Spotlight Shines on Food Stamp Fraud : Social services: Arrests related to quake relief highlight the billion-dollar cheating that plagues program. Officials say replacing coupons with a debit card may cut losses.

The recent arrests of 20 people for illegally buying food stamps from earthquake victims has focused angry national attention on abuse of emergency quake relief. But profiteering from the disaster pales in comparison to the billion-dollar fraud that plagues the food stamp program each year.

Some estimates place error, waste and fraud--from the theft of freshly printed coupons stored in warehouses to the selling of coupons for a profit at the grocery store--as high as one in every $7 spent on the program. In Los Angeles County, that would amount to $55 million a year.

“This has been a longstanding problem that has really only been accentuated by the earthquake,” said Assistant U.S. Atty. George B. Newhouse Jr., who supervises the government fraud section in Los Angeles.

The problem is so great that county officials want to eliminate food stamp coupons entirely by converting to an electronic computer system, in which recipients would use plastic debit cards to pay for groceries.

A few weeks ago, authorities probably would not have bothered with many of the so-called “runners” who buy and resell food stamps on the street--five of whom were picked up in late January outside a South-Central Los Angeles check-cashing store. Officials say street sales in food stamps are too numerous and too low on the fraud chain to warrant the attention of strapped federal investigators, a situation that changed only because of public outcry over abuses of earthquake relief.

“We could go out there and arrest 1,000 people for trafficking on the street, but when the money to be made is great, there would be another 1,000 on the street to take their place,” said David F. Dickson, regional inspector general for the U.S. Department of Agriculture, charged with investigating food stamp fraud.

The $22-billion food stamp program provides 27 million low-income Americans with monthly coupons to buy groceries, and authorities say the vast majority of recipients are honest, deserving and law-abiding. But the program also serves as the grist for a lucrative black market, with the colorful coupons the next best thing to dollars for drug traffickers, gun runners and scam artists from Los Angeles to Miami.

“Food stamps have become a second currency on the street,” said Ellen Haas, assistant secretary of agriculture for food and consumer services. “They are so easily available, and it is so easy to intimidate recipients that there has grown an underground street crime that involves food stamps in a major way.”

Undercover agents have been offered everything from houses to surface-to-air missiles in trade for the coupons, although Haas said drugs, guns and cash are by far the most sought-after commodities.

Last year, federal agents won convictions in the largest food stamp fraud cases in Southland history, with the owners of two family-run grocery stores going to prison for illegal trafficking in more than $20 million worth of food stamps.

Anaheim residents David Rodriguez, his wife, Juana, and son Eduardo, and South Gate residents Evristo Pereira and his wife, Maria, operated small neighborhood markets near Downtown Los Angeles, but were redeeming more food stamps than most major supermarket chains, authorities said.

In a separate case, the owner of a Hollywood milk delivery company was sentenced to 27 months in prison after pleading guilty to illegally trafficking and redeeming $2.3 million in food stamps. Authorities said Michael A. Presumido became so wrapped up in running the scheme that he had to give up his milk delivery route and devote his attention full time to food stamp trafficking.

Another Los Angeles man was sentenced to 15 months in prison last year after he sold $29,400 in food stamps to an undercover agent for $25,000 in cash. Agents also found $82,000 in food stamps in the man’s home.

Federal agents were aware of trafficking at Broadway and Manchester Boulevard for several months, but did nothing to stop the illegal sales until recently because they wanted to trace the stamps to a retail store. Runners typically unload food stamps by selling the coupons at a discount to an authorized grocery store, which in turn redeems them at face value from the federal treasury.

“We emphasize getting the store owners because without them, the stamps can’t be used for anything but food,” Dickson said.

But the federal government’s big-dollar approach abruptly changed--at least for now--when rampant curbside sales in food stamps intended for earthquake victims embarrassed the federal program. A Senate hearing on the problem was called last week in Washington, and Department of Agriculture officials scurried to reassure a restless public that the massive food assistance program had not become a reckless waste of money.

“I have said from Day One that the program’s integrity is essential,” Haas said. “Fraud takes benefits away from people who are hungry, and every time (the media) write about fraud, public support of the program erodes.”

On Friday, the U.S. attorney’s office announced the formation of a federal task force, which includes eight federal law enforcement agencies, to investigate earthquake-related fraud in food stamps and other government assistance. Newhouse, who heads the task force, said the special unit is designed to expand the government’s focus on big-dollar fraud to include street-level crime as well.

Even so, the resulting crackdown on street sales in Los Angeles and surrounding counties will do little to combat the biggest fraud problems, local and federal officials say; the runners typically carry less than $2,000 in illegal food stamps. Los Angeles County distributes $66.4 million in food stamp coupons monthly and expects to issue an additional $100 million in emergency earthquake-related coupons.

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It is hoped that the highly visible street-level enforcement will discourage new traffickers from entering the crowded resale scene. Officials worry that word of unchecked street sales after the earthquake sent the wrong message to both honest and dishonest food stamp recipients, in effect recruiting a new class of opportunists and scam artists.

“We cannot tolerate the impression on the street that the program is out of control,” one federal investigator said. “It is undermining public support for a program that is very worthwhile.”

But when the earthquake emergency passes, federal investigators with the Department of Agriculture will have little choice but to concentrate once again on the most egregious cases of fraud. With just 45 investigators monitoring 300 federal programs in eight western states, the department is so strapped that it plans to hand over some enforcement responsibilities to the county under a two-year experiment expected to begin in April.

The county, which is charged with investigating eligibility fraud, will get $1.7 million in state and federal money to take on street traffickers as well. Although catching the traffickers is a federal job, the state and county have agreed to help because they fear the problem has gotten out of hand.

More than 1 million people--nearly one in eight Los Angeles County residents--depend on food stamps to put meals on the table, making tracking the stamps an enormous bureaucratic undertaking. Day in and day out, county officials follow thousands of tips and leads to ferret out fraud in eligibility, which involves everything from people lying on food stamp applications to recipients failing to report new jobs.

Last week, the fraud may have extended to some county welfare workers, with federal authorities investigating tips that county workers had filed false claims of their own. At least 19 workers have been referred for possible criminal prosecution or administrative discipline.

County fraud investigators last year uncovered 7,000 cases of food stamp and welfare overpayments totaling more than $29.1 million. Many of the cases began with a call to the county hot line at (213) 749-4266, officials said.

In an effort to get a better handle on the abuse, the county last month hired 70 investigators (for a total of 245) to beef up its early detection program. The investigators review applications for food stamps and other federal and local assistance and attempt to prevent fraud artists from obtaining benefits.

Even with stepped-up enforcement, county officials believe that they can put a bigger dent in the black market for food stamp benefits by introducing plastic debit cards and scrapping the food stamp coupons. Maryland introduced the cards statewide last year, and San Bernardino and San Diego counties will become the first counties in California to begin using them next year. The program--known as electronic benefit transfers--allows food stamp recipients to pay for groceries at the checkout stand much as other customers use bank or credit cards.

“We need it and want it as soon as possible,” said Lisa Nunez, who heads the computer division of the Los Angeles County Department of Public Social Services.

State welfare officials said they want to monitor the programs in San Bernardino and San Diego before authorizing the cards in Los Angeles, where the sheer volume of recipients will make the conversion a huge undertaking.

Maryland officials say the system is too new to know how much money it is saving the state in fraud, waste and mistakes, but they say anecdotal evidence has been very positive. Fraud investigators like them because they leave an electronic trail of each transaction, said Dale Brown, who heads the program for the Maryland Department of Human Resources.

One Maryland recipient, Bobbie McKinney, 41, a single mother of two, said the biggest advantage is the avoidance of long lines for food stamp redemptions and the embarrassment of paying with food stamp coupons.

“I call it the poor people’s MasterCard,” McKinney said. “To me, a lot of dignity comes with it.”

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The federal government has endorsed the idea, recently requiring that all states develop plans by 1996 to convert from paper coupons to plastic cards. Federal officials want eventually to distribute all public assistance benefits--including welfare, Social Security and military pensions--on the cards in an effort to cut bureaucratic costs associated with shuffling reams of paper.

Federal and local fraud investigators welcome the move to electronic benefits, but they warn that the fraud problem will not go away with the change.

“People who want to break the law will always find a way to beat the system,” Dickson said.

Times staff writer Ray Delgado contributed to this story.