer trafficking investigations by 
other federal entities, such as USDA's Inspector General and the U.S. 
Secret Service, have declined in recent years, resulting in fewer 
referrals for prosecutions of retailers that traffic. For example, the 
number of trafficking investigations opened by the Inspector General 
declined from 179 in 2000 to 77 in 2005, and the number of 
investigations it referred for prosecution to the Department of Justice 
declined as well. Ultimately, the number of federal convictions for 
retailer trafficking has also declined. Federal law enforcement 
officials told us that they are increasingly focused on high-impact 
investigations, such as those focused on large-scale trafficking or 
involving other criminal activity. 

Despite the progress FNS has made in combating retailer trafficking, 
the Food Stamp Program remains vulnerable because retailers can enter 
the program intending to traffic and do so, often without fear of 
severe criminal penalties, as the declining number of investigations 
referred for prosecution suggests. FNS field office officials told us 
their first priority is getting stores into the program to ensure needy 
people have access to food, and therefore they sometimes authorize 
stores that stock limited food supplies but meet the minimum 
requirements in areas with few larger grocery stores. However, once 
authorized, some dishonest retailers do not maintain adequate food 
stock and focus more on trafficking food stamp benefits than on selling 
groceries, according to FNS officials, and 5 years may pass before FNS 
checks the stock again unless there is an indication of a problem with 
the store. In addition, while EBT has aided FNS's monitoring ability, 
some retailers have adapted their behaviors to avoid detection and 
found new ways to exploit the EBT technology. For instance, individuals 
can obtain point-of-sale machines and conduct illegal food stamp 
transactions in unauthorized stores or apartments. Yet, despite 
dwindling staff resources, FNS has not conducted the analyses to 
identify high risk areas and to target their compliance-monitoring 
resources to the areas of highest risk. Furthermore, current FNS food- 
stamp-trafficking penalties may not be sufficient to deter traffickers, 
because the most severe penalty most traffickers face is 
disqualification from the program and FNS must rely upon others for 
prosecution. Finally, if recipients suspected of trafficking are not 
investigated by the states, it may leave a pool of recipients ready and 
willing to traffic their benefits as soon as a disqualified store 
reopens under new management. 

To reduce program vulnerabilities and help FNS better target its 
limited compliance-monitoring resources, we are making recommendations 
to the Secretary of the Department of Agriculture to require FNS to 
develop additional criteria to identify stores most likely to traffic, 
use these criteria to conduct risk assessments, and provide more 
targeted and early oversight of stores determined most likely to engage 
in trafficking. Also, we are recommending that FNS work to develop a 
strategy to increase the penalties for trafficking, working with the 
Inspector General as needed. In addition, we are recommending steps to 
promote state efforts to pursue recipients suspected of trafficking. 
The Department of Agriculture officials generally agreed with our 
findings, conclusions, and recommendations but noted they believe they 
do have a strategy for targeting resources through their use of EBT 
transaction data to identify suspicious transaction patterns. We 
believe that FNS has made good progress in its use of EBT transaction 
data; however, it is now at a point where it can begin to formulate 
more sophisticated analyses. 

Background: 

The federal Food Stamp Program is intended to help low-income 
individuals and families obtain a more nutritious diet by supplementing 
their income with benefits to purchase nutritious food such as meat, 
dairy, fruits, and vegetables, but not items such as soap, tobacco, or 
alcohol. The Food and Nutrition Service (FNS) pays the full cost of 
food stamp benefits and shares the states' administrative costs--with 
FNS usually paying approximately 50 percent--and is responsible for 
promulgating program regulations and ensuring that state officials 
administer the program in compliance with program rules.[Footnote 4] 
The states administer the program by determining whether households 
meet the program's income and asset requirements, calculating monthly 
benefits for qualified households, and issuing benefits to participants 
on an electronic benefits card. 

In fiscal year 2005, the Food Stamp Program issued almost $28.6 billion 
in benefits to about 25.7 million individuals participating in the 
program, and the maximum monthly food stamp benefit for a household of 
four living in the continental United States was $506. As shown in 
figure 1, the increase in the average monthly participation of food 
stamp recipients in 2005 continues a recent upward trend in the number 
of people receiving benefits. 

Figure 1: Food Stamp Participation Has Increased Since Fiscal Year 
2000: 

[See PDF for image] 

Source: FNS. 

[End of figure] 

Retailer Authorization: 

Retailers are the front line for determining which goods can be 
purchased and for ensuring the integrity of the food stamp transaction. 
FNS operates 44 field offices throughout the country, and they have the 
primary responsibility for authorizing retailers to participate in the 
Food Stamp Program. To become an authorized retailer, a store must 
offer on a continuing basis a variety of foods in each of the four 
staple food categories--meats, poultry or fish; breads or cereals; 
vegetables or fruits; and dairy products--or 50 percent of its sales 
must be in a staple group such as meat or bakery items. However, the 
regulations do not specify how many food items retailers should stock. 
The store owner submits an application and includes forms of 
identification such as copies of the owner's Social Security card, 
driver's license, business license, liquor license, and alien resident 
card. The FNS field office program specialist then checks the 
applicant's Social Security number against FNS's database of retailers, 
the Store Tracking and Redemption System, to see if the applicant has 
previously been sanctioned in the Food Stamp Program. The application 
also collects information on the type of business, store hours, number 
of employees, number of cash registers, the types of staple foods 
offered, and the estimated annual amount of gross sales and eligible 
food stamp sales. 

If the application is complete, most field offices will forward a 
request to the private contractor employed by FNS to conduct on-site 
inspections that verify the information in the application and provide 
additional information for the approval process. The contractor visits 
the store and submits a map of the store layout, the inspection form, 
and photographs of the outside and inside of the store and its 
inventory. The contractor reports information on the type of store and 
its location, access to parking, the number of cash registers and EBT 
point-of-sale devices,[Footnote 5] whether shopping carts or baskets 
are available, and the availability of nonfood stock and services 
offered, such as liquor, tobacco, gasoline, check cashing, and lottery 
tickets. As part of the inspection, the contractor also evaluates the 
general store conditions and notes problems--such as empty coolers and 
shelves, dusty cans and expired or outdated foods--that could indicate 
that this may not be a viable grocery operation. Upon receiving 
favorable information from the contractor, the FNS program specialist 
authorizes the store to participate in the Food Stamp Program for 5 
years. Unless a problem arises with the store, it typically would not 
be re-inspected until it applies for reauthorization. 

At the end of fiscal year 2005, more than 160,000 retailers were 
authorized to accept food stamp benefits. During the fiscal year, 
almost 24,000 new stores were authorized, 30,000 were reauthorized and 
almost 17,000 left the program, most for voluntary reasons.[Footnote 6] 
As shown in table 1, supermarkets account for only about 22 percent of 
the authorized stores but redeem the lion's share of food stamp 
benefits. FNS defines a supermarket as a store with $2 million of gross 
sales, three or more cash registers, and coded as a supermarket on its 
food stamp application. 

Table 1: Percentage of Authorized Stores and Food Stamp Redemptions by 
Store Category for Fiscal Year 2005: 

Type of firm: Supermarkets; 
Percentage of total authorized firms: 22.34; 
Percentage of total food stamp dollars redeemed: 86.44. 

Type of firm: Grocery stores; 
Percentage of total authorized firms: 21.59; 
Percentage of total food stamp dollars redeemed: 6.57. 

Type of firm: Convenience stores; 
Percentage of total authorized firms: 19.95; 
Percentage of total food stamp dollars redeemed: 1.86. 

Type of firm: Combination stores[A]; 
Percentage of total authorized firms: 22.17; 
Percentage of total food stamp dollars redeemed: 1.95. 

Type of firm: All other stores[B]; 
Percentage of total authorized firms: 12.31; 
Percentage of total food stamp dollars redeemed: 2.97. 

Type of firm: Meal services[C]; 
Percentage of total authorized firms: 1.64; 
Percentage of total food stamp dollars redeemed: .21. 

Source: FNS data. 

[A] This category includes stores such as grocery/gas, grocery/bar, 
grocery/restaurant, and grocery/merchandise. 

[B] This category includes farmers markets, produce stands, 
wholesalers, co-located retailers, drug stores, specialty food stores, 
health/natural food stores, non-profit food-buying co-ops, military 
commissaries, and delivery routes. 

[C] This category includes drug and alcohol treatment centers, group 
homes, and communal dining facilities or meals on wheels for seniors. 

[End of table] 

Use of EBT and Trafficking: 

Prior to EBT, recipients used highly negotiable food stamp coupons to 
pay for allowable foods. The Personal Responsibility and Work 
Opportunity Reconciliation Act of 1996 (PRWORA), however, required each 
state agency to implement an EBT system to electronically distribute 
food stamp benefits, and the last state completed its implementation in 
fiscal year 2004. Under the EBT system, food stamp recipients receive 
an EBT card imprinted with their name and a personal account number, 
and food stamp benefits are automatically credited to the recipients' 
accounts once a month. As shown on the left in figure 2, in a 
legitimate food stamp transaction, recipients run their EBT card, which 
works much like a debit card, through an electronic point-of-sale 
machine at the grocery checkout counter, and enter their secret 
personal identification number to access their food stamp accounts and 
to authorize the transfer of food stamp benefits from a federal account 
to the retailer's account to pay for the eligible food items. The 
legitimate transaction contrasts with a trafficking transaction 
portrayed on the right, in which recipients swipe their EBT card, but 
instead of buying groceries, they receive a discounted amount of cash 
and the retailer pockets the difference. 

Figure 2: Legitimate Food Stamp Transaction Compared to Trafficking 
Transaction: 

[See PDF for image] 

Source: GAO. 

[End of figure] 

Monitoring, Investigating, and Prosecuting Retailer Fraud: 

In addition to approving retailers to participate in the program, FNS 
has the primary responsibility for monitoring their compliance with 
requirements and administratively disqualifying those who are found to 
have trafficked food stamp benefits. FNS headquarters officials collect 
and monitor EBT transaction data to detect suspicious patterns of 
transactions by retailers. They then send any leads to FNS program 
specialists in the field office who either work the cases themselves or 
refer them to undercover investigators in the Retailer Investigations 
Branch to pursue by attempting to traffic food stamps for cash. 

FNS notifies the USDA's Office of the Inspector General (OIG) before 
the field office specialist or undercover investigator develops a case, 
and the OIG may choose to open an investigation on this case on its own 
for possible criminal prosecution. The OIG may also work with the US 
Secret Service, the Federal Bureau of Investigation, or other agencies 
to investigate retailers for criminal prosecution.[Footnote 7] Secret 
Service officials told us they have a memorandum of understanding with 
the USDA that allows them to initiate food-stamp-trafficking 
investigations on their own, provided they notify the OIG of all the 
investigations in which an authorized retailer is targeted. 

When trafficking is proved, FNS penalizes the store owners, usually by 
permanent program disqualification but in limited circumstances they 
may receive civil money penalties.[Footnote 8] Store owners who sell 
ineligible goods but do not traffic are generally subject to a 1-year 
temporary program disqualification.[Footnote 9] If a field office 
specialist finds that a retailer has trafficked, the specialist sends a 
letter to the retailer detailing the charges and the intended penalty. 
If the Retailer Investigations Branch succeeds in trafficking food 
stamps with a retailer, it first refers the case to the OIG, which then 
decides whether it will investigate the case further for possible 
prosecution by the US Attorney's office or by state and local 
prosecutors or refer the case back to the FNS field office to complete 
the disqualification action. 

The retailer may attempt to rebut the charges, but if the retailer does 
not respond or cannot provide a reasonable explanation for the specific 
charges, then a letter is sent executing the program disqualification. 
The retailer may appeal the decision, first to the Administrative 
Review Branch at FNS headquarters and later to the appropriate federal 
district court. 

Monitoring, Investigating, and Prosecuting Recipient Fraud: 

In addition to administering the day-to-day operation of the Food Stamp 
Program, states also have the primary responsibility for monitoring 
recipients' compliance with the program's requirements and 
investigating any case of alleged intentional program violation. This 
includes cases of ineligible persons attempting to obtain food stamps 
or applicants deliberately providing false information in an attempt to 
receive more benefits than they should as well as cases in which 
recipients traffic their food stamp benefits. States must ensure that 
appropriate cases are acted upon, either through administrative 
disqualification hearings or referral to a court of appropriate 
jurisdiction, in accordance with the procedures outlined in the Food 
Stamp Program regulations. 

FNS Estimates Suggest That the Rate of Food Stamp Trafficking Has 
Declined and That It Occurs More Frequently in Smaller Stores: 

FNS estimates that the rate of food stamp trafficking was 1.0 cent on 
the dollar for calendar years 2002 to 2005. Overall, the estimated rate 
of trafficking at small stores is much higher than the estimated rate 
for supermarkets and large groceries, which redeem most food stamp 
benefits. Furthermore, the implementation of EBT eliminated the role of 
the middleman by requiring personal identification numbers each time 
the EBT card is used. 

FNS Reports That the Rate of Food Stamp Trafficking Declined between 
1995 and 2005: 

FNS's most recent estimate suggests that the food-stamp-trafficking 
rate was 1.0 cent on the dollar for calendar years 2002 to 2005 and 
that this rate and the total estimated benefits trafficked have 
declined in recent years. FNS' first trafficking study in 1995 
estimated that about 3.8 cents of every dollar of food stamp benefits 
issued was trafficked in 1993. As shown in table 2, subsequent FNS 
studies estimated that this trafficking rate continued to decline. 

Table 2: FNS Estimates Suggest That the Trafficking Rate Has Declined: 

Millions of dollars. 

Calendar year period: 1993; 
Estimated trafficking rate percentage: 3.8; 
Food stamp benefits issued annually: 21,100; 
Estimated amount of benefits trafficked annually: 812. 

Calendar year period: 1996-1998; 
Estimated trafficking rate percentage: 3.5; 
Food stamp benefits issued annually: 19,627[A]; 
Estimated amount of benefits trafficked annually: 657. 

Calendar year period: 1999-2002; 
Estimated trafficking rate percentage: 2.5; 
Food stamp benefits issued annually: 16,139[A]; 
Estimated amount of benefits trafficked annually: 393. 

Calendar year period: 2002-2005; 
Estimated trafficking rate percentage: 1.0; 
Food stamp benefits issued annually: 23,213[A]; 
Estimated amount of benefits trafficked annually: 241. 

Source: FNS studies and GAO calculation. 

[A] FNS reported that they annualized redemption data over the period 
of the study but did not provide the annualized figures. We calculated 
the three-and four-year average of benefits redeemed for comparative 
purposes. 

[End of table] 

The trafficking exchange rate that retailers offer for food stamp 
benefits can vary from place to place. While retailers generally offer 
recipients about 50 cents for each dollar of benefits, in New York City 
we were told by an FNS undercover investigator that the exchange rate 
is about 70 cents, and in a few locations, some retailers will exchange 
one dollar of cash for one dollar of benefits as an accommodation to 
the food stamp recipient. 

Most Trafficking Still Occurs in Small Stores: 

FNS studies suggest that small convenience and grocery stores continue 
to be the most common sites for trafficking. Small stores, including 
small grocery, convenience, specialty, and gas/grocery stores have an 
estimated trafficking rate of 7.6 cents per dollar. In contrast, 
supermarkets and large grocery stores have an estimated rate of 0.2 
cents per dollar. However, because supermarkets account for the lion's 
share of food stamp benefit redemptions, even at this lower rate, over 
$49 million of benefits may have been trafficked in supermarkets and 
large grocery stores in fiscal year 2005. Most FNS field officials we 
interviewed told us these findings reflected their experience. They 
characterized a typical trafficking case at their field office 
occurring at a convenience, small grocery, or gas/grocery store located 
in an urban area where the store owner traffics with familiar 
neighborhood food stamp recipients. 

EBT Has Changed How Food Stamps Are Trafficked: 

The nationwide implementation of EBT has changed the way some food 
stamp benefits are trafficked. Previously, in addition to trafficking 
conducted directly between store owners and recipients, middlemen could 
wait around public assistance offices or subsidized housing complexes 
to purchase large numbers of food stamp coupons at a discounted rate 
directly from recipients. The coupons might also change hands among 
multiple middlemen, with each taking a cut, before ultimately being 
exchanged for cash from a willing retailer. Field office officials told 
us that EBT has largely eliminated the middleman because retailers must 
now have the recipients' EBT card and personal identification number to 
conduct a trafficking transaction. As a result, some recipients have 
adapted their trafficking behavior to the new EBT environment. For 
example, one field office official told us that some food stamp 
recipients now stand outside of stores offering to loan their EBT cards 
to shoppers entering the store. In this situation, the shopper would 
purchase groceries using the card and return it and a discounted amount 
of cash to the recipient upon leaving the store. During our field 
office visit to Tallahassee, a GAO analyst was approached in his hotel 
parking lot by a would-be trafficker offering such a transaction. 

FNS Has Taken Advantage of New EBT Data to Improve Retailer Monitoring, 
While Other Federal Entities Have Focused on Fewer, High-Impact 
Investigations: 

FNS has taken advantage of new technology to improve its monitoring and 
sanctioning of food stamp retailers, but other federal agencies' have 
been investigating and prosecuting fewer traffickers. With the 
implementation of EBT, FNS has supplemented its traditional undercover 
investigations by the Retailer Investigations Branch with cases 
developed by analyzing EBT transaction data. These EBT cases now 
account for more than half of the permanent disqualifications by FNS 
(see fig. 3 below).[Footnote 10] Although the number of trafficking 
disqualifications based on undercover investigations has declined, 
these investigations continue to play a key role in combating 
trafficking. However, as FNS's ability to detect trafficking has 
improved, the number of suspected traffickers investigated by other 
federal entities, such as the USDA Inspector General and the U.S. 
Secret Service have declined. These entities have focused more on a 
smaller number of high-impact investigations. As a result, retailers 
who traffic are less likely to face severe penalties or prosecution. 

Figure 3: As Trafficking Disqualifications Based on EBT Data Have 
Increased, Those Based on Undercover Investigations Have Decreased: 

[See PDF for image] 

Source: FNS. 

[End of figure] 

EBT Has Provided FNS with Powerful New Tools to Supplement Traditional 
Retailer Trafficking Investigations: 

The nationwide implementation of EBT has given FNS powerful new tools 
to supplement its traditional undercover investigations of retailers 
suspected of trafficking food stamp benefits. FNS traditionally sent 
its investigators into stores numerous times over a period of months to 
attempt to traffic benefits. However, PRWORA gave FNS the authority to 
charge retailers with trafficking in cases based solely on EBT 
transaction evidence, called "paper cases." A major advantage of paper 
cases is that they can be prepared relatively quickly and without 
multiple store visits. These paper cases accounted for the majority of 
FNS's 841 trafficking disqualifications in fiscal year 2005. 

As part of the monitoring process, FNS collects each month's food stamp 
transaction data from the states' EBT processors and adds the data to 
its EBT transaction database for analysis. Six months' worth of EBT 
transactions--about 500 million--are available on line.[Footnote 11] 
Information on the amount of the transaction is reported. Information 
on the items being purchased is not available through EBT. The system 
scans these data to flag transactions or sets of transactions that fit 
a certain set of criteria defined by established patterns of fraudulent 
activity. The system then generates a monthly "Watch List" of retailers 
with suspicious transaction patterns incongruent with a store's 
particular type of retail operation.[Footnote 12] 

The Watch List is sent out to the responsible FNS field office for 
follow-up. In the field offices, program specialists begin their work 
on paper cases by reviewing the Watch List and leads from other 
sources, such as the state food stamp agency, the state EBT processors, 
and law enforcement agencies. Using experience with the retailers in 
the area, program specialists may determine that suspicious 
transactions for some retailers are explainable. In such cases, the 
specialist may take no further action or schedule a later review of the 
store's transactions. In cases for which they cannot explain the 
suspicious transactions, program specialists determine which retailers 
they will pursue as paper cases. If the program specialist is unable to 
develop a paper case, the case may be referred to the Retailer 
Investigations Branch for an undercover investigation. 

After deciding to open a paper case, FNS obtains clearance from the OIG 
to pursue the case, and then the program specialist uses FNS data and a 
variety of other resources to gather evidence. Program specialists 
generally use 3 months of EBT data to show suspicious patterns. In the 
case files we reviewed, charge letters typically contained hundreds of 
examples of suspicious transactions, although FNS guidance does not 
specify the number of transactions necessary to support a case. 
Specialists also review FNS historical data on retailers to check for 
such things as prior program violations.[Footnote 13] In addition, 
these specialists obtain more current transaction data as well as 
information on recipients suspected of trafficking with the retailer, 
through state Food Stamp Program databases. Many specialists supplement 
these data with online resources, such as mapping software to identify 
suspicious shopping patterns. Program specialists can also consult the 
photos taken at the time of authorization to assess whether conditions 
in the store support the volume of food stamp redemptions claimed. 
Figure 4 shows the limited counter space and the single cash register 
of a store that claimed food stamp redemptions of almost $200,000 per 
month and was later disqualified for trafficking. Such information 
enables the program specialists to corroborate conclusions they have 
drawn based on patterns in the EBT transaction data. 

Figure 4: Limited Counter Area and Single Cash Register of a Store 
Disqualified for Trafficking: 

[See PDF for image] 

Source: FNS. 

[End of figure] 

In addition, most program specialists in the offices we visited told us 
they also visit the store once before charging a retailer with 
trafficking. Some store visits allow the program specialist to check 
for possible explanations for the suspicious transaction patterns, 
while others corroborate the suspicion that the stores are in business 
to traffic. For example, during one store visit, program specialists 
found cans of food on the shelves with thick layers of dust, many items 
that had passed their expiration dates, and jars of spaghetti sauce so 
old that the contents had separated. 

The store owner may attempt to rebut the charges. For example, a store 
owner may claim to have extended credit to recipients so they could 
purchase food until they received their next month's food stamp 
benefits, and the high-dollar transactions were repayment of the 
credit. Although extending credit is also a violation of program rules, 
it carries a lesser penalty--temporary disqualification--than 
trafficking. If the owner is unable to rebut the charges, and the 
program specialist disqualifies the store, the store owner may appeal 
to the Administrative Review Branch. In 2005, about 6 percent of the 
permanent disqualifications were modified or reversed by the branch. 

The length of time between a new store's authorization and its first 
disqualification has decreased over the last 10 years. Stores that 
received a temporary or permanent disqualification in 1996 had been 
open an average of about 8.7 years, but by 2005, that average had 
dropped to 6.3 years. Two factors may have contributed to this 28 
percent decrease in length of time between authorization and 
disqualification: improved FNS monitoring of the program and use of EBT 
transaction data or more store owners who begin to traffic food stamps 
sooner. The officer-in-charge of the Chicago field office believes that 
in her area an increasing number of store owners are trafficking 
immediately after authorization. We analyzed FNS's authorized retailer 
data for stores in the Chicago area and found that the average time 
between authorization and a store's first temporary or permanent 
disqualification dropped by nearly half. In 1996, it took a Chicago 
store about 5 years to receive a term or permanent disqualification, 
and in 2005, it was just 2.6 years. 

Investigations by the Retailer Investigations Branch Account for Fewer 
Trafficking Disqualifications, but Still Play a Key Role in Combating 
Trafficking: 

The number of Retailer Investigations Branch undercover trafficking 
investigations has declined, but these investigations are often used in 
cases where EBT data alone are not enough to prove a retailer is 
trafficking. The investigators initiate cases based on requests from 
FNS field offices, their own review of the Watch List, or leads from 
state or local law enforcement agencies. Like the paper case process, 
FNS consults with the OIG before opening a case. To build a case, the 
investigators make undercover visits to the store to determine whether 
the retailer is selling ineligible goods or trafficking food stamps. If 
a retailer sells the investigator ineligible goods but does not 
traffic, the resulting temporary disqualification from the program for 
selling ineligibles can create a deterrent effect on the disqualified 
store owner, other store owners, and trafficking recipients, because 
such penalties often become known in the community. 

Personal safety can be a concern for investigators. One investigator 
told us that there are some stores, especially in urban areas, where it 
would be dangerous to attempt an undercover investigation. 

Although cases in which the Retailer Investigations Branch finds 
trafficking are routinely referred to the OIG for possible prosecution, 
in most cases the OIG returns the case to the field office for 
administrative disqualification. As with paper cases, the field office 
sends a charge letter, detailing the dates on which the retailer sold 
ineligibles or trafficked food stamp benefits, and the retailer may 
attempt to rebut the charges. Once disqualified, the retailer can 
appeal the penalty to the Administrative Review Branch. If no violation 
is found, the Retailer Investigations Branch refers the case to the 
field office to determine whether to continue investigating. 

OIG and Other Federal Entities Are Conducting Fewer Retailer 
Trafficking Investigations and Fewer Retailers Are Prosecuted: 

In recent years, the USDA OIG has opened a decreasing number of food- 
stamp-trafficking investigations and has focused on high-impact 
investigations. In 2000, the OIG opened 179 trafficking investigations, 
while in 2005 it opened 77. According to OIG, this has occurred both 
because of a lack of resources--the number of OIG investigators has 
dropped by 28 percent since 1997--and because the OIG has focused its 
resources on high-impact investigations such as those with large-scale 
trafficking, those involving other criminal activity, or those 
involving possible terrorist connections since September 11, 2001. In 
addition, OIG officials told us that it can take up to 5 years to 
investigate and prosecute a store owner, and the process of developing 
an investigation for prosecution further strains limited resources. 

Other federal agencies are also conducting fewer retailer food stamp 
trafficking investigations. The US Secret Service used to take on 
investigations when large amounts of food stamp coupons were being 
trafficked. However, its involvement in retailer trafficking 
investigations is rare because the Secret Service finds that large 
trafficking investigations are less common since the implementation of 
EBT. EBT cards typically only have a few hundred dollars of benefits 
each month, so it takes many transactions for a dishonest store owner 
to traffic a large amount of money. However, in large trafficking 
investigations or those where a retailer is believed to be diverting 
profits from trafficking to terrorist causes, the Secret Service or the 
FBI might work with the OIG and other agencies on a sting operation or 
a joint task force. For example, the OIG and FBI worked jointly with 
state and local law enforcement authorities in Florida on an 
investigation involving store owners who were ordered to pay $2.6 
million in restitution to the USDA and went to prison after pleading 
guilty to trafficking over $3 million in food stamp benefits. OIG 
officials told us they were actively conducting task force 
investigations with other federal, state and local law enforcement 
authorities. If an investigation is accepted and developed for 
prosecution by a law enforcement entity, there is still no guarantee 
that the trafficker will be prosecuted. Most US Attorneys' offices will 
not prosecute a retailer unless a great deal of money is involved, 
although the threshold varies from one region to another, according to 
federal law enforcement officials. Thus, prosecuting the store owners 
is a challenge. 

Figure 5 shows a decline in recent years in the number of 
investigations deemed serious enough to be referred by the OIG to the 
US Attorney for prosecution, down from 202 in fiscal year 2001 to 21 in 
2005. These data illustrate the relatively small number of store owners 
who have faced prosecution for trafficking in recent years, 
particularly in light of the 841 owners who were disqualified in fiscal 
year 2005. These data also show that the proportion of investigations 
accepted by the US Attorney for prosecution has been increasing in 
recent years. OIG officials told us they believe they are better 
targeting investigations for referral. 

Figure 5: Trafficking Investigations Referred to the US Attorney and 
Accepted for Prosecution for Fiscal Years 2000 to 2005: 

[See PDF for image] 

Source: USDA OIG. 

[End of figure] 

With fewer retailers prosecuted, the number of convictions has also 
declined. Because of the length of time it takes to prosecute a case, 
there is a lag between the time when a trafficking investigation is 
accepted by the US Attorney for prosecution and the time when a 
retailer is convicted. Thus, it is not possible to compare the figures 
for investigations accepted for prosecution and those resulting in 
convictions in the same year. However, as shown in figure 6, the number 
of convictions resulting from investigations by the OIG has declined 
from 260 in 2000 to 94 in 2005. 

Figure 6: Fiscal Year Totals for Trafficking Convictions Resulting from 
OIG Investigations: 

[See PDF for image] 

Source: USDA OIG. 

Note: Convictions are for retail store owners and employees and not for 
stores; some stores have multiple owners. 

[End of figure] 

Despite the Progress That Has Been Made against Trafficking, 
Vulnerabilities Still Exist in the Program: 

Despite the declining FNS estimates of retailer trafficking, retailers 
can still enter the program intending to traffic and do so, often 
without fear of severe criminal penalties. Minimal food stock 
requirements for authorization and a lack of FNS oversight of 
contractor inspections may allow dishonest retailers into the program, 
and delays in access to transaction data may allow retailers to traffic 
large amounts for several months undetected. In addition, some 
retailers have adapted their trafficking behaviors to avoid detection 
while others have found new ways to exploit the EBT technology. FNS 
does not yet have an overall strategy to target its monitoring 
resources to high risk areas. Moreover, the available FNS penalties for 
trafficking may not be sufficient to deter retailers from trafficking, 
and the states' lack of focus on recipient trafficking can also 
facilitate trafficking. 

Minimal Requirements for Authorization and Lack of Oversight of 
Contractor Inspections May Allow Corrupt Retailers into the Program: 

Minimal food stock requirements may allow corrupt retailers to enter 
the program, yet their stocks will not likely be checked for 5 years 
absent the indication of a problem. FNS field office officials told us 
their first priority is getting stores into the program to ensure needy 
people have access to food. In part because large grocery stores are 
sometimes scarce in urban, low-income areas, officials may allow stores 
with minimal food stock that meet the minimum FNS requirements to 
become authorized food stamp retailers. Officials told us that when a 
retailer only stocks small quantities of eligible food items, such as 
just a few cans of one kind of vegetable, it is often an indication of 
the intent to traffic. However, FNS regulations do not specify the 
amount of food items that would constitute sufficient stock. The 
officer-in-charge of a large urban field office expressed frustration 
with this lack of specificity. Many authorized stores in her area are 
gas-and-grocery combinations or convenience stores and some of these 
stores stock only one item from each required food group. However, she 
said the field office cannot deny these stores authorization based upon 
minimal food stock because, in her experience, the denial would be 
overturned if appealed. Another official at an FNS regional office told 
us about a store that was denied authorization in that region. 
According to this official, the denial was overturned by the 
Administrative Review Branch when the reviewing officer determined that 
a single can of corn sufficed as one of the three different products 
required in the fruit or vegetable food group. In addition, Secret 
Service officials said that some merchants quickly learn that they do 
not need to restock their stores to continue to redeem food stamps 
because stores aren't routinely checked for 5 years unless there is 
some indication of a problem with the store. Staff in one of the 10 FNS 
field offices we visited told us that they have to authorize some 
retailers who seem suspicious, but they perform post-authorization 
visits of these stores to ensure they are legitimate. 

During the authorization process, FNS field offices rely on contractors 
to inspect stores to ensure they meet program requirements, but FNS 
does not independently verify the inspectors' reports. The inspector 
provides the final check that a store exists, it has food in each of 
the required food groups, and the information provided on the 
application for authorization to become a food stamp retailer is 
correct. However, at one field office, a contract inspector was 
submitting false reports, allowing dishonest retailers into the 
program. 

Oversight of retailers' entry into the program and early operations is 
important because newly authorized retailers can quickly ramp up the 
amount of food stamps they traffic, and there is no limit on the value 
of food stamps a retailer can redeem in 1 month. At one field office 
location where retailers are often innovative in their trafficking 
schemes, FNS officials noticed that some retailers quickly escalated 
their trafficking within 2 to 3 months after their initial 
authorization. As shown in figure 7, one disqualified retailer's case 
file we reviewed at that field office showed the store went from $500 
in monthly food stamp redemptions to almost $200,000 within 6 months. 
Redemption activity dropped precipitously after the trafficking charge 
letter was sent to the retailer in late October. In its application for 
food stamp authorization, this retailer estimated he would have 
$180,000 of total annual food sales, yet the retailer was redeeming 
more than that each month in food stamp benefits before being caught in 
a Retailer Investigations Branch investigation. 

Figure 7: Food Stamp Redemptions of a Newly Authorized Store 
Disqualified for Trafficking: 

[See PDF for image] 

Source: GAO analysis of FNS case file. 

[End of figure] 

Delays in Access to Transaction Data Allow Trafficking to Continue for 
Months Undetected: 

Although EBT implementation provides FNS with valuable transaction data 
to identify potential trafficking, an FNS headquarters official said 
monitoring and identification of traffickers will be improved once 
program specialists have faster access to transaction data to detect 
suspicious ramp-up activity. Currently, FNS receives each state's EBT 
transaction data monthly on disk from the states' EBT contractors. 
Using this process, the program specialists would not be aware of a 
retailer's rapid ramp-up activity until they had 2 months' worth of 
transaction data, in the third month after the retailer's 
authorization. Then, following the normal case development process, a 
charge letter would not be sent to the store until the fourth month, 
leading to possible disqualification in the fifth month. According to 
this official, as retailers learned that FNS would eventually discover 
them by analyzing their EBT transactions, they responded by ramping up 
their trafficking activity more quickly to make a quick profit before 
FNS could take action. 

FNS officials told us they believe that the solution to combating rapid 
ramp-up trafficking is for FNS to receive EBT transaction data daily. 
FNS systems could then monitor the data more quickly and produce daily 
reports of rapidly increasing amounts of retailer transactions called 
"spike reports." In order for FNS to receive so much data on a daily 
basis, it is working on building large data pipelines from the states' 
EBT processors and developing its ability to manage that data before 
the end of this year. In the interim, FNS is piloting the use of spike 
reports using monthly data. 

Retailers Are Developing New Trafficking Schemes under EBT: 

As some retailers have become familiar with FNS's monitoring 
techniques, they have adapted their trafficking patterns to avoid 
detection. Unlike those who quickly ramp up their trafficking behavior 
for quick profit before detection through FNS monitoring, other 
retailers have adjusted to EBT monitoring by manipulating trafficking 
transactions to prevent detection by FNS analysis of transaction 
patterns. One field official said that there is a large network of 
trafficking retailers in her field office area that dissects the charge 
letters sent to traffickers to determine what analyses FNS conducts and 
to teach other retailers how to elude detection. Secret Service 
officials confirmed the existence of fraud networks in this area and 
said that one ringleader will recruit, encourage, and reward an entire 
family and the friends of that family for trafficking food stamp 
benefits. 

Some retailers have also found new ways to exploit the EBT technology 
and continue to traffic. In her July 2003 testimony, the USDA Inspector 
General reported that her office had recently identified a fraudulent 
scheme that, while rare, appeared to be growing in the Food Stamp 
Program.[Footnote 14] The OIG noticed that some authorized retailers 
were moving their point-of-sale terminals to an unauthorized location, 
such as an unauthorized store or apartment, for trafficking purposes. 
In its Semiannual Report to Congress for the first half of fiscal year 
2004, the OIG reports that four individuals moved the authorized 
terminals to different locations in Chicago so they could exchange cash 
for food stamp benefits away from the authorized stores and possible 
detection. This allowed them to conduct a large number of transactions 
one after another. These individuals had been sentenced to serve from 
15 to 57 months in prison and ordered to pay $29.1 million in 
restitution for defrauding the Food Stamp Program in this way from the 
fall of 1997 through August 2001. OIG headquarters officials told us 
that moving authorized and unauthorized terminals remains a significant 
area of concern because of the large volume of money that could be 
redeemed quickly. 

FNS Has Not Taken the Next Steps to Target Its Monitoring Resources to 
High Risk Areas: 

FNS has not taken the steps to ensure that it identifies those areas or 
stores that are at highest risk for trafficking so that it can allocate 
its resources accordingly. FNS has made good use of EBT transaction 
data to produce its Watch List to identify suspicious transaction 
patterns and target certain stores. It has also established task forces 
of undercover investigators when it identifies geographic areas needing 
additional coverage. However, it is now at a point where it can begin 
to formulate more sophisticated analyses to identify high risk areas 
and target its resources. For example, certain states have a 
disproportionate share of the disqualified stores compared with the 
number of food stamp recipients in their states, yet it is not clear 
whether these numbers indicate that trafficking is more common in those 
states or whether FNS program specialists and investigators have 
engaged in more intensive pursuit of traffickers in those areas. Our 
analysis of FNS's database of retailers showed that of the 9,808 stores 
permanently disqualified from the Food Stamp Program, about 35 percent 
were in just 4 states: New York, Illinois, Texas, and Florida, and yet 
about 26 percent of food stamp recipients lived in those states. 
However, FNS headquarters officials did not know the number of program 
specialists in the field offices in these states who devote a portion 
of their time to monitoring food stamp transactions and initiating 
paper cases[Footnote 15]. Moreover, FNS officials believe there are 
probably other areas of the country where trafficking is occurring that 
may warrant further attention or additional resources, such as 
California, where fewer than 5 percent of all permanent store 
disqualifications occurred and about 8 percent of food stamp recipients 
live. However, FNS officials have not yet developed a clear strategy or 
criteria to systematically identify those areas and reallocate 
resources in response. 

In addition, some retailers and store locations have a history of 
program violations that lead up to permanent disqualifications, but FNS 
did not have a system in place to ensure these stores were quickly 
targeted for heightened attention. Our analysis showed that, of the 
9,808 stores that had been permanently disqualified from the program, 
about 90 percent were disqualified for their first detected offense. 
However, 9.4 percent of the disqualified retailers had shown early 
indications of problems before being disqualified. About 4.3 percent of 
these retailers had received a civil money penalty, 4.3 percent had 
received a warning letter for program violations, and 0.8 percent had 
received a temporary disqualification.[Footnote 16],[Footnote 17] Most 
of these stores were small and may present a higher risk of future 
trafficking than others, yet FNS does not necessarily target them for 
speedy attention. 

Further, some store locations may be at risk of trafficking because a 
series of different owners had trafficked there. After an owner was 
disqualified, field office officials told us the store would reopen 
under new owners who continued to traffic with the store's clientele. 
One field office official would like to be able to bar these repeat 
store locations, while another suggested a 90-day waiting period before 
a new owner of a disqualified store location could qualify as an 
authorized food stamp retailer. As table 3 shows, our analysis of FNS's 
database of retailers found that about 174, or 1.8 percent, of the 
store addresses had a series of different owners over time who had been 
permanently disqualified for trafficking at that same location, 
totaling 369 separate disqualifications. In one case, a store in the 
District of Columbia had 10 different owners who were each disqualified 
for trafficking, consuming FNS's limited compliance-monitoring 
resources. 

Table 3: Some Store Locations Have Had Multiple Retailers That Engaged 
in Trafficking: 

Number of different owners at same address disqualified: 2; 
Number of disqualified addresses: 162. 

Number of different owners at same address disqualified: 3; 
Number of disqualified addresses: 10. 

Number of different owners at same address disqualified: 5; 
Number of disqualified addresses: 1. 

Number of different owners at same address disqualified: 10; 
Number of disqualified addresses: 1. 

Number of different owners at same address disqualified: Total; 
Number of disqualified addresses: 174. 

Source: GAO analysis of FNS data. 

[End of table] 

Our analysis of the data on these stores with multiple disqualified 
owners indicates that FNS officials found this type of trafficking in a 
handful of cities and states. Almost 60 percent of repeat store 
locations were in six states and 44 percent were in 8 cities, often 
concentrated in small areas. For example, as figure 8 shows, 14 repeat 
store locations were clustered in downtown areas of both Brooklyn and 
Baltimore. However, it is not clear whether these data indicate 
heightened efforts of compliance staff or whether trafficking is more 
common in these areas. Regardless, early monitoring of high-risk 
locations when stores change hands could be an efficient use of 
resources. 

Figure 8: Map of Stores Repeatedly Disqualified for Trafficking in 
Brooklyn and Baltimore: 

[See PDF for image] 

Source: GAO analysis of FNS data. 

[End of figure] 

Efficient use of resources is particularly important because available 
compliance-monitoring resources have decreased in recent years. As the 
importance of paper cases has grown, the compliance-monitoring workload 
has gradually shifted to field office program specialists at a time 
when overall program resources have dwindled. Officials said the number 
of field investigators and field staff nationwide, which includes 
program specialists, has declined over the last 10 years. 

Available FNS Penalties May Not Deter Traffickers: 

FNS penalties alone may not be sufficient to deter traffickers. The 
most severe FNS penalty that most traffickers face is disqualification 
from the program, and FNS must rely on other entities to conduct 
investigations that could lead to prosecution. For example, in the food-
stamp-trafficking ramp-up case previously cited, this retailer redeemed 
almost $650,000 of food stamps over the course of 9 months before being 
disqualified from the program in November 2004. As of August 2006, 
there was no active investigation of this retailer. 

Because of the time it takes to develop an investigation for 
prosecution and the costs associated with doing so, a natural tension 
exists between the goal of disqualifying a retailer as quickly as 
possible to prevent further trafficking and seeking prosecution of the 
retailer to recover losses and deter other traffickers. One FNS field 
office official said it can take months or even years to investigate a 
case for prosecution and in the meantime the store continues to 
traffic. FNS can disqualify a retailer relatively quickly--thereby 
saving federal dollars from misuse--compared with the time OIG needs to 
investigate a case for referral for prosecution. However, if 
prosecution is successful, a retailer's assets and profits from 
trafficking can be seized, providing a potential deterrent to others 
considering trafficking. 

States' Lack of Focus on Recipient Trafficking Can Facilitate Vendor 
Trafficking: 

Paper cases often identify recipients suspected to have trafficked 
their food stamp benefits with a dishonest retailer, and some FNS field 
offices send a list of those recipients to the appropriate state. In 
response, some states actively pursue and disqualify these 
recipients.[Footnote 18] For example, Illinois has used these lists to 
disqualify more than 3,000 of the almost 20,000 suspected recipients 
referred to them since 1999 through FNS retailer investigations. In 
addition to pursuing recipients who are suspected of trafficking, one 
state told us it uses some recipients charged with trafficking to 
gather evidence against retailers. 

However, FNS field offices do not always send lists of suspected 
individual traffickers to states or counties administering the program, 
and not all states investigate the individuals on these lists. 
Officials from four FNS field offices we visited said they don't send 
the list of recipients suspected of trafficking to the states or 
counties administering the program. Other field office officials said 
they send the lists to their states, but they are not acted upon 
because states do not have the resources to conduct investigations into 
recipients who may be trafficking. FNS headquarters officials also 
believe that not many states are acting on the lists they receive 
because it is difficult and potentially costly to prove individual 
cases of recipient trafficking. One field office official said that 
store owners represent only half of the problem and that states could 
do more to address trafficking. If states could reduce recipients' 
trafficking, it would curb retailer trafficking as well. 

Instead of focusing on food stamp recipients who traffic their 
benefits, states are using their resources to focus on recipients who 
improperly collect benefits, according to FNS officials.[Footnote 19] 
The current incentive structure for the states includes performance 
bonuses to reward states for correcting payment errors and reducing 
error rates. In addition, states are penalized financially if their 
error rates reach a specific threshold for 2 years in a row.[Footnote 
20] States that do investigate recipient traffickers can keep 35 
percent of any monies they recover; however, it may be difficult to 
recover the funds, and the amount recovered may be minimal. When a 
state proves a recipient has trafficked, the recipient can no longer 
receive benefits, but other members of the family can. States can try 
to recover some of the benefits trafficked by deducting a set amount 
from the family benefits each month. However, pursuing recipients who 
traffic can be costly and time-consuming.[Footnote 21] Taken together, 
these factors can result in states' choosing to focus on improper 
benefit payments rather than recipient trafficking. This inaction by 
some states allows recipients suspected of trafficking to continue the 
practice, and such inaction also leaves a pool of recipients ready and 
willing to traffic their benefits as soon as a disqualified store 
reopens under new management. In fact, California field office staffs 
have begun to track suspected trafficking recipients from a 
disqualified store to a new store, where they begin exhibiting the same 
patterns. 

Conclusions: 

In the Food Stamp Program, stores are the frontline for ensuring that 
recipients use food stamps to purchase appropriate food items, and 
these stores operate with no day-to-day oversight. Although the vast 
majority of stores do not traffic food stamp benefits, each year 
millions of dollars of program benefits that were awarded to provide 
food to needy individuals and families are trafficked. FNS, using EBT 
data, has made significant progress in taking advantage of new 
opportunities to monitor and disqualify traffickers. However, because 
store owners can begin trafficking as soon as they are authorized to 
participate in the program, pocketing large sums of cash for months 
before FNS can detect potentially suspicious transaction patterns, 
early monitoring and detection are critical to curbing larger losses to 
the program. FNS has at its fingertips a wealth of information that 
could help it develop additional criteria to target certain stores or 
geographic areas for early or more heightened monitoring, including the 
presence of low food stocks, the location of repeat offender stores, 
areas of recipient trafficking, and areas with evidence of organized 
fraudulent activity. FNS's loss of monitoring staff in recent years 
magnifies the need to ensure that compliance-monitoring resources are 
focused on those stores and geographic areas at greatest risk of 
trafficking. A more focused effort to target and disqualify these 
stores could help FNS meet its continuing challenge of ensuring that 
stores are available and operating in areas of high need while still 
maintaining program integrity. 

Yet, as EBT has limited the amount of benefits that can be trafficked 
at one time, there is less chance the retailer or the recipient will be 
prosecuted. There is no easy solution to this lack of deterrence. Law 
enforcement agencies are making decisions to efficiently use their 
resources by targeting larger or more critical cases. And FNS currently 
does not have authority to impose stiffer penalties on retailers other 
than program disqualification or in limited situations, civil money 
penalties in lieu of disqualification. Food stamp trafficking will 
continue to be lucrative for retailers as long as the potential rewards 
outweigh the penalties and there are recipients willing to exchange 
their benefits for cash and resources are not used for investigations 
and penalizing recipients. 

Recommendations: 

We recommend that the Secretary of the Department of Agriculture direct 
FNS to take the following five actions. 

To help ensure that its limited compliance-monitoring resources are 
used efficiently, FNS should: 

* develop additional criteria to help identify stores most likely to 
traffic and their locations; conduct risk assessments, using compliance 
and other data, to systematically identify stores and areas that meet 
these criteria; and allocate resources accordingly, and: 

* provide more targeted and early oversight of stores that meet these 
criteria, such as conducting early monitoring or follow-up inspections. 

To provide further deterrence for trafficking, FNS should: 

* develop a strategy to increase the penalties for trafficking, working 
with the OIG as needed. If these penalties entail additional authority, 
consider developing legislative proposals for program reauthorization 
in 2007. 

To promote state efforts to pursue recipients suspected of trafficking 
and thereby reduce the pool of recipient traffickers, FNS should: 

* ensure that FNS field offices report to states those recipients who 
are suspected of trafficking with disqualified retailers, and: 

* revisit the incentive structure to incorporate additional provisions 
to encourage states to investigate and take action against recipients 
who traffic. 

Agency Comments: 

We provided a draft of this report to the U.S. Department of 
Agriculture and the U.S. Secret Service for review and comment. On 
September 5, 2006, FNS officials provided us with their oral comments. 
The officials generally agreed with our findings, conclusions, and 
recommendations. However, FNS officials raised a concern regarding our 
recommendations on more efficient use of their compliance-monitoring 
resources. They stated they believe they do have a strategy for 
targeting resources through their use of the Watch List, which helps 
them identify suspicious transaction patterns and target certain 
stores, combined with their ability to establish task forces of 
investigators when they identify geographic areas needing additional 
coverage. We believe that FNS has made good progress in its use of EBT 
transaction data; however, it is now at a point where it can begin to 
formulate more sophisticated analyses. For example, these analyses 
could combine EBT transaction data with other available data, such as 
information on stores with minimal inventory and stores with a past 
history of trafficking, to develop criteria to better and more quickly 
identify stores at risk of trafficking. In addition, FNS could also 
take advantage of more sophisticated analysis tools, such as certain 
mapping programs,to better identify those areas where trafficking is 
more prevalent. Finally, to increase the likelihood of success, FNS 
will need to combine the expertise of its field investigators and its 
program specialists and then allocate these resources to monitor those 
stores at the greatest risk of trafficking. FNS and OIG officials also 
provided technical comments, which we incorporated where appropriate. 

The U.S. Secret Service did not provide us with formal comments but 
told us it concurred with the findings in our report and that it agreed 
with our recommendation that additional work needs to be done to 
increase existing penalties for trafficking. 

We are sending copies of this report to the Secretary of Agriculture, 
appropriate congressional committees, and other interested parties. We 
will also make copies available to others upon request. In addition, 
the report will be available at no charge on GAO's Web site at 
[Hyperlink, http://www.gao.gov]. 

If you or your staff have any questions regarding this report, please 
contact me at (202) 512-7215 or nilsens@gao.gov. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. GAO staff who made major contributors to 
this report are listed in appendix I. 

Signed by: 

Sigurd R. Nilsen: 
Director, Education, Workforce, and Income Security Issues: 

[End of section] 

Appendix I: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Sigurd R. Nilsen (202) 512-7215 or nilsens@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Kay Brown, Assistant Director; 
Gloria Hernandezsaunders; Kevin Jackson; Kevin Kumanga, Analyst-in- 
Charge; Crystal Lazcano; Jesus Moreno; Phil Reiff; Ramon Rodriguez; 
Eden Savino; Dan Schwimer; Vanessa Taylor; Rachael Valliere; and Jill 
Yost. 

[End of section] 

Related GAO Products: 

Improper Payments: Federal and State Coordination Needed to Report 
National Improper Payment Estimates on Federal Programs. GAO-06-347. 
Washington, D.C.: April 14, 2006. 

Food Stamp Program: States Have Made Progress Reducing Payment Errors, 
and Further Challenges Remain. GAO-05-245. Washington, D.C.: May 5, 
2005. 

Food Stamp Program: Farm Bill Options Ease Administrative Burden, but 
Opportunities Exist to Streamline Participant Reporting Rules among 
Programs. GAO-04-916. Washington, D.C.: September 16, 2004. 

Food Stamp Program: Steps Have Been Taken to Increase Participation of 
Working Families, but Better Tracking of Efforts Is Needed. GAO-04-346. 
Washington, D.C.: March 5, 2004. 

Financial Management: Coordinated Approach Needed to Address the 
Government's Improper Payments Problems. GAO-02-749. Washington, D.C.: 
August 9, 2002. 

Food Stamp Program: States' Use of Options and Waivers to Improve 
Program Administration and Promote Access. GAO-02-409. Washington, 
D.C.: February 22, 2002. 

Executive Guide: Strategies to Manage Improper Payments: Learning from 
Public and Private Sector Organizations. GAO-02-69G. Washington, D.C.: 
October 2001. 

Food Stamp Program: States Seek to Reduce Payment Errors and Program 
Complexity. GAO-01-272. Washington D.C.: January 19, 2001. 

Food Stamp Program: Better Use of Electronic Data Could Result in 
Disqualifying More Recipients Who Traffick Benefits. GAO/RCED-00-61. 
Washington D.C.: March 7, 2000. 

Food Assistance: Reducing the Trafficking of Food Stamp Benefits. GAO/ 
T-RCED-00-250. Washington D.C.: July 19, 2000. 

Food Stamp Program: Information on Trafficking Food Stamp Benefits. 
GAO/RCED-98-77. Washington D.C.: March 26, 1998. 

FOOTNOTES 

[1] U.S. Department of Agriculture, Office of Analysis and Evaluation, 
The Extent of Trafficking in the Food Stamp Program (August 1995); The 
Extent of Trafficking in the Food Stamp Program: An Update (March 
2000); The Extent of Trafficking in the Food Stamp Program: 1999-2002 
(July 2003); and The Extent of Trafficking in the Food Stamp Program: 
2002-2005 (September 2006). 

[2] For example, FNS did not randomly select a sample of retailers to 
produce its estimates. Instead, it selected those retailers who had 
been investigated for trafficking and used this group to analyze and 
calculate the trafficking rate. FNS believes its trafficking estimates 
likely overstate the amount of dollars diverted by trafficking because 
FNS based its estimates on retailers already suspected of trafficking. 
However, it is possible that trafficking occurs among stores outside of 
the pool of suspected traffickers. To the extent that this occurs, FNS' 
estimates could understate actual trafficking. Also, this approach does 
not ensure that each retailer has a known probability of being selected 
in the sample, which undermines the ability to statistically generalize 
to a larger population. 

[3] FNS used a relatively consistent method for each estimate; however, 
to improve its 1999-2002 estimate, FNS included retailers suspected of 
trafficking and disqualified on the basis of certain EBT transactions. 
To be more reflective of all its trafficking-related activities, for 
its 2002-2005 estimate, FNS used a number of additional data sources. 
These sources include closed cases on FNS's Watch List and retailers 
investigated by the OIG, the U.S. Department of Justice, the states, 
and other entities. While the additional data sources in the most 
recent estimate provide a broader range of trafficking investigations, 
this adjustment could also contribute to a lower estimate as the Watch 
List, for example, contains retailers that demonstrate a lesser level 
of suspicious behavior than retailers used for prior estimates. 

[4]Reimbursements for food stamp administrative costs in 44 states are 
adjusted each year to subtract certain food stamp administrative costs 
that have already been factored into these states' TANF grants. As a 
result, these states receive less than 50 percent of their 
administrative costs. See GAO, Food Stamp Program: States Face Reduced 
Federal Reimbursement for Administrative Costs, RCED/AIMD-99-231 
(Washington D.C.: July 23, 1999): 

[5] Point-of-sale devices or terminals read the recipient 
identification information from the magnetic strip on the back of the 
food stamp EBT card. That information, along with the amount of the 
purchase, would be sent to the state's EBT contractor for approval of 
the transaction. 

[6] Voluntary reasons include changes in store ownership, changes in 
the nature of the store, or store closings. Involuntary reasons include 
the store no longer meets the basic eligibility requirements for 
authorization or the store had no redemption activity. 

[7] The Secret Service was originally given authority to participate in 
food stamp investigations because food stamps were considered the same 
as currency, and the Secret Service is responsible for investigating 
currency violations such as counterfeiting. With the move to EBT, 
Secret Service authority derives from the use of an EBT card as an 
access device to commit fraud. 

[8] If the retailer had taken proper measures and can prove he was not 
involved in the trafficking, rather than permanent disqualification, 
FNS may impose a civil money penalty. Civil money penalties may also be 
imposed against disqualified owners who sell their stores before the 
expiration of the disqualification period, because they have not 
completed their program suspension penalty. 

[9] FNS officials said it is more common for a store to receive a 6- 
month temporary disqualification because they are unable to determine 
whether the ineligible goods were sold by the store owner or a store 
employee. 

[10] According to FNS officials, at least 90 percent of non-Retailer 
Investigations Branch trafficking disqualifications result from paper 
cases. Other disqualifications may result from the OIG and state law 
enforcement investigations. 

[11] FNS has retained archives of all state EBT transaction data from 
the beginning of each state's EBT system, and if program specialists 
request older data, FNS can e-mail it to the field office within hours. 

[12] Although FNS's EBT transaction data system analyzes all 
transaction data, large stores are not included on Watch Lists, because 
FNS's data show that large stores are rarely involved in trafficking. 

[13] Additional historical data can be requested by field office staff 
as necessary. 

[14] U.S. Congress, House Committee on the Budget, Fraud, Waste and 
Abuse in Mandatory Spending Programs (July 9, 2003). 

[15] Program specialists also devote time to other duties, but the 
range and extent of other duties vary from field office to field 
office. 

[16] Civil money penalties may be imposed against a store in lieu of 
disqualification. FNS collected almost $1.7 million in civil money 
penalties in fiscal year 2005. 

[17] Warning letters are sent for lesser violations of program 
regulations such as charging food stamp recipients higher prices than 
other customers or when the evidence is too limited to warrant a 
disqualification. Temporary disqualifications are generally for selling 
ineligible goods such as paper plates, tobacco or alcohol or providing 
credit to food stamp recipients. 

[18] The states are responsible for conducting a hearing for recipients 
caught trafficking. A recipient who is found to have trafficked faces 
disqualification from the Food Stamp Program: 12 months for a first 
offense, 24 months for a second offense, and permanently for a third 
offense. 

[19] In fiscal year 2004, states reported that they completed almost 
746,000 food stamp fraud investigations resulting in over 55,000 
recipient disqualification determinations. They do not, however, report 
the number of cases involving recipients who trafficked versus the 
number who obtained benefits fraudulently. 

[20] States are penalized when there is a 95 percent statistical 
probability that that their error rates exceeds 105 percent of the 
national average for 2 consecutive years. The penalty is equal to 10 
percent of the cost of errors above 6 percent. For more information, 
see GAO, Food Stamp Program: States Have Made Progress Reducing Payment 
Errors, and Further Challenges Remain, GAO-05-245 (Washington, D.C.: 
May 5, 2005). 

[21] In addition, the Omnibus Budget Reconciliation Act of 1993, Pub. 
L. No. 103-66, reduced the administrative reimbursement for all 
investigations and prosecutions from 75 to 50 percent. 

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