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DoD Briefing on Credit Card Task Force Findings

Presenters: Dov S. Zakheim, Under Secretary of Defense (Comptroller)
June 27, 2002 11:00 AM EDT

(Briefing on the findings of the Department of Defense task force on charge card programs. Slides shown at this briefing are located at http://www.defenselink.mil/news/Jun2002/g020627-D-6570C.html.)

Zakheim: We're doing better this morning. Fewer people than last time on this subject.

Q: You're two minutes early. They might come in.

Zakheim: Well, I'm just so excited.

Q: (inaudible)

Zakheim: Yeah, exactly. Really turns everybody on here.

All right. Shall we get started?

Q: Go ahead.

Zakheim: I saw all of you, and actually more of you, three months ago to the day, March 27th, to tell you what we were going to try to do about the charge card issues that had been arisen -- that had arisen, that had been surfaced by the GAO and our own inspector general. And I had been directed by Secretary Rumsfeld to somehow get our arms around the problem, analyze the difficulties, at least come up with suggestions for remedies.

In doing this, I want to emphasize that I worked very closely with the assistant secretaries for financial management of the three service departments -- Sandy Pack of the Army, Dionel Aviles of the Navy, and Mike Montelongo of the Air Force -- because there's no way we can improve upon where we are today without the complete and unstinting support of the service departments, and the key people in those departments are the financial managers. So I would urge you to speak to them as well to see how they've responded to what we're trying to do and what they're planning to do about it.

Let me walk you through a little briefing here and then try to answer questions. As you can see, I have had a book prepared for me. (As if) this was congressional testimony. It's very difficult when you're talking to reporters to flip pages and look down and find answers. But that just testifies to the extreme complexity of the problem. This is not a simple matter at all, and it's one that we hope, with remedies, will go away so that there will be even fewer people here next time we talk about charge cards.

So let's move to the next slide, please.

As it says there, they really are essential to improving business practices. For the government, every time a purchase card is used, you save about $20. And the reason you do is because you're saving time. You can take a purchase card, go out, buy what you need and get it. In the old days, you had to staff it. It would take two to four weeks to staff it. Time is money.

There also are actual rebates to the government, which goes back into the Operations and Maintenance accounts when payments are made in time or ahead of time. And we've saved about $28 million this year alone. So there is a real value to the taxpayer in having cards of this type.

Another thing: When you look at the travel cards -- and as you know, there are purchase cards, and there are travel cards. And the purchase card, essentially, is when you go out on behalf of the government -- this is a government-billed account. And there are two kinds, by the way. There's what's called centrally billed accounts, where you can have government activity -- say, an Army division -- and they've got an account. And you use the card on that account. Or you have an individually billed account, where you've got your own purchase account on behalf of the government. So you go out and buy something.

Then you have the travel side. And the travel card is -- it looks, to all intents and purposes, like a credit card. It's not; it's a charge card. It's a little bit different. And you can go out and charge your hotel tickets to it or your meals or whatever. And again, you -- if you need cash, for example, you can use your card, instead of getting a cash advance. And there used to be offices that were dedicated to doing nothing else except processing cash advances for people. Then they go out and lose the cash. So what this does is, it cuts down on bureaucracy, cuts down on time, and it cuts down on lawsuits. And since some of the places that our people find themselves in are not necessarily safe, they avoid robberies; they avoid losses; they avoid theft -- all kinds of things. So this is a good deal for the taxpayer.

And as you can see, we spent about $3 1/2 billion on travel cards and something over $6 billion on purchase cards in the fiscal year. And therefore, because this is a good deal, you don't want to throw the baby out with the bath water. You don't want to get rid of the program. What you want to do is cut back on any abuse, any misuse, any fraudulent use and have this program as pristine as it can possibly be, because it is saving us money.

Next slide, please.

So in response to what the secretary asked me to do, we set up a task force on March 19th. We had representatives from all the great powers in this department: my opposite number in Acquisition, Technology and Logistics; Pete Aldrich had people there; David Chu, Personnel and Readiness, had people there; the general counsel had people there.

We also had observers. We had people observing from the Office of Management and Budget, Justice, Office of Personnel Management, General Services Administration. We had the very active participation of the Defense Department Inspector General community. In other words, anybody who we thought might in any way, however tangential, be able to make a contribution to this process, we said, "Come on in. Help us out. Talk us through some of the issues. Give us advice, if you can. Take part in writing the report, if you can. Make this a government-wide effort, for the taxpayers' benefit."

And we are releasing the task force's recommendations today. We will have reports for you on your way out.

And we focused on the three major areas listed there, because they really are quite different. One is demonstrating that there is a commitment from the top to dealing with the issues that have arisen in the various investigations of charge cards.

And the first item that I will show you is this: a memorandum signed on June 21st by Deputy Secretary Wolfowitz, which, in addition to laying out the importance of doing this job properly, of not allowing abuse to happen and saying all the right things that you're supposed to say, has two specific directives in it, in the second paragraph, if you have the memo.

The first one is that the component heads -- that is to say, the service departments, the agency heads -- have to provide to me by July 15th, which -- in a few weeks' time, a report on what they have done to deal with the current cases of abuse and misuse and delinquencies. So they've got to say what they've done and how they are prepared to prevent such recurrences in the future.

And then he has directed -- the deputy secretary, that is -- has directed the inspector general to coordinate audits and investigations of the charge card programs, so that it'll further ensure the addressal of top management to these concerns.

So that's out. That was put out on the 21st of June.

In addition to that, we have made recommendations relating to management emphasis and culture. We -- the task force recommends that the investigative community, which is a rather large one in our department, ensure that supervisors and security managers are informed of allegations of purchase and travel card misuse and abuse, so that an appropriate determination can be made regarding the suspension of security clearances.

Now I want to emphasize this is not a matter of a penalty. It is a matter of how you deal with organizational culture, and you -- and it's not an easy determination. But clearly, when people have background checks, one of the things that are checked are the way they have dealt with money issues in their private lives. So, there may be, in certain circumstances, when all the appropriate steps have been taken and the proper determinations have been developed, certain cases where you now have a black spot against your record because of what you did with a charge card. And so, this goes not to a compliance issue, which some people might think, but rather to an organizational culture issue. We need people who are above and beyond in all respects.

Now, regarding compliance itself, we have a lot of regulations on the books that address many of the issues we're talking about in the report. The problem very often is people don't know about them or they're not clearly written. That happens to be an occupational hazard of bureaucracy, where a subject, a predicate in a declarative sentence might make sense; it usually is a 60-word-or-more, convoluted constellation of incomprehensible gobbledy-gook. It is very difficult to sometimes take those regulations and translate them into a way that will force compliance. And so, what we're saying is, let's look at those regulations. Are they clear? Are they understandable? Can they be acted upon? And if not, let's make revisions.

Another area is, what do you do in terms of actually prosecuting when you believe someone has violated a norm? Now, normally, prosecution is done by the local U.S. Attorney's office. But everybody's resource-constrained, including U.S. Attorney's office(s), so not everybody can be prosecuted. And the question is, well, how do you pursue and how do you prosecute fraud? Are there any other options out there? The answer is, yes, there are.

The Department of Justice Public Integrity Section is interested in prosecuting crimes involving fraudulent use of these cards, purchase cards. Defense criminal investigation organizations are going to pursue these cases with the Public Integrity Section for prosecution.

Still another alternative is pursue cases in state or local courts instead of federal courts where you can establish jurisdiction. Of course, you won't always be able to establish jurisdiction, but don't write it off. Let's see. Maybe there will be cases where, in fact, you can pursue these cases in those courts.

There is an act that was passed in 1986, called the Program for Fraud Civil Remedies Act. And that allows the pursuit of civil as opposed to criminal remedies -- penalties, rather, against the person who abuses a government charge card. You can be found liable, and if you are, you can be penalized up to $5,000 per claim, and also could be required to pay double the amount that was falsely claimed. So, because this act establishes administrative procedures for use against anybody who makes a false claim or a false statement to an agency, that is another vehicle for pursuing those who might abuse government charge cards.

Then there is the possibility that the department could take disbarment or suspension action against vendors who are involved with fraudulent activity. Sometimes it's the vendor who's involved. We can go after them, too. And the bottom line is, there are lots and lots of vehicles; are we going to use them? The answer is yes. The inspector general, the Defense components are going to do whatever it takes, all available means to pursue these cases as aggressively as is possible.

At the same time -- and I have to emphasize this -- we are dealing here with individuals. They have individual rights. I mentioned this the last time I briefed on this. There are individual protections. There is the law. We don't want to abuse the law in order to remedy the abuse of cards. That doesn't work. So we're going to operate within the law. We're going to make sure that individuals have every protection that the law guarantees them. We're going to be thorough about this. We're not going to do anything that's either preemptive or peremptory.

Another way to deal with compliance is to have some way of getting indicators that certain behaviors may well be fraudulent. And this is a technique called automatic data mining, where you have automated ways of checking certain behaviors in the cards, and it triggers -- you know what it's like -- have you ever been to an airport and they made you take your shoes off? Okay? One of the reasons they'll make you take your shoes off is you arrived late. It's an indicator. So they go, "Who knows who this person is?" Suppose you had a ticket and then you changed it at the last second. Different destination. Off go the shoes.

So there are ways in this purchase-card and travel-card world as well where you look at indicators of certain kinds and you can say, "We need to examine that." We need figuratively to make them take their shoes off. And I don't want to get into the indicators, because that helps people figure out what to do. But believe me, we've identified a lot of them and we're pursuing this automated data mining very, very vigorously.

Now, process and workforce, the next one, if we could have the next slide. People need to be trained, and it is amazing, actually, the degree to which this whole area of training people to manage government charge cards has been the back order of back orders. For a start, it tends to be a secondary activity of whoever is doing it. There are other things they're doing as well. So they are harassed, they've got other priorities, it's tough to focus. The key people are the agency program coordinators, and these are the people who actually manage some number of folks who are using these cards.

Now we can sometimes have an agency -- an APC -- and normally in this building, that's an armored personnel carrier, but in this case, it's an agency program coordinator -- we can have this person looking after a thousand people. And if the thousand people are each -- I don't know -- doing a thousand transactions a month, then this poor, unfortunate individual now has to look after a million transactions. But this is his or her secondary duty. Now what kind of control, what kind of oversight do you think you can expect out of a person like that?

Now let me complicate it still more. There is no particular grade level for somebody who does this job. So you could be a GS-5 -- and we have some who are -- or you could be a GS-13, which is a mid-level person. And we have some who are that. Now obviously, a GS-5 is trained and does different things than a GS-13, educationally and in other ways.

So now lump that -- lump the looking after the million possible transactions, put that on somebody who's doing this as a part-time job, in effect, who's only a GS-5. Not exactly a remedy (sic) for success.

We've got to get into training. We are -- the task force is recommending -- and I want to emphasize this -- these are all recommendations. And a recommendation means just that. We have to still get interagency approval in many cases. In some cases, we're going to need legislation, so obviously we need legislative approval. In all cases, we have to run everything by the lawyers, again to ensure individual protection and guarantee that everybody has every one of their rights looked after. So these are just recommendations, but they're a consensus of those who looked at it.

One of the recommendations we're making is that these agency program coordinators look after 300 people. Now it could be 299. It could be 301. I mean, you know, it's not a hard and fast rule. But 300 looks like a best practice. Not everybody's going to do a thousand transactions a month, and so we think this is manageable.

It's not enough. We have to use, as much as we can, online purchase card certification. Anything you do online takes the burden off the managers. It's online. It's there. Record keeping is easier, tracking is easier, and so on.

How about the fact that we have too many cards out there? We recommend that a thousand travel charge card accounts that are associated with cards that expired ought be cancelled. Why keep the account if the card was cancelled? Let's get rid of those.

We also believe that the components should be told to cancel an additional 300,000 accounts that had no activity in the past year, unless you can justify why you want to keep an account that had no activity in the past year. That can be pretty hard to justify, but there will be some cases. You don't want the accounts floating out there. That's always dangerous.

And lastly, there are other ways to deal with the travel card in particular, because that's the one where the person goes out with the card. And again, when we say somebody's going out with a card, who are we talking about? In some cases, we're talking about an 18-year-old. Tough do a credit check on an 18-year-old. They probably wouldn't have received credit; they just applied for a bank, maybe because they're not earning enough. Maybe they're on the most junior of junior pay scales in the military. And then you're just giving them a card. That -- they need to be trained. They need to understand what it's about. They need to be supervised and -- like any 18-year-old, quite frankly, with the greatest respect to 18-year-olds. And what you want is to be sure that there aren't accounts that are open, because then, all kinds of things happen. So we're recommending that accounts that haven't been used for a year really ought to be closed down, unless there's a good case for keeping them.

Other alternatives: As I said, debit cards. A debit card is like what your bank is. It's not a credit card. Again, a charge card isn't a credit card, either. But people kind of think, "Well, you know, I mean I have 60 days to pay, so it's kind of credit." Well, it really isn't, because you better pay up. But a debit card is against your checkbook or against your checking account. So that's a possibility.

Stored-value cards: Those are the cards that are like your telephone card -- you know, you give money up front, and then you can make a bunchy of calls from the card. There are upsides and downsides to both of these, and we've got to look at them carefully. The point is, we ought to look at alternatives -- again, because of the kinds of people we're dealing with.

Now there are some proposals that will require legislation.

I don't know; do we have a slide on that? Next slide, please. No?

Let me talk a little bit about some proposals that will require legislation. In every one of those cases, I have to say that we need OMB agreement in particular on this. We're still scrubbing these. And these are -- treat these as recommendations, as ideas.

One of them is mandatory split disbursement. That's non-English for basically saying, if you've got a situation where a person charges the hotel bill on a charge card, the payment is sent to the bank from the government disbursement office, and you pull the person out (of the transaction.) Instead of the person having to pay or writing a check or whatever, it's just done directly. And that will take care of a significant part of the expenses, because so much of what travel cards do is buy the kinds of things that, in fact, the bills could be sent directly to the government for. So that's one area where I think -- and we do need legislation for it, but we may be able to make some progress.

There's a thing called mandatory salary offset. And, in fact, we already have that for all of the military and a significant part of the civilian force. And a salary offset isn't garnishing. This isn't where you go to court and you get the court order to garnish somebody's salary, and there are limits as to how much you can do -- I think it's 15 percent is the max at any given time. But what it does is it lets the government go and collect delinquent accounts directly, basically take 15 percent off the person's paycheck. And what we would like to do is spread it to everybody in government and also to member -- retired -- civilian retirees, because it already applies to military retirees. And so, the fact that you've run up these charges and then retired doesn't mean you're off the hook. We can still have some kind of offset there.

So, to conclude, the cards as a program make sense. We are deeply concerned, the secretary, the deputy secretary, the top department leadership, the service department leaderships are all concerned that this program be managed in a pristine way to the greatest extent possible. And as I've indicated, this is a series of recommendations. The task force had only 60 days to work. The recommendations continue to be scrubbed. OMB has to pass on it. Lawyers have to pass on it. In many cases, legislators have to pass on it. And so, this is the beginning, but, as the deputy secretary's memo indicates, we've already begun to move. And there are enough viable ways of dealing with this that we don't have to say, well, we'll wait until there's some legislation. We're moving out on all fronts.

Thanks, and I'll try to answer your questions.

Yeah?

Q: Except my question isn't just exactly about credit cards. I hope it's okay. It's a comptroller question, if I might?

Zakheim: Well, I'll see if I have my other hat in my pocket.

Q: Okay. You know, with WorldCom being such a major contractor for the Defense Department and for the U.S. military, as comptroller, what are your thoughts at the moment about their fiscal situation, how it could impact their business with the Pentagon, with the military? Are you reviewing their contracts? Or have you been in touch? You know, any --

Zakheim: Well, you know, I don't want to get into the details of that. I'm going to give you a general answer. This is not the first time in the history of the Department of Defense that contractors of various kinds have gotten into difficulties. We've had many contractors in many areas, and we always build in protections. So I think it's safe to say that those who use the services of WorldCom or of any contractor of a kind like WorldCom are protected. That really should not be an issue for concern.

As to the details of WorldCom itself, well, of course, you know, that's being worked out. And as we've seen in other cases where -- you know, this is certainly not the first nor the last government contractor that will, you know, run into some difficulties. We have functioned fine. And I think it's just a matter of looking back at the track record in the past, and you'll see there have been no disruptions. So I'm reasonably confident that once they work their way through the entire process that they've got, we'll find that there really isn't any disruption to what is essential to departmental needs.

QFor people who don't understand this whole business clearly, what kind of protections does the Pentagon, does the U.S. military have against contractors who --

Zakheim: Well, we tend to have -- there are always backup plans. There's always ways. I mean, you know, these are in the abstract because I don't want to deal with this one specifically. But for example, you could have a situation where you're getting a service from someone, an essential service, and provisions are made so that if, for whatever reason, that particular purveyor of the service no longer is there, it can all be handed over intact and transferred to some other purveyor of the service, so that there is no break at all. And from the perspective of the recipient, they don't even know the difference. So that's why I'm reasonably confident. I mean, as I say, we've got quite a bit of experience in this. And again, I have no idea how the WorldCom situation will work itself out, but from the departmental perspective, I'm reasonably confident that we're okay regardless.

Yeah?

Q: Okay. So between the two cards, the travel cards and the purchase cards, it looks like you've got about 1.6 million of those cards out. You want to reduce that down in total to about 1.2 million, right?

Zakheim: At least.

Q: When you issue the cards, is there -- I don't seem to remember any kind of a background or a financial check that people get when they get issued those cards.

Zakheim: Well, what you have -- you're right. And the reason is that you don't have the standard background check that a bank has. I mean, that's one of the benefits of the card, in the sense that people who might not be able to qualify for a MasterCard or something or a Visa card or an American Express card or Discover or whatever would be able to get a card here.

Now, what happens is -- and I've got some numbers on that -- you get a situation where people get what's called a restricted card, and so they are restricted as to how much they can spend and in what ways. And we've issued quite a few of those. In fact, you know, as I say -- I have to find the numbers in front of me, but it's a not insignificant number of cards that are issued in this way. Let me see if I've got the number in front of me. Does anybody remember the number, in what tab it is so that I can look it up and get you the statistics?

Q: D-2. D-2.

Zakheim: Okay. Here we are. Okay, this is what Bank of America told us. They're our contractor for the travel cards. From October, 2001, through March, 2002, so a six-month period. Of the 93,113 -- I told you this was a pretty accurate statistic -- applicants for a travel charge card, 61,647, that is to say 66 percent, were issued a restricted card. So you see the benefit. I mean, people -- two out of three people would not be able to have a card to do these kinds of things, and without the card, you would have to have all these offices and the superstructure and all that.

Now, of those applicants, 19 percent -- you get a choice whether you can authorize a travel -- credit check or not. Nineteen percent said, "No, I don't want a credit check." Now, why don't they want a credit check? It doesn't necessarily mean that they've got bad credit. They may have no credit. And they may not -- and they may be scared that, gee, if they have no credit and for some reason, you know, the credit card audits show up whatever, they might have trouble getting their own cards later. And that's perfectly innocent. I mean, again, if they don't have credit, it may be because they're so young, and they don't even know. So, they say, "Just leave me alone. If I don't need to have a check, I don't want a check."

If a person doesn't authorize a credit check, for whatever reason, and again I would say that many of these reasons are quite innocent, they still get a restricted card. Now, of these -- the remainder, which is 75,490 who did authorize the check, 58 percent did not meet the requirement for a standard card, and they also therefore got some kind of restricted card.

Now, what does it mean when you don't mean the requirement? It doesn't mean you're Jesse James. It means that you may not earn enough. It means that you may be too young. I mean, just next time you get one of these applications in the mail, take a look at it, and see whether your 18-year-old recent inductee would qualify.

Yeah?

Q: Sir, the thing that triggered this whole thing was GAO -- (inaudible) -- better take a look at two Navy facilities. Now, I've been looking into this thing for quite some time. Can you say anything about whether, you know -- is the Navy still, you know, the rampant abuser? Or how is this spread across the services? And have you been able to quantify to any greater extent what the abuse, the fraud, the loss to the government has been?

Zakheim: Well, that's a lot of questions. Let me start off with what we did at SPAWAR (Space and Naval Warfare Systems Command.) On March 12th, the commanding officer suspended all purchase cards at all SPAWAR locations. And then, they obviously had some critical mission needs so they opened a handful of accounts. And then, by mid-June, they authorized for San Diego and Charleston 70 cardholders, and that's it, with seven cardholders to one approving officer. So, you've got a very, very tight span of control. And the cardholders only get their cards after the names are reviewed and approved by the SPAWAR deputy commander for contracts. What they've done is they've really raised up the level of management attention there. They are setting requirements for local control of the card and card limits. And they're going to -- and the Navy says they're going to hold local commanders accountable for card transactions.

And let me again make this clear: Why do I say Navy commanders? Well, there is a thing called command influence. Civilians cannot go and tell the services how they should deal with these issues. In fact, you know, it's the immediate commanders that have to deal with these issues. And there is a chain, and it's very important to respect that chain and in part because if you don't, you really can't go after people, anyway; you're violating your rules, and they'll go and, you know -- and they'll get off.

So what the Navy has done respecting that chain is to say, "We're going to hold the local commanders accountable." They've also conducted in San Diego remedial training for card holders and billing officials. And that included looking at the GAO findings and talking about corrective action. And then they reviewed what the corrective actions were, and that's how they got up to the 70 people.

Now just now, I got another, very long list of things that the Navy has undertaken -- Navy Department has undertaken in terms of the travel card. The commands have been told to review open -- and this from Dino Aviles, the Navy assistant secretary for financial management. Again, you really need to talk to those folks, too, because they're dead serious about this. They directed the commands to review open accounts and cancel or deactivate unnecessary ones, which is consistent with our recommendation. The number of open Navy accounts declined by 19,000 from September to June -- September 2001 to June 2002.

They've developed and distributed a comprehensive travel card instruction that tells people how to use this. They've promulgated revised policies for the use of the card. They've got a new delinquency metric that'll only -- 4 percent. They're going to see to what extent they're delinquent above 4 percent and keep grinding it down until they get below that metric. And if commands fail to meet the metric -- and this is key -- they have to take additional actions, including deactivating all travel card accounts until 10 days prior to travel, which really can be difficult for people.

And so the Navy is really ramping down on that one. They're going to conduct spot checks for at least 25 percent of the command account. And 50 percent of the accounts, if there is any pattern of abuse. And that's just part of what they're doing. So there's a really serious effort here to get to the root causes of these problems and to manage them.

Q: (inaudible) -- the spotlight is pointed at the Navy. You know, they can't be the only one who's -- (inaudible)

Zakheim: No, they're not. And that's why I said -- I mean, I just -- this just came to me today, so I thought I'd bring it down with me. I think all the services are taking these kinds of remedial actions. They all actively participated in the task force. And they're all stepping out smartly. And I really urge you to speak with financial managers.

Q: What percentage of purchases or travel have you guys determined is fraudulent across the services?

Zakheim: Okay, let me have a -- I have a percentage there.

(To staff) Do you know which tab? Don't we have a percentage?

Q: Can we get a dollar figure, as well?

Zakheim: Well, we're still -- I think part of the difficulty is, you have to --

Q: What I really -- (inaudible) -- is this a huge --

Zakheim: No. No. All right. No, you get -- roughly in the private world it's about 3-5 percent. Okay? What you have here is, we are still -- we're sort of looking at what has not happened. I mean, what you have are relatively small percentages based on the fact that that's what GAO (General Accounting Office) and the IG (Inspector General) constantly turn up. And I think it's safe to say that the preponderance, the overwhelming majority of people are playing it straight. And the reason I say it's safe to say it is because otherwise what you would get are GAO reports of widespread abuse. They would be using, you know, instead of small numbers, very, very large numbers. And they're constantly checking this. I mean, GAO has been on top of this year after year after year and there's endless reports. But the numbers are actually quite small, and that leads us to conclude that, you know, this isn't a large percentage. What is the percentage? Until we do all the data mining, it's not going to be that easy to get our arms around the problem in the sense of -- to give you an exact percentage. And remember, too, you've got lots and lots of people and lots and lots of transactions.

Q: All right. What's your -- what's your feeling on that? Can you --

Zakheim: My feeling was that we're probably in the same ballpark as the private sector.

Q: Around 4 percent?

Zakheim: That's just a guess. I think we're taking a -- it may even be less than that. It actually may be less than that. By and large, if you -- you know, if I were to take an analog with just a general law-abiding nature of the military vis-a-vis the rest of society, the military is far more law-abiding. Okay? So I would argue that that's probably analogous here. And I would say that -- and again, this is just a pure sort of guess, back-of-the-envelope, or gut guess, that we're probably below the rest of society in this. But it doesn't matter. That's still not good enough.

Yeah.

Q: Bank of America has been able to provide with you how many people got restricted and how many were authorized. But have they been able to provide to you a dollar figure on -- as of such and such a date these are the millions of dollars in delinquent accounts?

Zakheim: I don't think we've got that yet. But I --

(To staff) Do we have anything like that on a given date? How much money on a given date was delinquent?

Well, we have a sense of delinquency. But -- but -- are you asking about fraud or about delinquent? Just straightforward delinquency?

Q: Straightforward delinquency --

Zakheim: Yeah, we know that. Sure.

Q: And how much?

Zakheim: How much are delinquent? Where's that tab on that one?

STAFF: B-12.

Zakheim: Okay. That I can tell you.

Okay. The delinquency rate on travel and purchase cards, as of April '02 -- remember, this isn't fraud, this is just delinquency, which means somebody's late, for whatever reason -- 3.4 percent of purchase cards, 6.9 percent for individually billed cards, and .2 percent for centrally billed cards. And that number has just plummeted in the last year or so. I think it was in double digits before. I mean, it was really quite high. And by component, I guess -- I don't know what you would -- we have it by component, too. Okay? So now in the rest of the world the delinquency rate's about 3-5 percent as well.

Again, there's a difference between delinquency and fraud. And by having mandatory offsets, very often people do pay up for all kinds of reasons. You know, if you go -- if you retire, the bank still has your name, and you still may run into problems with a credit check. You don't know that. And so many people pay up. So the level of fraud as opposed to the level of delinquency is probably considerably lower.

Yeah.

Q: And with the travel card you're effectively --

Zakheim: Oh, one other point, if I may. You don't have fraud until it's been proven. Okay? It's not enough to say this was fraudulent. You've got to demonstrate it.

Yeah.

Q: With the travel cards you -- with the mandatory use requirements you're effectively forcing people to get into a third party contract with Bank of America, and they are personally responsible for getting the card paid. Has anybody looked at the legality of that?

Zakheim: Oh, sure.

Q: And it -- I mean, is it --

Zakheim: Oh, sure. I mean, you know, look, a person can always refuse to take a card. You know, nobody's forcing you to take the card.

Q: But there's a mandatory use requirement.

Zakheim: Well --

Q: (off mike) -- it's the law.

Zakheim: I -- yes, it's true it's the law. But the thing is that because of the nature of the protections and because of the nature of the card itself, it's not like, gee, you're forced to have a credit card and you have to pay up in 30 days and you start paying penalties. For example, you don't pay any kind of late charges until 75 days after the account is cleared. Now, why anybody in his right mind should think that's a terrible thing, I don't know. So, yes, the law is telling you to do it, but the fact is, if you didn't do it, either you'd have to find your money, your own cash, or you would have to wait four weeks for a travel advance and go through that whole drill, or you would use your own credit card, in which case you'd have to pay up after 30 days. So this is actually a good deal for the person. And that's why, you know, I mean -- I don't recall -- and correct me if I'm wrong -- have people been violently against the use of credit cards -- or rather, charge cards? We haven't heard any protest against it.

Q: Did your task force recommend prosecution in any instances?

Zakheim: We can't recommend prosecution, because, as I said, that's not -- that becomes an issue of command influence. What we can recommend is that all the vehicles that are available to conduct investigations and prosecutions be used. And then those vehicles, you know, determine whether there is a prosecutable offense or not. But we can't say, "Go and prosecute X."

Q: In doing these audits, can't you refer incidents to --

Zakheim: Absolutely.

Q: -- to the attorney general --

Zakheim: We can refer incidents. And that's what I was saying, was talking about earlier. We can make all kinds of referrals, and the IG can make referrals. But it's one thing to refer for possible prosecution; it's another thing to say, "Go and prosecute" or "They have to have this penalty." We can't do that.

Q: You said in March that the criminal investigative -- the Defense Criminal Investigative people might be a part of your task force, but were they? I don't see them listed.

Zakheim: Yeah, they are. They were. Absolutely.

QHow many cards, travel or purchase, have you taken away for fraud or misuse in the past year? Any idea?

Zakheim: I don't know the number. I can get -- we can probably get it for you. (Centralized statistics are not available on removal of purchase cards for misuse. The Defense Criminal Investigative Service reports investigation of 17 cases involving misuse of purchase cards since 1999. Another 17 cases are ongoing.)

Q: And also, the audits that you're asking the IG to do, are they in addition to what's already done? Are they going to be more comprehensive?

Zakheim: Yeah. Yeah. I mean, what we want them to do is to ramp up their activity in this area.

Q: How do they do it now? Is it real random? Is it 10 percent, less than 10 percent? You want them to do half?

Zakheim: Well, I don't know that you have a percentage. I mean, you would have to go to Joe Schmitz and see how he plans to do this. As you know, the IG takes on all kinds of cases for all kinds of reasons. What this is essentially telling them is, this should become one of your priorities. As you're considering what cases to undertake, bear in mind the deputy secretary, speaking for the secretary, has sent out a memo telling you, "Hey, this is priority." And it may well be that they undertake this kind of a case and move something else to the side because, like everyone else, they have limited resources. So this is, in effect, setting a priority.

One more? Who hasn't asked yet. You asked. You asked.

QBut I've got a good one.

Zakheim: You've got a good one. All right.

Q: You say you're going to hold the senior leadership responsible.

Zakheim: Yes.

Q: Does that mean that somebody could be held either criminally, civilly, their job might be in jeopardy for an employee's actions?

Zakheim: Well, there already is a situation where a person can be liable, and that's the certifying officers. It's called -- and this is a horrible term -- pecuniary liability.

Q: (off mike) --

Zakheim: All it means is that if you were negligent, you are liable. And we already have that on the books. And so now the question is, how do you oversee the certifying officer? And there what we're trying to do is get people to focus on that.

See, there's a lot of things on the books, but you know what the books are. They're huge. The regulations are -- you know, they're mountain-sized.

And so what we're trying to do is to get people to get the bare essentials right, to get the scope of management narrowed so that people don't have to manage a thousand folks or something like that, to get the supervisors to assign priority of monitoring this stuff. And that way, we hold them accountable.

And they could be dealt with in lots of different ways, obviously. Again, it works up in the service chain or in the agency chain. But you're now saying it's not just the person him or herself who used the card improperly. It's not just the certifying officer who can be held pecuniarily liable. How do you like that one? Eliza Higgins (sic) would have had a good time with that. And it's also their bosses. And that's really what we're trying to drive at here.

Q: If they're negligent and don't take corrective actions.

Zakheim: Thank you very much.

Q: It's Eliza Doolittle.

Zakheim: Doolittle.

Q: Yeah.

Zakheim: Another Defense mistake. (laughter)

Q: Professor Higgins and Eliza Doolittle.

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