Report 2014-110 Recommendation 2 Responses

Report 2014-110: California Department of Resources Recycling and Recovery: The Beverage Container Recycling Program Continues to Face Deficits and Requires Changes to Become Financially Sustainable (Release Date: November 2014)

Recommendation #2 To: Resources Recycling and Recovery, Department of

To ensure it can demonstrate that its fraud prevention efforts are maximizing financial recoveries for the beverage program, CalRecycle should both modify and annually update its fraud management plan to include the following:
- By December 31, 2014, formally establish a systematic process for analyzing, monitoring, and responding to the risk of fraudulent recycling of out-of-state beverage containers.
- Develop fraud estimates—by type of fraudulent activity—that quantify the potential financial losses to the beverage program and the methodology CalRecycle used to develop these estimates.
- Identify the amount of actual fraud in the prior year by type of fraudulent activity, such as the financial losses resulting from the redemption of out-of-state beverage containers or the falsification of reports used to substantiate program payments.
- Identify the amount actually recovered for the beverage program in the form of cash for restitution and penalties resulting from fraud.

Annual Follow-Up Agency Response From October 2021

CalRecycle formed a unit within DOR to focus on fraud: Data Analysis & Risk Evaluation. The DARE unit spent a year developing tools within our tracking system DORIIS to identify and extract data elements including types of fraud. CalRecycle now has the tools in place to identify fraud through data collection and analysis and are exploring work with a third party with expertise in forecasting. In addition, DOJ continues to provide data points for criminal arrests and the associated fraud. CalRecycle has increased our partnerships and bolstered our joint training programs with DOJ and CDFA including training to over 100 CDFA staff at California border access points. Calecycle and DOJ have increased training with attorneys and enforcement staff and several joint partnerships leading to success in court proceedings in several cases. In the future, CalRecycle will implement a cross departmental data system which will help bolster our data capacity, fraud activity by type and analysis.

California State Auditor's Assessment of Annual Follow-Up Status: Pending

Annual Follow-Up Agency Response From September 2020

CalRecycle continues to work towards improved fraud management plans. The Data Analysis and Risk Evaluation (DARE - a unit established in 2017) became fully staffed as of September 2020. The DARE unit creates, develops, and implements various tools that better analyze and assess the potential risks of fraudulent activities. The unit also helps to quantify known financial losses to the program due to fraudulent activities.

The risk assessment tools developed by DARE have continued to produce successful results in 2020. The unit is currently processing data sets that will help to quantify known losses due to fraudulent activities. Because of DARE becoming fully staffed in September 2020, the final step in the methodology process of quantifying financial losses is still on track to be finalized by December 31, 2020.

CalRecycle and the California Department of Justice (DOJ) met in December 2019 to discuss the final steps of jointly developing the fraud estimates. The data points have been gathered and totals have been calculated to quantify known losses to the Fund. A comprehensive method to estimate the level of criminal fraud affecting the program has also been completed.

CalRecycle developed a process and is continually Identifying amounts recovered for the beverage program for restitution and penalties resulting from fraud.

Based on the preliminary results, CalRecycle does not need to currently contract out for additional work on the fraud estimates.

California State Auditor's Assessment of Annual Follow-Up Status: Pending

Annual Follow-Up Agency Response From November 2019

CalRecycle continues to work towards improved fraud management plans. While the department experienced delays fully staffing the Data Analysis and Risk Evaluation (a unit established in 2017), the unit will be fully staffed by the end of 2019. The DARE unit creates, develops, and implements various tools that better analyze and assess the potential risks of fraudulent activities. The unit also helps to quantify known financial losses to the program due to fraudulent activities.

In 2018, these risk assessment tools were tested with great success. The Recycling Program Enforcement Branch (RPEB) was able to identify 30 recycling centers and processors that were committing fraud and recommended revocation for these sites. RPEB also recommended three recycling center applications be denied. This new data set will help to quantify known losses due to fraudulent activities. Because of the delay in staffing this new unit, the final step in the methodology process of quantifying financial losses may be delayed until December 31, 2020.

CalRecycle and the California Department of Justice (DOJ) have spent the last year gathering the data points needed to develop a comprehensive method to estimate the level of criminal fraud affecting the program. A meeting has been scheduled with DOJ in December 2019, to discuss the final steps of jointly developing the fraud estimates.

Based on the results of this work, and the future availability of funding, CalRecycle may contract for additional estimation work.

California State Auditor's Assessment of Annual Follow-Up Status: Pending

Annual Follow-Up Agency Response From October 2018

CalRecycle has developed several risk assessment tools to better focus enforcement efforts. A new unit has been created (Data Analysis and Risk Evaluation) in order to implement the use of these new risk assessment tools. The new unit is not yet fully staffed but is projected to be by mid 2019. This new unit will identify and quantify known financial losses to the program from fraudulent activity (from both administrative and criminal cases).

CalRecycle incorporated the lessons learned from its work with the Department of Justice (DOJ) and the recommendations from the State Auditor when developing the next contract. On June 27, 2017, CalRecycle entered into a new contract with the Department of Justice from July 1, 2017 through June 30, 2020. In order to properly develop fraud estimates, the new contract added this specific language:

"In collaboration with CalRecycle, DOJ will develop a method by which to estimate the level of criminal fraud affecting the Beverage Container Recycling Program and the portion of fraud DOJ is preventing with their efforts."

CalRecycle and DOJ are currently in the process of gathering data points in order to develop a comprehensive method to estimate the level of criminal fraud affecting the program.

California State Auditor's Assessment of Annual Follow-Up Status: Pending

Annual Follow-Up Agency Response From November 2017

The Imported Materials Unit now uses a process to analyze, monitor, and respond to the risk of fraudulent recycling of out-of-state beverage containers.

CalRecycle has identified and quantified known financial losses to the program from fraudulent activity associated with known criminal activity.

CalRecycle has initiated reconciling restitution amounts owed from criminal activity with payments. CalRecycle is determining any outstanding restitution owed. CalRecycle has not yet updated the case management system to identify the amount of fraud in the prior year by type of activity or the amount recovered. Higher-priority enhancements have taken precedence. CalRecycle is finalizing procedures to better track referrals from CalRecycle to the Department of Justice through to invoicing and disposition.

Precisely estimating fraud is difficult and estimates are potentially inaccurate. While CalRecycle manages fraud risk to the best of its ability and via cooperation with partners, identifying additional potential fraud losses and risks requires expertise that CalRecycle does not have in-house. A formal statistical estimation is needed, and CalRecycle is exploring options to conduct this work. DOJ has conducted a preliminary fraudulent activity risk assessment by county to better utilize their agents. Similarly, CalRecycle is developing a risk assessment tool to better focus enforcement efforts. CalRecycle estimates this tool will be ready by the end of 2018. CalRecycle and DOJ are collaborating to develop a comprehensive method to estimate the level of criminal fraud affecting the program. CalRecycle and DOJ will use known fraud and other factors to characterize and estimate—as well as possible—potential losses. DOJ and CalRecycle will meet in January 2018 to further develop their approaches. Based on the results of this work, and the future availability of funding, CalRecycle may contract for additional estimation work.

California State Auditor's Assessment of Annual Follow-Up Status: Pending

Annual Follow-Up Agency Response From October 2016

Process and procedural documentation were completed on 1/15/15. Through the establishment of the Imported Materials Unit, a systematic process for analyzing, monitoring, and responding to the risk of fraudulent recycling of out-of-state beverage containers was implemented.

There is currently no estimated completion date for the following:

Fraud estimates. CalRecycle does not have in-house staff with the necessary expertise to develop the fraud estimates. A formal methodology based upon further study and statistical estimation is necessary. CalRecycle would need to contract for these services. Given the ongoing structural deficit in the CBCRF, CalRecycle does not anticipate having funds for this project in the foreseeable future.

Identification of fraud. CalRecycle has not updated the DORIIS case management system to identify the amount of actual fraud in the prior year by type of fraudulent activity. This improvement item is currently on CalRecycle's DORIIS Ticket Prioritization List. To date, higher priority DORIIS enhancements and improvements have taken precedence. Once DORIIS is updated, CalRecycle may be able to implement CSA's recommendation.

Amount recovered after fraud. CalRecycle has not updated the DORIIS case management system to identify the amount actually recovered resulting from fraud. This improvement item is currently on CalRecycle's DORIIS Ticket Prioritization List. To date, higher priority DORIIS enhancements and improvements have taken precedence. Once DORIIS is updated, CalRecycle may be able to implement CSA's recommendation.

California State Auditor's Assessment of Annual Follow-Up Status: Not Fully Implemented

1-Year Agency Response

CalRecycle fully implemented process and procedural documentation that formally establish a systematic process for analyzing, monitoring, and responding to the risk of fraudulent recycling of out-of-state beverage containers. Seven additional LT positions have been hired to execute this systematic process.

CalRecycle does not have in-house staff with the necessary expertise to develop the fraud estimates. CalRecycle believes a formal methodology based upon further study and statistical estimation is necessary. Given the wide variety of variables, associated complexity, and the professional expertise and skill needed to effectively design and develop such a model, CalRecycle would need to contract out for these services. Unfortunately, given the ongoing structural deficit in the CBCRF, CalRecycle does not anticipate having funds for this project in the foreseeable future.

CalRecycle has not fully updated the DORiis case management system to identify the amount of actual fraud by type and identify the amount actually recovered. When the update is completed DORiis will be able to fully implement CSA's recommendation

California State Auditor's Assessment of 1-Year Status: Not Fully Implemented

6-Month Agency Response

Process and procedural documentation for Imported Empty Beverage Container Reporting and Inspection Program was completed on January 15, 2015.

Notice to known recyclers in Arizona and Nevada was issued on January 16, 2015. Final draft of notice to all major truck rental companies is pending review by the CalRecycle Legal Office as of April 28, 2015.

On April 2, 2015, CalRecycle, Division of Recycling, Enforcement Branch staff, representatives from DOJ, and the AG's Office educated state and local law enforcement/code enforcement personnel, whose jurisdictional boundaries include CDFA border stations, about illegal importation and illegal CRV redemption of imported out-of-state beverage containers occurring within their respective jurisdictions. 35 state and local law enforcement/code enforcement personnel attended the workshop. CalRecycle's objective is to secure assistance from state and local law enforcement personnel to detect, deter and interdict individuals illegally importing and/or attempting to illegally redeem out-of-state empty beverage containers for CRV. Additional outreach and education sessions will be conducted during 2015.

Notice was issued to all certified processors and posted on CalRecycle's webpage on November 12, 2014.

Initial notice was issued to all certified and registered program participants and posted on the CalRecycle webpage on November 12, 2014. Notice included a webpage link where select information submitted on Imported Material Reports (IMR) is posted for program participants to reference. Since issuance of the initial notice in November 2014, CalRecycle routinely posts updated IMR information to the CalRecycle webpage on a monthly basis

California State Auditor's Assessment of 6-Month Status: Pending

60-Day Agency Response

Finalize process and procedural documentation associated with the implementation of the Imported Empty Beverage Container Reporting and Inspection Program

Send a notice to all major truck rental companies and all recyclers currently operating in Arizona and Nevada to ensure and document that they have been educated and informed as to the illegality of redeeming, attempting to redeem, or aiding in the redemption of imported empty beverage containers.

Participate in a series of education and training sessions for local law enforcement agencies whose jurisdictional boundaries include CDFA operated Quarantine Inspection Stations and roads which can be used to bypass CDFA border stations.

November 12, 2014: DOR issued a notice to all certified processors regarding the current regulations as they pertain to receipt and processing of imported loads of single-stream recyclable materials which included imported empty beverage containers.

November 12, 2014: DOR issued a notice to all certified and registered program participants to inform them of information associated with persons importing empty beverage containers.

CalRecycle will release a Request for Proposal (RFP) by in 2015-2016 for the development of fraud estimates, by type of fraudulent activity, in an effort to quantify potential financial losses to the beverage container recycling fund.

Develop specific criteria to clearly identify/flag administrative cases in the Division of Recycling Integrated Information System (DORiis) which contain allegations of fraud.

The identified restitution and/or civil penalty amounts will serve as the basis for the calculation of the actual fraud amount by the type of fraudulent activity for the prior year.

California State Auditor's Assessment of 60-Day Status: Pending

All Recommendations in 2014-110

Agency responses received are posted verbatim.