United StatesDepartment ofAgriculture

Office ofInspectorGeneral

No. 50

January 2004

Office ofInspector GeneralSemiannual Reportto CongressFY 2003—Second Half

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

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

On the cover: Graphic commemorating the 25th anniversary of the enactment of the Inspector General Act of 1978,courtesy of the President’s Council on Integrity and Efficiency/Executive Council on Integrity and Efficiency.

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Overview of USDA and OIG

To help the reader better understand the context inwhich we audit and investigate the programs andoperations of the Department, this section outlines themissions of USDA’s agencies and the role OIG fulfills.The overriding USDA mission is to enhance the qualityof life for the American people by supporting agriculture.At OIG, we perform a complementary function—we takeas our motto and our purpose, “Ensuring the Integrity ofAmerican Agriculture.”

This Department plays a role of great breadth andmagnitude in American life, both at home and abroad,with hundreds of programs. While we at OIG do notmake policy or run programs, our auditors work toensure that both policy and programs are formulatedand carried out properly, and our investigators, as theprimary law enforcement arm of the Department,investigate significant criminal activities involving USDAprograms, operations, and personnel.

HIGHLIGHTS OF USDA AGENCIES

When President Abraham Lincoln signed the legislationcreating USDA in 1862, he called it the “people’sDepartment.” It touches all of our lives, every day, fromcity to suburb, and small town to farm.

• USDA helps keep America’s farmers and ranchers inbusiness as they face the uncertainties of weatherand markets. The Farm Service Agency (FSA) helpsensure the well-being of U.S. agriculture through theadministration of farm commodity programs; farmoperating, ownership, and emergency loans;conservation and environmental programs;emergency and disaster assistance; domestic andinternational food assistance; and international exportcredit programs. The Foreign Agricultural Service(FAS) opens, expands, and maintains global marketopportunities through international trade,cooperation, and sustainable development activities.The Risk Management Agency (RMA) providesagricultural producers with the opportunity to achievefinancial stability through effective risk managementtools, such as crop insurance.

• The Department works to harness the Nation’sagricultural abundance with a goal of ending hungerand improving nutrition and health in the UnitedStates and in many other places around the world. Itadministers the food stamp and other nutritionassistance programs, and links scientific research to

nutritional needs. The Food and Nutrition Service(FNS) works to reduce hunger by providing childrenand low-income individuals with access to food, ahealthy diet, and nutrition education.

• USDA ensures that the Nation’s commercial supplyof meat, poultry, and egg products is safe,wholesome, and correctly labeled. The Food Safetyand Inspection Service (FSIS) sets standards forfood safety; inspects meat, poultry, and eggproducts; and informs the public about food safetyissues. FSIS works with a number of national andinternational organizations including the Meat andPoultry Advisory Committee Staff and NationalAdvisory Committee on Meat and Poultry Inspection,the National Advisory Committee on MicrobiologicalCriteria for Foods, and the Codex AlimentariusCommission, an international organization created bythe United Nations to promote the health andeconomic interests of consumers.

• USDA facilitates the domestic and internationalmarketing of U.S. agricultural products and ensuresthe health and care of animals and plants. TheAgricultural Marketing Service (AMS) facilitates thestrategic marketing of agricultural products indomestic and international markets, while ensuringfair trading practices and promoting a competitiveand efficient marketplace. USDA agencies are activeparticipants in setting international and nationalstandards through international organizations andFederal-State cooperation. For example, AMSprovides services to promote the quality of U.S.agricultural products, including grading, qualitystandards, and certification.

The Animal and Plant Health Inspection Service(APHIS) protects America’s animal and plantresources by safeguarding them from exotic invasivepests and diseases, monitoring and managing pestsand diseases existing in the United States, resolvingtrade issues related to animal and plant health, andensuring the humane care and treatment of animals.The Grain Inspection, Packers and StockyardsAdministration (GIPSA) facilitates the marketing oflivestock, poultry, meat, cereals, oilseeds, andrelated agricultural products, and promotes fair andcompetitive trading practices. GIPSA also providesFederal grading standards and a national inspectionand weighing system for grain and oilseeds.

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• USDA provides help to farmers and ranchers topromote the health of the land through conservationprograms administered by the Natural ResourcesConservation Service (NRCS) and FSA. NRCSprovides national leadership in a partnership effort tohelp people conserve, maintain, and improveAmerica’s natural resources on the Nation’s 1.6billion acres of private and other non-Federal land.Stewardship of 191 million acres of national forestsand grasslands rests with the Forest Service (FS),the largest USDA agency.

• USDA provides research, analysis, and education toassist individuals and communities, and improveagricultural products. The Agricultural ResearchService (ARS) works to provide the scientificknowledge and technologies needed to ensure theviability of American agriculture. The CooperativeState Research, Education, and Extension Service(CSREES) works with land-grant universities,historically black colleges and universities, Hispanic-serving institutions, Native American institutions, andother universities and public and privateorganizations to advance research and education inthe food, agricultural, and related sciences. TheEconomic Research Service (ERS) is USDA’sprincipal social science research agency. TheNational Agricultural Statistics Service (NASS)serves the basic agricultural and rural data needs ofthe country by providing statistical information andservices to farmers, ranchers, agribusinesses, publicofficials, and others.

• USDA helps rural communities, home toapproximately 60 million Americans, develop, grow,and improve their quality of life by targeting financialand technical resources to areas of greatest need,through activities of greatest potential. The RuralBusiness-Cooperative Service (RBS) providesfinancing and technical assistance to help buildcompetitive businesses and establish and sustainagricultural cooperatives. The Rural Housing Service(RHS) provides financing and technical help forneeded community facilities and housing for very-low- to moderate-income areas. The Rural UtilitiesService (RUS) provides financial and technicalassistance so rural areas can have modern,affordable electricity, telecommunications, publicwater, and waste removal services.

OIG’S ROLE IN USDA

Helping to identify and correct questionable practicesand bring criminals to justice adds value to theDepartment’s programs and operations. OIG conductsand supervises audits and evaluations, as well asinvestigations and law enforcement efforts relating toUSDA’s programs, operations, and employees. OIG’sgoal is to promote economy, efficiency, andeffectiveness. In addition, investigators concentrate onpreventing and detecting crimes, as well as assistingwith the prosecution of criminal and civil cases. Auditorsconduct financial and performance audits of USDA’sprograms and activities.

We perform an array of work that is as diverse as USDAitself. Audit work might include visiting food stampretailers, reviewing crop insurance claims, reviewinginspection controls at meat packing plants, andanalyzing financial statements and reports. We alsoaudit programs to ensure that disaster assistance goesto producers who suffered losses and need help. AsFederal law enforcement officers, OIG special agentsconduct a wide range of criminal investigations. Someinvolve theft, smuggling, bribery, extortion,embezzlement, food tampering, processing and sale ofadulterated food products, threats against the foodsupply, false claims, misuse of loan funds, or otherfraud against the Government. Others involveworkplace violence, including threats, assaults, orhomicide of Departmental employees, while engaged inperformance of official duties; and child pornographyperpetrated by USDA employees using Governmentsystems and equipment. OIG special agents areauthorized to make arrests, execute warrants, and carryfirearms.

Our activities better ensure the Department’s protectionof production agriculture, the public, and USDAemployees, and we save the Government money.Taxpayers expect and deserve to have their moneybenefit those who are entitled. Funds for improperlyimplemented programs can be put to better use. Basedon our audit work this reporting period, managementofficials agreed to recover $17.8 million and put anadditional $19 million to better use. Our investigativeefforts resulted in $24.1 million in recoveries/collections,fines, restitutions, claims established, cost avoidance,and administrative penalties. Our investigationsproduced 244 indictments and 223 convictions. Thisreport covers the period April 1 through September 30,2003.

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MANAGEMENT CHALLENGES

The Reports Consolidation Act of 2000 requires OIG toidentify and report annually the most seriousmanagement challenges the Department and itsagencies face. This year, we have summarized USDA’smost serious management challenges by issue area,rather than by mission. USDA’s major managementchallenges frequently cross organizational lines withinthe Department and should be addressed on acoordinated basis. The management challenges OIGidentified last year fall under one or more of the generalissue areas we have identified this year. While progresshas been made in each challenge facing USDA, morecan be done to strengthen management controls, toensure USDA benefits go to those intended, and toprotect the integrity of USDA’s programs and activities.Also, we have identified three new emerging issues thateither mandate new requirements or have not beeneffectively addressed on a Department-widecoordinated basis. OIG has identified 10 Department-wide and 2 agency-specific challenges that we believeare the most significant management issues facingUSDA.

Department-wide Challenges

1. Homeland Security Considerations Should BeIncorporated Into Program Design andImplementation

2. Increased Oversight and Monitoring of Food SafetyInspection Systems Are Needed To Meet HazardAnalysis and Critical Control Point (HACCP) Goals

3. Risk Must Be Examined and Improper PaymentsMinimized Within USDA – Emerging Issue

4. Financial Management – Improvements Made butAdditional Actions Still Needed

5. Information Technology Security – MuchAccomplished, More Needed

6. Controls Over Germplasm Storage Material andGenetically Engineered Organism Field Testing AreCritical to U.S. Markets – Emerging Issue

7. Civil Rights Complaints Processing Still a Concern atUSDA

8. Research Misconduct Policy Not ConsistentlyImplemented – Emerging Issue

9. USDA Faces Major Challenges in Implementing the2002 Farm Bill and Disaster Assistance Legislation

10. Integrity of the Federal Crop Insurance ProgramsPolicyholders’ Database Must Be Strengthened

Agency-Specific Challenges

11.Strong Internal Control Structure Is Critical to theDelivery of Forest Service Programs

12. Improvements and Safeguards Needed for RuralMulti-Family Housing Program

STRATEGIC GOALS

OIG’s strategic plan reflects the work of all levels of theorganization. It assesses our purpose, our future, andthe needs we must meet to achieve our mission, realizeour vision, and provide a worthy return on the U.S.taxpayers’ investment. As part of our Strategic Plan forFiscal Years (FY) 2004-2008, we have developed fourgoals, which will be achieved by specific strategies andactions:

1. Support USDA Management in the Identification andReduction of Vulnerabilities in Benefits Programs

2. Support USDA in the Enhancement of Safety andSecurity Measures To Protect AgriculturalResources and Related Public Health Concerns

3. Maximize USDA Effectiveness Through Increasingthe Efficiency With Which USDA Manages andEmploys Public Assets and Resources

4. Ensure OIG Readiness To Achieve Its StrategicBusiness Goals

As we refocus our overall business planning efforts, onebyproduct is that we anticipate reformatting oursemiannual reports. For FY 2004, we will produceresults-oriented semiannual documents, whereby ourstrategic plan will provide a framework against which wewill report. Ultimately, our strategic plans, annual plans,budget requests, and semiannual reports will work inconcert to present a unified view of historical trends, ourcurrent situation, ongoing efforts, and future goals. Thiswill achieve continuity among successive semiannualreports, as well as other documents describing ourwork. In addition, our reporting will dovetail with thePresident’s Management Agenda and the Department’sstrategic 5-year plan.

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Contents

Message From the Inspector General .................................................................................................................. iOverview of USDA and OIG ................................................................................................................................... iii

Highlights of USDA Agencies .............................................................................................................................. iiiOIG’s Role in USDA ............................................................................................................................................ ivManagement Challenges ..................................................................................................................................... vStrategic Goals .................................................................................................................................................... v

Contents .................................................................................................................................................................. viiHomeland Security ................................................................................................................................................. 1

Front-Line Vulnerabilities ..................................................................................................................................... 1Investigating Sabotage and Threats .................................................................................................................... 4

Information Technology ........................................................................................................................................ 5Protecting the U.S. Food Supply and Agriculture ............................................................................................... 7

Food Safety ......................................................................................................................................................... 7Safety of Production Agriculture .......................................................................................................................... 11

Public Corruption ................................................................................................................................................... 12Rural Development ................................................................................................................................................ 14

Rural Business-Cooperative Service ................................................................................................................... 14Rural Housing Service ......................................................................................................................................... 16Rural Utilities Service ........................................................................................................................................... 17

Feeding Programs .................................................................................................................................................. 19Food Stamp Program .......................................................................................................................................... 19Special Supplemental Nutrition Program for Women, Infants, and Children ....................................................... 19

Program Irregularities and Abuses ...................................................................................................................... 21Farm Programs .................................................................................................................................................... 21Farm Service Agency .......................................................................................................................................... 21Federal Crop Insurance ....................................................................................................................................... 22Risk Management Agency ................................................................................................................................... 23

Financial Management and Accountability ......................................................................................................... 24Departmental Administration/Office of the Chief Financial Officer ....................................................................... 24

Summaries of Audit and Investigative Activities ................................................................................................ 26Full FY 2003 Results in Key Categories ............................................................................................................... 27Statistical Data ....................................................................................................................................................... 28

Audits Without Management Decision ................................................................................................................. 28Indictments and Convictions ................................................................................................................................ 35Office of Inspector General Hotline ...................................................................................................................... 36Freedom of Information Act and Privacy Act Requests ....................................................................................... 37

Appendix I: Inventory of Audit ReportsWith Questioned Costs and Loans .................................................................................................................. 38

Appendix II: Inventory of Audit ReportsWith Recommendations That Funds Be Put to Better Use ............................................................................ 39

Appendix III: Summary of Audit Reports Released FromApril 1 Through September 30, 2003 ............................................................................................................... 40

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The events of September 11, 2001, and subsequentheightened concern about potential terrorist attacks andthreats have added a new dimension to theDepartment’s missions and priorities. At issue areUSDA’s missions to ensure the safety and abundanceof the Nation’s food supply, from the farm to the table,and to protect the health of American agriculture fromthe introduction of foreign animal and plant pests anddiseases. USDA must now readily identify its assets,perform security risk assessments, and design andimplement appropriate safeguards to prevent or deterdeliberate acts to contaminate the food supply, disruptor destroy American agriculture, or harm U.S. citizens.At the same time, USDA must work in concert with theDepartment of Homeland Security (DHS) to continue tostrengthen the current inspection and safeguardprocesses for the unintentional introduction of pests,diseases, and contaminants on imported products. TheDepartment has been both proactive and responsive tospecific vulnerabilities identified by OIG. However, itmust continue its efforts to shift from a focus on safetygoals to both safety and security in each of its missionareas; to foster effective coordination andcommunication across jurisdictional lines to betterdefine roles and responsibilities; and to increaseDepartmental oversight of, and accountability by, USDAagencies.

The Department, in response to our auditrecommendations, has taken significant steps toincorporate these approaches in restructuring some ofits mission activities. However, more needs to be doneto provide assurance that established policies andprocedures are consistently implemented and thateffective inter- and intra-agency coordination andcommunication continue.

This year, there was a significant transfer ofresponsibilities and personnel from USDA to DHS. Amajor challenge now faced by USDA is timely andeffective coordination and communication, not onlywithin USDA, but also with DHS. Prior audits disclosedmaterial weaknesses within USDA when certainfunctions were solely the responsibility of USDA.Therefore, it is imperative that USDA continue to workwith DHS to help ensure appropriate control systemsand processes.

Currently, we have a number of ongoing reviewsevaluating the spectrum of USDA agencies’ homelandsecurity initiatives and activities in response to theheightened alert resulting from September 11. (1) We

initiated a review of controls and procedures overchemicals and radioactive materials stored and used atUSDA facilities. This review is pointing to the need forDepartment-wide policies and procedures on theaccountability of hazardous chemicals. (2) We reviewedhomeland security issues as they pertained to USDAowned or controlled agricultural commodity inventories,focusing on the actions taken by FSA and theCommodity Credit Corporation to minimize the risk tosuch commodities, and thus to the food and feed supplyof the country. We will issue these reports soon. (3) Weare also reviewing APHIS’ controls over pesticides,drugs, and other hazardous materials used in protectingagriculture from animal predators. In the wrong hands,such chemicals could be harmful to people and animalsalike. Previously, we found that APHIS could notaccount for material amounts of some of thesechemicals.

For the second half of FY 2003, OIG issued threeaudit reports relating to homeland security. For thefull fiscal year, OIG issued seven audit reports.OIG’s investigations for the second half of FY2003 yielded 10 indictments, 10 convictions, and$2.1 million in monetary results. For the full fiscalyear, OIG results totaled 17 indictments, 23convictions, and $2.5 million.

FRONT-LINE VULNERABILITIES

Government-wide Policies Are Needed To EstablishSecurity Standards for Federally Funded Researchat Non-Federal Institutions

As part of our effort to assist the Government instrengthening homeland security, we reviewed non-Federal institutions that receive USDA funding toconduct research into human, animal, and plantdiseases. We evaluated the controls these institutionsexercise over biological agents and toxins, andchemical and radioactive materials.

We visited 104 laboratories at 11 USDA-fundedinstitutions and determined that although some of theinstitutions had implemented security standards on theirown, no Federal Government-wide or institution-widestandards provided security guidance to thelaboratories. Institutions that manifested a concern with

Homeland Security

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security were generally those whose laboratories hadexperienced break-ins or domestic terrorist attacks priorto September 11, 2001. We found deficiencies ininventory controls over biological materials, physicalsecurity at the laboratories, and access to researchareas. For example:

• Only 1 of the 11 institutions we visited had acentralized database to maintain an institution-widesummary-level inventory of the biological materialsunder their administration.

• Forty-three of the 104 laboratories we visited did notmaintain detailed inventory records for their biologicalagents stored in freezers, and only a few conductedperiodic physical inventories.

• Of the 104 laboratories visited, 39 laboratories at all11 institutions used or stored pathogens on theCenters for Disease Control and Prevention (CDC)select list or the APHIS list of high-consequencepathogens, and 20 laboratories at 10 of theinstitutions did not have security that we regarded asbeing commensurate with the risk associated withthese pathogens.

• In an unsecured freezer at one institution, wediscovered a CDC select agent for which no riskassessment had been made. The agent, Yersiniapestis, causes bubonic and pneumonic plague andrequires strict containment. The freezer in which thisagent was stored had not been inventoried since1994, when a box of unidentified pathogens wasnoted as missing.

• A laboratory at a second institution claimed to havestored in its freezer Actinobacillus pleuropneumoniae,a pathogen that causes a severe and often fatalcontagious disease in swine. However, laboratorypersonnel had never inventoried the freezercompletely to identify how many vials or containers ofthe pleuropneumoniae pathogen it actually had andhow much it ought to have had.

• None of the sites we visited did background checkson visitors. Only 2 of the 11 institutions we reviewedperformed limited background checks on thecustodians and maintenance employees in facilitieshousing hazardous materials.

We recommended that the issues raised in our reportbe elevated to the Department of Homeland Securityand to the Executive Office of the President’s HomelandSecurity Council, and that a Federal Government-wideset of security standards be established. Werecommended that these standards call for:

• A centralized database of all biological materialsstored at an institution,

• written procedures concerning background checksfor all individuals having access to CDC- and APHIS-listed agents and toxins as well as a requirement toreport missing pathogens, and

• risk assessments of laboratories and securityupgrades based on the risks assessed.

The Department generally agreed with the findings andrecommendations and specifically agreed that aconsolidated set of security standards should apply tofederally funded research at all non-Federal institutionshandling various types of biohazardous material.Department officials have begun and plan to continuediscussions with the Homeland Security Council for theExecutive Office of the President regardingbiohazardous materials, including those issuesidentified in our report. The Department has alsoprovided guidance to USDA client organizations that isbased on Departmental Manual 9610-1, USDA SecurityPolicies and Procedures for Biosafety Level-3 Facilities.Additionally, the Cooperative State Research,Education, and Extension Service (CSREES) plans tomodify its “Terms and Conditions” for entities receivingUSDA funding by February 1, 2004, to incorporate alllaws, regulations, and guidance regarding biosecuritygoverned by CDC and APHIS.

Improvements Needed in Security Over NRCSAssets

As part of our ongoing homeland security effort, whichincludes identifying and protecting USDA resources, weevaluated the assets maintained by the NaturalResources Conservation Service (NRCS) and themeasures implemented by the agency to protect suchassets. We found that NRCS has not yet developed orapplied effective homeland security policies toadequately safeguard some assets such as aerialphotography, dams, plant cultivars (cultivated varietiesused by researchers to restart plantings in case of a

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disaster), and weapons. For example, although NRCScarries out much of its work through partnering efforts, ithas not developed strategic action plans to protect andminimize damage to its agency-funded assets, includingdams now maintained and owned by local sponsors, inthe event of an attack.

In addition, NRCS has not performed the requiredbackground checks for some headquarters and Stateoffice personnel and allows many types of volunteers,students, and partners who have not had backgroundchecks to access computer systems and data that maycontain sensitive information. We concluded thatagency officials have critically assessed neither thevulnerability of NRCS assets to attack nor theavailability of sensitive information that might assist aterrorist or terrorist groups.

We recommended that NRCS review procedures forrelease of sensitive information included in aerialphotography, coordinate with local sponsors to mitigaterisks associated with NRCS-assisted dams, ensureplant materials are stored at national seed laboratories,and ensure authority is obtained prior to allowingfirearms for personal protection from dangerous wildlifeor identify alternative methods of protection. In addition,we recommended that NRCS develop a plan of actionto track the status of security clearances for eachcurrent employee, including volunteers, stay-in-schoolstaff, and partners. We also recommended that NRCSexpedite required clearances for personnel assigned tothe National Headquarters office. NRCS staff concurredwith the findings and recommendations.

Subsequent Review Found Further Actions NeededTo Strengthen Security Over Aircraft and AircraftFacilities

As part of our ongoing review of departmentalvulnerability to terrorism, we followed up on a prior audit(October 2001 through January 2002) to determine thestatus of the audit’s recommendations and to ensurethat all aircraft acquired or used by the Forest Service(FS) for firefighting purposes were adequatelyaccounted for and secured. We had determined that airtankers are vulnerable to theft and could be attractive toterrorists wishing to disperse biological or chemicalweapons in the air.

During our current audit, we inventoried all 42 existingair tankers under FS contract and concluded that theywere adequately secured at the time of our visits. Themajority of the air tankers at the facilities we visitedwere inoperable because they were undergoing heavymaintenance.

We revisited the seven FS air tanker bases reviewed inour prior audit and found that only two of the bases hadadded new security features since our last visit.However, FS had made progress toward fulfilling therecommendations of our audit. FS had completed itsinitial assessments of the air tanker bases to determinetheir security needs, and the agency was in the processof finalizing its National Aviation Security Policy, whichwill establish minimum security standards based on risklevel.

Although FS has made progress in implementing ouraudit recommendations, our review identified additionalissues that require further action.

• FS had not established adequate controls to accountfor Federal Excess Personal Property (FEPP) aircraftloaned to States for firefighting purposes. We notedthat 52 of the 276 FEPP aircraft currently on loan toStates had tanks capable of dispersing biological orchemical weapons.

• FS does not require States with FEPP aircraft toconduct security assessments at their aircraftfacilities and to develop security plans that meet theFS’ minimum standards.

A DC-6 air tanker undergoing heavy maintenance at a contractor’sfacility. OIG photo.

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• The FS draft National Aviation Security Policy doesnot require FS’ Washington Office to review andapprove security-level determinations and securityplans made by air tanker base managers.

• FS had not formally notified all appropriate Federalagencies to monitor the use and security of airtankers no longer under its jurisdiction and control,including C-130A and PB4Y-2 air tankers that hadbeen effectively grounded by FS due to safetyconcerns.

OIG has made a number of recommendations toaddress the accountability and security of contactor andFEPP aircraft and to increase FS internal controls overits security program. We have also recommended thatFS notify the applicable Federal agencies, in writing,about the PB4Y-2s and C-130As no longer under FSjurisdiction so that the use and security of these aircraftmay be appropriately monitored. FS officials generallyagreed with our findings and recommendations.However, FS disagreed that it should assumeresponsibility to ensure the security of all C-130Asobtained through the Historic Aircraft ExchangeProgram during periods when the aircraft are not underFS control. FS has agreed to consult with USDA’sOffice of the General Counsel (OGC) and the U.S.Department of Justice on this issue.

INVESTIGATING SABOTAGE AND THREATS

Graduate Student Sentenced in Staged LaboratoryBreak-In

In a new development to a case previously reported inthe semiannual report for FY 2002—2nd half, a Federaldistrict judge sentenced a former graduate student atMichigan State University (MSU) to 10 months ofincarceration, followed by 3 years of supervised release.The judge also sentenced him to 120 hours ofcommunity service and ordered him to pay $69,937 inrestitution for his role in falsifying research funded by

CSREES. The restitution represents salary paid to theindividual during the period he worked on CSREES-funded research at MSU developing a vaccine againstActinobacillus pleuropneumoniae (APP), which causespneumonia in swine. During the investigation, theindividual confessed to staging a break-in at the MSUlab in September 2002 in an attempt to conceal APPresearch findings he had fabricated over the previous 5years. The news media reported that samples of ahighly virulent, genetically altered strain of APP hadbeen stolen during the apparent break-in. Investigationby OIG, the FBI, and MSU police found that no theft hadoccurred, and that the APP strain reported to be stolenis no more virulent than naturally occurring APP. Thegraduate student admitted, first in an interview withagents and later in an FBI-administered polygraphexamination, that he had never mutated the trkH genein APP bacteria, as he had claimed, which renderedfraudulent all the lab’s research that had been built onthe supposed mutation. He also stated that he did notremove any APP samples from the lab. CSREEScontinues to freeze funding for the current APP grantuntil an ethics/misconduct investigation by MSU officialscan be completed following the criminal investigation.

Individual Sentenced for Mailing a ThreateningAnthrax Hoax Letter to USDA Employee

In June 2003, a Federal judge sentenced a Florida manto 3 years of probation, 150 hours of community service,mental health treatment, and $824 in restitution formailing a threatening letter allegedly tainted withanthrax to an NRCS District Conservationist in Deland,Florida, in the fall of 2001. The county sent a fullhazardous materials response team to the office whenthe anthrax threat was discovered. The letter containeda white powder, which was tested and found not to becontaminated with anthrax. The defendant admitted thathe wrote the threatening letter, put a commercialheadache powder in the envelope, and mailed it toNRCS because he was upset that NRCS had denied hisrequest for financial assistance to dig a pond.

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USDA depends on information technology (IT) toefficiently and effectively deliver its programs andprovide meaningful and reliable financial reporting. Oneof the more significant dangers USDA faces is acyberattack on its IT infrastructure, whether by terroristsseeking to destroy unique databases or criminalsseeking economic gains. While the Department and itsagencies continue to strive to improve the security overIT resources, significant progress is still needed towardestablishing an effective security program. Specifically,increased management involvement and commitment atthe agency level is needed to effectively implement astrong IT security program. Despite the efforts of OIGand the Office of the Chief Information Officer (OCIO)during the past several years to heighten awareness ofsecurity issues, our reviews in 10 agencies during thisyear continue to show that the Department and itsagencies are not yet in compliance with Office ofManagement and Budget (OMB) Circular A-130(Management of Federal Information Resources),Appendix III. This noncompliance includes preparingsecurity plans for all major applications, conducting riskassessments, establishing disaster recovery plans, andimplementing a system certification/authorizationprocess. We also continue to find that agencies do nothave strong physical and logical access controls over ITresources and have not yet effectively used thevulnerability scanning tools provided by the Departmentto identify and mitigate known security vulnerabilities intheir systems.

In FY 2004, we plan to perform a review of the NationalInformation Technology Center’s (NITC) generalcontrols to assess whether they are in place andoperating effectively. We will also perform a review ofsecurity over USDA IT resources as is mandated by theFederal Information Security Management Act (FISMA).Currently, electronic Government (e-Gov) initiatives arein place in 20 USDA programs. We will be performing areview of these initiatives to evaluate the securitycontrols in place, and to assess whether data integrityand confidentiality may be compromised. We will beperforming a review of application controls on criticalUSDA systems to determine whether an effective levelof security is built in to protect data integrity andconfidentiality. We will also be performing a review toevaluate security controls and the overall managementof IT assets at select agencies. Prior audits haveidentified significant weaknesses in physical and logicalaccess controls, and a lack of adequate systemdocumentation and contingency planning.

Information Technology (IT)

For the second half of FY 2003, OIG issued twoaudit reports relating to IT. For the full fiscal year,OIG issued four audit reports. OIG’s investigationsfor the second half of FY 2003 yielded oneindictment, three convictions, and $1,400 inmonetary results. For the full fiscal year, OIGresults totaled one indictment, four convictions,and $2,911.

The Department Is Improving Its IT Security, butFurther Actions Are Needed

The Department and most of its agencies have takennumerous actions in the past few years to improvesecurity over their IT resources; however, additionalactions are needed. Most critical is managementcommitment and accountability for implementing therequirements of OMB Circular A-130 and other federallymandated security guidelines.

Our recent audit work was comprehensive, as wereviewed the following nine agencies: FAS, FSIS,GIPSA, APHIS, RMA, ERS, NITC, the Office of Budgetand Program Analysis, and the Office of the ChiefEconomist. We found that the Department is not incompliance with the requirements of OMB Circular A-130 in preparing all the required security plans,conducting risk assessments, preparing disasterrecovery plans, providing security awareness training toall employees, and performing system certifications andaccreditations. We also found physical and logicalaccess control weaknesses in every agency wereviewed, hindering agencies’ abilities to adequatelyprotect their critical IT resources. Further, mostagencies we reviewed did not have adequate controls inplace to timely identify and correct potential systemvulnerabilities that could compromise the confidentiality,integrity, and availability of critical IT systems and data.Finally, we found that not all agencies had adequatecontrols in place to properly manage and test changesto their applications, leaving those applicationsvulnerable to unauthorized and potentially maliciouschanges.

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What we found at FSIS and NITC was typical of ourcomprehensive review:

• Our vulnerability scans of selected FSIS systemsdisclosed weaknesses that may be exploited bothinternally and externally from the Internet. FSIS hadnot adequately protected physical access to itsheadquarters computer facility by limiting it to userswho need access to perform their duties, and it hadnot completed all security plans required by OMBCircular A-130. FSIS database administrators wereallowed to make changes to FSIS data withoutfollowing up with appropriate personnel to verify thevalidity of the changes, and FSIS had notimplemented a standard system development lifecycle process for managing its applicationdevelopment and change control process.

• Significant improvements have been made since thelast general controls review at NITC, including theimplementation of password policies in accordancewith National Institute of Standards and Technologyguidance, reduction of users with special accessprivileges, completion of risk assessments, andcompletion of a mainframe security plan. However,NITC needs to complete its disaster recovery andbusiness resumption planning efforts, preparesecurity plans for general support systems, certifyand accredit all critical systems, implement controlsto periodically reconcile user identifications to currentemployee and contractor listings, finalize its changecontrol management process, and finalize secureaccess from the Internet.

Our comprehensive report fulfilled the requirements ofFISMA for FY 2003. We made recommendations inindividual agency reports to correct the weaknesses weidentified; therefore, we made no additionalrecommendations in this report.

Two NRCS Employees Sentenced to Prison on ChildPornography Violations

• The former director of National Production Servicesfor the Natural Resources Conservation Service(NRCS) in Fort Worth, Texas, pled guilty in Federalcourt to possessing child pornography from aboutJune 2000 through May 2001 on his Government-issued computer at a Government facility. On July 8,2003, he was sentenced to 57 months ofimprisonment to be followed by 3 years of supervisedrelease.

• In fall 2001, a former Arkansas NRCS districtconservationist admitted that he had accessed anddownloaded pornography, including childpornography, on his Government computer while onduty, and later pled guilty to possession of childpornography. In April 2003, he was sentenced toserve 27 months of confinement, ordered toparticipate in a sex offender treatment program whileincarcerated, and ordered to pay a $1,000 fine. Hewas also ordered to serve 3 years of supervisedrelease after incarceration and, as part of hisprobation, to participate in mental health counselingand to have no access or subscription to any Internetsources. OIG conducted this investigation jointly withthe FBI.

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Protecting the food supply and agriculture within theDepartment includes those activities designed to ensurethat the food the consumer eats is safe and properlylabeled and graded, and that the Nation’s plant andanimal resources are safeguarded. These activities areperformed by the Food Safety and Inspection Service(FSIS); the Agricultural Marketing Service (AMS); theAnimal and Plant Health Inspection Service (APHIS);and the Grain Inspection, Packers and StockyardsAdministration (GIPSA). The activities includeinspecting all domestic establishments that preparemeat and poultry products for sale or distribution;reviewing foreign inspection systems andestablishments; inspecting and quarantining animalsand plants at U.S. ports-of-entry; controlling agriculturallosses caused by predatory animals; developingstandards for licensing and testing veterinary biologics;establishing grading standards for eggs, tobacco,livestock, dairy products, poultry, fruits, vegetables, andgrain; and performing weighing and inspection servicesto ensure the standards are met.

In 1998, the Department, through FSIS, implemented amajor change to its food safety system and created anew regulatory system for meat and poultry safetywithin the meat and poultry plants it regulates. ThePathogen Reduction and Hazard Analysis and CriticalControl Point (HACCP) rule is the centerpiece of thenew regulatory approach because it mandates HACCP,sets certain food safety performance standards,establishes testing programs to ensure those standardsare met, and assigns new tasks to inspectors to enablethem to ensure regulatory performance standards aremet. In 2000, OIG reported on FSIS’ implementation ofHACCP, concluding that while FSIS had taken positivesteps in its implementation of the science-basedHACCP system, HACCP plans were not alwayscomplete; FSIS needed to place greater emphasis onpathogen testing; and it needed to define its oversightrole in the HACCP system, and hold plants accountablefor noncompliance. During 2002, USDA experiencedsome of the largest recalls in its history. OIG’s reviewsof two of these recalls in the past year indicate thatFSIS still faces significant challenges to ensure thesuccessful implementation of HACCP. Most critical tothis process are FSIS’ assessment of plant HACCPplans and resolution of any deficiencies; establishmentof management controls to accumulate and analyzedata to monitor and assess the adequacy of food safetysystems; establishment of criteria to initiate enforcementactions; baseline studies to define the goals, objectives,

and performance measurements for pathogen testingprograms; and better supervision and oversight of fieldinspection processes. Also, FSIS must reassess itsrecall process, including traceback policies, to identifythe product source, and improve monitoring to ensuretimely notification of the recall and maximum recovery ofthe product. While FSIS has generally been responsiveto these issues and has made some changes to itsinspection policies and procedures, complete correctiveactions and estimated timeframes for addressing theseweaknesses are not yet known.

For FY 2004, we plan to audit controls over APHIS’Emergency Pest Eradication and Control Programs andevaluate agency memoranda of understanding withDHS. Under our ongoing food safety efforts we will auditFSIS’ food safety automated information systems andcontinue to monitor implementation of the HACCPregulation along with evaluating very small meat andpoultry establishments’ compliance with HACCPrequirements. In addition, we will conduct work toreview the egg processing inspection activity.

For the second half of FY 2003, OIG issued oneaudit report relating to protecting the U.S. foodsupply and agriculture. For the full fiscal year, OIGissued three audit reports. OIG’s investigations forthe second half of FY 2003 yielded 12 indictments,10 convictions, and $4.5 million in monetaryresults. For the full fiscal year, OIG results totaled18 indictments, 15 convictions, and $4.5 million.

FOOD SAFETY

ConAgra Recall Exposed Weaknesses in FSISRecall Operations

At the request of the Senate Committee on Agriculture,Nutrition, and Forestry, we performed an audit of theFood Safety and Inspection Service’s (FSIS) oversightof the recall by the ConAgra Beef Company (ConAgra)of 18 million pounds of ground beef and beef productssuspected of being contaminated with Escherichia coli(E. coli) O157:H7. Beginning in mid-June 2002, at least46 people in 16 States became ill from contaminatedmeat. About 1 month earlier, FSIS’ microbiological testsof ground beef at a meat grinder that used productsupplied by ConAgra identified the presence of E. coli

Protecting the U.S. Food Supplyand Agriculture

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O157:H7. ConAgra officials agreed to an initial voluntaryrecall of about 354,000 pounds of ground beef producedin late May of that year. A subsequent FSIS review ofConAgra records showed that beef product from thatplant had been testing positive for E. coli O157:H7 asearly as April 12 and as late as July 11. The recall wasconsequently expanded to include about 18 millionpounds of beef product.

We evaluated the effectiveness of USDA’s managementand oversight of the recall of ConAgra product. We alsodetermined whether FSIS was aware of potentialproblems at ConAgra prior to the recall and whetherFSIS and ConAgra operated in accordance withHACCP requirements. Our audit found that neitherConAgra nor FSIS effectively fulfilled theirresponsibilities under the Hazard Analysis and CriticalControl Point (HACCP) system. ConAgra did not designor reassess its food safety system to ensure it operatedin compliance with sanitation standard operatingprocedures (SSOP) and HACCP requirements. Datawas available to both ConAgra and FSIS in the periodprior to the recall that indicated E. coli O157:H7contamination was becoming a continuous problem atConAgra. FSIS inspectors did not recognize and/orrespond to these indicators but instead followed FSISpolicies that effectively limited the documents theinspectors could review and the enforcement actionsthey were allowed to take.

FSIS needs to be more proactive in its oversight byseeking access to available sources of data andanalyzing, on an ongoing basis, the data’s importanceas indicators of problems that could impact food safety.Also, FSIS needs to reassess its management andoversight of the recall process. The recall wasineffective and inefficient because adequate controlsand processes were not in place to timely identify thesource (establishment) of the contaminated product orprovide reasonable assurance that recovery of therecalled product was maximized or enforcement actionstaken, as necessary. As of the end of January 2003,only about 3 million pounds of the 18 million pounds ofrecalled product had been recovered. The majority ofthe beef was not returned or accounted for.

• Pre-Recall Indicators Showed Problems. The HazardAnalysis and Critical Control Point (HACCP) programgenerally requires FSIS to test for E. coli O157:H7 atplants producing ground beef. We found that FSISinspectors at ConAgra did not perform their own tests

and did not review other test results that wereavailable to them. Under FSIS policy, plants likeConAgra that performed their own pathogen tests asa part of HACCP were exempt from FSIS testing, andthose tests ConAgra performed apart from HACCPwere not directly presented to FSIS for review. Noneof the tests taken by ConAgra for HACCP purposesin 2001 and 2002 showed the presence of E. coliO157:H7, while at least 63 of the tests taken for non-HACCP purposes in 2002 did. FSIS inspectors didnot pursue the non-HACCP test results because theydetermined FSIS had no clear authority to reviewnon-Government tests even though they knew thosetests showed the presence of the E. coli pathogen.On April 18, 2003, FSIS issued a notice thatinstructed inspection personnel to collect raw groundbeef samples whenever they received a request, andthe notice no longer permitted plants exemptionsfrom sampling for E. coli based on plants conductingtheir own tests.

• Reanalysis of Hazards Was Lacking. In designing itsHACCP system, ConAgra management assumedthat E. coli O157:H7 contamination was not likely.Consequently, the ConAgra HACCP system wasunprepared to respond to the actual hazards thatcould and did present themselves. FSIS regulationsrequire that a plant reassess its HACCP systemwhen food safety hazards are found in the finishedproduct.

ConAgra did not perform a reassessment of itsHACCP system, even though its tests were showingan increasing presence of E. coli O157:H7contamination. FSIS plant inspectors were aware ofsome of ConAgra’s tests, but they believed thatbecause the tests were not part of the HACCPprogram, they could not use the test results to forceConAgra to reassess its HACCP system.

• Enforcement Actions Were Indecisive. Before therecall, FSIS issued multiple noncompliancenotifications to ConAgra for fecal contamination ofproduct (the source of E. coli), but it took no decisiveenforcement action. Instead, it continually allowedConAgra to introduce superficial stopgap measures,such as increasing supervision or retraining anemployee. The actions taken by ConAgra did notprovide assurance that the physical and biologicalhazards to the production process had beenidentified and controlled. The inspectors continued to

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issue citations because FSIS has not establishedcriteria for determining when repeat violationswarrant taking additional enforcement action orrequire a plant to reassess its HACCP plan.

• Both FSIS and Beef Processors Were Unpreparedfor a Recall. Although FSIS encourages allestablishments to prepare recall plans, HACCP plansfor two of the grinders using ConAgra beef did notaddress recall procedures. One of these grinderswas unable to readily determine from its recordswhich of its customers received the recalled product.

FSIS policies added to the inefficiency of the recall byimpeding the inspectors’ ability to trace acontaminant from the grinder’s establishment back tothe supplier. Concurrences needed before tracebacksamples could be tested contributed to a 7-day delayin the recall and added to the quantity of beef productrecalled.

• FSIS had imposed no specific requirement thatplants keep production or distribution records.Poor records at the establishments that usedConAgra beef increased the difficulty FSIS had intracking the further distribution of the ground meat.

• Reviews designed by FSIS to determine theeffectiveness of the recall (whether distributorswere notified and distribution was stopped) werenot used to exercise control over the recallprocess because they were performed too lateand problems found received limited managementattention.

• Even though 67 of the 490 effectiveness checkswe reviewed indicated that distributors and othersin the distribution chain had not been notified ofthe recall, FSIS district managers determined therecall was a success because, to their knowledge,no one consuming the unrecovered productbecame ill.

During the recall, ConAgra altered its HACCPprocess by introducing lactic acid into the productionof ground beef to control the E. coli O157:H7contaminant. FSIS approved the use of the acid butdid not adequately document how it determined thatlactic acid was an appropriate antimicrobialintervention in ground beef. We found scientificevidence in two ARS studies that the use of lactic

acid in ground beef may raise the cookingtemperature necessary to destroy the E. coliO157:H7 contaminant.

• Monitoring Needs To Be Proactive. The recall ofConAgra beef products might have progressed moreeffectively if FSIS had provided closer monitoring ofConAgra and the establishments that processed itsbeef. Primarily, FSIS needed to ensure theestablishments’ HACCP plans were technicallysufficient to ensure compliance with HACCP andStandard Sanitation Operating Procedurerequirements. HACCP plans at all three of the plantswe reviewed for this audit did not adequately addressall food safety hazards.

FSIS officials stated that the FSIS in-plant personnelperforming most of the reviews of HACCP plans werenot sufficiently trained and, therefore, not technicallycompetent to make accurate assessments of theplans. In 2000, FSIS started a program to hire andtrain a staff of technically competent personnel, andby the end of 2002, it had about 105 individualsavailable to review the more than 5,000 HACCPplans at federally inspected plants. However, evenwith the program in place, FSIS does not want orplan to have approval authority over establishmentHACCP plans.

FSIS oversight needed strengthening in other keyareas:

• FSIS guidance to reinspect carcasses when fecalcontamination is observed is not clearly announcedin FSIS’ written policy, but rather is expressedobscurely in the model generic Beef SlaughterHACCP plan. We noted at least 1 case where175 beef carcasses at ConAgra may have beencontaminated with fecal matter and were notreinspected.

• FSIS’ current random nationwide sampling of plantsfor the presence of E. coli O157:H7 does not verifythe effectiveness of HACCP systems and does notmeasure the extent of a hazard. We concluded thatthe sampling should be based on the risk posed byindividual plants.

• FSIS has no written procedures that require FSISpersonnel to take control of or monitor beef that has

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tested positive for E. coli O157:H7. FSIS allowedConAgra to resell contaminated beef without verifyingthat the buyers would not reuse it as raw groundproduct.

We concluded that two conditions were material internalcontrol weaknesses: (1) FSIS lacked a process toaccumulate, review, and analyze all data available toassess the adequacy of food safety systems; and(2) accurate assessments of HACCP plans had notbeen made because FSIS lacked sufficient, competentstaff to make those assessments.

We recommended that FSIS 1) provide clear authorityto ensure that it has access to all plant pathogen andmicrobial testing results; 2) make recall activities moreeffective by ensuring that ground beef is readilytraceable from manufacturing to point-of-sale; 3) issueregulations to provide clear directions on tracebacksamples; 4) establish a management control process toaccumulate, review, and analyze all data available tothe agency; 5) increase supervision and oversight ofConAgra until the plant demonstrates it is capable ofsanitary and wholesome production; 6) ensure thatinspectors acceptably apply HACCP requirements; 7)define the goals, objectives, and methods of its E. coliO157:H7 testing program and ensure that the programis risk-based and includes performance measures; and8) instruct FSIS inspection personnel to take control ofE. coli O157:H7 adulterated product and verify thatproduct is properly processed or destroyed.

During the recall and audit, FSIS took a number ofactions to strengthen its inspection procedures. InOctober 2002, FSIS informed establishments producingraw beef products of the need to reassess their HACCPplans, based on the assumption that E. coli O157:H7 isa hazard reasonably likely to occur at all stages of theprocess. FSIS has also begun comprehensive foodsafety assessments to evaluate the adequacy ofHACCP plans and food safety systems. Theseassessments are critical to the success of HACCP.

In response to the audit, FSIS stated that the agencyhad already recognized many of the issues reportedand is committed to making cost-effective improvementsin its inspection programs. FSIS will continue tostrengthen its programs with updated policy andguidance, base policy decisions on science, providesupplemental training for field personnel, increaseaccountability, and provide better supervision and

oversight to ensure a safe and wholesome food supply.These actions are consistent with the Department’svision statement, issued in July 2003, that set out itscore goals to improve the safety of U.S. meat, poultry,and egg products and to better protect public health.These goals are (1) improve the management andeffectiveness of regulatory programs; (2) ensure thatpolicy decisions are based on science; (3) improvecoordination of food safety activities with other publichealth agencies; (4) enhance public education efforts;and (5) protect meat, poultry, and egg products againstintentional contamination.

Supermarket Employee Poisons Meat

On September 19, 2003, a former meat cutter inMichigan was sentenced in Federal court to 9 years inprison, followed by 3 years of supervised release, andordered to pay $12,161 in restitution. As previouslyreported, a Federal grand jury indicted the meat cutterin February 2003, charging him with poisoning meatwith an insecticide and poisoning meat to seriouslyinjure a business. The charges stem from aninvestigation conducted by OIG, the FBI, and localhealth authorities after approximately 130 consumersreturned product or complained of sickness after eatingground beef purchased from a supermarket in Michiganin early January 2003. Ninety-two people who ate thecontaminated hamburger reported acute symptomsincluding burning in the mouth and lips,lightheadedness, dizziness, nausea, and vomiting.Preliminary lab results indicated the contaminant to benicotine, and meat tampering was suspected. Furtherinvestigation disclosed that the meat cuttercontaminated approximately 250 pounds of ground beefwith Black Leaf 40, a pesticide containing nicotine,because of ongoing disagreements with co-workers inthe meat department at the store. He said he had hopedthat his action would result in his co-workers beingdisciplined or fired.

Meat Firm and Officers Plead Guilty to Selling Rat-Infested Meat

A Los Angeles corporation, its president, and itswarehouse manager were placed on probation andwere fined more than $105,000 after they pled guilty toselling and offering to sell adulterated meat foodproducts for human consumption. Our joint investigationwith FSIS Compliance disclosed that the company,which was engaged in the business of purchasing,

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storing, and selling meat and poultry products incommerce to retail customers, had sold adulteratedmeat and poultry product that had been gnawed by andotherwise contaminated by rodents.

SAFETY OF PRODUCTION AGRICULTURE

Prompted by an outbreak of Exotic Newcastle Disease(END) in the Southwestern United States, OIG beganan initiative to investigate criminal activity that couldcontribute to further outbreaks and spread of END, oneof the most infectious poultry diseases. OIG’s initiativeemployed a two-prong approach to target (1) actualcockfighting activities and (2) the smuggling of fightingcocks into the United States. Smuggling in turn canresult in the introduction of dangerous diseases into theUnited States, because the animals being smuggled arenot inspected or quarantined to guarantee their health.Details of several of our recent cockfighting casesfollow.

More than 4,700 Fighting Cocks Seized in NorthernCalifornia; 24 Subjects Arrested

An OIG special agent, working undercover, developedthe probable cause for the issuance of 3 searchwarrants that resulted in law enforcement agentsseizing more than 4,700 fighting cocks in 3 raids innorthern California in 2003. Also as a result of thesesearch warrants, California state criminal charges werefiled against 24 individuals for “owning, keeping, ortraining animal(s) for fighting.” Seven of the chargedindividuals have been sentenced, 2 are fugitives, andthe remaining 15 subjects are awaiting trials. Alsoseized during the searches were several firearms and alarge quantity of cockfighting paraphernalia. Most of thefighting birds have since been destroyed. This joint lawenforcement operation also involved Napa County,California, sheriff’s deputies, as well as sheriff’sdeputies and animal control officers from several otherCalifornia counties. The Humane Society of the UnitedStates helped coordinate the operation. This operationwas particularly significant because fighting cockscontributed greatly to the spread of END in southernCalifornia and other Southwestern States in late 2002and early 2003.

Two Illegal Cockfighting Rings in Bronx, New York,Raided

In January 2003, OIG special agents, law enforcementofficers of the New York City Police Department, andagents of the American Society for the Prevention ofCruelty to Animals jointly raided a cockfighting operationin progress in the Bronx, New York. Approximately 137people were either arrested or summoned, and 38fighting cocks were seized. We conducted another raidoperation in April 2003 in which 84 people were eitherarrested or summoned and 144 fighting cocks wereseized.

New Mexico Man Caught Smuggling Five FightingCocks Into United States From Mexico

On January 14, 2003, a New Mexico man tried tosmuggle five live fighting roosters from Mexico into theUnited States near the Columbus, New Mexico, port-of-entry. An accomplice handed the roosters over from theMexican side of the fence to him. He placed the crate ofroosters in his truck and was driving toward his homewhen he was stopped by Border Patrol agents andinterviewed. He confessed that he had smuggled theroosters into the United States because he knew it wasillegal to bring in live birds. He also stated that he wasbringing the roosters into New Mexico for fightingpurposes. The man later pled guilty to failure to obtainan import permit and was ordered to pay a $475 fine.

Dozens of dead fighting cocks. OIG photo.

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A continuing priority for OIG is the investigation ofalleged criminal acts by USDA employees involvingUSDA programs and operations. The percentage ofwrongdoers is small, but to maintain the public trust,those who commit crimes must be brought to justice.Descriptions of some recent investigations follow.

During the past 6 months, public corruptioninvestigations resulted in 10 convictions of currentor former USDA employees and 31 personnelactions. OIG’s investigations for the second half ofFY 2003 also yielded 14 indictments and $209,980in monetary results. For the full fiscal year, OIGresults totaled 26 indictments, 21 convictions, and$3.2 million.

Former RD State Director Sentenced to Prison Termfor Bribery

In June 2003, the former State Director of RuralDevelopment (RD) in Virginia was sentenced to serve27 months in Federal prison and ordered to pay a fine of$49,000 after he pled guilty to bribery. OIG’sinvestigation revealed that, almost immediately aftertaking office, he began accepting cash payments andother financial assistance from real estate developerswho had encouraged him to apply to become StateDirector. During his tenure as State Director, heaccepted more than $60,000 from various real estatedevelopers doing business with USDA and gave themfavorable treatment in return. He was indicted inDecember 2002 on one bribery count for accepting$32,000 from the president of a Texas developmentcompany in August 1999. In return, the former StateDirector allowed the company to continue to manageUSDA-financed housing projects, even though a 1995OIG audit had shown that the company had skimmedfunds from numerous projects. The developer skimmedan additional several hundred thousand dollars from hisVirginia housing projects after the audit. (The developerdied before the investigation uncovered his involvementin the bribery scheme.) This case was worked jointlywith the FBI.

Visa Fraud Ring Involving USDA EmployeeUncovered

A former Senior Agricultural Economist for the USDAEconomic Research Service has pled guilty to chargesof conspiracy to commit visa fraud and has agreed, aspart of the plea agreement, to remit to the Governmentapproximately $82,000 that he obtained as a result ofhis role in the scheme. This economist, working withothers, arranged for Chinese nationals to fraudulentlyobtain visas to illegally enter and remain in the UnitedStates. Although they were not agricultural specialists,the Chinese nationals received letters of invitation onUSDA letterhead to enter the United States as part of aGovernment delegation of agricultural specialists. Eachimmigrant paid $10,000 for costs associated withobtaining the visas. As a result of the scheme, from late1999 through April 2002, 99 Chinese immigrantsimproperly entered and remained in the United States.The U.S. Embassy in Beijing, China, deniedapproximately 150 other applicants’ visas when thescheme was discovered. Two co-conspirators have alsobeen criminally charged and have entered guilty pleas.This was a joint investigation with the State Department.

Three USDA Employees Sentenced inEmbezzlement Schemes

• In Minnesota, a former Animal and Plant HealthInspection Service (APHIS) accounting clerk pledguilty in Federal court to embezzling $48,599 inAPHIS program payments and was sentenced toserve 16 months in prison, followed by 3 years ofprobation. The subject used identification cards thathe obtained from homeless people to create fakeveterinarians in the APHIS computer system andthen authorized the issuance of payments to the fakeveterinarians for nonexistent services. He retrievedthe fraudulent APHIS program checks from a postoffice box that he opened as part of the scheme. Inaddition to the prison sentence, he was ordered topay a $100 special assessment fee and restitution of$48,599.

Public Corruption

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• In June 2003, a former Forest Servicetelecommunications specialist in Arkansas wassentenced to 6 months of home detention and 5years of probation, and ordered to pay $12,500 inrestitution and a $20,000 fine. He had pled guilty tocharges of theft of Government money and makingfalse statements in conjunction with the unauthorizeduse of his Government-issued credit card. From late1998 to about April 2001, the employee wasresponsible for purchasing radio equipment for theFS. However, he purchased approximately $70,000in items not related to his job, including a digitalcamera and computers.

• Also in June 2003, a Farm Service Agency (FSA)Acting County Executive Director in Maine pled guiltyto converting to her own use $22,150 in FSA funds.She was subsequently fired, and in August 2003 wassentenced to home confinement, 5 years ofprobation, and restitution of $22,150.

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One of our agency-specific management challengesaddresses the fact that improvements and safeguardsare needed for the Multi-Family Housing (MFH)program, which comes under the purview of the RuralHousing Service in the Rural Development missionarea. A substantial portion of RHS’ current Rural RentalHousing (RRH) loan portfolio involves properties over20 years old. RHS faces a major challenge to maintainits portfolio in good repair so that it will continue toprovide safe, decent, and affordable housing for low- tomoderate-income rural residents. RHS needs toaddress several challenges in its management of theMFH program. RHS needs to inspect and repair itsaging portfolio; accurately report to Congress the unitsbuilt in its guaranteed MFH program; plan for futureincreases in rental assistance costs; implement wage-matching to identify excessive rental assistance costs;fairly use equity incentives to keep RRH projects in theprogram; and continue to implement regulatory andother internal controls to address deficiencies that havebeen identified in the program.

For FY 2004, we will continue to review the RHS MFHprogram. We plan to audit RHS’ managementoperations of the MFH program to determine if RHSimplemented corrective actions to identify unauthorized,ineligible, or fictitious project expenses, particularlythose that involve identity-of-interest companies. Wealso plan to audit RRH construction and rehabilitationcosts to ensure that the costs were actually incurredand were for authorized purposes. Both audits willfollow up on previous nationwide reviews of the MFHprogram.

More work is scheduled for the MFH program involvingexpansion of the RRH tenant certification audit inFlorida to a nationwide review of the accuracy andeligibility of RRH tenant subsidies. In our reviews of theMFH program, we will utilize our increasing expertisewith RHS’ database systems to identify potentialproblems and trends that may indicate fraud, waste, orabuse.

In late 2003, we also initiated a review of RHS’ servicingof its Single Family Housing Program and accuracy ofborrowers accounts, which is conducted at theCentralized Servicing Center (CSC) in St. Louis,Missouri. The ongoing work will include an assessmentof CSC’s servicing actions and how the automatedsystems support these functions. We also plan to

Rural Development (RD)

determine whether there is any pattern or substance tothe numerous hotline complaints that OIG-Investigationshas received concerning allegations of inaccuracies andimproprieties involving CSC servicing actions.

Finally, we will again audit RD’s FY 2004 financialstatements and continue to monitor the contracted auditwork for the Rural Telephone Bank financial statements.

For the second half of FY 2003, OIG issued 11audit reports relating to Rural Development. Forthe full fiscal year, OIG issued 20 audit reports.OIG’s investigations for the second half of FY2003 yielded four indictments, six convictions, and$523,977 in monetary results. For the full fiscalyear, OIG results totaled 17 indictments, 16convictions, and $21.6 million.

RURAL BUSINESS-COOPERATIVESERVICE (RBS)

RBS Needs To Take Action To Reduce Losses in theB&I Loan Program

After OIG’s comprehensive review, we issued an auditreport that summarized the results of 21 auditsperformed in 16 States to disclose recurring issues thatneed to be addressed by the RBS’ national office in theBusiness and Industry (B&I) loan program. Weexamined 38 guaranteed loans totaling over $125million and 18 direct loans totaling over $14 million. Wequestioned $58 million in guaranteed loans and $5.8million in direct B&I loans.

We identified instances where RD had guaranteedquestionable loans, failed to identify lender negligencein servicing existing loans, and honored guarantees insituations where lenders had not fulfilled loanobligations. We attributed these conditions toinappropriate appraisal methods used to determine thevalue of loan collateral, and to inadequate lenderassessments of borrowers’ financial conditions whenloans were guaranteed and on an annual basisthereafter. Rural Development also lacked effectiveprocedures to enforce compliance when lenders failedto meet agency requirements. In addition, RD officialshad not always verified that lenders complied withagency requirements prior to honoring loan guarantees.

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As a result, agency officials were unaware of lendernegligence until our review.

Rural Development and OIG have identified conditionsin the past that are similar to those disclosed during ourcurrent review. Since 1980, OIG has issued 46 suchaudit reports with monetary findings of over $224million. With more than $4.7 billion in loan guarantees,RD needs to ensure that lenders are making soundloans and properly monitoring borrower financialconditions to reduce the risk of significant losses to theGovernment. However, the results of our review maynot accurately indicate the extent of problems in the B&IGuaranteed Loan Program because 55 percent of theloans we reviewed were delinquent.

Rural Development’s annual performance reports alsoinaccurately depicted the number of jobs created andsaved by the B&I Guaranteed Loan Program. Theagency reported program results based on borrowerprojections, rather than the actual number of jobscreated and saved by the program. In addition, theagency’s data collection and input controls did notensure the accuracy of reported results.

We found that RD lacked effective measures to enforceborrower compliance with agency requirements, suchas borrowers providing current financial statements andinsurance coverage. We also found weaknesses incollateral appraisals, procedures to verify the existenceof collateral, and procedures to file required legaldocuments. However, since the B&I Direct LoanProgram is no longer being funded, we did notrecommend any corrective action for direct loanmaking.

We recommended that RD establish guidelines to(1) better identify the most appropriate appraisalmethods used to value collateral, (2) verify that lendersuse the most appropriate appraisal method, (3) requirethat lenders use audited financial statements to performfinancial analyses of borrowers, (4) enforce lendercompliance with critical agency oversight controls, (5)require annual lender visits for all new and delinquentborrowers, and biennial lender visits for currentborrowers, and (6) define deficiencies that classify loansin significant nonmonetary default and requireacceleration of all loans in that classification. We alsorecommended that the agency require that the lossclaims be evaluated by State loan committees. Further,we recommended specific procedures that wouldimprove the accuracy of RD’s annual performancereport.

RBS disagreed with the report recommendations, withthe exception of using State loan committees to reviewliquidated loss loans, and the need for implementationof improvements to the accuracy of annual performancereports. We are in the process of responding to theirconcerns.

Lender Misrepresents Use of Loan Proceeds andProvides Negligent Servicing of B&I Loan

At the request of the RBS national office, we conducteda review of a guaranteed B&I loan made to a tomatocooperative in Arkansas. This audit was conducted afterthe completion of our national audit of the B&I program.We found that the lender misrepresented key financialinformation and inadequately serviced nine loanstotaling over $9.6 million for the cooperative. Theborrower defaulted, resulting in a potential liability toRBS of over $7.4 million (about $7 million remainingguarantee plus about $448,000 accrued interest). Thelender has filed a loss claim.

Our audit found that the lender processed guaranteedloans to an ineligible borrower, improperly allowed theborrower to use guaranteed funds to pay delinquentFederal debt, allowed the borrower to use guaranteedloan funds for unauthorized purposes, and failed toadequately supervise construction of facilities financedwith loan proceeds. As a result, the borrower builtfacilities that did not conform to plans approved by RBS.The lender falsely represented to RBS that theseconditions did not exist. In addition, the lender allowedthe borrower to divert $6 million in working capital awayfrom the cooperative for personal use. These conditionseventually led to the failure of the cooperative.

We recommended that RBS, after consultation withOGC, take actions to contest the guarantees, orsubstantially reduce the remaining balance of the loannote guarantees. RBS agreed with our recommendationand on August 29, 2003, notified the lender that it willnot honor loan note guarantees totaling over$6.9 million of principal and $448,000 of interest.

RBS Should Improve Controls To MinimizeLiquidation Losses on Guaranteed B&I Loans

We conducted a review of the process used by RBS toliquidate defaulted B&I loans. We reviewed the files for10 judgmentally selected (highest dollar loss) liquidatedloans with final loss payments in fiscal year 2001. We

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conducted our review at 7 RBS State offices and at 10lenders’ offices. The loans accounted for about $13.1million out of $25.5 million in total final losses for 2001.We found no material weaknesses in RBS’ controls overB&I loan liquidation.

Nevertheless, about $818,000 could have been saved ifRBS had improved controls. For four loans, lenderseither did not file estimated loss claims or filed themlate, resulting in almost $582,000 in excess interestcosts to the Government. For three loans, RBSimproperly authorized about $199,000 in protectiveadvances (for security, maintenance, etc., to protect thecollateral at liquidation), resulting in excessive interestexpenses of about $16,000. RBS approved final lossclaims that contained errors for two loans reviewedeither because agency procedures were inadequate orstaff did not follow established procedures, resulting inexcess final loss payments of about $45,000. For oneloan, the lender did not provide supportingdocumentation for about $194,000 worth of protectiveadvances plus accrued interest. Since the Governmentguaranteed 90 percent of this loan, the final excess lossclaim totaled almost $175,000.

We recommended that RBS (1) establish a control toensure that lenders timely submit estimated loss claimsafter RBS approves their liquidation plans, (2) clarifywhen State office staff should authorize protectiveadvances, (3) direct State office staff to recover about$45,000 from lenders for errors on final loss claims, (4)direct State office staff to recover about $175,000 forunsupported protective advances after consulting withOGC, and (5) direct State office staff to obtain andreview supporting documentation when claimedliquidation expenses and protective advances surpass apredetermined amount. The agency concurred with ourfindings and recommendations.

RURAL HOUSING SERVICE (RHS)

Rental Subsidy Payment Errors Exceeded $4.7Million in Florida’s RRH Program

We evaluated the Florida State Office’s (SO) controlsover the tenant eligibility determination process in theRural Rental Housing (RRH) Program and accuracy ofrental subsidy payments to borrowers on behalf of low-income tenants. As of April 2002, RRH provided rentalsubsidies to 327 projects with 14,705 rental units ofwhich 10,326 units received rental assistance.

The State had not implemented wage and benefit matchprovisions, and supervisory reviews were generally notof sufficient depth to detect the material problemsidentified by the audit. We statistically estimated thattenant certifications for 2,583 (20.8 percent) of the14,705 units contained errors in households (includingthose of apparent illegal aliens) receiving improperrental subsidies totaling about $4.7 million(overpayments of $4.4 million and underpayments ofabout $271,000). The primary cause for the impropersubsidies was that tenants did not accurately reporttheir incomes at certifications or they did not notify theproject managers of subsequent changes. The projectmanagers did not have an independent source, such aswage and benefit matching, to verify household income,and RD had not fully implemented controls over thetenant certification process to monitor and improve thequality of certifications.

We made a series of recommendations regarding theSO’s oversight and monitoring of the tenant certificationprocess, including substantially expanding the use ofwage and benefit matching and more substantivesupervisory reviews. In addition, we recommended thatthe SO (1) establish a claim and collect theoverpayments from the households in our sample whoreceived excess benefits and (2) review the tenantcertifications for all 80 units at 1 project where themanager failed to follow RD certification procedures,determine the amount of overpayments, and recoverthem.

The SO generally agreed with four of the report’s sevenrecommendations. These recommendations addressed(1) reviewing and recovering overpayments questionedin the report, (2) working with the Florida Department ofLaw Enforcement and the Florida Department of Laborand Employment Security to permit wage and benefitmatching information sharing with project managers,and (3) developing procedures for project managers’verification of applicants’ citizenship or legal alienstatus.

The SO disagreed with the other threerecommendations. They addressed (1) requiring wagematches on all households at both initial certificationsand annual recertifications, (2) developing additionalprocedures and guidelines for (a) RD staff to followwhen conducting supervisory reviews and (b) projectmanagers to follow when forecasting tenants’ annualincomes.

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We evaluated the SO comments on the threerecommendations, and our basic position remainsunchanged.

Louisiana Developer and Four Associates ForfeitGold Coins, Sentenced for Equity Skimming

A major real estate developer has been sentenced toserve 5 years in Federal prison and ordered to pay finesand restitution of $3.7 million. The developer and hisassociates devised a scheme to skim several milliondollars from RRH and U.S. Department of Housing andUrban Development (HUD) properties owned by thesubject and others by having contractors submit inflatedinvoices for work done at the properties. The subjectobtained the funds paid for the inflated costs from thecontractors and converted those funds, which had been“skimmed” from the equity of the property, into goldcoins. During the investigation, we seized 1,599 goldcoins valued at nearly $600,000, as well as aninvestment account totaling $1.288 million. The goldcoins and investment account were forfeited to theGovernment. The associates and one of the developer’scorporations also have been sentenced. The sentencesranged from probation to 5 months in Federal prison,with fines and restitution totaling over $700,000.

RURAL UTILITIES SERVICE (RUS)

RUS Did Not Maximize Leverage of Limited Waterand Waste Grant Funds With Private Sector

RUS did not leverage limited grant and loan funds formaximum benefit to proposed water and waste projectsin rural areas. For example, RUS did not limit grantsubsidies to only the most needy applicants. As a result,we statistically estimated that, during a 4-year period,grant funds totaling about $85.5 million were providedunnecessarily to 97 projects. In addition, we estimatedthat RUS made concurrent loans totaling about $97.9million to projects that could have been financed withprivate credit. RUS procedures did not allow privatelender funding for the loan portion of projects where theagency determined grants were a necessary part ofproject funding. We estimated that 169 grant recipientsreceived RUS loan funding, totaling about $163.3million, which could have been financed by commerciallenders if RUS procedures allowed decoupling of grantand loan funding. In addition, we projected thatinadequate tests for other credit were completed for286 projects receiving grants totaling about $325.4million.

We recommended that RUS discontinue its currentpolicy of making grants contingent on RUS loans beingused to finance the balance of project costs and thatRUS work with private creditors. In addition, werecommended that RUS revise current policy andrequire proposals from nationwide investment lenders tobe solicited and analyzed before it considers eachfuture grant obligation. Also, we recommended thatRUS establish Government Performance and ResultsAct-specific goals for successful referrals of grantapplicants to private credit and/or participation in jointfinancing with the private sector.

RUS officials generally concurred with the auditrecommendations and plan to publish a directive insupport of maximizing use of grant funding.

Gold coins seized by the Government. OIG photo.

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Two Water Association Circuit Riders Plead Guiltyin False Travel Claim Scam

In April 2001, the National Rural Water Association(NRWA) informed RD officials that the ExecutiveDirector and wastewater circuit rider for the NevadaRural Water Association had resigned, followingdiscovery of evidence that he had falsified work andtravel claims. (NRWA contracts with local and Stateassociations to provide technical assistance on water,wastewater, and solid waste issues for operators andboard members of rural utility systems. USDA, throughRUS, reimburses NRWA for official time and travelexpense claims.) After discussions with RD officials,OIG conducted an investigation and found that theformer Nevada wastewater circuit rider had submittedfalse documentation and claims from 1998 until hisrequested resignation in 2001, resulting in improperpayments to him of more than $50,000. The Nevadawater circuit rider (a separate employee) had alsosubmitted false documentation and claims that resultedin payments to him in excess of $15,000. The formerwastewater circuit rider pled guilty to mail fraud and wassentenced to 6 months of home confinement and5 years of probation, and ordered to pay restitution ofmore than $37,000. The water circuit rider, who alsoresigned from his position, has pled guilty to one felonycharge of false statements and was sentenced to 120hours of community service and placed on probation for3 years.

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Feeding Programs

The Food and Nutrition Service (FNS) administers theDepartment’s food assistance programs, which includethe Food Stamp Program (FSP); the Child NutritionPrograms (CNP); and the Special SupplementalNutrition Program for Women, Infants, and Children(WIC). These three major entitlement programs willaccount for approximately $42 billion in estimatedexpenditures in FY 2004.

Since FNS programs have large cash outlays, thepotential exists for fraud and large dollar losses. In FY2004, we will emphasize audits of FNS programs,particularly FSP, to ensure that critical internal controlchecks are in place to guarantee efficiency,effectiveness, and economy. We will continue to monitorElectronic Benefits Transfer (EBT) systems as they areimplemented. Additionally, our plan calls for audits ofFNS’ implementation of revised WIC vendor regulations,controls over eligibility for the National School LunchProgram, and analyses of EBT databases.

For the second half of FY 2003, OIG issued 13audit reports relating to feeding programs. For thefull fiscal year, OIG issued 22 audit reports. OIG’sinvestigations for the second half of FY 2003yielded 127 indictments, 163 convictions, and$9.3 million in monetary results. For the full fiscalyear, OIG results totaled 300 indictments, 290convictions, and $23 million.

FOOD STAMP PROGRAM (FSP)

Philadelphia Investigation Nets Seven Convictions,$3.3 Million Restitution Order

OIG special agents have investigated three grocerystores in the Philadelphia area that fraudulentlyredeemed over $3.4 million in paper food stamps andfood stamp benefits issued via the EBT system. Sevenowners, employees, or associates of these marketshave now been convicted on charges of trafficking infood stamp benefits, money laundering, and conspiracy.An eighth individual is a fugitive and is believed to haveleft the United States. The seven convicted individualsreceived sentences ranging from probation to 46months in prison and were ordered to pay more than$3.3 million in restitution to USDA. The IRS participatedin one of these investigations.

Operator Ordered To Pay $1 Million in Restitution

The former operator of a disqualified Chicago retailstore was sentenced to 27 months of incarceration and3 years of supervised release. The individual also wasordered to pay $1 million in restitution to USDA. Theindividual pled guilty to wire fraud for participation in afood stamp benefit trafficking scheme that occurredfrom January 1996 through September 1997.

Indiana Needs To Improve Controls and OversightOver FSP Costs

Our review of the accuracy and allowability of FSPadministrative costs claimed in Indiana identifiedunsupported administrative costs of $1.8 million for FY2000. The State agency did not have controls in placeto properly process FSP costs in a consistent andaccurate manner. The State agency did not provideadequate oversight over its local office operations, andhad not performed a management evaluation review ofits two largest counties in 7 years. The State agencyalso did not comply with its approved cost allocationplan. We identified numerous weaknesses with itsmethodology to allocate indirect costs through itsrandom moment sampling time study. Based on theresults of our testing, we questioned whether the $79million charged for FY 2002 FSP expenditures correctlyrepresented actual FSP activity.

We made recommendations to recover the unsupportedcosts and for the State agency to improve controls overthe reimbursement and claiming of FSP administrativecosts. FNS generally agreed with our findings.

SPECIAL SUPPLEMENTAL NUTRITIONPROGRAM FOR WOMEN, INFANTS,AND CHILDREN (WIC)

Husband and Wife Sentenced in WIC-RelatedCounterfeit Manufacturer Coupon Scam

On March 12, 2003, the primary subject of thisinvestigation was sentenced to 22 months ofimprisonment followed by 3 years of probation for hisrole in counterfeiting manufacturer discount coupons forthe only kind of infant formula approved for use by WICrecipients in Ohio. He then used these fake coupons topurchase the formula throughout Ohio, Kentucky, and

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other areas in the Midwest, and resold it at a profit. Afterhis sentencing, the defendant was immediatelyremanded to the custody of the U.S. Marshal. Thesubject’s wife was sentenced to 3 years of probationand ordered to pay $27,000 in restitution and a $1,000fine for defrauding FSP and WIC from June 1996 toSeptember 1998. The subject and his wife werecharged with welfare and WIC fraud conspiracy. Thesubject was also charged with income tax evasion andillegally transporting money out of the United States.The producer of the infant formula had projected thatthe redemption value of discount coupons for the infantformula would approximate $175,000. With thecounterfeit coupons included, the redemption value forall coupons exceeded $415,000.

WIC Fraud Conspiracy in Phoenix, Arizona, InvolvesMaricopa County Employee

From at least March 2002 through February 2003, anemployee of Maricopa County, Arizona, preparedfraudulent applications and WIC checks for manyfictitious clients. She and three accomplices pretendedto be those clients in order to obtain infant formula andother food products from local grocery stores. Anotheraccomplice resold the formula at a profit. All fiveparticipants in the scheme shared in the proceeds fromthe resales. The Maricopa County employee wassentenced to 15 months of imprisonment, followed by 3years of supervised release, and ordered to pay$83,049 in restitution. Two of the accomplices have pledguilty to conspiracy and await sentencing. The thirdaccomplice, who was indicted on one count ofconspiracy and eight counts of theft from the WICprogram, is a fugitive from justice.

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Program Irregularities and Abuses

FARM PROGRAMS

OIG’s Farm Programs work encompasses a variety offarm commodity, farm credit, and conservationprograms administered by the Farm Service Agency.The programs are funded primarily through theCommodity Credit Corporation, a Government entity forwhich FSA provides operating personnel.

Since the new Farm Bill—the Farm Security and RuralInvestment Act of 2002 (the 2002 FSRIA)—wasenacted in May 2002, market conditions have improved,and the only major disaster assistance authorized is the$3.1 billion provided in the Agricultural Assistance Act of2003 (2003 AAA). The 2002 FSRIA mandatedsubstantial changes in farm program and conservationpayments; we have been monitoring the effects of thosechanges. Total FSA outlays are projected to be about$19.4 billion in 2003 and $18.2 billion in 2004. FSA’s2004 budgeted program level is more than 27 percent ofthe Department’s total.

In FY 2004, we will continue monitoring implementationof the 2002 FSRIA and the 2003 AAA and intend toconduct reviews of affected farm programs including theMilk Income Loss Contract Program, 2001/2002 CropDisaster Program, and Sugar Beet Disaster Program.Also, as Congress continues to challenge Governmentagencies to “do more with less,” we plan to systemicallyassess the efficiency of certain comprehensiveprocesses and initiatives administered or undertaken byFSA. Specifically, we will look at FSA’s internal end-of-year payment limitation review process, programcompliance activities, and compliance with the ImproperPayments Information Act of 2002. Our more systemicapproach to work for FY 2004 corresponds with theDepartment’s comprehensive Human Capital Plan,which includes implementing management initiativesboth within the agencies and from a corporateperspective in support of the President’s ManagementAgenda.

For the second half of FY 2003, OIG issued fiveaudit reports relating to farm programs. For the fullfiscal year, OIG issued six audit reports. For farm-related programs (RMA/FSA), OIG’s investigationsfor the second half of FY 2003 yielded 38indictments, 20 convictions, and $8.1 million inmonetary results. For the full fiscal year, OIGresults totaled 68 indictments, 72 convictions, and$12.8 million.

FARM SERVICE AGENCY (FSA)

Peanut Quota Buyout Program Generally WellManaged

On May 13, 2002, the Farm Bill eliminated the long-standing peanut quota system and enacted the PeanutQuota Buyout Program (QBOP) to compensate quotaholders $0.55 per pound of quota for the loss of assetvalue. For the 16 States with peanut quotas, QBOPpayments were expected to cost approximately$1.3 billion. QBOP payments for the States wereviewed, Georgia and Florida, were $535 million and$55 million respectively. We selected the two largestpayment counties in each State for review. Thepayments in the four counties totaled about$96.3 million.

QBOP procedures allowed payments to producers whowere quota holders as of May 13, 2002. At the 4 countyoffices reviewed, we identified 1,365 payments totalingabout $9 million made to parties other than the quotaholders/owners of record reflected in FSA’s farmrecords system as of May 13, 2002. This generally wasdue to producers not reporting changes in ownership toFSA.

However, of the 102 payments tested, we questioned4 payments totaling almost $153,000, made by3 service centers, because the payees could notprovide sufficient proof of ownership. One servicecenter generally did not obtain sufficient documentationto support payments to parties other than the owners ofrecord. The service center made 184 payments totalingabout $1.4 million to the other parties.

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We recommended that FSA evaluate the fourquestioned payments for eligibility and recovery, asappropriate, and have all county offices that madeQBOP payments review and certify that they haveadequate documentation that payees were eligiblequota holders. FSA generally agreed with therecommendations.

North Dakota Insurance Agent/Farmer Sentenced in$14 Million Fraud Scheme

In an update from our last semiannual report, a NorthDakota insurance agent/farmer and two of his farmingentities were convicted for their roles in a scheme todefraud USDA and the IRS of more than $14 million.From 1988 to 2000, the insurance agent created falsefarming entities and filed false applications and claimsfor FSA and RMA benefits. In June 2003, the insuranceagent was sentenced to serve 60 months in prison andordered to forfeit $5.9 million to the United States. Bothof the farming entities were placed on probation for 5years. The identification and seizure of assets iscurrently being conducted.

FEDERAL CROP INSURANCE

Our risk management work encompasses a variety ofFederal Crop Insurance Corporation (FCIC) programsadministered by the Risk Management Agency (RMA).FCIC receives funds from four main sources: capitalstock subscriptions from the U.S. Treasury, premiumincome from producers purchasing insurance policies,administrative fees paid by producers purchasingcatastrophic risk protection insurance, andappropriations for Federal premium subsidies andoperating expenses.

Our work is designed to ensure overall programintegrity, prevent and detect program/ insurance losses,provide a visible audit presence, ensure programobjectives are being accomplished, and assist programmanagers to find solutions for known or potentialprogram weaknesses. Emphasis on crop insuranceprograms is needed because of the significance of prior

audit findings; the expansion (i.e., new types ofinsurance) and revision of major insurance programs;the reliance placed upon the Federal Crop InsurancePrograms by Congress to be the “safety net” forAmerican farmers; and the mandated changes underthe Agricultural Risk Protection Act (ARPA).

As last reported, our FY 2003 audits continued todisclose problems with RMA’s administration of theFCIC programs in the areas of crop loss claims(preparation and loss adjustment), producers’ reportingof production, conflicts of interest within the reinsuredcompanies and/or representatives, and establishment ofa reliable quality control system.

One of the initiatives under the President’s ManagementAgenda is to improve financial performance inGovernment programs. This initiative includesdetermining agencies’ efforts to determine and reduceerroneous payment rates, including actual and targetedrates, where available, for benefits and assistanceprograms over $2 billion. Based on prior and ongoingreviews involving RMA, we have identified this initiativeas a management challenge. To address theseconcerns, major audits of RMA planned for FY 2004include audits to assess the distribution of insurancepolicies by the insurance companies within the threeinsurance pools provided for within the StandardReinsurance Agreement (SRA), the extent of improperpayments made within the insurance programs, RMA’srenegotiation of its SRA with the insurance companies,and RMA’s implementation of significant selected ARPAprovisions.

For the second half of FY 2003, OIG issued twoaudit reports relating to risk management. For thefull fiscal year, OIG issued three audit reports. Forfarm-related programs (RMA/FSA), OIG’sinvestigations for the second half of FY 2003yielded 38 indictments, 20 convictions, and$8.1 million in monetary results. For the full fiscalyear, OIG results totaled 68 indictments, 72convictions, and $12.8 million.

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RISK MANAGEMENT AGENCY (RMA)

Improvements Needed in the Data ReconciliationProcess

Our review of the Department’s implementation of theAgricultural Risk Protection Act of 2000 (ARPA)concluded that the Risk Management Agency (RMA)and Farm Service Agency (FSA) initiated reasonableactions to implement 19 of 30 significant ARPAprovisions we identified. For 10 of the remaining 11provisions, we concluded that the agencies’ actionswere not developed enough to adequately assess theirprogress. The remaining ARPA provision required theSecretary of Agriculture, through RMA and FSA, toreconcile at least annually, beginning with the 2001 cropyear, all relevant information received from producerswho obtained crop insurance coverage.

We determined that the Department had not timely oreffectively performed data reconciliation efforts forproducers that carried crop insurance on their 2001crops. A number of factors, including differences inagency program definitions and weaknesses in planningand coordinating the referral of errors among theagencies and reinsured companies, contributed to thiscondition. As a result, effectiveness of the reconciliationas a tool to enhance program integrity has beencompromised and the reconciliation process, as it ispresently being conducted, may not be in compliancewith legislative requirements. We continue to stress thatunless a common information system is developed andimplemented, the inefficient use of RMA and FSAresources to meet this legal requirement will remain.

We recommended that RMA and FSA, in consultationwith the Under Secretary for Farm and ForeignAgricultural Services, establish an executive-level taskforce to develop plans for reengineering theDepartment’s data reporting for each producer,landowner, and policyholder under an integrated

common information collection system. In addition, werecommended that the agencies develop strategies toaddress each of the conditions cited. We alsorecommended that RMA obtain written legal opinions asto whether (1) reinsured companies can be required toparticipate in the data reconciliation process and toclarify their role and responsibilities in resolvingidentified discrepancies and (2) the limited samplingplan being used to address and resolve thediscrepancies identified during the 2001 reconciliationmeets the requirements of ARPA.

The RMA Administrator agreed to obtain the opinionsfrom OGC. However, at this time these opinions havenot been provided to OIG. RMA generally concurredwith the audit findings and recommendations.

RMA officials conditionally concurred with therecommendation to develop strategies for addressingeach of the 10 conditions cited, including promptlycompleting the 2001 crop year reconciliation and anyassociated corrective actions for all identifieddiscrepancies, and to require RMA and FSA to takeimmediate action to address the methodology to beimplemented for reconciling and resolving 2002 cropyear data. RMA officials stated in their response to theaudit report that RMA is in the process of analyzing theconditions cited and the 10 factors outlined in the draftreport, and that they plan to meet with FSA to determinethe appropriate actions necessary to address each one.RMA officials stated in their response, dated September10, 2003, that they expect to complete this review andprovide their response to the recommendation within 60days.

RMA officials also conditionally concurred with therecommendation to include the issues identified by thereport, as well as any corrective actions taken orcontemplated to address OIG’s recommendations, inRMA’s next annual report to Congress. RMA officialsstated in their response to the audit report that RMAplans to include a discussion on the Data ReconciliationProcess in its next annual report to Congress.

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In FY 2003, we performed audits or provided oversightof audits of the FY 2002 financial statements for CCC,FCIC, FNS, FS, and the RD mission area, including theRural Telephone Bank (RTB), as well as the FY 2002consolidated USDA financial statements. All entitiesreceived an unqualified opinion. An audit of the FY 2001balance sheet for the Department’s working capital fundwas also completed under contract. An unqualifiedopinion was issued within this abbreviated scope.

In addition to financial statement audits, OIG’s workencompasses USDA’s implementation of the ImproperPayments Information Act of 2002. The act requires thehead of each Federal agency with estimated improperpayments in excess of $10 million to report on actionstaken to reduce them. OMB defines improper paymentsas payments that should not have been made or thatwere made in incorrect amounts under statutory,contractual, administration, or other legally applicablerequirements. In FY 2003, we initiated a review of FNS’adherence with OMB requirements regarding improperpayments in FSP, WIC, and NSLP.

In FY 2004, we will examine the myriad of USDApayment programs and develop an approach that willdetermine whether USDA has controls in place toidentify and prevent improper payments. For example,we will examine RMA’s error rate over crop insuranceclaims and conduct an audit of the use of purchasecards in USDA. In addition, we will review theimplementation of the new law from the departmentalperspective. Our audit efforts help determine whetherUSDA’s financial systems provide accurate and timelyinformation to the Department’s management. Theseefforts also determine whether USDA has takenadequate actions to reduce improper payments madeby its programs.

For the second half of FY 2003, OIG issued oneaudit report relating to financial management andaccountability. For the full fiscal year, OIG issued12 such audit reports.

Financial Management and Accountability

DEPARTMENTAL ADMINISTRATION(DA)/OFFICE OF THE CHIEF FINANCIALOFFICER (OCFO)

Controls Over the Travel Card Program NeededStrengthening

Internal controls over the individually billed travel cardaccount (IBA) program needed to be strengthened atthe time of our audit (issued June 2003). Methods andmeasures, such as establishing uniform and consistentreview and monitoring processes, had not been formallyprescribed. The current management of the Office of theChief Financial Officer (OCFO) is working towardimplementing measures to minimize misuse. However,the conditions we noted stemmed from ineffectivecontrols despite certifications from previousmanagement that those controls had been instituted inresponse to our prior recommendations in this area. Inthe absence of adequate controls, we found evidencethat IBA was used improperly.

Although we did not identify any significant monetaryloss to the Department, we estimated that total misuse,to include not using the card when required, totaledmore than $7.7 million. Further, we estimated that morethan $5.8 million of the nearly $78.5 million chargedduring the period involved transactions for other thanbona fide travel-related charges. The most egregiousactivity we noted was use of the travel card whenemployees were not on authorized travel.

We also identified a number of obvious cases of misuseat various types of vendors, such as a $6,000 purchaseof an automobile and enrollment in a bartending college.Our analysis of 25 individuals who obtained the most incash advances from automated teller machines (ATMs)during the scope of the review disclosed that in everycase they repeatedly abused their IBA privileges byobtaining excessive cash advances for travel, or whennot on travel. Twelve of the twenty-five individuals nevertraveled for official Government purposes, yet their cardusage amounted to almost $196,000 during the reviewperiod. Several individuals acknowledged using thewithdrawn funds first to pay personal debts and then torepay the bank, thereby paying for unauthorizedwithdrawals with subsequent unauthorized withdrawalsand creating a kiting scheme.

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As a result, improper charges, if unpaid, couldnegatively impact the Department in the form of lostrebates from the contractor bank. We also found thatagencies took inconsistent disciplinary actions whenthey identified misuse; this was traceable to the lack ofspecific travel card policy/guidance issued by DA.

OCFO and various agencies took action to improve thetravel card program in response to our interimdisclosures. We recommended that OCFO officialsformally promulgate the interim measures that theyhave enacted to ensure permanent and lastingcorrective action. OCFO issued departmental guidancethat established a “zero-tolerance” policy for cardmisuse, lowered ATM cash advance limits, standardizedlower credit limits on USDA travel cards, deactivated orcanceled travel cards of infrequent travelers, andblocked transactions from non-travel-related merchants.Further, OFCO officials have stated that they haveprovided additional training to employees on travel cardregulations. In addition, DA should establish policy/guidance for fair, equitable, and consistent treatment ofall employees when misuse is identified. OCFOgenerally agreed with the findings andrecommendations, as did the Assistant Secretary forAdministration.

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Summary of Audit Activities—April 2003-September 2003

Reports Issued ................................................................................................................................................. 40Audits Performed by OIG .................................................................................... 39Evaluations Performed by OIG ........................................................................... 0Audits Performed Under the Single Audit Act ..................................................... 0Audits Performed by Others ................................................................................ 1

Management Decisions MadeNumber of Reports ........................................................................................................................................ 38Number of Recommendations ....................................................................................................................... 283

Total Dollar Impact (Millions) .......................................................................................................................... $41.2Questioned/Unsupported Costs .......................................................................................... $22.2ab

Recommended for Recovery .......................................................................... $17.8Not Recommended for Recovery ................................................................... $ 4.4

Funds To Be Put to Better Use ............................................................................................ $19.0

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

as debts due the Department.

Summary of Investigative Activities—April 2003-September 2003

Reports Issued ................................................................................................................................................... 268Cases Opened ................................................................................................................................................... 202Cases Closed ..................................................................................................................................................... 323Cases Referred for Prosecution ......................................................................................................................... 173

Impact of InvestigationsIndictments .................................................................................................................................................... 244Convictions .................................................................................................................................................... 223a

Searches ........................................................................................................................................................ 46Arrests ........................................................................................................................................................... 190

Total Dollar Impact (Millions) .......................................................................................................................... $24.1Recoveries/Collections ........................................................................................................ $ 8.5b

Restitutions .......................................................................................................................... $13.2c

Fines .................................................................................................................................... $ 0.6d

Claims Established .............................................................................................................. $ 0.1e

Cost Avoidance .................................................................................................................... $ 0.5f

Administrative Penalties ....................................................................................................... $ 1.2f

Administrative Sanctions ................................................................................................................................ 123Employees ........................................................................................................................... 31Businesses/Persons ............................................................................................................ 92

a Includes convictions and pretrial diversions. Also, the period of time to obtain court action on an indictment varies widely;therefore, the 223 convictions do not necessarily relate to the 244 indictments.

b Includes money received by USDA or other Government agencies as a result of OIG investigations.c Restitutions are court-ordered repayments of money lost through a crime or program abuse.d Fines are court-ordered penalties.e Claims established are agency demands for repayment of USDA benefits.f Consists of loans or benefits not granted as the result of an OIG investigation.g Includes monetary fines or penalties authorized by law and imposed through an administrative process as a result of OIG findings.

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OCTOBER 2002-SEPTEMBER 2003

Summary of Audit Activities

Reports Issued ................................................................................................................................................... 71

Total Dollar Impact (Millions) .............................................................................................................................. $74.1Questioned/Unsupported Costs ........................................................................................... $25.1Funds To Be Put to Better Use ............................................................................................ $49.0

Summary of Investigative Activities

Reports Issued ................................................................................................................................................... 461

Impact of InvestigationsIndictments .................................................................................................................................................... 491Convictions .................................................................................................................................................... 435

Total Dollar Impact (Millions) .............................................................................................................................. $68.5

Administrative Sanctions .................................................................................................................................... 405

Full FY 2003 Results in Key Categories

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Statistical Data

AUDITS WITHOUT MANAGEMENT DECISION

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

NEW SINCE LAST REPORTING PERIOD

Amount WithTotal Value No Mgmt.at Issuance Decision

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

APHIS 02/20/03 1. Safeguards To Prevent Entry 0 0of Prohibited Pests andDiseases Into the UnitedStates (33601-3-Ch)

03/31/03 2. Controls Over Permits To 0 0Import Biohazardous Materials(33601-4-Ch)

ARS 03/28/03 3. Florida A&M University - 560,371 421,764Science Center CooperativeAgreement (02007-1-At)

CCC 12/26/02 4. FY 2002 CCC Financial 0 0Statements (06401-15-FM)

FNS 02/07/03 5. FSP Administrative Costs 8,663,131 0(27099-14-Te)

03/31/03 6. FSP Employment & 3,152,731 614,600Training Program - Tennessee(27601-12-At)

FS 02/28/03 7. FY 2002 Forest Service Financial 0 0Statements – Summary of ITFindings (08401-2-FM)

OPPM 10/21/02 8. Departmental Compliance With 0 0the National Energy Policy Actsand Executive Order 13123(89099-1-HQ)

RBS 01/10/03 9. Lender Servicing of B&I 3,766,908 3,766,908Guaranteed Loans (34601-4-At)

RMA 01/09/03 10. FY 2002 FCIC Financial 0 0Statements (05401-11-FM)

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Amount WithTotal Value No Mgmt.at Issuance Decision

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

PREVIOUSLY REPORTED BUT NOT YET RESOLVED

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

CCC 02/26/02 11. FY 2001 CCC Financial 19,586 0Statements (06401-4-KC)

Office of 09/30/98 12. Evaluation of CR Efforts 0 0Civil Rights To Reduce Complaints(CR) Backlog (60801-1-Hq)

03/24/99 13. Evaluation of CR Management 0 0of Settlement Agreements(60801-2-Hq)

03/10/00 14. Office of CR Management of 0 0Employment Complaints(60801-3-Hq)

03/10/00 15. Status of Implementation of 0 0Recommendations Made inPrior Evaluations of ProgramComplaints (60801-4-Hq)

CSREES 08/06/02 16. Grants to National Center 1,246,161 1,246,161for Resources Innovation(13099-2-Te)

FNS 03/22/00 17. CACFP - National Initiative to 319,279 0 Identify Problem Sponsors - Wildwood, Inc. (27010-3-KC)

05/11/01 18. NSLP - Food Service 3,572,137 3,572,137Management Companies(27601-12-KC)*

09/10/01 19. NSLP - Food Service 3,537,912 3,198,926Management CompaniesMWR (27601-24-Ch)

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11/21/01 20. CACFP - Wildwood, Inc. - 36,895,611 36,895,611Phase II (27010-6-KC)

03/29/02 21. NSLP - Chartwell’s 307,711 307,711Food Service ManagementCompany (27601-13-KC)*

FS 03/31/97 22. Research Cooperative and 1,771,984 468,547Cost ReimbursableAgreements (08601-18-SF)

11/14/01 23. MATCOM – Contract Audit 66,899 66,899(08017-10-KC)

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

03/30/99 25. Payment Limitation - Mitchell 881,924 881,924County, Georgia (03006-20-At)

07/30/01 26. 1999 Crop Disaster Program 950,891 950,891(03099-42-KC)

09/30/02 27. Assessments on Imported 4,583,797 4,583,797Tobacco (03099-164-At)

FSIS 06/21/00 28. Implementation of the Hazard 0 0Analysis and Critical ControlPoint System (24001-3-At)

06/21/00 29. Imported Meat and Poultry 0 0Inspection Process (24099-3-Hy)

09/30/02 30. Overtime Controls (24099-4-At) 0 0

Multiagency 09/30/98 31. CSREES Managing Facilities 3,824,211 74,366Construction Grants(50601-5-At)

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

9/28/00 33. Crop Loss Disaster 10,728,872 149,178Assistance Program(50801-3-KC)

Amount WithTotal Value No Mgmt.at Issuance Decision

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

31

09/09/02 34. Management of USDA 1,813,809 0Hazardous Waste ManagementFunds (50801-12-At)

OCIO 03/30/01 35. Security Over USDA IT 0 0Resources Needs Improvement(50099-27-FM)

09/10/02 36. FY 2002 USDA Government 0 0Information Security ReformAct (50099-50-FM)

RBS 10/01/99 37. B&I Loan - Indiana 595,511 595,511Farms Pork Marketing(34099-3-Ch)

01/28/02 38. Lender Servicing of 1,536,060 1,536,060B&I Guaranteed Loans –Florida (34601-3-At)

RD 08/05/02 39. Security Over IT Resources - 0 0Rural Development(85099-2-FM)

RHS 01/08/99 40. RRH Program - Dujardin 195,694 195,694Property Management, Inc.,Everett, WA (04801-5-SF)*

05/25/00 41. RRH Nationwide Initiative 4,922,879 4,919,579in Missouri, St. Louis, MO(04801-2-KC)

09/28/01 42. RRH, Insurance Expenses, 596,665 500,667Phase II (04601-4-KC)

RMA 09/30/97 43. Crop Insurance on Fresh 15,082,744 0Market Tomatoes(05099-1-At)

02/28/01 44. FY 2000 FCIC Financial 0 0Statements (05401-1-Hq)

Amount WithTotal Value No Mgmt.at Issuance Decision

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

32

03/12/01 45. RMA/FCIC FY 2000 0 0Financial StatementsReport on Management Issues(05401-2-Hq)

03/14/01 46. Crop Insurance for 2,254,014 2,254,014Specialty Crops(05601-4-At)

05/21/01 47. Review of Written 1,565,730 1,565,730Agreements (05002-1-Te)

03/15/02 48. Monitoring of RMA’s 0 0Implementation of Manual 14Reviews/Quality ControlReview System (05099-14-KC)

09/30/02 49. Viability of 1999 Fall 21,100,000 21,100,000Watermelon Crop InsuranceIn Texas (05601-8-Te)

09/30/02 50. Review of Large Insurance 6,998,779 6,998,779Claims for Watermelon(05601-9-Te)

Amount WithTotal Value No Mgmt.at Issuance Decision

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

33

1. Safeguards To Prevent Entry of ProhibitedPests and Diseases Into the United States(33601-3-Ch), Issued February 20, 2003

Management decision has not been accepted for 30 ofthe 37 recommendations. APHIS needs to provide uswith additional information regarding its Memoranda ofUnderstanding with the U.S. Department of HomelandSecurity (DHS), and the arrangements that have beenor will be made to transfer inspection responsibilities toDHS. We also need additional information on otherfunctions that will remain the responsibility of APHIS,such as the plans to enhance the accuracy of theWADS database, the completion of background checksfor APHIS employees, and the methodology to be usedin preparing GPRA reports.

2. Controls Over Permits To Import BiohazardousMaterials (33601-4-Ch), Issued March 31, 2003

Four of the 11 recommendations remain open. APHISofficials need to provide an additional response to clarifythe current Veterinary Service (VS) procedures forinspecting new applicants prior to permit issuance. Inaddition, agency officials need to explain how theywould check the validity of VS permit packages arrivingat ports-of-entry where APHIS personnel are notpresent, and how they would handle permit packagesthat do not involve agricultural select agents.

3. Florida A&M University - Science CenterCooperative Agreement (02007-1-At), IssuedMarch 28, 2003

ARS agreed with most of our recommendations, butgenerally disagreed with our recommendations that itrecover the $233,184 reimbursed for ineligiblepersonnel expenses and disallow the $57,444 pendingreimbursement, and recover the $114,512 reimbursedfor 36 ineligible items and disallow the $16,624 pendingreimbursement from ineligible items. ARS agreed thatone project was ineligible and agreed to recoverexpenses associated with that project. ARS and OIGcontinue to disagree whether three other projects areeligible.

AUDITS WITHOUT MANAGEMENT DECISION - NARRATIVE FOR NEW ENTRIES

4. FY 2002 CCC Financial Statements(06401-15-FM), Issued December 26, 2002

We issued an unqualified opinion on CCC’s financialstatements. However, as in prior years, we continue toidentify material weaknesses in its internal controls overfinancial reporting. CCC still needs to improve its (1)information security controls, (2) financial systemfunctionality, (3) mechanisms that govern fundscontrols, (4) financial reporting policies and procedures,and (5) budgetary accounting and reporting policies andprocedures.

We also identified instances of noncompliance with (1)the Computer Security Act of 1987 and the GovernmentInformation Security Reform Act (GISRA), (2) the DebtCollection Improvement Act of 1996, and (3) the FederalFinancial Management Improvement Act of 1996. Wehave agreed to management decision on 9recommendations and continue to work with CCC toreach management decision on the remaining 20recommendations. To reach management decision onmany of the remaining recommendations, CCC needsto provide us the proposed completion dates for itsplanned corrective actions.

5. FSP Administrative Costs (27099-14-Te),Issued February 7, 2003

The New Mexico State Agency responsible for FSP didnot follow FNS and Federal procurement guidelines tofund a new computer system to administer FSP andother Federal programs. The State agency incurredunauthorized expenditures of over $8 million allocableto FSP. One recommendation remains open in thereport. FNS continues to work with the State agency toidentify and recover unauthorized amounts that mayhave been improperly reimbursed to the State. Toaccept management decision, we will needdocumentation to show establishment of a claim foramounts to be recovered.

34

6. FSP Employment & Training Program –Tennessee (27601-12-At), Issued March 31, 2003

This audit disclosed significant fiscal and programmanagement deficiencies in the State agency’sEmployment and Training program. Excessive costs ofover $3 million were claimed for a 2-year period.Management decisions have not been reached on fourrecommendations. We continue to work with FNS toresolve these recommendations.

7. FY 2002 Forest Service Financial Statements –Summary of IT Findings (08401-2-FM), IssuedFebruary 28, 2003

Management decisions have not been reached on thereport’s 16 recommendations. The report, issued as aresult of the FY 2002 FS Financial Statement audit, hadrecommendations to implement controls and improvesecurity over the FS’ IT resources. We are reviewingagency response to our recommendations, and workingwith FS to achieve management decision.

8. Departmental Compliance With the NationalEnergy Policy Acts and Executive Order 13123(89099-1-HQ), Issued October 21, 2002

Our audit disclosed that some information included inthe Department’s Annual Report on EnergyManagement Activities was unsupported, incorrect, and/or incomplete, and thus could not be independentlyverified. We attributed this condition to the absence ofadequate quality assurance procedures established bythe Office of Procurement and Property Management(OPPM), the agency within USDA delegated by theAssistant Secretary for Administration with theresponsibility to prepare the Annual Report. Werecommended that OPPM develop a managementcontrol process to ensure it verifies and maintainsdocumentation that supports the assertions made in theAnnual Report. We are working with OPPM toimplement our recommendations.

9. Lender Servicing of B&I Guaranteed Loans(34601-4-At), Issued January 10, 2003

Seven of this report’s recommendations remain withoutmanagement decision. We recommended that RBS, inconjunction with the Office of the General Counsel,reduce the guarantee. We based our recommendationon the lender’s lack of due diligence in the planning andconstruction of the proposed sawmill, selection of anunorthodox method of appraising machinery andequipment, and the application of guaranteed loanfunds for an unauthorized purpose (repaying itself forfunds advanced before RBS’ conditional commitment).

10. FY 2002 FCIC Financial Statements(05401-11-FM), Issued January 9, 2003

We issued an unqualified opinion on FCIC’s financialstatements. However, we identified one material internalcontrol weakness related to the reconciliation of fundbalances reported by the U.S. Treasury with its generalledger. We identified two reportable conditions relatedto its monitoring of the Reinsured Organizations and itsfinancial reporting process. We also identified instancesof noncompliance with the Privacy Act of 1974 and theFederal Financial Management Improvement Act of1996. We have reached management decision on fourrecommendations and continue to work with FCIC toreach management decision on the remaining threerecommendations. To reach management decision forone of the recommendations, FCIC needs to implementan independent, comprehensive, and continuousmonitoring and testing effort to ensure its financialmanagement systems comply with Federalrequirements.

35

Between April 1 and September 30, 2003, OIGcompleted 268 investigations. We referred 173 cases toFederal, State, and local prosecutors for their decision.

During the reporting period, our investigations led to244 indictments and 223 convictions. The period of timeto obtain court action on an indictment varies widely;therefore, the 223 convictions do not necessarily relateto the 244 indictments. Fines, recoveries/collections,restitutions, claims established, cost avoidance, andadministrative penalties resulting from our investigationstotaled about $24.1 million.

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

INDICTMENTS AND CONVICTIONS

Indictments and ConvictionsApril 1 - September 30, 2003

Agency Indictments Convictions*

AMS 2 0APHIS 45 15ARS 6 3CSREES 1 2ERS 3 0FNS 127 161FS 2 2FSA 33 17FSIS 12 10NRCS 3 4OCFO 1 0RBS 1 1RHS 3 3RMA 5 3RUS 0 2

___ ___Totals 244 223

*This category includes pretrial diversions.

36

The OIG Hotline serves as a national receiving point forreports from both employees and the general public ofsuspected incidents of fraud, waste, mismanagement,and abuse in USDA programs and operations. Duringthis reporting period, the OIG Hotline received 807complaints, which included allegations of participantfraud, employee misconduct, and mismanagement, aswell as opinions about USDA programs. Figure 1displays the volume and type of the complaints wereceived, and figure 2 displays the disposition of thosecomplaints.

OFFICE OF INSPECTOR GENERAL HOTLINE

Hotline ComplaintsApril 1 to September 30, 2003(Total = 807)

Disposition of ComplaintsApril 1 to September 30, 2003

Figure 1 Figure 2

ParticipantFraud397

Bribery2

Health/Safety

4

Opinion/Information

89Employee

Misconduct147

Waste/Mismanagement

167

Reprisal1

Referred toFNS for Tracking

162

Referred toUSDA Agencies

for Response366

Referred toState Agency

32

Referred toOther Law

EnforcementAgencies

1

Referred toOIG Audit or

Investigationsfor Review

38

Filed WithoutReferral-

InsufficientInformation

73

Referred toUSDA or OtherAgencies for Information-

No Response Needed

135

37

FREEDOM OF INFORMATION ACT (FOIA) AND PRIVACY ACT (PA) REQUESTS FOR THE PERIODAPRIL 1 TO SEPTEMBER 30, 2003

Number of FOIA/PA Requests Received 128

Number of FOIA/PA Requests Processed: 133

Number Granted 27Number Partially Granted 29Number Nondisclosed 77

Reasons for Denial:

No Records Available 12Referred to Other Agencies 21Denied in Full (Exemption 7A) 17Request Withdrawn 3Fee-Related 6Not a Proper FOIA Request 8Not an Agency Record 0Duplicate Request 3Other 7

Requests for OIG Reports From Congressand Other Government Agencies

Received 38Processed 35

Appeals Processed 3

Appeals Completely Upheld 2Appeals Partially Reversed 0Appeals Completely Reversed 0

Number of OIG Reports/Documents 52Released in Response to Requests

NOTE: A request may involve more than one report.

During this 6-month period, 31 audit reports werepublished on the Internet at the OIG Web site:www.usda.gov/oig.

38

INVENTORY OF AUDIT REPORTSWITH QUESTIONED COSTS AND LOANS

FROM APRIL 1 THROUGH SEPTEMBER 30, 2003

DOLLAR VALUES

QUESTIONED UNSUPPORTEDa

NUMBER COSTS AND LOANS COSTS AND LOANS

A. FOR WHICH NO MANAGEMENT 40 153,124,841 84,772,187DECISION HAD BEEN MADEBY APRIL 1, 2003

B. WHICH WERE ISSUED DURING 15 30,578,737 9,254,559THIS REPORTING PERIOD

TOTALS 55 $183,703,578 $94,026,746

C. FOR WHICH A MANAGEMENT 18DECISION WAS MADE DURINGTHIS REPORTING PERIOD

(1) DOLLAR VALUE OFDISALLOWED COSTS

RECOMMENDED FOR RECOVERY $17,831,270 $2,371,663

NOT RECOMMENDED FOR RECOVERY $4,361,483 $0

(2) DOLLAR VALUE OF $13,051,303 $5,652,581COSTS NOT DISALLOWED

D. FOR WHICH NO MANAGEMENT 37 $149,031,962 $86,002,502DECISION HAS BEEN MADE BYTHE END OF THIS REPORTINGPERIOD

REPORTS FOR WHICH NO 29 $128,079,489 $76,754,606MANAGEMENT DECISION WASMADE WITHIN 6 MONTHSOF ISSUANCE

aUnsupported values are included in questioned values.

Appendix I

39

INVENTORY OF AUDIT REPORTSWITH RECOMMENDATIONS THAT FUNDS BE PUT TO BETTER USE

FROM APRIL 1 THROUGH SEPTEMBER 30, 2003

NUMBER DOLLAR VALUE

A. FOR WHICH NO MANAGEMENT 16 $53,191,308DECISION HAD BEEN MADEBY APRIL 1, 2003

B. WHICH WERE ISSUED DURING 3 $675,867,175THE REPORTING PERIOD

TOTALS 19 $729,058,483

C. FOR WHICH A MANAGEMENT 7DECISION WAS MADE DURINGTHE REPORTING PERIOD

(1) DOLLAR VALUE OF $19,008,946DISALLOWED COSTS

(2) DOLLAR VALUE OF $1,981COSTS NOT DISALLOWED

D. FOR WHICH NO MANAGEMENT 12 710,047,556DECISION HAS BEEN MADE BYTHE END OF THE REPORTINGPERIOD

REPORTS FOR WHICH NO 9 34,180,381MANAGEMENT DECISION WASMADE WITHIN 6 MONTHSOF ISSUANCE

Appendix II

40

SUMMARY OF AUDIT REPORTS RELEASEDFROM APRIL 1 THROUGH SEPTEMBER 30, 2003

DURING THE 6-MONTH PERIOD FROM APRIL 1 THROUGH SEPTEMBER 30, 2003, THE OFFICE OFINSPECTOR GENERAL ISSUED 40 AUDIT REPORTS, INCLUDING 1 PERFORMED BY OTHERS.

THE FOLLOWING IS A SUMMARY OF THOSE AUDITS BY AGENCY:

QUESTIONED UNSUPPORTEDa FUNDS BEAUDITS COSTS COSTS PUT TO

AGENCY RELEASED AND LOANS AND LOANS BETTER USE

FARM SERVICE AGENCY 5 $448,289 $152,535FOOD AND NUTRITION SERVICE 13 $1,831,418 $6,663FOOD SAFETY AND INSPECTION SERVICE 2FOREST SERVICE 3MULTIAGENCY 5 $20,052NATURAL RESOURCES CONSERVATION

SERVICE 1RURAL BUSINESS-COOPERATIVE SERVICE 6 $23,608,137 $9,095,361 $598,112RURAL HOUSING SERVICE 4 $4,670,841 $3,183,305RURAL UTILITIES SERVICE 1 $672,085,758

TOTALS 40 $30,578,737 $9,254,559 $675,867,175

TOTAL COMPLETED:SINGLE AGENCY AUDIT 35MULTIAGENCY AUDIT 5SINGLE AGENCY EVALUATION 0MULTIAGENCY EVALUATION 0

TOTAL RELEASED NATIONWIDE 40

TOTAL COMPLETED UNDER CONTRACTb 1

TOTAL SINGLE AUDIT ISSUEDc 0

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

Appendix III

– – Continued

41

AUDIT REPORTS RELEASED AND ASSOCIATED MONETARY VALUESFROM APRIL 1 THROUGH SEPTEMBER 30, 2003

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

FARM SERVICE AGENCY

030060008SF DISASTER PAYMENTS TO PRUNE PRODUCERS IN $295,7542003/04/16 CALIFORNIA – PRODUCER D030060016CH FARM SERVICE COUNTY OFFICE AUDIT FY 20022003/06/06030080002KC REVIEW OF CCC BIDDING PROCEDURES AND2003/09/25 AWARDS FOR COMMODITIES030990166AT IMPLEMENTATION OF THE PEANUT QUOTA BUYOUT $152,535 $152,5352003/08/12 PROGRAM036010019KC 2000 MARKETING ASSISTANCE LOANS AND LOAN2003/09/30 DEFICIENCY PAYMENTS

TOTAL: FARM SERVICE AGENCY 5 $448,289 $152,535

FOOD AND NUTRITION SERVICE

270100006TE NATIONAL SCHOOL LUNCH PROGRAM, NOVA2003/09/24 CHARTER SCHOOL SOUTHEAST270100007TE NATIONAL SCHOOL LUNCH PROGRAM, LAKE WORTH – $12003/09/23 ISD270100008TE ACCOUNTABILITY AND OVERSIGHT OF THE NATIONAL2003/09/30 SCHOOL LUNCH PROGRAM – ST. MARGARET MARY

SCHOOL, SAN ANTONIO, TX270100009KC NATIONAL SCHOOL LUNCH PROGRAM – EFFINGHAM, KS2003/06/03270100010KC NATIONAL SCHOOL LUNCH PROGRAM – GIRARD, KS2003/07/31270100011KC NATIONAL SCHOOL LUNCH PROGRAM – OTTAWA, KS $1,4152003/08/05270100012KC NATIONAL SCHOOL LUNCH PROGRAM – PITTSBURG, KS $3,3192003/08/29270100013KC NATIONAL SCHOOL LUNCH PROGRAM – BONNER SPRINGS,2003/06/20 KS270100015CH FOOD STAMP PROGRAM ADMINISTRATIVE COSTS $1,799,5972003/08/13270100018KC NATIONAL SCHOOL LUNCH PROGRAM, ELWOOD, KS2003/08/04270160001SF CACFP AUDIT FUNDS – CALIFORNIA DEPARTMENT OF $27,086 $6,6632003/04/16 EDUCATION270990013TE TEXAS EBT SYSTEM DEVELOPMENT2003/06/23270990022SF REVIEW OF ELECTRONIC BENEFITS TRANSFER SYSTEM2003/09/24 DEVELOPMENT – STATE OF NEVADA

TOTAL: FOOD AND NUTRITION SERVICE 13 $1,831,418 $6,663

FOOD SAFETY AND INSPECTION SERVICE

240990001FM SECURITY OVER INFORMATION TECHNOLOGY2003/08/11 RESOURCES AT FSIS246010002KC FSIS OVERSIGHT OF CONAGRA RECALL2003/09/30

TOTAL: FOOD SAFETY AND INSPECTION SERVICE 2

FOREST SERVICE

080030008SF FOREST SERVICE’S SOUTHERN CALIFORNIA2003/04/01 CONSERVATION STRATEGY GROUP080160001SF FOLLOW-UP REVIEW OF FOREST SERVICE SECURITY2003/09/30 OVER AIRCRAFT AND AIRCRAFT FACILITIES080170012KC CONTRACT AUDIT – MANAGEMENT ASSISTANCE2003/08/01 CORPORATION OF AMERICA (MACA)

TOTAL: FOREST SERVICE 3

42

MULTIAGENCY

500990012KC USDA – IMPLEMENTATION OF THE AGRICULTURAL RISK2003/09/30 PROTECTION ACT500990014AT CONTROLS OVER BIOLOGICAL AGENTS, CHEMICALS2003/09/29 AND RADIOACTIVE MATERIALS – USDA FUNDED

RESEARCH FACILITIES500990015KC 2000 CROP DISASTER PROGRAM $20,0522003/09/3050990052FM FY 2003 FEDERAL INFORMATION SECURITY2003/09/24 MANAGEMENT ACT506010005HQ ADEQUACY OF INTERNAL CONTROLS OVER TRAVEL2003/06/06 CARD EXPENDITURES

TOTAL: MULTIAGENCY 5 $20,052

NATURAL RESOURCES CONSERVATION SERVICE

100990010KC NRCS HOMELAND SECURITY PROTECTION OF2003/09/30 FEDERAL ASSETS

TOTAL: NATURAL RESOURCES CONSERVATION SERVICE 1

RURAL BUSINESS-COOPERATIVE SERVICE

340990005TE REQUEST AUDIT OF B&I LOAN IN LOUISIANA $5,585,1362003/09/30340990006TE B&I REQUEST AUDIT IN ARKANSAS $6,993,5782003/07/29346010005AT RD LENDER SERVICING OF B&I GUARANTEED $9,145,549 $8,920,5982003/08/27 LOANS IN GEORGIA346010008SF RURAL DEVELOPMENT – LIQUIDATION OF BUSINESS $220,009 $174,763 $598,1122003/09/30 AND INDUSTRY GUARANTEED LOANS346010010TE LENDER SERVICING OF B&I GUARANTEED LOANS - $1,663,8652003/07/23 LOUISIANA346010015TE NATIONAL REPORT ON B&I LOAN PROGRAM2003/09/30

TOTAL: RURAL BUSINESS-COOPERATIVE SERVICE 6 $23,608,137 $9,095,361 $598,112

RURAL HOUSING SERVICE

040040003AT RD RRH PROGRAM TENANT INCOME VERIFICATION - $4,598,330 $3,183,3052003/06/26 GAINESVILLE, FL040040005HY SURVEY OF SINGLE FAMILY HOUSING PROGRAM IN2003/05/27 MAINE040990005AT RD B&I GUARANTEED LOAN – PARADISE OF PUERTO2003/06/12 RICO, INC.046010002HY REVIEW OF PROGRESSIVE PROPERTY MANAGEMENT, $72,5112003/07/22 INC., RRH PROJECTS

TOTAL: RURAL HOUSING SERVICE 4 $4,670,841 $3,183,305

RURAL UTILITIES SERVICE

096010006KC RURAL UTILITIES SERVICE WATER AND WASTE $672,085,7582003/09/08 GRANTS

TOTAL: RURAL UTILITIES SERVICE 1 $672,085,758

GRAND TOTAL: 40 $30,578,737 $9,254,559 $675,867,175

AUDIT REPORTS RELEASED AND ASSOCIATED MONETARY VALUESFROM APRIL 1 THROUGH SEPTEMBER 30, 2003

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

43

Abbreviations of Organizations

AMS Agricultural Marketing ServiceAPHIS Animal and Plant Health Inspection ServiceARS Agricultural Research ServiceCCC Commodity Credit CorporationCSREES Cooperative State Research, Education, and Extension ServiceCR Office of Civil RightsDHS U.S. Department of Homeland SecurityERS Economic Research ServiceFAS Foreign Agricultural ServiceFCIC Federal Crop Insurance CorporationFNS Food and Nutrition ServiceFS Forest ServiceFSA Farm Service AgencyFSIS Food Safety and Inspection ServiceGIPSA Grain Inspection, Packers and Stockyards AdministrationNASS National Agricultural Statistics ServiceNITC National Information Technology CenterNRCS Natural Resources Conservation ServiceOCFO Office of the Chief Financial OfficerOCIO Office of the Chief Information OfficerOGC Office of the General CounselOIG Office of Inspector GeneralOMB Office of Management and BudgetOPPM Office of Procurement and Property ManagementRBS Rural Business-Cooperative ServiceRD Rural DevelopmentRHS Rural Housing ServiceRMA Risk Management AgencyRUS Rural Utilities ServiceUSDA U.S. Department of Agriculture

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

www.usda.gov/oig