As shown on the left in figure 2, in a legitimate food stamp  transaction, recipients run their EBT card, which works much like a debit  card, through an electronic point-of-sale machine at the grocery checkout  counter, and enter their secret personal identification number to access  their food stamp accounts and to authorize the transfer of food stamp  benefits from a federal account to the retailer’s account to pay for the  eligible food items. FNS Reports That the Rate of Food Stamp Trafficking Declined between 1995 and 2005

FNS’s most recent estimate suggests that the food-stamp-trafficking rate  was 1.0 cent on the dollar for calendar years 2002 to 2005 and that this rate  and the total estimated benefits trafficked have declined in recent years. FNS’ first trafficking study in 1995 estimated that about 3.8 cents of every  dollar of food stamp benefits issued was trafficked in 1993. Small stores, including small  grocery, convenience, specialty, and gas/grocery stores have an estimated  trafficking rate of 7.6 cents per dollar. In contrast, supermarkets and large  grocery stores have an estimated rate of 0.2 cents per dollar. EBT Has Changed How Food Stamps Are Trafficked

The nationwide implementation of EBT has changed the way some food  stamp benefits are trafficked. FNS Has Taken Advantage of New EBT Data to Improve Retailer Monitoring, While Other Federal Entities Have Focused on Fewer, High-Impact Investigations

FNS has taken advantage of new technology to improve its monitoring and  sanctioning of food stamp retailers, but other federal agencies’ have been  investigating and prosecuting fewer traffickers. These EBT cases now account for more than half of the  permanent disqualifications by FNS (see fig. However, as FNS’s ability to detect trafficking has improved,  the number of suspected traffickers investigated by other federal entities,  such as the USDA Inspector General and the U.S. Secret Service have  declined. Despite the Progress That Has Been Made against Trafficking, Vulnerabilities Still Exist in the Program

Despite the declining FNS estimates of retailer trafficking, retailers can  still enter the program intending to traffic and do so, often without fear of  severe criminal penalties. In addition, Secret Service officials said that some  merchants quickly learn that they do not need to restock their stores to  continue to redeem food stamps because stores aren’t routinely checked  for 5 years unless there is some indication of a problem with the store. Oversight of retailers’ entry into the program and early operations is  important because newly authorized retailers can quickly ramp up the  amount of food stamps they traffic, and there is no limit on the value of  food stamps a retailer can redeem in 1 month. However, it is now at a point where it can begin to formulate  more sophisticated analyses to identify high risk areas and target its  resources. In one case, a store in the  District of Columbia had 10 different owners who were each disqualified  for trafficking, consuming FNS’s limited compliance-monitoring resources. Available FNS Penalties May Not Deter Traffickers

FNS penalties alone may not be sufficient to deter traffickers. For example, in the food-stamp-trafficking  ramp-up case previously cited, this retailer redeemed almost $650,000 of  food stamps over the course of 9 months before being disqualified from  the program in November 2004. This inaction by some states allows recipients  suspected of trafficking to continue the practice, and such inaction also  leaves a pool of recipients ready and willing to traffic their benefits as  soon as a disqualified store reopens under new management. Agency Comments

We provided a draft of this report to the U.S. Department of Agriculture  and the U.S. Secret Service for review and comment. Food Stamp Program: Information on Trafficking Food Stamp Benefits.
Why GAO Did This Study

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

What GAO Found

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