President Obama signed a law Thursday that aims to bar payments to federal contractors that haven’t paid their taxes and to make sure that payments go out in the correct amounts to the right people.

The Improper Payments Elimination and Recovery Act, which passed unanimously in both the House and Senate, is designed to cut waste, fraud and abuse due to improper payments by federal government agencies.

“We’ve begun an unprecedented effort to put an end to a problem known as improper payments, which is the purpose of the bill that I’m signing into law today,” said Obama.  “Now, these are payments sent by the government to the wrong person, or for the wrong reasons, or in the wrong amount: payments to a defense contractor that’s been disbarred for shoddy work but somehow managed to get through the system, payments to companies that haven’t paid their taxes, or to folks who are incarcerated – or who are dead."

"Sometimes these payments are the result of innocent mistakes or reflect valid claims that were paid at the wrong time," he added. "But sometimes, they result from abuses by scam artists and crooked companies. And all told, they added up to $110 billion.  I want everybody to understand, just get some perspective on that.  That is more than the budgets of the Department of Education and the Small Business Administration combined. And that’s unacceptable.”

Obama noted that earlier this year, he  directed all federal agencies to launch rigorous audits conducted by auditors who are paid based on how many abuses or errors they uncover.

“The more they find, the more money they make, so they are highly incentivized,” he said. “We’re also creating a 'Do Not Pay' list – a consolidated database of every individual and company that’s ineligible for federal payments. Before checks are mailed, agencies will be required to check this list to make sure that the payment is to the right person, in the right amount, for the right reason.”

The bill amends the Improper Payments Information Act of 2002 to expand the requirements for identifying programs and activities susceptible to improper payments by requiring the head of each federal agency, during the year after the enactment and at least once every three fiscal years, to review and identify agency programs and activities that may be susceptible to significant improper payments.

The bill also sets forth the risk factors to be considered in conducting improper payment reviews, including: whether the program or activity reviewed is new to the agency; the complexity of the program or activity; the volume of payments made; whether payment or payment eligibility decisions are made outside of the agency; recent major changes in program funding, authorities, practices, or procedures; the level, experience, and quality of personnel training; and significant deficiencies in auditing practices.

In addition, the bill revises the requirements for estimating improper payments to require agency heads to produce a statistically valid estimate of the improper payments in their agencies; and include the estimates in their annual financial statements.

The bill also expands agency reporting requirements on actions to reduce improper payments to require a statement of whether the agency has sufficient resources with respect to internal controls, human capital, and information systems and other infrastructure to prevent improper payments. It also requires reports on actions to recover improper payments, and requires the director of the Office of Management and Budget to report each fiscal year to the House Committee on Oversight and Government Reform and the Senate Committee on Homeland Security and Governmental Affairs on actions agencies have taken to report information relating to improper payments and to recover the payments; prescribe guidance to agencies to implement requirements of the bill; and develop specific criteria as to when an agency should be required to obtain an opinion on internal control over financial reporting.

The bill also requires agency heads to conduct recovery audits for agency programs that expend $1 million or more annually if such audits would be cost-effective; and conduct financial management improvement programs that address problems that contribute directly to agency improper payments. In addition, the bill requires the Chief Financial Officers Council to conduct a study of the implementation and cost effectiveness of recovery audits and report on the study to the House Committee on Oversight and Government Reform, the Senate Committee on Homeland Security and Governmental Affairs, and the Comptroller General.

The bill also requires the inspector general of each federal agency in each fiscal year to determine whether the agency is in compliance with the requirements of the bill and submit a report on that determination to the head of the agency, the House Committee on Oversight and Government Reform, the Senate Committee on Homeland Security and Governmental Affairs, and the Comptroller General.

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