oversight

Supplemental Nutrition Assistance Program: Actions Needed to Better Measure and Address Retailer Trafficking

Published by the Government Accountability Office on 2019-01-15.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                United States Government Accountability Office
                Report to Congressional Requesters




                SUPPLEMENTAL
December 2018




                NUTRITION
                ASSISTANCE
                PROGRAM

                Actions Needed to
                Better Measure and
                Address Retailer
                Trafficking




GAO-19-167
                                            December 2018

                                            SUPPLEMENTAL NUTRITION ASSISTANCE
                                            PROGRAM
                                            Actions Needed to Better Measure and Address
Highlights of GAO-19-167, a report to       Retailer Trafficking
congressional requesters




Why GAO Did This Study                      What GAO Found
SNAP is the largest federally funded        The U.S. Department of Agriculture (USDA) Food and Nutrition Service’s (FNS)
nutrition assistance program, providing     estimates of retailer trafficking—when a retailer exchanges Supplemental
about $64 billion in benefits to over 20    Nutrition Assistance Program (SNAP) benefits for cash instead of food—have
million households in fiscal year 2017.     limitations, though they suggest trafficking has increased in recent years, to $1
FNS oversees SNAP at the federal            billion each year from 2012 to 2014. One key limitation of the estimates is that
level and is responsible for authorizing    FNS has not evaluated the accuracy of its assumption about the percentage of
and overseeing retailers. While most        SNAP benefits trafficked. FNS assumes that, among stores that trafficked, 90
benefits are used as intended, some         percent of the benefits redeemed in small stores, and 40 percent in large stores,
retailers have engaged in trafficking,
                                            were trafficked. A former FNS official stated that this assumption is based on
which represents fraud and diverts
                                            discussions with investigators in the 1990s when FNS first developed its
federal funds from their intended use.
GAO was asked to review FNS’s
                                            approach to estimate trafficking, and that they have not since evaluated it for
efforts to address SNAP retailer            accuracy. However, there are options available for evaluating this assumption,
trafficking since GAO’s last report in      such as reviewing SNAP transaction data from stores that are known to have
2006.                                       trafficked. Statistical standards for federal agencies indicate that assumptions
                                            should be reviewed for accuracy and validated using available, independent
This report examines (1) what is known      information sources. By not evaluating this key assumption, FNS’s commonly
about the extent of SNAP retailer           cited estimates of SNAP fraud are potentially inaccurate.
trafficking, and (2) the extent to which
FNS has taken steps intended to             Illustration of Retailer Trafficking in the Supplemental Nutrition Assistance Program (SNAP)
improve how it prevents, detects, and
responds to retailer trafficking. GAO
reviewed relevant federal laws and
regulations, FNS policies, and studies
related to retailer trafficking; assessed
FNS’s use of statistical standards for
federal agencies and selected leading
practices in GAO’s Fraud Risk               FNS has generally taken steps to address retailer trafficking that align with
Framework; and interviewed FNS and          leading fraud risk management practices, but the agency has not pursued
USDA Office of Inspector General            additional actions to prevent and respond to trafficking. For example:
officials and key stakeholders.             •   Although FNS assigns a risk level to each store when it applies to participate
What GAO Recommends                             in SNAP, it is not currently using this information to target its reauthorization
                                                activities to stores of greatest risk. During reauthorization, FNS reviews
GAO is making five recommendations,             previously approved stores for continued compliance with program
including that FNS improve its                  requirements. FNS currently reauthorizes all stores on the same 5-year
trafficking estimates by, for example,          cycle, regardless of risk, although its policy states that it will reauthorize
evaluating the accuracy of its                  certain high-risk stores annually. FNS officials planned to reauthorize a
assumption of the percentage of                 sample of high-risk stores each year, but said they did not follow through with
benefits that are trafficked; assess the        those plans. Officials also stated that they did not document an analysis of
benefits and costs of reauthorizing a           the benefits and costs of this practice, which would be consistent with leading
sample of high risk stores more                 fraud risk management practices. As a result, FNS may be missing an
frequently than others; and move                opportunity to provide early oversight of risky stores and prevent trafficking.
forward with plans to increase
penalties for trafficking. FNS generally    •   The Food, Conservation, and Energy Act of 2008 gave USDA the authority to
agreed with GAO’s recommendations.              strengthen penalties for retailers found to have trafficked, but as of
                                                November 2018, FNS had not implemented this authority. FNS proposed a
View GAO-19-167. For more information,          related rule change in 2012 and indicated the change was necessary to deter
contact Kathy Larin at (202) 512-7215 or        retailers from committing program violations, but the rule was not finalized.
larink@gao.gov.                                 By failing to take timely action to strengthen penalties, FNS has not taken full
                                                advantage of an important tool for deterring trafficking.
                                                                                          United States Government Accountability Office
Contents


Letter                                                                                  1
             Background                                                                 3
             FNS Estimates Suggest Retailer Trafficking Has Increased in
               Recent Years, but the Estimates Have Limitations                        10
             FNS Has Taken Some Steps That Generally Align with Leading
               Practices to Prevent, Detect, and Respond to Retailer
               Trafficking, but Has Not Pursued Others                                 17
             Conclusions                                                               30
             Recommendations for Executive Action                                      31
             Agency Comments and Our Evaluation                                        31

Appendix I   GAO Contact and Staff Acknowledgments                                     34



Figures
             Figure 1: Number of Authorized Stores and Amount of Benefits
                      Redeemed in the Supplemental Nutrition Assistance
                      Program (SNAP), Fiscal Years 2007 – 2017                          4
             Figure 2: Examples of Legitimate and Retailer Trafficking
                      Transactions in the Supplemental Nutrition Assistance
                      Program (SNAP)                                                    6
             Figure 3: Food and Nutrition Service (FNS) Offices with
                      Responsibilities Related to Supplemental Nutrition
                      Assistance Program (SNAP) Retailer Oversight and
                      Trafficking                                                       8
             Figure 4: Food and Nutrition Service’s (FNS) Methodology to
                      Estimate Retailer Trafficking in the Supplemental
                      Nutrition Assistance Program (SNAP)                               9
             Figure 5: Supplemental Nutrition Assistance Program (SNAP)
                      Retailer Trafficking Estimates and Ranges, 2006 – 2014           12
             Figure 6: Previous (as of 2006) and Current Supplemental
                      Nutrition Assistance Program (SNAP) Food Stock
                      Requirements for Authorized Retailers                            19
             Figure 7: Food and Nutrition Service (FNS) Photographs from
                      Training Session on Detecting Retailer Trafficking               22
             Figure 8: U.S. Department of Agriculture (USDA) Office of
                      Inspector General (OIG) Retailer Trafficking
                      Investigations Accepted and Declined for Prosecution,
                      Fiscal Years 2007 – 2017                                         25




             Page i                                         GAO-19-167 Retailer Trafficking
Figure 9: Permanent Disqualifications and Penalties for
         Supplemental Nutrition Assistance Program (SNAP)
         Retailer Trafficking, by Type of Case, Fiscal Years 2007
         – 2017                                                                           26




Abbreviations

ALERT             Anti-Fraud Locator using Electronic Benefits Transfer
                  Retailer Transactions
EBT               Electronic Benefits Transfer
FNS               Food and Nutrition Service
MOU               memorandum of understanding
OIG               Office of Inspector General
OMB               Office of Management and Budget
SLEB              state law enforcement bureau
SNAP              Supplemental Nutrition Assistance Program
USDA              United States Department of Agriculture




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Page ii                                                     GAO-19-167 Retailer Trafficking
                       Letter




441 G St. N.W.
Washington, DC 20548




                       December 14, 2018

                       Congressional Requesters

                       The Supplemental Nutrition Assistance Program (SNAP) is the largest
                       federally funded nutrition assistance program, providing approximately
                       $64 billion in benefits to about 42 million people in over 20 million
                       households in fiscal year 2017. SNAP recipients receive monthly cash
                       benefits on an Electronic Benefits Transfer (EBT) card and redeem them
                       for food at authorized retailers.

                       Most SNAP benefits are used for the intended purpose, according to the
                       U.S. Department of Agriculture’s (USDA) Food and Nutrition Service
                       (FNS), which oversees SNAP at the federal level and is responsible for
                       authorizing and overseeing retailers that participate in the program.
                       However, program officials have long-standing concerns about retailer
                       trafficking—a practice in which retailers exchange recipients’ benefits for
                       cash instead of food, often taking a fraudulent profit. As we previously
                       reported in 2006, FNS has faced challenges in addressing retailer
                       trafficking. 1 You asked us to review steps FNS has taken in this area
                       since our last report.

                       We assessed (1) what is known about the extent of retailer trafficking in
                       SNAP, and (2) the extent to which FNS has taken steps since 2006
                       intended to improve how it prevents, detects, and responds to retailer
                       trafficking.

                       To examine what is known about the extent of retailer trafficking and
                       FNS’s trafficking estimates, we reviewed FNS’s three most recent reports
                       on the Extent of Trafficking in the Supplemental Nutrition Assistance
                       Program—covering data from calendar years 2006 through 2014. In order
                       to assess the reliability of the estimates, we reviewed technical
                       information on FNS’s methodology included in appendices to its
                       trafficking reports and additional FNS studies regarding the methodology
                       used to estimate trafficking. We also reviewed the Office of Management



                       1
                        GAO, Food Stamp Trafficking: FNS Could Enhance Program Integrity by Better Targeting
                       Stores Likely to Traffic and Increasing Penalties, GAO-07-53 (Washington, D.C.: Oct. 13,
                       2006).




                       Page 1                                                    GAO-19-167 Retailer Trafficking
and Budget’s statistical standards for federal agencies. 2 We interviewed
FNS officials about the methodology and data used to estimate trafficking
and any steps the agency has taken or plans to take to address any
limitations of the methodology. We also interviewed USDA Office of
Inspector General (OIG) officials about their prior work related to the
retailer trafficking estimates, as well as a former FNS official familiar with
the development of the methodology and the contractors who produced
the most recent estimates and studied limitations of the methodology. We
determined that FNS’s trafficking estimates were sufficiently reliable for
the purpose of describing general trends in retailer trafficking, but we also
identified some limitations of the estimates, which we discuss in this
report.

To examine FNS’s steps intended to improve how it prevents, detects,
and responds to retailer trafficking, we reviewed relevant federal laws and
regulations and proposed rules related to retailer trafficking, as well as
relevant FNS policies, standard operating procedures, and staff
performance work plans, among other documents. We also reviewed
relevant GAO and USDA OIG reports and determined the status of FNS’s
responses to prior audit recommendations by interviewing FNS and OIG
officials and obtaining relevant documents. We interviewed FNS officials
about steps the agency has taken since 2006 to improve how it prevents,
detects, and responds to retailer trafficking, and OIG officials about their
role investigating SNAP retailer trafficking. We assessed FNS’s efforts to
address retailer trafficking against selected leading practices in GAO’s A
Framework for Managing Fraud Risks in Federal Programs (Fraud Risk
Framework) related to designing and implementing fraud controls and
monitoring and evaluating activities. 3 To obtain stakeholder perspectives,
we interviewed representatives from two national associations
representing independent grocery stores and convenience stores. We
also interviewed officials from three states—Georgia, Pennsylvania, and

2
 Office of Management and Budget, Standards and Guidelines for Statistical Surveys
(Washington, D.C.: September 2006).
3
 GAO, A Framework for Managing Fraud Risks in Federal Programs, GAO-15-593SP
(Washington, D.C.: July 2015). This document describes leading practices that agencies
can follow to proactively and strategically manage fraud risks. The Fraud Risk Framework
describes leading practices in four components: commit, assess, design and implement,
and evaluate and adapt. We selected leading practices within the design and implement
and evaluate and adapt components because FNS had identified SNAP retailer trafficking
as a fraud risk. The other components relate to organizational culture and risk
assessments, which we considered to be broader than retailer trafficking. We did not
evaluate the effectiveness of FNS’s controls for addressing retailer trafficking.




Page 2                                                    GAO-19-167 Retailer Trafficking
             Washington—about their experiences working with FNS to help
             investigate SNAP retailer trafficking. We selected these states as
             illustrative examples based on several criteria, including the rate at which
             retailers in each state received sanctions for SNAP violations and
             geographic dispersion. Finally, to provide context for our findings, we
             analyzed summary-level data from FNS and the USDA OIG on trends in
             SNAP participation and agency activities to address retailer trafficking
             from fiscal years 2007 through 2017. We assessed the reliability of these
             data through a review of FNS and OIG documents and interviews with
             knowledgeable officials. We found the data to be sufficiently reliable for
             the purpose of providing contextual information on trends in FNS and OIG
             retailer monitoring and oversight activities.

             We conducted this performance audit from January 2018 to December
             2018 in accordance with generally accepted government auditing
             standards. Those standards require that we plan and perform the audit to
             obtain sufficient, appropriate evidence to provide a reasonable basis for
             our findings and conclusions based on our audit objectives. We believe
             that the evidence obtained provides a reasonable basis for our findings
             and conclusions based on our audit objectives.


             SNAP is intended to help low-income households obtain a more nutritious
Background   diet by providing them with benefits to purchase food from authorized
             retailers nationwide. 4 SNAP is jointly administered by FNS and the states.
             FNS pays the full cost of SNAP benefits and shares the costs of
             administering the program with the states. FNS is responsible for
             promulgating SNAP program regulations, ensuring that state officials
             administer the program in compliance with program rules, and authorizing
             and monitoring stores from which recipients may purchase food. 5 States
             are responsible for determining applicant eligibility, calculating the amount
             of their benefits, issuing the benefits on EBT cards—which can be used
             like debit cards to purchase food from authorized retailers—and
             investigating possible program violations by recipients.



             4
              Recipients may not purchase certain items, such as tobacco, alcohol, or hot food
             intended for immediate consumption.
             5
              For the purposes of this report, we use the term “retailer” generally or to refer to the entity
             that owns a store. We use the term “store” to refer to individual store locations. FNS
             authorizes store locations individually.




             Page 3                                                         GAO-19-167 Retailer Trafficking
                                       Participation in SNAP has generally increased among recipients and
                                       retailers in recent years. Specifically, participation in SNAP increased
                                       from about 26 million recipients in fiscal year 2007 to 42 million in fiscal
                                       year 2017, leading to a corresponding increase in the amount of SNAP
                                       benefits redeemed. The number of stores FNS authorized to participate in
                                       SNAP also increased, from about 162,000 nationwide in fiscal year 2007
                                       to more than 250,000 in fiscal year 2017. 6 Although there was particular
                                       growth in the number of small grocery and convenience stores, as well as
                                       “other” stores (which include independent drug stores, general
                                       merchandise stores like dollar stores, and farmers’ markets), the majority
                                       of SNAP benefits were redeemed at large grocery stores and
                                       supermarkets in each year (see fig. 1).

Figure 1: Number of Authorized Stores and Amount of Benefits Redeemed in the Supplemental Nutrition Assistance Program
(SNAP), Fiscal Years 2007 – 2017




                                       6
                                        The number of authorized stores—based on data provided by FNS—excludes meal
                                       services, which can also participate in SNAP. An example of a meal service is a dining
                                       facility in a building predominantly occupied by elderly people and recipients of
                                       Supplemental Security Income and their spouses.




                                       Page 4                                                     GAO-19-167 Retailer Trafficking
                       a
                        Specialty food stores include stores that specialize in the sale of certain foods, such as bread or
                       cereal products, fruits or vegetables, or meat products.
                       b
                        The “other” category includes stores that primarily sell general merchandise, but also sell a variety of
                       food products. These stores include independent drug stores, dollar stores, general stores, as well as
                       farmers’ markets.


Retailer Trafficking   According to FNS, most SNAP benefits are used for the intended
                       purpose; however, as we have reported in prior work, FNS has faced
                       challenges addressing trafficking—one type of program fraud. 7 In general,
                       trafficking occurs when retailers exchange recipients’ SNAP benefits for
                       cash, often taking a fraudulent profit. For example, a retailer might charge
                       $100 to a recipient’s SNAP EBT card and give the recipient $50 in cash
                       instead of $100 in food. The federal government reimburses the retailer
                       $100, which results in a fraudulent $50 profit to the retailer. While this
                       type of trafficking is a direct exchange of SNAP benefits for money,
                       trafficking also can be done indirectly. For example, a retailer might give a
                       recipient $50 in cash for the use of $100 in benefits on that recipient’s
                       EBT card. The retailer could then use the EBT card to purchase $100 in
                       products at another SNAP retailer (see fig. 2). In this instance, the retailer
                       would profit because they paid $50 for $100 worth of products, and the
                       retailer might also increase their profit by reselling the products at a
                       higher price in their own store.




                       7
                           GAO-07-53.




                       Page 5                                                               GAO-19-167 Retailer Trafficking
                          Figure 2: Examples of Legitimate and Retailer Trafficking Transactions in the
                          Supplemental Nutrition Assistance Program (SNAP)




Retailer Management and   Among other things, FNS is responsible for authorizing and monitoring
Oversight                 retailers who participate in SNAP to ensure program integrity. In order to
                          participate in SNAP, a retailer applies to FNS and demonstrates that they
                          meet program requirements, such as those on the amount and types of
                          food that authorized stores must carry. FNS verifies a retailer’s
                          compliance with these requirements, for example, through an on-site
                          inspection of the store. If the retailer meets requirements, FNS generally
                          authorizes it to participate for a period of 5 years.

                          FNS then monitors retailers’ participation by analyzing data on SNAP
                          transactions and conducting undercover investigations, among other
                          activities. If FNS suspects a retailer is trafficking, it generally must notify
                          the USDA OIG—which is responsible for investigating allegations of fraud
                          and abuse in all of USDA’s programs, including SNAP—before opening a




                          Page 6                                                 GAO-19-167 Retailer Trafficking
case. The OIG may choose to open its own investigation of the retailer for
possible criminal prosecution, or allow FNS to pursue the case. 8

If FNS determines that a retailer has engaged in trafficking, FNS
sanctions the store. 9 Generally, stores found to have engaged in
trafficking are permanently disqualified from SNAP, but in limited
circumstances, the owner may instead receive a civil monetary penalty. 10
Retailers who do not agree with the sanction assessed by FNS can file a
written request to have FNS’s Administrative Review Branch review the
decision, and, if not satisfied, file a complaint in the appropriate U.S.
District Court.

In 2013, FNS consolidated its retailer management functions, including
those for authorizing stores and analyzing SNAP transaction data, into a
single national structure known as the Retailer Operations Division (see
fig. 3).




8
 The OIG also may work with other federal law enforcement agencies, such as the
Federal Bureau of Investigation, to pursue retailer trafficking.
9
 Prior to assessing a permanent disqualification or penalty as a result of an undercover
investigation, FNS generally presents the case to the OIG for possible escalation.
Specifically, the OIG will decide whether to investigate the case further for possible
prosecution by the U.S. Attorney’s Office or by state and local prosecutors, or allow FNS
to complete the disqualification action.
10
  Under current regulations, FNS assesses either a civil monetary penalty for trafficking or
permanent disqualification, but not both. 7 C.F.R. § 278.6. At the retailer’s request, FNS
can assess a civil monetary penalty for trafficking if a store demonstrates that it has an
effective compliance policy and program in effect to prevent violations of relevant law and
regulations and meets additional criteria.




Page 7                                                      GAO-19-167 Retailer Trafficking
Figure 3: Food and Nutrition Service (FNS) Offices with Responsibilities Related to Supplemental Nutrition Assistance
Program (SNAP) Retailer Oversight and Trafficking




                                         Note: FNS generally notifies the U.S. Department of Agriculture Office of Inspector General (OIG)
                                         before opening a case based on analysis of SNAP transaction data. In addition, if an FNS investigator
                                         is successful in trafficking with a retailer, FNS generally presents the case to the OIG for possible
                                         escalation.


Estimating Retailer                      Since 1995, FNS has published periodic reports estimating the extent of
Trafficking                              trafficking in SNAP as part of its efforts to monitor program integrity.
                                         These trafficking estimates are the most commonly cited measure of
                                         SNAP fraud, including in the news media and congressional testimony.

                                         FNS estimates retailer trafficking by adjusting a sample of stores known
                                         or suspected of trafficking to reflect the total population of SNAP-
                                         authorized stores. For each report, FNS uses 3 years of data on stores



                                         Page 8                                                            GAO-19-167 Retailer Trafficking
                                         and SNAP transactions to estimate the amount and percentage of
                                         benefits that were trafficked and the percentage of stores engaged in
                                         trafficking (see fig. 4). For example, the most recent report—published in
                                         September 2017—analyzes data from 2012 through 2014.

Figure 4: Food and Nutrition Service’s (FNS) Methodology to Estimate Retailer Trafficking in the Supplemental Nutrition
Assistance Program (SNAP)




                                         Note: FNS’s Watch List is a list of stores that FNS has identified as having suspicious transaction
                                         patterns or other indications of potential trafficking.




                                         Page 9                                                              GAO-19-167 Retailer Trafficking
FNS Estimates
Suggest Retailer
Trafficking Has
Increased in Recent
Years, but the
Estimates Have
Limitations
FNS Estimates Indicate an     FNS’s data indicate an increase in the estimated rate of retailer trafficking
Increase in Retailer          in recent years. FNS reported in March 2011 that approximately $330
                              million in SNAP benefits (or 1 percent of all benefits redeemed) were
Trafficking, but the Actual
                              trafficked annually from 2006 through 2008, and that approximately 8.2
Extent of Trafficking Is      percent of all authorized stores engaged in trafficking. 11 In its most recent
Uncertain                     report from September 2017, FNS reported that approximately $1 billion
                              in SNAP benefits (or 1.5 percent) were trafficked annually from 2012
                              through 2014, and that approximately 11.8 percent of all authorized
                              stores engaged in trafficking. 12

                              Although FNS produces the trafficking estimates with accepted statistical
                              methods, its reports do not clearly convey the level of uncertainty
                              introduced by the approach used to calculate the estimates. Throughout
                              each report, FNS presents its estimates as precise numbers. However,
                              uncertainty is introduced when extrapolating from a smaller sample—in
                              this case, an investigative sample that solely includes stores known to
                              have trafficked or suspected of trafficking—to the full population of SNAP-
                              authorized stores because the extent to which the sample reflects the




                              11
                                U.S. Department of Agriculture, Food and Nutrition Service, The Extent of Trafficking in
                              the Supplemental Nutrition Assistance Program: 2006-2008 (Alexandria, VA: March
                              2011).
                              12
                                U.S. Department of Agriculture, Food and Nutrition Service, The Extent of Trafficking in
                              the Supplemental Nutrition Assistance Program: 2012-2014 (Alexandria, VA: September
                              2017).




                              Page 10                                                     GAO-19-167 Retailer Trafficking
broader population of stores is unknown (see sidebar). 13 According to the
Office of Management and Budget’s (OMB) statistical standards for
federal agencies, possible variation in estimates should be noted, such as
by reporting the range of each estimate. 14 While FNS discusses some
limitations of its trafficking estimates in the body of each report, only the
report’s appendices include information that can be used to assess the
level of uncertainty around the estimates.

Using information contained in these appendices, we found widely
varying trafficking estimates. 15 For example, although FNS reported that
approximately $1 billion in SNAP benefits were trafficked annually from
2012 through 2014, information in the report’s appendices indicates that
the amount trafficked could have ranged from about $960 million to $4.7
billion. In other words, the total value of SNAP benefits that were
trafficked each year from 2012 through 2014 could have been
approximately $40 million less or $3 billion more than FNS reported (see
fig. 5).




13
  FNS’s sample is not a random sample drawn from the population of all SNAP-authorized
stores. Instead, it is the subset of stores FNS suspected of trafficking or found trafficking.
As a result, any estimates made from the sample to the population need to be adjusted to
reduce the bias introduced because the sample only includes stores meeting these
criteria. In a random sample, every SNAP-authorized store would have a known chance of
being selected for the sample, regardless of whether they were suspected of trafficking.
Statistical theory ensures that such a sample would produce estimates for the population
of SNAP-authorized stores that are accurate to a specified level of certainty.
14
  Office of Management and Budget, Standards and Guidelines for Statistical Surveys
(Washington, D.C.: September 2006).
15
   Two of the appendices in FNS’s reports include the results from tests that look at how
much the estimates could change if different stores were included in the sample. The first
test varies the cases that are chosen from the current investigative sample. FNS refers to
the results of the test as “estimate intervals.” The second test is a sensitivity analysis that
assesses how the estimates could change if the sample were defined differently (e.g., if
FNS assumed that a certain percentage of cases on its Watch List that were closed
without further action were actually trafficking). The lower end of the range we report in
figure 5 is the lowest estimate from either appendix, and the upper end of the range is the
highest estimate from either appendix. Although these appendices use different
approaches, FNS reported that both should be considered to indicate the possible extent
of trafficking. These analyses are included in appendices H and I to FNS’s August 2013
and September 2017 trafficking estimates reports and appendices I and L to the March
2011 report.




Page 11                                                        GAO-19-167 Retailer Trafficking
Figure 5: Supplemental Nutrition Assistance Program (SNAP) Retailer Trafficking Estimates and Ranges, 2006 – 2014




                                        Note: The estimates presented in the figure above are annualized, based on 3 years of data.
                                        Information on the ranges of the estimates was obtained from two appendices to FNS’s The Extent of
                                        Trafficking in the Supplemental Nutrition Assistance Program reports. The two appendices report the
                                        results of separate tests that look at how much the estimates could change if different stores were
                                        included in the sample. For example, one appendix includes the results of a sensitivity analysis that
                                        assessed how the estimates could change if the sample were defined differently.


                                        FNS officials stated the agency has not considered and does not intend to
                                        consider changes to how it reports its trafficking estimates in the next
                                        report. 16 According to an FNS official, FNS would like the reports to
                                        continue to provide non-technical information that is comparable to prior
                                        years. However, as shown in the figure above, it is possible to compare
                                        estimates over time when estimates are presented with ranges. Further,
                                        reporting the level of uncertainty with each estimate increases
                                        transparency. According to a recent Congressional Research Service
                                        report, these estimates are the most-often cited measure of fraud in
                                        SNAP. 17 The estimates have been cited in the news media and

                                        16
                                          FNS officials told us that they awarded the contract for the next trafficking estimates
                                        study in September 2018.
                                        17
                                         Congressional Research Service, Errors and Fraud in the Supplemental Nutrition
                                        Assistance Program (SNAP) (Washington, D.C.: Mar. 30, 2018).




                                        Page 12                                                           GAO-19-167 Retailer Trafficking
                             congressional testimony, and FNS officials stated the estimates can help
                             quantify the outcomes of FNS’s efforts to prevent, detect, and respond to
                             retailer trafficking. By not clearly reporting the level of uncertainty around
                             these commonly cited estimates of SNAP retailer trafficking, FNS’s
                             reports are potentially providing misleading information to Congress and
                             the public regarding the extent of fraud in SNAP.


FNS Evaluated Ways to        FNS has acknowledged limitations with its current approach to estimating
Address Some Limitations     retailer trafficking and evaluated ways to address some of those
                             limitations. As previously noted, FNS selects a non-random sample of
in the Trafficking
                             stores known to have trafficked or suspected of trafficking when
Estimates, but Does Not      calculating its estimates, which may introduce bias into those trafficking
Plan to Take Further Steps   estimates (see sidebar). For example, the sample could overestimate the
                             extent of retailer trafficking if the stores in the sample that are targeted for
                             investigation are more likely to traffic. Conversely, if FNS’s detection
                             methods do not capture all instances of trafficking—such as retailers who
                             only traffic with people they know—the sample could lead to an
                             underestimate of trafficking among all SNAP-authorized stores.
                             Recognizing that the trafficking estimates provide important information
                             on program fraud, FNS evaluated ways to address limitations in the
                             estimates. In 2013, FNS convened a technical working group of experts
                             to discuss alternate ways to estimate retailer trafficking. That group made
                             various recommendations to improve the estimates, some of which FNS
                             pursued through additional analyses.

                             For example, to address limitations introduced by the sample FNS uses
                             to estimate trafficking, the agency conducted a study to assess the
                             feasibility of calculating its estimates using a national random sample of
                             stores. 18 However, FNS determined it would be infeasible to use a
                             random sample because of the costs and resources that would be
                             involved. According to FNS officials, it cost the agency approximately
                             $67,000 to produce the September 2017 trafficking estimates report. By
                             comparison, FNS estimated that using a national random sample could
                             cost between $11.5 million and $38 million, depending on the specific

                             18
                               FNS contracted for a feasibility study in response to a recommendation from the USDA
                             OIG. U.S. Department of Agriculture, Office of Inspector General, Analysis of FNS’
                             Supplemental Nutrition Assistance Program Fraud Prevention and Detection Efforts, Audit
                             Report 27002-0011-13 (Washington, D.C.: September 2012). Some of the members of the
                             technical working group in 2013 also recommended FNS explore using a random sample
                             of stores.




                             Page 13                                                  GAO-19-167 Retailer Trafficking
sample selection method. This is because, among other factors, taking
this approach would require investigative staff to visit stores suspected of
trafficking as well as those that are not suspected of trafficking. Doing so
would require a significant number of additional investigators, according
to the feasibility study.

Also in response to a recommendation by the technical working group,
FNS contracted for a study in November 2017 that reviewed the five
factors the agency uses to make adjustments to reduce the bias in its
sample of stores (see sidebar). FNS began using these five factors—such
as the type of store—more than 20 years ago when it initially developed
its approach to estimating trafficking. The study evaluated the continued
relevance of the five factors, as well as the relevance of additional factors
related to store characteristics and neighborhood demographics. 19 The
study did not make recommendations, and the expert who conducted the
study told us that based on the analysis, the original five factors remain
relevant. As a result, FNS officials stated the agency would continue to
use these factors to reduce bias in the sample.

However, FNS has not evaluated whether factors the agency currently
uses to identify stores for possible investigation could help reduce bias in
the sample and improve the trafficking estimates. Specifically, FNS
analyzes data on SNAP transactions and looks for suspicious patterns or
other indications of potential trafficking. Based on the results of these
analyses, FNS assigns a numeric score to each store, and stores with
scores above a certain threshold are added to FNS’s Watch List for
further review. 20 Several experts have suggested to FNS that including
this score or other related factors when adjusting the investigative sample
could help reduce the bias in the sample and improve the trafficking




19
  FNS’s contractor explored the current factors and possible other factors as part of a
larger proof-of-concept study on the use of statistical models—instead of the current
methodology—to calculate trafficking estimates. Prior to this, the technical working group
in 2013 recommended FNS re-examine the current factors to ensure they are still
predictors of trafficking.
20
  The numeric scores are based on the results of a logistic regression model. Stores also
must meet other criteria, such as having monthly SNAP transactions over a certain level,
to be included on the Watch List. FNS analysts and investigators prioritize the stores on
this list, among other factors, for further review. We discuss FNS’s data analytics to detect
trafficking in further detail later in this report.




Page 14                                                      GAO-19-167 Retailer Trafficking
estimates, 21 yet FNS has not evaluated the use of these factors for this
purpose. 22 FNS officials said that stores’ numeric scores and the factors
related to the Watch List are not public information, and the agency’s
preference is to be transparent about the methodology used to produce
the trafficking estimates. However, FNS already describes its Watch List
and the use of a numeric score threshold in an appendix to its trafficking
reports. According to OMB’s statistical standards, federal agencies should
take steps to maximize the objectivity of the statistical information they
produce. Objectivity refers to whether the information is accurate, reliable,
and unbiased. 23 Without evaluating the usefulness of the Watch List
factors for adjusting the sample, FNS may miss an opportunity to reduce
the bias in the sample and improve the accuracy of its trafficking
estimates.

In addition, FNS has not evaluated the accuracy of its assumption of the
percentage of SNAP benefits trafficked by different types of stores, which
FNS developed over 20 years ago from anecdotal information. Among
stores that engaged in trafficking, FNS assumes that 90 percent of
benefits redeemed in small stores and 40 percent of benefits redeemed in
large stores were trafficked (see sidebar). A former FNS official who
helped develop the agency’s approach for estimating trafficking stated
that the assumption was based on conversations with investigators in the
1990s—deemed to be the best source of information at the time. He
noted that the investigators who were consulted generally disagreed on
the percentage of benefits that were trafficked, as the actual percentage
could vary widely based on whether, for example, one employee had
trafficked or the entire store was a front for trafficking. However, the
investigators generally agreed that 90 percent and 40 percent would
overestimate trafficking by retailers in small and large stores, respectively.
According to FNS officials, in the absence of other data, they preferred to
use an overestimate, rather than an underestimate, of the percentage of
benefits trafficked in stores found to have trafficked.

21
  The contractors who produced the most recent retailer trafficking estimates and studied
limitations of the methodology, as well as the technical working group FNS convened in
2013, both discussed the use of a numeric score or related factors with FNS.
22
   Specifically, using factors to adjust the investigative sample that are related to a store’s
likelihood of being investigated by FNS could help reduce selection bias in the trafficking
estimates.
23
  Office of Management and Budget, Standards and Guidelines for Statistical Surveys
(Washington, D.C.: September 2006).




Page 15                                                        GAO-19-167 Retailer Trafficking
Despite an increase in the availability of data on retailer trafficking over
the last 20 years, FNS officials have not evaluated the accuracy of this
key assumption and said that they have no plans to do so. FNS officials
noted that they do not believe there are available data that indicate
whether the assumption is accurate and, as such, any evaluation would
require new data collection. However, according to contractors and a
former official we spoke with who had studied the methodology as well as
USDA OIG officials, data are currently available that may help FNS
evaluate the accuracy of this assumption. 24 For example, they suggested
FNS could analyze the transaction data of stores that trafficked to identify
the percentage of all redeemed SNAP benefits that were consistent with
known indicators of trafficking. Currently, OIG officials told us that they
use a similar approach to calculate the amount of benefits trafficked for a
store whose owner is being prosecuted. According to OMB’s statistical
standards, assumptions should be reviewed for accuracy and validated
using available, independent information sources. 25 Without FNS
evaluating its key assumption of the percentage of SNAP benefits
trafficked, the estimates it reports on the extent of program fraud are
potentially inaccurate.




24
  We interviewed a former FNS official familiar with the development of the methodology
and the contractors who produced the most recent estimates and studied limitations of the
methodology. One of the contractors also was a member of FNS’s technical working
group in 2013.
25
  Office of Management and Budget, Standards and Guidelines for Statistical Surveys
(Washington, D.C.: September 2006).




Page 16                                                   GAO-19-167 Retailer Trafficking
FNS Has Taken
Some Steps That
Generally Align with
Leading Practices to
Prevent, Detect, and
Respond to Retailer
Trafficking, but Has
Not Pursued Others
FNS Has Taken Steps to
Address Retailer
Trafficking, but Has Not
Pursued Certain
Prevention and Response
Activities
Preventing Trafficking in the    FNS has taken some steps to prevent retailer trafficking that align with
Retailer Authorization Process   leading fraud risk management practices and our prior recommendations,
                                 but has not pursued some opportunities for early oversight. 26 As we note
                                 in our Fraud Risk Framework, while fraud control activities can be
                                 interdependent and mutually reinforcing, preventative activities generally
                                 offer the most cost-effective investment of resources. FNS officials told us
                                 that the agency tries to prevent trafficking through its policies and
                                 procedures for authorizing stores to participate in SNAP. Since our 2006

                                 26
                                    The Fraud Reduction and Data Analytics Act of 2015, enacted in June 2016, requires
                                 the Office of Management and Budget to establish guidelines for federal agencies to
                                 create controls to identify and assess fraud risks and design and implement antifraud
                                 control activities and incorporate leading practices in GAO’s Fraud Risk Framework.
                                 According to the Act, the controls should include: (1) conducting an evaluation of fraud
                                 risks and using a risk-based approach to design and implement financial and
                                 administrative control activities to mitigate identified fraud risks; (2) collecting and
                                 analyzing data from reporting mechanisms on detected fraud to monitor fraud trends and
                                 using that data and information to continuously improve fraud prevention controls; and (3)
                                 using the results of monitoring, evaluation, audits, and investigations to improve fraud
                                 prevention, detection, and response. Further, agencies are required to annually report on
                                 their progress in implementing the required controls for each of the first three fiscal years
                                 after the Act’s enactment. Pub. L. No. 114-186, § 3, 130 Stat. 546, 546, codified at 31
                                 U.S.C. § 3321 note.




                                 Page 17                                                      GAO-19-167 Retailer Trafficking
report, 27 FNS has taken some steps to amend retailer authorization
policies to address vulnerabilities that we identified. For example:

•     Increasing requirements for food that retailers must stock to
      participate in SNAP: In 2006, we found that FNS had minimal
      requirements for the amount of food that retailers must stock, which
      could allow retailers more likely to traffic into the program. At that
      time, FNS officials said that they authorized stores with limited food
      stock to provide access to food in low-income areas where large
      grocery stores were scarce. In 2006, retailers were generally required
      to stock a minimum of 12 food items (at least 3 varieties in each of 4
      staple food categories), but FNS rules did not specify how many items
      of each variety would constitute sufficient stock. 28 We recommended
      that FNS develop criteria to help identify the stores most likely to
      traffic, using information such as the presence of low food stock. 29 In
      2016, FNS promulgated a final rule increasing food stock
      requirements and, in January 2018, issued a policy memorandum to
      clarify these requirements. 30 FNS officials told us that the new
      requirements are designed to encourage stores to provide more
      healthy food options for recipients and discourage trafficking.
      According to the memorandum, retailers are now generally required to
      stock at least 36 food items (including stocking at least 3 varieties in

27
    GAO-07-53.
28
  Alternatively, retailers could meet a second criterion for authorization, which required a
store to have more than 50 percent of its sales in staple foods. According to FNS, staple
foods are the basic food items that make up a significant portion of an individual’s diet and
are usually prepared at home. Staple food varieties are different types of food within a
staple food category. For example, oranges, bananas, and broccoli are three distinct
staple food varieties in the vegetables or fruits category.
29
 GAO-07-53. We recommended that FNS develop criteria to help identify and target its
monitoring resources to stores most likely to traffic, including those with low food stocks.
FNS stated that it generally agreed with our recommendations.
30
  The final rule, “Enhancing Retailer Standards in the Supplemental Nutrition Assistance
Program (SNAP),” published on December 15, 2016, implemented provisions of the
Agricultural Act of 2014 (known as the 2014 Farm Bill), and made other changes. 81 Fed.
Reg. 90,675. For example, changes were made to food stock requirements, including the
number and types of items stores must stock (known as “depth of stock” requirements).
Subsequently, the Consolidated Appropriations Act, 2017, enacted on May 5, 2017,
prevented implementation of certain provisions of FNS’s December 2016 final rule and
directed USDA to continue utilizing the requirements in place prior to the 2014 Farm Bill
until FNS promulgates specific regulatory amendments. Pub. L. No. 115-31, § 765, 131
Stat. 135, 179. FNS published a policy memorandum in January 2018 to clarify the
requirements, as those regulatory amendments had not yet been made.




Page 18                                                       GAO-19-167 Retailer Trafficking
                                             each of 4 staple food categories, and 3 items of each variety). 31 See
                                             figure 6 for a comparison of the previous (as of 2006) and current
                                             (reflecting the January 2018 memorandum) requirements.


Figure 6: Previous (as of 2006) and Current Supplemental Nutrition Assistance Program (SNAP) Food Stock Requirements for
Authorized Retailers




                                        Note: Alternatively, under both the previous and current requirements, retailers can meet a second
                                        criterion for authorization, which requires a store to have more than 50 percent of its sales in staple
                                        foods. According to FNS, staple foods are the basic food items that make up a significant portion of
                                        an individual’s diet and are usually prepared at home.
                                        a
                                         “Current requirements” refers to the requirements as clarified in FNS’s January 2018 policy
                                        memorandum. This memorandum was in response to a 2017 federal law that prevented the
                                        implementation of certain provisions of a 2016 FNS final rule.



                                        31
                                          Retailers can also meet a second criterion for authorization, which requires a store to
                                        have more than 50 percent of its sales in staple foods.




                                        Page 19                                                              GAO-19-167 Retailer Trafficking
•    Assessing retailer risk levels: Also in 2006, we found that FNS had
     not conducted analyses to identify characteristics of stores at high risk
     of trafficking and to target its resources accordingly. For example, we
     reported that some stores may be at risk of trafficking because one or
     more previous owners had been found to be trafficking at the same
     location. At that time, FNS did not have a system in place to ensure
     that these stores were quickly targeted for heightened attention. We
     recommended that FNS identify the stores most likely to traffic and
     provide earlier, more targeted oversight to those stores. 32 In 2009,
     FNS established risk levels for stores: high, medium, and low. For
     example, high-risk stores are those with a prior permanent
     disqualification at that location or nearby. 33 In January 2012, FNS
     revised its policy for authorizing high-risk stores. The policy requires
     high-risk retailers to provide specific documentation to ensure that the
     owners listed on the application have not been previously disqualified
     or do not have ties to a previously disqualified owner, such as a letter
     from the bank listing the authorized signers on the store’s accounts. 34

Although FNS took these steps to identify risk levels for stores and target
its initial authorization activities accordingly, the agency is not currently
using this information to target its reauthorization activities to stores of
greatest risk. During reauthorization, FNS reviews previously approved

32
  GAO-07-53. FNS stated that it generally agreed with our recommendations, and the
agency implemented this recommendation by establishing risk levels for stores and
targeting its detection efforts to stores most likely to traffic.
33
  According to FNS’s standard operating procedure for processing store applications,
stores are considered high risk if the store is located in a ZIP code with a high
concentration of permanently disqualified stores. Stores also can be considered high risk if
a person associated with the applicant store is also associated with a permanently
disqualified store, among other reasons. Medium-risk stores include those with temporary
disqualifications or other prior program violations, according to FNS.
34
  In 2013, the USDA OIG found that some permanently disqualified retail store owners
circumvented their disqualification by transferring ownership of their stores to a spouse,
relative, co-habitant, prior employee, or manager. The OIG found that this occurred
because FNS had not established adequate guidance and management controls to
ensure that staff reviewed authorization and compliance documentation. In addition, while
FNS had procedures to deny applicants who attempted to circumvent disqualification, the
OIG found that those procedures did not require a supervisory review to ensure
documents obtained were adequately evaluated by staff prior to authorization. In
response, FNS instituted supervisory reviews of a random sample of authorization
decisions to ensure that staff followed high-risk and other policies and procedures. U.S.
Department of Agriculture, Office of Inspector General, FNS: Controls for Authorizing
Supplemental Nutrition Assistance Program Retailers, Audit Report 27601-0001-31
(Washington, D.C.: July 2013).




Page 20                                                     GAO-19-167 Retailer Trafficking
                                 stores for continued compliance with program requirements. Although the
                                 agency’s policy and website both state that certain high-risk stores will be
                                 reauthorized annually, FNS is currently reauthorizing all stores on the
                                 same 5-year cycle, regardless of risk. 35 FNS reauthorized most high-risk
                                 stores under this policy one time in fiscal year 2013, but officials told us
                                 that they then discontinued annual reauthorizations after an in-depth
                                 assessment of the benefits and costs of this practice. 36 For example, FNS
                                 staff reported collecting more than 150,000 documents as part of the
                                 fiscal year 2013 reauthorization cycle and found that collecting these
                                 documents annually is ineffective and burdensome to FNS and the
                                 retailer.

                                 FNS instead decided to annually reauthorize a sample of high-risk
                                 retailers as a result of its assessment of the fiscal year 2013 cycle, but did
                                 not follow through with those plans. Specifically, the agency decided to
                                 pursue annual reauthorizations of a sample of stores at the greatest risk
                                 of program violations—those at the same address as a store that had
                                 been previously permanently disqualified. However, FNS officials did not
                                 have documentation that the approach was ever implemented or that they
                                 assessed the benefits and costs of reauthorizing this sample of high-risk
                                 retailers. More frequent reauthorization of certain high-risk stores is
                                 consistent with federal internal control standards, which suggest that
                                 agencies should consider the potential for fraud when determining how to
                                 respond to fraud risks. 37 Considering the benefits and costs of control
                                 activities to address identified risks is a leading practice in GAO’s Fraud
                                 Risk Framework. By not assessing the benefits and costs of reauthorizing
                                 certain high-risk stores more frequently than other stores, FNS may be
                                 missing an opportunity to provide early oversight of risky stores and
                                 prevent trafficking.

Detecting Retailer Trafficking   The steps FNS has taken to improve how it detects retailer trafficking
                                 generally align with fraud risk management leading practices for


                                 35
                                   FNS, “What Is FNS Doing to Fight SNAP Fraud.” https://www.fns.usda.gov/fraud/what-
                                 fns-doing-fight-snap-fraud. Accessed September 28, 2018.
                                 36
                                   FNS officials told us that they were unable to reauthorize all high-risk stores in 2013,
                                 and that they issued a waiver to allow reauthorization of the remaining fiscal year 2013
                                 stores to continue into fiscal year 2014.
                                 37
                                   GAO, Standards for Internal Control in the Federal Government, GAO-14-704G
                                 (Washington, D.C.: September 2014).




                                 Page 21                                                       GAO-19-167 Retailer Trafficking
                                         designing and implementing control activities to detect fraud. 38 For
                                         example, FNS’s website shows how to report SNAP fraud, including
                                         retailer trafficking, through the USDA OIG’s fraud hotline. According to
                                         our Fraud Risk Framework, reporting mechanisms help managers detect
                                         instances of potential fraud and can also deter individuals from engaging
                                         in fraudulent behavior if they believe the fraud will be discovered and
                                         reported. Increasing managers’ and employees’ awareness of potential
                                         fraud schemes can also help managers and employees better detect
                                         potential fraud. To that end, FNS has developed fraud awareness training
                                         for staff in each of the branches in its Retailer Operations Division—the
                                         office primarily responsible for oversight of SNAP-authorized retailers.
                                         This includes training related to retailer trafficking for new staff and
                                         refresher training for experienced staff. Some of the training materials
                                         employ identified instances of trafficking to improve future detection and
                                         response activities. See figure 7 for photographs from a store
                                         investigation that were featured in an April 2017 training session.

Figure 7: Food and Nutrition Service (FNS) Photographs from Training Session on Detecting Retailer Trafficking




                                         FNS also uses data analytics, another leading practice in our Fraud Risk
                                         Framework, to identify potential trafficking and prioritizes its investigative
                                         resources to the stores most likely to be trafficking. Specifically, FNS
                                         scans about 250 million SNAP transactions per month through its Anti-
                                         Fraud Locator using EBT Retailer Transactions (ALERT) system to
                                         identify certain patterns indicative of trafficking. ALERT assigns a numeric
                                         score to each store based on the likelihood of trafficking. Stores with

                                         38
                                           As noted previously, we did not assess the effectiveness of FNS’s activities in these
                                         areas.




                                         Page 22                                                     GAO-19-167 Retailer Trafficking
                         scores above a certain threshold are added to FNS’s Watch List, and
                         FNS analysts and investigators prioritize the stores on this list for review
                         based on factors such as average transaction amounts that are excessive
                         for that type of store. 39 In addition, FNS’s analysts conduct their own data
                         mining and review complaints and fraud tips from the OIG’s hotline to add
                         stores to the Watch List.

                         FNS also has explored ways and taken steps to improve its data analytics
                         through internal workgroups and external studies. Using the results of
                         monitoring and evaluations to improve fraud risk management activities is
                         a leading fraud risk management practice. For example, staff in the
                         Retailer Operations Division participate in a workgroup that uses findings
                         from FNS’s trafficking investigations to improve the Division’s detection
                         efforts. This collaborative effort has led to improvements such as using
                         store ZIP codes to compare transactions at stores suspected of trafficking
                         with similar stores nearby. According to FNS, its staff can use this
                         information to substantiate charges against retailers by establishing what
                         typical transaction patterns look like, compared to trafficking patterns, for
                         similar stores. In addition, FNS commissioned studies in fiscal years 2014
                         and 2015 to evaluate the effectiveness of its data analytics to monitor
                         stores and identify areas for improvement. For example, one of the
                         studies identified and recommended new ways that FNS could analyze
                         SNAP transaction data to detect emerging trafficking schemes—such as
                         indirect trafficking at super stores and supermarkets, where more than 80
                         percent of SNAP benefits are redeemed. FNS officials reported in August
                         2018 that they examined the recommendations and implemented those
                         they determined were feasible with current resources and would add
                         value to their efforts. For example, they decided to analyze data over
                         shorter periods of time (monthly instead of a 6-month period) to more
                         quickly identify stores that may be trafficking. Officials also reported that
                         they are continuing to assess the effectiveness of their data analytics.

Responding to Retailer   FNS’s efforts to respond to retailer trafficking generally align with leading
Trafficking              practices for fraud risk management. Consistent with our Fraud Risk
                         Framework, FNS has established collaborative relationships with external
                         stakeholders to respond to identified instances of potential fraud. For
                         example, to amplify its own efforts, FNS has agreements (known as state
                         law enforcement bureau, or SLEB, agreements) with 28 states. Through
                         39
                           Although FNS analyzes transactions of all store types, FNS does not include large
                         stores (e.g., supermarkets or super stores) on its Watch List. Officials said that these
                         types of stores already have antifraud measures in place to prevent trafficking.




                         Page 23                                                       GAO-19-167 Retailer Trafficking
these agreements, FNS allows state and local law enforcement agencies
to use SNAP EBT cards in their own undercover investigations of
retailers. According to the most recent available FNS data, participating
states opened 1,955 cases from fiscal year 2012 to fiscal year 2018
under SLEB agreements. These cases resulted in a total of 139 retailers
being permanently disqualified from the program. 40

Within USDA, FNS and the OIG also said they recently updated a
memorandum of understanding (MOU) that outlines, among other things,
how the two entities will coordinate on retailer trafficking investigations.
Under the MOU, FNS investigates retailers with average monthly SNAP
redemptions below a certain dollar threshold without first obtaining
clearance from the OIG to pursue the case. FNS and OIG officials said
that this provision of the MOU allows FNS to more quickly investigate
suspicious behavior and pursue administrative action, such as permanent
disqualification, against retailers found to be trafficking. Previously,
according to OIG officials, FNS needed to clear most cases against
retailers suspected of trafficking through the OIG. As we noted in our
2006 report, due to the time it takes to develop an investigation for
prosecution and the costs associated with doing so, a natural tension
exists between the goal of disqualifying a retailer as quickly as possible to
prevent further trafficking and seeking prosecution of the retailer to
recover losses and deter other traffickers. 41 The MOU is also designed to
strengthen collaboration between FNS and the OIG in identifying the
situations that warrant criminal investigations.

Since our 2006 report, OIG and FNS both generally increased the
number of actions taken against SNAP retailers found to be trafficking.
Specifically, the OIG reported an increase in the number of trafficking
cases that it successfully referred for federal, state, or local prosecution
(see fig. 8). The OIG also reported increases in the number of convictions
resulting from its investigations, from 79 in fiscal year 2007 to 311 in fiscal
year 2017. 42


40
  In addition, SLEB investigations had other outcomes, including temporary
disqualifications and warning letters. Some cases are still pending final action. Most of the
investigations were closed with no further action (69 percent, or 1,352 cases).
41
 GAO-07-53.
42
  According to the OIG, these results are recorded as of the fiscal year they are entered
into the data system, rather than the year the case was closed.




Page 24                                                      GAO-19-167 Retailer Trafficking
Figure 8: U.S. Department of Agriculture (USDA) Office of Inspector General (OIG)
Retailer Trafficking Investigations Accepted and Declined for Prosecution, Fiscal
Years 2007 – 2017




Note: The data represent closed cases with results that the USDA OIG referred for federal, state, or
local prosecution. The OIG reported that administrative or other actions were taken in many of the
cases that were declined for prosecution.


FNS also generally increased the number of retailers sanctioned for
trafficking, though few received a monetary penalty. From fiscal year
2007 to fiscal year 2017, the number of permanent disqualifications
resulting from FNS’s trafficking investigations nearly doubled (see fig.
9). 43 In lieu of a permanent disqualification, FNS sometimes imposes a
monetary penalty on a retailer found to be trafficking. 44 However, FNS
imposed few monetary penalties for trafficking in lieu of permanent




43
  At the same time, since the number of authorized stores also increased over this period,
the number of permanent disqualifications in each year represented less than 1 percent of
all authorized stores.
44
  Under current regulations, FNS assesses either a civil monetary penalty for trafficking or
permanent disqualification, but not both.




Page 25                                                            GAO-19-167 Retailer Trafficking
                                        disqualification during this period. 45 From fiscal year 2007 to fiscal year
                                        2017, FNS assessed a total of 40 such penalties, totaling $1.5 million (for
                                        an average of about $38,000 each).

Figure 9: Permanent Disqualifications and Penalties for Supplemental Nutrition Assistance Program (SNAP) Retailer
Trafficking, by Type of Case, Fiscal Years 2007 – 2017




                                        Note: The data in this figure are reported as of the year the case was opened. As a result, cases in
                                        later years may have final results that were not captured as of March 2018, when the data were
                                        generated. Further, FNS officials told us that additional factors may have contributed to a decrease in
                                        permanent disqualifications after fiscal year 2015, such as an increase in the number of retailer
                                        appeals of FNS’s decisions. The data include the results of FNS cases and do not include permanent
                                        disqualifications or penalties resulting from other investigations, including those by the U.S.
                                        Department of Agriculture Office of Inspector General or state and local law enforcement entities.


                                        In our 2006 report, we found that FNS’s penalties for retailer trafficking
                                        may be insufficient to deter traffickers. We noted that trafficking will
                                        continue to be lucrative for retailers as long as the potential rewards

                                        45
                                          FNS might assess a civil monetary penalty for trafficking if a store demonstrates that it
                                        has an effective compliance policy and program in effect to ensure that the store is
                                        operated in a manner consistent with SNAP regulations and policy and meets additional
                                        criteria. Officials said that there is a purposefully high bar to obtaining a civil monetary
                                        penalty because, under current regulations, retailers can stay in the program and continue
                                        to redeem SNAP benefits after paying the penalty.




                                        Page 26                                                             GAO-19-167 Retailer Trafficking
outweigh the penalties and recipients are willing to exchange their
benefits for cash. We recommended that FNS develop a strategy to
increase penalties for trafficking. 46 Using the results of evaluations, such
as audits, to improve fraud risk management activities is a leading
practice in GAO’s Fraud Risk Framework. The Food, Conservation, and
Energy Act of 2008 (known as the 2008 Farm Bill) gave USDA authority
to impose higher monetary penalties, as well as authority to impose both
a monetary penalty and program disqualification on retailers found to
have violated relevant law or regulations (such as those found to be
trafficking).

Although USDA was granted this authority a decade ago, the department
has not finalized regulatory changes to strengthen penalties against
retailers found to be trafficking. In August 2012, FNS proposed regulatory
changes to implement this authority from the 2008 Farm Bill, including
assessing a new trafficking penalty in addition to permanent
disqualification. 47 The penalty would have been based on the store’s
average monthly SNAP redemptions and was intended to recoup
government funds diverted from their intended use. 48 In proposing these
changes, FNS stated that they were necessary to improve program
integrity and deter retailers from committing program violations. FNS also
estimated that it would assess an additional $174 million per year in these
new trafficking penalties—a significant increase from the amounts FNS
currently assesses in penalties for trafficking (less than $100,000 in fiscal
year 2017). 49 However, FNS did not finalize this rule, and, as of spring




46
  GAO-07-53. FNS stated that it generally agreed with our recommendations, and USDA
requested strong penalties to strengthen enforcement, according to a July 2007 report
from the House Committee on Agriculture.
47
 Supplemental Nutrition Assistance Program: Farm Bill of 2008 Retailer Sanctions, 77
Fed. Reg. 48,461 (Aug. 14, 2012).
48
  FNS stated that its proposed rule would have increased other types of penalties to up to
$100,000 per violation, including the penalty for transferring ownership of a store after an
owner is disqualified from the SNAP program for trafficking or other violations. Specifically,
FNS imposes a “transfer of ownership” penalty if the disqualified owner sells his or her
store before the expiration of the disqualification period (and in the case of permanent
disqualification, the penalty is double that for a 10-year disqualification period).
49
  FNS also noted that the majority of retailer penalties are turned over to the Department
of the Treasury and never collected.




Page 27                                                      GAO-19-167 Retailer Trafficking
                          2018, the rule was considered “inactive.” 50 At that time, FNS officials told
                          us that they had not finalized the rule because other rulemaking had
                          taken priority in the intervening 6 years. 51 More recently, in August 2018,
                          FNS officials told us that they plan to revise the previously proposed rule
                          to increase penalties and submit it for the spring 2019 regulatory
                          agenda. 52 In November 2018, FNS officials indicated that they were
                          beginning to draft the proposed rule but could not provide us with
                          documentation of this effort because the regulatory action was still
                          pending. Increasing penalties for retailer trafficking would serve as an
                          important tool to deter trafficking and safeguard federal funds.


FNS Has Not Established   FNS measures the effectiveness of many of its trafficking detection and
Performance Measures to   response activities, but lacks measures to evaluate its prevention
                          activities. Measuring outputs, outcomes, and progress toward the
Assess its Retailer
                          achievement of fraud risk objectives is a leading practice in our Fraud
Trafficking Prevention    Risk Framework. At the agency level, FNS has a priority plan for fiscal
Activities
                          50
                            Several other SNAP program integrity-related changes have also not yet moved
                          forward. For example, in response to a 2013 OIG recommendation, FNS agreed to
                          propose a rule to define “benefit” so that store owners could demonstrate that they did not
                          personally benefit from the trafficking that occurred at their store and, therefore, be eligible
                          for a civil monetary penalty in lieu of permanent disqualification. FNS submitted a
                          regulatory work plan and secured a regulation identification number in fall 2015 but the
                          regulatory action was considered inactive as of spring 2018. In addition, in response to
                          another OIG recommendation, FNS agreed to submit a regulatory work plan in fiscal year
                          2016 to revise regulations to permanently disqualify retail store owners who own multiple
                          stores at all authorized locations if the retailer was found to be trafficking at one and did
                          not meet the criteria for a trafficking civil monetary penalty. Current policy allows owners
                          found to be trafficking in one location to continue to accept SNAP benefits in other
                          locations. U.S. Department of Agriculture, Office of Inspector General, FNS: Controls for
                          Authorizing Supplemental Nutrition Assistance Program Retailers, Audit Report 27601-
                          0001-31 (Washington, D.C.: July 2013). In August 2018, FNS officials told us that they
                          were planning to include both provisions in a revised retailer sanctions proposed rule, and
                          that they would include these changes in the spring 2019 regulatory agenda.
                          51
                            We discussed the status of this proposed rule in our May 2018 testimony before the
                          Subcommittees on Healthcare, Benefits and Administrative Rules and Intergovernmental
                          Affairs of the House Committee on Oversight and Government Reform. GAO,
                          Supplemental Nutrition Assistance Program: Observations on Employment and Training
                          Programs and Efforts to Address Program Integrity Issues, GAO-18-504T (Washington,
                          D.C.: May 9, 2018).
                          52
                            The Unified Agenda of Federal Regulatory and Deregulatory Actions is published
                          semiannually and generally includes regulatory actions, such as notices of proposed
                          rulemaking and final rules, that executive agencies plan to issue within the next 12
                          months.




                          Page 28                                                        GAO-19-167 Retailer Trafficking
year 2018 that includes a goal of reducing the SNAP trafficking rate
through retailer- and client-focused activities.

At the program level, FNS’s Retailer Operations Division has an internal
scorecard that tracks performance measures related to retailer oversight
activities, but none of these focuses on prevention of trafficking. For
example, the scorecard measures the outputs and outcomes of activities
designed to detect and respond to trafficking, such as the total number of
sanctions implemented against retailers and the percentage of
undercover investigations that result in a permanent disqualification.
However, the scorecard does not have any measures related to
preventing trafficking through the retailer authorization process—a key
area for prevention activities. The scorecard includes one output measure
related to this process, but the measure (the percentage of retailer
authorization requests processed within 45 days) focuses on how quickly
retailers gain access to the program, rather than preventing trafficking.
Although FNS officials have acknowledged that their program compliance
efforts begin with the retailer authorization process, they said that they
had not considered establishing measures related to preventing
trafficking. They added that their supervisory review process may help
ensure that staff who process retailer applications in the Retailer
Operations Branch do not overlook evidence of potential fraud, but this
review includes a small sample of approved store applications (typically 5
cases per staff member monthly). 53

Although FNS has not established measures to assess its trafficking
prevention activities, the agency has data that it could leverage for this
purpose. For example, FNS collects data on the number of applications
that were denied because FNS found that the retailer lacked business
integrity, such as applicants previously found to be trafficking or with ties
to a prior owner who had trafficked. 54 Such data could be used to develop
measures related to the number and percentage of retailer applications
denied for business integrity. FNS officials acknowledged that these data
could be used to develop performance measures for its trafficking
prevention activities. Establishing such measures would enable FNS to
more fully assess the effectiveness of its retailer oversight activities and
53
  According to officials, FNS’s supervisory review process includes a sample of approvals
and 100 percent of denials of authorization.
54
  FNS regulations lay out a number of criteria for a store to be found lacking the
necessary business integrity and reputation to further the purposes of the program. See 7
C.F.R. § 278.1(k)(3).




Page 29                                                    GAO-19-167 Retailer Trafficking
              better balance retailer access to the program with preventing retailer
              fraud.


              FNS must continue to balance its goal of program integrity with its
Conclusions   mission to provide nutrition assistance to millions of low-income
              households. During a period in which SNAP retailer participation has
              markedly increased, FNS has made progress in addressing SNAP retailer
              trafficking by identifying high-risk stores and increasing the number of
              stores disqualified for trafficking. It is critical that FNS maintain progress
              and momentum in these areas, particularly since FNS’s own data suggest
              that trafficking is on the rise.

              To its credit, FNS has already evaluated some ways to improve how the
              agency measures and addresses retailer trafficking, yet, at the same
              time, the agency has missed opportunities to strengthen these areas. For
              example, since FNS has not taken steps to clarify and improve its retailer
              trafficking estimates—one of the only available SNAP fraud measures—
              questions remain regarding the accuracy of the estimates and the extent
              of fraud in SNAP. In addition, prevention and early detection of retailer
              trafficking are particularly important and deserve continued attention,
              especially since retailers can quickly ramp up the amount they redeem in
              federal SNAP benefits, potentially by trafficking. However, because FNS
              is reauthorizing all stores once every 5 years, the agency may be missing
              an opportunity to prevent trafficking through more frequent oversight of
              risky stores. Further, until FNS strengthens its response to trafficking by
              increasing penalties, the agency will continue to miss an opportunity to
              improve program integrity and deter retailers from committing program
              violations.

              Finally, FNS directs a significant amount of staff resources to authorizing
              and monitoring retailers who participate in SNAP. Ensuring that those
              staff understand the importance of addressing fraud is key for program
              integrity. FNS has taken steps to make that clear through the inclusion of
              relevant performance measures for the branches responsible for fraud
              detection and response, yet the agency has not developed such
              measures for its trafficking prevention activities. Until FNS establishes
              performance measures for these activities, it will be unable to fully assess
              the effectiveness of its overall efforts to address retailer trafficking. In
              addition, such measures would assist FNS in balancing its efforts to
              ensure retailer access with those to prevent retailer fraud.




              Page 30                                            GAO-19-167 Retailer Trafficking
                      We are making the following five recommendations to FNS:
Recommendations for
Executive Action      The Administrator of FNS should present the uncertainty around its
                      retailer trafficking estimates in future reports by, for example, including
                      the full range of the estimates in the report body and executive summary.
                      (Recommendation 1)

                      The Administrator of FNS should continue efforts to improve the agency’s
                      retailer trafficking estimates by evaluating (1) whether the factors used to
                      identify stores for possible investigation could help address the bias in its
                      sample, and (2) the accuracy of its assumption of the percentage of
                      SNAP benefits that are trafficked by different types of stores.
                      (Recommendation 2)

                      The Administrator of FNS should assess the benefits and costs of
                      reauthorizing a sample of high-risk stores more frequently than other
                      stores, use the assessment to determine the appropriate scope and time
                      frames for reauthorizing high-risk stores moving forward, and document
                      this decision in policy and on its website. (Recommendation 3)

                      The Administrator of FNS should move forward with plans to increase
                      penalties for retailer trafficking. (Recommendation 4)

                      The Administrator of FNS should establish performance measures for its
                      trafficking prevention activities. (Recommendation 5)


                      We provided a draft of this report to USDA for review and comment. On
Agency Comments       December 3, 2018, the Directors of the Retailer Policy & Management
and Our Evaluation    Division and the Retailer Operations Division of FNS provided us with the
                      agency’s oral comments. FNS officials told us that they generally agreed
                      with the recommendations in the report. Officials also provided technical
                      comments, which we incorporated as appropriate.

                      Regarding the recommendation to present the uncertainty around the
                      retailer trafficking estimates, FNS officials told us that they plan to include
                      the estimate intervals and results of sensitivity analyses in the body of
                      their next report, rather than in appendices. This is the information we
                      used to determine the range around the trafficking estimates. Making this
                      change would address our recommendation, as we continue to believe
                      that reporting the level of uncertainty around each estimate would
                      increase transparency and provide Congress and the public with better
                      information on the extent of fraud in SNAP.


                      Page 31                                             GAO-19-167 Retailer Trafficking
In addition, regarding the recommendation to assess the benefits and
costs of reauthorizing a sample of high-risk retailers more frequently, FNS
officials noted that while reauthorizations currently occur at least once
every 5 years, monitoring for potential violations occurs on an ongoing
basis regardless of risk level. Low-, medium-, and high-risk stores are
continually scanned by FNS’s ALERT system. FNS officials added that, in
fiscal year 2017, FNS imposed sanctions (e.g., fines or temporary
disqualifications) on 862 stores found to be violating program rules, and
disqualified permanently 1,661 stores for trafficking SNAP benefits or
falsifying an application. FNS officials noted that this is a 26 percent
increase in the number of stores sanctioned, compared to fiscal year
2013. We agree that ongoing monitoring is important, and we discussed
these and other FNS efforts to detect and respond to retailer trafficking in
our report. We nevertheless believe, and FNS officials agreed, that
assessing the value of earlier oversight of risky stores through the
reauthorization process is warranted, and could enhance efforts to
prevent trafficking.


As agreed with your offices, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 30 days from the
report date. At that time, we will send copies to the Secretary of the
USDA, congressional committees, and other interested parties. In
addition, this report will be available at no charge on the GAO website at
www.gao.gov.

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




Kathryn A. Larin
Director, Education, Workforce, and Income Security Issues




Page 32                                           GAO-19-167 Retailer Trafficking
List of Requesters

The Honorable Trey Gowdy
Chairman
Committee on Oversight and Government Reform
House of Representatives

The Honorable Mark Meadows
Chairman
Subcommittee on Government Operations
Committee on Oversight and Government Reform
House of Representatives

The Honorable Jim Jordan
Chairman
Subcommittee on Healthcare, Benefits, and Administrative Rules
Committee on Oversight and Government Reform
House of Representatives

The Honorable Gary J. Palmer
Chairman
Subcommittee on Intergovernmental Affairs
Committee on Oversight and Government Reform
House of Representatives




Page 33                                       GAO-19-167 Retailer Trafficking
Appendix I: GAO Contact and Staff
                  Appendix I: GAO Contact and Staff
                  Acknowledgments



Acknowledgments


                  Kathy Larin, (202) 512-7215 or larink@gao.gov.
GAO Contact
                  In addition to the contact named above, Rachel Frisk (Assistant Director),
Staff             Rachael Chamberlin (Analyst-in-Charge), and Swati Deo made significant
Acknowledgments   contributions to this report. Also contributing to this report were James
                  Bennett, Thomas Cook, Alex Galuten, Lara Laufer, Olivia Lopez, Jean
                  McSween, Jessica Orr, Philip Reiff, Almeta Spencer, Jeff Tessin,
                  Matthew Valenta, and Erin Villas.




(102523)
                  Page 34                                          GAO-19-167 Retailer Trafficking
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