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109th Congress                                                Committee
                            COMMITTEE PRINT                   
 2d Session                                                 Print 109-C
_______________________________________________________________________



 
AN EXAMINATION OF FEDERAL 9/11 ASSISTANCE TO NEW YORK: LESSONS LEARNED 
         IN PREVENTING WASTE, FRAUD, ABUSE, AND LAX MANAGEMENT

                               __________

                             A STAFF REPORT

                      SUBCOMMITTEE ON MANAGEMENT,

                       INTEGRATION, AND OVERSIGHT

                                 of the

                     COMMITTEE ON HOMELAND SECURITY

                     U.S. HOUSE OF REPRESENTATIVES

                             109th CONGRESS

[GRAPHIC] [TIFF OMITTED] TONGRESS.#13


                              August 2006



                    U.S. GOVERNMENT PRINTING OFFICE
20-452                      WASHINGTON : 2006
_____________________________________________________________________________
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                     COMMITTEE ON HOMELAND SECURITY

                  Peter T. King, California, Chairman
DON YOUNG, Alaska                    BENNIE G. THOMPSON, Mississippi
LAMAR S. SMITH, Texas                LORETTA SANCHEZ, California
CURT WELDON, Pennsylvania, Vice      EDWARD J. MARKEY, Massachusetts
    Chairman                         NORMAN D. DICKS, Washington
CHRISTOPHER SHAYS, Connecticut       JANE HARMAN, California
PETER T. KING, New York              PETER A. DEFAZIO, Oregon
JOHN LINDER, Georgia                 NITA M. LOWEY, New York
MARK E. SOUDER, Indiana              ELEANOR HOLMES NORTON, District of 
TOM DAVIS, Virginia                      Columbia
DANIEL E. LUNGREN, California        ZOE LOFGREN, California
JIM GIBBONS, Nevada                  SHEILA JACKSON-LEE, Texas
ROB SIMMONS, Connecticut             BILL PASCRELL, Jr., New Jersey
MIKE ROGERS, Alabama                 DONNA M. CHRISTENSEN, U.S. Virgin 
STEVAN PEARCE, New Mexico                Islands
KATHERINE HARRIS, Florida            BOB ETHERIDGE, North Carolina
BOBBY JINDAL, Louisiana              JAMES R. LANGEVIN, Rhode Island
DAVE G. REICHERT, Washington         KENDRICK B. MEEK, Florida
MICHAEL MCCAUL, Texas
CHARLIE DENT, Pennsylvania
                                 ------                                

         Subcommittee on Management, Integration, and Oversight

                     Mike Rogers, Alabama, Chairman
CHRISTOPHER SHAYS, Connecticut       KENDRICK B. MEEK, Florida
JOHN LINDER, Georgia                 EDWARD J. MARKEY, Massachusetts
TOM DAVIS, Virginia                  ZOE LOFGREN, California
KATHERINE HARRIS, Florida            SHEILA JACKSON-LEE, Texas
DAVE G. REICHERT, Washington         DONNA M. CHRISTENSEN, U.S. Virgin 
MICHAEL MCCAUL, Texas                    Islands
CHARLIE DENT, Pennsylvania           BENNIE G. THOMPSON, Mississippi Ex 
CHRISTOPHER COX, California Ex           Officio
    Officio

                             Majority Staff

            Michael J. Russell, Subcommittee Staff Director
        Heather E. Hogg, Subcommittee Professional Staff Member
           Julie Schmidt, Subcommittee Legislative Assistant
                        Matthew McCabe, Counsel
                       Kerry A. Kinirons, Counsel
                   Danielle Rosengarten, Legal Intern
                    Michael S. Twinchek, Chief Clerk

                             Minority Staff

          Rosaline Cohen, Counsel and Subcommittee Coordinator
            Cherri L. Branson, Senior Investigative Counsel
                       Jeffrey E. Greene, Counsel
               Todd A. Levett, Professional Staff Member

                            Fellow/Detailee

 Ken Vogel, Legislative Fellow, American Political Science Association
      Joanne Madden, Supervisory Special Agent, Federal Bureau of 
                             Investigation
                         Letter of Transmittal

                          House of Representatives,
                            Committee on Homeland Security,
                                   Washington, DC, August 10, 2006.
    To the Members of the Committee on Homeland Security: Last 
December, I tasked the Subcommittee on Management, Integration, 
and Oversight to conduct an examination of allegations of 
waste, fraud, and abuse of Federal funds provided to New York 
in the aftermath of the September 11th attacks. Attached for 
your review is the Subcommittee's report entitled, ``An 
Examination of Federal 9/11 Assistance to New York: Lessons 
Learned in Preventing Waste, Fraud, Abuse, and Lax 
Management.''
    I urge you to examine this bipartisan report, which sets 
forth the findings of the Subcommittee's six month review and 
proposes legislative changes to strengthen Federal assistance 
programs for use in the aftermath of future disasters. I look 
forward to working with you as we seek to improve Federal 
disaster assistance programs in light of this and other recent 
reports of waste, fraud, and abuse in these programs.
            Sincerely,
                                             Peter T. King,
                                                          Chairman.

                         Letter of Transmittal

        House of Representatives, Committee on Homeland 
            Security, Subcommittee on Management, 
            Integration, and Oversight,
                                    Washington, DC, August 9, 2006.
    To the Chairman of the Committee on Homeland Security: It 
is our pleasure to present you with a bipartisan staff report 
entitled ``An Examination of Federal 9/11 Assistance to New 
York: Lessons Learned in Preventing Waste, Fraud, Abuse, and 
Lax Management.''
    Forwarded by Members of the Subcommittee on Management, 
Integration, and Oversight, this report details the 
Subcommittee's examination into the use and misuse of 
approximately $20 billion in Federal assistance allocated to 
New York to respond to, recover from, and rebuild after, the 
terrorist attacks of September 11, 2001.
    Additionally, the report sets forth the findings of the 
Subcommittee's six month review, which culminated in a series 
of three Subcommittee hearings held on July 12 and 13, 2006. 
The Subcommittee hearings focused on issues of response, 
recovery, and rebuilding, taking testimony from 22 witnesses 
representing Federal, State, and local government agencies, 
non-profit aid organizations, business groups, and government 
watchdog groups.
    It is our hope that findings contained in this report will 
form the basis of Federal legislation implementing lessons 
learned from the 9/11 experience in New York City. If 
implemented, the reforms may deter and prevent fraud in future 
major disasters that require a Federal response.
    We appreciate your consideration of this report, and look 
forward to working with the Members of the full Committee to 
pass legislation implementing recommendations contained in the 
report.
            Sincerely,
                                   Mike Rogers,
                                           Chairman, Subcommittee on 
                                               Management, Integration, 
                                               and Oversight.
                                   Kendrick Meek,
                                           Ranking Member, Subcommittee 
                                               on Management, 
                                               Integration, and 
                                               Oversight.
                                   John Linder.
                                   Mark E. Souder.
                                   Katherine Harris.
                                   Dave G. Reichert.
                                   Michael T. McCaul.
                                   Sheila Jackson-Lee.
                                   Bill Pascrell, Jr.
                                   Bennie G. Thompson.


                            C O N T E N T S

                              ----------                              
                                                                   Page
 I. Introduction:
        The Need for Oversight...................................     3
        The Subcommittee's Examination...........................     4
        Accounting for the $20 Billion...........................     5
        Subcommittee Findings....................................    11
II. Response:
        Tragedy Prompted Unprecedented Response, New Approaches..    12
        Debris Removal: Formidable Effort for Monumental Task....    14
        Testing and Cleaning.....................................    23
        Individual Assistance....................................    23
        Mortgage and Rental Assistance...........................    26
        Crisis Counseling........................................    27
        Unemployment Assistance..................................    28
        Temporary Transportation.................................    29
        Coordination Between and Among the Federal Government, 
            Charities, and Voluntary Agencies....................    29
III.Recovery:

        Federal Government Reaction..............................    32
        Housing and Urban Development Community Development Block 
            Grant-Funded Programs................................    34
        Business Recovery Grants.................................    38
        Residential Grant Program................................    39
        Job Creation and Retention Program.......................    40
        Small Firm Attraction and Retention Grant Program........    40
        Small Business Administration Programs: STAR Loan Program    41
        Disaster Loans...........................................    42
        Department of Labor Programs.............................    42
IV. Rebuilding:
        Five ``Mega-Projects'': Lower Manhattan's Transportation 
            Infrastructure.......................................    44
        Internal Controls........................................    55
        External Controls........................................    56
 V. Conclusion.......................................................58

                               Appendices

A. Agency Budget Tables..........................................    61
B. Convictions for Fraudulent Activity...........................    67
C. Summary of Lower Manhattan Development Corporation Commitments 
  to the Revitalization of Chinatown.............................    71
D. Prepared Witness Statements for the Subcommittee on 
  Management, Integration, and Oversight hearings ``An 
  Examination of Federal 9/11 Assistance to New York: Lessons 
  Learned in Fraud Detection, Prevention, and Control.''.........    75
    Part I--Response--July 12, 2006..............................    77
    Part II--Recovery--July 13, 2006.............................   145
    Part III--Rebuilding--July 13, 2006..........................   179
E. Acronyms......................................................   200


109th Congress                                                Committee
                            COMMITTEE PRINT
 2d Session                                                 Print 109-C

======================================================================




AN EXAMINATION OF FEDERAL 9/11 ASSISTANCE TO NEW YORK: LESSONS LEARNED 
         IN PREVENTING WASTE, FRAUD, ABUSE, AND LAX MANAGEMENT

                                _______
                                



 Mr. Peter T. King, from the Committee on Homeland Security, submitted 
                             the following

                              STAFF REPORT

                              Introduction

    The September 11, 2001, terrorist attacks in New York City, 
Northern Virginia, and Southwestern Pennsylvania resulted in 
what was, at the time, the costliest disaster in the history of 
the United States. The financial and emotional toll of the 
attacks were especially felt in New York City, where Al-Qa'ida 
hijackers crashed two passenger jets into the World Trade 
Center. The attack collapsed the twin towers, killing 2,749 
people,\1\ injuring thousands more, and leaving many others 
homeless. Indeed, New York City witnessed the elimination of as 
many as 100,000 jobs,\2\ and dealt with the need to remove 1.63 
million tons of debris \3\ strewn across 16 acres of Lower 
Manhattan, and repair damage to major electrical, communication 
and transportation infrastructures.
---------------------------------------------------------------------------
    \1\ Subcommittee Staff Telephone Interview with Ms. Ellen Borakov, 
Director of Public Affairs, New York City Medical Center Office of the 
Chief Medical Examiner, conducted Aug. 8, 2006.
    \2\ The New York State Assembly Ways and Means Committee estimated 
that of the 125,300 jobs lost in New York in the 4th quarter of 2001, 
80 percent resulted from the 9/11 terrorist attacks. U.S. General 
Accounting Office, Review of Studies of the Economic Impact of the 
September 11, 2001 Terrorist Attacks on the World Trade Center, GAO-02-
700R, May 29, 2002 at 13 citing New York State Assembly Ways and Means 
Committee, ``New York State Economic Report,'' Mar. 2002.
    \3\ Review of EPA and FEMA Responses to the September 11, 2001 
Attacks Before the Senate Comm. on Environment and Public Works, 107th 
Cong. (2002) (statement of Mr. Joseph Allbaugh, Director, Federal 
Emergency Management Agency) (hereinafter Allbaugh Written Testimony).

[GRAPHIC] [TIFF OMITTED] T9452.001

    The response to the disaster was remarkable. At the urging 
of the New York Congressional Delegation, the President 
requested and Congress appropriated approximately $20 billion 
to the State of New York to assist the response, recovery, and 
rebuilding efforts in the wake of the attacks. Congress pressed 
the Federal agencies responsible for administering the disaster 
relief to expeditiously process funds so that the funds would 
reach those impacted by the attacks as quickly as possible, and 
granted the agencies greater flexibility to do so. Federal 
agencies, in turn, found themselves in the difficult position 
of using existing disaster recovery programs in unfamiliar 
ways, implementing new programs, and stretching existing 
authority to take on new tasks.\4\
---------------------------------------------------------------------------
    \4\ Neither the Federal Emergency Management Agency (FEMA) nor the 
Environmental Protection Agency (EPA) had previously coordinated post-
disaster indoor contaminant-cleaning efforts and neither was 
specifically authorized to do so. However, working together, the 
agencies undertook such an effort in New York City after the September 
11th terrorist attacks under FEMA's Stafford Act debris removal 
authority. Federal Emergency Management Agency Office of Inspector 
General, FEMA's Delivery of Individual Assistance Programs: New York--
September 11, 2001, Dec. 2002 at 25 (hereinafter FEMA's Delivery of 
Individual Assistance Programs).
---------------------------------------------------------------------------
    Agencies loosened regulations and expanded eligibility for 
programs, some of which dispensed more assistance to victims of 
September 11, 2001 (9/11) in New York than they had in response 
to all previous disasters combined.\5\ To date, Federal 
agencies, partnering with State and local agencies, have 
disbursed approximately $13.7 billion of these funds for 
services ranging from treating the injured and providing 
temporary housing to removing 100,000 truckloads of debris.\6\ 
Funds have also been used to provide assistance to unemployed 
workers and affected businesses, and to rebuild the 
transportation, communication, and utility infrastructures of 
Lower Manhattan. The majority of the balance of the $20 billion 
is dedicated to the rebuilding of Lower Manhattan's 
transportation infrastructure.
---------------------------------------------------------------------------
    \5\ Prior to 9/11, the largest Department of Housing and Urban 
Development (HUD) Community Development Block Grant (CDBG) 
appropriation for disaster recovery was about $500 million, which was 
the amount allocated for both the 1997 Midwest floods and 1994 
Northridge, California earthquake. Subcommittee Staff briefing with Mr. 
Jan Opper et al., Director of Disaster Recovery and Special Issues, 
U.S. Department of Housing and Development, May 26, 2006, in 
Washington, D.C. (hereinafter Opper Briefing). In addition, from the 
inception of FEMA's Mortgage and Rental Assistance Program until 9/11, 
the agency has awarded only $18.1 million to victims of 68 declared 
disasters, compared to $76 million to the victims of 9/11 in New York. 
See, FEMA's Delivery of Individual Assistance Programs, supra note 4 at 
9.
    \6\ Allbaugh Written Testimony, supra note 3.
---------------------------------------------------------------------------
    In addition to governmental assistance, charities assisting 
in the recovery from the attacks also received unprecedented 
donations and dispensed more and broader services than for any 
previous disaster.\7\ The role of these charities and issues 
related to disbursement of Federal assistance are discussed 
herein.
---------------------------------------------------------------------------
    \7\ U.S. General Accounting Office, More Effective Collaboration 
Could Enhance Charitable Organizations' Contributions in Disasters, 
GAO-03-259, Dec. 19, 2002 at 7 (hereinafter More Effective 
Collaboration Could Enhance Charitable Organizations' Contributions in 
Disasters).
---------------------------------------------------------------------------

                         THE NEED FOR OVERSIGHT

    Even as New Yorkers and all levels of government struggled 
to respond to this event, some sought to take advantage of the 
tragedy for financial gain. From a man who collected nearly 
$300,000 in Federal loans after claiming his two 
telecommunications companies, which moved out of the World 
Trade Center in July 2001, sustained physical damage in the 
attacks,\8\ to two employees of the New York City Medical 
Examiner's Office accused of embezzling Federal funds intended 
to help identify victims' remains,\9\ unscrupulous individuals 
tried any number of ways to take advantage of the massive 
outpouring of Federal and private funds in response to the 
disaster.
---------------------------------------------------------------------------
    \8\ U.S. Small Business Administration, Summary of Convictions--
Fraud Related to 9/11 Disaster Loans, received by Subcommittee Staff on 
Feb. 9, 2006.
    \9\ Press Release, U.S. Attorney for the S.D.N.Y., U.S. Arrests Two 
Former City Employees for Defrauding New York City Medical Examiner's 
Office (Dec. 9, 2005).
---------------------------------------------------------------------------
    This report is intended to fill a vacuum in the nation's 
understanding of how the money set aside for New York City was 
administered. Despite documented instances of fraud, waste, and 
abuse, no Congressional Committee or other government oversight 
group has ever catalogued the full nature and scope of the 
Federal assistance to New York City. This report also develops 
recommendations to enhance response and improve controls across 
the Federal government, based on the lessons learned from the 
9/11 response, recovery, and rebuilding effort in New York 
City. To fill this gap, Committee on Homeland Security 
Chairman, Peter T. King, directed the Subcommittee on 
Management, Integration, and Oversight (MIO) to conduct a 
comprehensive examination of how the $20 billion in Federal 9/
11 assistance directed to New York City was utilized, with 
special emphasis on allegations of mismanagement that resulted 
in waste, fraud, and abuse.\10\ This report sets forth the 
findings of the Subcommittee's six month investigation, which 
culminated in a series of three Subcommittee hearings held on 
July 12 and 13, 2006. These hearings focused on issues of 
response, recovery, and rebuilding, and involved testimony from 
22 witnesses representing Federal, state, and local government 
agencies, non-profit aid organizations, business groups, and 
government watchdogs.\11\ The findings contained in this report 
are the basis for forthcoming legislation to act upon the 
lessons learned from the 
9/11 experience in New York City as detailed in this report.
---------------------------------------------------------------------------
    \10\ In December 2005, the New York Daily News published a lengthy 
series of articles outlining a wide range of examples and allegations 
of misuse of 9/11 funding. Examples included the influence of organized 
crime in debris removal at Ground Zero, the use of ghost and shadow 
employees by contractors, kick-backs and embezzlement, unfair 
allocation of recovery funds to big businesses, and inappropriate uses 
of 9/11 disaster assistance funds.
    \11\ The prepared statements submitted by 20 witnesses for the 
Subcommittee's series of hearings on July 12-13, 2006 may be found at 
the end of this Report. Two additional statements submitted for the 
record from the Honorable Michael J. Garcia, United States Attorney for 
the Southern District of New York, and the Honorable Thomas McCormack, 
Chairman of the New York City Business Integrity Commission, may be 
found in the forthcoming official hearing record available from the 
Government Printing Office.
---------------------------------------------------------------------------

                     THE SUBCOMMITTEE'S EXAMINATION

    The Subcommittee's bipartisan review included a 
retrospective examination of funding already spent on the 
initial response to the 9/11 attacks; an examination of funds 
spent on the recovery of businesses and residences in Lower 
Manhattan; and a prospective examination of fraud controls in 
place for the balance of 9/11 monies to be spent on rebuilding 
Lower Manhattan's infrastructure.
    In preparation for this report, the Subcommittee reviewed 
allegations of waste, fraud, and abuse in the media, government 
audits, and analyses by community and watchdog groups. 
Subcommittee staff also conducted numerous site visits, 
interviews, and conference calls with officials from Federal, 
state, and local agencies that received Federal 9/11 funds, or 
investigated or prosecuted cases involving the funds. Through 
its analysis of grant data, indictments, Federal audits, and 
reports by media and government oversight groups, the 
Subcommittee has catalogued specific cases of fraud, waste, and 
abuse; determined whether assistance could have been disbursed 
more efficiently or effectively; and assessed various anti-
fraud mechanisms that were put in place after 9/11 for possible 
replication in future disaster assistance situations.
    The Subcommittee closely scrutinized--and this report 
discusses--the projects to be funded by the more than $6 
billion remaining from the $20 billion, and the controls in 
place to ensure the money is spent appropriately and 
efficiently. The Subcommittee has also compiled a 
representative sampling of indictments, prosecutions, and 
convictions for frauds perpetrated with respect to 
9/11 assistance funds. In addition, the Subcommittee has 
completed an accounting of all Federal funds, with technical 
assistance from the Government Accountability Office (GAO).

                     ACCOUNTING FOR THE $20 BILLION

    On September 14, 2001, Congress passed the Emergency 
Supplemental Appropriations Act for Recovery from and Response 
to Terrorist Attacks on the United States, FY 2001 (P.L. 107-
38), which made available $40 billion ``to provide assistance 
to the victims of the attacks,'' to improve local preparedness 
for mitigating and responding to the attacks, to pursue and 
prosecute those involved in terrorism, to increase national 
security, and to repair public facilities and transportation 
systems damaged by the attacks. The Act further provided that 
not less than one half of the $40 billion would be designated 
for ``disaster recovery activities and assistance related to 
the terrorist acts in New York, Virginia, and Pennsylvania on 
September 11, 2001.'' The $20 billion in Federal assistance 
appropriated to the New York City area to address the impact of 
the 9/11 attacks marked the first time the Federal government 
set a target amount of disaster assistance near the beginning 
of the response and recovery process. The appropriations Act 
also stipulated that the remaining $20 billion would be 
obligated ``only when enacted in a subsequent emergency 
appropriations bill as a condition for the availability of 
funds.''
    Over the subsequent 11 months, Congress passed several 
bills to provide an estimated $20 billion in direct funding and 
tax benefits. Specifically, Congress approved the Department of 
Defense Appropriations Act (P.L. 107-117) on January 10, 2002, 
as well as a second emergency supplemental appropriation (P.L. 
107-206), on August 2, 2002.
    The $20 billion in Federal aid slated for New York was 
provided primarily through four channels: the Federal Emergency 
Management Agency (FEMA), the U.S. Department of Housing and 
Urban Development (HUD), the U.S. Department of Transportation 
(DOT), and the Liberty Zone tax benefits--a set of tax benefits 
targeted to stabilize and restore the economy of Lower 
Manhattan. Together, these sources provided 96 percent, or 
$19.63 billion, of the committed Federal aid to the New York 
City area.
    In its October 2003 report, the GAO provided a preliminary 
review of the use of the $20 billion grouped in the following 
categories:
    <bullet> Initial Response--search and rescue operations, 
debris removal, temporary utility system repairs, etc. One 
billion dollars was set aside to establish an insurance fund to 
cover claims resulting from debris removal operations.
    <bullet> Compensation for Losses--individual assistance for 
housing costs, loans to businesses to cover economic losses, 
and funding for disaster-related costs incurred by New York 
City and New York State.
    <bullet> Infrastructure Restoration and Improvement--
restoration and enhancement of transportation systems in Lower 
Manhattan and permanent utility repair.
    <bullet> Economic Revitalization--Liberty Zone tax 
benefits, small business loans, and business attraction and 
retention programs.
    As part of its examination, the Subcommittee obtained an 
updated accounting from each Federal agency involved in 
disbursing 9/11 funds. Based on that financial data, and with 
technical assistance from GAO, the Subcommittee updated GAO's 
original four categories as depicted below.
[GRAPHIC] [TIFF OMITTED] T9452.002

    Based on the financial data provided by Federal agencies 
and a review of appropriations acts, the Subcommittee compiled 
the accounting of funds, with Federal agencies ranked in order 
of the amount of 9/11 funds for which they are responsible 
(highest to lowest).
[GRAPHIC] [TIFF OMITTED] T9452.003

    The Subcommittee further analyzed the current status of 9/
11 funds appropriated to the primary Federal agencies involved 
in the response, recovery, and rebuilding of New York City 
after the terrorist attacks. This analysis includes the total 
amount of funds committed, obligated, and disbursed.\12\ The 
chart below reflects these three categories for the primary 
Federal agencies involved.
---------------------------------------------------------------------------
    \12\ For the purposes of this report, funds are ``committed'' once 
they are designated for a specific purpose. ``Obligated'' funds have 
been set aside for a particular contract or purchase order. Commitments 
and obligations may also differ due to rescissions, transfers (once 
programs close), and de-obligations. ``Disbursed'' means the funds have 
been expended.

               BREAKOUT OF FUNDING IDENTIFIED FOR NEW YORK
                    [Figures in millions of dollars]
------------------------------------------------------------------------
    Major Contributing Agency       Committed    Obligated    Disbursed
------------------------------------------------------------------------
FEMA............................       $8798          $8780        $5798
HUD.............................        3107           3107         1723
DOT.............................        2353           1850          490
SBA.............................         197.1          182          181
LABOR...........................         241            105          103
HHS.............................         121            121          121
DOJ.............................          75             70           68
                                 ---------------------------------------
      Total.....................      14,892.1       14,215        8,484
------------------------------------------------------------------------
Figures Represent Approximate Amounts.
Column Names Are Intended for Representational Purposes Only.

    The Subcommittee focused its examination on the controls 
implemented by the Federal agencies to which Congress 
appropriated the greatest amount of funding, as well as the 
state and local agencies and charitable organizations with 
which those Federal agencies partnered. The Federal agencies 
and the amounts they were appropriated are as follows:
          Federal Emergency Management Agency (FEMA) $8.799 
        billion
          U.S. Department of Housing and Urban Development 
        (HUD) $3.483 billion
          U.S. Department of Transportation (DOT) $2.366 
        billion
          U.S. Small Business Administration (SBA) $250 million
          U.S. Department of Labor (DOL) $249 million
          U.S. Department of Health and Human Services (HHS) 
        $120 million
          U.S. Department of Justice (DOJ) $75 million
    The state and local agencies that disbursed the largest 
amounts of Federal 9/11 funds and, as such, were a major focus 
of the Subcommittee's inquiry, include:
          The Port Authority of New York and New Jersey (Port 
        Authority)
          Empire State Development Corporation (ESDC)
          Lower Manhattan Development Corporation (LMDC)
          New York City Department of Design and Construction 
        (DDC)
    The Subcommittee also examined the roles played by private 
relief agencies, generally, and the American Red Cross, in 
particular, in disbursing assistance, as well as the role FEMA 
played in coordinating the assistance provided by voluntary and 
charitable agencies.

                         SUBCOMMITTEE FINDINGS

    In its examination of these Federal, state, and local 
agencies, as well as voluntary and charitable organizations, 
the Subcommittee carefully considered the balance between the 
need to expeditiously supply assistance to disaster victims, 
and the need to maintain controls over the programs through 
which that assistance is disbursed. It is the sense of the 
Subcommittee that these goals are not mutually exclusive, and 
that both can be accomplished through effective management and 
oversight.
    This report incorporates lessons learned by the 
Subcommittee through its examination of the 9/11 response. 
These lessons are presented as legislative recommendations that 
the Subcommittee believes could improve the management and 
oversight of financial assistance to respond to future 
disasters. The report identifies effective management and 
oversight mechanisms--or ``best practices''--employed in the 
response to 9/11, as well as systemic problems exposed in the 
response that opened the door to waste, fraud, and abuse. The 
report identifies steps that were taken to address some of 
these systemic problems, but also points out instances in which 
problems were not addressed and, as a result, plagued the 
responses to subsequent disasters, most notably Hurricanes 
Katrina and Rita. If these problems are not remedied, they will 
continue to keep the door open to waste, fraud, and abuse in 
the responses to future disasters.
    The major systemic problems, common to disaster response, 
identified by the Subcommittee include:
          (1) lack of information sharing and cooperation;
          (2) inadequate verification prior to disbursing 
        funds;
          (3) duplicative payments;
          (4) relaxed or ineffective controls; and
          (5) weak oversight of procurement.
    The Subcommittee also identified ten ``best practices'' 
used in the aftermath of the September 11th attacks, and urges 
their use in future events:
          (1) private integrity monitors;
          (2) database searches to screen contractors;
          (3) mandatory regular audits;
          (4) dedicated temporary oversight office;
          (5) full-time Independent Coordination Agency that 
        prevents fraud;
          (6) temporary Fraud Prevention Task Force;
          (7) fraud awareness training;
          (8) fraud tip lines;
          (9) controlled electronic access to disaster sites; 
        and
          (10) contractor employee screening.
    In the chapters that follow, this report will not only 
undertake an in-depth discussion of the systemic problems in 
disaster response, recovery, and rebuilding, but will also 
analyze the effectiveness of systems implemented by Federal, 
state, and local agencies, and voluntary organizations to 
prevent waste, fraud, and abuse.
    As our nation approaches the fifth anniversary of the 9/11 
attacks, this report, in a small way, memorializes the 
extraordinary efforts of New Yorkers, as well as personnel on 
the Federal, state, and city levels to respond to an 
extraordinary situation. The lessons learned from their 
experiences provide valuable insight about the importance of 
establishing controls in the provision of disaster assistance. 
The Subcommittee believes the enactment of disaster assistance 
reforms based on lessons learned from the response to 9/11 is 
one way in which something positive can be derived from the 
horrific events of 9/11.

                                Response


        TRAGEDY PROMPTED UNPRECEDENTED RESPONSE, NEW APPROACHES

    The immediate response to the attacks by Americans, 
charitable organizations, and all levels of government was 
unprecedented. The Federal response, directed by FEMA, focused 
on: debris removal at the Ground Zero site; environmental 
testing and cleaning the inside of residences; individual 
assistance, including grants for medical and dental costs, 
funeral costs, transportation needs, and air conditioners and 
other air quality improvement equipment; temporary housing 
assistance to displaced individuals; crisis counseling; 
unemployment assistance; legal services; temporary 
transportation to and from Lower Manhattan; and coordination 
between and among the Federal government and charitable 
agencies.

Unique circumstances and scope of response increased need for oversight

    It is the sense of the Subcommittee that at least four 
unique elements of the 9/11 response in New York City created a 
need for the establishment of more aggressive controls to 
reduce or eliminate waste, fraud, and abuse than had been put 
in place for previous disasters.
    First, FEMA funded 100 percent of all public disaster 
assistance provided to New York. FEMA usually requires state 
and local governments to pay a matching share of up to 25 
percent.\13\ The 9/11 response marked the first disaster 
response for which FEMA announced at the beginning of recovery 
and rebuilding efforts it would fund 100 percent of the public 
assistance program.\14\ FEMA officials are generally reluctant 
to recommend a 100-percent Federal share for rebuilding 
projects because requiring state or local governments to pay 
some percentage of costs creates an incentive for them to 
control costs and root out waste and abuse, FEMA officials told 
the GAO.\15\
---------------------------------------------------------------------------
    \13\ U.S. General Accounting Office, Disaster Assistance: 
Information on FEMA's Post 9/11 Public Assistance to the New York City 
Area, GAO-03-926, Aug. 29, 2003 at 24 (hereinafter Disaster 
Assistance).
    \14\ Id.
    \15\ Id. at 25.
---------------------------------------------------------------------------
    Second, the Federal government appropriated $20 billion for 
New York prior to any estimates of the response, recovery, or 
rebuilding costs. This, in effect, preset the spending level 
for agencies. Eventually, the difficulties agencies experienced 
as they tried to expend $20 billion led Congress to alter the 
range of allowable uses of Federal disaster funds to include 
activities that are not normally permitted under the Robert T. 
Stafford Disaster Relief and Emergency Assistance Act (P.L. 93-
288). The decision to permit FEMA to pay not only New York 
State's and New York City's traditionally reimbursable 
expenses, but also their ``associated costs,'' enabled FEMA to 
spend down the funds more rapidly. Non-traditional uses of 
disaster funds included a public awareness campaign called ``I 
Love New York,'' designed to attract tourists back to the area 
after 9/11, and payments to fund the pensions of New York City 
police and fire department personnel.\16\ When asked by Members 
and staff of the Subcommittee, FEMA and the other Federal 
agencies denied that they felt pressured to spend the $20 
billion.\17\
---------------------------------------------------------------------------
    \16\ Id. at 5.
    \17\ See, House Homeland Security Subcommittee on Management 
Integration and Oversight Holds Hearing on Fraud in September 11 
Assistance: Recovery, CQ Transcripts, July 13, 2006, available at 
http://www.cq.com (last visited Aug. 4, 2006).
---------------------------------------------------------------------------
    Third, Federal agencies utilized existing disaster recovery 
programs for new purposes, implemented new and untested 
programs, expanded their authority to address never-before-
handled tasks, loosened regulations, expanded recipient 
eligibility for certain programs, and utilized some programs to 
a greater extent than in all previous disasters combined. For 
example, prior to 9/11, neither FEMA nor the Environmental 
Protection Agency (EPA) had coordinated post-disaster indoor 
contaminant-cleaning efforts. However, this assistance was 
provided for homes polluted by debris from the World Trade 
Center collapse.\18\ In addition, FEMA's Mortgage and Rental 
Assistance program, a pre-existing program that had been used 
prior to 9/11 to award just $18.1 million to victims of 68 
previously declared disasters, provided $76 million to the 
victims of 9/11 in New York.\19\
---------------------------------------------------------------------------
    \18\ FEMA's Delivery of Individual Assistance Programs, supra note 
4 at 25.
    \19\ Id. at 9.
---------------------------------------------------------------------------
    Fourth, organized crime is reputed to have a continuing 
influence in New York City, particularly in the trucking, 
demolition, and waste disposal industries, which handled the 
bulk of the debris removal from the site of the World Trade 
Center.
    It is the sense of the Subcommittee that the exigent 
circumstances after 9/11 exposed systemic problems pertaining 
to the Federal oversight of immediate disaster response 
programs, grantees, and charities, making the funds susceptible 
to waste, fraud, and abuse. In his testimony before the 
Subcommittee, Department of Homeland Security Inspector General 
(Deputy Inspector General of FEMA at the time of 9/11) Richard 
Skinner stated that ``The fraud, waste and abuse that [occurred 
after 9/11 were] the same types of fraud, waste, and abuse we 
see after every disaster.'' \20\
---------------------------------------------------------------------------
    \20\ Written Testimony submitted by the Honorable Richard Skinner 
before the Subcommittee on Management, Integration, and Oversight 
hearing entitled, ``Federal 9/11 Assistance to New York: Lessons 
Learned in Fraud Detection, Prevention, and Control.'' Part 1 
``Response,'' July 12, 2006, at 6 (hereinafter Skinner Written 
Testimony).
---------------------------------------------------------------------------
    Further, it is the sense of the Subcommittee that the State 
and City governments performed admirably as stewards of Federal 
taxpayer dollars given the extraordinary circumstances, though 
this report identifies a few instances in which the State and 
City could have better handled programs.
    For their part, charities and private organizations 
assisting in the recovery received an outpouring of donations 
and provided more and wider services than for any previous 
disaster.\21\ But the Subcommittee found those services were 
susceptible to fraud and duplication with the assistance 
provided by other voluntary organizations and government 
agencies.
---------------------------------------------------------------------------
    \21\ More Effective Collaboration Could Enhance Charitable 
Organizations' Contributions in Disasters, supra note 7, at 2.
---------------------------------------------------------------------------

         DEBRIS REMOVAL: FORMIDABLE EFFORT FOR MONUMENTAL TASK

    The terrorist attacks of 9/11 left a tangled, burning 
mountain of steel and other debris rising 11 stories above 
street level and descending seven stories below it at Ground 
Zero--the site where the World Trade Center once stood. The 
removal of that 1.63 million tons, or 100,000 truckloads, of 
debris \22\ was a monumental task made more difficult by a 
chaotic mix of grief, urgency, unsafe conditions, some unsavory 
contractors, and the American impulse to volunteer.
---------------------------------------------------------------------------
    \22\ Allbaugh Written Testimony, supra note 3.
---------------------------------------------------------------------------
    While the wreckage continued to burn for three months, \23\ 
debris removal proceeded around the clock. This task was made 
more difficult by the magnitude of the destruction and by 
Ground Zero's unique status as both a disaster site and a crime 
scene. In the first two weeks, debris removal was slowed 
further by the ongoing search for survivors amidst the 
wreckage.\24\ When there was no longer a chance of finding 
survivors, the work proceeded slowly because of the need to 
carefully sort and screen debris for the remains and personal 
effects of victims, as well as criminal evidence.
---------------------------------------------------------------------------
    \23\ Mae M. Cheng and Curtis L. Taylor, WTC Fires Almost Out; FDNY 
Won't Declare Site ``Under Control,'' Newsday, Dec. 20, 2001, at A61.
    \24\ Michael Cooper, A Nation Challenged: The Trade Center; 
Giuliani Declares That Finding Anyone Still Alive in the Rubble Would 
Be ``a Miracle,'' N.Y. Times, Sept. 25, 2001, at B9.
---------------------------------------------------------------------------
    Initially, private contractors from across the country 
poured into New York from as far away as Washington State to 
help with the search and rescue and debris removal work, \25\ 
and most began working without contracts. This frenzied 
environment allowed corrupt subcontractors--including some 
affiliated with organized crime--to infiltrate Ground Zero and 
engage in fraudulent activities. For instance, several 
contractors were accused of diverting debris shipments; 
submitting charges to the government for the work of so-called 
``ghost employees,'' fictitious individuals who were said to 
have worked on the site; and submitting charges for broken or 
non-existent equipment. These illicit activities occurred 
primarily before New York City secured the area and employed an 
innovative system for eradicating waste, fraud, and abuse at 
the site, which included the deployment of private integrity 
monitors known as Independent Private Sector Inspectors General 
(IPSIGs).
---------------------------------------------------------------------------
    \25\ Subcommittee Staff Briefing with Mr. David Varoli, General 
Counsel, New York City Department of Design and Construction, Mar. 20, 
2006, in New York, New York (hereinafter DDC Briefing).
---------------------------------------------------------------------------
    Other difficulties were caused by New York City's inability 
to sign contracts with the private companies handling most of 
the debris removal because private insurers would not cover the 
potential liability claims stemming from the risky work.\26\ 
That discouraged contractors from signing traditional 
contracts. In response, FEMA waived key internal contracting 
controls intended in part to prevent contractors from over-
billing agencies disbursing FEMA funds.
---------------------------------------------------------------------------
    \26\ Disaster Assistance, supra note 13, at 15-16.
---------------------------------------------------------------------------
    Still, the debris removal was completed in less than half 
the time and for about half the cost originally projected. 
Originally expected to take two years \27\ at a cost of $1.2 
billion, \28\ the work was finished in nine months \29\ at a 
cost of $636 million.\30\
---------------------------------------------------------------------------
    \27\ DDC Briefing, supra note 25.
    \28\ Allbaugh Written Testimony, supra note 3.
    \29\ Disaster Assistance, supra note 13, at 12.
    \30\ Allbaugh Written Testimony, supra note 3.
---------------------------------------------------------------------------
    In his September 2002 testimony before the Senate Committee 
on Environment and Public Works, then-FEMA Director Joseph 
Allbaugh lauded the efficiency of the New York City and FEMA 
employees who oversaw the debris removal, which he said was 
performed without serious loss of life or injury. ``Thanks to 
the men and women of the New York City Department of 
Sanitation, Department of Design and Construction along with 
our FEMA employees, they did an extraordinary job by cutting 
that projected cost of debris removal by almost half,'' 
Director Allbaugh said, calling the work ``an incredible 
task.''
[GRAPHIC] [TIFF OMITTED] T9452.004

Organized crime infiltration in the Ground Zero clean-up?

    Because of the urgency of the situation at Ground Zero, the 
New York City Department of Design and Construction (DDC), 
which managed the debris-removal operations, was not able to 
start screening contractors and subcontractors through the New 
York City Vendor Information Exchange System (VENDEX) until 
three months after the attacks.\31\ VENDEX is a database with 
background information on all contractors who bid on New York 
City contracts and subcontracts valued at $100,000 or more, and 
sole source contracts valued at $10,000 or more, and/or whose 
aggregate business with New York City in the preceding 12 
months totals $100,000 or more.\32\
---------------------------------------------------------------------------
    \31\ DDC Briefing, supra note 25.
    \32\ New York Mayor's Office of Contract Services, Contractor 
Responsibility--How the City Ensures that Its Contractors are 
Responsible, available at http://www.nyc.gov/html/moc/html/
contractor.html (last visited August 3, 2006).
---------------------------------------------------------------------------
    The inability to screen companies in this environment 
allowed some subcontractors with links to organized crime or 
records of unsavory business practices, including--according to 
media reports--at least one barred from City or Federal 
contracting, \33\ to receive payments for debris-removal and 
shipping work. Experts testifying before the Subcommittee could 
not verify the accuracy of assertions in the media that at 
least $63.2 million in FEMA funds for Ground Zero cleanup work 
was paid to companies with mob ties.\34\ However, Mr. Neil 
Getnick, a private integrity monitor hired by DDC to monitor 
part of the debris removal, stated that $63.2 million could 
have gone to companies accused of mob ties. Since private 
integrity monitors probed many layers of association, Mr. 
Getnick noted at the July 12, 2006, Subcommittee hearing one 
example where private integrity monitors discovered that a 
subcontractor's father once was indicted--but not convicted--on 
mafia-related charges. Additionally, Mr. Getnick and others 
involved in Ground Zero oversight contended it was possible 
that companies accused of mob ties capably and honestly 
performed the work for which they were paid.
---------------------------------------------------------------------------
    \33\ Laquila Construction is barred from winning contracts for both 
the City of New York and the Federal government. See, Russ Buettner et 
al., Exposed: Map of Ground Zero Spoils: Where the Money Went to Clear 
Trade Center Debris, N.Y. Daily News, Dec. 5, 2005, at 24.
    \34\ Russ Buettner et al., Towers Fell, Mob Schemes Began: How 
Organized Crime Divvied Up Ground Zero Work, N.Y. Daily News, Dec. 5, 
2005, at 4.
---------------------------------------------------------------------------
    Elements of the construction, trucking, demolition, and 
waste disposal industries in New York City have reputed ties to 
organized crime. Without the IPSIGs at Ground Zero, New York 
City Commissioner of Investigations Ms. Rose Gill Hearn said 
``it would have been a free-for-all.'' \35\ Commissioner Hearn 
testified before the Subcommittee that a local prosecutor 
informed her office of an intercepted conversation between two 
organized crime associates. They lamented that the on-site 
presence and close scrutiny of the monitors at the World Trade 
Center was making it impossible for anyone to overbill New York 
City using the usual scams.\36\
---------------------------------------------------------------------------
    \35\ Subcommittee Staff Briefing with Ms. Rose Gill Hearn, 
Commissioner of Investigations, New York City Department of 
Investigations, Feb. 24, 2006, in New York, New York (hereinafter Gill 
Hearn Briefing).
    \36\ Written Testimony submitted by Ms. Rose Gill Hearn before the 
Subcommittee on Management, Integration, and Oversight hearing 
entitled, ``Federal 9/11 Assistance to New York: Lessons Learned in 
Fraud Detection, Prevention, and Control.'' Part 1 ``Response,'' July 
13, 2006, at 12 (hereinafter Gill Hearn Written Testimony).
---------------------------------------------------------------------------

Congress and FEMA adapt to unique circumstances

    FEMA paid the U.S. Army Corps of Engineers $72 million to 
sort debris for remains and personal belongings that could 
identify victims and for criminal evidence related to the 
attacks--an endeavor in which the Federal Bureau of 
Investigation (FBI) also participated.\37\ The sifting 
operation occurred at the Fresh Kills landfill in Staten 
Island, New York. Officials intended for all debris to be 
shipped directly to the landfill by barge and truck. However, 
private integrity monitors found that some truckers diverted 
debris to sell to scrap yards, paused mid-route for long 
periods of time, or otherwise delayed the trip to increase fees 
generated by hourly billing, a practice known as ``cooping.''
---------------------------------------------------------------------------
    \37\ Disaster Assistance, supra note 13, at 14-15.
---------------------------------------------------------------------------
    ``Time and materials' hourly payments, which are generally 
disfavored in government contracting, were necessitated because 
DDC and contractors could not agree on contractual payment 
arrangements after several private insurance companies declined 
liability coverage for the risky work.\38\ New York City asked 
Congress to indemnify it against potential claims stemming from 
most injuries or deaths at Ground Zero in much the same way 
Congress indemnified the airlines against potential lawsuits 
brought by the survivors of 9/11 victims, \39\ but proposed 
legislation was not enacted.\40\ Instead, after the debris 
removal was finished, Congress authorized FEMA to set aside $1 
billion for a government-backed insurance fund to cover 
contractors and New York City for liability claims resulting 
from debris-removal work.\41\ The move was unprecedented but 
could prove necessary in light of the class action lawsuit 
filed on behalf of 8,000 plaintiff firefighters, police 
officers, and construction workers claiming they were harmed by 
exposure to toxic substances while working at Ground Zero and 
seeking compensation from New York City.\42\
---------------------------------------------------------------------------
    \38\ Id. at 15-16.
    \39\ DDC Briefing, supra note 25.
    \40\ World Trade Center Worker and Contractor Protection Act of 
2001, H.R. 3503, 107th Cong. (2001).
    \41\ Pub. L. No. 108-7 (Consolidated Appropriations Resolution, 
2003).
    \42\ Anthony DePalma, 9/11 Suit Tests New York Stand on Immunity, 
N.Y. Times, June 23, 2006, at B1.
---------------------------------------------------------------------------
    Because New York City could not sign traditional contracts 
with the companies removing and shipping the debris, FEMA 
allowed DDC to continue paying contractors on a time-and-
materials basis indefinitely. FEMA's internal guidelines only 
permitted time-and-materials contracting for the first 70 hours 
after a disaster, partly because those contracts do not 
incentivize efficiency and thus become more prone to waste, 
fraud, and abuse.\43\
---------------------------------------------------------------------------
    \43\ Subcommittee Staff Telephone Interview with Mr. Dennis R. 
White, Deputy Special Inspector General, Department of Homeland 
Security, conducted July 5, 2006 (hereinafter White Telephone 
Interview).
---------------------------------------------------------------------------
    ``Time and materials contracting is something that's 
frowned upon in government contracting. It's used only in cases 
of emergencies,'' Mr. Dennis R. White, a Department of Homeland 
Security (DHS) Deputy Special Inspector General who worked in 
the FEMA Office of Inspector General's (OIG) New York City 
field office after 9/11, told Subcommittee staff.\44\ ``The 
problem is that it encourages the contractors to take as many 
hours as possible because they get paid by the hour.''
---------------------------------------------------------------------------
    \44\ Id.
---------------------------------------------------------------------------

Best practice: Private integrity monitoring caught and deterred fraud

    The removal of cost-control incentives on private 
contracts, combined with the chaos at Ground Zero, made it 
exceedingly important for the government to exercise oversight 
and implement stringent controls over debris-removal 
operations. FEMA's OIG asserted that it initially stationed 
people at the four exits of the site of the World Trade Center 
to track the shipments of debris to ensure they were not 
diverted.\45\ On October 4, 2001, the administration of former 
New York City Mayor Rudolph Giuliani announced it had 
dispatched four integrity monitoring companies to oversee the 
four construction management companies hired to clean up the 
four Ground Zero quadrants.\46\ This action came just days 
after a grand jury began hearing testimony about truck drivers 
allegedly diverting debris shipments to scrap yards to sell 
instead of to the landfill to be sifted.
---------------------------------------------------------------------------
    \45\ Id.
    \46\ Jennifer Steinhauer, A Nation Challenged: City Hall, 4 
Companies Are Hired to Oversee Contractors, N.Y. Times, Oct. 5, 2001, 
at B11.
[GRAPHIC] [TIFF OMITTED] T9452.005

    The World Trade Center Integrity Compliance Monitorship 
Program, which was continued by Mayor Giuliani's successor, 
Mayor Michael Bloomberg, hired four private integrity monitor 
companies--Decision Strategies/Fairfax International; Getnick & 
Getnick; Stier, Anderson & Malone; and Thacher Associates--all 
of which were run by former prosecutors. Known as Independent 
Private Sector Inspectors General (IPSIGs) the companies 
employed an innovative approach to contract management first 
utilized in New York in the 1990s for public school 
construction projects. Working with the New York City 
Department of Investigation (DoI), FEMA, and DDC, the IPSIGs 
used forensic auditing, surveillance, interviews, informants, 
global position system tracking of trucks, background checks, 
and other investigative techniques to screen subcontractors and 
ensure they were utilizing the appropriate equipment and 
workers, accurately billing the government, and hauling debris 
to the appropriate destination.
    The private integrity monitors' performance of background 
checks on contractors, using New York City's VENDEX database 
and independent means, proved a useful tool. The checks 
resulted in the indictments by the Manhattan District 
Attorney's office of two principals of a Yonkers carting firm 
working at Ground Zero who allegedly lied about their ties to 
organized crime in documents filed with New York City. The 
private integrity monitors also identified numerous instances 
of over-billing by this firm.\47\
---------------------------------------------------------------------------
    \47\ Id.
---------------------------------------------------------------------------
    Private integrity monitors had never previously been 
deployed on such a large scale \48\ and, by all accounts, their 
deployment in the debris removal context was an overwhelming 
success. Private integrity monitors identified a number of 
contractors with ties to organized crime which were 
subsequently removed from the site, found trucks cooping while 
on the clock, \49\ flagged several attempted frauds that were 
referred for prosecution, recovered $47 million in over-billing 
by contractors and subcontractors, and saved immeasurably more 
money by deterring fraud.\50\
---------------------------------------------------------------------------
    \48\ Gill Hearn Briefing, supra note 35.
    \49\ Subcommittee Staff Briefing with Mr. Neil Getnick et al., 
Independent Private Sector Inspectors General, Mar. 21, 2006, in New 
York, New York.
    \50\ Gill Hearn Written Testimony, supra note 36.
---------------------------------------------------------------------------
    The World Trade Center Integrity Compliance Monitorship 
Program was effective in large part because it was preventive. 
By embedding private integrity monitors with the individual 
contractors, the monitoring program prevented fraud and abuse 
by contractors that were unscrupulous or sloppy in their 
accounting. In addition, the monitoring ensured proper record 
keeping and established internal controls, which created a 
culture of compliance within each contractor's operations and 
ensured accountability to New York City.
    DoI and the monitors took several steps to bolster the 
effectiveness of the monitoring program. First, they met 
regularly with one another and with law enforcement agencies. 
Second, they set up an electronic key-card system to track each 
person who accessed the site. Third, they established a fraud 
hotline, which received 80 tip calls.\51\ Together, these 
controls increased the effectiveness of the private integrity 
monitor program and enhanced the overall vigilance against 
fraud and waste during the debris removal. It is the sense of 
the Subcommittee that private integrity monitors should be 
incorporated into future disaster response oversight, 
particularly in instances requiring debris removal.
---------------------------------------------------------------------------
    \51\ Gill Hearn Briefing, supra note 35.
---------------------------------------------------------------------------
    High-ranking officials in the DHS OIG office said debris-
removal work has always posed oversight problems for FEMA, but 
the removal of debris from Ground Zero was among the agency's 
best run projects.\52\ In the Subcommittee's judgment, that 
success resulted from the presence of private integrity 
monitors and occurred in spite of very challenging conditions.
---------------------------------------------------------------------------
    \52\ Subcommittee Staff Briefing with the Honorable Richard L. 
Skinner, Inspector General, Department of Homeland Security, June 28, 
2006, in Washington, D.C. (hereinafter Skinner Briefing); White 
Telephone Interview, supra note 44. Mr. Skinner stated that debris 
removal poses challenges. Mr. White stated that the 9/11 debris removal 
was among the best ever run.
---------------------------------------------------------------------------

Hard lesson learned: Costly oversight in aerial photography contract

    Not every part of the response phase paralleled the success 
of the private integrity monitoring program. For example, FEMA 
contracted with a photographer to take aerial photographs of 
Ground Zero without checking the photographer's background or 
experience and without including in the contract standard 
language giving FEMA title and ownership of the photographs. As 
a result, the photographer was able to copyright 30,000 
photographs and 34 minutes of video of Ground Zero that he took 
from a New York City Police Department helicopter while also 
receiving $300,000 from FEMA and the DDC. He sold 36 of the 
photographs to LIFE Books, which printed them in a 2002 book. A 
lawyer for the photographer reportedly sent New York City a 
letter warning that it could not use the photographs without 
the photographer's permission.\53\
---------------------------------------------------------------------------
    \53\ Greg B. Smith, Shameful Abuse of 9-11 Footage, N.Y. Daily 
News, Feb. 12, 2006, at 6 (hereinafter Shameful Abuse of 9-11 Footage).
---------------------------------------------------------------------------
    According to an interview the photographer gave to LIFE 
Books, a representative from FEMA called the photographer at 
2:00 a.m. on September 15, 2001, after spotting his ad in a 
phone book, and asked if he had ever taken aerial photographs. 
LIFE Books quoted the photographer as saying:

          I said ``yes,'' and we all know now that I had never 
        taken aerial photos before. I guess the reason I said 
        yes was because I have gotten all kinds of strange 
        calls from my photography business ad in the yellow 
        pages. When you have a yellow pages ad in New York 
        City, you can just imagine the kind of calls you might 
        get.'' \54\
---------------------------------------------------------------------------
    \54\ Interview by Life.com with Gregg Brown, Photographer, New 
York, New York, available at http://www.life.com/life/lifebooks/
amspirit/brown.html (last visited August 3, 2006).

FEMA could not identify the FEMA employees responsible for 
awarding the contract. FEMA did not offer a satisfactory answer 
to the Subcommittee's repeated queries about whether FEMA 
typically includes clauses in contracts ceding title and 
ownership to the agency,\55\ though Mr. Joe Picciano, Deputy 
Director for the FEMA regional office that includes New York, 
testified before the Subcommittee on July 12, 2006, that the 
failure to include such a clause was an oversight.
---------------------------------------------------------------------------
    \55\ According to Adrian Sevier, FEMA does not engage in much 
direct contracting and does not have standard contract language. FEMA 
did not respond to Subcommittee Staff inquiries requesting additional 
information about FEMA contracting practices, generally, or the 9/11 
aerial photography contract, specifically. In a subsequent telephone 
interview in April 2006, a FEMA representative said contractors are 
normally required to cede title and ownership of their work, but also 
said most photographers dealing with FEMA do not give up ownership of 
their photographs. Subcommittee Staff briefing with Mr. Adrian Sevier, 
Acting Deputy General Counsel, Federal Emergency Management Agency, 
Mar. 24, 2006, in Washington, D.C.
---------------------------------------------------------------------------
    The photography began under FEMA's direction on September 
15, 2001.\56\ In November 2001, the DDC assumed the contract 
and asked the photographer to cede title and ownership to New 
York City, which the photographer refused.\57\ The DDC revoked 
the photographer's access to the helicopter on May 10, 
2002.\58\
---------------------------------------------------------------------------
    \56\ Shameful Abuse of 9-11 Footage, supra note 53.
    \57\ DDC Briefing, supra note 25.
    \58\ Shameful Abuse of 9-11 Footage, supra note 53.
---------------------------------------------------------------------------
    The photographs and the video footage were commissioned to 
assist the rescue effort by tracking the plumes of smoke 
emanating from the rubble at Ground Zero and to record the 
event for posterity. However, to view the photographs and the 
video, members of the public must file a request with New York 
City under New York State's Freedom of Information Law \59\ or 
go to the U.S. Copyright Office, located in the Madison 
Building of the Library of Congress in Washington, D.C., 
because the photographer owns the images and video.\60\
---------------------------------------------------------------------------
    \59\ DDC Briefing, supra note 25.
    \60\ Greg Smith, Only Playing in D.C., N.Y. Daily News, Feb. 12, 
2006, at 7.
---------------------------------------------------------------------------

                          TESTING AND CLEANING

    FEMA and the Environmental Protection Agency (EPA) entered 
into two interagency agreements to detect and remove 
potentially harmful materials scattered by the World Trade 
Center collapse from private residences in Lower Manhattan. 
Neither agency had previously provided such services after a 
disaster, nor was either specifically authorized to do so. 
However, after residents in the area complained for months 
about the pollution, the EPA and New York City formed task 
forces to examine the issue.

Systemic problem: Lack of interagency coordination

    Months after the attacks, FEMA implemented an indoor 
testing and cleaning program with the EPA by invoking its 
Stafford Act authority for debris removal. Though the deadline 
to register for the program was extended twice to December 28, 
2002, residents expressed frustration with delays and 
difficulties obtaining information and registering for the 
program.\61\ According to the FEMA OIG, difficulties resulted 
in part because FEMA failed to request that EPA conduct the 
necessary testing to determine whether debris posed a public 
health or safety threat. The EPA was required to confirm that 
disaster dust and debris posed health and safety risks before 
FEMA could provide funding for cleanup. However, FEMA failed to 
coordinate with EPA to ensure that the required assessments 
were conducted in a timely manner.\62\
---------------------------------------------------------------------------
    \61\ FEMA's Delivery of Individual Assistance Programs, supra note 
4 at 24.
    \62\ Id. at 25.
---------------------------------------------------------------------------

                         INDIVIDUAL ASSISTANCE

    Lax management and weak oversight plagued some of FEMA's 
individual assistance programs, including Individual and Family 
Grants, Temporary Housing Assistance, and Crisis Counseling. In 
at least one case--FEMA's Air Quality Program--the result was 
rampant waste, fraud, and abuse. This program and others were 
the subject of critical reports by the media, FEMA's OIG, and, 
after the establishment of DHS, the DHS Office of Inspector 
General (DHS OIG).
    DHS Inspector General Richard Skinner told Subcommittee 
staff that FEMA did not require state and local agencies 
receiving FEMA grants to have proper oversight plans in place 
to prevent waste, fraud, and abuse among subgrantees.\63\ As 
opposed to in-depth reports citing potential problems, Mr. 
Skinner said FEMA allowed its grantees to file reports that 
were mere numerical tallies. According to Mr. Skinner, FEMA 
would benefit from Congressional mandates for quarterly reports 
to Congressional Appropriations Committees, much like HUD's 
reporting requirement which proved to be effective during its 
response to 9/11, as discussed below.
---------------------------------------------------------------------------
    \63\ Skinner Briefing, supra note 52.
---------------------------------------------------------------------------
    It is the sense of the Subcommittee that FEMA failed to 
grasp the lessons learned from 9/11. For example, the FEMA OIG 
recommended changes to the Individual and Family Grants (IFG) 
program, which funded the Air Quality Program. FEMA relaxed the 
programmatic controls associated with this program which was 
intended to reimburse applicants for costs associated with air 
conditioners, air purifiers, and vacuums. The FEMA OIG found 
that the program was vulnerable to fraud and abuse, partly 
because of lax oversight by FEMA and the New York State 
Department of Labor, which administered the program.\64\ Yet, 
according to the GAO, following Hurricanes Katrina and Rita, 
the successor to the IFG program paid as much as $1.4 billion 
in fraudulent assistance for inappropriate expenditures such as 
season football tickets, a $200 bottle of Dom Perignon 
champagne purchased at a Hooter's restaurant, and ``Girls Gone 
Wild Videos.'' \65\
---------------------------------------------------------------------------
    \64\ U.S. Department of Homeland Security Office of Inspector 
General, The Federal Emergency Management Agency's Individual and 
Family Grant Program Management at the World Trade Center Disaster, 
OIG-04-49, Sept. 2004, at 7 (hereinafter FEMA's Individual and Family 
Grant Program Management).
    \65\ Written Testimony submitted by Mr. Gregory D. Kutz before the 
Committee on Homeland Security, Subcommittee on Investigations hearing 
entitled, ``Waste, Fraud, and Abuse in the Aftermath of Hurricane 
Katrina,'' June 14, 2006, at 25.
---------------------------------------------------------------------------
    The ability to detect fraud, waste, and abuse in FEMA-
administered programs ends three years after the last 
expenditure of funds. At that time, the OIG's authority to 
audit a program and disallow costs ceases.\66\ Once the three 
years have passed, state and local governments may archive, 
destroy, or deny Federal agencies access to grant records.\67\ 
DHS OIG Skinner advised the Subcommittee staff that his agency 
does not intend to conduct additional audits of the major FEMA 
programs that administered funds for the 9/11 recovery.\68\
---------------------------------------------------------------------------
    \66\ ``Pursuant to 44 CFR 13.42, states are required to retain 
records, including source documentation, to support expenditures/costs 
incurred against the grant award, for 3 years from the date of 
submission to FEMA of the Financial Status Report. The State is 
responsible for resolving questioned costs that may result from an 
audit conducted during the three-year record retention period and for 
returning disallowed costs of ineligible activities.'' 44 C.F.R. 
Sec. 206.120 (2006).
    \67\ Skinner Briefing, supra note 52.
    \68\ Id.
---------------------------------------------------------------------------

Systemic problem: Inadequate verification prior to disbursing funds

    Normally, FEMA requires that disaster victims apply and be 
denied for Small Business Administration (SBA) disaster loans 
before disbursing funds from the IFG program. However, FEMA and 
New York State categorized air conditioners, air purifiers, 
filters, and vacuum cleaners in a way that exempted them from 
the SBA loan application requirement.\69\ That designation 
permitted those items to be purchased with air quality grants 
regardless of SBA consideration.
---------------------------------------------------------------------------
    \69\ Id.
---------------------------------------------------------------------------
    Typically, FEMA inspects property that applicants claim was 
damaged or destroyed in a disaster before issuing IFGs to 
replace the property. In March 2002, FEMA waived that 
requirement for air conditioners purchased through the air 
quality program after determining it would be impractical to 
verify damage to individual units.\70\ Instead, New York State 
implemented a self-certification process requiring applicants 
to describe the circumstances associated with the repair or 
replacement of items and to submit supporting receipts. 
According to the FEMA OIG, this shift, combined with promotions 
by stores selling eligible items and misleading notices in 
community foreign-language newspapers, significantly increased 
the number of applications and may have increased the 
likelihood of fraud and abuse.\71\ In a random sample of 4,435 
IFG applications to replace damaged window air conditioners, 
FEMA found that 2,731--or 62 percent--of the units were likely 
ineligible.\72\
---------------------------------------------------------------------------
    \70\ Air conditioners were added to the list of reimbursable items 
after home inspections had already been completed and FEMA determined 
it would not be cost effective to send inspectors back to homes to 
inspect air conditioners. FEMA's Individual and Family Grant Program 
Management, supra note 64, at 6.
    \71\ Id. at 8.
    \72\ Id.
---------------------------------------------------------------------------
    FEMA typically requires receipts or similar records to 
verify that IFG funds will be used for essential needs prior to 
disbursement. In May 2002, FEMA and New York State authorized 
advance payments to applicants who could not afford items 
covered by the Air Quality Program. FEMA asked applicants to 
provide receipts after purchasing approved items,\73\ but by 
March 2003, FEMA found none of a randomly selected group of 
5,602 cash-advance recipients (who had received a total of $5.8 
million in assistance) had submitted receipts.\74\ In July 
2003, FEMA determined that 1,682--or 33 percent--of a random 
inspection of 5,029 recipients had not purchased air 
conditioners. These cases were referred for collection.\75\
---------------------------------------------------------------------------
    \73\ Id. at 6-7.
    \74\ Id. at 8.
    \75\ Id.
---------------------------------------------------------------------------
    Mr. Skinner credited efforts by his office as well as 
FEMA's sampling and home inspection program with prompting 
100,000 of the original 229,000 applicants to voluntarily 
withdraw from the program.\76\
---------------------------------------------------------------------------
    \76\ Skinner Written Testimony, supra note 20.
---------------------------------------------------------------------------

Best practice: Demonstrate intolerance for fraud by prosecuting small 
        cases

    The Manhattan District Attorney's Office and the U.S. 
Attorney's Office largely declined to prosecute cases of 
alleged fraud against the Air Quality Program in part because 
the frauds involved small sums of money and in part because 
prosecutors determined the program's regulations were too lax 
to prove violations.\77\ The Manhattan District Attorney's 
Office did prosecute 12 cases investigated by Federal 
auditors.\78\ Prosecutors also pursued other 9/11 fraud cases 
involving less than the typical monetary thresholds to send a 
message that fraud against disaster funds would not be 
tolerated. (See Appendix B for convictions of fraudulent 
activity associated with 9/11 assistance.)
---------------------------------------------------------------------------
    \77\ Id. at 5.
    \78\ Id. at 6.
---------------------------------------------------------------------------
    Subcommittee staff has been told that prosecutors' offices 
often lack the resources to prosecute the surge in post-
disaster cases that result from frauds perpetrated against 
disaster assistance programs. Given that certain kinds of fraud 
occur after every disaster, \79\ Subcommittee Chairman Mike 
Rogers stated that prosecutors' offices should assess their 
needs in the event of a disaster. Chairman Rogers further 
asserted it would be worth considering setting aside a 
percentage of total Federal disaster-response funds 
appropriated to assist prosecutors' offices in handling fraud 
cases associated with disaster relief. \80\
---------------------------------------------------------------------------
    \79\ Id.
    \80\ See, House Homeland Security Subcommittee on Management 
Integration and Oversight Holds Hearing on Fraud in September 11 
Assistance: Recovery, CQ Transcripts, July 13, 2006, available at 
http://www.cq.com (last visited Aug. 8, 2006).
---------------------------------------------------------------------------

Systemic problem: Lack of information sharing and cooperation

    The FEMA OIG found that FEMA's Air Quality Program would 
have been better served by limiting eligibility to the areas 
identified by the EPA and New York City's Department of Health 
as affected by toxic debris, rather than providing grants to 
households in all five boroughs of New York City.\81\ 
Specifically, FEMA could have utilized a map of the smoke 
plumes from Ground Zero to designate eligible geographic areas. 
``If the IFG Program and the EPA testing and cleaning program 
had worked more closely together in terms of geographic 
eligibility, the prog ram would have had reasonable and 
justifiable boundaries,'' according to the FEMA OIG.\82\
---------------------------------------------------------------------------
    \81\ FEMA's Delivery of Individual Assistance Programs, supra note 
4 at 20.
    \82\ Id.
---------------------------------------------------------------------------

                     MORTGAGE AND RENTAL ASSISTANCE

    FEMA administered its Mortgage and Rental Assistance (MRA) 
program to provide as much as 18 months of mortgage or rental 
payments to 9/11 victims. During implementation, FEMA changed 
the eligibility criteria from aiding people who lost at least 
25 percent of their incomes ``as a result'' of the catastrophe 
to those who lost 25 percent of their incomes ``as a direct 
result'' of the attacks.\83\
---------------------------------------------------------------------------
    \83\ FEMA's Delivery of Individual Assistance Programs, supra note 
4 at 11.
---------------------------------------------------------------------------

Systemic problem: Ineffective oversight

    According to one media report, FEMA failed to explain how 
the agency defined ``direct result.'' It also did not provide a 
place on the MRA application for applicants to explain why 
their job loss was a ``direct result'' of the attacks, or even 
to list their employers' addresses. FEMA also did not provide 
its employees with guidelines explaining how to determine which 
applicants were directly affected by the attacks.\84\ Most 
denials of assistance appear to have resulted from 
misinformation or misunderstanding about eligibility or the 
specific benefits covered, and/or the application process, 
according to the FEMA OIG.\85\ The New York Times identified 
some of the rejected applications. Among them were the 
following:
---------------------------------------------------------------------------
    \84\ Diana B. Henriques and David Barstow, Change in Rules Barred 
Many From Sept 11 Disaster Relief, N.Y. Times, Apr. 26, 2002, at A1.
    \85\ FEMA's Delivery of Individual Assistance Programs, supra note 
4 at 35.
---------------------------------------------------------------------------
    <bullet> Hundreds of Chinatown seamstresses, Manhattan 
hotel workers and taxi drivers were denied MRA funds.
    <bullet> FEMA denied MRA funds to a disabled veteran who 
sold hats and gloves on the sidewalks of lower Broadway, though 
he provided sworn statements from shopkeepers confirming that 
he was a regular vendor in the area.
    <bullet> An applicant ``who had worked at a restaurant on 
the concourse of the World Trade Center, supplied the 
restaurant's name and his supervisor's telephone number at work 
* * * was denied aid because an agency evaluator could not get 
through on the telephone to the now nonexistent restaurant.'' 
\86\
---------------------------------------------------------------------------
    \86\ Henriques and Barstow, supra note 84.
---------------------------------------------------------------------------
    There were also examples of fraudulent applications to the 
MRA program. For example, according to the Manhattan District 
Attorney's Office, an attorney and his girlfriend created false 
documents to show that the girlfriend had lost her job and was 
being evicted from her apartment. She then filed claims for 
assistance and received $70,000 from FEMA, the Red Cross, and 
Safe Horizon. In reality, she had not lost her job and was 
living with her boyfriend in New Jersey.\87\
---------------------------------------------------------------------------
    \87\ Press Release, District Attorney of New York County, People 
vs. 26 Individuals--WTC Charity Fraud (Nov. 13, 2002).
---------------------------------------------------------------------------
    After media reports in April 2002 showed seven out of 10 
applications for the MRA program had been denied, \88\ FEMA 
took steps to remedy and expand the program. FEMA re-examined 
all 7,323 rejected applications, deemed 1,625--or 22.2 
percent--eligible and requested additional documentation for 
3,126--or 42.7 percent.\89\ FEMA modified MRA applications to 
allow applicants to explain how their economic hardship was a 
direct result of the attacks, and eliminated the requirement 
that self-employed applicants and business owners be rejected 
by the SBA before applying for assistance under the MRA 
program.\90\ FEMA also expanded the geographic area of 
eligibility in late June 2002, a little more than one month 
before Congress passed a bill doing the same.\91\
---------------------------------------------------------------------------
    \88\ Henriques and Barstow, supra note 84.
    \89\ FEMA's Delivery of Individual Assistance Programs, supra note 
4, at 13.
    \90\ Id. at 14.
    \91\ Id.
---------------------------------------------------------------------------
    Ultimately, FEMA's MRA program provided more than four 
times the amount of financial assistance to New York's 9/11 
victims than the program had delivered to all victims of 
previous disasters since its inception.\92\ FEMA's Inspector 
General said the program would need to be altered if it were to 
be revived.\93\
---------------------------------------------------------------------------
    \92\ From the inception of FEMA's Mortgage and Rental Assistance 
program until Sept. 11, 2001, it has awarded only $18.1 million to 
victims of 68 declared disasters compared to $76 million to the victims 
of 9/11 in New York. See, FEMA's Delivery of Individual Assistance 
Programs, supra note 4, at 9.
    \93\ Id.
---------------------------------------------------------------------------

                           CRISIS COUNSELING

    The Stafford Act authorizes FEMA to fund professional 
counseling to treat mental health problems caused or aggravated 
by a disaster or its aftermath. In addition, the U.S. 
Department of Justice (DOJ) can fund professional counseling to 
treat mental health problems caused or aggravated by a crime or 
its aftermath. Since the 9/11 attacks are considered to be a 
crime resulting in a disaster, both programs applied.

Systemic problem: Lack of information sharing and cooperation

    FEMA and DOJ failed to coordinate to ensure that 
individuals psychologically impacted by the 9/11 attacks did 
not receive duplicative services funded by the two agencies, 
according to the FEMA OIG.\94\ Shortly after 9/11, the two 
agencies reached a verbal agreement on the sequence of delivery 
of services. However, the FEMA OIG wrote, ``more detailed and 
comprehensive guidance is necessary to ensure that services 
delivered to disaster victims who are also victims of crime are 
appropriate, consistent, and not duplicative.'' \95\ The FEMA 
OIG encouraged the agencies to enter into a Memorandum of 
Understanding formalizing their relationship, their respective 
responsibilities and authorizations, as well as programs, time 
frames, and sequencing to apply when a disaster is also a crime 
scene. It was not until 2006, four years after the OIG made its 
recommendation, when FEMA and DOJ executed a Letter of Intent 
discussing services needed in responding to catastrophic 
Federal crimes.\96\
---------------------------------------------------------------------------
    \94\ Id. at 28.
    \95\ Id.
    \96\ Skinner Briefing, supra note 52.
---------------------------------------------------------------------------

                        UNEMPLOYMENT ASSISTANCE

    The U.S. Department of Labor (DOL) administers the FEMA-
funded Disaster Unemployment Assistance (DUA) program to 
provide assistance to any person left unemployed by a disaster 
who is not eligible for regular State Unemployment Insurance or 
other supplemental income. DOL after 9/11 expanded the program 
by:
          <bullet> allowing disaster unemployment benefits to a 
        broader range of survivors than in past disasters;
          <bullet> extending application periods;
          <bullet> loosening documentation standards; and
          <bullet> extending the duration of benefits by 13 
        weeks.\97\
---------------------------------------------------------------------------
    \97\ FEMA's Delivery of Individual Assistance Programs, supra note 
4, at 35.
---------------------------------------------------------------------------
    Nevertheless, DOL experienced a historically 
disproportionate denial rate for DUA, \98\ and advocacy groups 
complained in public forums that eligibility was unjustly 
limited and that improper processing excluded eligible 
applicants.\99\ According to the FEMA OIG, after examining New 
York State records, DOL officials determined denial decisions 
were consistent with guidelines and regulations, but that 
``most denials appear to have resulted from misinformation or 
misunderstanding about eligibility or the specific benefits 
covered, and/or the application process.'' \100\
---------------------------------------------------------------------------
    \98\ Id.
    \99\ Id. at 45-46.
    \100\ Id.
---------------------------------------------------------------------------

Systemic Problem: Lack of information sharing and cooperation

    The FEMA OIG indicated FEMA should have made information 
available earlier in multi-lingual formats \101\ and that 
outreach shortcomings may have resulted in misunderstandings 
over eligibility for the DUA program. But, the FEMA OIG 
stressed, the agency's post-9/11 outreach program was the most 
comprehensive in agency history.\102\ At its peak, the outreach 
program included 107 FEMA representatives and 32 DOJ outreach 
workers, as well as a helpline, a toll-free registration line, 
disaster service centers which disseminated information in 17 
languages, and extensive advertisements in various mediums--
even on the marquees of Madison Square Garden and the NASDAQ 
Stock Exchange.
---------------------------------------------------------------------------
    \101\ ``Advertisements were placed in foreign press papers in 
August 2002, in mainstream papers in November 2002, and on buses and 
subways in December 2002.'' FEMA's Delivery of Individual Assistance 
Programs, supra note 4, at 34.
    \102\ Id. at 33.
---------------------------------------------------------------------------

                        TEMPORARY TRANSPORTATION

    The Port Authority of New York and New Jersey (Port 
Authority) issued five FEMA-funded contracts to a private 
company called New York Waterway to operate ferries between New 
Jersey and New York as an alternative to PATH rail lines 
damaged in the attacks.

Systemic Problem: Ineffective oversight of procurement

    Between March 2002 and April 2003, FEMA authorized at least 
$29.8 million for increased ferry service and new ferry 
terminals. FEMA disbursed the funds through the New York State 
Emergency Management Office to the Port Authority, \103\ and 
according to the DHS OIG, FEMA had no direct contact with the 
company.\104\
---------------------------------------------------------------------------
    \103\ Email from Ms. Tamara Faulkner, Congressional and Media 
Liaison, Department of Homeland Security Office of Inspector General, 
to Subcommittee Staff (Apr. 11, 2006).
    \104\ Id.
---------------------------------------------------------------------------
    Three of the five contracts issued to New York Waterway 
were not competitively bid. Given that the Port Authority had 
an existing contract with New York Waterway since 1988, \105\ 
from the Port Authority's perspective, the no-bid contracts 
were justified. Port Authority Chief Operating Officer Ernesto 
Butcher told Subcommittee staff that New York Waterway ``was 
the most logical choice'' to do the work.\106\ ``Their effort 
was a Herculean one in terms of providing the services to move 
people back and forth across the river,'' Mr. Butcher 
said.\107\
---------------------------------------------------------------------------
    \105\ Id.
    \106\ Subcommittee Staff Telephone Interview with Mr. Ernesto 
Butcher, Chief Operating Officer, Port Authority of New York and New 
Jersey, conducted May 26, 2006.
    \107\ Id.
---------------------------------------------------------------------------
    The Department of Justice, in cooperation with the Port 
Authority Office of Inspector General (Port Authority OIG), 
brought civil fraud charges against the company alleging New 
York Waterway over-billed the government. The government 
accused the company of submitting false bills to the Port 
Authority for expenses it never incurred, overstating its 
profit margin, and inflating its incremental costs. The company 
agreed in July 2006 to settle the charges for $1.2 million, 
without admitting wrongdoing.\108\
---------------------------------------------------------------------------
    \108\ Press Release, U.S. Attorney for the S.D.N.Y., Ferry Operator 
to Pay $1.2 Million to Settle Civil Charges That it Defrauded the 
Government After the September 11 Terrorist Attacks (July 17, 2005).
---------------------------------------------------------------------------

 COORDINATION BETWEEN AND AMONG THE FEDERAL GOVERNMENT, CHARITIES, AND 
                           VOLUNTARY AGENCIES

    As Americans sought to help after the 9/11 attacks, many 
made contributions to charities and voluntary agencies. Surveys 
suggest as many as two-thirds of American households donated 
money to voluntary agencies aiding in the response. Reports 
from 35 such charities and agencies show that they received an 
estimated $2.7 billion in contributions within 14 months after 
the attacks.\109\ Voluntary agencies made a significant 
contribution to the recovery. In New York, these agencies 
provided direct cash assistance and services including 
counseling to families of those killed, disaster relief 
workers, and those left unemployed or homeless by the attacks.
---------------------------------------------------------------------------
    \109\ More Effective Collaboration Could Enhance Charitable 
Organizations' Contributions in Disasters, supra note 7, at 7.
---------------------------------------------------------------------------

Systemic problem: Lack of information sharing and cooperation

    Pursuant to the Stafford Act, FEMA is charged with 
coordinating the administration of relief with the American Red 
Cross, the Salvation Army, the Mennonite Disaster Service, and 
other relief or disaster assistance organizations, as well as 
with state and local governments \110\ to avoid duplication of 
benefits.\111\ The Subcommittee found that despite efforts by 
the voluntary agencies and by FEMA to coordinate assistance to 
prevent fraud and avoid duplicate payments, the assistance 
provided by voluntary agencies was susceptible to fraud.
---------------------------------------------------------------------------
    \110\ 42 U.S.C. Sec. 5121 et seq. (2000).
    \111\ FEMA's Delivery of Individual Assistance Programs, supra note 
4, at 31.
---------------------------------------------------------------------------
    For example, according to the Manhattan District Attorney's 
Office, one applicant for assistance from FEMA, the Red Cross, 
and Safe Horizon claimed his income decreased by more than 
$100,000 due to the attacks. In reality, the individual, who 
had assets in excess of $1 million, saw his income increase 
from $137,198 in 2001 to more than $200,000 in 2002. According 
to the Manhattan District Attorney's office, his fraudulent 
applications initially went undetected, however, and he 
received nearly $60,000 in assistance.\112\
---------------------------------------------------------------------------
    \112\ Press Release, District Attorney of New York County, People 
vs. Charles Cadorette (July 31, 2003).
---------------------------------------------------------------------------
    FEMA took several steps to coordinate the services and 
assistance provided by traditional voluntary agencies, as well 
as others not traditionally involved in the delivery of 
assistance. These efforts were hampered, however, by the 
unprecedented influx of contributions to the voluntary agencies 
and by privacy laws prohibiting the sharing of information 
between and among voluntary and government agencies.\113\ FEMA 
officials conceded to the FEMA OIG that some people may have 
received duplicative assistance from governmental agencies and 
from the voluntary organizations.\114\
---------------------------------------------------------------------------
    \113\ More Effective Collaboration Could Enhance Charitable 
Organizations' Contributions in Disasters, supra note 7, at 21.
    \114\ FEMA's Delivery of Individual Assistance Programs, supra note 
4, at 32.
---------------------------------------------------------------------------
    ``FEMA needs to be better able to anticipate the proactive 
role non-governmental organizations will play in disaster 
recovery operations and attempt to coordinate relationships 
with those organizations through protocols such as Memoranda of 
Understanding to alleviate the potential for duplicating 
benefits,'' the FEMA OIG recommended.\115\ In a December 2002 
report, the GAO recommended that FEMA convene a working group 
of officials from key charitable and voluntary groups and 
Federal, state, and local officials to help reduce fraud and 
build cooperation in charitable responses to future disasters. 
The GAO specifically suggested that the group develop and adopt 
a common application form and confidentiality agreement for use 
in disasters and strategies for enhancing public education 
regarding charitable giving.\116\
---------------------------------------------------------------------------
    \115\ Id.
    \116\ More Effective Collaboration Could Enhance Charitable 
Organizations' Contributions in Disasters, supra note 7, at 21.
---------------------------------------------------------------------------
    Despite the coordination problems that occurred after 9/11, 
similar problems plagued the responses of FEMA and the Red 
Cross to Hurricanes Katrina and Rita, according to a June 2006 
GAO report. GAO found that disagreements between the 
organizations about their roles and responsibilities ``created 
tension between FEMA and the Red Cross and affected the 
organizations' working relationship,'' \117\ hindering their 
ability to coordinate relief efforts for Hurricanes Katrina and 
Rita. The report also found that as of May 24, 2006--one week 
before the start of the 2006 hurricane season--FEMA and the Red 
Cross had yet to reach agreement on key responsibilities.\118\
---------------------------------------------------------------------------
    \117\ U.S. General Accounting Office, HURRICANES KATRINA AND RITA: 
Coordination Between FEMA and the Red Cross Should be Improved for the 
2006 Hurricane Season, GAO-06-712, June 8, 2006 at 3.
    \118\ Id.
---------------------------------------------------------------------------

                                Recovery

    The economic, physical, and psychological damage wrought by 
the 9/11 attacks in New York City is difficult to fathom. In 
addition to the loss of life, injuries, and physical 
destruction, the attacks dealt a substantial blow to the 
residential neighborhoods of Lower Manhattan. Due to the 
importance of the financial, insurance, and real estate 
industries of Lower Manhattan, the impact of 9/11 reverberated 
throughout the economies of not only New York City and the 
surrounding area, but the nation as a whole.
    Estimates of economic losses range from $54 billion to $105 
billion.\119\ A study by the Milken Institute, a non-profit 
fiscal research group, estimated that as a result of the 
attacks, the economy of the New York-New Jersey metropolitan 
area sustained income losses of about $2.7 billion in 2001 
alone, while all metropolitan areas in the country sustained 
losses of about $191 billion.\120\ By some estimates, the 
attacks eliminated as many as 100,000 jobs \121\ in the New 
York area and more than 10 million square feet of office space 
in Lower Manhattan.\122\ As a result, Lower Manhattan slipped 
from the third to the fourth largest central business district 
in the nation.\123\
---------------------------------------------------------------------------
    \119\ U.S. General Accounting Office, Review of Studies of the 
Economic Impact of the September 11, 2001 Terrorist Attacks on the 
World Trade Center, GAO-02-700R, May 29, 2002 at 12. (These estimates 
include direct and indirect costs of lost income brought about by 
business closing and related spending reductions.)
    \120\ Id. at 2-3.
    \121\ The New York State Assembly Ways and Means Committee 
estimated that of the 125,300 jobs lost in New York in the 4th quarter 
of 2001, 80 percent resulted from the 9/11 terrorist attacks. U.S. 
General Accounting Office, Review of Studies of the Economic Impact of 
the September 11, 2001 Terrorist Attacks on the World Trade Center, 
GAO-02-700R, May 29, 2002 at 13 citing New York State Assembly Ways and 
Means Committee, ``New York State Economic Report,'' Mar. 2002.
    \122\ Written Testimony submitted by Mr. Stefan Pryor before the 
Subcommittee on Management, Integration, and Oversight hearing 
entitled, ``Federal 9/11 Assistance to New York: Lessons Learned in 
Fraud Detection, Prevention, and Control.'' Part 1 ``Recovery,'' July 
13, 2006, at 2 (hereinafter Pryor Written Testimony).
    \123\ Id.
---------------------------------------------------------------------------
    The impact of the terrorist attacks on the neighborhoods of 
Lower Manhattan was evidenced by the decrease in downtown 
occupancy rates. In the months after 9/11, occupancy rates 
downtown, which includes the communities nearest to the World 
Trade Center site, were estimated to have declined to 60 
percent, from a pre-9/11 rate of 95 percent.\124\
---------------------------------------------------------------------------
    \124\ Email from Mr. David J. Herbenick, Legislative Specialist, 
Department of Housing and Urban Development, to Subcommittee Staff 
(June 23, 2006).
---------------------------------------------------------------------------

                      FEDERAL GOVERNMENT REACTION

    In response to the economic devastation to the 
neighborhoods of Lower Manhattan, Congress appropriated 
previously unprecedented sums to the U.S. Department of Housing 
and Urban Development (HUD) for disaster response. The U.S. 
Small Business Administration (SBA), the U.S. Department of 
Labor (DOL), and other Federal agencies also received funding 
to help compensate individuals, businesses, and other groups 
for losses resulting from the attacks. Additionally, Congress 
authorized more than $5 billion in Liberty Zone tax incentives 
designed to spur redevelopment in Lower Manhattan. This was the 
first geographically-targeted tax program in response to a 
disaster.\125\
---------------------------------------------------------------------------
    \125\ U.S. General Accounting Office, September 11: Overview of 
Federal Disaster Assistance to the New York City Area, GAO-04-72, 
October 31, 2003 at 86.
---------------------------------------------------------------------------

U.S. Department of Housing and Urban Development (HUD)

    In three appropriations acts,\126\ Congress directed HUD to 
administer $3.483 billion through its Community Development 
Block Grant (CDBG) program to New York State to assist 
individuals, businesses, groups, and utilities that sustained 
physical or economic damage from the terrorist attacks. This 
marked by far the largest appropriation of HUD funds for 
disaster recovery,\127\ though the appropriation was 
subsequently surpassed by the $17 billion in HUD assistance to 
the Gulf states for the recovery effort following Hurricanes 
Katrina and Rita.\128\ HUD issued the grants to New York State, 
which authorized the funds be disbursed by two state public 
benefit corporations,\129\ the Empire State Development 
Corporation (ESDC) and an ESDC subsidiary formed specifically 
to disburse HUD funds for 9/11 recovery efforts, the Lower 
Manhattan Development Corporation (LMDC).
---------------------------------------------------------------------------
    \126\ (1) Pub. L. No.107-73 (2001): $700 million appropriated by 
Congress November 26, 2001, granted to the ESDC February 2002. (2) 
P.L.107-117 (2002): $2 billion appropriated by Congress January 10, 
2002, granted to the LMDC June 2002. (3) Pub. L. No.107-206 (2002): 
$783 million appropriated by Congress August 2, 2002, granted to the 
LMDC Sept. 2003.
    \127\ Prior to 9/11, the largest Department of Housing and Urban 
Development (HUD) Community Development Block Grant (CDBG) 
appropriation for disaster recovery was about $500 million, which was 
the amount allocated for both the 1997 Midwest floods and 1994 
Northridge, California earthquake. The $3.483 billion CDBG 
appropriation for 9/11 recovery has been eclipsed by the $17 billion 
appropriated for the recovery from Hurricanes Katrina and Rita. Opper 
Briefing, supra note 5.
    \128\ Written Testimony submitted by Ms. Ruth Ritzema before the 
Subcommittee on Management, Integration, and Oversight hearing 
entitled, ``Federal 9/11 Assistance to New York: Lessons Learned in 
Fraud Detection, Prevention, and Control.'' Part 2 ``Recovery,'' July 
13, 2006, at 10.
    \129\ 1-A N.Y. Pub Auth. Sec. Sec. 50-51.
---------------------------------------------------------------------------
    Major ESDC and LMDC initiatives administered using HUD 
funds include:
      <bullet> Utility Restoration and Infrastructure 
Rebuilding;
      <bullet> Residential Grant Program (RGP);
      <bullet> Business Assistance Grants;
      <bullet> Business Recovery Grants (BRG);
      <bullet> Job Creation and Retention Program (JCRP);
      <bullet> Small Firm Attraction and Retention Grants 
(SFARG);
      <bullet> Technical Assistance for Small Businesses;
      <bullet> Business Information Program;
      <bullet> NYC Housing Preservation District for affordable 
mixed-income housing;
      <bullet> Cultural Enhancement Fund;
      <bullet> Ferry service;
      <bullet> Disproportionate Loss of Workforce (DLW); and
      <bullet> Other specific improvement projects.\130\
---------------------------------------------------------------------------
    \130\ The improvement projects include: the Downtown Alliance 
Streetscape, New York Stock Exchange security and improvements, West 
Street Pedestrian Crossing, Parks and Open Spaces, Hudson River Park 
and East River Waterfront, Columbus Park Pavilion Renovation, Marketing 
History/Heritage Museum, Millennium High School, Public Service 
Activities, Lower Manhattan Community Outreach, Pace University Green 
Roof Project, Chinatown Tourism and Marketing, and Lower Manhattan 
Information.
---------------------------------------------------------------------------

U.S. Small Business Administration (SBA)

    In the wake of 9/11, the SBA and Congress adjusted SBA's 
direct and guaranteed loan programs to make them more 
responsive to the needs of those impacted by the attacks. SBA 
expanded the eligibility of the Economic Injury Disaster Loan 
Program--which provides direct loans to repair physical damage 
and provides working capital to home- and business-owners who 
suffer losses in a disaster--to permit loans to businesses 
located outside the boundaries of the declared disaster areas. 
In addition, in January 2002, Congress authorized the SBA to 
guaranty up to $4.5 billion \131\ in loans made by private 
sector lenders to small businesses ``adversely affected by the 
September 11, 2001 terrorist attacks and their aftermath'' 
\132\ through the Supplemental Terrorist Activity Relief (STAR) 
Loan Program.
---------------------------------------------------------------------------
    \131\ The actual appropriation was for $75 million, which allowed 
the SBA to guarantee $4.5 billion worth of loans, based upon historical 
default rates and program costs offset through fees paid by lenders to 
obtain an SBA guaranty. That is why the amount of money appropriated to 
fund the STAR loan program was substantially less than the total 
lending authority for the program.
    \132\ Pub. L. No. 107-117 (2002).
---------------------------------------------------------------------------

U.S. Department of Labor (DOL)

    In addition to the Disaster Unemployment Assistance 
administered by DOL using FEMA funds (discussed in the 
``Response'' section), DOL made grants to retrain and help 
workers left unemployed by the attacks secure new employment. 
Grants were also provided to the New York State Workers' 
Compensation Board to process claims related to the terrorist 
attacks.

Liberty Zone tax incentives

    Congress authorized more than $5 billion in tax incentives 
designed to spur redevelopment in Lower Manhattan, including 
the New York Liberty Bond (Liberty Bond) program. The Liberty 
Bond program granted New York State and New York City the 
authority to issue up to $8 billion in low-cost, tax-exempt 
private activity bonds, which in turn created $1.8 billion in 
funding for New York City. That funding has been used for 
residential, commercial, utility, and retail development in New 
York City's Liberty Zone, which runs south of Canal Street 
between East Broadway and Grand Street.

HOUSING AND URBAN DEVELOPMENT COMMUNITY DEVELOPMENT BLOCK GRANT-FUNDED 
                                PROGRAMS

Well-crafted State and local systems eased disbursement

    The Subcommittee found that both ESDC and LMDC generally 
performed well. ESDC had procedures in place and experience in 
using government funds to administer economic development 
programs. LMDC, a new agency, created procedures parallel to 
those developed by ESDC.\133\
---------------------------------------------------------------------------
    \133\ Opper Briefing, supra note 5.
---------------------------------------------------------------------------
    Testifying before the Subcommittee on July 13, 2006, Ms. 
Eileen Mildenberger, ESDC's Chief Operating Officer, stated 
that her staff reviewed each request for assistance and 
utilized third-party verification when awarding grants. This 
third-party verification included: a request for tax 
information; site visits to business locations; conversations 
with landlords; and obtaining information from the New York 
State Department of Labor to confirm employment.\134\ In 
addition, at the recommendation of the HUD OIG, ESDC hired a 
consultant to audit the 4,100 Business Recovery Grants it 
awarded.\135\ The consultant concluded that 98 percent of the 
grants were awarded based on accurate estimates.
---------------------------------------------------------------------------
    \134\ Written Testimony submitted by Ms. Eileen Mildenberger before 
the Subcommittee on Management Integration and Oversight hearing 
entitled, ``Federal 9/11 Assistance to New York: Lessons Learned in 
Fraud Detection, Prevention, and Control.'' Part 2 ``Recovery,'' July 
13, 2006, at 4 (hereinafter Mildenberger Written Testimony).
    \135\ U.S. Department of Housing and Urban Development Office of 
Inspector General, Office of Audit, Interim Report on Community 
Development Block Grant; Disaster Funds, Memorandum No. 2002-NY-1802, 
May 22, 2002 at 5 (hereinafter HUD Interim Report).
---------------------------------------------------------------------------
    As part of the Subcommittee staff's examination of LMDC's 
fraud controls, the Subcommittee staff learned that LMDC has a 
``three-layer'' approach.\136\ The first layer is LMDC's Audit 
and Finance Committee, composed of LMDC Board Members, which 
evaluates all funding proposals prior to submission to the full 
board.\137\ As part of the evaluation process, the Committee 
evaluates financial controls and incorporates input from the 
HUD OIG. Contracts are reviewed by LMDC's General Counsel. 
Contracts over $50,000 are reviewed by LMDC's president and 
approved by the board. Other controls at this level include 
background checks on prime contractors and careful monitoring 
of the procurement process.
---------------------------------------------------------------------------
    \136\ Subcommittee Staff Briefing with Mr. Stefan Pryor et al., 
President, Lower Manhattan Development Corporation, Feb. 23, 2006, in 
New York, New York.
    \137\ Id.
---------------------------------------------------------------------------
    The second layer of LMDC's fraud controls includes 
compliance with HUD and LMDC guidelines and financial 
monitoring.\138\ The third layer is a proactive approach which 
focuses on investigations.\139\ LMDC works closely with, and 
refers cases to, the New York City Department of Investigation, 
the U.S. Attorney for the Southern District of New York, and 
the HUD OIG.\140\ In addition, Subcommittee staff were advised 
that LMDC conducts an internal audit program, which includes 
ongoing reviews of internal controls and regular reports to 
LMDC's audit committee.\141\
---------------------------------------------------------------------------
    \138\ Id.
    \139\ Id.
    \140\ Id.
    \141\ Id.
---------------------------------------------------------------------------

Push to expeditiously disburse funds

    Congress took steps to ensure that HUD and its grantees, 
ESDC and LMDC, quickly disbursed CDBG funds to those harmed by 
9/11. Congress required that applicants for Business Recovery 
Grants (BRG) receive a response to their request within 45 days 
of application submission.
    In order to expedite the disbursement of funds, Congress 
also included a provision in the initial emergency supplemental 
appropriation authorizing the HUD Secretary to waive or alter 
any CDBG statutes or regulations ``except for requirements 
related to fair housing, nondiscrimination, labor standards, 
and the environment.'' \142\ There were 19 waivers in all, 
which allowed expedited disbursement of funds through the 
Partial Action Plan system. Under this system, LMDC is required 
to submit interim proposals, known as Partial Action Plans, to 
HUD for pre-approval prior to awarding funds. A high-ranking 
HUD Disaster Recovery official said the waivers were necessary, 
particularly early in the response, because ``disasters aren't 
typical.* * * We do not really grant waivers lightly.'' \143\ 
He conceded though, that the waivers became less necessary 
three years after the disaster.
---------------------------------------------------------------------------
    \142\ Pub. L. No. 107-73 (2001).
    \143\ Opper Briefing, supra note 5.
---------------------------------------------------------------------------
    The Secretary granted waivers in the following areas:
    <bullet> Low-income requirement: HUD waived the requirement 
that 70 percent of CDBG funds be used for activities benefiting 
people of low- to moderate-incomes.\144\ The waiver language 
added ``HUD expects the grantee [New York State] will make a 
good faith effort to maximize benefits for low- to moderate- 
income persons, and maintain documentation of such efforts.'' 
\145\ According to the high-ranking HUD Disaster Recovery 
official, this waiver was necessary because the areas nearest 
the World Trade Center site contained a heavy concentration of 
businesses in the financial, insurance, and real estate 
sectors.\146\
---------------------------------------------------------------------------
    \144\ 67 Fed. Reg. 4164 (Jan. 28, 2002) (Waiver No. 1).
    \145\ Id.
    \146\ Opper Briefing, supra, note 5.
---------------------------------------------------------------------------
    <bullet> Public input: HUD waived certain citizen input 
requirements, replacing them with ``Streamlined Citizen 
Participation Requirements,'' which were enumerated in the 
Federal Register.\147\ The requirements ``do not mandate public 
hearings, but do provide for a reasonable opportunity for 
citizen comment and for ongoing citizen access to information 
about the use of grant funds.'' \148\ This waiver was used to 
reduce the period during which the public can comment on action 
plans (typically 30 days) to 15 days.\149\ LMDC provided 
mechanisms for public input, including a town hall-style 
meeting. A high-ranking HUD Disaster Recovery official said the 
grant processes established by both LMDC and ESDC included more 
public input than most non-disaster CDBG disbursements. ``They 
went above and beyond what the regular requirements would have 
been for CDBG funds,'' the official said.\150\
---------------------------------------------------------------------------
    \147\ 67 Fed. Reg. 4164 (Jan. 28, 2002) (Waiver No. 2).
    \148\ Id.
    \149\ Opper Briefing, supra note 5.
    \150\ Id.
---------------------------------------------------------------------------

Outside criticism: Waivers allowed closed process that favored big 
        companies

    Media and nonprofit groups criticized ESDC and LMDC grant 
processes for being too secretive in their decision-making and 
unresponsive to public input.\151\ Ms. Bettina Damiani, Project 
Director for Good Jobs New York, a nonprofit government 
oversight group that closely followed the 9/11 recovery 
process, testified before the Subcommittee on July 13, 2006, 
that the waivers created a process by which subsidies were 
granted with little accountability and minimal input from New 
York taxpayers.
---------------------------------------------------------------------------
    \151\ Russ Buettner et al., Ground Zero: $2.7B Money Pot; LMDC 
Pouring Fed Dollars Into Site--With No Results, N.Y. Daily News, Dec. 
6, 2005, at 42. See also, Heidi Evans and David Saltonstall, Mike Adds 
to Call for Big Probe, N.Y. Daily News, Dec. 6, 2005, at 7. See also, 
Russ Buettner et al., Towers Fell, Mob Schemes Began: How Organized 
Crime Divvied Up Ground Zero Work, N.Y. Daily News, Dec. 5, 2005, at 4. 
See also, Good Jobs New York, The LMDC: They're in the Money; We're in 
the Dark, A Review of the Lower Manhattan Development Corporation's Use 
of 9/11 Funds, August 2004, at 15-19.
---------------------------------------------------------------------------
    Also testifying on July 13, 2006, was Mr. John Wang, 
President of the Lower Manhattan-based Asian American Business 
Development Center--a nonprofit group created in 1994 to help 
businesses in New York City's Chinatown neighborhood--who 
stated that Chinatown had no representative on the board of 
LMDC.\152\ He told the Subcommittee that the application and 
funding processes did not accommodate the distinct needs of 
Chinatown's mostly small businesses. As a result, he believes 
Chinatown did not receive a proportional share of CDBG funds, 
despite the neighborhood's close proximity to the World Trade 
Center. According to an LMDC official, Chinatown was among the 
neighborhoods most impacted by the attacks.\153\
---------------------------------------------------------------------------
    \152\ Written Testimony submitted by Mr. John Wang before the 
Subcommittee on Management, Integration, and Oversight hearing 
entitled, ``Federal 9/11 Assistance to New York: Lessons Learned in 
Fraud Detention, Prevention, and Control.'' Part 1 ``Recovery,'' July 
13, 2006, at 3 (hereinafter Wang Written Testimony).
    \153\ Pryor Written Testimony, supra note 122.
---------------------------------------------------------------------------
    According to a June 2003 survey of 731 Chinatown business 
owners who had sought help from the Asian American Business 
Development Center,\154\ less than half of the businesses that 
sought assistance from LMDC received a grant. More than half of 
those that did receive a grant received only $3,000 in 
assistance. According to information the Asian American 
Business Development Center received from ESDC in March 2003, 
the average grant award to Lower Manhattan businesses was 
$33,680 as compared to only $7,829 for Chinatown businesses. 
Despite testimony from LMDC President Stefan Pryor that 
Chinatown received more than $170 million from LMDC alone,\155\ 
Mr. John Wang contended the neighborhood did not receive the 
assistance it needed.\156\ (For an inventory of LMDC's major 
projects benefitting Chinatown, see Appendix C.)
---------------------------------------------------------------------------
    \154\ Asian American Business Development Center, AABDC Financial 
Assistance Center: Findings from the Application Process for the World 
Trade Center Business Recovery Grant and Small Firm Attraction and 
Retention Grant Programs, June 2003, at 1.
    \155\ Prior Written Testimony, supra note 122.
    \156\ Wang Written Testimony, supra note 152.
---------------------------------------------------------------------------

Best practice: Fraud prevention task force and regular audits

    Officials from investigative and enforcement divisions of 
Federal, state, and local agencies involved in 9/11 recovery 
efforts participated in two informal fraud prevention task 
forces: the Lower Manhattan Construction Integrity Team, which 
continues to meet, and the World Trade Center Fraud Working 
Group. The World Trade Center Fraud Working Group convened in 
December 2001 to discuss concerns regarding the susceptibility 
of grants and contracts issued in response to the attacks to 
fraud. Many members of the group later formed the Construction 
Integrity Team to deal with fraud concerns related to the 
contracts to rebuild Lower Manhattan.
    Members of the World Trade Center Working Group included:
          <bullet> U.S. Department of Housing and Urban 
        Development--OIG
          <bullet> U.S. Department of Labor--OIG
          <bullet> U.S. Department of Transportation--OIG
          <bullet> U.S. Department of Energy--OIG
          <bullet> Federal Emergency Management Agency--OIG
          <bullet> U.S. Small Business Administration--OIG
          <bullet> Social Security Administration--OIG
          <bullet> U.S. Environmental Protection Agency--OIG
          <bullet> Internal Revenue Service--Criminal 
        Investigation Division
          <bullet> United States Postal Inspection Service
          <bullet> New York City Department of Investigation
          <bullet> Lower Manhattan Development Corporation
          <bullet> State of New York--OIG
          <bullet> State of New York Insurance Department
          <bullet> Port Authority of New York and New Jersey--
        OIG
          <bullet> Metropolitan Transit Authority--OIG
          <bullet> New York City Business Integrity Commission
          <bullet> Metropolitan Transit Authority, Chief 
        Compliance Officer
          <bullet> United States Attorney's Office, Southern 
        District of New York
          <bullet> Manhattan District Attorney's Office
    The Department of Justice initiated a Hurricane Katrina 
Fraud Task Force to preemptively eliminate fraud in the Gulf 
states' recovery from Hurricanes Katrina and Rita. This task 
force includes many of the same members as the World Trade 
Center Working Group. It is the sense of the Subcommittee that 
such groups should be institutionalized to monitor responses to 
future disasters.
    Additionally, Congress required the HUD OIG to conduct an 
audit every six months of the CDBG funds provided to New York 
State after the terrorist attacks of September 11, 2001.\157\ 
It is the sense of the Subcommittee that these audits were 
particularly effective in identifying systemic weaknesses, 
promoting better management, and preventing waste, fraud, and 
abuse, and should be replicated for future Federal disaster 
assistance programs.
---------------------------------------------------------------------------
    \157\ H.R. Conf. Rep. No. 107-350, at 456 (2001).
---------------------------------------------------------------------------

Best practice: Fraud awareness training

    The HUD OIG provided fraud awareness training to agencies 
administering grants, including ESDC and LMDC. The training 
included fraud detection techniques, particularly before grants 
were disbursed, as well as tips to identify fraud indicators. 
According to Ms. Ruth Ritzema, the Special Agent in Charge of 
the HUD OIG New York Field Office, the training helped to 
prevent or mitigate a number of potential frauds, as well as to 
uncover and provide evidence of criminal activity. It is the 
sense of the Subcommittee that fraud training should be 
provided to employees and volunteers of state, local, and 
voluntary agencies that disburse Federal disaster assistance 
funds or award contracts.

                        BUSINESS RECOVERY GRANTS

    Four and one-half months after the attacks, ESDC began 
providing $563 million in business recovery grants (BRGs) to 
compensate small businesses for their losses. LMDC later 
disbursed BRGs as well. If a business was located south of 14th 
Street, had fewer than 500 employees, and had unreimbursed 
economic losses, it was eligible for assistance. In addition, 
$13 million was allocated to large businesses that employ 200 
workers or less at their downtown locations. BRGs provided 
assistance to more than 14,000 businesses. The average grant 
was nearly $39,000 and compensated only 16.8 percent of the 
average firm's loss.\158\
---------------------------------------------------------------------------
    \158\ Mildenberger Written Testimony, supra note 134.
---------------------------------------------------------------------------
    In reviewing how ESDC determined eligibility, Subcommittee 
staff learned that ESDC based its decisions on the size of a 
company's ``economic loss,'' rather than following a ``claims 
adjustment'' approach as had been used in prior disasters.\159\ 
In determining the amount of financial assistance, ESDC 
developed a formula which considered: (1) in which of four 
zones the company was located; (2) the company's gross revenue; 
and (3) the extent of economic loss which the grant could not 
exceed.\160\ Under this formula, small businesses that had 
limited revenue received small grants.\161\ In addition, 
Subcommittee staff learned that ESDC used gross revenue in its 
calculation because it was the ``least complicated.'' \162\ 
This approach, however, had the effect of favoring large 
companies.\163\
---------------------------------------------------------------------------
    \159\ Subcommittee Staff briefing with Mr. John Bacheller, et al., 
Executive Vice President and Senior Deputy Commissioner, Empire State 
Development Corporation, Feb. 23, 2006, in New York, New York.
    \160\ Id.
    \161\ Id.
    \162\ Id.
    \163\ Id.
---------------------------------------------------------------------------
    The Subcommittee and the HUD OIG identified a number of 
systemic problems in the BRG program.

Systemic problem: Failure to coordinate funding

    The inability of ESDC and LMDC to reach agreement quickly 
on a funding issue was partly to blame for the ESDC's delayed 
disbursement of $54.5 million in BRGs, which a media report 
indicated made it difficult for some businesses to stay 
afloat.\164\
---------------------------------------------------------------------------
    \164\ Lore Croghan, Grant Delays Threatening Firm's Survival; WTC 
Recovery Payments Postponed Again; Downtown Businesses Make Drastic 
Cuts, Crains N.Y. Bus., July 28, 2003, at 1.
---------------------------------------------------------------------------
    The BRGs, which had been awarded to 1,714 first time 
recipients and 452 companies expecting supplements to earlier 
awards, had initially been scheduled for distribution in March 
2003. The date was pushed back to April 2003, then to June 
2003, then to July 2003, and finally to August 2003.\165\ This 
violated the Congressional mandate that all applications for 
CDBG funds be fulfilled or rejected within 45 days after 
applications are submitted.
---------------------------------------------------------------------------
    \165\ Id.
---------------------------------------------------------------------------
    This significant delay occurred because ESDC had 
applications for more BRG money than could be funded by the 
$340 million originally allocated to the program and needed 
money from LMDC to continue the program. ``It took us many, 
many, many meetings with LMDC to get those funds,'' an ESDC 
official told Subcommittee staff.\166\ LMDC eventually signed 
off on the transfer in LMDC Partial Action Plan (PAP) No. 2, 
which provided $150 million to fund ESDC's BRG program and was 
approved by HUD on November 22, 2002.\167\ LMDC's Partial 
Action Plan (PAP) No. 4, approved by HUD on August 6, 2003, 
provided an additional $74.5 million to fund the program.\168\
---------------------------------------------------------------------------
    \166\ Subcommittee Staff Telephone Interview with Mr. John 
Bacheller, Executive Vice President and Senior Deputy Commissioner, 
Empire State Development Corporation, conducted June 22, 2006 
(hereinafter Bacheller Telephone Interview). ESDC Officials Ms. Amy 
Schoch and Ms. Susanna Stein also participated in the interview.
    \167\ Email from Ms. Helen Albert, Deputy Assistant Inspector 
General, Department of Housing and Urban Development Office of 
Inspector General New York Field Office, to Subcommittee Staff (June 
14, 2006) (hereinafter HUD OIG Email).
    \168\ Id.
---------------------------------------------------------------------------

Systemic problem: Inadequate verification before payments

    ESDC issued BRGs totaling $110 million to 4,100 businesses 
before it began using a new application form requiring a 
detailed itemization of economic losses.\169\ While CDBG 
regulations do not contain requirements that businesses prove 
economic losses,\170\ ESDC's lack of verification is contrary 
to the guidance for calculating business interruption losses 
provided by the Senate Report accompanying the appropriation of 
CDBG funds that went to ESDC.\171\ At the recommendation of the 
HUD OIG, ESDC hired a consultant to audit the 4,100 
grants.\172\ The consultant concluded that 98 percent of the 
grants were awarded based on accurate estimates. The HUD OIG, 
however, sampled 170 of the grants and found 13 applications 
conflicted with IRS records. HUD OIG referred the 13 to its New 
York Office of Investigation.\173\
---------------------------------------------------------------------------
    \169\ Id.
    \170\ Opper Briefing, supra note 5.
    \171\ S. Rep. No. 107-109, at 206 (2001).
    \172\ HUD Interim Report, supra note 135.
    \173\ HUD OIG Email, supra note 167.
---------------------------------------------------------------------------
    One noteworthy case--not among the 170 grant recipients 
audited by the HUD OIG--was New York Waterway, the ferry 
company discussed above, that in July 2006 paid $1.2 million to 
settle a civil fraud case in which it was accused of over-
billing the Federal government.\174\ The company received three 
Business Recovery Grants totaling $358,188, despite the fact 
that it had benefited from a drastic increase in ferry service 
after the terrorist attacks forced the suspension of PATH rail 
service between New Jersey and New York. The company, which did 
not admit wrongdoing in the settlement, claimed in its ESDC 
application that it had lost $8.6 million from September 11, 
2001, through the end of the year.\175\
---------------------------------------------------------------------------
    \174\ Press Release, U.S. Attorney for the S.D.N.Y., Ferry Operator 
to Pay $1.2 Million to Settle Civil Charges That it Defrauded the 
Government After the September 11 Terrorist Attacks (July 17, 2005).
    \175\ Charles V. Bagli, Ridership Up, But Ferry Company Got 9/11 
Aid, N.Y. Times, May 6, 2003, at B3.
---------------------------------------------------------------------------

                       RESIDENTIAL GRANT PROGRAM

    The Residential Grant Program (RGP) offered grants to 
encourage individuals to renew existing leases, sign new 
leases, or purchase residences in Lower Manhattan.

Systemic problem: Inadequate verification before payments

    According to the HUD OIG New York Regional Office, LMDC 
made duplicate payments through its Residential Grant Program 
and did not maintain proper documentation related to the 
program. The HUD OIG referred 10 cases for prosecution.\176\
---------------------------------------------------------------------------
    \176\ Subcommittee Staff Briefing with Mr. Edgar Moore et al., 
Regional Inspector General for Audit, Department of Housing and Urban 
Development Office of Inspector General New York Regional Office, Feb. 
24, 2006, in Washington, D.C.
---------------------------------------------------------------------------

                   JOB CREATION AND RETENTION PROGRAM

    The Job Creation and Retention Program (JCRP) was intended 
to attract and retain large ``anchor'' firms. Twenty-seven 
companies accepted grants totaling $292 million. They committed 
to retain and create more than 70,000 jobs in Lower Manhattan 
and a total of 91,000 jobs throughout New York City.\177\
---------------------------------------------------------------------------
    \177\ Mildenberger Written Testimony, supra note 135.
---------------------------------------------------------------------------

Outside criticism: Inequitable distribution of funds

    Media and nonprofit oversight groups were critical of JCRP 
for facilitating large grants to companies that they alleged 
either did not need the money to stay afloat or would have 
stayed in New York City without the grants.
    For example:
    <bullet> American Express received a $25 million JCRP grant 
six months after it stated publicly that it would return all 
its employees to Lower Manhattan, according to the New York 
Daily News.\178\
---------------------------------------------------------------------------
    \178\ Russ Buettner et al., Rich Got Richer As Poor Got Crumbs, 
N.Y. Daily News, Dec. 4, 2005, at 32.
---------------------------------------------------------------------------
    <bullet> Health Insurance Plan of New York received a $12 
million JCRP grant to move from midtown to Lower Manhattan, 
though the New York Daily News reported the company had been 
looking to expand in the area for more than a year.\179\
---------------------------------------------------------------------------
    \179\ Id.
---------------------------------------------------------------------------
    <bullet> The Bank of New York received $40 million, and the 
New York Daily News reported that, though the bank retained 
7,700 jobs in New York City, it is moving 1,400 of them out of 
Lower Manhattan to Brooklyn.\180\
---------------------------------------------------------------------------
    \180\ Id.
---------------------------------------------------------------------------
    ESDC and HUD officials responded that such large firms are 
anchor tenants critical to the economies of New York City and 
the region.

           SMALL FIRM ATTRACTION AND RETENTION GRANT PROGRAM

    The Small Firm Attraction and Retention Grant program 
disbursed nearly $115 million to 2,200 small businesses that 
made five-year lease commitments to stay in Lower Manhattan. 
These firms employ over 37,000 people, nearly one-third of whom 
are low-wage earners. Second grant disbursements, totaling $42 
million, to eligible companies that stay downtown will take the 
program into mid-2007.\181\
---------------------------------------------------------------------------
    \181\ Mildenberger Written Testimony, supra note 134.
---------------------------------------------------------------------------

                 SMALL BUSINESS ADMINISTRATION PROGRAMS

                           STAR LOAN PROGRAM

    In January 2002, Congress authorized the SBA to guaranty up 
to $4.5 billion \182\ in loans made by private-sector lenders 
to small businesses ``adversely affected by the September 11, 
2001 terrorist attacks and their aftermath'' \183\ through the 
Supplemental Terrorist Activity Relief (STAR) Loan Program.
---------------------------------------------------------------------------
    \182\ The actual appropriation was for $75 million, which allowed 
the SBA to guarantee $4.5 billion worth of loans, based upon historical 
default rates and program costs offset through fees paid by lenders to 
obtain an SBA guaranty. That is why the amount of money appropriated to 
fund the STAR loan program was substantially less than the total 
lending authority for the program.
    \183\ Pub. L. No. 107-117 (2002).
---------------------------------------------------------------------------

Systemic problem: Inadequate oversight

    SBA failed to provide adequate oversight of the STAR Loan 
Program to ensure it met the Congressional mandate that it 
guaranty loans to small businesses ``adversely affected by the 
September 11, 2001 terrorist attacks and their aftermath.'' 
\184\ SBA encouraged lenders to liberally interpret the term 
``adversely affected'' when evaluating eligibility for the 
program. SBA also did not require lenders to ask borrowers 
whether they were affected by 9/11 and, therefore, eligible for 
STAR loans. Nor did SBA require lenders to submit documentation 
to justify why a loan was eligible for the STAR loan program. 
This left the SBA unable to check the loans before they were 
issued.
---------------------------------------------------------------------------
    \184\ Id.
---------------------------------------------------------------------------
    While SBA made STAR loans more cost-effective for lenders 
to encourage them to make the loans more affordable to 
borrowers,\185\ SBA's failure to regularly track the fees 
lenders charge borrowers undermined this effort.\186\ As a 
result, lenders who were already urged to push the bounds of 
eligibility for this program, found a new incentive to 
originate STAR loans--they could collect higher fees on STAR 
loans than they could on other SBA loans.
---------------------------------------------------------------------------
    \185\ U.S. General Accounting Office, Small Business Administration 
Response to September 11 Victims and Performance Measures for Disaster 
Lending, GAO-03-385, Jan. 29, 2003 at 15.
    \186\ Subcommittee Staff Briefing with Mr. Peter McClintock, et 
al., Acting Inspector General, Small Business Administration Office of 
Inspector General, Feb. 9, 2006, in Washington, D.C.
---------------------------------------------------------------------------

Systemic problem: Inadequate verification before payments

    Lenders issued 9/11 loans to ineligible businesses. Private 
sector lenders approved by SBA \187\ aggressively steered 
businesses--including those not affected by 9/11--into the SBA-
backed STAR loan program, presumably violating the intent, if 
not the letter, of the program. Many lenders likely failed to 
inform borrowers their loans were from a program intended for 
businesses hurt by the terrorist attacks, and, according to an 
examination of a representative sample of STAR loans by the SBA 
Office of Inspector General (OIG), a majority of borrowers were 
unaware they had received loans from such a program.\188\ The 
sample also found lenders did not document how the recipients 
were impacted by 9/11, and the SBA did not check for such 
documentation before the loans were issued.
---------------------------------------------------------------------------
    \187\ STAR loans could only be issued by private sector lenders in 
SBA's Preferred Lenders Program, which allowed designated lenders to 
process, service, and liquidate SBA-guaranteed loans with reduced 
oversight from SBA.
    \188\ See, U.S. Small Business Administration, Audit of SBA's 
Administration of the Supplemental Terrorist Activity Relief Loan 
Program, Rep. No. 6-09, Dec. 23, 2005.
---------------------------------------------------------------------------
    The SBA OIG placed considerable blame on SBA for the 
program's shortcomings. The OIG found that SBA failed to 
adequately oversee the program and encouraged lenders to 
liberally interpret eligibility guidelines. According to the 
SBA OIG audit examining a statistical sample of 59 STAR loans: 
\189\
---------------------------------------------------------------------------
    \189\ See, Id.
---------------------------------------------------------------------------
          <bullet> Only nine recipients were appropriately 
        qualified to receive STAR loans.
          <bullet> In five cases, there was no justification of 
        eligibility for the loan in the lenders' files.
          <bullet> In 21 cases, the justification in the files 
        was contradicted by interviews with the businesses or 
        other information in the loan files.
          <bullet> Of the 42 businesses that auditors were able 
        to interview:
          <bullet> Only two were aware they had received a STAR 
        loan.
          <bullet> 25 said they were not adversely affected by 
        9/11.
          <bullet> 36 said they were not asked or could not 
        recall if they were asked whether they were adversely 
        affected by 9/11.
    While media reports and a 2003 GAO audit indicated that 
businesses hurt by the terrorist attacks were denied 
loans,\190\ the Subcommittee's review found that no eligible 
applicants were denied loans because of lack of funds. In fact, 
there was money remaining when the program statutorily sunset.
---------------------------------------------------------------------------
    \190\ See, Geoff Earle, City Firms Stiffed in 9/11-Loan Outrage, 
N.Y. Post, Nov. 7, 2005, at 2. See also, U.S. General Accounting 
Office, Business owners testified that SBA's existing disaster program 
did not have the ability to provide loans to small businesses within 
the disaster areas, Audit, Aug. 2003, at 14.
---------------------------------------------------------------------------

                             DISASTER LOANS

    The SBA expanded the eligibility of the Economic Injury 
Disaster Loan Program--which provides direct loans to repair 
physical damage and provides working capital to home- and 
business-owners who suffer losses in a disaster--to allow loans 
to businesses located outside the declared disaster areas.

Systemic problems: Relaxed controls

    According to the SBA OIG, SBA did not follow its own 
procedures for pursuing collection of delinquent disaster loans 
issued to 9/11 victims. As of September 30, 2004, 1,495 
disaster loans to 
9/11 victims, valued at $208.8 million, were delinquent.\191\ 
Letters demanding payment are an important and required part of 
SBA's collection process, but when the OIG reviewed a sample of 
delinquent loans, it found SBA had sent such letters to only 
four of the 17 borrowers who should have received them.\192\
---------------------------------------------------------------------------
    \191\ Written Testimony submitted by Mr. Eric M. Thorson before the 
Subcommittee on Management, Integration, and Oversight hearing 
entitled, ``Federal 9/11 Assistance to New York: Lessons Learned in 
Fraud Detection, Prevention, and Control.'' Part 2 ``Recovery,'' July 
13, 2006, at 4.
    \192\ Id.
---------------------------------------------------------------------------

                      DEPARTMENT OF LABOR PROGRAMS

    The U.S. Department of Labor made grants to retrain and 
gain employment for workers left unemployed by the attacks and 
to the New York State Workers' Compensation Board to process 
claims related to the terrorist attacks.

Systemic problem: Inadequate oversight

    Similar to the STAR loan program, worker training programs 
administered by DOL also did not receive adequate oversight. 
According to the GAO, DOL failed to properly monitor a $125 
million grant to the New York State Workers' Compensation 
Board, leading to the misspending of a portion of the grant. 
Congress had earmarked the $125 million ``for the processing of 
claims related to the terrorist attacks,'' \193\ according to 
the GAO.\194\ The Workers' Compensation Board, however, at the 
direction of the New York State Legislature,\195\ spent $44 
million of these funds to reimburse two other state agencies 
\196\ for expenses they incurred paying claims to victims of 
the World Trade Center attack. GAO found these expenditures 
violated the terms of the congressional appropriation.\197\ GAO 
recommended that DOL recover the $44 million or retroactively 
reclassify it to approve its use to reimburse the two state 
agencies. The fiscal year 2006 appropriations bill for DOL 
retroactively approved the use of the $44 million to reimburse 
the two agencies.\198\
---------------------------------------------------------------------------
    \193\ The grant was part of a $175 million appropriation to DOL's 
Employment and Training Administration made by Congress in Pub. L. 
No.107-117 (2002) under the heading, ``Workers Compensation Programs,'' 
which was to be obligated from amounts previously made available in 
Pub. L. No.107-38 (2001).
    \194\ See, U.S. General Accounting Office, Department of Labor-
Grant to New York Worker' Compensation Board, Decision File No. B-
303927, June 7, 2005 (hereinafter Department of Labor-Grant to New York 
Worker' Compensation Board).
    \195\ 2003 N.Y. Laws, A.B. 7265, S.B. 3377, Mar. 23, 2003.
    \196\ The Board paid $28 million to the New York Crime Victims 
Board and $16 million to the New York State Insurance Fund.
    \197\ Department of Labor-Grant to New York Worker' Compensation 
Board, supra note 194.
    \198\ Pub. L. No. 109-149 (2005).
---------------------------------------------------------------------------

Systemic problem: Ineffective oversight of procurement

    According to the DOL OIG, DOL became improperly involved in 
Chinatown Manpower Project, Inc.'s subcontracting of a $1.1 
million contract it received. DOL awarded a $25 million 
Workforce Investment Act National Emergency Grant to the New 
York State Department of Labor to provide training services to 
workers who lost their jobs as a result of the attack on the 
World Trade Center. The New York State DOL contracted with the 
Chinatown Manpower Project to provide services in Chinatown 
related to the grant. According to an audit by the DOL OIG, DOL 
became improperly involved in the subcontracting process, 
resulting in subcontracts being awarded without proper 
competition to vendors in Chinatown, including to two 
organizations to which the DOL Regional Representative in New 
York had long-term personal ties. The DOL OIG concluded that 
this violated Federal procurement rules and created the 
appearance of favoritism.\199\
---------------------------------------------------------------------------
    \199\ See, U.S. Department of Labor Office of Inspector General, 
Departmental Involvement in Chinatown Manpower Project, Inc. 
Contributed to Circumvention of Procurement Rules, Rep. No. 02-05-202-
01-001, Aug. 25, 2005.
---------------------------------------------------------------------------

                               Rebuilding

    The 9/11 terrorist attacks crippled the transportation, 
communication, and utility infrastructure of Lower Manhattan 
and impacted much of the surrounding area. New York City 
streets disappeared beneath rubble, a major arterial highway 
was heavily damaged, and debris temporarily blocked tunnels to 
motor vehicle traffic. Below the ground, the collapse of the 
towers and World Trade Center Tower 7 destroyed the Port 
Authority commuter rail station and subway stations that ran 
beneath the buildings.
    The electrical, gas, steam, and telecommunications utility 
infrastructures in Lower Manhattan were also heavily damaged, 
resulting in extensive disruptions in service. Utility 
companies responded quickly to provide emergency service to all 
customers, which was eventually improved and made 
permanent.\200\ The New York City Comptroller's Office 
estimated that utility repair costs for AT&T and Verizon alone 
would be $2 billion.\201\ In response, Congress appropriated 
$750 million to compensate utility companies for this work 
\202\ so consumers would not have to bear the costs. To date, 
most--if not all--of this designated funding has been spent.
---------------------------------------------------------------------------
    \200\ Daily Message, Secretary Martinez Announces $783 Million in 
Aid to New York for Post-9/11 Restoration (Sept. 17, 2003).
    \201\ U.S. General Accounting Office, Review of Studies of the 
Economic Impact of the September 11, 2001 Terrorist Attacks on the 
World Trade Center, GAO-02-700R, May 29, 2002 at 14.
    \202\  Pub. L. No. 107-206 (2002). (Chapter 13 appropriated $783 
million to HUD, of which $750 million went to the LMDC for the Utility 
Restoration and Infrastructure Rebuilding Program.)
---------------------------------------------------------------------------
    Of the $20 billion appropriated by Congress to assist New 
York after 9/11, more than $6 billion remains to be spent. Most 
of the more than $6 billion of unspent funds is committed to 
rebuilding projects, with transportation infrastructure 
projects slated to receive a majority of the funds. Also 
remaining is more than $2 billion in under-utilized Liberty 
Zone tax incentives. New York State officials have requested 
these funds be redirected by Congress to fund transportation 
projects in New York City.\203\
---------------------------------------------------------------------------
    \203\ Subcommittee Staff Telephone Interview with Mr. James A. 
Mazzarella, Director, State of New York Office of Federal Affairs, 
conducted July 7, 2006.
---------------------------------------------------------------------------

FIVE ``MEGA-PROJECTS'': LOWER MANHATTAN'S TRANSPORTATION INFRASTRUCTURE

    Lower Manhattan is perhaps more reliant on public 
transportation than any other city in the United States. About 
80 percent of the 350,000 people who commute to work in Lower 
Manhattan do so using public transportation--the highest 
percentage of any commercial district in the nation.\204\ The 
terrorist attacks eliminated the routes most of those commuters 
used prior to 9/11. The Port Authority Trans-Hudson (PATH) line 
between New Jersey and the World Trade Center alone had carried 
an average of 67,000 passengers daily before it was destroyed 
on 9/11.\205\
---------------------------------------------------------------------------
    \204\ Disaster Assistance, supra note 13, at 16.
    \205\ Written Testimony submitted by Mr. Bernard Cohen before the 
Subcommittee on Management, Integration, and Oversight hearing 
entitled, ``Federal 9/11 Assistance to New York: Lessons Learned in 
Fraud Detection, Prevention, and Control.'' Part 3 ``Rebuilding,'' July 
13, 2006, at 1 (hereinafter Cohen Written Testimony).
[GRAPHIC] [TIFF OMITTED] T9452.006

[GRAPHIC] [TIFF OMITTED] T9452.007

    After the attacks, DOT and FEMA committed a combined $5.1 
billion to restore and enhance New York's transportation 
infrastructure. FEMA allocated $2.75 billion, with DOT 
providing the rest through two of its sub-agencies: the Federal 
Highway Administration (FHWA) and the Federal Transit 
Administration (FTA).
    New York committed funding primarily to five mega-projects 
in Lower Manhattan: a new PATH terminal; a World Trade Center 
Site Security Center to screen vehicles entering the World 
Trade Center site and provide parking for tour buses; a Fulton 
Street Transit Center to replace the existing subway station; a 
reconfiguration of the South Ferry Terminal subway station; and 
a realignment of Route 9A (the West Side Highway)/West Street, 
the major north-south state arterial highway along the west 
side of Lower Manhattan.
    Those mega-projects and the total Federal allocations to 
date are as follows:
          <bullet> Permanent World Trade Center PATH terminal: 
        $1.92 billion (The Port Authority will fund $300 
        million from insurance payments it received for its 9/
        11 losses)
          <bullet> World Trade Center Site Security Center: 
        $478 million
          <bullet> Fulton Street Transit Center: $847 million
          <bullet> South Ferry Terminal Station: $420 million
          <bullet> Route 9A/West Street: $287 million
        [GRAPHIC] [TIFF OMITTED] T9452.008
        
Unique Federal funding of Lower Manhattan transportation mega-projects

    The Federal approach to funding these projects differed in 
three key ways from other post-disaster transportation 
projects.
    First, the projects are almost entirely Federally-funded. 
As FEMA officials informed the GAO, FEMA is typically reluctant 
to recommend a 100-percent Federal share for rebuilding or 
recovery projects because requiring state or local governments 
to pay some percentage of the costs creates an incentive for 
them to control costs and root out waste, fraud, and 
abuse.\206\
---------------------------------------------------------------------------
    \206\ Disaster Assistance, supra note 13, at 25.
---------------------------------------------------------------------------
    Second, most of the projects will not just rebuild damaged 
or destroyed facilities, but will also make improvements to the 
transportation infrastructure. Mr. Bernard Cohen, the Federal 
Transit Administration's official leading the agency's 
oversight of Lower Manhattan mega-projects, testified before 
the Subcommittee on July 13, 2006, that ``[t]he recovery 
presented Lower Manhattan with an opportunity to modernize and 
rationalize its infamous spaghetti bowl tangle of transit 
lines.'' \207\ This scope change represents a departure from 
the Stafford Act directive that Federal disaster assistance 
funds be spent only to repair, restore, reconstruct, or replace 
damaged facilities.
---------------------------------------------------------------------------
    \207\ Cohen Written Testimony, supra note 205, at 2.
---------------------------------------------------------------------------
    For example, the design of the new World Trade Center PATH 
terminal, which began construction in March 2006 and is 
scheduled for completion in June 2011, has been compared to 
that of Grand Central Station. The majestic glass and steel 
terminal, designed by renowned architect Santiago Calatrava, 
will include new underground pedestrian walkways linked to 
another transit hub and a major building.\208\
---------------------------------------------------------------------------
    \208\ Id.
    [GRAPHIC] [TIFF OMITTED] T9452.009
    
    Other Federally-funded plans call for a new multi-level 
transit center serving 12 different subway lines to replace the 
old Fulton Street Station's maze of narrow ramps, stairs, 
platforms, and street entrances. The New York State 
Metropolitan Transportation Authority began construction in 
July 2005 on the new Fulton Street Transit Center. Construction 
is scheduled for completion in June 2009.\209\ The New York 
State Metropolitan Transportation Authority is also 
reconfiguring the South Ferry Terminal Subway Station to 
eliminate the tight-curve platforms that prevented operators 
from opening the doors on the rear five cars of their trains. 
The new design will also increase the number of entrances from 
one to three and make the station accessible to disabled 
passengers.\210\
---------------------------------------------------------------------------
    \209\ Id.
    \210\ Id.
    [GRAPHIC] [TIFF OMITTED] T9452.010
    
    [GRAPHIC] [TIFF OMITTED] T9452.011
    
    Third, because the funding for transportation projects came 
from the total $20 billion Federal aid package appropriated to 
help New York respond to, recover from, and rebuild after 9/11, 
the Federal funding allocated to Lower Manhattan mega-projects 
is finite. If costs exceed the fixed Federal funding, it is not 
clear what funding sources will cover any increases.
    The Subcommittee's research has shown that the need for 
effective internal and external oversight of the five Lower 
Manhattan mega-projects is heightened for several reasons:
    <bullet> The projects will be paid for primarily using 
Federal funds.
    <bullet> They will improve--not just replace--previous 
infrastructure.
    <bullet> The funding is capped, so that cost overruns could 
be problematic.
    <bullet> Simultaneous construction of multiple, major 
projects in a limited geographic area will demand extraordinary 
coordination and oversight.
    The Federally-funded mega-projects will have to compete 
with many other New York City construction projects--both 
prompted by 9/11 and otherwise--for contractors, labor, and 
materials. According to the DOT Office of Inspector General 
(OIG), within the next five years, more than $20 billion in 
construction work will likely be underway in Lower 
Manhattan.\211\ This work will require more than two million 
cubic yards of concrete, more than 200,000 concrete trucks, and 
a daily construction workforce of 6,500 for the next three to 
five years.\212\
---------------------------------------------------------------------------
    \211\ Written Testimony submitted by Mr. Todd J. Zinser before the 
Subcommittee on Management, Integration, and Oversight hearing 
entitled, ``Federal 9/11 Assistance to New York: Lessons Learned in 
Fraud Detection, Prevention, and Control.'' Part 3 ``Rebuilding,'' July 
13, 2006, at 2 (hereinafter Zinser Written Testimony).
    \212\ Written Testimony submitted by Mr. Ronald P. Calvosa before 
the Subcommittee on Management, Integration, and Oversight hearing 
entitled, ``Federal 9/11 Assistance to New York: Lessons Learned in 
Fraud Detection, Prevention, and Control.'' Part 3 ``Rebuilding,'' July 
13, 2006, at 3 (hereinafter Calvosa Written Testimony).
---------------------------------------------------------------------------
    In general, when substantial infusions of funding are 
directed to an area for reconstruction efforts, it increases 
the risk of fraud.\213\ In New York City, that is especially 
true due to the lingering influence of organized crime in the 
construction, trucking, demolition, and waste disposal 
industries. Additionally, rebuilding in densely-developed, 
public transit-reliant Lower Manhattan presents logistical 
challenges, not least of which is an inability to seal off the 
area from traffic and human congestion due to the area's status 
as the center of the financial industry.
---------------------------------------------------------------------------
    \213\ Id.
---------------------------------------------------------------------------
    Heightened attention should be paid to these projects 
because of the aforementioned factors and because of the fact 
that the DOT OIG recently cited the need for the FTA and the 
FHWA to strengthen their stewardship of Federal funding of 
highway and transit projects.\214\ The Subcommittee believes 
that the FTA and the various other Federal and state agencies 
involved in the mega-projects have established strong oversight 
mechanisms and internal control systems. Some of these are 
innovative and, if they perform well, may serve as a model for 
future disaster recovery efforts.
---------------------------------------------------------------------------
    \214\ U.S. Department of Transportation Office of Inspector 
General, DOT's 2006 Top Management Challenges, Rep. PT-2006-007, Nov. 
18, 2005 at 5.
---------------------------------------------------------------------------
    The DOT OIG recommended several steps that could be 
replicated to prevent fraud in ``mega-projects' in other parts 
of the country. These steps include: (1) establish a single 
complaint hotline; (2) conduct background checks on 
contractors, including contractor databases (e.g., VENDEX in 
New York City), the Federal debarment list, Occupational Safety 
and Health Administration (OSHA) violations, and licensing 
agencies; (3) design an employee background screening system in 
consultation with unions; (4) create a fraud awareness training 
program; and (5) utilize private independent integrity 
monitors.\215\
---------------------------------------------------------------------------
    \215\ Subcommittee Staff Briefing with Mr. Theodore Alves et al., 
Principal Assistant Inspector General for Auditing and Evaluation, U.S. 
Department of Transportation Office of Inspector General, June 20, 
2006, in Washington, D.C.
---------------------------------------------------------------------------

                           INTERNAL CONTROLS

    Through a Memorandum of Agreement with FEMA, FTA was 
designated as the lead agency to administer all Federally-
funded transportation projects in Lower Manhattan. To carry out 
its responsibilities, in 2002 FTA established a special 
oversight office, the Lower Manhattan Recovery Office (LMRO), 
exclusively to oversee the Lower Manhattan mega-projects.
    The FTA received nearly $90 million in dedicated funding 
for oversight.\216\ The LMRO coordinates the resources of the 
various agencies involved, including the Port Authority, the 
New York State Department of Transportation, and the New York 
State Metropolitan Transportation Authority by offering 
technical and logistical assistance and allowing for ``one-stop 
shopping'' for Federal transportation funds.
---------------------------------------------------------------------------
    \216\ Zinser Written Testimony, supra note 211.
---------------------------------------------------------------------------
    In a meeting with Subcommittee staff, FTA officials 
indicated they had encountered no fraudulent activity thus far 
in the use of Federal 9/11 financial assistance. They 
attributed this, in part, to establishment of the LMRO in July 
2002. The Office conducts rigorous project oversight that 
includes: (1) an oversight team leader; (2) project engineers; 
(3) a procurement consultant; (4) a financial management 
consultant; and (5) easy access to FTA headquarters legal 
staff. \217\ The Director of the Office recommended to 
Subcommittee staff the following key factors that control fraud 
in the use of 9/11 funds:
---------------------------------------------------------------------------
    \217\ Subcommittee Staff Briefing with Mr. Bernard Cohen, Director, 
Lower Manhattan Recovery Office, Federal Transit Administration, Feb. 
22, 2006, in Washington, D.C.
---------------------------------------------------------------------------
          <bullet> establishment of a fraud hotline in the 
        Lower Manhattan Construction Command Center (LMCCC);
          <bullet> the LMCCC Director of Security is an 
        experienced fraud fighter, who works with all agencies 
        involved in rebuilding on fraud prevention;
          <bullet> a task force of Federal, state, and local 
        Inspectors General in Lower Manhattan meets at least 
        monthly;
          <bullet> fraud prevention training is conducted; and
          <bullet> private integrity monitors are hired and 
        deployed by the Metropolitan Transit Authority.\218\
---------------------------------------------------------------------------
    \218\ Id.
---------------------------------------------------------------------------
    In addition, as part of its examination of fraud controls 
for the remaining balance of 9/11 funding, the Subcommittee 
staff confirmed that FTA has adopted a ``risk management 
approach'' for the Lower Manhattan recovery projects.\219\ FTA 
officials told Subcommittee staff that FTA will: (1) apply a 
risk analysis ``in early project development for all LMRO 
projects''; (2) ``focus project management on identification, 
assessment and mitigation of risks'; and (3) conduct 
``continuous assessment of project scope, budget and schedule 
based on risk status.'' \220\
---------------------------------------------------------------------------
    \219\ Id.
    \220\ Id.
---------------------------------------------------------------------------
    As part of its risk analysis to control costs, FTA advised 
Subcommittee staff of the types of budget and scheduling risks 
that will be considered. These include: ``security; utilities; 
historic preservation; risks due to project scope; risks due to 
cost escalation; construction risks; real estate and other 
property risks; and project coordination risks.'' \221\
---------------------------------------------------------------------------
    \221\ Id.
---------------------------------------------------------------------------

Best practice: Dedicated temporary oversight office

    The Subcommittee recommends allocating a certain percentage 
of disaster-recovery mega-project funds to establish a special 
oversight office within the Federal agency with primary 
jurisdiction over the relevant mega-projects. The FTA's LMRO 
could provide a working model for such an office.
    The Subcommittee believes two types of cost-control 
techniques employed by LMRO warrant discussion. Per FTA's 
requirements, LMRO utilizes value-engineering studies to 
objectively review all reasonable alternatives during the 
design phase in order to find more cost-effective alternatives. 
LMRO has already implemented recommendations from such studies 
and officials told the DOT OIG the recommendations have saved 
nearly $67 million on the Fulton Street Transit Center project 
alone.\222\ Additionally, a risk-management approach is 
intended to keep costs within estimates and avoid overruns that 
would price projects over the fixed amounts the Federal 
government has appropriated.\223\
---------------------------------------------------------------------------
    \222\ Zinser Written Testimony, supra note 211, at 15.
    \223\ Id. at 5.
---------------------------------------------------------------------------
    The FHWA and FTA transfer funding on a reimbursement basis. 
Accordingly, grantees must meet certain guidelines to receive 
reimbursement, and FHWA conducts physical oversight and process 
reviews to ensure those guidelines are met. As an added layer 
of oversight, FHWA has requirements in place to monitor a 
state's expenditures. If a funding recipient fails to comply 
with the FHWA's guidelines, FHWA has the capability to recover 
funds.

                           EXTERNAL CONTROLS

    In testimony before the Subcommittee on July 13, 2006, 
Acting DOT Inspector General Todd J. Zinser announced that his 
agency had established an OIG Lower Manhattan Transportation 
Oversight Team specifically to support oversight of the 9/11 
recovery mega-projects in Lower Manhattan. Team members and 
resources were redeployed from the DOT OIG's work on the $14.6 
billion Central Artery/Tunnel Project--or ``Big Dig''--in 
Boston.\224\
---------------------------------------------------------------------------
    \224\ Id.
---------------------------------------------------------------------------

Best practice: Temporary fraud prevention task force drawn from other 
        agencies

    The Lower Manhattan Construction Integrity Team was 
established in 2004 to prevent fraud in publicly-funded 
projects in Lower Manhattan. It includes the DOT OIG, LMCCC, 
LMDC, the New York City Department of Investigation, the New 
York City Business Integrity Commission, the New York State 
OIG, the New York State Metropolitan Transportation Authority 
OIG and Chief Compliance Officer, the Port Authority OIG, and 
the OIGs of the U.S. Departments of Labor (DOL) and Housing and 
Urban Development (HUD).
    The Lower Manhattan Construction Integrity Team has 
developed a range of measures for the prevention of fraud, 
including best practices for screening potential contractors, 
information sharing, fraud awareness training for contractors' 
supervisors and managers, employee screening and access control 
to the World Trade Center site, and the use of private 
integrity monitors to supplement existing oversight resources. 
The Lower Manhattan Construction Integrity Team members also 
maintain a joint fraud complaint hotline, which can be accessed 
at www.LowerManhattan.info.\225\ A similar task force, the 
Hurricane Katrina Fraud Task Force, subsequently was formed to 
monitor the hurricane recovery efforts in the Gulf states.\226\
---------------------------------------------------------------------------
    \225\ Id. at 9.
    \226\ Id.
---------------------------------------------------------------------------

Best practice: Full-time independent coordination agency that prevents 
        fraud

    The Lower Manhattan Construction Command Center (LMCCC) 
began as a voluntary collaboration among project sponsors 
intended to coordinate overlapping construction projects.\227\ 
On November 22, 2004, New York Governor George Pataki and New 
York City Mayor Michael Bloomberg issued parallel executive 
orders to establish the LMCCC as a formal, full-time oversight 
agency. According to those orders, the LMCCC was created to ``* 
* * coordinate between all construction located in Lower 
Manhattan [including] all construction projects beginning from 
2004 to 2010 valued at over $25 million * * * work requiring 
governmental action or permit, and construction requiring work 
directly in City or State streets or highways.'' \228\ Funded 
mostly through a $6.5 million FTA grant, the LMCCC brings 
together private developers, public agencies and authorities, 
utilities, businesses, and resident representatives in one 
physical location to resolve disputes among agencies, 
coordinate construction logistics, and prevent fraud.\229\
---------------------------------------------------------------------------
    \227\ Cohen Written Testimony, supra note 205, at 4.
    \228\ New York Governor George E. Pataki, Establishing the Lower 
Manhattan Construction Command Center, Exec. Order 133, Nov. 22, 2004; 
New York City Mayor Michael R. Bloomberg, Creation of the Lower 
Manhattan Construction Command Center, Exec. Order 53, Nov. 22, 2004.
    \229\ Calvosa Written Testimony, supra note 212, at 3.
---------------------------------------------------------------------------

Best practice: Fraud awareness training

    LMCCC, together with members of the Lower Manhattan 
Construction Integrity Team, developed a fraud prevention 
training module for presentation to contractors and employees 
to provide information about prohibited conduct. For example, 
contractor employees are informed of the penalties for bribing 
public servants, submitting false documents, paying incorrect 
wages, or engaging in other fraudulent activity.\230\ While 
common among public sector employees, this sort of training has 
rarely been provided to contractor staff.\231\ The Subcommittee 
recommends mandating this training for employees of contractors 
working on future disaster recovery mega-projects.
---------------------------------------------------------------------------
    \230\ Id. at 5.
    \231\ Id.
---------------------------------------------------------------------------

Best practice: Contractor employee screening and access control

    LMCCC, in collaboration with the Port Authority OIG and 
organized labor, conducts background checks on contractor 
employees at Lower Manhattan construction sites, especially the 
World Trade Center site. In order to be granted access to the 
construction sites, employees will have to submit to background 
screening that will include a cross check against the terrorist 
watch-list and criminal record searches to determine if 
prospective workers have been convicted or charged with certain 
crimes. Workers cleared by the checks will be issued an access 
card. Initially, the access control program will be implemented 
only at the World Trade Center site. However, LMCCC hopes to 
extend it to other construction projects in Lower 
Manhattan.\232\
---------------------------------------------------------------------------
    \232\ Id. at 7.
---------------------------------------------------------------------------

Best practice: Private integrity monitors

    Borrowing from the successful debris removal protocols 
developed at the World Trade Center site, LMDC has retained a 
private integrity monitor to oversee the demolition of a 
building located at 130 Liberty Street. The New York State 
Metropolitan Transportation Authority has retained compliance 
monitors at its Fulton Street Transit Center and South Ferry 
Subway Station projects. The Port Authority plans to hire an 
integrity monitor to oversee the construction of the new World 
Trade Center PATH terminal.
    It is the sense of the Subcommittee that replicating the 
use of private integrity monitors, as was done for not only 
debris removal, but also for mega-project construction, is 
likely to significantly deter and prevent fraud. As noted 
above, the Subcommittee recommends the use of private integrity 
monitors in future major disaster recovery efforts.

                               Conclusion

    The terrorist attacks of September 11, 2001, have left a 
lasting impact not only on New York City, Northern Virginia, 
Southwestern Pennsylvania, but also on the Nation as a whole. 
The outpouring of support for victims of the attacks and their 
families was unparalleled. At that time, people across the 
country and around the world reached out to offer support in 
any way they could. Unfortunately, unscrupulous individuals 
sought to exploit the disaster for their own financial benefit.
    Under the direction of Subcommittee Chairman Mike Rogers 
and Ranking Member Kendrick B. Meek, bipartisan Subcommittee 
staff--augmented by a FBI Supervisory Special Agent and an 
investigative journalist on detail to the Subcommittee--
conducted a six-month review, with technical assistance 
provided by the Government Accountability Office. Through its 
review, the Subcommittee has concluded that there are important 
lessons to be learned from the Federal Government's and New 
York's response to 9/11--both systemic problems which require 
attention and best practices worthy of replication.
    This report makes recommendations for how those lessons can 
be incorporated into the planning for and response to major 
natural disasters and potential future terrorist attacks to 
help ensure assistance programs are more cost-effective. In 
addition to this report, the Subcommittee plans to develop 
legislation to implement many of this report's recommendations 
so that future disaster assistance programs can benefit from 
the lessons learned in New York City after the attacks of 
September 11, 2001. It is the Subcommittee's view that many of 
the best practices identified in this report, if in place prior 
to last year's hurricane season, could have prevented waste, 
fraud and abuse in disaster assistance programs responding to 
Hurricanes Katrina and Rita.
                               APPENDIX A

                          Agency Budget Tables

                   FEDERAL EMERGENCY MANAGEMENT AGENCY
                    [Figures in millions of dollars]
------------------------------------------------------------------------
                                      Total        Total        Total
             Activity               committed    obligated    disbursed
------------------------------------------------------------------------
                        Initial Disaster Response

Search and rescue operations.....           22           22           22
Debris removal operations........        1,718        1,718        1,718
Emergency transportation measures          482          482          482
Testing and cleaning efforts \1\.           94           94           89
Other initial response services..          212          205          121

           Compensation for Disaster-Related Costs and Losses

Total assistance for State, City,        2,981        2,980        2,702
 and other organizations.........
    Assistance for the State,            1,256        1,256        1,256
     City, and other
     organizations...............
    Reimbursement of associated          1,258        1,257        1,257
     costs authorized by Congress
    Hazard mitigation grants.....          307          307           31
    Other administrative costs...          160          160          158
Total assistance for individuals           539          529          529
 and families....................
    Mortgage and rental                    222          222          222
     assistance..................
    Crisis Counseling............          164          154          154
    Individual and family grants.          105          105          105
    Other individual assistance..           48           48           48

               Infrastructure Restoration and Improvement

Restoring and enhancing the Lower        2,750        2,750          135
 Manhattan transportation system
 \2\.............................
                                  --------------------------------------
      Total \3\..................        8,798        8,780        5,798
------------------------------------------------------------------------
\1\ The funds allocated for testing and cleaning include all FEMA
  transfers to the Environmental Protection Agency (EPA).
\2\ From FEMA's perspective, the funds for the restoration of
  Manhattan's transit system were obligated upon the execution of the
  Interagency Agreement that committed these funds to the Department of
  Transportation (DOT). DOT estimates that from the funds available to
  restore and enhance Lower Manhattan's transportation system,
\3\ All figures are current as of December 31, 2005.


            U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
                    (Figures in millions of dollars)
------------------------------------------------------------------------
                                      Total        Total        Total
             Activity               committed    obligated    disbursed
------------------------------------------------------------------------
                     Initial Response Assistance \4\

Temporary utility repairs........         250           250          160
           Compensation for Disaster-Related Costs and Losses

Residential grants for                     281          281          236
 individuals and families........
Business recovery grants and               624          624          554
 loans...........................
Compensation to businesses for              43           43           43
 disproportionate losses.........
Compensation to businesses for              33           33           33
 disproportionate loss of
 workforce.......................
Bridge loans.....................            5            5            0
Technical assistance grants......            5            5            4
Business information program ....            5            5            4
               Infrastructure Restoration and Improvement

Rebuilding and improving Lower               4            0            0
 Manhattan transportation system.
Permanent utility infrastructure           500          500           33
 repairs.........................
Short-term capital projects......           68            0            0
                     Economic Revitalization Efforts

Job creation and retention grants          320          320          232
 ................................
Small firm attraction and                  155          155          110
 retention grants................
Other planning efforts...........          93            93           66
                  Other Economic Revitalization Efforts

Parks and open space improvements           31           31            8
Affordable housing construction             50           50            0
 and improvements................
Memorial and cultural programs...          370          370          206
Tourism..........................           10           10            7
Employment training and public               8            8            5
 service activities..............
Other economic revitalization              324          324           22
 improvements ...................
    Total \5\....................       3,107         3,107        1,723
------------------------------------------------------------------------
\4\ Congress appropriated $3.48 billion to HUD; as of February 6, 2006,
  HUD had committed $3.107 billion to specific purposes. Thus, $376
  million has not yet been committed to a specific activity.
\5\ All figures are current as of February 6, 2006.


                    U.S. DEPARTMENT OF TRANSPORTATION
                    [Figures in millions of dollars]
------------------------------------------------------------------------
                                      Total        Total        Total
             Activity               committed    obligated    disbursed
------------------------------------------------------------------------
                       Initial Response Assistance

Federal Transit Administration's           100          100           76
 (FTA) emergency transportation
 measures........................

               Infrastructure Restoration and Improvement

Restoring and enhancing the Lower        5,003        4,041          551
 Manhattan transportation system
 \6\.............................
    Transit projects.............        1,800        1,397          220
    Transit projects to be               2,750        2,291          137
     reimbursed by FEMA \7\......
    Street resurfacing and                 242          160           77
     reconstruction..............
    Ferry projects...............          100           93           50
    Rail safety projects.........          100          100           67
                                  --------------------------------------
        Total \8\................        2,353        1,850          490
------------------------------------------------------------------------
\6\ Not including projects reimbursed by FEMA, DOT committee $2.242
  billion, of which $1.75 billion was obligated and $414 million was
  disbursed.
\7\ FEMA reimbursements are not included in DOT funding totals.
\8\ All figures are current as of December 31, 2005.


                   U.S. SMALL BUSINESS ADMINISTRATION
                    [Figures in millions of dollars]
------------------------------------------------------------------------
                                      Total        Total        Total
            Activity                committed    obligated    disbursed
------------------------------------------------------------------------
           Compensation for Disaster-Related Costs and Losses

Supplemental Terrorist Activity           75             41           40
 Relief (STAR) Subsidy..........
World Trade Center/Pentagon              135            116          116
 Subsidy........................
World Trade Center/Pentagon               40             25           25
 Administration.................
SBA funds from initial                   250
 appropriation..................
Funds Transferred Out...........          51.4
Subtotal........................         198.6
Funds Rescinded.................           1.5
------------------------------------------------------------------------
      Total funds available         \10\ 197.1          182          181
       after rescission and
       transfer \9\.............
------------------------------------------------------------------------
\9\ All figures are current as of June 23, 2006. Following the initial
  $250 million appropriation, the total commitments for the SBA loan
  programs were reduced from the STAR program by $1.5 million in FY
  2006. In addition, $51.4 million of unused emergency funding was
  transferred to pre-9/11 loan programs and other programs at the
  closure of the STAR loan and the World Trade Center/Pentagon (WTCP)
  programs ($27.4 million was transferred to STAR 7(a) loans in FY03;
  $15 million to the regular disaster loans from WTCP in FY04; and $9
  million for WTCP Administration transferred back to the Treasury and
  Office of Management and Budget (OMB). Because the STAR loan and WTCP
  programs have closed, $14,976,000 of unobligated funds are no longer
  available--$5 million for STAR loans; $3.8 million for WTCP
  Subsidiary; and $6.192 million for WTCP administration. SBA's FY07
  budget proposed the return of these unobligated amounts to the
  Treasury and Office of Management and Budget. In addition, the $1
  million from the Start Subsidy Budget Authority that was obligated but
  not disbursed is no longer available.
\10\ The effective amount of ``committed'' funds is composed of $46.102
  million from the STAR loan program, $119.968 million from WTCP
  Subsidy; and $31 million WTCP administration.


                        U.S. DEPARTMENT OF LABOR
                    [Figures in millions of dollars]
------------------------------------------------------------------------
                                      Total        Total        Total
            Activity                committed    obligated    disbursed
------------------------------------------------------------------------
           Compensation for Disaster-Related Costs and Losses

Funds Allocated to DOL Programs:
    Assistance to DOL for                   6             6            6
     management, salaries and
     expenses...................
    Reimbursement for                       2             2            2
     Occupational Safety and
     Health Administration/
     Employee Benefits Security
     Administration salaries and
     expenses...................
New York Agencies:
    New York State Unemployment           7.6             1            1
     Insurance Fund.............
    New York State Training and          57.5            49           49
     Employment Services
     Operations.................
    New York State Workers                175            55           53
     Compensation...............
    Total Initial Funding to DOL        249.1           113          111
Total Assistance Allocated to             241           105          103
 New York \11\..................
Subsequent Funding Activity:
    Rescinded Funds.............       (122.2)  ...........  ...........
    Funds Returned to New York             50   ...........  ...........
     through Supplemental
     Appropriations \12\........
    Subtotal of Funds Made              168.8   ...........  ...........
     Available to New York......
    Funds De-obligated at New           (12.8)  ...........  ...........
     York City's Request........
------------------------------------------------------------------------
\11\ All figures are current as of February 15, 2006.
\12\ Congress rescinded $122.3 million from the initial $249 million
  appropriated to DOL, recovering $2.3 million from New York State
  Unemployment Insurance and $120 million from the New York State
  Workers Compensation Fund. After appeals from New York, $50 million
  was returned through DOL and the remaining $75 million through the
  U.S. Department of Health and Human Services.


              U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES
                    [Figures in millions of dollars]
------------------------------------------------------------------------
                                    Total         Total         Total
           Activity               committed     obligated     disbursed
------------------------------------------------------------------------
                       Initial Response Assistance

Centers for Disease Control             10            10            10
 and Prevention--Enhancing lab
 security.....................
Centers for Disease Control             10            10            10
 and Prevention--Environmental
 hazard control...............
Centers for Disease Control              3             3             3
 and Prevention--Medical
 supplies.....................
Substance Abuse and Mental              28            28            28
 Health Services
 Administration (SAMHSA) \13\.
Administration on Children and          23.7          23.7          23.7
 Families \14\................
Administration on Aging--                1.3           1.3           1.3
 Senior Citizen Centers.......
                               -----------------------------------------
      Total Initial Response            76            76            76
       Assistance.............

           Compensation for Disaster-Related Costs and Losses

Health Resources and Services           45            45            45
 Administration (HRSA) for
 Health Centers...............
                               -----------------------------------------
      Total \15\..............         121           121           121
------------------------------------------------------------------------
\13\ New York City received $22 million of the $28 million allocated to
  SAMHSA, according to information obtained by Management, Integration,
  and Oversight Subcommittee staff by telephone call with officials of
  the U.S. Department of Health and Human Services, May 16, 2006
  (hereafter referred to as ``May 16 telephone call'').
\14\ New York State received a majority of the funds allocated to the
  Administration on Children and Families, but some funding was also
  provided to Pennsylvania, Virginia, and Washington, D.C. HHS was
  unable to provide the exact allocation of funds by state, according to
  May 16 telephone call.
\15\ All figures are current as of May 16, 2006.


                       U.S. DEPARTMENT OF JUSTICE
                    [Figures in millions of dollars]
------------------------------------------------------------------------
                                      Total        Total        Total
             Activity               committed    obligated    disbursed
------------------------------------------------------------------------
           Compensation for Disaster-Related Costs and Losses

Office of Justice Programs--                 7            7            7
 funding for various assistance
 programs \16\...................
Salaries and Expenses for the                7            7            7
 General Litigation Division.....
                                  --------------------------------------
    Total Assistance for state,             14           14           14
     city, and other
     organizations...............
Victim Compensation..............           54           54           54
Office of Justice Programs--                24           24           24
 funding to the New York Crime
 Victims Board...................
Office of Justice Programs--                30           30           30
 Formula Grants to the New York
 Crime Victims Board.............
                                  --------------------------------------
    Total Assistance for                    54           54           54
     Individuals and Families
     \17\........................
      Total \18\.................           75           70           68
------------------------------------------------------------------------
\16\ This includes a $7 million obligation to New York University for
  ``NYU Center Catastrophe,'' $38,271 to Nassau County to implement the
  Law Enforcement Tribute Act, and $367,291 to New York City for the
  County and Municipal Agency Domestic Preparedness Equipment Program.
\17\ The Department of Justice (DOJ) also obligated and disbursed
  $246,518.56 for crisis counseling.
\18\ All figures are current as of March 31, 2006. DOJ's grants
  accounted for $63 million of its $68 million in commitments for
  assistance, while salaries and expenses accounted for $7 million.
  Approximately $5 million in commitments remained unspecified as of
  March 31, 2006. Thus, the obligated amounts total approximately $70
  million ($7 million in salaries and expenses and $63 million in
  grants). In addition to the $75 million in DOJ funds from the original
  $20 billion in assistance to New York, DOJ has provided over $300
  million in direct and indirect assistance to New York City and New
  York State in response to 9/11 through Office of Justice Programs
  (OJP) funding, OJP formula grants, U.S. Attorneys Assistance, and COPS
  grants.

                    U.S. Department of the Treasury

    The Government Accountability Office reported that Treasury 
received $26 million of the initial $20 billion in emergency 
funds provided to New York City. Treasury advised the 
Subcommittee that it could not confirm that figure because it 
had lost its ability to track the funding following the 2003 
reorganization that resulted in the transfer of the Federal Law 
Enforcement Training Center, U.S. Customs Service, and the U.S. 
Secret Service from Treasury to the newly created Department of 
Homeland Security.
    However, Treasury advised that the expended funds were 
primarily used to reestablish the Lower Manhattan offices of 
the U.S. Secret Service, the Internal Revenue Service, and the 
Treasury Inspector General for Tax Administration.

                  U.S. GENERAL SERVICES ADMINISTRATION
                    [Figures in millions of dollars]
------------------------------------------------------------------------
                                      Total        Total        Total
             Activity               committed    obligated    disbursed
------------------------------------------------------------------------
           Compensation for Disaster-Related Costs and Losses

Security upgrades at the New York          4.5          4.5          4.5
 Civic Center....................
Other Accommodations to GSA               26.7         26.7         26.7
 Tenants.........................
                                  ======================================
    Total assistance for GSA              31.2         31.2         31.2
     tenants.....................
                                  --------------------------------------
Other security costs, including            1.6          1.6          1.6
 overtime, hiring of guards,
 equipment purchases, and
 updating communications systems.
                                  --------------------------------------
      Total \19\.................         32.8         32.8         32.8
------------------------------------------------------------------------
\19\ All figures are current as of June 30, 2006.

                U.S. Securities and Exchange Commission

Total Funds Allocated to the SEC \20\...................     $20,705,000
Funds Obligated by the SEC..............................      20,694,428
Funds Expended by the SEC...............................      15,131,898
Funds Available to the SEC..............................       5,562,530

\20\ All figures are current as of June 7, 2006.
---------------------------------------------------------------------------

              U.S. Commodities Futures Trading Commission

Total Funds Allocated to the CFTC \21\..................     $17,100,000
Funds Expended the CFTC.................................      10,618,162
Unexpended Funds........................................       6,481,838
Unliquidated Obligations................................       5,666,473
Available Funds.........................................         815,365

\21\ All figures are current as of June 22, 2006.
---------------------------------------------------------------------------

                      U.S. Department of Education

Funds Allocated to the Department of Education \22\.....     $10,900,000
Funds Allocated to New York City through Project School 
    Emergency Response to Violence (SERV)...............       4,200,000
Funds Allocated to New York State.......................       1,700,000
Funds Allocated for New York City Extended Services.....       5,000,000

\22\ All figures are current as of June 15, 2006.
---------------------------------------------------------------------------

                      U.S. Department of Commerce

Economic Development Administration Grants:
    Grant to the Empire State Development Corporation to 
      produce an emergency planning process and 
      redevelopment strategy for immediate survival and 
      long-term business development....................      $1,000,000
National Telecommunication and Information 
    Administration Grants:
    Grant to Educational Broadcasting Corporation, Inc. 
      to replace transmission equipment of WNET-TV, 
      Channel 13, which was destroyed in the attacks....       6,429,502
    Grants to WNYC Radio to replace transmission 
      equipment of WNYC-FM..............................       1,421,969
Total Funds Allocated to the Department of Commerce \23\       9,250,000

\23\ All figures are current as of June 12, 2006.
---------------------------------------------------------------------------

                  U.S. Social Security Administration

    The Government Accountability Office reported that the 
Social Security Administration (SSA) received $4 million. The 
SSA disputed that figure to the Subcommittee staff, and 
asserted that it received $2.5 million.
    The SSA advised that it used the funding to reestablish its 
Lower Manhattan offices.

              U.S. Equal Employment Opportunity Commission

Funds Allocated to the EEOC \24\........................      $1,310,000
Funds Expended by the EEOC..............................       1,308,000
Funds Available to the EEOC.............................           2,000

\24\ All figures are current as of June 7, 2006.
---------------------------------------------------------------------------

              U.S. Office of National Drug Control Policy

    On December 3, 2001, the ONDCP approved a grant awarding 
the New York City District Attorney's Office $2.3 million to 
reestablish the Lower Manhattan office of the New York-New 
Jersey High Intensity Drug Trafficking Area (HIDTA).
    The HIDTA used the funding to locate and renovate its new 
office space and purchase equipment.

            U.S. Department of Housing and Urban Development


                    Office of the Inspector General

    HUD OIG received and obligated $1,000,000 in Emergency 
Relief Funds for disaster recovery activities and assistance 
related to terrorist acts in New York.
    HUD OIG used these funds to reconstitute its investigation 
office located in New York City. These costs included 
rebuilding the structure of its offices as well as for the 
purchase of vehicles, a phone system, office equipment, 
furniture, and computers.
    HUD OIG reported that all allocated funds have been 
dispersed and expended.

                               APPENDIX B

    Note: Names of individuals have been redacted.

                                       CONVICTIONS FOR FRAUDULENT ACTIVITY
----------------------------------------------------------------------------------------------------------------
                                                                   Date of                          Restitution/
    Date charged            Charges            Jurisdiction       conviction        Sentence          recovery
----------------------------------------------------------------------------------------------------------------
5/23/2002..........  18 U.S.C. 641.......  SDNY................    5/23/2002  3 months............    $26,140.00
2/20/2003..........  18 U.S.C. 287.......  SDNY................    3/26/2003  probation...........       $11,683
1/26/2004..........  18 U.S.C. 641/1341..  SDNY................    9/15/2004  probation...........        $5,250
5/11/2004..........  18 U.S.C. 64          SDNY................    4/25/2005  18 months...........       $45,251
                      1,1001,1343-12
                      counts.
10/1/2001..........  Attempted Theft.....  Lexington, KY.......    3/15/2002  60 months probation.  ............
11/8/2001..........  Offering a False      New York County.....    8/28/2002  Diversion...........          $975
                      Instrument (FI).
11/8/2001..........  Offering a False      New York County.....    8/27/2002  Restitution & Cond.         $2,420
                      Instrument.                                              Disch.
11/8/2001..........  Offering a False      New York County.....    11/4/2002  Restitution & Cond.         $1,250
                      Instrument.                                              Disch.
11/8/2001..........  Offering a False      New York County.....    8/28/2002  Conditional           ............
                      Instrument.                                              Discharge.
11/8/2001..........  Offering a False      New York County.....    11/4/2002  Restitution & Cond.         $1,145
                      Instrument.                                              Disch.
11/8/2001..........  Offering a False      New York County.....    11/4/2002  Restitution & Cond.         $1,530
                      Instrument.                                              Disch.
11/8/2001..........  Offering a False      New York County.....    11/4/2002  Restitution & Cond.           $550
                      Instrument.                                              Disch.
11/8/2001..........  Offering a False      New York County.....    8/27/2002  Restitution & Cond.         $1,125
                      Instrument.                                              Disch.
11/8/2001..........  Offering a False      New York County.....    8/28/2002  60 months probation.          $735
                      Instrument.
1/28/2002..........  Offering a False      New York County.....    8/27/2002  60 months probation.        $6,508
                      Instrument.
1/28/2002..........  Offering a False      New York County.....    8/27/2002  36 months probation.        $8,740
                      Instrument.
1/28/2002..........  Offering a False      New York County.....    3/19/2003  60 months probation.  ............
                      Instrument.
1/28/2002..........  Offering a False      New York County.....    3/19/2003  60 months probation.  ............
                      Instrument.
4/8/2002...........  Offering a False      New York County.....    4/14/2003  60 months probation.        $5,753
                      Instrument.
11/8/2001..........  Offering a False      New York County.....     4/8/2003  36 months probation.          $671
                      Instrument.
1/8/2002...........  Offering a False      New York County.....    8/27/2002  Restitution & Cond.         $1,268
                      Instrument.                                              Disch.
2/8/2002...........  Offering a False      EDNY................    5/23/2002  3 months confinement        $6,508
                      Instrument.
4/1/2002...........  Offering a False      New York County.....    8/27/2002  Restitution & Cond.        $11,451
                      Instrument.                                              Disch.
4/5/2002...........  Offering a False      New York County.....     4/5/2002  12 months             ............
                      Instrument.                                              confinement.
11/3/2001..........  Offering a False      New York County.....     7/9/2002  1 month probation...  ............
                      Instrument.
10/2/2002..........  False Claim.........  ND-GA...............     8/6/2004  21 months                     $400
                                                                               confinement.
4/8/2002...........  Offering a False      New York County.....    5/14/2002  5 months confinement       $11,194
                      Instrument.
4/7/2002...........  Offering a False      New York County.....    12/2/2002  36 months probation.  ............
                      Instrument.
1/7/2002...........  Offering a False      New York County.....    6/21/2002  10 days community     ............
                      Instrument.                                              service.
4/2/2002...........  Offering a False      New York County.....   12/16/2003  conditional           ............
                      Instrument.                                              Discharge.
3/19/2002..........  Offering a False      New York County.....     2/5/2003  12 months probation.  ............
                      Instrument.
3/19/2002..........  Offering a False      New York County.....    11/5/2002  Restitution & Cond.        $31,000
                      Instrument.                                              Disch.
4/4/2002...........  Offering a False      New York County.....    10/1/2002  6 months confinement        $3,438
                      Instrument.
4/11/2002..........  Offering a False      New York County.....    4/22/2002  36 months probation.  ............
                      Instrument.
2/20/2003..........  Offering a False      New York County.....    9/15/2003  6 months confinement       $11,783
                      Instrument.
6/19/2002..........  Offering a False      New York County.....   10/31/2002  36 months probation.  ............
                      Instrument.
5/31/2002..........  Offering a False      New York County.....    8/22/2002  54 months             ............
                      Instrument.                                              confinement.
6/19/2002..........  Offering a False      New York County.....     3/3/2003  Restitution & Cond.         $1,000
                      Instrument.                                              Disch.
6/18/2002..........  Offering a False      New York County.....     4/2/2003  60 months probation.  ............
                      Instrument.
6/19/2002..........  Offering a False      New York County.....    2/19/2003  12 months probation.          $712
                      Instrument.
6/26/2002..........  Theft by deception..  Camden Cty, NJ......    11/7/2003  10 years confinement  ............
3/20/2002..........  Offering a FI,        New York County.....     9/3/2003  5 years probation...  ............
                      GrandLar.
6/19/2002..........  Offering a False      New York County.....    3/13/2003  3 years probation...  ............
                      Instrument.
3/20/2002..........  Offering a FI,        New York County.....     8/7/2003  3-6 years             ............
                      GrandLar.                                                confinement.
6/19/2002..........  Offering a False      New York County.....    3/23/2004  100 hours community   ............
                      Instrument.                                              service.
11/13/2002.........  Offering a FI,        New York County.....    11/5/2003  2-6 years prison....
                      GrandLar.
11/13/2002.........  Offering a FI,        New York County.....    11/5/2003  1 year prison.......  ............
                      GrandLar.
6/19/2002..........  Grand Larceny.......  New York County.....    6/20/2003  36 months probation.  ............
11/13/2002.........  Grand Larceny.......  New York County.....    4/15/2003  1 1/2-4 years prison  ............
4/10/2003..........  Forgery, False        New York County.....     1/6/2004  Counseling..........  ............
                      BusRec.
11/13/2002.........  Grand Larceny.......  New York County.....    9/29/2003  2-4 years prison....  ............
3/17/2003..........  Grand Larceny.......  SDNY................    6/12/2003  6 month probation...  ............
4/9/2003...........  Grand Larceny.......  New York County.....    12/8/2003  5 years probation...        $9,366
3/17/2005..........  18 U.S.C. 1341/641..  SDNY................     5/3/2005  3 years probation...        $1,168
11/23/2004.........  18 U.S.C. 1343/1957.  SDNY................     6/8/2005  18 months...........       $18,500
7/6/2005...........  31USC3729...........  SDNY................          n/a  n/a.................      $300,000
12/17/2002.........  18 U.S.C. 371, 1001,  SDNY................    10/3/2003  51 months...........      $373,228
                      1341.
12/17/2002.........  18 U.S.C. 371, 1001,  SDNY................    10/3/2003  33 months...........      $373,228
                      1341.
11/24/2003.........  18 U.S.C. 641.......  SDNY................    8/25/2004  24 months...........      $170,108
6/21/2004..........  18 U.S.C. 641.......  SDNY................    7/19/2004  probation...........       $26,250
7/1/2003...........  18 U.S.C. 641.......  SDNY................    4/15/2004  probation...........  ............
5/29/2003..........  18 U.S.C. 641.......  SDNY................    5/29/2003  probation...........  ............
8/25/2003..........  18 U.S.C. 1341......  SDNY................    10/1/2003  probation...........          $250
8/18/2003..........  18 U.S.C. 641/1341..  SDNY................    9/29/2003  6 months............  ............
12/9/2003..........  18 U.S.C. 641/1341..  SDNY................     2/5/2004  2 months............        $2,228
12/8/2004..........  18 U.S.C. 641.......  SDNY................    3/11/2005  pending.............  ............
8/25/2004..........  18 U.S.C. 1341......  SDNY................    8/25/2004  house/arr...........        $3,683
7/1/2005...........  18 U.S.C. 641.......  SDNY................   11/14/2005  time serv...........  ............
                     42 U.S.C. 408.......  ....................  ...........  ....................  ............
3/16/2005..........  31 U.S.C. 3729......  SDNY................          n/a  n/a.................       $36,500
8/19/2002..........  18 U.S.C. 371/1341..  SDNY................    6/16/2003  97 months...........      $504,869
12/22/2003.........  18 U.S.C. 371/1343..  SDNY................    6/10/2004  21 months...........       $73,430
1/26/2004..........  18 U.S.C. 641/841...  SDNY................     6/9/2004  48 months...........       $31,718
3/8/2005...........  18 U.S.C. 1341/1001.  SDNY................    9/16/2005  pending.............  ............
                     18 U.S.C. 287.......  DNJ.................    2/28/2006  30 months...........  ............
5/26/2004..........  18 U.S.C. 1001......  SDNY................    8/31/2004  4 months............  ............
3/13/2002..........  Grand Larceny.......  New York County.....  ...........  ....................      $190,867
3/25/2002..........  Grand Larceny.......  New York County.....  ...........  ....................       $21,500
3/26/2002..........  Grand Larceny.......  New York County.....  ...........  ....................      $272,800
                     Fraud...............  New York County.....  ...........  ....................       $89,599
                     Forgery.............  New York County.....  ...........  ....................  ............
                     false records.......  New York County.....  ...........  ....................  ............
                     Forgery.............  New York County.....  ...........  ....................       $31,000
                     Forgery.............  New York County.....  ...........  ....................       $41,761
                     Forgery.............  New York County.....  ...........  ....................       $13,500
                     Forgery.............  New York County.....  ...........  ....................        $4,000
                     fraud...............  New York County.....  ...........  ....................       $10,000
                     fraud...............  New York County.....  ...........  ....................        $3,300
                     false records.......  New York County.....  ...........  ....................        $4,000
                     grand Larceny,        New York County.....  ...........  ....................   $108,905.28
                      forgery.
                     grand Larceny,        New York County.....  ...........  ....................  ............
                      forgery.
                     grand larceny.......  New York County.....  ...........  ....................       $20,774
                     grand Larceny,        New York County.....  ...........  ....................     $3,966.67
                      Forgery.
                     fraud...............  New York County.....  ...........  ....................       $10,994
                     grand larceny.......  New York County.....  ...........  ....................        $4,500
                     Forgery.............  New York County.....  ...........  ....................  ............
                     larceny, forgery....  New York County.....  ...........  ....................          $685
                     ....................  New York County.....  ...........  ....................       $12,170
11/13/2002.........  Theft...............  New York County.....  ...........  ....................       $70,000
11/13/2002.........  Theft...............  New York County.....  ...........  ....................        $8,000
11/13/2002.........  Theft...............  New York County.....  ...........  ....................   $114,653.09
11/13/2002.........  Theft...............  New York County.....  ...........  ....................       $45,283
11/13/2002.........  Theft...............  New York County.....  ...........  ....................       $45,176
11/13/2002.........  Theft...............  New York County.....  ...........  ....................          $400
11/13/2002.........  Theft...............  New York County.....  ...........  ....................          $400
11/13/2002.........  Theft...............  New York County.....  ...........  ....................          $950
11/13/2002.........  Theft...............  New York County.....  ...........  ....................        $4,000
11/13/2002.........  Theft...............  New York County.....  ...........  ....................        $4,400
11/13/2002.........  Theft...............  New York County.....  ...........  ....................        $3,000
11/13/2002.........  Theft...............  New York County.....  ...........  ....................        $3,780
11/13/2002.........  Theft...............  New York County.....  ...........  ....................        $3,850
11/13/2002.........  Theft...............  New York County.....  ...........  ....................        $9,226
11/13/2002.........  Theft...............  New York County.....  ...........  ....................          $800
11/13/2002.........  Theft...............  New York County.....  ...........  ....................
11/13/2002.........  Theft...............  New York County.....  ...........  ....................       $35,875
11/13/2002.........  Theft...............  New York County.....  ...........  ....................
11/13/2002.........  Theft...............  New York County.....  ...........  ....................    $46,490.52
11/13/2002.........  Theft...............  New York County.....  ...........  ....................     $8,092.92
11/13/2002.........  Theft...............  New York County.....  ...........  ....................    $12,323.60
11/13/2002.........  Theft...............  New York County.....  ...........  ....................       $31,000
3/21/2002..........  ....................  New York County.....
3/21/2002..........  ....................  New York County.....  ...........  ....................       $14,000
3/21/2002..........  ....................  New York County.....  ...........  ....................       $16,381
2/2/2005...........  fraud...............  New York County.....
8/5/2002...........  Theft...............  New York County.....
8/5/2002...........  Theft...............  New York County.....
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................       $18,995
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................        $6,900
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................        $8,808
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................        $8,129
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................        $6,607
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................        $6,607
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................        $5,000
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................        $3,936
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................        $4,650
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................        $2,328
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................        $9,366
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................        $4,458
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................          $499
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................           N/A
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................        $3,298
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................       $14,057
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................        $6,508
7/31/2003..........  Fraud...............  New York County.....  ...........  ....................    $59,192.36
8/27/2003..........  Fraud...............  New York County.....  ...........  ....................      $135,000
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................       $11,854
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................        $4,684
4/10/2003..........  Fraud...............  New York County.....  ...........  ....................           N/A
6/18/2003..........  Grand Larceny.......  New York County.....  ...........  ....................      5,899.00
6/18/2003..........  Grand Larceny.......  New York County.....  ...........  ....................      5,149.28
6/18/2003..........  Grand Larceny.......  New York County.....  ...........  ....................      5,094.59
6/18/2003..........  Grand Larceny.......  New York County.....  ...........  ....................      7,715.45
6/18/2003..........  Grand Larceny.......  New York County.....  ...........  ....................      7,353.82
6/18/2003..........  Grand Larceny.......  New York County.....                 ..................     $7,336.50
6/18/2003..........  Grand Larceny.......  New York County.....                 ..................     $6,096.75
6/18/2003..........  Grand Larceny.......  New York County.....                 ..................     $5,044.75
6/18/2003..........  Grand Larceny.......  New York County.....                 ..................     $5,655.00
6/18/2003..........  Grand Larceny.......  New York County.....                 ..................     $7,499.75
12/3/2003..........  Grand & Petty         New York County.....                 ..................       $15,205
                      Larceny/Fraud.
12/3/2003..........  Grand & Petty         New York County.....                 ..................        $6,602
                      Larceny/Fraud.
12/3/2003..........  Grand & Petty         New York County.....                 ..................        $1,117
                      Larceny/Fraud.
12/3/2003..........  Grand & Petty         New York County.....                 ..................        $4,989
                      Larceny/Fraud.
12/3/2003..........  Grand & Petty         New York County.....                 ..................        $8,361
                      Larceny/Fraud.
12/3/2003..........  Grand & Petty         New York County.....                 ..................        $2,500
                      Larceny/Fraud.
12/3/2003..........  Grand & Petty         New York County.....                 ..................        $4,477
                      Larceny/Fraud.
12/3/2003..........  Grand & Petty         New York County.....                 ..................        $4,093
                      Larceny/Fraud.
12/3/2003..........  Grand & Petty         New York County.....                 ..................        $5,398
                      Larceny/Fraud.
12/3/2003..........  Grand & Petty         New York County.....                 ..................        $3,499
                      Larceny/Fraud.
----------------------------------------------------------------------------------------------------------------
18 U.S.C. 286: Conspiracy to defraud the government with respect to claims.
18 U.S.C. 287: False, fictious, or fraudulent claims.
18 U.S.C. 371: Conspiracy to commit offense or defraud the U.S.
18 U.S.C. 641: Embezzlement.
18 U.S.C. 666: Theft or bribery concerning programs receiving federal funds.
18 U.S.C. 841: Manufacture, distribution, or storage of explosive materials.
18 U.S.C. 1001: False statements.
18 U.S.C. 1341: Mail fraud.
18 U.S.C. 1343: Wire fraud.
18 U.S.C. 1349: Attempt and Conspiracy.
18 U.S.C. 3147: Penalty for offense committed while on release.
18 U.S.C. 3551: Sentencing.
31 U.S.C. 3729: False Claims.
42 U.S.C. 408: Receiving Increased payments.
Relevant Abbreviations: SDNY = U.S. Attorney's Office for the Southern District of New York; EDNY = U.S.
  Attorney's Office for the Eastern District of New York; New York County = Manhattan District Attorney's
  Office; ND-GA = Northern District of Georgia; DNJ = District of New Jersey.


                               APPENDIX C

 Summary of Lower Manhattan Development Corporation Commitments to the 
                      Revitalization of Chinatown

                         Over $171 Million \23\
---------------------------------------------------------------------------

    \23\ Information provided by the Lower Manhattan Development 
Corporation to the Subcommittee on Management, Integration, and 
Oversight on July 21, 2006.
---------------------------------------------------------------------------

                          ECONOMIC DEVELOPMENT

Chinatown Partnership LDC: $1.6 million
    <bullet> The Chinatown Partnership Local Development 
Corporation (LDC) is a community-based not-for-profit 
organization that was formed in 2004 as a result of the Rebuild 
Chinatown Initiative (RCI), a comprehensive community 
assessment and planning initiative that was conducted by Asian 
Americans for Equality (AAFE) to address the needs of Chinatown 
in the aftermath of September 11th. Funding for the LDC is also 
provided by the September 11th Fund.
    <bullet> The creation of the Chinatown Partnership LDC--a 
single organization that has brought together major civic 
organizations, cultural institutions, and businesses in the 
community--marks a significant milestone for the neighborhood.
    <bullet> The CPLDC's goal is to improve business conditions 
by making Chinatown a cleaner, safer, more attractive place to 
conduct business by strengthening connections between commerce 
and culture.
Clean Streets Program: $5.4 million
    This supplemental cleaning program for the Chinatown 
community is the outgrowth of a major survey of more than 3,000 
Chinatown residents and businesses following 9/11, which found 
that improving cleanliness, reducing odors and removing 
graffiti is the top priority for the neighborhood. The campaign 
builds on and incorporates the efforts of the Council for a 
Cleaner Chinatown, a non-profit community group founded over 
ten years ago. The program is administered by the Chinatown 
Partnership with assistance from the New York City Department 
of Small Business Services.

                                TOURISM

Explore Chinatown Tourism Campaign: $1,160,000
    <bullet> The campaign, officially launched on May 10, 2004, 
is intended to build awareness and increase revenues for 
Chinatown businesses. The campaign includes an international 
public relations and advertising campaign; a website 
(www.explorechinatown.com); a visitor information kiosk on 
Canal St., and special events. The campaign has won numerous 
awards in the marketing, travel and public relations 
industries.
    <bullet> On October 15, 2005, more than 50,000 people 
attended the third ``Taste of Chinatown.'' Taste of Chinatown 
included tasting stations and cultural and family oriented 
activities to entertain visitors. A Chinatown to China 
sweepstakes was also held.
    <bullet> A post event survey of 51 participating businesses 
conducted by Asian Women indicated the benefit of the event. 
Some of the survey's findings included: over $85,000 was 
generated in tasting plate sales and related inside sales 
during the event; 100% of those surveyed said they would 
participate in the next Taste of Chinatown and felt that the 
street closure for the event was very effective and worthwhile.
Chinatown Visitor Kiosk: $216,000
    <bullet> In 2005 alone over 165,000 people visited the 
Chinatown kiosk.

                                CULTURE

Cultural Enhancement Funds for Chinatown: More than $1.5 million
    LMDC funded cultural projects in Chinatown have the 
potential to attract visitors from around the world; attract 
world-class artists and performers; support cultural richness 
and diversity; and enrich the lives of Chinatown residents and 
workers.
    <bullet> $135,000 for Asian American Arts Center--founded 
in 1974, the center explores the interplay between contemporary 
American and Asian culture and art through exhibition, 
presentation, and education. LMDC funds will assist the 
organization in digitizing and increasing public access to this 
important archive.
    <bullet> $140,000 for Asian Americans for Equality and 
Chinatown Partnership LDC for CREATE (Committee to Revitalize 
and Enrich the Arts of Tomorrow's Economy)--Embodies an 
unprecedented effort among diverse Chinatown arts and cultural 
institutions, civic members, and community leaders to unify 
around the vision of developing a major cultural and performing 
arts center in Chinatown. LMDC funding will support Phase II of 
the planning effort for CREATE. LMDC also funded Phase I with a 
$150,000 grant.
    <bullet> $800,000 for Downtown Community Television 
Center--Located on the border of Chinatown, the center 
increases access to media by producing documentaries, providing 
educational programming on film, and training students in film-
making free of charge. LMDC funds will assist with the build-
out of DCTV's lower level space, allowing for the creation of a 
120-seat screening room dedicated to documentary film and 
additional classrooms.
    <bullet> $50,000 for H.T. Dance Company--Supports Asian-
American and contemporary dance through artistic creation, arts 
education, and presentation. LMDC funds will provide technical 
equipment to create a multi-media center at the organization's 
home in Chinatown.
    <bullet> $200,000 for Museum of Chinese in the Americas 
(MoCA)--Founded in 1980, the MoCA is the first full-time, 
professionally-staffed museum dedicated to reclaiming, 
preserving, and interpreting the history and culture of Chinese 
and their descendants in the Western Hemisphere. LMDC funds 
will support the pre-design phase of a new 12,500-square-foot 
museum designed by Maya Lin at 215 Center Street.
    <bullet> $100,000 for National Dance Institute--This art-
based education program engages children and professional 
artists in the creation of dances and performances of high 
quality. Since its founding in 1976 by Jacques d'Amboise, NDI 
has introduced more than half a million fourth, fifth, and 
sixth grade public school students in the New York metropolitan 
area to the magic of dance. NDI seeks to create a permanent 
home and expand its program with a Center for Learning and the 
Arts in Chinatown. LMDC funds will support site search and 
project development.
    <bullet> $150,000 for New York Chinese Cultural Center--
Teaches and preserves traditional Chinese performing arts. 
NYCCC hosts the country's only full-time professional school of 
Chinese dance, offering a comprehensive curriculum of more than 
1,000 classes and workshops annually. LMDC funding will support 
the reconfiguration of the Chinatown organization's performing 
arts space to increase programming capacity and strengthen the 
organization's administrative and management facilities.

                       TRAFFIC AND TRANSPORTATION

Chatham Square Study and Implementation: $25 million

    <bullet> In 2004 the LMDC worked with the community to 
identify traffic problems in Chinatown. The Chinatown Access & 
Circulation Study recommended a new configuration for Chatham 
Square to improve pedestrian safety and vehicular flow within 
Chinatown--based on community input.
    <bullet> Currently the LMDC is working with the City of New 
York to further prepare the proposal for implementation.

Chinatown/Brooklyn Bridge Study:

    <bullet> As part of its efforts to revitalize downtown, the 
LMDC has developed a plan to better integrate the Chinatown 
community and the area around the Brooklyn Bridge Anchorage, 
located to the east of Chinatown, with the rest of Lower 
Manhattan.
    <bullet> The main elements of the plan include five 
components developed from 14 public outreach meetings related 
to Chinatown circulation and access problems.

                           AFFORDABLE HOUSING

Chinatown/Lower East Side Acquisition Grant Program: $16 million

    <bullet> This Department of Housing Preservation and 
Development (HPD) administered program will enable non-profit 
property managers to acquire and preserve low-to-moderate 
income residential buildings in Chinatown and the Lower East 
Side.

Knickerbocker Towers: $5 million

    <bullet> This 1,600 unit complex consists primarily of low 
and moderate income residents. LMDC's funding will enable the 
complex to make necessary capital improvements without 
increasing rents or applying an assessment, helping to preserve 
the affordability of the project.

                          PARKS AND OPEN SPACE

Parks Renovations: $20 million

          <bullet> Columbus Park--$3.25 million
          <bullet> James Madison--$2.12 million
          <bullet> Sara D. Roosevelt--$7.75 million
          <bullet> Pike/Allen Street Mall--$5.93 million
          <bullet> Albert Smith Playground--$1.6 million
    Chinatown will also benefit from LMDC's $150 million 
commitment to the East River Waterfront Project. Chinatown's 
waterfront will receive major improvements as part of this 
comprehensive program.

Residential Grant Program: Chinatown $40 Million

    The Residential Grant Program seeks to compensate 
individuals for the extraordinary expenses they may have 
incurred as a result of the disaster, as well as creates 
incentives for individuals and families to rent, purchase, or 
remain in housing in Lower Manhattan.

The WTC Business Recovery Grant Program: Chinatown $60 million

    The WTC Business Recovery Grant Program, established by 
ESDC with funding from LMDC, provided grants to businesses 
(including not-for-profit organizations) with fewer than 500 
employees, located in Manhattan south of 14th Street, to 
compensate them for economic losses resulting from the 
disaster, thereby assisting in the retention of thousands of 
jobs both directly and indirectly.

                               APPENDIX D

                               Statements
   ``An Examination of Federall 9/11 Assistance to New York: Lessons 
     Learned in Preventing Waste, Fraud, Abuse, and Mismanagement''
               Wednesday, July 12, 2006, Part I--Response
                               Witnesses
                                PANEL I

                                                                   Page
Mr. Greg Kutz, Director, Financial Management and Assurance, U.S. 
  Government Accountability Office...............................   101
Mr. Joe Picciano, Deputy Director for Region II, Federal 
  Emergency Management Agency, U.S. Department of Homeland 
  Security.......................................................    77
The Honorable Richard Skinner, Inspector General, U.S. Department 
  of Homeland Security...........................................    92

                                PANEL II

 Ms. Leigh Bradley, Senior Vice President for Enterprise Risk, 
  American Red Cross.............................................   134
 Mr. Neil Getnick, President, International Association of 
  Independent Inspectors General.................................   126
 The Honorable Rose Gill Hearn, Commissioner, New York City 
  Department of Investigation....................................   118
 Ms. Carie Lemack, Co-Founder, Families of September 11..........   130
 Mr. David J. Varoli, General Counsel, New York City Department 
  of Design and Construction.....................................   122

         Thursday, July 13, 2006, 10:00 a.m., Part II--Response
                               Witnesses
                                PANEL I

Mr. Leroy Frazer, Bureau Chief, Special Prosecutions Bureau, New 
  York County District Attorney's Office.........................   160
 Ms. Ruth, Ritzema, Special Agent in Charge for New York, Office 
  of Inspector General, U.S. Department of Housing and Urban 
  Development....................................................   145
 Mr. Douglas Small, Deputy Assistant Secretary, Employment and 
  Training, U.S. Department of Labor.............................   154
 The Honorable Eric Thorson, Inspector General, U.S. Small 
  Business Administration........................................   151

                                PANEL II

Ms. Bettina Damiani, Project Director, Good Jobs New York........   172
Ms. Eileen Mildenberger, Chief Operating Officer, Empire State 
  Development Corporation........................................   164
Mr. Stefan Pryor, President, Lower Manhattan Development 
  Corporation....................................................   166
Mr. John Wang, Founder and President, Asian American Business 
  Development Center.............................................   169

         Thursday, July 13, 2006, 2:00 a.m., Part III--Response
                               Witnesses
                                PANEL I

Mr. Bernard Cohen, Director, Lower Manhattan Recovery Office, 
  Federal Transit Administration, U.S. Department of 
  Transportation.................................................   189
Mr. Todd J. Zinser, Acting Inspector General, U.S. Department of 
  Transportation.................................................   179

                                PANEL II

Mr. Ronald P. Calvosa, Director of Fraud Prevention, Lower 
  Manhattan Construction Command Center..........................   191
Mr. Michael Nestor, Director, Office of Investigations, Port 
  Authority of New York and New Jersey...........................   195
                        Wednesday, July 12, 2006

             2:00 p.m. in 311 Cannon House Office Building

         Subcommittee on Management, Integration, and Oversight

                                Hearing

   ``An Examination of Federal 9/11 Assistance to New York: Lessons 
 Learned in Preventing Waste, Fraud, Abuse, and Mismanagement, Part I-
                               Response''

                               Witnesses

 Prepared Statement of Mr. Joseph F. Picciano, Deputy Director, Region 
    II, Federal Emergency Management Agency, Department of Homeland 
                                Security

    Good Morning Chairman Rogers, Ranking Member Meek and members of 
the Committee. My name is Joseph Picciano. I am the Deputy Director for 
Region II of the Department of Homeland Security's (DHS's) Federal 
Emergency Management Agency (FEMA) based in New York City and covering 
New York, New Jersey, Puerto Rico and the Virgin Islands. On behalf of 
FEMA and the Department of Homeland Security, I appear before you today 
to discuss FEMA's disaster assistance for response and recovery to the 
New York City area following the September 11, 2001 terrorist attacks.
    FEMA and its staff are proud of the work accomplished following the 
attack. The tragic event posed unique challenges. It tested our ability 
to deliver help in a timely and effective manner while maintaining 
accountability.

FEMA Responds
    Immediately following the attack, FEMA activated the Federal 
Response Plan, which brings together 28 federal agencies and the 
American Red Cross to assist local and state governments in responding 
to national emergencies and disasters. FEMA Headquarters also activated 
the Washington-based Emergency Support Team (EST) on a 24-hour basis, 
and Region II deployed its Emergency Response Team-Advance Element 
(ERT-A). In addition, FEMA activated the following federal assets to 
support response operations:

        <bullet> Twenty Urban Search & Rescue Teams (FEMA)
        <bullet> U.S. Army Corps of Engineers (Power and Debris Teams)
        <bullet> Four Disaster Mortuary Teams (DMORT)
        <bullet> Four Disaster Medical Assistance Teams (DMAT)
        <bullet> One Management Support Team (MST)
        <bullet> One Deployable Portable Morgue Unit (DPMU)
        <bullet> One Veterinary Medical Team
    President Bush appointed the Federal Coordinating Officer (FCO), 
responsible for coordinating the timely delivery of Federal disaster 
assistance to New York State, local governments, and disaster victims. 
On September 15, 2001, FEMA established the Disaster Field Office (DFO) 
at Pier 90 on the West Side of Manhattan. It initially operated 24 
hours per day and served as a base for all FEMA operations. On December 
3, 2001, the DFO relocated to 80 Centre Street in Lower Manhattan.
    President Bush pledged at least twenty billion dollars to the City 
and State of New York. In the following 11 months, Congress passed 
several bills to provide approximately $20 billion in direct funding 
and tax benefits. This was the first time that the amount of federal 
assistance for a disaster was determined early in the response and 
recovery process. Congress allocated $8.8 billion of this twenty 
billion to FEMA to reimburse individuals, governments, and not-for-
profit organizations for response and recovery work related to the 
World Trade Center (WTC) disaster. As of May 30, 2006, FEMA has 
obligated approximately $8.77billion, leaving approximately $30.3 
million remaining for distribution. These remaining funds will be used 
to bring several ongoing programs to their completion, particularly 
Human Services programs such as Mortgage Rental Assistance, Individual 
and Family Grants, and Crisis Counseling assistance for the State of 
New York, and funding to reimburse applicants for currently non-funded 
projects authorized by the Consolidated Appropriations Resolution, 
enacted February 20, 2003, P.L. 108-7 (CAR).

Public Assistance (PA)
    Although there were a total of 191 applicants with Project 
Worksheets (PWs), three applicants received approximately 95 percent of 
all the Stafford Act funding:
        <bullet> New York City (50 agencies received assistance);
        <bullet> The Port Authority of New York and New Jersey; and,
        <bullet> The State of New York (50+ agencies, including the 
        MTA).
    Recognizing that the response to this tragedy was widespread, and 
that the New York State Emergency Management Office (SEMO) could not 
conduct a thorough and complete applicant briefing with such an 
extensive and unknown population, FEMA and SEMO established a Private-
Non-Profit (PNP) Hotline on October 17, 2001 to identify potential PNP 
applicants. FEMA staffed the call center with local hires who worked 
Monday through Friday, 8 a.m. to 6 p.m., from October 17 to November 
17, 2001; however, the call center was discontinued due to extremely 
low call volume (less than 150 inquiries total).
    Based on the magnitude of the disaster and the duration of past 
recovery efforts (such as the Northridge Earthquake and Hurricane 
Andrew), the FCO appointed the Deputy FCO for Long-Term Recovery, 
responsible for identifying the needs of the community, coordinating 
with other federal, state, and local agencies to address those needs, 
and developing FEMA's long-term recovery plans.
    Since the disaster recovery needs could not be solved within one 
program or agency, the Deputy FCO relied heavily on the creation of 
local and federal task forces to better coordinate the recovery effort. 
The various task forces focused on activities designed to immediately 
stimulate the development and infrastructure needs of the community. By 
bringing together all of these resources, the local agencies could 
immediately gain access to the resources of numerous federal agencies, 
and the local agency could promptly respond to time-sensitive problems 
in an effective manner.
    The primary task force was the Federal Task Force (FTF) to Support 
NYC. The FEMA Deputy FCO for Long-Term Recovery chaired this task 
force. It was comprised of representatives from 11 federal agencies 
focused on developing a complete understanding of the reconstruction 
needs of the local and state government, and devising a recovery 
solution comprehensive enough to address these needs.
    Equally important for its immediate impact on local projects was 
the Infrastructure Recovery Workgroup (IRWG), originally chaired 
jointly by SEMO and FEMA, and then later chaired by the Commissioner of 
NYC Department of Transportation. This task force was assembled to 
ensure an efficient and integrated restoration of public and private 
infrastructure destroyed or damaged by the disaster. The IRWG consisted 
of numerous federal, state, local, and private sector participants.

The Public Assistance Team
    Immediately following the disaster, Region II assigned a Public 
Assistance Officer (PAO) and deployed over 30 Disaster Assistance 
Employees (DAEs) to serve as Public Assistance Coordinators (PACs) and 
Project Officers (POs). Within two weeks of the disaster, Headquarters, 
the FCO, and the Regional Director decided to replace the PAO and 
outsource the remainder of the PA operation (with the exception of 
National Emergency Management Information System (NEMIS) positions), 
substituting the DAEs with its Technical Assistance Contractors (TACs). 
The decision to outsource the PA operation, the first ever for FEMA, 
was made for several reasons:
        <bullet> The catastrophic nature of the disaster called for 
        deep technical expertise and professional management;
        <bullet> The long-term nature of the project required a high-
        level of consistency among the staff; and,
        <bullet> A fear that another terrorist attack might occur and 
        require immediate FEMA resources.
    To ensure that FEMA had access the broadest available range of 
technical specialists, the contracting officer asked all three TAC to 
supply personnel.

Ensuring Quality
    It was recognized by FEMA and the applicants that well-written PWs, 
supported by accurate and well-documented cost analyses, and prepared 
in accordance with the Stafford Act and FEMA regulations, would reduce 
appeals and Office of Inspector General (OIG) audits. For that reason, 
quality was emphasized at the outset and considered extensively when 
disaster-specific processes were established.
    To ensure quality, and validate that agencies were requesting 
reimbursement for all they were entitled to under the law, New York 
City, the disaster's largest applicant, required that all PWs, once 
prepared by the PAC and PO, be reviewed and signed-off by the agency 
representative, a NYC Office of Emergency Management representative, 
and an OMB representative, before being entered into NEMIS. Although 
FEMA was initially concerned the obligation process would be slowed, in 
the end it assured both the City and FEMA of a higher quality PW.
    On the FEMA side, three initiatives were undertaken to ensure 
quality:
        1. A Policy and Program Advisor position was created to provide 
        verbal and written guidance to PACs and POs on eligibility 
        questions. This advisor served as a critical link between PA 
        management (the program decision makers) and field staff (the 
        program implementers). Besides dealing with complex and 
        sensitive issues, this advisor also prepared the PA Program 
        Guidance memos for the PAO's signature.
        2. FEMA developed a Quality Assurance Guide in October 2001, 
        and disseminated it to all PACs and POs. This guide provided a 
        series of detailed steps to be completed by FEMA POs during the 
        preparation of PWs.
        3. A quality control queue was created within NEMIS. An 
        experienced technical specialist, with extensive program 
        knowledge, a background in accounting, and access to 
        management, worked off-site to review every PW and confirm 
        eligibility decisions against all applicable regulations and 
        disaster-specific guidance; verify cost estimates; correct any 
        errors or omissions; and provide feedback to PACs and POs, when 
        necessary.
    In addition, FEMA's Office of General Counsel (OGC) and the OIG 
were physically present at the DFO, and subsequently the Federal 
Recovery Office, and provided day-to-day advice to the applicants and 
PA management. The OGC attorney(s) drafted mission assignments and 
interagency agreements, addressed eligibility-of-applicant issues and a 
myriad of other issues surrounding access rights, property ownership, 
liability, procurement, and insurance.
    The OIG staff worked proactively with PA staff and applicants to 
ensure a consistent level of understanding regarding the documentation 
and audit requirements. Besides attending the applicant briefings and 
kickoff meetings, the OIG held a three hour audit briefing for all NYC 
agencies, and frequently provided feedback to PA managers regarding 
program, policy, or process issues. The OIG also reviewed all 9/11 
Associated Cost PWs.

Consolidated Appropriation Resolution (P.L. 108-7)
    In the aftermath of the disaster, it soon became apparent that 
while the Stafford Act was generally well-suited to most response and 
recovery needs, there were a number of significant costs which were 
clearly ineligible.
    To address these types of projects, Congress enacted the 
Consolidated Appropriation Resolution of 2003 (CAR) signed into law by 
the President as Public Law 108-7 on February 20, 2003, to fund:
        (1) 9/11-associated costs not reimbursable under the Stafford 
        Act;
        (2) $90 million for long-term health monitoring of emergency 
        services, rescue, and recovery personnel; and,
        (3) Up to $1 billion to establish insurance coverage for the 
        City of New York and its contractors for claims arising from 
        debris removal at the World Trade Center site.
    This authorization was granted contingent on funds made available 
under P.L. 107-38, 107-117, and 107-206. In other words, any 
reimbursement for non-Stafford Act associated costs would come from the 
existing appropriations of $8.8 billion, after all Stafford Act-related 
costs had been reimbursed. By the time that the CAR was enacted, more 
than 17 months after the disaster, New York City and New York State had 
already paid many of these costs; therefore, reimbursement from FEMA 
effectively resulted in much needed budget relief for these agencies.
    In March 2003, FEMA, the City, and the State verbally agreed to the 
following:
        <bullet> The PA program would stop accepting costs for 
        Stafford-eligible projects as of April 30, 2003;
        <bullet> The applicants would submit all Project Completion and 
        Certification Reports (P.4s) no later than June 16, 2003;
        <bullet> FEMA would programmatically close all Stafford-
        eligible projects by June 30, 2003;
        <bullet> FEMA would use the Project Worksheet to fund all 9/11 
        Associated Costs; rather than complete a P.4 certifying 
        completion of the project and expenditure of the funds, the 
        City and State would each separately sign a grant management 
        letter certifying to abide by the Federal grant management 
        requirements;
        <bullet> FEMA would establish a Dedicated Fund (also referred 
        to as a Set-Aside Fund) for both the City and State that would 
        include:
                (1) the estimated cost of all incomplete Stafford-
                eligible projects deobligated due to the April 30, 2003 
                deadline, and
                (2) an estimate for all Stafford-eligible projects not 
                funded on a PW as of April 30, 2003;
        <bullet> The City and State could draw against the 9/11 
        Associated Costs PWs on a dollar by dollar basis up to the 
        amount set-aside in their Dedicated Fund;
        <bullet> Once the City and State exhausted their respective 
        Dedicated Funds, all remaining dollars available for 9/11 
        Associated Costs would be divided on a two-thirds for the City, 
        one-third for the State basis (as mutually agreed to by NYC and 
        NYS); and,
        <bullet> The applicant and grantee would submit no further 
        appeals or time extension requests.
    This was documented in a Joint Letter of Agreement dated June 2003. 
The letter also specified that the Port Authority would receive $448.75 
million in federal funding, and that the date for the Port Authority to 
submit Stafford-eligible costs would extend beyond April 30, 2003. 
Since all County and PNP projects were completed and funded by April 
30, 2003, the agreement did not affect these applicants.

Expedited Closeout
    To close out the PA Program and accelerate funding of the 9/11 
Associated Costs, FEMA established an expedited closeout process. 
Unlike the traditional closeout process where the applicants initiate 
it and the grantee coordinates it, this expedited process established 
firm deadlines and was led by FEMA. By closely managing the development 
of P.4s, streamlining the financial reconciliation of projects, and 
refining the closeout database initially developed by the Region to 
closeout DR-1391, by July 2003 FEMA was able to receive and forward to 
the grantee signed P.4s for all Stafford-eligible projects. The City 
and State were active participants in this process because it quickly 
brought to a close the Stafford Act-eligible program, thereby saving 
the City and State considerable time and money to manage a long-term, 
traditional closeout, and it allowed them to promptly draw down on any 
remaining funds using 9/11 Associated Cost projects.

9/11 Associated Costs
    Once the closeout was complete, FEMA then worked with NYC and NYS 
to prepare PWs for 9/11 AssociatedCost projects. 9/11 Associated Cost 
projects were defined as those related to 9/11 that were not 
reimbursable under the Stafford Act. Projects such as CUNY's Fiterman 
Hall and the Battery Park City sidewalk and road repair identified in 
the City and State's dedicated fund, respectively, were not prepared as 
9/11 Associated Cost projects because these were eligible under the 
Stafford Act.
    To determine the allocation of the CAR funding, FEMA subtracted 
from the $8.8 billion all Stafford Act program expenditures to arrive 
at the available funding, and immediately deducted from that figure all 
the projects authorized by the CAR.
    Calculating the funds available for projects authorized by the CAR 
2003 was complicated, as FEMA wanted to ensure that funds remained to 
meet its projected Stafford Act obligations, and still be able to 
expedite funding to the City and State for the Debris Removal Insurance 
Program (DRIP), expanded health care monitoring, and 9/11 Associated 
Projects all large and costly projects. To do so, FEMA's Stafford Act 
projection of $6.44 billion reflected an amount slightly higher than 
anticipated in certain areas primarily for Human Services and other 
Administrative Costs to mitigate the risk of FEMA not having enough 
funds to meet its Stafford Act obligations. This projection was refined 
in January 2004 when it became clear that additional funds could be 
made available to the City and State to fund 9/11 Associated Cost PWs, 
and these PWs were obligated. All or a portion of these available funds 
may be provided in the future to NYC, NYS, and the Port Authority to 
cover additional 9/11 Associated Costs.

Port Authority
    As a result of the WTC attacks, the Port Authority suffered an 
estimated loss of $4.6 billion generated primarily by:
        <bullet> The collapse of seven major office buildings 
        (including the Twin Towers) owned by the Port Authority;
        <bullet> The deaths of 84 Port Authority employees, including 
        37 PAPD police officers;
        <bullet> Damage to its PATH system; and,
        <bullet> Lost revenue.
    Since the estimated $4.6 billion loss far exceeded its insurance 
coverage of $1.5 billion, FEMA, the Port Authority, and SEMO developed 
and implemented an Insurance Apportionment Strategy. This strategy 
provided immediate cash flow to the Port Authority for Stafford-
eligible costs, while ensuring that the overall obligation was not 
duplicated by insurance benefits.
    Under the terms of the ECP, and pursuant to the June 2003 Letter of 
Agreement (LOA) reached between FEMA, NYS, and NYC:
        1. FEMA would reimburse the Port Authority for all Stafford-
        eligible work completed and paid for by May 31, 2003, 
        regardless of whether the entire scope of eligible work had 
        been completed; and,
    2. The Port Authority's allocated disaster funding--whether 
Stafford eligible, Associated Costs, or Subgrantee Allowance--was 
capped at $448.75 million.
    Using the Insurance Apportionment Strategy, FEMA reimbursed the 
Port Authority for Stafford-eligible costs obligated via project 
worksheets, and an administrative allowance. These payments accounted 
for $400 million toward the Port Authority's funding limit capped at 
$448.750 million. The left $48.750 million available to the Port 
Authority as reimbursement for 9/11 Associated Costs.
Facts
    In two years FEMA obligated $7.48 billion in Public Assistance and 
infrastructure-related costs, in three categories as shown below in 
Figure VI-1. (An additional $21 million was obligated in January and 
February 2004 two years and four months after the attacks--to fund NYC 
and NYS 9/11 Associated Cost PWs.)
[GRAPHIC] [TIFF OMITTED] T9452.012

FEMA Transfers $2.75 Billion to FTA
    The $2.75 billion transferred to FTA was combined with the US DOT's 
$1.8 billion allocation, to create a $4.55 billion transportation fund 
to be administered by FTA and used to reconstruct and enhance Lower 
Manhattan's transportation infrastructure, including roadways, subway 
systems, and commuter rails. The process and conditions of this 
transfer of funds is treated in greater detail later in the ``Emergency 
Transportation Restoration of the Lower Manhattan Intermodal System'' 
section of this PA Summary.

FEMA Obligates $2.38 Billion Under Stafford Act
    The Stafford Act obligations totaled $2.38 billion, including $.06 
billion representing grant management and project administration costs. 
As Figure VI-2 illustrates, of the $2.32 billion obligated to 
traditional PA Program recipients, approximately two-thirds was awarded 
to NYC, with the Port Authority and New York State claiming the 
majority of the remaining third.
    Figure VI-2 Stafford Act Project Worksheet Obligations by Recipient
    [GRAPHIC] [TIFF OMITTED] T9452.013
    
    Approximately 90 percent of the reimbursed costs represented 
Emergency Work, FEMA work categories A and B (refer to Figure VI-3).

    Major obligations included:
        <bullet> Debris Removal to DDC and DSNY
        <bullet> Incremental Cost Approach (ICA) for OT Labor
        <bullet> Death and Disability Benefits
        <bullet> Temporary PATH Station
        <bullet> Emergency Transportation (excludes Temporary PATH 
        Station)
        <bullet> OCME for Victim Identification
        <bullet> Building Cleaning and Air Monitoring
    The above statistics comprise roughly 82 percent of all Emergency 
Work and nearly 75 percent of all funds obligated within FEMA's 
traditional Stafford Public Assistance Program.
    Figure VI-3 below illustrates Stafford Act Project Worksheet 
Obligations by Category of Work
[GRAPHIC] [TIFF OMITTED] T9452.014

[GRAPHIC] [TIFF OMITTED] T9452.015


FEMA Obligates $2.37 Billion under CAR 2003
    As previously discussed in Section III, the passing CAR 2003 in 
February 2003 allowed for greater flexibility in disbursing federal 
grants to the City and State of New York for costs associated with the 
events of September11th. After budgeting the $1 billion for debris 
removal insurance and the $90 million for expanded health care 
monitoring, FEMA allocated and then obligated funds to NYC and NYS on 
9/11 Associated Cost PWs, first disposing of each entity's Dedicated 
Funds, and then separating the remaining funds two-thirds to the City, 
and one-third to the State. As of August 3, 2004, the City had received 
$913 million in 9/11 Associated Costs and the State has received $372 
million including $49 million for the Port Authority.

Backfill Labor
    Stafford Act-eligible backfill labor costs after the WTC disaster 
exceeded $50 million, primarily for the FDNY, NYPD, NYC Department of 
Sanitation, and NYC Department of Transportation. To evaluate the 
eligibility of backfill costs--costs incurred by the applicant to 
backfill for an employee performing eligible emergency work--PA staff 
followed the November 1993 memo issued by the PA Division Chief 
regarding force account (in-house) labor. This memo outlined instances 
where FEMA could reimburse for backfill, and how this reimbursement 
should occur. The methodology also contained a final step to validate 
that the eligible disaster-related overtime and backfill overtime did 
not exceed the total overtime paid by the department. This was a 
critical step since some FDNY backfill overtime PWs were greater than 
ten million.

Cleaning
    The collapse of the WTC created a widespread plume of dust and 
debris. From the beginning, residents, community leaders, and City and 
State officials expressed concern that the dust may pose a threat to 
health and air quality. Due to these concerns, the EPA recommended to 
FEMA that the dust and debris be removed from residential units and 
unclean buildings in order to reduce the long-term risk of exposure to 
chemicals such as asbestos.
    Based on EPA's advisement and requests from the City, FEMA provided 
funding for the exterior and/or interior cleaning of 244 buildings and 
4,500 residential units in Lower Manhattan, and two unoccupied 
privately owned buildings in close proximity to the WTC site. FEMA 
classified this work as debris removal and based its eligibility 
determination on the EPA's and NYC Department of Environmental 
Protection's concern over the potential health threats posed by the 
debris, and the threat to the economic recovery this debris posed to 
lower Manhattan, as outlined in a letter from NYC to FEMA.
    To ensure authorized right-of-entry, as required by the Stafford 
Act and 42 USC Sec. 5173, the City of New York developed a request form 
that the building owner or resident needed to sign before work could 
commence. The authorization form included a stipulation that any 
insurance proceeds received for activities covered by the EPA/DEP's 
dust cleaning program would be remitted to the federal government. The 
State Emergency Management Office maintains responsibility for 
notifying FEMA of any such remittance.

Death and Disability Benefits
    In responding to the WTC disaster, 341 FDNY firefighters, 2 FDNY 
EMTs, 23 NYPD police officers, 3 State Court Officers, and 37 Port 
Authority police officers died. Their deaths were the first large-scale 
casualties resulting from an emergency response effort in FEMA's 
history. For the first time, FEMA received a request that it reimburse 
applicants--the City and State of New York--for certain contractually 
obligated death benefits, increased pension contributions, and other 
associated costs. Specifically, the City and State requested 
reimbursement for more than $750 million in death and disability 
benefit costs, including:
        <bullet> Funeral Costs and Memorial Services;
        <bullet> Lump Sum Line of Duty Benefit Costs;
        <bullet> Increased Pension Costs Due to Line of Duty Deaths;
        <bullet> Increased Pension Costs Due to Increased Disability 
        Retirements; and,
        <bullet> Leave Payout.
    Upon review, FEMA concluded that funeral and memorial costs, lump 
sum death benefits, and increased pension costs due to line of duty 
deaths, although unusual, were a direct result of the disaster and a 
cost of performing the emergency work. Specifically, FEMA management 
found $291 million to be in accordance with OMB Circular A-87 
Attachment B, Item 11, Compensation for Personnel Services, and item 
11d(5).
    Given the magnitude of the death benefit claims, the FEMA had an 
actuary review the applicant's actuarial studies to determine the 
soundness of the applicant's methodology and the reasonableness of the 
assumptions. Based on the actuary's findings, which supported the 
applicant's claim, FEMA authorized the reimbursements.
    FEMA reimbursed the City and State for additional death and 
disability benefit costs as 9/11 Associated Costs.
    FEMA did not approve death benefit costs for City or State 
employees killed as a result of the disaster where it could not be 
reasonably demonstrated that these individuals were performing eligible 
emergency work. FEMA also did not reimburse for State worker 
compensation costs as FEMA reimbursed the applicant a fringe rate to 
perform the emergency work, which included a component for workers 
compensation.

Debris--Time and Material Contracts
    The FEMA PA Debris Management Guide (FEMA 325) states that the Time 
and Material (T&M) work should be limited to a maximum of 70 hours of 
actual emergency debris clearance work, and shall be permitted only for 
work that is necessary immediately after the disaster has occurred when 
a clear scope of work cannot be developed. After the WTC disaster, the 
NYC Department of Design and Construction--the overseer of the debris 
removal effort--entered into time and material contracts with four 
construction managers (CMs) to accomplish the emergency debris removal, 
hauling tasks, building demolition, and site stabilization. The CMs 
operated via a letter of intent, and not a complete written contract. 
Each of the CMs was capped at $250 million.
    On September 15, 2001, FEMA approved a written waiver of policy, 
which allowed the extended use of T&M contracts based on continuing 
unpredictable and complex site conditions at the WTC. In addition, FEMA 
waived in part the requirement for competitive bidding on the basis of 
continuing public exigency and emergency. Due to these contracting 
circumstances, it was prudent that the federal government provide 
oversight to ensure that the scope of work and costs of the debris 
operation were properly controlled. In order to accomplish this, the 
City and FEMA established and implemented monitoring systems using 
resources from FEMA, Office of the Inspector General, the DDC, the NYC 
Office of Management and Budget, the NYC
    Department of Investigation, and several private auditing groups.
    In November 2001, FEMA tasked the US Army Corps of Engineers 
(USACE) to provide an independent evaluation of the contract 
arrangement and recommend whether a T&M contract was still the most 
feasible and cost effective contract payment basis, or whether another 
type of contract, such as a lump sum or unit price, would be more 
suitable. Based on USACE's assessment and recommendation, FEMA extended 
its T&M waiver to DDC for the duration of the debris operation.

Debris Removal Insurance Program
    Generally contractors, such as the four CMs, provide their own 
general and professional liability insurance coverage and include the 
costs of insurance as part of their overhead. As such, these costs are 
generally eligible for reimbursement by FEMA. Because of the extreme 
conditions related to debris removal at the WTC, and the unique nature 
of the hazards associated with the debris removal operation, the CMs 
required a greater amount and scope of insurance coverage than is 
typically obtained, including coverage for environmental liability.
    The City agreed to provide a master insurance program, called the 
Coordinated Insurance Program, to cover both the debris removal 
contractors and employees that had worked at the WTC site. However, due 
to the impact of the disaster on the insurance market, available 
insurance was severely limited. The City was reimbursed to obtain 
general liability coverage and marine insurance coverage. These 
policies did not provide the City with coverage for environmental 
risks, such as asbestos, or professional liability. Although the City 
sought coverage for these risks, no commercial insurance was available 
due to the unknown environmental and health risks associated with the 
disaster. Because of the unresolved insurance issue, the CMs completed 
debris removal at the WTC without a written contract.
    The major issue for FEMA was the City's insistence that the 
liability protection apply not only to the contractors, but also to the 
City for claims brought by City employees that had worked at the WTC 
site. FEMA had informally advised the City that the contractor-based 
insurance was eligible under the PA program, but the City-employee 
based insurance was not and would have to be separated in order for 
FEMA to provide funding. In addition, FEMA was concerned about the cost 
effectiveness of the City's proposal.
    The passage of the CAR resulted in the City establishing a captive 
insurance company to process and payout any claims, and FEMA obligating 
$999.9 million on PW 1554 in September 2003. The draw down of funds 
will not occur until all final terms and conditions, including the 
scope of coverage, have been agreed upon.

Emergency Transportation
    The WTC disaster caused unprecedented damage and disruption to New 
York's regional transportation system. The region relies on a complex 
network of rail, subway, bus, bridges, tunnels, roads, and ferry lines 
that ties together millions of workers and residents throughout New 
York City and in surrounding counties in New York, New Jersey and 
Connecticut. The collapse of the WTC towers caused massive damage to 
sections of this regional transportation system which serves Lower 
Manhattan. This network of rail, subway, bus, and ferry lines was 
disrupted as a result of:
        1. The destruction of the Port Authority Trans-Hudson (PATH) 
        WTC station, the terminal station for the PATH lines running 
        under the Hudson River and serving Lower Manhattan.
        2. The damage to the Metropolitan Transportation Authority's 
        (MTA) Cortlandt Street Station and the N & R and 1 & 2 subway 
        lines, all located below and adjacent to the WTC towers. (The 
        MTA subway lines run underground along the west side of 
        Manhattan. These subway systems were seriously impacted by the 
        disaster, but unlike the PATH system, did not suffer complete 
        destruction of major system components.)
        3. Alteration of surface transit routes made necessary by 
        debris removal operations and infrastructure repairs in the 
        vicinity of Ground Zero.
    As a direct result of the disaster, 68,000 commuters who used the 
WTC PATH station each day had to find an alternative route to work. 
Approximately 76,000 commuters and residents were forced to find 
alternatives to their pre-9/11 subway routes.
    The direct damage caused by the disaster represented only a portion 
of the disruption to the region's transportation system, however. The 
damage caused a ripple effect that disrupted the entire system, 
affecting every mode of transportation that served Lower Manhattan. For 
example, the tens of thousands of New Jersey residents who commuted to 
Lower Manhattan on the PATH each day were suddenly forced onto other 
modes of transportation. Overnight, the demand for ferry service to 
Lower Manhattan more than doubled, and Penn Station experienced an 
influx of new riders as commuters were forced to take New Jersey trains 
into Penn Station and then take subways downtown. This strained the 
capacity of existing transportation routes, created dangerous 
overcrowding, resulted in long waits for service, and caused 
significant damage to the region's economy.

Restoration of the Lower Manhattan Intermodal System
    A traditional interpretation of Section 406 of the Stafford Act 
would have limited FEMA's funding to the replacement of the WTC PATH 
station and other physically damaged elements of the system. However, a 
white paper was developed that provided a broader definition, within 
the context of the Stafford Act, of what can comprise a ``damaged 
system,'' which FEMA Headquarters approved. By accepting this 
definition, FEMA was able to find eligible both directly and indirectly 
damaged projects that are critical to restoring the functionality of 
the Lower Manhattan intermodal transportation system. In August 2002, 
this unique approach resulted in two critical developments:
        1. FEMA announced that $2.75 billion appropriated by Congress 
        to FEMA's disaster fund could be
     used to help restore the transportation infrastructure system in 
Lower Manhattan. To this amount, the Federal Transit Administration 
(FTA) added $1.8 billion, both of which were made available for
     transportation projects, for a total of $4.55 billion.
    2. FEMA and the US Department of Transportation (DOT) entered into 
a Memorandum of Agreement
     (MOA) in August 2002, which designates the FTA as the responsible 
agency for administering and
     monitoring the distribution of the $4.55 billion. This would 
enable the Federal government to assess needs and distribute funds in a 
systematic, comprehensive, and efficient manner.
    Although the MOA noted that the FTA needed to disperse the $2.75 
billion in accordance with the Stafford Act, this was waived due to the 
passage of the Consolidated Appropriation Resolution of 2003 (CAR 
2003).
    In March 2002, FEMA agreed with New York City that the emergency 
transportation needs of the region justified the increased costs 
involved in increasing the frequency of ferry services. FEMA agreed to 
reimburse
    New York City and the Port Authority for the operating costs of 
some new and expanded services initiated post 9/11. This began a series 
of ferry projects aimed at providing alternatives to commuters seeking 
ways, other than driving and subways, to reach Lower Manhattan. 
Eventually, over $47 million was obligated for ferry service and 
temporary landing projects that provided ferry service from:
        <bullet> Hoboken to Lower Manhattan;
        <bullet> Brooklyn to Lower Manhattan;
        <bullet> Hunters Point, Queens and East River down to Lower 
        Manhattan; and,
        <bullet> Lower Manhattan Circulator.

Family Center
    As part of its rescue and response effort, the City of New York 
needed to quickly establish space where families and friends of the 
victims could gather to provide or could obtain information about those 
missing or presumed dead, and where families of victims could apply for 
assistance. To meet this need, NYC established the Family
    Center at Pier 94 in Manhattan, which provided a safe and 
convenient location where families to obtain information about the 
missing as well as various services and programs.
    Because the Family Center provided some services similar to those 
of a Disaster Service Center, which are generally not eligible for PA 
funding, FEMA had to carefully consider the eligibility of the build-
out and operation of the Family Center. Basing its decision on 44 CFR 
Sec. 206.225, FEMA determined that the costs incurred by the City to 
establish and operate the Family Center were eligible since services at 
the Family Center, such as providing a centralized site to fill out 
missing person reports, submit DNA samples, and begin processing death 
certificates, was an essential community service in the aftermath of 
this disaster. The total cost to build-out and manage the Family Center 
was approximately $10 million.

Full Replacement Value (Vehicles)
    As a result of the collapse of the WTC towers on September 11, over 
200 publicly owned vehicles were destroyed beyond repair. Title 44 CFR 
Sec. 206.226(g) stipulates that eligible equipment damaged beyond 
repair may be replaced by ``comparable items.'' In interpreting this 
federal regulation, FEMA's Public Assistance
    Guide states:
    When equipment, including vehicles, is not repairable, FEMA will 
approve the cost of replacement with used items that are approximately 
the same age, capacity, and condition. Replacement of an item with a 
new item may be approved only if a used item is not available within a 
reasonable time and distance.
    In recognition that the collapse of the WTC towers destroyed 
hundreds of emergency response vehicles, which significantly and 
adversely impacted these agencies' ongoing ability to expeditiously 
deliver emergency services, the Federal Coordinating Officer, in a memo 
dated December 12, 2001, sought Headquarters' approval for a disaster-
specific directive aimed at fully and promptly restoring the services 
provided by these emergency vehicles, with minimal disruption to the 
overall recovery process. More specifically, this directive would serve 
to allow for the reimbursement of new, 2002 model vehicles to replace 
those lost in the disaster in lieu of analyzing and determining, on a 
case-by-case basis, whether each destroyed vehicle could be 
replaced``within a reasonable time and distance.''
    The FCO's request was granted and documented in PA Program Guidance 
8, dated January 16, 2002.
    According to this guidance, the reimbursement value of a 
replacement vehicle would be:
    <bullet> Based on the estimated cost of its purchase through the 
applicant's normal procurement process; and,
    <bullet> Calculated net of deductions for actual or anticipated 
insurance proceeds.

Lost Instructional Time
    On September 11, 2001, the collapse of the WTC forced the NYC Board 
of Education (BoE) to evacuate schools in Lower Manhattan and cancel 
classes citywide. Whereas most students were able to return to their 
respective schools on September 13th, students attending schools within 
close proximity to the disaster site were displaced and unable to 
return to either their own school or to provisional school facilities 
until September 18th. In total, NYC estimated that public school 
students lost more than 15 million hours of instructional time due to 
school closures, delayed openings, and school relocations. To replace 
the lost instructional time, the City proposed implementing an after-
school program, contingent on FEMA funding.
    While FEMA recognized that school hours were lost as a result of 9/
11, a program contingent on FEMA funding would not satisfy the 
emergency work criteria per FEMA regulations. Ultimately, Congress 
directedFEMA to pay for this activity in House Report 107-593. FEMA 
obligated a $78 million Category G PW to fund an after-school program 
intended to replace the instructional time lost as a result of the WTC 
disaster.

Mutual Aid
    Not surprisingly, the response from people, non-profits, and other 
governmental jurisdictions to help NYC respond and recover was 
enormous. In part due to this response, the President declared every 
county in New York eligible for Category B emergency work. In light of 
every county being declared and the response of so many counties 
without a pre-disaster mutual aid agreement in place with New York 
City, FEMA found certain mutual aid arrangements eligible even though 
they were not formally established in writing prior to September 11, 
2001. By doing so, several provisions of Policy Series 9523.6 were 
waived. These waivers and authorities were permitted only because the 
impact of this terrorist event was catastrophic and well beyond 
reasonable planning assumptions of the applicants, and because mutual 
aid agreements were unlikely to have been formulated with all the 
entities from whom assistance was needed.
    In reimbursing local governments within NYS who responded to the 
aid of NYC, FEMA limited the eligible costs to overtime, travel 
expenses, lodging, and other direct costs, and reimbursed the mutual 
aid provider directly. Only applicants who had pre-9/11 mutual aid 
contracts in place that allowed payment for straight time were 
reimbursed for that cost. All mutual aid providers outside of the state 
had to have a pre-9/11 mutual aid contract in place to be reimbursed, 
in that case through NYC. The City did not request reimbursement for 
any in-state or out-of-state mutual aid providers because, according to 
NYC's Office of Emergency Management(OEM) officials, none billed the 
City.
    Specific to DR-1391, the vast majority of mutual aid assistance 
requested by NYC was provided by various New York State counties. 
Although numerous counties were called upon to support the response and 
recovery effort, Nassau, Suffolk, Westchester, and Rockland counties 
incurred most of the mutual aid costs. These four alone accounted for 
approximately $10.5 million in mutual aid assistance, with Nassau 
County providing the bulk--over $7.2 million in mutual aid assistance.

Obtain and Maintain Insurance
    Per Section 311 of the Stafford Act and Title 44 CFR 206.253, 
following any disaster, and as a condition for receiving PA funds, an 
applicant must obtain and maintain insurance on those insurable 
facilities (including content, equipment and vehicles) for which PA 
funding had been found eligible. The insurance must be for the hazard 
that caused the damage. An applicant is exempt from this requirement 
only if the state insurance commissioner certifies that such insurance 
is not, per Section 311(a)(1) of the Stafford Act, ``reasonably 
available, adequate, and necessary.'' In addition, with regard to 
requests from public entities that they be allowed to self-insure, 
Section 311(a)(c) of the Stafford Act notes that only states will be 
allowed to act as self- insurers.
    Prior to 9/11, NYC did not maintain commercial insurance on NYC 
buildings or property, such as vehicles or building contents. Rather, 
NYC considered itself to be ``self-insured.'' When damages or losses 
occurred to a
    NYC property, the property was either not repaired or replaced, or 
else it was replaced or repaired using funds appropriated from NYC 
revenues.
    Following 9/11, NYC requested that it be allowed to continue to 
self-insure and to be exempted from FEMA's
    Obtain and Maintain Insurance requirement. NYC argued that 
obtaining and maintaining commercial insurance for the damaged or 
destroyed property eligible for PA funding would be a deviation from 
normal business practice, resulting in serious fiscal implications to 
NYC's budget. On March 26, 2002 the NYS Superintendent of Insurance 
issued a letter stating that NYC was self-insured, and that the type of 
insurance required was not reasonably available, adequate, and 
necessary. FEMA's Acting Regional Director declined to recognize NYC as 
self-insured, but granted a waiver to the Obtain and Maintain 
requirement based on the NYS Superintendent of Insurance's opinion.

Port Authority Apportionment
    One of the most complex challenges of the disaster was determining 
an insurance apportionment strategy for the Port Authority of New York 
and New Jersey. The Port Authority reported estimated losses in excess 
of $4.6 billion, and had $1.5 billion of insurance coverage for all 
insured risks on a per occurrence basis. Since the Port's projected 
losses significantly exceeded its insurance coverage--the only 
applicant to whom this occurred in DR-1391 FEMA worked with the Port 
Authority to develop a funding strategy that would provide the Port 
Authority with cash flow, yet account for the Port Authority's future 
insurance proceeds.
    For the first year and a half after the disaster, while estimates 
of the Port's overall loss were still being developed, FEMA, NYS, and 
the Port Authority agreed to apply a 50 percent insurance reduction to 
each individual funding obligation. The implementation of this strategy 
allowed Stafford Act grant funds to be released in advance of final 
insurance resolution. The 50 percent was based on FEMA's analysis at 
the time of the Port's Preliminary Loss Assessment.
    Through subsequent developments and the Port Authority's refinement 
of its losses, FEMA later modified its funding strategy and effectively 
reduced its obligation outlay to 26 percent of eligible projects. FEMA 
and the
    State allowed individual project reimbursements to be released with 
varying percentages applied for insurance proceeds. Even though the 
Port Authority's loss claim will continue to mature, the financial 
model--the Insurance Apportionment Strategy--calculated the net FEMA 
eligible obligation at $409.88 million, representing 26 percent of the 
total Stafford-eligible costs.
    In the end, the Port Authority was granted $397.97 million as 
Stafford Act-eligible costs obligated via PWs, and an administrative 
allowance of $2.03 million. FEMA was able to fully exhaust the 
available insurance proceeds by documenting the amount of eligible work 
and making provisions through the apportionment process, thus ensuring 
no duplication of insurance benefits.

Equipment and Contents Repair and Replacement
    Costs contained in this category are relatively low since its focus 
is the repair and replacement of damaged equipment, computer systems, 
contents and furnishings. More specifically, this category includes 
costs associated with the:
    (1) Replacement of destroyed vehicles;
    (2) Installation and replacement of telecommunication and computer 
systems, and,
    (3) Replacement of destroyed building contents and furnishings.
    The repair and replacement of larger, more permanent structures, 
such as buildings, water mains, and transportation components are 
included in the Infrastructure category.

Death and Disability Benefits
    Costs contained within this category are for certain contractually 
obligated death benefits, increased pension contributions, and other 
costs associated with the death or disability of emergency personnel as 
a direct result of the disaster. Specifically, this category includes 
costs for:
    (1) Funeral and memorial services;
    (2) Lump sum line of duty benefits;
    (3) Increased pensions due to line of duty deaths and increased 
disability retirements;
    (4) Leave payout to beneficiaries; and,
    Cost of living adjustments for the State's pension contribution

Hazard Mitigation
    This category contains costs associated with FEMA's 404 Hazard 
Mitigation Grant Program (HMGP), which for DR-1391-NY provided funds 
for long-term hazard mitigation measures against terrorism. Funding for 
HMGP is generally 15 percent of the total estimated Federal disaster 
assistance to be provided by FEMA under the declaration. That 15 
percent is cost-shared on a 75/25 Federal/State and local ratio. For 
this event, it was capped at 5 percent of that total, limited to the 
disaster area, and intended for projects that protect infrastructure 
and systems essential to the City's continued viability. These 
parameters on the HMGP were implemented due to the immense financial 
size of the disaster, particularly where the disaster assistance that 
serves as the basis for the HMGP allocation was provided at 100 percent 
federal expense, with no State or local cost-share. FEMA considered 
many projects, including those that:
    (1) Protect public infrastructure and utilities;
    (2) Protect key governmental and healthcare facilities;
    (3) Promote awareness initiatives;
    (4) Ensure the continuity of government and business operations;
    (5) Promote high-rise building safety; and,
    (6) Protect public landmarks.

Administration
    This category includes costs associated with administering all of 
the FEMA Federal grant programs for DR-1391-NY. The most significant 
and costly items in this category are those associated with:
        (1) Grant management costs (including the FTA);
        (2) FEMA administrative costs;
        (3) Contractor costs; and,
        (4)Administrative allowances.

New Jersey
    Included within this category are all costs funded through EM-3169-
NJ. The most significant and costly projects in this category were 
those associated with emergency protective measures taken by the State 
of New
    Jersey and its associated entities. Specifically, this category 
contains funds expended by New Jersey resources to:
    (1) Provide logistical and operational support to NYC;
    (2) Evacuate Lower Manhattan;
    (3) Transport and treat the injured;
    (4) Establish emergency staging areas for rescue and recovery 
operations;
    (5) Secure bridges and tunnels; and,
    (6) Manage traffic to and from New York City.
    Not included in this category are New Jersey projects that were 
sponsored by the New York State Emergency Management Office.

Individual and Family Grant
    Costs contained within this category are for projects in which 
individuals, not public entities, were the ultimate beneficiaries of 
services. The most significant and costly projects in this category are 
those associated with the Human Services Program, which includes costs 
for:
        (1) Mortgage and Rental Assistance;
        (2) Temporary Housing;
        (3) Individual and Family Grants;
        (4) Disaster Unemployment;
        (5) Crisis Counseling; and,
        (6) Disaster Food Stamps.
    Also included in this category are funds expended via Interagency 
Agreements for:
        (1) Expanded health care monitoring for rescue workers;
        (2) Establishment of a health registry;
        (3) Medical screening/health assessments of Federal workers; 
        and,
        (4) Residential cleaning and sampling.
    Costs associated with operating the Family Center are also included 
in this category.
    While all of the categories of spending listed above are important, 
the Crisis Counseling program was the most significant FEMA had 
established since the Murrah Building bombing in Oklahoma City in 1995. 
As with the Oklahoma City experience, this program was also of a longer 
duration than most programs associated with disaster-related 
counseling. The issues and challenges to individuals and families such 
as Post-Traumatic Stress Syndrome and other mental health challenges 
caused by such a horrific event are manifested in the size and scope of 
this program.
    The largest program in terms of financial costs was the Mortgage 
and Rental Assistance (MRA) program. This program was deleted from the 
Stafford Act with the passage of the Disaster Mitigation Act of 2000. 
However, that Act and the provisions for the deletion of MRA were not 
yet in effect in September of 2001. As such, it was still an eligible 
program and available for this disaster. The MRA program authorized 
temporary mortgage or rental payments to or on behalf of individuals 
and families who experienced financial hardship caused by a major 
disaster. Given the need to show causality, as well as a requirement 
that the applicants have received a written notice of dispossession or 
eviction, this had always been a challenging program to administer. 
Given the population size of the immediate area impacted by this event, 
this was an especially difficult program to administer in both an 
urgent and equitable manner. However, despite all of those challenges, 
a significant number of applicants were assisted through this program.
    The most challenging program, among human services programs, was 
the Individual and Family Grant (IFG) program. Traditionally this 
program helps individuals and families to replace household items and 
provides special help for those without adequate insurance to pay for 
some medical and funeral expenses. The most difficult aspect of the IFG 
program was the payment for air conditioners based on the contaminated 
air quality caused by the destruction of the towers.
    By the time determinations had been made regarding air quality, 
most home inspections, FEMA's chief means of verification of damage, 
had already been performed. The EPA's warnings regarding the air 
quality were real, as were the concerns of residents. Therefore, rather 
than re-inspect thousands of homes, FEMA and the State of New York 
accepted self-certifications by residents as to the urgency of their 
need and to their contention that they were replacing air conditioners 
previously owned.
    While FEMA and the State entered into this program cognizant of the 
risk of fraud, as with many emergency- related programs, we err on the 
side of safety with the assumption that we could assure more 
accountability as the recovery continues. The aggressive, and at times 
deceptive, approach by vendors anxious to encourage purchases presented 
a serious complication. The fact that there was no re-inspection and 
the vendors' approach contributed to fraud and abuse in the IFG 
program. Although this program was abused, it also ensured that those 
most in need of such assistance received help.
    Undeniably, the WTC disaster impelled us to move quickly and 
compassionately. However, it is also our duty to ensure that our 
programs provide the benefits intended under the law to eligible 
applicants. The experience with the September 11th IFG program 
underlines the importance of balancing compassionate service with the 
need for accountability. To provide a clear understanding of how 
effectively the program is operating, the
    States must perform inspections and, barring those, random 
eligibility samples throughout the process.

Conclusion
    Taken together, these project areas represent an overall picture of 
the damage and the steps taken to repair the damage and to assist the 
individuals, families, and communities who suffered the most direct 
pain and loss from this national event.
    Even a brief review of the different categories of spending serves 
as a reminder of the various forms of disruption and chaos caused by 
the event but it is also a reminder of the heroic work that took place.
    I appreciate the opportunity to share with you the details of 
FEMA's role in response, recovery, and mitigation for the World Trade 
Center disaster, and I will do my best to answer any questions you may 
have.

 Prepared Statement of Mr. Richard L. Skinner, Inspector General, U.S. 
                    Department of Homeland Security

    Good afternoon Mr. Chairman and Members of the Subcommittee. I am 
Richard L. Skinner, Inspector General for the Department of Homeland 
Security. Thank you for the opportunity to be here today to discuss the 
work of the Office of Inspector General (OIG) in response to the 
terrorist attacks of September 11, 2001, in New York City. During the 
period of the federal response, I served as the Deputy Inspector 
General for the Federal Emergency Management Agency (FEMA). 
Subsequently, I became the Deputy Inspector General, and later 
Inspector General for the Department of Homeland Security.

OIG RESPONSE TO SEPTEMBER 11, 2001
    The events of September 11, 2001, resulted in catastrophic loss of 
life and physical damage as well as loss to the business and 
residential infrastructure in the lower part of the Borough of 
Manhattan. FEMA applied the full range of authorized disaster 
assistance programs to address the post-disaster needs of the City of 
New York and its citizens, including grants for Public Assistance, 
Temporary Housing (specifically Mortgage and Rental Assistance), 
Individual and Family Grants, Disaster Unemployment Assistance, Crisis 
Counseling Assistance and Training, and Legal Services. However, due to 
the unique circumstances of this disaster--i.e., managing the 
consequence of a terrorist event rather than the consequences of a 
natural disaster--FEMA had to use its authorities and programs more 
broadly than ever before. As a result, FEMA's authorities were not 
adequate to meet everyone's expectations in recovering from the 
unprecedented needs created by this event.
    On September 17, 2001, our investigators arrived in New York City 
and met with the Federal Coordinating Officer, representatives of the 
U.S. Attorney's Southern and Eastern District Office, the Manhattan 
District Attorney's Office, the New York Police Department, the Port 
Authority Police Department, the City of New York Department of 
Investigations, and many other investigative organizations with 
jurisdiction over the World Trade Center disaster. The purpose of those 
meetings was to provide and receive information; explain our mission of 
aggressively investigating and recommending prosecution of anyone 
attempting to defraud FEMA; and, to fulfill our objectives of:
        <bullet> Participating in public service announcements
        <bullet> Conducting fraud awareness briefings
        <bullet> Organizing a multi-agency task force to collectively 
        address fraud
        <bullet> Reviewing applications through computer matching
        <bullet> Monitoring debris removal
        <bullet> Participating in press conferences with the U.S. 
        Attorney's Office
        <bullet> Distributing FEMA fraud Hotline posters and 
        information
    During the initial first eight months, a satellite office was 
established in Manhattan where our investigators worked round-the-
clock, in three shifts with six agents per shift. In April 2002, 
investigators transitioned to two/12-hour shifts, and maintained six 
agents per shift. By February 2003, investigators were working one/12-
hour shift with six agents. The Agent in Charge of the FEMA OIG Eastern 
District Investigations Branch Office in Atlanta, Georgia provided 
supervisory oversight of the World Trade Center investigations.
    By early October 2001, we also deployed teams of auditors and 
inspectors from our headquarters and various field offices to the New 
York City Disaster Field Office (DFO). Our mission was to (1) assist 
the Federal Coordinating Officer in reviewing and assessing procedures, 
practices, and controls in place throughout the operation; (2) identify 
and prevent fraud; and (3) assure FEMA's Director that all possible 
actions to protect public welfare and to ensure the efficient, 
effective, and economic expenditure of federal funds were undertaken. 
One team of auditors and inspectors worked directly with the Federal 
Coordinating Officer and monitored set-up and operation of the DFO. 
Another team of auditors worked with FEMA's public assistance staff 
while a team of inspectors worked with FEMA's individual assistance 
program staff.

INVESTIGATIVE ACTIVITIES
    We received allegations of fraud in a variety of ways. While the 
FEMA OIG fraud hotline was our primary source of information, FEMA's 
disaster assistance program staff, the Manhattan District Attorney's 
Office, and other federal, state, and local agencies provided 
information.
    Our investigators received over 1,100 complaints resulting in 
approximately 250 investigations, the majority of these complaints were 
related to fraudulent applications for Mortgage and Rental Assistance, 
Disaster Unemployment Assistance, and individual assistance. We worked 
many of those investigations jointly with the Social Security 
Administration OIG, the New York Department of Investigations, and 
other law enforcement agencies. We arrested or indicted 117 individuals 
resulting in 96 convictions, 10 dismissals, 3 warrants, and 8 
investigations pending final disposition. Further, the approximate 
aggregate dollar amount that can be attributed to our investigative 
activity is $940,000 in recoveries, $6.9 million in restitutions, $2 
million in fines, and $8 million in cost savings to the federal 
government.

Individual Assistance
    Our investigative activities in response to the World Trade Center 
closely paralleled a profile we learned from responding to prior 
catastrophic disasters. We projected that the first investigations 
would involve false claims for individual assistance, which included 
the Mortgage and Rental Assistance, Disaster Unemployment Assistance, 
Individual and Family Grants programs, and other associated programs to 
assist individuals affected by the disaster.
    During our initial meeting with representatives of both the U.S. 
Attorney in the Eastern and Southern Districts, it was mutually agreed 
that the Manhattan District Attorney's Office would prosecute the 
smaller individual assistance cases while the U.S. Attorney's offices 
would pursue debris removal cases.
    Examples of the individual assistance cases accepted by the 
Manhattan District Attorney's Office were:
        <bullet> Claims for damage to residences owned by others
        <bullet> Claims for damage to a residence where no damage 
        occurred
        <bullet> Claims for pre-existing damage
        <bullet> Claims for mortgage and rental assistance
        <bullet> Claims in the names of decedents
        <bullet> Renters filing claims purporting to be landlords

    Mortgage and Rental Assistance Program
    The Mortgage and Rental Assistance (MRA) program was designed to 
cover rent or mortgage payments for victims who suffer financial 
hardship as a result of a major disaster. Victims who were unable to 
pay their rent or mortgage and received written notice of eviction or 
foreclosure may have been eligible for MRA grants.
    One example of an MRA-related investigation involved a person who 
was temporarily employed by FEMA at the Applicant Assistance Center in 
Manhattan. The employee participated in a scheme to defraud FEMA by 
filing false claims under the MRA program. To further the scheme, he 
and seven others obtained, or helped to obtain, over $1 million in MRA 
grants based upon applications that contained fake phone bills and 
bogus driver's licenses, which were intended to prove residency at a 
particular location, or identified residential addresses that were 
actually commercial mail receiving facilities. Additionally, these 
individuals enlisted accomplices to create false documents, submit 
false claims, vouch for information provided to FEMA, and to receive 
grant payments. In April 2006, with the cooperation of the Secret 
Service and the Postal Inspection Service, six were arrested and 
charged in the Eastern District of New York, in a 52-count indictment 
to include false claims, conspiracy, mail fraud, wire fraud, and making 
false statements. Two of the individuals pleaded guilty, one remains a 
fugitive, and prosecution is pending on the remaining four defendants.
    Other examples of related investigations include two individuals 
who claimed damage to their personal property items from debris and 
smoke filled air in their apartment, which was located 35 blocks from 
the World Trade Center site. Each received $10,000 in grants from FEMA. 
Another individual claimed her estranged husband was a window washer at 
the World Trade Center and died in the attack. She received $3,200 in 
rental assistance before we determined the husband was alive and living 
on Long Island. All of these individuals were successfully prosecuted.
    Individual and Family Grants Program
    The Individual and Family Grants (IFG) program was designed to meet 
the disaster-related necessary expenses or serious needs of disaster 
victims which could not be met through other provisions of the Stafford 
Act; or, through other means, such as insurance; other federal 
assistance; or voluntary agency programs. Eligible expenses may include 
those for real and personal property, medical and dental expenses, 
funeral expenses, transportation needs, and other expenses specifically 
requested by the state.
    On October 18, 2001, air purifiers, air filters, and vacuum 
cleaners with high efficiency particulate air filters were added to the 
list of IFG eligible items. On March 22, 2002, FEMA and the state 
decided to add window air conditioners as an IFG eligible item. 
Eligibility was dependent upon applicants having owned a window air 
conditioner that was damaged during the event. Traditionally, during a 
home inspection inspectors would verify damage before recommending the 
repair or replacement of an eligible item.
    However, when air conditioners were added as an IFG eligible 
property item, home inspections had been completed. FEMA then decided 
that it would not be cost effective to have inspectors verify damage of 
a single property item. Instead, the state implemented a self-
certification process. Further, on May 1, 2002, FEMA and the state 
authorized advance payments to applicants who were financially unable 
to purchase air quality items. Rather than requiring receipts for such 
items prior to grant approval (which was traditionally required) or an 
ability to document financial need, applicants were permitted to 
certify that they were unable to pay for the items and were asked to 
provide receipts after purchase.
    On February 20, 2003, the Associated Press reported that people who 
did not suffer from the effects of contaminated air filed 90 percent of 
the applications for reimbursement of IFG eligible air quality items. 
The source of that figure was FEMA's World Trade Center disaster 
recovery manager. The manager's estimate was based on an assumption 
that, of the 225,000 applicants for air quality items, only the 25,000 
applicants that lived in Manhattan and who were eligible to participate 
in an Environmental Protection Agency home cleaning program, suffered 
from contaminated air. Consequently, the manager concluded that 90 
percent of the applications submitted were from individuals who had not 
suffered from the effects of contaminated air.
    We determined there was no indication that eligible applicants did 
not receive assistance. However, because FEMA and state management and 
control over IFG eligible air quality items was reduced, many 
applicants received assistance for which they may not have been 
eligible, which increased opportunities for fraud and abuse.
    In response to these concerns, and at our urging, FEMA implemented 
a sampling program to verify applicant eligibility and to identify 
abusers. FEMA selected two random samples: one of applicants who 
repaired or replaced air conditioners, and one of applicants who 
received advances for air quality items. Although the samples were not 
designed to be statistically valid, the results suggest that a large 
number of applicants were not suffering from the effects of 
contaminated air.
    In January 2003, FEMA selected a sample of 4,435 people who applied 
for assistance to buy window air conditioners and visited their homes 
to verify that they had window air conditioners before the disaster 
occurred. FEMA representatives inspected damaged air conditioners or, 
when damaged air conditioners had been disposed of, inspected 
indentations left in windows by the air conditioners. The home 
inspections identified 1,704 applicants who had evidence of the prior 
existence of a window air conditioner, and 2,731 applicants, or 62%, 
who did not and therefore were probably ineligible for assistance.
    The second sample of 5,602 applications was selected in March 2003 
to verify the proper use of $5.8 million in advances for air quality 
items. Applicants who received advances were required to submit 
receipts to the state within 30 days after receiving the funds, but 
FEMA said that none of the applicants included in the sample complied 
with this requirement. As of July 22, 2003, FEMA had completed 5,029 
home inspections and determined that 3,347 applicants had purchased the 
air quality items. FEMA referred the 1,682 applicants, or 33%, who had 
not purchased the air quality items to the state for collection.
    These findings and conclusions were discussed with Manhattan 
District Attorney's Office prosecutors who expressed concern proving 
criminal intent. The prosecutors felt it would be their burden to prove 
that a subject's intended purpose was to defraud FEMA, yet the 
prosecutors were not certain they could satisfy that element. While 
prosecutors did state that they would be willing to review such cases, 
unless our investigators had solid proof of intent, prosecutors would 
be more likely to decline prosecution. Also, prosecutors expressed 
concern over the low dollar amount--about $1,200--of each potential 
case and over the administration of the program, which allowed 
applicants to receive funds and purchase items with no stated purchase 
deadline.
    The Assistant U.S. Attorneys expressed similar concerns. 
Specifically, the lack of program criteria allowing applicants to 
receive funds and purchase items with no stated purchase deadline, and 
the low dollar amount, made the cases very unattractive. An additional 
issue for the U.S. Attorney was the appearance of selective prosecution 
for which a logical defense would be why is the government prosecuting 
certain individuals when it chose not to prosecute all 200,000 of the 
potential fraudulent claims.
    We reviewed many allegations and referrals concerning this matter 
and determined, from a historical and reasonable approach, that with 
few exceptions, the allegations and referrals did not appear to have a 
great deal of prosecutorial merit. However, both federal and state 
prosecutors stated that if the case involved false documents, they 
would be more likely to prosecute those subjects. We conducted 12 
investigations, the subjects of which were prosecuted by the Manhattan 
District Attorney's Office. Two individuals filed claims to obtain 
filters for their window air conditioners when in fact the high-rise 
building where they resided had central air conditioning. Another 10 
individuals, when confronted by our investigators, confessed to 
submitting false invoices to support their claims for IFG assistance. 
Last, we investigated complaints against 16 air quality products 
companies for using unethical sales tactics and referred them to the 
New York State Attorney General's office.
    Nevertheless, we did have success, in our opinion, mitigating some 
of the fraud. As a result of FEMA's intensive efforts to educate the 
public as to the true intent of the IFG Program and its aggressive home 
inspection sampling initiative, coupled with our investigative 
initiatives, which received considerable media coverage, more than 
100,00 of the original 229,000 applicants voluntarily chose to withdraw 
from the program. They either returned or did not accept their grant 
award. Given that the average IFG award was about $1,200, these actions 
helped FEMA save more than $120 million.

Public Assistance
    Public assistance investigations, the majority of which deal with 
debris removal and generally involve primary contractors and 
subcontractors, are more complex and take longer to complete than the 
individual assistance investigations. Examples of public assistance 
cases the U.S. Attorneys agreed to prosecute dealt with the removal and 
disposal of disaster related debris. We have long recognized that the 
nature of debris removal operations make it an area where unscrupulous 
individuals and firms could potentially use a disaster for personal 
gain. With our years of experience, we have seen contractors engaged 
in:
        <bullet> Submitting false debris removal invoices
        <bullet> Artificially increasing tonnage hauled
        <bullet> Inflating the number of employees
        <bullet> Falsifying labor and material costs
        <bullet> Bribery, bid-rigging, and kickbacks
    Working jointly with the Internal Revenue Service's Criminal 
Investigations Division and the Postal Inspections Service, we 
investigated the president and owner of a disaster recovery and clean-
up company. This individual and others were convicted in U.S. District 
Court of engaging in a fraud scheme to enrich themselves by taking 
advantage of federal disaster relief funds in New York and two other 
states. Specifically, the contractor was hired to provide monitoring 
and maintenance services at the Fresh Kills Landfill on Staten Island. 
The contractor misrepresented the hourly rates it was paying employees, 
and submitted false invoices for employee lodging and per diem.
    In another investigation, two contractors working for a trucking 
company were successfully prosecuted. All contractors are required to 
have a valid New York City permit to do business in the city. We 
received information that this trucking company submitted an 
application to remove debris and provided false information as to the 
owner of the company. Working jointly with the New York Department of 
Investigations, we participated in the execution of a New York State 
search warrant at two of its places of business, which produced 
documentation as to the true owner and manager of the company. One 
individual was arrested for submitting false documents to the City of 
New York for a work permit license. A second individual was arrested 
for making false statements in a deposition as to the ownership of the 
company. Both were convicted on multiple counts of perjury.

GENERAL MANAGEMENT OVERSIGHT ACTIVITIES
    As I briefly mentioned, our auditors and inspectors worked in 
direct support of the Federal Coordinating Officer responding to 
specific requests and addressing matters that independently came to our 
attention. Some of the tasks we performed at the Disaster Field Office 
related to accounting and auditing, but some were as varied as tracking 
down missing copy machines. We worked closely with a team of FEMA 
comptrollers and Office of General Counsel representatives, helping 
them with a wide assortment of financial matters. Further, we worked 
with other federal agencies, as well as with state and city 
organizations and voluntary agencies. Our support included establishing 
a partnership with program staff to identify and suggest courses of 
action regarding potential and emerging issues with duplication of 
benefits, donations management, accountable property, program 
limitations and administration, DFO training, and safety and security.

Public Assistance
    We responded to the World Trade Center attack as a partner with 
FEMA's response and recovery components. We deployed a team of auditors 
to monitor public assistance operations and assist in reviewing 
requests for assistance. The team maintained a presence for more than 
18 months after the attack, working with FEMA public assistance staff 
to ensure that recovery efforts were on track and complied with federal 
laws and regulations.
    Our efforts were far from the traditional role of the OIG as this 
was an extremely unique situation. We were able to contribute 
significantly to the effectiveness of FEMA's response by providing 
proactive oversight rather than reactive hindsight. Early in the 
process we briefed applicants on how to qualify for FEMA assistance and 
maintain records, and we reviewed accounting systems of some of the 
local governments to ensure they were adequate for collecting necessary 
cost data.
    We reviewed requests for funding and the detailed worksheets for 
proposed projects and met with public assistance program staff on a 
regular basis to provide them technical assistance on allowable costs. 
At FEMA's request, we reviewed questionable bills submitted by 
applicants for payment and FEMA's implementation of its policy on 
heightened security eligibility.
    We did not conduct any traditional compliance audits of public 
assistance grants, nor did we audit any costs incurred under the 
Consolidated Appropriations Resolution Act of 2003, which provided that 
costs not eligible for public assistance funding, referred to as 
associated expenses, would be funded with the remainder of the $8.8 
billion of authorized FEMA funding. FEMA estimated that $7.6 billion 
would be required for Stafford Act purposes and $1.2 billion would be 
used for associated expenses. Associated expenses include such costs as 
local government employee salaries, heightened security costs, and the 
``I Love NY'' campaign, which encouraged tourism and visitors to the 
state.

Individual Assistance
    In response to congressional inquiries, we reviewed the delivery of 
individual assistance in New York after September 11, 2001. The review 
focused on issues that needed to be addressed by both FEMA and Congress 
as they considered regulatory and legislative changes to improve FEMA's 
delivery of assistance to victims of future terrorist attacks that 
result in presidential disaster declarations. The following is a 
summary of some of the issues raised during our review, FEMA's Delivery 
of Individual Assistance Programs: New York--September 11, 2001 
(December 2002).

Eligibility Issues in the Mortgage and Rental Assistance Program
    FEMA has not implemented the MRA program on a large scale because 
previous disasters did not coincide with nor result in widespread 
unemployment or national economic losses. From the inception of the MRA 
program until September 11, 2001, only $18.1 million had been awarded 
in 68 declared disasters, compared to approximately $76 million awarded 
in response to the New York World Trade Center disaster alone. Because 
the program was seldom used, Congress eliminated it when the Disaster 
Mitigation Act of 2000 (DMA) was enacted, making the program 
unavailable for disasters declared after October 14, 2002.
    FEMA had to face the challenge of implementing this program in a 
disaster that caused significant economic consequences, including not 
only the obvious economic impact of the incident itself but also the 
indirect economic effects felt throughout the nation. The language of 
the Stafford Act's MRA authority established, as a criterion for 
assistance, a written notice of dispossession or eviction. The law was 
silent, however, on what constitutes a financial hardship. This 
omission required FEMA to interpret to what extent a personal financial 
loss constitutes a financial hardship, and to determine whether that 
hardship resulted directly from the primary effects of the attack or 
from the secondary effects on the nation.
    The MRA program's limited use, the broad economic impact of this 
unprecedented event, and FEMA's challenge to differentiate between 
primary and secondary economic effects contributed to difficulties in 
delivering timely and effective assistance. The MRA program was unique 
because it addressed limited, individual economic losses versus 
physical damage resulting from a disaster. Traditional inspection of 
damages as a basis for program eligibility determinations, therefore, 
did not apply to MRA. Individual financial hardships caused by the 
disaster were evaluated on a case-by-case basis. FEMA attempted to 
clarify eligibility criteria that required a clear link between 
physical damage to the business or industry caused by the disaster and 
an applicant's loss of household income, work, or employment regardless 
of geographic location.

State Capability to Implement the Individual and Family Grants Program
    Applications for IFG assistance rose sharply in June 2002, as 
applicants requested assistance for air quality items. FEMA believed 
the increase in new applications coincided with public announcements 
being made by the Environmental Protection Agency (EPA) regarding the 
poor air quality in the city and the need for air-conditioning and 
related items because of the unusually warm spring and early summer. 
The state believed the surge in new applications coincided with the 
closing of assistance from many nonprofit organizations. FEMA received 
an average of 7,660 applications per month from June 2002 to August 
2002 for air quality items. Applications for IFG assistance typically 
do not spike at this point in the recovery phase of a disaster.
    The unanticipated increase in applications received after June 2002 
also may have been related to two other decisions regarding assistance 
for air quality items. First, assistance was made available to all 
households in the five boroughs of New York City. The broad geographic 
eligibility was not related to the areas of actual impact. A better 
model might have been to limit eligibility to the same areas identified 
by the EPA and the New York City Department of Health for purposes of 
the apartment cleaning and testing program. Had the IFG program and the 
EPA testing and cleaning program worked more closely in terms of 
geographic eligibility, the IFG program would have had reasonable and 
justifiable boundaries. Second, as a result of concerns expressed by 
certain advocacy groups, applicants were allowed to certify that they 
were unable to pay for the air quality items (costing as much as 
$1,600). Funding was advanced to those applicants and they were 
requested to provide receipts after purchase. There were few 
limitations placed upon who could qualify for this ``unable to pay'' 
option. As I have previously noted, this may have increased the 
likelihood of fraud and abuse.

Interagency Coordination Challenges
    I cannot stress enough the need for interagency data sharing and 
coordination to improve disaster response, recovery, and oversight. 
After 9/11, responsibilities shared among FEMA, EPA, the U.S. 
Department of Justice's (DOJ) Office for Victims of Crime, and 
voluntary agencies, for example, were not defined clearly enough to 
distinguish roles and establish the sequence of delivery of assistance. 
Recovery from the event highlighted the need for data sharing 
agreements regarding shared roles and responsibilities among key 
agencies likely to respond to future criminal actions.

Information Data Sharing
    Although progress has been made in this area since 9/11, much more 
needs to be done. Accordingly, I would like to again emphasize the need 
for interagency data sharing and coordination through three principal 
means: direct access to FEMA data, computer matching agreements, and 
real-time data exchange.
    Hurricane Katrina clearly demonstrated that law enforcement needs 
direct access to disaster victims' personal information, not only to 
reconnect family members and locate missing persons, but also to 
convicted sex offenders who relocated as a result of the disaster. 
Hurricane Katrina left over 5,000 children missing and more than 2,000 
unaccounted for registered sex offenders. The process employed by FEMA 
to fulfill law enforcement agency requests for FEMA records under the 
Privacy Act is untimely. The FBI has indicated that these requests 
sometimes take days to fulfill. A similar protracted process was used 
for governors to request information from FEMA to obtain data on sex 
offenders who relocated to their state. The HHS believes, and we agree, 
that evacuated, registered sex offenders are a potential threat to 
children until appropriate law enforcement has information to identify 
and monitor these individuals. Timely access to FEMA data can assist 
law enforcement in protecting public safety and security, such as in 
the apprehension of fleeing felons.
    In support of these issues, FEMA published a notice in the Federal 
Register, on July 6, 2006, adding a new routine use to its Disaster 
Recovery Assistance system of records that allows for greater 
information sharing with federal agencies, state and local governments, 
or other authorized entities for the purposes of reunifying families, 
locating missing children, voting, and with law enforcement entities in 
the event of circumstances involving an evacuation, sheltering, or mass 
relocation, for purposes of identifying and addressing public safety 
and security issues. As FEMA noted, these routine uses are being added 
to resolve any ambiguities about FEMA's authority to share information 
under these circumstances and to ensure that necessary information can 
be disseminated in an efficient and effective manner. This is a step in 
the right direction.
    Another advantageous means of data sharing involves computer 
matching. Computer matching agreements among federal agencies that 
provide disaster assistance are often necessary to detect fraud, waste, 
and abuse. Agencies such as the Social Security Administration and the 
Small Business Administration, for example, have expressed a high 
degree of interest in such agreements with FEMA. An agreement between 
FEMA and the Department of Housing and Urban Development was recently 
executed to identify individuals who are receiving excess or duplicate 
housing assistance relating to Hurricanes Katrina and Rita. Yet, to 
date, only the HUD computer matching agreement has been executed, 
eleven months after Katrina's landfall. Without such agreements, the 
prospect for protecting the taxpayer's dollars and prosecuting fraud is 
diminished.
    One more means of data sharing I would like to convey is the real-
time exchange of information among federal agencies that provide 
disaster assistance. This exchange of information is necessary to 
verify identity and eligibility, as well as to create a holistic 
approach for the effective delivery of disaster assistance. According 
to FEMA's Guide to Recovery Programs, the federal government has over 
90 disaster assistance programs. Real-time data sharing agreements are 
necessary to prevent the duplication of federal disaster assistance and 
to ensure that disaster victims receive the full compliment of disaster 
assistance needed for a timely and effective recovery. Currently, FEMA 
has a contract with the commercial data reseller ChoicePoint to 
authenticate the identity of disaster assistance applicants. Since 
Hurricane Katrina, approximately $4.3 million has been expended for 
their authentication services. Furthermore, it is our understanding 
that FEMA has extended this contract with ChoicePoint through June 
2007. However, interagency data sharing agreements between federal 
agencies that provide disaster assistance would lessen the government's 
reliance upon commercial data resellers such as ChoicePoint for 
identity authentication. For example, data sharing agreements between 
FEMA and the Social Security Administration and the Postal Service can 
verify the name, social security numbers, and address of an individual 
applying for disaster assistance. These agreements will result in 
greater intergovernmental collaboration in the delivery of disaster 
assistance, which corresponds with the intent of the National Response 
Plan and FEMA's Strategic Plan Fiscal Years 2003-2008, which charges 
FEMA to serve as the nation's knowledge manager and coordinator of 
emergency management information.
    I would like to note that we have an ongoing review of how FEMA's 
data sharing processes and procedures can be enhanced to promote 
effective and efficient disaster response, recovery, and oversight. We 
look forward to sharing our findings of this review with you when it is 
complete. The following are examples where interagency data sharing and 
coordination after the 9/11 terrorist attacks could have been approved.

Response to Residential Air Quality, Testing, and Cleaning Requires 
More Coordination
    EPA was aware, based on its work in the aftermath of the 1993 World 
Trade Center terrorist bombing, that the World Trade Center complex 
contained asbestos material. Neither FEMA nor New York City officials, 
however, initially requested that EPA test or clean inside buildings 
because neither EPA nor the New York City Department of Environmental 
Protection could identify any specific health or safety threat. EPA 
nevertheless advised rescue workers early after the terrorist attack 
that materials from the collapsed buildings contained irritants, and 
advised residents and building owners to use professional asbestos 
abatement contractors to clean significantly affected spaces. 
Directions on how to clean the exterior of buildings affected by dust 
and debris were provided to building owners by the New York City 
Department of Environmental Protection, and directions on how to clean 
interior spaces were provided by the New York City Department of 
Health.
    Neither FEMA nor EPA traditionally had been involved in testing and 
cleaning private residences. Neither agency is specifically authorized 
to provide such services. However, when a potential health and safety 
threat was identified and New York officials documented that interior 
testing and cleaning would beneficially impact the City's economic 
recovery, FEMA used its debris removal authorities under the Stafford 
Act to provide the necessary funding.
    However, the program to test and clean residences in lower 
Manhattan did not commence until months after the disaster. Although 
FEMA has the responsibility to coordinate recovery from declared 
disasters, FEMA must depend on the particular expertise of the EPA in 
circumstances involving possible air contaminants or environmental 
hazards. EPA must confirm that such hazards constitute a public health 
and safety threat before FEMA can provide funding for emergency 
response. We suggested that FEMA be more proactive in requesting EPA to 
conduct necessary testing and/or studies to determine if a public 
health or safety threat exists in future, similar disasters so that 
cleaning efforts could begin much earlier in the recovery phase. FEMA 
also should address the roles of state and local agencies in such 
circumstances, as consultation with those agencies would provide useful 
information in review or evaluation.

Department of Justice Authorities Compliment FEMA Authorities
    Because the World Trade Center complex and Pentagon were declared 
disasters by the President resulting from criminal actions, both FEMA 
and DOJ's Office for Victims of Crime had authority to provide victim 
assistance. FEMA's Crisis Counseling Assistance and Training Program 
(CCP) providers found it necessary to offer support services that went 
beyond the normal levels of CCP mental health programs. Further, too 
many entities were involved at the outset to ensure coordination and 
avoid potential confusion of services provided to victims.
    The event uncovered potential DOJ-FEMA overlaps in some programs 
covering disasters that are also crime scenes. FEMA's CCP program funds 
crisis counseling and the IFG program reimbursed victims of disasters 
for medical, dental, and funeral expenses. The Victims of Crime Act of 
1984, as amended (42 United States Code Sec. 10603), authorizes DOJ's 
Office for Victims of Crime to provide financial assistance to victims 
of federal crimes and of terrorism and mass violence in the form of (1) 
grants to state crime victim compensation programs to supplement state 
funding for reimbursement of the same out-of-pocket expenses, including 
mental health counseling; and, (2) grants to state victim assistance 
agencies in support of direct victim services such as, crisis 
counseling, criminal justice advocacy, shelter, and other emergency 
assistance services. Because the event was both a disaster and a 
criminal act, programs of DOJ's office for Victims of Crime were also 
applicable. As a result, expenses medical, dental, and funeral expenses 
were covered by DOJ.
    FEMA, the Office for Victims of Crime, and DOJ's Executive Office 
for United States Attorneys subscribed to a Letter of Intent to ensure 
that victims received needed services and information and to articulate 
services needed in responding to catastrophic federal crime. The Letter 
of Intent should serve as the foundation for future cooperative 
activities but more detailed and comprehensive guidance is necessary to 
ensure that services delivered to disaster victims who are also victims 
of crime are appropriate, consistent, and not duplicative. Those 
objectives could be accomplished through a Memorandum of Understanding 
between FEMA and DOJ's Office for Victims of Crime that formalizes the 
relationship, the responsibilities and authorities to be applied, 
programs, time frames, and sequencing when a disaster is also a crime 
scene.

Coordination with Voluntary Agencies
    Voluntary Agencies (VOLAGS) typically provide immediate emergency 
assistance to victims, while FEMA addresses short and long-term 
recovery needs. Near the end of the recovery cycle, VOLAGS address 
victims' unmet needs. After the September 11, 2001 attacks, individuals 
donated time, resources, and money in record volumes to a large number 
of VOLAGS. The overwhelming generosity and rapid influx of cash 
donations likely contributed to the ability of VOLAGS and other groups 
to provide higher levels of assistance. Since so many VOLAGS, ad hoc 
organizations, and other entities not traditionally in the sequence of 
delivery were distributing assistance, it was difficult to collect 
accurate information necessary to understand the scope of assistance 
being provided. FEMA, attempting to bring order to the chaos created by 
the multitude of voluntary organizations, developed a matrix of various 
government and non-government entities. At one point, this matrix 
included over 100 organizations and was used to identify their 
contributions to disaster recovery efforts and the types of assistance 
provided. FEMA validated the information and became familiar with the 
kinds of assistance being offered so that staff could make informed 
referrals. In spite of those efforts, FEMA was not able to assure that 
all voluntary agencies were coordinated appropriately to ensure that 
benefits were not duplicated among disaster programs, insurance 
benefits, and any other type of disaster assistance.
    Historically, FEMA has not considered the assistance of voluntary 
agencies to be duplicative of its assistance in most declared 
disasters. In response to this event, however, VOLAGS far exceeded 
their traditional role in the provision of assistance. FEMA, to ensure 
timely assistance to victims, decided to activate its own individual 
assistance program and to treat VOLAG and other non-governmental 
assistance as non-duplicative. Had FEMA expended the resources 
necessary to fully identify and quantify such assistance, the timely 
provision of urgently needed assistance would have been delayed. FEMA 
acknowledges, however, that some people may have received assistance 
for similar losses from more than one source.
    Regardless of FEMA's decision not to identify and quantify 
voluntary agency assistance on a case-by case basis, the potential that 
duplication occurred did exist although the nature and amount of 
duplication remains unknown. FEMA needs to be better able to anticipate 
the proactive role non-governmental organizations will play in disaster 
recovery operations and attempt to coordinate relationships with those 
organizations through protocols such as Memorandums of Understanding to 
alleviate the potential for duplicating benefits.
    Improvements have been made since the 9/11 attacks. The Coordinated 
Assistance Network was established through a memorandum of 
understanding in 2003 and was first piloted during the 2004 hurricane 
season in Florida. The following organizations signed this document: 
American Red Cross, Salvation Army, Alliance of Information and 
Referral systems, United Way of America, United Services Group, 
National Voluntary Organizations Active in Disaster, and Safe Horizon. 
The goal of the Coordinated Assistance Network is to afford more 
efficient and effective service coordination among voluntary, as well 
as governmental, agencies during disaster events. It was designed as a 
communication mechanism for services providers and to identify any gaps 
or redundancies in services. The network allowed registered 
organizations to access information on available services and to share 
information on the levels of services delivered to individuals, 
families, or households. It also allowed disaster victims to explain 
their needs and register only once, as registration afforded disaster 
victims a registration with all service providers on the network. In 
response to the 2005 hurricanes in the Gulf Coast region, five 
organizations were using the network and 81,817 clients records were in 
the system as of September 30, 2005.
    Mr. Chairman, this concludes my prepared remarks. I would be happy 
to answer any questions that you or the Subcommittee may have.
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Prepared Statement of the Honorable Rose Gill Hearn, Commissioner, New 
                 York City Department of Investigation

    Good afternoon Chairman Rogers, Congressman Meek, Members of the 
Committee. It is a privilege to address this Committee and describe the 
foresight of and efforts made by the City of New York to prevent fraud 
and waste in connection with the clean up of the World Trade Center 
site immediately following the destruction of the Twin Towers and 
surrounding buildings. New York City's experience demonstrates that the 
proactive measures taken were highly effective in detecting and 
preventing fraud and waste, without compromising the ability of the 
emergency efforts to proceed with remarkable efficiency.
    Appointed by Mayor Michael R. Bloomberg, I am the Commissioner of 
the New York City Department of Investigation, known as DOI, which is 
one of the oldest law-enforcement agencies in the country. Created in 
the wake of the Boss Tweed scandals of the 19th century, DOI is an 
agency of New York City's government charged with rooting out, but 
perhaps more importantly, preventing corruption within or impacting 
City government. That mission is a challenging one as New York City is 
one of the largest employers with one of the largest budgets in the 
country. DOI often works with the federal and state prosecutors who 
have jurisdiction over the City of New York. We work jointly with other 
law enforcement agencies such as the New York City Police Department, 
the FBI and the federal Postal Inspectors. DOI is also empowered by law 
to investigate and report on potential corruption hazards and to advise 
the Mayor and the other branches of City government on measures they 
should take to prevent corruption and the waste of City funds. Thus, we 
do not just try to catch criminals after they have committed crimes, 
but we also devote a substantial amount of our resources to preventing 
crimes before they happen and to preventing the needless loss of 
precious City resources through waste and inefficiency.
    DOI offices are located on Maiden Lane just up the block from what 
was the World Trade Center. On the morning of September 11th, DOI 
personnel and detectives responded to the scene to help with the 
evacuation of the buildings. When the Towers collapsed, the cloud of 
dust and smoke came rushing down Maiden Lane, and debris rained down on 
our building. For days thereafter, DOI personnel became part of the on-
site digging and security operation. My own experience included seeing 
the apocalyptical sight at the World Trade Center: people jumping from 
the fireline seventy stories high in the North Tower; followed by the 
explosion of the second plane into the South Tower; and the collapse of 
the Towers as if they were sandcastles. The City then mobilized in an 
extraordinary way, and DOI was part of that.
    In the aftermath of the 9/11 terrorist attack on the World Trade 
Center, the City had to undertake a clean-up operation that was 
unprecedented in scope and cost. Moreover, it was recognized that the 
City's clean-up would have to be safe, include a sensitive on-going 
search for remains, and allow businesses and residents to return 
swiftly to the densely populated Wall Street financial district, whose 
economic viability was crucial, not only to the City, but to the 
Country as a whole.
    To achieve the goals of the World Trade Center clean-up, it was 
understood that vast amounts of government money would have to be spent 
and spent quickly. Indeed, some of the members of this Committee were 
instrumental in seeing that New York received the money it needed for 
the historic clean-up and recovery effort. However, experience has 
taught us that the expenditure of large sums of government money in an 
emergency situation increases the likelihood of fraud, inefficiency and 
price gouging. Accordingly, based on the concerns of the possibilities 
of fraud and corruption in all aspects of the clean-up effort, Mayor 
Rudolph Giuliani's office asked DOI to put in place a monitoring 
program to prevent exploitation of the emergency situation by 
unscrupulous firms and individuals. That initiative was continued by 
Mayor Bloomberg, who took office on January 1, 2002, and with it 
responsibility for the site and its clean-up, which was completed in 
July 2002. Mayor Bloomberg required DOI and the other agencies to 
continue to be vigilant and proactive about corruption and waste issues 
at the site, a priority in the Bloomberg Administration.
    DOI had already established under non-emergency circumstances such 
a procedure for monitoring various municipal projects, for example, 
construction projects within the City, where there had been a 
particular concern about corruption. Thus, DOI drew on that experience 
in putting a monitoring program together for the World Trade Center 
site but, of course, on a much larger scale.
    In order to accomplish and better manage the necessary clean-up, 
the City divided the 16-acre World Trade Center site, Ground Zero, into 
four quadrants. A construction manager, or CM, was retained for each of 
the four quadrants. (A map of Ground Zero as divided into the quadrants 
is attached to my written materials.) The Cbs were paid based on the 
labor, time and materials they used to carry out the clean-up. The CMs, 
in turn, had hundreds of subcontractors throughout Ground Zero, for 
example, truckers, waste disposal, and demolition companies--industries 
with a long history of organized crime involvement.
    Thus, these contracts were not only enormous, but as ``time and 
materials'' contracts, they presented specific vulnerabilities to fraud 
and abuse from unscrupulous contractors, subcontractors and suppliers 
from which the City needed to protect itself. In addition, the work of 
the contractors and oversight of that work, was complicated by the 
multiple activities going on at Ground Zero during the clean-up due to 
the fact that the 16-acre site was a crime scene with an active 
recovery effort underway for the remains of the thousands of victims of 
the disaster. In combination with the fact that the work was to be 
carried out under the direction of four CMs, rather than one, the 
potential for fraud was increased. Thus, the purpose of the DOI 
monitoring program was, to the best of our ability, ensure that the 
City knew what work was being performed at the site and that the 
billing was appropriate and legitimate.
    The Ground Zero clean-up was remarkably well-coordinated and 
ultimately well-accomplished because one agency, the City's Department 
of Design and Construction (DDC), was given the responsibility of 
managing the project. DDC is the City's construction and engineering 
expert. All four of the Ground Zero CMs reported to DDC. Thus, given 
that DOI was tasked with monitoring the four CMs, we collaborated 
closely with DDC.
    DOI created and implemented the World Trade Center Integrity 
Compliance Monitorship Program, which was in place by early October 
2001. This program required each of the four Ground Zero CMs to retain 
an onsite ``Integrity Monitor'' selected by DOI. Through DOI, each 
Integrity Monitor had the authority to review and audit all of the 
books and records of the contractors working at the site, and to 
maintain a physical presence on the site, including around the 
perimeter of Ground Zero. By virtue of this oversight program, the 
Integrity Monitors scrutinized the contractors' activities in real time 
and functioned as the City's eyes and ears. DOI also required the 
Monitors to establish a hotline number where anyone could call with 
concerns or information. A key feature to the effectiveness of the 
Monitors was that they reported directly to DOI on the contractors 
activities. Thus, if there were any issues or problems, they were 
addressed immediately. Reports of their findings were made on a 
frequent basis to DOI, which set up a trailer right at Ground Zero 
where meetings could readily and frequently take place. DDC was 
included in many of those discussions and received regular reports as 
well. DDC also hired an auditing firm to assist its Engineering Audit 
operation with auditing and payment issues. Together with the Monitors, 
this created strong oversight to detect and prevent fraud and waste.
    The Integrity Monitors were themselves closely monitored by DOI in 
order to ensure that they were performing the kind of work that was 
really needed by the City, and in order to enable DOI to act on their 
findings quickly when necessary. The Monitors had to be tethered to a 
pivotal government oversight agency like DOI would make them a much 
less effective and useful tool.
    DOI's Integrity Monitor program was a good government step because 
it was preventive in nature. By embedding the Monitors with the 
individual contractors, the monitoring program prevented fraud and 
waste by any contractors that were unscrupulous or sloppy, both: (1) 
instituting proper record keeping and work procedures to create a 
culture of legal compliance within each contractor's operations; and 
(2) ensuring accurate accountability to the City.
    The Integrity Monitor model requires specialized firms with legal, 
accounting, law enforcement and investigative expertise. Because this 
model had been used in New York City by DOI, we were fortunate to have 
a number of highly qualified firms ready from which to pick, with whose 
work we were already very familiar. . The Monitors selected by DOI, who 
did an outstanding job under very difficult circumstances, were four of 
the New York areas leading monitoring firms: Getnick & Getnick for the 
Turner Construction quadrant; Stier, Anderson and Malone, LLC for the 
AMEC Construction quadrant; Decision Strategies for the Tully 
Construction quadrant; and Thacher Associates, LLC for the Bovis Lend 
Lease quadrant.
    Thus, DDC was responsible for overseeing the operations of the four 
CMs, subcontractors and suppliers performing work at Ground Zero, and 
under the direction of DOI, the four Monitors maintained oversight of 
those activities.
    DOI oversaw the work of the Monitors by reviewing the results of 
their investigations and audits and by helping to direct and focus 
their activities. DOI held joint meetings with all of the Monitors 
together every week in order to facilitate the dissemination of 
information among the Monitors and to ensure the coordination of joint 
efforts. This was particularly important because the coordination 
helped to ensure that the decentralization of the clean-up effort did 
not in itself breed fraudulent schemes, such as having individual 
workers reported on the payrolls of different companies for work 
performed at the same time or subcontractors double bill for work 
through multiple CMs. DOI was also in constant communication with DDC 
and other government agencies, to make sure that information obtained 
by the Integrity Monitors was communicated quickly to the entities that 
most needed it. Finally, DOI communicated with the other area law 
enforcement and prosecutorial agencies on matters disclosed by the 
Integrity Monitors and ensured an appropriate flow of information 
between these agencies and the Monitors.
    Initially, the Integrity Monitors maintained an on-site presence at 
Ground Zero on a 24-hour basis, seven days a week. Their duties fell 
into general categories of: deterrence, detection and documentation. In 
order to perform these duties, the Integrity Monitors engaged in legal, 
investigative, forensic accounting and engineering analysis. To perform 
their jobs, they reviewed books and records; identified and corrected 
inadequate financial and quality controls; analyzed financial records 
to ensure accuracy and basic contract compliance; assisted with 
clarifying agency policies at the site; analyzed laws and contracts; 
gathered intelligence for the law enforcement community; detected and 
corrected incompetence; and monitored the day to day work on the site. 
And they did all of this with a sensitivity to the City's needs for 
efficiency, speed and cost control.
    Specific investigative, auditing and monitoring activities engaged 
in by the Integrity Monitors included:
        <bullet> Background checks on companies and individuals working 
        at Ground Zero;
        <bullet> Establishment of a hotline to enable anonymous tips 
        and to field complaints from workers on the site;
        <bullet> Observation of employees sign-in/sign-out procedures 
        and reviewing sign-in and sign-out sheets;
        <bullet> Interviews of employees on-site;
        <bullet> Reviewing payrolls to ensure that there were no 
        fictitious employees on the payroll, through comparisons of 
        payroll records with payroll checks issued and payroll records 
        with the daily sign-in/sign-out sheets;
        <bullet> Reviewing payrolls for prevailing wage violations and 
        other labor law violations;
        <bullet> Monitor swipe card system at the site for employees;
        <bullet> Monitor equipment on site to verify its presence and 
        use; ensure billings conformed accordingly;
        <bullet> Auditing inventories of equipment on site and 
        verifying whether it was rented or owned by the company, and 
        verifying that the City was properly billed accordingly;
        <bullet> Monitor GPS tracking system for trucks removing 
        debris;
        <bullet> Conducting spot checks and surveillances of supplies, 
        equipment, activities at the site;
        <bullet> Monitoring of material deliveries;
        <bullet> Reviewing truck manifests;
        <bullet> Verifying that materials that were ordered were in 
        fact delivered;
        <bullet> Verifying that the materials that were ordered and 
        delivered were in fact job related;
        <bullet> Verifying that the costs of materials were not 
        inflated through forensic audits;
        <bullet> Reviewing invoices and verifying that appropriate 
        mark-ups were made, that there were no computational errors, 
        and that there was no over billing and/or double billing;
    While it should be noted that the vast majority of contractors on 
the site performed their work exceptionally well and with integrity, as 
a result of all of these types of intensive investigating and auditing 
efforts and more, the Integrity Monitors prevented a significant amount 
of waste, fraud and abuse in the Ground Zero clean-up. To a significant 
degree, the prevention came as a result of their presence on the site 
alone, which in and of itself, served as a deterrent to misconduct. For 
example, the sign-in sheets at the site from the earliest days of the 
clean-up prior to the arrival of the monitors, contained the names of 
individuals who allegedly did work at the site who were associated with 
organized crime. Moreover, some of those early sign-in sheets also 
contained the names of alleged workers on multiple sign-in sheets for 
work done (impossibly) at the same dates and times. However, when the 
four Monitors went into place and the CMs and the subcontractors all 
knew the Monitors were closely analyzing such items, these probable 
illegitimate and duplicative labor costs were no longer showing up on 
the payroll records billed to the City.
    Indeed, corroborating the fact that the Monitors served as a 
deterrent, early on during the clean-up, DOI was advised by a local 
prosecutor of an intercepted conversation between two organized crime 
associates in which they lamented that the on-site presence of the 
Monitors at the World Trade Center site was making it impossible for 
anyone to overbill the City via the usual scams, because the site was 
being so closely scrutinized. We couldn't have said it better 
ourselves.
    In addition to the deterrence of the type of willful misconduct 
lamented in that intercepted phone call, it is clear that the Integrity 
Monitors' activities further prevented waste and abuse through the 
establishment of proper record keeping systems, their physical presence 
on the site and their frequent audits of the billings. While, as with 
the general deterrence, it is difficult to precisely quantify the 
savings resulted from the institution of good record keeping 
procedures, direct observations and the quick detection of problems 
through frequent audits, the fact that significant savings that 
resulted from these activities is clear. For example, based on the 
submission and review of required documentation, the Integrity Monitors 
found evidence that purchased equipment initially billed to the City 
was also listed as equipment leased to the City. Thus, the City was 
being charged a rental fee on equipment it had already purchased and 
for which it had already been paid. As a result, these charges would 
not only then be disallowed (a quantifiable savings) but future 
improper billings on this equipment would not occur (a more difficult 
to quantify but clear savings nonetheless). Similarly, a review of 
required documentation by the Integrity Monitors revealed that requests 
for payments for rental equipment at times included fuel costs where 
such costs were built into the rental fees. Again, these costs would be 
disallowed (easily quantifiable savings) and not billed going forward 
(more difficult to quantify).
    In another instance, the Integrity Monitors on-site spot checks 
resulted in a clear, but difficult to quantify, savings. Some debris-
removal trucks were found to be operating with broken odometers. Had 
the trucks been allowed to continue to operate with this type of 
mechanical failure, they could have easily deviated from their approved 
travel routes, a problem observed with some trucking from the outset of 
the debris removal activity. The work of the Integrity Monitors 
resulted in the early detection and systemic correction of this problem 
and thereby reduced the ability of unscrupulous truckers to misdirect 
the debris or misuse the free dump tickets they were given in 
connection with their work at Ground Zero.
    The Integrity Monitors background checks on contractors also 
resulted in the indictment of two principals of a Yonkers carting firm 
working at Ground Zero by the Manhattan District Attorney's office for 
lying about their ties to organized crime in documents filed with the 
City. Not surprisingly, invoices submitted by this same carting firm 
were identified by the Integrity Monitors as containing numerous 
instances of over-billing by that contractor.
    Significant quantifiable savings through the identification and 
correction of sloppy, and sometimes willfully abusive, practices were 
also achieved by the Integrity Monitors. For example, in one instance, 
bills submitted to the City for payment by one subcontractor were so 
fraught with errors and improper mark-ups of heavy equipment and 
services, and lack of documentation authorizing the performance of 
services and labor charges, that they were reduced by two thirds--from 
$2.6 million originally billed to $795,000. In another instance, after 
long discussions concerning various billing issues between a Monitor 
and a subcontractor based on the Monitor's review of the records, the 
subcontractor agreed to revise prior billing submissions--translating 
to an estimated downward adjustment of $1 million.
    In yet another example, one Integrity Monitor examining 
subcontractor invoices submitted to the City totaling more than $7.3 
million, identified over-billing in the amount of $3 million, or almost 
42% of the total invoice. In another type of overbilling uncovered and 
stopped by the Integrity Monitors, certain subcontractors were found to 
have impermissibly marked-up their bills beyond the 10% allowed for 
overhead and the 10% allowed for profit. .
    Double billing for workers, time and materials were caught through 
the Integrity Monitors' frequent audits and on-site observations. So, 
for instance, the Monitors caught a subcontractor submitting invoices 
for debris removal at two different locations at exactly the same time, 
using the exact same vehicles and drivers. This matter, among others, 
was referred to the local prosecutor's office.
    These are just a few examples to highlight the kinds of activities 
engaged in by the Integrity Monitors in connection with the World Trade 
Center clean-up and the savings to the government that resulted from 
those activities. They clearly demonstrate the effectiveness of the 
Integrity Monitor model, where the Monitors are embedded in a project 
from the beginning, and where they report directly to a government 
agency that ensures the appropriate focus of their work and the quick 
and effective dissemination of their findings.
    It is clear that, as a result of the World Trade Center Integrity 
Compliance Monitorship Program, the government saved a significant 
amount of money by preventing and curtailing fraudulent activity, waste 
and abuse of public funds. In total, we have estimated that, based on 
their extensive work and forensic analysis, the Integrity Monitors 
recommended in excess of $47 million in cost savings and that their 
very presence on the Ground Zero site and their frequent audits 
produced additional significant savings that cannot be quantified. All 
of these efforts not only protected public tax money, but helped to 
preserve the faith of the taxpayers in the quality and integrity of 
government services.
    In conclusion, DOI makes the following recommendations to the 
Federal Government: (1) have a list of pre-existing list of known, 
experienced and vetted monitors in various fields of expertise and 
disciplines; (2) put an integrity monitor in place at the outset of any 
situation that will call for a large, costly government response 
operation, so that proper record keeping and work procedures can be 
instituted to create a culture of legal compliance within the 
operation, and ensure accurate accountability to the government; (3) 
have the integrity monitor(s) report to a government oversight agency 
with a broad governmental mandate encompassing fiscal integrity and law 
enforcement (e.g., in New York it was DOI); and then (4) closely work 
with the integrity monitors and the other government entities concerned 
with addressing the emergency at issue throughout the duration of the 
project.
    Thank you for this opportunity to speak to you today. At this time, 
I would be pleased to answer any questions that the Committee members 
or other representatives may have. Attachment

 Prepared Statement of Mr. David J. Varoli, General Counsel, New City 
                 Department of Design and Construction

    Chairman Rogers; Congressman Meek; members of the committee: Good 
afternoon. Thank you for inviting me to testify before you, it is both 
an honor and privilege to be here today on behalf of the City of New 
York, Mayor Michael R. Bloomberg, Commissioner David J. Burney, AIA, 
and the City's Department of Design and Construction.
    I want to thank you, Chairman Rogers, for calling this hearing.
    Today's hearing is entitled ``9/11 Federal Assistance to New York: 
Lessons Learned in Fraud Detection, Prevention, and Control.'' As the 
Counsel to the City's Department of Design and Construction (``DDC''), 
I am here today to discuss the recovery and clean-up efforts of the 
City following the terrorist attacks of September 11, 2001, which was 
the largest unplanned demolition project in American history. Every day 
the City encountered head on an unpredictable and complex site and 
responded with innovation and comprehensiveness to all issues. Yet, 
from the outset, the City's objective was for the work to be done in 
conformity to FEMA standards in order to minimize the costs and 
financial exposure to the taxpayers of the City and the country.
    This July, DDC is celebrating its 10th anniversary. DDC was created 
to oversee the work of building and repairing the City's municipal 
infrastructure. DDC designs and constructs the City's sewers, water 
mains, roadways, police and fire stations, daycare centers, jails, 
municipal offices, and a variety of other structures in support of the 
City's infrastructure. We have expertise in the fields of engineering, 
architecture, and construction services. We work with some of the best 
and biggest private sector firms in the world. In addition, DDC works 
with a lot of small and new firms. Our business is to know the 
construction business and to deliver quality and cost efficient 
services to our clients and the ultimate users--the people of New York 
City.
    As you have heard from my colleague, Commissioner Rose Gill Hearn, 
DOI is similar to DDC in that it also has an expertise and it knows its 
business very well, which is finding and rooting out fraud, waste, and 
corruption. DOI has created a system of inspector generals that are 
placed in each agency and has established a sophisticated 
infrastructure to monitor and combat government corruption both on the 
inside and in the vendor community.
    As will be described in greater detail, DDC immediately hired four 
construction management firms--Bovis Lend Lease, Tully Construction, 
AMEC, and Turner Construction (who I'll refer to as the ``Construction 
Managers''). The Construction Managers were engaged to manage the 
debris removal and coordinate the work of the many trades working at 
the site. Moreover, DDC immediately issued a task order against a 
requirements contract for the auditing services of KPMG to assist in 
the engineering audit functions traditionally handled by DDC. DOI and 
its private inspector generals (who I'll refer to as the ``Monitors'') 
monitored the Construction Managers' compliance with the City's laws, 
regulations, and policies from an integrity perspective. This included 
background checks of all major principals; investigations of 
potentially fraudulent matters; surveillance and review of day-to-day 
operations; verification of payroll reports to comply with DDC policies 
and prevailing wage laws; operating an integrity hotline to receive 24/
7 allegations of misconduct or violations; making recommendations to 
the Construction Managers and DDC; and, verifying payments to 
subcontractors and vendors. The Monitors functioned independently of 
DDC and reported their findings directly to DOI, which then forwarded 
pertinent information to DDC.
    Before I describe the system put into place by DDC, DOI, and the 
rest of the City, I want to first set the stage by going back in time 
to the day before September 11th. It was a Monday, September 10th. The 
weather in the City was outstanding. The skies were clear blue and the 
sun shone brightly. Similar to the weather on September 11th, it was a 
beautiful summer day even though it was already the third day of public 
school. On September 10th the City did not have a plan to deal with an 
act of war against the City. However, the City did have in place a form 
of government that encouraged expertise in certain fields. The City, 
with a strong executive branch, was separated into a series of agencies 
with, for the most part, single missions and goals. This is an 
important point worth stressing. City agencies like DDC and DOI are 
experts at what they do and, over time, have created systems and 
contracts to provide their services in an efficient manner. For 
example, the City has experts in the following municipal services--
sanitation, emergencies, health, construction, law, environment, 
police, fire and the prevention of corruption at the government level, 
to name just a few.
    On the morning of September 11th, the day was starting as good as 
it ended the night before. A suit jacket was all that was needed and 
kids were still wearing shorts to school. The Hudson River was 
sparkling as the sun rose above the skyscrapers from the East. By 8:40, 
public school children were in school and most people were at work or 
commuting to work. Then, as we all know, in a matter of minutes, the 
world changed for New York City, Pennsylvania, Washington, D.C., and 
the United States of America. We had all been attacked and violated. A 
war had been brought to our doorsteps and into our backyards. After the 
first Tower fell that morning, the clear blue skies were immediately 
replaced with a thick dark haze of dust. We lost more than our clear 
blue skies and Sun that morning.
    My perspective is both a personal and professional one. You see, I 
was there the day our country's world changed. I was in Tower 1 and 
Building 5, after the two planes hit, searching for my two-year old and 
his daycare classmates. Later that morning, my children and I saw the 
brave men and women jump from the towers, and at 9:59 in the morning I 
fell on top of my children in an attempt to protect them from the 
falling debris as the South Tower fell. My perspective also comes from 
having lived across the street from the World Trade Center and having 
my children's daycare set up in Building 5. During the clean-up, DDC 
and the other governmental agencies operated out of my children's 
elementary school at Public School 89. In fact, my office was my 
daughter's classroom. It is a day my family, my city, and my country 
will never forget.
    There are many success stories that followed the City's and the 
country's response following the attacks. Two of the success stories 
are how the City cleaned up the debris in such a short time and how the 
City worked to detect and prevent fraud. We believe that the recovery, 
demolition, and clean-up was a success for the following reasons: 
first, all branches of government--Federal, State, and local--gave one 
entity--DDC--responsibility for managing the administrative, financial, 
and legal aspects of the project; and second, the events of the tragedy 
forged a strong partnership between the three levels of government and 
further forged a strong partnership between DDC, the Construction 
Managers, and the over 200 subcontractors. With the responsibility for 
managing the project, DDC then looked to the respective experts in-
house and in City government in each of the fields of administrative, 
financial, technical, and legal and brought them on the team--the 
City's Department of Investigation, to name one of the most important 
agencies, worked closely with DDC. Moreover, in the middle of all the 
chaos following the attacks, the City put into place one of the best 
proactive fraud prevention programs, whereby the City utilized the best 
men and women, and technology available to monitor every aspect of the 
project. The institution of the Monitors by DOI and the retention of 
KPMG by DDC earlier on established a certain tone for the project of 
respect and an expectation of law-abiding behavior. These two steps 
created a system of verification and reconciliation of all payment 
requisitions, and extensive field monitoring work.
    DDC worked with a team of public and private entities in the 
attempted recovery of survivors once the Towers fell, and DDC lead a 
team of public and private entities in the deconstruction of the war-
damaged buildings and in the removal of the ensuing construction 
debris. DDC's mission was clear--assist the City in restoring order to 
the City by cleaning up the debris in a timely and cost effective 
manner.
    The recovery aspect of the City's job did not meet any of our 
dreams, expectations, or prayers. Once the Towers fell, we did not find 
any survivors. We did not find alive any of the people who did not 
evacuate in time or any of our Police or Fire that had not gotten out 
in time. Words cannot express how we all felt as the days turned into a 
month and we had found no survivors.
    As for the demolition and debris removal work, the cleanup of the 
World Trade Center site far exceeded anyone's expectations. In the 
aftermath of the tragic loss of life, safety was the City's number one 
priority as we proceeded to demolish the remaining buildings and cart 
off the debris. Another key priority was to prevent fraud and theft. 
Thanks to extraordinary efforts by the City and all of its agencies, 
its contractors and consultants, and cooperating state and federal 
agencies, the City had an excellent safety and fraud prevention record.
    Early projections had the City cleaning up the site for two or more 
years. In fact, the City finished cleaning up the site in nine months. 
The City worked for twenty-four hours a day, seven days a week, for 
nine full months. The only day off was on November 12, 2001. The irony 
of that day was that the Commissioner, First Deputy Commissioner, 
myself, and a skeletal crew of DDC employees who reported for work to 
catch up on paperwork, immediately dropped everything and went out to 
the Rockaways, Queens, following the crash of Flight 587 to aid in the 
recovery. As for the World Trade Center project, in a matter of days 
DDC had created a crude management structure, which then materialized 
into a clear management structure with an organization chart. In nine 
months, DDC demolished the wrecks of the remaining structures--
Buildings 3, 4, 5, 6, and 7, and the skeletal walls of Towers 1 and 2, 
and DDC removed 1,642,116 or slightly over one and a half million tons 
of heavy steel and debris.
    Together, DDC and DOI, with the assistance of the Monitors and 
KPMG, instituted a program to monitor any attempts at fraud or waste, 
while at the same time never stopping the debris removal process. 
Furthermore, DDC and DOI put into action our respective expertise, with 
the assistance of many other City agencies, State agencies and Federal 
agencies. To name just a few of the other City agencies that played an 
important role there was the City's Office of Emergency Management, 
Police Department, Fire Department, Buildings Department, Environmental 
Protection Department, Transportation Department, as well as the Port 
Authority of New York and New Jersey.
    It is important to understand that in a normal ``planned'' 
demolition and debris clean-up project, architects and engineers study 
the as-builts and other related blueprints of the building to be taken 
down. Experts in how to bring down a building in a neat fashion are 
retained and consulted. Prior to any demolition work, the contents of a 
building are emptied, the area around the building is restricted, and 
only a limited work crew is allowed nearby the site both during and 
after the demolition. The end result is usually a controlled and self-
contained destruction, with no loss of life and limited external 
property damage.
    None of this happened before September 11th. We have all seen the 
pictures and film footage. War brings chaos and in the City on 
September 11, we were surrounded by tons of chaos.
    In addition to having people still in the buildings as they came 
down, the buildings were loaded with all of their contents. The City 
did not have the time to study the buildings before they came down. 
There was nothing controlled about how the buildings came down. In 
fact, it was the complete opposite. Chaos was the order of the day. As 
I mentioned earlier, I lived nearby the World Trade Center. In my 
apartment, every surface was covered in the dust and debris from the 
collapse of the Towers. And, as I also stated earlier, the City was 
faced with the largest unplanned demolition project--7 direct buildings 
destroyed, including two of the largest office towers in the world, 
plus damage to numerous nearby buildings, and, most sadly, the 
unprecedented loss of life and destruction of families--parents faced 
with burying their children, spouses faced with burying their spouses, 
and children faced with the reality that their parents are gone 
forever, as well as their childhood innocence.
    As we now know, DDC was placed in charge of coordinating the 
deconstruction of the remaining structures and to remove all debris. 
DDC's approach was to hire the four Construction Managers and to break 
down the 16-acre site into 4 quadrants or areas. This enabled the 
agency to track and coordinate the flow of labor and equipment onto and 
off the site, and to monitor daily and nightly the amount of progress 
made. DDC contacted four of the largest construction firms in the City 
who had either prior experience in the area, New York City, or the 
World Trade Center complex. Every morning and evening the City's best 
construction people--private and public--would meet in a kindergarten 
classroom and discuss what work was to be done that day and to review 
what had taken place during the prior twelve hours. Having these 
meetings in a kindergarten classroom sitting in chairs appropriate for 
a six year old was good for comic relief at such a sad time.
    When all this started, no one knew what we were looking at in the 
sense of time to complete and cost. DDC recognized very early on that 
it would need help in dealing with all of the auditing and payment 
issues. The City had in place a contract with KPMG, a large accounting 
firm for consultanting purposes. The firm also has a construction and 
forensics auditing division. DDC utilized KPMG to work with DDC's 
engineering audit officer to institute an audit engineering team for 
the entire project. I have not mentioned this earlier, but please keep 
in mind that during the nine months DDC worked on the project, DDC also 
continued to service all of its other clients and kept on building the 
City's infrastructure in the rest of the City (DDC manages a current 
portfolio of design and construction projects in the billions of 
dollars). In addition, DOI continued its mission with regards to all 
other City agencies.
    What does a nine-month demolition and recovery clean-up project 
mean in terms of sheer numbers and dollars? The City paid the four 
Construction Managers cumulatively almost a half billion dollars or to 
be precise $476,907,125.54. As I stated earlier, the City removed 
1,642,116 or slightly over one and a half million tons of steel and 
heavy debris. The daily average of men and women working at the site 
ranged from 1,096 people in the early months to 346 people in the last 
month. In total, 2,400,000 man-hours were expended during the project. 
Hundreds of pieces of equipment from the largest crane in New York City 
history to small hand tools were used throughout the project. In 
addition to the four Construction Managers that reported directly to 
DDC, there were approximately 200 different subcontractors and 
consultants working on the project.
    Included in the $476,907,125.54 paid to the Construction managers, 
was $24,661,101.93 paid to DOI's Monitors. DDC also paid KPMG 
$15,315,507.29 for all of its services. In the fall of 2001, DDC 
installed a Global Positioning System in all trucks--private and 
public--that came onto and left the site. In addition, in the winter of 
2002, DDC instituted an electronic check-in system to gain access to 
the site. This system instituted on January 31, 2002 reported 5174 
people accessing the site in the remaining months of DDC's demolition 
and debris removal operation.
    DDC and DOI instituted a lot of innovative procedures to ensure 
compliance and accuracy. The use of KPMG is one example of an 
innovative procedure. For example, KPMG provided audit expertise in 
prevailing wage compliance and documentation; verification of actual 
numbers of personnel working based on shift logs 24/7; determination of 
equipment usage on a given shift by established categories--
operational-in-use, standby-staffed by an operator to be deployed when 
directed, and idle-being serviced or repaired; verification of costs of 
material, rental and owned equipment based on costs and rental rates in 
effect on September 10, 2001; verification of costs of professional 
personnel on established salary and benefit schedules; and 
certification of marine transport of debris loads by examination of 
vessel logs.
    With regards to reviewing the payment requisitions submitted by the 
four Construction Managers, DDC and KPMG in consultation with DOI and 
its Monitors, FEMA, and the four Construction Managers, put into place 
a payment requisition review process as follows:
    An innovative detailed system of checks and balances was instituted 
by DDC and DOI to ensure that the taxpayers' money was spent in 
accordance with FEMA's and DDC's policies and regulations. DDC's 
engineering audit officer and KPMG, would audit a sample from each 
payment requisition for each subcontractor cost category to assure 
proper documentation exists and there is agreement; check for proper 
equipment rates, labor rates, material prices and markups in compliance 
with industry standards, and prevailing wage prices; take withholdings 
of payment on a percentage basis per issue identified; enter all 
findings into a central electronic database; and submit a report to DDC 
and the Construction Manager for review and comment. DOI and its 
Monitors would review the payment requisitions submitted by the 
Construction Manager as they relate to fraud, waste, and abuse. DDC 
would send field monitors, who were not auditors, out to cross 
reference the payment requisition with their daily field logs for 
agreement; DDC's project managers, who also were not auditors, reviewed 
the payment requisition packages for reasonableness of expenses, 
agreement with costs with field reports, and supporting documentation; 
and, the DDC project managers would also recommend withholdings to 
DDC's engineering audit officer. FEMA would review the payment 
requisitions for accuracy, agreement with proper source documents, and 
eligibility of cost items for reimbursement and scope of work; and 
would also use their own field monitors to verify the daily reports.
    With regards to tracking the time and material tickets submitted by 
the approximately 200 subcontractors, DDC and KPMG created a very 
detailed methodology. Each group in the process had a unique focus and 
role. The system or methodology worked as follows: KPMG's role was to 
assess and enhance processes and controls over field operations, 
including time and materials data capture and processing; and to 
monitor and sample debris removal cost data on a daily basis. DOI's 
Monitors' also had a role. The Monitors focus was to review supporting 
documentation for all subcontractor payment requisitions for fraud, 
waste, or abuse. DDC's project managers' role was to monitor all 
documentation so that the work was completed in a timely and cost-
effective manner, and to ensure that payment requisitions contain 
supporting documentation. And, finally, FEMA's role was to monitor 
documentation to ensure that work being performed and billed for was 
eligible for payment by the Federal government, and was reasonable and 
cost-effective.
    To follow through on each of these important roles, a detailed 
procedure was instituted by DDC. For example, KPMG fulfilled its role 
by breaking out its review into three distinct parts--labor, equipment, 
and materials. For labor, it would take random, 10% samples of names 
from shift sign-in sheets and physically verified that the workers were 
present. For equipment, it checked that all large equipment from the 
Construction Manager's equipment logs were present and entered their 
findings with the following notation--working, standby, or idle. As for 
material, it would collect daily a copy of receiving slips and make 
notes in their daily observation logs, and report findings to DDC's 
engineering audit officer. DOI's Monitors, as already highlighted by 
Commissioner Rose Gill Hearn, also had a comprehensive system to review 
all labor, equipment, and materials.
    As I conclude my testimony today, again I would to take this 
opportunity to thank the Committee for convening these Hearings. I 
would also like to highlight some of the issues we encountered during 
the nine months it took us to complete the recovery, demolition, and 
debris clean-up.
    First, and foremost, the issue of how this country will respond, 
God forbid, to another act of war on its shores. I believe the 
destruction that follows an act of war should be treated differently 
than a natural disaster. As Commissioner Gill Hearn mentioned, the work 
done at World Trade Center was performed under a criminal investigation 
the entire time. There were times when a construction crew had to stop 
work to allow the FBI, ATF, Secret Service, FDNY, and/or NYPD search 
for some item.
    Moreover, we had to respond to a lot of different federal rules and 
regulations as administered by FEMA that had been created over time in 
response to flood and hurricane damage. These policies and regulations 
did not fit the mold here. In the end, after several meetings and the 
act of writing letters, we would receive an exemption to a set policy 
or regulation. But there has to be a better way.
    In closing, like a lot of other people, I have read the stories of 
how this nation responded to the World Wars that scarred the prior 
century. What I took from those stories was the ideal that a democratic 
and diverse nation such as ours can and will rise up to meet any 
challenge. After my personal experiences on September 11th, it is funny 
to say this, but I consider myself lucky to be in New York and to work 
for the City of New York. I witnessed first hand the best in people 
following that day's attacks. Similar to how the federal government and 
private industry responded to the call by President Roosevelt at the 
start of World War II, the government of the City and the private 
industry located in New York City also answered a call on behalf of 
itself and the country.

  Prepared Statement of Mr. Neil V. Getnick, President, International 
             Association of Independent Inspectors General

    Good afternoon Chairman King, Chairman Rogers, and members of the 
Subcommittee. My name is Neil Getnick, and I am an attorney and the 
Managing Partner of the law firm, Getnick & Getnick, which is located 
in New York City. It is a privilege and an honor for me to appear 
before you today to speak about my firm's participation as an Integrity 
Monitor in the clean-up and recovery effort which took place at the 
site of the WorId Trade Center after the terrorist attacks upon our 
Nation on September 11th. I am especially honored to appear this 
afternoon with New York City's Commissioner of the Department of 
Investigation, Rose Gill Hearn. The Department of Investigation has 
long utilized Integrity Monitors to assist New York City in fighting 
fraud, waste and abuse in City projects and departments, and was 
responsible for the appointment of Integrity Monitors to participate in 
the clean-up and recovery effort at Ground Zero.
    New York City has shown that government can join together with 
private individuals, serving as Integrity Monitors, to effectively and 
economically combat and prevent fraud, not only in the area of disaster 
relief, but also in the regular day-to-day business of government. 
Historically, the use of Integrity Monitors was an essential component 
of the City's campaign to combat mob infiltration and corrupt influence 
in key industries and markets, such as wholesale food markets, 
commercial carting, and school construction. The Integrity Monitors 
proved highly effective and the City expanded their use. Examples of 
this are found not only in the disaster relief effort at Ground Zero, 
which I will address in more detail shortly, but also in situations 
where the City enters into contracts with private business and has a 
concern that there is the potential for misuse of taxpayer funds, and 
therefore appoints an Integrity Monitor to oversee a particular 
contractor or project. New York City's innovative use of private 
individuals and firms as Integrity Monitors is an example of government 
and the private sector working together for the public good in a cost-
effective manner.
    Although I am speaking today in my capacity as the Managing Partner 
of Getnick & Getnick, I am also the President of the International 
Association of Independent Private Sector Inspectors General 
(``IAIPSIG''). IAIPSIG is a nonprofit professional association whose 
mission is to preserve and promote integrity, honesty, impartiality and 
professionalism in the work of IPSIGs, monitors and independent 
investigators. An IPSIG is an independent, private sector firm (as 
opposed to a governmental agency) that possesses legal, auditing, 
investigative, and loss prevention skills, that is employed by an 
organization (i) to ensure that organization's compliance with relevant 
laws and regulations, and (ii) to deter, prevent, uncover, and report 
unethical and illegal conduct committed by the organization itself, 
occurring within the organization, or committed against the 
organization. Notably, an IPSIG may be hired voluntarily by an 
organization or it may be imposed upon an organization by compulsory 
process such as a licensing order or contract issued by a governmental 
agency, by court order, or pursuant to the terms of a deferred 
prosecution agreement. The IPSIG may also, in appropriate cases, 
participate with management in enhancing the economy, efficiency and 
effectiveness of the organization. Members of the IAIPSIG adhere to a 
comprehensive Code of Ethics and have been appointed as Integrity 
Monitors by local, state and federal agencies, as well as voluntarily 
retained by private industry.
    When I speak about Integrity Monitors today, I am speaking about an 
IPSIG which has been imposed upon an organization, and in the case of 
disaster assistance we are referring to construction management firms 
and general contractors, as a condition set forth in the contract to 
provide disaster relief services. This was the situation that existed 
at Ground Zero.
    After the attack on the World Trade Center on 9/11, Mayor Giuliani 
and top New York City officials realized that, as with any 
construction-type project, the potential for fraudulent and abusive 
behavior was present at Ground Zero. The City was determined not to 
allow that type of behavior to occur. Within a few weeks after the 
disaster the New York City Department of Investigation reached-out to 
private firms with extensive past experience as Integrity Monitors on 
City projects and in short order put into place an Integrity Monitor 
program to oversee the recovery and clean-up process. There were four 
construction management companies assigned to oversee the disaster 
clean-up, and the site was divided into four quadrants with each 
construction manager assigned to a particular quadrant. Our firm, 
Getnick & Getnick, was assigned as the Integrity Monitor to oversee the 
work performed on the quadrant assigned to the joint venture between 
Turner Construction Company and Plaza Construction Corporation. The 
other three Integrity Monitors were Thacher Associates, LLC, assigned 
to monitor Bovis Lend Lease; Stier, Anderson and Malone, LLC assigned 
to monitor AMEC Construction Management, and DSFX (Decision Strategies) 
assigned to monitor Tully Construction. Each of the four monitors were 
well known to the Department of Investigation, having been pre-
qualified to serve as Integrity Monitors in the past and having 
successfully handled other monitorship assignments for the City.
    It is important to note what the appropriate role of an Integrity 
Monitor is, and is not, at a disaster relief site. There are many 
participants from the private and public sectors who take part in a 
disaster relief project. There is a construction manager whose job is 
to: manage the day-to-day operations on the work site; hire and 
supervise all subcontractors; interact with the relevant governmental 
agencies overseeing the project; prepare daily information logs; 
prepare billing requisitions; in addition to other responsibilities. 
Typically, a government agency with in-house engineering capability 
oversees the performance of work by the construction managers and the 
subcontractors working under them. At the World Trade Center, the New 
York City Department of Design and Construction performed this task. 
Numerous governmental agencies inspected the work for compliance with 
applicable laws, rules and regulations, such as OSHA requirements and 
safety and environmental regulations. At the World Trade Center site, 
in addition to the New York City Police and Fire Departments, various 
federal agencies were present on a daily basis, including 
representatives from the Federal Emergency Management Agency, the 
Environmental Protection Agency, the Occupational Safety and Health 
Administration, and the Federal Bureau of Investigation, among others.
    An effective Integrity Monitor does not duplicate or supplant the 
functions of these other participants in the project. Rather, an 
Integrity Monitor uses a multidisciplinary approach, bringing to a 
project its unique knowledge and expertise in the following areas: (i) 
legal, (ii) investigative, (iii) auditing, (iv) loss prevention, and 
(v) other project-specific requirements such as engineering, 
environmental, etc. The Integrity Monitor utilizes these specific skill 
sets to review and monitor policies, procedures, and practices in the 
area of record-keeping and billing, as well as for the actual field 
work. The Integrity Monitor evaluates these procedures and work 
progress to assess efficiency, accuracy and compliance with all 
applicable law, rules and regulations. It reports its findings to the 
assigned governmental agency, as in the case of the World Trade Center 
the Integrity Monitors reported to the Department of Investigation. 
Much of the information reported to the Department of Investigation was 
subsequently shared with the monitored companies and the other 
governmental agencies involved in the project. An Integrity Monitor in 
many cases, and this was certainly true at the World Trade Center, 
works with the monitored parties to develop programs and procedures 
which prevent corrupt practices, ensure compliance with all pertinent 
laws and regulations, and promote the efficient and cost-effective 
completion of the project. For example, when a billing issue was 
discovered which did not fall into the category of potential criminal 
behavior, the Integrity Monitor brought the issue to the attention of 
the construction manager and the Department of Design and Construction, 
discussed ways to avoid that problem in the future, and the billing was 
adjusted to reflect the proper amount. This is an example of how the 
Integrity Monitor facilitated corrections and improvements so that the 
City was not overbilled. In cases where corrupt and fraudulent behavior 
was suspected, whether in the area of billing or construction-related 
matters, the Integrity Monitors reported the matter to the Department 
of Investigation and then worked with it and the appropriate law 
enforcement agencies to assist in the investigation and in some 
instances, ultimate prosecution, of the responsible parties.
    Because of the unique role and skill set of the four Integrity 
Monitors assigned to the recovery and clean-up at Ground Zero, we were 
able to provide coordinated assistance to the companies and 
governmental agencies working at the site, as well as to serve as a 
deterrent to those seeking to take advantage of the disaster situation 
for their own selfish gain. Members of the Integrity Monitor teams had 
expertise in legal, investigative and forensic accounting work and were 
former government lawyers, police officers and accountants with many 
years of experience working in law enforcement and on criminal 
investigations. We were in the field on a daily basis, observing the 
work in progress, speaking with the workers on the site, monitoring a 
complaint hotline 24 hours a day, and gathering significant 
intelligence. We reviewed billing submissions, checked back-up 
documentation, visited home offices of subcontractors when appropriate, 
and compared the billing submissions with our own observations in the 
field. Using this approach, we worked together with the Department of 
Investigation and the other governmental and private agencies on the 
project, to expose and prevent waste, fraud and abuse.
    My firm has been appointed or retained as an IPSIG and Integrity 
Monitor on numerous federal, state and local projects across a wide 
variety of industries. Based on that experience generally, and at the 
World Trade Center disaster site specifically, I would like to 
highlight for you the types of improper and often criminal behavior 
which can take place during the clean-up and recovery phase of a 
disaster site, which, because of its emergency nature, is typically 
billed on a time and materials basis, as opposed to a fixed price basis 
following a competitive bidding process.
    <bullet> Improper Payroll and Labor Billing: (1) ghost employees on 
the payroll; (2) employees who sign-in and out of the work site but who 
go to off-site work locations during the day, often to work on private 
jobs in nearby areas; (3) employees who ``loan'' their identity to 
others who work in their place and receive a portion of the wages, with 
the balance being pocketed by the employee named on the books; (4) 
excess labor present on site resulting in inefficient use of work 
force, i.e., workers on site who are not being utilized; (5) 
contractors paying employees substandard wages and billing the 
government at a higher rate; (6) bribes to union officials to permit 
non-payment of pension and welfare benefits to union employees; (7) 
inflating the amount of union benefit payments in labor bills submitted 
to the government; (8) work slow-down to incur overtime pay.
    <bullet> Improper Equipment Billing: (1) billing for equipment not 
present at the site; (2) billing for equipment present at the site 
which is either unnecessary or is not functioning and in need of 
repair; (3) billing for repairs which were not performed or which were 
occasioned by off-site use; (4) billing for inflated rates higher than 
those permitted by contract; (5) billing for inflated rates higher than 
those charged on private work; (6) double-billing of equipment; (7) 
excessive and inaccurate billing for fuel needed to operate equipment 
on site.
    <bullet> Improper Materials Billing: (1) billing for substandard 
materials required for proper job performance; (2) inflating the price 
of materials purchased for the site; (3) inadequate inventory control 
resulting in billing for materials which are removed from the job site 
and used at a different location; (4) double-billing for materials; (5) 
kick-back schemes and bribes resulting in inflated prices for materials 
used on the work site.
    <bullet> Safety and Environmental Issues: (1) failure to properly 
train employees in safety procedures and use of equipment, and to 
enforce those procedures on the job site; (2) failure to properly 
dispose of hazardous waste material; (3) billing for substandard and 
ineffective environmental monitoring and testing; (4) performance of 
unnecessary and duplicative environmental monitoring and testing; (5) 
billing for safety equipment not utilized at the disaster site; (6) 
utilization of machinery and equipment on site which does not comply 
with current safety and environmental standards; (7) failure to 
maintain adequate site records and logs to determine whether required 
site safety and environmental standards are met.
    <bullet> Subcontractors: (1) selection of subcontractors based on 
improper criteria which does not include ability and pricing, such as 
payment of bribes, personal relationships, etc.; (2) improper mark-up 
of subcontractor billings; (3) retention of subcontractors unqualified 
and incapable of providing required services; (4) improper vetting of 
subcontractors' qualifications and background.
    <bullet> Security: (1) insufficient site security and spotty 
enforcement of security regulations, such as failing to check 
identification and to inspect deliveries, allowing for unauthorized 
personnel and goods on work-site; (2) theft of property from site due 
to inadequate security, inventory control and theft prevention 
procedures; (3) inadequate coordination between various organizations 
and individuals responsible for site security.
    <bullet> Management of proiect: (1) relationships between 
construction managers and subcontractors which prevent objective 
evaluation of job performance; (2) corruption of supervisory personnel 
by bribes, threats, etc., (3) inadequate supervision and implementation 
of appropriate procedures to prevent fraud, waste, abuse, and 
violations of rules and regulations; (4) inability to perform necessary 
tasks and assignments.
    Many of these kinds of activities were identified as issues or 
potential problems by the Integrity Monitors at the World Trade Center 
clean-up and recovery project, and have been encountered during other 
monitorships we have worked on in the past. Due to the 
multidisciplinary approach and extensive experience in combating 
fraudulent and criminal activity on construction and other government 
projects which the Integrity Monitors brought to bear on this 
challenging task, and our partnership with City Government, we were 
able to identify and address these problems, and, when appropriate, 
work with law enforcement agencies to gather evidence for criminal 
prosecution. As a result, the money spent on 9/11 disaster relief at 
the World Trade Center site was spent for its intended purpose.
    I understand that the Committee on Homeland Security is considering 
legislation which will address fraud prevention in disaster relief 
programs. Based on our extensive experience in working as an Integrity 
Monitor and IPSIG on various governmental assignments, we offer the 
following suggestions with respect to that proposed legislation:
    <bullet> A list of pre-qualified organizations which can act as 
Integrity Monitors should be established so that qualified individuals 
can quickly mobilize to monitor disaster relief programs. These 
organizations should have among its members individuals with legal, 
investigative, forensic auditing and loss preventions skills, and have 
extensive experience in acting as Integrity Monitors on other 
government projects.
    <bullet> The obligations and duties of an Integrity Monitor at a 
disaster recovery site should be clearly delineated, and should include 
adherence to a Code of Ethics such as the one followed by members of 
the IAIPSIG (copy attached to this testimony).
    <bullet> The construction manager or contractor overseeing the 
disaster relief project should be required as a condition of its 
contract with the government to cooperate with the Integrity Monitor, 
including providing access to all books and records and access to all 
personnel, and require all of its subcontractors to do the same. The 
four construction managers working at the World Trade Center disaster 
site entered into such agreements with each of their respective 
Integrity Monitors as a condition of the CMs providing construction 
services at the site.
    <bullet> The hallmark of an IPSIG and an Integrity Monitor is its 
independence. Integrity Monitors should have no prior business or 
personal relationships with the monitored entity which would create a 
conflict of interest, or even the appearance of one.
    <bullet> Indemnification should be provided to the Integrity 
Monitor, similar to the type of indemnification provided to public 
officials acting during the course of their official duties.
    <bullet> Payment to the Integrity Monitor for services provided 
should be guaranteed on a regular basis to ensure that the Integrity 
Monitor is not thwarted in carrying out its obligations by companies 
that might withhold or delay payment in an attempt to deter the 
Integrity Monitor from performing its duties.
    Any construction project, even one which is anticipated and planned 
in advance, is susceptible to fraud, waste and abuse. By its very 
nature, a disaster recovery project is more vulnerable to this type of 
conduct. As we have seen with the World Trade Center recovery and 
clean-up after 9/11, however, the appointment of Integrity Monitors 
allowed the City of New York to detect improper behavior on a real-time 
basis, and not just after the fact. This enabled the City to remedy 
problems and bad practices quickly, and thus save significant sums of 
money. Even more noteworthy, however, is the preventive effect the 
Integrity Monitors had at Ground Zero in stopping fraudulent and 
wasteful conduct before it occurred by their presence and involvement 
at the site. This deterrent effect is invaluable. The use of Integrity 
Monitors at future disaster relief sites will have the same impact and 
will ensure that the money designated for disaster recovery is used for 
its intended purpose.
    Thank you for the opportunity to address you this afternoon on this 
very important topic. I am happy to answer any questions you may have 
for me at this time.

    Prepared Statement of Ms. Carie Lemack, Co-Founder, Families of 
                              September 11

    It is an honor to be given the opportunity to testify in front of 
the House Committee on Homeland Security's Subcommittee on Management, 
Integration and Oversight. I would especially like to thank Chairman 
Rogers and his impressive staff for inviting me here today. The work 
you do in overseeing the Department of Homeland Security is vital to 
ensuring that our nation's protectors remain focused and prepared for 
the threats our country faces.
    Today we are not here to talk about these threats, though they 
remain constant and require our continued vigilance. Today we are here 
to talk about our response when these threats strike, and how to more 
effectively deploy aid to those in need.
    A quick note; while I am a co-founder of Families of September 11, 
today I speak as a daughter of a 9/11 victim. My views are my own and 
have not been voted on or endorsed by the Families of September 11 
board of directors, of which I am a member.
    There are three things that I believe responders need to keep in 
mind when trying to eliminate fraud and inappropriate use of funds for 
terrorism victims. First, we have to recognize that in the United 
States today, ``family'' is not just the traditional husband, wife and 
2.5 kids. There are couples who never married, but have made lifelong 
commitments to each other; re-married fathers, with children from both 
a current and previous marriage. There are young workers who support 
their elderly parents and disabled siblings. When administering aid, an 
organization or government agency has to be able to take non-
traditional familial structures into account.
    Accordingly, if an aid organization advertises that it is 
collecting and distributing donations for disaster victims, it must 
abide by its promotions. The agency cannot choose which subset of 
victims to support after the fact. If they advertise to help all 
victims, they must help all victims.
    Another issue that must be addressed is how a recipient can monitor 
and report fraud. Those who are collecting aid and managing the flow of 
funds for their family are in the best position to identify when 
something is amiss, but oftentimes, at least in the majority of cases 
after 9/11, there was no way for the head of household to know who else 
was applying for, and receiving aid in the name of the victim. 
Information should be available to the victims and their family 
representative, not held in secret by the agencies that are unequipped 
to handle the tremendous influx of requests and inquiries.
    Lastly, any type of aid distribution should go through an opt-in 
database system, not one that is opt-out. That is, let the families 
decide who sees their personal financial information and which groups 
they would like to apply to for aid, instead of automatically giving 
their private information to all aid organizations that then decide 
which programs they are eligible for. This process will also help 
families detect and prevent fraud in their loved one's name. The opt-in 
system should be used in concert with a single application, instead of 
the system used after 9/11, when each aid agency had its own 
application that required hours of duplicating efforts from the 
families the aid was supposed to help.
    These three issues became clear to me after my personal experiences 
with post-9/11 aid. My mother, Judy Larocque, was the CEO of Market 
Perspectives, a small market research firm employing approximately 20 
people in Framingham, MA, my hometown seventeen miles west of Boston. 
Mom was 50 in September 2001, about to turn 51 on October 27th. She had 
two daughters; my older sister, Danielle, who at the time lived in 
Chicago, and me.
    Mom's dream was to get both her daughters back home after we left 
Massachusetts for college in California. In the fall of 2001, it looked 
like her dream was going to come true. On Labor Day weekend, Danielle 
and her boyfriend, now husband Ross, came to Boston to visit. I took 
Mom to a Red Sox-Yankees game, we ate lobster and steamers, and we 
enjoyed a peaceful weekend spending time together. When Danielle and 
Ross left to return to Chicago, Ross told Danielle he thought he could 
definitely live in Boston. Mom and I were ecstatic.
    On September 10th, Mom was as proud as ever. Danielle taught her 
first class as an adjunct professor at Northwestern Law School that 
day, and Mom beamed. When I called her late that night, I woke her up. 
Even in her sleepy state, the first question she asked me was ``Did you 
call and congratulate your sister?'' Of course the answer was yes. We 
were as close as any mother and daughters can be. Mom made sure of 
that. Whenever Danielle and I fought, she made us hug, and told us 
``you are always going to be sisters, that will never change''.
    That bond became even stronger after 9/11. There are not words to 
describe the pain and grief of losing Mom, my best friend, my 
confidant, my comforter, my rock. We all know of the horrors of that 
day, September 11, 2001, so I will not go into that any further. 
Instead, I will focus on the troubles we encountered after 9/11.
    Immediately, we began to understand that the methods in place to 
deal with victims' families are not made for today's familial 
structure. Mom was recently divorced, and since Danielle and I were not 
considered dependents, Mom was treated as a single woman with no 
children. I cannot even begin to imagine how furious that designation 
would make her.
    American Airlines was the first organization we came in contact 
with that treated us differently. They kept me on hold for hours, never 
confirming Mom was on Flight 11. At one point, I remember thinking that 
she could not have been on that flight, because an airline would not 
treat victims? family members this poorly. Unfortunately, I was wrong 
on multiple counts.
    When Danielle asked for help in getting home to Boston from 
Chicago, the American Airlines representative gave her the number for 
Amtrak, and told her that the trains were all booked. We then learned 
that Mom's name was released to the media sometime in the afternoon of 
9/11, even though we had expressly asked American Airlines not to give 
out her name.
    Only later did we find out that there was a lot of information we 
were not told about. There was a meeting at Logan Airport on the 
morning of the 12th that we were not invited to. The only explanation 
for the omission was that we were not considered immediate family, 
though we can never really know if that is why information was kept 
from us.
    Perhaps all of this would have been different had Mom had a 
husband. Instead, she had two daughters in their twenties, trying their 
best to handle her affairs, but not considered her children by aid 
agencies and the like.
    As we struggled with that hurdle, we also learned that the 
specifics of her murder were being taken into account, without our 
prior knowledge, to determine if her family was eligible for aid. To 
prevent improper practices, organizations need to make clearer their 
criteria and procedures ahead of time to ensure all families receive 
appropriate treatment.
    This lesson became apparent in the American Red Cross' decision not 
to give aid to the families of those who loved ones perished on the 
four planes. They claimed that the airlines? legal obligations would be 
substantial enough to help those families. They did this without 
alerting the public, all the while collecting donations in the name of 
the ``9/11 victims and their families''.
    The ramifications of this decision may not be immediately apparent, 
but they were severe. Suddenly, many of Mom's friends who donated to 
the American Red Cross asked us about the aid we were getting to help 
pay Mom's mortgage on our childhood home. When I had to tell them we 
were not eligible for the aid, they became angry, frustrated, and 
wanted me to provide the explanation.
    It seemed that everywhere we went, we saw solicitations for the 
American Red Cross. It was incredibly painful to feel like a second-
class victim's family member, as if we were not good enough for the 
generosity that the American public put forth. When we went to 
Framingham's Town Hall to get copies of our birth certificates to apply 
for Mom's death certificate, we were faced with another reminder of our 
low status. There on the counter was an appeal to help the victims in 
New York and Washington by giving to the Red Cross. When we asked if 
the woman at the counter knew there were victims right here at home, 
her eyes welled with tears.
    Families need to be accepted as what they are. When an ad is placed 
saying an organization is raising money to help victims? families, it 
must either specify which type of families, or be open to all affected 
families. To this day, all the scholarship money that was raised for 
the ``children'' of 9/11 victims only goes to dependent children of a 
certain age. I was a 27-year-old daughter of a 9/11 victim, but was 
deemed ineligible for any 9/11-related scholarships or aid when I began 
graduate school in 2002. I may not be what most considered when they 
donated money for 9/11 children, but there is no doubt in my mind, nor 
would there be in my mother's, that I lost a parent on 9/11.
    As a co-founder of Families of September 11, a national 
organization of 9/11 victims' family members, survivors and concerned 
members of the public, I heard the stories of many non-traditional 
family members who fell through the cracks of aid organizations in the 
months following 9/11. There were the engaged, some of whom were 
supposed to be married only four days after the attacks, who were not 
eligible for most types of aid. I remember vividly speaking with a 
woman whose ex-husband had remarried before he was killed on 9/11, so 
that the new wife received all of the aid. The problem occurred because 
the man had fathered children with both women, and the first wife was 
unable to collect money to help her young son. The story of a couple 
who chose not to marry, but lived together for seventeen years comes to 
mind, with the victims' parents getting aid, but not the partner who 
was left with bills and a mortgage. This scenario was played out over 
and over again with many of the gay and lesbian victims whose partners 
were left with no legal and varying social status to receive aid.
    Aid organizations must recognize the differing aspects of American 
families as we know them today. They must be flexible and 
accommodating. To its credit, the American Red Cross and United Way did 
finally come around and begin to help non-traditional families. But 
this change came only after tremendous pressure. It should not be the 
responsibility of the victims to have to actively lobby those who are 
purporting to help them. Instead, the aid organizations should welcome 
their input and act on it, not resist it until Bill O'Reilly or his 
counterparts repeatedly attack their practices on national television.
    The Department of Homeland Security (DHS) could play a crucial role 
in solving this problem. Currently, there is no Office of Victim 
Assistance in DHS, which means that while there are lots of people 
thinking about how to deal with preventing and immediately responding 
to a disaster, there is no one trained to deal with the people a 
disaster might affect. If DHS has trained professionals on hand who 
specialize in assisting disaster victims, perhaps the good people at 
American Airlines and other corporations can leave victim support to 
those better suited.
    The designation of who is eligible for aid, and who is not often 
walks a thin line. We are all aware of the reports of limousine drivers 
and mistresses who racked in large sums of money from aid organizations 
because they were able to prove, however tenuously that they suffered 
losses after 9/11. But there are some programs, and some individuals 
for whom this designation is crystal clear. What is less precise, 
however, is how to identify and respond to them.
    After Congress created the Victim Compensation Fund (VCF), families 
were faced with a difficult decision: should they give up their right 
to pursue litigation against those liable in their loved one's death in 
order to receive an unknown amount of money from the government? This 
was made even more difficult by the fact that when the regulations for 
the VCF were finalized, there was strong resistance in Washington 
against any type of in depth investigation into the 9/11 attacks. How 
could a family decide whether or not to pursue litigation, when we had 
no way of knowing what really went wrong?
    For Danielle and me, however, this decision was simple. We knew 
that we had to pursue litigation in order to get to the truth, and 
therefore do our part to ensure that what happened to Mom and nearly 
three thousand others would never happen again. If the airlines, 
security companies and others had been forthcoming, we might have 
chosen differently, but based on their secretive behavior, we felt it 
was our obligation to shed light on the truth in our call for 
accountability.
    There was someone who did not share our sentiments. He wanted to 
collect money, and was not interested in seeking the truth. His name is 
Wayne Larocque, and he is Mom's ex-husband.
    One day while on the phone with an attorney and my sister, I 
decided to look at the list the Department of Justice had created of 
those who had applied for the fund. At the time I was President of 
Families of September 11, and I felt an obligation to do what I had 
advised our members to do; stay informed, be diligent, and make sure no 
one was fraudulently applying to the VCF in your loved one's name.
    When I saw Wayne's name on the list, applying on behalf of Mom, I 
was shocked. That disbelief soon turned to action, and Danielle and I 
quickly contacted VCF officials. As I understood it, Wayne applied, and 
in his application, he failed to mention that Mom had two daughters who 
were her legal next of kin.
    We were not allowed to see Wayne's application, although we did 
contact the proper authorities to ensure that Mom's rights, and our own 
were not violated and that no fraud was ultimately committed. His 
application could have jeopardized our participation in a lawsuit; the 
airlines have tried to have any family that even minimally applied to 
the VCF thrown out of the pending litigation.
    Even today, I have no way of knowing what other money Wayne applied 
for and received. Perhaps there is none. But if he was willing to go 
the trouble of filling out the VCF form (which was much more involved 
that most aid applications), I can only imagine how easy it might have 
been for him to collect other money. Without having access to 
information regarding who applied for and received money in Mom's name, 
I can have no way of knowing if any fraud was committed, and therefore 
cannot report and deter it.
    There are systems that are very exact when determining how to 
compensate victims' families. Worker's compensation for example, does a 
terrific job of knowing exactly how much each family gets, and to whom 
it goes. I know this, since we were not eligible for worker's 
compensation aid, but Mom's mother, my grandmother, was. Based on my 
experiences with it, I feel very confident that little to no fraud got 
through the their system, nor the system the Social Security program 
uses. I do not believe it is too much to ask aid agencies to have some 
sort of system that could allow a victims? family to know who is asking 
for and receiving aid in a victim's name, in an effort to curb fraud. 
In the case of the VCF, this type of transparency clearly worked.
    This database should be part of an opt-in system that could be used 
to streamline aid distribution. After 9/11, Americans, and for that 
matter, people from across the globe, showed their patriotism, unity 
and compassion in a generous outpouring of support and donations. 
Speaking for myself and my family, we were overwhelmed with the 
selfless giving of time, money and love from our neighbors, friends, 
communities and fellow Americans.
    The job of collecting and distributing the aid was not an easy one. 
Those agencies that stepped up to the plate and volunteered to house 
and give out the money might not have been fully aware of the difficult 
task that lay before them.
    On the Tuesday before Thanksgiving 2001, I drove from Boston to New 
York City for a meeting with other 9/11 family members and New York 
Attorney General Elliot Spitzer to discuss how to streamline the aid 
distribution process. He suggested creating a database of 9/11 
families? financial information, so that the aid organizations could 
review our status and decide how best to divvy up the aid.
    I agreed that idea of a database was useful, but thought it should 
work in the opposite direction. The families needed one list of aid 
agencies with a common application, that told them the criteria and 
amount of aid each agency was offering. This way, families could fill 
out one form, and could then decide to which organizations they wanted 
their application sent. For many families, the idea of deciding which 
agency was able to see their information was extremely important.
    Unfortunately, we were unsuccessful in creating this database. As I 
understood it, the aid agencies did not want to collaborate in drafting 
and approving a single application and did not like the opt-in idea.
    The result was that families had to spend hours on the phone, or in 
queue at the Family Assistance Center, repeating the same information 
over and over again to different aid agencies. Not only was it 
frustrating to the families, it also led to an environment that could 
foster fraud. There was no way to keep track of which agency was paying 
which bill for a family, possibly resulting in multiple payments, 
whether intentional or not.
    For future events requiring aid distribution, I highly recommend 
the opt-in, single application approach. Families have every right to 
know who sees their financial information, which an opt-in system 
provides. Using an opt-out approach assumes that every family 
completely understands the complicated system--after suffering a 
traumatic loss, this is just one more unnecessary burden to place on a 
grieving, overwhelmed family.
    A single application is a seemingly simple, yet hard to implement 
process. Each aid agency uses its own, slightly modified approach, and 
there is no overseeing authority to make them all collaborate for the 
benefit of the recipients. If Congress can get them to work together 
now, before another event, perhaps the victims of the next catastrophe 
will receive an improved, more streamlined and easier to use response 
process.
    This is an area that DHS could address. If an office of victim 
assistance is created, it could house a ready-to-be-deployed database 
that will immediately serve disaster victims. With one data collection 
point, families are spared the unenviable task of repeating their 
personal data, and are capable of monitoring aid activity for their 
family. This office could also develop rules and strategies for dealing 
with any fraud that is detected and increase family-approved 
information sharing among agencies and aid organizations.
    The generosity demonstrated by the public towards 9/11 victims? 
families and survivors was tremendous and deserves to be lauded. 
However, the treatment of the aid after it was collected was less then 
perfect. We need to learn from the mistakes committed in the past to 
improve the process for the future.
    Mom always taught Danielle and me to be accountable for our 
actions. If we erred in some way, we did our best to admit it, correct 
it, and make sure it didn't happen again. I can think of no better way 
to honor my mom than to apply this same standard to post-9/11 aid and 
response. This is why I fought so hard for the creation of the 9/11 
Commission, and again for the implementation of its recommendations, 
and that is why I am here today to work with you to create the best aid 
response we can for the future.
    Thank you very much for this opportunity to speak before you. I am 
happy to take any questions.

 Prepared Statement of Ms. Leigh A. Bradley, Senior Vice President for 
                  Enterprise Rusk, American Red Cross

    Chairman Rogers, Congressman Meek, and Members of the Committee, my 
name is Leigh Bradley and I am the Senior Vice President for Enterprise 
Risk at the American Red Cross.
    I want to thank you for providing me with the opportunity to appear 
before you today to talk about the American Red Cross response to the 
attacks of September 11th--work that is ongoing to this very day. I 
appreciate the opportunity to share with you our lessons learned 
regarding fraud prevention, detection, and controls.
    The attacks on the United States that occurred on September 11, 
2001, tested the American Red Cross and America in ways we had not 
experienced as an organization or as a nation. It is a day that will 
remain burned into the minds of all who witnessed on national 
television two of our nation's tallest and proudest buildings fall more 
than 100 stories, a massive inferno at the Pentagon and a plane crash 
in a remote field in Shanksville, Pennsylvania. Thousands of innocent 
people died on September 11, including members of the first response 
community who put their lives at risk to save others. Since September 
11, thousands more have since suffered from the physical and emotional 
stress of responding to these vicious attacks. All who witnessed this 
day will remember where they were, what they were doing, and will 
always recount their feelings and emotions as we, as a nation, were 
overcome with grief.
    The American Red Cross had been America's partner in disaster 
preparedness, prevention and response for nearly 120 years on that 
fateful day in September. In our long history, we have aided soldiers 
on the battlefield, supported victims of all disasters, and provided 
support to first responders.
    Our experience in the aftermath of the Oklahoma City Bombings in 
1995 helped to prepare us for this day. Almost immediately after the 
first plane struck the World Trade Center, Red Cross volunteers and 
personnel were on the scene ready to aid in the response.
    I want to acknowledge the work of Alan Goodman who is with me 
today. Alan is the Executive Director of the American Red Cross 
September 11th Recovery Program (SRP). For the past four years, Alan 
has been at the helm of this program, which has provided longer term 
recovery to tens of thousands of individuals and families, including 
families of the deceased, the physically injured rescue and recovery 
workers and their families, and people who were living or working in 
the areas of the attacks.

Response to September 11, 2001
    One year after the terrorist attacks occurred on 9/11, the American 
Red Cross issued a report to the American people regarding the 
activities of the Red Cross, the Liberty Disaster Relief Fund, and the 
execution of the September 11th Recovery Program. Included in this 
report was a chronology of our response, which is attached to my 
testimony. (Appendix I)
    Before I discuss the Red Cross response to 9/11 and some of the 
lessons learned, it is important that I briefly share what the Red 
Cross traditionally does during times of disaster and how this response 
differed.
    The American Red Cross responds to disasters in communities across 
the nation each and every day. In fact, we respond to more than 70,000 
disasters each year. The vast majority of disasters we respond to are 
single family home fires. We also respond to large-scale disasters, 
such as hurricanes, floods, tornadoes, and manmade events. There is one 
constant in all of our response operations and that is to ensure the 
immediate emergency needs of our clients are met.
    Individual client assistance has been provided by the American Red 
Cross for as long as the organization has been in existence. Red Cross 
individual client assistance includes much more than just financial 
support. In fact, traditional individual client assistance has been 
based on a cadre of services to ensure that the health and welfare 
needs of our clients are met. This includes feeding and sheltering 
operations, mental health assistance, first aid, and relief and 
recovery referrals. We partner with other nongovernmental 
organizations, the for profit community, and with all levels of 
government to ensure that the emergency needs of disaster victims are 
met. In each response, our first priority is to ensure that those 
affected by disaster have a safe shelter and are provided with the 
basic necessities of life.
    The next priority is to assist families in taking the first steps 
toward recovery. This is the purpose and concern that individual client 
assistance is designed to serve. It has long been the case that while 
shelter, feeding and the distribution of critical items are sufficient 
to stabilize individuals and families, it is not sufficient to meet all 
short term emergency needs necessary for disaster victims to begin 
their individual road to recovery. Critical items of assistance such as 
resources for food, changes of clothing and bedding bridge the gap 
between mass care activities and the receipt of state and federal 
recovery assistance. This allows a family a modicum of independence and 
a flexible resource for the types of essential items mentioned above. 
Ultimately, within the framework of disaster assistance provided by 
other agencies, as well as state and federal programs, individual 
client assistance helps bridge the gap between mass care activities and 
loans, temporary housing, and other assistance.
    The response of the American public in the wake of 9/11 was 
extraordinary. When thousands of Americans needed help following the 
attacks, tens of thousands volunteered with the Red Cross, and tens of 
thousands made financial contributions. The American Red Cross received 
more than $1 billion in contributions. While the Red Cross often 
provides financial assistance for the immediate emergency needs of our 
clients, the intent of our donors was to ensure this money was 
earmarked for the victims of 9/11.
    To that end, we created the Liberty Disaster Relief Fund as a 
distinct and segregated fund for those financial donations and to 
assist those directly affected by the September 11th attacks. Former 
Senate Majority Leader George Mitchell was appointed as the independent 
overseer of the fund. Under the distribution plan, and consistent with 
the Red Cross mission of providing immediate emergency disaster relief, 
the majority of funds were to be distributed to the families of those 
who were killed in the September 11 attacks, those who were seriously 
injured, and others directly affected by the disaster.
    For an organization that is accustomed to providing de minimus 
amounts of financial assistance--money that is meant to provide for 
immediate emergency needs such as a change of clothes, toiletries, or 
diapers for children--this meant providing much larger sums of money.
    The American Red Cross had two phases of response to the tragic 
events of September 11. Phase One represents the immediate response to 
the terrorist attacks, dating from September 11, 2001 through October 
1, 2002, and is referred to as the Relief Operation Phase. Phase Two 
encompasses the long term recovery effort, dating from October 2, 2002 
to the present, and is referred to as September 11th Recovery Program 
(SRP) Phase.

Relief Operation Phase
        <bullet> Family Gift Program #1 (FGP I)--The FGP I provided 
        three months of rent, food, utilities and other ongoing 
        expenses to family members of those missing, deceased, or 
        injured from the World Trade Center (WTC), Pentagon, or 
        Shanksville, Pennsylvania events.

SRP Phase
        <bullet> Family Gift Program #2 (FGP II)--The FGP II began on 
        December 6, 2001, and provided six months of living expenses to 
        family members and injured clients who received FGP I and nine 
        months of expenses to clients who initially sought financial 
        assistance after December 2002.
        <bullet> Family Gift #3 (FGP III)--FGP I and FGP II met the 
        early financial needs of the victims covered under the Family 
        Gift Program. The first two gifts were designed to cover the 
        first nine months of living expenses and these gifts were all 
        disbursed prior to June 30, 2002. In January 2002, the Cross 
        determined that the Family Gift Program should also cover unmet 
        essential living expenses for an entire year through September 
        11, 2002. The third Family Gift (FGP III) was created to cover 
        expenses for the months ending on September 11, 2002. The third 
        Family Gift (FGP III) was created to cover expenses for the 
        months ending on September 11, 2002. No funds were distributed 
        for FGP<plus-minus> III until July of 2002.
    Specifically, FGP III granted expenses, depending on whether or not 
clients received the previous two gifts, to financially dependent 
immediate and extended family members of decedents, child guardians, 
and the ``seriously injured.'' The ``seriously injured'' were defined 
as individuals who were in the immediate vicinity of the WTC, the 
Pentagon or the Pennsylvania crash site on 9/11 and as a result 
suffered a verifiable, serious physical injury or illness for which 
they were admitted to a hospital for at least 24 hours between 9/11 and 
9/18/01. The FGP III ended on June 15, 2004.
        <bullet> The Supplemental Gift Program--The Supplemental Gift 
        Program began in August 2002. Each estate and seriously injured 
        client was originally eligible to receive a gift of $45,000 to 
        be distributed to those individuals named as executors or 
        administrators of the estate. In November 13, 2002, the Liberty 
        Committee approved an increase of the gift amount to $55,000.
    To be eligible for the Supplemental Gift, injured clients must have 
met the FGP III criteria and additionally have been totally disabled 
for 90 consecutive days. Gifts to estates were awarded with the agreed 
upon restriction that they be distributed only to individual 
beneficiaries, rather than to charities or academic institutions. 
Supplemental gifts made to the seriously injured have no other 
restrictions following verification of eligibility.
        <bullet> Special Circumstances Gift Program (SCG)--The SCG 
        Program is a needs-based gift provided to seriously injured who 
        qualified for the Supplemental Gift as well as financially 
        dependent extended, nontraditional, and traditional family 
        members who were eligible for the FGP III, had not received 
        substantial amounts of assistance from other sources, and 
        continued to have unmet needs. All awards were determined by a 
        Review Committee on a case-by-case basis, taking into account 
        the individual's unmet financial needs, the level of dependence 
        on the deceased and any 9/11 related special circumstance. The 
        SCG ended in December 2004.
        <bullet> Disaster Responders--Clients who were officially 
        deployed as disaster responders to the WTC, Pentagon, or 
        Pennsylvania are eligible to receive all of the above benefits 
        if they meet other specific criteria, such as for injury or 
        economic need.
        <bullet> Additional Assistance--An additional assistance 
        program began in April 2003 to assist disabled individuals and 
        family members. Eligible clients were able to receive up to six 
        months of financial assistance for demonstrated unmet, 
        essential housing and living expenses. This program ended in 
        December 2005.
    To be eligible, family members were required to demonstrate 
financial need and one of the following: financial dependence upon the 
decedent, a mental health condition that led to a continuous 90-day 
period of disability, or had been appointed the legal guardian of the 
minor child/children of a decedent. Disabled individuals were required 
to have suffered a 90-day disabling respiratory, mental health or 
physical disability and demonstrate financial need.

    Joint Relief Operation Phase and SRP Phase
        <bullet> Displaced Residents--Clients whose primary residence 
        was south of Canal Street in Manhattan and who were displaced 
        from their homes, had their homes damaged, or had access to 
        their homes disrupted were eligible to receive assistance which 
        may include relocation, temporary housing costs, rent/mortgage, 
        cleaning, moving, storage, and air purifiers.
        <bullet> Economically Impacted--Clients who worked below Canal 
        Street in Manhattan and were unemployed due to the 9/11 attacks 
        were eligible for three months of assistance with rent, food, 
        and utilities until February 7, 2002. After February 7th, 
        clients were eligible for a one month grant disbursed according 
        to household size. The last day for economically impacted 
        clients to register for Red Cross assistance was March 28, 
        2002.
    In total, the September 11 Recovery Program has provided support to 
nearly 60,000 individuals and families directly affected by the 
September 11 terrorist attacks. While the direct services provided by 
SRP, including financial assistance and referral to social work 
agencies for case management needs, ended on December 30, 2005, the 
program had been established around five major initiatives:
        <bullet> Long Term Mental Health Services--based on financial 
        need, this program provided financial assistance for services 
        including individual, group and family counseling; psychotropic 
        medication coverage; hospitalization; and inpatient and 
        outpatient substance abuse treatment. Programming will continue 
        through the end of 2007.
        <bullet> Long Term Health Care Services--this program provided 
        financial assistance and clinical case management for uncovered 
        health expenses directly related to injuries or illnesses 
        caused or exacerbated by the events of 9/11.
        <bullet> Family Support Services--This program provided 
        individualized support and guidance to eligible families to 
        ensure that they had access to the resources they needed for 
        their recovery. Trained Red Cross Family Support specialists 
        assisted with determining health care and mental health needs, 
        identifying resources, making referrals, providing assistance 
        through three financial assistance programs, identifying long-
        term needs and planning for the future.
        <bullet> Assistance to Residences--For displaced residents with 
        ongoing needs, the Red Cross provided air purifiers and HEPA 
        vacuums, helped to relocate individuals and families, and 
        provided reimbursement for expenses incurred during 
        displacement. In addition, this program offered mental health 
        assistance to affected residents who experienced emotional 
        trauma as a result of 9/11.
        <bullet> Communication Coordination--To help meet the needs of 
        those affected by the September 11 attacks and maximize 
        efficient use of resources, the Red Cross coordinated with 
        other groups including community organizations, constituency 
        groups, advocacy organizations, local elected officials, faith-
        based and interfaith organizations, and other nonprofit and 
        government agencies providing direct services and benefits to 
        those affected. The Red Cross is a founding member of the 9/11 
        United Services Group (USG), which coordinated 13 service 
        agencies to help ensure that those affected by the events of 
        September 11 were able to get the help they need. The Red Cross 
        assisted the USG in developing a shared database that has 
        helped various charities provide financial assistance and 
        services to victims of the September 11 attack more 
        efficiently.
    At the end of the first quarter of 2006,\1\ the Liberty Disaster 
Relief Fund had collected a total of $1.080 billion. Approximately $738 
million of the funds received has been expended in financial assistance 
to those directly affected; $159 million has been expended for 
immediate and long-term program costs; $66 million has been expended 
for indirect services; and about $60 million has been used for fund 
stewardship. As of the end of March, 2006, $55 million remained in the 
Liberty Fund.
---------------------------------------------------------------------------
    \1\ These figures represent contributions and expenditures through 
March 31, 2006 and are the most current data available. The next report 
of the Liberty Disaster Relief Fund will be released on the fifth 
anniversary of 9/11 on September 11, 2006.
---------------------------------------------------------------------------
    The Red Cross will use the balance remaining in the Liberty 
Disaster Relief Fund to support non-profit agencies that can deliver a 
variety of services to the people whose lives were the most seriously 
affected by the terrorist attacks in the communities where they live 
and work. These services include mental health and wellness for adults, 
adolescents and children; health diagnosis and treatment for rescue and 
recovery workers; financial assistance; and community recovery in lower 
Manhattan.

Fraud Prevention, Detection and Controls
    Waste, fraud and abuse are very serious issues to the American Red 
Cross. As an independent nonprofit agency, we rely on the donations of 
the American public to provide services free of charge to victims of 
disaster. We have an obligation to our donors to ensure that we are 
good stewards of the donated dollar. The Red Cross treats its 
obligation to deter and detect fraud or abuse with the utmost 
seriousness and when appropriate seeks prosecution of fraudulent 
activity to the fullest extent of the law.
    During times of disasters there are individuals who take advantage 
of the generosity of the American people and of the very agencies and 
institutions that provide services to those in need. That has held true 
in all Red Cross disaster responses, and unfortunately, it was evident 
during our response to September 11. Attached to my testimony are 
examples of fraud that we witnessed as an organization during our 
response to September 11. (Appendix II)
    We learned a number of valuable lessons in our response to 9/11 and 
have implemented a number of changes in the Red Cross response to 
disasters and to prevent, detect and control fraud. I will address some 
of the lessons learned and elaborate on fraud prevention, detection and 
controls that have been put in place as a result of our response to 9/
11.
    But first let me describe the 9/11 compliance and enforcement 
response. 1,473 cases were investigated by the Red Cross involving 
actual or potential allegations of fraud, and many of these cases were 
referred to federal, state and local prosecutors for full investigation 
and prosecution. There were some cases that were not pursued by law 
enforcement and these were reviewed by the Red Cross for possible civil 
prosecution as I discuss below.

Methods of Prevention
    The Red Cross executed a number of policies and methods to mitigate 
fraud from occurring. These include:
        1. Except where immediate assistance was necessary, require 
        applicants for assistance to document financial need and/or 
        injury caused or exacerbated by the disaster.
        2. For every eligibility requirement, we established a 
        corresponding documentation requirement that was specific and 
        enforced.
        3. Required applicants to affirm that the information provided 
        and recorded in the case file was accurate and true.
        4. Whether automated or manual processes, developed more 
        effective case tracking mechanisms to detect and track fraud 
        and ensure that those not entitled to benefits did not receive 
        them.
        5. Implemented at the outset of any disaster relief effort the 
        types of fraud detection and prevention efforts, including 
        cooperation with other charities and governmental entities.
        6. Make certain that all decisions about program design and 
        eligibility criteria were made by a centralized authority and 
        were communicated to the field clearly, in writing.
        7. Developed forms and procedures that minimize discretion for 
        case workers and clearly articulated the ground rules for 
        discretionary decisions by supervisors.
        8. Delineated clearly the responsibilities of all those 
        involved in the review and approval process by making clear 
        that someone was obliged to make sure all necessary information 
        and documentation was provided.

Methods of Detection
    Detection of fraud in the aftermath of September 11th occurred in a 
variety of ways. The most prevalent and successful methods include:
        1. Casework--Many cases involved the presentation of false 
        documents, false identities and false victims.
        2. Internal Controls--Disaster Accounting was alerted to 
        duplication of benefits, forged checks, changes in address, 
        etc.
        3. Neighbors, Family Members and Associates--Individuals would 
        alert the Red Cross to the possibility of fraudulent claims, 
        which were investigated.
        4. Law Enforcement--Red Cross was alerted to on-going 
        investigations involving FEMA, NYPD and NYFD as to the 
        possibility of fraud.
        5. Case Audit Unit--would discover inconsistent data, 
        documentation and statements, which would lead to further 
        investigation.
    The Red Cross identified 20 cases as possible targets for civil 
suits. Hogan & Hartson LLP, a nationally recognized law firm, 
represented the Red Cross in these civil proceedings on a pro bono 
basis. After further investigation on these 20 cases, we decided to 
refrain from pursuing ten of the 20 cases because of factors, such as 
an inability to locate and serve the defendant with legal process or 
the defendant did not have sufficient financial assets that could 
satisfy a judgment. However, we filed suit in the remaining 10 cases. 
The total amount sought to recover in these 10 cases is $111,352. As of 
this date, two cases have been completed, with $25,894 recovered 
through settlements. There is a settlement in a third case for $15,600, 
with monthly payments of $100 for 156 months. The defendant made the 
first payment but has defaulted on remaining payments. We have filed a 
motion with the court to enforce the settlement agreement, which is 
pending. We have obtained a default judgment in a fourth case and we 
are moving forward with the appropriate procedures to garnish the 
defendant's wages. The remaining six cases are in various stages of 
active litigation.
    One of the lessons that the Red Cross learned from 9/11 was the 
need to more aggressively pursue fraud perpetrated against the Red 
Cross though the civil court process and to include verifying that Red 
Cross insurers kept their commitments to pay fraud claims filed by the 
Red Cross. Two cases illustrate this point.
        <bullet> In the Southeastern Connecticut Chapter matter, the 
        Red Cross filed an employee dishonesty claim with Royal 
        Insurance Company arising out of the embezzlement of 9/11 funds 
        by the Executive Director of the Southeastern Connecticut 
        Chapter. The Red Cross filed a claim with Royal for $173,657, 
        the total amount of the loss, even though the local prosecutor 
        valued the provable loss as $120,000. In December, 2003, the 
        Red Cross reached a settlement of our claim with Royal for 
        $97,710. The policy at the time had a deductible of $50,000, so 
        we received from Royal $47,710. It was determined between the 
        Chapter and Red Cross National Headquarters that the Liberty 
        Fund would receive 79% of this settlement.
    <bullet> In the Hudson County Chapter matter, the Executive 
Director of the Chapter embezzled $1,113,577 from the Chapter that was 
a provable loss. With additional costs associated with the embezzlement 
that were covered by our fidelity loss policy, the total claim 
submitted to Royal Insurance was $2,490,593.70. Royal Insurance paid 
part of the claim in the amount of $1,676,024.65 in August, 2003, 
leaving $787,796 as an amount that Royal said was not covered by the 
policy. The Red Cross filed suit against Royal and the case was settled 
for $475,000 in November, 2003. Thus, the total amount recovered from 
Royal in this matter was $2,151,024.65.
    The Red Cross will continue to work with federal, state and local 
law enforcement regarding fraud against the Red Cross and will actively 
pursue in the civil courts those provable cases not prosecuted in the 
criminal courts. The Red Cross also will file appropriate claims with 
its insurance companies and will pursue claims for any fraud losses 
against those insurance companies that wrongfully deny claims.

Methods of Controls
    The detection and prevention of fraud is a small, but important 
component of the design of a disaster relief program. The September 
11th Program provides myriad examples of the kinds of fraud that people 
will try to perpetrate if substantial sums of money are available. Many 
types of fraud can be minimized by taking proper steps in the design 
and controls of the eligibility criteria and documentation requirements 
for the programs.
    In developing a response to any disaster, the Red Cross must do at 
least two things; 1) define the individuals who are eligible to receive 
assistance and; 2) define the assistance that each will receive.
    An important issue for defining eligibility is creating an 
authoritative list of those who are entitled to benefits/assistance. 
This was an ongoing problem for all of the charities that responded to 
the September 11 attacks. In a future disaster, it will be important 
for the charities and governmental entities to work together to develop 
a comprehensive list of those injured, deceased, and entitled to 
benefits. Where an individual seeks benefits for a relative who is not 
on the list, some additional documentation should be required. 
Additionally, documentation beyond a simple assertion that an 
individual was killed must be provided for claims of death. Many of the 
significant cases of fraud against the Red Cross (in dollar terms) 
occurred when people falsely claimed that a loved one had been killed.
    A well-designed program with appropriate levels of controls should 
balance the interest in minimizing fraud with the interest in ensuring 
that victims receive assistance without undue administrative burden.
    Failure to obtain adequate documentation or documentation of any 
kind was a significant problem in the early Family Gift Programs (FGP 
I; FGP II) when the standards of ``assumed'' and ``attested'' 
eligibility were utilized. Many case files have nothing (other than 
case worker notes) to substantiate the claims made or the assistance 
provided. This problem was rectified when the ``demonstrated'' 
eligibility standard was used for the final family gift distribution. 
Although there are numerous examples of individuals who forged 
documents, a substantive amount of fraud was committed by those who 
lied, but were never asked to provide documentation to back up their 
claims. A number of additional suspected fraud cases were identified 
when applicants were unable to provide the required documentation to 
substantiate their additional claims of ongoing financial assistance.
    Finally, those who design future financial assistance programs must 
be cognizant that the ability often given to case workers to be 
creative and flexible in helping applicants to obtain benefits or 
assistance often has the effect of encouraging case workers to bend or 
break rules for eligibility. To the extent such flexibility is 
encouraged, it should be done at the supervisory level and it should be 
clear that flexibility cannot result in providing additional funds to 
those who are not eligible.

Coordinated Assistance Network (CAN)
    One of the great successes to come out of the entire 
nongovernmental organization community's response to 9/11 was the 
development of the Coordinated Assistance Network (CAN). Our 
experiences in 9/11 showed clearly that having clients find their way 
through a web of service providers caused added confusion in an already 
trying time. Several disaster clients were lost within the improvised 
system; others were shuttled from appointment to appointment, having to 
tell their painful story time and time again.
    The Coordinated Assistance Network provides the framework and tools 
to make casework management easier and more efficient though advanced 
collaboration and also adds additional safeguards to prevent fraud. CAN 
enables disaster clients to visit any one of the participating 
organizations, tell their story, provide required documentation, and--
with their permission--have that information shared automatically with 
the partner agencies that are able to assist them. Through a secure, 
web-based system, an agency can instantly review each client's specific 
situation and the services received--in real time--helping to provide 
better services to the client, eliminate duplication of benefits, and 
measurably lessen the burden for each participating agency.

Since 9/11
    In addition to the valuable lessons we have learned and 
incorporated as a result of our response to 9/11, our nation has 
continued to see individuals take advantage of the generosity of the 
American public and the agencies responsible for helping victims 
recover from disaster. This past year, the American Red Cross provided 
assistance to more than 1.4 million families impacted by the 
devastation wrought by Hurricanes Katrina, Rita and Wilma. $1.2 billion 
of emergency financial assistance was provided to those million 
families. To stop those that attempt to cheat the system, the Red Cross 
participates in the Department of Justice's Hurricane Katrina Fraud 
Task Force, which also includes members from the FBI, the United States 
Secret Service, the Federal Trade Commission, the Postal Inspector's 
Office, and the Executive Office of the United States Attorneys, among 
others. The Red Cross is assisting in hundreds of investigations now in 
progress. Every resource is precious to the Red Cross and we are taking 
every measure to aggressively pursue any illegal activity. To date, 
there have been 76 indictments and 55 convictions.
    As of June 14, we are investigating 7,109 cases of suspected and 
actual fraud. These represent a combination of cases turned over to law 
enforcement and cases being investigated internally. We estimate the 
potential of approximately $9.5 million in cases stemming from this 
fraud.
    There were instances where individuals or families received 
duplicative assistance that was neither fraud nor abuse on behalf of 
our clients, but rather a simple oversight or human error. I am pleased 
to report to this Committee today that as of May 1, 2006, the American 
Red Cross had collected $2.3 million in returned assistance from 
clients who had received duplicate payments.
    As a result of the fraud we have experienced during and since 9/11 
and the 2005 hurricane season, the American Red Cross is incorporating 
even stronger controls to mitigate future abuses. These include 
improvements to our Client Assistance System (CAS) software, with 
reporting enhancements to provide a single system of record to support 
the delivery of assistance to those in need; and improvements in 
chapter advance procedures and new monitoring and control processes to 
support the use of the cash-enabled client assistance cards (CAC).

Closing Remarks
    Mr. Chairman, Congressman Meeks, and Members of the Committee, I 
want to thank you again for providing me the opportunity to share with 
you our experiences in our response to September 11. The American Red 
Cross provided assistance to nearly 60,000 individuals and families 
impacted by the devastating attacks on America on September 11, 2001. 
As the September 11th Recovery Program begins to wind down nearly five 
years after the first plane struck the World Trade Center, the American 
Red Cross continues to respond to disasters, both natural and manmade, 
each day in communities across the country.
    We are proud to be America's partner in disaster prevention, 
preparedness, and response, and we urge all Americans to be prepared 
for whatever disaster may strike.
    I am happy to respond to any questions you may have.

Appendix I
September 11, 2001
        <bullet> Four airplanes are hijacked and crash into the twin 
        World Trade Center towers, the Pentagon, and an open area near 
        Shanksville, Pennsylvania. The terrorist attacks affect tens of 
        thousands of victims and their family members throughout the 
        United States. Millions more across the country and around the 
        world are overcome by grief, fear, and compassion.
        <bullet> Within minutes, the American Red Cross immediately 
        responds. More than 6,000 trained disaster volunteers are 
        mobilized. Emergency Response Vehicles are deployed to help 
        victims and rescue workers.
        <bullet> When the towers collapse, an Emergency Response 
        Vehicle from the Red Cross in Greater New York is hit with 
        debris and rubble. There is great concern throughout the 
        organization for the welfare of the staff.
        <bullet> Volunteers open 13 shelters in the New York area for 
        people left homeless or stranded.
        <bullet> Volunteer mental health professionals trained in 
        disaster response are dispatched to the shelters, crash sites, 
        the flights' points of origin and destination, and other major 
        transportation hubs, providing physical and emotional support 
        to the victims, their families, rescue and recovery workers and 
        thousands of others affected by the tragedy.
        <bullet> After the FAA grounds all commercial traffic in the 
        United States, Red Cross chapters across the country help 
        hundreds of thousands of travelers stranded at airports 
        nationwide.
        <bullet> Respite centers are established near the crash sites 
        to provide the police officers, firefighters, rescue and 
        recovery workers, and others with places to turn for physical 
        and emotional relief.
        <bullet> The Red Cross begins taking spontaneous donations to 
        help the victims of the attacks and their families. Individuals 
        and businesses in America and around the world begin donating 
        money and blood in record numbers.
        <bullet> The Red Cross blood donation line receives more than a 
        million calls. (The most received previously in one day was 
        3,000.)

September 12, 2001
        <bullet> The City of New York opens the Compassion Center for 
        families whose loved ones are missing. There, the Red Cross 
        provides mental health counseling and meals.
        <bullet> The Red Cross sets up a phone bank at the offices of 
        PBS affiliate WNET Channel 13. Mental health volunteers take 
        calls there from people in need of assistance. At Red Cross 
        headquarters, a 24-hour Emergency Communications Center is 
        activated.
        <bullet> At the request of the White House, the Red Cross mans 
        a blood drive for White House staff.

September 13, 2001
        <bullet> Within one day, volunteers answer more than 13,000 
        calls at the Emergency Communications Center.
        <bullet> A special Amtrak train containing relief supplies 
        leaves Union Station in Washington, D.C., bound for New York.
        <bullet> At the request of Congress, the Red Cross commences a 
        two-day blood drive in Senate and House office buildings.

September 15, 2001
        <bullet> Three new mental health brochures are released to help 
        people around the country address and cope with the emotional 
        trauma created by the disasters.

September 16, 2001
        <bullet> Working with Microsoft and Compaq, the Red Cross 
        launches the Family Registration Web, an online network to help 
        unite loved ones with survivors of the attacks.

September 17, 2001
        <bullet> Acting in part on counsel from the Red Cross, the City 
        of New York moves the Compassion Center to a new location where 
        it becomes the Family Assistance Center. The Red Cross 
        continues to play a major role, offering financial assistance, 
        bereavement counseling, guidance and help with gathering 
        information. Red Cross crisis counselors are aboard all 
        shuttles carrying family members to the center. In addition, 
        the Red Cross provides meals for both families and workers.
        <bullet> When the world financial market reopens, Red Cross 
        mental health volunteers are at major transportation hubs to 
        offer counseling, provide mental health information and to let 
        people know that help is available.

September 18, 2001
        <bullet> Eighteen teams of Red Cross workers go door-to-door in 
        the Restricted Zone in downtown New York to assist residents 
        who choose to stay in the area. Each team is made up of six 
        people and includes a mental health professional, a disaster 
        specialist, and a family service worker.

September 20, 2001
        <bullet> The Red Cross establishes the Liberty Disaster Relief 
        Fund as a separate, segregated account to fund relief services 
        related to the September 11 attacks.
        <bullet> The Red Cross commences a series of blood drives at 
        federal departments, including Commerce, Health and Human 
        Services, Justice, Transportation and Defense.

September 23, 2001
        <bullet> The Red Cross launches an unprecedented Emergency 
        Family Gift Program to help families of the deceased and 
        seriously injured meet their immediate financial needs. This 
        gift program assesses each family's needs and provides a grant 
        for living expenses such as food, clothing, utilities, mortgage 
        or rent payments, funeral, and related expenses. The program 
        places funds in the hands of families, often within one 
        business day.

September 27, 2001
        <bullet> The Red Cross launches a nationwide, toll-free hotline 
        offering assistance and referral information for anyone seeking 
        help from the Red Cross. 1-866-GET-INFO and a call center in 
        Virginia become important components of the overall Red Cross 
        response to September 11.

October 9, 2001
        <bullet> By the end of the fourth week, the Red Cross has 
        served 5,854,373 meals, answered 64,211 hotline calls, and 
        helped people affected by the disaster by making 61,104 mental 
        health contacts and 31,717 disaster health contacts.

October 12, 2001
        <bullet> The Red Cross announces that at least $300 million 
        will be needed for the Red Cross response. Because future 
        terrorist attacks seem imminent, the announcement states that 
        funds raised will be spent on other terrorist-relief programs, 
        including a strategic blood reserve, Armed Forces services, and 
        community outreach.

October 31, 2001
        <bullet> The Red Cross ceases active fund-raising for the 
        Liberty Disaster Fund. At this point, the organization has 
        received more than $500 million in September 11-related 
        donations.

November 6, 2001
        <bullet> In testimony before Congressional and Federal 
        officials, the Red Cross announces that it has spent or 
        committed close to $154 million in less than seven weeks. 
        Within that short time frame, the organization has already 
        helped 25,000 families affected by the September 11 terrorist 
        attacks, provided more than 10 million meals and snacks to 
        families, police officers, firefighters, investigators, and 
        rescue and recovery workers. Trained mental health workers also 
        have provided emotional support to more than 144,000 people.

November 11, 2001
        <bullet> The Red Cross in Greater New York commences a two-day 
        training seminar for more than 700 tri-state mental health 
        professionals who interact with citizens affected by the events 
        of September 11.

November 12, 2001
        <bullet> On the second day of the training seminar, Red Cross 
        volunteers on staff at the event are quickly mobilized to serve 
        the needs of victims of a plane crash in Belle Harbor, Queens, 
        a neighborhood that has already lost a number of residents to 
        the September 11 terrorist attacks.

November 14, 2001
        <bullet> With nearly $550 million in the Liberty Disaster 
        Relief Fund, the Red Cross announces that it will use the fund 
        to meet the immediate and long-term needs of the victims of the 
        September 11 terrorist attacks exclusively.

December 4, 2001
        <bullet> The Red Cross extends its financial assistance to 
        economically affected individuals to cover the cost of rent or 
        mortgage, utilities and food for up to three months.

December 27, 2001
        <bullet> The Red Cross names Senator George Mitchell, former 
        Senate Majority Leader, as the independent overseer of the 
        Liberty Disaster Fund to ensure donors that their contributions 
        will meet the ongoing and long-term needs of the families 
        affected by the September 11 terrorist attacks.
        <bullet> The Red Cross announces that it will spend $317.5 
        million by the end of 2001 on aid to more than 36,000 families 
        affected by the September 11 terrorist attacks.
        <bullet> At this point, the Red Cross has received more than 
        $667 million in donations to the Liberty Disaster Fund, which 
        has grown by more than $100 million since the organization 
        stopped soliciting donations.

January 31, 2002
        <bullet> Senator George Mitchell and the Red Cross announce the 
        Liberty Disaster Fund Distribution Plan. This plan calls for 
        distributing the majority of funds to those directly affected 
        by the disasters and reserves a portion of the fund to respond 
        to long-term needs of the families, rescue workers, and others 
        affected by the disasters. Senator Mitchell also announces 
        plans to expand the direct Family Gift Program to cover 
        expenses for up to one full year.

March 11, 2002
        <bullet> Six months after the terrorist attacks, the Red Cross 
        has received $930 million in contributions, of which it has 
        expended more than $550 million to date. The organization has 
        distributed $169 million to more than 3,200 families of the 
        deceased and those seriously injured. More than 51,000 families 
        displaced by the attacks have received $270 million. An 
        additional $94 million has funded the provision of 14 million 
        meals, mental health services to 232,000 people and health 
        services to 129,000 people.

May 1, 2002
        <bullet> Senator George Mitchell releases the first of his 
        quarterly reports on the distribution of the Liberty Disaster 
        Fund. The report states that the Red Cross ``fairly responds to 
        the needs of victims, complies with the intentions of Red Cross 
        donors, and is consistent with the Red Cross mission of 
        providing emergency disaster relief.''
        <bullet> Despite having discontinued solicitation of 
        contributions for the Liberty Disaster Fund for many months, 
        continued donations bring the fund's size to more than $950 
        million, nearly double the amount received when the Red Cross 
        stopped soliciting donations.

June 5, 2002
        <bullet> The Red Cross announces a series of bold changes in 
        its disaster fund-raising practices. The national initiative 
        expands efforts to educate donors about the Red Cross General 
        Disaster Relief Fund and institutes a new system of affirmative 
        confirmation and acknowledgement to ensure all disaster-related 
        donations are directed as intended. The program is called Donor 
        DIRECT, which stands for D(onor) I(ntent) RE(cognition), 
        C(onfirmation) and T(rust).

June 21, 2002
        <bullet> The Red Cross announces the start of the final phase 
        of the Family Gift Program. The Red Cross also announces the 
        Supplemental (Estate) Gift Program, which will provide one-time 
        gifts of $45,000 to the estates of those who were killed in the 
        attacks, as well as to those who were seriously injured.

August 1, 2002
        <bullet> Senator Mitchell releases the second quarterly Liberty 
        Disaster Relief Fund report, which finds that the Red Cross 
        continues to distribute the fund properly to meet the needs of 
        the families and individuals affected by the September 11 
        terrorist attacks. More contributions bring the total receipts 
        to the Liberty Disaster Fund to $988 million.

August 22, 2002
        <bullet> The Red Cross announces the details of its September 
        11 Recovery Program. The Program will allocate more than $133 
        million to provide services over a period of three to five 
        years to the families most directly affected by the September 
        11 attacks. These funds are to be used primarily to help pay 
        for mental health and uncovered health care services, as well 
        as family support and assistance to affected residents in 
        downtown Manhattan.

September 11, 2002
        <bullet> As the nation marks the one-year anniversary of the 
        terrorist attacks of September 11, 2001, the Red Cross 
        continues to help provide family support, mental health, and 
        spiritual counseling for affected families and individuals. In 
        addition to providing support on the day of the anniversary, 
        the Red Cross is also offering assistance to help pay the 
        expenses for families who wish to travel to a memorial service 
        that will take place in affected cities across the country but 
        who might not otherwise have the means to attend.
        <bullet> Within one year, $643 million has been distributed or 
        committed to those directly affected by the September 11 
        disasters. Another $200 million is projected to be distributed 
        by year's end depending on the pace of family responses 
        received and the processing and verification of necessary 
        documentation.
Appendix II
Examples of fraudulent cases:
    October 2002 Daniel Djoro reported that his brother, ``Daniel 
Zagbre,'' had perished while at the World Trade Center for a business 
meeting. He produced his ``brother's'' Social Security number and 
driver's license to prove ``Zagbre's'' existence. We had flown him from 
Lansing, Michigan to New York City to retrieve the death certificate. 
But ``Daniel Zagbre'' was in fact a fictitious name the defendant 
himself had used. Djoro eventually defrauded the Red Cross and Safe 
Horizon out of $269,000, of which he has repaid $138,000. (Prosecuted 
by Manhattan DA)
    August 2003 Cyril Kendall, a father of 12 children, claimed that a 
13th child had died in the WTC attack. He told the Red Cross and Safe 
Horizon that his son was in the North Tower for a job interview with 
the American Bureau of Shipping, a legitimate company. To prove the 
existence of his ``son,'' Cyril showed Red Cross workers a picture of 
himself as a young man. He stole over $119,000 from September 11th 
Recovery Program and $190,000 in total. (Prosecuted by the Manhattan 
DA)

    January 2004 Terry Smith received over $136,000 from the Red Cross 
after claiming his wife died on 9/11 while visiting a friend at the 
WTC. He also claimed that he and his wife had 10 children and needed 
the funds for health care and child care. Our staff became suspicious 
when he was reluctant to produce a New York death certificate. His wife 
was actually deported to Jamaica in 1999. (Prosecuted by the US 
Attorney, Southern District, California)

    November 2004 Donna Miller claimed that her husband, Michael, died 
in the attack on the World Trade Center. When she was unable to provide 
documentation of Michael's death, the September 11th Recovery Program 
contacted the authorities in Michigan. After further investigation by 
the Kent County Sheriff's Department, Detective Steve Moon found that 
her deceased husband was actually still alive. She collected over 
$98,000 from the Red Cross and Safe Horizon. (Prosecuted by the Kent 
County (MI) District Attorney)
    Jonathan Finkelstein received $51,000 for injuries he said he 
suffered as a volunteer paramedic at Ground Zero. However, the 
September 11th Recovery Program learned that not only was he never at 
the World Trade Center site, but the documentation supporting his 
injury claims was forged by his wife at the doctor's office where she 
worked. He repaid the $51,000 in court-ordered restitution upon 
pleading guilty to the charges. (Prosecuted by the Manhattan District 
Attorney).
                        Thursday, July 13, 2006

             10:00 a.m. in 311 Cannon House Office Building

         Subcommittee on Management, Integration, and Oversight

                                Hearing

   ``An Examination of Federal 9/11 Assistance to New York: Lessons 
 Learned in Preventing Waste, Fraud, Abuse, and Mismanagement, Part II-
                               Response''

                               Witnesses

Prepared Statement of Ms. Ruth A. Ritzema, Special Agent in charge for 
 New York, Office of Inspector General, U.S. Department of Housing and 
                           Urban Development

    Chairman Rogers, Ranking Member Meek, members of the Subcommittee; 
thank you for inviting me to testify today on the lessons learned after 
the events of September 11, 2001. Although this hearing is about the 
oversight efforts in fraud detection, prevention and control, which I 
will elaborate in great detail on, I wanted to start off my testimony 
by quickly sharing with you how the events of that day directly and 
intimately impacted me.

Events of September 11th
    The Department of Housing and Urban Development's Office of 
Inspector General (HUD OIG) Office of Investigations, of which I am the 
Special Agent in Charge, was at 6 World Trade Center. It housed 
approximately thirty-five HUD OIG employees--special agents, forensic 
auditors and support staff.
    On that morning, fortuitously, our New York City special agents 
were out of the office at a quarterly firearms qualification. 
Unfortunately, our forensic auditors and support staff were on site 
when the first plane hit the North Tower, which was adjacent to our 
office. All of the auditors and support staff in the building heard the 
explosion and one of our secretaries, who saw pieces of the plane and 
building fall, immediately told everyone to evacuate prior to any 
alarms going off. They fled across the street near the financial 
district where they watched the building burn. The group became 
separated when the second plane went into the South Tower.
    Four of my special agents from our regional sub-office in Buffalo, 
New York, had flown in for their firearms qualification and they were 
to meet at our building at 9:00 a.m. for case reviews. The agents were 
traveling on the subway and made a lucky mistake by getting off at City 
Hall instead of the next exit that would have put them in the basement 
of the World Trade Center complex at exactly the wrong time.
    I had meetings scheduled for that day in New Jersey and was across 
the river when I received a page from an agent about a fire at the 
World Trade Center. When I heard on the radio about the second plane 
going in, and worried about my own people, I immediately headed into 
the City using the shoulder of the New Jersey Turnpike to bypass the 
stopped traffic. As I approached the extension, I could see the towers 
on fire. I repeatedly tried to get through to headquarters, the staff 
or the offices, but as hard as I tried I only got a busy signal.
    As I was driving towards the City, the first of the two towers 
collapsed before my eyes and I heard on the radio that the Pentagon had 
also been attacked. I drove through the Holland Tunnel to the federal 
building located at 26 Federal Plaza, which is six blocks away from the 
World Trade Center and is also where the HUD OIG Office of Audit is 
located. A Federal Bureau of Investigations (FBI) agent told me that 
the emergency law enforcement command post was setting up at the church 
adjacent to the World Trade Center complex.
    Running down Broadway, I was struck by how surreal the whole 
situation appeared. The beautiful cloudless day had turned all dark 
with soot and smoke in the air. People tried to turn me away from 
Ground Zero until I threw on my ``Federal Agent'' vest cover. I stopped 
from time to time to try to get help for a couple of people who had 
pretty serious burns. I then continued to run to the command post to 
check and make sure that our people were out safe. I just arrived at 
the church adjacent to the towers when the second tower collapsed 
literally right in front of me.
    At that point, I have no memory of what happened during the 
collapse. My next memory is being about a block away with firemen all 
around and hearing screaming radio transmissions of firemen who were 
getting buried and were desperately trying to give their coordinates; 
``we're at two o'clock from the fountain'' (the fountain was located in 
the middle of the plaza). After the air cleared some, another FBI agent 
saw me and told me that we were rallying in Chinatown and he and I ran 
there.
    I immediately agreed to work with and assist the FBI in any 
capacity. Our Assistant Special Agents in Charge (ASACs) had rallied 
our agents and were standing by for instruction. One of my ASAC's and I 
went back to what was formerly our office and watched the building 
burn. Shortly thereafter, 7 World Trade Center collapsed. Training from 
my years in the military kicked in as we dispersed and established 
security perimeters to deal with the rumors and false reports swirling 
about in the dark mist of that day. Thankfully, and most importantly, 
we accounted for our people, but we had lost everything else--our 
evidence, all our case files, and our equipment. The HUD OIG had 
previously suffered a tragedy when one of our special agents died in 
the Oklahoma City bombing and I was very grateful how lucky we were 
considering our proximity to the devastation.
    A command post was set up at 290 Broadway and it seemed that every 
law enforcement-related agency was in that room with a phone that 
rarely worked and a handwritten piece of paper taped in front of their 
table to identify their agency. Our OIG agents were stationed all over 
the city--at command post, airports, Ground Zero or whatever other hot 
spot came up. They also searched for evidence with rakes, shovels and 
gloved hands at the landfill in Staten Island. This command post was 
move to the ``Intrepid'' in the Hudson River and to a garage on the 
West Side Highway where for the next few months our special agents 
continued to assist in the terrorist investigation and to transition 
back to HUD-related oversight activities.

Auditing Activities
    In the aftermath, Congress authorized HUD to provide the State of 
New York with $3.483 billion in Community Development Block Grant 
(CDBG) disaster assistance to aid recovery and revitalization and 
earmarked at least $500 million of this to compensate small businesses, 
nonprofit organizations, and individuals for economic losses. Out of 
these funds, the Empire State Development Corporation (ESDC), 
designated by New York State to develop and administer economic and 
business recovery grant and loan programs, was allocated $700 million. 
The Lower Manhattan Development Corporation (LMDC), established to 
administer and develop programs to rebuild and revitalize lower 
Manhattan, was allocated $2.783 billion.
    Direction from the legislation insisted on speed in assisting 
businesses located in lower Manhattan hardest hit by the attack. For 
instance, applicants for Business Recovery Grants (BRG) were required 
to have a response to their request within 45 days of application 
submission. Congress also insisted on the utmost integrity from the 
program and required that the HUD OIG maintain a continuous audit 
activity of funds allocated to the rebuilding efforts. The Congress 
required that we report on the expenditure of the funds every six 
months. Our audit objectives to fulfill this mandate were to determine 
whether ESDC and LMDC:
        <bullet> Disbursed the CDBG disaster funds to applicants in a 
        timely manner;
        <bullet> Disbursed the CDBG disaster funds to eligible 
        applicants in accordance with HUD-approved action plans;
        <bullet> Had financial management systems to adequately 
        safeguard the funds; and
        <bullet> Developed and implemented adequate procedures for 
        monitoring the CDBG disaster assistance programs.
    HUD OIG called for a meeting with Inspectors General from all the 
affected agencies to begin investigative and auditing coordination and 
cooperation in the New York/New Jersey office. Early collaboration with 
other agencies was important to the success of our auditing efforts. As 
a result, procedures were developed that provided that if an entity 
already received a Small Business Administration (SBA) grant and 
applied for a BRG grant, that entity could not receive a BRG grant if 
the total of both grants exceeded its economic loss. Likewise, we met 
with Federal Emergency Management Agency (FEMA) officials to also work 
on the issue of duplication of benefits among our programs.
    We further collaborated with the Internal Revenue Service (IRS) to 
obtain a copy of an applicant's tax transcript, which was then used to 
verify that the tax information included on the application for 
computing economic loss was accurate. We discovered that some 
applicants did not file a tax return but still submitted a tax return 
on their BRG application and/or they sometimes included a higher 
taxable income than what was actually filed with the IRS in order to 
inflate economic loss. The auditors referred these over for 
investigation.
    Additionally, we coordinated with the Social Security 
Administration (SSA) to test whether the social security numbers from 
our audit sample were legitimate. If our auditors discovered a 
discrepancy (i.e., the age of applicant did not agree with the age 
registered with the SSA), they referred it to investigations. In 
general, if the auditors detected any suspicious information during the 
course of its financial review, for instance, in the ESDC's Business 
Retention Grant (BRG) or Small Firm Attraction and Retention Grant 
(SFARG) programs or in the LMDC's Residential Grant program, it 
referred it to investigations for further review. This greatly enhanced 
anti-fraud and abuse endeavors.
    HUD OIG auditors took a proactive approach that stressed prevention 
of fraud and abuse, as opposed to solely a detection emphasis whereby 
audits would take place long after the funds had been expended. The 
unusual nature of this audit recognized that the funds needed to be 
disbursed quickly and that Congress had waived the pre-set CDBG 
statutory requirements that governed the parameters of who were to 
receive grants. Early in the program our audits identified significant 
weaknesses in internal controls and program design. We conducted audits 
in an almost real-time basis that gave the auditee an early opportunity 
to take corrective action and improve controls and procedures for 
future expenditures. Audits were started no more than six months after 
the disbursements had been made. While this was resource intensive and 
caused a strain on our other operations as we had not been given any 
additional funds to undertake this initiative, we felt it was important 
that we remain aggressive and in the forefront.
    To date, we have audited over $1 billion dollars in disbursements. 
The results of these audits include findings of duplication of benefits 
and payments; of overpayments; of ineligible and unsupported costs, and 
of improvements needed in collection efforts. For example, our audit 
work found that over $2 million had been disbursed to the Hudson River 
Park Improvements Program contrary to the terms of the sub-recipient 
agreement.
    In furthering our early collaborative work with the SBA, only eight 
months after the attack, we issued an interim audit report noting the 
duplication of benefits between SBA loans and the ESDC's BRG program. 
We also reported on concerns we had with the calculation of recipients' 
economic loss amounts for the BRG program. As a response, ESDC 
developed procedures and formulas that tried to prevent duplication. 
ESDC also revised its application for the BRG program to require 
recipients to itemize the amount of claimed economic loss. In addition, 
it has responded by:
        <bullet> Revising and enhancing controls and procedures to 
        minimize ineligible and incorrect grant payments;
        <bullet> Instituting additional efforts to collect grant 
        overpayments;
        <bullet> Hiring additional internal audit and investigative 
        staff; and
        <bullet> Establishing an audit staff of retired New York State 
        Department of Public Service Commission employees to review the 
        claims submitted by utility companies under the Utility 
        Restoration and Infrastructure Rebuilding Program (i.e., they 
        have completed audits of claims for two utility companies and 
        disallowed in excess of $33 million of the companies' $99 
        million claim for reimbursement).

Investigative Activities
    In addition to our audit work evaluating operational and 
administrative controls and other financial matters, we are also 
intensively involved in anti-fraud and abuse efforts. We have grouped 
our efforts into the three general areas of HUD expenses: immediate 
disaster relief funding, mid-term grant relief, and long term 
rebuilding expenditures. Our Office of Investigation works in 
cooperation with the Office of the United States Attorney to prosecute 
recipients that have fraudulently obtained CDBG funds. We have 
established working relationships with other federal agencies and State 
and city entities. Very early on, due in large part to what our 
auditors were initially finding, we met with the U.S. Attorney's office 
to discuss the vulnerabilities and fraud patterns that were identified.
    Originally established as an informal group by the U.S. Attorney's 
office, the World Trade Center Fraud Working Group solidified and began 
to meet monthly to discuss fraud concerns and share information on 
schemes. The working group was made up of high-level management that 
allowed for the discussion of complex matters and encouraged an 
environment where issues were expeditiously addressed. The working 
group attempted to, among other things, identify all the various agency 
dollars flowing into lower Manhattan, de-conflict cases, use automation 
to detect criminal activity, pass on criminal trends to enable better 
training, coordinate cases for maximum impact, identify legal 
weaknesses in the various programs and pass on recommendations to make 
them more fraud resistant, coordinate amnesty programs, and facilitate 
federal, State and local prosecutions.
    This concentration of law enforcement and prosecutorial efforts 
resulted in the arrest and conviction of many perpetrators and also 
generated publicity that we believe had, to some extent, a deterrent 
effect. Members of the group included the:
        <bullet> Office of the United States Attorney's-Southern 
        District of New York
        <bullet> Office of the Manhattan District Attorney
        <bullet> Department of Labor-Office of Inspector General
        <bullet> Department of Transportation-Office of Inspector 
        General
        <bullet> Federal Emergency and Management Agency--Office of 
        Inspector General
        <bullet> Small Business Administration-Office of Inspector 
        General
        <bullet> Social Security Administration--Office of the 
        Inspector General
        <bullet> Environmental Protection Agency--Office of Inspector 
        General
        <bullet> Internal Revenue Service--Criminal Investigation 
        Division
        <bullet> U.S. Postal Inspection Service
        <bullet> New York City Department of Investigation
        <bullet> Lower Manhattan Development Corporation
        <bullet> State of New York--Office of Inspector General
        <bullet> State of New York Insurance Department
    Through our joint efforts, we have identified a number of types of 
potential criminal vulnerabilities that relate to the disaster 
assistance funding for lower Manhattan. These include:
        1. False Statements and Claims
        2. Wire Fraud
        3. Mail Fraud
        4. Theft or Bribery
        5. Tax Evasion
        6. Bid Rigging
        7. Prevailing Wage Fraud
        8. No Show Jobs
        9. Artificial Price Market Inflation
        10. Contract Fraud: Invoicing and Double Billing
        11. Environmental Crimes
        12. False Payrolls
        13. Public Corruption
        14. Embezzlement
        15. Insurance Fraud
        16. Collusion
        17. Kickbacks
    Every day our HUD OIG agents are at work on cases of fraud stemming 
from disaster funding for lower Manhattan. We received over 115 
referrals as well as work we initiated. Although a number of our cases 
have been completed, we still have 62 cases open that are under 
investigation.
    An example is the case against an individual who claimed his 
executive search firm sustained damage at 2 World Trade Center. He was 
convicted on 18 counts of defrauding nearly $350,000 from private and 
government agencies of disaster benefits including grants and loans. 
FEMA, SBA, HUD and the Red Cross were among the targets of his fraud. 
Using forged documents, he received Business Recovery Grants for non-
existent equipment that was supposedly lost when the tower collapsed.
    In a further example, as I speak to you today, there is a trial 
that is proceeding against a man who submitted fraudulent applications 
to government programs, received $118,000 that he was not entitled to, 
and applied for another grant when his scheme was uncovered. The amount 
of the grant award was calculated on the size of the business's 
expenses. So while his business was eligible for funds, he padded his 
application with thousands of dollars of phony expenses. He included 
lists of fake employees, business expenses, social security numbers, 
checks, wage reports that he supposedly filed with New York State--but 
never did, lease agreements, and signatures that were forged onto other 
documents.
    Another case involved a Maryland man, who was sentenced to 24 
months incarceration, to 26 months of probation, was ordered to pay 
restitution of $170,000, voluntarily forfeited $280,000 to the 
government, and was fined $10,200 for obtaining Business Recovery 
Grants claiming he had a business in lower Manhattan. In reality, the 
floor he claimed he was on was actually entirely occupied by a city 
agency. He offered a tax return that listed his business in lower 
Manhattan and reported gross earnings of $3.3 million. Our 
investigation proved he had no business in lower Manhattan but worked 
from his home in Maryland and that the business reported minimal gross 
earnings.
    Two other instances illustrate some of the early matters we were 
investigating. A New Jersey resident, who sublet his unit in lower 
Manhattan, fraudulently submitted a two-year commitment grant 
application, claiming he resided at his apartment on Pearl Street. A 
Manhattan woman claimed she lived on St. John Street and intended to 
stay in her apartment until the following year. In reality, she had 
moved uptown to W. 63rd Street. She had given LMDC a doctored lease and 
repeatedly lied about her address.
    A case of public corruption was brought against an official of the 
New York State Division of Housing and Community Renewal. This official 
illegally obtained a LMDC Residential Retention Grant saying his father 
lived with him in lower Manhattan and he then sublet the unit at market 
rent prices.
    Moreover, we found individuals who thought they would have easy 
access to money by establishing phony addresses. One such individual 
gave his address as 121 Reade Street, when in fact he lived further 
uptown on West 21st Street. This cost him a $2,000 fine, 200 hours of 
community service and one year's probation.
    The LMDC Residential Grant Program received more than 40,000 
applications and distributed more than $235 million. With each 
successful prosecution, we hoped that people who had lied to receive 
grant money had become anxious. To give these people a limited chance 
to come forward, a Fraudulent Grant Recipient Amnesty program was 
established. To date, over 160 households have returned money to the 
program.

    Lessons Learned from September 11th Experiences
    In addition to the establishment of a joint fraud working group, 
there are a number of initiatives that occurred, some of which we 
helped facilitate, which we believe are important to fraud detection, 
control and prevention.
    A lower Manhattan Construction Command Center was organized to 
coordinate all construction valued at over $25 million. As a result, a 
Construction Integrity Team was established which, among other things, 
consists of federal and local OIGs working in cooperation to evaluate 
vulnerabilities and improper activities. It has shared information so 
as to assist each of the contracting agencies in vetting contractors 
and subcontractors and to ensure the integrity of the process. It has 
set up an information campaign to deter fraudulent activity. It is also 
a productive venue to share facts on fraudulent and abusive trends. As 
construction and redevelopment begins, we anticipate that we will see 
more fraud and abuse involving contractors as HUD's funding moves away 
from benefit reimbursement to development efforts.
    In order to provide a mechanism for the State and City to receive 
information on potential improper activity relating to construction, a 
Fraud Prevention Hotline was created under the direction and control of 
the Command Center. It was designed to receive allegations of 
corruption or criminal activity by any agency employee, public 
official, contractor employee, agent, subcontractor, vendor, or labor 
official. This hotline began operations in 2005. Posters publicizing 
the hotline are, and will be, located in all construction work sites 
and trailers. A press release was issued to inform the public. In 
addition, flyers are inserted in paychecks and stickers are placed on 
the back of employee identification cards in order to highlight the 
hotline's presence. Moreover, a website was created that contains a 
complaint form.
    We also cooperated on a project that has established an employee 
baseline background check from third party databases that is overseen 
by a screening company. The background review will search for organized 
crime connections, terrorism ties, any previous histories of violence 
in construction, and theft and integrity issues. While recognizing that 
some employees involved in construction may have had past criminal 
problems, this check will try to evaluate the nature of the crimes 
committed. It is important that the unions buy in to this process, as 
they did so with this project, or it will be very difficult to 
undertake.
    Our oversight efforts have shown that the most effective way to 
proceed is to have monitoring be constant, continuous and at all the 
different levels of activity. Monitors should be concerned with: funds 
disbursement from the U.S. Treasury to State financial institutions; 
disbursements from the grantee to the sub-grantees; invoices and 
paperwork of the grantees and sub-grantees; timely reports for award 
and expenses; and timely reports on fraud prevention.
    As I believe you have heard about in previous testimony, we also 
advocate the use of integrity monitors, also sometimes known as 
Independent Private Sector Inspectors General (IPSIGs). These are 
monitors with legal, auditing, investigative and loss prevention skills 
that are employed usually by a government entity to ensure compliance 
with relevant laws, regulations and contracts. They can be helpful in 
the procurement or licensing phase of contracts and can assist in the 
vetting of initial contractors. In general, they act to deter, prevent, 
uncover and report unethical or illegal conduct that is especially 
useful if agency resources are inadequate to handle the response 
needed.
    The HUD OIG labored to provide useful fraud awareness training to 
granting agencies. We gathered trends in criminal activity from a host 
of other law enforcement agencies in order to facilitate our training. 
We worked together with the ESDC and LMDC to train them on fraud 
detection techniques, particularly before grants were disbursed, as 
well as on identifying fraud indicators. This enabled the grantees to 
subsequently identify possible fraud and retain the necessary 
documentation for prosecution. We established a rapport that was 
designed to receive referrals from them on a timely basis. Although 
hard to measure, we believe these joint efforts helped to prevent, or 
to mitigate, a number of potential frauds as well as to uncover, and 
provide, evidence of criminal activity. We are currently working on a 
training module that will be geared to the contracting community as 
rebuilding efforts begin in earnest and that will include instruction 
in areas such as bribery awareness, false invoice detection, and bid 
rigging schemes. Throughout the grant implementation and distribution 
process, we continually educated the grantees on how to structure their 
application forms in a manner that would positively identify the 
applicant to reduce the potential for fraudulent applications and that 
would enumerate on the form the penalties for committing fraud.
    From an auditing standpoint, we also believe there were important 
lessons learned. We believe it beneficial to: coordinate with other 
auditing entities to prevent overlap and duplication; hold meetings 
with auditees when new programs begin; utilize consultants or experts 
when necessary; use statistical sampling to better estimate results; 
discuss results early with auditees and local agency officials to 
prevent surprises; establish a relationship such that auditees will 
notify OIGs immediately upon the discovery of fraud; and work closely 
with investigators to get referrals to them quickly.

Oversight of Hurricane-related Disaster Relief Efforts
    The destruction and aftermath of Hurricanes Katrina, Wilma and Rita 
challenge the HUD OIG with a task even more daunting than the 
reconstruction of lower Manhattan following the September 11th attack. 
Once again, an area of our nation has been hit by an unexpected 
disaster that has taxed emergency services and redirected federal 
Inspectors General toward assisting local government and overseeing the 
expenditure of a large amount of federal money. However, it also 
important to understand that there are differences, as they relate to 
our oversight efforts, between these two disasters.
    From a HUD standpoint, New York City received approximately $3.5 
billion. At this juncture, the Gulf Coast States have received almost 
$17 billion in assistance from HUD. With post-September 11th relief 
efforts: there were only two major ``pass through'' entities of CDBG 
funds; there were far fewer prospective grantees and sub-grantees, 
there was a limited land area to consider; and the oversight activities 
were, to some extent, more controllable. With the post-hurricane relief 
efforts: there is a multitude of ``pass through'' entities of CDBG 
funds in numerous States; there are thousands of grantees and sub-
grantees; there is a huge land area of effected devastation; and, 
consequently, there is a much more arduous task for oversight.
    Though we had some disaster experience with Hurricane Andrew in 
Florida a number of years back, we were definitely on a learning curve 
with our September 11th oversight activities. Each of our encounters 
have taught us some general lessons including probably the most 
important lesson--that OIG teams on the ground, and at headquarters, 
must be proactive rather than reactive. This posture extends to 
collaboration. Joint task forces combine assets, manpower, information 
technology, budgets and other agency specialties to monitor 
expenditures and to attack fraudulent and criminal activities. To be 
truly effective, an OIG must continuously work to prevent waste, fraud 
and abuse by acting in real time and in a purposeful way to have a 
deterrent effect. Some of our best practices garnered from September 
11th have become invaluable to us in this current effort. These include 
endeavors such as:
        <bullet> Criminal investigators and auditors training State and 
        local entities on how to uncover fraud, how to identify fraud 
        indicators, how to retain necessary documentation; and how to 
        make referrals to appropriate law enforcement;
        <bullet> Participating in joint teams, such as grant fraud task 
        forces and construction integrity teams;
        <bullet> Setting up of hotlines and information campaigns on 
        how to report fraud; and
        <bullet> Properly vetting contractors and subcontractors and 
        creating a clearinghouse database, as well as systems to 
        conduct employee background checks.
    In particular, we have especially honed our training capabilities 
over time and are providing in-depth and varied instructional 
opportunities on topics such as fraud detection in disaster relief 
settings to a host of entities in the effected Gulf Coast area. The 
first State to submit their plan was the State of Mississippi through 
their agency, the Mississippi Development Authority (MDA). The MDA met 
on several occasions with the HUD OIG to discuss their plan, listen to 
our concerns, and to be briefed by HUD OIG audit and investigative 
managers on the potential for scams and how to deal with application 
fraud, such as false statements, identity theft and false documents. In 
addition, as part of our fraud awareness efforts, the HUD OIG educated 
MDA contract appraisers hired to assess property damage on fraud red 
flags. Homeowners applying for grant money received a HUD OIG fraud 
awareness bulletin as part of their application packet.
    Though not the focus of this testimony, I would like to inform the 
Subcommittee that while we are working together to put controls in 
place we do, however, still have some concerns. From an audit oversight 
standpoint, the MDA plan, oversight and monitoring of grant funds 
ceases after the State has issued ``compensation'' funds to the 
homeowner ``to be used at the discretion of the homeowner.'' The MDA 
plan is concerned with the funds to the point when they are given to 
the homeowner, at which point they are allowed to work through their 
personal disaster recovery as they see fit. We do not think that 
monitoring and oversight should end at this phase and we have remaining 
concerns about how ``compensation'' plan that basically reimburses will 
spur the rebuilding of now blighted communities. What is to become of 
these communities in the future?
    In general, our Office of Investigation down in the Gulf Coast 
region has created a far reaching fraud prevention program designed to: 
(1) create a training course for other agents/auditors and program 
officials to teach them to identify fraud specifically in CDBG 
programs; (2) sponsor fraud prevention meetings between HUD OIG and the 
major programs of HUD; and (3) sponsor fraud prevention meetings 
between the HUD OIG and industry groups such as the Mortgage Bankers 
Association, the Public Housing Authorities Directors Association; and 
the National Association of Housing and Redevelopment Officials.
    As part of this prevention program, the HUD OIG also created a 
Suspicious Activity Report (SAR) that will be given to HUD grantees, 
sub-grantees, and others associated with delivering disaster funds. The 
SAR is a method of informing HUD OIG of suspected irregularities in the 
delivery of HUD program money.

Conclusion
    In closing I would like to thank the Subcommittee for the 
opportunity to talk about the work that the agents, auditors, attorneys 
and support people of the HUD OIG have accomplished since the onset of 
this tragic and trying event. Our people do it because we are committed 
to the Department's mission of providing safe, decent, sanitary and 
affordable housing for the Nation, and of providing economic 
development for our country's communities. I look forward to answering 
questions that members may have.

  Prepared Statement of Mr. Eric M. Thorson, Inspector General, U.S. 
                     Small Business Administration

    Introduction. Chairman Rogers, Ranking Member Meek, distinguished 
Members of the Subcommittee, thank you for inviting me here today to 
discuss the efforts by the Small Business Administration (SBA) Office 
of Inspector General (OIG) in connection with the SBA's response to the 
September 11th terrorist attacks. September 11, 2001, was a day in 
American history that we can never forget. Beyond the tragic loss of 
life, the terrorist attacks disrupted the economy of the United States. 
The SBA responded to the economic downturn by providing guaranties on 
loans made by private lenders through the Section 7(a) Loan Guaranty 
program, and by making loans directly to affected small businesses 
under the Disaster Loan program. My testimony today addresses the OIG's 
efforts to review the efficiency and management of these 9/11 
assistance programs and to prosecute wrongdoers who took advantage of 
this national tragedy by obtaining loans through fraudulent means.
    Overview of the OIG's Audit of the STAR Loan Program. In January 
2002, Congress authorized SBA to provide financial assistance to small 
businesses that were affected by the 9/11 attacks and their aftermath 
through what is known as the Supplemental Terrorist Activity Relief or 
``STAR'' loan program. Newspaper articles in the Fall of 2005 raised 
questions as to whether borrowers obtained STAR loans even though they 
had not been affected by the terrorist attacks. As a result, Senator 
Snowe, who chairs the Senate Small Business and Entrepreneurship 
Committee, and the SBA Administrator asked the OIG to review this 
program. The audit objectives were to determine if STAR loan recipients 
were appropriately qualified to receive STAR loans and if SBA 
established and implemented proper administrative procedures to verify 
STAR loan recipient eligibility. However, before getting into the 
results of our review, let me provide a short background on the STAR 
loan program, which was administered under the Section 7(a) Loan 
Guaranty program.
    Overview of 7(a) Program. Under the Section 7(a) of the Small 
Business Act, SBA may guaranty up to 85 percent of a loan made by an 
authorized lender to a small business. This program is known as the 
``7(a) program.'' In 1983, SBA implemented the Preferred Lenders 
Program (PLP) which allows designated lenders to process, service, and 
liquidate SBA-guarantied loans with reduced SBA oversight and, as SBA's 
budget for salaries and expenses has shrunk over the past decade, the 
Agency has increasingly delegated this authority to lenders.
    Loans made under the 7(a) program that go into default are 
individually reviewed by SBA to determine whether the lender complied 
with the Agency's lending requirements. Generally, this review is the 
primary means that SBA uses to determine lender compliance with Agency 
regulations and requirements. If it is determined that the lender did 
not comply materially with SBA's regulations, SBA can negotiate a 
settlement of the guaranty amount or deny payment of the guaranty 
entirely.
    The STAR Loan Program. Under the STAR loan program, SBA was 
authorized by Congress to charge lenders reduced fees for guaranties on 
loans made to small businesses which were deemed ``adversely affected'' 
by the September 11th terrorist attacks and their aftermath. Although 
the term ``adversely affected'' was not defined, Congressional staff 
and SBA program managers appear to agree that Congress intended the 
program to benefit not only those businesses that were directly 
impacted by the attacks, i.e., firms located near the World Trade 
Center or the Pentagon, but also businesses across the country that 
were harmed by the economic consequences of the attacks. Congress 
appropriated $75 million for the STAR loan program, which provided 
authority for SBA to guaranty up to $4.5 billion in loans. Funds were 
available from January 11, 2002, through January 10, 2003.
    SBA Guidance on the STAR Loan Program. SBA issued guidance on the 
STAR loan program that defined an ``adversely affected small business'' 
as any business that ``suffered economic harm or disruption of its 
business operations as a direct or indirect result of the terrorist 
attacks . . . .'' Qualifying businesses were not limited to a 
``particular geographic area or to any specific type of business.'' SBA 
procedures required lenders to determine that the loan applicant was 
adversely affected by the terrorist attacks and to prepare and maintain 
in its loan file ``a write-up summarizing the analysis and its 
conclusion that the loan is eligible for the STAR program.'' The 
guidance made clear that a lender would be deemed not to have met its 
responsibility for determining that a borrower was adversely affected 
if the lender did not provide a narrative justification demonstrating 
the basis for its conclusion. Borrowers were permitted to use STAR loan 
funds for any purpose authorized for 7(a) loans. Lenders also had 
authority to reclassify loans made under the regular 7(a) program as 
STAR loans if the borrower was eligible.
    Our review found that lenders were initially reluctant to use the 
STAR loan program due to concerns that SBA would second guess their 
justifications and deny payment of the loan guaranty. Congressional 
staff expressed concern about the lenders' lack of interest in the 
program and urged SBA to promote the use of the program. SBA reacted by 
vigorously promoting the program through articles in trade journals, 
speeches at lender conferences, and by directing its district offices 
throughout the country to contact local lenders to persuade them to 
approve STAR loans. SBA advised lenders that a very large percentage of 
small businesses could qualify for STAR loans and assured lenders that 
SBA would not second guess their justifications.
    OIG Audit of the STAR Loan Program. The OIG conducted an audit of a 
statistical sample of 59 STAR loans from the universe of 7,058 STAR 
loans approved between January 11, 2002 and January 10, 2003, to 
determine whether loan recipients were eligible to receive the loans. 
There were 27 lenders included in the sample. Using accepted 
statistical methodology, the audit results could be projected with 95 
percent certainty. For 50 of the 59 borrowers (85 percent) in the 
sample, we were unable to determine from the lenders' loan files and 
discussion with available borrowers whether the borrowers were 
adversely affected by the 9/11 attacks and their aftermath, as required 
for STAR loan eligibility. For these 50 loans, the required 
justification was either (1) missing--5 loans; (2) merely a conclusion 
with no support--4 loans; (3) based on the adverse affects suffered by 
the business being purchased with a STAR loan rather than the ``loan 
applicant'' and SBA procedures did not specify whether such loans could 
qualify--11 loans; (4) contrary to documentation in the lender's loan 
file or borrower statements--21 loans; or (5) vague and neither 
contrary to nor supported by documentation in the lender's loan file or 
borrower statements--9 loans. Although these results do not necessarily 
show that the 50 borrowers were ineligible for the program, they 
indicate that lenders failed to prepare adequate justifications and 
obtain supporting documentation to determine eligibility.
    Further, of 42 borrowers that we were able to contact, only two 
stated they were aware that they had received a STAR loan. Thirty-six 
borrowers said they were not asked, or could not recall if they were 
asked, about the impact of the attacks on their businesses. We 
concluded that, in many cases, funds appropriated for guaranties on 
loans to small businesses adversely affected by the terrorist attacks 
may not have been used for that purpose.
    Inadequacy of SBA Program Controls. In trying to establish the 
reasons behind these findings, we determined that SBA did not implement 
adequate internal controls and oversight to ensure that only eligible 
borrowers obtained STAR loans. Although SBA established guidance for 
the program requiring lenders to prepare and file written 
justifications showing borrower eligibility, senior SBA officials, in 
order to encourage the use of the STAR loan program, broadened the 
scope of program eligibility. Public statements made by senior SBA 
officials conveyed SBA's expansive interpretation of the term 
``adversely affected'' and that SBA believed that virtually every small 
business had suffered some direct or indirect adverse impact and could 
likely qualify for a STAR loan. Further, SBA officials reassured 
lenders that the Agency would not second guess their eligibility 
justifications. SBA also did not require lenders to provide their 
justifications to the Agency, either at the time a loan was made or at 
the time that a lender requested SBA to honor the guaranty on a 
defaulted loan.
    I should note that, although the SBA guaranties may not have been 
used for appropriated purposes, we did not find that any businesses 
legitimately affected by the 9/11 attacks were precluded from obtaining 
a STAR loan. Indeed, when the STAR loan program appropriation expired 
in January 2003, funds for the program were still available and were 
transferred to the regular 7(a) loan program. Therefore, it does not 
appear that eligible businesses were prevented from receiving STAR 
loans due to a lack of funds. Furthermore, the default rate for STAR 
loans does not appear excessive in comparison to similar SBA-guarantied 
loans. As of September 30, 2005, only 8 percent of disbursed STAR loans 
approved between January 11, 2002, and January 10, 2003, had been 
transferred to liquidation status, while 10 percent of the 7(a) loans 
approved during the same time period had been transferred to 
liquidation status.
    Lessons Learned. What were the lessons learned from this review? 
For future special programs where 7(a) loans are used for nationwide 
disaster relief, the OIG recommended that SBA: (1) require loan 
applicants to justify how the business was harmed by the disaster; (2) 
require lenders to obtain supporting documentation to verify applicant 
claims of injury and provide detailed justifications showing applicant 
eligibility; and (3) implement effective internal controls and program 
oversight to ensure borrower eligibility and lender compliance. 
Specifically related to the STAR loan program, the OIG recommended that 
the Agency: (1) implement procedures to require lenders to submit STAR 
loan justifications when seeking SBA's purchase of a STAR loan 
guaranty; (2) establish criteria to provide more definitive guidance 
and examples for purchase reviewers to use in determining what 
constitutes an inadequate justification for STAR eligibility; (3) for 
future purchase requests, determine whether STAR loans that contain 
inadequate justifications can be reclassified as 7(a) loans or whether 
SBA can deny lender requests for purchase of the guaranties under SBA 
regulations; and (4) review guaranties the Agency has already paid 
under the STAR loan program to determine whether lenders were paid 
despite the absence of adequate borrower eligibility justifications. If 
there is inadequate justification, we recommended that the Agency 
determine whether SBA should reclassify the loan as a 7(a) loan or seek 
recovery of the guaranties from the lenders.
    Disaster Loans for Businesses Hurt by 9/11. The Small Business Act 
also permits SBA to make direct loans to victims of declared disasters. 
Disaster loans, which are available to businesses and to homeowners, 
can be used to fund repairs of physical damage to homes and businesses, 
and to provide working capital to disaster-impacted businesses to allow 
them to pay their bills or otherwise fund operational needs. These 
latter loans are known as Economic Injury Disaster Loans (EIDL). These 
loans are made at a low interest rate, generally less than 4 percent, 
with generous repayment terms, which can last up to 30 years. In order 
to make Federal assistance available to more businesses that were 
impacted by the September 11th terrorist attacks, and not just those 
located in the declared disaster areas, SBA expanded the EIDL program 
to assist small businesses located outside the declared disaster areas. 
SBA disbursed over $1.1 billion in 9/11 disaster loans.
    9/11 Disaster Loan Fraud. In 2003, the OIG began a proactive review 
of defaulted 9/11 EIDLs to assess whether there was fraud involved in 
obtaining or using loan proceeds. Inevitably, some of these disaster 
loans involved fraud due to loan transactions being expedited in order 
to provide quick relief to disaster victims. The OIG's Auditing 
Division screened a sample of defaulted 9/11 loans to identify 
indicators of fraud. Where indicators existed, these loans were then 
examined further by investigators. Based on these referrals, as well as 
those from other sources such as OIG Hotline, Office of Disaster 
Assistance, other law enforcement, etc., the OIG's Investigations 
Division opened 51 cases on loans valued at approximately $20 million. 
Thus far, 37 cases have been closed, and 14 cases are in an open status 
at various stages of investigation. There have been 10 indictments, 10 
convictions, and over $1 million in restitution and settlements.
    The types of fraud schemes we identified in these cases included 
individuals and businesses claiming losses even though their companies 
were not located in the disaster area, false claims related to personal 
property or equipment damage, misuse of the disaster loan proceeds, and 
false statements concerning financial status. For example, in one case, 
the president and the managing partner of a business received an SBA 
disaster loan by falsely claiming that their company had been located 
at the World Trade Center. In fact, the business was not located there 
on September 11, 2001, and the individuals were salaried employees of 
another company at the time. They were sentenced to incarceration and 
ordered to pay a combined total of $618,000 in restitution.
    OIG Finding Regarding SBA Collection of 9/11 Disaster Loans. While 
the auditors were screening defaulted loan files, it became apparent 
that SBA was not always pursuing collection timely. Therefore, the OIG 
conducted a review to determine if delinquent 9/11 disaster loans were 
serviced appropriately. As of September 30, 2004, 1,495 of these loans, 
valued at $208.8 million, were delinquent. The Office of Management and 
Budget (OMB) requires that agencies promptly act on the collection of 
delinquent debts, using all available collection tools to maximize 
collections. Since 1993, SBA has employed the issuance of demand 
letters as an important part of the loan liquidation process.
    The OIG reviewed a sample of delinquent loans and found that SBA 
sent pre-demand or demand letters to only 4 of the 17 borrowers who 
should have received them. We found that insufficient staffing of SBA's 
liquidation center prevented personnel from following proper collection 
methods. Instead of properly issuing pre-demand and demand letters to 
collect delinquent loan funds, personnel were used to service 
bankruptcies, collateral activities, and/or borrower initiated offers 
of compromise.
    OIG Recommendations on Proper Debt Collection. The OIG recommended 
that the Agency revise its procedures to direct servicing centers to 
send timely pre-demand and demand letters to delinquent borrowers and 
to maintain copies of these letters in loan files. Additionally, we 
recommended that the Agency ensure that sufficient staff resources are 
devoted to liquidation center activities to fulfill the debt collection 
responsibilities required by OMB. Attention to the collection of funds 
when a loan is delinquent must be part of SBA's most basic 
responsibilities.
    Conclusion. Thank you for the opportunity to comment. I look 
forward to answering any questions that you may have.

Prepared Statement of Mr. Douglas F. Small, Deputy Assistant Secretary, 
           Employment and Training, U.S. Department of Labor

    Good morning. Chairman Rogers, Ranking Member Meek and 
distinguished members of the Subcommittee, thank you for this 
opportunity to discuss the Department of Labor's Employment and 
Training Administration's response to the terrorist attacks of 
September 11, 2001.
    In the aftermath of that terrible tragedy, the Employment and 
Training Administration (ETA) engaged in a number of activities to 
ensure that the affected workers received income support, job training, 
job search assistance, and other employment related services. Today, I 
will testify about these activities, and the lessons we learned about 
disaster preparedness and program oversight during that time period. I 
would also like to take this opportunity to discuss a very different 
kind of disaster--Hurricane Katrina, and the lessons that we learned 
from responding to the vast devastation and displacement that it left 
in its wake. Finally, I will share with the subcommittee how these 
lessons have helped shape our future disaster response and oversight 
activities.
    ETA is responsible for an array of programs and services to assist 
workers who have lost or might lose their jobs as a result of 
disasters. These include the Unemployment Compensation program (UC), 
Disaster Unemployment Assistance (DUA), National Emergency Grants 
(NEGs), and the wide variety of employment and training services that 
are available through One-Stop Career Centers.
    Before I go into more detail about our disaster response and 
oversight activities after the terrorist attacks of September 11, 2001, 
I would like to give a brief overview of each of the programs I have 
just mentioned. The UC program provides temporary partial income 
support (also known as unemployment insurance) to laid-off workers to