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Excerpt from the SAR Activity Review
Food Stamp Fraud Using Electronic Benefit Transfer Cards

The United States Department of Agriculture (USDA)14 Food Stamp Program is the government’s primary food assistance program available to help low-income individuals and families obtain nutritious food for healthy diets. In fiscal year 2003, $21 billion in food stamp benefits were issued. The USDA Food and Nutrition Service administers the Food Stamp Program through 53 State government agencies who contract with transaction processing companies for Electronic Benefit Transfer systems.15 Once an eligible household is approved to receive food stamp benefits, the household is issued an electronic benefit transfer card that is essentially a debit card for purchasing food. A monthly allotment of food benefits averaging about $85 per person is made available to each eligible household at the beginning of each month.

Food stamp recipients can use their benefits to purchase food at licensed stores. There are currently 145,000 stores in the program. The food stamp recipient selects the food to be purchased and goes to the checkout counter at a retail store authorized by the USDA Food and Nutrition Service to accept food stamp benefits. The eligible recipient swipes the Electronic Benefit Transfer card through an electronic point of sale device, and then enter a personal identification number. The information is transferred to the processing facility to determine the validity of the Electronic Benefit Transfer card, the level of available food stamp benefits, and whether or not the retailer is authorized by the Food and Nutrition Service.

Some food stamp recipients, however, sell their Electronic Benefit Transfer cards for cash for less than face value. This activity is known as food stamp trafficking. The authorized retailer processes the Electronic Benefit Transfer card transaction but, in most cases, no food is sold during the trafficking transaction.

Under either scenario, Electronic Benefit Transfer transactions are reconciled each day and an Automated Clearing House transaction moves the funds from the United States Department of the Treasury to the retailers’ bank accounts.

As part of administering the program, the Food and Nutrition Service monitors authorized retailers and Electronic Benefit Transfer transactions to identify suspicious or illegal activity. The Food and Nutrition Service may use Electronic Benefit Transfer transaction records to initiate further investigation of retailers or to take administrative action against them. Information is also provided to the USDA’s Office of Inspector General for possible criminal investigation.

An estimated $395 million of food benefits are diverted each year from their intended purpose through food stamp trafficking and associated money laundering activities to hide the illegal proceeds.16 Law enforcement efforts by the USDA Office of Inspector General and other investigative agencies have linked food stamp trafficking to narcotics trafficking, money laundering, and the transfer of money overseas. Violations and enforcement of the food stamp program are pursued under the provisions of 7, U.S.C. §2024. More information about food stamp trafficking is contained in the USDA Inspector General’s Semiannual Reports to Congress found at http://www.usda.gov/oig/rptssarc.htm.

Financial institutions are in a unique position to help the Food and Nutrition Service and law enforcement agencies by identifying suspicious activities related to the Food Stamp Program. Over the years, many financial institutions have played a key role in noting a variety of suspicious activities.

FinCEN found 352 Suspicious Activity Reports filed during the last eight years related to possible food stamp fraud. Examples include the following.

Financial institutions reported that several food stores received large volumes of food stamp-related electronic credits and executed other suspect financial transactions, mainly cash withdrawals, that are not customary for small food stores.

  • Suspicious Activity Reports were filed by numerous banks on food marts where the only funds credited to accounts originated from food stamp Electronic Benefit Transfer transactions. In some instances, these credits were withdrawn from the account through structured cash withdrawals shortly after being credited to the account.
  • A Suspicious Activity Report was filed on a cash-intensive food store that processed large food stamp Electronic Benefit Transfer transactions. When the food store business account was credited for the Electronic Benefit Transfer activity, agents of the company conducted several structured cash withdrawals from the account. The structuring was done by using different bank branches and executing withdrawals just under $10,000.
  • A financial institution filed a Suspicious Activity Report on a food store for possible Bank Secrecy Act/Structuring/Money Laundering violations. The Suspicious Activity Report identified Electronic Benefit Transfer deposits that were credited to the business’ account and then followed by cash withdrawals. The withdrawals were usually conducted the day after Electronic Benefit Transfer credits were posted to the account. In addition, checks drawn on the business account were made payable to cash.
  • A Suspicious Activity Report identified a small food market receiving food stamp electronic credits. After deposits were received, the filer noted a pattern of suspicious withdrawals made by the storeowner. The storeowner typically requested $1,000 to $5,000 withdrawals in new $100 bills.
  • Another Suspicious Activity Report identified a grocery store owner who received Electronic Benefit Transfer funds for food stamp sales to his business account. The Suspicious Activity Report reported structured check cashing that was under federal reporting threshold requirements. The filer noted that the store cashed a large volume of checks. The owner brought those cashed checks to his bank and exchanged them for cash (possibly utilizing third-party endorsement of the instruments).
  • A Suspicious Activity Report was filed on a cash intensive business that received numerous food stamp electronic benefit transfers. On a daily basis, agents and associates of the business withdrew funds and cashed checks for just under $10,000 at the business. Some of the checks were made payable to “cash” while others were made payable to unrelated third parties.

As noted above, the bulk of activity involving the Food Stamp Program offers a valuable service for the low-income segment of the population. Moreover, the food and grocery industry has taken a firm stand against all such crimes that abuse the food sales industry. A review by FinCEN of the Suspicious Activity Reports filed by financial institutions indicated several vulnerabilities of the Electronic Benefit Transfer program that may be indicators of abuse of the Food Stamp Program.

14 Some information appearing in this section was prepared and submitted by the United States Department of Agriculture
15 Before the advent of Electronic Benefit Transfer transactions, the Food Stamp Program was administered with engraved paper coupons that were deposited into the authorized retailers’ bank accounts. Currently, 96% of the program is being issued through the use of Electronic Benefit Transfer transactions. Please refer to the Food and Nutrition Service website: at http://www.fns.usda.gov/fsp/ebt/ and http://www.fns.usda.gov/fsp/ebt/ state_ebt_websites.htm for additional information on the United States Food Stamp Program.
16 Macaluso, Theodore. The Extent of Trafficking in the Food Stamp Program. Alexandria, VA: Food and Nutrition Service, 2003.

Excerpted from SAR Activity Review Issue 7, page 9







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