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Usoig Audit of the Fbi Mgt of Confid Case Funds and Tele Costs 2008

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U.S. Department of Justice
Office of the Inspector General
Audit Division
Audit Report 08-03
January 2008


The Federal Bureau of Investigation (FBI) conducts undercover
activities as part of its mission to detect and deter terrorist attacks and
foreign intelligence threats and to enforce the laws of the United States. The
FBI uses confidential funds to support its undercover activities. By using
these funds, the FBI is able to conceal its role and identity from criminals,
vendors, or the public. However, the way FBI field divisions currently handle
confidential funds presents special challenges and creates potential
vulnerabilities for theft.
The Department of Justice Office of the Inspector General (OIG)
recently concluded a criminal investigation into allegations that an FBI
employee stole FBI confidential case funds. As a result of this investigation,
in June 2006 a telecommunication specialist at an FBI field division pled
guilty to stealing over $25,000 in confidential case funds intended for
undercover telecommunication services. The investigation showed that the
employee took advantage of weak controls over field division confidential
funds to convert FBI monies for her own use.
Audit Objectives and Methodology
The OIG initiated this audit to evaluate how the FBI and its field
divisions: (1) request and track confidential case fund payments, (2) handle
telecommunication expenses that support undercover activities, and
(3) control and oversee the confidential case funding process.1 During this
audit, we interviewed officials at FBI headquarters and reviewed documents
relating to confidential case funds. We also visited five FBI field divisions
where we analyzed written procedures, assessed methods of processing and
overseeing the confidential case funding process, and spoke with FBI


The FBI uses different types of confidential funds to support its undercover
activities. However, our audit focused on field division confidential case funds because they
were the only type of funds not requiring approval from an operational unit within FBI


The OIG completed an 87-page report that contains the results of our
audit. However, the full version of this report includes information that the
FBI considers too sensitive for public release. As a result, the OIG is
releasing this summary of findings without including law enforcement
sensitive information. The full report has been provided to the FBI, the
Department of Justice, and congressional oversight committees.
The following is a summary of the OIG’s findings.
OIG Findings
1. The FBI Lacks an Effective Confidential Case Fund Financial
Management System
Each FBI field division has a third party draft office that disburses
confidential case funds to pay for undercover activities such as
telecommunication surveillance, leases, and rental cars. Functioning like a
small bank, third party draft offices review and record requests and
distribute drafts for confidential case funds. Since 1986, FBI third party
draft offices have used the FBI’s Financial Management System (FMS), a
commercially developed information system, to track and pay requests for
field division confidential case funds. According to FBI Finance Division
officials, however, FMS is an antiquated information system, and third party
draft personnel must work around the system’s limitations to enter and track
confidential fund requests. For example, FMS does not allow users to enter
various details for confidential case payments such as the commercial
vendor name or the invoice number.
In an effort to mitigate various FMS weaknesses that have been
identified over time, the FBI has developed procedural controls, independent
of FMS, that employees at its field divisions should perform when tracking
confidential case funds.2 As demonstrated by the FBI employee who stole
funds intended to support undercover activities, procedural controls by
themselves have not ensured proper tracking and use of confidential case
funds. As a result, our review outlines automated controls that we believe
the FBI should incorporate into FMS to help it improve confidential case fund


Such procedural controls include weekly transaction report reviews performed by
draft office personnel; monthly, quarterly, and semiannual audits conducted by field division
auditors; and communications sent and tracked by field division managers regarding the
status of undercover cases.


In addition, according to FBI guidelines, field division confidential case
funds should not be used to finance undercover activities related to cases
financed from operational units at FBI headquarters. Yet, our audit found
that no system controls exist within FMS to ensure that requesting
employees cannot receive funds used to support undercover activity twice –
once from FBI headquarters funds and once from third party draft
confidential funds. Out of 130 undercover payments we tested, our audit
identified 14 instances totaling more than $6,000 where FBI field divisions
used their office’s third party draft confidential case funds to supplement
case activity that should instead have been supported by headquartersissued funds.
We also found that FMS does not: (1) indicate whether a case is
ongoing or closed; (2) easily provide the financial information required by
the third party draft office to ensure that field division confidential fund
requests comply with FBI-established case expenditure limits; and
(3) restrict or otherwise prevent employees who approve and disperse field
division confidential funds from receiving them. Instead, third party draft
office employees rely on manually updated lists to determine the status of
each case. Further, FMS only shows expenditures by individual requestor –
rather than by individual case – and therefore requires that third party draft
office personnel access various screens to determine the total case
expenditure amount. We believe that the lack of strong system controls –
coupled with interpersonal professional relationships that invariably develop
over time – increases the risk that field division confidential case funds can
be misused.
In addition, third party draft office employees told us that they
routinely receive only money order receipt stubs as the required proof of
payment on advanced confidential case funds. Our audit found that because
the preparer of a money order – who normally is the employee who receives
the funds – identifies the payee on the face of the money order, money
order stubs may not necessarily show who was ultimately paid by the money
order. We recommend that the FBI ensure that recipients of advanced field
division confidential case funds submit documents that actually show proper
proof of payment.


FMS also does not accurately track or record the status of confidential
case fund advances. Although FBI employees need to submit proof of
payment to account for obligations made for each advance, this information
is not directly attributed to the specific request in FMS. FMS only tracks
advances by employee and case, not by specific request. As a result, our
audit found that third party draft office employees could not readily identify
outstanding or unsupported confidential case fund advances.
2. The FBI Pays Telecommunication Surveillance Expenses
Inefficiently and Untimely
Since payments for fees associated with surveillance services provided
to the FBI are routinely made with confidential case funds, third party draft
systems at each field division process and pay telecommunication
surveillance bills. Besides paying for surveillance techniques, the FBI also
pays for various delivery mechanisms to receive surveillance information
from carriers. Because carriers charge for establishing and providing service
separately from court-ordered activation and renewal costs, the FBI receives
invoices both for surveillance techniques and delivery mechanisms each
As part of our audit, we analyzed 990 telecommunication surveillance
payments made by 5 field divisions and found that over half of these
payments were not made on time. We also found that late payments have
resulted in telecommunications carriers actually disconnecting phone lines
established to deliver surveillance results to the FBI, resulting in lost
evidence including an instance where delivery of intercept information
required by a Foreign Intelligence Surveillance Act (FISA) order was halted
due to untimely payment.
According to FBI field division officials, the various types of
telecommunication charges, coupled with the number of invoices resulting
from each surveillance order, make it difficult to identify and track incoming
surveillance bills. The FBI also lacks proper guidance and consistent
procedures necessary to track telecommunication surveillance bills
accurately. Lacking such headquarters-issued procedures, FBI field divisions
have instituted separate, ad hoc tracking mechanisms, which had mixed
results in paying bills on time. For example, a primary carrier sent a list to
one of the field divisions we tested detailing $66,000 in unpaid
telecommunication costs resulting from surveillance activity.


In addition to the various methods of processing, tracking, and paying
surveillance invoices, we found that FBI field divisions did not handle refunds
from carriers consistently. These refunds result from overpayments or from
payments made for services that were not rendered. FBI personnel told us
that a field division can receive several refunds a month from
telecommunication carriers, depending on the surveillance activity requested
by that field division.
According to the OIG investigators who conducted the criminal
investigation described at the beginning of this summary report, the lack of
formal procedures used by field divisions to handle telecommunication
refunds provided opportunities for the FBI employee to steal refunded
money. Moreover, our audit found that many FBI employees did not know
how to handle refunds of confidential case fund money. One technical agent
told us that he sends refunds back to the carrier attached to other
telecommunication surveillance bills and requests that they be applied to the
remitted bill. Another official told us that he does not know why he receives
refunds and has a difficult time matching them to the proper case. In some
cases, special agents told us they returned refund checks to the third party
draft office simply because they did not know what else to do. Our report
recommends that the FBI ensure that employees understand how to
properly process refunds of confidential case payments.
3. The FBI’s Oversight of Confidential Case Funds Needs
Our audit determined that the FBI needs to improve its oversight of
the use of confidential case funds. FBI guidelines and Office of Management
and Budget (OMB) Circular A-123 stress that employees who maintain
financial records and drafts should not also approve or handle case
expenditures. In addition, OMB Circular A-127 requires that financial
management system users receive adequate training necessary to
understand and operate financial systems. Our review of FBI reporting
structures showed that the FBI has not achieved adequate separation of
duties among those who control and oversee confidential case funds at the
field division level. Throughout our site visits, third party draft office
personnel expressed unfamiliarity with how to achieve proper separation of
duties, demonstrating that the FBI may not be offering or providing
adequate training. Moreover, our audit noted that the FBI Finance Division
has provided FMS training to fewer than half of its third party draft
employees since 1997.


According to FBI guidelines, each field division must conduct monthly,
quarterly, and semi-annual audits of its third party draft system and
activities. However, employees selected to perform these internal audits
should not be part of or oversee the field division’s third party draft office.
Field division auditors told us that in a few cases, because their supervisors
also oversaw the third party draft office, they were placed in the unenviable
position of reviewing aspects of their manager’s performance. In these
cases, auditors told us they felt that findings could be misinterpreted and
result in negative performance reviews. We believe that the supervising
official responsible for overseeing the third party draft office should not
simultaneously supervise auditors or other staff who perform third party
draft audits.
As part of our review of the FBI’s oversight of confidential case funds,
we also examined the personnel and security files of 35 field division
employees who had daily access to confidential case funds. This
examination revealed that nearly half of the sampled employees had
indications of personal financial problems, such as late loan payments and
bankruptcies. As demonstrated by our review of FBI files, the 5-year
background investigation program may be helpful in identifying employees
who have financial hardships or concerns. Beyond identification, however,
the FBI has not developed or implemented procedures that ensure
employees with financial concerns are not placed in situations where they
are responsible for approving and handling confidential case funds without
enhanced supervision. We believe that the FBI needs to develop and
implement procedures that ensure employees with serious financial concerns
do not regularly handle confidential case funds without additional oversight
or safeguards.
FBI’s FMS lacks the controls necessary to prevent theft and, as such, is
not an effective financial system for FBI employees to use to account for and
approve confidential case funds. In addition, the audit found that the FBI
has not established sufficient guidance and consistent procedures necessary
to track and pay telecommunication surveillance bills accurately and timely.
The audit also identified areas where field division oversight should be
improved to further mitigate the risk of improper use of confidential case


Status of Final Report Recommendations
The report offered 16 recommendations to improve the FBI’s
management of confidential case funds and telecommunication costs. For
example, our recommendations addressed improvements in the FBI’s
processing of and tracking confidential case funds in FMS; improvements on
how the FBI tracks and pays undercover telecommunication expenses; and
improvements in the FBI’s oversight of confidential case fund management.
The report also recommended that the FBI should implement FMS-related
recommendations when developing its new financial management system.3
In its response, the FBI: (1) provided sufficient evidence to close
a recommendation relating to personal financial concerns of employees
charged with managing confidential case funds; (2) agreed to implement
controls or other procedures adequate to resolve 11 recommendations
concerning telecommunication costs and confidential case fund operations
and oversight; and (3) stated that 4 recommendations would be either
unfeasible or too cost prohibitive considering its current FMS. As a result,
the FBI stated that it had referred these 4 recommendations to those units
charged with developing the FBI’s new financial management information


During the audit, FBI officials told us that they are developing a new financial
management information system to replace the antiquated FMS. As a result, some of the
report recommendations apply to FMS and any information system under development that
the FBI will use to track or account for confidential case funds.