Fraud on the farm

Although the U.S. Department of Agriculture’s Risk Management Agency has taken steps to improve its procedures and processes to address fraud, waste and abuse in selling servicing crop insurance policies, many flaws remain in the system, according to a new report from the Government Account-ability Office.

The USDA RMA administers the federal crop insurance program in partnership with private insurers that sell and service the policies. The program provides protection against financial disasters caused by droughts, flood or other natural disasters. In 2005, the crop insurance program provided $44 billion in coverage for more than 200 million acres of farmland at a cost of $2.7 billion. Of that, an estimated $117 million were losses from fraud, waste and abuse, the report said.
The Agricultural Risk Protection Act (ARPA) of 2000 was designed to improve the integrity of the crop insurance program and provided tools to monitor control and abuses, such as providing RMA sanction authority to address program abuse. RMA now develops a list of farmers each year whose operations warrant an onsite inspection during the growing season because data mining uncovered patterns in their claims that are consistent with the potential for fraud and abuse. For example, the list includes farmers, agents and adjusters linked in irregular behavior that suggests collusion or farmers who for several consecutive years received most of their crop insurance payments from prevented planting indemnity payments. RMA reported more than $300 million in savings, primarily from avoided estimated payments, from 2001 to 2004.
Concerns have arisen that some farmers may have abused the crop insurance program by allowing crops to fail through neglect or deliberate actions to collect insurance, and some insurance companies have not exercised due diligence in investigating losses and paying claims.
The GAO said RMA is not effectively using all of its tools, and identified weaknesses in four areas:

1. Field inspections. The USDA’s Farm Service Agency inspections during the growing season are not being used to the maximum effect, the report said. Between 2001 and 2004, FSA conducted only 64 percent of the inspections RMA had requested. Without inspections, farmers may falsely claim crop losses, GAO said.
2. Data mining processes. RMA’s data analysis of the largest farming operations is not complete. According to GAO’s analysis, in 2003, about 21,000 of the largest farming operations in the program did not report individuals or entities with an ownership interest in those operations as required. Without the information, RMA was unaware of ownership interests that could help it prevent potential program abuse, GAO said. FSA did not give RMA access to the data needed to identify such individuals or entities. USDA should be able to recover up to $74 million in improper claims payments, the report said.
3. Quality assurance reviews. RMA is not effectively overseeing insurance companies’ efforts to control program abuse. GAO’s review of 120 cases showed that companies did not complete all of the required quality assurance reviews of claims, and those that were conducted were largely paper exercises.
4. Imposition of sanctions. RMA has infrequently used its new sanction authority to address program abuse. RMA has not issued regulations to implement its new sanction authority under ARPA and imposed only 114 sanctions from 2001 through 2004, although it annually identifies about 3,000 questionable claims, not all of which are necessarily sanctionable, the report said.
   Weaknesses in those four areas leave the program vulnerable to questionable claims, and insurance programs cannot always determine the validity of a claim to minimize fraud, waste and abuse, GAO said.

Steps taken
RMA’s regulations to implement the crop insurance program, as well as some statutory requirements, create program design problems that hinder RMA’s efforts to reduce program abuse. For example, RMA’s regulations allow farmers to insure fields individually rather than all fields combined. That option allows farmers to “switch” reporting of yield among fields to either make false claims or build up a higher yield history on a field to increase its eligibility for higher insurance guarantees. High premium subsidies, established by statue, also may limit RMA’s ability to control program abuse because the subsidies shield farmers from the full effect of paying higher premiums associated with frequent claims.
Eight recent crop insurance fraud cases, investigated by the USDA’s Office of Inspector General and resulting in criminal prosecutions between June 2003 and April 2005, reflect the issues GAO noted. Those cases show how farmers, sometimes in collusion with insurance agents and others, falsely claim prevented planting and low production. Several of those cases also demonstrate the importance of having FSA and RMA work together to identify and share information on questionable farming practices and activities, the report said.
GAO recommended that Congress should consider allowing RMA to reduce premium subsidies for farmers who consistently have claims that are irregular in comparison with other farmers growing the same crop in the same location. While RMA has made progress in strengthening a number of program elements and thereby reducing fraud and the amount of funds paid in error, there is room to improve aspects of the crop insurance program’s design, the report said.
To view the full report, including the scope and methodology of GAO’s analysis, visit www.gao.gov/cgi-bin/getrpt?GAO-06-878T.